United Community Banks, Inc.
Q4 2018 Earnings Call Transcript

Published: 23 Jan 2019

[Operator:]

Good morning, and welcome to United Community Banks' Fourth Quarter 2018 Earnings Call. Hosting the call today are President and Chief Executive Officer, Lynn Harton; Chief Financial Officer, Jefferson Harralson; and Chief Credit Officer, Rob Edwards. United's presentation today includes 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 at the end of the investor presentation. Both are included on the website at ucbi.com. Copies of the fourth 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. At this time, I'll turn the call over to Lynn Harton.

[Lynn Harton:]

Good morning, and thank you all for joining our fourth quarter earnings call. The fourth quarter was a strong finish to an outstanding year. Loans grew at an 8% annualized rate. Customer deposits grew at a 7% annualized rate. Our net interest margin improved and we posted an ROA of 1.45 on an operating basis. For the full year of 2018, our operating ROA was 1.40. Our asset quality was exceptional during the quarter as it has been all year. We remain conservative in our underwriting and disciplined in our concentration management. This is not the time to reach or compromise in our lending businesses and I'm very confident in our credit strategies and execution. Our operating earnings per share reached $0.57, which is up $0.02 or 4% from last quarter and $0.15 or 36% from last year's fourth quarter. During the fourth quarter, we declared a dividend of $0.16 per common share to shareholders of record on December 15, 2018. This is a penny higher than last quarter's dividend and represents a 60% increase over last year. We also have a stock buyback program approved in place and ready to execute. Our focus continues to be on delivering sustainable, top quartile financial performance and with that will come solid returns for our owners. While 2019 holds some questions about the direction of the economy, everything we see in our business and our communities makes us confident that we have another great year ahead of us. Our markets continue to grow with a strong pace. We're well positioned from a funding perspective. Our credit outlook remains positive and we have good momentum in nearly all of our businesses. I'm actually excited to see what the New Year brings. But for now, I'll turn the call over to Jefferson for more details on our performance in the fourth quarter.

[Jefferson Harralson:]

Thank you, Lynn. While we are pleased with the quarter and our 2018 performance, our goal is to be a top quartile performer. And we believe that even if we are not there this quarter that we will have made significant progress towards that goal this year. If you would like to follow along with me, I'm starting on page 5 of the investor deck. We had $114.9 million in net interest income in the fourth quarter, up 10% annualized from Q3. The spread growth regenerated, got a boost from a continued two basis point increase in our net interest margin and our strongest loan growth quarter of the year at 8% annualized. One thing that sets us apart we believe is our core deposit base, which costs just 54 basis points this quarter. We were particularly pleased with our deposit growth this quarter, with customer deposits up almost $200 million in Q4, more than funding our strong loan growth. Turning to loans on page 8, end of period loans were up $157 million in Q4 or up 8% annualized. Excluding indirect auto loan runoff, end of period loans grew at a 10% annualized pace. The 10% pace came as our loan production in the quarter was a record at $868.3 million, up 35% over the same period last year. Our Navitas unit also played a part in the growth. We had $56 million of loan growth at Navitas as our investments in the dealer and middle market channels appear to be pushing the growth rates higher. Moving to page 10, fee revenue in the second quarter was $23 million, up $1 million from last year. SBA gains were down $600,000 versus last year, even though we had greater loan sales in the quarter versus a year-ago, as the gain on sale has fallen quite a bit over the last year. We have made the strategic decision for 2019 to keep a portion of our SBA originations on our balance sheet rather than sell them. Specifically we are going to keep our 10 year SBA originations on the balance sheet and continue to sell our longer paper. Ten year paper comprises about half of our originations, but a good deal less than half of our gains because it has a lower gain percentage. Our mortgage business also continues to perform well. Although our fee income was down $1.8 million versus last year, our mortgage originations are up 4% year-over-year but a $1.3 million MSR write-down negatively affected this quarter. Turning to slide 11, operating expenses were essentially flat versus Q3. The flat expenses enabled us to generate operating leverage as our efficiency ratio improved 60 basis points to 55.8%. On slide 12, we're pleased to be able to report outstanding credit results again this quarter. Net charge-offs were very low at 9 basis points this quarter, just higher than last quarter, with our original Navitas loan mart [ph] now mostly consumed, we do expect net charge-off to move to the mid-teens range next quarter, a move we have been talking about, that we expected to come in 2018. NPAs came in at 20 basis points, essentially flat to last quarter and slightly better than last year. On page 13 you can see our capital ratios. Our capital ratios are strong and growing. We have authorization to repurchase 50 million in shares, but to-date we have not repurchased under this authorization. While we have not repurchased as of yet, I wouldn't mention that our dividend is up a full 60% over last year. With that Lynn, I'd like to turn it back over to you.

