Q1 2023 United Community Banks Inc Earnings Call

Speaker 2: Hosting the call today are Chairman and Chief Executive Officer Lynn Harton, 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 in general and also no longer maximum funds for competitive debt.

Speaker 2: 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.

Speaker 2: Copies of the first quarter's earnings release and investor presentation were filed last night 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 statement should be considered in light of risks.

Speaker 2: this has certainly been a busy and an interesting quarter. Despite the turmoil in the US banking markets, we continue to perform well.

Speaker 2: While our reported operating earnings per share was 58 cents,

Speaker 2: If you exclude the progress double dip credit provision, which I think is a better way of looking at it, our operating EPS was 65 cents for the quarter and our operating return on assets was 119 basis points.

Speaker 2: Given the focus on liquidity and funding costs, we were pleased with our customer deposits growing at a 10% annualized rate in the quarter.

Speaker 2: The cost of deposits did increase and our mix of deposits moved toward more interest fairing as would be expected in a higher rate environment.

Speaker 2: Our bankers work proactively with our customers after the news of Silicon Valley and Signature Bank, and we also saw mixed changes resulting in growth in our insured products.

Speaker 2: We ended the quarter with essentially no short-term borrowings or advances. However, we did incur extra costs during the quarter as we decided to hold higher levels of liquidity given the environment.

Speaker 2: we expect to be able to hold more normal levels of operating cash going forward. We've included additional information in our investor deck regarding our deposit composition, granularity, and insurance coverage and are glad to take additional questions on these topics on the call.

Speaker 2: Our deposit franchise continues to be a key strength for us.

Speaker 2: With mixed changes and increases in rates paid on interest-bearing deposits, our overall cost of deposits increased by 61 basis points. Our loan yields increased by 46 basis points for the quarter.

Speaker 2: Taking together, these changes combine to decrease our margin by 15 basis points from 3.76 to 3.61, while down, it's still significantly better, 64 basis points better, than the same period a year ago. Our loan growth for the quarter was 8% on an annualized basis.

Speaker 2: Credit quality continues to be strong with net charge-offs of 17 basis points, flat with last quarter. We did have an increase in non-performing assets and past dues from 29 basis points to 43, but these numbers continue to be consistent with normal performance. Our Senior Care Portfolio

Speaker 2: which is $410 million or 2.4% of total loans, continues to be our most stressed sub-portfolio, and was responsible for the increases in non-performing assets in past twos.

Speaker 2: Our office portfolio, $710 million or 4.2% of total loans, continues to perform well with very low levels of loans identified as high risk. This is a very granular portfolio. Our largest office loan is $23 million on a single property.

Speaker 2: and our 10 largest office loans combined total 132 million are only 80 basis points of total loans.

Speaker 2: Rob will be glad to provide additional color on the portfolio during the question period. This was the first quarter we officially had Progress Bank as part of United.

Speaker 2: While the deposit and loan growth numbers I previously mentioned exclude progress and progress activity, they of course did add to our balance sheet and income for the quarter. We are thrilled to have them as part of the team.

Speaker 2: I'm also pleased to report that we completed the conversion of progress over this past weekend.

Speaker 2: And so now, not only are they part of United financially, they are also operating under the United brand and systems.

Speaker 2: David has built a great team and fantastic markets and we're a better company together with them.

Speaker 2: During the quarter, we were also very pleased to announce a merger agreement with First National Bank of South Miami.

Speaker 2: This is a great bank which has been in the market since 1952.

Speaker 2: We spent a lot of time with the management leadership team and are excited to bring their talent and energy to United in the latter part of this year.

Speaker 2: So, as I said, a busy and interesting quarter, and now I'd love for Jefferson to provide more detail on our performance.

Speaker 3: Thank you, Lynn, and good morning to everyone. I am going to start my comments on page 8 and go into some details on deposits.

Speaker 3: As I mentioned, we had a strong customer deposit growth quarter of $525 million, and we elected also to raise some brokered CDs in February , which gave us $790 million of new funding in Q1. The growth came in our CD's and our money market accounts as our DDA shrunk in the quarter.

Speaker 3: Our cost of total deposits moved to 1.1% in the first quarter from 49 basis points in the fourth. And we now have a beta of 23% through the cycle.

Speaker 3: We have added some more detail on page 9 on our deposit base. We have a granular deposit base with $32,000 average account size.

Speaker 3: Also, our business deposits were up 6% not annualized this quarter, with stable DDA and the growth coming on the interest-bearing side. In addition, our consumer deposits were up 1% not annualized, with a more noticeable mix change from DDA to interest-bearing.

Speaker 3: On page 10 is yet another look at our deposits, this time with regard to FDIC insurance.

Speaker 3: We estimate that 64% of our deposits have FDIC insurance, and we also calculate that another 12% are public funds that are collateralized with securities, making them somewhat stickier, we believe. So in total, we have 76% of our customer deposits that are either guaranteed or collateralized.

Speaker 3: We also have a note on this slide that we are seeing growth in our insured cash sweep deposit or ICS deposits That was three hundred and nineteen million dollars in the first quarter moving on to page 11 and the topic of loan growth adjusting for the acquisition our loans grew three hundred and thirty five million dollars or eight point two percent annualized

Speaker 3: Again, adjusting for the progress book, the biggest growth categories were residential mortgage, owner-occupied CRE, and NVIDAS.

Speaker 3: Our portfolio is very granular with relatively small project limits and is very diversified.

Speaker 3: On page 12, we look at some balance sheet highlights.

Speaker 3: Our loan-to-deposit ratio increased slightly but remained low at 78%, with the strong deposit growth in the quarter offsetting the addition of progress. We also show that we had an increase in our TCE ratio to 8.2%.

Speaker 3: but did fall slightly and moved towards peers a bit with the progress acquisition.

Speaker 3: Moving on to the margin on page 14.

Speaker 3: The margin increased 64 basis points year over year, but fell 15 basis points from last quarter.

Speaker 3: And excluding loan accretion came in 21 basis points lower on a core basis. Our loan yield increased 46 basis points in the higher rate environment, but our cost of total deposits was up 61 basis points to 1.10%.

Speaker 3: The main driver of the cost of total deposits increase was higher deposit rates, but a mix change away from DDA towards money market and CDs also contributed another five basis point of margin pressure.

Speaker 3: Many of these trends are continuing. I mentioned that our average cost of total deposits was 1.10% in the first quarter.

Speaker 3: But on 3 31 on a spot basis, the cost of total deposits was 1.27%. We have seen that move up.

Speaker 3: five basis points as of Friday. So we have the benefits of loan yields moving higher and a positive mix change on the asset side being offset by higher deposit costs and a negative mix change in deposits.

Speaker 3: On page 15, we look at fee income, which was down $3.2 million compared to last quarter.

Speaker 3: The decline is mainly due to the absence of $3.5 million in equity gains that came in Q4, along with $1.6 million of securities losses that occurred in Q1. Mortgage came in stronger as mixed change towards fixed product means that we sold more loans and put less loans on the balance sheet.

Speaker 3: thousand dollars in higher FDIC costs from the rate increase. Finally, the first quarter is seasonally higher with the restart of FICA taxes that came in 2.2 million dollars ahead of the fourth quarter.

Speaker 3: On page 17, we talk about credit.

Speaker 3: Net charge-offs were flat at 17 basis points.

Speaker 3: of the net charge-offs, Navidas losses came in at 93 basis points, which we believe is now back in the normal range.

Speaker 3: NPAs increased to 43 basis points of loans, and past dues also increased, while special mention loans improved.

Speaker 3: Rob is on the call and can discuss credit more in the Q&A. Our last page is page 18, where we talk about the reserve. We set aside $21.8 million in a loan loss provision, which more than covered our $7.1 million in net charge-offs.

Speaker 3: A $21.8 million provision also included a $10.4 million double dip provision to set up a reserve for progress. And with that, I'll pass it back to Lynn.

