Q3 2019 Earnings Call
Good morning, and welcome to the first Horizon National Corp, Third quarter 2019 earnings Conference call. All participants will be in listen only mode should you need assistance. Please signal a conference specialist by pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask a question.
You asked a question you May press Star then one on your telephone keypad to withdraw your question. Please press Star then too. Please note. This event is being recorded I would now like turn the conference over to Aarti Bowman of Investor Relations. Please go ahead.
Thank you Isley. Please note that the earnings release financial supplement and slide presentation will use in this call are posted on the Investor Relations section of our website at Www Dot birthright and dotcom and this call will mention board looking at non-GAAP information actual results may differ from the forward looking information for a number of I can read them out.
One in our earnings materials, and our most recent annual and quarterly airports are forward looking statements reflect our views today and where non operated.
non-GAAP information is identified that you're not earnings materials in the slide presentation, let's call. It has reconciled to GAAP information and.
Also please note that this webcast on our website is the only other.
This call. This morning speakers include our CEO , Brian Jordan, and our CFO be daily. Additionally, our chief credit officer season, Springfield, well be available with by everyday.
I'll now turn out goodbye.
You're already.
Good morning, everyone. Thank you for joining our call.
Plays where a third quarter strong financial results, we showed good balance sheet trend.
Deficiency and remain disciplined with expenses.
Third quarter demonstrated that our counter cyclical business mix helps produce good returns even in a challenging interest rate environment.
Net income revenue was up 66% from last year.
Lower rates in greater market volatility.
Average daily revenue increased nearly $1 million in the third quarter, two girls and boys.
We strengthened our dominant position well profitably growing our new markets.
Specialty businesses in Tennessee.
In the third quarter, we saw good balance sheet momentum across our markets with average loans up 10% year over year.
We're also improving our funding mix growing customer deposits to replace wholesale funding.
Particularly pleased with the customer deposit growth in our key markets.
In the third quarter, we showed solid revenue growth.
And controlled our call, resulting in an improved efficiency ratio on an adjusted basis.
Our cost saves are enabling us to reinvest them to the company.
We're better products and better technology for customers.
Overall, our customers right good financial position and they remain reasonably positive about the economy and growth Rosberg.
Over the past 12 18 months since completing the integration of the capital Bank merger, we focused on growing our business.
We've executed on the opportunities that are attractive markets offer.
At the same time, we've been implementing plans and making investments and better position us for Bob products and services in an increasingly cost effective and convenient one.
Our actions have enabled us to deliver solid improvement in our earnings power this year and position us for a long term.
I'll now turn the call over to BJ to go through the quarter and then I'll be back for some closing comments BJ.
Thanks, Brian Good morning, everybody.
I'll start on slide six with our financial results, which.
Demonstrate continued execution on our creeper already laid out at our Investor Day last November and strong growth momentum from our newer markets, we entered with our capital Bank merger.
We had another very good earnings quarter in Three Q1 935 cents on a reported basis and 43 cents adjusted for notable items, we saw strong revenue growth up 2% linked quarter driven by fee income in both our fixed income and banking businesses.
After yen in particular continued its strong 2019 performance with just under 1 million of average daily revenues in the quarter.
We saw very strong broad based loan growth in both our markets and our specialty businesses with overall loans up 5% linked quarter.
We saw healthy core deposit growth with strength in key markets, such as Middle, Tennessee, South, Florida and the Carolinas.
The strong customer flow isn't able to continued positive mix shift in the deposit base.
And this customer growth coupled with good pricing discipline allowed us to both grow customer deposits and lower our deposit rate paid by three basis points quarter over quarter.
Strong loan growth and deposit pricing does the blend helped to mitigate continued macro interest rate pressures.
Well as lower accretion, resulting in only a modest 3 million dollar decline in net interest income per quarter.
Thanks control remains a key focus and we delivered another good quarter on quarter expenses with the fishing feeds offsetting reinvestment in the business at a higher variable compensation supporting the strong revenue growth in our fixed income business.
Total expenses were up 2% did it some notable items that weve listed out on the bottom right of the slide the primary drivers were restructuring expenses related to our efficiency actions resolutions of legal matters and some acquisition related charges, primarily related to legacy legal and employment agreement Matt.
There's along with fixed asset impairment.
Other than rebranding, which will officially rollout in late October we would expect much lower impacts were notable items in the fourth quarter.
Turning to loan growth on slide seven you can see that after the capital Bank systems conversion mid last year, we've seen materially improved balance sheet momentum.
Total loan growth stands that 10% year over year much higher than the 3% to 6% growth we discussed at Investor Day last November .
And the growth has been in the key markets and specialty businesses that are most profitable segments and the ones that we are very focused on growing.
Looking at the loan growth in more detail on slide eight you can see that our strategic focus on growing those areas have clearly paid off.
Linked quarter specialty loans grew 11% and were up 23% year over year.
As expected loans to mortgage companies delivered more strong growth with linked quarter increases of 32% and year over year increase of 84%.
Brian mentioned earlier the business offers counter cyclical benefits at lower rates helped drive volume.
And while refinancings were higher in the third quarter. The purchase market remains very strong as well in fact purchase volume outpaced Rifai volume with the purchased three five next at 56, 44% respectively.
We continue to grow market share and maintain competitive pricing through our ability to buy provide balance sheet capacity.
Expert knowledge and flexibility to our customers.
As you can see in the bottom left to this slide.
Not only did loans to mortgage companies grow into specialty businesses area, but all other lines of businesses also grade linked quarter as well.
Specialty loan growth in aggregate, excluding loans to mortgage companies was up 4% linked quarter and 7% year over year.
And our key markets Middle, Tennessee, South, Florida, the Carolinas in Texas delivered solid growth as well just under 2% linked quarter with a 7% increase year over year.
Shifting to deposits on slide nine you can see our continued emphasis on growing concern about customer deposits resulted in solid deposit growth across key markets and specialty areas.
Look at the bottom of the slide we've seen excellent deposit growth across all areas.
21% deposit growth year over year in specialty businesses.
10% growth in key markets, and a very healthy 6% year over year in Tennessee.
And the key markets in particular ourselves are focused on south, Florida is paying off with 16% growth.
It'll Tennessee growing double digits, and our mid Atlantic market, primarily in the Carolinas growing 8%.
Non interest bearing deposits were also up 4% linked quarter due to a consistent dedicated focus on building primary relationships across our consumer and commercial customer bases.
By continuing to shift our deposit mix and manage our deposit rates appropriately. We saw another decline in our deposit costs, which were down another three basis points this quarter.
Turning to slide 10 look good and I and the margin we continue to proactively manage the balance sheet to optimize both eni and NIM drivers in various rate environments. As you can see our core net interest income was up due to strong commercial loan growth as well as the lower.
Deposit costs.
The overall and I NIM decreases were largely due to a large step down in accretion.
Well it big impact of declining LIBOR rates.
Well, the lower rate environment is affecting our and I admit unlike others across the industry. Our unique business mix is providing the expected counter cyclical offset that others in the industry do not because that would help support our overall earnings.
Within the net interest income line or lunged mortgage company business benefits from falling rates through higher volume.
And our fee income businesses the benefit from lower rates, specifically, our fixed income in derivatives businesses, we saw strong performance.
Moving to slide 11, we see some of the key drivers of another great quarter for fixed income.
Linked quarter again average daily revenues about a million a day, a 15% from last quarter and up 83% year over year.
A decline in interest rates the sentiment towards continued lower rates and market volatility all favorably impacted activity in the quarter.
Other product revenue increased as well with customers continuing to execute rate swaps, resulting in higher fees in our derivatives business.
In addition, we're very pleased the hard work that my kids were in his team at Ftn have gone to reduce fixed cost over the last few years have improved our profit margins on incremental revenue growth from prior levels.
Based on the key drivers to revenues in fixed income we expect earnings in the business to continue its strength in the current market position.
Ah conditions.
Turning to expenses on slide 12, you see that our strategic focus on optimizing our expense base to both improve efficiency and enable incremental investment it's paying off.
We've demonstrated disciplined expense management on a core basis year to date.
In addition to benefiting from capturing the full year benefit of merger cost saves in 2019, we've taken additional actions across the franchise. This year to achieve approximately $80 million of incremental efficiencies with about $15 million reinvestment.
We have reduced structural cost meaningfully by Rightsizing, our span across all areas of our business.
Rethinking, how we deliver services to our customers based on what they want and improving processes to take out unnecessary cost.
With the $80 million of cost reduction that avoidance will achieve this year, we will have saved about 7% off our gross expense base well starting to invest a meaningful amount in growth markets, such as South Florida.
Well if needed areas, such as technology digital banking customer experience and Treasury management.
Turning to ethic quality on the next slide loan loss provision remained relatively stable linked quarter regional bank provision was up due to strong commercial loan growth and modest grade migration offset by continued net reserve releases in the non strategic portfolio the linked quarter uptick in net charge offs woods.
Related to two commercial credits and we're still seeing over all credit stability in our portfolios with charge offs still at historical lows and credit quality remains strong.
To sum up.
Controlling what we can control and delivering on the key priorities, we laid out last November at our Investor day.
We have strong balance sheet momentum with good loan and deposit growth in key markets and specialty areas.
Implementing cost savings to reinvest into the company to further enhance our earnings power credit quality is stable, we're deploying capital smartly.
And our counter cyclical businesses, such as fixed income and loans to mortgage companies are providing unique offsets that we expected in a declining rate environment.
Wrapping up with the outlook slide on slide 15.
You'll see that our outlook for the year or return on tangible common equity efficiency ratio and credit quality remained unchanged. However, we've increased our away outlook to reflect strong revenues on higher fee income coupled with the ongoing expense discipline.
As have others in the industry, we've lowered our NIM outlook for the full year due to earlier fed rate cuts than previously expected as well as our updated expectation of two additional fed rate cuts this year and subsequent further declines in LIBOR.
Again, the impact in NIM will be somewhat offset with loan growth that is likely to exceed our prior outlook of 3% to 6% for the year as well as Dekalb cyclical offsets in our fixed income business.
Due to our strong organic loan growth opportunities, we've been able to put more capital to work in an accretive fashion and we expect C. P. One levels to be in the nine to nine and half percent range for the year.
So with that I'll turn it back over to Brian and he can make some closing comments.
Thank you paid yet.
We feel very good about our our outlook for the remainder of the year and we're very encouraged by the momentum we see in the fourth quarter and going into the turn of 2020.
The economies across our footprint continue to be good our customers are generally optimistic and we're well positioned to continue growing our balance sheet, improving profitability and controlling expenses.
Thank you do all of our colleagues for all their hard work in the quarter building, our business and serving our customers.
With that Ali will take now some questions.
We will now begin the question answer session.
Good question you May Press Star then one on your Touchtone phone.
Using speakerphone, please pick up your handset for pressing the keys to withdraw your question. Please press Star then too.
Our first question comes from Steven Alexopoulos with JP Morgan.
Hey, good morning, everybody.
The.
Oh, just started the NIM guidance. So if I look at the 325, new estimate for full year 19 implies a fairly sharp drop coming here in Fourq, you, maybe seven basis point range or so.
Is there another large step down in accretion coming in Fourq, you or is this margin pressure from the assumption that we get to two rate cuts in the quarter.
Hey, Steve.
