Q3 2019 Earnings Call
Good day, everyone and thank you all for joining us This FMT Bancorp third quarter 2019 earnings Conference call. As a reminder, all telephone participants are there any most it after todays prepared remarks instructions on how to signal for a question will be shared with the audience also if you require operator assistance during today's meeting simply press star in zero on your telephone.
Pat.
Now to get started I'm happy to turn the floor over to CFO Mark Catchmark. Please go ahead mark.
Good afternoon. Thank you all participating in todays conference call before beginning the presentation I want to take time to refer you to our statement about forward looking statements under risk factors, which should be on the screen as part of the the statement provides a cautionary language acquired by the Securities Exchange Commission.
We're lucky paid but that may be included in this presentation.
A copy of the third quarter earnings release can be obtained by clicking on the press release link on your screen or by visiting our Investor Relations website at Ti Bancorp dotcom.
I'd now like to introduce Todd Brice, absentee CEO , who will provide an overview of that and teachers all Todd.
Thank you Mark and good afternoon, everybody a we're pleased to announce net income of $26.9 million were 79 cents per share versus second quarter results of $26.1 million or 76 cents per share and third quarter 2018 results of $30.9 million or 88 cents per share a few Rick.
Well, we did have a onetime tax benefit of eight cents per share.
In the third quarter of last year that related to a a pension cost you contribution.
Performance metrics for the quarter were very strong with Norway, a 1.4 or five [laughter] a return on equity were 10.97% and return on tangible common equity a 15.69% like the big highlight this quarter was balance sheet growth. This total loans increased $162.6 million were 10.7%.
Annualized and deposits increased by $126 million or 8.6% annualized.
Compared to the second quarter.
Both loan and deposit the man were very strong across our five market footprint and we continue to see nice activity going into the fourth quarter.
<unk> total revenue increased by over $500000 quarter over quarter isn't that in interest income increased by $369000.
The increase in average loan balances helped offset a six basis point decline in our net interest margin.
Which was impacted by the decrease in short term rates non interest income also increased by $162000 quarter over quarter into our efficiency ratio for the quarter was 50.9% and it was positively impacted by reduced FDIC costs. We also incurred 552000 in merger related cost.
Sure Mark is going to provide some color in his comments in a few moments.
Our credit results for the quarter included net charge offs of $4.3 million driven by existing substandard credit.
That experience annual evaluation adjustments this compared to charge offs of $2.1 million into second quarter provision expense was $4.9 million, it's which was driven by the net charge offs as well as a strong loan growth.
We did experience a a slight uptick in n. da's to $51.7 million, an hour and be a in total asset ratio stands at 2.68%.
Oh, so what I'm actually that we're on track to close our pending merger with Dnbi financial Oh, we anticipate the effective date to be on or about November thirtyth and are very excited about entering into this high growth market today things are progressing very nicely and we anticipate us these transition.
Conversion of the I T systems is scheduled for February at which point, we will also change over the size of that Citibank. So I'm actually that's been a pleasure working with bill alive and his team and it becomes more and more apparent that our cultures and how we serve our customers are very similar so we think with our increased product set and money capacity, we can ramp up the revenue stream.
Fairly quickly and finally Wanna mention that our board of directors. It has approved the quarterly dividend of 28 cents per share, which is a a penny higher or 3.7% increase over the same period last year and this is a seventh consecutive year that we've increased our dividend. So at this point a I just like to thank you for your continued support diversity Bancorp.
And now I'd like to turn the program over to our President and Chief lending officer, Dave into it well. Thank you Todd and good afternoon, everyone. As Todd mentioned, we're very pleased with the growth in the third quarter, where loans grew by nearly $163 million for the quarter, we experienced growth in both commercial and consumer loans led by increases in C and I have six.
The $7 million.
For construction of 48 million residential mortgage of 20 million and commercial real estate growth of $15 million. As you know we operate in five distinct markets, Western Pennsylvania, Central Pennsylvania, Northeast, Ohio, Central Ohio in Upstate New York and for the quarter, we saw positive loan and deposit growth in each market.
And in each of our commercial business banking retail mortgage and consumer business lines. We're very proud of this accomplishment and these results are a testament to our market based growth platform that I spoke about and we implemented at the beginning of 2019 during the quarter, we saw cnine revolving utilization rates increased from 41% to 42%.
Over the second quarter with balanced growth being driven primarily by new customer acquisition that resulted in a $76 million increase in total revolving commitments. In addition to the previously mentioned in $48 million in commercial construction balanced growth, we saw unfunded commitments increased by $66 million for this category.
Our residential mortgage balance growth it was driven primarily by increased production a 52% year over year.
We expect to see elevated pay offs through the balance between 19, particularly in the exceptionally competitive commercial real estate space that will temper growth in Q4 versus Q3. However, we do anticipate growth in Q4 that will allow us to achieve our full year mid single digit loan growth expectations our commercial.
Line continues to be solid there's approximately 35% larger than at this point last year, and our retail mortgage and consumer pipeline has increased by over 40% year over year. Finally, as a result at the current rate environment, we're experiencing strong demand for commercial loan swap leading to a one and a half million dollars a fee income in the third quarter.
Now I'll turn it over to Mark for additional details. Thanks, Dave net interest income improved by about 400000. Despite next margin pressure due to higher average loan balances of 103 million and one additional day in the quarter.
To the six basis points decline in the margin was related to lower prepayment fees in the third quarter versus the second while the balance while the remaining four basis points, primarily related to lower short term rates.
We do have good loan balance momentum going into the fourth quarter with ending period loans 118 million higher and the third quarter average assuming another rate cut next week the quarter over quarter decline of almost 50 basis points in the fed funds rate will result in an estimated eight basis point decline in the net interest margin rate in the fourth quarter.
We do have approximately 1.7 billion a funding that reprices very quickly and we all have also been proactive in adjusting other customer deposit rates. We did see four basis point decline in total coffee liabilities and a two basis point decline in interest bearing deposit costs in the third quarter compared to second quarter.
As we thought when rates were increasing there is a lagging deposit pricing that should stabilize and improve the winners margin rate once rate cuts stop.
Well deposit growth 126 million included the maturity of about 52 million of brokered Cds that we did not replace netting brokered out customer deposits increased by 178 million or about 12.8% annualized are up $460 million year to date.
The deposit growth Nics was distorted third quarter by changing one of our broker deposit program.
Clearly in money market and interest bearing demand is 300 million a brokered funds at the end of the second quarter 295 million was in money market and only 5 million wasn't interest bearing demand, but at the end of the third quarter only 100 million was in money market and 200 million within interest bearing demand so without this shift.
Interest bearing demand category increased about 7 million and then money market grew by about 114 million.
Noninterest income was in line with the second quarter and continued strong activity into commercial back to back swaps as Dave mentioned.
Non interest expense included 552000 or about a penny per share of merger related expenses. We also benefited this quarter from the small bank assessment credits from the FDIC. We book No FDIC expense in the third quarter and wound our accrual from the second quarter, resulting in a net credit in the third quarter. This represents a quarter over quarter bear.
Earnings of almost 1.4 million.
But not a merger expenses and the FDIC credit expenses were about 38, and a half million, which is in line with our expectations.
Closing of DMP merger in the fourth quarter will resort will result in significant onetime items of approximately $10 million with expected close at the end of November . We also have one month of Dnbi revenue and expense along with the various purchase accounting adjustment and net interest income and the CVI and expenses.
Well, we don't expect the net impact of that one month of activity in the fourth quarter to be significant to EPS.
Our tax rate in the third quarter was a little lower than expected as we have revised our full year 2019 estimate to the 15 and a half is 16% range.
Finally, our risk based capital ratios declined by about 20 basis points now what do the strong loan growth and commitment growth combined with some stock buybacks.
Thanks, very much at this time I'd like to turn it back over to the operator to provide the instructions for asking any question.
Excellent. Thank you Ed. Thank you all to our presenters for their comments today and for joining today on the phone and you'd prefer to ask a life question over your telephone line. Please press star one on your telephone keypad preference Armando place your line into acute and also a friendly reminder, that if you're joining us today on the speakerphone. Please return to your handset before pressing star and want to ensure that you're.
Signal does recharge equipment once again that is star and one on your telephone keypad, Oh, just a few moments where everyone at your assets.
And we'll take our first question from Russell Gunther with D.A. Davidson. Please go ahead. Your line is open.
Hey, good afternoon guys.
Right.
Hey, I just wanted to circle back to some of the loan growth commentary, which was very helpful.
As you look out to 2020, so I understand the headwinds we've got on the Paydowns in the fourth quarter, but yeah and as you are looking out into 2020, what do you expect the loan growth drivers to be both from an asset class and geographic perspective.
Yeah, I think geographically.
Entering into the Dnbi markets will help we've seen good growth out of a central Ohio, and we're starting to see better growth in western Pennsylvania, as well, we're rebuilding some of our construction pipeline and seeing decent activity from commercial real estate activity.
These are the per market is really where where we're seeing some payoff pressure.
Our CNR growth, we that we've added a fair number of bankers in the United States and that's what's really providing some some activity a in that in that line item as well and we're also seeing pretty consistent as consistently strong growth in central Pennsylvania as well.
And and also the small business channel continues to.
Originate a record loans and then as David indicated in his comments. The mortgage pipeline is is a is up as well yeah. We've added a number of a loan officers mortgage loan officers to our ranks as well and that's that's driving some nice growth and a strategy of looking at things from a market perspective in integrating the business lines into.
The markets is really paying dividends for us, particularly on the consumer retail mortgage in small business areas right. So we you know we just kind of came out of our money management planning sessions, a few weeks ago, and and you know there's a lot of lot opportunities across our footprint to really to just drive good core organic growth and so we feel.
And in some some product sets in some markets. Some will be you know that we've added some people that will start to see more tangible results in 2020.
But we like our position with the markets that were in with the people that were in and and a you know we would expect to continue to hit those.
Organic growth targets that we've we've talked about.
That's great color guys I appreciate that and then switching gears to the margin Mark appreciate your.
Last one on the upcoming corridor that could you just help us what that contemplates a if anything from the.
Quarter of the upcoming deal close and then how that from a purchase accounting perspective may factor into the reported margin going forward.
Right.
Dnbi has a maybe a 20 or 25 basis point lower margin than than we have that will pretty much be offset by the anticipated purchase accounting adjustment. So we think we see kind of level level back out going forward at that but those two offset each other approximately.
Okay. So it's just for simplicity say they need.
Easy enough for us to just kind of thinking about the core margin trends that you laid out.
Eight basis points with compression from two rate cuts as.
Something we can extrapolate going forward should the fed continue to cut or do you believe you have the ability for deposit so it really reflects lower and begin to mitigate any incremental cut.
No I think you know at least for that the next several cuts you know if they go beyond that the the additional one that we expect next week I still expect around four basis points.
Initial compression after each that cut.
The bounced back without any color you know in time after they stop that that the lag in the deposit pricing.
Okay, Great and then last one for me is on the asset quality Franchi I appreciate the comments about a charge offs higher this quarter, but you just give us some broad strokes outlook for.
How you how you see the environment is there any flashing yellow signs are you concerned about.
Energy for example, or what your restaurant exposure is just some hot button issues I'm curious as to how you guys are feeling about those related portfolios and asset quality in general.
Yeah, Russell I don't think is anything systemic I mean, you know we had.
The charges were just different asset classes in different markets to pass here with us too and they let him with a real sources bad.
I'm not sure if there's any.
Looking at least in our footprints disappointing right now to a lot of Red flags.
Italys, obviously, an area, where we watch carefully not to get everyone's watching carefully for overbuilding.
Certain certain markets.
Some of that you can relate back to.
The energy boom that happened two years ago.
But others is just civil overbuilding looking out and you know we take kind of a close look at what's going on.
Across all the footprints and any type of diverse economic situations in each industry. So what does that mean trucking hospitality or things of that nature, and our exposures and in a lot of lose those industries right now the seemed to pop up certain red flags are not extremely substantial.
Great. Thank you also to help I appreciate you taking my questions.
Vessel see Russell.
Once again that is star had wanted if you would like to ask a question over the phone ladies and gentlemen will move next to the line of Collyn Gilbert with KBW.
Thanks, Good afternoon guys.
To and quite a little bit more into sort of the your deposit strategy. How you guys are positioned.
Maybe where you're seeing good growth coming in and then also if you could talk about within your NIM guide Mark sort of what assumptions, you're making on the deposit pricing our deposit cost side.
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Our strategy this year, we've been a little bit more aggressive over the course of a lot of this year would send money market promotion and I'll add a little bit better pricing on on the TV side and less prior to high mid last year, we were pretty strict on our CD rates for new customers. We are seeing what we're seeing a.
Lot of of exiting with that so we lined up on that and that help stemmed the tide on the CD side, but we have seen good both money market and CD growth over the past year. So now that has helped our DTA growth the seeing I push on the commercial side.
Has also helped a lot or to generate a lot of D.A. balances. So were you know with with the big build up in deposit that has shifted some of our funding mix away from the wholesale side to the.
Two customer deposits, which don't react as quickly as the the wholesale side. So that has made it maybe a tiny bit more asset sensitive than we would've been and so we're taking a look inward you know what the bed moving down we're kinda resetting some of our product offerings and really right reevaluating does taking a little bit or the.
Hi, good and and probably come back that something either later this year early next year. After we kind of see where I get a better idea where things settle and then also and how we want to approach that dnbi market with any deposit.
Promotion and some of those start the.
Promotional time starts to roll off in December so we can start to hit a hit some of those rates.
December right, we have seen some a little bit easier comp competitively it hasn't been as at top as it was earlier. This year for example, I think the the competition, it's been a little bit more.
More in line with a market or the wholesale rates. So it seems a little bit less competitive environment. As I mentioned, we had we did put on a fair amount with is a promotional.
Money market that starts to roll off in December over the course of the next right 10 months after that.
Okay, do you I, but how would that kind of the the blended rate is on that promotional money market slug that set to roll off.
And it's currently priced and most of its price at a two and a half.
Probably about two thirds of that two and a half and maybe another third at about 215.
Okay. Okay.
Okay, and do you have a sense of how the the deposit pricing in the Dnbi market compares to your legacy P.A. markets and then also what you're seeing in Ohio.
From always me I think I'll higher market is it tends to be a little bit more competitive, especially up in northeast, Ohio.
Dnbi is more similar I think to central and Western PA, we haven't seen a lot depends there's some different players in there. There is some I think there's more larger institutions in that dnbi market.
We haven't error as of yet, though it does appear that pricing is significantly different than than what we haven't our western and central market.
Okay. Okay. That's helpful and if you addressed this in your opening comments I apologize if totaling hopping on but the buyback kind of how are you thinking about that or a buyback and just sort of capital management at this point.
We do get though we did do another reauthorization or an authorization for 50 million that goes through March 21.
Right now we're just we're watching it depends on we do have what there's lot of things going on with you know with the merger with the implementation as Cecil that'll take a cautious look that it'll depend on on the pricing and the market.
So we'll continue to evaluate that and some of the you've got the loan growth helped to utilize some capital during the quarter as well.
Okay did you give you did you give preliminary guidance on Cecil.
Mark.
No, we're still and we're making good progress and we have we have our models in place, but they haven't been fully tested in a there we have a independent model validation coming in so we're going to hold off on providing any firmer guidance until we get through all that so it we don't anticipate providing any firm numbers until.
The.
Fourth quarter really.
Okay. Okay.
That's good I'll leave it there thanks guys.
Thanks.
And gentlemen at this time, we have no signals from our group, but before I turn it back to you I would like to offer audience a final opportunity to press star and one on their telephones for a verbal question.
Well pause for just another moment.
Again, we do have one question they came in over the I'm sure many email.
Address.
And it was just a asking about the increase in accruing tdrs this quarter. So I'll, let Pat Yeah sure. This bad.
We did have a GDR new TDR was long term customer.
Operating company, which is secured by my real estate, we have current values.
Borrower had experienced in short term cash flow issues.
So we had restructured the credit a weird previously.
Early in 2018 that at this credit downgraded in adversely rated so therefore it continues to accrue. It's always been card has continued to make payments.
But because of the restructure in the problem and a risk rating.
It goes into fall into the TDR status.
Good.
So.
If there are no further further questions I just want to thank everybody for participating in today's call and we'll look forward to talking with you and in January for our fourth quarter results.
You'll have a good day ladies.
Ladies and gentlemen, this does conclude todays earnings release and we thank you all for your participation. You may now disconnect your lines and we hope that you enjoy the rest of your day.
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