Q3 2019 Earnings Call
Ladies and gentlemen, today's conference is scheduled to begin shortly piece continues standby. Thank you very patients.
Welcome to one trust financial Corporation's third quarter, and yet today 2019 earnings conference call.
At this time, all participants are not listen only mode.
The question during this session you'll need to press star one on your telephone.
If you acquire any further assistance please press star zero.
Following overview, there was offset by Edward Wehmer, Chief Executive Officer, and precedent and David Dykstra Senior Executive Vice President and Chief operating officer, there won't be a form of question and answer session.
During the course of the today's call when Trust management May make statements that constitute projections expectations beliefs or similar forward looking statements.
Actual results could differ materially from the results anticipated or projected in any such forward looking statements.
The company's for looking assumptions that could cause actual results to differ materially. Some information discussed during this call are detailed in our earnings press release and the companies must be sent Form 10-K .
And any subsequent filings on file with the FCC.
Also our remarks made reference certain non-GAAP financial measures our earnings press release and slide presentation include a reconciliation of each non-GAAP financial measure to the newest comparable GAAP financial measure.
As a reminder, this conference call is being recorded I when I turn the conference call over to Mr. Edward Wehmer.
Thank you good afternoon, everybody welcome to our third quarter earnings call, let's be was always or Dave Dykstra.
Our Chief operating Officer Kid Bobier.
What are you cater our general counsel and they start to see helpful.
We'll have the same format as usual I'll go some general comments regarding our results.
Turning over to Dave for more detailed analysis of other income other expenses in taxes that could mean for some summary comments about the and thoughts about the future and then have some time for questions.
Under the financial results for the quarter and year to date in general the quarter can be summarized as follows record quarterly earnings nice people say that again very strong organic balance sheet growth margin on net interest income pressures due to rate environment effectively offset by strong mortgage results and balance sheet growth.
Credit metrics returned to historically low numbers.
Onetimers being the MSR valuation adjustment, that's the FDIC refund.
$4 million, each and basically offset each other and we had about $1.3 million pretax and acquisition related expenses.
That covers $99.1 million for the quarter up to two one of course $270 million for the year, that's up 2%.
And can be said for the earnings per share.
Year to date basis for fit.
Well, it's 60 compared to $450 69 go down 38 for the quarter were up 22% from last quarter, but then last quarter General included some extra charges on the credit side.
Well get that income pre MSR valuation adjustments the quarter up 21% and the you're up 9%.
Same for earnings per share so close to the double digit earnings growth did we that we project in the we always look for.
Turning to assets was up a 1.16%.
Equity 11 42.
Return on tangible equity 14.36.
Overhead ratio dropped to 140 due to balance sheet growth and the fee income on the mortgage side that 24 basis point drop basically offset the drop in the net interest margin.
Oh, it all pretty good quarter concerning the rate environment in the headwinds that we had.
The NIM.
It's been frequently pointed out today.
Fell 25 basis points is earning asset yields fell 21 basis points interest expense rose two basis points and that and then a prefunds ratios positive margin one basis point O'neill 12, 14 basis points loans held for sale Oldham fell 70 579 basis points.
Well could it be management yields fell 30 basis points the drop in liquidity management yields was due to the $812 million increase in average liquidity management assets during the quarter. This increase at the time do you ended the quarter had yet to be invested into longer term securely securities as evidenced by the drop in liquidity mask.
Portfolio duration.
From 4.1 years or 3.4 years.
During these assets in the longer term securities will assist a this part of the margin contribution going forward well are well underway doing that a as we speak.
Goal is to maintain or approximate six your duration that liquidity management assets. So we have some opportunity there.
Also resulted in our loan to deposit ratio plug into our desire to 85% to 90% range, but just barely at 8.6% down from 92% in the prior quarter.
I knew it on the interest expense front, the positives expense increased six basis points in the quarter, but flat from a month of June run rate.
As you know it takes time to decrease deposit rates were actively and aggressively working to do this.
And decrease the cost of funds on our deposit base. So there's a lot of opportunity here also.
Consumers don't know what LIBOR is LIBOR can fall.
But until you get moves in prime it's hard to move your deposit rates in this competitive environment, but we feel pretty good about where we are.
Or overall cost of funds in there just bring your liabilities was up five basis points deposit increase plus a full quarter over $300 million in sub debt.
<unk>, which was two basis points was offset by lower funding and other funding cost decreases.
The net interest income from quarter to decrease is only $1.3 million.
I was telling somebody Sig.
I can't eat net interest margin I could eat net interest income and its by $1.3 million. We believe that that's easily made up through the investments that we've made in liquidity management and as we lowered the cost of or a cost of funds.
We we feel very good about and continue to grow by the way we feel good about where we where we are right now.
Going forward, depending on the Red Robin for the rate cuts would not be appreciated by the way we expect the margin to be underage decreased pressure due to our ability to deploy liquidity management assets higher yielding securities Gresser deposit cost cutting where we can work.
We're closing, yes, those as TC deal the countryside bank deals, which will add approximately 800 million a total assets.
And additional organic loan growth more on this later.
Net interest income should girls read all the above additional growth organic franchise growth.
The other income another expense side, they will be reviewing these areas in detail, but later like to provide some high level remarks.
I believe obviously the quarter's greatly influenced by mortgage banking results.
If you know our business model you know that we have a very diversified model with internal hedges in the in the businesses that we have.
When rates fall, our mortgages take off and cover while we well we get the margin squared away.
And and go from there.
And it's working in that regard I know a lot of people think that mortgages the mortgage businesses too volatile to be considered core.
But this is an integral part of what we do on a part of their overall management and it's working as we anticipated we expect strong growth in the strong results in the fourth quarter and hopefully in the first quarter rates remain where they are being very aggressive on the mortgage side, our new product a person can apply for mortgage and.
Basically little over an hour on line with it and have it in and we were able to turn around relatively quickly. So.
We were advertising we believe that this is a it's a good thing for us that's working just as we anticipated.
<unk> expenses were in line and consistent with prior quarter. When one considers increased commissions on increased mortgage business.
Other than that I think we're in pretty good shape. The net overhead ratio fell to 140, the 25 basis points increase basically offset as I said earlier the drop in the margin.
This coupled with a return to historical norms and credit cost, resulting in a record quarter we experienced.
One timers included offsetting MSR valuation adjustments FDIC insurance refunds Rose 1.3 million acquisition related expenses, one board add back the after tax or those none of those one timers, we would have experienced their first quarter, where we exceeded $100 million.
We look forward to achieving that milestone run very very soon.
If one were two omit the negative MSR valuation adjustments for the year, we will as I said, it really would be close to achieving double digit earnings growth objective is despite the second quarter credit blip that we had.
On the balance sheet side, we continued our strong balance sheet growth in the quarter.
Assets were up a billion to to the almost.
$35 billion.
Average, earning assets were 31 from 29 of them billions seven.
Loans were up $405 million.
With a 364 million dollar head start in the fourth for the fourth quarter.
Due to the average unending issues that we always were always seem to book things at the end of the corridor, where we start with a great or a good head start going forward.
Oh deposits were up almost 1 billion to well that's after returning over $500 million and.
Spencer brokered funds.
It occurred during the quarter that will help US also an overall cost of funds.
So on average our deposits were up a billion eight.
Loan deposit ratio at 89.6% as I said.
And I talked about the liquidity management, a yield and the investment of those.
The were down 30 basis points, but we expect to fix some of that up.
Through the investments, we're making and have made already this quarter.
Loan side.
Loan with loan growth is good across the board.
Pipelines real estate loans, a commercial residential grew 257 million.
Insurance premiums and ask for 240 million and basically see an eye, our commercial portfolios relatively flat down a little bit.
We still have good pipelines were booking a lot of deals, but we're seeing.
Companies sell we're not we're we only lost maybe 89 $90 million going out to other institutions last quarter, that's consistent with every quarter, we've had a in the past three or four quarters.
Most of them go to Finco companies, where we retained a deposit relationship, but we're seeing a lot of.
Recaps and dividend recaps people, taking money out in more highly leveraged transactions that we don't don't fit into our.
Credit appetite.
So all numbers if you look at the pay downs of what we've had the numbers are consistent over the last four quarters.
[laughter] pardon me, we start to fourth quarter close to 350 million a head start on the loan front as growth again this quarter was backend loaded our pipelines remain consistently strong.
We expect to continue a growing loans in the single digit area and single digit percentage wise consistent with our prior statements in that regard in credits that as mentioned credit metrics returned to historical norms and pcls decreased and totaling 6.38% of Outstandings. This is as low as it's been they tie.
Given the recent past.
James who said for nonperforming assets, which stood at 44 basis points, a total assets again.
As long as they've been in recent past charge offs. A 9 million included 4 million a charges that was related to the three credits we discussed last quarter. They had been reserved for so a in that previous quarter and provided for so that they are behind US now I declare the issue closed on these pre.
Secular bad assets and good written still mall.
Charge offs with according to your were 15 basis points of average total loans.
We expect that to be a number going forward that we're comfortable with we continue to pull the portfolio looking for problem credits before they come problems.
And get them, an expeditious basis is there still number of nike's out there who will eat anything so we.
When we ask somebody to leave they can find the new home relatively quickly with that matured over to Dave Southern come another expensive, Texas.
All right. Thank you had as normal I'll briefly touch on the non interest income and expense actions that had a.
No significant variations and just in general.
So turning first to the non interest income.
Our wealth management revenue stayed relatively steady at $24 million from the third quarter compared to 24.1 million in the second quarter. This year and was up 6% from the $22.6 million recorded in the year ago quarter.
Overall, we believe the third quarter of the sure was another solid.
Period for Us and our wealth management segment.
Mortgage banking revenue increased by 36% or $13.5 million to $50.9 million from third quarter from $37.4 million recorded in the prior quarter was also up 21% from the $42 million recorded in the third quarter of last year.
The increase in this category as revenue from the prior quarter resulted primarily from higher levels of loans originated and sold during the quarter a mix of originations weighted more heavily to the higher margin business.
Versus the prior quarter aided the higher average production margins, though we basically our have won down the correspondent.
Channel of our of our mortgage business during the quarter.
The company originated approximately $1.42 billion of mortgage loans for so third quarter. This compares to $1.15 billion originations and each of the second quarter of this share in the third quarter of last year.
The mix of loan volume originated for sale that was related to purchase home activity was approximately 48%.
Compared to 63% in the prior quarter, so refinance volumes increased substantially during the quarter when was relatively equal weighted with the purchase from activity and we continue to see.
An elevated level of refinance volume going into the fourth quarter relative to the prior quarters.
Table 16 of our third quarter earnings release provides a detailed compilation of the components of origination volumes by delivery channel.
And also the mortgage banking revenue, including production revenue MSR capitalization MSR fair value another adjustments and servicing income.
Given given the pipelines, we have and the increase in refinance business. We expect the fourth quarters again be another strong quarter for the mortgage operation.
Other noninterest income totaled $17.6 million in the third quarter of 2019.
Proximately $3.4 million from a 14.1 million recorded in the second quarter of this year.
The primary reasons for that increased revenue in this category include $1.6 million of higher interest rate swap fee revenue and $1.7 million of income from investments and partnerships.
Turning to noninterest expense categories, a non interest expenses totaled $234.6 million in the third quarter up approximately $4.9 million or 2.2% from the prior quarter.
Commissions associated with a significant increase in the mortgage production and acquisition related charges of approximately $1.3 million were the primary drivers of the increase.
Turning to the more significant categories.
Salaries and employee benefits expense category increased approximately 7.3 million in third quarter from the second quarter of this year.
Commissions and incentive compensation expense accounted for approximately $3.8 million of that increase.
Relative to the prior quarter and that was due to the higher commission expense tied to the personally greater mortgage origination production.
Salaries expense accounted for slightly more than $2.7 million have the increase resulting from a full quarter. The staffing costs related to New York Bank acquisition completed in late May of 2019, approximately $1.1 million of severance or.
We really did the route.
And normal growth as the company continues to expand including staffing for the seven new branch banking locations that we opened this year.
Additionally, employee benefits expense was approximately $782000 higher in the current quarter than the prior quarter due primarily to the impact of higher health insurance claims during the quarter.
