United Community Banks Inc (UCBIO) 2017 Q4 法說會逐字稿

Good morning, and welcome to United Community Banks' fourth quarter earnings call. Hosting the 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, pretax, precredit 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 fourth 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 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 statements should be considered in light of risks and uncertainties described on Page 4 of the company's 2016 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 will turn the call over to Jimmy Tallent.

Good morning, and thank you for joining our fourth quarter earnings call. I'm very pleased with our fourth quarter results. In fact, 2017 has been an exceptional year by nearly every measurement, from revenues to margins to operating efficiency and net income.

Our bankers excelled and produced strong results. We finished this year with an operating result of $1.63 for the full year, up 10% versus 2016 and up 14% versus last year when excluding the impact of Durbin. The earnings per share growth was achieved by an improvement in profitability as the operating return on assets moved to 1.09% and operating return on tangible common equity moved up to 12.2%. All measurements moved in the right direction, and we expect this positive momentum to continue in 2018.

For the quarter, we've posted a GAAP loss of $0.16 due to the remeasurement of our deferred tax asset following the passage of tax reform legislation. That noncash charge was $38.2 million or approximately $0.50 per share, which we will earn back in 4 to 5 quarters through the lower federal income tax rate. Excluding the impact of tax reform and merger and other nonoperating charges, we reported an operating result of $0.42 per share and operating return on assets of 1.10% and an operating return on tangible common equity of 11.9% and an operating efficiency ratio of 56.9%.

Our $0.42 operating result compares to $0.41 in Q3 and is up 5% from a year ago. Excluding the impact of Durbin and the large bank deposit insurance assessment, which reduced our quarterly pretax earnings by approximate $3.3 million, our results were up over 12% from a year ago.

This quarter is also highlighted by pick-up in loan growth, along with nice net interest margin expansion, and continues our journey to be in the top quartile of our peer group in profitability.

During the quarter, we were also busy on the strategic front. We closed our transaction with Four Oaks Bank & Trust on November 1. We're excited about our new teammates in the Greater Raleigh area and view Raleigh as a key growth market for us going forward.

Also, on January 8, we announced the acquisition of Navitas Credit Corporation. Navitas had a $410 million of assets at year-end and originated $323 million in loans in 2017. The Navitas acquisition represents the natural continuation of our commercial product build-out in the small ticket equipment space. The business is a great strategic fit as an add-on within our Commercial Banking Solutions unit, and the partnership works financially, being $0.20 accretive to earnings per share in the first full year.

All said, we had a very solid fourth quarter and a terrific year, leaving us well positioned to grow, compete and perform.

Now I'll ask Lynn to share the details of the fourth quarter.

Thanks, Jimmy. We are proud of both our results this quarter and the continuing strategic moves we are making to build the franchise. One driver of our results is the ongoing improvement in our margin.

On Slide 8, you'll see that this quarter, the margin expanded to 3.63%, up 9 basis points linked quarter and 29 basis points from a year ago. The expansion was driven by higher rates, an increase in our loan yield and benefit from the maturing of $35 million in senior notes. The strength of our low-cost deposit base continues to support our margin expansion.

Slide 9 exhibits that so far through the cycle, our deposit beta has been 8%, about half the industry average. Our cost of deposits, at 24 basis points in the fourth quarter, is about 3/4 of the industry cost of 31 basis points. Additionally, our strong liquidity position provides us the ability to fund future growth and is a competitive strength that we plan on continuing to leverage.

Turning to Slide 10, our loan production in the quarter was strong with $644 million of new loans funding, an increase of $27 million linked quarter. Total loans reached $7.7 billion in Q4, up from $7.2 billion in Q3, up 7% quarter-to-quarter. Excluding the impact of Four Oaks and the $42 million of our indirect auto runoff, core loan growth was $88 million or 5% annualized, which is a good improvement from last quarter.

We continue to strategically position the business for quality, diversified loan growth. Our C&I business at the end of the quarter totaled 39% of loans versus 23% precrisis. Conversely, investor CRE and commercial construction have moved to 30% versus 47% precrisis. Residential mortgages have increased as a percentage of the loan book, as we have introduced better adjustable-rate products we are holding on balance sheet.

