Q3 2019 Earnings Call
Welcome to the cadence Bank Corporation third quarter 2019 earnings Conference call. All participants will be in listen only mode. The comments are subject to the forward looking statement disclaimer, which can be found in the press release and on page two other financial results presentation.
Those documents can be located in the Investor Relations section.
Hey Corporation Dot com.
After todays presentation, there will be an opportunity to ask question. Please note. This event is being recorded I would now like to turn the conference All Murphy Chairman and CEO . Please go ahead.
Well good morning. Thank you all for joining our third quarter 2019 earnings conference call with me today on the call around her Sam break and David as was reported in our release on an adjusted basis, we aren't 44 million or 34 cents. A share. This is 10.5 return on tangible common equity right at a 1% return on assets.
And our efficiency ratio improved 200 basis points linked quarter to 48.1% [laughter] before I discuss the quarter I'd like to first take a moment and thank our investors and analysts candid feedback we've received since our last quarterly call interim management team and board of directors are listening very carefully and I want you know that you're you were hurt.
I expect you'll see a number of your suggestions incorporated into our communications going forward.
This quarter for example, we've included some additional disclosure in our earnings release and slides on credit migration and you'll hear more color on the makeup of our charge offs will also provide some context about how we think about managing credit over time and most importantly, how we ultimately generate returns for shareholders.
I'd like to emphasize the point that I have strong conviction, we have strong conviction and our strategy by no means are we satisfied with the research. So we're remain confident in our team and our ability to generate attractive returns.
I'd also like to ensure investors that we are aligned with them.
Illustrate this conviction and alignment I think it's important to point out that our senior management team collectively own approximately 4.4 million shares or 75 plus million dollars worth the pay in stock in 2019 members of our board and executive management team have acquired over 6 million shares of common stock.
Additionally, in a third quarter, we completed a repurchase of roughly $10 million worth of shares which were part of our previously announced a share repurchase authorization.
So simply put we are invested alongside you and we believe cadence is an attractive investment.
Now turning to our third quarter results as many of you have seen in our press release, we experienced another quarter of elevated charge offs and we've taken provisions higher as a result of some pressure we're seeing in certain pockets of our portfolio I.
I think it's significant to note that the predominance of our elevated credit call stem from a few loans that hit us really hard opposed to a broad based deterioration.
In the third quarter charge offs totaled 31 million and provision over 44 million.
31 million a charge offs in the quarter 15 came for one.
From a snake CNR credit.
50 million charge off year to date 20 may and was from the same sienna non snack line.
This credit resulted in a very high severity of loss driven by complex set of reasons, which we'll talk more about in a moment.
I'd like to reiterate my comments from last quarter, which says that we're not seeing a weakening economy.
That said I would like to provide some detail about what we see on the ground and sector, where there has been some negative credit migration.
The good place to start for this discussion is with the disclosure that I noted earlier as you can see in our press release earnings deck. We have had an up tick in criticized and classified assets. This drove approximately half of our loan loss provision for the third quarter. These increases were primarily from general Sienna and energy.
Specifically classified assets rose linked quarter, but are in line with prior periods criticized assets also rose and are also and learn.
The increase in special mention is partially offset by a decrease in doubtful credits.
So of course I asked myself onto these increases suggests there were session is coming out or is this more of a return to a normal level of criticized and classified loans.
The call about portfolio like ours.
At this point I think it's the latter and of course all continue to study this and report back to your monitored further in the future, but for now let's talk about the pockets in our portfolio, where we are experiencing some pressure.
First let's discuss our restaurant business, which stood at 1.050 billion outstanding 8% of loans at quarter end.
The way this is down from a peak 12% of loans several quarters ago.
Within the restaurant.
Business, the underlying consumer demand seem to be we pretty good I wouldn't say strong but solid.
That of course will generally be our major concern for the sector, where we enter recessionary environment.
So if it's not the consumers and what's pressuring our borrowers it's really three factors oversupply wage inflation.
Delivery.
So first we would note that casual dining is clearly the most at risk of the at this portfolio and we're pleased to report that's only about 14% of our book.
75% of the portfolio is quick service restaurants, QSR fast casual, which historically has been more resilient overtime.
Second as we noted on the last call we have slowed our originations in restaurant overall, and we're monitoring keeping a very close.
All the dynamics impacting each of our borrowers we've raised the bar on new credits, we're closely monitoring existing relationships.
Pops and now we are seeing several operators have effective.
Cost reduction strategies that have been implemented at are improving results.
So in summary, the restaurant portfolio risk remains elevated.
We had one restaurant snack charge off of 4.4 million in the third quarter, we had one credit that was upgrade to past.
Other nonperformers progresses mix copper moving towards upgrades others are in various stages of restructuring to improve operating performance, while others are considering a sale of all or parts of their business.
I think it's going to take six to 24 months for the $52 million classified credit portfolio to be resolved.
Additionally would refresh your memory, we have 58 million in special mentioned credits that were monitoring closely.
Our restaurant team has been through stress periods in the past and they are really good bankers. However, I think it's fair to say that the stressed this time might be a bit more challenging I know the team is working very hard to collect every loan and resolutions are progressing well.
I would not be surprised to see other credits added to the npls in the future.
Thats not necessarily a given.
Now, let me turn our attention to our energy loan category. The majority of our exposure. There has been midstream, which has performed well through recent energy downturn Gen. Not been is susceptible to impact by energy prices midstream loans or 946 million or 63% of our portfolio.
We have seen an increase in criticized classified loans in energy and let me give you a little bit more color, especially on the ERP portfolio in 2014, we felt that terms and conditions were.
Beyond what we were comfortable with and we elected to to change and tighten our underwriting parameters are ERP portfolio went from 590 million down to 275 million over the next three years, we exited numerous credits we restructured other to meet our post 2014 underwriting.
Sanders.
Today, the S&P portfolio, it's roughly 380 million outstanding we had one energy charge offs in the quarter 5.3 million.
Lifetime today, all of our MP charge offs have been pre 2014 originations.
We have remaining three pre 2014 credits on the books today, better slated to exit and they totaled $29 million.
While the post 2014 energy portfolio has done very well so far I would say that energy capital markets are very constrained.
Well with our book today, but we're not relaxed with respect to any new energy loans. We are highly cautious it's a very high bar you most clear for any new.
Excuse me new energy originations.
Our intent is to keep the portfolio flat or see it reduce over the near term.
Next let's talk about the migration across the general CNR categories as I mentioned on numerous occasions in the past our view our leverage loan portfolio without moderators as one of the higher risk categories. In the bank. This portfolio peaked at 840 million back in June and has declined at the end of September to 782.
Billion.
Debt in moderation is an acceptable part of the business plan and we believe this portfolio has been well underwritten.
And we continue to be cautious with respect to new loans there.
However, we are looking to reduce risk on this portfolio and what I mean by that is that we're actively managing anything that is at the high end of the leverage spectrum, we're looking to see higher leverage companies come down to a more moderate risk profile.
We have 63 credits and 109 facilities in this portfolio.
Credit or diverse industry and by geography.
Refreshing quickly on our private bank consumer mortgage portfolio 2.6 billion outstanding continues to report pristine credit results gross charge offs originated on these residential loans over the last five years had been less than half a million dollars.
Cadence legacy $1.2 billion CRT portfolio continues to report it simply credit statistics, no charge offs no nonperformers no sander.
Excuse me know substandard credits in the last five years legacy Kate CRT portfolio numbers are very good also this portfolio has performed better than expected when we did our due diligence 18 months ago.
Our healthcare and technology portfolios are generally it's generally stable with modest migrations.
Risk profile of these two businesses is very much in line with expectations.
So in summary leverage lending in restaurants or the portfolios were working most actively with respect to energy were highly cautious the rest of the bank is business as usual and steady in the boat.
Going back to the one March CNR charge off.
And why was the reason the loss severity of so hi, it's the company experience materially negative operating results caused by an expansion strategy that quite simply failed the company had liquidity pressure that.
Required a costly restructuring process that ultimately ended with a highly distressed sale.
The remaining exposure on this credit was paid off yesterday.
There are several unique elements to this credit that are not found and other existing cade loans today in other words, we did not have a portfolio of similar credits we have to work through.
To be fair, we are seeing sector specific factors that are pressuring credit and more general way and that led to some of the provisioning that you saw in the quarter, but I really want to distinguish that the potential loss content from the sector. This specific factors are going to look a lot less severe than what we experienced and be outlier.
Scenario.
We're not for this one how SaaS credit impacting our last two quarters, our charge offs in provision number would be up from prior years, but would be in a normal range.
Because we are in late stage resolution of this group of credits previously mentioned, we're confident that our reserves for these credits reflect the risk accurately.
As you expect the last two quarters credit results have resulted in a reduction in the managed management bonus pool accrual.
Last topic I'd like to discuss on credit before moving on is about returns.
So thats really not in defense of the loans that are not performed to our underwriting standards, but instead to say that our focus is on our ultimate.
Performance and returns on the entire loan portfolio.
Especially for the risk that we are taking.
So for example, our restaurant portfolio, we've seen an uptick in criticized assets there Dave originated about two and a half billion in loans in the last eight years, they've been with us their lifetime to date charge offs are $6 million or roughly three basis points.
So as I mentioned, the next 24 months will be a stressful period, but I fully expect the returns over time for going to be attractive.
Same with CNR charge offs have been acceptable. We previously mentioned that we anticipate 20 530 basis points charge offs for portfolios over time 2017, and 18, we were unusually low at six basis points and 2019 square to be at the other into the spectrum.
So while were no by no means happy with the elevated credit cost of the past two quarters. We believed that this is not indicative of our overall portfolio quality.
Before I turn the call over to Sam Let me touch on a couple of highlights in the quarter first we showed nice growth in our pretax pre provision earnings. We grew from 96.1 to 100.8 up 4.7 names roughly 5% nice quarter.
