Q4 2023 Old Second Bancorp Inc Earnings Call
Good morning, everyone and thank you for joining us today for old Second Bancorp, Inc. Fourth quarter 2023 earnings call.
On the call today are Jim Edgar the company's chairman, President and CEO, Brad Adams, the Companys C O O N C F O N.
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 from those projected.
Management: Management would ask you refer to the company's SEC filings for a full discussion of the Companys risk factors.
Management: The company does not undertake any duty to update such forward looking statements.
On today's call. We will also 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 our homepage under the Investor Relations tab now I will turn the floor over to Jim.
Management: Jim Edgar the floor is yours.
Good morning, and thank you for joining us I have several prepared opening remarks and give my overview of the quarter and then turn it over to Brad for additional details.
I'll, then conclude with certain summary comments and thoughts about the future before we open it up to questions.
Net income was $18 2 million or <unk> 40 per diluted share in the fourth quarter of 2023, adjusted net income was $19 1 million or <unk> 42.
Per diluted share in the fourth quarter.
Management: On the same adjusted basis return on assets was 133%.
Speaker Change: There was also an additional <unk> <unk> impact from the fair value of mortgage servicing rights in the fourth quarter.
Fourth quarter 2023, adjusted return on average tangible common equity was $17, two 1% and the tax equivalent efficiency ratio was $48 76%.
Fourth quarter 2023 earnings were negatively impacted by $8 million.
Provision for credit losses, and a $1 $2 million estimated litigation accrual.
The combined after tax impact of these two items reduced diluted earnings per share by <unk> 15 cents in the fourth quarter.
Despite these setbacks profitability old second remains exceptionally strong and balance sheet strengthening continues with our tangible common equity ratio, increasing by 86 basis points linked quarter to 853%.
Speaker Change: Our financials continue to be positively impacted by higher market interest rates pre provision net revenues remained stable and exceptionally strong.
For the fourth quarter of 2023 compared to the prior year like period income on earning assets increased 6 million or eight 7% while interest expense increased $8 8 million.
The increase in both cases is rate driven however average balance on other short term borrowings increased significantly compared to prior year like period, causing an overall equal increase between rate and volume factors on the liability side.
Speaker Change: The fourth quarter of 2023 reflected loan growth of $13 4 million from the prior linked period and expanded $173 3 million.
Or four 5% over the same period last year, which was in line with our revised expectation.
For the year following the volatility in banks.
Earlier in the year.
Loan prepayments continued to be modest in origination activity.
Main steady over the last quarter.
<unk> within our loan committees remain modest relative to prior periods due to both higher interest rates and seasonal impacts.
The net interest margin compressed slightly this quarter driven by higher funding costs loan yields were flat during the quarter with no change from the linked quarter and 55 basis point increase year over year.
Funding cost increased due to the increases in both rates and balances the tax equivalent net interest margin was 462% for the fourth quarter.
Speaker Change: Compared to $4, 66% in the third quarter.
Net interest margin decreased slightly in the year over year quarter due to the impact of rising rates on the cost of funds, which was partially mitigated by growth in interest income driven by the variable portion of the loan and securities portfolio and continuing loan growth in 2023.
Speaker Change: The loan to deposit ratio is 88% at the end of the year compared to 87% after the third quarter and 76% as of 12 31 'twenty two.
As we said last quarter, our focus continues to be on balance sheet optimization and I'll, let Brad talk about that more in a moment.
Turning to credit.
Fourth quarter represents our hope that to provide an inflection point in our credit trends old second began substantially downgrading large amounts of commercial real estate loans, including office and health care at the end of 2021 and accelerating through 2022.
Substandard criticized loans went from approximately $60 million or a little more than 1% of loans.
At the end of the third quarter, and 21% to a peak of nearly 300 million or over 7% of the loans in the first quarter of 2023.
In the fourth quarter of 2023, substandard criticized loans are down to $200 million and the expectation remains for further improvement.
2024.
Encouragingly, our special mentioned loans are now at their lowest levels in two years we.
