Q3 2019 Earnings Call
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First name David.
Last name Brown.
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This bodes well for our residential mortgage group, which realized increased volume and gain on sale income during the quarter driven primarily from a tailwind of lower interest rates and increased refinance activity.
We sold approximately 220 million in loans, approximately 39% of which came in the form of a jumbo portfolio bulk sale in which we retained servicing.
Conforming loans sold increased 29% from the previous quarter, which generated the balance of gains by a sales through our standard GRC outlets.
Deposit trends were more mix during the quarter on the favorable side noninterest bearing deposits grew 3.3% annually for the quarter, while our core branch deposits have grown almost 5% year to date annualized.
Time deposits expanded 29% on a quarterly annualized rate. However, much of the growth came in the form of brokered Cds.
Notably, we witnessed accelerated loan closings towards the ended the quarter, which exacerbated the use of brokered Cds.
That said, we recognized a favorable term relative to other forms of wholesale funding that fit well within our interest rate positioning.
As illustrated in the average deposit balance and rate trends chart on slide nine we've been managing deposit rates lower across both business and retail segments.
As shown on the monthly average rates for savings now and money market accounts have declined for five of the past six months, while Cds have begun to show signs of low repricing as well.
Worth mentioning is our ability to consistently realize retention rates well above 80% for the related CD maturities.
With that said the use of brokered Cds may continue to be a useful tool to offset any future slippage as we continue to realign our core deposit pricing.
Finally, where there is always a lag to the effects of lowered pricing is seen in the averages. We do expect more noticeable declines over the course of the next few quarters given the forward repricing dynamic as we previously highlighted on slide six.
During the quarter, we saw reliance on short term borrowings diminished by approximately 562 million driven by a combination of adding modest duration at favorable long term funding rates combined with the addition of 300 million of inverse floating rate repos to the balance sheet.
The impact of these actions can be seen in the linked quarter decline of our average long term funding costs of 41 basis points and the average balance increase of 536 million.
On a combined basis, we saw total short and long term borrowings, including brokered Cds increase only 100 basis points to 19.6% of total assets.
Moving to slide 10, I want to spend a few minutes talking about credit and the anticipated impact of Cecil.
Our total nonperforming assets increased approximately 4 million from the previous quarter.
The majority of this increase was related to one commercial real estate loan, which we believe as well collateralized in the event of further degradation.
Our accruing past due loans selling more noticeable increase from the previous quarter. However, most of this was due to non credit related issues delaying a few large loan renewals.
While we were required to report these matured performing loans as accruing past due loans. We believe loans are well secured in the process of collection and do not present, a material negative trend in our credit quality trends.
Notably the bulk of the increase from the quarter end has since been returned to current status.
During the third quarter of 2019, we recorded an $8.7 million provision for credit losses.
This was an increase of 6.6 million from the previous quarter.
As we had mentioned on previous calls we are anticipating an additional allocation of reserves related to non impaired taxi medallion loans previously identified as TDR loans coming up for renewal in the third quarter of 2019.
Accordingly, these actions drove approximately $4.7 million of the quarterly increase.
Currently we do not expect a similar provision related to medallion loans for the fourth quarter.
As you know we're approaching the adoption of Cecil the new accounting standard for credit losses, which will go into effect January Onest 2020.
We've completed our third parallel test today and based on our expectation of the forecasted economic conditions and portfolio balances as of September Thirtyth 2019, we estimate that Cecil could result in an increase to our non PCI allowance of approximately 50 to 70 million as compared to our current reserve levels.
This addition would be exclusive of the balance sheet transfer that occurs within the PCI related credit portion that exist today.
The PCI related reclassification will not have any impact on the pro forma capital or regulatory phase in period.
We continue to expect the increase in reserves to be driven by several factors, including our economic outlook and geographic diversifications.
Notably the estimated impact is also exclusive of potential impacts from Oritani. However, based on our previous diligence, we do not expect a material deviation on a relative basis.
Importantly, this remains an approximation and will further refine this estimate through year end.
Finally, moving to slide 11 of our presentation to cover some targets and outlook, you'll notice we are narrowing and revising the range for our net interest income projection for the full year from 4.5% to 6.5% to a range of 3.5% to 4.5%, which encompasses a greater emphasis on our.
Prolonged flat yield curve environment.
This range does not encompass any potential impacts were more a tiny should the transaction close in the fourth quarter.
Additionally, we are lowering our fourth quarter effective tax rate range to 24% to 26% from the previous range of 25% to 27%.