[Lynn Harton:]

Thanks, Jefferson. The continued improvement in our performance is something that we're very proud off, and something that is a testament to our outstanding employees. During 2018 our team's dedication to both performance and service was recognized multiple times. For the fifth consecutive year, we were selected as one of Forbes top 100 Best Banks in America. We also earned the top ranking for overall customer satisfaction in the Southeast by JD Power for the fifth year in a row. During the year our employees demonstrated their strong support for United and honored us by being recognized as one of the Best Banks to work for in the U.S. by American Banker for the second straight year. None of what we do, or the successes that we enjoy would be possible without our outstanding team. And I couldn't be more thankful for them or more proud of them. Speaking of outstanding people, as we mentioned last quarter, Bill Gilbert, our President of Community Banking is retiring after 20 years with United. Bill, you'll be missed. Your dedication to this company, your passion for service, your ongoing example of doing whatever was needed to make us successful has made you a legend at United. I congratulate you on a great career and I wish you all the best as you enjoy your retirement. With Bill's departure, Rich Bradshaw, formally President of Commercial Banking Solutions has been named Chief Banking Officer, adding community banking and mortgage to his responsibilities. Rich's track record of building and growing our commercial bank and developing a highly effective partnership between our commercial and our community teams will serve him well in his new role. I am looking forward to the continued growth and success these areas will enjoy under Rich's leadership and Rich's team. Rich, congratulations for this well-deserved promotion. Now we'll be glad to answer any questions.

[Operator:]

[Operator Instructions] And our first question comes from Catherine Mealor of KBW. Your line is now open.

[Catherine Mealor:]

Thanks, good morning.

[Lynn Harton:]

Good morning.

[Catherine Mealor:]

First want to start on growth, I apologize if you may have mentioned this, but had a really nice improvement in growth this quarter. What are your expectations for how we should think about growth going into next year?

[Lynn Harton:]

Great question, Catherine. And I'll start out by saying we continue to target kind of a mid-single digit growth rate. As you know this past year we were below that for some period of time. So we were really happy with the fourth quarter. But actually Rich is here with us and so I might turn it over to him, and let him give a little more color on expectations for next year?

[Rich Bradshaw:]

Thanks, Lynn. And as Lynn just said, we are targeting mid-single digit for 2019. But the nice part is we have some tailwinds in 2019 that we didn't have in '18. Number one, Navitas sales team, we've grown it by 20 sales people this past year. As stated, SBA strategy change, we're going to hold ten year paper. So we'll be holding 75% more on the balance sheet in average of Prime plus 275 variable. Our Raleigh team continues to grow. We just invested in our Atlanta franchise, hiring Doug Higgins as our Atlanta Metro President. The goal was to bring in a top banker and leader in order to attract other top bankers. We believe the M&A activity in Atlanta over the last six months provides a strong opportunity for talent and customers. And lastly, we feel good about our current pipelines.

[Catherine Mealor:]

Okay, great. And then on SBA, Jefferson, you mentioned, that you're going to be keeping the ten year on balance sheet and just on your longer term paper, can you give us a little bit of color in terms of how we should think about SBA gain on sale and then kind of near term impact from the government shutdowns on that business?

[Jefferson Harralson:]

All right, I might start on that and I'll pass it over to Rich, as head of our expertise in the SBA. So I think of the SBA being roughly half of our originations, and maybe - or I'm sorry, the ten year paper being roughly half of our originations and maybe 40% of our gains, because we're getting less gains on the tenure paper versus the longer paper. So kind of keep that mind as we're modeling. Also keep in the mind the seasonality. We have our weakest seasonal quarter is the first, and then kind of ramps up from there throughout the year. So that kind of give you some modeling ideas and maybe I'll pass it over to Rich on the government shutdown and how that's impacting?

[Rich Bradshaw:]

Sure, the government shutdown we did plan for this. So from PLP standpoint, and PLPs that what you need from the SBA to be able to close the loan. And we dedicated a lot of our resources in December to getting in PLP numbers for both December, but also for Q1, so we can support our customers. So we feel pretty good about that. And I think Jefferson did a nice job explaining little bit strategy change for this year.

[Jefferson Harralson:]

I just fill on there. There is a pretty big offset there with the additional loan growth that the - with the Prime plus 2.

[Catherine Mealor:]

Yeah, for sure. Okay, great. Thanks for the color.

[Lynn Harton:]

Thanks.

[Operator:]

Thank you. Our next question comes from Jennifer Demba of SunTrust. Your line is now open.

[Jennifer Demba:]

Thank you, good morning.

[Lynn Harton:]

Good morning.

[Jennifer Demba:]

Question on the net interest margin outlook, Jefferson. Your loan-to-deposit ratio, still pretty well below peers. What do you think for the margin this year with no rate hike environment or maybe one hike?

[Jefferson Harralson:]

All right thanks Jenny. I do think our margin will be at least flat. We have some mix change happening for us with loan growth and smaller securities portfolio, so towards loans, away from securities. We are getting a good growth rate from Navitas. So within the loan book we have a mix towards higher yielding loans. We did see an improvement in our deposit beta in the fourth quarter to gives you some encouragement - at least some encouragement about deposit betas next year. So we should have some margin expansion in 2019. We do still think we are also asset sensitive, not as asset sensitive as we were before with higher deposit betas. But we do think that rate hike still give us a slight margin expansion as well.

[Jennifer Demba:]

Any inclination to hedge away any of that asset sensitivity at any point or do you want to just stay naturally asset sensitive?

[Jefferson Harralson:]

It's a great question and something we do talk about quite a bit. We have 52% of our loans are floating. We have generated a significant amount of margin expansion as rates have moved higher. We do have some - it's natural lengthening of our asset side with Navitas' growth and adding Navitas also added some duration to the asset side. So we like where we are now, but we are looking at it all the time.

[Jennifer Demba:]

Okay. One more question if I can. You mentioned the buyback authorization, $50 million still in place, what's the thought on being opportunistic there and what's your M&A interest right now. I'm assuming it still kind of remains the same as it has been for the last several months?

[Jefferson Harralson:]

So I'll start with the buyback piece of it. And we do believe that we will be buying back shares throughout the year. We'll be opportunistic in that. M&A will play a piece of the likelihood of it - of buybacks. And maybe I'll pass it over to Lynn and step back if need be.

[Lynn Harton:]

Yeah. Sure Jefferson. And from a M&A perspective, we continue to have the same strategy we have had, which is targeting relatively small, culturally similar organizations in markets we'd like to be in, or markets we'd like to get deeper in. We've funded those typically with a mixture of cash and stock, but today we would be more biased toward more cash and less stock in a M&A deal. We continue to have conversations and would hope to have some activity. But so no real change in our M&A strategy at this point.

[Jennifer Demba:]

Great. Thanks so much.

[Operator:]

Thank you. Our next question comes from Michael Rose with Raymond James. Your line is now open.

[Michael Rose:]

Hey guys, how are you?

[Lynn Harton:]

Hey Michael.

[Michael Rose:]

Just wanted to clarify on the NIM commentary, I assume that's on a core basis. Can you at least, or can you provide - maybe accretion was a little elevated this quarter. Do you have a sense for at least what the scheduled accretion is expected to be this year, somewhere in the ballpark?

[Jefferson Harralson:]

Yeah. Thanks for a great question. I do think that will be relatively steady in 2019. We've got about $30 million to run through still with accretion. So I think the - that accretion number should be relatively steady in '19.

