Q2 2019 Earnings Call
Good day and welcome to the first Horizon National Corp. second quarter 2000, Nineteens earnings conference call and webcast all participants will be in listen only mode. So you need assistance. Please signal a conference specialist by pressing the star key followed by zero. After todays presentation, there will be an opportunity to actually questions to exit question. You May Press Star then one on a touchtone phone to withdraw your question. Please press Star then two please note. This event is being recorded I would now like to turn the conference over to Aarti Bowman of Investor Relations. Please go ahead.
Thank you Kat. Please note that the earnings release financial supplement and slide presentation. We'll use in this call are posted in the Investor Relations section of our website at Www Dot first horizon Dot com.
In this call we will mention forward looking and non-GAAP information actual results may differ from the forward looking information for a number of reasons outlined in our earnings materials and our most recent annual and quarterly reports.
Our forward looking statements reflect our views today and we are not obligated to update them. The non-GAAP information is identified as such in our earnings materials and in the slide presentation for this call and is reconciled to GAAP information in those materials.
Also please remember that this webcast on our website is the only authorized record of this call. This morning's speakers include our CEO , Bryan Jordan and our CFO BJ life. Additionally, our chief Credit Officer, Susan Springfield will be available with Bryan and BJ for questions I'll now turn it over to Brian .
Thank you already good morning, everyone. Thank you for joining our call.
I'm pleased with our second quarter results, we saw good loan and deposit trends across the franchise.
So very good expense management and margin management as well.
As we discussed last November .
We are transforming this company for changing financial services landscape.
We're focused on driving efficiency to reimbursed in people products and technology.
The opportunity to do for us and the expanded capital Bank markets were very very good.
Our specialty businesses are capitalizing on those opportunities.
And there are also taking advantage of growth opportunities more broadly.
Or bring in a brief deep and broad product set and knowledge to our customer base.
And the second quarter, we also demonstrated the countercyclical nature of our fixed income business and we benefited from a mortgage warehouse finance business.
It is benefiting from lower rates and the strong housing market.
Our outlook on the economy and interest rates are still reasonably constructive.
We think that the economy is still doing very very well the customer loan demand continues to be good.
We think as most do did the bid will make a move lower in July .
I'm not sure about later in the year, but in all likelihood. This economy, we think continues to be reasonably stable and constructive over the remainder of this year.
Borrower sentiment continues to be good there's a little bit of bogus.
More prevalent today on tariffs and the impact of tariffs and what that May mean in decision, making cycles, but overall borrowers are constructive and still optimistic.
So our outlook for the remainder of the year is reasonably optimistic we see good momentum going into the third quarter were encouraged by what we see in our customers and our customer base. We feel good about our ability to continue to one grow the balance sheet to continue to manage our margin and thirdly continue to drive efficiency. So as I said earlier to reinvest in people products and technology to transform this business. So with that let me start when we turn it over to BJ to walk you through the details and then I'll come back for a few closing comments BJ great. Thanks, Bryan Good morning, everybody I'll start on slide six with our financial results.
Simply put we had an excellent quarter.
Double digit EPS growth linked quarter was driven by significant revenue growth and expense control across both the banking and fixed income businesses, our operating leverage was outstanding.
With revenues up 6% linked quarter, while total expenses, including notable items was up only 1% and adjusted expenses were actually down 2%.
This resulted in an adjusted efficiency ratio of 59% in the quarter, an improvement of almost 500 basis points over one key 19. The total revenue growth of 6% linked quarter was driven by net interest income up 3%, primarily driven by commercial loan growth and fee income up 12% linked quarter driven by a 22% increase in fixed income fees and a 12% increase in bank fees.
On slide seven.
You can see that we demonstrated tangible product progress to deliver strong EPS and balance sheet growth by executing on the strategic priorities, we laid out at our Investor Day last November .
Our execution on the growth oriented priorities of dominating Tennessee, and profitably growing key markets and specialty businesses are evidenced by the revenue on balance sheet growth that we saw in the quarter.
And our priority of optimizing the expense base in order to improve our efficiency and ability to reinvest in the business and transform our customer experience was seen in reduction in core expenses net of reinvestment.
We remain confident in our ability to maintain the business momentum we are seeing and will continue improving profitability and earnings profile of the company.
Turning to total loan growth on slide eight you'll see that our year over year loan growth is that 5% and continuing to strengthen post our systems conversion and balance sheet repositioning for the capital Bank merger throughout 2019 as expected we started capturing opportunities in our key markets and seeing strong organic growth, particularly in our specialty businesses.
On slide nine you see a bit more detail on the broad based loan growth we delivered in the quarter.
Overall specialty loans grew 14% linked quarter.
Loans to mortgage companies had a particularly strong quarter in average balances were up significantly over a billion dollars from last quarter.
Volume was up from seasonal strength in home purchasing as well as the lower rate environment. The purchase refi mix was roughly 70 30.
Weve retained and grown customers over the year and our balance sheet capacity knowledge and experience in this business have positioned us as a market leader.
Outside of loans to mortgage companies all other specialty areas still delivered great growth on average, 3% linked quarter and as you can see on the bottom left hand of the slide as I said, all other lines of business in our specialty areas group.
In addition, our loan growth in Tennessee, and key markets continue to remain steady.
And we expect continued growth over time, particularly in the newer markets of the Carolinas and South Florida.
Turning to deposits on slide 10, we are incredibly pleased with the continued success, we are experiencing and increasing customer deposits to improve our funding profile deposits in specialty areas were up 3% linked quarter and up 2% in key markets, such as South, Florida, Middle, Tennessee and mid Atlantic.
