United Community Banks, Inc. (UCB) Earnings Call Transcript & Summary

Good morning, and welcome to United Community Bank's 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, pretax, precredit 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 in its filings with the SEC and included on its website. At this time, I'll turn the call over to Lynn Harton.

Good morning and thank you for joining our call today. This quarter was a bit unusual with several nonrecurring 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 2 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 3 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. Nonperforming assets were essentially flat at 51 basis points. Navitas continued to experience higher-than-normal losses as we continue to work out of the sleeper truck portfolio. We expect losses to trend back toward 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.

Thank you, Lynn, and good morning to everyone. I'm 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 funds. 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, our charts of 2 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 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 AOCI 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 buy back 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 (sic) [ Page 13 ] 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 cost. We self-insure and our medical costs came in higher than expected and required us to build our reserve 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 1 less day this year in the first quarter, it's seasonally the slowest for SBA and Navitas in their 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 FICA restart and other expense accruals. Net-net, on the expense side, I'm expecting them to be essentially flat for the first quarter. On the 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 fund 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 are 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 mark down, repossess 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.

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 2 very high-quality banks to the franchise with progress in 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 and 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.

[Operator Instructions] And our first question today comes from Michael Rose from Raymond James.

A bunch of calls this morning but -- sorry if I missed this, but Jefferson can you just give us your -- what great 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 map out the sensitivity from rates. I assume it's not linear. So I just wanted to get some perspective.

Michael, great question. So on the margin, we are 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 on a -- in that environment, we are expecting that the margin will increase throughout the year as we're, I think, near the top of our deposit beta. We have a -- we've had a 42% deposit beta cycle to date, we're projecting a peak at 45%. If rates were to follow the forward curve, I think we'd 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'd get an extra -- if you follow exact 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.

Okay. That's helpful. And where does that assume that the NIB mix, noninterest-bearing mix kind of troughs in your modeling?

Yes. So that would shrink to the 27% range. So we're at the 28% range now. We're seeing that slow down. So right around 27%.

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 a 3% year-on-year growth in '24, last quarter.

That's right. Yes. So I'll start and then Rich will kick in. We really took a hard look at our producers and kind of who's producing and who's 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 shut down. Those are some of the bigger items. And Rich, I don't know what -- if you'd like to add anything to that or Jefferson.

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 we'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.

I'll just add a detail on that. So as we went into budget, we didn't have branch cuts in there. Now we're planning on cutting 4 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 years beyond that, I think it's -- we picked up 2 great trust and 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.

Great. I appreciate the puts and the takes. And maybe just finally for me. Can you just talk about kind of borrower demand in your markets? I think previously, you talked about kind of a mid-single-digit growth expectation for this year. Certainly, I understand that you're in some really strong markets, but that borrower demand has probably come in a little bit. So just wanted to get a sense for where you see some opportunities? And then I assume that you're probably not looking to necessarily grow your office portfolio or some of those other "higher risk areas." But just some commentary there would be great.

Michael, this is Rich. And I think you summarized it pretty well, I have to say. But we are -- as you said, we're in the best markets. We remain optimistic, certainly looking for our new hires from late last year and our new hires that we just made. So I'm excited. We've made some more recent big hires. And these are both people that we've been recruiting for over a year. And so we brought on Evan Wyant. Evan is our new Central Florida President in Orlando, and we brought in Spencer Wiggins, who's our new Market President in Mobile, Alabama and will be -- has opened up an LPO there, both these gentlemen bring portfolio with them. I mean they both carried a portfolio and either they have or will bring some additional lenders. So we're excited about that to kick in with some of the lift outs that we did late last year to Tennessee, one is -- which was in Knoxville is really kicking in. And by kicking in, I mean close loans, not just pipeline, and so excited about that. And we're also excited about our continued investment in Florida for the first time, Florida led the bank, Q4, in production, and we're really excited about that.

Our next question comes from Graham Dick from Piper Sandler.

I just wanted to circle back to the NIM quickly, specifically on the deposit betas. Jefferson, I think you said you're expecting to kind of catch back up the peers in terms of bringing your beta down if rates were to come lower. What are you expecting, I guess, in terms of deposit betas on some of the initial cuts if they were to occur in 2024? Do you think there'll be a lag? Or do you think it will sort of be linear where you have a set of index deposits that are going to reprice down immediately.

Yes. So we have $3.6 billion of index deposits. So some of that would be immediate. We're using -- for the non-maturity deposits we're using kind of high 30s, 37%, 38%, 39% range. But we also believe that we can maybe get some back possibly before rates start going down, we've lowered rates in our promotional money market CD or money market or ICS. So we are -- we think we can use the strength of our balance sheet, no wholesale funding, the good deposit growth of this year, Lynn mentioned the 8% our loan-to-deposit ratio is 79%. So we believe that we can maybe start getting some of this back before rates start going down and Rich may have some...

Yes. I'll add a little color. We brought -- at start of the year here. We brought down our money market special of 35 basis points. There was over $2 billion in that product. So that's -- just doing the math, that's about $7 million savings right there. And as you mentioned, Jefferson, the ICS, the treasury management -- really hard to bring that down $1 million. And I will tell you, we're working on a pilot in Atlanta to even bring it down further.

Okay. That's really helpful. And then I guess turning to credit. Navitas, obviously, there's still the stress in the trucker segment. I mean, you expect it to come down to, I guess, 85 to 95 basis points, a total charge-off level, at some point later this year. But I'm just wondering, on that long-haul trucking, the $49 million that's left, how much of that do you think is at risk, I guess, today of needing to be charged off?

Yes, I'm not sure I have an answer for you on that. I think maybe the best thing I could give you is that we do a refresh of public score, absolute probability of default. It's kind of like a FICO for small business. And I think that number is like a 15% so that would be one way to identify the higher-risk population of that group but it's a really granular portfolio. So short of that, I don't -- there's no risk rating that goes on that this is a small business, $100,000, $200,000 loans.

Okay. Is there anything, I guess, economically that could help that segment? I mean with lower rates, do you have anything to help? I mean, I guess it might all be dependent on invoice size, freight invoices. But anything out there that might be able to help this thing out externally?

Yes. So I think it's more business related than it is interest rate related. So the value of the tractors went down pretty dramatically towards the end of last year, really in the second half. And so I think it's more about the value of the tractors and the demand for trucking. The -- a bunch of retailers got overloaded with inventory and demand went down. So to me, it's really -- the root cause is really demand of transportation.

Okay, understood. And I guess just lastly is more on M&A. I mean, you guys obviously have been very active over the years. How do you feel about M&A conversations in 2024 and the likelihood of maybe looking to bolster some of your markets, maybe like Florida, like you mentioned, in terms of adding scale there even further.

Yes. So our strategy has -- remains consistent, we like smaller deals in markets where we are, where we can be more additive. And at the end of last year and as we come into the first quarter, M&A, I think, is generally less likely because of the marks. And with high marks, you have to allocate more capital to an M&A transaction with questions about the economy, then you have to ask the question whether or not you want to do that or not. Now -- so my view has been that an actual transaction in '24 is not as likely as it has been in the past for those reasons. Now obviously, as rates come down, then those marks get less, as you get clarity about the economy, your comfort in using your capital becomes greater. So look, could you do a small -- a small deal in one of our markets -- happen? Yes, I don't think it's overly likely. I think '25 is kind of when you'll see more M&A activity come online.

Our next question comes from Catherine Mealor from KBW.

Let me just start with just your growth outlook. I know this quarter was just a little bit slower and you talked about that in your prepared remarks. But just sort of thinking about how you think about loan growth, maybe just in the first part of the year. And then as we see rate cuts, what you think that will do to net loan growth maybe in the back half of the year?

Catherine, this is Rich. Q4 production actually came in pretty much on plan. It was the reality for us was that payoffs were greater than the forecast. And I really got into the weeds a little bit on that. And throughout our markets, we just had a fair amount of customers who sold their business or they sold their owner-occupied real estate and did a sale leaseback. So that was not in our projections. That was a little higher. The other thing, as we think about this quarter and next year, or this year is the thing that creates a lot of opportunity for us are the continued merger disruptions and the fact that some of our competition has fairly high loan-to-deposit ratios and just really aren't in the game right now. So I think we're going to see -- it's going to be low to mid-single digit, but I think we're going to be just fine on loan growth and I think we're actually -- that merger disruptions will also provide talent opportunities for us as well. So we continue to want to be opportunistic on that. But having said all that, that's why I'm feeling good about where we are in Q1 and 2024.

On the rates down translating into demand question, I think a normal shaped curve would really help. When you have a variable rate loan, we're trying to price it in the mid-8s right now. It's just a lot of people don't want to do that loan, even if they think the rates are coming down. So I think if you got lower rates on a more normal curve, I think you'd see some better demand, but at the same time, lower rates is implying a slower economy at the same time. But I think a normal curve would be very helpful. And also one more thing on deposits. We do have deposit growth in our budget for next year. We have the seasonality outflows in Q1, I believe. So I wouldn't be surprised to see deposits down a little bit in Q1. But we're pretty optimistic. We've been growing deposits pretty well, and we think we'll have net growth in 2024.

Okay. And then on your comment that you're now liability sensitive, Jefferson. I guess 2 questions within that. I'm assuming a lot of that is coming from your just ability to lower deposit costs when we start to see rate cuts just given that, that kind of was surprisingly more higher than expected as we moved through the year. Just kind of curious on that, just big picture. And then secondly, within that, what -- do you see amount of loans that you -- fixed rate loans that you expect to mature and reprice in 2024?

Okay. So let me get -- remind me the first question -- yes, how do we...

How the liability -- because it's interesting, like you've been asset sensitive for so long and now you're liability sensitive, and this quarter has been really interesting because different banks have answered that question differently than I would have expected all over the past few weeks. So just kind of curious what's driving that?

Well, it's hard on the assumptions, but I would say we're temporarily liability sensitive. Because we do have more assets tied to SOFR and prime, then we have liabilities. So you might think of that as traditionally asset sensitive. But I would say that those numbers are closer than they ever have been before because of this $3.6 billion that we have actually tied to -- on the liability side tied to SOFR and prime. So that number would have been $600 million pre-Silicon Valley. So the numbers are much closer on the assets that are going to move directly with rates. And then from there, you're not going to see a lot of prepayments on the first 100 basis points move because these mortgages are pretty far out of the money. So they are behaving more like fixed rate loans temporarily. So you get that benefit. Now that's not going to be as rates go way down. But in the near term, you're not going to see increases, we don't think, of prepayments because of that. So it's a little bit peculiar as I think we'll end up asset-sensitive but the prepayments are just so far out of the money. Now on the fixed rate loan question, if I answered that one, I hope I did, is that if you look at variable rate loans that are variable or scheduled to reprice within a year then you add to it fixed rate loans that mature within a year, it moves from about 32%, 33% to 36% with adding in the fixed maturity. So you have 3% -- you're adding 3% to the floating rate category if you add in fixed rate loans soon to mature. So 36% with that.