Earnings Call Transcript - UCB Q4 2021

Operator, Operator

Good morning, and welcome to United Community Bank's Fourth Quarter 2021 Earnings Call. Hosting the call today are Chairman and Chief Executive Officer, Lynn Harton; Chief Financial Officer, Jefferson Harralson; President and Chief Banking Officer, Rich Bradshaw; and Chief Risk 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 Pages 5 and 6 of the company's 2020 Form 10-K, as well as other information provided by the company in its filings with the SEC and included on its website. And now at this time, I'll turn the call over to Lynn Harton.

Lynn Harton, CEO

Good morning, and thank you all for joining our call today. I'm very proud of what the United team has accomplished during the fourth quarter and really all of 2021. First, our financial performance continues to be strong with a 110 basis-point return on assets and a 13.9% return on tangible common equity, both on an operating basis for the quarter. During the fourth quarter, our teams delivered strong annualized organic loan growth of 7% and 17% annualized organic deposit growth. Our cost of deposits dropped by 1 basis point during the quarter and now stands at only 6 basis points. Credit results continue to be excellent with net charge-offs of only 1 basis point for the quarter, allowing for a small reserve release during the quarter. Our operating efficiency was 56.5% even with a somewhat higher expense base, both from organic and acquired growth. And strategically, we completed the acquisition of Aquesta in August, and we completed systems conversion in mid-November. Our wealth management line of business strengthened by the addition of FinTrust this past summer is performing well, and our assets under advisement now stand at $4.7 billion. And finally, our Reliant acquisition closed on January 1, and we're now on track for systems conversion in April. I'd like to extend a special welcome to the Reliant team, Devan, John, Mark, all the leaders of Reliant, have built a great team that will make United better, not just bigger. Reliant has been a multiple year winner of Best Places to Work and has been recognized as the best performing small bank in Tennessee for several consecutive years. We're very excited to have them join United. So once again, welcome to the entire Reliant team. I'm proud of what our people have been able to accomplish this year, and I'm also grateful for the quality of the teams that have joined us, and the opportunities that our new markets and lines of business have brought this year. We're entering 2022 with great momentum, thanks to the hard work of the entire United family. And now I'd like to turn it over to Jefferson for more details on the quarter.

Jefferson Harralson, CFO

Thank you, Lynn. I'm going to start my comments on Page 8 and discuss the loan portfolio. The loan portfolio was positively impacted by the addition of the Aquesta loan book as well as the ongoing forgiveness of PPP loans. Excluding these offsetting factors, we grew loans by $190 million in the fourth quarter, which was at a 7% annualized pace. This is our strongest growth of the year and encouraging for 2022. Our strategy for the portfolio is for it to be diversified, C&I-heavy and granular, and you can see the statistics on the bottom of the page. Moving to Page 9, it shows our deposit growth, which was also impacted by Aquesta. We've had strong growth all year with $2.4 billion of increases, which is 15% annual growth. That growth momentum continued in the fourth quarter with $718 million of organic deposit growth or 17% annualized. Moving to Page 10. Our strong deposit growth from both 2020 and 2021 creates a nice opportunity for us in the medium term. Our loan-to-deposit ratio has moved down to just 64% from 81% at the end of 2019, and our average cash balances in Q4 were $2.3 billion, up $557 million. We think we have a big opportunity to improve our margin and ROA, as we grow back into our balance sheet in 2022 and beyond. Moving on to Page 11, we talk about capital. We have been intentional in how we manage capital. In May of 2020, we raised $100 million of preferred equity to steepen our capital stack. And in 2021, as we understood COVID more, we started putting capital to work. In 2021, we paid down $66 million in debt and Tier 2 capital. We raised our dividend by 11% year-over-year. We repurchased $15 million of our own shares and included $40 million of cash in the Aquesta deal that closed this quarter. Also, with Reliant closing in Q1, we still believe that we'll be in line with peers with our capital ratios. Page 12 highlights our net interest income and margin trends. Our net interest income is impacted by PPP fees and loan accretion. If you adjust for these and the Aquesta deal, we were pleased that our core spread income grew at approximately 8% annualized in the fourth quarter. Our core margin compressed 5 basis points as our 17% annualized deposit growth pushed our average cash position up by $557 million in Q4. Excluding this cash build, our core margin was relatively flat. On Page 13, if you look at fee income, which was down $2.9 million from last quarter, mainly driven by normalizing mortgage income. Specifically, mortgage fees came in at $10.9 million, in line or a little above our expectations as volume declined. Partially offsetting the margin decline was an increase in the gain on sale of other loans. Specifically, the fourth quarter is typically our strongest quarter for SBA sales, which came in at $3 million, and we had just under $1 million in gain on sale of Navitas loans as well. I would like to talk about our service charge outlook in 2022 a little bit. UCB, like a lot of banks, made changes to our overdraft program to make it more customer-friendly. Specifically, our customers now get their first overdraft of the year automatically forgiven. And now we don't charge for overdrafts if the account stays within $20 underwater. This is compared to a $5 threshold before. And we have put limits on the number of overdrafts that can occur in a single day at 3; before, this limit had been 8. All said, we think this could cost us $2.7 million in 2022, but there could be offset in the form of fewer waivers and hopefully, higher customer satisfaction. We think we are doing the right thing for our customers and our business. Page 14, we look at expenses that were higher in the quarter, primarily driven by the addition of Aquesta. We completed the Aquesta conversion in November and got some of our expected cost savings in Q4. And we believe that we will be on pace for the full cost savings run rate here in Q1. Moving to Page 15. We are 95% complete on PPP forgiveness, and we have $1.8 million in fees left to recognize. We will hopefully be through the forgiveness in Q1, and perhaps this slide will even come out next quarter. Page 16, quickly. Credit quality was stable and strong in the fourth quarter, as we had negligible net charge-offs in the fourth quarter. Moving on to Page 17. I'll just make a comment that our special mention and substandard loans are stable to improving, and we are encouraged about 2022. Finally, on Page 18, you can see our waterfall chart for the change in allowance for credit losses. We had a $647,000 release of provision in Q4. The release was driven by a $3.3 million Aquesta double dip, netted by a $3.9 million core reserve release. The chart shows the components of the change in our reserve, which includes a $3.6 million day 1 reserve increase from Aquesta PCD loans that went straight into the reserve without going through the provision. And with that, I'll pass it back to Lynn.

Lynn Harton, CEO

Thank you, Jefferson. I mentioned that we were entering 2022 with momentum. We've got four primary measures of success at United, and this is a good time to look back at 2021 to see how we did. The first measure is to be a great place to work for great people. And this quarter, United was once again named one of the Best Banks To Work For in the U.S. by American Banker and Best Companies Group. This is the fifth consecutive year the bank has been selected for this list. Our second measure of success is to provide class-leading customer service. And our teams delivered that in 2021 as well with another year of recognition by J.D. Power for having the top retail banking satisfaction score in the Southeast and the second highest Net Promoter Score among all of the top 100 publicly traded banks in the country. Our people truly care, and it shows. Our third measure of success is top quartile financial performance relative to peers, and we believe we have delivered that in 2021. As importantly, we are well-positioned to continue that performance with strong teams, great markets, and an incredible deposit base and strong momentum in our lending businesses. Finally, we want to make a difference in our communities. 2021 was the first full year of operations of the United Community Bank Foundation. And already, we have made over 110 donations to various community organizations throughout our footprint, amplifying the on-the-ground volunteer work that our employees are already doing for these organizations. I am honored to be part of such an amazing team, and I appreciate all their support and yours during the year. And I'd like to now open the floor for questions.

Operator, Operator

Our first question is from Michael Rose with Raymond James.

