Old Second Bancorp, Inc. Aktie

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; Darin 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 and 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 and under the Investor Relations tab.

Now I will turn it over to Jim Eccher.

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 2 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 that was restructured into an A/B 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-notes collectibility 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 Bank Group.

The property continues to produce cash flow adequately to support the A-note at this time. Net charge-offs related to the Powersports 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 last quarter. The tangible equity ratio increased 12 basis points from last quarter from 11.07% to 11.19% and is 36 basis points higher than the like period 1 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 1 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 9 basis point improvement for last quarter and 38 basis point increase over the prior year like 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 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 30 compared to 93.2% last quarter and 83.3% as of June 30, 2025. Total loans increased $60.6 million during the second quarter, partially reversing seasonal declines in the previous quarter.

Tax equivalent loan yield increased 12 basis points during the second quarter of 2026 compared to the linked 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. Nonperforming loans decreased $19 million and classified assets declined $16.5 million. In general, our collateral position remained 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 30 or 1.34% of loans from $72.1 million at March 31, 2026, which was 1.39% of loans. Unemployment and GDP forecast used in the future loss rate assumptions remained 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 tariff volatility and the war in Iran continues to be considered within our modeling.

Provision levels quarter-over- linked-quarter decreased by $2.5 million to $7.5 million and were partially driven by significant movements in 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 nonperforming assets and classified assets quarter-over-linked-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 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 linked quarter. Mortgage banking income increased $97,000 compared to the linked quarter and 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-linked quarter. However, excluding the impact of mortgage servicing rights mark-to-market adjustments, mortgage banking income increased $164,000 over the prior year like period.

Other income declined $176,000 in the second quarter compared to the prior linked quarter and increased to $551,000 compared to the prior year like quarter, driven largely by Powersports loan service fees and dealer chargebacks and lease syndication fees. Total noninterest expense for the second quarter increased $1 million from the prior linked 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 6 basis points.

That is the fundamental driver of what I guess I would call a margin surprise increase of 9 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 margin is ridiculously good at this point. 5.23% relative to 5.14% last quarter, 38 basis points up year-over-year. We did have some loan growth 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 $21.08. The result, obviously, in a reduction to equity and growth in the treasury stock of $15.4 million. This enhanced EPS in the quarter by about $0.01.

Year-to-date, repurchases under the stock repurchase program totaled 1.9 million shares at an average price of [indiscernible]. 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 pin 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'll turn the call back over to Jim.

Okay. Thanks, Brad. In closing, we are cautiously optimistic due to the improvements in credit metrics this quarter. I think we're particularly encouraged by a 30% reduction in our special mention loans. The rest of the bank is performing far ahead of our expectations. We remain optimistic about loan growth, as Brad mentioned, and the potential for more strategic growth opportunity as well. That concludes our prepared comments this morning.

So I'll turn it over to the moderator, and we can open it up to Q&A.

[Operator Instructions] Your first question for today is from Nathan Race with Piper Sandler.

Obviously, some nice cleanup in terms of classified loans and nonperformers in the quarter. And it sounds like you guys largely mopped up some of the lingering credits on that office commercial real estate loan and also that C&I loan in the quarter. So just curious, as you look out over the next several quarters, what do you think is kind of a better kind of projection in terms of where charge-offs can shake out for Old Second with hopefully kind of more benign nonperforming inflows and so forth in the future?

Yes. I mean, I think the big takeaway for us this quarter is not only the meaningful reduction in criticized and classified NPAs, but to have a 30% reduction in special mention, which is generally a leading indicator for future problems. I think, gives us some optimism. Powersports also had a nice reduction in charge-offs. We're obviously going to see a little more charge-off in that vertical, but we're seeing -- maybe Darin can speak to this later, but we're certainly seeing a normalization in the seasonal trends in charge-offs.

Having said that, we're still working through a couple of credits, but we haven't seen anything new really pop up in the last couple of quarters that had not been previously identified. So I think we're really close to having a very clean quarter on the credit front, which should -- I think which will really drive exceptional performance.

Okay. That's helpful. And then maybe, Brad, just thoughts on how the margin could trend in the back half of the year. I know it's going to be dependent on market rates similar to what we saw in terms of the impact in the second quarter. But just any thoughts in terms of what you're seeing in terms of kind of weighted average rates on loan production these days. And just any thoughts on kind of where deposits and overall cost trend?

Yes. I start with the caveat that there's like 52 ways that I can be wrong if something changes in the next week or something like that. The magnitude of the wrongness will be relatively subdued, though. if I had to guess, I would say that we would be at kind of a 5.18% range in the third quarter and maybe 5.15% in the fourth. That's my best guess. But I fully recognize my track record's c***. I think I said that the margin was going down before it crossed 5. So at least I'm wrong on the right side of it, which is somewhat comforting. But best guess, 100 ways, I could be wrong.

And underpinning that, is it essentially, Brad, that loan yields only go down from here and then deposit costs are likely going higher as well, albeit from a very, very low base.

Yes. So the things that are really driving it for us is the speed of attrition of what is effectively mimics wholesale on the deposit side. Our ability to backfill that growth with different types of deposits. Loan yields feel relatively stable. We've been in essentially the same rate environment, except for the last 3 months for almost 18 months, 24 months now on the asset side.

Obviously, we've talked about this in the past, year 1 of kind of rates moving back lower is pretty great within the Powersports business. Year 2 is a little bit, not as good, and year 3 is worse. So the tailwind of margin expansion from Powersports is we're certainly in the very late innings of that. I've been remiss in pointing out at this point that another ridiculously strong increase in the contribution margin from Powersports this quarter. The business continues to be exceptional.

But I think the biggest thing is the biggest delta on margin and being able to nail it down right now is the speed of attrition on effectively wholesale deposits and our success in backfilling. It's a liability world these days. So I think you're seeing that from other banks. It's -- I've always believed it was a liability world just broadly, but more so today than ever.

Understood. And then maybe one last one just on capital management. Curious if we expect the pace of buybacks to step up relative to the second quarter. It looks like they came down a little bit versus 1Q. And then just within kind of the capital management context, curious kind of what the appetite and kind of prospects are on the acquisition front these days.

Latter question first. Well priced M&A that adds something to our franchise value is something we're always interested in. I believe the market is still favorable for that. As it relates to stock buyback activity, we have been buying as much as we can. I expect that to continue. Obviously, we're still growing capital, even buying back as much shares. But I think it's reasonable to expect that we will fully execute this authorization as well over the next 12 months.

Your next question is from Brandon Rud with Stephens Inc.

I guess my first one to follow up on one of your earlier answers there, Brad, the -- backfilling the higher rate attrition on the deposit side with core deposits, what rate is kind of needed now to generate that core deposit growth? Or maybe said another way, what's the blended interest-bearing deposit rate for that new growth?

I'm not sure -- I get the gist of the question. To maintain the margin, the reality is that if we ran out $200 million of effectively wholesale funding right now, it would be margin accretive to replace it with wholesale funding. That is the nature of the deposit competition that exists marginally right now. So I get what you're asking, at what rate can we generate deposit growth? I'm not sure it really matters. It's just a question of how much wholesale funding are you willing to stomach.

The reality is when you look like us, which is largely retail core deposit funded, all we're really giving up by adding wholesale funding is more asset sensitivity, which doesn't hurt. It's the trade I'm willing to make. So that's why what you're hearing from me is relatively bullish because there's these levers that are out there.

And additionally, we could pay off the remainder of sub debt that exists out there, too. There are various levers that you can pull, the net-net of which is that margin feels pretty stable. But I'm contemplating therapy to not say, "hey, the margin can go up from here." I don't really want to say that anymore. So it's gives and takes and what have you, I guess.

Okay. Yes. Got it. And then -- just on the expense side, the efficiency ratio is in the low 50s as a percent of assets, expenses are mid- to high 90s. Is there anything in the near term, any investments coming down the pipeline that may change either of those metrics?

Not materially, no. But the reality is that there's no deferred maintenance here. We have capital projects underway across the board to make us an even better bank, and we don't shy away from them. That's the challenge of growing a bank. So those things are continuing. They are in the run rate, and they are in the future prognostications.

Okay. Perfect. Maybe just one last one. Thanks for the comments on the commercial real estate charge-offs. On the C&I loan, is that still on balance sheet? Or is that now off balance sheet? Or maybe can you just kind of walk through that a bit more?

