Old Second Bancorp, Inc. (OSBC) Earnings Call Transcript & Summary

Speakers you may now begin your conference.

Good morning and welcome to our first ever 2020 Annual Stockholders Meeting of Old Second Bancorp, Inc. I am Jim Eccher, CEO and President of Old Second Bancorp. It is my pleasure to welcome you here today for this meeting and to introduce our Chairman, Mr. Bill Skoglund.

Good morning. Thank you, Jim, and welcome, everyone. Thank you for joining us today. We're excited to be hosting our first virtual meeting, which allows us to be more inclusive and reach a greater number of our stockholders, particularly in light of this pandemic. We have stockholders attending via the web portal. We have adopted an agenda for our meeting this morning. In accordance with this agenda, we will proceed as follows. Following instructions, I will conduct the official business of the 2020 annual meeting. During this portion of the meeting, all discussion will be limited to the official business in hand and participants will be limited to stockholders of record and their proxies. If you wish to participate in this meeting, please follow the instructions on your screen. After the official business, Jim and Brad will provide brief comments on our performance, and we will open the meeting to question-and-answer session. Please hold any general questions you may have concerning our operations until that time. We will entertain questions from stockholders of record and their proxies. If you wish to participate in the question-and-answer session, please follow the instructions on your screen. Though we may not be able to answer every question, we'll do our best to provide a response to as many as possible. And we'll address any unanswered questions on our corporate website shortly after the meeting. It's now after 9:00 a.m. Central Time on August 18, and this meeting is officially called to order. Before we move to our official business, besides Jim and myself, it's my pleasure to introduce the members of our Board who are present through our virtual web portal. Gary Collins, Vice Chairman of Old Second Bancorp and Old Second National Bank; Ed Bonifas, Vice President, Alarm Detection Systems, Inc. and Chairman of our Information Technology Steering Committee; Barry Finn, Retired President and CEO of Rush Copley Medical Center. Barry is the Lead Director and Chairman of the Nominating Corporate Governance Committee and the Audit Committee Financial Expert; William Kane, General Partner of the Label Printers, Inc. and Chairman of the Risk Management Committee; John Ladowicz, Former Chairman of Heritage Bank and Chairman of our Compensation committee; Hugh McLean is a partner of Rock Island Capital LLC; Duane Suits, Retired Partner of Sikich LLP and Audit Committee Financial Expert; Jim Tapscott, Retired Partner of McGladrey LLP and Chairman of the Audit Committee and Audit Committee Financial Expert; and Patty Temple Rocks is a senior partner of ICF Next. I would also like to introduce Brad Adams, our Executive Vice President and CFO of the Old Second Bancorp, Inc; John Jennings and Aileen Nagy, Corporate Counsel from Nelson Mullins Riley & Scarborough LLP. We are also joined here today by Steve Schick from Plante Moran, our independent auditor. And finally, the company has appointed Broadridge Financial Services to act as official examiner of today's votes in the election. Ms. Shannon Logan from Broadridge is here with us today and will act as the official examiner. Also appointed for proxies are Jim Eccher, Brad Adams and Gary Collins. Gary Collins, our Vice Chairman, will also serve as Secretary of the meeting and record the proceedings. Gary, will you please [indiscernible] related to the organization of this meeting. Gary?

Yes, Bill. The Board of Directors approved June 26, 2020, as the record date for determining stockholders entitled to vote at this meeting. An affidavit has been presented attesting to the fact on or about July 17, 2020, a notice of meeting, proxy statement and annual report was mailed to all stockholders of record as of the record date. This affidavit will be filed with the minutes of this meeting. I hereby appoint Shirley Cantrell to act as our inspector of election. She has signed an oath to act as an inspector of election and the oath will be filed with the minutes of this meeting. The stockholder list shows that as of the record date, there were 29,589,341 shares of common stock outstanding and entitled to vote at this meeting. This list is available during the meeting via the web portal if any stockholder wishes to examine. [indiscernible] by the official number, there are 25,055,752 shares or approximately 85% present in person or represented by proxy [ in this ] meeting. Since this represents more than a majority of all issued and outstanding stock entitled to vote on the record date, a quorum is present for purposes of transacting business. Accordingly, this meeting has properly been convened.

