United Community Banks Inc (UCBIO) 2024 Q1 法說會逐字稿

Good morning, and welcome to United Community Bank's First Quarter 2024 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 first quarter's earnings release and investor presentation were filed this morning on Form eight 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 or any forward-looking statements should be considered in light of risks and uncertainties described on Pages 5 and 6 of the company's 2023 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 will turn the call over to Lynn Harton for Good morning and thank you all for joining our call today.

We're pleased to report solid performance this quarter. Operating earnings per share came in at $0.52 down $0.01 from last quarter in part due to seasonally higher employment costs. Our operating return on assets was 93 basis points, up slightly from 92 basis points last quarter. As we've continued to work through changes in the interest rate environment, one of our focus areas naturally has been our net interest margin. We were pleased to see those efforts begin to pay off this quarter with a margin holding steady up one basis point on a GAAP basis and up two basis points on a core basis. Excluding loan accretion income, we continue to improve our loan and deposit pricing strategies to perform in a higher for longer rate environment. We're also seeing the effects of higher rates on loan growth as growth came in lower than we anticipated at 1.2%. The two portfolios with the highest correlation to interest rates, commercial real estate, including construction and mortgage, were essentially flat with our C&I portfolio growing during the quarter. Deposits appear relatively flat on an overall level. But as Jefferson will discuss, we had solid core deposit growth outside of our higher rate public funds portfolio credit continues to perform well. Total losses came in at 28 basis points. We have two portfolios that are designed to have higher loss levels, Navitas and manufactured housing, both portfolios also have higher coupon rates that compensate us for those higher loss levels. So excluding those portfolios, core bank losses were 12 basis points. Nonperforming loans increased slightly to 58 basis points and substandard loans decreased three basis points to 1.3%. Overall, credit metrics remain in a range consistent with strong underlying economic conditions. We continue to be mindful of how Fed efforts to slow the economy could negatively impact credit performance, but we're pleased with our results and have a positive outlook.

Our liquidity position continues to be very strong with a loan-to-deposit ratio of 79% and essentially no wholesale borrowings.

When I turn the call over to Jefferson Now for more detail on the quarter.

Thank you, Lynn, and good morning to everyone.

I am going to start my comments on Page 6 and go into some more details on deposits. As Lynn spoke to, our deposit balances in total were essentially flat in the first quarter, and we saw some continued, albeit slower shrinkage in our demand deposits. Underlying this flat result, we had 4228 million of deposit shrinkage in our public funds. This decrease was partly due to seasonality and partly due to our strategy to not match pricing. In certain cases, we were pleased to be able to more than replace the public funds runoff with solid retail and commercial deposit growth this quarter, our cost of deposits moved up eight basis points in the quarter to 2.32%. Our deposit betas for the cycle were below the industry median a year ago, but are above the industry median now at 44%. And we are hopeful to move closer to peers to get some of that back in 2020 for return to our loan portfolio.

On page 7, we grew loans in the first quarter by $56 million, which is 1.2% annualized.

This is a little lighter than we originally expected.

We are seeing less demand from our customers who appear to be holding back on projects due to rate and uncertainty. And we saw growth in C&I, but this was offset by shrinkage in investor CRE and residential construction. We saw Navitas loans be relatively flat as we kept loan sales high in that area at $28 million similar to last quarter.

On page 7, we also laid out that our loan portfolio is diversified and generally more granular and less commercial real estate heavy as compared to peers.

Turning to Page 8, where we highlight some of the strengths of our balance sheet. We believe that our balance sheet is in good position with no FHLB borrowings and very limited brokered deposits. This gives us some flexibility in managing through a tough interest rate and competitive environment.

On page 9, we look at capital, we had increases in our regulatory capital ratios and RTCE. and all of our capital ratios remain above peers. Our leverage ratio was also up 21 basis points. We did not repurchase any preferreds in Q1, but we remain opportunistic as we bought back $7 million last year at a discount to par.

