Q3 2023 Old Second Bancorp Inc Earnings Call
Good morning, everyone and thank you for joining us today for old second Bancorp Incorporated's third quarter 2023 earnings call.
On the call today are Jim <unk>, the company's chairman, President and Chief Executive Officer.
Bryan Adams, the company's Chief operating Officer, and Chief Financial Officer, and Gary Collins, Vice Chairman of our board.
I will start with a reminder, that old second's comments today will contain forward looking statements about the company's business strategies and prospects, 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.
Really from those projected.
Management would ask you to refer to the company's SEC filings for a full discussion of the Companys risk factors.
The company does not undertake any duty to update such forward looking statements.
On today's call, we will be discussing certain non-GAAP financial measures.
These non-GAAP measures are described and reconciled to their GAAP counterparts in our earnings release, which is available on our website at old second Dot com.
On the homepage under the Investor Relations tab.
Now I'll turn it over to Mr. Jim <unk>.
Good morning, and thank you for joining us today.
As customary I have several prepared opening remarks, I will give my overview of the quarter, then I'll turn it over to Brad for additional details I will then conclude with certain summary comments and thoughts about the future before we open it up to Q&A.
Net income was $24 3 million or <unk> 54 per diluted share in the third quarter. Adjusted net income was $24 8 million or <unk> 55 per diluted share in the third quarter on the same adjusted basis return on <unk>.
Assets was $1 seven zero percent.
Third quarter 2023 return on average tangible common equity was 20, 280%.
And the tax equivalent efficiency ratio was 50.08%.
Third quarter earnings were negatively impacted by 924000 and pretax securities losses.
Strategic security sales as well as 629000 in net deconversion and liquidation costs related to the visa credit card portfolio sale last year.
The combined impact of these two items reduced diluted earnings per share by <unk> <unk> in the third quarter.
Our financials continue to be favorably impacted by elevated market interest rates with a $7 5 million or 13, 4% increase in net interest income in the third quarter compared to the prior year linked quarter due to manageable funding cost increases along with significant expansion in asset yields across the balance sheet.
The third quarter of 2023 reflect reflected loan growth of $14 million from the linked period and expanded $160 2 million or four 1% over the same period last year.
Loan prepayments continued to be modest however, origination activity has slowed significantly over the last six months.
Activity within loan committee remains modest relative to prior periods due both to higher interest rates and seasonal impacts.
The net interest margin expanded slightly this quarter driven by increased loan yields partially offset by the higher cost deposits.
Loan yields continue to expand modestly during the quarter, increasing by 90 basis points over the linked quarter and 127 basis points year over year.
The tax equivalent net interest margin was 466% for the third quarter compared to 396% in the third quarter of last year.
The margin has benefited year over year from balance sheet.
Mix improvement the impact of rising rates on the variable portion of the loan portfolio and continuing loan growth in 2023.
The loan to deposit ratio is now <unk>, 87% as of September 30, compared to 85% last quarter and 73% as of September 32022.
As we said last quarter, our focus continues to be balance sheet optimization and ill, let Brad talk about that in a minute.
We had previously expected reported linked quarter improvement in credit metrics with workout plans in place for a few credits were downgraded in prior quarters.
Unfortunately, these plans designed to improve free cash flow metrics failed to materialize this quarter.
Our outlook has not changed though although the speed of resolution will be slower than hoped.
The good news is that the portfolio trends remain well behaved at an overall basis and the stress testing that renewal rates has not raised any new red flags for us.
On an overall basis non accruals were largely unchanged with some pluses and minuses under the covers.
Classified loans did tick up a bit this quarter due largely to to three credits.
First is a $17 million multifamily and mixed use project.
Characterize at this point is half complete and leased and have an improved sponsors are looking to just to liquidate the property.
We don't expect significant losses here if any the other credits are healthcare related.
And while nicely occupied at below par debt service coverage ratios due to the combination of higher renewal rates and significantly higher labor cost inputs.
Beyond these impacts are ongoing evaluations of commercial real estate and office have not revealed significant deterioration at this point.
