United Community Banks, Inc.
Q1 2015 Earnings Call Transcript

Published: 22 Apr 2015

[Operator:]

Good morning, and welcome to United Community Banks' First Quarter Earnings and Merger Announcement Conference Call. Hosting the call today are Chairman and Chief Executive Officer, Jimmy Tallent; President and Chief Operating Officer, Lynn Harton; Chief Financial Officer, Rex Schuette; and Chief Credit Officer, Rob Edwards. Also on the call are Chief Risk Officer, Brad Miller and Director of Mergers and Acquisitions, Chris Zych. United's presentation today includes references to core pretax, pre-credit earnings and other non-GAAP financial information. For each of these non-GAAP financial measures, United has provided reconciliation to GAAP in the Financial Highlights section of the news release and at the end of the Investor Presentation. Both are included on the website at ucbi.com. Copies of today's earnings release and investor presentation for the first quarter as well as the Palmetto merger announcement and investor presentation were filed this morning on Form 8-K with the SEC, and a replay of this call will be available on the company's Investor Relations page at ucbi.com. Please be aware that during this call, forward-looking statements may be made by United Community Banks. Any forward-looking statements should be considered in light of risks and uncertainties described on Page 4 of the company's Form 10-K and other information provided by the company in its filings with the SEC and included on its website. At this time, we will begin the conference call with Jimmy Tallent.

[Jimmy Tallent:]

