Q2 2019 Earnings Call
Welcome to the cadence Bank Corporation second quarter 2019 earnings Conference call. All participants will be in listen only mode. The comments are subject to the forward looking statement disclaimer, which can be found in the press release and on page two of the financial results presentation.
Both of those documents can be located in the Investor Relations section at cadence Bancorporation Dotcom. After today's presentation, there will be an opportunity to ask questions. Please note. This event is being recorded.
I would now like to turn the conference over to Paul Murphy, Chairman and CEO . Please go ahead.
So thank you all for joining us and welcome to our second quarter 2019 earnings Conference call, joining me today or Sam toward receive our tolson and Hank homes.
For the second quarter on an adjusted basis, we earned $51.5 million of net income that's 40 cents per share so right at a 13% adjusted return on tangible common and a 1.2 on assets.
It's a 50% adjusted efficiency ratio.
And while these results are within peer averages. They obviously are disappointing to me.
And the higher credit costs in the quarter.
That does not meet with our top level industry performance bar that we set for ourselves.
So just you know in all honesty opened with saying units, it's not a great quarter.
However, I think once you dig into the numbers and walk through us with us Youre going to see is it's not an awful quarter either.
First and foremost, we're we're not in business to make bad loans, and having charge offs of almost 19 million.
Resulting for related to four credits.
Is this disappointment for sure.
The four credits so one of the one of those credits was a restaurant. The other three were general Cnine credits one of the four was a snake.
There is no correlation on these four credits and we don't view this as systemic if you look at our last 12 months trailing total charge offs for 22, and a half million or 18 basis points on average loans.
Which is still higher than our past several years, but.
Then the acceptable ranges for CNS focused bank.
We also reported increases in nonperformers of roughly $30 million Thats three loans when energy one restaurant and once again.
Of these three loans to our snacks.
We took targeted prudent steps in these credits as we reviewed updated information did during the quarter that led to the accounting impairments.
Let's see on lending for us of course has historically been lumpy, but overall our view on credit.
Remains unchanged, we take action promptly when issues arise and we had some issues this quarter.
We do not believe that the second quarter credit problems or a result of a weakening economy.
They are more episodic.
We remain very diligent and very focused on every credit every new credit at renewal every existing credit.
Just looking at all of the trends and properly underwriting.
On an ongoing basis and.
So while reporting credit loss hustings.
We still are fundamentally confident in our team our discipline, our credit underwriting our policies our credit monitoring practices.
That have served us well in the past and we are confident that that will be the case going forward.
But we also remain forever humble on credit.
Turning to some of the more positive developments in the quarter tangible book value increased 98 cents linked quarter pretty spectacular to 14 21, our capital ratios continue to grow our tangible common equity ratio at 10 83 as over 100 basis points higher than a year ago.
Our well time interest rate color from the first quarter increase in value significantly in the quarter and does give us nice protection against lower interest rates.
We reduced our wholesale funding in the quarter, we had a $145 million in debt that matured, we refinanced 85 million of that so $60 million less debt.
And it's a sub debt issuance, so we get more favorable capital treatments and at a rate that's a bit less than the previous issue. So really a lot of positives there.
We completed the exit of the Patriot capital line of business, which came from the state Bank acquisition Thats about $130 million of equipment finance loans that were non strategic.
This moderates our loan growth a bit moderates risk of bed allows us to better fun with core deposits and is up a pos effort for capital ratios.
So we have intentionally moderated our growth and I believe improved risk profile of the loan portfolio. This quarter and are looking for a less aggressive growth in the future.
And again.
Meaning for improved outlook for capital ratios, which increased nicely in the second quarter.
So let me ask you to turn your attention to slide four of our presentation and comment on a few of the highlights their net income 48.3 million 37 cents a share.
Well again, the higher credit costs.
Or are disappointing.
We have not given up on our goal of top level performance in the future.
Now has 397 for the quarter and it's a bit complicated valor is going to walk you through a lot going on with Nam.
Here in a moment.
Period end loans were 13.6 billion, excluding the impact of the acquired loans.
We've increased $1.1 billion in half or 16% from a year ago.
And our update on 2019 organic loan growth estimates of 8% to 10%.
We're now currently expecting that to come in on the lower end of that range or possibly maybe just a little shy of the low end of that range.
As we're just moving towards a more conservative posture on overall loan growth.
Period end posits were 14.5 billion up $289 million, 2% linked quarter Sams going to go into more of an update on those initiatives.
Adjusted efficiency ratio as I mentioned, 50% compared to 45.7.
Last quarter.
So the operating leverage in our model continues to be one of the key drivers of the I think attractive investment thesis here.
