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UNITED COMMUNITY BANKS INC (UCBI)·Q2 2020 Earnings Summary

Executive Summary

  • Q2 2020 GAAP EPS was $0.32 on net income of $25.1 million, with pre‑tax, pre‑provision income of $65.6 million; EPS declined year over year primarily due to a $33.5 million provision for credit losses under CECL reflecting COVID‑19 macro uncertainty .
  • Net interest margin compressed 65 bps sequentially to 3.42%, driven by lower purchased loan accretion (‑18 bps), lower‑yielding PPP loans (‑6 bps), and excess low‑yield liquidity from deposit inflows (‑9 bps), while noninterest income increased $14.4 million linked‑quarter on record mortgage activity .
  • Record loan and deposit growth: loans +$1.2B (including $1.1B PPP) and core transaction deposits +$1.7B, with noninterest‑bearing deposits up $1.1B; the company raised $200M of capital (preferred and senior notes) and closed the Three Shores/Seaside acquisition on July 1, positioning for strategic opportunities .
  • Management expects near‑term reserve and capital ratio impacts from Seaside marks and double‑dip provisioning (ACL +25–40 bps in Q3; capital ratios down 75–105 bps), but highlights strong digital adoption and mortgage momentum as offsets; dividend maintained at $0.18 and buybacks suspended given the environment .

What Went Well and What Went Wrong

What Went Well

  • Record production: $2.0B loan production including $1.1B PPP, plus traditional loans grew at a 5% annualized rate; core transaction deposits up $1.7B, with DDA up $1.1B (cost of deposits down 18 bps to 0.38%) .
  • Mortgage strength: rate locks hit a record $802M (up 106% YoY), with noninterest income up $14.4M linked‑quarter primarily from mortgage gains; gain‑on‑sale margins improved versus Q1 .
  • Digital execution and customer acquisition: “the investments we have made in our digital delivery channels are being put to the test and exceeding our expectations,” and PPP processing added ~4,000 new loan and deposit customers .

What Went Wrong

  • Margin compression: NIM fell 65 bps q/q to 3.42% due to lower accretion, PPP yield drag, and excess overnight liquidity from deposit surge, pressuring net interest revenue (down $9M q/q) .
  • Elevated provisioning and credit metrics: provision for credit losses increased to $33.5M; NPAs rose to 0.32% of assets and deferrals reached $1.8B (17% of loans), reflecting COVID‑19 stress (notably restaurants and hotels) .
  • Earnings down YoY: GAAP diluted EPS decreased 42% YoY (operating EPS down 46%), driven by reserve build; ROA fell to 0.71% GAAP (0.72% operating) .

Financial Results

MetricQ2 2019Q3 2019Q4 2019Q1 2020Q2 2020
Total Revenue ($USD Thousands)139,065 145,269 143,321 122,229 115,999
Net Interest Revenue ($USD Thousands)117,784 119,338 116,638 118,606 109,304
Noninterest Income ($USD Thousands)24,531 29,031 30,183 25,814 40,238
Provision for Credit Losses ($USD Thousands)3,250 3,100 3,500 22,191 33,543
Net Income ($USD Thousands)44,085 48,362 49,012 31,884 25,096
Diluted EPS (GAAP, $)0.55 0.60 0.61 0.40 0.32
Diluted EPS (Operating, $)0.59 0.63 0.61 0.41 0.32
Net Interest Margin (FTE, %)4.12 4.12 3.93 4.07 3.42
Efficiency Ratio (GAAP, %)57.28 55.64 54.87 56.15 55.86
Pre‑Tax, Pre‑Provision Income ($USD Thousands)60,502 65,445 65,397 62,882 65,562
ROA (GAAP, %)1.40 1.51 1.50 0.99 0.71

Segment/Portfolio Mix at Q2 2020 (Period‑End Loans):

CategoryAmount ($USD Millions)
Owner‑Occupied Commercial RE1,760
Income‑Producing Commercial RE2,178
Commercial & Industrial1,219
PPP Loans1,095
Commercial Construction946
Equipment Financing (Navitas)779
Residential Mortgage1,152
Home Equity Lines of Credit654
Residential Construction230
Consumer121
Total Loans10,133

Key KPIs:

KPIQ2 2020
PPP Loans Funded (# / $)10,994 loans / $1.1B; Seaside: 789 loans / $220M
Core Transaction Deposits Growth (Linked‑Q)+$1.7B (22%)
Noninterest‑Bearing Deposit Growth (Linked‑Q)+$1.1B
Cost of Deposits0.38%
Mortgage Rate Locks$802M (record; +106% YoY)
Noninterest Income (Linked‑Q change)+$14.4M, led by +$15.3M mortgage income
Deferrals at 6/30$1.8B (17% of loans); Commercial $1.4B; Mortgage $105M; Consumer $45M
Net Charge‑Offs$6.1M; 0.25% of average loans
NPAs / Total Assets0.32%

Guidance Changes

MetricPeriodPrevious GuidanceCurrent GuidanceChange
Allowance for Credit Losses (ACL)Q3 2020N/AACL expected to increase by 25–40 bps due to Seaside PCD marks and non‑PCD double‑dip provision Raised (reserve build)
Regulatory Capital RatiosQ3 2020N/AExpected 75–105 bps decline from Seaside acquisition impact Lowered
EPS Accretion from SeasideFully phasedPrior estimates updatedExpected to be $0.14–$0.18 accretive to EPS on a fully phased‑in basis; one‑time pre‑tax merger expenses ~$15M Accretive
Common DividendQ2 2020$0.18$0.18 maintained Maintained
Share RepurchasesOngoingOpportunistic historicallyTemporarily suspended given environment Suspended

Earnings Call Themes & Trends

TopicPrevious Mentions (Q4 2019, Q1 2020)Current Period (Q2 2020)Trend
Digital/TechnologyOngoing investments; groundwork laid for digital engagement “Investments in our digital delivery channels… exceeding our expectations,” with materially higher digital usage and account openings Strengthening
PPP Program & Customer AcquisitionN/A (pre‑program rollout); Q1 groundwork 10,994 PPP loans ($1.1B) processed; ~4,000 new loan/deposit customers; +$800M deposits from PPP customers Strong near‑term inflows
Net Interest Margin DriversQ4 2019/Q1 2020 NIM ~4.07–3.93% NIM down 65 bps q/q to 3.42% (‑18 bps accretion, ‑6 bps PPP, ‑9 bps excess liquidity) Down
Credit Quality & DeferralsCECL adopted in Q1; provision $22.2M; NCOs 0.37% Provision $33.5M; deferrals $1.8B (17% of loans); NPAs 0.32% Reserve build/heightened risk
Mortgage BusinessQ1 locks $801M; MSR write‑down Locks $802M; mortgage income +$15.3M q/q; gain‑on‑sale improved Strong momentum
Capital & M&AAnnounced Three Shores; strong capital levels Raised $200M (preferred/senior notes), closed Seaside July 1; near‑term capital ratio impact; long‑term accretion Positioning for growth

Management Commentary

  • “The investments we have made in our digital delivery channels are being put to the test and exceeding our expectations. Customer traffic patterns suggest that our customers have significantly increased their use of our digital platform to access our products and services, as well as to open and manage their accounts.” — Lynn Harton, Chairman & CEO .
  • “Our SBA team… processed nearly 11,000 applications for the PPP loans totaling $1.1 billion… we added approximately 4,000 new loan and deposit customers since the Program began.” — Lynn Harton .
  • “In June, we raised $200 million—$100 million in preferred stock… and $100 million in senior notes… to provide us with substantial flexibility… and be prepared to emerge from the health crisis in a very strong position.” — Lynn Harton .
  • “We… formed the United Community Bank Foundation… with an initial $1 million contribution” to expand community support .

Q&A Highlights

  • Margin mechanics clarified: management detailed NIM headwinds from lower purchased loan accretion (‑18 bps), PPP yields (‑6 bps), and excess liquidity (‑9 bps), framing near‑term pressure while deposit costs continued to fall .
  • Credit outlook and reserves: discussion emphasized CECL reserve methodology under multiple scenarios and noted anticipated ACL increase in Q3 tied to Seaside marks and provisioning .
  • Deferral and sector exposure: granularity on deferrals ($1.8B; 17% of loans) and higher‑risk segments (restaurants $325.4M with 39% deferred; hotels $305.3M with 72% deferred) provided transparency on stress points .
  • Capital and M&A integration: management addressed capital raises, expected near‑term capital ratio impact from Seaside, and longer‑term EPS accretion expectations [$0.14–$0.18] .

Estimates Context

  • Wall Street consensus (S&P Global) for Q2 2020 EPS and revenue was unavailable due to missing SPGI/CIQ mapping for UCBI; as a result, we cannot provide a definitive beat/miss assessment relative to S&P Global consensus. Values retrieved from S&P Global were unavailable for this period due to mapping constraints.

Key Takeaways for Investors

  • Balance sheet strength with proactive capital raises ($200M) and high‑quality deposit inflows (DDA +$1.1B) provide funding stability, but margin headwinds from PPP yields and excess liquidity weigh on near‑term NIM .
  • Credit remains the swing factor: elevated provision ($33.5M) and broad deferrals ($1.8B) indicate conservative reserving; watch restaurant/hotel trends and deferral roll‑offs for reserve trajectory .
  • Mortgage is a bright spot: record locks ($802M) and improved gain‑on‑sale support fee income, partially offsetting NII pressure; continued talent upgrades should sustain production .
  • Seaside acquisition is strategically attractive: near‑term capital ratio dilution (75–105 bps) and ACL step‑ups are expected, but management forecasts EPS accretion ($0.14–$0.18) and wealth management expansion, enhancing medium‑term ROATCE .
  • Digital adoption is accelerating: increased digital sales and engagement underpin operating efficiency and customer acquisition, a secular tailwind in a socially‑distanced world .
  • Dividend maintained ($0.18) and buybacks paused: capital deployment remains disciplined; monitor buyback reinstatement as macro visibility improves .
  • Near‑term trading lens: stock likely sensitive to updates on deferrals, PPP forgiveness timing, and mortgage pipeline; medium‑term thesis hinges on margin normalization post‑liquidity surge and accretive integration of Seaside .

Notes: All figures are GAAP unless stated “operating.” Non‑GAAP reconciliations provided in the company’s exhibits .