Jim Eccher: Hey, Nathan.
Nathan Race: Just going back to credit and just kind of thinking about the healthcare portfolio specifically. That’s a decent remaining balance of the classified loans. So just curious to what extent you have any other out of footprint, healthcare loans that are maybe more susceptible to the inflationary environment and other factors impacting that space?
Jim Eccher: Yeah. First of all, Nate, I think the healthcare portfolio is diversified throughout the country where we’re seeing the stress, there’s about $42 million classified in that book, $28 million is in the assisted living space where we have a 2% allowance against that, another $14 million in skilled nursing. We’ve got a 10% allowance reserved against that. Where we’re seeing the most paying geographically is in California, where the state of California had the most restrictive gating rules around entrance and occupancy during COVID. What’s also further stressed the portfolio is that they’re all — a lot of our floating rate structures. So the interest rate carry and debt burden has been substantial. So we think we’ve addressed everything. We’ve stress tested all the remaining commercial real estate that’s in health — in office and healthcare that are maturing in 2024, and we think we’ve got everything well reserved for.
Nathan Race: Okay. Great. And I know it’s difficult to predict, but I appreciate that you guys have gotten out in front of a lot of the credit issues that popped up earlier in last year and kind of cleaned things up a little bit here in 4Q. But as you kind of look out over the next year or so, what’s kind of a decent range to expect charge-offs going forward within that context? Just given your guys’ conservatism generally? And just any guideposts around charge-offs as you guys see the world today would be helpful.
Brad Adams: I think in the first half of the year, depending on timing of resolution that you’re likely to see between $3 million and $5 million in charge-offs, which is currently already reserved for. And I don’t see a lot after that. So which is why the — our comments earlier reflected around provision consistent with loan growth. Now, I will say that all of our discussion is kind of ceteris paribus type basis, which is absent changes in econ. I think most bank stock investors are a jittery breed anyway. And I think that we’re always lurching at shadows. I think that we are in a type of macro environment where it could fall either way. It’s been interesting watching the belief that soft landing is a real animal in nature. I don’t really subscribe to that. But absent any changes in macro, that is our current outlook.
Nathan Race: Okay. Great. And then — so I suppose that implies maybe the reserve relative to loans trends down a little bit. Just given those charge-offs expected in the first half of the year largely allocated for. So just any thoughts on kind of where the reserve settles out in the back half of this year, after some of those qualitative adjustments as we spoke to on the macro front.
Brad Adams: Stable to modestly down. But I think that we’re comfortable where we are in that regard. And again, as it relates to a stable economic environment broadly.
Nathan Race: Okay. Got it. And I appreciate your guidance on the salary line for expenses this year. Just any overall thoughts on the run rate and just how you guys are kind of thinking about year-over-year expense growth? And the expenses were really well controlled last year, up 1%, but maybe a low to mid-single-digit trajectory more appropriate to use for 2024.
Brad Adams: I’m hoping to be in that kind of that 3% range, to be honest. We’ve done a really good job of migrating cost saves from the acquisition two years ago and continue to realize synergies there. That has belied some significant investment that both in people and facilities that allows us to step into our next decade here at Old Second and continue to grow into being a Chicago-based bank. Feel very good about what our expense trends look like. We feel very good about what kind of our balance sheet flexibility is and our ability to maintain earnings as well.
Nathan Race: Got you. And just lastly, going back to the discussion around margin, but maybe translating that into kind of NII thoughts for this year. I appreciate that you guys are obviously asset sensitive have less inherent deposit cost leverage as rate cuts occur. But just given kind of maybe a low to mid-single-digit growth outlook in terms of loans, how are you guys kind of thinking about just the NII cadence and just overall year-over-year NOI growth prospects for 2024?
Brad Adams: Pretty stable, to be honest, within that piece. That’s — and that’s just a function of when you’re looking at what potential marginal yields are, marginal spreads to be more specific, they’re very tight. A lot of people are lending kind of in that 7% range, and they’re funding whether they realize it or not in that 5% to 5.5% range. That doesn’t make a ton of sense. We have started to dabble in the 7s on the loan side, but that’s more a function of overall decreasing asset sensitivity because it allows us with cash flows that are coming in to lock in at that rate and just overall migrate down. Just to give you some context, we’ve been basically outside of absolute policy limits in terms of asset sensitivity all the way from the end of ’22 — the middle part ’22.
We have now reduced that such that we are within policy limits from overall asset sensitivity. We’ve made substantial progress, but it is a function of basically remaking the balance sheet and continuing to eliminate tail risk with movements in interest rates. As we spoke last quarter and the quarter before that, we were selling variable instruments hand over fist, and everybody was buying. And obviously, that trade has not worked out well for somebody as variable rates have taken a nose dive. So that opportunity has kind of slowed down a bit. But it can go back the other way quickly as we saw last year. So we’ll continue to be flexible.
Nathan Race: Okay. And just to clarify that kind of flat NII outlook for this year. Does that include two to three rate cuts in the back half of this year?
Brad Adams: It includes three rate cuts spread over the year.