And the trends within criticized assets are stable.
Clearly our focus remains on monitor any potential weakness in commercial real estate and office and health care specifically.
We have stressed all maturing credits under renewal rates and believe we don't see broad based risk.
We've been very proactive on refreshing valuations and as a result, our outlook for credit is not changed.
I think it's important to remember that nearly half of our commercial real estate exposure is owner occupied which we believe is unusual for a bank of our size and our office exposure is only about 5% of the loan book.
We simply don't have much exposure here and we're watching it very closely.
Please refer to the additional disclosures in our earnings release for more color on the portfolio.
We recorded net charge offs of $6 6 million in the third quarter of 2023 compared to 505000 of net charge offs in the second quarter.
The majority of the current period charge offs were specific to two borrowers within commercial real estate.
On which we had existing specific allocations within the ACL of $4 7 million as of June 30th other.
Other real estate owned.
Reflected a $354000 decrease in the third quarter.
And at 407000 in total based on four property sales during the quarter net of one transfer into Oreo.
The allowance for credit losses on loans decreased to $51 7 million as of September 30th from $55 3 million at the end of the previous quarter, which is one 3% of total loans as of September 32023.
Down from one 4% total ACL to gross loans as of June <unk>.
Unemployment or GDP forecast to use in future loss rates at great assumptions remain fairly static from last quarter.
I think investors should know that we remain confident in the strength of our portfolios and our credits driving the reduction in the allowance or the same credits we've talked about previously and which we continue to monitor and work towards remediation or sale.
Noninterest income continued to perform well and excluding losses on security sales discussed earlier noninterest income increased $1 million compared to the second quarter of 2023 drew.
Driven by gains on bully income due to restructuring MSR gains and other income.
Pre tax losses of 924000 on security sales in the third quarter.
Were incurred related to strategic repositioning within certain types in the portfolio.
Expense discipline continues to be strong and our efficiency ratio continues to be excellent.
As we look forward, we're focused on doing more of the same which is managing liquidity and building commercial loan origination capability for the long term.
The goal is obviously to continue to build towards a more stable long term balance sheet mix, featuring more loans and less securities in order to maintain our returns on equity commensurate with our recent performance.
I'll turn it over to Brad now for more color in his comments.
Thank you Jim net interest income decreased slightly to $63 million for the quarter relative to the prior quarter of $63 6 million, but increased seven 5 million or 13, 4% from the year ago quarter.
Loan yields continue to grow in the third quarter, though at a slower pace than recent periods in securities yields declined slightly since last quarter.
Due to the significant sales of variable rate issues this quarter and last.
Total yield on interest, earning assets increased 10 basis points.
549 basis points and was partially mitigated by a 25 basis point increase in the cost of interest bearing deposits.
And a 14 basis point increase to interest bearing liabilities in aggregate.
Which we believe continues to be exceptional margin performance.
As discussed in last quarter's call, we redeemed the outstanding senior debt issuance on June 30th this redemption provided a net interest margin cost savings of approximately three basis points net of alternative funding costs.
Deposit flows this quarter showed modest leakage on the high end along with typical seasonal decline in the third quarter, we always see based on tax payments for personal and business customers and commercial customers rolling out new activities throughout the summer.
The nature and character of the declines largely looks like an inverse move as it flows into the bank. We saw beginning in the latter half of 2020 through 2021.
Fortunately, we have the liquidity and the balance sheet flexibility to adapt and we'll continue to remix and optimize rather than chase high by high beta deposits.
We still arent lurching at anything but have made some fairly significant progress in reducing asset sensitivity over the last year.
Including reducing variable rate securities concentrations.
Variable rate issues within the bond portfolio are now approximately 18% a level that is roughly half where it was before rates started moving higher.
There has been some significant income and margin give up associated with doing this but it's the right time to return to a more normal duration profile within the portfolio.
As the belief and higher for longer has taken hold spreads have tightened considerably on some of the variable rate issues we old.
