UNITED COMMUNITY BANKS (UCB) Q1 2023 Earnings Call Transcript

Transcript

Operator (participant)

Good morning, and welcome to United Community Banks' First Quarter 2023 Earnings Call. Hosting the call today are Chairman and Chief Executive Officer, Lynn Harton, Chief Financial Officer, Jefferson Harralson, President and Chief Banking Officer, Rich Bradshaw, and Chief Risk Officer, Rob Edwards. United's presentation today includes 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 first quarter's earnings release and investor presentation were filed last night on Form 8-K with the SEC, and a replay of this call will be available in the investor relations section of the company's website at 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 five and six of the company's 2022 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.

Lynn Harton (Chairman and CEO)

Good morning. Thank you for joining our call today. This has certainly been a busy and an interesting quarter. Despite the turmoil in the U.S. banking markets, we continue to perform well. While our reported operating earnings per share was $0.58, if you exclude the Progress double-dip credit provision, which I think is a better way of looking at it, our operating EPS was $0.65 for the quarter, and our operating return on assets was 119 basis points. Given the focus on liquidity and funding cost, we were pleased with our customer deposits growing at a 10% annualized rate in the quarter. The cost of deposits did increase, and our mix of deposits moved toward more interest-bearing, as would be expected in a higher rate environment.

Our bankers worked proactively with our customers after the news of Silicon Valley and Signature Bank. We also saw mix changes resulting in growth in our insured products. 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. 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 a glad to take additional questions on these topics on the call. Our deposit franchise continues to be a key strength for us. With mix 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.

Taking together, these changes combined 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. Credit quality continues to be strong, with net charge loss 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. These numbers continue to be consistent with normal performance. Our senior care portfolio, 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 and past dues.

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. Our ten largest office loans combined total $132 million are only 80 basis points of total loans. 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. 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.

I'm also pleased to report that we completed the conversion of Progress over this past weekend. Now, not only are they part of United financially, they are also operating under the United brand and systems. David has built a great team in fantastic markets, and we're a better company together with them. During the quarter, we were also very pleased to announce a merger agreement with First National Bank of South Miami. This is a great bank, which has been in the market since 1952. 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. As I said, a busy and interesting quarter. Now I'd love for Jefferson to provide more detail on our performance.

Jefferson Harralson (CFO)

Thank you, Lynn. Good morning to everyone. I am going to start my comments on page 8 and go into some details on deposits. As Lynn 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 CDs and our money market accounts as our DDA shrunk in the quarter. Our cost of total deposits moved to 1.1% in the first quarter from 49 basis points in the fourth. We now have a beta of 23% through the cycle.

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. 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. On page 10 is yet another look at our deposits, this time with regard to FDIC insurance. 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. In total, we have 76% of our customer deposits that are either guaranteed or collateralized.

We also have a note on this slide that we are seeing growth in our insured cash sweep deposit or ICS deposits that was $319 million in the first quarter. Moving on to page 11 and the topic of loan growth. Adjusting for the acquisition, our loans grew $335 million or 8.2% annualized. Again, adjusting for the Progress book, the biggest growth categories were residential mortgage, owner-occupied CRE and Navitas. Our portfolio is very granular, with relatively small project limits and is very diversified. On page 12, we look at some balance sheet highlights. 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%.

Our CET1 ratio remains above peers, but came down 20 basis points with the Progress acquisition as we put some capital to work. On page 13, we take a deeper look at capital and show how we achieve the tangible book value growth in the quarter. Our regulatory ratios remain above peers, but did fall slightly and move towards peers a bit with the Progress acquisition. Moving on to the margin on page 14. The margin increased 64 basis points year-over-year, but fell 15 basis points from last quarter, 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%.

The main driver of the cost of total deposits increase was higher deposit rates, a mix change away from DDA towards money market and CDs also contributed another 5 basis points of margin pressure. Many of these trends are continuing. I mentioned that our average cost of total deposits was 1.10% in the first quarter, on 3/31 on a spot basis, the cost of total deposits was 1.27%, we have seen that move up 5 basis points as of Friday. 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. On page 15, we look at fee income, which was down $3.2 million compared to last quarter.

