Q3 2019 Earnings Call
Good morning, everyone and welcome to the citizens Financial Group third quarter 2019 earnings Conference call. My name is spread and I'll be your operator today.
Currently all participants are not listen only mode. Following the presentation, we will conduct a brief question answer session.
A reminder, inventus being recorded now I'll turn the call over to Ellen Taylor head of Investor Relations Ellen you may begin.
Thanks, very much Brad and happy Friday, everybody.
Really cool you don't have you all Giorno first off this morning, our chairman and yeah, I do stance on an airplane John Lewis will provide an overview of our results that are out what no. One [laughter] the earnings presentation, which you can find it and Dr. Dot citizens bank dotcom, they will be happy to take question.
In the room with US today are Brad Conner head of consumer banking and Don Mccree head of commercial banking and definitely able to provide some additional color.
So now for some quick housekeeping or comments today will include forward looking statements, which are subject to risks and uncertainties and you should review the factors that may cause our results to differ materially from the expectations on page two of the presentation and in our 2018 Form 10-K , we also utilize non-GAAP financial financial.
Sure. So it's important to review our GAAP results on page three of the presentation and to utilize the information about these measures reconciliation to GAAP independent.
Well this is all yours.
Alright, Thanks, Alan and good morning, everyone. Thanks for joining our call today.
Well I, we're pleased to announce another strong quarter in spite of interest rate yield curve has once we grew our revenue 5% versus a year ago and 1% versus last quarter.
Earnings per share was up 5% versus a year ago went up 2% sequentially.
The kids to these results were strong performance in our mortgage business continued good expense discipline and robust capital return.
We progressed well on our efforts around pop.
Some other strategic investment initiatives that we outlined last quarter.
We continue to actively managed to balance sheets lot. Yeah. So program and we maintained a long term deposit ratio up around 94%.
He managed deposit cost down aggressively in the quarter.
Chris bearing deposit costs down six basis points versus last quarter, and we expect the bought deposit betas checked off as we see further rate cuts.
Our credit metrics remain strong overall on both consumer and commercial aren't really good shape.
Our view is that the economy, it's holding up reasonably well oh growth slowed somewhat versus a year ago.
Well, we don't see a recession on the horizon anytime soon we are being duly cautious in selective areas all new loan originations [noise].
So overall I'd say, we've executed well your today and we feel like we are positioned to close out the year with a good fourth quarter, our formula for 2020, well remain consistent.
Namely grow our balance sheet prudently deftly managed our NIM continuing to invest in our fee businesses and read for returns carefully manage the expense base by finding fresh efficiencies and then self funding new initiatives.
Stay disciplined on credit and actively manage our capital base.
We celebrated an important milestones during the quarter the fifth anniversary of our IPO on September 24th it's been quite a journey. She made much progress and building a great time, and we are now delivering better and better for customers colleagues communities shareholders and regulators.
No. There is more work to do and we are energized by the challenge.
I'm confident that our track record of strong and disciplined execution will continue and most differentiate us from our peers and there's no reason next five years, you have to even better than the last slots.
With that let me stop and turn it over to our CFO John Edwards.
Great. Thanks, Bruce good morning, everyone.
We reported strong quarter with record fee income good expense discipline and continued execution against our strategic initiative.
Let me kick off my probably important highlights of our underlying results and explore.
On a yearly basis Ibps is up 11%.
So the quarter because everything that's 5% year over year. If you do you know to yourself.
This reflects relatively stable net interest income at 3% loan will help offset the impact of the declining net interest margin.
On the once you've done right I mean younger.
We delivered record fee income was nearly $500 million.
19% year over year illustrating the diversity of our business model.
Commercial consumer longer each trial weakness that year over year.
He could drive to its deploying our capital allocation.
Strong deposit growth rates by continuing momentum it's true that.
It's reaching 5.6 billion by quarter right.
Our spot LDR was 94.5% providing us with all these lucky that I guess he has begun to year.
Give me Bob will either be highly focused I think at home and continue to execute extremely well my popular.
We now expect to realize the pre tax money. These benefits were on how far program in the range, what coming back to 115 million or the ended the year.
$10 million increase your broker.
They were all critical always remain strong with a stable as well one ratio.
And this is why.
And then allowance to loans ratio, Oh, 100, it's not a business.
On an underlying basis the effect, it's actually some people, 3% actually was 43% to 20.5%.
And we'll use all the toxins that associated with an operational infrastructure.
We delivered underlying Mafia 12.6 person, we tangible book value per share with a 14% year over year nobody wants to $40.
This quarter or some noise general line I'm doing it gives you an aircraft lease restructuring or non core portfolio.
This was triggered by quite a merger and reflects the could you mean that was just tell me the runs on the noncore These little.
Yeah, I thought about resulting in an increasingly expensive enrollment.
I'm not going into <unk>.
Charge off information wealthy bodies on synergies this year into this transaction.
Well you're back to this restructuring you given the positive operating up to 40 basis points and move forward basis and she makes your 57.
[noise] on Bridgetex noninterest income was relatively stable year over year fighting in parts of the churn we do they couldn't month.
Loan growth.
Hello, largely offset the impact of a 10 basis point decline net interest margin.
I want to pursue.
Given the rate backdrop.
Contributing to the decline in your hand.
Rebates point impact year over year from higher Premiumization tied to significantly lower long term right.
This is partially offset by the notion of higher interest, earning asset yields continued mix shift is better returning assets and modestly Irish what you're right.
On a linked quarter basis margin decreased nine basis points.
We think we've got some premium amortization.
Well I didn't know managed to probably well with 60 point decrease in interest bearing deposit costs.
Given the challenging rate environment, you have continued to actively manage [laughter] extreme winter of 2.7% to a gradual 200 basis points Nike right versus 2.9% to be quite a core.
Year over year enough to keep getting it comes down which is driven by the issue of approximately $7 billion. It never secret swaps passport wars.
Yes, I didn't know what we're starting position we added this quarter.
Well first of all the expectations the balance sheet.
As you most of the truck or hedging activities over the last year Walter balance you mix changes have been affected shifting or [laughter] belonging to occur there's about 20% to 25% of their exposure now five to six months in shorter.
Our current outlook so great job is not sure whether we like this you know what level of into pressured the fourth quarter destructive well be declines in interest bearing deposit calls.
Well, obviously that reorganization and eventually they're going ahead.