Moving on to the margin on page 10, the margin came in just slightly higher, up a basis point on a GAAP basis and up two basis points on a core basis. Our loan yield moved up nine basis points to 6.24% with our new and renewed loan yield in the 8.5% range. For the quarter, we had slightly less loan accretion in the quarter as compared to Q4. Loan accretion went from eight basis points in the fourth quarter to a seven basis point benefit in the first, our net interest margin should be moving higher in Q2 of five basis points by our estimation, plus or minus one to two basis points.

On the positive side, our loan yields should continue increasing and our cost of CDs should be near a top as new CD costs are very near maturing CD costs. That said, we are still seeing mixed changes with DDA and savings shrinking and mix change towards more promotional pricing within now and money market accounts. Last quarter, I mentioned that our terminal deposit beta would be 45%, but now we are thinking is closer to 46%.

Moving to page 11, noninterest income was up $8.6 million to $37.2 million on an operating basis, better mortgage fee income of $5.6 million drove most of the $8.6 million increase for the quarter. We had 1.4 million of an MSR write-up, which compared to a $2.4 million write-down last quarter. This was a $3.8 million positive swing and the gain added just under a penny to earnings in Q1 aside, the MSR same core mortgage income was $1.8 million higher as we had greater volumes and a mix change towards fixed rate product over 90% was fixed rate that we sell and get more of the economics upfront than our gain on sale of other loans was down $700,000 in Q1. It was driven by fewer SBA loans sold, even though the gain on sale percentages were a bit better.

Operating expenses on page 12 came in at $140.4 million, up $1.6 million. Primary reason for the increase is a $1.5 million increase in fiber taxes. We also saw fewer expenses. We were able to defer as more of our mortgages ended up being sold. So the mix change towards fixed rate loans in the mortgage business ended up creating more loan sale gains, but we also had fewer deferred cost or about $700,000 because fewer loans came onto the balance sheet.

Moving to credit quality.

Net charge-offs were 28 basis points in the quarter with the bank being very low at just 16 basis points. Our NPAs were up slightly.

Our breakout on Navitas loan losses on page 18, we first broke out long-haul trucking two quarters ago, book has shrunk from $57 million to $38 million. Over that time. We had $2.4 million of long haul losses in Q1 as compared to $4.4 million last quarter, Navitas losses, excluding long-haul, were 1.06%, and we are putting on new loans and a 10.5% range.

I will finish back on page 14 with the allowance for credit losses, we set aside $12.9 million to cover $12.9 million in net charge-offs and our ACL stayed relatively flat quarter to quarter and is up year over year.

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

Thank you, Jefferson. Before we take questions, I'd like to recognize our teams for a great accomplishment this quarter. At the end of March, J.D. Power recognized United Community as the winner of the retail banking satisfaction survey for the Southeast in 2023, while not announced publicly we also know that we were rated as number one in trust in the Southeast. This is the 10th time that United has received this recognition, a testament to the dedication of our teams in taking care of our customers. We also received 15 Greenwich Excellence Awards for small business banking, a new hire for us. I am fortunate to work with some incredible teammates throughout our company, and I look forward to a great 2024 with them.

And now we'd like to open the floor for questions.

We will now begin the question and answer session. To ask a question, you may press star then one on your touchtone phone. If you're using a speakerphone, please pick up your handset before pressing the keys. If at any time your question has been addressed and you would like to withdraw your question, please press star then two. At this time we will pause momentarily to assemble our roster. First question comes from Catherine Mealor with KBW. Please go ahead.

Thanks. Good morning or I would start on growth. You mentioned that growth was a little bit slower this quarter and your clients are being more conservative and pulling back, how are you thinking about growth for the rest of the year, especially if we don't get rate cuts and how that may impact on origination levels.

