Q3 2024 Old Second Bancorp Inc Earnings Call

Operator: The Vice Chairman of our Board.

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

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.

Speaker Change: They are based on management's existing expectations and the current economic environment. These statements are not a guarantee of future performance and results may differ materially from those projected.

Speaker Change: Management would ask you to refer to the company's SEC filings for a full discussion of the Companys risk factors.

Speaker Change: 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.

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: non-GAAP measures are described and reconciled to their GAAP counterparts in our earnings release, which is available on our website at old second dot com on the homepage and under the Investor Relations Tab now I will turn it over to Jim Eckert.

James Eccher: Now I will turn it over to Jim Eckert. Good morning, everyone, and thank you for joining us. I have several prepared opening remarks and will give you my overview of the quarter and then turn it over to Brad for additional details.

Jim Eckert: Good morning, everyone and thank you for joining us I have several prepared opening remarks.

Jim Eckert: Give you my overview of the quarter, and then turn it over to Brad for additional details.

James Eccher: I will then conclude with certain summary comments and thoughts about the future before we open it up to Q&A. Net income was 23 million or 50 cents per diluted share in the third quarter of 2024, and return on assets is 1.63%. Third quarter of 2024 returned on average tangible common equity was 17.14%, and the tax equivalent efficiency ratio was 53.38%. Third quarter of 2024 earnings were negatively impacted by $2 million of provision for credit losses in the absence of significant low growth, which reduced after-tax earnings by three cents per diluted share. However, despite this profitability, OldSecond remains exceptionally strong, and balance sheet strengthening continues, with their tangible equity ratio increasing by 75 basis points linked quarter to 10.14%.

I will then conclude with certain summary comments and thoughts about the future before we open it up to Q&A.

Jim Eckert: Net income was $23 million or <unk> 50 per diluted share in the third quarter of 2020 for the return on assets was 163%.

Jim Eckert: Third quarter 2020 for return on average tangible common equity was $17, one 4% and the tax equivalent efficiency ratio was 50, 338%.

Jim Eckert: Third quarter 2024 earnings were negatively impacted by $2 million of provision for credit losses, and the absence of significant loan growth, which reduced after tax earnings by <unk> <unk> per diluted share.

Jim Eckert: However, despite this profitability to old second remains exceptionally strong and.

Jim Eckert: And balance sheet strengthening continues with our tangible equity ratio, increasing by 75 basis points linked quarter to 10.

Jim Eckert: One 4%.

James Eccher: Common equity tier 1 increased to 12.86% in the third quarter, and we feel very good both about profitability and our balance sheet positioning at this point. We are pleased to announce a 20% increase in the common dividend in this quarter, reflective of continuing strong profitability and a well-capitalized balance sheet. We would like to position ourselves to regularly deliver growth in the common dividend as we continue to build OldSecond into one of the best banks of Chicago. Our financials continue to reflect a strong net interest margin, even as market interest rates begin to decline. Pre-provision net revenues remain stable and exceptionally strong.

Jim Eckert: Common equity tier one increased to $12 eight 6% in the third quarter and we feel very good both about profitability and our balance sheet positioning at this point.

Jim Eckert: We are pleased to announce a 20% increase in the common dividend this quarter reflective of continuing strong profitability.

Jim Eckert: Well capitalized balance sheet.

We'd like to position ourselves to regularly deliver growth in our common dividend as we continue to build <unk> into the into one of the best banks in Chicago.

Jim Eckert: Our financials continue to reflect a strong net interest margin.

Jim Eckert: Even as market interest rates begin to decline pre provision net revenues remained stable at exceptionally strong.

James Eccher: For the third quarter of 2024, compared to the prior year of like period, income on average earning assets increased 1.8 million, or 2.5%. While interest expense on average interest bearing liabilities increased 4.3 million, or 38.4%. The increase in interest expense is rate driven and primarily due to remixing and market pricing on certain commercial deposits. The third quarter of 2024 reflected an increase in total loans of 14.5 million from the prior link quarter end, 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 third quarter of last year was 14 million, which is in line with the 2020-408 quarters' total Long Growth.

Jim Eckert: For the third quarter of 2024 compared to the prior year like period income on average, earning assets increased $1 8 million or two 5% while interest expense on average interest bearing liabilities increased $4 3 million.

Jim Eckert: Or 38, 4%.

Jim Eckert: The increase in interest expense is rate, driven and primarily due to remixing and market pricing on certain commercial deposits.

Jim Eckert: The third quarter of 2024 reflected an increase in total loans of $14 5 million from the prior linked quarter end, primarily due to growth in commercial lease and construction portfolios net of payoffs on a few large credits during the quarter.

Jim Eckert: Comparatively low growth in the third quarter of last year was $14 million, which is in line with the 2024.

Jim Eckert: Orders total loan growth.

James Eccher: The historical trend in our bank is long growth in the second and third quarters of the year due to seasonal construction and business activities. Currently, activity within Long Committee is improving but remains relatively modest to part of prior periods. Primarily due to many customers waiting to see how market volatility, including election results and any further interest rate reductions, play out in the next three to six months. The tax equivalent net interest margin increased by one basis point in this quarter, driven by continuing higher rates on variable securities and laws, partially offset by higher funding costs.

Jim Eckert: The historical trend in our bank is loan growth in the second and third quarters of the year.

Jim Eckert: Due to seasonal construction and business activities.

Jim Eckert: Currently activity within loan committee is improving but remains relatively modest to positive prior periods.

Jim Eckert: Primarily due to many customers waiting to see how market volatility including election results at any further interest rate reductions play out in the next three to six months.

Jim Eckert: The tax equivalent net interest margin increased by one basis point this quarter driven by continuing higher rates on variable securities and loans, partially offset by higher funding costs.

James Eccher: Lone yields reflected a 16 basis point increase during the third quarter compared to the basis point increase year over year. Funding costs increased due to increases in both rates and growth and time deposits. The tax equivalent net interest margin was 4.64% for the third quarter of 2024 compared to 4.63% for the second quarter and 4.66% in the third quarter of last year. The net interest 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 security portfolios, as well as the deposit base and our short-term borrowing costs.

Jim Eckert: Loan yields reflected a 16 basis point increase during the third quarter compared to the linked quarter and 28 basis point increase year over year.

Jim Eckert: Funding cost increased due to increases in both rates and growth in time deposits.

Jim Eckert: The tax equivalent net interest margin was 464% for the third quarter 2024.

Jim Eckert: Compared to $4, 63% for the second quarter and $4 six 6% in the third quarter of last year.

Jim Eckert: The net interest 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 loan and securities portfolios as.

Jim Eckert: As well as the deposit base in our short term borrowing costs.

James Eccher: Lone deposit ratios at 89% as of September 30th, compared to 88% last quarter and 87% as of September 30th, 2023. As we have said in the past, our focus continues to be on guaranteed optimization. I'll let Brad talk more about that in a minute. The third quarter of 2024 saw improving asset quality metrics and moderate actions taken on substandard credits, continuing remediation trends noted primarily since late last year. Our belief remains that the fourth quarter of 2023 represented an inflection point in our credit trends. Old segment began substantially downgrading large amounts of commercial real estate loans, including office and healthcare, at the end of 2021 and accelerating through 2022.

Jim Eckert: Loan to deposit ratio was at 89% as of September 30th compared to 88% last quarter at 87% as of September 32023.

Speaker Change: As we have said in the past our focus continues to be on balance sheet optimization I'll, let Brad talk more about that in a minute.

Speaker Change: The third quarter of 2024, so improving asset quality metrics and moderate actions taken on substandard credits.

Speaker Change: <unk> remediation trends noted primarily since late last year.

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

Speaker Change: 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.

James Eccher: Substandard and criticized loans went from approximately 60 million, or a little more than 1% of loans, at third quarter of 2021 to a peak of nearly 300 million, or over 7% of loans, in the first quarter of 2023. As of the end of the third quarter of 2024, substandard and criticized loans are down 187.6 million, which is essentially flat to last quarter and approximately 15.7 million less than year and 2023, and more than 40% below peak levels. The expectation remains for further improvement to the rest of the year. Encouragingly, our special mention loans decrease 45.6 million, or more than 37%, from a year ago.

Speaker Change: Substandard criticized loans went from approximately $60 million or a little more than 1% of loans that the third quarter of 2021 to a peak of nearly 300 million or over 7% of loans in the first quarter 2023.

Speaker Change: As at the end of the third quarter of 2024 substandard criticized loans are down $187 6 million, which is essentially flat to last quarter and approximately $15 7 million less than year end 2023.

Speaker Change: And more than 40% below peak levels.

