Prepared remarks
Good morning, and welcome to United Community Bank's Second Quarter 2020 Earnings Call. Hosting the call today are Chairman and Chief Executive Officer Lynn Harton, Chief Financial Officer Jefferson Lee Harralson, Chief Banking Officer Richard William Bradshaw, and Chief Risk Officer Robert A. 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. 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 2020 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 non-operating 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, only 2.5%. Loan growth reached a 6.8% annualized pace for the quarter. More importantly, organic loan growth excluding Navitas was the strongest it has been in some time, reaching a 6.4% annualized pace 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 that it 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 integrating 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 are 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 costs and a notable one-time expense item. We continue to be excited about bringing Peach State into the United family.
When we put the two teams together, we will have the best bankers and top deposit market share in one 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 will 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 non-operating 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 believed it was no longer required to have one under United ownership as a bank subsidiary. That said, we settled with the California Department of Financial Protection and Innovation (the DFPI). The $4.5 million represents our cost.
About 75% of the $4.5 million was not tax deductible. Including the associated legal fees and adjusting for the tax impact, we estimate that the notable items negatively impacted Q2 by $0.35. 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 two-thirds 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, 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, 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.
This is the sixth quarter in a row of margin expansion. Moving to Page 11, non-interest 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, non-interest expenses grew by $2.9 million as compared to the first quarter, of which our annual merit increase accounted for $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 9/30/2025. Since then, we have added 37 net new producers, about half of whom are commercial lenders.
This increases our overall sales force by about 17%. We are encouraged we are starting to see 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 will pass it back to Lynn.
Thank you, Jefferson. Given that this will be the last quarterly call before the sale is completed, I would like to take this opportunity to thank the Navitas team for being a valuable part of United for the past eight 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 would like to now open the call to questions.
Questions and answers
Question-and-answer session. To ask a question, you may press *1 using a touch-tone telephone. To withdraw your question, you may press *2. If you are using a speakerphone, we do ask that you please pick up the handset prior to pressing the keys to ensure the best sound quality. Once again, that is *1 to join the question queue. Our first question today comes from Stephen Scouten from Piper Sandler. Please go ahead with your question.
Yes. Thanks. Good morning, everyone. I guess maybe first question — hope I did not miss it in your comments, Jefferson — but obviously six consecutive quarters in NIM expansion. Do you feel like we can get to seven here? Or is the deposit cost kind of stabilizing here? Does that negate that ability moving forward?
Hey, Stephen. That is a great question. I will talk about the go-forward margin and I will throw in there what it 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 4.25%. We still have the back book of loans and securities that should provide some tailwind. And we also will be paying down the proceeds of Navitas' borrowings and that shrinks 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 sale — the margin may be down maybe 20 to 25 basis points. If you assume 30 basis points down on a static basis, that underlying widening margin should offset that over two quarters, and the third quarter is somewhere in between that down 20 to 25 basis points and where we are today.
Okay. Got it. Yeah, that makes sense. And just around the time deposit specifically, I think in the deck you noted three-month repricings maybe coming off at 3.09%, and I think new CDs were coming on at 3.2%. So could we see CD costs going higher from here? Or is the liquidity from Navitas and paying down other higher-cost funds allowing you to 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 have been having; we have 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; competition is a little stronger for deposits. Now we will have something that will help us, which is a lot of cash and a large 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, you know, we seem to be seeing an uptick in smaller bank M&A these days — kind of sub-$5 billion asset banks. What are the conversation dynamics like? Do you feel like some of these potential smaller bank sellers are more receptive? Just any feel for what conversations are looking like and your appetite once you get beyond Peach State?
Hey, Stephen. This is Lynn. I would say there are very active conversations in that smaller-bank, call it $1 billion and less, size. So yes, we would expect to see more activity once Peach State is completed for the rest of the year. Great. Thanks for the color. Appreciate the time this morning.
Our next question comes from Jacob Morton from Stephens. Please go ahead.
Hey. Good morning. This is Jacob Morton on for Russell Elliott Gunther. Just want to start out with — I hear you on the hiring. I am wondering historically how much incremental annual loan production does an experienced banker contribute once fully ramped up? And as a follow-up, what is your level of conviction on loan growth? I hear you on the 6%, but I am wondering what specific asset classes you are expecting growth to come from and which geographies in your footprint do you expect to produce the most? Thank you.