Morning, Catherine, this is Rich. I'll take that, Laurence. Good morning. While certainly interest rates are impacting and also we have customers that have kind of hit the pause button. So we do expect low single digit loan growth greater than Q1. But absent a change from the Fed, we don't see significant loan growth moving forward in 2024.

And how about deposit growth should that match loan growth? Are there more initiatives to still maybe even grow deposits at a faster pace than that?

Yes. So we I think what you'll see is the Jefferson conference of the overall strategy is to be a little more aggressive in pricing for our most expensive depositors take public funds. So we're not matching some pricing on public funds. So you may see some of our most price-sensitive people leave the bank. We are getting really nice growth in our retail and commercial more core areas so we're trying to do a bit of a our mix changed a little bit. So I wouldn't be surprised if we ended up having a quarter where we had negative deposit growth because of this mix change that we're trying to do. But I think if I'm guiding for the whole year, I think I'd be positive growth.

And if that mix changes that partially what's driving your belief that the margin should expand by five basis points next quarter, but a little bit more coming on this on the funding side?

That's right. So we are in the first quarter, we lowered some of our money market rates. We lower some of our other promotional pricing. We did match on the some of our public funds accounts. And so we're doing it more on a targeted basis though versus a kind of a mass basis. We're just trying to optimize our cost of funds in our margin in our margin even before we get rate cuts. So we're trying to fight back a little bit and for benefit of our margins so that some of it a big piece of it too is no longer a headwind in the CD book. We are seeing CDs come on at about the pace and about the rate that they're coming off. So you don't have that headwind anymore. We have a continued mix change towards loans.

On the asset side, we have continued we're putting on loans at a higher yield than where our loan book is. So it's really a lot of little things. But I think the CD piece of it is one of the biggest pieces of things that was a headwind that's now not great. Very helpful.

Thank you.

Next question comes from Michael Rose with Raymond James. Please go ahead.

Hey, good morning, guys. Thanks for taking my questions on. So good to see a nice rebound in in mortgage this quarter. I'm just wondering to get a sense for trends there, pipelines and then I know the some of the loan sale gains were a little bit lower. Just wanted to get to kind of your thought process there, the market for SBA and Navitas paper, just as we kind of conceptualize what the fee income could look like over the next couple of quarters. Thanks.

Morning, Michael. This is Rich again. In terms of mortgage production, we do expect Q2 to be greater than Q1. We also expect fee revenue to be greater as well. However, with interest rates 7.5%, now we don't see the seasonality be as much of an uptick as you would normally expect or historically expect. And then I'll address the SBA side on the in the SBA world, you need to have see a lot of what we do is on the construction side in SBA and you have to have certificate certificate of occupancy in order to sell. So a little bit timing this year, we expect to come this quarter was a little bit off in terms of number of loans that we could sell. But the pipelines where we wanted to be, we expect that we will catch up this year, particularly in the second half of the year and what's also giving us optimism as the secondary markets up about 20% to 25% from last year. So we feel good about that.

Yes. So from SBA or the first quarter is our slowest seasonal quarter and we do expect increases just like Rich said, on the Navitas loan sale piece of it, we only grew were very flat on the VIA side for the for the first quarter, we sold on the higher end of what we have historically sold $28 million or so as we go into second quarter, we're going to reevaluate do we sell a little bit less and have that loan growth be a little higher or do we keep the loan sales where they are and keep that book flat. So I don't know if we've made that decision a little bit, but it's possible we could pull back on our loan sales a little bit, but the main driver of that line item is really the SBA line because it has a higher a higher gain.

So I would expect that line items to increase throughout the year.

That's very helpful, Jefferson. Thank you very much. Just as a follow-up, I know you guys have talked about M&A likely being a 2025 dynamic totally get that. But you guys have obviously very strong capital levels. You do have a buyback in place. I know the earnback maybe isn't as good as it would be if you were trading lower, but nonetheless, still very attractive as we think about any reason that you won more aggressively look at the buyback and usage of it for you. It's uncertain out there. You don't know the direction of the economy, so you'd rather just maintain relatively high capital levels near-term?