Now I'll turn the call back over to IRA for some additional commentary.
Thanks, Mike.
I'd like to give a brief update regarding our announced acquisition avoid Danny.
Let me start by saying, we are extremely excited and well prepared to welcome the customers and employees of mortality into valley.
Our planning and outreach had been remarkable and I remain highly confident in the success of this integration.
As previously disclosed.
Valley has received regulatory approval from the FCC to complete the merger.
The merger remains subject to additional regulatory action by the fed and approval by the shareholders of both valley and Oritani.
We remain hopeful in our ability to close this transaction within the original timeline of the fourth quarter of 2019.
When we announced the transaction we had not included any branch consolidations into the cost save estimate.
Subsequent to announcement, we filed a public regulatory application and disclosed our plan to consolidate nine branches upon conversion.
These include six or attaining branches and three legacy valley branches.
We plan to give updates on savings associated with these consolidations as we had closer to conversion most likely in the first or second quarter of 2020.
Importantly, we do not expect any of these additional consolidations to impact the timing of the existing 10 closures identified in our Standalone branch transformation plan, which we discussed last quarter.
As we strive to achieve a more relevant retail experience you should expect the continued rationalization.
Relocation and improvement of our physical branch network for many years to come.
For reference over the past five years, we have closed 59 branches, while maintaining and improving retention rates on deposits.
In closing this quarter's results demonstrated many of the efforts we have been working towards over the past two years.
Valley has renewed focus on sustainable and responsible growth driven by greater diversification and product and talent.
The banks transformation from manual to more automated processes.
Combined with the streamline delivery systems are creating greater operating efficiencies.
The revenue distribution away from net interest income is showing increasing signs of stabilization and growth.
I am extremely proud of all the outcomes and believe overtime. These will contain have a greater positive impact on shareholder return, while reinforcing our commitment to community.
Employees innovation and acquiring new talent.
With that I'd like to now turn the call back over to Michelle to begin QNX. Thank you.
Thanks.
Thank you as a reminder.
Hi, Andrew.
Good question. Please press star one on your telephone to withdraw your question. Please press the pound can you. Please standby.
Yes.
Our first question comes from the line of Ken Zerbe with Morgan Stanley . Your line is open. Please go ahead.
Great. Thank you.
I guess is just starting off with taxi in terms of additional provisioning put up against that one is there to stop I guess next quarter or the quarter. After if additional taxi loans mature and they are not able to pay that the loans, but could we see a repeat of this where we're building additional reserves for those those.
The other launch thanks, Yes, not bank. This is Tom Identive. Thanks for the question I, we don't have any significant maturities of the taxi portfolio in the fourth quarter or through 2020 mindful that we review values, 85% of our portfolio is on impaired status.
But we don't expect this year. This in this past quarter, we had about 14 million that came off up for renewal, we don't have that in the fourth quarter or through most of 2020.
Gotcha, Okay, and then I guess.
And with taxi that got a lot of your peers or some of the bigger taxi lenders unless they effectively dealt with their tax exposure stay where they rode down.
Just very low levels do you guys feel good about the levels that you're currently holding the taxi loans evidence is there if we use market values I guess, where you marketing these loans down to on your books right now thanks, Yeah, Okay and we.
We are using a six month trailing average of of sales where marked down to about 212000 on in New York City 31000 on the Chicago keep in mind, we 67% of our portfolio is on non accrual status, while only 16% is actually not paying and as a group.
Opened that 16% that we're in a process of renewing and bringing back to current part of that renewal be bringing it to current status. The will continue to carried on non accrual.
It's less than what percent of our total portfolio. When we do renew we tend to get more guarantee sometimes side collateral. We think we're better off just managing as we are at at this stage.
Gotcha, Okay, and then just one final question in terms of the swap activity I understand that this quarter is very strong it's unlikely to repeat next quarter, but are you doing anything different in that business that is driving the higher amounts or is this just solely driven by interest rates that should fall back down at some point back down to more normal level.
So what we've seen in the past.
I think is your highlight a ken it's obviously a little bit higher than what has historically been but I think it's consistent with their focus we've had on ensuring middle market lending across the entire organization.
We've begun to really train our staff and targeted and allocate resources towards specific customers as well. So we think this is a concerted effort that we've done internally to really drive this specific business.
As a part of its a function of where interest rates are as well, but this was definitely a strategy internally.
And just to add is there's really nothing unusual.