These factors along with an expected assumption of London, Chanel supportive net interest income fourth quarter.
Maybe the season like seven as I mentioned [laughter] record the book this quarter, it even probably 30% of revenue.
Non interest income about 7% leased quarter basis, and up 19% year over year, driven by strong results in mortgage banking RPM in foreign exchange in particularly callable.
Service journey to New York, <unk> second quarter, reflecting seasonality the copies worldwide perspective, when she was driven by seasonally higher volume.
Our position is likely to slang I wasn't sure I think nice hedge against the backdrop in low rates.
Mortgage banking fees were up $55 million at the origination let the wind production revenue up 31 million on higher volumes.
Sure.
Overall mortgage servicing revenue increased 24 million given favorable and that's already been adult and our largest mortgage servicing portfolio.
Joel Marcus you came in at 39 years old score, which represents the well no worse to 22.
The overall market leases.
No no who's our market share and position.
[laughter] <unk> down nearly 40, reflecting significant long into the market activity and seasonality. While I was wondering if people higher income market picks up later in the quarter.
We are entering the fourth quarter with a strong well couple of other pipeline, which includes the package.
Her shopping.
Well the kids present more linked quarter record setting a goal is definitely Dell is almost with market conditions.
[laughter] products, we executed exceptionally well despite challenging conditions that was already a record level and good morning to second quarter.
Before we slow quarter.
No easy blockbusters, they were supplying a few better use like where are these capabilities executing well strategic initiative and integrating she acquisitions to build scale in mortgage expand or M&A business added here to walk you though.
And that we look forward the investments we've been making your call platform over the past five years should continue to gain traction as we choose to do more for all customers can be a trusted advisor.
Turning to page eight underlying non interest expenses attending linked quarter, reflecting the impact of the eastern.
[laughter] illustrating our strong commitment to expenses and then as we continue to deliver efficiencies topic.
We continue to be favorable cost savings and triple digit revenue generating opportunities.
Salaries and employee benefits will be relatively stable and equipment and software since we don't recur said given our ongoing technology.
Compared with the current here on the long non interest expense will be attractive acquisition and construction gets up.
I see efficiently managed our call while investing for growth.
Let's move on the page nine to discuss the balance sheet.
Local relatively stable this quarter largely reflect the.
Second quarter alone.
As well.
Payments and lower line utilization commercial.
Year over year average loans were up 3% driven by growth in both commercial and retail it's a modest headwinds asset disposition.
Adjusting for me about the board to helping personal loan growth is 4% year over year.
Commercial was up 4% year over year that strengthened yeah, yes, you're down slightly older nodes or did I hear you paid and the interactive online.
As long as planned reduction commensurately.
On the retail side, well, you're up 3% year over year, one person each quarter, given broken mortgage education refinance and emerging for Lynparza.
Regarding the new construction this quarter I should mention there was a nice job running down the non core.
And it's all not more book, which are both down about 30% year on year, while the overall credit quality and well continue to improve.
Overall period end loans of one for settlements.
Why do you momentum.
Hello.
Moving to page.
Nice deposit growth of 1% work and 6% year over year.
We continue to benefit from us exactly digital platform, which has contributed nicely to our diversification any optimization other deposit levels and call.
I think we ended the quarter, we reached $5.6 million <unk>. These access.
Given rate environment, even aggressively executing our deposit Blake will manage down our deposit costs, our deposit costs across all channels, reducing TV rates, we saw money market promo rates and he's got a cdthree directly.
We've also there's an easy way to some commercial clients.
As a result, our total deposit costs will welcome slow down five basis 0.9 core a nice improvement from the three basis point increase last quarter.
Interest bearing deposits were down six basis points import.
Yeah, let's move to page 11 couple credit which continues to be quite good overall.
Just want to accident, beating the football in retail relatively stable or even more level in promotional.
Net charge off came in at 30 basis for the quarter up modestly some relatively low level.
Net charge offs.
For the year over year.
He brings all increasing commercial largely driven by a small number 11 quality losses at the long only this profile there to be relatively stable.
We don't have charge offs increased $8 million.
[laughter], even in our own internal goals.
He was in principle critical hundred Wonderland, just Oh Swire order in prior year levels, reflecting higher travel.
The nonperforming loans ratio of 67 basis points is relatively stable waste water [laughter] six basis points year over year.
Nonperforming loans decreased 5% year over year, driven by improvements in retail.
On a linked quarter basis, nonperforming loans decreased 3% driven by increasing commercial primarily types, it's more normal.
Included in retail driven by whom equity and education.
I want to once again problems ratio when a relatively stable in the quarter that 107 basis points.
Yes, no covenant breaches, it's also stable this quarter and 159 basis.
Okay, well, we maintained our strong capital liquidity position and equally with CET, one ratio test set which compares well with yours and excellent financial flexibility.
During the quarter, we repurchased 41 million shares of common stock and dividend the term signaling to 52 million to shareholders of 25% year over year.
Going forward, we continue to target a dividend payout ratio of 30, 540%.
And our plan glide path to reduce our CET one ratio remains on track.
Let's move to page there can you discuss people.
We expect that the day, one impact or she's still on a pro forma basis would be about a 30% to 35% increase just in Missouri, which was about 1.9 at the ended the quarter.
From a capital perspective. This represents about 20 to 25 basis points. It set one on a fully phased in basis or possibly five to six basis points in year one.
This range considers the current economic outlook and mix and credit characteristics of the portfolio.
In addition, a key factor the impact of longer duration on such as education home equity auto and residential mortgages they tend to attract a higher level of reserves.
At the seems on the commercial portfolios, Germany shorter duration than expected to require investments are gonna does today.
Ultimately the impact of the initial impact will reflect both the portfolio mix and the macroeconomic outlook when we got to the ended the year.
Well, there's been a gene I want to highlight a few exciting things are happening across our bank.
First we ranked number for the 2019 JD power yet so mortgage.
To talk to each other.
Since last year, they moved up 60, Washington that today, which is a little something that the hard work on mortgage call, we put down to integrate Franklin American while relentlessly focusing on our customers.
There are also very excited to announce let me just entered into a new consumer banking partnership with an iconic technology company he announced shortly.
By more details around the launch of this program, which which is later this quarter, but this is another great example of our commitment to innovation and strong focus on the customer experience.
In commercial we are really progressing well with the client migration to actually its optimal our best in class cash management platform.
