Q2 2019 Earnings Call
Welcome to the chorus call leasehold and operator will be with you shortly.
First call lets call would you like to join.
It's a nine Q2 75.
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Having upon K.E. the I am.
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Intercompany.
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Right.
Thank you I will join you end the call is being recorded.
Let's have grown 236.2 million or 12.2% annualized this growth has led to a 10.4% increase in our net interest income compared to the six months ending June Thirtyth 2018.
We continue to see solid loan demand due to market disruption and the strength of our local economy, however competition around rate and structure is increasing.
In our non banking lines of business wealth management revenues, which includes our trust business rebounded in the second quarter as the market rebounded as first quarter revenue was impacted by the market downturn in the fourth quarter.
Insurance revenues increased 5.6% year over year due to strong contingent commission income and growth in commercial lines and group health and life premiums.
Ill now turn it over to Brian for some additional discussion on our results. Thank you, Jeff and I would also like to thank everyone for joining us today.
I'd like to start off by saying I think we continued our positive trend of earnings growth and consistent financial performance as Jeff mentioned, we reported earnings per share of 56 cents for the quarter with no unusual or nonrecurring items.
Through the first six months of 2019, we achieved a return on average assets of 1.29%.
Return on average equity of 10.28% and return on tangible equity of 14.23%.
I would now like to touch on two items from the earnings release first as Jeff highlighted net interest income for the first six months of 2019 is up 10.4% compared to the same period in 2018 due to strong average loan growth and a relatively flat net interest margin.
Our core net interest margin for the second quarter of 3.66% decreased eight basis points from 3.74% in the first quarter. It is important to note that excess liquidity, which was driven by strong deposit growth during the quarter negatively impacted core NIM by approximately five basis points, excluding the impact of excess liquidity core net interest margin was 3.71% a decrease of three basis points when compared to the first quarter.
We would anticipate that core net interest margin for the third quarter would compress approximately six to eight basis points to a range of 3.63% to six points, 3.65%. This includes compression at a similar rate experienced in the second quarter plus the negative impact of the current decrease in short term LIBOR rates and the anticipated 25 basis point reduction in prime rate later this month.
Due to recent signs of deposit cost abatement, we do expect the core NIM to flatten out in the fourth quarter absent any further prime rate decreases.
Second as expected our efficiency ratio continue to.
Decline as compared to the prior year, excluding 2000 eighteens restructuring charges total noninterest expense for the six months ended June Thirtyth 2019 increased by 5.0% from the same period in 2018.
When combining significant revenue growth and continued expense discipline, our year to date efficiency ratio, excluding restructuring charges declined to 61.0% from 63.2% in 2018.
It should also be noted the 2019 expense numbers include approximately $675000 of year to date noninterest expense associated with hiring the eight person team in Lancaster and Youre counties during the first quarter of the year.
As it relates to the full year of 2019, I would like to remind everybody that we expect noninterest expense growth, excluding restructuring charges of 7.0% to 7.5% for the year.
This translates to 2019 noninterest expense of $146 million to $147 million, which includes the incremental investments in lending teams that we have made during the year.
I believe the press release, we straightforward for the remaining items, particularly related to noninterest income and accordingly that is it for my prepared remarks, we will be happy to answer any questions. Operator would you. Please begin the question and answer session.
We will now begin the question and answer session.
As a reminder to ask a question you May Press Star then one on your telephone keypad. If you are using a speakerphone. Please pick up your handset before pressing the keys.
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At this time, we will pause momentarily to assemble our roster.
Today's first question comes from Frank Schiraldi of Sandler O'neill and partners. Please proceed.
Good morning.
Correct.
Just a couple of questions just wanted to start with a the ER NIM outlook, Brian you mentioned.
Down six to eight bips on a core basis in the third quarter, but was wondering if you can you know extract if we can extrapolate out you know.
And 25 be given 25 basis point rate cut you know what does that mean for the NIM is that six to eight bips a good number or I would imagine some of the Twoq. You included the reduction in LIBOR or that sort of front ran the reduction in or the expected reduction in fed funds. So just trying to get a sense for you know just generically a given 25 basis point rate cut where do you think that.
The impacts the margin.
Yeah, frankly, we on a normalized basis, we saw a three basis points of compression in the current quarter in the second quarter, we expect similar compression absent the decrease so we on the with the six to eight guidance of compression there will be an incremental three to four as it relates to the prime rate decrease federal reserve rate decrease.
Okay.
So 25, Bips I mean, I guess the next 25 barrels are you thinking three to four basis points as well.
In that range of course, there is the uncertainty around deposit cost.
And pricing on the commercial loan side, so well, but all things equal all models today would suggest three to four basis points for a 25 basis point decrease.
Okay, and then why the six to eight is that that includes just a.
I guess continued ramp up in deposit costs.
From.
The rate hike I guess in December or.
Yeah, we're starting to see are we starting to see some abatement, but there still is we have our public funds build that occurs during the third quarter and the like so we do see a little bit of pressure.
For that and then we expect that to normalize and flatten out in the fourth quarter absent any further rate decreases.
Okay and then.
Just finally on the loan growth continued strong loan growth just wondering.
You mentioned the eight member team in Lancaster in New York.
You know is that are they contributing.
At all in a big way.
Or is that still sort of yet to come.
Yes, Frank it's Mike.
Yes, they did and they did some deals that came through in the second quarter. It was a small percentage of the overall growth. They are building pipelines. So we are expecting to see them to be a stronger contributor as we move forward here.
Okay, all right great. Thank you.
Thanks for thank you.
Our next question comes from Michael Perito of KBW. Please proceed.
Hi, good morning, guys or morning morning like.
Thanks for taking my questions I wanted to just quickly a quick clarification question their earnings release, the increase in other income within noninterest income.
There were a couple of things mentioned fees on risk participation agreements and then some gain on sale of SP. I was wondering if you could I guess on the first part just give us a little bit more color about what that business actually is the fees on risk participation agreements and then second just give us a sense of kind of how big the SBA platform is today and your expectations. There moving forward if that continued to be as positive a contributor as it was in the second quarter.
Sure. Mike This is Brian as it relates to risk participation agreements thats the vehicle we used to provide.
Swaps and derivatives to our customer base is really situations, where customers are seeking on longer term fixed rate loans than what we would like to put on balance sheet. So we achieve that via having them enter into or derivative and we participate in a risk via risk participation agreement. So thats the instruments there okay.
On the aerospace side it was a very strong quarter as it relates to ask BA. We would we continue to or we expect that to taper off a little bit as we look into the third quarter.
But we have been focusing on on that over the last year to 18 months.
And so as you think about I mean, the first half of the year here, you've done north of 60 million a quarter and noninterest income core I mean, as you think about that run rate as you move into the back half of the year.
Hey, what's the thought process I mean, do you think that that is a sustainable level, just given the wealth insurance and investment momentum and some of the swap in NSP momentum as well and.
Another seasonally strong quarter for mortgage even nine overall, the environment or its a little tough there locally, but what are your thoughts I guess broadly on the fee income line in the back half of the year.
We had originally guided to a 5% increase year over year compared to 2018 for the full year and we we are affirming that guidance at this point.
Okay.
Helpful. And then just another clarification question on the on the margin guide. So does that six to eight assume a constant level of the Q2 liquidity or is that liquidity already run down just maybe and then I guess more broadly just you know.
How do not margin related just on an absolute dollar basis, where do you expect the liquidity profile to kind of move forward as I imagine there's quite a build in the deposit pipeline as well as the loan pipeline.
Today.
Yeah, Mike This is Bryan again to answer that the last part there as it relates to normal liquidity levels, we operate around $40 million on a normalized basis were approximately $60 million $60 million to $65 million in excess of that throughout the second quarter on that 60 basis points does anticipate a normalization of excess liquidity and so far through the quarter, we see that occurring.
Helpful. And then just lastly, as we look out to.
Two two next year and the back half of this year.
Capital levels are pretty healthy here.
