United Community Banks Inc (UCBIO) 2023 Q3 法說會逐字稿

Good morning, and welcome to United Community Bank's Third Quarter 2023 Earnings Call. Hosting our call today are our 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 this morning 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 2022 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. As you would expect, we continue to see influences of a higher rate environment this quarter. On the positive side, we had strong deposit growth and excellent liquidity. Customer deposits grew $314 million or 5% annualized this quarter, excluding the first Miami acquisition and the 2 branches we sold in Tennessee.

We do continue to see movement into higher-yielding deposit products with DDA as a percentage of total falling slightly to 30%, down from 31% last quarter. Our liquidity position continues to be very strong. During the quarter, we were able to fund organic loan growth of 5.4% annualized, while paying down over $400 million in broker deposits and still reaching over $750 million in cash equivalents at quarter end. All with essentially no short-term borrowings.

Our loan-to-deposit ratio remained at 80%, providing ample liquidity to meet our customers' borrowing needs. Our margin continued to be impacted by rate competition and mix change, but the rate of change has slowed. Our net interest margin fell from 337 basis points last quarter to 324 basis points this quarter, a 13 basis point decline. Higher rates are also impacting some of our weaker customers from a credit perspective. As previously disclosed, we took a $19 million charge-off on an 8.7% share of a locally based shared national credit.

We also wrote down 2 memory care centers, which have been on nonaccrual by $3 million, reflecting expected market value for the properties. With the charges, our bank net charge-off ratio, excluding Navitas was 49 basis points, up from 15 basis points last quarter. Our Navitas subsidiary had increased charge-offs this quarter due to higher losses coming from a relatively small exposure to the long-haul trucking segment. Navitas' annualized charge-off rate for the quarter was 1.62%. Excluding the long-haul segment, charge-offs in Navitas were approximately 88 basis points for the quarter.

Taken together, our consolidated charge-off ratio for the quarter was 59 basis points, up from 20 basis points last quarter. These losses are somewhat unique. The majority of our portfolio continues to perform well and our local economies continue to be very strong. However, we know from history that the combination of rapid interest rate increases and tightening credit conditions can weaken credit performance, at least in some business segments. We're cautious in our lending and portfolio management strategies for this reason.

In summary, our operating earnings this quarter were $0.45 per share, down $0.10 or 18% compared to last quarter. Our operating return on assets was 79 basis points for the quarter, and our pretax pre-provision ROA was 144 basis points, down 21 basis points from last quarter.

On the strategic front, we closed on First National Bank of South Miami, July 1, a deal we announced on February 13 of this year. Conversion is scheduled for this weekend, and we look forward to having their outstanding team fully integrated with the company.

Now I'll ask Jefferson to provide more detail on our performance for the quarter.

Thank you, Lynn, and good morning to everyone. I am going to start my comments on Page 7. And go into some more details on deposits. As Lynn mentioned, our total deposit balances were up $606 million in the quarter with the addition of First National Bank of South Miami, driving the increase. In the quarter, we had very strong business and consumer deposit growth of $314 million, which more than funded our $241 million of loan growth.

In addition to the strong deposit growth, we also had the proceeds of the sale of South Miami's $200 million securities book that allowed us to pay down $427 million of broker deposits and also offset the sale of 2 branches in Tennessee totaling $110 million in deposits that were outside our targeted footprint.

We continue to see increased price competition in the third quarter that drove our cost of deposits up 39 basis points to 2.03% and took our cumulative total deposit beta to 38% since the fourth quarter of 2021.

Moving to Page 8. We also saw continued deposit mix change in the third quarter, albeit at a slower pace as our DDA percentage moved to 30% from 31% last quarter. Our deposit base is growing, diversified between industries and geographies and very granular.

We turn to our loan portfolio on Page 9. As I mentioned, we grew loans in the third quarter by $241 million, which is 5.4% annualized. On Page 9, we also lay out that our loan portfolio, it is diversified and generally more granular and less commercial real estate heavy as compared to peers.

