OSBC - Earnings call transcript Q3 2020 | Old Second Bancorp, Inc.

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Operator

Good morning, everyone, and thank you for joining us today for Old Second Bancorp, Inc.

Third Quarter 2020 Earnings Call.

On the call today is Jim Eccher, the company’s CEO; Gary Collins, the Vice Chairman of our Board; and the company’s CFO, Brad Adams. I will start with a reminder that Old Second’s comments today may 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. to discussion the factors. of you for SEC ask full a the would refer company’s to filings Management company’s risk today’s also measures. will call, certain On financial non-GAAP be discussing we to These are earnings which tab. under available non-GAAP is oldsecond.com, counterparts our at Investor described reconciled release, website measures on the in their and our GAAP Relations

I turn will it Now over to Jim Eccher.

Jim Eccher

related magnitude lower of anticipated was hours to significant discipline XX% and and the overall remarks then asset of continued The thank massive deposits you sizeable rates than compression reductions deferral of Brad details. I quarter. thoughts loans deposit rate Earnings to it prepared our in NIM summary questions. we origination XX% opening points. million PPP before reported income today. of the of impacted to the for was variable liquidity, The with of have from increase from this $XX.X overview positively open of last comments future quarter Net which reduction of my diluted by and strong of growth income us was or taxable and and continued joining morning for earning the Net for higher share reduced give resulted gains expectations Good on slightly I not banking a turn net income had conclude Okay. mortgage volumes. our $XXX in in without in basis over quarter operation will expenses ratio in third we result this and loans. activity PPP on and interest quarter will with corresponding volumes impact core it the were increased loans, taken several additional loan about million then more because per up margin XX sale quarter. based on loans. to mortgage interest specifically a $X.XX in Expense a the declined some equivalent

point on changes. our stable. this contact about at of assets the staying book of of today the these remain in the at the is million trends Non-performing already closely $XXX X.X% of in we deferral, and remained our Of earnings and quality focused were a our bulk payment $XXX.X situation. clients. modification modestly, and portfolios. And or in each somewhat our are we team classified remarkably and are related Loans that with XX% to million to Asset borrowers strength original Details are approximately confident increased on monitoring COVID-XX tables close and stand with release understand lending on have working every which loans, loan status. returned available

for second our reserve breakdowns received $XX.X loan X.XX% that XX, As the a of totaling the on of balances earnings commitment Exclusive in additional loans current stands XX will the October at portfolio, loans, Second also levels. period. the PPP of additional Old is million investors considered. total X.X% unfunded and modification Concurrent and with on also our portfolio reserve detail of composition reserve give filed release, loans loan deferral currently detail at

quarters relatively credit of of allowance $X a the rate loans. reclassified stable the reflecting reserves were results, environment. positive mortgage earning unfunded losses commitments and into for trends consistent with million fundamentals impact and During quarter, was for Overall prior banking the on low with

employees, to are protect communities. Old our We has customers number with Second a performance. of this extremely steps pleased and taken

our For remain and albeit, available, open precautions. our with customers, locations safety necessary

proud to are waived defer been also appropriate. the cases. of in vast to our impacted ability communities employees few is directly remotely working We been offering more and of has efforts couldn’t be I staff we are last our serve March to months. the The been many grateful Fees those of Old our majority Second over with have work as continuing since issue. the payments that and have without

steered strengths that us of clear fortunate core industries. has most many are impacted We the of our lending

quarter, reminder a zero had energy is our exposure and limited for is hotel aircraft we portfolio. and significantly As lending from the portfolio, restaurant our last term rising in We the falling to direct demand. in many realized or be of lending consumer scarce other similarly to in extremely the and potential industries unemployment implications intermediate exists for the impacted commercial short loan

our both are monitoring office and We both customers commercial closely in estate, footprint. in retail trends our and real for

although this remains relationships. overall lending Our point, at outlook we new seeking are cautious

XX base portfolio. yet at loan our life Of worsen economic unemployment either. upgraded forecast economic scenarios the not did note, in rate although of case as elevated an and Our base stress the quarter, we September of we third them the significant economic have continues project to not, over

hold We will well believe have than losses better and but diversified will up is much some at point, our we most. portfolio

in XXXX, on beyond $XX and and liquidity are pandemic strong the progression softer they the it have did regards line about in featured pipeline an Brad, of and In quarter and our been. a below total by process the our of of In economy who a receipt far encouraged Old specifically, capital comments. of based believe mostly time, disappear. began muted. robust prepared overall demand, you Second position could Second of at Loan the last his areas. turn Concurrent surprisingly from results estimation. XXXX. trends through loan loans lending number year, improve over froze more this, origination third application remain remain volume. funds very We with of with in line to we cash-out drawdowns due the will period from Importantly, that significant activity to refinancing. the as million that payoff a quarter. continue to cautious, activity quarter, well with we growth of from decreased third ever give forgiveness to Old In as any credit not drawdowns the impact XXXX third mostly into see continuing forgiveness continued of short and quarter will the quickly saw we Thus quarter the in in of the applications but path remainder fourth current color to SBA levels expectation the And should I’ll pipelines we Overall, process have SBA

