Q3 2019 Earnings Call
Good morning, welcome to <unk> third quarter 2019 earnings conference call.
My name is case and I'll be your operator today.
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No it's not covered a Barbara Callahan head of Investor Relations. Please proceed ma'am.
Thank you Keith good morning, and welcome to see <unk> third quarter 2019, earning conference call. Our call today will be hosted by Ellen Alemany chairwoman and CEO John spots that our CFO . During this call we will be referencing a presentation. That's available in the Investor Relations section of our website at <unk>.
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Forward looking statements disclosure and non-GAAP reconciliations are included in todays earnings materials and within our FCC filing you cover our presentation material prepared comments and the question and answer segment of today's call.
Thank you and I'll now turn the call over to Ellen Alemany.
Thanks, Barbara Good morning, and thank you for joining the call.
I'm pleased to report that we had to so we had another solid quarter performance until it is deliberate continued progress on our strategic plan.
We posted net income of 143 million or $1.50 per diluted common share for the third quarter.
We had a few noteworthy items in the quarter as a result of our strategic initiative that improved our net income by 20 million and John will take you through that was in more detail.
Excluding those items, we posted income from continuing operations of 123 million or dollar 29 per diluted common share.
On slide two of the presentation, we highlight some key drivers of performance.
Our core business continued to post steady growth with average loans and leases up 2% from last quarter and 8% from the prior year period.
Our deposit costs remained relatively flat from the prior quarter as we optimize pricing and continue to grow our non maturity deposit accounts to about 65% of average total deposits.
55% last year.
We remain disciplined on expenses and are on track to achieve our goal for the year.
Credit performance remained strong, reflecting our strategic steps towards more collateral based blending.
We ended the quarter with tangible book value with $55, a 60 cents per share, which is an 11% increase compared to last year.
To further accelerate our strategic plan in August we announced an agreement to acquire mutual of Omaha Bank. This transaction will diversify our funding profile with scalable lower cost deposits through the addition of the market leading homeowners Association banking business.
And it will also expands our middle market commercial banking capabilities with additional products technology and a broader geographic footprint.
This transaction continues to move forward as planned.
We submitted our application to the L.C.C. on September 26, which was a key milestones.
We established an integration management office under the leadership, Mike wait till then Mike is a seasoned banking and integration professional who is joined C.I.T. to lead this effort and drive a robust process around the deal.
Full management team is engaged in the process to complete the transaction deliver on a timely integration and achieve the synergies and growth opportunities that we have identified.
As we've said before we believe this opportunity will create substantial long term value for the franchise in particular, we expect the steel to generate double digit EPS accretion over time and improve our return on tangible common equity starting in 2020.
The profitability enhancement next year, largely be driven by realizing cost savings and deploying excess capital related to the deal.
Includes an immediate 20 basis point improvement and our deposit funding through the addition of the homeowners Association business.
Over to your timeline, we believe we can continue to improve our returns as we begin to leverage the growth synergies and the h. away space and middle market banking.
Expected growth in the H. way channel should take some pressure off other deposit channels and allow us to further optimize our funding profile.
In addition, a lower cost of deposits and integration of regional middle market banking team should expands our addressable market and opportunity for fee income.
Oh, there longer term benefits of the steel are expected to include moving more rail assets into the bank as the overall bank gross which will lower funding costs for those deposits those assets.
With lower cost of deposits. We can also improve our overall risk profile, which should contribute to our goal of achieving investment grade credit rating at the holding company.
Our operating leverage will expand through growth, which will further improve our efficiency ratio and ultimately we aim to free up additional capital as our risk profile better aligns to peers in the industry.
To sum it up we believe there several elements of this transaction that will positively affect our business and I'm mark meaningful value overtime.
We're focused on a first quarter close pending regulatory approval and a smooth and timely integration.
As a result of the multiyear transformation, we have completed to date I'm pleased to say that at the end of September we were added to the KBW Bkx index, which further recognize the C.I.T. as a national bank.
We're glad to be listed among other banks in our industry on the index.
Before I turn it to John I, just want to such a few highlights in our business. We drove strong origination volume in the quarter largely in the commercial finance business capital and consumer Division.
Markets remain competitive however in the rate environment has put some pressure on margins.
We remain prudent and our risk appetite and our growth comes from our expertise in key pockets of the market, where C.I.T. has strength.
The commercial finance business grew average loans and leases compared to last quarter and last year.
