Q2 2019 Earnings Call
Good morning, and welcome to United Community Banks second 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 includes references to operating earnings pre tax pre credit earnings and other non-GAAP financial information for these 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 at the end of the Investor presentation and both of these are included on the website at you see <unk> Dot com.
Copies of the second quarter's earnings release, and Investor presentation were filed last night on form 8-K, with the FCC and a replay of this call will be available in the Investor Relations section of the company's web site at U.C.B. I 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 in its filings with the FCC and included on its website.
At this time I'll turn the call over to Lynn Harton.
Good morning, and thank you for joining our call. We appreciate your interest in United and we look forward to our conversation today.
Our second quarter results represent a continuation of great execution by our teams across the company.
We reached an operating return on assets of 150 basis points the best in our history.
Our operating EPS was 59 cents, an increase of 11% year over year.
Our net interest margin increased slightly quarter over quarter.
Both loan and deposit growth, we're on target with expectations and our first Madison partnership continues to be on track.
Our markets continue to perform well economically and our credit results reflect that sound economic Foundation.
Here in Greenville, we sit in the middle of some important international supply chains.
And so we are aware of the uncertainty that global growth and trade frictions can have on local companies decisions to invest for the future.
It's unclear today, how those uncertainties will develop however, we believe that we have positioned the company to be able to perform well in any normal economic cycle.
Over the past several years, we have entered into several new business lines to diversify our revenue sources and leverage our strong brand and local relationships.
We have grown historically strong lines of business and expanded our footprint and brand into several new fast growing markets.
These initiatives have enabled us to exit less profitable areas like purchased indirect auto loans and improve the strength of both our core earnings and our balance sheet.
We are a much stronger and more profitable organization.
And one less dependent on traditional community bank lending alone.
We have continued to enhance our credit culture through process improvements improve talent.
And disciplined concentration management by product type relationship size and geography.
Our funding base continues to be one of the strongest in the south as our service space culture continues to deliver high quality core deposit growth, giving us ample liquidity and low cost funding.
We've continued to keep pace and technology investments.
Both in digital solutions for our customers and operational improvements for employees.
But most importantly, we have maintained our focus on the fact that this is a people business.
We have an outstanding team that works together to produce great results.
We're also able to attract great bankers to join our team.
And they are drawn in large part to the same attributes that our customers value in us.
We're small enough the individuals matter.
Large enough to have the products and services to compete.
And forward thinking enough to have a promising future.
We're excited about the path that we're on and we appreciate you being here with us. So Jefferson why don't you give us more details on the results for the quarter.
Hi, Carolyn Thank you.
I'll begin on page six to discuss our net interest income and margin trends.
Our net interest income increased 7.4% annualized versus last quarter and increased 9% year over year.
Spread income growth did benefit from two months of first Madison and the numbers.
Our net interest margin increased by two basis points to 4.12% in the quarter of which one basis point came from slightly higher accretable yield versus last quarter.
Last quarter I mentioned on the call that about three basis points of first quarter Accretable yield would not repeat in the second quarter. These three basis points in fact did not repeat but will replaced with some of the initial accretion from first Madison.
Turning to page seven we take a look at our deposit base. We are very proud of our core deposit base with a 33% contribution from demand deposits.
Our cost of deposits were only up three basis points versus last quarter and the continued to be well ahead of our peers and deposit costs.
On page eight we were also pleased with the growth in our core transaction deposits. So far this year.
Core transaction deposits were up 8% annualized year to date with $302 million of growth, which more than fully funded all of our loan growth this year.
On page nine you can see our loan portfolio breakout, which is very diversified we were pleased to grow loans, excluding first Madison and indirect auto loans at a 9% annualized pace versus last quarter.
On page 10, we look at non interest income, which was up $3.5 million versus last quarter and up $1.2 million versus last year.
We experienced good growth in fees across the board with a record mortgage production quarter and higher SP, a brokerage and other fees as well.
Expenses on page 11, we're in line with or slightly better than our expectations are increased in expenses came mainly from merit increases and higher mortgage commissions.
Our operating efficiency ratio came in at 54.4%, which is a new low for our company.
Credit quality on page 12, with stable with improved net charge offs versus last quarter.
We recorded a $3.2 million provision that more than covered the 2.4 million and net charge offs. Our reserve percentage declined to 70 basis points with the addition of the first medicine loan book.
I'll finish up on page 13 with capital our risk based capital ratios came in as expected with the all cash first Madison deal, while our leverage ratio and TC ratio saw slight improvement as we continue to shrink our securities book, which offset the impact of the deal.