Duration is slowly being added to reduce asset sensitivity and numerous other ways as well.
I still don't see much opportunity to hedge away asset sensitivity, but balance sheet positioning and flexibility at this point is excellent in my opinion.
The effective duration on the bond portfolio is now $2 seven years.
Rates during the quarter move much more significantly further out the curve. So old second saw significantly less fair value deterioration in perhaps some peers experienced.
The loan to deposit ratio remains low and our ability to source liquidity from the portfolio has increased relative to the color. We gave you last quarter.
The bid has come back a bit on variable rate issues as I said and that has allowed us to move out of our excess positioning ear quite effectively.
And Mark on the Securities portfolio remains high but will be recaptured relatively quickly.
The net result is that old second should continue to build capital very quickly as evidenced by the 50 basis point improvement in the TCE ratio over the linked quarter.
Even without a tailwind from OCI.
Combined with the 93 basis points in the first six months means we've added 143 basis points a TCE of this year.
So we sit here today, we have approximately 700 million in undrawn borrowing capacity and an additional $420 million in Unpledged securities and.
In short liquidity at the bank is excellent and the holding company is in a strong position as well.
We are likely to seek non objection to resume stock repurchases soon.
Margin trends from here are expected to be relatively stable over the remainder of the year with benefits from the last rate hike still to come and continued asset re pricing not expected to outpace the increase reliance on our overnight borrowings by very much.
Provision for credit losses of 3 million was recorded during the quarter and was primarily attributable to credit losses on loans.
Net of an immaterial reversal of provision on unfunded commitments during the quarter.
I would expect loan growth to be roughly consistent with provision growth over the near term, though that could change with significant worsening in the macro environment.
Noninterest expense increased $2 6 million from the previous quarter, driven by higher salaries and employee benefits as well as expenses related to liquidation in deconversion fees from the visa credit card portfolio.
I continue to expect quarterly wages and benefits to be between 22 and $23 million going forward in the near term.
Given the revenue performance employee investment costs have been running high, but we will maintain the ability to dial back as conditions warrant.
I would be remiss, if I didn't add that we are not really in the market to chase much growth here.
It doesn't really make sense, given the marginal yields available relative to the marginal cost of funding and the costs associated with the origination.
As such we remain focus on optimization and efficiency I believe our results indicate that we are doing a pretty darn good job at this so far.
It can continue and I believe we can potentially grow earnings absent balance sheet growth.
At the very least I believe earnings can be much more resilient than perhaps many people expect from us.
With that I'd like to turn the call back to Jim.
Thanks, Brad.
In closing, we remain confident in our balance sheet and the opportunities that are ahead for us.
We're paying close attention to both credit and expenses.
We believe our underwriting has remained disciplined and our funding position is strong.
We have the balance sheet and flexibility to excel at a higher rate environment capital level should continue to grow and maintain levels above targets and we will look to be aggressive in adding talent and relationships.
That concludes our prepared comments. This morning, so I'll turn it over to the moderator to open it up for questions.
Thank you.
This time, we will be conducting a question and answer session.
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One moment, please while we poll for questions.
Thank you.
Our first question is coming from Jeff Lewis with D. A Davidson your line is life.
Thanks, and good morning.
Hey, Jeff.
Jim I appreciate the comments on the credit side I would count on it.
Just checking in on the balance of non accruals or theres some.
Maybe.
I think you mentioned the timeline to resolution baby extending it a bit but I'm trying to get a sense for that balance of non accruals are there are there. Some chunkier credits in there that it may have kind of a shorter timeline to resolution.
Trying to dig into a little bit.
Pace of resolution from from your perspective.
Yeah, there are chunkier ones, Jeff and I will tell you its.
Primarily concentrated in <unk>, and CRE office and health care.
What's made some of this challenging is there shared credits so that they are participations purchased.
And we're working closely with the lead bank two to ride a resolution we do feel.
We will have resolution on a couple of these it's just taken a little bit longer there's a couple of properties under contract.
Looking at note sale options.
Yeah.
It seems as though the time to resolve credits has just taken longer than.
