Q2 2021 United Community Banks Inc Earnings Call
Good morning, and welcome to United Community Banks second quarter 2021 earnings call hosting the call today are chairman and Chief Executive Officer, Lynn Harton, Chief Financial Officer of Jefferson Harralson, President and Chief Banking Officer, Rich Bradshaw, and Chief Risk Officer, Rob Edwards United.
Today includes references to 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.
Are included on the website at U C. B I dot com copies of the second quarter's earnings release and Investor presentation were filed last night on form 8-K, with the S. E C and a replay of this call will be available in the Investor Relations section of the company's website at U C. B I Dot com. Please be aware of that during this call for it.
We're looking statements may be made by representatives of the United any forward looking statements should be considered in light of risks and uncertainties described on pages 5 and 6 of the company's Twenty-twenty form 10-K, as well as other information provided by the company in its filings with the SEC and included on its website at this time I'll turn the call over to.
Lynn Harton, good morning, and thank everyone for joining our call today the.
This has been of great quarter for United and I want to start by congratulating our teams for what they are doing to build the company. We've had several strategic accomplishments this quarter.
We doubled the size of our investment advisory business and added offices in South Carolina, and Georgia with the acquisition of Entrust capital Advisors.
Excited to welcome that team to United and look forward to the opportunities that our combination will bring.
We also announced the bank expansion in the Charlotte MSA with the acquisition of of Questar.
Jimmy angle has built a great team that will be additive to our franchise with approximately 750 million in assets in non offices.
We've had several lending divisions in Charlotte for some time and we've been looking for a way to grow our presence there and we're very excited the request of chose to partner with US We anticipate closing the acquisition in the fourth quarter of this year and finally last week, we were glad to announce our entry into the Nashville, Tennessee market with the acquisition of reliant bank.
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Reliant is of high performance community bank, they will be of great fit with our culture and strategy.
Reliance team led by the van or the founder Chairman and CEO will lead our continued growth in the Tennessee market, where we now will have a top 10 deposit market share.
From an operating perspective for the quarter.
The P. S was 78 cents per share equating to a $1.46 basis point ROA and.
17.8% return on tangible on an operating basis loan growth ex P. P. P was 5% annualized and we had strong overall average balance sheet growth, resulting in strong growth in our spread income deposits continued to grow strongly while our cost of deposits dropped 5 basis points and now <unk>.
Fans at only 9 basis points credit continues to be of strength with net recoveries of 2 basis points and reserve release of $13.6 million overall, a great quarter.
1 we're very proud of that.
And I'll turn it over to Jefferson for more details. Thank you and I'm going to start my comments on page 9 the chart highlights our consistent loan growth excluding P. P. P loans over the last year.
It also shows our strong deposit growth over the same timeframe.
And in combination we have become a lot more liquid and our loan to deposit ratio has moved to 70% from 80% of year ago.
On page 10, we take a closer look at our loan book and the mix of our loans, we had $123 million of loan growth, which is of 5% annualized loan growth rate.
Which is net of the sale of a number of SBA and the Vita phones that total just over $45 million in the quarter.
Moving to page 11 of which details our deposit growth well, we had $123 million of loan growth. We also had $335 million of deposit growth, which annualized is at an 8% growth rate. We did have a lot of successive quarter of continuing to lower of cost of deposits, which moved to 9 basis points this quarter.
Down from 5 basis points last quarter.
On page 12, I will touch briefly on capital our capital ratios grew in the quarter and our above peer levels.
Harley because of a $100 million preferred raise we did last year with our pending transactions. We are putting that raised the work and we expect that are of capital ratios will be of peer levels on a pro forma basis.
We did buyback of modest amount of shares in Q2, which totaled just over $5 million.
On page 13, we talk about spread income and the margin.
Excluding P P P fees and loan accretion our spread income grew at a 17% annualized pace in Q2.
Our core margin was down 4 basis points, mainly due to continued increase liquidity driven by strong deposit growth in combination with the significant cash flow coming in with P. P. P. Forgiveness page for Keane details our fee income, which was significantly down from last quarter.
Primarily because of mortgage our rate lock volume was down in Q2, and this combined with our gain on sale percentage also being down from Q1, well down our gain on sale percentage does still remain above pre pandemic levels.
Then given the lower rates in the quarter. We also had a 3 million dollar of MSR write down this quarter, which compare to a $1.3 million gain of last quarter and created a $4.3 million dollar negative swing in total from Q1, we did resume the V. The phone sales this quarter and had 803000.
The dollars of gains of $18.9 million of loans sold we would expect to continued in the veto loan sales for the rest of the year. In addition to our normal SBA loan sales.
Page 15 shows our expenses of $800000 from last quarter, excluding merger related charges I expect relatively flat to possibly down expenses in Q3, excluding the impact of Finch for us that adds about $1.5 million of quarterly expenses.
I'll finish up on page 16, and talk about PPP loans, we had $411 million of PPP loans forgiven in Q2, and we have $472 million remaining to be forgiven.
Recognize the $11 million of PPP fees in Q2.
And half of $19 million of fees yet to be recognized of.
Which we would expect to get the lion's share later in 2021 and with that I'll pass it to Rob to discuss credit Rob. Thank you Jefferson. We are pleased to report the second quarter of net recoveries for this year. The recoveries were driven by very low levels of losses at our equipment Finance company Novartis and the ongoing.
Success of our collections and recovery efforts.
As we expected the combined level of special mention and sub standard loans remained relatively flat this quarter at just under 5% of total loans, our hotel and senior care borrowers continue to report improved performance and we expect to see upgrades materialize in the.
Half of the year the largest improvement occurred in the hotel portfolio as our top 50 hotel borrowers are now reporting a weighted average occupancy of 73%.
The low level of losses, and strong credit quality metrics combined with the positive economic outlook to drive of negative provision of $13.6 million for the quarter.
The allowance for loan losses, including the unfunded reserve now amounts to $122 million and 1.12% of the loan portfolio, excluding PPP loan balances and now I'll pass it back to land for closing remarks.
Thanks, Rob.
Once again, congratulations to all of our bankers and support staff for an outstanding quarter.
In addition to having great business momentum across our geographies and businesses.
Our team was once again recognized by J D power.
For having the best retail banking satisfaction in the southeast.
That's an unprecedented for 7 of the past 8 years.
Truly an incredible accomplishment and 1 that we believe is the driver of our financial success.
We're well positioned for continued earnings growth.
With hiring success in our current footprint.
And expected strong EPS accretion from our announced acquisitions. This.
This is estimated on the final slide in our deck.
Once we have completed and converted our 2 pending deals I believe we will have 1 of the most attractive footprints in the south East and I look forward to continuing success driven by our great United team.
And I'd like to now open it up for questions.
Thank you.
To ask a question you'll need for press star 1 on your telephone to withdraw your question press the pound key.
Please do not use your speaker phone for audio quality purposes. Please standby, while we compile the Q&A roster.
Our first question comes from Michael Rose with Raymond James You May proceed with your question.
Okay.
It might be on the Michael.
Yeah.
Perhaps the mood for the next call and.
Michael back on at the end.
Our next question comes from Kevin Fitzsimmons with D. A Davidson you May proceed with your question.
Hey, good morning, everyone can you hear me, Okay, Hey, Kevin.
Hey.
It seems like we just spoke but.
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I wanted to ask about just with the the.
The negative provision, which came in right in line with what you all are.
Pre announced last week.
Looking forward and I know.
This is there's a lot of noise in this with the past acquisitions and the acquisitions to come but looking at that reserve ratio of where you stand in looking at.
Economic.
Your expectations for the economy improving.
Would you expect negative provisioning from here too.
And are we.
And at some point over the next few quarters, we start to transition over to more positive provision I know that's tough.
You load in the seats of model, but just trying to get from a taking a step back how you guys are viewing it yes.
Yeah, Hey, Kevin This is Rob.
Youre exactly right the economic environment and forecast does play a big role in it.
For the modeling really for the first 2 quarters did have very positive expectations in forecasting elements.
The modeling in the seasonal model that did play a role in the negative provision.
