Q3 2019 Earnings Call
Good day and welcome to the West Bank.
Third quarter 2019 earnings conference call.
Participants will be in listen only mode should you need assistance. Please signal a conference specialist by pressing star key followed by zero.
After todays presentation there'll be an opportunity to ask questions to ask a question you May Press Star then one on your telephone keypad to withdraw your question. Please press Star then too.
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I would now like to turn the conference over to John I and I am.
Please go ahead.
Thank you Sarah good afternoon, and welcome to Whats Banco Inc.'s third quarter 2019 earnings Conference call.
Our third quarter 2019 earnings release, which contains consolidated financial highlights.
Reconciliations of non-GAAP financial measures was issued yesterday afternoon, that's available on our website <unk> dot com.
Leading the call today are Todd Clossin, President and Chief Executive Officer, and Bob Young Executive Vice President and Chief Financial Officer.
Following our opening remarks will begin a question answer session.
An archive of this call will be available on our website for one year.
Forward looking statements in this report relate to whats baked those plans strategies objectives expectations intentions and adequacy of resources are made pursuant to the safe Harbor provisions other private Securities Litigation Reform Act of 1995.
Information contained in this report should be read in conjunction with Wesbancos Form 10-K .
Your ended December 31st 2018 at Form 10-Q for the quarters ended March 31st in June Thirtyth 2019.
Well its documents definitely father West Bank go with the Securities Exchange Commission.
Are available on the FCC and Wesbanco websites.
Investors are cautioned that forward looking statements, which are not historical fact involve risks and uncertainties, including those detailed in Wesbancos. Most annual most recent annual report on Form 10-K .
<unk> the FCC under risk factors in part one item one day.
Such statements are subject to an important factors that could cause actual results could differ materially those contemplate away such statements.
Frankly does not assume any duty to update forward looking statements Todd.
[laughter]. Thank you John Good afternoon, everyone on today's call will be Rubig review in our results for the third quarter of 2019.
Key takeaways from the call today, our he credit quality metrics remain at or near historical levels.
Loan growth continues to demonstrate positive trends across a number of our lending categories.
The pending merger with 'em up online Bancshares continues to progress and is on track to be completed during the fourth quarter.
Supported by strong underlying fundamentals, we remain focused upon and well positioned for long term sustainable and profitable growth, while not sacrificing long term shelf shareholder value for near term games.
During the quarter, we experienced flat and at times inverted yield curve.
Multiple federal reserve interest rate cuts.
Revived pick up in commercial real estate projects going to the secondary market.
We're being sold outright earlier than expected due to the current rate environment and our mandatory limitation on interchange fees for banks with more than $10 billion in total assets.
Despite these changes we were encouraged by the continued supported strength of our distinct long term strategies and unique advantages.
When excluding merger costs and the reflected the impact of the items I just mentioned net income for the three months ended September Thirtyth was $39 million were 71 cents per diluted share and for the nine month period increased 13% to $126 million or $2.31 per diluted share.
Sure.
These earnings generated year to date core returns on average assets, an average tangible equity a 1.35% and 15.42% respectively.
Overall, we believe our credit quality ratios remained strong as we balanced disciplined loan origination in the current environment with our prudent lending standards and key credit quality metrics and ratios such as nonperforming assets past due loans allowance for loan losses, and net loan charge offs continue to remain.
At or near historic lows.
I'm very pleased with the quarterly trend in our key asset quality measures as they reflect consistent high quality of our overall loan portfolio.
The increase in criticized and classified loans, primarily reflects changes in our internal classification methodology, which caused the reclassification of loan grades and subsequently added 2.1 million to the provision for credit losses.
It's important to note that this reclassification was not driven by credit deterioration.
As a community bank, we have historically performed our loan risk rating through utilization of a number of factors, both quantitative and qualitative.
However, as we have grown to nearly $13 billion in assets as well as entering many new higher growth markets. We believed it was more important than a go forward basis to heavily weight quantitative measures in particular debt service coverage.
The shift in fact utilization is what drove the changes in loan risk grade ratings and associated criticized and classified loan levels.
Our pending acquisition of old wanting continues to progress.
We have filed all the necessary regulatory applications and have already received approval for the West Virginia Department of financial institutions.
We've also completed our proxy statement, a prospectus mailing to shareholders and set the shareholder meeting dates for October 29 for both companies.
The transaction is on track to be completed during the fourth quarter of 2019 bending the additional regulatory approvals from the FDIC and the state of Marilyn and the shareholder meeting next week.
And we anticipate that the branch and data processing conversions to occur during the first quarter up 2020.
We remain excited about our merger with old line and the opportunities that present.
In particular, the match up of old lines market presence and loan growth with our enhanced products and services and deposit funding advantage.
This combination will provide the opportunity to attract additional talent.
Take market share and to be more profitable on each lending opportunity than other local competitors in the mid Atlantic market.
What's bancos underlying core performance during the third quarter of 2019, which was supported by our key long term differentiators continued to perform well and within our expectations.
