Morning, welcome to United Community Banks' first quarter 2018 earnings call. Hosting our call today are Chairman and Chief Executive Officer, Jimmy Tallent, President and Chief Operating Officer, Lynn Harton, Chief Financial Officer, Jefferson Harralson, 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 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, 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 statement should be considered in light of risks and uncertainties described on page four of the company's 2017 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 Jimmy Tallent.
Good morning, 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 two 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 the year-ago quarter.
The EPS growth was accomplished by an improvement in profitability as the operating return on assets moved to 1.33%, 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, 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 run off 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 the 1st, we announced the completion of our acquisition of Navitas Credit Corporation. Navitas had $527 million of assets at the end of the first quarter, and they are 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 Lynn to share the details of the first quarter.
Thanks, Jimmy. We are proud of both our results this quarter and the continuing strategic moves we are making to build our company. If you want to follow along with me, I'll start on page eight of the investor deck. There you'll note a significant increase in our margin, up 17 basis points linked quarter and 35 basis points from a year ago. Navitas added 10 basis points of 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 nine, 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 one basis point on a linked quarter basis.
Our core deposit base continued 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 our 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.
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 in 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 to 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 eight basis points, marking the seventh consecutive quarter of 11 basis points or better performance, and non-performing assets came in at 24 basis points, essentially flat with the last four quarters. Our $3.8 million in provision expense this quarter was impacted by a one-time initial provision for Navitas. The Navitas portfolio was actually marked at a 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 1st and promises to be a great partnership. We are on track toward the $0.20 EPS accretion and nine to 10 basis points added to ROA in the first year, which we announced earlier. I'd like to close with a review of what our team achieved in the first quarter of 2018.
Both 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 am 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. With that, Jimmy, I'd like to turn it back over to you.
Thanks, Lynn. 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 the 2nd, we announced that I was reducing my role to Executive Chairman of the Board, and that Lynn will become the CEO of United on July the 1st.
It is absolutely the right time for this transition, and I'm looking forward to serving in my new role. Lynn'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 am so proud of you and what we've been able to accomplish together. Now, we will be glad to answer any questions.
Thank you. Ladies and gentlemen, if you have a question at this time, please press the star and then the number 1 key on your touch-tone telephone. If your question has been answered or you wish to remove yourself from the queue, please press the pound key. Once again, to ask a question, please press star and then 1 now. Our first question comes from Michael Rose from Raymond James, your line is open.
Hey, good morning, guys. How are you?
Good morning, Michael.
Good morning, Michael.
Hey, just wanted to touch on your comments, Jimmy, about the profitability targets. It does seem like you guys could actually exceed those as we move into the back half of the year. Can you guys give just some color around what would be the biggest contributors to you meeting or exceeding that outlook for profitability and then the things maybe that could detract from it the most? Thanks.
Jefferson, you want to?
Yeah, I'll start with that. 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 it or not. I do think that this quarter was very good in getting us on the route to that 1.40 ROA . I think we've made good progress, and we are set to achieve those goals.
Okay, that's helpful. Maybe just switching gears a little bit to M&A. There's been quite a flurry of activity in the Atlanta market in the past few weeks. How does that change your appetite for potential opportunities in the Atlanta market? Might there be some other areas of the footprint where you'd be more focused at this point?
Really, Michael, it doesn't change our strategy at all. The markets that we have indicated in the past within the entire four-state region in which we operate in is 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. We're going to remain very disciplined which includes the pricing and identifying the cost saves that we certainly have total confidence that we are able to achieve integration. Then, of course, the growth on a pro forma basis. There's a lot of markets that we have strong desires in within those four areas or four 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.
We'll remain disciplined, and I think our history has proven that when we do make an acquisition, that what we say, we do execute.
All right. Thanks for the color, Jimmy. Maybe just one more for me. You guys have continued to highlight, and rightfully so, your deposit base and lower loan-to-deposit ratio. I think you guys are one of the few companies that actually had a positive mix shift this quarter in the deposit book, and costs were obviously very well contained. Can you give us your expectations for betas as we move forward with future rate hikes and what other deposit strategies maybe you've put into place more recently or what you're focused on here that would keep those betas low and would keep that loan-to-deposit ratio lower than peers? Thanks.
