Q3 2019 Earnings Call
Good morning, ladies and gentlemen, and welcome to the first mid West Bank Corp. 2019 third quarter earnings Conference call.
Following the close of the market yesterday. The company released its earnings results for the third quarter of 2019, and also issued presentation materials that will be referred to during the call today.
These provide those historical financial information and the company's outlook for 2019.
During the course of the discussion today management's comments in the presentation materials may include forward looking statements. These statements are based upon the company's current beliefs and are not historical facts or guarantees of future performance.
Outcomes.
Actual results or outcomes they differ.
The risks uncertainties and safe Harbor information contained in the company's most recent 10-K and other filings with the S easy.
The forward looking statement non gap in other regions included in the company's earnings release and presentation materials should be considered for the call today.
Finally, the company will not be updating any forward looking statements. After this call.
This call is being recorded at all participants are named listen only mode.
When the presentations by Mike Scudder, Chairman and Chief Executive Officer, Mark Sanders, President and Chief operating Officer, and Pat Barrett Executive Vice President and Chief Financial Officer. The car will be open for questions any answers for analysts only I.
I'll now turn the call over to Mr., Scott or please go ahead.
Good morning, everybody. Thanks for joining us today, it's great to see where [noise].
Overall, it was a record quarter for us against what you described as a tougher rate backdrop.
As was shared in the opening introduction to the call I'd remind you we do have a supplemental presentation to follow on with his we lived through our remarks.
I was our custom or I'll cover the highlights and then leave it to Mark and Pat to walk you through the components. So let me start with the highlights.
I suggested we closed the quarter with they are having generated a record levels.
Earnings $54.5 million.
Total assets stood at 18 billion, that's up 3% from last quarter and 20% from a year ago.
Adjusted for the impact of acquisitions are delivering excellence and that's for all periods and delivering excellence in flight implementation cost from prior periods. Our Pos was up a robust 4% versus last quarter and 13% from a year ago.
As a result, our return on tangible common equity improved to 16.1%.
Even as our common equity tier one ratio to risk weighted assets expanded 25 basis points again, all versus a year ago.
Operationally, we had a full quarter bridge here with the systems conversions I haven't completed a then completed and integration and onboarding activity going well and on track.
Our loans were up 8% annualize from last quarters, we follow through on our guidance that we were looking at both diversification duration and yield through our consumer portfolio responsive to the rate backdrop.
See an eye growth was also solid well see our eight continues to see heavier pay downs.
We continue to hold or owner and we're maintaining our underwriting discipline as from my perspective than Mark and I've talked about this and this environment. This is where you really have to be careful as the rate environment, sometimes will lead others to chase Chase volume.
Posits also held up very nicely, increasing on average, 4% and 16% linked quarter and from a year ago, respectively. While our mix was relatively unchanged net interest income remained stable as average, earning assets grew 6% essentially holding our revenues as margins declined to 3.82% reflect the both.
Rate environment and change in mix.
Also offsetting the impact of lower margins was improved fee based revenues, which increased 12% from last quarter and 20% from last year.
It was nice from our perspective to see the investments that we've made both in our mortgage platform as well as our sales of derivative products are in prior years, both of which benefited from lower rates and those were a big contributors to drive increases this quarter.
Operating efficiency continues to remain a focus for us coming in at 54% for the quarter improved from last quarter's 55% and two percentage points better than where we were a year ago.
Then last but certainly not least credit which arent for our growth was generally stable and inline with prior quarters. So with that let me turn it over to our market path for some additional color. Thanks, Mike and good morning all.
Overall loan growth came in as expected in Q3 at $250 million as shown on page three of our presentation deck.
Our commercial and consumer teams all has solid the strong production in the quarter, which allowed us to grow inline with expectations. Despite continued and in fact elevated payoff activity.
We've seen and talked about high pay off levels and see I read from longer term financings and property sales all year and again this quarter.
Fortunately for borrowers, but a headwind for us. These dynamics also developed in our C and I book in Q3, such that very strong see an eye production resulted in modest overall growth of about $50 million given some elevated payoffs for reasons that were favorable to our clients.
Our consumer businesses had a good quarter across the board led by mortgage the rate environment, certainly drove volumes higher across the industry. Importantly, we also expanded our teams earlier this year as noted in previous calls. So together this allowed us to retain mortgages to grow earning assets, while also expanding fee income.
Elsewhere, our consumer direct business again grew at a nice pace organically.
Looking forward, we expect more of the same story in Q4.
We think commercial will be flat to up modestly this quarter given certain assets sales, we foresee a credit market dynamics that may stretch beyond our comfort level.
Conversely, our consumer businesses look to again post solid results.
In total then we expect low to mid single digit annualized loan growth this quarter.
Turning to asset quality on page four.
Results in Q3 were right in line with our guidance charge offs fell modestly to 29 basis points a level, we expect to be near in Q4 as well.
Nonperforming assets were slightly elevated reflecting normal quarter to quarter fluctuations, but this was more than offset by a 13% drop in adverse performing loans.
Thus aro outlook remains unchanged provision going forward should approximate charge offs plus enough to cover loan growth such that we maintain our allowance near current levels.
[noise] deposit growth closely match loan growth as shown on page five.
We remain competitive on rates and markets. It does not as thus far not reacted meaningfully do interest rate cuts.
Fortunately whatever the rate environment, our strong core deposit base continues to result in a cost advantage versus our peers.
Pat will now discuss net interest income and margin.
Thanks, Mark turning to net interest income in margin on slide six net interest income was up modestly compared to the prior quarter and up $19 million or 14% compared to the same period in 2018.
Hard to both prior periods the acquisition of bridge view, which closed mid second quarter. This year securities purchases combined with loan growth were partly offset by higher funding costs.
In addition, the increase compared to the second quarter benefited from an extra day, while the increase compared to the same period a year ago was impacted by the acquisition nor states thing.
Acquired loan accretion contributed 9 million to the quarter inline with expectations and down a million from the prior or.
4.7 million compared to the same period a year ago.
Moving to net interest margin tax equivalent NIM for the current quarter of 382% was down 24 basis points linked quarter and 10 basis points from prior year.
Excluding your gross margin was <unk> nine for the quarter down 19 basis points linked and 20 basis points from the same period a year ago.
Margin compression reflected the impact of lower market rates on loan yields compared to the prior quarter and compression related to the mix of interest earning assets acquired in the bridge via transaction compared to a year ago.
In addition actions weve taken to reduce rate sensitivity and higher cost of funds impacted the current quarter compared to both prior periods.
Overall margin compression was nearly double our expectations as a result of lower than expected market rates as well as modestly higher funding costs due to balance sheet mix.
Going to earning assets and funding sources average, earning assets were up 850 million linked quarter, and 2.3 billion compared to the prior year, reflecting earning assets from the bridge you acquisition loan growth and securities purchases.
In addition assets acquired in the North states transaction impacted earning asset growth compared to the prior year.
Average funding sources were up over 850 million linked quarter, and 2.3 billion from the prior year, reflecting the impact of acquisitions organic growth.
And federal home loan bank advances.
Moving to our fourth quarter 2019 in <unk> outlook, we expect to flat to modest in <unk> decreased from the third quarter, assuming further rate cuts occur.
Every 25 basis points downward adjustment by the said would likely result in approximately 2 million dollar decline in Eni per quarter.
Our accretion guidance is unchanged with approximately $7 million expected in the fourth quarter. Overall. This guidance is in line with full year guidance for 2019 that we've previously provided.
From a NIM outlook perspective, we expect continued compression in the high single digit range in the fourth quarter, assuming further rate cuts by year end, but we do expect this compression to slow as interest rates stabilize.
Once again I want to remind you that projections are subject to volatility due to movements in interest rates pace with loan growth in the impact of acquisitions.
With that I'll turn it back over to Mark talked about noninterest income on slide seven.
