Q2 2019 Earnings Call
Please standby we're about to begin.
Good day and welcome to the Sterling Bancorp Q2, 2019 earnings Conference call.
Today's conference is being recorded at this time I would like to turn the conference over to Mr. Jeff.
Hi, Misty President and CEO . Please go ahead Sir.
Good morning, everyone and thanks for joining us to present, our results for the second quarter of 2019, joining me on the call is Luis Massiani, our Chief Financial Officer.
We have a presentation on our website, which along with our press release provides detailed information on our quarterly results. During this call. We will highlight the solid quarterly financial results review the balance sheet remix in that we are doing to create higher returns update you on our common share repurchase program and highlight our outlook for the balance of 2019, given the changes that have occurred in the rate environment.
First on an operating basis, our second quarter results were solid.
Adjusted net income available to common shareholders for the quarter was $105.1 million, which was flat to a year ago.
Adjusted earnings per share of 51 cents was 2% higher than second quarter, 2018, and one cents higher than our prior quarter.
Adjusted return on average tangible assets was 151 basis points adjusted return on average tangible common equity was 16.83%.
Our efficiency ratio was 40.9%, resulting from continued creation of up by positive operating leverage and our tangible book value per share of $12.40 has increased 13.6% over the prior year.
We had a strong organic commercial loan growth for the quarter as average loan growth was $759 million or 11.9%.
Year over year commercial real estate public finance mortgage warehouse traditional cnine and lender finance portfolios, all increased organically more than 10% on an annualized basis.
The organic growth was meaningful although the majority of the net growth came at the end of the quarter and did not contribute to net revenue for the second quarter, but provides a good foundation for growth in net revenue for the following quarters.
We continue to have strong organic pipeline of commercial loan opportunities that will result in continued net loan growth.
Now that we have restructured a good portion of the acquired residential mortgage and multifamily portfolios and do not anticipate selling additional portfolios, we intend to grow our overall balance sheet, we see opportunities to add core earnings through.
Commercial loan growth and associated funding.
As with this quarter the loan to deposit ratio may exceed 95% for several quarters, we will not exceed 100%.
Deposit balances were down by $265.7 million for the quarter for two specific reasons first muni balances decreased $328 million as expected the reductions are seasonal in the second quarter due to municipal spending cycles.
Secondly, given the yield curve and the rate environment, we are driving deposit costs down.
Our cost of deposits increased by three basis points to 91 basis points for the quarter, but the actions. We are taking we have taken on non relationship deposit clients will begin to lower deposit costs in future quarters.
Additionally, total cost of interest bearing liabilities decreased by one basis points.
Our deposit mix and are rate sensitive deposits continues to be favorable at 42% demand deposits, 11% savings, 35% money markets and 12% Cds.
Our core net interest margin increased by six basis points to 322 basis points as we added a higher yielding targeted commercial loans and reduced lower yielding residential mortgages and broker driven multifamily loans.
We will continue to shift the asset mix lower F edge F. H L b borrowing costs and reduced deposit costs to ensure the core margin is in a range of 320 to 330 basis points through the end of the year.
The moderate reduction in the range results from the expected downward pressure on security yields short term commercial loan rates and loan origination yields.
Core fee income for the quarter was $27.6 million and we expect to end the year at approximately $110 million as we continue to expand our treasury management swap factoring loan and payroll fee income businesses.
Core expenses exclusive of amortization expense, whereas planned at $107 million.
During the quarter, we incurred a non core charge of $14.4 million related to our ongoing consolidation of our financial Center network.
Consolidation strategy.
Since our merger with a story in October 2017, we have reduced the financial Center network from 130 centers to 97.
We will continue to rationalize our real estate and our targeted to be below 85 centers over the course of the next 18 months.
We continue to be confident that we will end 2019, with a core operating expense and expenses between $415 million and $425 million as we reduce financial centers automate our back office operations and sell real estate.
Our credit metrics and capital level levels remains strong.
Charge offs were 12 basis points.
Nonperforming loans and delinquencies were slightly higher but well within our targeted range. The increases were due to two collateralized ABL loans and an equipment finance loan.
Total tangible common equity was strong at 8.94% and total risk based capital was 14.03%.
In the second quarter, we utilized excess capital to repurchase 4.5 million shares. We will continue to review the use of our capital on a quarterly basis to repurchase shares as appropriate.
There are approximately 8.38 million shares remaining in our repurchase authorization.
Finally, finally, we are confident in our model and our ability to meet and exceed our growth and return targets in the future even with a more challenging rate environment.
Our ability to generate targeted organic commercial loan growth and supplement the growth with portfolio acquisitions will enable us to continue to remix the loan portfolio and produce strong net revenue growth.
With disciplined deposit pricing, we will continue to improve although overall net interest core net interest margins as we fund the loan growth with core relationship funding.
Our expense discipline will enable us to allocate cost to areas, where we receive this strong returns and results.
Credit quality has continued to be strong and we have added additional resources to the credit risk area to ensure continued strong oversight.
Lastly, we generate significant excess capital each quarter that provides capital management flexibility.
The results of our strategy over the past eight years as reflected on page four of the presentation. Our adjusted EPS growth has been a.
Compound annual growth rate of 29% and our tangible book value since the legacy Sterling acquisition has been a compound annual growth rate of 13%.
For the second quarter of 2018, EPS was up 2% and tangible book value grew by 13.6% from previous year.
We expect to achieve our targeted financial metrics for 2019 and beyond.
So let's open up the line for questions.
Thank you the question and answer session will be conducted electronically. If you would like to ask a question. Please press star followed by the digit one if you are using a speakerphone. Please make sure. Your mute function is turned off to allow your signal to reach our equipment.
Once again style line and well pause for just a moment.
And our first question today will come from Austin Nicholas with Stephens.
Hey, guys good morning.
Good morning Austin.