Turning to Page 10, where we highlight some of our strength of our balance sheet. While our customer deposits grew faster than loans, the effect of paying down the $427 million in broker deposits, pushed our loan-to-deposit ratio higher to 80%. But this leaves us with virtually no wholesale funding remaining, which is a positive for 2024.

On the bottom of the page, our chart of 2 of our capital ratios, our TCE ratio and our CET1 ratio.

They were just down slightly in the quarter with the impact of South Miami but remain just under 100 basis points higher than our peer medians.

On Page 11, we take a deeper look at capital, and we show a tangible book value waterfall chart. Our regulatory ratios also remain above peers and mostly just slightly decreased with the investment into South Miami. Our leverage ratio increased 10 basis points with the delevering effect of paying down South Miami's securities book and paying down the brokered funds.

Moving on to the margin on Page 12. The margin decreased 13 basis points compared to last quarter. Our loan yield increased 17 basis points, similar to the increase of last quarter with the new loans coming on in the mid-8% range, but our cost of total deposits was up 39 basis points to 2.03%. The main driver of the cost of total deposits increase was a tougher competitive environment in the form of higher deposit rates, but we also saw our balance sheet was more liquid than we had estimated, which cost us 2 basis points on the margin and offset other positive net mix changes.

Moving to Page 13. Noninterest income was down $4.4 million relative to last quarter, mostly due to the absence of one-timers I mentioned last quarter. Notable items and fee income included an MSR write-up of $1.1 million and $2.2 million in unrealized losses on equity investments that we do not expect to repeat regularly.

Expenses on Page 14, came in at $135.5 million, up $6.5 million. Excluding South Miami, we estimate that our core expenses were up just modestly. We are expecting $1.7 million in quarterly cost savings to begin to materialize in Q4 and to be fully extracted in the first half of 2024.

Lynn covered the charge-off and credit trends well in his remarks, but I will talk on the allowance for credit losses on Page 16. We set aside $30.3 million to cover $26.6 million in net charge-offs. In addition to that $3.7 million difference, we added another $3.7 million into the reserve with the South Miami PCD mark.

Our allowance for credit losses as a percentage of loans remained essentially flat and our coverage of NPAs improved with the improvement of NPAs.

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

Thank you, Jefferson. And many thanks to the United team, I appreciate your focus on living our purpose, building our communities, and I look forward to continuing to succeed together. And now I'd like to open the floor for questions.

(Operator Instructions) We will take our first question, which will come from Michael Rose with Raymond James.

Maybe we could just start on credit quality. And if we exclude the [Mountain] Express Credit, looks like there were some moving pieces within charge-offs and NPAs and specifically wanted to touch on what's going on in home equity. Saw, there was a recovery, but then NPAs were up. And then if you can just -- I know you touched on it, but if you can just delve into Navitas as we move forward, just given some of the challenges this quarter. I think when you guys announced this, I won't -- going off memory here, but I think you talked about the business being kind of a 70 to 80 basis points through the cycle loss content business, obviously above that this quarter given some of the challenges that you referenced, but just wanted to get some updated thoughts there. And then what expectations might be for that business as we move forward?

Thanks, Michael. it's Rob Edwards. I would just say we do expect -- while we do expect -- and Lynn made the comment, the credit to tighten and the credit losses economically to struggle in the future because of credit tightening and the rapidly increasing interest rates. We're not really seeing anything to speak of yet. And so if you scale everything back, our losses are down, if you include Navitas from 20 basis points last quarter to 17 basis points this quarter. We did have -- you mentioned the large recovery in the home equity space. That was a single credit kind of a unique circumstance from a credit that we had acquired, and not -- but not really seeing any drivers in the home equity space. It continues to perform well. Actually, 50% of our home equity business is first lien business. So it's a very strong portfolio.

And as it relates to Navitas, I think when we purchased it, what I remember is sort of thinking of it as a 1% loss business, clearly, we are above that 1% number. And I think our recent guidance has been in the 95 basis point range. And Lynn made the comment that they were at 88 basis points for the quarter, if you take out this transportation portion of the portfolio. But -- the rest of the business outside of that long-haul trucking aspect of it seems to be performing so far within our expectations.

Okay. Great. Maybe just as a follow-up question, switching gears. Obviously, rates moved against you and every other bank this quarter. I know last quarter, you kind of talked about expansion in the fourth quarter, at least on a core basis kind of moving forward. Is that kind of still the expectations? And again, sorry if I missed this, I hopped on late, but if you can talk about maybe some of the headwinds that you guys still face and then maybe some of the potential tailwinds, I assume, not having any FHLB and hopefully getting to a peak or close to a peak and deposit pricing increases will certainly help, but would love some greater color.

Thanks, Michael. Talking about the margin in the fourth quarter and some of the trends that we are seeing. I do think the margin will be down a little bit in the fourth quarter, but not by as much as it was. And the third, we have some -- the positives are, we're seeing a slowdown of the mix change with the DDA moving from 31% to 30 in we do get 3 basis points of benefit from paying down the brokered mid-quarter here, which is -- which will be a bit of a positive. And what we were -- I guess what happened in this quarter, we really didn't raise rates this quarter, but what we saw was our existing customers moving to our promotional money market rates, choosing CDs, moving to more expensive CDs in some cases.

So it was kind of an existing customer mix change because our new customers are coming on at reasonable rates. We're putting on new loans at high rates, but we're still getting customers seeking and finding higher rates within a bank, which we're actually -- we're happy about. In some cases, we're calling them and making sure they know about the rates that we have out there. But I do think what you're seeing is the loan yield should continue at a similar pace moving higher and the cost of funds is going to be moving higher at a slower pace. So I think what you'll see is, again, slight compression in Q4 and stabilization to hire next year.

Very helpful. And then maybe just one final one for me. The revenue outlook for you and other banks, obviously, remains challenged and a higher for longer type environment. I know you've talked previously about kind of a 4-ish percent kind of expense target as we move forward. But just wanted to see if there's any plans to maybe look to either formally or informally plan to reduce expenses and is there a possibility under that scenario where you could experience positive operating leverage next year?

So yes, I think so. We're in our budget process right now. We have -- we closed 5 branches. Rich can apply on that (inaudible) in July. We sold the 2 branches that we had mentioned before that has a cost savings and a revenue impact to it off, obviously. There are certain segments of our business where we are actively cutting expenses, namely mortgage, like a lot of banks are.

So yes, we have many things that we're thinking about on the expense front and executing. And to give you a number, it's kind of hard to give a number right now because we are in the middle of our budget piece of it, but that 3% sounds like an okay target, but it's also an inflationary time period and we're kind of going through the individual budgets now. So my model higher than 3%, but I think we're going to shoot for that.

Our next question will come from Catherine Mealor with KBW.

I want just to ask about your loan growth outlook. You kind of -- you maintained a pretty steady growth pace, I feel like over the past few quarters. Just curious how you're thinking about that into next year. And then also within that conversation, I noticed that Navitas growth slowed a little bit this quarter. Is that something that you plan to continue through next year as well?

Catherine, this is Rich Bradshaw. We're still looking at the mid-single-digit loan growth, but probably a little bit less than the pace in Q3, recognizing the higher interest rates and some of the stress out there. And we expect that to kind of continue into Q1. However, we are optimistic about the opportunity that some of the downsizing of banks are doing, that's going to create real opportunities on the customer side. So we remain very optimistic about that.

And this is Jefferson. I'll take the Navitas question. Navitas trends were pretty similar on the growth front, but you'll notice that we sold more loans this quarter, we kind of leaned into selling a little bit more. We have -- our Navitas loans are 8% of total loans. We like that ratio. We've talked about keeping it below 10%, but our target is the 8% range. So I think you'll see us selling continue -- as long as that market is accommodative and amenable, we'll continue selling a higher number of loans each quarter.

