Q3 2022 United Community Banks Inc Earnings Call
Good morning, and welcome to United Community Bank's third quarter 2022 earnings call hosting the 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 <unk>.
For instance to operating earnings pretax 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 U C. B I D.
Copies of the third quarter's earnings release, and Investor presentation were filed last night 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 U C. B I Dot 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 five and six 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'll turn the call over to Lynn Harton.
Good morning, and thank you for joining our call today.
Well I have concerns about the pace of the fed tightening and the impact of a potential overshoot.
Our south eastern economies are performing well and we had a very strong quarter that demonstrated momentum in several key areas of our business.
First our net interest revenue grew at an annualized rate of 47%.
Driven by loan growth at the upper end of our target range and a 38 basis point expansion in our margin.
While we did see deposit outflows.
And we expect the pace of deposit rate increases to accelerate.
The strength of our core deposits will continue to give us an advantage in this environment.
Our loan to deposit ratio remains low at 73% provide.
Providing us ample liquidity to fund growth at reasonable cost.
Our operating return on assets improved to 1.34%.
Our return on tangible common increased to 15, 6%.
Our pretax pre provision return on assets reached 1.97%.
And our efficiency ratio reached an all time low for us at 48%.
Credit continues to perform well with very low net charge offs and only nominal increases in both nonperforming assets and special mentioned credits.
We are not seeing significant signs of consumer or business stress.
While inflationary pressures are impacting both consumers and businesses.
Both groups exited the pandemic and stronger than normal financial shape and.
Enabling them to continue to perform well to date.
Employment activity continues to be strong in our markets with labor shortages continuing to be common for many of our business customers.
We are seeing slowdowns in our mortgage market as well as slower turnover in our builder finance business as home sales slow both of which would be expected, giving higher mortgage rates.
We increased our loan loss reserve this quarter as Moody's economic forecast weakened due to their anticipation of higher unemployment and reduced residential sales and home improvement activity in the future.
Loan growth was at the higher end of our target range with commercial increasing by $100 million led by equipment finance at $70 million residential mortgage grew by 152 million as more of our closed loans were adjustable rate, which we hold on balance sheet rather than sale.
Our commercial growth was negatively impacted by runoff in Tennessee.
This was not unexpected and we believe we're making great progress in implementing our growth plan and that outstanding market.
We continue to look forward toward closing our acquisition of progress Bank.
Progress has outstanding bankers with strong momentum and it will be a great addition to our franchise.
We've been working closely with him as we anticipate becoming one team early in 2020 three.
And now Jefferson will share more details on the quarter.
Thank you Ann and good morning to everyone.
I'm going to start my comments on page eight and go into some details on deposits. We are proud of our core deposit franchise, and we think it will serve us well as rates move higher 40% of our deposits are demand deposits, which grew by $48 million in the quarter that said total deposits shrunk by 2.5 PAH.
<unk> are $522 million this quarter about half of that decrease was in public funds deposits, which are typically seasonally weak in the third quarter that said we are also in a higher rate environment, where customers have a lot of attractive options outside the banking industry, which is creating headwinds for our deposit growth and the industry.
Still our transaction deposits were up $406 million or 4% year over year, excluding acquisitions.
Our cost of deposits was up 11 basis points in the quarter and helped drive our margin expansion that I will talk about on a later page on page nine we talk about our diversified loan portfolio. We grew loans at a 9% annualized pace Lynn mentioned the drivers of the loan growth in his opening so we'll move on to page <unk>.
10.
On page 10, we highlight that we believe we are in a very good position when it comes to our balance sheet strength and flexibility the.
The combination of loan growth and deposit shrinkage. This quarter took our loan to deposit ratio to 73% up from 70% last quarter again, giving us a lot of flexibility to fund future loan growth, our TCE ratio improved in the quarter to 7.7% despite higher unrealized.
<unk> bond losses, due to good profitability and a smaller balance sheet.
More on capital on page 11.
Our ratios improved and our above peers.
Our tangible book per share decreased by 16 center in the quarter as the higher unrealized bond losses drove 68 cents of headwind in the quarter.
Moving to page 12, we discuss our net interest margin.
As Lynn mentioned, we had 38 basis points of margin expansion in the quarter.
33 basis points of which came from the impact of higher rates and seven came from the positive mix change in the form of lower cash on the balance sheet and a higher loan to deposit ratio I mentioned earlier.
Page 13, we talk about fee income it was down from last quarter. Our mortgage business was the driver of the decrease with rates rising and rate lock volumes declining 24% in response.
The mortgage line had a $2 4 million dollar MSR game that will most likely not repeat in Q4 and the other income line had a $650000 bully game that is also unlikely to repeat in the fourth quarter moving onto some of the other fee income categories. We also had $1.5 million in <unk>.
Gains on SBA laws, and just under $700000 in Nevada and loan sale gains in the quarter.
Moving to page 14, and expenses operating expenses were improved by $2 $6 million in the quarter. The lion's share of the improvement was due to lower mortgage commissions and we got the final cost savings from the reliant acquisition.
With the help of higher rates and the expense improvement our efficiency ratio came in at just under 48%.
Moving to credit on page 15, we had strong credit results in the quarter with three basis points of net charge offs and continued low levels of problem loans.
On page 16, we show our waterfall chart on the allowance for credit losses, while net charge offs were $1.1 million, we provided $15 $4 million into the reserve and have built a reserve for three consecutive quarters.
That reserve increase is due to our solid loan growth.
But Lynn mentioned the main drivers in his remarks, which was anticipated higher unemployment and reduce future investment in residential real estate as a result, the allowance for credit losses moved to 1.12% this quarter from 1.05% last quarter and 97 basis points at year end with that I'll pass it back.
Thank you Jefferson and many thanks to the United team you all continue to deliver outstanding performance that you should be very proud off and finally I'd like to welcome George Bell to our board of Directors, Georgia, and I've met and the BB&T training program as we both began our careers in the early eighties, he's an experienced information tech.
Knowledge executive with more than 35 years in large financial institutions with a specific emphasis on customer information management. He brings an incredible depth of knowledge and leveraging technology to improve products and services to.
To enhance the customer experience and increased organizational productivity.
George Welcome to United is an honor to have you on the team I'd like to now open the line for questions.
Okay.
We will now begin the question and answer session.
As a quick note before we begin we ask that you. Please refrain from using speaker phones during Q&A participation.
To ask a question you May press Star then one on your telephone keypad.
To withdraw your question. Please press Star then two.
At this time, we will pause momentarily to assemble the roster.
First is Kevin Fitzsimmons with D. A Davidson. Please go ahead.
Hey, good morning, everyone.
Very impressive margin expansion, so I'm, just trying to get a little.
Dig a little deeper in terms of looking out at the next quarter or two.
Anticipated further hikes from the fed Jefferson I'm wondering if you can.
AMD what for the month of September the margin the loan yield.
Austin deposits might be just to help guide us on that trajectory for each dose. Thanks, yeah. Thanks, Kevin. Thanks for the question I appreciate it the how I'm thinking about the margin next quarter I don't want to start with the cost of deposits on the deposit beta there is that it was only 8% last quarter I think from the rate <unk>.
<unk> that we've already made its oh, you're at 10% for the fourth quarter and then I think with rate hikes that are expected I expect us to raise deposits on that too. So I'm using a 18% cost of deposits and are 18% deposit beta where our cost of deposits in my.
In my model.
On the entire margin I think you are seeing with that increased deposit betas.
Little less asset sensitive as we.
Go forward, but I think with our I expect I expect some mix change to help us I expect that our loan betas should stay relatively stable as a as rates continue to rise and all said if you bring it altogether I'm expecting about 20 basis points of margin enhancement our next quarter.