Okay. So maybe just on the updated guide on the loan growth can you remind us of maybe just what what's included in that in terms of assumptions from an organic perspective, and then is there is there a aid acquisition kind of contemplated in that number does the updated numbers.
Yeah. So right now the this is organic or getting to those numbers, we feel very confident in the pipelines that we have and are the volumes you know frankly, the economy is pretty good in the segments that we're in and we're seeing lots of volume, we're seeing more volume that hits our pricing targets then.
Maybe previously so the.
Organic growth opportunities are there all that said you know there there are always opportunities to look at.
According portfolios and.
We're constantly evaluating.
Portfolio acquisitions, all that said the guidance is specific to the rest of the year just be inorganic and.
Theres always an opportunity to look at portfolio acquisitions that will go above and beyond that.
Understood and can maybe just on the portfolio acquisitions, when we talk about what you're seeing in the market in terms of.
Opportunities from your acquisitions from banks and non banks.
And how you're thinking about.
What size those could be on the end markets more attractive today than maybe or less attractive than what it was when we last spoken in April .
Yes, it's interesting you know a lot of banks and frankly private equity firms are trying to remix their portfolios to so there are opportunities that come out of that those re mixing opportunities and so we have looked at a variety of things from 250 million 2 billion, maybe $1 billion in a quarter or so so that's the range of opportunities that we look at it.
Obviously, we've said there's a bunch of times, we say no to the vast majority of them the only ones that will get through ours, our screens are ones that.
Matched the types of assets we want.
That have the right credit metrics and frankly are at the right price.
But we're much more our focus Austin as we've talked about and passes on working with banks that for whatever reason have decided to.
Exit business lines, because they are non core and they're not going to be strategic were in longer term that is where we find the best opportunities the best pricing and always gives us the best.
Comfort level that when you're dealing with the bank, especially with LCC regulated banks that the credit box and the structure and how loans and the overall risk.
Good.
Loan operation.
Operational framework from risk management perspective is going to be much more in line with what we do so that's where our key focus is and if we are successfully completing some of these additional transactions that we're looking at are largely going to be similar to what we did with workforce, which is 500 to 750 million in size and they are more than likely going to be out of the bank.
Got it and then just in terms of the inbounds are getting would you say that there there maybe there's less given today given the outlook for rate cuts and maybe the ability to to.
The outlook to fund those funds assets, a little more easily at the potentially selling banks that may otherwise sold them do you think there is any change in view from from what you're seeing from the seller side.
So far we haven't seen it there you got it pretty vibrant secondary market and every other day or week, we see you another opportunity pop up on our radar screen.
Got it.
Appreciate that and maybe just on the margin I appreciate the updated guide there.
I guess, maybe one can you talk about how we should think about the cadence of that.
As we exit the year on the in terms of terms at the margin and then.
In the second in the in the third and fourth and then just can we see could we see deposit overall deposit costs start to to actually decline kind of overall is we get get towards the end of the year.
So I'll answer the second question first so on the cost of deposits. The short answer is yes.
But I'll ask you the question of how many rate hikes. The rate cuts are you going to be and I can provide you a little very clear answer on that that is the big unknown right, but when you started to see the leveling off of deposit cost in this quarter that is been twofold. It's been a fact that the competitive dynamic has improved a little bit and we have also stayed pretty disciplined and we have really focused on managing the.
The overall deposit book to focus on deposit relationships, where we have full relationships loans deposits that we have a good mix of both excess liquidity balances as well as operating accounts and so forth and so that you know that has led to us so I think being a little bit more aggressive on pricing deposits and not meeting some some competitive demands or.
Demands from.
Some of our deposit customers to raise rates in this quarter I do think that by similar to how we did not see much of an impact from a deposit beta perspective, when we first started hiking rates in our that first rate hike I guess back in 2016, we are here in a world in which in a couple of weeks, we're going to have a 25 basis point cut I don't think that you're going to see much of an impact yet on that first one but we are in a world in which there's 25, followed by 25, followed by 25 I think that by the end of the fourth quarter, you are going to see a cost to deposits that potentially to start decreasing pretty significantly.
And this is where we're headed into an environment, where this is where our commercial bankers and relationship managers are going to truly earn their keep alright, it's always easy to raise rates, they're not going to have to have the tough conversations with their clients as to how we're going to start moving these down and no similar to how we had a 30% deposit beta on the way up we're anticipating that we're going to have a 30% deposit beta on the way down and we are working on actively working on strategies to figure out how we can accelerate that that deposit beta if we are in a in a more kind of in a steeper decreasing rate environment I guess over the next call it six to nine months.
On the progression of the NIM is.
Again, it's tough to do we'll see what happens with.
With.
But with the brayton pace of Haiti.
A rate cut that come in.
Again as I said, you are going to start seeing if there is a 25 basis point cut I think that you're going to see a bigger decrease initially in net interest margin. Because you are going to have about $5 billion of livewatch in floating rate assets going to reprice downward and we started to see some of that pressure already year to date.
With LIBOR rates that have moved down by about 10 basis points since the beginning of the year and you're not going to see that corresponding change yet on the deposit cost, but I do think that those deposit costs will catch up pretty quickly in the back half of the year, we do see two or three rate hikes and so therefore, we we feel pretty good that we can maintain that 320 years that low end of the range that we provided even in the face of two to three rate cuts.
Yes, let me tell you let me just expand on what we said on the on the deposit side. We've been doing this for a long time, a bunch of us, but around probably too long.
But we it's very clear when you go through cycles like this that everybody wore UL. The competitors are lower in rates and it's tough out there. The reality of this is you have to lower rates and you just have to be tough on this and you play there is that there are going to be a couple.
Quarters, and a time period, where you're playing this kind of rate and volume game all that all the time and if you give into the exception pricing side of it you will never get to the right place in terms of.
Offsetting the deposit rates, where they are at so we've been very aggressive at lowering deposit rates.
