United Community Banks Inc Q4 FY2024 Earnings Call

Good morning, and welcome to United Community Banks’ Fourth Quarter 2024 Earnings Call. Hosting our call today are Chairman and Chief Executive Officer, Lynn Harton; Chief Financial Officer, Jefferson Harralson; President and Chief Banking Officer, Rich Bradshaw, and Chief Risk Officer, Rob Edwards. United's presentation today includes references to operating earnings, pretax, precredit 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 fourth 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 ucbi.com. Please be aware that during this call, forward-looking statements may be made by representatives of United. Any forward-looking statements should be considered in light of risks and uncertainties described on Pages 5 and 6 of the company's 2023 Form 10-K as well as other information provided by the company in its filings with the SEC and included on its website. At this time, I will turn the call over to Lynn Harton.

Good morning, and thank you for joining our call today. We were pleased to report earnings of $0.61 this quarter and $2.04 for the full year. On an operating basis, we recorded earnings of $0.63 for the quarter and $2.30 for the year. This represented an annualized growth in operating earnings of 11% from last quarter and an increase of 9% for the full year of 2024 compared to 2023. Our tangible book value increased 9% year-over-year and at a 7% annualized rate during the fourth quarter. Our operating return on assets reached 1.08% in the quarter, and we finished the full year at 1.02%. Our operating return on tangible common equity increased to 12.1% for the quarter and 11.4% for the full year. There was no single driver of performance this quarter. Rather, we recorded strong balanced performance across all of our businesses. Loan growth accelerated at the end of the quarter, reaching a 5% annualized growth rate with several different product types contributing. Deposit growth totaled almost 4% annualized during the quarter with seasonal growth in public funds driving those results. As the Fed lowered short-term rates this quarter, we were able to decrease deposit costs by 15 basis points, nearly offsetting the 21 basis point decline in loan yields. Our overall margin was down 7 basis points, but net interest revenue increased by $1.1 million over the previous quarter. Credit continues to reflect solid economic conditions in our footprint. Total net charge-offs were 21 basis points, our lowest rate since Q2 of 2023. Other credit metrics were also stable at low levels. Expenses were well managed, essentially flat with the third quarter. Our operating efficiency improved to 55%. We continue to have ample liquidity to fund growth and are looking forward to our opportunities in 2025, including the expansion of our South Florida footprint with American National Bank. Jefferson, why don't you cover the quarter in more detail now?

