Earnings Call Transcript - UCB Q3 2021

Operator, Operator

Good morning. And welcome to United Community Banks Quarterly 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, 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 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 five and six 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. 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. This has been another great quarter for United, and I want to start by congratulating our teams throughout the company for their performance. On an operating basis, our earnings per share for the quarter was $0.83, equating to a 148 basis point return on assets and an 18.2% return on tangible common equity. Loan growth excluding PPP was 4.5% annualized, and we continue to have strong overall average balance sheet growth, driven by robust deposit growth. Our cost of deposits dropped by 2 basis points and now stands at only 7 basis points. Credit results are also excellent with net charge-offs of only 2 basis points and a reserve release of $11 million. Our operating efficiency ratio improved to 52.3%, which is among the best we have reported. So once again, thanks and congratulations to the United teams that make these kinds of results possible. Our strategic initiatives also continue to perform well, following the completion of our acquisition of FinTrust Capital Partners in July. We continue to see solid performance in this line of business, as well as opportunities to deepen and expand our customer relationships with a stronger wealth management offering. Earlier this month, we completed the acquisition of Aquesta. We expect conversion and rebranding in November and continue to be very excited about the organic growth potential of the Charlotte and Wilmington markets that Aquesta brought to us. Our partnership with Reliant Bank also continues to be on track with an anticipated closing of that transaction in early January. I'm impressed with the quality of the leadership and the teams at Reliant and I look forward to them joining United. You may have seen, in fact, I hope you did see, Reliant's earnings release last night, where they reported record results for the quarter, demonstrated by a return on assets of 1.74%, a return on tangible common equity of 18.4%, and annualized loan growth excluding PPP of 14%. As I mentioned in our earnings press release, we're also very glad to welcome Jennifer Bazante, Chief Marketing Officer of Humana, to our Board. Her expertise in branding, marketing, and digital transformation will add tremendously to our Board and will be a great complement to our new Chief Marketing Officer as we continue to invest in these areas. And now I'd like to turn it over to Jefferson for more details on the quarter.

Jefferson Harralson, CFO

Thank you, Lynn. I am going to start my comments on page nine. The chart highlights our relatively consistent and strong loan growth, excluding PPP loans over the last year and also shows our strong deposit growth over the same time frame. In combination, we have become a lot more liquid and our loan-to-deposit ratio has moved to 66% from 81% a year ago, making us more liquid, but also providing us an opportunity to invest this over time. On page 10, we take a closer look at our loan book and our mix of loans; we had $122 million of loan growth, similar to last quarter in dollars, which rounds out to 4.5% annualized loan growth, net of the sale of a number of SBA and Navitas loans that totaled just over $33 million in the quarter. Moving to page 11, which details our deposit growth. While we had $122 million of loan growth, we also had $537 million of deposit growth, which annualizes at a 13% growth rate. Deposit costs are near the bottom, but we were able to move the cost down another 2 basis points this quarter to 7 basis points. On page 12, I will touch briefly on capital. Our capital ratios were relatively flat in the quarter and are above peer levels, partly because of a $100 million preferred raise we did last year. With the Aquesta and Reliant transactions, we are putting that raise to work, and we expect that our capital ratios will be at peer levels on a pro forma basis. In addition to our dividend this quarter, we did use capital in two ways. One, we purchased FinTrust for cash on July 6, and we bought back $10 million of shares in Q3. On page 13, we talk about spread income and the margin. Excluding PPP fees and loan accretion, our spread income grew at a 3% annualized pace in Q3. Our core margin was down 10 basis points, mainly due to continued increased liquidity driven by the strong deposit growth in combination with a significant cash flow coming with PPP forgiveness. On page 14, it details our fee income, which had good growth in Q3 of $4.3 million. That said, $2 million of the $4.3 million increase came from the FinTrust acquisition that closed on July 6. Besides FinTrust, fee income growth was quite strong and was driven by good mortgage results. The mortgage quarter was highlighted by increased rate lock volume and a $1.3 million MSR write-down compared to a $3 million write-down last quarter. Like last quarter, we had some Navitas loan sales and had $861,000 of gains on $19.3 million of loans sold. We would expect to continue Navitas loan sales in Q4 in addition to our normal SBA loan sales. Page 15 shows our expenses up $800,000 from last quarter. That said, excluding $1.9 million in new operating FinTrust expenses, comparable quarter expenses were down 1% from last quarter. I expect relatively flat to slightly higher expenses in Q4, excluding the impact of Aquesta that closed on October 1st. Page 16, we talk about PPP loans. We recognized $12.9 million in PPP fees in Q3 and have $5.8 million left to recognize and $150 million of loans still on the book, of which we expect a significant amount to be forgiven in Q4. Moving to Page 17, I will talk briefly on credit here, and Rob Edwards is here for Q&A on the subject. Net charge-offs were very low at just 2 basis points annualized and with improving special mention and substandard accruing loans, we had our third reserve release in three quarters this quarter, releasing $11 million. Page 18 gives you a closer look, and we saw improvements in the businesses that we lend to, special mention decreased by $92 million, and we saw improvements in substandard and NPAs as well. Looking to page 19, it shows the walk-forward of the reserve, excluding PPP loans, our allowance for credit losses moved to 1% in Q3 from 1.12% in Q2. With that, I'll pass it back to Lynn for closing comments.