Okay. Now I will present the matters to be voted upon. Please note that we'll give stockholders an opportunity to comment on the proposals themselves after all proposals have been presented. Proposal #1 is the election of 3 Class 1 directors; William Kane, John Ladowicz and Patti Temple Rocks, to serve a 3-year term to expire on our annual meeting of stockholders in 2023 and until his or her successor is duly elected and qualified. Proposal 2 is a nonbinding, advisory vote to approve the compensation of our named executive officers and described in the proxy statement. Proposal 3 is appointment of Plante & Moran, PLLC as our independent registered public accounting firm for the fiscal year ending December 31, 2020. If any stockholders would like to comment regarding any of these proposals, please present -- submit your comment through the web portal. We can wait a second to see if there are any comments. So far, there are none, so we'll keep moving. The polls are now open. Any stockholder who hasn't yet voted or wishes to change their vote may do so by clicking on the voting button on the web portal and following the instructions there. If you already voted by mail or via the Internet, you do not need to vote again now unless you want to change your vote. Why don't we take a short pause and see if there's anyone that wants -- that hasn't voted or wants to change their vote, please do so now. [Voting]

Okay. So it looks like everything is settled. And so now that everyone has had the opportunity to vote, I now declare the polls closed. Gary, do we have a preliminary results?

We do. We have been informed by the official examiner that the preliminary vote report shows that each nominee for election to the Board has been duly elected, the compensation of the named executive officers has been approved by the advisory vote, and the appointment of Plante & Moran, PLLC as our independent registered public accounting firm for 2020 has been approved. We will be reporting the final vote results in a current report on a Form 8-K to be filed with the SEC within 4 business days of this meeting.

Okay. Thank you, Gary. And with that, there being no further business to come before the meeting, the 2020 annual meeting of stockholders of Old Second Bancorp is now adjourned. Now I'll turn it over to Jim, who will give a brief presentation, followed by a question-and-answer session. Jim?

