Q3 2019 Earnings Call
Our net interest margin improved for the quarter by six basis points from 247 to 2.53.
The impact act of the July fed cuts.
Darren Thompson of both of 18 for $1 billion, which gave us some insurance at that time for future anticipated interest rate increases.
With the two rate cuts or already in place and a third anticipated in the near future or in the fourth quarter that.
The positive impact on our mall margin as we move.
Of this year.
Last year on this call for the.
And our net interest.
This margin forecast was LIBOR rate.
Hello.
And the but I would say the Cas currently is at the tail.
For the bank.
Either way less capital and continue to diversify our loan portfolio.
During the quarter, we grew cnine loans and construction loans.
Billion, while CR three and multi.
Approximately $287 million.
With the yield curve flat to inverted during the period, we decided to slow that down on multifamily and CRT lending and focus on higher yielding business lending.
This lending drives a 50 to 75 basis points improvement yield and is more profitable at the margin.
With all the noise related to New York multifamily regulation.
And the land latter stages of the credit cycle.
We believe that this is a good strategy to reduce our growth in CRT and multifamily, especially after the robust growth that we've experienced in the last five years.
With respect to the recent changes in the New York City rental regulations, there appears to be a market reduction in market activity for New York multifamily relative to New Jersey in Pennsylvania.
In our product portfolio refinances of non New York properties have outpaced New York.
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I would like to drive for investors Bancorp.
Kevin is every day.
First name David.
The last name Brown.
Our company U.S.
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H.I.E.R.A.
Okay. So I joined the call is being recorded.
Thank you.
Amber.
During the quarter, we reorganized our retail branch teams by eliminating the assistant branch manager position, thereby eliminating 140 positions.
We moved some of these positions to administrative functions at three regional sand is approximately 33 employees to Brooklyn as is Lynn and Robbinsville operating centers.
In addition.
We are creating more opportunities for assistant managers by move in 28 of them to branch manager positions and another 40 to universal bankers.
This change this net change in stat was a reduction of headcount 40 people.
We continue to expand our business banking initiative and now have teams of 27 bankers with three more to higher one in New York and two in South Jersey.
North Jersey team is fully staffed and we are moving into the markets with great enthusiasm and and speed.
We have stronger momentum with our advisory boards and have increased our outreach to centers of influence in both New York City and long Island.
Yesterday I spent the day on long island with the gold coast team attending their board meetings. The board along with their advisory Board will make up our new long Island Advisory team and has a very strong group, who are entrepreneurial and have a very robust knowledge of the long island market.
We're very excited to be working with this group and look forward to our meat and greed event with their top customers scheduled for mid November .
We expect expect to close on this transaction early in the first quarter of next year.
During the quarter the retail team entered into agreement with on deck at Fintech company as part of a small business digital lending platform, which will expand our small business lending and improve the customer service for loans under $1 million.
We have an agreement with we works, where our New York City relationship managers have access to call on businesses in that space also.
We continue to expand our sales activities with lawyers and Cpis in New York City, and long Island and have a coordinated effort engaging with the communities to expand our overall brand acts are to expand our brand across new target customers in the Lakewood deal and Brooklyn corridor.
Our teams are working hard and our sales activities are up during the previous year.
With the implementation of Salesforce CRM system, we are managing this process diligently and adding resources to improve results.
This is a critical part of our plan and we need to execute and invest in our technology and the sales training of our staff.
Being diligent to control our expenses.
With some help from the fed with respect to rates and sound cost control. We believe we were in a much better position for 2020 than last quarter.
With that good news I'd like to pass the call over to Sean Burke will give some further commentary on operating results. Thank you Kevin.
Net interest margin was 2.53% an increase of six basis points from the prior quarter higher asset yields higher prepayment fees and stable deposit costs drove the improvement.
Our provision for loan losses was negative 2.5 million for the quarter Division was impacted by improved credit quality metrics, including the level of nonaccrual loans, coupled with the decline in our loan portfolio balances.
Our allowance remains robust and our credit and allowance ratios remain amongst the strongest in our peer group.
Our allowance to nonaccrual loans coverage ratio was 248% and our allowance as a percent of loans was 1.05% at September thirtyth.
Noninterest income totaled 14.8 million for the quarter, an increase of 2.1 million from the prior quarter on a core basis.
The increase was attributable primarily to the success of our customer swap program.
Non interest expenses totaled 108.7 million.
Included in the expense total for the third quarter were 3.3 million of compensation expenses related to employee severance and our shareholder litigation settlement.