In addition, we're maintaining the critical focus on expense management and credit quality to historical hallmarks of our institution.
On a year to date basis, we reported an efficiency ratio of 56.09%.
Which is within our long term target of the mid Fiftys range. Despite the mandatory limitation on interchange fees.
Moreover, we continued to maintain what we believe are strong regulatory capital ratios as both consolidated and bank level regulatory capital ratios are all well above the applicable well capitalized standards promulgated by bank regulators and the Basel three capital standards.
The successful execution of our growth and diversification plans has enabled west bank go to continue its transformation into an emerging regional financial institution that delivers large bank capabilities with a community bank feel.
Furthermore, our long term success is dependent upon the continued execution of our plans as we remain both disciplined and balanced to ensure stability and success across economic cycles.
We are benefiting from our deposit rich legacy footprint, which provides funding for companywide loan growth as well as allowing higher cost certificates of deposit to mature.
While total deposits, excluding Cds were roughly flat year over year noninterest bearing demand deposits grew 2.7% year over year, primarily due to our legacy footprint and our strong market position within it.
We continue to see the stabilization across loan categories that we have experienced during the last couple of quarters.
During the third quarter of 2019, we reported total loan growth and the low single digits on both a year over year and sequential quarter basis for both period and as well as quarterly averages.
This growth was driven by strength across a number of our lending categories, including a 21% year over year increase in total gross production during the third quarter.
As a result of the current rate environment highlighted by two recent federal reserve interest rate cuts, we have begun to again see a revive pickup in commercial real estate projects going to the secondary market or selling outright earlier than expected.
In fact, the acceleration we experienced during the third quarter of 2019 was more than 50% above our expectations heading into the quarter and was comparable to the record payoff levels, we experienced during the third quarter of 2018.
Despite this headwind.
We recorded good production during the quarter.
That said, we expect a similar high level of commercial real estate payoffs during the fourth quarter of 2019.
Furthermore, the fed rate cuts at both attracted from and benefited our residential real estate categories home equity lending decreased 2.7% year over year, primarily due to the low interest rate environment driving an increase in residential mortgage refinancing as homeowners trade variable rate gilat balances for fish.
Great first lien mortgages.
On the flip side. This is benefit our residential mortgage business, which experienced production of nearly $200 million during the third quarter, representing 45% growth year over year, and 20% growth quarter over quarter.
In addition, the refinancing volume component of total production more than doubled when compared to both prior year end sequential quarters.
While commercial industrial lending typically has long sales cycles, we're seeing the benefits of the prior investments we have made in the expansion and quality of our CNR lending teams and the launch of our online lending application capabilities earlier this year.
These investments contributed to 3.1% year over year growth.
And 9.7% quarter over quarter annualized growth NRC Eni lending category.
Despite the headwinds created by low interest rate environment, we remain confident in our ability to deliver low to mid single digit total loan growth over the long term due to the strength of our lending teams and the record levels of both our commercial and residential mortgage pipelines as of September thirtyth.
I would now like to turn the call over to Bob Young our Chief Financial Officer for an update on the third quarter's results up.
Thanks, Todd and good afternoon to our listeners during the third quarter, our core performance continue to perform well within our expectations. While we also displayed positive blending trends historically low credit quality measures and solid expense management as Todd mentioned during the third quarter of 2019, we experienced a flat and at times inverted yield curve.
From multiple federal reserve interest rate cuts a revived pickup in commercial real estate projects going into secondary market or being sold out right rather than expected due to the current rate environment and the mandatory limitation on interchange fees for banks with more than 10 billion in total assets.
For the three months ended September Thirtyth 2019, we reported GAAP net income of 37.3 million and earnings per diluted share of 68 cents as compared to 32, and a half million and 64 cents respectively in the prior year period.
Excluding after tax merger related expenses from both of these periods net income decreased 5.7% to 38.7 million and earnings per diluted share decreased 12.3% to 71 cents, reflecting a decrease in the net interest margin as well as the additional shares issued for last.
For years to acquisitions.
In addition for the nine months ended September 30, we reported GAAP net income of 122.5 million and earnings per diluted share of $2.24 as compared to 99.2 million and two doors and 11 cents respectively in the prior year period.
Again, excluding after tax merger related expenses from both periods net income increased 12.6% to 126.3 million while earnings per diluted share decreased 2.9% to $2.31.
As a reminder, financial results for both for our centric and farmers capital have been included in West Bank goes results subsequent to their respective merger date of April fat in August 22018.
Total assets as of September 32019 of 12.6 billion were roughly flat year over year as both for Saturday and farmers are included in both periods. Now. Furthermore, total portfolio loans of 7.8 billion increased 0.4% compared to the prior year due to strength across a number of.
Our lending categories, including commercial and industrial residential mortgage and consumer.
When adjusting for the higher than anticipated commercial real estate project payoffs during the third quarter growth across the entire loan portfolio would've been approximately 1% year over year or 3% quarter over quarter annualized.