Second our tomlin interest rate color has insulated the bank well from the lower rate environment and just a high level summary, a reminder, we have about 9.5 billion in floating rate loans.
At the end of quarter, we have a $4 billion five year hedge that we put on back in February of this year.
2.3 billion in deposits that are index. So this leaves really 3.2 billion floating rate loans that are not perfectly hedged so to speak.
Our deposits are a little higher price than most slowing of falling rate environment, we expect to see our deposit costs come down perhaps more than some others.
Specifically linked quarter total funding costs came down nine basis points on our cost of deposits came down seven.
So when you look at all of those these variables and kind of reflect on the application.
Let me suggest a more stable NIM outlook for the foreseeable future.
Next I comment just quickly on expense growth, we had a good quarter with non interest expenses declining from 96 to nine 3.3 million and as I mentioned the efficiency ratio improved to 48.1, we have a good expense culture and the good focus on continuing to manage expenses tightly.
And looking back at state of the merger really has exceeded our expectations. We achieved our cost saving goals and were pleased with the growth opportunities or the quality of the deposit franchise has really had wonderful impact on the balance sheet overall sampled to Atlanta in the middle market hiring and opportunities we see there should road fuel nice growth.
For the company in the future.
So last were making nice progress on our core deposit funding.
And I'm going to ask Sam to take it from here and tell you more about that.
Oh, Thanks, Paul for the last several quarters, we've commented on up some pretty solid deposit performance, but we're particularly pleased with our deposit performance for the third quarter.
Core deposits, excluding brokered were 14.3 billion up 658 million or almost 5% versus the second quarter, notably noninterest bearing deposits grew 306 million or 9.3% linked quarter.
This growth just continues to be the result of motivated bankers are banking teams really focused on deepening customer relationships all of our branch associates and further penetration of our Treasury management services.
The increase in our deposits has led to meaningful reductions and brokered and wholesale funding with our broker deposits declining to 3% of total deposits at quarter end.
The it so the improved a non interest bearing mix wholesale reduction and overall reductions in deposit rates led to a seven basis point linked quarter decline in deposit costs as Paul mentioned earlier.
Our loan to deposit ratio also dropped to 92% in the quarter down from 94.
In the second and is and this is again the result of our core deposit growth and our moderated loan growth.
Our new loan originations in the quarter continue to be solid, but had been largely offset by higher pay offs.
We are continue to expect mid single digit loan growth for full year 2020.
Paul talked about state bank and up and I just want to reiterate how pleased we are with the merger and the opportunity. This presents for cadence in Atlanta and throughout the state of Georgia, our retention of Georgia clients and key customer facing bankers has been solid and we've made some strategic hires to launch our commercial middle market.
And wealth efforts and we've really been pleased with the early results and some some exciting new customer conversions.
We believe back in May of last year, when we announced the merger that there was strong strategic rationale and I can share that after being in Atlanta for a year I feel even better that this merger is a meaningful enhancement to our franchise.
So with that let me turn over to validate a few other details on the quarter great. Thank you Sam.
As noted previously we're very pleased with 5% linked quarter growth in our pre tax pre loan provision net earnings and all the business drivers behind that growth the solid operating revenue at 1.2% from the prior quarter as well as a reduction in total expenses down 6% from the prior quarter.
Speaking to the revenue increase net interest income for the third quarter was relatively flat at a 160 million down less than 1% linked quarter driven by a modest decline and average earning assets combined with the three basis point decline in our net interest margin.
The decline in the linked quarter, earning assets was largely driven by the second quarter sale of about 130 millions and loan very late in that quarter and other paydowns and acquired loans exceeding that new moderated loan growth.
That three basis point decline in the net interest margin was the impact of a lagging deposit beta on our now materially neutral interest rate position of our balance sheet.
Noninterest income increased nicely in the third quarter 2.9 million or over 9% driven by increased service fees across many of our business lines due to increased volume associated with broad business growth post merger.
Additionally, adjusted non interest expenses that 93.3 million came down 2.79, our 3% from the prior quarter due to lower comp and benefit expenses as we align our incentive another accruals the performance.
Deferral acquired loan costs previously expense and lower FDIC insurance assessment this quarter.
The combination of the revenue and non interest expense dynamics drove our Jeff that efficiency ratio back down to 48.1% right in line with our expectation.
Lastly, let me give you an update on C.. So as we continue to prepare for that adoption.
In summary that day, one phase in capital impact is expected to be minimal.
At less than 10 basis points of total capital.
Regarding the estimated reserves based on third COVID-19 data, we would expect a 35% to 45% increase in our reserve levels for our originated portfolio with the percent greatest percent increase from our consumer portfolio with a life of the loan under Stifel is much longer than.
The current loss emergence period.
As you know FIFO requires establishing a reserve for acquired loans, even if they were recently marked as our state bank acquired portfolio.
Resulting in an effective double count.
Accordingly, including our acquired portfolios. We currently expect that total reserves to increase between 55% and 65%.
So with that I think operator, we'd like to turn it over to questions.
