United Community Banks, Inc.

Good morning and welcome to United Community Bank's third quarter 2024 earnings call. Hosting the 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 third 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'll turn the call over to Lynn Harten.

Good morning, and thank you for joining our call today to discuss what we believe was a strong quarter. During the quarter, we had two unusual items that impacted our reported earnings. First, the sale of our manufactured housing portfolio, which we announced several weeks ago. As we mentioned then, it was a business that we had inherited in an acquisition and that we had made the strategic decision to exit. Given that decision, we believed it was best to sell the portfolio, which was both long-dated and heavily subprime, rather than continue to collect it over time. The sale resulted in a one-time loss of 18 cents per share, but should be neutral to earnings on a go-forward basis. The second unusual item was Hurricane Helene. We have several offices in western North Carolina, including eight in the areas that were most heavily impacted. We outline our loan and deposit balances in those most impacted North Carolina counties on slide five of the presentation. While it's too early to predict the exact impact of the hurricane, we felt it was prudent to increase our reserves on this $383 million portfolio to 3.5%. We will continue to track and report on these markets as we go forward. Our teams and the communities there are doing an incredible job of both taking care of each other and preparing to rebuild and repair the damage. Including the special reserve for Helene, our operating returns were strong for the quarter with a return on assets of over 1%. Capital continued to grow with our tangible common equity increasing by 53 cents per share or 11% on an annualized basis. Excluding the sale of manufactured housing, our loan growth was 1.5% annualized and customer deposits grew at a 5% annualized rate. Our margin was down, just slightly, quarter to quarter, but continues at a solid level of 333 basis points. Deposit costs were flat to the second quarter. Credit continues to be stable. Reported net charge-offs increased, however, as noted in the slides, that increase was due to the manufactured housing sale. Navitas losses improved slightly for the quarter, and the core bank, excluding Navitas and manufactured housing, had credit losses of 15 basis points. consistent with both the first and second quarters this year. We continue to have ample liquidity to fund growth, with our loan-to-deposit ratio at 78%, and essentially no broker deposits. Jefferson, why don't you cover the quarter in more detail now?