Speaker 3: million provision also included a 10.4 million double dip provision to set up a reserve for progress and with that I'll pass it back to Len. Thank You Jefferson.

Speaker 2: And many thanks to the United team. You continue to drive great performance regardless of the environment and continue to exhibit your passion for taking care of our customers. And now I'd like to open the floor for questions.

Speaker 4: We will now begin the question and answer session.

Speaker 4: To ask a question, you may press star then one on your touch tone phone. If you're using a speakerphone, please pick up your handset before pressing the keys. And to withdraw your question, please press star then two. And at this time, we'll pause momentarily to a SIM bar roster.

Speaker 4: And the first question will come from Brad Millsap with Piper Sandler. Please go ahead.

Speaker 5: Hey, good morning. Good morning.

Speaker 5: Thanks for taking my question. Jefferson, I appreciate the color around spot deposit rates at the end of the quarter. And then as of last week, I was just kind of curious if you could update us on your view of maybe what you're through the cycle. Total deposit beta might be and maybe the interest bearing deposit beta as well. And just kind of what that means for how you're thinking about.

Speaker 3: on the high sevens. We have a mix changing towards more loans and away from securities, a rate hike that may come in May would help some. On the funding side, we're really happy with the growth this quarter, the $525 million of deposit growth. It was actually more than double what we had budgeted.

Speaker 3: for the year, so we feel really good about where our funding is. As far as specifically to betas, I think you'll see it move towards the high 20s on the total deposit beta, that's how I think about it. I don't have the, we can talk after on the interest-bearing liability data.

Speaker 3: I think that's going to the high 20s. I think that I think you're going to see some of these effects moderate during the year, especially some of this mix change that you're seeing is going to begin to moderate and we're also going to have some ability I think to reprice some of the funding that we're putting on. So I think the margin will be down next quarter but I think it will stabilize from there.

Speaker 5: I think that's a fairly normal number there. We added $34 million of accretion from progress. That took us to $54 million total, so we're right around $50 million left. So it's a pretty big chunk of accretion yet to come through with the progress deal coming in. Got it. Then just finally, on expenses, you called out a couple of things there that are seasonally heavy. I just kind of wanted to get a sense of if you still felt comfortable with the amount of cost savings from progress that should drop after the conversion. I think that Lynn mentioned that you just completed.

Speaker 5: I think last quarter you got it to sort of four to four and a half percent growth on top of the 4Q run rate plus progress. Just wanted to see if you still felt good about that as you think about expenses in 23.

Speaker 3: Yes, so I think the first quarter expenses were a little heavier with the seasonal items, so we're not going to have the growth rate on top of this, on top of where we are now. I think that the second quarter number is flat to down from where we are now, and if we think about this quarter.

Speaker 3: You know, we did have the seasonal items, the $2.2 million of FICA. We had unusually low deferred costs. I think that was down $900,000 versus the last quarter. That should come back to us. We have some, you know, there's some investment dollars in here too. We incrementally added $10,000 to the FICA.

Speaker 3: lenders this quarter, we're investing in seven new branches, so you've got our normal source of investment in these numbers. Then for this quarter you had the big stuff which we laid out there which was the intangible expense from the progress deal and the higher FDIC cost. I think what you're going to see from here is you're going to see

Speaker 3: flat to down next quarter, then you're going to see the cost savings coming in start next quarter as well, and you're going to be kind of flat to slightly higher for the rest of the year. So a lot of that growth rate came seasonally high this quarter that we were talking about before.

Speaker 5: I appreciate the color. I'll back in queue. Yep. The next question will come from Brandon King with TruStat. Please go ahead. Okay.

Speaker 3: Brenda.

Speaker 6: Good morning.

Speaker 2: Good morning to you. Yes, so I had a question on credit, and I appreciate the kind of the guidance on the Naveedis net charge-offs, but I wanted to get a sense of how confident you are that loss is close to peaking and base it off based off your guided range for the year in 2023.

