Earnings Call: Q4 2019

Jan 22, 2020

Good morning, and welcome to United Community Bank's 4th Quarter 2019 Earnings Call. Hosting our call today are Chairman and Chief Executive Officer, Lynn Harton Chief Financial Officer, Jefferson Harrelson Chief Banking Officer, Rich Bradshaw and Chief Risk Officer, Rob Edwards. United's presentation today includes references to operating earnings, pre tax, pre credit earnings and other non GAAP financial information. For these non GAAP financial measures, United has provided a reconciliation to the corresponding GAAP financial measure in the Financial Highlights section of the earnings release as well as at the end of the investor presentation. Both of these are included on the website atucbi.com. Copies of the 4th quarter's earnings release and investor presentation were filed last night on Form 8 ks with the SEC, and a replay of this call will be available in the Investor Relations section of the company's website atucbi.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 4 of the company's 2018 Form 10 ks as well as other information provided by the company in its filings with the SEC 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 a great team of bankers throughout our footprint. For the quarter, our return on assets was 150 basis points on both the GAAP and operating basis, and we believe we have once again achieved our top quartile financial performance goal. Our earnings per share was $0.61 an increase of 7% year over year. Credit results continue to be solid with both non performing assets and net charge offs remaining at historically low levels. We're excited about 2020. Our markets continue 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 at below peer cost. We continue to invest in our delivery systems and I'm already looking forward to another successful year. But first, Jefferson, let's cover the details of the Q4. Thanks, Lynn. I am pleased to share the detail of our Q4 2019 full year results. We only had a nominal amount of non operating items in the quarter, so the GAAP 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 $1,600,000 BOLI gain and we also had about $900,000 in securities losses. Separately, we also took $700,000 in losses when we sold our remaining $103,000,000 indirect auto portfolio at the end of the quarter. All three of those adjustments affected non interest income with the loss on sale coming in the gains and losses from other loan sales line item. As a note, the sale of our indirect portfolio is immediately accretive and accelerated our strategy to exit the business. Starting with Page 5, our spread income declined as expected in the 4th quarter and our net interest margin compressed by 19 basis points. Of the 19 basis points, we estimate that about 10 basis points came from the impact of rate cuts. Another 4 basis points came from the expected decline in accretable yield after being unusually high last quarter and 5 basis points of the decline I would call seasonal as we have our seasonal inflow of public funds in the 4th quarter leading to about $240,000,000 of excess liquidity that we had throughout the quarter. This was earnings positive, but hurt our NIM by about 5 basis points in the quarter. These 5 basis points should come back however by mid year as the public funds seasonally flow out. Moving to Page 6, I'll just say that our deposit base is very strong with 32% of our funding in DDA and 55% in 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 8, this shows our loan growth in the quarter. We are very pleased with strong loan production in the quarter which was at near record highs, but we also had near record high pay downs in the quarter, which offset. Average loans grew 2.5%, but ending balance loans declined with the indirect sale at the end of the quarter. On another topic we have discussed in the past that we would begin selling a portion of our Navitas production in the 4th quarter and we did just that. We sold $20,000,000 of Navitas loans in the quarter and you will notice $1,200,000 of gain on sale of Navitas loans and fee income. This $1,200,000 gain came in at about 6.5%, which was above our expectations. On Page 9, you can see that our non interest income came in at a record $30,200,000 for the quarter. Mortgage was a driver of the strong fee quarter and the strong volume of Q3 extended into Q4. New rate blocks did decline but the follow through of originations and sales helped increase fee income versus last quarter as well as an MSR gain of about $1,200,000 I also want to highlight the gains from other loan sales line item. We had seasonally strong SBA loan sales in the 4th quarter, the $1,200,000 gain from Navitas loan sales and the $700,000 loss on our indirect loans. You'll notice that our SBA 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 $1,200,000 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, credit quality is stable, but we did see some slight increases in NPAs and net charge offs. Excluding our indirect reserve release, our provision essentially matched our net charge offs for the quarter. Moving on to Page 12 and CECL, with our January 1 adoption, our current estimated day 1 reserve increase is about 13% and we expect a modest adjustment to 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 will notice