As you know we've been executing on a plan to meaningfully improve our deposit funding profile by growing customer deposits, particularly in our newer markets and specialty businesses, which would enable us to decrease the higher cost funding from market index deposits.
Our results in the second quarter prove out the execution of that plan with average market index balances down almost $2 billion or 19% from first quarter to second quarter.
That mix shift in deposits favorably impacts overall deposit rate paid net interest income and net interest margin and we are pleased with the results that we are seeing let's turn to slide 11 to review our net interest income and net interest margin trends, which given the macro rate environment backdrop were quite strong.
Linked quarter Eni was up 3% from strong loan growth and a few million dollars of higher accretion.
Net interest margin was up three basis points in the quarter to 334 basis points as we optimized our excess cash and ticket advantage of the favorable mix shift in deposit costs, which offset LIBOR floor and rate compression as well as trading inventory impacts.
As I mentioned, the favorable mix favorable mix shift in deposits has helped moderate and in this quarter actually lower our overall deposit rate paid.
Our total deposit rate paid declined four basis points linked quarter and in the regional bank deposit costs remained relatively steady only up one basis point.
We put back in the slides our sensitivity chart given the active discussion in the marketplace around rates specifically rate cuts.
As a reminder, this is a shock analysis, meaning it takes our current balance sheet and immediately moves rates up or down and looks at the resulting in high impact keep in mind three important things about our business model if rates were to shock down.
Number one we would continue to grow the balance sheet, and therefore add incremental revenue.
Two it is likely that our loans to mortgage companies business would be strong with higher re fi activity and continued strong purchase volume.
And number three our fixed income business would continue to strengthen all of these would serve as mitigants to a decline in rates.
Turning to slide 12, I'll take a moment to reintroduce you two are counter cyclical fixed income business.
Which had an excellent quarter.
Our average daily revenues were at $866000 up 19% linked quarter and up 85% year over year.
As a reminder, we're showing the factors that impact to fixed income on the bottom right of slide 12, and you can see that the direction of rates and the market volatility contributed mostly to the increase that we saw in the second quarter.
Additionally, other product revenues were up significantly largely driven by fees in our derivatives business with customers in the banking business executing interest rate swaps.
Pre tax income was up 55% linked quarter and the businesses EPS contribution in the quarter was four cents a share.
As we've discussed as the fixed income opportunity was needed the last several quarters. The management team at Ftn did an excellent job of streamlining the business to be more profitable moderated levels of volume, while maintaining the power to capture profitable revenue and volume when the market opportunity presented itself and we saw exactly that this quarter.
As we sit here today, we see no reason why our fixed income business won't remained strong over the next few quarters.
Let's turn to expenses on slide 13.
As I.
Talked about before our total reported expenses were up 1% linked quarter, which included an incremental 10 million of notable items in the quarter, including some remaining acquisition related expenses and our previously disclosed restructuring and branding expenses.
As we've previously discussed the restructuring actions include items, such as branch closures and improved processes that should reduce our total run rate on expenses going forward.
Adjusting for these notable items, our expenses were down 2% linked quarter. Despite a 5 million dollar quarter to quarter increase in variable compensation related to the higher fixed income revenue as well as reinvestments in the business through strategic hires and customer experience enhancements.
For full year 2019, we're targeting $50 million plus in cost saves with total reinvestments of $20 million for the year and as you can see in the first half of 2019, we took actions to achieve $36 million of efficiencies and about $6 million of reinvestment.
We will continue to manage our expense base to maximize efficiency and enable us to reinvest in the business to drive revenue and improved customer experience.
Turning to asset quality on slide 14, we see continued solid asset quality across our portfolios.
In the second quarter net charge offs were $5 million stable from last quarter, roughly $4 million of the five main in charge offs was related to one credit in the loans to mortgage companies portfolio.
The linked quarter provision increase reflected commercial loan growth as well as additional reserves for two nonperforming commercial credits.
But we continue to see steady credit performance with issues being idiosyncratic or one off and do not see broad based deterioration in the book.
Slide 15, as a reminder, about how we've reduced credit risk in our portfolio since the last economic downturn.
And though we took some key for how we took actions last year to run down or sell lower quality and or lower spread portfolios that impacted our loan growth those actions along with many others over the course of the last several years have positioned our credit portfolio quite well from a soundness and profitability perspective.
As you can see our loan portfolio has shifted from a real estate oriented one a decade ago to a much higher quality commercially oriented portfolio and relative to our risk profile and earnings power our capital levels are strong.
We operate on the philosophy of soundness profitability and growth in that order, which we believe will consistently serve us well and in the operating environment.
So to recap the 20 Two Q1 9 highlights on slide 16, we're seeing steady profitable loan growth in several areas along with strong deposit growth.
We have excellent expense discipline and are taking additional efficiency actions to reinvest in the company to drive further earnings improvement.
Fixed income had a strong quarter and the current environment seems more favorable for the business that we've seen in a few years credit quality is stable and we deployed capital effectively through strong loan growth share buybacks.
And an attractive dividend, we're successfully executing on our strategic priorities that we laid out at our Investor day, and seeing good momentum with our differentiated business model.
And we're confident in the business momentum.
And expect continued strong performance in the second half of 2019.
I'll wrap up with our 2019 outlook on slide 17.
Our outlook for net interest margin net charge offs.
In our capital levels remained unchanged.
Our net interest margin should benefit from continued loan growth.
And stabilization of our deposit costs offset by some lower accretion.
And so.
Rate impacts from the macro environment.
These factors should serve as an offset to those macro rate environments.
And the forecast that we are now using using it seems to rate decreases in 2019 with some continued declines in LIBOR.
And given the strong results we saw in the second quarter, we have improved the outlook for some of our return and efficiency metrics for the full year.
Returns, we now expect higher Razzi, an oral away.
Razzi at 17% plus or minus versus previously 16%.
And our ROA at 120, plus or minus versus 115 previously.
And in addition, we have revised the full year efficiency ratio to 61% plus or minus down from 62% previously as we see continued benefit from net expense efficiencies and strong revenue opportunities in both the banking and fixed income businesses with that ill wrap up and turn it back over to Brian .
Thank you BJ.
As BJ said were optimistic about the second half of the year. We don't know what we don't know about the economy and interest rates, but from our perspective as evidenced by our retail sales. This morning. The consumer is still strong borrowers are confident and if there's a recession right now it seems to be isolated to wall Street economy seems to be overall pretty steady and pretty strong.
So we're optimistic.
We have a great franchise, we are excited about as BJ mentioned, we're a year beyond the integration of capital Bank and we see great opportunities in the Carolinas.
In Florida, as well as existing Tennessee franchise.
We are optimistic about the momentum we see in our fixed income business. So we think we're very well positioned for the second half of 2019.
I want to say I will say, thank you to our employees. Thank you for all your hard work to all you are doing to build our business and our customers and serve them. We thank you for that.
Chuck we will stop and take any questions.
Okay. We will now begin the question and answer session to actually a question you May Press Star then one on your Touchtone phone.
Using a speakerphone please pick up your handset before pressing the keys if at any time. Your question has been interesting you will like to withdraw. Your question. Please press Star then two at this time, we will pause momentarily to assemble our roster.
The first question comes from Steven Alexopoulos of JP Morgan. Please go ahead.
Hey, good morning, everybody.
Good morning.
I wanted to start on the margin for BJ. So if we assume the forward curve holds and we get to cuts. This year two cuts next year, how do we see the core NIM trending for the rest of the year.
Hey, Steve Good morning.
So.
What I just talked about a little bit was not changing our outlook.
For total NIM.
So we have it at plus or minus.
330.
Embedded in that would be less accretion.
Going forward the rest of the year, so that would overall be.
Headwind.
To the overall margin, but from a core perspective.
I think we've got a couple of positives and then certainly a couple of things that would be a headwind so.
The headwinds clearly would be if we solve cuts.
Rate cuts.
We're currently assuming too I'm not sure that will happen quite honestly, but we're assuming that because that's what the forward curve is implying and so we're trying to align with the forward curve.
So that will definitely be up.
Headwind to us, but we are very encouraged about how steady our spreads are staying on the loan side in aggregate, we're very encouraged.
About the new volumes that were putting on then the spreads that were seeing.
We are highly encouraged about the average deposit rate paid dynamics that we see in the deposit portfolio as we've reduced our market index deposits as we've managed our base rates very effectively across the banking franchise and we've been very smart about where we are offering promotional rates to still grow deposits, but maintain very good discipline.
On the deposit rate paid side, so we see.
Some tailwinds with some headwinds and so sitting here today in the second quarter Threethirty four.
We still felt comfortable that we could defend both the total in the core margin around these levels plus or minus a few basis points.
Okay and CJ, if the fed continues to cut rates through into 2020.
I mean that would expect to me, you're giving a disclosure that you do have an asset sensitive balance sheet that at some point you would expect NIM pressure to build correct.
Correct.
That's right.
Okay.
And then separately that.
I was just going to say it depends on when you're assuming the rate cuts by so we're already into July if there is one in July that's a half a year impact if there is one.
At the latter half of the year than a lot of those tailwinds that I talked about in terms of actions that we're taking would largely offset at this year youre right going into next year, when there would be a full year impact it would be harder.
But then again some of the offset that aren't necessarily in the high line would also come through things like our fixed income business being counter cyclical et cetera, So clearly there'd be.
They are going to be pressure for us or for anybody on the margin. If there's if there's rate cuts, but were actively trying to plan, Florida manages as best we can.
Okay.
And then the follow up on that.
So the 80, our was up really really nicely this quarter and I was a bit surprised because mall was still low in the quarter and rates haven't moved down yet. It is just on an anticipation of rates moving down that you're starting to see more volume there.
Well I think if you look at where.
The belly of the curve is where a lot of the fixed income buying would be that's continued to move down and so.
I think we've seen a lot of.
Customers trying to get ahead of price increases as yields.
In the two to five year range in particular.
Have been coming down and so we saw strength on the mortgage desk, we saw strength.
On the agency desk and we saw.
Very very good performance from our governor government guaranteed lending business.
In the quarter, so it's not necessarily Steve as you will know that the shortest end of the curve. It's more in the belly of the curve and so we saw a lot of trading volume in those.
In those areas.
Maybe last one for Brian if we do see short term rates decline and volume increases, whereas historically from a church structural view is there any reason 80 or could it move back up to the higher end of that prior one to one another million range. Thanks.
Yes, Thanks, Steve.
Absolutely.
The fixed income business.
Has the ability to move up from here.
Last week was a very strong week approach in a million dollars in average daily revenue, it's going to be a little bit volatile is BJ just answered Europe strengthen the calls a number of the asset and you would have to say in all likelihood there was some confidence from borrowers at the head at least shifted from raising rates to reducing rates are so to speak getting out of the way and I think thats good for the business.
I think as you move up from here.
I'd be reluctant to all the difficulty we had backing away from the value under a million and a half guidance for for embracing that but I think it can be stronger in the back half of the year I think.
From what we've seen over the last couple of quarters. It has strengthened and I think you can stay in this range to slightly better throughout the remainder of this year.