We had no buybacks in the quarter and we will look to be opportunistic with the $42 million remaining on our authorization.
And with that Lynn ill pass it back to you.
Thanks, Jefferson we are pleased with these results and I'd like to close my comments by once again, recognizing and thanking the United team. It takes great people to deliver great performance.
For those of you there listening in I am proud to work alongside of each one of you and thank you all for what you do every day.
And now we'll be glad to answer any questions that you might have.
Thank you.
Ladies and gentlemen, if you have a question at this time. Please press the star followed by the number one key on your Touchtone telephone. If your question has been answered we wish to remove yourself from the queue. Please press the pound key.
Once again to ask a question. Please press star and then one now.
And our first question comes from Catherine Mealor from KBW. Your line is open.
Thanks, Good morning morning morning.
Really great quarter and has to start with the margin Youve seen some really nice margin expansion and you love it's been from mix shift, but also your asset sensitivity. So just wanted to get an update on how you're thinking about your margin outlook, if the fed does kite.
Later this month there again this year.
Alright, Thanks Catherine.
If we get it right, we could have 53% of our loans that are floating.
Of that 62% are tied to LIBOR or 2.9 billion.
38% of those are tied to prime which is one and a half billion dollars. So you have had some of the impact on our LIBOR loans are ready and then you'll get a more full impact on LIBOR and prime with the cut.
I think that the margin think of it because we'll still have some positive.
Each quarter.
So the seven attendance per quarter per cut.
That's right.
Okay got it.
And then <unk> and then how you mentioned related deposit ratio be how how aggressive do you feel like you could get on lowering deposit costs, and then bringing that loan to deposit ratio higher when the fed cuts.
Hi, guys I missed.
Part of that question you might ask you to redo that do want to say that when you mentioned seven to 10 basis points per quarter.
Onyx for each Cod I would make sure you do the offset each quarter for.
For the remix as it continues to occur.
Yes, yes, it's evident in on a core basis offset by the next so you're kind of like five debt.
Per cut roughly.
That's right.
Okay, Okay that makes sense.
And then my other question was just how aggressive you think you could be on bringing your loan to deposit ratio higher as you push deposit cost.
As you push deposit cost down.
In a rate cut.
Right so.
We do that we do have a nice loan to deposit ratio. We do have a great core deposit base, we have customers, we want to we want to grow our customers.
We can be a little more conservative we already have lowered our CD rates, we have seen some other competitors do that as well.
We have lowered some of the rates were going to take another look at deposit rates, if we do get a cut.
On the 30 Onest. So we do go to be I guess I would use a description description aggressive and.
An artist and our deposit rate cuts. So we think we do have the flexibility to do that.
And we're not looking to shrink our deposit base for silicon to grow our deposit base, but we think we do have flexibility with the loan to deposit ratio and do plan to be relatively aggressive in cutting pricing on some.
Deposit types.
Okay, that's great.
I think maybe one other one on just grows and grows the seed has think this quarter any update.
The back half of this year and how much of that you think will come from your core businesses versus the neatest growth.
Alright.
Rich do you want to start with that or I can.
Jump on that too.
You want me to start on a <unk>.
How we feel about Q3, yeah sure.
So Catherine good morning.
Our brand is limited another strong production quarter pipelines for loans and bankers looks good for Q3.
However, we have seen lower pay offs in Q1, and Q2 and anticipate more normalized payoffs in Q3.
But expect to still be at mid single digit growth for the quarter.
Okay.
Great and how and do you think the percentage of Navidea versus kind of your core bank should should stay about where it is or you see that mix shift changing over time.
Thanks, So we are around 7.5% of our loans to be interviewed as loans currently they have been a good source of growth for us.
Yeah, we were very happy and pleased where that deal is.
No we have imposed a a limit of having the Vodafone to total loans are being around 10%.
I think as we mentioned last quarter that we are planning on in the third quarter to begin selling.
Davita phones, so I think that you're going to see the because of the selling of certain of either phones, you're going to see the percentage of growth coming from the vetoes decline and you're going to see the percentage of maybe the phone to total loans, you know stay more stable and less than the 10% limit.
Great.
Right.
Welcome to Ethan that jump out thanks.
Thank you. Our next question comes from Brad Milsaps from Sandler O'neill. Your line is open.
Hey, good morning, this is actually theories on for Brad.
Oh Peter.
Hello, So maybe just following up on the NIM could you maybe give a little bit of color on on maybe the.
Specific impact from the V. This just on the loan yield side with with each rate gotten what that kind of looks like.
So the.
I would not expect.
A from the loan yield side, a big move from maybe the phones are longer term in nature. When they are made.
They are so I would not expect a decline in the v. to phones as rates decline. There are there is some pricing competition in the business.
But from the rate cut itself I don't expect a lot of change there.
Got it got it Okay, and then maybe just on expenses.
You know you guys maybe came in just below.
Your previous guidance for this quarter, but what do you kind of expecting here as we go into the back half you know work with first Madison.
You know kind of integrated in and what kind of the run rate looks like going forward.
Yep. Thanks for the question there so on the Ritas that are on the expenses, we do have a full quarter of first Madison to come in.
We have core growth and we've also had some relatively significant hires over the last quarter and we expect more of those to occur. So if you combine the three of those I think the I put a.
A number out there maybe 79 and a half for Q3, and then more of a core low single digit growth rate offer there.
Got it makes sense. Thanks, so much.
Thank you. Our next question comes from Tyler Stafford from Stephens. Your line is open.
Hey, good morning, guys.
Hey, I just wanted to just start on on fee income and congrats on a nice quarter by the way, but on on fee income can you just give us the the mortgage production that you saw this quarter and then the SP a production you saw this quarter.
Yes, so the mortgage production is in the form of applications was $410 million.
And the SP a production in terms of originations was $31 million.
Got it okay. Thanks.
I guess for me one from me just on on the Verizon obviously.
Right. It hasn't started to percolate on off at least from what we can tell there on that on that portfolio I'm. Just curious if you're starting to see any signs of weakening specifically on the interveners portfolio or if everything is still a pretty clean.
Yes. So this is Rob Edwards, Hey, Tyler I would say we have not seen really any change you will really our first quarter of owning the Venus was Q1 of 18 and it's now it does you know the losses do change from quarter to quarter, but it's been right in line with our expectations. In fact on the loss side, it's been I would say a little bit better than expectations. Here recently, and then we do a they do have a fairly robust portfolio management process, where they're refreshing a external scores on the portfolio on a monthly basis and those continue to to look very consistent as well.
Got it okay.
And then just lastly for me.
The snick balances.
That you guys provided in the deck does decline and call. It 25% from last quarter I'm, just wondering I guess, what drove that decline. If it was more of an intentional exit based on kind of what you're seeing on those underlying credits or if that was just.
In a normal paydown activity that that took those balances down and you know if there are any more kind of planned exits over the near term.
So I wouldn't define it as planned exits, but I would just say we have been saying that were sort of a lukewarm maybe I should say cool in the leverage loan portfolio a lot of that portfolio is done through the shared national credit Avenue and so I would just say I think we're comfortable where we are there when we're in snacks generally there with a local companies, where we're close to and know the management team a and so that's the that's the majority of what that book is and I would expect it to be stable, but but not see a lot of growth there.
Okay, and maybe just last last one from me just going back to innovate as do you have what the average yields or this quarter.
I think I too tired, let's see what I.
I did not they're relatively stable, but I'll get back to you. Okay. Okay, great nice quarter guys. Thanks.
Thanks.
Thank you. Our next question comes from Jennifer Demba from Suntrust. Your line is open.
Good morning.
Morning.
Question I'm wondering if you can give us an update on your Atlanta progress.
Specifically with new hires or land production and maybe talk about any other hires that you'd want to highlight across the other markets. Thanks a lot.
Sure Rich.
Hi, Jennifer.
In Atlanta in Q2, we hired a new market President in Buckhead, Sharon Thompson, who has brought on another lender in Q2 and another lender just started this past Monday.
I will tell you that we are looking at a additional hiring there and feel very good about that and in addition, I wanted to highlight Charlotte we open up the community banking market there with the New Park market President Charlie Curtis and he has brought on additional commercial lender and this is adding to our Charlotte presence of asset based lending builder finance SP, a renewable energy and mortgage and then lastly in Columbia, South Carolina, we executed a lift out late in June the Newpark market President is Shannon Stephens and he brought to commercial lenders with them.
Thanks, so much.
Thank you.
And our next question comes from Christopher Marinac from Janney Montgomery. Your line is okay. Thanks, Good morning, I wanted to delve into our credit a little bit more what's rich on the specialty see anti fraud, and just get a sense of you know behind the numbers that we saw which are very good. This quarter you know any other trends that you see both inside your portfolio as well as sort of your loans that you see as opportunities for the future and just as a general trends on credit.
So Chris for Hey, this is Rob maybe I'll answer the first part of that question just in terms of credit trends and then if rich wants to chime in on opportunities on the C. and I saw it in the future that'd be fine as well I would say economically speaking.
It just feels like there's a lot of mixed signals out there on the manufacturing side of course, the expert export piece that Len mentioned in his opening remarks as well, we're paying close attention to.
And so we're aware of that and we're watching the portfolio closely we do have I would say relatively conservative project limits at 20 million and relationship hold mid limits at 35 million. So we don't it's a you know it's a fairly conservative portfolio from that aspect. When we look at 'em. When we look at our criticized and classified were basically flat year over year, so there'll be some ups and downs quarter to quarter, but we feel good about where we are.
Chris This is rich in terms of C. and I, we still are very positive on that asset class and putting a lot of effort and a lot of our hiring is very focused on that.
Okay, Great and then I guess as a follow up for either you or either you Robert or others. As you know that there is a scarcity of banks now North Carolina and I'm curious does that help you on the conversation as United is coming into these markets and ramping up with your production team and of course, continuing to hire as you outlined is that sort of scarcity of competition.
You know incrementally helping you.
I would say the answer is yes, there in the last as you all are aware of in the last two years, there's been a lot of M&A activity in North Carolina and that it could always creates opportunity at both the customer and the banking a level and we're you know we're probably seeing that same thing in Atlanta as well.
Great. Thanks, very much guys appreciate the color.
Hey, Chris.
Thank you and our next question comes from Michael Rose from Raymond James Your line is open.
Hey, guys just wanted to get some color on deposits. It was nice to see broker calm down I know some of the trends are skewed by the.
Well the deal, but if you can just give us an update on some of your deposit.
Efforts and if you think that were at or near peak for costs.
Thanks.
Oh, Okay to start this is Jeff say on the deposit growth. The a lot of it is Japan blocking and tackling a new hires in the new markets and the efforts of the last.
A few years, we have been very pleased with that we have our deposit pricing in the middle of the appears right now in our growth rate has been very strong on the brokerage side. There has been an intentional decision to to shrink brokered and FHLB and offset that with securities.
Shrinkage, that's been a a a strategy.
I do think that Q3, we have we have lowered some deposit pricing, but we also have probably three or four months of Cds repricing higher saying that none of that is going to be a cost of funds that.
Right around here or maybe a basis point or two higher.
Next quarter, then improved for the fourth quarter. So I think we're right at the apex.
Of deposit pricing in Q3.
Okay. That's helpful. And then just one separate question for me on a on capital obviously, it was down a little bit because the deal, but still very healthy.
How do you guys thinking about the buyback at this point.
Right. So if you think about capital for US number one we want to use it for for growth.
We have been Oh, we have had higher growth recently, so we think that that uses a is increasing.
Deals, we like to use it and deal just for that number to use of capital for us and we like to use cash in deals when we can.
Two years ago, we're able to put $84 million of cash into the novartis deal and were able to but $53 million of cash in the first Madison deal, which has help we.
We do have some optimism on our pipeline that we'll be able to use cash and deal overtime as well.
And then maybe third.
As buybacks that we are going to be.
Managers of our of our capital, we do have $42 million of authorization left.
So depending on the first two.
We would look to be opportunistic and perhaps aggressive on the buyback.
Okay. That's helpful and then actually just one more for me.
Just as it relates to Cecil any sort of update there.
And as we go through it.
Any thoughts around potentially changing any portion of a long mix just given now.
Yes, some of the longer dated consumer stuff is.
Hurt a little bit more through that process. Thanks.
So Michael this is Rob I would just say we're on track for Cecil we've.
We've run our models against the portfolio or two quarters in a row now and are increasingly confident with the modeling and the results of a of those and the looking forward to a <unk> continuing to build the robustness there of that process and I would say the answer to your second question is a that we have not yet I'm really made any decisions around re mix based on seasonal results.
Okay. Thanks for taking my question.
Thank you.
And I am showing no further questions from our phone lines I would now like to turn the conference back over to Lynn Harton for any closing remarks.
Okay. Great then thank you all for being on the call and for the questions great questions and and we are very excited about where we are in a look forward to see you next quarter. So have a great day.
Ladies and gentlemen, thank you for participating in today's conference. This does conclude the program you may all disconnect everyone have a wonderful day.