Than what it used to.
Got it okay and within that the charge offs and it looks like you know mostly in the CRE bucket, where the where those from credits that were not.
New to classifieds are or just something those are those are two office.
We had already allocated for our prior quarters.
And we took the charges to position them for for either sale or note sale.
These are the same credits we've been talking about in our last two calls Jeff.
Yeah, just just making sure that.
I didn't know whether.
Yes, it does.
The increase in classified it sounded like a multifamily and mixed use it net to <unk>.
Care related.
You know I guess.
Yes.
The first of which I think you said not a lot of losses expected, there and perhaps liquidation occurring soon on the health care front.
Was there any more detail on those two credits here sure I'll give you some color that the largest net additions to the classified.
We're from healthcare.
Construction.
In owner occupied commercial real estate I would say the construction and the and the owner occupied commercial real estate credits or are isolated issues.
Pretty well collateralized the owner occupied one is as SBA backed.
55% loan to value or we don't see any loss there obviously.
And then the construction related project is backed by some sponsors that have just decided to to abort the project. It's a mixed mixed use multifamily.
Retail.
We there's substantial equity behind us on this again, we think that these properties are in the process of being sold its just taken a little bit longer.
The two healthcare credits.
Both are just struggling from a cash flow perspective.
As you know as.
As they are dealing with the aftermath of Covid higher labor cost and just weaker occupancy.
Surprisingly, we've got refreshed appraisals, where loan to values in both of those properties that were talking about appraisals within the last few months.
Are still hanging in there wanted sub 50% and one about 65% so.
There's going to be longer term workouts and.
And really probably going to be a situation, where we're going to have to go back to the sponsors and ask for for more equity to right size of transactions.
Does that answer your question is Jeff you all know that.
That's I appreciate the color I I I mean.
Trying to true that up with kind of your thoughts on overall credit it sounds like while kind of frustrated by the pace and some of these but but but certainly the positioning and lost contact you feel pretty good about so.
I appreciate the color and maybe just one other question on the just on security sales do you think you've got some more positioning to do there are you happy with what happened this quarter and that could be pretty quiet going forward.
Yeah.
Yeah, we're going to keep selling.
Yeah, We we peaked out at around 35% of the portfolio when rates were at zero being variable just to make sure we were protected.
In a higher rate world.
As we've kind of started to slow down on the movement in rates, we have been moving out of that as we've told you about we're down to 18% now a good long term rate stability type level is probably like 10.
As you know, we don't have a lot of duration on the asset side of the balance sheet. So typically a securities portfolio does serve as both a warehouse for liquidity and duration for us.
But we couldn't do that given the kind of asymmetric risk that existed when rates were zero.
So we did this and now we are moving out of it and we you should expect us to continue to move out of it.
A couple of things I mean, one we would probably have a margin above five right now if we just stood Pat and hadn't done this.
And our earnings would be substantially higher.
But.
We will always be asset sensitive just given what we are which is the strength of the deposit base, but we can be less so and that's what we're progressing towards an end we're.
We're doing it in such a manner that doesn't involve paying transaction fees and broker fees and having to fair value are various hedge accounting issues.
This is the most cost effective way to step out of it and.
I'm grateful that everybody has decided they want to be in variable rate issues over the last four months because it has tightened up our execution a great deal.
Okay.
Okay.
I appreciate it Brad.
It sounds as if.
A lot of leg work has been done and it looks like you got I guess, if you go 18% to 10% you got a little bit more but the securities losses have been.
Narrowing as well would that be the expectation as you wind it down that that become less of a drag.
On the income statement yeah.
Yeah, I mean, what we got to sell is all the rage. These days, so [laughter], we're doing pretty well.
Okay. Thanks, guys I'll step back.
Thank you. Our next question is coming from Terry Mcevoy with Stephens Your line of sight.
Hey, good morning, guys area voluntary.
Maybe maybe first question what are you going to do with all the capital the capital you're building Brad you mentioned the stock repurchase program, but what are your thoughts on building it to take advantage of any future I'm kind of in in market M&A opportunities.
