PARK STERLING BANK (NASDAQ:PSTB)
Q4 2015 Earnings Conference Call
January 28, 2016 08:30 AM ET
Susan Sabo - Senior Vice President and Chief Accounting Officer
Jim Cherry - Chief Executive Officer
David Gaines - Chief Financial Officer
Bryan Kennedy - President of the Company and Park Sterling Bank
Stephen Scouten - Sandler O’Neill
Nancy Bush - NAB Research
Tyler Stafford - Stephens Inc.
William Wallace - Raymond James
Christopher Marinac - FIG Partners
Good morning and welcome to the Park Sterling Corporation Fourth Quarter 2015 Earnings Conference Call. All participants will be in listen-only mode. [Operator Instructions] After today presentation, there will an opportunity to ask questions. [Operator Instructions] Please note this event is being recorded.
I would now like to turn the conference over to Susan Sabo. Please go ahead.
Thank you, operator. During this call, forward-looking statements will be made regarding Park Sterling's future operational and financial performance. The forward-looking statements should be considered within the meaning of the applicable securities laws and regulations regarding the use of such statements.
Many factors could cause results to differ materially from those in the forward-looking statements. We encourage participants to carefully read the section on forward-looking statements incorporated in our press release issued this morning and in all documents Park Sterling has filed with the SEC.
I would now like to turn the meeting over to Jim Cherry, Park Sterling's Chief Executive Officer.
Thank you, Susan, and thank you to our listeners to being on the call this morning. We appreciate your joining us. We’re pleased to have this opportunity to discuss Park Sterling's fourth quarter 2015 results and annual results for the year. In addition to our earnings release, you can find our Investor Presentation on our website, which gives detailed information about these results and which we’re going to be following during this call.
Joining me this morning are David Gaines, our Chief Financial Officer; Nancy Foster, our Chief Risk Officer; and Bryan Kennedy, our President. I'm going to begin with some highlights of the quarter and the year then I will to turn to David to review the financial results, and afterwards all of us will be available to answer your questions.
I’m actually going to start on slide three. Slide three covers the fourth quarter highlights. But frankly for the second expediency, I am going to kind of really speak to both slides three and four at same time and the only difference is four covers the highlights for the year, but I think it’ll make it a little quicker if we go that way. So maybe a little flip in back and forth but any of the annual results I am really looking on the slide four and I speak today is, we’re very pleased to reported record operating results for the quarter and the year, while our net income decreased to $1 million or 21% to $3.8 million or $0.09 a share for the quarter. It was driven by the incurrence of $1.4 million in merger related expenses.
For the year, we’re actually up $3.7 million or 20% over the previous year for a record $16.6 million or $0.37 a share. And looking our earnings on adjusted basis excluding merger related expenses and gains and losses on security sales, we actually increased our fourth quarter earnings by a small amount over the previous quarter, but still achieved a record $4.8 million or $0.11 a share. More importantly for the year, we were up $2.6 million or 17% adjusted net income over the previous year to $17.8 million or $0.40 a share.
Looking at our organic growth, we enjoyed organic growth from the quarter of $41.7 million, which annualizes at 10%. We also achieved organic loan growth of $161 million or 10% annual loan growth for the year. In addition to that, we enjoyed organic deposit growth just over a $100 million for the year, which is a 5% growth rate and was aided significantly by the introduction of the high yield money market account in Richmond. You’ll recall we introduced for only a few months last year that we are ended up with about $60 million in deposits in that account.
Adjusted operating expense to adjusted operating revenue, our efficiency ratio was 67.84% and it allowed us to achieve our year-end target of begin under 70%. We continue to see asset quality improvement in our non-performing loans to loans and non-performing loans to total assets decreasing again. And interestingly for the year, we saw a total decrease of 35 basis points in the non-performing assets to total assets. And this is the very single quarter for the last five years we have see an important in non-performing loans to total assets. So really I feel very good about the asset quality and continued improvement there.
Our capitalization remain strong with tangible common equity to tangible assets of 9.93% in Tier 1, leverage ratio of 11% as a consequence of these results and had continued confidence in our earnings going forward. It declare a dividend of $0.03 a share, the board cleared that yesterday. I would add that while that’s not an increase over the previous dividend rate per share. We should remember that we did bring in all the first capital shareholders just after year end, so there’s actually an increase in our total dividends being paid.
I’ll speak a little bit to some of the things we did during the year, they actually on slide four. We continued to advance our strategy of building a region franchise in the Carolinas and Virginia. We opened our second de novo branch we call in Richmond, Virginia. We introduced that high yield money market account for couple of months generating the 60 million I mentioned previously. More importantly we confirmed our belief that we could use that as a vehicle for funding loan growth, while having a higher interest rate expense, it would decrease all the other expenses that is typically associated with attracting deposits, branch facilities, personal, et cetera. And with an average brand size of around 30 million would basically build two branches and deposits if you will in a matter of just a few months.
We introduced new online treasure services capabilities and commercial and business banking capabilities and we’re currently completing the rollout of mobile banking capabilities for commercial and business banking. In combination, there is new capabilities put us in a position of frankly being able to compete very, very strongly with even the largest banks and their treasury services capabilities for the target market that we are targeting.
We also introduced new mobile treasury services capabilities for our small business. And so together across the commercial platform now we have very robust treasury services capabilities. We introduced new foreign exchange capabilities which in combination with the capital markets capabilities for hedging that we introduced the year before. We now in a position of offering in-house foreign exchange and hedging strategies for our customers and I would say that is unique for frankly I’m not aware of another bank shortly under 10 billion in asset size that has those in-house capabilities and I have already proven to be very effective and are gaining new customer relationships.
