Q2 2020 United Community Banks Inc Earnings Call
Good morning, and welcome to United Community Banks second quarter 2020 earnings call hosting the call today, our chairman and Chief Executive Officer, Lynn Harton, Chief Financial Officer, Jefferson Harrelson, Chief Banking Officer, Rich Bradshaw, and Chief Risk Officer, Rob Edwards United's presentation today includes references.
Operating earnings pretax 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 <unk> Dot com.
Copies of the second quarter earnings release, and Investor presentation were filed last night on form 8-K, with the FCC and a replay of this call will be available any investor relations section of the company's website that you see <unk> dot com. Please be aware that during this call forward looking statements may be made by representatives of United any forward looking statements.
You'd be considered in light of risks and uncertainties described on page three other companies 2019 form 10-K as well as other information provided by the company and its filings with the FCC and included on its website at this time I will turn the call over to Lynn Harton. Good morning, and thank you all for joining our call.
The second quarter continues to be strongly influenced by the effects of covert 19 as you would expect.
A significant growth in deposits driven by a stimulus funds clot reactions to the economic environment and new customer acquisition on the heels of the PPP program, all combined to drive or balance sheet over the 15 billion dollar Mark ahead of our acquisition of see side, which closed July 1st our E. B S. This quarter came in at 32 cents.
Eight cents below the first quarter and 23 cents below the second quarter of 2019.
The primary driver that decline was continued reserve building as we increase the reserve by more than $27 million during the quarter, reaching 1.28% of total loans, excluding PPP loans.
Our pretax pre provision income was actually up 2.7 million over the first quarter and up 5.1 million from the second quarter 2019, due to the reserve building and the low margins on the significant increases in our investment portfolio a return on assets dropped to 71 basis points for the quarter.
Given the uncertainty in predicting where the health crisis takes the economy. Our focus is on the things that will enable us to withstand whatever size credit storm materializes.
And also on those things that will put us in a position to succeed once we have more clarity on the operating environment.
From a financial perspective, we outline those items on slide five.
Our capital and reserve position, a strong ranking in the top quartile among our KRX peers in the first quarter.
Our pretax pre provision or away is also strong ranking in the top 20% of our KRX peers in Q1.
We have significant liquidity driven by one of the best and lowest cost core deposit franchises in the southeast.
So financially we believe we were well prepared.
We're also in some of the best markets in the country, which we believe will both performed better during the kind of it recession and will also rebound faster once the pandemic ends as you can see on slide six we now have a presence in 13 of the fastest growing in assays in the southeast.
And while the slot doesn't show what our ability to support that growth is supplemented by strong shares in some very stable rural markets within our footprint.
We're also proud to have taken steps to support our communities by establishing a United Community Bank Foundation. This quarter, we funded the foundation with $1 million and we look forward to helping deserving causes and organizations throughout our footprint.
But the real strength of United is our team.
During the second quarter, they set a new record in loan production.
You're welcome nearly 4000, new customers to United and while doing that they were recognized by JD power for having the highest level of retail customer satisfaction in the southeast and that's the fifth time in the last six years they were recognized in that fashion.
And be more proud of this team and for those either listening I couldn't be more fortunate then to be here working alongside each one of you I'd like to now turn it over to Rob and Jefferson for more details on the quarter.
Thank you land and thank you for being on the call today I'm going to start my comments on page seven.
During the quarter, our loan portfolio grew by 1.2 billion.
Now 1.1 billion was P.P. loans, and 103 million in normal loan growth that amounts to a 5% annualized pace.
Well our growth came in the owner occupied and Investor Creek categories. Our 100 300 ratio still remains very low at 72 and 197, respectively.
Moving onto credit quality on slide eight our net charge offs were improved from last quarter at 25 basis points.
The losses this quarter were primarily driven by two credits. These credits were already struggling pre coded and had been rated sub standard for the past year. However, the additional stress from the Cove environment did push them over the edge.
On page nine we show a deeper dive for you on the need us credit portfolio.
The new leaders loan book represents 7.5% of our total loan book.
We had a normal amount of charge offs in the second quarter at 87 basis points.
