Q3 2019 Earnings Call
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The hand, the conference over to your Speaker director of Investor Relations James Abbott Sir. Please go ahead.
Thank you and good evening, we welcome you to this conference call to discuss our 2019 third quarter earnings.
Our our agenda today Harris Simmons, Chairman and Chief Executive Officer will provide a brief overview key strategic and financial performance after which Paul Burdiss, Our Chief Financial Officer will provide additional detail on science financial condition wrapping up with our financial outlook additional executives with us in the room today include Scott.
<unk>, President and Chief operating Officer, and Ed Schreiber, Chief Risk Officer.
Copy of the full earnings release as well as a supplemental slide deck are available at times Bancorporation Dot com and we'll be referring to these items during this call.
The earnings release, the slot related slide presentation in the earnings call contains several references to non-GAAP measures, including pre provision net revenue in the efficiency ratio, which are common industry terms use by investors in financial services analysts.
Well the use of such non-GAAP measures are believed by management to be of substantial interests to the consumers are these financial disclosures and are used prominently throughout this disclosures.
The full reconciliation of the difference between such measures.
And GAAP financials is provided was in the published documents and participants are encouraged to carefully review this reconciliation.
We intend to limit the likes of this call. The one hour during the question and answers section on the call. We ask you to limit your questions to one primary and one related follow up question to enable other participants to ask questions I'll now turn the time over to Harrison and.
Thank you very much James and we welcome all hit or a cold today to discuss.
Scott <unk> third quarter results.
Slide three is a summary of several key highlights.
The results for the quarter were favorable in most areas compared to the year ago results.
Loan growth was generally in line with our expectations for the quarter.
<unk> outlook for a moderate loan growth remains unchanged, even though loan growth has been somewhat stronger in recent quarters.
Deposit growth in the third quarter on a linked quarter basis was broad based and stronger than we'd anticipated.
Topics of received the most attention as we met with many of you during the quarter was the net interest margin and the cost of deposits.
Although the cost of deposits for the full quarter did not decline when compared to the prior quarter I'm happy to report that recently deposit rates have been coming down and I would therefore expect the cost of deposits to decline more moderately in the fourth quarter.
[noise] credit cost remained low we don't see any indicators of a broad based recession on the horizon.
Credit stress or a appears to be somewhat episodic within our loan portfolio with the only sub sector, demonstrating broad based stress being agriculture and industry to which we have limited exposure.
We have not observed broad based credit stress.
Regarding capital, we're pleased to have repurchased nearly 4% of our outstanding shares in the third quarter.
And 12% of our shares during the last year.
During the past few months, we've been delivering and <unk> and annualized common dividend yield.
<unk>, 3%.
Our common equity tier one capital ratio remained strong at 10.4%.
Slide four we show the earnings per share results for the last several quarters.
In the third quarter 2019 reported $1.17 of earnings per share compared to a dollar four cents per share in the third quarter last year.
Notably our average diluted shares outstanding declined by 23.9 million shares from nearly 12% over the past year accounting for most of the earnings per share improvement.
Still we feel very good about the quality of this quarter's financial performance.
Turning to slide five on the up on the left on the left side as you will see adjusted pre provision net revenue or PPNR.
Which increased 6% over the same period a year ago.
On the right sizes, a chart showing pre provision net revenue less current period net charge offs on a per share basis, which increased 19% over the prior year.
We believe this view of bank performance will be perhaps more comparable across banks once the new Cecil accounting standards that goes into effect next year.
Slide six to show some of the key technology objectives, we've been working on we're enhancing digital experiences for our customers with the goal of being quite competitive with the best providers of financial service products.
Thanks, and Nonbanks alike, while remaining focused on continuous improvement in stream streamlining our processes, thereby keeping noninterest expense under control.
I'll conclude my remarks, with slide seven which is a list for key objectives and our commitment to shareholders.
For our financial goals, we've long been committed to achieving stronger revenue growth and expense growth also referred to as positive operating leverage.
We have the falling interest rates, our ability to achieve positive operating leverage becomes more difficult.
For the long term, we'll remain focused on delivering positive operating leverage operating leverage all that we recognized this challenge will increases our operating efficiency improves.
As lower interest rates across the yield curve at materialized over the past several months, we've sharpened our focus on noninterest expenses.
Today, we're announcing an acceleration of our drive toward improving operating efficiency.
