Q2 2024 Old Second Bancorp Inc Earnings Call

Good morning, everyone, and thank you for joining us today for Old Second Bancorp Incorporated's second quarter 2024 earnings call.

Operator: and second quarter 2024 earnings call. On the call today are Jim Eckert, the company's Chairman, President and CEO, Brad Adams, the company COO and CFO, and Gary Collins, the Vice Chairman of our board.

Operator: Second Quarter 2024 Earnings On the call today are Jim Eccher, the company's chairman, president, and CEO, Brad Adams, the company's COO and CFO, and Gary Collins, the vice chairman of our board. I will start with a reminder that Old Second's comments today will contain forward-looking statements about the company's business strategies and prospects, which are based on management's existing expectations in the current economic environment. These statements are not a guarantee of future performance, and results may differ materially from those projected.

On the call today are Jim Eccher, the company's chairman, president, and CEO .

Brad Adams, the company's COO and CFO .

Operator: I will start with a reminder that all the second comments today will contain forward-looking statements about the company's business strategies and prospects, which are based on management's existing expectations in the current economic environment. These statements are not a guarantee of future performance, and results may differ materially from those projected. Management would ask you to refer to the company's SEC filings for a full discussion of the company's risk factors. The company does not undertake any duty to update such forward-looking statements.

Speaker Change: and Gary Collins, the vice chairman of our board.

Speaker Change: I will start with a reminder that Old Second's comments today will contain forward-looking statements about the company's business strategies and prospects, which are based on management's existing expectations in the current economic environment.

Speaker Change: These statements are not a guarantee of future performance, and results may differ materially from those projected. Management would ask you to refer to the company's SEC filings for a full discussion of the company's risk factors.

Operator: Management would ask you to refer to the company's SEC filings for a full discussion of the company's risks. The company does not undertake any duty to update such forward-looking statements. On today's call, we will also be discussing certain non-GAAP financial measures. These non-GAAP measures are described and reconciled to their GAAP counterparts in our earnings release, which is available on our website at oldsecond.com, on the homepage, and under the Investor Relations tab. Now, I will turn it over to Jim.

Operator: On today's call, we will also be discussing certain non-GAAP financial measures. These non-GAAP measures are described and reconciled to their GAAP counterparts in our earnings release, which is available on our website at oldsecond.com, on the homepage and under the Investor Relations tab.

Speaker Change: The company does not undertake any duty to update such forward-looking statements.

Speaker Change: On today's call, we will also be discussing certain non-GAAP financial measures. These non-GAAP measures are described and reconciled to their GAAP counterparts in our earnings release, which is available on our website at oldsecond.com, on the homepage, and under the Investor Relations tab. Now, I will turn it over to Jim Eccher.

James Eckert: Now I will turn it over to Jim Eckert. Good morning, everyone. Thank you for joining us.

James L. Eccher: Okay, good morning, everyone. Thank you for joining us. I have several prepared opening remarks. I'll give an 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 it up for questions. Net income was $21.9 million, or $0.48 per diluted share, in the second quarter of 2024, and return on assets was 1.57%. Second quarter 2024 return on average tangible common equity was 17.66%, and the tax equivalent efficiency ratio was 53.29%.

James Eckert: I have several prepared opening remarks. I will give my overview of the quarter and then turn it over to Brad for additional details.

James L. Eccher: Okay, good morning everyone. Thank you for joining us. I have several prepared opening remarks. I'll give my overview of the quarter and then turn it over to Brad for additional details.

James Eckert: That will conclude with certain summary comments and thoughts about the future before we open it up for questions.

Speaker Change: I will then conclude with certain summary comments and thoughts about the future before we open it up for questions.

James Eckert: Medica was 21.9 million, or 48 cents per diluted share, in the second quarter of 2024. The return on assets was 1.57 percent. Second quarter of 2024 return on average change will come, and equity was 17.66 per cent, and the tax equivalent efficiency ratio was 53.29 per cent.

Brad: Net income was $21.9 million, or $0.48 per diluted share, in the second quarter of 2024. And return on assets was 1.57%.

Brad: Second quarter 2024 return on average changeable common equity was 17.66% and the tax equivalent efficiency ratio was 53.29%.

James Eckert: Second quarter of 2024 earnings were negatively impacted by 3.8 million of provision for credit losses in the absence of significant loan growth, which reduced the accurate tax earnings by six cents per diluted share. However, despite this profitability, Old Second remains exceptionally strong, and balance sheet strengthening continues, with a tangible equity ratio increasing by 35 basis points quarter to 9.39 per cent. Common equity tier 1 increased to 12.41 per cent in the second quarter of 2024, and we remain feel very good about profitability and our balance sheet positioning at this point. Our financials continue to be positively impacted by higher market interest rates; pre-provision net revenues remain stable and exceptionally strong.

James L. Eccher: Second quarter 2024 earnings were negatively impacted by $3.8 million of provision for credit losses in the absence of significant loan growth, which reduced the after-tax earnings by $0.06 per diluted share. However, despite this, profitability at Old Second remains exceptionally strong, and balance sheet strengthening continues with our tangible equity ratio increasing by 35 basis points linked quarter to 9.39%. And we remain, we feel very good about profitability and our balance sheet positioning at this point. Our financials continue to be positively impacted by higher market interest rates. Pre-provisioned net revenues remain stable and exceptionally strong.

Brad: Second quarter 2024 earnings were negatively impacted by $3.8 million of provision for credit losses in the absence of significant loan growth, which reduced the after-tax earnings by $0.06 per diluted share.

Brad: However, despite this, profitability at Old Second remains exceptionally strong and balance sheet strengthening continues with our tangible equity ratio increasing by 35 basis points linked quarter to 9.39%.

Brad: Common Equity Tier 1 increased to 12.41% in the second quarter of 2024.

Brad: And we remain, we feel very good about profitability and our balance sheet positioning at this point.

Brad: Our financials continue to be positively impacted by higher market interest rates. Pre-provisioned net revenues remain stable and exceptionally strong.

Bradley S. Adams: For the second quarter of 2024, compared to the prior year-like period, income on average earning assets decreased $663,000, or 0.9%, while interest expense on average interest-bearing liabilities increased $3.2 million, or 31.3%. The increase in interest expense is rate-driven and primarily due to remixing and exception pricing on certain commercial deposits. Our average other short-term borrowings and other borrowings were significantly less in the second quarter of 2024, compared to the prior link quarter and year-over-year quarter, as our daily funding needs were reduced. And in the second quarter of 2023, we retired 45 million of senior debt. These actions reduce interest expense on borrowings, offsetting some of the growth in interest expense stemming from higher rates offered on deposits.

James Eckert: For the second quarter of 2024 compared to the prior year-like period, income on average earning assets decreased 663,000 per point 9 per cent, while interest expense on average interest vary by abilities increased 3.2 million or 31.3 per cent. The increase in interest expense is rate driven and primarily due to remixing an exception pricing on certain commercial deposits. Our average other short term borrowings and other borrowings were significantly less in the second quarter of 2024, compared to the prior link quarter in year over year quarter. Is our daily funding needs were reduced.

Brad: For the second quarter of 2024 compared to the prior year-like period, income on average earning assets decreased $663,000, or 0.9%, while interest expense on average interest bearing liabilities increased $3.2 million, or 31.3%.

Brad: The increase in interest expense is rate-driven and primarily due to remixing and exception pricing on certain commercial deposits.

Brad: Our average other short-term borrowings and other borrowings were significantly less in the second quarter of 2024.

Brad: compared to the prior late quarter and year-over-year quarter.

James Eckert: In the second quarter of 2023, we retired 45 million senior debt. These actions reduce interest expense by borrowing, offsetting some of the growth and interest expense stemming from higher rates offered out of the process. The second quarter of 2024 reflected an increase in total loans of 7.2 million from the prior-link quarter, primarily due to growth in commercial lease and construction portfolios, net of payoffs on a few large credits during the quarter. Comparatively, long growth in the second quarter of 2023 was 12.2 million and a net decrease in loans of 7.3 million in the first quarter of 2024.

Brad: as our daily funding needs were reduced.

Brad: And in the second quarter of 2023, we retired 45 million of senior debt. For more information, visit www.fema.gov

Brad: These actions reduced interest expense on borrowings, offsetting some of the growth in interest expense stemming from higher rates offered on deposits.

Bradley S. Adams: The second quarter of 2024 reflected an increase in total loans of $7.2 million from the prior link quarter, primarily due to growth in commercial, lease, and construction portfolios, net of payoffs on a few large credits during the quarter. Comparatively, loan growth in the second quarter of 2023 was $12.2 million, and a net decrease in loans of $73.5 million in the first quarter of 2024. The historical trend for our bank is for long growth in the second and third quarters of the year due to seasonal demand and business activity.

Brad: The second quarter of 2024 reflected an increase in total loans of $7.2 million from the prior link quarter.

Brad: primarily due to growth in commercial, lease, and construction portfolios, net of payoffs on a few large credits during the quarter.

Brad: Comparatively, loan growth in the second quarter of 2023 was $12.2 million and a net decrease in loans of $73.5 million in the first quarter of 2024.

James Eckert: The historical trend for our banks is long growth in the second and third quarters of the year due to seasonal demand and business activities. 2023 was an anomaly as a savvy commercial customer's realized interest rates were about to increase in sought funding prior to those market rating increases in late first quarter 2023. By a second quarter of 2023, long growth had tempered due to market rating increases in the late first quarter and second quarter 2022. Currently, activity within our Long Committee has picked up as pipelines are at their highest level at 18 months and up 3x from 1231-23, providing optimism for Long growth in the second half of the year.

Brad: The historical trend for our bank is long growth in the second and third quarters of the year due to seasonal demand and business activities.

Bradley S. Adams: 2023 was an anomaly as savvy commercial customers realized interest rates were about to increase and sought funding prior to those market rate increases in late first quarter 2023. By the second quarter of 2023, low growth had tempered due to the market rate increase in late first quarter and second quarter 2023. Currently, activity within our loan committee is picking up as pipelines are at their highest level in 18 months and up 3x from 1231.

