Q3 2019 Earnings Call
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Good day and welcome to the starting Bancorp Q3 2019 earnings Conference call. Today's conference is being recorded at this time I would like to turn the conference over to Jack Kopnisky, President and CEO of starting Bancorp. Please go ahead Sir.
Good day and welcome to the starting Bancorp Q3 2019 earnings Conference call. Today's conference is being recorded at this time I would like to turn the conference over to Jack Kopnisky, President and CEO of starting Bancorp. Please go ahead Sir.
Good day and welcome to the starting Bancorp Q3 2019 earnings Conference call. Today's conference is being recorded at this time I would like to turn the conference over to Jack Kopnisky, President and CEO of starting Bancorp. Please go ahead Sir.
Good day and welcome to the starting Bancorp Q3 2019 earnings Conference call. Today's conference is being recorded at this time I would like to turn the conference over to Jack Kopnisky, President and CEO of starting Bancorp. Please go ahead Sir.
During the call we will highlight our solid quarterly financial metrics, resulting from strong targeted commercial loan growth.
Improved deposit growth strong fee income growth solid credit quality and significant cost controls and in line.
We will also discuss our balance sheet Remixing acquisition of an 843 million dollar equipment finance portfolio. The announcement of our technology partnership with Deloitte consulting and our outlook for the balance of 2019 and beyond given the changes in the rate environment.
First on an operating basis, our second quarter quarter results were solid.
Adjusted net income available to common shareholders for the quarter was $105.6 million, which was slightly higher than second quarter 2019.
Adjusted earnings per share of 52 cents was two cents or ones, 2% or one cents higher than both last year 2018, and the linked quarter.
Adjusted earnings per share of 52 cents was two cents or ones, 2% or one cents higher than both last year 2018, and the linked quarter.
Adjusted return on average tangible assets was 150 basis points and adjusted return on average tangible common equity was 16.27%.
Efficiency ratio continues to be among the industry leaders at 39.1% and.
On a GAAP basis, EPS was 59 cents and earnings were $120.5 million, which included a $12.1 million gain from the termination of the of storia defined benefit pension plan that we excluded from our adjusted earnings.
We continue to produce strong organic loan growth of $636 million over the linked quarter, which has an annualized.
Annualized growth rate of 14.4%.
Commercial real estate public finance traditional see an eye mortgage warehouse and lender finance portfolios have grown organically by more than 10% year over year. During the quarter, we saw run off of $165 million of non strategic low rate residential mortgage.
Yes.
On October seven we announced the acquisition of.
On October seven we announced the acquisition of.
On October seven we announced the acquisition of.
$843 million equipment finance portfolio from Santander Bank.
The portfolio is comprised of loans and leases to middle market and corporate clients with an average relationship size of approximately $5 million a tax equivalent yield of 4.3% and the duration of 3.5 years. We expect this transaction will close by the end of November .
We will continue to remix the loan and securities portfolio to achieve higher risk adjusted returns.
We will also returned to growing the overall balance sheet as we have most of the balance sheet repositioning behind us.
Deposit balances increased significantly driven mainly by a seasonal increase in municipal deposits, new brokered CD deposit relationships and a successful launch of our new direct bank channel. We also generated substantial relationship commercial deposits toward the end.
Into the quarter.
Our mix of products channels and funding sources provides flexibility to grow balances, while we lower funding costs.
Our core net interest margin excluding accretion income on acquired loans was 315 basis points. The declining interest rate environment resulted in lower asset yields on our floating rate loans and securities that comprise approximately one third of our assets, which coupled with competition for.
Our core net interest margin excluding accretion income on acquired loans was 315 basis points. The declining interest rate environment resulted in lower asset yields on our floating rate loans and securities that comprise approximately one third of our assets, which coupled with competition for.
Our core net interest margin excluding accretion income on acquired loans was 315 basis points. The declining interest rate environment resulted in lower asset yields on our floating rate loans and securities that comprise approximately one third of our assets, which coupled with competition for.
Our core net interest margin excluding accretion income on acquired loans was 315 basis points. The declining interest rate environment resulted in lower asset yields on our floating rate loans and securities that comprise approximately one third of our assets, which coupled with competition for.
Our core net interest margin excluding accretion income on acquired loans was 315 basis points. The declining interest rate environment resulted in lower asset yields on our floating rate loans and securities that comprise approximately one third of our assets, which coupled with competition for.
Deposits had pressured our net interest margin.
Deposits had pressured our net interest margin.
Deposits had pressured our net interest margin.
However, as we detail on page 13 of the presentation. We have maintained a stable core net interest margin over the past 12 months as third quarter NIM was essentially the same as a year ago. This reflects our balance sheet remix seeing earning asset growth.
Turning and focus on controlling deposit costs.
We anticipate that our core net interest margin should remain steady at approximately 315 basis points for the first quarter as we reduce our proportion of securities to earning assets lower FHLB costs, and borrowing balances and reduced deposit costs at prolonged flat interest.
Freight environment will continue to impact our net interest margin and profitability.
Core fee income growth was strong as a result of commercial loan fee income swap fees Treasury management fees accounts receivable fee income and BOLI income, resulting from the restructuring of this portfolio.
Excluding the pension gain in securities gains and losses non interest fee income grew by $5.3 million or 19% over the linked quarter, we expect core fee income to be over $110 million for 2019.
Core expenses exclusive of amortization of intangibles declined from the prior quarter to $101.7 million or 6%. We continue to aggressively reduce our financial center network and staffing and have reallocated a portion of the reductions to support growth.
<unk> expense run rate for the quarter equates to an annualized operating expense level of $403 million.
<unk> expense run rate for the quarter equates to an annualized operating expense level of $403 million.
Yesterday, we announced the strategic partnership with the Deloitte consulting to provide technology support in the areas of cloud based infrastructure robotics and automation enhanced digital banking applications and artificial intelligence enabled service experiences.
We view this as an opportunity to use best in class capabilities on a variable expense basis, where both parties are aligned to provide the best client and colleague experience and provide incremental positive operating leverage. Most importantly, we will be able to access these capabilities at.
Credit quality and capital levels remained strong charge offs increased to $13.6 million for the quarter, resulting from the continued resolution of three ABL and equipment finance loans that we highlighted last quarter.
The level of nonperforming loans delinquency and sub standard loan categories all improved this quarter.
Ted total tangible common equity to tangible assets was strong at 9.22%.
We continue to evaluate the use of excess capital for investment into our core business share repurchases and dividend payouts and anticipate we will repurchase between four and 5 million shares in the fourth quarter.
We continue to evaluate the use of excess capital for investment into our core business share repurchases and dividend payouts and anticipate we will repurchase between four and 5 million shares in the fourth quarter.
We continue to evaluate the use of excess capital for investment into our core business share repurchases and dividend payouts and anticipate we will repurchase between four and 5 million shares in the fourth quarter.
Finally, we are confident in our model and our ability to meet and exceed our growth and return targets in the future even with a more challenging rate environment for several reasons.
Secondly, we have a model that effectively produces strong organic and acquired commercial loan growth or got organic loan growth in the commercial group will exceed $1.8 billion in 2019, and coupled with portfolio acquisitions, we can support our growth objectives.
Third we are adding additional funding channels and our lowering the cost of funding to support growth.
Fifth we have strong credit quality capital levels liquidity and core earnings that will enable us to support growth.
We have strategically and structurally aligned the company to produce incremental positive operating leverage in the future.
We continue to point to the information on page four of the presentation that reflects the overall results of our actions over the past several years over the five year period, ending September 32019, our adjusted EPS growth compounded annual growth rate of 18.8% and our tangible book value.
We expect to continue deliver strong financial results.
So now let's open the line for questions.
Well, you're saying.
Yes.
We will now take our first question Casey Haire of Jefferies. Please go ahead.
They want to start wanted to start up on the NIM first off just.
315 level.
315 level.
So if the NIM guide right now is three is 315 correct. So to get 15 for the year would to get to that level would would imply about a three await NIM in the fourth quarter.
Now is that no sorry that.
And we think that thats largely going to be offset by the repricing of borrowings that we have substantial amount of those repricing. This quarter and then moving into next year, we repriced the entirety of our borrowing stack except for the for the senior notes in the subordinated notes everything else does reprice within an eight month window, we have about 1 billion and a half dollars of CD that are going to reprice.
And we think that thats largely going to be offset by the repricing of borrowings that we have substantial amount of those repricing. This quarter and then moving into next year, we repriced the entirety of our borrowing stack except for the for the senior notes in the subordinated notes everything else does reprice within an eight month window, we have about 1 billion and a half dollars of CD that are going to reprice.
And we think that thats largely going to be offset by the repricing of borrowings that we have substantial amount of those repricing. This quarter and then moving into next year, we repriced the entirety of our borrowing stack except for the for the senior notes in the subordinated notes everything else does reprice within an eight month window, we have about 1 billion and a half dollars of CD that are going to reprice.
Hundred 90 basis points to 2%, but there's a cut next week. We're in the next couple of days then we should see some we should see some movement down from that today. So there should be somewhere between 20 to 25 basis point decrease in the in the borrowings that reprice.
Hundred 90 basis points to 2%, but there's a cut next week. We're in the next couple of days then we should see some we should see some movement down from that today. So there should be somewhere between 20 to 25 basis point decrease in the in the borrowings that reprice.
Hundred 90 basis points to 2%, but there's a cut next week. We're in the next couple of days then we should see some we should see some movement down from that today. So there should be somewhere between 20 to 25 basis point decrease in the in the borrowings that reprice.
Gotcha, yet I are repricing in that yeah.
When do you how long do you anticipate getting to that 15% from 21% today.
That depends it depends on the performance of the municipal book going forward. So one of the reasons as we've talked about in the past or having that larger than the normal securities balances. The fact that a substantial chunk of what we do in the municipal side are collateralized deposits right and so one of the key areas that we are targeting two contested.
Focus on to reduce the cost of deposits on the funding side is.
The extent that those municipal accounts reprice the way that we anticipate that they will these securities decreases are going to be programmatic overtime, and they're not going though it will take us two to three quarters to get to that 15%.
To the extent that we're not successful and repricing those accounts in for whatever reason their deposit outflows that come from that municipal side, then you're going to get much what we will get there much faster could potentially happen this quarter, but more than likely would happen early next year and so the math from that perspective is.
The securities that roll off would be wrote the security that we would sell in order to fund or to get those numbers down on the securities portfolio are yielding today somewhere between 225 to 240, roughly and our higher balanced commercial municipal sorry municipal accounts are yielding somewhere between 215.
Well business a lot, but in this flat rate environment Theres components of the municipal business that don't make sense from an economic perspective, and those are the fires that we're going to focus on so.
Okay, Great and just last one from me just tying it all together I mean, it sounds like loan yields are coming on.
Even with a cut somewhere between that for 30 450 range and then your funding costs are 110, and then you have.
Falling so I mean, the incremental NIM seems like it's a decent 320 to 330.
And you're talking about a.
Three fiftys what is the headwind that I'm missing.
Thanks.
The financial center closures.
Branch based consumer or municipal in some of the direct bank things.
Core expense run.
It includes the acquisition and it is net loan growth. So it is how is the three component to it. So you have the acquisition you have somewhere between four to 500 million of.
It includes the acquisition and it is net loan growth. So it is how is the three component to it. So you have the acquisition you have somewhere between four to 500 million of.
It includes the acquisition and it is net loan growth. So it is how is the three component to it. So you have the acquisition you have somewhere between four to 500 million of.
It includes the acquisition and it is net loan growth. So it is how is the three component to it. So you have the acquisition you have somewhere between four to 500 million of.
It includes the acquisition and it is net loan growth. So it is how is the three component to it. So you have the acquisition you have somewhere between four to 500 million of.
Our organic growth through the commercial teams then you're going to we will again see somewhere between 150 to 250 million of runoff the between the resi and the acquired revenue multifamily portfolio.
Okay.
My last question wondering if you have any.
My last question wondering if you have any.
Color around the potential impact from from Cecil in 2020.
We do so we've we're going to shortly in more than likely with our 10-Q. Finally, we will have some additional information in there, but big picture, it's very consistent what we've talked about in the last quarter's call.
We're going to see an increase.
We're talking ranges, but we're we're going to see an increase of somewhere between 50% to 60% relative to our balance sheet.
Our allowance for loan loss reserves today now you have to remember that the little bit of an apple to an orange when you look at our numbers because the purchase accounting adjustments in the various acquired portfolios that we have created a little bit of a difference relative to folks that have not had acquired portfolios that have.
Organic loans on their balance sheet. So no we anticipate seem to be about a 50% to 60% increase felt that that 104 million that we have today, but about half of that is unwinding kind of left pocket right pocket type of dynamics between purchase accounting adjustments relative to no required allowances under Cecil So no we don't envision that became.
An impact to no to our capital position.
And we feel we've been doing a lot of work around that as you can imagine for the past.
Two years and were no will be pretty close to being able to provide kind of full details shortly and in reality our provision expense will remain pretty consistent we don't view the net effect of all this on a financial statement basis is the provision expense will remain around where we're at today.
Yes, so when you cut through all the all the moving.
Allowances and reserves around it ends up to that level.
Alright, Thank you very much.
Thank you.
We will now take our next question from Alex Twerdahl Sandler O'neil. Please go ahead.
Hey, good morning.
Turning now it's.
First off can you just remind us the characteristics of those three ABL credits that caused the higher charge offs this quarter and I presume that.
I guess, we'll start with that.
One of them was a printing sector.
Printing industry sector exposure, one of them was a lending business or a lender finance business.
And one of them was a concern.
Commercial construction crane operator.
So pretty diversified from the perspective of the industry sectors in which they operate in and Theres always a story to credit. So we could be here for two hours, telling you what happened with each one at the end of the day.
The.
The nature of the ABL business.
We've had three of these pop up we're now and the kind of working our way through them two of them are now behind us where we have essentially executed our collateral and weve charged off what we're going to charge off and then there's one more what we're still going in collecting our accounts receivables in selling off some inventory and equipment and so forth. So.
They should this third one should also be behind us in the fourth quarter, but.
The end of the day, we know this is what we do NPL when things go sideways, we go and collect as much money as we can and sometimes we we have charge off some numbers show and today the the three workouts.
Painful to go through work out, but they actually worked the way they should we collected as much as we could we moved on from that.
And just sort of the difference in that sort of higher charge off level this quarter than.
And maybe you indicated that when we talked about in last quarter that a difference in the collateral value versus where you thought they were.
Or is there something else, we should be thinking about.
Pretty much though that it is and it's largely driven by one of the relationships, which was more driven by an enterprise value dynamic versus borrowing base or kind of accounts receivable dynamic where it's much clear to be when you're borrowing or lending against accounts receivable, it's easier to kind of figure out how much the accounts receivable or and then take some haircut or discount tooling to.
The and figuring out we're estimating what your realizable value is in one of the instances.
The.
The workout included kind of selling the business as a going concern and that's where some of the kind of greater uncertainty arises and that's what that's what resulted in a good amount of those charge offs.
But that is now done in behind us.
And we expect a return to instead of 27 basis points to charge US we expect to return to the 10 20 basis point side. We you know all the rest of the trends that we see in credit Theres nothing that concerns us alarms us and frankly as rates continue to come down.
You know credits going to remain relatively pristine.
Going going forward as long as rates stay low they're going to be very pristine levels of of our credit metrics.
Got it presents.
It's safe to assume that the provision will return to that $10 million to $12 million per quarter. Following this event.
Yes, we anticipate that is the case, okay and then just back to the NIM seems like the the acquisition you did.
Has a.
Spread that is much tighter than the and then sort of the state in them. So if this thing closes in November of presumably Thats in that 315 guide is that is that indicate that kind of what the funding costs coming down from the other metrics at the margin is actually excluding the acquisition would be going up a little bit in the fourth quarter.
That's right that is correct. We do anticipate that is going to put so some of the as we put in done sorry, I don't have the slide deck justifiably, but one of the pages that we have in the slide deck shows.
The add some information on the acquisition and we are going to fund some of that with some security sales. So it's not that dollar for dollar the the acquisition doesn't impact entirely them, because we are going to replace some 2% yielding securities.
At that current level.
Pardon me we do.
We do so we think there are puts and takes in the mix of those fee income categories, but where we're pretty confident that.
The loan fee related types of things, we will continue to grow our comfortable with accounts receivable. The Bali restructuring that there has been done should yield even better returns as time goes on so were we are comfortable going forward.
Got it and then I know at the.
Trust the L. issue at the beginning but you are honest just in terms of maybe.
Comfort I guess, then that asset class, we getting a lot of questions I guess lately as we move along the credit cycle here in terms of riskiness of all that asset your comfort level in terms of potential losses.
Managed down the credit cycle Im just curious maybe just give us an update in terms of the loss history, there sort of your comfort overall as we migrate for the.
Through the economic.
Yes majority of our ABL is is.
Hey, Bill the secured by 85%.
Accounts receivable eligible accounts receivable and 50% advances against inventory. So that's meant the majority of this.
These there's a couple categories, where we had that plus some equipment loans that were in a BL that caused the variation in value and back to.
Looses comment on enterprise value.
So most of our portfolio is traditional ABS, while there is a portion of it that has some equipment finance or some cash flow dynamics.
Two at so we're comfortable with the portfolio were comfortable we know what what's going on in the portfolio. We've done a ton of analysis on it given.
Frankly, where rates have come.
The negative on NPL now is that the rates for a BL.
Hey, Bill has come down to the point, where in some cases doesn't make sense. We look at a ton of ABL deals. The volume is overwhelming and we pass on the vast majority of VBL deals now because of a pricing one and in some cases structure.
Got it and one final question.
I know you had sort of highlighted.
The public finance segment.
Strong closed in the second half of the year good growth in that therefore, you don't see that sort of carrying through into the fourth quarter. This year.
We do it is an interesting business.
Lots of communities want to do infrastructure projects and the infrastructure projects across America infrastructure is aged and.
The these projects are generally secured by the revenue of the of the community, which we think is good credit and I think.
You know, we're getting pretty good yields out of out of.
Those types of credits. So we're we're comfortable that that will continue to grow and expand and the demand will be.
Consistent and maybe even higher into the future given the infrastructure that we're financing.
Yeah.
Great. Thank you.
Sure.
Once again, if you would like to ask a question. Please press star one.
We'll now take our next question from Stephen Dawn RBC capital markets. Please go ahead.
Hey, good morning, guys.
Hey, So what you guys had talked about a.
It was I guess 310, 333 35 corridor on your NIM generally in the past if if we do end up getting.
At December rate cut do you think that will that 310 line would hold.
It would but it wouldn't be it'd be so you'd see similar so we get to cuts this quarter it be similar to what happened in the third quarter, which is near that would put some pressure of probably five to seven basis points down. So I think that'd be we still the three tenant think holds but if it went below three tenant would it be meaningfully below three.
And.
Then again.
We have not I caveat that by saying that you saw in the third quarter and we talked about this in the second quarter call is that the good thing about having low deposit betas on the way up as obvious Conversely, you're also going to see that same dynamic on the way down we're very confident that once those commercial and municipal count start repricing you have.
That plateau feature where a substantial chunk of the book start repricing from one day to the next but it takes a while to get to that point so.
Longer term to rate cuts give us greater air cover to continue to move those cost of deposits down. So short term there might be some risk to it but theres no doubt that the commercial side of the house catches up from a cost of funds perspective and so.
Two cuts I, even if there are two cut this quarter versus one it would not meaningfully change whatever whatever we consider to be the proper run rate NIM number for 2020, because we're confident that that the no. The commercial deposit side of the house catches up relatively quickly as well, but it will it will take it a little bit of time to catch up but once it catches up that reach.
Prices meaningfully down in one shot.
Understood and correct me if I'm wrong I think your historical data has been around.
30% or are you looking at a similar 30% in this go around.
We think so 30 to 35 and Thats got to tail to kind of till two cities. The consumer side is somewhere between 10% to 15% of the consumer and media is a commercially municipal is.
40% to 50% so there's that commercial.
That 40 or 50% holds a holds true on the commercial side.
You would start seeing that for every two cuts you should start seeing about a decrease of 25 basis points and Thats. What we have started to see play out enough on the books, which again, we're pretty confident it comes down so we just need to continue focusing on.
Kind of working with all of our commercial banking teams and having the right types of conversations with our clients sooner rather than later is that we can start moving those costs down.
That's good to hear.
And then just going onto your Cecil comments about the 50% to 60%.
Is that.
Is basically the offset to that going all that going to capital or some of that going to gross up.
It's going to capital.
Okay.
In dovetailing into that how does that impact your 2020 accretion outlook.
It does not because the accretion numbers that we provided in the past already fed theres going to be let me caveat. This by saying that both my comments before now not my auditors and legal folks would kill me or a preliminary results for the work and all that good stuff so levy caveat that.
But it really it wouldn't change it meaningfully because we had already started to embed the impact of.
You know ups of seasonal adoption into 2020, we were providing or prior guidance. So we've been we've been pretty consistent in saying that it's going to be somewhere between 30 to 40 million Bucks of accretion next year.
If anything I think that the bigger impact to accretion is actually the fact that if you continue to see.
You know acceleration of Paydowns, and so forth because of low rates and refinancing activity and so forth that's going to have a bigger impact on the guy that we provided then the adoption of Cecil. So we we feel pretty good that the numbers that we provided in the past with transitioning down to about 30 to 40 million Bucks. In 2020 are are still going to hold those we still feel pretty good about those.
All right. Good here and then just one last one just on your expenses. It looks like you guys came in about a 142 basis points on on assets.
As you start to pick up more assets do you see that number gravitating, a lower and lower into 2020.
Yes.
Alright perfect. Thanks, Thanks for the color guys. Thank you. Thank you.
It appears there are no further questions at this time, Mr. Comiskey I would like to turn the call back to you for any additional.
No I really appreciate everybodys interest in the following the stock. So thanks have a great day take care.
Ladies and gentlemen, this concludes today's call. Thank you for your participation you may now disconnect.