Old Second Bancorp, Inc. Aktie

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.

Good morning, everyone, and thank you for joining us today for Old Second Bancorp, Inc. Second 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, and Gary Collins, the Vice Chairman of our Board.

I will start with a reminder that Old Second's comments today will contain forward-looking statements about the company's business, strategies and prospects, which are based on management's existing expectations in the current economic environment. These statements are not a guarantee of future performance and results may differ materially from those projected. Management would ask you refer to the company's SEC 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.

So I will now turn it over to Jim Eccher. Over to you.

Good morning, everyone, and thank you for joining us. I have several prepared opening remarks. We'll give you my overview of the quarter and then turn it over to Brad for additional details. I will then conclude with a certain summary comments and thoughts about the future before we open it up to Q&A.

Net income was $21.8 million or $0.48 per diluted share in the second quarter. Return on assets was 1.53%. Second quarter 2025 return on average tangible common equity was 15.29% and the tax equivalent efficiency ratio was 54.54%. Second quarter earnings were significantly impacted by a couple of items, the first being a $531,000 and MSR mark-to-market losses or penny per share. And an $810,000 charge in merger-related expenses or $0.01 per diluted share primarily related to the Bancorp Financial merger, which closed on July 1.

Despite these items, profitability Old Second remains exceptionally strong and book value continued to compound heading into the July 1 close of the Evergreen Bank acquisition. The tangible equity ratio increased by 49 basis points from last quarter from 10.34% to 10.83% and has increased by 144 basis points over the like period 1 year ago. Common equity Tier 1 was 13.77% in the second quarter, increasing from 13.47% last quarter. We feel really good both about profitability and our balance sheet positioning at this point. Brad will provide additional color on our capital positioning in his comments.

Our financials continue to reflect a very strong net interest margin with pre-provision net revenues increasing from exceptionally strong levels. For the second quarter of 2025 compared to last quarter tax equivalent income on average earning assets increased $1.7 million, while interest expense on average interest-bearing liabilities increased $343,000. Net interest margin improved 22 basis points year-over-year on a tax equivalent basis and decreased 3 basis points compared to last quarter. Total cost of deposits was 84 basis points for the second quarter compared to 82 basis points for both the prior linked quarter and for the second quarter of last year.

The loan-to-deposit ratio is 83.3% as of June 30 compared to 81.2% last quarter and 87.9% as of June 30 last year. I'll let Brad talk about that more in a moment. Second quarter 2025 reflected an increase in total loans of $58.4 million from last quarter, driven by growth in construction and lease portfolios during the quarter. Tax equivalent loan yields reflected a 3 basis point decrease during the second quarter of 2025 compared to the linked quarter and a 4 basis point decline for the quarter year-over-year.

Asset quality was largely stable this quarter with nonperforming assets essentially flat and only a modest increase in classified assets as well. We recorded a $1.2 million gross charge-offs in the second quarter of 2025, of which the majority was associated with a single C&I credit, which is fully reserved for. One property was moved to OREO during the quarter with a favorable outlook regarding its disposition this year. The allowance for credit losses on loans increased to $43 million as of June 30 or 1.08% of total loans from $41.6 million at March 31, which was 1.05% 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 set projections. The impact of the global tariff volatility was considered within our modeling. Provision levels quarter-over-linked quarter reflect no material change as our projections continue to be aligned with the prior quarter's assumptions for allowance allocations.

Noninterest income continued to perform very well in the second quarter compared to prior year like quarter after excluding $893,000 in debt benefits in BOLI realized in 2024 as wealth management fees increased $324,000 or 11.7% and service charges on deposits increased $280,000 or 11.2%. Mortgage banking income reflected a slight increase in the second quarter of 2025 compared to the prior linked quarter, and a decrease in the prior year like quarter primarily due to volatility of mortgage servicing rights, mark-to-market valuations. Excluding the impact of mortgage servicing rights, mark-to-market adjustments, mortgage banking income increased nominally quarter over linked quarter and from the prior year like period.

Other income was flat in the second quarter compared to the prior linked quarter and higher compared to the prior year like quarter. Expense discipline continues to be strong with total noninterest expense for the second quarter of 2025 at $1.1 million less than the prior linked quarter. Our efficiency ratio continues to be excellent as the tax equivalent efficiency ratio adjusted to exclude core deposit intangibles, amortization, acquisition costs and OREO costs was 54.54% compared to 55.48% for the first quarter of 2025.

