United Community Banks, Inc.

Good morning everyone and welcome to United Community Bank's second quarter 2022 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 last night in 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 2021 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 Hartin.

Good morning, and thank you for joining our call today. Despite the concerns over inflation, Fed tightening, and the direction of the economy, we had a solid quarter that demonstrates some of the strengths of the company and of our strategy. First, our net interest revenue grew at an annualized rate of 37%, driven primarily by a 22 basis point expansion in our margin. This expansion highlights the strength of our deposit base created by our service performance. We've included some historical deposit beta information in our deck this quarter to give you additional insight into this core advantage. Due largely to our net interest revenue growth, our operating return on assets improved to 1.17 percent, our return on tangible common increased to 14.2 percent, and our pre-tax pre-provision income increased by $8 million, a 39 percent annualized growth rate. Secondly, our credit performance continues to be outstanding, with net recoveries and improvements in both non-performing assets and special mention credits. Our goal has always been to focus on balanced credit performance through the cycle, and we believe we're prepared if the economy does slip into recession. While we're not seeing significant signs of consumer or business stress, we know that increasing interest rates always flush out excessive leverage from the economy. We believe the majority of that is outside the banking system, but we are watching for any signs of weakness in the markets we serve. Our loan growth was in our target range, but distributed a bit differently than normally. Our C&I loans were essentially flat. Our commercial real estate was down slightly. Equipment finance grew nicely, but at a slightly slower pace than in the past. A large part of our growth was driven by residential mortgage, where increasing fixed rates caused more of our customers to choose adjustable rates, which we have always held on balance sheet. These are all in-market, United originated, relationship-focused loans, which we're glad to hold. Given that we seem to be moving into more of a late-cycle economic environment, I'm pleased with our growth mix this quarter. Finally, I continue to be very excited about our newest partner, Progress Bank. We're well into integration planning, and it's clear that we're a great cultural fit together and share a very similar approach to the market. David, I'm looking forward to having you and the rest of your team officially become part of United. And now, Jefferson, how about going over more of the details for the quarter?

Thank you, Lynn, and good morning to everyone. I'm going to start my comments on page eight and look at our markets a little bit, and we have one of the best footprints in banking. We are excited that the pending progress merger adds some of the fastest-growing markets in the Southeast in the form of Huntsville, Birmingham, and the Florida Panhandle, as well as Tuscaloosa, and that our markets are growing population at 150% of the national average. On page 9, we are proud of our core deposit franchise, and we think it will serve us well as rates move higher. Deposits shrunk by 0.8%. or $183 million in the quarter, which we believe is the natural evolution of higher rates and some deposits moving to their more natural home. Our deposits were still up $1.4 billion year over year, excluding the deals. The combination of loan growth and our slight deposit shrinkage drove our loan-to-deposit ratio up to 70% from 68% last quarter. Our cost of deposits was up just two basis points in the quarter and helped drive our margin expansion that I will talk about on a later page. On page 10, we talk about our diversified loan portfolio and growth drivers for the quarter. Excluding PPP loan shrinkage, we grew loans at a 7% annualized pace. The growth was driven this quarter by residential mortgage, as Lynn mentioned, as there was a mixed change towards folding rate loans in our mortgage business this quarter. At the bottom of the page, we highlight that we have intentionally kept our portfolio very granular with low lending limits and very diversified. It's CNI heavy, it's light on CRE, all of which we believe translates into less risk over time. We had record loan originations this quarter at $1.5 billion. And we ended up having high pay downs as well. And we are optimistic about loan growth for the rest of the year. I am going to skip ahead to page 12 and talk about our capital. Our ratios stayed relatively flat with a strong profitability and strong loan growth. We did see a slight decline in our TCE ratio as the strong profitability was offset by $91 million of higher AOCI related to our AFS securities, as rates rose in the quarter, of course. Moving to page 13, we discuss our net interest margin. We had 22 basis points of margin expansion in the quarter, 18 basis points of which came from the impact of higher rates, and five came from positive mix change in the form of lower cash on the balance sheet and the higher loan-to-deposit ratio that I mentioned earlier. Moving to page 14, While this rising rate cycle is certainly different from the last one, we did include a page this quarter on our experience last cycle. And we had a 24% deposit data from the fourth quarter of 2015 to the second quarter of 2019, which we believe stands up well against peers. While we want to and will take care of our customers this cycle, we are optimistic that we will once again fare well compared to peers on this metric. Page 15, we talk about fee income. It was down from last quarter. Our mortgage business was a driver of that decrease with rates rising and the refi business falling off. We had three main drivers in the quarter that drove the decrease. One, we had a smaller MSR gain in Q2 compared to Q1. We had a $2.1 million MSR gain in Q2 compared to a $6.4 million gain last quarter And this is a $4.3 million difference. Also, despite being a seasonally stronger quarter, we did have a 21% decline in rate locks in Q2. This decline in lock volume also combined with a mixed change towards floating rate loans, which means more loans were going to the balance sheet and less loans were being sold. So more of the economics of the lock volume in Q2 we will realize over time. Moving on to some of the other fee income categories, we also had $3.1 million in gains from SBA loan sales and just under $700,000 in Navitas loan sale gains in the quarter. With good loan demand, rates rising, and the NIM expanding, and a bit more uncertain pricing market, we plan to be a little more picky on selling loans this quarter, and I would expect this line item to be closer to $2 million in the third quarter. Moving on to page 16 and expenses, operating expenses were up $3.3 million in the quarter. The lion's share of the increase was driven by a $2.2 million merit increase, and the quarter also included some core growth and some reliant cost savings. On a year-over-year basis, our expense increase was mostly driven by the acquisitions. If we adjust for the acquisitions and the cost savings that we would get and have gotten, We estimate that our core expenses were up $3.5 to $4 million over last year as we achieved the cost savings from both AQUESTA and Reliant. Also, if you look at it another way, if you take our operating efficiency ratio and then take it to another level and also exclude PPP fees and MSR marks, which I know a lot of analysts already do, you can really see the benefit of our deals on the efficiency ratio and profitability over the last year. This adjusted efficiency ratio, if you will, moved from nearly 58% in the year-ago quarter to just under 54% this quarter, which is an improvement that we are proud of. Moving to credit on page 17, we had strong credit results in the quarter with three basis points of net recoveries and improved problem loans. On page 18, we give you some details on special mention, substandard accruing loans, and non-performing assets, all three categories, were flat to slightly improved, and we feel good about where we are on credit. On page 19, despite generally improving credit trends and the fact that we had $1 million in net recoveries, we still did build our reserve for the second time in two quarters. Part of that reserve increase is due to our solid loan growth, but our CESA model also had a slightly worse economic outlook which necessitated another $3 million in second quarter provision. The chart at the bottom shows our reserve in dollars and percentage since CECL inception. That shows a COVID-related buildup and release, and now we've had two quarters of reserve build in a row with this quarter and the Reliant deal and its related double dip last quarter.