Q3 2019 Earnings Call
Nations third quarter 2019 earnings conference call.
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Speaking today will be Scott Cabinet first foundations, Chief Executive Officer.
On the Jones, Chief Financial Officer, David Depaolo, President and John I'm, hoping President first Foundation advisors.
Before I hand over to Scott. Please note that management will make certain predictive statements during today's call that reflect our current views and expectations about the company's performance and financial results.
These forward looking statements Amit subject to the Safe Harbor statement included in todays earnings release.
In addition, some of the discussion may include non-GAAP financial measures.
From a complete discussion of the risks and uncertainties that could cause actual results could differ materially from any forward looking statements and reconciliations of non-GAAP financial measures see the company's filings with the Securities and Exchange Commission.
And now I'd like to turn the call over to Scott have at all.
Hello, and thank you for joining us.
We would like to welcome all of you Tour third quarter 2019 earnings Conference call.
We will be providing some prepared comments regarding your activities and then we will respond to questions.
As highlighted in the press release, we experienced another strong quarter.
Our earnings for the third quarter were 17.4 million worth 39 cents a share an 18% increase over the third quarter 2018.
For the third quarter total revenues were 57 million in our efficiency ratio was 59.5%.
As of September 32019, our tangible book value per share was $11.35.
Notable events for the quarter included a long so and securitization of 551 million of multifamily loans.
The sale of 284 million of lower yielding securities and the purchase.
576 million of securities from the securitization.
I'm very pleased with our ability to complete this fourth securitization a tool, which we intend to continue to utilize going forward.
Our banking operations continued to experience growth.
Loan originations totaled 486 million in the third quarter, and a 1.4 billion year to date.
Deposits have grown by 638 million during the first nine months of 2019.
Year to date or wealth management business has experienced an increase of 309 million in assets under management and a total ended the quarter at 4.2 billion.
Our Trust Department has continued to grow.
With increases of 97 million and assets under management during the first nine months of 2019, and a 35% increase in revenues when compared to the corresponding period in 2018.
Pipelines for both wealth management and trust business remain very strong.
Our business model, providing banking and private wealth management services allows us to deliver the results like what we announced today.
20 locations across three states, we serve a wide array of client each of whom have unique financial needs that we can help with.
As we head into the fourth quarter I want to call out a few accolades about the company. We have consistently been ranked as one of the top banks and wealth managers in Orange County.
We are listed once again as one of the fastest growing public companies in Orange County.
Also for the second time, we were named the Orange County business journals Civic 50, which has awarded to the most philanthropic minded companies in our region.
This is a reflection of our culture and our amazing employees doing great work for community.
Overall, it was a great quarter.
Now, let me turn the call over to John Mitchell our CFO .
Thank you Scott.
I'll provide a brief summary of our financial results for the quarter.
This quarter management took the opportunity to restructure our securities portfolio portfolio by selling $284 million of lower yielding securities with a weighted average yield of 2.09%.
In addition activities in the quarter included the sale and securitization of 551 million of multifamily loans, resulting in a 4.2 million dollar game.
The purchase of 576 million of securities from the securitization with a weighted average yield of 2.4% to 6% lower duration than the securities sold in the quarter.
And the receipt of a $1.2 million refund of FDIC insurance fees.
Total revenue for the third quarter were 57 million earnings were 17.4 million and earnings per share were 39 cents year to date total revenues were 158 million earnings were 41 million and earnings per share were 91 cents.
Our net interest margin was to 89 for the third quarter and 2.87% for year to date.
Our overall cost of inter bear interest bearing liabilities decreased to 1.91% in the third quarter 2019, as compared to 1.94% and the second quarter as we start to realize the benefits of decreasing short term interest rates.
We experienced net recoveries for the quarter and our age of wells at 52 basis points of our non acquired loan.
We're refining the required modeling for the implementation of seasonal in 2020, and we expect to be able to assess the impact of seasonal later in the here.
Including the benefits of the FDIC refund non interest expenses for the third quarter 2019 were $1.3 million lower than the third quarter 2018.
System with the seasonal increase of the related deposit balances customer service costs in the third quarter increase from the second quarter.
The effect of this increase in balances was partially offset by decrease in the related earnings.
I will now turn the call over today for pillow President percentage. Thank you John .
Got it mentioned during the third quarter, we originated 486 million of lines the composition of our loan originations were.
57% multifamily 31% commercial.
9% single family and 3% another.
For the third quarter, the weighted average interest rate on our loan originations was 4.44%. This reflects the benefit of our diversification into commercial loans as the weighted average bye bye.
