United Community Banks, Inc. (NASDAQ:UCBI) Q1 2023 Earnings Call Transcript April 19, 2023
United Community Banks, Inc. misses on earnings expectations. Reported EPS is $0.58 EPS, expectations were $0.69.
Corporate Participants Lynn Harton – Chairman and Chief Executive OfficerJefferson Harralson – Chief Financial OfficerRich Bradshaw – President and Chief Banking OfficerRob Edwards – Chief Risk OfficerConference Call Participants Brad Milsaps – Piper SandlerBrandon King – TruistCatherine Mealor – KBWMichael Rose – Raymond JamesKevin Fitzsimmons – D.A. DavidsonDavid Bishop – Hovde GroupRussell Gunther – StephensChristopher Marinac – Janney Montgomery ScottOperator Good morning, and welcome to the United Community Banks First Quarter 2023 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 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 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 will turn the call over to Lynn Harton.Lynn Harton Good morning and thank you for joining our call today.This has certainly been a busy and an interesting quarter. Despite the turmoil in the U.S. banking markets, we continue to perform well. While our reported operating earnings per share was $0.58. If you exclude the progress double dip credit provision, which I think is a better way of looking at it. Our operating EPS was $0.65 for the quarter, and our operating return on assets was 119 basis points.Given the focus on liquidity and funding cost, we were pleased with our customer deposits growing at a 10% annualized rate in the quarter.
The cost of deposits did increase, and our mix of deposits moved toward more interest bearing as would be expected in a higher rate environment. Our bankers work proactively with our customers after the news of Silicon Valley and Signature Bank. And we also saw mixed changes resulting in growth in our insured products. We ended the quarter with essentially no short-term borrowings or advances. However, we did incur extra costs during the quarter as we decided to hold higher levels of liquidity given the environment.We expect to be able to hold more normal levels of operating cash going forward. We’ve included additional information in our investor deck regarding our deposit composition, granularity and insurance coverage and we’re glad to take additional questions on these topics on the call.
Our deposit franchise continues to be a key strength for us.With mixed changes and increases in rates paid on interest bearing deposits, our overall cost of deposits increased by 61 basis points. Our loan yields increased by 46 basis points for the quarter. Taking together these changes combined to decrease our margin by 15 basis points from 3.76 to 3.61. While down it’s still significantly better 64 basis points better than the same period a year ago.Our loan growth for the quarter was 8% on an annualized basis, credit quality continues to be strong with net charge offs of 17 basis points flat with last quarter. We did have an increase in non-performing assets and past dues from 29 basis points to 43. But these numbers continue to be consistent with normal performance.
Our senior care portfolio, which is 410 million or 2.4% of total loans, continues to be our most stressed sub portfolio and was responsible for the increases in non-performing assets and past dues.Our office portfolio 710 million or 4.2% of total loans continues to perform well, with very low levels of loans identified as high risk. This is a very granular portfolio. Our largest office loan is $23 million on a single property, and our 10 largest office loans combined total 132 million are only 80 basis points of total loans. Rob will be glad to provide additional color on the portfolio during the question period.This was the first quarter we officially had Progress Bank as part of United. While the deposit and loan growth numbers I’ve previously mentioned exclude Progress and Progress activity, they of course did add to our balance sheet and income for the quarter.
We are thrilled to have them as part of the team.I’m also pleased to report that we completed the conversion of Progress over this past weekend. And so now, not only are they part of United financially, they are also operating under the United brand and systems. David has built a great team and fantastic markets and we’re a better company together with them.During the quarter, we were also very pleased to announce a merger agreement with First National Bank of South Miami. This is a great bank, which has been in the market since 1952. We spent a lot of time with the management leadership team and are excited to bring their talent and energy to United in the latter part of this year. So, as I said, a busy and interesting quarter.And now I’d love for Jefferson to provide more detail on our performance.Jefferson Harralson Thank you, Lynn, and good morning to everyone.
I am going to start my comments on Page 8 and go into some details on deposits.As Lynn mentioned, we had a strong customer deposit growth quarter of $525 million, and we elected also to raise some brokered CDs in February, which gave us $790 million of new funding in Q1. The growth came in RCDs and our money market accounts as our DDA shrunk in the quarter. Our cost of total deposits moved to 1.1% in the first quarter from 49 basis points in the fourth and we now have a beta of 23% through the cycle.We have added some more detail on Page 9 on our deposit base. We have a granular deposit base with $32,000 average account size. Also, our business deposits were up 6%, not annualized this quarter, with stable DDA and the growth coming on the interest-bearing side.
