Q3 2019 Earnings Call
[noise], everyone and welcome to be Opus Bank third quarter 2019 earnings conference call.
My name is Tiffany they'll be your conference call coordinator today.
At this time, all participants are any listen only now.
Well be Paul Taylor, President and Chief Executive Officer, Kevin Thompson, Executive Vice President and Chief Financial Officer.
Brian Fitzmaurice, Vice Chairman and senior credit.
Chief Credit Officer.
Today's discussion will cover the company's performance during the third quarter of 2019 and information contained in yesterday's press release issued earlier this morning.
Slide show presentation that accompanies today's call is available on the Opus Bank Investor webpage at Investor Dod focusing dot com forward slash presentations.
The call will be recorded it made available for replay after two eastern time on October 28, 2019 through November 28, 2019 at 11, <unk> nine PM Eastern time like dialing 18558.
Your own Fivesix.
Passcode two to two to one two and.
The discussion during the call today may entail forward looking statements, which are intended to be covered by the safe Harbor provisions of the private Securities Litigation Reform Act of 1995.
You'll find a discussion of these forward looking statements in our recent FDIC filings and indeed earnings press release issued earlier this morning.
Today's call will include a question and answer session following management's prepared remarks.
Now I'll turn the call over to pulp Taylor, President and CEO for opening remarks, Sir you may begin.
Thank you Stephanie.
Turning to everybody listening to our third quarter earnings call I am Paul Taylor on CEO of Opus Bank.
Today, what I will provide a brief overview of our performance in the third quarter of 2019, I will then hand, it over to Kevin Thompson, any Pete and Chief Financial Officer, and Brian Fitzmaurice, Vice Chairman and senior Chief Credit Officer, who will go through the details of our financial and credit perform.
[noise], we had a strong third quarter, including improvements and credit quality, which led to a 7.7 million dollar negative provision for loan losses.
Our levels of non interest income from both PENSCO and our escrow and exchange Division and lower operating expenses. These accomplishments were the direct result of the efforts as a termination of Opus team members, who worked very hard to improve our profitability and strengthen our balance.
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As you recall, we undertook an expense reduction initiative and the second quarter and we saw an immediate benefit and our overhead expense run rate our efficiency ratio for the third quarter was 61.8%.
Which was compared to 71.3% three 2% and the second quarter.
We also began to see the trend and our cost of deposits moderate in the third quarter, which help cushion the decline and our net interest margin.
For the third quarter of 2019 Opus recorded net income of $22 million or 57 cents per diluted share compared to net income of $8.7 million or 23 cents per diluted share in the second quarter.
Return on average assets was 1.13% and return on average tangible common equity was 12.8% helped by the negative provision expense.
Credit quality improved with nonperforming assets, dropping 65% and the third quarter to only 10 basis points of total assets and enterprise value loans decreased 44%.
From the prior quarter to $35.9 million at this point in time, we're done reporting on enterprise value loans that 35.9 million should continue to decline every quarter and will decline in the fourth quarter of this year also.
Our commercial banking division had a very nice quarter, they originated $99.1 million of loans during the quarter and can and is continuing to gain traction. It is important to note that the intentional run off of enterprise value loans has cloud the progress we are making in remix.
Seen our loan portfolio towards a greater percentage of commercial loans, but we expect this headwind headwind will lessen in 2020.
The current interest rate environment remains a challenge for the banking industry in general and we are no exception, yet I am confident that our profitability will continue to improve in the coming quarters.
With that I will now hand over the discussion to Kevin Thompson, our CFO . Thank.
Thank you Paul.
Turning to slide four average loans increased 72 million from the prior quarter driven by new loan fundings of 406 million offset by loan payoffs of 300 million.
Loan fundings decreased primarily due to lower multifamily loan originations as we previously guided and we originated $99 million of loans in our commercial banking division.
Loan payoff rates, where historically low for the first half of the year, but returned to normal levels this quarter.
Total loan yield decreased six basis points to 4.24%, primarily due to lower market rates offset by higher prepayment fees.
