Earnings Call Transcript - OSBC Q4 2024

Operator, Operator

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, Chairman, President, and CEO

Good morning, everyone, and thank you for joining us this morning. I have several prepared opening remarks and give my overview of the quarter and then turn it over to Brad for additional details. I will then conclude with certain summary comments and thoughts about the future before we open it up for questions. Net income was $19.1 million or $0.42 per diluted share in the fourth quarter of 2024, and return on assets was 1.34%. Fourth quarter 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 will 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 to end at 10.04%. Common equity Tier 1 was 12.82% in the fourth quarter, and we feel very good both about our 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 declined. Pre-provision net revenues remained stable and exceptionally strong. For the fourth quarter of 2024 compared to the prior year like period, income on average earning assets increased $1.6 million or 2.1%, while interest expense on average interest-bearing liabilities increased $1.2 million or 9.9%. The increase in interest expense is rate-driven primarily due to remixing market pricing on certain commercial deposits. The fourth quarter of 2024 reflected a slight decrease in total loans of $9.7 million from the prior linked quarter end, primarily due to some large paydowns in commercial real estate, owner-occupied and multifamily portfolios during the quarter. Comparatively, loan growth in the 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 the 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 3 to 6 months. Tax equivalent net interest margin increased by 4 basis points this quarter, driven by continuing high interest rates on variable securities and loans as well as reduction in our funding costs due to the close of the 5 branch purchase from First Merchants in early 2024. Loan yields reflected a 12 basis point decrease during the fourth quarter compared to the linked quarter, but a 16 basis point increase year-over-year. Funding costs decreased primarily due to approximately $267 million of deposits acquired from First Merchants, which allowed us to pay down 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 is in good shape. It's at 84% as of December 31, 2024, compared to 89% last quarter and 88% as of December 31, 2023. As we have said on prior calls, our focus continues to be balance sheet optimization, and I'll let Brad talk about that more in a minute. In terms of credit, this is a mixed quarter with both some good news and bad news, the bad news first. We recorded an $8.6 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 are in much better positioned 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 $0.37 on the dollar. This represents our current best estimate and recovery at this point, but additional losses 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 and OREO valuation expense in the quarter. These represent charges below recent appraisals to immediately and contractually clear 2 properties from our book soon. These are loans that have been identified long ago and have been worked their way through the resolution process. On a $16.4 million commercial real estate loan was foreclosed on in the fourth quarter. Notably, no loss is expected and the properties under contract for a first quarter sale with significant earners money already received. We remain optimistic this asset will sell clear in the next few weeks. And now for the good news, substandard and criticized loans decreased significantly in the fourth quarter. These balances in total $129.9 million 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 represented a decline of more than 56% from peak levels and are near their lowest levels in 2.5 years. Classified and nonaccrual balances continued to improve significantly on both a year-over-year and linked quarter basis, and we expect further substantial non-cost improvement in the very near term. Special mention loans also continued to improve dramatically. These balances are down 46% from 1 year ago. When your portfolio is short duration, it's important for investors knowing 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 for us and the bulk of our loan portfolio has transitioned into the higher rate environment and will be impacted with downward rate movements going forward. The allowance for credit losses on loans decreased to $43.6 million as of December 31, 2024, or 1.1% 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 forecast used in our future loss rate assumptions remained fairly static from last quarter, with no material changes in the unemployment assumptions on the upper end of the range based on recent Fed projections. The change in provision level quarter-over-linked quarter reflects the reduction in our allowance allocations on substandard loans which largely relates to the 27% reduction in criticized assets year-over-year. Noninterest income continues to perform well with growth in the fourth quarter of 2024, compared to the linked quarter in wealth management fees, service charges on deposits and mortgage banking income. Excluding the impact of mortgage servicing rights, mark-to-market adjustments, mortgage banking income was flat quarter over quarter. Other income decreased in the fourth quarter of 2024 compared to the prior linked quarter and prior year like quarter with the linked quarter variance primarily due to recoveries on vendor contract and other contract incentives received in the third quarter of '24. Expense discipline continues to be strong with total noninterest expense in the fourth quarter of 2024 $5 million more than the prior linked quarter, primarily due to an increase in incentive accruals and First Merchants acquisition costs incurred of $1.5 million in the fourth quarter of 2024 compared to $471,000 in the third quarter. Our efficiency ratio continues to be excellent as the tax equivalent efficiency ratio, adjusted to exclude acquisition costs and OREO costs was 54.61% for the fourth quarter of 2024 compared to 52.31% for the prior linked quarter. As we look forward, we are focused on doing more of the same, which is managing liquidity, building capital and also building commercial loan origination capability for the long-term. The goal is obviously to continue to create a more stable long-term balance sheet mix featuring more loans, less securities in order to maintain the returns on equity compared to recent performance. I'll now turn it over to Brad for additional color.

Brad Adams, COO and CFO

Thank you, Jim. There's not a lot of controversy for me to talk about. So I'll add a few comments and then pass the puck back to Jim. But I don't really feel the need to be much up on the 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 and increased $349,000 from the year-ago quarter. Tax equivalent securities yields decreased 10 basis points and loan yields were 12 basis points lower in the fourth quarter compared to the third quarter. Total yield on interest-earning 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 to net interest-bearing liabilities in aggregate. The end result was a 4 basis point increase in the tax equivalent NIM to 4.68% for the quarter from 4.64% last quarter, which we believe continues to be exceptional performance. Deposit flows this quarter continue to display signs of seasonality and stabilization. Average deposits increased $114 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 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 NIM 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 2 years, expectations have become much more realistic relative to absolute economic conditions and federal deficit constraints. We are very proud of the balance sheet decisions we have made over the entirety of the cycle and continue to believe we are well positioned for what is to come. Duration is a bit more attractive as we sit here today. So our bias leans in that direction but not dramatically so. Relatively poor marginal spreads persist and Old Second is continuing to focus on compounding book value and maximizing returns. For us, that means being careful with expenses and pricing risk appropriately. As a result of the recent rate cuts and their impact on indices, margin trends for 2025 are expected to trend down slowly. Success in funding loan growth with the newly acquired deposits offers the opportunity for upside to these expectations. As Jim mentioned, the loan deposit ratio is now sub 84% from 89% plus in the fourth quarter compared to the third quarter, and that's due to those purchased 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 intangible book value over that time. This quarter, capital was essentially flat. That is a result of the use of cash for the purchase of the First Merchants acquisition. 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 in rates relative to the 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. Our buyback is in place and is on the table. Noninterest 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. Old Second performed exceptionally well at the 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, it's in the 4%, maybe 5% range, and we're targeting loan growth in the mid-single-digits. I know we said that last year, but I feel more optimistic about it this year. Overall, things feel great. We're very proud of where we are and believe that our future is extremely bright. And with that, I'd like to turn the call back over to Jim.

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

Operator, Operator

Your first question is coming from Jeff Rulis with D.A. Davidson.

Jeff Rulis, Analyst

Really just a couple of follow-ups, maybe 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 '25. 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?

Brad Adams, COO and CFO

So you force me up on my soap box, Jeff. I don't really see a mechanism for further rate cuts. I see fairly persistent sticky core inflation, and I see fairly strong underlying both employment and macro trends overall. But that being said, I do realize that some do want to talk about 1 or 2 more. I think if we get to more, I think you're likely to see us trend towards kind of a $4.35 to $4.40 margin eventually, but it will be a slow path to get there. I feel pretty confident that what is ahead has us significantly above the 420 margin level. I just don't see a significant margin contraction overall.

Jeff Rulis, Analyst

Brad, if there are no more cuts, something better than 440 then in that.

Brad Adams, COO and CFO

That would be my expectation, yes.

Jim Eccher, Chairman, President, and CEO

One thing. The Merchant's acquisition closed very early in December so we did not have a full quarter benefit on the interest expense savings on the FHLB borrowings.

Brad Adams, COO and CFO

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 of hundred million of received fixed swaps that matured in 2024, which helped us with margin stability. And by design, we had a ton of bonds that matured through a laddering that allowed us to reinvest at higher rates. It was well managed. The cash flows were well planned. And that has contributed to our margin stability that was probably much better than anybody expected.

Jeff Rulis, Analyst

Thank you. I would like to follow up on the expense side. Is the 4% or 5% growth based on the reported full year '24?

Brad Adams, COO and CFO

Ex the merger stuff. Ex the nonrecurring stuff. We try to be pretty transparent with what we call nonrecurring, if you ex that out, the core on an operating basis, and I know you can get to this number is we're targeting a 4. And the bulk of that, the bulk of our drift on the expense side is in the employee benefits caption we are seeing significant increases across those in terms of what our expectations are. We may do better than that. We certainly have in the past. And I yell at our HR department about it all the time that they live on it in order to look like heroes. But as we sit here today, it looks like there's some significant inflation in that number.

Jeff Rulis, Analyst

Okay. And that was

Brad Adams, COO and CFO

I got about 7 HR people on the call right now, too. So I know they're all just rolling their eyes right now.

Jeff Rulis, Analyst

I believe the 4% potential growth would consider merchants on a full quarter basis. That's part of that expectation, correct?

Brad Adams, COO and CFO

From an operating expense perspective, First Merchants increased their operating expenses by approximately $400,000 for the month of December while they were with us. Although we didn't generate many loans during that time, we aren't incurring costs for overnight borrowings thanks to our deposits. Additionally, our funding structure, which currently has no overnight borrowings, is unlikely to remain this way for long. Changes will occur as balance sheets are managed and other factors come into play. This is the situation as we assess the current impacts.

Operator, Operator

Your next question is coming from Chris McGratty with KBW. Seems Chris has left the queue. Your next question is coming from Nathan Race with Piper Sandler.

Nathan Race, Analyst

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

Brad Adams, COO and CFO

I believe we're currently around 462. If the Fed makes a cut in July, that could lead to a decrease of 2 to 3 over time as we move forward. I expect we'll see a reduction of 2% to 3% each quarter, and another rate cut could add to about 7%. The significant challenge for us is our short duration exposure, making margin guidance particularly complicated. The fluctuations in Fed fund futures and their effect on SOFR can cause SOFR to change by 100 basis points within a quarter, which will influence our loan yields. The timing of these changes is uncertain. My projections of a 2% to 3% decline each quarter, along with a 7 basis point reduction from a Fed cut, assume a consistent trend in SOFR or OIS rates, which is not always the case. It is unreasonable to expect complete stability when rates can jump significantly in a short period. Currently, there appears to be a level of rationality in the interest rate futures, which gives me some reassurance and more confidence in forecasting what 2025 may look like.

Nathan Race, Analyst

Okay. Got you. And just to clarify, are you suggesting you're at 462 coming out of the fourth quarter because I think you guys posted 468 in 4Q?

Brad Adams, COO and CFO

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, Analyst

Got you. Thanks for clarifying. Just within that context, you're thinking mid-single-digit growth this year. So can you just update us in terms of how much cash flow you have coming off the bond book to fund that? And to the extent maybe there's a shortfall kind of what your deposit gathering aspirations are in 2025?

Brad Adams, COO and CFO

We expect to generate around $250 million from our bond portfolio this year, which could fully support loan growth if we choose to go that route. Over the past six months, the yields from our bond portfolio and the quality of the assets have been particularly appealing. We have made selective purchases at times, especially when investors were favoring variable rate securities in the middle of 2024, which proved to be a beneficial strategy for us. While I prefer more attractive duration over variable rates, the situation has improved slightly today compared to earlier in 2024. With some stability in rates, we lean towards asset growth, and I am open to enhancing loan growth through loan acquisitions if valuable opportunities arise. We have numerous options at our disposal, ample flexibility, and significant capital. Our balance sheet is strong, we have substantial cash inflows, and our profitability is high. Overall, the outlook is positive.

Nathan Race, Analyst

Right. Yes. And regarding the capital that has been accumulating and will continue to do so, I would like to hear your updated thoughts on the current M&A environment. If you are feeling less optimistic about that area, what would it take for you to consider reengaging in share repurchases?

Jim Eccher, Chairman, President, and CEO

Yes, Nate, all we'd say around that is discussions are active and ongoing.

Brad Adams, COO and CFO

In terms of buyback, I'm not all that price sensitive. When you're earning at the levels we are and at the relative valuations, there's nothing that would preclude a buyback at these levels.

Operator, Operator

Your next question is coming from David Long with Raymond James.

David Long, Analyst

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. So you are at $41 million. If you add in a full quarter First Merchants that comes up again closer to $42 million. Is that the number we're looking at the growth based on? Or is it simply the number for the year that you posted, that you're talking 4%.

Brad Adams, COO and CFO

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

David Long, Analyst

Okay. Great. That's very clear. 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 bankers to take advantage of some opportunities?

Jim Eccher, Chairman, President, and CEO

Yes, Dave, we reduced our growth expectations for 2024 due to the yield curve, as we weren't finding favorable risk-adjusted spreads. However, we believe the pricing situation is improving, and we are observing a more active pipeline, particularly in commercial real estate, where we took a cautious approach last year. We are confident in our ability to achieve mid-single-digit growth this year. That said, we remain open to hiring new talent in the commercial bank, whether it involves teams or individual producers. Based on discussions and early pipeline indicators, we feel optimistic about this year.

Operator, Operator

Next question is coming from Terry McEvoy with Stephens Inc. Brandon Rud: This is Brandon Rud on for Terry. I have 2 questions on Credit Quick. I guess, do you have the industry for the C&I charge-off? And then two, the $19.4 million of OREO under contract. Did you say that you do not expect any other expenses related to that?

Brandon Rud, Analyst

I will address the OREO question first. We have put several larger properties up for sale with the recent valuation adjustments. We are quite confident that these will sell in the first quarter, so we do not anticipate any additional write-downs. Regarding the commercial and industrial credit, I need to tread carefully as we are currently involved in a legal process. I can only say that when credit issues arise in bankruptcy, there are many complexities involved. I cannot delve into specifics about the industry, but I can assure you that Old Second does not have a significant concentration in it. In fact, it is an area we are not looking to expand. That’s about all I can share on that credit matter for now. Okay. 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?

Jim Eccher, Chairman, President, and CEO

We compete with typical banks in Chicago, and that environment hasn't changed much. Last year, we decided not to book loans at lower yields. We believe that with the curve becoming more normalized, we will encounter better opportunities. Our choice not to pursue lower yielding credit wasn't due to a lack of options.

Brad Adams, COO and CFO

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

Operator, Operator

Your next question is from Chris McGratty with KBW.

Chris McGratty, Analyst

Brad, just coming back to NII for a minute. You've been running that kind of 60 to 62 a quarter. It feels like kind of that's about right based on what you're saying. Absent like a loan purchase or something stronger 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.

Chris McGratty, Analyst

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

Brad Adams, COO and CFO

I mean, I looked at a few things already Life Equity loans are certainly an option. Some classes of consumer assets are certainly an option, not really interested in commercial real estate. If there are 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 think 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 5/1 jumbo arms right now today. So we can turn off that origination internally as well, get more competitive on that rate and put that on the sheet. There's a lot of asset options right now. I feel pretty good about that.

Chris McGratty, Analyst

Jim, you discussed M&A briefly. Could you share any additional insights on your preferences between public and private deals, any differences in pricing, or any changes in those conversations?

Jim Eccher, Chairman, President, and 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, Analyst

How would you consider using some cash to leverage it?

Brad Adams, COO and CFO

Absolutely. That's why a significant reason for building capital was that the cost to maintain it has been the lowest it has been in the last 18 months or so. There's essentially no real cost for having that flexibility. In this environment, mergers and acquisitions are influenced by access to cash and capital, which many people lack. I'm not particularly interested in simultaneous equity raises during such mergers and acquisitions as they undermine everything we've successfully accomplished over the past few years. I believe we are in a great position.

Operator, Operator

Your next question is coming from Brian Martin with Janney Montgomery Scott.

Brian Martin, Analyst

Brad, just for clarification on M&A, can you provide some insight on the size? Is it leaning more towards smaller deals, larger ones, or something in between? I might have missed your previous comments on this.

Brad Adams, COO and CFO

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, Analyst

That's good. Okay. And then just two clarifications on the margin outlook, Brad. It seems like you're suggesting that if you consider your current position compared to your trend, there might be a basis point decline in a quarter along with a potential rate impact around midyear. It appears the margin could range from about $4.40 to $4.50 depending on how things unfold. Is that a correct overall perspective? If so, what steps can you take to exceed that range? Additionally, if a rate cut occurs and all these factors come into play, will you be able to perform better than that?

Brad Adams, COO and CFO

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, Analyst

Okay. And that's even with the rate cut in midyear.

Brad Adams, COO and CFO

I mean, yes.

Jim Eccher, Chairman, President, and CEO

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. Nonaccrual loans were down 47% this quarter, I think, down over 60% for the year. We think we've 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, a special mention category, that's down 50% from just last quarter. So we think the balance sheet is in great shape. We don't see any red flags at this point outside of this bankruptcy credit that we're dealing with. I think we're positioned for a very strong year on the credit front next year.

Brian Martin, Analyst

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

Jim Eccher, Chairman, President, and CEO

Correct.

Brad Adams, COO and CFO

Health care 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.

Operator, Operator

Your next question is coming from Kevin Roth with Black Maple Capital.

Kevin Roth, Analyst

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 in the Midwest and your footprints in terms of originations and trying to avoid going out of market? I mean if you could just talk a little bit about that that would be great.

Jim Eccher, Chairman, President, and CEO

Yes, Kevin, thanks for the call, the question. We primarily focus in the Chicago MSA, although we do have a couple of lending verticals that are nationwide focused sponsors and finance and health care come up, just to name a couple. And so we've kept a pretty wide net where those opportunities make sense. And 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.

Kevin Roth, Analyst

Yes. The reason I ask the question is that the risk profile of markets like California and Florida appears to be increasing, driven by insurance premiums and other factors. I'm curious how that impacts your underwriting.

Jim Eccher, Chairman, President, and CEO

Absolutely. We pay close attention to that. I can give you an example. Health care is an area that we had prior to the pandemic done some assisted living and skilled nursing in those markets, we'd pull back dramatically, not looking at opportunities in those markets. So it's a fair point and something we monitor very closely.

Brad Adams, COO and CFO

I think in California wasn't great. We certainly aren't immune from learning from that.

Operator, Operator

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

Nathan Race, Analyst

Yes. 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. So in 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.

Jim Eccher, Chairman, President, and CEO

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

Brad Adams, COO and CFO

I think you have to go by how we calculate reserves. We don't really have a lot of specific reserves left. There's nothing that's really spooking us right now.

Operator, Operator

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

Jim Eccher, Chairman, President, and CEO

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

Operator, Operator

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.