Q4 2024 Old Second Bancorp Inc Earnings Call

Good morning, everyone and thank you for joining us today for old Second Bancorp, Inc. Fourth quarter 'twenty 'twenty four earnings call.

Operator: Good morning, everyone, and thank you for joining us today for Old Second Bancorp Inc. fourth quarter 2024 earnings call. On the call today are Jim Eccher, the company's Chairman, President and CEO, Brad Adams, the company's COO and CFO, and Gary Collins, the Vice Chairman of our Board.

Brad Adams: On the call today are Jim Eckert, the company's chairman, President and CEO, Brad Adams, the company's C O O N CFO and Gary Collins, 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 and the current economic environment.

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: 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.

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 page.

Jim: 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 old second dot com on the homepage under the Investor Relations tab now I will turn it over to Jim.

James Eccher: Now I will turn it over to Jim Ecker, please go ahead. Good morning, everyone. And thank you for joining us this morning. I have several prepared opening remarks. I'll give my overview of the quarter and then turn it over to Brad for additional detail.

Speaker Change: Please go ahead.

Jim: Good morning, everyone and thank you for joining us this morning.

Jim: I have several prepared opening remarks, and give 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 for questions. Net income was $19.1 million, or $0.42, per diluted share in the fourth quarter of 2024. return on assets was 1.34%. Fourth quarter 2024 return on average tangible common equity was 13.79%. And the tax equivalent efficiency ratio was 54.61%. Fourth quarter 2024 earnings were significantly impacted by several items. The first was a $3.5 million provision for credit losses in the absence of significant loan growth, which reduced after-tax earnings by $0.06 per diluted share. We also had $1.7 million in Oriel write-downs, or $0.03 per diluted share.

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

Jim: Net income was $19 1 million or <unk> 42.

Jim: Per diluted share in the fourth quarter of 2024.

Jim: And return on assets was 134%.

Jim: Fourth quarter 2044 return on average tangible common equity was $13 seven 9%.

Jim: And the tax equivalent efficiency ratio was 50, 461%.

Jim: Fourth quarter 2024 earnings were significantly impacted by several items.

Jim: Yeah.

Jim: First was a $3 5 million provision for credit losses, and the absence of significant loan growth, which reduced after tax earnings by <unk> <unk> per diluted share.

Jim: Also had $1 7 million and Oreo write downs or <unk> <unk> per diluted share and lastly, a $1 5 million.

James Eccher: And lastly, a $1.5 million merger-related expense, or just shy of $0.03 per diluted share. However, despite all this, profitability of Old Second remains exceptionally strong and balance sheet strengthening continues with our tangible equity ratio decreasing only modestly from last quarter due to dilution to tangible equity from the first merchant's cash acquisition in the fourth quarter of 2025. The Tangible Equity Ratio increased by 151 basis points over the past year to end at 10.04%. Common Equity Tier 1 was 12.82% in the fourth quarter, and we feel very good both about profitability in our balance sheet positioning.

Jim: Merger related expense were just shy of <unk> <unk> per diluted share.

Jim: However, despite all those profitability old second remains exceptionally strong and balance sheet strengthening continues with our tangible equity ratio decreased only modestly from last quarter due to the dilution to tangible equity from the first merchants cash acquisition in the fourth quarter of 2024.

Jim: The tangible equity ratio increased by 151 basis points over the past year.

Jim: At 10.0% to 4%.

Jim: Common equity tier one was $12 eight 2% in the fourth quarter and we remain we feel very good both about our profitability and our balance sheet positioning at this point.

Jim: Our financials continue to reflect a strong and stable net interest margin, even as market interest rates declined.

James Eccher: Our financials continue to reflect a strong and stable net interest margin, even as market interest rates decline. pre-provisioned net revenues remain stable and exceptional. For the fourth quarter of 2024 compared to the prior year-like period, income on average earning assets increased $1.6 million, or 2.1 percent, while interest expense on average interest-bearing liabilities increased $1.2 million, or 9.9 percent. The increase in interest expense is rate-driven and primarily due to remixing market pricing on certain commercial deposits. The fourth quarter of 2024 reflected a slight decrease in total loans of $9.7 million from the prior linked quarter end.

Jim: Pre provision net revenues remained stable and exceptionally strong.

Jim: For the fourth quarter of 2024 compared to the prior year like period.

Jim: Income on average, earning assets increased $1 $6 million were two 1%.

Jim: Interest expense on average interest bearing liabilities increased $1 2 million or nine 9%.

Jim: The increase in interest expense is rate driven and.

Jim: Primarily due to remixing market pricing on certain commercial deposits.

The fourth quarter of 2024 reflected a slight decrease in total loans of $9 7 million from the prior linked quarter Ed.

James Eccher: primarily due to some large paydowns and commercial. Commercial Real Estate, Owner Occupied, and Multi-Family Portfolios during the quarter. Comparatively, loan growth in the third quarter of 2024 was $14.5 million, and loan growth for the prior year, fourth quarter, was $13.4 million. The historical trend for our bank is long growth in the second and third quarters of the year due to seasonal construction and business activity. Currently, activity within loan committee remains modest relative to prior periods, primarily due to many customers waiting to see how market volatility including changes due to the fourth quarter 2024 election results and any further interest rate reductions play out over the coming three to six Tax equivalent net interest margin increased by four basis points this quarter, driven by continuing high interest rates on variable securities alone.

Jim: Primarily due to some large pay downs in commercial <unk>.

Jim: Real estate owner occupied and multifamily portfolios during the quarter comparatively.

Comparatively low growth in the third quarter of 2024 was $14 5 million in loan growth for the prior year fourth quarter was $13 4 million.

Jim: The historical trend for our bank as loan growth in the second and third quarters of the year due to seasonal construction and business activities.

Jim: Currently activity within loan committee remains modest relative to prior periods, primarily due to many customers waiting to see how market volatility include.

Jim: Including changes due to the fourth quarter 2020 for election results and any further interest rate reductions play out over the coming three to six months.

Jim: Tax equivalent net interest margin increased by four basis points this quarter, driven by continuing high interest rates on variable securities and loans as well as reduction in our funding costs due to the close of the <unk> branch purchase for first merchants in early 2024.

James Eccher: as well as reduction in our funding costs due to the close of the five-branch purchase from First Merchants in early 2024. Loan yields reflected a 12 basis points decrease during the fourth quarter compared to the link quarter, but a 16 basis point increase year over year. Funding costs decreased primarily due to approximately $267 million of deposits acquired from first mergers. which allowed us to pay down our other short-term borrowings at the Federal Home Loan Bank and significantly lower our cost of funds. The tax equivalent of that interest margin was 4.68% for the fourth quarter of 2024 compared to 4.64% for the third quarter of 2024 and 4.62% in the fourth quarter of 2023.

Jim: Loan yields reflected a 12 basis point decrease during the fourth quarter compared to the linked quarter, but a 16 basis point increase year over year.

Jim: Funding costs decreased primarily due to approximately $267 million of deposits acquired for first merchants.

Jim: Which allowed us to pay down our other short term borrowings at the federal home loan bank and significantly lower our cost of funds.

Jim: The tax equivalent net interest margin was four 6% to 8% for the fourth quarter of 2024 compared to $4, 64% for the third quarter of 2024 and $4 six 2% in the fourth quarter of 2023.

Jim: The net interest margin has remained.

James Eccher: 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 well as the growth in our deposit base and other short-term borrowing costs. Loan-to-deposit ratio is in good shape. It's at 84% as of December 31, 2024, compared to 89% last quarter and 88% as of December 31, 2023.

Jim: 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 well as the growth in our deposit base and other short term borrowing costs.

Jim: Loan to deposit ratio is in good shape, it's at 84% as of December 31, 2024, compared to 89% last quarter and 88%.

Jim: December 31 2023.

Jim: As we have said on prior calls our focus continues to be balance sheet optimization and ill, let Brad talk about that more in a minute.

James Eccher: As we have said on prior calls, our focus continues to be balance sheet optimization, and I'll let Brad talk about that more in a minute.

Jim: In terms of credit this was a mixed quarter with sports some good news and bad news the bad news first.

James Eccher: In terms of credit, this was a mixed quarter with both some good news and bad news. The bad news first. We recorded an $8.6 million charge-off on a C&I loan that was downgraded last quarter. Based on audited financials, collateral field audits, and bankruptcy declarations, we believe we are in a much better position on this credit. Subsequent investigation and workout actions indicate otherwise, which unfortunately happens in some bankruptcy cases as they develop. Currently, our carrying balance is effectively $0.37 on the dollar. This represents Our current best estimate at recovery at this point, but additional loss is possible as more facts come to light.

