Good morning, everyone, and thank you for joining us today for Old Second Bancorp's First 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. The floor is yours.

Good morning, and thank you for joining us. As customary, I have several prepared opening remarks and will give my overview of the quarter and then turn it over to Brad for additional color. I will then conclude with certain summary comments and thoughts about the future, before we open it up for questions. Net income was $21.3 million or $0.47 per diluted share in the first quarter. Return on assets was 1.51%, and the first quarter 2024 return on average tangible common equity was 17.8%, and the tax equivalent efficiency ratio of 3.09%. First quarter earnings were negatively impacted by $3.5 million of provision for credit losses, which reduced after-tax earnings by $0.06 per share. However, profitability at Old Second remains exceptionally strong, and balance sheet strengthening continues with our tangible common equity ratio increasing by 51 basis points linked quarter to 9.04%. Common equity Tier 1 crossed 12% this quarter, and we feel very good about profitability and our balance sheet positioning at this point. Our financials continue to be positively impacted by higher market interest rates. Pre-provision net revenues remained stable and exceptionally strong. For the first quarter of 2024 compared to the prior year period, income on earning assets increased $3.2 million or 4.5%, while interest expense increased $7.5 million. The increase in both cases is rate driven. However, exception pricing and certain commercial deposits as well as growth in average balances of other short-term borrowings compared to the prior year period caused a net decrease in net interest margin, which is attributable to both interest rate and volume factors on the liability side. First quarter 2024 reflected a decrease in total loans of $73.5 million from the prior linked quarter end, primarily due to a few payoffs on some large credits towards the end of the quarter. The historical trend for our bank is really softer first quarter originations due to limited new projects and construction during the winter season. 2023 was an anomaly as savvy commercial customers realized interest rates were about to increase and sought funding prior to those market rate increases in late first quarter 2023. Our loan growth was much larger in the year-ago period compared to the first quarter of 2024. Activity within our loan committee remains modest relative to prior periods due to both the higher interest rate environment, lower demand, and seasonal impacts. Our net interest margin compressed slightly this quarter, driven by higher funding costs. Loan yields reflected a 7 basis point increase during the first quarter compared to the linked quarter and a 37 basis point increase year-over-year. Funding costs increased due to the increases in both rates and growth in time deposit balances. The tax equivalent net interest margin was 4.58% for the first quarter compared to 4.62% for the fourth quarter and 4.74% in the first quarter of 2023. The net interest margin decreased 16 basis points in the year-over-year quarter due to the impact of rising rates on the cost of funds, which is partially mitigated by growth in interest income driven by the variable portion of the loan and securities portfolio. The loan-to-deposit ratio is 86% at March 31, 2024, compared to 88% last quarter and 82% a year ago. As we said last quarter, our focus continues to be balance sheet optimization, and I'll let Brad talk about more of that in a minute. First quarter of 2024 reflected stable asset quality metrics and much more moderate actions taken on substandard credits compared to the fourth quarter of 2023. Our hope and belief remain that the prior quarter represented an inflection point in our credit trends. Old Second began substantially downgrading large amounts of commercial real estate loans, including office and healthcare at the end of 2021 and accelerating through 2022. Substandard and criticized loans went from approximately $60 million or a little more than 1% of loans at the third quarter of 2021 to a peak of nearly $300 million or over 7% of loans in the first quarter of 2023. As of the end of the first quarter of 2024, substandard and criticized loans are down to $200 million, which is approximately $3.2 million less than year-end 2023, and the trend expectation remains for further improvement through the remainder of the year. Encouragingly, our special mention loans are now at their lowest level in over two years. We continue to expect realization of a relatively less costly resolution on a number of nonperformers in the near future, and we remain hopeful we can recover some of the losses realized in the second half of 2023. The reality is that commercial real estate valuations are heavily dependent upon the market level of interest rates as a primary determinant of cash flows for a given property. A movement in rates such as we have seen, is substantial enough to significantly impair the equity positions and a large percentage of commercial real estate credits. Additionally, the residual stress brought upon by the pandemic in office and healthcare is not abated. We believe we are being proactive and realistic in addressing commercial real estate loans facing deterioration from higher interest rates, declining appraisal values, and cash flow pressures. As we discussed last quarter on the call and consistent with our expectations, we recorded net charge-offs of $3.7 million in the quarter, one specific current period charge-off of $3.9 million on a previously allocated loan was partially offset by approximately $159,000 of net recoveries during the first quarter. The one charge-off was due to the receipt of an updated appraisal on a healthcare property. The good news is that criticized and classified loans are declining, and the remainder of the portfolio remains well behaved. Continued stress testing and renewal rates have not raised any new red flags for us, and the bulk of our loan portfolio has transitioned and is seasoning into a higher rate environment. Being short duration on the asset side has obviously helped us immensely in terms of interest rate risk management but has probably put us at the forefront in terms of commercial real estate stress. The belief is reinforced by the experience that a significant percentage of our substandard loans are acquired secondary participations. The allowance for credit losses on loans decreased to $44.1 million as of March 31, 2024, or 1.1% of total loans from $44.3 million at year-end 2023, which was also 1.1% of total loans. Unemployment and GDP forecasts using the future loss rate assumptions remained fairly static from last quarter. The change in provision level quarter-over-linked quarter reflects the reduction in our allowance allocations on substandard loans, which largely relates to the 31% reduction in criticized assets since March 31, 2023. I think investors should know that we are continuing with the level of strong profitability and we will be aggressive in addressing weak credits, and that we remain confident in the strength of our portfolios. Noninterest income continued to perform well with growth noted quarter over linked quarter in BOLI and mortgage banking income. BOLI income bounced back from a weak fourth quarter due to changes in market conditions, Mortgage banking income increased $1.3 million quarter-over-linked quarter, primarily due to the minimal MSR gains recorded in the first quarter of '24 compared to MSR losses of $1.3 million for the prior quarter. Expense discipline continues to be strong with the usual seasonal uptick noted in the first quarter of 2024 compared to the prior linked quarter, primarily due to the annual increase in wage rates as well as growth in payroll-related taxes and 401(k) company match due to payout and employee-related annual incentives in the first quarter of 2024. In addition, our occupancy costs have increased quarter over the linked quarter due to the rollout of multiple updated branches at our corporate office. Our efficiency ratio continues to be excellent. As we look forward, we're continuing to do 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 build towards a more stable long-term balance sheet mix, featuring more loans and less securities in order to maintain the returns on equity commensurate with our recent performance. I'll now turn it over to Brad for additional color in his comments.