Thank you, Bill, and good morning, everyone, again. Even though it seems like 2019 was ancient history, it was a very successful year for our company, and we are extremely pleased with the things we accomplished to position us for future growth and the direction the company is heading. Revenue growth far exceeded expense growth and returns on equity and assets were nothing short of excellent on both an absolute basis and in comparison to peers. Loan growth was muted in 2019 as our company strategically pulled back on the lending front as credit structures and pricing were not at acceptable risk tolerance levels. A very healthy net interest margin and good expense control led to our strongest year in pretax income in over a decade. We added several high-quality salespeople, improved our infrastructure and delivered extremely strong profitability. Our platform is strong, and our momentum continues to build, although we remain very cautious during this pandemic. We started taking the steps in mid-2019 to prepare for an economic slowdown and recession. Our key objectives in 2019 and now into 2020, shifted from a growth strategy to more of a defensive strategy as loan pricing and structures became irrational in our markets. Our focus remains primarily on credit quality and efficiency initiatives. We feel we accomplished both of these objectives. The benefit of an expanding net interest margin helped deliver meaningful shareholder value throughout the year. We are proud of the earnings growth we have delivered and believe we remain well positioned to continue our recent success. Some of the key highlights for our company in 2019 include an 18% increase in pretax pre-provision income over 2018, further reductions in classified or problem assets with levels that are now consistently in line or better than peers, a net interest margin expansion in excess of 4%, driven by the strength of our deposit franchise. Loan growth increased approximately 2% in 2019 as our appetite for loan growth moderated due to market conditions. We are adhering to disciplined underwriting practices and remain focused on adding high-quality full banking relationships. Today, as we look forward to 2021 and beyond, we're moving forward with new initiatives to improve earnings per share. We remain focused on maintaining a strong balance sheet with below average risk while continuing to look to deliver excellent customer service. Our core deposit franchise is unlike any other in our markets. While it will likely remain underappreciated through the prolonged low interest rate environment, it will be a source of strength once interest rates begin to rise. We are well positioned for a difficult interest rate environment, and our momentum is among the strongest of any bank in the Chicago market. Despite the poor recent stock price performance for both Old Second and banks more broadly, we remain encouraged with our operating results, confident in our balance sheet and ready for the challenges ahead. We have taken the steps to position ourselves well for this slowdown and recession. We believe our credit and underwriting has remained disciplined, and our funding and capital position is strong. Overall, the team has never been better. And at some point, I remain optimistic that opportunities will be available to improve our footprint. The focus remains on timing and making sure that we have the balance sheet, liquidity and access to capital we need in order to take advantage. Similar to last year, our slide deck presentation will be brief, and we have added some data for 2020. And we'll move through that pretty quickly, and then we'll open it up to some questions. So Sam, you can move forward. We have the obligatory forward-looking statements -- safe harbor statement. And the first slide I just wanted to touch on is the performance summary, which is our dashboard. You can see we've got 4 years of data there along with June 30 year-to-date numbers, which represent the first 6 months of operation. So total assets were relatively flat, and loan growth was pretty modest in 2019, but you can see loans were up about $125 million so far this year, largely the result of generating $137 million in PPP or Paycheck Protection Loans, which we expect to be forgiven sometime in the next 2 to 3 quarters. Assets are also up about $300 million, mostly due to the aforementioned PPP loans and the surge in deposits that we've experienced as businesses and consumers have curtailed spending. You can see we took a very sizable provision for loan loss in the first quarter as we continue to be very cautious with our balance sheet in light of the pandemic, high unemployment and eventual economic slowdown. Next slide touches on our focus on quality loan growth. As I mentioned, we had about 2% loan growth in 2019 through 6 months this year, we're up 6.3%. However, I will say loan growth is -- absent the PPP loans, loan growth is relatively flat this year. We continue to be very disciplined and cautious. Commercial growth was up 21% in the quarter, that's all related to PPP. Lease -- our leasing division had a very strong year last year. It's a relatively new vertical for us. They've also experienced pretty good growth this year, up about 5.5% through the second quarter. As I mentioned, we did hire new commercial sales teams in 2019 to focus on diversifying the commercial portfolio. We're very pleased with that group as they continued to make solid traction in the Chicago market. We did adopt CECL on January 1, 2020. This is a new accounting standard that was issued by FASB. It stands for current expected credit losses. This replaced the allowance for loan losses. By adopting that provision, we took so far $8 million in provision in the first quarter and just over $10 million so far year-to-date. Following that slide, just another indication of our stable credit position. You could see on the left-hand side, nonperforming loans, very manageable at this point, slight uptick in 2020, and that's really a result of the adoption of CECL in the inclusion of PCI loans, which are now PCD or purchased credit deteriorated loans, which is required under CECL, but again, well controlled. Credit remains very stable for us. Our OREO or other real estate owned portfolio is down about -- down to $5 million and shrinking. We feel very good about those trends and continue to expect strong performance in the next few quarters. Core earnings stability on the following slide. Core revenues and core earnings remain very stable despite a dramatically lower net interest margin as a result of the Fed moving interest rates to 0. Balance sheet growth, cost of funds improvement and stability and noninterest expenses have all helped to drive pretty solid core earnings growth. You can see the chart there. With the exception of the first quarter, we were very conservative with our loan loss provision. Second quarter earnings have bounced back and are at levels consistent with the 4 quarters we experienced in 2019. Our focus remains on quality loan growth, full relationship business. Our fee income streams remain strong. I'll touch on that shortly. We continue to focus on our core deposit franchise. And I should mention, we have made significant improvements in investments in our risk management and back office to allow for continued growth in the future. As far as the fee income diversification, the following slide is something we're very proud of. About 25% of our revenues are derived from fee income. And that's been a pretty consistent pattern for a number of years. This year is no different. We've experienced very strong results from our residential mortgage group and our wealth management group. The remaining components of that fee income stream come from card business, debit cards, service charges. And again, we're on track to be in that 25% to 30% range. Our focus remains on operating leverage with net interest income and margins, obviously, down this year due to lower market rate -- lower market rate environment. We've continued to focus on noninterest income and obviously expenses. Our efficiency ratio remains in that 60% or better range, which has been our strategic target. We're here under that through the first 2 quarters of 2020, and the focus remains on noninterest expenses. We're on about an $80 million run rate for 2020, which is exactly where we were in 2019. Next slide speaks to our core deposit franchise. We believe this is one of the crown jewels of our organization. It continues to provide us the lever to price lower on the cost of deposits, which remains around 37 basis points. 2/3 of our households have now been banking with us for 10 years or longer, which is pretty remarkable. Furthermore, about 80% of our deposits are now considered core, which I believe sets us apart from a lot of our peers. The last slide is -- focuses on our strategic summary. And as I mentioned earlier, we have moved into more of a defensive position. But as we look forward and as good stewards of capital, we will remain cautious during this pandemic in very uncertain times. We will remain disciplined on the credit front, yet be opportunistic for solid overall good banking relationships. We'll remain focused on efficiency and expenses. We will continue to protect our core deposit franchise. And continue to position the company for opportunities to enhance shareholder value when the time is right. So that really concludes our slide deck here this morning, and I would like to open it up for any questions. We'll stop and pause and wait for any questions that might come up. Give it one more minute. Hearing no questions, in closing, I would just say that our Board of Directors is committed to continuing our progress to deliver an enhanced long-term shareholder value. I do want to especially thank all of our employees who really drive the results on a daily basis. The relationships they have built over the years and the support they deliver on a daily basis has created a very special and valuable franchise. We also appreciate the loyalty and support of all of our shareholders and a special thank you to our Board of Directors for their guidance and commitment to our company. Thank you, and that concludes our presentation, and we hope to see you all next year. Goodbye.

Ladies and gentlemen, thank you for your participation on today's conference. This does conclude your program, and you may now disconnect.