United Community Banks, Inc. (NASDAQ:UCBI) Q4 2023 Earnings Call Transcript

United Community Banks, Inc. (NASDAQ:UCBI) Q4 2023 Earnings Call Transcript January 24, 2024

United Community Banks, Inc. isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).

Operator: Good morning, and welcome to United Community Banks’ Fourth Quarter 2023 Earnings Call. Hosting our 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 fourth quarter’s earnings release and investor presentation were filed this morning on Form 8-K with the SEC.

And a replay of this call will be available in the Investor Relations section of the company’s website at ucbi.com. Please be aware that during this call, forward-looking statements may be made by representatives of United. Any forward-looking statements should be considered in light of risks and uncertainties described on Pages 5 and 6 of the company’s 2022 Form 10-K, as well as other information provided by the company and 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 quarter was a bit unusual with several non-recurring items. First, the FDIC special assessment to replenish the insurance fund was $10 million. Additionally, we took the opportunity as rates fell going into the end of the year to sell some of our longer-duration bonds to shorten the average life of our balance sheet. While not the driver of this decision, this will also increase our earnings for 2024. Together, these two items reduced our GAAP earnings by approximately $0.39 in the quarter. On an operating basis, earnings improved to $0.53 per share, with an operating return on assets of 92 basis points. We had strong deposit growth in the quarter, centered primarily in our public funds relationships.

The rate of contraction in our margin slowed with our core margin dropping only 4 basis points this quarter. By way of comparison, our core margin fell by an average of 19 basis points in each of the first three quarters of the year. Loan growth was slower at 2.5% annualized versus 5.4% last quarter. Our liquidity position continues to be very strong. We ended the year with over $1 billion in cash and cash equivalents and essentially no wholesale borrowings. Credit quality in the core bank was very good with only 5 basis points of net losses. Non-performing assets were essentially flat at 51 basis points. Navitas continued to experience higher-than-normal losses as we continue to work out the sleeper truck portfolio. We expect losses to trend back towards normal levels at Navitas by the middle of next year.

I’m going to turn the call over to Jefferson now for more detail on the quarter and then I’ll make a few comments on the full year.

Jefferson Harralson: 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 mentioned, our total deposit balances were up 7.9% annualized for the quarter. And if you adjust for the broker deposits we paid down, we grew total deposits by $504 million or 8.9%. The primary driver of the growth this quarter was public fund. We saw some seasonal inflow and got a couple of new accounts that accounted for the growth in this line item. The deposit growth in the quarter more than funded our loan growth, and our loan-to-deposit ratio moved to 79% from 80%. Our cost of deposits moved up 21 basis points in the quarter to 2.24%. And we saw continued shrinkage in our DDA accounts, but this is happening at a slower pace.

Our deposit betas for the cycle were below the median a year ago but are above the median now at 42%, and we are hopeful to move closer to peers and get some of that back in 2024. We turn to our loan portfolio on Page 8. We grew loans in the second quarter by $116 million which is 2.5% 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 rates and uncertainty. We have seen our residential construction book shrink by about $97 million in Q4 and we also saw our construction commitments drop in Q4 in both commercial and residential. We saw Navitas loans grow at a 2% pace as we kept loan sales in this area high at $28 million. On Page 8, we also lay out that our loan portfolio is diversified and generally more granular and less commercial real estate-heavy as compared to peers.

Turning to Page 9, where we highlight some of the strength of our balance sheet. As mentioned, our balance sheet is in good position with no FHLB borrowings and very limited brokered deposits. On the bottom are charts of two of our capital ratios, our TCE ratio and CET1. The TCE was up because of less unrealized losses. We had 28% of our AFS unrealized loss come back this quarter, and in both TCE and CET1, we are well above our peers. On Page 10, as I mentioned, our regulatory ratios also remain above peers and were mostly unchanged in the quarter. Our leverage ratio was down 24 basis points, driven by a larger balance sheet, being $400 million larger with a strong deposit growth. At the bottom of the page, we show a tangible book value waterfall chart, and note that the change in OCI was a benefit of $0.78.

We put out a press release at the end of the year detailing our securities loss transaction in the fourth quarter. For risk purposes, we wanted to be shorter in our securities book, and now our AFS book has a 2.4 year duration, which we believe is a better risk profile through cycles. We have been continuing to be opportunistic in repurchasing our preferred shares at a discount to par. We bought back $1.8 million in Q4 and $7.1 million for the year, and we will continue to buyback small amounts depending on price. Moving on to the margin on Page 11. The margin came in a little better than I was estimating and was down 5 basis points and down 4 basis points on a core basis. We were pleased to see this translate into spread income growth this quarter.

Our loan yield moved up 13 basis points to 6.15%, 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 Q3. This went from a 9 basis point benefit to the margin in the third quarter to an 8 basis point benefit in the fourth. Moving to Page 12, noninterest income. Excluding the portfolio restructuring, noninterest income was down $3.4 million relative to last quarter. This was primarily due to a $3.5 million negative swing in the MSR valuation. Other income was up $2.5 million in the fourth quarter, due mainly to the absence of the $1 million loss on the sale of branches last quarter, and then a variety of small items made up the positive difference. Our gain on the sale of loans were basically flat in the quarter.

Another notable item was $2.5 million in unrealized losses on equity investments that we do not expect to repeat regularly. Operating expenses, on Page 14, came in at $138.8 million, which was up $3.5 million from last quarter. The primary reason for the increase is a $3.2 million negative swing in our group medical insurance costs. We self-insure and our medical cost came in higher than expected and required us to build our reserves sum in the fourth quarter. Excluding this event, our expenses were essentially flat. Let’s talk seasonality a little bit. The first quarter is our seasonally worst quarter. Besides one less day this year in the first quarter, it’s seasonally the slowest for SBA and Navitas and our corresponding loan sales. Mortgage volumes are picking up a little bit with lower rates but remain seasonally slow until spring.

We will have lower group medical costs by about $1.7 million, but we will also have a FICO restart and other expense accruals. Net-net, on the expense side, I’m expecting them to be essentially flat for the first quarter. Of a net interest margin, the securities transaction is expected to take our yield up to the 3.10% range, which is a 4 basis point benefit to the net interest margin. Our loan yields should continue to increase and we are expecting our cost of funds increases to slow down. We still have new CDs coming on at higher rates than maturing ones, and DDA could shrink a bit, but we are starting to push back and lower some of our promotional rates. In combination, our margins should be relatively flat in Q1, somewhere between minus 2 and plus 2 basis points.

Moving to credit quality. Net charge-offs were 22 basis points in the quarter with the bank being very low at just 5 basis points. Our NPAs were essentially flat. Our special mention plus substandard were improved slightly and down from a year ago. Our breakout on Navitas losses are on Page 17. Last quarter, we broke out long-haul trucking for the first time. We were having higher losses in this small book as Lynn talked about in his opening. This quarter, the book shrunk from $57 million to $49 million, and of that shrinkage, we had $4.4 million of losses. We changed our practice at Navitas to markdown repossessed collateral at the repossession date. This had the impact of recognizing losses sooner than we had been, and this added $1.8 million or 47 basis points to the Navitas loss rate this quarter.

We continue to believe that Navitas losses will stabilize in the 85 to 95 basis point range later this year. Navitas’ losses excluding long-haul were 96 basis points and we are putting on new loans in the 10.5% range. I will finish back on Page 15 with the allowance for credit losses. We set aside $14.6 million to cover $10.1 million in net charge-offs. This had the impact of building the ACL slightly in the quarter. With that, I will pass it back to Lynn.

Lynn Harton: Thank you, Jefferson. Great comments on the quarter. As we look back at 2023, I am proud of the way our teams responded to the many challenges the industry faced. In spite of industry-wide concerns over liquidity and deposit stability, we were able to grow customer deposits over 8% during the year, excluding mergers. We know from our internal surveys that our customer service scores grew significantly from already high levels. We added two very high-quality banks to the franchise with Progress and First National Bank of South Miami. Both have been performing very well and ahead of my expectations. We strengthened our customer-facing teams with new leadership at the state level in Tennessee and Florida, as well as significant market hires in Northwest Georgia, Atlanta, Orlando, Nashville, Knoxville, and middle market banking.

We hired a new leader for Wealth Management to drive the expansion of that business. We strengthened our support and control teams as well with a new Chief Audit Executive and several important additions in credit, risk, and technology. We were named the Best Bank to Work For by American Banker for the seventh consecutive year. We rebranded the company with our fourth refreshing in our 70-year history. We added another outstanding Board member with highly relevant experience to help guide our continued growth. All were outstanding accomplishments for the year. However, our financial results for ’23 did not meet our expectations. Much of the shortfall was driven by the margin contracting more rapidly than we expected. Part of the reason for that is that we reacted appropriately, I believe, to the turmoil in the spring, and increased deposit rates more rapidly than expected and perhaps more than required.