We expect to realize a relatively less costly resolution at a number of non performers in the near future and remain hopeful we can recover some of the losses realized in the second half of 2023.
The reality is that commercial real estate valuations are heavily dependent upon market level of interest rates as a primary determinant of cash flow for a given property.
A movement in rates such as we've had seen a substantial enough to significantly impair the equity positions and a large percentage of commercial real estate credits.
Speaker Change: Additionally, the residual stress brought upon by the pandemic and CRE office and health care is not abated.
The idea of that bank portfolios are somehow immune and should not be risk rated for such as in probable.
We believe we are being proactive and realistic and addressing commercial real estate loans patient deterioration from higher interest rates declining appraisal values and cash flow pressures.
We recorded net charge offs of $15 5 million in the fourth quarter of 2023 compared to $6 6 million of net charge offs in the third quarter of 2023 <unk>.
Speaker Change: The majority of the current period charge offs were specific to three borrowers within commercial real estate.
The charge offs realized in the fourth quarter relates to the positioning of the Chicago office credit for potential sale.
And further write downs on two assisted living facilities in California.
All who are integrated substandard and classifieds for some time.
The latter credits had.
We had subpar occupancy and higher labor costs.
Speaker Change: For some time.
However, projected cash flows experienced further stress with the passage of new draconian healthcare minimum wage laws in California that necessitated more aggressive action.
One of the two properties saw the updated appraisal updated appraisal decreased by more than 70% from an appraisal performed not that long ago due to the impact of cash flows.
The good news is that criticized and classified loans are declining and the remainder of the portfolio remains well behaved nonaccrual assets ticked up modestly based largely unexpected migration timing issue and the transfer of two properties into Oreo that had been significantly mark based on very recent appraisals.
Speaker Change: Stress testing at renewal rates has not raised any new red flags for us and the bulk of our loan portfolio has transitioned and as seasonally seasoning into a higher rate environment.
Being short duration on the asset side has obviously helped us immensely in terms of interest rate risk management, but it has probably put us at the vanguard in terms of commercial real estate stress.
Speaker Change: This belief is reinforced by the experience that a significant percentage of our substandard loans are acquired secondary participations.
And believe based on the weight of the metrics is that old second has turned the corner.
That others are just beginning to approach please refer to our additional loan disclosures in our earnings release.
The allowance for credit losses on loans decreased to $44 3 million as of 12 31 23.
$51 7 million at September 30, which is one 1% of total loans as of December 31, 2023 down from one 3% total ACL to gross loans as of September 32023.
Unemployment and GDP forecast using future rate loss rate assumptions remained fairly static from last quarter.
The change in provision levels largely relates to the 26% reduction in criticized assets since the middle of 2023.
I think investors should know that we will be aggressive in addressing weak credits and that we remain confident in the strength of our portfolios.
Noninterest income continued to perform well excluding changes in fair value of mortgage servicing rights and losses on security sales the decline from the previous quarter was approximately 500000 driven by the change in cash surrender value of bank owned life insurance.
Pre tax losses of 924000 of security sales in the third quarter of 2023 compared to minimal losses. During the fourth quarter from a few calls were offset by a decrease of $1 6 million and the fair value of our mortgage servicing rates.
Expense discipline continues to be strong and our efficiency ratio continues to be excellent.
As we look forward, we are focused on doing more of the same which is managing liquidity building capital and also building commercial loan origination capability for the long term. The goal is to obviously continue to build towards a more stable long term balance sheet mix, featuring more loans and less securities.
Order to maintain the returns on equity commensurate with our recent performance.
With that I will now turn it over to Brad for more color.
Thank you Jim net interest income decreased by $1 8 million to $61 2 million for the quarter.
Relative to the prior quarter of $63 million and decreased $2 9 million or four 5% from the year ago quarter.
Loan yields were flat in the fourth quarter as compared to the third quarter in securities yields increased only slightly.
Total yield on interest, earning assets increased six basis points over the linked quarter to 555 basis points, which was partially offset by 24 basis point increase in the cost of interest bearing deposits and an 18 basis point increase to interest bearing liabilities in aggregate.