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

Speaker Change: Encouragingly, our special mentioned loans decreased $45 6 million or more than 37% from a year ago.

James Eccher: We continue to expect realization of a relatively less costly resolution on a number of non performers in the near future and remain hopeful we can recover some of those losses realized in the second half of 2023. In the third quarter of 2024, we recorded net recoveries with the allowance for credit losses on loans of $155,000 compared to net charge-offs of $5.8 million in the second quarter of this year and net charge-offs of $6.6 million in the third quarter of 2023. Prior quarter elevated net charge-off levels and continued asset remediation efforts have resulted in a more stable credit outlook on current problem loans, and a good news is that classified loans continue to decline, falling by almost $10 million in the third quarter, with the remainder of the portfolio remaining well behaved.

Speaker Change: We continue to expect realization of a relatively less costly resolution on a number of non performers in the near future and remain hopeful we can recover some of those losses realized in the second half of 2023.

Speaker Change: In the third quarter of 2024, we recorded net recoveries with the allowance for credit losses on loans of 155000 compared to net charge offs of $5 8 million in the second quarter of this year and net charge offs of $6 6 million in the third quarter of 2023.

Speaker Change: Prior quarter elevated net charge off levels and continued asset remediation efforts have resulted in a more stable credit outlook and current problem loans.

Speaker Change: And the good news is that classified loans continue to decline falling by almost $10 million in the third quarter with the remainder of the portfolio remaining well behaved.

James Eccher: Continued stress testing has not raised any new red flags for us, and the bulk of our loan portfolio has transitioned into the higher rate environment and will be impacted with downward rate movements going forward. The allowance for credit losses on loans increased to $44.4 million as of September 30 of 2024, or 1.11% of total loans, from $42.3 million at the end of the second quarter, which was at 1.06% of loans. Unemployment and GDP forecast used in future loss rate assumptions remained fairly static from last year, with a 25 basis point uptick and the unemployment assumptions on the upper end of the range based on recent set projections.

Speaker Change: Continued stress testing is not raise any new red flags for us and the bulk of our loan portfolio as transient transitioned into the higher rate environment and will be impacted with downward rate movements going forward.

Speaker Change: The allowance for credit losses.

Speaker Change: Loans increased to $44 4 million as of September.

Speaker Change: Timber 32024, or 1.11% of total loans.

Speaker Change: $42 3 million at the end of the second quarter, which was at 1.06% of loans unemployment or GDP forecast used in future loss rate assumptions remain fairly static from last year with a 25 basis point uptick in the unemployment assumptions on the upper end of the range based on our recent said projections.

James Eccher: 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 September 30 of 2023. 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 portfolios. Non-interest income continued to perform well, with growth relatively flat in the third quarter of 2024 compared to the link quarter in wealth management fees, service charges on deposits, card-related income, and mortgage income, excluding the impact of mortgage servicing rights marked to market.

Speaker Change: The change in provision level quarter over linked quarter reflects the reduction in our allowance allocations on substandard loans.

Speaker Change: Which largely relates to the 29% reduction in criticized assets since September 32023.

Speaker Change: 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 portfolios.

Speaker Change: Noninterest income continued to perform well with growth relatively flat in the third quarter of 2024 compared to the linked quarter and wealth management fees service charges on deposits.

Speaker Change: Card related income and mortgage income, excluding the impact of mortgage servicing rates mark to market.

James Eccher: A death benefit of $893,000 was realized on one bully contract in the second quarter of 2024, with final true up of these proceeds in the third quarter of 2024. No, like benefit was recorded in 2023. Other income increased in the third quarter of 2024 compared to the prior link quarter and prior year-like quarter due to recoveries on a vendor contract and refunds of prior servicing advances on a sole credit card portfolio. Expense discipline continues to be strong with total non-interest expense for the third quarter of 2024 at 1.4 million more than the prior link quarter, primarily due to an increase in incentive of rules and the first merchants acquisition cost incurred a 471,000 in the third quarter.

Speaker Change: A death benefit of 893000 was realized on one bully contract in the second quarter of 2024 with final true up of these proceeds in the third quarter of 2024.

Speaker Change: No like benefit was recorded in 2023.

Speaker Change: Other income increased in the third quarter of 2024 compared to the prior linked quarter and prior year linked quarter due to recoveries on a vendor contract and refunds of prior servicing advances on our solid credit card portfolio.

Speaker Change: Expense discipline continues to be strong with total noninterest expense for the third quarter of 2024 at $1 4 million more than the prior linked quarter, primarily due to an increase in incentive accruals in the first merchants acquisition costs incurred a 471003rd quarter.

James Eccher: Oriole expenses also increased in the third quarter of 2024 compared to the prior quarter, as the second quarter included a net gain on the sale of Oriole of $259,000. Our efficiency ratio continues to be excellent, as the tax equivalent efficiency ratio adjusted to exclude acquisition costs and bully death benefits was 52.31% for the third quarter. compared to 52.68% for the prior link quarter.

Speaker Change: Oreo expenses also increased in the third quarter of 2024 compared to the prior quarter as the second quarter included a net gain on the sale of Oreo of 259000.

Speaker Change: Our efficiency ratio continues to be excellent as the tax equivalent in efficiency ratio adjusted to exclude acquisition costs and boldly death benefits was $52 three 1% for the third quarter.

Speaker Change: Impaired to $52, 6% to 8% for the prior linked quarter.

James Eccher: As we look forward, we are focused on doing more of the same, which is managing liquidity, building capital, and also building commercial loan origination capability for the long term. The goal is obviously to continue to create a more stable long-term balance sheet mix featuring more loans and less securities in order to maintain the returns on equity commensurate with our recent performance.

Speaker Change: As we look forward, we are focused on doing more of the same which is managing liquidity building capital and also building commercial loan origination capability for the long term.

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

Bradley Adams: With that, I'll turn it over to Brad for additional color. Thanks, Jim. I don't know; there's a time more for me to talk about. I think Jim covered a lot of things. That interest income increased by a little less than a million dollars or 1.5% to 60.6 million for the quarter-ended September 30th, relative to 59.7 million last quarter. Securities yields increase 17 basis points, and loan yields increased by 16 basis points. Total yield on interest-earning assets up by some more 16 basis points to 583 basis points in aggregate. This is partially offset by a 15 basis point increase in the cost of interest-bearing deposits, and a 19 basis point increase to interest-bearing liabilities and aggregate.

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

Brad: Thanks, Jim.

Brad: I know, there's a ton more for me to talk about I think Jim covered a lot of things.

Speaker Change: Net interest income increased by a little less than a $1 million or one 5% to $60 6 million for this quarter ended September 30.

Speaker Change: Relative to $59 $7 million this quarter.

Speaker Change: Securities yields increased 17 basis points and loan yields increased by 16 basis points.

Speaker Change: Total yield on interest, earning assets of Biosimilars, <unk> 16 basis points.

Speaker Change: 583 basis points in aggregate. This was partially offset by 15 basis point increase in the cost of interest bearing deposits.

Speaker Change: 19 basis point increase in interest bearing liabilities in aggregate.

Bradley Adams: The end result of that was a one basis point increase in the NIM, basically making my guidance from last quarter wrong yet again, but not by much. Obviously, we have rate cuts now, 50 basis points, and more expected in the forward curve, which tends to show up in market indices before the cuts actually happen and does impact our margin. I don't have anything different to say in terms of the guidance there. I still think it's around seven basis points per 25 basis point cut impact to the margin.

Speaker Change: The end result of that was a one basis point increase in the NIM.

Speaker Change: Basically, making my guidance from last quarter wrong, yet again.

Speaker Change: But not by much.

Speaker Change: Obviously, we have rate cuts now 50 basis points and more expected in the forward curve, which tends to show up in market indices.

Speaker Change: Before the cuts actually happening does impact our margin.

Speaker Change: I don't have anything different to say in terms of the guidance. There I still think it's around seven basis points per 25 basis point cut impact to the margin.

Bradley Adams: That will be mitigated somewhat in the near term by the announced acquisition of five branches and a couple hundred million in deposits that are coming with that that we expect to close in early December. The deposit flows this quarter. We're pretty much stable. Nothing like the volatility that we saw last year and earlier this year. Average deposits decreased by $91 million or 2% quarter or a link quarter, and period in total deposits somewhat better at 56.3 million or 1.2%. The deposit pricing in our markets has come down a bit, but it remains exceptionally aggressive relative to the Treasury curve and is still largely pricing off overnight borrowing levels.

That will be mitigated somewhat in the near term by the announced acquisition of five branches in a couple of hundred million dollars and deposits that are coming with that though we expect to close in early December.