Michael Rose, Analyst

Jefferson, let's begin by discussing loan growth. This quarter showed strong performance excluding Aquesta and PPP. In terms of originations versus paydowns, could you provide insights? Have any of the accelerator paydowns decreased? Looking ahead to 2022, excluding Reliant, should we still anticipate a mid-single-digit growth, or is there enough confidence in your market presence and customer base, along with the recent market changes, to expect a higher growth rate?

Rich Bradshaw, President and Chief Banking Officer

Michael, this is Rich Bradshaw. I'll go ahead and take that if that's okay. So the big drivers in Q4 were mortgage, owner-occupied CRE, and our equipment finance team, Navitas. In terms of geographies, where we're seeing that came from changed a little bit. In terms of Q4, Metro Atlanta led the way with North Carolina right behind. And a big change for us in 2021, North Carolina and the Raleigh team led the company. And so that's a change taken over from South Carolina. In terms of 2022, we see that looking a little bit like Q4. So I would expect that 7% is probably a good number going forward, maybe a little conservative, but I would also say that Q1 is a little seasonal. So that's how we're looking right now.

Michael Rose, Analyst

Okay, that's helpful. If we consider Reliant coming in at the start of the quarter, you didn't provide any updates on the accretion targets in the press release, but it seems likely that as we think about rates, those accretion numbers would increase. Could you provide any updates on Reliant accretion expectations? Additionally, based on your modeling work, what is the asset sensitivity with Reliant included as we consider a plus 100 scenario for January 1?

Jefferson Harralson, CFO

All right. So the Reliant deal numbers, the accretion numbers are unchanged. The cost savings estimates are correct. And the numbers we've given you in the past are still good to use for 2022. We're really excited about Reliant and the team and demand. So I think the financial piece of the deal is going to work exactly like we thought. From an asset sensitivity standpoint, yes, if rates go up, that deal will be more accretive. But think about the whole bank on the asset sensitivity question. I think that in the current balance sheet, in a 25 basis point environment, we're $0.10 accretive. And I think that level of asset sensitivity might go down some over the year, as we put some of this cash to work and become less asset sensitive over the year. But if it happened right now, I think it's $0.10 annual to us.

Michael Rose, Analyst

Okay. So roughly $0.10 for each 25 basis point hike? Or does that fade like you just mentioned as we get, hopefully, more?

Jefferson Harralson, CFO

Yes. So I think it fades a little bit with each one, because your deposit betas will start to normalize higher. For the first one, I think the deposit beta is very close to 0. I think the second one starts to move up, each one starts to move up a little bit. So I think it starts at $0.10 and then fades down a little bit from there on each one.

Michael Rose, Analyst

All right. Fair enough. And maybe just one final one for me. Looks like the Navitas gain on sale margin down again. Can you give us just any sort of initial expectations for '22 as it relates to how much you might plan to sell? I know it's going to be a function of if you do more deals or things like that? And then where that gain on sale margin should hopefully stabilize and what it would do in a rising rate environment?

Jefferson Harralson, CFO

I've been noticing a consistent gain on sale at Reliant in the 4% to 5% range, with 4.5% being what I would anticipate. However, I'm not seeing that consistently come in. We’re witnessing yields decrease by about 2 or 3 basis points each quarter, but the gain on sale remains steady. This is a very appealing asset, offering a high yield with minimal loss experience. I would project that we will sell between $10 million and $20 million of Navitas loans each quarter and maintain that 4% to 5% gain on sale range as we proceed.

Operator, Operator

The next question is from Brad Milsaps with Piper Sandler.

Brad Milsaps, Analyst

Jefferson, just curious how quickly you might put some of the excess liquidity to work in the bond portfolio. You guys have talked about 7% loan growth, probably not enough to sop up all the excess liquidity you have. Just kind of curious how to think about growth in the bond portfolio from here?

Jefferson Harralson, CFO

Yes, that's a great question. Thank you for it. You have seen our securities portfolio grow at a strong pace. With rates moving higher, you can expect our securities growth to increase significantly. That's how I view it on a quarterly basis. Annually, we are working to put this cash to use this year. You can anticipate a securities portfolio that absorbs cash by year-end, along with the loan growth mentioned by Rich. Our plan is to achieve substantial growth in the securities portfolio, particularly as rates rise.