Thanks. I think it's a little more of the latter. We do have the preferred buyback still in place, but we saw that price move closer to par since the beginning of the year. So I think we're still of, I guess, actively looking at that lever. We like buying at less than par because of the increase to tangible equity. If we if we do the buyback, we really like having higher capital relative to peers in this environment. So we're always looking at it. We'll always have our authorization there, but we're not actively looking at that strategy currently.

All right. I'll step back. Thanks for taking my questions.

Next question comes from Stephen Scouten with Piper Sandler.

Please go ahead and good morning, everyone. Thanks. I guess on the Navitas loans, it sounds like at 10.5% yield, even though the net charge-offs have been obviously higher that the spreads there remain extremely attractive. So is that kind of the math that would drive potentially sell a little less and hold? No, more.

Yes. And we are looking at that. We want to stay below our kind of self-imposed limit. We do have a little room there. We continue to really like the business like the team there. And so that is a consideration as we go forward.

Okay. And as it pertains to some kind of credit around that book and maybe I think you guys kind of called out manufactured housing as well that could have higher losses over time. It seems like at least for Navitas that that could be maybe we can begin to crest, given what you've shown on the long haul trucking balances, do you have any view on what that book looks like in the quarters ahead and manufactured housing as well?

Yes, hey, Stephen, it's Rob Edwards on the Navitas book. It is also our view that the losses did Crest and have now come down. In fact, during the quarter in the long haul sector, we saw past-dues come down dramatically. So we're expecting continued improvement in that portfolio to come down in the second quarter.

And then maybe more normalized results in the third and fourth quarter as it relates to manufactured housing charge-offs are up. But I would say we've done a lot of studies of Freddie Mac has 20 years of results on manufactured housing and our results are consistent with what you should expect of this portfolio. And so we're not surprised by the performance, but I would just say keep in mind, we did stop originating last year. And so the loss rates may seem a little higher than normal. And anytime you have a runoff book as you're not originating new credit loss rates will be a little bit higher, but it's consistent with what we have expected and modeled.

Okay, very helpful. And then maybe just last thing for me. Kind of a more big picture question. I'm curious. I know it's been a pretty I'd say it's a difficult environment for you all to operate in as a bank here today and hopefully things look, you know, a little bit better in 2025. But from a strategic priority perspective, what's the focus for you all today, primarily as you think about positioning yourself well to outperform your peers when that environment does kind of improve and stabilize?

Yes. Thanks. This is Lance, Steven. I would say the primary focus is really on building our organic growth through organic teams rich continues to hire in and work on that opportunistically, really getting our Tennessee franchise stabilized and turned around when that that is really exciting to us what we see going on there. And that's been a drag on us in the past. We believe Florida is really starting to work forward. And so those internal things on the growth side are we're focused on on the pricing side, Jepsen mentioned margin. So really doing a lot of just kind of a one-on-one elements around how do we price better? How do we get the balance sheet structured a little better. And so I would say as more internally focused we do, I do continue to look at M&A opportunities, frankly, surprised at the number of those that are coming to us in that you wouldn't think this would be a time that a lot of sellers would raise their hands, but we continue to look at those. But I would say that our primary focus is internal. I'm getting ready for what we see as a lot of opportunity in 25.

Great. That's really helpful, Carl, and appreciate the time it will.

Next question comes from Russell Gunther with Stevens.

Please go ahead.

Hey, good morning, guys, and I wanted to follow up on the margin discussion. So Jefferson, I appreciate the commentary you gave for the coming quarter, would you expect that type of and a pattern to continue absent rate cuts or how are you kind of contemplating the remainder of the year. And then as we do get cut, if we do get cuts, how would you expect the margin to behave?