Speaker Change: Deposit flows this quarter.

Speaker Change: We're pretty much stable nothing like the volatility we saw last year and earlier this year.

Speaker Change: Average deposits decreased by $91 million or 2% quarter over linked quarter and period end total deposits somewhat better at $56 $3 million or one 2%.

Speaker Change: Pricing in our markets has come down a bit but it remains exceptionally aggressive relative to the treasury curve and is still largely pricing off overnight borrowing levels public.

Bradley Adams: Public funds has provided a bit of a headwind, as fixed income markets offer, and I'll track it, but I'll turn it to some customers. My overall position remains, and excuse me while I talk our book here for a minute. My overall position remains that markets continue to believe that inflationary trends are far easier to kill than they actually are. The level of rate cuts reflected in the forward curve is not a realistic expectation, without significant declines in real demand and consumption, otherwise known as a recession. My current expectation does not include in your term recession, with the amount of fiscal and monetary largest that is currently on the table.

Speaker Change: Public funds has provided a bit of a headwind as fixed income markets offer an attractive alternative to some customers.

Speaker Change: My overall position remains an excuse me, while I talk our book here for a minute.

Speaker Change: My overall position remains that the markets continue to believe that inflationary trends are far easier to kill and they actually are.

Speaker Change: The level of rate cuts reflected in the forward curve is not a realistic expectation without significant declines in real demand and consumption otherwise known as a recession.

Speaker Change: Our current expectation does not include a near term recession, but.

Speaker Change: But the amount of fiscal and monetary large asset is currently on the table as.

Bradley Adams: As a result, I see very little value and duration at this point, and cash flows are being reinvested in variable rate opportunities. With credit spreads unbelievably tight, there is simply no value out the curve at this point relative to the risk. So poor marginal spreads persist, and Old Seconds continue to focus on compounding both value and maximizing returns. For us, that means being careful with expenses and pricing risk appropriately. As I mentioned, success and funding loan growth with these newly acquired deposits offers the opportunity for upside to these expectations. The loan to deposit ratio is still very low at below 90%, and our ability to source liquidity from the securities portfolio remains excellent.

Speaker Change: As a result has seen very little value in duration at this point and cash flows are being reinvested in variable rate opportunities.

Speaker Change: With credit spreads unbelievably tied there is simply no value out the curve at this point relative to the risk so poor marginal spreads persist in old second is continuing to focus on compounding book value and maximizing returns for.

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

Speaker Change: As a result of the recent rate cuts and their impact on these market indices that I referenced margin trends for the remainder of the year are expected to trend down modestly.

Speaker Change: The magnitude will be mitigated by the expected closure of the branch acquisition as I mentioned.

Speaker Change: Success in funding loan growth with these newly acquired deposits offers the opportunity for upside to these expectations.

Speaker Change: The loan to deposit ratio is still very low at below 90%.

Speaker Change: And our ability to source liquidity from the securities portfolio remains excellent.

Bradley Adams: AOCI on the portfolio came down by some 30% this quarter, which resulted in some of the capital build that you saw. I think that illustrates what we have been talking about in terms of where that portfolio was positioned on the curve and seeing improvement that may be somewhat better than others are seeing at this point, given the short overall duration of the portfolio. I think capital build will slow from here, and I do believe that the overall M&A environment remains very favorable to a bank like Old Second.

Speaker Change: Aoc I on the portfolio came down by some 30% this quarter, which resulted in some of the capital build that you saw.

Speaker Change: That illustrates what we had been talking about in terms of where that portfolio was positioned on the curve.

Speaker Change: And seeing improvement that may be somewhat better than others are seeing at this point given the short overall duration of the portfolio.

Speaker Change: I think capital build will slow from here and.

Speaker Change: And I do believe that the overall M&A environment remains very favorable to a bank like old second.

Bradley Adams: If that does not come to fruition, we will return to capital. A buyback is still in place and is on the table. Non-interest expense increased 1.4 million from the previous quarter, primarily due to acquisition-related costs and an increase in officer incentive accruals, and an increase in net Oreo-related expenses due to ongoing credit remediation, with a small gain recorded in Oreo last quarter. Given the bottom line performance, employee investment costs have been running high, but we will maintain the ability to dial that back as conditions warrant.

Speaker Change: If that does not come to fruition, we will return capital buyback is still in place and is on the table.

Speaker Change: Noninterest expense increased $1 4 million from the previous quarter, primarily due to the acquisition acquisition related costs.

Speaker Change: An increase in officer incentive accruals and an increase in net Oreo related expenses due to ongoing credit remediation.

Speaker Change: There's a small gain recorded in Oreo last quarter.

Speaker Change: Given the Bottomline performance employee investment cost have been running high but we will maintain the ability to dial that back as conditions warrant.

Bradley Adams: That's all I really have with that.

Speaker Change: That's all I really have with that ill turn the call back over to Jim.

James Eccher: I turn the call back over to Jim. All right. Thanks, Brad.

Jim Eckert: Alright, Thanks, Brad and closing.

James Eccher: In closing, we remain confident or balance sheet in 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 maintain excellent profitability. Net interest margin trends are perhaps more resilient than some expect, and income statement efficiency remains at record levels. I am proud of the year that is shaping up for us, given the risk we have faced.

Jim Eckert: <unk> remained confident in our balance sheet and the opportunities that are ahead, our focus remains at assessing and monetary risks within our loan portfolio and optimizing the earning asset mix.

Jim Eckert: Order to maintain excellent profitability.

Jim Eckert: Net interest margin trends are perhaps more resilient and some expect an income statement efficiency remains at record levels.

Jim Eckert: I am proud of the year that is shaping up for us given the risk we have faced.

Operator: That concludes our prepared comments this morning.

Jim Eckert: That concludes our prepared comments. This morning, so I'll turn it over to the moderator and we can open it up to questions.

Operator: So I'll turn it over to the moderator, and we can open it up to questions.

Operator: Thank you.

Jim Eckert: Thank you.

Operator: Ladies and gentlemen, the floor is now open for questions. If you wish to join the queue to ask a question at this time, you may press star one on your telephone keypad to join the queue. We do ask if listening on speaker phone this morning that you pick up your handset while asking your question to provide optimal sound quality. Once again, please press star one on your telephone keypad at this time. If you wish to join the queue to ask a question at this time, please hold the moment while we pull for questions.

Speaker Change: Ladies and gentlemen, the floor is now open for questions. If you wish to join the queue to ask a question. At this time you May press star one on your telephone keypad to join the queue. We do ask if listening on speaker phone. This morning that you pick up your handset while asking your question to provide optimal sound quality once again.

Speaker Change: Please press star one on your telephone keypad at this time, if you wish to join the queue to ask a question at this time, please hold a moment, while we poll for questions.

Terence McEvoy: And your first question this morning is coming from Terry McAvoy from Stevens. Terry, your line is live. Please go ahead. Hi, good morning, guys.

Speaker Change: And your first question. This morning is coming from Terry Mcevoy from Stephens Terry Your line is live. Please go ahead.

Terry Mcevoy: Hi, Good morning, guys, maybe if you could talk about loan pipelines today and thoughts on organic loan growth over the next several quarters.

James Eccher: Maybe if you could talk about loan pipelines today and thoughts on organic loan growth over the next several quarters for the bank. Yeah, that's sure, Terry. Good morning. Yeah, you know, this is the time of the year heading into, you know, the last quarter. Pipelines generally are a little softer than they were in the second and third quarters. I will say, you know, pipelines aren't better than they were a year ago, but traditionally the fourth quarter, you know, is a softer quarter for us.

Speaker Change: For the bank.

Speaker Change: Yes, sure Terry Good morning, Yes.

Speaker Change: Yes.

Speaker Change: This is the.

The time of the year heading in.

Speaker Change: Over the last quarter pipelines generally are a little softer than they were in the second and third quarters.

Speaker Change: I will say.

Speaker Change: Pipelines are better than they were a year ago, but traditionally the fourth quarter.

Speaker Change: Is this a softer quarter for us I think looking into 2025.

James Eccher: I think looking into 2025, you know, we still think and confident that we can be a mid-single digit grower organically in loans. Thanks, Jim.

Speaker Change: We still think and confident that we can be a mid single digit grower organically in loans.

Speaker Change: Okay. Thanks, Tim and then maybe a question on expenses kind of looking out into 2025 anything to call out in terms of technology spending digital spending preparing for being a larger bank and how do you think about just that core.

