UCBI (2019 - Q3)

Good morning, and welcome to United Community Banks' Third Quarter 2019 Earnings Call. Hosting our call today are Chairman and Chief Executive Officer, Lynn Harton; Chief Financial Officer, Jefferson Harralson; Chief Banking Officer, Rich Bradshaw and Chief Risk 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 third 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 at 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. We're pleased to report another great quarter, which is a continuing testament to the strength of the teams here at United. For the quarter, our operating return on assets reached 158 basis points, which beats last quarter to become the best in our history. And once again, we attained our goal of top quartile financial performance. Our operating earnings per share reached $0.63, an increase of 14.5% year-over-year and an increase of $0.04 over the last quarter. Our net interest margin remained stable despite declining rates and both loan and deposit growth were in line with expectations. Credit results remained solid and the strength of our deposit base continues to give us a foundation for ongoing outperformance. We also continue to invest, if you have a chance I'd like to invite you to visit our new website. For the last couple of years, we've been investing in digital customer acquisition tools. We've added online mortgage processing, deposit account opening, and now small business and consumer lending online. We've also been testing what we call digital micro marketing campaigns, which is basically testing our ability to give clients a click-through option to do more business with us. As those tools have progressed, we also planned on updating our online presence to reflect a more action-oriented posture. And I'm very pleased with the result and we are continuing to invest and extend our brand digitally. I was also particularly pleased this quarter that United was again recognized by American Banker as one of the best banks to work for in the country. Of all the recognition we've received, this is the most important one. If we're a great place to work for great people performance will follow. And that's what we see once again this quarter as our teams delivered great results across-the-board. So Jefferson, why don't you fill us in on the details?

Thank you, Lynn. I will start on page 8 to discuss our net interest margin and income trends. Our net interest income increased 5% annualized versus the last quarter and increased 6% year-over-year. Spread income growth did benefit from the full impact of First Madison in the numbers versus a two-month impact last quarter. Our net interest margin stayed flat at 4.12%, of which we had three basis points of lower core margin offset by three basis points of higher accretable yield. On the purchase accounting, we had an early payoff on an acquired loan that drove the increase versus the last quarter. I would expect that 15 basis points of NIM benefit we got this quarter to be closer to the 9 basis point range in Q4. The core net interest margin held in better than expected this quarter as we had more than expected positive mix change in the form of strong deposit growth and continued mix change towards loan from securities. The forward-meaning impact of the September rate cut should take 6 basis points to 8 basis points from our core margin in Q4. Page 9 highlights our deposit base, which we view as a differentiator for us in the core strength of our bank. Our cost of deposits did come down 2 basis points to 63 basis points in the quarter which was a little better than we expected. Perhaps even better on page 10 our core transaction accounts grew $105 million and once again, funded more than all of our loan growth and was a key driver to the mix change that drove our strong margin. The core transaction account growth has been strong for us all year as you can see in the chart. On page 11, you can see our loan portfolio breakout, which is very diversified. Excluding the run off of our indirect portfolio, we had a 4% annualized growth rate in Q3. As expected pay downs normalized a bit higher in Q3 as we said we thought they might on last quarter's call even as we enjoyed significantly increased loan production levels. On page 12 we look at fee income which was another bright spot for us in the quarter up $4.5 million versus the last quarter. The main driver was mortgage as we set almost every record that we have in that unit. Rate locks were $508 million up from what had been our record of $390 million last quarter. Also benefiting the mortgage result was that we had about $700,000 and less MSR mark this quarter versus the last quarter. Expenses on page 13 were $80.3 million just higher than the guidance I gave last quarter of $79.5 million with the main difference being $700,000 in higher mortgage commissions. Lastly on expenses we are also proud to have set a new corporate mark for our operating efficiency ratio at 53.9%. Credit quality on page 14 was stable at very low levels. And our $3.1 million provision more than covered the $2.7 million in net charge-offs. I will finish up on page 15 with capital. As you can see our capital ratios grew nicely in the quarter and we also bought back just under 200,000 shares and we have $37 million remaining on our authorization. With that I'll pass it back to Lynn.

Great. Thanks, Jefferson. And now we really just like to open it up for questions.

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

Hey, good morning, guys.

Good morning.

Good morning.