Brad Adams

Net compression more last excess lower the further balance Thank and yielding PPP relative decreased loans. persisted of to sheet, the you, margin modest Jim. than quarter. $XXX,XXX due the interest rates margin declined but continued deposit entirety only has of we Net liquidity income We more excess on margin expansion for and – reduced to substantial quarter. this, expected liquidity, had inflows interest

expectations. of distance Our margin these performance factors has remained within exclusive of shouting our

future We improve. trends banking $XXX,XXX, pandemic the would for of sale loans. stabilize in profile. at as unemployment September do the improve. quarter, losses loan second soon last economic modestly recessionary I with outlook of loans would the coming the in of due reflected will the customer some XXXX of and excess margin and mortgage quarter on quarter provision charges these first expect conservative outflow in in for the increased returns, were to margin slowly growth to This total look of This in remaining second banking currently also rate mortgage prolonged highly because third our short this in I’m gain the X% reduction The the credit over quarter. short outlook anyway, outlasts durations will The inflows a occur extremely approximately losses of on in growth environment. remaining the year not $X.X of in XXXX margin the for and of above over is the periods deploy the MSR loan or income start the elevated not environment as term. spend Consumers’ back activity an income is us assuming bounce in improve million should $XXX,XXX relative the next primarily in conditions and deposits into quarter reverse point allowance economic and loss either third strong Service again quickly. through credit to If to falling If periods. to conditions extremely our with relatively deposit life that quick, over the as $X quarter. million net increased.

the Jim has to minimal very As in culture overall. hardest exposure industries hit credit Old mentioned, strong a Second

relative Our to dramatically consumer last lending have exposure XX% Reserves and in well seasoned. is modest both book across year. relatively of this excess year, commercial the increased

modest and loan remain the coming quarters core funding customers, of focused efforts funding spreads expectation the trends, quality assuming growth contraction and in liquidity will our unreasonably tight. in margin risk on robust, helping with Our maximizing further remains be

positioned, well initiatives franchise. have us remainder turn well call the to expense while of the that, modest the year to more some back in remain I’ll pursue Expenses quality the pursue stream of and to economic With Our flexibility levels leave capital over liquidity depth relationships the the and controlled, we ample extremely clear. becomes Jim. likely as will we and protecting continue

Jim Eccher

In remain challenges feel trends, these for Okay. we in ahead. confident Thanks, closing, the and ready we’re Brad. with like our encouraged sheet balance

We ourselves our right is goals. liquidity, agreed disciplined, the years on can the Directors our funding focus timing. with our We with balance comments We this and concludes and help bank that sheet to regulation and improve well mention capital to I’d I the credit underwriting Bill access need available to York, the perspective this position Making welcome be advantage. that remained is Financial slowdown and That that and sure than more experience OCC new order to will us believe to time join morning. like their opportunities reach optimistic in two and strong. XX to long-term have long our taken us of of also Lyons, capital us. they position believe to our with franchise, we week, for Board prepared MB our we steps have we take have a and and recession. additions for has Jill announced executive a remain

the it we open can questions. will turn it So for to I up over and moderator

Operator

Thank you.

from with question. Our first Sandler. Nathan your comes Please Piper question Race state

Nathan Race

guys And Good reversing part outlook, in think commitment that as in the was to you hoping just line start I maybe utilization, growth to morning. ACL of resulted was I I also well. with unfunded actually the loans quarter. think loan lower which attributable decline

have So of these how kind about think kind I just to the should of of piece commitment ACL unfunded XQ forward? PPP in think the levels and at trough loans we trying here going

Jim Eccher

a Yes, based we’re economic but more weeks, active three few predict, certainly guess definitely seeing starting build I seeing weeks, going the in difficult Nate. again. than the very on committee. with Things last a two, But to loan the to are pipeline would more I say, we out COVID. are uncertainty

encouraged We’re opportunities with a growth some quality fourth expect in the hopefully show at, we’re can that and looking and the we quarter. stabilize of portfolio the