Brad Milsaps, Analyst

Okay. Rich mentioned a loan growth guidance of 7%. That includes the base from the Reliant loans. Is that correct?

Rich Bradshaw, President and Chief Banking Officer

Yes, that is correct. Yes.

Brad Milsaps, Analyst

Okay. Great. And then just one follow-up for me, Jefferson, maybe on the mortgage business. I think that you mentioned it was maybe about in line with your expectations for the quarter. Can you talk about kind of what you think will play out in 2022 for you guys? Do you have any expense offset? And then sort of third, how to think about the Reliant mortgage piece as you pull that in as well?

Rich Bradshaw, President and Chief Banking Officer

All right. This is Rich. I'll discuss mortgage briefly in relation to your comments about Q4 and then move on to 2022. We anticipate a decline in volume of around 7% to 10% year-over-year. The MBA is projecting a strong demand for purchases over the next two years, and we've consistently performed well in this area. While we have benefited from refinancing, it hasn't been our sole focus. We feel positive about our position. Additionally, we've seen significant opportunities in Florida, which has become a major growth market for us, leading to the hiring of many mortgage loan originators there, a trend we plan to continue. We are also looking forward to the new opportunity in Nashville.

Operator, Operator

The next question is from Kevin Fitzsimmons with D.A. Davidson.

Kevin Fitzsimmons, Analyst

Just a follow-up on fee revenues. I noticed that service charges were down in the fourth quarter. Is some of that attributed to the overdraft charges you mentioned? I believe you had indicated a potential loss of about $2.2 million in 2022. Is that impact already reflected in the current run rate due to the decline we saw, or is it still ahead of us?

Jefferson Harralson, CFO

So this is Jefferson. I'll say it's really still to come. We did put this in place in November. The impact was less than we thought it would be for the fourth quarter, but the fourth quarter run rate is a good base to use this off of. Because of the piece of this that has the first one that is waived automatically, seasonally that makes this a little more front-end loaded. So I would use the $2.7 million or something close to it, front-loaded a little bit into Q1 off of this base, and that's the way to forecast it.

Kevin Fitzsimmons, Analyst

That's great. I know it's challenging because there are many variables at play. With Reliant joining, there will be a double count on day two. Looking at the potential for reserve releasing and the expected ACL ratio over time, do you think we're approaching the end of negative provisions and releases, or is it possible there are still more adjustments to make in the next two to three quarters?

Rob Edwards, Chief Risk Officer

Kevin, it's Rob. Just on the provision, I think two things. One is, certainly the growth will play a role in provisioning. So if we have a 7% growth rate, that will obviously play a role in how we need to provision for that. And then on the loss side, basically finishing the year with no losses after having built the allowance up, because of the pandemic really is what created the need to bring that down. But going forward, we would expect losses to come back to something closer to the 2020-2019 level in the 12 to 15 basis-point range, at least we would expect that. And so the combination of those events would seem to make a release less likely in 2022 than it was in 2021. Build of that ratio with the Reliant marks. Just keep that in mind, too; you've got to overlay that piece of it.

Operator, Operator

The next question is from Jennifer Demba with Truist.

Jennifer Demba, Analyst

What do you feel like the best fee income growth opportunities are for the company in '22 and '23 right now with the headwind in overdraft and in mortgage?

Jefferson Harralson, CFO

Jennifer, that's an excellent question. We are currently evaluating this collectively. Asset management is quite promising for us. You may have noticed that our assets under management increased from $4.5 billion to $4.7 billion this quarter. We have strong leadership in Gideon Haymaker. We have acquired the RIA Fintrust and are rebranding it to expand our presence. We're enthusiastic about this development. Although our mortgage fee income may be lower this year, I remain optimistic about the ongoing growth in that sector. We plan to enhance our efforts in Florida, and Rich can share details about our activities since entering the state. We also see further growth opportunities in Tennessee. I'm highlighting brokerage and mortgage and inviting anyone else to contribute.

