Q3 2019 Earnings Call
As a reminder, today's program is being recorded and now we'd like to introduce your host for today's program Morgan <unk> Chairman and CEO . Please go ahead Sir.
Hi, Good morning, and welcome to our third quarter 2019, Investor Conference call at this time I'd like to ask they are forward looking statement wrote.
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Now I'll turn the call over to chairman and CEO of Morgan Gauger.
Thank you.
At this time, we filed our press release and our five quarter supplement.
Turning to document will be felt on or before the deadline.
So we are at this time ready to take questions.
Certainly not as a reminder, ladies and gentlemen, if you have a question at this time. Please press Star then one on your Touchtone telephone. If your question has been answered and you'd like to move yourself from the could you. Please press the pound key.
First question comes on line of Kevin really from D.A. Davidson Your question. Please.
Good morning Morgan.
Kevin.
So first question is related to your margin, which came in a lot better than we expected it looks like with the.
We.
Costs was what roughly two the significant jump in loan yields could you give us any color as to what.
Oh absolutely.
Significantly poor to jump in loan yields well was it mix were there any prepayment fees and then.
Your thoughts kind of on the on the margin going forward in with the key drivers are going to be.
Well the answer your question is yes.
It was both a little bit of mix and that we grew the commercial.
Loan portfolio and some prepayment income.
So and I would expect both those to continue at least in the very short term.
Fourth quarter and potentially in the first quarter.
The pay offs, obviously will generate a certain amount of prepayment income depending on the seasoning of the transaction and some of those.
Investors received terrific offers on their property were writing a check for the prepayment was just a cost of doing business. So I would expect that relative accommodation to continue.
I would say the prepayment will skew a little bit higher you know it was a good third quarter and fourth quarter.
It's probably too early to tell what's going to happen in first quarter in second quarter, a prepayment income.
As far as the margin goes a couple of things versus talked about the deposit side a little bit.
We have started to see some some modest movement on the retail pricing side.
And we've been doing our best tonnage that along where feasible. So we will see some help on the deposit interest expense side.
And we'll especially see it on the wholesale side, we don't have that much of wholesale to begin with but 90% of the wholesale is going to reprice in the next 12 months. So we'll see some help on the deposit side going forward.
And on the loan side I would say right now obviously, we're sitting on some excess cash.
Oh, so they will skew the merge into the lower side you know the we've said before 340 ish. If the mix was not you know optimized and with sitting on excess cash the mix of certainly not optimized.
But we spent time during the third quarter, assessing where we thought the rate environment would be.
And where markets were so one we reconfigured products and pricing on the real estate side to capture.
The lower risk, 50% risk weighted transactions.
It'd be at or near a market leader in that segment and we got the marketing pushed out in the third quarter you saw the expenses flow through.
We're starting to see some stirrings of interest on that and the one good thing about the drop in yields is a brought more refinance volume to the table than would otherwise would've been the original rate environment.
There are more investors out there who good profitably refinance at these levels and they could order points higher.
So what I would say if you look at 2020 him and that's kind of our focus right now is looking at the full year 2020.
Given the cash position right now, we're probably looking more in the three fortyish range for net interest margin maybe 350 for the you know between 340 350 in the first half of the year.
But if we get the mix right and in the commercial side, we saw some progress we're going to see some more progress in the fourth quarter.
For news from new customers and expanded relationships with existing customers in the fourth quarter. Obviously, we'll have to see what happens with line usage. If it goes down then that'll have a certain amount of offset but if the trends continue in the commercial.
The commercial area, then we could see something a little bit of expansion in the second half maybe 350 360.
Because one the mix will improve a little bit and we'll start to get the benefit of some of the repricing on the deposit side.
But it is gonna be largely driven by mix, including deploying excess cash a with a certain amount of prepayment income that will provide some temporary support along the way.
Great. Thank you that's Morgan.
Thank you and once again, ladies and gentlemen, as a reminder, if you have a question at this time. Please press Star then one.
Our next question comes on line of Fine Martin Director of equity your question. Please.
Hey, more and good morning.
Good morning right.
Hey, Brian can you just elaborate your last comment on the margin just as it pertains to kind of how youre thinking in the context of that outlook, what you're thinking you know rate cap rate cuts and kind of what's factored into that outlook.
