Q3 2019 Earnings Call
Ladies and gentlemen, thank you for standing by and welcome to the Q3 2019 Midland stage Bank Corp. earnings Conference call. At this time, all participants are any listen only mode. After the speaker presentation, there will be a question and answer session.
The question during the session you want me to press Star one on your telephone. Please be advised to today's conference is being recorded if you require any further assistance. Please press star zero I would now like to hand, the conference over to your Speaker, Tony Rossi a financial profiles. Please go ahead Sir.
Thank you city good morning, everyone and thank you for joining us today for the Midland seems Bancorp third quarter 2019 earnings call joining us for Midlands management team or just like with President and Chief Executive Officer, and Don Spring Chief Accounting Officer.
We will be using a slide presentation as part of our discussion. This morning, if you've not done so already please visit the Webcasts <unk> presentations page of Midlands Investor Relations website to download a copy of the presentation.
The management team will discuss the third quarter results and then we'll open up the call for questions.
Before we begin I'd like to remind you that this conference call contains forward looking statements with respect to the future performance and financial condition of Midland seats Bancorp that involve risks and uncertainties various factors could cause actual results to be materially different from any future results expressed or implied by such forward looking statements. These factors are discussed in the company's FCC.
Thanks, which are available on the company's website.
The company disclaims any obligation to update any forward looking statements made during the call.
Additionally, management may refer to non-GAAP measures, which are intended to supplement but no substitute for the most directly comparable GAAP measures. The press release available on the website contains the financial and other quantitative information to be discussed today as well as the reconciliation of the GAAP to non-GAAP measures.
With that I'd like turn the call over to Jeff Jeff.
Good morning, everyone welcome to the Midland States earnings call I'm going to start on slide three with the highlights for the third quarter. We generated 51 cents in earnings per share, which includes integration and acquisition expense that impacted our net income by 15 cents per share on an adjusted basis, we had 60.
He six cents in earnings per share the highlight of the quarter. Once the closing of our acquisition of Homestar financial group in mid July with the system conversion completed last weekend.
Both teams worked very hard to complete this transaction and just a little over three months. After the deal was announced and completed the systems conversion 90 days after closing I.
I would like to convey my thanks to the teams for their exceptional efforts, then adding homestar to our franchise.
Our third quarter results reflected the initial benefits of this transaction, namely the positive impact of adding an attractive low cost deposit base that reduced our cost of deposits.
And provided excess liquidity that lowered our loan to deposit ratio, we expect to see additional benefits as we fully realize the cost savings projected from this transaction and offer our new clients and Kankakee, the broader suite of products and services and larger lending capacity that mid.
And can provide.
From an organic standpoint, we had another quarter of solid execution on our strategic priorities. We continue to prudently manage our loan port for production and focus on areas that provide more attractive risk adjusted yields.
Our equipment Finance group forgot continues to do an outstanding job of generating high quality lending opportunities and grew our balances in this portfolio by another 57 million in the third quarter.
Over the past year, our equipment finance portfolio has increased 81% and has been a great asset generator for the company.
This has been particular value, particularly valuable during a time when we are seeing extremely aggressive pricing and terms structures being offered by other banks for commercial and commercial real estate loans.
The other side of the balance sheet, we had a very good quarter from a core deposit gathering perspective on inorganic basis, our core deposits were up $153 million.
From the end of the prior quarter, while we continue the intentional runoff of broker time deposits.
This resulted in total organic deposit growth of 112 million or 2.8% in the third quarter.
The addition of Homestar improved our deposit mix and the success, we had and gathering core deposits in the third quarter resulted and even more improvement.
We also had another strong quarter of expense management and driving additional efficiencies throughout the organization.
This helped drive our efficiency ratio down to 60.6% in the third quarter from 61.6% in the prior quarter.
During the third quarter. We also took some significant steps to enhance our capital management, we issued $100 million of subordinated notes that we used to repay our senior debt and put us in a position to refinance 40 million of existing subordinated debt with less expensive and longer term funding.
In addition that its previously announced our board of directors authorized the repurchase of up to $25 billion of our common stock.
Combined with our long track record of increasing our dividend by at least 10% annually. The stock repurchase program provides us with another tool for returning capital to shareholders.
I'm going to turn the call over to Don to walk through more details on our financial performance in the quarter Donna.
