Old Second Bancorp Inc: Form 10-Q for the period ended Sep 30, 2025

Overview

The following discussion provides additional information regarding our operations for the three and nine months ended September 30, 2025, compared to the three and nine months ended September 30, 2024, and our financial condition at September 30, 2025, compared to December 31, 2024. This discussion should be read in conjunction with our consolidated financial statements as well as the financial and statistical data appearing elsewhere in this report and our Form 10-K for the year ended December 31, 2024. The results of operations for the three and nine months ended September 30, 2025, are not necessarily indicative of future results. Dollar amounts presented in the following tables are in thousands, except per share data, and September 30, 2025 and 2024 amounts are unaudited.

In this report, unless the context suggests otherwise, references to the “Company,” “we,” “us,” and “our” mean the combined business of Old Second Bancorp, Inc. and its subsidiary bank, Old Second National Bank (the “Bank”).

We have made, and will continue to make, various forward-looking statements with respect to financial and business matters. Comments regarding our business that are not historical facts are considered forward-looking statements that involve inherent risks and uncertainties. Actual results may differ materially from those contained in these forward-looking statements. For additional information regarding our cautionary disclosures, see the “Cautionary Note Regarding Forward-Looking Statements” on page 3 of this report.

Business Overview

The Company is a bank holding company headquartered in Aurora, Illinois. Through our wholly-owned subsidiary bank, Old Second National Bank, a national banking organization also headquartered in Aurora, Illinois (the “Bank”), we offer a wide range of financial services through our 55 banking centers located in Cook, DeKalb, DuPage, Kane, Kendall, LaSalle and Will counties in Illinois. These banking centers offer access to a full range of traditional retail and commercial banking services including treasury management operations as well as fiduciary and wealth management services. We focus our business on establishing and maintaining relationships with our clients while maintaining a commitment to provide for the financial services needs of the communities in which we operate. We emphasize relationships with individual customers as well as small to medium-sized businesses throughout our market area. We also have extensive wealth management services, which includes a registered investment advisory platform in addition to trust administration and trust services related to personal and corporate trusts and employee benefit plan administration services.

On December 6, 2024, we completed our branch transaction with First Merchants Bank (“FRME”). Under the terms of the purchase and assumption agreement, we assumed approximately $268.0 million in deposits related to the branch locations acquired and purchased approximately $7.1 million in branch-related loans along with other branch-related assets. The five branches acquired in the transaction are located in Cook and DuPage counties in Illinois as part the branch purchase agreement.

On July 1, 2025, we completed our previously announced acquisition of Bancorp Financial, Inc. (“Bancorp Financial”), pursuant to the agreement and plan of merger dated February 24, 2025. At the effective time of the acquisition, Bancorp Financial merged with and into the Company, with the Company continuing as the surviving corporation. Immediately following the merger, Evergreen Bank Group, an Illinois-chartered banking corporation and wholly owned subsidiary of Bancorp Financial, merged with and into Old Second National Bank, with the Bank continuing as the surviving bank. Under the terms of the merger agreement, each share of Bancorp Financial common stock outstanding immediately prior to the effective time was converted into the right to receive 2.5814 shares of Old Second common stock and $15.93 in cash, without interest, with cash paid in lieu of any fractional shares.

As of July 1, 2025, Bancorp Financial had approximately $1.43 billion of total assets, $1.19 billion of total loans, and $1.23 billion of total deposits. The consideration paid totaled $189.4 million and consisted of 7.9 million shares of Old Second common stock and $48.9 million of cash. The systems conversion was successfully completed in October 2025.

Our results of operations depend generally on net interest income, which is the difference between interest income from interest-earning assets and interest expense on interest-bearing liabilities. Net interest income is affected by regulatory, economic and competitive factors that influence interest rates, loan demand and deposit flows. In addition, we are subject to interest rate risk to the degree that our interest-earning assets mature or reprice at different times, or at different speeds, than our interest-bearing liabilities. Our results of operations are also affected by noninterest income, such as service charges, wealth management fees, loan fees, gains from the sale of newly originated loans, gains or losses on investments and certain other noninterest related items. Our principal operating expenses, aside from interest expense, consist of compensation and employee benefits, occupancy costs, professional fees, data processing expenses and provision for credit losses.

We are significantly impacted by prevailing economic conditions, including federal monetary and fiscal policies, and federal regulations of financial institutions. Deposit balances are influenced by numerous factors such as competing investments, the level of income and the personal rate of savings within our market areas. Factors influencing lending activities include the demand for housing and the interest rate pricing competition from other lending institutions.

As of September 30, 2025, all of our capital ratios were in excess of all regulatory requirements. While we believe that we have sufficient capital to withstand an extended economic recession, our reported and regulatory capital ratios could be adversely impacted by credit losses.

Financial Overview

Our results of operations for the third quarter of 2025 include three full months of Bancorp Financial operations. Net income for the third quarter of 2025 was $9.9 million, or $0.18 per diluted share, compared to $21.8 million, or $0.48 per diluted share, for the second quarter of 2025, and $23.0 million, or $0.50 per diluted share, for the third quarter of 2024. Net income decreased significantly compared to the prior year like quarter, primarily due to the impact of the Bancorp Financial acquisition legal close and purchase accounting adjustments. Variances included an increase of $23.9 million in noninterest expense, a $17.7 million increase in provision for credit losses, and a $5.8 million increase in interest expense, partially offset by a $28.0 million increase in interest and dividend income, a $2.5 million increase in noninterest income and a $3.7 million decrease in provision for income taxes. Net income in the third quarter of 2025 was negatively impacted by Day Two non-PCD provision for loan losses recorded of $13.2 million, as well as acquisition costs, net of gains on branch sales, of $11.5 million, which primarily increased noninterest expense. Adjusted net income, a non-GAAP financial measure that excludes Day Two provision for credit loss adjustments, death benefits related to BOLI, mortgage servicing rights mark to market gains or losses, and acquisition related costs, net of gains on branch sales, as applicable, was $28.4 million for the third quarter of 2025, compared to $22.8 million for the second quarter of 2025, and $24.0 million for the third quarter of 2024.

See the discussion entitled “Non-GAAP Financial Measures” on page 50, as well as the table below, which provides a reconciliation of this non-GAAP measure to the most comparable GAAP equivalents:

1 Adjusted net income for the quarter ended September 30, 2025, uses a blended income tax rate of 24.74%, which is slightly higher than the effective tax rate utilized for GAAP earnings due to the tax treatment of certain acquisition related costs.

The following provides an overview of some of the factors impacting our financial performance for the three-month period ended September 30, 2025, compared to the like period ended September 30, 2024:

• Net interest and dividend income was $82.8 million for the third quarter of 2025, compared to $60.6 million for the third quarter of 2024. The increase in net interest and dividend income in the third quarter of 2025 was primarily driven by the acquisition of Bancorp Financial, as well as organic loan growth.
• We recorded a net provision for credit losses on loans and leases of $19.7 million in the third quarter of 2025, driven by the Day Two non-PCD provision for credit losses of $13.2 million based on our assessment of the acquired loans from Bancorp Financial. The third quarter of 2025 standard provision expense consisted of a $6.5 million provision for credit losses on loans driven by loan growth, current period charge-offs within the powersport and lease portfolios, and a downgrade to substandard on one large commercial credit. Further, we recorded a $38,000 provision for credit losses on unfunded commitments in the third quarter of 2025 based on an adjustment of historical benchmark assumptions, such as funding rates and the period used to forecast those rates, within the ACL calculation. We recorded a net provision for credit losses of $2.0 million in the third quarter of 2024.
• Noninterest income was $13.1 million for the third quarter of 2025, compared to $10.6 million for the third quarter of 2024. Contributing to the higher noninterest income was a $430,000 death benefit realized on BOLI in the third quarter of 2025. Also contributing to the growth in noninterest income during the quarter were increases in wealth management, residential mortgage banking revenue on faster prepayment speeds, and an increase in the cash surrender value of BOLI as a result of an increase in the market value of our insurance policies due primarily to more favorable market interest rates.
• Noninterest expense was $63.2 million for the third quarter of 2025, compared to $39.3 million for the third quarter of 2024, an increase of $23.9 million, or 60.7%. Contributing to the increase in noninterest expense in the third quarter of 2025 was higher salaries and employee benefits as well as increases in occupancy, furniture and equipment, computer and data processing, amortization of core deposit intangibles, consulting & management fees, and other expense, all of which were primarily due to Bancorp Financial acquisition related costs, net of gains on branch sales, of $11.5 million.
• We had a provision for income tax expense of $3.2 million for the third quarter of 2025, compared to a provision for income tax expense of $6.9 million for the third quarter of 2024. The effective tax rate for these two periods was 24.5% and 23.1%, respectively.
• As of September 30, 2025, total loans increased by $1.28 billion compared to the year ended December 31, 2024, and increased $1.27 billion compared to September 30, 2024. The increase from both periods is primarily driven by the $1.19 billion of loans acquired in our acquisition of Bancorp Financial as well as approximately $72.3 million of organic loan growth in the third quarter of 2025.
• Nonaccrual loans totaled $34.1 million as of September 30, 2025, which is an increase of $5.3 million as of September 30, 2025, compared to December 31, 2024, but a decrease of $18.0 million compared to September 30, 2024. The increase in nonaccrual loans in the third quarter of 2025, compared to December 31, 2024, was primarily due to inflows of $22.0 million on 54 loans, consisting primarily of 13 commercial loans totaling $13.5 million. The inflows are partially offset by $2.4 million of net nonaccrual loan charge-offs year to date, as well as $2.9 million of paid off nonaccrual loans, $5.0 million transferred to OREO, and $5.3 million of reduction of principal. The decrease in nonaccrual loans year over year is due to various charge-offs, primarily in the Commercial portfolio, larger transfers to OREO in late 2024 which were sold in the first quarter of 2025, and an increase in paid off loans over the last twelve months, primarily related to the CRE-Investor portfolio, the majority of which are office and healthcare loans. Nonperforming loans as a percent of total loans was 0.9% as of September 30, 2025, compared to 0.8% as of December 31, 2024, and 1.3% as of September 30, 2024. Classified assets increased to $142.8 million as of September 30, 2025, reflecting an increase of $28.7 million, or 25.1%, over December 31, 2024, and an increase of $21.7 million, or 18.0%, from September 30, 2024.

Critical Accounting Estimates

Our consolidated financial statements are prepared based on the application of accounting policies in accordance with generally accepted accounting principles (“GAAP”) and follow general practices within the banking industry. These policies require the reliance on estimates and assumptions, which may prove inaccurate or are subject to variations. These estimates, assumptions, and judgments are based on information available as of the date of the consolidated financial statements. Future changes in information may affect these estimates, assumptions, and judgments, which, in turn, may affect amounts reported in the consolidated financial statements. Changes in underlying factors, assumptions, or estimates could have a material impact on our future financial condition and results of operations.

Of the significant accounting policies used in the preparation of our consolidated financial statements, we have identified certain items as critical accounting policies based on the associated estimates, assumptions, judgments and complexity. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Critical Accounting Estimates” in our Annual Report on Form 10-K for the year ended December 31, 2024. Refer to Changes in Significant Accounting Policies within Note 1 of this Form 10-Q for a description of policies impacted by the acquisition of Bancorp Financial.

Non-GAAP Financial Measures

This report contains references to financial measures that are not defined in GAAP. Such non-GAAP financial measures include the presentation of net interest income and net interest margin on a tax equivalent (“TE”) basis, adjusted net income, adjusted basic and diluted earnings per share, our adjusted efficiency ratio, and our tangible common equity to tangible assets ratio. Management believes that the presentation of these non-GAAP financial measures (a) provides important supplemental information that contributes to a proper understanding of our operating performance, (b) enables a more complete understanding of factors and trends affecting our business, and (c) allows investors to evaluate our performance in a manner similar to management, the financial services industry, bank stock analysts, and bank regulators. Management uses non-GAAP measures as follows: in the preparation of our operating budgets, monthly financial performance reporting, and in our presentation of our performance to investors. However, we acknowledge that these non-GAAP financial measures have a number of limitations. Limitations associated with non-GAAP financial measures include the risk that persons might disagree as to the appropriateness of items comprising these measures and that different companies might calculate these measures differently. These measures should not be considered an alternative to our GAAP results. A reconciliation of non-GAAP financial measures to the most directly comparable GAAP financial measures is presented below or alongside the first instance where each non-GAAP financial measure is used.

Results of Operations

Overview

Three months ended September 30, 2025 and 2024

Our income before taxes was $13.1 million in the third quarter of 2025, compared to $29.9 million third quarter of 2024. Net interest and dividend income increased $22.2 million, and provision for credit losses increased $17.7 million in the third quarter of 2025, compared to the like 2024 quarter. Income before taxes was also affected by a $2.5 million increase in noninterest income and a $23.9 million increase in noninterest expense. The noninterest expense increase of $23.9 million is primarily due to a $15.0 million increase in salary and employee benefits expense primarily attributable to $8.4 million of change in control, retention, and severance payouts related to the Bancorp Financial acquisition, a $1.1 million increase in occupancy, furniture and equipment, a $1.6 million increase in computer and data processing, a $681,000 increase in amortization of core deposit intangibles, a $2.0 million increase in consulting & management fees, and a $2.4 million increase in other expenses, which were all primarily driven by Bancorp Financial acquisition related costs. Total acquisition costs of $11.8 million, excluding net gains on branch sales were recorded as a result of the Bancorp Financial acquisition during the three months ended September 30, 2025. In addition, our five branch purchase from FRME in December 2024 also drove the increase in noninterest expenses for the year over year periods. Our net income was $9.9 million, or $0.18 per diluted share, for the third quarter of 2025, compared to net income of $23.0 million, or $0.50 per diluted share, for the third quarter of 2024. The Bank remains well positioned to navigate uncertain macroeconomics. We have proactively addressed interest rate risk, maintained disciplined expense management, and ensured robust daily liquidity oversight. In addition, our liquidity metrics remain solid, and our short-duration securities portfolio provides flexibility for near-term funding requirements.

Net interest and dividend income was $82.8 million in the third quarter of 2025, compared to $60.6 million in the third quarter of 2024. The $22.2 million increase was driven by a $28.0 million increase in interest and dividend income due to the acquisition of Bancorp Financial as well as organic loan growth. A net increase of $5.8 million in interest expense in the third quarter of 2025 negatively impacted net interest and dividend income compared to the third quarter of 2024, driven by the higher cost deposits and increased borrowing balances assumed with the Bancorp Financial acquisition.

Nine months ended September 30, 2025 and 2024

Our income before taxes was $68.5 million for the nine months ended September 30, 2025, compared to $87.6 million for the nine months ended September 30, 2024. This decrease in pretax income was primarily due to a $35.7 million increase in noninterest expense and a $15.3 million increase in provision for credit losses, which were both driven by the acquisition of Bancorp Financial. These changes were partially offset by a $29.9 million increase in net interest and dividend income, a $2.0 million increase in noninterest income, and a $4.5 million decrease in provision for income taxes. Our net income was $51.5 million, or $1.06 per diluted share, for the nine months ended September 30, 2025, compared to net income of $66.2 million, or $1.45 per diluted share, for the same period of 2024.

Net interest and dividend income was $209.9 million for the nine months ended September 30, 2025, compared to $180.1 million for the same period of 2024. The $29.9 million increase was primarily driven by an increase in loan related income of $25.5 million due to the loan portfolio acquired with Bancorp Financial as well as a $3.1 million increase in securities related income due to the year over year higher yielding securities portfolio. Partially offsetting the increase in interest and dividend income was an increase in interest expense in the first nine months of 2025, compared to the first nine months of 2024, driven by higher cost of deposits and increased borrowing balances assumed with the acquisition of Bancorp Financial. However, this increase in interest expense was nominal, due to a reduction in average balances of short-term borrowings in the year over year period, primarily stemming from the inflow of cash received related to the FRME five branch purchase in December 2024.

