Q3 2019 Earnings Call
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Hi.
Good morning, Thank you for joining us for rent as a corporation 2019 third quarter webcast and conference call.
Operating in this call today are members of <unk> Executive management team.
Before we begin let me remind you that some of her comments during this call maybe forward looking statement, which involve risks and uncertainties and number of factors could cause actual results to differ materially from the anticipated results or other expectations expressed in forward looking statements.
Factors include but are not limited to interest rate fluctuations regulatory changes portfolio performance and other factors discussed in our region filings with the Securities and Exchange Commission, we undertake no obligation to update or revise forward looking statements to reflect changed assumptions the occurrence of unanticipated event or change.
To future operating results over time in addition.
The financial measures that we made its got this morning, maybe non-GAAP financial measures a reconciliation of non-GAAP measures to the most comparable GAAP measures can be found in our earnings release, which has been posted to our corporate site. When it's not dot com under the Investor Relations <unk> and the news and market datasets.
Now I will turn the call over to run about Corporation Executive Chairman Robin Mcgraw Nike Ali Good morning, everyone and thanks for joining us today.
We closed the third quarter with solid result, despite having to navigate through to write cuts continued and version of the yield curve and uncertainty another macroeconomic factors during the quarter. Additionally, the Durbin Amendment became effect you personally scored reducing our debit card income by $3 million from the previous quarter. You may recall, however that we see.
Access we managed our consolidated assets below the $10 billion ratio imposed by the Durbin Amendment as of December 31st.
2017 was delayed the impact you allowed us to collect uncapped interchange fees for an additional year.
Our return on average assets with exclusions for the quarter was one for 23% and our return on tangible equity with exclusions was 14 point, 23%.
Our previously announced $50 million stock repurchase program, which began in October of 2018, which completed in the early part of October the company purchased approximately one and a half million shares over the life. The plan. We're also pleased to announce that our board of directors is authorized another $50 million stock repurchase plan effective.
Over 18 2019.
In July we redeemed subordinated notes that we assumed as part of the brand acquisition interest expense on the notes was fixed debate half percent.
And preferential cap and trade another $30 million bridge from them out began to phase out at the end of the second quarter. This year.
Repurchase programs and the debt redemption sport, our strategy of returning value to our shareholders well prudently deploying our capital. We believe this strategy coupled with a steadfast focus on profitability and growth of our core operations will drive continued shareholder return.
Now I'll turn the call over to our President and CEO , Mitch Waycaster disguise in greater detail. This quarter's financial results Mitch. Thank you Robyn.
Looking at our results for the third quarter of my team net income was $37.4 million compared to $32 million in the third quarter of 18, our basic and diluted EPS were 65 cents in 64 cents, respectively for the third quarter basic and diluted EPA.
As for both for both 61 cents for the third quarter of 18.
Two items, particularly impacted our net income for the third quarter My team.
First we recognize the valuation adjustment on our mortgage servicing rights of approximately $2.4 million on an after tax basis, which decreased deluded EPS by four cents second our net income includes approximately $2.6 million an after tax.
Expense related to new production team members that have joined the company during 2000 and I think.
The expense related to these strategic hires decrease deluded EPS by five cents for the quarter.
Turning our focus to our balance sheet total assets at September 39 chain were approximately $13 billion as compared to approximately 12.9 billion at December 30 118.
Total loans held for investment were $9.3 billion that they ended the quarter as compared to $9.1 billion at both December 30, 118, and June 30 19.
The balance it they ended the quarter includes a portfolio of Nonmortgage consumer loans transferred from our held for sale portfolio during the quarter. Excluding these loans annualized net loan growth on a linked quarter basis was 5.93%. It is worth noting that the majority of our way.
Loan growth occurred in September as shown by the difference between our average loans for the quarter and I were ending loan balance as of September 30.
During our earnings conference call last quarter, we emphasized our significant investments in production talent across our footprint during the first half of the year and I just noted the impact of this hiring on our expenses.
Our new teammates have been quickly integrated and together with the tremendous talent of our existing team have been successful and executing on our growth strategy for the third quarter.
Total loan production for the quarter was $561 million with $83 million from our new production team members higher during the second quarter.
All of our producers, both new and legacy have committed themselves to our plan and we are beginning to see the results.
We closed the quarter with strong momentum and a healthy pipeline keeping us on track to meet our growth goals for the remainder of 2019 and into 2020.
Consistent with our guidance from last quarter as the portfolios of our new production team members continue to mature over the next nine to 12 months, we expect net loan growth for the company to be in the mid single digits in Q4, and high single or low double digits or better in 2020.
Which in turn will meaningfully enhance our revenue growth and profitability in 2020 and beyond.
Further we believe opportunities to add additional talent still exist in the marketplace. We added 10 additional producers to our team during the third quarter by remaining opportunistic and taking advantage of various market disruptions, whether due to organizational restructuring our merger activity.
We can build out our teams across our footprint, which will support growth and expansion in all markets and across all lines of business.
While we have emphasized the impact of our new production team members are expected to have on our loan growth. Our growth strategy is equally focused on the liability side of the balance sheet.
We remain committed to growing low cost stable deposit base to fund our loan growth.
Total deposits increased $10.3 billion at the end of the quarter as compared to $10.1 billion at December 30 118.
During a year highlighted by interest rate volatility, we deployed a strategy focused on growing noninterest bearing deposits, which has resulted in a 288 million dollar increase in such deposits since the beginning of the year.
With our momentum heading into the fourth quarter, we are optimistic about growth on both sides of our balance sheet by remaining disciplined in our pricing strategy and emphasizing profitability our growth into 2020 and beyond will continue to deliver the value our shareholders have come to expect now.
Ill turn the call over to rentals on Chief operating and financial Officer, Kevin Chapman for additional discussion of our financial results. Kevin. Thank you mentioned good morning, everyone on call as noted in our press release and as mentioned in part by robbing the Mitch we had several moving parts during the quarter in my remarks, I will provide some additional detail.
On these items.
Net interest income.
As.
180, $108.8 million, which was down $4 million from.
The linked quarter and up $9 billion, when compared to the third quarter by saying.
Purchase accounting income and interest income collected on problem loans accounted for most of the decreased on a linked quarter basis as it was down $3.2 million for the quarter.
Net interest margin was 3.98% for the third COVID-19, as compared to 4.19% for the second quarter of 90.
4.07% for the third quarter of 80.
The decrease in purchase accounting income over the on a linked quarter basis reduced net interest margin about 13 basis points.
Our core margin decreased 60 basis points from the second quarter of 19, several factors led to the decrease in core margin.
On the asset side of the balance sheet, a decrease in yield on loans negatively impacted margin by approximately three basis point as we experienced.
To recap assortment of occur and the yield on mortgage loans held for sale and investment securities. Both weighed on margin by basis point, each turning to the liability side of the balance sheet, our increased cost of deposits negatively impacted margin by basis.
While our while our cost of deposits increased slightly and occur in the quarter. We are beginning to see signs that deposit costs are moderating.
This was evidenced by four basis point decrease in our cost of interest bearing deposits.
From August to September .
Also as Mitch previously mentioned, we have been successful and growing noninterest bearing deposits during the year and we are continually looking at ways to manage our deposit cost in the current rate environment.
[noise], although we had to recognize evaluation adjustment the third quarter with another strong quarter for a mortgage operations.
Interest rates continued to decline.
And our mortgage production increase.
We earn higher margins on that production.
Overall noninterest income continues to be a great source of income for us representing over 25% of our total revenues, although noninterest income decreased by $4 million on linked quarter basis, two particular items negatively on noninterest income.
As I mentioned, we recognized a.
3 million dollar 3.1 billion dollar mortgage servicing rights adjustment.
As Robin mentioned effective July 1st we became subject to the interchange fee cap described in the Durbin Amendment, which.
System with our previous guidance reduced fees and commissions and on loans and deposits by $3 million during the cold.
Noninterest expense increased quarter over quarter by $3.2 million. This increase is primarily attributable to an increase in salaries and employee benefit driven by the new hires previously mentioned.
Salary expenses associated with the higher than with the increase in mortgage production.
This increase in expense coupled with the Durbin Amendment impact discussed earlier negatively impacted our efficiency ratio during the quarter.
