Q1 2021 United Community Banks Inc Earnings Call

Deposits continue to grow rapidly do both to our service culture and ongoing stimulus funding our core transaction deposits increased in the quarter by nine hundred and fifty million dollars or 33% on an annualized basis and our cost of deposits dropped three basis points, and now stand it only 14 basis points mortgage continues to outperform with records set off both closings and locks in the quarter.

Credit remains a source of strength this quarter. We had net recoveries of one basis point and non-performing assets declined from fifty five basis points to 48 basis points of total loans Money overall. I continue to be proud of how our teams have adjusted to the environment and how they deliver both great service to our customers and great results for our owners for more details on a quarter. I'm going to turn it over to the team here and I'll start with Rob. Thank you Lin. I will start my comments on page seven. We are pleased with our loan growth in the quarter over off loans increased by $308 million dollars in 1/4 with $518 million of new round three p p p loans that were netted down by significant forgiveness of first and second-round PPP loans, excluding PPP activity. We had seventy 1 million dollars in loan growth which translates into 3% off.

Large growth in the quarter the primary drivers of loan growth for the quarter were mortgage loans and real estate categories some of the growth for the quarter was muted by a strategic Direction off shared National credits.

In the bullet on page seven, we highlight the granularity of our loan book in which our top 25 relationships only comprise 5% of total loans and we believe this is a demonstration of how we manage various levels of concentration.

On page eight. We also feel encouraged about our credit quality and in general we were seeing stress decreasing in key areas are net charge-offs were essentially flat one basis point of net recoveries as we had the benefit of strong recoveries. Again, this quarter Navitas net charge-offs were also relatively low in the first quarter at 670 basis points, which is the best number that unit has reported since the third quarter of 2019. We had a negative loan loss provision of 12.3 million dollars fax order. The release came primarily due to are more optimistic economic forecasts, which was consistent with the trend in recoveries and declining non-performing balances wage. You may recall that we had about eighty million dollars in loan-loss Provisions for the year of 2020, which was about sixty million dollars above net charge-offs.

so our first quarter

Pieces were about 20% of our twenty-twenty Reserve billed on page nine. There's additional detail on credit in the upper left corner of the slide our loan continue to improve and now stand at 48 million dollars in the lower left. We highlight our special mention loans and are accruing substandard loans Pub special mention loans are grade seven for us and substandard is grade eight. We did direct ninety million dollars in downgrades primarily from our senior care portfolio, which drove the increase you see in special mention. We are actually seeing some improvement in the occupancy and leasing characteristics of the senior care portfolio. How about we do put loans into special mention if they are not cash flowing or not leasing up according to plan regardless of their collateral value the equity contribution or the dog.

For support that may exist in the project. I will remind you that both our hotel and Senior Care books have significant equity and we do provide greater detail on both portfolios wage in the appendix.

Is improved by 5.8 million dollars and stand at 48 basis points of total loans as borrowers successfully liquidated real estate on two of our larger not grueling relationships. All said we are encouraged as to the direction of our portfolio and where our Reserve is and the economic Trends developing in our markets page ten shows the details as to the change in reserve as I mentioned, we release 12.3 million dollars into the reserve in the first quarter mainly due to the change in our forecast excluding PPP loans are reserved percentage is 1.26% which we believe is conservative given the credit environment as we see it.

With that I'll pass it to Jefferson.

Thank you Rob. I am going to start my comment on page eleven and talk about Capital are capital ratios were relatively flat in the quarter and remain significantly over. Levels were able to redeem fifteen point seven million dollars inexpensive sub debt interrupts in q1, and we are currently planning on paying down 50 million dollars of senior debt and cute to walk in another 15 million dollars of Bank level sub debt in the third quarter. We are optimistic we can put some Capital to work via m&a and if that does not happen, you should expect us to consider using our fifty million dollar share repurchase authorization sometime this year.

