United Community Banks - Earnings Call - Q1 2025

Transcript

Operator (participant)

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 Harrelson, 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 five and six 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.

Lynn Harton (Chairman and CEO)

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 costs. 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 balance 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've 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?

Jefferson Harralson (CFO)

Thank you, Lynn, and good morning. On page five, 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 six, we show that we have additional opportunity in repricing CDs, with $1.3 billion maturing at 3.78%. We should be able to save 25-30 basis points on these maturities. On page seven, we turned to the loan portfolio, where growth continued specifically in areas that we are targeting. We had 7% annualized growth in C&I, which includes owner-occupied CRE. 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 eight, where we highlight some of the strengths of our balance sheet, we believe that our balance sheet is in 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% and remains a source of strength for the bank. Moving to page nine, 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 cost. Excluding two 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.

Lynn Harton (Chairman and CEO)

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. With that, 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 telephone keypad. If you are using a speakerphone, please pick up your handset before pressing the keys. If at any time your question has been addressed and you would like to withdraw your question, please press star, then two. At this time, we'll pause momentarily to assemble our roster. First question comes from Russell Gunther with Stephens. Please go ahead.

Russell Gunther (Managing Director and Equity Research Analyst)

Hey, good morning, guys.

Lynn Harton (Chairman and CEO)

Morning. Morning, Russell.

Russell Gunther (Managing Director and Equity Research Analyst)

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 March and then any willingness to maybe flex the loan-to-deposit ratio here.

Lynn Harton (Chairman and CEO)

Yeah, thanks, Russell. Great question. Spot rates on cost of deposits were right around 2%. We think we can lower that through the quarter, and that will be the key part to our expectation for our margin to be up 5-10 basis points next quarter. A big piece of that is also the improvement in that mix between loans and securities. I would expect our securities book to shrink a little bit and our loan book to grow. The combination of those things should push our margin up 5-10 basis points.

Russell Gunther (Managing Director and Equity Research Analyst)

Okay. Super helpful. Then just switching gears, you guys mentioned no cause 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 it 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. If you could touch on expectations within Navitas, both from an asset quality and growth perspective, that would be helpful as well.

Lynn Harton (Chairman and CEO)

Sure. This is Lynn Harton. I'll start, and I'll let Rob jump in. It's really just too hard to tell. Everybody is looking—so we're talking to a lot of clients, as I mentioned—and everybody is looking at where their tariff impacts are and what point in the supply chain. It's rare that you see somebody who's directly impacted. We've got one, for example, client of a client, not a client of ours, but one of our client suppliers who's 100% tied to China, and they're really concerned about what's going on. Our client is more, "How can I replace that supplier with somebody else?" It's just a very—I don't think you could say this particular sector is more impacted necessarily than another. It just really is almost a client-by-client basis is the way we're taking it. I would say I've been very pleased.

I've had a lot of these conversations myself, and they're reacting very quickly. They learned during COVID—some of them have memories back to the GFC—that you've got to take actions quickly. As I mentioned in the preamble, whether it's going ahead and adjusting prices, going ahead and negotiating splits, and a fair number of them are looking at this as an opportunity. We've talked to a couple of domestic manufacturers who've already seen increases in orders moving from Canada, moving from other areas. It's a real mixed bag, and we're not at all downplaying that it could have an impact. In fact, as I turn to Rob, I mean, I think the real impact's going to be if you have a recession, if you have an increase in unemployment. I mean, our portfolio in total is small business dominated. It's going to be impacted by any recession.

I would assume, Rob, that's what you would think with Navitas.

Robert Edwards (Chief Risk Officer)

Yeah. We've been saying sort of the potential risk is in the small commercial segment. Navitas is a place in that segment, as does the bank. Certainly that's true. When I look at Navitas and I look at this past quarter, they're right on track. 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. It feels like at the moment, things are kind of going well in kind of the way we would think they would go. Even the losses in the over-the-road space were right on target for where we expected them. When we look at first quarter, it's kind of what we would have expected to see, and no surprises.

There is uncertainty, as you're talking about, in that small commercial space. We are watching it very closely.

Russell Gunther (Managing Director and Equity Research Analyst)

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

Operator (participant)

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

Gary Tenner (Managing Director and Senior Research Analyst)

Hey, 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, etc.?

Richard Bradshaw (President and Chief Banking Officer)

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

Gary Tenner (Managing Director and Senior Research Analyst)

Great. Appreciate that. 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?

Richard Bradshaw (President and Chief Banking Officer)

Gary, we are a preferred lender, which means we have the approval to approve loans via the SBA. Generally, we're not going through them for approval. Where you would see it a little bit is on the 504 program. We do not do a lot of 504. On the 7(a) program, I feel good. The first quarter was our largest first quarter ever in SBA. Right now, premiums are holding in the secondary market as well.

Gary Tenner (Managing Director and Senior Research Analyst)

Great. 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. Excluding the small acquisition closing in May, where do you kind of see the trend here for the remainder of the year on expenses?

Jefferson Harralson (CFO)

Thanks, Gary. Jefferson, I'll answer the question on expenses. We're keeping expenses to low single digit, but you do have a merit seasonality coming in next quarter at $2.2 million. We do expect with ANB closing on May 1st, 2025 to add about $2 million to the quarter as well. Besides that, there should be some modest growth in the second quarter. Think about it longer term in that kind of 3%-4% range.

Gary Tenner (Managing Director and Senior Research Analyst)

Great. Thank you.

Operator (participant)

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

Stephen Scouten (Managing Director and Senior Research Analyst)

Hey, 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 kind of that stack rank of capital priorities looks like today, and especially with the weakness in the group stock prices, how you think about that $100 million share purchase authorization?

Lynn Harton (Chairman and CEO)

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

Stephen Scouten (Managing Director and Senior Research Analyst)

Yeah. That makes a lot of sense. That's great. Kind of thinking about the balance sheet moving forward, it sounds like, if I'm hearing things correctly, we could see maybe more of an 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?

Jefferson Harralson (CFO)

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

Stephen Scouten (Managing Director and Senior Research Analyst)

Okay. That's helpful. 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?

Jefferson Harralson (CFO)

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

Stephen Scouten (Managing Director and Senior Research Analyst)

Okay. 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? Have you disclosed any of the weightings? Maybe the last part of that is I know some of the April data was a little bit worse. How do you think about kind of managing through those various scenarios and weightings and so forth?

Robert Edwards (Chief Risk Officer)

Yeah. Hey, this is Rob. Just on the allowance, we do use the Moody's scenarios. I do not 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 the economic forecast plays a significant role, but really just as much as what we are seeing in the portfolio. There has got to be a balance of validation. We have seen forecasts in the past, recent past, that have sort of overstated what actually happened pretty dramatically. We are 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.

Stephen Scouten (Managing Director and Senior Research Analyst)

Yeah. That's really well said. Thanks for all the color and the time. Great quarter.

Jefferson Harralson (CFO)

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

Stephen Scouten (Managing Director and Senior Research Analyst)

Great. Thanks, Jefferson.

Operator (participant)

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

Michael Rose (Managing Director of Equity Research)

Hey, good morning, guys. Thanks for taking my questions. Just wanted to go to the deposit side. 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 business 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 give me a certain need. Just trying to better understand and appreciate the growth this quarter. Thanks.

Lynn Harton (Chairman and CEO)

Yeah. Thanks. I'll start maybe with the seasonality of public funds and pass it to Rich. We didn't have any special campaigns that I can think of. Maybe Rich has something. 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 in the second if the typical seasonality plays out. I think it was across the board just strong deposit growth, but I'll pass to Rich to see if he has.

Richard Bradshaw (President and Chief Banking Officer)

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

Michael Rose (Managing Director of Equity Research)

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?

Richard Bradshaw (President and Chief Banking Officer)

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

Michael Rose (Managing Director of Equity Research)

All right. Great. Maybe final one for me, and this kind of relates into Steven's question. Obviously, you get the ANB deal closing. Lynn, you mentioned that the earnback 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. 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. I always think of you guys as kind of unique in that you're willing to do some smaller acquisitions relative to your size. We just love just some commentary on how you see M&A playing out over the next couple of years. Thanks.

Jefferson Harralson (CFO)

Yeah. Sure. Thanks, Michael. 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. The numbers today just don't work. You've got the added piece of a little bit or maybe more than a little bit of economic uncertainty out there. Really, how much do you want to certainly, it's not an environment where you want to extend yourself on the M&A side. Personally, I think we're continuing the conversations.

I feel great about it longer term, but I wouldn't see much happening in the next 12-18 months.

Michael Rose (Managing Director of Equity Research)

Perfect. Thanks for taking my questions.

Operator (participant)

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

Catherine Mealor (Managing Director of Equity Research)

Thanks. Good morning. I just have a follow-up question on the margin. Per view 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. That should continue to come down. 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.

Lynn Harton (Chairman and CEO)

Thanks. Great question. I think that any quarter you get a cut, we're going to get an initial decline in the margin. 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. I think the bigger picture is any quarter that we do not get a cut, we have a decent chance at margin expansion because of the repricing on the asset side of the balance sheet. We are asset-sensitive. 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.

Catherine Mealor (Managing Director of Equity Research)

Okay. Great. That makes sense. Any update to your outlook on fees and maybe what we'll see on SBA and Navitas over the course of the year?

Jefferson Harralson (CFO)

I'll start that maybe with Navitas, and maybe I'll pass to Rich on SBA, which I think he answered some of that. On Navitas, we elected not to sell loans this quarter. We had an absence there in our gains on loans sold. 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. For modeling, maybe assume that we won't sell Navitas loans possibly because I think that's our most likely second quarter take. As we go into the year and as the Navitas loan approach closer to 10%, you may see us start selling maybe in the second half of the year. We'll see what the prices are and what we think the relative economics are. With that, I'll pass to Rich on SBA.

Richard Bradshaw (President and Chief Banking Officer)

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

Catherine Mealor (Managing Director of Equity Research)

Great. Jefferson, 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?

Jefferson Harralson (CFO)

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

Catherine Mealor (Managing Director of Equity Research)

Great. Maybe one more on fees. The service charges fell down a little bit this quarter, which I know we always see seasonally. 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?

Jefferson Harralson (CFO)

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.

Catherine Mealor (Managing Director of Equity Research)

Okay. I know like $10.5 million per quarter range.

Jefferson Harralson (CFO)

Sounds reasonable.

Catherine Mealor (Managing Director of Equity Research)

Maybe. Okay. Great. Thank you. Great quarter.

Operator (participant)

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

David Bishop (Director and Senior Equity Research Analyst)

Yeah. Good morning. Hey, 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 to. Thanks.

Jefferson Harralson (CFO)

Yeah. Thanks. Last quarter, we repriced the CDs in the $3.50 range or just a smidge under. We think the repricing of the CD book would be either at that level or slightly better. We had moved our CD durations to be very short in that four-month range, and you're seeing a more normalized spread than in the past. We've changed our pricing around to encourage a little bit longer-term CDs. You will see the CD portfolio lengthen just slightly. We have had very good experience with our CDs repricing our keep rates there and being able to reprice those at a lower rate. We were very pleased this quarter to grow CDs even as we were shrinking the rates, and we're hopeful to be able to do that again.

David Bishop (Director and Senior Equity Research Analyst)

Got it. One final question just to housekeeping. Good effect of tax rates to use moving forward? Thanks.

Richard Bradshaw (President and Chief Banking Officer)

22.

David Bishop (Director and Senior Equity Research Analyst)

Perfect. Thanks.

Operator (participant)

We'll close our question and answer session. I would like to turn the conference back over to Lynn Harton for any closing remarks.

Lynn Harton (Chairman and CEO)

Great. Thank you, everyone, for joining our call and to the United Team that is listening in. Congratulations again on a great quarter. 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.

Operator (participant)

Conference has now concluded. Thank you for attending today's presentation. You may now.