So thank you for the question, Russell. We are essentially neutral to rate cuts right now we have in order to have a flat margin. We need to get a 39% down total deposit beta to keep it flat, and we think that we can do that. But a lot of it's going to be determined upon what our competitors do, how much rate cutting we do before this rate cut comes. But we think that we are essentially neutral neutral to rates. So I think what you're going to see is some of the trends that we're talking about continue in the back half of the year. So I don't expect our margin to increase absent rate cuts. And if we get rate cuts, I think it's neutral to the margin, but it's very good to the whole bank. I think if we get rate cuts, I think Rich's forecast on loan growth would change some at netting our credit risk, other things change, and we think we're of a better, stronger industry and bank with rate cuts.

But on the margin specifically, I don't think it changes our margin a lot, and Rich may want to add to that I think the best way to illustrate that currently are underwriting interest rate is 8.5%. So that makes it difficult for some of these deals and projects to pencil out where if rates go down, then all of sudden you're talking this makes a lot more sense. So that's why we're very optimistic. We see some rate decreases.

That's really helpful color, guys. I appreciate it. And then last one for me would just be on expenses. So you gave some good and direction in terms of the dynamics this quarter. Just how do you see that playing out for the remainder of 24 on the non-interest side? Thank you.

Yes, thanks.

Thank you, a good question.

And as to delay at the expense of what it looks like this year.

Number one, we had some nominations at the end of the year that we started getting benefit from probably in February. We have four brands closures that should be kind of late April, early May. So we have many projects across the bank with targeted outcomes either via new technology, making us more efficient or are just trying to be more efficient with people or processes. So what so that is kind of the bigger picture.

The more direct picture is in the second quarter, we have about a $2 million increase due to merit. We have a little bit of offset of that from a seasonal spike in expenses declining than I would expect kind of that normal low low single digit growth rate kind of besides that. So you have a little bit of a bump in Q2 and then flattens out for the rest of the year.

That's great, guys.

Thanks very much.

Next question comes from Gary Tenner with D.A. Davidson.

Please go ahead. Thanks. Good morning. I had a little bit of a follow-up to the NIM. question.

As we're looking at it from the loan yield side, a nine basis points expansion this quarter, a little bit less than you had in the fourth quarter, barring any changes to the rate environment, do you suspect to have a similar amount, have your pick up 2Q, 3Q or is the kind of lower loan growth outlook, maybe an impediment to that level of expansion.

So I think in Q2 that nine basis point range is a good target. I could see it waning off a little bit in third or fourth quarter if the growth doesn't pick up a little bit because that replacement would that happen with the new 8.5% loans coming on slowing down?

I can see that slowing it down a little bit.

I like the plus nine for Q2 and then maybe slowing down a little bit from their bank structure.

And then as it relates to your guide than that, five basis points plus or minus two basis points is would you say that deposit pricing or loan growth, which one of those is a bigger lever right now for a that's a good question.

I would say it's more on the deposit side is our bigger lever. We have a little more control over that and succinct and has more I guess.

Yes, I would say deposit pricing on that, but they both affect that.

Of course.

Thanks for the questions.

Next question comes from Christopher Marinac with Janney Montgomery Scott LLC.

Please go ahead. Thanks. Good morning.

I wanted to ask either Rob or Rich, just about the inflows and outflows on sort of criticized assets this quarter. Whether you look at it from the special mention or the classified side. Just wanted to get more detail on the puts and takes of what's coming and going on and off.

Yes. So Chris, it's Rob. So on the on the classified side, basically, we upgraded one very large substandard credit C&I credit and so that that played a role there.

In terms of other items, we do go through a process. And we just finished one in Q. one where we look at maturing loans in the next 12 months. And re amortizing them look at the impact of interest rate on payments and trying to identify upcoming problems and address the risk rate at that time. So we did have a senior care project that got downgraded, and we had a large C&I credit that got upgraded. So just some movement in those types of spaces.