And then finally, we completed our merger with First Capital which I am going to highlight in a moment on the next page, so I’ll hold off on that for just a moment.
During the year, we completed a comprehensive performance benchmark study. We also completed the closure of five branches in South Carolina and continued to selectively rationalize staffing levels for investment in higher return opportunities. And it’s the combination of those of that that allows us to actually reduced our benefit, expenses throughout the year and ultimately to meet our efficiency goal of being under 70% by the end of the year.
Looking forward, we expect continue to leverage the investments that we made in these very attractive organic growth. Opportunities in these very attractive communities, we expect to continue to return capital through regular cash dividends and periodic stock repurchases. During the past year, we did repurchase 200,000 shares of stock under our 2.2 million share authorization and we expect to remain active and disciplined M&A discussions.
Finally, I’d like to close my opening comments by looking at slide 5 on page 5. Here you see that we continued to build a very distinctive franchise with I think extraordinarily attractive footprint. We are now the largest regional community banking franchise headquartered in the attractive Charlotte, Concord, Gastonia MAS, we are through our legacy companies we now date back over a 108 years, so it’s a real bank, real depositor or sometimes second every third generation clients of our bank. We are continued to expand and grow a very attractive presence and the attractive Richmond NSA where we started two started ago January as a de novo bank and we now proved the legacy First Capital our ten year old franchise in that market with expanded leadership and very strong banker many of how both leadership and bankers have 30 years or more experience in the Richmond market which makes that a very attractive market for us.
The branch network there I think we mentioned this before, if we went to Richmond today and said I want to cover this market but we’ll do that in a sufficient manners I can, I don’t believe you could do a better job of targeting the locations branches better than what First Capital has done. So we really have a wonderful platform to leverage our franchise own and we are always seeing the results of that. A number of First Capital with customer relationships have already been expanded beyond what they could manage on that platform but now with the expanded balance sheet and capabilities that we bring they’ve been able to leverage and increase those relationships.
Today we have 87% of our deposits in markets with projected population grows above the national average, I think that makes us a unique and frankly gives us a secured city [ph] value to our franchise that is all too attractive. In addition to the strong capabilities that we have in the Richmond and Charlotte NSAs, you can see by looking at the map that we have a very strong presence around the greater Greenville area which is another attractive growth market and we also have good origination capabilities in Charleston, Wilmington and Raleigh.
We are dedicated to providing superior customer service and I think you can that in the products we are dealing as much as we can find ways to do in-house, we like to do, which I think it gives us the distinctive capability when we are meeting with clients and to present good leading hedge kinds of products. We continue to have distinctive products and I think best illustration over the retail side continues to be the mobile banking capability where we not only can do all of the services typically are found there but in addition to that we do picture price so you can take your - pay your bills through mobile banking, you also can turn your debit card on and off with your phone for security reasons.
In combination like all of this gives us a very attractive franchise and footprint, we continue to exhibit attractive asset quality, strong liquidity and strong capitalization.
So with that overview David, if you’d share some of the details of our performance.
Thank you, Jim and good morning everyone. I am now on slide number six. And as Jim stated this morning, we reported a decrease in net income from the three months for ended December 31st, 2015 to $3.8 million or $0.09 a share, primarily driven by the $1.4 million in merger related expenses associated with our partnership with First Capital which closed on January 1st.
Now importantly, we did report at least a small increase in adjusted net income which excludes those merger related expenses and gain a loss of sale of securities to a record $4.8 million or $0.11 a share for the quarter. You can see the high levels results summarized on this slide and I’ll cover that move in detail on subsequent pages.
I would say the key takeaways continue to be our ability to maintain good organic loan growth, good asset quality, good balance in our non-interest income and disciplined expense management together had helps us offset continued pressure on net interest margin. And why it would be great if all those things were sort of pull together in the same positive direction, we continue feel very good that our business model which we will acknowledge is still in its adolescents in many ways, but our business model is still able to produce good solid earnings even when everything is not working ideally for our industry.
Three things I’d note on this page before we move on. First, you can see that we did post 409,000 in provision expense during the fourth quarter to support that loan growth as Jim mentioned, that compares to no provision expense last quarter when we were able to utilize net recoveries for that purpose.
Second, we did absorb a material increase in our effective tax rate from 30.45% last quarter when we benefited from a non-taxable debt benefit to 34.08% this quarter when we really suffered from non-deductable merger related expenses.
And third, you can see that we’re able to reduce our adjusted operating expense ratio to that 67.84% number that Jim share with you and thereby did bring our ratio below 70% by the year.
Now I will note there is some benefit this quarter from reversing incentive compensation accrual since we did not meet all of our objectives, financial objectives for the year and we’ll talk more about that in a second. But even if smooth that out over you know two or three quarters, don’t give the full benefit to the fourth, you would still get under that 70% ratio for the year.
If you’ll turn to slide seven, you’ll see the 12 months results. I think Jim’s kind of said everything that needs to be said here, so why don’t we just forward all the way to slide eight and look at net interest income. What you can see is that net interest income decreased by 387,000 or 2% during the period to $20 million driven primarily by continued margin pressure. Total average earning assets were essentially flat compared to the prior quarter and part due to a significant portion of our loan growth occurring prelate in the quarter, a lot of it prelate in December to be honest, so you should see some of that benefit more this quarter than we saw last quarter.
You can also see a shift in earning asset mix away from cash and investment and into loans, something we’ve been doing for - trying to do for awhile now, that did benefit interest income for the period probably to the tune of a little over $200,000 despite the lower average balances. However that change in mix still really couldn’t fully overcome continued margin pressure. Then margin pressure came in two areas.
First, you can see that loan yield sell by 12 basis points to 448 for the quarter. Now I will tell you roughly a third of that about 4 basis points is not a normal item, it’s not sustainable item, it result from a $181,000 negative swing in accelerated accretion. And you guys know we’ve talked about this before typically when we have one of those performing acquired loans payoff, you accelerate some income in. While in this case, we had a large loan that carried an industry mark premium. So when it paid off, we actually had a rate that off and so you had an unusual hit to net interest income this quarter because of that.
So of the 12, about - you know again a third of it is really unusual, so I wouldn’t consider that a trend. Now, I would say what we see why you still had some decline in loan rates as we - you know lots of contributors but primarily and Bryan can talk more about this. We continue to have difficult through placing our maturing in prepaid loans at the same yields. It’s just a competitive environment and we share with you before, we are not really comfortable stretching on credit or interest risk to hold our yield up. We don’t like the idea of the yield coming down, but we’d rather see the margins come down then take risk that we don’t think make sense long term. And so you’re just seeing that happen and we’ll talk about guidance, but I think that’s something we would not expect to change in 2016.
The second area margin pressure was an increase in the cost of interest bearing liabilities. Big driver here is really what Jim mentioned which is we had a first full quarter of that Richmond high yield market account which averaged just under $60 million in outstanding; it’s about a 134 rate. Now you will remember we ceased taking new deposit under that program back in October shortly after announcing the First Capital partnership. But what a success on it has driven our cost up a little bit. The second factor was some increase borrowing cost and there is a couple of things going on there.
First, understandably, the home loan banks sort of moving up some of their short term rates in anticipation of the fed action in December, so some of that borrowing cost went up. And then the other thing as you see, we did pull down some money on new senior unsecured term loan at the parent level associated with the merger and had expense of that coming in.
Net impact of all that as you can see was a 6 basis point decline in net interest margin to 352 for the quarter or if you take out that accelerated accretion, as we always do, you see a little more modest 3 basis point decline in adjusted net interest margin to the 354 level.
Now from a guidance stand point and what we are trying to do this time and take it this time and we’re not going to probably be this specific in the future but you know in fairness we just closed the merger, you don’t have visibility on how First Capital performed in the fourth quarter. We’re going to try to help you understand how the company might look coming together. So with that in mind, looking at 2016, there are three things we are looking at.
The first, as of this moment, we continue to work under our original budget assumption that the fed with tighten by 25 basis points four time including the move authority happened in December, so you’d have additional moves in June, September and December of this year. Now on average, over the course of the year, we believe that level of tightening would benefit our NIM by call it 2 to 4 basis point. Now of course you guys can pull up Bloomberg today, you can see the market doesn’t expect. Right now the market is looking for one, you know increase somewhere in that September range maybe even later. But you know what we’ve got in our model today was that original view and that would be a 2 to 4 basis point benefit.
Second, when we look at First Capital, even the First Capital actually had relatively good loan yields compared to us by the time we run the fair market value purchase accounting adjustments through the machine and look at how we expect First Capital behave during the year and even with kind of improving the funding cost of First Capital, the merger is still going to cost us, it’s going to negatively impact us probably in the neighborhood of 4 to 5 basis points of NIM during 2016.
Now, importantly, as you guys know, we assume our credit marks are correct. So we are not assuming any accelerated income in purchased - you know the acquired performing tools, we are not assuming any improved asset quality behavior in anything depends up in a PCI pool, so that’s just a straight margin view. If asset quality changes one way the other, you know it’s going to impact that number.
So the third thing is you kind of say, what is net interest margin generally going to do? And we continue as I said a second to expect continued pressure across the industry just given the intense competition that exists for attractive earning assets. Now, I think there is some chance that if the fed continues to tighten, you will see some easing of that competitive pressure. Obviously alternatively if you don’t see continued tightening, that pressure might increase and so all those factors can influence.
Roll that all up together, what things going to happen? Well, we’re going to manage the company with the expectation that net interest margins could decline in the neighborhood of 20 basis points in 2016. Now in the neighborhood, as I can’t tell you that’s 18 or 22, or 17 or 23, but you know we think it’s going to be in that neighborhood of 20 and obviously a lot of things could push it you know slightly up or below that number. And that 20 basis points is coming off of that 354 level we posted in the fourth quarter and it’s saying by the time you get to the fourth quarter of 2016. So over the course of the year, you would see that come in. And as we always say, it’s not going to be even quarter-to-quarter, so please don’t you know kind of just peanut butter that thing across and think that’s and check us against it.
And obviously any meaningful change in those sort of three core assumptions that I mentioned underlying it could influence it positive or negatively. And we’ll be happy to try to get over that again in the Q&A but hopefully that’s giving you guys a good sense of what we expect.
If you got to slide nine, you’ll see that non-interest income decreased by 404,000 or 8% to 4.5 million for the quarter. That was really entirely driven by two non-customer related items. Of course we had the big bully income last quarter and so you had a 687,000 negative swing there and you also had 54,000 in securities gains last quarter that we didn’t have this quarter, so those things missing.
