Q3 2019 Earnings Call
Good day and welcome to the service stuff Bancshares Inc. third quarter earnings Conference call.
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I would now like to turn the conference over to data Schafer President and CEO . Please go ahead.
Good afternoon. This is Dennis Shaffer and I would like to thank you for joining us for third quarter 2019 earnings call.
Joined today by Rich Dutton SVP of the company in Chief operating Officer, The Bank Chuck Perjure SVP of the company in Chief lending Officer, the bank and other members of our executive team.
Before we begin I would like to remind you that during today's call, including the question and answer period. You May hear are forward looking statements related to the future financial results and business operations for so this the bancshares inc.
Our actual results may differ materially from current management forecasts and projections as a result of factors over which the company has no control.
Information on these risk factors and additional information on forward looking statements are included in our news release and then the company's reports on file with the Securities and Exchange Commission.
We will record this call would make it available on so that's the bancshares website at C.I.V. be dot Com again welcome to suggest the bancshares' third quarter 2018 earnings call.
We'd like to begin by discussing our results which were issued this morning.
At the conclusion of my remarks, we will take any questions you may have.
I'm very pleased to announce that this morning, we reported another quarter of strong core or earnings with net income for the third quarter 2019 of seven and a half million dollars were 46 cents per diluted share and $25.5 million or $1.54.
<unk> per diluted share for the nine month ended September Thirtyth 2019.
To adequately compare to 2018, you need to add back the 9.2 million and 12.3 million in pretax non recurring expenses related to the acquisition of United Community Bancorp.
And the restructuring of the.
Their securities portfolio that were included in the comparable 2018 period after doing so our diluted earnings per share would've been 37 cents for the quarter in $1.37 cents for the nine month ended September Thirtyth, 2018, which means our 2000.
A night team diluted earnings per share increased by 24.3% for the quarter and 12.4% year to date.
Our return on average assets was 1.38% for the quarter and 1.56% year to date, while our return on average equity was 9.38% for the quarter and 11.07% year to date.
We had another great quarter, driven by our strong net interest income and non interest income.
During the third quarter, we did automate our accretion model related to the purchase accounting adjustments of you see be loads and consequently reviewed our assumptions.
Through that process, we determined that we needed to adjust the speed of accretion Accordingly, we made an adjustment during the quarter of 209000, which decreased our margin to 4.12 per se, we estimate that that impact a purchase accounting accretion will increase our margin.
Future quarters by approximately 15 basis points.
Well net interest income for the quarter declined slightly due to the accretion adjustment our net interest margin remains strong at 4.12% and 4.35% year to date.
Our core margin, excluding a excrete accretion is 4.15 per cent for the quarter and 4.21% year to date compared to 4.15% and 4.14% a year ago.
We increased non interest income by 2.1 mill.
We increased not increase interest income by 2.1 million for the quarter and 3.5 million for the first nine month up 2019 compared to the same periods last year.
These increases are primarily due to increases in games and service charges and interchange fees, which are consistent with the increases we've seen with the addition of new customers and debit card users from do you see bee transaction.
In addition gains on the sale of mortgage loans increased $260000 from the linked quarter in $466000 year over year, we originated and sold $80.5 million a mortgage loans in the first nine months of 2019 compared to 57.
Point $9 million during the same period in 2018, the third quarter alone, we sold $36 million of mortgage loans.
We continue to focus on controlling noninterest expense, which increased only 0.6% for the linked quarter. Our 2018 resolve included $8.8 million and $12 million in pretax non recurring expenses related to the U.C.B. acquisition.
Adjusting for the nonrecurring items are non interest expense increased $11.5 million or 30% year over year, which we are pleased with given that the acquisition of you see be increased our size by 36%.
Our loan portfolio increased $49.9 million during the third quarter and $86.7 million year to date.
That equates to an annualized growth rate of 12.4% for the quarter and 7.5% year to date, we continue to have strong growth in virtually all loan categories and across our entire footprint.
Our recent focus on Treasury management services has aided in the growth of commercial and industrial loans commercial real estate.