Turning to equipment expenses totaled $13.3 million in the third quarter of 2019, an increase of $555000 as compared to the second quarter of 2019 increase of current quarter is primarily the increase software depreciation and licensing.
Professional fees increased to $8 million in the third quarter compared to $6.2 million in the prior quarter.
These fees can fluctuate on quarterly basis based on a level legal services related to acquisitions litigation problem loan workouts as well as any consulting services.
Although up slightly from the prior quarter. This category of expenses remains close the midrange in the last five quarters expense calls the slight increase in those categories expense was due primarily to acquisition related legal fees and increase in consulting fees, which related primarily to some work that we're having done relative to.
CECO projects and the like more replacement projects and then also a small increase in legal fees for loan documentation on collections.
The FDIC insurance expense was down $4 million on the third quarter compared to the prior quarter.
As you May know the FDIC insurance assessment regulations provided that after the reserve ratio reached 1.38%. The FDIC would imply small bank credits to reduce small banks regular deposit insurance assessment. After the full amount of the assessments or the full amount of the credit whatsoever as less.
The reserve ratio reached 1.4 on June Thirtyth of 2019. Therefore credits were first supplied on our September 2019 invoice since each of our subsidiary banks are less than $10 billion in assets each of them qualified for the credits.
We believe we have up to $3 million on additional assessment credits I could be applied in the future. If the insurance reserve ratio remains above the required threshold.
Other than the expense categories that I just discussed all the other expense categories were down in the aggregate by a little over $700000 from the prior quarter with no particular items to know.
As Ed mentioned the companies that overhead ratio for the third quarter improved a 1.40% from 1.64% in the prior quarter.
And then proved to 1.58% for the nine months ended September 30 in 2019.
This 24 basis point decline and then overhead ratio essentially offset the net interest margin compression for the quarter and was primarily driven by growth in total assets and strong mortgage origination quarter.
We expect balance sheet growth and that continuing strong mortgage market, whereas on the company having another good net overhead ratio in the fourth quarter.
And should cause our annual net overhead ratio to be less than our previously discussed target of 1.55 per cent per year.
With that I will conclude my comments and turn it back over to add.
Thanks, Dave.
Just be back in the record earnings.
And the record quarterly earnings train.
That's 12 of the last 15 quarters that we've had.
We had record earnings and we expect to that's our goal to continue that trend going forward.
Pardon me.
Although the rate environment provides a plethora of challenges we believe that we will be able to navigate to the storm.
Overall growth as overall growth, both organic and acquisition, we've talked in previous quarters about the ability to data.
Organic growth without a commensurate increase in expenses.
If in fact, we grow faster the loans again, that's okay. I think we can make and that a 1% or after tax were higher on the investments that we make as we ladder out a portfolio.
We want to make sure the numbers or that the deposits are sticky enough. They stay here, so we don't and upside down on anything like that but we feel.
We feel that the that plus adding 800 million and in assets from the two acquisitions will be important decrease our cost of funds is a priority again we are.
Actively doing that as we speak with the last drop in prime were a big customers understand the rate environment is going down and we're able to two to execute these.
Loan pipeline still remain very strong we're deploying liquid liquidity management assets.
We have every expectation of a continued strong mortgage market.
Credit the always the big question looks pretty good right now, but you never know.
We were not once the kick the can down the road as you all know when it comes a credit we're going to continue.
Due to growth and will be the key.
We also have closes as TC transaction already expect to close countryside. This quarter, that's 800 million and total assets as I said earlier.
We expect significant cost outs from these deals.
We'll take a few quarters to achieve these efficiencies.
We have to get them converted and takes couple of quarters to do that but STC is close to 80% cost out for us and.
By estimate and.
The countryside deal is closer to 35% to 40% cost out so.
Those should be very accretive to us once we get that done.
We're not a loss for future acquisition opportunities as our pipelines remain full we're consistently certainly in the value of these opportunities all areas of our business as always we can be assured of our best efforts. We appreciate your support I look forward to future record quarters going forward now it's time for questions.
Thank you as a reminder to ask a question you wanted to press star one on your telephone to withdraw your question pest. The pankey. Please standby, while we compile the Q1 day roster.
First question comes from John our strong with RBC capital markets.
And is now open.
Good afternoon.
Hi, John how are your I am going on when you.
Oh live in a dream everyday.
Good.
Let me put out record earnings when the stock gets clobbered, but.
Maybe we should go the other way Oh this is your opportunity I'd.
The I want to ask about just margin in mortgage but on deposits what.
What was different what drove that quarter that was a big.
Deposit growth number and you kind of alluded to it but if that continues.
Have you acquired deposits come on it kind of feel like next quarter looks a lot like this quarter with some NIM pressure, but maybe some growth in net interest income, but just maybe touch on what drove it and what do you guys are thinking for how this might look in Q4.
Well if you if you look at the last few quarters, they pulled up here.
Deposits have grown.
In December 2.6 billion.
In March 1.9, this above 1.21 point, which should be closer to 1.7, if you add the.
The brokered we paid back. So this is considered this is just consistent growth for us.
Our marketing is paying off.
The.
No we opened new branches the acquisitions, we started marketing heavily into those markets. These smaller banks are.
Never really had the capital to go out in and and market. So a lot of it is this is consistent with everything we've done in the past. So I don't think things different. It's just same old same old for us.
Okay.
And I guess in terms of.
You know thinking about the outlook for the margin.
You talked about the plan to put some liquidity to work and I guess curious how quickly you think you can do that and when I kind of go through some assumptions, maybe we get to flat to maybe a little bit down on the margin, but we don't have any insight that you have in terms of how you put some liquidity to work so maybe give us some healthcare.
Oh, the margin could well might go down a couple of basis points, but again, we're at a point in time or where the margin.
You Gotta look at net interest income more than the margin I think everybody gets hung up on the March I said I can't eat a margin I can eat that I can eat off net interest income that's real money.
If we have to is the loan to deposit ratio comes down if we grow again of loans loans grow slower than deposits, which seems to be the case right now.
For putting those investments.
That will give us a great after tax return great return on capital no overhead associated with it and I'm still make but hopefully 120 on assets, which is accretive to where we've been right now after tax so.