Lynn Harton, CEO

Once again, I want to thank all of our bankers and support staff for continuing to build this company. Their ability to deliver great service, which according to J.D. Power, ranks number one in customer satisfaction and number one in trust in the Southeast and also has the second-highest Net Promoter Score in the country. This focus on service continues to set United apart and attracts both customers and great bankers to join us. I appreciate your interest in United. And I'd like to now open the floor for questions.

Operator, Operator

Thank you. And our first question comes from Jennifer Demba with Truist Securities. Your line is open.

Jennifer Demba, Analyst

Hi, good morning.

Lynn Harton, CEO

Hi, Jenny.

Jefferson Harralson, CFO

Good morning.

Jennifer Demba, Analyst

Two questions. The first one is for Rob. Rob, just wondering about the low charge-offs for the last several quarters, particularly this quarter. I'm wondering how long you think that could continue. The second question is regarding the excess liquidity; just wondered how much you expect to buy security for the quarter versus deploying it for loans?

Lynn Harton, CEO

So Jenny, for some reason, we're having a little bit of a problem here, and so I'm going to repeat what I think the question is, and that really is just because losses are so low, how long do we think they've been low for a while? And this year, we're basically at zero year-to-date; how long do we think they can continue at this low rate? And I would just say, at the moment, we're fairly optimistic about the quality. We feel good about where the numbers are. We don't see any big looming issues. And so we're positive and feel strong about continued strong asset quality and relatively low charge-offs.

Rob Edwards, CRO

And I'll take the next one, Jenny. I think what I heard you say was maybe the timing and plan to use the excess liquidity. You saw that our securities book grew this quarter; we had strong loan growth. We expect to continue to grow our securities portfolio. I don't know if we'll use all of our excess liquidity next year, and we're still coming up with our budget. But what I expect to happen is our deposit growth will slow down. I expect that we'll continue to grow the securities bucket roughly at this pace, and then we'll have strong loan growth, I believe, too. And by the end of next year, we will have utilized a significant amount of that liquidity that you see on the balance sheet.

Jennifer Demba, Analyst

Thanks so much.

Operator, Operator

Thank you. Our next question is from Catherine Mealor with KBW. Your line is open.

Catherine Mealor, Analyst

Hey, good morning. Just one follow-up on the size of the securities book; is there a percentage of average earning assets that you are targeting for that to maybe not grow above, Jefferson?

Jefferson Harralson, CFO

Great question. And Catherine, our thinking there is there's not really a percentage we won't go above. It really depends on the loan-to-deposit ratio. If there is excess cash on that, we're going to put that to work. As the ratio gets larger, as it moves from 30% or even higher, we'll take less risk incrementally with the securities we invest in. So we believe we need to put this cash to work, but we'll just incrementally reduce the risk as the portfolio gets bigger as a size of the balance sheet.

Catherine Mealor, Analyst

Is there anything to be aware of as Reliant integrates into your securities book or their borrowings or deposits that you should pay attention to as you restructure the balance sheet with all the excess liquidity?