Our efficiency ratio adjusted for the merger the mortgage servicing rights valuation was 62.53% for the quarter and 59.47% for the year, we'd like to reiterate however that we consider the costs associated with a new producers the been investment that will that will yield is return in loan intra.
Net income and margin as the underlying portfolios continue to mature in the future.
Shifting to our asset quality at 930.
In 2019, our overall credit quality metrics continued to remain strong as a percentage of total assets all credit quality metrics, including Npis.
Loans 30 to 89 days past due in our internal watch list are at or near historic lows.
For the quarter net loan charge offs were 940.
945000, or four basis points annualized as a percentage of average loan.
And we provided approximately $1.7 million in provision for loan losses during the quarter.
Although we are focused on loan growth.
We will not sacrifice credit quality to get there we remain disciplined in our underwriting standards and for the margin structure.
And we'll remain faithful to our business model with respect to structure in terms.
As we build our production teams across our footprint. We're also committed to identifying talent to add to our already strong credit team.
The quality of our portfolio remains in check.
For more information on our financials I'll refer you to our press release for specific numbers are ratios and now I'll pass the call back to Robin for closing comments. Thanks, Kevin.
In closing, we finished the quarter with tremendous momentum and we're optimistic about the potential growth on both sides of our balance sheet. We are mindful of the current rate environment and the impact of other macroeconomic factors, which may have.
On our results, but by focusing on growth and profitability while at the same time emphasizing quality. We can operate through this cycle and provide value for all of our stakeholders.
Now you know turning the call back over to you questions and answers.
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Our first question comes from Catherine Mealor of KBW Catherines. Please proceed.
Thanks, Good morning.
Good morning to gather.
Let's start with the margin and just wanted to see as Kevin you could give us your updated thoughts on your outlook.
For the margin though.
Backing from purchase accounting and also the core margin with.
Perhaps further rate thanks.
Yes, sure so I'll start with purchase accounting for little bit harder to.
To predict.
As you know and as you saw in the quarter it can be volatile and.
We've seen purchase accounting benefit.
Be indicate that volatile is going to be that recapturing of the nonaccretable difference the accretable yields going to be fairly stable.
But the Nonaccretable difference recapture that's where we have the volatility so it's a little bit hard to predict.
As well as interest income on previously charged off loans those that we isolate those two just because they can be volatile.
We will continue to expect those to be 10 to 15 basis points on a quarterly basis. This quarter I think there were a little bit less than nine.
But I just would emphasize that the volatile piece of that purchase accounting adjustment.
As we look at our core margin.
Into the future.
There are still pressure on the margin.
I do think that as as we have more rate cuts that gives us the opportunity.
To address it on the funding side with the nature of our deposits our deposit costs are going to lag a little bit they're not going to reprice as quickly as the rate cuts occur and I, just really goes to the corners of the deposits. We have very little wholesale funding and we have virtually no broker deposits is all core funded as we'll take a little bit longer to reprice.
I think we saw that on a on a intra month. If you look at a monthly break down just throughout the quarter. We saw we sell deposit costs start to move from efforts that we started making at the beginning of the quarter at the end of the second quarter and it just takes a little bit more time with that funding.
As we look out into Q4, we are anticipating another rate cut.
That will have an impact on the four full quarter, including the right just occurred towards the end of September and would expect margin to continue to compress in that five to possibly eight basis point range.
But still but but we are taking positions to try to mitigate.
The debt to mitigate any immediate impact, but just with.
With how the balance sheet position and then the lagging to be able to reprice. The deposits will continue to expect more a little bit more margin compression in the next roka.
Okay. That's helpful.
So about five to eight beds to further compression assuming we get a cutting in October and then maybe.
Relatively that same and now if we get further cuts, but then expect as deposit costs continue to lower then we may do you see the margin reflects kind of mid next year and and start to see that creep back up would that be a fair way to think about it I think that's a fair way to think about it as we know right now now although the wildcard in their.
Look at the if the 10 year, we see the 30 year continue to fall.
That's going to put another basis point or two in there more as mortgage loans held for sale impact the margin mortgage loans held for sale I think the yield on this sale 40 to 50 basis points from Q2 Q3. So that's a fact I just don't win there.
The shape of the longer into the curve could could provide a variable into that margin calculation by a couple of basis points.
Five to eight is just more on the short end of the curve if there is right.
Okay that makes sense and then just to be clear on that the 10 to 15 best Oh.
Yes accounting accretion.
As we model. This is Steve So next year and is it still true, though that the accelerated accretion that we've seen that I know that's been a volatile piece. It bounces around is that goes to zero next year post diesel, but essentially goes into provision is that still the way to think about that.
I think.
Conceptually, yes, that's the way that we think about it.
We're still finalizing all the nuances in intricacies of sea salt and how it impacts.
Those 310 30 loans.
Credit impaired loans and how much goes.
From purchase accounting, how much does from margin into the allowance in provision, but conceptually I think you're you're you're you're correct in that.
Okay, Okay I'll step out thank you.
Yes.
Our next question comes from Jennifer Demba Suntrust. Jennifer. Please proceed.
Hi, Good morning, just curious on on.
Your pipeline for new hires in the fourth quarter and 2020.
Mitch and what you're thinking about.
Just in terms of capacity to to hire more.
Sure Jennifer.
As we stated in the past as I've mentioned today.
Just looking at Threeq, you, we had 10.
We will continue to be opportunistic as there's disruption in the marketplace and.
Looking forward to Q4 into 2020 that more typical run rate would be say in that six to 10 as we have discussed before was whether that be and the.
Commercial corporate are also across other lines of business in the company.
As you'll recall, we enjoyed a five Q1 course in the second quarter, we had to 31.
Which.
Was unusually high but took advantage of an opportunity there and then came back this quarter with 10, but we see those opportunities continuing we continue to have those conversations.
And.
Like say, we'll we'll continue to have those opportunities and we believe and to add talent to an already strong team.
Thank you.
Thank you.
Our next question comes from Michael Rose of Raymond James Michael. Please proceed.
Hey, good morning, guys how white.
Good morning, Michael.
So so you guys reiterated kind of be the initial loan growth outlook for for next year.
So, it's a fairly wide range, which I understand.
You know what are some of these assumptions around you know pay downs and production and just kind of what comprises and then acquired loan runoff et cetera. What are what are some of the the pieces that make up some of that outlook. Thanks.
Sure Michael I'll start with production than we'll talk a little pay offs and then we'll end up with.
The net that.
We are projecting are we expect so.
As far as production, we saw this quarter as I mentioned 561 million, which was very strong quarter. We thought in Q3, we would again approach how footwear is 500 million, we actually exceed that 561, we would expect again in Q4 to be in that five.
500, plus range and as we go into 2020 for that.
To continue to grow in 2020, maybe five to mid fives as we get to mid year we.
We believe that will drive non acquired growth as it did this quarter in the mid teens mid to upper teens.
Which would result.
In Q4 again mid single and then as we go into 2020.
Yes, more high single, possibly low double.
That is assuming that pay offs of remain generally in the range, we've seen them throughout the year actually in Q3.
We actually saw an elevation and payoffs, we had 472 million and payoffs for for the quarter that was up 38 million from 434 million in Q2 on an average of around 420.
We've been seeing for a per quarter and 19.
July was unusually high month, we had over 190 million and pay offs in July we had seven payoffs that exceeded $5 million. If we go back and look at those reasons.
Particularly in July was loans moving to the permanent market.
Again this quarter about 45%.
Of those payoffs was the bar is selling the underlying asset about 22% going to the permanent market and then about 15%, where we were just simply unwilling to match the terms but.
Back to your question just looking forward, we expect payoffs my quarterly and probably in that for 20 430 range and that's a part of our projections, giving that production those payoffs where we expect.
You know net to be like say this this current quarter.
But mid single and then as we go into next year high single low double.
That's great color, maybe as a follow up can you talk about and you guys have obviously.
I think frontloaded some expenses here to support future growth.
How much.
Roughly a bad or the growth that you're seeing now is coming from some of those new hires I expect some of that's that's obviously lagging but as we move into next year.
Would you expect a greater split from you know if some of the new hires as they move the books over versus kind of the core lending staff.
Yeah no. Good question so of the 561 million in production. This quarter. We saw just from the new hires this year about 15% or $83 million.
Coming from that group, we expect that to continue as we go into Fourq, you and then forced into 2020 and as we discussed last quarter and actually it's going to take several months for those portfolios to begin to mature, but we have been very pleased to this point.
Seeing that 83 million.
Of that 561 million in production this past quarter actually a little ahead of expectations like say, we continue to see that growth I think the other important part of that story of that 561 million in production that's up from 350 million in the prior quarter and you can look at it this way.
With only 83 million of that coming from those that new talent. So we're seeing a production increasing across the footprint and.
As we mentioned in the past, which is our strategy to hit on a number of cylinders within the company whether that be the corporate the commercial business salons.
And the small business units of the bank.
That's a that's that's really helpful. Maybe just one more for me just broadly thinking about some of the investments you've made in hiring staff, obviously, it's been a.
Tractor from.
You know the efficiency ratio perspective.
One should we begin to see I know, it's hard because of the interest rate environment, but once you may begin to see.
Some of the the operating leverage begin to come through and maybe it's too difficult because of the at least for next year because of the interest rate backdrop, but.
But given.
Some of the lending hires obviously, what you've done what the mortgage company.
I understand their bonds would be probably down next year, but how should we just kind of reconcile the efficiency equation and operating leverage equation. Thanks.
Sure. So Michael this is Kevin.
We'll start seeing some leverage on the efficiency ratio as we get into Q1 that doesn't mean, there's not going to be a benefit in Q4 from the new hires they will.
Mitch mentioned words were experiencing.
Growth coming from the from the new hires will experience more in Q4, but is still going away on the efficiency ratio, we won't get over the inflection point, probably until Q1 of next year.
But that being that aside you mentioned all the variables. Our goal is to work that efficiency ratio back down.
Below the bulk of 60% Mark that we've always said and I'd also say just.
Just the Durbin amendment that with a very efficient revenue stream that was taken out.
I just ways and now it's going to require as who require that growth that we've been investing in to fill to fill that gap.
But we anticipate that being in Q1 of next year at least on the hires that we have today.
Michael One other thing I failed to mentioned earlier relative to your current question and just looking at the quarter.
I had mentioned that payoffs were quite heavy in July just.
Just unusual on how the fail, particularly with things moving to the permanent market. So we ended July .
Probably 90 plus million down in loans.
We began to see that growth in August , which brought us back to basically flat.
So really the benefit from our growth in this quarter, we really didn't see that net growth towards the until the end of the quarter. It actually come later in this came later in September .
So I think just back to your current question, but when we will see the the impact actually this quarter, we didn't see the impact or we didn't say they impacted it mostly occurred at the end of the quarter will enjoy the benefit of that as we go into Q4.
Great. Thanks for all the color guys.
Our next question comes from Brad Milsaps Sandler O'neill Brent. Please proceed.
Hey, good morning, guys.
Morning breath.
You guys have addressed most everything just was curious maybe little more detail on the expenses in the quarter other expense looks like it was down maybe $3 million or so.
Just kind of curious any additional color there I know you brought over the yes, okay, guys, but would've thought maybe either would've been a little more lift there just kind of curious how you're thinking about where the run rate of expenses, particularly that other line as you move forward now that you have all mostly all the new hires in the run rate.
Sure. So a brag a more of this Kevin so we didnt have a little bit of an offsetting the other line item and I think we discussed it in Q O Q2, where we had a large increase because of the the premium for being over 10 billion from an FDIC insurance assessment, we had to it.
The increase our.
<unk> expense related to that we just finally that finally caught up with us and we didn't have that accrued at the right level, so little bit of a catch up expense in Q2, well in Q3, we got a rebate from from an adjustment that came when we were community bank would qualified as community bank. So.
Right that other noninterest expense when that normalizes in Q4, probably go up about seven to 800000, just to normalize that adjustment that was made in.
In Q3 just from that.
But as I mentioned that FDIC insurance assessment rebate that we got when we were classified as a quote unquote community Bank.
Okay. So with that that's probably a decent run rate notwithstanding kind of the variability of mortgage Commission.
That's right.
Okay, and I did not offer new hires yeah sure sure and then just a follow up on a component of the NIM I was curious the timing of the a of the pay off of the debt I know it's small.
During the quarter I didn't notice the rate on kind of that borrowings category had was up from.
Around 4.6% to 5.3 can you talk about kind of what kind of the mix is there.
Does that come down some in the fourth quarter or is that going to kind of run at that level.
Yeah, we think it'll come down a little bit the.
The increase that you saw really just had to do with the mix we paid off that we paid off the sub debt.
And in the late July August early August timeframe.
So it's almost a full run rate in there I think just the way the remaining debt that is there a is what's causing that that volatility in the in the right.
But for most part the paying off that there's some dish that there'll be a slight benefit in Q4.
But that the yield at that rate on the bark funds may come down just a little bit.
So even though that was at an 8% rate that it's still brought the total combined up by 70 basis points in the quarter.
Yeah, well <unk> the stated rate was eight and a half the purchase accounting right. We marked to market. It was in the 5% to 5.5% range.
I would call that now okay, great. Thank you.
Our next question comes from Jon Russell Chairman Chang. Please proceed.
Good morning, guys.
John .
Kevin back to just back to Brad's question on expenses. So if you add back the the rebate you said seven 800000, that's sort of puts you around 97 million for the quarter and then obviously some variability with mortgage.
Are there any other.
Cost saves in there or how should we think about it.
<unk> expenses for 2020.
<unk> expenses as we get into 20, where we've been trying to just just looking at our expenses over the last.
Three to four quarters is as we've incurred the next incremental dollar expense that going into revenue production not not a dead experience or compliance expenses. The is to invest that next incremental dollar in production that we don't over 10.
We feel from its from the rigor of exam from there from the expectation to be something other than a community bank.
We feel that we were prepared for that and our conversations our relationship with our examiner.
Reflect that so what we've tried to do is invest that next incremental dollar into something that'll drive topline revenue.
And so so as we look at the expenses. We're cognizant of expenses. There are some initiatives that that will help contain the growth of I would call. It that non revenue producing expense increase.
But really our guide is going to be on that efficiency ratio and spending that expense dollars, that's going to drive more revenue than what we're currently making so.
Invest that expense dollar to drive something more than 38 cents trickling into the bottom line.
So expenses and they may increase.
But expenses in that compliance or that non revenue producing.
Category, that's where we're looking to minimize into get more lift off the revenue production.
I'm cases, there may be some churn and revenue producers, but invest that next incremental dollar that drives topline revenue.
Okay, Okay that makes sense.
Just one other question on the on the buyback. So you guys announced a new buyback would you you know at current prices would you expect to be.
See as aggressive as you have been over the last few quarters.
I think Thats I think that's a fair assessment we.
Well, we view the buyback and it's something on the table with an option that we have and again, how we tried to position the company's leave all options on the table. So we renewed a board renewed the buyback with the intent of providing management Optionality and I think it's fair to if you look at the weighted average price.
We repurchased in not only Q3, but in prior prior periods. This was this is in the appropriate range as to where we would be bought.
Thank you.
Thank you John .
Our next question comes from Catherine Mealor of KBW Kathryn. Please proceed.
Hi, Thanks for let me jump back on I, just had a quick follow up on the expense.
On the extends questions to where you can break out how much of this quarters.
Salary expense was driven by mortgage maybe as compared to last quarter.
Yeah, it's up about a million 2 million to.
Just total mortgage.
That would be there commissions the additions of the wholesale all of mortgage is up about a million to make into.
And what does that number.
The total number.
<unk>.
Yes total mortgage.
Employee compensation for third quarter was 12.7 million.
Roughly seven.
That's helpful. Thank you Catherine just just a point on the mortgage banking gross income, but that valuation adjustment of 3.1.
Ran through the gross mortgage banking income line item, so more and more excluding valuation adjustment mortgage had a great quarter and their gross revenues almost 19.
Yes of course will be sure back that out.
Great. Thank you.
This concludes our question and answer session I'd now like to turn the conference back over to Robin Mcgraw for any closing remarks.
Thank you again, we appreciate Everybodys time today and your interest in Roseanne Corporation, and we look forward was speaking you again soon.
[noise] The conference now concluded. Thank you for attending today's presentation you may now disconnect.