Yes. No, it's still on balance sheet, Brandon. The company is in the process of transacting, and we're just working through and being conservative with taking additional charges as to where we believe a sale price will eventually happen. So I expect that credit to be fully resolved within the next quarter.

Your next question for today is from Jeff Rulis with D.A. Davidson.

Just a couple of follow-ups on maybe the margin, Brad, I just wanted to kind of confirm that any sort of recovered interest on maybe some problem loan resolution that may have added to the -- I guess, any one-timers in that 5.23%. And then if you could, what -- do you have the June monthly average for margin?

I don't have it in front of me, but no, I'm not aware of any one-timers that positively impact the margin.

It was largely stable throughout the quarter. It started going up. It was going up when we were on this call last quarter. I just didn't believe it can continue.

Yes. I mean I think largely, as Brad pointed out, there were 3 levers that drove it. We had some repricing of some 2021, 2022 vintage commercial real estate loans that came up for maturity. We had some high-yield deposit costs priced lower out. And then we had some securities also rolling off that were reinvested at higher yields.

Got it. And then on the -- just on the fee income front, your thoughts on -- I guess, we'd expect maybe BOLI to normalize, but that wealth management number pretty encouraging. If you could just kind of touch on kind of fee income -- overall fee income levels in the second half as you think.

Yes. I mean we've been a low single-digit grower in fee income. I mean wealth -- our wealth group continues to be successful in bringing in new assets under management. They've obviously benefited from an equity market uptick. But we fully expect it to drive, I would think, low single-digit growth. And if we see any pickup in the mortgage bank, we could get to mid-single digits.

Okay. And maybe the last one, just to confirm, the Evergreen kind of merger costs as well as cost saves, that's pretty much -- we've seen the end of it. Just wanted to kind of housekeeping.

I believe so, yes.

We have one branch we just shuttered last month. So we'll have a little bit of a pickup on a go-forward basis there. But yes, we're largely through that.

Your next question is from Ken Kohut with Raymond James.

Brad, I appreciate the commentary on share repurchases and it sounds like you're going to be continuing that going forward. But I'm just wondering how sensitive you guys are to the share price and valuation. And at what point do share repurchases not make sense from your perspective?

I'm not sensitive to it. The reality is that we have more capital than we would otherwise need, certainly absent M&A opportunities, and we have more capital than any M&A opportunity that we would have an appetite for. The reality is that buying back fully this authorization would still not result in capital levels going down.

So it's just a question of -- it's a lever to return capital to shareholders such that we don't grow it as fast. And it really is that simple. It's a tax-efficient return of capital to shareholders. Although I don't like that 5% tax one tiny bit, I would -- I feel remiss if I don't throw an editorial in there, but whatever.

Yes. Understood. And then apologies if I missed this, but going to the loan growth, it looked great in the quarter and what stood out to me was the commercial growth. Can you just provide maybe a little bit more detail there, just given the impressive growth and also considering the competitive backdrop that you had talked about?

Yes. As Brad mentioned, it remains exceptionally competitive. Last quarter, first quarter, we had we saw some pullback, which we normally do in the first quarter. Growth this quarter really came from really 3 or 4 buckets, our middle market C&I group, our commercial real estate group, sponsored finance and then Powersports had some growth this quarter when we thought maybe it would be relatively flat.

But -- and Darin can speak to that, but second quarter and third quarter are generally pretty good in that business, and we're optimistic that we may see some growth in the third quarter as well. But those are the drivers. The competition remains fierce. There's no question about it, but we're encouraged by our pipelines today.

[Operator Instructions] Your next question for today is from Brian Martin with Brean Capital.

Just on the credit front, Jim, I guess that seems like the -- there's some nice improvement potentially coming. I know you've got a couple of credits you talked about still working through. But just can you just kind of give some thought on how you think credit plays out? I mean over the next couple of quarters, what would you expect in terms of some meaningful resolution, just a handful of things coming back or just in general, given what you see today?

Yes. I mean we're -- we printed about 70 basis points in charge-offs this quarter. I mean I'd like to say we're going to get back into that 35 to 45 basis points with -- we're going to run a little bit higher with Powersports, right? But we saw a nice reduction second quarter over first. We're working through a couple more credits, but we're optimistic we're going to see improvement again next quarter, not only in charge-off levels, but in overall migration, and we hope to see further reductions in classified and NPAs.

Okay. And is there anything, I guess, in terms of how much of a reduction in NPAs we could see in the coming quarters? Is it -- are there a couple of meaningful things you're working on? Is it just kind of some granular stuff or just bigger picture, how to think about it?

We're only -- not even halfway through the quarter, but we already had a couple of small wins early in the quarter. There's a couple of larger ones we're optimistic that we can hopefully get resolved. But we certainly aren't seeing anything new that has popped up in the last couple of quarters. So we're encouraged. And as I mentioned in my prepared comments, the fact that special mention was down 30%. It's usually a pretty good leading indicator as to future migration trends.

Yes. And do you have that number, Jim, what the special mentions were -- you said 30% from the previous quarter? Just what's the barometer there?

They were down $12.5 million in the quarter, from about $40 million to $27 million.

Okay. Perfect. All right. And then just 1 or 2 last ones for me. Brad, you talked about just kind of the M&A, which you've talked about in the past. But in terms of size, is there something -- I mean, are you guys, preference-wise, if you found an opportunity smaller or bigger, if you kind of comment just on kind of how you're thinking about that with the approval times and whatnot, but it seems like it has been smaller, but maybe that's not the case.

I'd say the bias is towards smaller right now, but I don't really rule anything out. It's just that at the end of the day, the question is, does doing a transaction make the franchise more valuable. And yes, 99 times out of 100, that's a deposit base question. Obviously, not always because we've done an asset generator deal.

But there's no interest in betting the farm at this point. What we have here is pretty special. It is what shows up in the profitability numbers. And it's not easy to find a transaction that makes you a better bank, but they're out there with some work on the front end and the back end. So I am optimistic we can get something done in relatively short order.

Got you. And then just lastly, you talked about that contribution margin. I guess your outlook for that contribution margin, I think it was up...

I'll let Darin answer that one.

Yes. So contribution margin for the National Specialty lending, as Jim and Brad both mentioned, at a historical high for us. I expect that to continue through this year with some reduction coming next year -- coming down a little bit next year as we changed rates a little bit lower in the middle of this year. And so you'll start seeing as the portfolio turns over, a little bit more of that impact into '27 than you would this year, but nothing material, but you will see it come down a little bit in '27.

Brian, I think what's important to understand is that portfolio, APR is right now over 10%. And the loss rate came down from a little over 2% to 1.80%. So you can see the contribution margin well over 8.5% in that business, which is extraordinary.

Yes. No, it's great. I think that answers most of it. The only thing I could ask you, Brad, that I don't know or you haven't commented on or maybe it's just not something you'd want to at this point. But just in terms of the stability in the margin near term, if we think about going into next year, I mean, what's kind of the puts and takes on directionally where you would expect the margin to be whether -- not quantifying a number, but just kind of directionally how you think about it as you go into next year?

Well, I think we've won this award like 47 times now. So I'd say if that becomes like 57 times, then maybe interest rates would go down along the curve and inflation would dampen and then you would probably give back a little bit of margin. But normally, I talk about this stuff over beer, but I fundamentally believe that the world is shedding the idea that rates are somehow anchored to 0 interest rate policy. I believe those days are done. And as long as that is the case, and I'm correct about that, then fundamentally, this is a very high-margin financial institution just based on the quality of the funding. So I'm very bullish, a very elevated margin for a very long time, I guess, is the way I put that.

We have reached the end of the question-and-answer session, and I will now turn the call over to Jim Eccher for closing remarks.

Okay. Thanks, everyone, for joining us this morning, and we look forward to talking to you again in the third quarter. Goodbye.

This concludes today's conference, and you may disconnect your lines at this time. Thank you for your participation.

Good morning, everyone, and thank you for joining us today for Old Second Bancorp, Inc.'s First 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; Darin 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 Eccher.

Good morning, and 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 color. 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 $25.6 million or $0.48 per diluted share in the first quarter and return on assets was 1.51%. First quarter 2026 return on average tangible common equity is 14.2% and the tax equivalent efficiency ratio was 52.4%. Excluding all adjustments, which include MSR valuation adjustments and costs related to the 2025 acquisition of Bancorp Financial and its wholly owned subsidiary, Evergreen Bank Group, net income for the first quarter was $26 million or $0.49 per diluted share.