Good morning, Jacob. This is Richard. In terms of the experience that we are looking for in hires, $30 million funded would be where I would say that person is fully producing. We are going after 20-year experienced bankers. 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 are using no recruiters in our hiring and culture makes a big difference. In terms of the forecast, for Q3 we are looking at the 7% range ex-Navitas. And then in terms of next year, I am even more confident, obtaining upper single-digit growth next year, particularly based on the hiring that has occurred. The pace is going to slow down in the second half of the year, but we still have ongoing discussions. In July, we have hired five more that are on payroll already. So we are feeling pretty good.
Got it. Thank you. And then on the expense side, a bit of a bigger-picture question trying to get the pro forma expense base. But given recent commercial lender hirings and related aspirations, in addition to the impact of the sale of Navitas and the expected close of 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 will take that one. Thanks, Jacob. So we had $154.5 million of expenses on what I would call a run-rate basis. Overlay Peach State adds $4 million quarterly and then we will have roughly $2 million of cost savings off of that $4 million next year. We expect that to close August 1, so think about that as $2.5 million hitting this quarter. Now offsetting that, Navitas has a $9 million quarterly run rate, and that will go away when the deal closes. Think about a $154 million expense base 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 million with cost saves next year at Peach State. With an asterisk that we will be hiring lenders in an opportunistic way just as Richard mentioned. So Q3 has timing issues of when Navitas goes away, so it is hard to be precise. But net in Q4, we should be looking at a roughly $150 million base, maybe just slightly higher depending on lender hires.
And Jacob, to finish answering your question, you had several in there.
Just to answer in terms of where we are producing: it is going to probably look equal between C&I and CRE, and it would be spread across all the geographies. We are seeing really good equal production and the geographies are kind of fighting it out each quarter on who is on top. So we are starting to see really equal production across the footprint, which is a good feeling.
Got it. Awesome. I appreciate all the color there. That is it for me. Thank you, guys.
Next question comes from Hannah Wen stepping in for Catherine Mealor from KBW. Please go ahead with your question.
Hi. 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 is a great question and one that we are thinking about quite a bit because the 4.25% number I mentioned is a realistic number to think about, but I do not know if we invest that all right away because some of that will remain in cash. So we are using 4.25% as a proxy. I think for the first one to three months you will see a portion of that in cash at roughly 3.75%. Then that will be offset somewhat by using some of that cash for 6%+ loans. We settled on 4.25% as a good proxy, but I think it could be plus or minus 25 basis points. I think it could start slightly slower or slightly lower than that and then move up towards 4.25% and beyond over time.
Great, thank you. And then my other question is — I know you mentioned repurchases in your prepared remarks. If you could just give a little more detail on your mentality moving through the rest of the year. I know you were in a blackout period for this quarter, so we did not see any, but just curious where you expect to go for the rest of the year?
That is a great question. We have said publicly that we intend to buy back the other $50 million of the $100 million in total consideration that we are 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 sold we would be roughly at a 14.5% CET1 ratio. We have not given capital targets, so we are not providing targets today. But if you think about just getting back to the 13% range, that is 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. You could realistically see capital usage and perhaps buybacks increase significantly next year.
Great, that is all for me. Thanks for taking my questions.
Our next question comes from Gary Tenner from D.A. Davidson. Please go ahead with your question.
Thanks. Good morning. I just wanted to ask in terms of the gain-on-sale piece, the relative impact of the equipment finance sales versus SBA — just to kind of drill down to a more base gain-on-sale number?
Going forward? I do not have the exact amount of the Navitas gain-on-sale in front of me and I do not think I have the precise split on this call. But I would say about 75% of the gain-on-sale this quarter was SBA. Let's talk after the call and I will get you the exact number.
Okay, appreciate that. And then just a follow-up on repurchases: my sense when you announced the sale of Navitas a couple of months ago was a little more definitive around buybacks and maybe sooner than thinking about 2027. Did anything change? Is it timing of the deal closing or anything that pushes that out at all versus perhaps front-loading it a bit more?