Will do. Thank you, Lynn, and good morning to everyone. I'm going to start on Page 5 and lead off by talking about deposits. We enjoyed $213 million of deposit growth or 3.7% annualized. We had stable DDA, and we had the benefit of seasonally strong public funds. The strong deposit growth funded substantially all of our loan growth in the quarter. We were proactive in lowering our deposit cost. Our cost of total deposits improved by 15 basis points in the quarter. We have a total deposit beta of 22% so far, but we believe we are still on pace for a high 30% range total deposit beta through the cycle. On Page 6, we go into some more detail on deposits. In particular, we show our opportunity to reprice CDs here in the first quarter. We have been shortening our CD book over the past year, and we have a significant amount of dollars maturing in the first quarter. Specifically, we have over half of our CD book maturing, which is $1.8 billion at 4.14%. We should be able to reprice these in the 3.50% range given the current environment. On Page 7, we turn to the loan portfolio where growth picked up nicely, specifically in areas that we are targeting. We had 13% annualized growth in C&I, which includes owner-occupied CRE and 15% annualized growth in the Navitas book. We have also been targeting our HELOC product for growth, and we were pleased with 20% annualized growth in that area. Turning to Page 8, we highlight some of the strengths of our balance sheet. We believe that our balance sheet is in good position with just a small amount of wholesale borrowings and very limited broker deposits. Our loan-to-deposit ratio stayed at 78% in Q4 after moving down from the 80% level with the sale of our manufactured housing portfolio in Q3. Our CET1 ratio remained over 13% in the quarter. On Page 9, we look at capital in more detail. We had increases in most of our regulatory capital ratios and our TCE, and all of our capital ratios remained above peers. If you recall, last quarter, we took the opportunity to call a small amount or $8 million of trust preferreds that saved some money and helped the margin. We took a similar action in the fourth quarter, redeeming $60 million of subordinated debt. This debt was about to flip from the low 5% range to the low 8% range. So it saves us about $1.8 million in 2025. It was also just beginning to lose Tier 2 capital treatment. The redemption moved our capital ratio down by about 30 basis points, and the total capital ratio ended up down 20 basis points in the quarter. The redemption also generated a $2.2 million gain as the debt came to us in an acquisition and was marked on the books at a premium. This gain is called out on Page 4 as a notable item. Moving on to spread income and the margin on Page 10. We achieved 2% annualized growth in spread income. We were pleased with this outcome, given the sale of the manufactured housing portfolio that negatively affected the average loan balances. Excluding the MH impact, we estimate that our spread income growth was in the 4% to 5% annualized range this quarter. The margin came in 7 basis points lower in the fourth quarter. The decrease was in line with our expectations and was explainable by the manufactured housing impact of 2 basis points and the mix change due to public fund seasonality of 5 basis points. Excluding these two items, our margin was flat, which we view as a good outcome while we work on executing to achieve the high 30% total deposit beta as compared to the 22% achieved so far. Moving to Page 11. On an operating basis, noninterest income was up $5.2 million from last quarter. The growth came despite a $1.6 million shrinkage in wealth income fees with the sale of our FinTrust segment on October 1. The total fee income increase benefited from a $3.5 million MSR write-up and a $1.4 million realized gain on the sale of equity securities and was offset by $3.3 million in securities losses. Including the debt redemption gain I mentioned before, our run rate of noninterest income is closer to the $36 million range. Besides the highlighted items, we had strong results in debit card income, customer swap income, and treasury management fees that drove quarter-to-quarter growth on a core basis. Our gain on sale of SBA and Navitas loans was similar to last quarter, adjusting for the manufactured housing sale. Operating expenses on Page 12 came in flat at $140.9 million. We had about $1.2 million of tail expenses from FinTrust we expect not to repeat next quarter. Moving to credit quality. Net charge-offs were improved to 21 basis points in the quarter. Recall that our net charge-offs, excluding the MH sale, were 28 basis points last quarter. Our overall losses were lower, Navitas losses were a little bit higher and contributed 13 basis points of total losses, up from 12 basis points last quarter. Excluding MH and Navitas' losses, the bank's losses were low and stable at just 8 basis points, down from 15 basis points last quarter. In other credit statistics, NPAs and past dues were improved. While special mention and substandard loans moved slightly higher. We'll finish on Page 14 with the allowance for credit losses. Our loan loss provision was $11.4 million in the quarter and more than covered our $9.5 million in net charge-offs. We also covered loan growth with the provision, and the reserve stayed stable at 1.2% of loans. We still have $9.9 million of reserves set aside as a special provision for loans in a nine-county area in North Carolina for Hurricane Helene. We already had $3.1 million in reserve on these loans before, so the total reserve is $13 million on these loans in the nine counties or 3.5% of total loans there. Our update is that we have $27 million in storm-related deferrals, $18 million of which occurred in the nine-county area where we have the special reserve. We believe that our current provision is sufficient to cover any potential losses. With that, I'll pass it back to Lynn.

Thank you, Jefferson. Before we open for questions, I want to give a special welcome to Ginger Martin and her team at American National Bank. It has been a pleasure getting to know them, and I'm very confident they will be an outstanding addition to our South Florida team. I'm also glad to welcome Matthew Bruno as our new leader for our Miami operation. Matthew is a 25-year veteran of the market, well respected and is already making a tremendous positive impact on our business there. And finally, I want to recognize that 2025 is United's 75th anniversary. We plan on making it a great year, and we look forward to sharing that with you. And with that, I'd like to open the floor for questions.

Hey, good morning, everyone. Thanks for taking my questions. Maybe just wanted to start on loan growth. It was really good to see the C&I growth. Just wanted to get some color around what drove that? Was it increased utilization? Or was it just market share gain, and then just as we kind of contemplate 2025 and an outlook, I would think there'd still be some headwinds in some of the portfolios like Senior Care, Multifamily. But it does seem like some of the CRE and C&I categories could be some tailwinds, particularly if the economy performs. So maybe you can just kind of give some color there, I'd appreciate it.

Good morning, Michael, this is Rich. For the Q1 forecast, we're expecting a similar quarter to Q4 or slightly better. Some of the drivers, business owner confidence is certainly up, pipelines are very strong, talking with the credit officers, their throughput, they're seeing more deals than they've ever seen, and I feel like our new hires and growth initiatives have really paid off. Lastly, I want to point out that Florida led the bank in Q4 loan production, followed by North Carolina and South Carolina. Last quarter, that was Tennessee. So for two quarters back to back, the new markets have been leading the bank, so we're very pleased with that. In terms of other drivers, yeah, you're right, C&I was up 20%, equipment finance up 15%, income producing CRE 9.5%, and we're very pleased that owner-occupied CRE, which is a real big initiative for us at the end of the year was up 9%. In terms of 2025, we're very optimistic; it is probably too early to talk numbers for the year.

Okay, that’s helpful. Jefferson, I appreciate all the details and the various factors affecting the margin. As we consider the loan repricing opportunities you mentioned, could you provide some insight into how we should view the repricing on the asset and liability sides and what we can expect for core margin trends moving forward? Thank you.

I believe we are still somewhat asset sensitive. If we consider a scenario where the entire curve decreases, the current tilt is beneficial for us due to the steeper curve. However, with a rate cut, there are timing factors to consider, especially concerning how deposits are repriced in relation to our target deposit betas. Taking all of this into account, we are currently originating new loans around 7.25% based on December’s pricing. In any quarter without a rate cut, we should see an improvement in loan yields from the repricing of our existing loans and the new loans coming in at approximately 7.25%. We also anticipate some shifts in our mix during the first quarter, particularly with a slight reduction in public funds. Lynn pointed out that our loan growth occurred later in the quarter, which means we will benefit from higher average balances in the first quarter, which is positive. We expect strong loan growth in the first quarter as well. When we combine all these factors, we project an improvement of 5 to 10 basis points in our margin for the first quarter. Moving into 2025, any quarter without a rate cut should also show an improvement in the margin. Even in quarters where we do experience a rate cut, I believe we can reach that high 30s deposit beta and stabilize over time.

Appreciate all that color. Jeff, it has been very helpful. And then maybe just one final one for me for Lynn. Just as it relates to M&A, obviously, the ANB transaction, a nice addition to what you're building in South Florida. Can you just talk about what's changed in your mind since the election? And it does seem like banks are going to be allowed to do maybe a few deals at once or per year. Any updated thoughts there and does what you're looking for potentially change under this new administration? Thanks.

Yeah. Sure, Michael. So first, we are very excited about American National. It's a small deal, very high quality, just a tuck-in. And with that, we have always been very confident that we have the capacity and the ability to do one additional one this year in addition to American National, and whether or not that happens, of course, depends on the opportunities that are out there. There's definitely been a pickup in conversations since the election. There's just a better environment overall for M&A. People are kind of getting their balance sheets better understood and better taken care of. Of course, the approval side is anticipated to be better. Honestly, for us, the size deals that we've done up to 15%, which we've capped at around $4 billion to $5 billion, is the top end. So those smaller deals we do have not seen and wouldn't have anticipated any change. They've always been very easy to get approved. So that part is not affecting us much. But I just think the general atmosphere is very conducive, and we would certainly expect to see some opportunities during 2025.

Great. Thanks for taking all my questions, guys.

Thanks. Good morning.

Good morning.

Can you provide your outlook on credit now that manufactured housing is no longer on the balance sheet? With Navitas experiencing a slight increase in core performance and your core bank showing very low losses, how should we approach expectations for provisioning or net charge-offs in the upcoming year?

Yeah. Hey, Catherine, it's Rob. The way it is, we had $58 million in charge-offs in 2024, about $14 million of that was related to manufactured housing, either from regular charge-offs before the sale or created by the sale. So that gets you down to $44 million. And I'm kind of thinking about that as being a good number for the outlook for 2025 right now. Things feel very stable, and so that's kind of the way I'm thinking about it for next year.