Thanks, as you can see noninterest income was up dramatically it exceeded our expectations in Q3, 11% higher versus last quarter, and 20% higher than a year ago.
Mortgage had a strong quarter as I previously mentioned and the outlook remains positive there given interest rate levels.
The uptick in commercial loan production and a desire to take advantage of this rate environment to lock in fixed rates led to a record swaps quarter nearly double when quarter.
Elsewhere in core services, we had solid gains as well.
As a result, our $43 million of noninterest income was above our guidance.
Assuming swap income holds at current levels, we expect to post similar fee results in Q4.
Now back over to pass talking about expenses and capital.
Let me go expenses on slide eight. Please note that the current quarter includes $4 million of acquisition and integration related expenses associated with the bridge view acquisition and to a lesser extent.
The residual delivering excellence implementation costs, both of which we believe will remain at or better than original expectations for the full year.
Away from these items total expenses were in line with the second quarter in up 11% compared to the same quarter a year ago.
The increase compared to prior year was driven by increased operating costs associated with acquisitions combined with higher staff costs, reflecting merit increases.
Our efficiency ratio of 54% improved from 55% linked quarter and 56 present a year ago.
Our outlook for 2019 legacy expenses remains unchanged as we continue to expect expenses to average.
Around 106 million per quarter for the second half of the year.
Said, another way expect the fourth quarter to be up modestly from the third quarter.
Last note on taxes before I leave the slides our effective tax rate for the quarter was approximately 25% inline with our guidance and remains our expectation for the fourth quarter.
Moving to capital on Slide nine we continued to maintain capital at strong levels and are pleased with our track record of rapidly earning back to the capital we've deployed.
Capital accretion from excess earnings continues to provide us with flexibility to fund, but growth and continued share repurchases. Although note that we're currently constrained on repurchase activity until we closed heart acquisition.
During the quarter, we repurchased 645000 shares and paid a dividend to shareholders that represents nearly 30% increase from the same period a year ago.
We expect continued capital accretion from excess earnings.
Hi to providing further flexibility to fund growth were continued share repurchases once we close park.
And for that we have remaining board approved repurchase capacity of approximately $145 million.
Looking ahead on slide 10, we've summarized our current estimated range of impact both capital and the allowance for credit losses.
The adoption Cecil standard on January 1st of 2020.
Overall, and as we expect the estimated impact to our tier one capital is relatively limited.
Approximately 25 to 40 basis points or approximately $35 million to $55 million, which can be earn back. We are typical quarterly earnings accretion rate in one to two quarters.
Excluding the impact of acquired loans, we expect the allowance will increase by 20% to 40% or approximately $20 million to $45 million.
Building allowance for acquired loans will add an additional 45% to the allowance or approximately $50 million.
But the majority of this represents the mark on purchase credit impaired loans, which will transition to the title purchase credit deteriorated or PCD loans as an allowance with no capital impact.
As a reminder, these are estimates and the extent of the increase will depend on the composition of loan portfolio as well as economic conditions and forecast as of the adoption date.
And finally note that for your convenience, we've summarized our outlook the announce details of the park acquisition as well as our current quarter's earnings on slides 11 to 13, respectively.
Now I'll turn it back over to Mike for final remarks, Thanks, Pat So just to recap.
Obviously, it's a tough rate backdrop, but that's that's really true for the short term.
As we look to the longer term, we really like our positioning we continue to execute on our priorities and as we say in this type of environment that also creates opportunities that we believe will accrue to our long term benefit.
Included among those is our teams continue to work hard and have built a tremendous core deposit foundation, which can be undervalued today.
Today short term noise, our credit capabilities are broader and more diverse.
Our acquisition of part Bank will add an additional billion dollars in assets talented team and broader access to what we believe is a very attractive Milwaukee marketplace.
As we await an expected first quarter close the team is locked and loaded and we look forward to competing in the marketplace. We're very thrilled with our progress to date there.
Our earnings remain very strong as we continue to organically build capital. This gives us tremendous flexibility to leverage the environment grow capital as well as optimize our mix.