I you know, it's hard to say when when something is going to present itself, but what I do know is is in this environment.
It takes a lot of capital to stomach the marks in order to earn a lot of of accretion.
I don't know, whether that's going to show up or not which is why we need to be ready with a buyback as well.
It's not lost on me that.
That.
You know when you raise rates this fast in this far.
99 times out of 100 do you enter some form of recession.
And I also know that the tangible book value per share.
<unk> serves as some level of a floor and valuation. So I think our investors are well protected by us raising that floor.
There's very little cost to carry excess capital right now given the alternative funding yields are five and a half so on a relative basis the cost of carrying excess capital is much lower today than it typically is so all of that just in terms of prudence and protecting unions tail risks.
Minimizing potential shocks to the stock price all of that argues to carry more capital than not right now.
And that's what we're doing I do recognize that some level, there's too much and so we are prepared to step in.
And return some of it showed that condition present itself.
I can't tell you we will be there in the near term that I can tell you we will be ready to be there in the near term.
At least that's my hope that there is no objection I can't imagine there would be.
So that's kind of what my thinking is Terry if that makes sense.
Yeah.
And what are your thoughts on the near term margin outlook can the new loan yields in some of the balance sheet flexibility you talked about earlier offset just deposit pricing pressure I did you called out a CD specials and I look you've got a four 5% eight months C. D are tough to keep the margin if that's your incremental funding costs.
Well you know what we're doing okay. I mean, we're growing film.
Sure.
I am a bit mystified right is that you can't fight the flows in this business and money has only a few places to go to them and you know everybody decided they were a genius at growing deposits when when money into the banking system was flowing in at 35% a year. The reality is is it had nothing to do with execution for almost.
Everybody in and you can fight those flows if you want to but it'll cost you, 5.5%. What we've tried to do is maintain the balance sheet flexibility to.
The stomach the outflows just like we stomach the inflows not do anything stupid.
And we can make a lot of money just optimizing so that's that's kind of what we're up to.
As far as margin goes I think last quarter, I said, plus or minus five basis points.
Maybe I said it but it was certainly maybe I didn't but it was my attention that the plus side of that was more likely.
We do still have some benefit to come on the loan repricing side from the last rate hike if theres. Another one our arm our biases for higher margin.
If there's not another one I would say that.
Probably more like minus three basis points, given what we're selling them on.
On the variable portion.
And given our current positioning so stable plus or minus a few basis points with minus more likely if there's no further rate hikes, but everything should be pretty much like this.
And maybe one last question if I could cause CRE loan maturities in the fourth quarter and early part of next year.
Have you gotten ahead of that in terms of what higher rates could do to those borrowers in a way that it was that incorporated yeah yeah.
Yes, we've been we've been pulling our hair out shock and stuff.
So that's what I wanted to be in theory, I don't have I don't have much higher anyway. So.
[laughter] [laughter] just thanks for taking my questions guys.
Thanks Terry.
Thank you. Our next question is coming from Chris Mcgratty with Kb doubling your line is life.
Hey, good morning, Jim breath.
Some of your peers are restructuring balance sheets for mistakes they made with.
With rates you guys it.
Seemingly don't have to do that but you could if you if you had to prune.
Yes. The question more open ended on that and also just.
Max Max loan to deposit you're willing to run with given the.
Given the optimization you should keep talking about.
So you're talking about selling securities that are perfectly mark to market in order to buy different securities that are perfectly mark to market.
Yeah, well within the bottom up and I know it.
Is there any piece of it that you would think about no. We I see absolutely no scenario, whereby we would do that to seven year duration means were and are in good shape.
I'm very happy with where we are.
And what was what was the second part I think that from a loan the loan to deposit standpoint, Chris I mean.
I think we could comfortably take this you know up to 1995.
I would not expect.
A whole lot of growth a whole lot of loan growth for the balance of this year based on.
Where our pipelines are there they are about a third of what they were.
A year ago.