Thank you, Lynn, and good morning to everyone. I am going to start my comments on page six. Lynn spoke about the sale of our manufactured housing portfolio that closed on August 30th. We stopped originating loans in the third quarter of last year, and the sale came with an 18-cent loss that you can see impacted fee income in the quarter. In addition, while it did not affect earnings this quarter, we also charged off $11 million in manufactured housing loans as an estimate of the credit loss in the transaction, which was the equivalent of the amount of reserve we had already set aside for the portfolio. This $11 million of transaction-related net charge-offs takes our total net charge-offs from 24 basis points to 52 basis points and a quarter. The transaction slightly increased our regulatory capital ratios and slightly decreased our TCE and is neutral to EPS as we reinvest the proceeds. We do believe that the sale reduces our risk profile and allows us to reinvest capital in our other businesses going forward. Moving to page seven, we had a strong quarter in terms of deposit growth with 4.7% annualized growth. The growth came primarily in core transaction deposits as we benefited from public fund seasonality, which should continue into the fourth quarter. Our cost of deposits was flat at 2.35% in a quarter as we had been lowering rates on our promotional accounts to offset some negative mix change that occurred with small shrinkages in DDA and savings accounts. Moving to page 8, in the chart in the lower left, we highlight that we have been shortening our CD book this year and that 75% of our time deposits will mature within six months. We turn to our loan portfolio on page 9. Excluding the manufactured housing sale, loans increased by about 1.5% annualized. As mentioned in earlier quarters, our senior care book is in runoff and shrunk $38 million in a quarter, which hurt the run rate a little bit. We are optimistic that loan growth may be picking up some by looking at the increased activity in our loan approval meetings. Our commercial real estate exposure moved down on the whole in the quarter, with commercial real estate construction projects completing and with fewer new projects coming into the pipeline. Our loan book remains diversified and granular. Turning to page 10, 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. This gives us some flexibility in managing through a tough interest rate and competitive environment. Our loan to deposit ratio moved down to 78% with the sale of the manufactured housing portfolio. And our CET1 ratio tipped over 13% in the quarter. On page 11, we look at capital in more detail. We had increases in our regulatory capital ratios and our TCE and all of our capital ratios remain above peers. Our leverage ratio was also up nine basis points. We did take the opportunity in the quarter to call two small trust refers that totaled $8 million in size that lowered our capital ratio by four basis points, but took some expensive debt off the balance sheet. Moving on to the margin on page 12, the margin came in four basis points lower in the third quarter on a gap basis, and down two basis points on a core basis. Of the two basis points of core margin pressure, we estimated one basis point of that came from the sale of the manufactured housing portfolio. We had slightly less loan accretion in the quarter compared to Q2. Loan accretion went from a nine basis point benefit in the third quarter to a seven basis point benefit in the second. Moving on to page 13, On an operating basis, non-interest income was down $1.3 million from last quarter. That decrease, however, is more than explained with a $2.7 million MSR rate down in the third quarter, which was a $3.3 million negative swing from last quarter. Other non-interest income was up $1.9 million and had the benefit of $700,000 in BOLI gains and $900,000 and unrealized equity gains. Our gain on sale of SBA and Navitas loans was up slightly compared to last quarter. From a modeling perspective, remember that we sold our RIA FinTrust on October the 1st, and we expect our wealth income to be down by about $2 million next quarter and for their related expenses to be down by a similar amount or by $1.7 million. Operating expenses on page 14 came in at $140.9 million, up just $300,000, and the operating efficiency ratio was also relatively flat. Moving to credit quality, net charge-offs were 52 basis points in the quarter. Of the 52 basis points in losses, 24 basis points came from the estimate of lifetime losses in the manufactured housing portfolio transaction. and another one basis point came in manufactured housing losses that were not related to the transaction. Navitas losses improved and contributed 12 basis points of the 52 basis points in losses for the quarter. Excluding manufactured housing and Navitas losses, the bank's losses were low and stable at approximately 15 basis points. In other credit statistics, NPAs and past dues were improved, while special mention and substandard loans moved slightly higher. I will finish on page 16 with the allowance for credit losses. Our loan loss provision was $14.4 million in the quarter, and of that number was the $9.9 million special provision for Hurricane Helene. Excluding Helene, we had $4.5 million in provision compared to $12.7 million in net charge-offs. This differential came as our economic forecast improved favorably with the benefit of lower rates and a greater chance of a soft landing coming into the forecast. Taken together, the allowance for credit losses decreased slightly for the first time in over a year. With that, I'll pass it back to Len.

Thank you, Jefferson. As we complete our strategic planning cycle for the year, we're very excited about the opportunities we see. We have operational and product improvements that we believe will help us grow, and our recruiting pipelines are strong. We're well positioned from a capital, liquidity, and market potential perspective, and we expect to have a great finish to 24 and a strong 2025. And with that, I'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're using a speakerphone, please pick up your handset before pressing the keys. To withdraw your question, please press star, then two. At this time, we'll pause momentarily to assemble our roster. Our first question comes from Russell Gunther from Stevens. Please go ahead. Hi, Russell.

Hey, good morning, guys. Apologies. Maybe we could start on... It's a margin question, Jefferson. You guys flagged the deposit or time deposit maturity schedule. Could you give us a sense of what your current offerings are from a rate and duration perspective?

Yes. So we are in the mid threes from a CD. I'm going to check that. So I think we are four and a quarter on our highest rated CD at four months. We've just recently lowered that. And I think we'd be putting on new CDs in the total if you include the board rates and the high threes on average.

Okay. Got it. Very good. And then as we think about down betas for the cycle, how are you guys thinking about that? And then as a piece of it, just remind us how much you guys have in the way of indexed deposits.

All right, we have about $6 billion that's indexed. Then we have another $3 billion of promotional money market that I would call not indexed but management controlled to get you to about $9 billion in total. Down betas, we're bottling currently 38% down betas. We were 45% in the up, and we were trying to make a strategy that could help beat that 38% down beta. You might get a little less than that 38% in the first quarter of rate cuts, the fourth quarter here, because of CDEs and some negotiated accounts that might take a little while to get lower. But we think that 38% is the right number to use, although we're going to try to beat that.

Okay. Great. And then just last one for me, guys, switching gears on to the loan growth side of things. Lynn, you mentioned some expectations that may be picking up. You guys have plenty of capital screened relatively low on CRE and C&D concentrations, well below peer loan to deposit ratio. Could you guys just give us a sense of what the drivers of the pickup would be and what's a good order of magnitude to think about as we move into 25?

Good morning, Russell. This is Rich. And yeah, I'll hit on that. And also the preparation for this call, I actually spoke to each of the state presidents in the last 24 hours just to get the most realistic time in terms of what the pipelines look like and activity. I will say those calls were all either very positive or extremely positive. So we feel good about mid single digit for Q4, and we feel good rolling into 2025. Also, we were very pleased that Tennessee was the leading geography this quarter. That was an acquisition. You know, we always go through a little bit of trials with an acquisition, so Kelly Key and that team did a great job delivering that. We also are seeing Cree pick back up, so that's helpful in everything. And the last thing I would comment when we're looking at growth and optimism is is we've done some really good hiring in the last quarter. We've hired some lenders in Florida, a new market president in Charlotte, a new corporate middle market lender in Charlotte as well. In addition, a new player coach in charge of 501C3 of the not-for-profit space. And lastly, a real focus on wealth management. I feel really good about the hiring there we've done this past quarter.

That's great, Collin. I really appreciate it. Guy, thanks for taking my questions. I'll step back.

Thanks, Ross.

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

Hey, good morning, everyone. Thanks for taking my questions. Maybe I'll start with Rob. I think the MPLs related to the manufactured housing portfolio were around $20.5 million, but the stated MPLs were only down a couple million bucks. Can you just talk about what some of the uh, the increase, uh, would have been there, uh, X, the, uh, manufactured housing portfolio and, um, you know, how we should just overall think about, uh, credit trends as we, uh, as we move forward. Thanks.

Yep. Thanks, Michael. Um, thanks for the question. In terms of the NPLs, your analysis is correct. We had, uh, several smaller CNI borrowers that, uh, were substandard accruing that did roll over into the non-accrual category. So that was the primary driver of the refill of the reduction from manufactured housing. We do still have about $2 million of manufactured housing non-accruals that are still in the bucket. So we didn't eliminate all of the manufactured housing non-accruals. And as it turns out, of those C&I borrowers that did roll into non-accrual, we've already received payoff on one of them at 100%. So we continue to feel good and expect stable performance going forward.

All right, helpful. And then, you know, if I just look at mortgage, just switching to fees, if I just look at mortgage, on a core basis, maybe up a little bit, but maybe not as much as we were looking for. Jefferson, can you just give us some thought process on production trends as we move forward? I just saw earlier today that housing sales kind of hit the lowest level since 2010, and just the willingness to hold versus hold. versus sell both for mortgage, but also for SBA and Nubitus loans as we move forward. Just trying to get a sense for what we could expect in that regard. Thanks.

So maybe I'll start, pass it to Rich, and then maybe come back to me. But we felt like we had a pretty good quarter in mortgage with applications and locks and revenue up, if you exclude the mark in both quarters. But I'll pass it to Rich, and I'll come back with the balance sheet.

Yeah, I'd say the same thing. We were up 11% from Q2. Felt good about that. We were up on the gain on sale. But we are rolling into Q4, which is seasonally a slower quarter. So we expect to see that. Also, a fair amount of our mortgage business is Western North Carolina. So we expect a little bit of an impact from that as well.

And we had been pricing our mortgages to encourage fixed-rate loans and then to sell them into the marketplace. And we have recently amended our pricing where we're a little now more indifferent between the pricing of an adjustable variable rate loan and a fixed rate loan. So we expect more variable rate loans now and that you'll see mortgage loan growth pick up a little bit from where it is now because of the adjusted pricing.

That's great, Collin. I'll step back. Thanks for taking my questions.

Thanks, Michael. Thanks. The next question comes from Catherine Miller from KBW. Please go ahead.

Thanks. One follow-up on the margin outlook. Can you talk a little bit about loan yields and talk about maybe the percentage of loans that will remind us how much floats immediately and maybe how much of that, if you've got it, kind of tied to SOFR versus prime so we can think about any kind of lag effect there with rates. And then if you could quantify the fixed rate repricing Just trying to get a sense as we get through rate cuts, you know, how much downside we should see to the loan yields.

Thanks. Yes. So we have 44% of our loans that float. Of that 44%, it is primarily SOFR. I want to get back to you with the exact switch. But we are feeling that impact of SOFR moving before the rate cuts now. So I believe it's primarily SOFR there. On the fixed rate book, I expect about $800 to $900 million of that back book to reprice in the next 12 months. That's currently in the high fours, so you get that bit of a tailwind from the back book there. We're putting all new loans in the 7% to 7.5% range. So in quarters that you don't get a rate cut, we should expect to see our loan yield increase. But in quarters with a rate cut, you're going to see that 44%. be impacted by that.

Okay, so then any, I might have missed it earlier, any outlook for the margin in the next quarter and then any early guide on 25?

Yes, so we think the margin is relatively flat excluding some mixed changes and the mixed changes that are coming in Q4 will be negative to the margin but they'll either be positive or neutral to earnings and EPS. The first mixed change is that we typically see $400 to $500 million of public funds deposits come in in the fourth quarter. We expect that again this quarter. We saw a little bit at the end of Q3. That's going to have a 1.5% to 2% spread on it. So while we'll make more money, but it'll hurt our margin by about four basis points. Secondly, you get the full quarter absence of the manufactured housing loans. Hurts the margin by about two basis points. That said, that margin decrease is offset in lower net charge-offs. It's offset in lower expenses, and so it's relatively neutral to earnings. So excluding those couple things, I think you may get a little bit of timing from that SOFR piece that you just spoke about, but I think relatively flat, possibly slightly down, but relatively flat is the margin guidance, excluding those two mixed change items.

Okay, great. And then in 2025, is there a scenario where we could see the margin increase or are we more just kind of holding steady for a while until we get to the end of the easing cycle?

That's a great question. We haven't budgeted 2025 yet. We're getting very close. So I really want to hold that answer for 90 days or so. But in the big picture, you know, we have a 650 loan yield. We're putting on new loans in the 7% to 7.5% range. I believe that our cost of funds is coming down either way, so it really depends on what this rate cycle looks like. We're going to be pretty aggressive in trying to cut deposit rates because we want to outperform in our deposit beta in this down cycle, but not prepared to give 25 margin guidance just yet.

That's fair, and that color was helpful. Thank you so much. Great quarter.

Thanks. Thanks. The next question comes from Gary Tenner from D.A. Davidson. Please go ahead.

Thanks. Good morning. I wanted to ask about the manufacturer housing proceeds reinvestment, the timing of that in the quarter, and then bigger picture as you're thinking about the securities portfolio over the next 12, 15 months, kind of reinvestment versus runoff of that book.

All right. So I caught the first part of the question. You have to remind me of the second piece of it. But we had a combination of things that happened this quarter on cash. We had really strong deposit growth. And then we had the proceeds from the manufactured housing sale come in. So all quarter, and you can see it in the average balances, we were running higher cash than we would expect to run. We did buy $450 million or so of securities in the quarter. So part of that you might want to attribute to the manufactured housing sale, but the cash came in from two different spots. In the bigger picture, we're going to be continuing to invest kind of relatively higher amounts than we had been in the past because of this cash that we have. So I would expect a similar amount of securities purchases in the fourth as in the third. In the third quarter, we were in the 550 range of where we were buying securities. Now we're going to be in kind of that five to five and a quarter range buying securities. So I don't know if I answered that first part of your question, but the We are reinvesting this money into the securities portfolio, and over time we expect to reinvest that into loans. That didn't quite catch the second part of your question.

Yeah. Jackson, you got half of the second part anyway. I was thinking about 2025 and the securities portfolio kind of runoff versus reinvestment, but it sounds like the expectation might be leaning towards using runoff to fund loan growth.

Yep, so we have about $70, $80 million a month of principal payments from the securities portfolio. So that will be reinvested either way. And then from there, it just kind of depends on what our deposit and loan growth is going to be. If we have more deposits growth than loan growth, you'll see higher reinvestment. I think you will see we have been growing deposits well. I'm optimistic about our ability to grow deposits. We're feeling better about our ability to grow loans. as well with the comments that both Rich and Lynn had. So we do think that you'll see a pickup in growth and 25 less need to purchase securities.

Okay, I appreciate that. And then just quickly on the expense side, as it relates to the hurricane, any expectations of elevated expense or cost in the fourth quarter from that?

I can start on that. We have seen some damage to a handful of branches that we're looking at our insurance coverage to see what that might be. We have small expenses and various things to provide services at branch locations. So I don't think it's meaningful, but we are seeing some small expenses coming through, and others can add to that if they like. So yes, but not meaningful.

Thank you. The next question comes from Christopher Maranek from Jenny Montgomery Scott. Please go ahead.

Thanks. Good morning. I was just going to follow up on the same Hurricane Helene question that Gary had just related to forbearance and is there any noise of that this quarter or would it largely take care of itself by the time you report in January?

So, hey Chris, it's Rob. We did put in place, which we do for all storms, for FEMA-designated counties the option to defer payments. And so we've had primarily tracking. Over the course of the two storms, there's a lot of counties over our footprint, but we've had about... $11 million in deferrals so far. That's just payment deferrals. They range from 30 days to 90 days. And in the designated counties, kind of the hardest hit counties of Western North Carolina, we've had about 39, so $5.5 million. So half of them really coming in that hard hit area of Western North Carolina.

Great. And Rob, is it too early to talk about any of the deposit inflows or sort of benefits that might happen on the back end? I know you're still working through the challenges at the moment.

Christopher, this is Len. We certainly expect that. You know, when we put this reserve together, both Rob and I and our chief data officer were all at regions during Katrina. And, you know, so we put together a reserve there on the credit side and ended up not using it. So we had about a 4.5% reserve there, and it ended up being too much. And we were surprised by the amount of deposit inflow that came in. So our expectation is similar for this. We're generally the number one or number two market share in those heavy counties. And so we'll see how that develops, but we expect the same kind of trends.

Got it. Great, Len. That's helpful. And then just one last one. Jefferson, can you remind me what the yield on the manufactured housing portfolio was at the time it was sold?

Yes. So it was 8.5, but there were some non-accruals in there. If you adjust the denominator for that, it's about 8%. Great.

Okay. Thank you all very much. Thank you. Thanks.

Again, if you have a question, please press star, then 1. And our next question comes from David Bishop from the Huvday Group. Please go ahead.

Hey, good morning. Hey, Jefferson, a question on the Navitas portfolio. Obviously, losses have been tipping up of late, you know, from the sub-100 basis point level to about, I guess, 134 this quarter. Just curious how quickly you think that can, you know, maybe recover and get back to a more normalized, I don't know, 60, 70, and maybe even, you know, sub-60 basis point range.

Yeah. Hey, David, it's Rob Edwards. We kind of are subdividing the portfolio into two different parts right now. And we're still running, I think it says it in here, around 97 basis points. Yeah, on slide 19, it's in the appendix. We're running about 97 basis points. And we sort of target 1% loss rate as a normal loss rate. They did get stuck in... Late last year, they had a small $50 million – I guess it was $55 million over-the-road trucking portfolio that they've suffered some pretty significant losses from. And that's really the delta between the 1 percent and the 134. So that portfolio now is down to $29 million. we were originally thinking it would be done by now, but there's still some additional losses coming through that portfolio. And we think it'll probably be mid next year before we're through all of that.

Got it. Appreciate that color. And then Jefferson, you noted the seasonality on the, on the muni deposit front. Does that typically flow out then just as quickly in the same amount, maybe in the, First or second quarter of next year should we model that outflow as well?

That's right. So you get to March, April of next year, it flows out.

That's all I had. Thank you. There are no more questions in the queue. This concludes our question and answer session. I would like to turn the conference back over to Lynn Hartin for any closing remarks.

Well, once again, thank you all for joining the call and supporting the company. And any follow-on questions that you have, please feel free to reach out directly to Jefferson or myself. And we look forward to seeing and talking with you soon. Thank you.

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