The Vitaros is a national business, making loans for the specific purpose of purchasing equipment and software for the expansion or the improvement of small businesses.
As of June Thirtyth, there were about 31% of Itas loans in deferred status on the right side of the page you can see the five largest business categories and the deferral amount within each of those categories.
And then the vetoes deferrals, we ask for at least a modest monthly payment.
What we call a touch payment.
And we are getting these touch payments from nearly all are 98% of our deferred loans.
It's important to keep in mind that the standard process for loan payment setting of Itas is to be on an automated AC aged draft.
So since June Thirtyth, we're seeing many of these 90 day deferrals coming off of their deferral period, and starting to make full payments.
Specifically the July 10th billing cycle has $49 million in formerly deferred loans, where a full payment is now do.
We have received a full payment on $44 million of those deferred loans.
Or on a percentage basis, 89% of the formerly deferred loans with payments due on July 10th have now made full payments.
While we do not know if this trend will continue we are encouraged by the amount of nevada's customers going back to making full payments.
On page 10, the loan deferrals in total were $1.8 billion as of June Thirtyth.
This does include intravenous deferrals that we just talked about from the prior page.
The majority of the bank deferrals will be expiring in July.
And we are working closely with the customers to assess the impact of last quarter's economic environment and the returned to full payment or possibly if a second deferral is warranted. We have some optimism that the deferrals that United and Davita is will be down significantly in Q3, but.
There is a lot of uncertainty as communities and businesses go through the reopening process.
On page 11, we included the same information as we did last quarter on the hotel and the restaurant exposures each portfolio remains at about 3% of our loan book, excluding PPP loans.
Specifically on hotels, we have studied the top 65% of the portfolio about $230 million and commitments.
Our underwriting typically yields a breakeven at 50% occupancy.
We have $58 million committed that are under construction.
And $175 million in operating properties.
The weighted average occupancy.
Of the operating properties as of June Thirtyth was 48%.
We have been told that occupancy rates are climbing and we do plan on continuing to closely monitor this portfolio.
On page 12, we look at the reserve and the reserve building that we did during the quarter.
The allowance to credit losses increased by $27 million and is now at 1.28% of loans.
Excluding the PPP loans and up 77% from year end in dollars.
We do expect the allowance to build next quarter as a result of the double dip provision from the seaside acquisition that occurred on July onest with that I'll pass it over to Jefferson.
Thank you Rob Im going to start my comments on page 13, and capital we raised 100 million dollar as a preferred equity in the quarter and you can see the growth and the tier one ratio is because of it.
We also raised $100 million and senior debt that further enhance our liquidity at the holding company.
Our capital levels are now that historic highs for the company and remain in the top cortile for the industry.
We have $63 million and senior debt and Trups that we could call. This year, depending on the environment and for now we are planning to hold the capital as we keep an eye on the economy.
The net interest income on page 14 was down $9 million from Q1 to Q2.
5 million up which was due to lower accretion as we had unusually high accretion in Q1.
On the margin, we had 65 basis points of compression in the quarter of which 18 basis points came from the absence of the unusually high accretion in Q1.
For the remaining 47 basis points of margin pressure, we had a combined 15 basis points of headwind from the surge of liquidity in the form of $1.7 billion and core deposit growth and from the addition of ERP alone.
For Q3, either a lot of moving parts and the margin to think about first seaside is coming in at a lower margin than we currently have.
Second we expect our cost of funds to improve as Cds mature and we had been lowering other deposit rates as well.
Third we have a three basis point headwind from our debt raise and we have become more liquid as we have moved into July versus the Q2 average fourth we also plan ill put in cash to work in Q3.
That's all excludes any impact from PPP fees and any impact from seaside rate marks which both should have a positive impact.
On the race side of the slide I mentioned core deposit growth in the quarter. It was tremendous at $1.7 billion, well over and beyond the impact of PPP.
We're also very pleased with our fee income result, this quarter up $14.4 million from last quarter. The main driver of the increase is our mortgage business up $15.3 million versus last quarter, while our second quarter mortgage fees were significantly higher than Q1, we actually had a similar amount of rate locks at 800 million Don.