The economy from where we sit continues to perform very well and so at the moment of our we don't expect any changes there and we do expect continued.
I'll say reduction in criticized and classified are special mentioned in sub standard assets as we go forward. So it's quite possible we could see additional.
Provisions in the latter half of the year.
Okay great.
Thank you.
And.
Maybe.
Looking at the balance sheet and I know, we've talked a lot about loans, but securities went up and I'm, just wondering with where rates stand today Jefferson how.
We should be thinking about the likelihood of you guys taking the securities.
Putting some of that excess liquidity to work.
More of an securities going forward. Thanks.
Yes, Kevin it's of Great question. So you should think about that securities portfolio of continuing to grow and albeit at a slower pace than it did this quarter.
I mentioned in the prepared remarks, we have a significant cash we have significant cash coming in from PPP.
Got more of P. P P to be forgiven or of deposit growth remains strong.
Our securities portfolio has has grown and it will continue to grow just at a lower.
At of all of our growth rate than in the past.
Okay and I just wanted to ask 1 kind of more housekeeping question on with the combination with the reliance day.
Of that mortgage joint venture in.
My understanding and modeling reliant and covered NIM was always that.
Even when mortgage turned profitable common.
The common shareholders of relying didn't benefit from that just because of the terms of the joint venture and it was kind of stay that way for quite some time and modeling I basically pulled that out just so I didn't have the.
The forecasted non controlling interest adjustment, but is that is there anything from a legal standpoint change with with the combination is that still the way to think of it or should we be building in the revenues and expenses from that mortgage joint venture.
I think the way you've been thinking about it is correct going forward. We're in we're in conversations with the joint venture partner about the future strategy for that business, but as it sits today youre exactly right. It has no kind of positive or negative impact I will say also that the terms of the <unk>.
<unk> venture do not preclude us from any other mortgage operations that we have so all of those are totally separate we're not bound in any way.
While the joint venture agreement. So yeah, I would just kind of put it aside and and let's see what book develops with it and when we talked about the cost savings from the deal we talked about 31 per cent that was on the bank only side of it.
Think about it excluding the joint venture, it's an extra of $16 million of cost savings, but that's a similar amount of revenue. So again, not a major impact on underlying earnings, but it does improve the efficiency ratio of something.
That's perfect. Thanks for the clarity on that thanks, guys.
Thank you. Our next question comes from Jennifer demo and true.
For the Securities you May proceed with your question.
Yeah.
Good morning, how are you.
Good day.
I'm just wondering about you.
2022, after you have <unk>.
Why isn't the quest integrated.
All of your interest level in future transactions would be.
And are there any markets you really want to build scale in like like Tennessee.
Yeah, So well first off you're exactly you know kind of an embedded in your question is.
The effectively of statement that is correct and that our focus right now is on getting a quest of.
And reliant you know both operationally and culturally integrated so we're not.
Interested at this point in doing additional deals until we feel confident that that's that's behind us.
But beyond that you know we.
The you know we've got a great footprint today Theres not any places that we were looking at outside of our current footprint, but there's any number of markets in the Carolinas.
The Georgia, and Florida for that matter that we think would be additive to our current footprint and you know if we.
Have the same combination of great markets and a great teams and of great cultural fit and then we'd be interested in pursuing those opportunities when they come. So I think I think we've you know in 2022, if you look at how many deals we've done over the years, we typically have done at least 1 and some.
<unk> 2 deals a year, but again been very selective about that if you look at the markets. We've gone into you know again, Nashville, Charlotte Raleigh, Greenville, Charleston, Orlando, Myrtle Beach et cetera.
We're going to be very selective very selective of EFS to the people and <unk>, but with all of that said I mean, our focus right now is rollout and the quest of getting those done and in bad and it will we'll figure out what we do from there.
Okay.
Okay.
Thank you. Our next question comes from Catherine Mealor with <unk>.
You May proceed with your question.
Thanks, Good morning, good morning, good morning Catherine.
The nice to see that you bought back some stock this quarter do you anticipate.
Continuing buyback activity with your 2 deals pending or do you think that's off the table until we get past the club.