It also depends upon the types of mix that you have in your in your company and frankly the type of relationship you have with your clients and our particular set up about 80% of the deposits. We have a relatively rate insensitive and about 20% of them are more rate sensitive so things like Cvs or high balanced money markets or people, they're just looking for a rate. So that's the realm in which you are really trying to move rates down on so that you create the right right funding number and again it isn't.
Sometimes it's not it doesn't all happen in one quarter, but it happens over a period of time, but we we intend to continue to drive down rates and CNO select will selectively.
Price.
In a relationship deposits along the way.
Probably more than you wanted Austin on this but how do we give you a little more.
No I appreciate it.
And then maybe just one last quick one on expenses could we see expenses be flat in 2020.
Compared to the operating number this year, just given everything you're doing on the cost cutting side.
Short answer is yes, we feel when we've been a little bit.
The.
The recognition or the realization of the cost saves, it's taken us a little bit longer bids, especially with as we've talked about here in the past in prior calls.
Getting out of financial centers getting out of real estate, reducing head count related to financial centers and reductions in real estate are always messy and complicated.
But the trajectory of where we see our expenses headed has not changed and we actually are very confident that we're going to continue to realize those cost saves and that we're going to maintain a relatively flat to slightly decreasing opex base from here into 2020, we feel very confident about that and again. This is one of those history history tells you when when you have a decreasing rate environment, where margins are kind of under fire you kind of skinny down the company to make sure that you have high levels of productivity and the right people in the right places, but this is not a place to spend to go out and.
Overspend, so we've been very very deliberate about.
Looking at our cost structure and moving it down and again it doesn't all happen in just one quarter. It happens over a period of time, but we're very comfortable with the roadmap that we have created so that we overall lower the expense base and go in as we said go into.
2020 with.
Kind of a flat or decreasing expense base.
Got it great Jack Louise Thanks for the questions take my time is up.
Thank you.
Next we'll move to Casey Haire with Jefferies.
Yeah. Thanks, good morning, guys.
Good morning, Casey so.
How you doing.
Great I guess, a little more more color on the NIM. So I guess I'm trying to understand so you're saying that fed cut would would compress the core NIM from here.
And yet you're still holding to to the to the 320.
The low end of the Guy would be 320, so I'm just.
It seems like it's going to be a bit of a close call I'm just I'm, what am I missing something on the borrowing side I know you have 2.5 billion coming due on the on the borrowing side, but it just seems like something's on squaring here.
Yes, I think that there is a I think that it holds color I think that it is a.
A lot of moving pieces that go into it.
The 320 or not.
Not necessary there is a chance that we would hit that range, but with the ongoing repositioning of the balance sheet, what we're going to be doing on the borrowing side and where we have a substantial chunk of that thats coming in maturing near term.
And just the continued focus on having runoff of lower yielding loans being replaced by no by higher yielding.
Commercial loans.
We're going to continue doing what we said we were going to do which is we are investing in asset classes, where we find better risk adjusted returns and better overall yields and.
Again, the one it's all a matter of how quickly the funding side of the equation catches up to whatever you can happen on the left on the on the asset side and for the past two quarters. We have been much more focused on originating are the places where we've seen the most amount of our growth on the loan side have been in places like public sector and in the commercial the diversified commercial real estate side, which are largely fixed rate loans, where again thats not going to be impacted by it so you're going to continue to see a transition on the types of loans or the loan composition going forward and we anticipate that that's going to again is more residential mortgages in multifamily loans that yield.
3.5% or below runoff in the replaced by loans at higher yields and combined with some of the loan growth in the after the acquisition opportunities that we're looking at we feel pretty good that we can do with that low end of the range.
You do this step by step Casey so.
The loan yields have generally held held in there pretty well we have a obviously a portion that reprices with lower lower rates that are variable. The the we have the issue of.
Mixing the so as we said taking off 3.25% loans and putting on four and a half or five or five a little more than 5% loan loans you have the the of the borrowing costs going down. So we're repricing some of the the borrowing costs. We have and then ultimately the most fungible is is the deposit costs. So again, we're being disciplined about driving those down so we're comfortable in the range.
Probably.
Comfortable with two rate declines really comfortable third rate decline may may.
Really push up against the 320, so it depends on how many rate cuts there are but thats kind of how we think about it.
Okay, I mean I guess.
I mean, if I think about it like the one missing ingredient here has been the deposit growth.
I understand that Muni is going against you this quarter.
But.
What.
If I heard you correctly, Jack you, you're not going to 100% loan to deposit ratio is.
He is a hard ceiling for you so that would presume given your loan growth guide that deposits are really going to ramp up here.
So just what's underlying that confidence and then some.
To the borrowings what.
What is the.
Is that going to continue to run down and what is the what is the replacement rate versus that 250 level.
Yes, so I'll take the first part of the lose to the second part on the borrowings. So the first part of this is we have what we've built in the company is many sources of deposits. So if you think about it in the consumer Bank you have the through financial centers you have.
Certain deposit mix certain deposit volume at a certain rate enough certain longevity of those deposits same thing in the commercial side and the commercial side is even more broad in the different sources you can go to for funding the different cost with different volumes and frankly, we've been experimenting with some online functions that.
You know again, how different volume rate mixes along the way. So we're pretty confident that you can go to different parts of this to get different funding at different prices again.
The sequence where rates decline in where you're holding your line on your core funding you have some flexibility to go out and pay for certain other types of funding to to support the the asset growth.
Now I would not I would not characterize 100% of the hard ceiling, that's when Jack when when we referred to 95 95, 100% north deposits ratio Thats. The long term target that we want to run the business that but we have plenty of liquidity in excess liquidity available to us to for a period of time, we have till we find and identify good loan that we want to originate or a good portfolio. We want to purchase we certainly have more the ability to operate at a slightly higher ratio than that for some time. So this is.
Don't think you should come away from the saying there.
One on one for a period of time that we would not.