First quarter 2026 earnings were impacted by $9.8 million of net loan charge-offs, which primarily included a commercial real estate investor charge-off of $3.9 million that was an office property located in downtown Chicago. The property experienced some vacancy and an updated valuation that was approximately 50% lower than prior estimates. The property does now cash flow adequately at the new carrying value after a restructuring. A commercial and industrial charge-off of $1.3 million in the warehousing and distribution space that has seen its cash flow position deteriorate over the last year. And lastly, net charge-offs related to the Powersports business totaled $3.9 million, a relatively higher than normal level due to some seasonality and continuing consumer lending softness consistent with what's being seen in the broader economy.

Tangible book value per share increased to $14.35 as of March 31, 2026, from 14.12 as of December 31, 2025. The tangible equity ratio increased 5 basis points from last quarter from 11.02% to 11.07% and is 73 basis points higher than the like period 1 year ago. Common equity Tier 1 was 13.13% in the first quarter, increasing from 12.99% last quarter, but decreased 34 basis points from a year ago.

Our financial performance continued to reflect an exceptionally strong net interest margin at 5.14% for the first quarter. That's a 5 basis point improvement from last quarter and 26 basis point increase over the prior like quarter on a tax equivalent basis. Pre-provision net revenues decreased in the first quarter from the prior quarter, primarily due to day count, lower loan balances and a decline in rates overall. Cost of deposits was 105 basis points for the first quarter compared to 115 basis points for the prior linked quarter and 83 basis points for the first quarter of 2025.

For the first quarter of 2026 compared to last quarter, tax equivalent income on average earning assets decreased $4 million, while interest expense on average interest-bearing liabilities decreased $2.1 million. The loan-to-deposit ratio is 93.2% as of March 31, 2026, compared to about 94% last quarter and 81.2% as of March 31, 2025. The first quarter of 2026 experienced a decrease in total loans of $66.9 million from last quarter.

Tax equivalent loan yields declined 5 basis points during the first quarter of 2026 compared to the linked quarter, but reflected a 48 basis point increase from the quarter year-over-year. The decrease in yield in comparison to the prior quarter is primarily a function of Fed rate cuts working through the portfolio. Asset quality trends softened during the quarter. Nonperforming loans increased $22.7 million, with classified assets declined by $2.8 million.

In general, our collateral position is very good on quarter 1 downgraded credits. We recorded $9.8 million in net loan charge-offs in the first quarter with the majority stemming from the Powersports portfolio and one relationship each in commercial real estate investor and commercial.

The allowance for credit losses on loans was $72.1 million as of March 31 or 1.39% of total loans from $72.3 million at year-end, which was 1.38% of total loans. Unemployment and GDP forecast used in future loss rate assumptions remained fairly static from last quarter with no material changes in the unemployment assumptions on the upper end of the range based on recent Fed data projections. The impact of the global tariff volatility and the war in Iran continues to be considered within our modeling.

Provision levels quarter-over- linked quarter increased by $6.5 million to $9.5 million and were largely driven by the Powersports portfolio net loan charge-offs as well as the 2 larger credits that we mentioned earlier. Noninterest income reflected a $476,000 increase in the first quarter compared to the prior linked quarter and $2.4 million increase from the prior year like quarter.

Mortgage banking income increased $225,000 compared to the linked quarter and increased $574,000 compared to the prior year period, 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 decreased $51,000 over the prior linked quarter, but increased $156,000 from the prior year like period.

Other income increased $358,000 in the first quarter compared to the prior linked quarter and $714,000 compared to the prior year like quarter, driven largely by Powersports loan service fees and dealer chargebacks. Total noninterest expense for the first quarter of 2026 declined $2.7 million from the prior linked quarter as the first quarter experienced $349,000 in acquisition costs compared to $2.3 million in the fourth quarter last year.

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 51.7% for the first quarter compared to 51.28% for the fourth quarter of 2025.

On the credit front, we're obviously disappointed in the level of charge-offs in the quarter, but otherwise, trends at Old Second remain excellent. Commercial real estate office continues to be under pressure broadly with valuations coming in at steep discounts to prior levels and rents declining broadly. The good news is that we don't have very much of it on a relative basis and don't see circumstances in other credits similar to this credit that decline in value this quarter.

I would say that the last office credit we are generally worried about is a participation loan that came with us via acquisition in 2021 that we unfortunately acquired an additional piece with the Evergreen transaction. I would like to call your attention to Page 6 of our loan portfolio disclosures for more color on our office portfolio.

With respect to the aforementioned C&I relationship, we are working through that one, and there's underlying cash flow and value in that business. More broadly, our focus continues to be on the optimization of the balance sheet to perform and withstand the variability of current future interest rates as well as diligent oversight of commercial credits and assessment of potential collateral shortfalls. 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 to Brad for more color.

Thank you, Jim. As Jim mentioned, revenue trends were generally excellent with only a modest decline in net interest income relative to last quarter. That's pretty unusual. Relative to the prior year quarter, net interest income increased by $18 million or 29%. Tax equivalent loan yields decreased by only 5 basis points, but securities yields increased 4 basis points in the first quarter relative to last quarter.

Overall total yield on interest-earning assets declined 3 basis points and the cost of interest-bearing deposits decreased 15 basis points. Total interest-bearing liabilities decreased by 12 basis points. The end result was a 5 basis point increase in the tax equivalent NIM to 5.14% relative to 5.09% last quarter. Obviously, we believe this continues to be exceptional margin performance.

Tax equivalent NIM for the first quarter of 2026 increased 26 basis points compared to 4.88% last year. Average loans decreased by $70 million or 1.3% quarter-over-linked quarter, and average deposits decreased by $162 million. Deposit runoff is largely concentrated in high beta, effectively wholesale deposit captions as planned.

Loan origination activity in the first quarter was seasonally slower, but the pipeline remains strong. Certainly, the market environment, including ongoing pricing challenges due to tariffs and the uncertainty with war results in reluctance on borrowers' end to invest in capital projects. Our lending teams are working with their customers to ensure we can meet their needs and offer loans at a good price when the demand is there.

From a stock repurchase perspective, we acquired 1.2 million shares at an average price of $19.63, resulting in a reduction in equity and a growth in treasury stock of $23.1 million for the first quarter of 2026. That enhanced EPS by about $0.01 for the quarter. We're a little more than halfway through the existing buyback authorization. We expect to continue to remain active.

Obviously, capital still managed to grow in the quarter despite the size of this capital return, and that's due to the exceptional earnings power that's inherent in this balance sheet right now. It's pretty remarkable that we can have a couple of stumbles in credit and still produce this level of earnings with an ROTCE still in the mid-teens.

Margin trends still feel very good and stable in the near term. I do think later in the year, we'll start to trend back towards 5%. Loan growth for the remainder of the year is still being targeted in the mid-single-digit level. Expense growth will continue to be modest in the quarters ahead, as you can see. As I mentioned, stock buyback will continue to be an attractive alternative for us as our capital continues to grow.

That's it from my end. So with that, I'll turn the call back over to Jim.

Okay. Thanks, Brad. In closing, obviously, a mixed quarter, especially as it relates to the 2 aforementioned credits. But the rest of the bank is performing exceptionally well, far ahead of expectations, and the earnings power is extremely strong. We remain optimistic about loan growth in the coming quarters and the potential for more strategic growth opportunities as well. That concludes our prepared comments this morning.

So I'll turn it over to the moderator and open it up to Q&A.

[Operator Instructions] Your first question for today is from Jeff Rulis with D.A. Davidson.

Just a question on maybe the net charge-off expectations just to kind of realign with maybe where we are for the balance of the year. You've kind of been bouncing around the 40 basis points, and you've talked about that with the Powersports book. Given this quarter's elevated level, is there any pull forward on some of those losses? Or should we revert back to kind of that prior guide on net charge-offs?

Yes. Good question, Jeff. I mean I think the first thing is as it relates to Powersport, the absolute level of charge-offs is going to be a little bit higher. I'd call your attention to Page 9 of our loan disclosure deck. You can see, and Darin can speak to this certainly, but the actual absolute losses were certainly higher this quarter, but the contribution margins were at an all-time high. So that's the trade-off here. We had 8.3% really net contribution margin after charge-offs. That will probably -- we think loss content will probably trend lower in the coming quarters due to normal seasonality.