Brad: 2023 was an anomaly as the savvy commercial customers realized interest rates were about to increase and sought funding prior to those market rate increases in late first quarter 2023.

Brad: By the second quarter of 2023, low growth had tempered due to market rate increases.

Brad: in the late first quarter and second quarter of 2023.

Brad: Currently, activity within our loan committee is picked up as pipelines are at their highest level in 18 months and up 3x from 1231.

Bradley S. Adams: 23 providing optimism for long growth in the second half of the year. The interest margin increased slightly this quarter, driven by continuing higher rates on variable securities and loans, partially offset by higher funding costs. Loan yields reflected a five basis point increase during the second quarter of 2024 compared to the late quarter and a 21 basis point increase year over year. Funding costs increased due to increases in both rates and growth in time deposit balances.

James Eckert: That interest margin increased slightly this quarter, driven by continuing higher rates on variable securities loans, partially offset by higher funding costs. Long yields reflected a five basis point increase during the second quarter 2024 compared to the link quarter and a 21 basis point increase year over year. Funding costs increased due to increases in both rates and growth and time deposit balances. The tax equivalent that interest margin was 4.63% for the second quarter compared to 4.58% for the first quarter 2024 and 4.64% of the second quarter 2023. The margins remain relatively stable in the year-over-year period due to the impact of rising rates on both the variable portions below and securities portfolio, as well as the deposit base in our short term by our cost.

Brad: 23 providing optimism for long growth in the second half of the year.

Brad: That interest margin increased slightly this quarter, driven by continuing higher rates on variable securities and loans.

Brad: partially offset by higher funding costs.

Brad: Loan yields reflected a five basis point increase during the second quarter of 2024 compared to the late quarter, and a 21 basis point increase year-over-year.

Brad: Funding costs increased due to increases in both rates and growth in time deposit balances.

Bradley S. Adams: The tax equivalent net interest margin was 4.63% for the second quarter compared to 4.58% for the first quarter of 2024 and 4.64% in the second quarter of 2023. The margins remain relatively stable in the year-over-year period due to the impact of rising rates on both the variable portions of the loan and securities portfolio, as well as the deposit base and our short-term borrowing costs. The loan to deposit ratio is 88% as of June 30th, 2024, compared to 86% last quarter and 85% as of June 30th last year. As we have said, our focus continues to be balance sheet optimization. I'll let Brad talk about that in a moment.

Brad: The tax equivalent net interest margin was 4.63% for the second quarter, compared to 4.58% for the first quarter of 2024, and 4.64% in the second quarter of 2023.

Speaker Change: The margin has remained relatively stable in the year-over-year period due to the impact of rising rates on both the variable portions of the law and securities portfolio, as well as the deposit base and our short-term borrowing costs.

James Eckert: Long at a positive ratio 88% as of June 30th, 2024, compared to 86% last quarter and 85% as of June 30th of last year. As we have said, our focus continues to be balance sheet optimization.

Speaker Change: The loan to deposit ratio is 88% as of June 30th, 2024, compared to 86% last quarter, and 85% as of June 30th of last year.

Speaker Change: As we have said, our focus continues to be balance sheet optimization. I'll let Brad talk about this in a moment.

James Eckert: I'll let Brad talk about this in a moment. The second quarter 2024, some improving asset quality metrics and minor actions taken on substantive credits continued remediation trends noted primarily since late last year. Our belief remains at the fourth quarter 2022, represented in a collection point in our credit trends. We'll second be against substantially downgrading large amounts of commercial real estate loans, including office and health care, at the end of 2021 and accelerating through 2022. Substandard and Chris Sides loans went from approximately 60 million, or a little more than 1% of loans, in the third quarter of 21 to a peak of nearly 300 million, or 7% of loans, in the first quarter 2020.

Bradley S. Adams: The second quarter of 2024 saw improving asset quality metrics and moderate actions taken on substandard credits, continuing remediation trends noted primarily since late last year. However, our belief remains that the fourth quarter of 2023 represented an inflection point in our credit trend. Old Second began substantially downgrading large amounts of commercial real estate loans, including office and health care, at the end of 2021 and accelerating through 2022. Substandard and criticized loans went from approximately $60 million, or a little more than 1% of loans, in the third quarter of 2021 to a peak of nearly 300 million, or 7% of loans, in the first quarter of 2023.

Brad: The second quarter of 2024 saw improving asset quality metrics and moderate actions taken on substandard credits, continuing remediation trends noted primarily since late last year.

Brad: Our belief remains that the fourth quarter of 2023 represented an inflection point in our credit trends.

Speaker Change: Old Second began a substantially downgrading large amounts of commercial real estate loans including office and health care at the end of 2021 and accelerating through 2022.

Speaker Change: Substandard and crib-sized loans went from approximately $60 million, or a little more than 1% of loans, in the third quarter of 21 to a peak of nearly $300 million, or 7% of loans, in the first quarter of 2023.

James Eckert: Street. At the end of the second quarter of 2024, substandard and criticized loneser down to 187.4 million, which is approximately 15.9 million less than year and 2023, and more than 40% below peak levels. The expectation remains for further improvement throughout the rest of the year. Incurately, our special message allows decreased more than 55% from one year ago, interactive lowest levels in over two years. We continue to expect realization of a relatively less costly resolution of a number of non-performers of the near future, and remain hopeful we can recover some of the losses realized in the second half of 2023.

Bradley S. Adams: At the end of the second quarter of 2024, substandard and criticized loans were down to $187.4 million, which is approximately $15.9 million less than year-end 2023 and more than 40% below peak levels. The expectation remains for further improvement throughout the rest of the year. Encouragingly, our special mention loans decreased more than 55% from one year ago and are at their lowest levels in over two years. We continue to expect realization of a relatively less costly resolution of a number of non-performers in the near future and remain hopeful we can recover some of the losses realized in the second half of 2023.

Speaker Change: At the end of the second quarter of 2024, substandard and criticized loans are down to $187.4 million, which is approximately $15.9 million less than year-end 2023, and more than 40% below peak levels.

Speaker Change: The expectation remains for further improvement throughout the rest of the year.

Speaker Change: Encouragingly, our special mention loans decreased more than 55% from one year ago and are at their lowest levels in over two years.

Speaker Change: We continue to expect realization of a relatively less costly resolution of a number of non-performers in the near future.

Speaker Change: and remain hopeful we can recover some of the losses realized in the second half of 2023.

James Eckert: Commercial real estate valuations are heavily dependent upon the market level of interest rates as a primary determinant of cash flow for a given property. A movement in rates such as we have seen is substantial enough to significantly impair the equity positions in a large percentage of commercial real estate credits. Additionally, the residual stress brought upon by the pandemic and commercial real estate office and health care has not debated. We believe we have been proactive and realistic in addressing commercial real estate loans facing deterioration from higher interest rates, declining appraisal values, and cash flow pressures. As we discussed last quarter on the call and consistent with our expectations, we recorded net charge-off of 5.8 million in the second quarter compared to 3.7 million in the first quarter of 2024.

Bradley S. Adams: Commercial real estate valuations are heavily dependent upon the market level of interest rates as a primary determinant of cash flow for a given property. A movement in rates such as we have seen is substantial enough to significantly impair the equity positions in a large percentage of commercial real estate credit. Additionally, the residual stress brought upon by the pandemic.

Speaker Change: Commercial real estate valuations are heavily dependent upon the market level of interest rates as a primary determinant of cash flow for a given property.

Speaker Change: A movement in rates such as we have seen is substantial enough to significantly impair the equity positions in a large percentage of commercial real estate credits.

Bradley S. Adams: Commercial Real Estate Office and Health Care The commercial real estate crisis has not abated. We believe we have been proactive and realistic in addressing commercial real estate loans facing deterioration from higher interest rates, declining appraisal values, and cash flow pressures. As we discussed last quarter on the call, and consistent with our expectations, we recorded net charge-offs of $5.8 million in the second quarter, compared to $3.7 million in the first quarter of 2024. Additionally, one specific current period charge-off of $4.1 million on a previously allocated loan.

Speaker Change: Additionally, the residual stress brought upon by the pandemic in commercial real estate office and health care has not abated.

Speaker Change: We believe we have been proactive and realistic in addressing commercial real estate loans facing deterioration from higher interest rates, declining appraisal values, and cash flow pressures.

Speaker Change: As we discussed last quarter on the call and consistent with our expectations, we recorded net charge-offs of $5.8 million in the second quarter, compared to $3.7 million in the first quarter of 2024.

James Eckert: One specific current period charge off of 4.1 million on a previously allocated loan, one final charge off of 1.5 million related to a no sale and charge off is related to a transfer to Oreo a 550,000 or partially offset by approximately 217,000 in every coverage during the second quarter of 2024. The good news is that criticize the classified loans continues to climb, and the remainder of the portfolio remains well behaved. Continued stress testing is not raised any new red flags for us in the bulk of our long portfolio's transition and is seasoning into this higher rate environment.

Speaker Change: One specific current period charge off of $4.1 million.

Bradley S. Adams: One final charge-off of $1.5 million related to a note sale, and charge-offs related to a transfer to OREO of $550,000 were partially offset by approximately $217,000 of net recoveries during the second quarter of 2024. The good news is that criticized and classified loans continue to decline, and the remainder of the portfolio remains well-behaved. Continued stress testing has not raised any new red flags for us.

Speaker Change: on a previously allocated loan.

Speaker Change: One final charge-off of $1.5 million related to a note sale and charge-offs related to a transfer to Oreo of $550,000 were partially offset by approximately $217,000 of net recoveries during the second quarter of 2024.

Speaker Change: The good news is that criticized and classified loans continue to decline, and the remainder of the portfolio remains well behaved.

James L. Eccher: And the bulk of our loan portfolio has transitioned and is seasoning into this higher rate environment. We've said this before, but it's worth repeating, that being short-duration on the asset side has probably put us at the vanguard in terms of commercial real estate stress. We remain disappointed it did not offer 7 or 10 year maturities on commercial real estate assets a few years ago.

Speaker Change: Continued stress testing has not raised any new red flags for us.

Speaker Change: And the bulk of our loan portfolio has transitioned and is seasoning into this higher rate environment.

