Good morning, everyone, and thank you for joining us today for Old Second Bancorp Inc.'s First Quarter 2022 Earnings Call. On the call today is Jim Eccher, the company's CEO; Gary Collins, the Vice Chairman of our Board; and the company's CFO, Brad Adams. I will start with a reminder that Old Second Bank's comments today may 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. 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 home page under the Investor Relations tab. Now I will turn it over to Jim Eccher.

Good morning and thank you for joining us. I have several prepared opening remarks and will give my overview of the quarter and then turn it over to Brad for additional detail. I will then conclude with some summary comments and thoughts about the future before we open it up to questions. Net income was $12 million or $0.27 per diluted share in the first quarter. Net income adjusted to exclude West Suburban acquisition related costs was $16.1 million or $0.36 per share in the first quarter of 2022. On the same adjusted basis, return on assets was 1.05%, returns on tangible common equity was 16.97%, and the efficiency ratio was 61.38%. Earnings this quarter were favorably impacted by an MSR valuation mark-to-market gain of $3 million and, of course, by the inclusion of a full quarter of legacy West Suburban net interest income. The first quarter marks our first full quarter with the impact of the West Suburban acquisition in our financial statements. At this point, we are far ahead of schedule on cost save realization and outperforming our own expectations on both fee and interest revenue that we had set for ourselves internally. We completed the systems conversions and signed changes this past weekend with no significant customer disruption. Overall, we could not be more pleased with where things stand today from both the balance sheet positioning and operational standpoint. Our only area of disappointment internally was bottom line loan growth, which is up only modestly excluding paydowns within the PPP portfolio. The trends here, though, are deceptively good with extremely strong originations, mitigated by acquired loan participation payoffs. Over the last two years, Old Second has averaged annual originations of approximately $500 million including unfunded commitments at origination. In the first quarter of 2022, we originated over $300 million on the same basis. Activity within loan committee remains extremely strong. Line utilizations contracted modestly from 64% to 63% in the quarter. We do not currently expect this level of runoff within the participation portfolio to continue. Loan growth within legacy Old Second totaled $82 million in the first quarter and early indications are positive for the second quarter as activity within loan committee is extremely strong. Recent hires are starting to hit their stride and the cultural fit has been fantastic. We are seeing significant pipeline builds in commercial real estate, healthcare, and importantly sponsored finance. We are busier than we have been in many years. The net interest margin expanded modestly this quarter despite the two additional months of West Suburban. Here too, we consider ourselves ahead of schedule and the trends underneath the surface are much more positive than the bottom line indicates. The stabilization and improvement that you've seen thus far in the margin are more a product of liquidity deployment than an upward movement in rates. The story will be very different in the quarters ahead. And I'll let Brad talk more about that in a minute. Nonperforming loans decreased $6.7 million, compared to the prior quarter with upgrades of various credits and payoffs of others. We recorded net charge-offs of $293,000 in the first quarter compared to $4.7 million of net charge-offs in the fourth quarter of 2021 due to two large credits last quarter, one in commercial from legacy Old Second and one in commercial real estate from legacy West Suburban. Both of those large credits were fully allocated. Total classified loans decreased $8.1 million to $66.6 million. We remain very pleased with where credit stands today and confident in the strength of our portfolios. Other real estate owned did not change materially in the first quarter of 2022. The allowance for credit losses totaled $44.3 million at the end of the quarter, which is 1.3% of total loans, which is consistent with the total ACL as of December 31, 2021. At quarter end, $320,000 of provision for credit losses on loans was recorded, which was offset by a like total reversal of reserves for unfunded commitments based on a review of line utilization trends. Our outlook is cautiously optimistic, as the underlying economy continues to improve, albeit with significant uncertainties. We believe that we are more than adequately reserved under base case scenarios, but continue to modestly overweight more pessimistic scenarios given the high degree of uncertainty. Expense discipline continues to be strong, and we are far ahead of schedule on cost saving targets announced with the acquisition. Total merger-related costs of $5.6 million were recorded in the first quarter of 2022, which includes data deconversion fees for multiple operational systems, legal, and other consulting fees. As we look forward, we are focused on deploying liquidity in order to more fully leverage the quality of the deposit base; by building commercial loan origination capability for the long term and making prudent investments in the securities portfolio in the short term that do not carry excess spread or credit risk. The goal is obviously to build back towards an 80%-plus loan-to-deposit ratio in order to drive the returns on equity commensurate with our recent historical performance. I'll now turn it over to Brad for additional color.

