Old Second Bancorp Inc (OSBC) 2015 Q1 法說會逐字稿

Greetings and welcome to the Old Second Bancorp first-quarter 2015 earnings conference call.

(Operator Instructions)

As a reminder, this conference is being recorded. I would now like to turn the conference over to our host Mr. Doug Cheatham, Executive Vice President and Chief Financial Officer for Old Second. Thank you, sir, please go ahead.

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 in the current economic environment. These statements are not a guarantee of future performance and results may differ materially from those projected. I ask you to refer to our SEC filings for a full discussion of the Company's Risk Factors.

And now at this point I will turn it over to our President and CEO, Jim Eccher.

Good morning and thank you for joining us today. I will start by giving you my view of the quarter and then Doug will follow up with a more detailed report on the financial statements and then we will take your questions.

Our first quarter was positive in many areas as we look to improve our core profitability. As we've discussed in prior quarters, we continue to put a lot of focus on strengthening our balance sheet.

And as we mentioned on last call we did execute on the redemption of one-third of the outstanding shares of the Company's Series B preferred stock on January 31. The redemption was successfully completed and 31,553 shares remain outstanding. We will continue to evaluate the timing and feasibility of further redemptions over the next few quarters and we view this as a high priority initiative as we continue to work towards deleveraging the balance sheet.

As far as noninterest income we had solid performance by our mortgage and wealth management business which helped offset lower service charges on deposits. Our mortgage banking group in particular had strong originations in the quarter and this business line remained strong. Mortgage originations reached the highest level in the last two years and were up 57% from the fourth quarter.

We also continue to build upon our strong core funded deposit base. Noninterest-bearing deposits were up over 7.8% from the prior quarter and up over 11.5% from a year ago. Overall core deposits which excludes CDs are up 5% from the prior quarter and we continue to focus on building our core deposit base which now comprises 76% of our total deposits and is up 5% from a year ago.

After five consecutive quarters of loan growth, loan totals declined slightly in the quarter. The performing loan portfolio declined about $4 million and the nonperforming loan portfolio declined by a similar amount. The performing portfolio was down modestly in the quarter as most of the decline was attributable to pay downs in the consumer loan portfolio.

Overall loan demand was relatively soft in our footprint in the first quarter along with a seasonal slowdown but we do expect stronger demand in the coming quarters. We do expect some headwinds in overall growth as we continue to move nonperforming loans out of the bank or into our other real estate portfolio.

Reported first-quarter net income available to common stockholders is $2.7 million, or $0.09 per diluted share compared to $630,000 or $0.04 per diluted share in the first quarter of 2014. Asset quality improved again in the first quarter although not as significantly as the prior quarter. Nonperforming loans declined; however, OREO assets increased $3.5 million as a large nonperforming finally reached resolution and moved into our OREO portfolio.

Classified assets resumed their downward trend and we continue to position the portfolio for further credit remediation. Net charge-offs were modest in the quarter and OREO costs were moderately lower than a year ago.

Okay, at this time, I'll turn it over to Doug to give you more insight on first-quarter performance and he'll open it up for questions.

Okay, thanks, Jim. As we announced yesterday first-quarter 2015 net income available to common stockholders was $2.7 million, or $0.09 per share compared to $630,000 or $0.04 per share in the first quarter of 2014 and $1.9 million or $0.06 per share in the fourth quarter of 2014.

Improvements were seen in a number of areas. Net interest income was up $1 million from the first quarter of 2014 to $14.6 million in the first quarter of 2015.

Although net interest income was down about $0.5 million from the fourth quarter of 2014 the fourth quarter did include some recovered interest and it had two more days of interest accruals than the first quarter of 2015. That alone accounts for more than $300,000.

In percentage terms the net interest margin was 3.26% in the first quarter of 2015 compared to 3.13% in the first quarter of 2014. If you look back over the past five or six quarters you can see that we have been at a higher level beginning in the second half of 2014. This is attributable to moderate loan growth last year, the addition of CLOs in the investment portfolio and the continued decline in the cost of funds.

Noninterest income of about $8 million was 26% higher than the first quarter of 2014. Residential lending income was $932,000 higher in the first quarter than in the first quarter of 2014 and $559,000 higher than the fourth quarter of 2014.

Other income of $2.1 million was $1.062 million higher than the fourth quarter of 2014 and $787,000 higher than the first quarter of 2014. A one-time nonrecurring fee of $917,000 explains the bulk of the increase in other income.

Noninterest expenses in the first quarter of 2015 were at the lowest level in over seven years at $17.2 million. In comparing expenses in the first quarter of 2015 with the first quarter of 2014 the main differences were an increase in net other real estate expenses offset by a decline in amortization expense. Compared to the fourth quarter of 2014 the decline in expenses was primarily in other real estate.

In addition to generally declining staffing over the course of the past year, last weeks we reduced staff by 21 full-time equivalents. Severance cost will be recognized in the second quarter and the full effect of the reduction will begin in the third quarter.

We continue to look for ways to improve our efficiency ratio. As defined in the release at 68.77% the ratio was more than 10 points lower than a year earlier and more than 5 points lower than the fourth quarter of 2014.

And finally as most of you know, this was the first quarter of reporting capital ratios under Basel III which became effective January 1, 2015. The new regulatory ratio common equity Tier 1 was 9.12% as of March 31, 2015. Even with the redemption of preferred shares and the transition to Basel III the Tier 1 leverage ratio was unchanged from the fourth quarter to the first quarter at 9.93%.

And now with that I will open it up for questions. Operator, we can open it up for questions.

(Operator Instructions) Chris McGratty, KBW.

Hey, good morning everybody. Jim, on your prepared remarks on TARP can you remind us it sounds like it's a priority that's going to be addressed in the coming quarters, can you remind us the cash that you guys currently have at the holdco? And what annual needs you may have to frame the timing and the method of which you may take out another piece?

I will let Doug comment on -- the cash. As you know, Chris, we've talked in prior quarters about our desire to get that TARP repaid but we do have to continue to work with the regulators on that and work through the capital ratios.

When we did the common equity raise about a year ago at this point we did keep some money up into the holding company. We've got, I can get you the exact number or Doug can, but we've got plenty of cash. And we also have the ability to continue to dividend money up from the bank up to the holdco.

Okay. So it does sound like you have the cash on hand. Maybe I will move on to credit.

You made a higher back from a local competitor I believe last week whom we all know. When he was at the prior institution I think he was fairly active with their accelerated remediation efforts. I wonder if there's anything to read into there.

I mean your nonperforming assets are still on a relative basis about 5%, a little bit high. Is there any contemplation of expediting now that your capital is a little bit stronger expediting the divorce from the credit cycle?

Yes, I guess as far as the hire of our new Chief Credit Officer we had an opening in our credit group. We feel Mr. Kozak is a great addition to our team.

We also feel and agree with you that we'd like to continue to work these classifieds down. And I think we continue to position particularly the OREO portfolio and also a few of our non-accruals to get them -- to get a little more velocity out of those and out of the bank here hopefully in the next few quarters.

So it sounds like it will be methodical as opposed to one aggressive step. Is that the right interpretation?

Yes, I would agree with that, yes.

Thank you very much.

Andrew Liesch, Sandler O'Neill.

Hey guys. Just want to look at the margin. Doug, can you just give us your thoughts here on why you think it may -- it sounded like there was some interest recoveries in the prior quarter and with those away where do you think it can go from here?

Well if you look just taking a step back, if you look over the last few quarters we have -- we were at 326 in the third quarter, 335 in the fourth quarter and back to 326 in the first quarter. I think it's always going to move around a little bit quarter to quarter but I think we're in the range in the new range with the first-quarter results.

Compared to where the first two quarters of last year it was 313 and 304 and then it really stepped up with some of the progress that we've made. So I think this is a good level right now.

Okay. And then just looking at FDIC insurance it looked like that was down pretty substantially from the fourth quarter. Was that a true down or are you going to be accruing that at a different rate now?

It's a little bit -- the reduction was a little bit overstated it that make sense. We did have an accrual adjustment where we had and I apologize I don't remember the exact amount but we had over-accrued by a little bit that we had to reverse in the first quarter. But so we may be slightly higher than this.

Got you. All right, thank you.

(Operator Instructions) Evan Plisner, Trishield Capital Management.

Good morning guys how are you? So just a few questions for me, the first being so residential mortgage banking obviously very strong so congratulations on that. Have you seen that continue through in the second quarter?

We generally don't give a lot of guidance, Evan, but I can tell you it's been pretty steady. Obviously the low rates have been a good contributor to that but we've just seen a general uptick in overall activity in our markets and we've obviously been very pleased with the level of originations. So we're optimistic in the near-term.

Excellent. Then going back to the $917,000 incentive payment from the service provider, could you provide some more color on that?

Well we actually have a contractual obligation not to go into any detail on that. We pretty much put out there what we can and we've got the amount out there and it is a nonrecurring item.

Got it, okay. And then the last thing was when I look at the time deposit trends so year over year it looks like the interest rates have come down about 36 basis points. How much lower do you think that can go over the next call it 12 months?

Well, yes, I think I don't want to put a number on that but I think there is room for it to continue to drift lower. We still see some older CDs running off and that's been helpful to lower our cost of funds.

We have stemmed the tide a little bit on that to try to manage the levels that we're at. So we are offering some competitive CDs but it's still more a retention tool than a -- it's not an objective of ours to grow the CD portfolio at this point.

Got it. And then the last thing was in terms of the Federal Home Loan Bank of Chicago, so on December 31 you had $45 million outstanding.

At the end of the first quarter you had $30 million outstanding but then you took a term advance on the 31st. Would you just mind walking through the rationale behind that?

Well, sure. That's just partly managing short-term funding and really it's quite inexpensive short-term funding. We pay depending on if it's overnight or a short-term term advance those things cost 12, 13 basis points and we're getting 25 basis points from the Fed.

So even on overnight funds there's a small positive spread. So as long as we're in that kind of a range, we have plenty of liquidity to manage that. We don't consider that to be necessarily a permanent situation but it's something that for the time being it's being a little bit more on the borrow side than the excess funding side is a net benefit.

Perfect. Thank you guys very much.

Congrats on the quarter and we really appreciate the focus on expense reduction. It's very impressive.

Brian Martin, FIG Partners.

Hey guys. Sorry I joined a little bit late, so maybe this was already covered since it sounds like the last person talked about the expense reductions. But maybe just any thoughts on the staff reductions that you made here in April and just any thoughts on the brand structure.

I think you guys talked a little bit about that last quarter. So I apologize if you've already covered it.

Yes, Brian, this is Jim. We obviously are really working hard towards becoming a lot more efficient in a number of areas. And it was unfortunate that we had a little bit of a reduction but we really started to see and realized some efficiencies through technology and have been able to really do a lot more with less so a lot of backroom reductions.

As far as branch rationalization we're looking at that all the time. We are down six or seven branches from the peak.

We continue to look at that -- we're also conscious of the fact that we've done a great job at building core deposits. And for the last two or three years we've opened up record amounts of checking accounts and we want to keep that momentum. We feel that will serve as well long-term and continue to build a low-cost funding base is critical and again we continue to look at branch rationalization and at this point we don't have anything to report.

All right, thanks.

At this time there are no further questions. I'd like to turn the floor back to Mr. Eccher for any final remarks.

Okay, thank you to everyone for joining us this morning. And we look forward to speaking with you again next quarter. Goodbye.

Thank you. This concludes today's teleconference.

You may disconnect your lines at this time. Thank you for your participation.