United Community Banks, Inc.

Good morning and welcome to United Community Bank's second quarter 2024 earnings call. Hosting our call today are Chairman and Chief Executive Officer Lynn Harten, Chief Financial Officer Jefferson Harrelson, 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 this morning on Form 8K 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 2023 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 Harten.

Well, good morning, and thank you for joining our call today. We were pleased with our performance this quarter. On an operating basis, our earnings per share of 58 cents was up 5% from last year and 11.5% from last quarter. We moved above a 1% ROA on an operating basis, reaching 1.04% for the quarter. Our net interest margin expanded by 17 basis points due to our focus on discipline deposit pricing, as well as ongoing loan repricing. Our margin increase led net interest revenue to increase by $9.6 million for the quarter. While non-interest income was down $3 million from last quarter on a gap basis, excluding a non-recurring gain we realized in the first quarter, our non-interest income was essentially flat. We held expenses on an operating basis flat for the quarter, and we continue to look for opportunities to reduce our expenses and improve our results. Tangible book value increased by 9% on an annualized basis. Credit trends remain solid and stable. Net charge-offs were 26 basis points, down slightly from 28 basis points last quarter. Equipment finance charge-offs continued to normalize as we expect and were down 24 basis points sequentially. Non-performing assets were up slightly from 58 basis points to 64, while special mention and substandard accruing loans dropped by 10 basis points. We have some additional information in the appendix this quarter on our office and multifamily portfolios, both of which continue to perform well. While credit continues to be strong, we are selective on new credits and are actively managing existing relationships given the uncertainty in the environment. This, along with caution on the part of our borrowers, contributed to a small decline in our loan outstandings this quarter. We continue to hire new teams and see new opportunities, and we believe growth will improve for the balance of the year. On the deposit side, we consciously allowed some higher-rate, unprofitable balances to exit, primarily in our public funds business. We continue to see some movement from non-interest-bearing to higher-rate products However, the cost of our interest-bearing deposits increased just three basis points this quarter compared to eight basis points last quarter. Our liquidity position continues to be very strong with a loan-to-deposit ratio of 80% and essentially no wholesale borrowings. I'll now turn the call over to Jefferson for more detail on the quarter.

Thank you, Lynn, and good morning to everyone. I am going to start my comments on page 60. and go into some more details on deposits. As Lynn mentioned, our total deposit balances were down in the second quarter, primarily due to our strategy. With the loan demand being lighter and with significant cash on hand, we were able to lower our public funds pricing and pricing on some of our more promotional deposit accounts, which translated into some deposit shrinkage, but also into a higher margin. We did continue to grow total accounts in the quarter and continued our momentum there, but we were able to be more strategic on the more expensive pieces of our funding base. Excluding public funds, our deposits shrunk $132 million, or 2.6% annualized, with the mix staying relatively stable. Our cost of deposits moved up three basis points in the quarter to 2.35%. We turn to our loan portfolio on page seven. Loans shrunk in the quarter by $164 million. Loans being down is a combination of us being cautious on new loans, us moving some downgraded loans out of the bank, and wider loan demand from customers who appear to be holding back on projects due to rates and uncertainty. We saw Navitas loans grow a little bit in the quarter as we pulled back on loan sales given the lighter demand in other areas. On page seven, 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 eight, where we highlight some of the strengths of our balance sheet, we believe that our balance sheet is in good position with no FHLB borrowings and very limited broker deposits. We believe This gives us some flexibility in managing through a tough interest rate and competitive environment. On page nine, we look at capital. We had increases in our capital regulatory ratios and our TCE, and all of our capital ratios remain above peers. Our leverage ratio was also up 24 basis points in the quarter. Moving on to the margin on page 10, The margin came in 17 basis points higher in the second quarter on a gap basis and was up 15 basis points on a core basis. Our loan yield moved up 19 basis points to 6.43%, with our new and renewed loan yields remaining in the 8.5% range for the quarter. We had slightly more loan accretion in the quarter compared to Q1. moving from a benefit of seven basis points in the first quarter to nine in the second. From here, I expect our loan yield to continue to increase and that our cost of funds is near a top. That said, we are still having some, albeit slower, negative mix changes, and we have a significant amount of CDs maturing in the third quarter. Currently, our CDs are coming on at about the same rate as maturing CDs, but industry competition could also change. Taken together, our net interest margin should be flat in the third quarter, plus or minus one to two basis points. Moving to page 11, non-interest income was relatively flat, excluding MSR write-ups in both quarters. Better service charge income offset lower other fees, and mortgage was relatively flat. Mortgage volume was higher due to seasonality, and our mortgage production continued to be predominantly fixed rate that we fell into the secondary market, generating fewer loans for the balance sheet. Our gain on sale of SBA and Navitas loans was down slightly compared to last quarter. We decided to sell fewer Navitas loans in a quarter to partly offset the soft loan demand at the bank. Our wealth management revenue was $6.4 million in the second quarter, up slightly from Q1, and I will direct you to page 16. On an ongoing basis, we review all of our business lines, and we underwent a study of our wealth businesses and how they fit together. We concluded that our retail, trust, and insurance businesses have a great interconnection with the bank and bank customers and were a great long-term fit. while our registered investment advisor, FinTrust, was not. We also found growing FinTrust was expensive and generally would require capital to buy advisors and their books at relatively high prices. At that time, we decided to invest in and grow our private bank, trust, and retail businesses and to sell the RIA. And we signed a contract to sell it in June to another large private registered investment advisor. While the deal will not close until the third quarter most likely, we wrote down some of the goodwill associated with FinTrust by $5.1 million. For the second quarter, FinTrust was in our numbers and accounted for 44% of the AUA, but only accounted for one-third of the wealth management revenue. FinTrust contributes about $2 million of fees per quarter. Its expenses are roughly equal to its revenue, so the sale will not impact EPS going forward. Back to page 12, operating expenses came in at $140.6 million of just $200,000 from Q1. We had our annual merit process that moved expenses higher. We also had higher health insurance costs, but this was offset by lower other expenses, including lower incentives and lower fraud losses. Moving to credit quality, net charge-offs improved to 26 basis points in the quarter, with the bank being very low at just 15 basis points. Our NPAs were up slightly. Our breakout of Navitas losses are on page 19. Navitas losses were improved at 1.42%, and Navitas losses excluding long-haul trucking were 1.01%, which was also just slightly improved, and we are putting on new loans in the 10.5% range. I will finish back on page 14 with the allowance for credit losses. We set aside $12.2 million to cover $11.6 million in net charge-offs, And our ACL increased slightly in the quarter and is up year over year. With that, I will pass it back to Len.

Thank you, Jefferson. Before we take questions, I'd like to add to Jefferson's comments on our decision to sell our registered investment advisor, FinTrust. Several quarters ago, I asked Melinda Davis-Lux on my team to review our various wealth-related businesses and develop a more comprehensive strategy. In that process, she interviewed and spent time with multiple external resources, team members of our different wealth businesses, as well as our frontline bankers. As a result of that review and under her leadership, we began to execute on building a more integrated wealth strategy. We want a bank-centric model designed to be understandable to bankers and deepen our relationship with clients. We want to minimize internal competition and conflict. and we want the business to be scalable and profitable. The development of this more focused strategy led to our decision to sell FinTrust. While we recognize a small loss this quarter in doing so in the form of a goodwill write-down, it will be capital accretive upon closing in the third quarter and will have no impact on our ongoing net income. Additionally, I believe the FinTrust team will be more successful individually within a dedicated RIA business. I appreciate Melinda's leadership on this and am excited about the outstanding leadership team she has assembled to drive this business. As we move forward in 24, we will continue to sharpen our focus and execution throughout the company as we build a great bank with the incredible teammates we have here at United. And now we'd like to open the floor for questions.

We will now begin the question and answer session. To ask a question, you may press star then 1 on your telephone keypad. If you are using a speakerphone, please pick up your handset before pressing the keys. To withdraw your question, please press star then 2. At this time, we will pause momentarily to assemble our roster. The first question comes from Steven Scouten with Piper Sandler. Please go ahead.