Not book loan growth again assume that there's good good loan growth and that increases the.
Our long term strategy of diversifying the portfolio and continue to build out the commercial businesses. Our ceilings you shouldn't really be a way to characterize that now the intention is long term it is to maintain that.
Funding profile, it's somewhere between 95% to 100% and as Jack alluded to we are we have a bunch of different channels that we're using to originate deposits that include the financial centers. It includes work with the commercial banking teams. It includes specific investments that we're making in.
Various verticals, including legal and property management is not for profit.
It includes things that we're doing on the online channels. So there is a mixed bag of.
Of.
There was a mixed bag of orb a mixed approach in a diversified approach to generating deposits.
Today, we're deposits coming in at somewhere between 2% to 25.
We have three rate cuts, it's going to be at a lower that any number that substantially lower than that and we three years ago. We were in a world in which a good commercial account high balanced commercial account used to cost us somewhere between 50 to 75 basis points and in today's world that costs us to 25. So there is as I said before our commercial banking teams are going to earn their keep but we truly are in a decreasing rate environment and we are going to essentially have the ability over the course of 2020. So theres two three rate cuts. This year. There is the cost of deposits on especially on the commercial side of the house.
Well decrease there's going to be a lag to it but its going to decrease pretty significantly once rates once competitors and market dynamics start moving in that direction, we're pretty confident that.
We're talking about.
Yes go ahead.
Yes, sorry, just last one from me and so the run off the multifamily and can and.
And the mortgage buckets. The ROV is very slow this quarter. It was I mean, only 30 million on just so.
Just some color as to what happened in the quarter and do you expect that to accelerate going forward.
Yeah. So there's there's a nuance that you have to factor into that $30 million. The remember that we had held up we had a bigger proportion or bigger number of loans held for sale at the end the Threethirty, one which was the remnants of the residential mortgage book when we started seeing the decreasing rate environment than the acceleration and prepayments that we decided to essentially retain those loans that we move those back into loans for portfolio. So in total the runoff is actually pretty much exactly the same as what we saw in the first quarter. So it was roughly about 250 million of two just just over $200 million in total so if anything with the decreasing rate environment, we actually anticipate that there's going to be faster prepayments in both residential mortgage and in the multifamily book. So we've been guiding to about 600.
Of total runoff, that's still a pretty good number for the year and if anything we think that it might actually exceed that by 100 million or so for the for the back half of this year.
Gotcha. Thank you.
Thank you.
And next we'll hear from Iran, Cyganovich with Citi.
Thanks.
Check you had mentioned in the kind of prepared remarks that the opportunity you see in commercial loan growth and you mentioned the associated funding is that.
What associated funding were you referring to just the deposit growth or are there other avenues that you're looking to fund the commercial loan growth, yes, no. It's primarily deposit growth, but we are looking at other channels. So.
It's really core deposit growth from retail commercial and and.
Frankly, some of the online function. So we're experimenting with but we're looking at other things of part of the.
M&A things that we're looking at are also deposit functions so that.
And there's a variety of things in many of the verticals that.
Luis touched upon so there are some opportunities along that path also.
And then in terms of M&A are you finding any opportunities are open to opportunities on a broader M&A more strategic beyond just the portfolios, but other other banks that might be.
Available in the market.
Yeah, you know, it's it's an interesting time for bank M&A I.
My experience as there is a lot of banks that are interested in talking about potentially selling.
They are talking about potentially selling at pretty favorable prices I might my view again weve been doing this for a long time this is a.
Interesting environment, where there are more banks that want to sell than there are buyers are banks and the pricing for the banks that are interested in selling are better than they have been in the past. So we.
We are looking at that and again, we we look at.
Bank M&A to create more funding, but primarily a normal outgrowth of that is that.
You get cost saves in a normal growth as the year.
They have some good practices that we can apply to.
The combined company going forward, but.
So there there are there are an awful lot of conversations we've had with folks I probably have more conversation in the last three to six months, then maybe lifetime over that period of time.
But folks that are interested in talking.
Now doing is you know.
Actually making things happen is something separate but there is an awful lot of.
Opportunities that seemingly better prices along the way and.
So the there are where we're continuing to look at those opportunities.
Great. Thank you.
Thank you.
And we'll move on.
Alex Twerdahl with Sandler O'neill.
Hey, good morning, guys.
Good morning, Alex.
Just first off back the margin I'm sure you guys are seeing and talking about it by now, but what would have to go right to get to 330 on the margin in the back half of 2019.
I think first and foremost would be a.
We are successful in.
Executing on a decent sized acquisition opportunity that has the types of yields and the various diversified commercial asset classes that would certainly help.
Second it's going to be the progression of the how fast is the beta going to be on on potential reductions across the board in both consumer and commercial deposits, but I think that there's a again as long as we continue to originate diversified commercial loans that we find or find acquisition opportunity to generate diversified commercial loans.
That are fixed rate with good credit spreads heading into this type of we can fund those with.
Well liabilities that are going to have favorable beta and Brent great dynamics in the back half of the year. There's a there's a path to getting to the high end of that range through Threethirty, Adam I don't want to minimize as I said, it's not a layup or we don't consider it a lay up but we do see a path to getting there. We are successful in getting some of these pieces of the puzzle the work and come our way.
Okay, and then assuming that we get a rate hike in a week and another one in September .
Potentially one early next year, how do you.
Thinking about the margin heading into 2020 like it are you ready to be able to give some sort of a range because I think at this point.
Investors, if I look more 2020 bps in the back half of 2019 anyway.
Well, so I'd tell you that.
So I think that it's a little bit early to tell but I do think that we are so we're back into a world and I think about it more from the perspective of the steepness of the curve right and so we're where we stand today with two to 10 spreads where they are and you compare that to 10 spreads where they were three or four years ago, and then you compare what our core NIM. Excluding purchase accounting was back then versus where it is today.
We stayed pretty neutral we've always operated somewhere between three tend to three thirtyish 335 or so.
And we operated at the high end of that range. When you know the steepness of the curve was closer to 100 to 120 basis points versus where it is today.
So we are in a world in which we're going to now be in a decreasing rate environment did you see a decrease in the short end of the curve of call. It 50, 75 basis points and over a longer period of time, even more so than that where you start getting to those types of.
Of those spreads between the two and then I think that we we can we're again, we're pretty neutral we can we can start hitting the higher end of that range. If we get a little bit of help from the perspective of being able to put.
Get done.
Five we really get compensated or paid at least on a relative basis.
In originating five seven and 10 year assets both in the Securities book and in the loan portfolio. So I don't think that it's a major difference for that you'd see anything to different relative to where we've operated historically, especially we come back to a more normalized rate environment with a little slightly steeper curve.
Okay. Thanks for that and then.
Your comment earlier, Jack about not anticipating any more residential loan sales, but that change if you land in an acquisition of some sort.
Well, if you do a bank acquisition sure you remix the whole the whole balance sheet again, so you reset that but as far as what we see today.
Based on what we're doing today is I would say that's my statement is correct.
But all all bets are off if there is a meaningful M&A transaction.
But if you if you added it like a half a billion dollars or $750 million commercial finance acquisition.
You would try to fund that deposit growth as opposed to as opposed to less than in the balance sheet.
Deposit growth overtime, but there would be a component we still have a fair amount of assets that are pretty low yielding in in both the securities book in the loan portfolio. So there will be the ability to do a little bit of a mix of both yeah, we're actually trying to drive down our loan to securities.
Percentage to our securities level.
Our our little bit too too high on a percentage basis. So we have lots of liquidity to take lower yielding securities often kind of funded.
Okay and then just final question for me can you, maybe just give us a little bit more color on what's going on with the substandard loans.
I recognize there's a lot of choppiness in there it does seem like some standardized attributed to some I think SBL loans this quarter, but maybe give us a little more comfortable that theres nothing working behind the scenes that we should be worried about.
Yes, the biggest thing I think you all everybody's worried about as there is some big big number out there that's going to hit the wall and Thats not is that not the case. So if you think about it.
The Npls and delinquency levels are about the same as they were kind of a year ago.
From a very macro standpoint, we're very comfortable with the.
With the collateral mix in the loan to value. So again on the commercial real estate side, we have about a 48% loan to value on the entire portfolio and about a 160 deaths.
Debt service coverage.
On the the total CNS portfolio.
We have about 97% our secure within margin of conceivable inventory or equipment now all that said there will always be one offs that it'll go wild.
Abigail, especially.
Is one that it's monitored credits so we know what the collateral value is so if there are losses they are.
So 10% of the total rather than a 100% of the total or something like that 10% to 20% at the most so we're very comfortable with where it's at though there are there are no negative trends in any of the portfolios that we see.
Charge offs were very comfortable with where we're at on the charge off.
Ratios also so.
That's that's how we think about this thing so no negative trends.
We think the charge offs will continue to be low.
In a very moderate range the ratios are not much different than they were a year ago and from a macro standpoint.
The collateral oversight on these things are pretty strong.
Great. Thanks for taking my questions.
Thank you. Thank you.
And just a reminder, if you would like to ask a question. Please press star followed by the digit one.
Next we'll move to Stephen do along with RBC capital markets.
Hey morning, guys.
Good morning, how are you doing.
Good thanks.
So just first off just a technical question on your loan growth target of two to 2.5 billion is that off of a 19.1 billion base that you used in the prior guidance.
Correct.
Okay great.
And then just your on your.
Capital.
Keith.
Eight.
2.3 million shares.
To repurchase.
Can you just walk through how this the math on this.
Given that you repurchased about 4 million this quarter and your TC ratio went up.
Yes, so were the eight in a quarter is a long term target and based on where we are today from an internal capital generation and how we've we've been managing some of that run off for the balance sheet growth based on the run off that we've seen in multifamily and residential mortgage.
We're not going to get to the eight in a quarter, even if we bought back the entirety of the eight and a half million shares by the end of the year. So unlikely that we're going to get back to the end or the organic on a standalone basis, we're going to get back to the late in the quarter by the end of this year.
What would potentially get us there faster is that we actually exceeded that loan growth either through better organic or greater organic origination or we found again one of these and we're able to execute on one of these.
Fully acquisitions opportunities sooner than the second half of this year.
We're going to subject to market conditions, we are going to continue being active on on the buyback front.
To your point, we bought a lot of shares we bought for an afternoon shares this quarter and in RTC ratios in our regulatory capital ratios increased again.
Part of that increase in the capital ratios is the fact that this is the first quarter, where you see the true full impact of the loan portfolio sale 2 billion and a half that we sold last quarter and so therefore average earning assets were lower this quarter in risk weighted assets were lower or average.
For tier one leverage ratio purposes average total assets were lower this quarter than the next we don't anticipate that that's going to our that capital formation isn't going to be as significant in the following quarters as it was in second quarter, because we do anticipate seeing some balance sheet growth in the second half of the year, but unlikely we get their part to eight in a quarter by the end of this year, but we will continue to be active on the buyback front and once we use up the state and half million, we will review with our board potentially re upping that and continuing to be active again, if prices make sense.
Got it thanks for the color there so.
Maybe if we just move on that.
Looking on to 2020.
Okay is there any reason why you wouldn't do a comparable buyback that you've done. This year. So you are expected to do this year.
There there's no particular reason there wouldn't be a definite they wouldn't be definitive reason as to why we would not do it.
As we've always said, we're pragmatic about the world to the extent that we find.
Investment opportunity to redeploy that capital into generating 17% and 18% plus our tcs like we generate today, we would do that we would shut off the buyback that we found them.
To the extent that we don't find sufficient opportunities to do that then we will continue to buy back shares more than likely based on what we see out there today, it's going to be a combination of both and.
