Old Second Bancorp Q4 2024 Earnings Call Transcript

Quartr
Provided by Quartr
January 23, 2025
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Operator

Good morning, everyone, and thank you for joining us today for Old Second Bancorp, Inc. 4th Quarter 2024 Earnings Call. On the call today are Jim Eckers, the company's Chairman, President and CEO Brad Adams, the company's COO and CFO and Gary Collins, the Vice Chairman of our Board. I will start with a reminder that Old Second's comments today will contain forward looking statements about the company's business, strategies and prospects, which are based on management's existing expectations in the current economic environment. These statements are not a guarantee of future performance and results may differ materially from those projected.

Operator

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. 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 dotcom on the homepage and under the Investor Relations tab. Now, I will turn it over to Jim Ecker.

Operator

Please go ahead.

James Eccher
James Eccher
President, CEO & Chairman of the Board at Old Second Bancorp

Good morning, everyone, and thank you for joining us this morning. I have several prepared opening remarks and give my overview of the quarter and then turn it over to Brad for additional details. I will then conclude with certain summary comments and thoughts about the future before we open it up for questions. Net income was $19,100,000 or $0.42 per diluted share in the Q4 of 2024 and return on assets was 1.34%. Q4 2024 return on average tangible common equity was 13.79 percent and the tax equivalent efficiency ratio was 54.61%.

James Eccher
James Eccher
President, CEO & Chairman of the Board at Old Second Bancorp

4th quarter 2024 earnings were significantly impacted by several items. First was a $3,500,000 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 $1,700,000 in OREO write downs or $0.03 per diluted share. And lastly, a $1,500,000 merger related expense or just shy of $0.03 per diluted share. However, despite all this, profitability 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 Merchants Cash acquisition in the Q4 of 2024.

James Eccher
James Eccher
President, CEO & Chairman of the Board at Old Second Bancorp

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 4th quarter, and we feel very good both about profitability and our balance sheet positioning at this point. Our financials continue to reflect a strong and stable net interest margin, even as market interest rates decline. Pre provision net revenues remained stable and exceptionally strong. For the Q4 of 2024 compared to the prior year like period, income on average earning assets increased $1,600,000 or 2.1 percent, while interest expense on average interest bearing liabilities increased $1,200,000 or 9.9 percent.

James Eccher
James Eccher
President, CEO & Chairman of the Board at Old Second Bancorp

The increase in interest expense is rate driven and primarily due to remixing market pricing on certain commercial deposits. The Q4 of 2024 reflected a slight decrease in total loans of $9,700,000 from the prior linked quarter end, primarily due to some large paydowns in commercial real estate owner occupied and multifamily portfolios during the quarter. Comparatively, loan growth in the Q3 of 2024 was 14,500,000 dollars and loan growth for the prior year Q4 was $13,400,000 The historical trend for our bank is loan growth in the 2nd 3rd quarters of the year due to seasonal construction and business activities. 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 Q4 20 24 election results and any further rate reductions play out over the coming 3 to 6 months. Tax equivalent net interest margin increased by 4 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 5 branch purchase from First Merchants in early 2024.

James Eccher
James Eccher
President, CEO & Chairman of the Board at Old Second Bancorp

Loan yields reflected a 12 basis point decrease during the 4th quarter compared to the linked quarter, but a 16 basis point increase year over year. Funding costs decreased primarily due to approximately $267,000,000 of deposits acquired from First Merchants, 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 net interest margin was 4.68 percent for the 4th quarter of 2024 compared to 4.64 percent for the Q3 of 2024 and 4.62% in the Q4 of 2023. 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.

James Eccher
James Eccher
President, CEO & Chairman of the Board at Old Second Bancorp

It's at 84% as of December 31, 2024 compared to 89% last quarter and 88% as of December 31, 2023. 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. In terms of credit, this is a mixed quarter with both some good news and bad news. The bad news first, We recorded an $8,600,000 charge off on a C and I loan that was downgraded last quarter. Based on audited financials, collateral field audits and bankruptcy declarations, we believe we are in much better position on this credit.

James Eccher
James Eccher
President, CEO & Chairman of the Board at Old Second Bancorp

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 and recovery at this point, but additional loss is possible as more facts come to light. We will continue to actively monitor this matter and take actions to best protect our interest. We also recorded a $1,700,000 in OREO valuation expense in the quarter.

James Eccher
James Eccher
President, CEO & Chairman of the Board at Old Second Bancorp

These represent charges below recent appraisals to immediately and contractually clear 2 properties from our books soon. These are loans that have been identified long ago and have been worked their way through the resolution process. A $16,400,000 commercial real estate loan was foreclosed on in the 4th quarter. Notably, no loss is expected, and the property is under contract for a 1st quarter sale with significant earnest money already received. We remain optimistic this asset will sell and clear the next few weeks.

James Eccher
James Eccher
President, CEO & Chairman of the Board at Old Second Bancorp

And now for the good news. Substandard and criticized loans decreased significantly in the 4th quarter. These balances now total $129,900,000 and decreased by 31% or $58,000,000 from last quarter. In the Q1 of 2023, substandard and criticized loans were nearly $300,000,000 Year end 2024 balances represented a decline of more than 56% from peak levels and are near their lowest levels in 2.5 years. Classified and nonaccrual balances continue to improve significantly on both a year over year and linked quarter basis, and we expect further substantial non costly improvement in the very near term.

James Eccher
James Eccher
President, CEO & Chairman of the Board at Old Second Bancorp

Special mention loans also continue to improve dramatically. These balances are down 46% from 1 year ago. 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 impacts. We've been very aggressive in addressing weak credits and remain confident in the strength of our portfolios. The bulk of the largest problems we have seen have been acquired, but we've made a few mistakes ourselves.

James Eccher
James Eccher
President, CEO & Chairman of the Board at Old Second Bancorp

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 and will be impacted with downward rate movements going forward. The allowance for credit losses on loans decreased to $43,600,000 as of December 31, 2024 or 1.1 percent of total loans from $44,400,000 at the end of the 3rd quarter, which was also 1.1 percent of total loans. Unemployment and GDP forecast used 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

Brad Adams
Brad Adams
CFO at Old Second Bancorp

Thank you, Jim. There's not a lot controversial

Brad Adams
Brad Adams
CFO at Old Second Bancorp

for me to talk about. So I'll add a

Brad Adams
Brad Adams
CFO at Old Second Bancorp

few comments and pass the puck back to Jim. But I don't really feel the need to be much up on a soapbox this quarter. But net interest income increased by $1,000,000 to $61,600,000 for the quarter relative to the prior quarter of $60,600,000 and increased $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 Q4 compared to Q3. Total yield on interest earning assets decreased 11 basis points.

Brad Adams
Brad Adams
CFO at Old Second Bancorp

That was more than offset by a 7 basis point decline in the cost of interest bearing deposits and a 22 basis point decrease in net interest bearing liabilities in aggregate. The end result was a 4 basis point increase in the tax equivalent NIM to 4.68 for the quarter from 4.64 last quarter, which we believe continues to be exceptional performance. Deposit flows this quarter continue to display signs of seasonality and stabilization. Average deposits increased $114,000,000 or 2.5 percent and period end total deposits increased $303,000,000 or 6.8 percent from the prior quarter, primarily due to the deposits acquired from First Merchants branches. Deposit pricing in our markets remains exceptionally aggressive relative to the treasury curve and is largely pricing off overnight borrowing levels.

Brad Adams
Brad Adams
CFO at Old Second Bancorp

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 a limb with a claim that the forward curve is nonsense. It's first time in a little bit. Relative to last quarter and many times over the last 2 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.

Brad Adams
Brad Adams
CFO at Old Second Bancorp

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

Brad Adams
Brad Adams
CFO at Old Second Bancorp

As Jim mentioned, the loan deposit ratio is now sub-eighty 4 percent from 89% plus in the Q4 compared to the Q3, and that's due to those purchase deposits and the branch deal. Our ability to source liquidity from securities portfolio remains and our current short term borrowing level is negligent. Old Second continues to build capital as evidenced by 151 basis point improvement in the TCE over the past year, which means we have added fairly astonishing $1.65 intangible 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.

Brad Adams
Brad Adams
CFO at Old Second Bancorp

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 Q3. Capital will build more slowly from here and I do believe that the overall M and A environment remains exceptionally favorable to a bank like Old Second. 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 $5,000,000 from the previous quarter, primarily due to acquisition related costs and OREO write downs as well as various other credit remediation efforts.

Brad Adams
Brad Adams
CFO at Old Second Bancorp

Incentive accruals are probably higher than I would have thought in the Q4. That's a function of relative performance as we manage 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. Old Second performed exceptionally well at essentially the

Brad Adams
Brad Adams
CFO at Old Second Bancorp

99th

Brad Adams
Brad Adams
CFO at Old Second Bancorp

percentile, which puts us in a 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 2025 percent 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 it this year.

Brad Adams
Brad Adams
CFO at Old Second Bancorp

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.

James Eccher
James Eccher
President, CEO & Chairman of the Board at Old Second Bancorp

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 on this front. Our focus remains on assessing and monitoring risks within the loan portfolio and optimizing the earning asset mix in order to maintain excellent profitability.

James Eccher
James Eccher
President, CEO & Chairman of the Board at Old Second Bancorp

Net interest margin trends are perhaps a little more resilient than some expect and income statement efficiency remains at record levels, a proud of the year we had in 2024 and very optimistic about the year ahead. That concludes our prepared comments this morning. So I'll turn it over to the moderator. We can open it up to Q and A.

Operator

Certainly. The floor is now open for questions. Your first question is coming from Jeff Rulis with D. A. Davidson.

Operator

Please proceed with your question. Your line is live.

Jeff Rulis
MD & Senior Research Analyst at D.A. Davidson Companies

Thanks. Good morning. Really just a couple of follow ups maybe for Brad on the margin. It seems as if you've adjusted the rate cuts pretty well and we've poked at the terminal level before, got your comments about maybe a slow drift in 'twenty five. Any other 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 a slow pullback in the margin?

Brad Adams
Brad Adams
CFO at Old Second Bancorp

So 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. But that being said, I do realize that some do want to talk about 1 or 2 more. I think if we get 2 more, I think you're likely to see us trend towards kind of a 4 35% to 4.40% margin eventually, but it will be a slow path to get there. I feel pretty confident that what is that has us significantly above the 4.20 margin level.

Brad Adams
Brad Adams
CFO at Old Second Bancorp

I just don't see a significant margin contraction overall. Something better than $440,000,000 in that? That would be my expectation, yes.

Jeff Rulis
MD & Senior Research Analyst at D.A. Davidson Companies

Okay.

Brad Adams
Brad Adams
CFO at Old Second Bancorp

And then just thing.

Brad Adams
Brad Adams
CFO at Old Second Bancorp

Purchase acquisition closed very early in December. So we did not have a full quarter benefit of the interest expense savings on the FHLB borrowed. Now, we've had some benefit this year. There are some things, obviously, a level of detail that people don't often see. We had a couple of 100,000,000 received fixed swaps that matured in 2024, which helped us with margin stability.

Brad Adams
Brad Adams
CFO at Old Second Bancorp

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 improving much better than anybody expected.

Jeff Rulis
MD & Senior Research Analyst at D.A. Davidson Companies

Appreciate it.

Jeff Rulis
MD & Senior Research Analyst at D.A. Davidson Companies

And just a follow-up on the expense side, maybe the 4% or 5% growth, is that off of the base of the reported full year 2024?

Brad Adams
Brad Adams
CFO at Old Second Bancorp

Are you Yes, that's the merger stuff. That's the nonrecurring stuff. You try to be pretty transparent with what we call nonrecurring. If you ex that out, then the core on an operating basis, and I know you can get to this number, is we're targeting a 4%.

Brad Adams
Brad Adams
CFO at Old Second Bancorp

And the bulk of that, the bulk of our drift on the expense side is in the employee benefits captioned, which are seeing significant increases across those in terms of what our expectations are. We may do better than that. We certainly haven't passed and I yell at our HR department about it all the time that they don't want to look like heroes. But as we see here today, it looks like there's some significant inflation in that number.

Jeff Rulis
MD & Senior Research Analyst at D.A. Davidson Companies

Okay.

Jeff Rulis
MD & Senior Research Analyst at D.A. Davidson Companies

And lastly, I have an HR people on the call right now, too. So I know they're all just rolling their eyes right now. I guess the 4% potential growth would be inclusive of First Merchants on a full quarter basis. That's inclusive of that expectation?

Brad Adams
Brad Adams
CFO at Old Second Bancorp

From an operating standpoint, First Merchants had about $400,000 in OpEx for the December month that they were with us.

Brad Adams
Brad Adams
CFO at Old Second Bancorp

Obviously, we get a lot of loans with it, we do not have to pay for overnight borrowings because of the deposits here. And our funding mix with 0 overnight borrowings isn't going to look like this for very long. Something will happen, but that's as we sit here today in terms of what the impacts are.

Operator

Your next question is from KBW. Please proceed with your question. Your line is live. Your next question is coming from Nathan Race with Piper Sandler.

Nathan Race
Nathan Race
Director & Senior Research Analyst at Piper Sandler Companies

Brad, maybe you could just help us a little more on the margin front. Maybe just as you guys absorb the full impact of 100 basis points breakouts in the Q4, what's kind of a good starting point to the margin in 1Q? And if the spreads remain on pause, can you just update us on kind of the cadence from there, what we maybe get 1Q in July and how that would impact?

Brad Adams
Brad Adams
CFO at Old Second Bancorp

I feel like kind of 4.62% where we sit right now. And if the Fed cuts into buy that shade 7, we'll be down 2 or 3% in order to have to get there.

Brad Adams
Brad Adams
CFO at Old Second Bancorp

I feel like we'll discount 2 to 3 per quarter and an additional rate that would take out about 7. So the biggest impact for us because we're so short for patient, and this is what makes margin guidance so difficult, It's because whoever is that's pouring money around Fed fund futures and its impact on has moved 100 basis points into the quarter at the short end. It assumes there's no schizophrenia in terms of OIS rates. But obviously, that happened. And it's not really fair to say, Brett, you're wrong when those rates jump around on And that will make 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.

Nathan Race
Nathan Race
Director & Senior Research Analyst at Piper Sandler Companies

Okay, got you. And just to clarify, 4.68% in 4Q?

Brad Adams
Brad Adams
CFO at Old Second Bancorp

I'm feeling like if you ask me what margin was going to be in the Q1, which is what I thought you were doing, I would guess it's going to be 4.62 Okay, got you.

Nathan Race
Nathan Race
Director & Senior Research Analyst at Piper Sandler Companies

Thanks for clarifying. Just within that context, you're thinking mid couple of digit growth this year.

Nathan Race
Nathan Race
Director & Senior Research Analyst at Piper Sandler Companies

So can you just update us in terms of how much cash flow would have come off the bond book to fund that and to the extent due to the shortfall of what your deposit gathering aspirations are in 2025?

Brad Adams
Brad Adams
CFO at Old Second Bancorp

The bond book will probably get about $250,000,000 off of it this year, which would be entirely fund on growth if we so elected. That being said, there have been times over the last 6 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, in 2020 4, investors were thrown up by 48 Securities and the value in that was tremendous. And that's really the last thing that I wanted to do is you take what's out there and it's worked out very well.

Brad Adams
Brad Adams
CFO at Old Second Bancorp

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 stability and rates, our bias is towards more asset growth than not. So I would be interested in even supplementing loan growth with loan purchases if there's value out there. We got a lot of levers.

Brad Adams
Brad Adams
CFO at Old Second Bancorp

We've got a lot of flexibility. We've got a lot of capital. Our balance sheet is in very good shape. And we've got a lot of cash coming at us. And we're making a lot of money.

Brad Adams
Brad Adams
CFO at Old Second Bancorp

So things are pretty good. 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.

Operator

Your next question is coming from David Long with Raymond James. Please proceed with your question. Your line is live.

David Long
David Long
Managing Director at Raymond James Financial

Good morning, everyone. Just wanted

David Long
David Long
Managing Director at Raymond James Financial

to go back to the expenses. Just as you're thinking about 2025, I want to

David Long
David Long
Managing Director at Raymond James Financial

make sure we're clear here on the expectation. You're $42,800,000 maybe $1,800,000 added to the OREO to $41,000,000

David Long
David Long
Managing Director at Raymond James Financial

If you add in a

David Long
David Long
Managing Director at Raymond James Financial

full quarter of First Merchants, that comes up again closer to $42,000,000 Is that number we're looking at the growth based on? Or is it simply the number for the year that you posted? Is that number around 4%?

Brad Adams
Brad Adams
CFO at Old Second Bancorp

It's the number for the year after merger related in 10 or more ago.

David Long
David Long
Managing Director at Raymond James Financial

Okay, great. That's very clear. Thank you, Brent. And then the other thing

David Long
David Long
Managing Director at Raymond James Financial

I want to ask about was just you talked about the strategic focus on building commercial banking capabilities and trying to take advantage of opportunities. As you look into 2025, do you see further investments in any specialty lines or is

David Long
David Long
Managing Director at Raymond James Financial

it your core C and I and what is your appetite to add veteran bank to take advantage of some opportunities?

Brad Adams
Brad Adams
CFO at Old Second Bancorp

Find risk adjusted rather than the normalize best for us. We do believe things are definitely getting better on pricing front. We're seeing more active pipeline sales, say, for instance, in commercial real estate, which we were very careful and prudent not to the last year. We feel we have internal capability to be a mid single digit grower. Having said that, we are always open and budget for new talent in the commercial bank, whether it be as a team or some one off individual producers.

Brad Adams
Brad Adams
CFO at Old Second Bancorp

So discussions in early pipeline indications and not a team, hopefully we can get there this year.

Operator

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

Brandon Rud
Senior Research Associate at Stephens Inc

This is Brandon Roode on for Terry. I just have two questions on credit quick. I guess, do you give the industry for the C and I charge off? And then 2, the $9,400,000 the 19 point $4,000,000 for you under contract, do you see there is do not expect any other expenses related to that?

James Eccher
James Eccher
President, CEO & Chairman of the Board at Old Second Bancorp

As it relates to the C and I credit, Brandon, I need to be

James Eccher
James Eccher
President, CEO & Chairman of the Board at Old Second Bancorp

a little careful here. We're in the middle of a legal process. And all I can say is when a 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 at all. In fact, it's something that we are not focused on growing.

James Eccher
James Eccher
President, CEO & Chairman of the Board at Old Second Bancorp

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

Brandon Rud
Senior Research Associate at Stephens Inc

Okay.

Brandon Rud
Senior Research Associate at Stephens Inc

Thank you. 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?

James Eccher
James Eccher
President, CEO & Chairman of the Board at Old Second Bancorp

It's a typical bank, Chicago banks that we compete with, that environment hasn't really changed. We've just 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 pursue lower yielding credit.

Brad Adams
Brad Adams
CFO at Old Second Bancorp

And you look at that, right?

Brad Adams
Brad Adams
CFO at Old Second Bancorp

I mean, that was the period where curves took a dive because it was going to be 8 break cuts in 2024 and more in 2025. And what that did on interest rate curves is it means you weren't getting paid for risk. And that doesn't appear to be the constraint as we head into 2025, which obviously feels a lot better in terms of growing the balance sheet.

Operator

Your next question is from Chris McGratty with KBW.

Christopher Mcgratty
MD & Head of U.S. Bank Research at Keefe, Bruyette & Woods (KBW)

Brad, just coming back to NII for a minute.

Christopher Mcgratty
MD & Head of U.S. Bank Research at Keefe, Bruyette & Woods (KBW)

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 stronger loan growth. Is that kind of how you're thinking about it?

Brad Adams
Brad Adams
CFO at Old Second Bancorp

That is how I'm thinking about it, but I wanted

Brad Adams
Brad Adams
CFO at Old Second Bancorp

to throw that out there that that may occur.

Christopher Mcgratty
MD & Head of U.S. Bank Research at Keefe, Bruyette & Woods (KBW)

Okay. And I guess what type of assets would you be most interested in?

Brad Adams
Brad Adams
CFO at Old Second Bancorp

I mean, I looked at a few things already. 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 and I,

Brad Adams
Brad Adams
CFO at Old Second Bancorp

we would look at that, but

Brad Adams
Brad Adams
CFO at Old Second Bancorp

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

Brad Adams
Brad Adams
CFO at Old Second Bancorp

I think, I'd say it's largely going to

Brad Adams
Brad Adams
CFO at Old Second Bancorp

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, if they were in our markets, I would buy 5.1 jumbo arms right now today. So we can turn off 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.

Brad Adams
Brad Adams
CFO at Old Second Bancorp

I feel pretty good about that.

Christopher Mcgratty
MD & Head of U.S. Bank Research at Keefe, Bruyette & Woods (KBW)

Okay.

Christopher Mcgratty
MD & Head of U.S. Bank Research at Keefe, Bruyette & Woods (KBW)

And then maybe Jim, you guys

Christopher Mcgratty
MD & Head of U.S. Bank Research at Keefe, Bruyette & Woods (KBW)

talked about M and A a little bit. Any more color you could provide public versus private preference, any difference in pricing and also

Brad Adams
Brad Adams
CFO at Old Second Bancorp

Our buying Are

Christopher Mcgratty
MD & Head of U.S. Bank Research at Keefe, Bruyette & Woods (KBW)

you changing with conversations?

Brad Adams
Brad Adams
CFO at Old Second Bancorp

Okay.

Brad Adams
Brad Adams
CFO at Old Second Bancorp

No. Investors should know that our criteria is rational, at least I like to think we're rational. There's a certain level of accretion that's required. There is a bias against credit risk. There is a size that I feel like most investors know what we're interested in.

Brad Adams
Brad Adams
CFO at Old Second Bancorp

And we're not looking to reinvent where we are. So all that kind of draws a pretty well defined box for people, I think.

Christopher Mcgratty
MD & Head of U.S. Bank Research at Keefe, Bruyette & Woods (KBW)

How would you I mean, would you use some of the would you throw a piece of cash in there just

Christopher Mcgratty
MD & Head of U.S. Bank Research at Keefe, Bruyette & Woods (KBW)

to lever the capital?

Brad Adams
Brad Adams
CFO at Old Second Bancorp

Absolutely.

Brad Adams
Brad Adams
CFO at Old Second Bancorp

That's why a big part of the we talked about why

Brad Adams
Brad Adams
CFO at Old Second Bancorp

we built capital, certainly because

Brad Adams
Brad Adams
CFO at Old Second Bancorp

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 and 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 concurrent equity raises and that sort of M and A.

Brad Adams
Brad Adams
CFO at Old Second Bancorp

That kind of negates everything that we've done well over the last few years. I feel like we're in a great spot.

Operator

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

Brian Martin
Director - Banks & Thrifts at Janney Montgomery Scott

Hey, Brad. Just so we're clear on just blasting on M and A, simple as in terms of size, just can you give 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, maybe I've missed it in the past on general comments?

Brad Adams
Brad Adams
CFO at Old Second Bancorp

I mean, we'd love to buy JPMorgan, but I don't think we can afford it. Something bigger than $500,000,000 something less than 4,000,000,000

Brian Martin
Director - Banks & Thrifts at Janney Montgomery Scott

dollars Got you. Okay. And then, thank you for that. And then, just the 2 clarifications on the margin outlook, Brad. I think if you kind of where you're at today versus where you're trended, it sounds like you if you said earlier, maybe getting below, if you have that basis point decline a quarter and then the potential rate impact in midyear, it's kind of a band of maybe $440,000,000 to $450,000,000 is kind of where you shake out depending on how things transpire.

Brian Martin
Director - Banks & Thrifts at Janney Montgomery Scott

Is that seeing big picture? And if that's right, then just how do you do better than that? 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, are you able to do better than that or Brian,

Brad Adams
Brad Adams
CFO at Old Second Bancorp

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 than that.

Brian Martin
Director - Banks & Thrifts at Janney Montgomery Scott

Okay. And that's even with the rate cut in midyear? I mean, yes. Yes. Okay.

Brian Martin
Director - Banks & Thrifts at Janney Montgomery Scott

Got you. And then in terms of the just the credit improvement, I think you talked about kind of maybe given your prepared remarks, just 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 any notable losses that you would expect going forward? It sounds like there's still one on that a little bit of potential on the C and I credit, but outside of that, nothing meaningful on the loss side as we look into?

James Eccher
James Eccher
President, CEO & Chairman of the Board at Old Second Bancorp

Yes. Brian, we worked hard this year, and fortunately we've got the income and profitability to be aggressive in dealing with some of these. Obviously, we're pleased with the progress we've made. Non accrual loans were down 47% just this quarter, I think down over 60% for the year. We think we positioned a couple of large OREO properties for sale this quarter, that would be a meaningful improvement to our NPAs.

James Eccher
James Eccher
President, CEO & Chairman of the Board at Old Second Bancorp

And then I think what's also important, that early stage bucket, that special matching category, that's down 50% from just last quarter. So we think the balance sheet is in great shape. We don't see any red flags at this point outside of this bankruptcy credit that we're dealing with. I think we're positioned for a very strong year on the credit front next year.

Brian Martin
Director - Banks & Thrifts at Janney Montgomery Scott

Okay. So really just the reduction from here is kind of looking at that OREO number, seeing that move down is kind of where you get the improvement. And outside of that, it's just nothing new coming aboard?

Brad Adams
Brad Adams
CFO at Old Second Bancorp

Correct. Healthcare looks a lot better. Office has largely been dealt with as far as

Brad Adams
Brad Adams
CFO at Old Second Bancorp

we can

Brad Adams
Brad Adams
CFO at Old Second Bancorp

tell. We strengthened a lot of commercial real estate credits over this year. 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.

Brian Martin
Director - Banks & Thrifts at Janney Montgomery Scott

Yes. Yes, agreed. Okay, that's all I had guys. Thanks for taking the questions.

Brad Adams
Brad Adams
CFO at Old Second Bancorp

Thanks, Craig.

Operator

Your next question is coming from Kevin Roth with Black Maple Capital. Please proceed with your question. Your line is live.

Kevin Roth
Senior Portfolio Manager at Black Maple Capital Management LP

Hey, guys. Happy New Year. Just 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, that would be great.

Kevin Roth
Senior Portfolio Manager at Black Maple Capital Management LP

Thanks.

James Eccher
James Eccher
President, CEO & Chairman of the Board at Old Second Bancorp

Yes, Kevin. Thanks for the call and the question. We primarily focus in the Chicago MSA, although we do have a couple of lending verticals that are nationwide focused, 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.

James Eccher
James Eccher
President, CEO & Chairman of the Board at Old Second Bancorp

And like I said, I think this will be a much better year. Spreads are more favorable and just feels like based on active discussions we're having with our borrowers that demand will improve this year.

Kevin Roth
Senior Portfolio Manager at Black Maple Capital Management LP

Yes. And I just the reason I asked

Kevin Roth
Senior Portfolio Manager at Black Maple Capital Management LP

the question

Kevin Roth
Senior Portfolio Manager at Black Maple Capital Management LP

is, the risk profile of markets like California and Florida, just as an example, I mean, seem to be going up, driven by insurance premiums amongst other factors. So I don't know how that's playing into your underwriting.

James Eccher
James Eccher
President, CEO & Chairman of the Board at Old Second Bancorp

Well, absolutely. We pay close attention to that. I can give you an example.

James Eccher
James Eccher
President, CEO & Chairman of the Board at Old Second Bancorp

Healthcare is an area that we had prior to the pandemic done some assisted living and skilled nursing in those markets. We pulled back dramatically, not looking at opportunities in those markets. So it's a fair point and something we monitor very closely.

Brad Adams
Brad Adams
CFO at Old Second Bancorp

Our experience with health care planning in California wasn't great. We certainly aren't immune from learning from that.

Kevin Roth
Senior Portfolio Manager at Black Maple Capital Management LP

Right, right. Okay. Well, thanks guys. Appreciate the comments.

James Eccher
James Eccher
President, CEO & Chairman of the Board at Old Second Bancorp

Thanks, Joe.

Operator

Your next question is coming from Nathan Race with Piper Sandler. Please proceed your question. Your line is live.

Nathan Race
Nathan Race
Director & Senior Research Analyst at Piper Sandler Companies

Yes. Thanks for taking the follow-up. Just going back to one of Brian's earlier questions, just thinking about 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 derisking the loan portfolio last year or so and 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 and beyond?

James Eccher
James Eccher
President, CEO & Chairman of the Board at Old Second Bancorp

A lot less than this year. If I had to best guess, 10 to 20 basis points maybe in 25, I hope we do better.

Executives
    • James Eccher
      James Eccher
      President, CEO & Chairman of the Board
    • Brad Adams
      Brad Adams
      CFO
Analysts
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Earnings Conference Call
Old Second Bancorp Q4 2024
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