Earnings Call: Q4 2018

Jan 23, 2019

Good morning, and welcome to United Community Bank's 4th Quarter 2018 Earnings Call. Hosting the call today are President and Chief 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 4th quarter'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 on the Investor Relations section of the company's website atucbi.com. Please be aware that during this call, forward looking statements may be made by representatives of United. Any forward looking statement should be considered in light of risks and uncertainties described on Page 4 of the company's 2017 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'll turn the call over to Lynn Harton. Good morning, and thank you all for joining our Q4 earnings call. The Q4 was a strong finish to an outstanding year. Loans grew at an 8% annualized rate, customer deposits grew at a 7% annualized rate, Our net interest margin improved and we posted an ROA of 1.45 on an operating basis. For the full year of 2018, our operating ROA was 140. Our asset quality was exceptional during the quarter as it has been all year. We remain conservative in our underwriting and disciplined in our concentration management. This is not the time to reach or compromise in our lending businesses, and I'm very confident in our credit strategies and execution. Our operating earnings per share reached $0.57 which is up $0.02 or 4 percent from last quarter and $0.15 or 36% from last year's 4th quarter. During the Q4, we declared a dividend of $0.16 per common share to shareholders of record on December 15, 2018. This is a penny higher than last quarter's dividend and represents a 60% increase over last year. We also have a stock buyback program approved, in place and ready to execute. Our focus continues to be on delivering sustainable top quartile financial performance and with that will come solid returns for our owners. While 2019 holds some questions about the direction of the economy, everything we see in our business and our communities makes us confident that we have another great year ahead of us. Our markets continue to grow at a strong pace. We're well positioned from a funding perspective. Our credit outlook remains positive, and we have good momentum in nearly all of our businesses. I'm actually excited to see what the New Year brings, but for now, I'll turn the call over to Jefferson for more details on our performance in the 4th quarter. Thank you, Lynn. While we are pleased with the quarter and our 2018 performance, our goal is to be a top quartile performer. And we believe that even if we are not there this quarter that we will have made significant progress towards that goal this year. If you would like to follow along with me, I'm starting on Page 5 of the investor deck. We had $114,900,000 in net interest income in the 4th quarter, up 10% annualized from Q3. The spread growth we generated got a boost from a continued 2 basis point increase in our net interest margin and our strongest loan growth quarter of the year at 8% annualized. One thing that sets us apart, we believe, is our core deposit base, which cost just 54 basis points this quarter. We were particularly pleased with our deposit growth this quarter with customer deposits up almost $200,000,000 in Q4 more than funding our strong loan growth. Turning to loans on Page 8. End of period loans were up $157,000,000 in Q4 or up 8% annualized. Excluding indirect auto loan runoff, end of period loans grew at a 10% annualized pace. The 10% pace came as our loan production in the quarter was a record at $868,300,000 up 35% over the same period last year. Our Navitas unit also played a part in the growth. We had $56,000,000 of loan growth at Navitas as our investments in the dealer and middle market channels appear to be pushing the growth rates higher. Moving to Page 10, fee revenue in the 2nd quarter was $23,000,000 up $1,000,000 from last year. SBA gains were down $600,000 versus last year, even though we had greater loan sales in the quarter versus a year ago, as the gain on sale has fallen quite a bit over the last year. We have made the strategic decision for 2019 to keep a portion of our SBA originations on our balance sheet rather than sell them. Specifically, we are going to keep our 10 year SBA originations on the balance sheet and continue to sell our longer paper. 10 year paper comprises about half of our originations, but a good deal less than half of our gains because it has a lower gain percentage. Our mortgage business also continues to perform well. Although our fee income was down $1,800,000 versus last year, our mortgage originations are up 4% year over year, but a $1,300,000 MSR write down negatively affected this quarter. Turning to Slide 10, operating expenses were essentially flat versus Q3. The flat expenses enabled us to generate operating leverage as our efficiency ratio improved 60 basis points to 55.8%. On Slide 12, we are pleased to be able to report outstanding credit results again this quarter. Net charge offs were very low at 9 basis points this quarter, just higher than last quarter. With our original Navitas loan mark now mostly consumed, we do expect net charge offs to move to the mid teens range next quarter, a move we have been talking about and actually expected to come in 2018. NPAs came in at 20 basis points, essentially flat to last quarter and slightly better than last year. On Page 13, you can see our capital ratios. Our capital ratios are strong and growing. We have authorization to repurchase 50,000,000 in shares, but to date, we have not repurchased under this authorization. While