I think that as we think about the world, we're going to see a kind of same type of commensurate level of growth, especially on the commercial side of the house in 2020 as we've seen this year.
And that is going to leave us in a place where we're going to no more than likely be actively buying back shares as well maybe not to the same degree of the 20 million Pops that we would buy this year, but we're still going to have a.
Like the meaningful buyback activity given the the internal capital generation that we we create today.
Hey, you're thinking about it.
This the sequence of things our view is the best use of capital is investing into a business and frankly, we think we've done a pretty good job of of delivering the right returns over a period of time when you invest back in the business through organic or M&A and if those opportunities aren't there than buying back shares and kind of controlling that destiny makes makes makes sense to us too.
Right. Thanks for the color.
And then just moving back in on the NIM again.
So the two and a half billion, what's the what's the.
Borrowing costs on the borrowing said that.
Jeanette billion, that's coming off the end of the year and what's the current rate that.
Margin rate for these borrowings.
Today the difference between those two numbers is approximately 25 to 30 basis points. So things are rolling off or five or 30 basis points higher.
We are in a three rate rate scenario from here to the end of the year that number is going to increase substantially from that 30 basis point difference and so that also depends even on depending on how far out you go. We've we by design. It stayed relatively short and Thats why at a $3.7 billion. We have posted to have billions of more than two thirds of that comes due we have purposely stayed short trying to not anticipating or trying to play rate gain but thinking that there could be a chance where we're rates would not continue to hike and so therefore, we did not to go out on the duration curve on that.
Now we will have the same type of decision that based on if you stay in overnight money versus three or six nine month or one year going out to three years, you can actually borrow today better rates on the FHLB three almost five or seven years out relative to what you can do on the overnight. So.
The good thing is is that they are all at a lower rate and we're going to have the ability to reprice a substantial chunk of that in the second half of this year with the balance of that other billion ish or so we're billion and a half being repriced in the first half of next year. So we're going to have a bunch of bites at the Apple there, but its about 30 basis points.
Great. Thank you and just last one.
And let's assume that if there is a rate the 25 basis.
Point cut in July and that's the only cut for the third quarter do you expect your core NIM in the mood below the 322 from this quarter.
It does it would the way that we would move slightly we don't envision that that would have a major impact short term the bigger impact is going to be what happens with longer term loan origination yields and how and what's going to be the difference between asset that roll off for a longer term versus assets that role on near term I don't envision having that big of a that big of an impact because we have about five or 6 billion. So we have about $5 billion of asset that reprice on the short end of the curve.
Obviously prepayment activity and repayment activity will have or acceleration of prepayments good.
That impact that that number.
But conversely between borrowings broker deposits and then just some higher cost funding liabilities, we have a similar.
Similar percentage so we could that we should be able to have noted with the again, we're pretty neutral we should be able to withstand that relatively well, but it's only one cut that that would likely have a recycler, there's definitely a chance that we could be slightly below that three to one.
Got it I appreciate it thanks guys.
And next we'll hear from Collyn Gilbert with KBW.
Thanks, Good morning, guys Oneq, two just quick housekeeping items and if you guys covered this at the beginning I apologize, but Luis what was what's your outlook for accretion income I mean are you still holding in your prior guide of that 75 to 80 million or does that change at all this year and then just your outlook for next year on that too.
Based on the re acceleration of prepayment activity that we've seen on the resin multifamily side is probably going to be a little bit higher than that but I caveat that by saying that there is always some uncertainties surrounding that number so that $75 million to $80 million I think if you think about what we've done in the first half of this year, which is closer to between the first and the second quarter. We were running at about just over 40 about $45 million year to date.
There's definitely a path to having that 75 day to be closer to 80 to 85 million. So it actually moved that up by about $5 million and again, if we continue to see a decreasing rate environment, where you start seeing greater prepayment activity in particular on the multifamily side that number there is a chance that number could be higher than that.
Okay, and then just how much of that drops off next year with.
Cecil and just the amount of Beijing.
So not a big change relative to next year. Because this is essentially more so of acceleration of long and tails that would come in.
And so for next year with the guide that we provided before closer to $35 million to $40 million, we still feel pretty good because again this isn't necessarily that.
This is usually longer term loans that would have a longer tail to them on the accretion that get accelerated back the and plus that tail kind of accelerate into next year as well and so that I don't think this would have a big impact relative to the guide that we provided for next year does that changes kind of old stuff. We let you know.
Okay. Okay. That's helpful. And then just any change in the provision outlook.
Not right now.
No we've been we've been right around $10 million to $12 million in quarterly provision for the past six or seven quarters, and we envision that thats going to remain.
We obviously, we've seen some you know some questions here on some of those substandard credits, we feel very good about those in the sense that we are well collateralized, we've got accounts receivable and equipment and in some cases enterprise value that are protecting our our interest there we're going to collect our money back at any charge offs that you see there are we think would be very manageable and should not have a disproportionate impact on the reserve based on what we're seeing today, So 10 to 12 million so pretty to numb.
Okay, Okay and then.
On the loan side, so the jump in construction this quarter.
Can you just talk about that and kind of what your outlook is for construction going forward.
And everything that we're doing that.
Yes, no we have not covered that that's a good question everything that we're doing on the construction side is connected to our low income housing credit investments tax credit investments.
So it's a very.
Nichey component of construction. This is not high in construction projects. This is not.
Residential or traditional residential construction or or retail construction. This is entirely tied to our low income housing tax credit business, which is in an asset class that we like a lot where you find very good risk adjusted returns and where you have out there actually also tax efficient. So they are actually tax free. So the yields are very good credit is very manageable and as long as you're working with good developers in many instances we are our own take out because this is part of the equity that tax credit equity investments that we make so once the construction we fund the construction loan the construction project occurs and once it's reached its completion, we actually take ourselves out because we also hold the commitment from you know from a tax credit equity investor perspective. So.
We are we like that business a lot you're not going to see the same type of growth that you've seen quarter over quarter, it's going to be a little bit choppier, but that is going to be a line item that's going to increase but again its not traditional construction. It's very it's completely concentrated in in low income housing. Okay. Okay. That's very helpful. And then can you just remind us what the outstanding balance is of New York City rent regulated multifamily loans.
So the rent regulated multifamily loans, so we've got $4.7 billion of total multifamily.
Billion and a half of that is co ops. The remainder of that is multi kind of traditional multifamily loans. So call. It three to three and a quarter billion or so.
Out of that amount of about $850 million of them have involved we will have some form of free rent type of unit in them that would potentially be impacted by new legislation. The rent the rest of it is rent stabilized direct control and in its entirety.
Okay, and then just happen to have that but the ltvs would be on that $850 million.
That's 40% to 45%.
Okay.
Okay.
And then just finally, Jack a question for you I know you had said in your comments that you guys are still committed to your performance and growth targets of the like just obviously given the environment changing quite rapidly.
How does how should we think about kind of I know you've said in the past like a 10% EPS growth target should we is that going to now be kind of a little bit more of a longer term target or just kind of.
Just curious to see your kind of broader views on where you think that can go.
Yes, we think you know things like the ROI ways Anoro Tcs and the efficiency ratio is I think we're still very comfortable at the onefifty 17, or 18% and 40% on that bps.
Depending on the mix of what were doing it has to be a long term a more long term one on the 10%. So we think we can get pretty close to that.
But this is more in the near term, it's more kind of 7% to 10%. We believe that over the cycle. We are we will get back to 10% or more.
And part of part of that is.
Part of the point that.
You all may see what we've done in the last two quarters is we've really reset the balance sheet. So we will see lower year over year EPS now that weve tend to reset it by selling off and changing this thing we should be able to begin to.
Accrete back incremental EPS growth.
For the remainder of this year and into 2020 so.
Unfortunately, we live quarter by quarter on these call calls.
Sarah Everything's in a micros.
Piece, if you look at it over a period, that's what we've really done weve.
We have really reset the balance sheet based on what we bought in the last.
Our last acquisition and all those things and now it really does position us well to go beyond and continue to more a creepy us along the way.
Okay. That's why use the term broadly Jack to know I know.
Yes.
During the resistance to like look at it on a microcosm of but anyway.
Okay. All right. That's that's all I had I appreciate it I'll leave it there thanks guys.
By the way you said two questions you ended up with six questions. So.
Okay Fair enough I never can do and I know the short version stunning.
All right. Thank you.
Thanks, Thank you.
And next we'll move to David Bishop with D.A. Davidson.
Hey, good morning, gentlemen.
Hey, David.
Yes, I'm just curious the.
You maintained.
I guess, maybe a little bit of an inflationary pressure on the expense outlook there.
Second quarter look like there may be some some unusual charges on our chicken.
If thats the case or something in there that looks like me, maybe I would say unusual nonrecurring from up from the second quarter perspective.
Yes, we had a we had a couple operational losses in the <unk> million to $2 million range that frankly, we screwed up on so we we had some issues with some.
Some fraudulent wires some operational losses things like that that we're pretty comfortable that those are non re occurring but there are.
A number of items in that the we again is kind of those quarter by quarter to things we.
We had to deal with and.
And frankly clean up so yes.
And did I hear you right I think in the preamble. It sounds like you may be expanded a little bit more on the on the risk management side on the credit side of the house is that correct and I hear you right from the off the opening.
Yes.
That's a good pick up you know wondering what other things.
One of the fun things about this company as we continue to evolve the company and as the company gets bigger and more sophisticated. We've we've tried to always be ahead of the tour the curve on enterprise risk management. So we've.
Weve brought in a number of really.
Terrific folks to make sure that we can monitor and manage in a in a very sophisticated way in what part of our underlying success has been we've had very very strong enterprise risk management.
Foundation in into the company and again as the World gets more sophisticated and complicated we we need to always be ahead of the curve on that so we've been able to attract a ton of really high performing folks into the in the company.
Across the board, but specifically in the the credit risk area.
Got it and then.
Circling back to the discussion on terms on the funding side here.
I know you guys have laid out a pretty aggressive plans to shutter additional financial centers. There has there been any impact and you've seen it all from a from a funding side.
Terms of attrition have you lost any.
Accounts or has been a little bit more attrition as of late then.
That's been the trend historically.
Yes, no that as we've consolidated financial centers, our experiences better than.
The the our plan and better than what is norm for that so.
If you think about it we're trying to we're trying to create a company that has value added support to our clients. So what happens in in when you consolidate.
You you end up exiting transactional deposits that frankly don't have a ton of long term.
Value you generally.
Control and maintain ones that do have long term value and our relationship oriented relative to the strategy of whatever bank that they're they're part of so in our experience has been a little bit better than what we expected a little bit better than.
You know that kind of the norm out there. So all of the comments we've made we factor in the idea that we are at the same time consolidating financial centers and.
And and.
Having having.
Depending on the type of situation having summer.
Attrition of clients.
Got it and then one follow up question.
You noted that there could be some.
Runoff additional runoff in the investment securities little bit higher than expected you have a targeted ratio there as a percent of assets earning assets.
18%.
Maybe the low end.
18.
Okay.
Got it Thats all I don't think you color Matt yes.
Great. Thank you.
Okay, and that's the move to Matthew Breese with Piper Jaffray.
Hi, everybody.
Hi, good morning.
Good morning.
A couple of follow up questions.
Honing in on your portfolio acquisition commentary and.
Part of that that would kind of get you to the high end of the 330 margin range.
How would you probability weight your ability to get.
Actually complete a.
Portfolio acquisition or at least announce one by the end of the year.
That's very funny.