As it relates to commercial office, Page 6, I mentioned before, we've got a little over 3.5% of the loan book in office today, 68% loan-to-value based on updated appraisals, only $3 million is classified. Now there's one other credit that's not classified that we're keeping a close eye on that we may see some pull forward losses, but it's too early to tell at this point. So roundabout way of saying we think losses will trend lower in coming quarters. But just keep in mind that Powersport losses will be a little more elevated than what we normally report.

Appreciate it, Jim. And yes, I guess I'd take the positive side of the next question on the margin. I guess the first part is, and I heard your comments, Brad, on expectations for the margin. But is there any residual maybe positive impact on the sub debt payoff? Is that inclusive of your expectations? And the second piece to that is just, are you assuming kind of a static rate environment?

Well, what I'd tell you at this point, and obviously, notice is required to pay it off further, but what we have done for the go forward is we paid down a portion of the sub debt that resulted in the basically gross dollar amount of interest expense remaining the same. Obviously, we have ample flexibility to pay it down further or we could refinance depending on what we view our capital needs as Capital needs are not urgent at this point, obviously, as you can see by looking at our balance sheet. But I don't think the name of the game is any different than what we said for the last 2 years, Jeff, is that we've got lots of flexibility.

Balance sheet is ridiculously strong. To be able to see the kind of delta that we've seen in rates along the curve and deliver this kind of margin stability has been something I'm very proud of. And I don't see a lot of volatility going in. I think we'll see more competition on consumer loan yields as it relates to Powersports. I think we'll see in the near term, some of that mitigated by the movement back up in rates with some of the macro uncertainty, what that's done to overnight index swap rates and so on and so forth. But all in all, this is about as upbeat and positive as I can sound on interest rates, and I realize I still sound monotone and boring, but it's about as upbeat as I can be.

Your next question is from Brandon Rud with Stephens Inc.

I guess the first one, thanks for the color on the charge-offs. Could we drill into the increase in the nonperforming loans? I think the press release mentioned a few larger relationships. If you could provide a bit more color there.

Yes. So actually, classifieds were lower. We did have an uptick in some 7 or substandard accruing loans. The largest was that aforementioned C&I credit that is cash flow dependent. They've been hit pretty hard with supply chain disruption and tariff issues. That's really the largest one. We did have a little bit of an uptick in special mention, 2 or 3 credits, one of which we talked about was that office, one that we repositioned. But again, classifieds in total, were down about $3 million.

Okay. And then maybe if I kind of put some pieces together here, the provision a bit higher than expected. I'm assuming that's to cover the charge-offs in this quarter, but the reserve ratio kind of held flat. Looking ahead, should we assume the reserve level kind of -- sorry, the ACL ratio kind of holds flat at this, call it, 140-ish level going forward? Or classified loan system, they come down?

Plus or minus, that's a reasonable expectation, Brandon.

Okay. And then one last one, just kind of taking a step back. I think there's a new exhibit on Slide 4 at the bottom showing the decline in participation and syndication exposure over time. Is there a level that you'd like to get that down to just over time?

Yes. That's a good point. I mean that portfolio largely came over with the West Suburban acquisition peaked at right around $500 million. We've done a real good job of reducing that portfolio. We've essentially more than halved it over the last couple of years. There's probably some room here. We'd like to continue to wind that down. But certainly, it's created a headwind to growth the last few quarters. But that's not a main line of business for us. We don't view that as franchise-enhancing type of business. So I think you can expect us to continue to wind that down. There's a certain level we'll probably keep, but we'd like to continue to wind this down even further.

Got you. Okay. And maybe just one last one on loan yields. I think broadly, we've kind of heard that spreads were a bit compressed last quarter. So do you have where new origination yields are relative to roll-off yields and what that incremental pickup is?

Yes. If I look at it quarter-over-quarter, we've been -- the weighted average yield that we've put on as far as new business is averaged between 6.6% and 6.75% over the last couple of quarters. And that's actually down, obviously 50 to 75 basis points from prior quarters.

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

Bigger picture question. The earnings power and the high-quality and kind of top quartile earnings that you guys have been putting up over the last several quarters seems to be being masked by just the ongoing credit inconsistencies and noise there. Jim, is there anything else you can offer just to assure investors that you're getting towards the tail end of some of this credit noise in the legacy portfolio?

Yes. I guess our nonperformers overall, if you look at 2 years ago to the end of last year, were almost halved, right? Obviously, this is a little bit of a disappointing print having them go up again this quarter. I'd just say credit progress improvement isn't always linear. So this office credit has been hanging out there for some time. We think we're through most of that book. And then the C&I relationship kind of came to a head over the last 6 months. All I can say is we understand our NPAs are higher than we'd like, and we're working very hard to reduce those.

Okay. That's helpful. And maybe, Brad, just given the buyback pace this quarter, is the appetite near term, just given you're expecting some moderation in charge-offs going forward and the margin is pretty well positioned for the current rate environment with the Fed on hold. Just any thoughts on just kind of the pace of buybacks and the appetite just to limit excess capital inflows going forward?

I don't see any reason why buyback can't continue at these levels subsequent to the remaining amount on the authorization. If you would ask me today what my intentions are, it would be to refile another authorization in short order once this is filled. We have more than enough capital to do -- we have more than enough capital to do anything strategic that I could envision coming our way and still continue to return capital to shareholders.

Okay. Got it. And I apologize, I jumped on late, but just, Jim, maybe any thoughts on just what you're seeing from a pipeline perspective and just kind of how you're thinking about loan growth over the balance of this year?

Yes. I think first quarter is obviously soft in commercial and soft in powersport. Pipelines are building. We still are anticipating low to single-digit growth through the balance of the year. Nothing's changed on that front.

Okay. And just from a pricing competition perspective, are you seeing anything kind of irrational out there on the commercial lending side of things in Chicago land these days? Or just generally, how are kind of new spreads holding up on the commercial portfolio?

Yes. I would say commercial real estate is fiercely competitive right now. We're still getting acceptable spreads in our C&I group and leasing. As Brad mentioned, we think powersport yields will come down a little bit due to competition, but we're still bullish our margin is going to be hanging in there about 5%...

[Operator Instructions] Your next question is from David Konrad with KBW.

Just a follow-up question on the loan growth from here. I was just hoping you can kind of break that down a little bit between commercial and powersports. I imagine powersports, this is kind of the trough seasonal level for the year. So maybe those 2 asset classes give a little bit of expectations for the year.

Maybe I'll let Darin talk about powersport. As it relates to commercial, we think it will be pretty broad-based. I think we'll see growth in commercial real estate, C&I sponsored leasing. We're not seeing any one sector with higher expectations than the other. As it relates to powersport, maybe, Darin, you can comment on that?

Yes. So I'm the same as where I was at in the beginning of the year, we'll have -- in the overall group and with that, I include the collector car lending that we do as well nationally. We'll have single-digit growth. I'm still projecting for the remainder of the year.

And then charge-offs in powersports were a little bit over 2% this quarter. But to your point, Jim, the excess spread, the contribution margin was actually one of the highest you've had in recent quarters. So just wondering if you're doing anything to tweak the credit on that aspect as you're looking at originations going forward in terms of underwriting?

We have a little bit -- a little tighter on the underwriting, but not a material change because we do focus on that contribution margin, which is the overall profitability of the business. And a lot of it's driven, which is important to note, it's a product mix. So we have a good mix of originations that's endorsed OEM products and non-endorsed products, and we charge higher on the non-endorsed products than we do for our endorsed products. So example would be endorsed Indian, Triumph, KTM. If you're non-endorsed, maybe it's Harley, BMW, Yamaha, Suzuki, those type of products, we charge a point higher for those products.

So part of the little higher charge-off rate is related to the product mix coming in over the last couple of years, which is driving the overall profitability. So it doesn't charge off at a point higher, but we charge a point higher. So it's driving a little bit higher charge-off rate, but it's also driving a better profitable portfolio. And so I see it staying around this level, maybe slightly less with a couple of changes that we made. Our overall mix of paper that we did first quarter. So if you include everything that we did nationally in the business, first quarter of '25 compared to the first quarter of '26, actually, our FICO score went from 735 up to 743 on the full mix of business that we did comparing quarter-over-quarter.

So all that will start playing into the mix as this portfolio continues to turn over. And so that number should start coming down a little bit. But I wouldn't say materially going down because we like the mix of business that's going into the portfolio from a profitability standpoint.