Good question. So you can see from second quarter to third quarter, we had a fairly large step down in the loan accretion from about 12 million in second quarter down to about six in the third I wouldn't expect that big of a step down.
In the fourth it will probably continue to come down modestly, but this was quite a big step down I think it's more related to our now current assumption for two additional fed rate cuts.
In the fourth quarter.
You know fed funds futures have been moving all over the place.
But as of this morning.
The futures actually imply only one rate cut the rest of this year in October and then not another one until August of next year, but.
Be more on the conservative side, we're we're assuming t. rate cuts and so.
We would continue to do you assume that there will be further pressure on the margin in the fourth quarter.
Okay.
That's helpful and then under fixed income business. If I look at the 1 million 80 are nice to see it back to the low end of the historical range.
Market volatility was really high in August is that's where you saw the bigger pickup in volumes or is short term rates just move lower you just seeing a sustained increase overall trading volumes.
I would actually say was pretty consistent you know if you look at a month to month.
Come on.
For the quarter.
Thank you.
July was just under a million.
August was right around a million and September was slightly above a million.
And so it was fairly consistent.
But the interesting thing that to the C.
Was the number of days that we had above a million was about 42% of trading days in the quarter above a million 75% of trading days were actually above 750000, So we had very consistent.
Volume.
Throughout the quarter in terms of what we were seeing so.
That gives us a lot of encouragement that going forward at least in these current market conditions.
This kind of performance can continue for Ftn.
Okay. That's helpful and just finally VJ on C., so what's the anticipated impact day, one and how do you think about ongoing provision impacts from c. So thanks.
Sure. So we we haven't yet disclosed our impacts foresee so we'll probably do that with our with our fourth quarter.
Earnings announcements the we have done a significant amount of work of course is as you can imagine and so.
Yeah, we'd expect much like the industry.
To see more of an impact on the longer dated assets more on the consumer portfolios less of an impact on the commercial portfolios.
So we will generally I believe be in line with with what we're seeing across the industry, but but we'll disclose that upcoming in the fourth quarter.
Okay.
Terrific. Thanks for all the color.
Sure.
Next we have Ebrahim Poonawala with bank of America.
Good morning, guys.
<unk>.
I I guess I'm BJ, if you could help clarify it on the on the efficiency plan. So you expect $65 million off net savings through the restructuring you blending all of that that's going on when we look at the 276 million dollar expense on the need for the third quarter, how much of that is baked in how much of that comes to us.
In the fourth quarter I'm, just trying to think too as we look into next year wed.
Oh, we should think about just accord expenses ex any capital markets, what kind of thing.
Yeah. So you know if you look across if you look at slide 12, it kind of gives you a pretty good view of the relative stability quarter to quarter of our of our expenses and that's with materially.
Growing fixed income so we've been taking cost out of the organization.
Particularly during the first half of the year.
Some of it being offset by variable comp with Ftn, but also towards the second half of the year as as I mentioned, we are reinvesting in the business. It's not just all drop into the bottom line and so more of our reinvestment is hitting in the latter part of the year.
So <unk>.
I expect expenses to be in this range.
Give or take $5 million in the fourth quarter.
Based on what were what we're seeing yeah, we have very very good expense discipline, which we're proud of but we will be reinvesting in the business as well.
Understood the net $65 million of savings one way or the other I reflected in these numbers.
Okay understood, but that said it's come in its come in across the year. That's that's a all in.
A number relative to what are what our run rate was at the beginning of year.
And just tied to that when you think about the cap markets I guess the efficiency Nishu ex the legal what about say when do you want to 72%.
Can you give us a central fleet, how we should think about operating leverage adx continue to get better into next year and it doesn't fall into the sixties, Dan I'm not sure trough in that business when you think about it.
Yeah, I think it it's a good question. If you if you do take out you know some of the legal matters and really look at both last quarter and this quarter.
The business roughly has a 50% margin on the incremental revenues that were generating right now.
I alluded to in my opening comments that Mike Casper and the team out there have done great work last few years on taken out fixed costs.
And other costs that that werent supportive of revenue.
That that 50% used to be a 60% margin a couple of years ago and so now we're getting much more leverage so incremental 50% margin will of course.
Overall, the 70% efficiency ratio that we see today, so as fixed income move higher we would expect the efficiency ratio to continue to get better.
That's helpful and if I can just one follow up to Steves question on the margin I guess.
To me to be clear you assume a October in December need got in the guidance.
And it's implied about a T 15, plus or minus margin for fourth quarter can you talk about the outlook going forward given the dynamic of what you're seeing in terms of deposit mix shift like is that a point, where you can defend the margin despite.
Thank God for do we need deep cuts to stop the for the margin troughs.
Yes, so I'd say that 315, plus or minus I'd, probably be a little bit more on the plus side than the minus side for that in the fourth quarter.
Because I think we are doing a good job defending the margin with our deposit pricing discipline. We are seeing good volume, particularly in loans to mortgage companies based on the rate environment. So we do have pretty good offsets, but but LIBOR declining and you know the fed out.
Look.
Yes, certainly is is the headwind.
Deposit pricing dynamics are still very competitive no doubt but.
You have seen with the fed cutting rates more and more banks, whether its online or you know the traditional banks being lot more thoughtful and a lot more disciplined around deposit pricing in general.
And so I.
I think thats incrementally helpful too soon and supportive of the margins.
But.
Overall declining lie boring is gonna be more of a headwind that we have to deal with although again.
Remind.
Every body.
The unique counter cyclical offsets that we have in our business some of which are in net interest income and net interest margin like loans to mortgage companies, but others like our fixed income business and our derivatives business are going to show up more in the fee income line such that our S.
Can be potentially more supported than than maybe some others that are just levered to the margin.
