UCBI
#Good morning, and thank you for joining our first quarter earnings call.
Let me start by saying that I am, once again, very pleased with our results in the first quarter.
In fact, it was a standout quarter by nearly every measurement.
It is a credit to our bankers who started out of the gates in 2018 producing strong results.
Our operating earnings per share for the quarter was $0.50, which was up $0.08 or 19% from last quarter.
This increase was due in part from tax reform benefits and from our new partnership with Navitas, which was included for 2 months in the quarter.
These results were achieved despite headwinds from expected seasonality and a special beginning provision for Navitas, which reduced our operating EPS by $0.02.
Our operating result of $0.50 per share was an increase of 28% from a year ago quarter.
The EPS growth was accomplished by an improvement in profitability as the operating return on assets moved to 1.33%, and the operating ROTCE moved up to 15.3%, putting us on pace to reach our 1.4% ROA and our 16% ROTCE goals in 2018.
All measurements moved in the right direction and we expect this positive momentum to continue for the remainder of 2018.
Continued expense discipline and a wider margin driven by Navitas and core margin expansion provided a meaningful lift during the quarter.
This quarter is also highlighted by pickup in loan growth despite continuing to intentionally runoff our indirect portfolio.
And an increase in core deposits with deposit betas remaining low in an increasing rate environment.
This has contributed to a higher loan-to-deposit ratio, although the strong deposit growth held the increase down a bit.
We have also reduced our securities portfolio.
Our measured growth and resulting margin expansion continues our progress toward our goals of achieving top quartile profitability.
During the quarter, we were also busy on the strategic front.
On February 1, we announced the completion of our acquisition of Navitas Credit Corp.
Navitas had $527 million of assets at the end of the first quarter, and they're meeting all performance targets that were determined during the acquisition process.
We're very pleased with how our partnership is progressing.
In a very short period of time, we are already experiencing the strategic fit and synergy between Navitas' small ticket equipment focus and our Commercial Banking Solutions unit.
The partnership is working and we are well on our way to achieving the $0.20 EPS accretion in the first full year we mentioned last quarter.
We also recently completed the operational conversion of Four Oaks Bank and Trust.
And so we now share all of the same systems and officially the United Community Bank name.
This, once again, gives us the opportunity to welcome the customers, employees and shareholders that have joined us.
All said, we are very pleased with our solid performance in the first quarter.
We're well positioned to grow, compete and perform in the foreseeable future.
Now, I'll ask <UNK> to share the details of the first quarter.
Thanks, <UNK>.
We are proud of both our results this quarter and the continuing strategic moves we're making to build our company.
If you want to follow along with me, I'll start on Page 8 of the investor deck.
There you'll know the significant increase in our margin, up 17 basis points linked quarter and 35 basis points from a year ago.
Navitas added 10 basis points for the linked-quarter increase with the remainder caused by increasing loan yields and an influence of a full quarter of the Four Oaks portfolio being included.
On Slide 9, the stability of our core deposit base remains a driver in our margin expansion.
Our cost of deposits in the first quarter was only 23 basis points, which was an increase of only 1 basis point on a linked-quarter basis.
Our core deposit base continue to grow, increasing $172 million or 8.7% annualized during the quarter.
This fully funded our loan growth during the quarter.
Our overall cost of funds increased 14 basis points versus last quarter, due largely to their sub-debt raise and also the securitization debt from Navitas coming on during the quarter.
Turning to loans on Page 10.
Our annualized core loan growth was 6%.
Our loan production in the quarter was $665 million, up 16% over the same period last year.
Total loans reached $8.2 billion in Q1, up from $7.7 billion in Q4.
As noted on Slide 11, my goal is to continue to strategically position United for quality, diversified loan growth in metropolitan areas with solid long-term prospects.
On Slide 12, seasonally, the first quarter is generally our weakest in fee revenue.
And while we're essentially flat with the same period a year ago, the year-ago period included the revenue we have now lost as a result of Durbin.
A notable new item this quarter is $800,000 of fee income from Navitas.
SBA fee income was down $200,000 from a year ago, but commitments this quarter were particularly strong at $26.4 million, 27% higher than the same period last year.
This continues to give me confidence in the continued growth of the business, which is among the top 20 nationally.
Mortgage also continues to do well despite a more challenging and uncertain interest rate environment.
Our originations were up 26% year-over-year, at $191 million.
Turning to Slide 13.
Expense control is a great story this quarter.
While operating expenses were up $2.3 million in the quarter.
If you exclude the impact of additional expenses from Four Oaks and Navitas, total expenses were actually down $1.2 million versus Q4.
Our operating efficiency ratio improved to 55.8%, which is an improvement from last quarter, and I believe strong performance relative to our peers.
On Slide 14, our rebalancing of the loan portfolio continues to pay dividends with very strong credit results.
Net charge-offs were 8 basis points, marking the seventh consecutive quarter of 11 basis points or better performance, and nonperforming assets came in at 24 basis points, essentially flat with the last 4 quarters.
Our $3.8 million in provision expense this quarter was impacted by a onetime initial provision for Navitas.
But Navitas portfolio was actually marked at 1.5% premium due to their high yield and strong credit characteristics, instead of the discount we normally see.
This premium equated to $5.6 million.
With the write-up in Navitas loans, our allowance model required us to set aside $2.3 million or about 50 basis points of the Navitas loans in an initial reserve, which accounted for approximately $0.02 of EPS this quarter.
The Navitas acquisition closed on February 1, and promises to be a great partnership.
We are on track toward the $0.20 cents EPS accretion and 9 to 10 basis points added to ROA in the first year, which we announced earlier.
So I'd like to close with a review of what our team achieved in the first quarter of 2018.
But the announcement and closing of the Navitas transaction, solid performance or improvement in nearly every financial measure, including credit quality, operating efficiency, margin, a significant increase in our dividend, growth in both core deposits and loans and a flawless conversion of Four Oaks bank to the United brand.
The first quarter was a great one for United.
And as I look forward to the remainder of the year, I'm highly optimistic about our continued high performance based on the strategies in place today, our high-growth markets, industry-leading customer service and the determined execution of our plan by our bankers, day-in and day-out.
And with that, <UNK>, I'd like to turn it back over to you.
Thanks, <UNK>.
Last quarter, we provided some clarity and direction on our expectation for profitability in 2018.
Given our earnings momentum, tax reform and Navitas, I mentioned that we believe we can achieve a 1.40% ROA and a 16% ROTCE for 2018.
We stand by those results today, and believe that we can achieve them for the year and possibly sooner during the second half of 2018.
I truly believe that United is in a tremendous position to continue the success we've had and more.
The bank is thriving, and we have one of the most capable teams in the industry.
On April 2, we announced that I was reducing my role to Executive Chairman of the Board, and that <UNK> will become the CEO of United on July 1.
It is absolutely the right time for this transition, and I'm looking forward to serving in my new role.
<UNK>'s leadership since joining the company in 2012 has been instrumental in getting us to where we are today and positioning our company for many future successes.
He has done an excellent job in the role as CEO of the bank, and I believe there is no one more capable to lead this company into its next chapter.
He is totally dedicated to this company, our culture, our business model, and most important, our people.
People, that's what this is and always has been about.
I'm truly grateful to the shareholders, our board and the 2,300 employees that make this company what it is today.
I'm so proud of you and what we've been able to accomplish together.
Now we will be glad to answer any questions.
<UNK>, do you want to.
Yes, I'll serve it down.
I think the biggest driver of us hitting this, will be the loan growth.
We had good loan growth this quarter.
We're seeing good demand through credit committees, but I think that is the biggest swing factor towards meeting or not.
I do think that this quarter was very good in getting us on the route to that 1.40% ROA.
So I think that we've made good progress, and we are set to achieve those goals.
So really, <UNK>, it doesn't change our strategy at all.
The markets that we have indicated in the past within the entire 4 state region in which we operate in, it's still at top of mind.
Certainly, there has been a lot of activity in Atlanta.
We like Atlanta a lot, 25% of our balance sheet is in the Atlanta MSA.
But we're going to remain very disciplined, which includes the pricing and identifying the cost saves that we certainly have total confidence that we're able to achieve integration.
And then, of course, the growth on a pro forma basis.
But there's a lot of markets that we have strong desires in ---+ within those 4 areas or 4 states.
