Earnings Call: Q1 2019

Apr 24, 2019

Good morning, and welcome to United Community Bank's First Quarter 2019 Earnings Call. Hosting the call today are President and Chief Executive Officer, Lynn Harton Chief Financial Officer, Jefferson Harrelson and Chief Credit Officer, Rob Edwards. United's presentation today includes references to operating earnings, pre tax, 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 atucbi.com. Copies of the Q1's earnings release and investor presentation were filed last night on Form 8 ks with the SEC and a replay of this call will be available in the Investor Relations section of the company's website atucbi dotcom. 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 ks as well as other information provided by the company in its filings with the SEC and included on its website. At this time, I will turn the call over to Len Harton. 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 3 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 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 Q1's results. On an operating basis, EPS was up 12% over last year. Our operating return on assets was $1.45 for the 2nd consecutive quarter. Tangible book was up over 15 percent from last year. Loans grew at a 7% annualized rate excluding the continued runoff of our indirect portfolio and core transaction deposits grew by $135,000,000 an 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 frontline is allowing us to generate core funding to support our growth. Our credit culture and execution is 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 $183,000,000 and we shrink 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 accretable 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 the last quarter, but there is a lot of positive mix change underlying that flatness. First, we had DDA growth of $111,000,000 that actually fully funded our $110,000,000 of loan growth. And including DDA, we had $135,000,000 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 delevering 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 is 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 on to Page 10 and discuss our fee income that came in at $21,000,000 this quarter. The $21,000,000 result was down $1,400,000 versus last year. We were pleased that our SBA business had 15% higher originations versus last year at $37,600,000 even with the higher originations, our SBA income was actually down $500,000 due to both fewer sales as we are now holding our 10 year paper and lower gain on sale percentages as well. We also believe we had a good mortgage quarter, although it did not fully show up in fees. We had $181,000,000 of mortgage originations in the quarter, which was down 6% year over year. That said, with rates falling, we also had $317,000,000 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 $1,300,000 mortgage servicing rate valuation reduction, which hurt mortgage fee income in the quarter. On Page 11, note that expenses were down sequentially by $1,700,000 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 hitting in Q2, I do expect the expenses to be at the 4Q 2018 levels in Q2. Plus First Madison 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 and in line with our expectations. We had a $3,300,000 provision compared to $3,100,000 in net charge offs and the reserve stayed flat at 73 basis points. The tick up in net charge off was expected as the loan marks made when we acquired Navitas last year have 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 $50,000,000 in return to shareholders. In addition, we have a $50,000,000 share repurchase authorized of which we repurchased just under $8,000,000 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 $85,000,000 to work in the Navitas acquisition last year and we are putting $52,000,000 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 at First Madison Bank and 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 Q2 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 1 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. Thank Hey, Jefferson, I appreciate all the great color you gave us on some of the income statement line items. I was curious if there were 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 Q1? 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 maintain or even increase the NIM from here? Yes. Thanks, Brad, for the question. The full impact of the delivering will be felt in the Q2 as well fully in the Q2. So also we expect to I think the securities to I think the securities portfolio will continue to shrink throughout the year. We still have some broker 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. Okay, great. That's helpful. 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 other 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 1 C and I lender. We have an additional 2 C and 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 and A activity in Charlotte and Atlanta have created opportunities, both talent and customers for us. Okay, great. I'll hop back to you. Thank you. Thanks. Thank you. And our following question comes from Jennifer Demba with SunTrust. Thank you. Good morning. Good morning. Good morning. Question, Jefferson, on Brad's question on delevering. 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 borrowings, we have at quarter in the Q1, we had $559,000,000 of brokered CDs. We had $40,000,000 of HLB borrowings. And so 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'll look at deposit growth, we'll look at where that funding is and we'll shrink it throughout the year. Okay. And one follow-up on actually Brad's other question on hiring. Do you have an ideal number of C and 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 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. Okay. Thank you. I appreciate it. 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 unmute. If your phone is on speaker, please lift your handset. And our next question comes from Catherine Miller with KBW. Your line is open. Thanks. Good morning. Good morning. 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. All right. I don't know if I have Navias here, but I do have we had 3 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 a number of the 20. I did a calculation where we have 10 core. Got it. So there may be some loan fees in there also that needed to sit up this quarter? Yes, it's not loan fees. 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. Okay. All right. And then how about on maybe just a bit more big picture on the margin. How are you thinking about your outlook for the margin? Actually, last time we spoke, last call, we were expecting a couple of rate hikes. Now we've got a flat outlook. So do you believe that you can still kind of increase your core margin even with a flat rate outlook? Thanks. Yes. So in the near term, this quarter we had 11 basis points of accretable yield hitting versus 9 last quarter. The additional 2 was on specific loan recoveries, I don't think will occur again. So I think if you take you would take maybe 2 basis points off for less accretable yield next quarter. You also have a pretty tough curve and a pretty aggressive pricing environment. So you get some headwinds there for sure. But at the same time, we had the full impact of the Q1 deleveraging. We have continued remix towards loans and towards Navitas away from securities. So I think the path to the margin is flat to higher from here. Got it. Okay. And how about on loan growth, your outlook for loan growth, you had a really nice growth this quarter. Do you expect this kind of up mid single digit level to continue for the rest of the year? Jefferson, you want me to take that? Hi, this is Rich Bradshaw again. Yes, we feel Hi, Rich. Hi, good morning. 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 is the start of the quarter. And lastly, we've already talked about the strong hiring that we have done and we'll plan to continue to do as well. Great. The mid single digit growth feels good then? Yes, ma'am. Great. Great. All right. Thank you so much. I'll pop out. Thank you. And our following question comes from Christopher Marinac with FIG Partners. Your line is open. Thanks. Good morning. Just wanted to ask about new hires in Atlanta and really other parts of the footprint and just sort of what's the update there as well as sort of plans for the next 12 to 18 months? All right. This is Rich again. I already covered Doug Higgins and 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 CRMs scattered throughout the footprint that we have hired in our cities that we're already in. Great, Rich. That's very helpful. 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. Okay. 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? Yes. So thanks, Chris. Last time I talked about a kind of low single digit expense growth of that $77,000,000 base. Now we have the strong expense quarter this quarter heading back towards that $77,000,000 range next quarter. And I still think that kind of low single digit base is what you should think about. Okay, very well. Thanks guys. 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 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.