We did realized strong total production during the third quarter, increasing 21% year over year and that was primarily driven by commercial and industrial residential mortgage and commercial real estate.
As well as to a lesser extent consumer and balancing properly both balance risk and reward.
As taught already discussed commercial real estate and see it I lending.
As well as a residential mortgage continues to be a bright spot for us as the expansion of our mortgage origination teams continue to take market share and result in higher gain on sale fees and margins as well as production for balance sheet growth.
While we financed origination volumes have roughly doubled residential mortgage originations continue to be dominated by home purchases and construction across our footprint.
In addition, while we experienced significant increases in quarterly mortgage banking fee income both year over year in quarter over quarter. We also reported 2.2% year over year growth and wonder for family mortgage loans, primarily in the jumbo and private banking loan sector, which were held on our balance sheet.
As we are seeing across our industry net interest margins are being negatively impacted by the recent cuts the federal reserves target federal funds rate as well as the flat and at times slightly inverted yield curve.
Net interest margin for the third quarter 2019 increased six basis points year over year to 3.56%, reflecting the benefit of the 2008 fed rate increases.
2018 federal rate increases and the higher margin on the acquired farmers net asset net assets.
However, on a sequential quarter basis, the net interest margin declined by 11 basis points, roughly equally reflecting those industry wide headwinds as well as the anticipated decrease in purchase accounting accretion.
Purchase accounting accretion from the acquisitions last year benefited the third quarter net interest margin by approximately 13 basis points as compared to 11 basis points in the prior year period, and 18 basis points in the second quarter of this year and I would remind you. The second quarter included three basis points of accretion from.
Larger impaired credit that paid off.
Excluding purchase accounting accretion, we reported a core net interest margin of 3.43% up four basis points year over year, but down six basis points on a sequential quarter basis.
The year to date net interest margin was up 20 basis points to 3.64% due to last year's Federal reserve fed funds increases the higher margin farmers net earning assets acquired and higher purchase accounting accretion in the year to date period of 17 basis points versus last years 10 basis points.
Also helping to improve the margin over the last year is the strength of our deposit franchise, which has assisted and maintaining our loan to deposit ratio in the upper 80% range as well as aiding profitability by controlling our funding costs or total deposit funding costs.
Which includes noninterest bearing deposits has increased just 10 basis points. During the last 12 months and just 18 basis points during the last five years.
Turning now to fee income for the quarter ended September 32019, noninterest income increased 2.8% from the prior year to 27 million driven mostly by mortgage banking income and service charges on deposits, the 1.1 million or 70.2% year over year increase in mortgage banking income.
Was due to the growth in residential mortgage origination dollar volume and the associated sale of approximately one half of such volume end of the secondary market.
Service charges on deposits increased.
Point 7 million or 11.8% year over year due to the increased customer base from the farmers acquisition.
While the mark to market of existing commercial customer loan swaps negatively impacted other income the third quarter. We are seeing increased usage of loan swaps by our commercial customers as they take advantage of this product in the current rate environment on a year to date basis, we have seen a 50% year over year increase in gross swap fee.
Income prior to Mark to Mark Mark to market adjustments on the existing customer swaps book.
As a reminder, this quarter also reflects the beginning of the ongoing limitation on interchange fees for debit card processing that resulted from the so called Durbin Amendment to the 2010 Dodd Frank Act. This limitation, which first became effective for West Bank go in the quarter, beginning July onest applies to banks with more than 10.
Total assets and it did reduce our electronic banking fees by approximately 1.9 million as compared to the prior year period.
In addition, because we recognize electronic banking fees on a one month flag. The reduction represents only two months for this initial quarter of applicability. So that the amount for future quarters should we be between 2.5 to 3.0 million.
Turning now to operating expenses operating expenses continue to be well control during both the three a nine month periods ending September thirtyth as demonstrated by the efficiency ratio of 57.6% and 56.1% respectively.
Excluding merger related expenses noninterest non interest expense for the third quarter of 2019 increased six point threemillion or 9.6% compare to the prior year period reflective of the farmers acquisition in the middle of last year's third quarter and their associated staff and locations as well as.
Annual Merit increases the hiring of several new revenue producers across our business lines and certain necessary staff additions as we have grown beyond 10, Dan.
Nonetheless, total fulltime equivalent employees are down more than 3% from last September due to the farmers related cost savings.
During September 2019, the banking industry was notified by the FDIC that its deposit insurance fun reached a required minimum reserve ratio of 1.38% that permitted by law, but the FDIC to offset color back assessments with prior credits from 2016 through 2018 earned by.
Banks with less than 10 billion in assets during that time period.
This allowed us to record a credit of two point Fourmillion from the total 3.1 million assessment credit that we were notified of earlier this year.
Covering the FDIC insurance expense otherwise accessible for both the second and third quarters of 1.2 million per quarter. The remaining credit of approximately <unk> point 7 million is anticipated to be recorded during the fourth quarter.
As of September Thirtyth.
Both nonperforming loans, a non performing assets as percentages of the portfolio and total assets have remained relatively low and consistent throughout the last five quarters.
Criticized and classified loan balances increased to 174 million or 2.24% of total portfolio loans due to recent adjustments to our internal on classification system, which impacted risk rates.
The provision for credit losses increased to 4.1 million at quarter end of which 2.1 million was due to certain borrower downgrades to these criticized and classified categories.
Annualized net loan charge offs to average loans. However, did remain low for the quarter and year to date periods at four and five basis points respectively.
Let me wrap up with a discussion about seasonal.
In September 2016, the fast the issued asked you 2016 Dash 13 financial instruments credit losses, which will require entities to use a new forward looking expected loss model on trade and other receivables held to maturity debt securities loans and other instruments. A generally will result in the earlier recognition of.
Allowance for credit losses, and will be effective for the fiscal year beginning January one 2020.
The final rule provides banking organizations the option to phase and over a three year period. The day, one adverse effects on regulatory capital that May result from the adoption of new accounting standard and we are continuing to analyze analyze as to its capital impact. Although it is expected to be immaterial to our regulatory.
Right well capitalized levels.
Based on our preliminary analysis forecasts are macroeconomic conditions exposures during that time and were certain qualitative factor determination that model validation still in process. The overall day one range potential outcome outcomes is estimated to result in an increase of up to 30% in the allowance for credit losses for the loan portfolio.
Ill, resulting in an allowance to total loans coverage ratio ranging from the current level of 0.7% up to 0.9%.
Upon adoption. We were also recognize an allowance for credit losses were held to maturity debt securities under these new accounting rules, but based on their credit quality, we do not expect their allowance for credit losses to be significant.
Before opening the call for your questions I would like to provide some current thoughts and our outlook for the remainder of the year, we will provide our thoughts in 2020 during our fourth quarter earnings call to be held in January .
Since we do remain somewhat asset sensitive we're not immune from the factors that are affecting net interest margins across the industry, which include a very flat to slightly inverted spread between the three month and tenure treasury yields and an overall lower long term rate environment.
We continue to believe that our core deposit funding advantage combined with our low loan to deposit ratio should help to control overall deposit funding costs, but as we didnt increased deposit rates much when rates were increasing we don't have as far to go as market rates decreased.
Regarding our stated net interest margin for the fourth quarter of this year and into 2020, we still anticipate purchase accounting accretion to decline, while the two basis points per quarter.
And we are currently anticipating an additional 25 basis point fed federal funds rate cut during the fourth quarter and therefore currently believe we will experience a decrease of three to five basis points for each further caught in the federal funds rate again, depending upon the shape and overall level of the yield curve.
We also continue to believe our delinquencies nonperforming assets and net charge off ratios should remain relatively strong in the fourth quarter.
And one final note the effective tax rate is currently expected to be in the range of 18.2% to 18.6% for the full year of 2019.
We're now ready to take your questions. Operator would you. Please review the instructions.
We will now begin the question answer session to ask a question you May Press Star then one on your Touchtone phone, if you're using a speakerphone. Please pick up your handset for pressing the keys to withdraw your question. Please press Star then to.
At this time, we will pause momentarily to assemble a roster.
Our first question comes from Casey Whitman with Sandler O'neil. Please go ahead.
Casey good afternoon.
I just circling back to some of your margin comments you just made Bob I think you said, maybe three to five basis points core margin impact from on additional.
And just just curious if we do get a cut I.
I guess next week.
Could we assume I guess, even more compression than in the fourth quarter, then that three to five is technically we have kind of two two cats impacting the quarter.
Thanks.
Yes, Casey well, you'll note that we job.
Reduced our core margin or saw reduction about six basis points in the second quarter, which would be indicative of.
Three basis points per caught.
Some of us on a lag, though because you have the September caught that really impacts the fourth quarter and if there were to be a December caught that would be likewise through next year.
I think one thing that would be different would be that the yield curve really did shift.
Very significantly in the third quarter for instance that budget time late last year, we were anticipating a 3.2%.
Tenure yield in 2019, and you are at the low at the end of the core 168, I believe and today and the one eighties. So.
The shift of the yield curve downward, particularly in the valley section the intermediate portion.
Of the curve.
I think we have found it thats really impacted banks in general on it and certainly we're not immune from that.
But beyond that I would tell you that were becoming more aggressive after the second caught with rate decreases in some of our larger public and institutional funds customers are here early in the third quarter that should be reflective or reflected in the in the margin here in the fourth quarter, but.
But my guidance is really thinking about if there are no increases net no decreases a next year and one or two here in the fourth quarter or one this quarter. One in January however, you want to model that.
There is some reduction that would occur thereafter subject to the deposit beta that we're able to to influence.
For some of those higher tiers, and now accounts private client savings and for.
Public funds in institutional customers as well as on the CD side.
Hi, and then I guess my next question, though the during the first quarter Witold Linac, how does that.
Or remind us sort of what you're assuming the blended margin is going to be there.
Well I'd just brief.