We still believe we'll see.
Good expense discipline.
As we continue to manage that 44% to 46% longer term efficiency ratio target that we have previously reported.
We don't see this changing that.
And so as.
I began to mention on these quarterly calls in the past that just going have to take a moment to brag on our team. We've got a lot of great bankers that are really the engines that are driving our growth in there. They are experienced they are motivated and they're not making a lot of calls on really good customers and prospects and.
Again tip my hat to the hard work and cadence bankers.
And thank them for their dedication.
So really good about the retention rates and.
Top talent is so hard to get and never taken for granted but we've done a good job of hanging onto a great team.
So as we think about quality growth around our our footprint.
We still feel like we're strengthen our customer service relationships and feel like we're well present well.
Physician for good future growth.
As a public company for the last two years, we generate a pretty decent track record.
And we're still very focused on our long range goal of consistently being among the top performing regional banks in the country. So with that I'll turn it over to Sam for more in deposits.
Thanks, Paul I'll be commenting on our deposit growth starting on slide nine of our presentation.
I'm pleased to report that the combination will stay bank interest has enhanced our funding and deposit mix as we had projected.
Core deposit growth was up $276 million or 2% linked quarter and up 5 billion from the prior year driven by the state Bank acquisition client retention and deposit growth initiatives.
The organic drivers of this growth continued to be the expansion of commercial Treasury management and consumer retail growth throughout our Texas in southeastern markets.
We also increased non interest bearing deposits by 87 million linked quarter and $1.2 billion from a year ago.
Noninterest bearing deposits represented 23% of total deposits and are trending nicely.
Our improved core deposit mix is a priority for the company and has been directly tied this year to management compensation.
We are confident that all these efforts will drive improved funding costs in the future.
We are really pleased the cadence bank recently secured an investment grade credit rating from standard and Poors, which in addition to our accrual investment grade rating validates the bank's financial strength and stability.
We believe the ratings will contribute to furthering long term client relationships and attract additional commercial corporate and institutional deposits to the bank.
Our broker deposits were $868 million or 6% of total deposits at quarter end.
$228 million of broker deposits mature following the end of the quarter, which we don't currently anticipate replacing until the latter half of 2019.
Other borrowings and debt also declined by $349 million or 48% as a result of the quarters deposit growth and also due to repayment of $145 million in senior debt in June .
We replaced that debt with a lower amount $85 million of subordinated debt at a lower interest rate.
Now a quick update on our new Georgia franchise.
Following our January one closing in subsequent rebranding and systems conversion of state Bank, we're quite pleased with our progress in the new Georgia market.
A few highlights first customer and associate retention a key priority for US has been solid this has been evidenced by Georgia retail deposits being steady since conversion and deposits in our community banking commercial real estate group showing solid growth.
Our Georgia community Bank and commercial real estate teams also experienced weather strongest loan production quarters in recent history.
As you know commercial middle market has been one of cadence is core strengths and we added a top Atlanta middle market sales leader during the quarter, along with two seasoned bankers.
We will continue to thoughtfully build out this important team.
We also recently announced the acquisition of at Atlanta, based wealth and pension services group, which has approximately 400 million and assets under management to combine with our Linscomb in Williams registered investment advisory platform.
Representing our initial wealth management offering in the Georgia market and adding nicely to fee income.
So we're encouraged by our prospects to grow our core businesses throughout Atlanta, and the rest of the state.
With that let me turn it over to Valerie to go through a little more of our quarterly performance.
Thanks, Sam Slide 10 summarizes our net interest margin.
There were a number of moving parts this quarter, but if you.
Back and look at it from a high level, we did experience some NIM compression from higher deposit costs combined with the new deposit acquisition.
That was partially offset by positive originated loan interest income for loan growth slightly lower yield.
Of course, the printed NIM with further impacted by a couple of additional items, one with the timing of hedging time between the first and second quarters. We have discussed previously and that would not be recurring.
Year to date, a total impact from the hedges on NIM is a negative $3 million, which at a similar rate environment is that normalized at a normalized level.
Second the total accretion for acquired portfolios with a little bit lower this quarter, we expect the year to date yield on these portfolios excluding recovery creation to approximate the yield for the rest of the year.
Recovery increases you know can be bumpy and is generally not significant breadth.
Easy Elds are laid out in table three in earnings release.
We also included a couple of additional slides this quarter in the presentation appendix slides 14, and 16 to help clarify the quarterly movements for you. So you can really honing in on core margin assets more easily.
Based on the recent trends, we're seeing we believe our funding cost may have peaked mid quarter as wholesale and broker deposits have declined.
