UCB Announces Quarterly EarningsApr 25, 2018 04:05PM ● By Kathleen Maris
United Community Banks, Inc. (United) announced its first quarter 2018 financial results reflecting solid margin improvement, effective and disciplined expense management, an acceleration of loan growth, and the continuation of sound credit quality. Net income was $37.7 million, or 47 cents per diluted share, compared with $23.5 million, or 33 cents per diluted share, for the first quarter of 2017.
On an operating basis, net income rose to $39.7 million for the first quarter of 2018 compared with $28.2 million for the first quarter of 2017. First quarter 2018 operating net income excludes pre-tax merger-related charges totaling $2.50 million and pre-tax charges related to branch closures completed during the quarter of $147,000. The income tax benefit from these non-operating charges was $628,000. First quarter 2017 operating net income excludes pre-tax merger-related charges of $1.17 million and pre-tax charges related to branch closures of $831,000. The income tax benefit associated with the charges was $758,000. Also excluded from first quarter 2017 operating earnings is a non-cash tax charge of $3.4 million related to the cancellation of interest rate swaps that were designated as cash flow hedges. The non-cash tax charge was previously included in other comprehensive income until the swaps matured or were canceled.
At March 31, 2018, preliminary regulatory capital ratios were as follows: Tier 1 Risk-Based of 11.7 percent, Total Risk-Based of 13.6 percent, Common Equity Tier 1 Risk-Based of 11.3 percent, and Tier 1 Leverage of 9.1 percent.
"Our first quarter earnings are a strong start to what we expect will be another exceptional year for United Community Banks, Inc.," said Jimmy Tallent, chairman and chief executive officer. "Our bankers excelled in nearly every financial measure, reporting solid improvement in return on assets, return on tangible common equity, operating efficiency and more. Operating return on assets was 1.33 percent for the first quarter, up 23 basis points from fourth quarter and only seven basis points from our goal of 1.40 percent. Our operating efficiency ratio was 55.7 percent, our best ever, which is a credit to our bankers who work hard to provide the best customer service in an efficient and cost-effective manner."
Tallent continued, "In the first quarter, we not only announced a merger with NLFC Holdings Corp. and its wholly-owned subsidiary, Navitas Credit Corp., but we completed the merger on February 1. With headquarters in Ponte Vedra, Fla., Navitas is a premier specialty lender providing equipment finance services to small and medium-sized businesses nationwide that will continue to operate under the Navitas name. This fast-growing company is a solid strategic addition to our existing specialty and commercial lending businesses and enables us to further expand our client offerings. This partnership brings exceptional growth and a significant profitability enhancement to United and is a solid win for both of us. I am excited to welcome this talented team of industry veterans to United Community Bank.
"First quarter loan production was $665.8 million with $427 million originating from our community banks and $238 million from our Commercial Banking Solutions group, which now includes our newly acquired Navitas subsidiary," Tallent continued. "Linked-quarter loans were up $448 million, mostly reflecting the $379 million in net loans received through our acquisition of Navitas. Our indirect auto loan portfolio was down $42.3 million from fourth quarter, reflecting our decision to suspend indirect auto loan purchases. Excluding the reduction in indirect auto loans and the loans acquired through the Navitas acquisition, loan growth was up at an annualized rate of approximately 6 percent from the fourth quarter."
First quarter net interest revenue totaled $103.3 million, up $19.7 million from the first quarter of 2017 and up $5.78 million from the fourth quarter of 2017. The increases from both periods reflect acquisitions, business growth and net interest margin expansions of 35 basis points from a year ago and 17 basis points from the fourth quarter of 2017. Rising short-term interest rates and the acquisitions of Four Oaks Bank & Trust Company on Nov. 1, 2017 and Navitas on Feb. 1, 2018, contributed to the linked quarter net interest margin expansion as well as the increase in net interest revenue. The acquisition of Horry County State Bank on July 31, 2017 also contributed to the increase from a year ago. Acquired company results are included in United's financial results beginning on their respective acquisition dates.
The first quarter provision for credit losses was $3.8 million compared to net charge-offs of $1.5 million. Included in the first quarter provision for credit losses was $2.3 million resulting from including Navitas' loans and leases in United's allowance for loan and lease losses model. Because Navitas' loans and leases were recorded at a net premium of approximately $5.62 million, the allowance for loan and lease losses model required United to establish an allowance sufficient to cover credit losses inherent in the Navitas portfolio. This additional provision related to the Navitas loans and leases is in addition to $3.9 million of non-accretable discount included in the fair value mark on Navitas' acquired loans and leases providing a conservative $6.2 million of loss absorbing capacity on the acquired Navitas portfolio.
As mentioned, first quarter net charge-offs totaled $1.5 million, down from $1.7 million in the first quarter of 2017 and up $440,000 from the fourth quarter of 2017. Contributing to the low level of net charge-offs were continued strong recoveries of previously charged-off loans. Nonperforming assets were 0.24 percent of total assets at March 31, 2018, compared with 0.23 percent at both December 31, 2017 and March 31, 2017.
"Credit quality remains strong and steady as indicated by the low level of net charge-offs," Tallent commented. "Our credit quality indicators show no indication of credit deterioration and our outlook is for that to continue. Although our first quarter provision was elevated due to the acquisition of Navitas, we expect our provision levels to return to the range of our more recent quarterly experience with gradual increases each quarter due to loan growth. We expect our allowance and the related ratio to total loans may continue to decline slightly."
First quarter fee revenue totaled $22.4 million, up $322,000 from a year ago and $468,000 from the fourth quarter of 2017. Included in first quarter 2018 fee revenue are $940,000 in losses from securities sales. The securities losses were part of a larger balance sheet management strategy that included the cancellation of $289 million notional in interest rate caps as well as the partial cancellation of other hedging instruments. The derivative cancellations resulted in gains of $1.16 million, which are included in other fee revenue. The securities losses and gains from derivative activities are mostly offsetting.
Mortgage fees were up $935,000 from a year ago and $474,000 from the fourth quarter of 2017, reflecting strong origination and rate lock activity as well as a favorable mark on United's mortgage servicing asset. In the first quarter, United closed 799 loans totaling $191 million compared with 795 loans totaling $197 million in the fourth quarter and 697 loans totaling $151 million in the first quarter of 2017.
Operating expenses were $73.5 million for the first quarter, compared with $62.8 million for the first quarter of 2017 and $75.9 million for the fourth quarter. Included in the first quarter's operating expenses are $2.65 million in merger-related and branch closure expenses. United also had merger-related and branch closure charges of $2.05 million in the first quarter of 2017, and $7.36 million in merger-related expenses in the fourth quarter of 2017. Excluding these charges, first quarter operating expenses were $70.8 million compared with $68.5 million for the fourth quarter and $60.8 million a year ago. The increases from a year ago and from the fourth quarter of 2017 primarily result from the acquisitions of Navitas on February 1, 2018, Four Oaks Bank & Trust Company on November 1, 2017 and Horry County State Bank on July 31, 2017. Operating expenses of acquired companies are included in United's consolidated operating expenses beginning on their respective acquisition dates.
Tallent concluded, "As our first quarter financial results demonstrate, we are off to a great start for 2018. United Community Banks operates in some of the most attractive markets in the United States, has an extraordinarily talented management team and the best bankers in the business. I could not be more confident in the future of this company and I eagerly anticipate the successes that will be achieved in the quarters ahead. Every day, our bankers demonstrate their passion and commitment which drive our performance and ensure our success. This is a legacy I take great pride in."