Q2 2019 Earnings Call
Expenses to continue to grow in the mid single digit range reflective of growth and additional investments in revenue producers and technology.
Excluding our mortgage retail footprint and an estimated increase related.
To Atlantic Capital Bank level noninterest expenses increased approximately 5% in the second quarter, reflecting normal compensation increases and continued investments in people and infrastructure.
Our effective tax rate was 25.3% for the second quarter for the remainder of 2019, we expect our effective tax rate to be in the 23.5% range due to projected to equity compensation benefits in Q3 and Q4.
As shown on slide 10, our asset quality remains sound and provides a strong foundation for our company.
Nonperforming assets to total assets increased slightly for the quarter, but on the whole our loan portfolio remains in solid shape, we had lower than expected provision expense. This quarter on the back of that sound credit quality, but we would expect those costs to increase slightly over the remainder of the year as net charge offs normalize.
Slide 11.
Shows our strong capital position and this quarter, we estimate that our tangible book value per share was diluted approximately $1.48 cents by the branch acquisition since the first quarter. Following our IPO, our tangible book value per share has increased by $5.62 or 48.6% to $17.
And 18 cents, our excess capital was utilized on the brands acquisition this quarter in at 9.2% tangible common equity and 11.6% of total capital we're slightly above where we had forecast. We believe that we are well positioned to continue to grow organically support our dividend and execute on future M&A.
With that overview I want to turn the call back over to Chris for closing comments and then we'll open the call to your questions.
Thank you James and once again, we appreciate your interest and investment in the financial operator that concludes our remarks.
On this morning's call, we'd now like to open the call up for questions.
Thank you ask a question. Please press star one on your telephone keypad.
Using a speaker phone. Please mention your function is turned off your signal to reach the Atlanta again that is star one for questions.
We'll go first to Jennifer Demba at Suntrust.
Thank you can you hear me.
Good morning, Jennifer we can't hear you good morning.
Oh great.
You mentioned, obviously credit quality still excellent, but you would appreciate some weaker credits over the next few quarters.
Any idea what amount of credits you are looking to prune at this point.
And would they be in any particular category. Thanks.
No.
There's there's not anything.
Specific there, but I'll I'll explain it this way we are.
Undergoing right now on annual credit review process that we that we.
Do annually [laughter] and and it's a it's a process where we got to do when we look at.
All of our our credits over a certain balance and then we look at some others randomly and we do that by market, we do it with each market and we do it with our credit team.
And we see channel is the quality of the credits and talk about the quality of the overall portfolio and is that process is underway one of the things that I have have channels that team to do is to look.
More critically at that portfolio than perhaps we have in the past to do exactly we use the word proving you work through it and for those credits that are weaker and could be even further negatively impacted the downturn to let's look at how we we take actions to either improve those are moved those from the bank because as we all know.
Once you're in the throes of the downturn you don't you know, it's hard to move anything, especially if it's not of high quality and so that's a proactive process on our part and it's it's it's going to be more rigorous than it's been in the past in anticipation that that at some point.
HM.
The economy is not as rosy it as it is today.
So that that's what that's in reference to and so.
And you would expect as you would expect in terms of what would be you know we were always going to continue to look at the hospitality segment at the.
Multifamily segment at the.
You know at some other smaller concentrations that we that we particularly monitor that are specific to either a market our footprint or or some niche that we have and so they'll they'll look at all of those but not with any specific targets other than the internal targets that we already have.
Okay, great. Thank you.
Thanks, Kevin.
Well go next to Catherine Mealor at KBW.
Thanks, Good morning.
Good morning, rather.
They came out with a follow up on your expense guide do you see your saying that.
Core bank level expenses from from today should increase at a mid single digit.
Growth rate is there anything in this past quarter I guess anything so that's the way we think about how you see the guy is this a full quarter with ACB on are there any.
Savings that we should see from that run rate that we had in this quarter.
Or.
And so after that I guess.
Hey, I guess at the bank level, if things were a little high so just trying to figure out if there's any kind of savings than ever before we then grow it at that mid single digit rate.
No not a whole lot of a savings allow because remember we closed and converted and closed on the branches home. The same day is closing the transaction so not a lot of saving probably a little bit on the edge, but not not not anything or.
Unit material on that front I would say, what you know a big contributor and I mentioned it in my comments live.
This was a quarter, where we get the full effect of our normal.
Annual merit raises and equity grants and other things so that should be you know.