We have 60 million less debt on the balance sheet, we are seeing maturing Cds being replaced with lower rate.
And we have over $2 billion of deposits that are linked to indices and would have a 100% beta if rates were cut.
Our originated loan yields excluding hedge impacts declined about five basis points.
Largely due to low mix shifts and an average LIBOR decline of five basis points during the quarter.
Close to 70% of our loans are variable rate with about 85% of those tied to LIBOR and about 85% of those.
Tied to one month LIBOR.
On an overall balance sheet basis, it's important to note that at a down 100 basis point scenario. Our next 12 month net interest income is modeled to be down only 1%.
Due to the positive impact of hedging activities on our otherwise asset sensitive balance sheet.
We're very pleased with that dynamic as we look out towards the rest of the year.
Slide 11 highlights non interest in that also had a nice increase in the quarter, 3.5% for the quarter and now up to 16.5% of our total operating revenue.
Credit related fees grew at impressive 10% linked quarter and assets under management from our investment Advisory and trust business lines grew 3% both from an asset acquisition as well as market performance.
We also had a little over 900000 in securities gains due to some portfolio rebalancing in the second quarter.
Moving on to slide 12, this highlights the GAAP and adjusted measures of net income and efficiency with the largest differences between GAAP and adjusted coming from merger related expenses.
Now two quarters since the state bank merger and over a full quarter since systems integration. We believe the vast majority of these merger related expenses are behind us.
We noted last quarter that the first quarter's adjusted expenses were unsustainably low and the adjusted base. This quarter essentially represent full run rate expenses for the larger combined organization.
While we do anticipate some modest increase in expenses in the latter half of 2019, as we continue to invest in talent and technology.
We remain confident in our ability to achieve further efficiencies based on scale.
And also maintain our commitment to the longer term mid fortys efficiency ratio target.
Operator, let's go ahead and turn it over for questions now thank you.
Thank you we will now begin the question and answer session to ask a question you May Press Star then one on your telephone keypad, if youre using a speakerphone. Please pick up your handset before pressing the keys if it anytime. Your question has been addressed and you would like to withdraw your question. Please press Star then too.
At this time, we will pause momentarily to assemble our roster.
Our first question today comes from Steven Alexopoulos with JP Morgan. Please go ahead.
Hi, everybody.
Hi, Steve.
To start surprise on credit if we look at the increase in non performers and net charge offs. The market's clearly concerned this is systemic.
Could you give us more color on these the three mph in the foreign Ceos, maybe size the loans the reserves on there just give us a little bit more color. These are truly one offs.
Yes, Steve let me try to walk you through at a high level here.
The first credit that we took a charge on in the quarter is a 40 year old business. It's a two well known private equity firms sponsored the acquisition this business several years ago.
They went through a major expansion period and that was not effective and had a management team change out.
Initially the private equity firms were supportive and put some more money in but couldn't get comfortable with the kind of go forward projections from the new management team and have elected to put the basically the business up for sale.
And so.
It's not a snake by the way this first win and so we.
And kind of take a look at the operating performance of the company and the fact that they are going through a sales process.
We thought it would be accounting treatment, taking a charge on that was appropriate.
Credit number two different industry.
Great private equity firm, we've done six or seven deals with all successful except this one.
This is a snag the agent by the way has done a fantastic job.
And this company went through some major margin contraction in their business just due to new competition and decided to sell the business and that has been done and the marks on this one or based on the final resolution of the sale of the business would show up.
I think funds here just in the next two or three days so.
Really hats off to the agent on that one.
Company three is a supply chain management business. They lost their major vendor, there and sort of turned their business inside out several years ago going through a restructuring.
Hired.
A new management team.
And this Mark is a result of the C 10 to see accounting process that you go through looking at their operating performance again, they are showing some improvement bird in their results, but it's it's very stressed company.
Credit number four is a restaurant deal and up by the way. The first two are Houston deals. The third deal is Birmingham deal and they'll number four is in Atlanta deal that so it's a restaurant company.
That is.
Going through the sale of their business and that may or may not be in or out of bankruptcy and.
Mark seemed appropriate there.
Turning to the three new non performers.
The first one is just an orderly orderly liquidation of an inventory of a company, whose business line change and.
Based on new appraisals, we believe were adequately secured there.
It will wind down over a period of several months it will take some time.
Credit number two is an energy credit.
That is in bankruptcy because of the sub debt. We believe our senior secured position is in a good collateral position.
And then and Thats, a snic by the way and then credit number three restaurants Nick.
Is a company that management team is continuing to support the business, including putting cash in on but.
They have multiple concepts one of which has been really great and they are going through a sale process.