Rich Bradshaw, President and Chief Banking Officer

And Jefferson, I thought you did a good job of summarizing that. I'd probably add that we bought FinTrust last year, and we've been working on behind the scenes, or when you have trust powers, you've got to do the things the right way in terms of legality. And we've kind of done all that work, and we're planning to roll that out to our 55,000 commercial customers, starting to pilot in North Carolina. It looks like Jacksonville in the first quarter. So it's just the 1 plus 1 equals 3 hasn't happened yet because we haven't rolled this out yet, but rolling it out in Q1, and so we're excited about that. And then I would say it's nice to have different levers, and the one we can pull a little bit more is probably SBA. So that's one we'd expect to see a little bit more. And I use that term SBA generically because we sometimes do a fair amount of USDA, either business and industry or the REIT program, which is the energy program we do through our solar side. So really, I'm talking about government guaranteed products, and we expect to see more of that this year, and we've had some big opportunities that we've already closed on construction loans that are under the USDA program. So we expect those to come to fruition later this year.

Jennifer Demba, Analyst

Okay. Just one more question, if I can. You guys have done a fair amount of transactions over the past year or two. Just wondering what your interest level is here in '22 after the conversion of Reliant?

Lynn Harton, CEO

Yes, we plan to maintain our strategy. We prefer smaller organizations because they align well with our focus on customer and employee experiences. They tend to organize geographically similar to us, which makes for a strong leadership fit, leading to better retention. We are particularly interested in smaller organizations in high-growth markets, and our track record shows that we've been consistent with this approach. The timing for any acquisitions depends on the sellers. Currently, there seems to be a lot of interest, but it will ultimately depend on their timing and price expectations. I hope we can make additional acquisitions that align with our strategy and are well-priced in the upcoming year. However, we are in a strong position with our current momentum, so while acquisitions would be beneficial, they are not essential for achieving our goals.

Operator, Operator

The next question is from Brody Preston with Stephens.

Brody Preston, Analyst

I've got a number of questions. I'm just going to ask some and hop back in the queue and maybe come back at the end. I wanted to follow up on the securities question that was asked earlier. So just looking at the securities book, the HTM growth is up 175% year-over-year, which is quite a bit more than the AFS portfolio. And so I guess I wanted to ask, how much of that is being driven by more attractive yields within the held-to-maturity portfolio versus maybe the need to deploy liquidity without seeing tangible book value get negatively impacted from AOCI as rates continue to move higher?

Jefferson Harralson, CFO

That's a great question, Brody. Our perspective is that as our portfolio has expanded, it has become a more significant part of our assets. The size of our securities assets is increasing, and that ratio will keep rising. We are considering how tangible book value and TCE will be affected in a higher rate environment, particularly regarding those two ratios. With our portfolio representing a larger percentage of the balance sheet, we decided to increase the held-to-maturity securities from 10% to 20%, and we are now almost there. This is why it has grown more quickly, due to that decision to raise the percentage. It is likely we will reevaluate that 20% mark. If our securities portfolio grows from $5.5 billion to $7 billion by the end of the year, that ratio will keep increasing, and we might expand the HTM portion further. Additionally, as our portfolio grows and becomes more robust, we need to consider the percentage that is fixed versus floating. Initially, we had 10% floating in our securities portfolio, and now it's at 25%. As we expand the securities book, we believe the floating percentage will also rise to mitigate the risk of unrealized bond losses amid higher rates, which will support our ongoing risk management strategy to grow the HTM portfolio.

Brody Preston, Analyst

Great. I really appreciate that color. And so I guess I would ask as a follow-up on that, what's the current duration of the securities portfolio, Jefferson? And what are current yields that you're putting on the book coming on it?