Hours in both quarters.
That said Q1 had a $4.6 million MSR write down in Q2 had a $1.8 million write down. So there was a 2.8 million dollar positive swing there.
There was also a big swing and the gain on sale in Q2 as the market to sell loans improved from quarter to quarter and included a $6 million positive swing in the value of our loan pipeline.
We believed that the $6 million swing will not be repeated in Q3, but our volumes and gain on sale, but very strong early this quarter.
Other notable items and fee income where service charges down $1.6 million or 19% from last quarter, driven by the pandemic and lack of economic activity, especially early in the quarter.
We had an unusual BOLI gain of $1.1 million in the quarter and a $1.6 million CBVA to reserve for possible losses, and our customer derivatives business on page 16, we give you some more detail on our mortgage business of course, the environment is very good right now, but we believe we are taking.
<unk> market share in the business our number of originators has stayed relatively flat over the last 12 month, but we have also been upgrading talent in our originator pool, which is one of the main drivers why you're seeing such an increase in the originations per originator figure skipping ahead to total expenses on page 20, they came in $2.9 billion higher than.
Last quarter at $83.6 million. The main reasons for the increase is $1.4 million from higher mortgage commissions and a million dollars from a contribution to our new Foundation. Our finished up on page 22 with a quick reminder, an update on C. side, we feel very good about where we already.
Question.
Updated our expectations and given you some more information on where we think the marks might land. The marks are higher than our original expectations on March 9th when we announced I'll give you the caveat that they continue to change based on market conditions and rates with that I'll pass it back to lend for closing comments. Thank you Jefferson we are very.
Excited to have completed the legal closing of our partnership will see side, which adds new wealth management insurance businesses, approximately 2.1 billion and assets and 14 locations in Florida as top growth markets to our now five state footprint.
I'm also thrilled to Gideon haymaker founder of see side will remain with United as both president for the state of Florida.
And the leader of the expansion of see sides wealth management offering throughout the United footprint.
Our M&A strategy is based on partnering with banks that will make us better.
Now moving us into new markets, or adding new products, not just making us bigger.
We know that success is determined by shared cultural values and without question. We MC side are aligned on the commitment to service.
The commitment to be a great place to work.
And the commitment to be a top performer.
See Sun has a tremendously talented team of bankers and our combined banks are better together so welcome to the team all the seaside family.
And with that I'd like to open the line to take your questions.
Ladies and gentlemen, they will now begin to question and answer session.
Ask your question. Please press star one on your telephone if you Mr. Cancer requests you made fresh this town.
Please standby will be compiled like your any loss.
Yes first question comes from the line of Michael The Wells of Raymond James Your line is now open.
Hey, good morning, guys. Thanks for taking my questions.
Just wanted to start on mortgage this quarter, obviously in it and exceptional quarter I'm, just wondering to see where pipelines.
Stood now and it seems like most other banks that have reported would expect some degree degradation of the gain on sale margin just wanted to see how you guys are thinking about a mortgage as we move over the next quarter too. Thanks.
I'll start on a this is rich I'll start on kind of the pipeline. We're looking at Q3 pretty similar to Q2, and then from industry data. It looks like Q4 might be 15% down the Q3 in Q2 from a production standpoint should be pretty similar.
Yeah. The gas sales remained strong just from our prepared remarks.
The gain on sale was unusually high and Q2 because of the reversal devaluation of the pipeline. So you won't have that repeat but.
Is that the mortgage businesses continuing at a very strong pace in Q3.
Okay, and excluding Pvp and and the addition of the seaside loans.
How should we think about.
Core loan growth as we look forward. Obviously you guys have brought on you know some people over the past couple of quarters, but I would expect that there'd be some.
And pay down I mean enough that you guys are huge revolvers out there, but I expect that would be a little bit of a headwind some stronger borrowers maybe paying down some balances.
Should we think about our core loan growth in the near terms and move forward.
This is rich again I feel good about the current pipelines we are enjoying some PPP tailwind we had patent to know we had a roughly 1800 PPP customers that were non customers and so we have been aggressively going after that loan and deposit business.