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 security losses that occurred in Q1. Mortgage came in stronger as mix change towards fixed product means that we sold more loans and put less loans on the balance sheet. Moving to expenses on page 16, that came in at $131.2 million. Progress was the main driver of the increase. In particular, we added $2 million in higher core deposit and tangible amortization. We also had $900,000 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 ahead of the fourth quarter. On page 17, we talk about credit.

Net charge-offs were flat at 17 basis points. Of the net charge-offs, Navitas losses came in at 93 basis points, which we believe is now back in the normal range. NPAs increased to 43 basis points of loans and past dues also increased, while special mention loans improved. 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. The $21.8 million provision also included a $10.4 million double-dip provision to set up a reserve for Progress. With that, I'll pass it back to Lynn.

Lynn Harton (Chairman and CEO)

Thank you, Jefferson. 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. Now I'd like to open the floor for questions.

Operator (participant)

We will now begin the question and answer session. 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. To withdraw your question, please press stars and two. At this time, we'll pause momentarily to assemble our roster. The first question will come from Brad Millsap with Piper Sandler. Please go ahead

Brad Millsap (Analyst)

Hey, good morning.

Jefferson Harralson (CFO)

Morning, Brad.

Brad Millsap (Analyst)

Thanks for taking my question. Jefferson, I appreciate the color around kind of spot deposit rates at the end of the quarter. Then as of last week, I was just kind of curious if you could update us kind of on your view of maybe what you're through the cycle, you know, total deposit beta might be and maybe the interest-bearing deposit beta as well. Just, you know, kind of what that means for how you're thinking about the margin going forward.

Jefferson Harralson (CFO)

Yeah. Talk about the margin a little bit. We were up 84 basis points year-over-year up to last quarter. We're down 15 in Q1. Some of the changes that are happening here is we have, you know, continued good news on the asset side. We have new loans we're putting on the high sevens. We have a mix changing towards more loans and away from securities. Rate, 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. That was actually more than double what we had budgeted for the year. 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. We can talk after on the interest-bearing liability beta, but I think that's going to the high 20s. I think that you're gonna see some of these effects moderate during the year, especially some of this mix change that you're seeing is gonna begin to moderate. We're also gonna have some ability, I think, to reprice some of the funding that we're putting on. I think the margin will be down next quarter, but I think it will stabilize from there.

Brad Millsap (Analyst)

Great. That's helpful. Just a follow-up to that. The accretion that you had this quarter, would you expect that to remain fairly consistent, as you move through the year? Just kind of want to think about, you know, what that number could be.

Jefferson Harralson (CFO)

I think that's a fairly normal number there. We added $34 million of accretion from Progress. That took us to $54 million total, we're right around $50 million left. It's a pretty big chunk of accretion yet to come through with the Progress deal coming in.

Brad Millsap (Analyst)

Got it. Then, just finally, you know, on expenses, you called out a couple of things there that are, you know, seasonally, you know, heavy. Just kind of wanted to get a sense of, you know, if you still felt comfortable with the amount of cost savings from Progress that, you know, should drop, you know, after the conversion. I think that Lynn mentioned that you just completed. I think last quarter you guided sort of 4% to 4.5% growth on top of the 4Q run rate, plus Progress. Just wanted to see if you still felt, you know, felt good about that as you think about expenses in 23.

Lynn Harton (Chairman and CEO)

Rob Edwards (Chief Risk Officer)

Yeah. 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, right? That, that was kind of the comment I made a minute ago about the 25-35 basis points is what I would think about as being a normal operating environment. I could see us, I could see us getting to that range later this year, but I don't, I don't have anything specifically at the moment that says it's gonna happen next quarter. It could. You know, things change. It's a dynamic portfolio.

Again, we're not seeing you know, if you look at the chart on the bottom right of 17, you'd see that our criticized and classified has really been pretty stable over the last two years.

Brandon King (Treasury Sales Analyst)

Okay. Very helpful. Thanks for taking my questions.

Operator (participant)

The next question will come from Catherine Mealor with KBW. Please go ahead.

Rob Edwards (Chief Risk Officer)

Hello, Mark.

Catherine Mealor (Managing Director - Equity Research)

Can you hear? This is Catherine Mealor. Can you hear me?

Rob Edwards (Chief Risk Officer)

Hey. Hey, Catherine.

Catherine Mealor (Managing Director - Equity Research)

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 maturity is? Just trying to think about perhaps how long that may be on your balance sheet and, you know, it's fair to model that some of that rolls off towards the back half of the year and is replaced with perhaps lower cost funding.

Rob Edwards (Chief Risk Officer)

Yeah, thank you. That's a great question. Mid-February, we put these on. The average rate was in the 4.60% range, and they have six-month maturities. I would expect to continue to grow core deposits and replace it with core deposits.

Catherine Mealor (Managing Director - Equity Research)

Okay. Interesting that, you know, it seemed like you sold down your FHLB and really chose to put in brokered CDs instead. How do you think about, you know, weighing the two options between brokered CDs and FHLB and when you choose to pull one funding versus the other?

Rob Edwards (Chief Risk Officer)

That's a great question. As we came into the year, this year, we made a decision, one, to sell a small amount of securities, $270 million. The idea there was that we could now fund our expected loan growth for the year. If you remember back to Q4, we had $550 million of FHLB. The plan, again, this was all before Silicon Valley, is that we take down a little broker deposits and free up liquidity at the FHLB if we ever came to possibly need that. The pricing is relatively similar, but we just wanted to tap that market to make sure that the broker CD market was open to us.

At the same time, you get the benefit of saving your, you know, 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.

Catherine Mealor (Managing Director - Equity Research)

Okay, great. Super helpful. A follow-up on the credit conversation. There's, you know, a lot of anxiety about all the CRE maturities that we're gonna see over the next couple of years. Can you give just any kind of clarity, Rob, of what you're seeing with your clients? You know, when you've got a CRE loan that's maturing and it's moving to a higher rate, generally, what are you seeing in your clients' behavior? What kind of new underwriting is taking place? Are the occupancy rates or your underwriting still appropriate to where they can handle the higher rate?

Rob Edwards (Chief Risk Officer)

It does. I mean, the short answer is yes. You know, we are seeing rental rates are increasing, occupancies are stable. We're not seeing a lot of problems pop out of maturities. I did go in the portfolio to try and examine, you know, are there, you know, are there properties that currently have low debt service coverage that are maturing this year? I came back with a number of about $30 million. 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.

Catherine Mealor (Managing Director - Equity Research)

Okay, great. Any color on the loans that moved to non-performing this quarter?

Rob Edwards (Chief Risk Officer)

Yeah. One of them is a senior care credit that struggled to stabilize, and so it went nonaccrual. Another one was a C&I credit that actually it was a long-term customer, sold the business to a private equity group, and the private equity group wanted to expand into some additional lines of business. They didn't have the financial controls in place to be able to do that and had some, ended up filing bankruptcy during the quarter. I feel good about the business. We've known it a long time. The core business is very strong, I don't see it as being a big problem in the future, but we're working through it right now. Those are the two credits that drove the increase in NPAs.

Catherine Mealor (Managing Director - Equity Research)

Okay, great. Thank you for that. Appreciate it.

Rob Edwards (Chief Risk Officer)

Yeah.

Operator (participant)

The next question will come from Michael Rose with Raymond James. Please go ahead.

Michael Rose (Managing Director)

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 had kind of talked about, you know, 5%, as we moved through the year, excluding Acquisition. Just wondering to get a sense for, you know, kind of borrower demand versus where, you know, current rates are and just how we should think about that push-pull dynamic as we move forward. Thanks.

Rich Bradshaw (President and Chief Banking Officer)

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. Demand's surprisingly still strong, stronger than I would have guessed. We're working through that. 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 5 commercial professionals. I will tell you that we are currently down the road and across the footprint, but there are 3 other lift outs that we are in deep discussions with and very, very close. I 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. We're gonna be opportunistic. We're gonna be very selective, but we are gonna take the opportunity if it exists. We're very, very close. I think that mid-single digit moves to high single digit if we're able to execute on some of these lift outs.

I'll just add, I think we...

Michael Rose (Managing Director)

Maybe-

Rich Bradshaw (President and Chief Banking Officer)

To be able to support this, given the funding that you saw this quarter and the loans to deposit ratio that we have. I think we're in a really good strategic position to be able to hire people and set them loose. The strong core deposits plus the lower loan to deposit ratio is attracting our lenders.

Michael Rose (Managing Director)

Very helpful. Maybe just as a follow on to that, how much of this quarter's organic growth acquisition was, you know, kind of fund up of existing commitments versus, 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, you know, 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 have, you obviously have some offsets with some of the people you're hiring and planning to hire.

Rich Bradshaw (President and Chief Banking Officer)

Sure. I'd say it was kind of fair to the round numbers, 50/50 on organic growth. Then, of course, we do a fair amount of construction lending, and you have the draws always catching up.

Michael Rose (Managing Director)

Okay, perfect. Just going back to Navitas and, you know, obviously, uptick here in charge offs and things are normalizing, you know, not surprisingly. Notice that the reserve allocation, you know, went up about 11 basis points to a little over 1.8%. 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.

Rob Edwards (Chief Risk Officer)

Yeah. This is Rob. Michael, just in terms of we purchased the portfolio in 2018. When we did that, we looked all the way back to when the company started. Now, they you know, they started post 2010, their loss rates have been up until we bought them and 1% was kind of the what we budgeted and expectations that we set when we bought it. Coming in at 93 is kind of where we have thought it would be. We haven't seen a lot out. In fact, we think the portfolio's gotten better since we've bought it. They've moved upstream a little bit on the credit range. I feel like this is a reasonable expectation for the portfolio going forward. I'll just layer in that it's a, it's a very profitable company at this level of charge offs.

Michael Rose (Managing Director)

Certainly understand the yields obviously are very sticky. Just maybe one final one for me. The gain on sale of Navitas loans and the SBA loans, can you just give some color there and kind of what we might expect going forward? Thanks.

Rob Edwards (Chief Risk Officer)

Yeah. Maybe Rich 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 Navitas originations. I expect, they have a little bit of a different seasonality, but in both cases, they both tend to increase, throughout the year. I would expect those gains to, this is typically the first quarter is the lowest gains we see in both. For Navitas specifically, I think you would see this level or slightly higher as we go through the year, but there might be a bigger ramp in SBA. We'll pass to Rich on that.

Rich Bradshaw (President and Chief Banking Officer)

Two things. One is the gain on sale for SBA right now looks like it'll be flat from Q1 to Q2 in terms 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. As if the economy is struggling a little bit, SBA is gonna do better. We are full up in all positions and really strong pipelines.

Michael Rose (Managing Director)

Hey, guys. Thanks for taking my question.

Operator (participant)

The next question will come from Kevin Fitzsimmons with D.A. Davidson. Please go ahead.

Kevin Fitzsimmons (Senior Research Analyst)

Hey, good morning, guys. How are you?

Rich Bradshaw (President and Chief Banking Officer)

Morning. Good, Kevin.

Kevin Fitzsimmons (Senior Research Analyst)

Appreciate the spot levels, Jefferson, on cost of deposits. Was wondering and apologize if you've 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 maybe the margin was for the month of March or at the end of the quarter.

Jefferson Harralson (CFO)

The loan yields on a spot basis and kind of moving up are actually almost up as high as the deposit yields, 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. You get SOFR and LIBOR start to move up before that to anticipate that rate hike. We're getting a little bump in our loan yields early in the quarter because of that expectation. It's not a great look-through for the whole quarter, but so far, the loan yields have almost matched the deposit costs and moving higher. The, will you say your second question again or somebody help me out with your second one?

Kevin Fitzsimmons (Senior Research Analyst)

Just on the overall margin, like if you can kind of combine and say what your margin was at the end of the quarter?

Jefferson Harralson (CFO)

Annualizing a month to quarter is really, really hard, and we do it, but it sometimes comes out with these numbers that are just not helpful. 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 multiplying times 12 is just it gives you crazy numbers sometimes.

Kevin Fitzsimmons (Senior Research Analyst)

Understood. Okay. One question on the mix shift that's happening within deposits. I think you mentioned how you expect it to moderate. Specifically with the % of DDA to total deposits, where do you see that settling and where and when do you expect that to settle? Thanks.

Jefferson Harralson (CFO)

Russell Gunther (Managing Director)

I wanted to follow up on the commercial lender list out commentary. Can 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? 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.

Rich Bradshaw (President and Chief Banking Officer)

Sure. For us, it is opportunistic. We don't have this built in our budget. 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. Recently it's been primarily on the larger size. We just continue. Yes, I'll give you quotes. I won't tell you what banks, but, you know, part of the reason we're getting these looks is some of these banks are telling their commercial lenders they're gonna be deposit gatherers in 2023. We need our people to do deposits too, but we're still open for loans.

That's what's driving a lot of the interest.

Russell Gunther (Managing Director)

I appreciate the color. It's really helpful. Jefferson, I had a question for you in terms of just a reminder on securities cash flow this year, and then how you guys think about a target cash to assets and how that bogey may or may not have changed inter-quarter.

Jefferson Harralson (CFO)

That's a great question. We're expecting about $750 million, a little bit more in total cash flow, principal, and interest from the securities portfolio this year. I mentioned with 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. Now we're moving back down towards more normal holdings of overnight cash. We're in that $200 million-$300 million of what we hold overnight now with the Fed. That is we're back basically to a normal level post Silicon Valley.

Russell Gunther (Managing Director)

Got it. Okay, great. Thank you. 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?

Jefferson Harralson (CFO)

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. 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 133 of them are medical office, and of course that's in that, second bullet on that slide 23. Probably about a third of it is medical office buildings.

Russell Gunther (Managing Director)

All right, great. I appreciate that. guys, that's it for me. Thanks for taking my questions.

Operator (participant)

The next question will come from Christopher Marinac with Janney Montgomery Scott. Please go ahead.

Christopher Marinac (Director of Research)

Thanks. Good morning. We appreciate all the information you've given this morning and also in the deck. I wanted to follow back up on the last question on office CRE. 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 the properties and the loss you take? Can you just kind of walk us through the mechanics?

Rob Edwards (Chief Risk Officer)

Yeah. Maybe, I guess I could talk about, one situation we had. In the fourth quarter, we did have small office property. I think it was a $2 million, slightly over $2 million, you know, valued property. We had a $1.4 million loan on it. The tenant, they had some occupancy. It went into non-accrual. We took it to foreclosure. The property didn't end up coming into OREO because there were other interested parties. 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, so we never did come into OREO, and we ended up recovering.

We had taken a loss originally. We ended up recovering, I think, 90% of the loss. The final charge-off on the whole project is, you know, I think it was less than $100,000. 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 the value. The disposal process is faster and less painful.

Christopher Marinac (Director of Research)

Great. Thank you for that. I appreciate that. Jefferson, just a final question for you on expenses. If we look at slide 16, you've got a recent history of the operating expense ratio. I know if we went backwards in time, that number was a lot higher as the company was smaller and less successful than today. As you think about 2024, 2025 in the big picture, what's the ability to push operating expenses down further just as a percentage of revenue? you know, can you possibly get closer to that 50 threshold over the long time, long term?

Jefferson Harralson (CFO)

I mean, that is certainly our goal. We set up our budgeting process and our plans every year to move that ratio down. Our budgets will always have more revenue than expense growth. If we can possibly get there, this is an unusual year with the margin moving in the wrong direction. We'll contemporarily move it higher. We'll always be pushing to move it lower. We believe and what all of our targets are is to be a top quartile ROA bank. We think about this all the time. To be a top quartile ROA bank, you have to be a top quartile efficiency ratio bank. We think about that ratio. We manage by that ratio. We push that ratio.

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.

Christopher Marinac (Director of Research)

As you're getting very good at doing acquisitions of this size that you're doing, does that, does that give you a sharper pencil on sort of looking at M&A in the future?

Lynn Harton (Chairman and CEO)

Yeah, it does. I mean, you know, you know what you're gonna get. You know, our whole strategy has been built around these smaller deals where they align with us on culture, they align 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. It's just a really great group of people.

I met with several clients while I was there, and, really strong people and, you know, they're like, "Oh, you guys have long, bigger limits now." Yeah, so that. It really is. 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.

Christopher Marinac (Director of Research)

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

Operator (participant)

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.

Lynn Harton (Chairman and CEO)

I always wanna thank all of you for really great questions. You know, I know there's a lot of noise this quarter and certainly a lot of noise in the environment with Silicon Valley, et cetera. We wanna be as open and transparent as we can and obviously give us any questions after the call as well. Also, there's always noise anytime we consummate a deal. There was noise in this quarter from Progress. Great questions, and 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 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.

We're really getting the opportunity to get great quality teams, that we're excited about, very excited about. I think it shows the focus on our markets and whether from the Progress deal and 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. Again, thank you for your support and questions, and look forward to talking soon.

Operator (participant)

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

United Community Banks - Q1 2023

Transcript

Operator (participant)

Lynn Harton (Chairman and CEO)

Jefferson Harralson (CFO)

Lynn Harton (Chairman and CEO)

Operator (participant)

Brad Millsap (Analyst)

Jefferson Harralson (CFO)

Brad Millsap (Analyst)

Jefferson Harralson (CFO)

Brad Millsap (Analyst)

Jefferson Harralson (CFO)

Brad Millsap (Analyst)

Lynn Harton (Chairman and CEO)

Brad Millsap (Analyst)

Lynn Harton (Chairman and CEO)

Operator (participant)

Lynn Harton (Chairman and CEO)

Brandon King (Treasury Sales Analyst)

Lynn Harton (Chairman and CEO)

Brandon King (Treasury Sales Analyst)

Rob Edwards (Chief Risk Officer)

Lynn Harton (Chairman and CEO)

Rob Edwards (Chief Risk Officer)

Lynn Harton (Chairman and CEO)

Rob Edwards (Chief Risk Officer)

Brandon King (Treasury Sales Analyst)

Rob Edwards (Chief Risk Officer)

Brandon King (Treasury Sales Analyst)

Rob Edwards (Chief Risk Officer)

Brandon King (Treasury Sales Analyst)

Rob Edwards (Chief Risk Officer)

Brandon King (Treasury Sales Analyst)

Rob Edwards (Chief Risk Officer)

Brandon King (Treasury Sales Analyst)

Operator (participant)

Rob Edwards (Chief Risk Officer)

Catherine Mealor (Managing Director - Equity Research)

Rob Edwards (Chief Risk Officer)

Catherine Mealor (Managing Director - Equity Research)

Rob Edwards (Chief Risk Officer)

Catherine Mealor (Managing Director - Equity Research)

Rob Edwards (Chief Risk Officer)

Catherine Mealor (Managing Director - Equity Research)

Rob Edwards (Chief Risk Officer)

Catherine Mealor (Managing Director - Equity Research)

Rob Edwards (Chief Risk Officer)

Catherine Mealor (Managing Director - Equity Research)

Rob Edwards (Chief Risk Officer)

Operator (participant)

Michael Rose (Managing Director)

Rich Bradshaw (President and Chief Banking Officer)

Michael Rose (Managing Director)

Rich Bradshaw (President and Chief Banking Officer)

Michael Rose (Managing Director)

Rich Bradshaw (President and Chief Banking Officer)

Michael Rose (Managing Director)

Rob Edwards (Chief Risk Officer)

Michael Rose (Managing Director)

Rob Edwards (Chief Risk Officer)

Rich Bradshaw (President and Chief Banking Officer)

Michael Rose (Managing Director)

Operator (participant)

Kevin Fitzsimmons (Senior Research Analyst)

Rich Bradshaw (President and Chief Banking Officer)

Kevin Fitzsimmons (Senior Research Analyst)

Jefferson Harralson (CFO)

Kevin Fitzsimmons (Senior Research Analyst)

Jefferson Harralson (CFO)

Kevin Fitzsimmons (Senior Research Analyst)

Jefferson Harralson (CFO)

Kevin Fitzsimmons (Senior Research Analyst)

Jefferson Harralson (CFO)

Kevin Fitzsimmons (Senior Research Analyst)

Jefferson Harralson (CFO)

Operator (participant)

David Bishop (Director)

Jefferson Harralson (CFO)

Rob Edwards (Chief Risk Officer)