I would just add Steve as well that.
The 40 ish trading days that we saw.
I would say 25% of them had over a million dollars a day.
In trading volume and so it was very very healthy across the quarter and particularly strengthened in June .
The next question comes from Brady Gailey of KBW. Please go ahead.
Hey, good morning, guys.
Brody.
So moving to start with the buyback do you guys have.
Pretty consistently repurchased around 1% of the company per quarter for the last few quarters.
If you look at where you guys have been buying the stock back when the stock as of today is probably.
Almost 10% higher than the level, you repurchased stood last quarter.
Yes, so just I'm asking basically as you look to buybacks.
Back half the year do you expect to.
Continue to be this active or with the stock trading where it's trading does the buyback would come a little less attractive to you.
Hey, Brady, it's it's BJ. So yes, we bought back stock attractively and we were pleased with that in the quarter.
We still see that as a lever going forward to deploy capital.
First we're going to look to loan growth than we had excellent loan growth to support. So you will see that RCT, one actually floated down below.
What our.
What our intended range was simply on higher risk weighted assets.
But we still think that given our earnings profile and given our earnings momentum now we've still got a runway and still frankly trade.
At a discount and so we think that there's going to be opportunities for us to continue to selectively buy back stock over the second half of the year.
All right and then BJ you mentioned the back half of this year.
To expect a lower level of yield accretion, which is explained what was that you saw a nice tick up in Two Q2 first one Q.
So I guess just to be a little more precise and what what level yield accretion do you think you guys will see in the back half of this year.
Brady I think we were assuming.
12 million 11 million 10 million $9 million coming into this year for a first through fourth quarter respectively.
And I think we were at $12 million this quarter, so a couple of million higher but.
In that and $9 million or a quarter range.
For the back half of the year 10, nine aid is probably what we expect.
Alright, great. Thanks, guys.
Sure. Thank you.
The next question comes from Ken Zerbe of Morgan Stanley . Please go ahead.
Great. Thanks.
In terms of the loans to mortgage companies, obviously, you had a really strong quarter this quarter.
Is it fair to assume that comes back down more to sort of the high ones next quarter or is there any reason to think just given that the business model has changed so that could remain a little higher.
I mean aside from the seasonality of course on a go forward basis.
Hey, Ken This is Brian the we think the business Ken can be strong for a while and boom.
We've we've said in the past we fully understand that there is a cyclical nature to it and you pointed out the seasonality.
Fundamentally we see a couple of things going on today one is.
The the housing markets, particularly the purchase markets are still reasonably strong.
The the refi markets or or Theres demand for their out a bigger percentage of the warehouse today is still at about 30%.
I would acknowledge that 30% of a bigger number means more reside tivity, but there's so much demand for purchase money reef.
Is really being pushed a little bit out the curve or out of the comp spectrum goods are not as time sensitive so.
We think that business.
Structurally can just be stronger.
Typically in the third quarter, which is seasonally pretty good as well.
We have done in our management of the business.
Bob Deere and the team there have done a really nice job, taking some additional market share. They have they have used our our positioning with customers and our balance sheet and our ability to extend credit.
In ways that we think has improved our share of the market over the long term and so.
While we'll have some cyclical nature to it we think it is a bigger in a stronger business today than it has been based on the way they've they've managed to expand share with our customer base.
Specifically, if you look two years ago, the number of clients in that business. We had about 225 points today, we've got about 275 clients over a two year period.
Significant increase in market share.
That's really what's very deliberate as Brian mentioned.
Okay, and then just in terms of matching them just for a second.
Hi, guys. You guys was 333 30 on go forward basis, but it seems about 10 basis points.
Have to change this quarter related to the lower cash balances.
Right and I'm not going to imply that your NIM should have been 320, but.
That's kind of implication.
When you think about the 300 hurting your ability to hold the threethirty steady on a go forward basis.
Are there other factors like I am just going through additional lower cash balances that you're building in that we don't know us in your guidance. Thanks.
Hey, Ken it's BJ so.
You may recall that Q1 19.
Our margin when two 331.
From Fourq use level of 337.
Right and so we had a lot of impact from excess cash that hurt us from fourth quarter to first quarter now it's helped us.
First quarter to second quarter. So that's kind of that that impact is largely I think moderated our excess cash levels are much more reasonable now so I don't think that there's there's nearly as much movement. There we've been able to take out market index deposits far quicker than we thought and finally got the ability to put that cash to work. So I don't think that will be is as much of a movement, it's really going to be over the next couple of quarters us managing deposit rates really really well.
Loans to mortgage companies, continuing we believe to be strong given what we think the rate environment and outlook is.
And then offsetting that any impacts if there are rate cuts.
In tail skews the headwinds from that so if we sit here today at 334 I look at the positives I just talked about.
I look at potential rate cuts and what that impacts us at.
Thank you.
330, plus or minus is probably where that over the second half of the year.
All right. Thank you.
The next question comes from Abraham Poonawala of Bank of America. Please go ahead.
Hey, guys good morning.
On everything.
Well.
Sorry about following up again on a question NIM just wanted to make sure BJ actually if you're thinking about disconnect clean if I look at your slide 11 disclosure.
25 basis points 11 million dollar impact is about three basis points of the margin is that the simplest way to think about the core NIM. If maybe you get a July Scott may impact us about CBS just one schematic.
That that again is on a on a static balance sheet.
So that would mean that that wouldn't take into account for instance that loans to mortgage companies would.
Would continue to strengthen in the third quarter, but generally speaking on a static basis Ebrahim Thats correct.
Hey, Ryan. This is this is Brian that is.