We also realized we had let our assets become less interest rate-sensitive than we would have liked. We underperformed in credit due to a miss on a large shared national credit as well as entering into a small high-risk segment within our Navitas book in which we have since ceased originations. Fortunately, our belief in managing concentrations, including fixed rates, and not betting the bank, allowed us to maintain performance, which while okay from a peer perspective, is not at the level we strive to deliver. 2024 will be an improvement. We’re focused on actively managing rate exposures and growing our net interest margin. Our relative credit results will improve in ’24. We also see a great environment for taking market share. Merger disruptions continue, providing us opportunities to add talent.

Some of our competitors are liquidity-challenged, also providing opportunities for us to grow. While the overall demand for credit may be lower if the economy slows, we believe we are well-positioned to grow our lending business regardless. Our customer service scores and responsiveness to our customers puts us in a great place to be able to continue to grow low-cost deposits as well. On the expense side, we have just completed some difficult decisions in putting together our budget and we will continue to manage our costs actively as the year unfolds. ’24 will be a strong year for United and will set us up well to outperform in ’25, which is our goal. I appreciate your support and interest. And now, we all look forward to your questions.

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Q&A Session

Operator: Ladies and gentlemen, at this time, we’ll begin the question-and-answer session. [Operator Instructions] And our first question today comes from Michael Rose from Raymond James. Please go ahead with your question.

Michael Rose: Hey, good morning, everyone. Thanks for taking my questions. Bunch of calls this morning, but sorry if I missed this. But Jefferson, can you just give us your what rate outlook you guys have embedded into your outlook? And then, can you describe, if it’s not the forward curve, what the sensitivity would be if you were to assume the forward curve, and then if we did stay higher for longer, and let’s just say we didn’t get any cuts this year? Just trying to kind of math out the sensitivity from rates. I assume it’s not linear. So, I just wanted to get some perspective. Thanks.

Jefferson Harralson: Great. Yeah, thanks. Michael, great question. So, on the margin, when we were giving the guidance that plus 2% to minus 2%, not having any rate hikes in there — or I’m sorry, rate cuts in there. And in that environment, we are expecting that the margin will increase throughout the year as we’re take near the top of our deposit beta. We’ve had a 42% deposit beta cycle to date, we’re projecting a peek at 45%. If rates were to follow the forward curve, I think we get a little bit of boost in there. If you look at our analysis, we’re a little bit liability-sensitive right now. So, I think that, we would get an extra — if you follow exact the forward curve, you might get 5 to 7 basis points positive if you follow the exact — for the year, if you follow the exact forward curve currently today.

Michael Rose: Okay. That’s helpful. And where does that assume that the NIB mix, non-interest bearing mix kind of troughs in your modeling?

Jefferson Harralson: Yeah. So, that would shrink to 27% range. So, we’re at the 28% range now. We’re seeing that slowdown. So, right around 27%.

Michael Rose: Okay. Perfect. And then, Lynn, I think you just made some comments around just some tough decisions around the budgeting process. I’m sorry if I missed it, but can you just talk about some areas where you’re maybe scaling back a little bit and maybe some areas where you’re investing? And just how that translates, and again, sorry if I missed it, to the kind of expense outlook as we think about this year? I think previously you guys were talking about, about a 3% year-on-year growth in ’24 last quarter. Thanks.

Lynn Harton: That’s right. So, I’ll start and then Rich will kick in. We really took a hard look at our producers and kind of who is producing and who is not, made some difficult choices there. On the technology side, which projects do we really need to do, which projects can we cut out. Made some — the branch decisions get more and more difficult only because all of our branches are profitable, but which ones do we need to consolidate and shutdown. Those are some of the bigger items. And Rich, I don’t know if you’d like to add anything to that or Jefferson.

Rich Bradshaw: No, just we — as you go through in looking at — we’ve done this every year now in terms of the branches, so we’re really looking also strategically and does it make sense and we’re closing branches that’s near another branch, so they’re enjoying the economics of moving because we know if we close a branch near another branch, then we’re going to keep about 90% of the deposits. And so, we’ve gone through that exercise, and those have been identified and notifications have gone out to the regulators. So, we’re down the road on those.

Jefferson Harralson: Yes. I’ll just add some – a detail on that. So, as we went into budget, we didn’t have branch cuts in there. Now, we’re planning on cutting four branches in 2024. In terms of investments, we are excited about Wealth Management. I don’t think you’re going to see a huge change in ’24. But as we look in the years beyond that, I think it’s — we picked up two great trust in Wealth Management businesses in both of our Florida acquisitions. And really as we’ve come to understand that business, we know that our client base actually skews wealthier than average, probably wealthier than most people would think. We think it’s a great opportunity to take that throughout the footprint, brought in a really strong leader for that. So that’s one investment area that we’re looking at.