Jim: We recorded an $8 $6 million charge offs on a C&I loan that was downgraded last quarter base.

Jim: Based on audited financials collateral fueled audits and bankruptcy declarations. We believe we are in much better position on this credit.

Jim: Subsequent investigation and workout actions indicate otherwise, which importantly, unfortunately happens and some bankruptcy cases as they develop.

Jim: Currently are carrying balances effectively 30 37 on the dollar this represents.

Jim: Our current best estimate of recovery at this point, but additional losses possible as more facts come to light.

James Eccher: We will continue to actively monitor this matter and take action. to best protect our in- We also recorded a $1.7 million in OREO valuation expense in the quarter. These represent charges below recent appraisals to immediately and contractually clear two properties from our book suit. These are loans that have been identified long ago and have worked their way through the resolution process. million commercial real estate loan was foreclosed on in the fourth quarter. Notably, no loss is expected in the properties under contract for a first quarter sale with significant earners money already received. We remain optimistic this asset will sell and clear in the next few weeks.

Jim: We'll continue to actively monitor this matter and take actions to best protect our interests.

Jim: We also recorded a $1 7 million in Oreo valuation expense in the quarter. These represent charges below recent appraisals to immediately and contractually cleared two properties from our book soon.

Jim: These are loans that have been identified long ago and have been worked their way through the resolution process or <unk>.

Jim: 16 four.

Jim: Million commercial real estate loan was foreclosed out in the fourth quarter, notably no loss is expected in the properties under contract for our first quarter sale.

Jim: With significant earnest money already received.

Jim: We remain optimistic this asset will sell a clearer in the next few weeks.

Jim: And now for the good news substandard criticized loans decreased significantly in the fourth quarter. These balances now total $129 9 million.

James Eccher: And now for the good news, substandard and criticized loans decreased significantly in the fourth quarter. These balances now total $129.9 million and decreased by 31 percent, or $58 million from last quarter. In the first quarter of 2023, substandard and criticized loans were nearly $300 million. Year-end 2024 balances represented a decline of more than 56% from peak levels. and are near their lowest levels in two and a half years. Classified and non-accrued balances continue to improve significantly on both a year-over-year and link quarter basis. and we expect further substantial, non-costly improvement in the very near term.

Jim: <unk> decreased by 31% or $58 million from last quarter.

Jim: In the first quarter of 2023 substandard criticized loans were nearly 300 million year end 2024 balances represent a decline of more than 56% from peak levels and are near their lowest levels in two and a half years.

Jim: Classified and non accrual balances continue to improve significantly on both a year over year and linked quarter basis.

Jim: And we expect further substantial non cost improvement in the very near term.

Jim: Special mentioned loans also continue to improve dramatically. These balances are down 46% from one year ago.

James Eccher: Special mention loans also continue to improve dramatically. These balances are down 46% from one year ago.

Jim: When your portfolio is short duration.

James Eccher: When your portfolio is short duration, it's important for investors to know when interest rates rise as quickly as they did, it's important to be realistic and pragmatic about its impact. We've been very aggressive in addressing weak credits and remain confident in the strength of our portfolio. The bulk of the largest problems we have seen have been acquired, but we've made a few mistakes ourselves. We'll learn from those and be better. Continued stress testing has not raised any new flags, red flags for us, and the bulk of our loan portfolio has transitioned into the higher rate environment.

Jim: Forrester investors into on interest rates rise as quickly as they did this important to be realistic and pragmatic about its impacts.

Jim: We've been very aggressive in addressing weak credits.

Jim: <unk> confident in the strength of our portfolios.

Jim: The bulk of the largest problems we've seen have been acquired but we've made a few mistakes ourselves.

Jim: We will learn from those and be better.

Jim: Continued stress testing is not raise any new flags red flags for us and the bulk of our loan portfolio has transitioned into the higher rate environment and.

James Eccher: will be impacted with downward rate movements going forward. The allowance for credit losses on loans decreased to $43.6 million as of December 31, 2024, or 1.1% of total loans. 44.4 million at the end of the third quarter, which was also 1.1% of total. Unemployment and GDP forecasts to use in our future loss rate assumptions remain fairly static from last quarter With no material changes in the unemployment assumptions on the upper end of the range based on recent Fed projections The change in provision level quarter over late quarter reflects the reduction in our allowance allocations on substandard loans, which largely relates to the 27 percent reduction in criticized assets year over year.

Jim: And we will be impacted with downward rate movements going forward.

Jim: The allowance for credit losses on loans decreased to $43 6 million as of December 31, 2024, or one 1% of total loans from.

Jim: From $44 4 million at the end of the third quarter, which was also a one 1% of total loans unemployment and GDP forecast using our future loss rate assumptions remain fairly static from last quarter with no material changes in the unemployment assumptions on the upper end of the range based on recent fed projections.

Jim: The change in provision level quarter over linked quarter reflects the reduction in our allowance allocations as substandard laws, which largely relates to the 27% reduction in criticized assets year over year.

Jim: Noninterest income continues to perform well with growth in the fourth quarter of 2024 compared to the linked quarter and wealth management fees service charges on deposits and mortgage banking income.

James Eccher: Non-interest income continues to perform well with growth in the fourth quarter of 2024 compared to the wink quarter in wealth management fees, service charges on deposits and mortgage banking. excluding the impact of mortgage servicing rates, mark-to-market adjustments, mortgage banking income was flat quarter over late quarter. Other income decreased in the fourth quarter of 2024 compared to the prior link quarter and prior year-like quarter, with the link quarter variance primarily due to recoveries on vendor contract and other contract incentives received in the third quarter of 2024. Expense discipline continues to be strong, with total non-interest expense in the fourth quarter of 2024 at $5 million more than the prior link quarter, primarily due to an increase in incentive accruals and first merchants acquisition costs incurred at $1.5 million.

Jim: Excluding the impact of mortgage servicing rights Mark to market adjustments mortgage banking income was flat quarter over linked quarter.

Jim: Other income decreased in the fourth quarter of 2024 compared to the prior linked quarter and prior year linked quarter with the linked quarter variance, primarily due to recoveries on vendor contract.

Jim: Other contract incentives received in the third quarter of 24.

Expense discipline continues to be strong with total noninterest expense in the fourth quarter of 2024 $5 million more than the prior linked quarter, primarily due to an increase in incentive accruals and first merchants acquisition cost incurred of $1 5 million.

Jim: In the fourth quarter of 2024 compared to 471003rd quarter.

James Eccher: in the fourth quarter of 2024 compared to 471,000 in the third quarter. Our efficiency ratio continues to be excellent. As the tax equivalent efficiency ratio adjusted to exclude acquisition costs and OREO costs was 54.61% for the fourth quarter of 2024 compared to 52.31% for the prior link.

Jim: Our efficiency ratio continues to be excellent as the tax equivalent efficiency ratio adjusted to exclude acquisition costs and Oreo cost was $54 six 1% for the fourth quarter of 2024 compared to $52 three 1% for the prior linked quarter.

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

James Eccher: We look forward, we're 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 security. in order to maintain the Returns on Equity commensurate with the recent performance.

Jim: Goal is obviously to continue to create a more stable long term balance sheet mix, featuring more loans and less securities and.

Jim: In order to maintain the returns on equity commensurate with our recent performance.

Bradley Adams: I'll now turn it over to Brad for additional call. Thank you, Jim. It's not a lot controversial for me to talk about, so I'll add a few comments and pass the puck back to Jim.

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

Brad Adams: Thank you Jim.

Brad Adams: There's not a lot controversial for me to talk about so I'll add a few comments and pass it back to Jim.

Brad Adams: I don't really feel the need to be as much up on a soap box this quarter, but.

Bradley Adams: I don't really feel the need to be much up on the soapbox this quarter. Net interest income increased by $1 million to $61.6 million for the quarter relative to the prior quarter of $60.6 million. an increase $349,000 from the year ago quarter. Tax equivalent securities yields decreased 10 basis points and loan yields were 12 basis points lower in the fourth quarter compared to third quarter. Total yield on interest earning assets decreased 11 basis points. That was more than offset by a seven basis point decline in the cost of interest bearing deposits and a 22 basis point decrease in net interest bearing liabilities in aggregate.

Brad Adams: Net interest income increased by $1 million to $61 6 million for the quarter.