Speaker 5: Brandon, this is Rob Edwards. In terms of peaking, I think what we said last quarter and what I would hold to is a more normalized loss level on a sort of a standard book would be in the 25 to 35 basis point range. And so I feel like the...

Speaker 5: Sorry, you're talking about Naveetis. Oh, I'm sorry. OK, so if you're talking specifically about Naveetis, I feel good that when we put it in the slide in the back of the deck that we would be in the 85 to 95 basis point range throughout the year.

Speaker 3: Okay, yeah, I just I would say we feel pretty confident about that. Still confident in past dues and the normal course of business there.

Speaker 6: Okay, yeah, I just want to confirm that you kind of got it. Okay, and I know the small

Speaker 6: of your own portfolio, but I did notice that manufacturer housing, those charge-offs more than double. Just wanted to get a sense of what's going on there. What kind of trends you're seeing.

Speaker 3: in that book. Yep, so we had saw $628,000 of losses, up from $300,000. We did liquidate some of the chattel from out of the non-accruals through the

Speaker 5: auction versus in the past, we've sort of taken ownership and done some repairs, so it's a little bit of an acceleration there. Okay. And kind of going back to your previous point as far as normalize net charge offs.

Speaker 2: Overall, how do you see that trending as we progress throughout this year based off what you're seeing in your current graded loans? Yeah, so like I said earlier, I'm at you know, it's in terms of quarter to quarter I don't see any big shifts coming but other than I would just say normalization.

Speaker 3: Right, so that was kind of the comment I made a minute ago about the 25 to 35 basis points is what I would think about as being a normal operating environment and I could see us getting to that range later this year, but I don't have anything specifically at the moment that says it's going to happen next quarter.

Speaker 5: But it could, you know, things change. It's a dynamic portfolio. But again, and we're not seeing, you know, if you look at the chart on the bottom right of 17, you'd see that our criticize and classified has really been pretty stable over the last two years.

Speaker 6: Okay, very helpful. Thanks for taking my questions.

Speaker 4: The next question will come from Mark Shutley with KBW. Please go ahead. How about we Didier Rodrik

Speaker 7: Hello, Mark. This is Katherine Miller. Can you hear me? Hey, Katherine. Oh, great. Okay. Hey. Wanted to follow up on Brad's questions about the brokered CDs that you added this quarter. Can you tell us the average rate that those came on and what the mature CDs were? The average rate that those came on and what the mature CDs were?

Speaker 3: February we put these on, the average rate was in the 460 range, and they have six months maturity

Speaker 7: I would expect to continue to grow core deposits and replace it with core deposits. Okay. And then interesting, it seems like you sold down your FHLB and really chose to put in brokered CDs instead. How do you think about weighing the two options between brokered CDs and FHLB and when you choose to pull one funding versus the other?

Speaker 3: That's a great question. So as we came into the year this year we made a decision one to sell a small amount of securities two hundred seventy million dollars and The idea there was that we could now fund our expected loan growth for the year If you remember back to Q4 we had five hundred fifty million dollars of FHLB. So the plan again, this is all before

Speaker 3: CD market was open to us. At the same time, you get the benefit of saving your kind of button push liquidity at the FHLB if you ever needed it. Turned out that we didn't really need that this quarter so we went ahead and paid the FHLB down.

Speaker 3: increasing occupancies are stable. So we're not seeing a lot of problems pop out of maturities. I did go in the portfolio to try and examine, are there properties that currently have low debt service coverage that are maturing this year.

Speaker 3: I came back with a number of about 30 million dollars. So we're just not, it doesn't feel like there's a ton of exposure out there in terms of sort of looming troubles on the maturity side at the moment.

Speaker 5: Okay, great. And then any color on the ones that move to non-performing this quarter? Yeah, so one of them is a senior care credit that struggled to stabilize, and so it went non-accrual. Another one was a C&I credit that actually was a long-term customer.