Which will result in the near term workforce reduction of about 5% along with other operating expense reductions.
This acceleration will result in a temporary increase in noninterest expense in the fourth quarter severance and other similar efficient efficiency initiative related.
Charges are recognized.
We believe this will enable us to achieve our previously stated outlook for an on it interest expense for next year, which is to hold expenses to flat to down when compared to this year.
Despite the efforts to reduce costs will continue to invest in I mean in a enabling technologies, which will help to ensure our success in an increasingly competitive marketplace.
Well that overview I'll turn the time over the Paul Burdiss to review, our financials and additional detail.
Paul.
Thank you Harris and good evening everyone.
I'll begin on slide eight which highlights two measures of profitability return on assets and return on tangible common equity both improved in the third quarter and our long term goal.
His continued improvement in balance sheet profitability on slide nine for the third quarter of 2019.
Net interest income was essentially flat to the prior year period.
Average, earning assets increased just slightly more than 5%.
Over that timeframe and the yield on earning assets increased by nine basis points. However, even though our average deposits increased 3%.
Over the past year, our cost of funds increased significantly.
Due to the increase in short term interest rates. This increase in our cost of funds more than offset the increase in the yield on earning assets.
Slide 10 breaks down net interest income by both rate and volume.
You can see that our average loans grew 8% over the year ago period.
Average loan growth in the third quarter was more modest up 4% annualized from the prior quarter.
Over the prior year period, the yield on loans increased four basis points and relative to the prior quarter the yield on loans declined 10 basis points.
The reasons for this are the same as we provided in the last quarter first the recent decline in short term rates and second the turning of loans loans that is lower rates on new loans relative to maturing loans.
That compression can be attributed to several factors, including competitive forces as well as a lower country risk profile in the loan portfolio.
I'll discuss the benefits of the lower risk profile and just a moment when I review our capital position.
Shifting to funding average total deposits increased 3% over the prior year period.
We are reporting a relatively strong 7% annualized growth rate when compared to the prior quarter, achieving such strong such a strong rate of growth will likely be difficult to sustain but we do not expect moderate deposit growth.
Sorry, we do expect mater deposit growth to accompany our loan growth.
Our cost of total deposits increased just one basis point relative to the prior quarter and I expect the total cost of deposits to decline in the fourth quarter relative to the third quarter due to ongoing efforts to better align deposit cost with lower market rates.
Slide 11 depicts the key net interest margin components, our net interest margin compressed six basis points relative to the second quarter as loan securities and borrowing yields and costs reacted relatively quickly to lower interest rates. It is reasonable to expect that the net interest margin will compress.
Further during the next few quarters, reflecting the forward curve and our best estimates of loan yields deposit costs balance sheet growth and other factors.
Turning to loan growth.
Slide 12 depicts year over year period end loan growth by portfolio type with the size of the circles on this chart, representing the relative size of the portfolio.
For nearly all categories, where we are reporting solid and consistent growth.
As a minor footnote, we reclassified about $250 million off construction and land development loans into the term commercial real estate portfolio.
Credit risk of the total commercial real estate portfolio is unchanged.
But this reclassification as mentioned previously we are expecting moderate loan growth and the composition of the growth should be relatively similar to prior guidance with lower risk categories growing at a stronger rate than the higher risk categories.
Interest rate sensitivity is reported on slide 13, Zions remains modestly asset sensitive, although we have continued to reduce the magnitude of that sensitivity.
Earlier in the quarter, we utilize the mark to market gains in previously contracted out of the money interest rate floors and converted those into interest rate swaps.
Earlier in the year, we're inclined to keep some optionality for scenarios, where interest rates may have continued to rise however, as the year progressed and the likelihood of rates declining became more certain their became a greater need to hedge the emerging near term decline in net interest income.
The partial offset to declining net interest income due to falling rates is the strengthening of certain fee income items as discussed on slide 14.
Customer related fees were up 11% from the year ago period. This increase is primarily attributable to strengthen capital markets product sales, including interest rate swaps as commercial customers lock in low interest rates on their variable rate loans.
We've also seen strength and other lending activities such as residential mortgage loan originations.
Although the noninterest income lift associated with these products is often driven by market conditions and can be fleeting. We're optimistic that this increased activity can continue in the near term.