Great. Thank you.
Just one quick follow up so on.
Comments that it's been three consecutive quarters of building the reserves.
Given the uncertainty and the.
The headwinds out there should we expect.
Yeah.
Based on what you can see now.
Yeah. So thanks, Kevin its Rob.
There's really three things that play into that this quarter. It certainly was the change in the economic forecast, but of course loan growth and asset quality will also play a role in the future.
We've been saying I don't think our loan losses are going to be three basis points forever and it would seem that.
You know that likely they would return to more normalized levels and of course that will play.
Play a role I think in the provisioning and the allowance going forward.
As much as anything else the Moody's economic forecast is less easily predictable.
Okay. Thanks very much.
Our next question will come from Brad Millsaps with Piper Sandler. Please go ahead.
Okay.
Hey, good morning, guys.
Good morning, Brad.
Hey, Jefferson you talked about some mix change in the fourth quarter and maybe beyond.
Can you talk a little bit about the bond portfolio and sort of how you balance your aspect of that.
That rate continue to move higher since 25% of it is variable it would almost seem like.
The the yield maybe on the bond book going forward would would move up maybe more than what it would cost you to go out rate deposits just kind of wonder if you could one day, if youre thinking on maybe shrinking versus keeping the bond book the same.
And how that plays into your kind of margin and balance sheet guidance.
Yeah, great. Thanks for the question.
I believe our securities portfolio is most likely hit its peak and you'll see a shrinking of for the fourth quarter and into next year.
It is it spits off about call it $60 million to $90 million of cash flow per quarter, depending on the quarter little higher in the near term and a decreasing a little bit into next year and I'm expecting to use that to help fund the loan growth in 2023, So I think if you're off your <unk>.
Modeling the securities portfolio I would model it a smaller.
As time passes.
On the funding side I expect the deposit. It's it is a tough environment. I think you are seeing deposits stabilize a bit but it could be down again.
Next quarter and it as there is a lot of competition out there from short term money market institutional money market funds short term bond funds that kind of thing so I wouldn't be surprised to see if the.
Deposits were down not as much as Q3, but if they were down in Q4, it's a seasonally stronger.
Quarter, four our public funds in the fourth quarter, which helps out a lot as well, but either way.
My kind of short to medium term plan is to fund a lot of our loan growth with securities portfolio run off and that should help that mix change and help increase the margin next.
Next year.
And maybe just one quick follow up to that as well.
As you use those cash flows did most of that come out of the fixed piece or do you expect the variable piece to kind of stay static.
In terms of its debt.
In dollars of the of the Bond book I think it would stay that mix will stay relatively the same.
Okay. Okay and then my second question Jefferson you guys have done a great job managing expenses.
From cost savings from deals mortgage lower mortgage commissions. This summer or this this quarter and I know you put in some new Meredith.
Merit increases midyear. In addition to what you did earlier.
Curious, how you're thinking about expenses going into next year, obviously, a lot of inflationary pressure out there but.
I just wanted to get your thoughts around your.
Your ability to continue to control costs.
I'll start on that and see if anybody else wants to jump in there. So we did do a mid year increased two employees under $75000.
That run rate is in this Q4 number Q3 number so you will see I'm, maybe a little increase in the fourth quarter.
Carry over for that because that was done kind of early Q.
Q3, so there'll be some increase from that mid year increase.
And in total we're doing our budget for next year, we're gonna be budgeting some operating leverage.
Until until all of our budget. It is a tough year with inflationary pressure. So it's hand to hand combat.
With as invoices come in or vendors and others want to raise pricing. It's a it's a battle and so I think that there is pressure on expenses to move higher we do have.
The $3 million a quarter of cost savings from progress that's going to help a little bit in 2023. So that's that's helpful.
Think that.
You know kind of.
Starting with a mid single digit thought on expense growth in 2023, but where.
Again, we're in the budget process currently.
[laughter].
Excuse me.
At.
With regards to mortgage we continue to rationalize our head count with the change of volumes. So we've taken that down accordingly.
Great. Thank you I'll hop back in queue I appreciate the color.
Our next question will come from Michael Rose with Raymond James. Please go ahead.
Hey, good morning, Thanks for taking my questions, Yes, Sir just wanted to dig into the ER.
To the SBA and Novartis businesses, I know spreads on SBA have been under pressure. It looks like you guys are portfolio more of those can you just give us.
You know kind of an outlook as we kind of look forward and then on the venous side, obviously yields are very consistent as you've kind of outlined but it looks like credit is.
Maybe beginning to normalize here. If you can just give an update on kind of what you would expect for <unk>.
Cumulative losses through the cycle in that business and maybe other maybe versus last cycle and how you know.
Maybe you've changed some of the underwriting there to help the loss content as we move forward. Thanks.
Okay.
Theres two maybe three questions in there and do you want to start that Richard.
Start on the SBA side, so a priori.
Okay. That's all good.
On the SBA side premiums are down a little bit so that fourth quarter is traditionally a stronger quarter for us. So we are expecting to be up on a fee income this quarter and then the just a quick aside just we have out of 20000 P. P. P loans.
We have 12 left that we're administering so we're pretty happy about that.
I would say strategically on the SBA side, some some quarters over the last couple of years, we have held back and kept some of those those loans in portfolio.
Our strategy is depending on the pricing out there is most likely changing to where we're going to sell what we originate so with the fourth quarter being a seasonally strong quarter and with the new strategy of not holding well into back I would expect that SBA loan sale gains line to be at our half mill.
Or maybe a little more higher in the fourth quarter.
Yes, we have been selling loans consistently over each quarter I remember on last quarter's call I was mentioning that we may not sell them every quarter with rates moving higher and that being a fixed rate business I could see that if the gain on sale. There is not attractive there could be a quarter in here, where we don't sell.
<unk>.
So so I would say is most likely expectation is another small and they beat us on sale and more normal higher SBA loan sales, but again, there could be a quarter in here, where we don't sell davita salons, if we don't like the pricing and it's the same thing on SBA, there's kind of an over under when we when we hold in cell based on though with the sale.
Yeah dollar amount would be now on the.
Normalized vetoes credit loss yeah.
Part of that John is pass it over to Rob So so.
In the first quarter. This year, we had nine basis points of losses, I think we've been saying they were going to increase they have increased to 35. This quarter. Prior you know if we go back in time, our losses were as high I think in 2020, we were at 78 basis points.
I think we will see that normalize I'm not sure we're going to get back to 78, we do feel like we have I think you you sort of pointed in the direction that I would agree with us. It's a it's a better book today than it than it was in 2020 we've.
Sort of upscale and some of the customers that we're dealing with through the approval process. So so I don't know that we'll get back to 78, but I do think it'll increase although I wouldn't say that we're seeing it yet I don't the difference between 30 and 35 basis points.
So I'm watching the early stage delinquencies pre pandemic they were running 1% and early stage delinquencies were not anywhere near that number at this point, so not really seeing much of a change there yet either.
Okay very helpful credit changes, but the portfolio has been upscaled.
So all things equal it's a it's a lower risk portfolio. He believes in it.
When we bought it in 2018.
Makes sense.
Just a follow up and.
Sorry, if I missed this but any update on the progress deal in getting approval. There and then if you can just remind us Jefferson.
You've obviously had a couple of deals this one pending here recently.
As we go into next year, what is the pool of Accretable yield that youll have to realize over the next couple of years and you have our initial expectation.
For for next year for scheduled accretion.
Yes. This is land and on the progress deal we continue to work with the FDIC and fed toward approval and are optimistic toward getting that done so that we could close in the early part of next year, but we're just continuing on the process with them.