James Eckert: We've said this before, but it's worth repeating that being short duration on the asset size probably put us at the bad garden in terms of commercial real estate stress. We remained disappointed that did not offer 7 or 10 year maturities a commercial real estate assets a few years ago. The allowance for credit losses on loans decreased 42.3 million, decreased 2.42.3 million as of June 30 of 2024 or 1.1% of total loans from 44.1 million at March 31 of 2024, which was also 1.1% of total loans. Unemployment and GDP forecast used in future loss rate assumptions for me fairly static from last quarter.

Speaker Change: We've said this before, but it's worth repeating, that being short-duration on the asset side has probably put us at the vanguard in terms of commercial real estate stress.

Speaker Change: We remain disciplined and did not offer 7 or 10 year maturities of commercial real estate assets a few years ago.

Bradley S. Adams: The allowance for credit losses on loans decreased $42.3 million, decreased $42.3 million as of June 30, 2024, or 1.1% of total loans, from $44.1 million at March 31, 2024, which was also 1.1% of total loans. Unemployment and GDP forecasts used in future loss rate assumptions remain fairly static from last quarter. The change in provision level quarter over late quarter reflects the reduction in our allowance allocations on substandard loans, which largely relates to the 29% reduction in criticized assets since June 30th, 2023.

Speaker Change: The allowance for credit losses on loans decreased $42.3 million.

Speaker Change: Decreased $42.3 million as of June 30, 2024, or 1.1% of total loans, from $44.1 million at March 31, 2024, which was also 1.1% of total loans.

Speaker Change: Unemployment and GDP forecast used in future loss rate assumptions remain fairly static from last quarter.

James Eckert: The change in provision level quarter over link quarter reflects the reduction in our allowance allocations on substandard loans, which largely relates to the 29% reduction in criticized assets since June 30 of 2023.

Speaker Change: The change in provision level quarter over late quarter reflects the reduction in our allowance allocations on substandard loans, which largely relates to the 29% reduction in criticized assets since June 30, 2023.

James L. Eccher: I think investors should know that with our continuing level of strong profitability, we will be aggressive in addressing weak credits, and we remain confident in the strength of our portfolio. Non-interest income continued to perform well, with growth noted quarter-over-late quarter in wealth management fees, card-related income, and mortgage banking income, excluding the impact of mortgage servicing rights mark-to-market. A death benefit of $893,000 was realized on one Bully contract in the second quarter of 2024 with no like benefit in the previous quarter or prior year like period.

James Eckert: I think investors should know that with our continuing levels from profitability. We will be aggressive in addressing weak credits, and that we remain confident in the strength of our portfolios. Now, interesting come continue to perform well with Drone to know the quarter overlink quarter and Welp management fees, card related income and mortgage bank income, excluding the impact of mortgage servicing rights market market. A death benefit of 893,000 was realized on a one-bole contract in the second quarter of 2024, with no light benefit in the third quarter or prior year, like put period. Expense discipline continues to be strong with the second quarter of 2024 total 9 inch, which is expensive, $364,000 less than the prior link order.

Speaker Change: I think investors should know that with our continuing level of strong profitability.

Speaker Change: We will be aggressive in addressing weak credits and that we remain confident in the strength of our portfolios.

Speaker Change: Non-interest income continued to perform well, with growth noted quarter-over-late quarter in wealth management fees, card-related income, and mortgage banking income, excluding the impact of mortgage servicing rights mark-to-market.

Speaker Change: A death benefit of $893,000 was realized on one Bully contract in the second quarter of 2024, with no life benefit in the previous quarter or prior year-like period.

Bradley S. Adams: Expense discipline continues to be strong, with the second quarter of 2024 total non-interest expense at $364,000 less than the prior quarter, primarily due to reductions in salaries and employee benefits and a gang on the sales of an Oriole property. Our efficiency ratio continues to be excellent. As we look forward, we are continuing to do more of the same, which is managing liquidity, building capital, and also building commercial loan origination capability for the long term.

Speaker Change: Expense discipline continues to be strong, with the second quarter of 2024 total non-interest expense at $364,000 less than the prior blink quarter, primarily due to reductions in salaries and employee benefits.

James Eckert: Primarily due to reductions in salaries and employee benefits, and a gain on the sale and oil property. Our efficiency ratio continues to be excellent. As we look forward, we are continuing to do more of the same, which is managing liquidity, building capital, and also building commercial loan originating capability for the long term. The goal is to continue to build towards a more stable, long-term balance sheet, mix featuring more loans of US securities, in order to maintain the returns that equity commenced it with a recent performance.

Speaker Change: and again on the sale of an Oriel property.

Speaker Change: Our efficiency ratio continues to be excellent. As we look forward, we are continuing doing more of the same, which is managing liquidity, building capital, and also building commercial loan origination capability for the long term.

Bradley S. Adams: The goal is to continue to build towards a more stable, long-term balance sheet mix featuring more loans and less securities in order to maintain the returns of equity commensurate with our recent performance. I'll now turn it over to Brad for additional color.

Speaker Change: The goal is to continue to build towards a more stable long-term balance sheet mix featuring more loans and less securities in order to maintain the returns that equity commensurate with our recent performance.

Bradley Adams: I'll now turn it over to Brad for additional color. Thank you, Jim. Net interest income decreased by 93,000 or 0.2% to 59.7 million for the quarter and the June 30th. Relative to the prior quarter or 59.8 million. Down 3.9 million, or 6.1% from the year-ago like quarter. Security yields increased 16 basis points due to the variable portion of the portfolios, and loan yields for five basis points higher in the second quarter compared to the first quarter of 2024. Total yield on interest earning assets increased six basis points linked quarter to 567 basis points. This was partially offset by a 15 basis point increase in the cost of interest bearing deposits, and a two basis point increase in interest bearing liabilities in aggregate.

Bradley S. Adams: Thank you, Jim. Net interest income decreased by $93,000 or 0.2% to $59.7 million for the quarter ended June 30th, relative to the prior quarter of $59.8 million, down 3.9 million or 6.1 percent from the year ago like quarter. Securities yield increased 16 basis points due to the variable portion of the portfolios, and loan yields were five basis points higher in the second quarter compared to the first quarter of 2024. Total yield on interest-earning assets increased six basis points linked quarter to 567 basis points.

Speaker Change: I'll now turn it over to Brad for additional color.

Brad: Thank you, Jim. Net interest income decreased by $93,000 or 0.2% to $59.7 million for the quarter ended June 30th.

Brad: relative to the prior quarter of $59.8 million.

Brad: Down 3.9 million or 6.1% from a year ago like quarter. Securities yield increased 16 basis points due to the variable portion of the portfolios and loan yields were five basis points higher in the second quarter compared to the first quarter of 2024.

Brad: Total yield on interest earning assets increased 6 basis points linked quarter to 567 basis points. This was partially offset by a 15 basis point increase in the cost of interest bearing deposits and a 2 basis point increase to interest bearing liabilities in aggregate.

Bradley S. Adams: This was partially offset by a 15 basis point increase in the cost of interest-bearing deposits and a two basis point increase to interest-bearing liabilities in aggregate. The end result was a five basis point increase in the tax equivalent NEM to 463 from 458 last quarter.

Bradley Adams: The end result was a five basis point increase in the tax equivalent, and then the 463 compared to 458 last quarter. The believers continues to be exceptional margin performance and surpassed our expectations modestly. The positive flows this quarter continue to display signs of seasonality and overall stabilization from what we saw last year. Average deposits increased 4.3 million linked quarter. And period and total deposits decreased to 86.5 million from the prior quarter. The positive pricing in our markets remains exceptionally aggressive relative to the Treasury curve, and is still largely pricing off overnight borrow and level costs.

Brad: The end result was a five basis point increase in the tax equivalent NEM to $463,000.

Bradley S. Adams: We believe this continues to be exceptional margin performance and has surpassed our expectations modestly. Deposit flows this quarter continue to display signs of seasonality and overall stabilization from what we saw last year; average deposits decreased $4.3 million link quarter. Period again, total deposits decreased to 86.5 million from the prior quarter.

Brad: compared to 458 last quarter.

Brad: We believe this continues to be exceptional margin performance and surpassed our expectations modestly.

Brad: Deposits closed this quarter continue to display signs of seasonality and overall stabilization from what we saw last year.

Brad: Average deposits decreased $4.3 million, link quarter and period end total deposits decreased $86.5 million.

Bradley S. Adams: Deposit pricing in our markets remains exceptionally aggressive relative to the Treasury curve and is still largely priced off overnight borrowing-level costs. Public funds provided a bit of a headwind this quarter as fixed income markets offered an attractive alternative. On an overall basis, we are continuing to add duration, albeit at a more modest pace than I would like. In totality, marginal spreads remain unattractive at this point, and Old Second does not feel the pressure to swell in order to overcome expected margin pressures.

Brad: from the prior quarter. Deposit pricing in our markets remains exceptionally aggressive relative to the treasury curve and is still largely pricing off overnight borrowing level costs.

Bradley Adams: Other funds provided a bit of a headwind this quarter, as fixed income markets offer an attractive alternative. On an overall basis, we are continuing to add duration, albeit at a more modest pace than I would like. In totality, marginal spreads remain on attractive at this point. An old second does not feel the pressure to swell in order to overcome expected margin pressures. marginal returns on allocated equity remain poor for outside growth, and flat NII performance for the year is more difficult in the absence of long growth. But we have made progress in extending duration, and the outlook for long growth is improving.

Brad: Public funds provided a bit of a headwind this quarter as fixed income markets offer an attractive alternative.

Brad: On an overall basis, we are continuing to add duration, albeit at a more modest pace than I would like.

Brad: In totality, marginal spreads remain unattractive at this point, and Old Second does not feel the pressure to swell in order to overcome expected margin pressures.

Bradley S. Adams: Marginal returns on allocated equity remain poor for outsized growth, and flat NII performance for the year is more difficult in the absence of loan growth. However, we have made progress in extending duration, and the outlook for loan growth is improving.

