Q1 2020 Earnings Call
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Operating Officer done best over to you thank speed and good morning everyone at the end of the December nineteen quarter-end loans were 9.6 billion, which is a decline of $81 million from the prior quarter during the quarter commercial real estate loans decreased slightly as advances in construction and development and multi-family residential were offset with declines and non-owner-occupied an occupied during the quarter. We experienced one hundred six point five million in credits that refinanced with other financial institutions at pricing that did not meet our returned off its commercial non real estate loans were down forty three point five million. This was mostly centered in our mortgage Warehouse portfolio that ended the quarter down by $26 million to the underlying transaction and disbursement activity Additionally, the undrawn percentage of operating lines of credit increased approximately 1% over the last two quarters. This reflects a balance.
Decline of approximately twenty-five million agricultural balance has decreased $28 million during the quarter with the decreased primarily driven by the exit of relationships with a higher profile, which is a trend we anticipate over the upcoming quarters as operators secure suitable financing Alternatives R. Denova office strategy continues to be a key contributor of our growth and expansion. And for the quarter of the aggregate growth of those portfolios were 4% annualized we have successfully opened 11:00 offices over the last few years three of which he's currently in the Loan Production Office stage currently, we have leadership and teams in place for two new locations with timing dependent on reaching internal targets nine new commercial Bankers have been hired in various existing markets during quarter fiscal one.
consistent with prior guide
We will spend fiscal year 2020 rebalancing the risk profile in all sectors of our loan book particularly those in the agricultural sector are priority of employer has that quality is expected to result in exits that will impede loan growth which we have seen traces of already. This will continue over the next few quarters and our expectation is still for loan growth to be in the low single-digit range for 2020 deposits declined 212 million to 10.1 billion during the quarter primarily related to a reduction in broker deposits of 214.8 million as those costs have become less competitive within the rest of the portfolio non interest-bearing deposit showed good growth, particularly and the consumer book offset with a $127 million decrease in non-brokered time deposits.
Management of deposit costs have resulted in a 20 basis-point decrease during the quarter due to the increased mix of non-interest-bearing coupled with a decrease of twenty five basis points in interest-bearing costs from reduced rates on money market and offering rates on time deposits. We have moved deposit rates down again in January and will continue to move our rates down commensurate with declining loan rates to maintain a targeted net interest. Margin. I'll now turn the call over to our chief risk officer Carlin conarium who also oversees our loan remission function to provide updates on our asset quality strategy Carlin Doug for the quarter net charge-offs of 6.1 million or 25 basis points on an annualized basis wage, which is a decline from 31 basis points in the prior quarter of this amount 4.5 million dollars was attributable to a few relationships with the remaining 1.6 million spread across a number of Smith.
Turn on relationships.
Total credit related charges at twelve point six million dollars for eight point four million higher than the prior quarter driven mainly by 6.1 million of more normalized provision expenses and two million from reverse interesting come on loans move to non-accrual in the. Non-accrual loans, as a percent of total loans were 1.62% up from 1.1% the prior quarter and a modest increase in historic levels primarily related to a small number of agricultural loans identified as we continue to work through the higher-risk credits are allowance for loan loss two loans increased three basis points in the wage order to 76 basis points and our comprehensive credit coverage which includes credit-related fair value adjustments on our long-term portfolio and purchased accounting marks with 94 basis points off looking at our loan classifications. Our loans rated substandard increased 168 million dollars six hundred and forty million due to a $67 net increase off.
Related to a small number of a globe.
Primarily in Dairy and one in the swine sector and 101 million dollar increase in non egg loans particularly with a few relationships and Health Services.
Watch loans increased slightly to $416 related to additional monitoring of a small number of relationships as an update to the asset quality of the dairy portfolio at the end of the month. We had two hundred and thirty million dollars rated as substandard and 63 million rated as watch fundamentals for the sector continued to improve and in general quarter to and quarter three Financial salaries that the anticipated Improvement in profitability supported by a lift and milk prices. We are regularly Gathering financial information as it becomes available so we can update our views on not only the operational performance but also the overall Financial Health of each relationship.
In recent quarters, we have discussed our broader focus on overall asset quality and we are making good progress on those initiatives one key change, we will make relates to a loan classifications and ratings as we have that inflate project that will give him more granular view of our loan ratings and asset quality in general in coming quarters among other things will be the implementation of a special mention rating category a part of it criticized loan framework that does not exist in our current rating scale, but typically is used by other institutions and Falls between watch and substandard by implementing our new scale. We will better align off the criticizing classified ratings and Metric seen in the industry while also allowing us to be more efficient in managing our credits and relationships and complementing our adoption of Cecil later in the air while this project is not yet complete all things being equal. We would expect this to move a number of relationships from substandard to special mention when implemented and bring down the level of substandard loans based on the current month.
With that, let's turn the call back to Ken for some closing remarks. Thank you Carlin. I am pleased with how we began the year as our consistency and expense and
Your management resulted in good earnings reflected in our strong return on tangible common Equity of 15% and return and assets that over 1.3% now is the right time to reposition our loan portfolio and make enhancement that we'll both improve our current asset quality and enable us to achieve future growth. We will now open up the call for questions.
We will now begin the question-and-answer session to ask a question may press star then one on your telephone keypad. If you're using a speaker phone, please pick up your handset before pressing the keys off your question, please press * then two. Please limit yourself to one question to allow other callers and opportunity to ask questions. The first question today comes from Jeff with d a Davidson, please go ahead on the off the commentary on the dairy side. So if if that was sort of the the impetus for the increase in substandard loans, could you true that up with the commentary on how long you know, you're feeling more positive on Dairy and a what's flushing through there and maybe if you can touch on kind of work out timelines of of what was added and and then
kind of into the renewal points of of
We expect to see when the dairy book is is then annual reviewed kind of the exit point of that. That'd be helpful thing. Okay, Jeff. Let me this is Doug. Let me take that question for you first off on the substandard increase it was due to a one-time event that should be corrected on that relationship in the month of February . It was not an earnings or cash flow related downgrade that item should be corrected here relative to comments. I think that were made last quarter we talked about roughly a 155 cash flow with class 3 milk prices in the name is what we are seeing today would be debt service coverage from that up to 2.0 times for debt coverage and that's reflected in class 3 milk prices that are averaging in the low said teens today. Probably also to note is many of the producers are using the opportunity to lock in Revenue insurance through the USDA program, which allows them to lock in, correct?
places out for eighteen months
Many of our producers are using that program relative to Renewal timelines and risk rating timelines. We have looked at these credits on a rolling 4-quarter basis. Um, many of the operations started turning the quarter in in Q2 virtually all had very profitable results in Q3 as we're gathering information on a Q4 results for fiscal year end 12:30 119. We usually start coming in towards the end of March April and early-may. So the renewal season for this book of business would typically be in the april-may timeframe. We anticipate based on trends of the last two quarters and recent milk prices and locked in prices through the wreckage Protection Program and favorable production levels that a number of these relationships will be considered for risk-rating improvements at the renewal. It'll probably be dead.
April through May time frame
What was the size of the the one-time add that that you expect to be corrected in February ?
Well, the substandard credit result from 12 from 9:30 to September went up $35 million. So it was embedded within that number.
Okay, and I'm sorry. The last one was was just on on charge off visibility. This was sort of the lowest quarter I guess on net in the last few quarters with fiscal nineteen was obviously a big bigger charge-off quarter any visibility on fiscal 20 charge of activity something less than nineteen or dead something more than 18 any broad thoughts on where we are in the cycle on on charge-offs.
Yeah, just Jeff Ford. That's wise. If you look over there the average lost the average Los for you know, that that June one we'd hope is a normal and then normally in there. I'm sorry, sir. I think somewhere in that twenty-five to Thirty twenty-five to thirty five point range. I think it's a safe boundary to to think about it in.
Okay. Thanks Jeff.
Next question comes from Andrew leash with Piper Sandler, please. Go ahead. Hey guys. Good morning. Just want to touch on Thursday. The security is booked in the quarter. And then the the increase in borrowings just kind of curious. What was really driving some of the movement there was that additional borrowing just to offset some of the deposit outflows in the in the brokerage accounts then what was the what was causing the building to Securities book and how should we look at that as a size going forward, It was a sort of a mix change Andrew between the brokered CDs and fhlb. We just look at both of those interchangeably and whatever is if we can save a few points going one way or the other will certainly can I ask you to look to do it. There's a little bit more build in the current quarter. We had some good deposit inflow. Um, I'd see it sort of flattish to a modest sort of low single-digit increase for the rest of the year, Andrew.
Okay, great. Thank you. I'll start back. The next question comes from Abraham. Hona Wala with Bank of America Merrill Lynch, please. Go ahead.
Good morning, guys. Good morning. I I guess is the first question taking a step back on credit. It sounds like you don't expect just a p double charge of guidelines for the year doesn't sound like you expect big losses despite the migration that we've seen. So the p&l impact when we think about provisioning should be relatively modest As you move some of these credits. Thru is Dead Redemption.
Look, I think sort of run right on on where we are in the current quarter Ibrahim is maybe a couple of million dollars above what was previously guided once you sort of throw the interest accrual in there as well. But I hope sort of a quarter like this is looks to be a a more normalized quarter from an overall expense perspective, you know, it could be a little bit of lumpiness quarter-on-quarter as we do go through some of these larger ones with charge offs in the lounge. It's what about were three or four quarter cycle would hope it settles down to around these levels.
and I guess
Picture just because of all the moving pieces are leg portfolio like and you talk about higher risk portfolio of few times like can you quantify what you view as higher risk of your life alone book and you've talked about some runoff which is included in your low single-digit loan growth guidance, but I'm just trying to get a sense of what do we expect on substandard loans on what's list loans as we move forward and 20/20. Do you do we continue to see inflows or do we start seeing an improvement? If that's kind of the biggest driver of how from an Investor's standpoint folks are looking at your stock and I'm just took offence of should we prepare to see worsening in those metrics or an improvement?
Yeah Abraham, this is Doug. Let me talk versus maybe into the next quarter of the following. Let me talk over a several quarter Horizon. When we look at, you know, the trajectory as I mentioned earlier of the dairy book. We see a number of upgrades that are happening there over the next two fiscal quarters. And then when we take a look at a couple of the other large downgrades that happened in the hog industry that we called out in the PowerPoint that you've seen those two operations have also seen more favorable results of tariff impacts early in calendar nineteen. So we see some rebounding their grain prices for much of the Mid-West are at break-even levels. When we look at corner by beans cattle and Hogs and again more of the operations are probably going to show positive results. So it's really difficult to project a quarter-to-quarter number but over the horizon.
of the next few quarters we
He planned to see improvements in those Matrix.
Got it and anything outside of the book where your concerns you mentioned some of these loans where you've seen one of migration issues anything that's concerning Thursday from a geography standpoint on an asset class. You mentioned Healthcare earlier. Just wondering if something there that could become an issue.
Good morning. This is Carlin. You know, we we are conducting monthly segment reviews as part of our risk management practices and we just recently did conduct a healthcare Deep dive actually and did not divorce rate any pass rated credits from that review. And as far as other emerging areas, we think that at this point we've been through the majority of our higher risk portfolios and Thursday are now migrating down to smaller credits for further review geography. Nothing is really sticking out that way.
Go ahead and just want a separate topic if I can sneak one more and in terms of capital return you mentioned in your strategic priority for the year looking at Acquisitions. Can if you can just talk to us in terms of BuyBacks versus m&a how you thinking about both those and if there's any update on the CEO search?
