Apr 24, 2014
Operator
Greetings, and welcome to the Old Second Bancorp First Quarter 2014 Earnings Conference Call. [Operator Instructions] As a reminder, this conference is being recorded.
Operator
I would now like to turn the conference over to your host, Mr. Doug Cheatham, Executive Vice President and CFO for Old Second Bancorp.
Thank you, Mr. Cheatham, you may begin.
Doug Cheatham
Thank you. Good morning, everyone, and thank you for joining us.
I will start with a reminder that our comments today may contain forward-looking statements, which are based on management's existing expectations in the current economic environment. These statements are not a guarantee of future performance, and results may differ materially from those projected.
I ask you to refer to our SEC filings for a full discussion of the company's risk factors.
Doug Cheatham
With me this morning are Bill Skoglund, President, Chairman and CEO of Old Second Bancorp; and President and CEO of Old Second Bank and Chief Operating Officer of Old Second Bancorp, Jim Eccher.
Doug Cheatham
And now I'll turn it over to Bill to get things started.
William Skoglund
Good morning, everyone, and thank you for joining us today. I'm happy to report that the first quarter of 2014 continued the current trends of positive results.
Classified assets declined for the 13th consecutive quarter. From their peak of $471 million in December of 2010, they now totaled $93 million and decreased $10.9 million from December 31, 2013, a 10.5% reduction.
Our classified asset ratio also decreased and is now at 38.44%. Earnings for the quarter were $2.2 million, and net income available to common shareholders, 630,000.
William Skoglund
Capital also increased with a leverage ratio of 7.29% and a total capital ratio of 15.87% at the Bancorp. And at the Bank, these ratios were 11.12% and 17.8%, respectively.
William Skoglund
Loans, which were up in the first quarter, were up by $10 million and continued the growth trend started in the fourth quarter of 2014. And early in April, we announced the completion of a public offering of 15,525,000 shares of the company's stock at a price of $4.40 per share.
The company received net proceeds of $64.3 million. The proceeds will allow us to bring our trust preferred interest current, bring TARP preferred stock dividends current, repurchase a portion of the outstanding TARP preferred securities at a discount and give us some extra liquidity in the Bancorp.
William Skoglund
The stock issuance will also provide extra capital that will help the bank grow and will reposition the balance sheet in light of the new Basel III capital regulations set to take effect on January 1, 2015.
William Skoglund
This capital -- this additional capital, along with improving credit conditions and profitability, I believe, puts the company on a solid footing to a brighter future. And with that, I'll turn it over to Doug and Jim for further comments.
Doug Cheatham
Thanks, Bill. Net income available to common stockholders was $630,000 in the first quarter of 2014 compared to $4.2 million in the first quarter of 2013.
The difference is primarily the result of a few key items: the provision release was $1 million in the first quarter of 2014 compared to $2.5 million last year; securities loss of $69,000 was incurred in the first quarter of 2014 compared to $1.5 million gain in the first quarter of 2013; and no income taxes were accrued in the first quarter of last year compared with $1.2 million this year.
Doug Cheatham
On the plus side, FDIC insurance was $756,000 lower in the first quarter of this year compared to last year, and other real estate expenses were $2.1 million lower in the first quarter of 2014 compared to a year ago.
Doug Cheatham
The net interest margin was 3.13% compared to 3.18% in the first quarter of 2013. The margin has remained relatively stable for the past 6 quarters.
While this extended period of low interest rates does put pressure on the margin, a few things are working in our favor. The continuing decline in non-accrual loans, which are being replaced in the portfolio by new loans, and the continuing roll-off of older CDs at rates above the current market each helped to support the margin.
Doug Cheatham
Noninterest income was $6.3 million in the first quarter compared to $10 million a year ago. Last year, we had $1.5 million securities gains in the first quarter, as I mentioned.
Another significant factor is the decline in mortgage lending in the first quarter of 2014.
Doug Cheatham
Mortgage revenue was $727,000 in the first quarter of 2014 compared to $2.5 million in the first quarter of 2013. We know that other lenders are seeing similar declines.
The extent to which the decline was exacerbated by the severe weather that we have remains to be seen. Expenses were down $3.4 million or 16% compared to last year.
Other real estate expenses were down $2.1 million. FDIC insurance, as I mentioned, was down $756,000 and general bank insurance was down $360,000 in the quarter.
All of these cost declines are a direct result of our improved condition.
Doug Cheatham
Regulatory capital ratios at the bank remained strong. The leverage ratio increased from 9.94% a year ago to 11.12% at the end of the first quarter this year.
The total capital ratio increased from 14.86% at the end of the first quarter of 2013 to 17.83% at the end of the first quarter of 2014. The bank level ratios are unaffected by our recent capital raise and ongoing actions since those affect only the holding company, and we will not be pushing any of that down to the bank.
Doug Cheatham
To give the latest on that capital moves, the TARP preferred dividends have been declared and will be paid in mid-May to record holders on May 1, and we expect to repurchase the shares that we indicated before that time. Previously accrued interest on trust preferred securities has been paid to the trustees, and those interest payments will be made in June.
Doug Cheatham
And with that, I will turn it over to Jim.
James Eccher
Thanks, Doug, and I'll keep my comments brief. The credit quality, again, strengthened in the first quarter, as all asset classes showed improvement as a result of continued asset remediation.
Other real estate-owned, special mention, nonaccrual and problem loans all declined in the quarter. Total classified assets declined $10.9 million or 10.4% in the quarter and, as Bill mentioned, represents the 13th consecutive quarter we've realized lower classified assets.
Total OREO declined modestly in the quarter as outflow exceeded inflow.
James Eccher
And while OREO activity was muted due mostly to seasonal and weather-related headwinds, valuation adjustments were minimal in the quarter, further indicating stabilizing property values in our market. OREO valuation adjustments were only $436,000 in the quarter, and this represented our lowest quarter in 5 years.
James Eccher
The loan portfolio continued to stabilize after successive quarters of runoff and intentional deleveraging. We now feel we've reached an inflection point in the portfolio as new originations are more than offsetting paydowns.
While loan growth was modest in the first quarter, it represents our second consecutive quarter of loan growth. And as overall credit quality continues to improve, we feel runoff and criticized loan migration to OREO will produce less of a drag on our ability to produce organic growth in coming quarters.
James Eccher
Overall, commercial loan originations have improved substantially in the first quarter compared to a year ago, while loans actually declined $37 million in the quarter. So while we're not where we want to be as far as new loan originations and generation, momentum is building in our pipelines and we feel we are on the right track to position the company for moderate organic growth.
James Eccher
On the funding side, total deposits increased 2.5% in the quarter, mostly as a result of growth in non-interest-bearing checking and retail core deposits. Mix changes continue to be very favorable as non-time deposits or core deposits represent 73% of our deposit base compared to 71% from a year ago.
The availability of other liquidity sources reduced the need for deposit funding.
James Eccher
And with that, I'll now turn it over to the moderator, and we can open it up to questions.
Operator
[Operator Instructions] Our first question comes from the line of Michael Perito with KBW.
Michael Perito
Doug, I thought maybe I could start on the expenses. The quarter-over-quarter improvement, rather, was pretty meaningful.
And I was wondering if you guys could maybe just give some thoughts on where you expect that to go near term here. Obviously, the credit-related expenses could be a little choppy.
But what about some of the other lines, such as the FDIC insurance expense? Should that stuff stay kind of at the 1Q levels?
Doug Cheatham
Yes, I think most of those, Q1 is a pretty good indicator. I don't want to get too far out here on making forward-looking statements.
But obviously, FDIC insurance has come down, and that tends to be a fairly stable expense once you hit a new level. The other things that are sort of indirect credit costs, like other real estate expense but also general bank insurance and some of those kinds of things.
Legal fees were down significantly. And I don't see those popping back up in any significant way.
Michael Perito
Okay. And there wasn't any type of one-off adjustments or anything like that in the OREO expense line in this quarter, correct?
Doug Cheatham
No, it was a pretty quiet quarter. As Jim mentioned, prices have really stabilized quite a bit, in addition to the fact that we just simply have a smaller OREO portfolio than we did a year ago.
Michael Perito
Okay. And then on the loan growth in the quarter, it looked like it was predominantly commercial real estate, but then there was also some C&I.
How granular was that growth? Was it some bigger credits?
Or was it multiple smaller credits?
James Eccher
Yes, pretty granular. I'm just looking at what we actually closed.
And I'd say the average ticket is probably in the $2 million range. There really wasn't any large ones.
I think the largest was maybe $3.5 million, so pretty granular.
Michael Perito
And then just an update maybe on the newer lenders that you guys have. I know, Jim, you made the comment that the pipelines are okay.
Just wondering how ramped up those guys are and if you guys expect any acceleration from them over the balance of the year here or anything like that?
James Eccher
Yes, we're fairly pleased with the first quarter, which tends for, us anyway, typically, is a slower quarter and things generally begin to ramp up as the year unfolds. We are seeing a pretty good traction from some of our new hires.
And while I would like to see more broader support, we're optimistic that in the coming quarters, we'll continue to see improvement in the pipeline.
Michael Perito
Okay. And then just a quick one on pricing, Jim, if you don't mind.
The margin was pretty stable, just on the loan yields quarter-over-quarter.