Hi. Jefferson, I appreciate all the color. It was just curious if you could maybe talk a little bit about the -- your outlook for the NIM a little bit more? Obviously, the core NIM held in fairly well this quarter, benefiting from the mix change et cetera. Just kind of curious what your thoughts are there as you kind of move out over the next several quarters particularly if we get additional rate cuts?

Yes. Thanks, Brad for the question. I'll start with the accretable yield piece of it. I mentioned in the prepared remarks that kind of 9 basis points was sort of the base. But we are seeing and we're getting to the end of a lot of these pools. And so these positives surprises are popping up more and more often. So it does feel like an accretable yield that nine is a -- is the base. And -- but it just seems like in any given quarter, we're more than likely to be a higher than that nine but it's just hard to predict. On the core margin, I did mention down six to eight. That's given what is happening with LIBOR since quarter end. So, in a way, it includes a piece of potential rate cut this quarter. I do think that six to eight is a good range for Q4 that does have basically one rate cut in that number. For next year, I mean I mentioned the last time that I thought that each rate cut was five to eight basis points down. And I still think that's probably a good range.

Great, that's helpful. And Jefferson just maybe follow-up with one more on the fee side of things. Just kind of curious how you're thinking about your specialty business being SBA and then Navitas in terms of retaining that production or selling it? I know you've historically sold the SBA, have been retaining a little bit more had thoughts of maybe selling some of the least equipment production. I'm kind of curious where you are in that process and kind of how you're thinking about it in the realm of sort of what's going on in interest rates et cetera?

I could start on that Rich will probably have something to add on that maybe. On the SBA business, we had started this year deciding to sell half and keep half of that production. We have seen an increase in certain gain on sale rates which makes it enticing to sell a little bit more of that especially in a down environment possibility. But we are, for now anyway, we're sticking with that 50/50 strategy. With Navitas, we have a target -- a limit I guess I should say of 10% of total loans being Navitas loans. We're decently below that now. And we are going to start selling Navitas loans starting in the fourth quarter. We talked about selling them this quarter. But I would expect to see loan sales starting in the fourth quarter and some gains coming off of that starting this quarter and into next year.

Good morning Brad, this is Rich. And I'd like to add we have seen the 10-year paper pricing come up pretty materially. And so we are not selling some of our lower priced 25-year paper and instead selling the higher priced 10-year paper with a goal still of holding about half.

Got it. And Jefferson on the Navitas gains would those approximate something similar to an SBA loan sale gain or just kind of curious what types of premiums you can get there?

I would say 4% or greater on Navitas sales gains. That's what the market is currently.

Okay. And you'll just operate into that 10% kind of target that's kind of where you want to be?

That's right.

Okay, all right. Thank you, guys. I'll hop back in the queue.

Thank you. Our next question comes from the line of Catherine Mealor with KBW. Your line is now open.

Thanks. Good morning.

Good morning.

Wanted to circle back on the margin. I mean the loan yield stability was really incredible to me with your core loan yields down. I think only about four basis points. Just given how much of your loan book is variable in rate. Is -- was there any kind of one-time maybe higher loan fees in there that kept that high? And how are you thinking about your kind of core loan yields repricing down with LIBOR to a little lower? Thanks.

Yes. So, the loan yield piece of it the main differentiator was the -- just the accretable yield in there. Ex-accretable yield it did held up relatively well. There was some Navitas growth in that -- in there that helped it hold up. Going forward as rates come down, I still think you're going to be looking at on a rate cut loan yields being down kind of eight to 10 basis points on rate cuts .

Okay. Eight to 10 bps per quarter?

Per cut.

Per cut. Got it. Okay. Got it. And actually as forward -- as I'm looking at that 4% decline does include the accretable yield. So, it was a little bit lower than that.

That's right.

And then on the deposit side is -- can you give us any view into what deposit costs did on a monthly basis?

I can do that maybe with some portfolios. So the -- I guess, I've been focusing in on the CD portfolio. CD portfolio, we have been cutting rates in that CD portfolio. Our cost there is $170 million. New adds in September for the CD portfolio was $145 million. We have $180 million -- I'm sorry, we have $300 million coming due in the fourth quarter at about 1.8%. And that should be moving down to that $145 million, $150 million. So from a monthly perspective, I've been focusing on that CD portfolio. We have seen the rates of each of our portfolio, is coming down as we've been lowering rates. So CD is where we're seeing the -- kind of the apex on the turn. And we are seeing kind of lower rates throughout the quarter across all the categories.

Great. All right. Thank you. That’s helpful. Great quarter.

Thank you. Our next question comes from the line of Christopher Marinac with JMS. Your line is now open.

Good morning. I wanted to talk about credit trends and kind of what's happening on classifieds or any emerging issues that Rob sees or even that Rich sees from customers?

So, this is Rob. I would say we're not seeing any specific trends. You do see -- I would say, our asset quality numbers historically have been very low for a bank with a general commercial lending type portfolio like ours. And so, I would expect some normalization to occur. We did have an uptick in -- just a small uptick in our non-accruals, but the largest category for the quarter was mortgage when we look at past dues and non-accruals together in the mortgage book they were flat quarter-over-quarter. And we didn't have any new non-accruals in the quarter greater than $500,000. So, it feels relatively stable. We do see -- we're sensing what everybody is that there's more noise economically about the future than there has been historically. But we're not seeing any significant or noteworthy trends in the portfolio.

And Chris, this is Rich. I would add the same thing. I was out in a market visit yesterday with some clients. And I'm still hearing a little more caution than before. So, nothing specific, but a little bit more noise.

And Rich are there any businesses that you maybe deemphasizing or perhaps not pushing as hard as you would have before, or anything more specific on the types of things that you like versus dislike?

Sure. Well, one area that we're very focused on concentrations. And so, one area that we are kind of at a time out, if you will, is hospitality. So that's one particular area. And then one of the areas that we are hearing some noise on is transportation. So we're very cautious on that as well.

Okay. Great. Thanks very much guys.

Thanks, Chris.

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

Hi, guys. Just wanted to talk about Navitas a little bit. I think, when you guys brought them on, the loan yields were somewhere in the 9.5% range. And I think as we talked about a little while ago, Jefferson, those yields didn't get the benefit as rates went up. But, conversely, have held pretty steady as rates have come down. And I know part of that is, you've expanded a little bit into the middle market. So, can you just give us kind of a broader update on Navitas? And how we should think about yield trends and growth from here? Thanks.

Yes. I can start with that. And we can -- the others might want to join in there too. So, you're exactly right. So when we bought Navitas, it was 9.5% yields. Rates went up and we felt a little bit of margin squeeze in that business. Although, the overall bank benefited. And now as rates are going down, we still have a 9.5% yield at Navitas. But we're seeing a wider margin within the Navitas business. So it's a good thing to have in a falling-rate environment for sure. We have seen originations increasing there. We are -- our middle market business -- we're not doing the middle market business anymore. That is a business that we were -- had moved into. We were seeing lower years. We had seen a -- it was more purchase loans that we wanted to see, there's more syndicated loans that we wanted to see. It was more in pools. And so we exit that business and went back to the core business there. Still, I would expect to see -- we want to keep that underneath 10%. This should grow at a faster than 10% rate. So, hence, you will see sales of Navitas loans in 2020.

Okay. Yes, it was going to be my follow-up question. So it's very helpful. So, as we think about next year and I think you guys are kind of on track to hit the mid-single-digit loan growth outlook. On the one hand, you're going to be selling some more Navitas loans, as you mentioned. I think there's a general sense of caution out there from customers. I know you guys are cognizant of structure and price, which seems to be getting a little stretched here. But you've also hired some people, right? And I think, in prior quarters you've talked about the opportunity set there. So is mid-single digits, as we move into the next year, kind of, counter balancing all those factors, is that kind of the right way to think about the growth rate for you guys? Thanks.

Michael, this is Rich. I'll take that. So the answer is yes, mid-single digit. We feel good about that. As we move into next year, we've had 26 hires this year-to-date, seven this quarter. We feel that there'll be a few more in Q4. And with the current momentum, the pipelines, and what's going out in the marketplace including trust, we feel good about next year, very optimistic.

Okay. Maybe, one final one for me. Looks like this was brought up earlier, deposit costs have kind of peaked in -- on their way down. You guys have had some good mix shift with brokerage coming down. You still got a really low loan-to-deposit ratio. What's the flexibility or incentives to push on the gas a little bit here, as it relates to reducing, at least, posted rates? Thanks.

