Old Second Bancorp Inc (OSBC) 2012 Q1 法說會逐字稿

Greetings and welcome to the Old Second Bancorp first-quarter 2012 earnings conference call. At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. (Operator Instructions). As a reminder, this conference is being recorded.

It is now my pleasure to introduce Mr. Doug Cheatham, Executive Vice President and CFO.

Thank you. Good morning, everyone, and thank you for joining us. I will start with a reminder that our comments today may contain forward-looking statements which are based on management's existing expectations and the current economic environment. These statements are not a guarantee of future performance and results may differ materially from those projected. I ask that you refer to our SEC filings for a full discussion of the Company's risk factors.

With me this morning are Bill Skoglund, President, Chairman, and CEO of Old Second Bancorp; President and CEO of Old Second Bank, and COO of Old Second Bancorp, Jim Eccher; and Executive Vice President and Chief Credit Officer, Joe Marchese.

Now I will turn it over to Bill to get things started.

Good morning and thank you for joining us today. I would start off with a few brief comments and I will turn it over to Doug and Jim and Joe for more detailed comments.

But for the quarter, earnings for the first quarter were pretty similar to the fourth quarter, with the Bancorp showing a loss of $3 million before TARP and the bank showing a loss of $1.3 million. The loss this quarter was mainly the result of putting $6.1 million into the reserve versus last quarter we only needed to put $1.4 million in.

One credit was the culprit here I think. We required to put $2 million in allocation for one credit. It was the result of a lawsuit that went against us on one of the guarantors, which we are appealing, and some allocated real estate taxes that were as the Company was in bankruptcy, we didn't have a full view of those until a little later.

That -- the charge-offs, also the charge-offs this quarter of $10.5 million, the way we calculate the reserve, it increases the average and required a $1.6 million to be put in for that, so those two accounted for more than half of that $6.1 million in additional reserves. Hopefully those are more one-time events.

Our OREO expenses were actually down $3 million from the fourth quarter and things are moving in the right direction there. Core earnings were up with the mortgage banking income up $1.1 million. Our capital ratios at the bank were still above regulatory ratios, required ratios. Total ratio at the bank, total capital ratio at the bank was 12.88% and the leverage ratio 9.22%. You might recall the regulatory required was the total to be 11.25 and leverage 8.75.

The good positives this quarter were more on the loan side, continued good progress on the loan remediation. Nonperforming loans were down $14 million. Problem loans accruing were down $24 million. Both of those were from the year-end and watched loans also down $5.3 million.

The total problem loans now are $193 million, which is the lowest level since January of 2009 and that's down more than 50% from the peak of $401 million.

Overall, we continue to see less new problems coming in and appraisals stabilizing on many types of properties, which should be good news for us in the future. As I mentioned, watched loans are down $5.3 million and OREO was up $8.4 million for the quarter.

Our strategy continues to be one of capital stabilization where we would like to keep asset levels the same but hopefully with loan growth; maintain or increase our capital levels; continue to remediate and reduce problem loans and OREO; and the key, return to profitability, which hopefully would eventually lead to a recovery in the DTA.

With that, I will turn it over to Doug for his more detailed comments.

Thanks, Bill. The previous trends continued for the most part in the first quarter of 2012. It was very similar to fourth quarter of 2011 in some respects. The first-quarter net loss per share was $0.30, which was unchanged from the fourth quarter of 2011 and also from the first quarter of 2011.

Nonperforming loans were down 35% since the first quarter of last year and fell $13.5 million in the first quarter of 2012. In summary, earnings were flat and asset quality continues to improve.

The net interest margin was 3.48% in the quarter compared to 3.44% in the fourth quarter of 2011 and 3.50% a year ago, so the margin has been relatively stable.

Assets increased by $40 million in the quarter. Other than a very slight uptick in the fourth quarter of 2011, this is the first real increase since we began deleveraging at the beginning of 2009.

With regulatory capital ratios stable for an extended period of time now, we did not need to reduce assets further. We are adding assets in the investment portfolio and we will shift those funds to loans as lending recovers.

Securities available for sale have increased by $214 million since the end of the second quarter of 2011 when we entered this new phase. The increase in deposits and purchase of securities has also greatly increased our liquidity.

Noninterest income was $10.5 million in the first quarter, which was higher than any quarter since the fourth quarter of 2010. The biggest reason for this was $2.6 million in net gains on sales of mortgage loans. This was an increase of $1.4 million from the first quarter of 2011. Service charges on deposits were down from the fourth quarter but were consistent with the first quarter of 2011. We tend to see lower deposit service charges in the first quarter so this is a normal seasonal fluctuation.

I would also note that we had $1.2 million in lease revenue on other real estate owned, which offset some of the costs of holding these properties. Other noninterest categories were more or less in line with previous trends.

Noninterest expenses were $22.5 million in the first quarter. We continue to manage expenses very carefully. The first quarter was the lowest point in noninterest expenses since the fourth quarter of 2009.

Holding company tangible common equity has declined to a negative 0.25% from the 0.08% as of year-end. All holding company regulatory ratios are at acceptable levels. It is the common equity components that we will need to remedy when conditions allow.

Capital ratios at the bank continue to exceed the minimum level contained in the consent order. The leverage ratio was 9.22% compared to a minimum of at least 8.75% and the total risk-based ratio was 12.88% compared to a minimum of at least 11.25%. These are down slightly in the quarter but they're up significantly over the first quarter of 2011.

And with that, I will turn it over to Jim Eccher.

Thank you and good morning. The primary focus with our loan portfolio has been and will continue to be on credit remediation. We made progress in a number of areas with most key metrics showing improvement on a linked-quarter basis. And while there is still room for improvement, we did continue to make strides in reducing our classified loans.

First, total classified assets declined over $30 million in the quarter or nearly 9% from beginning of the year and over the past 12 months, classified assets have declined over $143 million or 32%. Total classified assets peaked in December of 2010 and have dropped steadily over the past five quarters.

Our classified loan trends continue to steadily decline and have been achieved without the benefit of a bulk loan sale.

Our early-stage delinquencies or loans in the 30- to 89-day and accruing past-due bucket declined again and stands at only $7 million. Consistent progress has been made in our portfolio management efforts and we are optimistic that early-stage delinquencies have stabilized. We feel on a go forward basis, this should minimize adverse loan migration in future quarters.

As Doug mentioned, nonaccrual loans declined $13.5 million in the quarter while troubled debt restructurings and loans greater than 90 days past due increased slightly by $2 million resulting in a $12 million decline in nonperforming loans for the quarter.

We continue to reduce our exposure to commercial real estate and construction-related credits. Construction-related loans are down to only $60 million in the portfolio and have been reduced by over $300 million since the beginning of the cycle. Construction loans now represent only 4.5% of the loan portfolio.

Prospecting for new loan growth opportunities began in earnest in the fourth quarter of last year and while we still expect overall loan footings to decline in the near term, loan pipelines are slowly beginning to build. Overall loan demand still remains relatively weak in our core markets particularly at high quality C&I and owner-occupied commercial real estate opportunities.

Our credit and remediation initiatives were effective as more properties migrated into our OREO portfolio in the quarter and our single greatest challenge continues to be in OREO disposition. Total OREO of $102 million increased $8 million in the first quarter as inflow exceeded outflow for the quarter.

While we were disappointed in our OREO outflow in the quarter, we are seeing increased buyer interest for some of our assets. We attribute the lack of sales in the first quarter to both seasonality as well as the postponement of some contacted sales into future quarters. We expect sales to pick up in velocity over the next couple of quarters.

Internal efforts to sell OREO are still netting anywhere from $0.85 to $1.10 at par. Absent a bulk loan sale, we expect better results in the next few quarters based on our current negotiations and properties that we currently have under contract.

On the funding side, we continue to improve our deposit mix. Over 67% of our total deposits are now on DDA savings and money market and that compares favorably to a year ago when approximately 60% of our deposit mix were in core deposits. We continue to really focus on relationship banking and their strategies continue to be effective.

We also have some repricing opportunities in our CD portfolio in the next six months that should provide some benefit on the margin and funding side.

At this point, I will turn it back over to the moderator and we can certainly address any questions you may have.

(Operator Instructions). Stephen Geyen, Stifel Nicolus.

Good morning. Maybe just a couple of questions on credit. Jim, what were the amount of new nonaccruals during the quarter? I think it was around $25 million, $26 million last quarter.

Last quarter, I believe yes. It was in the low 20s in new nonaccruals and this quarter we had very few new nonaccruals. We had I would say less than $5 million.

Okay, maybe a question for Bill. How do you look at the capitalization right now of the holding company and what's the plan over the near term to rebuild that?

Good question. We look at that all the time and look at what our options are. Our current strategy would be to say we need to kind of heal ourselves a little bit first and we have -- if we can do that and could get things like the consent order off of us and the DTA back, we think that we could be in a much better position to raise some capital at that point rather than trying to do it now, when our stock is trading in the 160 or 170 number.

It is pretty dilutive today, so we are just kind of slugging through it is our strategy, Steve, and we are just thinking that we can heal ourselves a little bit that things will get better and we know we are going to need some capital at some point. We have -- we can defer on our trust preferreds until 2015. We can defer on our TARP for quite some time, but we know we need to get that done.

The question is still a question whether we need to pay off TARP or not. We are not sure of that. We are seeing some of these auctions happening. We don't know where we would fit into that. We're not in a position to pay off TARP ourselves, but -- so there is a little bit of uncertainty there.

But our plan right now is to kind of keep working through it, start -- continue to heal ourselves and at some point when our stock price is higher, we would go get some capital. It may not have to be enough to pay off TARP completely or it may. It just depends on how this goes.

It may just be a smaller capital raise to get some liquidity and to be able to grow a little bit. It depends on -- again, depends on where we go with this TARP. But right as for now, we just feel like we need to work through a couple more quarters at least, maybe even a few more than that and see where it is. This DTA could take a while before that could come back.

Okay, thank you.

(Operator Instructions). Gentlemen, there are no further questions at this time.

I would just like to thank everyone for calling in and for their interest in the bank. We look forward to continuing to improve in each quarter. Thank you.

This concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation.