Q4 2019 Earnings Call
Total assets increased by one and half percent sequentially while loans declined slightly during the quarter despite very solid loan originations of $179 million, which were up from $97 last quarter consistent with the third quarter. Our origination were stronger in the commercial small business and sponsor Finance groups. We continue to see good deal flow across the bridge but believe given the stage of the economy and credit cycle. It's important to remain disciplined and selective when evaluating opportunities pay off and pay down activity was elevated at a hundred ninety million and offset the strong originations. We saw during the quarter r c r e and residential portfolios were particularly impacted on the cre front. We saw a number of projects reached completion and borrowers opting to sell their projects or secure long-term permanent financing a residential portfolio. So increase pay down stemming from the lower rate environment our commercial birth.
For you including small business?
Also saw higher than anticipated payoffs coming from business sales or refinancings at terms outside of our credit appetite.
On the deposit front we had a strong quarter of deposit growth particularly on non-interest bearing and other core categories time deposits declined to 28.3% of total deposits off the shifting mix contributed to the faucet cost declining six basis points for the quarter our basic strategy of pursuing full banking relationships and doing more business with existing clients continues to generate a very good results given the deposit and Loan growth Dynamics during the quarter. We saw our loan to the faucet ratio ticked down to ninety one and half percent on our liquidity in the former investment Securities increase we expect to redeploy that excess liquidity overtime in our loan portfolio revenues for the quarter declined as expected given the current rate in a moment, but we're up 1.2% over last year net interest income was lower impacted by a lower margin compared to the third quarter non-interest. Yep.
Was down slightly.
Given by lower gain-on-sale Revenue due primarily to lower average premiums as well as a fair value charge taken against our servicing asset on the expense side. We saw operating expenses declined sequentially by 1.8 million from the third quarter lastly as a quality improved with higher-resolution activity driving lower number forming loan levels provision expenses declined covered lower net charges, which came down by 14 basis points from last quarter to 42 basis points in the fourth quarter, the allowance increased two basis points to 84 basis points at the end of the year with that. I'd like to turn over the call to Lindsay who will provide you more detail on our results. Thanks, Alberto. Good morning, everyone starting with loans and leases are total loss. The leases were three point eight billion at December 31st a net decrease of 45.4 million from the prior quarter the decrease in total loans and leases was primarily due to a higher level of pay off.
And pay Downs in the quarter.
Payoff came in at $190 million compared to a hundred and fifty million in the third quarter are originated loan portfolio increased approximately $68 million net for the quarter the growth was primarily driven by our commercial and Commercial Real Estate portfolios the growth in the originated loan portfolio was offset by $113 decrease in our acquired portfolio approximately half of the decrease in the money portfolio related to the Natural movement to originated and the remainder stems from pay downs and pay off on loans and relationships not considered Corridor business or lower graded credits that we believe did not justify the risk-adjusted pricing and structure offered by the market as Alberto mentioned earlier most of our new Loan Production continues to come in the cni and small business lending areas, which has helped to improve the balance and diversification in our portfolio over the past year cre loans declined 34% of our total loan portfolio down from 36% at the end of 2018 Weil Sie ni loge.
increased two percentage points to 35
Percent over the same time period during the fourth quarter of 2019 we moved up to the number for SBA lender Nationwide and continue to be ranked. Number one in Illinois and Wisconsin. We had a very productive quarter closing 132 million of long commitments up from $125 million in the third quarter with a strong production are managed government-guaranteed portfolio income by $20 million the fourth quarter to just under one point nine billion moving on to deposits. We had another strong quarter of core deposit growth with our total deposits increasing 67.5 million to 4.1 billion at December 31st. The girls was entirely driven by increases in our lower cost deposit categories, most notably non-interest-bearing and money market balances them in these categories is largely being driven by inflows of commercial deposits on an average basis are not interest bearing deposits for 65 million higher than the previous quarter.
The growth in these lower-cost areas allowed us to run off 97 million and time deposits improving our overall deposit mix as a result of the improved deposit mix both our total cost of deposits our cost of interest bearing deposits decreased six basis points from the prior quarter making a significant inflection point in our ability to manage our funding costs. We continue to be well-positioned from a liability standpoint during the fourth quarter. We began to see higher cost funding repricing at levels below their current rates at maturity. So assuming no change in the outlook for rates and market conditions. Is there time deposits continue to renew life to see a continued decline in the cost of these deposits during the first half of 2020 moving on to net interest income and margin our net interest income decreased three point nine million from the third quarter as a result of lower creation and the lower rate environment our net interest margin was 432 in the fourth quarter down 30 basis points from last quarter accretion income and acquired loans contributed 43 beja.
to the margin in the fourth quarter down for
62 basis points in the last quarter excluding increase in income our net interest margin was 389 the 11 basis point decrease from the previous quarter was primarily due to the fact filled excluding increase in income declining to 5:45 from 667 approx. 50% of our portfolio is floating rates and split between library and prime the decrease in the average loan yields excluding increase in income with students that impact of the September and October rate cut the decline in our average loan yields offset the decrease that we saw in our cost of deposit.