that the TCE 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 Len. Thanks, Jefferson. This quarter demonstrated strengths that have been built into the company, which give us confidence in our ability to continue to perform at a high level. Our investments in SBA and mortgage continue to pay dividends, and I'm very pleased with the balanced performance of our Navitas team. As I've already mentioned, our hiring activity has been strong, our pipeline of new bankers continues to grow. And I would amplify 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 and support of the company. And at this time, we'd like to open up the call to questions. And our first question is from Catherine Mealor from KBW. Your line is now open. Thanks. Good morning. Good morning. Good morning. I wanted to start just on fee income. Can you give us any color as to what you're thinking about sustainability of the higher gain on sale volume that we saw this quarter and how you're thinking about that for 2020? Yes, this is Jefferson. I can start with that, Catherine. So the gain on sale comes from a few different categories. I think you're talking about the non mortgage category I think there. Within that category is SBA. SBA is seasonally strong this quarter, is seasonally weak in the Q1 and builds throughout the year. And we think that can be flat to slightly higher, flat to slightly higher. On the Navitas loans, we think we're going to be selling $20,000,000 to $30,000,000 a quarter throughout 2020. So that number should be relatively stable to slightly higher as well. And then going forward, we won't have the loss on the indirect sale. Okay, got it. That's helpful. All right, thank you. And then on the margin guidance, it was helpful to break out the 5 bps that's attributed to the excess liquidity. But can you kind of talk us through what your outlook is for the margin this year assuming no further rate cuts? Thanks for that. So with no further rate cuts, I think that the 10 basis points of margin pressure, core margin pressure that we had this quarter, I think that will reverse itself. So I think in the Q1 our margin is up 2 to 5 basis points. Then as we get towards the middle of the year you'll see some of that excess liquidity come off. So some of those 5 basis points will come back and then should be fully back by mid year. So we think that the with the mix change happening towards loans away from securities with the ability to reprice CDs, you should see our margin decently higher in 2020. Great. All right, 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. Good morning. Good morning. Good morning. Land or Jefferson, you guys had another nice quarter of loan production. Obviously, pay downs are continuing to have an impact. One of your peers commented 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 and around the Southeast to maybe improve upon kind of the growth rate you've seen of late, particularly as you got the indirect sale behind you? Yes. So I'll start and then 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. The recession fears are kind of fading away. But we do have there's 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 the growth. And so maybe Rich might want to talk about kind of what he's seeing there. Sure. Good morning, Brad. And I agree with Lynn, the competition, non banks out there is new and different. We are forecasting 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 and Q4. 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 we're very optimistic. And Rich, can you just remind me how many new 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 combination of both sales leaders and lenders and probably expect less than that in 2020, but it's we're going to be opportunistic when it's available in terms of both lenders and possible lift out of teams. Okay, great. Thank you, guys. Thank you. Our next question comes from the line of Michael Rose from Raymond James. Your line is now open. 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 $25,000,000 a year runoff from indirect auto. Comparing that with the hires, I mean, is help me put together the pieces. I mean, is mid single digits still the right way to think about it? And then where do you see the greatest opportunity? Is it from the new hires? Is it from existing clients, etcetera? Thanks. So, yes, as Lynn said, we've had, I think, payoffs will continue to be high. So that's a little bit of a headwind, but the new hires are where we're seeing a lot of lift. So we're seeing that from our existing. We talked about what's going on, for instance, in Columbia, South Carolina with that team and how they really hit the ground running. We're 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 to capital, obviously continues to build a little bit here. You guys announced the $50,000,000 buyback last quarter. How do I balance capital growth from here with the buyback and maybe some opportunities for M and A? Just how should we think about capital priorities from here? Thanks, guys. Yes. Thanks, Michael. So our capital priorities remain the same. First, organic growth and M and A and then dividends also very important to us and buybacks are last in that although it can be an important tool. We did not buy back shares in the Q4. We have not bought back shares so far in the first. We're relatively optimistic that M and A can occur and we're optimistic that some cash can be deployed in M and A. We were successful in 2019 and in 2018 and putting some cash into deals. That said, you are seeing our capital ratios increase and they increased quite a bit this quarter. Our TCE was relatively flat, but we also had $250,000,000 of excess liquidity on that should fall back again throughout the year. So I think the TCE in a way is a little bit understated. So the combination of all those things leads us to we do think we'll have M and A. We do think that's 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 remind us, Jefferson, you guys are looking more at the in market transactions, let's call it $2,000,000,000 or less as opposed to anything more transformational at this point? Yes. I would say the priorities are really the threefold that we've always looked at. Clearly less than $2,000,000,000 We like the smaller deals, better cultural fits. Existing markets first, anywhere we could get deeper. But we would look at other high growth markets where we've got expertise as well. And then finally, just like Navitas, we continue to look at where we could bring in new products or new expertise. So those are our 3 priorities, the size, you're spot on with. And as Jefferson said, we continue to have meaningful conversations. We're hopeful that we get one done. Whether or not they materialize, it depends a lot of course on price, on diligence, all those items. But yes, 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 talk about specifically about the traction you're seeing in the Atlanta market? And maybe how the hiring environment has changed in the last several months? You seem to have new entrants coming into the at least the Atlanta market recently. Thanks. Hi, Jennifer, this is Rich. As you know, this past year, we've invested a lot in the Atlanta market. We've hired 7 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 and A activity that's really kind of coming to fruition particularly with Truist on they just landed their regional presidents and their market presidents. So we've just kind of seen the fallout really start coming right now, call it, the last 60 days. Okay. Thank you. Thank you. Our next question comes from the line of Christopher Marinick from Janney. Your line is now open. Thanks. Good morning. I want to go back to the Navitas loan sale. I know Jefferson you mentioned the next couple of quarters. Do you have an idea of the gain will vary much or do you think that the gain would stay similar? And I'm curious if the buyers of your paper actually could increase as they have demand and cash to put to work beyond what you've just seen? Yes. Thanks, Chris. So the Navitas sale I think is going to be it's going to be determinant on the greater rate environment. When we first started thinking about Navitas sales, we're thinking about the 4% to 5% gain, then we saw rates come down with the rate cuts. So what you have here is a relatively long term fixed rate loan. And so to the extent that rates go down, you might see it be a little better and to the extent that rates go up, you might see it be a little worse. Okay, that's helpful. Thanks for that. And then just another 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 moved forward. Great, Rich. Thanks very much guys. Thank you. Our next question comes from the line of Tyler Stafford from Stephens. Your line is now open. Hey, good morning gentlemen. Good morning. Good morning, Tyler. Hey, congrats on a very impressive 2019. I just wanted to follow-up on some of the hiring commentary that you've made and kind of looking to 2020, but in the context of expense growth and just how we should be thinking about expense growth 1 for the year? And then I guess 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 headwinds that are going to be persistent this year? All right. Thanks. Thank you, Tyler, for some thoughts on expenses. So first, in the Q1, I think flat to slightly down is what I'm thinking about for expenses. You have merit increases in Q2 and then we're thinking about low single digit from there. On operating leverage, it's year to year with the 3 rate cuts could be relatively difficult but it's something that we're fighting. We have we're working through our budget and we're going to do everything that we can do to produce operating leverage in 2020 versus 2019. We do think from Q4 2019 to Q4 'twenty 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 it. Yes. No, that's great. Thanks for that, Jefferson. And then just the expectation switching over to Navitas, the expectation for just annual production out of that team, how are you thinking about that? Yes. So we annual production, I think of it as flat to slightly higher there. Okay. And the duration remind me what the duration of those loans are as I think about you guys kind of keeping those portion of those on balance sheet? Yes. So we have 4 year maturities on Navitas loans. Okay, perfect. Thanks, Jefferson. Thank you. At this time, I am showing no further questions. I would like to turn the call back over to Lynn Harton, Chairman and CEO, for closing remarks. Great. 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 you so much. Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect.