United Community Banks, Inc.
Q1 2018 Earnings Call Transcript

Published: 25 Apr 2018

[Operator:]

Good morning and welcome to United Community Banks First Quarter 2018 Earnings Call. Hosting our call today are Chairman and Chief Executive Officer, Jimmy Tallent; President and Chief Operating Officer, Lynn Harton; Chief Financial Officer, Jefferson Harralson; and Chief Credit 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 are included on the website at ucbi.com. Copies of the first quarter’s earnings release and investor presentation were filed last night on Form 8-K with the SEC; and a replay of this call will be available in the Investor Relations section of the Company's website at ucbi.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 2017 Form 10-K, 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 will turn the call over to Jimmy Tallent.

[Jimmy Tallent:]

Good morning and thank you for joining our first quarter earnings call. Let me start by saying that I am once again very pleased with our results in the first quarter. In fact, it was a standout quarter by nearly every measure. It is a credit to our bankers who started out the gates in 2018 producing strong results. Our operating earnings per share for the quarter was $0.50 which was up $0.08 or 19% from last quarter. This increase was due in part from tax reform benefits and from our new partnership with Navitas which was included for two months in the quarter. These results were achieved despite headwind from expected seasonality and a special beginning provision for Navitas which reduced our operating EPS by $0.02. Our operating result of $0.50 per share was an increase of 28% from a year ago quarter. The EPS growth was accomplished by an improvement in profitability as the operating return on assets moved to 1.33% and the operating ROTCE moved up to 15.3%, putting us on pace to reach out 1.4 ROA and a 16% ROTCE goals in 2018. All measurements moved in the right direction and we expect this positive momentum to continue for the remainder of 2018. Continued expense discipline and a wider margin driven by Navitas and core margin expansion provided a meaningful layoff during the quarter. This quarter is also highlighted by pickup in loan growth despite continuing to intentionally run off our indirect portfolio and an increase in core deposits with deposit betas remaining low in an increasing rate environment. This has contributed to a high loan to deposit ratio although the strong deposit growth will be increased down a bit. We have also reduced our securities portfolio. Our measured growth and result in margin expansion continues our progress toward our goals of achieving top quartile profitability. During the quarter, we were also busy on the strategic front. On February 1, we announced the completion of our acquisition of Navitas Credit Corporation. Navitas had $527 million of assets at the end of the first quarter and their meeting all performance targets that were determined during the acquisition process. We're very pleased with our partnership is progressing. In a very short period of time we're already experiencing the strategic feet and synergy between Navitas, small ticket equipment focus and our commercial banking solutions unit. The partnership is working and we are well on our way to achieving the $0.20 EPS accretion in the first full year we mentioned last quarter. We also recently completed the operational conversion of Four Oaks by contrast. And so we now share all the same systems and officially the United Community Bank name. This once again gives us the opportunity to welcome the customers, employees and shareholders that have joined us. All said, we are very pleased with our solid performance in the first quarter. We're well positioned to grow, compete and perform in the foreseeable future. Now, I’ll ask Lynn to share the details of the first quarter.

[Lynn Harton:]