Yeah, thanks. This is Jefferson. I'll start with 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. With our balance sheet mix, some of the things that we're going to do to help fund the bank this year is we're going to be shrinking the securities portfolio a bit. I would think about, call it $20 million a month or so. Layer on top of that, we have the indirect portfolio that's shrinking 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.
I think a 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 on the marketplace there. We think 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.
Hey, thanks for all the color, guys. Much appreciated.
Thank you, Michael.
Thank you. Our next question comes from Jennifer Demba from SunTrust. Your line is open.
Hey, guys. This is actually Steve on for Jenny. First question, just on Navitas. What are you guys looking for kind of growth for the year? Any kind of portfolio remixing you have to do as well, or can that just grow from here?
This is Jefferson. I will start with that one. We are expecting about $10 million-$12 million a month in Navitas growth. This quarter, we were a little higher than that at $44 million for the first two months. We still think that 10 to 12 number per month is a good number to think about. So for the remaining nine months, that would put you at $90 million-$95 million for the rest of the year. There is 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.
Okay. Then the Navitas financing you guys have there, is there any way to kind of speed up the change to more bank financing from securitizations, or is that going to kind of just have to roll off?
Yeah. That Navitas securitization debt will just roll off naturally as those loans pay down or prepay. There's nothing that we can do to accelerate that.
Okay. Any timing on how you guys expect that to roll off?
It's a natural. They have their four-year loans, they're rolling off at a predictable, natural pace. There's two securitizations left. One is getting relatively small. By June or July, we'll be able to do a cleanup call, we think, on the smaller, older origination or securitization. From there, we'll just have one left that should go into next year.
Thank you.
Thank you. Our next question comes from Brad Milsaps from Sandler O'Neill. Your line is open.
Hey, guys. This is actually Peter on for Brad. I just wanted to kind of touch on maybe expenses. Most of my other questions have been answered, but obviously, a little bit of a noisy quarter from considering the deal closings and the conversion and whatnot. Where do you kind of see the expense trajectory going from here? Is it closer to the low $70 million range, or what are the impacts here with the systems conversion and all of that?
Yes. This is Jefferson Harralson, again. I'll start you out with the $71 million base that we reported this quarter. We have the full quarter of Navitas in Q2. That'll add an extra million, one or two for Navitas expenses. Put that number as the Q2 base, I would grow it from there at a natural rate. Keep in mind, too, 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. I would think of it as a $72 base with core growth on top of it.
Okay. That makes sense. I guess just your commentary seems incrementally more optimistic on loan growth. Does it seem like kind of year-over-year growth can maybe accelerate closer to a high single-digit pace? What are really the drivers behind that? I know Navitas is obviously a positive there, and you see some long-term opportunities, are you seeing anything specific in your markets that are making you more optimistic at this point?
Peter, this is Lynn. Typically, the first quarter is seasonally low for us on loan growth. As we even intra-quarter, 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. 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, Raleigh, Horry County, are picking up. Navitas is very strong. Senior living is doing very well. Renewable energy is getting some traction. The only question is kind of the broader economy and how that goes. Those are some of the things that we're seeing.
That's great. Okay. Thanks.
Thank you. Our next question comes from Catherine Mealor from KBW. Your line is open.
Thanks. Good morning. Can we talk about the margin a little bit? It felt like your core margin came up. I guess almost it modeled to where almost I thought it would be with a full quarter of Navitas. I think we've still got a month of Navitas to help the margin as we move into next quarter. Can you just kind of give us an updated outlook for where you see your core margin going for the back half of the year? Thanks.
Yep. Thanks, Catherine. With the 17 basis points of increase this quarter, again, 10 of that was Navitas for a two-month impact, and seven was the core bank. We do think Navitas will continue to impact the margin similarly, given the three-quarter piece of it. All things equal, that would tell you we have an up margin next quarter, and the Navitas impact should be roughly five 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 this loan-to-deposit ratio should be increasing over time. We do have securities shrinking and loans growing as a remix. We have a remix slowly away from the Navitas securitizations as well.
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 380.
Got it. Okay. You've got another five basis points from a full quarter of Navitas, and then for every rate hike from here, maybe a little bit less than that seven basis points you saw this past quarter, just given the competition on the loan side.
Yeah. 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. For the rate hikes, I'd say less than half of that 7 for future rate hikes.
Got it. Okay. That's helpful. Back to the expenses, do we have any further cost savings from Four Oaks, or is that fully in the run rate this quarter?
