Q3 2019 Earnings Call
Good morning, welcome to United Community Banks third quarter 2019 earnings call hosting our call today, our chairman and Chief Executive Officer, Lynn Harton, Chief Financial Officer, Jefferson Harralson, Chief Banking Officer, Rich Bradshaw, and Chief Risk Officer, Rob Edwards United's presentation today.
Include references to operating earnings pretax pre credit earnings and other non-GAAP financial information.
non-GAAP financial measures United has provided a reconciliation to the corresponding GAAP financial measure in the financial highlights section of the earnings release as well as it begins to be Investor presentation. Both are included on the web site at you see <unk> Dot com.
Copies of these third quarter's earnings release, an investor presentation were filed last night on form 8-K with the FCC at a replay of this call will be available at the Investor Relations section of the company's website at <unk> Dot com.
Please be aware that during this call forward looking statements may be made by representatives of United any forward looking statements should be considered in light of risks and uncertainties described on page four of the company's 2018 Form 10-K as well as other information provided by the company and its filings with the FCC and included on its website at at this.
Hi, My we'll turn the call over to Lynn Harton.
Good morning, and thank you all for joining our call.
We're pleased to report another great corn, which is a continuing testament to the strength of the teams here at United.
For the quarter, our operating return on assets reached 158 basis points.
Which beach last quarter to become the best in our history.
And once again, we attained our goal of top Cortile financial performance.
Our operating earnings per share reached 63 cents, an increase of 14.5% year over year.
On an increase of four cents over last quarter.
Our net interest margin remained stable despite declining rights.
Loan and deposit growth were in line with expectations.
[noise] credit results remain solid and the strength of our deposit base continues to give US a foundation for ongoing outperformance.
We also continued to invest if you have a chance I'd like to invite you to visit our new web site for the last couple of years, we've been investing in digital customer acquisition tools. We've added online mortgage processing deposit account opening and now small business and consumer lending online.
We've also been testing, what we call digital micro marketing campaigns, which is basically testing our ability to give clients a click through option to do more business with us.
As those tools have progressed, we also planned on updating our online presence to reflect a more action oriented posture.
And I'm very pleased with the result, and we're continuing to invest and extend our brand digitally.
I was also particularly pleased this quarter that United was again recognized by American banker as one of the best banks to work for in the country.
Of all the recognition we receive this is the most important one.
If we are a great places to work for great people performance will follow.
And that's what we see once again this quarter as our teams delivered great results across the board.
So Jefferson why don't you fill us in all the details.
Thank you again I will start on page eight to discuss our net interest margin and income trends. Our net interest income increased 5% annualized versus last quarter and increased 6% year over year spread income growth did benefit from the full impact of first Madison and the numbers versus a two month impact last.
Quarter.
Our net interest margin stayed flat at 4.12% of which we had three basis points of Laura core margin offset by three basis points of higher Accretable yield.
On the purchase accounting, we had an early payoff on an acquired alone that drove the increase versus last quarter I would expect a 15 basis points of NIM benefit we got this quarter to be closer to the nine basis point range in Q4.
The core net interest margin held in better than expected this quarter as we had more than expected positive mix change in the form of strong deposit growth and continued mix change towards loans from securities.
Four remaining impact other September rate cut should take six to eight basis points from our core margin in Q4.
Page nine highlights our deposit base, which we view as a differentiator for us in a core strength of our bank or cost of deposits did come down two basis points to 63 basis points in the quarter, which was a little better than we expected, perhaps even better on page 10, our core transaction accounts grew one.
Saturday and $5 million and once again funded more than all of our loan growth and was a key driver to the mix change that drove our strong margin.
The core transaction account growth has been strong for us all year as you can see in the chart.
On page 11, you can see our loan portfolio breakout, which has a very diversified.
Excluding the run off of our indirect portfolio, we had a 4% annualized growth rate in Q3.
Expected pay downs normalize a bit higher in Q3, as we said we thought they might on last quarter's call even as we enjoyed significantly increased loan production levels.
On page 12, we look at fee income, which was another bright spot for us in a quarter up $4.5 million versus last quarter. The main driver was mortgage as we said almost every record that we have in that unit.
Locks were $508 million from what had been our record of $390 million last quarter.
Also benefiting the mortgage result was that we had about $700000 and west MSR, Mark this quarter versus last quarter.
Expenses on page 13 were $80.3 million, just higher than the guidance I gave last quarter of $79.5 million, but the main difference being $700000 and higher mortgage commissions.
Lastly on expenses. We are also proud to have set a new corporate mark for operating efficiency ratio at 53.9%.
Credit quality on page 14 was stable at very low levels.
And our 3.1 million dollar provision more than covered the $2.7 million net charge off.