In addition, professional fees were elevated by approximately $2 million due to enhancements made to our commercial treasury management and online banking products as well as cost to improve our risk management process efficiency.
Absent these items noninterest expenses were relatively consistent quarter over quarter.
Our effective tax rate was 28.8% fairly consistent with the prior quarter.
Now I'd like to turn it back over to Kevin for concluding remarks, good thanks, Sean.
I haven't been out on the road recently with shareholders and potential investors in California in Boston.
It is clear to us that we need to continue our transition to a commercial bank and enhance our transition from a trip to a full service bank, we need to work smarter and more efficiently and I emphasize more efficiently to maintain our strong risk and credit culture, while improving our operating matrices.
There was a strong focus here at the bank on our culture at investors that is focused on driving shareholder value.
We certainly are not satisfied in our results, but our dedicated to making the changes and changes difficult, sometimes but necessary to improve our returns with the goal of a 10% return on equity by the end to 2021.
We have a plan and we are different bank.
That wants to make a difference with as employees our customers and the communities that we serve and if we continue to serve these groups our shareholders and own is you will be rewarded.
There is strong momentum.
Going into the fourth quarter and 2020.
It's a different feel at the place, especially after being added to be DSA order, but we need to execute on our plans execute on our strategy with both the retail and commercial customers.
Where we feel pretty good about the quarter and I think we are moving forward with tremendous tremendous opportunity in the marketplace for our bank. Our size. We thank you for your support and now I'd like to turn the call over for some questions. Thank you very much.
We will now begin the question and answer session.
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If you are using a speakerphone. Please pick up your handset before pressing the keys to withdraw your question. Please press Star then to at this time, we will pause momentarily to assemble our roster.
The first question comes from Mark Fitzgibbon with Sandler O'neill and partners. Please go ahead.
Hey, guys good morning.
Good morning remark.
Sean I'm wondering with all the costs associated with those projects you did this quarter Treasury management online banking and risk.
Well those costs all be out in the fourth quarter and should we assume and operating expense run rate of around 103 million.
We expected to return to a more normalized level Mark So I would probably guide around 105 million area is more appropriate plus or minus $1 million.
Okay, and then secondly, I wondered if you could share with us the size of the Cnine pipeline and maybe with the average rate on that is.
Yeah, Hey markets dominant the the Cnine pipeline is about.
900 million.
And has a.
In average yield of about 480.
Okay.
And then.
Well, we likely to see more negative provisions in coming quarters or a week, we get into the end of that would you say.
It really does depend on asset quality and loan growth and this quarter. We benefited from the fact that loan balances were down as Kevin alluded to.
The strategy about.
Allowing lower yielding.
Multifamily commercial real estate in residential loans running off and associated high cost funding that goes along with that so is that.
Trended down so did our allowance.
Okay, and then our Hawk arc I'd, just like to add like I mentioned the pipeline the 60 to 90 pipeline.
The doesn't seem like any major loans around.
On the on the horizon and in that time like I said, there's no loan lodging and 3.3 million.
Okay, and then you will notice.
From if I'm reading the tea leaves properly.
Looks like your margins going to be up significantly in the fourth quarter can you help us get a sense of how much that is and.
How future rate cuts will impact the margin in 2020.
Sure there some moving pieces there but.
Regardless, if the fed cuts in October we expect margin will trend higher in the fourth quarter, Mark driven by lower deposit costs and our emphasis on higher yielding commercial loans, we forecast the margin to expand around five basis points in the fourth quarter.
And that's exclusive of prepayment penalties.
I think thats, regardless of what happens to prepayment penalties. It is a wildcard, but the guidance that I gave I think were being relatively conservative when it comes to prepayment.
Hey, Mark just to point to add to what Sean's comments, where.
Approximately 25% on now deposits.
Our.
Tied to the fed funds index.
So.
The fourth quarter.
We will result.
In a full quarter of benefit if you will.
For the two rate cuts that have occurred in July and in September .
And then thank you Nick.
Mark Mark just a clarification point I think you were asking our core margin. So the guidance I was giving is a core margin lift.
Due primarily as Dominic and Kevin described improvements related to deposit costs or that trend downward in deposit costs and also our continued remix of the balance sheet to higher yielding commercial loans.
Thank you.
The next question is from Laurie Hunsicker with Compass point. Please go ahead.
Yes, hi, good morning, and really like to see your margin expansion I was wondering if if you could help US do you have a margin for the month of September just said that we get a snapshot look at where are you currently are.