Jefferson Harralson, CFO

Another great question. Thanks, Catherine. I would say their securities book is relatively small. So all things equal, it helps our balance sheet mix towards loans. The securities they have are relatively heavy in municipal bonds, which we like. We have a barbell approach right now in our securities investing. There are some borrowings to prepay, but there's not significant debt that can be prepaid in the near term. So it's not too much on the liability side. If you saw their quarter, they had very significant improvement in their cost of funds on their own. So with liquidity, that could be an opportunity to utilize over time. But they enhance what we're doing and help to allocate more of our liquidity to work when you blend that together.

Catherine Mealor, Analyst

And is it fair to assume that your growth rate on loans should improve into next year just given Reliant is growing at a double-digit pace? From a core UCBI perspective, where do you think there is an upside to your current mid-digit growth rate?

Rich Bradshaw, President and Chief Banking Officer

Yeah, good morning. Catherine, this is Rich. So yes, we are optimistic about next year with Reliant and Aquesta, and feel very good about those markets and layering on our verticals on top of what they're already doing. We feel that Q4 will be better than Q3; we're going into it with a really strong October and feeling really good about the pipelines and the activity in the senior credit committee. So we feel like we've got a lot of tailwinds right now.

Catherine Mealor, Analyst

Thank you so much.

Operator, Operator

Our next question is from Kevin Fitzsimmons with D.A. Davidson. Please go ahead.

Kevin Fitzsimmons, Analyst

I hope you can hear me. I know it's very early with the Aquesta deal you closed; I'm just curious about any opportunities you see in metro Charlotte to bring in new teams or new hires onto that Aquesta platform, whether you're getting inbound interest from teams or officers.

Rich Bradshaw, President and Chief Banking Officer

Hi. This is Rich again. Yes, we're very excited about this. First of all, just to clarify, we have a large existing commercial team in Charlotte, including a core commercial banking team. But we also have a number of our verticals located there as well. What I'm really pleased to tell you is that we have already approved two very large existing Aquesta customers for loans that will either close in Q4 or Q1 next year. I think we started off on the right foot and these victories always help. And so starting with two large approvals feels very good, and we're excited about it. The other part of this is, two years ago, we hired a leader for us from Aquesta, and he managed about 40% of that existing portfolio. We feel good about the possibilities here. You always worry with an acquisition how much you're going to hold, but we feel confident about our insights. Everything is aligning really well from a credit culture, and these first big wins are going to help a lot.

Kevin Fitzsimmons, Analyst

Great. Thanks, Rich. And one quick follow-up. There's been a lot of attention on supply chain disruption and worker shortages. Just wondering, is that, in your view, purely constraints on growth? Or is it emerging more as a potential credit risk?

Rich Bradshaw, President and Chief Banking Officer

I think I'll take a stab at this. This is Rich, and maybe Rob can answer as well. Certainly, as we talk to our customers, the two concerns we do hear are about the supply chain and labor. So as we think about next year, providing those do not get worse, we still feel optimistic. We haven't seen a lot of impact, but I'll let Rob elaborate on that.

Rob Edwards, CRO

On the asset quality side, we are not seeing, as you can tell, really an impact from those issues. The way I'm looking at it is, as you propose, people are hesitant to do the next expansion because they are concerned about the issues that you raised. So I see it more as a loan growth limiter than really an asset quality element at this point.

Kevin Fitzsimmons, Analyst

Okay, great. Thanks, everyone.

Operator, Operator

Our next question is from Brody Preston with Stephens Incorporated. Go ahead, your line is open.

Brody Preston, Analyst

Hey. Good morning, everyone.

Lynn Harton, CEO

Good morning, Brody.

Jefferson Harralson, CFO

Hey, Brody.

Brody Preston, Analyst

I wanted to start maybe on the loan growth discussion; it lagged down by about 2% quarter-on-quarter. Was there anything specific driving that?

Rich Bradshaw, President and Chief Banking Officer

Good morning, Brody. This is Rich. Yes, we did have a Florida C&I credit that we wanted to exit, which was $20 million. It also happened to be a special mention credit, so we feel very good about exiting that. In Q3, we hired five commercial lenders throughout the footprint. We added an SBA business development officer and an asset-based loan officer and a private banker. What we feel great about is that we are having serious discussions with a couple of lift-out teams that would be very prolific for our future, and we have had a lot of success with lift-outs. These aren't finalized but are far along in discussions, and we're very excited about that.