Thank you, Jim. Not a lot of surprises from us this quarter, which I think is good news. Net interest income decreased by $1.5 million or 2.4% to $59.8 million for the quarter relative to the prior quarter of $61.2 million, a decrease of $4.3 million or 7% from the year-ago period. Loan yields were 7 basis points higher in the first quarter, and securities yields were flat. Total yield on interest-earning assets increased 6 basis points over the linked quarter to 561 basis points, but that was offset by a 29 basis point increase in the cost of interest-bearing deposits and an 18 basis point increase in interest-bearing liabilities in aggregate. The end result was the expected 4 basis point decrease in the tax equivalent NIM to 4.58 from 4.62 last quarter, which we believe continues to be exceptional margin performance. The core margin was a little bit stronger than that as we saw a decrease in accretable yield of a few hundred thousand dollars. Pretty certain, we're pretty much done with that at this point. We've only got about $600,000 or so left to accrete. So from this point forward, core margin is actual margin for us. Deposit flows this quarter continued to display signs of stabilization and actually some growth. Average deposits increased only $3 million over the linked quarter, but period-end total deposits increased by $38 million. It's not really anything that we did on rates. I think others being kind of anticipatory of rate cuts have peeled back some time deposit pricing, making ours relatively more attractive. And you can see that showing up in the balances. I would say that we are still 30 to 40 basis points below market leaders in that pricing, but others have fallen off. So I guess, as an alternative, we've picked up more dollars on that front. Our interest rate outlook hasn't really changed on that front, and we haven't peeled back pricing at all in anticipation of any rate cuts. Deposit pricing overall remains exceptionally aggressive relative to the treasury curve and is still largely pricing off of overnight borrowing pricing. We did add some time deposits, as I mentioned, as others had peeled back. I'm not a lover of time deposits, but they aren't exactly garbage either. And the rate cut expectations that were in the marketplace as we discussed this last quarter were quite simply wrong. The growth here remains short. We are largely pricing less than a year and does offer significant value relative to overnight borrowing rates. You can see the alliance there has fallen somewhat significantly relative to prior quarters. On an overall basis, we are continuing to add duration and expect margin trends from the bounce back in market rate indices to be absorbed by projected growth in the securities portfolio beginning in the second quarter of 2024. We aren't going to lurch at anything, but we are looking to add more fixed-rate product. As we've seen long rates tick back up here recently, it's going to give us another opportunity to move some variable rate product out of the portfolio as we've been consistently doing over the last 18 months. Incrementally, I'm more bullish on margin than I was at this time last quarter. But I highly expect that we'll give back the upside in terms of reducing further duration. I think that's prudent at this point. The concentration of variable rate securities will resume its decline if the market continues to move on the path that has been on in recent weeks. I would be remiss if I didn't point out that all of the relatively minor margin compression that we have seen to date is attributable to balance sheet actions to reduce this asset sensitivity, specifically and most notably, the reduction in variable rate securities. In totality, marginal spreads remain unattractive at this point, and we don't feel the pressure to swell in order to overcome expected margin pressures. Marginal returns on allocated equity remain poor for outsized growth, but I still think we can see relatively flat net interest income performance for the year. We have made a ton of progress in reducing asset sensitivity over the last year. And we are extending duration in the loan portfolio at this point as well. I'm pleased markets have lost some of the inexplicable bloodlust for rate cuts that we were talking about last quarter, and I look forward to more rational Fed speak in the face of persistent inflationary trends. That's the extent of my soapboxing on rates for this quarter, but margin trends for the remainder of the year are expected to be relatively flat, maybe slightly down. If I'm wrong and a couple of rate cuts actually occur, we would lose a few basis points. The loan-to-deposit ratio remains low at 86.1%, and our ability to support liquidity from the securities portfolio continues as the fair value adjustment on the portfolio was only an $800,000 loss over the prior linked quarter, from $84.2 million to $85 million. This total unrealized loss remains high, but will be recaptured relatively quickly. The net result is that Old Second should continue to build capital quickly. As evidenced by the 51 basis point improvement in the TCE ratio over the linked quarter, which means that we have added an astonishing 221 basis points of TCE and $2.23 of tangible book value over the last 12 months. As of March 31, 2024, we have approximately $880 million in undrawn borrowing capacity, an additional $365 million in unpledged securities. Short liquidity at the bank is excellent, and the holding company is in a very strong position as well. Mentioned last quarter that we received non-objection from the Fed in December 2023 to resume stock repurchases. We haven't done anything yet, but it's getting very close based on the rationale I discussed last quarter. Noninterest expense increased $1.2 million from the previous quarter, primarily due to growth in salaries and employee benefits as well as a small increase in occupancy costs due to seasonal maintenance and depreciation on new office and remodeled branches. Salaries and employee benefits reflected the annual increase in base salary rates paid to employees in the first quarter as well as an increase in payroll taxes, 401(k) matches, and employee benefit costs over the prior linked quarter. I expect quarterly wages and benefits to be lower than $23 million going forward in the near term. Given the revenue performance, employee investment costs have been running high, but we will maintain the ability to dial back as conditions warrant. Say this quarter that we saw 2 or 3 kind of $300,000 to $400,000 items within salaries that make it kind of linked quarter artificially high. Those include better-than-expected performance on performance-based stock issuance. That also had an impact on the tax rate as well. With that, I'd like to turn the call back over to Jim.