James Eccher: And then maybe a question on expenses, kind of looking out into 2025, anything to call out in terms of technology spending, digital spending, preparing for being a larger bank. And how do you think about just that core expense growth next year? I think the biggest driver for expense growth for us next year is going to be on the salary benefits line. I think you're likely to see something kind of mid-single digits, maybe in the three to five percent range. And some of that is the benefits that's not fully baked yet in terms of what we're going to see there.

Speaker Change: <unk> gross next year.

Speaker Change: I think the biggest driver for expense growth for US next year is going to be on the salary and benefits line I think you're likely to see something kind of mid single digits, maybe in the 3% to 5% range and some of that is the benefits, it's not fully baked yet in terms of what we're going to see there.

James Eccher: Most of the technology spend and infrastructure spend, to be quite honest, we were spending like a drunken sailor for the better part of the last two years trying to get all the infrastructure in place. I don't anticipate a lot of catbacks moving forward into next year. So I think expense growth will be pretty modest outside of what happens with employee benefits. I think that, you know, obviously some parts of the wage scale are suffering more than others in terms of the inflation that we've seen. I think we all see that at the grocery store. There's no doubt it's cumbersome.

Speaker Change: Most of the technology spend in infrastructure spend.

Speaker Change: To be quite honest, we were spending like a drunken sailor for the better part of the last two years.

Speaker Change: Trying to get all the infrastructure in place I don't anticipate a lot of Capex moving forward into next year. So I think expense growth will be.

Speaker Change: Pretty modest outside of what happens with employee benefits.

Speaker Change: <unk>.

Speaker Change: Obviously, some parts of the wage scale are suffering more than others in terms of the inflation that we've seen I think we all see that at the grocery store.

Speaker Change: There's no doubt, it's cumbersome if not devastating to many.

James Eccher: It's not devastating to many.

James Eccher: And we are committed to taking care of our employees and making sure that we offer a very good value proposition and believe we're an excellent place to work, and we intend to honor that.

Speaker Change: And we are committed to taking care of our employees and making sure that we offer a very good value proposition and believe we are in excellent place to work and we intend to honor that.

Terence McEvoy: Thanks for taking my questions, guys.

Speaker Change: Great. Thanks for taking my questions guys.

Christopher McGratty: Thank you. Your next question is coming from Chris McGrady from KBW. Chris, your line is mapping to kind of like a 4% terminal margin. If you believe the futures market, which I think we can debate, is that about the right way to think about it given the position of the balance sheet and the transaction that's pending?

Speaker Change: Terry.

Terry Mcevoy: Thank you. Your next question is coming from Chris Mcgratty from K B W. Chris Your line is live. Please go ahead.

Chris Mcgratty: Hey, good morning.

Speaker Change: Jimmy Brad.

Speaker Change: One basis point to cut.

For Cod is roughly map into kind of like a 4% terminal margin. If people. If you believe that the futures market, which I think we can debate is is that about the right way to think about it given the positioning of the balance sheet and the transaction that's pending.

James Eccher: I think we can do better than that, Chris, to be honest. I think we've learned enough how damaging zero percent rates are, and we can talk about where the terminal is and get into all that. There's a lot of things going on right now, and it is very difficult to know what actually is the right level of interest rates for this economy. I think in election plays a part in it, I think the fiscal mess we've gotten into plays apart in it, and we've all seen how very wrong the forward curve can be just in recent history.

Speaker Change: I think we can do better than that Chris to be honest.

Speaker Change: <unk>.

Speaker Change: I don't think I think we've learned enough that how damaging zero percent rates are and we can talk about where the terminal is and get into all of that.

Speaker Change: There's a lot of things going on right now and it is very difficult to know.

Speaker Change: What actually is the right level of interest rates for this economy.

Speaker Change: Thank an election plays a part in and I think the physical mass we've gotten into plays a part in it and we've all seen how very wrong.

Speaker Change: The forward curve can be just in recent history.

James Eccher: So it's difficult to know what's going on there. I think that if, say, for example, the terminal Fed funds is 3%, we are significantly far north of a 4% margin, just given where we are and how we're constructed. I think that a higher curve at the short end, which is anything above 2.5, there is no reason why Old Second wouldn't be north of a 4% margin. Helpful, thank you.

So it's difficult to know what's going on there I think that.

Speaker Change: If say for example that the.

Speaker Change: Terminal fed funds is 3% we are significantly far north of a 4% margin.

Speaker Change: Just given where we are and how are constructed.

Speaker Change: Thanks, Ed.

Speaker Change: Higher curve at the short end.

Speaker Change: Which is anything above two five there is no reason why old second wouldn't be north of a 4% margin.

Helpful. Thank you and then Jim on capital.

James Eccher: And then Jim on Capitol, you know, markets are up. I mean, any change in kind of timing or priorities on either pulling that buyback or doing something inorganic.

Speaker Change: And markets are up I mean any change in.

Speaker Change: Timing or priorities on either pulling that buyback.

Speaker Change: Or doing something inorganic other maybe how would you describe the inorganic opportunities today.

James Eccher: Other, maybe how would you describe the inorganic opportunities today? Yeah, obviously we're building Capitol rapidly every quarter. Chris, we understand, you know, to maintain a high level of return on tangible common, we're going to need to deploy some of that capital. All that you mentioned is on the table at this point. We are open to inorganic growth. The buyback is still on the table. You saw that we raised the dividend on this quarter. We're fully aware of where we're at with Capitol.

Speaker Change: Yes.

Speaker Change: So we're building capital rapidly every quarter, Chris we understand to maintain.

Speaker Change: The high level of return on tangible common we're going to need to deploy some of that capital. All that you mentioned is on the table. At this point. We are we are open to inorganic growth.

Speaker Change: The buyback is still out of the table you saw that we raised the dividend this quarter.

Speaker Change: We're fully aware of where we're at with capital it's going to be whatever.

James Eccher: It's going to be one of our key initiatives heading into 2025.

Speaker Change: Key initiatives heading into 2025.

Speaker Change: Okay.

Speaker Change: Thank you.

Speaker Change: Okay.

Speaker Change: Thank you. Your next question is coming from Nathan race from Piper Sandler Nathan Your line is live. Please go ahead.

Nathan Race: Your next question is coming from Nathan Race from Piper Sandler. Nathan, your line is live. Please go ahead. Hi guys, good morning. Thanks for taking the questions.

Hi, guys. Good morning, Thanks for taking my questions.

Nathan Race: I made an eight.

James Eccher: I was wondering if you could just spend some time describing the 14 million dollar loan that moved to not performing in the quarter and also any additional color on the 36 million roughly in the classified loans that implode as well. Sure, Nate. I mean, the increase in non-accruals is stemming from one commercial credit. The CNI law that deteriorated late in the quarter. We thought it was prudent to take that to non accrual. Cash flow is strained with this company. We're still in the early stages of assessing next steps here, but our strategies always tend to be an early identifier, and we're moving towards hopefully a remediation process that's going to allow us to mitigate any significant losses there.

Nathan Race: I was wondering if you could just spend some time describing.

Speaker Change: <unk> 14 million.

Speaker Change: Million dollar loan that moved to nonperforming in the quarter and also any additional color on the.

Speaker Change: $36 million roughly in classified loans in Florida as well.

Speaker Change: Sure.

Speaker Change: The increase in non accruals is stemming from one commercial credit.

Speaker Change: C&I loan that.

Speaker Change: Deteriorated late late in the quarter, we thought it was prudent.

Speaker Change: To take that to nonaccrual cash cash flows strained with this company. We are still in the early stages of assessing next steps here, but.

Speaker Change: Our.

Speaker Change: <unk> has always been to be early identifier and.

Speaker Change: We're moving towards hopefully a remediation process thats going to have.

Speaker Change: Allow us to mitigate any significant losses, there and what was the second part of your question.

James Eccher: What was the second part of your question, Nate? Yeah, I think you had about 35 and a half million dollars in classified loans that flowed in the quarter. Obviously, classifieds came down in aggregate just based on some improvement across some other loans, but which is curious in terms of the inflow drivers? Yeah, I mean, there was some inflow, and obviously a lot more outflow, but there's movement was significant in the quarter. We had really a couple of credits that we took to the substandard, although they're still accruing. One was a health care law and one was a CNI law and both are we feel pretty well collateralized and then we had, you know, 36 million dollars.

Speaker Change: Yes, we had about 35 five.

Speaker Change: Classified loans has slowed in the quarter, obviously classifieds came down.

Speaker Change: In aggregate just based on some improvement.

Speaker Change: Across some other loans, but I was just curious in terms of the inflow driver yet I mean, there were some inflow and obviously a lot more outflow but.

Speaker Change: Movement as was significant in the quarter.

Speaker Change: We had.

Speaker Change: Really a.

A couple of credits that we took the substandard, although they are still accruing.