We do not Laurie we don't have that him in front of us and okay.
The point, we were trying to make that Kevin was alluding to is that this quarter. We benefited more from prepayment fees. Sir we saw deposit cost inflect were slightly down and we expect to see deposit cost trend, even lower selling into the fourth quarter.
Sure and just to close the loop on what Mark was asking so your your core margin extra prepays, let's to 45. So we should think about that in the 250 range.
With everything sort of adjusted for the fourth quarter is that correct.
Sounds about right sorry, Okay, and then can you just help us in terms of your deposit cost because we've seen those come down nicely.
Particularly savings.
What what sort of what's sort of cuts are you making in various categories.
What's on the docket, how should we thinking about that Laurie I think the primary cut.
Were in our online accounts.
We had approximately 350 million there.
At a rate of 250, those it down to 190.
We've lowered all about CD rates.
And as I said, we have a significant portion of the deposit book tied to fed funds, which is benefiting the cost of funds also.
Okay, Great and then can you just give us an update on your muni deposits, where those balances are.
And what that cost us running.
It's about $4 billion.
$4 billion and.
Cost was running as of September Thirtyth that.
Just under 2%.
Okay, Great and then.
Just a quick quick line item on the income statement that [noise].
Sean that look like the BOLI income was a little outsized is there something nonrecurring in that.
A little bit there was a small debt benefit that we picked up in the quarter.
Around why 300, or something maybe 100 or 200000, Laurie, but it sounds about.
Right.
Okay, Great and then just generally Kevin I wondered if you could comment.
On your view of M&A as we look forward and this postseason world how you're approaching it what your thoughts are what changes. Thanks. So much. So we're certainly focused on the Gulf coast transaction.
We filed the yes for this week and.
I think we continue to look at situations, but we continue to be mindful of where our stock is trading at and the opportunities that that allows us to to execute on.
I think there's a lot of discussion activity in the marketplace.
We have opportunities to look at a lot of things, but we're going to be very prudent in our approach and mindful of.
Have a tangible book value dilution.
I don't think anything has changed at the organization.
But I think it's we're pretty consistent on that message and.
We'll continue to execute on the gold coast deal and because of the opportunities that provides us.
Great. Thanks for taking my questions.
Your next question comes from Stephen do wrong with RBC capital markets. Please go ahead.
Mr. John Your line is open an entre and perhaps your muted on yours.
Good morning, guys, sorry about that.
So im just jumping out a little late I apologize. So my question sorry been asked but I'm, just leaving prepayment income aside how should loan yield hold up in the fourth quarter under an October rate cuts scenario.
They should hold up well Steve.
Looking at the average loan yield that was Cnine CRB.
And.
Yes, it's north of four in a quarter percent.
So.
Florida quarter is where we are on multifamily CRT and about 475 on multifamily.
Sorry on Cnine.
Great. Thanks, I appreciate the color that and then just on your FHLB borrowings.
Do you really what's the repricing opportunity in 2020 in the costs that were looking at.
Steve There is an opportunity for us to reprice those at a lower levels.
I'd say the bigger opportunity that I'd highlight remains with respect to our brokered deposits in our CD book.
There are significant savings there as those reprice the average life of the brokered CD book and our our retail Cds is inside of a year and probably closer to six months on average and we're going to see a tremendous amount of repricing and.
On average what we see repricing is is in the around the currently around the 230 area and we believe that it will reprice down so around the 180 area.
That's very nice to hear yes. It then basically the borrowings would just be an additional potential tailwind on top of that.
And then just to get moving onto your expenses are you guys pretty much done with the consulting type of professional fees or is there still more to come.
If the consulting fees are done for the year we.
I think we were pretty specific on what we use the money for in we've.
Those expenses were one time.
We will see some additional expense reductions in the fourth quarter, we had a.
Yes.
A change in employee count, we reduced head count and that will happen.
That will be reflected in the fourth quarter.
Got it.
And similarly, your your advertising promotional expenses is essentially a good run rate to end the year.
No. It's elevated this quarter, so Steve we estimate and that approximately.
2 million of expense professor of advertising and professional fees will be.
Right Yeah.
Got it got it yeah, I apologize for that and then to say ex those.
And then just lastly.
Your your share repurchase opportunity.
Have you guys sized up what you're looking at for 2020.
No not absent the gold coast deal. So what I'd say is we're expecting the gold coast deal to close in the first quarter and we have communicated our desire to repurchase the stock equal to the stock that we're issuing in connection with the transaction. So.