Business owner, a confidence overall now certain segments are certainly down but overall is higher than I would've expected and then lastly, the large and regional banks have kind of pulled away from our target market size of that two and a half to $20 million loan sweet spot and so we're filling in oak <unk> pro.
The good about it and we'll continue to monitor Cove it in the impact.
Okay, and then maybe last one for me how are you guys thinking about just the timing.
Payoffs or.
From the PDP loans in terms of forgiveness and.
What kind of percentage you guys. Thank and at this point, we'll we'll be forgivable loans you guys made.
Sure I'll talk talk about that so one of the hot Hot.
Topics and PPP Lan today is the forgiveness of debt for loans under 150000, Senator Skews Me Secretary Treasury mutation as mentioned in two recent hearings that he is pushing for that to be forgiven. We have to senators that have introduced a bill I haven't seen much moved.
Then in Congress, because they're in recess, but we were anticipating that in Q3 or early Q4, we will see the 150000 under forgiven and for US that's a 83% of our loans, so probably we're expecting 75% forgiveness of debt.
In the in this calendar year and then the remainder of the following year.
Okay. Thanks for taking my questions and happy birthday Jefferson [laughter].
Robs birthday Tomorrow, so look on double birthdays here. So [laughter] next year you can offer him.
[laughter].
Your next question comes from the line of Brad Milsaps from 5%.
Your line is now open.
Hey, good morning, guys.
Good morning.
Yes.
And when I appreciate all the color and Rob as well just kind of curious on the reserve build that did occur in the quarter appreciate you've got more coming down the pipe with.
With the acquisition, but it still seems you reserve will kind of end up on they'd be the lower end versus peers can you just kinda talk little bit about.
Kind of what you see in the back half you know it in terms of provisioning and sort of a you know kind of where you could see the reserve going you know in second half. The I know, there's a lot of moving parts and nobody has a crystal ball, but just wanted to kind of get some additional commentary there around the reserve provisioning.
Yes. So this is Rob Brad and I would just say probably the best way to think about it as the economic assumptions play a stronger role in Cecil than they did historically.
As you're aware and the economic assumptions that we used in Q2 were worse than the ones. We used in Q1. So the reserve build was greater it's it's hard at this point to really predict where the assumptions are going to go in the future. So it's it's a.
Difficult to say that it's you know, it's going to be up or down from here.
And of course, the performance will have a lot of loans rolling off of a deferral status and being looked at closely and of course that could also play a role in how we think about the reserve build in the latter half a year.
Okay, and then Jefferson, maybe maybe switching gears to out TPP I was curious if you had the average.
Now of TPP loans for the quarter and then the actual dollar amount of.
Contribution from PPP in the quarter.
Yes, so the average balance of PPP bonds in the quarter was $800 million.
And we had $3.7 million of fees that rolled through in the quarter and we have $38 million a fees left to roll through.
Okay.
Where any of that did did you have any fas 91 kind of deferred origination cost that impacted.
Expenses in the quarter related to the program.
So we did so we had with with the very significant originations, albeit in a quarter. The Fas 91, and helped expenses by about $1.9 million.
Okay, and then just as a reminder, you guys show your mortgage revenue net of a net of commissions right. So.
That's that's in that number or is that incorrect.
No the conditions, our commissions come through the expense line and the fees go get it yet mortgage loan.
Because if you look okay numbers those commissions did.
Negatively affect our expense line this quarter by about <unk> about about 1.5 million Bucks.
Got it helpful. Alright, Thank you guys.
Your next question comes from the line as Jennifer Demba from Suntrust.
Let's now open.
Thank you good morning.
On a hiring just wondering if you could give us an update on the talent and added during the second quarter and what your biased move on hiring over the next two quarters right now thank you.
Hi, this is a rich.
We hired at the very end of first quarter, a lift out in Atlanta from a truest and a that was a total of six people and that's part of the reason we feel good about the pipelines we are seeing that.
Tailwind in terms of.
See side, we are investing in see side, we are looking at the mortgage opportunity there and higher Nemo lows, we CNS be a opportunity there we see a cree opportunity there if they do a lot of cnine. So we really see accrete opportunity. There. So that is what we're looking at presently and then we are continuing to have.