Moving to Slide 12, we had a good quarter in our fee businesses as well with linked-quarter growth of $1.4 million. Our SBA production set a new record for us at $56 million, and we moved into the top 15 ranking nationally. Rich Bradshaw, Annemarie Murphy and our entire SBA and community banking teams have done a truly exceptional job on building the business to this level in just 3 years.

Mortgage also continues to do well, despite a more challenging interest rate environment and some of the uncertainty leading up to tax reform legislation. Our originations were up slightly year-over-year at $196 million, with purchase volume up $27 million and refinanced volume down $25 million. Our loans sold this quarter were down relative to a year ago as we are holding more of our adjustable-rate loans on balance sheet given their favorable credit and return characteristics.

On Slide 13, expense control and a focus on operating leverage continues to be a strength of the company. Total expenses were up $6.5 million in the quarter. But excluding the impact of Four Oaks and Horry County, operating expenses were up $2.2 million versus Q3. The operating efficiency ratio moved to 56.9%, just slightly higher than last quarter. The increase was primarily driven by professional fees and incentive accruals, and we feel good about continuing to move the efficiency ratio down.

Turning to Slide 14. Our rebalancing of the portfolio continues to pay dividends with strong credit results. Net charge-offs were 6 basis points, marking the sixth consecutive quarter of 11 basis points or better performance. And nonperforming assets came in at 23 basis points, essentially flat with the last 2 quarters and down 5 basis points from a year ago.

I'm very excited about the 2 major strategic moves we either closed or announced recently. Our Four Oaks team in the Raleigh area of North Carolina is performing ahead of expectations, and our new hires in Raleigh, led by Jim Rose and John Lowe, have already built a very impressive pipeline. Navitas also promises to be a great partnership.

Given our liquidity, core funding and desire to build our commercial product set, we have been looking to add additional high-growth, niche lending businesses to United. Navitas is the right company with the right management team to help us reach some of those goals. Led by industry veteran Gary Shivers, the management team averages 25 years of experience in the business and also promises to be a strong cultural fit with United.

In addition to their own growth opportunities, Navitas will have significant synergy with both our SBA business and our local community banking customers. Navitas offers very attractive risk-adjusted returns. It will add 200 basis points to our rate of loan growth, and our funding strength nicely complements Navitas' needs. Initially, the combination increases our loan-to-deposit ratio to just 83%, and the continuing runoff of our indirect portfolio will fund the growth of Navitas.

We expect the deal to close February 1, and believe that the deal is $0.20 per share accretive and adds 9 to 10 basis points to ROA in the first year.

Overall, our teams continue to execute our strategies very well, and I'm very positive about our performance going into the new year.

And so with that, Jimmy, I'd like to turn it back over to you for any closing comments.

Thank you, Lynn. I feel really good about the continued execution of our strategies and our performance as we move into 2018. I want to take just a moment to lift up just a few of the many accomplishments that our team achieved in 2017.

We became regulated as a large financial institution in the third quarter and absorbed the financial impact of Durbin, DFAST and the large bank deposit insurance assessment without any decrease in earnings per share or decline in return on assets.

We completed 2 bank acquisitions and converted 1 of those banks to our core systems. Both of these banks are solid cultural fits, and they operate in strong growth markets that are a natural extension of our footprint.

In early 2018, we announced another merger with Navitas Credit Corporation, which will significantly expand our Commercial Banking product offerings and provide a strong source of growth.

All 3 of these transactions are immediately accretive to earnings per share, with Navitas expected to be $0.20 accretive in the first full year.

We saw solid improvement in nearly every financial performance measure. Credit quality remains outstanding, and we continue to diversify our loan book, which is a key strategy in our management of credit risk. Our operating efficiency ratio improved 111 basis points. Our margin was up 16 basis points. We achieved positive operating leverage of approximately 2%. We increased our dividend 27%, and still, our payout ratio remains at the lower end of our peer group.