Relative to the prior quarter of 66.

Brad Adams: And increased 349000 from the year ago quarter tax equivalent securities yields decreased 10 basis points and loan yields were 12 basis points lower than the fourth quarter compared to third quarter.

Total yield on interest, earning assets decreased 11 basis points.

Brad Adams: That was more than offset by a seven basis point decline in the cost of interest bearing deposits and a 22 basis point decrease in net interest bearing liabilities in aggregate.

Brad Adams: The end result was a four basis point increase in the tax equivalent NIM to $4 68 for the quarter from 464 last quarter, and which we believe continues to be exceptional performance.

Bradley Adams: The end result was a four basis point increase in the tax equivalent M to 468 for the quarter from 464 last quarter, which we believe continues to be exceptional performance. Deposits closed this quarter, continue to display signs of seasonality and stabilization. Average deposits increased $114 million, or 2.5%. In period end total deposits increased $303 million or 6.8% from the prior quarter, primarily due to the deposits acquired from First Merchants Branch. Deposit pricing in our markets remains exceptionally aggressive relative to the treasury curve. is largely pricing off overnight borrowing levels. Public funds provided a bit of a headwind this quarter as fixed income markets offer an attractive alternative.

Brad Adams: Positive flows this quarter continue to display signs of seasonality and stabilization average deposits increased $114 million or two 5%.

Brad Adams: Period end total deposits increased 300 $303 million or six 8% from the prior quarter, primarily due to the deposits acquired from first merchants branches.

Brad Adams: Deposit pricing in our markets remains exceptionally aggressive relative to the treasury curve.

Brad Adams: Is largely pricing off overnight borrowing levels public funds provided a bit of a headwind this quarter as fixed income markets offer an attractive alternative.

It's always nice when I don't have to go out on the women with a claim that the forward curve is nonsense. That's first time in a little bit realm.

Bradley Adams: It's always nice when I don't have to go out on a limb and put a claim that the forward curve is nonsense. It's the first time in a little bit. Relative to last quarter and many times over the last two years, expectations have become much more realistic relative to absolute economic conditions and federal deficit constraints. We are very proud of the balance sheet decisions we have made over the entirety of the cycle and continue to believe we are well positioned for what is to come. Duration is a bit more attractive as we sit here today so our bias leans in that direction but not dramatically so.

Brad Adams: Relative to last quarter and many times over the last few years expectations have become much more realistic relative to absolute economic conditions and federal deficit constraints.

Brad Adams: We are very proud of the balance sheet decisions, we have made over the entirety of the cycle and continue to believe we are well positioned for what is to come.

Brad Adams: Duration is a bit more attractive as we sit here today, so our bias leans in that direction, but not dramatically. So.

Bradley Adams: Relatively poor marginal spreads persist and Old Second is continuing to focus on compounding book value and maximizing returns. For us, that means being careful with expenses and pricing risk appropriately. as a result of the recent rate cuts and their impact on indices. Margin trends for 2025 are expected to trend down slowly. Success in funding loan growth with the newly acquired deposits offers the opportunity to upside to these expectations. As Jim mentioned, the loan deposit ratio is now sub-84%, from 89-plus in the fourth quarter compared to the third quarter. and that's due to those purchase deposits and the branch deal.

Brad Adams: Relatively poor margin spreads persist in all second is continuing to focus on compounding book value and maximizing returns.

Brad Adams: For us that means being careful with expenses and pricing risk appropriately.

Brad Adams: As a result of the recent rate cuts and their impact on indices.

Brad Adams: Trends for 2025 are expected to trend down slowly success.

Brad Adams: Success in funding loan growth and with the newly acquired deposits offers the opportunity to outside of these expectations.

Brad Adams: As Jim mentioned the loan deposit ratio is now sub 84% from 89, plus in the fourth quarter compared to the third quarter.

Brad Adams: And thats due to those to purchase deposits in the branch deal.

Brad Adams: Our ability to source liquidity from the securities portfolio remains and our current short term borrowing level is negligent.

Bradley Adams: Our ability to source liquidity from the securities portfolio remains, and our current short-term borrowing level is negligible. Old Second continues to build capital. is evidenced by a 151 basis point improvement in the TCE over the past year. which means we have added a fairly astonishing $1.65 in tangible book value over that time. This quarter, capital was essentially flat. That is a result of the use of cash for the purchase of the first merchants acquisitions. I would note that the relatively minor move in AOCI should indicate to investors just how short our securities portfolio is, given the magnitude of the backup and rates relative to third quarter.

Brad Adams: Second continues to build capital.

Brad Adams: As evidenced by 151 basis point improvement in the TCE over the past year.

Brad Adams: Which means we have added.

Brad Adams: Early astonishing $1 65, and tangible book value over that time.

Brad Adams: This quarter capital was essentially flat that is a result of the use of cash for the purchase of the first merchants acquisitions.

Brad Adams: Note that the relatively minor move in the OCI should indicate to investors just how short our securities portfolio is given the magnitude of the backup in rates relative to third quarter.

Brad Adams: Capital will build more slowly from here.

Bradley Adams: Capital will build more slowly from here. And I do believe that the overall M&A environment remains exceptionally favorable to a bank like Old Second.

Brad Adams: And I do believe that the overall M&A environment remains exceptionally favorable to a bank like old second.

Bradley Adams: If that does not come to fruition, we will return capital. A buyback is in place and is on the table. Non-interest expense increased $5 million from the previous quarter, primarily due to acquisition-related costs, and where you'll write down. as well as various other credit remediation efforts. Incentive accruals are probably higher than I would have thought in the fourth quarter. That's a function of relative performance. as we calculate it relative to peer groups. Metrics like ROA and return on tangible equity adjusted for AOCI so as not to have huge outliers for people who have impaired capital positions.

Brad Adams: That does not come to fruition, we will return capital buyback is in place and is on the table.

Brad Adams: Noninterest expense increased $5 million from the previous quarter, primarily due to acquisition related costs and Oreo write downs as.

Brad Adams: As well as various other credit remediation efforts.

Brad Adams: Incentive accruals are probably higher than I would've thought in the fourth quarter.

Brad Adams: Function of relative performance.

Brad Adams: As we manage.

Brad Adams: We calculated relative to peer groups.

Brad Adams: Metrics like ROA and return on tangible equity.

Brad Adams: Adjusted for iOS.

Brad Adams: So as not to have huge outliers for people, who have impaired capital positions.

Bradley Adams: Old Second performed exceptionally well. essentially the 99th percentile. puts us in the position of hitting payout for the bulk of our officer base, despite the fact that our overall performance for the year was slightly below what we expected. And again, primarily because of that bonus accrual. But overall, the performance continues to be excellent. Margin trends are stable to modestly down. We're hopeful for overall operating expense of twenty twenty five. within the 4%, maybe 5% range. And we're targeting loan growth in the mid-single digits. I know we said that last year, but I feel more optimistic about it this year.

Brad Adams: Old second performed exceptionally well.

Brad Adams: Essentially the 99 percentile.

Brad Adams: Which puts us in a position of hitting paid out for the bulk of our officer base. Despite the fact that our overall performance for the year was slightly below what we expected.

Brad Adams: And again, primarily because of that bonus accrual.

Brad Adams: Yes.

Brad Adams: But overall the performance continues to be excellent margin trends as stable to modestly down.

Brad Adams: We're hopeful for overall operating expense in 2025.

Brad Adams: In the 4%, maybe 5% range and we're targeting loan growth in the mid single digits. I know, we said that last year, but I feel more optimistic about this year.

Brad Adams: Overall things feel great and we're very proud of where we are and believe that our future is extremely bright and with that I'd like to turn the call back over to Jim.

Bradley Adams: Overall, things feel great.

Bradley Adams: We're very proud of where we are and believe that our future is extremely bright.

James Eccher: With that, I'd like to turn the call back over to Jim. Okay, thanks, Brad. In closing, we remain very confident in our balance sheet and the opportunities that are ahead for Old Second. We're pleased with the progress we made on credit, not only this quarter, but for the entire year, and we're optimistic that future quarters will be very good. 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 a little more resilient than some expect, and income statement efficiency remains at record levels.

Jim: Okay. Thanks, Brad in closing, we remain very confident in our balance sheet and the opportunities that are ahead for old second we're pleased with the progress we made on credit not only this quarter for the entire year and we are optimistic that future quarters will be very good on this front our focus remains on assessing at Mont.