If you actually look at our core customer related activities, we experienced a pretty good performance. You had a 69,000 or 5% increase in basis service charges our deposit account that’s been a trend you’ve seen for a couple of quarters now. We had a 110,000 or 20% increase in ATM and card income. We are benefiting that from the expenses of that special programs starting to abate a little bit that we’ve talked about in the past. We had a 199,000 of 84% increase in capital markets income, good hedging activity is people were anticipating right moves, we had a little more customer interest and trying to preserve their rate positions.
And those things offset were turned out to be flat mortgage income and a little bit of a decline in wealth management activities.
Overall, we continue to feel very good about the diversity of the non-interest income since it seems that virtually every quarter a different business leads our results. In this quarter I think we give to capital markets and we’ll see who leads in next quarter.
And the guidance here, when we think about non-interest income, still feel very good about our expanded product lines, feel very good our origination capabilities, believe those things should collectively be able to drive low double digit to low-teen kind of growth in 2016 compared to the underlying non-interest income levels you seen over the last couple of quarters. And on first one I say underlying I would look at $4.5 million run rate and kind of say that’s the basic if you take out some of the noise. And when we say kind of low double digits or low-teen range you know is that 12%, is it 16%, is it 11%, is it 17%, but something in that range is probably what we would expect to hit during the course of the year. And again same qualifier any given business unit, any given quarter, those changes not going to be even over the course of the year.
And then in addition, we would expect to take up about a $1 million of non-interest income from First Capital during the year. So the guidance is really on the old legacy 4.5 through another $1 million rough we drawn it for First Capital.
So if you go to slide number ten, you could have break that of non-interest expenses which continue to be a bright spot for the company, on a stated basis, they decreased by 57,000 for the period, that decrease really benefitted from a couple of things. First, you have the absence of 640 some thousand dollar in cost related to branch closures last year and you can see those in those memo items down there that we had last quarter rather, as well as we had a $570,000 adjustment to incentive accrual that I mentioned. So you have those two unusual benefits in expenses this quarter.
Now those things were more than offset by 1.4 million in merger related expenses, significant portion of which were non-deductable, which is why you know you see what ultimately it happen on an interest. If you net those things out, you get still a reduced core run rate driven in salaries and employee benefits, communications, advertising, OREO, it’s kind of across the number of categories that we continue to have very good expense discipline.
When we think about this forward guidance going for the year, again we’re going to do probably the same type of investments you saw on ‘15. We are going to look at some selective hiring in key markets or product areas, we are going to look at some thoughtful product line extensions, you are not going to see likelihood to big sort of megacity team lift out that you saw a couple of years ago, but we’re not going to not spend money either. And obviously we’re going to have a material pickup in our run rate associated with First Capital which will logically be heaviest in the first quarter since we’ve just completed the merger there.
Now with that framework if you look at the memo items on this slide, what you’ll see is for a just at non-interest expenses, you get an 18.1 million run rate in the second quarter, 18.4 in the third, 17 in the fourth. To get a normal view, you sort to got to take those unusual brands closure expenses out of last quarter and you are going to add back the incentive comp accrual for this quarter. And what we tell you is call at $17.8 million. So that sort of what we think you know could it a 100,000, 150,000 either way it’s sure, but just think of it is a 17.8 for the legacy Park Sterling non-interest expense run rate.
We would believe that with the initiatives, we plan in the addition of First Capital, over the course of the year, the normalized quarterly run rate will increase in the mid-teens range, so 14% to 16% something in that lip code. Again with the caveat, it’s not going to be even by category, it’s not going to be even of our given quarter.
I would also note though maybe it’s a good place to think about your models. You know if we do better in loan growth or margin, well then we would expect to do have higher incentive comp accruals. So expenses will run off. And as you saw this quarter, if we fail to get some of our revenues and our expense savings that we expect, well then incentive comps going to do down, so this is dynamic model, don’t run your model and just kind of make everything good or everything bad because they are going to play off each other a little bit.
As you get aside 11, you are see our normal comparison to those of our peer group, happy to answer any questions. But why don’t we move on to slide 12, which shows an overview of the balance sheet which remains very strong. We see the total assets increased just over $2.5 billion by year end which was really driven by the organic growth, Jim mentioned about 10% rate, 41.7 million. We also did post an increase in our cash position as a result of that 30 million in debt we brought down an anticipation of the First Capital merger. And finally you see an increase in shareholder’s equity where retained earnings were able to offset some higher unrealized losses on securities and balance sheet hedges as well as about 48,000 in share repurchases during the quarter.
Net-net all that said, TBV per share went up about $0.02 to 5.60 and TC to TA came down a little bit but still strong 9.93.
Moving on to key components of the balance sheet if you look at slide 13, you can see an overview of marketable securities which decreased by about $19.5 million or 4% for the quarter. As we’ve shared in prior conference calls, we’re not necessarily looking to decrease this component of earning assets but we still have trouble finding securities, we really want to purchase in this environment. Duration of that portfolio stays very manageable just around 3.5 years, so manageable risk position.
If you go to slide 14, you’ll see an overview of our loan portfolio, which excluding loans held for sale, you see that 10% growth we talked about to the 1.74 billion at the end of the year. We detailed out the changes in load mix on the table. Probably the most important thing to know here is you can see we had a nice jump in C&I and owner occupied together going from 31.8% to 33.2% of total loans during the period. I love to see that trend continue because those are stickier loans in the real estate side and they also offer some really interesting cross selling opportunities with treasury services in other areas. So that was a nice trend.