<unk> has been strong predominantly in our urban markets, including better than expected growth in the Cincinnati I must say.
Included in the first nine months of 2019 were $90.7 million and load pay off which somewhat muted our loan growth.
Jordi of our pay offs came from the successful completion of construction projects that are sold or refinanced into the permanent market.
Our loan pipelines remained very strong.
In addition, we have $117.4 million an approved undrawn construction loans at September Thirtyth, we anticipate a strong finish to 2018 with our loan portfolio growing at a slightly above slightly above a mid single digit annual rate.
On the funding side.
Our deposits increased $52.7 million since the beginning of the year. This increase was primarily the result of a 29.2 million dollar increase in non interest bearing demand and an increase of $35.1 million in interest bearing demand accounts.
As we mentioned during last quarter's call, we are emphasizing treasury services to our commercial customers and prospects, which is aided and expanding lower cost commercial and municipal operating accounts. These increases were partially offset by a 24.4 million dollar decline in broke.
Her deposits, which was shifted to short term federal home loan bank advances, which increased $42.5 million.
Our asset quality remained strong while we experienced 208000 hours of net recoveries during the quarter. We did provide 150000 for loan losses to accommodate the growth in our loan portfolio.
Our nonperforming loans declined to 9.4 million from 9.9 million at the end of 2018, which represented 0.42% of total assets.
The ratio of allowance for loan losses, the loans was 0.86% at September Thirtyth 2019, compared 2.88% at December 30, Onest 2018, the allowance for loan losses to nonperforming loans increased to 149.9%.
At September Thirtyth 2018 from 137.8% at the end of 2018, while we had good loan growth during the quarter, we continue to be disciplined and how we originate loans and believe this is reflected in our continued strong credit metrics with.
Fas. These final ruling earlier this month so less so this the meets the test to delay implementation of Cecil until 2023.
However, we will continue to prepare for its implementation.
I'm sure. Many of you saw the announcement earlier this week that we we redeeming our convertible preferred shares on December Twentyth, We believe redeeming our preferred shares helps to uncomplicate, our capital structure, particularly for investors that may not follow so this the closely.
We also announced that we purchased we repurchased 188200 shares of common stock during the quarter at an average price of $20.77 per share. We continue to view our stock repurchase program as one of the options available to us.
And maximizing shareholder value.
Again, we are pleased with another strong quarter fueled by solid core earnings and are confident our disciplined approach to managing civista and our long term focus on driving shareholder value, we'll continue to yield positive results.
In closing, while the lending and deposit environments remain competitive we believe that our continued focus on relationships will allow so best of the grow both loans and deposits without relaxing our standard.
Thank you for your attention. This afternoon and now we'll be happy to address any questions you may have.
We will now begin the question and answer session to ask a question you May Press Star then one on your Touchtone phone, if you're using a speakerphone. Please pick up your handset before passing the keys to withdraw your question. Please press Star then tail.
This time, we'll pause momentarily to assemble our roster.
Our first question comes from Nick could trolley with Sandler O'neill and partners. Please go ahead.
Good afternoon gentleman.
Okay.
So first I'd like to start out on the margin I. Appreciate your commentary on the go forward rate of the accretion impact, but can you give us some color with on your outlook for the core NIM.
I'm, sorry, I didn't hear the last part of that core NIM Oh, So core NIM I think is gonna be steady for the last quarter, we modeled.
One rate cut.
Occur next week and one at the end of the years really won't have any impact. So we're really not thinking that are for the core quarter to core it's going to be pretty flat based on what we modeled.
Okay, Great and then secondly, you guys had a nice gain in wealth management. This quarter can you kind of just discuss your progress with respect to broadening your customer base to incorporate you CB and your outlook for this business going forward.
Sure I think the wealth management, we've we've hired a seasoned veteran down in the Lawrenceburg and the Indiana market a gentleman that came from one of the larger institutions down there at a pretty sizable portfolio he's been able to transition over quite a few account.