Brad: Marginal returns on allocated equity remain poor for outsized growth and flat NII performance for the year is more difficult in the absence of loan growth but we have made progress in extending duration and the outlook for loan growth is improving.

Bradley Adams: My position remains that markets continue to believe inflationary trends are far easier to kill than they actually are in real life. Rate cuts right around the corner is not a realistic expectation without significant declines in real demand and consumption. Regardless of the deeply inverted yield curve, which ensures poor spreads in our industry, so we're continuing to focus on compounding both value and maximizing returns. For us, that means being careful with expenses and pricing risk appropriately. Credit protected securities then have been a better avenue at times this year. The point is that we are being careful.

Bradley S. Adams: My position remains that markets continue to believe inflationary trends are far easier to kill than they actually are in real life; rate cuts right around the corner is not a realistic expectation without significant declines in real demand and consumption. Regardless, the deeply inverted yield curve ensures poor spreads in our industry, so we're continuing to focus on compounding book value and maximizing return. For us, that means being careful with expenses and pricing risk appropriately. Credit Protected Securities have been a better avenue at times this year. The point is that we are being careful.

Speaker Change: My position remains that markets continue to believe inflationary trends are far easier to kill than they actually are in real life.

Speaker Change: Rake cuts right around the corner.

Speaker Change: is not a realistic expectation without significant declines in real demand and consumption.

Speaker Change: Regardless, the deeply inverted yield curve ensures poor spreads in our industry, so we're continuing to focus on compounding book value and maximizing returns.

Speaker Change: For us, that means being careful with expenses and pricing risk appropriately.

Speaker Change: Credit Protected Securities have been a better avenue at times this year.

Bradley S. Adams: As a result, margin trends for the remainder of the year are expected to be relatively flat, maybe slightly down. If I'm wrong and a couple of rate cuts actually occur, we would lose a few bases. Absolute NII growth from second-quarter levels will be a function of our ability to find some loan growth. The loan-to-deposit ratio remains low at 87.9%, and our ability to source liquidity from the securities portfolio remains

Bradley Adams: And as a result, margin transfer remainder of the year expected to be relatively flat, maybe slightly down. If I'm wrong in a couple of rake cuts, actually, I will lose a few basis points. Absolute and I grow from second quarter levels will be a function of our ability to find some long growth. The loan to deposit ratio remains low at 87.9%, and our ability to support source liquidity from the securities portfolio remains. Old Second should continue to build capital, as evidenced by the 35 basis point improvement in the TCE ratio over the link quarter, which means we have added an astonishing 222 basis points of TCE.

Speaker Change: The point is that we are being careful. As a result, margin trends for the remainder of the year are expected to be relatively flat, maybe slightly down.

Speaker Change: If I'm wrong and a couple of rate cuts actually occur, we would lose a few basis points.

Speaker Change: Absolute NII growth from second quarter levels will be a function of our ability to find some loan growth.

Speaker Change: The loan-to-deposit ratio remains low at 87.9%, and our ability to source liquidity from the securities portfolio remains.

Bradley S. Adams: Old Second should continue to build capital, as evidenced by the 35 basis point improvement in the TCE ratio over the linked quarter means we have added an astonishing 222 basis points of TCE and $2.37 of tangible book value per share over the last 12 months. I expect at least two people will ask in a few moments what we are going to do with all this capital. It is a fair question. Sometimes I'm wrong, but I always try to be safe when that happens.

Speaker Change: Old Second should continue to build capital, as evidenced by the 35 basis point improvement in the TCE ratio over the link quarter.

Speaker Change: which means we have added an astonishing 222 basis points of TCE and $2.37 of tangible book value per share over the last 12 months.

Bradley Adams: And $2.37 of tangible book value per share over the last 12 months. I expect at least two people will ask in a few moments. What we are going to do with all this capital. It's a fair question. Sometimes I'm wrong, but I always try to be safe when that occurs. Building capital today earns a nice return relative to the recent past, and I continue to have conviction in the belief that an opportunity to invest that excess capital is coming. M&A looks like it's starting to get interesting. If that does not come to fruition, we will return capital.

Speaker Change: I expect at least two people will ask in a few moments.

Speaker Change: what we are going to do with all this capital. It's a fair question.

Bradley S. Adams: Building capital today earns a nice return relative to the recent past, and I continue to have conviction in the belief that an opportunity to invest that excess capital is coming. M&A looks like it's starting to get interesting. If that does not come to fruition, we will return capital. A buyback is in place, and is on the table. Dividend levels will be considered as well. Non-interest expense decreased $364,000 from the previous quarter, primarily due to a reduction in salaries and benefits due to the timing of officer incentive and accruals and related payroll taxes paid in the first quarter, as well as a small decrease in occupancy costs primarily due to seasonal maintenance and a small gain recorded on an Oreo sale.

Speaker Change: Sometimes I'm wrong, but I always try to be safe when that occurs.

Speaker Change: Building capital today earns a nice return relative to the recent past, and I continue to have conviction in the belief that an opportunity to invest that excess capital is coming.

Speaker Change: M&A looks like it's starting to get interesting.

Bradley Adams: A buyback is in place and is on the table. Divit and levels will be considered as well.

Speaker Change: If that does not come to fruition, we will return capital. A buyback is in place and is on the table. Dividend levels will be considered as well.

Bradley Adams: Non-interest expense decreased 364,000 from the previous quarter primarily due to reduction in salaries and benefits. Due to a timing of officer incentive and rules and related payroll tax is paid in the first quarter. As well as a small decrease in occupancy costs primarily due to seasonal maintenance and a small gain recorded on an Oreo sale. As noted last quarter, quarterly wages and benefits are posted to 23 million run rate going forward in the near term. Given the revenue performance, employee investment costs have been running high for a while now, but we will maintain the ability to dial back as conditions weren't.

Speaker Change: Non-interest expense decreased $364,000 from the previous quarter, primarily due to reduction in salaries and benefits, due to a timing of officer incentive accruals and related payroll taxes paid in the first quarter, as well as a small decrease in occupancy costs primarily due to seasonal maintenance.

Bradley S. Adams: As noted last quarter, quarterly wages and benefits are closer to $23 million run rate going forward in the near term. Given the revenue performance, employee investment costs have been running high for a while now, but we will maintain the ability to dial back as conditions warrant. With that, I'd like to turn the call back over to Jim.

Speaker Change: and a small game recorded on an Oreo sale.

Speaker Change: As noted last quarter, quarterly wages and benefits are closer to $23 million run rate going forward in the near term.

Speaker Change: Given the revenue performance, employee investment costs have been running high for a while now, but we will maintain the ability to dial back as conditions warrant. With that, I'd like to turn the call back over to Jim.

James Eckert: With that, I'd like to turn the call back over again. Okay, thanks, Brad. In closing, we are confident in our balance sheet and the opportunities that are ahead. Our focus remains assessing and monitoring risks within the loan portfolio and optimizing the earning asset mix in order to reduce their overall sensitivity to interest rates. Net interest margin trends are stable and income statement efficiency remains at record levels. The expectation for continuing efficiency gives me confidence we are well positioned to deliver a solid year.

James L. Eccher: Okay, thanks Brad. In closing, we are confident in our balance sheet and the opportunities that are ahead. Our focus remains on assessing and monitoring risks within the loan portfolio and optimizing the earning asset mix in order to reduce our overall sensitivity to interest rates. Net interest margin trends are stable, and income statement efficiency remains at a record level. The expectation of continuing efficiency gives me confidence we are well positioned to deliver a solid year. That concludes our prepared comments this morning, so I'll turn it over to the moderator and open it up for questions. At this time, we will...

Speaker Change: Okay, thanks Brad. In closing, we are confident in our balance sheet and the opportunities that are ahead. Our focus remains on assessing and monitoring risks within the loan portfolio and optimizing the earning asset mix.

Speaker Change: in order to reduce our overall sensitivity to interest rates.

Speaker Change: Net interest margin trends are stable and income statement efficiency remains at record levels. The expectation for continuing efficiency gives me confidence we are well positioned to deliver a solid year.

Operator: That concludes our prepared comments this morning, so I'll turn it over to the moderator, and it will open it up for questions.

Speaker Change: That concludes our prepared comments this morning, so I'll turn it over to the moderator and open it up for questions.

Operator: At this time, we will be conducting a 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 that your line is open for the question. You may press star 2 if you would like to remove your question from the line. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the start key.

Operator: At this time, we will be conducting a question and answer session. If you would like to ask the question, please press star one on your telephone keypad. A confirmation tone will indicate that you're long in the question queue. You may press star two if you would like to remove your question from the queue.

Speaker Change: At this time, we will be conducting a 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 that you are on the question queue.

Operator: For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star.

Speaker Change: 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.

Operator: One moment, please, while we poll for questions. And we do have our first question here from Jeff Rulis from D.A. David.

Speaker Change: One moment please while we poll for questions.

Speaker Change: And we do have our first questioner, Jeff Rulis from DA Davidson.

Jeffrey Allen Rulis: Brad, I'll stay off the capital questions, but maybe on the credit side. Just possibly an update on the credits we talked about, either the Chicago office or the California healthcare, just to try to get an update on timing and status, if we can.

Jeffrey Allen Rulis: Thanks, good morning.

Speaker Change: Brattle, I'll stay off the capital questions, but maybe on the on the credit side

Jeffrey Allen Rulis: This is possibly an update on the credits we talked about, either the Chicago office or the California health care, just to try to get an update on timing and status, if we could.

Bradley S. Adams: Sure, well, I think that, you know, the big story this quarter was that we had two major charge-offs, and really that was the extent of... The pain we took this quarter. They were both credits that had been on the horizon here for several quarters. One was a Chicago office building that we took a final charge on, $4 million, and then the other was a note sale that we were able to execute on that required $1.5 million plus a $1.5 million additional charge.

Jeffrey Allen Rulis: Sure.

Speaker Change: Sure, well I think that the big story in this quarter, we had two major charge-offs and really that was the extent of...

Speaker Change: The pain we took this quarter, they were both credited then.

Speaker Change: on the horizon here for several quarters. One was a Chicago office building that...

Speaker Change: We took a final charge of $4 million, and then the other was a note sale that we were able to execute on that required...