Yeah. No, nothing has changed. We are just continuing to evaluate all the options. Our priorities still remain funding loan growth, which is accelerating, and opportunistic M&A — think of things like Peach State. We are not looking at large deals or out-of-market deals. But as we mentioned earlier in the call, there continue to be some nice small banks that are very high quality that we are interested in. In my mind, doing some of those for cash is a more effective use of capital in some ways than buybacks. We are looking at buybacks and other balance sheet options as well. So nothing has changed; we are continuing to evaluate all those options.
Okay. So maybe more a sense of not wanting to lock into buybacks immediately, giving you more flexibility if other opportunities arise? Is that fair to say?
That is a great way to think about it.
Our next question comes from Michael Rose from Raymond James. Please go ahead with your question.
Hey. Good morning, guys. Thanks for taking my questions. Maybe for Richard, just wanted to go back to the underlying strength in loan growth and the commentary about stronger growth in the back half of the year. As we think about the lending hires you made, the addition of Peach State, and likely paydowns waning, should we begin to think about United Community Bank as a mid- to high-single-digit grower versus the mid-single-digit grower you have laid out previously? It seems like you have some real momentum in building out other verticals and markets. Thanks.
Michael, I think you are spot on. That is where we are headed. I feel that we have a really good balance now with some strong C&I initiatives. For instance, the ABL group has really shown strength the last two quarters and provides another alternative for our lenders. So very positive.
Okay. Maybe as a follow-up — how should we think about loan yields as we move forward ex-Navitas? I know there will be a lot of moving parts in Q3 for sure, but on a go-forward basis, given the competitive dynamics and what seems like increasing pressure, any thoughts?
I can talk about it from a market and competition perspective. Right now, we are seeing, for the first time in a while, that pricing and structure have both kind of leveled off. You did see CRE pricing come down over the last year, but that has stabilized. Structure has stabilized right now.
Real quick: the loan yield does come down with Navitas going away by about 30 basis points. We are putting on new loans at a higher rate than that, so we do get the initial impact of Navitas going away, but we should have an increasing loan yield off of that lower base.
And maybe one last follow-up — congratulations on your upcoming retirement, Jefferson. Just trying to get a sense of when we could expect to see the announcement for a new CFO.
Yes. We are actively recruiting and we have some great candidates in. My expectation would be probably sometime in September or October would be a good timeframe to expect that announcement.
Our next question comes from Christopher Marinac from Brean Capital. Please go ahead with your question.
Thanks. Good morning. I wanted to ask about the impact of the new hires on loans — should we see that accelerate? Richard touched on that earlier and I just wanted to quantify that.
The answer is yes — we really started this in Q4 and saw their impact in Q2. The approximately $30 million funded is how we think about net fundings attributable to a new producer ramp. Going forward, we expect to see that continue to accelerate for the rest of the year and we feel optimistic about next year.
Great. Thank you for that, Richard. Then Jefferson, just a quick one on net charge-offs ex-Navitas: is the number you told us in June still a good number to use?
Hey, Christopher. This is Robert. When I look back over the last ten years, it has really been between 8 basis points and 13 basis points in net charge-offs for the bank, excluding Navitas. The last two years have been 12 basis points. I am not remembering the specific number we stated recently, but I would say those are good ranges to think about going forward.
That is perfect. Thank you, I appreciate it. Then just a last one about M&A pricing: as you think about possibilities in the future, is the pricing similar to what you did with Peach State a few months ago or is it different as you have looked at possibilities this year?
Yes. I would say each deal is a bit unique. We target a three-year earn-back on an all-stock basis, so it really depends on overlap and the underlying momentum of the bank itself. Peach State was unusual, so I would say that was probably on the higher side. Each deal is priced individually based on those attributes.
Sounds good, Lynn. Thank you all for taking our questions this morning.
All right. Thank you. I am showing no additional questions. I would like to turn the floor back over to Lynn for any closing comments.
Great. Well, once again, thanks to everyone for joining our call and for the great questions. If you have any additional questions, do not hesitate to reach out and we will look forward to talking to you again soon. Have a great day.
With that, ladies and gentlemen, we will conclude today's presentation. We do thank you for joining. You may now disconnect your lines.