Q4 2019 Earnings Call
Good morning, and welcome to United Community Banks fourth quarter 2019 earnings call hosting our call today, our chairman and Chief Executive Officer, Lynn Harton, Chief Financial Officer, Jefferson Harralson, Chief Banking Officer, Rich Bradshaw, and Chief Risk Officer, Rob Edwards, you're not its presentation.
They include references to operating earnings pretax pre credit earnings and other non-GAAP financial information for these non-GAAP financial measures United has provided a reconciliation to the corresponding GAAP financial measure in the financial highlights section of the earnings release as well as would be in to be investor presentation. Both of these are included.
On the web site at U.C.B. I Dot com copies of the fourth quarter's earnings release and Investor presentation were filed last night on form 8-K, with the FCC and a replay of this call will be available in the Investor Relations section of the company's website at you see <unk> Dot com.
Please be aware that during this call forward looking statements may be made by representatives of United any forward looking statements should be considered in light of risks and uncertainties described on page four of the company's 2018 Form 10-K as well as other information provided by the company in its filings with the FCC and included on its website.
And at this time I'll turn the call over to Lynn Harton.
Well good morning, and thank you all for joining our call. We are pleased with our results. This quarter once again driven by great team of bankers throughout our footprint.
For the quarter I return on assets was 150 basis points on both the gap and operating basis.
And we believe we have once again achieved our top cortile financial performance goal.
Earnings per share was 61 cents, an increase of 7% year over year.
Credit results continued to be solid with both nonperforming assets and that charge offs remaining at historically low levels.
We're excited about 2020, our markets continued to be strong we're fortunate to have a number of great bankers that have joined our team. This past year and we have more in the pipeline.
Our deposit base continues to be a strength given us ample funding it below peer costs, we continue to invest in our delivery systems and I'm worried there looking forward to another successful year, but first Jefferson, let's cover the details of the fourth quarter.
Thanks, Glenn I am pleased to share the detail of our fourth quarter and 2019 full year results.
We only had a nominal amount of non operating items in the quarter. So the gap and operating results are essentially equal we did have some unusual items in the quarter that netted out to a slight gain first we had a $1.6 million BOLI gain and we also had about $900000 in securities losses.
Separately, we also took $700000 and losses, when we sold our remaining $103 million indirect auto portfolio at the end of quarter.
All three of those adjustments affected non interest income, but the loss on sale coming in the gains and losses from other loan sales a line item.
As a note the sale of our indirect portfolio is immediately accretive accelerated our strategy to exit the business.
Starting with page five are spread income declined as expected in the fourth quarter and our net interest margin compressed by 19 basis points.
The 19 basis points, we estimate that about 10 basis points came from the impact of rate cuts.
Another four basis points came from the expected decline in Accretable yield after being unusually high last quarter and five basis points out the decline I would call seasonal as we have our seasonal inflow of public funds in the fourth quarter waiting to about $240 million of excess liquidity that we had throughout the quarter. This.
As earnings positive, but hurt our NIM by about five basis points in the quarter.
These five basis point should come back however by mid year at the public funds seasonally flow out.
Moving to page six I'll, just say that our deposit base has very strong with 32% of our funding and DTA and 55% and transaction accounts.
And this is the driver of us having one of the lowest cost of deposits in the southeast at 61 basis points.
Moving to page eight this shows our loan growth in a quarter. We're very pleased with strong loan production in the quarter, which was at near record highs, but we also had near record high paydowns in the quarter, which offset.
Average loans grew 2.5%, but ending balance loans declined with the indirect sell it ended the quarter.
On another topic, we have discussed in the past that we would begin selling a portion of our Venus production in the fourth quarter and we did just that we sold $20 million of Nikitas loans in the quarter and you'll notice $1.2 million a gain on sale of Navios loans and fee income this $1.2 million gain came in at about six and a half.
Percent, which was above our expectations.
On page nine you can see that are non interest income came in at a record $30.2 million for the quarter mortgage with a driver the strong fee quarter and the strong volume of Q3 extended into Q4, new rate Vox did decline, but to follow through of originations on sales helped increase fee income versus last call.
Peter as well as an MSR gain of about $1.2 million.
I also want to highlight the gains from other loan sales line item, we had seasonally strong SP a loan sales in the fourth quarter, the $1.2 million gain from the via phone sales and a 700000 our loss on our indirect loans.
You'll notice that our SP a loan sale gains were down 25% in 2019 versus 2018 on our decision to keep more production on the balance sheet.
Moving to page 10, our operating expenses increased by $1.2 million and with the rate cuts our efficiency ratio was up compared to last quarter, but still down 91 basis points compared to last year.
Moving to page 11.
Had a quality is stable, but we did see some slight increases in NPS and net charge offs.
Excluding our indirect reserve release, our provision essentially matched our net charge offs for the quarter.
Moving onto page 12, and Cecil with our January Onest adoption or a current estimated day one reserve increase is about 13%.
And we expect a modest adjustment the capital, which is just a handful of basis points.
I'll close on page 13, our capital ratios grew and remained strong and continue to create opportunities for us in 2020, you'll notice that the T.C.E. and leverage ratios remain more flat with the excess liquidity on the balance sheet at the end of the year.
And with that I'll pass it back to Lance.
Thanks Jefferson this.
This quarter demonstrated the multiple strengths that have been built into the company.
Which give us confidence in our ability to continue to perform at a high level.
Estimates and SP, a mortgage continued to pay dividends.
Very pleased with the balance performance of our innovative team.
As I've already mentioned, our hiring activity has been strong our pipeline of new bankers continues to grow.
And I would amplified jefferson's comments on capital and point out that our capital strength and our rate of capital generation affords us multiple options to create shareholder value.
Thanks, once again for your interest in support of the company and at this time, we'd like to open up the call to questions.
As a reminder to ask a question you're wanting to press star one on your telephone to withdraw your question press the pound key please standby well, we compile the culinary roster.
And our first question is from Catherine Mealor from KBW. Your line is now open.
Thanks, Good morning, Werent morning.
I'm sorry, just on fee income can you just any.
Color as to what you're thinking about sustainability of the higher on gain on sale volume that we saw this quarter, how you're thinking about that for 2020.
This is Jefferson I can start with that.
Catherine so the gain on sale comps from a few different.
Categories, and I think you're talking about the the Nonmortgage category I think there yeah within a category is SPJ SP is seasonally strongest quarter is seasonally weak in the first quarter and builds throughout the year and we think that can be slight to flatly flat to slightly higher flat to slightly higher on the davita phones.
We think we're going to be selling $20 million to $30 million a quarter throughout 2020, so that number.
It should be relatively stable to slightly higher as well and then going forward, we won't have the loss on the.
On the indirect sale.
Okay got it is helpful.
Thank you and then.
And on the margin guidance.
Thats helpful to break out the fact that.
That's attributed to the excess liquidity, but.
Talk us through your outlook is for the margin this year, assuming no further rate.
Thanks for that so with no further rate cut I think that T. The 10 basis points of margin pressure core margin pressure that we had this quarter I think that will.
Reverse itself I think in the first quarter, our margins up two to five basis points than if we get towards the middle of the year, you'll see some of that excess liquidity come off so some of those five basis points will come back and then should be fully backed by mid year. So we think that the with the mix change happening towards loans away from securities with the ability to re.
Price Cds, you should see our margin.
Decently higher in 2020.
Great Okay.
Okay, great. Thank you.
Thank you. Our next question comes from the line of Brad Milsaps from Piper Sandler Your line is now open.
Hey, good morning, guys.
Good morning.
Lennar Jefferson you guys had another.
Nice quarter of loan production, obviously pay downs are continuing to have an impact more of your peers call me last night, they felt like maybe.
Pay downs were slowing a bit as they kind of moved into this year just kind of curious.
Kind of how you guys feel about loan growth this year, given the new hires you've made the opportunities in around the southeast to.
Maybe improve upon kind of the growth rate you see it away, particularly if you got the indirect sale behind you.
Yes, so I'll start now I'll turn it over to rich.
We are blessed to be in some great markets I would say business optimism if anything is slightly better now than it was over the last couple of quarters, a recession, so fears or kind of fading away.
But we do have theres a lot of competition a lot of non bank competition and so I do think.
Payoffs will continue to be a headwind for us and so in my mind, those two things kind of balance off each other and our strategy is to continue to try to add new producers to drive growth and so maybe rich might want to talk about kind of what he's what do you see in there sure. Good morning, Brad and I agree with when the competition non banks out there is.
New and different.
We are forecasting a mid single digit growth up from 2019, because we did a lot of hiring in 2019, but a lot of that took place in Q3 in Q4, and we're just seeing those benefits today and I will tell you that even early here in Q1, we're having some very serious good discussions and so were.
Listing.
And rich can you just remind me how many producers you did add in 2019, and how that might compare to sort of what you're thinking about adding in 2020 sure. We hired 29, a combination of both sales leaders and and lenders and probably expect less than that in.
I wasn't 20, but it's we're going to be opportunistic when they went when its available in terms of both lenders and possible lift out of teams.
Okay, great. Thanks, guys.
Thank you. Our next question comes from the line of Michael Rose from Raymond James Your line is now fan.
Hey, guys just circling back to the loan growth question I think you guys talked about mid single digits last quarter.
Going forward, you're not going to have that 25 million a year.
Runoff from from indirect auto.
Comparing that with the hires I mean is.
Let me put together Usiminas is mid single digit still the right way to think about it and then where do you see the greatest opportunity is that from is it from the new hires as it from.
Turning clients et cetera. Thanks.
So yes, I'm as Len said, we've had a I think payoffs will continue to be.
Hi, So that's a that's a little bit of a headwind, but the new hires or where we're seeing a lot of lift.
So we're seeing that from our existing Ah, we talked about what's going on for instance, and Columbia, South Carolina with that team and how they really hit the ground running a were really still optimistic about what's going on in Atlanta. So we do see that continue forward again, we're having some good discussions and so we remain optimistic.
Okay.
Maybe switching gears a little bit capital, obviously continues to build a little bit here, you guys announced the $50 million buyback last quarter.
How do I balance capital growth.
You know from here with the buyback and maybe some opportunities for for M&A, just how should we think about.
Our capital priorities from here.
Yes, thanks, Thanks, Microsoft capital priorities remain the same.
First organic growth and M&A and then a dividends also very important to us and buybacks are our last and that although it can be an important tool we cannot buy back shares in the fourth quarter, we have not bought back share so far in the first.
We are relatively optimistic that M&A.
Can occur and we're optimistic that some cash can be deployed and M&A. We were successful in 2019 and in 2018 and putting some cash into deals.
That said or are you are seeing our capital ratios increase increased quite a bit this quarter.
RTC was relatively flat, but we also had a $250 million of excess liquidity on that should.
Fall back again throughout the year, So I think the Tc in a way as a little bit.
Understated so the combination of all those things that leaves US too. We do think we'll have M&A. We do think Thats. Our pipeline is strong there and if we don't look for us to use this authorization and get a little more aggressive in the buyback.
Okay, and just as a follow up just just remind us Jefferson you guys are looking more at the end market.
Transactions, let's call it 2 billion or last as opposed to anything more transformational at this point.
Yeah, I would say the priorities are really the threefold.
That we've always looked at it clearly less than 2 billion, we like the smaller deals better cultural fits.
Assisting markets first anywhere we could get deeper, but we would look at other high growth markets, where we've got a expertise as well and then finally, just like innovate US we continue to look at where we could bring in new products or new expertise. So those are our three priorities or the size your.
You're spot on with and as Jefferson said, we continue to have meaningful conversations we're hopeful that we get one done it whether or not they materialize. It depends a lot of course on price on diligence all those all those items, but.
But yeah those are our focus areas.
Okay. Thanks for taking my questions.
Thank you. Our next question comes from the line of Jennifer Demba from Suntrust. Your line is now open.
Thank you.
Could you just talked about specifically about the traction you seen in the Atlanta market and and maybe how the hiring environment has changed in the last several months you seem to have.
New entrants coming into the leasing Atlanta market.
Recently.
Hi, Jennifer this is rich as you know this past year, we've invested a lot in the Atlanta market, we've hired seven new lenders. There this past year and I will tell you that we're looking at more for Q1. So we feel like there is opportunity both talent and particularly now with the different M&A active.
Nobody that's really kind of coming to fruition, particularly with truest on though they just landed there regional presidents in their market presence. So we've just kind of seeing the fallout really start coming in right now call. It the last 60 days.
Okay. Thank you.
Thank you. Our next question comes from the line of Christopher Marinac from Janney. Your line is now open.
Thanks, Good morning wanted to go back to the beat Us loan sale and I know.
Oh Jefferson you mentioned to discuss the next couple of quarters.
Do you have idea if the gain will very much or do you think that the.
Okay would stay similar and I'm curious if the buyers.
Above your paper actually could could increase as they have demand and cash to put to work beyond what you've just seen.
Yes, thanks, Chris So the innovative sale I think it's going to be it's going be determinant on the greater rate environment. When we first started thinking about interviewed a sales were thinking about the 4% to 5% gain than we saw rates come down with the rate cuts. So what you have that here is a relatively long term fixed rate loan and so to the extent that rates.
Go down you might see it'd be a little better and to the extent the rates go up you might see it be a little worse.
Okay. That's helpful. Thanks for that and then just that are kind of interest rate related question.
Do loan floors.
Are they possible for you to get done today is that something that you're looking at at all for 2020 within your commercial contracts.
This is rich we're really not at this time, we have done a little talking about it but we have not move forward.
Great. Thanks, very much guys.
Thank you. Our next question comes from the line of Tyler Stafford from Stephens. Your line is now Ben.
Hey, good morning, gentlemen, good morning, more to Tyler Hey, Congrats on a very impressive 2019 I just wanted to follow up on on some of the hiring commentary that you've made in kind of looking to 2020, but but in the context of expense growth and just how we should be thinking about expense growth one for the year and then.
As part B to that would be just your ability to put up positive operating leverage and earnings growth. This year with just some of the the headwinds that are going to be persistent this year.
Alright, Thanks, Thank you Tyler for.
For some thoughts on expenses. So first on the first quarter I think.
Flat to slightly down if I'm thinking about four expenses.
You have merit increases and Q2, and then we're thinking about low single digit from there.
On operating leverage it's a year to year with the.
With the three rate cuts could be relatively difficult, but something that we're fighting we have and we have we're working through our budget and we.
We're going do everything that we can do to produce operating leverage and 2020 versus 2019.
We do think from Q4 2019 to Q4 20 that we will produce some relatively significant operating leverage.
There.
So I don't know if that answers your question, but that's how we're thinking about yes. That's great. Thanks for that Jefferson and then just the expectation switching over to notice the expectation for just annual production out of that.
Out of that team.
Are you thinking about that.
Yeah. So we annual production I think of it as flat to slightly higher there.
Okay.
And in the duration remind me what the duration of does.
Those loans are as I think about you guys can kind of keeping those portion of those on balance sheet.
So we have four year maturities on levied us loans, okay perfect. Thanks Jefferson.
Thank you at this time I'm showing no further questions I would like to turn the call back over to Lynn Harton, Chairman and CEO for closing remarks.
Well I just want to thank you all for listening in and for your support of the company and I Hope you have a great day. Thank so much.
Ladies and gentlemen, this concludes today's conference call. Thank you for participating you may now disconnect.