Q2 2019 Earnings Call
Okay.
The chorus call leasehold and operator will be with you shortly.
Convinces.
That's for sure.
Chorus call conference would you like to join.
Calling about the United community financial.
Absolutely.
Michael.
Yes.
Well I say Michael.
Its mccallum, it's spelled am I see H E. L E V I C age.
Yeah.
Thank you <unk> company please.
Era, it's A.I.E.R.A.
Also when you're running your music so again another way thank you.
Thank you.
Good morning, and welcome to the United Community Financial Corp, Second quarter 2019 earnings Conference call.
All participants will be in listen only mode should 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 ask questions to ask a question you May Press Star then one on your telephone keypad to withdraw your question. Please press Star then too.
Please note. This event is being recorded I would now like to turn the conference over to Tim Esson CFO . Please go ahead.
Good morning, and thank you for participating in today's conference call.
As always before we begin I would like to refer you to the company's forward looking statements and risk factors that appear on the screen in front of you.
Additionally, risk factors can be found in our Investor Relations website.
IR Dot you CFC online dot com.
This statement provides the standard cautionary language required by the Securities and Exchange Commission.
Forward looking statements that may be included in today's call.
In addition, a copy of the second quarter earnings release can be obtained at the same website.
With that said I would now like to introduce Gary small president and CEO of both you CFC and home savings.
Thanks, Tim and good morning to all thank you for joining US we're very pleased to report record earnings for the second quarter of $10.5 million 21 of the house cents a share for the quarter earnings are up about 9.9% over Q2 of last year and the EPS number is up 13.2% over the same period of last year.
We and the industry are managing through a challenging rate environment and our Q2 performance benefited from our diverse business unit mix provided us with multiple ways to wet.
Having said that loan growth for the second quarter increased a little over 6% versus the same period last year commercial growth came in relatively strong at north of 8% versus Q2 of last year. The residential portfolio is up 6.4%.
Total loans, including our significant held for sale balance portfolio was up 5.8% annualized on a linked quarter basis with consumer loans up 6.6% on a linked quarter basis, we've re energized our indirect lending effort. After about a six month pause to work on improving the unit's profitability and see that being a bigger contributor going forward.
Customer deposit growth was up over 7% versus Q2 of 18 non interest bearing deposit growth was just shy of 8% over that period and business deposits are up 30% year over year year to date Weve extend expanded our treasury management client roster by 16% and that continues to grow at that pace.
Revenue overall is up 5.8% Q2 to Q2 margin for the quarter down three basis points from last years same period and down five basis points on a linked quarter basis.
I was a five basis point linked quarter reduction.
Lower purchase accounting accretion accounts for two bips of the reduction we lost a bit to our aggressive stock repurchase activity, which use more cash than we had planned originally.
The beginning of the year and another two Bips was lost to what I'll call. The day to day rate management process in this volatile environment.
LIBOR rate loans have already begun to feel the effect of the anticipated move book Feds.
Lowering the rates and we felt that a bit in some of our yields over the last six to eight weeks.
On the funding side of the balance sheet, we initiated a meaningful rate reduction effort affecting our deposit portfolio repricing scheme and lowering our promotional CD and money market rates that initiative began in mid may.
And it was a meaningful move on some of those promotional rates where move it over 40 basis points.
Versus where we were when we are trying to attract money.
We have sufficient liquidity and funding sources to support our balance sheet growth.
And thats going to allow us to more moderate deposit pricing positioning in the marketplace through year end.
Credit quality indicators remain very positive for the quarter, we were in a net recovery position and the slight increase in nonperforming loans that appeared as of 630 has already have subsided due to pay downs received in July and we had visibility into how that would work at the end of 630 and felt very comfortable with our position.
From a noninterest income perspective, the residential mortgage business has been very strong for the quarter obviously.
Delivering excellent gain on sale results, we've actually doubled our revenue Q2 versus Q2 and were up 68% on a year to date comparison on just that gain on sale line item.
Last quarter, we incurred a $500000 MSR, mark and thought the worst was likely behind us than the 10 year Treasury dropped to 2% during the second quarter and we booked another 995000 MSR valuation adjustments.
While we do have the potential to recover the combined year to date $1.5 million marked down on the MSR, if the treasury rates bump back up.
We're more encouraged by the strength of our gain on sale momentum and our mortgage act residential mortgage production activity and expect excellent results in the residential mortgage business for the remainder of the year.
On the expense front, we returned to a more normalized level for our organization of just under $16 million for the quarter as we had.
Expected.
Now I'll turn it over to Matt cover loan growth in more detail and discuss our commercial and residential businesses.
Thanks, Gary.
As Gary mentioned, our lending businesses performed in line with our expectations for the second quarter total loan growth for the second quarter was 5.8% on an annualized basis, when including loans held for sale and deferred loan costs.
Commercial loan balances remained flat during the second quarter, which we had expected and communicated on the last call with growth for the period coming from our residential mortgage and consumer lending businesses over the last 12 months total loan growth when excluding loans held for sale was 6.17% with commercial growth coming in at approximately 8.2% during this period.
As we look to the rest of 2019, we expect that total loan growth for the year will come in at 6% to 8% with commercial growth coming in at 8% to 10% representing a 2% decline from our original guidance I would note that the adjustment is driven by higher planned payoff activity in our commercial business and not origination activity.
Lending Act.
Any during the second quarter was solid in pipeline levels continued to expand during the quarter, which should provide solid momentum heading into the second half of the year.
Commercial loan production increased over 24% in the second quarter versus the first quarter and over 25% when compared to the second quarter of 2018.
Cnine production continues to be strong, making up approximately 40% of second quarter originations.
In our mortgage business, we had another solid quarter in terms of originations sales mix and gain on sale as expected origination activity ramped up sharply in the second quarter of 2019, when compared to the first quarter and we continued our first quarter trend of having a higher mix of salable originations. This improvement provided an offset to the servicing valuation servicing rights valuation adjustment that was incurred.
When comparing the total of mortgage servicing revenue rights adjustments in gain on sale activity for the first half of 2019 to the first half of 2018, we were up by 13.8%.
Balances grew modestly for the second quarter consistent with our strategy for the business.
Overall, we remain very pleased with the performance of our mortgage business and we're well positioned to have a solid second half of 2019.
With respect to asset quality delinquency as a percentage of total loans increased from 0.41% in the first quarter of 2019, 2.58% in the second quarter of 2019, which is generally in line with delinquency levels in the second quarter of 2018.
Nonperforming loans increased $5.765 million in the second quarter of 2019, but I would note that in early July we resolved a substantial portion of the increase which puts us back in line with recent quarters.
Charge offs for the second quarter of 2019 resulted in a net recovery of $87000.
While we remain focused on asset quality and signs of increased credit risk.
At this stage of the economic cycle, we see no signs of portfolio level deterioration in our outlook remains stable.
I would now like to turn the call over to Tim Esson, who will review our financial performance in greater detail.
Thanks, Matt.
Let me begin by reiterating Gary's opening comment.
Q2, again demonstrated very solid performance numbers and as far as income concern it was a record performance.
We saw very positive growth in both loans and deposits. In addition to the continuation of a very strong credit performance.
Our quarter results at 21, and a half cents per share on a fully diluted basis were 13.2% ahead of the same quarter last year and are consistent with our expectations for Q2.
Looking at loans and deposits we saw the total gross loan portfolio increased 129, and a half million are about 6.2%.
The average customer deposit growth, which excludes brokered deposits grew $111.6 million or 5.7% and comparing current quarter to linked quarter.
Year over year, the increase aggregated 7.7%.
Increases in money market business and non interest bearing accounts have all contributed to this increase.
We have experienced significant deposit growth in the first half of 19, but would expect more muted deposit growth in the second half the year.
Additionally, we will strive to maintain pricing discipline with deposits as of flat BT inverted treasury curve continues to create challenges.
Net interest income for the current quarter totaled $22.1 million up 3.4% from the second quarter of the team.
Essentially this increase as a result of a 4.3% growth in earning assets.
Tempered with the decline from the benefit of purchase accounting adjustments.
The net margin for the quarter was 3.33 on an equity basis.
This would compare to 3.36 for the same quarter last year, excluding the purchase accounting adjustments the margin would be 329 for 19.
And 328 for 18.
Going forward.
It would appear that deposit costs have topped and will begin moving lower the treasury curve, However remains flat and expectations for the federal reserve to lower rates in Q3, and Q4 of this year will result in the net interest margin coming under additional pressure during the remainder of 19.
That said, we would expect to see the net interest margin full year results in the range of 333 to 334.
Continuing on non interest income was 6.7 million in Q2.
This level of performance is approximately 14% greater than Q2 of the team.
