Capital Bank Financial (NASDAQ:CBF)
Q1 2016 Earnings Conference Call
April 22, 2016 10:00 AM ET
Kenneth Posner - Chief of Strategic Planning, Investor Relations
Eugene Taylor - Chairman and Chief Executive Officer
Christopher Marshall - Executive Vice President and Chief Financial Officer
Bruce Singletary - Chief Credit Officer
Jaime Gow - Chief Accounting Officer
Paul Miller - FBR Capital Markets & Co.
Frank Barlow - Keefe, Bruyette & Woods
Please standby we are ready to begin.
Thank you, Jennifer. Good morning, everyone. I'm Ken Posner, Chief of Strategic Planning and Investor Relations for Capital Bank Financial Corp. Welcome to our First Quarter 2016 Conference Call which is being recorded.
During the call, we'll refer to a slide deck on the Investor’s page of our website www.capitalbank-us.com. The slide deck and the press release contain a reconciliation of non-GAAP financial measures to GAAP results. This call contains forward-looking statements regarding expected operating and financial performance. Statements that are not of historical facts may be deemed to be forward-looking. The words believes, anticipates, plans, expects and similar expressions are meant to identify forward-looking statements.
We caution that forward-looking statements may be affected by risk factors, including those set forth in Capital Bank's SEC filings and actual operations and results may differ materially. The Company undertakes no obligation to publicly update any forward-looking statements.
At this time, I'll turn the call over to the Company's Chairman and Chief Executive Officer, Gene Taylor.
Good morning. Thanks for joining us today. In addition to Ken Posner, I am here this morning with our Chief Financial Officer, Chris Marshall; our Chief Credit Officer, Bruce Singletary; and our Chief Accounting Officer, Jaime Gow.
We’ll discuss the Company's results and then answer your questions. You’ll find the first quarter highlights on Slide 5 and then taking you through the numbers, I would like to emphasize our disciplined approach to growth; the quality and diversity of new business we are booking, and the consistency and sustainability of the Capital Bank business model.
The Company report a GAAP EPS of $0.22 and core EPS of $0.38 per share, up 41% year-over-year. First quarter loan production totaled $296 million, which is down slightly year-over-year, but bear in mind that’s due to the prime auto portfolio which we put into runoff last quarter.
Excluding auto, loan production was up 9% year-over-year which reflects our constant focus on sales force productivity. The loan portfolio was flat during the quarter mostly due to the auto runoff and then it’s helping us to achieve a couple of goals. First, we would like to push off crossing the $10 billion asset threshold until next year.
Second, we are emphasizing production in loan segments with more attractive spreads and this is part of our strategy to improve our return on assets to 1.1% and generate an attractive double-digit return on tangible common equity by the end of year 2017.
Just as important as growth is, is the quality of what we’re booking and our credit metrics remain excellent. Bruce will share with you some additional information on our commercial real estate loan book and you will see that our exposures are very modest, which means we have room to continue to prudently grow this asset class.
I am very pleased with the core deposit growth this quarter. We grew core deposits by $213 million or 21% sequentially on an annualized basis and this follows strong performance last quarter as well. Strong deposit growth improves the quality and stability of our funding base, which will pay dividends over time in terms of profitability, liquidity, and interest rate management.
As you saw, we negotiated in loan termination of the remaining FDIC loss sharing agreements, which saves us the associated amortization costs and helps clean up the income statement. Otherwise, fee income was largely stable in the quarter.
With regard to expenses, we were pleased to hold the core efficiency ratio to 61.6%, which was better than planned. As we mentioned last quarter, we don’t count on Fed rate hikes in our profit plans. Instead, the 1.1 ROA target depends on things we can control namely quality revenue generation plus appropriate expense control.
Switching gears to CommunityOne, we are in very good shape with regards to integration planning and I am pleased by our teammates from both banks have been working together to ensure that we can deliver on all cost reduction and profitability targets for this transaction.
We are planning for the deal to improve profitability and return on equity, and we believe it will make our Southeastern banking franchise even more valuable. We’ve received shareholder approval at both Capital Bank and CommunityOne, which positions us to close the transaction very quickly once we receive regulatory approvals.
I will now turn the call over to Chris.
Thanks, Gene, and good morning, everyone. Q1 was a good solid quarter and performance in line with our plan, which gets us off to a good start for the year, and it positions us perfectly for the integration of CommunityOne that echo Gene’s comments that we feel we’re in very good shape to deliver on all of our cost reduction and profitability targets for the merger.
To summarize our first quarter, Capital Bank reported net income of $9.8 million and core net income of $16.9 million, or $0.38 per share which was up 41% year-over-year. Core adjustments totaled $10.7 million pre-tax, $7 million after-tax of which the largest was the $9.2 million pre-tax charge for the early termination of the remaining FDIC loss share agreements. And then we also had $1.6 million in merger related costs. You can see a summary of adjustments at the bottom of the slide and our appendix contains a full reconciliation of GAAP in core income.
Now, let me summarize the major items in the income statement. First, net interest income declined sequentially by approximately $700,000, reflecting the shorter day count in the first quarter, but it was up $1.6 million year-over-year, thanks to solid portfolio growth. The NIM declined by six basis points sequentially which was slightly better than expected, thanks to higher level of recoveries.
We recorded a provision of $1.4 million for new loan production and our credit metric as Gene just said remain excellent and Bruce will cover that momentarily. Excluding the FDIC early termination costs, non-interest income was largely flat and core non-interest expense was higher sequentially due to seasonal first quarter accruals, but it’s down 10% year-over-year. And then finally, tangible book value rose by $0.24 in the quarter to $19.77 per share.
Now, let’s take a look at new loans. I’m turning to Slide 7, you can see the effect that exiting prime auto had on production. Now excluding auto, new loan production in the first quarter was $296 million which was up 9% year-over-year, but despite the strong production, loan growth was flat this quarter, which was slightly below our plan for the low single-digit growth and this was due to a pickup in payoffs for certain commercial real estate loans and lower line utilization, but there was nothing unusual and we are not seeing anything new in the environment that would impact our full-year plan.
Now, on a pro forma basis for CommunityOne, we are right at $9.8 billion in assets and remind you we expect to reduce this by $250 million to $300 million through the run-off of the auto portfolio and the sale of some lower yielding loans. We expect stronger loan growth in the second half which will leave us at just under $10 billion in total assets at year-end.
Now turning to Slide 8, I’d say we were very pleased with this quarter’s growth in core deposits, which were up $213 million or 21% annualized following very strong results in the fourth quarter. We generated excellent growth in non-interest checking, which is always our top priority, which was up $70 million or 24% annualized.
Additionally, we saw strong growth in money market balances which has been a special focus for the consumer bank over the last couple of quarters. But we are very pleased with the growth that I’d also remind you that first quarter is typically our strongest quarter for deposit growth.
The cost of core deposits rose two basis points sequentially and this is mostly due to the Fed’s move in December as well as to a lesser extent the growth in money market. We continue to expect deposit cost to rise at around one to two basis points for quarter for the rest of the year.
Now turning to Slide 9, let’s discuss the NIM which compressed by six basis points during the quarter to 3.64%. We did get a small benefit in earning asset yields from the Fed’s rate hike which offset four basis points of impact to our funding costs. Also we had some recoveries on legacy acquired loans during the quarter, which contributed roughly two basis points in non-recurring benefit to the NIM. Otherwise, there is no real change in the story of continued NIM pressure associated with the runoff of acquired loans and the persistent low interest rate environment.
Now we continue to project about 10 basis points in NIM compression per quarter, which will be offset to a small degree by the sale of lower yielding loans. If Fed raises rates in 2016, we would get a minor incremental benefit, but we are not assuming any rate hikes in our plans.
Now, let’s turn to Slide 10 and review non-interest income. As you saw we negotiated an early termination of the remaining FDIC loss sharing contracts which will eliminate the remaining amortization from our income statement.
We are pleased by the cost savings we recognized as well as the fact that it makes our income statement just a little bit clear going forward. The termination was effective as of January 1, so there is no amortization during the first quarter. Otherwise fee income was largely flat with the exception of a $400,000 decline in the other category, which reflects a BOLI benefit received in the fourth quarter of last year.
Slide 11, shows you the trend the non-interest expense, as we mentioned last quarter. Core non-interest expense rose sequentially by $2.2 million, which reflects lower than average benefit costs in the fourth quarter as well as typical first quarter payroll and healthcare accruals.
The core efficiency ratio was 61.6% this quarter was - we just a little bit better than our budget. Looking at the trend year-over-year core non-interest expense is down 10%, which is due to lower legacy credit costs plus the impact of the various cost saving initiatives that we implemented last year.
Now again integration planning for CommunityOne is almost complete at this point. And we feel very good about our 39% fully phased in cost savings target. We are planning for systems integration over the July 4 weekend, which should position us to start realizing cost savings during the fourth quarter.
Slide 12, summarizes our capital and liquidity positions, which remain strong. The consolidated Tier 1 leverage ratio declined sequentially from 12.7% to 12.5%. During the quarter, we repurchased 148,000 shares, which brings us to accumulative 23% of the Company's shares that have been retired since we went public.
Our remaining Board approved stock repurchase authorization stands at just over $100 million. And with regard to future repurchases, we view our stock as for very attractively priced at these levels. However, as a reminder you should expect limited share repurchase until the CommunityOne acquisition is closed. There has been no material change in the composition of the securities portfolio which remains concentrated in highly liquid instruments with moderate direction.
And so with that, I'll now turn the call over to Bruce to discuss credit trends.
Thanks Chris. Let’s start by reviewing the performance of the new loan portfolio on Slide 13. As you can see credit metric remaining quite strong, cash used to fund sequentially to nine basis points and non-accruals was flat 11 basis points. In both cases, these are at the low point in the last five quarters. In addition, criticized and classified loans at a very solid level at 91 basis points.
Lastly, net charge-offs was 17 basis points annualized. However, bear in mind that recoveries for legacy acquired loans are not included in net charge-offs to report, but rather show a net interest margin are in provision of reversal impairment. We have built a diversified portfolio with high quality credit relationships and no material concentration in any borrower type, collateral type or geography. While charge-offs remain well and we will likely lag at some point at this time I am not seeing any indication of weakness in either our commercial or consumer portfolios.
Slide 14, provides you an update of special assets activity. For the total portfolio non-performing loans declined from 1.2% at December 31 to 1.1% at quarter end. Again, I will remind you non-performance consist almost entirely a legacy acquired impaired loans which have been considerately marked the expected life time losses. We continue to reduce the special assets portfolio which is down 75% from its peak $250 million.
Inflows into nonperforming status remain minimal and we are pleased with our collection results. This wasn’t indeed a good quarter for legacy credit expenses, which is down to just under $1 million excluding the FDIC termination cost.
As expected we are experiencing lower valuation, workout, and compensation expense. We have benefited from the gains on OREO sales. Clearly there is a much room for progress, clients and legacy credit expense. However, this point of cycle, we do expect credit expenses to remain at relatively low levels for the foreseeable future.
I will now finish my comments by providing you some color on our commercial real estate portfolio, which has been a topic of focus in some markets in recent weeks. You’ll find a portfolio breakdown on Slide 15. As you can see our CRE portfolio amounts for only 22% of total loans.
If you look at the chart on the right you will see that CRE portfolio was highly diversified by geography and collateral. Construction and development make up around 5% of total loans. Also our total multifamily exposure is slightly over 1% with most of their exposure in Carolinas. This portfolio is in very good share and as a result we are well-positioned to prudently grow our CRE portfolio with high quality projects and proven operators and developers across our footprint.
I'll now turn the call over to Ken for questions and answers.
Thanks Bruce. This completes our prepared remarks and Jennifer would you please open the call to questions.
[Operator Instructions] We’ll go first to Paul Miller with FBR.
Yes, thank you very much. Going back to the - yes, M&A stuff have you - I know the CommunityOne you are trying to digest that. But, have you seen any other opportunities out there? What’s the environment out there? Are some of the banks but more willing to talk to you or talk to other people on the M&A front?
Good morning, Paul. This is Chris. I wouldn’t say they’re more eager. We really have not stopped our dialogue with other banks. We continue to meet with them even as we’re planning for the integration of CommunityOne. And we’ve never really seen that dialogue slowdown. So I think while it’s always tough to get a deal negotiated and announced, but the amount of dialogue I think remains pretty robust.
And then on your buybacks, you mentioned that you still feel that your stock trading at these levels is still relatively inexpensive. At what price would you start considering backing off on the buybacks?
That would be a decision our Board would make, I just would say given our authorization and the parameters they put out for us, the current price is attractive to us.
Okay guys. Thank you very much.
We will go next to Frank Barlow with KBW.
Good morning Frank.
So you all continue to guide to about 10 basis points of reported NIM compression, and maybe with some portfolio optimization maybe closer to seven, but the core NIM was also down a bit this quarter I think was about five basis points and I know you are asset sensitive, but how should we be thinking about the core NIM going forward?
Well, I think largely the core NIM is stabilizing. It was down this quarter largely due to the increase in deposit costs, but all of the costs are a little bit higher. We were using some of the strong deposit growth that we recorded this quarter to pay down some shorter duration wholesale borrowings with the intent of trying to stabilize overall funding costs going forward.
Another thing I think that happened in the quarter and we were pleased with this. Actually our yield on new originations was actually higher than our book yield by about 13 basis points. So we feel that was good and that was despite the fact that the fixed variable mix was actually I think the highest we've ever had in the quarter were 70% of our new loans were variable. So with all that said, I think there are a few missing moving pieces in the quarter, we did see some compression both in the topline NIM and the core NIM, but I think the direction of the core is pretty stable.
Okay, that's helpful. And then turning to expenses, in salaries and comp are up about $2 million I mean is that just regular increases in FICA. And as a follow-up to that, core expenses overall I calculated roughly in a $45 million this quarter, is that the right run rate to use prior to see it would be closing?
Yes, I think the run rate is right in line with our plans. First quarter accruals are always a little bit higher so nothing unusual on that line.
Okay, great. Thanks.
Thank you everybody for being with us today. And if you have questions please don't hesitate to reach out to me or other members of the management team.
This does conclude today's conference. We thank you for your participation.
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