we have not repurchased as of yet, I would mention that our dividend is up a full 60% over last year. With that, Len, I'd like to turn it back over to you. Thanks, Jefferson. The continuing improvement in our performance is something that we are very proud of and something that is a testament to our outstanding employees. During 2018, our team's dedication to both performance and service was recognized multiple times. For the 5th consecutive year, we were selected as one of Forbes Top 100 Best Banks in America. We also earned the top ranking for overall customer satisfaction in the Southeast by J. D. Power for the 5th year in a row. During the year, our employees demonstrated their strong support for United and honored us by being recognized as one of the best banks to work for in the U. S. By American Banker for the 2nd straight year. None of what we do or the successes that we enjoy would be possible without our outstanding team, and I couldn't be more thankful for them or more proud of them. Speaking of outstanding people, as we mentioned last quarter, Bill Gilbert, our President of Community Banking is retiring after 20 years with United. Bill, you will be missed. Your dedication to this company, your passion for service, your ongoing example of doing whatever was needed to make us successful With Bill's departure, Rich Bradshaw, formerly President of Commercial Banking Solutions has been named Chief Banking Officer, adding community banking and mortgage to his responsibilities. Rich's track record of building and growing our commercial bank and developing a highly effective partnership between our commercial and our community teams will serve him well in his new role. I'm looking forward to the continued growth and success these areas will enjoy under Rich's leadership and Rich's team. Rich, congratulations for this well deserved promotion. Now we'll be glad to answer any questions. Thank And our first question comes from Catherine Mealor of KBW. Your line is now open. Thanks. Good morning. Good morning. Good morning. First one to start on growth, and I apologize if you may have mentioned this. What had a really nice improvement in growth this quarter, what are your expectations for how we should think about growth going into next year? Yes, great question, Catherine. And I'll start out by saying we continue to target kind of a mid single digit growth rate. As you know, this past year, we were below that for some period of time. So we were really happy with the 4th quarter. But actually Rich is here with us. And so I might turn it over to him and let him give a little more color on expectations for next year. Thanks, Lynn. And as Lynn just said, we are targeting mid single digit for 2019. But the nice part is we have some tailwinds in 2019 that we didn't have in 2018. Number 1, Navitas sales team, we've grown it by 20 salespeople this past year. As stated, SBA strategy change, we're going to hold 10 year paper. So we'll be holding 75% more on the balance sheet, an average of prime plus 2.75 variable. Our Raleigh team continues to grow. We just invested in our Atlanta franchise hiring Doug Higgins as our Atlanta Metro President. The goal is to bring in a top banker and leader in order to attract other top bankers. We believe the M and A activity in Atlanta over the last 6 months provides a strong opportunity for talent and customers. And lastly, we feel good about our current pipelines. Okay, great. And then on SBA, Jefferson, you mentioned that you're going to be keeping the 10 year on balance sheet and it's just on your longer term paper. Can you give us a little bit of color into how we should think about SBA gain on sale and then kind of near term impact from the government shutdown on that business? All right. I might start on that and I'll pass it over to Rich who has a lot of expertise in the SBA. So I think of the SBA being roughly half of our originations and maybe I'm sorry, the 10 year paper being roughly half of our originations and maybe 40% of our gains because we're getting less gains on the 10 year paper versus the longer paper. So kind of keep that in mind as you're modeling. Also keep in mind the seasonality. We have our weakest seasonal quarter is the first and then kind of ramps up from there throughout the year. So that kind of gives you some modeling ideas and maybe I'll pass it over to Rich on the government shutdown and how that's impacting. Sure. The government shutdown, we did plan for this. So from a PLP standpoint and PLPs that what you need from the SBA to be able to close the loan. And we dedicated a lot of our resources in December to getting PLP numbers for both December, but also for Q1 so we can support our customers. So we feel pretty good about that. And I think Jefferson did a nice job explaining what the strategy changed for this year. I'll just go on there. There is a pretty big offset there with the additional loan growth at the with the Prime Plus 2. Yes, for sure. Okay, great. Thanks for the color. Thanks. Thank you. Our next question comes from Jennifer Demba of SunTrust. Your line is now open. Thank you. Good morning. Good morning. Question on the debt interest margin outlook, Jefferson. Your loan to deposit ratio still pretty well below peers. What do you see for the margin this year with either no rate hike environment or maybe one hike? All right. Thanks, Jenny. I do think our margin will be at least flat. We have some mix change happening for us with loan growth and a smaller securities portfolio. So towards the loans away from securities, we are getting a good growth rate from Navitas. So