How many customers, that's gonna do and kind of timing.
You know I would say that's a you know we're kind of expecting right now that the fed my caught one or two more times, but you know we knew that for sure we.
Probably be buying derivatives and options imports.
But the deposit the deposit yields are not necessarily rate sensitive they seem to be more driven by local competitive factors and asset liability factors of the competitors in there or anything else or maybe even some strategic planning.
On the yield side yields have stabilized now for about the last month or so in fact, you saw a slight retracement.
Below in the five year with say 130 to 135 and now were 55 160.
So right now that the current yield environment is kind of our baseline on the asset side.
So what I would expect is all things considered if you think that we're going to skew a little bit more towards a 50% lower risk multifamily.
We're going to have some amount of investment grade leases or commercial finance assets. For example, commercial finance asset is a bundled deal where there's equipment, but also quite a bit of software. So we have a large one we're working with now that's an investment grade transportation company.
It's a bit hasn't been awarded yet, but it's about a 7 million dollar transaction and it trades about 25 points higher than an investment grade lease what so you get a little bit of yield benefit, but you get a considerable amount of credit quality that comes with them. So all things considered we would say that.
Our overall asset yield to be somewhere around four to quarter for 2020.
You know blended with everything in it it would skew higher if we do a little bit more see an eye. It will skew lower if we do more 50% risk weighted multifamily and investment grade leases.
Just going to be a function of what habits and would prefer to do the investment grade leases Alternatively to sitting in cash, but there's a lot of people chasing those assets right now and there's fewer than there used to be of so it's hard to say exactly how that portfolio that end of the portfolio was going to grow.
Okay I appreciate it and just maybe your kind of high level comments on kind of loan growth and kind of what.
You had talked about some targets last quarter for kind of year end, what you thought you might like to get to on what might be reasonable, but just kind of what areas are are you expecting to see some growth in and then just kind of your targets as far as.
You know, where you can get too on the loan portfolio.
Yeah, I think let's talk about full year 2020, as we noted earlier, we will see some headwinds from pre from prepayments and that is there kind of hard to predict.
Sometimes we're working with borrowers would give us a heads up.
And and that is helpful. Sometimes we just get a request for a payoff statements and it just depends so if we go it let's look at the end of 2020 from where we are now.
We are goals kind of remain the same we might face some headwinds, but the goals remain the same.
On the low side, if the loan portfolio was at 1 billion three the sooner we can get back to our original goal for fourth quarter, the better and that means we skew a little bit towards investment grade leases to get there that casuals off pretty quickly. It's a good place to be from a credit quality perspective, it's a good place to be from an asset liability mix perspective.
To.
Provide some incremental yield it continues the engagement with the less or base.
So that will be our backup plan going forward.
So lease portfolio overall, if we got it to 325 by the end the 2020, especially with a better mix in the equipment side on the commercial finance side, we'd be pretty happy but that portfolio runs quickly that kind of volume will be a bit of a challenge, but it should be achievable, but also going would add a few people.
During the course of next year and give ourselves more chances to win with a broader base less source.
The CNS I'm.
But as I said, we have some large we have some new business with existing customers in the pipeline. We also have some new business with new customers on the pipeline.
The goal there would be a portfolio somewhere between.
200 million on the low side at the other 2020 to 225 on the high side.
I will probably be smaller transactions on the newer customer side, but there are people who come to us with Oh, a group of Ah facilities or a larger opportunity that some equipment. Some line of credit some capital improvements and so maybe those transactions are a little bit larger therefore, we get to our goal little bit faster.
But 200 to to 25 on the.
On the commercial loan portfolio seems about right.
On the multifamily portfolio that is the one that has the greatest amount of challenge and service or Predictivity I'm, just because of the risk of prepayments. So there are uncertain, but we topped out at about 640 million.
Earlier in 19, I'd say at the very very high end Thats, where we go there's just not that many buildings trading at an underwriting level, we'd be comfortable with at the very end to that scale, we're more likely to take the customer to capital markets, because that's where they can get the the most amount of proceeds with the best.
The environment on rate and non recourse our portfolio underwriting won't support that level of risk.
If we on the other hand hit us seam of replacing the pay offs with lower risk refinances.
Then you know I'd say as a result around 625 million at the end of the year seems feasible.
So.
For 2020, low end of Multiphase 600 million of high end of Multiphysics 25.
To go beyond that would assume things that are really of evident to us and I would hesitate to put them in a model somewhere.
And put much room, they will state of the commercial sales say about the same it might go up by $10 million might go down by 5 million.
Really not looking at too much in the retail space right now.
We do see some opportunities and some smaller office and industrial here in Chicago, which we follow up on.
We're not seeing node or retail ever, but it would have to be pretty low leverage with pretty stable tenants.
To get us interested because the risk of vacancy on that remains high and the risk of and Hawaii compression given real estate taxes and utilities in Chicago remains even higher so it's we've just been hard for people to keep these occupancy stabilized and we also see competitors out there doing a lot of non recourse stuff, which is not stuff we're going.
To do.
Okay and your comments on the last quarter. When you talked about hope that the expectation maybe able to get to you know the billion three or billion 325 by year end I guess is that right. When it came on equities.
I will then.
Yeah. When we have 50 million of multifamily paid off right that was just not going to happen anymore. So that came off the board as we saw a couple of those larger payoffs come through.
And right now, we're not really focused on replacing the larger customers.
But one largest pay off was a function of the customer wanting a maximum proceeds cash out.
On a portfolio basis, and we were not going to be able to provided to them and therefore, we got the payoff.
To replace the one essentially to double has exposure almost certainly not quite double maybe about 50% to 60% more we just weren't able to get there with him. So.
Yes, I would have loved to be closer to the billion three but we're just not going to get there for fourth COVID-19.
Right and I guess, that's how I was asking was the big you'd kind of move that number to the end of 2000 27 billion three or little bit north of that is kind of it the outlook for where you end up factoring in all of your comments to as you get to late in 2020, no I would say I'd be if things work the way, we want to we'd get to somewhere around 1 billion three by the end of second quarter.
2020, and then again, if we get things the way we want them to work, we'd get to closer to 1 billion 350 billion 375 by the other 2020.
The ability of 375 number is everything clicking for us plus we did not get another $50 million quarter tsunami of pay offs every single quarter throughout 2020.
Gotcha, Okay. That's helpful. Thanks, Morgan and just.
The comments about the prepayments and kind of how that factors in do you guys have prepayment penalties on most of the loans most of the larger loans out. This I guess, we can expect that income to kind of be recurring.
Repayment continue to happen.
The answer is yes, we have them almost every loan its originated in the real estate side has prepayment penalties some of the line of credit products adults, but they're also short maturities anyways, but also you know it depends on the transaction some of the transactions are timed they sell or they refinance to be outside of the prepayment.
Window. Some of these transactions were very seasoned so it just depends.
I would say it breaks into two categories, there, our buy and hold investors, who get the offer they just can't refuse and I would say probably 40% of the payoffs we saw last quarter.
Reflected that type of activity.
And in the even and then if they if they financed with those two or three years ago. They still have a true truly prepayment penalty. They wrote a check can pay that.
The professional investors.
We also have prepayment penalties.
Those transactions tend to move faster they buy it they do what they're going to due to the property. They approve the performance the cap rate comes down and then they sell it those transactions might be on the books for one year to have two years, two and a half years and then they go. So all are almost all loans originated with prepaid.
Payments, but it's extremely difficult to predict what youre going to get in prepayment income because you don't know which building in how seasoned loan is when it pays off.
Gotcha, Okay, and just to be clear the yes, I guess, where you're most optimistic on the loan growth would be it sounds like it would be if the cnine booking is that kind of Hollywood and we think about 2020 aware most often optimism lies as far as growth if you're talking about getting to a 200 million Butler.
Little bit above that from a 160 is today.
Looking at maybe 20% growth as we as we think about it from here.
I think so because we're starting the euro as you saw in the third quarter, we started to add new borrowers and new customers.
So you'll see some additional use from the new customers, we're doing more with existing customers. So you'll see some expanded use there.
And we're seeing on both sides of the ball, we're seeking the healthcare space and we're seeing in the and the and the leasing space. So for those reasons I think thats why were.
Optimistic costly so but optimistic it's also the growth focus for us if we're going to add talent in the market.
And expand our talent base, that's where we're going to add it. So for all those reasons. That's why I think it's it's what we want to have happened and we're going to do our best to make it happen.
But the signs that we have today give us the most comfort that we have a better chance a bit.
The flip side on the leasing portfolio is the capital investment volumes are not as strong. This time of years. They usually are the phones are little wider.
But the new products, we released on the bundled give us some chances of deals that we were doing before and it also fits where the markets going more deals are a combination of equipment and cloud services, and we reconfigured our products and our lean structures to be able to accommodate that and that's that one large transaction we bid on as our first one of the.
That segment, so because we've expanded the profile, there's some opportunity for growth, but you're still facing the headwinds that theres less equipment being lease than there used to be.
Real estate is the big wildcard, we said that last quarter and we continue to feel there.
There are an expanded base of refinances out there, but on the other him there are more people selling and not reinvesting we have any number of customers who have sold the properties, but they are just sitting on cash youre going to write the check for the taxes on the capital gains and they're going to wait and see what happens next.
So the uncertainties out there on the direction of the economy on affected the properties are fairly and fully valued in a lot of cases.
We don't see the level of reinvestment in our customer base that we see so for example, some of the payoffs we've been seeing are more institutional investors buying from smaller partnerships or private investors. The private investors are sitting on the sidelines, the institutional investors or the one driving the market.
Gotcha, Okay, and I guess just.
The new new yields you're getting I guess on new originations on that commercial book and I know it kind of various but what are the new rates that you're getting on.
The originations today relative to what they were mostly portfolio yield is for multifamily it's going to average right around 4% seems to be the consensus.
Sometimes a little lower if the borrower is just one of these lower risk.
Lower risk refinances, but 4% seems like a good number might skew down to 375, it's a lowers transaction, but somewhere in that neighborhood.
Just real estates about a quarter point higher for 25.
See an eye.
Right around prime to prime plus a quarter.
Again, some of those transactions, we will price to get the best quality. So it'll be slightly below prime other transactions are prime plus one prime plus two even so it balances out, but I would say prime plus a quarter. So is probably a good place to be there overall.
And then the leasing portfolio I would say right now 375 seems like a reasonable valence, obviously, though that could skew down if you do more investment grade because investment grades trading at a 100 over swaps. So that's under three.
But the balance we have 375 seems like a reasonable number.
But again, it could skew a little bit lower if the investment grade leases dominate the originations.
Got you. Okay. That's helpful. And then maybe just going turning to capital for a minute just you can talk a little bit about.
I think last quarter, you talked about maybe a little picked up in conversations I am on M&A and then.
Just secondly, as you can just kind of talk about your.
Appetite for the buyback today, and how that plays and given the organic growth outlook, you've got kind of what's left on the buyback and how you're thinking about.
That in the next couple of quarters.
Well again with the with the price at these levels, we'd certainly be interested in the share repurchase program and we expect that to continue.
In the 2020.
I I think the board sees that is helpful element to increase earnings per share out of all be low risk basis.
So we'd expect to be back in the market with various levels of our participation depending on how we're trading.
We.
I think that is funds are available.
A role will be safe place for us to go and obviously.
If there is dips in the market, let's try to take advantage of them. So we may even create a reserve.
So that we just have money available in case, there is a sudden dip in the market for one reason or another that we can take advantage of.
Secondly on the M&A front.
Yes, it's been we it's been quiet on our side and kind of deliberately so.
Some of the conversations we've had the people are deliberating and we haven't heard much activity on their side a couple of other conversations we had.
Their price expectations moved around a bit.
It really wanted to get paid for future earnings and in an environment, where that was kind of tough to give visibility on so.
Their current profile they would be more of a branch purchase type transaction and therefore for US mostly expense with our liquidity position right now that wasn't necessarily in our interest to do.
So I think that when it was a wait and see story on both sides of their earnings improved going forward further plan.
Then it contributes more earnings to us and price that theyre talking about might be feasible.
But they don't than the price they were talking about would not be feasible and indeed, the transaction wouldn't make much sense for us because it wouldn't be very accretive in the short run other than cost saves. So right now I think we'll probably be something could change tomorrow afternoon, but right now I'd say, we're going to be pretty quiet on that front for at least the next six months.