Hey, this is Brian I'll add to the comment I think they're fundamentally when you step back from what's going on with interest rates.
There seems to be a fundamental disconnect between the expectation of lower rates and and what's going on in the underlying economy and as I indicated lower it clearly has slowed a little bit and I think some of the impact is driven by tariffs are the expectation of tariffs.
And I think there's an awful lot of talk about lower rates in the impact, but if you look at even the dialogue at the fed they have a bit of a mix discussion about whether they need to cut whether they don't we don't fundamentally see that rates need to go a whole lot mower go a whole lot lower based on economic activity.
They said we've built in an expectation for a couple of cuts, but fundamentally the business underlying.
Our markets is still very good consumers are good borrowers are good borrowers are confident and generally speaking we see a lot of momentum in our footprint and so while we think that like everybody else, we're going to see negative impacted the fed cuts rights on our margin, we do think theres a lot of.
Underlying momentum in the business.
Lending and customer activity and then as BJ said, we'd have a bit of a counter cyclical balance that helps us overcome some of that so we look at these write cuts and see them as a headwind, but we're still very optimistic about our outlook.
Our next question comes from Ken Zerbe with Morgan Stanley .
Thanks, Good morning.
And obviously your loan growth just is awesome this quarter and I was that I was hoping to get a little clarity and when you think about 2020.
Obviously, London more loans to mortgage companies very strong I mean is that something that can continue into 2020, I'm I guess sort of two questions one on the lunch mortgage.
Side and then the other one just given that economic uncertainty I mean, I think you just so very positively about so the healthy your borrowers and what they're seeing sort of I guess implies that you do see some of that strength continuing but it just seems like it's a tough pace to continue.
Yeah.
Started and then let Susan picked up the.
Again, I think the the loans to mortgage company is going to depend known.
For the next couple of quarters, what Rifai activity looks like and there's still a huge number of potential.
Refinance opportunities out there with the way the 10 year has dropped into the extent that mortgage originators lower rates as volumes start to subside a little bit I think you can make it subs are steady we would acknowledge very readily that that is a bit of with cyclical business and that.
At some point those balances will trend down, but I do think fundamentally on our warehouse business. Our team has done a really an outstanding job of building market share.
And build in a very strong business. So I think we've improved share I think will run at higher balances.
I'm I'm still optimistic about the opportunity to grow loans and in our existing footprint on a broader or on a broader basis you see.
And the data we had good growth in our specialty businesses.
South, Florida, our Florida region, what's going on and Middle Tennessee mid Atlantic are still very very good economies that we see good opportunities. There. There's no one point in there the sort of underscores my my next point, which is if you look at our commercial real estate business. It was down a little bit on a year.
We're over your basis. So we look at the opportunity to grow the balance sheet and a very disciplined thing. We think it's important that we not stretch our credit standards that we not take undue credit risk to grow the balance sheet. So we're going to.
Continue to try to capitalize on opportunities in the marketplace with the same time, we're going to continue to be very disciplined and the way we use our balance sheet and make sure.
We're keeping good credit structure, and we're we're keeping us a strong pricing discipline as we because we look at opportunities Susan.
For the mortgage warehouse business we've added.
14 on clients over the last two years to to the client count mortgage warehouse.
So being able to continue to expand that market share. So it's important for since we think about growing that business.
We also had great opportunities over the last couple of quarters with rate.
They're doing to expand existing relationship too.
In addition to that or the mortgage warehouse team has added.
Very talented relationship managers from other entities, who have relationship and I'm just recently on a coal and we were able to.
Bring in a client that we've actually been calling on for several years and because of the are in that we hired they finally decided to come on over so we feel like that business I will continue to be good as Brian mentioned.
Do impact it but I feel good about.
The fact that we've expanded market share with new clients as well with existing client.
And then to add onto what Brian said more broadly outside of mortgage warehouse.
We do believe there are opportunities to continue to grow.
And I am pleased with the discipline that I see we have monthly calls with wine and with credit leaders.
Talk about business, they're winning and business, they're choosing not to compete on and.
That's very important as we continue to build the balance sheet for the long term.
Okay. That's that's very helpful.
And then just my second question in terms of deposit costs. It looks like your cost of core deposits was down about three basis points this quarter.
When you think about your NIM guidance for fourth quarter, how much of that is dependent.
On a short reset assumption about what your deposit costs are and I guess, what I'm asking is how much visibility do you have in those deposit costs. Currently in terms of what you know is rolling off in terms of pricing given the October rate cut versus how much more variability could there be if the industry's less aggressive on on deposit pricing.
Yes, I think can we have very good visibility into deposit costs, we know obviously exactly what.
We are.
Offering from a base rate from a promo perspective, what vintages are what's rolling off what our rate guarantees are et cetera.
So we've seen two quarters now step downs on deposit pricing as the fed has cut rates.
We expect to be similarly disciplined.
In the fourth quarter, if they continue to cut rates.
We've seen we've done a very good job on the commercial side moving those rates down I would expect that to continue.
And I think we can do a good job, maybe even a little better job on the consumer deposit side.
Managing rate so I feel very very good about our deposit discipline in the face of continuing to grow deposit and I.
Reasonable fashion, particularly in those key markets.
Our next question comes from John Pancari with Evercore.
Morning.
Just so subject to loan growth question.
I appreciate the color around both the warehouse as well as the other businesses and how it's holding up I know, we're broadly you're looking at the loan growth coming in above your 3% to 6% level for 19 for 2025.
Factoring in the mortgage warehouse is still fair to assume a mid single digit range and then or is it something that.
Could be closer to the low single digits just given.
Later cycle in some of the.
Macro backdrop indicators that we're seeing thanks.
Yeah. So.
John I think like we talked about we continue to see strength in the fourth quarter continuing into next year right. Now we are in the midst of bar.
Strategy planning, which we do with.
The management team in the board at this time every year and sell we actually pretty good visibility into what the execution plans are for next year across the businesses and like Brian and season said earlier unit sentiment is pretty good we know where we want to focus.
Which is key markets in specialty businesses, we understand where the niche opportunities are and so we expect to be able to continue do.
To grow now can we do 10% year over year every year that's difficult.
But I think that we can continue to sustain some of the momentum that we've seen the last couple quarters for quite some time clearly the toggles going to be loans to mortgage companies, which for the foreseeable future with rates doing what they're doing.
With refi volumes.
How there how they're acting.
I think that that can have continued strength at least for the next.
A couple of quarters. So we feel very good about our loan growth prospects.
Okay, and then on that same topic the.
Outside of the warehouse are you seeing any.
Impact because it's a borrower sentiment just if we look at the I assume data, we're seeing some softness there and some capex pull back any indication that you're seeing that yet.
Really.
We've got had a couple of what customers that were impacted by tariff and so obviously there.
They're set of lets not real good do the impact on their business that's it.
A couple appliance that we talked too.
Sentiment I think Brian said this earlier then that's still good.
And people are.
Cautiously optimistic at this point, so I don't think that's not necessarily do Brett, but optimistic and they're talking with our bankers about opportunities too.
Our company.
Yes, the old news, so where the than duston equipment, so there's still opportunities for our clients.
Great.
John This is growing up.
I would add to do what Susan said, they're very few customer meetings that don't some would come up tariffs don't somewhere to come up and whether that's.
In fact their business or not it does come up so it is affecting sentiment to some extent because people are talking about it.
You look at borrower financial statements balance sheets, they continued to be very good and as Susan said.
Wow that they're competing for labor at higher rates are higher cost they still are fairly optimistic and so.
I'd say on the whole goods is not without some some headwinds and then tariffs do come up and higher power cost, particularly around labor affect people, but generally speaking people are still pretty positive right.
Okay, Great. If I could just has one more follow up on the credit front could you just give us a little bit more color on those two commercial credits that drove the higher charge offs and then I know that your non accruals came down but can you give us some more color around what happened in criticized assets for the quarter and maybe delinquencies more broadly thanks.
Sure.
So on the two credits, where we had a charge off.
One was in energy credit.
And they do not really the drivers of that were two things. They have had inadequate production like we're not able to successfully complete an equity right. So we did take a charge.
Quarter on that credit.
The other was our health care credit that owns and operates specialty surgical hospitals ambulatory surgery centers and they're they're real issue I had to do what they were bringing their accounts receivable collection in house.
And we're very delighted getting going out and you may know medical receivables.
Correct.
Longer they go out and they also had some acquisition. So we took a charge on that credit as well.
As it relate to.
General outlook again, we've had a couple of downgrades with.
Two companies related lumber companies that have some care fishy.
We've had a restaurant that had been reputation with franchise issue.
All of these are specific to those credits I don't really not saying anything broadly as it relates to criticized balances.
They were up about 70 million quarter over quarter.
But there are the same level at this point that they weren't fourth quarter of 2018. So it's really not elevated as you know there's going to be some lumpiness from time to time.
And then nonperforming loans did come down that much.
Specifically related to.
The mortgage warehouse clients that we identified last quarter.
We were actually able to successfully.
That into held for sale, we also took a charge.
Charge reversal on that.
Mortgage warehouse line this quarter last quarter, we charge off 4 million.
Look the recovery this quarter of two and a half on that mortgage warehouse clients I feel good about that.
And then lastly, you mentioned delinquency delinquencies were really stable across the book with exception of you probably saw level elevation in seen I I think 22 million for the quarter.
6 million of that has already been resolved and we're also expecting I'm actually expecting.
Approximately $9 million pay off to come in this way.
That does that not knowing was really to the driver of the elevation in the delinquency Cnine overall I feel.
Very good about where we are as it relates to our asset quality.
Our next question comes from Brady Gailey.
Maybe W.
Hey, good morning, guys.
Remembered another great quarter in the mortgage warehouse, so I was wondering.
The yield of the mortgage warehouse I think it was around 5.5% last quarter.
With the pickup in volumes I was wondering if there was any large change in mortgage warehouse you don't quarter over quarter.
Yeah.
So it it is based on one month LIBOR, so with one month LIBOR coming down the yields came down so that the yields are roughly around 530.
Now versus the 550 last quarter.
What I would tell you is very interesting is as we've gotten more volume this quarter, we've actually gained a bit more pricing power as well, particularly towards the end of the quarter.
What we saw all across the industry and some of the market participants were actually.
Backing away from some volume and and having some capacity constraints, we were able to step in and serve those clients very well.
And so we saw a significant increase obviously in our volumes as well as our pricing hold up holding up pretty well, so again as as Brian and season I've said this business is incredibly well managed.
We have very loyal customers were gaining them every day and so we're very bullish on the prospects to this over time.
You also had the they yield was also slightly impacted by averaged at all time went up to date quarter over quarter.
Because of the way, we do but fees on those with it.
Slight impact on yield due to just the massive volume in the whole system that really as what led to a slightly increased dwell time.
All right that's helpful and then one more on expenses.
You talk about kind of the net 65 million taken out I mean, I think if I look at that slide last quarter. It was a net 30 million. So you all the number continues to go up but longer term as you look out the next couple of years.
Is there more opportunity to continue to get efficiencies or are you close to the level where.
Operating leverage just won't be as great as it has been those last couple of years for you guys.
[noise] Brady this is Brian .
As we looked out we think there or two.
Compelling things on the expense side that we've got to keep both focused on and and one is is making the right investments in our business on products and services and the other is paying for it by driving efficiency and in our existing.