Thanks, Jeff I'm going to start with a little portfolio on slide four.
Our total loans outstanding increased $255 million from the end of the prior quarter.
211 million or the increase was attributable to loans added to the Homestar acquisition.
On an organic basis, our total loans were up $44 billion or 1.1% driven primarily by growth in the consumer commercial loans and leases portfolio.
The primary driver the growth in this portfolio came from our equipment finance business, which increased total outstanding balances by 57 million or 11.2% from the end of the prior quarter.
Turning to deposits on slide five.
Total deposits were 4.45 billion at the end of the third quarter, an increase approximately 434 million from the end of the prior quarter.
The majority the increase was due to the Homestar acquisition, although as Jeff mentioned, we also had strong organic deposit growth in the quarter of $112 million or 2.8%.
Given by the 153 million increase we hadn't core deposit.
Our success in core deposit gathering enabled us to continue to implement our strategy to reposition or deposit portfolio to improve our liquidity management and reduce our non core funding.
During the third quarter, we intentionally reduced their balances of broker time deposits by another 46 million.
With this runoff in the addition of whom stores deposits broker time deposits represented just 2% of total deposits at September Thirtyth.
Turning to wealth management on slide six.
The ended the quarter or assets under administration were 3.28 billion with an increase of 155 million from the end of the prior quarter.
The increase was primarily due to the addition of boosters assets under administration.
Our wealth management revenue increased 9% from the prior quarter to $6 million, which was attributable to an increase in the state fees in the contribution from home Star.
Turning to our net interest income and net interest margin and slide seven.
Our net interest income increased 7.3% from the prior quarter, primarily due to the contribution from home Star.
Excluding the impact of accretion income our net interest margin was relatively unchanged from the prior quarter is lower deposit costs were essentially offset by decline in earning asset yields.
The decline in deposit costs was primarily due to the impact of home stars lower cost deposits.
Exclusive of the impact of Homestar, we started to see our deposit cost plateaued during the third quarter. We believe it's likely that we'll be able to continue to move rates down as a result of the recent rate cuts.
Moving to loans, but we've seen some decline in the average rate on our new and renewed loans as a result, the lower rate environment, our focus on more attractive risk adjusted yields to enable us to continue to add loans that exceed the average yield on our overall portfolio excluding accretion income.
During the third quarter, the average rate on our new and renewed loans was 5.39% were 32 basis points higher than the average loan yield excluding accretion income under overall loan portfolio.
Looking ahead, we continued to be relatively neutral from a balance sheets sensitive sensitivity standpoint.
However, the new subordinated debt, we issued will temporarily raise our average borrowing cost by seven basis point until redeem our higher cost subordinated debt in June of 2020.
We continue to expect our net interest margin excluding the impact of accretion income three remain relatively stable going forward, although the temporary increase in our average borrowing costs will play some modest pressure to the downside.
In terms of our scheduled accretion income, which does not include the impact of prepayments on acquired loans, we're expecting 2.4 million in the fourth quarter 2019.
Moving to our noninterest income on slide eight.
Total non interest income was relatively unchanged from the prior quarter at $19.6 million.
The $6 million, our wealth management is $6 million, our wealth management revenue remains our single largest contributor to our non interest income and continues to generate the large recurring source of fee income that we target for this business.
We had a strong quarter of loan production in our commercial FHLB business this quarter with $113 million rate lock commitments, our highest level in two years.
However, we had 1.1 million dollar impairments mortgage servicing rights in this business.
And as we indicated after last quarter's unusually low cost in unusually high gain premiums both of these items returned to more normalized levels.
As a result, our commercial update Jay revenue came in at 2.9 million for the quarter and excluding the impairment we are within the range of three to 5 million in revenue per quarter.
Turning to our expenses an efficiency ratio on slide nine.
We incurred 5.3 million in integration and acquisition expense in the third quarter. It also recognize to gain in MSR as held for sale of $70000.
Excluding these adjustments are non interest expense increased by 5.9% on a linked quarter basis, which was primarily due to the addition of home stores operations.
The strong expense management the jet previously discussed in combination with higher revenues lowered our efficiency ratio to 60.6% from 61.6% last quarter.
Moving to slide 10, we'll look at our asset quality.
Our portfolio was generally stable this quarter with no significant new additions to nonperforming loans.
As we indicated or on our last call.
A number of existing nonperforming loans that had a specific reserves set against them move to charge off in the third quarter, which resulted in elevated net charge offs with a corresponding reduction in nonperforming loans.
Our net charge offs represented 49 basis points of average loans in the third quarter will or nonperforming loans dropped to 1.04% of total loans from 1.24% at the end of last quarter.
We recorded provision for loan losses of $4.4 million.
2.3 million of the provision was related to an increase from the specific reserve established for an existing nonperforming loan.
This additional 2.3 million was the result of recent appraisal data that we received on the underlying collateral.
The third quarter provision broader loans to 58 basis points of total loans as of September thirtyth.
And our credit marks accounted for another 51 basis points.
With that ill turn the call back over to Jeff Jeff. Thanks, Don I will wrap up on slide 11, with some comments on our outlook as we finish up 2019, our primary focus will be on the integrate on integrating the homestar acquisition and fully capitalizing on all the synergies that we projected for this acquisition.
Now that we've completed the system conversion we are on track to have all the cost saves phased in by the start of 2020.
We continue to focus on driving greater efficiencies throughout the company.
And as part of that process, we continually assess our branch network in light of changing customer needs.
In addition to to Midland branches that will be consolidated as part of the Homestar integration. We have identified one branch from the Homestar acquisition that can be closed and three other branches that can be consolidated and other areas of our footprint with minimum minimally expected disruption to.
Customer service.
These branch consolidations will put us in position to realize additional efficiency or per improvements next year.
In terms of loan production, we don't expect to see any meaningful change in the trends we have experienced over the past few quarters. We've we still expect loan growth to be in the low single digit range with the growth primarily coming from areas that generate more attractive risk adjusted yields.
With the strong execution, we have on our strategic priorities, we feel good about our ability to drive additional earnings growth in 2020, as we realize the earnings accretion from the Homestar acquisition and continue to realize further improvement inefficiencies with that we'll be happy to answer any questions you might have.
Operator open the call. Thank you as a reminder to ask a question you on each press star one on your telephone to withdraw your question. Please press the pound.
Our first question comes from Andrew Liesch Sandler O'neill. Your line is open.
Good morning, guys.
Morning, Andrew.
Question here on the book flow liquidity in the loan growth. So from a good deposit inflows in the home start deal edited good base load liquidity as well so with the loan deposit ratio not down year, 97%. It doesn't sound like you have.
Much interest and stepping on the loan growth too much but.
What are your thoughts about driving that back up towards towards 100% or are you comfortable operating more more near this level.
Yes, so I think I I'm more comfortable operating under a 100%.
When we were at 100, and we were a little bit above 100, and prior quarters, probably that's on the higher end of probably where we would like to operate.
Ideally under a 100.
It is probably where we want to be and again that number will probably again it'll fluctuate a little.
Depending on what's going on quarter to quarter.
That number could be lower we've been paying brokered deposits off over the last several quarters.
Which is actually improves that ratio or lowers that ratio. So.
Yes, I think the good thing is we have a lot more flexibility on the balance sheet today than we did a year ago.
A lot more liquidity, a lower loan to deposit ratio and lower non core funding on the balance sheet. So I think we're well positioned going forward and as we see no loan growth.
That makes sense, we'll be able to capitalize on that.
Okay.
And then just on the done the core deposit inflows as curious what was driving that you had some pretty good success. This quarter is anything unique that.
That generated that growth.
A couple of things were running.
Some deposit campaigns, our bankers in the market are are running calling campaigns with customers I think we're getting we're starting to get trip traction there.
We've introduced some new products on the commercial side and we're seeing some good inflow.
On on that front, and then theres, probably some seasonal money in there as to municipalities are collecting taxes.
In a way to little bit of an uptick in servicing deposit area, which.
That money kind of comes and goes at times, but overall, we saw a really good deposit flow or or as a company.
Very focused on gathering deposits and lowering that loan to deposit ratio. So.
It was a really good quarter and it's good to see.
That that level of core deposit growth so.
Certainly.
Great I'll step back.
Thank you and our next question comes from Terry Mickey.
With Stephens your line is open.
Hi, Thanks, good morning, everyone.
Morning daring.
The commentary about the margin being stable going forward I was wondering if.
You are assuming another.
