Q3 2019 Earnings Call

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Hi that will be the old second bancorp.

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Okay and May I have your first name of styling.

Yes, Rachel are a C H E L.

Okay and your last name with spelling.

Smits S.M.I.T.H.

Our a C H E L S and Samuel M.I. isn't ice tea for Tom each for hotel Rachel Smith.

Yes.

Your company.

Era A.I.E.R.E.

Era I missed about that one back A.I.E.R. <unk>.

Yes.

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Right.

Just a second.

Okay.

Yeah, I'm going to join you to your conference.

Okay. Thank you.

You're welcome.

Relationship managers over the last quarter.

There's still significant dislocation in Chicago and further opportunities to add to our talent staff will be.

Should be realized in the coming quarters returns on tangible equity are excellent and the challenging interest rate environment provides an opportunity for bank like old second to demonstrate its strengths.

Capital is continue to build significantly for our company.

No we remain very comfortable with the returns we are generating.

We will be evaluating opportunities to returning capital to shareholders.

Potentially reduce high cost debt versus our outlook for opportunities to invest capital.

We remain optimistic that there are opportunities to improve our footprint, but we will remain discipline in their evaluation.

The focus for us is going to be on timing, making sure. We have access to capital that we need in order to take advantage.

Periods of significant changes in the volatility of bank valuations.

Make M&A more difficult at this time, but things can change quickly on that front, especially as we were approached a period, there very well me very well, maybe a difficult year for some banks.

That concludes our prepared comments. This morning, so I will turn it over to the moderator to opening up for questions.

Thank you Sir the floor is now open for questions. If you do have a question. Please press star one on your telephone keypad at any time to join the queue.

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Again, ladies and gentlemen, if you have a question or comment. Please press star one on your telephone keypad at this time.

And our first question comes from Chris Mcgratty with KBW. Please go ahead.

Hey, good morning.

Brad maybe start with you the optimization comments.

I've asked in the past about the trust preferred.

I assume that's what you're talking about.

Maybe you can elaborate I know some of your senior debt is it is in Kabul for a couple of years.

But there is some high cost 30, 30 plus million almost 8% is that is that were you referring to and if so.

What will be the timing in the strategy that too to redeem it.

Yes, Mike My referring specifically to two things one you did see during the quarter that that we sold down some of the securities portfolio didn't reinvested fully.

Expectation is some portion of that we'll continue to bleed into loans, although it's a relatively small contribution.

And you're right there is an opportunity to significantly reduce.

Interest expense related to that trust preferred specifically.

No comments in terms of near term intentions, but.

That is certainly something with it we are evaluating.

I think larger it's a question in the capital.

We are having still excellent returns on on tangible common and that's primarily what we focus on in terms of what investment opportunities to take advantage of.

I think that we need to make some careful decisions in terms of what we do with that capital position going forward.

Taking out some debt is certainly an option stock buybacks are certainly an option and M&A is still a preferred option.

All will be evaluated.

Is there or if you were to rank those three.

Hello.

Would it seem.

I guess, how would you rank the three in terms of.

Willingness or preference.

And the is the first preference.

Debt, taking care of is the second preference third preferences stock buybacks.

Okay.

Great and.

Maybe just one on the margin.

The.

The prepaying the Abbey book in the reference in the quarter.

How does that affect the go forward run rate of accretion any prior it was around 400000. This quarter was it spiked a bit how do we how do we think about that over the next several quarters.

In terms of just margin margin contribution.

So I think normal is still around 400000.

The.

The decrease in rates rather dramatically this quarter.

Obviously has an impact on prepayments and I would say that I would never acts as expected a 15% pay down in the portfolio and a three month timeframe. So that was a bit shocking.

Specifically the bulk of the access contribution this quarter came from one particular credit that was resolved.

That can happen at anytime.

I don't know when it's going to happen.

But the portfolio has significantly outperformed our marks overall and I do not see anything that's going to change that in the near term and unless something happens different in the world.

So it could be fourth quarter, it could be first but there will be quarters that pop up where the margin of supported by Paydowns.

Great. Thanks for that and then maybe last one.

Tax rate fair for Q3 going forward.

[laughter] modestly lower than this quarter.

Okay.

Got it thanks.

Yes, Sir.

And just a reminder, ladies and gentlemen, it is star one if you like to ask that question. Our next question comes from David Wong with Raymond James. Please go ahead.

Good morning, everyone.

Hey, David.

Maybe you disclose it but the just follow up on that question with the impact of purchase accounting accretion what was it in the quarter.

So.

Last quarter it was around $400000 this quarter, Brian we added.

One moment.

A little over a million.

Okay.

Got it okay.

And.

With the securities gains in the quarter do you expect to continue to look for opportunities.

Something if your broader management or the balance sheet at this point.

I think that so the securities portfolio for us given the lack of duration elsewhere on the sheet is effectively a warehouse for duration.

You know I never would have expected that muni is broadly would get to within 25 basis points of treasuries and all right.

I'm not old old, but im kind old.

I've never seen that before.

And I don't think 25 basis points.

You know versus risk free is a realistic interpretation of the world. So it's certainly interesting right and.

If you present me with a lot opportunities where were you say.

I can have three and a half million today or I can have a 100100 30000 a quarter for.

Like a decade, and I'm going to take the three and half million today.

So it is.

Given the potential for that to widen I think if we see moves like that again, where we go from 200 basis points to 150 basis points on the tenure I think theres a possibility we will be opportunistic.