With the repricing in our loan portfolio largely completed and the continued repricing of our higher cost funding at lower rates. We believe we are in a good position to maintain our net interest margin excluding accretion income subject to no additional changes in the FED funds rate and the pace of lung growth turning to non-interest income on slide 8 in the third quarter our non-interest income decreased by $290,000 off Porter. The decrease was primarily due to a 2.5 million dollar fair value adjustment on our servicing asset to reflect increased prepayments fees and discount rates up from one point six million wage adjustment last quarter during the fourth quarter, we sold 101.5 million of government guaranteed loans compared with ninety three point three million of loans sold in the prior quarter. However, long premiums received during the quarter decreased 81 basis points to 1060 resulting in a decline of $670,000 in our net gain on government guaranteed loans offsetting the volume down.
We have the servicing asset and average.
Premium decreases. We saw proof the income on our deposits increased interchange income and an increase in swap revenues looking at are 9 to 6 cents. Our fourth quarter expenses included 236,000 of merger-related expense, of course system conversion expense and impairment charges on assets held-for-sale adjusting for these items in both periods are not interest expense decreased 1.8 million from the prior quarter of the decrease was primarily due to the full quarter impact of the additional cost savings resulting from the Oak Park River Forest integration and system conversion from the expense perspective. We will continue to be disciplined and focused and our management of expenses so that we can realize additional operating leverage as our Revenue increases as we mentioned a few months ago during the first quarter. We are consolidating four branches that will result of one point two million annualized cost savings that should help our efforts to manage expense levels during the second half of 2020 as we continue to make investments in our technology and infrastructure.
These actions combined with our continued core deposit growth should help drive further Improvement the productivity of our Branch Network and increase our deposits per Branch looking ahead to 20 20, May dissipate non-interest expenses between 42 to 44 million per quarter. Now, we'll take a look at asset quality. Our non-performing assets decreased to eighty seven basis points of total assets from ATM basis points at the end of the prior quarter primarily due to an improved pace of resolution of non-performing loans, as of December 31st, our non-performing assets included 4.2 million of government-guaranteed loan, excluding government-guaranteed non-performing loans, our non-performing loans to Total loans ratio with 89 basis points down from 98 basis points at the end of the prior quarter our net charge-offs were for calling the quarter virtually all of the net charge-offs during the quarter were attributed to the on guaranteed portion of US Government guaranteed loans comparing year-over-year net charge-offs remained flat at 37 basis points Dead.
Our provision expense was four point.
4.4 million which cover charge off and resulted in an increase in our allowance for loan losses to 84 basis points of total loans and leases are coverage on non-performing loans, excluding. The government guaranteed portion was 95% in addition to the traditional allowance of the percentage of loan and Lease metrics. We also analyze the allowance in conjunction with the acquisition accounting adjustments impacting are required polio it December 31st, the acquisition accounting adjustments plus their allowance for loan and Lease losses represented 158 basis points of total loans and leases as you may have noticed in our prepared materials. We do not include the impact of people as an emerging Growth Company. We intend to adopt a new accounting standard in 2023 as a result. We will not have an adjustment to our Capital at this time, and we will continue to record accretion income in our earnings at a trajectory similar to Prior quarters with that. I would like to pass the call back to Alberto.
Thank you and see I would like to wrap up today with a few comments about our outlook for 2020 and our priorities going forward before I do that. I'd like to quickly go back to the last year at this time and age are priorities for the coming year to see how well we did in summary. We completed the integration and conversion of two Banks grew deposits nicely and continued pursuing discipline loan growth. We also thought that we see opportunities in the market to add talent to the organization and we feel we added some great people over the course of the Year. Lastly. We wanted to continue to see improved profitability and were able to deliver on that as well for 2020 our strategy and areas of focus remained the same continue to generate the buses by executing a relationship banking strategy pursued and Loan growth and capitalize on opportunities with both customers and talent in terms of loan growth. We expect growth for the year to be in the six to eight percent range assuming some normalization. Yep.
payoff activity and a state
Will rate environment given the additions we made in terms of staff that came in towards the second half of the year. We expect to see business from those hires becoming more pronounced in the second half of 2028. We will continue investing in infrastructure products and capabilities particularly in treasury management and continue to put technology in place to improve efficiencies and our customer experience with our Market position strong Capital level of liquidity and most importantly our team were optimistic about our ability to navigate the current environment and take advantage of opportunities in 20-25 includes all prepared remarks, and now operator we can tell we can open up the call to questions. We will now begin the question-and-answer session as he questioned me, press * then 1 on your touchtone phone. If you're using a speaker phone, please pick up your handset before pressing the keys to withdraw your question, please press star then to the first question I asked.
from Michael perrito
From KBW, please. Go ahead.
Hey, good morning, guys. Happy New Year every day. I had a few things. I wanted to hit. I wanted to start on the expense side of the home of run rate for twenty twenty Lindsay. Obviously, it's a little wide. I'm curious. How do you think the trajectory of the year? I mean, it sounds like you're a little bit more optimistic maybe about being towards the lower end in the back of your first the first half is that kind of a fair read on your comments or or would you guide me in a different direction that is a fair fair read on the common. So we do have seasonality in our business and we do 10,000 have higher expenses in the beginning of the year. So there is that level of seasonality that does take place. So I think that's their might and then just kind of a follow-up on on that same topic, you know, as I think about, you know, kind of the stability in the efficiency ratio that you guys have had over the last couple of years after the big Improvement in 2018. You know what I realize it's heavily dependent on rates and Martin, but but if we just kind of em,
whom your margin guidance at face value
And that rates don't move dramatically. I mean what type of efficiency ratio do you guys think you could achieve in? 2020? I mean is it do you think you could continue to have the stability? Do you think there's some upward pressure sending General thoughts on that topic sure. I think in terms of the efficiency there. There are definitely headwinds. Obviously you thought this this quarter was the rate environment. So I think there's pressure here at home. I do think that in terms of the the latter half of the year. We we will see the ability to guide that down up into the high fifties and then Alberto and capture so, you know, obviously it it was kind of an active 2019 between Oak Park the dividend share repurchases, you know, you kind of mentioned it a little bit. I was wondering if you could expand maybe a little bit more for us just on what the wage for twenty twenty and maybe specifically kind of what the appetite is to use BuyBacks here as we move forward. Yeah might sure I look I think we we certainly remain dead.
Open to that we are.
Obviously that was one of the reasons why we we instituted the program at the end of you know, last year, I think flexibility is important. Obviously if we we look at our couple levels today, they're healthy, which is great. I mean given the bit of uncertainty still in the environment. I think that's that's prudent. That being said, we just recently instituted a dividend wage. So you you know, I think that's that's a good example of us taking action to to return Capital back to shareholders and I I would put the buy back in the context of capital priorities first and foremost is supporting organic growth then obviously we want to have you know Capital, you know available when we when we do and see opportunities to potentially do m&a as we've done in the past, but that being said, obviously the the buyback is a tool to manage, you know growing Capital levels. I think we've accreted, you know, Capital very nice job.
From you look at a 2018.
To 2019 so in the context of having the program in place, I I certainly certainly think that that that's a tool that you know, we we certainly have available to manage that and and you know, make sure that that we're not creating, you know Capital, you know growing Capital that that we can't, you know deploy, um, you know, uh back in a reasonable amount of time. So I guess for more perspective and I understand that it's hard hard question to answer because you know opportunities can shift but but from our perspective as we try to model guys out here, I mean, is it fair to say that by this time next year your hope is to use all the levers at your disposal. So that is 10.3% tce ratio isn't really that much higher a year from now.
I think that's fair Mike. I think I would say Obviously like the one caveat is, you know opportunities that may present themselves, you know over the course of the year that that may change that fact that position but I think that's fair and on that point just any update on the deal pipeline.
You know, I think I I would say I would I would we remain constructive on it, I think.
You know, I think activity I would say if it if anything maybe from over the course of the of the summer in terms of you know, the the pace or the conversations and discussions that we've had with with parties. Um, you know, I think probably remain, you know, pretty pretty healthy. I would tell you though probably met our expectations are are probably a little high relative to reality today that being said, you know, I think in terms of you know activities and discussions and and having opportunities to to look at transactions, I think I think the environment remains pretty healthy great. Thanks, and then just one last one quick one for me and I'll step back Lindsay thoughts on the tax rate for 2020.
sure, so that
What you saw here in in the fourth quarter, what was the one-time item? So our guidance going forward for the effective tax rate is between 26 to 28% Like right. Thank you guys. Appreciate the color bulb.
Again, if you every question, please press * then 1 next question comes from Nathan rice and Nathan you may go. Thank you. Good morning. Everyone needs somebody just start on deposit growth expectations. Actually pretty strong core deposit gathering in the fourth quarter. So just curious know as we think about the cord kind of holding stable from June 2020 how much opportunity exists to continue to, you know, grow core deposit of similar clip than what we saw on the back half the last year to, you know, continue to kind of prune some higher costs deposit relationships and so forth.
Yeah, Mike, I think I would answer that in the context of kind of loan growth and you know seeing deposits. We want to see the Boston to keep Pace with that wage. So it's a you know, we're primarily a relationship oriented institution. So, um, I would the guidance that I would give you is, you know, consistent with loan growth. I you know, we obviously want to bank the full relationship and that's where core deposits, you know come from so to the degree that we continue to see the trends that we saw in the fourth quarter. I think you you saw what we were able to do in terms of you know, managing call it higher funding higher cost of fund type deposits down and replacing them with, you know, either non-interest-bearing or other, you know types of core accounts.
Understood that's helpful. And then
One thing one thing that I want to add to that obviously the the other lever there. I made a comment related to increase liquidity given the Dynamics and the portfolio and the fourth quarter back. I would say our Investment Portfolio today is probably a little higher in terms of just absolute level. So obviously that's a level lever that that we can utilize where she can redeploy some of that excess liquidity overtime back into the loan portfolio. So just wanted to add that context as well understood but sounds like you kind of want to keep the loan deposit ratio near its current job in ninety-one ninety-two percent over the course of this year. No, we we think that we've got ample liquidity here at the where we can we we've got some Runway here. So we we've peaked I think at around 6 or 95% agree about $95 and change and so I really think by the end of 2020 we'd like to see that get back up to that range.
Okay, understood. Thank you. And then just changing gears a little bit on payoffs, you know, we've heard from a couple of other Chicago Banks so far this earnings season that you know, they're seen some moderation payoff activity as far in 1 Q. Are you seeing any of that as relates to your portfolio?
I think it's I mean I I'll I'll say there's it's it's a it's a call. I mean, it's we're not even through the first month of the year. So I mean I think about a month is too early to tell but that being said let's say January has been has definitely has been so moderation in the in the month of January , but I think I think the the important thing for from our perspective is 2019 as a whole was elevated. I think if you look at the at the chart on the presentation, you know, you kind of saw pay I was kind of increasing off the course of the year with the fourth quarter being um, being higher a couple of things. They're the rate environment and certainly the outlook for the rate environment changed material mid year hard to quantify the impact of that but I think that had something to do, you know particularly on the on the cre side. The second thing is for us we had obvious.
portfolios that came
In particularly the acquisition of Oak Park River Forest bancshares. There's always some transition, you know, they're that happens, you know, and we saw some of that so, you know in terms of Outlook 2020, we do expect that we're going to see some moderation, you know with a stable rate environment and some of the transition effects, you know, largely Faithfully being done here by by the end of the first quarter, you know, I think I think payoff activities should moderate over the course of of twenty-twenty.
Got it. It's great to hear and then if I could just ask one more on SBA premiums came down sequentially in the fourth quarter and I would think you know, a short-term rates have kind of come down as well over the last several months that that may have would have supported you again on sale premiums just any kind of visibility in terms of helping to train in 1 q and just and so forth. Sure. So so again, my there does tend to be some volatility in that number. I think in the fourth quarter here, you saw the the slight decrease was really just driven by the the premiums with the volume was there in terms of what we sold. So we were happy about that that fourth-quarter looking into the the next year. We look at it on an aggregate basis over the course of the year. However, in the first quarter for instance, if you look back at 2018, the first quarter does tend to be to be fairly light and so I you know, I I'd say look at 2018 and that'll give you a good idea in terms of how things float wage.
over the
Course of the year. Yeah need to add two two at Lindsay just said and and and this is just more in an aggregate, you know bases when we look at kind of historical Trends in in premiums for for SBA 7A only but I think it's a fair statement when you look back relative to the last quarter, you know, so say 33 compared to Q4 and certainly before that. Um, you know premiums I think it's fair to say are slightly down as a whole. This is gross premiums, um, you know across-the-board so I'm kind of ten twenty years ten fifteen twenty five years, you know, I think it's fair to say premiums are slightly down over the last quarter as a whole.
Got it, understood. I appreciate you guys taking the questions. Thank you.
The next question comes from Brian Martin from Jenny Montgomery, please go ahead. Hey, good morning. Good morning, Brian . So I talked about her. I don't fell Berto just the kind of the loan pricing stabilizing a bit. It's I mean, it sounds like I appreciate the call around the funding side still seeing some, you know reductions here in the first half. But just what are you guys seeing on pricing, you know can a new production sounds like certainly it's competitive but may be stabilizing at current levels give you that optimism on the margin or might hearing that wrong.
