Q3 2019 Earnings Call
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Good morning.
Super participating in todays conference call as always before we begin I would like to refer you to the company's forward looking statements and risk factors that appear on the screen in front of you.
Additionally, the risk factors can be found at our Investor Relations website.
Are you see a C online dot com.
The statement provides the standard cautionary language required by the Securities Exchange Commission forward looking statements that may be included in today's call.
In addition, a copy of the third quarter earnings release can be obtained at the same website.
With that said I would now like to introduce Gary small president and CEO <unk> you see a C.
Yes.
Thank you Tim and good morning to all we appreciate you joining us this morning.
Very pleased to report third quarter earnings of $10.5 million were 21.8 cents per share for the quarter earnings were up 10.2% versus Q3 of last year and the M. S improved 14 stepping over the same period last year the interest rate environment during the quarter certainly been challenging to say beliefs.
That's a repricing more quickly what well be up funding cost reset takes that's a bit more time.
Our organization, we usually lags the quarter.
By about a quarter with equilibrium coming in at the six month Mark following already a separate reduction we anticipate margin will stabilize through year end.
Loan growth on a linked quarter basis grew 6.1% annualized linked quarter commercial growth in that over 8% residential portfolio was up 5% over the prior year.
In spite of what's been a very busy period for refinery so forth.
Our commercial clients continue to cash flow nicely and remain thoughtful regarding capex an expansion commitments as they had into 2020.
Total loans, including held for sale balances were up 6.7% versus last year.
The loan provision for the quarter did spike on the resolution of single commercial credits, we still expect full year net charge off position to be five bips or less.
The residential real estate in commercial loan portfolios are performing at unprecedented levels and the falling rate environment will only continue to provide a tailwind to each of these factors.
Customer deposit growth was up 7.2% versus Q3 of 18 noninterest bearing deposit growth was 7.6.
And business deposits were up 28% versus again, the third quarter of 18.
Average customer deposits and when I say customer I mean, excluding broker deposits remain flat on a linked quarter basis, we have plenty of funding to get us through the foreseeable future of our loan demand. We're always on the hot for non interest bearing a business deposits, but the flatness reflect starts taking a more moderate position for pricing position.
In the market.
Noninterest income perspective residential mortgage business is performing exceptionally.
Gain on sale in comes up 78% versus the same period last year and the business as a whole provides an excellent earnings hedge against the unfavorable net interest income.
Margin issues that were all being driven by the inverted curve and the lower rate environment. So it's a.
Great or to have in the water in times like this.
It's worth mentioning that we have a 1.8 million dollar year to date on favorable Mark our mortgage servicing rights in the portfolio.
At 1.8 millions recoverable to the extent the 10 year treasury increases in the future.
With the current environment challenging revenue growth in the near term, we remain very focused on expense management.
Quarterly expense run rate fell to $15 million, we continue to take steps to maintain our positive operating leverage as always for the organization. So we can guarantee prudent for the shareholder under any scenario.
Now I'll turn it over to Mac dirty to cover commercial and residential real estate businesses in more detail.
Thanks, Gary as Gary mentioned, we're very pleased with the performance of our lending businesses in the third quarter.
Loan originations in both the commercial and residential mortgage businesses were strong mortgage gain on sale income was excellent and commercial balanced growth. The salad in spite of a very heavy quarter planned pay offs.
Our outlook for both business lines remains positive.
Commercial third quarter originations were the strongest yet over 65% when compared to the second quarter of 2019 year to date known production is up approximately 8% what compared to year to date 2018.
She and I production remained good at over 35% of total origination.
Pipeline levels remain good and salad production for the fourth quarter as expected.
With respect to balance activity, we achieved balanced growth a little over 2% for the third quarter in spite of a significant ramp up plan payoff activity when compared to prior quarters. Our view for the fourth quarter is for payoff activity to remain elevated although not to the degree of the third quarter and for full year.
Commercial balanced growth of approximately 8%.
And our mortgage business, we had another great quarter in terms of loan production as originations were up over 12% in the third quarter compared to the second quarter and are up over 15% when compared to third quarter of 2019.
The third quarter of 2018.
Plain levels remain strong and we are well positioned for a very good fourth quarter.
Mortgage banking income was excellent in the third quarter and was approximately 78% compared to the third quarter of 2018.
Wow rights adjustments were again significant in the third quarter when comparing the total mortgage servicing revenue Reits adjustments and gain on sale activity for the first three quarters of 2019 to the first three quarters at 2018 were up by approximately 22%.
With respect to asset quality nonperforming loans as a percentage of total loans improved by over 20% and nonperforming assets as a percentage of total assets improved approximately 19% in the third quarter compared to the second quarter.
Charge offs on a year to date base to sorry, seven basis points and our expectation for the full year, it's for charge offs to be inline with what we experienced for the full year 2018, if not better.
Overall, we expect asset quality to remain stable I.
I would now like to turn the call over to Tim Esson, who will review our financial performance in greater detail.
Thank you Matt.
Let me begin by reiterating Gary's opening comment that again.
Q3 demonstrated very solid performance numbers, our quarterly result at 21.8 cents per share on a fully diluted basis were 14.7% ahead of the same quarter last year and are consistent with our expectation.
Total loans grew a 117.9 million, including loans held for sale or 5.3% during the last 12 month.
35.3 million for 6.1% annualized compared to the previous quarter.
Average quarterly customer deposits, which exclude brokered certificates of deposit increased a 140.4 million or seven 2.2%.
September 38, cheat and our flat compared to the linked quarter.
Net interest income totaled 21.6 million on an F.C.G.E. basis for the quarter ended September 30, 19, compared to 21.7 million for the same period last year.
Average, earning assets grew 79.8 billion during this time.
But the benefit of this was offset by 12 point.
Decline in the net interest margin.
The net interest margin on an empty basis was 3.21% for the third quarter of 19 compared to 3.33 in the third quarter E. G.
Excluding the effects of purchase accounting adjustments net interest margin was three E T.
The third quarter up 19 compared to 327.
In the third quarter of 80.
Nine basis point decline in net interest margin, excluding purchase accounting was due to declining interest rates and the inverted yield curve.
The net interest margin on a linked quarter basis declined 12 basis points from the 333 and the second quarter of 19, the 321 in the third quarter of 19.
Excluding the effects again, a purchase accounting adjustments. The net interest margin was 318 in third quarter of 19 compared to 329 in the second quarter of 19.
The dramatic Paul when interest rates in the third quarter, along with continued treasury curve inversion continues to place pressure on margins the company expects stabilization in the margin in the range of 320 in the fourth quarter.
Noninterest income increased 14.1% or $869000 to 7 million for the third quarter of 19 compared to 6.1 million for the same quarter last year.
The primary reason for this increase is in mortgage banking income our gain on sale a 1.1 million.
It was offset by a decrease in the value of mortgage servicing rights of 100 331000.
The decrease in mortgage servicing rights valuation was due to the dramatic drop in long term interest rates and the commensurate rise.
Mortgage prepayments speeds.
At the end of the third quarter. The company had 1.8 million valuation allowance associated with its mortgage servicing rights steady or rising rates should allow the company to recoup most of this 1.9 million allowance over the next 18 months or so.
The increase in mortgage banking income was driven by increased margin and sale volumes when comparing the third quarter of 19 to third quarter.
Total non interest expense was 15 million for the third COVID-19, compared to 15.8 million during the third quarter.
<unk> decreased 763000 or 4.8%.
This decrease can primarily be attributable to a decline in salaries and benefits along with reduction in FDIC expense related to a credit adjustment on premium.
We continue to place emphasis on disciplined expense management is help.
Offsetting the rate environment that exist currently.
Our efficiency ratio hasn't proved a 52.2% for the core hurt corridor.
One final comment regarding our effective tax rate on an activity based for the quarter the rate is 18.8%.
But that said I would now like to turn the call back to Gary's small.
Thanks again, Tim as we look toward year end, we see no material adjustment to our prior expectations communicated regarding loan growth and commercial loan growth would still eggs are we still expect top 8% Oh, but of course the year.
Margin will continue to be under pressure, but with promo money market rates and some high rate C.D. activity beginning to reprice substantially over the next two quarters, we should see some really on that front. The residential mortgage business will continue to exceed prior year performance and when adjusting for M&A.
<unk> expenses and we'll have a few of those in the fourth quarter, we anticipate our expense run rate to continue to be at lower levels throughout your end.
[noise] comments regarding our merger integration process with the first the fine we're six weeks post announcement or pull leadership team is in place.
We have about 40 project teams working on the integration effort at this point and all is progressing as anticipated.
I do want to be clear, though that on behalf of both organizations, we remain 100% focused on our client needs and our opportunities and it's business as usual out in the field.
And the strong third quarter results for each organization reflect as much.
So at this time I'd like to turn it over for questions.
[noise] well now begin the question answer session.
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At this time, we'll pause momentarily to assemble a roster.
First question comes from.
Let's see first Sandler Oneill go ahead.
Morning, guys. Thanks for taking my question.
One it's got Hey, I'm just wanted to ask on expenses, obviously very good performance and the third quarter and then it sounded carry like from your prepped remarks, there at the end.
It's possible that we'll be able to see additional declines from this quarter's call it $15 million run right through the end of the or did I catch that correctly.
I think if we go back to earlier in the year, we were saying 16 million or a little under that was kind of our run rate and this quarter. Just completed we dropped to 15 now we had a little FDIC bump that helped us along the way, but even without that we would have been flat.
With prior year in and and well below that 16 million. So.
All things being equal will still land somewhere between 15, and 16 and I think we will be closer to Q3's number than past quarters.
Okay.
Perfect Alright, and then can you add just a little additional commentary on the path expectations. It sounds like they'll stay elevated in the fourth quarter, but not to the same order magnitude as we saw in the third quarter. So maybe just some additional comments there and then I'd say something you can expand upon.
Your comments about.
Finds remaining sort of thoughtful or are constructive on the overall outlook just what what kinds of things are they they're telling you as you sort of survey them in field.
Sure Scott This is Matt.
I would say with regards to payoff activity, we certainly saw spike in the third quarter of planned payoff activity and that included a couple of loans that we would have expected to pay off in the fourth quarter actually paying off in the third.
Along with the occasional property or two that might have been sold at what that would normally be in your planning and just to put some further color around third quarter, our payoffs in the third quarter, what has been more than we experienced in the first and second quarter combined and I think that's why we're.
Pretty enthused about the level of commercial growth, we're actually able to achieve in the third quarter.
With regards to the fourth quarter again with those pay offs are pushing out or pushing up into the third quarter. We do expect a level of payoffs to abate slightly in Q4, and I would say somewhere in the neighborhood as 20% to 25% less than we experienced in Q3 regarding class.
And it.
Okay, then clients at where clients are today.
You know there they as Gary mentioned, they thing cautious about a large expansions or even acquisitions relative to valuations and things of that nature.
Just an eye out and preserving liquidity and cash flow, which from a credit perspective, you see in our numbers as well it's been a really good credit environment for us.
All right, that's what I would say that Scott good Gary if you looked at the full year and what we planned for the year relative to pay Downs you know, there's always some lumpiness up between quarters.
With a couple of exceptions, where we really had clients who sold their business and we didn't see that one coming we haven't been surprised by who's paying off it's just the timing moved a little bit between quarters. So the original guidance. We gave on commercial loan growth expectation for 12 31 to 12 31 is still holding up.
With our original Skus.
Okay terrific. Thank you guys very much.
Sure.
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This concludes the question answer session.
I'm sorry.
We do have with question Daniel Cardenas Raymond James Go ahead.
Yes.
Good morning, Dan.
Or maybe just a.
Little bit clarity on the margin guidance that you gave in the 320 20 range.
Uh huh.
Are you baking in any additional rate cuts into that [noise].
And so that margin assumption.
Well, we have Dan is we expect something that's at the end of this month and we do have a still place holder for December although it doesn't really affect the margin numbers given the timing of that more kind of analyzing whether we feel committed to that December whether or not but that's if none of it but we have over 400 million Don.
All ours in Oh promos promo money markets meeting this time last year, when we thought rates, we're getting ready to run up.
All that we were locking in some money up some 12 month block and and so we're still paying out some pretty assortment at rates on money markets right, now and they'll get or a chance to reprise here in the fourth quarter in the first quarter next year and then the normal CD movement, but again, it's 400 million Bucks is not a.
The big number in the movement would probably be 60 bips in today's rate environment on average.
Yeah.
And maybe just a quick reminder, in terms of all your variable rate debt. The portion of your loan portfolio that's variable rate.
Would be impacted by another rate cut.
Well we have.
580 million or so the to the LIBOR or prime and some of that Livewatch is already occurred and got to 75, it's in the life or spot I'm. So.
Again, it's more of a twod a 2020 issue relative to what's moving Livewatch got ahead of the curve on the October supported priced and.
And the December move wouldn't really have much of an impact on the margin there or.
Okay fair enough.
All right and then how should I think about your tax rate for Q4.
The same ranges is what we're in right now.
In that 18 a range.
Okay.
The normalized run rate, we may have some nondeductible expenses in the fourth quarter, there would be M&A related but on the normal flow.
Yep.
Okay, Great Alright, thanks, guys I'll step back.
Thank you.
This concludes our question answer session I'd like to turn the conference back over the Gary small for any closing remarks.
Okay. Thank you all for joining us. This morning, I would expect that we would likely release earnings again in January but we probably will dispense with the call in January given the expected timing of our.
Get together with first defiance on 31 and up for those of visited them with us for a long time spent a pleasure and the looking forward to see all on the other side.
Thank you.
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