As shown on slide 15, noninterest expense declined 1% to $415 million from $420 million in the year ago quarter relative to the prior year. The third quarter contained a reduction in incentive compensation, reflecting the more challenging interest rate driven environment for revenue growth.
And reductions in FDIC insurance premiums and credit costs offset by an increase in base salaries and software amortization.
As Harris noted earlier, we are accelerating our efforts to streamline operations and improved overall efficiency. While this will create elevated non interest expense in the near term driven by severance and other restructuring related costs. We believe these changes will enable an ongoing expense level, which is reflective of the current.
Environment for revenue.
In fact, we now expect that total adjusted noninterest expense for 2020 will be consistent with or slightly below full year 2019, which would mean that we will have kept noninterest expense level generally flat for more than five years.
Turning to slide 16.
We should see ratio was 57.3% compared to the year ago period of 58.8%.
One of our long term financial goals is to achieve an efficiency ratio that is consistent with the peer median as a first step and eventually stronger than the peer median while simultaneously investing in digital delivery strategies, such as our core modern our modern core system top quality Treasury management software and strong web and mobile.
Banking platforms.
Additionally, we are committed to maintaining a strong risk management infrastructure that will allow us to reduce consistently good credit quality results throughout the cycle. We therefore plan to invest meaningfully in the business, while achieving improved efficiency.
Let's see on slide 17 credit quality continues to be remarkable as the trailing 12 month net charge off ratio is only one basis point.
We are reporting continued improvement in nonaccrual loans and loans 90 days past due.
Nonperforming assets plus loans 90 days past due expressed as a percentage of loans and other real estate owned declined to below 50 basis points a level not seen in quite some time.
We had a slight uptick in classified loans, although we don't see that as the beginning a trend.
The quality of the overall portfolio is very strong and we expect only modest provision for loan losses in the near term, noting of course that the upcoming Cecil based allowance for credit loss estimate, which I will discuss further in a few minutes will fundamentally change the allowance for credit loss process and estimate.
We continue to maintain disciplined underwriting standards and have eaten tightened standard even tightened standards somewhat in select areas as we continue to prepare to be a positive outlier during the next economic downturn.
Over the past few years this improvement in portfolio quality and composition has adversely impacted our loan yields but has also translated into superior credit quality results relative to peers.
Changes also led to stronger performance in our stress test results, which we continue to post on our website.
The resulting improvement in our risk profile has supported our reduction and the amount of common equity needs support the company therefore, enabling the repurchase of 12% of the company stock over the past year.
Our improved risk managed risk management and credit performance have been key factors in an improvement of our debt ratings still we believe we can make the case for further improvement in these external credit assessments.
Comparing zions financial performance to that a single day, an a minus really peer banks can be seen in the appendix.
During the third quarter, we ran a full parallel allowance for credit loss process, one for the incurred loss accounting standard and the other for the new current expected credit loss or Cecil accounting standard Slide 19 reports the results of that parallel run we have highlighted the various changes that may impact the allowance for each.
Of the major loan portfolios with a total estimated impact on the allowance for credit losses at the bottom of the table.
Our estimated day, one impact and the allowance for credit losses associated with the adoption of the new Cecil accounting standard currently ranges from a minus 15% to a positive 5%. We've given ranges to reflect the reality that the economic scenarios used to create the seasonal estimate are likely to change between now.
And adoption in January of 2020.
Slide 20 depicts our financial outlook for the next 12 months relative to the third quarter of 2019 with regard to loan growth, we're leaving our outlook unchanged at moderately increasing.
We do see some softening on that front as compared to what we reported earlier in the year not mentioned in the chart, but incorporated in the outlook for net interest income is a modest further reduction in the size of the securities portfolio as we refine how much liquidity is needed to support the balance sheet.
In September we reduced our outlook for net interest income to slightly decreasing from stable to slightly decreasing as the outlook for interest rates have become more negative than it was in July we continue to believe that this is the best estimate we can provide we're incorporating into our outlook. The current shape of the yield curve.
Regarding customer related fees, we had a very strong quarter and as I said earlier, it's likely that some of the factors that contributed to the strong third quarter will remain in the near term.
It's a bit more difficult to expect such strength in this activity a year from now. Meanwhile, However, we expect more steady growth in other fee income categories. The combination of these two trends.
Seems likely to result in relatively stable customer related fees, a year from now when compared to the third quarter.
Building on our prior comments related to noninterest expense, we expect the overall level of adjusted noninterest expense in 2020 to be consistent with or slightly below adjusted noninterest expense in 2019. However.
Total non interest expense in the fourth quarter of 2019 is expected to be elevated by severance charges of about $25 million and other restructuring related items.
Also as we have previously disclosed we're in the process of eliminating our defined benefit pension plan, which is expected to result in a onetime charge likely toward the middle of 20 to 20.
Our outlook for adjusted noninterest expense excludes these items.
Finally, I will briefly discuss our outlook for capital management, our CE tier one ratio has declined to 10.4% from more than 12% Virago. This measure remains about 50 basis points above the median of our peers for the second quarter.
We continue to feel that run.
That remaining stronger than the peer median is important and we believe this level of capital is also somewhat conservative relative to our risk profile.
Maintaining a risk profile, which compares favorably to peers, while also maintaining strong positions in capital and liquidity is prudent therefore, while the capital we returned to shareholders and 2020 is likely to be less than it was in 2019, assuming the status quo and the economy, we expect to continue to return excess capital through dividends.
And share repurchases over the next several quarters.
This concludes our prepared remarks Letif would you. Please open the line for questions. Thank you.
As a reminder to ask a question you will need to press star one on your telephone to withdraw your question press the pound key.
Please standby, while we compile the Q when a roster.
Our first question comes from a lot of Ken Zerbe Morgan Stanley . Your line is open.
Great. Thanks, Good evening guys.
Again, Jim I guess, probably the first question for you the $25 million a severance that you mentioned is that the entire amount of the elevated expenses in fourth quarter and also is there anything that carries over into first quarter of 2020.
Did the $25 million as an approximation of the severance charge that will occur in the fourth quarter. There are other charges related to for example branch closures that will occur in the fourth quarter, but those will likely carry over into at least the first quarter of 2020.
But I have not specified the size of those.
Items.
Gotcha, Okay, but okay, so first or could be elevated as well in addition to the seasonality of normal comp increases.
Right and we will we will called those out as they occur.
Okay, Great and then I guess my second question.
Is the guidance for flat expenses in 2020 does that include the $25 million of expenses you are taken in 2019 or should we strip out the 25 to get more of a core base number that you're going to be in line to below.
Our expense outlook as an adjusted expense outlook as you may recall, and we have a GAAP to non-GAAP reconciling page that shows up at the back of our earnings release and at the back of our slides and in that you can see that items such as severance are excluded from that adjusted non interest expense figure. So that's a long way of saying that yes, you show.
Would exclude that.
Perfect Alright, Thank you very much for the question.
Thank you.
Thank you. Our next question comes from the line of Chen Austin <unk> of Jefferies. Your line is open.
Thanks, a lot Hey, Paul.
No. This is a tough question here to answer, but and I. Appreciate the sliding scale point on zions wanting to remain above the peers and you cited the 50 basis points gap, but you cited also that you continue to believe you're going to return excess capital, which implies that you still think you can live at a lower absolute ratio how do we just start to get a sense of.
Sure that bottoming spot is like where you're just not going to go below because you guys. You've said previously wanted just stay above it and in case, we get to a different park cycle back.
Right. Thank you for the question and just to be clear I'm not sure that you referred to capital specifically in the question, but I.
I believe you're talking about in particular, the Cetone ratio, what I was trying to say as it relates to excess capital is that and what I tried to say by the.
Collective comments.
Is that we are as we have been telegraphing for the last six quarters and so we're getting close to the level that we think makes sense for us as an organization.
And so I would not expected to go a lot lower from where we're at night, so when I refer to excess capital I'm, referring to the capital that we generate through net income we need to support of the risk profile of the balance sheet, including loan growth, we need to support dividends and then everything over and above that.
I'm trying to say is we will will be available for.
Distribution to shareholders through.
Share buyback.
Understood. Thanks, Paul and as a follow up just a one question on the on the on the margin side.
Could you talk about just how impacted.
Yeah, well premium amortization wise, and whether came from MBS and DSP portfolio.
This quarter.
On the securities portfolio yield I haven't done the math on the margin, it's only a couple of basis points, but on the secure security portfolio yields about eight basis points quarter over quarter on premium amortization a lot of that as it turns out is yes. Some of its MBS, but a lot of it is related to our SB eight portfolio, which you may recall as a couple of billion dollars and has about a 10% premier attached.
So it just for your information that that's not an asset class that we are continuing to add too.
Okay. Thank you Paul.
Yes. Thanks.
Thank you. My next question comes from John Pancari of Evercore. Your question. Please.
Good afternoon.
On the expense.
Regarding the 5% head count reduction could just give us a little bit more detail in terms of the timing of that the reductions in the overall targeted savings as a result of the redone the reductions and I guess the same question will go for the branch closures as well in terms of the targeted savings that you expect in the maybe.
The number branches.
John This is Scott and on the targeted.
Savings that come from.
The 5% reduction in workforce.
It basically it.
It's occurring and.
We should see the benefit of it throughout 2020.
So that's pretty much the outlook on on that.
And on branch.
Branch closures again, it's a modest amount.
We're absolutely committed to our branch footprint.
Or relocating some branches, but we're bringing our total level of branches down by a very modest amount, we absolutely believe that our customer base, which as you know is largely.
Small business small and medium sized businesses. Most survey data reflects what they absolutely value convenience and locations and they value access to bankers. So.
It's a modest trimming of the branch footprint.
I just add chose Harris.
You could pretty much take that percentage and apply it to our.
Salary and benefits number.
Give your Russ a rough approximation.
<unk>.
No. It gives you a.
Precise number that would get kitchen of the ballpark and it it will.
You'll start to see that.
In the first quarter.
The much unfold.
And Thats why were the magnitude of that is why we're guiding to.
Flat to slightly decreasing on noninterest expense.
Got it.
Okay, alright, thanks for that and then separately just on the on the margin I know you you indicated in your prepared remark that the NIM should see some continued pressure over the next couple of quarters or several quarters I think you said.
It could you give us a little bit could you help frame that out maybe give us some color around the expected magnitude and then maybe just remind us of what you're assuming in terms of the fed. Thanks.
John This is Paul I, you know, we are kind of trying to follow the forward curve and we are deliberately non specific.
With respect to the number of basis points to expect and the reason is as you know as the Threed outlook is a little uncertain. We know we don't know precisely what will happen there, but more importantly.
I think you know that we are as all banks, our efforts, particularly leverage so the cost of deposits.
And so we have been working really hard to manage that down you saw the cost of total deposits only was only up one basis point this quarter and as I said, we're expecting that too.
Fall in the fourth quarter relative to the third and the degree to which we are successful there will define.
In a large way to our success in maintaining.
Net interest margin in as we.
As earning asset yields continue to fall.
Okay, great. Thanks.
Thank you Joe.
Thank you. Our next question comes from Kevin Barker of Piper Jaffray. Your line is open.
Thank you the deposit growth was generally much better than what we expect that.
Are you still seeing some of that deposit growth into the fourth quarter is there anyway, you can manage that.
Just given the NIM outlook for additional pressure.
Yes.
Yeah I would this is Scott I would just say that we don't really give sort of guidance during the quarter, but the deposit growth. We're experiencing really I know its may seem a little surprising to you, but if you look at the loan growth we've had over the last four quarters. It really is very deposit friendly type of law.
On growth its.
See an eye owner occupied its commercial loans as being eligible.
And.
It's one to four family mortgages on our or HELOC portfolio. So those are very deposit friendly types of loan growth and as you know we've had for really solid quarters now of loan growth and to see the deposits growing.
Should happen with a portfolio like ours.
That said that said I wouldn't expect to see it continue as strong as we saw in the quarter. It was it was a little bit of a surprise.
Okay, and then you know just a follow up on some of your comments about a lower risk profile and tightening of the underwriting or use.
Yeah.
Are you seeing a decline in new money yields versus your current book and also on the.
On the Securities book as well like given given some of that.
Rating and also just.
Decrease in the risk profile.
Yes, yes, James May have a little precision.
I wouldn't describe the tightening is enormous it's something that we've been dealing with quarter by quarter here.
For the last several years.
Yes. This is James the amount is pretty similar to what we saw on last.
Three quarters recruitment, some or all year long actually about 15 basis points or so per dollar volume.
During the year.
So 15 basis points below were current new money yields are.
That's correct yes.
Build on a rolling off at a 50 basis point higher levels.
Moving on and as another is saying it part of that's a mix shift mortgage loans and municipal credit.
Have such a much lower risk profile that they have a much lower interest rate associated with them and so that's.
Totally apples to apples.
Same loans same loan, but the new volume coming on lower.
Yes.
Okay. Thank you.
Thank you. Our next question comes from the line of Steven Alexopoulos J.P. Morgan Your question. Please.
Everybody.
Stephen to start on the 5% workforce reduction how does that roughly split between customer facing rolls right items, such as closing branches and then what I would consider say back office REIT outsourcing staff functions overseas stuff like that.
Oh, Thank you Stephen the Scott, it's about roughly 30%, what I would refer to as customer facing and the remainder would be other enterprise activities and back office activities.
Okay. That's helpful and then Harris regarding the ability to deliver positive operating leverage long term I wasn't sure you signaling in your prepared comments, maybe less of an ability.
2020.
Well I guess.
What I'm, what I'm, what I want to be saying is simply that.
Theory, you can't do it forever.
Without.
Fundamentally shrinking I think so as you as an efficiency ratio gets.
It's a it gets lower it becomes more challenging and so that at least the pace of it becomes tougher.
And I think most notably in the in the short term because of the.
The feds pivot on interest rates.
Thats doing the merchants in the industry, it's a particular headwind but longer term, it's something I will absolutely continue to keep really focused on operating expenses.
But at some point.
That.
You get convergence between growth rates and expenses in revenue.
Got you, okay, otherwise with all the entire industry would be down it kind of two or 3%. So I guess.
Happens in part is that.
Is that as the industry becomes more productive.
Pricing changes too so.
So its a.
Thats really what we're trying to say.
Okay fair enough. Thanks for taking my questions.
Thank you.
Thank you. Our next question comes from Jennifer Demba of Suntrust. Your line is open.
Thank you good afternoon.
Quick question on credit quality remained.
Really good can you talk to us about any weakness you. You mentioned you think you saw on AG and can you also update us on credit quality in the energy portfolio.
[noise] you want to.
This is Michael Morris.
Thank you.
As Chief Credit Officer, all the for the energy question to Scott Mclean.
We've seen a little stress in a couple of other portfolios.
Like the restaurant.
Sector.
Commercial subcontractors nothing.
Really.
Really concerned about here, but I think its.
And well represented in the industry that those are.
Segments that are experiencing some stress is part of the cycle.
I think AG AG is I mean, we have a couple of credits.
Yeah. It was.
In the state of Idaho, the potato crop had some challenges with early freezes.
So I think nothing that were expected to see.
Any.
Significant loss him, but no. We're that's right errors were in about the fear of depressed commodity prices terms trade war.
Talk because virtually impacted mostly.
The from Green.
Potatoes.
Good.
Should we be tool that most of our clients, especially our large borrowers.
Fairly deep balance sheets have experience working cap stress.
Total AD portfolio is about roughly 600 600 million yes.
And on the Jennifer on the energy portfolio.
Yeah.
Basically classified ads nonperformers or.
Flat for the most part.
Charge offs are still pretty benign.
Since weve.
Since the last couple of quarters.
And national Clay natural gas prices have been soft.
They generally trade either side at $3 and have for quite some time going back 567 years.
But we're we're now down below 250, but that that it tends to adjust and as you know our our borrowing bases adjust also pretty naturally with it. So we're watching it closely but it's just not something thats overly concerning to us at the moment.
Declining rig count.
As is something to watch.
But.
Interestingly as the rig count declines.
So too will gas drilling and that will allow for pricing to go up fairly quickly because most of these wells that are being driven drilled or on three year decline curve. So.
In any event, we will we watch the energy portfolio very very closely but.
But we think the fundamentals are pretty good shape right now.
Just add gross charge offs and the energy book were $1.3 million during the quarter had recoveries of a male and a half so.
We saved benign it's pretty benign.
Which is not a word that.
Probably abuse very much related to the portfolio saw I, probably should pick a different were.
One follow up if I could I'm wondering what's the size of your restaurant portfolio and your commercial subcontractor bucket.
The restaurant portfolio is roughly 750 million.
And the subcontractor this would be just subcontractors not general contractors closer to 300 million.
Great. Thanks, so much.
Thank you.
Thank you. Your next question comes from Steve Moss B. Riley your question. Please.
Good evening.
Paul and your comments you said, it's curious portfolio would continue to decline here just wondering as percentage of assets, where you see that heading over next 12 months or so.