Okay. Thanks, Brad. In closing, we are confident in our balance sheet and the opportunities that are ahead for Old Second. Our primary focus today remains on assessing and monitoring risks within the loan portfolio and optimizing the earning asset mix in order to reduce our overall sensitivity to interest rates. Net interest margin trends are stable and income statement efficiency remains at record levels. The expectation for continuing efficiency gives me confidence that we are well positioned to deliver another strong year in 2024. That concludes our prepared comments this morning. So I'll turn it over to the moderator and we'll open it up for questions.

Your first question is coming from Nathan Race with Piper Sandler.

Just curious to kind of get your updated thoughts on how we should be thinking about charge-offs going forward? Obviously, you had some stability in NPA and classified loan levels in the quarter. So first, would just be curious to hear the driver of the charge-offs. The score looked like it came from the owner-occupied CRE bucket. So I'm not sure if these are some of the loans that we've been talking about in the past quarters recently. And just generally, kind of what you're seeing in terms of loss content over the next quarter or two.

If you refer back to last quarter's call, we mentioned that we anticipated a loss of $3 million to $4 million. We believed that this charge-off would occur last quarter, but the timing did not allow for that. Thus, this charge-off was something we expected to convey. Next quarter, we might see an additional $1 million or $2 million, but I think there's only a 50% chance of that happening. Aside from that, I do not foresee significant losses, unless something unexpected arises. We aimed to communicate that we had reached a turning point last quarter, and we haven't encountered anything in the past three months that would cause us to revise that message.

The only other thing I'd add, Nate, is we haven't really seen any new problems crop up here in the last quarter or so and any future charge-offs that we will realize will more than likely be on previously allocated credits.

Okay. Great. And can you guys just remind us kind of how you're thinking about loan growth going forward? I understand demand is low and I imagine the pipeline slowed as well as I believe you touched on, Jim. But just any thoughts on how you see kind of the cadence of loan growth and also how you guys are expecting deposits to trend over the course of 2024.

Yes. I can discuss the loan pipeline, while Brad will address deposit flows. If we exclude 2023, our loan origination in the first quarter has historically been moderate, and that has been the case again this year. We also experienced significant large payoffs and paydowns due to property sales. I would describe loan demand as somewhat muted compared to last year. However, activity in our loan committee is increasing. We believe we still have the internal capacity for organic loan origination, allowing for low to mid-single-digit loan growth this year. Our teams are performing well, although some of the opportunities we are examining do not offer attractive marginal returns. As Brad mentioned earlier, we are not looking to compromise our balance sheet to address margin compression; instead, we are being selective and opportunistic. Nevertheless, we still believe that achieving low to mid-single-digit growth is possible this year. Now, I'll pass it over to Brad to discuss deposit flows.

Yes. The game is getting easier. So I think one thing that if you look at our deposit trends, and I've seen the industry and the flows from noninterest-bearing into other deposit captions. For us, as I mentioned, the open-to-close ratio is positive for the first time in a long time, and Old Second has historically been a net grower of checking accounts, absent the period of volatility coming out of acquisitions. Our deposit attrition within that caption is more a function demographically, I think, than anything else, just the struggle that's seen at the lower end of the pay scale and lower demographics. We are seeing some pricing pressure in commercial account balances, but nothing that we can't match. And certainly, at rates well below overnight borrowing levels. The speed of the mix shift that we saw coming into time deposits and coming out of overnight borrowings surprised us a little bit. I don't know if that will continue, but certainly, you can see a fair amount of volatility in market-ready interest rate expectations, and it does make sense for some volatility to bleed through into deposit markets as well from that. I'm more bullish than I expected to be on deposit funding, I can tell you that.

I think we're certainly in a fortunate position to have 40% of our deposit portfolio in DDA noninterest-bearing; that obviously will provide us a nice floor for any future margin compression.

It doesn't help our stated goal of reducing asset sensitivity to have that overnight borrowing position have in a period of weeks. That was certainly interesting. But things feel very good on the deposit front at this point.

Okay. Great. And then just turning to the margin, Brad, I think you alluded to greater stability in a higher for longer rate environment from here overly expressed next quarter too. And just within that context, I understand you guys obviously have a pretty short duration securities book. So just curious how much cash flow you're coming off the securities portfolio over the next couple of quarters and how you guys are thinking about redeploying that just given the fairly soft environment for growth in loans.

If the current trends continue in regards to growing the securities portfolio, the increase won't be substantial. It could be around $100 million to $300 million over the next year. There is potential value arising from the current volatility in interest rate markets, and I believe this trend will work in our favor, with more rates further out on the curve. My inclination is to continue selling variable and purchasing fixed rates. We will see if that opportunity arises, but if it doesn’t, that’s fine too. Over the last 12 to 18 months, we've communicated that there could have been more margin upside, but instead, we've achieved margin stability by reducing asset sensitivity. I anticipate this trend will persist.

Right. And can you just remind us how much cash flow you're coming off or maturing.

So just natural amortization of the portfolio would throw off about $25 million to $50 million per quarter.

Your next question is coming from Chris McGratty with KBW.

This is Nick Moutafakis speaking for Chris. Given the rapid pace of capital growth, could you discuss the priorities between buybacks and M&A? Is there a specific stock price that would encourage you to increase buybacks?

So we talked about this a little bit last quarter. It's not one variable, but I would say that, one, it's very difficult to do M&A if you trade at 7x earnings. That math is, if you're in a kind of a PE arbitrage game, that's a bad trade. So our stock becomes relatively attractive. When you talk about buying a lower quality balance sheet, say, 1.5x, just pulling the number out of a hat versus buying a higher-quality balance sheet at 1.2x. So the methodology we communicated last quarter was that projecting earnings 12 months forward, what's tangible book value per share? And are we below that in terms of the current trading price? I think that's a level that's very attractive to us, and that remains the case. I alluded in the prepared comments that we are very close to that threshold.

All right. And then maybe one more just on the NIB outflows towards the end of the quarter, I think the higher for longer kind of became more consensus. I guess, are you seeing any more deposit outflows towards the end of the quarter? Or do you think that narrowed a bit largely.

And I tried to allude to this as well. It's purely seasonal factors. We don't have a deposit base that's made up of people doing interest rate speculation. It's $5,000 and $10,000 checking accounts, and it's just a function of when pay periods occur, when is payday versus when are bills due and tax payments and tax refunds and normal people stuff.

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

This is Brandon Rud on for Terry. I just have a quick one. Can you expand on the impacts of the market rates have on the salaries and benefits lines? And then also what would occur going forward? If rates remain unchanged and you maintain these current, high levels of profitability.

It's not interest rates on the salaries and benefits line. It's a couple of items that drive it higher. One, you've got bonuses that are paid out in the first quarter. So you're fully maxing out FICA for your higher paid employees. So you've got a higher share there. And then I mentioned earlier that performance-based restricted stock vesting came in above target based on Old Second performing at the 90th percentile of the peer group on ROTCE and efficiency. That increased share issuance related to those performance stocks also has an impact on the tax rate, which is what it was a little bit lower this quarter. Those of you that listened know I'm loathed to talk about tax rate because I'm always wrong about it. I had said that salaries and benefits are expected to be kind of closer or even below $23 million per quarter going forward. The only thing that can make us wrong on that is, if say, there's a virus and a bunch of people get sick and health care claims go through the roof. That's the kind of stuff that I can't predict, but there's no step change here. It's just first quarter one-off type stuff.

Okay. Got it. And maybe one, your classified multifamily loans are pretty low. I'm just curious, can you talk about what you're seeing in your markets and trends in your own portfolio?

Yes. I think certainly, our focus with asset quality continues to be on office and healthcare. Those are the two main areas that we're seeing some stress. Nothing new has cropped up in office or healthcare for that matter in the last quarter or two. We continue to work through that. I think one of the other things we're struggling with is 1/3 of our classified loans are almost 1/3 of purchase participations and some are SNC credits, whereby we don't have a voice at the table. So working out of those is going to be a challenge. It's going to take time. But I think the good news is when you have 1/3 of your classified and criticized declining almost 31% from a year ago, that certainly bodes well for future migration.

Your next question is coming from Brian Martin with Janney.

Jim, I might have missed it in your comments. Just to clarify, I know the criticized loans are down, but can you confirm the criticized level for the quarter? Was it around $200 million? Is that what you mentioned, or do you have an updated number?

Yes, we have that. It sounds right, Brian.

Okay. $200 million a quarter. And then just for Brad, regarding the securities repricing, it seems like it's around $100 million or so this year. Are those mostly treasury securities, Brad? I thought that's what I heard.

That is almost entirely treasury. We had purchased a number of 2 to 4-year treasuries back in 2021 and 2020, hoping to recover our investment if our predictions about interest rates proved correct, which they did, and we successfully got our money back. We have a bit more common stock now. I didn't completely address the first question; someone asked about the cash flow from the portfolio. The normal amortization ranges from 25 to 50, but we still have some significant cash flows coming in over the next 6 months. We need to track the cash coming out, but we have plenty of opportunities for higher yields. I am quite pleased with our current position compared to where we were last quarter regarding reinvestment opportunities.

Okay. It seemed like last quarter there was about $100 million on the treasury stuff that was coming due, but it sounds like now the expectation of loan demand is off that maybe you just redeploy that into the securities book and maybe grow it from that when it becomes due.

We still believe we can grow loans, and there's no substitute for that. I don't have a problem with being at a $400 million overnight borrowing level. I'm fine with that, especially since it provides something that reprices if we're wrong about short rates. I don't see any reason to shrink the balance sheet, which is the main takeaway here. This quarter came in light on a period-end basis but performed a little better on an average basis. I would guide you to focus on the average balance sheet rather than the period-end.

Got you. Okay. That's helpful. And then maybe just on the capital kind of the buyback versus the M&A. I mean, I guess how is the market given, absent your stock price and the impact that has. But just as far as the level of opportunities you're seeing on the M&A side versus balancing that with stock price and then the potential for the earnings where tangible book is heading to, just thinking about M&A as a potential.

M&A continues to be difficult at this time. Many are facing challenges and may not perform well in the coming years, particularly in a prolonged higher interest rate environment. These entities also struggle with fair value assessments related to their balance sheets. Engaging in such M&A requires significant capital. I'm not entirely against it, but it can be burdensome. I believe there is a certain rate level where fair value evaluations, pricing expectations, and the decision to go solo versus waiting for rates to drop can be balanced out. I’m unsure where that level is, but M&A activity remains low. The simplest transactions tend to be with those holding a lot of unused deposits, and while we have seen some of those, competing on price with our current valuation is not feasible for us.

Thank you. This does conclude the Q&A section. I would now like to turn the floor back over to Jim Eccher for closing remarks.

Okay. Thanks, everyone, for your interest in our company and for joining us this morning, and 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.