We do most of our business is below 10 year maturity are there is some slightly above that but it's nothing unusual and it's really across the board within our portfolio and oil all four of our states.
Okay, great. Thank you very much.
Thank you and our next question comes from the line of French.
Sandler O'neill.
Please go ahead.
Good morning.
Just wanted to start on.
Focus on the NIM.
In terms of.
Obviously got a pretty challenging yield curve as well as as rates move and lower but.
Based on your GAAP analysis. It seems like you. Your messaging here is that you can.
Defend.
The NIM at these levels is that the message and then secondly.
Patch that when you guys announced oritani.
You were asked about pro forma NIM, you gave a number of down three basis points just wondering if there's any.
A significant change there thanks.
Thanks for the questions Mike.
I'm going to reference you back to slide six in my prepared comments that one of the things that will provide a tailwind to value in the coming quarters is just the sheer level of cumulative negative gap that we have as we reprice.
The large portions of our funding sources, including core deposits.
So I think thats a huge advantage.
Maybe relative to some other competitors.
Okay.
Sure so okay. So.
And then just on the on the Aratana or Tony part of the question any change there.
So.
Nothing to add there.
Okay, and then just finally on loan growth.
As you mentioned you're.
Trending at the high end or slightly above the high end of full year guide.
Just kind of curious what the.
Why we should expect normalization in for Q to sort of stay in that guide is it just seasonal more than anything else or can you give us any color on.
Your thoughts given what the pipeline looks like here.
Yeah, It's Tom Mcgough frankly.
Our our growth through the first nine months, we annualize that it's at just over 8% to 8.2% third quarter has traditionally been our strongest quarter of production and growth.
Yes, we have different options of what we can and will do with regards to loan sales and such to our syndication and secondary marketing desks.
Yes, our growth again as well diversified the new production. The average loan size is no different than what we have historically had on the balance sheet at around 3 million loan size for Cree and about 1 million load size for CN I. So the focus has really been on relationship driven not volume driven and when you look at that deposit growth and.
I remember in the 5% on pace for the 5% growth our business deposits year to date grew 6.5%. So when you look at that see Eni growth combined with that business deposit growth. Yes, that's what's really fueling both ends of that so I I think we're comfortable with the 6% to 8% guidance for the are probably closer to that upper range.
Frank This is our you know being a finance Guy right you love to see something on a linear basis.
Thats, how budget should look and everything else just makes things a lot easier, but the Tom and team tell me that theres customers and relationships involved and unfortunately, everything Doesnt say close at the same time that we and anticipate but we're comfortable with that full year guidance of 6% to 8% as we attempt to manage.
Profitability versus loan growth as well.
Okay. Thank you.
Thanks Frank.
You and again, ladies and gentlemen, if you have a question at this time. Please press Star then one.
Question comes from the line of David.
With Wedbush Security. Your line is open. Please go ahead.
Hi, Thanks, a couple of questions for you so sticking with slide six I just wanted to make sure I understand the.
GAAP analysis this essentially is.
Representing how much in liabilities are repricing in each of the quarters versus how much in assets are being repriced in those respective quarters right.
Thats correct, that's the dark blue versus the light blue bars Yep, Okay, and then on the right hand side with the CD rates do you have an estimation as to.
How much you expect the CD rates to to improve and in each of these quarters.
Well I'll point, you back to our.
Our overall deposit betas, which in the prior to the past quarter were only 7% and I don't think thats reflective of what.
Has gone on and will go on in the future actually when you go back to June to September those deposit betas are closer to 21%. So I think as the fed continues to.
Decreased rates as we expect.
We could see meaningful repricing somewhere in the neighborhood of the first and second quarters of 2020, probably around 50 basis points.
Got it that's helpful and then shifting back to the swap fees I was curious as to who's who's taking on the counterparty risk because I'm assuming that the borrowers are swapping fixed for floating.
Most of this is clear.
Through through the exchanges.
Got it got it Okay and then the final question for me is on New account openings, you mentioned about how the branch deposits have grown 5% annualized year to date and last quarter. You had a couple interesting stats about new account openings and so forth I was curious any updates and if that.
Momentum continued into the third quarter.
Yes, absolutely has yet when I talked about the business accounts, we at 65, New account 6500, new accounts opened up sorry for the first nine months.
On the positive side, you'll Florida demand deposits were up over 10%, Alabama up over 13% are the biggest increase in deposit and commercial deposit openings and dollars is coming out of the New York market and on year to year basis, We've had 450 million of deposit growth in our.