Good morning and thank you for being on the call today. Today we will cover two items, our earnings for the quarter and our announcement of a merger agreement with Palmetto Bancshares. Palmetto is what we would call the ideal partner for expansion into the upstate South Carolina markets. We are extremely excited about the management, teammates, customers and business this combination will bring to the United franchise at about the value it will bring to our shareholders. More on the merger later in my comments. First, let’s discuss our earnings and business outlook. We are off to a great start for 2015. The solid first quarter results reflect our investments in new talent across the company and the successful execution of our business plans to grow revenue while controlling expenses. I will begin with some highlights. Net income was $17.7 million or $0.29 per share. Earnings per share were up 16% from a year-ago. Our return on assets was 94 basis points, compared with 85 basis points a year-ago. Our return on common equity was 9.3%, compared to 8.6% a year-ago. Total revenue excluding the provision was $73.3 million, up $7 million or 10% from a year-ago. Our margin held steady with the fourth quarter at 3.31%, and was up 10 basis point from a year-ago. We had strong loan production of $423 million with net loan growth of $116 million or 10% encarnalized. Our provision for credit losses was $1.8 million, net charge-offs were $2.6 million and our allowance ratio was 1.46%. Non-performing assets to total assets were 26 basis points unchanged from the fourth quarter. We had three non-core items during the first quarter. First, we repaid $6 million of an expensive structured repurchase agreement and redeemed $15.5 million in high rate trust preferred securities. In doing so, we incurred prepayment charges totaling $1 million resulting in reduced fee revenue. Second, we closed out our loss share agreements with the FDIC related to our 2009 acquisition of Southern Community Bank. This resulted in a charge of $690,000 and other operating expenses. And third, early in the quarter, we had an opportunity to sell securities at a gain of $1.5 million. Finally, in summary, all of our capital ratios remain very strong under the new Basel 3 rules. Now I’ll share some details of the quarter and outlook for the remainder of 2015. As you can see on Page 5 of the investor presentation, core pre-tax, pre-credit earnings were $30.5 million, down $258,000 from the fourth quarter, but up $3.2 million or 10.5% from a year ago. The decrease from the fourth quarter resulted mainly from two fewer days in the first quarter, which resulted in lower net interest revenue. This was partially offset by higher fee revenue. Our net interest margin held steady with the fourth quarter at 3.31%. It was up 10 basis points from a year ago due to balance sheet restructuring and hedging actions taken late in the second quarter of 2014. Although we held the margin flat, net interest revenue decreased $715,000 from the fourth quarter primarily due to two fewer days of interest accruals. Strong loan growth saw from the impact on net interest revenue of the two fewer days in the first quarter. We grew loans by $116 million or 10% annualized. As shown on Page 7 of the investor presentation, the growth was driven by new loan production of $423 million. Production was strong in nearly every market and categories. Three quarters of the production or $314 million was driven by our community banks with the balance of $108 million from our specialized lending group. Over half of the production was in our C&I and CRE loan portfolios. In fact, these categories have been very strong for the past four quarters reflecting our investments in talent and leadership. We are very excited about the prospects of continuing to build these businesses. Continuing with loan growth by categories, we generated $239 million in commercial loan production and increased outstanding balances by $81 million in the first quarter. We also added $46 million in net new loans in our indirect auto loan portfolio. We took steps as well to lower our funding cost. I mentioned earlier that we repaid the remaining $6 million balance of our structured repurchase agreement. We have been paying interest for this at a rate of 4%. I also mentioned that we’ve redeemed $15.5 million in trust preferred securities. These carried an average interest rate of 11%. Through both of these redemptions, we incurred prepayment charges of $1 million. The good news is, we will reduce our annual interest expense cost by $1.9 million. At quarter end, our balance sheet remains asset-sensitive. A 200 basis point ramp up in interest rates over the next year is expected to improve net interest revenue by 2.6%. We still hold a large balance of floating rate securities to assist us in managing our exposure to rising interest rates. At the end of the first quarter, 32% of our investment portfolio was in floating rate securities. Looking forward, we expect loan pricing pressures to continue and our margins to decline slightly for the remainder of 2015. At the same time, we expect loan growth to drive increases in net interest revenue going forward. You’ll find the trends on core fee revenue on Page 5 of our investor presentation. First quarter core fee revenue was $15.1 million, up $567,000 from the fourth quarter. The increase was spread among several categories. Mortgage fees were up $644,000 from the fourth quarter and $1.4 million from a year ago, even though the first quarter typically is slow for the mortgage business. The increases reflect our strategic focus on mortgage growth by adding lenders in metro markets. We closed $88 million in mortgage loans in the quarter, up from $77 million in the fourth quarter and $46 million a year ago. Production was about evenly split between home purchase mortgages and refinancing activity. We also saw strong growth in our advisory services business. First quarter fee revenue in this area was up approximately $375,000 or 32% from the fourth quarter and a year ago. Our growing SBA business produced $1,140,000 in fee revenue from loan sales during the quarter, up $218,000 from the fourth quarter. Sales of a portion of our SBA loan production and the resulting gains in fee revenue will remain a core part of our SBA business strategy. We see momentum continuing to build throughout the year. Other fee revenue is up $161,000 from the fourth quarter and up $554,000 from a year ago. This is mostly due to an increase in customer derivative activity as commercial customers saw to lock in low fixed rates on the loans. I want to say how pleased I am with the growth we are seeing in fee revenues. The strategic investments that we have made over the past three years are starting to pay off. We expect these areas to continue to drive momentum going forward. Core operating expenses are on Page 5 of the investor presentation. The total $42.2 million, up $110,000 from the fourth quarter and up $3.4 million from a year ago. Most of the increase from a year ago reflects our investments in new specialized lending talent. As I noted earlier, we had non-core expense items during the first quarter of 2015 and two during the fourth quarter of 2014 that we excluded from core earnings. These non-core items are summarized as a line item below core operating expenses on Page 5 of our investor presentation. In the first quarter as noted earlier, the primary item was the FDIC payment of $690,000 to terminate our loss share agreements related to the 2009 acquisition of Southern Community Bank. Going forward, the closure of these agreements allows us to avoid future administrative and processing cost. More importantly, it allows us to retain the full benefit of a steady stream of recoveries on previously charged-off