Old Second Bancorp - Earnings Call - Q4 2024

Executive Summary

• Q4 2024 delivered solid profitability amid elevated credit costs: Net income was $19.1M ($0.42 diluted EPS) vs. $23.0M ($0.50) in Q3 and $18.2M ($0.40) in Q4 2023; tax-equivalent NIM rose to 4.68% and ROAA was 1.34%.
• Margin resilience and deposit acquisition offset funding costs: TE NIM increased 4 bps q/q to 4.68% as FRME branch deposits lowered FHLB advances; loan-to-deposit ratio improved to 84% from 89% in Q3.
• Asset quality improved sharply: Nonperforming loans fell 42% q/q to $30.3M (0.8% of loans), though net charge-offs were $4.9M driven by an $8.6M C&I charge-off; management expects further NPA reduction early 2025.
• Expense pressure from transaction/OREO costs: Noninterest expense rose $5.0M q/q (to $44.3M) on FRME-related costs and $1.7M OREO write-downs; adjusted EPS was $0.44 vs. $0.51 in Q3.
• Catalysts ahead: Authorized $39.1M buyback (Dec 2024), dividend raised to $0.06 in Q4/Q1, active M&A dialogue, and mid-single-digit loan growth targeted for 2025; Wall Street consensus from S&P Global was unavailable for estimate comparisons.

What Went Well and What Went Wrong

• What Went Well

  • “Exceptional profitability” and strengthening capital: TE NIM stable at 4.68%; TCE/TA improved to 10.04%; ROATCE 13.79%.
  • Asset quality inflected positively: Nonperforming loans down to 0.8% of loans; criticized/classified loans declined meaningfully vs. Q3 and YoY.
  • Funding mix improved post-FRME: Deposits up $303M q/q; other short-term borrowings fell to $20M from $335M; L/D ratio moved to 84%.

• What Went Wrong

  • Elevated credit losses and OREO expense: Net charge-offs $4.9M (C&I charge-off $8.6M); OREO valuation expense $1.7M; provision increased to $3.5M.
  • Noninterest expense spike: +$5.0M q/q driven by transaction-related costs, legal fees, data processing, and OREO write-downs; efficiency ratio worsened to 57.12% (GAAP).
  • Margin outlook guided modestly down with rate cuts: Management expects NIM drift lower in 2025 if cuts continue (to ~4.35–4.40 with two cuts), despite resilience.

Transcript

Operator (participant)

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. 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 in our earnings release, which is available on our website at oldsecond.com on the homepage and under the Investor Relations tab. Now, I will turn it over to Jim Eccher. Please go ahead.

Jim Eccher (CEO)

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 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 $0.42 per diluted share in the fourth quarter of 2024, and return on assets was 1.34%. Q4 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. 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 OREO write-downs, or $0.03 per diluted share, 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 Merchants' cash acquisition in the fourth quarter of 2024. The tangible equity ratio increased by 151 basis points over the past year, year-end at 10.04%. Common Equity Tier 1 was 12.82% the fourth 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 remain stable and exceptionally strong.

For the fourth quarter of 2024, compared to the prior year-ago 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 re-pricing 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 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 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 points decrease during the fourth quarter compared to the linked quarter, but a 16 basis points 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 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% 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. 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 was in good shape. It's at 84% as of December 31, 2024, compared to 89% last quarter and 88% as of December 31st of 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 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 were 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 in 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 in the properties under contract for a first quarter sale, with significant interest 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%, or $58 million from last quarter. In the first quarter of 2023, substandard and 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. Classified and non-accrual 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. Special mention loans also continue to improve dramatically. These balances are down 46% from one 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. 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 $43.6 million as of December 31st, 2024, or 1.1% of total loans, from $44.4 million at the end of the third quarter, which was also 1.1% of total loans. Unemployment and GDP forecasts 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 (COO and CFO)

Thank you, Jim. There's 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. But 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 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-bearing assets decreased 11 basis points. 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 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%, and period-end total deposits increased $303 million, or 6.8%, 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 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 both 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-to-deposit ratio is now sub-84%, from +89 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 negligible. 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 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.

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'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.

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 in 2025 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. 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.

Jim Eccher (CEO)

Okay. Thanks, Brad.

In closing, we remain very confident in our balance sheet and the opportunities that are ahead for Old Second. We are 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 interest and 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, and we can open it up to a Q&A. Certainly. The floor is now open for questions.

Operator (participant)

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 if listening on a speakerphone to provide optimum sound quality. Please hold just a moment while we poll for any questions. Your first question is coming from Jeff Rulis with D.A. Davidson. Please pose your question. Your line is live.

Jeff Rulis (Managing Director and Senior Research Analyst)

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 we've poked at the terminal level before, got your comments about maybe a slow drift in 2025. 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?

Jim Eccher (CEO)

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 one or two more. I think if we get two more, I think you're likely to see us trend towards kind of a 35-440 margin eventually, but it'll be a slow path to get there. I feel pretty confident that what is ahead has us significantly above the 420 margin level. I just don't see a significant margin contraction overall. Something better than 440 then in that? That would be my expectation, yes. Okay. And then you said one. Go ahead.

First Merchants acquisition closed very early in December, so we did not have a full quarter benefit of the interest expense savings on the FHLB borrowing. 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 in 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. Appreciate it. And just to follow up on the expense side, the 4% or 5% growth, is that off of a base of reported full year 2024? Yeah. That's the merger stuff. That's 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 to four, and the bulk of that, the bulk of our drift on the expense side is in the employee benefits caption, which are seeing significant increases across those in terms of what our expectations are. We made investment in that. We certainly haven't passed, and I yell at our HR department about it all the time that people fall in order to look like heroes, but as we sit here today, it looks like there's some significant inflation in that number. Okay, and I got an HR people on the call right now too, so I know they're all just rolling their eyes right now.

But I guess the 4% potential growth would be inclusive of First Merchants on a full quarter basis. That's inclusive of that expectation. From an operating expense standpoint, First Merchants added about $400,000 in OpEx for the December month that they were with us. Obviously, we can get a lot of loans with it, but we do 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. Managed and whatnot, but that's as we sit here today in terms of what the impacts are.

Jeff Rulis (Managing Director and Senior Research Analyst)

Got you. Okay. Thank you

Okay. Next question is KBW. Please pose your question. Your line is live. Team Chris is listening. Your next question is coming from Nathan Race with Piper Sandler. Just please pose your question. Your line is live.

Nathan Race (Managing Director and Senior Research Analyst)

Hey, guys. Good morning.

Jim Eccher (CEO)

How are you doing? Good morning, Nathan.

Brad Adams (COO and CFO)

Good morning, Nathan.

Nathan Race (Managing Director and Senior Research Analyst)

Brad, maybe you could just help us a little more on the margin front. Maybe just as you guys absorbed the full impact of the 100 basis points rate cuts in the fourth quarter, it was kind of a good starting point for the margin in 1Q. And if the Fed remains on pause, can you just update us on kind of the cadence from there? We maybe get one cut in July and how that would impact.

Brad Adams (COO and CFO)

I feel like kind of 4.62 where we sit right now. And if the Fed cuts to 457, we'll be down two or three in order to get there. I feel like we'll be 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 pulling money out on Fed fund futures and its impact on has moved 100 basis points intraday over the short end, that's going to move our loan yield 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 leading about two to three per quarter and then seven basis points on a Fed rate cut, it assumes there's no schizophrenia in terms of over OIS rates. But obviously, that happened.

It's not really fair to say, "Brad, you're wrong when those rates jump around about the basis points since the last Fed dumped them." Right now, as I said, there's a fair amount of rationality in terms of what interest rate futures are. That will make me feel better, less crazy, and also gives me a little bit more confidence in terms of directing people for what 2025 can look like.

Nathan Race (Managing Director and Senior Research Analyst)

Okay. Got you.

Brad Adams (COO and CFO)

Just to clarify, 468 and 42? 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.

Nathan Race (Managing Director and Senior Research Analyst)

Okay. Gotcha. Thanks for clarifying. Yeah. Just putting that in context, you're thinking a couple of digit growth this year.

Can you just update us in terms of how much cash would have come out of the bond book to fund that, and to the extent there is a shortfall, what your deposit gathering aspirations are in 2025?

Brad Adams (COO and CFO)

Bond portfolio will probably get about $250 million off of it this year, which would entirely fund loan growth if we still liked it. 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, in the middle of 2024, investors were throwing up very poorly rated securities, and the value in them was tremendous. And that's really the last thing that I wanted to be doing, but 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 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 got a lot of levers. We've got a lot of flexibility. We've got a lot of capital. 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 up ahead, you have an M&A environment these days, and if you're feeling less optimistic on that front, would you be willing to do share repurchases? Yeah.

I'll always stay around that as discussions are accidental in terms of buyback. I'm not all that priced into it. When we're earning at the levels we are and have relative valuations, there's nothing that would preclude a buyback at these levels.

Nathan Race (Managing Director and Senior Research Analyst)

Okay. Thanks, guys. Thanks, Matt. Yeah.

Operator (participant)

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

David Long (Managing Director and Senior Research Analyst)

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're at $42.8 million, maybe $1.8 million added to the OREO to your $41 million. If you add in a full quarter of First Merchants, that comes up, again, closer to $42. Is that number we're looking at the growth based on, or is it simply the number for the year that you post on it?

Is that number up 4%?

Brad Adams (COO and CFO)

It's the number for the year after merger-related and the OREO.

David Long (Managing Director and Senior Research Analyst)

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. 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 banks to take advantage of some opportunities?

Jim Eccher (CEO)

Yeah. Obviously, we were pulled back on growth in 2024 with the yield curve such that it was. Just did not find risk-adjusted returns to make a whole lot of sense for us. We do believe things are definitely getting better on the pricing front.

We're seeing more active pipeline still, say, for instance, in commercial real estate, which we were very careful and prudent not to do last year. We feel we have the internal capability to be a mid-single-digit grower. And having said that, we are always open and budgeted for new talent in the commercial bank, whether it be with a team or some one-off individual producers. So discussions and early pipeline indications and not the team that we can get there this year.

David Long (Managing Director and Senior Research Analyst)

Got it. Thanks a lot, Tim. Appreciate taking the questions.

Jim Eccher (CEO)

Thanks, David.

Operator (participant)

Yeah. Next question is coming from Terry McEvoy with Stephens Inc. Please pose your question. Your line is live.

Hi. This is Brendan Reudy for Terry. I just have two questions on credit quick. I guess, do you give 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?

Brad Adams (COO and CFO)

A couple larger projects remaining very fast that those will sell in the first quarter. So we don't see any further right now there. As it relates to the C&I credit, Brendan, I need to be 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 in at all. In fact, it's something that we are not focused on growing. That's about all I can say on that credit at this point.

Okay. 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?

It's the typical banks, Chicago banks that we compete with. That environment hasn't really changed. 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. And you look at that, right? I mean, that was the period where curves took a dive because 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.

Got you. I appreciate you taking the questions. Thanks.

Yep.

Operator (participant)

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

Chris McGratty (CFA)

Oh, great. Brad, just coming back to NII for a minute. You've been running that kind of 60-62 a quarter. It feels like kind of that's about right based on what you're saying, absent a loan purchase or something, stronger loan growth. Is that kind of how you're thinking about it?

Brad Adams (COO and CFO)

That is how I'm thinking about it, but I wanted to throw that out there that that may occur. Okay.

Chris McGratty (CFA)

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

Brad Adams (COO and CFO)

I mean, I've 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&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 at, but I would tell you that I would buy if they were in our markets, I would buy 501(j)(1)(b)(r)s 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.

Chris McGratty (CFA)

Okay.

And then maybe, Jim, you guys talked about M&A a little bit. Any more color you could provide? Public versus private preference? Any difference in pricing and also any change in conversations? Okay.

Jim Eccher (CEO)

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'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.

Chris McGratty (CFA)

How would you, I mean, would you throw a piece of cash in there just to lever the capital?

Brad Adams (COO and CFO)

Absolutely. Absolutely.

That's why a big part of the way 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 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.

Chris McGratty (CFA)

All right. Thank you.

Operator (participant)

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

Brian Martin (Director and Senior Equity Research Analyst)

Hey, guys. Good morning.

Brad Adams (COO and CFO)

Hey, Brian. Morning, Brian.

Brian Martin (Director and Senior Equity Research Analyst)

Hey, Brad.

Brad Adams (COO and CFO)

Just so we're clear on just last thing on M&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. I mean, we'd love to buy JPMorgan, but I don't think we can afford it. Something bigger than $500 million, something less than $4 billion.

Brian Martin (Director and Senior Equity Research Analyst)

Got you. 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 it earlier, maybe getting below, if you have that basis point decline a quarter and then the potential rate impact in mid-year, it's kind of a band of maybe 440-450 is kind of where you shake out depending on 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 rate cut and you have all that happen, are you able to do better than that or?

Brad Adams (COO and CFO)

Brian, Brian, 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 than that.

Brian Martin (Director and Senior Equity Research Analyst)

Okay. And that's even with the rate cut in mid-year?

Brad Adams (COO and CFO)

I mean, yeah. Yep.

Brian Martin (Director and Senior Equity Research Analyst)

Okay. Got you. And then in terms of just the credit improvement, I think you talked about kind of maybe giving 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 little bit of potential on that C&I credit, but outside of that, nothing meaningful on the loss side as you look into early quarter cuts?

Brad Adams (COO and CFO)

Yeah.

I mean, 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, we're 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. And then I think what's also important, that early-stage bucket, that special mention category, that's down 50% from just last quarter. So we think the balance sheet's 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. Okay.

Jim Eccher (CEO)

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. Correct. 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.

Brian Martin (Director and Senior Equity Research Analyst)

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

Brad Adams (COO and CFO)

Thanks, Brian. Thank you.

Operator (participant)

Your next question is coming from Kevin Reevey 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 trying to avoid going out of market? I mean, if you could just talk a little bit about that, that'd be great. Thanks.

Brad Adams (COO and CFO)

Yeah, 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, not just in finance and healthcare, just to name a couple. And so we've cast a pretty wide net where those opportunities make sense. And like I said, I think this will be a much better year. Spreads are more favorable. And it just feels like, based on active discussions we're having with our borrowers, that demand will improve this year.

Yeah. And the reason I asked the question 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 among other factors. So I don't know how that's playing into your underwriting.

Jim Eccher (CEO)

Oh, absolutely. We pay close attention to that. I can give you an example. Healthcare is an area that we had prior to the pandemic done some assisted living and skilled nursing in those markets. We've pulled back dramatically, not looking at opportunities in those markets. So it's a fair point and something we monitor very closely. Our experience with healthcare lending in California wasn't great. We certainly aren't immune from learning from that.

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

Brad Adams (COO and CFO)

Thanks, Kevin.

Operator (participant)

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 Sandler. Please pose your question. Your line is live.

Nathan Race (Managing Director and Senior Research Analyst)

Yeah. 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 de-risking 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.

Brad Adams (COO and CFO)

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.