Our focus now is on the effective integration of Evergreen Bank and optimizing the balance sheet for its impacts. We have sold the bulk of the acquired securities portfolio from Evergreen and reduced reliance on wholesale funding within the legacy Evergreen Bank as it was merged in Old Second. Nothing really has changed relative to our expectations in terms of financial performance and targets associated with the transaction. Cost saves estimates are on target and earnings expectation are maybe biased to slightly higher. Next quarter will, of course, be slightly messy and feature the bulk of acquisition-related expenses.

With that, I'll turn it over to Brad for additional color.

Thank you, Jim. Net interest income increased by $1.3 million or 2.1% to $64 million for the quarter ended June 30 relative to the prior quarter of $62.9 million, also increased $4.5 million or almost 8% from the year ago like quarter. Tax equivalent yields increased 16 basis points and loan yields were 3 basis points lower than the second quarter of 2025 compared to the first quarter. Total yield on interest earning assets decreased 2 basis points over the linked quarter to $568. Interest-bearing deposits and total interest-bearing liability costs experienced a 2 basis point increase. The end result was a 3 basis point decrease in the tax equivalent NIM to 4.85% for the quarter ended from 4.88% last quarter. We believe this continues to be exceptional margin performance.

Average deposits increased $51 million or 1.1% quarter-over-linked quarter, that's primarily seasonal and not a lot going on underneath the hood there. Old Second should continue to build capital as evidenced by the 144 basis point improvement in the TCE ratio over the past year, which means we have added $1.78 of tangible book value over the last 12 months, pretty strong performance. Evergreen will absorb some of this capital cushion, however, Old Second will still have an exceptionally strong and flexible capital position.

To that end, and subsequent to the end of the quarter, we repurchased approximately 327,000 shares and a privately negotiated transaction at a modest discount to market. Our perceptions on capital return continue to evolve given the Evergreen Bank acquisition consumed significantly less capital than almost any other potential deal we could have done. Our financials remain relatively uncluttered by the impact of purchase accounting going forward due to the lack of significant fair value marks associated with the transaction.

Noninterest expense was materially on track with the previous quarter, increasing $1.1 million primarily due to significant lower OREO expenses in the current quarter Noninterest expense is running higher year-over-year, increasing $5.5 million compared to the same quarter last year, primarily due to higher salaries and employee benefits as well as occupancy cost, computer and data processing and core deposit intangibles. Most of the core deposit and tangible expense related to the 5 branches we acquired late last year.

Overall, we are hopeful we can keep core expense growth, exclusive of acquisitions in the kind of 4% area. Not a lot going on in terms of this quarter, I think it's pretty transparent. The trends remain very strong, still feel very good, as Jim mentioned, about the estimates we put forward as it relates to Evergreen. You also mentioned bias slightly higher. I think that from a rate standpoint, things still feel roughly balanced to me in terms of status quo versus some level of recession and/or rate cuts.

I don't see rate cuts happening absent a recession. Obviously, there's some butterfly somewhere that's flapping it's wings that can make things very different than that expectation. But as we sit here right now, I feel exceptionally good about how we're positioned. And I believe that while it's difficult to get the margin forecast for next quarter, given we're not done with the fair value marks. I'm very bullish that our market will remain at exceptionally strong levels over the remainder of the year and into next.

With that, I would like to turn the call back over to Jim.

Thank you, Brad. In closing, as Brad mentioned, we feel this is a very solid quarter for the company. We remain confident in our positioning and extremely exciting with what the Evergreen Bank transaction will add for us. We're off to a strong start for the first half of 2025 and we are extremely optimistic about the rest of the year, ahead as we welcome the Evergreen team and its product offerings. That concludes our prepared comments this morning.

So I'll turn it over to the moderator and open it up to questions.

[Operator Instructions] Your first question is coming from Jeff Rulis of D.A. Davidson.

Just wanted to check, kick in on the -- maybe the timing of conversion expected on Evergreen. And on that expense run rate, it's a 2-part, the conversion timing and then run rate -- kind of looking at -- kind of 52, 53 on a core basis. Does that sound in the ballpark?

Yes, I think some of that relates to timing of the cost saves. The conversion, we expect to be kind of early fourth quarter type range, early to mid. So we -- by the time we report fourth quarter and kind of December is the first time that you'll see a closer to final run rate on operating expenses and then first quarter should be relatively clean.

Got it. And then if you could remind us that at acquisition date, the loan to deposit balances brought over?

For Evergreen? [indiscernible] They were just north of 90%.

Okay, 90% loan deposits.

Well, the actual levels, I think it was [ 1.3 billion ] -- 1, 2 in change.

