United Community Banks Inc Q1 FY2025 Earnings Call

Good morning, and welcome to United Community Banks First Quarter 2025 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, 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 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 2024 Form 10-K, as well as other information provided by the company in its filings with the SEC and included on its website. At this time, I'll turn the call over to Lynn Harton.

Good morning, and thank you for joining our call today. We're happy to report a strong start to 2025. Operating earnings were $0.59 per share, with an operating return on assets of 1.04%, both solid improvements from a year ago. Loans grew at an annualized pace of just over 5%, and deposits grew at an annualized rate of 5% as well. We saw growth in non-interest-bearing DDA for the first time in several quarters with balances up $46 million from year end. Our net interest margin increased 10 basis points over the fourth quarter, driven by lower deposit cost. Credit continues to reflect quality underwriting with non-performing assets lower and credit losses stable from last quarter. Operating expenses were lower both from last quarter and when compared to the first quarter of 2024. I'd like to congratulate and thank our teams throughout the bank for strong balanced performance as we begin the year. This quarter, J.D. Power recognized United for the 11th time as the Retail Banking Satisfaction winner for the Southeast. They also recognized us as being number one in Trust and number one in People this year. It's an amazing accomplishment for our team. United teammates continue to live out our values of Team, Truth, Trust and the Golden Rule. I am proud to be part of this great group of people. With these results and the strength of our balance sheet, we are well positioned to succeed, despite the uncertainties developing in the economy. Ultimate tariff impacts are impossible to predict at this point. As you can imagine, we have been soliciting feedback from our clients on the issue and they reflect confidence in their ability to navigate the environment successfully. Impacted companies are adjusting quickly with price increases, sharing or splitting tariffs with suppliers, finding ways to change their material sourcing and cutting costs in other areas to maintain margins. Consumer spending and employment in our markets remain strong. We are watching the environment closely, but see no cause for elevated levels of concern at the current time. Jefferson, why don't you cover the quarter in more detail now?

Thank you, Lynn, and good morning. On Page 5, we were very pleased with our deposit growth in the first quarter. We enjoyed $309 million of deposit growth, or 5.3% annualized. We achieved this growth even with approximately $85 million in seasonal public funds outflow in the quarter. We were also happy to see 3% annualized DDA growth. I would also like to add that the deposit growth funded more than all of our solid 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 30% so far and we continue to believe that we are on pace for a high 30% range deposit beta through the cycle. We were able to reprice $1.4 billion in CDs, costing 4.14% that matured in the first quarter to 3.49%, while growing the book slightly. On Page 6, we show that we have additional opportunity in repricing CDs, with $1.3 billion maturing at 3.78%. We should be able to save 25 basis points to 30 basis points on these maturities. On Page 7, we turn to the loan portfolio, where our growth continued specifically in areas that we are targeting. We had 7% annualized growth in C&I, which includes owner-occupied CRE. And we also had 15% annualized growth in the Navitas book. We have also been targeting our HELOC loan book for growth, and we were pleased with 13% annualized growth in that area. Turning to Page 8, where we highlight some of the strengths of our balance sheet. We believe that our balance sheet is in a good position from a liquidity and capital standpoint to be ready for any economic volatility. We have no wholesale borrowings and very limited broker deposits. Our loan to deposit ratio is low and stayed at 78% with our balanced loan and deposit growth. Meanwhile, our CET1 ratio increased to 13.3%, remaining a source of strength for the bank. Moving to Page 9, we look at capital in more detail. Our TCE ratio was up 21 basis points and went over 9%, and we had increases in most of our regulatory capital ratios. We were able to grow capital in a solid way even with good loan growth in the quarter. Our TCE and all of our capital ratios remain above peers, which we believe will allow us to be opportunistic in our capital use. Moving on, spread income increased 6.5%, compared to last year, and 3.2% annualized from the fourth quarter, even with two fewer days. The margin came in 10 basis points higher in the first quarter. The increase was in line with our expectation and came mainly due to our ability to bring down deposit costs. Excluding 2 basis points and less purchase accounting adjustments, our core margin increased by 12 basis points. Moving to Page 11, on an operating basis, non-interest income was down $4.8 million from last quarter. That said, our run rate of fee income was essentially flat, excluding last quarter's notable items such as an MSR write-up and realized securities gains. Operating expenses on Page 12 were improved by $1 million in the quarter, which we were pleased with as we were able to generate some operating leverage in a quarter that is typically our weakest seasonal quarter. Moving to credit quality, net charge-offs were 21 basis points in the quarter, flat to Q4 as Navitas losses improved and offset slightly higher bank losses. I will finish on Page 14, with the allowance for credit losses. Our loan loss provision was $15.4 million in the quarter and more than covered our $9.6 million in net charge-offs. We also covered loan growth with the provision and the allowance for credit losses moved up just slightly to 1.21% of loans. We reduced our Hurricane Helene reserve by $2.6 million to $7.2 million as we are feeling more comfortable with potential loss content. 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. We are also glad to welcome American National Bank into United with our closing date set for May 1st. American National has a talented team led by Ginger Martin and Amy Mahaney, that will be an outstanding addition to our South Florida franchise, and a great start to United's 75th anniversary year. And with that, I'd like to open the floor for questions.

The first question comes from Russell Gunther with Stephens. Please go ahead.

Hi, good morning, guys.

Good morning.

Good Morning, Russell.

Maybe to start on the margin expectations going forward, Jefferson, just a great result this quarter. Maybe how you're thinking about the trajectory going forward, if you could touch on where spot rates ended in March, and then any willingness to maybe flex the loan to deposit ratio here?

Yes, thank you, Russell. That's a great question. Spot rates on the cost of deposits were around 2%. We believe we can lower that throughout the quarter, which will be crucial for our expectation of an increase in our margin by 5 to 10 basis points next quarter. A significant factor in this is the improvement in the mix between loans and securities. I anticipate that our securities portfolio will decrease slightly while our loan portfolio will expand, and this combination should help push our margin up by 5 to 10 basis points.

Okay. Super helpful. And then just switching gears, you guys mentioned no cost for elevated concerns at this time just with all the potential impacts from tariffs and the current trade war. You guys give good granularity in the deck on the loan portfolio, but would be helpful to get your sense for what parts of the book you're paying closer attention to today that may have borrowers with some outside exposure to all that's going on. And if you could touch on expectations within Navitas, both from an asset quality and growth perspective, that would be helpful as well?

Sure, this is Lynn, Russell. I'll begin now and then let Rob join in. It's really quite difficult to determine specifics as we're engaged in conversations with numerous clients. Everyone is assessing their tariff impacts and where they occur in the supply chain. It's uncommon to find someone who is directly affected. For instance, there's one supplier of one of our clients who is entirely dependent on China and they have significant concerns about the situation. Consequently, our client is more focused on finding a replacement supplier. It’s not accurate to say that this specific sector is more affected than others; it truly varies from client to client. Personally, I've had numerous discussions and I've been encouraged by how swiftly clients are responding. They’ve learned valuable lessons from COVID and some remember the Global Financial Crisis, so they understand the need for rapid action. As I noted earlier, many are adjusting prices, negotiating arrangements, and viewing this as an opportunity. We've spoken to a few domestic manufacturers who have already experienced an uptick in orders coming from Canada and other regions. Overall, it's quite a mixed scenario, and we’re not underestimating the potential impact. Turning to Rob, I believe the real effect will be felt if there's a recession or a rise in unemployment. Our portfolio mainly consists of small businesses, and it will inevitably feel the effects of any recession. I'm sure Rob would agree with that perspective regarding Navitas.

Yes. We've been saying sort of the potential risk is in the small Commercial segment. And so Navitas plays in that segment, as does the bank. And so certainly that's true. But when I look at Navitas, and I look at this past quarter, they're right on track. And in fact, if you take out the over-the-road stuff, they came in at 95 basis points, which is down 6 basis points from the previous quarter. So, it feels like at the moment things are kind of going well, and the kind of the way we would think they would go. And even the losses in the over-the-road space, we're right on target for where we expected them. So when we look at first quarter, it's kind of what we would have expected to see and no surprises, and certainly there's uncertainty as you're talking about and in that small commercial space. So, we're watching it very closely.

Okay. Great, guys. Well, I appreciate you all taking my questions. Thank you.

Next question comes from Gary Tenner with D.A. Davidson. Please go ahead.

Hi, good morning, everybody. A couple of questions. First, I appreciate that the first quarter loan growth certainly came in as you expected, in that it was stronger than the fourth quarter. I just wonder if your comments a moment ago on your customer interactions aside, can you talk about any change in borrower behavior and pipelines over the last few weeks? Are you seeing deals pushed out, or borrowers just being a little more conservative in how they're managing their business from an investment perspective, et cetera?

Good morning, Gary. This is Rich. Yes, I'll comment on that. So, right now we're seeing Q2 kind of similar to Q1 in terms of pipeline. So to answer your question shortly, and the short answer is, we've not really seen it negatively impact the pipelines. So, that's a very positive thing. We do have some that are saying they're kind of in the wait and see mode. And as Lynn said, they're managing through it. So, right now we feel pretty good about where we're at and we feel good about the markets that we're in.

Great. Appreciate that. And then follow up question. In terms of SBA and fee income, we've heard from a couple of banks that it's become a bit more challenging of late to get sort of SBA deals approved possibly due to staffing reductions in the administration. Have you seen this at all? Is it potentially a headwind for gain on sale income near term?

So Gary, we are a preferred lender, which means we have the approval to approve loans via the SBA. So generally we're not going through them for approval. So where you would see it a little bit on the 504 program, we don't do a lot of 504. So on the 7(a) program, I feel good. And the first quarter was our largest first quarter ever in SBA, and right now premiums are holding in the secondary market as well.

Great. And if I could ask one more quick question just on expenses. Effectively, your operating expenses have flatlined over the past year. A lot of success in holding that flat. So excluding the small acquisition closing in May, where do you kind of see the trend here for the remainder of the year on expenses?

Thanks, Gary. It's Jefferson. I'll answer the question on expenses. We're keeping expenses to low single-digit, but you do have a, the merit seasonality coming in next quarter at $2.2 million. We do expect with ANB closing on May 1st, that adds about $2 million to the quarter as well. And besides that, there should be some modest growth in the second quarter. And then think about it longer term in that kind of 3% to 4% range.

Great. Thank you.

Next question comes from Stephen Scouten with Piper Sandler. Please go ahead.

Hi, good morning, everyone. Appreciate the time. I think you guys talked a little bit about the desire to be opportunistic around capital deployment. Could you give us an idea of what, you know kind of that stack rank of capital priorities looks like today? And especially with the weakness in the group in stock prices, how you think about that $100 million share repurchase authorization?

Yes, great question. So, in terms of deployment, I mean, always organic growth first. Historically, we've been more M&A focused in terms of secondary, but at this, at these prices, the earn back on repurchasing shares is roughly equivalent to an M&A deal. So, I'm highly confident in our own book. Why? So I've got, in my mind a no risk in a three-year earn back investment or an investment that's going to have some risk embedded with a three-year earn back. We'd go, we'd put the stock buyback ahead of M&A at these prices, so.

Yes. That makes a lot of sense. That's great. And then kind of thinking about the balance sheet moving forward, it sounds like, if I'm hearing things correctly, we could see maybe more of a average earning asset remix throughout the year, which helps the NIM and presumably helps earnings, but maybe not a lot of net average earning asset growth. Is that the right way to think about your expectations for kind of medium-term balance sheet trends?

Stephen, I would say, yes, with the caveat. So, I think our balance sheet is going to grow at the rate of our deposits. And then from there you're going to continue to see that remix from securities to loans. So, in combination, I would expect some balance sheet growth, but it'll be driven by the deposit growth. So, think 2% to 3%, maybe up to 4% balance sheet growth from the deposit side.

Okay. That's helpful. And I think from a securities perspective there's maybe, I think it was $265 million that ran off this quarter. What's kind of that normal cadence that you expect in terms of cash flows off the securities book?

I would expect that same pace for the rest of the year.

Okay. And then just last thing for me, I know, you guys said in the credit commentary that the loan loss reserve ticked up a little bit based on higher unemployment trends. I mean, I guess, remind me, are you guys using the Moody's scenario and have you disclosed any of the weightings? And then maybe last part of that is, I know some of the April data was a little bit worse. So, how do you think about kind of managing through those various scenarios and weightings and so forth?

Yes. So, hi, this is Rob. Just on the allowance, we do use the Moody's scenarios. I don't think we have provided weights per attribute. We run 11 different models for the various segments of the portfolio and each model has different weightings in it. In terms of how we look forward, I think the way I would say it is, certainly we, the economic forecast plays a significant role, but really just as much as what we're seeing in the portfolio. So, there's got to be a balance of validation. We've seen forecasts in the past, recent past that have sort of overstated what actually happened pretty dramatically. And so we're cautious to just blindly follow the forecast and really want to see the portfolio begin to perform in some consistent manner with the forecast before we start moving dramatically.

Yes, that's really well said. Thanks for all the color and the time. Great quarter.

I'll add in there, Stephen, that we use the baseline forecast and some banks would use a weighted S2 or something like that and we use the baseline, if that's where your question was going.

Great. Thanks, Jefferson.

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

Hi, good morning, guys. Thanks for taking my questions. Just wanted to go to the deposit slide. Was there any sort of campaign that drove the interest-bearing growth or any sort of timing around municipal deposits? Obviously, really good growth. I did see the average balance in those deposits pick up a little bit. Anything to read into that in terms of some of your smaller business customers just trying to conserve cash, just given the uncertainties? Just trying to better understand, and appreciate the growth this quarter.

Yes, thanks. I'll start maybe with the seasonality of the public funds and pass it to Rich. We didn't have any special campaigns that I can think of. Maybe Rich has something. But we did have that shrinkage of public funds in the first quarter. I would expect probably $150 million or so, maybe up to $200 million in shrinkage. And the second, if the typical seasonality plays out, but I think it was across the board just strong deposit growth, but I'll pass to Rich to see, if he has.

I would agree with you on that. And I would say, the one thing, when we had started to see some of the CDs maturing, so we did put a little more emphasis on the money markets and we saw some growth there and that would be the only thing I'd really add.

All right. Great. As a follow up, I noticed that loans in Tennessee kind of reversed a multi-quarter trend of declining balances. Anything there of note and any of the special businesses there?

Michael, thank you for asking that question. So, I'll just say in the last three quarters our new markets have led the production throughout the company. So Tennessee led in the third quarter, Florida led in the fourth quarter, and Tennessee led again in the first quarter, followed by Florida. So, we feel very good about that. And that's a lot of the new team coming in, the leadership through Kelley Kee and Sharon Thompson, a lot of new hiring, a lot of focus on C&I, and a lot of hard work.

All right. Great. Maybe final one for me. And this kind of relays into Stephen's question, but obviously you get the ANB deal closing. Lynn, you mentioned that the earn back on the buyback is about equivalent to an M&A deal. I'd argue it's actually more attractive just given it's somewhat risk-free. But what does the M&A environment look like at this point? It does seem like a lot of people are on pause, but some of the secular trends around M&A and some of the challenges that banks face are still in place. So, I always think of you guys as kind of unique in that you're willing to do some smaller acquisitions relative to your size. But we just love, just some commentary on how you see M&A playing out over the next couple of years. Thanks.

Yes, sure. Thanks, Michael. So, I would say there continues to be a lot of conversations going on. I'm meeting with a lot of great bankers that are interested in selling at some point. Frankly, until the market turns around in terms of prices, I don't see much happening for some of the reasons you mentioned: a) buybacks are more attractive; b) a lot of the banks that we would talk to the smaller banks, they tend to focus on a certain number versus an exchange ratio and the numbers today that just don't work. So, and you've got the added piece of a little bit, or some maybe more than a little bit of economic uncertainty out there. And so really, how much do you want to, you certainly, it's not an environment where you want to extend yourself on the M&A side. So personally, I think we're continuing the conversations. We feel great about it longer term, but I wouldn't see much happening in the next 12 months, 18 months.

Perfect. Thanks for taking my questions.

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

Thanks. Good morning. I just have a follow-up question on the margin. Heard you on the second quarter guide, Jefferson, just kind of seeing some nice expansion again just from what you can do on the deposit side. Can you just remind us bigger picture, if we start to see Fed cuts in June, how you think your position? I know you've moved a lot more of your deposits to be directly indexed, so that should continue to come down. But just kind of curious to update us on how we should think about the trajectory of your margin once the Fed starts to cut. Thanks.

Thanks. Great question. I think that any quarter you get a cut, we're going to get an initial decline in margin. And once we get the opportunity with the passage of a quarter or two, we should be able to get most all of it back. I do think that we are slightly asset sensitive and so a rate cut does hurt us a little bit. But I think the bigger picture is any quarter that we don't get a cut, we have a decent chance at margin expansion, because of the repricing on the asset side of the balance sheet, but we are asset sensitive. And if the forward curve is saying three cuts and we get those three cuts that will hurt our margin a little bit, especially in the initial quarter of the cut.

Okay. That's great. That makes sense. And then just on fees, any update to your outlook on fees and maybe what we'll see on SBA and Navitas over the course of the year?

I'll start that maybe with Navitas, and maybe I'll pass it to Rich on SBA, which he, I think he answered some of that. But on Navitas, we elected not to sell loans this quarter and so we had an absence there in our gains on loans sold. And I think it's most likely that we would not sell Navitas loans in the second quarter, although we have not made that decision fully yet. But I think as a, for modeling, maybe assume that we won't sell Navitas loans possibly, because I think that's our most likely second quarter take, because we go into the year and as the Navitas loans approach closer to 10%, you may see us start selling maybe in the second half of the year, but we'll see what the prices are and what we think the relative economics are. With that I'll pass to Rich on SBA.

Sure. And as I said on SBA, prices in the secondary market are holding. First quarter was said was our best first quarter ever and that's usually seasonally low. So, we're feeling good about the year and feeling good about, I would expect that our fee income for the year would exceed that in 2024.

Okay. Great. And Jefferson, on your, is your belief that you won't sell Navitas in the second quarter. Is that more a pricing decision, or is that more because if the core bank kind of slows down on growth, that's a good way to still kind of be able to deliver kind of that low-to-mid single-digit loan growth target?

Just think it's better economics for the company to, I think it's high quality credit. I think it's a 9.5% of loan and having it on the balance sheet for the full year is more accretive than selling it. So, it's more of a relative economics call.

Great. And then maybe one more on fees. The service charges fell down a little bit this quarter, which I know we always see seasonally. But should we expect that to kind of come back up to the level that we saw in the back half of the year, or is there anything just to be aware of that we shouldn't be modeling there?

Nothing to be aware of. I think it's not really a growth business for us, but I would expect that to return towards previous levels.

Okay. They're like 10.5% per quarter range?

Sounds reasonable.

Next question comes from David Bishop with Hovde Group. Please go ahead.

Yes. Good morning. Hi, Jefferson. Just curious, I may have missed this in the preamble, but any color you can give, I know the presentation has nice color in terms of the roll-off rates, maturing CDs, what you're expecting to sort of reprice those into? And maybe where you're seeing the average durations trending too? Thanks.

Yes, thank you. Last quarter, we adjusted the rates on our CDs to around 3.50% or a bit lower. We expect the repricing of the CD portfolio to be at that level or slightly better. We shortened our CD durations to about four months, which has led to a more normalized spread compared to the past. We've modified our pricing to encourage somewhat longer-term CDs, so you'll notice a slight lengthening of the CD portfolio. We've had positive results with repricing our CDs, managing to maintain competitive rates while reducing them. We're pleased to report growth in CDs this quarter even with lower rates, and we hope to achieve similar results moving forward.

Got it. And one final question as to housekeeping. Good effective tax rate to use moving forward? Thanks.

22%.

This concludes our question-and-answer session. I would like to turn the conference back over to Lynn Harton for any closing remarks.

Well, great. And thank you, everyone for joining our call and to the United team that's listening in. Congratulations again on a great quarter, and for the investors and support out there. If you have any additional questions, feel free to reach out to myself or Jefferson, and we look forward to talking to you soon. Thank you.

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