As you can see on slide five lower interest rate environment, which led to elevated prepayment activity on securities in the quarter resulted in a decrease of 3% in average balances and 26 basis points in yield.
We continue to optimize our securities portfolio by selling some lower yielding shorter duration securities and swapping them with a mix of longer duration mortgage backed and corporate securities yielding 3.81%.
Turning to slide six average deposits increased 79.8 million in the quarter driven by growth in interest bearing demand money market and savings deposits generated by our retail commercial and PENSCO divisions.
Our cost of deposits increased three basis points to 1.09% has competition remain high in our markets.
We have found opportunities to lower pricing in certain deposit categories, and we anticipate making further progress should the fed continue to lower rates.
Our loan to deposit ratio remained at approximately 93%.
Turning to slide seven net interest income decreased 937000 or 1.9% during the quarter.
Interest income from loans increased half a million, but was offset by a decrease in interest income from cash and securities of 1.4 million.
Driven primarily by lower average balances and higher premium amortization.
Net interest margin decreased six basis points from the prior quarter to 2.82% primarily due to this decrease in yield and balance of cash and securities.
Our cost of funds was unchanged from the prior quarter at 1.23%.
As the cost of deposits increased three basis points to 1.09% our cost of borrowings decreased due to lower average balances a bit FHLB borrowings.
Proceedings slide eight noninterest income increased 9% to 13.1 million in the quarter. After we increased customer fees across various divisions within opus and PENSCO last quarter Trust administrative fees from PENSCO increased 6% to 7.2 million.
And fee income from our escrow and exchange divisions increased 8% to $1.6 million.
We also recognize sell gains totaling 220000, primarily on the self loans in the quarter, our noninterest income equaled 21% of total revenues.
Turning to slide nine noninterest expense decreased 13% from the prior quarter to 40.1 million.
Excluding the second quarter cost reduction expenses of 4.9 million. The decrease was 4% mostly in lower compensation and benefits expense due to reduced headcount offset by fewer deferred loan origination fees from lower fundings.
Professional services expense increased due to additional legal and consulting fees and we benefited from a small bank assessment credit to our FDIC insurance expense.
On Slide 10, we show capital ratios at quarter end, our tangible common equity ratio increased 41 basis points to 9.28%.
And our total risk based capital increased 49 basis points to 15.26%.
Tangible book value per common share increased to $18 a 94 cents.
The board has approved.
And 11 cents dividend per common share payable in the fourth quarter, which is unchanged from the prior quarter.
On slide 11, we display some of our asset liability metrics, which includes durations and our simulation of net interest income assuming instantaneous parallel shifts.
Anticipated duration of our assets has increased as a result of the slight mix shift in loans, we continue to closely assess our position as we navigate this difficult interest rate environment.
I'll now turn the discussion over to Brian Fitzmaurice to go into more detail on our loan portfolio and credit metrics.
Thank you Kevin.
This morning, I will review, our third quarter credit performance performance, which depicts continued and significant progress towards a normalized credit environment. This progress is highlighted by a reduction in enterprise value loans, a 44% or 28.6 million, leaving a 35.9 million portfolio a reduction in class.
Refied loans of 40.1 million or 37% and a 13.7 million or 65% reduction in nonperforming assets nonperforming assets measured 10 point, 10% of total assets as of September 32019, we recorded a negative provision for loan losses of 7.7 million for the third.
Third quarter, driven by the improvements in credit net charge offs totaled $4.9 million or 33 basis points of average loans and there were 5.7 million in specific reserves established for the charged off loans. We continue to expect our enterprise value to loan portfolio will reduce through the rest of 2019 through 2020.
As a result of the portfolio, reducing to 35.9 million, we will no longer single out this portfolio for discussion in our quarterly earnings Communications. Please note that during the quarter. We did not have any new special mentioned substandard nonaccrual loans and in fact, there are no nonperforming loans as of the end of the third quarter.
As I previously mentioned, we recorded a negative provision for loan losses of 7.7 million compared to 3.3 million provision expense last quarter.
We previously recorded negative provisions in the second and third quarters of 2017 due to similar circumstances, where improvements in our credit quality drove the release of previously allocated reserves the material factors driving the negative provision this quarter, where loan exits, which drove 7 million of the reserve release a decrease.
Reserves of 5.7 million in a positive risk rating migration at 1.2 million offset by net charge offs, a 4.9 million and changes in portfolio mix and loan fundings of 2.3 million.
As of September 32019, our allowance for loan losses totaled 45.2 million or 0.78% of total loans held for investment a reduction of 12.6 million and 22 basis points for the product from the prior quarter and specific reserves decreased to 1 million compared to 6.7 million in the second quarter of two.
As a 19.
At the beginning of the year I indicated that I was optimistic that our credit performance for 2019 would be favorable to both 2017 in 2018 and that our credit metrics would continue overtime to align with peer bank performance.
I'm happy to report, we are well along that path. Additionally, as a result of the improvement in the loan portfolio I don't believe it's necessary for me to make a separate presentation on credit performance on future earnings calls therefore in the future, Kevin and Paul will incorporate credit performance within their comments. Thank you and I will now hand, the discussion back over to.
Evan.
Thank you Brian .
On slide 14, we present, a summary of our outlook through the end of 2019.
We assume a continuation of the current economic environment and one interest rate cuts at the end of October .
Despite the difficult interest rate environment, we are optimistic and we continued to see slow steady economic expansion in our markets.
We expand we expect loan growth to continue to moderate through the end of the year.
With prepayments and competitive pressure at levels, we've experienced over the past few years. The overall loan growth for the year should be in the low double digits.
We believe with the federal reserve potentially lowering rates that deposit costs could moderate through the year, while still subject subject to competitive pressure.
We estimate our net interest margin for the full year will be approximately 2.9% due to the impact of the rate environment on loan and deposit pricing.
And the lack of repricing benefit on variable rate loans, we would experience in an increasing rate environment.
We continue to anticipate a flattening yield curve and elevated prepayments in coming quarters.
We continue to maintain our prudent expense discipline and we're very focused on increasing operating leverage we expect our core efficiency ratio for the full year to be in the range of 64% to 65% with coming quarters driving further down into the low sixtys.
We expect our credit metrics to be aligned with peer bank performance by the end of 2019, we remain focused on maintaining strong rigs risk management infrastructure and we are prepared for the implementation of Cecil.
We feel this quarter has provided the foundation to drive profitable growth and enhance long term shareholder value our diverse fast growing markets. Our focus on relationship baking and our expense discipline are expected to result in continued improvement overtime.
This concludes our prepared remarks, operator would you. Please open the line for questions.
At this time, if you would like to ask your question. Please press star but.
Telephone keypad.
Your first question comes from the line Matthew Clark with Piper Jaffray. Your line is open.
Hey, good morning.
Good morning, good morning.
First question just on expenses in the run rate here this quarter, a little better than expected, even adjusting for that FDIC credit, but want to get a sense for.
How we should think about additional cost saves if there are any and need to the plans for plans for ongoing hiring on the commercial lending side of things.
So as as we look forward.
There will be.
Expenses will be flat to down every quarter that we post.
And then as far as a commercial lending teams.
We have hired a bunch, but.
We will continue to be Opportunistically opportunist and looking for people that can produce loans. If we can find good quality commercial lenders that can produce loans, we will continue to higher and find offsets.
Okay and then on.
The reserve to loan ratio 78 basis points, just thinking about the mix multifamily.
The coverage, there 36 basis points and I guess, how do you think about the pro forma loan mix. So we can get a sense for where reserves might settle out between commercial cnine Siri and multifamily.
Well as we look at that you know multifamily, it's about 60% of our loan portfolio as we stand here today.
We're having great success in our commercial lending division, we expect that to continue.
And hopefully the commercial loan growth will continue to be very positive and eventually and time would outpace the.
The percent of loan growth in the multifamily.
We will always be a multifamily lender.
Just move need to move up the percent of actual commercial loans on our balance sheet.
You know and as we all know there are more reserves required on commercial lending then there on multifamily lending.
So in time, the reserve would grow along with the respective loan growth.
Okay, and then just on the multifamily.
Lending segment. This quarter, you mentioned you guys raised rates.
In that category can you give us a sense for what would your.
Rates are being offered at this quarter relative to last.
Yes, and we maintained rates this quarter, so last quarter. Our average funding rate was in the low for twenties were about 420 further for this quarter. So we kind of maintain that despite the low map.
Quite large decrease in LIBOR over the quarter.
Okay, and then just last one on the tax rate.
Coming close to 26% for the year is 26, the right number to use going forward.
Well, it's dependent on a lot lot of factors growth and income et cetera, So I would say somewhere in the range of 24% to 26% going forward.
Thank you.
Thank you.
Our next question comes from the line, Tim O'brien with Sandler O'neill and partners. Your line is open.
Good morning. Thanks.
First question Steve.
Hi, you don't pass on doing good are you good.
No complaints.
You don't listen anyway.
First question you guys said that Youve kind of got your Cecil analysis wrapped up can you provide any color at this point in terms of.
Kind of out of the gate, where that might be headed and.
That'd be great.
Yes.
We've we're very proud of the progress we've made on C. So we've done a lot of work internally and we are parallel testing right now were documenting the process doing model validation and we do have preliminary results and have had for a while until we are complete with our process.
We're not prepared to disclose too much added because I want to make sure that we have everything button down in our controls in place, but I Wouldnt say were two different from what we're seeing in the industry and we expect this to settle down this first quarter will provide more.
A detailed in our 10-K.
Great.
And.
And then as far as Casa deposits are concerned when do you feel like.
Are you ready to say or could you say that.
They might have topped out here for us.
On a cyclical basis, and we could see some moved down here going forward.
You know Tim that's the way it feels it's hard to predict that but.
As the upward pressure is definitely abated at this point in time.
We are now looking at lowering the cost of our deposits and have already taken some of those actions. So.
We're in hopes that this trend continues.
And then just too quickly kind of clean up questions around credit.
The when you guys are reserving for for commercial loans and obviously, they theres some variance in the kinds of commercial loans that you're putting on the books, but.
Can you give a ballpark of how much in initial.
Provision you put towards those loans to support them kind on a go forward basis is it like 1% to 1.5% something like that or.
Can you give a little color there sure it changes every quarter, but at this quarter, It's 146 forever for a path seeing island.
And then last question I am I mean, I know enterprise value loans that theres not much left there are you pretty much done with planned exit loans or is there a balance left there.
No. There is still about so we have classified loans of $16 million and so.
There's opportunity for us to still exit those if in fact, they can't be rehabilitated, but I think generally those would be exits.
And that takes time so.
Great. Thanks for answering my questions.
Thank you Tim.
Your next question comes from the line of Jackie Bohlen with KBW. Your line is open.
Hi, good morning, everyone. Good morning.
Brian just a question for you before you got put on the back burner going forward.
Yes.
With if I look at the breakdown that you provide in terms of the provision expense and I strip out.
Loan asset specific reserves the next charge off just yeah.
Under the assumption that this is related to a book that has now diminished significantly and I look at what the go forward as the provision in of itself is pretty low is that a good way to look at how it will be going forward outside of whatever changes are going to be implemented with Stifel.
So.
I don't know that its low it just depends on the.
It's relative to the asset class right. So because so much of the book is what we consider low risk with a very with with no charge off history multifamily. That's why it's one where thats, where it is and the as it grows.
In the C and I.
Space it'll grow its Paul was saying just.
I can tell you when we book.
Multifamily loan, we booked 35 basis points of provision on a new loan. So there is 111 basis points required every time, we booking.
Delta every time, we book and you see an island.
So I think and yet against peer we wouldn't be I think if you look at Pierre for somebody that has a lot of multifamily we're not low.
Okay, and when you when I think about that 146 is that assumption.
The past charge off history, and so as we go forward and the look back that's further in the past that would go down or is that assumption of where you see credit today.
That's a that's look back.
That includes look back.
So.
So assuming domain credit if you could go down.
Yes, the factor should go down each quarter.
Okay. Okay. Thank you.
Then I think about I'm looking more broadly to just the loan portfolio and understanding that you want to get your point, where new findings are coming more from commercial then multifamily what is an ideal portfolio mix look like.
And how long do you think it takes to get there just generally.
Well you know it's hard to state what an ideal portfolio mix is clearly there needs to be more commercial.
We have keep in mind the commercial is.
I'm much more of a relationship business you know, we hope to garner deposits and Treasury management fees and business.
So it's a more holistic business.
Right now were gone for as much as we can.
Clearly as you look into the markets that we're in.
I think every bank in the market is trying to grow commercial loans I believe we have a really great trade team and the team is improving every day and we'll continue to get our fair share where in the past we were not so I think you'll see commercial loans grow nicely.
And.
Hopefully it will become a much greater percent of the balance sheet as we look forward.
Okay. So just kind of a gradual.
Mix shift over time.
Yes.
Okay. Okay.
Okay. Thank you.
Thank you.
As a reminder to ask your question. Please press star.
On your telephone keypad.
Your next question comes from the line of Tim Coffey with Janney. Your line is open.
Great. Thank you weren't everybody.
Morning, Tim.
As we start looking at a lower rate environment and the next couple of quarters would you were thinking about what loan growth could look like for next year is 300 million and payoffs a reasonable expectation per quarter.
Yes.
It's a little hard to forecast that it very dependent on the markets dependent on cap rates dependent on interest rates.
We definitely the first half of the year side for us historically low pay down rates and I think that was people maybe on the sidelined waiting to see what happened with interest rates, we've done right back up to our historical rates. So I anticipate that probably will continue into the future, but it's dependent on many factors.
Of course cars.
Earlier, you mentioned that you had a feeling about deposit rates and I just want to kind of wondering if you had a feeling about they expect to pay off levels next couple quarters.
Well clearly clearly the trend looks like it's going to continue you know rates are falling.
You know in LIBOR seems to be staying in line with that so one would think that.
No.
Paydowns would continue and increase potentially.
Okay I.
I apologize if I missed this and your comments, but did the payoffs in the quarter have any positive impact on margin.
Yes, our prepayment fees came in higher quarter over quarter. So we did.
Some benefit from that but of course are paid the loans that are paying down are coming off at a higher rate than those loans coming on so it increases our asset sensitivity and I.
Down rate environment.
Okay.
And then a question for Brian for Brian with the introduction of.
Caps on rent increases for multifamily every year.
As I have any impact on the current portfolio in terms of cap rates.
I Wouldnt.
I don't know, what's going to happen the cap rates, but.
If your question is what's going to happen, we don't think there's a negative effect to the performance of the portfolio.
Yes.
So.
Because we underwrite the rents in place.
So we don't think it'll impact.
The performance.
Okay. Okay. That's great color alright. Thank you those are all my questions. Thank you.
Your next question comes from the line Kevin.
Your line is open.
Hey, guys.
Good morning.
Just one kind of follow up.
Most of my question and answer but last quarter PENSCO is called out as a strategic focus going forward can you provide any color on what that may be or any progress made on PENSCO. So far thanks.
Yes.
We recently installed a new president at PENSCO.
Very experienced gentleman has spent most of his well spend all of his career and the wealth management Arena.
As I've always said I believe PENSCO is an incredible opportunity for this company and I think theres a lot more we can do with PENSCO and.
You know and better sell our products that PENSCO.
So I believe PENSCO will be a shining stars we move forward.
But we are still putting flesh on the skeleton right now to see what thats going to look like.
Okay.
Your next question comes from the line of Tim O'brien with Sandler O'neill Partners. Your line is open.
Thanks, One quick other follow up the professional service expense increased legal and consulting fees can you give a little more color on that one.
On what that was.
And Tim I would call that a more normalized level it was.
Abnormally low in the prior quarter.
Great. Thanks.
You bet.
No no further questions in queue at this time.
The conference back over to our presenters.
Yes, we just want to thank you for calling into our conference call in your interest in Opus Bank and we'll talk to you next quarter.
Thank you.
This concludes today's conference call. Thank you for your participation you may now.