About half of our clients on the platform I do expect the transition to be complete by the end of year.
And in addition to talk five which I mentioned earlier substantial work is underway on our truck six program, which is targeting a pre tax lunday benefit of about 300 to 325 million by the end of 2021.
Our outlook for the portfolios on page 15, and it reflects continued good condition for both our top and bottom line result.
Okay and deal with that we expect an additional weight called in October and as a result, we expect net interest income to be relatively stable in the fourth quarter of long wall should also further but let's not NIM contraction due today.
Our outlook for one with the longer period, and train coupled with health and healthy pipeline driven by our geographic product and coin focus expansion strategy.
Also we expect the moderation of third quarter commercial pay down either litigation train was continued growth in mortgage students and other Lisa.
We are expecting noninterest income to be down modestly from the record level last quarter.
Strength in capital markets revenues should largely offset a decline from record mortgage food.
Given our continued focus on expense discipline, we expect non interest expense to be flat to slightly down.
Additionally, we've got provision expense increased by about 10 million.
And finally, we expect to end the year with a CET one ratio of approximately 10.1%.
To sum up 117, our results this quarter demonstrate our continuing strong performance as we execute against our strategic initiatives.
Cost of living revenues carefully manage our expense base.
For the button allergies and improve how we run the banks.
Now, let me turn it back to boots.
Okay. Thanks, John .
Operator, Brad let's open it up for some Q1 night.
And ladies and gentleman, who would like to ask a question. Please press Star then one on your Touchtone phone, you'll hear a tone, indicating you've been place and kill you may remove yourself from the Q anytime by pressing the punky again it star one Casco question.
And then go to line up Ken Zerbe with Morgan Stanley . Please go ahead.
Great. Thanks.
First of all great job on reducing your inch screen deposit costs last quarter.
We've heard from other banks a deposit competition is still really aggressive Bruce I know you mentioned that you expect your deposit betas to increase next quarter does that apply to some of that deposit competition might be easing.
Well certainly there are no, but I can start up there again I mean, I think I think it's a number of factors I mean, when you have await a rate called like we had ended in September . It was just a natural operational lag. If you will you talked in previous calls that there's a deposit lag that maybe call. It three to six months and so.
As you as we thought you don't get farther away from that September cod impacted that caught yet.
Operationally and and you don't see deposit betas includes from Luke you into Fourq, you and therefore, we expect interest bearing deposit costs.
Actually declined by a larger amount than they did this quarter.
Okay, Great and then just my second question is in terms of your energy exposure. We had three other banks that I cover announce higher energy charge offs. This quarter and I know you guys didn't mention at all which certainly positive but can you just address what you're seeing from a credit perspective in your energy portfolio Yeah.
CAD.
[laughter], you've actually been working through our energy exposure on a year now.
Our our NPL laying down the down from about 25 or something like Philadelphia nine so we've restructured or walk through a lot of their overall quality.
I think what are the things that are that we have it in our portfolio I don't know what I was.
Very low oil field services and that for a lot of distress.
Yes, so we definitely good RBL structures, and the midstream structures and what sort of got Lucky I know.
Oh.
Sorry.
Alright, great. Thank you.
And we can we'll go next question with John Pancari with Evercore. Please go ahead.
Good morning.
Hi.
Why don't you can give a little bit more color on the.
On the commercial credit front I know your commercial Nonperformers were up 25% linked quarter.
And you noted in the release that its small number of uncorrelated credit. So just want to see if you can give us a little more detailed in the industry on maybe the sizes in the types of loans as well. Thanks.
Yeah. Thanks, Adam.
We did have a couple of charge offs in the quarter, one real estate Division, which is a regional mall always on the small charge off basically present yourself hopefully exit out of that credit.
Restructuring in the near future our non performer, who was was nearly one credit which you again in the automotive late sector, which we've been working through his well deserved.
I think there's a significant charge off there are we talking nonperformer nonperforming and restructuring.
Got a year ago, there's a significant amount of capital while it's now walk into clinical studies.
Performer.
Well done an excellent yeah, I would add that what I mentioned on that first credits.
We're close to having athlon resolved, which would allow mpns to fall back down in Q4, Okay more generally.
Thank God, we feel good about general trends in the portfolio, we feel like.
Well I mean, do you see fairly aggressively addressing them.
Well the mall portfolio he said.
There's your reps so why no rule anything a portfolio anything any significant well into the.
The proactive good good model [laughter].
Okay got it got it and then Bruce you want you indicated in your remarks that you're being cautious pretty cautious in certain lending areas.
Well what type of areas are they in what's what are you seeing that's making you get more cautious thanks.
And I can tell that wants to Don as well, but I'll kick off here, but I think in general Theres some.
Very competitive conditions in certain parts of the market, particularly middle market you have a lot of non bank competition, there and so.
We're competing where we want to.
Hold up our.
Relationships with our customers, but we're not being aggressive try to grow the book there and take on a tough spreads situations are tough terms situation. So that's one I think in certain areas like.
Restaurants.
We are certainly.
Actually taking a posture towards reducing exposure not adding exposure.
I think we're also being proactive there and we have some good momentum there so.
Yeah, I'd, just say, it's around the edges being disciplined.
And then seeking out areas of growth our specialty verticals, we get some better spreads there were moving up market than competing effectively at the corporate so we think we'll see some growth there and I think we did indicate that we will see a return to overall loan growth in Q4 and also in commercial.
So in Q4, so our pipelines look quite good.
We have seen in Q3 elevated pay downs refinancings.
Lower line utilization, so even though we had a pretty strong quarter in terms of originations were fighting against that a little bit.
But I think in shoot for we would expect to see less of that we're continuing to see a nice pipeline side.
Give me a little more offensive that a year ago. He was saying hey, I'm glad about two thirds, our origination basically wonder why this water. So you really got hurt on the new origination side, Yeah, I think it's a combination of things slowing that down.
Thank you in the middle market in general when she will be leveraged anticipation for uncertainty in the next year, so they're not going on incremental data.
Yes, one out of thought maybe leasing capital of buybacks that we're seeing in the core of our portfolio.
You say, you're going to take your utilization data.
[laughter] moderating.
Well go up or.
As mentioned somewhat challenging portfolios our restaurant.
50%.
Well, what meltdown or purposely walking our leasing portfolio as.
Yes.
Morning.
And even say portfolio downstairs, there's a lot of people were actually finding additional portfolio standpoint.