loans. We expect to fully recover the $690,000 within two years. You may recall that in the fourth quarter of 2014, we recognized a charge of $492,000 for an accrued interest adjustment relating to our initial FDIC loss share filing in 2009. We also released $1.2 million of a previously established litigation reserve. As expected, our effective tax rate for the first quarter was 37%, the same as the fourth and the first quarters of 2014. We expect the rate to remain in this range for the rest of 2015. And now an update on the First National Bank acquisition in Tennessee. We received all regulatory approvals and have scheduled the closing for May the 1st. We are very excited about this bank and bankers under the leadership of David Allen. This will double our size in East Tennessee and provides the opportunity to capture additional growth in this dynamic market. We are pleased to welcome this team to the United family. In summary, it’s been a great first quarter and a great start for the year. Now I want to talk about our acquisition of Palmetto Bancshares. I will refer to our investor presentation and the announcement that we’ve released earlier today. Palmetto is a high-quality franchise, headquartered in Greenville, South Carolina. It was founded 108 years ago and has deep community roots as you would expect. The company today has $1.2 billion in assets and 25 banking locations across nine counties primarily in the Greenville and Spartanburg MSA. Based on total assets, it is one of the largest South Carolina based bank and the largest bank headquartered in the Upstate area. Adding Palmetto to United reflects our strategy of expanding in fast-growing, highly attractive Southeastern markets. The combination of our two companies significantly enhances United’s position in Greenville and the Upstate area where we have already invested heavily. Lynn Harton our President and Chief Operating Officer is based there as are Rob Edwards, our Chief Credit Officer, Rich Bradshaw, our President of Specialized Lending and several other key members of our leadership team. In total, United has approximately 70 bankers in the Greenville area with decades of experience in that market. Adding the exceptional presence and leadership of Palmetto, will greatly strengthen our footprint, our capabilities and our opportunity to grow our business and build shareholder value. Speaking plainly, this is a transaction that we very much like. There is no doubt that it propels United forward several years faster than we could done on our own and saves us millions of dollars of ongoing expense. It is meaningfully accretive. Fully phased in for cost savings, it will provide double-digit earnings per share accretion. It will enhance our return on assets and tangible equity and it will provide an internal rate of return north of 20%. Our capital levels will remain very strong and importantly, the acquisition is low risk. Palmetto is located in a market we know, with people we know, with customers we know, and where we have been able to structure the right transaction that we can feel comfortable about with the extensive due diligence and prudent conservatism in our assumptions. On Page 5, you will see that Palmetto shareholders will have the option to receive, $19.25 in cash or 0.97 shares of United common stock for each share of Palmetto common stock. The cash and stock elections will ultimately be pro rated to ensure a 30% cash and a 70% stock transaction. Using our 10 day average closing price as of yesterday, the implied price per share is $18.53 bringing the aggregate value to approximately $240 million including $3 million for options. We expect a closing sometime early in the fourth quarter. On Page 6, you will see how Palmetto’s footprint is contiguous to that of United and how strongly we will add to our presence in South Carolina. The next page refers to the immediate scale that we will have in these markets and just how attractive the markets are. Companies with national or regional headquarters in the Upstate include BMW, General Electric, and several others. In fact, the Upstate boasts the highest international investment per capita in the nation with more than 375 international firms. The area is recognized for a vibrant economy that helps drive a high-quality of life. Page 8 provides an overview of Palmetto, much of which we’ve already discussed. We are really excited about the experienced Palmetto team, the deep market relationships that they’ve earned , the comprehensive strategic plan that they have successfully executed and the strong balance sheet that they have built. On Page 9, you will see the loan compositions and deposits of Palmetto and United both separately and combined. You’ll notice the similarities between our loan portfolios meaning that our lending expertise will be complementary and mutually beneficial. You will see the very low cost deposit base that Palmetto brings to United, lowering our cost as well. Combined, deposits excluding Jumbo and Brokered CDs will comprise 86% of our total deposit base. That’s something to be proud of. Page 10, notes that Palmetto’s loan portfolio was reviewed by our credit team in addition to an independent third-party who found the underwriting to be strong and the portfolio high-quality. The estimated credit loan mark is 1.9% or $15 million and the estimated OREO mark is 50% or $3 million. The Palmetto team has done an excellent job building sound credit quality. Page 11 shows our key assumptions and the transactions value-added, financial impacts that I’ve discussed earlier. We expect cost savings of $15 million to be fully realized in 2016 and thereafter. These estimates are the result of a very thorough analysis that we perform in conjunction with Palmetto’s management. We also have reflected the benefit of foregoing expenses totaling approximately $5 million for planned organic expansion over the next few years. Our plans included de novo branches, additional infrastructure, and office space. We are confident that we have identified the appropriate cost synergies while preserving business growth momentum. We expect dilution of tangible book value of less than 7%, but we expect to earn that back including one-time merger expenses within five years. On Page 12, we review benefits for investors, customers, and employees. For investors, we have the opportunity and expectation to meaningfully enhance shareholder value through this combination. For customers, we expect a seamless transition. Both of our companies have customer-focused cultures and high value financial products and services. For employees, we expect high retention of customer-facing bankers and the shares of value creation from the strength and focus of the combined franchise. Bringing Palmetto’s team together with ours is critical to the transition process and the long-term success of this partnership. To that end, we cannot be more pleased to announce that Sam Erwin, Palmetto’s Chairman, President and CEO as well as Lee Dixon, the company’s Chief Operating and Risk Officer will be joining the United team in key executive leadership positions. Sam will become CEO and President of South Carolina and Lee will become an Executive Vice President. Let me close with the bottom-line. This merger creates significant benefits for United community Banks including meaningful earnings per share accretion, improved profitability, attractive internal rates of return, and earn-back in less than five years, and improved growth profile and a higher franchise value. We anticipate and expect a low risk integration, reasonable, clearly identified cost savings and the ability to leverage existing infrastructure and management already in the market. We are very excited about this partnership. Now we’ll be glad to answer any questions.