within the loan book, we have a mix towards higher yielding loans. We did see an improvement in our deposit beta in the Q4 that gives you some encouragement at least some encouragement about deposit betas next year. So we should have some margin expansion in 2019. We do still think we're also asset sensitive, not as asset sensitive as we were before with higher deposit betas, but we do think that rate hikes still give us a slight margin expansion as well. Any inclination to hedge away any of that asset sensitivity at any point? Or do you want to just stay naturally asset sensitive? That's a great question. It's something we do talk about quite a bit. We have 52% of our loans are floating. We have generated a significant amount of margin expansion as rates have moved higher. We do have some, I guess, natural lengthening of our asset side with Navitas growth and adding Navitas also added some duration to the asset side. So we like where we are now, but we are looking at it all the time. Okay. One more question, if I can. You mentioned the buyback authorization, dollars 50,000,000 still in place. What's the thought on being opportunistic there? And what's your M and A interest right now? I'm assuming it still kind of remains the same as it has been for the last several months. So I'll start with the buyback piece of that. I mean, we do believe that we will be buying back shares throughout the year. We'll be opportunistic in that. M and A will play a piece of the likelihood of buybacks and maybe I'll pass it over to Lynn and step back in if you need be. Yes, sure, Jefferson. And from a M and we'd like to be in or markets we'd like to get deeper in. We've funded those typically with a mixture of cash and stock, but today we would be more biased toward more cash and less stock in an M and A deal. We continue to have conversations and would hope to have some activity, but so no real change in our M and A strategy at this point. Great. Thanks so much. Thank you. Our next question comes from Michael Rose with Raymond James. Your line is now open. Hey, guys. How are you? Just wanted to clarify on the NIM commentary. I assume that's on a core basis. Do you at least or can you provide the accretion was a little elevated this quarter. Do you have a sense for at least what the scheduled accretion is expected to be this year somewhere in the ballpark? Yes, thanks for great question. I do think that will be relatively steady. In 2019, we've got about $30,000,000 to run through still with accretion. So I think the accretion number should be relatively steady in 2019. Okay, that's helpful. And then maybe just moving back to loan growth, you guys gave some really good commentary on the opportunities. Where do you think or where are some areas where you're potentially a little bit more cautious, either by product type or maybe geography? It sounds like Atlanta obviously is a big opportunity for you guys, but are there any markets or products that you're a little bit more cautious on at this point? Thanks. So Michael, it's Rob. I would say probably the one area where we have been cautious more probably in the last 12 months is in the leverage lending arena. So we just have been very quiet in that space over the past year. And then maybe longer term than that, we've been cautious in the multifamily space. Just a lot of building going on and really it's been over 2 years now that we've just we've really wanted to be cautious, stay with people we know, so no new customers and we have not done our portfolio there has been relatively flat over the last couple of years. Okay. Just one follow-up. What is your HLT or leverage exposure? $82,000,000 dollars outstanding. Okay. Yes. Great. Thanks for taking my questions, guys. Thank you. Our next question comes from Brad Milsaps of Sandler O'Neill. Your line is now open. Hey, good morning guys. This is actually Peter Ruiz on for Brad. Hey, Peter. Hey, just wanted most of the questions have been answered, but just wanted to kind of follow-up on loan growth, just given your commentary of the mid single digit outlook. It seems like you have quite a few tailwinds going into 2019, especially with the new Atlanta leader and the growth in Navitas and maybe some additional SBA production. So what are you maybe more cautious on that gives you that mid single digit outlook? Is it increased competition, pay downs coming back or what's the what are the puts and takes there? Yes. I would say primarily it's the question about pay downs. This quarter, we had about $40,000,000 less in pay downs that we in the large dollar category that we relative to the Q3. And that number has kind of gone all over the place all year long. So I would say the caution in our mind is just not having a great deal of visibility on that. But other than that, I don't we feel really good about where we are and feel great about the pipelines. I mean, Rich, what would you add to that, if anything? No, no, I'd agree. The production levels have been really been consistent throughout the year and rolling into Q1 pipelines look strong and we feel good about it. Again, it's the lumpiness of the payoffs. Okay. That's it for me. Thanks. Thank you. Our next question comes from Tyler Stafford of Stephens. Your line is now open. Hey, good morning everyone. Good morning, Tyler. Good morning. Nice quarter. I wanted to start on just the expenses and the run rate of the compensation expense that was down $1,500,000 or so quarter over quarter. What can you talk about, Jefferson, what drove that decline and then just kind of expectations for the compensation expense going forward? Yes. So a lot of that from Q3 and Q4 was gyrations and bonus accrual adjustments. You also had some kind of longer term comp valuation issues in there. I think that we're probably the number the result is somewhere in between those two numbers and probably towards the Q3 number versus the Q4 number. There are also some other pieces in here, possible offsets in other expense categories for the 4th quarter. So I do think that was that $77,000,000 range was a good base to start a run rate off of. I do think you'll have low single digit expense growth in 2019 is what we're thinking about. Okay. Very helpful. On the fees, just taking into account the SBA expectations for the year and the mortgage headwinds and results you'd expect to see this year, would you still expect to be able to grow fees year over year 2019 versus 2018? Yes. So what you have SBA fees being down, we have made significant investments in the mortgage business. Obviously, the gain on sale can move around. But with Navitas growth and Navitas fees coming through, I do think we'll have up fees year over year. Okay. All right. Thanks for that. And let's see, just going back to your prepared comments around the charge offs or one of the earlier questions just about the charge offs picking up towards the mid teens level in the Q1 of 2019 and continuing through 2019. How should we think about provisioning and the reserve in light of the total charge offs ticking up a little bit from the mark going away? So Tyler, it's Rob. And recently so the allowance is made up of 3 components, right? So it's asset quality, portfolio mix and loan growth. And so certainly as those credit discounts roll off that the new charge off number would play a role in the provisioning process as well as the loan growth of the various portfolios. Okay. All right. And then just last one for me. Just on the Navitas portfolio, can you just remind us the size ultimately, I mean obviously that's seen some nice growth, but just how big would you feel comfortable being that as a percentage of the total loan portfolio? And then can you just remind us of kind of credit quality, what you're seeing there right now and kind of expectations through the cycle of what type of losses you'd expect to see from that portfolio? Sure. Great question. I'll take the growth piece and let Rob talk about the credit quality. When we remember that they had a larger engine than their own balance sheet. So they were they always had a bigger production level and then they were securitizing, selling off their assets. So as we looked at it and we modeled it out, we felt comfortable in the that they could be in the 8% to 10% of total assets. So let's call it $1,000,000,000 over about a 48 month period. And they're really we're really kind of right on track, maybe a little ahead of that. So somewhere in the $900,000,000 to $1,000,000,000 at our current balance sheet would be, we think very manageable. And Rob, I'll let Rob cover. Yes. So we kind of have just looking back over their history, part of your question was through the cycle. They performed very stable. They actually kind of the company started sort of near the beginning of the last downturn. So but their charge offs have been very stable throughout and in fact, in the early years, very low for a company like this. Our expectation is, and my thought process is around a 1% loss rate on that portfolio. Okay. Thanks for all the color guys. I appreciate it. Thank you. Our next question comes from Christopher Marinac of FIG Partners. Your line is now open. Thanks. Good morning. I had a similar question just kind of driving back to Navitas kind of historically. I mean, have they been sort of, I guess, cluing in on various indicators that are early warning indicators of the business in general? And is are any of those flashing from the last 90 days? So I would say no. There is some lumpiness in how the charge offs come through. And so you may see past dues come up a little bit and then some charge offs elevate and then next quarter back down. But we've not seen anything. One of the things that they do really well there is they refresh their scores through an industry bureau for equipment finance companies, and we've not seen any deterioration in the portfolio from that perspective. And then Rob, just a quick one on CECL. How will Navitas play out on CECL? Do you have a feel for that? Is that going to be any bit of a challenge relative to the rest of the portfolio? So our plan for CECL is to run 4 quarters parallel run-in 2019. So we'll begin to see some of the results of the CECL modeling probably early after end of Q1. Okay. So we can circle back in April on that. But in general, it's a fairly short portfolio. So it shouldn't have a significant CECL impact relative to the rest of the portfolio. Yes. So I'm a little hesitant to speculate on CECL impact, but I do agree with Lynn's comment 100%. That duration, I think, is everybody's talking about duration in the portfolio and the role that, that will play on CECL. And I think that's something that we'll have to study hard in the coming quarters. Very good, guys. That's helpful. Thank you very much. Thank you. Ladies and gentlemen, thank you for participating in today's question and answer session. I would now like to turn the call back over to Lynn Harton for any closing remarks. Well, thank you so much. I just want to thank everyone for joining the call and I hope you have a great day. Ladies and gentlemen, thank you for participating in today's conference. This concludes today's program and you may all disconnect. Everyone have a great day.