I think you've got to change your focus off the margin to net interest income, which we think we.
You know, where we'd love to see the margin go up we're working like crazy to hold steady, but it's it's kind of like a parameter that net interest income as well where most concerned with.
Now I'll like to the bottom line and that's earnings per share and that's where we get paid for this so.
Probably a little bit of pressure on the margin, but we believe net interest income should should be up nicely this coming quarter.
Yes that makes sense.
It makes sense I understand it I guess from.
Unfortunately people do look at that number, but I understand what you're saying.
I know you JV they look at it because that's how they model but.
We've been able in the past the minimal to managing maneuver through times like this and put up record good quarters.
You know.
The margin itself sure we what we like as I said, we'd love to go up working like Crazy to go up but.
If your loan deposit ratio does come down, which we expected to come down a little bit more did back in the 85 to 90 present range.
Margins are going to get hurt a little bit, but your net interest income should be just fine. So.
We'd love to have a you know have loans keep up with it but what I can do anything stupid right now and we continue our loan portfolio is growing nicely it.
No for the year, it's up.
Over those single high single digit so we talked about.
It's up 11.18%.
Just deposits are up little bit more so we are we hope to be able to control the margin.
And ER and really grow net interest income that's our plan.
No no I've got a plus the acquired loans I understand that that's coming on so Dave just a quick one for you we ask about it every quarter, but mortgage banking typically see a bit of a tail off in Q4, but it sounds like it sounds like maybe a little more optimistic is that fair and any thoughts on volumes.
You know I think.
I think we're we're seeing a higher percentage of our applications recently being the refinance area. So I do think you'll you'll see some seasonality like we typically do on the purchase side, we're hoping that's offset on.
On the.
Refinance side right now so maybe down just a tad, but I wasn't expected to be down.
Dramatically.
And it could it could hold in there were just going out to see how the refi volumes are there they've been fairly strong recently and and the we expect to be strong strong quarter, certainly probably more than what we had in the second quarter, but.
Maybe just a tad off from from the third quarter, but a.
Crystal ball there John as you know as we close these things now and apparently short period of time until until you start November and see what those applications are you don't really have.
Visibility for the full quarter, but right now we book it looks like another really pretty consistently strong.
Advertising a lot John I mean, now that we've been able to get that application time close a little bit over an hour or if you do it on line.
We.
We're able to it.
Our front end has tested better than rocket mortgages front end and.
We believe that we.
If we advertise properly we can bring in a lot of new customers.
Because it is easy to work with them, we are local and the local aspect of it is that you do have an issue a guy jumps on and can walk you through and take care of you it.
Locally so we hope to be we my goal is to beat up the.
The seasonality aspect of this in the fourth in the first quarters.
We'll see how good we are at it.
Okay all right. Thank you.
Thank you.
Next question comes from David Long with Raymond James Your line is open.
Good afternoon guys.
Hi, David.
I need deposit cost when you look at the total deposit costs in the quarter. We were up about your guys are up about five basis points and you talked about needing prime to change we've gotten that now as we're looking at just the deposit side of the equation here what.
What can we see in the in the fourth quarter in early 2020 on the total cost there.
Does that Mr. Dykstra.
Well.
You know.
Some of this depends on mix and and we've had specials in the in the Cds and money market areas and so just a lot of it will depend on where the money comes in if you look at our CD portfolio, you know the cost of that.
In the third quarter was to 18.
The new money coming on.
Rates paid and.
The last month was closer to sort of more like the one.
So if we put in the repricing of the Cds and in the press release so.
If all things equal that portfolio over time should be repricing no down nicely and we'll just have to see whether people.
Placing their money, there and money markets et cetera, but.
We haven't given a specific number but we certainly are working on.
On hard to get those numbers down there was a lot of specials that we ran one we're opening branch in the early quarters that that kind of carried through.
The second quarter and an early part of the third quarter. So as you climb up that that ramp you have to come down the same amount to sort of offset and we're starting to bring that down. So we're optimistic that the rates are going to come down.
Hesitant to give you exact basis point number.
So.
David the.
Interestingly in the last 15 months, we've opened 15 branches.
Almost $850 million, a new deposits new customers.
Those come in I'd say.
Probably.
70, 60, or 70% of that money comes in in the first six months subject to teasers and then the teasers run off.
So we're seeing that happen is the rates we are they reprice, we bring them down.
But that's not bad for 15 months and.
We still think the right hand side of the balance sheets of franchise and we get these people then we got to name a reason to come over they come over our retention rates are extremely good on that.
But now is those teachers are running off on a repricing you have to slowly bring about yonah given the Benz [laughter], So we bring them down and Oh.
So we're doing that and there's a number of.
Customers that had specials in other words.
Guy with a big deposit who sold his business or whatever comes when you gave them 2%.
We're bringing those down to one and a half a one quarter a case in almost every cases, but it's going to take a year to or not a year or probably three four months you get all that done and the core rates come down right right. When the happens where we can't come down 25 basis points really paying 15 or 20 on south.
He'll give that a little bit so.
We tried to give you that number because I don't really know how the I know that through the specials that we can cut those by 75% for 75 basis points that would be very helpful. So all in all it should be very positive for us in that regard and then the flip side is investing those assets, which we've done.
And so.
We're already we're already pretty much done with that so I think will be okay.
Theres a little this is a little high grade.
Thank you think of this holistically and that's an early on you have a fairly diversified business model here. So as rates have come down the mortgage market react X better we've gotten good growth in growing the franchise and taken advantage of this market disruption.
It's great to bring in though most deposits and and garner those households will put that those funds to work comes on down down. The road. We we've we've worked in a low interest flat environment for a number of years you know.
Over the last decade, and so we know how to deal with that Theres, just a little lag here, because we were really ramp in ramping up and giving good deposit growth to fund the good good loan growth and the market turned quickly so just a little bit a lag here, but.
You know the pieces are all working together as that set up.
On the front on the call and the deposit pricing, maybe lagged a little bit because of the specials, we're running a hand and the growth, we're having but it'll kill kept up here and we're working hard data is not rocket scientists at on rates come down you got to lower your deposit rates. We're we're doing that now.
Got you know I appreciate the color I know, that's sort of the core tier.