[Operator:]

[Operator Instructions] Our first question comes from Jefferson Harralson of KBW. You may begin.

[Jefferson Harralson:]

Hey, thanks guys and congratulations. I wanted to ask you about the cost savings, the 39% assuming on the high-end from what we usually see for what kind of an market deal I guess part of the branch footprint goes, can you talk about what makes it different, or what makes that 39% achievable?

[Lynn Harton:]

Hey, Jefferson, this is Lynn. We went through is Jimmy mentioned earlier, we went through line-by-line, position-by-position with Sam and Lee who, obviously, we highly respect and who has Jimmy mentioned will be joining us to come up with the numbers. And frankly, our number was a little less than what they thought was achievable. If you look at Palmetto, really the way they had positioned the company, they had really positioned more for growth and it’s probably got the infrastructure of a bank, 2 to 2.5 times its size. Appropriately, through the crisis, they spent a lot of money in credit and compliance and other areas that was the right and proper thing to do and we did the same as just we don’t need to do that twice. And as Jimmy mentioned, we do have even some in-market synergies with both lease expense, expenses that we have in Greenville that we have invested there from a kind of a regional headquarters perspective that will also get some cost savings on our side. So, we agree it, its first glance it looks a little on the high side, but we are very confident in achieving those numbers.

[Jimmy Tallent:]

Jefferson, I would add to with that that, I think given our efficiency and cost structure that we’ve been able to really demonstrating over the last few years in addition to the reinvestment of some of those still having a respectful efficiency. So we are very confident that this cost saves they are real, they are actionable and they will be executed.

[Jefferson Harralson:]

Okay, thanks guys. And I want to ask for a follow-up on the SBA business, do you have handy what the amount of SBA loans that you originated this quarter and if possible how much you sold?

[Lynn Harton:]

Sure, absolutely and we are very excited about what’s going on there. So, in the first quarter, a lot of people don’t know this, but the first quarter is traditionally the slowest quarter for SBA lending. The fourth quarter is always the highest quarter. So any SBA business you look at, the first quarter is the weakest quarter. We actually closed $27 million in the first quarter which is slightly up. We closed about $26 million in the fourth quarter. We funded $19.3 million. We sold a gross amount of $16.4 million, which the guaranteed portion then was $12.4 million. Our pipeline is very strong. So, it couldn’t really be more confident in or complementary of the SBA team and kind of where they are at and where they are going in the rest of the year.