Operations and so as BJ said earlier, we have demonstrated over many years. It we have the ability to continue to think about our business and drive efficiency in the way we operate it.
Oh, you may or May not have noted last couple of weeks, we closed another 20, or so 22 branches. So we're we're constantly trying to make sure that that we're providing high levels of service and customer experience and doing it with the most efficient infrastructure, we can and so.
So while I don't know what the.
The demand for investment will be we think that we've got the opportunity to pay for a substantial if not all of that substantial portion if not all of that by continuing to think about how we.
Reposition our infrastructure and use technology to get more vision for the long term.
Got it thanks guys.
Thank you.
Our next question comes from Marty most be Vining Sparks.
Good morning, and Marty.
As always do I have more of a layer to question and I want to kind of walk through.
Going into year first wasn't really well positioned you are kind of at a seasonal low with mortgage companies.
Fixed income was at its you know kind of cyclical low. So those are kind of deltas. They can kind of kicking in which we've seen over the last two quarters. Once you know should've been expected given what you saw with the interest rates and then the seasonality and mortgage company.
That's you know generated.
About eight cents a gross.
From the first quarter to where right now and the third quarter out of about the non sense now some of that's been offset by loan loss allowance that's been picking up as well.
So if you net that out.
Say that it's about five or six cents out of the nonsense. So my thing now is as we kind of go through this inflection point and we look at the seasonality a mortgage now you still have to revise it could take a couple quarters to burn out.
Well, if you kind of you know going through that Nexidia up you know you kind of see that seasonality. If you look at what's happening in fixed income as much as you have right you know down we still have on the back end of your whole table. There you don't carbs going to be flat on burden the economy still relatively positive given all the loan growth that you talked about so.
Those things are really negative and the positives I think are more related to cash flow in other words rates came down mortgage.
Prepayments have kicked off and so cash flows creating some of this temporary uptick and the fixed income side.
So if the allowance.
Three questions aren't really if you look at the mortgage company seasonality, that's kind of a headwind. If you think about sustainability of fixed income that looks like incremental headwind as we go forward and then lastly, when we look at the allowance have we kinda gotten to a minimum level or is this just elevated because of what we had what the twoq.
Credits or that we charged off this particular quarter. So just trying to get the level all those three things because that really wasn't a dynamic that we went through a in the last two quarters.
So.
There's a lot there Marty I.
No I don't know what sorry.
So.
I guess I'll start on the mortgage company in Ftn and maybe season can give her views on loan loss provision.
But.
I think on on the to counter cyclical offsets, which we've said before yes. They are up.
Because sentiment and the rate environment are down if the if the.
Reverse said had happened maybe they wouldn't have been a strong but our margins would've been better and we would have gotten more incremental income from.
Some of the great loan growth that we've seen so.
I kind of seeing as counterbalances to continue to help us over time in any rate environment or any economic environment continue to improve our earning so yes, I don't necessarily sit here and say well gosh. This this has been great, but it's going to be a headwind we kind of.
Look at the totality of our business mix, which is why we like it working together to allow us to figure out ways to continue to grow the business and as Brian just articulated you know we we are constantly trying to think ahead about how we continue to do that.
Particularly around let's say expenses, knowing that we have to take out more cost to be able to reinvest or any of those types of things. So we are constantly tweaking in managing to continue to grow and.
Well, we'll continue to do that best we can.
And then as it relates to the allowance we believe we're adequately reserved.
And you know we didnt have each quarter comes we will take a look at what's going on in the book at this point I feel very good about our asset quality Marty.
And so.
Yes, we didn't have the two larger charge off this quarter.
I'm not I feel very good about the fourth quarter and the outlet for 2020, assuming the economic conditions remained stable.
Hey, Marty this this is Brian .
The thing that when you went through and you throw doing your reconciliation I didn't hear you pick up was Oh.
Yields on loans were down about three cents in the quarter, just due to lower rates and.
You know the old adage that that every dark cloud houses silverline and I'm not sure that every silver lining has a dark wild and I wouldn't work too hard to the worked out all the cyclical stuff I mean, the end of the day, we have a balanced business model, we understand that the mortgage business will Evan.
Hello, we understand that fixed income business will ebb and flow.
Our outlook for those today continues to be a positive simply because of what we see in customer activity in what we believe about the rate environment. It's.
I don't think there as you describe them I don't think there are a headwind for 2020 as we sit here today.
Yeah. My worry was just that some of these positives kinda ARCT more temporary where some of the negatives or could be more permanent. So that's what I was trying to size up but appreciate Charles willingness stuff to go through that thank you. So so.
Are you barely bearish on long term rates and that they're going to be this low and go down from here.
No. What we generally think is that rates are going to tick down, but they're going to kind of stabilize on a range I was I can be as much volatility. So when you look at your market volatility where you're talking moderate.
I think it's gone flip back once we kind of get into a level and it's just going to kind of be stock and that level. So I kind of goes low yield curve still gonna be flat, you'll get the economy, it's still relatively positive and the direction on rates kind of stabilizes. So it's not going down anymore, it's not going up it's not going down. So if you have that then you really don't have the pre.
Payments that you got on the mortgage backed side and then the revised eventually kind of burn out. So you know that mortgage piece you know, while it's positive right now it doesn't have any lasting duration to it and then you know Susan on the credit side. The only thing that we were at last year ones, we still had or leases of loan loss reserves you know our.
Provisioning was in the you know, let's call it $3 million to $6 million range now, we're kind of stepping up to what $10 million to $15 million range. So you know you just kinda looking at those things happening that the dropdown and rates. The net interest margin doesn't get any better the allowance some provisioning stays higher and then some of these things that we've got that been helping us.