Was approximately 4% for multifamily.
Slide 15 for commercial loan.
As of September Thirtyth, our loan portfolio includes including loans held for sale consists of.
50% multifamily loans, 20% of which are held for sale, 22% Cnine loans increased side other CR rate.
10% consumer and single family and 1% land and construction.
Our credit quality of our loan portfolios from as we had net recoveries in the quarter and our NPL ratio up 33 basis points.
As mentioned before deposits grew by 638 million for the first nine months of 2019.
With branch deposits, increasing by 92 million specialty deposits, increasing by 541 million.
Some of the increases, especially deposits is a tribute to seasonal increases we experience.
Question on deposit rates have started to abate and we expect our overall funding costs to decrease at short term rates that decrease and are expected to continue to decrease.
Overall I'm pleased with our results now I'd like to turn the call over to John cooking President improves patient advisors. Thank you David and good morning.
During the first nine months of 2019, we experienced positive returns in the market.
And while the markets continue to show signs of uncertainty our investments have performed well with respect to their benchmark.
As Scott mentioned, our AUM saw an increase of 309 million year to date.
Our robust investment offering continues to help position our portfolios for the uncertainties, we faced with respect to the trade more interest rates and other economic factors.
Strategically we are focusing on leading with our wealth planning offerings.
This allows us to better serve decline in results in higher retention rates.
More and more clients are turning to our team to help with complex financial matters.
This affords us opportunities to work closely with our trust department to build and maintain relationships with our clients.
In addition to banking and lending opportunities or wealth planning team is able to uncover opportunities for both our insurance and philanthropy services offering.
Having these additional resources available for our clients keeps them within the first foundation ecosystem.
As we look into the final much of the year and into 2020.
We remain confident in maintaining strong pipeline and expect to continue to be successful and attracting new clients.
At this time, we are ready for questions and I will hand, it back the operator.
Thank you Sir the floor is now open for questions to ask a question at this time simply press Star then the number one on your telephone keypad.
To withdraw your question.
Okay.
Thank you our first questions coming from the line, Steve Moss of B. Riley FBR.
Hi, good morning, guys.
Good morning.
Oh I want to start off with the margin here nice expansion quarter over quarter, obviously securitization in the remix helps kind of wondering what are your expectations for the fourth quarter and.
Where's the investment securities yield as of September Thirtyth front portfolio there yeah. Okay.
Hello responses that this investment securities answer I can provide it's 3% Steve in terms are going forward, our weighted average yield thats, what we expect yielding over the next few quarters on the securities portfolio.
The impact of that and the impact of our seasonal run off of.
The customer service related deposits will kind of keep our NIM flat for the next quarter and started we start seeing the benefits, especially in the next year with his first second and third quarter.
Whereas our customer service costs are expected to decrease in the fourth quarter, because we'd have lower balances. So that the bottom line impact we're still seeing the benefits, it's just not going to NIM in the fourth quarter.
Okay, and then on the customer service side, I guess, perhaps or even worse little more of a pickup then.
On the customers on the especially deposits.
Wondering if you give us any ranged from what the potential expense could be in the fourth quarter.
You want the.
He's looking for the end.
We have a coupon dynamic.
Events that we typically see about.
Somewhere about 20% to 30%.
And down during the quarter during the quarter.
Balances related to deposit those will obviously reduce.
The relative cost.
The same time, we havent model than any potential, but if there is movement.
The immediate reaction during the quarter.
So we should have a dual benefit on both the benefits continue as expected.
It's hard for us to give you exact.
Number, but you could probably assume about a 30%.
Reduction again.
Nominal cost and that should be close, yes, third 30% would be.
Beginning the core in the quarter. So the average balance won't go down as much during the quarter in the first quarter, we'll continue to see the benefits of that.
But the rates as Dave said are lower in the fourth quarter than they were for the full third quarter. So we'll have written.
That helps and then where the especially deposits elevated this quarter just because of the refi wave we saw here.
Not really I think I think those you know at the peak, that's that's probably where they're going to stay.
So you know.
I don't.
Like most Dave and John are saying, we should start to see some declines in those balances.
But it's going to range as they said you know from where we are at the end of this quarter.
At the high end and then.
Dip down 2020, 530% on the low wind that Theres couple of events, Steve that affects us some of the specialty deposits are outside of that March related right servicing assets.
So we did experience growth away from that and that was.
A pretty significant chunk, we additionally did have growth and bolt balances and not just.
Buildup.
Huh.
Taxes and insurance from existing pools of loans. So we had net increases so.
Some of that.
Could be attributed that but I think it was additional excess deposits that were sitting in the system that we're able to.
Because of our relationships that will have picked up.
The quarter.
Again, I think a little more of it a dual.
That's helpful. And then one last question for me originations for the quarter were definitely stronger than dow's expecting.
Okay.
Wondering what your expectations are for the fourth quarter pipeline.
And.
Any color you can give around another good quarter on the commercial lending side as well.
Yes, we expect to another strong quarter and.
Consistent.
With the third quarter, maybe depending on your end funding.
That could get pushed into January but.
Turning to continue to be strong on both sides of the business, even though we're holding fairly.
But judiciously on on our rates, we are still are getting a lot of demand. So.
Our expectations are we should have a strong fourth quarter.
And on the Cnine site.
Some of that as seasonal but I would still expect too.
Have a strong.
Fourth quarter, we have.
A good strong pipeline some of that again us when it funds out, but so far it's on both sides looking strong.
Alright, Thank you very much guys.
Thanks, Steve.
Our next question comes from the line of Angelina of Sandler Oneill.
Good morning, everyone.
Right.
Yes, So youve completed tortoise Securities book, Remixing and restructuring on how what's what should we thinking about the size of the securities portfolio going forward.
Should it be near this billion dollar level side you also brought on.
That $500 million of funding of.
I'll be funding was that to support the.
Maybe the planned securitization next year or was that also to bring on some liquidity for the security just kind of curious like how we should be looking at the securities book that yes, I think you're going to see the securities portfolio, probably well if you notice.
Year trends in the past.
We've kind of built up during the securitization and then we don't really do much throughout the remainder of the year.
So I would see those balances decline based on whatever prepayment.
Experiences we received so I think we were on balance sheet liquidity, probably close to 20% at the end of year or into this quarter.
I read some of that was cash from a client that we expect will go out.
If you just look at the securities portfolio is about 18% on balance sheet liquidity.
I think we would like to maintain the on balance sheet liquidity of around 14%.
So to the 14, 15% so to the extent that.
Prepays continue to is to pay off throughout the year and then you know wouldn't be surprised if we wind up based on next year securitization buying around securities. Yes. The spreads are very advantageous for us.
On the Securitizations I'm.
Frankly surprised that the spreads have been a little bit wide on on some of these securitizations.
So we're able to lock in three and a half.
This year duration.
As you saw with yields of about 254, given where where the market is today.
So.
With regards to the home loan bank advance.
Yes, there was a little bit to lock down against the securities portfolio.
But quite honestly, we saw an anomaly and.
Home loan bank advances.
Yeah, I think at the time that we lost that in I think the average daily rate.
To borrow was like to 35, and we were able to lock it down at 177 for one near term that's pretty good.
And that was right before the repo crisis kind of hit so you look at I guess, you could look at a one or two ways. One is lock in against our securities portfolio or kind of an on balance sheet edge of our.
Available for sale pipeline either way.
Scott mentioned, we Didnt strategically.
Certainly do it for either or it was taken advantage of an anomaly in the markets at a period of low interest rates.
Timing was good I guess it when we consider.
Rather be launching thanks, yeah, yeah yeah.
Is what these loans are moved to held for sale is the plan for another securitization and the third quarter next year.
Yes, I think it at this point.
As we mentioned demand for product is still strong.
We've been.
In addition, surround our delivery and trying to keep our rates within a specific range, but even with that our expectations are that we would originate.
More loans than we could balance sheet and.
500 million, it's a good benchmark number it may be slightly more on depending on how much more we originate but.
I would say low point is probably 500 million at this point.
Okay.
And then just one last question just on it looks like Nonperformers went up a little bit just any color behind that what what drove that.
Just kind of interesting we really only have two.
Larger nonperforming loans outside of that we have zero Oreo now.
Yeah very.
Very small balance.
Hi.
Relationships that we typically do for silver grey purposes that.
Our in that balance, but it's typically its two relationships one is the legacy cast secured.
Lineup.
Credit that was done thats tied up and litigation.
We actually.
Earn a return on that based on the existing securities. The collateralized that it's just stuck and litigation and manage that portfolio. We yeah, we actually advantages as well so we're waiting for that to come to fruition. The other one is up.
Land secure did say.
Legacy loan that was.
On several years ago and then.
How low 30 percents loan to value it's just.
An issue them getting there.
Thank you at school trying to get there.
Enrollment and other activities up so we feel well secured on both of those outside of those two relationships, there's really de minimis.
And isn't really that pipeline us.
Troubled assets or.
Very material.
Gotcha. Thank you for the color that covers all my questions.
Yes.
Our next question comes from one of Matthew Clark with Piper Jaffray.
Hi, good morning.
Hi.
Can you help us I guess I'm, a little surprised you're not going to see some margin release here in the upcoming quarter ft unloaded does lower yielding assets.
Can you just.
Maybe give us a little more color there and then just help us with the progression next year. It sounds like you expect some relief and then in the first quarter next year, but again, you're going to be comparing.
Loans in held for sale for another securitization, which I thought would have been somewhat of a drag but maybe just help US is is 3% kind of a sell a bogey for you all next year or not.
In terms of what happens is bottom line, we're going to make more money absolute dollars. This is all a percentage thing and placing on downstream, we're going to make more money on the topline we're going to make more money on the bottom line because our customer service costs are going to go down so for when you look at the bottom line is that it's still there. It's just an anomaly both one because we have more so.
Purities, yielding a 3% it brings down the average it's a percent if we make more money and also from the perspective of the non interest bearing deposits that we pay customer service costs as they roll off in their seasonality will replace those with borrowings or other deposits a bear interest so those will affect the NIM, but Bob.
In line will be at a lower cost and so we will still benefit from it. So in the fourth quarter, we will see the benefits from it to the bottom line, but it won't be a NIM as we stabilize that we will see the benefits going forward in the first and second quarter and we expect that that 3% target in next year is not it's very reachable.
Okay great.
And then did you happen to have the purchase accounting accretion number off hand, I know, it's not a lot, but I just like to have it.
It was nominal in the quarter couple we are kind of picking up on a monthly basis more Albany 50 to $100000. We didnt have any larger items. So we in prior quarters, we've had one or two large items. So we always disclosed that recovery Howard here, Yes, now we're just doing the normal amortization of those things and is.
It's nominal.
Maybe.
50 to $100000 a month, depending on the loans.
Okay, and then just on.
Non interest expense.
And the run rate.
If you look back to last year, you had a little bit of relief in the fourth quarter on the comp line can you just remind us of the seasonality.
And that if there is.
Another isn't the first quarter, but no I'm not sure, but yes. The first quarter has the job. So what happens is basically as we near the end of the year people start reaching their caps on taxes caps on for one case contributions things like that and so those percentage decline now the big the big decline is really the second and third quarter. The fourth quarter, you see a little bit smaller decline and going through at that.
Obviously impact is going to be going from the fourth quarter to the first quarter of next year, you'll see us a large increase.
And then again it will start tapering off from the staffing perspective as you can see by the head count we're keeping controls on our costs and making sure that any hires we do our substantiate unjustified.
So I think we've done a really good job over the last year and a half of focusing on making sure that we have an efficient operation and I think you can see that when you.
See the continuing trend on the efficiency ratios and so we see that continue to improve next one thing I would definitely emphasize as as we are looking everywhere to try to make sure that we're maintaining our cost controls.
Say that we've made significant investments in technology and infrastructure four years ago, and we're starting to see one of the benefits.
If we have a lot of room for growth without.
Need for significant.
Investments in technology and or is it.
Staff to support that growth.
Okay, great. Thank you.
Hey, thanks.
Again, ladies and gentlemen in order to ask a question simply press Star then the number one on your telephone keypad.
Our next question comes from line of Gary Tenner of D.A. Davidson.
Thanks, Good morning.
A couple of quick questions first on.
The loan production yields in the third quarter have where did those come in and how that compared to.
The yield on what you produced in the second quarter.
Hello.
I think the weighted average was 476 in the second quarter. The second quarter for 44 already for the majority of the decline well there was actually a slight decline in some of the CNR yields I think it was five in a quarter previously it was by 15 this quarter a.
Only came down a little over 20 basis points during the quarter.
The good news is.
With the mix and kind of the natural floors, we put on multifamily our expectations are.
New origination yields will be in this range.
The foreseeable future still net improvement to our overall portfolio yield which is important to us.
But that was kind of the mix.
In the decline from the previous quarter.
Okay. Thanks, and then with regard to the FDIC credit.
Craig you took this quarter represent the entire credit do expect or whether it be carryover into the fourth quarter no that represents the entire credit.
Okay.
Perfect. Thank you.
Thanks.
And at this time there appears to be no further questions I'd like to turn the call back over to Mr., Scott Kevin all for any additional for closing remarks.
Thank you everyone for taking the time to listen and today, we certainly appreciate it.
Overall, we're pleased with our results and we look forward to speak into next quarter.
Have a great remainder of your day and thank you once again.
Thank you ladies and gentlemen, this does conclude today's conference call you may now disconnect.