And then a mark on that one seems to be prudent.
So.
As you might expect a metro talked about the vessel and we've ever made but it is my view that these are.
Not correlated unique set of facts.
So a little bit of bad luck coming on the heels of the Investor day, but my view of credit really unchanged our credit underwriting a cadence is good.
We've got.
A bad quarter here, but all in still pretty confident with where we are.
Well I guess, what I'm trying to figure out. So these do appear to be one offs. If you will but I'm trying to connect that to the commentary that loan growth expectations are being reduced maybe even below the low end of the range have you decided to exit segments reduced exposure to segments I'm not really clear to me walk why were all simultaneously lowering the loan growth outlook.
The only thing we've decided to exit was the Patriot capital business and so that's part of it what we're seeing is the lung pipelines look good. It's the payoffs are running a little bit higher is what sort of yield. It gets me to maybe the lower end of the range and and we debate. It here internally I mean, we are we're open for business in all lines. There's no business line that we are actively deciding to exit but we of course have an ongoing review of everything we're doing and and as we've reported previously restaurant is not slated for growth. So we see those numbers coming down there so that impacts our totals just a bit but.
Overall were steady in the boat. It's the it's the Paydowns that lead me to think more about.
Lower net growth in the future.
Okay, and maybe thank you and just one final one for Valerie there's obviously, many moving parts of the NIM. This quarter, how should we think about the starting point for NIM.
And then from that level, where do you see NIM trending assuming the fed does cut rates in July thanks.
Yes sure.
And.
So basically if if we did there are a number of moving parts at an aggregate three though as you like but basically if we get a rate cut and next week. We do expect some modest margin pressure in the latter half of the year from the current level and that probably in the range is eight to 12 basis points or so on average for that the latter half and said another way for the full year of 2019, we are looking at and then probably near what we saw this quarter give or take a basis point or two.
That being said based on the anticipated growth for the rest of the year. We do expect net interest income in dollars to be up even with a little bit softer margin.
So and of course.
LIBOR movement betas, and all of that can change and.
Changing rate environment, but that's what we're expecting currently.
So full year NIM 397.
You are saying.
Within that range.
In that range, okay. Thanks for taking my questions.
Absolutely.
The next question comes from Brady Gailey with KBW. Please go ahead.
Hi, Brian Thanks for joining us.
Yes, Thanks Paul.
I know I know another thing you all talked about is your guidance on expense growth. This year, I think you've talked about kind of that 5% to 6% level.
That's still an appropriate way to think about expense growth this year.
Hi, Brady.
Yes, we talked about that based on the first quarter run rate expenses.
As we look out in the latter half of the year materially within lines that expectation, we might see no extra million or so.
Per quarter in the third and fourth quarter, but overall.
Fairly consistent maybe slightly higher.
All right.
And then if you look at capital levels are they grew pretty nicely in the quarter I think some of it was related to the mark to market of the head, but to your TC is now kind of approaching 11%.
Your stock is now trading around 16 Bucks I know you have a buyback in place. It doesn't look like you all repurchase any stock this quarter, but with the stock trading now it's trading with your capital.
Going up pretty nicely this quarter, but maybe just talk about your thoughts around the buyback for the back half of this year.
Yes, Brady so the the buyback that we had in place previously has been fully satisfied. So there is not any current.
Buyback authorized by the board or approved by the fed.
And our position on additional buybacks in the future is.
Really remains unchanged from the first quarter, we got Cecil coming up really understanding that as our first priority.
I get your point on the stock price Thats kind of new information to bake into the equation here.
But I think in the future, we'll be looking at it every quarter and.
Making a decision based on facts and circumstances at the time, but so no no additional buyback is eminent but something we will consider.
All right and then finally from me Paul when you were walking us through the problematic credits out of second quarter yard you mentioned a lot of these are private equity sponsor deals.
Are some of these loans considered levered lending loans.
Yes, we do look at that.
At origination are they consider levered, if if if if they had poor operating results then they typically trip leverage covenants and they become levered by definition and so.
Oh Gosh help me with that at origination and none of them were levered.
Okay and to deliver destination.
Alright, great. Thanks, guys.
The next question comes from Brad Milsaps with Sandler O'neill. Please go ahead.
Hey, good afternoon.
Hi, Brad.
Paul just curious if you could add maybe some additional color on the also the bump and.
Criticized loans at the corner of the release they went from about 260 basis points at March 31 up to 3% at June Thirtyth.
It's all that driven by the EPA categories, where there are other other loans in there as well.
It would be mostly the NPS Asia there were a few other downgrades.
You not consider it to be.
Really pretty flat all things considered I wouldnt.
Total call that a big increase but.
Yes, mostly for things that are identified.
Okay and then.
Valerie I appreciate the color on the margin and accretion I think in the release notes that you adjusted some of your assumptions.
With the accretion from from January one when the deal closed.
Does the guidance still hold in terms of some of the recovery accretion as it relates to see so heading into next year.
And then I think if I heard you correctly, you said that the yields on the acquired book.
What sort of approximate kind of the first half yields in the second half of the year is that correct.
Yes, that's correct and that was kind of at a pretty easy way to.
Look at that and if you look at table three in the press release, we've got that was year to date.
There for you.
That would be on the AMC I accretion and then the AC I accretion, but the recovery accretion as you know, it's kind of bumpy, so yes and.
I wouldnt expect materially higher level than that if we go forward.
And how many guidance for you.
So, yes, the recovery accretion and.
Yes.
Treated differently Anderson.
Now moving to that okay, and how much do you have left in that in that bucket.
Well the recovery accretion.
The Accretable difference is ballpark around 75 million.
At the end of the quarter and the.
Most of that comes in through a scheduled accretion timeline.
Where cash flows changes their pay off et cetera, Thats, where you.
The recovery question kind of.
Okay, great. Thank you.
Correct.
Our next question is from Brett Robinson with Piper Jaffray. Please go ahead.
Hey, good afternoon, everyone.
Hi, Brad Hi, Brett.
Wanted to just go back to growth for a second you know if you look at the quarter restaurant in healthcare were a little lower.
Can you talk maybe a little bit about where the growth comes from in the back half of the year.
And will there be efforts to reduce any the portfolios that you have that that might be somewhat stymied that growth.
Sure well I'll take that answer that one is as Hank.
So we are seeing.
As Paul mentioned, the pipelines pretty good at this point and we are seeing some nice growth throughout the footprint.
Specifically, we do see real estate has had some good movement, we should have some good movement. The cnine teams are really seeing.
Nice.
Portfolios and pipelines in place.
And so its hard to specifically give one area.
Our midstream group continues to have a pretty strong robust pipeline and it's when you look at our Atlanta group that Sam is put together nice pipeline. There and then obviously, we have a new group in Dallas.
That is seeing some growth as well so pretty balanced between them in the pipelines.
Okay does the restaurant and health care book shrink from here can you give us any thoughts on those portfolios.
Okay aggressive.
I'm sorry go ahead.
No no go ahead, Sam I'm, sorry go ahead.
Yes, Hey, Brett Sam here, So as Paul noted earlier, we noted in the first quarter call and an Investor day, we are.
Intentionally kind of slowing growth in the restaurant space just due to the.
Handful of pressures facing that industry. So we would expect that to be kind of flat to slightly down on the healthcare side, we we have a.
I have had a really solid production year and a great pipeline.
That's being partially offset by some unexpected payoffs that's the good news our customers are doing really well in their their their owners are monetizing good for them not so not so great for us. So we do expect to see about possibly a little bit of growth in healthcare, but definitely not in the restaurant space.
Okay, and then last one on back on credit.
Just thinking about the linked quarter increase in criticized loans and.
These these lumpy credits that you're having that are they're not related can you give us some color on how you're thinking about provisioning in the back half of the year and then just what.
Basically if you if you've taken that provision needed for all the stuff that happened in terms of.
QQ I know, there's one one credits and liquidation type status.
Yes, Brent. So this is Paul I mean, I think the accounting methodology works the way. It works you go through and do they pay us C. Jansan.
If additional provision is required and.
It gets it gets made at that time, so predicting that with certainty is.
A little bit of a challenge, but I mean, I think that based on what we know today wholly appropriate provisions that should have been taken have been taken.
And.
And hopefully we get more good news bad news from here, but if we see additional deterioration then we'll wrap it up.
But I think.
I think it's unusual that we have sort of this much in one quarter and I would not expect that to be ongoing.
Okay, great. Thanks for all the color.
Our next question comes from Ken Zerbe with Morgan Stanley . Please go ahead.
Great. Thanks.
I guess just sticking with credits you had a comment in your press release to basically said you increased your provision expense due to general credit migration.
And you are seeing I portfolio. Paul you you were very clear that these credits are very unique and not systematic but I guess im just some clarity around the code to quote general credit migration comment that you had thanks.
Yes, Ken I think it just goes back to we did see some additional downgrades.
In the quarter and that.
Is taken into consideration when we do our reserve allocation.
And these additional downgrades were they in addition to the three nonperformers in the four charge off this is extra or additional stuff.
Hi, Dan This is Valerie yeah basically.
The majority of the reserve that we took relates to that specific analyses fancy three cans and that would include the loans that are categorized nonperforming.
That's probably 20 million of it right there and the rest is really just related to the combination of loan growth loan payoff migration and with the majority of that difference really over two thirds of that being migration within the past category.
First is.
Downgrade significantly.
So if the credit goes from a five to six it's going to take a little more provision right.
Every quarter, so that there will be.
Got it understood I just wanted to clarify because you guys as far as I recall I think you are the only bank Thats actually mentioned general credit migration in their portfolio. So just want to make sure we understood what that was about.
I guess just a small question just back on in terms of loan growth you mentioned, the payoffs were running higher than expected.
What kind of assumptions are you, making about future payoffs and how does that tie into your.
Lower end to 8% to 10% loan growth.
We certainly watch the pay offs and just kind of anecdotally, we are seeing a few of the non banks.
You come in and look at some higher leverage points than we're willing to look at at this point. So we are seeing a few payoffs it's been fairly consistent it's a little lumpy as well and so we recognize kind of a consistent level of pay offs and as we get to reposition the balance sheet and look to.
Continue to grow we just feel like that lower end of the range is more in line with our expectation, it's really hard to budget for it really isnt, yes, we know there will be some unexpected payoffs, but but we have numbers in that and then sometimes we're close and some times.
It fluctuates more dramatically quarter to quarter. It was a little higher this quarter than it has been.
Understood. So in one other point, yes, and I'm, sorry, I'm going to I'm going to ask myself from earlier in the call I'm sorry, we did have one of the loans that Paul discussed earlier that is that was leveraged at origination one of the onshore at one of the four charge offs. This quarter was leverage loan at origination just clarify that.
Got it okay. Thank you.
Okay, but just to.
Kind of I'm, sorry can't coming back to your.
Going from 2.6% to 3% criticized classified does that concern me as an indication of a.
Beginning of a trend that would be noteworthy I would say I consider that to be in.
Normal ordinary fluctuation in it.
In the loan grading of the portfolio and.
From a pretty low level.
No understood understood I guess were just you can imagine from our side of the table. We're just trying to take into consideration the increase in criticized plus the charge offs plus the npis plus the reserve build I mean, it's all all kind of tied together, we're just trying to make sure we understand where to go from here.
Yes, yes, thats higher totally yeah.
Thank you.
And our next question comes from Michael Rose with Raymond James. Please go ahead.
Hey, I'm, just going back to the to the margin.
Valerie I think you said eight to 12 basis points.
But I think that was just for one rate if we were to get a second one sometime later in the year.
I guess can you just lay out the expectations and then if you can remind us when the when the hedge really.
The interest rate color really kicks in.
Is it plausible that deposit costs essentially having peaked.
From what she said that we could actually start to see the margin stabilize perhaps increase as we move into 2020. Thanks.
On a corbett, yes, so basically the.
The guidance I gave on the margin incorporates the forward rate curve.
From June and I believe that incorporate a couple of rate cuts during the year. So it already includes a couple of those and so that's that's factored in there that was less it would be it would be less.
On the call are basically if you look at it on a full year to date basis.
There's zero income coming from that color specifically.
And that that's the cause rate LIBOR hasn't materially changed since we put it on in the first quarter.
So basically if nothing else changed then that is what we would be expecting going forward.
But.
Obviously simply that the color on the forward rate curve and the expectations for a rate cut and are lower.
So assuming we have a rate cut next week that would of course impact our LIBOR based loan yield.
Negatively and it would impact our color positively.
And based on that forward rate curve, we would actually expect a collar encourage them to go from zero to approximately 4.3 million in the next quarter and and I think it's just important that.
On an overall basis, our modeling indicates that in a down 100 basis points scenario, our net interest income.
I will be impacted by only 1% on that on a downside.
Okay. That's very helpful. And then if I can just go back to the comment around the efficiency ratio and the target there the 44% to 46% I guess, just given a more challenging.
Rate backdrop here, and maybe a little bit higher expense build I guess over what timeframe.
You think you can get back there and.
Yes is it is it plausible that you could be back there by the end of next year.
Thanks here, you're right I mean, it's going to take Hello, several quarters for us to see the movement I mean, I guess, what I'm encouraged about is our.
Three year trend line or really any way you look at it we've seen the operating leverage in the model almost every quarter practically. So this is a setback for that just from operating leverage standpoint.
You know the interest rate pressure margin pressure would also further challenge our ability to get there quickly so.
And we'll have to give me should there be some time I mean overall I think thats still is.
A trend that we'll see resume but.
But its going to definitely be a setback in a period of declining rate that that will be a headwind to it but.
When you look at our overall business model that were over the long term, where we're confident that lower efficiency and in the meantime, we're at 50%, where we are this quarter and that's pretty good efficiency.
Okay. Thanks for taking my questions.
The next question comes from Matt Olney with Stephens. Please go ahead.
Yes, thanks for taking my question.
Just want to go back to the sale of the equipment finance loans can you tell me at what point of the quarter.
Did that still take place in what's the average yield on those loans.
Yeah, Matt This is Paul it closed very late in the quarter and as anybody and just the.
A little over 7% average yield on Atlanta.
Got it did record some modest getting on.
And then.
Valerie any impact of interest reversals on the Eni from some of the.
Credit deterioration in Twoq.
Yes, there was.
There was a couple of hundred thousand or so, but it was actually pretty consistent with what it was in the first quarter, so not too much variation between them.
Okay.
And then I guess lastly, going back to credit and Paul you gave us some good details around.
The problem loans, but as far as the timing it seems unusual to see all seven of these credit issues.
Experienced deterioration over the last 50 days or so since the Investor day.
Is this what you are saying that it will happen in the last 50 days or was there any kind of regulatory exam that could have also resulted in some of these downgrades.
The downgrades or have no well results as of the regulatory exams.
And I guess, if at Investor day, if I left you with the impression that we're not ever be any downgrades and created the wrong impression I mean these these are for the most part credits that have been.
Nonperforming or on the watch list or been things that weve been watching for some time and so they were on my mind at Investor Day.
And I still believe what I believed that Investor day that our credit story is a good one.
But albeit we have had some migration and some some reserves as a result of.
The credit so we walk through.
I would just follow up but there was it any specific portfolio focus analysis and et cetera. It was it's really our normal course of business that where we every quarter due diligent assessment of our credit and then the reserving process.
It's episodic shifts going like pay off so thats supersonic you just never know when you'll have more of that in one quarter or not.
Okay.
I wish the timing were different however, but.
It is what it is.
Thank you.
Our next question is from Jennifer Demba with Suntrust. Please go ahead.
Thank you asked two questions first.
Can you give us a little bit more color on the technology investments you're making.
Right now and my second question is back to credit.
Paul given that you think this these credit.
Trends this quarter were episodic what kind of net charge off range do you think makes sense or cadence at this point in the cycle. Thanks.
Yes, so Jennifer first on technology, we are.
On an ongoing basis looking at routine upgrades to application so on.
You know, it's a little bit of delay in some of that as a result of the conversion, but like our more transfer system set for upgrade later this year, new AC eight system.
Things like that.
On the cost of which are very manageable I think water transfer systems 800000.
And.
Should get a lot of efficiencies from that.
So routine ongoing investment in our tea.
In line with prior years would be I think the way to think about it.
And we do continue to look.
Down the road at the future whats whatever platforms and other models and we're comparing notes with peer banks and and our work through the NVCA, just always thinking about technology, and where should we go and where do we have but we're sort of steady in the boat I guess for for technology, So from back to credit.
I would say our long term goal would be for charge offs to be under 25 basis points on the CNS portfolio.
Through a down cycle at year end the year out and.
So we are.
At 18 basis points, so based on the last four quarters.
That still seems like a reasonable goal to me.
Thanks, so much.
The next question will be from Jon Arfstrom with RBC capital markets.
Thanks, Hello, everyone.
Hi, John .
Hey, just back to comment on this question.
When these issues started to come up did that caused you to do anything different any kind of a deep dive or look deeper in some of your other.
Credits.
Well I mean, John we're always looking at the portfolio and thinking about how to what's the optimum level.
I mean I will tell you. This we at Investor Day, We said Hey, you know Paul's view as the most concentrated.
The area of risk in the bank that everyone should be aware of would be the leverage lending portfolio and so since investor day, we are running really really thin on some new capacity for new leveraged lending loan we've got a.
Adequate size book kits.
Performing much in line with what we thought but with the potential recession on the horizon you know increasing that is something that we've decided we don't want to do so we're not close to new business, but we've kind of raised the bar if you will on anything.
That would be considered leverage.
Without moderators and.
Very high bar you much clear to be open there but for.
Many of these long term relationships were still entertaining request.
But we've we've moved to a more conservative place on the on the risk spectrum with respect to leverage lending.
Okay.
You said you made the comment about potential recession on the horizon I just want to be clear that you're you're not saying you're seeing signs of that you still feel like the general health of the economy in the sectors Youre one into a strong.
Main street looks fantastic our loan committee or customers are.
Successful, they're profitable theyre growing their businesses.
Finding people is often times the biggest problem they site.
And so.