[Michael Rose:]

Okay. That's helpful. And then maybe just moving back to the loan growth, you guys gave some really good commentary and the opportunities. Where do you think - or where are some areas where you're potentially a little bit more cautious, either by product type or maybe geography. It sounds like lan [ph] obviously is a big opportunity for you guys. But are there any markets or products that you're a little bit more cautious out at this point? Thanks.

[Rob Edwards:]

So Michael, it's Rob. I would say probably the one area where we have been cautious more probably in the last 12 months is in the leverage lending arena. So we just have been very quiet in that space over the past year. And then maybe longer term than that we've been cautious in the multifamily space, just a lot of building going on. And really it's been over two years now that we've just - we've really wanted to be cautious, stay with people we know. So no new customers and we have not done - our portfolio there has been relatively flat over the last couple of years.

[Michael Rose:]

Okay. Just one follow-up. What is your HLP or leverage exposure?

[Rob Edwards:]

$82 million outstanding.

[Michael Rose:]

Okay.

[Rob Edwards:]

Yeah.

[Michael Rose:]

Great. Thanks for taking my questions guys.

[Operator:]

Thank you. Our next question comes from Brad Milsaps with Sandler O'Neill. Your line is now open.

[Peter Ruiz:]

Hey good morning guys. This is actually Peter Ruiz on for Brad.

[Lynn Harton:]

Hey Peter.

[Peter Ruiz:]

Hey just wanted to - my most of the questions have been answered, but just wanted to kind of follow up on loan growth just given your commentary of mid-single-digit outlook. It seems like you have quite a few tailwinds going into 2019, especially with the new Atlanta leader and you know the growth in Navitas and maybe some additional SBA production. So what are you maybe more cautious on that that gives you that mid-single digit outlook? Is it increased competition, pay downs, coming back or what's the - what are the puts and takes there?

[Lynn Harton:]

Yeah. I would say primarily it's the question about pay downs. This quarter we had about $40 million less in pay downs that we - in the large dollar category, that we, relative to the third quarter. And that number has kind of gone all over the place all year long. So I would say the caution in our mind is just not having a great deal of visibility on that. But other than that, I don't - we feel really good about where we are, we feel great about the pipelines. And Rich, what would you add to that, if anything?

[Rich Bradshaw:]

No, I'd agree, the production levels have been really consistent throughout the year and rolling into Q1, pipelines look strong. We feel good about it again, it's the lumpiness of the pay offs.

[Peter Ruiz:]

Okay. That's it for me, thanks.

[Operator:]

Thank you. Our next question comes from Tyler Stafford of Stephens. Your line is now open.

[Tyler Stafford:]

Good morning, everyone.

[Lynn Harton:]

Good morning, Tyler.

[Jefferson Harralson:]

Good morning.

[Tyler Stafford:]

Nice quarter. I wanted to start on just expenses and the run rate of the compensation expense. That was down $1.5 million bucks or so quarter-over-quarter. What - can you talk about Jefferson what drove that decline and then just kind of expectations for the compensation expense going forward?

[Jefferson Harralson:]

Yeah, so a lot of that from Q3 and Q4 was gyrations and bonus accrual adjustments. You also had some kind of longer term comp valuation issues. And I think that we're probably the number - the result's somewhere in between those two numbers and probably towards the third quarter number versus the fourth quarter number. There are also some other pieces in here, possible offsets in other expense categories. For the fourth quarters, I do think that was - that $77 million range of was a good base of sort of run rate off of. I do think you'll have low-single-digit expense growth in 2019. This is what we're thinking about.

[Tyler Stafford:]

Okay. Very helpful. On the fees, just taking into account that the SBA expectations for the year and the mortgage headwinds and results you'd expect to see this year, would you still expect to be able to grow fees year-over-year '19 versus '18?

[Lynn Harton:]

Yeah. So what you have SBA fees being down, we have made significant investments in the mortgage business. Obviously the gain on sale can move around, but with Navitas growth and Navitas fees coming through, I do think we'll have up fees year-over-year.