Conversations and we are replacing people in the existing United footprint, but were we you know, we're a little cautious and trying to figure out where we are in covert before we invest a lot more and particularly as same questions. You have on where we end up on the deferrals.
That's very helpful. One more question on credit or Rob you talked about most of your hotel land.
Having a breakeven occupancy of around 50% do you have an average occupancy rate for your hotel portfolio as of today and what the ranges kind of best worse.
So.
We've looked at.
230 million of the 305 million in a pretty close study six of those are I think of it I think I said 58 million are in construction. So theres no occupancy there we did look at 175 million So 919.
Properties or that we studied of the 305 million the weighted average occupancy is 48% on those.
Thanks, so much.
Your next question comes from the line as Katherine generic KBW. Your line is now open.
Thanks, Good morning, good morning.
One follow up on on deferrals.
Rob the color you gave around than in the Venus deferrals are really helpful. If we think about the deferral trend outside of the data.
Is can you give us any kind of anecdotes or thoughts on what you're seeing so far through the month of July and just to kind of gauge how much of these deferrals. If you think will ask for a second I now modification. Thank.
So.
We are at that point, just within a few days, where a lot of deferrals are Oh, if you will call. It maturing the challenge with looking at the bank deferrals. If you. If you go back to my comments on the feed us the vetoes basically sets all of their customers up to fit into one of four.
Or billing cycle. So it's easy to the first the tab, the 15th or the 25th and so you can look at you know we look I in my comments I talked about the July 10th.
Billing cycle, so that there's actually a pretty large group of people.
In that segment enough to kind of get a sense and so that was what we talked about with on the bank side. It's you know it's one of Ah I guess 20 days I'm actually probably 30 days of where a payment could be made and so you don't have that aggregation into a pool of behavior that you're able to stuff.
Okay. So that's sort of why it gets to be a little bit difficult, but I will tell you. We are tracking a those customers that are making payments and through the 15th as a month. We are seeing that number increase pretty dramatically I'm kind of reluctant to to put it into a percentage like I did with.
Davita, it's just because there isn't enough of a single pool to Ah to give us any indication, but we are seeing a the payment full payment increase a as as we go into July.
Okay. That's helpful.
Makes sense and then.
Oh question on the margin Jefferson or they're just I kind of moving parts as you highlighted in your remarks honestly, just kind of take PPP out of it and just think about core margin outside of ERP do you think to rationally you're still at a bottom here or is there still just an impact from liquidity and.
Hello, Neil if that's still cuts could push that lower before it starts it to rebound.
Yes, so I think.
Lower is that number and IRSA, let me give you a few things as to why first of all our ending balance sheet was about $700 million larger than our average balance sheet. So that serves our deposits that we that came in haven't fully gotten into the average balance sheet. Yet so just sort of rolling that forward, that's an impact of.
10 basis points down that you'd have a 700 million dollar larger balance sheet, so net positive on and <unk>.
You have the a the negative impact of the debt, which is about three basis points.
On the deposit pricing I mean, it pretty aggressive on deposits, we have $400 million.
Coming to at 170, or so on Cds, and our highest CD price out there isn't a 20 basis point range.
So we should get about eight basis points of ER positive margin.
Enhancement from the deposit pricing.
Did you have the seaside piece coming in seaside how to 70 margin.
Last quarter to 70 range margin last quarter, and just layering them in is accretive to EEP, yes, but it's 15 basis points negative to the to the margin. So then you get back 10 basis points over time as we invest the excess liquidity, we have accretion coming in from seaside which will enhance.
And then we have the PPP fees that should help as well.
Great really super Thank you so much.
Your next question comes from the line of Kevin Fitzsimmons.
And your line is no.
Hey, good morning, guys I know, there's been a lot of discussion about deferrals I just want to make sure I did miss the fat.
And I know a lot is changing in the month of July but so the way I understand is beat us is up 30% deferred and the entire bank is 17% deferred as of June thirtyth.
Can you give what those.
Those those same ratios are as of mid July.
And I'm, assuming the whole bank.
Would include seaside in that as well if you're able to.
Yeah. So this is Rob we were not a I don't have the mid July non deferred or or previously deferred and now having made a full payment number for you I'm sort of back on Catherines comments. You know just just is too early to be able to give that kinda informed.
Nation I can tell you, though that the 200 million differed from sea side is not in the $1.8 billion. So.
The 243, so so if you think about deferrals as of June Thirtyth, you've got a billion five of a call United Bank Deferrals, and then you've got $240 million of Divvied us deferrals. So that's where the 1.8 I think it's 1.77 or something as the number but that's where that.
Number comes from and then we'll be bringing over the.
The seaside numbers are not in our June thirtyth numbers.
Got it that's helpful. Thank you and one one question on the reserve I know you guys have made the comment about adjusting for ppt, but what about just in terms of taken into account past acquisitions and discounts you have on those loans is there a way or an adjusted version of.
Or higher version of that reserve ratio, we should be thinking.
So I didn't think that number and with me I can circle back around on any marks that might be.
Surviving from that.
It would be some interest rate marks that survive from that.
Still but the credit marks you know when you transition to see sold they change.
Okay.
Got it and just just a general question with there's been obviously a lot of press recently about Florida in.
Corporate 19, and just curious I'm sure you're looking very closely to see sites markets and how those are holding up just any top level observations you Pat.
No I mean, I think it's very similar to what we're seeing in Georgia, and South Carolina, and you know in terms of the business activity.
The customers that you would have thought were a of concern before the little flare up are there still are and there's not been any significant change and you got to remember to see side is primarily a wealth management focused.
Company, primarily CNS focused.
We've been very impressed we've had three of their credits already come through credit Committee press not only with the quality of the client base and the significant resources that they have but also.
With the client advisors themselves I mean, the getting has built a team that very experienced spend in those markets forever.
And you can see that in the customer selection so.
We don't have any.
Different kind of view in terms of the you know the recent flare up that's kind of coming on in the south southeast <unk> other than we did did beforehand and continued feel really good about the seaside operation.
Okay, great. Thanks, guys.
Your next question comes from the line as Christopher Marinac of Janney Montgomery Scott.
Your line is now.
Thanks, Good morning, Jefferson one basketball liquidity to some another angle is there a level that's too high or that you need advantage to I know what might sound strange at this point of the pandemic, but just curious if it's too much liquidity as you managed deposits and what sticks around in the future.
Yes, I don't know if you ever have too much liquidity, but we should have a lot right now are we target to having $50 million to $100 million overnight at the fed.
We're at a a billion dollars right now given the $1.7 billion of core deposit growth that we've had this quarter. We also raised $200 million of debt and equity.
This quarter. So there's a lot of Ah definitely a lot of cash there.
No we had some use that cash right away when we purchased seaside where you have $300 million that we either have or will have in pay down and there are a in their wholesale debt now from here and we're going to keep extra liquidity as we watch could play out and we see if theres a.
Reversal of some of this deposits that have come in but we also at the same time have a plan to put this liquidity to work and habit earned more than seven to 10 basis points.
For us so.
We're glad we have it I don't know if there is a a max but it does present, a nice opportunity for us to to enhance our margin in our earnings over time.
Okay, great. Thank you for walking us through that and then when you mentioned at the outside of the call, but the new hire the team in Atlanta, what's the pipeline for that whether it's in Atlanta or really any other city within the footprint.
Go ahead rich, yes, hi, this is rich.
So yeah, we're really happy with the team in Atlanta as I mentioned earlier see sides are really looking to invest there and we looking out the opportunities again of Emma lows mortgage SP, a and present leak Cree and then we're being opportunistic in our other markets and.
But we are having discussions and a continued to have discussions in terms of when we get passed a we feel the covert 19 impact.
Great Rich. Thank you very much guys. Appreciate all the information today, Sir thanks.
There are no questions from participants online Sir you may continue.
Oh, great well. Thank you all very much for joining the call me appreciate the questions and if you have any additional ones feel free to follow up with us directly.
And with that I hope you have a great day. Thanks.
This does conclude today's conference call. Thank you for participating you may now disconnect.
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