Yeah. Yeah, I think you got three questions in there a room. That was really good. So first, yeah, definitely we will continue to look at Acquisitions life without going into much detail always have something active on it too. There's some opportunities maybe this person deposit only Acquisitions that that may happen and and and wage strong returns generate a lot of capital. We as other banks are seeing lower loan growth and so we will be looking at doing stock BuyBacks here at the opportunities timer that will continue both both of those I think can be done with the capital that we generate on it to on the CEO search. The board is very involved and quite far along with the CEO search off without going into too much detail. Obviously, the board will have to make some final decisions, but we would hope to have an announcement here in the in the next few months regarding the CEO succession on it too so dead.
That is moving, you know, very very fast and appropriate.
Good. Thanks for taking my questions.
Thanks.
Next question comes from John Ostrom with RBC Capital markets, please. Go ahead. Thanks morning with just bigger picture on again. Just based on your comments Doug.
You know, I don't want to put words in your mouth, but I think you're saying that your egg portfolio is stabilizing to potentially improving.
Is that I think there I think that's a fair comment John . I mean from one quarter to the next, you know, we're Gathering a lot of 12/31 information here over the next few months. So the reflection and improvements will probably be over the next couple of quarters in that result. But yes, I think you know commodity prices and dairy have improved and we've seen that in the last half of nineteen results and we chart bi-monthly milk checks and we can see that result in the fourth quarter continuing to move up.
Okay.
And then as long as you have the mic some of the loan growth activity you you rattled through a few items and I think you said 168,000 payoffs another $26 million at warehouse.
28 million in egg you talk about the offset to that. Where are you seeing the growth potential that offsets, you know some of those headwinds, you know, I think first off on the warehouse lending piece the $26 million that was really a seasonal. Peace. All those relationships are still here and balances of already, you know, starting a comeback. Although there's obviously seasonality to it in the spring is it picks up that is also a segment that we're seeing increased opportunity and demand in and we feel very comfortable with the risk profile of our warehouse lending book. That's a segment will continue to see increases in we also will continue to see some headwinds as I mentioned on the egg side as we look to find alternative financing options for some of the higher-risk higher-profile risk credits on the opportunity side. We talked about the new markets. We have a 4% annualized growth going we've got to
We also have a couple of others that are in the infancy stages that are probably latter in 2020 and 21 that are being discussed. So a number of initiatives interesting to take a look at to try to augment and offset the headwinds of some AG portfolio declines, which have been over the last few quarters. Okay, Thanks for the help.
It's Jen. The next question comes from David long with Raymond James, please go ahead good morning, everyone.
Good morning, the the substandard loans that were I think you said it was the health care services related any any additional color you can provide on those were there anything in common amongst the credits that that we should be aware of?
You know, I think as Carlin mentioned David nothing geography that would be consistent what we are seeing our senior housing projects that are in a slower absorption slower lease up than originally planned and when those don't need original assumptions, we moved them down in a risk rating mode. The fortune of peace is all of those have been supported by guarantor and ownership and continue to see improved performance, but it's really just in that Healthcare peace and not Carlin mentioned. We went through the segment report in January given the elevated downgrades in that sector and resulted in feeling good about the entire rest of the book with no further downgrades.
new ones were looking at
I could thank you. And then as it relates to your your deposit cost very good quarter there. If everything kind of moves as you plan, what kind of improvement in deposits cost can we look at for the next couple of quarters?
I look probably a little bit more modest than than what you've seen this quarter, but that as we said we've moved money market and CD rates down in January to to sort of move towards that in line god with name. So, you know, the unknown is on the loan side of things, but we'd hoped to manage them within sort of that few basis points downward downward movement over the next couple of quarters.
Okay, great. Thanks guys. The next question comes from Damon Delmont with hey, good morning guys. First question. Just wondering Peter could give a little color on your outlook for the income as we go into 2020.
Yes, certainly expect to see a more modest in a modest increase sort of I think we usually typically talk like last single-digit range in there and Damon having the Colorado trust Aqueduct. Come on board this quarter. That was nice to see income in line with what we thought that would do. So outside of that. I'd expect a modest increase. This next quarter is usually a little soft on that service charge line. I'm just seasonally we find that service fee incomes a little lower and also you gotta lower this quarter as well that makes it a little lower.
Got it. Okay, and then with respect to
Land values for agbay Sloan's, you know, what what has been the Trends on real estate values.
You know the Federal Reserve a Kansas City put out a report here recently that talked about a very modest 1% increase in the state of Iowa and we had you know, sort of six or plus or minus two or three percent across I think you know while certainly the economy continues to have its challenges. We've seen land values hold up relatively well off and there continue to be buyers investors that are interested.
Okay, most sales, private treaty as well, which I think is also an indication of the the positive support.
Got it. Okay. All right. That's that's all that I had. Thank you.
Thank you.
Next question comes from Janet Leigh JPMorgan, please go ahead morning. I want to go back to the Health Care Services Credit you pointed out as a part of the increase in substandard lounges quarter just want to clarify is the same Healthcare facility credit. You called at last quarter and to watch long category that is migrated into substandard wage. And can you quantify the size of this problem Health Credit you have on your book Janet? Yes, it is. It's the one we mentioned that went in to watch last last quarter and we put that in a substandard and that's correct. And you know, it's well within range has of a lot of the portfolio and you know, we don't probably get into quoting individual portfolio page size of specific credits.
Helpful, and on your comment last quarter. I think it was roughly around 3:18 million of total problem Dairy credits, including substandard and watch Lounge think you mentioned about 30% of these are expected to be upgraded and about 20% of these going through self liquidation. Can you just give us the update on the status?
Sure, I think if you look from September to December of the aggregate of watch and some standard went down about twenty-five million in the dairy book, and I think your percentages are continually being very close. We've made some estimates that are going to be right within those same ranges of combination of pay Downs or upgrades that are roughly in the Forty to fifty percent of the current outstanding book. So we continue to see that Improvement and that's consistent right and lastly just on loan growth your low single-digit guidance. Can you just talk about like what are going to be drivers of the longest loan growth that are going to offset the decline in and activate a portfolio?
I think we talked about the new offices. There's some other initiatives that we have implemented here over the last few months in a couple of other sectors in our Metro markets relative to some owner-occupied commercial real estate promotions that sort of tie into treasury management and operating lines of credit. We've also been working on some multi-family options wage and also some pieces that are in some of our larger markets in some specialty areas that we're considering as well. So primarily centered in commercial and see and I'll ending a as in our Metro markets Janet
Sure.
Okay. Thanks for taking my questions.
The next question comes from Terry McEvoy with Stephens, please. Go ahead.
Thanks. Good morning. Just a couple of questions on expenses last quarter. Was there any impact in the expense line from the the trust Assets in Colorado? And then in the in the press release you mentioned the office expenses was that connected to the the CEO search or was that uh related to the build-out of the commercial lending teams that you've discussed in the past? Yeah more the the wage going backwards the the recruiting Spencer's more on the CEO search. So definitely that was a factor there and then on the expense side of things the there was the the trust in there for the full quarter this quarter in in that area and I think when I we spoke about it last quarter, I think it was three to four hundred thousand dollars in expenses. I said a quarter were embedded in there as a result of that acquisition.
Okay, and then just one last question just on on credit. You took the $26 billion dollar provision?
Three quarters ago and I'm just looking at substandard loans up called 35% and what I'm hearing today, is that reserved to loan ratio, which is relatively flat from when you took that larger provision still feel comfortable with that provision looking out of the next 4 quarters based on the improving Trends and dairy break even and Grain and some of the other kind of positives you've run through as it relates to get healthier loan portfolio.
Yeah, this is Carlene. I I would say that's correct. As I mentioned, you know, we've we've conducted some pretty deep dives into many of these segments and we feel comfortable with our provisioning at this point. I'm at the portfolio. That's it. Thank you.
Thank you.
This concludes our question-and-answer session. It also concludes our conference. Thank you for attending today's presentation. You may now disconnect service.