[Tyler Stafford:]

Okay. All right. Thanks for that. And let's just going back to your prepared comments around the charge-offs are one of the earlier questions just about the charge-offs picking up towards the mid-teens level in the first quarter of '19 and continuing through '19 How should we think about provisioning in the reserve, in light of the total charge-offs taking up a little bit from the mark going away?

[Rob Edwards:]

So Tyler, it's Rob. And recently - so the allowance is made up of two components, right? So it's asset quality, portfolio mix and loan growth. And so certainly as those credit discounts roll-off that the new charge-off number would play a role in the provisioning process, as well as the loan growth of the various portfolios.

[Tyler Stafford:]

Okay. All right. And then just last one for me. Just on Navitas portfolio, can you just remind us the size ultimately, I mean, obviously that seems nice growth. But just how big would you feel comfortable being that as a percentage of the total loan portfolio. And then can you just remind us of, kind of credit quality. What you're seeing there right now and kind of expectations through the cycle of what type of losses you'd expect to see from that portfolio?

[Lynn Harton:]

Sure, great question. I'll take the growth base and let Rob talk about the credit quality. When we - remember that they had a larger engine than their own balance sheet. So they were - they always had a bigger production level. And then they were securitizing, selling off their assets. So as we looked at it, and we modeled it out, we felt comfortable in the, that they could be in the 8% to 12%, 8% to 10% of total assets. So let's call it a $1 billion over about a 48-month period. And they - we're really kind of right on track, maybe a little ahead of that. So somewhere in the $900 million to $1 billion at our current balance sheet would be, we think very manageable. And Rob, I'll let Rob to cover that.

[Rob Edwards:]

Yes. So we kind of have just looking back over their history your part of your question was through the cycle they've performed very stable. They - actually kind of the company started sort of near the beginning of the last downturn. So, but their charge-offs have been very stable throughout and in fact in their early years very low for a company like this. Our expectation is and my thought process is around a 1% loss rate on that portfolio.

[Tyler Stafford:]

Okay, thanks for all the color guys. Appreciate it.

[Operator:]

Thank you. Our next question comes from Christopher Marinac of FIG Partners. Your line is now open.

[Christopher Marinac:]

Thanks, good morning. I had a similar question just kind of driving back to Navitas kind of historically I mean, have they been sort of I guess cooling in on various indicators that are early warning indicators of the business in general and is - are any of those flashing from the last 90 days?

[Lynn Harton:]

So I would say no. There is some lumpiness in how the charge-offs come through and so you may see pass dues come up a little bit and some charge-offs elevate and then next quarter back down. But we've not seen anything. One of the things that they do really well there as they refresh their scores through an industry bureau for equipment finance companies and we have not seen any deterioration in the portfolio from that perspective.

[Christopher Marinac:]

And then Rob, just a quick on -. How will Navitas playout on - do you have a feel for that is that going to be any bit of a challenge relative to the rest of the portfolio?

[Rob Edwards:]

So our plan CECL is to run four quarters, of parallel run in '19, so we'll begin to see some of the results of the CECL modeling probably early after end of Q1.

[Christopher Marinac:]

Okay, so we can circle back in April on that.

[Rob Edwards:]

Yeah, but in general it's a fairly short portfolio, so it shouldn't have a significant SESO impact relative through that rest in the portfolio.

[Jefferson Harralson:]

So I am a little hesitant to speculate on CECL impact, but I do agree with Lynn's comment 100%. Duration I think is everybody is talking about duration in the portfolio and the roll that will play on CECL and I think that something that we'll have to study hard in the coming quarters.

[Christopher Marinac:]

Very good guys, that's helpful. Thank you very much.

[Operator:]

Thank you. Ladies and gentlemen, thank you for participating in today's question-and-answer session. I would now like to turn the call back over to Lynn Harton, for any closing remarks.

[Lynn Harton:]

Well, thank you so much. I just want to thank everyone for joining the call and I hope you have a great day.

[Operator:]

Ladies and gentlemen, thank you for participating in today's conference. This concludes today's program and you may all disconnect. Everyone have a great day.