We havent remodeled batch.
We haven't adjusted our model I should say of for our earlier assumptions that we would get a few basis points of accretion from the old line acquisition.
Harken back to farmers I think we guided to.
Mid single digits led to ended up in substantially higher than that in terms of the margin accretion last year I don't anticipate that kind of the pickup.
With old line, but I would tell you that they are more neutral.
Two asset sensitivity than than we are currently are they have more fixed rate term loans in the commercial side that I think would help in a declining interest rate environment and then we have the opportunity from a revenue enhancement perspective to reduce some of their higher cost deposit rates as well so.
That's not in that that guidance relative to purchase accounting interest blending the two balance sheet, but I think is an opportunity for us.
To enhance the margin when those two when the two companies are blended together here.
Later this quarter hopefully.
Is that helpful. It is thank you I'll just ask one one let some nice jump on maybe this is probably free you Todd just a little bit bigger picture question just that all the moving parts. This quarter you know the impact of the challenging rate environment Durbin higher provision.
Profitability profile, you guys down from where they've been running with the first half of the year. So maybe just help us understand what you guys are targeting maybe in terms of arley ROTC or whatever you look at in 2020 with old line kind of what it takes to get there you don't do you think you can get VR lay back to 131 for.
Have you said any sort of.
Profitability targets or anything you can help us help us out there. Thank you yeah. Just amid maybe just mentioned were 135 now so we're already pretty well above peer group average is on that but we like being like being in that range.
It would be some puts and takes obviously Bob mentioned, some things were going to do on the.
In a repositioning the balance sheet, a little bit with our lower cost deposits.
This is was there some higher cost borrowings that they've got so we think we've got some levers to pull there obviously one of the keys of this merger is to gets up to a loan growth out of their markets as well. So I think they're trending well and I think that bodes well for us as well too so.
I really think it's going to be going to be pretty pretty smooth I really don't expect again, but we know today based upon interest rates and economy inflation economic GDP growth and all that I wouldn't expect to be materially different I'd like to be able to maintain those type of ratios that that we've historically had there are ways.
One 1.2, which is also pretty good growth for a bank their size very good actually so I don't see where.
I see any big significant differences in terms of the level of profitability of our bank.
Because again, there are very good well, Rebecca low fiftys efficiency ratio and we're still going to hit our at cost Takeouts, there as well too. So they've got an average average branch deposit size of $60 million or so so I think there's an awful lot of.
Benefits kind of coming together for the two of them.
That kind of looked at the looked at the quarter. There's some aspects of this I'm just kind of being in emerging regional bank right. Yet you got three cents or so with with Durbin.
Impact you got.
Two to three sensors. So in terms of our kind of moving to more of a quantitative approach versus qualitative approach on on risk rating.
And I was just functions of our size and kinda.
I think you made really appropriate comment in your your initial overview last night in terms of kind of comparing us to other banks in that 10 to 25 billion dollar size range that even with our changes on the Reclass, we're still very significantly below the average for the peer group on the criticized and classified.
So my guess is that guide grading methodology similar to the ones that were that we've adopted so.
I don't see any kind of continued increase on a regular basis any type of.
Changes in credit quality provision or anything else. So to me it's more of just continuing the business as we've been running that.
We don't have we didnt have any downgrade services say any any what I would say.
Deterioration of any type of significant credits during during the third quarter. So it's the same credit quality wasn't third quarter first first to second quarter same credit quality, just we've looked at based upon more quantitative focus a little heavier focus on debt service was I think it's very appropriate given a bank our side thats going into many markets in many.
Different states.
And that.
That cost us a couple of cents this quarter. So when they start looking at those type of things and look at what's the long term kind of run rate Bob mentioned, the margin and kind of how we see the margin playing out for us.
But I don't see anything significant wise.
Trending thats going to be materially different post merger.
And next year than what we're seeing today I think it should just make a stronger and minimal, but a little bit better and the fully phased in cost savings should give us an enhancement to our away by by a few basis points off of our current run rate.
Right along.
Very helpful. Thank you guys sure.
Our next question comes from Russell Gunther with da Davidson. Please go ahead.
Hey, good afternoon, guys. The first one.
Bob Bear with me a margin follow up for you. So the incremental guide roughly three to five basis points per caught should we layer on top of that your guidance for purchase accounting to be down one to two basis points or is that all inclusive of the of the purchase accounting moving parts.
It is not you'll see that end market risk in the 10-Q.
We would still guide to continued reduction until we get past old line, but just in terms of where you stand today.
And it really has played out as we anticipated there were 13 basis points of core accretion here in the third quarter was 15 in the second quarter and I believe 14 or 15 in the first quarter. So it is coming down by that leveled out, but obviously the lower you get it did it skews towards one base.
Per quarter versus too.
As opposed to here in the third quarter was two plus those three extra basis points.
The one one difference and seasonally you probably understand Russell is that those three extra basis point, the first and second quarter in the future.