Our market position and the aviation renewable power health care and see an eye area should enable us to win strong deal in these vertical as we leverage our industry in collateral back to expertise.
For example, we want to $425 million deal in the healthcare finance business in the quarter, where we served as lead arranger and administrative agent for a long term client.
This relationship and our proven track record enabled us to lead the deal and build the significant treasury management relationship and a stream of capital market fees over multiple years.
This is an example of the deep relationships, we cultivate in this business.
The business capital Division posted another quarter of solid growth with the technology and industrial industries driving volume.
Core factoring volume was up in the third quarter, largely due to seasonality in that business.
Originations in the commercial real estate business were solid however, pre payments continue to be elevated.
As a result assets were down on the quarter, but in line with our expectations for this area or the business.
Average loans and leases in the rail division were flat in the quarter, but our ongoing investments in a modern diverse rail fleet allowed us to maintain a strong utilization rate 95%.
Industrial production has slowed and railroads continues to rationalize their operation, but we believe the quality of our fleet our market expertise and service level are key advantages in the market.
We continue to post strong growth in our core mortgage of small business lending operations.
Total average loans and leases were down slightly in the consumer banking segment, reflecting the sale of nonperforming loans and the run off portfolio as we continue to improve our risk profile.
As I mentioned earlier, we have made progress and shifting our deposit accounts towards more non maturity deposits and strategically reducing our C.D. volume.
We've also optimize their pricing on the savings builds or accounts reflect changes in the rate environment and retention and this pratik remains stable.
We had very good strong deposit growth in the first half and we've taken a more measured approach to growth in the third quarter.
Overall, we have been building on our momentum and it was a solid quarter.
With that let me turn it to John .
Thank you Alan and good morning, everyone.
We had another solid quarter with net income available to common shareholders. Excluding noteworthy items of $123 million were $1.29 cents per common share and we continue to make steady progress on our strategic priorities.
We grew average loans and leases our core portfolios by Cooper said from the prior quarter at 8% from a year ago quarter.
Credit metrics remain stable and we remain disciplined in our underwriting.
We reduced operating expenses slightly despite higher cost related to the mutual of Omaha Bank acquisition.
We launched our bank node program in issued or first unsecured note, which had an investment grade rating from S&P, Oh, six non cool five year term and pricing just inside 3%.
And we grew tangible book value per share by over 2% to $55.60.
On page five we had a few noteworthy items this quarter related to strategic priorities that resulted in a net after tax benefit to earnings and an increase to tangible book value $20 million.
[noise] first we recognized a 53 million dollar tax benefit related to our reassertion that earnings from or operations in Canada would be reinvested indefinitely, which resulted in a reverse little bit of crude tax charge.
If you recall in 2016, we took a charge for similar amount when we decided to sell or commercial and equipment finance businesses in Canada.
With the restructuring completed we've analyzed our remaining operations in Canada and have concluded that we expect to reinvest our earnings there indefinitely.
Second during the quarter, we entered into an agreement to sell or Livingston office building and move or New Jersey operations, which is mostly corporate folks will stem to Morristown, New Jersey, where we entered into a 15 year lease.
We took a 22 million dollar after tax charge, reflecting the impairment of the Livingston building.
The new location will be more efficient for needs and the cost to keep Livingston building operational would've exceeded the increase in the operating cost for the move.
In addition, we were awarded a 22 million dollar New Jersey state tax credit to be used over a 10 year period, starting in 2021.
And a third this quarter. We also took an $11 million after tax restructuring charge related to initiatives to improve operating efficiency and expect the benefits to be realized over the next 18 to 24 month.
I will now go into further detail on our financial results for the quarter, which exclude the noteworthy items.
Turning to slide six of the presentation net finance revenue declined from the prior quarter driven by lower interest income for lower market rates on our floating rate loans as well as lower purchase accounting accretion.
Net operating lease revenues benefited from lower maintenance cost this quarter, while interest expense was relatively flat.
Slide seven is our net finance margin walk net finance margin was 3.06%.
Oh seven basis points for the prior quarter and below our target range.
As I mentioned last quarter, we expected the march into decline to the bottom of the target range with potential for further pressure depending upon the rate environment.
Yields on our loans were down across all businesses as well as our cash and investments reflecting lower market rates.
Net operating lease yields in rail were higher this quarter as lower gross yields from repricing rates were offset by lower maintenance expense, reflecting some of our productivity initiatives and a 3 million dollar at least warranty recovery.
As we anticipated deposit costs were flat, reflecting the reduction in our non maturity deposit rates.
Offset by the pricing of CBS , I will discuss deposit trends a little bit later.
The margin was also negatively impacted by lower interest recoveries and prepayment benefits, which were elevated in the second quarter.
In addition, as Alan mentioned as we continue to improve our risk profile, we sold approximately $200 million of nonperforming loans from our legacy consumer mortgage or LCM portfolio in July .
We received proceeds in excess of the carrying value, which will be recognized over the remaining life.
[noise], however, given the higher risk profile. These loans were also higher yielding.
On a pro forma basis, we estimate the sale reduces margin by approximately one basis point.
After considering the reinvestment into new mortgages with a stronger credit profile and at current market rates.
We're continuing to look for opportunities for additional sales of LCM loans in the coming quarter.
Turning to slide eight other noninterest income decreased by $5 million compared to the prior quarter, which if you recall included a 5 million dollar gain on the sale of alone that was previously written off.
Fee revenues factoring commissions gain on sale lease equipment and income from our bank owned life insurance program all increased modestly.
Turning to slide nine.
Operating expenses.
Excluding intangible asset amortization.
Decreased slightly from the prior quarter, but includes nearly $8 million in expenses.
Related to the mutual of Omaha Bank acquisition.
The prior quarter included a little under $3 million and expenses related to the acquisition and then that difference is reflected in the increase in professional fees.
Cost incurred were taught due diligence.
Legal and regulatory matters, a normal course, including me O C C application process as well as external support related to ongoing integration.
Advertising and marketing cost related to deposits increased to a more normalized level. This quarter as we had significantly reduce the spending in prior quarter as a result or excess deposit growth earlier in the year.
We estimate that approximately $8 million to $9 million of operating expense. This quarter resulted from the adoption of the new lease accounting standard, including $5 million or property tax expense that was offset in other noninterest income.
Year to date operating expenses include approximately $25 million related to the new lease accounting standard and we now estimate that the new standard will increase operating expenses by $35 million to $40 million in 2018.
The $20 million to $25 million offsetting increase in other noninterest income.
The net efficiency ratio increased to 57% from 56% last quarter result, resulting from a reduction in revenues slightly offset by the reduction in expenses and reflects the aforementioned lease accounting changes, which we estimate increases the rate by more than 100 basis points.
Well, our operating expenses have been elevated for the acquisition costs. We have been running ahead of schedule and achieving or 2020 target operating cost reductions.
As a result, we expect to meet our 2018 guidance. Despite the higher cost related to mutual of Omaha Bank acquisition.
[noise] Slide 10 shows our consolidated average balance sheet.
Average, earning assets were essentially unchanged from the prior quarter.
During the quarter, we reduced investments and grew average loans and leases by 1%.
The increase includes 2% growth in our core portfolio, partially offset by the sale of the non performing LCM loads previously mentioned as well as the continued run off of that portfolio.
Slide 11 provides more detail on average loans and leases by division.
During origination volume across most of our businesses drove quarterly growth or core portfolios.
Commercial finance grew 2% from the prior quarter, driven by aviation lending health care renewable power in various sub verticals within seasonally.
We continue to focus on collateral based lending, which represented about 60% of commercial financers origination volumes.
Well risk adjusted spreads have remained relatively stable loads in this business are floating rate and the reduction in portfolio yield reflect the decline in LIBOR rates this quarter.
And business capital continued strong new business volume in our equipment financing portfolios in higher seasonal factoring activity drove an increase in average loans and leases.
Growth in our equipment finance and small business solution portfolios continues to outpace the industry.
However, new business yields in certain areas are being pressure from the decline in swap rates.
From competitors looking to aggressively at assets.
In real estate finance, we continue to see good origination activity well prepayments remained high they occurred later in the quarter and as a result average loans were flat.
New business spreads have remained relatively stable however portfolio yields declined this quarter as a result of lower LIBOR levels.
Our rail portfolio increased modestly this quarter as new deliveries, mostly offset depreciation <unk> portfolio management activity.
Despite growing excess capacity in the North American fleet industry and industry and slowing growth in many industrial sectors or real team continues to successfully managed fleet utilization, which declined to just above 95%.
Leases reprice down 9% on average this quarter.
We continue to see strength in tank car lease rates, particularly in certain chemical in petroleum markets.