Yeah, well have the exact number of accretion.
With me, let's talk afterwards, I'll give you the the accretion numbers.
The pool of accretion numbers coming through.
Perfect. Thanks for taking my questions.
Our next question will come from Catherine Mealor with <unk>. Please go ahead.
Thanks. Good morning, just wanted to ask a question on credit you know we had at least.
The higher provision this quarter yeah.
They seem largely from the better gross and then in the macro changes. So as you sit here today, how do you what's your kind of outlook for the likelihood that we'll see more reserve build over the next couple of quarters.
Just given how you think kind of the macro factors have the potential to change and what are your reserve sits today.
It's an interesting question I think both land and Jefferson mentioned in their comments two of the drivers one being change in unemployment unemployment plays a role in basically all of our models. So how you think about the future of unemployment will drive that factor and then the other one is new.
New home sales the models, our new home sales and home improvement monies.
And the models were driven this quarter, particularly our residential portfolio driven by that are variable. So we're already seeing.
You know in the market.
Declines in new home sales year over year and specifically in September . So I you know I think it's happening already so to the extent that it happens you won't be predicting more of it then than it would be less likely but if you. If you begin to see you know further tightening and further no.
<unk> views on unemployment then I think you could see the reserve build.
So I'll just add on that it's just it's really sensitive to this moody's model, whether it's getting better or worse. So it's just so hard to make that to give you. The answer that I think he might be looking for but yeah. Yeah.
The Moody's it's just so sensitive to this model that is subject to change and sometimes it's it can be outside of consensus. So it's it's a it's a very difficult question to answer.
Okay, and then on the loan growth in the older cars has been so strong and we've had the view that you know as.
As you.
Yeah. After you incorporate reliant you'll see stronger growth just because of your vessels at the Nashville market, but the economy is also all of the weaker today than it was when you first did the reliant deal. So maybe just big picture comments on what loan growth could potentially look like as we move into next year.
Yeah. Catherine this is rich thanks for the question. So yes are we it certainly has changed a little bit with the next year. So we're thinking about well first of all we're in still the best market. So that's very positive we're.
We're not we're still seen pipelines be strong, but you've got to think that with labor.
Supply change in interest rates that that has an impact next year. So you know we were high single digit this year and we're expecting that to be down a little bit next year kind of mid single digit.
Great.
Great day everything else has been answered thanks, so much.
Thank you.
Our next question will come from David Bishop with Hub Group. Please go ahead.
Yes, good morning, and thanks for taking my question I think Lynn or Jefferson in the preamble you noted there was some oh.
Some headwinds in the Nashville market it sounded like maybe on the loan front, just curious if youre seeing any sort of rationality in the market.
Syed maybe when you expect and how to resume growth in that market. Thanks.
Hi, This is rich, yes suites, and obviously, Tennessee was down I will tell you a.
Part of that was credit appetite, we had a large made up primarily of two loans, a subprime auto paper and a land loan.
I have not we haven't gotten through all kind of what didn't meet our crap or the credit appetite we've gotten through most of it. So maybe just a little bit more in Q4, and then we really feel good about where we're moving to and the team also I will tell you some of our.
Hiring discussions there's a lot of emphasis in Nashville, we have some very positive momentum on the hiring front, there and feel good about that as well so that market is such a strong market, we feel very positive about it going forward.
And I might just overlay that it's pretty typical when we buy a bankruptcy.
On shrink for a quarter or two or maybe even sometimes three or asthma or overlaying, our box or the conversion or something.
Distraction, sometimes but so.
But either way we are we feel really good about the team we feel really good about the market and we feel.
There's very within our expectations of what we're seeing.
That's great.
Got it appreciate that color and then one follow up Jefferson.
The mortgage banking front I know it can be volatile.
No source of revenue sounds like there was some you mentioned some noise in there can you go over that again I don't know if you have a sense where that could normalize them too.
2023, Thanks, Jess I'll I'll start with the noise and rich can talk about the business a little bit so the accounting noise in the quarter was the MSR gain.
Which was $2 $4 million.
I don't expect that to repeat so I take that out to start and rich can talk about the pipelines and volumes and expectations for.
Blocks in Q2, and such yes, Q4, Yeah, we do expect a Q4 to be down about 20% from Q3.
And.
Probably a little bit more mixed moved two arms as well and are expecting the.
The merch margins to be down just a little bit as well.
Got it appreciate the color.
Our next question will come from Christopher Merrimack with Janney. Please go ahead.
Hey, Thanks, Good morning, Jefferson wanted to ask about the increase use of the held to maturity securities and I'm wondering if that.
Tap some of the excess deposits that you already have on the balance sheet and does that become a factor in how you're thinking about funding. The next couple of quarters.
Thanks, Chris that is a that's a great question as we're thinking about next year and planning out the balance sheet. So the bench.
Mentioned, the cash flow that I'm expecting to come from both the H T M. In the F S a portfolio.
Obviously, we're not planning on selling that 40% or about $4 billion of I'm, sorry, $3 billion of held to maturity securities, but if.
But the cash flow itself will fund a lot of islands, if we're not planning on selling <unk> securities either we can borrow against both F. As an HTM securities. So I'll.
I think about it that our portfolio went from $2 $5 billion to $7 billion. During the cycle I think that could be down to five or $6 billion or even $4 billion I think it would be a more normal loan to deposit ratio for us. So the amount of HTM securities fits in line with the.
Size of the portfolio I think we're always going to have so that the combination I believe of of letting the portfolio shrink.
And the ability to borrow against both a F. F N H T M. It's not really having those HTM securities is not affecting our strategy for liquidity or the size of the portfolio.
Got it that's very helpful. Thanks, and perhaps a question for rich Oracle.
Are there any new poles of deposits that you can tap or that perhaps you are tapping against what could be a better generation I'm. Just curious if there was incentives or teams of people that can focus more on deposits.
It wasn't necessarily the past year.
That's a great question I'll start with it and maybe a a pass it around to anybody else who wants to join us.
So I Wouldnt I don't know if I would say there is new.
Pools necessarily that's coming to mind, but what I would say is that a word Austin and I imagine that most banks are changing their energy associated with deposit growth and how we think about it where.
We're using rate more you'll see that out there as well we are I would've I would envision.
If you talk to our bankers before I think they use rate defensively I think they use rate to keep customers, but I can imagine campaigns happening in the future I can envision a compensation for deposit growth increasing in.
In the future and just changing the energy two where we had excess deposits.
Before and now we want to grow our deposit base and so I think youre going to see an organization all of energy change around the need to grow deposits.
And a real focus on our core customers, that's really where we want to emphasis and more so than public funds, it's really protecting the core customers and that's where our state presidents are putting a lot of energy in our teams.
Great. Thanks again for the background, that's all Super helpful. I appreciate it thank you Chris.
And this concludes our question and answer session I'd like to turn the conference back over to Lynn Harton for any closing remarks.
Oh, great well and once again, thank you all for joining our call you know we talked a little about about the economic environment and it's really hard it's hard to know where we're going to go into you know the fed tightening seems to make it seem like there'll be a a reception on the strength of the consumer and business customer, though and strengthening employment market us would seem to all.
There'll be mild if anything.
Regardless I think what you got to focus on is the amount of shock absorbers that the company has built in and you would think about shock absorber of pretax pre provision ROA that we have today, our liquidity and core deposits that we have the capital strength and our credit culture I'm, you know I'm really excited about Oh, well it's good.
To happen as we go into 2023 and <unk>.
So anyway I appreciate everybody being on the line and supporting Us and feel free to reach out with any other questions that you have thank you.
The conference has now concluded. Thank you for attending today's presentation. You may now disconnect your lines.