Absent something different than what I know today.
Okay and just a reminder, Paul has it just the amount of on the repurchase plan, what's what's still available out there and on the plan that you've not current plan.
Brian we have over 600000 shares lets 638463 shares left on the plan that matures March 30, Onest of 2000 2025, Okay. Thanks, Paul and then maybe just the last one or two for me just on the expenses just any change to kind of.
Outlook that we've talked about the last couple of quarters as far as kind of how you're thinking about.
Managing expenses in as you go into 2020, any any new initiatives or is any at rationalization or new a new plans to for spending.
Well I'd say our run rate.
Well, we had set around nine five and actually at a core level, we're kind of trending below that right now.
We're putting some extra money into marketing for the loan growth reasons, we talked about.
We're putting some money into technology, we have a new web site up and running.
Really developing a customer portal.
And we're doing a refresh on some of the cyber security assets at the moment, so but that will taper off overtime I don't think it'll be immaterial impact going forward at least not very much we'll have a poor banking contract to negotiate in 2020, but that will be latter part of the year. So I think this baseline expenses should.
To be relatively stable.
If they grow our objective is to grow them by adding more commercial bankers lease bankers to the mix.
And there might be a lag time on return on investment there, but if you told me we executed the plan with the people, we'd like to get and we're already l. talking to people now.
And we added another million dollars or more of comp expense.
To get to our goals were absolutely happy with that might.
Not have an immediate popped earnings, but we want to get those people out there with the products we have now.
Also enables us to add even more depth to the products over time, so that would be the biggest variable as we have more staff.
Got you, Okay, and lastly, I guess can you just give any thought if theres anything I'm guessing you think about credit today.
How things are on the credit front and.
Maybe just talk about the plan you've laid out more going as far as kind of the margin outlook and the growth outlook, just kind of how you see the profitability level shaping up and in 2020, I mean, it whether you can kind of put a range around.
If you get to this growth level, but just how big can quantify your outlook on our away or profitability.
In the outlook I know at that Theres too many there's too many variables to give you a target so let's talk about a range.
Given the short term environment, where we're sitting on more cash than we expected and asset yields have declined faster than deposit expense deposit rates.
I think in.
I would like to get somewhere in the.
22 to 25 cent range on earnings per share over the first half for the year, but let's see if we can get closer to 25 cents a share and hold that in the second half of the year. So what does that translate out too. If we can do somewhere between a 100 points and 110 on our way.
That would be good but it may not get there to middle of next year or the second half.
We're going to need will help from the deposit expense side.
And to help out and that's going to take some time and then again it depends on the mix.
One of the things that we're going to continue to be focused on though is managing the absolute level of net interest income to the 52 to 53 million range.
Got harder with the drop in yields and it got even harder after they have with excess cash, but thats still the goal and that would produce around 100 basis points or so on average assets and it would produce around one dollar per share annualized and that remains the golds little more challenging than it was but that still what we're going to shoot for.
Okay, all right and just on credit just kind of your big picture any anything change anything concerning to you today.
You know the portfolio stable and.
The annual loan reviews have been coming in well.
So and as we originate.
Going forward, we're going to skew more towards the 50% risk weighted multifamily. We're obviously talking more about investment grade leases than we have and that is a function of looking at where the economy is and saying Gee you know there appear to be some.
Some decline in economic activity that you do see some spreads widening out in in the middle part of the credit curve and lower.
So putting big bets on credit right now does not seem a prudent thing to do so we're going to try and offset that benefit that marginal credit benefit with a higher volume of lower risk assets.
But right now we're comfortable with the asset quality.
I think the origination path going forward.
Gives us a relatively stable credit environment Theres always the chance of one thing or another could happen on one individual credit or another but in the big picture So far so good.
Okay, perfect I will step back thanks for taking the questions Brian .
Thanks for your time.
Thank you and once again, ladies and gentlemen, good question at this time. Please press Star then one on you've touched on telephone.
Im not showing any further questions in the queue at this time I'd like to hand, the program back to that Morgan Geisha, Chairman and CEO for any further remarks.
Thanks to everyone for their participation and interest and enjoy the remainder of 2019.
Thank you, ladies and gentlemen through participation in today's conference. This does conclude the program you may now disconnect good day.