Franchise value is the deposit side of the equation here. So the other question that I hand, it relates to the liquidity management assets and I think you said it was up 812 million in the quarter.
Do you expect that to be up to the same extent here in the fourth quarter in it or do you see that number Triton coming down and did you did you disclose what maybe that impact was on the margin just having that 812 minutes knowing that you pointed out.
Well I think the excess liquidity costs was probably seven eight basis points.
So have we put that at the work with you know.
Probably 70 basis points or at least and then and then some of the <unk>. The cash that we did invest short term probably was another three basis points, so probably seven to.
The Tam or for keeping at short.
Okay and.
Replacing it in.
Two and a half to.
3%.
Last month Securities So.
Again, six six years as ours little over six years is our standard duration, but.
Down to four years because of all this liquidity piling up and.
So now that we know that it's good and it's it's 30 liquidity, we've been returned half a billion dollars of.
Of brokered funds as a result, which should help the deposit costs.
And then we'll get the deposits in from these two acquisitions, which are good sticky low cost consumer bases, which which is gonna be helpful and we're not running as many.
New branch specials, one for it. So this will flow through the system and the rates will come down and we'll put the liquidity to work and.
And.
In the meantime, the mortgage businesses, our internal hedge to that and it worked fine I mean, we had record earnings this quarter and worked fine we expected to to work in the future life's not linear and but we have a plan and we will be we are lowering rates and we expect.
Could generate good net interest income as Ed said.
Got it cool thanks, guys appreciate it.
Thank you.
Our next question comes from Kevin Reevey with D.A. Davidson Your line is open.
Good afternoon.
Oh, Kevin.
So I'm going to ask about the the left side of the balance sheet, but to what extent are you using four is a way to protect a your loan yields and if you can give us some color on how your structuring them.
On new deals.
We try to get a for all the time, but it's just it's competitively hard to do.
So we're we're living with that right now.
Life insurance of funding, we usually get floors property and casualty is nine mindful payouts are who cares.
Leasing is usually fixed rate.
Mortgages are what they are and the commercial side is what's left.
And Ah.
We get floors, where we can but none of our competitors are doing it. So we live with that risk for the most part.
Okay and then.
As far as we're seeing.
What we're hearing a little manufacturing a your clients feeling the negative impact.
Given what's happened happening from a geo political standpoint.
Well line usage is down about a point to half.
So you can see a little bit of it.
Taken place.
It's interesting, though if you think about the geopolitical side of things trade total trading to take total exports and imports is actually up the Adam both together, it's pretty interesting that China might be down, 30% or 25%, but Vietnam is up 30% and India is up 10.
And then and Taiwan's up like 20.
Trade is still doing all is going okay. So.
We.
Our manufacturers are doing pretty well, what we're seeing though is people everybody thinks if there is going to be recession, I I find it hard to believe unless we talk ourselves into it that there will be one we I don't think recessions in full employment go go together very well, but.
We did you never know I'm, not an economist but.
Clients, we have a pretty well fortress balance sheets we.
We are lowering.
He said, we got out of about $100 million of exit loans. The ones. We wanted out this quarter I'm, mostly in the HL t. side of things.
We are we are doing that.
And we're trying to keep our customers our clients in in the and I said, we lost about 198.
It's between 90 $100 million to other of other companies, usually finco, who allow much higher leverage so.
We don't we we don't see that is the problem with our commercial CN islands being flat.
It's not the business side of things, maybe a point in the half in terms of the Oh the draws but.
All in all our clients are doing pretty well.
And then Ed you mentioned HL tease that so that's an area weve, you're showing shying away from are there any other areas.
In lending given where we already in the cycle that you're a de emphasizing and staying away from.
[laughter].
Private equity firms, where we don't.
We don't have a.
General relationship with the P. you guys.
That's where we got into trouble last quarter learned our lesson there.
We'll get not have as many of those as we can.
But that being said our.
We had a lot of business businesses sold are good for you guys are harvesting right now.
They're not buying their harvesting so.
Stay away from those and.
And participations in those NHL teas are.
Bring them down a little bit we've ever had made to begin with.
But you know your your loved your lenders go out there like will seek the level of lease resistance.
They'll bring NHL team are we really want to do that so.
We're trying to shy away from those in general, but really we got out of retail commercial real estate over the last two years were basically a brought that almost down by 60%.
But thats been a two year project, but still commercial real estate.
He is doing very well here with great sponsors and our growth. There has been has been very nice so.
But just in very in just sectors, where.
Great sponsors a great equity.
Great that's sort of thing so.
We are diverse enough that sometimes not work and something else is so we feel good about where we're going with our loan portfolio.
Great. Thank you.
Thank you next question comes from Brad Milsaps with Sandler O'neill. Your line is now open.
I break afternoon, Hey, guys how are you.
Great.
Just wanted to follow up on the colonial discussion loan yields down 14 basis points linked quarter, you need that will be pretty consistent with subsequent.
Reduction in fed funds in LIBOR or anything else.
Going on this quarter that you know maybe made that compression better or worse than you thought it should have been and then secondly, just kind of curious the new loans that you brought on this quarter kind of what what types of rates are you seeing.
On those as they come on the books compared to the to the back book.
Well I think I think part of the issue Brad was I mean, if you look at one month LIBOR and we disclosed in our in our press release, how much is tied to one one month LIBOR and we've got about.
$8.4 billion are variable rate loans.
Tied to that so we've got $25.7 billion total loans and 8.4 tied to one month LIBOR, but one month LIBOR during the quarter.
Dropped quite a bit I mean, it ended June up to 40 and ended up at two Autousa was down 38 basis points. So that's one of the recently so you saw the decline in the loan yields as a variable piece of that in one year LIBOR.
You know if you found 15 basis.
It was down 53 basis points in the birth. So it's dropped a lot in our life portfolio is tied to that all about only about one off of that portfolio. Reprices every month, so we're starting to see little bit of that impacts.
Pricing so really it was the one month LIBOR or just drop.
Much more precipitously, then then other grades and that that causal a little but a pressure. So you can tell me where one month LIBOR is going to go rest of this quarter I can probably give you a better viewpoint on that but I think as people can look at the math on that and look at where were you LIBOR rates are gone and make some conclusions on their own <unk>.
I would be broke up I bet on interest rates. So we turned out.
On the what's going on the books, our premium commercial printing and finance business is going very well.
We've been able to hold our yields up there in the fives.
I think they might have been down 4567 basis points something like that.
Over the last two quarters, but.
Well the interesting there is that the average ticket size from your goes up from 22000, almost $30000 again, so we see in pretty good growth there that the commensurate increase in expenses. Thank God for hard markets on the life side.
The the spreads have remained relatively consistent.
The spreads out but again that's helpful on your LIBOR so.
It's always been a competitive market, we have big banks, Paulson and pulls out of that market.
And.
They they come and try to buy some then they figure out that they don't know what they're doing then they'd get out.
So we have to we have to maintain our business there, but the spreads have been relatively consistent there.
Did you know like to over one year something like that on average.
The other things with the commercial real estate is holding up well and we put close to $100 million of residential mortgages on the books.
50 of those were variable rate.
Waiting.
For conditions to clear, it's our hybrid product where.
If.
Somebody who has just went into business for themselves. We got alone you can't sell that loan primitive variable rate product. It's in the fours and then we booked 50 million of a fixed rate stuff to kind of help us to bring the gap down I think you'll probably see that going forward on the we have a real estate side on the call bye.
On the.
Residential real estate side, probably 50 million net of new growth on the on the.
Hybrid product and 50 million coming over on the.
Longer term product.
That help us with our GAAP position to.
It's nice to have you do a billion for Poland 50 million out of good stuff is okay. It good rates and.
Our GAAP position jumped up a little bit because while liquidity, we had we still want to maintain a positive gap.
Just because as rates go down the propensity for them go up is is higher than as a go down further but we.
We want to mitigate that to some extent by bringing the bring it down from the 11%. It is now down to.
On the back to where was 656% so.
That makes sense on that.
Yes, I think so and then Dave just one follow up on on the mortgage business I was writing quickly, but I think our would you say you hope to hang on to.
Gain on loan sale margin I think also heard you say that you'd basically the discontinued sort of your correspondent network just kind of curious the difference between kind of what you make on a loan sold out of the correspondent network versus how to your out of your retail channel, which obviously is more profitable.
Yeah, well a correspondent channel is probably.
2030 basis point margin so.
You can and you know in the past, maybe we did 100 150 200 million of that and supplemented it.
And there is reason to do that but we just decided we don't do wholesale and now we decided not because.
Just get out of the correspondent business based on those margins so.
Well part of the reason for the aggregate increase in our gross margins was because we reduced the amount of correspondent so next quarters should be.
Next is next to zero there might be just be a tab that carried over from some relationship that we had but not much at all should be very close to zero.
So the margins on the on the veterans first stuff is.
Hi, threes to 4% depending on the on the on the products that they do and then.
Retailers.
Generally in the upper twos or so.
Great. Thank you very much.
Thank you next question comes from Chris Mcgratty with KBW. Your line is now open.
Great. Thanks.
Dave or given the success you guys have been having with deposit growth in.
In particular, the last couple of quarters.
How are you thinking about kind of that the debt. That's on the balance sheet you got to about a billion dollars higher costs debt I'm. Just wondering if there's any thought to play in one of those levers to support earnings of the margin in this environment given the momentum on the deposits.
Well.
I'm not sure if I understand your question, whether we would.
With just payout pay off some of the borrowings.
Or reduce the borrowings given that given the high rate.
Well the bar winter at the holding company low Chris So could pay those off I'd have to dividend up a bunch of money from the banks.
Or or issued new debt is not data at the bank level, what does the holding company level.
Okay.
So I don't have.
Yes, it's cheap capital is whether it is for US. It's cheap you know its if we make up 12% on our OE and 14 Aro TV.
Do you have 5% that the after tax that's three and a half 370, something it's just cheap capital for us so.
No a unless a.
As we make a ton of money, we're going to keep using cheaper capital.
Yeah, we make a ton of money I'd, rather buy my stock back as pointed out the many times I know some people issue that debt at the bank level I understand look and question, but this at the holding company level side that might have and I don't have that months dividend capacity for the banks have half a billion plus as I said, we look at it is.
Cheaper capital than do uncommon or whatever.
Got it okay perfect clarity thanks.
Given the top line pressures that the group's facing given lower rates.
Can you speak about protecting profitability through kind of expenses I know you guys have been opening branches.
You've obviously made the mortgage business more efficient, but just any steps you kinda enter budget season that you might be looking at too.
It's kind of reduce the rate of growth in expenses.
Well I I I think one of the things we tried to point out in the releases even on the margin came down 25, and as we said we think there's certainly not going to decrease at that same rate because of this lag effect that we're going to be able to hopefully get on investing on the liquidity and Rick.
Hussein.
The positives, but the net overhead ratio came down by.
Almost the same same amount so well if you can get the growth and get the operational efficiencies out of it that that's one way to offset.
Lower margins is to grow into.
Grow into your close a little bit more and just grow and invest that money as Ed talked about so.
You know.
Do you could you sit down and start slow in the boat down and not invest in the company and cut expenses you could but there's a lot of opportunities in Chicago right now in a lot of disruption and we'd like to take advantage of that market disruption and take advantage of the growth and so we think that we as that has had a number of times, we can grow through this.
And that and build the franchise at the same time, we'd rather we'd rather grow into it and absorb that operational capacity versus start to cut.
And Scott and not grow so that's kind of.
The acquisitions were doing they should have relatively great cost outs, which will help our net overhead ratio.
And it was going to budget season, the things you could probably levers you can pull your marketing lever back a little bit nothing that would move the dial that much but we are telling everybody to try to get buying what they've got for a year.
We'll see how that goes through the budget process, but.
I said, you're going to add somebody they got a is either got to be.
Critical piece or somebody's going to make any money.
We'll see the budget processes are long going in.
Are there always arm wrestling, but.
Our goal has always done.
To give you double digit earnings growth and hopeful every lever we can to get there. The same time. It just seems you got to grow through this thing right now.
And we stop the boat and how do we started again it costs a lot more so.