Brad Adams

the it’s bad things looking quarter to of uncertainty in factor the commitments, provision in that that’s the of think maybe into relates a how – I largely there And unfunded terms quarter first how was time. second for much were at and

commitments unfunded characterize commitments. I can in actual pretty provision are of But stress. economic trends. substantially still indicative as that you would overall see still as Our for level down that it very the severe loan exists

stress of level So does it come in get where into the I Or in to of reversed? has question we But the the exists versus of think as reserve, quarter? it’s possible indicative it continue that go year is, third down. the level it can that today. saw the early does stress it’s The general that more is

Nathan Race

it. the elevated excess the remain like, level at it got And they’re liquidity to outlook in Okay, near forward, then NIM core the term. going sounds least on expected

year, X.XX% some fourth So to compression the expectation compression magnitude per hoping year, that couple kind your frame of is from quarters? it of into head I’m like, this sounds early up the past next expectations of the the quarter level of the over kind leads for just core NIM next

Jim Eccher

be as Nate. would mine, Your good as guess

and I I relative on expect average an heck that. $XXX this the in did million net a to a only increase we not not one second. sole seeing money of not quarter, I around Obviously, expected lot of have would there’s fund the think saw fed position, that. basis, a sloshing we’re dynamic. third whole that,

out are liquidity the dependent investment that be when you from that those issuers margin that that to look now, available opinion, spreads here upon right trends cautious will Certainly, around plow and that’s for credit industry think desire tight largely back of not risk to in. there. in are indicative my in opportunities the unreasonably I are

in that something short of But credit guarantees. would I my be to have with that, in duration liquidity to putting terms that it we some obviously do think and extremely preference that work. strong of is

help it. point But will anything’s So going position. than better not fund that because basis it’s the sole a XX fed margin, to improve

long bother me. around be to margin As remains liquidity necessarily on. it as going I a doesn’t it’s say also will that’s excess stepped that

I core calcs, margin margin as measured think internally. margin at what’s least stable our we’re the into by we the internally margin and running what’s And excess incredibly liquidity. impacted is core

by So not I’m margin the this contraction terribly too of point. concerned possibility at future

Nathan Race

acceptable understood. lastly there only in maybe helpful. me the was classified. the an That’s just quarter. for performance think loans. Okay, was The was to uptake in item It And in increase quite then like credit looks stood construction me, classified that I out

would lines those So be helpful? just color any along

Brad Adams

modest had We Yes. uptick, Nate. a

but substandard, very here. one common loans mentioned credit either to flow proactive that in of struggling, under don’t the of this or off project came that our losses of to condo specifically portfolio or those duress point, first is downgraded I round theme the that in we at the think see be small and special churches try abatement most cash coach. in XX had were is our committee We but reside some motor in is transportation in leasing we

of these downgrades. see of next quarters, upgraded the couple with some importantly, expect don’t to we We any in get losses these but

Nathan Race

I Great questions, guys right. the next taking All quarter. hear. to you appreciate

Jim Eccher

you. Thank

Operator

your James. question question. Long Our next Please from with comes David state Raymond

David Long

time? on types of you optimistic losses guys Jim, Good you but do have. record And you will expect to are point bank still at come It cautious, sounds the in said guys will losses. like losses what Where those morning, you everyone. this

Jim Eccher

least you got Well, The is the an portfolio risk probably losses. I’ll give for highest example. potential

point the a Actually, either industry – abatement, mentioned, could borrowers COVID TDR. hand But or that duress. and don’t be longer are are number us. the second I retail them under couple guess, under of more abatement none we of concentrations in duress. the transportation. of have keys this our abatement, in get that, over extended we absence them date, at motor them to change. a would to Many extends As then, But they’re there’s tiding, have credits had to to which I create the – could potentially that coach first portfolio on this again, that a ready to of if is the extends a provided church to virtual and In certainly hanging there. But second under able have sector make of only been adapted of there, the that haven’t the number

provide a payment always them we’ll beyond situation. is, with that’s even the If to second my continue challenging deferral. So and more guess work relief

David Long

Got it.

TDR? point, you Thank if you. a XXX Okay. sounds it become then the And once the accounting do, at you go days that like it past then does

Jim Eccher

It yes. would. It would,

David Long

Okay. Got it.

Brad Adams

As we here the in deferrals second are, million. sitting mid-$XX our are are today

terms total in X% the loan of in range it’s So portfolio.

here We’ve tiny and the in surprised of and strength. today, this to been specifics in talking it what the what more So be cash about of forces flow to ago. where optimistic customers’ months relative we’re like what terms seeing terms six us it were to like our looked we’re upside looks underlying dynamics is

things encouraging. that pretty So on are front

David Long

built into your reserve in I stimulus had your have what you assumptions what do for it. Got assumption question on the last is, your a looking is today, then reserve? – at And package reserve for

Jim Eccher

an package We’ll the not and currently the of have expectation reserve. stimulus

David Long

it. Thank Got you.