Speaker 3: bankruptcy during the quarter. I feel good about the business. We've known it a long time. The core business is very strong and so I don't see it as being a big problem in the future but we're working through it right now. Those were the two credits that drove the increase in NPAs.

Speaker 4: Okay, great. Thank you for that. Appreciate it. Yeah. The next question will come from Michael Rose with Raymond James. Please go ahead.

Speaker 2: Hey, good morning, guys. Thanks for taking my questions. Just wanted to go to this quarter's core loan growth of kind of 8% annualized. I think you guys kind of talked about 5% as we move through the year, excluding acquisitions. Just wondering if you have a sense for kind of borrower demand versus whereiang it is.

Speaker 2: you know, current rates are and just how we should think about that push-pull dynamic as we move forward. Thanks.

Speaker 3: Sure. Good morning, Michael. This is Rich Bradshaw. How are you? With regards to how we're thinking in the near term, it's probably still mid-single digit. Demands, surprisingly still strong. Stronger than I would have guessed. So we're working through that.

Speaker 3: I would say, and I said near-term, mid-single digit, Jefferson mentioned the hiring for first quarter. We hired 10 on the incremental side. Half that was a lift out, and that lift out was in North Georgia in the greater Rome area with five commercial professionals.

Speaker 3: I will tell you that we are currently down the road and across the footprint, but there are three other lift outs that we are in deep discussions with and very, very close. And also comment, this is the best hiring market I believe I've ever seen. The volatility in the banking industry just has really created great opportunities.

Speaker 3: We're going to be opportunistic, we're going to be very selective, but we're going to take the opportunity if it exists and we're very, very close. So I think that mid-single digit moves to high-single digit if we're able to execute on some of these lift-outs.

Speaker 3: And I'll just say I think we have to be able to support this given the funding that you saw this quarter and the loan to deposit ratio that we have. So I think we're in a really good strategic position to be able to hire people and set them loose. And that the strong core deposits plus the lower loan to deposit ratio is attracting our lenders.

Speaker 2: Very helpful. Maybe just as a follow-on to that, how much of this quarter's organic growth acquisition was kind of fond up of existing commitments versus

Speaker 2: you know, just stuff that kind of came in through the quarter. Just trying to get a sense for, you know, how much of a tailwind versus headwind kind of dynamic we're kind of thinking about here. Seems like growth is, you know, obviously is kind of slow for the industry, but you know, you obviously have some offsets with some of the people you're hiring and planning to hire. Sure, and I'd say it was kind of fair to the round numbers 50-50 on organic growth and then of course

Speaker 2: 1.8%. But I think in a normalized credit cycle, I mean, I think that number could, you know, it has historically been, you know, much higher. Can you just give us some historical dynamics on, you know, loss rates through the cycle loss rates and kind of where that reserve level could go? Thanks.

Speaker 5: Yeah, so this is Rob Michael just in terms of we purchased the portfolio in 2018 and when we did that we looked all the way back to when the company started. Now they started post 2010.

Speaker 5: But their loss rates have been up until we bought them, and 1% was kind of what we budgeted and expectations that we set when we bought it. So coming in at 93 is kind of where we have thought it would be. We haven't seen a lot. In fact, we think the portfolio has gotten better since we bought it.

Speaker 3: They've moved upstream a little bit in the credit range. So I feel like this is a reasonable expectation for the portfolio going forward.

Speaker 2: I'll just let her in that it's a very profitable company at this level of charge offsets. I certainly understand the yields are very sticky. Just maybe one final one for me. So I'll just let her in that it's a very profitable company at this level of charge offsets.

Speaker 2: the gain on sale of Naveedus loans and the SBA loans. Can you just give some color there and kind of what we might expect going forward? Thanks.

Speaker 3: Yes, so it's maybe Roosh can jump in on SBA possibly or I'll give it a shot as well. This is our seasonally weakest quarter for both SBA and Naveeta's originations. I expect they have a little bit of a different seasonality but in both cases they both tend to increase throughout the year. So I would expect those gains to, this is typically the first quarter is the lowest gains we see.