The end result was a four basis point decrease in the tax equivalent NIM from last quarter to $4 62.
Speaker Change: We believe continues to be exceptional margin performance.
I would note that the entirety of our margin give up up to this point is largely attributed to the sale of variable rate securities.
Don from some 35% variable rate securities positioning, 219% as we sit here today.
Deposit flows this quarter showed signs of stabilization deposit pricing in our markets remains exceptionally aggressive relative to the treasury curve and is largely pricing off overnight borrowing levels. Some signs of abatement are beginning to appear however, with the most aggressive showing shortening of time deposit specials as hopes of a fed rate cut ad.
Regardless marginal spreads remain an attractive at this point in old second does not feel the pressure as well in order to overcome margin pressures.
Speaker Change: Marginal returns on allocated equity remain core for outsized growth.
We've made some fairly significant progress in reducing asset sensitivity over the last year, including <unk>.
<unk> variable rate securities concentrations as mentioned, we are beginning to extend duration in the loan portfolio as well.
I do believe this most recent move in interest rate futures has gotten ahead of itself just as it did at this time last year.
Don't really understand the mechanisms and reasoning behind the fed's dovish.
Dovish pivot this quarter.
A more cynical person might conclude that either the fed is prioritizing physical over monetary policy or the inflation target rate has changed I'll.
I'll, let you read about that in somebody else's newsletter, though.
As a result, we are somewhat on pause here in terms of further reduction in variable rate asset concentrations.
The loan to deposit ratio remains low at 88% and our ability to source liquidity from the portfolio continues to improve as market rates have allowed us to recoup fair value over the past quarter.
The unrealized loss Mark on the securities portfolio declined by $36 million in the fourth quarter from $121 million.
The $84 2 million, which remains high but we will be recaptured relatively quickly.
The net result is that all second should continue to build capital quickly as evidenced by the 86 basis point improvement in the TCE ratio over the linked quarter.
It means we have added an astonishing 229 basis points for TCE and $2 63, a tangible book value for the year.
Speaker Change: As we sit here today, we have approximately $700 million in undrawn borrowing capacity, an additional $380 million in Unpledged securities.
Short liquidity at the bank is excellent and the holding company is in a strong position as well.
We received non objection from the fed in December to resume stock repurchases in 2024.
Speaker Change: I've been in a capital build mode for the last two years and I expect that to continue.
I believe having capital can result in tremendous merger base earnings per share accretion.
Further stress is realized in our industry.
Capital availability will be the gating factor to this accretion.
The capital build strategy will be somewhat aborted and we would aggressively buy back shares if our valuation crosses a 12 month forward tangible book value per share of one times.
At that time and absent a significant macro environment change a buyback would commence.
I'm not opposed to doing so much sooner if our M&A outlook remains soft.
For example, buying back today, we currently be less than a two year earn back absent any improvement in OCI.
I continue to believe we have been proactive in realistic on credit evaluation you can see from our disclosures that we began rewriting CRE exposures as interest rates rose the risk the risk for maturing credit given the equity cushion deterioration is simply much higher today to not see that reflected in credit trends broadly is confusing to me.
<unk>.
Any cash flows track stress as we have seen from market office demand in wage pressures in health care results in a problem that must be addressed we are doing so.
The good news is that our loan portfolio is seasoning nicely.
Speaker Change: And to the current rate environment and risk as we perceive it is declining rapidly I believe as you can see I believe you can see this in our disclosures.
Margin trends from here are projected to be relatively stable. This year with benefits from fixed rate loan repricing largely swallowed up by the recent declines in variable rate market indices.
For example, I currently expect first quarter margin to decline mid single digit basis points with the largest driver of that being the decline in silver.
I also 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 non.
Noninterest expense decreased 397000 from the previous quarter mitigated by a $1 $2 million onetime estimated litigation expense.