[Jefferson Harralson:]

Okay, thanks guys.

[Operator:]

Thank you. Our next question is from Michael Rose of Raymond James. You may begin.

[Michael Rose:]

Hey, good morning guys. How are you?

[Lynn Harton:]

Good morning, Michael.

[Michael Rose:]

Hey, just going back to the cost question, it looks like $5 million is reflective of foregone expenses related to branches you expected to build. So when I think about kind of on a core basis, the sub-58% efficiency target for this year, did that contemplate the $5 million?

[Jimmy Tallent:]

If I understand the question correctly, Michael, our $50 million of the 39% cost saves, that does not include what we see as the investment cost that we would have and the length of time to expand into that market. So that’s not part of that number.

[Michael Rose:]

I guess, just what I am trying to ask is on a core basis, ex this deal, did your plan which calls for a sub-58% efficiency ratio this year incorporate $5 million of de novo branch costs in the Greenville market?

[Jimmy Tallent:]

Yes, it does, but that – keep in mind, that’s a build-up over time. So it’s not $5 million in 2016. So, it’s the plan that we had to build it over time. So a portion of that, call it, maybe 20% in 2016 and rest of it deals over five years. So it was not – so that’s the way we have modeled it out and that’s what we had in plan to invest. Correct.

[Michael Rose:]

Okay, that’s helpful. I appreciate that color. And then, can you just talk about how this deal – how this deal came together? Was it a negotiated deal? Was it a short transaction, any thoughts or color there?

[Jimmy Tallent:]

Well, they were represented by an investment banking firm. Honestly, we go back for the last couple of years, Michael, where Lynn and I were having conversations with the bank and investors and so forth, I think, you know, it’s a process that they probably have gone through over the last two three years. One of the points that Lynn was making today when you are at $1 billion and you are positioned to be a $3 billion bank, you have a pretty sizable infrastructure cost, and to grow the earnings at the rate that I know was their desire. It’s a challenge. So, I think, there is a combination of a number of things that being one, the merger with United is a – what we believe to be a perfect marriage from all those reasons we’ve already discussed and I think they just felt it was time to explore that opportunity.

[Michael Rose:]

Okay, that’s – go ahead

[Lynn Harton:]

I was going to say, I might add, I mean, certainly, it was competitive. This is one of the most attractive franchises in the state. So as you can imagine it would been competitive, but I know, I believe from both Board’s perspective, I know from our Board’s perspective, it was – our combination was clearly viewed as a more strategically attractive, for all the reasons that Jimmy indicated. At the end of the day, we’ve got a transaction that makes us more profitable. It lets us grow faster. It positions us as a company in conjunction with our strategy as a more metropolitan franchise and earns returns significantly in excess of our cost to capital. So, and I think that’s what both Boards looked at and believed at.

[Michael Rose:]

Okay, that’s helpful, and then just one final question as it relates to both the mortgage and the SBA business, obviously, both are good quarters. Have you continued to add staff and maybe what’s the outlook from an expense perspective in adding staff in those areas or other areas going forward? Thanks.

[Lynn Harton:]

Sure, on the SBA side, we are pretty much fully staffed now. And so, from here on out, it’s really ramping up more the revenue side than the expense side. On the mortgage side, we still have – we are still recruiting, but we frankly – the new mortgage loan officers and new training tools and new marketing that we put in place were actually ahead of where we expect it to be in production with a fewer number of originators. So, we think we’ve got room if we want to continue to add in that business.

[Michael Rose:]

Okay, great. Thanks for taking my questions.

[Operator:]

Thank you. Our next question comes from Kevin Fitzsimmons of Hovde Group. You may begin.

[Kevin Fitzsimmons:]

Hey, good morning guys.

[Jimmy Tallent:]

Hey, Kevin.

