Old Second Bancorp, Inc.

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 Ecker, 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. 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 and our earnings release, which is available on our website at oldsecond.com, on the home page, and under the investor relations tab. 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 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 19.1 million or 42 cents per diluted share in the fourth quarter of 2024 and return on assets was 1.34%. Fourth quarter of 2024 return on average tangible common equity was .79% and the tax equivalent efficiency ratio was 54.61%. Fourth quarter of 2024 earnings were significantly impacted by several items. First was a $3.5 million provision for credit losses in the absence of significant loan growth, which reduced after-tax earnings by six cents per diluted share. We also had $1.7 million in oriole write-downs or three cents per diluted share. And lastly, a $1.5 million merger related expense or just shy of three cents per diluted share. However, despite all this, profitability of 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 2024. The tangible equity ratio increased by 151 basis points over the past year to end at 10.04%. Common equity tier one was .82% in the fourth quarter and we feel very good both about profitability in 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-provisioned net revenues remain stable and exceptionally strong. 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%, while interest expense on average interest bearing liabilities increased 1.2 million or 9.9%. 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 link quarter end, primarily due to some large pay downs in commercial real estate owner occupied and multifamily 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 loan growth in the second and third 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 fourth quarter 2024 election results and any further interest rate reductions play out over the coming three to six months. 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 five branch purchase from first merchants in early 2024. Loan yields reflected a 12 basis point 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 merchants, which allowed us to pay down or other short term borrowings at the Federal Home Loan Bank and significantly lower the cost of funds. The tax equivalent net interest margin was 4.68 percent for the fourth quarter of 2024 compared to 4.64 percent for the third quarter of 2024 and 4.62 percent in the fourth quarter 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. The balance sheet estimates at 84 percent as of December 31, 2024 compared to 89 percent last quarter and 88 percent 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 was a mixed quarter with both some good news and bad news. The bad news first, we recorded an 8.6 million dollar 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 37 cents 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. We will continue to actively monitor this matter and take actions to best protect our interests. We also recorded a 1.7 million dollar in the Oreo valuation expense in the quarter. These represent charges below recent appraisals to immediately and contractually clear two 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 16.4 million commercial real estate loan was foreclosed on in the fourth quarter. Notably, no loss is expected and the property is 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. 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 percent from peak levels and are near their lowest levels of two and a half years. Classified and non-accrual balances continue to improve significantly on both a -over-year and link quarter basis. And we expect further substantial non-costly improvement in the very near term. Special mention loans also continue to improve dramatically. These balances are down 46 percent from one year ago. When your portfolio's short duration is important for investors and though an 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. We'll learn from those and be better. Continued stress testing has not raised any new red flags for us and the bulk of our loan portfolio has transitioned into the higher rate environment and will be impacted with downward rate movements going forward. The allowance for credit losses on loans decreased to 43.6 million as of December 31, 2024, or 1.1 percent of total loans, from 44.4 million at the end of the third quarter, which was also 1.1 percent of total loans. Unemployment and GDP forecast 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. Non-interest income continues to perform well with growth in the fourth quarter of 2024 compared to the link quarter in wealth management fees, service charges on deposits, and mortgage banking income. Excluding the impact of mortgage servicing rates, -to-market adjustments, mortgage banking income was flat quarter over link 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 venture 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 merchant's acquisition costs incurred at $1.5 million 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 percent for the fourth quarter of 2024 compared to 52.31 percent for the prior link quarter. 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. The goal is obviously to continue to create a more stable long-term balance sheet mix featuring more loans and less securities in order to maintain the returns on equity commensurate with the recent performance. I'll now turn it over to Brad for additional color.

Thank you, Jim. This is not a lot controversial for me to talk about, so I'll add a 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. Net interest income increased by $1 million, $61.6 million for the quarter relative to the prior quarter of $60.6, an increase of $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 decreased in net interest bearing liabilities and aggregate. The end result was a four basis point increase in the tax equivalent N to 468 for the quarter from 464 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 million or 2.5 percent, and period N total deposits increased $303 million 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. 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 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 see 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, 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 Jen 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. Our ability to source liquidity from the securities portfolio remains, and our current short-term borrowing level is negligent. Old Second continues to build capital, as evidenced by a 151 basis point improvement in the TCE over the past year. Which means we have added a 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 merchant's 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. 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. 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 Oreo write-downs, as well as various other credit remediation efforts. Incentive accruals are probably higher than I would have thought in the fourth quarter. That is 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. Old Second performed exceptionally well at essentially the 99th percentile, which 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 2025 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. Overall, things feel great. We're very proud of where we are and believe that our future is extremely bright. With that, I'd like to turn the call back over to Jim.

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. Net interest margin trends are perhaps a little more resilient than some expect, and income statement efficiency remains at record levels. I'm 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&A.

Certainly. The floor is now open for questions. If you have any questions or comments, please press star one on your phone at this time. We ask that while posing your question, you please pick up your handset of listing on a speakerphone to provide optimum sound quality. Please hold just a moment while we pull for any questions. Your first question is coming from Jeff Rulis with D.A. Davidson. Please pose your question. Your line is live.

Thanks. Good morning. Really just a couple of 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. Any other kind of color in terms of if we see a couple cuts, the impact there or is that inclusive of kind of your explication for a slow pullback in the margin?

So you're forcing 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. 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 435 to 440 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.

Brad, and if there are no more cuts, something better than 440 then in that. That would be my expectation, yes. Yeah, one thing.

Merchants acquisition closed very early in December, so we did not have a full quarter benefit on the interest expense savings on the FHLB borrowings.

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 and received 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. Appreciate it.

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 for your 24? 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 4. 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. We may do better than that. We certainly have in the past. 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.

OK, and that way...

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, 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. 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.

OK, thank you.

Your next question is coming from Chris McGrady with KBW. Please pose your question. Your line is live. Seems Chris has left the queue. Your next question is coming from Nathan Race with Piper Sander. Please pose your question. Your line is live.

Hey, guys. Good morning. Hope you're doing well. Good morning, Nate. 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 of rate cuts in the fourth quarter, what's kind of a good starting point for the margin in one queue? And if the Fed remains on pause, can you just update us on kind of the cadence from there or if we maybe get one cut in July and how that would impact?

I feel like kind of 462 is where we sit right now. And if the Fed cuts in July, that'll shape 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 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 in each quarter at the short end. 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 two to three per quarter and then seven 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 when those rates jump around 100 basis points since I last said something. So right now, as I said, there's there's a fair amount of rationality in terms of what what interest rate futures are. 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.

OK, gotcha. 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.

OK, gotcha. Thanks for clarifying. You know, just within that context, you know, you're thinking mid-signal digital growth this year. So can you just update us in terms of how much cash will 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 will 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 the most tremendous. And that's really the last thing that I wanted to be doing. But, 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 would be interested in even supplementing loan growth with loan purchases if there's value out there. We've got a lot of levers. We've got a lot of flexibility. We've got a lot of capital. Our balance sheet's in very good shape. And we got a lot of cash coming at us. And we're making a lot of money. So things are pretty good.

Right. Yeah. And speaking of all that capital that's building or has built and will continue to build, I'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 reengage on share repurchases.

Yeah, Nate, I'll always 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.

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

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

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.

You're talking 4%. It's the number for the year X, the merger related and the Oreo. Okay, great. That's

very clear. 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, obviously we were pulled back on growth in 2024 with yield curves such that it was just did not find risk adjusted spread that made a whole lot of sense for us. We do believe things are definitely getting better on pricing front. We're seeing more active pipelines build, say, for instance, in commercial real estate, which we were looking at. 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. You know, having said that, we are we are always open in budget for new talent in the commercial bank, whether it be a team or some one off individual producers. So it feels like this is going to be a better year based on discussions and early pipeline indications and confident the team that we can get there this year.

God, thanks a lot, Jim. Appreciate taking the questions. Thanks, David.

Your next question is coming from Terry McEvoy with Stephen Zink. Please close your question. Your line is live.

I this is Brandon Rood on for Terry. I just have to follow two questions on credit quick. I guess. Do you give the industry for the C&I charge off and then to the nine point four the nineteen point four million dollars Oreo under contract? Did you say there you do not expect any other expenses related to that?

Yeah, I guess I'll take the Oreo one first. We position a couple larger properties for sale with these with these valuation write downs. We remain very confident that those will those will sell in the first quarter. So no, we don't see any further write downs there 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. And, you know, all I can say is when when a credit gets into a bankruptcy situation, there's 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 that old second has a meaningful concentration at all. In fact, it's something that we are not focused on growing. That's about all I can say on that on that credit display.

OK, 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?

You know, it's a typical bank, Chicago banks, that we compete with that that environment hasn't hasn't really changed. You know, we we've just we made a decision last year really not to not to book loans at lower lower yields. You know, 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 to pursue lower yield in credit.

And you look at that, right? I mean, that was the period where where curves took a dive because, you know, it was going to be eight rate 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 a balance sheet.

Gotcha. I you take my questions. Thanks.

Your next question is from Chris McGrady with KBW. Please pose your question. Your line is live.

Oh, great. Brad, just come back to NIA 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 stronger, 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?

I mean, I've looked at a few things already. You know, like 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 participation that can make sense and see and I would look at that, but that comes with full economics and an opportunity. It's in Treasury management as well. And you don't typically get that on the participation side of things. So I think I'd say it's largely going to be one off. So I don't know in general what asset class it would be. But I would tell you that I would buy if they were in our markets, I would buy five one 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. And maybe,

Jim, you talked about M&A a little bit. Any more color you could provide, you know, public versus private preference? Any any difference in pricing and all? Our 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. So all that kind of draws a pretty well defined box for people, I think.

How would you would you use some of the would you throw a piece of cash in there just to lever the cap?

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

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

Hey, guys. Good morning. Hey, Brian. Hey, Brad. Just so we're clear on just last name M&A simple is in terms of size. Just can you give you 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. 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 earlier, maybe getting below, 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? 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 or? Right,

right. Right. We will do. 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.

Okay. And that's even with the rate cut in mid year. I mean, yeah. Yep. Okay. Gotcha. 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 little bit of potential on that C&I credit. But outside of that, nothing meaningful on the loss side as we look into. Yeah.

You know, Brian, we've 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, you know, non accrual loans. We're down 47 percent just this quarter. I think down over 60 percent for the year. We think we position a couple 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 percent from just last quarter. So we think the balance sheet's in great shape. You know, 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, you know, for a very strong year at the credit front next year.

Okay. So really just 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. Yeah. 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. 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.

Yeah. Yep. Agreed. Okay. That's all I had, guys. Thanks for taking the questions. Thanks, Brian.

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

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, you know, trying to avoid going out of market? I mean, if you just talk a little bit about that, that'd be great. Thanks.

Yeah, Kevin. Thanks for the call and the question. You know, we primarily focus in the Chicago MSA, although, you know, we do have a couple of lending verticals that are nationwide focused. Sponsored finance and health care come up, just to name a couple. And so we've kept a pretty wide net where those opportunities make sense. And like I said, I think this would be a much better year. Spreads are more favorable. And it just feels like, you know, based on the active discussions we're having with our borrowers, that demand will improve this year.

Yeah, and 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, you know, insurance premiums amongst other factors. So I don't know how that's playing into your your your underwriting.

Well, 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. We've 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.

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

Right, right. OK, well, thanks, guys. Appreciate the comments.

Thanks, Joe.

Once again, if you do have any remaining questions or comments, please press star one on your phone at this time. Your next question is coming from Nathan Race with Piper Sander. Please pose your question. Your line is live.

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. 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 the best guess, 10 to 20 basis points maybe in 2025, I hope we do better.

I think you have to go by, you know, 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.

OK, that's helpful. Thanks, guys.

Thanks, Nate.

There are no additional questions in queue at this time. I would now like to turn the floor back over to Jim Ecker for any closing remarks.

OK, thanks to everyone for joining us this morning. We look forward to speaking with you again next quarter. Goodbye.

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.

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