In addition, our consumer deposits were up 1% not annualized, with a more noticeable mixed change from DDA to interest-bearing.On Page 10 is yet another look at our deposits this time with regard to FDIC insurance, we estimate that 64% of our deposits have FDIC insurance. And we also calculate that another 12% are public funds that are collateralized with securities, making them somewhat stickier, we believe. So in total, we have 76% of our customer deposits that are either guaranteed or collateralized. We also have a note on this slide that we are seeing growth in our insured cash sweep deposit or ICS deposits that was $319 million in the first quarter.Moving on to Page 11 and the topic of loan growth, adjusting for the acquisition, our loans grew $335 million or 8.2% annualized.
Again, adjusting for the progress book, the biggest growth categories were residential mortgage owner-occupied CRE and Navitas. Our portfolio is very granular with relatively small project limits and is very diversified.On Page 12, we look at some balance sheet highlights. Our loan-to-deposit ratio increased slightly but remained low at 78%, with a strong deposit growth in the quarter, offsetting the addition of progress. We also show that we had an increase in our TCE ratio to 8.2%. And our CET1 ratio remains above peers but came down 20 basis points with the Progress acquisition as we put some capital to work.On Page 13, we take a deeper look at capital and show how we achieved tangible book value growth in the quarter. Our regulatory ratios remain above peers but did fall slightly and moved towards peers a bit with the Progress acquisition.Moving on to the margin on Page 14.
The margin increased 64 basis points year-over-year but fell 15 basis points from last quarter and excluding loan accretion came in 21 basis points lower on a core basis. Our loan yield increased 46 basis points in the higher rate environment, but our cost of total deposit was up 61 basis points to 1.10%.The main driver of the cost of total deposits increase was higher deposit rates, but a mixed change away from DDA towards money market and CDs also contributed another 5 basis points of margin pressure. Many of these trends are continuing. I mentioned that our average cost of total deposits was 1.10% in the first quarter. But on 3/31, on a spot basis, the cost of total deposits was 1.27%, and we have seen that move up 5 basis points as of Friday.
So we had the benefits of loan yields moving higher and a positive mix change on the asset side being offset by higher deposit costs and a negative mix change in deposits.On Page 15, we look at fee income, which was down $3.2 million compared to last quarter. The decline is mainly due to the absence of $3.5 million in equity gains that came in Q4 along with $1.6 million of securities losses that occurred in Q1. Mortgage came in stronger as mixed change towards fixed product means that we sold more loans and put less loans on the balance sheet.Moving to expenses on Page 16, that came in at $131.2 million. Progress was the main driver of the increase. In particular, we added $2 million in higher core deposit intangible amortization, we also had $900,000 in higher FDIC costs from the rate increase.
Finally, the first quarter is seasonally higher with the restart of FICA taxes that came in $2.2 million ahead of the fourth quarter.On Page 17, we talk about credit. Net charge-offs were flat at 17 basis points. Of the net charge-offs, Navitas’ losses came in at 93 basis points, which we believe is now back in the normal range. NPAs increased to 43 basis points of loans and past dues also increased, while special mention loans improved. Rob is on the call and can discuss credit more in the Q&A.Our last page is Page 18, where we talk about the reserve. We set aside $21.8 million in a loan loss provision which more than covered our $7.1 million in net charge-offs, a $21.8 million provision also included a $10.4 million double dip provision to set up a reserve for progress.And with that, I’ll pass it back to Lynn.Lynn Harton Thank you, Jefferson.
And many thanks to the United team. You continue to drive great performance regardless of the environment and continue to exhibit your passion for taking care of our customers.And now I’d like to open the floor for questions.
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Question-and-Answer Session
Operator: We will now begin the question-and-answer session. [Operator Instructions]. And the first question will come from Brad Milsaps with Piper Sandler. Please go ahead.Brad Milsaps Jefferson, I appreciate the color around kind of spot deposit rates at the end of the quarter. And then as of last week, I was just kind of curious if you could update us kind of on your view of maybe what you’re through the cycle total deposit beta might be and maybe interest-bearing deposit beta as well? And just kind of what that means for how you’re thinking about the margin going forward.Jefferson Harralson Yes.