Jim: Deterring risks within our loan portfolio and optimizing the earning asset mix in order to maintain excellent profitability.

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

James Eccher: Proud of the year we had in 2024 and very optimistic about the year ahead.

Jim: Proud of the year, we added 2024 and very optimistic about the year ahead.

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

Operator: That concludes our prepared comments this morning. So I'll turn it over to the moderator.

Operator: We can open it up to Q&A. Certainly. The floor is now open for questions.

Speaker Change: Certainly the floor is now open for questions have you have any questions or comments. Please press star one on your phone at this time, we ask that while posing a question that you. Please pick up your handset if listing on a speaker phone to provide optimum sound quality. Please hold just a moment, while we poll for any questions.

Operator: If you have any questions or comments, please press star 1 on your phone at this time. We ask that while posing your question, you please pick up your handset if listening on a speakerphone to provide optimum sound quality. Please hold just a moment while we poll for any questions.

Speaker Change: Your first question is coming from Jeff <unk> with D. A Davidson. Please pose your question your line is live.

Jeffrey Rulis: Your first question is coming from Jeff Rulis with D.A. Davidson. Please pose your question. Your line is live.

Jeff: Thanks, Good morning.

Jeffrey Rulis: Thanks, good morning. Really just a couple follow-ups for Brad. On the margin, it seems as if you've digested the rate cuts pretty well, and, you know, we've poked at the terminal level before, got your comments about, you know, maybe a slow drift in 25.

Speaker Change: Really just a couple of follow ups.

Maybe for Brad.

Jeff: On the margin.

Speaker Change: Seems as if you've digested the rate cuts pretty well and Ed.

Speaker Change: We've poked at the terminal level before got your comments about maybe a slow drift in 'twenty fives any other.

Bradley Adams: Any other kind of color in terms of if we see. A couple of cuts, the impact there, or is that inclusive of kind of your expectation for a slow pullback in the margin? So.

Speaker Change: Kind of color in terms of if we see.

Speaker Change: A couple of cuts.

Speaker Change: Back there or is that inclusive of kind of your expectation for us.

Speaker Change: Us.

Slow pullback in the margin.

Speaker Change: So.

Speaker Change: You're forcing me up on my Soapbox, Jeff.

Bradley Adams: You forced me up on my soapbox, Jeff. I don't really see a mechanism for further rate cuts. I see fairly persistent, sticky core inflation, and I see fairly strong underlying both employment and macro trends overall.

Speaker Change: I don't really see a mechanism for further rate cuts.

Speaker Change: I see fairly persistent sticky core inflation nic's fairly strong underlying both employment and macro trends overall.

Bradley Adams: But that being said, I do realize that some do want to talk about one or two more. I think if we get two more, I think you're likely to see us. trend towards kind of a $4.35 to $4.40 margin eventually, but it'll be a slow path to get there. I feel pretty confident that what is to head has us significantly above, you know, the 420 margin level. I just don't see a significant margin contraction overall.

Speaker Change: But that being said I do realize that some do want to talk about one or two more.

Speaker Change: I think if we get to more I think youre likely to see us.

Speaker Change: Trend towards kind of a 435 to $4 40 margin eventually.

Speaker Change: But it'll be a slow path to get there.

Speaker Change: I feel pretty confident that what is the herd has us significantly above the $4 20 margin level.

Speaker Change: <unk>.

Speaker Change: I, just don't see significant margin contraction overall.

Speaker Change: Okay.

Speaker Change: Okay.

Bradley Adams: Brad, if there are no more cuts, something better than 440, then in that... That would be my expectation, yes. Okay.

Speaker Change: Brad.

Speaker Change: There are no more cuts.

Speaker Change: Better than 440, then and that is that.

Speaker Change: That would that would be my expectation yes.

Speaker Change: Yes, one thing to that.

Speaker Change: With the same name as merchants acquisition closed very early in December. So we did not have a full quarter benefit.

Bradley Adams: Merchants acquisition closed very early in December, so we did not have a full quarter of benefits. The Interest Expense Savings on the FHLB bar. Now, we've had some benefit this year. There are some things, obviously, at a level of detail that people don't often see. We had a couple hundred million to receive fixed swaps that matured in 2024, which helped us with margin stability. And by design, we had a ton of bonds that matured through a laddering that allowed us to reinvest at higher rates. It was well-managed, the cash flows were well-planned, and that has contributed to our margin stability that was probably much better than anybody expected.

Speaker Change: Sure.

Interest expense savings hlv borrowers.

Now we've had some benefit this year.

Speaker Change: There are some things obviously at a level of detail that people don't often see.

Speaker Change: We had a couple hundred million dollars in received fixed swaps that matured in 2024, which helped us with margin stability.

Speaker Change: And by design, we had a ton of bonds.

Speaker Change: That mature through a ladder and that allowed us to.

Reinvest at higher rates.

Speaker Change: It was well manage the cash flows were well planned.

Speaker Change: And that has contributed to our margin stability that was probably much better than anybody expected.

Speaker Change: Yeah.

Speaker Change: I appreciate it and then just a follow up on the expense side.

Jeffrey Rulis: appreciate it.

Jeffrey Rulis: And then just to follow up on the expense side, maybe the 4% or 5% growth Is that off of a base of the reported full-year 24, or are you- Yeah, X the merger stuff. X the non-recurring stuff. We try to be pretty transparent with what we call non-recurring. If you X that out, then the core on an operating basis, and I know you can get to this number, is we're targeting a four. And the bulk of that, the bulk of our drift on the expense side is in the employee benefits caption. We are seeing significant increases across those in terms of what our expectations are.

Speaker Change: The 4% or 5% growth.

Speaker Change: Is that off of the base of the reported full year two.

For our U S.

Speaker Change: The X the merger stuff.

Speaker Change: Ex the nonrecurring stuff.

Speaker Change: We tried to be pretty transparent with what we call nonrecurring if you ex that out.

Speaker Change: Then the core on an operating basis and I know you can get to this number as we're targeting a four and the bulk of that the bulk of our drift on the expense side is it in the employee benefits caption. We are seeing significant increases across those in terms of what our expectations or we may do better than that.

Bradley Adams: We may do better than that. We certainly have in the past.

Speaker Change: We certainly have in the past.

Bradley Adams: And I yell at our HR department about it all the time, that they whiff on it in order to look like heroes. But As we sit here today, it looks like there's some significant inflation in that number.

Speaker Change: And I yell at our HR Department about it all the time that they work on it in order to look like heroes.

Speaker Change: But.

Speaker Change: As we sit here today, it looks like Theres, some significant inflation in that number.

Speaker Change: Okay and that way, we've got about I got about 700 HR people on the call right now too. So I know, they're all just rolling their eyes right now.

Jeffrey Rulis: I got about seven HR people on the call right now, too, so I know they're all just rolling their eyes right now. Love it. I guess the 4% potential growth would be inclusive of first merchants on a full quarter basis. That's inclusive of that expectation, right? From an operating expense standpoint, first merchants added about $400,000 in OPEX for the December month that they were with us. Obviously, you know, we didn't get a lot of loans with it. But we do. We don't have to pay for overnight borrowings because the deposits are here. And our funding mix with zero overnight borrowings isn't going to look like this for very long.

Speaker Change: Love It.

Speaker Change: I guess, the 4% potential growth would be inclusive of a FERC merchants on a full quarter basis, that's inclusive of that export tariff rate from them from an operating expense standpoint first merchants added about $400000 in opex for the December month that they were with us.

Speaker Change:

Speaker Change: Obviously, we didn't get a lot of loans with it.

Speaker Change: But we do.

Speaker Change: We don't have to pay for overnight borrowings because of the deposits are here and our funding mix with zero overnight borrowings isn't going to look like this for very long.

Bradley Adams: Something will happen. Balance sheets will be managed and whatnot. But that's as we sit here today in terms of what the impacts are. Not yet.

Speaker Change: Something will happen.

Speaker Change: Balance sheets will be managed and whatnot, but.

Speaker Change: Thats as we sit here today in terms of what the impacts are.

Speaker Change: Okay. Okay. Thank you.

Jeffrey Rulis: Okay, thank you.

Speaker Change: Your next question is coming from Chris Mcgratty with <unk>. Please pose your question your line is live.

Christopher McGratty: Your next question is coming from Chris McGratty with KBW. Please pose your question, your line is live.

Speaker Change: Thanks, Chris has left the queue. Your next question is coming from Nathan race with Piper Sandler.

Nathan Race: Your next question is coming from Nathan Race with Piper Sander. Please pose your question. Your line is live.

Speaker Change: Please pose your question your line is live.

Nathan Race: Hey, guys. Good morning. Hope you're doing well. Good morning, Nate. Brad, maybe you could just help us a little more so on the margin front. As you guys absorb the full impact of 100 basis points of rate cuts in the fourth quarter, what's kind of a good starting point for the margin in 1Q? And if the FRED remains on pause, can you just update us on kind of the cadence from there, or if we maybe get one cut in July, how that would impact? Uh, I feel like... kind of 462s where we sit right now.

Nathan: Hey, guys. Good morning, we're doing well.

Speaker Change: Alright.

Speaker Change: Brian maybe you can just help us a little more.

Speaker Change: So on the margin front, maybe just.

Speaker Change: As you guys absorbed the full impact of a 100 basis points of rate cuts in the fourth quarter, what's kind of a good starting point for the margin in <unk> and if the fed remains on pause can you just update us on kind of the cadence from there or if we maybe got one cut in July and how that would impact.

Speaker Change: I feel like.

Speaker Change: Kind of $4 60, twos, where we sit right now.

Bradley Adams: And if the Fed cuts in July, that'll shave seven. We'll bleed down two or three in order of the time to get there. I feel like we'll bleed down two to three per quarter and an additional rate cut would take out about seven. So the biggest impact for us, because we're so short duration, and this is what makes margin guidance so difficult, is because whoever it is that's pouring money around on Fed Fund futures and its impact on SOFR. You know, SOFR can move and has moved 100 basis points inch per quarter at the short end.

Speaker Change: And if the fed cuts in July that'll shape, seven will bleed down two or three.

Speaker Change: And in order to time to get there.

Speaker Change: Yes.

Speaker Change: I feel like will bleed down 2% to three per quarter and an additional rate cut would take out about 7%.

Speaker Change: So the biggest impact for us because we're so short duration and this is what makes margin guidance so difficult is because.

Speaker Change: Whoever is it's pouring money around on fed fund futures and its impact on.

Speaker Change: On sofa.

Speaker Change: So if we can move and has moved 100 basis points intra quarter on the short end.

Bradley Adams: That's going to move our loan yields around, and I don't know when that's going to happen. It's rational now, and what I'm talking about now in terms of bleeding out 2 to 3 per quarter and then 7 basis points on a Fed rate cut, it assumes there's no schizophrenia in terms of SOFR or OIS rates. But obviously they happen. And it's not really fair to say, Brad, you're an idiot. You're wildly wrong. when those rates jump around 100 basis points since I last said so. So, right now, as I said, there's a fair amount of rationality in terms of what interest rate futures are.

Speaker Change: That's going to move our loan yields around and I don't know when thats going to happen it's rational now.

Speaker Change: And what I'm talking about now in terms of bleeding out two to three per quarter, and then seven basis points on a fed rate cut it assumes there's no schizophrenia in terms of so for OIS rates.

Speaker Change: But obviously they happen and it's not really fair to say, Brad you're an idiot youre wildly wrong.

Speaker Change: When when those rates jump around a 100 basis points and sell assets.

Speaker Change: So right now as I said there is there is a fair amount of rationality in terms of what.

Speaker Change: Interest rate futures are.

Nathan Race: And that both makes me feel better and less crazy and also gives me a little bit more confidence in terms of directing people for what 2025 can look like. Okay, gotcha. And just to clarify, are you suggesting you're at 462 coming out of the fourth quarter? Because I think you guys posted 468 and 4Q. I'm feeling like if you asked me what margin was going to be in the first quarter, which is what I thought you were doing, I would guess it's going to be 462. Okay, gotcha. Thanks for clarifying. And, you know, just within that context, you know, you're thinking mid-single digit growth this year.

Speaker Change: And that both makes me feel better and less crazy.

Speaker Change: And also gives me a little bit more confidence in terms of directing people for what 2025 can look like.

Speaker Change: Okay got it and just to clarify are you, suggesting you were at $4 62 coming out of the fourth quarter, because I think you guys posted 468 and <unk>.

Speaker Change: I am feeling like if you asked me what margin was going to be in the first quarter, which is what I thought you were doing I would guess, it's going to be $4 62.

Speaker Change: Okay got it.

Speaker Change: Thanks for clarifying.

Speaker Change: Just within that context.

Speaker Change: Youre thinking mid single digit growth. This year. So can you just update us in terms of how much casualty of coming off the bond book to fund that and to the extent maybe there is a shortfall kind of what's your deposit gathering aspirations are in 2025.

Bradley Adams: So can you just update us in terms of how much cash flow you have coming off the bond book to fund that and to the extent maybe there's a shortfall, kind of what your deposit gathering aspirations are in 2025? Bond portfolio, we'll probably get about $250 million off of it this year, which would entirely fund loan growth if we so elected. That being said, there have been times over the last six months where bond portfolio yields and the type of assets you can get have been exceptionally attractive. We have picked at things whenever investors, if you recall, middle of 2024, investors were throwing up variable rate securities, and the value in them was tremendous.

Speaker Change: Bond portfolio will probably get about $250 million off of it this year.

Speaker Change: Which would entirely fund loan growth if we sell elected that.

Speaker Change: That being said there had been times over the last six months, where bond portfolio yields.

Speaker Change: And the type of assets you can get have been exceptionally attractive.

Speaker Change: We have picked it things when whenever investors. If you recall middle of 2020 for investors, we're throwing up variable rate securities and the value of them was tremendous.

Bradley Adams: And that's really the last thing that I wanted to be doing. You know, you take what's out there and it's worked out very well. I would like for duration to be more attractive than variable, but it hasn't been. It's slightly better today than it has been over the entirety of 2024. I would say that When you've got some stability in rates, our bias is towards more asset growth than not. So I... I would be interested in even supplementing loan growth with loan purchases if there's value out there. We got a lot left. We've got a lot of flexibility, we've got a lot of capital, our balance sheet's in very good shape, and we've got a lot of cash coming.

And Thats really the last thing that I wanted to be doing but.

Speaker Change: And if you take what's out there.

Speaker Change: And it's worked out very well.

Speaker Change: I would like for duration to be more attractive than variable, but it hasnt been it.

Speaker Change: Slightly better today than it has been over the entirety of 2024.

Speaker Change: I would say that.

Speaker Change: When you're when you've got some stability in rates, our bias is towards more asset growth and not.

Speaker Change: So I.

Speaker Change: I would be interested in even supplementing loan growth with loan purchases, if theres value out there.

Speaker Change: <unk>.

Speaker Change: We got a lot of levers we've got a lot of flexibility we've got a lot of capital.

Speaker Change: Our balance sheet in very good shape.

Speaker Change: And we got a lot of cash coming at us.

Speaker Change: And we're making a lot of money.

Bradley Adams: And we're making a lot of money.

Bradley Adams: So things are pretty good. Right.

Speaker Change: So things are pretty good.

Speaker Change: Right, Yes, and speaking of all of that capital is building has built and will continue to build would be curious to get your updated thoughts on what youre seeing in the M&A environment. These days.

Nathan Race: And speaking of all that capital that's building or has built and will continue to build, we'd be curious to get your updated thoughts on what you're seeing in the M&A environment these days. And, you know, if you're feeling maybe less optimistic on that front, maybe what it would take for you guys to re-engage on share repurchases. Yeah, Nate, all we can say around that is... Discussions are active and ongoing. In terms of buyback, I'm not all that price sensitive. When you're earning at the levels we are and at the relative valuations, there's nothing that would preclude a buyback at these levels.

Speaker Change: If you are feeling maybe less optimistic on that front, maybe what it would take for you guys to re engage in share repurchases.

Speaker Change: Yes.

Speaker Change: Say around that is.

Speaker Change: Discussions are active and ongoing.

Speaker Change: In terms of buyback.

Speaker Change: I am not all that price sensitive.

Speaker Change: When when you're earning at the levels, we are in at the relative valuations.

Theres nothing that would preclude a buyback at these levels.

Nathan Race: Okay, I appreciate all the color.

Okay I appreciate all the color thanks, guys. Thanks, Craig.

David Long: Thanks guys.

Speaker Change: Your next question is coming from David long with Raymond James. Please pose your question. Your line is live.

David Long: Your next question is coming from David Long with Raymond James. Please pose your question.

David Long: Your line is live.

Speaker Change: Good morning, everyone.

David Long: Good morning, everyone. Just wanted to go back to the expenses. Just as you're thinking about 2025, I want to make sure we're clear here on the expectation. You know, you're at $42.8 million, maybe $1.8 million added to the OREOs, you're at $41 million. If you add in a full quarter of first merchants, that comes up again, closer to 42. Is that the number we're looking at the growth based on? Or is it simply the number for the year that you posted that number talking 4%? It's the number for the year X, the merger related and the OREO.

David Long: Just wanted to go back to the expenses just as Youre thinking about 2025, we want to make sure we're clear here on the expectation.

David Long: You're at $42 $8 million, maybe $1 8 million of added to the Oriels here at $41 million, if you add in our fourth quarter.

David Long: First merchants that comes up again closer to 42 is that the number we're looking at the growth based on or is it simply the number for the year that you pulled that number 4% its.

David Long: It's the number for the year ex the merger related and the Oreo.

Speaker Change: Okay, Great. That's very clear. Thank you Brett and then the other thing I wanted to ask about was just you talked about the strategic focus on building commercial banking capabilities and trying to take advantage of opportunities.

David Long: Okay, great. That's, that's very clear.

David Long: Thank you, Brad. And then the other thing I wanted to ask about was just, you talked about the strategic focus on building commercial banking capabilities and trying to take advantage of opportunities. You know, as you look into 2025, do you see further investments in any specialty lines? Or is it your core CNI? And what is your appetite to add veteran bankers to take advantage of some opportunities? Yeah, Dave, obviously we were pulled back on growth in 2004 with the yield curve such that it was, just did not find risk-adjusted spread that made a whole lot of sense for us.

Speaker Change: As you look into 2025 do you see further investments in any specialty lines or is it your core C&I and what is your appetite to add veteran bankers to take advantage of some opportunities.

Speaker Change: Yes, obviously.

Speaker Change: We were we will pull back on.

Speaker Change: Growth in 'twenty four with the yield curve is such that it was just did not find risk adjusted spreads and they had a whole lot of SaaS for us.

David Long: We do believe things are definitely getting better. Pricing Front, we're seeing more... Pipeline, Build, Sync. Commercial Real Estate, which We were very careful and prudent not to grow last year. We feel we have the internal capability to be a mid-single-digit grower. Having said that, we are always open in budget for new talent. and the commercial bank, whether it be a team or some one-off individual producer. feels like this is going to be a better year based on. Discussions and early pipeline indications, and I'm confident in the team that we can get there. Got it. Thanks a lot, Jim.

Speaker Change: We do believe things are definitely getting better.

Speaker Change: Pricing front, we're seeing more active pipeline build.

Speaker Change: <unk> and commercial real estate, which we were.

Speaker Change: We were very careful and prudent not to grow last year, we feel we have the internal capability to be a mid single digit grower.

Having said that we are we are always open and budget for new talent and.

Speaker Change: In the commercial bank, whether it be a team or some one off individual producers so.

Speaker Change: It feels like this is going to be a better year based on.

Speaker Change: Discussions and early pipeline indications.

After the team that we can get there this year.

Speaker Change: Got it thanks, a lot Jim I appreciate taking the questions.

David Long: Appreciate taking the questions.

Thanks, Dave.

Terence McEvoy: Your next question is coming from Terry McEvoy with Stephens Inc.

Speaker Change: Next question is coming from Terry Mcevoy with Stephens, Inc. Please pose your question your line is live.

Brandon Rood: Please close your question, your line is live.

Hi, This is Brandon on for Terry.

Brandon Rood: Hi, this is Brandon Rood on for Terry. I just have two questions on credit quick. I guess, do you have the industry for the C&I charge off? And then two, the $19.4 million Oreo under contract, did you say you do not expect any other expenses related to that? Yeah, I guess I'll take the Oreo one first. We positioned a couple larger properties for sale with these with these valuation write downs. We remain very confident. Those will sell in the first quarter. So we don't see any further write-downs there.

Speaker Change: I have two.

Speaker Change: Two questions on credit quick I guess.

Speaker Change: As the industry for the C&I charge offs and then too.

Speaker Change: The <unk>.

Speaker Change: Nine.

Speaker Change: 19.

Speaker Change: Our million Oreo under contract did you say there.

Speaker Change: Do not expect any other expenses related to that.

Speaker Change: Yes, I guess I'll take the <unk>, one first we position.

Speaker Change: A couple of larger properties for sale with these with these valuation write downs.

Speaker Change: We remain very confident.

Speaker Change: Those will those will sell in the first quarter. So we don't see any further write downs there.

James Eccher: As it relates to the C&I credit. Brandon, I need to be a little careful here, we're in the middle of a legal... process. You know, all I can say is... Credit Gets Into a Bankruptcy Situation There's a lot of twists and turns that can happen. I can't really get into the industry, but I can tell you the industry is not something that Old Second has a meaningful concentration in at all. something that we are not focused on growing.

Speaker Change: As it relates to the C&I credit.

Speaker Change: Brandon I need to be a little careful here, we're in the middle of a legal.

Speaker Change: Process.

Speaker Change: All I can say is with.

Speaker Change: Credit gets into a bankruptcy situation, there's a lot of twists and turns that could happen.

Speaker Change: I can't really get into the industry, but I can tell you.

Speaker Change: The industry is not something that old second has a meaningful concentration at all and factors.

Speaker Change: Something that we are not focused on growing.

Speaker Change: That's about all I can say on that on that credit at this point.

James Eccher: That's about all I can say on that credit at this point.

Speaker Change: Okay. Thank.

Brandon Rood: Thank you.

Speaker Change: Thank you and then just my last one can you talk about the competition Youre seeing in your markets from maybe specifically as the larger banks and any impact that's having on loan spreads.

James Eccher: And just my last one, can you talk about the competition you're seeing in your markets from maybe specifically the larger banks and any impact that's having on loan spreads? You know, it's the typical banks, Chicago banks, that we compete with. That environment hasn't really changed. You know, we made a decision last year, really. not to book loans at lower yields. We think now with the curve. Getting more normalized, we'll see better opportunities. So it wasn't a function of lack of looks for us. It was just our decision not to. And you look at that, right?

Speaker Change: That's a typical bank Chicago banks that we compete with that environment hasn't hasn't really changed.

Speaker Change: We've just we made a decision last year really.

Speaker Change: Not to not to book loans.

Speaker Change: Lower lower yields we think now with the curve.

Speaker Change: Getting more normalized we will see better opportunities. So it wasn't a function of lack of works for us It was our decision not.

Speaker Change: To pursue lower yielding credits and you look at that right. I mean that was the period, where we're curves took a dive because.

James Eccher: I mean, that was the period where curbs took a dive because, you know, it was going to be eight rate cuts in 2024 and more in 2025. What that did on interest rate curves is it meant you weren't getting paid for risk. That doesn't appear to be the constraint as we head into 2025, which obviously feels a lot better in terms of growing a balance.

Speaker Change: It was going to be.

Speaker Change: Eight rate cuts in 2024 and more in 2025.

Speaker Change: What that did on interest rate curves as it means you werent getting paid for risk.

Speaker Change: <unk>.

Speaker Change: And.

Speaker Change: That doesn't appear to be the constraint as we head into 2025, which obviously feels a lot better in terms of growing our balance sheet.

Speaker Change: Sure.

Speaker Change: Gotcha.

Brandon Rood: Gotcha.

Brandon Rood: I appreciate you taking my questions.

Speaker Change: Thank you taking my questions. Thanks.

Brandon Rood: Thanks.

Speaker Change: Yes.

Speaker Change: Your next question is from Chris Mcgratty with <unk>. Please proceed your question your line is live.

Christopher McGratty: Your next question is from Chris McGratty with KBW. Please post your question. Your line is live. Oh, great. Brad, just come back to NII for a minute. You've been running that kind of 60 to 62, a quarter. It feels like kind of that's about right, based on what you're saying, absent like a loan purchase or something, you know, stronger or longer. Is that kind of how you're thinking about it? That is how I'm thinking about it, but I wanted to throw that out there that that may occur. And I guess what type of assets would you be most interested in.

Speaker Change: Oh great.

Brad Adams: Brad just going back to NII for a minute.

Brad Adams: You've been running that kind of stuff.

Speaker Change: 60 to 60.

Brad Adams: <unk> 62 a quarter.

Brad Adams: Sure.

Brad Adams: It feels like kind of Thats about right based on what you are saying.

Brad Adams: Absent like a loan purchase or something stronger loan growth does that does that.

