United Community Banks, Inc. (UCB) Earnings Call Transcript & Summary

Good morning, and welcome to United Community Bank's Second Quarter 2026 Earnings Call. Hosting the call today are Chairman and Chief Executive Officer, Lynn Harton; Chief Financial Officer, Jefferson Harralson; Chief Banking Officer, Rich Bradshaw; and Chief Risk Officer, Rob Edwards. United's presentation today includes references to operating earnings, pretax, free 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 second 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 Page 5 and 6 of the company's 2025 Form 10-K as well as other information provided by the company in its filings with the SEC and included on its website. At this time, I will turn the call over to Lynn Harton.

Good morning, and thank you for joining our call today. This was a great quarter with solid results and progress on our strategic goals. We had a large nonoperating item from the Navitas reserve release this quarter, which Jefferson will cover in more detail later. For now, leaving that aside, I will focus on our operating results. On that basis, EPS of $0.71 per share was up 8% over last year. Total revenue was up 7% over last year. Our net interest margin reached 3.68%, up 18 basis points over last year and up 3 basis points from last quarter. Credit results were solid with bank-only net charge-offs of 9 basis points and total net charge-offs of only 16 basis points. Past dues were very low at only 11 basis points and special mention and substandard accruing loans were at the lowest level in several quarters at only 2.5%. Loan growth reached 6.8% annualized for the quarter, -- more importantly, organic loan growth, excluding Navitas, was the strongest it has been in some time, reaching 6.4% annualized for the quarter. For comparison, it was 4.3% for the year of 2025 and 3.9% annualized for the first quarter of this year. This is due to our investment in hiring new producers. When we decided early last year, there was time to sell Navitas and refocus on our core franchise, we spent time developing a playbook and strategy -- to put the same effort and attention we have paid to integrate merged teammates into hiring new revenue producers. We began executing that plan in the third quarter of last year. and have seen net expansion of 17% in producers since that time. We're pleased with this execution and look forward to continuing strong growth as a result. Our operating return on assets was 122 basis points and our operating return on tangible common equity was 13%, both essentially equal to last quarter, even with elevated hiring cost and a notable onetime expense item. We continue to be excited about bringing Peach State into the United family. When we put the 2 teams together, we will have the best bankers in the top deposit market share in 1 of the fastest-growing counties in the Southeast. Everything is on track for a close early in the third quarter as planned. Capital levels remain high. And even though we had extended blackout periods resulting from the Navitas and Peach State announcements, we continue to have repurchase authorization remaining that is sufficient to retire the shares to be issued for the acquisition of Peach State, which is our intention. I'll now turn it to Jefferson to cover our second quarter performance in more detail.

Thank you, Lynn, and good morning to everyone. I will start on Page 4 and talk about some of the details of the quarter. We recorded GAAP results of $0.95 per share that benefited from a large nonoperating item. Specifically, we released our Navitas loan loss reserve as we reclassified those loans to held for sale. This added $0.25 to our GAAP earnings in the quarter. On Page 4, we also highlight a $4.5 million notable operating expense that we do not expect to recur. In the second quarter, we settled with the state of California to obtain a lender's license for Navitas. Navitas had previously held a California license but let it expire after we bought them in 2018 because we believe it was no longer required to have 1 under United ownership as a bank subsidiary. That said, we settled with the California Department of Financial Protection and Innovation, the DFPI and the $4.5 million represents our cost. About 75% of the $4.5 million notable item was not tax deductible. Including the associated legal fees and adjusting for the tax impact, we estimate that notable items negatively impacted Q2 by $0.035. I will move on to Page 6 to talk about the deposit results. On an end-of-period basis, our customer deposits declined by $295 million, with 2/3 of the decline coming from expected seasonal public fund outflows. On an average basis, excluding public funds, our customer deposits grew $169 million or 3.3% annualized. We were also very pleased that our cost of deposits remained relatively flat improving by 1 basis point in the second quarter. On Page 7, we turn to the loan portfolio, where our loan growth accelerated to a 6.8% annualized pace. Excluding Navitas, we grew at a 6.4% annualized pace. Similar to past quarters, we saw strong growth in the Heloc and C&I categories, which continue to be our focus for growth. We have included a new section at the bottom of the page, showing what our new loan mix is ex-Navitas, which is still diversified and C&I heavy. Turning to Page 8, 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 show that our loan-to-deposit ratio, excluding Navitas came in at 76%, up from 74%. Our CET1 ratio was relatively flat at 13.5% and remains a source of strength for the bank. On Page 9, when we look at capital in more detail. As I mentioned, our CET1 ratio was 13.5% and our TCE was also flat at just under 10%. Moving on to spread income on Page 10. Spread income grew 14% annualized due to the combination of 6.8% loan growth, 6% average earning asset growth and the benefit of the extra day. Spread income grew 7% on a year-over-year basis. Our net interest margin increased 3 basis points to 3.68% compared to last quarter and was up 18 basis points compared to last year. And the second quarter is the sixth quarter in a row of margin expansion. Moving to Page 11. Noninterest income was $38.4 million in the quarter, which was relatively flat as compared to last quarter when Q1 is adjusted for the $5.2 million gain on an interest rate cap that we sold last quarter. Our operating expenses were $159.9 million in the second quarter. Excluding the California lender license issue that I described earlier, noninterest expenses grew by $2.9 million as compared to the first quarter, of which our annual merit increase contributed $1.8 million. The cost of new revenue producer hiring comprised the remaining $1 million of expense growth. Excluding the license issue, our efficiency ratio improved slightly to around 55%. We added a new page on Page 13, where we talk about our significant hiring since September 30, 2025. Since then, we have added 37 net new producers of which about half are commercial lenders. This increases our overall sales force by about 17%. We are encouraged that we are starting to see the balance sheet growth from this initiative and this was a factor in our increased loan growth this quarter. Moving to credit quality on Page 14. Net charge-offs were only 16 basis points in the quarter and only 9 basis points on a bank-only basis. Credit was stable with essentially flat NPAs and nice improvements in past dues, special mention and substandard accruing loans. On Page 15, we show the allowance for credit losses our $29.8 million net reserve release included a $38.5 million Navitas reserve release as we reclassified those loans to held for sale as a result of the pending sale of Navitas. On a bank-only basis, we had an $8.7 million provision, which more than covered our $4.2 million in bank net charge-offs. With the Navitas release, our allowance for credit losses moved down to 1.04% of loans. This decrease reflects the lower potential loss content and variability of losses with the sale of the Navitas portfolio. With that, I'll pass it back to Lynn.

Thank you, Jefferson. Given that this will be the last quarterly call before the sale is completed, I'd like to take this opportunity to thank the Navitas team for being a valuable part of United for the past 8 years. It has been a pleasure working with all of you, and you have made a great contribution to our growth and success. I wish you continued success in your next chapter and I look forward to remaining in touch. I'd like to now open the call to questions.

[Operator Instructions] Our first question today comes from Stephen Scouten from Piper Sandler.

I guess maybe first question. I hope I didn't miss it in your comments, Jefferson, but obviously, 6 consecutive quarters of NIM expansion. Do you feel like we can get to 7 here? Or is the deposit cost kind of stabilizing here does that negate that ability moving forward?

Stephen, it's a great question. Talk about the -- go forward with the margin, and I'll throw in there, what we might look like ex-Navitas -- so on a static basis, selling Navitas and reinvesting the proceeds at 4.25%, moves our margin down by about 30 basis points. But dynamically, and I think where your question was going, the underlying margin should be widening because we will be adding loans at an increasing pace in the 6% range. So our reinvestment will end up being higher than that 4.5%. We still have the backlog of loans and securities that should provide some tailwind. And we also will be paying down with the proceeds of Navitas borrowings and that strengths the balance sheet a little bit and helps the margin. So Q3 is difficult because it hinges on the timing of the Navitas sale, but I believe the fourth quarter assuming the third quarter Navitas sales down maybe 20 to 25 basis points, if you assume 30 basis points down on a stacked basis and that underlying widening margin should offset that over 2 quarters. And the third quarter is somewhere in between that down 20% to 25% and where we are today.

Okay. Got it. Yes, that makes sense. And just around the time deposits specifically, I think in the deck, you noted 3-month pricing maybe coming off at 3.09%. And I think new CDs were coming out at 3.2%. So could we see CD costs going higher from here? Or is the liquidity from Navitas being paying down other higher cost funds does that allow you to kind of manage that a little bit more than just those numbers would suggest?

We have a few strategies in the CD book. One is that 30% is down from the 50% maturities that we've been having. So we've been extending this book a little bit, which has the effect of raising the CDs a little bit. We do think we will have stronger loan growth in the second half. The competition is a little stronger for deposits. Now we will have something that will help us, which is a lot of cash to a big securities portfolio to fund some of our loan growth. But if you add all that together, I think our cost of deposits will drift slightly higher in the back half?

Okay. Great. And maybe just last thing for me. Curious, we seem to be seeing an uptick in smaller bank M&A these days kind of sub-$5 billion in asset and banks. What's kind of the conversation dynamics like? Do you feel like some of these potential smaller bank sellers are more receptive? And just kind of any feel for what conversations are looking like in your appetite once you get beyond each day?

Stephen, this is Lynn. Yes, I would say they're very active conversations in that side, that smaller bank, call it, $1.5 billion and less side. So I would expect to see more activity once Peachtate is completed for the rest of the year.

Our next question comes from Jacob Morton from Stephens.

This is Jacob Morton on for Russell Gunther. I just want to start out with -- I hear you on the hiring. I'm wondering historically, how much incremental annual loan production does an experienced banker contribute once fully ramped up? And as a follow-up to that, what is your level of conviction on loan growth. I hear you're on the 6%, but I'm wondering what specific asset classes, are you expecting the growth to come from? And which geographies and your footprint you expect to produce the most?

Jacob, this is Rich. In terms of the experience that we're looking for in the hiring side, $30 million funded would be where I would say that person is -- we're going after the 20 years experience, where we want them to have a portfolio that they produce greater than $100 million. We know them in the marketplace. Just to be clear, we're using no recruiters in our hiring and culture makes a big difference. In terms of the forecast, in terms of Q3, we're looking at the 7% range ex-Navitas and then in terms of next year, I'm even more confident in obtaining upper single digit next year, particularly based on the hiring that has occurred and those -- the pace is going to slow down in the second half of the year, but we still have ongoing discussions. And in July, we've hired 5 more that are on payroll already. So we're feeling pretty good.

Got it. And then I guess on the expense side now, a bit of a bigger picture question trying to get the pro forma expense base, but given the recent commercial lender hirings and related aspirations. In addition to the impact of the sale of Navitas in 3Q closed the deal, when all is said and done and deal cost saves are achieved -- where do you see the expense base shaking out? And longer term, what is a good core expense growth rate to consider?

All right. I'll take that one. Thanks, Jacob. So we just did $154.5 million and expenses on what I would call a run rate basis. Overlay peach dated adds $4 million quarterly -- and then we'll have $2 million roughly of cost savings off of that $4 million next year. We expect that to close August 1. So think about that $2.5 million hitting this quarter. Now offsetting that, you have Navitas has like a $9 million quarterly run rate that will go away when the deal closes. So think about $154 million expense base is growing at roughly a 3.5% pace -- then you have $9 million of expenses going away with Navitas and $4 million coming on turning into 2 with cost saves next year of peachdates. With an astric that we will be hiring lenders in an opportunistic way, just as Rich mentioned. So Q3 has timing issues of when Navitas goes away, so it's hard. But net-net, we should be looking at roughly $150 million base, maybe just a slight higher depending on the lender hires?

And Jacob to finish answering your question, you had several 1 there. I will just answer in terms of what type of -- where are we producing? It's going to probably look equal between C&I and CRE and it would be spread across all the geographies. We're seeing really good equal production and the geographies are kind of fighting it out each quarter on who's the top. So we're starting to see really equal, which is a good feeling.

Our next question comes from Katherine Mueller from KBW.

This is Hanan stepping in for Kathryn Miller. I wanted to start off on the reinvestment side as Navitas comes out next quarter and you redeploy the proceeds. How are you thinking about the timing and pace of the securities purchases throughout the rest of the year?

That's a great question and 1 that we are thinking about quite a bit because the 4.25%, I think, is a realistic number to think about. But I don't know if we invest that all right away because I think some of that will be in cash. So we're using that 4.25% as a proxy, I think that's a relatively easy number to get to. But for the first 1 to 3 months, I think you'll see a portion of that at $375 million in cash. Then again, that will be offset somewhat by using some of that cash for 6% plus loans. So we settled on the 4.5% as a good proxy, but I think it could be -- or 4.25%. I think it could start slightly slower than that or slightly lower than that and then move up towards 4.25% and beyond over time.

Great. And then my other question is, I know you mentioned in your prepared remarks about repurchases. If you could just give a little more detail there on your mentality moving through the rest of the year? I know you were in the blackout period for this quarter, and so we didn't see any, but just curious where you expect to go for the rest of the year.

That's great -- we have said publicly that we intend to buy back the other $50 million -- of the $100 million in total consideration that we're paying for Peach State. We still expect to do that. We have $63 million in authorization as well. So think about that maybe for the rest of this year. However, in the bigger picture with Navitas and sold, it will be roughly a 14.5% CET1 ratio. We haven't given capital targets, and we're not giving capital targets today, but if you think about just getting back to the 13% range, that's about $300 million of excess capital. So I think that is something that we will be talking about in Board meetings over the next year. So I think you could realistically see capital usage and perhaps and buybacks increase significantly next year.

Our next question comes from Gary Tenner from D.A. Davidson.

Just wanted to ask in terms of the gain on sale piece, the kind of the relative impact of the equipment financials versus SBA just to kind of drill down to more base gain on sale number going forward?