I continue to expect quarterly wages and benefits to be between 22 and $23 million going forward given the revenue performance employee investment costs have been running high but we 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 focused on optimization and efficiency I believe our results indicate that we are doing a pretty good job of this.
It can continue and I believe we can potentially even grow earnings absent balance sheet growth at the very least I believe earnings can be much more resilient than perhaps much better than many people expect from us.
With that I'd like to turn the call back over to Jim.
Okay. Thanks, Brad in closing we are confident in our balance sheet and the opportunities that are ahead for old second our focus remains on assessing and monitoring risks within the loan portfolio and optimizing the earning asset mix in order to reduce our overall sensitivity to interest rates.
Net interest margin trends are stable and income statement efficiency remains at record levels the expectations for our continuing record efficiency gives me confidence that we are well positioned to deliver another strong year in 2024.
Jim Edgar: Look forward to the opportunity to demonstrate the strength of the franchise we have built.
Jim Edgar: That concludes our prepared comments. This morning, so I will turn it over to our moderator to open it up for questions.
Certainly the floor is now open for questions. If you have any questions or comments. Please press star one on your phone at this time.
Also while posing your question please pickup your handset.
Speak to provide the optimum sound corny. Please I'll just I'm, Amit wildly poll for questions.
Jim Edgar: Your first question is coming from Jeff Lewis with <unk>.
Please pose your question your line of sight.
Thanks, Good morning.
Alright.
Jim you mentioned.
Wanted to just talk about the workout potential on that non accruals and Oreo I think you mentioned there is hopeful.
Some progress there anything kind of lumpier in there if we could look at a basket of those to say hey in the first half of this year, we feel like there is.
Some chunkier credits that could be.
Jim Edgar: Resolved.
Jim Edgar: Any color there helpful.
Yes, yes, there is some lumpiness in it.
In the non accrual bucket.
Jim Edgar: And we did move a couple of office buildings into Oreo, So thats, obviously last stage and migration.
Which will position those assets for sale.
The larger credits are healthcare related.
We've had these at our radar for quite some time.
We did have a couple of large loans that moved into non accrual this quarter.
Unfortunately, it's going to be it's going to be a long a slug.
Jim Edgar: To work these out as we look towards litigation.
Absent that we did execute.
The loan sale.
Late in the quarter, we have a potential another.
Loan sale coming up this quarter, so I am confident.
We're going to have some positive movement. There is also a large.
Snick credit.
Jim Edgar: But we're very optimistic we will get upgraded this quarter as it was performing.
Well last quarter. So we're just waiting on the OCC to give us the green light to upgrade that one.
Got it.
Don't want to put you in a tough spot, but I guess, if you're thinking about npa's next year at this time.
Can we think about something half that balance or what.
Jim Edgar: Big picture.
Progress from Premier ends.
Does that balance had.
Yes, I think Thats I think thats, obviously the goal is to start addressed.
Aggressively working through these.
The litigation process does take some time.
But I do feel we've.
Got about $130 million in classifieds I think I think we can.
Jim Edgar: I think we can make meaningful improvement in the coming quarters.
Got it.
Brad: Okay Brad.
At.
Brad: Got your comments about.
Reducing asset sensitivity.
And as well as your Q1 expectation for margin.
Jim Edgar: Could you just kind of give us an update on if and when you don't sound too convinced who've got a wallets rate cuts.
I'm with you but.
We do see up to do in the back half of the year.
Kind of give us an update on rate sensitivity, what that does to the margin.
Guesses.
A little bit of headwinds, but.
Maybe just an update there.
Yes.
Yes.
Based on our current trends right now my expectation would be and.
Again, I don't really see a pathway for this world scenario, but I'm obligated to follow it to some degree.
We got three rate cuts in 2024, we would probably have a very similar year in terms of bottom line.
Jim Edgar: Kind of that $2 per share type level.
<unk> margin down some 15 basis points.
We've got a lot of things that are helping us on the margin and largely that stems from how we built the securities portfolio with all the liquidity inflows in 2020 in 2021.
Specifically, we've got almost $100 million of very low yielding securities that fully mature this year.