Thank you, Jim. Net interest income increased $12.6 million relative to last quarter and $17.7 million from the year-ago quarter. Margin trends increased slightly due to the securities portfolio growth and reductions in funding costs following the close of the transaction. These factors overcame declining loan yields and an increase in liquidity from significant linked quarter deposit growth. The reinvestment rate on the portfolio purchases increased to 2.14% this quarter, a significant increase relative to the 1% we had been experiencing in prior quarters. This is an outcome of a move up in rates at the short end of the curve, as we continue to avoid duration during the quarter. Given the more recent moves, we are willing to go a bit longer. What we do remain decidedly cautious. The first quarter saw a significant move in rates all along the curve, but none more dramatic than the under three-year portion. This was essentially the move that we have been preparing for, but the speed at the short end of the curve surprised us a bit. The mark on the securities portfolio recognized through AOCI went from a $9 million gain to a $37.5 million unrealized loss position, a decrease in portfolio value of 2.5%. We would like investors to know that we have been exceptionally cautious in deploying excess liquidity. The portfolio duration at 3/31 was 2.7 years. The weighted average life was 4.5 years, and approximately 35% of the entire portfolio is variable. Our fixed-rate MBS exposure is and was many multiples less than peers. Our absolute exposure to fixed-rate issues is and was also extremely short going into this move. While it's not fun to see the impact on the portfolio, this move was exactly what we were preparing for, and I wouldn't change much with the benefit of hindsight. When the under two-year portion of the current gaps like it has, even extremely cautious portfolios can initially look dislocated. I'm confident in my belief that we have the right positioning and that the relative conservatism will serve us well. I'm also thankful we got the opportunity to reposition the acquired portfolio ahead of this move in early December. Going forward, we will continue to leg into the new regime cautiously and let the rest of the balance sheet carry the day, while collecting the whole of our money back in a relatively short order. The rest of the balance sheet looks fantastic. With one rate hike in hand and several more projected on the near-term horizon, Old Second will undergo a step change in profitability and performance. The deposit base, as many of you know, is extremely granular and insensitive to rates. On the loan side, existing balances feature high concentrations of variable rate structures and relatively short duration on the fixed side. Barring a change in current macro expectations, Old Second will transition quickly into a higher rate world with rapidly improving profitability. On the cost save front, we are performing better than I expected. I expect we will recognize greater-than-expected savings in both facilities and information technology and far ahead of the schedule we originally provided with the announcement of the transaction. We are continuing to be aggressive in recruiting and believe we have a compelling story to tell prospective sales additions. So I'm hopeful we'll be able to spend some of the upside in the savings to enhance the core asset organic growth rate. From a cultural standpoint, there are always challenges to overcome, but I would say that the communication is very good, and we are getting to the right answers, and things feel even better than we expected. We continue to have strong deposit inflows and substantial excess liquidity persisted for the entirety of the quarter. Our margin trends are now a function of overnight rates first and loan growth second. Confidence is high, but I would still love to see positive developments in C&I and utilization rates. Both remain somewhat subdued. But as Jim mentioned, we do feel quite a bit better on the loan growth side of things. The end result is that margin trends are expected to trend strongly in the right direction. The forward curve is accurate. The first two rate hikes will benefit us, but not to the degree of subsequent moves would. I would stand by the guidance I gave last quarter that each 25 basis point hike would benefit us by $2 million to $3 million net after tax. Noninterest income increased from last quarter with an increase of $1.5 million due to MSR market gains, card-related income increased by $583,000, and service charges on deposits increased by $466,000. Wealth management income also increased quarter-over-quarter by $276,000 due to growth in assets under management or advisory services. Those balances now stand at $1.71 billion at quarter end. No material provision for credit losses was recorded during the quarter, although our economic outlook has improved with an unemployment rate projection decreasing to approximately 3.5% to 5% through March 31, 2023, and over the remaining life of the loans. This is a decline from the approximate 5% to 6.25% from last quarter. I would expect loan growth to outpace provision over the near term. We are pleased with how credit has performed with credit metrics improving and a number of credits that I would be concerned about having been resolved favorably, as noted with our $8.1 million decline in classified assets this quarter. Expenses are difficult to manage in 2022 overall, with mid-single-digit increases in salaries and double-digit increases in benefits reflecting wage inflation in a difficult environment to hire. We are managing through this and are thankful for the flexibility and opportunities for synergies that exist for us right now. Our efforts in the coming quarters will be to finish delivering on the synergies, continue to bring additional talent on board, help our customers, and fund quality loan growth with the expectation of an improving margin. We need to build capital back a bit, and we'll focus on delivering bottom-line earnings. With that, I'd like to turn the call back over to Jim.