Speaker 3: of what you get in the secondary market. In terms of volume, our volume is up and our pipelines are as big as they've ever been in SBA and you know that's a great counter financial environment product. So as the economy is struggling a little bit, SBA is going to do better and we are full up in all positions and really strong pipelines.

Speaker 3: in the secondary market. In terms of volume, our volume is up, and our pipelines are as big as they've ever been in SBA, and you know that's a great counter financial environment product. So as the economy's struggling a little bit, SBA's gonna do better, and we are full up in all positions, and really strong pipelines. Hey guys, thanks for taking my question.

Speaker 4: The next question will come from Kevin Fitzsimmons with DA Davidson. Please go ahead. Let me go just for you.

Speaker 5: Hey, good morning guys. How are you? Good morning, good. Kevin? I appreciate the spot levels, Jefferson, on cost of deposits. I was wondering and apologize if you.

Speaker 5: given this and I missed it was wondering if you could fill us in also on the same basis for loan yields and for the actual margin what what maybe the margin was for the month of March or at the end of the quarter. Yeah so the loan yields on a spot basis and kind of moving up are actually

Speaker 5: almost up as high as the deposit yield, but it's part of a phenomenon that I don't think is going to continue through the whole quarter, because what you have is a possible rate hike coming so you get SOFR and LIBOR start to move up before that to anticipate that rate hike and so we're getting a little bump in our loan yields early in the quarter.

Speaker 5: because of that expectation. So it's not a great look through for the whole quarter, but so far the loan yields have almost matched the deposit cost and moving higher.

Speaker 5: Will you say your second question again or somebody help me out with your second one? Just on the overall margin, if you can kind of combine and say what your margin was at the end of the quarter.

Speaker 5: Annualizing a month's quarter is really, really hard and we do it, but it sometimes comes up with these numbers that are just not helpful. So I felt like the spot in the, as of last Friday's number was the best I could give you because taking some of these numbers with the fees coming through there and...

Speaker 5: mentioned how you expected to moderate, but specifically with the percentage of DDA to total deposits, where do you see that settling, and where and when do you expect that to settle? Thanks. That's a great question. I might pass. We're looking around each other, because it's hard to say, because that's not what I was going to say, because...

Speaker 5: and we've seen some people take us up on it, and I've taken myself up on it, actually, too. And so I think what you're going to see is sort of a peaking of rates here and a slowdown of people taking up on the offer because they've had opportunity now for a handful of months. So I think, again, you're going to see a continued mix change. I think we're going to see a mix change on the asset side, too.

Speaker 5: I believe you're going to see a shrinkage in that DDA number, but I think that's just going to slow down as we go through the year. Great. One last one for me.

Speaker 5: depending South Miami deal, any better sense for, I know you said in the back half of the year for that to close but any

Speaker 5: tighter frame on third quarter, early, late, and then just generally.

Speaker 5: that whole, you know, regulatory merger approval process, if you guys noticed any changes or expect any lengthening of that process post the bank failures.

Speaker 5: Okay, great question. Thank you for it. It's a relatively opaque process, but I'll say to you, I think it's most likely third quarter it could move into the fourth, but I think I would say most likely third quarter, and we have not seen anything unusual from the regulators from our...

Speaker 5: The things we turn into them or what we're hearing from them seems like a normal transaction and most likely third quarter Right, thanks Jeff. Yep The next question will come from David Bishop with Hubby Group. Please go ahead.

turn into them or what we're hearing from them seems like a normal transaction and most likely third quarter. Great. Thanks, Jeff. Yep. The next question will come from David Bishop with HUB-D Group. Please go ahead. Hey, Jeff. Good morning, gentlemen. Hey, Robert.

Good morning. Good morning, sir. Good morning, sir. Jefferson and Rob, maybe just in terms of the new loan yields, I think Jefferson said they're approaching 7% or so. Is that having any impact in terms of the quality of the loan pipeline you're seeing out there? Is it becoming more difficult to...

In terms of term sheets, you're putting in front of borrowers to find quality credits that meet underwriting with the higher debt service coverage, etc. In this higher rate environment? That's a great question. I'll just start with the yield we're seeing is in the high seven, so 785 to 790 is what our incremental new yields were coming on at this quarter.

So stuff that used to be done at SOFR 225 is now being done at SOFR 250, SOFR 275. And part of that's driven, just there's less competition out there and it's more scarce dollars and we want to stay close to our clients, we're not looking to gouge, but it's a limited resource and we're going to charge for it.

I appreciate the color. Jefferson, just curious, mortgage banking obviously trending down here. Just curious, any early read into how the spring, summer selling season housing market is looking down there across the southeast markets? If you expect a rebound, people have gotten used to mortgage rates settling in this range?

I could start with it or I just maybe give it right to Rich if you if you like. So we're you know obviously first quarter is seasonally down in mortgage and we're already seeing a pickup in here already in the start of the second quarter so we are still in the best markets in the country you still have a thousand people moving to Florida a day so we we expect you know that mortgage isn't going to be where it was.

Certainly, we're at 88% purchase now, so the refi business is behind us. But we see we're going to be...

very similar picking up in the new markets because we've Huntsville has really gone well on the mortgage side and we expect that Miami will go as well as 2 and so pick up a little bit a little bit higher than Q1 pace.

And we think we'll finish the year at a decent clip.

And I'll just add in there, we're returning to a more normal seasonality, which is positive, but I also wanted to point out that there was a pretty big change this quarter towards fixed rate product, which goes right to the secondary market, and so that is a bigger piece for the near-term fee income that you see and the near-term profitability. That mix change is a good sign there.

I appreciate the color. The next question will come from Russell Gunther with Steven. Please go ahead. Please read the answer. You're Kobastian samurai.

I appreciate the color. The next question will come from Russell Gunther with Steven. Please go ahead. Hey, good morning guys.

I wanted to follow up on the commercial lender list out commentary. Did I just characterize that strategy for me? Is that an evergreen approach at United or are you guys seeing more opportunities as perhaps some competition tighten up on a willingness to lend and maybe any color in terms of...

you know, asset size of where folks may be coming from, if they see, you know, potentially a bigger, more liquid balance sheet as a competitive advantage at United. Sure, and for us it is opportunistic. We don't have this building our budget, so it's when the opportunity arises and they have the right

people, the right market for us, and they have the portfolio that we think that can be brought over, then we're going to do it. They are generally banks of similar sizes, similar size or larger. And recently it's been primarily on the larger size.

But we just continue, and yes, I'll give you quotes. I won't tell you what banks, but part of the reason we're getting these looks is some of these banks are telling their commercial lenders they're going to be deposit gatherers in 2023. Well, we need our people to do deposits, too, but we're still open for loans. And so that's what's driving a lot of the interest.

I appreciate the color. It's really helpful. Jefferson, I have a question for you in terms of just a reminder on securities cash flow this year and then

How do you guys think about a target cash to assets and how that bogey may or may not have changed in this recorder?

That's a great question. So we're expecting about $750 million, a little bit more in total cash flow, principal and interest from the securities portfolio this year. And I mentioned what the securities sale we did. We think we have the loan growth mostly funded for the whole year.

The cash piece is we are holding more cash than we did just as we've gotten to be a bigger bank. Post Silicon Valley we held some more cash and held some more cash on the balance sheet for a while in that last two weeks of March. And now we're moving back down towards more normal.

holdings of overnight cash. So we're in that two to three hundred million dollars of what we hold overnight now with the Fed and that is we're back basically to a normal level post Silicon Valley. Got it. Okay great. Thank you. And then last one for me appreciate the

slide on office exposure. Any additional color you could share in terms of LTV or the reserve on that portfolio? So we don't break it out specifically, so it's really just the investment CRE book. It's about a 1% reserve on the entire CRE book.

So consistent with really the rest of the portfolio. It's the weighted average LTV is 63%. So pretty low LTV and of course I think the granularity.