Thanks Jimmy. We are proud of both our results this quarter and the continuing strategic moves we're making to build our company. If you want to follow along with me, I'll start on Page 8 of the investor deck. There you’ll note a significant increase on our margin up 17 basis points linked quarter and 35 basis points from a year ago. This added 10 basis points of a linked quarter increase with the remainder caused by increasing loan yields and then influence of a full quarter of the Four Oaks portfolio be included. On Slide 9, the stability of our core deposit base remains a driver in our margin expansion. Our cost of deposits in the first quarter was only 23 basis points which was an increase of only one basis point on a linked quarter basis. Our core deposit base continue to grow increasing 172 million or 8.7% annualized during the quarter. This fully funded our loan growth during the quarter. Our overall cost of funds increased 14 basis points versus last quarter due largely to their sub debt raise and also the securitization debt from Navitas coming on during the quarter. Turning to loans on Page 10, our annualized core loan growth was 6%. Our loan production in the quarter was 665 million up 16% over the same period last year. Total loans reached 8.2 billion in Q1 up from 7.7 billion in Q4. As noted on Slide 11, my goal is to continue to strategically position United for quality diversified loan growth in metropolitan areas with solid long-term prospects. On Slide 12 , seasonally the first quarter is generally our weakest in fee revenue and now we essentially flat with the same period a year ago, the year ago period it included the revenue we have now lost as a result of Durbin. A notable net item this is 800,000 in fee income from Navitas. SBA fee income was down 200,000 from a year ago but commitments this quarter were particularly strong at $26.4 million, 27% higher than the same period last year. This continues to give me confidence and the continued growth of the business which is among the top 20 nationally. Mortgage also continues to do well despite a more challenging and uncertain interest rate environment. Our originations were up 26% year-over-year at $191 million. Turning to Slide 13 expense control is the great story this quarter. While operating expenses were up $2.3 million in the quarter, if you exclude the impact of additional expenses from Four Oaks and Navitas, total expenses were actually down $1.2 million versus Q4. Our operating efficiency ratio improved to 55.8% which is an improvement from last quarter and I believe strong performance relative to our peers. On Slide 14, a rebalancing of the loan portfolio continues to pay dividends with very strong results. Net charge-offs were 8 basis points marking the seventh consecutive quarter of 11 basis points for better performance and nonperforming assets came in at 24 basis points essentially flat with the last four quarters. Our $3.8 million in provision expense this quarter was impacted by a onetime initial provision for Navitas. The Navitas portfolio was actually marked a 1.5% premium due to their high yield and strong credit characteristics instead of the discount we normally see. This premium equated to $5.6 million. With the right up in Navitas loans, our allowance model required us to set aside $2.3 million or about 50 basis points of Navitas loans in an initial reserve which accounted for approximately $0.02 of EPS this quarter. The Navitas acquisition closed on February 1 and promises to be a great partnership. We're on track toward the $0.20 EPS accretion and 9 to 10 basis points added to ROA in the first year which we announced earlier. So I’d like to close with a review of what our team achieved in the first quarter of 2018. Both the announcement and closing of the Navitas transaction, solid performance or improvement in nearly every financial measure including credit quality, operating efficiency, margin, a significant increase in our dividend, growth in both core deposits and loans, and a flawless conversion of Four Oaks Bank to the United brand. The first quarter was a great one for United and as I look forward to the remainder of the year, I'm highly optimistic about our continued high-performance based on the strategies in place today, our high growth markets, industry-leading customer service and the determined execution of our plan to our bankers day-in and day-out. And with that Jimmy, I’d like to turn it back over to you.

[Jimmy Tallent:]

Thanks Lynn. Last quarter we provided some clarity and direction on our expectations for profitability in 2018, given our earnings momentum, tax reform and Navitas. I mentioned that we believe we can achieve a 140 ROA, and a 16% ROTCE for 2018. We stand by those results today and believe that we can achieve them for the year and possibly sooner during the second half of 2018. I truly believe that United is in a tremendous position to continue the success we've had and more. The bank is thriving and we have one of the most capable teams in the industry. On April 2, we announced that I was reducing my role to Executive Chairman of the Board and that Lynn will become the CEO of United on July 1. It is absolutely the right time for this transition, and I'm looking forward to serving in my new role. Lynn's leadership since joining the company in 2012 has been instrumental in giving us to where we are today and positioning our company for many future successes. He has done an excellent job in the role as CEO of the Bank and I believe there is no one more capable to lead this company into his next chapter. He is totally dedicated to this company, our culture, our business model and most important our people. That's what this is and always has been about. I'm truly grateful to the shareholders, our board and 2300 employees that make this company what it is today. I'm so proud of you of what we've been able to accomplish together. Now we will be glad to answer any questions.

[Operator:]

[Operator Instructions] And our first question comes from Michael Rose from Raymond James. Your line is open.

[Michael Rose:]

Just wanted to talk to you on your comments, Jimmy about the profitability targets. It does seem like you guys could actually exceed those as we move into the back half of the year. Can you guys give some - just some color around what would be the biggest contributors to you meeting or exceeding that outlook for profitability? And then the things maybe that could detract from it the most? Thanks.

[Jefferson Harralson:]

I think the biggest driver heading us will be the loan growth. We had good loan growth this quarter. We're seeing good demand through credit communities but I think that is the biggest swing factor towards meeting or not. I do think that this quarter was a very good in getting us on the route to that 140 ROA. So I think we've made good progress than we are set to achieve those goals.

[Michael Rose:]

And then maybe just switching gears a little bit to M&A. There's some quite a flurry of activity in the Atlanta market in the past few weeks. How does that change your appetite for potential opportunities in the Atlanta market and might there be some other areas at the footprint where you'd be more focused at this point?

[Jimmy Tallent:]

So really, Michael, it doesn't change our strategy at all. The markets that we have indicated in the past within the entire four state region in which we operate in, is still at top of mind, certainly there has been a lot of activity in Atlanta. We like Atlanta a lot. 25% of our balance sheet is in the Atlanta MSA. But we're going to remain very disciplined which includes the pricing and identifying the cost saves that we certainly have total confidence that we are able to achieve integration, and then of course the growth on a pro forma basis. But there's a lot of market that we have strong desires within those four areas or four states, and it could take the shape of a affluent, it could take the shape of an overlap, or it could take the shape of an entirely new market. So we will remain discipline, and I think our history has proven that when we do make an acquisition that what we say we do actually keep.

[Michael Rose:]

And maybe just one more from me. You guys have continued to highlight and rightfully so you're deposit base and lower loan to deposit ratio. I think you guys are one of the few companies that actually had a positive mix shifts this quarter and the deposit book, and costs were obviously very well contained. Can you give us your expectations for betas as we move forward with future rate hikes and what other deposit strategies maybe you've put into place more recently or what you're on focused on here would keep those betas low and would keep that loan to deposit ratio lower than peers? Thanks.

[Jefferson Harralson:]

We were really excited about this quarter with our loan growth almost more than double funded by DDA growth this quarter. So the deposit growth was outstanding. With our balance sheet mix, some of the things that we're going to do to help fund the bank this year is going to be, we're going to be strengthening the securities portfolio a bit. I would think about - call it a $20 million a month or so. We're on top of that. We have the indirect portfolio that's reaching about $42 million a quarter. We have had a really good deposit growth. We can't really count on that going forward as the pricing is getting more and more competitive out there. So I think combination of some of the liquidity produced by other pieces of our balance sheet and combination with the growth that we have been getting, we think we can continue to compete on the marketplace there. And then we think our loan growth will pick up from here. Specifically on the beta, I do think the betas will increase with each rate hikes from here. I do believe that we are still modestly asset sensitive to reach rate hike that occurs from here.

[Operator:]

And our next question comes from Jennifer Demba from SunTrust. Your line is open.

[Unidentified Analyst:]

This is actually Steve on for Jenny. First question is kind of on Navitas. What do you guys looking for kind of growth for the year any kind of portfolio remixing you have to do as well or can that just grow from here?

[Jefferson Harralson:]

We're expecting about $10 million to $12 million a month in Navitas growth. This quarter we were little higher than that at $44 million for the first two months but we still obtained that 10 to 12 number per month as a good number to think about. And so for the remaining nine months that will put you at $90 million to $95 million for the rest of the year. There is no meaningful remix of what they have on their books. We do think there might be an opportunity to move upstream over time and maybe even increase that growth rate over time as we find new niches.

[Unidentified Analyst:]

And then the Navitas financing you guys have there, is there any way to kind of speed up the change to more bank financing cum securitizations or is that kind of just have to roll off?

[Jefferson Harralson:]

That Navitas securitization debt will just roll off naturally as those loans are paydown or prepay. So there's nothing that we can do to accelerate that.

[Unidentified Analyst:]

Any timing on how you guys expect that to roll off?

[Jefferson Harralson:]

I mean it’s a natural and to have a four-year loan so they’re rolling off at a predictable natural pace. There is two securitizations left one is getting relatively small by June or July will be able to do a cleanup call we think on the smaller order origination securitization. And then from there, will just have one left as we go into next year.

[Operator:]

And our next question comes from Brad Milsaps from Sandler O'Neill. Your line is open.