Operationally, we remain very much focused on our efforts to leverage technology and process improvements all with an eye toward driving a better and more efficient client experience today's environment makes that even more important.
So with that let's open it up for your question.
Thank you Sir.
Question and answer session will begin at this time.
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Question will be taken in the order that is perceived please standby for your first question Sir.
The first question comes from Michael Young with Suntrust. Please state your question.
Hey, good morning, everyone.
Good morning.
I wanted to start just with the mortgage loan purchases in the quarter can you just tell us how much of that was was purchase volume and then maybe give us an update on kind of where we stand in that process of reducing asset liability.
Sensitivity and.
Where that kind of stands today from an eni at risk perspective.
Hey, Michael it's Pat.
I'll take that.
I would say that the majority of the.
Mortgage purchases during the quarter, we're under the banner of extending our duration, but we have pretty tight conns.
Guidelines on both credit quality and yield so we continue to make sure that we're getting.
Paid for the incremental risk over what we would get if we just bought mortgage backed securities for example.
Which were pretty comfortable with it.
Away from the purchase mortgages, we still had pretty solid origination activity.
It was probably 25% of or increase was origination and 75% of our increase was purchases right Mark that's right yeah.
Going forward.
We feel well we hit our objective that we set out about three quarters ago from a extending duration perspective, but frankly with with market behaving the way. It is in with the continued origination of the predominantly floating rate loans that we still see.
I think that that might be something that we could continue into next year modestly, but I think that we've got the lion share. What we were looking to do this year done this year.
Okay, and so future kind of purchases will be more of a pacing with what's going on in the commercial portfolios I kind of the right way to think about it if that's stronger growth and we'll see less purchases next year.
I think thats exactly the way to think about it Michael Mark Yes.
And Mark just on kind of the activity you're seeing I think you called out specifically.
Higher payoffs and Paydowns, you expect that to persist into the fourth quarter do you give a sense that a lot of clients are looking to liquidate or sell businesses.
Head of a presidential cycle are capturing this favorable tax environment et cetera.
We do see a little bit more in the fourth quarter and I'll say it. This way. This has been a trend in salary for a number of quarters as you know it across the industry and certainly for us and we've got some visibility to that and I think that will continue in Q4 Cnine. This is the first time, we've seen a dramatic.
Increase in pay offs and see an eye in some time and it was.
Largely at assets company sales, but there's also a credit component of that that is just either stuff. We didn't want to do or stuff that we had that we didn't want to continue doing I guess I would say and so I see a little bit of.
We.
Got short term visibility to a few more those in Q4 I'm not ready to call that a trend, but there is a couple a little bit more that pressure.
In Q4, so therefore as I said I think commercial and total will be flat to up very modestly in Q4.
Okay, and one last one if I could just sneak it in on hiring I mean, given some of those dynamics that you are seeing does that make you kind of more aggressive the to hire to try to get more production or kind of given where we are in the cycle or you kind of ease and often to say the markets moving away from us maybe we just.
We wait for a little bit buyback more stock.
I'll say it this way Michael our production is not the issue we had a really nice production quarter, and so and I think we'll have a nice production quarter in Q4, So I don't feel a need to go higher at all on the other hand, as we've always said Opportunistically and just as part of all normal course, we have to stay in touch with.
Quality bankers in our markets and if some of them want to join US in some did in Q3, we're happy to make room, even if we don't have a spot a good good bankers pay for themselves quickly. Michael This is Mike if you picked it up in my comments. This is also an environment, where you want to maintain your underwriting.
Because you can see some in the markets start to chase that growth.
The detriment of long term performance.
Our judgment.
Okay. Thanks, I appreciate all the color.
Okay. Thank you.
The next question comes from Chris Mcgratty with KBW. Please go ahead.
Hi, good morning.
Pat maybe start with the margin.
Yes.
The down high single digit basis points, but slate.
Got to down modestly and I would imply.
Continuation of kind of the securities purchases in the quarter.
Part of an update on where you are in terms of adding securities and borrowings.