On purchase credit deteriorated loans would go through the allowance as opposed to coming through net interest income, although the accretion on the good book in an acquisition will still come through.
Net interest income so.
Hopefully that was responsive to your question.
Yes, no very much thanks and then.
And just circling back to the risk rating change I. Appreciate the color you guys are trying to share.
I think there may be was an initial jump to think about any incremental deterioration be it.
Within a particular geography.
Asset class energy shale, we've read a lot of love troubles in that number one so.
Could you give us again, just a general sense for the asset quality outlook here and then again just this quarterly provision in the 4 million ish range. I mean is is that a.
Decent run rate to thinking about going forward.
Yes, and I appreciate appreciate getting getting the question.
The answer is no we to again, we don't see any any significant deterioration across any markets or any any product types or any industry classifications or anything else and again didnt have any.
Any deterioration of any credit of any size that's occurred in the last quarter. So I mentioned.
I think two loans in the first quarter, one in the hospitality business and one in kind of a manufacturer of retail products, we talked about that back in April and.
One of those has gotten better improved in has come off the list in the the other still silicon issue, but we're well collateralized and have good solid management team supporting us.
With that one, but I mentioned that back in the first quarter X. I mean, there's nothing nothing new since then I mean, there there aren't any there aren't any deteriorate is not any deterioration. This there. It's just a function again moving more heavily toward more quantitative measures and qualitative measures were in the past you might have given more weight to guarantor sport might have given.
More weight to repayment history have made payments every time for the last five years type of thing.
And we're just not going to do that given the size organization. We are moving into new markets, Maryland, Kentucky Places places like that as well too. So we want to make sure that we've got some things graded according to the where peers are grading things and we reviewed we view ourselves still view ourselves to continue.
If you ourselves as a very conservative underwriting organization that has a very low risk profile and I don't think that changes. This it's just that again as a large bank we got different criteria that we're going to implement we're going to work through and so I think.
What I would tell you is don't compare as to where we were last quarter compare as to how we stack up against our peer group right. So the banks the $10 billion to $25 billion in size, the 45 or so that are in that group.
I have a 2.8.
Criticized ingress classified number and or two to right. So we're still fairly significantly below below that so as we go through this process. This matrix that we can put together earlier in the year and we're in the process of implementing that during the third and fourth quarters of this year will be substantially complete by the end of year, what we did in the third quarter.
Well as we looked at the biggest loans, we add that were rate above that criticized and classified category. So basically there was we took a very biased to sample their intentionally so and putting the matrix on top of it. So we got we think the lion's share majority of what was going to be impacted we picked up in the third quarter.
But I think this makes us.
A very healthy organization.
Long term and I think we took we took a few sense out of the quarter by doing that too I think benefit us on a long term basis.
And I would say the same thing with regard to.
And then talk what other organizations, but I see a lot that are building the securities portfolio at very low yields and trying to out run margin compression with.
With growth and the balance sheet through securities well, that's taken money today out of your pocket, probably got hurt you in terms performance down the road.
We aren't going to do that we're running this bank for the long term it for the long haul so our risk profile hasn't changed we don't see anything that changes as a result of.
You know that the risk rate classification I think we're just we're growing up as a bank and emerging regional financial institution and these are all the right things to be doing in the right things to be taken and I'm I'm very comfortable with him and I.
Say that.
I don't see anything different in the future with regard to the tenants of our company being a strong oriented company on a risk adjusted basis I think our returns are significant and I don't see any reason why that's why that's going to change, but no deterioration at all that we're seeing across the franchise.
I appreciate your thoughts. Thank you guys were taking my question sure.
Our next question comes from Catherine Mealor with KBW. Please go ahead.
Thanks, Good afternoon, the Kevin.
One more question on the Reclass beyond.
Well the rest of question was there any certain asset class, where you saw more of the of the request more than others.
No.
Really.
Now, we didnt knit wasn't.
Related to any particular any particular area and then I'll give you feel for a feel for for example, we might look at a a credit historically that it would cover debt service coverage, let's say one one to one but we might include other income that might be in the CNL PML statement that might show up some years and not be there other years.
What we've done in terms of putting more emphasis on on the debt service and how we get we would exclude that now Greg its income. It's there it's used to pay debt, but yet you're not sure it's going to show up every year because it moves around a lot. So thats a change in methodology that would create a change in the risk rate again same credit.
While we paid things like that but the way, we would calculate a debt service coverage and more heavily weight debt service coverage.
What would be the way that we would have we would approach that.
But there isn't a geography or an asset class, we're not seeing any deterioration and.
And any any areas you don't have much energy to begin with as you know it's less than a percent, but we're not seeing anything there we're not seeing anything in commercial real estate.
Multifamily hospitality all of its.
Performing well and as expected not seen anything on the manufacturing side, we don't have much of a presence at all in retail we don't have the big box retail at all.
So.
Yeah, we really any you can see it reflected in a four basis point charge off.
That's that's that's pretty pretty low so.
And our delinquencies are well controlled and well managed to so we just we just don't see seal a lot a lot here, we've taken some pretty proactive steps I think as a company.
That are going to benefit us in the long term I would also mentioned you too.
On on loan growth, we've obviously showing.
Low single digit, but very low single digit at 1%.
About a percent we would calculate to heavier payoffs in the secondary market that a re accelerated again, but we've also converted to banks in the last four quarters right to represent about 25% of the size of our bank and we've gone through those as well too with the same credit the same credit approach and we've been able to.
For some credits to some different areas. So that's that's also impacted.
On an annualized basis about 1%, we don't expect that to continue right. Because you don't do that every year, but your first year. So after you acquire a bank.
You're going to go through and you're not going to look at those things in your loan review process and so if I if I if I really look at kind of how am I seeing our growth rate in terms of loans. This prior to align bancorp.
We're really looking at a three 3.5% in a more normalized environments, where you're not having the big pay offs and you Didnt just acquired 25% of your bank in the last 12 months. So.
To me, that's kind of why I feel more confident about a longer term kind of low to mid single digit growth rates not having to rely on on growth and securities portfolios and less.
The yields on that type of stuff them improve.
I think we're already we're already there in terms that growth rate to we're just we're intentionally masking it by some of the things that we're doing on exiting some credits that don't make sense for us what I will tell you want to basins, but about old line is that.
Very strong credit quality and operating very similar models that way that we operate so I wouldn't anticipate you know.
Going through the portfolio and exiting exiting credits over the first year like we've done with the last couple of acquisitions.
As these guys are pretty well lined up according to how we do things already so long answer, but I wouldn't give you some color now.
Very helpful.
I think it's clear that if not more risk weighting change.
Kevin Your methodology now that theres been a deterioration any of your credits I guess just follow up to that is more jester hasn't clear there hasn't been a change necessarily in the debt service coverage ratio. That's the one example that you've given its more just you're giving more of a waiting towards.
Certain level of debt coverage ratios that would.
That would give you had certain risk weighting for Sir now for certain Latin RASM Theres been no change in the debt service coverage ratios because if weakness it's just the weighting towards the that qualitative factor quantity effect has changed.
I think Thats I think Thats correct very correct. If when you go back and you look at our look at look at less bancos charge off ratio and and.
Delinquency and all that kind of stuff over the last well go back even to the great recession in the last 10 years and you can see how strong the performance has been on the credit quality side I would tell you that we operate like a lot of other community banks with and this is prior to my it again, you're on a really good people that have good understanding of the markets were into Pete we do business with so.
You rely to rely more heavily as a community bank on repayment history guarantor support all those types of things those are all still very present in the loans that we make what I'll tell you is we are just waiting them less than we are waiting them now so having a good strong guarantor behind deal, it's still very important to us.
But it may not necessarily up the great right, whereas in the past at Midas.
So it's just more awaiting difference anything else, but we haven't changed.
Ratio there were no I think we're more closely following.
Policies that we were putting in place in the matrix, we're putting in place and I think if I had insight into.
Some of our some of our peers I'd be willing to bet, it's probably fairly similar to what they're using right now as well too.
But not not a change in.
In ratios and things just a methodology change and awaiting change.
Got it that's really helpful. And then maybe I'll circle back to one of the margin.
Can you remind.
In your loan portfolio, how much of your loan book is.
Variable floating rate immediately repricing with that signed and then.
And then fixed rate and the color on aligns more fixed rate loans I think what's really helpful. Just trying to think about how that married with your portfolio.
Yes, I do get this question quite frequently we go out in the road Katherine so.
We have a business loan book today, it's about 5.2 billion. So this is endemic to that portfolio. Obviously you have other sectors.
But we don't have that much in consumer and that's a low average maturity weighted average maturity home equities are obviously variable residential mortgages have typically a four to five year average lives. So excluding those sectors just looking at business about 65 or 70%.
The portfolio as CRM and the rest of Cnine.
If you want to take total effects from both of those portfolios.
You're basically looking.
At about two and a half million dollars and then the rest is variable over some period of time it could be immediately reprice double off of prime or LIBOR floor.
Or it could be.
Adjustable after a period of three to five years.
So without Elongating, the answer and giving you all the breakdowns in variable hopefully.
That that is that's helpful to your to your question.
Okay. Thank you and a half billion fixed 2.7 billion variable on the.
5.2 billion dollar business book Alright.
I quoted that wrong, it's it's more variable than that variable is 3.7 and in the rest of million a billion and a half his business, sorry billing and happening.
No. That's my fault matures, Okay got it billion Astec 3.7 variable. Okay. So then that explains why the loan yields fell as much as it did this quarter and is it can you give us any.
Any kind of outlook or or color around where new loan yields are coming on persons by the portfolio as today.
Well portfolio today.
It is right around 465 between for 65, and 470, new businesses coming on the books generally right around that level to slightly above.
Okay.
Thank you for all of the Unclarity appreciate it.
Again, if you have a question. Please press Star then one.