Sounds like growth is well positioned to at least kind of continue in this upper single digit range minimally with with the new teams coming on I know thats part of kind of long term capital plan to continue to drive organic growth, but can you give us any thoughts Jeff maybe beyond that I mean, it would seem like even with the 989% growth rate, you're still going to be building capital towards 10% on the CCM just curious what the updated thoughts on how to kind of manage that moving forward our.
Yes, similar to what we've talked about in the past our plan is to try to repay some of our sub debt, which starts to come due next year.
So right now you are correct, we will should be building capital and the intention would be to use that to repay our sub debt.
Can you remind us what.
It comes due next year and what was the rate on it is.
It's a 50 million dollar piece is what comes due at the end of the year and the rate is approximately five point.
1%.
So I'm not sure we'll pay all of that off but we're going to try to eat into that and make a good dent on that at a minimum.
And that's the end of next year correct.
No. It's the end of March March March 30 Onest.
Of 2020.
I'm 2020, Okay got it.
Perfect. Thank you guys for taking my question.
Thank you Mike.
As a reminder, if you do have a question. Please press Star then one.
The next question comes from Matthew Breese of Piper Jaffray. Please proceed.
Good morning.
Hi, good morning, Matt.
I just wanted to talk about the other team did the.
The new team hired in the second quarter.
New Jersey in Philly are the commercial real estate focused or seen I focus where would they be additive.
And then just stepping back and considering further consolidation in your market with the WSFS beneficial deal.
Are there still good hiring opportunities are there more or less could you just characterize the environment on that front.
Hey, Matt its Mike.
In terms of the guys in South Jersey, they are primarily business bankers.
So they are doing smaller deals.
Which would be more on the CN ice side.
But they also have a couple of larger deals. So there will be some mix a series of being a little cryptic and I apologize for that but they've got a good good blend on average that or deal size is going to be smaller than.
What our average deal sizes across.
The platform.
In terms of health care environment for recruiting.
Look we still get opportunities and we'll continue to do that and I think the biggest.
Value that we always can point to is we've done team lift outs, where we've been successful and.
We continue to invest in our process and get away to demonstrate the folks that we can get deals done and we work well with our customers. So.
I think we have created an environment that is.
Attractive for people to come and join US and we will continue to foster that environment.
And therefore, we will continue to get opportunities to bring additional folks on board.
Understood.
Just given the they are in South Jersey, and legacy Fox Chase had some exposure to South Jersey as well do you ever.
See yourselves building out more of a physical presence in that market.
So the fit the former Fox 15 was more down the shore.
These guys are operated and then the kind of the Jersey suburbs of Philadelphia.
We are going to look at putting an LPO in place.
But at this point, we have no additional plans to add a financial center.
Or branch, that's what we call.
Understood Okay.
And then I know you said the deposit competition is starting to abate.
Could you just give us a characterization of where you're seeing it abate have you seen it yet on the money market in high cost savings kind of accounts or is it still in the CD front the longer duration front. That's following the curve so to speak.
Hi, Matt This is Brian It certainly has occurred on the CD side and it is and we are seeing signs of it starting to occur on the money market sign as well a lot of the promotional on products that were out there you start to see those dot being dial back a little bit over the last.
A couple of weeks to a month or so.
Okay.
Okay, and then just the last one.
Yes, we are getting very close to seasonal implementation, just curious where you stand in that process and any early indications of where we could see that first day trip allowance and what the go forward provision could look like.
The team that we assembled for the Cecil implementation projects has made great progress over the last 18 months.
We are very happy with where we are in that process, but at this point, we are not ready to disclose the expected impact.
Understood. Okay Thats all I had thank you.
Thanks, Max Matt.
This concludes our question and answer session.
At this time I would like to turn the call back over to Jeffrey Schweitzer for any closing remarks.
Thanks, Chris and thanks, everybody for joining us today and we're excited about the results we were able to publish for the second quarter.
And look forward to solid momentum as we head into the third quarter and the rest of the summer so look forward to talking to you.
On three months after we release earnings again, so have a great day and enjoy the rest of your summer. Thanks.
The conference has now concluded. Thank you for attending today's presentation you may now disconnect.
Yes.