And Rob, I presume that some of that also is just debt service coverage at normal things, but they're still performing as agreed?

That's correct. Yes, that's right.

Okay. And then my follow-up question just has to do with kind of risk-adjusted returns. I mean, it kind of lends itself to the slide on the Vidus every quarter, but it's also part of a broader question on the are you comfortable with what you're getting across the various business lines? Do you think those may even expand as rates stay high for longer?

That's a great question, and I'll start with that. So I would say on the Vidus where it's a very profitable company or use it. We're used to it being a lot more profitable than it is today. So we are really looking forward to those losses normalizing between now and Q4 to get that back up to the profitability that we'd like.

If you look at our marginal deposit E, our cost and our marginal loan loan yield that I'm going to speak to that because that is really a matter of we've got to burn off some of these old fixed rate loans because, right.

So along those lines, if you think about our new loan yield on new loans coming on at eight and a half in our new deposits coming on in the low fours. That's a really wide nice incremental margin. Now you're seeing pricing pressures on both sides of the balance sheet is not an easy environment, but it's there is optimism as we go into the back half as we go into 25 because I'd just like when I say these are older fixed rate loans that are hurting our profitability burn out over time. And so time is our friend to increase the use of these ROEs, ROAs and ROEs that you're seeing, we don't like having ROA below 1%. Our budget and our forecasts have us moving over that over time, we expect to be there over time. And so we feel good about our individual businesses and their improvements over time as well. And we can talk about any specific business.

I don't want to if you're talking about more specific businesses, we can talk about that, too, but we our targeting to be in a more profitable bank and having our ROAs and ROEs increase over time Jeff say I would at least by about two months ago now that we spent a lot of time on pricing strategy and a new pricing model, and that's been in place and we're going to see those benefits now and a little more emphasis on C&I versus CRI. And that's that's been a big part of all this. We're measuring that on a monthly basis by geography and how what the results are.

Great. That's super helpful. Thank you all for the hub for your contributions there. I mean, it's an interesting illustration that the new borrower paying eight 50 certainly comes on as a strong credit strong coverage so that their ability to repay is still very good.

Next question comes from David Bishop with Hovde Group.

Please go ahead. Yes, good morning, Jeff. Just as a follow-up question on that on the balance sheet, how should we think about the securities cash flows per quarter and I assume some of that's going to flow into funding loan growth this year. Just curious how those balance sheet dynamics should work.

That's right. So you are getting a couple of hundred million a quarter of, call it, $150 million to $200 million a quarter of cash flow coming from the securities portfolio. Our loan growth has been wider than as you've seen a lot of more reinvestment into the securities portfolio. And that is a reason that you're seeing and we're expecting to see that securities yield to grow throughout the year because we are investing into new securities. So a lot of that question. The answer we'll see comes from our expected deposit growth and deposit growth with our strategy that we've been talking about can stay flat, then you're going to see a lot more reinvestment in the securities portfolio that can fund the loan growth as well. So so my base plan is for relatively flat deposits, take the cash flow from the securities. I see how much of that funding loans and maybe funds all the loans?

We don't know. But I think maybe the bigger question you're asking is I think you will see a balance sheet be relatively flat this year, but grow a little bit all depending upon where what deposits do.

Great. Appreciate that guidance. And then one final question. You'd mentioned the Hartford Fire potentially to start the dialing back rates there. Are you seeing your competitors of tap that rate yet on money market or CD specials or have they stabilized your market allowing you to move down? Just curious what you're seeing from a competitive backdrop.

Maybe I'll start real quick and pass to Rich, I would say, very limited and scattered, but we are a little bit Would you agree?

And there's there's still everyone slow and irrational one button and it's been it's come down a lot. It certainly has gone down a lot.

Great. Thank you.

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

But Great. Well, thank you all for joining the call, and we look forward to our additional questions. If you have them, please reach out directly and we look forward to talking soon. Thanks so much.

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