We will now begin the question and answer session.
Good question you May Press Star then one on your Touchtone phone.
If you are using a speakerphone please pick up your handset before pressing the key.
At any time your question is going to address and they would like to withdraw. Your question. Please press Star then too.
At this time, we will pause momentarily to assemble our roster.
First question will come from Brady Gailey of KBW.
Hey, good morning, guys.
I've already.
So why don't we started in criticized were up 40% linked quarter on annualized.
Now a little over 4% allows let's just talk about some of the inflows into criticized auto linked quarter basis.
Yes, Brady page 24 for those of you who have it in front of you might be helpful reference point.
You're right the linked quarter increase is noteworthy.
Some historical perspective criticize has been as high as 4.4% back at the time of the IPO. So we're at 2.3% today I'm sorry, just the classified that as and totals have gone from 5.8 back in.
Prior periods to to 4.2.
Your question about the linked quarter increases David Let me ask you to come in.
We have to Paul good morning Brady.
I'm up what your based 21 would focus of.
The mix of that.
Quarter over quarter walk.
Thinking about first I'll tell you what does not know that Korean and breadth.
Consumer book Gold is holding up really well commercial real estate book is performing above expectations. It really.
Really pleased with how that portfolio is performing so this is driven by seeing.
Look at the components of that so the first being energy.
So at a $45 million increased on a linked quarter basis. This movement was really centered in midstream and is primarily into the special mention category.
We think this as a very different risk profile than the MP, particularly the pre 2014 credits the one bigger that drove the startup this quarter.
But we feel comfortable would kind of the underlying.
Outlook for those midstream credits.
Next in the healthcare, we had a $24 million increase the linked quarter basis, there the majority of that.
Exposure is actually.
Come about significant real estate collateral. So again, so feel good about severity or loss given default should any of that dairy going forward, but again help there into the special mention not substandard or doubtful.
And lastly generals being on all mentioned some of this and then in the prepared remarks, but let's really.
The number of larger nomination credits, but diverse above industry sector geography, and originated group and we really wouldnt expect to see.
Correlated movement within these bigger credits.
So going to collectively.
We feel better about the.
The outlook for these credits and really the underlying loss given default profile relative to the the credits the that drove the outsize net charge offs for the quarter.
Okay all right.
Maybe another one on credits I mean, the second quarter of a fairly elevated provision from you guys with when do you think the provision will normalize lower is that something that you think we could see happen in 2020 or.
Is there so much uncertainty, it's just hard to say when the provision lies the provision will normalize lower.
GAAP writing.
It's trying to predict it on a quarter quarter basis is tough and I understand your question is what about next year.
Yes, I think it depends on what happens with restaurant and if we see any of the high leverage credits.
Leverage wrap moderators deteriorate further and so at this point I am I don't have visibility that they're significant problems and with either of those books.
At the restaurant portfolio is is one that it's going to take us from time to work through that and so I I guess fundamentally I feel good about our credit outlook.
But I have to put an ashford by unless there's some things that shakeout of either those two portfolios that.
Got to become more challenging that what we have visibility on as of today ready. This is Barry I would just add to that about half of our loan provisions. This quarter were associated with the credits that we charged off and on those loans are either resolve and or in the process of rental.
Addition, and we believe that that reserves that are established as our.
Last and final and so that's a that's a big chunk of that provisioning. This quarter that we don't anticipate having to go forward aspect to it.
Alright, Great and then my last question is just on the margin you I'm used to thinking of cadence as a fairly asset sensitive company, but I know you've got the collar, which really limits that asset sensitivity Valley I heard you say you think about cadences somewhat neutral to rates going forward I meant with with the fed continuing.
To cut here do you think the NIM.
Can be stable or do you think we will see some downside.
Yes, no I think that once.
I think we may see another quarter or so at a little bit about lag in our deposit cost coming down the came down very nicely this quarter.
Total funding costs down nine basis points deposit cost down seven basis point, we expect that will accelerate in the fourth quarter and once that gets to kind of our fully modeled level of 50% beta.
I think that on a core basis, we're going to have a pretty flat margin and that is absolutely driven by the impact of the color that we put in place combined with the fact that half of the interest rate swaps that we have on the but we'll be rolling off at the end of this year. So the combination of those two really sets us up very nicely for 2020.
Yes that color was well timed thanks for the color.
Okay. Thank Brady.
The next question will come from Steven Alexopoulos of Jpmorgan.
Hi, good morning, everybody.
Good morning to follow up on credit so regarding the provision in net charge offs taken this quarter, which are basically for problem credits identified last quarter.
What changed so dramatically between the two quarters that you've taken the disposal value down by so much.
Well.
On the one large credit.
As was mentioned it went through a distressed sales process.
That was completed during the quarter that had an outcome that was.
Materially negative worse than anticipated.
So thats the biggest part of it right. There and then just Valerie just mentioned the provisions related to the increase in criticized and classified ads that's about half of the provision for the quarter and so.
Really those too thanks.
Paul was that one large credit covenant light loan.