Well I I would think of it really are usually I prefer things like percentages, because there are kind of broader and more directional then the case the securities portfolio, we signaled last quarter that we thought was going to decline in the third quarter.
And I'm just trying to signal that that may continue here into the fourth quarter, but it's in the range of kind of a couple of hundred million dollars, if not a gigantic decline.
To your point to the extent the bouncy, China balance sheet size changes.
That will change that targeted because the.
Investment portfolio really exists primarily for management up liquidity on the balance sheet.
Okay and then my second question just on the loan pipeline fourth quarter tend to be little little bit stronger seasonally for you guys wondering how this compares with other fourth quarters.
I don't know because its towards.
Center.
We are only two weeks into the quarter. So it's really it's really hard to provide any sort of accurate prediction with.
Precision and how the quarter turns out, but we are confident in our outlook.
For kind of moderate growth in loan portfolio and we're sticking to that.
Alright, Thank you very much.
Thank you.
Thank you. Our next question comes from the line of Erika Najarian of Bank of America. Your question. Please.
Hi, good afternoon.
Hi, I thought the chart.
Slide 13, where it was extraordinarily interesting we showed us to beta on deposits on the last 50 basis points of height.
Versus.
Relative and I'm wondering given some of the feedback from your peers that.
Competition of course remains strong you know how you see the pacing continuing especially since yield curve expectations are extraordinarily volatile right now.
That's all true as I would I would fall back, though on my comments Rijkaard regarding overall deposit pricing and that is that.
So as loan yields began to decline we saw that deposit costs continue to increase in the in the second quarter.
Bet flattened out in the third quarter and as we are actively managing this and we think we continue to have some opportunity to do that we're expecting the overall cost of deposits to begin to fall in the fourth quarter.
So yeah, so totally heard that loud and clear, but I guess I'm just wondering as as we think about you know.
Piece of it because some of your peers.
You know also had I haven't given us less consistent messaging. Some have said an accelerated pace in the beginning and then a leveling off in some have indicated a more accelerated pace into 2020 and I'm wondering if you think about it strategically and again thinking about sort of volatile expectations for the short end occur.
Any thoughts on.
That that piece that kind of pacing.
Well.
Overall, we have some of the best.
Cost of deposits in the industry and the reason for that I'd say is.
Largely due to the fact that the composition of our portfolio is very granular.
Where we look at sort of the most intense deposit pricing competition.
It's typically on sort of a larger I would say sort of lumpier deposits.
And because so many of our deposits are operating in nature, we have been able to benefit from.
A lower relative beta on the way up and what that means though is that on the way down.
My expectation is just as rates have been moving up rather slowly on the way up.
It's going to take a lot of work to move them back on the way down so if you're asking about sort of an accelerating beta.
In the near term I don't foresee that.
Got it and if I could squeeze my my second question, sorry had to have to ask a two part first question.
They take a step back I feel like you know Harris every single quarter, you're asking about the the capital ratios.
It's a conservatism we wish you manage your balance sheet exposure. It happened on your liquidity and I guess instant messenger really here is that right.
Clearly I look at 10% CP, one floor sixteens robust for your risk profile, but given the uncertainties he'd rather be using your balance sheet to win business in a downturn rather than dry down right. Now. So we should stop asking that question I'm trying to see I'm just trying to think about.
You know the instant messaging from capital is really that this is the right floor for now.
What a good idea.
[laughter].
I guess.
I.
I think somewhere around here is is about where we're going to want to be given.
The fact that we.
You know, there's there's a fair amount of uncertainty in the world them and.
Right.
I think we have said we want to be sure that we don't we don't want to have.
Enormous amount of excess capital just sitting here.
Follow but I, but I do want to be sure that we've got a strong balance sheet going into whatever the next down cycle looks like and I think I think we're pretty well positioned for that and we're probably.
We're just not going to see the kinds of.
The levels of buybacks that we've had been able to accomplish over the last year, but.
Particularly you know we don't we don't see.
Reasonably strong loan growth I think there's still going to be some room for 60 could continue down that path, but it just won't be the same pace.
Got it thank you.
Thank you.
Thank you. Your next question comes from Gary Tenner of D.A. Davidson Your question. Please.
Thanks, everybody my questions are actually asked and answered appreciate it.
Great. Thank you.
Thank you. Your next question comes from David Long of Raymond James Your line is open.
Thank you good afternoon, everyone.
David.
Question regarding mortgage banking something that you guys have talked a little bit about lately in some investor meetings, and just want to get an idea as to what your appetite is to grow that part of the business tends to leverage your footprint and also how big then can that become for for the bank. Thank you.
Thank you for the question the Scott Mclean we.
His business is really important to us it.
We'll generate will find about two and a half billion dollars. This year that will be up from about two to two three we've been at these levels and higher.
It is a perfect product for a community bank model like us.
Also very high percentage of our.
Mortgage clients are small business owners, which also fits really nicely in many cases their mortgage is larger than the business loans.
Ask us for.
And so it's a business to that we've just rolled out some really exciting customer facing digital technologies.
We'll take about 10000 applications a year and at this point last year, we were 100% paper at this point.
As of right now we're at.
75% coming through our digital channel that is a huge change in a short period of time going from paper to digital and its allowing us to get more into the conforming mortgage business. Historically, we have principally bana jumbo lender average loan size about 600000.
And this new digital.
Interface should allow us to started originating conforming mortgages much more actively than we have in the past its going to be a great product for our 430 branches and that kind of mortgage lending also.
It has fees associated with it because we sell all those conforming mortgages mortgage is generally less than 430 $450000 and so the fee income outlook associated with that volume is positive.
Got it thank you.
Thank you again to ask a question press Star one at this time at Star wanting your Touchtone telephone.
Your next question comes on line of Jon Arfstrom of RBC capital markets. Your line is open.
Good afternoon.
Hi, John Thanks.
Question on the back on loan growth I'm on your guidance slide.
Talk about moderately increasing and may not be as strong as the prior 12 months, but then you also we're talking about moderates a strong and cnine owner occupied another is just curious, but bigger picture you any more or less optimistic on the growth all book and any change in optimism from your typical that's some of you bought.
Our.
Well, let me, let me talk about the outlook, specifically and perhaps.
It wasn't clear the way we laid it out what we were trying to say was that if you look back over the last 12 months, we had sort of a moderately increasing outlook, but what we achieved was actually better than that.
And we're just trying to say hey that was a little better than moderately increasing and that's not what we're expecting we're expecting moderately increasing right.
That was met with kind of the concept that we're trying to accomplish.
But as it relates to.
Overall sort of a composition of the growth and what we've seen.
The mix of growth.
With the exception I just laid out I think we feel pretty good about.
That that category growth over the next 12 months, which is what we're trying to convey.
Okay.
Any change in the optimism.
Yeah.
Maybe ever so slightly John this is James.
There's ever so slight among a very maybe handful.
Uh huh.
Relationship managers would tell you that maybe some of their customers have experienced a little bit less optimism. These days.
But I don't think it's broad based.
Say, it kind of anecdotal and by definition really hard to measure.
Okay and then the thing I just wanted to clarify on the the fee income lines you talk about stable from a very strong Threeq you would you consider three Q elevated I realize it's clearly an offset to the margin and they seem to move in different directions, but.
Would you consider that elevated enough so maybe sustainable in the near term.
John The Scott, Yes, I was going to figure was a little elevated.
But with fee income.
It.
It seems like every quarter is a little muted or a little elevated.
And so we're still maintaining our guidance around.
Mid single digit fee income growth is what we've sort of said year over year and.
And we saw a really good strength.
In this quarter and.
A number of our capital markets businesses.
And but we're coming off a low base and so I am optimistic about those products going forward and we have some other products that are.
Going to be.
I think.
Positive for US next year also that takes place of anything that with those.
Just I think it's kind of if theres, a silver lining to what we see in the yield curve thats mortgage and.
And some capital markets activity.
Swaps in particular, and if we started starting to see some sloping yield curve with probably heard those and help us and some other places.
Yes.
Okay. Thanks, nice jump guys.
Thank you.
Thank you at this time I'd like to turn the call back over to James Abbott for any closing remarks, Sir.
Thank you as even thank you everyone for joining the call. This evening, we appreciate your time and and the interest in the company. We look forward you were speaking with you throughout the quarter or at a conference.
You do have any follow up questions will be around for little while Tonight and feel free to contact me directly and again. Thank you for your attendance. This evening.
Great night.
Ladies and gentlemen, this concludes todays conference call. Thank you for participating you may now disconnect.