As I indicated.
Jim Edgar: The only margin give up we've seen at this point is just simply been a structure, reducing asset sensitivity and to give you an idea of what we've been doing there we.
Gone from some all in earning asset mix of some 65% variable to something more approaching 50% today.
And it's not about lurching at it.
And there seems to be a popular perception that a bank can.
And should be a hedge fund and can go from fixed to variable the flip of a coin.
But really all we're trying to do here just as we did in 2021 is just eliminate tails.
And it is true that as rates go down we earn less because of what we are which is a great retail deposit base.
But we still are exceptionally profitable in any reasonable interest rate scenario.
And I expect well above peers.
So nothing bearish on that front I think we've done a great job with the balance sheet.
And earnings outlook remains very strong.
Okay I appreciate it.
Maybe just one last one.
Brushed up upon the buyback I guess if you.
We do feel strongly you've turned the corner on credit.
With a bit of weakness in the stock.
Yes.
You are building capital rather quickly.
Lean into that buyback a little heavier.
Interested in kind of comments there.
Well, let me first thing I get I get People's concern credit is not something that we take lightly and neither does the market it makes sense.
Buyback as part of capital management strategy, and I think we've been pretty transparent on what we're trying to do with capital.
Just to refresh those that may be new.
We typically run between 7% and 9% TCE ratio of seven when we just deployed a large amount of capital and nine when I get scared of my own shadow.
We're approaching the top end of that range right now, but I think it's less about fear today than it is about the fact that so many balance sheets in our industry are impaired.
And the gating factor to M&A is going to be capital availability.
Jim Edgar: Large earnings per share is accretion for those that can stomach the dilution from from March and it is a bond math exercise.
So there is an idea of carrying capital for the potential of an opportunity like that.
However.
It is not unlimited and those deals don't grow on trees. They arent they arent easy to source.
Jim Edgar: So we remain realistic in terms of its availability and to the extent that that deal doesn't come to fruition the capital needs to go back because we will be above capital targets very quickly here.
Jim Edgar: Again, the overarching as a return on tangible common equity mindset here at old second and we expect to be in the mid teens or better.
<unk> been obviously far above that.
We expect to continue to be.
Got it.
Yes.
Your next question is coming from Nathan race with Piper Sandler. Please pose your question your line of sight.
Yes, hi, guys. Good morning, I appreciate it.
Yes.
Just going back to credit and just kind of thinking about the health care portfolio specifically.
Nathan Race: A decent remaining balance of the classified loans. So just curious to what extent you have any other out of <unk>.
Nathan Race: <unk> healthcare loans that are maybe more susceptible to the inflationary environment and other factors impacting that space.
Yes first of all Nathan the healthcare portfolio is diversified.
Throughout the country.
We're seeing the stress is about $42 million classified in that book.
$28 million and is in the.
Assisted living space, where we have a 2% allowance against that.
Other $14 million in skilled nursing, we've got a 10% allowance reserved against that.
Where we're seeing the most pain geographically is in California, where the state of California had the most restrictive.
Gating rules around around entrants and occupancy during COVID-19.
Let's I'll also further stress the portfolio is that they are all a lot of our floating rate structure. So the interest rate carry that burden has been substantial so.
We think we've addressed everything.
We've stress tested all the remaining <unk>.
Commercial real estate is it healthy and office and health care that are that are maturing in 2024, and we think we've got everything well reserved for.
Okay, great and I know, it's difficult to predict but I. Appreciate that you guys have gotten out in front of a lot of the credit issues that popped up.
Earlier than last year.
Kind of clean things up a little bit here in <unk>.
But as you kind of look out over the next year, so what's kind of a deal.
Decent range to expect charge offs going forward within that context.
Just given your guys' conservatism generally.
Nathan Race: And then just just any guideposts around charge offs as you guys see.
Nathan Race: The world today.
It would be helpful. I think I think in the first half of the year, depending on timing of resolution that youre likely to see between three and $5 million in charge offs, which is currently already reserved for.
I don't see a lot after that.
So which is why the our comments.
Comments earlier reflected around provision consistent with loan growth.
Now I will say that all of our discussion is kind of on a.
Et cetera is Paradise type basis, which is absent any changes in econ I think.
Most bank stock investors are a jittery brewed anyway, and I think that we're always lurching and Shadows I think that we are in.
Type of macro environment, where it could fall either way it is.
Nathan Race: Been interesting watching that belief.
That soft landing is a real animal in nature.
Don't really subscribe to that.
But absent any changes in macro that has our current outlook.
Okay, Great and then.
Suppose that implies maybe the reserves relative to loans trends down a little bit just given that those charge offs expected in the first half of the year largely allocated for.
Just any thoughts on kind of where the reserve settles out in the back half of this year.
Some of those qualitative adjustments yet.
On the macro.
Stable to modestly down, but I think that we're comfortable where we are in that regard and again as it relates to a stable economic environment broadly.
Nathan Race: Yes.
Okay got it.
I appreciate your guidance on the salary line for expenses.
This year.
The overall any overall thoughts on the run rate and just how you guys are kind of thinking about year over year expense growth in the expenses were really well controlled last year up 1%.
Just maybe a low to mid single digit trajectory more appropriate to use for 2024.
I'm, hoping to be in that kind of that 3% range to be honest.
We've done a really good job of migrating cost saves from the acquisition two years ago and continuing to realize synergies there.
That has belies some significant investment both in people and facilities that allows us to step into our next decade here at old second and continue to grow into being a Chicago based bank.
Feel very good about what our expense trends look like.
Feel very good about about what kind of our balance sheet flexibility and our ability to maintain earnings as well.
Gotcha.
Just lastly.
Going back to the discussion around margin, but maybe translating that into kind of thoughts for this year.
I appreciate that you guys, obviously asset sensitive and have less inherent.
Deposit cost leverage as rate cuts occur.
But just given kind of maybe a low to mid single digit growth outlook in terms of loans, how do you guys kind of thinking about this.
DNI cadence and just.
Nathan Race: Overall year over year NII growth prospects for 2024.
Pretty stable to be honest.
Within that piece Thats and Thats, just a function of.
Nathan Race: When youre looking at what potential marginal yields are.
Marginal spreads to be more specific there are very tight.
Nathan Race: That doesn't make a ton of sense.
We have.
Started the dabble in the sevens on the loan side, but thats more a function of lower all decreasing asset sensitivity.
Because it allows us with cash flows that are coming in to lock in at that rate and just overall migrate down.
Just to give you some context, we've been basically outside of of absolute policy limits in terms of asset sensitivity all the way from the end of 2020 through the middle part of 'twenty two.
We have now reduced net such that we are within policy limits from overall asset sensitivity.
We've made substantial progress.
Nathan Race: But it is a function of basically remaking the balance sheet.
And continuing to eliminate tail risk with movements in interest rates.
As we spoke last quarter and the quarter for that.
We were selling variable instruments hand over fist and everybody was buying.
Obviously that train has not worked out well for somebody.
As variable rates.
Taken a nosedive.
So that opportunities kind of slowed down a bit.
But it can go back the other way quickly as we saw last year. So we will continue to be flexible.
Okay.
Nathan Race: Just to clarify that kind of flat outlook for this year does that include two to three rate cuts in the back half of this year.
It includes three rate cuts spread over the year.
Nathan Race: Okay, Great I'll step back thanks.
Thanks Scott.
Your next question is coming from Terry Mcevoy with Stephens. Please pose your question your line is live.
Hi, Thanks, good morning, everyone, you've been using loan modifications a bit more than your peers, specifically that the term extensions.
Can you just talk about <unk> activity and modifications in the portfolio.
So that's in the context of the discussion I, just had Terry where we've taken variable rate structures and move them into fixed rate structures as part of our basically.
Almost 12 months to 15 months alone strategy of reducing asset rates asset sensitivity. So it's basically taking variable loan portfolios and move them into fix it's not a function of of credit give up or.