Moving to page twelve you can see our net interest income and net interest margin spread income was driven by nine and a half percent annualized average earning asset growth and 7 basis points of action on the core net interest. Margin. We had expected The Lion's Share of our remaining first and second-round ptpp loans to be forgiven in q1 and that that would generate $13 in PPP fees that said we ended up with nine point eight million dollars of net PPP fees in the first quarter with the other three million dollars of fees am from around one and two moving to most likely we also had one point eight million dollars in West lone accretion in q1, which hurt the margin by 5 basis points off.

the larger balance sheet

Next changed towards Securities on the larger balance sheet drove the majority of the core margin pressure adjusting for the day count with two fewer days. We were able to grow course prep versus Q4 page thirteen shows the details of the strong deposit growth. I mentioned in the quarter specifically deposit growth was up 20% annualized and Kolb transaction deposits were up nine hundred Forty-Eight million or 33% annualized X Seaside. We have grown core transaction deposits by 3.4 billion months or 44% year-over-year. We were also pleased that we made continued progress on our cost of deposits moving down to 14 basis points from 17 basis points at last quarter.

Moving ahead to page fourteen. We had a very strong quarter in non-interest income the main driver of the increase versus last quarter is mortgage that was well above our expectations at twenty two point six million dollars. We had continued strong volumes strong gain on sale and a positive one point three million dollar MSR right up as well. That sucks with the long end of the curve moving higher. We are seeing volumes start to come in and there is a mix changed toward purchase activity purchased business has lower Associated margins are expecting to fees down closer to the range where we had expected them this quarter and the $13 plus or minus area on page fifteen. We talked about expenses excluding merger, and other related costs are expenses came in at ninety three point seven million dollars. This is down 2% from Q4, which is good, but the club

Stronger-than-expected mortgage volume translated into higher mortgage commissions, which is the main driver of the expenses being above my forecast from our prior call.

When thinking about second quarter and Beyond expenses, there are a lot of moving Parts Merit increases occurred on April 1st that adds about a million dollars in expenses to Q2. We completed our Seaside convention in February and realize never going to cost savings starting in March after the conversion and expect more and Q2 and later as technology contracts runoff taken altogether would expect the incremental cost savings to offset the Merit increases in Q2. We were also doing some hiring particularly in Florida that sometimes comes with a starting bonus mortgage commission should be down a bit but we are still paying out on a pipeline that is running through so their variable costs will be doubt more next quarter taking all of it together. I anticipate our queue to run red operating expenses to be relatively flat or perhaps up slightly moving on to page fifteen. We put $518 of round three p on the bulldog.

q1 and we expect that to

Increase some in Q2 it all we currently have twenty eight million dollars of PPP fees left to recognize which we expect to mostly come in this year.

All set on the quarter as a whole we had strong own production outstanding deposit growth very strong mortgage, which push Revenue ahead of our expectations even with less people and low nutrition coming through this quarter. I'll finish there and pass it back to land for closing comments.

Thank you Jefferson. We are proud to have kicked off 2021 with a strong quarter and we have a high level of optimism about the remainder of the year. We've got great opportunities in front of us improve and grow thanks to an outstanding team throughout the company as one last. Shout out to them earlier. This quarter Forbes recognized United on his 2021 list of the 100,000 banks in America for the eighth consecutive year. I am very proud of our teams throughout the company that make this possible year after year, and I'd like to now open it up for questions.

Thank you speakers participants. We will now begin session to ask a question over the phone. You may press the star key followed by the number one choice to draw your request. You may press the pound key.

Again, that's star one to ask a question or the pound key to withdraw your request.

Speakers. Our first question is from the line of Jennifer Demba Securities your lines now open.

Can you hear me? Yeah, now we can morning. Good morning? Reducing some of your shared National Credit exposure. Can you just kind of give us some detail on that in the rationale?

Yes, this is Rob. Hey, Jennifer. We identified in the seaside acquisition probably change and different shared National credits that were more nationally oriented than really locally oriented something that Seaside had done wrong.

You know really prior to our involvement in 2020. And so we were exiting those credits over time.

I might just add in there and Rashmi want to join in that would that would equate to about thirty million dollars of shrinkage and shared National Credit. This quarter is quarter. Yeah, so are the 2.76? Yeah in my mind under states that true volume that we showed this quarter. Yeah. We were probably more at a 4% annualized growth rate. If you if you add back the shared National credits.

And how how much more about would you like to edit a resource?

So we're going through an ongoing evaluation, but I would say it's likely that there's another forty million.