Got it. And then just one last one on the -- you called out the owner-occupied CRE that bought into classified. So if you could just wrap a little more detail about kind of geography or your position on that one?

Yes, Jeff, it really steps from 1 large health care transaction in Oregon. We don't see a loss at this at all. We're in a very strong collateral position, 70% covered loan to value. The facility had some restrictions put on by the state of Oregon, which caused a drag on their ability to lease up the facility. A lot of those restrictions have been freed up and we expect cash flow to get stronger in each subsequent quarter. So we've got a good sponsor behind us as well. So we don't see any loss given the fault here.

And your next question is coming from David Long of Raymond James.

Good morning, everyone. Just First question relates to just overall commercial client sentiment. When we were back in April, having this call, we were coming off a Liberation Day and everything seemed to be toned down a bit. Just curious what you're hearing from your commercial customers and their appetite to grow their business and close some of the loans that may be in your pipeline?

Yes. I think, first of all, Dave, I would say our commercial clients are weathering the tariff uncertainly exceptionally well. Appetite for CapEx has been muted, I would say, for the first half of the year, and that shows up in pretty low levels of line utilization. We are seeing pockets of growth in our leasing group and some in commercial real estate. We haven't -- even though we had a pretty good quarter from a loan growth perspective, that did not come with any growth in our sponsored finance group. That group has been obviously a historically very strong performer for us.

Loan demand in that area has been somewhat weak, although they are reporting pretty strong second half pipeline. And then you couple that with Evergreen Bank, which typically, historically is a very strong second and third quarter asset generator in the powersports area. So we're encouraged by loan pipelines. And the second quarter for us, that was our strongest growth quarter in over 2 years. So we think low to mid-single-digit growth is possible still for 2025.

Got it. Appreciate it. And then as a follow-up, you mentioned the Evergreen deal and maybe having a little bit more of a positive bias than when the deal was announced. Is that tied to the performance of that bank since you've announced the deal? And then as a tie-in to that, just any turnover worth noting with that transaction?

Yes. They're performing well ahead of what we had assumed. I mean the way M&A works is you basically have stub period that you have to project in terms of what it's going to be and what level of profitability is performing at and you project it forward 1 year, 2 year, 3 year as a stand-alone entity that's for better or worse, that's kind of industry standard that was done. They are already on the stand-alone entity performing at the profit level that I had assumed for all of next year.

So they are running better than what we had expected. It's a great asset mix. It's certainly pretty good probably to our margin, which I hadn't assumed it would be. That's difficult to say with fair value is not completed. That's the bias right now. My gut is usually pretty good. You didn't give me credit. I was right on margin this quarter, even though nobody got mad that we missed it by 20 basis points last quarter, because I guess that we missed it in the right direction. But overall, things feel pretty good.

Out next question is coming from Nathan Race of Piper Sandler.

I was hoping to talk about the outlook for charge-offs going forward. Obviously, you're picking up a higher risk reward business from Evergreen when you think about their lending specialties. So just curious with that business in the fold and all the improvement on the legacy Old Second side of things, how you're thinking about kind of the charge-off trajectory going forward?

Yes. Nate, I mean, I think obviously, a solid quarter for us from a charge-off perspective, I think we just had one about $1 million that fully reserved for. But I think investors should know that in powersports lending in general, loss rates can run a little bit higher. But you have to look at that hand in hand with the contribution margin that, that portfolio generates. So losses in that book could be anywhere between what, 1% and 1.5%. I feel like that's pretty good. But you're also looking at a portfolio with an average coupon today on new assets going on around 9%. So you have to look at those things hand-in-hand going forward.

Right. So if I was doing some quick back of the envelope math on their portfolio and overlaying that loss rate? Am I in the ballpark of around kind of 30 basis points going forward on charge-offs?

Yes, I think so. I think that's good.

Okay. Great. And then obviously, with Evergreen, you're picking up a higher beta deposit franchise, particularly relative to legacy Old Second. So just curious, Brad, to maybe get your updated thoughts on how you think the margin responds following a 25 basis point Fed cut at some point going forward?

Yes, what is that?

I will let you pontificate on that, Brad.

I don't know, man. I was just [indiscernible] yesterday and what used to be $13 is now $16 and that happened like in the last 2 weeks. And somebody just forwarded me the price increases at Walmart in the last 30 days. I am -- my interest rate prognosticator newsletter has a really hard time seeing our rate cut this year. I don't see a basis for it. I think people will [ fight ] for it. Here we are also in a land of mean stocks running again. Jim had to exit this call for a little bit to go and buy some [ GameStop ] and some calls. I think. So he'll be back in just a second.

So it's against my moral fiber and something approximating religion to think about a rate cut this year. It doesn't make any sense to me, whereas before we had said we lose somewhere between 4 to 7 basis points for every 25 basis point cut, I would say that's 25% lighter conservatively on a pro forma basis. But there's more margin movement for us right now just in balance sheet movements. As Jim mentioned, we sold the entire securities portfolio and reduced some wholesale funding. All those assets were limited. They were being carried at a net negative margin contribution.

So there are a number of things going on under the hood that are more powerful than movements and expected interest rates within the Fed futures curve. Put it this way, we gave up 3 basis points this quarter despite something approximating 40 basis points of movement out the SOFR curve. So I think we're less sensitive than maybe people expect at this point. And I have been somewhat surprised that the margin durability given what the curve has done over the last year. I think that if you had 3 beers in me, I would probably raise what I believe the long-term margin floor is for Old Second even on a stand-alone basis before Evergreen was added to it. So this is -- if you know me, this is about as bullish as I sound, monotone and all. I'd say if you make me assume there's a rate cut this year, I would say 4 basis points to give up. Man, I answered that with a lot of words.

Yes. I mean, I would say that we're 3 weeks after the close, right, of Evergreen. And you're right, they have higher beta funding shop, but we started bringing high-yield money markets down and deposit levels have been remarkably solid. We have not seen a whole lot of runoff. Again, it's only been 3 weeks, but I would agree with Brad right now, things are about as good as we could have hoped.

Got it. That's really helpful color and thoughts. So Brad, just maybe starting for the third quarter, given the repositioning of some of the securities portfolio at Evergreen and some of the other impacts on the deal, how are you thinking kind of like a range for the margin for the third quarter?

Nate, I'm going to go flat, but there's a wider margin error than is typical with me. So it's flat plus or minus 10 basis points instead of plus or minus 5. And bearing in mind, when I answer that last quarter, I said flat and then it went up by 20 basis points. So without the fair value work is being done, it's difficult to say with any precision, but it doesn't feel like down, this is what I'd say.

Okay. That's helpful. It sounds like you're more keen on the margin outlook than tax rate. So I'll leave it there.

And your next question is coming from David Konrad of KBW.

Just a little bit of a follow-up to that recent discussion. Just maybe add a little color to absent of what you paid down in wholesale deposits. Kind of what is their cost of funds bringing over and maybe the leverage you guys have over the next year plus of just working down that with your strong deposit franchise?

I mean, you can see what their cost of funds were and in their stand-alone financials. It's in the 4% range. Where do I expect to be by the end of next quarter? I would expect reliance on purely market rate funds, and that's something with 4% handle to be $100 million to $200 million less. So I'll let you math your way to that. But in aggregate, the overall stand-alone cost of funds within Evergreen should be down somewhere between 30 and 70 basis points. Again, there are movements here. And I'm speaking about a quarter that is only 1/3 of the way done. So it's a little difficult, decisions are being made on the fly here.

For example, nobody has asked me yet, but I don't think we'd be able to sell that solar loan portfolio that we had mentioned previously because I don't want to sell it where we have to market, then the mark is so steep that it actually becomes a pretty good asset. So we're learning as we go here, but that's about as precise as I can get at this point.

But moving past this quarter, I guess, can your deposit growth absorb their loan growth or you continue to kind of fund marginally with that set of...

We've got a substantial amount of ring given where our stand-alone loan-to-deposit ratio is and time deposit runoff coming in future quarters. It's not an overnight thing. But as we exit next year, if I haven't guessed, I would say we would be at a 90% loan-to-deposit ratio and an overall cost of funds that's substantially better than A+B. I spoke previously about a desire to pick up some supplemental small deposit franchise equivalent to, say, First Merchants branch deal that we did prior that would meaningfully basically return us to where we were before. So there's certainly room for that. Will it come to fruition? I don't know. Hope so.

Your next question is coming from Terry McEvoy of Stephens.

Maybe just a follow-up, Brad, on that last question, would your preference be to wait until Evergreen is integrated before your next transaction or something along the lines like you just mentioned, became for sale, would you take a serious look this year?

I mean, we're always looking, but ideal timing wouldn't be before October or no. I think there will be a serious risk of like a palace crew and me falling out a window or something like that. People will be very upset with me internally. Acquisitions are a lot of work. And you hear things about in this industry of -- it's only 4 branches or it's only 5 branches where it's only 10 branches and that is a wild understatement on the amount of work that's involved. This one does have some advantages that help us, namely a similar core that makes things a little bit easier, but there are a whole lot of buys and a whole lot of fees that need to be dotted and crossed so you get it right. It's a lot better than it used to be, but small missteps in conversions can touch in the newspaper as we've seen even in some deals around discount in the last couple of years. We don't want to be in the news.

Yes. I mean, Terry, I think in a perfect world, we'd like to pause here, digest the deal integrated and start growing organically a little better. But as you know, M&A timelines are unpredictable, rarely do seller buyer timelines come into alignment. So we'll continue to be opportunistic, but we've got plenty to do today.

I appreciate that. And then you mentioned repurchasing 327,000 shares in a private sale. Did that happen after the deal? And were the sellers connected to the bank that's sold? Or was that separately or separate? And then I guess as a follow-up with the appetite for incremental buyback?

It was a private equity investment and it was subsequent to the deal closing. The execution price was $18 per share in quarter. Buyback remains a viable option for us, Terry.

[Operator Instructions] Our next question is coming from Brian Martin of Janney.

I'll leave the tax question, Brad, since it sounds like you don't want to end on that anyhow. So maybe just one back for the margin, Brad, just bigger picture. Once things reset in third quarter and you get through some of the noise which -- it sounds like you're more optimistic than pessimistic. But just directionally from there, how should we be thinking about the margin kind of in a flat rate environment? I mean who knows what happens at the Fed. But once you kind of reset and get to the noise like you're talking about this quarter, can you give any thought just directionally how the margin, kind of what the puts or takes on the outlook thereafter?

I mean a flat rate environment a longer, meaning that we don't see this whipsaw in SOFT and overnight index rates that we've seen over the last 90 days, but truly flat along the curve, our margin is stable and durable -- slightly higher with what Evergreen brings to the table. Obviously, different per scenarios from that, from totally stable, which doesn't really exist in nature. Things are always moving in one direction or another. But I feel very good about what our margin outlook is. We're not offside on any debt. We do have a sub debt issue that like to deal with next year that will be a negative to margin, and don't know what the plan is for that yet. But assuming that gets taken care of in a way that's not dilutive to margin, then I would say our margin is both stable and durable.

Got you. And you talked about just kind of a long-term floor maybe being raised. Kind of how are you thinking about that kind of that long-term floor on where the margin is as you look perspectively?

Well, I mean, you've heard me say it before that I do not believe that there is a pathway back to a 0% interest rate world. And then bank like us are fundamentally better positioned even though there aren't many banks like us. But -- and I had said previously and saved everybody the time of going back through transcripts. I said previously that I believe that our margin floor was probably around 4%. If you tie me down and maybe answer the question today, which you kind of are, it's probably more like [ 4.25% ] would be my guess at an absolute floor.

Got you. I appreciate all the color. And then how about just in terms of once you -- given some of the noise that's going to play out here in the near term of the deal, can you talk about what -- when you get to that maybe first quarter of next year with the deal closed, integrated, kind of how you're thinking about ROA just so we kind of back into kind of how we should think about things. But what do you think ROA is going to trend to in '26, whether you point to a quarter or a year, Brad. Whatever you can offer just in terms of your outlook from where we stand today?

You are confusing me now. Are we talking about rate cuts land again? Or are we talking about -- are we still talking about stable interest rates? What are we talking about here?

We'll go with your scenario, Brad, I don't know, just like you don't know. I guess I'm just wondering where you think ROA is going to land in your thinking, which sounds like probably no rate cuts. So go with that. That's fine.

I would feel very comfortable above [ 1.50% ] ROA.

Above [ 1.50% ] okay. And then I think you answered the question about buyback, you're on the table at this point for...

Open to it, yes.

Open to it, okay. And then just last one on loan growth. It sounds like you're a bit more optimistic on loan growth?

Second and third quarter generally are better quarters, Brian, do you know that. What I'm most encouraged about is having more lending verticals to help sustain that growth has been encouraging. Now to be fair, we did not have as many payoffs or paydowns in the second quarter, but it was one of our stronger origination quarters than we've had in some time. So I would expect some growth again in the third quarter and then probably some stabilization in the fourth and first quarter.

Thank you very much. Well, we appear to have reached the end of our question-and-answer session. I will now turn the call back over to Jim for any closing remarks.

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

Thank you very much. This does conclude today's conference. You may disconnect your phone lines at this time, and have a wonderful day. We thank you for your participation.