Got it. Perfect. And then last one for me, Brad. Expenses were much lower than at least what I expected this quarter. Just maybe a little bit more color on core expenses where we go from here for the year.

So I think that's -- fourth quarter is always tough because you see bonus levels can have more variability in the fourth quarter based on where everything comes out, and acquisition costs were also in there. So I think that I'd point you to broadly just the overall expense guide, which is we're trying to go in that kind of 3% to 4% range for the year. That feels right. So I would just expect it to follow that range from here.

I would say, given how well the businesses are performing, I would expect to see an overall bonus level as a component of the salary and benefits to be relatively consistent with what we saw last year. So that all minus the one-time stuff, of course. Again, I feel like we've done a good job controlling it and 3% to 4% in this kind of inflationary world, given the type of double-digit increases that we have in employee benefits is pretty good performance for us. I'm pleased with that.

We have reached the end of the question-and-answer session, and I will now turn the call over to Jim Eccher for closing remarks.

Okay. Thank you, everyone, for joining us this morning. Appreciate your interest in the company, and we look forward to speaking with you again next quarter. Thank you.

This concludes today's conference, and you may disconnect your lines at this time. Thank you for your participation.

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 Eccher, the company's Chairman, President and CEO; Brad Adams, the company's COO and CFO, Darin 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 home page under the Investor Relations tab.

Now I will turn it over to Jim Eccher.

Good morning, and thank you for joining us, and thanks for your patience as we worked through some technical difficulties there. I have several prepared opening remarks. Give you my overview of the quarter and 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 $0.54 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 pretax loss on mortgage servicing rights and a $2.5 million in pretax 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 for the fourth quarter was $30.8 million or $0.58 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 1 year ago. Common equity Tier 1 was 12.99% in the fourth quarter, increasing from 12.44% last quarter and increasing 17 basis points from 1 year ago.

Our financials continue to reflect an exceptionally strong net interest margin at 5.09% for the fourth quarter, which is a 4 basis point improvement from last quarter and 41 basis point increase over the prior year like 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 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 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 linked 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. Nonperforming loans increased $4.8 million and classified assets increased by $10 million.

In general, our collateral position is very good on Q4 downgrade credits. We recorded a $6 million of net loan charge-offs in the fourth quarter of 2025 with the majority, where 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 Powersport 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 multiyear high in this business, and we're very bullish on our 2026 performance.

The allowance for credit losses on loans was $72.3 million, 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 forecasts used in future loss rate assumptions remained 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 2 purchase accounting impacts decreased $3 million and were largely driven by the Powersport portfolio, net charge-off levels with other losses associated with the previously allocated provisions. Noninterest income reflected a slight decrease in the fourth quarter compared to the prior quarter, but continue to perform well compared to the prior year like quarter.

Noninterest income in the third quarter of 2025 reflected a $430 death benefits on a BOLI policy which was not experienced in the fourth quarter of 2025. Mortgage banking income was flat compared to the linked 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 linked quarter and from the prior year like period.

Other income decreased nominally in the fourth quarter of 2025 compared to the prior linked quarter, but increased $550,000 compared to the prior year like quarter driven largely by Powersports service fees. Noninterest income increased $544,000 compared to the prior year like quarter as wealth management fees increased $238,000 or 7.2% and service charges on deposits increased $198,000 or 7.5%. Total noninterest expenses for the fourth quarter of 2025 declined $10.2 million from the prior linked quarter. Fourth quarter experienced a decrease of $9.3 million in 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 broker CDs to run off and reprice higher cost deposits in the falling interest rate environment.

With that, I'll turn it over to 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 a north of a 5% margin and ROA handsomely above 1.5% and ROTCE above 17.5% on an operating basis is pretty exceptional performance that we're proud of.

EPS, some 30% over last year. Integration 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 is 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 8 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 4 basis point improvement in the tax equivalent NIM, which is obviously pretty awesome.

Tax equivalent NIM for the fourth quarter of 2025 increased 41 basis points from 4.68% for the period last year. Average loans increased $60 million or $1.2 million over 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 spreads 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 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 5%. Loan growth being targeted in the mid-single-digit level for next year. Expense growth will be modest. Pre-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.

[Operator Instructions] Our first question for today is from Jeff Rulis with D.A. Davidson.

On the expense side, I just wanted to see if those cost savings, Brad, I could tell you, are those fully captured? Or was that -- is there a tailwind to '26 that leads to that muted expense growth from your perspective?

There's a tailwind to '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 saves run through.

Got you. And then on the credit front, Jim, I guess the charge-off from the Powersports, 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?

Yes, good question. I think we need to be accustomed to a little bit higher net charge-off rate due to Powersports. That's just the nature of that business. I think if you look at the $6 million in charge-offs, $4.5 million was Powersport related, so only $1.5 million 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 Powersports 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 multiyear high.

So 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 of loans that obviously migrated into nonaccrual 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 and it's going to take another couple of quarters to work through that one.

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

This is Adam Kroll on for Nathan Race. So maybe just a question for Brad on the margin. I was curious if you could kind of frame out expectations for the first quarter with the full quarter impact of the December rate cut and just your overall positioning if we were to get another cut or two in the middle part of the year and just where you think the NIM can settle out over the longer term?

I'd be very surprised if we're not around the 5% level for the full year 2027. I was my machine there. 2027, I have no comment on at this point.

And I was just curious if you have the purchase accounting accretion number for the quarter?

It's a 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. It's nothing. I think there was $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 linked quarter.

But the thing to keep in mind here is that the purchase accounting impact on the Powersports portfolio is negative for the next 2 years. So the go-forward business is better than what you're trying to isolate as the unrepeatable portion in the current periods. It's actually a tailwind going forward relative to a headwind.

Got it. No, that's super helpful. And then maybe just moving to deposits. You've called out letting exception price deposits run off from the acquisition. So I guess I'm curious how much is remaining of those deposits and if you're seeing opportunities to reduce deposit costs on your legacy nonmaturity deposits?

We talked about this last quarter. The thing to remember is that fixing and returning to an old second like funding profile is a multistage process. Some of it we did prior to bringing on the Evergreen balance sheet and some of it we'll do after. We probably need to replace $300 million to $400 million in deposits with our type of funding in order to complete the process.

In terms of the amount of wholesale funding, effective wholesale funding that's on the balance sheet right now, that's part of the reason why the margin is so darn resilient at this point because we do have substantially more funding that benefits from falling rates than we typically otherwise would have.

So it's not necessarily a bad thing to focus on, at least at this stage. It's not what I want over the long term. But right now, it's actually a benefit. I would say just the number to keep in mind is that I would like to look $300 million to $400 million different on the liability side.

Got it. And then maybe just last one for me. Digging into the mid-single-digit loan growth, [ Gary ], I was curious what your expectations are for growth in the Powersports vertical specifically?

Slightly less than that would be my expectation.

[Operator Instructions] Your next question for today is from Terry McEvoy with Stephens.

Maybe could you just remind us of the profile of a typical Powersport borrower? And I ask, I'm just curious, where do they line up in this K-shaped economy? And is there typically -- has there typically been some seasonality in terms of the charge-offs within that portfolio?

Sure. Terry. Darin, if you're there and on, do you want to take that one?

Yes, I can do that. Yes, Terry, the average FICO score for our portfolio in the Powersports and 730 with the biggest percentage of that in your Tier 1 bucket, which has an average FICO score of 776.

But from a seasonality perspective, Terry, our busy season starts March 1 through -- it's really the second and the third quarter from an origination perspective where you have most of your business. And you -- from a risk perspective from either delinquency and losses, you have more of that in the other 2 quarters, especially at year-end, like I say, when we compete with Santa Claus at year-end, the numbers elevate a little bit and then stabilize out again as you get into the second quarter.

But it's been -- I've been, Terry, I've been doing it for 30 years, and it's been pretty consistent trends for 30 straight years in this portfolio.

Great. And then as a follow-up, Brad, just capital management. I think you said share repurchase inevitable. I look back the stock is up 20% from 3 months ago. So the stock is higher. Is that just a comment on where your capital levels are? Or should I read into maybe the M&A market and what you see happening in '26?

No. M&A market feels good. There's no shortage of discussions happening. The question is what's the right deal for Old Second at the right time and how much capital do we need to do that.