This point and maybe what you're buying at these levels.
Well at current fourth quarter, we're not really in the market too much I think the bulk of what we did we finished up mid to midway in this in the third quarter call. It late July .
And other than just reinvesting cash flows we're not really aggressively looking to buy so our NIM guidance for the fourth quarter.
Presumes, what we've assumed for the last actually since since the downward expectation for interest rates is that we're assuming an October red cut 25 basis points and in December which will have a modest impact if we get both of those then our revenues will come down maybe two and a half million.
And the bulk of that call it $2 million would be the October Reagan.
We're not anticipating that adding duration asset sensitivity will have anywhere anywhere near the impact that it did this quarter, which was probably half of our compression was due to that.
So the bond portfolio, what kind of stay at current levels as just kind of what I'm hearing.
Okay.
Maybe the on whats, our depending on what tomorrow breaks so I mean, it's volatile environment.
No I totally get it.
Maybe a little bit on credit the two commercial credits you call out in the press release could you provide a little detail.
These loans previously non accrual.
Do they pop up kind of unexpectedly and.
And maybe what industry there might be in.
Yes, they were they were criticizing classified but not not across they moved to non accrual. This quarter. There. They were both in the $8 million to $10 million range one was in the.
Services business and what was the manufacturing so no real trend there and they've been on the radar screen as again they were criticizing classified so they've been on radar screen for some time.
That said had a nice decrease in our criticized and classified overall, so we don't see any change in the credit outlook as a result of this.
Okay, Great and then maybe housekeeping one Pat the.
I want to banks, if you have had that FDIC insurance benefit in the quarter could you specify what that might have been.
Sure we got out like a lot of people did it was a little over a million bucks.
Which drove for for the most part drove our beat on expenses versus our guidance.
That we weren't sure about the timing that we would get that but we did get that during the quarter.
Great. Thank you all you also telegraphed a couple of quick questions on.
Other income I think on Beauly and that's both has about three quarters of our other income non fee based revenue and that was pretty stable linked quarter. So there wasn't a big hit on that.
Great. Thanks for the color.
Yes.
The next question is from Terry Mcevoy with Stephens. Please go ahead.
Good morning, everyone.
Good morning.
Thanks for all the disclosure on Cecil and the day, one impact I guess I'm thinking about 2020 and if I.
Build the reserves $80 million I come up with a reserve to loan ratio of 120 to 125 and I understand your economic assumptions will change the portfolio will change, but all things being equal within 2020 is that the ratio I should have should hold too.
On a quarterly basis, as we think about charge offs loan growth and ultimately the provision.
I'd say when 30 would be a good handle.
Okay. Thank you.
On the deposits the deposit side.
Your margin outlook for the fourth quarter does that assume continued increase in your deposit costs or do you see some sort of plateau or potentially a decline in the fourth quarter.
I'll say that we're certainly hopeful that it will go up.
We I could see it coming down modestly lot will depend on.
What the market competitive dynamics do we're still running money market promotion in the seven minutes CD promotion, just so that we are competitive with what the market is offering and to the extent we have those there than that could.
Keep us from from dropping cost that.
As much as we would prefer to.
We obviously don't have a lot of room on the retail side to drop just because we have such a large.
Noninterest bearing or low interest bearing retail deposit base.
So the bigger opportunity would be in the municipal borrowings and to a certain extent in the corporate corporate money markets, but we.
We'd love to bring them down.
I think if you look at our quarterly interest expense, we're now down to about 27.
Under $30 million a quarter, so and that's all in with borrowings and deposits. So theres only so much room that we have to bring interest expense down.
At all so this is the curse of having such a great core deposit bases when interest rates go down we don't have as much room to drop.
Let me, let me add that that again philosophically, we're not operating quarter to quarter.
We're competitive in the marketplace and we will be.
So we continue to two we don't set the market rates for deposits we continue to.
Take advantage of those and continue to look at to grow the franchise.
Maybe a quick one for Mark not sure if you have it but the size of years shared national credit portfolio.
Do you have that handy as well as your leverage loan portfolio and I'm not quite sure. How you described leverage lending, but if you have that hand it'd be great.
Yes, our snic portfolio is really very modest Jerry so.
It's really a a relatively small number our leverage portfolio is lovely loan structure trends as we call. It is in the range about $400 million.
Great. Thanks, everyone.
Yes.
Ladies and gentlemen, as a reminder, please press star one if you have a question.
The next question comes from nascent race with Piper Jaffray. Please state your question.
Hi, guys good morning.
We are anymore on the.
Hi back from here I think Pat you mentioned some volume it constrained in the fourth quarter as the part deal nears closing so just curious on maybe the appetite for buybacks into 2020, assuming maybe the stock remains near the current levels and it seems like the seasonal impacts can be fairly digestible. So just curious kind of get your thoughts on the buyback heading into 2020.
Yeah.
So we like our capital levels, where they are so we're not a big hurry to lower them, but absent other either either higher organic growth or other acquisition or capital deployment alternatives, we're creating 70% of earnings every quarter and so.
The.
Philosophy behind the buyback if you will was to be able to to eat up that excess earnings accretion overtime as we earned it.
We would we like the stock at today's price as a buyer we would like it probably a good bit higher quite frankly to Mike's prepared remarks on value of our stocks that we think that we'll continue to be a good bye.
For the foreseeable future and you should you should expect us to be more programmatic with that as we as we earn and accrete excess capital.
Again.
Let me helpful. There as well, we manage our capital consistent with what our long term goals and priorities are so as we look to determine how we're going to manage that we look at what provides we think the strongest returned to our shareholders and Thats where will ultimately drive.
So how we ultimately deploy it will really be dependent on the environment and what the choices are as we go to do that.
Consistent with the capital plan that we talk about with our board and then consistent with the feedback that we get from our investors were up talking consistently with them as well.
Understood. That's helpful color and I guess within that context might curious to get up in just in terms of what you're seeing in terms of the flow of M&A opportunities at this point I can't imagine the size of the parties, but you guys on the sidelines near term. So just curious if you're seeing increased activity flow across your desk or if it's kind of steady state versus what we've seen recently.
I would say the environment generally reflects.
The M&A environment, just reflects about the environment around it so right now there's a lot of noise and a lot of volatility around the market. So I would assume that would slow things down to a degree, but there's always some steady stream of dialogue that's out there at any one point in time.
I would say our focus as we think about it certainly here in the short run is we want to make sure that we put our best foot forward as we go through and integrate park and that's that's really where appointed emphasis as to the extent opportunities become available we're always ready to consider those.
Be proactive there.
Okay. Thanks for the color.
Ladies and gentlemen, once again as a reminder, please press star one if you have a question.
The next question is from Daniel Tomorrow with Raymond James. Please go ahead.
Good morning, guys.
Good morning line.
This is just a little bit of a clean up question here you mentioned the employee expense had some commissions related to the higher loan sales you have that number in terms of the change between the second quarter in the third quarter.
I.
Don't have that tip of fingers that we can we can follow up with you on that.
Okay sounds good and then.
The decline in professional services fees it was impacted by timing differences.
The second quarter and over the tenant half million is that a better jumping off point then going forward.
No I think that timing would be sort and delayed and deferred so that that could tick up modestly.
Okay, so somewhere in between alright.
That's all I had everything else was that was that thank you.
Great. Thank you.
Ladies and gentlemen, once again as a reminder, please press star one if you had a question.
If there are no further questions I will now turn the call back over to Mr. Scott for closing comments.
Great. Thank you so in closing I just want to take the opportunity is as we always do to thank all of our colleagues.
Many of whom listen to this call for their many contributions and investment in our performance.
Is there engagement that drives our success.
I also want to take the opportunity. Thank all of you for listing and for your interest in an investment in first Midwest have a great day everybody.
Ladies and gentlemen, this concludes the conference for today. Thank you asked for participating and have a nice day all parties may now disconnect.
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