United Community Banks Inc (UCBIO) 2022 Q3 法說會逐字稿

Good morning, and welcome to United Community Bank's Third Quarter 2022 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, 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 third 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 2021 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.

Good morning, and thank you for joining our call today. While I have concerns about the pace of the Fed tightening and the impact of a potential overshoot, our southeastern economies are performing well, and we had a very strong quarter that demonstrated momentum in several key areas of our business.

First, our net interest revenue grew at an annualized rate of 47%, driven by loan growth at the upper end of our target range, and a 38 basis point expansion in our margin. While we did see deposit outflows and we expect the pace of deposit rate increases to accelerate, the strength of our core deposits will continue to give us an advantage in this environment.

Our loan-to-deposit ratio remains low at 73%, providing us ample liquidity to fund growth at reasonable cost. Our operating return on assets improved to 1.34%. Our return on tangible common increased to 15.6%. Our pretax, pre-provision return on assets reached 1.97%, and our efficiency ratio reached an all-time low for us at 48%.

Credit continues to perform well with very low net charge-offs and only nominal increases in both nonperforming assets and special mention credits. We are not seeing significant signs of consumer or business stress. While inflationary pressures are impacting both consumers and businesses, both groups exited the pandemic in stronger-than-normal financial shape, enabling them to continue to perform well to date.

Employment activity continues to be strong in our markets with labor shortages continuing to be common for many of our business customers. We are seeing slowdowns in our mortgage market as well as slower turnover in our builder finance business as home sales slow, both of which would be expected given higher mortgage rates. We increased our loan loss reserve this quarter as Moody's economic forecast weakened due to their anticipation of higher unemployment and reduced residential sales and home improvement activity in the future.

Loan growth was at the higher end of our target range with commercial increasing by $100 million, led by equipment finance at $70 million, residential mortgage grew by $152 million as more of our closed loans were adjustable rate, which we hold on balance sheet rather than sale. Our commercial growth was negatively impacted by runoff in Tennessee. This was not unexpected, and we believe we're making great progress in implementing a growth plan in that outstanding market.

We continue to look forward toward closing our acquisition of Progress Bank. Progress has outstanding bankers with strong momentum and will be a great addition to our franchise. We've been working closely with them as we anticipate becoming one team early in 2023.

And now Jefferson will share more details on the quarter.

Thank you, Lynn, and good morning to everyone. I'm going to start my comments on Page 8 and go into some details on deposits. We are proud of our core deposit franchise, and we think it will serve us well as rates move higher. 40% of our deposits are demand deposits, which grew by $48 million in the quarter.

That said, total deposits shrunk by 2.5% or $522 million this quarter, about half of that decrease was in public funds deposits, which are typically seasonally weak in the third quarter. That said, we are also in a higher rate environment where customers have a lot of attractive options outside the banking industry, which is creating headwinds for our deposit growth and the industries. Still, our transaction deposits were up $406 million or 4% year-over-year, excluding acquisitions. Our cost of deposits was up 11 basis points in the quarter and helped drive our margin expansion that I will talk about on a later page.

On Page 9, we talk about our diversified loan portfolio. We grew loans at a 9% annualized pace. Lynn mentioned the drivers of the loan growth in his opening, so we'll move on to Page 10.

On Page 10, we highlight that we believe we are in a very good position when it comes to balance sheet strength and flexibility. The combination of loan growth and deposit shrinkage this quarter took our loan-to-deposit ratio to 73%, up from 70% last quarter, again, giving us a lot of flexibility to fund future loan growth. Our TCE ratio improved in the quarter to 7.7% despite higher unrealized bond losses due to good profitability and a smaller balance sheet.

More on capital on Page 11. Our ratios improved and are above peers. Our tangible book per share decreased by $0.16 in the quarter as the higher unrealized bond losses drove $0.68 of headwind in the quarter.

Moving to Page 12, we discuss our net interest margin. As Lynn mentioned, we had 38 basis points of margin expansion in the quarter, 33 basis points of which came from the impact of higher rates and 7 came from the positive mix change in the form of lower cash on the balance sheet and the higher loan-to-deposit ratio I mentioned earlier.

Page 13, we talk about fee income. It was down from last quarter. Our mortgage business was a driver of the decrease, with rates rising and rate lock volumes declining 24% in response. The mortgage line had a $2.4 million MSR gain that will most likely not repeat in Q4, and the other income line had a $650,000 BOLI gain that is also unlikely to repeat in the fourth quarter. Moving on to some of the other fee income categories. We also had $1.5 million in gains on SBA loans and just under $700,000 in Navitas loan sale gains in the quarter.

Moving to Page 14 and expenses. Operating expenses were improved by $2.6 million in the quarter. The lion's share of the improvement was due to lower mortgage commissions, and we got the final cost savings from the Reliant acquisition. With the help of higher rates and the expense improvement, our efficiency ratio came in just under 48%.

Moving to credit on Page 15. We had strong credit results in the quarter with 3 basis points of net charge-offs and continued low levels of problem loans.

On Page 16, we show our waterfall chart on the allowance for credit losses. While net charge-offs were $1.1 million, we provided $15.4 million into the reserve and have built our reserve for 3 consecutive quarters. Part of that reserve increase is due to our solid loan growth. But Lynn mentioned the main drivers in his remarks, which was anticipated higher unemployment and reduced future investment in residential real estate. As a result, the allowance for credit losses moved to 1.12% this quarter from 1.05% last quarter and 97 basis points at year-end.

With that, I'll pass it back to Lynn.

Thank you, Jefferson. And many thanks to the United team, you all continue to deliver outstanding performance that you should be very proud of.

And finally, I'd like to welcome George Bell to our Board of Directors. George and I met in the BB&T training program as we both began our careers in the early '80s. He's an experienced information technology executive, with more than 35 years in large financial institutions with a specific emphasis on customer information management. He brings an incredible depth of knowledge in leveraging technology to improve products and services to enhance the customer experience and increase organizational productivity. George, welcome to United. It's an honor to have you on the team.

I'd like to now open the line for questions.

(Operator Instructions) And at first is Kevin Fitzsimmons with D.A. Davidson.

Just very impressive margin expansion. So just trying to get a little -- dig a little deeper in terms of looking out at the next quarter or 2 with anticipated further hikes from the Fed. Jefferson, I wondering if you can -- if you have handy, what for the month of September, the margin, the loan yield, cost of deposits might be, just to help guidance on that trajectory for each of those?

Yes. Thanks, Kevin. Thanks for the question. I appreciate it. How I'm thinking about the margin next quarter, I'm going to start with the cost of deposits and the deposit beta there is that there was only 8% last quarter. I think from the rate changes that we've already made, it's -- you're at 10% for the fourth quarter. And then I think with rate hikes that are expected, I expect us to raise deposits on that, too.

So I'm using a 18% cost of deposits in -- or 18% deposit beta for cost of deposits in my model. On the entire margin, I think you are seeing with that increased deposit betas, a little less asset sensitive as we go forward. But I think with our -- expect some mix change to help us. I expect that our loan beta should stay relatively stable as rates continue to rise. And all said, if you bring it all together, I'm expecting about 20 basis points of margin enhancement next quarter.

Great. And just one quick follow-up. So on the comments that it's been 3 consecutive quarters of building the reserve, given the uncertainty and the headwinds out there, should we expect that to continue based on what you can see now?

Yes. So thanks, Kevin, it's Rob. There's really 3 things that play into that. This quarter, it certainly was the change in the economic forecast, but of course, loan growth and asset quality will also play a role in the future. So we've been -- I don't think loan losses are going to be 3 basis points forever, and it would seem that likely they would return to more normalized levels. And of course, that will play a role, I think, in the provisioning and the allowance going forward as much as anything else. The Moody's economic forecast is less easily predictable.

Our next question will come from Brad Milsaps with Piper Sandler.

Jefferson, you talked about some mix change in the fourth quarter and maybe beyond. Can you talk a little bit about the bond portfolio and sort of how you balance the aspect of that rate continue to move higher since 25% of it is variable. It would almost seem like the yield maybe on the bond book going forward would move up, maybe more than what it would cost you to go out and raise deposits? Just kind of wanted to think of -- wanted to hear your thinking on maybe shrinking versus keeping the bond book the same? And how that plays into your kind of margin and balance sheet guidance?

Yes. Great. Thanks for the question. The -- I believe our securities portfolio has most likely hit its peak, and you'll see it shrinking for the fourth quarter and into next year. It spits off about, call it, $60 million to $90 million of cash flow per quarter, depending on the quarter, a little higher in the near term and decreasing a little bit into next year. And I'm expecting to use that to help fund the loan growth in 2023. So I think if you're modeling the securities portfolio, I would model it a smaller as time passes.

On the funding side, I expect the -- it is a tough environment. I think you are seeing deposits stabilize a bit, but it could be down again next quarter as there is a lot of competition out there from short-term money market, institutional money market funds, short-term bond funds, that kind of thing. So I wouldn't be surprised to see if the deposits were down, not as much as Q3, but if they were down in Q4. It's a seasonally stronger quarter for public funds in the fourth quarter, which helps out a lot as well. But either way, my kind of short to medium-term plan is to fund a lot of our loan growth with securities portfolio runoff, and that should help that mix change and help increase the margin next year.

And maybe just one quick follow-up to that. As you use those cash flows, does most of that come out of the fixed piece? Or do you expect the variable piece to kind of stay static in terms of its -- in dollars of the bond book?

I think it would stay -- that mix will stay relatively the same.

Okay. Okay. And then my second question, Jefferson, you guys have done a great job managing expenses, benefited from cost savings from deals, mortgage -- lower mortgage commissions this summer -- or this quarter. And I know you put in some new merit increases midyear in addition to what you did earlier. Just kind of curious how you're thinking about expenses going into next year. Obviously, a lot of inflationary pressure out there. But just wanted to get your thoughts around your ability to continue to control costs.

I'll start on that and see if anybody else wants to jump in there. So we did do a midyear increase to employees under $75,000. That run rate is in this Q4 number -- or Q3 number. So you'll see maybe a little increase in the fourth quarter, carryover for that because that was done kind of early Q3. So there'll be some increase from that midyear increase.

In total, we're doing our budget for next year. We're going to be budgeting some operating leverage into all of our budgets. It is a tough year with inflationary pressure. So it's hand-to-hand combat with as invoices come in or vendors and others want to raise pricing, it's a battle. And so I think that there is pressure on expenses to move higher.

We do have the $3 million a quarter of cost savings from Progress. That's going to help a little bit in 2023. So that's helpful. I think that kind of -- I'm starting with a mid-single-digit thought on expense growth in 2023, but we're -- again, we're in the budget process currently.

(inaudible) with regards to mortgage, we continue to rationalize our headcount with the change in volume. So we've taken that down accordingly.

Our next question will come from Michael Rose with Raymond James.

Just wanted to dig into the to the SBA and Navitas businesses. I know spreads on SBA have been under pressure. It looks like you guys are portfolioing more of those. Can you just give us kind of an outlook as we kind of look forward? And then on the Navitas side, obviously, yields are very consistent, as you've kind of outlined, but it looks like credit is maybe beginning to normalize here. If you can just give an update on kind of what you would expect for kind of cumulative losses through the cycle in that business and maybe other, maybe versus last cycle and how maybe you've changed some of the underwriting there to help the loss content as you move forward?

Okay. I think there's 2 or maybe 3 questions in there. And do you want to start that, Rich?

Yes. I'll start on the SBA side. On the SBA side, premiums are down a little bit. So the fourth quarter is traditionally a stronger quarter for us. So we are expecting to be up on fee income this quarter. And then just a quick aside, just we have out of 20,000 PPP loans, we have 12 that we're administering. So we're pretty happy about that.

I would say strategically on the SBA side, some quarters over the last couple of years, we have held back and kept some of those loans in portfolio. I think our strategy is, depending on the pricing out there, is most likely changing to we're going to sell what we originate. So with the fourth quarter being a seasonally strong quarter and with the new strategy of not holding loans back, I would expect that SBA loan sale gain line to be either $0.5 million or maybe a little more higher in the fourth quarter.

Navitas, we have been selling loans consistently over each quarter. I remember on last quarter's call, I was mentioning that we may not sell them every quarter with rates moving higher and that being a fixed rate business. I could see that if the gain on sale there is not attractive, there could be a quarter in here where we don't sell Navitas loans. So what I would say is most likely expectation is another small Navitas loan sale and more normal higher SBA loan sales. But again, there could be a quarter in here where we don't sell Navitas loans if we don't like the pricing.

And it's the same thing on SBA. There's kind of an overunder when we hold and sell based on what the sale of dollar amount would be.

Now on the normalized Navitas credit loss part of that, let pass it over to Rob...

So in the first quarter this year, we had 9 basis points of losses. I think we've been saying they were going to increase. They have increased to 35% this quarter. Prior -- if we go back in time, our losses were as high. I think in 2020, we were at 78 basis points. So I think we will see that normalize. I'm not sure we're going to get back to 78 basis points. We do feel like we have -- I think you sort of pointed in the direction that I would agree with is it's a better book today than it was in 2020.

We've sort of upscaled some of the customers that we're dealing with through the approval process. So I don't know that we'll get back to 78 basis points, but I do think it will increase, although I wouldn't say that we're seeing it yet. I don't -- the difference between 30 and 35 basis points. So I'm watching the early-stage delinquencies. Pre-pandemic, they were running 1% in early-stage delinquencies. We're not anywhere near that number at this point. So not really seeing much of a change there yet either.

Credit changes, I put that the portfolio has been upscaled. So all things equal, it's a lower risk portfolio, we believe, than when we bought in 2018.

Makes sense. Maybe just a follow-up. I'm sorry if I missed this, but any update on the Progress deal and getting approval there? And then if you can just remind us, Jefferson, you've obviously had a couple of deals, this one pending here recently. As we go into next year, what is the pool of accretable yield that you'll have to realize over the next couple of years? And do you have an initial expectation for next year for scheduled accretion?

Yes, this is Lynn. And on the Progress deal, we continue to work with FDIC and Fed toward approval and are optimistic toward getting that done so that we could close in the early part of next year, but we're just continuing on the process with them.

Have the exact number of accretion with me, let's talk afterwards. I'll give you the accretion numbers, the pool of accretion numbers coming through.

Our next question will come from Catherine Mealor with KBW.

Just wanted to ask a question on credit. We saw a higher provision this quarter, obviously, largely from the better growth and then the macro changes. So as you sit here today, how do you -- what's your kind of outlook for the likelihood that we'll see more reserve builds over the next couple of quarters, just given how you think kind of the macro factors has the potential to change and where your reserve sits today?

Yes. It's an interesting question. I think both Lynn and Jefferson mentioned in their comments, 2 of the drivers, one being change in unemployment. Unemployment plays a role in basically all of our models. So how you think about the future of unemployment will drive that factor. And then the other one is new home sales, the models, new home sales and home improvement monies and the models were driven this quarter, particularly our residential portfolio driven by that variable. So we're already seeing in the market declines in new home sales year-over-year and specifically in September. So I think it's happening already. So to the extent that it happens, you won't be predicting more of it than it would be less likely. But if you begin to see further tightening and further negative views on unemployment, then I think you could see the reserve build.

So I'll just add in that. It's just -- it's really sensitive to this Moody's model if weather is getting better or worse. So it's just so hard to make that -- to give you the answer that I think you might be looking for because the Moody's -- it's just so sensitive to this model that is subject to change and sometimes it can be outside of consensus. So it's a very difficult question to answer.

And then on the loan growth, I mean, the loan growth has been so strong, and we've had the view that as you kind of I guess after you incorporate Reliant, you'll see stronger growth just because of the [investments] at the Nashville market, but the economy is also a little bit weaker today than it was when you first did the Reliant deal. So maybe just big picture comments on what loan growth could potentially look like as we move into next year?

Yes. Catherine, this is Rich. Thanks for the question. So yes, we -- it certainly has changed a little bit with next year. So we're thinking about -- first of all, we're in still the best market, so that's very positive. We're not -- we're still seeing pipeline be strong, but you've got to think that with labor, supply change and interest rates that, that has an impact next year. So we were high single digit this year, and we're expecting that to be down a little bit next year, kind of mid-single digit.

Our next question will come from David Bishop with Hovde Group.

I think Lynn or Jefferson in the preamble, you noted there were some headwinds in the Nashville market, sounds like maybe on the loan front. Just curious you're seeing any sort of irrationality in the market on the loan or deposit side? And maybe what you expect and how to resume growth in that market?

This is Rich. Yes, we obviously, Tennessee was down. I will tell you part of that was credit appetite. We had a large -- made up primarily of 2 loans, a subprime, auto paper and a land loan. We haven't gotten through all kind of what didn't meet our credit appetite. We've gotten through most of it. So maybe just a little bit more in Q4, and then we really feel good about where we're moving to and the team. Also, I will tell you some of our hiring discussions. There's a lot of emphasis in Nashville. We have some very positive momentum on the hiring front there and feel good about that as well. So that market is such a strong market. We feel very positive about it going forward.