[Kevin Fitzsimmons:]

Just a couple quick questions. Jimmy, can you talk a little bit about – I think, we talked a little bit about this last call with the deal, but with that pending deal and now this is a larger deal, can you just give us a sense for – because you guys had been out of the M&A game for quite some time and then you took the first step with a smaller deal and now one coming in while it’s still pending. Just, give us a sense that you’ve touch base with the regulators and I am – obviously, I am sure, you are very comfortable or they are very comfortable with where you guys are in the process and then if you could dovetail into the whole $10 billion asset threshold question, because I think bolting all this together is kind of put you over $9 billion and how you view that threshold? Thanks.

[Jimmy Tallent:]

Sure, Kevin. Thanks for the question. Yes, certainly, we meet with our regulators on a very regular basis giving them updates about the company, our views of potential M&A, our strategic vision, all of those kind of things. Certainly, this transaction was discussed with the regulators really some time ago. You do bring up a really good point on the fact that First National Bank in Tennessee will close it and maybe the first we have the conversion schedule into July. And the – and Palmetto would be scheduled to close, we believe, in early fourth quarter. What you’ll see today is a self-imposed, I should say self-imposed timeout, because these are two very important transactions. We want to be a 100% focused on the execution of these. Of course the Palmetto we have senior management they are on the ground, but also, their senior management there as well, we want that to be integrated and all of those things to perfection. In regards to the $10 billion mark, let me just ask Brad, our Chief Risk Officer, if you would to address that Brad?

[Bradley Miller:]

Sure, Jimmy. As we’ve set out in our strategic plan, we’ve incrementally, an increase in the staff in the necessary areas as we approach $10 billion. Specifically, there is a BSA compliance, risk management. We expect to add an additional 7 to 10 members to the staff, mostly of which was already been budgeted for this year. We’ve already been – we’ve been running the de-fast stress test for the last two years and we have some flexibility in our securities portfolio to maintain the size, maintain our size under $10 billion and we’ll of course be mindful of the timing, and the size of any transaction that would put us over the $10 billion mark to maximize our Durban interchange fees.

[Jimmy Tallent:]

So, basically, we have been staffing up for sometime for the $10 billion.

[Lynn Harton:]

Lynn, just to add some color to that, some of the key areas that we have been focused on, so for example, compliance, if you look at our 2015 budget versus 2013 actuals we are up 23%, we are up 31% in credit risk, we are up 50% in the treasury function. Those were some of the key areas that you need to invest in to go over the $10 billion. We are not sitting here saying that we have all of it, but that’s a scoping of some of the investments we’ve already made the rest of the things we’ve got in our strategic plan as Brad laid out. So, we know that it’s there and we want to be ready for it.

[Kevin Fitzsimmons:]

Just as a quick follow-up, Lynn, can you touch base on just loan growth, what loan growth looks like in that Greenville market, because I cover Palmetto and the one thing they’ve done a great job overhauling the bank and cleaning it up. But the one things that’s been the problem over the last several quarters is just growing the loan book. And a big part of that as I understood it was just that, it was so competitive that pay downs were always such a big headwind for them that you always had such a high hurdle to put net positive loan growth. So, is it that competitive, or are you guys in a different ballpark from what they were doing in terms of loan growth? Thanks.

[Lynn Harton:]

Sure, great questions. First of all, it is very competitive. It’s certainly though no more competitive than Atlanta or Savannah or Knoxville or all those other places that we are competing in and winning. I think a couple of things as I’ve gotten to know that team even better there. Number one, some of their pay downs has been similar – frankly to some of our historic pay downs that are now lessening in their change in the mix of their book of business. So, some of their higher risk credits that that previous management had been involved with are, those were some of the biggest pay downs they’ve got and then they are nearing the end of that piece. Secondly, I’ve been really impressed with the team they’ve brought in over the last year on the lending side and it takes a little while that those to gain traction. So went through their pipeline. We’ve seen their first quarter results and we really feel confident that they are gaining traction. Of course, we also do have slightly higher lending limits that will be additive to their team, most of the team they’ve brought it comes from larger banks and they’ve been a bit hampered on the lending on the size, capacity. We bring products, asset-based lending for example that, have teammates that are familiar with and just haven’t been able to fully utilize that product. And the – as Jimmy mentioned, the joint, just presence of leadership, Sam and I have been knocking heads against each other and we think that gives us a little – we go jointly on some. We think that gives us a little extra this not bank that baked into the deal. So, a long way answer and say it is competitive, but their momentum is building and we are confident in that.

[Jimmy Tallent:]

But there is another component of that too that, Lynn you may want to comment on that, with our combined presence and really the opportunity to even bring additional lenders on board.

[Lynn Harton:]

That’s very true and that is something we have not put in the numbers. But, we do know a number of very high quality lenders that either we have worked with before or know well, that frankly need a larger platform to – because of the scope of their business to operate in and we are pretty confident based on inbound calls that we’ve already been getting that we can attract some of those, good number of those potentially into what we think now is the best most best lending platform in the Upstate. So, that’s not in our numbers, but we are also excited with that fact.

[Kevin Fitzsimmons:]

Okay, thank you very much guys.

[Jimmy Tallent:]

Thank you.

[Operator:]

Thank you. Our next question comes from Christopher Marinac of FIG Partners. You may begin.

[Christopher Marinac:]

Thanks, I was curious, I guess pro forma for the two acquisitions here, Jimmy and Rex, what do you think you will do with the loan-to-deposit ratio? We kind of seek and move that up from 75 to 80 plus and is that a source of future earnings as 2015 develops?

[Rex Schuette:]

Yes, I would agree, I think, they have an exceptionally strong core deposit base, again with the low deposit rate on top of it. So I think we will benefit from that. As Jimmy indicated, hoping to close sometime by early fourth quarter. I think it does give us an opportunity as we continue to build loans as Lynn just indicated. I think there is some opportunity for us there to continue to grow. So I think the mix will continue to see increase and again a more focus again on the core deposit base that they have also combined with our base. And you’ll see in our base, we had excellent core deposit this quarter, little over $200 million of core deposit growth, over half of that in DDA, more than funding of loan growth at the same time. So, I think we feel very comfortable where we are at and again trying to utilize our core deposit base for future growth.

[Christopher Marinac:]

Okay, and just a point of clarification, Lynn, when you look at the cash flow of the portfolio, and the incredible yield as you get to those decision in the future, is any of that embedded in the payback period as an accretion capital that we see in today’s presentation?

[Rex Schuette:]

Are you looking at the purchase adjustments that we would have with Palmetto? We’ve already looked at the preliminary numbers on that and I don’t think it will be a significant number for accretion versus the United credible discount that we’ve looked at already but there will be a little bit of accretion coming in. But I don’t think it will be a material number, Chris, numbers on a pro forma.

[Christopher Marinac:]

But even which is not part of what you laying out?

[Rex Schuette:]

If you could repeat that, I didn’t hear you as well.

[Christopher Marinac:]

It’s not included in what we are seeing on the accretion?

[Rex Schuette:]

Yes, it’s not included right now. That’s incremental.

[Christopher Marinac:]

Got it. Just wanted to clarify that.

[Rex Schuette:]

Yes.

[Christopher Marinac:]

A final follow-up just back to the earnings from this quarter, when you look at the loan growth and the loan by category as you laid out to us, will the mix on the – particularly the specialty side, either same as this year develops or will we see that, perhaps being less and at a traditional area it’s catching up as second, third quarter comes in provision.

[Jimmy Tallent:]

Yes, so if you look at production on Slide 7, we’ve seen solid increases in production across, if you take out South Carolina, which includes the specialized lending, it’s up 21% and we see continuing momentum there. You may recall last quarter we announced an additional region or LPO in Atlanta, what’s not in here is the F&D team who, as Jimmy mentioned earlier, we are very impressed with and the more time we spend with them, we are more impressed with. So, we feel good about the traditional markets if you will continuing to pick up. And if you look at the production, by far the majority of it is coming at their traditional markets. Now we don’t foresee the specialized lending slowing. We think, it will continue at its current pace. It’s not going to continue at the current growth rate that it’s at. And if you look at a year ago, doubling we are not going to continue to double it, but it will continue at this kind of production rate that we are at today.

