Good morning, everyone, and thank you for joining us today for Old Second Bancorp, Inc.'s third quarter 2026 earnings call. On the call today are Mr. Jim Eccher, the company's chairman, president, and chief executive officer, Mr. Brad Adams, the company's chief operating officer and chief financial officer, and Mr. Darin Campbell, the company's head of national specialty lending. I will start with a reminder that old seconds comments today will contain forward-looking statements about the company's business, strategies and prospects which are based on management's existing expectations in the current economic environment. These statements are not a guarantee of future performance and results may differ materially from those projected. Management would also 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 the earnings release, which is available on our website at allseconds.com. on the homepage and under the Investor Relations tab. Now, I would like to turn the call over to Mr. Jim Eccher.

Okay, good morning and thank you for joining us. As customary, I have several prepared opening remarks. I'll give you my overview of the quarter and then turn it over to Brad for additional details. I will then conclude with certain summary comments and thoughts about the future before we open up to questions. From a GAAP perspective, net income was $28.9 million, or $0.56 per diluted share in the third quarter. Return on assets was 1.69%. Third quarter, 2026, return on average tangible common equity was 15.77%, and the efficiency ratio was 52.34%. Excluding all adjusting items, which for the quarter was limited to MSR valuation adjustments, net income for the third quarter was $28.5 million, or $0.55 per diluted share. Third quarter 2026 earnings were impacted by $12.7 million of net loan charge-offs, which consisted of commercial and industrial loan net charge-offs of $9.2 million, primarily related to one relationship we have discussed on prior calls. 6 million of that 9.2 million was previously reserved for. This credit is a warehousing and distribution business that has seen its cash flow position deteriorate over the last year. We feel this credit is now largely behind us. The remaining portion of the charge off is related to the PowerSport business, which totaled 3.1 million, which is comparable to the prior quarter of PowerSport charge off level. tangible book value per share decreased slightly to $14.75 as of September 30th from $14.77 as of June 30th, and the tangible equity to tangible asset ratio decreased 19 basis points from last quarter from 11.19% to 11%. The modest declines in these metrics are primarily due to stock repurchases of approximately $39.5 million and a a change in the value of the securities portfolio due to higher rates during the quarter. Our financials reflect an exceptionally strong net interest margin at 5.27% for the third quarter 2026. That's a four basis point improvement from last quarter and 22 basis point increase over the prior year on a tax equivalent basis. Pre-provision net revenues increased in the third quarter 2026 from the prior quarter primarily due to day count slightly higher average loan balances and lower average savings and time deposit balances. Total cost of deposits was 102 basis points for the third quarter compared to 100 basis points for the prior link quarter and 133 basis points for the third quarter of 2025. For the third quarter of 2026 compared to last quarter, tax equivalent income on average earning assets increased and interest expense on average interest bearing liabilities increased nominally. Loan to deposit ratio is now 98.3% as the end of the third quarter compared to 96.4% last quarter and 91.4% as of September 30, 2025. Total loans declined nominally about $7.8 million during the third quarter. tax equivalent loan yields increased three basis points during the quarter compared to the wing quarter, but reflected a one basis point decrease for the quarter year over year. The increase in yield in comparison to the prior quarter is driven by higher short-term rates and repricing of lower yielding loans. We expect this to continue in the near term. Turning to credit, Asset quality trends improved significantly during the quarter, excluding the elevated charge-offs resulting from the single credit we just discussed. Classified loans decreased 57.8 million, and non-performing loans decreased 16.8 million. Criticized loans, an early indicator of stress, declined by 61.3 million, or 38% during the quarter. As a percentage of loans, classified loans have not been this low since before COVID. Needless to say, we are extremely pleased with the credit trajectory and its implication for future quarters. The allowance for credit losses on loans was $64.2 million as of September 30th, or 1.23% of total loans, from $70.4 million at the end of the second quarter, which was 1.34% of loans. Unemployment and GDP forecast 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. Non-interest income declined $191,000 in the third quarter of 2026 compared to the prior linked quarter and nominally from the prior year-like quarter. Wealth management continues to reflect strong performance and growth quarter over linked quarter and prior year linked quarters. Mortgage banking income increased $436,000 compared to the linked quarter and increased $762,000 compared to the like prior year period, primarily due to the changes in mortgage servicing rights mark-to-market valuations. MSR mark-to-market valuations increased $775,000 quarter over link quarter and $1 million over the prior year period. Total non-interest expense for the third quarter of 2026 increased $370,000 from the prior link quarter driven by higher regular salaries, higher officer incentive, and employee insurance costs within salaries and employee benefits, and an increase in occupancy, furniture and equipment due to continued capital projects and growth in real estate taxes and office equipment costs. These increases were partially offset by a decrease in other expense from several one-off expenses in the prior quarter. Our efficiency ratio continues to be excellent as a tax-equivalent efficiency ratio adjusted to exclude core deposit intangibles, Oreo costs, and the adjustments to net income, as noted earlier, was 52.06% for the third quarter compared to 50.8% for the second quarter. Overall, the company continues to perform at an exceptionally high level. Operating leverage is strong, the margin is largely stable, and fee businesses are performing well. The improvement in key credit metrics including reductions in classifieds and criticized during the third quarter will allow us to finish the year over the next quarter in a much better position to demonstrate the full earnings power of old second. I'll now turn it over to Brad for more color.

Thanks, Jim. Net interest income increased to $84 million relative to the last quarter at $83.3 million. It also increased $1.3 million from last year. Loan yields increased three basis points, while securities yields declined five basis points in the third quarter. Total yield on earning assets increased six basis points over the length quarter to 640 basis points. Cost of interest-sparing deposits increased modestly at two basis points, and total cost of interest-sparing liabilities increased one basis point to 174. The end result was a four basis point increase in the tax equivalent NIM to 527, versus 523 last quarter. Obviously, we believe this continues to be exceptional margin performance. Average loans increased 5.5 million, or only 0.1%, over the length quarter, and average deposits, however, decreased by 78 million, or 1.4%. Deposit runoff is largely seasonal this quarter, with some residual runoff and high beta, effectively wholesale deposit captions. Loan origination activity in the third quarter, was much better than it appears and in line with budget, but was offset by significant pay down and payoff activity. Loan prepayments through the first three quarters have already reached full year 2025 levels. Certainly the market environment, including ongoing interest rate volatility, and due to high energy prices, broad-based inflation has resulted in outsized payoffs, it appears to us. Our lending teams are continuing to work very hard and Pipelines for the fourth quarter are building, which should also bode well for the first quarter of 2027 as well. From a stock repurchase perspective, we acquired 1.5 million shares during the third quarter, resulting in a reduction to equity and a growth in Treasury stock of 39.2 million. Year-to-date repurchases total 3.4 million shares at an average price of 2274. That's a 74.7 million reduction in equity This has a negative impact on the net interest margin, obviously, but a positive impact on earnings per share. We do expect to continue being active in the repurchase of shares given our extremely strong capital position and current and expected earnings trends. In addition, based on the strength of the balance sheet and resilient income statements trends, Old Second elected to increase the common dividend in the fourth quarter of 2026 by 14%. as we continue to deliver growth commensurate with the bank's performance. Overall, margin trends still feel very good. Obviously, rates along the curve went up quite a bit with recent instability in the Middle East and previous expectations for rate cuts have reversed course into rate hikes. If those trends remain stable from here and high-cost deposit attrition slows, I would expect to maintain exceptional margin performance. I do believe at this point, however, that we are likely to give back and the rest of the Bancorp, Inc.

were optimistic due to the improvement in credit metrics this quarter, and the rest of the bank is performing ahead of our expectations. We remain positive about loan growth opportunities and the potential for more strategic growth opportunities as well. That concludes our prepared comments this morning, so I will turn it over to the moderator and open it up for questions.

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

Hey, guys. Good morning. Thanks for taking the questions. Good morning, Nathan. Jim, obviously, you know, disappointing, you know, charge-off number. Obviously, you mentioned you had this, you know, previously allocated for. And, you know, we've been through, you know, several quarters with, you know, some credit noise. But just given, you know, the reductions in both non-performers and criticized loans in the quarter, Can you just help us in terms of your degree of confidence that we're now in a position today where we can expect, you know, charge-offs to be consistently lower? I think we've talked about a range of maybe 35 to 40 basis points as kind of a normalized range going forward. But can you just speak to kind of your degree of confidence that we can expect that to unfold going forward?

Sure, Nate. Yeah, I mean, this is obviously the one charge-off. This has been a lingering credit that we've been working out for the better part of a year. The company is under contract to be sold, albeit at a much lower price, so we feel we've got this now largely behind us. I think what we're most encouraged about, Nate, is the significant reductions in classifieds and even special mention. You've got to go back to October of 2019, way before COVID, to have classifieds at this level. We think we've turned the corner at an inflection point with a lot of this credit and understanding we are going to have a certain degree of power sport charge-offs on it quarter over quarter, but we feel as good about the loan book today as we have in several years.

Okay, great. That's helpful. And Brad, a little surprised to hear your comments around giving back five pips of margin. in the fourth quarter, just given how low beta your deposit franchise has historically been. You know, I appreciate deposit pricing competitions increasing these days, but, you know, just given how much repricing you have and assets tied to short-term rates, you know, curious if you can kind of just unpack some of that a bit, just in terms of what your beta expectations are for the fourth quarter. And again, if you could remind us kind of what you have repricing on the left side of the balance sheet. tied to the short-term rates?

So, there's a couple things going on. What I would say from the expectation of giving back a few basis points, the drivers of it, one is how many shares we've repurchased. Obviously, we're giving up a fair amount of free funding in order to do that. That has a negative implication. The other thing is the loan-to-deposit ratio is pretty much nearing the ceiling at this point. So for the first time in a while, we are participating at the marginal funding rate relative to our loan growth expectations. And I think that's probably the biggest driver in what I'm talking about. There are, as you point out, things on the other side that are to the good. At any given time, 50% of our book is variable. Generally, it reprices with a 30-day lag, and then we move relative to SOFR, but SOFR is ahead of what the Fed's been doing, and that rate's been high for a while, so we've been seeing that benefit for quite some time. That being said, Jim was positively giddy the other day talking about this 3.5% commercial real estate loan that repriced in the sixes, and we are seeing some of that. and that's obviously a big benefit.

I would say 45% of our loan book is going to reprice in the next three to four quarters and 25% of our securities portfolio is going to reprice at the same time. So there will be some tailwind there.

The net of all that is we're going to hang out pretty high at these levels but guessing within plus or minus five basis points is clearly I've been pretty bad at it over the last year or so, but I've been bad on the right side of it. So maybe I'm hedging a bit, maybe I'm right, but I still think we're solidly above a 520 margin for the near and intermediate term.

Okay, great. And then can you guys just kind of speak to just the buyback appetite? Obviously, you know, really stepped up on the buybacks, you know, in 3Q and over the course of this year. To what extent do you guys want to continue down the path at a similar clip to what we've seen recently? And within that context, curious how you want to balance buybacks with perhaps an acquisition at some point, perhaps sometime next year.

I have plenty of capital to do both, Nate. I mean, as you can see, even this quarter, we didn't shrink capital and we bought back 3% of shares. I think it's reasonable for investors to expect us to take out 5% of shares a year and still have the ability to execute on the type of M&A that we're looking for, which, as we've talked about in the past, is relatively smaller than what we would have talked about a couple of years ago. It's kind of fill-in type stuff, from our perspective, is where the value would be at this point.

Okay, that's really helpful. I'll step back. Thanks, guys. Yep, thanks, Nate.

Thank you. Our next question is coming from Mark Shutley with KBW. Your line is live.

Hey, good morning.

Good morning. So, you know, loans were roughly flat this quarter with higher prepayments, and I think you said the outlook is low single-digit growth from here, but I was just curious sort of

all the pipelines looking and where you expect to see that growth in the coming quarters. Thanks.

Yeah, I think as Brad pointed out in his comments, loan production was better than maybe what the results showed. I mean, it's probably one of the stronger quarters in the last six, seven quarters. I think what we saw was outsized prepayments, 2x of what we would normally see in a quarter. couple that with the fact that we've been actively trying to work down our syndications portfolio. As you know, we have had a significant syndications portfolio come over with West Suburban. We reduced that $53 million this quarter alone, so had we not had that and the outside's payoffs, we would have had a really good quarter. As far as the pipeline is concerned, as of right now, it is looking like one of the more solid fourth quarters we've had in a long time, and we're optimistic we're going to get out of the gates pretty well in the first quarter next year as well.

That's helpful. Appreciate it. That's it for me.

Thank you.

Thank you. Our next question is coming from Jeff Rulis with DA Davidson. Your line is live.

Thanks, good morning. Wanted to kind of maybe jump off of the loan demand and higher rates. I guess initially you're seeing any pullback on the consumer power sports from a loan demand standpoint. Is that any impact that you're seeing out there?

Yeah, this is Darin Campbell. Yeah, no, we're not seeing any pullback at this point. Application volume for us this year is up a little bit over last year from the application process. I will say we've turned down more applications this year compared to last year just for, you know, consumers are stressed, so we're accounting for more debt that we're seeing on credit reports. And so we've turned down, as I said, about 7%, but originations is very similar to the same time last year. Applications is up a little bit. So overall, Strong, our collector car business is actually up quite a bit this year as well, so we're seeing a lot of demand in that area as well, so overall good.

Yeah, Jeff, I think when you look at the commercial bank, our pipeline build right now is pretty broad-based. We're seeing it building in small business, middle market, C&I, healthcare, investment, CRE, and even sponsored investment leasing, so we're as pleased as we can be. And normally four quarters is pretty soft, but pipelines are really pretty good right now.

I appreciate that. And I guess the other side of that is I think, Jim, you noted that nice to see the benefit of repricing in the book. The flip side of that is any thoughts on repricing risk on the credit side as maybe higher rates as as customers face that. I guess any color on, are you helping with borrowers in terms of that repricing risk potentially?

Yeah, I mean, keep in mind our loan book is very short duration, so a significant part of some of these credits have already been in a higher rate environment, but we stress test constantly. We feel early stage indicators are low and no concerns at this point. Darin, you want to add anything on the consumer side?

Yeah, I think, yeah, Brian, just one other thing that's worth mentioning on the call. We're very excited to announce that we signed a multi-year endorsed agreement with Sakati USA. So we, something we've been working on for quite some time to get to the finish line. That partnership was announced and launched last week. the dealer feedback that we've received from the dealer network has been tremendous the application flow has already started to come in so that's been exciting and as we think about growth going forward even in our fourth quarter this will give us a little boost for the fourth quarter but if you think about for 27 there'll be a substantial boost for us in originations next year and Ducati is one of the you know the best motorcycle brands that's in the market so we could not be more excited about this opportunity for us

Sounds good on the production side, but again, Jim, the credit and the repricing on the credit front, feel good about that given the short duration?

Yeah, this is Brad. I think what you've seen from us in terms of the spike in classified and criticized over the past three years has been that very thing. Yeah, I think it's pretty safe to say we're through that. Okay.

Fair enough. Thanks.

Thank you. Our next question is coming from Ken Kohut with Raymond James. Your line is live.

Hey, good morning, guys. Thanks for taking my questions. I'm filling in for Danny Tamayo. A lot of my questions have been asked and answered, but maybe just on deposits, you've been talking about optimizing your deposit base really since the Evergreen acquisition closed to more resembled a legacy old second deposit base. We saw another step down in deposits this quarter and you specifically called out the runoff of higher cost funding acquired from Evergreen. So I'm just wondering how much work is left to do on that front and should we expect to see further deposit runoff in the coming quarters?

I think you'll see deposit growth in the fourth quarter and I think that most of the attrition post that acquisition is largely behind us. My expectation would be that deposits would grow from here. Some of that will come at a little bit more rate. and obviously we remain on the lookout to supplement our deposit base through M&A activity as well.

Great. Thanks, Rob.

Yep.

Thank you. Our next question is coming from Brandon Rudd with Stevens, Inc. Your line is live.

Morning. Thanks for taking my questions. The first one may be kind of an adjacent question to a prior one. Just on the reserve, it's come down for the past few quarters now. Are there any remaining specific allocations within that, or is this 123 kind of the steady state you kind of anticipate going forward?

Yeah, I mean, there's certainly some reserve allocations built into the portfolio, but I think the drawdown in that reserve is largely reflective of the fact that our classifieds have come down significantly, right? Right. We won't run much lower from here just due to the fact we'll continually have to replace, you know, power score charge-offs quarter over quarter, but I don't see a majority drawed out for the reserves at this point.

Okay, perfect. Thank you. And then just one on expenses. It came in a touch higher than we had in our model. Is this like $51.5 million a good expectation for the near term and then growing, you know, Thank you.

As a reminder, ladies and gentlemen, if you do have a question, please press star 1 on your telephone keypad. Our next question is coming from Brian Martin with Breen Capital. Your line is live. Hey, good morning, guys.

Hey, Brian.

Hey, Brian. Hey, Brad, maybe just one follow-up on the expense one. Just the resolution of some of these credits that you've gone through the last couple quarters, is that a tailwind to the expense line? I mean, I get your comments about the outlook, but is that part of the reason, I guess, maybe we get a little improvement if there is any on the expense side?

So, I mean, that's the big delta between kind of the way you look at things and the way I look at things, Brian, is there's always ins and outs and what have yous in every quarter. And this quarter, for example, our third-party expense is elevated. And next quarter, it'll be something else. But there's always stuff coming and going. And I look at it much more granularly than probably it appears. Like, My income statement has like 42 captions for expenses and yours has like four. But there's always stuff moving around. I think that, you know, in a world where inflation in any real sense is probably between four and five, being in that three to four range is a pretty good thing given inflation. I don't know if you've noticed, your employer is probably cutting your health care benefits and increasing your costs, but our costs are projected in that caption to be up pretty close to 20% next year, which is shocking. So there's a lot of things going on, and I actually feel like kind of that 3% to 4% range is doing pretty damn good, and I feel great about it.

Yeah, that's what I meant, Brad. I guess it seems like you're going to have other stuff. This gives you a little bit of a tailwind, or at least a little help top set some of those other items.

It helps us deliver on that guidance I just gave, for sure. I wouldn't expect... I think we're doing a lot of heavy lifting to beat at that level, is the point I'd like to make.

Gotcha. That's clear. Thank you, Brad. And then Just on the opportunity set on, I know you talked about strategic opportunities, Jim, just the opportunity set in terms of what's out there. Are you seeing more opportunities today? Are there less out there today? Just kind of how's the environment on opportunities in the other side?

Brian, you know Chicago as well as anybody. There's been a handful of transactions obviously announced, and we continue to have conversations. I wouldn't say it's more robust now than it was a year ago. They're active and ongoing. We're hopeful an opportunity arises next year.

Yeah, okay. And then the last two for me were just the new rates on loans and I guess what you're putting on the securities book, Brad. Just we kind of reconciled to those numbers Jim gave in terms of what's repricing here. What are new rates on securities you're thinking about? Is it kind of 5%-ish and then on loans?

I'm not adding the securities book at this point, given where we are in deposit competition. It would be largely static in terms of what you'd see there. If there are flows coming out, it will be replaced at similar rates. So I wouldn't expect any real movement in the securities book. In terms of loans, it's still in the kind of mid-sixes type range would be my guess.

Okay. Okay. got you, and then the last one was just on the syndication book. I know you mentioned it's been running off, Jim, obviously. Just where it stands today, and I guess that runoff's just going to continue. It's just a steady decline in that book.

Is that how to think about that so it's not going to really impact the... Yeah, I mean, you know, at NRP, we were $550 million in syndications. We've reduced that by over 60% since the end of 21.

Yeah.

Roughly $285 million. will go to zero now. It's just not going to be a material part of our balance sheet. We just view that business as transactional, non-franchise enhancing type business. But we'll continue to do some of it. It's just not going to be a primary focus.

Okay. and the payoffs will just, you know, I guess that's what I was getting at. The payoffs won't be a major factor in terms of as we go forward here, like maybe it has been as you've wound it down.

Yeah, it won't be as much of a headwind as it has been, you're correct.

Yeah, okay. That's all I had, guys. Thanks for the calls or the questions.

Yep. Thanks, Brian. Thanks, Brian.

Thank you. Ladies and gentlemen, if you do have any final questions or comments, please indicate so now by pressing star 1 on your telephone keypad. Okay, as we have no further questions on the lines 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 look forward to talking to 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.