Mortgage gain on sale income of $1.4 million as the main driver of the increase this increase in gain on sale income was substantially driven by increased margins when comparing Q2 of 19 with Q2 of 18.
Going forward, we would anticipate mortgage banking income margins tracking higher than 18 for the remainder of the year.
But at a lower rate than seen in the first two quarters further complementing this for increases in brokerage and mortgage servicing fees along with trading in security gains.
These gains were partially offset with a fairly significant mortgage servicing rate valuation adjustment of approximately 995000 during the quarter. This adjustment can be credited to a drop in long term interest rates and the commensurate rise in mortgage prepayments speeds.
Noninterest expense was $16 million, an increase of 500000 over the same period last year or approximately 2.9%.
Expenses continue to balance out with plan as the year progresses.
Consistent with guidance offered in January of this year, we anticipate there will be an approximately 1% to 2% increase in non interest expense over the last years level.
The efficiency ratio is at 55.4% as we indicated on our last call. We expect this number to decrease to the mid fiftys level for the quarter, which aligns with plan.
During the second quarter of 19, the company repurchased 817000 shares for a total of $1.1 million.
This year.
The average cost of repurchases was 9.33 per share for the quarter at 936 per share for the year.
Recognizing this activity the estimated diluted share count for EPS calculations as of June 30 would be 48.100 million.
One final comment regarding our effective tax rate on an equity basis for the quarter the rate was 18.4.
Percent.
With that said I would now like to turn the call back to carry small.
Thank you Tim.
New business opportunities for the organization continue to trend up versus the pace at the end of <unk>.
18 in the first quarter of 19 with that in mind I do want to take the opportunity to update our guidance for the remainder of the year.
As Matt mentioned, we anticipate commercial growth to be at a minimum of 8% year over year with the earning asset growth remaining in the 6% to 7% range.
The commercial pipelines growing and commercial consumer activity is picking up in key segments and the residential mortgage business is great at some time, the MSR valuation adjustments will be much less of an issue.
Regarding margin, we had 333 for the second quarter, we lose another basis point, just to purchase accounting accretion dropping off.
In the third quarter, but we are firm on our estimate of 333% to 334 for a reasonable expectation for the full year.
Hi, expect residential mortgage revenue to continue to outperform the prior year and expect our quarterly expense run rate of $16 million throughout the end of the year.
For our organization from a full year perspective, we will be lighter on net interest income than we had originally planned at the beginning of the year.
Combination of lower average balances and lower margin.
Credit's, great and our loss provision is going to come in better than we had originally planned.
Perhaps stronger fee income, primarily driven by the residential mortgage business and expenses are right on target.
Expect net income to come and as we had planned for the year, which is slightly higher than the current consensus estimates.
We've had a more robust share repurchase plan over the first six months than we originally planned and thats, adding to the trajectory of EPS.
I can affirm that our expectations.
Of 12% to 15% EPS improvement on a full year basis versus the same period last year for the full year last year and that assumes no additional shares to be repurchased over the.
Remainder of the year from a math perspective.
Now I'll turn it over to the operator to take questions.
We will now begin the question and answer session to ask a question you May Press Star then one on your telephone keypad.
We are using a speakerphone please pick up your handset before pressing the keys.
If at any time. Your question has been addressed and you would like to withdraw your question. Please press Star then too.
This time, we will pause momentarily to assemble our roster.
The first question will come from Scott Siefers of Sandler O'neill.
Good morning, guys how are you.
Good morning, Scott.
Okay.
Just one.
Sort of clarify some of the loan growth guidance, the 6% to 8% is that.
Total growth for the year or is that the annualized rate for the <unk> that we should expect for each quarter in the second half and then.
The debt pay down activity being elevated.
Unfortunately kind of an industry issue, but sounds like its.
A little bit of a greater headwind than we might have anticipated I guess, just gary any any thoughts on any abatement insight or any relief that you might see or how do you think about that dynamic as well.
Good question, Scott I want to turn it over to Matt to get the particulars sure Scott Good morning, the that loan payoff activity in the.
In the first half of 2019 was a little bit higher in we'd certainly planned for we had expected a fairly robust amount of that to happen as weve communicated and we probably saw.
For the for the quarter about 20% more than we had anticipated and what's driving that is.
What we had planned for as primarily projects on the commercial real estate side that we would expect to be paid off and refinanced out into the life marker to the permanent market and which we saw plenty of that but what we began to see additionally in the second quarter given market conditions, where people were just selling their businesses.
Which were great Danes for them great returns.
But not something that we necessarily would be able to budget and have plans. So when we look at our outlook for the year.
That really represents that decline from original guidance and to your first question.
About the 6% debt that's for the full that'll be full year growth.
That 6% to 8%.
Loan growth guidance that we gave you this full year guidance not trajectory.
Perfect. Thank you Mike. Thank you, Matt I appreciate that and then.
Let's see just.
Regarding the repurchase expectation Gary do you have a sense for how aggressive you guys will be I mean with the Twoq. It was a really big number so there's sort of a lot of air between what you did in Twoq you and.
What a typical.
Quarter is just curious as to your thoughts there.
It was.
The opportunity is there and we took advantage of it.
I think.
We.
You can take some guidance from the number of shares that we re up with the board. This quarter another million shares brings us to a million seven that gives us.
Plenty of.
Room to work between now and the end of the year, we want to continue to be opportunistic Scott I wouldn't want to be too directional on.
Whether the velocity will be the same less or more.
But.
As part of our capital managing strategy and with the balance sheet being a little bit more crimped.
By 2% or so than we had originally planned for just that much more overcapitalized and will act accordingly.
Okay.
All right perfect. Thank you very much.
You bet.
The next question will come from Michael Perito of KBW.
Hi, this is actually.
Fashion on for Mike Credo. Thank you so much for taking my questions.
My first question mornings mortgage good morning.
I have a question about the mortgage banking business you mentioned in the release the margin should be stronger.
But do you think this platform can sustain recent activity if we start to decrease.
This is Matt yes, we do believe that if rates continue to at an increasing rate environment, We think thats for the for our residential mortgage business.
That's actually.
And actually a tailwind for us it will help spur purchasing activity as well as refinance activity and we have seen in our pipelines nice improvement.
With respect to what makes up refinance activity in our pipeline so that sets a growing piece of our business right now.
One point of clarification on that margin discussion of.
It's really the gain on sale calculation the margin related to that not the margin relative to the portfolio.
It is not a great time to be putting 30 year fixed pay for a 15 year paper on the portfolio. When we only have modest growth expectations. There really the only thing that goes on is what's needed to facilitate the bigger business of originate and sale and up.
And that margin on our cells that sold business has been climbing all year.
Yes, we is I mentioned in my comments, we've got a really nice mix of sale originations to total and it's been increasing its helped drive a lot of the improvement that you're seeing so.
To Gary's point, our view of balance use of the balance sheet for residential mortgages really modest in terms of overall growth its.
We were more positioned relative to saleable business in our book.
Okay, great. Thanks, and then could you also give us some more color and Hogan shorts and investment fee income and the ships are coming along like what are some reasonable growth expectations there.
I would say this on the insurance side, we'll have a year that's better than last year, we had better profit sharing and so forth we continue to see.
Sort of a mixed story and the softening from the underwriters as far as price increases and so forth, depending on which industry. So I think we'll call. It continue to move there of modest growth.
What we really look for continued.
Acquisition opportunities to grow that business beyond the.
And gain some scale and thats, probably our fastest path to.
To more meaningful results.
But the business of those very well, we're very happy with the margin on the line of business and with the investment we've made on the investment side.
We're having a good year, we've moved some dollars between say trusted investments. So we kind of look at both of them.
But with the market on the move that's helpful. We have.
Had.
A little move downward.
Due to a client defection, where they aggregated a bit of their trust money with the other organization that they work with.
And it was enough to be noticeable because our numbers are pretty small, but the business as a whole and the new business origination continues to be strong.
Great. That's all I had thank you so much.
Thank you.
This concludes our question and answer session I would now like to turn the conference back over to Gary small for any closing remarks.
Well again.
Tough quarter for banks in some respects, but I think many.
Have crossed the finish line from an earnings perspective, similar to how we have.
Great provision discussion managing their expenses and probably doing a little bit better on the fee income side.
We do view.
A couple of basis point movement downward on absolute growth as an episodic issue.
That's kind of a cumulative.
For sub a weak start to the year and then as Matt mentioned, a couple of percent lost on sold businesses that were unexpected.
But as far as new business growth in our growth thoughts beyond this year.
We still live in the range that we always looked at on the commercial side, which would be in that 10% to 12% range and on.
And that will be back on the table again once we get through this year.
Thank you for joining us and look forward to next quarter.
Thank you. The conference has now concluded. Thank you for attending today's presentation. You may now disconnect your lines have a great day.