Clearly, I got it wrong in that we were basically running a big Christmas plus savings account in order to acquire the capital for an acquisition, and we needed a fraction of what we had saved up. So it's just a function of what we need versus what we have. Obviously, we generated a ton of capital. And I'm not uncomfortable where we are. I just don't really see a need to grow it much from here is the thing.

Your next question is from Brian Martin with Janney.

Can you talk a little bit, Brad, about -- or Jim, you talked about the production being exceptional this quarter versus kind of the payoffs and then the piece from the West Suburban that was running off. Just maybe how much ran off in that West suburban and then how much is left there that may be a headwind going forward. But then just trying to get your take on this kind of mid-single-digit loan growth, but kind of the production being better kind of it's been in a long time.

Yes, Brian. The fourth quarter actually, surprisingly, was our best production quarter of the year. And normally, that's a softer quarter along with the first quarter, but it was exceptionally strong along multiple verticals.

The challenge, as Brad pointed out, we had some pretty big paydowns. Some of it was welcomed in the syndication portfolio, but we also had early payoffs in multifamily and commercial real estate, a lot of it is stemming from property sales. What I think we get encouraged is the pipeline today or as of the end of the year is the highest it's been in probably 6 to 7 quarters. So that gives us a lot of optimism that we're going to have a pretty good first half of the year in '26. And I think mid-single-digit growth is certainly achievable this year.

Got you. And how big is that -- where is that the syndication book today? How far is that down? And maybe how much more to go there? Is that a headwind going forward?

It's -- well, when we -- at the start of -- at the end of 2021, which is when we closed on West Suburban. We had about $772 million in commitments. We've had that as of the end of 2025. From a balance perspective, we got about $285 million left. I would anticipate 1/3 of that will continue to run off, and we'll probably keep the remainder.

I would tell you that those numbers that Jim is referencing are inclusive of some additions related to Evergreen. So what you're really talking about over a 5-year period is almost an 80% reduction in that loan book.

Yes. Got you. Okay. And Brad, I think you mentioned the stability in the margin, just maybe being down potentially a bit in 1Q. I guess is that -- I guess what's the -- I guess, the modest headwind here in 1Q? And just in terms of that -- the balance sheet, the runoff that you expect, it sounds like there's still a couple of hundred million of exception-based brokered CDs that, like you said, is benefiting now, but that's going to continue to run off. That's what's left to go in terms of what...

I'm just being really pessimistic, man, because the reality is that the biggest headwind to the margin is probably going to be deciding to buy treasuries, especially if people keep making noise about invading countries that are largely ICE. So the more we see moves like that, I would be comfortable adding assets that largely don't offer, obviously, a 5% spread.

So it's just a function of that. I also just don't want to go on here and say that, hey, the margin is going to go up from 5.09. I'm not going to say that. So I'm the biggest headwind, Brian, me personally.

Got you. Okay. And Jim, just going to the criticized or classified for a minute. I guess classifieds are up a little bit. I guess the -- how do you see those trends going forward? And then do you have -- how are the special mention trends? I don't know that you mentioned that, but -- or if you quantify those, were those up or down in the quarter?

Yes. We classified, certainly, we had a lot of migration in and migration out. I think where we're seeing a little bit of degradation of that portfolio is in the C&I book and companies just showing weaker performance. By and large, collateral positions are pretty good. We're not seeing a whole lot of loss given default at this point. But it's going to take some time to work through this.

I think the positive news from our perspective is the net change in special mention or watch loans was down materially. We had, I think, only a couple of loans migrate in, and we had over $15 million in reduction in that bucket. So those are early-stage indicators for us. So that should help us moving forward.

So the special mention were down on a linked quarter basis? Or did I hear that wrong?

Yes, down $15 million in the quarter.

Down $15 million. Okay. Perfect. And the last 1 or 2 for me, and I'll jump off was the -- Brad, you mentioned on the expenses, just to clarify that, your comment, the 3% -- you were talking about 3% growth year-over-year in expenses. So 25% expenses to 263 -- or were you talking about something else there in terms of your comments?

No, that's what I'm talking about.

Yes. Okay. And then just on the buyback, your general comments are we expected -- can you give any sense on how you're thinking about the buyback, Brad? Or is it just you expect to begin that this quarter and based on pricing, that will be opportunistic?

I expect it will begin in relatively short order, yes. I'm not price sensitive at this point.

Got you. Okay. And the M&A environment, you said it's good with lots of discussions. What is kind of the optimal target today look like for Old Second if you are looking at M&A? I mean the last one was obviously asset driven

I'm not sure how much that I can be helpful on an answer there because I can tell you that I wouldn't have described Evergreen, if you'd asked me that 18 months ago. So I think the only thing that investors can be certain of is that, we're not going to do anything unless it makes us a better bank, and that's what we're focused on.

Yes. Brian, I would say our priority this year is really fully integrating Evergreen, which we're about there, but really focusing on organically growing the balance sheet and optimizing it. That would be priority one.

Yes. That's what I was getting at. I felt like it was more if there was M&A, it was likely more on the deposit side rather than the...

We'll be opportunistic, but it's certainly not in the near term for us.

We have reached the end of the question-and-answer session. And I will now turn the call over to Jim Eccher for closing remarks.

Okay. Thanks, everyone, for joining us this morning. Again, I apologize for the technical difficulties. We look forward to speaking with you again next quarter. Goodbye.

This concludes today's conference, and you may disconnect your lines at this time. Thank you for your participation.

Good morning, everyone, and thank you for joining us today for Old Second Bancorp, Inc., Third Quarter 2025 Earnings Call. On the call today are Jim Eccher, the company's Chairman, President and CEO; Brad Adams, the company's COO and CFO; Darin 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 like -- 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 Eccher. Sir, the floor is yours.

Okay. Good morning, everyone. Thank you for joining us. I have several prepared opening remarks. I will 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 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 1 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 include the following: as it relates to the Evergreen acquisition, we had day 2 provision on non-PCD loans of $13.2 million pretax or $0.19 per diluted share. We also had acquisition-related costs of $11.8 million pretax or $0.17 per diluted share. We also had a $389,000 MSR mark to market losses pretax or about $0.01 a share and $430,000 of BOLI death benefit proceeds recorded due to the death of retired executive, also $0.01 a share.

Excluding all adjusting items, net income for the third quarter of 2025 was $28.4 million or $0.53 per diluted share. The quarter included favorable impacts of the Evergreen acquisition with a 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 on to the solar book. On a core basis, profitability at Old 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 1 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 1 year ago.

With the relatively team level of capital dilution despite the usage of $49 million of cash consideration, we now expect an earn back period associated with Evergreen to be significantly shortened from the 3 years estimated at announcement. Our financials continue to reflect exceptionally strong net interest margin at 5.05%, that is a 20 basis point improvement from last quarter and 41 basis points year-over-year on a tax equivalent basis. Pre-provision net revenues increased from 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 linked 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 was 91.4% as of September 30, 2025, compared to 83.3% last quarter and 89.4% as of September 30 of last year. I'll let Brad talk about this more in a moment.

The third quarter 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 linked 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, nonperforming 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 earnings to ratings changes primarily within the C&I portfolio as certain industries has 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, NPLs, classified and criticized loan levels are a little changed. We recorded $5.1 million of net loan charge-offs in the third quarter with the majority stemming from the Powersport 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 Powersports 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 30, 2025, which was 1.08% of total loans.

$30.7 million of the increase is associated with day 1 and day 2 allowances recorded on the acquired loans, PCD loans recorded from Evergreen increased the ACL by $17.6 million as of day 1 and the non-PCD loan credit mark recorded to provision expense for day 2 increased ACL by $13.1 million. Unemployment and GDP forecasts used in 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 1 and 2 purchase accounting impacts increased $6.5 million, reflecting the new consumer mix in our loan 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 8 basis points in the prior linked quarter. Noninterest 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 death benefits on BOLI realized during the quarter of 2025.

Noninterest 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 rates, 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 linked quarter and was nominally lower compared to the prior year like quarter. Total noninterest expense for the quarter was $19.7 million more than the prior linked 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 intangible 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 close. 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 color.