We think we have about 75%-80% of the Four Oaks expense savings in the run rate now. We did just do the conversion in April, we should start seeing the rest of those come through now. Or May. May and after.
Got it. Great. That's all I got. Great quarter, congrats to both Lynn and Jimmy on your new roles.
Thank you.
Thank you.
Thank you. Our next question comes from Tyler Stafford from Stephens. Your line is open.
Hey, guys. This is actually Gordon McGuire on for Tyler this morning. How are you all doing?
Good. How are you?
Doing pretty well. I just wanted to start with, I think there was some commentary in the release around the reserve ratio declining slightly from here. I was just wondering if you could kind of talk around the dynamics around this expectation and specifically what you're expecting for charge-offs and provisioning levels for the Navitas growth.
Rob.
Yeah. In terms of charge-offs for Navitas, I'm thinking about that in terms of a four basis point add to us. 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, then four 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 three things, asset quality. We did cover our charge-offs on the core bank, and would expect to continue to cover charge-offs to including Navitas. Asset quality is a component, loan growth is a component, so that would play a role in it. Of course, the portfolio mix is the third component.
We continue to reduce land, which has a historically higher reserve than maybe some of the other products we're adding in. That, of course, also plays a role.
Just later in, this is Jefferson. We did set aside that $2.3 million of the one-time startup 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 capability for Navitas loans going forward, which is about 1.7% of loans, which is about two years of losses set aside at the current loss rates.
It's hard to keep track of all this, if you're looking at the allowance of $61 million at quarter end, there's an additional just shy of $54 million in credit marks. A fairly large number, which includes the $3.9 that Jefferson just mentioned.
Sure. Thank you. Jumping over to fees, I think in the other fee line, there seemed to be a decently sized jump. I think some of that was carryover from Four Oaks, is that where you're putting the servicing from Navitas into?
That's correct. This quarter, we had an $800,000 increase of Navitas fees that was almost solely in that other line item. That number with a full quarter impact will increase, should increase again next quarter.
Okay. Can you talk around that servicing fee aspect, and then just the growth on that? Should that grow commensurate with their portfolio?
Most of those fees there, I guess the servicing fee would be a very 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. The primary piece of that is fees they charge in their normal everyday business. The SBA servicing fees would be very small.
Okay, perfect. Thank you.
Thank you. Our next question comes from Christopher Marinac from FIG Partners. Your line is open.
Thanks. Morning, everyone. I wonder if you could expound on the loan to deposit ratio as the gap narrows between where UCBI is and the peers. Are you comfortable going back to where the peer level is or maybe in the future, or is there an area where, whether it's above 90 or what have you, where you start getting that discomfort, and particularly as you look at other possible transactions outside of just organic growth?
I can run with that one. It's a great question, Chris. One we talk about quite a bit. Currently we're targeting a 90% loan to deposit ratio. We think we can slowly move this 82 towards 90 over time. Possibly an acquisition could help us move there like Navitas. Last quarter when I was on the call, we were talking about this 79% ratio going to 84, or 80 going to 84, all things equal. This quarter, we did make some progress going to 82, the deposit growth was very strong. There's several components in moving that loan to deposit ratio up. We feel 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, we hope to make progress on that loans to deposit ratio this year.
That 90%, too, Chris, just to square that, would be about $700 million of additional loans.
Great. That's helpful, guys. Thank you. Just a separate follow-up. When we look at the map, I think it's on page four of the slide deck. Is there interest in getting deeper into Florida, but doing it sort of organically without having to do a bunch of acquisitions and perhaps just hiring teams, doing things on the ground, just incrementally give you additional presence there?
Not at this time. We would certainly like to be in Florida. It's very difficult to do an LPO in a market where you don't have an on the ground brand. So I'd probably stay away from that at this point. If we had the right opportunity, again, we wouldn't turn it down, it's not been a focus and not a strategy at this point.
Got it. Great. Thank you, Lynn. Appreciate it.
Thank you. I am showing no further questions from our phone lines. I would now like to turn the conference back over to Jimmy Tallent for any closing remarks.
Thank you, operator. 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. To our teammates that are on this call, let me just once again say thank you and congratulations on another great quarter. With that, hope you all have a great day.
Ladies and gentlemen, thank you for participating in today's conference. This does conclude the program, and you may all disconnect. Everyone have a wonderful day.