At the same level. So it shouldn't go up in absolute dollars are the same but but we'll continue in particular as we focus on hiring new revenue producers and making continued needs and you know in the infrastructure and technology.
Okay got done down we get.
We did close the branch transaction on April the fifth.
And so it is in for most of the quarter practically all.
Yeah, Okay. Okay got it and then on me.
On the mortgage side.
Is there a way to think about mortgage extensive and we once we see the full impact of the sale of a third party in the correspondent.
Well you know I think that there's obviously a big component is variable that's based on you know the the revenue produced it looked like we saw this quarter you know when we didn't talk a little bit about the.
The contributions of the two.
Units that are that are have been sold or will be so I'm going to have roughly 2 million.
In the first half of <unk>.
<unk> of the year with two and a half million of revenues for about $500000 direct contribution.
You know I would.
You know then we are continuing to cut on the back office side, you know I would say somewhere in the 500000 to a million dollars of of expense you know cuts that were looking out over you know over the coming month or so as we finalize the sale.
The sale of the correspondent that's not in those direct units.
Got it okay.
And that's on a quarterly basis.
[noise] annual basis.
510 million annually.
Yeah.
Got it okay.
Yeah. So Katherine you said is there a way for you to think of those expenses.
Post those two dispositions and I would just say, yes lower.
[laughter] I assume that I assume that [laughter].
And then and just to make sure I'm on the same hedged the two and a half million revenue that is a first.
What does that time period.
The first half of the year.
Okay.
So those two units were two and a half million in revenue and 500000 direct <unk> bottom line contribution for the first half at 19.
Yes, it will go away at that rate.
Actually I think that maybe they do but let me double check yes, I'd say 95 million. Yeah, you had 5.5 million with a half a million dollars a net net direct contribution I'm, sorry is two and half quarter sorry.
With us here today this is David again.
With US here also that he was Germany other so about 5 million and 500.
Got 5 million.
In the first half and then 500000 also in the first half.
Got it okay great.
And then one other Honda.
On the margin so.
Yeah, I mean, I'd appreciate that decide to attend that Scott.
Our guidance for a lower margin per class.
And I mean, it feels high but is that really just high because youre really not giving any benefit too.
Lower funding costs and it did that guide also include any kind of deployment of excess liquidity from what you gain in the STB acquisition.
We've redeployed most of that this quarter that there was a little a little bit less often than we added the additional liquidity through the federal home loan bank advances that I talked about no I would say.
Bringing deposit cost downs Whoa, Whoa would get us up to five if we do if we're not able to do that it's it's closer to the 10. If you think about roughly half of our portfolio is variable rate to get to 25.
No basis point cut that's roughly 12 to 12 basis points on the on the yield just right off the top on the loan yields which is the majority of our.
You know, earning assets so that that's where the the 10 comes from and then the five would be if were able to to cut and control cost along with the repositioning some of our wholesale liabilities.
We've done done since the quarter ended so.
Got it.
That's very helpful. Thank you.
Thanks, Ken.
Next I'll move to Peter Koumas at Sandler O'neill.
Hey, Mike.
Hi, good morning, Peter.
Most of my questions have been answered, but you know maybe if you could just give a little color. I know you guys have been pretty transparent on you know the CD specials and whatnot that are that are going to be running off here in the coming quarters, but.
Could you give maybe some color on what you know any potential specials running right now what they look like and maybe what competitors are doing on the deposit side.
Yes.
Good.
I'm coming on from that occurs you continue to see some some deposits specials in the market.
It's been.
Sort of the the competitors are fairly consistent you know those that are really.
I have had an organic growth pattern and our.
ER and constantly growing their loan portfolio the funding and so so we see comps specials problem or it's just kind of the pattern.
Some others that are growing we don't you know or.
I kind of quiet in the market place instead, because they don't they don't need the funding and say too.
And it continues to be mostly driven by really two things time deposits.
And targeted more little more targeted on.
Money market type.
Type crops.
Yeah, I would say that that's all true we've seen a little bit of abatement of that over the last you know several weeks says I think everyone's a Christian is that there is likely a rate cut coming sometime when maybe unclear and so we've seen some of the Clinton and the competitive nature of that our current specials are really targeted at that money that is that is rolling out of that to 55 rate on the 11 month product that we did in the third quarter of last year and we've.
Spread out the maturities and the <unk> in the low twos that they can map over to to replace their their maturity money at this point.
Okay, great. Thanks, guys.
Thanks Bruce.