And I might just overlay that it's pretty typical when we buy a bank to see loan shrink for a quarter or 2 or maybe even sometimes 3 as we're overlaying our box. There's a conversion. There's some distraction sometimes. But so -- but either way, we feel really good about the team. We feel really good about the market, and we feel -- and this is very within our expectations of what we're seeing.

Got it. Appreciate that color. And then one follow-up, Jefferson, on the mortgage banking front. I know it could be volatile source of revenue. It sounds like there was some -- you mentioned some noise in there, if you can go over that again, and I don't know if you have a sense where that could normalize into 2023?

Yes. I'll start with the noise and Rich can talk about the business a little bit. So the accounting noise in the quarter was the MSR gain, which was $2.4 million. I don't expect that to repeat. So I take that out to start, and Rich can talk about the pipelines and volumes and expectations for [blocks] in Q2 and such -- Q4.

Yes. We do expect Q4 to be down about 20% from Q3. And the -- probably a little bit more mix move to arms as well, and we're expecting the margins to be down just a little bit as well.

Our next question will come from Christopher Marinac with Janney.

Jefferson, I wanted to ask about the increased use of the held-to-maturity securities. And I'm wondering if that tap some of the excess deposits that you already have on the balance sheet? And does that become a factor in how you think about funding the next several quarters?

Thanks, Chris. It's a great question as we're thinking about next year and planning out the balance sheet. So the -- so I mentioned the cash flow that I'm expecting to come from both the HTM and the AFS portfolio. Obviously, we're not planning on selling that 40% or about $4 billion of -- I'm sorry, $3 billion of held-to-maturity securities. But if -- but the cash flow itself will fund a lot of the loans, if we're not planning on selling AFS securities either, we can borrow against both AFS and HTM securities. So I think about it that our portfolio went from $2.5 billion to $7 billion during the cycle. I think that could be down to $5 billion or $6 billion or even $4 billion, I think, will be a more normal loan-to-deposit ratio for us.

So the amount of HTM securities fits in line with the size of the portfolio, I think we're always going to have. So the combination, I believe, of letting the portfolio shrink and the ability to borrow against both AFS and HTM, it's not really having those HTM securities is not affecting our strategy for liquidity or the size of the portfolio.

Got it. That's very helpful. And perhaps a question for Rich or whomever, are there any new pools of deposits that you can tap or that perhaps you are tapping this can be a greater generation? I'm just curious if there's [incentives] or teams of people that can focus more on deposits than was necessary in the past year?

That's a great question. I'll start with it and maybe pass it around to anybody else who wants to join in. So I wouldn't -- I don't know if I would say there's new pools necessarily that's coming to mind, but what I would say is that us and I imagine most banks are changing their energy associated with deposit growth and how we think about it. We're using rate more. You'll see that out there as well. We are -- I would envision -- if you talked to our bankers before, I think they use rate defensively. I think they use rate to keep customers, but I can imagine campaigns happening in the future. I can envision compensation for deposit growth increasing in the future and just changing the energy to where we had excess deposits before. And now we want to grow our deposit base. And so I think you're going to see an organizational energy change around the need to grow deposits.

And a real focus on our core customers. That's really where we want the emphasis and more so than public funds. It's really protecting the core customers, and that's where our state presidents are putting a lot of energy in our teams.

And this concludes our question-and-answer session. I'd like to turn the conference back over to Lynn Harton for any closing remarks.

Great. Well -- and once again, thank you all for joining the call. We talked a little bit about the economic environment, and it's really, obviously, hard to know where we're going to go into. The Fed tightening seems to make -- seem like there will be a recession, the strength of the consumer and business customer though and strength of the employment market, would seem to argue that it would be mild, if anything.

Regardless, I think what you got to focus on is the amount of shocks absorbers that the company has built in and you think about shock absorber, a pretax, pre-provision ROA that we have today, the liquidity and core deposits that we have and the capital strength and the credit culture. Yes, I'm really excited about what's going to happen as we go into 2023.

So anyway, I appreciate everybody being on the line and supporting us, and feel free to reach out with any other questions that you have. Thank you.

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