Yes, I feel very no I'd say, 75% plus there, but it's again, it's listen we've been patient with that Matt. So yeah. We are confident that there is plenty of opportunities out there and if it doesn't happen by the end of this year than the other opportunity that happened early next year, but we feel announcing a transaction and so patience is a virtue when it comes to the things right and so I don't want to put out their target that then would force us to do things that hit targets and so forth, we feel very confident being able to do meaningful acquisitions like that two or three that we've done in the last two years, we see just as much opportunity today as we did a year ago and we saw earlier this year and.
I don't know about probability weighted but I can just tell you that we're very confident being able to announce and execute on the same types of deals that we've done where we can re underwrite and we can reserve for upfront and where we can feel very confident.
That we are.
Doing the right amount of diligence and that we have you know that what we are buying meets our credit box in our risk management criteria. The danger. Matt is we don't want you know with the M&A stuff happens sporadically in as Louis said we've done.
A couple of deals every year for the last several several several years.
But what the danger is getting you all to put it into your models as highly probable that's that's a bit of a problem. So we're we're trying to.
We're trying to be honest and straightforward.
We know we need to not mislead or you know go too far on this thing. So there are as Luis said, there's plenty of opportunities out there they may or may not work and but we're going to stick to our knitting and we just don't want to go get folks too far ahead, and then come back and say well you thought there was a higher probability of this happening and it didnt happen and now we're going to underperform relative to what.
What the expectations were out there. So that's the dollars you're totally understand I'm just trying to.
Best gauge what I sense is positive body language around potential portfolio deals.
Has thats why we don't do video video calls.
[laughter].
[laughter].
The second the second kind of non organic.
Whole bank M&A discussion it seems like Theres, a little bit more openness on that front as well could you just characterize whether opportunities.
Our solely in or.
Could extend to out of market type tenants and if out of market what geographies still interest you longer term.
Yes, it's a great question. So the northeast so the geography that I would tell you for us would be the northeast.
I'm we're not.
Hi.
At least right now I don't see any reason to from a bank M&A standpoint, they do a west coast or.
Florida, given the Luis loves, Florida, we're not going to Florida, but its really northeast and.
It's interesting there are opportunities along the way there is opportunities that you create that may be small smaller fill in there is opportunities that are lower mid size and there's opportunities that may be similar size types of things. So.
Yes, the but it would it would be generally northeast.
Okay.
I just wanted to get a sense for the pipeline sounds strong.
What segments of the pie of the loan portfolio in terms of pipeline or the strongest.
And then could you just give us an update.
On on what your team front stands how many teams you currently have kind of pushing.
Rone, the Ors here and how many.
How many new hires have been completed recently.
Yes, the so the the the.
Pipelines that are the strongest are places like traditional cninety, it's different sectors of CRD, it's public finance its lender finance.
Those are the strongest pipelines out there and.
Lots of lots of opportunity.
There we still have 35 teams what we've done is we've added to the teams and.
We feel really good what happens in this model as you kind of refined the teams and you get the right mix and focus and size of those teams. So some of the newer teams that have come in the last couple of years, we've now added more people to because they get.
To a certain critical mass, we found that to be more productive than necessarily going out and hiring.
We'll find more teams a year all that said there are a number teams that were looking at right now that are pretty fulsome in some niches that we're interested in.
There are some.
There are some people that we want to continue to add too, especially in those kind of four categories that I mentioned that there are lots of opportunities and so we continue to do that and part of the secret to our success also as Weve basically.
Fundamentally taking.
<unk> expenses in consumer and move those expenses over to commercial so were not no. That's why we're comfortable with the the expense guidance, where we constantly kind of reset the mix that we have we think there is.
A certain number amount of expense capital that you spend on consumer banking and in the niches, we're in and the financial centers in the markets and online and we think that there's a increasing amount of expense that you would allocate toward the commercial segments. Because we think we get in a risk adjusted returns that are.
Very favourable in drive ultimately some of the metrics that we.
That we have in the in the.
We've we've produced over time.
Right and I think that segways into my last question, which is.
Just trying to square you have you have this pipeline of financial centers when we close.
10 of those three back offices, but if I look at your expense guidance, it's incrementally a bit higher and so kind of juxtaposing reduce physical footprint with slightly higher expense outlook.
Is that to say that.
The commercial efforts are going to be heavily invested in but what what other areas. Specifically are you going to put some dollars into to make sure that the bank is prepared for 2020 and beyond.
So I think that that might be just the presentation slashed timing issue, Matt I think that we are that incrementally or slightly higher number that we provided in the past on the Opex side is driven for this year.
And as I mentioned before I think that this is more of a this isn't a change in what we see the absolute level of opex coming too, but more so just the timing of how the realization of those savings as you know again, we said, it's just messy to get involved in that and the financial center consolidations reduction in real estate and head count related to that is always just a little bit choppy and how it happens and so I don't think that you would see a materially or you're not going to see materially different outlook from an opex perspective in 2020 relative to what we've said in the past we've been very vocal in saying that we think that we can operate this company at 415 to 420 type of Opex number for the foreseeable two to three year window, and that's going to be where we see things shaking out in 2020. This is more so the timing of how we've been able to execute on some of these cost savings initiatives, but the absolute level of where we see costs shaking out that has that outlook has not changed.
In that outlook incorporates the investments that we're making and back office process automation in the various.
Systems and technology that we're deploying on the commercial side. It factors in investments that we're going to make up people in hiring commercial banking team. So that thats, all inclusive and again the expense guide long term has not really changed we are going to operate the company at somewhere between 40 415, a portfolio of opex longer term.
Great. Okay totally understand that's all I had thanks for taking my questions.
Great. Thanks, Matt.
And that will conclude the question and answer session. At this time I would like to turn the call back over to Mr., Jack Kopnisky for any additional or closing remarks.
No just thanks for following the company and I appreciate your questions terrific.
Discussion thank you.
And that will conclude today's call. We thank you for your participation.