United Community Banks Inc Q2 FY2025 Earnings Call

Good morning and welcome to United Community Bank's Second 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, 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 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 all for joining our call today. We continue to enjoy solid growth in earnings. Operating earnings per share for the quarter was $0.66, an increase of 14% year-over-year. One cause of that growth was an expansion of our net interest margin to 350 basis points, an improvement of 14 basis points over last quarter. Jefferson will give more details, but the quarter saw continued stabilization of our noninterest-bearing balances as well as success in lowering interest-bearing deposit rates. Seasonal outflows of public funds were within our expected ranges, and our customer deposits, excluding merger activity, grew 1.3% annualized. Loan growth was 4.2% annualized, and pipelines remain strong as we head into the third quarter. Credit continues to perform well. Net charge-offs were 18 basis points for the quarter, including Navitas. Ex Navitas, net charge-offs were 8 basis points annualized. Both nonaccruals and past dues already at low levels improved during the quarter. Expense growth was well controlled and helped us reach an efficiency ratio of 54.8%, an improvement of 222 basis points compared to last year. I'd like to congratulate and thank our teams throughout the bank for these great results. I'm also grateful for all the work that our existing teams and our new teammates from American National Bank did this quarter to close the acquisition and convert systems and branding. American National is a 40-year-old institution in Fort Lauderdale that fits perfectly with our South Florida footprint. I'm very excited to welcome their talented and passionate team to United. Jefferson, why don't you cover the quarter in more detail now?

Thank you, Lynn, and good morning to everyone. I'll start on Page 5. We were very pleased with our deposit performance this quarter. Our $205 million increase in deposits had the benefit of the American National deal that closed on May 1. In the second quarter, we also saw our usual public funds deposits outflows of $233 million. Excluding the deal and the public fund seasonality, our deposits grew by $64 million or 1.2% annualized. We were also able to push down the cost of our deposits in the quarter to 2.01% to achieve a 34% total deposit beta so far. We continue to believe that we are on pace for a high 30% deposit beta range through the cycle. We also continue to have some opportunity to reprice our CD book lower. In the third quarter, we have about $1.4 billion of CDs or 38% of our CD book maturing at 3.72% that should be able to move down by 10 to 20 basis points. On Page 6, we turn to the loan portfolio, where our growth continued at a 4.2% annualized pace, excluding American National. Turning to Page 7, where we highlight some of the strengths of our balance sheet. We have no wholesale borrowings and very limited brokered deposits. Using some of our balance sheet flexibility, we redeemed $100 million in senior notes in June, where the cost was about to adjust to the 9% range from its existing 5% rate. Our loan-to-deposit ratio remained low but increased slightly to 79% with the acquisition and solid loan growth. In addition, our CET1 ratio remained at 13.3% and remains a source of strength for the bank. On Page 8, we look at capital in more detail. Our TCE ratio was up 27 basis points and our regulatory capital ratios were stable at high levels. Our TCE and all of our capital ratios remain above peers, which we believe will allow us to continue to be opportunistic. We were able to be opportunistic this quarter and repurchased 507,000 shares or about $14 million of UCB stock. We have been fairly active in managing our capital. Since the beginning of 2024, we have now paid down $100 million in senior debt, $68 million in Tier 2 capital and now have repurchased $14 million of common shares. Moving on to spread income on Page 9. We grew spread income at a 21% annualized pace excluding American National compared to last quarter. Our net interest margin increased 14 basis points to 3.50%, mainly driven by lower cost of funds and a mix change towards loans. Moving to Page 10. On an operating basis, noninterest income was down $1 million from last quarter. This was mostly driven by a negative swing in the MSR mark which was at a $300,000 gain in Q1 and a $400,000 loss in Q2. In addition, we had $700,000 in negative fees due to a write-down of our remaining deferred costs that came when we redeemed the senior debt I mentioned earlier. Excluding the MSR swing and the cost to extinguish the senior debt, fee income was slightly higher than Q1. We resumed selling Navitas loans in the quarter, which drove the increase in loan sale gains as compared to last quarter. Operating expenses on Page 11 were only up $2.1 million in the quarter, excluding American National. This $2.1 million increase was primarily driven by $1.8 million in merit increases. The expense base was relatively flat, excluding American National and the merit increase. Moving to credit quality on Page 12. Net charge-offs were 18 basis points in the quarter, improved compared to last quarter and last year. We also saw nice improvements in NPAs and past dues as credit quality remained strong. I will finish on Page 14 with the allowance for credit losses. Our loan loss provision was $11.8 million in the quarter and more than covered our $8.2 million in net charge-offs. The $11.8 million provision also included a $2.5 million provision or double dip to set aside a reserve for the American National non-PCD book. This double dip was more than offset by a $2.8 million release of our hurricane-related special reserve. Specifically, we reduced our hurricane Helene reserve by $2.8 million, and it now stands at $4.4 million as we are feeling more comfortable with the potential loss content. Net-net, our allowance coverage remained flat in the quarter at 1.21%. With that, I'll pass it back to Lynn.

Thank you, Jefferson. While we acknowledge that there are uncertainties in the environment, particularly relative to the tariff effects and the direction of the yield curve, we feel very optimistic about our outlook for the rest of the year. With that, I'd like to open the floor for questions.

And today's first question comes from Michael Rose with Raymond James.

Just wanted to delve into the loan growth, 4.2% annualized this quarter. Was there any sort of pay downs? And then just more broadly, can you talk about some of your hiring initiatives? I know M&A is kind of off the table right now would love some updates there just given the resurgence we've seen in some activity here recently. But I know you previously talked about not a ton of acquisition candidates at this point that would fit your thresholds and what you're looking for. But just on the loan growth front, just some of the hiring efforts and then if there were any impact of paydowns ex the A&B deal this quarter.

Michael, this is Rich. Yes, there were some pay downs. So we feel good about the growth in Q2. We expect Q3 to be more similar to Q1, which is around the 6% mark. Q2 did have some slippage in closing. So that's helping the pipeline going into Q3. So we feel really good about the activity. In terms of recruiting, we continue to focus on top talent and have conversations going on throughout the footprint. So we expect that we will be adding additional lenders during the year. I do want to announce that David Nast, our Alabama, Florida, State President has announced his retirement. We thank him for all his leadership pre and post-acquisition on Progress Bank, which was about 2.5 years ago. We have hired Jason Phillippe. Jason joins us from 25 years of C&I experience, both as a lender and a leader in the Huntsville and Alabama market. So we're very excited about that. And since we have hired him, we have brought on 2 additional CRMs in the Northern Alabama market. So we feel good about the trajectory there and feel really good about the second half of the year.

Michael, on the M&A side, our strategy remains the same. We continue to look for small, high-performing institutions that would be additive to our footprint and continue to have conversations. Certainly, I think the outlook is better now. If you look 3, 4 months ago where prices were in the industry, it just wasn't attractive for those banks to have conversations with anyone is still, frankly, kind of difficult to make the numbers work, but I'm optimistic that as the rest of the industry and particularly us continue to perform well, getting the stock prices where they ought to be and then there will be some more opportunities for us.

Perfect. I appreciate the color. And maybe one for Jefferson. It looks like the core margin was up about 12 basis points Q-on-Q. I think it was a little bit better than the 5 to 10 basis points you talked about last quarter. Just heard Rich talk about a little bit better loan growth in the third quarter. I think you mentioned beta is kind of in the high 30% range. If I caught that, I think that's a little bit higher than what you'd expected previously. So as we put all that together, it seems like there should be continued core margin expansion as we think about the next quarter or 2. Can you just walk us through some of the puts and takes, Jefferson?

Yes. Thanks for the question, Michael. So we do think there is an opportunity for some more margin expansion for us. In the third quarter, specifically, targeting about 5 basis points of margin expansion. A big piece of it, and the most important piece of it for us to execute on, would be the cost of deposits. We were just under 2% for an average in the month of June. That high 30% range, deposit beta, would take us relatively close to 1.95%. We think we can make some progress towards that in the third quarter. You're also going to see a continuation of one of the drivers of this quarter, which would be a mix change towards loans. We're not buying a lot of securities right now. You're going to see this loan-to-deposit ratio and this kind of loan to average earning asset ratio move higher. And so that should help as well in addition to the strong loan growth that we're expecting that Rich talked about. So even if we get a rate cut in September, we're a little bit asset-sensitive. I do think we'll have about 5 basis points of margin expansion.

All right. And just remind us, Jefferson, is there any other debt maturities we should be considering in coming quarters?

No significant ones that I'm thinking about.

Our next question comes from Catherine Mealor with KBW.

We're active in the buyback this quarter. Just curious, your openness to continue even though the stock has improved from levels where you were buying back.

Yes, that's a great question. At this price range, the time it takes to earn back is longer than our target of 7 to 8 years. Therefore, we are not currently buying back shares, though we still have the authorization. We have $86 million remaining for this purpose. If the prices were lower, we would consider taking action, but right now, we are not actively engaged in the buyback.

And then I look on to Navitas growth and how you were kind of keeping that on balance sheet versus selling in the secondary market?

I'll discuss the growth aspect, and then you can address the balance sheet, Jefferson. They had an excellent quarter, and we anticipate a similar performance in Q3 from Navitas.

Yes, so we're seeing some really strong activity out of Navitas. We did start selling loans again this quarter, $14 million. We're right at 9.4% of Navitas loans to total loans. We had talked about a limit of 10%. So we're getting relatively close to this 10% limit. We like the asset class, but we also like diversification. So I think you should expect us to keep the sales at this level or higher for the rest of the year.

And the next question comes from Russell Gunther with Stephens.

Lynn and Jefferson, I wanted to follow up on the loan growth conversation quickly. Just if we could put a finer point on sort of where commercial pipeline stand today versus linked quarter and bigger picture, any sentiment shift you're getting from your commercial borrowing?

Russell, this is Rich. I'd say, as I mentioned earlier that the pipeline is bigger than last quarter. It's similar to Q1, maybe even perhaps a little bit better. So I'd say our customers feel optimistic, and we feel optimistic with them. And again, we'll continue those hiring discussions throughout the footprint, and we feel good about those as well. So when you put all that together, we're pretty optimistic.

Yes. I would agree they had several meetings with clients over the last weeks and months. And while they were originally worried about tariffs, everybody has gotten more comfortable with that and comfortable with the negotiating strategy that appears to be developing. So that has fallen off. And frankly, they're all very excited about things like bonus depreciation, extension of current tax rates, et cetera, in the bill that was just passed. So I would say the mood is pretty positive with all the clients I'm talking to.

Great. Can you provide an update on the status of the recruitment pipeline? Also, are there specific markets within your footprint where you would like to increase your presence?

The hiring pipeline, I would say, looks good. It differs a little bit by markets and states and what our needs are. And we're continually analyzing where our next needs are and where the talent is. So it's kind of those 2 things got to come together for it to work, and we're continually doing that and putting through continued analysis of that. So again, we feel good about where we're at. The staying within the footprint is a priority for us.

Very helpful. And then just switching gears for me on the capital discussion. Obviously, well above peers. We touched on buyback appetite, M&A appetite. But where does your appetite stand for securities restructurings? In particular, we saw an HTM trade this week. Is that kind of on your guys' radar in terms of use of excess capital?

We have significant excess capital, and while we have an HTM book that is currently under earning, it is expected to improve over time. This situation provides us with a slight margin tailwind, though it also results in a current return on assets that is not as high as it could be. We monitor this closely. We have seen the recent transaction, but we prefer to maintain our high capital ratios. Although we haven't made any decisions yet, it's something we periodically evaluate.

Yes. I would just say our priorities continue to be organic growth, M&A, dividends, and buybacks. But we do look at all options, and we are aware that, particularly with the environment, I think, getting more stable, we've got more capital than we need to have. And so we're evaluating all those options.

Next question comes from Christopher Marinac with Janney Montgomery Scott.

Jefferson, I just wanted to circle back on Navitas from the standpoint of kind of the gain on sale there. Is there a scenario that margin would get better or worse as interest rates play out?

Yes, great question, Chris. Thank you. The margin primarily depends on the treasury yield in the 3- to 4-year range. Generally, if rates increase, the margin tends to tighten slightly. Conversely, if rates decrease, the margin widens. We have had some time since rates have risen to adjust rates at Navitas, which is resulting in higher gain on sale margins. Moving forward, this trend will continue. If rates rise, it largely hinges on the treasury yield, but lower treasury yields will likely lead to higher gain on sale for Navitas loans.

Got it. Great. And a follow-up question just for Rob. Just curious on how you look at the CECL modeling and how things may shape up in the future. Is there any possibility for the model to give you some relief incrementally?

So a lot of things go into that, but it is possible that the model gives relief and that the required allowance comes down. That is certainly a possibility. But loan growth plays a role in that, obviously, as well as economic predictions and forecasts and some of the indexes that are part of that modeling also play a role.

Got it. And Rob, just a quick one on just sort of the puts and takes on the criticized moves this quarter. I know either were substantial. Just curious kind of what you're seeing in the pipeline there?

The pipeline for you're saying special mention and classified assets. Is that the question?

Correct. Yes, correct.

Things feel stable. We continue to run stress test exercises around changing interest rates. And certainly, as it relates to the CRE book, we continue to run stress tests and get results from that and close to our customers. But I don't see anything on the horizon that would be different than where we've been recently.

And the next question is from Stephen Scouten with Piper Sandler.

I wanted to revisit the discussion about hiring. You presented a slide showing your deposit market share and some of the fastest-growing metropolitan statistical areas in the Southeast. Should we consider those cities that rank higher on that list, where your current deposit share is lower, as areas of greater focus for you? Or is the priority more about increasing your presence in areas where you already have a footprint to maximize the strength of your franchise?

I would say yes, we see opportunities for growth in markets where we currently have fewer commercial lenders. We're also focusing on major metropolitan areas where we are not yet present and that offer significant potential for growth. However, it's important to have the right talent in place, so our priority is to hire top talent.

That's helpful. I appreciate that, Rich. And then maybe just kind of a follow-up to that would be, there's a lot more M&A chatter in and around the market. And to the degree dislocation provides maybe a greater opportunity set than perceived? How aggressive would you guys think about being in terms of the balance of near-term expense build and recruiting that high-end talent?

Yes, I believe we have the ability to be very proactive. Disruptions can always occur, and as Rich mentioned, we want to leverage the market dynamics and our relationships with lenders. We don’t focus on any specific bank; instead, we engage with our bankers and their connections. If any of those institutions become dissatisfied for any reason, that presents us with an opportunity to attract them. We are continuously analyzing options, and Rich is encouraged to invest as needed to bring in the right talent.

And this concludes today's question-and-answer session. At this time, I would like to turn the conference back over to Lynn Harton for any closing remarks.

Well, great. Once again, thank you all for joining. It's great speaking with you once again. Look forward to seeing you soon, hopefully, at a conference. In the meantime, if you have any follow-up questions, don't hesitate to reach out. And I hope you have a great day. Thank you.

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