What's your outlook for Navitas charge-off? How long do you feel -- or do you feel like we'll see this kind of elevated level just given the trucking part of it for the next couple of quarters? Or do you expect that to kind of normalize back a little bit?

No, we're thinking the same way you're thinking. In the next couple of quarters. We think definitely next quarter will be similar to this quarter, but then thinking it will begin to subside early next year.

And our next question will come from Stephen Scouten with Piper Sandler.

Maybe if I could go back to the margin here briefly. I know Jefferson you said a lot of it was kind of existing customers taking higher rates and transactional accounts and so forth. But I mean, I think you had said maybe 5 bps to downside last quarter, and we saw closer to 15 and then maybe expected stabilization in 4Q and now it sounds like maybe 2024. So is there -- are there any other phenomenon that's pushing that out? I mean the (inaudible) loan yields look pretty good. I'm just trying to decipher if there's anything I'm not seeing other than that move you talked about with existing customers on deposit prices.

Yes, that's pretty much it. Now we have been -- the other phenomena here is we are growing deposits at a pretty good pace. And when you're growing deposits, it's going to be at market rates. So I feel like the faster growth of deposits also has a kind of a -- bit of a negative near-term impact on the current margin. But the main drivers as we study it and get into it is the -- is existing customers moving to our more promotional rates often with a call from our own -- our people to make sure they're in the best rates that the banks offer -- the bank has offered.

So we really haven't moved up rates. It's mostly the impact of existing customers moving into our promotional rates.

Okay. And I think you said last quarter, securities restructuring wasn't really on the table. Has that view changed at all? Or I mean, do you think about the math on any of the longer-dated mortgage backs at this point if we really are in kind of a higher for longer environment at this point?

We haven't -- we run the math on it. We see the numbers. We have not seriously considered this right now. We do have the ability to do this with the higher capital ratios that take a capital hit and reinvest that into higher investing securities, but it's not something that we have seriously considered as of yet.

Okay. And then I guess maybe lastly for me, just high level, kind of any other -- I know you said the Tennessee branches were kind of out of market. Any other branch footprint parsing that we would expect to see? And then kind of conversely is M&A still more of a mid- to late 24 potential endeavor? Or is activity changing there that might precipitate anything near term?

Stephen, this is Rich. I'll touch base first on the branch question. We're going through the budget process now. We continue to always evaluate this on profitability and what makes sense in place in the market. So that will be -- it happens, it seems to happen every year. So we'll continue on that process.

This is Lynn. On the M&A side, yes, I still expect it to be slow and the reasons for that really primarily because of the marks you take. It's really -- in a normal environment, two things happen. One is you don't have these big marks. Number two, we always budget for pretty flat loan growth in an M&A transaction initially just because you have new policies, people dealing with change, you might have a great franchise, but -- I mean that's what we always shoot for. But it's just difficult for the teams coming on. And so in this environment, but typically, then we can bring in our other products and all and kind of grow through that.

And just honestly, in a slower loan growth environment, it's harder to grow through that. and then you've got the larger marks upfront. So it's kind of a math question right now and I think probably for mid-next year or something, it's going to be slow overall for traditional M&A.

Our next question will come from Christopher Marinac with Janney.

I wanted to ask if there is an internal limit on sort of the shared national credits and club deals and things of that nature. Just curious kind of if that is going to change at all as a result of last quarter's experience.

Chris, it's Rob. We do have an internal limit. All the subsegments of the portfolio have triggers and limits established. We are right now very low and quite a bit below the limit that we have established, and we really consider this 1 credit to be an outlier and not really representative of what we would expect from that portfolio.

Great. And Rob, I guess just a general question about the reserve level. I mean given the reserve or the charge-off comments that were made earlier, does this reserve level kind of cover that? Or would you see kind of gradually increasing reserves next year?

