United Community Banks, Inc. (NASDAQ:UCBI) Q2 2023 Earnings Call Transcript

United Community Banks, Inc. (NASDAQ:UCBI) Q2 2023 Earnings Call Transcript July 19, 2023

Operator: Good morning and welcome to the United Community Banks Second 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, pre-tax, 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 second 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 five and six 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. Our operating earnings this quarter were $0.55 per share, down slightly from $0.58 per share last quarter. Our operating return on assets was 1% for the quarter and our operating pre-tax pre-provision ROA was 165 basis points, down modestly from 171 basis points last quarter. As expected, the current level of interest rates and particularly the pace of rate increases is influencing our results. While we were pleased with our deposit growth for the quarter, we did see continued deposit mix changes as customers move from non-interest bearing accounts into higher-yielding products. Our cost of deposits increased to 164 basis points, up from 110 basis points last quarter.

This was partially offset by a 21 basis point increase in our earning asset yields, leaving our net interest margin at 3.37% for the quarter. Our overall liquidity position continues to be strong with no short-term borrowings or federal home loan bank advances. Our loan-to-deposit ratio remained steady at 78%, providing ample liquidity to continue to serve our clients’ borrowing needs. Loans grew at an annualized rate of 6.3% for the quarter and we continue to be excited about the opportunities we are seeing to expand our lending team with new hiring opportunities. Our markets continue to perform well economically with all of our states having both unemployment rates below the national average and ranking in the top 10 states nationally for in migration.

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Even with the strength of our markets, we are cautious about credit given the inverted yield curve and the Fed’s focus on slowing the economy. Changes in our economic forecasting model caused us to build our allowance in the quarter, which now stands at 1.22% of loans. Over the past year, we’ve increased our allowance relative to loans by 16%. While we believe is prudent to increase our reserve coverage, we are currently not seeing signs of widespread credit weakening. Past dues have been low and our special mentioned in substandard loans have been essentially flat for several quarters. However, we are seeing those credits identified as substandard become weaker as interest rates and inflationary costs are hurting their ability to recover and be upgraded.

Our non-accrual loans increased this quarter as one of our senior care relationships, already the identified as substandard, was placed in the non-accrual. On the strategic front, the Progress Bank conversion went very well and we’re excited to be operating with that team under the United brand. They have great momentum and have been an outstanding addition to our franchise. On July 1st, we closed on First National Bank of South Miami, a deal we announced on February 13th of this year. Conversion is scheduled for October and we look forward to having their fantastic team fully integrated with the company. Progress was the first partner to be converted using our new branding and new logo. We think it looks great and represents both our history and our future in a positive way.

This month we will also begin rebranding Seaside as United Community. When complete, we will be excited to have all of our banking franchise operating under one brand. And with that, I’ll turn it to Jefferson for more detail on our performance.

Jefferson Harralson: Thank you, Lynn and good morning to everyone. I’m going to start my comments on page eight and go into some more details on deposits. As Lynn mentioned, we had deposit growth in the quarter up $249 million. And excluding broker deposits and public funds, we grew deposits by $109 million or 2.3% annualized. Year-to-date, our customer deposits are up $533 million or 5.1% annualized. We did see increased price competition in the second quarter that drove our cost of deposits up 54 basis points to 1.64% and took our cumulative total deposit beta to 32% since the fourth quarter of 2021. We also saw continued deposit mix change in the second quarter as our customers are reasonably moving some liquid dollars into CDs and higher yielding money market accounts.

This quarter our DDA as a percentage of deposits moved to 31% from 34% and conversely the percentage of CDs moved to 17% of deposits from 14%. On another note, we have a very granular deposit base as represented by the graph on the lower right. We turn to our loan portfolio on page 10. We grew loans in the second quarter by $270 million, which is 6.3% annualized and similar to the dollars at which we grew deposits this quarter. On page 10, we also layout that our loan portfolio is very diversified and generally less commercial real estate heavy as compared to peers. Finally on page 10, you can also see our manufactured housing slice of the pie at 2%. You will recall that this business came with the Reliance transaction in early 2022. After the deal, we had said we would take some time to evaluate the business and after some time of looking at it, we have decided that it doesn’t fit into our model and we have stopped originating new loans and we will wind down the business.

We will continue servicing the existing book while it runs off over time. Turning to page 11 where we will highlight some of the strength of our balance sheet. First, with similar dollars in loans and deposit growth, our loan-to-deposit ratio was flat at 78% in the quarter. On the bottom are charts of two of our capital ratios, our TCE and our CET1 ratios, they were flat this quarter and remain about 100 basis points higher than peers. On page 12, we take a deeper look at capital and we show a tangible book value waterfall chart. Our regulatory ratios remain above peers and generally increased slightly as compared to last quarter. Moving on to the margin on page 13, the margin increased 18 basis points year-over-year, but fell 24 basis points from last quarter.

Our loan yield increased 17 basis points in the higher rate environment as new loans are being put on and the high 7s, but our cost of total deposits was up 54 basis points to 1.64%. The main driver of the cost of total deposits increase was a tougher competitive environment in the form of higher deposit rates. 18 basis points of the margin decrease came from the impact of us moving rates higher. In addition to the higher rates, we had a continuation of mix change away from DDA to higher cost money markets and CDs this quarter that contributed another five basis points of higher deposit costs, which is similar to the run rate of last quarter. So, we have the benefits of loan yields moving higher and a positive mix change on asset side that was more than offset by higher deposit cost and a negative mix change in deposits.

On page 15, our fee income was up $6.2 million compared to last quarter. The increase was driven by higher service charges, an increase in mortgage income and greater gains from SBA and Navitas loan sales. We did have two notable non-recurring items including a $1.6 million gain from the sale of a small commercial insurance and corporate benefits business and we also had a $1.4 million MSR gain this quarter. Expenses on page 15 came in at $128.8 million, down $2.4 million from last quarter. The main drivers of the improvement are listed on the page. Moving to page 16 and on the topic of credit, we set aside $22.8 million to cover $8.4 million in net charge offs and built the allowance for credit losses to 1.22% of loans. A main driver of the increase was a decrease in the forecast for the CRE price index, which drove a $7 million increase in the provision.

NPAs increased to 60 basis points in the quarter, mainly due to the movement of a single senior care loan into non-accrual. For the quarter, Navitas had just $2.5 million in net charge offs or 69 basis points. That said, we expect Navitas losses to be higher than typical in the third quarter and then to moderate in the fourth and end up in the 90 to 95 basis point range for the full year. With that, I’ll pass it back to Lynn.

Lynn Harton: Thank you, Jefferson and many thanks to the United team for your tremendous focus and drive to perform and your heart for our customers. And now I’d like to open the floor questions.

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Q&A Session

Operator: We will now begin the question-and-answer session. [Operator Instructions] Our first question comes from Catherine Mealor of KBW. Go ahead.

Catherine Mealor: Thanks. Good morning.

Lynn Harton: Good morning Catherine.

Catherine Mealor: I thought I’d just start with the margin. Jefferson, could you just walk us through your thoughts on outlook for the margin over the back half of the year? Do you see some stabilization? Or do you think we’ll still see some further compression after this quarter’s decline? Thanks.

Jefferson Harralson: Thanks Catherine. I think we’re at or near a bottom with the margin modeling down five for my model for the third quarter and I think you see increases from there. Some of the main drivers there are the mix change, we’re seeing a little less mix change through June and into July. So, hard to predict, but it feels like it’s stabilizing. The exception pricing has been out there for us as again something that’s hard to model. But again, we’re getting less request there, so that feels a little better as well. We’ve got some tailwind with First Miami, First National Bank of South Miami closing to get the rate hike that helps a little bit too, although we’re pretty neutral now. And then I mentioned earlier that the new loan yields are coming in the high 7s and we get mix change on the asset side as well. So, I think we’re at or near bottom and increasing from there.

Catherine Mealor: Okay, great. And then on credit, can you just talk a little bit about the senior care book? It’s only 2% of loans. It’s not a big book, but I know been a book that we’ve talked a lot about over the past couple of years. Any other credits within that book that are showing signs of deterioration like the one we saw this quarter? And maybe just your outlook — maybe in terms of just overall kind of credit trends that you’re seeing within that book and then the broader CRE book as well? Thanks.

Rob Edwards: Yes. Thanks Catherine. So, on the senior care book, it’s interesting, the credit that did move into non-accrual that was mentioned or the relationship had been in substandard accruing for some period of time. And so if you look at that $106 million that’s showing as substandard on the slide, that’s basically $32 million now non-accrual. We one in to non-accrual in Q1 and then the second relationship in Q2. And so there’s three facilities in non-accrual now totaling that $32 million. We’re not seeing a lot of inflow into the substandard category. So, we’ve been at — if you look at the whole criticized and classified bucket, if you go back two years on that chart, you’re at $240 million two years ago, we’re down to $200 million or $214 million now.

So, feel like there’s not been a ton of change, there’s half a dozen relationships that we’re wrestling with in the substandard and non-accrual space. And I think that’s likely to happen. If you have $100 million of substandard accruing, some of those are going to fall over into non-accrual and we’ll work through those. So, we feel like we have the portfolio properly identified and we see some improvement. We’ve had an upgrade and a payoff and you see some that haven’t turned the corner and that’s kind of just where we are in that process. And if you’re asking just about the industry, I think a lot of it just depends on what else is coming online in the market. We have one property that we’re kind of is a substandard property, but somebody has decided to build a hospital across the street.