So we're really focused on optimization and expense control on credit.
Okay.
You talked about margin I mean, NII, putting the pieces together you know around these levels, Brad Yeah, I think so.
I think so I think we got a chance to grow on it.
<unk>.
Yeah, I mean, we're making a lot of money right now and that's that's kind of what our focus is.
I'm, a little surprised that expectations for us as pessimistic as they are.
But we're just going to continue to make sure we're positioned for any tails that are out there in and doing the prudent thing on the balance sheet, which is reducing asset sensitivity, while still making a healthy amount of money.
Okay, maybe just the last last two the bully looked a little high.
Comment on that and then just going back to capital Yeah.
You get the non objection, but whats the binding what's the ratio that that keeps you I.
I guess, what would prevent you or let you did buyback what's the what's the by any metric.
I guess at CET, one, which we're pretty healthy on.
You know it's.
I can't I can't imagine there would be much of an objection here I mean, we're in we're in real good shape in almost any way you can evaluate a bank.
So things things feel pretty good on that front.
Okay. Thank you.
Yeah.
Okay.
Thank you. Our next question is coming from Nathan race with Piper Sandler Your line of sight.
Thank you Hey, guys good morning.
Hey.
Going back to Chris's question, just on in terms of growing NII or at least near term.
What does that contemplate in terms of deposit balances from here and the overall size of the sheet.
It sounds like maybe there's an opportunity to continue to reduce wholesale funding, which support that outlook, but kind of curious to kind of hear something in the underlying.
Balance sheet drivers to get there.
Sure.
Optimization writes a smaller bond portfolio that can add their manifest through smaller overnight borrowings.
But what we tried to do during 2021 when everybody was convinced inflation was transitory as we try to stagger maturities such that we can get back a healthy amount of money relatively quickly.
Should the situation, we find ourselves in today present itself, which it obviously has.
Over the next 12 months, we have several hundred million dollars well a couple of hundred million dollars anyway of of Treasury securities that are yielding sub 70 basis points to us that it will be coming back to us and again that can either manifest through smaller overnight borrowings, earning a 400 basis points of that improvement or it can manifest through la.
John's, earning 700 basis points spread improvement.
We just have money coming in at the appropriate time in order to reposition and optimize the earning asset mix, which is what we've been talking about for the last year.
You know its.
It's tough right you try and tell people that you're in a good position in terms of what maturities you've got rolling off win but we've done it we've done a nice job and we've got ample opportunities to continue to optimize the earning asset mix coming at us over the next 12 months.
Okay got it and just going back to credit and the charge offs in the quarter. It sounds like these where the office CRE loans that you guys flagged I think back in April coming out of a one two earnings tied.
Tied to.
Plus suburban.
It also seems like there's still some chunky chart.
Non performers are tied to that acquisition can you just remind us kind of what fair value marks our purchase accounting.
[laughter] against those loans and just kind of how you are thinking about.
Loss content.
Going forward as those credits are.
Going forward.
Yeah. So so both of them both of the prop.
Properties that we took the charges are.
We're we're in fact office loans one.
Downtown Chicago that have just been struggling as a result of.
Covid.
And again, we're positioning those for for sale are in wholesale.
Yeah with regards to the to the non accruals you either chunky and like I mentioned before.
A.
A fair amount of them are.
Our participations that we were not leading so we're working with the lead bank too.
To find out.
Global resolution there as far as the purchase accounting marks I'll, let Brad talk about that.
So the purchase accounting a little different than it used to be right and what we've tried to do is rebuild the provision is that as the credit marks accrete and we've I think you can see that that that's occurred.
We do have substantial allocations to anything that we are concerned about so that's why earnings streams really shouldnt be interrupted in terms of what falls to the bottom line as we work out of these credits.
I think that.
What I'd like investors to know is is that you know.
The acquisition that we've done has been an absolute homerun for our investors. It was it was both well timed and well executed.
But no acquisitions, perfect and certainly the weakness within the last one was on the asset generation side and in the <unk>.
Basically purchased syndicated loans within that deal.