A static balance sheet as BJ said and news a parallel shift of the entire occur.
And so.
I don't know of lab bore has been forecasting lower rates and you've already seen some compression to fed funds. So some of that in all likelihood could be already factored in so it's not a forecast in any way shape or form. It is just a way to model the balance sheets of the balance sheet is identical and you move the entire yield curve by 25 basis points up or down. This is the impact on net interest income so.
It's a it's a rule of thumb, but it's it may or may not be useful in modeling and you have to make some assumptions about what parts of the curve, we've already moved in anticipation of lower rates.
Understood and just tied to that when you think about the interest bearing deposits back one coty dual appreciating the dynamics of the market index going down. They do you see the one coty dual going much higher or do we expect that just the offset of the market index running off.
Should support that around current levels.
So theres.
Ebrahim there are still plenty of deposit competition out there.
So I think that we will continue to be pressure on deposit rates paid now we do have the lever of lowering market index deposits, which will certainly help our overall deposit rate paid.
But even in the banking business like I talked about our our deposit rates paid in the core customer deposits were only up one basis point quarter to quarter.
Which is outstanding performance.
Will it continue to potentially float higher.
By a couple of basis points probably.
Because competition remains high and we're going to compete for deposits and retain customers as needed but.
We are maintaining the discipline that we need to maintain around.
Offering fair and competitive pricing, while also growing deposits so.
Again, we're we're very pleased with.
What we're seeing there and we expect.
These types of trends to continue.
This is Bryan again I.
The judge right deposit competition is still high but we've seen some moderation in some of the higher rate longer term.
Offers that are in the marketplace and so we're a little bit encouraged that the trend is is moving.
And in the right direction in the spec that has to do anticipation of the fed potentially cutting rates.
The next question comes from Jennifer Demba of Suntrust.
Please go ahead.
Thank you good morning.
Well Jennifer.
A question on the mortgage warehouse credit.
Charged off and you had.
A bit higher nonperforming loans as well can you give us any color on on those credits him on the overall book their credit wise.
Sure Jennifer.
We took a partial charge offs on a mortgage warehouse client.
That was impacted.
Due to a liquidity event.
Our particular credits was just the charge down based on an impairment analysis that we did in the second quarter.
This is not a traditional flatline.
It was a different type of facility that.
Yes, when the company had to repurchase certain loans at certain times.
Certain of that May have happened.
For those nodes.
So we have.
Selling very few lines like that in the mortgage warehouse lending business.
The majority of our business is traditional flatline.
Instead, we believe the asset quality outlet for mortgage warehouse lending remains excellent. This is really a one off situation.
Great. Thank you so much.
Thank you.
The next question comes from Michael Rose of Freeman James. Please go ahead.
Hey, just wanted to go back to the question on share repurchases. It looks like you're see Q1 ratio is currently below your guidance range is the expectation that you'll perhaps operate below that range in the near term. Thanks.
Hey, Michael its BJ.
So we decided not to change the outlook.
From the nine and a half to 10.
So.
It very well could be that we that we operate down at these levels. If you look at our TC DTA. It it actually was still at seven three it was unchanged.
So we feel very very comfortable with our capital levels at this range and so.
And within 20 basis points to the lower end of this range doesn't particularly bother us.
So like I said earlier, we continue to believe we're going to see healthy loan growth.
As well as be opportunistic on share buybacks in the second half of the year. So.
Whether it's nine three or the nine five somewhere in this range is where we feel comfortable for the second half of the year.
Okay. That's helpful. And then maybe just going back to warehouse I don't think you've given us the numbers in a while but can you just give us kind of a state of the b.
The state of where.
The businesses in terms of customers you know average line size things like that just as a reminder, thanks.
Sure.
We have been steadily adding market share I mentioned, a little bit earlier on the call, but if you look back over two years.
Client count it's gone from about 225 to 275.
So we've built some good market share over the last couple of years.
We have.
Really.
Average line size would probably be in the $40 million range from mortgage warehouse.
We have during this second quarter.
As the business really took off with the combination of it being buying season strong home home buying as well as rates lowering.
We did take the opportunity to do some expansion lines with some good existing customers.
Those are anticipated to come back down at the end of the second quarter. When you see the seasonality come back.
So that continues to be a very good business for us.
It's very well managed and we feel good about the outlook for the mortgage warehouse.
Okay, and just just a follow up to that where where do dwell time stand.
At this point.
Yes.
Sometimes actually went up a couple of days from first to second quarter.
Largely driven by the fact, there was so much activity in the system, just even being able to get one.
Through the system for all of our customers and probably the entire industry.
The other thing that we saw in the second quarter at least for our book of business is the average loan size went up.
About $15000 had been pretty steady at the Q 50.
250000 dollar range in it.
So I was about to 60 to 65.
For the second quarter.
What was the but the average drill time and would you expect that to fall as the dynamic of.
Repayments are up.
Before I close it went from 15 to 17 days.
Okay. I think we always expect ready it's always been in the 15 to 18 day range. There are different things that can affect it I mean, you've got obviously just through the system a few years ago. When there was a regulatory change you saw some.
Things get hung up there, but yes, I'd say 16, probably a good average drill time number.
Okay. Thank you.
The next question comes from Christopher Marinac of Janney Montgomery Scott. Please go ahead.
Thanks, Good morning, Susan could you elaborate on some of the specialty cnine business lines, and particularly restaurants and the portfolio. That's that's now a couple of years season, just curious what you're seeing there and any other relevant relevancy and I trends.
Sure.
I'll start with franchise finance, because you mentioned that.
We are we see good opportunities there we had no downgrades in that portfolio this quarter.