Thanks, Brad. In closing, we are confident in our balance sheet and loan growth opportunities that are ahead. Rising interest rates will certainly be beneficial to our bank profitability in 2022, and we continue to focus on expense discipline. We believe our credit and underwriting have remained disciplined and our funding position is strong. Today, we have the balance sheet and liquidity to take advantage of a rising rate environment and have the financial strength to wait for this to occur. We continue to be active in the effort to bring additional salespeople on board, and we completed systems integration last week of our core loan deposit and general ledger, which is a smooth transition for West Suburban customers and employees. We are excited about the opportunities that exist for Old Second in 2022 and beyond. So that concludes our prepared comments this morning. I'll turn it over to the moderator and open it up to any questions.

Your first question is coming from Chris McGratty at KBW. Please go ahead with your question. Your line is live.

Brad maybe start with just the balance sheet. You guys certainly weighted on liquidity. How do we think about just the balance sheet mix over the course of the year? Is it as simple as drawing cash down, bringing the investment debt flat or down and just remixing, or do you think deposits will grow and you'll continue to grow in asset base?

So I think the trend in deposits is the big question right now. I'm not a thinker, but I also don't pretend to know what's going to happen. The liquidity came out much faster than I would have ever expected. I think what you can expect is us to be cautious. We're not going to plow $600 million in any which direction and over any quick timeframe. Loan growth is going to pick up, but it's certainly not going to eat up that kind of cushion. The good news front is even just sitting in cash it's meaningfully accretive to the margin. I wouldn't expect us to be lurching anything there, Chris. We'll continue to add modestly to the securities portfolio. Some of the issues that we were buying before, that were variable or very short, have gone from 1% to 2% yields to 3% to 4% yields on the same securities. So certainly, there's a better risk-adjusted return there at this point. I think it's just going to be kind of steady as she goes for us in terms of not lurching anything.

Okay. And then maybe a follow-up, the deposit base obviously is a hallmark of the company. Loan to deposit is sitting at call it 60 versus 80 is your target. I guess two questions. How long do you think it will take to get in that zip code? And then two, can you remind us the mix of commercial and retail deposits?

We're about 85% retail. West Suburban was accretive to that number. It's exceptionally granular. And I think getting back to an 80% loan-to-deposit ratio is a two-year plus type of scenario, absent any significant kind of macro moves in the absolute level of liquidity and banking systems. If liquidity runs out, which I don't see happening at this point, then obviously it can be quicker.

Okay. Thanks.

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

Yeah. Hi guys. Good morning.

Hi Nathan.

Hi Nathan.

I just want to make sure I'm thinking about the kind of margin outlook accurately in terms of your guidance, Brad, in terms of the impact from each 25 basis point increase in Fed funds. And just relative to kind of the latest NII disclosures from the K that implied NII would be up almost 20% with a 100 basis point move. So I guess, putting all those pieces together and assuming the Fed moves by 0.5% in both May and June, I mean, is it fair to expect that the margins north of 320 or so by the end of this year?

Yes. That's fair.

Okay. We have credit one.

Understood. And within that context, I assume just going back to the last question that you guys aren't seeing much need to move on deposit rates at least this quarter and next?

Yeah. I mean, nobody has moved a basis point yet. I mean, there are some people that are going out with kind of three-year time deposit rates to kind of play the forward curve, which you always see. I think we may do that, but I don't see any reason to at this point.

Okay, understood. And then maybe just turning to expenses, obviously it seems like you guys are ahead of schedule on the West Suburban cost saves. Just given that you guys seem like you may exceed your target there with some additional saves likely in Q2 post the recent conversion. Are you guys targeting any reinvestments or anything over the course of this year that would cause the run rate to maybe deviate or maybe move higher from what we saw here in the first quarter?