Branch system into New Jersey market, So you're really seeing that very consistent commercial deposit driven activity and all around what we talked about over the last couple of years building a treasury solutions product hiring a sales force matching it with the lenders to make sure we have relationship driven business going on and all our markets.
That's very helpful in next year.
Sorry, if I could just add onto a tonsan.
To me I look at it over a relative basis from appear to have maybe a little bit longer time, but if you look at the annualized the new account business growth business accounts for this for this year to date were up 16% and new accounts on businesses, which is the big number when you go back versus two years ago, that's over 50.
Percent new business accounts that were generating this organization than where we were in 2017, which is the massive testament to this the shift in culture and shift in strategy within this organization and we think these are going to have positive benefits as we continue to grow the deposit book.
That's very helpful and actually one more clarification question on the expenses.
The year to date range.
Adjusted basis has been 136 million to 140 million when you say that.
The foreseeable future, we'll see <unk> expenses in this range, you're referring to the adjusted range.
Right.
Well I think were referring back to first quarter of 19, where you started 147 almost 148 million.
Through third quarter to almost 146, but if you look at the adjusted numbers that number for the first quarters more like 136 million and as we stated in our prepared remarks in the third quarter Visscher was 140. So I think that is probably closer to the range that.
We're going to experience.
So adjusted should be in the 136 to 140 range going forward credit.
Okay. Thanks very much.
Thank you. Thank thank you on our next question comes online.
With KBW. Your line is open. Please go ahead.
Thanks, Good morning, everyone.
Morning.
I apologize if you guys covered this I Unfortunately to happen late but just in terms of that this large swing in the swap fees. This quarter did you already indicate what was the driver of that.
We talked a little bit about it but largely collyn its or it's a focus internally that we've had on targeting middle market customers Reengaging with our staff to make sure they understand the benefits and having conversations with our relationship customers as to the benefit.
Obviously, there is a function of it that it should go to where interest rates are.
That said, you know where were attempting to manage the interest rate risk within our balance sheet as well. So it's a combination of where interest rates are a combination of the focus we've had on targeting specific customers and I think more of a testament to the the wonderful efforts of our staff.
Okay and in your slide deck I know you indicated that it's not like you to repeat was there any.
And just in terms of that that was it volume driven or is there any one large relationship that was in there I mean, I'm just trying to quantify when you say not likely to repeat like <unk>.
It was all it was all volume very granular a large number of trades and pretty much spread equally.
In north and south of our regions.
Okay. That's very helpful. Great. Okay. Thank you and then just one last small item the the uptick in the theory nonaccrual that you saw this quarter was that in the Florida market or New Jersey market now now it. It was it was the past due but paying it was one relationship a 22 million dollar is that was caught.
And for all payments not a credit issue we were in a process of renewing and we didnt renew until the first week of October that was removed. There was also a $4 million substandard loan that was moved to non accrual secured by two pieces of property up here in New Jersey market, which is a has value well above our loan.
And that was up here I was up here in New Jersey.
So everything went up here in New Jersey, Yeah got it maybe a longtime customers right. Okay. Okay on okay very good I'll leave it there thanks guys.
Okay. Thanks. Thanks.
Thank you and our next question comes from the line Steven.
With RBC capital markets. Your line is open. Please go ahead.
Hey, good morning, guys are apologize and jumping on late as well. So just wanted to follow up on the new business accounts you guys have a break out between the Florida versus the New York Metro area.
Oh, we do I don't have it handy as I as I mentioned.
The majority of the new business accounts on the commercial side are being opened in the New York market.
I don't have that information in front of me with regards to the other about what the important part as we are seeing growth in noninterest bearing and in total deposits and each region, with Florida, and Alabama being above 10%, primarily driven by commercial.
That's good to hear guys.
And then just Oh I appreciate your.
Guidance on Cecil.
How does that affect your 2020 accretion expectations.
So our expectation right now at the levels that I gave you and I want to caveat again at those levels could change between now and the end of year, we don't expect a material change and the accretion as a result as seasonal.
Alright, great there'll be it for me Thanks again guys.
Thanks, Tim Thank you.
Thank you and I'm showing no further questions at this time and I would like to turn the conference back over to Mr., Rick Kramer for any further remarks.
Thank you all for joining US today, if you need additional information please reach out to Mike Hagedorn or myself and we look forward to talking again next quarter I'm going to.
Ladies and gentlemen, thank you for participating in today's conference. This does conclude the program and you may now disconnect everyone have a great day.