Well go next to Tyler Stafford at Stephens.
Hey, good morning, guys.
Hi, good morning, though it though.
Hey, I wanted to go back to Catherines earlier question, just make sure I'm clear on the mortgage expectation. So in the first half of the year, the DBO and correspondent channels.
We're.
They they they contributed 5 million of revenue with I guess, four and a half million of expenses for the net of five.
Pre tax it yes.
Okay.
Okay got it so.
With with the exit of those two channels can you frame up just I guess, the looking at a different way to be the new I guess expected gain on sale margin with the absence of those two channels.
You know it it shouldn't move higher but given the the lack of that did you do in both of those have higher margins. Just you know historically it will it will move move up but not you know dramatically from where it's been because the lack of the production from from those two channels as we as we announced the shutdowns over the last.
A quarter or two so.
But it will move <unk> par so.
Okay.
With with rates, where they are at a backing up and just to be added strength of the mortgage market.
Do you see upside too.
Upside potential to 5 million pretax I guess God that you've given previously with.
With lower rates and an under the rate cuts scenario is there is a potential for that to move higher you back out the year and on a run rate basis and into 2020.
Ah yes.
Tyler there's a reluctant yes, there that there could be some.
You know we have.
Oh, you did you know we've stayed away from from trying to guide on.
Mortgage we.
And I think I said last quarter, we've given up on being good forecast or predict or when it comes to rates and mortgage volumes, which are closely tied together. We certainly didn't expect the you know if we were talking to the first quarter, we didnt expect volume to be where it was in the second quarter.
And so.
Yeah first of all if rates continue its been good for volumes. It's been good for margin, we hope that that is the.
That that continues and if that's the case and it leads to some outperformance there. So we think it.
So that's what.
I don't know I think that answers. Your question is that is there is a a reluctant yes, there but.
And I'll I'll just throw this in.
You know, we really try to run a balance or mortgage business like a you for you also heard me say hey, we like consistent we like repeatable, we like predictable.
And so you know we saw some balancing of that with a mortgage servicing rights. The decay in mortgage servicing rights are that that were negative for the quarter that balance the production and so that that's a little bit hard to forecast as well. So all things considered sure sure. There's some upside there, but we're we're reluctant to go out and say in rely on that.
Yeah, and really it comes down to whether there.
The rate environment.
Cancels out the seasonal decline that you're heading into the fourth quarter and that stuff. That's an unknown, but it obviously has happened in the past, but that's not always.
And the indicator of the future.
But that would be the biggest opportunity.
Sure No I understood.
And how many are I think I did miss some of the the asset earning asset repricing details you gave in the prepared comments again can you just.
I guess go over again kind of the fixed versus floating dynamics alone portfolio today, and if you guys have any floors on the <unk> on the floating portfolio and then just thinking about that the 140 million.
Cds that are maturing in the third and fourth quarter, just I guess new.
Cost for CD rate right now if you could if you could elaborate on that I appreciate it.
Okay on the on the asset side. So all of our investments are 99% of them are fixed rate. So no nothing much coming there maybe a basis point or two from accelerated repayments on the mortgage backs on on the loan portfolio. We have about a little over 2 billion that is variable rate to roughly have not see pretty evenly split between about a billion or lie bore an ability and then in prime. So the lack of words, obviously already kind of ahead of any you know cuts in the prime prime rate at this point.
So that.
That's pretty much the asset repricing side on the deposit side, we have 140 million.
Add to 55 that is that is renewing this quarter in the third quarter.
We would think that would could come down to you know the blue the low twos based on the specials ever relating to the target those customers and what they would.
Rollover into then we have another roughly 60 million of that same brought up in the fourth quarter is not we have started lowering those rates it as about two to 40 ish.
Actually 2.43% and so we would hope that could even be lower you know very similar to do what we do this quarter I'm now with that said you know depending on competition and another thing some of that money may leave, but we think we can replace that with short term wholesale money and probably would take that route and continue to deploy some of the excess liquidity that should help us manage manage that cost.
Someone immediately but but then over time right.
To <unk>.
Returning to the margin to either where we're operating today, but though it will I think the deposit pricing will lag some of that immediate asset repricing.
And Tyler.
Our shortest term Oh, yeah, we intend to do is priced at 2%.
Our longest terms price about two thirds of its fairly tight there that long term being 25 months. So.
Got it okay. That's helpful. Thanks for that color.
And then just lastly here.
Your deposit if you if you're looking for [laughter], Oh, sorry, [laughter] I think you're barking up the wrong tree there.
[laughter].
Hey, just like just lastly for me just giving a given your M&A comments earlier is it fair to assume that the buyback activity will remain.
I guess absent at at this point.
Yeah.
We haven't bought back any shares to this point, we do have the authorization in place and we.
We certainly could but but.
Hey, it looks unlikely right now.
Okay. Thanks, guys.
[laughter] picked up.
And as a reminder, if you do have a question. Please press star one well go next to Alex law at JP Morgan.
Hi, good morning.
Good morning out though.
Hi can you touch on the organic balance sheet growth during the quarter, which excludes the acquisition.
Which loan segments or industry do you see drive to loan growth and also on the deposit side.
Did you see anything seasonal on like with public funds.
Yeah, I'd say hold on one side.
No it hasn't been driven by any particular, ER segment or product type or it's pretty much been been spread and that that's.
Actually been pretty consistent over the last several quarters.
And so it's it's common in all forms you know since the United So see already some.
Oh.
Or maybe even a slight bit of some slight bit of retail we continue to to.
Have some growth in our.
Specialty lending portfolio.
Ah set so it's not specific to any any product type and we did we actually include the graph in there where we try to keep track of that and publicized where that.
That's where the growth is coming.
ER and so it's been fairly consistent on the loan side.
And on the deposit side with public funds are probably the more seasonality in the first order. A then that's within the second quarter and so most of that it was out of the balances in terms of seasonality by the end of the second quarter.
Got it and good to see a non interest bearing deposit growth in quarter, you mentioned, the new Treasury management platform, what does the pipeline or opportunity look like for this this new platform for bringing on more noninterest bearing deposits.
Yeah, So and we're actually excited about that opportunity.
If you if you look.
Over a over say the last seven or eight quarters.
Or even go back further than that we've had good experience in growing or non interest bearing and that's primarily been driven by treasury management or that was not nearly as robust in the last four to six quarters.
And and.
As a mentioned investments in technology and.
You know, it's part of what you get set aside aware this is sometimes your your systems.
Most of US are tied to a pretty small world of vendors out there sometimes your systems can be sunset.
Which took place with our Treasury management systems that we had to go through the process of a conversion or coach and that probably weighed on us just a little bit hearing say the last.
Say I'll say four to six quarters or you saw some growth this quarter, because we have converted to the new system. Our folks are excited about it and so we're hopeful about that moving forward I said, we had 13.
Almost 14% growth in non interest bearing this quarter on an organic basis. When you take out the acquisition. That's I think the scroll and so that's something that is a point of emphasis for us and and integrate the Alex I'm glad you picked up on it that's something that we're excited about well add to that.
With the disruption in the market between.
The <unk>.
Merger between Suntrust in B and C.
Or some other oh turmoil or federal criminal is the right word, but some other movement in the market we.
See opportunities there and we see opportunities for frankly, some fairly large accounts that.
Oh don't move very often like maybe what's in my career and said, we're we're trying to zero in on some of those and we're hopeful that that will be able to.
We have gotten a shot at a few of those we have won a few of those and we want to want to continue to focus on that.
Great. Thanks for that color and then just the last point you on that technology and system upgrade there's a treasury management platform is there anything else that you want to highlight.
Yeah, our our online.
Oh on both retail and.
<unk> is something that are areas that we are.
Have targeted for some upgrades in or are doing some.
And we'll see some improvements there.
And some investment there on our part.
Ah, yes going back at 2016, we did a core systems conversion and so we we when we did that.
We had we were taking a long term view of systematically continuing to rotate some enhancements on all of our customer facing technology. So that one looks at this treasury system list first and you will see those Oh and one systems come next and then I get it it's a it's a.
Consistent process over the next actually we got a three year plan there for that.
Consistently attractive.
Great. Thanks for taking my question.
Alright. Thank you. Thank you.
Oh them next to block vandervliet with U.B.S.
Oh good morning.
Thanks for.
Morning.
It's so it just in terms of the the balance sheets shape now with you know rates looking lower not not hire any more would you consider raising the.
The loan to deposit ratio closer to a 100% or do you kind of like where it's where it's running here.
Yeah, we we like where it right now.
Yeah, we we were not.
Right, we don't zero gradient predicting a the future there and so we want to say less than 100, and and and we we like where it is today is in the high 880, though.
Lo Oh helper and <unk>.
Portfolio and we like that you could go a little higher than where it is today, but keep in mind, we'd get that help herself.
<unk>.
Another five or 6% on their money yet so.
Running about 90.
And.
Okay.
That where we'd like to be.
Got it.
And you mentioned in the opening remarks I'm looking at <unk>.
Keeping things tight anticipating slowing at some point how.
<unk> could you just kind of frame that out a little more how deep do you think you're you're going to cut their and what characteristics are you are you looking for.
Yeah in so.
We don't have any any certain target <unk> one cup. This mark out that we we do have.
I I get that would make the.
Okay, well up to now Gee that.
You know.
But they used to do.
The G.E. they use to prove in a certain amount of.
Every year, you know <unk> <unk> <unk> <unk>, you know high performers.
And we don't have a certain target it's just.
We review the portfolio.
It's.
Think about those that or maybe struggling today, you know everything's correct everything's working but we you know we know the customers maybe had.
Some challenging in in keeping up in good times and when that's the case.
A joint <unk> really bad Huh.
And so.
I also want to say if you look at the first half of the year.
Ah you here today, we're nearly 14% longer.
<unk>.
<unk> with 13% on Angel out basis loan growth and we we'd like to grow and then 10% to 12% range. So we're over that.
So you know, we're not talking about anything drastic in terms of.
A reduction in or <unk>.
Or.
In our group right, but you know.
10% to 12% on an annual out of basis.
But you know we could already grow at 8% and still be in the middle that range right. So.
It's I think it's just a good opportunity to try yeah yeah.
Any.
Particularly down here and so.
We don't have we don't have any we're not.
Out there going but we want to reduce by X. dollars <unk>, we're just saying, let's let's take this opportunity while we continue to have strong growth opportunities.
To.
Try to make sure Apple polio is as strong as it can possibly be in the face of any down here.
Got it okay. Thank you.
Thanks, Thanks Bro.
[noise] next still going to Daniel Cardenas that Raymond James.
Morning, guys.
Yeah.
So just just quickly as it kind of goes to your your comments on M. in a <unk>.
Sounds like you're talking to a number of folks but are there any specific markets that perhaps hold more interest for you than others and then have you could remind us what what kind of Earnback period would you be looking for in in a in a transaction.
Sure it and.
Yes, so personal markets.
We.
We love in.
<unk>.
For for a number of reasons.
One operating leverage you know, we've got some market, where we like to have.
<unk> density.
To give us more operating leverage second they tend to be lower risk because you tend to know the people and the customers and and no the markets.
No the cultures and so so we always like in market first.
And then.
We all and then beyond that we like contiguous markets and and people, we know and things that we know and so.
And then I'd say those are where probably most of our more immediate out there's enough opportunities you know.
Yeah, we do have some some ambitions that go beyond our current markets, but we probably have enough opportunities today that are.
They are in those first two categories that we wouldn't have to go to the third to to be able to jump to mark is like.
You know.
Birmingham or Atlanta or places like that.
So so those are the the the the geography and the types of opportunities you know, we we really like.
As I mentioned, we like banks with strong deposit.
Ah portfolios, we liked the credit quality and then we we like.
Good solid.
Customer relationship Bangs in that contrast that with.
Wholesale things you know we see in some banks that are.
I have a lot wholesale loans and deposits and we can do that on our own we don't need them, we don't pay premium for that.
And then when we think.
The financial metrics.
Of course, we're looking to get some U.P.S. accretion.
And then we're going to manage any <unk> delusion carefully we don't like any and depending on the type of deal we might not be willing to take any there are some that are.
Quite attractive banks, you know could be quite attractive.
And could be a meaningful to us again, especially if they're in certain markets, where we need more than we already have.
And no no. We we would take some technical book bags illusion that gets complicated also because today.
Some sellers, particularly if it's a privately owned company. They may desire more cash in so that can lead to the <unk> solution. So we may take.
Some tangible bay delusion, but we you can watch that closely and we want to manage that earn back closely and we we generally going to keep that under three years, when you're when you're <unk> yearn back.
Try to keep that under that three or more on a transaction is particularly important even on a transaction predict what's important to us.
Alright, great. That's all I have for right now thanks guys.
<unk>.
Yeah.
And that doesn't include the question and answer session. At this time I'll turn it back over to Chris <unk>.
Okay. Thank you all very much for your time and thank you again for your interest in in F.B. financial we look forward to talking to your next quarter now or.
And that that's completed this conference again, thank you for your participation.
[noise] Audrey 90 bird.