Speaker Change: One was a healthcare law and one was a C&I loan both are we feel pretty well collateralized.

Speaker Change: And then we had.

Speaker Change: $36 million in reductions to sub standards and the reasons behind that.

James Eccher: and reductions to substandards and the reasons behind that ranged anywhere from loans that were paid off, either upgraded, curtailed, or paid off by a sponsor. I will say this: we feel we've got our arms around the office portfolio pretty well. We actually have no office loans in Chicago that are classified. And in a couple of years, we're down only $9 million and classified loans in the office book. So we feel really good about that. It's really still working through healthcare at a couple of these CNI loans, but by and large, we still feel very confident in the portfolios.

Speaker Change: Ranged anywhere from loans that were paid off either upgraded.

Speaker Change: Curtailed.

Speaker Change: Our paid off by our sponsor.

Speaker Change: I'll say this we feel we've got a.

Speaker Change: Arms around the.

Speaker Change: The office portfolio pretty well.

Speaker Change: We actually have no.

Speaker Change: No office loans in Chicago that are classified so that's the first time that's happened in a couple of years, we're down only $9 million in classified loans in the office book.

Speaker Change: So we feel really good about that.

Speaker Change: It's really still working through health care at a couple of these C&I loans, but by and large we still feel very confident in the portfolios.

Nathan Race: Okay, great. That's very helpful.

Speaker Change: Okay, Great. That's very helpful. And then just thinking about future levels of provisioning going forward. It seems like you're not seeing much in the way of loss content going forward in loan growth may be still somewhat slow here in the fourth quarter, but just any thoughts on just how you guys are thinking about the provision and reserve trajectory going forward absent any deterioration.

Nathan Race: And then just think about future levels of provision going forward. You know, it seems like, you know, you're not seeing much in the way lost content going forward in longer, maybe, you know, still somewhat slow here in the fourth quarter, but just any thoughts on just how you guys are thinking about the provision and reserved trajectory going forward, absent any deterioration broadly. Yeah, I think, you know, I think this quarter, you know, you saw $2 million provision; you know, some macro factors were tweaked, but we had run that allowance down a little bit the last couple of quarters.

Speaker Change: <unk>.

Speaker Change: Broadly.

Speaker Change: Yes, I think I think this quarter.

Speaker Change: You saw $2 million provision.

Macro factors were tweak, but we had run that allowance down a little bit the last couple of quarters. So we feel a lot more comfortable.

Nathan Race: So we feel a lot more comfortable. You know, north of 1%. So, yeah, I think future provisioning and that $2 million range for quarters, probably a good way to think about going forward.

Speaker Change: North of 1%, so, yes, I think future provisioning in that too.

Speaker Change: $2 million range per quarter is probably a good way to think about it going forward.

Nathan Race: Okay, great. And then just another one on the margin outlook. Leave Brad mentioned, you should have some offsets with the branch deal coming online here, laying the fourth quarter in terms of the base point impact falling each 25 cut. So just curious, you know, how you're thinking about what the magnitude of that offset could be with that branch deal, depending on how you're thinking about redeploying those proceeds. I imagine long growth is the number one priority there, but I'm just curious everything about also redeploying in the bottom book as well.

Speaker Change: Okay, Great and then just.

Speaker Change: Just another one on the margin outlook.

Speaker Change: I think Brad mentioned, you should have some offsets with the branch deal coming online here late in the fourth quarter in terms of that seven basis point impact following each 25 cut.

Speaker Change: So just curious how youre thinking about what the magnitude of that offset could be with that branch yield depending on how youre thinking about redeploying those proceeds I imagine loan growth is the number one priority there, but just curious how youre thinking about also redeploying in the bond book as well.

James Eccher: I, you know, you kind of answered it, and the way you asked it is that it's highly dependent on what we do with it. We frame that deal announcement on a bit of an unusual basis in that trying to keep it as simple as possible, just said. If we, if we elected to take the liquidity and pay down overnight borrowings, that it would be 5% accretive earnings and roughly 10 basis points accretive to margin. If we do something different than that, it could be more or less. So there's pretty much its impact is anywhere between a flat margin next quarter to maybe if we're more conservative and put it in a bond portfolio and maybe instead of 15 basis point decline in the margin, it's more like a 7 basis point decline in the margin.

Speaker Change: You kind of answered.

Speaker Change: Answered it in a way as it has been.

Speaker Change: It's highly dependent upon what we do with it.

Speaker Change: We frame that deal announcement.

Speaker Change: Bit of an unusual basis in China keep it as simple as possible and you said if we if we elected to take the liquidity and pay down overnight borrowings that it would be 5% accretive to earnings in roughly 10 basis points accretive to margin.

If we do something different than that.

Speaker Change: It could be.

Speaker Change: More or less.

Speaker Change: So there is pretty much its impact is anywhere between.

Speaker Change: A flat margin next quarter or two and maybe if we're more conservative and put it in our bond portfolio and maybe instead of a 15 basis point decline in the margin, it's more like a seven basis point decline in the margin.

Bradley Adams: It's highly dependent, and I would say that feels like a wishy-washy answer, but it's really not given the volatility that we have in a given three-month window is it's occurred over the last six months. We go from 200 basis points of cuts before the end of the year to the long end of the curve absolutely rejecting every message point that we've seen over the last two weeks. Things move around quite a bit. I can tell you that I kind of alluded to it a little bit. I see a hell of a lot more value and basically high credit tranche, variable rate, commercial back securities than I do anything else at this point.

Speaker Change: It's highly dependent and I would say that feels like a wishy washy answer, but it's really not.

Speaker Change: Given the volatility that we have and again in three months window as its occurred over the last six months we go from.

Speaker Change: 200 basis points of cuts before the end of the year to the long end of the curve absolutely rejecting every message point that we've seen over the last two weeks.

Speaker Change: Things move around quite a bit.

Speaker Change: I can tell you that I kind of alluded to it a little bit.

Speaker Change: I see a hell of a lot more value in and basically.

Speaker Change: Hi credit tranche.

Speaker Change: Variable rate commercial backed securities.

Speaker Change: I do anything else at this point.

Bradley Adams: If somebody's reaching for duration at this point, it's a fool's errand. I'm not entirely confident that the Fed's stance on inflation could be a lot more aggressive fight on the other side of an election. I certainly see things that indicate that inflation is by no means the corpse that people thought it was. So we're being cautious, and don't get me wrong when I speak about this. You could get the impression that we're taking some sort of rate, but we're not. We're doing the very opposite of that and just staying short and flexible.

Speaker Change: Somebody is reaching for duration at this point.

Speaker Change: It's a fool's errand.

Speaker Change: Im not entirely confident that that.

Speaker Change: The fed stance on inflation could be a lot more aggressive fight.

Speaker Change: On the other side of an election.

Speaker Change: I certainly see things that indicate that inflation is by no means the corpse that people thought it was.

Speaker Change: So we're being cautious.

Speaker Change: And don't get me wrong, when I speak about this.

Speaker Change: You could get the impression that were taken some sort of rate, but we're not we're doing the very opposite of that.

Speaker Change: And just staying short and flexible.

Bradley Adams: And I think that's the best path forward for all of a second.

Speaker Change: And I think Thats, the best path forward for old second.

Nathan Race: Got it. That's helpful.

Speaker Change: Got it that's helpful.

James Eccher: One last one for me. Just going back to the eminent discussions earlier. Could you guys just remind us, in terms of the size of potential partners that you would look to acquire down the road? Yeah. Obviously, Chicago's obviously still overbanked in a lot of areas. We think there's a lot of opportunity just in our core market. But for us, I think anything from 500 million to three billion would be something we would be interested in, and conversations are ongoing and active right now. Okay.

Speaker Change: One last one for me just going back to the M&A discussions earlier.

Speaker Change: Are you guys just remind us in terms of the size of potential partners that you would look to.

Speaker Change: Acquire down the road.

Speaker Change: Yes.

Speaker Change: Chicago's.

Speaker Change: Obviously, it's still over banked and a lot of areas, we think theres a lot of opportunity.

Speaker Change: Just in our core market, but for us I think anything from $500 million.

Speaker Change: Three.

Speaker Change: $3 billion would be something we would be interested in conversations are ongoing and active right now.

Speaker Change: Okay perfect.

Nathan Race: Perfect. Thanks, guys.

Thanks, guys.

Nathan Race: Thanks.

Operator: Thanks, Nate.

Speaker Change: Thanks Dennis.

Operator: Thank you.

David Long: Your next question is coming from David Long from Raymond James. David, your line is lies. Please go ahead. Thank you. Hey, guys. I'm the lending side. It seems like you guys have the infrastructure in place, people in place to take advantage of the backdrop.