Interest rate cut and that was behind your statement in if not what would you expect to margin to do if the fed cut, let's say 25 basis points.
Yes, so we're beginning to move our deposit rates down with the first couple of rate cuts.
And we'll continue to do that going forward you know.
The rate cuts initially put a little bit pressure on the margin.
But then we're able to react on the deposit side this to begin to offset.
Some of that impact.
Our balance sheet.
Has some some loans off on the books that move when those rate cuts happen, but it's probably a smaller percentage than than a lot. Other companies. So I think where we'll be able to work through on another rate cut and.
Other than the impact of.
The sub debt being put on the books thats going to for sure puts some pressure on the margin we should be able to work through these these rate cuts.
Over time, maybe a little pressure early.
But we will a quarter or two I'll be able to work through it.
Okay.
And then just a follow up question on the expenses with the conversion happening I guess earlier this month and I would say just through third quarter expense trends or at least better than I was expecting what your thoughts on the fourth quarter and then maybe the first quarter. Once you get the full benefits of the branch reductions as well as the the homes.
Star deal.
Yeah. So I don't have any specific target, but what I will say is you know expenses on an.
Adjusted basis will continue to trend down in the current quarter.
As that conversion happened last weekend and.
The system.
Cost and people costs will will begin.
Go away this quarter.
And be fully impacted in the into the next quarter. So.
Without giving you a specific number that number will will continue to trend down.
And then the additional the additional branch consolidations that we're doing well will.
We'll hit in the first quarter next year, as well and give us.
Some more.
Improvement on that expense line.
Understood. Thanks, Jeff Yes.
Thank you and our next question comes from Michael Perito with KBW. Your line is open.
Yes.
Hi, good morning.
Morning, Mike.
Couple of things I wanted to hit on I wanted to start on credit Don I. Appreciate the color in your prepared remarks and kind of.
Strong mapping the dots together on why the provision was elevated but if we kind of just take a step back in the last four quarters. Do you guys have been provisioning I kind of a 30 to 40 basis point rate, which I really I mean is probably about two X, where we're kind of the the the Midwestern peer group is and I'm just I guess two part question. One I mean is that something you expect to continue.
Going forward or two or do you have some insight into that moderating or any other general thoughts kind of about the provisioning credit environment. You guys are seeing I think what would be helpful.
Yes, all I'll take this Mike a little little challenging of a question. So we knew we had additional provisioning to take we would need to take it this quarter. So.
You know I think.
Yeah, we're hopeful that we can.
Start to move that provisioning back to where it was.
Three or four quarters ago at that that 2 million dollar Mark.
We are.
And then the last couple of quarters been working through some of the Nonperformers and some appraisal issues that weve received on some of those.
So we're hopeful that can migrate down.
But it's sort of hard hard for us to sit here and predict a good thing as we didn't see any new nonperformers come in this quarter.
But we do have nonperformers in there that you know appraisals or ill be ordered.
On on annual basis, and those appraisals come and we'll we'll need to to make adjustments to reserves. So.
I guess I'm, not probably answered your question real well, but.
As I looked at our current quarter you know if we had a more.
Normal provision line, we would have had a really good quarter.
But we're kind of in the credit business and.
Our quarters that come up where we got to put additional provisions up so.
I guess without answering your question specifically.
I'm hopeful that we can get back to that more normalized $2 million, but.
It could be.
4 million again next quarter I don't have a good sense that sit here today.
Okay, Yes, because I mean, that's kind of that the thought behind the question I mean, if you. If you could appear provisioning rate in I mean, you guys are will do in 121 25, our away in the third quarter and I guess trying to extrapolate if that's kind of up a range that you guys think is achievable if credit it normally.
As is a bit from from kind of the elevated level over the past year. So.
That is our expectation.
Thats.
Through our efficiency work to to get below 60% that work should help us drive to a more.
120 type our away, which are internally, our son targets that we've set for ourselves of efficiency to get under 60 at an ROI to get over 120 and those those work in tandem.
Now the provision hurts your our away and doesn't commodity or efficiency ratio and that was part of what happened this quarter were.
What were the quarter really showed up on the efficiency ratio because the provision and impairments are taken out of those efficiency ratios, but not taken out of our away calculations.
Right.
Okay, and then just can you talk about.
How you guys are feeling about capital today, and then just like a secondly kind of the appetite for share repurchases that we should be thinking about as you guys move forward here.
Yes, So I think we're in the physician now to try to build capital we've over the last three years, we've done to two fairly large acquisitions, we just closed on.
Acquisition and Thats put some pressure on our on our capital ratios are Tc ratio in particular.
And we need to begin to build those capital ratios of which we think we can as we get into next year.
And that that would be the goal is to get that Tc ratio back between eight and 9%.
As it relates to the buyback we did buy some shares back in the third quarter.
And I guess, what hop what I'll say about that as will be selective.
On our buybacks win win this we think the stock price.
As in and good value in the third quarter, our average prices right around 20, 550, and we think Thats, a really good price to be buying our stock back today, it's not there.
So I think we're using we're going to use that as one when we think that the stock is.
Well price, we're going to use that to buy some shares back. So I don't I don't see us using the 23 million or so that we have left in the plan using that up in the next quarter or next two quarters, we're kind of look at that as probably using that over.
Several quarters.
Helpful. Thank you and then just actually one last one just on.
The commercial up Ajay business I know the pipeline for that one I think typically extend out a little longer. So just curious if you have any initial insights on 2020, how the pipelines kind of comparatively look and whether you think kind of the.
Revenues in guidance that you guys have kind of provided previously will hold as we move into next year.
Yeah, I mean, I think we feel that.
That 12, the 20 million.
And again.
I would encourage to the analysts to take the lower end of that range, it's real hard for us to predict.
Even quarter to quarter, let alone into 2020.
Exactly what that number might be but.
I think we still feel comfortable.
In that range and probably the lower end of the range and and we were work real hard to to.
To get the number of more towards the top of the range, but I think thats a reasonable spot to be in.
Great. Thanks, Thanks, guys for taking my questions I appreciate.
Thanks, Mike.
Thank you as a reminder to ask a question you will need to press star one on your telephone once again press star one to ask the question.
Next question comes from Kevin Reevey with D.A. Davidson Your line is open.
Good morning.
Morning, Kevin.
So my first question of besides the.
Opportunities from home starts to use their deposits at June .
Okay awesome.
Higher cost funding, what other strategies and what are the levers can you hold to mitigate NIM compression going forward would be special if we have additional rate.
Yes. So you know we're looking at all product set and as rates are coming down we're beginning to trim those rates.
Just like we moved the rates up as rates were going up we're going to trim as they come down.
We've run.
Some CD specials earlier this year that will.
Get really repriced in early part of next year, So that will help on the CD front.
On another product sets, we're we're beginning to move those rates down.
We have the sub debt next year that will have a 40 million that will be paid down that will help.
And I guess, that's that's the strategy.
Okay and you do you have any below one is on your existing commercial loans and are you putting on new floors.
Hello.
Yes, I mean, we will.
Yes, we've we've been pretty active in the last price six months of trying to get floors.
In our loan agreements and we you know at a lot of our loan agreements, we have prepayment penalties and floors.
I think we're been more active in the last six months to try to get the floors, although those can be challenging negotiate with with clients.
But we are trying to do that we do have some floors in our loans.
Which will help in big part of our portfolios fixed so it's not moving quickly.
As rates are being cut.
And then lastly, I know equipment finance is in an area.
It's to loan growth.
What is the typical of a.
Borrow on look alike.
As far as a type of equipment.
Leasing and.
In the credit profile.
Yes, so kind of credit profile would be.
There's probably smaller businesses businesses they've been in business for 10 10 plus years is.
Probably part of the profile.
Did you know I'll say, a tangible equipment not soft equipments, so you know trucks and bulldozers and and.
One of our guys like say yelp yellow paint equipments, so the caterpillar type type equipment.
Are a big part of what what we do.
But its tangible as things that you know if it goes by we can go get we work through vendors.
So you know.
Our sales forces.
Closer to vendors, probably then customers. So it's this point of sale type of business, where I need.
Bulldozer I go into the cat dealer and the financing there is.
It's through Midland, because we're providing kind of point of sale at that at the dealer so.
Great. Thank you very much.
Okay. Thanks, Kevin.
Thank you and I'm not showing any further questions. At this time I would now like to turn the call back to management for closing remarks.
Alright, thanks, everyone and we'll see you next quarter.
Ladies and gentlemen, this concludes today's conference call. Thank you for participating you may now disconnect.