In the numbers on that basis, and then as you heard John talked about we are actively developing nations yet. So we don't see adequate funds over the next year two years, our slogan we had well consider moving them off balance sheet. So I think in new business feels good and married and actually well Allegion standpoint.
Especially standpoint is doing.
And what's your social mobile investment Domino effect of the overall sort of trying to survive. Thanks.
Let me say.
It's very competitive.
Hello.
And we want to stay disciplined on bulk it sounds like emission better pricing standpoint.
Okay, that's very small.
Hey, Thanks for taking my questions.
Hey, modem next question will come from Scott Secrets with Sandler O'neil. Please go ahead.
Morning, guys. Thanks for taking my question, maybe John first question Best for you I'm, hoping you can just put a little bit of a finer point on.
Do you guide for the fourth quarter and including some of the.
Back to drivers you mentioned capital markets in the pipeline there, but I guess I'm just curious given that yeah pretty substantial MSR benefit. So it's a write off the bat it could be kind about 25 million dollar whole or up to $25 million. All just curious if you can talk a little bit more detail about the puts and takes place.
Yeah sure I'll start off a there is going and I mean, I think that's the main point here is that as you mentioned that capital markets pipeline. So you are quite strong when you look at every Q.
As a.
A little bit more of a down quarter at $39 million. When you want me to the outlook into Fourq you. We had some deals push out of Threeq into Fourq you. We had we had.
A very saw syndication quarter in Threeq, you that looks to be firming up into the fourth quarter M&A advisory.
It's an area that was flattish from Twoq to Threeq, you and we look to see that being meaning significantly up in the fourth quarter. So I'd say that when we tend to look at this in the early part of.
In July we looked at our pipelines and how that would play out in early Q and now we're looking at the pipelines in early October here and.
Well for a really nice rebound in capital markets I should also mentioned that the service charges in car.
Which which were on your she had a nice quarter encourage you look to be a up a bit further and trust I mean, I think they're working on.
Choppy market conditions that impacted trust and investment.
Services, and I think you'll see that expectations are that that will improve going into the fourth quarter. Two so it's not so with a a couple of different while others that will all tend to have an impact into fourq you that.
Largely a largely offset as he said the up though the mortgage decline.
Okay perfect. Thank you and then a broader question just on rate sensitivity you pulled back a little bit of the asset sensitivity. If this quarters, while I'm wondering if you just comment on whether there's been sort of an end goal as to where you want the company's repositioning to be I mean, obviously, it's kind of tough given all the volatility in rates, but just what the broader or.
Thanks.
This is Mike.
Yeah, I think you've seen a tick.
Down over the last year, and I think that that we've been treated on that front.
As you know where commercial bank as a natural asset sensitive profile and we'll use dividends another.
These two items or frankly dampen that profile. So I think he would see US you know in a low to moderate asset asset sensitive position over time, maybe maybe converging towards usually I do see if we get towards the end of the there'd be a because even cycle. If you will and so I think we're getting.
Pretty close to a stable place, we do like and have that knew that that we are at historically low long term interest rate.
We have changed our our sensitivity from a majority exposure to the short end occur over the last year to now the majority of a full year as to the long into the occurred.
Have a view over time that that's a long into the color will rise in the we've executed our hedging activity, we keep that in mine and the general sense that we should take some asset sensitivity off the table and that's just on the net interest income line and as you know a mortgage provides a very nice overall red.
You know when when and if wage where it will decline by a lot which is what happens in the third quarter. So it's not just our derivatives and not just our sensitivity on it net interest income we look at how we try to preserve revenues overall and we saw the power of that diversification in the third quarter.
Perfect Alright, thanks, very much I appreciate it.
And next in queue, we've got Brian Foran with autonomous. Please go ahead.
Hi, good morning.
I wonder if.
You know just conceptually on net interest margin once the said stops.
No I guess, we're off to decide when that is let's say, it's mid 2020. The fed stops teasing you know Theres one school of thought that the banks could actually get a little bit of a bounce back in March and because of the deposit repricing Wagner you mentioned.
It will catch up.
And then there's another worry that well be assets don't all reprice immediately and you're still going to have that on a rollover of fixed rate assets to lower rate [laughter].
I guess as you think about it not getting into the basis points, what the actual margin is gonna be but just conceptually when the fed stops as your bias kind of a roughly stable margin for up on the deposit repricing or you know still some pressure on the asset yields rollover.
Yeah, I mean, I'd say I'd say, a couple of things I mean it. Thank you you mentioned the deposit lag and I think that that provides a tailwind once you get it you know three to six months out that that's helpful. I think I think it matters, where long rates are as I mentioned earlier it said.
I'm starting to get to the end of it even cycle, we end up with a Pablo being sold yield curve I think you can see.
Positive impacts in net interest margin.
Over the phone call in 2345 quarters out.
Between 20, and so that's an important aspect I mean, I think patented textron book backlog dynamic is.
Given the fact that we are roughly split 50, 50 with a fix a loan portfolio and a floating loan portfolio, you're right that that when we fall we get immediate impact on the flooding part of the portfolio, but the fixed part of it provides that buffer and anything we can see some lift them along and you can see stabilizing to rising in.
Can you get three to six months beyond a.
Even cycle. So what did you see some stabilization here over the next quarter or two and and and did those dynamics I mentioned.
Possibly even some lift when you get towards the end it sounds like you have the other thing I would add also is that.
If we get a little more loan growth, which we expect in the fourth quarter to be able to sustain that in 2020 that facilitates more via so actions in terms of trying to the loan side of the balance sheet and so hopefully that been kick in and then be accretive to our yeah as we go through.
While the flooding.
Thank you one small one that opened that jump into the weeds, but on page 20 of the supplement I had a few people ask about this negative 48 million in the provision for unfunded lending commitments can you just talk through with that I will lease or was it more like a transfer because alone brought drew down what drove that negative four.
The 8 million provision for unfunded lending.
Yeah. Thanks, Thanks for the question and looking at our supplement [laughter] I didn't look at it someone else pointed out [laughter].
Yeah. It is exactly as you mentioned it was a yeah, we had an unfunded loan where over time, we built the reserves on the unfunded part of the reserve in the A.C.L.. If you will always be producing reserves happened. While it is unfunded and then once it's fully reserved funded and then got transfer and needed.
To get transferred over to the Triple also overall really the driver was a transfer of an unfunded fully reserved alone. That's exactly it was a backup letter of credit yes.
Not Aaron.
Uh huh.
Ultimately drew down and we are moved over there. So I think it relates to my world because they knew that held for sale as well.
Great. Thank you.
Right.
And what do next question Kuno come from Matt O'connor with Deutsche Bank. Please go ahead.
Good morning.
Fees were obviously strongest quarter and you gave some pretty good granularity on your thoughts on a fourth quarter, but just looking out more medium term in or can you talk about the magnitude of fee growth do you think you can generate and and some of the drivers and then obviously, it's incrementally important from here given the pressures on that just one comment.
[noise] try to maybe quantify or the growth that you expect them having against some of the driver spikes.
Matt I'll start first John can pick up but when I think about.
What where we've been and how we've grown through time, we pretty much been growing.
Commercial fees, probably high single digits or keeping pace with the reasonably robust loan growth over that period.
And that's reflective of the investments we've made in building out the platform.
Hiring some great bankers standing up our own global markets FX neutral spread business investments into cash management business acquisitions of M&A shops, and I think we're really just gaining traction reaping the benefits of those investments. So I would expect to see continued good growth.
On the commercial side.
Q3 was a little bit of an air pocket. We think Q4 is gonna be bounce back quarter.
On the on the consumer side.
We've had a harder time growing I think we addressed some of those issues, we've been investing organically in building out the salesforce and coverage folks and wealth and in mortgage but I think the acquisitions that we've done.
Securely mortgage looks very timely in light of being able to catch the reply ways.
But I think there's a lot we can really do about business. So.
It's really scratching the surface of its potential in terms of.
Building out more tools for the correspondent and wholesale customers that we have so I think we can blow our market share there very nicely and then getting better penetration into our branch channels as we continue to add Hello. So.
Even though we came off a a high with the re Fi ways I think that will continue some two to four and early into.
The first half of 2020, but there's other levers to continue to I think gain market share in the mortgage business and then well we now address the high end of the pyramid would for ourselves and we're looking frankly, it's to do more in terms of acquisitions to further that growth on the wall side.
So so you know if we averaged the commercial and then the slower growth on consumer I think there's the rear view mirror, we'd probably where in the mid single digits a range and.
Certainly would it thinks that that's a that's a goal we could sense going forward. When we think out a number of years to at least be able to continue to do that.
That was helpful. Just elaborate on the type of course, maybe size of wealth deals that you'd be open to I think you did a relatively bob.
Well I think all these fields, we described as bolt ons and I think you know what we really need to to make sure of is it has a good strategic fit a that the company has a great culture, that's got a match well with us and that we can get attractive financial terms.
I think if you buy smaller.
That's a little better.
Handle on all of those things so if you buy a bigger.
It's a little harder to achieve those three objectives. So I.
I would think you'll you'll still consider these deals smart, but more in the bolt on categories. So you probably need to do several to continue to scale up our business.
Okay. Thank you.
And we can go to the next line Q it'll come from Saul Martinez with <unk>. Please go ahead and good morning.
So I wanted to I know you've addressed this too is to certain degree and I know, there's a lot of volatility and pricing seasonality in this but can you just give a little bit more color on how we should think about what a more normalized run rate is for mortgage income assuming the long end of the curve stays where it Chad you had I think 80 million to production revenue, which is very.
Strong be MSR valuation gain as we think about that going forward, how should we think about the.
Sort of the moving parts, there and what we could trend to not only in the fourth quarter, but just beyond that.
Yes, Thanks, two questions John here, I'd, I'd say I'm going to break that down into three PNM was right and you talk about production and servicing and then the.
The MSR valuation that'd be economic hands right. So.
When you go across each of those we got going forward I think you can see production being.
Production, PML basically coming down a bit right in the in the fourth quarter, but I would call at higher than than where it wasn't a second quarter. We had a theater you had a good quarter in the second quarter.
Phenomenal go during the third quarter, So I think maybe coming off those high but but Doug.
Kind of stabilizing at higher level than what we've seen in the Bakken production really excited about that very strong production, a really strong margins, which is important to how we generated revenues and just to.
A growing integration.
The Franklin platform. So that's that's hard to that no part of it DNL.
Similar comment on the operating servicing part of the piano, where there were having well the team all the new PB that isn't really that was previously being sold by this platform before we acquired and so I certainly see PD is growing nicely as well as the servicing fees and ancillary that we're recognizing on that on that on T. and also.
Exactly and all the stabilizing and rising and we're completing the full integration and insourcing all the servicing platform from the won't Franklin the using which does it now so stuff back on the bring it in house attributed more control over data and direct access to the customer. So we're excited about that I'm in the last one of course is the.
Our valuation net of economic hedges.
During the quarter when we see large swings on this past quarter.
These are positioned to benefit.
Mortgage spreads were to widen out you know when we get to extreme we tend to moderate positions in it and it seems that they will with all the time than it did.
That's something that I think.
You can see more out in the future I and.
I read that will jump around a lot, but I think we demonstrated a really solid job managing the.
What we would have otherwise a volatile I've said for the last four quarters that we've had this platform going into the fifth we manage that really well with the flat to up the bias on the on the MSR economic engine and Brad I do much just want to add a little bit some of the innovation in a new technologies that we're delivering in the mortgage business because I think.
Quite exciting what's actually I was actually just didn't do that is one thing I'll also chime in with John I.
I think you hit it spot on and one thing to keep in mind. The industry is quite full capacity right now and that gives us great optimism around margins maintaining for a period of time sort of those signs are good from a margin perspective, but the point bouchey. He made we've invested heavily in our digital capabilities in the mortgage business.
So we put a new digital fun and on going in onto our origination platform. This past quarter woman somewhere the older more applications come through foreign and digital platform, which gives us.
Fission see opportunities for one but also gives us more opportunity to the dealer direct to consumer direct to consumer side. It gives us well also invested in digital capabilities on the back into the business with a digital and mobile so to say application has seen a lot of our customers transition.
Oh, we're using that digital platform on the back end. So a lot of good things happening other than just a rate environment. I mean, I think the immigration as you said has done extremely well or starting to reap the rewards the investments that we made in the digital capabilities in the service.
Great. That's great. Thank you that's great color.
I could switch gears and also asked a question on one reserving.
You don't see so specifically I mean, if anyone impacts not a big deal from capital standpoint, how do we think John about the bank to impact of C., So because a lot of your growth.
If you look at the balance rose.
Over the last year.
To be large portion of it is coming from education coming from other Oh retail lending that tend to either have longer tenors or higher loss content than others.
And obviously has a higher provisioning load as you originate those those loans, how do we think about.
The loan loss provisioning outlook.
In light of that loan growth in mix shift into 2020.
Yeah, I think you know so we've just you know kind of come out with our first real quantitative <unk> outlook for no where this there this.
Adopting the standards will will affect us an early early.
Early January so I mean, where I would say couple of things, but also caveat that we are more work to do and we're continuing our parallel runs and considering all the validation that other models. So with all of that said you know I think they're exceeding forces that you have to think about one is with all of those portfolios that are.
Longer duration, we have a very big back book and the where the dynamic that we're dealing with is the fact that we're being asked to reserve over the entire life of the entire backlog for the longer duration loans on a in early January and so going forward. If our models are.
The the accurate and reflect the future where she is a big big question for all for all banks.
Ben and really the provisioning for that entire backlog because really behind us and is really already up on the balance sheet. So what you're lucky that you're left with is the other side of the Budweiser, which is the front book and they've done corporate originations.
Bad debt that you have to basically you know.
All of the it deserves it will likely one lets start thing for portfolio by portfolio. The gearing ratio is if you will have the benefit of the fact that the back book is no longer being prevailing which would otherwise have been provisioned and you've heard wealth model under the under the existing standards is now going to be already handled and probably closer to.
Closer to zero all against the magnitude of all the different walk and I think the the answer with respect to whether that's positive negative a neutral is it varies by portfolio and and and that's going to play itself out and that's what I would say just to add to that is that we're working.
Working through our three year Strat plan that we finished an airline so kind of overlay portfolio by portfolio, what the interplay between those dynamics. The John described back book Front book and then how does that play out some of the common standpoint over say the next three years there may be certain.
A product Swiss that before offering a longer duration version of alone that it may not make as much sense, we might tweak something but I would say that at the end of the day. The economics are the economics and the accounting something we'd have to contend with but we'll get on top of it and then obviously when we do our guidance in January .
The next fall, we'll be able to take you through that in some more detail, but we're we're working at it we're analyzing it and the whole thing we feel broadly falling about it.
Got it alright, that's very helpful. Thank you very much.
Yep.
And next needs to go to rely on Gerard Cassidy with RBC. Please go ahead.
Good morning, Bruce engine.
Hi, good morning to.
Bruce you touched on growing the fee revenue and I went to zero in on the capital markets business. Since you guys have had good success expanding that business and I understand the second quarter. If I read the press release correctly was a record level third quarter came down a bit. So two questions. One you mentioned the pipeline is very strong.
I'm going into the fourth quarter can you compare that pipeline to prior quarters as an higher or lower and then second one well take for you guys to me on bringing this business up to maybe a 70 million of quarter run rate is it hiring more people are expanding our geography.
Can you grow into that level.
Oh all let's.
<unk>.
I think about you know about a combination of lines for the commercial bank activity. So.
[laughter] right and that commodity hedging activities for clients and those who are running.
Incredibly strong levels for the last couple quarters, so one of them a little while this quarter it hurt us on the capital Y.
On the interest rate and currently side and we're seeing that continue.
On the capital market side generally play in the middle market in middle market, our finance space and what happened this quarter was.
Was way down year on year and.
The wall.
Six weeks in the middle of the SAR.
Changes in interest rate Foster and you saw a great in September on the back would only a quarter bond market moves at a high yield activities, who exponentially. So that'll be said I think that data.
In place to allow us.
And the opportunities present themselves, but really no area over the next quarter.
Okay at the acquisitions begin to get yet so even wanting it kind of 24 easily.
In terms of M&A fees that we should go up significantly this quarter pipelines or.
That's very very strong so our strategies.
Thank you I'm going to hire our call. One is now I know business you start a hybrid gel trading activity. This quarter, we should allow us to larger positions and how to model otherwise.
Some of those transactions, but double also outside and inside the business.
Building credibility in our loan syndications letters financing capability over 40 years, and we're seeing larger transactions and more transactions.
Comparable.
And a reputation for execution.
While our Investor base.
And we're seeing just general activity well in the fourth quarter won't and he is in the first quarter second quarter third quarter will only to say I think theres upside on all the elements nothing Baidu is well I guess.
So as we said [laughter], yeah, we moved into the mid water industry verticals actors go very strong corporate finance industry advisory.
They were leading to our clients.
The worldwide here as you know, it's very much around or getting credit and now it's about advice and Uh huh.
Ownership transition in contrast financing and it's always in the last couple years, we've had all those pieces inflationary wounded yelling well I think is going well last season, but in my career and we're just in a while ago interesting.
Conversation with our client that's actually going to spend money I would just add to that Gerard.
We have.
Knocked on the door of about 60 million core before.
I took my neck on the line, but I think this fourth quarter.
[noise] shapes up potentially to be a record a new record quarter for us in capital markets. So we're not that far away on that 71 quarter I don't think we really need to hire more people or acquire another M&A BOCI to get to that trying to have a level is required I think the markets are healthy and open.
Over the next year and then some of those investments that we've made to me approach to how we cover all that would have to continue to progress and come to fruition, though.
There's not there's not a lot of incremental investment that you need to make in order to continue to drive higher revenues in this business.
Points or are just to be a good question earlier about pipelines eating were our pipelines in early October .
They are up across the board, whether you're looking at the combination of syndications and bond underwriting or.
Yes, I ARPU and M&A in particular, there all of since early July when you look in early October just a quick.
Great. Thank you for the color.
Bruce [laughter] since the BBP Suntrust merger.
Many investors and myself all thought more deals we're going to be announce obviously nothing's happened, but when you look at the BBT stock has outperformed the general bank indexes. So it looks like the markets supporting that type of transaction is that something citizens could ever consider in the future.
Well I think the stock answer to that is were.
Always consider anything that benefits our shareholders, but I.
I wouldn't say.
Whether that deal proves to be.
Yeah, good one depends on the quality of the execution and so you've had.
Not been part of a big ammo, even back in New York in Maryland.
And the the spreadsheets when you announced the deals always look great and it comes down to the make the right personnel decisions. The if it gets a culture some mesh.