Outside of that.
What I would say is we do remain committed to buying back our stock specially at these levels and we will and we'll continue to buy back at these levels and we'll have more to report in terms of guidance on the fourth quarter call.
I appreciate the color guys. Thanks again.
The next question comes from Jared Shaw with Wells Fargo Securities. Please go ahead.
Hi, Good morning, this actually team or Brazil are filling in for Jared.
I appreciate all the nice I appreciate all the color on a New York multifamily I'm just wondering as we've been in this environment now for a couple months is or the thought still that this is mainly going to be a volume type impact or has there been any change in thoughts around the potential for credit risk.
Tim I'm not sure of your question are you asking if.
We're going to continue to see how multifamily portfolio decline.
Just in the and the broader environment is it still just the risk of volume going lower in this environment or has the environment show shifted such that there is credit at risk as well. So I think I think I think you always going to be this Kevin I think you always going to be looking at the.
The credit and it's always going to be an issue, but there are other factors that impact that is rising rates reset value right now it's been benign because.
Treasury rates were down people could reset and not have to go out and get an appraisal.
So we really havent seen we haven't done very we've done very little re Fi into New York market over the course of this past year, so because of the interest rates. They just reset and they'll go out and and get an appraisal in that type of situation.
If you look at where we are today I think a big issue in the CRD spaces property taxes, I mean, if that impacts your net cash flow. That's certainly will be a credit event in property taxes go up so with the facts and circumstances that we know today and the way things like our borrowing.
These are reacting to the change in regulation.
It's.
To be seen and we don't think is there's a credit event on the horizon at this point in time, but if some other factors should change we're all sudden the resets mixed and a wise.
More difficult or and cash flows change that could have an impact property taxes could have an impact, but the majority of our buy it and our overall exposure to this is not that significant of the $8 billion that we have in New York City rental and Reg and $8 billion and multifamily.
We're looking at possibly you know 800 to a million in exposure in this space that we're a powers would be impacted.
Okay. That's helpful.
What I would just add to it Kevin points out on the credit front is that.
The shape of the yield curve also has something to do with it in.
In the sense that.
In order to be in that market.
You need to be somewhere between three and creates in three and a half no thats, what the latest colors, showing where at three and five eight and so its deliberate attempt to.
To reduce the asset because of the the spread implications right with with the yield curve being inverted as it is.
Yes, it's dilutive it's dilutive to NIM. So we're being very careful about those types of assets coming on the balance sheet.
Right and as we think about that portfolio is the third quarter level of decline.
Good run rate going forward or should we see balances.
Next salaried and declining in future quarters.
Yes, I think that.
Our objective is to keep the balance sheet steady.
So im not sure if it will continue to decline I can tell you that we have lowered rates over the last.
Few weeks, we've got the benefit of the lower cost on the liability side. So that's given us a little bit more opportunity to be more competitive in that market.
But we're going to be very careful about the volume.
Of loans in the multifamily book coming on because quite frankly, we want to increase.
The portion of Cnine loans.
On the balance sheet, just in our transition to a commercial bank.
Great and then looking at the total loan book as expectation that other categories like see and I are going to be able to offset the declining multifamily portfolio.
To some degree at this point I would say that it it's not a one for one reclass between multi and see an eye, but we're going through a number of new hires and we expect that we can build up to that level also we have expanded some aspects of commercial real estate.
Lending like.
Non multifamily assets and construction assets. So we think with those two categories and cnine than we can pretty much filled the gap will fill up the negative of the multifamily amortization and pay offs.
Okay, and then just one last one for me.
Where do you see the capital ratios shaking out in the 10% a return on equity guide for 2021.
In terms of a tangible common ratio, we have talked about an 8.5% to 9% tangible common equity ratio to tangible assets.
Okay. Thank you.
Thank you.
This concludes our question and answer session I would like to turn the conference back over to management for any closing remarks.
Okay, well I want to thank you for.
For participating on the call today.
Again, we feel it's been a strong quarter, we're at an inflection point with respect to our net interest margin.
I guess, that's one of the advantage of being being an outlier being a liability sensitive organization, we're still on that journey to continue to.
To evolve into a full service commercial bank. Our credit is strong capital is strong we declared a dividend of 11 cents and we continue to make improvements in our infrastructure, our technology and our risk management I want to thank you for participating on the call I look forward to senior housing about on the road. Thank you very much.
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