Opus Bank (NASDAQ:OPB) Q4 2019 Earnings Conference Call January 27, 2020 11:00 AM ET
Paul Taylor - President and Chief Executive Officer
Kevin Thompson - Executive Vice President and Chief Financial Officer
Conference Call Participants
Jackie Bohlen - KBW
Matthew Clark - Piper Sandler
Kevin Swanson - Hovde Group
Good day, everyone, and welcome to the Opus Bank Fourth Quarter 2019 Earnings Conference Call. My name is Jason, and I'll be your conference call coordinator today. At this time, all participants are in a listen-only mode.
Speaking on today's call will be Paul Taylor, President and Chief Executive Officer; and Kevin Thompson, Executive Vice President and Chief Financial Officer.
Today's discussion will cover the Company's performance during the fourth quarter and full year 2019 and information contained in the earnings press release issued earlier this morning. A slideshow presentation that accompanies today's call is available on the Opus Bank Investor Relations website at investor.opusbank.com/presentations.
This call is being recorded and will be made available for replay one hour after the end of the call. Information about how to access the recording is available on our Investors Relation website or in the earnings press release. Today's discussion may entail forward-looking statements, which are intended to be covered by the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995.
You'll find a discussion of these forward-looking statements in our recent FDIC filings and in the earnings press release issued earlier this morning. Today's call will include a question-and-answer session following management's prepared remarks.
Now, I will turn the call over to Paul Taylor, President and CEO, for opening remarks. Sir, you may begin.
Thank you, Jason. Good morning everyone and thank you all for joining our fourth quarter call today and full year 2019 earnings conference call. Again, I'm Paul Taylor; I'm the President and CEO of Opus. Today, I'll provide you a brief overview of the performance of the fourth quarter and 2019, and then I'm going to hand the reins over to Kevin Thompson, our Executive Vice President and Chief Financial Officer, and he'll go through the performance for the full year and the quarter.
We had another good quarter, our earnings were very good. We had $0.53 per share earnings per share, which was a beat to consensus. Our return on assets was 1.02%. Our efficiency ratio was 61.3%. We did have a $2.7 million negative provision, which also bolstered those returns. We're very pleased with our commercial banking division. It funded $130 million in loans during the fourth quarter, which is up from $99 million in the third quarter of the year; and we do anticipate that trend to continue, that group is really gaining traction.
Our credit quality continues to improve as non-performing assets to total assets decreased to 7 basis points, very low in our industry as you know. We had further progress reducing problem loans, which resulted in our $2.7 million negative provision, which is actually down from our negative provision in the third quarter of the year of $7.7 million. We also had a good quarter for deposit growth. We increased deposits by $204 million or 3.3%, that was primarily driven by PENSCO and our Commercial Banking unit.
Our cost of deposits continues to come down and is mitigating some of the margin pressure that Opus Bank and the entire banking industry is experiencing today. We continue to work on the expenses in Opus Bank. Our efficiency ratio for the fourth quarter was 61%, which is down from the efficiency ratio in the fourth quarter of 2018 of 65%. We do expect our efficiency ratio to fall into the 50s during the second half of 2020.
Looking forward, I am confident that Opus will continue to improve on its growth and profitability over the coming year and continue to increase shareholder value. I want to take a moment here to thank all of my Opus teammates for all of their contributions to produce this successful fourth quarter and the year 2019. And we look forward to continued success in 2020.
With that, I'm going to turn over the discussion to Kevin.
Thank you, Paul. Turning to Slide 4, average loans decreased $37 million or 0.6% during the fourth quarter while period end balances increased $99 million or 2.9%. New loan fundings measured $410 million compared to $406 million in the prior quarter, but the timing of loan fundings was concentrated in the month of December.
Loan payoffs were $272 million compared to $300 million last quarter. New loan fundings included $130 million of commercial banking division loans, up from $99 million last quarter, while multifamily loans constituted $217 million of loan fundings, compared to $256 million in the third quarter.
Total loan yield decreased 11 basis points to 4.13%, primarily driven by the rate differential between new loan fundings and higher yielding loans that paid off, downward re-pricing of adjustable rate loans and a lower net benefit from prepays.
On Slide 5, you can see that the average balance of our investment securities portfolio decreased $21 million or 2% from the prior quarter while period end balances actually increased by $29 million or 3%. The decrease in the average balance was due to the timing of security sales at the end of the third quarter and the subsequent purchase of $65 million during the fourth quarter.
We continue to optimize our securities holdings by swapping out lower yielding, shorter duration securities with a mix of longer duration, mortgage-backed and corporate securities. The yield on investment securities increased 16 basis points to 3% due primarily to lower premium amortization.
Turning to Slide 6, average deposits increased $165 million or 2.6% with the majority of growth coming from interest-bearing demand deposits and money market accounts. The growth in average deposits was primarily generated through higher PENSCO, Escrow and Exchange and Commercial Banking division deposits.