No.
Was it just seems odd that you them more collateral protection on the credit.
Its.
Credit that we deeply regret okay and then just from a big picture view I mean credit it's not an issue really anywhere else, but you are seeing credit negative credit migration again. This quarter did you guys change anything internally is there a scrubbing of the portfolio something that's causing these problems to come to the surface.
Now.
Now Steve I mean, we every quarter go through the portfolio and and scrub it and look for changes in this is a period where.
With more than average number of credits were.
Food for size or cost.
Steve I would just also follow up on the larger credits as Paul mentioned.
We have than really a rabbit portfolio evaluating and feel comfortable that there are no. Other credits that have the makeup.
Of that credit and so again and believe that it is somewhat unique in its characteristics and unique in it.
Loss severity.
Okay, I guess every shareholder Ang on this call really wants to know one thing is is it in terms of the negative credit migration or is this now going to become a quarterly event, where we are reporting problems coming out of leverage problems coming out of restaurant.
How do you think about that is it's going to become a recurring event moving forward. Thanks.
Well I, Steve I guess, the way I'm thinking about it is that.
Over time the returns on our portfolio, we're going to be attractive on a quarter quarter basis. It can be lumpy.
This one outlier credit is if not.
Something the severity of loss on that is not something that we would expect too.
Experience again and.
The vast majority the bank's loan portfolios performing grade is really sort of an isolated thing, but with our stress in restaurant.
And.
We're watching how that leverage without moderating portfolio Blackhawk and looking for every opportunity to improve the risk profile there so I.
I think next year is going to be a much better here for credit.
I would just also.
We spoken recently about kind of the broader view of our portfolio fits with the 25 to 30 basis point.
Expectation for net charge offs now clearly the last couple of quarters are higher than that the last couple of years. Prior to this were lower than that so it does.
Sometimes have a lumpy aspect to it but on a broad basis, we still feel very comfortable with that 25 to 30 basis point performance for the portfolio and we may be getting into the time period, where that will be on a more consistent basis, then behaviors that we had in 2017 in 2018, but at that level that that.
Turning to the organization can provide which is I think evidenced by a pretax pre provision earnings this quarter.
We believe is is a very attractive and.
At result.
Okay. Thanks for taking my question.
The next question will come from Ryan Nash of Goldman Sachs.
Hey, good morning, guys.
Good morning.
So maybe a follow up to Steve's question, I guess, where there any factors contributing to the rising criticize outside of your control such as the Snick exam and then maybe 160 to 165 million of increased criticized do you have any sense of the breakdown of seed between Nick and non snack and maybe just what percentage.
Those bonds, where you actually the lead on.
Yes, so Ryan.
You are correct. The snick exam results are included in this quarter's results.
And I'm going to pause for second to see you can maybe best answer that.
Synergy question there or.
I don't know that we have an exact percentage of that but I would say that Adam.
There's there's probably at least a decent shock of them that that are shared national credit.
We don't have at specific number for you I don't know David if any other color on.
Now I guess as a percentage of from.
Okay.
Paul if I take a step back you know the strategy that bank has been to recruit bankers from larger institutions. You out you guys run with higher hold limits because those are a lot of the clients that that the bank just maybe that you are bankers historically bank.
I guess, given where we are the cycle does that strategy still makes sense at this point in time like are you guys, considering making any changes to the overall underwriting.
The hold limits the strategy of the credit portfolio at this point in time.
Yes, Ryan you make a good point and I guess the way I would summarize it is that.
We we did raised $1 billion to start with we are our legal loan limit is north of 300 million. We have an in house limit of 25 million when we merge with state Bank, we really didnt change the in house hold limit, we sort of tweaked a little bit here here and there.
And so I.
I think it's fair to say that we did start with a higher hold limit.
Dan.
Per dollar capital than maybe some other banks, but that we're we're sticking with it as we grow and not seeing it increase.
I would say the the plan is working I mean, notwithstanding these two quarters the fundamental credit performance at the company over eight years has been very good and we're sticking with the plan.
Got it I guess, one last follow up if I can sneak one last one and I think Sam mentioned mid single digit loan growth I understand you guys need to continue to grow the business, but given all the credit issues that you are experiencing I guess does it make sense given where we are in the cycle given your client base to continue to grow at that pace and.
Tell a much more thorough review of the portfolio has been done or at least until a lot of needs.
Energy restaurant and leverage credits have been worked out thanks.
Well I wouldn't say that mid single digits as a material change in the trajectory of our growth from prior years in its appropriate and that's largely by design.
Again, the way you mentioned the credit situation I mean, it's really one outlier credit this materially impacting our year were it not for that are the rest of the credit charge offs would be in the normal range and so we're focused on the long term returns and managing the portfolio over time.
And feeling.
Like we're going forward with some confidence.
Hey, Ryan this is Sam.
Thanks for the question.
As Paul pointed out with this is a pretty material deviation from a growth trajectory and.
Part of part of that is we're being we're certainly being cautious we have some portfolios that were managing in a different direction such as restaurant.
Our underwriting standards or are I think are appropriate and tight.
But you also have the growth factor opportunity here in Atlanta, we have a brand new middle market team on the ground that has already started to get traction that's going to be growing off of a base of zero and so thats going to if favorably impact of impact our trajectory I might just add a little bit of color than that but we are pipelines are good we are.
Now from the peak, but they are good we're seeing nice volumes and senior loan committee and as many of already stated we are slowing down in some areas. However, the community banking business banking in private banking areas are still see a nice volumes.
We added benefit of bringing in a lot of deposits as well and our theory teams the existing team initiatives State bank team are seeing.
Good activity in their respective areas.
Sam mentioned, Atlanta, but I also would like to mentioned Dallas, where a pretty through with the process of putting that team together and excited about the opportunities they've seen some nice growth over the last couple of quarters, but as Sam said, we're starting from zero point in Dallas as well at Atlanta, So good focus on those to those areas.
Thanks for all the call guys.
Thanks, Brian .
Next question will come from Jennifer Demba of Suntrust.
Thank you good morning.
Few questions.
What was.
The total loan production you had in the third quarter, how much of it came from Atlanta.
If you know.
Jennifer This is Sam I don't know, if we really have that broken down per se I know that our Atlanta real estate group was very active in the quarter and continues to have have really solid momentum in the middle market team has just gotten underway in has just been pickup.
Ample a nice new relationships, but it's early days early Atlanta, Cnine team and it takes time to build that business and as you know the sales cycle is long and banking so.
Jennifer I know you've heard me say at our focus is on building it right not building it fast and we're going to invest some time and see that business grow over the next several years.
Okay.
Back to credit for second.
Can you give us a sense of what your largest.
Non performing loans are in terms of size or industry. At this point, if you have that data.
Thanks.
Yes.
The NPL book at this point.
Yes.
Thanks.
Whereby we are what we can provide you on that.
I'd say that it's pretty consistent with our averages in.
The Buck on an overall basis.
Our credit to do tend to be.
At least that's population on that the Eni side tend to 12 million kind of on average.
I mean, let David kind of expand on that but.
But as a whole that's what you might expect.
Jennifer This is David so.
There will be from a non accruals that non 30, there will be.
Bob credits that will be north of 10 million, but but nothing larger than 12 million.
And then it gets pretty granular down from that.
Okay.
And my final question, Paul You mentioned, the the Investor and analyst surveyed top of the call.
Any major surprises out of that work.
For you in the management team.
I'm in for the most part of saying that investors have shared with us directly and face to face meetings and.
No major spreads.
Okay. Thank you.
The next question will come from Michael Rose of Raymond James.
Hey, guys part I would ask a non credit question.
So the deposit mix and the efforts you have continued to make have continued to improve the the mix of the portfolio just as we think about from here.
Is the goal eventually kind of get rid of all the broker deposits.
As you fund what seems to be slower than you typically grown core loan growth and then what efforts are you making to continue to further reduce costs. Thanks.
At so I'll start with that one so basically.
We use I think if that is before we use brokered deposits has that it's really just the tool the funding tool and at this point were down.
Oh peer level.
And so it may go down a little bit, but it'll probably hover around this area really just kind of as we manage quarter to quarter liquidity.
But but yeah, you're right we have had a nice opportunity of being able to bring that down and when you look at our quarter over quarter deposit.
The deposit in total may not be and significantly at a cost me significantly declined brokering claim on the average side. The average core deposits increased substantially while the brokered came down.
As far as what we're doing on a cost we are working actively to reduce our cost what did the benefits that we have as Paul mentioned as we've got about 2.3 billion that our index based and so those come down naturally.
And that really will help our assuming that we get the rate cut this month and then in December .
Significantly help our deposit costs, we're actually looking at Adam.
Yes, I'll also a number of our Cds that mature in December with got.
Oh gosh between 15% to 20% of RCD, that's maturing in December and.
It will come back on it probably.
50 basis points lower than they're rolling off so that will be at a positive in addition to that.
We're working actively with all the relationship managers on the customer accounts and ensuring that were.
And were proactive and not reactive to rate changes.
And expect the material improvement in our deposit costs continuing in the fourth quarter.
All right. So that's all reflected in your margin outlook correct.
Yes, Okay, and then maybe for Sam maybe back to Ryan's question could can win pack the loan growth a little bit guys I guess I look at it.
Energy is probably not going to grow materially from years, you work through some credits restaurants been kind of flattish healthcare.
It really growing.
Sorry impacted by a higher level paydowns.
How do you get to the 5% I guess I mean, what are the what are the drivers and maybe what are the tractors as we look forward. Thanks.
Hey, you pretty much hit on the detractors I mean, we expect restaurant to not just be flat, but probably down sequentially and energy probably in the in the flattish range I think I think we will see some some growth in real estate over overtime and.
Our originations there has been solid and much of that as construction lending and so that will fund up overtime.
But back to hikes point about Dallas, starting from a both basis zero Atlanta again same thing I think the and just our general. So you know we operate in some great markets Tampa Tampa team is doing doing great user than is just a fantastic economy and then we've got the other Dallas and Atlanta, New opportunities I think all in that.
That would drive as to that mid single digit guidance.
Okay, maybe one final one for me Paul previously talked about a 44% to 46% efficiency.
Target.
I know, it's still early but any thoughts on how that may shake out next year.
Brian I would still kind of remain optimistic about the efficiency ratio improving over time, but but I would have to say I think we need a little more time to get to that level.
I would see we had good core this quarter on expenses, but I could see next year being closer to the flat to the 48% efficiency ratio.
And let us continue to let some of these offensive hires that have been put in place.
Their businesses develop and mature.
But there is still good operating leverage in this model and we're still working hard on expenses all day everyday to to work both sides.
I think you'll see Sars along way of answering your question I think you'll see improvement over time, but not as fast as what we've seen the last couple of years.
No I understood. Thanks for taking my questions guys.
Thank you.
The next question will come from Brad Milsaps of Sandler O'neill.
Hey, good morning.
Morning.
Paul I appreciate all the Technicolor background on credit I wanted to maybe follow up on on the rest shop book and specifically.
The charge off you had this quarter in the restaurant portfolio. It sounds like frequency may pick up there in terms of a few more npis or criticized assets coming I'm. Just curious the severity of the loan that you did charge off this quarter or any kind of how that would.
Compared to what you typically see with with other restaurant credits.
Oh.
Hey, this is Sam good morning, yes vote. The restaurant charge off was has been an as long as identified problem for the past several quarters.
What was a bankruptcy situation and we've got it fully resolved for for the quarter in terms of other other material losses in the book Weve I think we've got the book graded appropriately where our clients are really doing a great job and restructuring and cutting costs injecting capital personal guarantees.
He's selling assets and so we feel good about the mode of our clients and it's good it's back to clients will activity. That's how we built this book in the first places we've bank top tier operators that have operated through cycles and so we're seeing some incremental improvement there and we're seeing incremental improvement in topline sales.
Same store sales growth.
So don't be dependent overly optimistic picture is just it's still stressful industry for sure, but up but I think we're in.
That does that was a casual dining and thats as Paul pointed out earlier our loss for this quarter that is one that is some is very much.
As an area of stress again, I want to point out that.
Significant portion of our restaurant book is quick serve and quick serve has been up in very resilient through route through cycles.
Okay. That's great I guess I was just trying to get a sense of.
Severity on that specific case that went to bankruptcy and in terms of kind of how that would.
The overlay with other loans that might go that way or due to take the other side just wanted to be the most severe case that you might see added that book.
I think the way I would answer your question is this would be the most severe case, it's the first one they go into bankruptcy as the worst one.
We anticipate it will be the worst one.
Okay, Great and then maybe just.
One follow up.
Now that you guys through to stick exam.
Gone up somewhat thorough review of the book, you've looked like you're going to build capital based on your loan growth guidance Sue.
My you've gotten get more aggressive with a share repurchase just kind of curious kind of how you're thinking about that today, maybe versus a quarter or two ago.
In terms of what you might buy back.
Yes, we're probably unchanged from prior periods in terms of how we think about its something we will revisit from time to time, we have authorized the $50 million as you heard US say, we purchased 10 so.
Well, we'll just continue to to visit but we'd expect that overtime will probably be in a pretty conservative place on it.
Okay, great. Thank you.
The next question will come from Ken Zerbe of Morgan Stanley .
Great. Thanks.
I can't I guess, just sticking with the loan growth topic, I guess, when you mean Christian out state.
Target if im segments are that 9% ish.
Growth in now it's mid single digits for 20 820.
I think I'm more curious just in terms of Y grade internally. He is it because you're pulling back in restaurant leveraged in there do you wish I totally understand and Thats why loan growth is declining is it because of the payoffs that you mentioned two were elevated in fourth Q do you expect those to continue.
Is it more intentional in terms of the other categories I'm just trying to figure out like driver of why loan growth expectations are coming down so much.
Then I mean, I think you really hit I mean, you well first off I would say, it's intentional or second the law of large numbers just with state their growth was little slower than ours on combined basis, it would be slower.
We're really work in the leverage portfolio heart, you saw that come down linked quarter 60 million dollar.
Restaurant, Neil flat to down so net net.
We're moving towards a lower risk.
Placing the in the portfolio and we feel we feel good about it we think it's still will be nice growth and still provide some operating leverage and far as as we mentioned several times, it's really all about long term return on tangible common equity and.
Building of the calling.
Profitable portfolio.
Okay understood and then I guess in terms of the problem credits you guys, how will this restaurant or leverage et cetera.
Is there a market for you to actually try to sell any of these loans into like or or is that just you would take such a huge loss on those that is just not worth it.
Yes.
Ken There are always you know people interested in talking about note.
Buying participations, you know read allocating portfolios things of that nature.
What we're focused on is managing the book that we have with the team that we have and and staying focused on being a good job for customers being responsive.
So we would never say never of course, but you are to say on the call me, we manage the energy BNP book from 590 million down to 275 now backup to Threeeighty through a very challenging cycle. So that would be code for the ordinary course business. The way, we do things and so we're managing restaurant down a bit.
Given the stress in that sector.
I would think there probably will be a diagnosed too far from now where we'll be looking to grow that business, but right now down as the direction.
Got it understood I would just imagine I think its reducing the balance sheet risk could probably do.
A lot positive thanks for your for your multiple on the stock.
I guess, maybe just a third question if I, if I might add in terms of the restaurant loans you talked about how they are they are trending lower over time whats the normal duration.
Have a restaurant along like how fast do they actually run off.
Hey, Ken this is Sam so in the restaurant space, you're typically doing term lend that term lending.
Five year term with an amortization of anywhere from seven to 12 years and so you'll generally see the restaurants everything just amortizes as as as steady at least half well over the five year period.
But most of these deals get really get renewed on re traded in up in a couple of years as they do acquisitions or other changes happened in that could give us the opportunity to actually and we have exited some credits where we did not like the trends.
Alright, perfect. Thank you very much.
Once again, if you have a question. Please press Star then one.
The next question will come from Jon Arfstrom RBC.
Thanks, Good morning.
Or John .
Couple more credit questions on your.
NPL balances.
How much of that is related to the three other credits that you talk about better in the final stages the resolution.
And also maybe the bigger credit it sounds like that was moved out as of today or yesterday.
Okay, Let me be sure I understand your question is how much of the nonperforming loans today are related to the three energy exit crude BNP exit credit you've got four credits that you're highlighting is bigger credits and I'm just curious.
930.
How much of the NPL balances included.
How much of those are and how much of the NPL balances those credits.
Yes, I mean added I would say go ahead, John as it is just over 20 million associated with those four.
As remaining at not third.
Turning to around 30, okay, and you're saying that these three credits the other three credits.
This is on slide eight or in the final stages. The resolution can you just maybe talk through that a bit with us I mean, the question is are you going to get out of those without any more pain.
Yes, the expectation is that the provisioning that we provided in the third quarter is is is all that will be required to add to complete that resolution and given that the near enough that we have to that situation and kind of the into the story. If you will add feel pretty confident about.
Fat and should be done, yes, I agree.
Okay. Good that helps and then.
In terms of the criticized increase you've talked a little bit about snack.
Impact you probably did a little bit of a deeper dive as my guess.
And you're saying, maybe it's back to.
To normal levels or it goes up and down are you.
You're not signaling that there is a wave of further increases coming in the criticize bucket or or are you.
We are not signaling that.
Okay.
Good Thats helpful and then in terms of the provision.
You talked about half of the provision.
Is from.
Specifically identified charge offs. So thats 23 million you have a little more coming from the criticize increase as well.
So is the message on the provision that its.
Could potentially be back in that 15 million or below type range.
So John I think Thats, a fair way to think about it and are reasonable comment and you know my only Africa's that if something happens in restaurant are highly leveraged that I don't have visibility as about today, if something happens there than it would be north of that.
Okay.
Alright, so so big picture message and I know, we're all nervous about credit, but your sand criticized is not going to spike.
Central for MPLX to come down.
Central for loan losses will the way, we sit today potential for that provision to go back to some sense of normalcy with some caution in terms of you can't 100% predict the future is that fair.
I think that the increase in criticized and classified ads are not terribly alarming and that it would not generate outsized provisions or charge offs in the future I think it's more.
Ordinary course business what comes from on areas of something a little different than that but it's an ebb and flow and what happens with the credit portfolio.
And it's in line with historical levels and so.
Slightly north appear but not out of control so.
No were my outlook for credit for next year is improving.
And and pasta.
And again, we would just kind of go back to that helped keep harping on it kind of that broader view. The 20 530 basis point that charge off expectations and that's what outliers that.
But.
That's our expectation with embedded in that previously that.
That's kind of what we expect as we look forward.
Okay, alright, thanks for the help I appreciate it.
Thank you John .
This concludes our question and answer session I would now like to turn the conference back over to Palmer.
Closing remark.
Okay, well. Thank you all for joining us just to summarize pre provision earnings were up sequentially and this will drive solid returns on return on equity and return on assets over time, assuming these charge offs of 20 530 basis points. Our goal then our expectation is that our bank will be able to achieve return on assets.
Thats 1.6 range and return on equity in the in the 17% range.
We're protected from lower interest rates by virtue of the hedge that we have in place and our ability to bring down deposit rates. So it's really fortunate that our strong deposit growth and slower loan growth is helped reduce our dependence on the broker deposits and it's really put us in a strong liquidity in a strong capital position.
In closing I think we've got a great franchise rooms really attractive markets terrific team of bankers working very hard to do a good job offer for clients I think we have a rock solid strategy and I remain confident that we're going to generate attractive returns overtime with that we're adjourned.
The conference has now concluded. Thank you for attending today's presentation. You may now disconnect your lines have a great day.