James Eccher
Yes, we're not seeing a big change from prior quarters. I think with our target being just below maybe the lower end of the middle market, we're still able to get prices in the low-to mid-4s and higher in some cases, able to price, still get 275 and 300 over LIBOR in a lot of cases on floaters.
Operator
[Operator Instructions] Our next question comes from the line of Andrew Liesch with Sandler O'Neill.
Andrew Liesch
Just circling back to some of the loan origination activity and just maybe some general comments on the economies and your markets, I mean, how much of this growth was -- draws on existing lines? How much was taking market share and taking clients from other banks?
James Eccher
I'd say 3/4 of it, Andrew, was new business secured from our newer lenders and originators, and maybe 1/4 of it was existing draws on existing lines. Typically, our line utilization again goes up in the latter half of the year.
And then we typically get paydowns earlier in the year. But most of it was originated through broad range in our footprint, not targeted at any one -- in any 1 market.
So we're pretty pleased with where the business came from.
Andrew Liesch
Got you. And then just one other expense line, the salaries and benefits line.
Usually, I think that there is like some higher bonus accruals and payroll taxes in the first quarter. So I'm just curious if maybe that line can turn lower from here.
Doug Cheatham
Well, I wouldn't necessarily expect a real marked change from where we are now. I think a lot of -- you're right, a lot of that does kind of come into the first quarter.
But we also have some annual adjustments for employees, those kinds of things that you have to deal with. So I don't think it's going to change all that much.
It's down this quarter a little bit from the previous couple of quarters. I'm not sure how much lower it can go, but it is certainly something we keep a close eye on.
Operator
[Operator Instructions] Our next question comes from the line of Brian Martin with FIG Partners.
Brian Martin
Doug, could you -- or maybe just for anyone, I guess, just talk a little about -- you talked about mortgage, obviously, being impacted with rates and kind of the conditions this quarter. As far as adjusting the expenses for that business, I mean, depending on how conditions change throughout the year, I guess, have you guys made any adjustments based on current reduced volumes?
Or, I guess, is that something you can still look at over the balance of the year?
James Eccher
Yes, Brian, this is Jim. Yes, a lot of our -- most of our sales force is on a commission-only account structure, so there won't be any effect there.
And then, obviously, it's the backroom processing and operations that we need to keep a close eye on. We did have -- the head of that department retired at the end of last year, and we were able to fill that internally without adding to overhead.
So we're seeing pipelines increase in our mortgage business. As the spring season is unfolding here, we are getting pretty strong pre-approval pipeline.
And as we're expecting a much better quarter in the second quarter just based on what we're seeing today.
Brian Martin
Okay. And maybe just secondly, on the loan growth.
I mean, can you just talk about competition for loans in your market? And I guess you talked a little bit about pricing being stable.
I guess, is competition getting tougher? Is it staying about the same, kind of what are you seeing on that end?
James Eccher
Brian, when we get into the lower end of the middle market-type opportunities, that's where we see competition very fierce and pricing becomes something that we're very, very cautious about. Where we see our niches is just below that lower end of the middle market, where nice $2 million to $4 million deals that are -- maybe a little bit bigger than some of the small community banks will go after.
And we are running up against local small community banks and then some of the regional banks that do have a small business unit. But there just isn't a lot of banks our size in the Western suburbs.
So while competition is still strong, it's not maybe as intense as it was a few years ago.
Brian Martin
Okay. And just lastly just on kind of the OREO that's still -- I guess, that's still on the books.
I guess, can you talk about the potential with maybe prices -- market prices stabilizing, the opportunity that there is some potential gains as you dispose of that? Or is it -- I guess, does that seem unlikely at this point based on kind of current market conditions?
James Eccher
Yes, it's -- we still have a 1/3 or better of the portfolio in construction-related assets. We're certainly [ph] not anticipating any gains in those assets.
We're going to be a little more patient, Brian, probably with those assets because our cost of carry is low and we're, obviously, looking for a little bit of a rebound in that market. If we get something close to par or within our strike range, we'll execute on the sale.
The rest of the portfolio, I think there are opportunities to pick up smaller gains. But historically, we've been able to sell OREO at between $0.90 and $1.05 on the dollar.
So we still want to move this. Obviously, our focus is on the higher cost of carry properties is what we really want to move and be a little more patient with other assets.
Operator
[Operator Instructions] There are no further questions at this time. I'd like to turn the floor back to management for closing comments.
William Skoglund
Okay, yes. This is Bill Skoglund.
Again, thank you for calling in. And we're -- as I said earlier, we're optimistic that we're on solid footing to a brighter future.
And so, again, thank you for your interest and patience in helping us work through these times.
Operator
Thank you. This concludes today's teleconference.
You may disconnect your lines at this time. Thank you for your participation.