During the quarter, we actively managed our cost of deposits, which resulted in an 8 basis point decrease in our cost of deposits to 1.01%. While competition remains high in our markets, we anticipate making further progress on lowering our cost of deposits during 2020 as we improve the mix to include a greater percentage of non-interest bearing deposits. Our loan to deposit ratio decreased to 91.1% compared to 92.5% in the prior quarter.
Turning to Slide 7, net interest income was largely unchanged from the prior quarter at $50.1 million. Interest income decreased primarily due to the effect of higher yielding loans paying off and the lower average balance of loans compared to the prior quarter. Lower interest expense offset the decrease in loan interest income as our cost of funds decreased 9 basis points.
Net interest margin decreased 6 basis points to 2.76% driven primarily by the 11 basis point decrease in loan yield that was partially offset by an 8 basis point decrease in our cost of deposits, and a 16 basis point increase in the yield on investment securities.
Proceeding to Slide 8, non-interest income increased to $13.9 million for the fourth quarter. During the quarter, we recognized a gain of $851,000 on the sale of a bank operations building. PENSCO fee income increased slightly to $7.3 million and BOLI income increased due to insurance purchases we made in October. Excluding the gain on sale of the bank operations office and $220,000 of sale gains last quarter, non-interest income increased $162,000 or 1.3%.
Turning to Slide 9, our quarterly non-interest expense decreased 1% from the prior quarter to $39.7 million, driven by continued focus and tension on reducing our overhead expenses and improving efficiency. Our efficiency ratio decreased slightly to 61.3%, driven by both lower expenses and higher revenues. We further utilized the FDIC small bank assessment credit in the fourth quarter, which reduced non-interest expense by $461,000, and we also had lower amortization expense due to prior acquisitions, costs, core deposit intangibles fully amortizing.
On Slide 10, we show capital ratios at quarter end, although our total equity increased 1.5% from the prior quarter. Our tangible common equity ratio decreased 4 basis points to a healthy 9.24%, while total risk-based capital decreased 18 basis points to 15.08% due to asset growth in the quarter. Tangible book value per share increased $0.44 to $19.38. Finally, our Board authorized an $0.11 cash dividend payable in the first quarter of 2020.
On Slide 11, we display some of our asset liability metrics, which includes durations and our simulation of net interest income, assuming instantaneous parallel rate shifts. The anticipated duration of our assets has increased as a result of a slight mix shift in loans. We continue to closely assess our position as we navigate this difficult interest rate environment.
Turning to Slide 12, our credit quality continued to improve during the quarter as non-performing assets decreased 19.5% to $6 million or 7 basis points of total assets compared to 10 basis points in the prior quarter. Net charge-offs were $1.6 million or 11 basis points of average loans annualized, compared to $4.9 million or 33 basis points in the prior quarter.
As a result of the continued improvement in reducing the balance of criticized loans during the quarter, we recorded a negative provision expense of $2.7 million compared to a negative provision of $7.7 million last quarter. Criticized loans decreased 27.5% to $73.5 million.
On Slide 13, we show the changes in our allowance for loan losses and the drivers of the $2.7 million negative provision expense in the fourth quarter. Total reserves decreased slightly to $40.8 million or 0.69% of loans compared to $45.2 million or 0.78% of loans in the prior quarter. The recapture of allowance associated with loans have paid off during the quarter, more than offset additions to the allowance due to growth. We had zero specific reserves as of the end of the quarter.
On Slide 14, we present a summary of our outlook for 2020 assuming a continuation of the current economic environment and no further rate cuts by the Federal Reserve. Despite the difficult interest rate environment, we are optimistic and we continue to see slow, steady economic expansion in our markets.
We expect loans will grow at a high-single digit rate for the full year 2020 with continued progress in our Commercial Banking division, supplemented with some growth in our multi-family portfolio. We intend to maintain our strong credit discipline, which has consistently guided our lending decisions. We estimate steady deposit growth with an increasing percentage of total deposits that are non-interest bearing.
We estimate our net interest margin will be stable to slightly declining in the year. We began to see relief in our cost of deposits during the fourth quarter with monthly levels incrementally following throughout the quarter, and we anticipate a continuation of this trend, as we see further room to lower rates on certain products, but we continue to anticipate a flat yield curve and elevated prepayments in coming quarters.
We continue to maintain our prudent expense discipline and we are very focused on increasing the operating leverage. We expect our core efficiency ratio for the full year to be in the low 60% range with quarterly levels dropping into the 50s in the last half of the year. We expect stable credit trends and we remain focused on maintaining a strong risk management infrastructure.
Regarding the implementation of CECL, we expect a minimal day one impact to capital with an initial increase in our credit allowance of between 5% and 10%. We estimate an effective tax rate going forward of 26% consistent with recent quarters. And finally, we evaluate our quarterly dividend payment based on our assessment of loan growth, our risk profile, capital levels and market conditions.
This concludes our prepared remarks. Operator, would you please open the line for questions?
We will now begin the question-and-answer session. [Operator Instructions] Our first question comes from Jackie Bohlen from KBW. Please go ahead.
I just wanted to understand that, you've talked about this in both the press release and the prepared comments, i.e., the rate differential between new loan fundings and payoffs. Do you have that, I know that there is dollar values in the helpful NIM chart you provided in the slides, but I was wondering if you have the rates on those?
Yes. New loan fundings were around $388 million. The payoffs were around $470 million.
Okay. And that differential, that's lower than it's been in past quarters, correct? Now, that the intentional run-off is slowing?
That's correct. A number of loans that were intentionally being run off were higher rate loans.
Okay, thank you. And then you talked about NIM stability with a slight downward bias. What's the main driver of that stability after some of the recent contraction we saw?
We do see some stabilization in the yield curve. We have some opportunity -- we have this lag behavior of our cost of deposits at lagged going up, it's lagged coming down. So, we have some opportunity there. There is still a good amount of pressure on loan pricing, but with a little stability in the yield curve, it gives us an opportunity to for things to settle, I -- we believe.
Okay. And then just one last one from me and then I'll step back. The loan growth that you're looking to, does that drive any mix shift in earning assets? Or do you anticipate a similar level of asset growth as well?
Yes. I think you'll see asset growth across the whole asset side of the balance sheet. But again, we're really pushing commercial lending. We're gaining traction with $130 million in funding in the fourth quarter. Pipeline in the first quarter looks good also. So, our goal is to make commercial lending a much bigger piece of our balance sheet.
Okay. So, a mix shift within the loan portfolio, but not necessarily a mix shift between loans versus cash and securities?
The next question comes from Matthew Clark from Piper Sandler. Please go ahead.
On loan pricing, can you give us a sense for where you're pricing new multifamily loans? I think you more recently have been trying to stay a little bit above the market. I think it was 4.25% last year on last quarter, 4.25%, can you give us a sense for where that pricing was this quarter relative to the competition?
Yes. So, I would say we're right in that kind of mid-range of competition and it's really followed the yield curve. So, it came down to probably on average about in the mid 3.80s to 3.90s. I would say, to be more precise, probably the mid 3.80s for the quarter.
Okay, great. And then do you happen to have the spot rate on interest-bearing deposits at the end of December?
I do. It's come down a little bit we're more in the mid 90s at the end of December.
Okay. And then, FDIC credits, do you have any left for the upcoming quarter? And if so, how much?
We anticipate kind of the average amount we've seen so far through third quarter of 2020.
Okay. And then the -- can you speak to the -- I know it's not a large amount, but can you speak to the inflow into special mention this quarter? What drove that?
It's mostly driven by one loan and just late financials, nothing concerning, no concerning credit trends.
Okay. And then one more if I can sneak it in. The day one impact from CECL looks to be a lot more modest, I think, than we originally expected. I guess how are you thinking about day two provisioning? I know it's not easy to forecast, but would you suspect that you'll see incrementally higher provisions, just from having to comply with CECL?
Yes, incrementally higher, definitely, CECL will introduce some volatility to all banks, because of the economic forecasts. And so we anticipate as all banks, we may have a little additional volatility. But other than that, I think this is a consistent rate as long as economic environment doesn't change, so we have to reserve a little bit higher at this rate, but this will be changing ongoing as all of us refine our models, and as we continually forecast.
[Operator Instructions] The next question comes from Kevin Swanson from Hovde Group.
It looked like PENSCO helped, you mentioned the deposit gathering. Any update on the outlook there and progress made with some time and the new President?
Yes. So, our new president, Rich Immesberger is a very experienced guy in this section of banking business, and we have high hopes for PENSCO. I mean, it's a great asset, it can be expanded, and it should be stable to increasing.
Okay. I think last time you talked about it on the call. Any kind of outlook on some strategic initiatives there or is it still too early for that?
It's still too early, but we are looking at various strategic initiatives that would help build that business.
And then I guess just on the ROA, I think you guys had 1% for two state quarters, obviously helped a little bit by the negative provisioning. I guess what's kind of the path of least resistance to maintaining that level -- kind of ex some of the credit movements going forward?
I think it's -- you know, it is, to your point, temporarily high because of the credit provisions, and of course, we had a sale of an operational center as well that helped with it. So, but it is incrementally improving as we're incrementally improving our pre-provision net revenue over time. And we plan to continue to march down that path, both on the expense and revenue side.
We have contributions in our strategic plan from both of those. Be very careful with expenses, operating in much more efficient way, while we grow revenues and leverage the existing infrastructure that we have and as the strategies of our commercial banking and our other bankers play out over the next few years.
Okay, great. And then maybe just on that point about commercial banking, obviously, you mentioned the pickup in funding this quarter, do you think some of the changes there have started to take hold and kind of how do you think about the current position of that division?
Very, very excited about our Commercial Banking division, we've brought out a lot of new people into that division, and commercial lending has got the longest sales cycle in my experience in banking, and it takes time and we've had some time and it's really starting to gain traction, and as I look forward into our new pipelines, it still looks very good. So I think we'll see that product continue to grow throughout 2020.
This concludes our question-and-answer session. I would like to turn the conference back over to Paul Taylor for any closing remarks.
Well, I want to thank everybody for their interest in Opus and joining us on this conference call and I look forward to speaking to all of you in the future.
The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.