Next question comes from Steve Moss with B. Riley FBR. Please go ahead.
Good afternoon guys.
I wanted to touch.
That's first on commercial loan growth this quarter pretty good and I apologize if I missed it but just wondering what were the drivers there and.
The color you can give there.
Yes, it wasn't due to increased usage on existing facilities I can tell you that.
It was 9.7% annualized I think it's just a result of the timing of deals that we've closed good teams out there are people that we've hired and.
This has been part of our longer term strategy is to.
Get more growth through Sienna and balance out the commercial real estate growth piece of it. So it's nice to see it nice to see it coming through I like to come through on a on a more regular basis would be in the low double digits on on a pretty consistent basis.
But it's up across the board all markets again.
It's new relationships that have come into the bank I can tell you I would echo what I have that I've seen other Ceos say in the last week in terms of.
Of caution on the part of business customers in terms of going out there and making capital expenditures or building inventory.
Whether it's.
Just uncertainty around tariff talks and the economy and everything else, but we do so we do see that so this is market share but were taken market share in the C Eni space and.
I'm happy to see that was 3.3% annualized year over year.
So you know nine points and 3.3% year over year. It was 9.7% annualized I'll get real excited if.
I see I see 9.7, or 10% four quarters in a row, then I'll know that were really we're really click and where we need to be so it's good quarter.
But I still like to see more of that and I think it's a result of the teams that weve.
We've hired a meat for example in Cincinnati, We got we got five additional.
See an islanders more than we had a year ago, Greg So.
Very very very strong ads and hires and they're they're bringing business and.
That's helpful and then on the expense side just wondering.
If you give any color around expense expectations for the fourth quarter.
Excluding old Glenn if it everywhere.
Yeah, Let me I'm, just I'm, sorry, I'm shuffling papers.
Modern day, Cfos and be able to find as rather I've had rights Dave.
I apologize for that.
So.
In the fourth quarter, and we're not ready to provide guidance yet for.
For next year, but in the fourth quarter.
The run rate in the third quarter.
We reported a bit less 72 million project debt back to 2.4 million for the FDIC. The rest of that 700000 would comment for the run rate on FDIC for us as about.
Currently.
1.2 million of quarter. So it gives you an ideal what the normalized amount would be on that particular line item and if you factor that and then you'd be looking at somewhere around that same 70 374 million dollar run rate.
During the fourth quarter without merger related expenses expected still get a few cost savings in the farmer side.
Primarily in some other categories other than salaries and benefits.
One of the things in the third quarter to her as a little bit oddity ordinary was it was a higher amount of health insurance you you picked that up by looking at the benefits line item that was higher than our expectation we've seen a number of.
Larger claims that have hit our stop loss limit.
And.
While we get insurance back on the stop loss. It we are seeing some higher health insurance claims.
Overall, but otherwise most of the categories, we are well under control and we would expect that similar level of control to exhibit.
Here in the fourth quarter before.
We put on online.
We started back actually in the first quarter, where we saw margins starting to react to little differently then.
You know what the thinking was at the end of last year, yet in the last year rates were still going up and then there was a pretty pretty abrupt about face started began to share in terms of.
Thats starting to look to decrease so we knew right then margin was going to your question. This year for the industry. So we undertook some expense initiatives back then.
And.
Some of those came out pretty quickly some of those will come out over time, but it was several million dollars in size.
And then also we don't we're not going to see in.
The fourth quarter, the what we've seen in terms of up.
Merit increase adjustments and things like that that would have happened at mid year that would show up in the in the third quarter as well too. So we don't we don't anticipate those type of type of things in the fourth quarter.
That helps and then one last question just circling back to the margin.
In particular purchase accounting accretion it was down five basis points over quarter more than the.
Typical one to two I know, there's little bit day count but.
Do we think about a one to two from the 13 Bips this quarter.
Yes.
You might have missed the comment Steve, but we had 18 deficit in second quarter three of which was a.
Purchase credit impaired loan from a prior acquisition.
That paid off and so that picked up three beps, so I'm analyzing it as you.
You didn't have similar situation the third quarter that three and then two beps for.
One from a normalized 15 call it down to 13, so think about it in terms of 11 or 12 for the fourth quarter.
Okay perfect. Thank you for anything unusual we have one more quarter and if there were another purchase credit impaired loan that would come through and pay off otherwise next year that'll go through the reserve as you know.
Right.
All right well, thank you very much Bob and Todd.
Thank you.
This concludes our question and answer session I would like to turn the conference back over to Todd Clossin for any closing remarks. Thank you. The successful execution of our growth and diversification plans has enabled us to transform into emerging regional financial institution again built upon a central try.
This business and we're going to be celebrating our 150 of anniversary as a community bank next year.
During the last three years, we've significantly diversified or institution into some new higher growth markets really good demographics, maintaining a critical focus on expense management and credit quality and we think we're well positioned for long term success and we do remain positive about the opportunities in the future I want to thank you for joining us today and look forward to seeing you at an upcoming investor.
Event and good afternoon.
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