Speaker Change: Thank you. Your next question is coming from David Long from Raymond James David. Your line is live. Please go ahead.

David Long: Thank you hey, guys on the lending side. It seems like you guys have the infrastructure in place people in place.

David Long: To take advantage of the backdrop, if it if it was appropriate to to grow more aggressively C more than mid single digit loan growth.

James Eccher: If it if it was appropriate to to grow more aggressively, see more than mid single digit long road, what would it take for old second to increase your appetite to lend at this point? Well, I think one demand's got improved. We're not, we're not seeing demand like we did, you know, 18 months ago, but also risk-adjusted returns just haven't been there for us. And when you're, when you have the benefit of a 460 margin, chasing long growth, you know, it yields around seven percent. Don't don't make a whole lot of sense. We we do have, you know, we do have the team in place to be a high single digit grower.

David Long: What would it take for old second to increase your appetite.

David Long: To lend at this point.

Speaker Change: Well I think one demands got improve we're not we're not seeing demand like we did 18 months ago.

Speaker Change: But also risk adjusted returns just haven't been there for us and when you are.

Speaker Change: And when you have the benefit of a $4 60 margin.

Speaker Change: Chasing loan growth.

Speaker Change: It yields around 7% don't make a whole lot of sense.

Speaker Change: We do have we do have the team in place to be a high single digit grower.

James Eccher: I think as the economy continues to evolve, we get a few more rate cuts. We get some clarity around the election.

Speaker Change: I think as the economy continues to evolve we get a few more rate cuts, we get some clarity around the election.

James Eccher: I do think I do think we'll get back to a mid single digit grower. We will continue to look at, you know, teams as they become available. But so, that's kind of where I see 2025. And David, we saw, as soon as those rate cuts occurred, and maybe even on before them, market pricing for loans that we were bidding on immediately get into the low sixes. So, competitors aren't wasting any time. And if you just take a step back and think about that for a second, you're looking at, you know, effectively a three-year loan that you're earning six percent on, that your marginal funding cost is five.

Speaker Change: I do think I do think we will get back to a mid single mid single digit grower will continue to look to add teams as they become available.

Speaker Change: But.

Speaker Change: That's kind of where I see 2025.

Speaker Change: And David we saw as soon as those rate cuts occurred and maybe even on before.

Speaker Change: Market pricing for loans.

Speaker Change: That we were bidding on and immediately get into the low sixes.

Speaker Change: So competitors aren't wasting any time and if you just take a step back and think about that for a second.

Speaker Change: Youre looking at.

Speaker Change: Effectively a three year loan that youre, earning 6% Omniture marginal funding cost is five.

James Eccher: And then you're at 50 basis point provision, you're talking about a marginal return on equity that is, that is poultry. And that's where markets have been. And some of that's just a function of an inverted curve. And you can pretend all you want that a deeply inverted yield curve doesn't impact our industry. But it sure as heck should in terms of how you think about investing capital.

Speaker Change: And then you're at 50 basis point provision.

Speaker Change: You are talking about a margin on return on equity that is that is poultry.

Speaker Change: And that's where markets have been and some of that's just a function of an inverted curve and.

Speaker Change: And you can pretend all you want that are deeply inverted yield curve doesn't impact our industry.

But it sure as heck should in terms of how you think about investing capital.

James Eccher: And that's what we've tried to explain, perhaps inelegantly at times, but that's why you haven't seen a lot of growth from us. I think that we could be quite aggressive in terms of growing earning assets in an environment where the curve is simply flat. You know, that offers a lot. I think that certainly the level of volatility that we've seen in interest rates for the last six months specifically.

And that's what we've tried to explain perhaps and eloquently at times, but.

Speaker Change: That's why you haven't seen a lot of growth from us.

Speaker Change: Think that.

We could be quite aggressive in terms of growing earning assets in an environment, where the curve is simply flat.

Speaker Change: That offers a lot I think that certainly the level of volatility that we've seen in interest rates for the last.

Speaker Change: Six months, specifically and certainly for the last two years more generally.

James Eccher: And certainly, for the last two years, more generally, makes things very difficult in terms of growing earning assets consistently. Got it.

Speaker Change: <unk> things very difficult in terms of.

Speaker Change: Growing earning assets consistently.

Speaker Change: Got it thanks for the color there and then a follow up question Jim mentioned the potential for more credit resolutions to come I know youre going to have those from time to time, but it seems a bit elevated here given some of the moves you made.

James Eccher: Thanks for the color there. And then follow question. Jim mentioned the potential for more credit resolutions to come. I know you're going to have those from time to time, but it seems a bit elevated here given some of the moves you made, which seems to be ahead of most of your peers.

Speaker Change: It seems to be ahead of most of your peers.

James Eccher: But can can old second record another, do you have another quarter to with recoveries exceeding gross charge offs? As we said, we remain hopeful that we can recover a significant portion of the losses that were charged off last year. Was that occurs or not is uncertain, but we have said that we expect mitigation efforts to be less costly than what you've seen from us over the last 12 months. Now, a million or two may show up here or there as we, you know, lack or don't elect to pull the trigger and exit something that we're worried about.

Speaker Change: Kent can hold second record another could you have another quarter or two with recoveries exceeding gross charge offs.

Speaker Change: As we said we remain we remain hopeful that we can recover a significant portion of the losses that were charged off last year.

Speaker Change: Whether that occurs or not is uncertain, but.

Speaker Change: We have said that we expect mitigation efforts to be less costly than what you've seen from us over the last 12 months now $1 million or two may show up here or there.

As we.

Speaker Change: <unk> don't elect to pull the trigger and exits something that we're worried about.

James Eccher: So that's hard to predict, but we don't see anything big and lumpy.

Speaker Change: So thats hard to predict.

But we don't see anything big and lumpy I guess is the real takeaway.

James Eccher: I guess is the real takeaway. Got it.

Speaker Change: Got it thanks, guys I appreciate it.

James Eccher: Thanks, guys. Appreciate it.

Speaker Change: Thanks, Dave.

Martin Friedman: Thank you. Your next question is coming from Martin Friedman from FJ Capital. Martin, your line is live. Please go ahead. Good morning. Congratulations on a good quarter.

Speaker Change: Thank you. Your next question is coming from Martin Friedman from F. J capital Martin Your line is live. Please go ahead.

Martin Friedman: Good morning.

Martin Friedman: Congratulations on a good quarter.

Bradley Adams: I just wanted to expand upon the M&A discussion. General Brad, to me, it looks like you didn't buy any stock this quarter. Is that suggesting that something is imminent on the M&A front, and given a capital build, what can't you do both at the same time? in short we can. There's no reason why we can't. Now capital levels will come down a little bit with the branch purchase that will burn 30 to 40 basis points of capital. The movement this quarter obviously is extreme, and that's reflective of an AOCI just basically collapse for us. Now we do add organically, what is about 30 to 40 basis points of tangible equity per quarter.

Martin Friedman: Wanted to expand upon the MMO discussion Jim abroad to me it looks like you didn't buy any stock this quarter is that suggesting.

Speaker Change: Suggesting that something is imminent on the M&A.

Martin Friedman: M&A.

Given the capital build why can't you do both at the same time.

Martin Friedman: Yeah.

Speaker Change: In short we can.

Speaker Change: There is no reason why we cant know capital levels will come down a little bit with the branch purchase that will burn.

Speaker Change: 30 to 40 basis points of capital.

Speaker Change: The movement. This quarter, obviously is extreme and that's reflective of any OCI, just basically collapse for us.

Speaker Change: Now, we do add organically what is about 30% to 40 basis points of tangible equity per quarter.

Bradley Adams: I would say this too, as our earnings have been more resilient than I think anybody expected from us, at least on some level, be that in the future or currently. And if you look at evaluation on earnings basis, Old Second looks down like pated in some respects, but there's been a significant risk of a recession at least or the potential for a recession at some time. And I think that as we work through some credit problems and there was some skepticism about what was going to happen with credit trends at Old Second. Building tangible book value is something that has provided a level of stability and make them a state carrying more capital at a point where the curve is higher at the short end carries very relatively little cost.

Speaker Change: I would say this too as are our earnings have been more resilient than I think anybody expected from us.

Speaker Change: At least on some level.

Speaker Change: Be that in the future currently.

Speaker Change: And if you look at evaluation on an earnings basis old second looks.

Speaker Change: Sure.

Speaker Change: Downright paid in some respects.

Speaker Change: But theres been a significant risk of a recession at least or the potential for a recession at some time.