Yes, so great question Catherine thing because I do think of that we will buyback some shares we have a we have authorization.
Our stock has underperformed a little bit of since the announcement of reliant we're pretty excited about that deal and about our outlook. So I would expect us to repurchase of shares in the second and the third quarter.
And in the fourth most likely.
Okay awesome.
And then on the margin what's your outlook for the core margin do you feel like we've hit a bottom and how you're kind of thinking about how excess liquidity plays out maybe within the next couple of quarters.
It's a great question. So we have some tailwind from cash going into securities.
But we also have some headwind in the area of the loan yield loan yields continue to come down a little bit of sort of a factor of the cash that you mentioned on everybody's balance sheet, we are seeing some pressure on loan pricing.
This quarter, we did a lot of really good work on the cost of funds to make our margin relatively flat, even with a lot of balance sheet growth, but that lever is pretty much pulled in I would expect some improvement there, but not not as much. So I think the the impact of the loan yield for now.
Offsetting the impact of moving some cash into securities.
All of that depends on what your forecast of deposit growth is once the deposit growth of.
False downturn of normalizes.
That mix change on the asset side can overwhelm the the loan piece of it but I think in the third quarter.
C a.
Some core margin of handful of basis points of margin.
Margin pressure because of the loan yield.
Great. Okay that makes sense. Thanks, so much thank you.
Thank you for our next question comes from Christopher <unk> with Janney Montgomery Scott You May proceed with your question.
Thanks, Good morning, I wanted to just drill down on the beta since for a second is the progress of they keep seeing part of kind of where we are with the economy and the restart or would you imagine that as the economy continues to evolve that they accelerate their pace of activity.
So Chris this is Rob when you were talking about pace of activity I'm, assuming you're talking about the strong.
Our low level of charge offs for the quarter.
So from from that aspect I think they they continue to focus.
Very closely they they've we've always said they've had great underwriting and great industry selection.
The combination of the government stimulus and economic optimism is really.
Creating that in and then maybe I'll pass it to Jefferson on the growth side, So I'll make 1 comment or 2 on the on the growth side is that they're seeing.
<unk> growth right now of lot of activity of really full pipeline.
And if you think of it had strong loan growth this quarter, especially if you put in debt, we sold $19 million this quarter and talking to the team down there. There. They are optimistic that feeling really good in the the growth pipelines continue to be.
Really strong so it's the.
The very positive outlook for reliant their credit and the growth.
Got it and then.
Just a follow up on the separate topic is.
All of your technology spending and as you assimilate the alliance in and of cholesterol and even on the of wealth management sales side.
Do you have incremental investments there or is there anything large that's going into your overall systems.
We don't have anything large, but we do have multiple projects going on of whether from new systems, we're bringing on the development group in the fetus that we brought on to tackle several internal projects as well. So there's no. We're not looking at any kind of core system change out.
Or anything like that but we do have several pretty exciting things that we're working on throughout the company.
Great. That's what I thought thank you very much guys.
Thank you. Our next question comes from Brody Preston with Stephens, Inc. You May proceed with your question.
Hey, good morning, everyone. Good morning, Brian Hey, Brody.
Hey, So I just wanted to circle back on the venous.
From Jefferson, maybe talking about the pace of sales going forward.
Are you kind of think this $20 million ish or so kind of quarterly <unk>.
Range will be used for moving forward or do you need to increase that I'm just trying to think about the percentage of that portfolio moving forward. Because you know post <unk>, even if you kind of run rate the growth of 20% annualized from here to there.
The kind of falls back down to 7.5 per cent alone. So do you need to keep selling them at this level or does it need to go up just from kind of color. There. Yes. That's the some of the questions that we're asking ourselves internally.
I would expect $15 million to $30 million a quarter.
You're exactly right, we do get some more.
Cushion to grow the VITAS with the with the acquisitions that are coming onto the key below our 10% threshold. So it gives us some room to keep them. If we want but I think we also want to have a pretty steady flow of sales that had to keep that debt.
Of that way and open for us. So I think 15 to 30 is the.
Number to expect and what that may be even the 20th of 25 range as the most likely.