In addition.
We're gaining pretty good or.
Momentum from our private bankers or who are working really well with our wealth managers, particularly in a lot of our urban markets.
And really across the footprint really across the footprint, but those two areas. We had we had revamp the private banking area about a couple of years ago to align it more without well we're story starting to bear.
Some of the fruit from those.
From that restructuring so.
We'll continue to look for opportunities in the in the wealth management area, but we've been pleased with what weve been able to do so far.
Okay, and then you mentioned the better than expected growth from the Cincinnati I must say this quarter can you help us quantify how much of the linked quarter growth came from that market.
Well I don't have the exact quarter to quarter piece of that but I do have I can tell you I guess from a year to date perspective.
About the $86.7 million the growth we've had in the and the first nine month.
A little bit over 40 million of that have come from the Cincinnati I'm essay.
Okay, Great and then lastly can you just update us on deposit pricing in your markets and have you seen an abatement in the competitive landscape given the interest rate environment.
Yeah, I mean, it's still competitive.
We do still see some outliers lot of the banks have retracted a little bit on their pricing as we have you know most we have a very low deposit cost base, our opportunity really lies with our Cds a private banking a in our municipal accounts those are really where we give a lot of special pricing.
Two.
So that's really where our opportunities, but it's still very competitive we do have some outliers that really have not adjusted the pricing, but again, we focus really on those relationships.
So you know, we're not chasing rate as much as some of our competitors are.
Okay. Thank you for taking my questions.
Yes.
Our next question comes from Kevin Reevey with D.A. Davidson. Please go ahead.
Good afternoon, Hey, Kevin Kevin.
So just curious.
What your mortgage lending pipeline looks like going into the fourth quarter I appreciate the color on the pipeline for the commercial side.
Pipeline.
No I looked at out there our pipeline going into the fourth quarters about $82 million.
Which is.
If you.
Quite higher than it was going to into the fourth quarter of last year.
Yes, we've had a knife a nice explosion of growth I'd say over the last this last quarter, just because of where rates reduced.
And I will tell you, but we'd normally run about 80 20 from a.
From a purchase versus refinance.
And I started we've really kept the purchase beef up at the Rifai amount of crept up and we and.
In the third quarter, we were 64, and a half 35 and a half a purchase to refi.
Great. So so what should we expect the same performance in residential mortgage in the fourth quarters, we saw in the third quarter.
I would say something close just because of some of the refi business, but as far as Lee in Ohio, and you're in the Midwest seems like late November early December things slow down another pipeline say that doesn't but as you know purchases usually slowdown that time, you're up here, but I would say that the run rate going to be somewhat similar.
And then on the other Treasury management side are you looking to continued to add professionals in that business and what's the competitive landscape looks like the higher I'm Treasury management professionals.
It's pretty competitive as you would get just because all of especially the regional banks.
Continue to drive trying to drive more and more fee income.
I would say, we're going to look to add people, but not anytime in the near future I would say that'd be somewhere in the into next year.
And is in depending on where we expanded.
Basis.
Excellent. Thank you very much.
Thanks, Kevin Kevin.
Ken if youd like to ask a question. Please press Star then one.
Our next question comes from Michael Perito with KBW. Please go ahead.
Hey, good afternoon, everybody bye bye.
[noise], if you walk me through the.
The comment in the release about the the margin and de accretion change can you just walk me through the mechanics of what exactly altered at that and.
Just maybe front a little bit more specifics about what happened exactly.
Sure sure. So when we did the deal we were using reports and it was it more manual process. The accretion that we got from our external accounts that helped us with it.
As we move for we wanted to automate that and as we went to that automation relooked at that some of the assumptions that we had and as we adjusted those assumptions.
Just to get it right, I guess, where or consistent with those assumptions when we made that adjustment in the third quarter. So what that did was reduced our margin by $209000 in the quarter, where we sit at the end of the core right. If you will and going forward as we modeled it again because.
We're doing it as a at a slower accretion and maybe we had been it looks like at least for the next couple of quarters up 15 basis point boost if you will to our core margin and then that will diminish obviously as that.
