Bradley Adams: I guess the CET1, which we’re pretty healthy on. It’s – I can’t imagine there would be much of an objection here. I mean we’re in real good shape in almost any way you can evaluate a bank. So things feel pretty good on that front.
Christopher McGratty: Okay, thanks.
Operator: Thank you. Our next question is coming from Nathan Race with Piper Sandler. Your line is live.
Nathan Race: Thank you, all. Hey, guys, good morning.
James Eccher: Good morning.
Nathan Race: Going back to Chris’ question just on terms of growing NII at least near term. What does that contemplate in terms of kind of deposit balances from here in the overall size of the sheet. It sounds like, Brad, maybe there’s an opportunity to continue to reduce wholesale funding, which would support that outlook. But kind of curious to kind of hear some of the underlying balance sheet drivers to get there.
Bradley Adams: Optimization, right? So a smaller bond portfolio that can add their manifest through smaller overnight borrowings. But what we tried to do during 2021, when everybody was convinced inflation was transitory as we try to stagger maturities such that we get back a healthy amount of money relatively quickly. Should the situation we find ourselves in today, present itself, which it obviously has. Over the next 12 months, we have several hundred million dollars – well, we got a couple of hundred million dollars anyway of treasury securities that are yielding sub-70 basis points to us that it will be coming back to us. And again, that can either manifest through smaller overnight borrowings, earning a 400 basis point spread improvement or it can manifest through loans, earning 700 basis point spread improvement.
We just have money coming in at the appropriate time in order to reposition and optimize the earning asset mix, which is what we’ve been talking about for the last year. It’s tough, right? You try and tell people that you’re in a good position in terms of what maturities you’ve got rolling off win, but we’ve done a nice job. And we’ve got ample opportunities to continue to optimize the earning asset mix coming at us over the next 12 months.
Nathan Race: Okay. Got it. And just going back to credit and the charge-offs in the quarter. It sounds like these were the office CRE loans that you guys flagged, I think, back in April coming out of 1Q earnings tied to West Suburban. And it also seems like there’s still some chunky nonperformers that are tied to that acquisition. Can you just remind us kind of what fair value marks of purchase accounting, you’re holding against those loans and just kind of how you’re thinking about loss content potentially going forward as those credits are resolved going forward?
James Eccher: So both of the properties that we took the charges on were, in fact, office loans. One, both downtown Chicago that had just been struggling as a result of COVID. And again, we’re positioning those for sale or no sale. With regards to the nonaccruals, yes, they’re chunky. And like I mentioned before, a fair amount of them are our participations that were not leading. So we’re working with the lead bank to find an equitable resolution there. As far as the purchase of accounting marks, I’ll let Brad talk about that.
Bradley Adams: So the purchase accounting is a little different than it used to be, right? And what we tried to do is rebuild the provision as the credit marks accrete and we – I think you can see that, that’s occurred. We do have substantial allocations to anything that we are concerned about. So that’s why earnings streams really shouldn’t be interrupted in terms of what falls to the bottom line as we work out of these credits. I think that what I’d like investors to know is that the acquisition that we’ve done has been an absolute home run for our investors. It was both well timed and well executed. But no acquisition is perfect. And certainly, the weakness within the last one was on the asset generation side and they basically purchased syndicated loans within that deal.
And we’ve – we told you from the very beginning that we were going to work out of those, and we’ve cut the syndications from that deal in half at this point, and we’ll continue to move it down. What we’ve seen so far in terms of weakness in downgrades, and we are downgrading realistically even without loss content is that the bulk of our problems, the overwhelming majority of our problems are poorly rated credits do come from acquisitions. Old Second originated portfolio remains very strong. So we’ll continue to get through this. And what’s helpful is for people to have perspective that not everything is a 100, but even that 90% in terms of acquisition – the execution on an acquisition is still pretty darn good.
Nathan Race: Understood. And it sounds like kind of the near-term loan growth outlook is pretty modest at least near term. So just curious how you guys are thinking about the reserve trajectory from here? You guys still sit at a pretty healthy level compared to a lot of your peers. And it does sound like there’s additional material charge-offs moving on the horizon from what we can see today. So just any thoughts on just how the reserve trends going forward?
Bradley Adams: I think we’ll probably take one more charge-off, but it’s largely allocated for. And then we’ll probably do what we’ve been doing, which is protect against the tail risk of a potential recession and just kind of hold it where it is, maybe bleed it up just a tiny bit. But I don’t see a lot to be worried about at this point.
Nathan Race: Okay, great. And if I could just ask one more on expenses. I think you mentioned 22% to 23% in terms of comp near term. Does that kind of translate to kind of flattish expenses in the fourth quarter? And just get any overall thoughts on how you figure that out?
Bradley Adams: And that reminds me too, that is the case, flattish kind of in the fourth quarter, maybe a little bit of improvement. Chris, I forgot to answer your question about the BOLI. I’m sorry, I’m below par today. We restructured the BOLI from an absolute ridiculously awful asset to a slightly better asset in terms of what we did with that, and that is both the portfolio that we acquired from previous acquisitions and our existing. So what you’re seeing this quarter is at run rate it’s still awful and we’ll never buy any ever again. But it is at run rate.
