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.

So, we think that’s favorable. Sometimes you get lucky. And so — but generally, we’re seeing some properties show improvement and gain traction and some are slower to gain traction. So, that’s the senior care and that’s really the driver in our three portfolio. So, your second question around CRE in general is that we’re seeing really favorable and consistent performance across the portfolio right now other than the senior care space.

Catherine Mealor: Great. Thank you. So, that increase in the reserve, would you say that’s directly tied to this portfolio or just kind of general CECL qualitative kind of factors?

Rob Edwards: Well, it’s — yes, so the — as it relates to CECL, the driver are charge offs, loan growth and economic forecast and really the drivers in the economic forecast for the quarter were the CRE price index and then not to the same degree, but to a lesser degree, a forecasted decline in business investment. And so the dramatic change was what Jefferson mentioned the CRE price index, but to a lesser degree, the business investment expected forecast also drove some of the allowance up in some of the C&I and equipment finance categories.

Catherine Mealor: Got it. Okay. Great. Thank you for the color.

Operator: Our next question comes from Stephen Scouten of Piper Sandler Companies. Go ahead.

Stephen Scouten: Hey, good morning, everyone. Appreciate the time. I guess, if I could maybe dig back into the margin guidance a little bit more. Jefferson I know you said maybe five basis points down next quarter, but could you give kind of updated thoughts on where you think that cumulative deposit beta might go for the full cycle and kind of how you’re thinking about the floor on non-interest bearing deposits as a percentage?

Jefferson Harralson: Yes. Thanks Stephen. Great questions. On the total deposit beta, I mentioned, I think that can move into the kind of $36 million to $38 million range is what we’re thinking about. The — that’s what we’re currently modeling. Now, what’s going on is that the — you get a continuation of the asset beta too that I think will offset that. So, you have both continuing to increase the rest of this year and into next year. The DDA percentage is — I think we are modeling for that to continue to move down. I think it could be down another 100 basis points, maybe 200 basis points. I know that kind of 10 years ago, we were much lower in the DDA percentage. But I think our bank has much changed since then with a lot more C&I mix in there since then.

So, I don’t think we’re going back to where we were way back historically. So, I think you’re getting close. I really think that once you see rates stop moving higher, that’s when you’re going to see that DDA percentage start to stabilize. I feel like we’ve already seen it start to stabilize. So, I think it’s moving down. We’re modeling it to move down, but I don’t think it’s going back to 2015 levels or 2012 levels.

Stephen Scouten: Yes, that makes a lot of sense, Jefferson. Appreciate that. And then just kind of conversely on the asset side, is the repricing of fixed rate loans, is that kind of the dynamic that makes you think the NIM could bottom here in the third quarter? And do you have any sort of numbers for how much of that book will reprice maybe fourth quarter or in 2024, what have you?

Jefferson Harralson: We might have to get off the line with that, but I do have that, but it’s coming off like 4.5% and coming on in around 7%. But I have to look at how much is actually coming off and so — but that is a driver of it. In addition, we’re trying to push a little more towards putting on variable now. So, the mix of variable and fix is coming on the high 7s now. Navitas is coming on just in the low 10s now. So, I was thinking more in combination, but we can certainly look at the fix by itself. I know it’s coming off at 4.50 and going on close to 7.

Stephen Scouten: Okay, that’s great. And maybe just last thing for me, you guys hold a little bit more capital than peers on the average. It sounds like continued hiring is probably in the plans, but can you give me some thoughts on just capital priorities as you look out maybe over the next year or two kind of longer term?

Jefferson Harralson: Yes. So, organic growth will be number one. It always has been. Dividends will be number two and a distant third is buybacks. M&A would be kind of a can [ph] with the organic growth there. So, we like having more capital. We think that serves us in times like now. We are buying back — put a modest amount of preferred. We like the opportunity with our preferred being less than $25 and we bought back less than $300,000 this quarter, but we’re continuing to buy back a little preferred just because it’s trading below that $25 level and you get a small gain on the TCE. The other part on the growth, on the — you mentioned hiring. Should we go there with Rich and talk about hiring and how we’re thinking about that?

Rich Bradshaw: Sure. This is Rich and it’s important to note that we did our — another lift out here in East Tennessee that was a leader in six commercial people. And since the last earnings call, we have brought on Kelly Key as our State President in Tennessee. We’re very excited about that. He had 25 years at a super-regional in Nashville. And between the lift out in East Tennessee and other hiring, we have gotten 14 yeses on the commercial side and 11 have started. So, we’re very excited in addition to our two lift outs in the first quarter. So, we’re very selective on this. Don’t have anything actively going at the moment going forward. I think we want to get this real right, but we’re very excited and extremely excited about the opportunity in Tennessee.

Stephen Scouten: Great. Thanks so much for all the color. Really appreciate it.

Lynn Harton: Thank you, Stephen.

Operator: Our next call — our next question comes from Brandon King of Truist. Go ahead.

Brandon King: Hey, good morning.

Lynn Harton: Good morning.

Brandon King: So, I wanted to talk about Navitas and I appreciate the guidance. It seems like losses were lower this quarter and expected that — just expecting that to trend higher next quarter and then moderate in fourth quarter, but could give us some context as to the cadence of the losses for this year? And what kind of — what gives you confidence that losses will moderate towards the end of the year?

Rob Edwards: Hey Brandon, this is Rob. Just as it relates to Navitas, if you go back, we purchased Navitas in 2018 and we sort of anticipated at that time a 1% loss rate. Following that, two things happened. One is I think they improved sort of moved upscale in their customer selection. And of course, we had some economic favorability. We continue to believe that the customer selection that they experienced over the last really four and a half years has improved, but they’ve experienced in just one small segment of their transportation portfolio over the last 18 months. When they look back in time they’ve identified about a $35 million book of long haul tractor/trailer loans that — where the values have come down and the revenues have also come down on those business, shipping cost have come down.

And so they’ve identified a pool that they’re going to have higher than normal stress in during the year — during the second half of the year. And so that’s really what’s driving that. It’s a small portfolio that they’ve contained, but it will drive losses up and really the size of it being small is really why we anticipated waning back in the latter half of the year.

Jefferson Harralson: So, I’ll just add in that we like that 90 to 95 basis point range for the year, but it’s just going to be higher in the third quarter and lower in the fourth.

Brandon King: Okay, okay. So, is this kind of come with the small subset of loans and just kind of a normalized rate going into next year?

Jefferson Harralson: Yes.

Brandon King: Okay. And then on expenses, Jefferson, what are your kind of expectations for the run rate with First Miami coming online in third quarter and back half of the year?

Jefferson Harralson: Right. Thanks. Great question. And on the run rate of expenses, so the expenses you saw this quarter are a pretty good run rate for us. I know they were down. We were pleased to be able to offset the natural merit increases that we had this quarter. So, I think this number plus First Miami with a small growth rate on it. We’ve been thinking a lot about expenses and where you have expenses are in the branch network and 60% of our expenses are on people. I mean, over the last three years, we’ve closed 16 branches or about to close, we have five that are set to close at the end of July. We’re going to be reviewing that. We have a management today get together coming up here where I think we’ll talk about these types of things and look at branches again.

60% of the expenses as I mentioned are in people and we think about productivity quite a bit. What we have happening now and it’s a little bit despite of what Rich just mentioned is a hiring what we call a chill. It’s not a hiring freeze because we’re always going to hire great people or great producers, but we’re being a lot more selective there than elsewhere in the bank really trying to successfully complete or successfully enact this hiring chills. You’ll see less new hires coming through. On the mortgage side, we’ve had multiple cuts there as their volumes have come down with higher rates. So, those are the types of things we’re thinking about expenses. But I think kind of flattish with a small growth rate is how we’re how we’re thinking about it.

And then others can jump in there if they like. But I’ll mention one more thing there is that our efficiency — as our margin has come down, our efficiency ratio has gone higher. So, our plants move this down is going to be some of the growth, some of the hires that Rich talked about. Being able to grow loans in this mid-single-digit range, keep expenses as flat as we can and improve the efficiency ratio like that.