And do you fundamentally execute well so so we'll see if that happens I think for US right. Now we're very focused on continuing to run the bank better and we're in a period of very rapid change in terms of a customer expectations, New technologies and we're very focused on b.
On the front foot with our top six program and some of our strategic investments I think we can carve a path it's very exciting.
And fulfilling for our stakeholders by really staying focused on on our own current agenda. One of the risks of getting involved in larger transactions as it can be distracting and take your eye off the ball in a period, where you really have to be all over the the turn agenda. So those are few thoughts there.
Sure No I appreciate you can or thank you.
And our next question comes from Erika Najarian with Bank of America. Please go ahead.
Hi, good morning.
I mean I just had one follow up question. It's really went turned around you know wine parameters asking earlier I think about what you need to citizens as they look out over the next few quarters now obviously, you've done a lot of work in terms of.
Driving your business momentum appoint an accelerating and second you do have high deposit costs.
We think in Maui.
You know <unk> beyond the fourth quarter right and you are still feeling good about loan growth, there's still feeling good about the economy and based on the forward curve. She should we should we think that the worst case scenario for Eni in next year can be stable.
[laughter].
I'm trying Ellen [laughter], I mean I think.
Eric as John I mean, I think the you know were taken for January irregular will be well come out with.
Well just a specific expectations for was like 2020 will be on Eni, but I think yeah, I think it yeah that would be a broad convoys. The direction correct. I mean, we expect when you think about there are longer than a year over year will in the neighborhood that 4% range.
They are central to above GDP. So next year, you know what we want to aspire to continue to grow the platform at levels that are similar to that is better and that that was all of the work that we're doing on the net interest margin side of things than we did have as you know maybe some betas that were.
When we're in a tightening cycle you had some base.
Deposit cost wise is that that were were higher but that's that's starting to retrace itself here and you'll see our deposit betas lies in the fourth quarter and and continuing to.
Back that we've done an amazing amount of work on or the probably late and frankly, we can outperforming all through the cycle deposit.
So in the second quarter. They did and then we outperformed in the third quarter two bed and I I think he can you can almost to consider a trajectory there that we expect.
They are what are we going into fourth quarter, you know, we're going to have a meaningful.
The improvement in the and the interest bearing deposit cost declines.
We're excited about that so a pick up a few others will will.
Causes that kind of stabilization that you're talking about that but does it stay tune they tend to try to oh.
Well January yeah, it's good to try there.
The open up a little tiny though [laughter].
Yeah, I I understand the timing is as I, but it just sounds like you know if you're relatively stable at you know next quarter. You know when you know pressure from October and not the underlying pressure from what's happened so far so quickly.
Well, we're the only taking your deposit cost down the way you did it seemed like you know me.
Table.
Able seems like a potential for did I guess I'm not asking to confirm that but that's how I was I was looking at that so I I appreciate the color.
That wasn't actually [laughter].
The other question can you have a question [laughter]. Thanks, thanks for that.
Okay sure.
And next we'll go to laugh Kennedy Wilson with Jefferies. Please go ahead.
Thanks, guys. Good morning, I'm, just a follow up on the overall balance sheet.
I, just showing really good deposit growth in the money market accounts and then the non interest bearing and obviously, we're starting to see the time deposits come down.
Again sad.
And citizens access kind of flattening out can you just talk us through just that mix and how you expect just overall balance sheet trajectory from here, especially as loans looked to be still growing.
And our and securities you've kind of flattened out just given where that rate dynamic. So do I guess, just talk about the earning asset base and the mix within and how you'd expect that to go forward. Thanks guys.
Yeah, I mean, I think so overall, you're seeing the fact that we continue to year over year, we're going to bother to 6% and and loans a bit less than that so you look at the LDR ratio around 94.5%.
The third quarter that step down.
Reasonably.
Significantly yes.
Indeed are sold all year and a half ago near year end up there. So I think the that the balance sheet strength is quite good really solid liquidity position position as we head into the ended the year deposit growth has been named a bit greater than one world that gives us optionality in terms of how we need to be execute.
Our playbook in terms of deposit pricing and that's part of how we've been able to drive deposit costs down into yet because all of the bid work that we've been we've been doing in terms of generating deposit on a long time. We are the you know we gave you that color about the fact that year over year trend during that 4% Ranger. So that's something we'll aspire to accomplish over time.
But the deposit costs will continue to wholly owned loan growth and.
And you know I think that doesn't mean, you know I think one.
The color I would add Sam is that.
We're quite pleased that we've been able to grow.
Our demand accounts.
And outperformed relative to peers, Brad you might want to add some color on that but really the focus on the mass affluent customer and some of the investments we've made in customer experience in customer journey.
We're gathering them targeting them getting in the door using data analytics and then they stays and so retention is up there and that's really fueling that growth in demand accounts, yes. That's it's I emailed of this I think we yeah, we've talked for quarter on quarter about our investment analytics and that has given us the ability.
We target delight customers improve the value proposition, which we've done that with a focus on the mass appeal and client, which is deepening our relationship with them in the we're getting an active quicker than we were in the past and we're improving our attrition in our net promoter scores are showing them much more satisfied customers and the I think that's what's fueling the.
The growth and noninterest bearing deposits.
Understood. Thanks for that and I'm, one follow up on the Securities book, So the Securities book.
You mentioned that the premium amortization was Oh it was a three basis point hit to the net interest margin I'm. Just wondering at this point, where you'd be where are you able to reinvest cash flows at versus the backbone.
Okay, if we try to isolate for what's happening aside from the premium am Thank you.
Yeah, I mean, I think on the front book backlog trends here I mean, you've got reinvestment in in the third quarter. Our our are around call. It 250, or thereabouts and you still have a positive been bought back book insecurity run off in the neighborhood of 220 to 20 or so so I mean I think.
You either we're feeling.
It's it's like the in against this backdrop, we've done a reasonably good job building.
Holding our our cash and investing.
Deploying that cash.
Points during the during the quarter, where rates are a little higher good. So yeah. I mean, it's hard to do that all the time, but when you last couple of quarters do than we've been holding our powder a bit until some of the big declines in rates moderate and then we put all the cash at work so well like I said to you know you still got a positive call. It 25.
<unk> basis point, just so I'm trying to look back book on the Securities portfolio and one quick one just on the premium M. If rates stay flat does that three basis point headwind just go away, meaning it doesn't it goes to zero as an increment <unk>. If you expect maybe realize it on like a realized basis and is there any lag to the premium and that we continue to.
Roll forward, just because of where rates have gone to thanks, Yeah. There's a guy you I think you've gotta. There's a couple of factors and then I think our outlook is that it's going to be relatively stable.
Quarter over quarter assessed.
That's what the drag of pretty this is what are you know.
Because it was an increase from two acute leukemia, our current outlook with yes.
Look for rates et cetera is that that will be flattish from the acute affords me. So therefore, no longer a wise and then you know over time, you know maybe that moderates a bit and again back to 2020, we'll get back to you on that later, but but yes. It will be flattish from Threeq you that will be.
Understood. Thank you.
Okay.
Our next question in queue will come from line of Peter Winter with Wedbush Securities. Please go ahead.
Thanks, as you know just get ready to implement the top six initiative.
Are there any thoughts maybe.
That you'd be willing to delay investments or maybe accelerate some of the planned cost saves trust to ensure you generate positive operating leverage going forward.
Well.
You know first off the.
We're trying to get this thing off the ground and we have a number of work streams basically seven or eight work streams.
With individual leaders and as soon as they are good to go and launch we're already moving ahead. So we thought given the green lights on two of those work streams already and will have more that launch in the fourth quarter.
The bulk of the top program is accretive right away. So we want to get those things going quickly the places where we would be in turn reinvesting.
The next Gen Tech is one of the big work streams.
That has probably the most value of any work streams to the bank in terms of how we're running the Bakken how we can deliver for customers, but it is somewhat reliant that building generate immediate savings.
Requires some investment and then the saving from later.
But as long as the rest of the streams are moving ahead, but our disposition as we got to move on that is really really critical.
When we announced the top six program. We also talked about some strategic investments that we were assessing and prepared to make.
Those include further expansion of so this is access our digital bank four of our point of sale merchant finance platform or new ways to cover.
Business small business customers have lower middle market customers with more digital and data apply them. So we're working through those I think we have an ability to gate those based on how fast the savings come through on the other streams and then also the overall macro environment.
Next year and so.
You know we do have this commitment that we've held fast too since the IPO of trying to deliver positive operating leverage and that's probably the lever that we have would be too to gauge some of those investments, but our our objective our hope is that.
We can move on those because I think there really exciting and I think they really you'll drive medium term revenue growth for us.
Great. That's really helpful. Because I guess when I look at the medium term profitability targets that you laid out obviously at the rate environment is much much different than front. When you originally gave that and so.
Yes, I'm, assuming you're still expecting to see than continued improvement in the profitability in terms of the efficiency and ROTC.
Yeah, I mean, thats, the only way to really get it is you're going to have to drive the operating leverage.
One of the things to keep your eye on is if the.
Some of these trade tensions and.
You know concerns that are holding back the economy, a little bit of B.
That obviously is going to be a tailwind into next year and that could also results in the long end of the curve moving back higher.
That's actually been a bit of the crusher when it looks when you look at Razzi because year on year.
Growth in OCI related so the growth in the value of the securities portfolio actually is equipped 75 basis points. The rocky. So if you add long and moved back you can actually throw that right back onto the equation. So.
The number of factors there but.
Its commitment to operating leverage a key in terms of continuing to drive forward and reach those ROTC equals.
That's great. Thanks, Chris.
No.
And we'll go next question will come from Marty muscular bidding Sparks. Please go ahead.
Thanks, and that's a good question a follow that last question.
When you look at banks, there's so many intrepid details that we spend all this time talking about but really investing in it comes down to three different metrics. One is a return on tangible common equity now there was a dividend yield and third is basically how can you have how fast can you grow tangible book value. So why your razzing has been under pressure.
One statistic that had really been talked about was your.
Can handle book value was 14% over the last year.
Got to counter of that so.
Well, what do you look at those three metrics, let's say, assuming we don't have a credit event or credit downturn, how do you see those three metrics moving forward.
Over the next let's call. It 12 to 24 months given the environment that we have.
You see progress and there was a metrics are worth the more right right now very positive.
I think the valuation reflects some no deterioration in those metrics. So just wanted to get your take on that.
I mean, obviously.
Objective is to be driving the razzi and driving the tangible book value per share higher than if we execute well in that environment.
The stays okay or improves I think we'll we'll certainly be able to do that if we do that the stock should reflect positively so our dividend yield would go down which wouldn't be a bad thing.
We're still committed to raising our payout ratio and getting to a 35% to 40% dividend payout ratio, but the yield obviously is a function of the stock price.
And then John I want to dive into a very hail so from a big picture right Manouchehr type of a question given that what we're seeing is consumer allowances are going up precipitously on the seasonal and commercial are going down.
Wall that day, one impact is the negative for those that have more consumer.
What I'm trying to get out is as we go into day to through 200.
Yes, the consumer because in the west lumpy and the commercial is getting impacted because of how low we are in the cycle right now and their losses tend to come in a big pieces.
As a consumer possibly going to be less volatile over a cycle versus commercial when do you have no big pieces coming in and out having to adjust those factors. When you go to those economic cycles.
Yeah, I know, it's we're still I would say developing our our intuition about this new standard and how the models will work I think I think there there.
A series of.
Factors that impact both side I think just the prevailing.
Market conditions and expectations, the Oh, how youre, a reasonable depletable projections will revert overtime I think good has meaningful impact on both both portfolios to tell you. The true. It's it's one of the reasons why will be.
We've all been scratching our heads about why this it's a standard that necessary, it's going to be very difficult to compare across institutions for period of time, and and it's going to be a lot more difficult.
Frankly anticipate where pinedale impact.
Go overtime all of that said as you heard earlier moods economics.
We're still something that.
This is something that you have to keep our eye on that ball and a and we'll deal with the capital impact.
Necessary, but I don't know that are ready to say that but one of the two portfolios is going to be less volatile at that it's possible that either portfolio could contribute to significant volatility in any given period.
And so stay tuned for the continuing.
Disclosures that will be on this in the fourth and you know in January as we finish out frankly, our parallel run in our our model Validations, which are happening here as we speak in the fourth quarter.
Thanks.
Alright, well.
Yeah I think.
Yes, no further questions at this time.
Already very good well thanks, everyone for dialing in today, we always appreciate your interest and support have a great tick.
Thank you and that does conclude the call for today. Thanks. Your participation you may now disconnect.