Q3 2019 Earnings Call
Good morning, and welcome to the financial institutions.
Third quarter 2.29, <unk> earnings conference call I'd wake cost.
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After today's presentation, the will be an opportunity to ask a question.
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Please note this event is being recorded.
Oh, no love to attend the country's ever to mission Shumeet Duran director of Investor and external relations IXYS Executive Vice President and General Counsel. Please go ahead.
Good morning, Thank you for joining us for today's call, providing prepared comments will be president and Chief Executive Officer, Mardi Gras, <unk> Chief Financial Officer, just some big.
During the question and answer portion of the call they will be to my T. thinking your revenue.
Bergen director of financial planning and analysis like Robert.
Today's prepared comments and killing they will include forward looking statements.
Actual results may differ materially from forward looking statements Seeger Friday risks uncertainties and other factors.
I refer you to yesterday's earnings release, some historical SBC filings, which are available on our website or safe Harbor description and it yourself.
Factors relating to forward looking statements.
We'll also discuss certain non-GAAP financial measures that are intended to supplement substitute.
Reconciliations of these non-GAAP measures to GAAP measures will provide the earnings release, which was filed exhibit to a form 8-K.
Please note that this call includes information that is accurate only as of today's date October 32019 about through the fall over to Marty.
Thank you very much Shelly good morning, and welcome to our third quarter earnings call.
We're pleased to report another strong quarter with net income of 12.8 million or 78 cents per share.
The tax pre provision income was 19.
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24.7% higher than the third quarter 2018.
Net income and pre.
Our next Preprovision income were the highest in company history.
Our results reflect the hard work of our teammates, resulting in an effective execution of strategies and having to drive long term shareholder value.
Okay, that's quarter reflect the continued focus on balance sheet optimization.
During the conversion of securities to relationship based loans.
Oh scaling the consumer indirect portfolio and building tangible capital.
While remaining disciplined with the management of expenses.
Non interest revenues and maintenance on a robust credit culture.
Meaningful progress was achieved in the third quarter related to realizing positive operating leverage and higher return on average assets and return on average equity.
During the quarter.
In addition to conclude the redeployment of Securities. We took advantage of a market opportunity to convert unrealized gains by selling 65 million of investment securities generating a 1.6 million gain.
Oh seeds of 65 million, where immediately reinvested into investment securities with intermediate duration.
That's repossession, they once completed without materially impacting portfolio yield.
We expect to continue to take advantage of these opportunities when they become available to us.
Well the total loss was relatively flat during the quarter due to factors first we experienced a higher than typical level of loan payoffs in the quarter. Following two quarters very low pay offs.
A portion of this activity was transactional.
For example, one customer was solved resulting into repayment of a 5.3 million dollar along.
There was a sizable see an eye relationship that we strategically participate into another bag, reducing loan outstandings by 6.2, Mike.
Other payoffs were smaller what a few related to construction loan pay offs.
Based on what we're seeing today, we anticipate a return to normalized payoff activity in the fourth quarter.
Second we continue to downscale, the consumer indirect portfolio by focusing on the profitability of new loan originations.
Portfolio decreased by 12.5 billion EUR, 1.4% from June Thirtyth.
And at quarter end comprised 27.4% of our total loan portfolio down from 30.4% one year ago.
Consumer direct portfolio yield for the quarter was nine basis points higher than the second quarter 2019.
Total deposits at quarter end were 114 million higher than the ended the second quarter 101 billion higher than a year earlier period.
Greetings from June 32019 was primarily due to public pod public deposits seasonality.
The growth from September 32018 was driven by business development and growth in a broker deposit portfolio, partially offset by approximately 50 million decrease at nonpublic Cds.
We made a conscious decision to lower our CD rates, leading to an approximately 28 million roll off of high cost nonpublic Cds and accordingly.
In the third quarter, we experienced an increase in interest rate swap transactions as part of our commercial lending program.
Resulting a fee income for the quarter of 890000. This fee based income category will fluctuate from quarter to quarter as is primarily based on the number and value of interest rate swap transactions.
Well noninterest expenses were higher we expected it provided guidance for this.
This is the ratio was 59.52% for the quarter compared to 59.79% in the second quarter and 62.4% in the third quarter 2018.
Performance ratios for the quarter were strong return on average assets was 1.19% 13 basis points higher than the second quarter of 2019 19 basis points higher than the third quarter 2018.
Return on average equity was 11.86% compared to 11.01% the second quarter and 10.71% your earlier period.
And our tangible capital equity ratio increased from 7.99% to 7.99% up 22 basis points from 630 19 at up 91 basis points from 930 18.
I'll now turn the call over to our CFO Johnson BAML will provide additional information on results as well as our current outlook for the fourth quarter.
Thanks, Marty good morning, everyone.
I'll be providing commentary on a few key items like comparisons to the second quarter 2019.
Net interest income was 32.5 million flat compared to the linked quarter.
That's what the result of lower average interest, earning assets in the quarter offset by the impact of net interest margin expansion.
During the third quarter as Marty discussed, we sold and immediately reinvest $65 million of securities Realizing a gain of 1.6 million.
Transaction had an immaterial impact on our NIM.
Additionally, and inline with our guide this quarter, we concluded our balance sheet strategy of redeploying investment securities into higher yielding loans going forward, we expect a securities portfolio to flow within a range of 780 800 million depending on the level of municipal deposit.
The decrease and securities was greater than the increase in loans during the quarter, resulting in lower average interest earning assets for a period of.
The timing of loan growth in the third quarter of 2019 resulted in a temporary deployment a portion of investment security proceeds for other purposes.
NIM for the quarter was 3.29% up one basis point from the linked quarter margin expansion was positively impacted by the repositioning of the balance sheet as loans became a higher percentage of earning assets.
Our average yield on loans was 4.77% the quarter down five basis points from the second quarter.
The average yield on interest, earning assets was 4.29% unchanged from the linked quarter.
Our cost of funds decreased by one basis point as compared to the second quarter.
To 100 basis points.
Total loans increased by 8.2% from the end of the second quarter as a result in growth in commercial mortgage and residential real estate of 2.5% and 2.3%, respectively offset by decreases and commercial business and consumer indirect portfolios.
Provision for loan losses was 1.8 million in the quarter down 510000 from the second quarter.
Provision for the quarter was impacted by a few factors.
First loan growth was lower therefore less reserve was required.
Second as the consumer indirect portfolio decreases last reserve as necessary and lastly.
We continue to experience good credit quality.
Net charge offs were 4.6 million compared to last quarter as 1.2 million.
The increase is primarily attributable to the partial charge off of $3 million of the commercial credit downgraded last quarter, approximately 2.2 million up that credit remains classified as nonperforming commercial mortgage loans.
Nonperforming loans were 9.8 million in the quarter down 1.7 million as a result.
A 3 million commercial markets charge off partially offset by a few commercial business credit downgrades in the quarter.
Allowance for loan losses, the total loans was 1% at quarter end down nine basis points from last quarter and the allowance for loan losses was 324% of nonperforming loans compared to 300%.
30 19.
Noninterest income was up 3.1 million in the quarter as a result of the falling.
Insurance income was up 567000, primarily due to the timing of renewals and business development.
Income from derivative instruments was up 935000, primarily due to new interest rate swap transactions.
And we benefited from the investment security sale and reinvestment generating $1.6 million of game.
Noninterest expense was 25.9 billion an increase of 883000 from the second quarter.
Salaries and employee benefits expense was up 1.2 million because of new hires and replacement personnel higher commissions related to higher revenue and an increase in healthcare claims.
Recall that in the second quarter, we experienced favorable healthcare claims and indicated that we expected them to be higher in the third quarter.
Professional services expense was 596000 higher than the second quarter.
Due to consulting and advisory projects.
These increases were partially offset by lower FDIC assessment as we benefited from FDIC assessment credit of 482000 in the quarter.
And lower advertising and promotion expense as a result of the timing of expenses related to the banks branding campaign.
Well noninterest expense was up in the quarter. It was in line with our expectations and guidance.
Our continued focus on revenue and efficiency resulted in another quarter of positive operating leverage year over year.
I'll now provide our current outlook for the remainder of 2019.
We expect mid single digit growth and our total loan portfolio for the full year, which is at the low end of archive of the guidance range provided last quarter. This takes into account the higher level of commercial loan payoffs received in the third quarter as well as the continued down scaling up our consumer indirect.
Loan portfolio.
We expect the consumer indirect portfolio to end the year near the high end up the range previously provided of 25% to 27% of total loans.
In light of the favorable runoff of high cost Cds experience to date.
And expected in the fourth quarter, we're changing our guidance for non public deposit to low single digit growth for the full year.
We continue to expect mid single digit growth in non interest income.
Excluding gains on investments securities for the full year.
Non interest expense guidance remains within a range of 25.5 to 26.5 million for the fourth quarter expenses, maybe closer to the high end of the range due to professional fees incurred in connection with improvement initiatives, Marty announced in our second quarter call.
As our efficiency ratio was 60.09% for the first nine months, we believe the ratio for the year will be slightly higher than the 59% to 60% range previously provided.
We expect modest expansion of the net interest margin in the fourth quarter for the full year, we anticipate a zero to one basis point increase in the 3.27%.
Net interest margin achieved in the first nine month.
As noted in the earnings press release, our effective tax rate of 25% for the third quarter includes a onetime true up of estimates related to attack to the tax cuts and jobs Act recorded at December 31, 2017, we expect to return to an effective tax rate a.
Only 21% in the fourth quarter.
And regarding provision for loan losses, we anticipate a more normalized level of provision for the fourth quarter inline with our historical experience.
We are currently in the process of developing our 2020 budget and expect to provide guidance in late January after we've obtained obtained board for approval.
Ill now turn the call back Tomorrow.
Thank you Justin before we open the call for questions a few concluding comments.
During last quarter's call I commented that we were about to deploy improvement initiatives to identify and take advantage of opportunities to improve efficiency, while enhancing customer.
Experience on employee experiences.
We continue to pursue opportunities to maintain expense discipline improve operational efficiency and automate low value repetitive activities using robotic process automation.
Our executive management team and senior leadership supported by capable improvement advisors, who specialize in near term self bonding business process improvement have initiated programs to improve company operations across the enterprise.
Also to deliver enhanced customer experience and improve operational efficiency to create incremental capacity and more effectively leverage our costs.
In conjunction with 2020 guidance, we will that will be communicated during the call at year end.
January we intend to provide more details on the costs and benefits of the substantive strategic opportunity.
Irene This concludes our prepared comments.
Thank you Sir.
We will now begin the question and suspicion.
Sounds good question you made three star one when you just answered.
If you are using speakerphone, please pick up your hands if people pushing the keys.
It was do we have question.
To start seeing too.
Well first question is from Damon Delmonte KBW.
Hey, good morning, everyone I was going today.
Good morning damaged James Good morning. Good morning. So just first question. If we just kinda talk a little bit about the margin I think Justin you said that you looks a little bit a modest expansion here in the fourth quarter can you just talk a little bit about your your rate expectations by the fed as far as cuts coming this year into next year and kind of how that plays into your outlook.
Yeah sure Damon so that outlook has caught today.
And does not assume anything more than the cut that's going to have that we anticipate will happen today.
And if there were to be another cut in December or you know one in March how is the margin position to Ah to handle that.
Well, we continue to be very slightly liability sensitive and so up my interest I would anticipate that a rate cut in December .
I would have only marginal impact on our margin.
Got it okay.
Alright, great and then with regard to the outlook for loan growth could you guys just give a little bit of color on what you're seeing throughout your footprint and where are the best opportunities are for that growth and kind of whats your you're targeting.
Over the next handful of quarters.
Well I think de Minimis spoke Ryan Burke.
Given our guidance as to where we think we'll end up overall from a.
The indirect portfolio, we've commented on our a conscious efforts to reduce the size of portfolio, but from a commercial point of view our pipelines remain pretty full.
We are seeing a lot of very good opportunities and.
Going through our normal process so.
We haven't seen any what we would call a economic weakening in or footprint.
And we remain confident about our ability on the commercial side.
The delivered alone.
Okay, great. Thanks, and they just one final question on expenses.
Yeah. The FDIC credit that you guys received this quarter are you expecting to begin to accrue again next quarter or how should we model that out.
We will be able to we will have enough credits to see FDIC costs similar to this quarter next quarter as well.
Okay.
Okay, Great. That's all that I had for now thank you very much.
Thank you.
Our next question is from Pemex Trudeau send you some Neil.
Hey, good morning.
Hi, Alex.
The first off just wanted to ask a follow up on the the expense initiatives that you were talking about a minute ago. Marty is there a specific objective our target do you have in mind and in terms of efficiency ratio or our away or anything like that that you're kind of is there kind of having the back your mind as you look at these expense initiatives.
So I anticipate that we will be much more definitive in January with you, but I think we have a material opportunity to think constructively and critically about.
The operations of the company and as I said, Alex It's an enterprise wide initiative.
We are being supported by a capable consultants who are going to support our ability to execute a project in a very definitive and timely manner.
Okay, and it's going to is it mostly going to be targeting expenses or is it going to be looking to to spend more in order to make a lot more.
Right now, we're looking at process improvement and efficiency.
If their ideas relative to revenues will be open to those but as I said, we will communicate a cost and our anticipated benefits of the program. I think you know reengineering has gone through general business certainly its cost of the banking industry over the course last up to.
20, or so years, and we have that opportunity available to us and we're going to take advantage of it.
Great and then you know just kind of to elaborate on the margin commentary.
Given that you guys are kind of a little bit on the liability sensitive side and now we've had to probably three later today cod.
No. It doesn't look like we're going to get any increases anytime soon I mean, it wouldn't be fair to say that the margin that kind of 329.
Yeah, that's kind of like a sort of a a low end for where the margin will be over the next.
Call it.
Four to five quarters.
Alex that's a great question very difficult to sort of project out that far.
As you can imagine it depends a lot on the shape of the curve not just overall that fund target rates.
And at the shape of the curve was to change materially it could have a material impact on the margin.
I guess the way that I would think about it is our slightly liability sensitive commentary is really more of a one year kind of new.
And as you get to year two in year three in year four obviously at some point if the rates if rates continue to decline you're not able to continue to reprice your liability side.
As low as your asset side can continue to come down. So it's just not as simple as an answer that but I can tell you that we will provide very specific ranges for 2020 in our call at the end of the in January .
Okay, and then just kind of as I sort of thinking I haven't done the exact math on this but just based on the security is kind of reaching the end of the transformation in the long growth being a little bit later this quarter in average, earning assets being a little bit lighter does that imply that there should be a little bit more margin.
Impact you know as loans that some of the loans come on in the fourth quarter.
I think that's a fair way to think about it and I guess, the other thing I'd point out to Alex as we talked about a pretty significant reduction in our CD portfolio and one of things that we also saw this quarter was a significant increase in our retail and commercial deposit.
Portfolio excluding Cds.
And so so we are generating and doing a really nice job generating strong deposit growth you know in it and it's primarily on the commercial side, where where we've seen that growth. So.
From my perspective, that's also sort of a good guy if you will relative to how we think about the margin going forward and I think your commentary about the asset side is also accurate.
Great and then just one final question for me.
So little bit M&A in your backyard announced last week.
You guys have talked about doing.
Maybe you can kind of data.
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And you hear me.
And over again that because we couldn't catch all of it.
Sorry, I'm not sure.
What's going on here, but.
I was just asking about M&A had a deal announced in your backyard last week and there's just kind of curious if M&A still something that's a consideration for you guys or and if it is what the criteria. If you could remind us what that might be.
So Alex I'm, you know where were we obviously saw the same thing you saw a relative to a small bank based in the southern tier in upstate New York.
From our perspective, we are focusing on the continued execution of our.
TG plant, which is a driving organic growth, which we continue to build on our track record there to the extent opportunities are available, we're ready and willing to consider them.
But at this point, we want to make sure we remain very discipline in terms of the execution of our plan as well as with the increased volatility in the world well it whether its political or the international pressures the economic outlook, we want to make very sure that Oh, we're not stretching on both the X.
Fusion of our plan as well as on strategic opportunity.
Understood. Thanks for taking my question.
Again, if she has a question.
Keith Fish Star then one.
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Okay. So I leave it looks like there's no further questions and we also experienced a little technical difficulty there. So at this point hearing no further questions I think we're ready to conclude the call and we'll look forward to be connecting in January .
With our investors.
Thank you. So we do not have any further questions do you have any other closing remarks.
Oh. Thank you very much currently we're ready to conclude the call.
Thank you.
The conference has now concluded. Thank you for attending today's presentation you may now disconnect.