Okay, and just one one clarifying comment at the <unk> common for Q4, I think you said it can be up nicely.
Does that assume we get a cut later this month from the fed or kind of what are your rate expectations built into that.
Uh huh.
We've got to cut later this month it it'll be a it wont be as good as we'd like it to be.
Yeah.
I think at <unk> from my perspective.
We're we're not projecting whether it's going to be October order or December even if they're going to be one sort of as we stand right now because we don't know whether.
No they could fix China and the one month LIBOR for whatever reason popped a little bit well that would be helpful. Too. So I just don't know again, what is going to happen with that one month LIBOR, one month LIBOR rate, but.
They kept 25 that would add that would be a little bit more problematic because but it all depends really on weather.
The question there Chris is really how does LIBOR react to that.
LIBOR stays flat I got eight and a half billion that doesn't do anything even a prime comes down 25.
Right.
If they reduce prime and LIBOR goes on another 25, well that's problematic, but I think I think the market is kind of ahead of prime so we're not expecting that LIBOR to go down so.
Roundabout way to say I'm not sure what the market dynamics are going to be between that relationship of LIBOR and prime but I think them I think the markets already kind of priced in the downward.
Well its expectations for rate in the one month LIBOR already.
Okay I appreciate it thank you.
Thank you Sir our next question comes from Tame Mckee Violet Stephens. Your line is open.
Hi, good afternoon.
I'm, sorry question, Hey, Dave you mentioned earlier, you're spending money or you spent money on Cecil preparation, what's your updated thoughts around Cecil at the end of year and the day one impact.
Well aware.
We aren't in a position where we think we.
Sure disclose that number yet horse, we're well along in the process we've got.
The dry rounds in the power runs and all that kind of stuff go on but we just we Wanna, we're well along in the process, we want to just get a little bit further and <unk> and to be a little bit firmer with that before we disclose it but so I think the answer is well along in the process. We think we're in good shape on that but not ready to disclose.
As a number yet.
Okay, and then just as a follow up.
Or the retail deposit promotions a function of the market disruption today that you're seeing given particularly to the acquisition that occurred earlier in this year or is it more of a bigger picture kind of overall strategy to build out the branches and and just having to pay up for deposits to to support those branches.
And the expenses and and I hear you loud and clear you can't eat the margin, but the investors eat on the stock performance and I just don't know how the margin sensitivity is going to go away anytime soon so I think it's important to understand why we why we saw five basis point increase in deposits. When these larger banks all week had been reporting lower deposits and what is that the.
Core strategy around deposit growth in the impact on the margin.
Well.
We have opened 15, new branches and we do we do put to use your accounts out there you get people in the door or bundled packages. So there's been a checking and savings accounts, maybe it's safe deposit. So we got to move our entire relationship that's pretty cheap when you think about it.
But and these and you kind of winning them down off of that over a period of a year. So that takes time.
And that's about it you know.
Brought in couple of billion dollars that money to build out these branches. So that's the strategy that plus.
If it's the market disruption the branches are doing well because the market disruption because we have great reputation town and we won the JD Power Award two of the last few years for customer service. We we went a lot of Greenwich Awards for commercial service. We've we've got great momentum, we got to take advantage of that.
And the disruption on the commercial side has caused.
US to get new clients in the door from other banks in town and they might come a lot of liquidity and we might pay a little bit up on that those are the specials that about $1 billion that there were talking about and gone from in the twos down to one and a half one on a quarter et cetera. So.
It is about growth it is about enticing people to join us.
And that's how we I've been doing adsense.
91, when we opened the first bank debt to get people reason to leave I am happy they get in they love the service and you get them for life. That's that's what we do so.
You know we want that we believe our cost of funds not withstanding a another rate cut that we talked about earlier.
Cost of funds should come down nicely this quarter and continue the kind of bottom out after that so it just say said for the retail they don't know LIBOR. It takes time, where you can have an excuse to bring it down so everybody. It's all all hands on deck for that and.
And that's what we're doing so and I think by the way investors should be more concerned about that net interest income then they showed about one number the margin isn't it you and I can have that discussion offline, but I think you want me to make more money, though you.
I'm not going to push back on that.
[laughter].
Thanks for the incited.
Thank you Sir our next question comes from Nathan raised with Piper Jaffray. Your line is now open.
Hi, guys good afternoon.
And there isn't going back to deposit costs questions.
Just curious what the timing wasn't terms of the run off of the brokered Cds in the quarter and if theres any other opportunities to further optimize the deposit base just given what you're seeing in terms of core deposit growth recently.
You know most of that was earlier in the quarter for probably the first month of a quarter that some of that went away and all that they're on the margin there some other brokered funds.
That are out there that we're looking to see if we can.
Replacements, so some of it as term and you're committed to it so but all in all our broker you know rates are are pretty well Nathan.
We don't we don't rely upon the brokered funding that that month, we're certainly down in the four probably four or 5% range on broker brokered funds. So.
Not a lot there to play with anymore.
Okay understood and then just switching gears a bit growth.
Growth was fairly soft this quarter for the first time in awhile. So I'm just curious if that was partially related to some of the workouts that you had with some.
Non performers or if it's a seasonal or just maybe perhaps less of an appetite to put on floating rate assets today.
Well, if you look into it the amount of payoffs as we head.
So $74 million payoff actually $87 million paid off are you going do another financial institution.
That's about consistent with what we've done every every quarter.
We had about $100 million of exit strategies, that's about double the normal.
And we had but another $100 million with a businesses were sold.
And line usage was down 100%. So we still brought in a good deal a business, but we're we're.
We were getting offset with with those types of pay down so.
I think nave and second quarter was was really a strong quarter for us, but the third quarter was new loans those fairly consistent with.
The first quarter and quarters prior to that so the issue really is what Ed talked about as just an elevated level paydowns and payoffs.
Understood I appreciate it I think I point out of silver good pipelines are still very good so.
You can always that.
No one the customer's going to.
Close alone and the third quarter tends to be we call sort of the doldrums around here at times, because borrowers on vacation and lenders are on vacation and sometimes things just getting pushed back. So we would expect a pretty decent fourth quarter based upon our pipeline.
Understood. Thank you.
Thank you.