Net Interest Income

Net interest income, which is our primary source of earnings, is the difference between income earned on interest-earning assets, such as loans and investment securities, accretion income on purchased loans, dividend income earned on certain equity investments, and expense incurred on interest-bearing liabilities, such as deposits and borrowings. Net interest income depends upon the relative mix of interest-earning assets and interest-bearing liabilities, the ratio of interest-earning assets to total assets and of interest-bearing liabilities to total funding sources, and movements in market interest rates. Our net interest income can be significantly influenced by a variety of factors, including overall loan demand, economic conditions, credit risk, the amount of nonearning assets including nonperforming loans and OREO, the amounts of and rates at which assets and liabilities reprice, variances in prepayment of loans and securities, early withdrawal of deposits, exercise of call options on borrowings or securities, a general rise or decline in interest rates, changes in the slope of the yield-curve, and balance sheet growth or contraction.

Three months ended September 30, 2025 and 2024

The increased yield of 66 basis points on interest earning assets compared to the linked period was primarily driven by higher interest rate consumer credits and related accretion on the loan portfolio acquired from Bancorp Financial, as the average yield on the acquired portfolio prior to purchase accounting accretion was 8.60%. Changes in the market interest rate environment impact earning assets at varying intervals depending on the repricing timeline of loans, as well as the securities maturity, paydown and purchase activities.

The year over year increase of 51 basis points on interest earning assets was primarily driven by higher yielding consumer credits and related accretion on the Bancorp Financial portfolio acquired, as well as planned turnover in our securities portfolio with many older and lower yielding securities maturing and being replaced with higher yielding investments while maintaining the shorter duration portfolio composition. Average balances of loans and loans held for sale increased $1.25 billion in the third quarter of 2025 compared to the prior year like quarter, with a corresponding increase to the tax equivalent yield on the loan portfolio of 47 basis points year over year due to the Bancorp Financial acquisition and organic growth. Average balances of securities available for sale decreased $8.0 million in the third quarter of 2025 compared to the prior year like quarter, but showed an increase to the tax equivalent yield on the securities available for sale portfolio of 25 basis points year over year primarily due to variable security rate resets and run-off of lower yielding investments.

Average balances of interest bearing deposit accounts have increased significantly since the second quarter of 2025 through the third quarter of 2025, from $3.12 billion to $4.15 billion, as all average interest bearing deposit account categories increased as a result of the Bancorp Financial acquisition. The Bancorp Financial acquisition drove the increase in interest bearing deposit expenses of $9.8 million compared to the prior linked quarter, which increased the cost of interest bearing deposits from 130 basis points for the quarter ended June 30, 2025, to 191 basis points for the quarter ended September 30, 2025. We will continue to control the cost of funds by monitoring market activity as well as allowing previous exception-priced deposits and the brokered CDs acquired from Bancorp Financial to runoff naturally. A 66 basis point increase in savings accounts and a 61 basis point increase in time deposits for the quarter ended September 30, 2025, drove a significant portion of the increase from the prior linked quarter, as a majority of the accounts assumed from Bancorp Financial were within these deposit categories. The cost of interest bearing deposits increased 43 basis points for the quarter ended September 30, 2025, from 148 basis points for the quarter ended September 30, 2024. A 20 basis point increase in the cost of money market accounts and a 70 basis point increase in savings accounts drove a significant portion of the overall increase from the prior year like quarter.

Borrowing costs increased in the third quarter of 2025, compared to the second quarter of 2025. The increase is primarily due to the $26.0 million increase in average other short-term borrowings, which are overnight FHLB advances based on daily liquidity needs, over the prior linked quarter as well as $14.8 million in notes payable and other borrowings due to long term FHLB advances assumed from Bancorp Financial. The decrease of $279.5 million year over year of average FHLB advances was based on daily liquidity needs due to the changes in the funding mix as a result of recent acquisitions and was the primary driver of the $3.9 million decrease to interest expense on other short-term borrowings. Subordinated and junior subordinated debt interest expense were essentially flat over each of the periods presented.

Our net interest margin, for both GAAP and tax equivalent (“TE”) presentations, showed noticeable growth over the prior linked quarter period and over the prior year like quarter presented above. Our net interest margin (GAAP) increased 20 basis points to 5.03% for the third quarter of 2025, compared to 4.83% for the second quarter of 2025, and increased 41 basis points compared to 4.62% for the third quarter of 2024. Our net interest margin (TE) increased 20 basis points to 5.05% for the third quarter of 2025, compared to 4.85% for the second quarter of 2025, and increased 41 basis points compared to 4.64% for the third quarter of 2024. The increase in net interest margin for the third quarter of 2025, compared to the prior linked quarter, was driven by the Bancorp Financial acquisition, market interest rates, and one more day in the period with larger interest earning asset balances. The net interest margin increased in the third quarter of 2025, compared to the prior year like quarter, primarily due to the Bancorp Financial acquisition, higher security yields, and the decrease in average other short-term borrowings and the corresponding reduction in interest expense. See the discussion entitled “Non-GAAP Financial Measures,” above, and the tables beginning on page 54 that provide a reconciliation of each non-GAAP measure to the most comparable GAAP equivalent.

Nine months ended September 30, 2025 and 2024

The year over year increase of 24 basis points on interest earning assets was driven by increased yields on our loans and securities portfolios. Average loans, including loans held for sale, increased $402.2 million in the nine months ended September 30, 2025, compared to the nine months ended September 30, 2024, due to the acquisition of Bancorp Financial. The large increase in average loans resulted in $215.0 million of loan interest income in the nine months ended September 30, 2025, compared to $189.4 million in the like 2024 period. The acquired portfolio provided higher yielding consumer loans helping to increase our overall loan portfolio yield. The securities portfolio was primarily impacted by maturities and paydowns of lower yielding assets and timely purchase of higher yielding securities as we work to increase the weighted average yield in the portfolio while maintaining short duration. Average securities available-for-sale increased $300,000 for the nine months ended September 30, 2025, compared the like 2024 period. Over the same period, market interest rates increased leading to an increase in securities income of $3.1 million to $33.8 million for the nine months ended September 30, 2025, compared to $30.7 million for the like 2024 period.

Average balances of interest bearing deposit accounts have increased significantly since September 30, 2024, through the nine months ended September 30, 2025, from $2.79 billion to $3.46 billion driven by the Bancorp Financial and FRME acquisitions, with these increases reflected in all deposit categories. The Bancorp Financial acquisition contributed to the increase in interest bearing deposit expense of $12.0 million compared to the prior year like period, which increased the cost of interest bearing deposits from 133 basis points for the nine months ended September 30, 2024, to 154 basis points for the nine months ended September 30, 2025. A 21 basis point increase in the cost of money market funds and a 34 basis point increase in savings accounts as of September 30, 2025, compared to September 30, 2024, drove a significant portion of the increase from the prior year period, as a majority of the deposit accounts assumed in the Bancorp Financial acquisition were within these deposit categories. Interest expense paid on time deposits partially offset the growth in cost of deposits year over year, as the cost of average time deposits decreased 28 basis points to 292 basis points for the nine months ended September 30, 2025, compared to 320 basis points for the nine months ended September 30, 2024.

Our borrowing interest expense was controlled over the past twelve months due to lower outstanding short-term FHLB advances compared to the prior year like period. This resulted in an average balance decrease of $284.3 million compared to the nine months ended September 30, 2024, with an accompanying decrease of $11.8 million of interest expense. However, our note payable average balance increased by $5.0 million compared to the nine months ended September 30, 2024, as we assumed long-term FHLB advances with the acquisition of Bancorp Financial. Subordinated and junior subordinated debt interest expense remained flat over the periods presented.

Our net interest margin (GAAP) increased 32 basis points to 4.91% for the nine months ended September 30, 2025, compared to 4.59% for the nine months ended September 30, 2024. Our net interest margin (TE) increased 32 basis points to 4.94% for the nine months ended September 30, 2025, compared to 4.62% for the nine months ended September 30, 2024. The increase in the current period, compared to the prior year like period, is primarily due to lower interest expense related to the lower average balances and interest on other short-term borrowings and increased yields on loans and securities.

We continue to observe competitive pressure to maintain reduced interest rates on loans retained at renewal. While our loan prices are targeted to achieve certain returns on equity, significant competition for commercial and industrial loans as well as commercial real estate loans has put pressure on loan yields, and our stringent underwriting standards limit our ability to make higher-yielding loans.

The following tables set forth certain information relating to our average consolidated balance sheets and reflect the yield on average earning assets and cost of average interest bearing liabilities for the periods indicated. These yields reflect the related interest, on an annualized basis, divided by the average balance of assets or liabilities over the applicable period. Average balances are derived from daily balances. For purposes of discussion, net interest income and net interest income to total earning assets in the following tables have been adjusted to a non-GAAP TE basis using a marginal rate of 21% in 2025 and 2024 to compare returns more appropriately on tax-exempt loans and securities to other earning assets.

Analysis of Average Balances,

Tax Equivalent Income / Expense and Rates

(Dollars in thousands - unaudited)

​

1 Represents a non-GAAP financial measure. See the discussion entitled “Reconciliation of Tax-Equivalent Non-GAAP Financial Measures” below that provides a reconciliation of each non-GAAP measure to the most comparable GAAP equivalent. Tax equivalent basis is calculated using a marginal tax rate of 21% in 2025 and 2024.

2 Interest income from loans is shown on a tax equivalent basis, which is a non-GAAP financial measure, as discussed in the table on page 56, and includes loan fee income of $1.2 million for the third quarter of 2025, loan fee income of $365,000 for the second quarter of 2025, and loan fee expense of $155,000 for the third quarter of 2024. Nonaccrual loans are included in the above-stated average balances.

Analysis of Average Balances,

Tax Equivalent Income / Expense and Rates

(Dollars in thousands - unaudited)

1 Represents a non-GAAP financial measure. See the discussion entitled “Reconciliation of Tax-Equivalent Non-GAAP Financial Measures” below that provides a reconciliation of each non-GAAP measure to the most comparable GAAP equivalent. Tax equivalent basis is calculated using a marginal tax rate of 21% in 2025 and 2024.

2 Interest income from loans is shown on a tax equivalent basis, which is a non-GAAP financial measure, as discussed in the table on page 56, and includes fee income of $2.1 million and fee expense of $2.0 million for the nine months ended September 30, 2025 and 2024, respectively. Nonaccrual loans are included in the above-stated average balances.

Reconciliation of Tax-Equivalent (TE) Non-GAAP Financial Measures

Net interest and dividend income (TE) and net interest income (TE) to average interest earning assets are non-GAAP measures that have been adjusted on a TE basis using a marginal rate of 21% for 2025 and 2024 to compare returns more appropriately on tax-exempt loans and securities to other earning assets. The table below provides a reconciliation of each non-GAAP (TE) measure to the GAAP equivalent for the periods indicated:

Noninterest Income

Three months ended September 30, 2025 and 2024

The following table details the major components of noninterest income for the periods presented:

(Dollars in thousands)

N/M – Not meaningful.

Noninterest income increased $2.2 million, or 20.3%, in the third quarter of 2025, compared to the second quarter of 2025, and increased $2.5 million, or 23.9%, compared to the third quarter of 2024. The increase from the second quarter of 2025 was primarily driven by a $412,000 increase in wealth management income based on continued growth in the advisory and estate planning, a $485,000 increase in the cash surrender value of BOLI due to changes in market interest rates, a $430,000 death benefit realized on BOLI recorded during the quarter, and a $513,000 increase in other income driven by powersport fees provided by legacy Bancorp Financial loan portfolio acquired.

The increase in noninterest income of $2.5 million in the third quarter of 2025, compared to the third quarter of 2024, is primarily due to a $728,000 increase in wealth management income from growth in advisory and estate fees, a $315,000 increase in the cash surrender value of BOLI due to changes in market interest rates, and a $430,000 death benefit realized on BOLI recorded in the third quarter of 2025. Also contributing to the increase in noninterest income during the quarter was a $699,000 increase in residential mortgage banking revenue mainly due to a $575,000 increase in MSRs mark to market valuations.

Nine months ended September 30, 2025 and 2024

(Dollars in thousands)

N/M – Not meaningful.

Noninterest income increased $2.0 million, or 6.2%, for the nine months ended September 30, 2025, compared to the nine months ended September 30, 2024. This increase was primarily driven by a $1.6 million increase in wealth management income from growth in advisory and estate fees, an $858,000 increase in service charges on deposits, a $325,000 increase in card related income, and a $234,000 increase in other income. Partially offsetting these increases was a $489,000 decrease in the cash surrender value of BOLI due to market interest rate changes on COLI investments, and a $475,000 decrease in death benefits realized on BOLI.

Noninterest Expense

Three months ended September 30, 2025 and 2024

The following table details the major components of noninterest expense for the periods presented:

(Dollars in thousands)

1 The efficiency ratio shown in the table above is a GAAP financial measure calculated as noninterest expense, excluding amortization of core deposits and OREO expenses, divided by the sum of net interest income and total noninterest income less net gains or losses on securities, death benefit realized on BOLI, as applicable, and mark to market gains or losses on MSRs.

2 The adjusted efficiency ratio shown in the table above is a non-GAAP financial measure calculated as noninterest expense, excluding amortization of core deposits, OREO expenses, acquisition expense, net of gains or losses on branch sales, as applicable, divided by the sum of net interest income on a fully tax equivalent basis, total noninterest income less net gains or losses on securities, death benefit realized on BOLI, as applicable, mark to market gains or losses on MSRs, and includes a tax equivalent adjustment on the change in cash surrender value of BOLI. See the discussion entitled “Non-GAAP Financial Measures” above and the table on page 60 that provides a reconciliation of this non-GAAP financial measure to the most comparable GAAP equivalent.

Noninterest expense for the third quarter of 2025 increased $19.7 million, or 45.5%, compared to the second quarter of 2025, and increased $23.9 million, or 60.7%, compared to the third quarter of 2024. The increase in the third quarter of 2025, compared to the second quarter of 2025 was driven by $11.5 million of acquisition costs, net of gains or losses on branch sales or 59.8% of the increase during the quarter. Significant changes in the period include a $12.8 million increase in salaries and employee benefits, of which $8.4 million was due to change in control, retention, and severance payouts related to the Bancorp Financial acquisition. Other increases include a $1.3 million increase in computer and data processing expenses, a $1.9 million increase in consulting & management fees, and a $2.1 million increase in other expenses, which were primarily due to costs incurred as a result of our acquisition of Bancorp Financial.

The year over year increase in noninterest expense is primarily attributable to a $15.0 million increase in salaries and employee benefits, primarily due to $8.4 million of change in control, retention, and severance payouts related to the Bancorp Financial acquisition as well as increases in annual base salary rates, officers’ incentives, restricted stock expense, and increased workforce in the third quarter of 2025. Also contributing to the increase was a $1.1 million increase in occupancy, furniture and equipment, a $1.6 million increase in computer and data processing expenses, a $681,000 increase in core deposit intangible, a $2.0 million increase in consulting & management fees, and a $2.4 million increase in other expense primarily due to the effect of the First Merchants branches purchased in December 2024 as well as costs associated with our acquisition of Bancorp Financial.

Nine months ended September 30, 2025 and 2024

(Dollars in thousands)

1 The efficiency ratio shown in the table above is a GAAP financial measure calculated as noninterest expense, excluding amortization of core deposits and OREO expenses, divided by the sum of net interest income and total noninterest income less net gains or losses on securities, and mark to market gains or losses on MSRs.

2 The adjusted efficiency ratio shown in the table above is a non-GAAP financial measure calculated as noninterest expense, excluding amortization of core deposits, OREO expenses, and net gains on branch sales, divided by the sum of net interest income on a fully tax equivalent basis, total noninterest income less net gains or losses on securities, death benefits realized on BOLI, mark to market gains or losses on MSRs, and includes a tax equivalent adjustment on the change in cash surrender value of BOLI. See the discussion entitled “Non-GAAP Financial Measures” above and the table on page 55 that provides a reconciliation of this non-GAAP financial measure to the most comparable GAAP equivalent.

Noninterest expense for the nine months ended September 30, 2025, increased $35.7 million, or 30.9%, compared to the nine months ended September 30, 2024, the increase includes $14.5 million of cost related to the branch acquisition and the Bancorp Financial acquisition. The increase is primarily due to a $21.3 million increase in salaries and employee benefits due to $8.4 million of change in control, retention, and severance payouts related to the Bancorp Financial acquisition, as well as higher annual base salary rates, increased workforce, restricted stock expense, and deferred employee compensation due to market interest rate changes. Occupancy, furniture and equipment increased $2.3 million, computer and data processing increased $2.2 million, the amortization of core deposit intangibles increased $1.6 million, consulting & management fees increased $1.8 million, and other expense increased $2.8 million, all of which were primarily due to Bancorp Financial and FRME acquisition related costs. Other increases year over year include a $1.8 million increase in other real estate owned, net, related to operating costs, closing costs, and valuation adjustments as we liquidated multiple OREO properties in the nine months ended September 30, 2025.

Reconciliation of Adjusted Efficiency Ratio Non-GAAP Financial Measures

N/A - not applicable

(Dollars in thousands)

N/A - not applicable

Income Taxes

We recorded income tax expense of $3.2 million for the third quarter of 2025 on $13.1 million of pretax income, compared to income tax expense of $7.4 million on $29.2 million of pretax income in the second quarter of 2025, and income tax expense of $6.9 million on $29.9 million of pretax income in the third quarter of 2024. Our effective tax rate was 24.5% in the third quarter of 2025, 25.3% for the second quarter of 2025, and 23.1% for the third quarter of 2024.

Income tax expense reflected all relevant statutory tax rates and GAAP accounting. There were no significant changes in our ability to utilize our deferred tax assets during the quarter ended September 30, 2025. We had no valuation reserve on the deferred tax assets as of September 30, 2025.

Recent Developments – Legislative and Regulatory Matters

On July 4, 2025, the One Big Beautiful Bill Act (“OBBBA”) was signed into law. The OBBBA extends or makes permanent a number of provisions originally enacted in the 2017 Tax Cuts and Jobs Act and introduces new items affecting both individuals and businesses. Topic 740, Income Taxes, of the FASB Accounting Standards Codification requires the effects of newly enacted tax law to be recognized in the period of enactment. We are still evaluating OBBBA’s impact on our deferred tax assets and liabilities, effective tax rate, and tax-related processes (e.g., payroll reporting for qualifying wage items). Based on preliminary analysis, we do not currently expect the OBBBA to have a material impact on our 2025 estimated annual effective tax rate or on our consolidated financial statements, but our evaluation is ongoing.

In addition to tax-related changes, the regulatory landscape for financial institutions continued to evolve in 2025 through a series of legislative, regulatory, and judicial actions. The federal banking agencies have proposed rescinding the 2023 Community Reinvestment Act (CRA) modernization rule and reinstating the 1995 framework with technical and inflation-indexed updates. We are evaluating potential effects on our CRA program and related compliance processes.

Separately, Congress nullified the CFPB’s overdraft rule, and a federal court vacated the CFPB’s credit-card late-fee rule. The CFPB has also paused enforcement of its Section 1071 small-business-lending data-collection rule, and repeal legislation remains under consideration. These developments have created uncertainty regarding the future scope and timing of consumer-compliance requirements applicable to the banking industry.

The FDIC has proposed inflation-adjusted revisions to certain regulatory thresholds, and Congress is considering legislation to modify capital-requirement thresholds and streamline merger-review procedures. Meanwhile, the U.S. Department of the Treasury continues to advance modernization of the Bank Secrecy Act and related anti-money-laundering regulations, and federal policymakers are evaluating potential frameworks for stablecoin and digital-asset regulation. The OCC has also realigned its supervisory structure to enhance coordination across midsize and community-bank portfolios.

We are monitoring these developments and evaluating potential implications for our operations, compliance obligations, and regulatory-capital management. Although the ultimate timing and impact of these initiatives remain uncertain, we do not currently expect any of them to have a material effect on our consolidated financial statements or results of operations, but our evaluation is ongoing.

Financial Condition

Total assets increased $1.34 billion to $6.99 billion at September 30, 2025, from $5.65 billion at December 31, 2024, due primarily to the increase of $17.2 million in cash and the increase of $1.28 billion in total loans due to portfolio assumed from the Bancorp Financial acquisition. These increases are partially offset by a decrease in OREO of $15.2 million and a decrease in securities available-for-sale of $4.2 million. We continue to actively assess potential investment opportunities to utilize our excess liquidity. Total deposits were $5.76 billion at September 30, 2025, an increase of $991.5 million from December 31, 2024, due to the assumed deposit portfolio from the Bancorp Financial acquisition.

(Dollars in thousands)

N/M – Not meaningful.

Securities available-for-sale decreased $4.2 million as of September 30, 2025, compared to December 31, 2024, and decreased $33.4 million compared to September 30, 2024. The decrease in the portfolio during year 2025 was driven by paydowns totaling $124.8 million along with maturities and calls totaling $75.8 million, partially offset by $183.8 million in purchases and a $20.9 million decrease to unrealized losses on securities available-for-sale. We continue to position the portfolio in higher credit quality, shorter duration securities with an appropriate mix of fixed- and floating-rate exposures.

(Dollars in thousands)

N/M – Not meaningful.

1 The “Other” classification includes consumer loans, such as collector cars, manufactured homes, and solar loans, as well as overdrafts.

Total loans were $5.27 billion as of September 30, 2025, an increase of $1.28 billion from December 31, 2024. The increase in total loans in the first nine months of 2025, compared to December 31, 2024, was primarily due to the $1.19 billion portfolio acquired from Bancorp Financial which significantly expanded our consumer lending and added the powersport classification. Excluding the acquisition, the Bank achieved organic loan growth, net of paydowns, of $89.0 million, comprised of leases, commercial real estate – investor, and residential real estate – owner occupied, partially offset by net decreases in commercial, commercial real estate – owner occupied, and construction. Total loans increased $1.27 billion compared to September 30, 2024, was primarily due to the $1.19 billion portfolio acquired from Bancorp Financial. Excluding the acquisition, the Bank achieved organic loan growth, net of paydowns, of $79.9 million, comprised of leases, commercial real estate – investor and residential real estate – owner occupied, partially offset by net decreases in commercial, commercial real estate – owner occupied, and construction. As required by CECL, the balance (or amortized cost basis) of purchased credit deteriorated loans, or PCD loans (discussed below) is carried on a gross basis, rather than net of the associated credit loss estimate, and the expected credit losses for PCD loans are estimated and separately recognized as part of the allowance for credit losses, or ACL.

The addition of the powersports loan portfolio has given us a more balanced loan portfolio by broadening the scope of our consumer lending and offering a higher yield in a lower rate environment. During the three months ended September 30, 2025, we originated $114.0 million powersport loans with a weighted average yield of 10.25%. As of September 30, 2025, the weighted average FICO score of the entire powersport portfolio is 730.

The quality of our loan portfolio is impacted not only by our credit decisions but also by the economic health of the communities in which we operate. Since we are located in a corridor with significant open space and undeveloped real estate, real estate lending (including commercial real estate, construction, residential, multifamily, and HELOCs) has been and continues to be a sizeable portion of our portfolio. These categories comprised 57.5% of the portfolio as of September 30, 2025, compared to 67.2% of the portfolio as of December 31, 2024. At September 30, 2025, our outstanding commercial real estate loans and undrawn commercial real estate commitments, excluding owner occupied real estate, were equal to 232.3% of our Tier 1 capital plus allowance for credit losses, a decrease from 273.3% at December 31, 2024. We continue to oversee and seek to manage our loan portfolio in accordance with interagency guidance on risk management.

Asset Quality

Nonperforming loans consist of nonaccrual loans and loans 90 days or greater past due. Nonperforming loans increased by $17.7 million to $48.0 million at September 30, 2025, from $30.3 million at December 31, 2024, and decreased by $4.3 million from $52.3 million at September 30, 2024. The increase of Nonperforming loans in the first nine months is driven by additions of two larger relationships. One relationship in commercial real estate – owner occupied is in the process of being renewed and both relationships are well positioned in a collateral perspective. Purchased credit deteriorated loans, or PCD loans, are purchased loans that, as of the date of acquisition, we determined had experienced a more-than-insignificant deterioration in credit quality since origination. PCD loans are included in our nonperforming loan disclosures, if such loans otherwise meet the definition of a nonperforming loan. Management continues to carefully monitor loans considered to be in a classified status. Nonperforming loans as a percent of total loans were 0.9% as of September 30, 2025, 0.8% as of December 31, 2024, and 1.3% as of September 30, 2024. The distribution of our nonperforming loans is shown in the following table.

(Dollars in thousands)

N/M – Not meaningful.

1 The “Other” classification includes consumer loans, such as collector cars, manufactured homes, and solar loans, as well as overdrafts.

The components of our nonperforming assets are shown in the following table:

(Dollars in thousands)

N/M – Not meaningful.

1 Repossessed assets are reported within other assets.

Loan charge-offs, net of recoveries, for the third quarter of 2025, prior linked quarter and year over year quarter are shown in the following table:

(Dollars in thousands)

1 Represents the percentage of net charge-offs attributable to each category of loans.

2 The “Other” classification includes consumer loans, such as collector cars, manufactured homes, and solar loans, as well as overdrafts.

Net charge offs, reported in the above table, reflect continuing management attention to credit quality and remediation efforts. Increased charge off rates from previous quarters are due to the addition of powersport loans. Powersport loans are measured for asset quality at origination based on FICO scores, then based on past due status through the life of the loan, and charge off occurs once a loan is past due 120 days. The gross charge offs for the third quarter of 2025 were primarily due to powersport loans of $3.7 million and $848,000 on two lease relationships. The increase to net charge offs in powersport and other are primarily related to loans identified as PCD at the acquisition date. We have continued our conservative loan valuations and aggressive recovery efforts on prior charge-offs.

Classified loans include nonaccrual loans and accruing substandard and doubtful loans. Classified assets include classified loans, OREO, and repossessed assets. Loans classified as substandard are inadequately protected by either the current net worth and ability to meet payment obligations of the obligor, or by the collateral pledged to secure the loan, if any. These loans have a well-defined weakness or weaknesses that jeopardize the liquidation of the debt and carry the distinct possibility that we will sustain some loss if deficiencies remain uncorrected. Loans classified as doubtful have all the weaknesses inherent as those classified substandard with the added characteristic that the weaknesses make collection or liquidation in full, on the basis of currently existing facts, conditions and values, highly questionable and improbable.

The following table shows classified assets by classification for the following periods:

(Dollars in thousands)

N/M - Not meaningful

1 Repossessed assets are reported within other assets.

Total classified loans increased $42.3 million and $21.4 million as of September 30, 2025, from December 31, 2024, and September 30, 2025, respectively. The increase in classified loans since December 31, 2024, is due to additions to classified loans of $99.4 million, offset by outflows of $57.1 million which consisted of $26.0 million of loans paid off, $15.5 million of classified loans upgraded, $7.1 million of principal reductions through payments and partial charge offs, $2.5 million of loans charged off, $5.0 million transferred into OREO, and $1.0 million repossessed. Classified assets increased primarily due to the increases to classified loans and is offset by net OREO outflows of $15.2 million, which was driven on four OREO sales during the first nine months of 2025. The $21.7 million increase in classified assets compared to September 30, 2024, is primarily due to a classified loan increase of $21.4 million. Classified loans since September 30, 2024, had outflows of $95.3 million which consisted of $35.4 million of loans paid off, $21.6 million of classified loans upgraded, $2.5 million of loans charged off, $17.5 million of net principal reductions and partial charge offs, and $18.0 million transferred to OREO. The outflows are offset by additions of $116.7 million of loans from September 30, 2024. Management monitors a ratio of classified assets to the sum of Bank Tier 1 capital and the ACL on loans as another measure of overall change in loan related asset quality, which is referred to as the “classified assets ratio.” The classified assets ratio was 16.55% for the period ended September 30, 2025, compared to 17.45% as of December 31, 2024, and 17.71% as of September 30, 2024.

Allowance for Credit Losses on Loans

The provision for credit losses, which includes a provision for losses on unfunded commitments, is a charge to earnings to maintain the allowance for credit losses (“ACL”) at a level consistent with management’s assessment of expected losses in the loan portfolio at the balance sheet date.

At September 30, 2025, our ACL on loans totaled $75.0 million, and our ACL on unfunded commitments, included in other liabilities, totaled $2.3 million. In relation to the acquisition, we recorded a Day One purchase accounting credit mark of $17.5 million and a Day Two non-PCD provision expense of $13.2 million based on our assessment of the acquired loans. In the third quarter of 2025, we recorded provision expense on loans of $19.7 million, primarily due to the Day Two non-PCD provision expense and a $6.5 million provision for credit losses on loans. The provision on credits losses were due to the inclusion of the powersport loan portfolio and related current period charge-offs, as well as two large downgrades to standards in commercial that has resulted in higher pooled loss rates. We expect a run rate of approximately $3.0 million in net charge offs each quarter from our acquisition of Bancorp Financial. Further, we recorded a $38,000 provision on unfunded commitments, primarily due to an adjustment of historical benchmark assumptions, such as funding rates and the period used to forecast those rates, within the ACL calculation. These adjustments resulted in a $6.5 million net impact to the provision for credit losses for the third quarter of 2025.

Management estimates the amount of provision required on a quarterly basis and records the appropriate provision expense, or release of expense, to maintain an adequate reserve for all potential and estimated credit losses on loans, leases and unfunded commitments. The ACL on loans totaled $75.0 million as of September 30, 2025, $43.6 million as of December 31, 2024, and $44.4 million as of September 30, 2024. Our ACL on loans to total loans was 1.4% as of September 30, 2025, and 1.1% as of December 31, 2024, and September 30, 2024. See Item 7 – Critical Accounting Estimates in the Management Discussion and Analysis in our 2024 Annual Report in Form 10-K for discussion of our ACL methodology on loans. Allocations of the ACL may be made for specific loans, but the entire allowance is available for any loan that, in our judgment, should be charged-off.

Below is a reconciliation of the activity in the allowance for credit losses on loans for the periods indicated (dollars in thousands):

1 The “Other” classification includes consumer loans, such as collector cars, manufactured homes, and solar loans, as well as overdrafts.

2 Amount does not include the provision for unfunded commitment liability.

The coverage ratio of the ACL on loans to nonperforming loans was 156.4% as of September 30, 2025, which was an increase from the coverage ratio of 133.3% as of June 30, 2025, and an increase from 85.0% as of September 30, 2024. Net charge-offs to average loans increased in the current quarter though remaining manageable, at 0.39% for the quarter ended September 30, 2025, compared to 0.08% for the quarter ended June 30, 2025, and (0.02%) for the quarter ended September 30, 2024.

In management’s judgment, an adequate ACL has been established to encompass the current lifetime expected credit losses at September 30, 2025, as well as general changes in lending policy, procedures and staffing, and other external factors. However, there can be no assurance that actual losses will not exceed the estimated amounts in the future, based on unforeseen economic events, changes in business climates and the condition of collateral at the time of default and repossession. Continued volatility in the economic environment stemming from the impacts of and response to inflation, tariffs, potential recession, and the war in Ukraine and the conflict in the Middle East, and the associated effects on our customers, or other factors, such as changes in business climates and the condition of collateral at the time of default or repossession, may revise our current expectations of future credit losses in future reporting periods.

Other Real Estate Owned

As of September 30, 2025, OREO totaled $6.4 million, reflecting a decrease of $15.2 million from $21.6 million at December 31, 2024, and a decrease of $1.8 million from $8.2 million at September 30, 2024. There were no property sales during the third quarter. A valuation adjustment of $70,000 was recorded to on a property to bring the book value to contract value less cost to sell. Valuation write-downs totaling $1.8 million occurred in the fourth quarter of 2024, and there were no valuation adjustments in the third quarter of 2024.

(Dollars in thousands)

N/M - Not meaningful

In management’s judgment, the property valuation allowance as established presents OREO at current estimates of fair value less estimated costs to sell; however, there can be no assurance that additional losses will not be incurred on disposals or upon updates to valuations in the future. These valuations are reversed when the property is sold.

(Dollars in thousands)

Deposits and Borrowings

(Dollars in thousands)

Total deposits were $5.76 billion at September 30, 2025, which reflects a $991.5 million increase from total deposits of $4.77 billion at December 31, 2024, and an increase of $1.29 billion from total deposits of $4.47 billion at September 30, 2024. The increase in deposits at September 30, 2025, compared to December 31, 2024, was primarily due to increases in noninterest bearing deposits of $33.1 million, savings accounts of $210.7 million, NOW accounts of $40.2 million, money market accounts of $197.9 million, and time deposits of $509.6 million. The increase in deposits at September 30, 2025, compared to September 30, 2024, stemmed primarily from both the FRME branch acquisition and Bancorp Financial acquisition, and was related to increases in noninterest bearing deposits of $69.0 million, savings accounts of $257.0 million, NOW accounts of $112.7 million, money market accounts of $268.6 million, and time deposits of $587.5 million. Total quarterly average deposits increased $1.44 billion, or 32.2%, in the year over year period, driven by an increase in average time deposits of 695.8 million, NOW accounts of $114.5 million, money market accounts of $261.6 million, savings accounts of $279.9 million and noninterest bearing deposits of $90.7 million. The overall increase in quarterly average deposits for the year over year period was primarily due to the acquisition of Bancorp Financial. Included in our quarterly average time deposits are $96.9 million of brokered deposits compared to none at September 30, 2024. The brokered deposits were assumed in the acquisition of Bancorp Financial; these deposits will run-off by 2027.

The following table presents estimated insured and uninsured deposits at September 30, 2025, and December 31, 2024, by deposit type, as well as the weighted average rates for each year to date ending period.

(Dollars in thousands)

Deposits increased 20.8% for the nine months ended September 30, 2025, compared to December 31, 2024. The notable increase in deposits is due to the acquisition of Bancorp Financial. These deposits have a moderately higher cost profile which increased average rate paid by 19 basis points.

In addition to deposits, we used other liquidity sources for our funding needs in all periods presented, such as repurchase agreements and other short-term borrowings with the FHLBC. Securities sold under repurchase agreements totaled $24.3 million at September 30, 2025, a $12.4 million, or 33.7% decrease from $36.7 million at December 31, 2024, and a decrease of $29.6 million, or 55.0%, from September 30, 2024. There were outstanding short-term FHLBC borrowings of 165.0 million as of September 30, 2025, and compared to $20.0 million as of December 31, 2024, and $335.0 million as of September 30, 2024. In addition, the Company had assumed $15.0 million in long-term borrowings due to the acquisition of Bancorp Financial.

We are also indebted on $25.8 million of junior subordinated debentures, net of deferred issuance costs, as of September 30, 2025, which are related to the trust preferred securities issued by its statutory trust subsidiary, Old Second Capital Trust II (“Trust II”). The Trust II issuance converted from fixed to floating rate at three month LIBOR, which is now three month Term SOFR, plus 150 basis points beginning June 15, 2017. Upon conversion to a floating rate, we initiated a cash flow hedge which resulted in net year to date interest rate paid on this debt of 4.48% as of September 30, 2025, as compared to 6.77%, which was the rate paid during the period prior to the June 15, 2017, rate reset.

In the second quarter of 2021, we entered into Subordinated Note Purchase Agreements with certain qualified institutional buyers pursuant to which we issued $60.0 million in aggregate principal amount of our 3.50% Fixed-to-Floating Rate Subordinated Notes due April 15, 2031 (the “Notes”). We sold the Notes to eligible purchasers in a private offering, and the proceeds of this issuance were used for general corporate purposes. The Notes bear interest at a fixed annual rate of 3.50% through April 14, 2026, payable semi-annually in arrears. As of April 15, 2026, forward, the interest rate on the Notes will generally reset quarterly to a rate equal to three-month Term SOFR (as defined by the Note) plus 273 basis points, payable quarterly in arrears. The Notes have a stated maturity of April 15, 2031, and are redeemable, in whole are in part, on April 15, 2026, or any interest payment date thereafter, and at any time upon the occurrence of certain events. As of September 30, 2025, we had $59.5 million of subordinated debentures outstanding, net of deferred issuance costs.

Capital

As of September 30, 2025, total stockholders’ equity was $866.7 million, which was an increase of $195.7 million from $671.0 million as of December 31, 2024. This increase was largely attributable to the Bancorp Financial acquisition, which resulted in consideration paid to Bancorp Financial shareholders of $140.5 million, or 7.9 million shares of our common stock. In addition, we had net income of $51.5 million in the first nine months of 2025, partially offset by $8.6 million of dividends paid to our common stockholders. Total stockholders’ equity as of September 30, 2025, also increased over December 31, 2024, due to a reduction in unrealized net losses on available-for-sale securities and swaps, within accumulated other comprehensive loss, of $15.5 million in the first nine months of 2025, due to changes in market interest rates. Total stockholders’ equity as of September 30, 2025, increased $205.3 million compared to September 30, 2024, primarily due to the Bancorp Financial acquisition, net income year over year, and the decrease in accumulated other comprehensive loss of $8.1 million year over year.

The following table shows the regulatory capital ratios and the current well capitalized regulatory requirements for the Company and the Bank as of the dates indicated:

1 Amounts are shown inclusive of a capital conservation buffer of 2.50%.

2 The prompt corrective action provisions are only applicable at the Bank level.

N/A - Not applicable

As of September 30, 2025, the Company, on a consolidated basis, exceeded the minimum capital ratios to be deemed “well capitalized” and met the capital conservation buffer requirements. In addition to the above regulatory ratios, our GAAP common equity to total assets ratio, which is used as a performance measurement for capital analysis and peer comparisons, increased from 11.88% at December 31, 2024, to 12.40% at September 30, 2025. Our GAAP tangible common equity to tangible assets ratio was 10.41% at September 30, 2025, compared to 10.04% as of December 31, 2024. Our non-GAAP tangible common equity to tangible assets ratio, which management also considers a valuable performance measurement for capital analysis, increased from 10.11% at December 31, 2024, to 10.47% at September 30, 2025, primarily due to an increase in tangible common equity at a faster pace than tangible assets in the first nine months of 2025. The increase in tangible common equity from December 31, 2024, to September 30, 2025, was primarily due to the consideration paid to Bancorp Financial shareholders of $140.5 million, an increase in retained earnings of $43.0 million, and a reduction of $15.5 million in unrealized losses in AOCI.

Reconciliation of Tangible Common Equity to Tangible Assets Ratio Non-GAAP Measure

(Dollars in thousands)

N/A - Not applicable

The non-GAAP intangible asset exclusion reflects the 80% core deposit limitation per Basel III guidelines within risk-based capital calculations, and is useful for us when reviewing risk-based capital ratios and equity performance metrics.

Liquidity

Liquidity is our ability to fund operations, to meet depositor withdrawals, to provide for customers’ credit needs, and to meet maturing obligations and existing commitments. Our liquidity principally depends on our cash flows from operating activities, investment in and maturity of assets, changes in balances of deposits and borrowings, and our ability to borrow funds. Through the third quarter of 2025, we experienced an increase in both loans and deposits due to our acquisition of Bancorp Financial. We managed the change in our funding through a decrease in average borrowings from the FHLBC through September 30, 2025, compared to the prior year like period. We seek to ensure our funding needs are met by maintaining a level of liquidity through asset and liability management. We monitor our borrowing capacity at the FHLBC as part of our liquidity management process as supervised by our Asset and Liability Committee (“ALCO”) and reviewed by our Board of Directors. In addition, our senior management team monitors cash balances daily to ensure we have adequate liquidity to meet our operational and financing needs. As of September 30, 2025, our cash on hand liquidity totaled $116.5 million, an increase of $17.2 million over cash balances held as of December 31, 2024.

Net cash inflows from operating activities were $78.0 million during the first nine months of 2025, compared with net cash inflows of $107.5 million in the same period of 2024. Funds used to originate loans held-for-sale, net of proceeds from sales of loans held-for-sale, resulted in inflows for the first nine months of 2025, but was a source of outflows for the like period of 2024. Interest paid, net of interest received, combined with changes in other assets and liabilities were a source of inflows for the nine months ended September 30, 2025, and a source of inflows for the like period of 2024. The management of investing and financing activities, as well as market conditions, determines the level and the stability of net interest cash flows. Management’s policy is to mitigate the impact of changes in market interest rates to the extent possible, as part of the balance sheet management process.

Net cash inflows from investing activities were $78.4 million in the nine months ended September 30, 2025, compared to net cash inflows of $63.4 million in the same period in 2024. The Bancorp Financial acquisition in July 2025 resulted in net cash inflows of $10.5 million. In the first nine months of 2025, securities transactions accounted for net inflows of $142.8 million, and the principal change on loans accounted for net outflows of $85.4 million. In the first nine months of 2024, securities transactions accounted for net inflows of $27.8 million, and principal on loans funded, net of paydowns, accounted for net inflows of $38.5 million.

Net cash outflows from financing activities in the nine months ended September 30, 2025, were $139.2 million, compared with net cash outflows of $155.3 million in the nine months ended September 30, 2024. Net deposit outflows in the first nine months of 2025 were $240.4 million compared to net deposit outflows of $105.2 million in the first nine months of 2024. Other short-term borrowings had $129.5 million of net cash inflows in the first nine months of 2025, compared to net cash outflows of $70.0 million for other short-term borrowings in the first nine months of 2024. Changes in securities sold under repurchase agreements accounted for outflows of $12.4 million and inflows of $27.4 million for the nine months ended September 30, 2025 and 2024, respectively. Dividends paid on our common stock totaled $8.6 million for the nine months ended September 30, 2025, and $6.7 million for the nine months ended September 30, 2024. The purchase of treasury stock in the first nine months of 2025 due to shares acquired with equity award vestings as well as a share repurchase resulted in outflows of $7.4 million, compared to cash outflows of $791,000 in the first nine months of 2024 related to shares acquired from equity award vestings.

Cash and cash equivalents for the nine months ended September 30, 2025, totaled $116.5 million, as compared to $99.3 million as of December 31, 2024, and $115.8 million as of September 30, 2024. The increase in cash and cash equivalents for the nine months ended September 30, 2025, as compared to year end 2024 and September 30, 2024, was primarily attributable to the decrease in securities available-for-sale based on strategic sales, net cash received from the acquisition of Bancorp Financial, and the increase in customer deposits, partially offset by the increase in our loan portfolio during the first nine months of 2025. In addition to cash and cash equivalents on hand or held as deposits with other financial institutions, we rely on funding sources from customer deposits, cash flows from securities available-for-sale and loans, and a line of credit with the FHLBC to meet potential liquidity needs. These sources of liquidity are immediately available to satisfy any funding requirements due to depositor or borrower demands through the ordinary course of our business. Additional sources of funding available include a $30.0 million undrawn line of credit held by the Company with a third party financial institution, as well as unpledged securities available-for-sale.

Interest Rate Risk

We are subject to interest rate risk from changes on assets (loans and securities), liabilities (customer deposits and borrowed funds) and off-balance sheet derivatives (interest rate swaps). Fluctuations in interest rates may have a material impact to fair market values of our financial instruments, cash flows, and net interest income. Like most financial institutions, we have an exposure to changes in both short-term and long-term interest rates. We believe a financial institution’s ability to effectively tune its interest rate risk profile and strategically position its balance sheet through rate cycles helps sustain the financial performance of the institution.

The Federal Reserve Board (“FRB”) reduced the Federal Funds target rate by 50 basis points in 2025 to a range of 3.75% - 4.00%, widely expected by market participants. While hiring and firing remained low, the FRB acknowledged the recent slowdown in job creation suggests a weakening labor market. Although the current forward curve implies one additional rate cut in December 2025 as probable, future rate cuts are uncertain given the lack of recent data from the government shutdown.

We manage interest rate risk within guidelines established by the asset liability policy which are intended to limit the amount of rate exposure. In practice, we seek to manage our interest rate risk exposure within our guidelines so that such exposure does not pose a material risk to our future earnings. We manage various market risks in the normal course of our operations, including credit, liquidity risk, and interest rate risk. Other types of market risk, such as foreign currency exchange risk and commodity price risk, do not arise in the normal course of our business activities and operations. In addition, since we do not hold a trading portfolio, we are not exposed to significant market risk from trading activities. Our interest rate risk exposures at September 30, 2025, and December 31, 2024, are outlined in the table below.

Our net income can be significantly influenced by a variety of external factors, including: overall economic conditions, policies and actions of regulatory authorities, the amounts of and rates at which assets and liabilities reprice, variances in prepayment of loans and securities other than those that are assumed, early withdrawal of deposits, exercise of call options on borrowings or securities, competition, a general rise or decline in interest rates, changes in the slope of the yield-curve, changes in historical relationships between indices (such as SOFR and Prime), and balance sheet growth or contraction. Our asset-liability committee seeks to manage interest rate risk under a variety of rate environments by structuring our on-balance sheet and off-balance sheet positions, which includes interest rate swap derivatives as discussed in Note 19 of our consolidated financial statements found in our Annual Report on Form 10-K for the year ended December 31, 2024. We seek to monitor and manage interest rate risk within approved policy guidelines and limits. Asset and liability modeling and tracking is performed and presented to the asset-liability committee and the Board of Directors no less than quarterly. Such presentations discuss our current and historical interest rate risk posture, shifts in the balance sheet composition, and the impact of interest rate movements on earnings and equity. Our current balance sheet is a moderately asset sensitive profile, our variable rate assets reprice faster than our longer duration, low beta deposit base. The market events of failed liquidity management at other banks in 2023 have been discussed and reviewed by the asset-liability committee. The committee concluded that we possess a strong liquidity profile and no new liquidity risks were identified. Prudently, we added new measures to assess liquidity risk and enhanced our internal reports to segment deposits by insured, uninsured, collateralized deposits, and we monitor the bank’s funding sources and uses on a regular basis.

We also have a risk committee, chaired by our Chief Risk Officer, which reports no less than quarterly to senior management as well as our Board of Directors regarding compliance with risk tolerance limits, key risk factor changes, both internally and externally, due to portfolio changes as well as market conditions. Our enterprise risk management framework is governed by this committee, with input being provided by line of business managers, senior management and the Board.

We use simulation analysis to quantify the impact of various rate scenarios on our net interest income. Specific cash flows, repricing characteristics, and embedded options of the assets and liabilities held by us are incorporated into the simulation model. Earnings at risk are calculated by comparing the net interest income of a stable interest rate environment to the net interest income of a different interest rate environment in order to determine the percentage change. As of September 30, 2025, our net interest income profile remained sensitive to earnings gains (in both dollars and percentage) should market interest rates rise. Comparatively, we have a slightly more sensitive profile relative to December 31, 2024, should interest rates rise. This reflects a continued build of our cash balance derived from earnings and return of principal in the form of amortizations, maturities, calls, and prepayments.

The following table summarizes the effect on annual income before income taxes based upon an immediate increase or decrease in interest rates of 0.5%, 1.0%, and 2.0%, with no change in the slope of the yield curve:

The amounts and assumptions used in the simulation model should not be viewed as indicative of expected actual results. Actual results will differ from simulated results due to timing, magnitude, balance sheet composition and frequency of interest rate changes as well as changes in market conditions and management strategies. The above results do not take into account any management action to mitigate potential risk.

Effects of Inflation

In management’s opinion, changes in interest rates affect our financial condition to a far greater degree than changes in the inflation rate; we monitor both. The annual U.S. inflation rate for September 2025 rose to 3.0%, an acceleration for the second consecutive month, versus a softer reading last quarter of 2.7%. Core CPI slowed marginally to 3.0%. With the unprecedented enactment of tariffs across U.S. trade partners, management believes this will eventually materialize over time. The downside risks of high inflation put upwards pressure on our expenses, which could impact our profits. Furthermore, higher costs of living may weaken the financial condition of our borrowers which could affect our credit profile. Inflation at the levels currently experienced has a minimal impact to our financial results.

Evaluation of Disclosure Controls and Procedures

The Chief Executive Officer and Chief Financial Officer have evaluated the effectiveness of the design and operation of the Company’s disclosure controls and procedures, as defined in Rule 13a-15(e) promulgated under the Securities and Exchange Act of 1934, as amended, as of September 30, 2025. Based on that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that as of September 30, 2025, the Company’s internal controls were effective to ensure that information required to be disclosed by the Company in reports that it files or submits under the Securities and Exchange Act of 1934 is recorded, processed, summarized, and reported within the time periods specified.

There were no changes in the Company’s internal controls over financial reporting during the quarter ended September 30, 2025, that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

The design of any system of controls and procedures is based in part upon certain assumptions about the likelihood of future events. There can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions, regardless of how remote.