Okay and question for Lynn on merger interest acquisition interest sounds like there's a lot of discussions going on in the industry right now. Can you remind us kind of what kind of Target you're looking for and what you're not looking for also? Yeah. Sure. So there are a lot of conversations lot of really exciting ones going on with continue to be focused really on the smaller Banks now that's that's smaller definition has gotten a little larger probably, you know, three 3 and 1/2 billion or less. And the reason we like those is took a couple of things really only cultural side. We find that they're focused on service. Their employees are focused on the employee engagement side, really mirrors ours. I think there's more upside because we can bring our products set and limits that they don't have and typically, you know, typically a lower price. So that continues to be our Focus we continue to be focused in the five states that we're in, New Jersey.

Okay, and and we're pretty optimistic that that will be able to have some success there. So I'd say the you know, the things we aren't looking for practically would be you know, those outside of our markets not to say that we wouldn't consider the right one. I'm say I would probably say we're not actively seeking, you know, any kind of large transformational kind of situation not that again we wouldn't be interested if the right one presented itself, but I'm not you know, there's it needs to have certain criteria. You need to have pretty significant overlap to power through the the changes that you need to make to put two companies together need to have real took nearly of leadership because that's the only way you have Clarity of culture and so our Focus continues to be on these ones. We're in markets either where we already are or attractive Market wage.

Are states that we want to enter we can find like my minded Bankers to to join up with?

Franklin

thank you, Jennifer.

Next question is from the line of Brad milsaps of Piper sampler. Your line is now open sir.

Hey, good morning.

Maybe Jefferson in just to start it sounds like you know, you'll be losing, you know, maybe six or seven million dollars in mortgage Revenue. Next quarter expenses will stay relatively flat. Can you talk about you know, any other levers you might have maybe as it relates to, you know, the decision-making around selling additional SBA or or production is maybe they sort of offset some of that headwind wage. Yep. Thanks great. Great question. We do think the expenses will come down some with specific to Mortgage in Q2 and then you'll see it come down more in Q3 said there are variable expenses. You'll just see the full impact of that in Q3. We have been for a year or so holding back a gains from our SBA Pine. We it was like, it's a great asset to keep on a balance sheet. We've been keeping those on the balance sheet. So you will see that start to increase keep in mind. Also. The first quarter is our seasonally week Thursday.

SBA quarters, so look for a a growth rate in that SBA activity Navitas has the same way Navitas we have

We've had good origination we've had outstanding credit were very happy was where we are there. This is also their slowest quarter. Generally, we are looking for sales at the right price there. I would expect to see some in the second half of the year. We are at 7 or just under 8% Navitas loans to Total loans off and environment with a lot of cash is really nice to have these in the Vita songs on the balance sheet, but they do get really nice premiums and look for us to begin selling Navitas loans in the second half of the year off and you bad that even though you know, we we are looking at mortgage production. Like you said every time we look at mortgage production, they have they we have a performed and so there there's some question about what that number actually might be next quarter crystal ball. We've been we've come up with our estimates and we've been beating our estimates vary. Yep.

Please and and so we have seen I think with the cash. It's on bank balance sheets. You are seeing just a lot of demand for that paperwork. I have seen some margins come in. We are seeing a mix change towards purchase, but we have been the more you you seen this with the NBA to where they've been increasing their expectations with Rich may have a piece to add to that one of their variables. That is we continue to hire. So we just hired three Emma Lowe's down in Florida and we're just starting to get some traction Thursday and I will tell you that there's ongoing discussions with other animals as well. So and as Len said the market continues to outperform Industry forecast

That's great. And then just just to just to follow up on the on the m&a discussion. I appreciate you know, some of the color around, you know, kind of size and geography just just kind of curious, you know deals that you are looking at.

How impactful do you do? You think somebody's deals can be from a from an EPS accretion standpoint. You know, our is pricing is such where you can you know, really, you know, Drive some, you know, a single digit ipps secretion or is the market is such where you know, it's more more singles, uh, you know, kind of you know, single-digit, you know type low single-digit ipps secretion. I'm just kind of curious when one of the gauge kind of odd, you know, kind of what you know, the potential, you know, kind of opportunity is out there to deliver some of your excess capital and and push our earnings higher. Yeah. So I mean, I would say that be similar to our own recent deals in terms of size and impact. I think the pricing is attractive, you know, there's a big differential in our pricing versus others. So if you look at you know paid a trade kind of ratios, I think they should be good and you know the

in terms of you know, you might have, you know to singles that look like a double then when you

For them to gather you could have two doubles that look like a home run, but I don't think you're going to have one home run if if that makes sense.

No, it's helpful. I'll hop back in to you. Thank you.

Next questions from the line of Michael Rose of Raymond James sir. Your lines are now open.

Hey, good morning. Thanks for taking my question. Sorry if I missed this in the in the opening remarks, if you just kind of walk through kind of your expectations four for Cornell and then maybe separately you know, how should we think about ppb fees this year? And what's the kind of the expectation for uh for for purchase accounting accretion Jefferson, if you can just kind of, you know walk through any Source changes from from last quarter. Thanks. Yep. Thanks. I'll start with the the margin, you know, hit the other the other two pieces. So what we're seeing here is our Charities that to average earning asset ratio has been increasing as we've been getting this really strong deposit growth has been ending up in the Securities portfolio to put some numbers behind it. We were at 17% of quarters ago or a 24% Securities to average earning Assets Now we had another really strong deposit growth quarter this quarter on an average basis. We're up over through

$300 and averaged deposits this quarter and so some of that mix changes what you've been seeing that said, I think you're going to start seeing this mix change start to even out. So I think off and is is flat going into next quarter and then it should be as you get into it later in the year should be starting to increase on the purchase accounting the loan accretion. I think we what we have here. We have 30 million dollars left to a Creed through we did five million dollars this quarter, I think our bases and that four million dollar range, then you have that increase do you get prepayment? So can afford a five million dollar there is what I'm expecting on PPP fees. We have twenty-eight million dollars left to run through Thursday 2nd quarter. I'm expecting the Lion's Share of the remaining fees from around 1 around 2, which is 3 million dollars to to come through in the second half of the year. I would expect a game.

Piece of that remaining twenty-five million dollars from around 3 to start hitting in the second half. I think it will into a 2022 but I do think you get you know, a really good piece of that full twenty-eight million dollars this year an important change in the second wave which is the 2021 p p p which loans under 150,000 now have a one page sign off on forgiveness. So after they wake. You're going to see that move much faster than we saw last year and that's 85% of our loans. Yeah, and you finally start to see a little movement on a million over when we have had we have had one approved and they're working so we have seen one. Yes. That's that's that's great color may need to put a finer point on on some of the the the capital actions you're going to take the score in terms of you know, the the Redemption of of debt and things like that. I just haven't run the math. What's what's the estimated impact just wage?

Barry isolation from the plan to

Yes, so you're looking at once there was a once you get the full and quarter, once you get the full quarter impact of the actions that I'm thinking for two and the full impact of took it in full effect of both of those is about 2 basis points a little more than you get another piece on top of that on the $15 sub debt.

Got it. And I did see that you guys did hire some some folks down in you know at Seaside. It's on the LinkedIn page the announcement. Can you just talk about you know broader hiring efforts? I know you guys have a girly active and and opportunistic and what that could mean for expenses this year. You know, what what is what's kind of in the plans and you know, what that mean from an extent standpoint. Thanks. Sure and this is Thursday and I'd say it's it's really the opportunities more than the plans. We continue to focus a lot on Florida Gideon reminds us that it's the 17th largest economy in the world. So a lot of good Metro markets down there. I will tell you we have not seen the benefit yet, but we did have a BMO Harris kind of left out in March and I was talking to the leader yesterday on Thursday and so feel very good about where that is going and I will tell you that we're talking to three other teams down there of which some people have accepted but haven't started yet. Yep.

We feel very optimistic about what's going on about both the opportunity the customers and the talent in Florida and we plan to take full advantage of that.

Great. Thanks for taking my questions.

Again participants as a reminder. It's star one to ask a question or the pound key to a draw your request.

Next question is from the line of Catherine mealor of KBW. May I have your last name will open?

Can you hear me?

Maybe on you Catherine.

And you can you hear me? Oh great. Okay, good morning. So I wanted to ask you just a question on the on the ACLU saw a big decline in the reserves quarter would could you would you say that the decline this quarter going to fully reflect the the better economic Outlook? And so if the moodies model effectively stays unchanged from here, you know, are we kind of are we kind of at a base for the ratio or do you think you'll see further declines as a move for the rest of the year off? Yeah. So so the way that I'm thinking this is Rob Catherine the way that I'm thinking of it is we provided eighty million dollars last year and we charged off 18. So we built the reserve by sixty million dollars in 2020 and then your your comment though about the economic forecast Thursday.

I would say at this way.

All of the benefit of the economic forecast has not been realized and we weren't comfortable taking all of that just because the wage increase in special mention loans that we had during the quarter so it didn't feel like it was right to realize all of that.

And your expectation in terms of when you might see so so but but yeah, so just in terms of credit Trends then I would say, you know, my expectation is that Q2 is kind of a flat cord, right? So once you put alone in special mention you probably are going to wait a quarter or two before you have the ability to to move it out. So I would say right now based on what I'm seeing. It would be my expectation that the special mention loans would begin to decline in the third quarter and fourth quarter. And as that happens, then we could see more of the reorganization of the positive economic Outlook.

Great. Okay, so then maybe not not for guidance, but kind of like a zero provision maybe next quarter and then we do is return to negative provision depending on what growth in charge obstacles wage and removing the back half of the year. That's a good way to think about it. Okay. All right, great. And then

On the senior care downgrade. It feels like it's it's it's really just that they're not cash flowing in leasing up. According to the original plan. Are there are there anything there? Are there any projects within that category that you're really worried about that? Perhaps have a potential loss content or is it really just kind of downgrading given the cash flow and and the and the leasing office? Yeah, so it's a good question. I would say in September. I was kind of worried about where things were going to go and I'm much more optimistic. Now we've seen a number of properties began to demonstrate Improvement in occupancies. And and you're right you're exactly right. So a project, you know comes into town obtains a certificate of occupancy and they begin to lease up and they just it just doesn't go as fast as it was originally thought that it would go. So it takes a little longer.

And we're carrying those projects and special mention. But but we are seeing the the majority of our projects are in fact improving in their occupancy and and we're pleased I was pleased with the first quarter of a game.

Okay, great. That's helpful. Everything else was asked. Thank you.

Next question is from the line of Kevin Fitzsimmons a d a Davidson sir. Your lies now opened. Hey, good morning. Everyone. Good morning. Just took follow-up question on it seems like a lot of the discussion on hiring and maybe it was just the examples given but it seemed like they were concentrated in Florida with with Rich. I know that that's a tremendous market and size of the market. I'm just wondering if is is the focus on hiring more a by-product that it's it's it's a good mom an environment right now to to take Talent or is it more a by-product of the lack of m&a opportunities in that market just given the consolidation that's happened over the years and years obviously got Seaside, but there's just not all that many sizeable banks left to consolidate. So I guess that's what I'm wondering is Florida going to be

To build that Florida going to be much more of a team lift out type of effort.

As opposed to traditional Acquisitions. Thanks some of the answer that in two ways and on a Focus on Florida first and then the rest of the footprint because I don't want to leave that out. But certainly there are opportunities in Florida right now for whatever reason the timing of m&a kind of noise that makes life and talent available seems to be the perfect time in Florida right now where it was in Atlanta like eighteen months ago. And so we're certainly taking advantage of those opportunities. I will tell you. I certainly it's more Wednesday Tuesday throughout the rest of the footprint. We're really looking for experienced lenders that have deep portfolios in relationships with can bring over and those conversations are going on all the time. They just not as much on the lift outside. They'd be one person in a particular Market. That's the right person. And so that's kind of how we're looking at both wage.

both opportunities

Okay. Great. Thanks very much. Thanks, Kevin.

Next question is from the line of Brody Preston of Stephen sink, sir is now open.

Hey, good morning, everyone.

Hey, I thought you just a follow-up question on on the snakes. So that was about thirty million that you ran off. And you said it was about another forty. You're considering What's the timing of when that 46 million will run off as a tattoo Q event or is it throughout 2021? Yeah, it's a good question. I was actually thinking about that because I think it is a longer-term right? Those loans have wage. I'm not going to it's not longer but it's not 6 months. So it'll be over the next I think likely 18 months would probably be a good window for that.

Okay. Okay. So this quarter was kind of anomalous and just the 30 million kind of all maturing this quarter. And so yeah, go ahead what part of it depends upon these how these credits work right that they'll do refinances. They'll do acquisition. Just just it's hard to predict those things but probably 18 months is probably a conservative. Yes, but it just depends on the activity and those markets.