Or restructuring in terms of doing that sort of thing at all.
Thats not what youre, saying.
Terry: Thanks, Thanks for clearing that up and I guess, just looking at the $137 million of CRE fixed rate loans that mature in the first half of this year I guess when's. The last time, you stress test the portfolio for for today's rate environment and are there specific reserves against.
That bucket of loans, yes, I would tell you we did an analysis on all fixed rate.
CRE loans that are maturing in 2024 and stress tested all of them and feel that we have no additional reserve needed I think what's important to note. We started building reserves pretty significantly really in the second and third quarter of 2002 and into 2003, when do we really start.
Seeing stress in certain portfolios, we hadn't really use those reserves until really the last two quarters. So.
Despite a little bit of a decline in the reserve levels.
Nathan Race: Still have a pretty healthy pooled reserve level out there.
The team has done a good job of stress testing, what we have coming forward.
And just last one Brad I was.
To track when you'd look to repurchase stock because it's a forward 12 month expectations on where tangible book value is expected to be yes. So take take basically four quarters of earnings and if we cross below one we absolutely will be active and aggressive in terms of repurchasing shares.
Shares, although as we sit here today.
It is less than a two year earn back on that same basis.
And a bank like us with a two year earn back is not a bad acquisition.
So it's not something that I would rule out and.
And that's not trying to be Florida, yet I'm, just trying to tell people how do we think about it.
And it's in it's in relation to an M&A outlook type thing Gary.
Yeah.
Understood. Thanks, a lot.
Once again, if you do have any questions or comments at this time. Please press star one on your phone.
Our next question is coming from Brian Martin with Janney. Please pose your question your line is nice.
Hey, good morning, guys.
Hey, Brian Good morning, Hey, Jim just to clarify one the special mentioned level today or just that the total total criticized and classified can you just run through what those are today I think you said there was the lowest level, but just want to make sure that you can give the classified in the release I don't know about the special mentioned.
So.
We see criticized or special mentioned those are the early warning buckets right that all banks focus on with that.
Jim Edgar: Those levels have declined four consecutive quarters.
Jim Edgar: 26%, just this last quarter and the lowest level in two years.
That gives us a little bit of optimism that.
Future migration from there to substandard is there's going to be.
That's a lot lower than it has been the last couple of years.
Total total classified and sub standards are down about $100 million.
Over the last year, so, we're making progress obviously, a tough a tough quarter, but.
Jim Edgar: We think we've done a pretty good job around putting a fence around a lot of these problems moving forward yes.
Okay got it and then.
I think just on the M&A outlook I guess.
Mentioned that in the context of capital and kind of how you look at things is that market soft today, I guess that you're not giving me working through these credit issues is it less of a less of a focus or just how should we think about the M&A.
Opportunities that maybe out there.
In the context of how you're running the bank today.
I mean, there's always banks are sold not bought so it's a question of are there willing sellers.
Over the last few months, we've seen a pretty large influx of OPM.
That short rates are going to fall in that all of a sense in terms of duration.
Are going to be forgiven in adults.
I don't as you know necessarily agree with that interest rate outlook. So I think that's it.
At least possible that that will swing back the other direction to some degree.
Durations are tricky thing.
As as great as it has been to not have any in terms of interest rate risk management.
Does offer kind of an opposite impact when it comes to credit and credit migration.
There was an awful lot of people in our industry due in seven and 10 year.
Balloons on commercial real estate from 2020, all the way through 2022.
And that May give some comfort that those loans are fine and obviously the cash flows benefited by that having that locked in low debt service coverage.
But given the fact that we didn't really depart from three and five year balloons, we don't have it.
That duration cushion that others may be experiencing.
Yeah.
Got you, Okay, and then Brad you talked about the fixed rate the fixed loans re pricing can you just remind us how much of that.
How much is occurring over the next maybe 12 months and just what pickup you're getting on that.
Net fixed rate re pricing your.
You're basically talking between somewhere between 150 and $200 million, depending on some level of prepayments.