Jefferson Harralson, CFO

So we have a 4-year duration and a range of 1.75%. The good news is that we are currently acquiring new securities at a higher rate compared to what our existing securities portfolio is yielding. I'll focus on that first point for now.

Brody Preston, Analyst

Understood. Understood. And then I wanted to follow up just on the service charges. So I get it on the overdraft. I guess I would ask it sounded like this quarter's run rate, I just want to clarify, is that a good run rate to use for UCBI plus Aquesta? And then I minus out the $2.7 million annually from this? Or is that inclusive of some of that $2.7 million? And then it looked like RB&C was running at like $1.5 million to $1.7 million per quarter in service charges in 2021. Do I need to layer that into the thought process here for the first quarter? So I guess, just kind of trying to combine all those moving pieces.

Jefferson Harralson, CFO

I believe this is a solid starting point for Aquesta alongside UCB, and factoring in Reliant, taking off $2.7 million for the year is a good approach. I also want to address the second part of your earlier question about duration. As I mentioned, we are quite asset-sensitive, with 53% of our loans on floating rates. Our deposit base is very stable. Therefore, we anticipate that we will continue to add securities of longer duration to our portfolio. We're noticing a bit more steepness in the yield curve right now, which we see as an opportunity. This strategy will help mitigate some of our asset sensitivity, and we plan to continue with this throughout the year. We will be adding to our securities portfolio while reducing cash and asset sensitivity, all while aiming to enhance earnings simultaneously.

Brody Preston, Analyst

Got it. Okay. And then I'll just ask two more quick ones before I hop back in the queue. The $1.8 million of PPP, is that inclusive of RB&C or do we need to add more to that for RB&C?

Jefferson Harralson, CFO

So just use the $1.8 million for PPP fees. The RB&C and Aquesta, we marked those books to market. They come back through via accretion. They don't come back through via PPP fees. So for that specific category, we just have the $1.8 million left, and that doesn't change with the deals.

Brody Preston, Analyst

Got it. And then on the accretable yield piece, I think last quarter, you said you were still kind of going through the RB&C marks. And so could you give us a sense, just given the volatility we saw in accretable yield this quarter, could you give us a sense for what that run rate is going to look like in 2022 with RB&C in the mix?

Jefferson Harralson, CFO

I can get you most of the way there. So we have $17.5 million of accretable yield at 12/31. Right now, we believe that Reliant adds $15 million to that. So we're at $32.5 million left to bring through. And we can talk offline about how much of that $32.5 million we think is going to come through in 2022. But think of it as a 3, 4-year duration coming through in a 3 or 4-year duration.

Operator, Operator

Your next question is from Christopher Marinac with Janney Montgomery Scott.

Christopher Marinac, Analyst

Jefferson, I just want to clarify if the loan growth comes in as planned off the base of Reliant, is there a scenario where the earning assets do not grow? Or would you imagine that there would be growth just at a slower pace?

Jefferson Harralson, CFO

It's a great question. The growth of earning assets will depend on the growth of deposits. If deposit growth is around 2%, then earning assets will increase by approximately 2% as we will primarily focus on adjusting the asset side of the balance sheet. This means taking cash and reallocating it into securities and then into loans. If deposit growth remains flat next year, earning asset growth will also be flat, resulting in a higher margin and higher return on assets with the same balance sheet.

Christopher Marinac, Analyst

Got it. And just a follow-up. When you mentioned earlier in the call about less asset sensitivity as you go along, is that partly because of the way that the securities portfolio will be managed, as you were just alluding to as well as kind of how you balance fixed versus floating on the loan side?

Jefferson Harralson, CFO

So those two things plus I think you're going to see what we saw last time was a ramping deposit beta. So I think deposit beta starts at 0 or very close to it. I think it moves to the mid-20s where we were in the 2015 time frame. So you'll go 0, 5 to 10, 10 to 15, and maybe after four, closer to a historical deposit beta. That said, for us, the last time rates rose, we didn't have $2 billion of cash on the balance sheet. And the last time rates rose, we weren't at a 64% loan-to-deposit ratio. So I think that points to the fact that our deposit betas should be lower this cycle than they were last cycle. And so maybe we keep some of that asset sensitivity. So two things, really. I think that we'll put some of this cash to work in securities, which will lower the deposit betas. But the other piece is, I think that the deposit betas will ramp off of something close to a 0% at the beginning.

Operator, Operator

The next question is from Stuart Lotz with KBW.

Stuart Lotz, Analyst

Jefferson, I appreciate all the detail on your margin outlook and asset sensitivity. As we look at the first quarter and a blended core loan yield, I believe RB&C's last disclosure indicated they were bringing over loans at about 5.25%. If I calculate your core loans today at just under 4%, where do you anticipate a blended rate will land in the first quarter? And how does that relate to executable yield?

Jefferson Harralson, CFO

Thank you for your question, Stuart. I believe we have reached the bottom of our core margin, partly due to the addition of Reliant. This acquisition alone increases our margin by 10 to 12 basis points because of its higher margin contribution. Additionally, as I mentioned previously, our average cash was $2.3 billion for the last quarter, but it has now fallen below $2 billion, providing some margin benefit. We are also experiencing solid loan growth, as Rich noted, and there's a higher interest rate, which makes it attractive to invest some of this cash in securities. All of these factors make me optimistic enough to declare that we've hit the bottom of our margin, and I expect at least double-digit growth in the next quarter.

Stuart Lotz, Analyst

And do you think from a reported standpoint, just given kind of the pieces there, you'll be back above 3? And then how quickly or how much expansion do you think is possible in 2022, if we do get a few hikes plus continued redeployment of your liquidity?

Jefferson Harralson, CFO

It's a great question. We're at $281 million this quarter, and to reach $290 million, we need an increase of $10 to $12 million. I believe we will stay below $300 million but will see an increase of $10 million to $12 million. Projecting the accretable yield for the first quarter is challenging. Additionally, this does not factor in any potential rate hikes, so while we won’t reach $300 million, we will be significantly above the $281 million.

Stuart Lotz, Analyst

Great. And I just had one follow-up regarding Navitas. I think the credit there continues to impress, but just given all the Fed stimulus and with that paring back now, I mean, how quickly do you think credit will normalize there? And how should we think about kind of net charge-offs from that portfolio in a normalized credit environment?

Rob Edwards, Chief Risk Officer

Stuart, it's Rob Edwards. We do expect some changes. I'm hesitant to say normalize, but since we acquired them in 2018 and up until about midway through last year, they had charge-offs between $1.3 million and $1.8 million every quarter. That process allowed the portfolio to grow from $400 million to almost $1 billion or over $1 billion. I expect it to return to a similar range this year. I'm uncertain about Q1, but as the year progresses, I anticipate that level of loss, probably somewhat higher, considering the portfolio has more than doubled in size.

Stuart Lotz, Analyst

Do you expect that normalizing charge-offs will lead to a further reserve release from the current 1.5% on that portfolio, or do you think we have reached the lowest growth point?

Rob Edwards, Chief Risk Officer

I'm not closely monitoring the reserve release at that segment level. However, I would say that if the portfolio continues to grow and charge-offs return to previous levels, it is unlikely that there would be significant releases in that specific portfolio.

Operator, Operator

The next question is a follow-up from Brody Preston with Stephens. Mr. Preston, is your line on mute perhaps?

Brody Preston, Analyst

Sorry about that. Yes, guys, I just have a few more. I appreciate you being on to take the follow-ups. Jefferson or maybe Rich should add color here as well. But just on SBA. This level of SBA sale volume is more consistent with what you all did in 2017 and 2018. And so I guess I want to ask, do you expect that this will be what you do going forward? I know there's some seasonality in there. And then separately, do you expect to be more active in the 7(a) program, just given the broader geographic footprint you all have now and the success you had in PPP?

Jefferson Harralson, CFO

I'll begin with our sales and expectations, and then Rich will provide additional details about the business. In 2020 and 2021, while the mortgage sector saw unusually high sales gains, we prioritized growing our cash and deposits by holding back on our SBA sales, allowing those balances to increase. Now, as the mortgage market stabilizes, we're planning to return to our usual approach of selling SBA loans. With that in mind, I would estimate around $2 million in the first quarter, give or take, as the first quarter is typically the slowest due to seasonality. I expect sales to increase throughout the year, surpassing the total gains from 2021.

Rich Bradshaw, President and Chief Banking Officer

I would comment with regard that we do have an inventory there because we don't sell everything each quarter. So we already have an inventory. So we're managing how much we want to sell currently. Then in terms of the 7(a) program going forward, I think you're aware that we were very active in PPP. We did not outsource anything. And so our SBA team has been center stage on PPP. So you're doing two things at the same time. And without winding down, we're ramping up for the first time, we're full on SBA salespeople. And then, of course, we just acquired Reliant. So we are actively looking in Nashville and our new people in Florida have really just started to gain traction. So we're really excited about the opportunity, and the team is excited to get back into the 7(a) business.

Brody Preston, Analyst

Got it. Regarding SBA, it seems that the gain on sale margin decreased based on the calculations from the presentation. I understand that the percentage of guarantees declined with the expiration of the CARES Act. Were there any other factors that contributed to the tighter SBA margins? Additionally, should we anticipate lower gain on sale margins in the future as interest rates rise?

Rich Bradshaw, President and Chief Banking Officer

We did notice a slight decline in the secondary market. The sales are influenced by duration and interest rates, and they depend somewhat on your mix for the quarter. However, the levels remained quite high. Historically, as interest rates increase, we might see some compression. Nevertheless, there is still significant demand and ample liquidity for that guaranteed income.

Jefferson Harralson, CFO

And we have the inventory that you spoke of too, so it gives us a little more flexibility to hit our budget even if rates rise and the gain on sale comes in a little low.

Brody Preston, Analyst

Got it. Okay. And shifting away from SBA, Jefferson. Do you guys have an estimate of what the day 1 reserve level looks like with Aquesta and Reliant folded into the mix? I know it's a little challenging.

Jefferson Harralson, CFO

Yes, I can do that. We are anticipating a double dip of 16, and the original mark was 15, which corresponds to about 1%. We expect roughly $30 million to go into the reserve due to the double dip and day 1 PCD mark. I haven't calculated this in percentage terms, but we can discuss it offline to provide you with the details. Rob might have additional insights on this matter.

Rob Edwards, Chief Risk Officer

Well, I was just going to say you said Aquesta and Reliant. The Aquesta stuff is in the deck on Page 18, what we did on day 1. And so your numbers were just Reliant. That's right.

Brody Preston, Analyst

Okay. Got it. And then just two more quick ones for me, if I could. Do you have the variable rate loan percentage pro forma with Reliant, Jefferson?

Jefferson Harralson, CFO

Not with me, but we're 53, and it'll be down fractionally from there. They're about 15% of our loan book. So it will come down a little bit, but not a lot.

Brody Preston, Analyst

Okay. And then could you guys provide some color on what Reliant’s core loan growth was ex-PPP for the fourth quarter?

Rich Bradshaw, President and Chief Banking Officer

It was relatively flat, maybe slightly lower. They had a strong third quarter, but they did not experience the same performance in the fourth quarter, which is not uncommon during an acquisition phase before the deal finalizes. We have seen this trend historically.

Rob Edwards, Chief Risk Officer

Here–

Operator, Operator

This concludes our question-and-answer session. I would like to turn the conference back over to Mr. Harton for any closing remarks.

Lynn Harton, CEO

Well, great. And I just would like to thank all of you for your time and attention. And if you do have any follow-up questions, don't hesitate to reach out at any time. And we'll look forward to talking to you next quarter. Thank you so much.

Operator, Operator

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.