I will finish up on page 15 with capital as you can see your capital ratios grew nicely in the quarter and we also bought back just under 200000 shares and we have $37 million remaining authorization, but that I'll pass it back to one.
Right. Thanks, Jefferson and now we really just like to open it up for questions.
Thank you.
To ask a question you would need to press Star then one on your telephone to withdraw your question. Please press the pound key.
Please standby, we compile the culinary roster.
Our first question comes from the line of Brad Milsaps with Sandler O'neill. Your line is now open.
Hey, good morning, guys.
Good morning.
Jefferson.
I appreciate all the color just was curious if you could maybe talk a little bit about your outlook for the NAND a little bit more obviously, the the court in elden fairly well this quarter.
Sitting from the mix change et cetera, just kind of curious for your thoughts are there as you kind of move out over the next several quarters, particularly if we get additional a rate cuts.
Yeah. Thanks, Brad for the question I'll start with the Accretable yield piece of it no I've mentioned in her prepared remarks that kind of nine basis points was sort of the base, but we are seeing we're getting to the end of a lot of these pools and so these positive surprises are popping up more and more often so it does feel like on Accretable yield that nine is a is this.
The base and but it does seem like in any given quarter, where more than likely to be higher than that nine but it's just hard to predict on to get on the core margin I did mention down six to eight that's given what is happening with LIBOR since quarter end, so going away. It includes a piece of a potential rate cut this.
This this quarter.
I do think that that six to eight is a good.
It is a good range for Q4 that does have a basically one rate cut and that in that number.
Our next year I mean, that's I mentioned last time that I thought that each rate cut was five to eight basis points down and I still think that's probably a a good range.
Great that's helpful and Jefferson just to maybe follow up with one more on on the fee side of things.
Just kind of curious how you're thinking about your specialty businesses being S.P.A. and then navistar us in terms of retaining that production.
We're selling it I know youve.
Historically sold the S.P.A. been retaining a little bit more apps that thoughts of maybe selling some of the lease equipment production kind of curious where you're on that process and that kind of how you're thinking about it in the realm of sort of what's going on in interest rates et cetera.
All right. Good start on that original probably has something to add on that maybe on the on the SP business. We had started this year.
Scientists sell half and keep half of that production.
We have seen an increase in certain gain on sale rates, which makes it enticing to sell a little bit more of that especially in a down.
Environment, possibly but we are for now anyway, we're sticking with that 50 50 strategy with the V. S. We have a target Oh no limit I guess I should say of 10% of total loans being davita phones, where decently below that now and we are going to start selling TV. This loan starting in the fourth quarter, we talked about.
And then this quarter, but I would expect to see a loan sale starting in the fourth quarter and some gains coming off of that Oh.
Starting this quarter and into next year.
Good morning, Brad This is rich and I'd like to add a we have seen the 10 year paper pricing come up a pretty materially and so we're not selling some of our lower price 25 year paper and instead selling the higher price 10 year paper with the goal still holding about half.
Got it and Jefferson on the Davita gains would would those approximate something similar to an S.P.A. loan sale gain or I'm, just kind of curious what types of previous you can get there.
I would say, 4% or greater on Davita sale gains this what the market is currently.
Okay, and you just operate under that 10% kind of target I'm, just kind of where you want to be that's right. Okay. Alright. Thank you guys all back into queue.
Thank you. Our next question comes on the line as Catherine Mealor with KBW. Your line is now open.
Thanks, Good morning, everyone.
Well circle back on the margin I mean that the there's loan yield stability was really incredible to Neil and with your core loan yields down I think only about four basis points.
Just given how much of your loan book is variable rate is was there any one time, maybe higher higher lumpy isn't there. They kept that high end. How are you thinking about your kind of colonial its repricing down with life, where somebody them lower.
So.
The the O'neill piece of it the main differentiator was the just the accretable yield in their X accretable yield it did held up relatively well there were some the biggest growth and that in there to help to hold up.
Going forward as rates come down I still think you're going to be looking at.
On a rate cut o'neill's being down kind of eight to 10 basis points on rate cuts.
Okay.
Eight to 10 that's per quarter.
Per cut.
Okay got it okay got.
And actually that's where it another I'm looking at that 4% declined as including the Accretable yield. So it was a little 11 huh.
And then and then on the on the deposit side can you give us any any view into what deposit cost it on a monthly basis.
There was.
I can do that maybe wins with some portfolio. So the I guess I've been focusing in on the CD portfolio, a CD portfolio. We had been raised we haven't cutting rates and that CD portfolio.
Cost there is 170.
New ads in September .
For the CD portfolio was 145.
We have a 180 million I'm, sorry, we have $300 million coming.
Due in the fourth quarter.
At about 1.8% and that should be moving down to that 145 150. So from a month. These perspective I've been focusing on that CD portfolio, we have seen the rates of each of our portfolios coming down as we've been lower and rate. So cdis, where we're seeing the I kind of the apacs on the turn and we are seeing.
Lower rates throughout the quarter.
Across all the up the categories.
Great. Thank you that's helpful great quarter.
Thank you. Our next question comes from the line of Christopher Marinac with J.M.S. Your line is now open.
Good morning, I wanted to.
Talking about credit trends and kind of what's happening on classified ads or any emerging issues that Rob season were even that rich sees from customers.
So a this is Rob you know.
I would say, we're not seeing any specific trends or you do see I would say our asset quality numbers. Historically has been very low for a bank with a you know general commercial lending type portfolio like ours, and so I would expect some normalization to occur.
We did have an uptick in just a small uptick in our non accruals, but the largest a category for the quarter was mortgage and when we look at past dues and non accruals together in the mortgage book they were flat quarter over quarter.
And we didnt have any new non accruals in the quarter greater than 500000, so it it feels relatively stable.
We do see a you know we're sensing what everybody is that there's more.
Noise economically about the future than there has been historically, but we're not seeing any significant or a noteworthy trends in the portfolio.
And Chris This is rich I would add the same thing I was out in a market visits yesterday with some clients and that's still here in a little little caught a little more caution than before.
So nothing specific but a little bit more noise.
And rich are there any businesses that you, maybe dino deemphasizing or perhaps not pushing as hard as you would have before or eight and they say more specific on types of things that you like this is for just as like.
Sure well one area that we're very focused on concentrations and so one area that we are kind of at a time out. If you will is hospitality. So that's a that's one particular area and then one of the areas that we are hearing some noise on his transportation. So we're very cautious on that as well.
Okay, great. Thanks, very much guys.
Thanks, Chris.
Thank you. Our next question comes from the line of Michael Rose with Raymond James Your line is now open.
Hi, guys I'm just wanted to talk about the beat us a little bit.
I think when you guys are brought them on the loan yields were somewhere in the Don and a half percent range and I think as we talked about a little while ago Jefferson those yields didn't get the benefit you know as rates went up but Conversely, you have held pretty steady.
As rates have come down.
And I know part of that as you've expanded a little bit into the middle market. So can you just give us kind of a broader update on.
The vetoes and how we should think about a yield trends a growth from here. Thanks, Yeah, I can start with that and we can.
The others might want to joining on there too so exactly right. So we we bought the view this it was 9.5% yields.
Rates went off and we felt a little bit of margin squeeze on that business. Although the overall bank benefited and now as rates are going down we still haven't done and a half percent yield at the view, that's but we're seeing a wider margins within the heaviest business. So it's a good thing to have and they and a falling rate environment.
For sure we.
We have seen originations increasing there.
We are our middle market business we.
We're not doing the middle market business anymore.
As a business that we were had moved into we were seeing lower yields a we had seen.
Hey.
It was it was more purchase loans that we wanted to see it was more syndicated loans, we wanted to see.
A more in pools, and so we actually that business and went back to the core business. There still I would expect to see a we want to keep that underneath 10%.
This should grow at a faster than 10% rate. So hence you will see sales up to be the phones in 2020.
Okay.
Andrew My my follow up question. So it's very very helpful.
So as we think about next year I think you guys are kinda on track to.
At the mid single digit loan growth.
Outlook on the one hand, you're going to be song some more interviewed as loans as you mentioned I think there's a general sense of caution out there from from customers. I know you guys are cognizant of structure in price, which seems to be getting a little stretched here.
But you also hires and people right and I think in prior quarters, you've talked about the opportunity set there so.
It is mid single digits as we move into next year can counterbalancing all those factors the kind of the right way to think about the the growth rate for you guys. Thanks.
Michael This is rich I'll take that.
So the answer is yes mid single digit we feel good about that.
As we move into next year, we've had 26 hires this year to date seven this quarter feel that there'll be a few more in Q4 and a with the current momentum the pipelines and what's going out in the marketplace, including truest, we feel good about next year very optimistic.
Okay, maybe a one one final one for me looks like.
This brought up earlier deposit costs of.
I've kind of peaked and are on their way down you guys have had some good some good mix shifts with a with brokered coming down you still got a really low loan to deposit ratio.
What's the what's the flexibility or incentive to.
Push on the gas little bit here as it relates to.
Reducing or at least posted rights. Thanks.
Yeah. Thanks, I think the a loan to deposit ratio gives us a little bit of extra cushion to be able to be more aggressive in a CD pricing, especially.
And so what we can do here and what we are doing as we board CD prices, probably four times since rates I've started coming down you've actually still been seeing decent growth in a in Cds, even though we've been lowering.
Even though we've been lowering rates and so now that we have our wholesale funding now down to where it's going to come off at a much more so slow pace.
We are pressing the gas little bit on CD on lowering seep CD prices.
So I think a big piece of what you'll see this quarter in next quarter is that a is that CD rate and the CD cost for us start to turn turn the corner and start to move down.
So we are pressing that gas pedal pretty hard.
So if I read that right. It sounds like maybe a they didn't guide for future cuts, maybe a little conservative that's what we that's what I hope.
Alright, thanks for taking my questions Doug.
Thank you. Our next question comes from the line as Kevin Fitzsimmons with D.A. Davidson. Your line is now open.
Hey, good morning, everyone.
Uh huh.
Jefferson I just wanted to clarify the commentary on core margin coming down six to eight is that.
Assuming an additional one caught in fourth quarter or is that just the flow through of the September .
So it is a if it's a little bit of a combination because we have is the full impact of September caught with a partial impact of a with a with an October 31st costs, we have seen libra coming down anticipating that we have $3 billion of loans that are floating with LIBOR. So we're starting to feel.
The the impact of a fourth quarter <unk> already.
So it's a little bit of a combination so we did get a cut.
There might be again, not a two or three basis points of downside to that.
Great Great. Thank you and then then if I could just asked if you guys could update us on how you feel about.
Hi, backs going forward and about traditional bank M&A, whether that's something that you think is more or less likely will start in the environment.
Yeah. So Kevin this is Glenn I'll start with the M&A side, it's always really hard to predict I mean, we're pretty disciplined own which markets. We want to go into a et cetera, and really disciplined around the cultures, particularly particularly around credit and the customer service called.
Sure, but with that said.
We actually right now we've got a several.
Conversations.
Going on with.
Companies that would fit.
And so the question is a wheel our price expectations may meet up so if pricing meets up I'm optimistic that we'll have some opportunities over the next several months.
You know, but if it if it doesn't happen then we feel like we've got great momentum here, a great levers to pull in the can the event that doesn't happen and with that I'll turn it over to the Jefferson.
On the buyback we put the I think if we have the ability to put to work in M&A, we prefer that.
With the buyback with or increase profitability and are now 10% Tc if a one of these deals do not come to fruition.
I think we would be more aggressive buyers of our own stock and 2020. So it's so it's there and we were ready to be more aggressive with it if if M&A doesn't.
Workout.
Okay. Thanks, guys.
Thank you. Our next question comes from the line of Tyler Stafford with Stephens. Your line is now open.
Hey, good morning, guys good morning.
Hey, Jefferson I, just wanted to see if you had any thoughts on seasonal expectations as we roll to Tony Tony.
Yes, so for C., so we feel.
Pretty good about we feel very good about where we are we've just completed our third parallel run we feel very confident about our process.
The reserve increase will be in a range that.
That I've seen other banks put out there. So I don't expect any surprises from our from our seasonal numbers also there's a minimal impact to capital.
Cecil and with the scenarios that we are using.
Now, we expect to provide more detail on our numbers before year end, so no surprises and stay tuned for a for the numbers coming more specifically before yearend.
Okay.
Alright, Thanks for that and then just the rest of my questions have been asked and answered just one more on expenses you. Obviously you guys have done.
Tremendous amount of hiring this year and I appreciate the $700000 you called out earlier that that.
Related to the mortgage commissions, just any any thoughts on kind of Fourq you expenses, and then kind of run rate.
Vince growth beyond that just given a tough revenue backdrop in any thoughts on just over auctions gross thanks, So I would say flat to slightly higher on expenses in Q4 and for 2020 were still in the budget period.
And so I don't have a great a run rate free for next year.
Operating leverage is very important loss, it's something we're going to put into our into our budget and could be a tough revenue year for sure.
Again operating leverage is very important but that's how I don't have expense guidance for 2020 at this point, but also I will say a flat to slightly higher in Q4.
But Jefferson you you would expect positive operating leverage in 2020 is what you're saying.
I do expect the budget that depending on how many rate cuts are going to put oh put on that's on the environment it might be very hard.
But.
We are in the business of creating operating leverage your United and that's what we will a budget for.
Excellent Thanks, Justin.
Thank you. This concludes today's question and answer session I would now like to turn the call back the Lynn.
Sorry, Mark.
Great well, thanks, once again for your interest and support the company and I. Appreciate your time on the call today. Thanks, so much.
Ladies and gentlemen, this concludes today's conference call. Thank you for participating you may now disconnect.