Recognizing that nobody's panels second to be a better on interest rates, but I think relative spreads is something we watch and the relative spreads on munis.

Quite frankly got a little stupid.

So.

If if we see something that looks Dom will will probably move if we don't we won't.

Got it makes sense and then.

For two years over to M&A I understand you guys are still very discipline, there, but what it would have you seen from you know some of the smaller banks on their price expectations is that coming down at this point or do you expect that to still come down.

Yes, David right now, we're still seeing probably unrealistic.

Hi expectations from from smaller community banks, we have not seen.

Over the last 90 days, we've not seen.

Transaction close that what I would call realistic.

Pricing at this point, so until we see something front and I think expectations are going to remain high and.

This is probably a normal normal cycle.

So what we see expectations come down.

Got it thanks for taking my questions guys.

Thank you David.

And our next question comes from Brian Martin with Janney Montgomery. Please go ahead.

Hey, good morning, guys.

Right right.

Hey, Brad maybe can you I appreciate the color on the on the margin just kind of your your thoughts on exactly the three to five basis points down I mean, you talk about kind of the repricing of loans versus deposits you kind of how that plays out under multiple cuts here maybe two to three markets can you just is that three to five basis points.

Narrow you know as you get more commentary it sounds like it increases maybe with with more cuts just kind of any context on.

On that if you've got multiple cuts coming.

Yeah, I mean, there's a there's a lag effect to everyone right. So and then.

Our job is to give some sort of directional guidance that that exists within 90 day windows, So theres a little bit of.

This translation as possible.

Hi.

And it works the other way too because we've seen a couple of cuts now.

But the reality is that the third quarter has some portion of the cut that's going to come already in it.

As as LIBOR or pricing reflects that so.

It's difficult to quantify but.

I would say that if you look at what was essentially kind of a 11 or 12 basis points contraction in the or margin in the third quarter.

Thats reflective of two rate cuts in relative close proximity to the third quarter.

That showed up in the LIBOR curve so.

Not terribly inconsistent with with three to five but some of that was also movements within the securities portfolio and some of it was also the LIBOR curve getting ahead of an October rate meeting so.

It is.

If you asked me what we got from each rate cut I would say it was probably in the range of about four.

For each one.

If you asked me what the next one is going to do I would say, it's also going to be about four but prepayment could show up to make me a liar.

And we can show more stability.

And I would say that if we get another one there is probably.

One to two basis points of headwinds from that in the following quarter.

All in all I'd say, if you if if.

You saw five to six in aggregate I think that it would be.

At the end of the cycle in every all the laggard kick in I think you probably give up about 30 basis point.

And I think we can overcome a significant portion of that with with balance sheet optimization and a significant portion with with actually growing loans.

So I think even in that scenario old second remains an incredibly profitable institution with excellent returns on equity.

Okay I appreciate that that's helpful. Brad in the just reminded you guys have much until we have floors on the loan portfolio or is that kind of it not not significant.

Yes, Brian we are we're implementing floors and.

I'd say three quarters of our of our loan.

Proposals and historically, we've we've obviously always try to get floors, and they're they're not always easy to to negotiate but they are.

They are at every new transaction, we're doing today.

Okay.

All right in the end, Jim maybe just to your point about the originations versus kind of the pay downs I mean, do you kind of have some color on whether it be this quarter and just kind of year to date, just kind of how those those have transpired in.

Yes, Brian obviously loan growth has been a it has been challenging a bit frustrating for us.

I will say this our loan pipelines today or are better than they have been in a in 24 months.

Originations we are projecting.

By the end of the year to be.

North of 15% higher than the 2018, it's the pay off to the payoff activity has been unprecedented and we're seeing.

We're seeing it come from from all areas. So.

We are.

We are optimistic next quarter, we will we will finally return.

Some some decent growth based on based on what we're seeing today.

Okay, and most of the originations today, Jim when you kind of characterize and geographically it sounds like more of it continues to come from the Chicago market is that that bear.

That's fair.

Yes, and that trend in our new like the new tell we fired Brian is starting to really.

Build their pipeline so.

We're optimistic going into the next few quarters.

Okay, Alright, and then maybe just one last thing on the on the debt.

That.

On the 30 million, Brad I guess is it possible as you kind of rank your rank the priorities and could you do a piece of that or would you would it need to be all of that I guess in your mind I guess, how would you think about that.

It can be done in pieces.

And again no decision has been made on that but it is something that we're evaluating.

Got you Okay I appreciate the color guys. Thanks.

Right. Thank you.

I feel free to call DRAM later.

Ladies and gentlemen, if you do have a question or comment. Please press star one and your telephone at anytime to join the queue.

And we have a question from Chris Mcgratty with KBW. Please go ahead.

Great. Thanks.

You know the bump up in expenses in the second quarter I think you talked about last quarter was related to the hires.

Pretty stable this quarter, how do we think.

About the rate of investment expense growth from here, given the $20 million level I'm optimistic about new hires or is this you know.

Kind of low single afforded.

So if growth reserves yet.

So fourth quarter should be.

Seasonally better just because of the some really factors that you get in the fourth quarter.

Next year kind of feels like a 3% to 4% year for me Chris.

Okay.

Thanks.

And there appear to be no further questions at this time, so I'll turn the call back over to management for any closing remarks.

Okay. Thank you for a for your interest in the company for joining US this morning.

And we look forward to speaking with you again next quarter.

Bye.

And that does conclude today's teleconference. We thank you for your participation you may disconnect. Your lines at this time and have a great.