This has led to improved pricing and demand for those cars and as a result, the repricing gap is closing faster than originally expected.
As it relates to our freight cars with the persistent industry surplus, which increased to 22% and slowdown in manufacturing sector freight car repricing levels remain modest downward repricing in most markets.
The sand market continues to show the most weakness.
In addition, the late harvest season, and continued uncertainty in trade policies are impacting the export demand for grain and other agricultural products.
I believe it does we have mentioned in the past our market position strong portfolio management expertise customer service and quality of our fleet or key strengths as we continue to navigate in an uncertain environment.
We continue to expect lease renewals on the total fleet to reprice down 10% to 15% through 2018 in its 2020.
Well, we expect this to vary quarter to quarter, depending upon the number and type of course renewing.
In consumer banking average loans were down slightly reflecting growth in the core business offset by the sales the nonperforming loans and continued run off of the legacy consumer mortgage portfolio.
Retail mortgage origination activity remains strong driven by refinancings little over 80% of our retail volume coming through or digital channel.
Total new originations continue to have ltvs below 80% and FICO scores in the 775 area.
Slide 12 highlights our average funding mix.
Total deposits declined slightly but remained at 85% of total funding.
Average unsecured borrowings remained relatively flat the prior quarter, but increased at the end of the quarter. As we took advantage of strong market and see I'd keep specific fundamentals at the end of September and funded a significant portion of our needs for the mutual of Omaha Bank acquisition.
As I mentioned earlier, we launched our bank load program and issued $550 million six year non coal five unsecured notes at a rate just below 3%. It was rated investment grade by S&P and he offering was significantly oversubscribed.
[noise] slide 13 illustrates the deposit mix by type and channel.
Overall deposit rates remained relatively flat, reflecting a reduction in rates are non maturity deposits offset by an increase from repricing Cds.
We continue to shift to a higher portion of non maturity deposits, which we believe will perform better, especially as rates continue to decline.
In line with that strategy average deposit balances were down slightly reflecting a reduction in time deposits.
Partially offset by an increase our savings and money market accounts.
In the direct bank. In addition to the five basis point reduction in rate on May Onest, we reduced our savings rate builder by another 20 basis points over the course of the quarter, while growing the average savings to pause it builds by 4%.
We continue to reduce the savings build a rate by another 10 basis points on October onest and have not seen any meaningful levels of attrition as a result of these moves.
Notwithstanding any rate reductions from the fed we're likely to continue to optimize our deposit rates bouncing or need to fund growth and are continuing effort to optimize our overall funding costs.
Turning to capitalize on slide 14, the common equity tier one ratio remained at 11.6% reflecting quarterly earnings.
Or WSE growth.
Then a decrease in disallowed deferred tax asset.
Capital ratio remained elevated relative to our target.
As we stopped repurchasing shares due to the pending mutual of Omaha Bank acquisition.
As a result, we now expect our common equity tier one ratio to remain in the mid to high 11% range by the end of the year.
[noise] upon closing of the acquisition our common equity tier one ratio is expected to decreased to approximately 10% lower end of our target range.
After the close our intention is for me out of the market for our common shares in order to increase our common equity tier one ratio to 10.5% within the ensuing 12 months, which is in the middle of our target range.
Slide 15 highlights our credit trends.
The credit provision this quarter was $27 million and that charge offs declined to $26 million or 34 basis points.
Both slightly below our guidance range.
Net charge offs continue to be primarily driven by commercial finance at school business solutions within business capital.
Non accrual loans increased by $27 million driven by an increase in commercial finance and business capital, partially offset by a reduction from the LCM loans.
A little over 60% of non accrual loans are occurring in total non accrual loans remained below 1% of totals.
Our credit metrics and the broad credit environment remains stable.
New business origination to reflect our continued efforts to enhance our risk profile and as a result can she did come in at a better risk ratings than the overall risk rating of the performing portfolio.
Our reserves remain stable and strong at 1.55% of total loans and 1.87% for commercial banking and continue to reflect more than four times last 12 month net charge offs.
As I mentioned in September the Barclays Conference, we will adopt Cecil at the beginning of next year upon which the allowance for credit losses must be cover must cover credit losses over the entire remaining expect life of the loans it commitments and we will consider future changes and macroeconomic conditions.
We have formed cross functional implementation of working groups in preparation for the adoption of Cecil and we continue to develop and test our last fourq loss forecasting models and methodologies.
Our expectation today is that the impact on tangible book value, Billy Rendell will will be relatively modest at $50 million to $100 million.
This excludes any impact for the mutual of Omaha Bank acquisition, which we are still working through.
From a regulatory capital perspective, we maintain the option of phasing into capital impact over a three year period.
We expect to increase in our allowance for loan loss reserves, however to be around 200 $300 million as they increase is expected to be largely driven by our purchase credit impaired or PCR loans in the legacy consumer mortgage portfolio.
I would emphasize the tangible book value would not be impacted by the increase in reserves from PCIA loans.
As the reserve will essentially replace the existing nonaccretable discount with a corresponding increase in the loan balance.
Our current estimated range assumes moderate economic growth.
Continued low lozano unemployment at a stable credit environment.
It also will be driven by economic conditions and the composition of our loan portfolios at the adoption date.
Therefore is subject to change.
We've included a slide in the appendix that illustrates our current thoughts.
Slide 16 highlights our key performance metrics, reflecting the trends we just discussed.
Our effective tax rate was 24%, excluding the noteworthy items, which is slightly below our guidance.
Our return on tangible common equity from continuing operations was 9.8%.
If you normalize for the semi annual preferred dividends paid in the second and fourth quarters or ROTC would have been nine and a half per se.
Page 17 highlights our outlook for the fourth quarter.
For the fourth quarter, we continue to expect low to single digit quarterly growth in our core portfolio and slightly lower growth in our total portfolio.
Given the challenging rate environment, we expect our margin for the fourth quarter to continue to decline to between 2.9, and 3%, resulting in our full year margin being around the bottom of our target range.
This takes into account the impact of the September rate cut and it continued rate decline in the fourth quarter, which will continue to pressure yields on loans and investment securities.
Net real yields are expected to decline from repricing of renewed leases.
Also we had a 3 million dollar warranty settlement in the third quarter that is not expected to recur.
We expect declines in deposit rates to only partially offset the asset yield declines.
As I mentioned earlier, we expect to meet our full year 2019 operating expense guidance. Despite the additional cost related to the mutual of Omaha Bank acquisition, which implies the fourth quarter operating expenses should be flat to slightly down when compared to the third quarter.
The net efficiency ratio is expected to be around the mid fiftys next quarter, reflecting a higher level of capital market fees and gain on sale of assets to offset lower net finance revenue.
Credit performance remained strong and as a result.
For the fourth quarter, our expectation is for the credit provision to be $25 million to $30 million.
$35 million, a 5 million dollar reduction from our previous outlook.
The effective tax rate absent any discrete items is expected to be consistent with our full year outlook.
We expect our common equity tier one ratio will remain high in the mid to high 11% range.
Given the impact of the rate environment, and the higher capital level, our return on tangible common equity for the fourth quarter normalized for the preferred dividend is now expected to be known and they have to 10%.
We remain focused on continuous improvement and closing the mutual of Omaha Bank transaction, and we will update our 2020 guidance on our fourth quarter earnings call and with that I will turn the call back over to help.
Thanks, John .
Moving forward, we're focused on advancing our strategic priorities growing our core businesses optimizing our deposit costs, managing our expenses and maintaining credit discipline.
In addition, we're focused on completing the mutual of Omaha Bank transaction pending regulatory approval.
We believe this deal will drive significant value for CHP and unlocked potential for our customers communities and shareholders with that we're happy to take your questions.
Thank you we will now begin the question and answer session.
Ask a question your press Star then one on your Touchtone phone, if you're using speakerphone. Please pick up your hands that before pressing the keys to tell your question. Please press Star then too.
This time, we'll pause momentarily to assemble a roster.
As the first question comes from Scott Valentin with Compass point.
Good morning, everyone. Thanks for taking my question.
Just trying to look out into 2020 on the cadence of the margin obviously out looking for exact guidance, but.
All of it obviously depends on what the fed does but if we assume the fed that's rates again.
In the fourth quarter than kind of holds off.
The margin then drop again Q1 20, and then with the mutual of Omaha Bank closing at the end of one Q potentially margin could improve in twoq given the lower cost of deposits is that that kind of a fair cadence.
I think it's a fair cave Scott I mean, the reality is looking going to have.
A series of rate cuts that happened this year that are going to continue to flow through into 2020, So you'll have July .
September and we're modeling October and who knows what happens in December .
But what's your point is spot on and part of the value of the mutual of Omaha Bank transaction is obviously the lower cost deposits that are then scalable and so that provides us an instantaneous benefited of 20 basis points in terms of.
Deposit funding and more important than that I think from our perspective is the fact that it's actually scalable.
So yeah I think for the rest of this year you expect.
July .
September October to work through.
Impact rest of 2020.
The benefit of bank of.
But mutual of Omaha Bank coming and hopefully early in first quarter and then I think the other lever that we have to play is.
On the deposits and so if you look at what we've done already so we've had two rate cuts we've pulled down the online rate.
On our savings builder product by 35 basis points.
We expect that we would move again.
I'm.
Very early in November .
To kind of keep pace with.
The fed actions and so that becomes the wildcard, but again as.
As you look at the change or what we can actually do when the deposit space you have to leverage you have rate.
Which is in large part driven by competition in the marketplace.
And you have advertising and marketing, which we've also tried had been very circumspect around and so you don't want to cut too quickly and I think so far we've had a pretty good node because we haven't seen.
Any meaningful levels of attrition in.
The savings builder product.
Thanks, that's helpful. Just one follow up question.
Average core loan growth was a little better than them and I expect it was like 2.3% linked quarter. I know you mentioned factoring seasonality is that the primary driver or you're seeing broad base, a little bit better outlook, maybe there's some core loan growth.
Scott This is Alan were seeing.
We had a really solid quarter.
And we're actually going into the fourth quarter with a very very strong pipeline.
And that means despite.
Customers being cautious with capital spending theorists I've been economic slowdown et cetera, but.
I would say that in business capital, that's probably the strongest growth in the business.
In commercial finance, the key verticals that had been performing including the aviation lending healthcare real estate and renewable project finance.
In real estate, we're not expecting any significant growth and as John mentioned, we had a lot of prepayments but were also been.
We had some really good capital markets fees from syndicating more deals in real estate.
So overall.
It wasn't just seasonality in factoring business and pipeline is very strong.
Thanks very much.
Thank you and the next question comes from Eric Wasserstrom with UBI us.
Thanks, very much just two points of clarification. Please.
First just on the MPL trend.
You mentioned the.
Sales that you sold but then it looks like the NPL ratio also increased in the absolute level.
Also sequential increase can you just walk us through with what's occurring there.
Yes. So the Npls are basically had been for at least the time, but I've been here $300 million plus or minus 25, or so I think there's probably a little bit of confusion around the impact of the LCM portfolio. So the LCM portfolio, which has about a 205 million dollar.
Those were for the most part not included in non accrual loans at all so it's not like we came down it went back up.
Most of the LCM portfolio was purchased credit impaired in never included.
In non accrual so what you're seeing is non accruals kind of trending right around 1% of total loans.
So nothing has really changed in the last.
I, probably 10 quarters that I've been here, yes, and I just want to reiterate that we don't see any specific indicators that suggest any type of the credit downturn and when I think we've been talking about this a lot. This year, how we really transformed the whole credit profile of this company but.
Right now criticized loans at the end of the third quarter totaled 3 billion, which is just like 9% of commercial loans and leases. This is kind of the lowest level that I've ever seen this at the company here, it's down about a billion dollars from a year ago.
And also we have.
The company less exposure to consumer that were under weighed on residential mortgage were not in the credit card business.
Cash flow loans now are only about 10% of our total exposure. So I feel we're in really good shape here on the credit line.
Yes, thank you for that and.
And so just to follow up on then on the NIM.
Yeah, I think as I, just sort of extrapolate what the short term trend is let's say heading a bit lower.
Factor and potentially.
The impact of mutual of Omaha, and then look out.
Into next year it seems that the consensus expectation is for.
Hey, let's say 30 or 40 basis point.
Rise from from the current level and maybe some of that is is a is reflecting the expectation of.
Of the benefit from a lower funding costs from the acquisition, but.
No not pushing for guidance, but just directionally, how do we think about the roll forward of the NIM into over the next few periods say.
Look I think it's the same analysis I went through Scott I mean, the reality is that we're in the midst of our planning process right now and it's a little bit of a juggling act because we're trying to do is dimension.
Exactly when we think.
The mutual of Omaha bank transactions going to close.
And we think it'll be in the first quarter, hopefully sooner rather than later.
But I will have a huge bearing on the.
The NIM guidance and so.
As I said, we're in the midst of our planning process right now and so are you really can't see much more than that.
I do expect that we will come through in the fourth quarter with more comprehensive guidance.
Hopefully even have some perspective from the FCC in terms of win.
We might expect the trade to close.
Excellent thanks very much.
Thank you and then asked question comes from Chris Kotowski with Oppenheimer <unk> company.
Yeah good morning.
I was reading this kind of in a hurry. This morning, I noticed you said in the text somewhere that R.W. ways went up.
As you.
You increased the yet the rail order book and I guess that particularly makes sense.
A share buyback is being suspended and.
You know you have excess capital right now, but how long does it take well hey, how material is it in terms of the.
Uptick in and the risk weighted assets and how long does it take before those the order book becomes an earning asset and how much is involved.
Yeah, I look like Hey, we have a fairly rigorous program around portfolio management, and so I think Chris as you know we've been taking cars out of.
The holdco, which are subject to fresh start accounting and realizing gains that we've probably been doing $15 million to $20 million a quarter.
When we buy new cars, which is on a fairly regular basis.
You know they come when they come most of the I think we took six took delivery of 600 cars in the quarter.
And to say about Florida those cars were in the in the tank space and so it's not really a special event. The extra thing I would say about or W. ways is is that we're gonna be Berg circumspect in terms of managing or w. ways across the fourth quarter.
Just because it's going to work into the calculation of the amount of shares that were actually going to deliver.
Two mutual of Omaha so.
I think we're going to be very mindful in terms of the way, we think about risk weighted assets in terms of the assets. We put on the kind of returns are generating the importance. They are they might have to the customer.
And where we have optionality probably.
Through a little bit less so that we can kind of provide.
A little bit less a common equity to mutual of Omaha, which is part of which as you know we can deliver up $250 million.
In shares to.
The mutual of Omaha apparent.
Oh, okay.
Alright Thats it from me thank you.
Correct.
Thank you and once again, if you'd like to ask your question. Please press Star and then one.
[noise] and the next question comes from its in contact with Stephens.
Thanks, Good morning, I appreciate the fourth quarter guidance details there I'm just kind of.
We think about 20, Tony I know, it's it's early and you're still planning, but kind of broadly speaking when you think about the fourth quarter is that a good jumping 0.4 2020 are there.
Particular items.
There that we should note and then kind of focusing on the NIM again remember the last time, we had a low interest rates you had floors and I was just kind of wondering if there any other mitigating factors to asset yields that we should be thinking about four or ask yields declining for the for 2020.
Yeah, I listened and I think we're in great shape going into 2021 is we further strengthened the management team.
One is we have one really experience individual who's done a lot of integration work running that mutual of Omaha integration for us.
Then on the commercial banking side.
Brian in date harness to run the commercial finance group very seasoned.
And Phil Robbins trend asset management capital markets and Jim Jeff This trend Treasury management, so what you're going to see on the commercial banking side is more a tradition more traditional banking model as we integrate utility Omaha, which is leading transactions more asset management strategies we.
I have already on and North bridge, both up and running those are JV structures.
That allow us to originate deals that wouldn't be are like credit appetite, but you know we move them into these joint ventures, and then Jim Jeffus running Treasury management, so that we can generate more.
Merchant card commercial card to Treasury management revenue from our customers. So all that is kind of in place up and running now and.
I think the mutual of Omaha deals going to be game changing for us because that 20 basis point drop in deposits is going to allow us to play in space.
From a probability defaults two notches below where we play today.
I will put us in regular more commercial banking land in terms of the competitive landscape. So I feel really positive.
We got our application and I mutual of Omaha on 30 days.
We're in the comment period, now, which ends on Saturday and as John said, you know, we're hoping that this deal gets approved.
In the first quarter, obviously the earlier we came in.
Get approval on this the better for us, but we're in good shape.
And Vincent just to to hit your questions Q4, being a good jump off point I would say it definitely not.
We're going to continue to aggressively manage our deposit cost down I think as we have thus far and as Alan said the mutual of Omaha Bank transaction is a game changer for us. It. It just gives us an enormous amount of optionality. So on a go forward basis.
We feel very good about the trade and I think the more time, we spend.
Looking at it the better we feel.
Okay, Great and I guess on the asset yield side, just following up on that the asset yield side are we are you close to your floors or is are there other mitigating factors, we typically think about the.
Life or declining and that's just directly translating reserve other factors to that is the contracts by concert thing. So I think a lot of the relationships have floors a lot of them don't.
So it depends.
You know.
As go low at LIBOR So goes.
You know the net interest margin improving the other thing too as you wonder at some point.
Our our spreads going to starting to widen out a little bit to offset some of that but.
It's just incredibly hard to forecast.
50% of our loans right now or floating so if you look at.
All of commercial finance, that's essentially all tied to one of three month LIBOR or if you look at commercial real estate, that's 100% floating that's tied to.
Largely one and three month LIBOR floor.
Which were down I think 30 127 basis points in the third quarter, and then essentially half of our.
Consumer mortgage book.
As floating rate so.
Yeah, It's a big part of the book.
Okay got you and then switching gears.
On the I'm, just kind of broadly as you're talking to your customers is there any sort of things you're hearing I know when we read news reports people are concerned about a recession and about maybe a slow down just kind of what you're wanting to get a sense of what you're hearing from your customer sensor probably good to read into the U.S.
Economy, and then any sort of watch list in this industry is you're looking at my no credit has been a concern for or sorry energy has been a concern for some of things just your thoughts there. Thanks.
So I would say just in general what were observing is that customers are cautious with capital spending you know I think that there are.
Kind of indicators in the market other potential macro slowdown.
There is obviously the geopolitical risk out there.
We are hearing anecdotally that tariffs are affecting.
Some of our customers I mean, we had.
Actually some of our leasing customers. They used equipment market is really really strong right now because new orders on some equipment like material handling equipment is taking six to 12 months.
Some consumer electronics are taking much much longer order book because of the impact on terrorists.
So we are seeing some of that in that factoring business.
I think what we heard from customers is the terrorists Darren affecting the Christmas season, but it may impact potentially.
This spring season, I think in terms of.
Energy I mean, obviously, we finance oil and gas exploration and production companies through our.
Railcar leasing business.
But as energy production in the U.S. has moved to really greener and cleaner so as our lending business and we've been doing a lot of project finance and that renewable energy space.
MP midstream and services energy loan exposure is like less than a billion dollars I think it's $945 million are less than 3% of our total loans.
And.
So I think that we have pretty reduce our exposure substantially in the energy space.
So I think on the credit side, we've been in really.
If you think about everything we've done over the last several years, we've de risked the company from certain businesses like financial freedom.
Nacco, which was the international rail the commercial air portfolio.
Now heightened standard bank, we have stress testing and our portfolio et cetera, we've kept all those processes in place, even though we're no longer see car bank.
We build out second line at defense, we have.
Credit review in place. These were all thing CHP didn't have several years ago that are in place now. So I think we feel were better prepare to.
To withstand challenges the downturn in the market than we ever had been the company's history.
Great all very helpful. Thanks, so much.
Thank you and the next question comes around so janowicz with us today.
Thanks.
One of things about that mutual of Omaha acquisition.
That seem to came up come up and I'm coming up this review, but I view. This the positive deal, but some of the pushback I got from speaking with investors. After this was.
How many of these do we expect in the future and should be concerned about you know this management team.
Routing shareholders further bye bye bye future jeers deals with kind of longer earn back period. So what's your what's your view and of course this acquisition of your appetite for additional deals in the future.
We feel that mutual of Omaha was a really unique opportunity for CHP in that it enhance our deposit funding and it really helped us build out a middle market banking franchise and although on a short term basis. It was dilutive we think it's gonna have.
Positive impact of.
Like 80 basis points of Razzi in the first 12 months and you know hundred.
Thereafter, but.
If you any any any feedback that we've ever had on C.I.T. as.
You need more long term source of lower.
Beta deposits.
And secondly, more earnings and Mysteel solves for both those issues. We just so we thought it was really good opportunity for us and we think that the benefits of the steel is going to have really long term implications for the company in terms of kind of fixing those two challenges that we had.
And I would say that this management team has time and time again says that we're always open to opportunities that are going to help accelerate or create more value for the shareholders.
But right now this team is really focused on executing this deal.
As quickly as possible and really I'm showing the market that.
Even though we we made a long term decision here for the company, we took a little short term pain to do it.
At this team is going to execute the steel and show the market that we really created a lot of value here.
Thank you.
Thank you.
As Tom I would like to return the Florida management for any closing comments.
Great. Thank you everyone for joining this morning, if you have any follow up question. Please feel free to contact the Investor Relations team you can find our contact information along with other information on C.I.T. Dot com. Thanks again for your time and have a great day.
Thank you that concludes today's call. Thank you for participating.