Brad Adams: How you are thinking about it.

Brad Adams: It's Alan I'm thinking about it but I wanted to throw that out there that that may occur.

Brad Adams: Okay.

Speaker Change: And I guess, what type of assets would you.

Brad Adams: The most interested in.

Brad Adams: <unk> looked at a few things already.

Bradley Adams: I mean, I've looked at a few things already. you know. Life equity loans are certainly an option. Some classes of consumer assets are certainly an option. Not really interested in commercial real estate. If there's participations that can make sense in C&I, we would look at that, but that comes with full economics and an opportunity at some treasury management as well. And you don't typically get that on the participation side of things. So I'd say it's largely going to be one-offs. I don't know in general what asset class it would be yet, but I would tell you that I would buy...

Brad Adams: No.

Brad Adams: Life equity loans are certainly an option.

Brad Adams: Some classes of consumer assets are certainly an option not really interested in commercial real estate.

Brad Adams: If there is participations that can make sense in C&I, we would look at that but that comes with full economics and an opportunity at some treasury management as well.

Brad Adams: You don't typically get that on the participation side of things so.

Brad Adams: I'd say, it's largely going to be one off I don't know in general what asset class it would be but I would tell you that I would buy.

Brad Adams: If they were in our markets I would buy five one jumbo arms right now today.

Bradley Adams: If they were in our markets, I would buy 5'1 Jumbo Arms right now, today. So we can turn up that origination internally as well, get more competitive on that rate, and put that on the sheet. There's a lot of asset options right now. I feel pretty good about that.

Brad Adams: <unk>.

Brad Adams: So what we can turn off that origination internally as well to get more competitive on that rate and put that on the sheet.

Brad Adams: There's a lot of asset options right now I feel pretty good about that.

Brad Adams: Okay.

Jim: And then maybe Jim.

James Eccher: And maybe, Jim, you guys talked about M&A a little bit, any more color you could provide, you know, public versus private preference, any difference in pricing, and also... No, I mean, you know, our buy-in... Any changes in the conversation? Now, you know, investors should know that our criteria is is is rational, at least I like to think we're rational. There's a certain level of accretion that's required, there's a bias against credit risk, there is a size that I feel like most investors know what we're interested in, and we're not looking to reinvent who we are.

Brad Adams: You guys talked about M&A a little bit.

Brad Adams: Any more color you could provide public versus private preference any any difference in pricing.

R J.

Brad Adams: And those conversations okay.

Brad Adams: Investors should know that our criteria is rational at least I would like to think we're rational.

Brad Adams: <unk>.

Brad Adams: There is a certain level of accretion that's required.

Brad Adams: There is a bias against credit risk.

Brad Adams: There is a size that I feel like most investors know what we're interested in.

Brad Adams: And we're not looking to reinvent who we are.

Brad Adams: So.

James Eccher: all that kind of. He draws a pretty well-defined box for people, I think.

Brad Adams: All of that kind of.

Speaker Change: Charles a pretty well defined box for people I think.

Brad Adams: How would you I mean would.

James Eccher: How would you, I mean, would you use some of the, would you throw a piece of cash in there just to lever the capital? Absolutely. That's why a big part of the, you know, we talked about why we built capital, certainly because the cost to carry it is as low as it's ever been for the last 18 months or so. So there's no real cost for the optionality. And M&A in this environment is driven by, do you have access to cash and capital? And a lot of people don't. I'm not really interested in, you know, concurrent equity raises and that sort of M&A.

Would you use some of the would you draw piece of cash and that is the lever that can absolutely absolutely. That's why that's why a.

Brad Adams: A big part of it we've talked about why we built capital certainly because the cost to carry it as low as it's ever been for the last 18 months or so.

Brad Adams: So theres no real cost for the Optionality.

Brad Adams: And M&A in this environment is driven by do you have access to cash and capital and a lot of people don't.

Brad Adams: I'm not really interested in <unk>.

Brad Adams: Concurrent equity raises and that sort of M&A.

Brad Adams: That kind of negates everything that we've done well over the last few years.

Brian Martin: That kind of negates everything that we've done well over the last few years. I feel like we're in a great spot. All right, thank you.

Brad Adams: I feel like we're in a great spot.

Brad Adams: Alright, thank you.

Your next question is coming from Brian Martin with Janney Montgomery Scott. Please pose your question your line is live.

Brian Martin: Your next question is coming from Brian Martin with Janie Montgomery Scott. Please pose your question. Your line is live. Hey, guys. Good morning.

Brian Martin: Hey, guys good morning.

Speaker Change: Hey, Brian.

Brian Martin: Hey Brad, just so we're clear on, just last thing on M&A Simple is, in terms of size, just can you give, you know, in terms of just being clear on, you know, is it more of a smaller variety, larger, I guess, can you give any sense on that, or if you have, you know, maybe I've missed it in the past, on general comments. I mean, we'd love to buy JP Morgan, but I don't think we can afford it. You know, something bigger than $500 million, something less than $4 billion. That's it. Okay. And then thank you for that.

Brian Martin: Brad just so we're clear on I, just lastly on M&A have boys in terms of size can you give us in terms of just being clear on is it more of a smaller variety larger I guess can you give any sense on that or if you have that.

Speaker Change: Missed it in the past and general comments.

Speaker Change: I mean, we'd love to buy JP Morgan, but I don't think we can afford it.

Speaker Change: Now something bigger than $500 million, Samsung Samsung less than $4 million.

Speaker Change: Got it Okay and then thank you for that and then just two clarifications on that on the margin outlook, Brad I think if you kind of where you're at today versus when you trend. It sounds like you. If you said it earlier.

Brian Martin: And then just the two clarifications on the margin outlook, Brad, I think if you kind of, where you're at today versus where you trend, it sounds like you, if you said it earlier, maybe getting below, if you have that, you know, basis point decline a quarter, and then the potential rate, you know, impact in mid-year, it's kind of a band of maybe 440 to 450 is kind of where you shake out depending on, you know, how things transpire. Is that kind of seeing big picture? And if that's right, then just how do you do better than that?

Speaker Change: Maybe getting below if you have that basis point decline in the quarter and then the potential rate impact in midyear, it's kind of a band of maybe $4 40 to $4 50 is kind of where you shake out depending on how things transpire or is that kind of seen big picture and if that's right. Then just how do you do better than that or I guess can you.

Brian Martin: Or I guess, can you just give a thought on if you don't get, if you get the right cut and you have all that happen, you know, are you able to do better than that? Brian, we will do better than that if nothing changes. If we stay right where we are today in terms of the interest rate curve, we will do substantially better. Okay, and that's even with the rate cut in mid-year. I mean, yeah. Yep, okay. Gotcha.

Speaker Change: Just give a thought on.

Speaker Change: If you don't get if you get the rate cut and you have all of that happen.

Speaker Change: Are you able to do better than that or Bryan Bryan Bryan. We will do we will do better than that if nothing changes if we stay right where we are.

Speaker Change: We are today in terms of the interest rate curve, we will do substantially better than that.

Speaker Change: Okay, and thats, even with the rate cut in mid year.

Speaker Change: <unk>.

Speaker Change: Yes, yes, okay.

Speaker Change: Got you and then in terms of the.

James Eccher: And then in terms of the, just the credit improvement, you know, I think you talked about, kind of, you know, maybe Jim, in your prepared remarks, just can you give some sense for how we should think about, you know, what type of improvement on the credit front could we see here early in the year? And then just, you know, potential risk on, you know, any notable losses that you would expect going forward. It sounds like there's still one on that, a little bit of potential on that C&I credit, but outside of that, nothing meaningful on the loss side, as we look into?

Speaker Change: The credit improvement I think you talked about kind of.

Speaker Change: Jim in your prepared remarks can you give some sense for how we should think about what type of improvement on the credit front could we see here early in the year and then just potential risk on.

Speaker Change: Any.

Speaker Change: Notable losses that you would expect going forward it sounds like Theres still want on that little bit of potential in that C&I credit, but outside of that nothing meaningful on the on the loss side as we look into.

James Eccher: Yeah, I mean, you know, Brian, we worked hard this year, and fortunately, we've got the income and profitability to be aggressive in dealing with some of the Obviously, we're pleased with the progress we've made, you know, non-accrual loans. We're down 47% just this quarter. I think down over... We think we've positioned a couple of large... Oreo properties for sale this quarter, that would be a meaningful improvement to our NPAs. And then, you know, I think what's also important, that early stage bucket, that special mention category, that's down... you know, 50% from. last quarter. We think the balance sheet's in great shape.