Our strong core deposit base has allowed us to manage deposit pricing to improve our margin and demonstrating the tremendous value of our core deposit base.

Clearly, 2017 was a very good year for United. And as I look forward to 2018, I'm filled with optimism as all of the 2017 drivers are still in place today.

Our balance sheet remains very liquid and flexible, even with the addition of Navitas, with a pro forma loan-to-deposit ratio of 83%, providing lots of room for additional loan growth. Our investment into new products and new geographies positions us for further loan portfolio diversification and growth as well as leads to expected improvement in both return on assets and return on tangible common equity.

We entered 2018 with strong earnings momentum resulting from being in high-growth markets with competitive products and bankers who are the best in the business at serving their customers and executing on our strategies.

Tax reform and an improving economy will give us an additional tailwind, as will our new merger partners with whom I look forward to a long and prosperous relationship. While we do not usually provide guidance, there are enough significant moving parts this year, with earnings momentum, tax reform and Navitas, that we want to provide some clarity and direction.

For 2018, we are expanding our goal post for our expectations and believe we can achieve a 1.40% return on assets and 16% return on tangible common equity.

Lastly, we are hosting an Investor Day on February 22 in Greenville, South Carolina, where we will be talking about our businesses and introducing investors to many of the leaders in the organization. Please reach out to Jefferson if you have an interest in attending.

Now we'll be glad to answer questions.

(Operator Instructions) And our first question will come from the line of Michael Rose from Raymond James.

So obviously, a really good deal with Navitas, so that, obviously, is just going to add to the Commercial Banking Solutions group. As we think about that moving forward, is there kind of a size threshold that you want to limit some of those businesses to, I guess, in the aggregate as it relates to the core portfolio relative to the community banking asset that you guys have?

Hi, Michael, this is Lynn. No, not really because even though we have it separately, I mean, these are -- the Community Banking Solutions businesses are really local commercial businesses. So with the exception of SBA and now Navitas, essentially, everything else is in-footprint local customers, and so it's really no different in any other C&I book of business.

All right. And just as a follow-up to the Navitas deal, I think we have talked about charge-offs being 70 to 80 basis points higher. Is that still a good way to think about it as we move forward?

Yes, Michael, this is Rob. That's the way we're thinking about it going forward.

Okay, that's helpful. And then maybe just one broader one for me. I appreciate you, Jimmy, laying out the targets. What would cause you to be above those targets? And maybe what would cause you to fall short? Is it rate hikes? Is it loan growth and maybe payoff activity, which has been elevated in the industry? Is it further investments in the franchise? Just any color there would be helpful.

Thank you, Michael. And you've kind of answered that question, I think. But yes, I think, certainly, our expectation going into '18, loan growth being more today than what we are expecting, obviously, would be very favorable and moving those numbers and expectation even higher. Certainly, short of that would just do the opposite. We think, too, in regards to the margin, we really feel reasonably comfortable. I mean, nobody knows what the rates will ultimately do, but given the optionality of our balance sheet, loan-to-deposits of 83%, post-Navitas, our securities will run off of our auto finance and so forth, we think we are able to protect that margin and hopefully, expand that. But we're optimistic about 2018.

And our next question comes from the line of Tyler Stafford from Stephens.

I wanted to start with the profitability goals that you guys just set. I appreciate that, and it looks like it'll be a good year for you guys. I just wanted -- just to clarify, is that a full year '18 goal? Or is that kind of a "by the end of the year" kind of run rate goal?

Tyler, I would answer it this way. If we are looking to hit those numbers for Q4 of '18, we're very confident. If we're looking at those for the entire year, we also believe they're very doable.

Okay. Very good. And I apologize if I missed this in the release or an earlier 8-K, but did you guys guide to the tax rate for -- that you'd expect for 2018 yet?

Tyler, thanks for the question. We're expecting 23% to 24% to use as a tax rate in 2018.

Perfect. And then maybe just on the loan growth commentary about the 200 bps added from the Navitas. Obviously, in the near term, the indirect runoff is pressuring the growth. So I mean, as you kind of look out, does Navitas get you back towards that, I don't know, kind of a high single-digit growth that you guys have seen prior to the indirect runoff? Is that kind of the right way to think about it?