Okay. Great. Jefferson, you mentioned that some of the other items and fees will be coming out. Can you share your outlook on Navitas loan sales and SBA fees, as well as overall fee growth for 2025?

Yeah, I'll start with that. And I know Rich will have some things to join in there on the SBA side and mortgage really. Mortgage, well maybe I'll pass it to Rich first, and then I'll come back to me on anything else. So maybe mortgage and SBA and then I'll come back with any other pieces of it.

Sure. Good morning, Catherine. Regarding mortgage volume, the NBA is projecting a 10% decrease for 2025, and we expect a similar figure. On the SBA side, as mentioned in the previous call, the SBA altered regulations concerning the timing of selling commercial construction loans, which we focus on in that area. This change affects when you can sell, not the gain from the sale itself, so the timeline has shifted. Consequently, Q4 was lower, and we anticipate this will carry over into Q1 and Q2. We expect a slightly improved Q1 compared to the same period last year.

And I'll throw in on Navitas. We had been selling this quarter too, was in the $20 million to $30 million range. I would expect that to be a little smaller, maybe the $10 million to $20 million range per quarter next year, mainly because it's more profitable to hold it on the balance sheet. We have good capital and liquidity, so we might hold a little bit more there. Especially, too, as we think our overall loan growth is going to pick up, we have more room on the balance sheet to keep more Navitas loans as well. So I would expect the seasonality change on the SBA, like Rich said and good growth there, then I would expect Navitas to be a little down on their loan sales in 2025.

Great. Very helpful. Thank you.

Thanks. I had a deposit pricing question. As you look at M&A, what's the likelihood to reprice those deposits on the front end? And is that an opportunity bigger this year than it had been in the past?

I'll begin by saying that Lynn might have additional insights on this. It really varies depending on the bank involved. Some banks, like ours, have excellent core deposits, which limits the opportunity. In contrast, other banks have significantly high deposit costs, allowing us to utilize our liquidity to reduce those costs. We're observing trends from both sides. It's essential to note that there's potential in every bank regarding the asset side. With our robust Tier 1 capital of 13%, we can manage loan and securities marks effectively, which can lead to increased margins. M&A can substantially enhance the asset side marks, but the liability aspect really depends on the specific bank.

Thank you for that, Jefferson. I have a follow-up question for Rob regarding Navitas. Is there a chance for the losses to decrease this year and moderate compared to what we've experienced?

We expect losses in over-the-road trucking to moderate this year. We started the year with a $44 million over-the-road portfolio and are now beginning 2025 with a $26 million portfolio, which is a significant decrease. I anticipate losses to decrease as well. In 2024, we experienced $7 million to $7.5 million in losses on the over-the-road portfolio, and I expect that to be around $4 million in 2025. This should contribute to the overall Navitas losses.

Great, Rob. Thanks very much. Appreciate it.

Thanks. Good morning, everybody. I wanted to ask Jefferson about the CD maturities. You mentioned, obviously, the half of them in the first quarter and then you've got another sizable slug in the second quarter. How are you thinking about kind of managing the duration of the renewals there from a rate perspective, really trying to get a sense of whether there'll be another opportunity to work pricing down more over the course of the year as we move later into 2025.

Thanks, Gary. That's a great question. Our most popular CDs have traditionally been in the 11-month, 13-month, or 12-month range, usually averaging about a year. With the expectation of lower rates, we've shortened that, offering our best rate for seven months and then four months, which presents us with this opportunity. As we adjust our pricing, we'll be aligning it more evenly across different time frames. You can expect to see an increase in the duration of these CDs, particularly in the 11-month, 13-month, and 12-month options. It will take some time, but you should notice a gradual extension of the CD portfolio from its current state.

Thank you. That’s all I had.

This will conclude our question-and-answer session. I would like to turn the conference back over to Lynn Harton for any closing remarks. Please go ahead.

Well, once again, many thanks for joining the call, for your interest. We look forward to continuing to be with you through the year. We expect it to be a great one. So take care, and have a great day.

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