And we've told.
Told you from the very beginning that we were going to work out of those and we've cut the syndications from that deal and half at this point and we'll continue to move it down.
What we've seen so far in terms of weakness in downgrades and we are downgrading realistically even without loss content.
Is that the bulk of our problems. The overwhelming majority of our problems are poorly rated credits do come from acquisitions.
Old second originated portfolio remains very strong. So we will continue to get through this and whats helpful is for people to have a perspective that you know.
Not everything's 100, but even back 90% in terms of acquisition.
Yeah.
The execution on acquisition is still pretty darn good.
Yeah.
Understood.
It sounds like kind of the near term loan growth outlook is pretty modest.
Near term.
So I'm just curious you know how you guys are thinking about the reserve trajectory from here.
Are you guys still sit at a pretty healthy level compare to a lot of your peers.
Doesn't sound like there is additional material charge offs looming on the horizon from what we can see today. So just any thoughts on just how the reserve trends going forward.
I think we'll probably take one more charge offs, but it's largely allocated for and then we will probably do what we've been doing which is <unk>.
Protect against the tail risk of a potential recession, and just kind of hold it where it is maybe bleed it up just a tiny bit.
But I don't see a lot to be worried about at this point.
Okay, great and if I could just ask one more on expenses I think you mentioned in 'twenty two to 'twenty three in terms of comp.
Near term.
Does that kind of translate to kind of flattish expenses in the fourth quarter and just any overall thoughts on how you think that Oh and and that reminds me that that is the case flattish kind of in the fourth quarter, maybe a little bit of improvement.
Chris I forgot to answer your question about the bowling I'm, sorry, I'm I'm I'm below par today.
We restructured the bowley from a absolute ridiculously awful asset to a slightly better asset.
In terms of what we did with that and that is both of the portfolio that we acquired from previous acquisitions and our existing so what youre seeing this quarter is at run rate.
It's still awful and will never buy any ever again.
But it is it is at run rate.
Yeah.
I'm, sorry to bully should stay around the <unk> level.
Great.
That's correct.
Apologize for failing to answer that earlier.
No problem and then just any thoughts on kind of overall expenses I know, it's early in the process and thinking about 2020 for expenses, but.
High level thoughts on.
Right now I'm, hoping right now I'm, hoping for three years to 4% right we still.
We still have to make sure that our employees are treated well given how much more expensive a gallon of milk and a pound of Bacon is and we want people to be happy to work here. So we do have some inflationary headwinds that we do have to be mindful of but.
What we did do as our margin was rocketing higher is as any deferred maintenance and buying a whole bunch of new computers and repaid in parking lots and all that stuff, we've got that in our rearview mirror.
So we don't have a lot of Capex ahead of us.
And does that.
3% to 4% outlook does that contemplate any opportunities to hire on the RM side of things into next year and stuff and opportunity.
Material delays on that front these days.
Yeah, we're always looking to get better.
Okay, Great I appreciate all the color.
Yeah.
Thank you. Our next question is coming from David long with Raymond James Your line is life.
Good morning, guys.
Hey.
On the loan growth expectations, obviously benign here, but just wanted to see if you can break it down between how much is based on old second's appetite versus demand in the marketplace.
Yes, well first.
I would say overall loan demand is pretty muted right now.
<unk> seen a lot of borrowers just a pullback on capex kind of expansion and we're still seeing a decent amount of deal flow in our sponsored finance group and then.
Some some some of our leasing verticals beyond that.
C&I and commercial real estate is.
Largely.
Dorman.
We're still.
We're still looking at opportunities but.
The risk adjusted returns on what we're seeing today, just don't make a lot of sense. When you look at really where we have to fund it at the margin so.
We'll be very selective.
I think I.
I think with what we have in our pipeline probably keep up with the runoff in paydowns.
But you know low single digit growth is probably.
But we're looking at over the over the near and long term.