[Unidentified Analyst:]

This is actually Peter on for Brad. I just wanted to kind of touch on maybe expenses most of my other questions have been answered, but obviously a little bit of a noisy quarter from considering that the deal closings and the conversion what not. What do you kind of see the expense trajectory going from here, you know is it closer to low 70 million range or what kind of - what are the impacts here with the systems conversion and all of that?

[Jefferson Harralson:]

I’ll start to you out with the $71 million base that we reported this quarter. Then we had the full quarter of Navitas in Q2 that had an extra million one or two for Navitas expenses so put that number as the Q2 base. And I would roll it from there at a natural rate and keep in mind until we have - this is our weakest seasonal quarter we expect stronger SBA and possibly mortgage going to next quarter which could also increase the expenses of debt. But I would think of it as a 72 base with core growth on top of it.

[Unidentified Analyst:]

And I guess just your commentary seems incrementally more optimistic on loan growth. So does this seem like kind of year-over-year growth can maybe accelerate closer to like a high single-digit pace. And what are really the drivers behind that, I know Navitas is obviously a positive there and you see some long-term opportunities. But are you seeing anything specific in your markets that are getting you - that are making you more optimistic at this point?

[Lynn Harton:]

So typically the first quarter is seasonally low for us on loan growth and as we even enter quarter, January and February are very weak, March was very strong. Our committee in pipeline activity in March was the strongest that we've seen in a long time. So certainly on the near-term horizon we feel really good about loan growth. In terms of the individual pieces, it's kind of same story our new markets Raleigh, Horry County are picking up. Navitas is very strong, senior living is doing very, very well, renewable energy is getting some traction. And then - the only question is, kind of a broader economy and how that goes. So those are some of the things that we’re seeing.

[Operator:]

Thank you. Our next question comes from Catherine Mealor from KBW. Your line is open.

[Catherine Mealor:]

As we talk about the margin a little bit, I thought like your core margin came up I guess almost it modeled to where almost I thought it would be with the full quarter of Navitas. And so I think we still got a month of Navitas to help the margin as we move into next quarter. So can you just kind of give us an update of the outlook for where you see your core margin going through the back half of the year? Thanks.

[Jefferson Harralson:]

So with the 17 basis points of increase this quarter, again 10 of that was Navitas for our two months impact and 7 was the core bank. We do think that Navitas will continue to impact the margin similarly given the three quarter a piece of us. All things equal that would, tell you we have an up margin next quarter and Navitas impact should be roughly five basis points by itself. Now within there we have a very competitive deposit pricing environment. We do have some remixing that is helping us. We do think this loan to deposit ratio should be increasing overtime. We do have loans securities shrinking and loans growing as a remix. We have a remix slowly away from the Navitas securitization as well. So it's a tough environment out there, but I guess for guys I would say that I think our margin will be up next quarter from the 380.

[Catherine Mealor:]

So you got 5 bps from Navitas - full quarter of Navitas and then for every rate hike from here maybe a little bit less than 7 bps you saw this past quarter, just given the competition on the one side.

[Jefferson Harralson:]

Yes, I would even say maybe the 7 basis point did include some core expansion from rate hikes. It also had a slight benefit from Four Oaks being in for the whole quarter. So for the rate hikes, I'd say it less than half of that 7 for future rate hikes.

[Catherine Mealor:]

And then back to the expenses, do we have any further cost savings from Four Oaks or is that fully in the run rate this quarter?

[Jefferson Harralson:]

So we think we had about 75% to 80% of the Four Oaks expense savings and the run rate now. We did just do the conversion in April. So we should start seeing the rest of those come through now or May and after

[Operator:]

Our next question comes from Tyler Stafford from Stephens. Your line is open.

[Unidentified Analyst:]

This is actually [indiscernible] for Tyler this morning. I just wanted to start with, I think there was some commentary in the release around the reserve ratio declining slightly from here. I was just wondering if you could kind of talk around the dynamics around this expectation. And specifically what you're expecting for charge offs and provisioning levels for the Navitas growth?

[Jimmy Tallent:]

In terms of charge offs of Navitas I'm thinking about that in terms of a four basis point add to us. So if we sort of - for the year a sort of budget a 10 basis point number, maybe it's 10 to 12 for the year and then 4 on top of that kind of gets me to the 14, 15 basis point charge off range. In terms of the allowance and how we run the model, you know it's a combination of really three things asset quality. So we did cover our charge offs on the core bank and would expect to continue to cover charge offs too including Navitas and then you would as asset quality is a component - loan growth is a component so that would play a role in it. And then of course, we continue to see the portfolio mix as the third component. We continue to reduce land which is has a historically higher reserve and maybe some of the other products we're adding in. And so that course also plays a role.

[Jefferson Harralson:]

So we did set aside that $2.3 million of onetime start up provision, in addition to that we have $3.9 million that came in the mark of the PCI loans in combination that's a $6.2 million of specific loss absorption capability for Navitas loans going forward which is about 1.7 % of loans which is about 2 years of losses set aside at the current loss rate.

[Jimmy Tallent:]

So it's hard to keep track of all this but if you know you're looking at the allowance of $61 million at quarter end, there's an additional 50 - just shy of $54 million in credit marks. So a fairly large number which includes the 3.9 that Jefferson just mentioned.

[Unidentified Analyst:]

And then jumping over to fees, I think in the other fee line there seem to be a decently sized job is I think some of that was carryover from Four Oaks but is that where you're putting the servicing from Navitas into?

[Jefferson Harralson:]

That's correct. So this quarter we had $800,000 increase of Navitas fees that was almost solely in that other line item. So that number with a full quarter impact will increase - should increase again next quarter.

[Unidentified Analyst:]

Can you talk around that servicing fee aspect and then just the growth on that should that growth commensurate with their portfolio?

[Jefferson Harralson:]

While most of those fees there - I guess the servicing fee a very modest piece of this part of it. The fee income would be fees they generally charge with loans that others may want to add in on there. But the primary piece of that is fees they charge in their normal everyday business. The SBA servicing fees would be very small.

[Operator:]

And our next question comes from Christopher Marinac from FIG Partners. Your line is open.

[Christopher Marinac:]

Wanted to drill a bit down on the loan to deposit ratio and is the GAAP in Navitas between what you see is and Tiers. Are you comfortable going back to where the Tier level is or may be in the future or in an area whether it’s above 90 and what have when you start and discomfort particularly as you looking at a possible transaction outside just looking at growth?

[Lynn Harton:]

I can run with that one. So it’s a great question Chris when we talk about quite a bit and we currently we’re targeting a 90% loan to deposit ratio so we think we can slowly move this 82 towards 90 over time possibly an acquisition could help us move there like Navitas. This quarter - last quarter when I was on the call we were talking about the 79% ratio going to 84% or 80% to 84% all things equal. This quarter we did make some progress going into 82 but the deposit growth was a very strong. So there is several components in moving that loan to deposit ratio up, but we felt comfortable moving towards that 90%. We haven't talked this a lot internally, I think we would be comfortable going over that 90% more towards peers. We’re setting interim goals and we hope to make progress on that loan to deposit ratio this year.

[Jimmy Tallent:]

And that 90% too Chris just to square that would be about $700 million of additional loans.

[Christopher Marinac:]

And just a separate follow up, when we look at the map I think it’s on Page 4 of the slide deck. Is there interest in getting deeper into Florida but doing it sort of organically without having to do a bunch of acquisitions and perhaps just a current teams doing things on the ground just incrementally because of the additional presence there?

[Lynn Harton:]

We would not at this time, we would certainly like to be in Florida it’s very difficult to do LPO in a market where we don't have on the ground brand. And so I probably stay away from that at this point, but if we had the right opportunity again we wouldn’t turn it down but it’s not been our focus and not our strategy at this point.

[Operator:]

Thank you. And I am showing no further questions from our phone lines. I would now like to turn the conference back over to Jimmy Tallent for any closing remarks.

[Jimmy Tallent:]

Thank you operator, and thank all of you being on the call this morning. We sincerely appreciate your interest in our company. Any additional follow-up questions don't hesitate to reach out to any of us and to our teammates that are on this call. I mean just once again say thank you and congratulations on another great quarter. And with that hope you all have a great day.

[Operator:]

Ladies and gentlemen, thank you for participating in today's conference. This does conclude the program and you may all disconnect. Everyone have a wonderful day.