So we have increased the reserve by $40 million this year, and we did increase the reserve by about $50 million last year, really, the reserve is driven by asset quality in general, portfolio mix, loan growth and now the sort of the economic forecast. And more recently, it's been about the economic forecast. And so given the last 2 years, I could see the allowance growing. And I -- my personal opinion would be with sort of projecting moderate to low loan growth that it would probably be more likely be the economic forecasting and economic experience that ends up driving growth if there is any.

Got it. And then just last question on credit is just related to kind of the combined substandard and special mention. I know it's hard to compare with past cycles because the company is so radically different in terms of your portfolio and scale. But -- is the criticized numbers combined, could those elevate next year? Or would you kind of think about managing those more stable?

So if I look -- and if you look back on the chart, it was 4.1% at the beginning of 2020. If you combine the 2 numbers, you're at 4.1% of the loan portfolio. And right now, were at 2.9%. So I would expect the numbers to increase. It sort of feels like we're at a low spot at the moment. I would call it more of a normalization than anything else.

And our next question will come from Russell Gunther with Stephens.

Just a follow-up. I appreciate the commentary on Navitas losses and how you'd expect that to trend. So as we think about that normalizing in the beginning of next year, and potential credit migration in the core bank. How are you guys thinking about aggregate charge-offs on appropriate range in '24?

So I think what we have said previously is that we would see ourselves as a 30 basis point loss rate through the cycle type of experience. And so that sort of is how I think of it if things normalize. Now if I take out this outlier, we were at 20 basis points last quarter and 17 basis points this quarter, and that's with Navitas sort of higher losses from the transportation sector included. So -- but that's what we've said in the past is sort of a 30 basis point business.

Okay. So no change to the outlook there. Got it. And then just a follow-up on the margin conversation. Jefferson, I appreciate the high-level commentary. Could you just share a bit about what you're anticipating in there from a continued remix perspective out of noninterest-bearing and then how you guys would expect the loan-to-deposit ratio to trend for peer. Do you want to actively manage around 80%, could that drift higher? Just some updated thoughts.

Yes. So the mix change element should be generally in our favor, I believe, for at least for the first half of the year where you have the securities portfolio continuing to shrink in the loans continuing to grow modestly. So you should have a positive mix change on the asset side.

The DDA piece is a little tougher. We have been seeing a slowdown there and has given me encouragement that we could continue to see a slowdown, especially if rates don't rise a lot more from here. That said, we're currently modeling a 27% number in some of the forecast that we are making, but it's the -- our most recent results have been better than that and encouraging that maybe it could be better than that. But we also are seeing, again, this trend towards our customers moving into higher rate products.

And I feel like you had another part of that question that may not -- the loan-to-deposit ratio. So -- yes. I would think that loan-to-deposit ratio could inch a little higher. We have a good funding base. We are going to be I think using the strength of our balance sheet and some of the deposit growth that we've been seeing, and we've been seeing good deposit growth, and we're encouraged by what we're seeing here in October. I think you can have us be a little more conservative in the rates that we are putting out there into the next few months into next year.

So I think if we can manage this exactly how we want to you would see the deposit growth slow down a little bit. The loan-to-deposit ratio inch a little bit better and for us to have a better cost of fund experience.

Okay. Really helpful. And then just lastly, on the loan growth outlook, which I believe you guys are saying mid-single digits. How do you think about the contribution via asset class and any particular geographies of strength there?

Russell, this is Rich. We'll see it, I think, to change a little bit of the mix a little bit away from CRE into C&I. We've got several different initiatives that we're working through. Our biggest geography contributor this past quarter was North Carolina, and they led the bank in C&I. So we're leveraging their experience across footprint, and so that's how I kind of think about that.

I want to talk about Tennessee and some of the...

Yes. And in Tennessee, it's a good story for us. We put our new state President there, Kelley Kee. And over the last 3 months, we've hired 20 commercial professionals and already not pipelines, but closings, those have paid really good dividends. It's going to take a little bit more time to turn that ship. But I think we're going to start seeing the very positive results of that, if not first quarter, certainly second quarter next year.