Thanks, Jim. I've got a lot less work 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 30. 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 and securities yields was 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, we're now at 5.05% for the quarter ended. That's up from 4.85% last quarter. Obviously, we feel like this continues to be the exceptional margin performance. The NIM relative to 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 the linked quarter. Averaged 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 for the last 2 years preparing the balance sheet to absorb, it was far less dilutive 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 2 days ago. And at this point, it appears to be the best we have ever done. The net interest margin is above 5%, and we're doing 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 over the last couple of quarters. This is all relative to a stock price that is of $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 2. 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 7 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 time frame. I'm really proud of how we've managed that growth. Over the last 5 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. Noninterest expense trends reflected Evergreen deal costs as expected. Operating costs increased $20 million over the prior 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. Noninterest expense is running higher year-over-year, again, due to the same reasons. Also included is the 5 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 ended 2026, exclusive of the impact 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. What 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.

Thanks, Brad. In closing, we're very confident in our positioning, extremely excited what Evergreen Bank transaction will add to our pro forma company with the completion of our Evergreen acquisition, data conversion and the full onboarding of the Evergreen team. We're very optimistic about the remainder of 2025 as we welcome new team members and product offerings. The 17% increase we just announced with our quarterly dividend of $0.07 a share is reflective of our continued confidence in the performance of Old Second in the markets we serve. That concludes our prepared comments this morning. So I will turn it over to the moderator and we can open it up to questions.

[Operator Instructions] Our first question is coming from Terry McEvoy with Stevens.

I want to keep Brad happy here. So I don't want to use any fancy words. I guess within the press release, you talked about kind of potential runoff of exception price deposits, could you just maybe expand upon the amount when you kind of see that naturally rolling off? And is it the -- is it your view that those will be replaced with more legacy Old Second types of deposits?

So I would say we've probably got a couple of hundred million dollars in what I would call pure market priced funding at this point. You can see that in its impact in overall pricing. It will be an ongoing battle. We had alluded prior to that we would like to get back to Old Second type funding. That's obviously exceptionally difficult to do organically, if not impossible. We are interested in acquiring additional deposits. Fortunately, for us, we have the balance sheet and now both the operational capacity to do that. It doesn't have to be big to make a big difference.

Obviously, you can see the power of what Evergreen has added from an earning asset perspective. I have no problem with taking some of the liability sensitivity off the table that was added at the margin. It's about being the best bank you can be. And it's not that difficult for us to get even better. So yes, we would look to replace that over time. I think it's probably a 6- to 12- to 18-month type look to get that back to what we looked like before.

Terry, surprisingly, excluding the brokered and high-yield money market runoff, we were very pleased to see that actual core deposit funding at Evergreen actually expanded in the first quarter, which was great to see.

Okay. And then as a follow-up, thank you for Slide 8 in that disclosure presentation. When you think about future originations in Powersports, is the focus diversified across that Tier 1 through 5? Or is there a bias towards maybe the 1, 2 or 3 tier given kind of the risk profile there.

Terry, this is Darin Campbell. Yes, I mean, our focus is to originate all those tiers, but historically, we've been doing this for 30 years. We've been in the top 2 tiers, 75% or better. And we'll stick with that policy going forward. And if there's a change economically, we would even tighten up a little bit more at the lower end to drive more to the top end, but right now, we feel good about that mix.

And maybe since on this topic, I'll squeeze in 1 last one. Those Powersport fees that were somewhere in the release, what's a typical kind of quarter look like or yearly run rate? Is there any seasonality there? And just kind of help me understand the nature of those fees.

Yes, the fees in that Powersport business could be payment fees, they could be a late fee, and that's consistent throughout all 4 quarters. Fee income would be consistent. Originations happens in the second and the third quarter, your biggest origination month with a little bit of runoff in the first and the fourth quarter, but fee would be consistent across every quarter.

Our next question is coming from Nathan Race with Piper Sandler.

Sorry about that guys. Brad, I appreciate the commentary on 4% legacy Old Second growth expectations going forward. Just curious if you can kind of frame up kind of where you see the run rate over the next quarter or 2 as you get some of the cost saves from the acquisition and just in light of that legacy growth expectation.

So I think it's basically -- my hope is that it's basically a wash between those 2 because I'm just really about making your life as easy as possible, Nate. I know you've got a lot going on with new family members being added and whatnot. So I want to make sure that you've got time at home to wake up at 2 in the morning with a baby.

So it sounds like it's pretty stable from kind of the core run rate right around $52 million in the third quarter.

I believe that will be pretty darn close. Yes.

Okay. Then a bunch of moving pieces on the margin. You obviously exceeded kind of which you were thinking last quarter. Curious if you can kind of just frame up overall kind of margin expectations just in light of what you brought out with the higher-yielding book at Evergreen and then also how you see yourself positioned from a margin contraction perspective these days with additional Fed cuts on horizon?

That's tough, right? Because it's not only at the absolute level of rates, it's actually the speed of NIM and what happens in terms of the overnight index swap rates, it's complicated. And you can be really wrong in terms of what you're saying with Fed fund rate not even changing. I would say this. I would say that 2 years ago, the bottom margin in a 0% rate world for Old Second probably looked like something around 3.80%. I do not believe that there's any scenario where we can go back to a 0% rate world, and we can get into a very nerdy macro discussion about why that is, but I'd rather not. But I would feel like the bottom margin for Old Second at Fed funds rate around 3% does not go below 4.50% by any stretch of the imagination and may not even threaten it. It's a different ball game now. I am very optimistic about how much money we can make even as short rates fall.

Yes. I mean I think what we're really encouraged about with Evergreen, even in rapidly declining interest rate environment. Coupons on the Powersport portfolio will still remain relatively robust, where we maybe print new business in the 9%, 9.5%, even when rates were 0, Darin was able to still achieve an 8% coupon. So we think that's really going to help us in a down rate scenario.

Okay. Great. And then just thinking about the charge-off trajectory from here. I appreciate a bulk of the charge-offs were tied to the solar book and just the components around the Powersports vertical. I think last quarter, Brad, we were talking around 30 basis points of charge-offs on a combined basis. Any thoughts on just kind of the go-forward outlook. It doesn't seem like there's much loss content expected with a couple of the legacy Old Second loans that moved to nonperforming in the quarter, but would just appreciate any updated thoughts there.

The movement in the nonperformers was almost entirely administrative. No real trend there to speak of. The movement in terms of classified, I would say that the substantial majority so call it, 2/3 is exceptionally well collateral protected even if things are poor. I would say that there is some level of risk on $10 million to $15 million of it, but I'm exceptionally optimistic that things will go the right way on that and may very well soon. Just in the last 3 weeks, nonperformers are down pretty significantly from what's in this print even. So I am not overly concerned about credit.

As it relates to Powersports, losses this quarter are a little higher than we had modeled. But as Jim mentioned, the yields are much higher. I'm not really concerned whether losses are $150 million, $120 million or $175 million given the net contribution margin of this business. I also understand that consumer recessions, which I do believe we were in -- we are in or right on the doorstep of tend to be very shallow and very short. So I don't really care. The business is that good. So this 30 basis points feel right for both a near, intermediate and long-term loss rate for Old Second, probably.

Yes. Our next question is coming from David Long with Raymond James.

Brad, you had mentioned expense growth in 2026 briefly. And I think you mentioned 4%. Was that inclusive of Evergreen in those numbers, I didn't...

No, it was not.

That's before the Evergreen impact, you're saying?

Yes. And Evergreen impact will be no impact with cost saves offsetting certainly the inflationary impact. I don't think you're going to see a lot of trend in expenses for us, to be honest, with significant inflation that's present in employee benefits expense largely being absorbed by cost save realization.

Got it. Okay. And then on the growth side, can you talk maybe about what you're seeing in your just core commercial loan pipeline and what your hiring prospects are. And if there is an appetite to still bring in some incremental lenders there?

Yes, obviously, a really good quarter this quarter, Dave, I think it was our best quarter in 2.5 years as far as organic growth. Pipelines are still pretty robust, probably at a 2-year high. So normally, the fourth quarter is a lighter quarter for us, but we're -- unless we see unusual paydown and payoffs. I think we've guided to a low single-digit growth rate in '25. I think that's still achievable. As far as looking for additional talent, that is something we always budget for and something we are always open to, particularly in the C&I world. But we have the team in-house to be a pretty consistent low to mid-single-digit growth in a normal environment.

Got it. And then specifically to the sponsor finance team, what does the pipeline look like there? And is there still capacity to add people?