Our next question comes from Brock Vandervliet live to give yes. Your line is open.
Oh thanks.
I'm still kind of a spot around about <unk> and I I mean, it seems from what you're saying no and I look at let's say one month LIBOR floor now on average.
Quarter to date.
A one month is down say 30 basis points versus where it was in the third quarter.
I know, we don't want to talk about NIM, but it seems like and I could be flat to down modestly again in Q4.
Okay, and just depends on what what happens with a LIBOR rate over the quarter, we wouldn't have been down nearly as much if LIBOR wouldn't have.
Gone down 38 basis points in the third quarter and.
If you can tell me, what's going to happen or we can do that I think the booked one it's down 30, it's down 30 right now in the fourth quarter.
Average.
And say it just stops right here were down 30 at the end of the year.
Well the point in the point, then then you're going to have pressure on the asset yields and we're gonna have worked hard on the funding decided to get to get that cost down and then we're going to try to grow through it we're going to have $800 million of growth come onto the acquisitions will have other strong growth we believe through.
The lending side of the equation and continued deposit side and we're going to we'll try to we'll try to grow through it as et cetera. So.
And get the Eni and have you know eventually rates are going to.
Stabilize at some point and and you managed through the process. So we can have the short.
Short blips up and down in the LIBOR rates, but.
We're going to grow through it.
And we will we will get a stabilizers, it's a little bit a lag on the funding side.
Okay. Okay.
Is your deposit pricing set centrally or is that set through the subsidiaries or <unk> or a mix mix above.
It's it's approved centrally a many of it is set centrally.
Specials are obviously.
Tended upon one of the beauties, we have as.
We've got a branch of a bank of a wintrust bags, let's say, we just opened or in back of the yards are in uptown or Wrigley Ville weekend, we can price to deposit there on a special but not cannibalize organization. So one of the beauties about multiple charter multiple brand approaches that we.
Let me.
Limit cannibalization that are on our deposit base, well and really.
Target our marketing there so.
Basically said.
Centrally.
Approves centrally but.
Competitively they've got some guys might that was a guy in the market who's coming after when we have to be flexible there. So but generally it's all approved centrally and usually said centrally are the most bird.
Got it okay I appreciate the color guys.
But can differ by by charter.
Yeah.
Thank you.
Next question comes from Peter release, with Sandler O'neill. Your line is open.
Neither.
Peter If your line is muted please them yet.
Like we go onto the next conference for the David.
And our next question comes from David Chiaverini with Wedbush Securities. Your line is open.
Hey, Thanks couple of questions for you I wanted to follow up on the Eni discussion I guess and this question might be a bit specific but what LIBOR or level are you assuming for eni to be up in the fourth quarter versus the for third quarter.
Thanks.
We're just assuming sort of the current state right now and adding in the and the girl.
Got it and then.
If we you know with that as a backdrop looking out to 2020 do you think in I guess looking at the fed funds futures. If we do assume you know 25 basis point cut at some point in the fourth quarter here and an additional 25 in the first quarter of next year do you think eni could be up in 2020.
Despite the NIM headwind.
Yes, it depends on growth and we.
We have if you build in the.
<unk> billion.
And a half to 2 billion dollar growth within every quarter organically plus occasional acquisition.
I think did we you will you can be okay.
But you never know as they said you know its.
Yeah.
Who don't I mean.
It's it's a lot of its a relationships of the a of the loans.
Oh, the rates themselves the shape of the curve.
No it what's working what isn't working around here.
That's the plan and we're working very hard on that and.
So I can say, but.
Theoretically you could have something that make it go down you have other things you may go up a lot so where we want it to go up and where we want to have double digit earnings growth.
Without MSR valuations and Onetimers, that's what our goal isn't.
I'll know better when we get through the budget cycle at the end of the.
In the next couple of six or seven weeks.
And go from there, but it's kind of hard to run all these different scenarios you know your Charlie Evans come out and say he doesn't see it need for another rate drop.
This year. So he is is it ahead of the Chicago Fed what scares me as it relates to keep going down is big it forms bubbles and bubbles don't help the Academy and then.
All bets are off of rates, you going down for a lot of different reasons.
You know people say why did you would you go under opened up a good well.
Not now, but if rates keep going down in the market gets stupid again, we very well could which are then all bets are off but you know you.
So with any certainty where you'd be that's our goal. That's what we're shooting for is it occurred rate environment. We think we can do it if rates move that it's going to be harder but.
We we got through the last one okay, we'll get through this one okay.
Yeah, I can definitely side, but it's it's just hard to try to Soma you got political issues forgot shakes. Those are there was a huge.
You know, it's just there's there's so many variables right now all we can do is control we can control do we can do.
As the market turns against US we could very well go into opened up but we don't see it now.
We're still getting deals that are on our terms. We know we have to cut costs. We know that the beta going down is the same as a beta going up.
We've got to get more demand deposits into we've been very fortunate to get the C deck deposits that are back up to over 1 billion, two or three but 800 on our books.
So.
Those are relatively cheap cost for funds for us and continue to grow that so lot of levers to pull.
But as so many variables out there. It's just hard to say, we're going to end up but we feel good if the rates stay where they are right now you have to get out little bit do we think we can weekend, we can pull this off so.
That's why I forget the big Bucks.
That's helpful. I can definitely appreciate all the variables involved now she shifting gears back to loan growth you mentioned about consistently strong pipelines and I think in your prepared comments you mentioned single digit loan growth. How are we still looking for it you know mid to high single digits.
Yeah, I don't think we haven't changed there.
We didn't put the fire off it would still have that same same cast yeah, you know or 11%. This year, which is we didn't expect that the bid.
You know single single digit mid single digit growth rates would be very good for us that we'd be happy to have it but mid to high mid to high sorry, sorry, I just want to make sure. We're clearly there so sorry, but along fall.
Great. Thanks very much.
Thank you.
Thank you. This concludes today's question and answer session and I'd like to send the call back over to Atlanta for any further remarks.
Thanks, everybody.
Hope do a talk again in January if that before we have any other questions on the quarter or what we're doing we're long feel free to call me or Dave. Thanks, a lot.
Ladies and gentlemen, this concludes today's conference call. Thank you for participating you may now disconnect.