Brandon King: Got it. And then last one from me, Jefferson, do you happen to have the NIM in the month of June?

Jefferson Harralson: So, I don’t have that. I have it, but it’s just so many of these non-recurring things that you annualize times 12 and it just doesn’t make a lot of sense. But I mean, I do think we’re — if you put a run rate on — if I try to put run rate on the June margin, it’d be very close to where we are now. I think our margin is bottomed out very close.

Brandon King: Okay. Got it.

Jefferson Harralson: It’s really hard to take some of these things that go in and out multiply times 12 and get a real feel for what that is.

Brandon King: Yes. Totally understand. Thanks for taking my questions.

Jefferson Harralson: All right. Thanks.

Operator: Our next question comes from Michael Rose of Raymond James. Go ahead.

Michael Rose: Hey good morning guys. Thanks for taking my questions. Jefferson, maybe just to go back to the margin briefly, I know First Miami just closed. Can you give us a sense for what the total amount of accretable yield is now with First Miami and then what you would expect the accretion to kind of run out over the next couple of quarters just on a scheduled base? Thanks.

Jefferson Harralson: That’s a great question because we’re going to do final marks now. So, the numbers I’m giving you could change as we do the final mark. So, without First Miami, we have $40 million of accretion to go through. Our initial expectation of the marks were that First Miami was going to add another $40 million on top of that. So, we had $4 million of accretion come through before First Miami. Currently modeling for the third quarter that that’s $6 million, although again that’s — we don’t have the final mark. So, it’s really — it’s tough, but the rates haven’t changed that much since we announced First Miami, so maybe that $40 million mark stays in there. But what I’m using for my forecast right now is that $40 million, but it is subject to change as we get to the final mark. So, for now I’m using that we’re at $80 million currently most likely, but then we’ll get the final mark here probably in a month or two.

Michael Rose: Okay, perfect. That’s very helpful. And I think you said that the margin was kind of nearing a trough. I think you said down about five basis points or so was your expectation for the third quarter. I assume that’s on a core basis correct without the impact of accretable yield or is it all in, just want to clarify?

Jefferson Harralson: So, they’re very close because the addition I’m using for the third quarter is $2 million. So, those numbers are very close, but I was thinking about it with, but the difference isn’t super huge at $2 million of increase I’m expecting for the third quarter.

Michael Rose: Okay, perfect. Appreciate it. Maybe just switching gears a little bit. So, you guys have been very kind of active with M&A over the years. I know your target size is kind of $1 billion to $3 billion is kind of what you’ve, kind of, targeted. You guys have pretty good currency. There’s a lot of chatter about M&A out there. Obviously, many people can’t do it loan mark’s credit, but interest rate marks are prohibitive, but just wanted to get a sense for, are you guys still open for business as it relates to M&A and are you actively engaged with anybody at this point? Thanks.

Lynn Harton: So, yes, Michael, this is Lynn. So, I would say we’re continuing to be actively engaged in terms of talking to people, building relationships. I feel like we are in the selection set of those people considering selling. So, from that perspective, we’re active in terms of actual transactions. My expectation is not much happens over the next several quarters, really, for the reasons you mentioned. The math is difficult, marks, prices are not what some sellers are expecting. So, I don’t know. I do hear chatter about deals getting announced, but I would personally think that we don’t see that pick up until maybe the middle part of next year or something like that.

Michael Rose: Okay. So, maybe an M&A fill just like a hiring fill has post–.

Lynn Harton: Yes, that’s right. I’m telling our technology team this is the opportunity to drive some of those projects a little quicker than we’ve been doing, which we’re kind of excited about. We’ve got a lot of great things on the path for that.

Michael Rose: Perfect. Maybe just finally for me. I know it’s hard to predict, but the Navitas SBA gains were up a little bit. Just can you kind of describe the environment and what we might be able to expect in terms of loan sales here in the next couple of quarters? Thanks.

Lynn Harton: So, I’ll pass to Rich on the SBA gains and we’ll talk about that. I’ll follow-up on the Navitas ones.

Rich Bradshaw: Sure. The SBA, it’s timely because we sold SBA loans yesterday. And I would say the market was a little bit up. So, I feel good about that. It’s kind of a countercyclical product. And one of the things I wanted to mention in this call today is looking at that first of all, order fully staffed in that which is rare because there’s always a lot of demand for that product and people. But we are anticipating that that product will be up for us about 25% this year. So, it’s been really good for us and we’re excited about that.

Lynn Harton: And I’ll add in that third quarter is usually a little bit seasonally stronger than second for SBA gains. So, I don’t know, flat to higher maybe on the SBA side. No, I think it would be up because our inventory will be up too with regards to the 25% greater production and the market for Navitas loan seem stable. So, I would expect that to be relatively flat. So, the category together I would expect to be slightly higher in third and fourth quarter, just following seasonality and the volumes that we’re seeing.

Michael Rose: Thanks for taking my questions guys.

Lynn Harton: Thank you.

Operator: Our next question comes from Kevin Fitzsimmons of D.A. Davidson.

Lynn Harton: Hi, Kevin.

Kevin Fitzsimmons: Hey, good morning, everyone. Maybe just start out on your comments about manufactured housing, I’m just curious whether that — just the line of thinking, is it something that you see out there in the environment or in terms of the economy or if the economy was perfect right now, would just not be a fit or is it a combination of — thanks.

Lynn Harton: And — Kevin, let me I’ll start with that and then Jefferson and Rich can jump in. I would say first, any of these businesses, we start with the — can it be meaningful for us and really be something of size enough that we want to that makes a difference. And as we looked at that business, we like the team, they know what they’re doing, but it’s very competitive. It’s subprime, it’s consumer-based, which adds to regular risk over time and it’s inside of our market. So, it really wasn’t any one thing, but we said look, we want to take this from do we want to take this from $300 million to $1 billion. For those reasons, we really don’t and if we don’t want to do that, then it’s probably just better just to wind it down and put our efforts somewhere else. But so that was — those to me were the drivers. I don’t know if Jefferson, you want to add.

Jefferson Harralson: Well, I’ll just add into that’s the same line of reasoning we used to sell the corporate benefits insurance business, the healthcare insurance business. It had very little overlap with our existing customers similar to MH. In this case, it was even — it was very, very small, less than $1 million of revenue, so — and not a lot of overlap with existing clients. So, we use a similar reasoning for that business as well. And we’ll continue to look at our businesses, especially our smaller businesses with that lens. So, it wasn’t anything specific, yes, to the portfolio or any problems we saw, it’s just really an overall business strategy question.

Kevin Fitzsimmons: And that was a business you guys were in and it was just imperative from Reliant, correct?

Lynn Harton: That’s correct.

Kevin Fitzsimmons: And will — so you stop originating then do you just let the loans mature out or do you go actively trying to sell them? I don’t know if there’s a market?

Jefferson Harralson: I think with rates moving higher, I think the idea is just to let them mature over time. If rates move down and there is a better market or if you can sell them without a loss, then maybe you accelerate the exit of the business, but our plan currently is just to service the loans and let it run down.

Kevin Fitzsimmons: Okay, great. And then just a quick follow-up on — you guys obviously have very strong capital There’s been some discussion that could banks look at selling some of their underwater securities and redeploying some of that at higher rates or paying down debt? Is that something that’s on the radar for you all or I would imagine in that with every acquisition like the First Miami coming in, you really get some of that just from dealing with their securities portfolio? Just curious how you’re thinking there?

Jefferson Harralson: Yes. So, we have looked at that and we are not going to do a restructuring such as that. We did make a decision this quarter to do a swap of $700 million of our securities book from fixed to floating. And the main idea of that was to protect TCE and capital in the event of higher rates. We took our AFS portfolio from three and a half years duration to two and a half years duration. We took our AFS portfolio from about 20% floating to 60% floating and we get 150 basis points initially anyway benefit which wasn’t the reason we did it, but you do get a little benefit by moving to the shorter end of the curve. So, part of the margin benefit next quarter is that the securities yield should be in the $2.80 range with this change depending on what rates do.

If you get a rate hike, you get a little more benefit from this and if you get rates down, you get — it works against you. But we mainly did it for risk allocation and protecting TCE and unrealized losses in a rising rate environment.

Kevin Fitzsimmons: Okay, great. Thanks.

Jefferson Harralson: All right. Thank you.

Operator: Our next question comes from David Bishop of The Hovde Group. Go ahead.

Jefferson Harralson: Hey David.

David Bishop: Hey, Jefferson. Hey, with the — I appreciate the color on the hires in the Eastern Tennessee market there. But I don’t know if I missed this. Does that impact your outlook in terms of expected loan growth this year, will that have maybe an inflationary result in the back half of the year? Are you still comfortable with that mid-single-digit growth outlook?

Rich Bradshaw: Hi, David, this is Rich. To answer your question, I think we’re still looking at the mid-single-digit loan growth. I mean, clearly, we’ve tightened credit criteria for both commercial and mortgage as we move forward in this world. But we are thinking about that same — I expect Q3 to kind of look like Q2 both loan and deposit growth. I’m hoping that can go, but realize these people have just started. So, within the last 30 days. So, it’s going to take a quarter for them even to see some results. But what we’re really thinking is — this is going to be hitting on all cylinders January 1st and we’re really excited about that.

David Bishop: Got it, understood. And then maybe from a credit perspective, I know — I appreciate the color on the office portfolio in the segment. But from the surface, does it look like there’s any pressure from debt service versions driving. But as you look out, any change quarter-on-quarter in terms of ability or prospects for your borrower base to handle higher rates as these loans come up to renewal and mature?

Rob Edwards: Yes. Thanks David, this is Rob Edwards. So, we’ve done several analysis both at a sort of special stress test at the top of the house that sort of focuses on CRE. We’ve gone through some fixed rate variety of CRE products and looked at top 50 and re-amortized at new rates and we’re actually doing another one of those test right now. So, we’re sort of in an ongoing sort of stress. The portfolio from different angles and so far we haven’t seen anything that really identifies as when the rates change, these people aren’t going to be to make payments. Really the first test we looked at was fixed rate borrowers maturing in the next 24 months because I think you sort of go back in time and like well their rates are going to change the most, but we had one borrower that we would have rated special mention after the analysis, but as it turns out they were already rated special mention.

So, we just didn’t see anything that forecast a need for a change or any downgrading.

David Bishop: Got it. I appreciate the color.

Operator: Our next question comes from Russell Gunther of Stephens. Go ahead.

Russell Gunther: Hey, good morning guys. Just a couple of quick follow-ups at this point. On the office topic, I appreciate the recent remarks. Do you guys have a maturity schedule that you could share for that sector?

Lynn Harton: We could create one. We have looked at the maturities a couple of different ways. I was thinking was a maturity in the K, we’d have to get back to you — or the Q maybe. I have to get back to you on that, Russell.

Russell Gunther: Okay, no worries. And then just last one, on the deposit side, any color you guys can share in terms of retention out of progress in First Miami?

Lynn Harton: So, I’ll pass this to Rich because it’s a hard question, but First Miami just closed, so we don’t really have a lot there. But talk about progress.

Rich Bradshaw: Sure. I think the challenge that with progress at the beginning is that we had all this pressure and we had a conversion. And so the great news is the conversion is behind us and talking with David Nast, our State President there, he feels very positive on this quarter. Not only we had loan growth last quarter, so that was strong, but he is anticipating and forecasting that we’ll have some loan growth this quarter as well. And with our pricing strategies and the fact we have the conversion behind us, is the new — he also is the first to get the new logo. So, there’s some excitement there as well.

Jefferson Harralson: And I can give more detail, exact numbers for you there on what progress deposits have been since we bought in that.

Russell Gunther: That’s helpful. I appreciate it guys. Everything else was asked and answered. Thank you.

Operator: Our last question comes from Christopher Marinac of Janney. Go ahead.

Christopher Marinac: Thanks. Good morning. Jefferson, as you look at the deposits and kind of new customers that have come in this year and just existing customers doing more, what is the average life of those relationships? Is it something north of three years? Is it longer than that? I just kind of want to recast kind of franchise value for the organization as you’ve expanded?

Jefferson Harralson: Wow, that’s a great question. We’ve been thinking a lot about that. We have Alco [ph] I think later today that we’re going to be talking about that because what we’ve seen is that our — as rates have risen, our asset durations have expanded and we think our liability durations have shortened. Now, what you’re seeing is a mix change from the product that you would usually assume as your longest duration product of DDA towards CDs, which have a stated duration to them, right? So, it’s — you’re seeing some mathematical mix change affecting the duration, but then you’re also seeing price competition, customers move around. So, I still think we’re longer than four years, four, four and a half years on our liability duration.

And — but as we’re doing the math, we have $1 billion, we’re trying to calculate surge and we’re trying to calculate new durations on each individual product and we’re watching the mix change on DDA. So, all-in I think we’re around four and a half years, which is longer than our assets, but that’s going to require a longer call of — kind of off-site to talk about all the different changes that we think are going on. But in total, we hop in — in terms of the actual customer life, we actually are doing a deep dive into that in our strategic planning sessions coming up in August. So, I don’t have the numbers to share with you now. But if you look at the organizations that we’ve purchased, it’s a very stable deposit base. I think three of our organizations we bought were over 100 years old, including Palmetto here.

Our bank is 72 years old, First National in Miami is 70 years old. It’s an outstanding deposit franchise. I would expect those — that number to look good as we look at it here in a month or so. We just got — the way I really try to focus on it is on the customer service side. So, we were disappointed to lose J.D. Power this past year. I will say in the first wave, they do four waves, a quarterly wave, we were in the lead the Southeast by 39 points, which is pretty outstanding. So, great job to the employees that are listening to this. So, I expect that we’re very confident with how our deposit base will.

Lynn Harton: And I’ll add one more thing with that rule change of lens of how we’re thinking about it. But I look at our net new ratios every month and our year-over-year net new and look at every market and our new customers are well ahead of the customers that we lose. And then when you see the deposits growth or shrinkage is usually within our existing customers that are continuing as existing customers. It’s just that maybe they’ve moved some money to treasuries or into other non-bank things. So, from a customer life standpoint, it’s very long and hasn’t changed and we’re adding a lot of new customers.

Christopher Marinac: Good stuff. Thank you both for that background. It’s really helpful. I just had a quick follow-up kind of a joint question for Rob and Rich, which is just to maybe delineate the difference between senior care and senior housing and are there still opportunities in senior housing down the road?

Rob Edwards: So, I think we don’t have a separate category for senior housing. You’re talking about 55 plus, Chris?

Christopher Marinac: Exactly, yes. Yes.

Rob Edwards: We have I think two multifamily — we would put senior housing in the multifamily category in our reporting and I’m not sure I have a breakout of that. So, senior care would in — as a way we have it listed in the Investor deck would include independent living, assisted-living, and memory care.

Christopher Marinac: Got it.

Rich Bradshaw: And on the over 55, we have started to see those for that product, but it’s probably limited to a handful.

Rob Edwards: Yes, I would say less than five.

Rich Bradshaw: In the whole footprint. So, we are interested in it, but cautiously.

Rob Edwards: Yes, that’s good.

Christopher Marinac: Got it. Great. Good stuff. Thanks again.

Rich Bradshaw: Thank you, Chris.

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

Lynn Harton: Well, once again, many thanks for being on the call. Great questions. Be glad to follow-up with anything that you need, just give us give us a call and hope you have a great rest of your day. Thank you.

Operator: The conference is now concluded. Thank you for attending today’s presentation. You may now disconnect.