And it could take the shape of a fill-in, it could take the shape of an overlap or it could take the shape of an entirely new market.
So we remain disciplined, and I think our history has proven that when we do make an acquisition that what we say, we do execute.
Yes, thanks.
This is <UNK>.
I'll start there.
We're really excited about this quarter with our loan growth almost more than double funded by DDA growth this quarter.
So the deposit growth was outstanding.
Now with our balance sheet mix, some of the things that we're going to do to help fund the bank this year is going to be ---+ we're going to be shrinking the securities portfolio a bit.
I would think about, call it, a $20 million a month or so.
We're on top of that, we have the indirect portfolio that's raked in about $42 million a quarter.
We have had a really good deposit growth.
We can't really count on that going forward as the pricing is getting more and more competitive out there.
So, I think, the combination of some of the liquidity produced by other pieces of our balance sheet, in combination with the growth that we have been getting, we think we can continue to compete out in the marketplace there and then we think that our loan growth will pick up from here.
Specifically, on the beta.
I do think the betas will increase with each rate hike from here, I do believe that we are still modestly asset sensitive for each rate hike that occurs from here.
It's Jeff, so I'll start with that one.
The ---+ we're expecting about $10 million to $12 million a month in Navitas growth.
This quarter we're a little higher than that at $44 million for the first 2 months.
But we still think that $10 million to $12 million number per month is a good number to think about.
And so for the remaining 9 months, that'd put you at $90 million, $95 million for the rest of the year.
There's no meaningful remix of what they have on their books.
We do think there might be an opportunity to move upstream over time, and maybe even increase that growth rate over time as we find new niches.
Yes, there's ---+ that Navitas securitization debt will just roll off naturally as those loans paid down or prepay.
So there's nothing that we can do to accelerate that.
It's a natural ---+ I mean they have a ---+ they are 4-year loans, so they're rolling off at a predictable, natural pace.
There's 2 securitizations left, one is getting relatively small.
By June or July, we'll be able to do a clean up call, we think on the smaller, older origination or securitization.
And then from there we'll just have one left that should go into next year.
Yes, this is <UNK> again.
I'll start you out with the $71 million base that we reported this quarter.
Then we have the full quarter of Navitas in Q2, that'll add an extra $1.1 million or $1.2 million for Navitas expenses.
So put that number as the Q2 base, and then we'll grow it from there at a natural rate.
And keep in mind too, we have ---+ this is our weakest seasonal quarter.
We expect stronger SBA, and possibly mortgage going into next quarter, which could also increase the expenses a bit.
But I would think of it as $72 million base with core growth on top of it.
Peter, this is <UNK>.
So typically, the first quarter is seasonally a low for us on loan growth.
And as we ---+ even intraquarter, January and February were very weak, March was very strong.
Our committee and pipeline activity in March was the strongest that we have seen in a long time.
So certainly on the near-term horizon, we feel really good about loan growth.
In terms of the individual pieces, it's kind of the same story.
Our new markets Riley, Horry County are picking up, Navitas is very strong, senior living is doing very, very well, renewable energy is getting some traction.
And then the other question ---+ the only question is kind of the broader economy and how that goes.
So those are some of the things that we're seeing.
Can we talk about the margin a little bit.
It felt like your core margin came up ---+ I guess almost ---+ it was modeled to where almost I thought it would be with a full quarter of Navitas, and so I think we still got a month of Navitas to help the margin as we move into next quarter.
So can you just kind of give us an updated outlook for where you see your core margin, I mean more for the back half of the year.
Yes, thanks, <UNK>.
So with the 17 basis points of increase this quarter, again, 10 of that was Navitas.
For 2 quarter impact ---+ for 2 months impact, and 7 was the core bank.
We do think Navitas will continue to impact the margins similarly given the 3-quarter piece.
If it's all things equal, that would tell you we have an up margin next quarter.
And the Navitas' impact should be roughly 5 basis points by itself.
Now within there, we have a very competitive deposit pricing environment.
We do have some remixing that is helping us.
We do think the loan-to-deposit ratio should be increasing over time.
We do have loans shrinking ---+ I'm sorry, securities shrinking and loans growing as a remix.
We have a remix slowly away from the Navitas securitizations as well.
So it's a tough environment out there, but I guess for guidance I would say, I think, our margin will be up next quarter from the 3.80%.
Okay.
So maybe ---+ so you're getting a 5 bps from full quarter of Navitas.
And then for every rate hike from here maybe a little bit less than that 7 bps you saw this past quarter, just given the combination on the loan side.
Yes, I would even say maybe the 7 basis points did include some core margin expansion from rate hikes.
It also had a slight benefit from Four Oaks being in for the whole quarter.
So for the rate hikes, I'd say less than half of that 7 for future rate hikes.
Got it, okay.
That's helpful.
And then back to the expenses.
Do we have any further cost savings from Four Oaks or is that fully in the run rate this quarter.
So we think we have about 75% to 80% of the Four Oaks expense savings in the run rate now.
We just ---+ we did just do the conversion in April, so we should start seeing the rest of those come through now or May and after.
Yes.
So in terms of charge-offs for Navitas, I'm thinking about that in terms of a 4 basis point add to us.
So if we ---+ sort of, for the year, I sort of budget a 10 basis point number, maybe it's 10 to 12 for the year.
And then 4 on top of that, kind of, gets me to the 14, 15 basis point charge-off range.
In terms of the allowance and how we run the model, it's a combination of really 3 things: asset quality, so we did cover our charge-offs on the core bank and would expect to continue to cover charge-offs to including Navitas; and then you would ---+ asset quality is a component, loan growth is a component.
So that would play a role in it.
And then of course, we continue to ---+ the portfolio mix is the third component.
We continue to reduce land, which is ---+ has a historically higher reserve than maybe some of the other products we're adding in.
And so that of course also plays a role.
This is why we're in this.
This is <UNK>.
So ---+ and we did set aside that $2.3 million of the onetime, sort of, provision.
In addition to that, we have $3.9 million that came in the mark of the PCI loans.
In combination, that's a $6.2 million of specific loss absorption and capability for Navitas loans going forward, which is about 1.7% of loans, which is about 2 years of losses set aside at the current loss rate.
Yes, and ---+ so it's hard to keep track of all this.
But if you're looking at the allowance of $61 million at quarter end, there's an additional 50 ---+ just shy of $54 million in credit marks.
So a fairly large number, which includes the $3.9 million that <UNK> just mentioned.
That's correct.
So this quarter we had $800,000 increase of Navitas fees, that was almost solely in the other line item.
So that number with a full quarter impact will increase ---+ should increase again next quarter.
Well, most of those fees there ---+ I guess the servicing fee would be a very ---+ a modest piece of this part of it.
The fee income would be fees they generally charge with loans that others may want to add in on there.
But the primary piece for that is the fees they charge in the normal everyday business.
The SBA servicing fees would be very small.
I can roll with that one.
So it's a great question, Chris, one we talk about quite a bit.
And we ---+ currently we're targeting a 90% loan-to-deposit ratio.
So we think we can slowly move this 82% towards 90% over time.
Possibly, an acquisition could help us move there like Navitas.
This quarter we ---+ last quarter when I was on the call, we were talking about the 79% ratio going to 84% or 80% going to 84%, all things equal.
This quarter we did make some progress going to 82%, but the deposit growth was very strong.
So there's several components in moving that loan-to-deposit ratio up, but we felt comfortable moving towards that 90%.
I don't know if ---+ we haven't talked about this a lot internally, I think we'd be comfortable going over that 90% more towards peers.
We're setting interim goals, and we hope to make progress on that loan-to-deposit ratio this year.
And that 90% too, Chris, just to square that, would be about $700 million of additional loans.
We would ---+ not at this time.
We would certainly ---+ like to be in Florida.
It's very difficult to do LPO in a market where you don't have a on-the-ground brand, and so I probably stay away from that at this point.
But if we had the right opportunity, again, we wouldn't turn it down.
But it's not been a focus and not a strategy at this point.
Thank you, operator, and thank all of you for being on the call this morning.
We sincerely appreciate your interest in our company.
Any additional follow-up questions, don't hesitate to reach out to any of us.
And to our teammates that are on this call, let me just once again say thank you and congratulations on another great quarter.
And with that, hope you all have a great day.