It's mentioned a couple of times in the slides, just a really granular portfolio.

Maybe one other point I guess I would make, I did do a scrub of the top 100, and 33 of them are medical office. And of course, that's in that second bullet on that slide, 23. But probably about a third of it is medical office buildings. All right, great. I appreciate that. Guys, I think that's it. Thank you.

wanted to follow back up on the last question on office CRE. So given the granularity, Rob, what does that mean as problems happen, even if they're few during the cycle? Does that lower size level give you flexibility on ultimately how you dispose of properties and the loss you take and you just kind of walk us through the mechanics? Yeah, maybe I guess I could talk about one situation.

loan on it. The tenant, they had some occupancy, it went into non accool, we took it to foreclosure, the property didn't end up coming into Oreo because there were other interested proper other interested parties because at the lower dollar value there's

Lots of people that can afford to get into this space, local parties interested, understand the value. So it does, it just gives you more flexibility. We ended up selling it on the courthouse steps that we never did come into Oreo. And we ended up recovering. We had taken a loss originally, but we ended up recovering I think 90% of the loss.

So the final charge off on the whole project is, you know, I think it was less than $100,000. So it just gives you lots of flexibility, the fact that you've got lower dollar-sized properties. There's a lot more buyers in the market and local buyers that understand.

operating expense ratio, but I know if we went backwards in time, that number was a lot higher as the company was smaller and less successful than today. So as you think about 24, 25 in the big picture, what's the ability to push operating expenses down further just as a percentage of revenue? And can you possibly get closer to that 50 threshold over the long term? I mean, that is certainly.

goal and we set up our budgeting process and our plans every year to move that ratio down and our budgets will always have more revenue than expense growth. If we can possibly get there this is a an unusual year with the with the margin and margin moving in the wrong direction. We'll temporarily move it higher but we'll always be pushing to move it.

lower, and we believe, and what all of our targets are, is to be a top quartile ROA bank. We think about this all the time, and to be a top quartile ROA bank, you have to be a top quartile efficiency ratio bank. So we think about that ratio, we manage by that ratio, we push that ratio, and we're

We do think about it relative to other banks, so we don't have an actual number in mind there, but we're always trying to push it down and we are pretty zealous about being in the top quartile of that ratio. And as you're getting very good at doing acquisitions of this size that you're doing, you're going

aligned with us on employee experience, and we can be more additive. I mean, we're already, I was just down in Miami on Monday, and Veronica, the CEO there, she was.

almost, you know, she was going on and on about the new toys in the toy box because we're already starting our partnership calls, you know, introducing them to the new products they'll be able to access and how we do things. And it's just a really great group of people. And I met with several clients while I was there.

really strong people and you know they're like oh you guys have long bigger limits now and yeah so that it really is so yes we certainly understand it on the expense side but it's really the strategy on just being able to be more additive as well.

Great, Lynn. Thank you for that color. I appreciate it and thanks Jefferson and Rob, too.

This concludes our question and answer session. I would like to turn the conference back over to management for any closing remarks. Please go ahead. Thank you. I just want to thank all of you for really great questions. I know there's a lot of noise this quarter, certainly a lot of noise in the environment with Silicon Valley, etc. We want to be as open and open as possible.

and transparent as we can and open and obviously give us any questions after the call as well. Also there's always noise anytime we consummate a deal. So there was noise in this quarter from progress. So great questions. I appreciate that. I do think this quarter demonstrates the strength of our strategy and franchise. If you look at the funding stability I think that's...

really demonstrates the core deposit base and the core customer relationships we have. What Rich mentioned about hiring, we've never seen it as he mentioned this kind of environment where really getting the opportunity to get great quality teams that we're excited about, very excited about.

I think it shows a focus on our markets and whether from the progress deal in Miami, our newer markets, or our existing markets where these teams are coming in. We feel really good about kind of where we are and how we're positioned going forward. So again, thank you for your support and questions and look forward to talking soon.

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