Speaker Change: Brian We worked hard this year and Fortunately, we've got the income.

Speaker Change: <unk> ability to be aggressive in dealing with some of these.

Speaker Change: We're pleased with the progress we've made.

Speaker Change: Nonaccrual walls.

Speaker Change: We're down 47% just this quarter I think dollars, 60% for the year, we think we position a couple of large.

Speaker Change: Oreo properties for sale this quarter that would be a meaningful improvement to our tour npa's.

Speaker Change: Then I think what's also important that early stage bucket that special mention category that's down.

Speaker Change: 50% from.

Speaker Change: Just last quarter or so.

Speaker Change: We think the balance sheet is in great shape.

James Eccher: We don't see any red flags at this point outside of this Bancorp. credit that we're dealing with. I think we're positioned. for a very strong year at the credit. Okay, so really just the the reduction from here is kind of looking at that Oreo number seeing that you know move down is kind of where you get the improvement and you know outside of that it's just you know nothing new coming aboard. Right. Healthcare looks a lot better. Office has largely been dealt with as far as we can tell. We've strengthened a lot of commercial real estate credits over this year.

Speaker Change: C a R.

Speaker Change: Red flags at this point outside of this bankruptcy credit that we're dealing with.

Speaker Change: I think were positioned.

Speaker Change: For a very strong year on the credit front next year.

Speaker Change: Okay. So really just the reduction from here kind of looking at that Oreo number seeing that move down is kind of where you get the improvement in outside of that it's just nothing new coming aboard.

Speaker Change: Right.

Speaker Change: Healthcare looks a lot better office has largely been dealt with as far as we can tell.

Speaker Change: We've strengthened a lot of commercial real estate credits over this year.

James Eccher: So it's not just the headlines and stuff like that. There's been a whole lot of just improvement through negotiations with borrowers in terms of our credit position across the portfolio this year. We've done a nice job. Yep, agreed.

Speaker Change: Not just the headlines and stuff like that there has been a whole lot of Av.

Speaker Change: Improvement through negotiations with borrowers in terms of our credit position across the portfolio. This year, we've done a nice job.

Speaker Change: Yes.

Speaker Change: Yes agreed okay. That's all I had guys. Thanks for taking the questions.

Brian Martin: Okay, that's all I had, guys. Thanks for taking the questions.

Speaker Change: Yes, correct.

Your next question is coming from Kevin Ross with Black Maple capital. Please pose your question your line is live.

Kevin Roth: Your next question is coming from Kevin Roth with Black Maple Capital. Please post your question, your line is live. Hey guys, Happy New Year. With regard to originations, has the thinking changed at all with regards to geography? In other words, are you still trying to focus primarily on the Midwest and your footprints in terms of originations and trying to avoid going out of market? I mean, if you could just talk a little bit about that. They'd be great, thanks. focus, sponsored finance, and healthcare come up, just to name a couple. And so we've kept a pretty wide net where those opportunities make sense.

Kevin Ross: Hey, guys happy new year.

Kevin Ross: Just with regard to originations.

Kevin Ross: Has the thinking changed at all with regards to geography in other words are you.

Kevin Ross: Still trying to focus primarily on the Midwest your footprints in terms of originations.

Kevin Ross: Trying to avoid going out of market I mean, if you just talk a little bit about that.

Kevin Ross: That'd be great. Thanks, Yeah.

Kevin Ross: Kevin Thanks for the thanks for the call. The question, we primarily focused in the Chicago MSA although.

Kevin Ross: We do have a couple of.

Kevin Ross: Lending verticals that are that are nationwide.

Kevin Ross: Focus sponsored finance and health care come up just to name a couple.

Kevin Ross: So we've cast a pretty wide net where those opportunities make sense.

Kevin Ross: Like I said I think.

Kevin Roth: that I think this will be a much better year, spreads are more favorable. It just feels like, you know, based on active discussions we're having. with our borrowers at...

I think this will be a much better year.

Kevin Ross: Spreads are more favorable.

Kevin Ross: Just.

Kevin Ross: Just feels like based on active discussions, we're having with them.

Kevin Ross: With our borrowers.

Kevin Ross: Demand will improve this year.

Speaker Change: Yeah, and I'd just add the reason I asked the question as you know.

James Eccher: Yeah, the reason I ask the question is, you know, the risk profile of markets like California and Florida, just as an example, I mean, seem to be going up, you know, driven by, you know, insurance premiums amongst other factors. So I don't know how that's playing into your underwriting. Oh, absolutely. We pay close attention to that. Yeah, I can give you an example, health care is, you know, is an area that we had prior to the pandemic done. done some assisted living and skilled nursing in those markets we pulled back. is a fair point and something we monitor very closely.

Kevin Ross: But the risk profile of <unk>.

Kevin Ross: Markets like California, and Florida, just as an example, I mean seem to be going up.

Kevin Ross: Driven by.

Kevin Ross: Insurance premiums.

Other factors, so I don't know how thats.

Kevin Ross: Playing into your Youre underwriting so absolutely.

Kevin Ross: Close attention to that I can give you an example health carriers.

Kevin Ross: It is an area that we had prior to the pandemic done.

Kevin Ross: Does some assisted living and skilled nursing and in those markets pulled back.

Kevin Ross: Dramatically.

Kevin Ross: Looking at opportunities in those markets. So.

Kevin Ross: Thats Fair, a fair point and something we monitor very closely.

Kevin Ross: Alright, experiencing healthcare lending in California wasn't great.

James Eccher: Our experience in California wasn't great, we certainly aren't immune from learning from that. Right, right. Okay, well thanks guys, appreciate the comments.

Kevin Ross: We aren't immune from learning from that.

Right right.

Kevin Ross: Okay, well, thanks, guys I appreciate the comments thanks, Joe.

Kevin Ross: Once again, if you do you have any remaining questions or comments. Please press star one on your phone at this time.

Operator: Once again, if you do have any remaining questions or comments, please press star 1 on your phone at this time.

Nathan Race: Your next question is coming from Nathan Race with Piper Sander. Please pose your question. Your line is live.

Speaker Change: Next question is coming from Nathan race with Piper Sandler. Please pose your question your line is live.

Nathan Race: Yeah, thanks for taking the follow-up. Just going back to one of Brian's earlier questions, you know, just thinking about, you know, kind of what's the realistic charge-off range for this year. You guys have obviously done a lot of heavy lifting in terms of de-risking the loan portfolio last year or so and, you know, exiting some suboptimal credits from the acquisition.

Kevin Ross: Yes, thanks for taking the follow up just going back to one of Brian's earlier questions.

Kevin Ross: Thinking about kind of what's the realistic charge off range for.

Kevin Ross: This year you guys have obviously done a lot of heavy lifting in terms of derisking the loan portfolio last year, or so and you know.

Kevin Ross: Exiting some suboptimal credits from the acquisition. So just curious if you have any thoughts on kind of what's a realistic charge off range for 2025.

James Eccher: So just curious if you have any thoughts on kind of what's a realistic charge-off range for 2025 and beyond. A lot less than this year. You know, if I had to best guess... 10 to 20 basis points, maybe, in 25. I hope we do better. I think you have to go by how we calculate reserves. We don't really have a lot of specific reserves left. There's nothing that's really spooking us right now. That's helpful.

Kevin Ross: A lot less of this year.

Kevin Ross: If I had the best guess.

Kevin Ross: And the 10 to 20 basis points, maybe in 'twenty five.

Kevin Ross: I hope, we do better.

Kevin Ross: I think you have to go by how we calculate reserves, we don't really have a lot of specific reserves left theres nothing thats really spook on us right now.

Kevin Ross: Okay. That's helpful. Thanks, guys.

Operator: Thanks guys. There are no additional questions in queue at this time.

Nick: Thanks, Nick.

Speaker Change: There are no additional questions in queue at this time I would now like to turn the floor back over to Jim <unk> for any closing remarks.

James Eccher: I would now like to turn the floor back over to Jim Ecker for any closing remarks. Okay, thanks everyone for joining us this morning. We look forward to speaking with you again next quarter.

Nick: Okay. Thanks to everyone for joining us. This morning, we look forward to speaking with you again.

Speaker Change: Next quarter Goodbye.

Operator: Goodbye. Thank you everyone. This does conclude today's conference call.

Speaker Change: Thank you everyone. 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: You may disconnect your phone lines at this time and have a wonderful day. Thank you for your participation.