Yes, I am.
You summed it up nicely, yet I'm not calling for a recession.
But I know that the longer we are in the cycle. The possibility of recession is something that we have to look at and and so what we know is that companies that.
Have low leverage can manage recessions well.
And if you have high leverage or recession can be a bigger problem.
Not necessarily 100%, but so yes, just moving towards more conservative place on the.
The portfolio risk level with leverage as to the direction, we've chosen to go.
Yes, okay.
And then maybe I'll get back on the provision outlook.
Can you help us a little more on that do you feel other than just for growth do you feel like you need to continue building reserves or do you feel like.
You know the next quarter's provision provision will come back down to the range it's been in the past.
Yes, so again, just kind of reiterating what let Paul.
Noted earlier in it.
It's very much a quarter to quarter assessment process and.
And careful evaluation of the individual credits for impairment then when you do that you know that the valuations of those.
Looking at the grading movements within the quarter positive or negative.
I mean, if it's if it's.
We're very consistent I would say and the application of our.
Our allowance.
And.
You know so it will be treated on a consistent basis.
Yes, that's not what you're looking for better, but that's not no not at all really.
So we're just trying to you know you understand what's going on here and stock is doing well on the call either so we're just trying to figure out if.
Seven credits went sideways in one quarter and its going to clear up in the next quarter is what we're trying to figure out.
Well I think Paul mentioned that we wouldn't expect to have that level.
And a charge off.
And in our future by any means.
Right.
Correct.
Okay, and then just last thing message to your bankers.
Use the term selectively growing in the release, but it sounds like it's more of a pay off issue. So the message isn't any different.
Yes, I mean, we're open for business, we're out looking for good good loans to good borrowers and.
And cross selling for deposit opportunities and and doing what we we always do.
Okay.
Okay. Thank you.
The next question is a follow up from Brett Robinson with Piper Jaffray. Please go ahead.
Hey, I just had one follow up wanted to see if you guys might have the total amount of loan portfolio that's tied to be.
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No I don't think thats not a number that we've given guidance on a regular basis.
Okay.
And and then I'm just curious if there was discussion earlier just about.
You know some of these credits you know they they they weren't leverage when they were made but they could it be called Levered by the time. They became an issue, which you guys don't have any covenants that would restrict junior debt or can you just talk about you know how these.
How these loans Sorta act once they've been made there not lever, but you know what these PE firms like what happens to them as they as they sort of mature.
Yes, sure. So EBITDA drops we do we do have covenants in place and typically they would violate the covenant.
At that point the bank has the ability to find any additional monies under the line of credit.
Can you know has actions we can take you know foreclosure et cetera.
So, but you know, but if a company. Good EBITDA goes from 15 million to 5 million I mean, theyre going to bust the covenant.
But then you're just sort of in a workout mode and you.
If you have good sponsors we've seen them come to the table to put in additional equity cure the defaults and yeah.
Upsize, the the company get and get the business going the right direction again or in some cases, it doesn't always work that way.
Okay I appreciate the additional color.
Our next question is also a follow up from Steven Alexopoulos with JP Morgan. Please go ahead.
But Steven perhaps your line is muted.
Hi, everyone. Thanks for taking the follow up.
So just a follow up on it all the questions you've had around provision and charge offs I hear you that credit can be choppy right, who knows what the future is going to have you could see volatility quarter over quarter, but I guess Valerie well, we're trying to understand so if you look at your internal budget for net charge offs and provision for the second half did that change because of what we're seeing this quarter.
No no material changes no no material changes.
Hey didn't see any change as we think about we did this quarter was about right, but internally. This was not an inflection point for you where you guys are now expecting a higher level of charge offs and provision versus your assumptions before the quarter.
Correct that's correct.
Statement, I mean, I'll say it this way I think our provision will return to a normalized level.
Hi, just being on the record could could it ever could we ever have another credit that will require personally I see 310 market of course, we could so I am not.
Trying to give a card launch, but I think that this quarter's unusual that edge.
This spike is not likely to be repeated and that will return to more normal levels overtime.
Okay. Thanks for taking the follow up.
Ladies and gentlemen, this concludes our question and answer session I would like to turn it back to management for any closing remarks.
Well, thank you Chad and thank all of you and first off my apologies for the disappointment in the results on credit we're continuing to work that very hard and look closely at every credit and.
To summarize that the point that Steve just made it said I don't think this is likely to recur and I feel like we've got a great team of professionals that are doing a good job managing risk in avoiding risk and we're going to do much better for you in the future.
So with that we stand adjourned.
Thank you.
The conference has now concluded. Thank you for attending today's presentation you may now disconnect.
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