No, I think.
Look if we if we look at for example.
Kind of new production and kind of weird new production was at the end of the fourth quarter. I would tell you and sometimes you know, I'll give you this number, but just know that the mix of funded loans and a particular quarter can very often but you know, we saw kind of the weighted average rate be around 5.6% roughly speaking if we compare that to the third quarter kind of where we were off again raw. This is not adjusting for mix changes from one quarter to the other it was around 6.07% So it's down around 40 basis points that said if you look at the change in 1-month Libor over the course of the third quarter relative to the fourth quarter, you know, if you spend of the timing of that you're going to see that we're kind of, you know drunk by somewhere between 26 to 30 basis points. So, you know what we saw, you know from a pricing standpoint, you know, I think your comment I think it's it's relatively
bear, but you can
See how it's tied to you know movement in short-term rates that sometimes are are not, you know, call it the FED funds Target. So hopefully that gives you a sense of you know, the variability there. Yes, that's how I appreciate it over and then maybe Lindsay just a normal accretion just installed. Mystically as we think about 20 20 just kind of percentage decline. You would expect an increase in given you know that you're not going to be adopting Cecil just any any thoughts on how how we should model that sure. So again, it's it's never perfect to predict how long has as I've always stated in the past. But I do think that you'll see it continue to come down as I've always said in the past and it continues to stare step down. I think you're going to see one more month larger stair step down here in the first quarter and then it it tends to level out. Ideally. We we can accelerate as much a creation as fast as we possibly can and resolve these low-wage.
With our credit team. Um
To to get it through our earnings prior to Cecil implementation. But um, you know from a just a a standpoint of where it's going it'll it'll stair-step down here again, and then begin to moderate in the latter half. Okay, and then just one housekeeping on the on the fee income side the loan servicing evaluation given kind of the the outlook on rates today any thought on if you start to see that decline or stable any thoughts there.
So I'd say on the servicing asset valuation. It does tend to be volatile. And we really just had the perfect storm this quarter in terms of everything with the prepayment speeds and the discount rates and birth. So you saw him or outsized, uh evaluation adjustment there then then you would typically see so, you know, if you look back historically Brian and yeah average that I think that's probably a pretty good Fair assumption to look at. Yeah, I think just when you think about that you think about two things you obviously you have your gross servicing fees, which is how we look at the business office. And then you have these fur value changes over time. When you have to make you know call it adjustments to either the discount rate or prepayment speeds. If you take that in the context of the comments that we made regarding kind of premiums being a little lower you can use that as a kind of like a proxy in terms of what's happening with discount rate. So we saw this quarter Disco.
Grades in chops. So that's you know, a fair value input change and then prepayment speeds which is the reason
Why probably premiums are you know down a bit in the market as a whole picking up that obviously had had a you know, fur value impact on the on the servicing asset but from an operating but she says I mean what we try to do is look at you know, how is gross servicing income coming in knowing that you're going to have for Value adjustments like you do and mortgage and my SARS from time to time. Gotcha. Okay. That's how fun. Maybe just the last one just in general the the buyback. I mean, I guess are you guys looking at that today as more of a defensive mechanism or the stock would have drop you maybe get more song you just is it just kind of the normal plan? They have some of it, you know going board just any thoughts on that Brian . I'll keep the comments do it's a way to opportunistically manager page, um, you know, and at the question that my cancer asked earlier in the call. I think that you know the point that that he brought up in the way he framed the question was was well.
But you know, we obviously have we instituted the dividend, you know, and I I would look at both of those measures as you know, the tools that we have in place.
To return capital and manage Capital levels in the context of continuing to support organic growth and take advantage of of acquisition opportunities when they surface got you. Okay. I appreciate the color. Thanks.
Thanks Brian . There are no more questions in the queue. This concludes. Our question-and-answer session. I would like to turn the conference back over to management for any closing remarks.
Thank you operator. I'd like to take this opportunity to say thank you to all of our colleagues for the contributions. They make to our business on a daily basis with all of the changes impacting our business Thursday from a technology standpoint banking is still a personal business and our colleagues are and will continue to be responsible for our success. I know a lot of our colleagues dial in and listen to these calls. So for those of you on the call as well as all others who could not join today. I just want to say thank you again and look forward to another great year in 2020 that concludes the call for today. Thank you for your participation your interest in by line and we'll talk to you again next quarter operator.
The conference has now concluded thank you for attending today's presentation. You may now disconnect.
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