Got it. And so the snake run off that's that's about a third of the run a third of the lower balances that you saw on the course cni portfolio. And so I wanted to ask what else was there that drove the reduction in my loans this quarter.

I'll go ahead. You know, we had a conversion so Seaside converted and March of this year and you got a lot of loans reclassified in that process. So there's just a lot of noise in that and so we don't really think we saw any material changes in the overall portfolio and we expect you know have a better view of all that Q2 going forward.

understood

I appreciate that and then robbed on the on the senior care loans, you know, I I understood that. It's it's the it's the lease up. So it's kind of caused the last couple of quarters or you've added more of these two special mention substandard, but I wanted to ask is there a consistent theme that you're hearing from? You know the sponsors on these projects that's causing the delay and the lease ups relative or the I guess the original timeline.

Well in the fourth quarter, it was very much about COVID-19. It feels like you know, and and a lot of the markets were not open and you couldn't go see a a relative that was in a senior care facility. So you put Mom in a senior care facility and you can never see her again. So it just wasn't very appetizing and then of course the fourth quarter is always slow season for these properties just because Christmas doesn't seem like the right time to do that. Especially if you're not going to be allowed to go visit in the facility so early in January, we have started seeing some uptick in occupancies that we weren't seeing before and we think that's largely due to and we are tracking vaccinations of employees and residents on the properties and and feel like the properties are making good progress there. I would we have a very good job.

Ship is a third-party underwriter portfolio manager and I have a monthly call at home just to check on the industry and where it's going with the trends are and what we're hearing is that the the the beds are starting to fill again and you know, we probably won't see that impact to the end of this quarter. But all the trends are positive. Everyone's feeling much better about the industry and obviously vaccinations have all picked up and you know, they're in the priority list of their workers of all got them as well. So the industry feels good. It's just moving slowly, but it's moving in the right direction. I agree with that.

Got it. Okay, and then just switching back to mortgage, you know understand it's it's going to be volatile. But just assuming that you know, the lower kind of fees do come through Thursday. I know that there's a lag but you know Jefferson, I guess what dollar amount if it's down 6 to 7, you know, what's the dollar amount of variable expenses? You would expect to kind of work the way it work its way out of the run-rate wage, maybe in three Q based on that. I'll give you some some parameters on that. So in total we had six million dollars a mortgage commissions this quarter and I'll expect that to be down to be rich talk kind of like maybe in concert with volumes. Yeah. I mean it's going to be down a certainly a couple of million if we're if we're if we're down accordingly in terms of what we're making in fee in, it's that's a that's a good question. I'm not sure it's down on this phone call. I have that answer, but we can look up.

I didn't get back to you.

Got it. Okay, and on the SBA front so the gain on sales that you guys have been having over the last few quarters have been hovering, you know, if you just did the simple math of the fee divided by the loan sales and that kind of money to 9% range. But you know with the economy improving and with rates still low, you know, the the premiums on that paper can get that up bit up pretty quickly. And so I wanted to ask what you guys are seeing thousands of gain on sale margins moving forward for that business. This is Rich. The the answer to question is right now gains are at record wage is now remember that it's based on the term of the loan and the pricing and the size of the loan. They do worry about concentration. So if five five million dollar loan isnt going to sell as much as I am a $1000000 loan but to your point the rep probably 15% quarter-over-quarter from last quarter, so very strong faith.

now at Cedar Point

Got it. And then I just had to last ones real quick Jefferson. What percent of of the loan portfolio is floating rate at this point? 53% Okay, go ahead and maybe your this is your next question. But on that one slide, we have one point 1 billion dollars of floating-rate loans prices our floors. So we're behaving right now on the next rate hike more like we're about 45% voting and if you got to rate hikes about half of that would be off the floor.

That was the next question. Thank you very much. All right.

Thank you for all the questions. I'll now hand to call back over to Lynn Martin for closing comments. Great. Well, once again, just thank you all for joining the call Great questions. Appreciate the interest gained any follow-up issues. Feel free to give any one of us a buzz and we look forward to talking next quarter. Thank you so much.

And that concludes today's conference. Thank you all for participating. You may now disconnect dead dead dead.

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