[Christopher Marinac:]

Great, thanks, Lynn. I appreciate it.

[Operator:]

Thank you. Our next question is from Nancy Bush of NAB Research. You may begin.

[Nancy Bush:]

Good morning. How are you?

[Jimmy Tallent:]

Hi, Nancy.

[Nancy Bush:]

Couple questions. Did you disclosed the restructuring costs?

[Jimmy Tallent:]

Chris?

[Christian Zych:]

Yes, hey Nancy. Restructuring cost in this deal, I was just seeing in the package is about $20 million.

[Nancy Bush:]

Okay, and that’s slated primarily toward what?

[Christian Zych:]

There is certainly, in terms of the breakout?

[Nancy Bush:]

Right.

[Christian Zych:]

It’s mainly – if you want to put it in two larger categories, our three larger categories maybe, it’s professional fees, as you would imagine. We have a certain amount that we’ve built in for the employment side. There is contract certainly in place there that we are settling and then DP is a large chunk of that. It’s probably, 20% of that number in terms of the contract terminations and so forth that will be having to settle.

[Nancy Bush:]

Okay, and also, I’d go back to this 39% of their base that you anticipate saving, that would – and I think that was question number one. That was certainly anticipated or it would me see that it’s more than HR, it’s more than back-office et cetera? Are there additional things in there that I am missing?

[Christian Zych:]

Nancy, again, Chris. Yes, I mean, you are good in running the head. I mean, it’s basically going to be a lot of operational redundancies that are we’ve identified there and you are right it’s just their basic operations and DP. Those are the two main components of it, you can probably call that, two-thirds of it there within that piece and the rest is somewhat choppy honestly.

[Nancy Bush:]

Okay, and then just one final question. I think you said that the IRR would exceed 20%. Can you tell me how you or what you think your internal cost of capital is, how you figure it and where is it?

[Christian Zych:]

Yes, I mean, you are right, we did disclosed greater than 20%, our internal cost of capital is in around 9%.

[Nancy Bush:]

Okay, okay. Thanks very much.

[Operator:]

Thank you. I am showing – our next question is from Jennifer Demba of SunTrust Robinson Humphrey. You may begin.

[Michael Young:]

Hello, this is Michael Young in for Jennifer. I just had a quick question as it pertains to cross in the $10 billion asset threshold. Have you done any preliminary work around what that will mean from a Durban amendment perspective in terms of your fee income?

[Jimmy Tallent:]

Yes, we have, Brad?

[Bradley Miller:]

Yes, Mike. Right now, looking at our numbers, we think it will be about a $6 million to $7 million impact, of course, a number that can change and a number that will stay closely on top of that near $10 billion.

[Michael Young:]

Okay, perfect. Are there any offsets to that? Any programs or anything that you could implement or is it just too early to value?

[Jimmy Tallent:]

It’s probably a little early on that, Mike. But certainly, crossing over the $10 billion mark, that’s got to be part of the cost that you would include in the transaction to make sure that all the numbers lined up and it became accretive to our shareholders. I am not sure there is way of lessening that in any meaningful way.

[Michael Young:]

Okay, thanks.

[Operator:]

Thank you. I am showing no further questions at this time. I would like to turn the call back over to Jimmy Tallent for closing remarks.

[Jimmy Tallent:]

Thank you, operator. Once again, than you all for being on the call. Thank you for your interest in United Community Bank. I am very proud of our people and what they’ve accomplished this quarter. We are very excited about our partnering with Palmetto Bank. I am very proud about where United Community Bank is today. Thanks again and hope you have a great day.

[Operator:]

Ladies and gentlemen, this concludes today's conference. Thank you for your participation. Have a wonderful day.