UCBI (2019 - Q1)

Good morning, and welcome to United Community Banks' First Quarter 2019 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 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 2018 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 Har

Good morning, and thank you all for joining our call. You may have noticed that we've got a new look to our slide presentation and at least one slide you may not have seen before. So I'm going to start there. On Slide 4 with my opening comments. Our mission, the reason we get up in the morning is to simply be a bank that treats our customers the way we would like to be treated. It's not much more complicated than that. To realize that mission, we have three primary goals. We speak of these often internally, and I thought it would be worth mentioning on the call today as well. We start with People. We want to be a great place to work for great people. We invest in training and communication and listening in order to do that. Our employee surveys demonstrate that our team is highly engaged, and our culture is proving to be a key advantage in our ability to hire new talent into the company to help us grow. We also listen to our customers, receiving over 5,000 surveys annually across all of our delivery channels and products, to make sure that we are living up to our brand promise of being the bank that service built and delivering that service in our offices, in our commercial businesses, and in our digital channels. Finally, we strive to earn the right to keep doing what we love to do by delivering consistent, through the cycle, top quartile financial performance. We benchmark ourselves religiously in every area of performance and we have clear strategies to deliver the results we expect for ourselves. And as we turn to Slide 5, we are proud of the first quarter's results. On an operating basis, EPS was up 12% over last year. Our operating return on assets was 145 for the second consecutive quarter. Tangible book was up over 15% from last year. Loans grew at a 7% annualized rate excluding the continued runoff of our indirect portfolio, and core transaction deposits grew by $135 million and 8% annualized rate. We are looking forward to the rest of 2019. Our markets are strong. We continue to add new commercial bankers and lift out teams. The strength of our franchise and the quality of our front line is allowing us to generate core funding to support our growth. Our credit culture and execution are strong, and we continue to control expenses effectively even in the face of investments in technology and people. Looking forward, we feel good about continuing to perform well in a very competitive environment. Jefferson, how about covering more details on our performance in the quarter.

Thank you, Lynn. I am going to start on Page 6 of the investor presentation if you are following along. On Page 6 you'll see despite seasonal headwinds, we grew spread income at a 3% annualized pace. The combination of 7% annualized loan growth excluding indirect loan portfolio shrinkage and a 13 basis point expansion in the net interest margin drove the spread growth. Given the yield curve this quarter we decided to shrink our securities book by $183 million and we shrank wholesale borrowings by a like amount. Taking off that low spread business added about 6 basis points to the margin this quarter and the increase in accredible yield added about 2 basis points to the margin this quarter leaving 5 basis points of core margin expansion in Q1. The core margin expansion was driven by mix change with solid loan growth and strong core transaction deposit growth. I just mentioned strong funding growth and you can see that on Page 7, actual total deposits were flat versus last quarter but there is a lot of positive mix change underlying that flatness. First, we had DDA growth of $111 million that actually fully funded our $110 million of loan growth and including DDA we had $135 million of core transaction account growth or up 8% annualized. Other things to note on Page 7 broker deposits are down which was part of our de-levering strategy and public funds shrunk seasonally this quarter. On Page 8, I'll just briefly mention that we believe our core funding base is a key strength of our company and that our loan to deposit ratio remains at 81%, which we believe gives us flexibility that helps in different environments. On Page 9, just some more detail on our loan book, which we believe is well diversified. I would also note that we are well within our 100%, 300% ratio limits, which allows us some flexibility to grow. And I'll skip onto Page 10 and discuss our fee income that came in at $21 million this quarter. The $21 million result was down, $1.4 million versus last year. We were pleased that our SBA business had 15% higher originations versus last year at $37.6 million, even with the higher originations, our SBA income was actually down $0.5 million due to both fewer sales as we are now holding our tenure paper and lower gain on sale percentages as well. We also believe we had a good mortgage quarter. Although we did not fully show up in fees, we had $181 million of mortgage originations in the quarter, which was down 6% year-over-year. That said with rates falling, we also had $317 million of rate locks in Q1, which was up 8% versus last year, and a record for the company. Falling rates in the quarter did necessitate a $1.3 million mortgage servicing rate valuation reduction, which hurt mortgage fee income in the quarter. On Page 11, note that expenses were down sequentially by $1.7 million in the quarter. Within expenses, salary and benefits were up versus 4Q due to benefits being higher and FICA tax restarting. That said most of the other expense line items were down on an absolute basis. I would characterize a decrease as a combination of good cost control efforts and some natural ebb and flow of the line items. With merit increases heading in Q2, I do expect the expenses to be at the 4Q 2018 levels in Q2, plus first management expenses will layer in too depending on when it closes. All said, we are proud that our operating efficiency ratio nudged below 55% in the quarter which is a low for the company. Page 12 credit quality is strong in line with our expectations. We had a $3.3 million provision compared to $3.1 million in net charge-offs and the reserve stayed flat at 73 basis points. The tick up and net charge-off was expected as its hallmark made when we acquired Navitas last year had dissipated as scheduled. Page 13 is Capital. We are focused on managing capital for risk and for returns to the shareholders as well. Our dividend payout at the current $0.16 dividend level is just under 30% of earnings and in turn represents about $50 million in return to shareholders. In addition, we have a $50 million share repurchase authorized of which we repurchased just under $8 million in Q1 at a $25.70 average price. Separately we have also been successful at managing capital in another way and that is by putting cash into acquisitions. As you recall, we put 85 million to work into Navitas acquisition last year and we are putting $52 million of cash into the First Madison deal that is closing this quarter. And speaking of First Madison I'll skip to Page 15 briefly before I finish up. Page 15 is a slide that points out the details of the deal that may help as you are doing your modeling. Thank you. And with that, I'll pass the call back over to Lynn.

Thanks Jefferson. We are excited that CEO, Jay Staines and his outstanding team First Madison Bank & Trust in Athens, Georgia will be joining forces with United. We share a culture built on service and passion for performance. So Jay and team welcome aboard. We are on track to close during the second quarter and we look forward to a smooth integration. I'd like to close my comments by recognizing and thanking the United team. It takes great people to deliver great results. In addition to reaching the top quartile ROA in our peer rankings this quarter which is one of our long term goals, our team also earned United the distinction of being named one of the world's best banks by Forbes, a recognition based upon superior customer service another of our long term goals. I couldn't be more proud to work alongside of each member of the United team. And for those of you that are listening in, thank you all for what you do every day to make this company great. Now we'll be glad to answer any questions.

[Operator Instructions] Our first question comes from Brad Milsaps with Sandler O'Neill. Your line is open.

Jefferson, I appreciate all the great color you gave us on some of the income statement line items. So I was curious if there are other balance sheet moves you guys might have in mind in terms of deleveraging? Or do you think you kind of captured everything you wanted to do in the first quarter? Just wanted to get a sense of anything else that you see out there in terms of balance sheet optimization and how that might impact your ability to maintain or even increase the NIM from here.

Thanks, Brad, for the question. The full impact of the de-levering will be felt in the second quarter as well - fully in the second quarter. So - also - I think the securities portfolio will continue to shrink then throughout the year. We still have some brokered CDs; we still have some borrowings on the balance sheet. So I think we're going to be looking at this curve and I would expect continued remix from securities towards loans throughout the year.

And just maybe as a follow-up, a bigger picture question. I know you recently hired someone new to head up the Atlanta market. I know you're focused on getting that person up and going, but with the big merger that's pending just kind of curious are there efforts you guys are making on the hiring front, specifically kind of targeted at Atlanta?

Sure, Brad, this is Lynn, and I'm going to introduce Rich Bradshaw, our Chief Banking Officer, is actually in the room with us today. So I'm going to actually pass that over to Rich and let him handle it.

Thank you, and good morning. So we had Doug Higgins join us last quarter in Atlanta. He has brought on one C&I lender. We have an additional two C&I lenders that have accepted offers, resigned and start with us May 1. So we feel good about that. And we're continuing those types of efforts throughout the footprint. Clearly, the M&A activity in Charlotte and Atlanta have created opportunities, both talent and customers, for us.

And our following question comes from Jennifer Demba with SunTrust.

Question, Jefferson on Brad's question on de-levering. Do you have sort of an ideal percentage of earning assets you'd like securities to be longer-term? Or can you kind of give us some thoughts about how you're thinking about that?

I think about it more on the funding side. I think we have - we have borrowings. We have - at quarter - in the first quarter, we had $559 million of brokered CDs. We had $40 million of FHLB borrowings. And so that's - that leverage of that book, funding securities is what I'm looking at here now. So it's going to depend on deposit growth a little bit. It's going to depend on our loan growth as well. So I think - how I think about it is, we look at deposit growth, we look at where that funding is and we'll shrink it throughout the year.

And one follow-up on actually Brad's other question on hiring. Do you have an ideal number of C&I lenders you'd like to hire in these key markets like Atlanta and Charlotte?

Yes. Jennifer, this is Lynn. We do but we're not - we're not announcing it because at the end of the day, I want it to be about quality, not numbers. We couldn't feel better about the people we're bringing on. But again, I don't want to get focused on a particular number. I want Rich focused on a particular number, which he is, but. So I'll respectfully avoid that question.

Thank you. And our following question comes from Michael Rose with Raymond James. Your line is open. Michael Rose, if your line is on mute, please un-mute. If your phone is on speaker, please lift your handset. Due to no response, I will clear the podium. And our next question comes from Catherine Mealor with KBW. Your line is open.

I want to circle back on the margin and talk about loan yields. Jefferson, can you talk a little bit about how much of this quarter's increase in loan yields came from Navitas versus just your core portfolio repricing? And then, how do you think about your outlook for loan yields given the flat curve and growth this year? Thanks.

Navitas here but, you have - we had - three basis points of the increase was accretable yield, 10 basis points, I'm going to call core and about - let me get back to you on the number of 10.. I did a calculation where we have 10 core.

So there may be some loan season there also that this quarter?

Yes, it's not loan season, it's going to be accretable yield and core piece of it. Let me get back to you on the breakout of that change in the yield.

And then how about - maybe just bit more of big picture on the margin. How are you thinking about your outlook for the margin? I think, last time we spoke, last call, we were expecting a couple of rate hikes. Now we've got a flat outlook. So you do believe that you can still kind of increase your core margin, I mean, with the flat rate outlook?

Yes. So in the near term - this quarter, we had 11 basis points of accretable yield hitting versus 9 basis points last quarter. The additional two was on specific loan recoveries that I don't think will occur again. So I think if you would take maybe two basis points off for less accretable yield next quarter. You also have a pretty tough curve and a pretty aggressive pricing environment, so you've got some headwinds there for sure. But at the same time, we had the full impact of the first quarter de-leveraging. We have continued remix towards loans and towards Navitas away from - away from securities. So, I think the path to the margin is flat to higher from here.

And how about on - on loan growth, your outlook for loan really nice growth this quarter. Do you expect this kind of mid single digit level to continue for the rest of the year?

Jefferson, you want me to take that? Hi, this is Richard Bradshaw again. Yes, we feel good obviously about the Q1 production results. We feel equally good about Q2 loan growth based on the current pipelines, the activity in our senior credit committee here the start of the quarter. And lastly we've already talked about the strong hiring that we have done and we can plan to continue to do as well.

Great. The mid single digit growth feels good.

Yes, ma'am.

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

Just wanted to ask you about new hires in Atlanta and really other parts of the footprint and sort of what's the update there as well as sort of plans for the next 12 to 18 months.

This is Rich again. I already covered Doug Higgins in the Atlanta team. As you're aware, our CBS team has a Charlotte presence. We have ABL lender, a builder finance, couple of SBA lenders and a renewable energy lender there. In addition, we recently hired [Charlie Curtis] to run the Charlotte market for us and he just started with us. In addition, we did a small SBA lift-out in Birmingham, and in addition to their normal customer targets, we have them team with our senior care team as well so that we take advantage of the senior care opportunities that are a little smaller than we presently were dealing with. And then, in addition, this week we put out a press release yesterday that John Golding started with us as the new head of CBS, and he'll be relocating to Greenville and brings a strong background in middle market ABL and treasury services. And so we're excited about that hire. And then we do have a few CRM scattered throughout the footprint that we have hired in our cities that we're already in.

So will you be able to get deposits in some of these new cities like Birmingham, just as an example?

The goal is yes. We absolutely have that as part of our plan. Obviously, it's a little easier when you have the branch, but using technology, we certainly, in certain kinds of industries, we are absolutely pushing that.

And then just last question for Jefferson on expenses. I mean, with the hires, how much of that's in the current expense run rate, as well as just kind of what you can create with operating leverage going forward.

The last time I talked about, a kind of low single digit expense growth of that $77 million base. Now we had the strong expense quarter this quarter, heading back toward that $77 million range next quarter. And I still think that kind of low single digit base is a - is what you should think about.

Thank you. And I'm showing no further questions at this time. I would now like to turn the call back to Lynn Harton for the closing remarks.

Well, thank you, and thank you all for joining the call. We really appreciate your support of the Company, and we will look forward to seeing you again soon. Thank you.

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