United Financial Bancorp, Inc. (UBNK) CEO Bill Crawford on Q3 2018 Results - Earnings Call Transcript

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About: United Financial Bancorp, Inc. (UBNK)
by: SA Transcripts

United Financial Bancorp, Inc. (NASDAQ:UBNK) Q3 2018 Results Earnings Conference Call October 17, 2018 10:00 AM ET

Executives

Betsy Wynnick - EVP

Bill Crawford - CEO & President

Eric Newell - CFO

Analysts

Collyn Gilbert - KBW

Brody Preston - Piper Jaffray

Kevin Swanson - Hovde Group

Operator

Good morning and welcome to the United Financial Bancorp Inc. Corporated Third Quarter 2018 Earnings Conference Call. All participants will be in listen-only mode. [Operator Instructions] After today's presentation, there will be an opportunity to ask questions. [Operator Instructions] Please note this event is being recorded.

I would now like to turn the conference over to Betsy Wynnick, Executive Vice President. Please go ahead.

Betsy Wynnick

Thank you Gary. Good morning, everyone. Welcome to our third quarter conference call. Before we begin, we would like to remind you to read our Safe Harbor advisement on forward-looking statements on our earnings announcement. Forward-looking statements by their nature are subject to risks and uncertainties. Certain factors could cause actual results to differ materially from expected results. Our comments today are intended to qualify for the Safe Harbor afforded by that advisement.

And now, I would like to introduce Bill Crawford, our Chief Executive Officer and President.

Bill Crawford

Thank you, Betsy and thanks to all of you for joining us on today's call. In the third quarter of 2018, we generated 91 basis point return-on-assets and 11.30 return on tangible common equity. We continue to grow revenue, core deposits and tangible book value.

In terms of risk management, credit strong and stable, and we’re positioned to handle rising rates with a flat yield curve, liquid here remains strong. Loan growth is slower than we would like but now is the time to maintain credit and duration discipline. Our banking teams are focused on initiating growing relationships which add value.

We’ve seen growth opportunities in some of our core markets due to some market dislocation. Last week and not in our Q3 at 2018 numbers, we added about $110 million in core retail deposits on three net new branches we acquired from Webster Bank. Now we also have new branches coming online a little later in the year in Greenwich and Fairfield, Connecticut. We’re seeing very nice deposit growth in our Hartford office with a relocation of our corporate headquarters last year.

Mainly [ph] we’ll continue to focus on growing revenue responsibly while improving expense control and operating efficiency, continuing to grow net new checking relationship vending, core deposits and tangible book value, all this will create value overtime. We are also working to balance growing earning assets, growing net interest income and preserving margins in this difficult operating environment.

I’ll now turn the call over to our CFO, Eric Newell for some more details on the quarter.

Eric Newell

Thanks, Bill and good morning. Yesterday, we announced third quarter earnings at $0.32 per diluted share versus the penny better than our linked quarter of $0.31 per diluted share and two pennies better than our third quarter last year.

Compared to the linked quarter, net interest income before and after provision expense moderately improved due to average asset growth despite net interest margin compression. Fee income improved due to lower loss and partnerships, and an increase in mortgage banking and our non-interest expense increased moderately due in part to salaries and employee benefits increasing over the linked quarter.

Our net interest margin declined 5 basis points during the quarter, with our cost of interest-bearing liabilities increasing 17 basis points and our interest-bearing deposits increasing 19 basis points in the quarter.

Our deposit pricing approach has largely been a defensive strategy to beat this share, responding to competitive pricing in our markets through proactive and reactive approaches. We’ve tested some offensive strategies during our third quarter and our time deposits with maturities that a customer behavior has started [ph] to accept and competition generally respond in kind.

We’re pleased to have successfully integrated the six branches we purchased from Webster Bank over Columbus Day weekend, as this adds to our franchise value and building core deposit funding with incrementally lower betas.

Interest bearing asset yields increased 9 basis points during the quarter with most earning asset segments contributing to our increase. Contributors through our improved fee income from the second quarter are higher fees from service charges and fees grew our annual fee increase that went in place – went into place on August 1st, higher mortgage banking revenue due largely to a higher mortgage servicing rights valuation and a lower loss and limited partnerships.

Contributors to our higher and non-interest expense from the second quarter, are higher health insurance expenses as more of our client participants meet their deductible at costs shifts in the company in the back half of the year, some increased temporary help that was seasonal in nature and some production based feature ups for commissions and incentives.

Our actual salaries line declined in the third quarter from the second quarter, and there were no other meaningful contributor to the linked quarter change. As we normally do, we provide our forecast for our fourth quarter -- now note that we’ve taken 2019 office slide as well in the middle of the budgeting process for that period.

For the fourth quarter I’d look through results in the third quarter as a guide. You’ll note that our loan growth to our cash is lower than we’ve talked about earlier in the year. We’ve been quite principal with our approach to the market pricing that we’ve been seeing in the markets and has consequently caused a slower level of growth.

Loan pricing is generally well below our hurdle rates for our aspirational ROA and ROEs, however, we have to defend our absolute net interest income dollars, so we’ve recently taken a more defensive approach to our pricing which will better position us for defending against loss of absolute net interest income dollars.

I wouldn’t interrupt but this is a signal that our NIM will decline notably in the future, however, as an adjustment to production that maintains our margin versus improving it. I know our [Indiscernible] coverage will be looking at our 2019 estimates and in the interim until we discuss more fully on the next earnings call I will direct them to our second half 2018 as an indication of what to expect in 2019 as it pertains to NIM and loan growth.

And now we’ll take your questions.

Question-and-Answer Session

Operator

We will now begin the question-and-answer session. [Operator Instructions] Our first question comes from Collyn Gilbert with KBW. Please go ahead.

Collyn Gilbert

Thanks, good morning guys. Maybe if we could start with just the NIM discussion Eric, and I understand the comments obviously on the competitiveness on the -- on the loan side and the asset side, but switching to the funding side, and it seems like that’s where a lot of the pressure came on the NIM this quarter. A couple of things, one is, can you just talk about what you’re seeing there, it looks like you also may be replaced at slugger borrowing this quarter with deposits, kind of where you’re seeing the repricing dynamic happening within each of those funding buckets, secondly then to just talk about what sort of support in your comment that you are anticipating the betas to be lower on the Webster deposits that you acquired versus what you are seeing within the organic organization and maybe we’ll stop there and I’ll follow up.

Eric Newell

Sure. I’ll take the last one first. You know some of the branches that we acquired are in less competitive areas in Connecticut and we’ve modeled and looked at that and we just feel that we are not going to have to necessarily respond as aggressively or quickly to our pricing strategy down there. And so that’s kind of the basis or the sign of the lower betas as well as the fact the composition of those deposits are a little more transaction oriented than what you would see time at the top of the house united, so incrementally there’s just more transaction related to deposits in that branch acquisition.

In terms of the – in terms of the pricing on the funding side, I think we certainly have, would obviously we are showing lower loan growth than what we normally have been and used to in the third quarter. Third quarter generally is a seasonal where we see our municipal deposits come back to us in the third quarter and we did see again so that’s why you are seeing deposits increase and the wholesale borrowings decline on a linked basis, but I would note that our municipal deposits are – have much higher betas than our other sleeves so therefore if you look at the composition of the deposit system how municipal contributed in the quarter, you are seeing a higher cost there and that’s one of the reasons why you saw an increase in the cost of funds linked period.

Collyn Gilbert

Got it. Okay, and then just you said in terms of your outlook for NIM you know strategically the objective is to try to keep the NIM stable is that right? So if there’s a week to assume then that this 292 was kind of the new stable run rate that you are going to hope to preserve?

Eric Newell

Yes, when I look at our forecast and all the modeling we do for interest rate risk in the balance sheet positioning that we have everything really indicates that we are fairly neutral to your interest rates. So as the rates do move up, there is some timing impact, so last quarter we obviously were 5 basis points higher and I said we’ll be stable. And then, I think I’ve been trying using that launch [ph] up for several years now and we’ve kind of bounced back and forth so I don’t want to necessarily probably calling that I think that our NIM will go up next quarter, but I think you know there is some phenomena on that were occurring in the third quarter particularly on the wholesale funding where we know it’s FHBL curve priced in early in the quarter in September and as well as the December rate hike because of the market expectation that those fed was going to move those two rates up, so we start paying for that in our FHLB borrowings at the beginning of the third quarter.

So that obviously puts some pressure on our funding cost, but we don’t really necessarily enjoy that on the asset side. So I think that we’ll have more, we’ll give the benefit of the September rate hike on the asset side in the fourth quarter, so my expectation is when you – when everything sells out I think that will be fairly stable, I mean we might see basis points up and down from quarter to quarter but I’m not – the way our balance sheet is structured, it’s fairly neutral for our interest rates.

Bill Crawford

Yes, Collyn I think the last four quarters were to prove that out if you look at us over the last four quarters, we are between 3% and [Indiscernible] we bounced around in there so, pretty fairly stable considering all the short term increases in funding.

Collyn Gilbert

Okay, that’s helpful. And then just on the loan side, so obviously while third quarter came in lower than what you were expecting is that you know you talked again about the pricing pressure, but just curious about sort of pay down activity and any other dynamics that might be playing into the slower loan growth or is it really all just a pricing, a phenomena on pricing and you’re just stepping away from it versus demand falling off.

Eric Newell

No demand is not falling off, actually we’ve looked at a lot more this year than we have last year, so it’s not getting a look and we’re definitely getting a look. It’s just that we are walking away and I think it’s probably 75% to 85% of the time we are walking away because of the pricing.

And we have a and I think I’ve talked about this in the past, we have – we’ve institutionalized many years ago a RAROC model that the producers look at and our hurdle rates there were driving towards the aspirational ROA, ROE that we were looking at and we’ve noticed that we were often times, sometimes 50 to 75 basis points out of the market.

And so we are looking at that now to say okay rather than look at our aspirational ROA, ROE why don’t we look at just defending the NIM or NII [ph] dollars that we are seeing now, so while we have paydowns, so the second part of your question, our paydown activity particularly in commercial real estate is significantly higher this year than it was last year, so we have that headwind as well.

So we frequently are looking at what’s the yield of the paper that’s paying off on the book. If we actually took that yield and we put it in our RAROC model it wouldn't hurdle, but what's happening is if we just don't originate than all of sudden NII dollars will start declining and that's not good either.

So, when I charged the production folks on wholesale banking as well as consumer groups is to make sure that we are trying to defend the NII dollars that we have on the balance sheet and try to maintain our NIM versus growing it.

Collyn Gilbert

Okay. Okay, that's very helpful. And then lastly and then I'll just hop in later in the queue. Just discussion around the tax maybe what you're thinking from the tax rate and how you see some of the dynamics within that business going forward?

Bill Crawford

Well, I'm not really able to talk about the tax too much on 2019. We'll talk about that in the next earnings call. But I think that the tax rate that we're seeing for the third quarter will repeat in the fourth quarter.

Collyn Gilbert

Okay. And just curious -- just kind of the big variances I guess in your tax rate from what you anticipated when you started the year versus kind of now where you're shaking out ending the year? I mean, it just – it's been violable and obviously difficult to model. So just trying to understand that a little bit more?

Bill Crawford

Yes. I mean, I think this year was a little bit more of a challenge because when we talk to you in January we were still flushing out some of the impacts of tax reform. And I think that we still have an actually or we're just recently or this week filing our tax return for 2017. So I think having that happen as well as some of the assumptions that we were under or using in January had more validated as the year went on, it was driving – it's driving the lower tax rate. But I think once we get beyond this initial 2018 year we'll have more stability in 2019.

Collyn Gilbert

Okay. And just strategically though the intention is to still be as aggressively utilizing these tax savings businesses as much as you have in the past?

Bill Crawford

Well, we constantly assess our that business, line of business and we'll look at the returns on that relative to where we can put capital in other parts of our balance sheet and we might make a decision that we'd rather put our capital somewhere else that's more efficient for us the driver term. So, I don't necessary want you say, yes, that I'm committed to it, but we're constantly looking at the returns in that business.

Collyn Gilbert

Okay. That's helpful. I'll leave it there. Thanks guys.

Operator

[Operator Instructions] The next question comes from Brody Preston with Piper Jaffray. Please go ahead.

Brody Preston

Good morning everyone. How are you?

Bill Crawford

Good.

Brody Preston

Eric, I just want to go back real quick, I know you've not given explicit 2019 guidance, but I think -- did you say you would point people towards what you've done in the back half of 2018 so far as sort of a rough guide?

Eric Newell

Correct.

Brody Preston

All right. Thank you. And I guess just going back to your earlier comments about demand hasn't fallen off in the loan side and 70% to 80% of the time you're walking away due to pricing and you've experience higher paydown activity this year relative to last year. I just want to know what's driving that. Like who? I guess who or what is making you walk away? I'm assuming there's some competitive pressures, but I'm trying to better understand who's the competition?

Bill Crawford

Yes. I mean, there's a lot of banks right here in New England and we also are in some of the bigger deals, we're competing with folks in the Metro New York or Mid Atlantic. Many of them have better cost structures, funding cost structures than we view on a relative basis. So therefore they are able to put up a narrower spread in terms of a price quote to our customer or our perspective customer. And for us it's just really looking at how do we drive improved returns whether its pretax, pre-provision, ROA ROE and we want to again look at how do we deploy our finite amount of capital in a way that is going to enhance our returns as much as possible.

The other thing, they were waving at maybe other thing that -- phenomenon that we're seeing particularly in the commercial real estate space is the light [ph] companies are coming in and competing with us and they obviously have a much longer liability structure than our bank does, so therefore they are able to be much more competitive on the pricing side.

Brody Preston

Okay. That's great color. Thank you. I guess sort of sticking with that deployment of capital being here in the phase of slower loan growth and margin compression. Would you folk see is you know your other options when you consider in driving EPS growth and PPNR growth, is there any expense initiatives in place or could you do share repurchase or changes in the securities portfolio?

Eric Newell

Sure. The investment portfolio is certainly an area that we leaned on in the past for earning asset growth. I mean you've seen that decline over the years. And I think that on an absolute basis we're probably going to maintain that portfolio in the future, but it's not going to – I don't see its being a significant increase in the percentage or earning assets. On the expense side, certainly NII to average asset has increased over the years, so we're going to constantly look – we're going to be looking at that to improve that metric.

And then share repurchases, we constantly are looking at where is the acceptable, I mean as a risk-free purchase of our shares. So we're constantly looking at the payback of that and comparing it to other initiatives that we might be looking at and determine whether or not make sense to maybe step in and buy some of our shares. So we're kind of looking at all three of those levers to assist in PPP [ph] growth.

Brody Preston

Okay. All right. Great. Then I guess maybe just sticking with the margin. Want to get a sense for how much your loan portfolio is tied to LIBOR? And I think you mentioned earlier that FHLB started pricing both rate hikes ahead of time, but LIBOR – LIBOR sort of went up ahead of the third quarter as well. So I'll just get a sense does that impacted your margin at all this quarter?

Eric Newell

So, when I -- I've been working at one-month LIBOR. I think its three-month LIBOR, but its not – one month is more prevalent than three-month and prime when you add those three, I believe we're at close to 47%. I don't actually have to breakdown of what LIBOR is, so I'd have the capacity on that.

Brody Preston

All right. Great. And then, I guess I wanted to go back to the Collyn's question about the deposit beta. I know that 3Q is a seasonal high point or if you guys for municipal deposits and those deposits are price here. But you know when I look at your quarter-over-quarter deposit beta in 3Q 2018 relative to 3Q 2017, you see a sizable sort of pickup in it? And I wanted to I guess maybe better understand, if the year-over-year trend is still increasing, I just want to get a better sense for why that would change moving forward?

Eric Newell

Well, I think there's a couple of psychological -- on the consumer size there's a couple of psychological things that have start to occur in the last – definitely in the last quarter. I don't know, maybe last three quarters. And that would be that there's a lot of our competition has a three handle on their offerings and I think of – and actually we have a couple people that have some -- I mean it's very limited, but they have some for handle on their offerings. And I think that really does that picks the customers interest and they are more willing to move their money for that. And so that's just something that we have to make a decision. Are we going to match that or we're going to react to that or we're going to be defensive or offensive on it. To-date, we've been defensive on it.

So, I think when it comes to the consumer I think they're starting to wake up a little bit more in our footprint. Obviously Muni is pretty 100% data and they'll call -- couple of our relationships will call us up in anticipation or next day what we're going to do for. So I mean there no even a lag there. And then I think you are also starting to see in the corporate or what we call wholesale banking but the commercial space, some of the treasurers of those -- of our customers are starting to look at what they can put their funds in that overnight and has a two handle volume. So I just think that that's one of the reasons why we're having – the cost of our fund increasing as there is a lot more attractive rates out there at least in our footprint.

Brody Preston

Okay. And then I guess, I'll circle back to I guess maybe overall economy, just wanted to get a sense if you're seeing any impact for Connecticut from changes to the self [ph] deductions so far?

Eric Newell

No. We have not. I mean, I think that one thing that we probably have seen is lower home-equity originations this year over last year because of the inability for the unbearable change on the tax deduction of that interest on home equity. And I believe – but we've also communicate that. We were not really driving customers to use the lines they has through direct mail in previous years and we started to actually view that. I think we've seen some early indications that one we actually paying our customers that hey, you have home equity, won't you try – they do.

Brody Preston

Okay, great. Thank you very much.

Operator

The next question comes from Kevin Swanson with Hovde Group. Please go ahead.

Eric Newell

Hey, Kevin.

Q - Kevin Swanson

Good morning.

Bill Crawford

Hi. How are you?

Q - Kevin Swanson

Good. So, I appreciate the comments and competition, but could you talk a little bit about the dynamic in terms of competition from non-banks on mortgage lending, maybe in terms of structure, and if some of these rate hike do slow in mortgage lending, how that competition changes in the near term?

Bill Crawford

Mortgage lending in terms of commercial mortgage?

Q - Kevin Swanson

In terms of just kind of talking specifically about kind of fee income from mortgage banking services?

Bill Crawford

So just to unclear your question, its more – its asking about mortgage banking revenue forecast or the structure that – or competition have structured on mortgages?

Q - Kevin Swanson

Just kind of the how you see the competition evolving in the near term from non-banks and other banks in the market given a potential slowing from increase in rates?

Bill Crawford

Actually there's two questions. I think that we're – obviously we're primarily a purchase shop. So with higher rates in the pace of the rates that how they've increased has certainly slowed our production numbers this year. I think we're about 15% to 20% lower this year than we were last year. I think that that is on part -- that's pretty close to what we're seeing nationally. So there's no surprise there. I wouldn't necessarily say that we're seeing any impact for competition from non-bank venders on that space at least from what we're seeing.

Q - Kevin Swanson

Okay. Thanks. All my other questions are answered. Thank you.

Bill Crawford

Thank you.

Operator

This concludes our question and answer session. I would now like to turn the conference back over to Bill Crawford for any closing remarks.

Bill Crawford

Okay. Well, thanks everyone for joining us on today's call and we look forward to speaking with you again soon. Take care.

Operator

The conference is now concluded. Thank you for attending today's presentation. You may now disconnect.