If you get aside 15, you’ll see our loans by geographic segment, organic growth continues to be driven by the metro markets which increased about a 14% annualized pace. The central units which have the mortgage and builder finance and private banking also grew nicely. While in contrast community markets continue to shrink because they are not as many opportunities in those market as we have elsewhere.
We’ve also included a snapshot of our loan production over the last couple of years. You can see at the top chart, the commercial segments posted about 41 million or 9% increase in production for the year when compared to 2014. I know the bottom retail about 12.5% to 26%. We’ve also shared in the bullet point, one measure that might help bring alive one other things Jim has mentioned a couple of times which is we did see a heavier load of our level of payoffs this year than we’ve had in prior periods. And that’s evident we think in this ratio where it look as $3.80 of commercial loan production to produce a dollar of net growth in 2015 compared to about a 2.6 times ratio in 2014. So you know heavier churn, how to work to keep that portfolio up.
Now impart, it’s a nature of the learning we do and we understand that. So but it’s just to give you a sense that it is a lot of work just to growth that portfolio 10% or so for the course of the year.
Having said that that’s the overall message really should not be lost that we do continue to post double digit organic loan growth even in this challenging environment. Now when we think about forward guidance on loan growth, current pipelines remained very solid, continue to benefit from having very good banking teams operating in very good markets. Very excited as Jim mentioned on the opportunity for the new combined team in Richmond and therefore we would expect to continue to post more than our fair shared organic loan growth. Well, what does that mean? It’s sort of economic market competitive positions kind of hang where they are today, look as reasonable there are today, we would expect to continue produce that sort of low double digit organic growth again in 2016. If those factors slip in some way both - you know you could flip back into the higher single range and again with the caveat any given loan category, reporting period is going to uneven.
If you go slide 16, provides detail on our funding profile. Deposits side we saw a reversal of that strong seasonal increase in DDA that we showed you last quarter which held over all deposit growth about $6 million for the period. The greater impact in funding came on the borrowing side when we did incur that senior unsecured term loan we’ve mentioned a couple of times for the First Capital merger. I’d also note that you get a shift here that all of our home loan borrowings as of the end of the year, we’re actually do within a year and we’ve rolled some of those out already but that’s why you have sort of everything rolled up in short term borrowings on this screen, really nothing else to talk about here.
If you go to slide 17, you’ve got the key comparisons of capital and liquidity ratios to the peer group which continued to be favorable.
If you go to slide 18, you got the overview of asset quality which is as Jim mentioned remains real straight to the company, you can NPLs continue to improve down the 47 basis points, NPAs down to 54 basis points, posted a modest 2 basis point annualized net loss this quarter, which left us with a small recovery for the whole year of about a basis point. So Nancy will be happy to talk to you about credit quality if you any question.
If you turn to slide 19, you can see that we did have an increase in the allowance $322,000 about 4% which was just a support that continued loan growth. The ratio held right at 52 basis point range. And if you include our fair market value adjustments are about 2.14. Now when we think about forward guidance on provision expense, get back to ‘14, we posted a 20 basis point recovery for the year, ‘15 we post a basis point recover for the year. Last I could tell you mid we have net charge offs ultimately this year, because we are you know the recovers are lessening as we’ve sort of worked away through all those assets.
And we’re going to want to maintain our allowance ratio in about the same range at least that it’s in today. We don’t see problems in the portfolio, so we don’t think it has to go up, but we certainly don’t want it backing up. So I would put some modest level of net charge offs in the coming year plus loan growth, we’re going to have to provision for, that’s what’s going to happen.
And finally on slide 20, you can see some of the same measures compared to our peer group which obviously continue to look good. And in conclusion, you know happy to report record quarter, be a small increase but happy to get the increase. I feel very good about the business model. I feel very good about the merger and how positions us for 2016.
And with that I will turn it back over to Jim.
Thank you, David. Before going to questions, the only thing I might mention that I failed to mention at the beginning that may help you in your thoughts is we do plan to have our core conversion completed sometime next quarter, so we doing that fairly soon.
And with that operator, we can go to questions.
Alright, we will now begin the question-and-answer session. [Operator Instructions] Our first question comes from Stephen Scouten of Sandler O’Neill. Please go ahead.
Q - Stephen Scouten
Hey guys good morning.
Hey first congratulations on getting that First Capital deal closed quickly, I think that was really impressive and well ahead of the curve, so congrats on that.
Thank you. We’re glad to have the extra core earnings.
Exactly, exactly. And one this as it pertains to that and I apologize if you touched on this in the call and I might have missed it. But in terms of the expectations for the timing of the cost related to the deal, is there any change to that given the expedited timeline on the closing and could we see some of those maybe hit more in ‘16 versus ‘17, or any real change or any color you can give there?
You know I think the best way to think about is Stephen is really what Jim just mentioned which is whether it’s cost save or revenue, you just sort of pulled everything up probably a quarter from where I think most people model the deal and frankly where we put our models. Now having said, we thought we’d get it closed January 1. So this is kind of where in our heart of hearts we were always targeting. But I just kind of pull everything up the quarter is probably the best way to think about it.
And First Capital, I had a good quarter, you guys won’t be able to see that obviously, you know you can pull cover for it, but they’ve got the same distortion we do from merger related expenses and so. But the company you know John and the team there continue to do real well.