Yes. I would say mid to high. So Navitas almost dollar for dollar offsets the indirect runoff. So effectively, it takes that kind of 2% to 3% off the table, if that makes sense. And with the underlying loan growth rate, just like last -- this quarter, we were at 5%, somewhere in that 5% to 7% range.

And our next question comes from the line of Jennifer Demba from SunTrust.

Two questions on Navitas. How big are you comfortable having Navitas as a percentage of your entire portfolio over time? And then secondly, can you just talk about your acquisition interest now post-Navitas, whether it'd be for a bank or a specialty lending line?

Sure, Jennifer, this is Lynn. So we think that, over time, Navitas is a $1 billion business for us, but that's over probably a 4-year time period from now. So we think it's a very manageable piece of the loan portfolio and somewhere in the 7%, 8%, 9% range over time, very comfortable with that. In terms -- I'll let Jimmy talk about the bank acquisitions. But in terms of nonbanks, I think we're -- right now, we're very, very focused on getting Navitas right, the integration of that. And so we would not, in my mind, be looking for anything in that area.

So -- and I certainly agree with Lynn. I mean, today, we're obviously, wanting to make sure we get the Navitas closed, integrated properly. There's a lot of very favorable things from the Navitas acquisition, not only on just the standalone basis, but [that] also complements our other lending products. And certainly, we got the Four Oaks that will have the conversion in April. But our overall strategy, Jennifer, on the M&A with banks really hasn't changed. Same strategy. If it occurs, it would possibly look like a fill-in or maybe an overlap market where we can take significant expense out, new markets. And certainly, the metrics are the same, immediately accretive as well as any tangible book dilution would be in less than 3 years. So really, none of that has actually changed.

Okay. And I just -- a clarification on your ROA and ROTCE goals, so that -- those were for the full year? And does that include any rate hike assumptions?

There's no rate hike assumptions there, but it does -- as I said earlier, if there is what we believe to be very -- we're very confident that those numbers can be posted in the fourth quarter of '18, and we believe there's a very good probability that those numbers could be posted for the entire year.

And our next question comes from the line of Brad Milsaps from Sandler O'Neill.

Jefferson, you got a lot of moving parts in the first quarter with Navitas coming on. You got the conversion of Four Oaks. Kind of curious where you think expenses might level out, maybe in the first quarter, and then kind of where you see them running for the rest of the year as you kind of get all the cost saves out that you're looking for.

I might give that to you in parts a little bit. We have -- if you think about our fourth quarter, that growth rate is -- was above the rate that we have been seeing. As Lynn had mentioned, there were some incentives and some professional fees in there for some projects in 2018 that we got in front of a little bit there. So I think -- think of us having a kind of a low single-digit core expense rate. Then you -- obviously, you're overlaying Navitas on top of there. Navitas brings over about $400 million of loans when it comes. The expenses of Navitas are about 5% of loans there. So think of the expenses, you have to layer that into the first quarter with a February close. But think of Navitas having about 5% of loan expenses, and that will -- balances growing throughout the year.

That's helpful. And just kind on that same vein, you've obviously got some very good momentum with the NIM to end the year and going into '18. Obviously, Navitas will give that a nice boost. You'll get another month of Four Oaks. Can you talk a little bit about kind of the puts and takes on the NIM as so you see it?

Yes. So I think that from a core perspective, that 3.63% margin is a good spot. But then you're overlaying Navitas' margin that comes in running about 6%. Now we get to go and refund or fund, pay down over $200 million of their -- of borrowings immediately. And so their 6% margin goes up with -- taking out their -- 60% of their 3.5% debt with our more -- or less expensive funding. So layer in a 6% margin for Navitas. That should grow over time as we fund their growth and as we kind of fund all their interest-bearing liabilities over time.

And our next question is from the -- comes from the line Catherine Mealor from KBW.