Yes. Thanks. I think the real loan-to-deposit ratio gives us a little bit of extra cushion to be able to be more aggressive in CD pricing, especially. And so, what we can do here and what we are doing is, we've lowered CD prices probably four times since rates have started coming down. And we've actually still been seeing decent growth in CDs, even though we've been lowering rates. And so, now, that we have our wholesale funding, now down to where it's going to come off at a much more slow pace. We are pressing the gas little bit on lowering CD prices. So, I think, a big piece of what you'll see this quarter and next quarter is that CD rates and the CD cost for us start to turn the corner and start to move down. So we are pressing that gas pedal pretty hard.

So if I read that right, it sounds like maybe the NIM guide for future cuts may be a little bit conservative?

That's what we – that’s what I hope.

All right. Thanks for taking my questions.

Thank you. Our next question comes from the line of Kevin Fitzsimmons with D.A. Davidson. Your line is now open.

Hey good morning everyone.

Good morning Kevin.

Jefferson, I just wanted to clarify the commentary on the core margin coming down 6 to 8. Is that assuming an additional one cut in fourth quarter or is that just the flow through of the September cut?

So it is a -- it's a little bit of a combination because what we have is the full impact of September cut with a partial impact of a -- with an October 31 cut. So we have seen LIBOR coming down anticipating that. We have $3 billion of loans that are floating with LIBOR. So we're starting to feel the impact of a fourth quarter cut already. So it's a little bit of a combination. So we did get a cut. There might be again I don't know a two or three basis points of downside to that.

Great. Great, thank you. And then if I could just ask if you guys could update us on how you feel about buybacks going forward and about traditional bank M&A, whether that's something that you think is more or less likely in the environment?

Yes. So Kevin, this is Lynn. I'll start with the M&A side. It's always really hard to predict. I mean, we're pretty disciplined on which market we want to go into etcetera. And really discipline around the cultures, particularly around credit and customer service culture. With that said, we actually right now have got several conversations going on with companies that would fit. And so the question is will our price expectations meet up. So if pricing meets up, I'm optimistic that we'll have some opportunities over the next several months. But if it doesn't happen then we feel like we've got great momentum here, great levers to pull in the event that doesn't happen. And with that I'll turn it over to Jefferson.

On the buyback we put the -- I think if we have the ability to put it to work in M&A we'd prefer that. With the buyback with our increased profitability and our -- now 10% TCE, if one of these deals do not come to fruition then I think we would be more aggressive buyers of our own stock in 2020. So it's there. And we were ready to be more aggressive with it, if M&A doesn't work out.

Okay. Thanks, guys, I appreciate it.

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

Hi. Good morning guys.

Good morning.

Hi. Jefferson, I just wanted to -- if you had any thoughts on, CECL expectations, as we roll to 2020?

Yeah. So for CECL we feel, pretty good about -- we feel very good about where we are. We've just completed our third parallel run. We feel very confident about our process. The reserve increase will be in a range that, I've seen other banks put out there. So I don't expect any surprises from our CECL numbers. Also there is a minimal impact to capital, with CECL with the scenarios that we are using now. We expect to provide more detail on our numbers before year-end. So, no surprises, and stay tuned for the numbers coming more specifically before year-end.

Okay, all right. Thanks for that. And then just -- the rest of my questions have been asked and answered, just one more on expenses. Obviously, you guys have done a tremendous amount of hiring this year. And I appreciate the $700,000 you called out earlier that related to the mortgage commissions. Just any thoughts on, kind of 4Q expenses and then, kind of run rate expense growth beyond that, just given a tough revenue backdrop and any thoughts on just overall expense growth? Thanks.

Yes. So I would say flat to slightly higher on expenses, in Q4. And for 2020, we're still in the budget period. And so I don't have a great run rate for you for next year. Operating leverage is very important to us. It's something we're going to put into our budget, and could be a tough revenue year for sure. But again operating leverage is very important. But -- so I don't have expense guidance for 2020 at this point, but I will say flat to slightly higher, in Q4.

But Jefferson, you would expect positive operating leverage in 2020. It's what you're saying?

I do expect to budget that. Depending on how many rate cuts you're going to put on us on the environment, it might be very hard. But we are in the business of creating operating leverage here at United. And that's what we will budget for.

Excellent, thanks, Jefferson.

Thank you. This concludes today's question-and-answer session. I would now like to turn the call back to, Lynn Harton for closing remarks.

Great, well, thanks once again for your interest and support of the company. And I appreciate your time on the call today. Thank you so much.

Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect.