Q3 2024 United Community Banks Inc Earnings Call

Unknown Executive: Good morning, and welcome to United Community Banks' third quarter 2024 earnings call.

Good morning, and welcome to United Community Bank's third quarter 'twenty 'twenty four 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.

Unknown Executive: Hosting the call today are Chairman and Chief Executive Officer Len Harton, Chief Financial Officer Jefferson Haralson, 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.

United's presentation today includes references 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.

Both are included on the website and you see be high Dot com copies of the third quarter's earnings release and Investor presentation were filed this morning 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.

Unknown Executive: 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.

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 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.

Lynn Harton: At this time, I'll turn the call over to Lynn Harten.

Speaker Change: I'll turn the call over to Lynn Harton.

Lynn Harton: 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.

Lynn Harton: Good morning, and thank you for joining our call today to discuss what we believe was a strong quarter.

Lynn Harton: During the quarter, we had two unusual items that impacted our reported earnings.

Lynn Harton: First the sale of our manufactured housing portfolio, which we announced several weeks ago.

Lynn Harton: As we mentioned then it was a business that we had inherited in an acquisition and that we have made the strategic decision to exit.

Lynn Harton: 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.

Lynn Harton: Sales resulted in a one time loss of 18 cents per share, but it shouldn't be neutral to earnings on a go forward basis.

Lynn Harton: 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 5 of the presentation. While it is 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 in the communities there are doing an incredible job of both taking care of each other and preparing to rebuild and repair the damage.

Lynn Harton: The second unusual item was hurricane Helane.

Lynn Harton: We have several offices in western North Carolina, including eight in the areas that were most heavily impacted.

Lynn Harton: We outlined our loan and deposit balances in those most impacted North Carolina counties on slide five of the presentation.

Lynn Harton: While it's too early to predict the exact impact of the hurricane.

Lynn Harton: We felt it was prudent to increase our reserves on this $383 million portfolio to 3.5%.

Lynn Harton: We will continue to track and report on these markets as we go forward.

Lynn Harton: 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.

Lynn Harton: 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.

Lynn Harton: Including the special reserve for Helene, our operating returns were strong for the quarter with a return on assets of over 1%.

Lynn Harton: Capital continued to grow with our tangible common equity increasing by 53 cents per share or 11% on an annualized basis.

Lynn Harton: Excluding the sale of manufactured housing our loan growth was one 5% annualized and customer deposits grew at a 5% annualized rate.

Lynn Harton: 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.

Lynn Harton: 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.

Lynn Harton: Nevidus losses improved slightly for the quarter, and the Core Bank, excluding Nevidus 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.

Lynn Harton: Nevadas losses improved slightly for the quarter and the core bank, excluding the veto some manufactured housing had credit losses of 15 basis points.

Lynn Harton: System with both the first and second quarters this year.

Lynn Harton: We continue to have ample liquidity to fund growth with our loan to deposit ratio at 78% and essentially no broker deposits.

Jefferson Haralson: Jefferson, why don't you cover the quarter in more detail now? Thank you, Wayne, 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.

Speaker Change: Jefferson why don't you cover the quarter in more detail now.

Jefferson: Thank you Ann and good morning to everyone I am going to start my comments on page six.

Speaker Change: When you spoke about the sale of our manufactured housing portfolio that closed on August 30th.

Speaker Change: We stopped originating go out into the third quarter of last year and the sale came with an 18th cent loss that you can see impacted fee income in that quarter.

In addition, while it did not affect earnings this quarter. We also charged off $11 million in manufactured housing loans at 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.

Jefferson Haralson: This $11 million of transaction-related net charge-offs takes our total net charge-offs from 24 basis points to 52 basis points in 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.

Speaker Change: This $11 million of transaction related that charge offs takes our total net charge offs of 24 basis points to 52 basis points in the quarter.

Speaker Change: The transaction slightly increase our regulatory capital ratios and slightly decreased our TCE and as neutral to EPS as we reinvest the proceeds.

Speaker Change: We do believe that the sale reduces our risk profile and allows us to reinvest capital in our other businesses going forward.

Jefferson Haralson: Moving to page 7, 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 percent and a quarter as we have been lowering rates on our promotional accounts to offset some negative mixed 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.

Speaker Change: Moving to page seven we had a strong quarter in terms of deposit growth with 4.7% annualized growth.

Speaker Change: The growth came primarily in core transaction deposits as we benefited from public funds seasonality, which should continue into the fourth quarter.

Speaker Change: Our cost of deposits was flat at 2.35% in a quarter as we have been lowering rates on our promotional counts to offset some negative mix change that occurred with small shrinkage is in DDA and savings accounts.

Speaker Change: Moving to page eight 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.

Jefferson Haralson: We turn to our loan portfolio on page 9. Excluding the manufactured housing sale, loans increase by about 1.5% annualized. As mentioned in earlier quarters, our senior care book is in runoff and shrunk $38 million in the 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 meeting. 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.

Speaker Change: We turn to our loan portfolio on page nine excluding that manufactured housing sale loans increased by about 1.5% annualized.

Speaker Change: As mentioned in earlier quarters.

Speaker Change: Our senior care book is in run off and shrunk $38 million in the quarter, which hurt the run rate a little bit where.

Speaker Change: We are optimistic that loan growth may be picking up some like looking at the increased activity in our loan approval meetings.

Speaker Change: Our commercial real estate exposure move down on the whole in the quarter with commercial real estate construction projects, completing and with fewer new projects coming into the pipeline.

Speaker Change: Our loan book remains diversified and granular.

Jefferson Haralson: 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 CET-1 ratio tipped over 13% in the quarter.

Speaker Change: Turning to page 10, where we highlight some of the strength of our balance sheet. We believe that our balance sheet is in good position with no F. H L B borrowings and very limited broker deposits.

Speaker Change: Gives us some flexibility in managing through a tough interest rate and competitive environment.

Speaker Change: Our loan to deposit ratio moved down to 78% with the sale of the manufactured housing portfolio.

Speaker Change: And our CET, one ratio tipped over 13% in the quarter.

Jefferson Haralson: 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. Our leverage ratio was also up 9%. We did take the opportunity in the quarter to call two small trust referrers that totaled $8 million in size that lowered our capital ratio by four basis. but took some expensive debt off the balance sheet.

Speaker Change: On page 11.

Speaker Change: 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.

Speaker Change: We did take the opportunity in the quarter to call two small trust prefers that totaled $8 million inside that lowered our capital ratio by four basis points, but took some expensive debt off the balance sheet.

Jefferson Haralson: 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.

Speaker Change: Moving on to the margin on page 12, the margin came in four basis points lower than the third quarter on a GAAP basis.

Speaker Change: And down two basis points on a core basis.

Of the two basis points of core margin pressure.

Speaker Change: We estimated one basis point of that came from the sale of the manufactured housing portfolio.

Speaker Change: 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.

Jefferson Haralson: 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 in 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 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.

Speaker Change: Moving onto page 13 on an operating basis noninterest income was down $1.3 million from last quarter.

Speaker Change: That decrease however is more than explained with a $2.7 million MSR write down in the third quarter, which was a $3.3 million negative swing from last quarter.

Speaker Change: Other non interest income was up $1.9 million and had the benefit of $700000 in boley games and $900000 in unrealized equity gains.

Speaker Change: Our gain on sale of SBA and Davita as loans was up slightly compared to last quarter.

Speaker Change: From a modeling perspective remember that we sold our our I E. Centrust on October the first 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.

Jefferson Haralson: 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 a quarter. Of the 52 basis points and 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.

Speaker Change: Operating expenses on page 14 came in at $149 million up just $300000 and the operating efficiency ratio was also relatively flat.

Speaker Change: Moving to credit quality.

Speaker Change: Charge offs were 52 basis points in the quarter.

Speaker Change: Of the 52 basis points, an office 24 basis points came from the estimate of lifetime losses, and the manufactured housing portfolio transaction.

And another one basis point came in manufactured housing losses that were not related to the transaction.

Speaker Change: David its losses improved and contributed 12 basis points out of the 52 basis points and losses for the quarter.

Speaker Change: Excluding manufactured housing and Davita sources, the bank's losses are low and stable at approximately 15 basis points.

Jefferson Haralson: In other credit statistics, NPAs and past dues were improved, while special mention and substandard loans moved slightly higher.

Speaker Change: And other credit statistics N P. As in past dues were improved while special mention and substandard loans move slightly higher.

Jefferson Haralson: I will finish on page 16 with the allowance for credit. 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. 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.

Speaker Change: I'll finish on page 16, with the allowance for credit losses are.

Speaker Change: Our loan loss provision was $14.4 million in the quarter.

Speaker Change: And of that number was the 9.9 billion dollar special provision for Hurricane Helane.

Speaker Change: Excluding Helene, we had $4 $5 million and provision compared to $12 $7 million and net charge offs.

Speaker Change: This differential cam as our economic forecast improved favorably with the benefit of lower rates and a greater chance of a soft landing coming into the forecast.

Speaker Change: Taken together the allowance for credit losses decreased slightly for the first time in over a year.

Lynn Harton: With that, I'll pass it back to Len.

Speaker Change: With that I'll pass it back to Lance.

Lynn Harton: 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.

Lance: Thank you Jefferson.

Lance: As we complete our strategic planning cycle for the year, we're very excited about the opportunities we see.

Lance: We have operational and product improvements that we believe will help us grow.

Lance: And our recruiting pipelines are strong where.

Lance: We're well positioned from a capital liquidity and market potential perspective, and we expect to have a great finish to 'twenty four and a strong 2025.

Unknown Executive: 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 one 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.

Lance: And with that I'd like to open the floor for questions.

Speaker Change: We will now begin the question and answer session to ask a question you May Press Star then one 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.

Unknown Executive: At this time, we'll pause momentarily to assemble a rocket.

Russell Gunther: Our first question comes from Russell Gunther from Stevens.

Speaker Change: Our first question comes from Russell Gunther from Stephens. Please go ahead.

Russell Gunther: Please go ahead. Hi, Russell. Good morning, guys.

Speaker Change: Hi, Russell.

Jefferson Haralson: Apologies. Maybe we could start on some margin questions. 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 ACD. 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.

Russell Gunther: Hey, good morning, guys apologies, maybe we could start on the.

Russell Gunther: The margin question Jefferson you guys flagged the.

Russell Gunther: Deposit or time deposit maturity schedule.

Russell Gunther: Give us a sense of what your current offerings are from a rate and duration perspective.

Speaker Change: Yes. So we are in the mid threes from a C D.

Speaker Change: Oh I'm going to check that so I think we are four in a quarter our highest rate of C. D at four months.

Speaker Change: Just recently lowered that.

Speaker Change: And I think we'd be putting on new Cds and.

Speaker Change: The total if you include the board rates in the high threes on average.

Russell Gunther: Okay, got it. Very good.

Speaker Change: Okay got.

Speaker Change: Got it very good and then as we think about.

Jefferson Haralson: 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, and 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.

Speaker Change: Down betas for this cycle. How are you guys thinking about that and then there's a piece of it just remind us how much you guys have in the way of index deposits.

Speaker Change: Alright, we have about $6 billion, that's indexed and we have another $3 billion of promotional money market.

Speaker Change: I would call not index Bot management controlled that gets you to about $9 billion and total gamba.

Speaker Change: Gambado, we're bottling currently 38% down betas.

Speaker Change: We were 45% in the App and we are trying to to make a strategy that can help beat that 38% down beta.

Jefferson Haralson: You might get a little less than that 38% in the first quarter of rate cuts, the fourth quarter here, because of CDs 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.

Might get a little less than that 38% in the first quarter of rate cuts in the fourth quarter here because of C. DS negotiated accounts that might take a little while to get a lower but we think that a 38% is the right number to use although we're going to try to beat that.

Russell Gunther: Okay, great.

Rich Bradshaw: 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 CND concentrations. well below peer loan to deposit ratio. Could you guys just give us a sense of, you know, what the drivers of the pickup would be and what's a good order of magnitude to think about as we move into 25?

Speaker Change: Okay.

Russell Gunther: Great and then just last one for me guys switching gears onto the loan growth side of things Lynn you mentioned some expectations that they may be picking up you guys have plenty of capital screen relatively low on CRE in C and D concentrations.

Russell Gunther: Yeah, well below peer loan to deposit ratio can you guys just give us a sense of.

Russell Gunther: You know what the drivers of the pickup would be and what's a good order of magnitude to think about as we move into 'twenty five.

Rich Bradshaw: Good morning, Russell. This is Rich. And yeah, I'll hit on that. And also, in 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 in 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.

Speaker Change: Good morning, Russell This is a rich and yeah, well 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 what the pipelines look like an activity.

Say those calls were all either a very positive 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 a acquisition.

Speaker Change: Oh, you 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 creep picked back up so that's a that's helpful and everything and we're the last thing I would comment when we're looking at growth and optimism is we've done some really good hiring in the law.

Rich Bradshaw: So Kelly Key and that team did a great job delivering that. We also are seeing Cree pick back up. So that's helpful and everything. And the last thing I would comment when we're looking at growth and optimism 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 and feel really good about the hiring there.

Speaker Change: This quarter, our fired some lenders in Florida, a new market President in Charlotte, a new corporate middle market lender in Charlotte as well and addition of new player coach in charge of 501 C. Three of the not for profit space and lastly, a real focus on wealth management and feel really good about the hiring there we've done this.

Rich Bradshaw: We've done this past quarter.

Speaker Change: Past quarter.

Russell Gunther: That's great, Culler. I really appreciate it. Guys, thanks for taking my questions. I'll step back. Thanks, Ross.

Speaker Change: That's great color I really appreciate it guys. Thanks for taking my questions I'll step back thanks.

Speaker Change: Thanks Ross.

Michael Rose: 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. You know, 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, you know, talk about, you know, what some of the increase would have been there x the manufactured housing portfolio and, you know, how we should just overall think about credit trends as we move forward. Thanks. Yep. Thanks, Michael. Thanks for the question.

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

Michael Rose: Hey, good morning, everyone. Thanks for taking my questions, maybe I'll start with with Rob I.

Michael Rose: I think the mpls related to the manufactured housing portfolio, where around 20, and a half million, but the stated mpls were only down a couple million Bucks.

Michael Rose: Box can you just talk.

Michael Rose: Talk about a you know what some of the.

Michael Rose: The increase would have been there are X the manufactured housing portfolio and you.

Michael Rose: You know how we should just overall think about credit trends as we are as you move forward. Thanks.

Speaker Change: Yeah. Thanks, Michael Thanks for the question in terms of the Npls. Your analysis is correct. We had several smaller C&I borrowers that are were substandard accruing that did a rollover into the non accrual category. So that was the primary driver of the refill.

Robert Edwards: In terms of the NPLs, your analysis is correct. We had several smaller CNI borrowers that 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 a payoff on one of them at 100%. So we continue to feel good and expect stable performance going forward.

Speaker Change: <unk> of the reduction from our manufactured housing we do still have about $2 million of manufactured housing non accruals that are still in the buckets. So we didn't eliminate all of the manufactured housing non accruals.

Speaker Change: And as it turns out of those C&I borrowers that did roll into non accrual. We've already received a payoff on one of them at 100% so are.

Speaker Change: We continue to feel good and XP.

Speaker Change: We expect stable performance going forward.

Michael Rose: All right, helpful.

Speaker Change: Alright helpful. And then if I just look at our mortgage.

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

Speaker Change: Switching to fees if I just look at mortgage on a on a core basis, maybe up a little bit, but maybe not as much as we were we were looking for Jefferson can you just give us.

Speaker Change: Some thought process on you know well production trends as we move forward you know as you saw earlier today that housing sales kind of it.

Speaker Change: Hello, this level since 20 pen and.

Speaker Change: Just the the willingness to hold versus.

Speaker Change: Versus sell both are for mortgage but also for for SBA and Davita slots. As we are as you go forward just trying to get a sense for you know what you what we can expect a you know in that regard. Thanks.

Jefferson Haralson: Thanks.

Rich Bradshaw: 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.

Speaker Change: 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 our applications and lock center revenue up if you exclude the the mark in both quarters, but I'll pass it to rich and I'll come back with the balance sheet.

Speaker Change: 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.

Rich Bradshaw: So we expect a little bit of an impact from that as well. And we have 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 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 in that you'll see mortgage loan growth pick up a little bit from where it is now because of the adjusted pricing.

Speaker Change: And for the way, we had been pricing our mortgages to encourage.

Speaker Change: Fixed rate loans than to sell them into the marketplace and we have recently amended our pricing where we're a little net now more indifferent between the pricing of an adjustable variable rate loan at a fixed rate loan. So I would expect more variable rate loans now and that you'll see mortgage loan growth pick up a little bit from where it is.

Speaker Change: Now because of the adjusted pricing.

Michael Rose: That's a great call.

Speaker Change: That's great color I'll step back thanks for taking my questions.

Michael Rose: I'll step back. Thanks for taking my question. Thanks, Michael.

Speaker Change: Thanks, Michael.

Catherine Mealor: The next question comes from Catherine Mealor from KBW. Please go ahead. Thanks. One follow-up on the margin outlook.

Speaker Change: The next question comes from Catherine Mealor from K B W. Please go ahead.

Catherine Mealor: Thanks, one follow up on the margin outlook can we talk a little bit about loan yields and it and talk about maybe the percentage of loans that top or remind us how much floats immediately he maybe how much of that you've got it kind of tie the sofa versus prime. So we can think about any kind of lag effect there with just with rates.

Jefferson Haralson: Can you talk a little bit about loan yields and talk about maybe the percentage of loans that 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 piece too, 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.

Catherine Mealor: And then if you could quantify the sixth straight repricing on P. J, just trying to get a sense as to how to get to a rate pets. You know how much downside, we should see to them because that's what else. Thanks, yes.

Speaker Change: Yes, so we have 44% of our loans that float.

Jefferson Haralson: 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 on 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.

Speaker Change: Of that 44% he was primarily so far I want to get back to you with the exact.

Speaker Change: Switch, but we are feeling that impact of so for moving before the rate cuts now so I believe thats, primarily so for there on the fixed rate book I expect about $8 million 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.

Speaker Change: But have a tailwind from the back book there, we're putting on new loans in the seven to seven 5% range.

Speaker Change: So the 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 are you going to see that 44% or be impacted by that.

Jefferson Haralson: But in quarters with a rate cut, you're going to see that 44% be impacted by that.

Jefferson Haralson: Okay, so then any, I might have missed it earlier, any outlook for the margin maybe for 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.

Speaker Change: Okay. So then any and I missed it earlier any outlook for the margin need for into next quarter and then.

Speaker Change: Hum.

Speaker Change: Really guide on 'twenty five.

Speaker Change: So we think the margin is relatively flat excluding some mix changes.

Speaker Change: And the mix changes that are coming in Q4 will be negative to the margin, but they'll either be positive or neutral to earnings and EPS are the first mix change is that we typically see $4 million 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.

Jefferson Haralson: 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, and 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.

Speaker Change: Three.

Speaker Change: That's gonna have a one 5% to 2% spread on it so while we will make more money, but it will hurt our margin by about four basis points.

Speaker Change: Secondly, you get the full quarter absence of the manufactured housing loans hurts the margin by about two basis points that said that margin decreases upset and lower net charge offs, it's offset in lower expenses and so it's relatively neutral to earnings so.

Speaker Change: Excluding those couple of things I think he may get a little bit of timing from that so for piece that you just spoke about but I think relatively flat.

Possibly slightly down but relatively flat.

There's the margin guidance.

Catherine Mealor: Excluding those two mixed change items. Great.

Speaker Change: Excluding those two mix change items.

Speaker Change: Okay, Great and then.

Jefferson Haralson: And then in 25, 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 seven to seven and a half percent range. I believe that our cost of funds is coming down either way.

Speaker Change: In 'twenty five is there a scenario where we could see the margin increase are really more just kind of holding steady for a while until we get to the end of the easing cycle.

Speaker Change: That's a great question, we haven't budgeted 20 twenty-five yet we're getting very close so I really want to hold that answer for for 90 days or so but in the big picture. You know we have a 650 well O'neill, we're putting on new Orleans in the seven to seven 5% range I believe that our cost of funds is coming down.

Catherine Mealor: So it really depends on what this rate cycle looks like. We're going to be, you know, pretty aggressive and trying to cut deposit rates, because we want to outperform the 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.

Speaker Change: Neither way so it really depends on what this rate cycle looks like.

Speaker Change: Gonna be pretty aggressive in trying to cut deposit rates, because we want to outperform and our deposit beta in this down cycle, but not prepare to give twenty-five margin guidance just yet.

Yeah, that's fair and that that color was helpful. Thank you so much great quarter.

Speaker Change: Thanks.

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

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

Gary Tenner: Thanks, Good morning.

Gary Tenner: 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, you know, 12, 15 months, kind of, you know, 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.

Gary Tenner: I wanted to ask about the manufactured 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.

Speaker Change: Alright, so I caught the first part of the question I 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 were running higher cash than we would expect.

Jefferson Haralson: 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 at a relatively higher amount 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.

Speaker Change: To run a we did buy a $450 million or so of securities in the quarter. So part of that you might want to attribute it to the manufactured housing sale, but the cash kind of came in from two different spots.

Speaker Change: And the bigger picture, we're gonna be continuing to invest.

Speaker Change: Relatively higher amount than we had been in the past the cause of this cash that we have so I would expect a similar amount of securities purchases in the fourth at in the third.

Jefferson Haralson: In the third quarter, we were in the 550 range. of where we're buying securities. Now, we're going to be in the 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 we are reinvesting this money into the securities portfolio. And over time, we expect to reinvest that into loans.

Speaker Change: In the third quarter, we were in the 550 range.

Speaker Change: Where we're buying securities now, we're gonna be in kind of that five to five and a quarter range buying securities. So I don't know if I can answer that first part of your question, but the we are reinvesting that 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.

Jefferson Haralson: I didn't quite catch the second part of your question. Yeah. Jefferson, you got half of the second part anyway. Just 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 Lumbra. 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.

Speaker Change: Yeah Jackson, you've got you've got half of the second part anyway, just I was thinking about 2025, and the securities portfolio kind of run off versus redevelopment, but it sounds like the expectation might be leaning towards using runoff to fund.

Speaker Change: Loan growth.

Yeah. So we have about $70 million to $80 million a month, a principal payments from the securities portfolio. So that will be reinvested either way and then from there just kind of depends on what our deposit and loan growth is going to be if we have.

Speaker Change: More deposits.

Speaker Change: Growth in loan growth Youll see higher reinvestment.

Jefferson Haralson: 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 Rich and both Rich and Lynn had. So we do think that you'll see a pickup in growth and so in 25 less need to purchase securities. Okay, I appreciate that.

And I think you will see our we had been growing apart as well I'm optimistic about our ability to grow deposits.

Speaker Change: We're feeling better about our ability to grow loans and as well with all the comments that rich and I, both rich and win had so we do think that you'll see a pickup in growth and so in.

Speaker Change: And twenty-five less need to purchase securities.

Speaker Change: Okay I appreciate that and then just quickly on the expense side as it relates to our you know the hurricane any expectations of.

Jefferson Haralson: And then just quickly on the expense side, as it relates to, you know, the hurricane, any expectations of, you know, elevated expense or costs in the fourth quarter? Um, I can start on that. We have seen, you know, 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, but so yes, but not meaningful.

Speaker Change: Elevated expense or costs in the fourth quarter from that.

Speaker Change:

Speaker Change: I can start on that we have seen some.

Speaker Change: Some damage to a handful of branches that were 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 I think like but so yeah.

Speaker Change: Yes, but not meaningful.

Christopher Marinac: Thank you. The next question comes from Christopher Marinac 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?

Speaker Change: Thank you.

Speaker Change: The next question comes from Christopher Merrimack from Janney Montgomery Scott. Please go ahead.

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

Robert Edwards: 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. There's, 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.

Christopher Merrimack: 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.

Speaker Change: And so we've had primarily tracking there's it over the course of the two storms, there's a lot of counties over our footprint, but we've had about a $11 million in deferrals. So far that's just payment deferrals there.

Christopher Merrimack: Right. They range from 30 days to 90 days.

Christopher Merrimack: And in the designated counties kind of the hardest hit counties of Western North Carolina, We've had about a 39, so five and a half million so half of them really coming in that are hard hit area of Western North Carolina.

Christopher Marinac: Great.

Len Harton: 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.

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

Len Harton: 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 four and a half percent 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.

Speaker Change: So Christopher this is land, 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.

Speaker Change: And you know so we've put together a reserve there and on the credit side and ended up not using it. So we had about 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.

Speaker Change: Our expectation is similar for this where generally the number one or number two market share in those heavy.

Len Harton: And so we'll see how that develops, but we expect the same kind of trend. Great, Len, that's helpful.

Speaker Change: Counties and so we'll see how that develops but we expect the same kind of trends.

Speaker Change: Got it.

Jefferson Haralson: And then just one last one.

Speaker Change: 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.

Jefferson Haralson: 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%. 8.0. Great. Okay.

Speaker Change: Yes, so it was eight and a half but there were some non accruals in there.

Speaker Change: Jesse.

Speaker Change: Denominator for that it's about 8%.

Speaker Change: 8.0, great. Okay. Thank you all very much thank.

Unknown Executive: Thank you all very much. Thank you. Again, if you have a question, please press star, then one.

Thank you.

Speaker Change: Again, if you have a question. Please press Star then one.

David Bishop: And our next question comes from David Bishop from the Update Group. Please go ahead. Hey, good morning. Hey, Jefferson, a question on the the DaVita portfolio obviously lost.

Speaker Change: And our next question comes from David Bishop from Hyundai Group. Please go ahead.

Speaker Change: Hey, good morning.

Speaker Change: Hey, Jefferson a question on the <unk>.

David Bishop: Portfolio, obviously losses have been deferred.

David Bishop: tipping off 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.

Speaker Change: Uh huh.

Speaker Change: You know from the sub 100 basis point level, it's about a.

Speaker Change: 134, this quarter I'm just curious how quickly you think that can go maybe recover and get back to that more normalized I don't know 60, 70, and maybe even sub 60 basis point range.

Robert Edwards: Yeah, 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% and the 134.

Speaker Change: Yeah, Hey, David It's Rob Edwards, we kind of are subdividing the portfolio into two different parts right now and we're still run in a I think it says it in here around 97 basis points. Yeah on slide 19, it's in the appendix, we're running at about 97 basis points, and we sort of target 1% loss.

Speaker Change: Right as a normal loss rate they did get stuck and last 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% in the $1 34.

David Bishop: 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. I appreciate that color.

Speaker Change: Sure.

Speaker Change: So that portfolio now is down to 29 million.

Speaker Change: We were originally thinking it would be done by now but are there 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.

Speaker Change: Got it I appreciate that color that Jefferson you noted the seasonality on the on the Muni deposit front is.

Jefferson Haralson: And then, Jefferson, you noted the seasonality 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 in that outflow as well? That's right. So you get to March, April of next year, it flows out. Go ahead.

Speaker Change: Is that typically flow out then just as quickly and the same amount maybe in the first or second quarter of next year should we model that and that outflow as well.

Speaker Change: Right. So you get to a March April of next year it flows out.

Speaker Change: That's all I had thank you.

Unknown Executive: Thank you. There are no more questions in the queue.

Speaker Change: There are no more questions in the queue.

Lynn Harton: This concludes our question and answer session.

Speaker Change: Concludes our question and answer session I would like to turn the conference back over to Lynn Harton for any closing remarks.

Lynn Harton: I would like to turn the conference back over to Lynn Harton 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.

Lynn Harton: Well once again, thank you all for joining the call and support in 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.

Unknown Executive: The conference has now concluded. Thank you for attending today's presentation.

Unknown Executive: The conference has now concluded.

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

Unknown Executive: Thank you for attending today's presentation.

Unknown Executive: You may now disconnect.

Speaker Change: [music].

Speaker Change: Yeah.

Speaker Change: [music].