Our next question will come from Brandon King with Truist.

So Jefferson, could you quantify what the spot cost of deposits was at the end of the quarter? And then what is the new rate for new relationships and new deposit customers?

Yes. So the spot cost of deposits was -- the average quarter was [$2.02] and the spot was probably 5 basis points higher than that for the -- well, I call that for the -- not exactly spot but for the month of September. On average, and new deposit relationships came in, I want to get -- I want to -- I have 2 numbers floating in my head here. Let's talk off-line. I'll get you the actual number. I don't want to say the wrong number. While, I do have that number, but I don't have it. I have 2 numbers that are in my head right now. So I want to make sure I get you the right one.

It's probably worth noting...

Hang on one second Brandon.

It's probably worth noting, we had deposit pricing committee this past Monday, and we had all the state presidents on and surveying them each individually, their exception pricing requests are certainly down. So it is -- we do see a little coming of the water here.

Good. Good. And then when you think about a cumulative deposit beta, I know before, I think you talked about 38%. But what are your thoughts are now just given that rates would essentially be higher for longer?

Yes. That's a great question. Let's -- we are doing our budget right now, and I want to talk -- we don't have a '24 forecast for our margin out there right now or our cost of funds. So let's stay in touch on this one. And I do think what you're going to see, I'll give you a shorter-term outlook. I do think that our loan yields will be up a similar amount as last quarter, so call that 18 basis points. And then with the margin guidance that I gave you of being down maybe half as much as last quarter, you can back into a cost of deposit increase that we're thinking about this quarter. So I think it is going -- it is continuing to grow faster than loans. And then we'll get into budget season and talk about what our '24 forecast is next quarter.

Okay. Makes sense. And just not going (inaudible), but following up on Navitas and expectations for losses to kind of ease next year. Just wanted to get more of a sense of what gives you confidence that losses will ease and maybe is it just more of a function of that trucking segment just kind of running off?

Yes, I think that's exactly the way I would describe it, Brandon, is that the trucking segment is -- I think if you add all the different trucking aspects of it together, I think it's 10% of the total portfolio. And then this specific piece where we're experiencing the highest stress level is much smaller than that. so probably 3%. So it's just such a small portion of the overall book, and we're continuing to see consistent performance of the remainder of the book, evidenced by the 88 basis points of performance in the third quarter.

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

Jefferson, I think I heard you mention that you guys were operating with a little bit higher elevated liquidity from last quarter, maybe where you think you see some of that cash being deployed here in the near term. Obviously, you paid off a lot of -- some of the short-term borrowings. Just curious where you see the opportunity to employ (inaudible).

Yes, with the inverted yield curve, I'm not seeing a ton of opportunity there. We are most likely to hold in cash or roll short treasuries with that cash.

Got it. And then final question. There's lot to unpack on the -- obviously, given the merger on the operating expense and fee income side, just curious maybe from a dollar perspective where you might see those normalizing here in the fourth quarter?

All right. So I did not completely hear a piece of that question. So can you -- I know it's an expense-related question, but I didn't totally hear what you said there. Apologies, David.

Sure. Yes. Just with the impact of First Miami, being fully layered in this next quarter, where you might see operating expenses of fee income normalizing on a dollar basis in the fourth quarter and near term?

Yes. I would expect expenses to be down on an absolute basis in the fourth quarter as we get the cost savings, we -- lion's share of the cost savings from South Miami this quarter. And fees, I think, should be -- we laid up a 2 nonoperating items. So the base is about $1 million higher than what you see here. We are seeing good underlying growth in our wealth management in our treasury management businesses. Mortgage is a bit of a wildcard. But I think you should see net growth off of that slightly higher base with the 2 adjustments that we laid out for you.

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, thank you all once again for joining the call, and we'll be glad to follow up with any additional questions, just reach out, and we will talk to you soon. Thank you.

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