Maybe one clarification on the margin guidance that you just gave, Jefferson. So can you help us think about how much kind of in Q1 we should expect from Navitas coming over? And then what the upside from that on the basis points is as we move through the year in the funding? And you need it to grow, but you're growing at a higher margin.

Yes. Let me give you some more components to that. So the Navitas loans, think of them yielding about 9.5%. Their funding currently is about 3.2%. And that 3.2% funding should move towards 2.2% over time and then even lower as we move -- as we get through funding more and more of their growth and funding their -- refi-ing their securitizations. If you think about it in basis points, our 3.63% margin, I think, would be over 3.70% in Q1. And then once you get the full impact of Navitas in there, I think it would be over 3.75%.

Got it. Okay. And then that guidance doesn't include another rate hike, so then you would expect to see even further upside to your margin if we see the Fed move again this year.

That's correct. We still think we are asset-sensitive. We do think our deposit beta should stay lower than peers with our balance sheet flexibility. So we don't have that in our model, but we do think that we would get some benefit from future rate hikes.

That's great. And then one -- switching over to capital management. I mean, the Navitas deal really looked -- helped leverage some of your excess capital. But you're sitting, I think, pro forma for that deal at about just a smidge under 9% from where we calculated. And so how do you think about -- and then you're going to be accreting capital at a faster pace now the you're moving towards a 16% ROTCE. So how do we think about capital management from here, both in terms of growth, M&A and maybe dividends?

Yes. Thanks, Catherine. So it had been a goal of ours to steepen our capital structure a bit. The -- if you think about where we were -- where we are now before Navitas closes, the difference between our CET1 and total capital ratio is about 100 basis points. In Q1, with the Navitas transaction, that's going to be over 200 basis points differential between the CET1 and the total capital ratio. And that's a big piece of putting $85 million of cash into the deal and then raising $100 million of sub debt in the quarter. So yes, my calculation is very similar to yours, just a smidge under 9% on the TCE. We think we could -- that is going to go on relatively quickly, but we think we could run that a little bit lower. So we like where we are now. We like what the Navitas transaction does for us and ability to lever some of our capital and get more towards an optimal capital structure. And over time, you're going to see these capital ratios continue to grow. We think we could run that TCE a little lower, but we like where we are and it's going to be growing from here. So we'll be looking to do some capital management types of things over time. Jimmy mentioned our dividend. We are in the lower range of our payout. So I think it's not a -- it's a board decision, not a CFO decision. But I think you'll see us target a higher payout over time. And I think even in future deals, putting some cash into those deals will continue to make sense to manage that TCE to a level where it is now.

And our next question comes from the line of Christopher Marinac from FIG Partners.

I just want to ask Lynn or whomever about new hires in Raleigh and other markets, both in terms of what's new but also kind of what you envision for the next 12 and 18 months.

Sure. Yes, we actually have just made another new hire in Raleigh we're very excited about as well as another new hire in Myrtle Beach. So we just continue to recruit in all of our businesses. We don't have any new LPOs or geographies targeted, but we continue to look in areas like builder finance in our middle-market group, asset-based lending, et cetera. So we would expect the same kind of hiring progress in '18 that we've made this year.

Great. And do you see adding more branches this year? Or would the branch count, in terms of footprint, kind of be net neutral? I'm just curious in terms of where you're closing and expanding.

Yes. So we actually have announced we're closing about 4 branches in the first quarter. We don't have any new branches on the construction list today, although we are looking for a better Raleigh location for our team. So that might be one that we combine with a new branch. But beyond that, we're not really looking at any branch expansions.

Okay. Great, Lynn. And just the last one, I guess, for Jefferson or Jimmy or whomever it is. Now that you're at a higher profitability level and ROA and the higher price targets, does it -- or higher targets for profits, does it make it more of a challenge to do the incremental M&A deal? Or does it become easier just because you can leverage it more?

Well, I think, certainly, with -- stronger financial and profitability metrics should lead to a stronger and larger share price. And assuming that did occur as we believe it will, probably would lend itself to being able to do deals that are more beneficial from a shareholder standpoint. But we're going to continue to be very disciplined in the approach. There's opportunities in markets that maybe we're not in that we desire to be in, but we'll just kind of take those one at a time, Chris. But bottom line is a [stronger currency] would certainly make a -- the M&A continue to be even more compelling.

And our next question comes from the line of Nancy Bush from NAB Research.

Just a question, Jimmy, for you. It's sort of philosophical and part financial. There were several articles in The Wall Street Journal, I'm sure you saw them, at around year-end about the rural markets, how banks are exiting rural markets and closing branches, et cetera, and the damage it's doing to some of these region -- rural economies. I just wanted to get your thoughts on that. I know you are in, as you said, fast-growing urban markets, but you're in a lot of rural markets as well. How do you look at that presence?

So if we look at our footprint, Nancy, today, 82% of our footprint resides in an MSA. So of course, the balance would be considered rural. What we have found is those markets are -- for us, are very, very profitable. They have very solid, very dependable core deposits. And with that, obviously, in the funding, is extremely valuable. So we're proud of those markets that we're in. They are really kind of -- [happen] to be the foundation to get us to where we are. We will not see the lending growth possibilities there that, obviously, you're going to see in the metro markets, but it's the beauty of having kind of the best of both worlds. There's some lending opportunities, fabulous core deposits that are very stable and dependable and profitable operations, which helps us to fund lending opportunities in the metro market. So we see that as a key part of who we are.

Well, I would ask, you and I have discussed this issue along the way of buying rural versus buying urban. And given that core funding may become more valuable in the future, I mean, is it possible that you will once again acquire in rural markets?

Well, at an 83% loan to deposit today, and even if we took that to 90%, that's another $700 million of loans. So I would never say never. But we do think that the asset generator today is important. And certainly, when you look at our core deposit growth, even in 2017, it was a little over $600 million. So -- and that's coming from both parties, rural as well as metro. So in this business, it's hard and maybe one should never say and never, but certainly, our focus would be more on the metro markets today.

And our next question comes from the line of Tyler Stafford from Stephens.

Just a couple of other follow-up questions on the fee income. Do you have how much the positive mark on the servicing asset was this quarter that drove the uptick in the mortgage fees? And then just the dollar amount of SBA and mortgage sold or sales during the quarter?

Yes, this is Jefferson. So on the mortgage piece of it, in the fourth quarter, we had a $372,000 rate up in the mortgage servicing rate. And in the third quarter, just for a reference, we had a $400,000 rate down. So that run rate is more in that mid-$4 million range going forward. And the amount sold of SBA this quarter was $44.7 million.

How much for mortgage sold this quarter? Do you have that handy?

I might have to get you that. I don't have that number. I can get you that number.

And our last question comes from the line of Brad Milsaps from Sandler O'Neill.

Jefferson, I just want to follow up with your kind of expense guidance related to the acquisition. Did I understand correctly, you said 5% of the $400 million in loans is roughly what expenses would represent?

That's right. That's correct.

Okay. All right. I thought I understood this well, and maybe it's -- I'm just missing it, but -- so if you had a gross yield of $40 million on the loans and you're bringing over $20 million in expenses, where is the -- I guess, the assumption is your cash is coming from somewhere else to pay off the -- to pay off their funding, because under that math, I can't quite get there, I guess. It doesn't seem like there's quite enough accretion with $20 million in annual expenses, but I may be missing something and likely so.

So let's -- maybe we'll take that piece of it offline, and we can walk through -- we can walk you through the model there.

And I am showing no further questions at this time. I would now like to turn the call back to Chief Executive Officer, Jimmy Tallent, for closing remarks.

Thank you, operator. And on behalf of all of us here today, we want to thank you for being on the call and certainly, your interest in United Community Banks. Any additional follow-up questions, don't hesitate to reach out to any of us.

Also, too, a reminder of the Investor Day on February 22. If you do or would like to attend, please let Jefferson know. And I think that will be a great day and a time to really see firsthand, face-to-face with a lot of the management of this company.

And last but certainly not least, I want to thank our United team once again for a great quarter and a great year.

And with that, we 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 great day.