Okay, okay. And that’s - and I think if I remember correctly a lot of those expense saves where kind of waited towards ‘17, so the timeline I’m realizing then you still expect to be somewhat elongated but again everything just push forward the quarter?
Yeah, now I will tell you, now that you say it that way. You know part of that was there is one management contract, it’s not happening now, that’s been disclosed obviously and that was part of what would have been the saving in ‘17, that just not going to happen. It never going to be an expense anymore Stephen, so that probably would pull some of that stuff forward right. I am sorry I hadn’t through about that when you first asked your question.
Okay, that’s fantastic. And then on the loan loss reserve, I know you just mentioned there David probably keeping it as a flattish percentage, but with the addition of First Capital loans, would it still be fair to assume that that will decline as a percentage of loans or you saying that we should - it should be in that 50 basis point range even with the inclusion of those new loans?
No, you’re right, you know you’re right Stephen because those things obviously they are marked. We think the marks are the right marks and so you don’t expect any provision expenses associated with that during the course of the year, but it will have the effective looking like the margin the ratio comes down, that’s a very fair point. Because we wouldn’t think we need to throw provisions against those things you know unless the markets deteriorates on however the course of year. We feel very good about the marks.
Right, right. Okay. And then maybe one last one from me, just really good guidance on the NIM obviously but I just want to make sure I am completely on board. In terms of the 20 basis points decline you know you are kind of staying from the 3.52 down to maybe ending the year, it’s 3.32 on GAAP basis.
Yeah, plus of minus, could it be 3 or 4 basis points, absolutely. And if you know if something is radically different in the interest rate environment then what we’re expecting it could be different. But yeah, I think that’s the way to think about it. And you know obviously, if things change, we’ll update the guidance.
Yeah, and where are the new loan yields coming on today on average?
Bryan - lower than - Bryan you want to answer that.
I think we’re seeing for good quality credits, we are seeing some deals LIBOR plus sub 200, but I mean if you get LIBOR 250 range for most of these, that’s somewhat at the top of the market. So it’s very competitive out there for top quality deals which is what we still think we are adding to our portfolio.
Now business banking you do better, consumer you do better, that’s - but the core commercial is a big of our book and it’s a big part of our growth. And so net-net roll it all over, you probably going to do a little bit better, but the big drivers going, Bryan just mentioned.
Okay, great. Well thanks for the clarity, guys, I appreciate it.
[Operator Instructions] Our next question comes from Nancy Bush of NAB Research. Please go ahead.
Good morning, gentlemen. Couple of questions for you, the success of the I guess you call the experiment in Richmond where does that stand right now, I think you said you raised 60 million you know are you still offering those rates or you still raising money there and how does that play into the outlook for the margin in 2016?
It won’t have any more impact then it’s already have all in the fact that those balances could fluctuate because those who have the account holders can rise or lower their balances and that could have some modest effect, but we cut that off in October shortly after we had announced the First Capital. And it really was you know obviously it was an experiment, we feel like it was very successful gives us a high degree of confidence and the ability to go selectively in the markets to do a similar kind of offering to help grow deposits at a lower cost. We think overall then it would be if you included what normally your lower interest but higher facilities and personal cost. We like the tradeoff is very attractive.
So we might go to another market with it and likely we would do anymore in that market. Now that we have a much larger presence, we would more disintermediate between the First Capital deposits in that new account.
So basically this is - you are looking at this is sort of a market booster I guess if you want to you know add some have in specific markets?
If you go back to the original concept, Nancy was basically thinking about the all in cost to deposit gathering including the fixed income associated with the branch. And could you - it’s just what LI and other folks do right. Could you actually take a market where you don’t have a big physical presence and drive reasonable deposits, it will lower all in cost. You know where we had it truncated in Richmond it was well - we picked up eight branches, so the whole idea having you know I know sort of break environment you know now the rate tradeoff, do it every day, do the merger again. So - but Richmond was no longer the right place to try that and think we would look at other markets where we don’t have a strong physical presence and see if it works. And overtime you know the idea would be would it let you take out physical presence in other markets.
I would add that it may not be as expensive in other markets, Richmond happened to be a very intensely competitive from a deposit rate perspective, more so than other markets.
Okay. And secondly, Jim, this is a question for you. When I am looking at the map on page 5, you know there are two things that sort of you know jump out you and one is the distance between you know Charleston - pardon me - Charlotte and Richmond on 85 and the second one is the distance between Charleston and Wilmington. You know is it important to sort of filling the blanks on that map and if so you know which is - which of those areas is more important to you?
Well you now obviously Raleigh would be very attractive to try that to get in. We’ve targeted that had that as a target market. But if you talk about filling in the blanks between, you know we are really focused on the higher growth markets Nancy and that was one of our original proposition was that we were to build a franchise that was in markets that were growing faster than the nation average because we believe that would help us avoid some of the consequences of being in low to no to negative growth markets where you stretch for growth and maybe do some foolish things.
So if you talk about filling in the blanks in between there, I don’t know that we will really see that in if we really talk about gain in some of the smaller markets and between, we’re really focused more on the larger markets. So if I guess the best way to describe the strategy that we’ve had and so far we feel very good about it and are committed to continuing it.
Okay. So that would lead you, I mean the highest growth markets that we’ve got against in the south you know around the coast right now so that would lead you to more around Charleston and/or Wilmington rather than trying to do fill in between the two?
Thanks correct, yeah, well.
Alright, thank you. Great, thank you.