And just but the purchase accounting adjustment Accretes now does that help.
Yeah, I guess I'm just trying to so.
It it.
By making the change does this kind of be long date, but less than the time period in which you're going to recognize the accretable yield that you otherwise why would it would have recognized and then if you didn't make the change it would it came up sooner or is that that that's exactly that yeah.
Reasonable assumptions the total amount of the adjustment.
Didnt change just the way that we're going to recognize it so yes.
Okay.
That's helpful. Thank you Richard and then.
On the to follow up on the Treasury management question just on the higher professional just more broadly.
Yeah, I would think about you know you've held the quarterly expense run rate pretty tight this year as you guys start to budget for next year any initial thoughts on.
Well, we can expect it even if it's just qualitative in terms of hires or investments you guys need to make that that we should be factory and when we think about your expense growth for too much money.
Yeah, we're still working through our budget process. So I don't have any real.
We'll go to answer for you Mike I mean, we're still trying to work through that budget I mean, each department has submitted their requests a I can tell you that everybody always submits to add a few more people. So we have to kind of work through the numbers first and then start prioritizing things.
I will tell you that that is an emphasis deposit growth as an emphasis for us.
And we've had pretty good success.
With a in the treasury field and with people that we brought over so we'll continue to give that area emphasis.
Mike I would add just one thing I mean, our third quarter.
Noninterest expense at 16.7.
It's probably a good proxy for the fourth quarter.
And we are interviewing right now.
For a CIO I think thats something that Dennis talked about last quarter, Yeah, and then well they're not hired yet I mean in terms of a significant salary I will let it be significant that'd be the most significant them anything that we would add right next 12 months.
Oh, okay.
And then just lastly on on capital.
So you guys are redeeming the preferred.
Obviously, the tangible common levels will still be pretty strong even after that event I noticed you start buying back some stock this quarter, what can you give us maybe the update Dennis on just the appetite for further repurchases and then also obviously I know your party still lie with organic growth in M&A and on the latter one any update.
Updated thoughts on M&A as well, yeah as far as.
Of future repurchases I believe we do consider that a pretty good tool ER and we'll continue to utilize that I think going forward, particularly if we keep burning the way we're earning.
And we don't have an M&A deal.
That is eminent or something so I think that we will continue that.
You know, we kind of look at that.
You know and look at M&A and there you know there's no execution risk. There. So you know we've kind of value at the same way, we look at an M&A deal as far as earn back and you know we might be willing to take slightly longer earn back period.
But we'll we'll continue to.
We'll continue to look at that as a viable off you know option for us to use our capital as far as M&A.
We continue to have a lot of conversation I would say the tone of those conversations has changed over the last six months or so.
There are less meat and greets and they're more sustained them in and seem to be more focused around a lot of the issues.
The banks are dealing with you know management issues board fatigue regulatory stuff.
And I also think the current interest rate environment with his yield curve.
Is going to put pressure on a lot of these banks because the the margins.
You know car continuing to compress and they're going to continue to compress and I think with us having the margin that we have we are you know better prepared to deal with that so.
We're continuing to have some pretty good dialogue and up some of the <unk> more recent announcement I think a fueled some of that as well so.
That's kind of the update.
Great.
Listen guys. Thank you for taking my questions I appreciate it.
You bet. Thank you.
Again, if you'd like to ask a question. Please press Star then one.
At this time there are no further questions. This concludes our question and answer session I would like to turn the conference back over to Dennis Schafer for any closing remarks.
Thank you well in closing I, just want to thank everyone for listening today and for those that participated in the call again, we are extremely pleased with our third quarter results and are very proud of the production across all of our business lines under the strong low cost core deposit franchise, we've created through.
Our disciplined relationship pricing approach.
So we look forward to continued success for the balance of the year and to talking to you again at the end of the year to share our results for 2019. So thank you for your time today.
The conference has now concluded. Thank you for attending today's presentation you may now disconnect.