Okay. Thank you for that and then maybe just as I think about margins between that and your AR and the SBA and use the loans.
As of Florida sort of for in a quarter margin good to use for the Davita sales and then separately as it looks like it was about a 10% margin on the AR on the SBA and use the loans is that of good good gain on sale margin of use for those loans. So.
So I'll start with on the VA side I liked your range. There I think we may be able to do a little better but I think that's a good range to put in the model and I'll pass the rich on the the SBA piece of it yes. Good morning, I would say that's probably a good number if anything it's a little bit on the low side. So the the SBA market and the USDA market continued to be strong.
Okay and enrich what do you what do you expect for for the pace of origination and sales on on those SBA and USDA loans.
I think because of the yield that we get the get on them and the amount of cash we have on the balance sheet will probably pull back just a little bit in our third quarter on the amount of sales.
Yes.
Might be a little possibly a little higher on the view that as of I had to throw out of the number now and a little lower on the SBA.
Understood.
Understood and then a question for Rob just on the on the senior care segments. So it looks like net net.
Net quarter over quarter, the portfolio remained relatively stable in terms of the size, but there are some moving parts that I was kind of hoping you can maybe help me.
The gain on especially as it came to the stabilized versus the lease up there is kind of of a big shift in the percentage there between those those buckets and so could you help me understand where there's some projects that.
Kind of rolled off versus new ones rolling on or did some projects that were previously stabilized you know fall below a percentage of that may be made them fall back into the lease up of some kind of color there would be helpful.
So.
Theres no backwards on stabilized versus.
In lease or the next category the are stabilized versus lease up yet so they go from construction to lease up the stabilized it's possible and we did have a couple of projects during the quarter. It's possible that just in the ebb and flow of the projects in other.
Stabilized they they may we did downgrade of couple to a sub standard during the quarter. So that that does happen. We also upgrade them, but really the grades are based on the.
Based on where they are in terms of expectations. So once they're in stabilized.
We expect them to perform if they drop of the occupancy the have some people pass away and then they go through a period and they need the lease back up that happens.
They stay in that category, what we have had is some projects in the lease up category sell.
Or pay us out and so that that would be more likely to create movement. Then and then of course as they're going through the stabilization process or the lease up process. They move into stabilization and that would also a.
Place of movement I will tell you that I don't think it's in the charts, but we did see an increase in occupancy in the lease up category of 10 percentage points. So we went from a.
<unk>, 36% to 46% now that's just sort of telling you it's not like the hotel space. We have released the room every night, but so but we are we are seeing improvement. There are continued improvement and expect to see improvement there are occupancy and the stabilize remained stable.
Over the quarter. So continue to feel good about the product that we have there.
Not only do we monitor this with their own portfolio of we're monitoring this nationally and we've seen positive trends as well as lease up nationally in this area.
Okay understood.
Thank you for that and then I did just wanted to touch.
Just on on the loan portfolio of Jefferson I. Appreciate the disclosure you gave with the variable rate loans I think it was $1.2 billion or so are.
We are at their floors I guess I wanted to ask could you just remind me and I think other assets in the past just what percent of the loan portfolio is floating rate and then if you do have the data and understand if you don't what percent of the portfolios you're acquiring in the coming quarters are floating rate.
As well.
Alright, so I don't have the data on the acquired banks right here, but I can get that for you.
We are at 53% for us.
As floating now if you take into the take into account the loans that are below the force that's going to behave as the 41% of floating now and if you go up by 100 basis points. So it would be it would get you really close to that 53 again.
And I can get you the data of the acquired the to be acquired banks.
Alright that would be great. That's all I had for you. Thank you for taking my questions everyone I appreciate it.
Thanks, Brian.
Yeah.
Thank you and I'm not showing any further questions. At this time I would now like to turn the call back over to Lynn Harton for any further remarks.
Oh, great well once again, we appreciate you joining our call and we hope you have a great day and we'll talk again soon thank you.
Yeah.
Thank you ladies and gentlemen. This concludes today's conference call. Thank you for participating you may now disconnect.
Yeah.
Okay.
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