No. We do have more open positions than we would like to have at this point given the difficulty in hiring at the retail level. That's modestly accretive, but I don't think you'd see that show up in terms of as a trend. I certainly think we'll get more savings on occupancy than we originally thought as we continue our branch rationalization strategy.

Okay. So fair to expect kind of the run rate to stay in the $32 million range, if not a little bit lower over the balance of this year?

Yeah. I mean, there's going to be relative to kind of what we reported now, it's going to maybe take down a little bit further. And then we'll stabilize.

Okay, understood. And I know it's not your favorite topic, Brad, but just on the tax rate going forward?

I'm going to say 25. My inability to get that number has reached legendary status at this point.

I appreciate you guys taking my questions and also, Brad, thanks.

Thanks, Nate.

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

Thank you. Good morning, everyone.

Hi, David.

Good morning, David.

You talked about the average origination in the quarter being around $500 million. I think you said $300 million in the first quarter. Given some key hires earlier this year and the latter part of last year and it seems like you're somewhat optimistic here. Where can that quarterly origination level go this year?

Yes. First, David, we were averaging $500 million in annual originations over the last two to three years. In Q1, we had over $300 million, which was our strongest quarter in many years. While I think we might not be able to sustain that level of momentum, I certainly believe we should approach $800 million to $1 billion in originations by the end of the year, which would almost be double what we achieved in the past couple of years.

Got it. Thanks for the clarity there. And then, in the quarter you had a nice MSR write-up. Do you still have any write-ups available, or are you back to original cost there?

I think there's a bit more room for that to go higher, pretty conservatively valued. And obviously, average lives are likely to get longer.

Got it. And then the last one, just within the margin, what are your expectations on purchase accounting accretion impacting the margin here going forward, versus where it was in the first quarter?

Pretty flat to first quarter levels for the next two years.

Got it. Thanks, guys. Appreciate it.

Thank you, David.

Your next question is coming from Manuel Navas with D.A. Davidson. Please pose your question. Your line is live.

Hey. Good morning.

Hi, Manuel.

Hi, Manuel. How are you?

I’m well. So I wanted to get a little more detail on lending team progress. It seems like a big part of the growth this quarter was in leasing and you had a pretty senior hire there recently. Is that hire already producing? Is that a major driver of that? And then CRE was really strong as well. And if you can add any color on the new teams helping CRE, that would be appreciated, please?

Sure, Manuel. Yes, obviously, an exceptional quarter by way of originations. And it was pretty broad-based, right? So I think we had significant contributions from commercial real estate, healthcare, investment-grade leasing, equipment finance, and C&I. So we're very pleased with the granularity of the mix. Sponsored finance is obviously our newest team. Momentum is building in that group. We're hopeful for a very strong remainder of the year out of that team. So we're very bullish on the near term with loan prospects.

Would you say most teams are in place and producing outside of the sponsor finance team?

Yes.

Yes.

Okay. Last time we talked, Brad, you mentioned you had a net increase of 10 lenders. Have you added any more people, and how is the talent pipeline looking?

We haven't had any major additions in the last 30 days to 45 days or so. We're always on the lookout. There are a number of conversations that we're having right now. There's a huge opportunity for us to continue to expand within the Chicago MSA. We've got additional geographies now that we can reach into with the West Suburban footprint. And I think we've got a great story to tell. We've got a meaningful shot here to really add strong footings through areas of geography that we previously couldn't touch. So we're going at it. We've got the operating leverage going forward that I believe we need to not even have to explain any corresponding movements in expenses. It's a nice position to be in.

That's great. Is the right way to think about expenses is that they're going to tick down a little bit? You're going to probably outperform cost saves and any of the further outperformance just kind of be reinvested into new talent and the franchise?

That would be my hope. Yes.

Okay. I appreciate that and I think I am good for now. Thank you.

Thank you.

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

Hey, good morning, guys.

Hey, Brian.

Brad, I think your comment, maybe unless I missed it there, was on the rate increases and just kind of the benefits. I guess was your comment that I guess it was going to slow after the first hike or two. I guess I missed what you said there, but it sounded like that's what you're suggesting on the benefits?

No, not really. It actually gets better after the first couple, but the first couple, given just the absolute level of the margin is pretty dramatic. We've got an awful lot of the balance sheet that reprices very quickly. And we've got a big slug that has to burn through about 50 basis points of floors. And after that, I'm kind of a naturally pessimistic person, so I don't want to start counting chickens or anything like that. But higher rates are wildly good for us.

Right. Okay. In that amount.

We peaked out at a 25% margin last time. There's nothing structurally different about this balance sheet actually. This balance sheet is structurally better and higher rates than it was two years ago. It's a hell of a lot more variable on the asset side. It's exceptionally well positioned.

Got you. And can you just remind us, Brad, what's the variable rate piece that moves immediately with rates? I know you said you have to burn through some floors, but what moves immediately today versus getting through the rest of those on the floors?

So 50% of the loan portfolio is variable, 35% of the securities portfolio is variable. About 35% of the variable loan portfolio, so 35%, 50%, 60%, Brian, on the variable rate portfolio will move immediately.

Okay. And then all the investment securities well.

No cash. All the investment securities, 35% investment securities will reprice instantly.

Okay. Got you. So, yes, the optimism I get that wrong. So okay. And then maybe just on Jim, the loan growth sounds great just the payouts in the participation book. Is there still a lot less there? It sounds like either the originations are going to be great or at least the optimism is there today. But I mean, I guess there's payoffs it sounds like they're going to slow. Is it just a function that book is pretty small at this point, or maybe just any color on that?

Legacy Old Second participation book is relatively modest. The West Suburban syndication book is still pretty meaningful, Brian. I do think this last quarter was an aberration. I don't recall ever seeing a quarter where we had over $200 million in paydowns and payoffs. I certainly expect that to subside and pipelines throughout the company, including legacy West Suburban, are building. So at least for the second quarter, we're very optimistic.

And have you, I mean, given the optimism you've got, I guess is kind of the I don't know if you guys have kind of given your targets on loan growth. But has it picked up? I mean if you look 90 days ago versus today, given the success with the hiring and the momentum it sounds like it's building, I guess it sounds like that you'd be?

Yes. We're very optimistic. I mean normally the first quarter is pretty sluggish for us. Keep in mind we're coming off an exceptionally strong fourth quarter. First quarter originations were surpassed expectations and the pipelines continue to be very robust. So we're very close to clicking on all cylinders with our loan teams.

Got you. Okay. Maybe just a last one for me. It sounds like you're most near-term lease optimistic on the potential for the sponsored finance group. Can you give any thought on just how you're thinking about that business growing, kind of what the appetite is, how likely you'd like to see that get bigger?

We approached our internal modeling assumptions with caution and anticipated around $100 million in growth this year. I believe there is potential for that figure to increase. While we are not getting ahead of ourselves, over the longer term, it could significantly exceed that, although it won't surpass $500 million in the near term.

Okay. And how big is it today, Brad, just?

Non-existing today. We've a couple of originations at this point.

Yes. Okay. So not in the numbers at all you have. Okay. Perfect. Well, congrats on a nice quarter guys and thanks for taking the questions.

Brian, thank you.

We have a follow-up question coming from Nathan Race of Piper Sandler. Please pose your question. Your line is live.

Yes. I appreciate you guys taking the follow-up. I apologize if I didn't catch in the release, but just the purchase accounting accretion that was in the quarter. And just in terms of thinking about your guidance, Brad, that being flat going forward?

So total accretable mark of $9 million recorded on loans, the accretion in December was $540,000, PAA income in Q1 2022 total was $2.4 million that should be relatively stable. So, the bulk of that, almost all of it, was related to West Suburban. There was a tiny bit from the legacy deal a couple of years ago.

Okay. So $2.4 million is the number to kind of model in future periods in terms of accretion?

Yes.

Got it. And then I know it's difficult with all the macro uncertainty out there within the CECL framework just in terms of kind of thinking about the reserve from here. But it sounds like with credit metrics improved in the quarter. And I imagine within that context you guys aren't seeing much in the way of losses on the horizon. So I guess how do you guys think about providing for the kind of high single-digit loan growth outlook going forward?

I think the level of provisioning will be far below provisioning at the current percentage basis should be modest.

Okay. Great. Thank you for taking the follow-ups.

All right.

There appear to be no further questions in queue at this time. I would like to turn the floor back over to Jim Eccher for any closing remarks.

Okay. Thanks for your interest in our company, and thank you for joining us this morning. And we look forward to speaking with you again next quarter. Goodbye.

Thank you ladies and gentlemen. 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.