So talk about the margin a little bit. We were up 84 basis points year-over-year up to last quarter, were down 15 in Q1. Some of the changes that are happening here is we have continued good news on the asset side. We have new loans we’re putting on the high 7s. We have a mix changing towards more loans and away from securities, a rate hike that may come in May would help some.On the funding side, we’re really happy with the growth this quarter, the $525 million of deposit growth that was actually more than double what we had budgeted for the year. So we feel really good about where our funding is. As far as specifically to betas, I think you’ll see it move towards the high 20s on the total deposit beta. That’s how I think about it. I don’t have the — we can talk after on the interest-bearing liability beta, but I think it’s going to the high 20s.I think you’re going to see some of these effects moderate during the year, especially some of this mixed change that you’re seeing is going to begin to moderate.
And we’re also going to have some ability I think to reprice some of the funding that we’re putting on. So I think the margin will be down next quarter, but I think it will stabilize from there.Brad Milsaps Great. That’s helpful. And just a follow-up to that. The accretion that you had this quarter, would you expect that to remain fairly consistent as you move through the year, just kind of want to think about what that number could be.Jefferson Harralson Yes. I think that’s a fairly normal number there. We added $34 million of accretion from Progress that took us to $54 million total. So we’re right around $50 million left. So it’s a pretty big chunk of accretion yet to come through with the Progress deal coming in.Brad Milsaps Got it. And then just finally, on expenses, you called out a couple of things there that are seasonally heavy.
Just kind of wanted to get a sense of if you still felt comfortable with the amount of cost savings from progress that should drop after the conversion. I think that Lynn mentioned that you just completed, I think last quarter, you guided to sort of 4% to 4.5% growth on top of the 4Q run rate plus progress? Just wanted to see if you still feel good about that as you think about expenses in ’23.Jefferson Harralson Yes. So I think the first quarter expenses were a little heavier with the seasonal items. So we’re not going to have the growth rate on top of where we are now. I think that the second quarter number is flat to down from where we are now. And if you think about this quarter, we did have the seasonal items, the $2.2 million of FICA, we had unusually low deferred costs.
So I think that was down $900,000 versus the last quarter, that should come back to us. There are some investment dollars in here too. We incrementally added 10 lenders this quarter. We’re investing in 7 new branches. So you’ve got our normal source of investment in these numbers.Then for this quarter, you had the big stuff, which we laid out there, which was the intangible expense from the Progress deal and the higher FDIC cost. But I think what you’re going to see from here is you’re going to see flat to down next quarter, then you’re going to see the cost savings coming in, start next quarter as well, and you’re going to be kind of flat to slightly higher for the rest of the year. So a lot of that growth rate came seasonally high this quarter that we were talking about before.Operator The next question will come from Brandon King with Truist.
Please go ahead.Brandon King Yes. So I had a question on credit, and I appreciate the kind of guidance on the Navitas net charge-offs, but I wanted to get a sense of how confident you are that loss close to peaking based on your guided range for the year in 2023?Rob Edwards Brandon, it’s Rob Edwards. In terms of peaking, I think what we said last quarter and what I would hold to is a more normalized loss level on a sort of a standard book would be in the 25 to 35 basis point range. And so I feel like the — sorry, so if you’re talking specifically about Navitas, I feel good that when we put it in the slide in the back of the deck, that we would be in the 85 to 95 basis point range throughout the year.Jefferson Harralson I would say we feel pretty confident about that range from what we’re seeing it in past dues and the normal course of business there.Brandon King Okay.
Yes, I just want to confirm that kind of look like there. Okay. And I know it’s a small piece of your own portfolio, but I did notice that manufactured housing, both net charge-offs more than double. Just wanted to get a sense of what’s going on there, what kind of trends you’re seeing in that book?Rob Edwards Yes. So we saw $628,000 of losses, up from $300,000. We did liquidate some of the chattel from — out of the non-accruals through auction versus in the past, we’ve sort of taken ownership and done some repairs. So it’s a little bit of acceleration there.Brandon King Okay. And kind of going back to your previous point, as far as normalized net charge-offs for the company overall, how do you see that trending as we progress throughout this year based off what you’re seeing in your current graded loans?Rob Edwards Yes.
So like I said earlier, in terms of quarter-to-quarter, I don’t see any big shifts coming but other than I would just say normalization. And that was kind of the comment I made a minute ago about the 25 to 35 basis points is what I would think about as being a normal operating environment, and I could see us getting to that range later this year, but I don’t have anything specifically at the moment that says it’s going to happen next quarter, but it could, things change. It’s a dynamic portfolio. But again — and we’re not seeing, if you look at the chart on the bottom right of 17, you’d see that our criticized and classified has really been pretty stable over the last 2 years.Operator The next question will come from Mark Shuttle with KBW.