Got it Okay and then a follow up question. When you look at the Securities portfolio, obviously running off and you guys have I've said it before if we get it done one of the best jobs in managing that portfolio through the pandemic, but when you when you're looking at using that as a liquidity base, how low as a percentage of earning assets do you see that.
Getting at this point.
It can go from I think its what I'd like 'twenty right now and go to 15.
Yeah.
Got it okay.
That's all I had thanks guys I appreciate it thank.
Thank you Dave.
Thank you once again, if there are any remaining questions or comments. Please press star one on your phone at this time.
Our next question is coming from Brian Martin with Janney Your line is life.
Hey, guys good morning.
Morning, Brian .
Brad just you talked last quarter, I think maybe before that.
If we did see you know going to the comment about the pessimism on People's outlook, I mean, I guess as far as the margin goes it.
I think you can talk about if rates went lower the margin can kind of bottom in that four to four and a quarter range. I mean, I guess, if we don't see if we are higher for longer we don't see these cuts is that margin bottom kind of occurring here in the next quarter and it's in the.
Kind of hold at $4 50 type of level is that kind of more realistic than if we don't see the rate cuts.
Yeah, we don't see any rate cuts will will we're a $4 50 plus margin bank. There are no rate cuts from here.
If there are 100 basis points and right gotcha, you'd probably see us at that 4% to 425, if there's 200 basis points and rate cut your policy is at $3 75 to four.
You know there's.
I've tried to give the candor is that.
When you look like old second, which is a retail quality deposit base.
You're inherently.
Volatile interest rates and and.
I'm not smart enough to try and hedge that I don't think you can anyway.
So I'm perfectly willing to accept that we make a lot of money when rates arent zero and we make less money when when when rates are zero, but I don't think we're going back to zero anytime soon I think it's been an absolute disaster of a strategy.
With all kinds of deals.
But even if they are zero were still a 1% ROA Bang.
No.
No.
Do the right thing protect against tails, except when you would be willing to accept when you make a lot of money and be willing to make except when you make just a normal amount of money and that's what we do.
Yeah, Okay. I appreciate that and then just going back to those credits the new ones that came on board. This quarter. The three that were classified it sounded like the loss content in general is pretty low for for all three of those is that kind of what the message is we are.
I always see Enel, Brian appraisal, we've refreshed appraisals, we've got work out strategies in place.
Right now you know.
We just don't see it.
Any major losses, given default here then.
What didn't didn't say it on the prior question if at all all of these new.
Classifieds are still are still paying and they still have sponsors behind them that are supporting the credits, but we just felt the overall cash flow was weak enough that as to necessitate a downgrade.
Okay, and then the charge offs that Brad talked about potentially you know still coming that's from a previous credit that was already identity. Yeah. That's the same stuff we've been talking about since April okay.
Making clear on that and then the portfolio you mentioned that participation portfolio, where some of these credits have come from can you size up where that's at today.
$250 million to $300 million.
Okay. So 250 to 300 and how much of that is currently classified today.
Oh, what four or 5%.
Yeah, I'd say less than that.
Okay Alright.
Alright, and then just on the you talked about always wanted to get better Brad I mean, I guess, how do you see opportunities given the weak demand out there currently I mean, it sounds like the ability to hire is what's going to contribute to our <unk>.
Proven and the economy getting blown engine kind of moving back I mean are there opportunities to add talent today or is it a struggled to find that fine alright.
We've continued to add someone off.
Relationship managers, even this year, we budget for it every year.
Yeah, we still you know we've had some success.
Even this quarter so.
We'll continue to look for those opportunities.
And the 24.
The best time to grow is when everybody else gets scared so.
That's kind of what our viewpoint is yes.
Okay, Alright, well. Thank you for taking the question guys.
Alright, Thanks, Brian .
Thank you.
We have reached the end of our question and answer session. So I will now turn the call back over to Mr. Ankur for his closing remarks.
Okay. Thank you for joining us today, we appreciate your interest in the company.
And we look forward to speaking with you next quarter.
Goodbye.
Okay.
Thank you. This concludes today's conference and you may disconnect your lines at this time.
And we thank you for your participation.