Speaker Change: And I think that as we work through some credit problems and there was some skepticism about what was going to happen with credit trends at old second.

Speaker Change: Building tangible book value is something that has provided a level of stability.

Speaker Change: And make no mistake carrying more capital at a point, where the curve is higher at the short end carries very relatively little cost.

Bradley Adams: And the barriers to entry to M&A this time is capital and a lot of people don't have it, which is kind of the reason we were alluded to it being a favorable environment for banks like Old Second. We have what it takes at this point, which is a well-positioned balance sheet and a lot of capital flexibility. You're right in that it one does not preclude the other. What you have is our commitment that we are focused on a return on tangible common, as Jim mentioned. And if earnings come down, the likelihood of capital being returned goes up exponentially.

Speaker Change: And the barriers to entry to M&A. This time as capital and a lot of people don't habit, which is kind of the reason we were alluded to it being a favorable environment from bank cycle second we have what it takes at this point.

Speaker Change: Which is a well positioned balance sheet and a lot of capital flexibility.

Speaker Change: <unk>.

Speaker Change: Youre right in that.

Speaker Change: One does not preclude the other.

Speaker Change: What you have is our commitment that we are focused on a return on tangible common as Jim mentioned.

Speaker Change: And if earnings come down the likelihood of capital being return goes up exponentially.

Bradley Adams: We will be smart with capital levels in the return that we earn and are provided to our shareholders, and that's the primary focus. I hope and I know certainly that you understand that more. I hope others understand that as well.

Speaker Change: We will be smart with capital levels and the return that we earn in or provided to our shareholders and thats. The primary focus I hope.

Speaker Change: I know certainly that you understand them already and I hope others understand that as well.

Great.

Martin Friedman: Great, thank you. I have another question about the margin, but I'll ask you offline. Okay, thanks for. Thank you.

Speaker Change: Thank you I have another question about the margin, but I'll ask you offline.

Speaker Change: Okay. Thanks Mark.

Thank you and as a reminder, if you wish to join the queue to ask a question. At this time you May press star one on your telephone keypad once again that'll be star one on your keypad at this time, if you wish to join the queue to ask a question.

Operator: And, as a reminder, if you wish to join the queue to ask a question at this time, you may press star one on your telephone keypad. Once again, that will be star one on your keypad. At this time, if you wish to join the queue to ask a question.

Jeffrey Rulis: And your next question is coming from Jeff Rellis from TA Davidson. Jeff, your line is live. Please go ahead.

Speaker Change: And your next question is coming from Jeff <unk> from D. A Davidson Jeff. Your line is live. Please go ahead.

Jeffrey Rulis: Thanks, good morning.

Speaker Change: Thanks, Good morning, just wanted to follow on on.

James Eccher: I just wanted to follow on the non-accrual terms of the inflows of the increase there. You mentioned the CNI credit. What industry was that, and if that was related to the inflows on the classified as well?

Speaker Change: On the non accrual.

Speaker Change: Just.

Jeff: Terms of the inflows of the increase there.

Speaker Change: The C&I credit what what industry was that and if that was related to the inflows on the.

Speaker Change: Classifieds as well.

James Eccher: Yeah, it was really it's the main new flow was that one CNI credit and the scrapping industry just has been not performing, and we thought we'd be aggressive with the downgrade. I don't have a whole lot more to share at this point, but that was really the main credit that migrated to the remaining.

Speaker Change: Yes, it was.

Speaker Change: Sure.

Speaker Change: The maintenance flow was at one <unk>.

Speaker Change: <unk> credit.

Speaker Change: Scrapping industry.

Speaker Change: Just as they are not performing.

Speaker Change: And we thought we'd be aggressive with.

Speaker Change: With the downgrade.

Speaker Change: We have a whole lot more to share at this point, but.

Speaker Change: That was really.

Speaker Change: The main credit that migrated.

Speaker Change: The remaining.

James Eccher: In the substandard bucket, I think I mentioned the two main ones, one other healthcare facility and solutions product company that had negative debt service coverage, but still accruing. Many more upgrades in the core, so overall we still feel good about the portfolio. Obviously, we're going to have, from time to time, some credits go south, and we feel like we'll get our arms around this one and hopefully take next steps to remediate.

Speaker Change: Credits in the substandard bucket I think I mentioned, the two main ones or another.

Speaker Change: One other healthcare facility.

Speaker Change: Yes.

Speaker Change: Solutions product company.

Speaker Change: Okay negative debt service coverage, but still still accruing but.

Speaker Change: Many more downgrade or many more upgrades and downgrades in the quarter. So overall, we still feel good about the portfolio, obviously, we're going to have.

Speaker Change: From time to time, some some credits.

Speaker Change: Go South and we feel like we'll get our arms around this one and hopefully take next steps to remediate.

James Eccher: Okay, so it sounds pretty idiosyncratic, but the scrapping industry credit was a bit of a one-off in terms of; you're not seeing other like factors, okay.

Speaker Change: Okay.

Speaker Change: Sounds pretty idiosyncratic scrapping industry credit was.

Speaker Change: A bit of a one off in terms of youre not seeing other.

Speaker Change: Right.

Speaker Change: Factors Okay.

James Eccher: One other thing on the deposit side, you mentioned some larger, non-intersparing depositors into quarter departures.

Wanted to just one other thing on the on the deposit side, you mentioned, some larger noninterest bearing depositors' into.

Speaker Change: In the quarter.

James Eccher: Any sense of that seasonality? I don't recall mentioning that, so I think when you look at what happens with Old Second's deposit base, I don't think anybody would be confused in terms of what we look like at this point. We are; our deposits are funding is dominated by very low-balanced denomination checking account. If you look at where stress is, given the level of inflation, given some softening and employment is at the low end of the wage scale, which is where we live on the funding side, we are not seeing negative impacts in terms of either account closures or anything other than just average balance, migration, down reflecting of these difficulties at the low end that I believe is driven by inflation.

Speaker Change: Any sense of that seasonality.

I don't recall mentioning that.

Speaker Change: So I think both.

Speaker Change: When you look at when you look at what happens with old Second's deposit base.

Speaker Change: I don't think anybody would be confused in terms of what we look like at this point, we are deposits or funding is dominated by very low balanced denomination checking account.

Speaker Change: If you look at where stresses.

Speaker Change: Given the level of inflation given some softening in employment is at the low end of the wage scale, which is where we live on the funding side.

We are not seeing negative impacts in terms of either account closures or anything other than just average balance migration down reflecting of these difficulties at the low end that I believe is driven by inflation that's been true for two years now.

James Eccher: That's been true for two years now. I think that when the liquidity spigots are open, you do see the deposit funds flowing into the industry that many confuse with organic growth; I assure you it is not. We saw some of that too, just as people fled fixed income markets, namely public funds and larger commercial customers. We are not seeing significant migrations or loss of accounts or anything like that.

Speaker Change: I think that.

Speaker Change: When the liquidity Spigots are open and you do see.

Speaker Change: Deposit funds flowing into the industry that many confused with organic growth I assure you it is not.

Speaker Change: And we saw some of that too just as people fled fixed income markets, namely public funds and larger commercial customers.

Speaker Change: But now we're not seeing.

Speaker Change: Significant migrations or loss of accounts or anything like that as a matter of fact, we have a positive open to close ratio.

James Eccher: As a matter of fact, we have a positive open to close ratio here recently this year, our first time since the closure of West Suburban in terms of that acquisition. We are now opening more accounts than we are closing, which the reason why you don't hear about that statistic very often is because it is overwhelmingly negative for our industry as a whole.

Speaker Change: Here recently this year are first time since the closure of west suburban in terms of that acquisition and.

Speaker Change: And we are now opening more accounts than we are closing.

Speaker Change: Which the reason why you don't hear about that statistic very often is because it is overwhelmingly negative for our industry as a whole.

Bradley Adams: Brad, I guess I am referencing the $60 million non-intersparing deposits by a few larger customers that linked quarter. Just interested in that flow. Again, this is liquidity flows and seasonalities and tax payment flows. Nothing significant.

Speaker Change: Brad I guess I am referencing the $60 million, Don and sharing deposits by a few larger customers that linked.

Speaker Change: Linked quarter.

Speaker Change: We're still in that slow.

Speaker Change: So again, its liquidity flows and seasonality and tax payment flows.

Bradley Adams: And is there seasonality with those customers that you believe comes back? Yes, I am trying to... Sorry, those are Yes. Yes.

Speaker Change: Significant.

Speaker Change: And is there seasonality with those customers that you believe pumps back.

Speaker Change: Yes.

Speaker Change: I'm, sorry, yes, yes.

James Eccher: Okay, great. Thank you.

Speaker Change: Okay.

Speaker Change: Great. Thank you.

Speaker Change: Alright, great. Thank you.

Speaker Change: Thank you. Your next question is coming from Brian Martin from Janney.

Brian Martin: Your next question is coming from Brian Martin from Jenny. Brian, your line is live. Please go ahead. Hey, good morning, guys. Good, Brian. Jim, Jim, you went through the criticize level. Can you just talk about where that was at this quarter relative to the last quarter? I think you kind of said, I think maybe what it went up or down? I missed what you said specifically, but I thought the criticize were about 187 million last quarter. We know classifies went down a bit. We're criticized equal this quarter, meaning the special mention maybe went up a bit or just link quarter change and criticize.

Speaker Change: Ian Your line is live please go ahead.

Speaker Change: Hey, good morning, guys.

Speaker Change: Hey, Brian.

Brian Martin: Thanks, Jamie.

Brian Martin: Jim you went through the criticized level can you just talk about where that was at this quarter relative to last quarter. I think you kind of said I think maybe what it went up or down I missed what you said, specifically, but I thought the criticized were about $187 million last quarter, and we know classifieds went down a bit.

Speaker Change: Criticized equal this quarter, meaning the special mentioned, maybe went up a bit better.

Jim Eckert: Linked quarter a change in criticized.

James Eccher: Yeah, pretty flat. I think up up a tick, Brian, from last quarter, the special mention was some standards were down about about 9 million and then the one credit that went to not a cruel lot of migration in and out. But that's hopefully that answers your question. Yeah, so if classifies were down 8 or 9 and special mention were up 8 or 9 and kind of net neutral to the total criticize, that's fair. That's correct. Yeah, okay, perfect. That's right. Thanks, Jim.

Flat I think up a tick Brian.

From last quarter's special mentioned was.

Sub standards.

Jim Eckert: We're down about this about $9 million and then the one credit that went to non accrual.

Jim Eckert: A lot of migration in and out but.

Jim Eckert: So hopefully that answers your question yes.

Classifieds were down eight or nine and special mentioned, we're up eight or nine that kind of net neutral to the total criticized that that's fair.

Speaker Change: Thats correct, yes, okay perfect. That's what I thought thanks, Jim and then.

Brian Martin: And then in terms of the buyback, I guess, Brad, I think it sounds like the inorganic is maybe the priority if it's available, but on the buyback. Can you talk about just give some thoughts on pricing as far as where you're interested in buying the stock? I think a while ago you talked about maybe one to do it at pretty attractive levels. Some thoughts on if you do go that route, based on what's available. I mean, everybody loves the bargain, right? But there's nothing about our current valuation that will preclude a buyback. Okay, gotcha. Okay.

Speaker Change: In terms of the.

Speaker Change: The buyback I guess, Brett Brad I think it sounds like the inorganic maybe the priority if its available but on the buyback can you talk about give us some thoughts on pricing as far as where you're interested in buying the stock I think a while ago you talked about maybe wanting to do it.

Speaker Change: Pretty attractive levels.

Speaker Change: Some thought on if you do go that route based on what's available.

Speaker Change: I mean, everybody loves a bargain but.

Speaker Change: There is nothing about our current valuation that would preclude a buyback.

Speaker Change: Okay Gotcha, Okay, and then I think just given your outlook Brad.

Bradley Adams: And then I think just given your outlook, Brad, that maybe inflation isn't quite gone yet. I mean, if we don't see the full return of carbon to fruition to these rates cuts, you know, a significant rate cuts materialize. I mean, fair to say that the margin is relatively flatish or down modestly, as you kind of go into next year, especially with. Yeah, my God, I got to say down modestly. I think. I think this is a very difficult time to be an economist, not that economists have a very good track record of ever being correct.

Speaker Change: Maybe inflation isn't isn't quite gone yet.

Speaker Change: If we don't see any of the forward curve covenant fruition these rate cuts.

Speaker Change: Difficult rate cuts materialize, I mean fair to say that the margin is relatively flattish or down modestly as you kind of go into next year, especially with.

Speaker Change: Yes, My guess my gut would say down modestly.

Speaker Change: Okay.

Speaker Change: Thank you.

Speaker Change: I think this is a very difficult time to be an economist not that economists have a very good track record of ever being correct.

Bradley Adams: But I think where we are, you know, on the eve of an election that is very polarizing. Just being overly blunt because that's what I do. I'm not sure that we'll have a willingness to declare victory on inflation on the other side of an election if Trump is the winner of the election. So I'm cautious and think that things can snap in either direction pretty aggressively. And that's why we've maintained our positioning is relatively neutral. And I think that we'll know more in a few months. Yep. Okay.

Speaker Change: But I think where we are on.

Speaker Change: On the eve of an election that.

Speaker Change: That is very polarizing.

<unk>.

Speaker Change: Just being overly blunt because thats, what I do I am not sure that we'll have a willingness to declare victory on inflation on the other side of an election.

Speaker Change: If trump is the winner of the election.

Speaker Change: So I am cautious and think that things can snap in either direction pretty aggressively.

Speaker Change: And that's why we've maintained our positioning is relatively neutral.

Speaker Change: And I think that we'll know more in a few months.

Speaker Change: Okay and then.

Bradley Adams: And then in terms of, you know, I think Jim mentioned it. You might venture a little bit more on the optimization of balance sheet, Brad. I guess can you expand a little bit on that or just how you think in here the next couple quarters. I would like to earn an excess of a 4% spread on marginal growth on the balance sheet, and if we can't, then we can sit tight for a bit.

Speaker Change: In terms of I think Jim mentioned it.

Speaker Change: Thank you Mike mentioned, a little bit more on the optimization of the balance sheet. Brad I guess can you just expand a little bit on that or just how youre thinking here. The next couple of quarters.

Speaker Change: I would like to earn.

Speaker Change: No.

Speaker Change: In excess of a 4% spread on <unk>.

Speaker Change: Marginal growth on the balance sheet and if we can't then then.

Speaker Change: We can sit tight for a bit.

Brian Martin: Okay, in last one, since economists are usually not right, Brad, I know the tax is a favorite item of yours. So the tax rate was down a little bit this quarter. Is that, you know, probably a decent rate to use as we look forward, given kind of changes? No. Yeah, I love. I thought about this a lot. I was going to answer your question, Brian. And I decided I'm going to go with an oddly specific guidance for tax rate, and we're just going to see how it turns out, and then you guys can really give me a hard time when I'm wildly wrong.

Speaker Change: Okay and last one since economists are usually not right Brad I know the taxes favorite item of euro. So the tax rate was down a little bit this quarter or is that probably a decent rate to use as we look forward given kind of changes.

Speaker Change: No.

Speaker Change: Yes, I love I've thought about this a lot is going to answer your question, Brian and I have decided.

Speaker Change: I'm going to go with an oddly specific guidance for tax rate and we're just going to see how it turns out and then you guys can really give me a hard time when I am wildly wrong.

Bradley Adams: I'm going to go with 24.763 for the effective tax rate going next quarter. We'll see how I do.

Speaker Change: I'm going to go with 24 763 for the effective tax rate going next quarter, we will see how I do.

Brian Martin: Okay, and in big picture for next year, can you give a thought as far as how you think about that or stick with your. I really like that 24.763 on the digits on there. We'll call that. That's what I feel good about. All right. I will stay tuned. I appreciate the color. And thanks. Great quarter, guys. All right. Thank you.

Speaker Change: Okay and big picture for next year.

Speaker Change: Can you give a thought as far as how you're thinking about that as let's stick with your I really like that $24 767.

Speaker Change: Digital on there we'll call that refi.

Speaker Change: <unk>.

Speaker Change: I feel good about alright.

Speaker Change: Stay tuned I appreciate the color and thanks, great quarter guys.

Speaker Change: Alright, Thank you Greg.

Speaker Change: Thank you.

Operator: And there are no further questions in queue at this time.

Speaker Change: And there are no further questions in queue at this time I would now like to hand, the floor back to Jim <unk> for closing remarks, okay. Thanks to everyone for joining US. We appreciate your interest in the company look forward to speaking to you again next quarter Goodbye.

Operator: I would now like to hand the floor back to Jim Ecker for closing remarks. Okay. Thanks, everyone, for joining us. We appreciate your interest in the company. Look forward to speaking with you again next quarter. Goodbye.

Operator: Thank you.

Speaker Change: Thank you. This does conclude today's conference call. You may disconnect. Your phone lines at this time and have a wonderful day. Thank you for your participation.

Operator: This does conclude today's conference call. You may disconnect your phone lines at this time and have a wonderful day. Thank you for your participation.