Yes. That group obviously has been very high performing. The first half of the year was very soft in that industry. I think you had a lot of sponsors on the sidelines waiting for some certainty around the economy and tariffs starting in the beginning of the third quarter, we saw pretty significant growth. We expect the fourth quarter to be very meaningful. This is approved that's consistently generated between $150 million and $200 million in originations a year, might be a little softer this year, but they will have a very big second half of '25.

Our next question is coming from Jeff Rulis with D.A. Davidson.

You guys touched on the credit to a degree. I wanted to ask about the acquired problem loans there. Is there any kind of low-hanging fruit or credits that have a quick resolution in place. Just trying to think about the balances of what was brought on? And do you think under your purview that maybe you could see a portion of that move along pretty quickly?

Yes. Good question, Jeff. I mean actually, timing didn't really work for us this quarter. We had about $10 million in resolved remediation right after the quarter so that -- we're hoping, obviously, to get that in, in the third quarter is going to provide a pretty nice tailwind for us in the fourth quarter. A couple of the acquired loans were actually shared participations that we had with Evergreen. So it's just added to our existing classified list. Most of the additions to the classified are really companies that have been burdened in the trucking and transportation and logistics industry that just having the general slowdown due to macroeconomic factors. Cash flow is a little tight, but as Brad alluded to, our collateral position and most of these is exceptionally well and a lot of them backed by SBA 504 deals. So we'll continue that to have resolution on some of these into the fourth quarter, but we still feel very good about credit.

Great. And then maybe 1 other -- one last one just on obviously focused on integrating and getting this deal done, but your thoughts on any additional M&A that I think Brad sort of alluded to, certainly we look at deposit heavy or something focused in that arena. But if you could just sort of give us an update on where you're at on potential acquisitions, if any.

So this is 1 of those questions where I wish the people who work here couldn't hear what I'm about to say because I just watch people sleep on couches all weekend, and I really don't want to scare them. But from a balance sheet perspective, we're ready. It's nice to have this integration done so quickly after the close. It's certainly nice not to have had what appears to be no significant customer disruption. A couple of one-offs here and there. But all in all, we've done a pretty darn good job. So I don't want to scare anybody who works here, they've done an exceptionally good job and worked really hard to do that. But from a finance perspective, we look really good right now.

And Brad, the aim would be, if you are ready -- again, would you kind of lean into the deposit would be a focus in market, what would...

It always is. The Evergreen was the unusual one here. It's not very often that you get a chance as a community bank to acquire an asset generation business that is attractive. So obviously, that's exceptionally exciting to us. But in general, our M&A strategy is entirely focused around the liability side of the balance sheet, and we are usually an organic grower from asset generation standpoint.

[Operator Instructions] Our next question is coming from David Konrad with KBW.

Brad, I thought maybe another follow-up question on the NIM. You guys are helpful on the asset side, but wondering with Evergreen deal, you actually now have a little bit of room. So I was just wondering your thoughts on the deposit beta now versus you guys and other cycle over the next few quarters, what you get on a deposit beta?

We're going to see some CD runoff over the next few quarters. We're going to see overnight borrowing rates pick up. So in terms of our liability sensitivity, it will increase, which obviously helps with sensitivity to forward rate cuts. You'll see the loan-to-deposit ratio will probably continue to pick up over the next few quarters until we get a chance to remix the funding a little bit. So that will help with margin sensitivity in the expected current interest rate environment. I have no issue with the loan-to-deposit ratio moving slightly higher ahead of any strategic opportunities that may present themselves.

I am very happy with where we sit from a rate positioning standpoint now.

Okay. Great. And then switching gears a little bit. Just want to talk a little bit about wealth management. I thought it was a really strong quarter. I don't know if Evergreen really helped that much into the quarter, but good sequential quarterly growth there and just wanted an outlook in the wealth management business.

Yes, exceptionally strong quarter wealth at north of a 25% increase in fees. The team has done a great job of bringing in new assets under management. Generally, this is a pretty slow growth business. I mean, normally, we're pretty happy with 3% to 4% growth in revenue, but we've made a couple of key hires over the last couple of years and new assets under management have gone up exponentially. Obviously, the market has also helped drive additional income as well. But we like that business. We'd like to continue to growing.

Our next question is coming from Brian Martin with Janney.

Jim, can you talk a little bit about or just give a little thought on just the loan growth outlook just in terms of what you think is sustainable? I guess I know you talked about maybe some of the seasonality where it's at, but just now that you kind of have the acquisition in hand, how should we think about that over the next 12 months or so in terms of what you think is sustainable longer term?

Normally, I would tell you, the fourth and first quarter are going to be pretty soft. I can't tell you what the first quarter of next year is going to look like. But based on our third quarter pipelines, we feel pretty good that the fourth quarter is going to net some meaningful growth. We're seeing pretty good pipelines and sponsored and good pipelines in investment commercial real estate and some C&I growth. So our leasing group continues to be very consistent. We've got some opportunities in health care. So I still feel really good about low to mid-single-digit growth heading into '26.

Got you. Okay. And just jumping back, I think outside of the M&A with the capital, just the buyback, what your thoughts are there on, I know you talked a little bit about your opportunities as Brad did on M&A, but just in terms of how you're thinking about the buyback. Any thoughts there?

It is open and on the table.

Okay. Would you -- I mean, given the valuation, is that more of a priority than M&A at this point or?

It depends on what the M&A looks like. I can tell you that very few deals are as priced as well as our stock rate now in my mind.

Okay. And then just on the -- I know you talked about the charge-off outlook or just how we should think about that. Just in terms of where the reserves are today, would you expect to just kind of maintain absent some change in economics in -- macroeconomic outlook that reserve level around the 140-ish level, is that something you would expect to maintain? Or should we see that move down a bit or up?

Yes. Brian, I think what you need to understand, as it relates to Powersport, once a loan that's 120 days, it's a full charge. And we obviously move to recovery. So we will be carrying a higher reserve in this 140 range is probably where we'll tend to manage it to. So yes, you'll see a higher reserve going forward.

It can't come down over time as loss rates. Actually, I think it will come down over time because I think the loss rates are high. Right now being at least on the doorstep of the consumer recession. It also helps if we've got loss history of our own experience going forward and we can refine it going forward. But make no mistake, I believe we are very well reserved at this point.

Yes. Got you. And Brad, just I know, I guess, on the margin, there's a lot of moving parts here, I guess. But in terms of the biggest drivers of the margin at this point? And it sounds as if we do get a couple of rate cuts, the margin may not even go lower. So just trying to understand the biggest drivers. I know you could be really right or really wrong, but just in terms of the biggest impact on the margin here as we think about directionally, where it's going to go, what should we be watching there?

SOFR, I mean it's always about SOFR. Obviously, it didn't go down even though SOFR took a nosedive with the change in terms of the expected rate cuts over the 6-month horizon. So that's pretty darn powerful. I would say the actual realized rate cuts will have a negative impact. I had spoken in the past that each kind of 25 basis points felt like at one point, it was 7, and I started to realize how wrong I was and that kind of became 4 to 5. And I guess that's still kind of what it feels like, it may be less. It's a bit of a different game now. But as I said, you can look wrong after we hang up this phone, all of a sudden, SOFR takes a 20 basis point dive. And I look like an idiot, it's not really my fault. So it's a difficult game.

Okay. But you -- it sounds as though you would not expect a lot of movement on the margin just in general.

I don't, I don't. You put me on the spot now to take a guess. I'm guessing flat.

Yes. That's what it sounds like. It didn't sound like I'm not asking up or down just more or less, not a lot of movement one way or the other right now. So I appreciate the taking a stand...

I don't know about you, Brian, but I haven't seen a lot of 5% margins in my 25 years doing this. So.

No. You guys are in a great spot. So it was a great spot before the deal, it's even better now. So I appreciate that. And Brad, maybe just 1 last one for me. On the profitability, I mean, given it sounds as though everything is better than when we looked at it before the deal got done. And if a couple of quarters ago, you were maybe thinking that the profitability for Old Second could be in the 150 ROA type of level as you go into next year. It feels like that could be higher today given the performance and what the deal has done thus far better than expected. Is that fair in terms of kind of what you're thinking then versus now the performance you're seeing?

Yes. I wouldn't want to engage in a fistfight if you try to convince me of that. That's certainly the case.

Thank you. As we have no further questions on the line at this time, I would like to turn the call back over to Mr. Jim Eccher for any closing remarks.

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

Thank you, ladies and gentlemen. This does conclude today's call. You may disconnect your lines at this time, and we thank you for your participation.