That is repricing from a three 5% to 4% range into a 7% to 8% range.
Okay and then.
Jim Edgar: Based on where silver is today.
Gotcha.
Your commentary.
High level on margin and I appreciate all that you've given me.
Last quarter, you kind of talked about where we.
Nathan Race: The margin could bottom with X number of rate cuts any change in your outlook as far as how much impact that could have on no. Let's let's broadly structural it would take it would take a mountain movement to see us fall below four.
I'm very comfortable with.
Basically running this balance sheet at a 4% margin, but we are so far from that that it's that it's.
It gives you a great deal of comfort.
Yes, I can take you would take a lot more rate cuts than even the most optimistic.
Person, who believes the fed will will buttress equity markets to infinity to achieve.
To get us below four.
Nathan Race: Okay.
Okay. That's all I had guys I appreciate it thank you.
Thank you thanks, Brian.
Your next question is coming from Chris Mcgratty with <unk>. Please pose your question your line of sight.
Andrew <unk>: Hey, this is Andrew <unk> on for Chris Mcgratty.
I know you mentioned your opening remarks that deposit pricing has remained aggressive in your markets.
Now how should we think about noninterest bearing outflows going forward and when should we expect to see a little more stabilization there.
Yes.
I think that the speed of the movement down has slowed considerably I would expect that to continue.
I think that.
There was an awful lot of people, who thought that the massive amount of deposit inflows into our industry in 'twenty, one and 'twenty, two where somehow because they became great bankers.
They elected to plow that money out the curve and.
Now that rates have reversed they are forced to compete with fixed income markets for those flows which is where they should have always been absent volatility in rate markets in COVID-19.
We don't feel compelled to compete with that front.
But largely what you're seeing in terms of noninterest bearing flows from us is simply a function of earnings credits and needing less balances to offset given fee levels.
There is no real change on an economic basis underlying our noninterest bearing trends at all.
As you may or May not know we are a very granular.
Andrew.
Andrew <unk>: Noninterest bearing balances balances relative to the entire deposit book has remained around 40%, which is an exceptionally strong position very sticky we have not seen a lot of outflows in that area.
Okay, great. Thank you.
I guess on your low to mid single digit loan growth guidance, where should we expect the source of that.
Andrew <unk>: They come from and what areas are you.
Essentially pulling back from.
Activity within our within our loan committee remains as we mentioned on the call pretty pretty modest.
We're seeing growth is really in C&I sponsored finance.
Andrew <unk>: Lease banking primarily.
We think.
In today's environment.
With 3% GDP, probably mid single digit outlook as realistic for us.
Okay and then.
Last one sorry, if I missed this on the.
M&A question.
But can you just remind us about your ideal target would look like.
Trades at significantly less than us so we're buying a dollar of earnings for <unk> 85 or less.
Okay. Thank you.
That's all yet.
Your next question is from coming from Kevin Ross with Black Maple capital. Please pose your question. Your line is live.
Hey, guys happy new year to you.
With regard to the two assisted living facilities in California, you mentioned litigation.
Are those is that litigation is a foreclosure actions or some other type of litigation.
We're in very early stages, I mean, thats, obviously an option.
Andrew <unk>: But we don't expect quick resolution on either one of them.
But we can't at this point, we can't really speak to the course of action, we're going to take but they are they are marked we took aggressive allocations and charges against them and we're positioning them for remediation.
Got it okay, and just one clarification on what it wasn't some other type of litigation related to.
California Litigation litigation estimates that have impacted earnings this quarter relates to consumer overdraft and specifically relates to disclosures that were in our account disclosure booklets between three and seven years ago.
Okay got it alright.
Alright, Thank you very much.
Got it.
There are no additional questions in queue at this time I would now like to turn the floor back over to Jim <unk> for any closing remarks.
Okay. Thanks to everyone for joining us this morning, and we look forward to speaking with you again next quarter have a great day. Thanks.
Thank you. This does conclude today's conference call. You may disconnect. Your phone lines at this time and have a wonderful day. Thank you for your participation.