Our next question comes from Tyler Stafford of Stephens. Please go ahead.
Hey, good morning, guys.
Hey, I appreciate all the color and outlook for the guidance for the year. I just had a couple of follow-up questions. Just to be clear that 20 basis points of margin compression give or take that guidance is under the framework of an addition three set funds movements, is that correct?
Yeah, so if - everything else didn’t you know then you’ve got that 2 to 4 basis points, you are not going to pickup Stafford.
Yeah, got it. Okay, I just want to be clear about that. And then any color for the tax rate for the year, I know it bounced around just a last couple of quarters with a bully, should that normalize?
Yes. Yeah, I mean obviously you never know when you are going to have a bully event, we are through most of the non-deductable of not all the non-deductable merger related expenses, those tend to be around the S4, so that’s done. You have a little bit this quarter from some tail billings maybe from the counsel but it should be much more normal.
Okay and you actually just said a little bit of my last question, do you have the remaining merger expenses that we expect to see?
Don’t but you now I am sorry, I didn’t bring that in here but if you go to the original guidance, you could take that number, take off the 1.4 million, I’ll tell you we’d think about the merger related expenses incurred the both companies, First Capital actually incurred more than Park Sterling did last quarter. You could basically deduct those things off and kind of get a ballpark. The big things we have left are the conversion costs. So you are going to see those coming in the first two quarters of the year. You may see some trailing things through the second half of the year but the big expenses will be out of here this quarter and all likelihood.
Okay, very good.
…with the rest is first quarter.
I appreciate it.
Our next question comes from William Wallace of Raymond James. Please go ahead.
I got two questions. David, you spoke about your non-interest expense run rate kind of legacy and then gave some guidance, I think you said 17.8 million with 14 to 16 or I think mid-teen meaning 14% or 15% growth on a run rate basis, once we layer in First Capital and whatever else. So my question is, does that include cost saves?
Yes, that’s a net number.
Okay. Okay and then I just - I am struggling with margin a little bit, so you are saying year-over-year based on your models, GAAP NIM is going to go down to the 332 range?
Yeah, I think that’s a simple way to think, 334, 334 you know as a plus or minus two or three either side absolutely could be, but that I think is the right zip code.
Okay, you had $12.6 million of accretion related to the PCI portfolio in 2015, you don’t disclose any accretion related to interest rate marks, so I guess I am just surprised that it’s going down so many with the anticipation that there would be addition accretion coming in from First Capital and I thought that their earning mix would actually have a positive impact on a core basis to your NIM, so I am miss-modeling something somewhere, I am wondering if maybe you could just help us at little bit on what’s going on with some of the moving parts around accretion?
Right and that would - we will have - see one thing about the accretion from the prior acquisitions you know that’s going to be in the model, that’s going to be you know - and I think you can probably look at a similar trend line to what you’ve seen over the last four, six, eight quarters and expect that sort of what’s going to happen there. I think you do have accretion if you will from the First Capital merger in that guidance. What you got at that is whatever the initial discount rate assumption is for the loans, but we are not doing as assuming you’ve got anything coming off that initial discount rate assumption right, because we are not assuming that the credit marks will not be fully used. Because right now we assume is credit marks are good and there is no reason to come off them, so there is no addition accretion that we every model from an acquisition when we close it.
Now we’ve done better in the past but I think also as you are seeing across the industry, the marks were higher in the past too. You know this - you know could we do better than we are giving you guidance for the First Capital? Sure. What I count on it right now, I just wouldn’t, I mean we’re not going to manage the company counting on picking up margins there beyond we’re kind of saying. And probably what happens is they did have a good loan mix but we’ve got a market down, right, because that’s - you know Bryan’s point of where the current yields are, we’ve got to mark those things to current yields. And so these don’t get the benefit from that fully as you were just dragging it across.
So if you mark it down, don’t you schedule that recovery of that mark over the estimated life of the own?
Yeah, absolutely. Yeah, absolutely, but it’s still the way those lives look right now, it still has a slight negative impact this year to us.
Okay, and then there is no PCI once that you’re picking up in the deal?
It’s a pretty small booking. You know again we will put the way we mark those things right or wrong. We put a pretty conservative discount rate in there day one, we would rather see the loans behave and if it’s all effects cash loan take the yields up, that’s great, but we’d rather have that occurred then being there and have a PCI impairment.
And so we put a pretty conservative discount rate. And if you think about it economically, I’ve got a PIC loan, I’ve just taken all the credit risk out of that pool by marking it, but what is the appropriate discount rate. It’s not - you know to us it’s not like you are marking it as a distressed asset, because you just took all the credit risk out of it.
Yeah. Now, I get you there. And so if you - just say we are in lower for longer and fed doesn’t do anything, you said you don’t pick up the 2 to 4 basis points since 2016, where - if we’re in lower for longer, where does the margins bottom?
Gosh, I don’t know, I don’t know how to answer that. Well, I mean if you take - you know if you really want us to stand back and take a big picture of you, the big banks all have margins well inside where the community banks are. We probably got a risk profile booked that is somewhere in between where the big banks are and the community banks are meaning it’s probably better than the typical community bank, right. You pay the price on your NIM for that higher asset quality you know which is why we’ve been working hard to get the non-interest income sources up and why we’ve been working hard to get the expenses right sizes for the revenue base and those things have been you know frankly why we have been able to produce the earnings we produced this year in a declining NIM environment. And I think that is a focus that the company will continue to take.
Okay, thank you. And I’ve one last question, I promised I’ll stop. But - on your loan, your new loan production, are you guys - is your mix trending more toward floating rate loan, so would we see a little bit may be more pressure on the loan yield spend, where you keeping your mix with the same interest rate profile?
Well, we’ve got our view of how that mix works in that guidance we gave you, but we have - you know what we see is, is what we’ve seen for the past few quarters, Bryan you can jump in but you know people do like to fix rates, the smaller loans come on the books of fixed rates because they uneconomic swap for us or for the customer. The larger loans we tend to swap and then so it does become a floating rate asset for us. But you can look in our notes, it’s not like we have a billion dollars of swaps out there well you know you’re talking about a $100 million has become 200, sure it could.
And you know we have a few borrowers becoming wanting a variable rate but that’s not the norm, not in this rate environment, people usually want to fixed rate, so we either getting it a naturally or getting it to the swap. Now the duration of the portfolio, I had - we’ve not got our outcome models back yet for December but we’re inside two years on our duration for the loan book in September. There is nothing that would have cost at that more radically in the last three months.
Okay, thanks so much. I apologize for taking so much time. I appreciate all the color.
No, it’s all right.
Our next question comes from Christopher Marinac of FIG Partners. Please go ahead.
Thanks. Jim, I was wondering if we get out of rates for a minute and look at the big picture in Richmond, you know what are the big banks doing and what is the opportunity still left in new business? That would be helpful.
Yeah, sure, in this - a little bit Chris may even go back a little bit to Nancy’s questions because I think there is relationship here. We spend five years looking for the opportunity to expand in Richmond. And if you go back and look at our following and you’ll see we literally start our conversation with First Capital that long ago. And we talked to a lot of banks in that area and we ultimately decided if we can’t buy it and build it and so we started building in that market and felt very good about it. And I think you all have seen over previous quarters how well that market was doing. We were telling you, you’d ask us where is the growth coming from. In any single quarter it might be coming from Richmond, it might have been Charlotte, it might have been Wilmington, might have been Charleston. It’s kind of coming and gain quarter across franchise. Could not feel better about how well that teamed it.
But all of the sudden we have a physical footprint across that market. And so as David mentioned about the money market initiative we had that makes a lot of sense when you are trying to play bigger than your footprint but when you have a very attractive footprint like that then you got different ways you can play in that market. Bill Bunn, who runs retail banking for us, Bill’s been a substantial part of his carrier in Richmond running retail banking for me when I ran the Mid-Atlantic and Richmond was part of my area, he ran the retail banking. So we feel really good about our knowledge with the bankers in that market and our ability to growth the retail franchise there.
From a wealth management standpoint as you’ll recall, the head of our wealth management for the company Michael Williams has been in that market, he built well for management for First Market, he then ran wealth management for StellarOne, and he is now building wealth management for us across the franchise but he’s been able to attract some very good trust off rules and private bankers and retail brokerage in that market. And so we got a significant opportunity to grow, we think across the wealth management piece of the business. And then obviously the combination of our commercial bankers together with the commercial bankers and business bankers at First Capital all of them were excited to be retaining and we tend to call really bankers early time we talked to our folks there and they talked about said what bank in Richmond would you most for us to find a partnership with. Early time without exception it was First Capital and it was that because of the footprint but also because of the bankers and the people that we knew there.
And Gary Armstrong, who was running commercial banking for First Capital is now our Market President for Richmond. Good of the way that you know when we partner with a company. We’re looking for leadership as well as for physical capabilities in people and staff and then we feel like we found that there.
Now a little bit higher view of that market, my view of it is that the larger banks there are still in some just away whether that’s the BBMT, the Bank of America, Wells or SunTrust and it’s because of significant waves of cost cutting and changes in business models in some cases that frankly most of the people of those that I knew when I was there not that long ago they all spread out within the market today. I think there is a significant opportunity for market leadership there from the community banks. And if you - you can pick your other players in that and I think there could be several. But I think we’ll be one of those players, we have the leadership and the franchise and the knowledge of that market to be a significant player in Richmond. So we are very enthusiastic about and I’ve welcome so far not just from the First Capital bankers and employees but I’m welcome from the community has been very strong. We’ve had a number of lead articles front page, business of Richmond dams, about our presence. So we gain a lot of really good press and good reaction from market. So it might be a little more than you’ve already hear on that Chris, but that’s how strong when we feel about the market.
That’s great Jim, I appreciate that and I guess it’s fair to say that of the overall loan growth double digit as Dave described awhile ago in the call is a disproportionate or above average, how do we want to think about it amount of this coming from Richmond this year?
Yeah, I guess only in the sense that now you look on the bankers we have in that market relative to what we had before, so probably more likely that Richmond and Charlotte you are going to lead in growth more than you would have see Richmond before for that very reason. So yeah, I think that’s fair, if you want to compare that perhaps to Wilmington or Charleston for example or Raleigh in terms of presence, I think that our zone would be if that be the case.
That’s good Jim. Thank you for the color, I appreciate it.
And this concludes our question-and-answer session. I would now like to turn the conference back over the Jim Cherry for any closing remarks.
Thank you. I just thank our listeners again and we appreciate your interest in Part Sterling. And we’ll continue to try to give you as much color as we can both around our performance and one of the way we are thinking about our future performance going forward. Thank you again for your participation this morning.
The conference is now concluded. Thank you for attending today’s presentation. You may now disconnect your lines. Have a great day.
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