Brody Preston, Analyst

Okay. If we're on the topic of loan production, I noticed that quarterly production was up 20% year-over-year, but it was down relative to the last two quarters. Was there anything over the last six months driving production to be a bit slower, or is this typical of what other banks have been seeing, given liquidity levels?

Rob Edwards, CRO

I think you really kind of summed it up at the end there. We're all facing that a little bit. There's certainly a lot of liquidity in the market. The supply chain and labor has also played into that. But again, providing those conditions don't worsen, going forward, we remain very optimistic.

Brody Preston, Analyst

Got it. And on the loan yields, I thought that the core loan yields held up fairly well last quarter. Could you give me a sense of what new production yields look like currently and what the yield is on the existing back book?

Rich Bradshaw, President and Chief Banking Officer

Great question, Brody. Thank you. Incremental loan yields coming in are, if you view the bank alone without Navitas, they're probably coming in 15 to 20 basis points lower than what the existing loan yield is. So, looking at the loan yield by itself, I expect it to trend downward slightly. That said, if you look at any given month with a higher mix of Navitas, some months might come in at higher rates. But net-net, I believe we will see the loan yield come down a little bit as we have a mix change that will help us on the asset side. Even though it did not help this quarter, the outflow of cash into the securities portfolio coupled with substantial loan growth should provide benefits moving forward. Overall, I think the margin will remain relatively flat plus or minus 3 basis points.

Brody Preston, Analyst

Okay, understood. Jefferson, what are the new yields that you're seeing in the securities portfolio?

Jefferson Harralson, CFO

Around 140 basis points.

Brody Preston, Analyst

Okay. And on the fee income, the SBA and Navitas sales; I remember last quarter you noted they might slow down from the second quarter. If the outlook for Q4 is relatively stronger than Q3, would you consider selling more of those SBA loans than you did in the quarter?

Rob Edwards, CRO

Rich may also join in here. Q4 is our seasonally strongest quarter for SBA loans so naturally it could be a bit higher. We think about it in combination with Navitas loan sales. I would expect a small amount of Navitas loan sales. We want to balance with having a lot of cash and we want to utilize some of it. We have been gaining a lot of positive momentum already, and we want to retain some of these assets if possible. However, due to that being our seasonally strongest quarter, we have the opportunity to sell more if we choose to.

Rich Bradshaw, President and Chief Banking Officer

I would note we likely need to include mortgages in this. We expect mortgage sales to be a bit down, so I would anticipate selling a bit more of SBA this quarter compared to last quarter.

Brody Preston, Analyst

Got it. Two last questions. Jefferson, could you touch on what drove the significant increase in margin this quarter versus last?

Jefferson Harralson, CFO

Sure, I might defer this to Rich. What drove the significant improvement in the gain-on-sale margin this quarter versus last?

Rich Bradshaw, President and Chief Banking Officer

We did have two one-time events. One had to do with the 50 basis points that Fannie and Freddie allowed for second homes and investment properties, also known as the adverse market fee. That created a one-time gain of roughly $100,000 last quarter. The preferred stock purchase agreement, when that strategy happened, we were able to sell in Fannie and Freddie markets and get a bigger gain. Those were the two main one-time boosts.

Brody Preston, Analyst

Understood. Lastly, on the wealth side, between Seaside and FinTrust, you've bolstered the wealth offering significantly. What is your timeline for those businesses to operate under one brand? And do you believe you can target more effectively than previously with this strengthened offering?

Rich Bradshaw, President and Chief Banking Officer

Sure, hi. This is Rich again. The FinTrust team and Seaside team, led by Gideon Haymaker, have been working on this. The thought is we'll be operating as one team at the start of the year. We are looking at identifying new hires and determining where to target first based on available talent. It seems likely we'll first bring this to market in South Carolina and then probably in North Carolina due to talent considerations. We're very excited about this and find numerous opportunities for successful integrations moving forward.

Brody Preston, Analyst

Thank you very much.

Lynn Harton, CEO

Thanks, everyone.

Operator, Operator

We have no more questions.

Lynn Harton, CEO

All right, great. Well, once again, just thank you for your interest in United. Our apologies for the audio quality here and sorry that happened. But anyway, we will talk to you next quarter, if not before. So thank you so much.