Operator

Please Chris state McGratty question with question. Our comes your from KBW. next

Chris McGratty

Brad to topic and industry COVID be your or what a hot seems guess, low you I be today could might of It within about maybe magnitude response on Jim, the you considering. Good everyone. in rates, comments morning, to elaborate just expenses?

Jim Eccher

lot. We Not a run lean.

you We honest run if you the a then ago. have probably opinion, should lean. draconian announced what been have weren’t And you my doing expense doing cut, year

So the for edges at us, it’s a here. little bit trimming

proud down XX% has efficiency efforts ship. years. have locked by last environment. – XX% ratio that despite to come mid several the in run everybody XX% expenses terms to rate from there here of sub We down. been very migrated a in that We the remain low I’m a over a keeping of have high We efficiency tight ratio a a made margin

capital margin on a in caught also and many the investments. deferred We XXXX was some expanding. XXXX great up improvement that maintenance have tech when also involves any and And significant

of which pretty we Some us went allowed darn to be remote. seamless full when

did level. And years CapEx drive base basically have tangible it and on just $XX relative I increases see quarterly that I’m don’t mid-teens million think that significant some damn close I to pretty where can happy returns around I common hang the any equity we So out think which can are this to with.

Chris McGratty

capital, Is you assume are capital have buyback, for improving? given of expectations to continue you’ve to Got mean, that a might if quarters thoughts the that it on kind it. I of the is of pace that guys returning few On of you couple been the one visibility done forward. fair going

Brad Adams

Yes.

Chris McGratty

Okay. all tax Obviously in that And from of all the up? at question. benefited I know from couple way then years way materially last you’ve had different different lower investment be risk assets. for the might – down Anything that Anything we portfolio your ago. a industry the sensitivity some the done rates stuff,

Brad Adams

No, not really.

change lean preference, Certainly into regime. but new that kind if I We if had think anything of my change, a see we are. tax we’ll that where wouldn’t way. tax the rates over we back that it’s step to be didn’t

Chris McGratty

Thanks. Got it.

Operator

Okay.

question state comes Montgomery. question. from next Our your Janney from Brian Please Martin

Brian Martin

morning. Hey Good guys.

was quarter this want I classifieds, Just the any there the as in one or there ask special but pretty stable migration question of list was any the credits about it well? to magnitude mentioned watch

Jim Eccher

mention we leasing and understand the credits couple one to don’t they special returning a handful Brian a quarter. that second aforementioned ironically, migrated hospitality are strain. fourth normal we we We coming loan portfolio need surprises. deferral took – mention, It’s a the no had that we had had to payments special but in of We – they where

pretty there that few sell. resolutions on too, some any I had can’t were some a say able as – to that and far was we minor surprises, upgrades non-accrual were and properties As had obviously to any really there we movement

Brian Martin

Okay.

the you so kind classifieds. reserve reserve take So we of how of what you general, underlying saw this modest your in a just on guys increase, similar in a trends? about increase build significant just – sounds. And credit at COVID how completed like I absent to here the build do from got feel change from deterioration most guess, in point any or just

Brad Adams

would economic That I the from stress. nature the that is Yes. is meaningful the modeling. duration for CECIL only of provision risk growth say of here

of You shorten to recession lot And to extend is lot the beyond when your a losses continue magnitude forecast recession a We your extent evident, beyond with So, a that? what forecast that capital. liquidity. does context the of lot got becomes We you to reserves. period? got we of or of yes, period extend see in began what got

else really how shape. put don’t it I We’re good to in that. know other than

Brian Martin

quarter your explanation Yes. change? guess, of there, made it quarter, your is it just of abundance like what’s sounds I just this kind changes or wait guys mean, caution change forecast. not Brad, – you or that but just I Moody’s to like forecast the I some the it or another is change guess I an guess, the didn’t seems better did

Brad Adams

rate above real And start fast that that do my the changed. does. I’ll some changed seemed say is that substantially this that you quickly. implications is get honest, movements as as be the stuff Despite you indicate can has good, meaningfully. if of your it – rate market pretty that X%. personal would And outlook forecast I whipsawed the not changing to not happen bias the is unemployment of unemployment Our

by means We’re out here. of no the woods

well. goes, our up our As very strong, quality holding Old is far Second as credit very is profitability

much experience unemployment things losses expect And remained on a we XX% you liquidity don’t goes underwriting I some stress. X% how care above I it. basis. how from we When you throw disciplined. has don’t like don’t say know will at Our real to occur,

Brian Martin

how deferral, do on I think more guys around one, deposit that much mean, of to growth – do guess, how something just permanent much is And kind how long-term that about of that’s The versus Okay. just Brad, you that one exit you year, you customers transitory stick think last the Jim. is are that this bank. the deposits going I

Jim Eccher

Yes. Brian, question. a that’s great

the lack growth the the consumer bleed some been going How fourth $XXX We’re said depositors as and feel fund certainly on side, seeing in down in soul. we’ve commercial cash. see side municipal to on of the but And million quarter, in quarter our stick? we’ve we’re be tell. hovering million, pretty side, PPP flip of much the and here about spending It’s million $XXX-some-odd between We both loans on normally and to we their then $XXX the – still got forgiven that’s fourth that right, do deploy better in could loan order. hard short

as is guess your So my. as good

Brian Martin

Okay. And maybe All the just two. last right.

touched Jim, half quarter much the is most though, this as PPP you guess, – forgiveness, most not that on it XXXX fourth expectation sounds point. of there’s your probably Just of I at of first its the and in that the

Jim Eccher

I would the handful it’s first quarter, have quarter. to like thereof, first although in lack into going or processed. response But one the looks going, process a are way into say things more probably do on the the Based and have we be

Brian Martin

Yes.

just about you on – and And of kind just updates Okay. retail office any then the portfolios. talked

the look the that some ones, with touched quarter on you the just when or or items last and the are retail on items. so. any office of analysis You But Jim, that noteworthy over here other the leases at other based have distress

Jim Eccher

Yes.

important Brian. I note it’s to think

suburbs. we no office in offices, in all, Downtown the no all they’re of properties large have First Chicago,

loans have portfolio the right deferral on office now. zero We in

the changing couple in a reading have portfolio, rapidly. retail things we’re are We news We you but know the same are.

to rental we’re get right us. to cap does rates. but book, concern be our in our rates So with arms and around up continue And over we’re going now that holding and well. And clients constant pretty it’s trying vigilant that to contact

Brian Martin

most Okay. retail when what? the I And today. the concern it guess, would in areas look be you at of book, Jim

Jim Eccher

Well, with. say I that strips, standalones Those most retail I the some would areas be me. would are would smaller concern concerned

Brian Martin

appreciate I you taking Thanks. Okay. questions. guys the

Jim Eccher

Thanks, Brian.

Operator

from your Please [Operator David question. with state Konrad Davidson. comes D.A. Instructions] Our next question

David Konrad

Good morning.

couple of One a follow-up there Just the fee us questions. you if PPP. there’s in prepayment the on quarter? is out remind still a that’s potential income taken going first earnings the Can of

Brad Adams

in of million earnings occurred So there impact, was expense impact line the $X.X bottom terms by net amount though we is had that deferral told quarter. impacted around bottom the people line The that of last gain.

So do I $X.X balance we got between redeploy $X still yield, pays of same the somewhere that rate or net sheet, the if million would outside. and say better portfolio at and million lost as economics exclusive not to we

David Konrad

really find investor And following it loan that Thanks. given category I CRE, was question conservative last on mention quarter-over-quarter, interesting X.X%. did guys growth growth were call Perfect. to I the portfolio. CRE the but to classes in about but on then the the up there been out asset that growth. know you down up just Most have and color any loan just of

Jim Eccher

Yes.

to loans? investor CRE specifically said You

David Konrad

Yes. Correct.

Jim Eccher

to get back were was But on on I back quarter. thought have pretty Yes. one. to to that. it I’ll you have We in better – quarter, but to originations overall I a see David, don’t that was the you do moderate I’ll think it growth. softer fourth get

David Konrad

you. Thank

Brad Adams

months so we Broadly recourse. doing have been six last well with have substantial the established or over at the looked loans operators that

Jim Eccher

were get I we that and I more mean, on larger at manufacturing. largest quarter color look that. you if some the multifamily the I funded some can in buckets But

David Konrad

you. Thank Perfect.

Operator

that our like it final And Okay. looks question. was

Jim Eccher

presentation our us. Well talk you we’ll joining next concludes And Okay. that quarter. to Thanks for today.

Operator

you. call. conference concludes you We thank today’s Thank your This participation. for

at may have disconnect day. a great You and time the this lines

Old Second Bancorp (OSBC) 22 Oct 202020 Q3 Earnings call transcript