We continue to.
To add business, there and Weve managed some of the smaller.
Oh relationships has paid off some of the small ones when we bought the GE business.
The outlook is very good that team is.
Very knowledgeable in the industry, but one thing I think I know others are watching this as well.
The cost of labor.
It's something we're watching in that franchise finance business, we have seen some commodity prices come down.
So you're still seeing some strong results there.
They actually had a good second quarter.
And added some business there.
The health care business.
Which is.
We manage in our middle Tennessee market continues to be a good business for us.
That's about EUR $900 million portfolio I failed to mention franchise finance is about 800 million.
We see good opportunities there and obviously, we watch the regulatory environment carefully within healthcare.
Asset based lending business, which is about a 2 billion dollar business for us.
Continues to be.
Core business as you know we've been in asset based lending business for 30, plus years performed extremely well during the downturn.
It's a good discipline business with borrowing base monitoring and we've continued to see good opportunities. There we have seen some borrowers use securitization.
So we occasionally will get payoffs on good borrowers as they securitized debt in the market.
But we've been able to continue to.
Do business with existing customers as well that that others.
The commercial real estate business again.
Kind of a what we call it the specialty business, but it's really a core business for us and you've heard us say this.
Phone calls we believe that.
Long term consistency is very important and lending in commercial real estate and we're very proud of the discipline, but also how we work with clients is they've got opportunities I think weve got the bandwidth.
Very good there we watch things like can you I know, there's a slide in the appendix about.
The diversification by product type that's remained pretty steady over the last several years in terms of William Blair lets associated with.
Those product types.
So we also are not overexposed to any particular geography in fact I was looking at that the other day in terms of.
Commercial real estate business.
Managing our professional team.
We have the largest exposure we have two analysts say is less than $200 million in balance. So we continue to be very diversified and we think that's a good approach there.
The energy business.
Which is managed in our Houston office is about a $400 million book today.
About 80% of that is reserve based lending.
And as a reminder, we also do.
Borrowing base true ups in that business as well and carefully watch what's going on in the economy.
Our correspondent banking business. It's also about a 400 million dollar business.
That's really landing obviously, the other other financial institutions. So.
But failed to mention our core just our core corporate banking business is about a billion dollars that's really.
Mostly public companies larger companies.
And that business continues to be steady for us, it's a calling effort that we have.
Overall I feel very good about one that really the array of specialty businesses that we have in the diversification that we have.
And the way in which we've invested in knowledge within the relationship team as well as the credit team.
Great. This is really helpful background. Thanks for the all the time on this.
You're welcome thanks, guys.
Our next question comes from Brock Vandervliet of.
Yes. Please go ahead.
Hi, good morning, Thanks for the question.
Wanted to go back to slide 11, that's very very helpful. I understand.
The guide on the near term based on the two cuts.
Okay should we should we think longer term also about.
You know asset liability betas.
Do you think about it in those terms in our longer term should we instead think about it.
NIM specific NIM sensitivity for each cut and can you dimension that any further for us.
Well I think Brock.
Clearly.
We run all different kinds of scenarios around net interest income and net interest margin sensitivity and so I don't have all of it today and probably couldn't talk through it without.
Get pretty confusing but.
Yes, I mean, we make sure that we understand the full annualized impacts on our portfolios of different.
Cuts or increases in short term rates, we have a myriad of assumptions that underlie this around.
Deposit betas.
Betas on the loan yields dish.
And then correspondingly, we actually run a what we call a dynamic interest rate sensitivity forecast, which takes into account shifting of balance sheet mix is on the deposit and loan side. So we are constantly thinking about.
What our margin impacts in our net interest income impacts are on different environment. So.
Now, we'll we'll continue to disclose what we think is most helpful to you all and.
We can we can certainly follow up with any further questions that you've got.
Brock This is Brian all that modeling goes into the category of all models are wrong some are useful.
[laughter] it on that yeah to that point can we extrapolate from that.
[noise] Eni sensitivity the shock test if we were to extend it down to 100 basis points.
Lower with that kind of move in proportion to the the down 50.
A percentage or.
Or not.
Yes, so certainly.
As you move down the curve, what's going to happen or you have rate cuts, what's going to happen, particularly on the deposit side is you're going to hit floors.
Under which you can't really move rates anymore for deposit rate paid.
And so Thats why you see a big step change from 25 basis points to 50 is once you get beyond 25, you start you hit some of the floors on different products and product categories. So 50 basis points excuse me going down a 100 would probably be more like a proportional step to the.
Because of 50.
Next question comes from Jon Arfstrom of RBC capital. Please go ahead.
Thanks, Good morning.
Jonathan Hey question on expenses I don't.
Hit on that yet but.
BJ you talked about 50 million in cost saves for the full year and 20 million in reinvestment. So maybe net of about $30 million.
It seems like maybe you're already there in terms of the first half.
36, and 6 million. So I'm just curious if you could just give us a little help on the run rate and what kind of expense expectations.
For 29 gross just wondering then Tim.
Yes.
So remember back at Investor Day, we talked about.
Targeting being flat to down in our expense base and we still believe that.
We expect it to be more down as opposed to the flat.
And thats, even despite probably $25 million or so of the incremental increase in variable compensation to support higher fixed income revenue.
So, we'll we'll cover that and we'll cover.
The reinvestments that we're making.
With additional efficiencies so as Brian said earlier.
Quick quick and heartfelt thanks to all the excellent work that our employees have done.
To put us in this position to reinvest so.
Yeah, we're probably ahead, John a little bit on what we what we have in terms of efficiencies that would hope that we would not be at the 50 million that we'd be north of the 50 million.
By the end of the year and I expect us to do that but our reinvestment was slower as you might imagine what we wanted to do is make sure that we took out the efficiencies first.
So that we had the appropriate run rate on which to reinvest.
So thats why you will see a more significant ramp up in the.
Reinvestments in the second half of the year and those are things like further strict pgx hires in some of our key markets strategic hires in technology that will actually enable us to do some of the systems.
And applications changes in architecture changes that we want to make to transform our technology environment over time.
As you know, we're making significant investments in customer experience related efforts.
That have both the technology component, a marketing component and people component to them. So those are really starting to just materially ramp up.
Into the second half of the year and they would continue going forward, we're not going to be able to just stop we know we're on a.
Hey.
We're trying to walk up or down escalator. If you will in terms of keeping up with all the changes in the industry and so we're going to be very very smart about the costs that we don't need any more.
With that.
We've reinvested in the places where customers are demanding that we do better.
And so we're pleased with how we've done that today, we expect expenses to be flat to down go on through the rest of the year and we'll continue to maintain.
Strong expense discipline into 2020.
Okay that helps.
Very big picture.
Is there anything wrong with.
Looking at the 42 cents isn't as a new earnings run rate for your company I know you have some variability but.
Looking at what everybody else, we've all picked up all your margin we've looked at the warehouse and Weve looked to fixed income and I know, there's some variability but any.
Any reason you to hold us back from that.
John This is Bryan I think you know I wouldn't have from any specific number I think we can be in that.
40 area and we're optimistic you've touched on expenses and we've had a lot of conversation about margin I think.
It's important to step back from it and look at the entire organization and when you look at the impact of declining rates of your asset sensitive it's going to hurt you, but you've got other levers in our business you have a strong mortgage warehouse lending business, which we think will continue strong as long as the consumer is strong.
And we have the fixed income business, where the average daily revenue so.
The <unk> our businesses is a balanced one we think we perform well in a number of different environment. We think we've got very very good credit quality and that will hold up. So we're we're optimistic about the back half of the year. We don't know what the bid is going to do or how they're going to do it but as I said in my opening comments, we're still pretty optimistic about the overall economy the strength in the economy momentum in our business and and the momentum that we see under align our businesses. So.
If it were in the <unk>.
40 area I would be I would lose.
Reasonably confident about it.
Yes, Okay, alright seems pretty healthy.
Okay. Thanks, a lot for the help I appreciate it.
All right. Thank you.
Our next question comes from Brett Rabatin of Piper Jaffray.
Please go ahead.
Hey, good morning wanted to go back if we could to expenses I'm, just thinking about the the saves versus the reinvestment and yes.
The fixed income piece continues to improve or drive results would that change how you guys think about.
Reinvestment into 2020, and then maybe can you just talk overall about the efficiency ratio and and how you want to see that trend over the next year versus the investment right.
Thanks, Brett This is Bryan let me start.
So what we're doing on the cost side of our business is really not heavily influenced by whats going on in the fixed income business.
Other than as BJ mentioned earlier, they're working really hard to make that business more effective and more efficient.
What we're doing on the on the expense side is really what we talked about in the.
In the first quarter call, which is we're trying to drive efficiency to separate out the good calls and the bad calls and and take that efficiency and invest it back into people and products and technology to really deal with the changing nature or the landscape of financial services.
We think we have the ability to do that and and manage through that the remainder of this year and into 2000.
And so while fixed income they are more or less than they are today, we're optimistic about 80 or it really doesn't have much impact on our.
Outlook on how we manage expenses.
I'll, let BJ sort of talk about his expectations on the overhead efficiency ratio, but as you saw this quarter. It moved down significantly we think over time, we will continue to move that overhead efficiency ratio down not necessarily from this given point, but over time, we expect to get more efficient as an organization.
Yes, and I would just just add to Brian's point on longer term the efficiency ratio. The adjusted ratio as you know was at 59.
This quarter, we had said back at Investor Day.
Back then we were sitting at 64 on an adjusted basis.
This quarter, we're at 59.
We believe that that might slowed up a little bit.
Over the next couple of quarters, not because of lack of discipline, but because of reinvestment and and so on but.
Our expectation as we said back in Investor day is to consistently have that efficiency ratio.
Below 59 and that wouldn't be.
The stopping point that wouldn't be the floor, we would continue to try to manage that down with the idea, though that we've got to reinvest some or a material amount.
Of our expense efficiencies in the future of the business. So we'll try to be very smart about it but but we expect to continue to drive its 59 overtime.
I would just add one other thought which is over the long arc of time, our our bankers are people have demonstrated the ability to control cost and take cost out of the organization and we think Thats a key competency of the organization and we continue to focus on that and we'll.
The next question comes from Tyler Tyler Stafford of Stephens, Inc. Please go ahead.
Hi, good morning, guys nice quarter.
Thanks.
Hi, just given that.
I mean, just given the expectations around the mortgage warehouse stream continuing.
And where that was on the India period basis in the second quarter. Just can you frame up just total consolidated growth that you'd expect to see for 2019 for us.
For total loan growth.
Yeah total consolidated loan growth for for for the year, just given the tailwind of the mortgage warehouse.
Yes, so yes.
Total loan growth.
Year over year second quarter of 19 versus 18 was 5%.
We did not change the outlook that we had laid out at Investor day in terms of loan growth between three and 6%.
Yes, so I think our expectation would be hopefully it's at the higher end of that range.
And I don't think that anybody would be disappointed if we broke through the higher end of that range.
So as Bryan talked about earlier season did I did.
Pipelines continue to remain strong we think loans to mortgage companies will continue to remain strong.
Our core commercial lending across specialty.
Is strong and even though our key markets, the Carolinas and South Florida had just modest growth this quarter as we've talked about we think that there's very positive strength going forward. There. So we feel very good about not the outlet that we laid out and maybe we can.
We can even made it.
One data point to add there.
When we look at new production in the second quarter compared to the same quarter last year, which was we went through the conversion in may of last year.
Just the course, I mean, cnine without mortgage warehouse and without commercial real estate, we saw new production increased about.
33% from second quarter last year to second quarter. This year so.
Our bankers are really doing a good job of getting out and and working with both new customers as well as existing customers to expand relationships, which should serve us well as we continue to it as I said in a very consistent way.
To look at that loan growth and relationship.
It's clearly a point about moving from an integration focus to calling effort and growing the business not to put too many points only to the the growth year over year that BJ mentioned, you also have about a point point and a half of a runoff in the non strategic portfolio about $400 million.
There was a lot of complexity to it but as BJ said, we're pretty optimistic about our ability in this economic backdrop to grow loans.
Our next question comes from Jared Shaw of Wells Fargo Securities. Please go ahead.
Hi, Good morning, this is actually Tim or Brazil, or filling in for Jared.
Maybe just follow up on that last comment as you look at some of the momentum growth you've seen out of the New Carolina, Florida markets on the deposit side, how much of that is being driven by this increased commercial penetration.
On the loan side on the relationship side or is that more so at deposit effort to try and grow those balances.
Yeah, I think it's a bit of a bit of both of course on the consumer side.
In those in those markets were predominantly focused on deposit gathering and specifically building what we call primacy of relationships is getting deposits with.
The checking accounts in particular and really doing the hard work to build those relationships on the commercial side. It has always been our practice for our relationship managers to build full relationships whenever they possibly can.
So our our core Cnine business, particularly on the legacy side legacy first Tennessee side has 90 plus percent full relationships.
We are working.
To build that exact type of model in the Carolinas and Florida as well we had a great head start with what capital Bank was already doing.
With clients and customer relationships.
But we're strengthening our treasury services platform introducing that into those newer markets, which has enhanced capabilities relative to what they would have seen before from legacy capital Bank side, and so it's an emphasis to grow both loans and deposits on the commercial side.
Oh good.
Two on the on the mid Atlantic portfolio, we that's a portfolio that we're still a little bit in transition in terms of reducing aggregate exposure to commercial real estate that is not in our traditional commercial real estate business and so that has had the effect of muting some of the growth. There. So we think that's a mid Atlantic for example, that's a market where we have the opportunity to see a significant acceleration.
We're seeing that in our South Florida, our Florida franchise. So were we would those businesses, we think still hold great potential for us.
Okay. That's good color and one last one from me if I could just follow up on the warehouse business. That's now 13% of the total loan books seems like Theres still good opportunity.
Within that business I guess, just broadly speaking how large can that business get from a concentration standpoint, and then also the yield that you got on that portfolio in the second quarter.
Well.
As I've mentioned before we do have a robust portfolio limits process in our company.
That includes limits for different industries and different businesses.
We re evaluate that at least annually.
Right now we are within the limits that we set for mortgage warehouse lending I think we feel good about where guarded day.
It's a business that we know is going to be both cyclical and seasonal seasonal so we're comfortable with that fluctuating up and down as it relates to limit.
So for now we've got we've got room in our limits to continue to grow that business, but we clearly don't want it to become outside either.
And the second quarter yield on a business.
About 550.
Great. Thank you.
Our next question comes from Gary and Holland of Baird. Please go ahead.
[laughter], thanks for taking the questions.
We've covered most of the topics, but I think it's impressive you continue to find the incremental expense saving so.
That 30 million for 2019.
Just curious are there any similar sized expense levers remaining or are the efficiency is likely to be more incremental moving forward.
No.
Likely be both.
As Brian said, we're not going to stop finding efficiencies, though clearly what we wanted to do in the first half of this year as good a significant jump start on those efficiencies. So we could start the reinvestment process.
We have taken a significant amount of cost added the organization.
This this year.
So it is going to be hard to replicate $50 million plus of cost savings every year clearly so.
Our efficiency.
Incrementals will probably be slower year over year.
And Reinvestments will ramp up I'll remind you that those reinvestments as Bryan talked about will be good costs. If you will that will be revenue generating that will be improving the customer experience.
That will be making our technology and operations environment much more efficient over time, such that our efficiency ratio continues to improve and our earnings power continues to get better.
That's helpful and just one more on the fixed income business performance, obviously very good this quarter. So your sense that you're taking your now taking market share in that business.
Chris This is Bryan.
It's hard to tell him in a short period of time like this we have a.
Unique positioning in the in the sales force and the coverage that we have we we'd call on thousands of accounts.
There are some areas, where I think in all likelihood would probably arent taking.
Some market share.
But but I think over time.
We'll know better.
Fair enough. Thanks for taking the questions first thing thank you.
This concludes our question and answer session.
I would like to turn the conference back over to Brian Jordan for any closing remarks.
Thank you Chuck.
Thank you all for taking time to join US. This morning, we feel very very good about the momentum we see across all of our businesses good loan and deposit transaction activity. We are encouraged about our ability to control costs under control our margin and were pleased with the momentum we see in our fixed income business. Thank you again to all of our colleagues for the great hard work that they're doing to serve our customers and build our business. If you have any further questions. Please feel free to reach out to any of us are to already and her team today. Thank you again for joining us have a great afternoon, Greg that.
This conference has now concluded. Thank you for attending today's presentation you may now disconnect.