In the last couple of quarters, just kinda burn out over the next you know let's call it two or three quarter. So that's that's the balancing act I'm trying to do as I was looking at it coming into the year, while we were position perfectly I'm not sure now with a teeter totter those things how that all works out. So that's what I was trying to size up.
You must be fairly bearish on the industry as a whole because you know we <unk>. We've got these counter cyclical things and.
And as we've acknowledged a couple of times clearly there there's a cyclical nature, but if the consumer remain strong rates stay strong purchase activity in them, but housing finance ought to be good.
I think there's a.
I wouldn't I wouldn't be as negative as you sound like Youre. This morning.
Well not negative just trying to just balance out the things that are particular to you. So that was really the issue just some first horizon. So generally positive because I think credit costs stay low.
For the duration here so the cycle stays positive loan growth still stays and what you're doing in the core bank with deposit growth on loan growth you know that's a generating a couple of pennies every quarter, so you're you're getting that kind of progression underneath that.
Horizon, we've always had this volatility there have to deal with I'm just trying to size up you know what I've experienced over the last three decades in this process. So that's what I was trying not to get out.
Yeah, I think Marty just just to add one more thing if I could.
As I look at our business, we've got excellent customer activity loan growth.
We've got positive deposit growth and positive mix shift into key markets.
Got really good.
Revenue growth from fixed income and fee income in the business, we've got excellent expense discipline. So.
Yeah, It's hard for me to see what we're not doing right and how we're not taking advantages of the opportunities we have with our counter cyclical offsets today, while also making sure we're looking to the future and making sure that we can continue to put up solid earnings numbers and returns.
Yeah that does two things that I heard that I think are helpful. In a sense of what I was trying to be more constructive on is fact that you know when Susan said you've added more mortgage.
Lenders. So that's a part of the core business grows if you look at the expense you know we are coming through the restructurings. So you should get some more expense savings. So there's probably some levers that you got on the back side to help you know compensate for maybe some of this burn out that I was.
Kind of anticipating.
We're optimistic about it.
Good discussion thank you.
Our next question comes from Casey Haire with Jefferies.
Yeah. Thanks, Good morning, guys one of the one of the touch on capital.
You guys you know taking down the the C. One ratio.
At the floor now can you just give us some updated thoughts on on buyback appetite here because it doesn't sound like you have decent loan growth on the comp still and then you know if we layer in sort of an industry average Cecil hit you could go below that.
10% level I'm, just trying to get your your your updated thoughts on on what the buyback appetite is.
Yeah, Hey kv so.
As you, obviously know C.T., one denominator is period end assets.
And we saw a significant run up in the last week as a month in our loans to mortgage company business.
So.
I would have expected the week before the end of the quarter that our C.T., one would have been probably 30 basis points higher and the period end assets ran up so much him and brought it down to nine and that's exactly why we have the capital levels that we do allow us to take advantage of.
Of organic growth opportunities like that so yeah, we did repurchase about $30 million of shares in the quarter.
Which we felt really good about will continue to try to be opportunistic with share purchase repurchase is if we can but always our first priority is to support customer growth and loan growth and so based on what we've talked about today you know, we still feel good about our loan prospects going into the fourth quarter.
So that'll be our primary way, we'll put capital to work and if there's any any excess that that we feel is there. We'll we'll put it to work in a different fashion, but for right. Now we would probably are in that the nine to not have percent range in the fourth quarter and feel really good about that.
Okay, Great and just one follow up on the on the mortgage warehouse yield.
It sounds like it's still accretive to your loan yields so.
If it's dilutive to your NIM as you guys point out on on Slide 12 is that that has to do with more I guess the funding side of that growth.
Yeah, I mean, just the easiest way to think about it as the loan yield that we talked about a 530 funded that let's call. It one month LIBOR since it has such short duration.
And so you know if you do that math, it's it's just yes, right on or slightly below.
Our margin and that's that's how we calculate it for the walk.
Our next question comes from Jennifer Demba with Suntrust Bank.
Hey, guys actually Steve on for Jennifer.
Hey, good morning once the.
Right. So I just wanted it kinda check up on your Nashville progress Howard loans and deposits growing there do you guys have any goals.
For growing it further.
Yeah. This this is Brian we had very good growth in the middle Tennessee, It's one of those.
A handful of markets that we continue to emphasize or mentioned a couple of others earlier, our Florida region mid Atlantic.
I'd also add into that our Houston market, we still see good growth opportunities in all of those.
The Middle Tennessee has there's been a tremendous growth engine for the economy and on state of Tennessee, as a whole and we have been very successful and seeing good strong customer acquisition and customer growth there and the team that we have in place.
Led by our Carol Yocum is doing a fantastic job its commercial its business banking, we're doing a really good job in the private clients by our music industry business continues to be good so.
We're we're very optimistic about the ability to continue our middle Tennessee growth as well some of these other markets and we think that's got to be a bright spot for quite awhile.
Perfect and I'll, just a little bit on kind of merger interest I mean, you guys talking at all I know you probably may not have the multiple to do something bag, but just kind of wondering what's your thinking there.
Well look we can't ever comment on all specifics and is as BJ pointed out earlier, you know we have a capital base, we have capital generation and we look at it and then three buckets and those three buckets are very simply supporting customer growth and customer active.
Today, which is continued to be very strong putting it to work in a and an M&A context or repatriating that the shareholders and and over the last several quarters, we've seen strong balance sheet growth that we've seen.
So the ability to buy back some stock. So it will continue to evaluate all those opportunities and then try to be smart about how we manage gap.
Our next question comes from Christopher Mariner with Janney Montgomery Scott.
Hi, Good morning, I want to go back to the margin discussion on on slide 10, if.
If the world gets a little more bearish then the 50 basis points down that you have here.
The beta be better necessarily and that would the momentum that you have any other businesses continue do you think into next year.
Hey, Chris So I think if there are you know multiple rate cuts beyond let's say the 50 basis points I do think in my opinion.
That.
Thanks would get a bit more aggressive even more so than they had been on managing deposit pricing because of what.
The yield curve looks like and short and long term right. So.
Yes, I think there would be further opportunity beyond the 50 basis points.
It's very interesting I know you you look at it as well.
But fed funds futures have been all over the math, you know and I've heard all kinds of sentiment about what's going to be 100 basis points of reductions from here over the next four quarters like I said earlier futures as of today would only imply one cut in October and not another one until August next year. So.
It's hard to tell.
We are trying to manage the balance sheet as well as we possibly can.
To mitigate those things in the way we're doing it is strong healthy loan growth managing pricing discipline and deposit mix as well as we possibly can and using those counter cyclical businesses to provide it offsets that that we can't as well so.
Well, we'll see how it works, but we like how will position.
Great. That's helpful. Then just a quick follow up on the fixed income business, the or we best to look at operating leverage year over year and not look at just what happened last last quarter. Just you seem to have had good operating leverage looking at it from a year ago.
Yeah, So Chris like I mentioned earlier, you know I think a pretty good rule of thumb.
Generally speaking is.
Probably a 50% margin on incremental revenue.
In the business right now you know the again to the team out there has done a great job.
Eliminating as much cost that wasn't customer, enabling as possible. So 50 basis point margin would probably be a good way look at.
Our next question comes from Garrett Holland with Baird.
Good morning, Thanks for taking the questions on it.
First maybe on the securities portfolio, it's trending a bit lower in recent quarters, which makes sense given the strong loan growth, but where do you expect that portfolio stabilize and where the new money yields for securities yields come in a bit too.
Yeah.
So it was down I don't know $100 billion. This quarter you know I.
Its base as you said on what we're seeing in terms of loan demand. So we'd much rather put money to work on the loan side, we expect loan direct growth to continue.
In the securities portfolio, we've generally just been reinvesting cash flows.
For the most part mostly back into mortgage backed securities.
Yields are are lower.
Generally speaking than what we're seeing in the aggregate portfolio right now.
Modestly so you can see if you look at our financial supplement.
In the yields and rates section you can see what the yields are doing and they've been modestly coming down as you might imagine with yield curve. So I don't see a material impact nor a change in our strategy to manage the securities portfolio it'll just be based on how much loan demand, we haven't what kind of reinvestments we.
Yeah.
That's helpful and I wanted to get your thoughts on deposit mix going forward I, specifically market index deposits and the relative attractiveness of those funds has raised to move lower.
Yes so.
Interestingly you know they would clearly a headwind as rates were going up they are a tailwind in terms the deposit cost as they come down.
Long term, we want customer deposits versus market index deposits. So we will continue to manage.
Those down as we continue to build customer deposits.
You saw in this quarter, though they were actually up and that's because we saw excess cash coming from the brokerage firms that we do have contracts were sending more money.
Into into our facilities.
So that that happens in has helped to fund our loan growth at lower cost. So that was helpful to us the long term, we'll continue to try to manage it down from these levels.
Our last question today comes from Jared Shaw with Wells Fargo Securities.
Hi, Good morning, this actually team or Brazil are filling in for Jared.
Just one more for me Brian in your prepared remarks, he mentioned that the operating environment has slowed somewhat how can you just frame that comment are you seeing that on the commercial side kind of ex mortgage warehouse business or utilization rates down you can provide any additional color on that comment a degree.
Yeah.
Oh.
It's really just a sense of talking to customers and our bankers talking to customers and and so it's not a scientific measure.
It did it sort of is consistent with job growth, which is by historical standards. Good. It's it's not as great as it was used to.
Patients around the economy, and GDP growth falling and that's consistent with the dialogue that we're having with our customers.
As I said and I.
I would acknowledge that.
Some of it may be a geographic and where we do business. The southeast is still relatively strong and my sense and we don't see well hear anything from customers that that is as negative is what you would read in the eyes, Sam either services or industrial.
And and but we do think it has slowed a little bit.
That said against the backdrop, we as we pointed out customer balance sheet continue to be strong and they continued to be board lighting. So all in all you know we remain optimistic about our ability to continue to grow at a somewhat slower growth economy and looked at the end of the day if.
If were down from three to two that's still not a bad place relative to where we've been for the last 10 or 12 years.
Well, we're still fairly optimistic and I would I would just said just look at our numbers and looking at the broad based growth that we're seeing so you know as Brian said, there might be a lot of discussion and sentiment out there but you.
The numbers are there and we still think that the growth prospects are very strong across all of our business lines across the key markets that we're in we have great people and so we're we're optimistic about our ability to continue to grow the firm.
Got you know then to the day.
Customers or are people to their consumers or was there.
Running big businesses, and and all day longer told the interest rates are down an inverted yield curve manger recession and.
And the politicians talk about how bad everything is and the impact of tariffs and so that's going away and submit it to some extent, but at this point, we don't think it's out of balance and we don't think we've talked ourselves into a recessionary try not to say that we don't do that over the next several quarters.
But at the end of the day, a balance sheet trends and momentum continue to be fairly good.
This concludes our question and answer session I would like to turn the conference back over to Brian Jordan for any closing remarks. Thank you I like thanks, everybody for joining our call. This morning. We appreciate your interest in our company in our quarter. Please let US know if you have any questions or anything that you want further follow up.
Well. Thank you again to all of our colleagues for their great work that you were doing build in our business.
And building our customers in our communities. Thank you very much.
The conference has now concluded. Thank you for attending today's presentation you may now disconnect.