Yeah, thanks. Good morning. I guess maybe if I could start with loan growth and kind of maybe some color around the view that growth will improve through the balance of the year versus the commentary about taking a more cautious stance on new originations. Just kind of wondering what that looks like. Is there a focus on a different segment of the loan book or is it just that hey, we could actually grow a lot faster if we wanted, but we're going to be cautious, which will still provide some growth, just maybe not what it could have been. If you could just kind of point me in the right direction there.

Good morning, Steven. This is Rich. With regards to Q2 results, as you know, high interest rates, credit tightening, and election uncertainty kind of dampened owner and sponsor confidence. We do see that improving a little bit, and I've spent time talking to each state president as well as all the senior credit officers individually as well to see what activity looks like going forward. And right now it does look like it's picking up in Q3 as compared to Q2, and as well as more optimism even in Q4. So we're feeling better about continued loan growth throughout the year. And in terms of products, we see Cree starting to come back a little bit. Because it's been flattened, we've seen a lot of tapering of that product over the last year. It's starting to come back a little bit. And the secondary markets there are coming back as well. And then we've got a lot of focus on owner-occupied Cree and have some specific specials on that, and that's performed very well for us.

Okay, great. That's helpful, caller Rich. Thanks for that. And then if I could just dig into the NIM for a second. You guys noted the stability, relative stability around funding costs, but it also looked like loan yields jumped quite a bit. And I was wondering if there was anything maybe unusual there or any sort of the maybe non-accrual loans that were removed off the balance sheet, if that had a larger impact. And just kind of what you think, I know you said maybe flat quarter of a quarter, but how you think about those Funding costs and loan yields moving forward specifically.

All right. Thanks, Stephen, for that question. Nothing really unusual there. You did get the benefit from the higher loan accretion, which helped. I do think you're going to see maybe kind of six to seven basis points increase in loan yield just from back book repricing and then putting on new loans at 850. The cost of funds is a little – and some of it is going to be our decision, too, of whether we sell Navitas loans or keep Navitas loans. The more we keep, the more it can help that loan yield, and that helped us a little bit this quarter. The cost of funds is a little different. Our actual June 30 cost of funds was a little lower than the first quarter average, which gives some optimism to the third quarter. But at the same time, we have a very significant amount of CDs repricing, A lot of banks have a lot of CDs repricing, so it's hard to tell exactly what this new money is going to come in at. But, you know, taken together, like I said, in the prepared remarks, you know, flat's probably a good for your model. But if there's some optimism, it could be better if it plays out like our current strategy has it. But I think flat is a good number given the uncertainty of some of our strategies.

Got it. Okay. Great. I'll let somebody else hop on. Thanks for the call, Edgar.

Our next question comes from Michael Rose with Raymond James. Please go ahead.

Hey, good morning, guys. Thanks for taking my questions. Just on a core basis, it looks like expenses were a little bit lower than, I guess, what I was looking for, than consensus was looking for. Can you just give us an update on kind of some of the strategic priorities as you, you know, kind of reinvest in the franchise and start to grow loans. Just tailing off Stephen's questions and what we could think about. I know it's a little early, but as we think about next year, would continued investments in the franchise lead you to something closer to kind of a mid-single-digit growth rate, just balancing investments, inflation with ongoing cost reduction initiatives? Thanks.

Yeah, Michael, this is Len. I'll start and Jefferson can add in. You know, our goal, we sat down earlier this year and said, look, as a team, let's figure out a way to hold our employee expenses flat if we can. That was a challenge I gave them. as we move through the year, all the time, at the same time, knowing that we've got to invest in growth, just like you mentioned. I think we've got to do both those things. So we just completed a review of positions where we believe we had excess capacity. Some of it's because of volume declines in some areas, some businesses, some technology improvements, frankly, and some other areas where we put in and just, and always anticipated reducing employment in those areas because of those improvements. And in some cases, organizational redundancy. We've grown quickly. We had some things there we could clean up as well. So we've eliminated a number of positions at the end of this quarter to do that. And our goal in doing that was not to drive expenses down, but knowing that we need to invest and want to invest. Rich has got a number of teams he's talking to. Melinda's got a number of teams she's talking to. Frankly, you've got to make some investments in some control functions that our stakeholders, for us to continue to grow as we've had, our stakeholders need and want us to be able to have control functions in place. So I'm not, it was an ambitious target to set out. I'm not promising we'll be able to do that, but that's the mandate the team has been operating under.

So I think that's well said. I'll only add in that I think that nets out to a low single digit overall. growth rate and expenses, and that is enabled by some of these production-related, technology-related cuts that we've made.

Very helpful. And then maybe just as a follow-up, and assuming we are going to get some rate cuts, I would assume some of your fee businesses, especially mortgage, would continue to do a little bit better just on a core basis. I would assume that the expectation for next year would be you know, decent positive operating leverage? Is that the way we should kind of think about it?

Yes, for sure. So we're going to budget positive operating leverage every year, and we're going to do what we need to do to generate some. It's not easy every year. But I think we'll have loan growth. We'll have customer growth. I think we will have some mortgage growth last year. So I think we'll have growth in our core businesses and our design business will be to keep our expense growth lower than our revenue growth every year, but I think that's going to be doable on 25 as well. I'll pass it over to Rich for some comments, too.

Yeah, Michael, you asked about 2025, and we are very optimistic about that. We're still in the best markets. The three liftouts we've done in Rome, Georgia, East Tennessee, and Middle Tennessee have gone really well and are continuing to go well. I will tell you we continue to work on several others and are very excited about that. We're very optimistic about 2025.

Thanks, guys. Maybe just one final one for me. I think you guys said that M&A wasn't really in the cards until next year. Is that still the The base case, I mean, I know a lot's going on in the political circle, and people are getting excited about just kind of the deregulatory backdrop if one party wins. But just wanted to get any sort of, you know, updates in your thought process around deals. Thanks.

Sure, Michael. This is Len again. So I would say, you know, we're in an open space. but conservative posture on M&A. I don't feel like we have to do M&A. And frankly, there's been some positives to the slowdown that we've had, particularly in the ability to focus on some project work. But what we're seeing is, of course, the math is getting better on M&A, particularly on rate marks. They've improved through time and a little bit of rate moderation. You've still got some marks on credit, particularly commercial real estate. The banks that we tend to look at tend to be smaller banks, and they tend to be commercial real estate heavy. So that's a little bit of a headwind. It has been interesting, too, to really look at the value of the individual deposit franchise of the banks that we're looking at, because we have seen several recently that are considering selling, and some are better than others. So our focus is on franchises we think will give us the opportunity to be additive with additional products, balance sheets, where we can bring new talent in. Based on what we're seeing, we think we'll see a number of those opportunities in the coming quarters and, you know, hopefully be able to execute on a small number of the best of them. In the deals we do, we really don't worry about the regulatory side just because of being smaller. But it is going to be interesting to see what the political and regulatory world looks like in post-November for sure.

Get your popcorn ready. Thanks, guys. Appreciate you taking my question. Thanks, Michael.

The next question comes from Catherine Miller with KBW. Please go ahead.

Thanks. I just had a follow-up on – you mentioned that part of the higher margin this quarter was just from keeping more Navitas loans on balance sheet. And, of course, you benefit from a higher yield on those loans. As you think – core loan growth or ex-Navitus loan growth improves in the back half of the year, would you envision that you start to sell more of that product or is the kind of balance between gain on sale versus on balance sheet still attractive enough where Navitus will continue to grow at this rate?

That's a great question. Last quarter we sold about $27 million. This quarter we sold about $8 million. And with the loan growth we're just talking about, it's still kind of low single-digit range. So I think we would lean towards, depends on the pricing, but it leans towards keeping more Navitas loans in the back half. So I don't know if it would be as low as eight, but I think it'd be in the lower end of that $8 to $26 million range. So it's kind of lean towards keeping more, given that even with better loan growth from here, it's still on the lower end of what we had budgeted this year.

Okay, great, great. And then thoughts on, just to circle back on the loan yield outlook, I mean, this quarter was so high. I'm assuming kind of this pace of loan yield expansion is not repeatable in the next couple of quarters. Any kind of thoughts on just as you look at what you see in your fixed rate book repricing and maybe growth, kind of what you would expect on a per quarter basis over the next couple of quarters for your loan yields to increase by? Okay.

Right, so I think if you look at the back book, look what we're adding, put that together, it's probably six to seven basis points, a quarter of additional loan yield.

Okay, great. All right, great, thanks so much, that's all I got.

The next question comes from Gary Tanner with DA Davidson. Please go ahead.

Thanks, good morning. One quick question on my end. Jefferson, you've mentioned a couple of times kind of the prospects of CD repricing in the third quarter as a potential headwind. Just wondering if you could detail the amount and rate of CDs you've got maturing in the third quarter.

Yep. Thanks, Gary. Great question. We have about a billion dollars of CDs maturing this quarter. They're maturing at about 420. Right now they're coming on at about 420. So there's some optimism that the headwind of CDs is has already fully realized. But it's a large amount that it's hard to forecast. And again, other banks also have a lot of CDs maturing as well. So we have some conservatism built in our forecast for that to move a little bit higher. Right now, it's not. So again, maybe there's a little conservatism in the forecast. But right now, it's 420 compared to 420. So it's not... giving us a headwind to our margin. But we think it very well could, given the amount and what we're seeing from other banks.

Okay, I appreciate that. And actually, while we're on that topic, can you give us the fourth quarter maturity schedule as well?

It's roughly a billion dollars. It might be a little plus or minus. I'll need to come back to you with that. But it's also a very large quarter.

Thank you very much.

Our next question comes from Russell Gunther with Stevens. Please go ahead.

Hey, good morning, guys. Following up on the margin discussion, you guys also saw a nice lift in the securities yields. Could you just remind us about what that cash flow looks like coming due over the next couple quarters and where you'd expect those yields to trend?

Yep. So we have about $40 million of cash flow principal coming in. per month there. The average that we're putting that on is $590. This quarter, you saw a bigger jump than you usually would because we had a lot of cash coming into the quarter, a little less loan demand. So we're putting that cash to work in a stronger, bigger fashion than I think we will in the second half of the year. But expect, again, $120 million a quarter reinvesting at roughly $590.

Got it. Okay. Thanks, Jefferson. And then just to clarify the expectations for the six to seven basis point pickup and loan yield, that assumes a similar level of NVIDA's loan growth going forward. Is that what's kind of contemplated in that guide?

That's correct.

That's correct. Okay. Excellent. Thank you. And then with the comments made yesterday, around the conservative approach to credit, the more cautious stance, and then moving some problems out. Could you just provide a little more color about kind of where within the loan book you've got that increased incremental conservatism?

So this is Rob. I'll take that, I guess. Really what has happened, and on a couple of points, is in the commercial real estate space, we've seen two things. One is we've reduced our appetite for speculative-type lending. And so I think in the past, maybe there might have been some warehouse loans that you might have done speculative. And going forward, we just said we're not in that market. In addition to that, not only us, but also the sponsors in the multifamily space have looked at some of the building going on. And so we've increased our vacancy assumptions in The underwriting process and, of course, the higher rates are impacting the underwriting process, and all of that requires more cash equity. And so, really, it's in the commercial real estate investment space that we have just tightened up around the underwriting aspects, interest rates, vacancies, speculative nature, some of those aspects.

Okay, great. Thank you for that. And then last one for me, guys, just an update in terms of your sort of near-term net charge-off expectations both within Navitas and then the core bank. Thank you.

Yeah, so this is Rob. So I'll start with Navitas and then move to the overall bank. On the Navitas side, we do expect charge-offs to continue to come down. We've seen, you know, over-the-road trucking was kind of the big story this Certainly in the fourth quarter, and that has come down, came down in the first quarter, came down again in the second quarter to $1.7 million of their $5.5 million of net charge-offs. So I expect it to come down a little bit in the third quarter and more in the fourth quarter, leveling out in the 1% annualized range. So that's Navitas. On the bank side, you know, so it's been right around $6 million and in that 15 basis point range, and I would expect it to, you know, remain relatively stable going forward.

All right, great. Thank you guys for taking my questions.

The next question comes from Christopher Marinak with Jannie Montgomery Scott. Please go ahead.

Thanks. Good morning. I want to continue on the credit line of thinking for Rob. Could you just talk about the sort of inflows and outflows on the both special mention and substandard? Do you see paths for upgrades? Are there future downgrades? Just kind of curious on the movement this past quarter.

Yeah, so we've seen a fair amount of movement. We see payoffs. We see upgrades. I'll give you two examples, I guess. One was a senior care credit that we had that We got paid off on during the quarter. That was a special mention credit. And we're seeing a fair amount of movement in that space, at least an interest coming back in the senior care space. And then one of the credits we had we upgraded was a C&I credit that I think got caught with some contracts that were They didn't have the appropriate adjustments in them, and of course labor costs went up, and that was a special mention credit, and we were able to upgrade that credit. They figured it out and got their contracts reworked and the company back performing very well. And so you just see a variety of those types of either payoffs or upgrades. There's quite a bit of movement and really opportunity in the space.

Great, Rob. That's helpful. And just to follow up, thanks for the disclosure in the slides on both office and multifamily. The level of criticize loans on both of those. Those already reflect your stress testing for debt service coverage and some of those machinations the past six months. I'm asking because it would seem to me that the risk of those changing a lot is probably pretty low at this point.

Yeah, so it does. I think I mentioned last quarter that we do go through a stress test for interest rate change on the credits, CRE credits over a million dollars maturing in the next 12 months. And we do regrade those credits based on how the debt service works out at the new interest rate. We did have several downgrades last quarter as a result of that. Some of those credits we do place in management watch, so they might not be in special mention or substandard. If there's some time, an opportunity for them to rework some of their leases, then we would give them the opportunity to do that before we downgraded them. So there could be some more downgrades, but I think, like you said earlier, we're just seeing a lot of opportunity to move credits in and out of special mention through a variety of avenues.

Great. Thanks for all the background today. I appreciate it.

Yeah.

Our next question comes from David Bishop with HubD Group. Please go ahead.

Yeah, good morning.

Thinking about that topic, the credit topic, I think you alluded to the fact that one of the senior care criticized loans paid off this quarter. There's a pretty big waterfall over the next, I guess, six months, and a lot of that's, you know, substandard or special matching. What's the thinking there? Do you think they'll continue to resolve? I'm just curious how you're going to manage that waterfall for charities.

Yeah, so we do continue to look for payoffs. and upgrades of credits. We have, you know, there's probably I think 18 credits overall that we're watching. Four of those credits are in non-accrual, and we have resolution strategies on all four of those credits that seem reasonable and would likely bring an exit. We are being patient in the portfolio. It feels like, you know, my belief is that the long-term demands, population demographics that existed that created all of the construction in this space still exist, and there still is demand. It took a big pause during COVID, but we're still seeing properties and people that, you know, are in need of this type of service, and I think the demographics support it. So, We are being patient, but we are encouraging payoffs and additional resolution strategies.

Got it. And then one final question, circling back to the commercial real estate. Appreciate the slide that gives the concentration. Just curious, is there an appetite to grow that closer to the 250 range? There's obviously a 205. There's some room to move up. Just curious, maybe a comfort level, how high to bring that ratio. Thanks.

Yeah, we are comfortable. There's a variety of products in the commercial real estate business. We've listed out some, so we would be more comfortable doing some more warehouse that has long-term... leases associated with it. We're being selective, particularly around markets and underwriting on the multifamily space. The retail segment appears to be strong. We continue to look at some grocery anchored tenant properties where the anchor is. basically handles the debt service. And so we think there's some opportunities, but being strategic about the specific property type that we approach.

Great. Appreciate the color.

This concludes our question and answer session. I would like to turn the conference back over to Lynn Hardin for any closing remarks.

Well, great. Well, first, I appreciate your time and attention, and we are excited to take your questions. With anything that comes up later, please feel free to reach out, and we will talk to you soon. Thank you.

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.