Bradley S. Adams: So we feel good about resolving those two. But I think what investors should know is we've made significant headway reducing non-parole loans this quarter with more than a dozen credits that we resolved. As far as... You know, office space, obviously still a very important part of the portfolio they're watching over. We only have $23 million in office exposure, $9 million in Chicago, and $14 million in the suburbs. We've got a reserve against them.

Speaker Change: about a one and a half million dollar additional charge so

Speaker Change: We feel good about resolving those two. I think what investors should know is we've made significant headway in reducing non-approval loans this quarter.

Speaker Change: with more than a dozen credits that we resolved.

Speaker Change: As far as

Speaker Change: You know offers, you know, obviously still

Speaker Change: We only have $23 million now in office exposure, $9 million in Chicago, and $14 million in the suburbs. We've got a reserve against.

Bradley S. Adams: The entire portfolio is north of 5%, so we feel like we've got our arms around that pretty well. Healthcare has been a slower remediation process, but we've seen no new red flags pop up in that portfolio, and we are actually starting to see some improvement in occupancy and performance.

Speaker Change: The entire portfolio north of 5%, so we feel like we've got our arms around that pretty well. Healthcare has been a slower remediation process, but we've seen no new red flags pop up in that portfolio, and actually starting to see some improvement in occupancy and performance.

James L. Eccher: And Jim, just on your tone, it sounded as if kind of the net charge-off outlook, barring surprises, seems like the second half is chunkier than the back half. And the expectation, just to confirm, is that you'd expect losses to be... More modest ahead.

Speaker Change: And Jim, just on your tone, it sounded as if kind of the net charge-off outlook, barring surprises,

James L. Eccher: It seems like the second half is chunkier than the back half, and the expectation, just to confirm, is that you'd expect losses to be more modest ahead.

James L. Eccher: Yeah, that's correct. I feel momentum is still very strong in credit remediation, but I don't see any chunkier charges in the coming quarters anyway.

James L. Eccher: Yeah, that's correct. I feel momentum is still very strong in credit remediation, but I don't see chunkier charges in the coming quarters anyway.

James L. Eccher: Maybe hop into the pipeline pickup trend, wanted to kind of get your sense of... Is that more something you're doing in-house? Do you feel like it's just the market picking up, or maybe a combo of both? And then the second part of that question is... Could you frame up what the second half looks like? Is that kind of low or mid-single-digit growth on that?

James L. Eccher: Okay.

Speaker Change: Maybe hop into the pipeline pickup trend, wanted to kind of get your sense of.

Speaker Change: Is that more something you're doing in-house? Do you feel like it's just the market picking up, or maybe a combo of both? And then that second part of that question is, could you frame up what the second half looks like? Is that kind of low or mid-single-digit growth on that?

James L. Eccher: Yeah, I mean, we've been pretty disciplined this year, Jeff. I would say the first half of this year, we were not seeing the risk-adjusted spreads that we would have liked to have seen. So we were really on the sidelines; we've seen more opportunities, and what I'm encouraged about now is that the pipelines are broad-based along many of our verticals. And, you know, we got to get them across the finish line here. But I would expect, you know, hopefully, load up to mid-single digit growth for 3Q and 4Q this year.

Speaker Change: Yeah, I mean, we've been pretty disciplined, Jeff. I would say the first half of this year, we were not seeing the risk-adjusted spreads that we would have liked to have seen. So we were really on the sidelines. We've seen more opportunities. And what I'm encouraged about now,

Speaker Change: is that the pipelines are broad-based along many of our verticals, and we've got to get them across the finish line here, but I would expect hopefully low to mid-single-digit growth.

Operator: So hopefully loaded to Nick Singleton to grow for 3Q and 4Q this year.

Operator: Okay, appreciate it. I'll step back. Thanks.

Jeffrey Allen Rulis: Okay. I appreciate it. I'll step back. Thanks. Now, we hear from Chris McGrady with KGB.

Speaker Change: for 3Q and 4Q this year.

Operator: We now hear from Chris McGrady with KBEW. I'm sorry, but we have Terry McEvoy with Stephen.

Christopher McGratty: We now hear from Chris McGratty with KVW. That's all we have, Terry McEvoy, but Steven's.

Jeffrey Allen Rulis: Okay, appreciate it. I'll step back. Thanks.

Jeffrey Allen Rulis: We now hear from Chris McGrady with KBEW.

Jeffrey Allen Rulis: I'm sorry, we have Terry McEvoy with Stevens.

Operator: Hi.

Terence James McEvoy: Hi, good morning, everyone, or Terry Wine. Maybe I could just ask a question on the expense outlook for the second half of this year. The personnel and expenses overall came in a bit above what was discussed on the last call, and I would be curious about your outlook for the second half of the year.

Terence McEvoy: Good morning, everyone. Thank you, Terry McEvoy. Maybe I could just ask a question on the expense outlook for the second half of this year. The personnel and expenses overall came in a bit above what was discussed on the last call and would be curious with your outlook for the second half of the year. Relative flat. I thought I said 23 million less quarter, but so maybe a 400 grand above that level. Second half of the year is always about, you know, how you're overall year performance is tracking relative to budget and how that works with incentive accruals.

Terence James McEvoy: Hi, good morning, everyone.

Terence James McEvoy: More Terry lining? Maybe if I could just ask a question on the expense outlook for the second half of this year. The personnel and expenses overall came in a bit above what was discussed on the last call and would be curious on with your outlook for the second half of the year.

Bradley S. Adams: Relatively flat. I thought I said $23 million last quarter, but... So maybe you have $400,000 above that level. The second half of the year is always about how your overall year performance is tracking relative to budget and how that works with incentive accruals. So you can be wrong by $500,000 in any given quarter and still be pretty darn close. It's kind of a horseshoes and hand grenades kind of thing.

Speaker Change: Relatively flat. I thought I said $23 million last quarter.

Speaker Change: So maybe at $400,000 above that level.

Speaker Change: The second half of the year is always about how your overall year performance is tracking relative to budget and how that works with incentive accruals. So you can be wrong by $500,000 in any given quarter and still be pretty darn close. It's kind of a horseshoes and hand grenades kind of thing.

Bradley Adams: So it, you can be wrong by 500,000 in any given quarter and still be pretty darn close. It's kind of or she's an anger-natured kind of thing, but I don't see anything labor market conditions have improved. We've been able to hire who we wanted. I don't see any real surprises coming at us at this point. So I think we are where we are. I'll say I'm broadly very happy with what expense trends have done over the last year and also over the last three years. There's no secret. This is a wildly, it's been a wildly inflation every time and I feel like we've done a really good job keeping a lid on things.

Bradley S. Adams: I don't see anything. Labor market conditions have improved. We've been able to hire who we wanted. I don't see any real surprises coming at us at this point, so I think we are where we are. I'll say I'm broadly very happy with what expense trends have done over the last year and also over the last three years. It's no secret this has been a wildly inflationary time, and I feel like we've done a really good job keeping a lid on things.

Speaker Change: I don't see anything.

Speaker Change: Labor market conditions have improved. We've been able to hire who we wanted. I don't see any real surprises coming at us at this point. So I think we are where we are. I'll say I'm broadly very happy with what expense trends have done over the last year and also over the last three years.

Speaker Change: It's no secret, this has been a wildly inflationary time and I feel like we've done a really good job keeping a lid on things.

Bradley S. Adams: And then there seems to be fears that when CRE loans mature, that's when the losses materialize. That wasn't obviously what happened last quarter. So when I look at the $25 million in maturities in Q3 and with that $40 million in Q4, are those loans built into the reserve today? And ultimately, you know, how should I think about potential loss content there? Yeah, we've been cynical.

Bradley Adams: And then there seems to be fears that when CRE loans mature, that's when the losses materialize; that that wasn't obviously what happened last quarter.

Speaker Change: And then there seems to be fears that when CRE loans mature, that's when the losses materialize. That wasn't obviously what happened last quarter. So when I look at the $25 million of maturities in Q3 and what's at $40 million of Q4,

Bradley Adams: So when I look at the 25 million of maturities in Q3 and what's at 40 million of Q4, are those loans built into the reserve today and ultimately, you know, how should I, how are you thinking about potential loss content there? Yeah, we've been cynical to press people on upcoming maturity for the better part of two years. Now that's a function of why we were downgraded credits two years ago and felt like we were alone in doing so. There is no surprises coming. We have looked at maturity that are less than 24 now to 24 months out for a while now and we've been very cynical, depressing people that you wouldn't want to talk to a cocktail parties.

Speaker Change: Are those loans built into the reserve today and ultimately you know how should I how are you thinking about potential loss content there?

Bradley S. Adams: Yeah, we've been cynical, depressed people on upcoming maturities for the better part of two years now. That's a function of why we were downgrading credit two years ago and felt like we were alone in doing so.

Speaker Change: Yeah, we've been cynical, depressed people on upcoming maturities for the better part of two years now. That's a function of why we were downgrading credits two years ago.

Bradley S. Adams: There are... No surprises coming. We have looked at maturities that are less than 24 months out for a while now, and we've been very cynical, depressing people that you wouldn't want to talk to at cocktail parties. I think that the kind of bowling ball through a garden hose has been the preponderance of our industry to offer seven and ten year maturities, which Jim alluded to, you know, back in 2020 and 2021. That's not a game that we played. So, we're a short-duration asset shop, always have been, and believe we always will be. There's nothing coming at us that is either unexpected or outsized in terms of maturities.

Speaker Change: and felt like we were alone in doing so, there is...

Terence James McEvoy: I appreciate that. And then, maybe one last one, Brad, I think you said M&A is starting to get interesting. Might have been the quote there. So I don't mean to ask a capital question, but I have to kind of take the bait on your statement there.

Speaker Change: No surprises coming. We have looked at maturities that are less than 24 months out for a while now, and we've been very cynical, depressing people that you wouldn't want to talk to at cocktail parties.

Bradley Adams: I think that the kind of bowling ball through a garden hose has been the proponents of our industry offer seven and ten year maturities, which Jim alluded to, you know, back in 2020 and 2021. That's not a game that we played in. So we're a short duration asset shop; always have been, believe we always will be. There's nothing coming at us that is either unexpected or outside in terms of matured. and smarter people than us have tried to bet on interest rates, and a large percentage of them wind up with a 10-cup in their hand-on-street corners. betting on interest rates is a fool's errand.

Speaker Change: I think that...

Speaker Change: The kind of bowling ball through a garden hose has been the preponderance of our industry to offer 7 and 10 year maturities, which Jim alluded to, you know, back in 2020 and 2021. That's not a game that we played in.

Speaker Change: So, we're a short-duration asset shop, always have been, believe we always will be. There's nothing coming at us that is either unexpected or outsized in terms of maturities.

Speaker Change: Appreciate that. And then maybe one last one, Brad. I think you said M&A is starting to get interesting. Might have been the quote there. So I don't mean to ask a capital question, but I have to kind of take the bait on your statement there.

Bradley S. Adams: Yeah, you know our statements have been...

Bradley S. Adams: You know, our statements have been... Our strategy has been to build capital. I think that there are several reasons to do that. The first of which is that, at this point, more so than at any point over the last 10 years, capital earns a nice return. The cost of funding is now 5.4% in the market. A levered return on equity is pretty darn good, even if you're not using it at this point.

Brad: Yeah, you know our statements have been...

Speaker Change: Our strategy has been to build capital. I think that there's several reasons to do that. The first of which is that

Speaker Change: At this point, greater than any point over the last 10 years, is that capital earns a nice return. The cost of funding is now 5.4% in the market.

Bradley S. Adams: So it allows you to have a margin of safety. That margin of safety is also... you know, is both economic and political. There is a recession around the corner. That's something people like to talk about. But it's also if times are difficult in our industry, which they have been with very low returns. Some people might begin to throw in the towel.

Speaker Change: A levered return on equity is pretty darn good, even if you're not using it at this point. So it allows you to have a margin of safety. That margin of safety is also

Speaker Change: You know, it's both.

Speaker Change: economic based is a recession around the corner. That's something people like to talk about. But it's also if times are difficult in our industry, which they have been with very low returns, some people might begin to throw in the towel.

Bradley S. Adams: We have capital flexibility to include cash in a deal so you can balance accretion. I don't know whether a deal is going to happen for us, and I realize that's the question. I can tell you that if we do get an opportunity, we will be exceptionally disciplined on price. That hasn't changed. If we don't get an opportunity, as I said, we will return the capital.

Speaker Change: We have capital flexibility to include cash in a deal so you can balance accretion. I don't know whether a deal is going to happen for us. And I realize that's the question. But.

Speaker Change: I can tell you that if we do get an opportunity, we will be exceptionally disciplined on price.

Speaker Change: That hasn't changed.

Speaker Change: If we don't get an opportunity, as I said, we will return the capital.

Terence James McEvoy: Understood. Thank you for taking my question. Yes, sir. Thank you.

Speaker Change: Understood. Thank you for taking my questions. Yes, sir. Thank you.

Operator: We now have Chris McGrady with KBW.

Speaker Change: We now have Chris McGraty with KBW.

Christopher Edward McGratty: Chris, are you having trouble? Yeah, I'm in the daytime.

Speaker Change: Chris, are you having trouble?

Christopher Edward McGratty: Well, very cool. The optimization of the balance sheet was mentioned a couple times in Prepare to Marks by you and Jim. What's left to do? Obviously, hedging is probably hard in this environment because of the curve, but what's left to do? What's coming off the bond portfolio every month? Just help us a little bit on that. Oh, we've had a couple of-

Christopher Edward McGratty: Can you hear me now Brad? Yes I can.

Christopher Edward McGratty: Obviously, hedging is probably hard in this environment because of the curve, but what's left to do? What's coming off the bond portfolio every month? Just help us a little bit on that.

Bradley S. Adams: We've had a lot come off the bond portfolio. The structure of the yield curve for the bulk of this quarter meant that we simply laddered it back out short, which did offer a pickup in yield. What I'd like to see is a steepening, but I don't know.

Speaker Change: We've had a lot come off the bond portfolio. The structure of the yield curve for the bulk of this quarter meant that we simply laddered it back out short, which did offer a pickup in yield.

Speaker Change: What I'd like to see is a steepening.

Bradley S. Adams: I think a steepening is coming. I don't know whether it's recession-driven with the short end falling, or if it's things people become less pessimistic, and the long end picks up. If we can get a steepening, obviously, the latter would be better. If we can get that, then what we would do is take off adoration aggressively by selling variable securities and reduce the overall size of the bond portfolio with loan growth to more like a 15% level from a 20% level.

Speaker Change: I think a steeping is coming. I don't know whether it's recession driven with a short end falling.

Speaker Change: or if it's things people become less pessimistic and the long end picks up.

Speaker Change: If we can get a steepening, obviously the latter would be better. If we can get that, then what we would do is take off, add duration aggressively by selling variable securities.

Speaker Change: and reduce the overall size of the bond portfolio with loan growth to more like a 15 percent level from a 20 percent level. That would be the ideal scenario. I would remind investors that we are what we are.

Bradley S. Adams: That would be the ideal scenario. But I would remind investors that we are what we are, and smarter people than us have tried to bet on interest rates. And a large percentage of them wind up with a 10 cup in their hand on street corners.

Speaker Change: And smarter people than us have tried to bet on interest rates.

Speaker Change: and a large percentage of them wind up with a tin cup in their hand on street corners. Betting on interest rates is a fool's errand. We will always be inherently sensitive and better off if rates are higher because of being a very good deposit base.

Bradley S. Adams: Betting on interest rates is a fool's errand. We will always be here, inherently sensitive and better off if rates are higher because of being a very good deposit base, and anybody that wants us to bat away would be making a mistake. So we do better when rates are high, that's no secret, and we are doing quite well. If short rates fall, we will do slightly worse, but we will invest capital wisely, and we will earn nice returns on it.

Bradley Adams: We will always be inherently sensitive and better off if rates are higher because of being a very good deposit base. And anybody that wants us to bet that away would be making a mistake. So we do better when rates are off. That's no secret. And we are doing quite well. If short rates fall, we will do slightly worse. But we will invest capital widely, and we will earn nice returns in any environment.

Speaker Change: And anybody that wants us to bat that away would be making a mistake.

Speaker Change: So, we do better when rates are high, that's no secret, and we are doing quite well.

Speaker Change: If short rates fall, we will do slightly worse.

Speaker Change: But we will invest capital wisely and we will earn nice returns in any environment.

Bradley Adams: Thanks for that. Maybe just a follow-up, kind of combining the expense in the NIH commentary. Yeah, efficiency ratio. The efficiency ratio, Brad, or Jim, like if we get that forward curve, we get a hundred basis points because obviously margins will go down. You're obviously going to probably be a little bit more careful on cost. Like, where is the efficiency ratio settle in if the future's markets right with a hundred of cuts? So low 50s and high rates mid to high 50s in very low rates. I don't see us going back above 60. Given our size and scale that we have now.

Christopher Edward McGratty: Thanks for that. Maybe just a follow-up, kind of combining the expense and the NII commentary, the efficiency ratio, the efficiency ratio, Brad or Jim, like if we get the forward curve, we get a cut, 100 basis points a cut, obviously margins will go down, you're obviously going to probably be a little bit more careful on cost. But like, where's the efficiency ratio settling if the futures market's right with a hundred cuts?

Speaker Change: Thanks for that. Maybe just a follow-up, kind of combining the expense and the NII commentary, the efficiency ratio, the efficiency ratio, Brad or Jim, like

Speaker Change: If we get the forward curve, we get 100 basis points of cuts, obviously margins will go down.

Speaker Change: You're obviously going to probably be a little bit more careful on cost, but where's the efficiency ratio settle in if the futures market's right with 100 of cuts?

Bradley S. Adams: So, low 50s and higher rates, mid to high 50s, and very low rates. I don't see us going back above 60, given our size and scale that we have now. But I also don't think we're ever going back to zero, given all the things that have resulted from that. I think it would take an absolute idiot to think that was a good idea at this point.

Speaker Change: So low 50s and higher rates, mid to high 50s, and very low rates. I don't see us going back above 60, given our size and scale that we have now.

Bradley Adams: But I also don't think we are going back to zero, given all the things that resulted from that. I think it would take an absolute idiot to think that was a good idea at this point. So, in a world where rates aren't zero, deposits are worth fundamentally more than most investors have a memory of. So, I think that as long as short rates don't cross 200 basis points at any time soon, we are a above 4% margin shop. As we are structured today. So mid to upper 50s with, yes, yeah. Okay, okay, quick to talk.

Speaker Change: But I also don't think we're ever going back to zero, given all the things that resulted from that. I think it would take an absolute idiot to think that was a good idea at this point.

Bradley S. Adams: So in a world where rates aren't zero, deposits are worth fundamentally more than most investors have a memory of. So I think that, as long as short rates don't cross 200 basis points at any time soon, we will be a above 4% margin shop, as we are.

Speaker Change: So, in a world where rates aren't zero, deposits are worth fundamentally more than most investors have a memory of. So I think that as long as short rates don't cross 200 basis points at any time soon.

Speaker Change: We are a above 4% margin shot.

Bradley S. Adams: So mid-to-upper 50s with the former current, okay, got it. The big difference today versus where we were last time is that we were in a potential scenario where rates were going to be cut because our balance sheet just wasn't as optimized, right? We were sitting at low, more than mid-60s on our loan to the positive rate. So we've got much stronger pre-tax, pre-tax.

Speaker Change: as we are structured today.

Speaker Change: So mid to upper 50s with the ability to forward cut? Yeah. Okay. Got it. The big difference today versus where we were last time, we were in a potential scenario where rates were going to be cut because our balance sheet just wasn't as optimized, right? We were sitting at low.

Bradley Adams: The big difference today versus the world, we were in the last time. We were in a potential scenario where rates were going to be cut with our values sheets. It wasn't an optimized rate. We were sitting at low, low to mid 60s on our low to positive ratio. So, we've got, we've got much stronger pre, you know, pre-tax speed provision earnings power now.

Speaker Change: low to mid-60s on our loan-to-deposit ratio. So we've got much stronger pre-tax, pre-provision earnings power now.

Operator: Perfect. Thank you.

Nathan Race: Is our, our next question, here is Nathan Race with Piper Sandler. Yeah, hi, guys. Good morning.

Nathan James Race: Our next questioner is Nathan Race with Piper Sandler. Yeah.

Speaker Change: Come.

Speaker Change: Perfect. Thank you.

Speaker Change: Our next questioner is Nathan Race with Piper Sandler.

Nathan James Race: Yeah, hi guys, good morning. In terms of funding loan growth in 3Q and 4Q, is that mostly going to be sourced from securities portfolio runoff, and does that imply maybe the margin can expand a little bit more here in 3Q?

Bradley Adams: In terms of funding along those in three to and four queue, that most are going to be source some secure support pulleering off. And does that imply maybe the margin can expand a little bit more here in three to? I would like to say flat on the margin. I, it wasn't my expectation that it would go up to this quarter. Yes, I would say that if, if long growth is, is strong, which we believe is trending in that direction, that at least half of it would come out of the bond portfolio. And, and you may see over, and I borrow them to pick up a bit, or you may see the positive.

Nathan James Race: Yeah, hi guys, good morning.

Nathan James Race: In terms of funding loan growth in 3Q and 4Q, is that mostly going to be sourced from securities portfolio runoff? And does that imply maybe the margin can expand a little bit more here in 3Q?

Bradley S. Adams: I would like to say flat on the margin. It wasn't my expectation that it would go up this quarter. Yes, I would say that if loan growth is strong, which we believe is trending in that direction, that at least half of it would come out of the bond portfolio, and you may see overnight borrowings tick up a bit, or you may see deposit growth. We had deposit growth last quarter. We had some lumpiness happen this quarter. I don't see any reason why deposits can't grow.

Speaker Change: I would like to stay flat on the margin. It wasn't my expectation that it would go up this quarter.

Speaker Change: Yes, I would say that if loan growth is strong, which we believe is trending in that direction,

Speaker Change: that at least half of it would come out of the bond portfolio and you may see overnight borrowings tick up a bit or you may see deposit growth.

Speaker Change: You know, we had deposit growth last quarter. We had some lumpiness happen this quarter. I don't see any reason why deposits can't grow.

Bradley S. Adams: Okay, great. And then Brad, can you just remind us the impact on the margin with each 25 cut from the Fed?

Speaker Change: Okay great and then Brad can you just remind us the impact on the margin with each 25 cut from the Fed?

Bradley S. Adams: Oh, five to seven basis point decline.

Brad: Oh, five to seven basis point decline.

Bradley S. Adams: Any earlier, just remind us of the floating rate assets that you have on the balance sheet both in loans and securities coming out of the quarter.

Speaker Change: And then earlier, just remind us in terms of the floating rate assets that you have on the balance sheet, both in loans and securities coming out of the quarter.

Bradley S. Adams: About 50% We're about 50-50, but the fixed portion of the balance sheet generally has an effective duration of a little over three. So, you know, rates down, we'll hit a, without a lot of weight, there is no question about that. But also, you get a pickup in the benefit of the free funding, and deposit costs will come down. And that's when you start looking at growth as well.

Speaker Change: About 50%.

Speaker Change: We're about 50-50, but the fixed portion of the balance sheet generally has an effective duration a little over three.

Speaker Change: So, you know, rates down will hit us.

Speaker Change: without a lot of weight. There's no question about that.

Speaker Change: But also you get a pickup in the benefit of the free funding and deposit costs will come down.

Speaker Change: So

Speaker Change: And that's when you start looking at growth as well.

Bradley S. Adams: Got it, that's helpful. Just one last one. It sounds like charge-offs may, there may be some additional cleanup here in the third quarter, and I imagine those are already largely allocated for, but just in terms of kind of where you guys want to see the reserve settle out coming out of the third quarter, any thoughts on what that level should be relative to total loans?

Speaker Change: Got it. That's helpful. Just one last one. It sounds like charge-offs may...

Speaker Change: There may be some additional cleanup here in the third quarter, and I imagine those are already largely allocated for, but just in terms of kind of where you guys want to see the reserve settle out coming out of the third quarter, any thoughts on what that level should be?

Bradley S. Adams: Yeah, I think the reserve at these levels as a percentage of total is probably an appropriate level for us. But To answer your earlier question, I don't see the magnitude of charge-offs in the second half of this year based on, based on the remediation progress we're making on a number of loans, we have already realized some progress this quarter. So I think a reserve level in close proximity where we're at now is appropriate.

Speaker Change: Relatives of Total Loans.

Speaker Change: Yeah, I think the reserve at these levels, as a percentage of total loans, is probably an appropriate level for us. But to answer your earlier question, I don't see the magnitude of charge-offs in the second half of this year based on...

Speaker Change: based on the remediation progress we're making on a number of loans and

Speaker Change: and have already realized some progress this quarter. So I think a reserve level in close proximity where we're at now is appropriate.

Nathan James Race: Okay, great. I appreciate all the color. Thanks, guys. Thanks, guys.

Nate: Okay, great. I appreciate all the color. Thanks, guys. Thanks, Nate.

David Joseph Long: We now hear from David Long with Raymond James.

Speaker Change: We now hear from David Long with Raymond James.

David Joseph Long: Good morning, everyone. Fred, I wanted to ask you about the deposit pricing. Obviously, you guys have a great core deposit base, and total deposit costs among the lowest of your peer group. In your marketplace, where I reside, I'm still getting some pretty nice offers, 5% plus on savings accounts. The, how much do you see the deposit, if we stay higher for longer for the back half of the year, how much higher do you see that deposit, total deposit cost? For Old Second Changing.

David Joseph Long: Good morning, everyone. Brad, I wanted to ask you about the deposit pricing. Obviously, you guys have a great core deposit base, total deposit costs among the lowest.

David Joseph Long: of your peer group.

David Joseph Long: In your marketplace, where I reside, I'm still getting some pretty nice offers, 5% plus on savings accounts. How much do you see the deposit if we stay higher for longer for the back half of the year? How much higher do you see that deposit, total deposit cost?

Bradley S. Adams: So I think what's largely going on here is that a bank such as ourselves, which is a good retail deposit bank, a natural mix of the deposits is probably about 25% time deposits. We got down around 10 or 12, because time deposits became a bad deal for consumers. And that's what happens in... with a curve that is at zero across any level of duration.

Old Second: for Old Second Changing.

Speaker Change: So I think what's largely going on here is that a bank such as ourselves, which is a good retail deposit bank,

Speaker Change: A natural mix of the deposits is probably like 25% time deposits. We got down around 10 or 12 because time deposits became a bad deal for consumers, and that's what happens.

Speaker Change: with a curve that is at zero across any level of duration.

Bradley S. Adams: So time deposits became just simply not a thing. And what we're seeing now is that mix shift going back, and there is a transition, and we'll probably start trending towards a 20% time deposit mix. I don't see any reason why it shouldn't be that.

Speaker Change: So, time deposits became just simply not a thing. And what we're seeing now is that mix shift going back and there is a transition and we'll probably start trending towards a 20% time deposit mix.

Bradley S. Adams: And that's going to be the primary determinant of pickup and deposit costs for us. Now there is a percentage of the deposit base that is a lot of money. For us, that's much lower than everybody else. We have very few accounts that have more than $10 or $15 million. You can count them on fingers and toes.

Speaker Change: I don't see any reason why it shouldn't be that. And that's going to be the primary determinant of pickup and deposit costs for us. Now there is a percentage of the deposit base that is a lot of money. For us, that's much lower than everybody else. We have very few accounts that have more than $10 or $15 million in them.

Speaker Change: You can count them on fingers and toes.

Bradley S. Adams: So... For that customer, for our industry, fixed income markets are simply a better deal. And fighting with fixed income markets for that money results in the big pickups and deposit costs that you've seen in our industry, and that's simply not a game that we're in to win. That's not what banks should be doing. Sophisticated, large public funds and commercial customers should have a diversified liquidity portfolio.

Speaker Change: So

Speaker Change: For that customer, for our industry, fixed income markets are simply a better deal.

Speaker Change: And fighting with fixed income markets for that money results in the big pickups and deposit costs that you've seen in our industry, and that's simply not a game that we're in to win. That's not what banks should be doing.

Speaker Change: Sophisticated, large public funds and commercial customers should have a diversified liquidity portfolio.

Bradley S. Adams: It's simply true that banks are having to fight with fixed income markets for funding because they got duration wildly wrong when rates were low and were going higher. And that's what happens when you're stuck. But we are simply not stuck.

Speaker Change: It's simply true that banks are having to fight with fixed income markets for funding because they got duration wildly wrong when rates were low and going higher. And that's what happens when you're stuck.

Speaker Change: We are simply not stuck.

David Joseph Long: Got it. Thank you for the, uh, for that caller. And then... On the credit side of things, a lot of talk about commercial real estate, particularly office space. Hearing more from Chief Card Officers that C&I needs to be more closely watched and regulators need to look more at C&I. How is the performance of your C&I book, and are there any segments there that you're a little bit more concerned about?

Speaker Change: Got it. Thank you for that caller.

Speaker Change: On the credit side of things, a lot of talk about commercial, particularly the office space.

Speaker Change: Hearing more from Chief Card Officers that C&I needs to be more closely watched and regulators need to look more at C&I, how is the performance of your C&I book and are there any segments there that you're a little bit more concerned about?

James L. Eccher: Yeah, I mean, so far, Dave, our C&I portfolio is holding up very well. Got about, I think, A little over a third of our portfolio is now in C&I, which we're, are pleased about, only about... Less than $20 million is classified in that book. We have seen a couple of credits that we're keeping an eye on. But by and large, a lot of our C&I clients still have relatively low leverage balance sheets and are producing pretty good top-line results, but we are obviously watchful with the very significant, The variable portion of that portfolio is NC&I, and we're seeing a little bit of stress, but right now, it's behaving very well.

Speaker Change: Yeah, I mean, so far, Dave, our C&I portfolio is holding up very well. We've got about, I think, a...

Speaker Change: A little over a third of our portfolio is now in C&I, which we're

Speaker Change: which we're pleased about, only about...

Speaker Change: Less than $20 million is classified in that book. We have seen a couple of credits.

Speaker Change: that we're keeping an eye on. But by and large, a lot of our C&I clients still have

Speaker Change: relatively low leverage balance sheet and

Speaker Change: Producing pretty good top-line results, but we are obviously watchful with with the very own, you know significantly

Speaker Change: The variable portion of that portfolio is NC&I, we're seeing a little bit of stress, but right now it's behaving very well.

David Joseph Long: Got it. Thanks for taking my questions, guys. Thanks, Dave.

Operator: A reminder before our next participants that if you have a question you would like to pose, please press star one on your keypad. Star one. We now have Brian Martin with Jannie Monk on.

Speaker Change: Got it. Thanks for taking my questions, guys. Thanks, Dave.

Speaker Change: A reminder before our next participants that if you have a question you would like to pose to please press star 1 on your keypad. Star 1.

Speaker Change: We now have Brian Martin with Jannie Montgomery Scott.

Brian Martin: Hey, most of my questions are answered, but just Brad, just on the securities portfolio, just for clarification on how much of that is coming off in the second half of the year and the percentage of that this variable rate just on the securities book. I think it was about 20% last quarter. It sounds like it dropped a bit this quarter, yeah, not much.

Brian Martin: Hey, good morning, guys.

Brian Martin: Hey Brian. Hey, good morning Brian.

Brian Martin: Hey most of my questions are answered but just Brad just on the securities portfolio just for clarity the how much of that is coming off in the second half of the

Bradley S. Adams: I mean, the type of volatility that we've seen has been not much to dropping. That is, the type of volatility that we've seen means that there are times when variable securities are quite simply a better deal, and they were for the bulk of the second quarter. So you get the best value for your money, in terms of, coming off the bond portfolio, I would expect no less than $100 million over the remainder of the year. So it feels fine to support loan growth for the bulk of it. I said at least half a few minutes ago. All the flexibility we need.

Speaker Change: I mean you have the type of volatility that we've seen has been not much to dropping that is.

Speaker Change: The type of volatility that we've seen means that there are times when variable securities are quite simply a better deal, and they were for the bulk of the second quarter. So you take the best value for your money.

Bradley Adams: In terms of coming off the bond portfolio, I would expect no less than 100 million dollars over the remainder of the year, so it feels fine to support long growth for the bulk of it. I said at least half a few minutes ago, all the flexibility we need, feel very good. Yeah, and that comes off at what, Brad? I mean, is it pretty low rate that 100 million? Yeah, I mean, it's certainly lower than the blended overall securities portfolio, which I think is like 320 or something like that, so it's significantly lower than that.

Speaker Change: In terms of coming off the bond portfolio, I would expect no less than $100 million over the remainder of the year.

Speaker Change: So, it feels fine to support loan growth for the bulk of it, I said at least half a few minutes ago. All the flexibility we need.

Bradley S. Adams: And that comes off at what, Brad? Is that a pretty low rate, that $100 million?

Speaker Change: feel very good yeah and what that comes off at what Brad I mean is it pretty low rate that hundred million yeah

Bradley S. Adams: Yeah, I mean, it's certainly lower than the blended overall securities portfolio yield, which I think is like 320 or something like that, but it's significantly lower than that.

Brad: Yeah, I mean, it's certainly lower than the blended overall securities portfolio yield, which I think is like $320,000 or something like that.

Operator: Got it.

Brian Martin: Got you, okay. And then just on the credit front, just the progress you made this quarter and kind of some of the comments, I guess, the resolutions at this point seem to be, you know, less costly, but in terms of any lumpy resolutions you expect here in the back half of the year, I mean, do you expect another meaningful decline in the non-performers or, you know, the classifieds are criticized here as you kind of get to the back half of the year, or is it more of a slow, slower decline now, given some of the, you know, the heavy lifting you've done?

Brad: is significantly lower than that.

James Eckert: Okay, and then just on the credit front, just a progress you made this quarter and kind of some of the comments, I guess. The resolutions at this point seem to be, you know, less costly, but in terms of any lumpy resolutions you expect, you're in the back half of the year. I mean, the expect, another meaningful decline in the non-performance or the classifies or criticized here, as you kind of get to the back half of the year, is it more of a slow, slower decline now, given some of the, you know, the heavy lifting you've done.

Speaker Change: Gotcha. Okay. And then just on the credit front...

Speaker Change: Just the progress you made this quarter and kind of some of the comments, I guess, the resolutions at this point seem to be, you know, less costly, but in terms of

Speaker Change: Any lumpy resolutions you expect here in the back half of the year? I mean, do you expect another meaningful decline in the non-performers, or, you know, the classifieds are criticized here as you kind of sit back half of the year, or is it more of a slower decline now, given some of the heavy lifting you've done?

James Eckert: Yeah, I mean, I don't know if we'll get, you know, 23% reduction in non-acruals next quarter, but we are already realizing some remediation on a number of fronts; momentum is good. You know, what's encouraging is there's been very little migration into not accrual this quarter. We always saw a million dollars and saw obviously 20, you know, 22 million reductions. So when you have a slow down and in migration, that allows you to really work on working some credits out and weeks back that momentum to continue.

James L. Eccher: Yeah, I mean, I don't know if we'll get, you know, a 23% reduction in non-accruals next quarter, but we are already realizing some remediation on a number of fronts. Momentum is good. You know, what's encouraging is that there's been very little migration into non-accrual. This quarter we only saw a million dollars, and we obviously saw 22 million reductions. So when you have a slowdown in migration, that allows you to really work on it. We're working some credits out, and we expect that. The momentum to continue is strong.

Speaker Change: Yeah, I mean, I don't know if we'll get, you know, a 23% reduction in non-accruals next quarter, but we are already realizing some remediation on a number of fronts. Momentum is good.

Speaker Change: What's encouraging is there's a very little migration.

Speaker Change: into non-accrual this quarter. We only saw a million dollars and saw, obviously, $22,000.

Speaker Change: you know, 22 million reduction. So when you have a slowdown in migration, that allows you to really work on working some credits out. And we expect that.

Brian Martin: Gotcha. Okay, thanks, Jim. And then, Brad, not to disappoint you on at least getting two questions on capital. Thank you. You had you had one.

Bradley Adams: Gotcha, okay, thanks, Jim. And then, Brad, not to disappoint you on at least getting two questions on capital. Thank you. You had one, the second one on the buyback, and I knew you talked about if you go that route or it's a possibility that pricing kind of where it was making sense, but given the rally in the market here, at least some of the banks. Can you, I guess, is your, if you go that route, is your outlook changed and how you would think about, you know, the profitability of that at what pricing it would look more track.

Speaker Change: momentum to continue in the next quarter.

James L. Eccher: Gotcha. Okay. Thanks, Jim. And then, Brad, not to disappoint you on at least getting two questions on capital. Thank you. You had one. The second one on the buyback, and I know you talked about if you go that route, or it's a possibility, the pricing, kind of where it was making sense. But given the rally in...

Bradley S. Adams: The second one on the buyback, and I knew you talked about it, if you go that route, or it's a possibility that the pricing is kind of where it makes sense, but given the rally and the market here, at least some of the banks, if you go that route, has your outlook changed on how you would think about the profitability of that and what pricing would look more attractive? No. I started flirting with the buyback talk about a year ago, and I think our stocks have been 25, 30%, or something like that. I don't know what it is.

James L. Eccher: the market here, at least some of the banks.

Speaker Change: Can you, I guess, if you go that route, is your outlook changed on how you would think about the profitability of that and what pricing it would look more attractive? No. I started...

Bradley Adams: No, I started flirting with the buyback talk about a year ago. Yeah, and I think our stocks have 25%, 30% or something like, oh, I don't know what it is. It's probably about like that; I think it's up 20% a month. Candidate book values up 26% on a relative basis is the same. Certainly, it would have been; I could have acted all smog that we bought back a big sluggish stock at 1250 or something, but ultimately it's a relative game and nothing's really changed.

Brad: flirting with the buyback talk about a year ago. Yep. And I think our stock's up 25, 30% or something like that. I don't know what it is. It's probably about like that, I think it's up 20% a month.

Brian Martin: It's probably about like that. I think it's up 20% a month. Tangible book value is up 26%. On a relative basis, it's the same. Certainly, it would have been. I could have acted all smug that we bought back a big slug of stock at $12.50 or something, but...

Speaker Change: Tangible book value is up 26% on a relative basis, it's the same.

Brad: Certainly it would have been, I could have acted all smug that we bought back a big slug of stock at $12.50 or something, but ultimately it's a relative gain and nothing's really changed.

Bradley S. Adams: Ultimately, it's a relative game, and nothing's really changed. Gotcha. Okay, that's all I had, guys. Thank you.

Operator: Gotcha, okay, that's all I had, guys. Thank you. All right, thanks, Brian.

Speaker Change: Gotcha. Okay, that's all I had guys. Thank you.

James Eckert: We have reached the end of the question-and-answer session, and I will now turn the call back over to James Eckert for closing remarks. Okay, thanks everyone for your interest in our company, and we look forward to speaking with you again next quarter. Goodbye, and have a great day.

Operator: We have reached the end of the question and answer session, and I will now turn the call back over to James Eccher for closing remarks. Okay, thanks.

Brian Martin: Alright, thanks Brian.

Brian Martin: We have reached the end of the question and answer session, and I will now turn the call back over to James Eccher for closing remarks. OK, thanks, everyone, for your interest in our company. And we look forward to speaking with you again next quarter. Goodbye, and have a great day.

James L. Eccher: Okay, thanks everyone for your interest in our company, and we look forward to speaking with you again next quarter. Goodbye, and have a great day.

Operator: This does conclude today's conference, and you may disconnect your lines at this time. Thank you for your participation.

Operator: This does conclude today's conference, and you may disconnect your lines at this time. Thank you for your participation.

Speaker Change: This does conclude today's conference and you may disconnect your lines at this time. Thank you for your participation.