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United Community Banks Inc (NASDAQ:UCBI)
Q1 2020 Earnings Call
Apr 22, 2020, 11:00 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Good morning and welcome to United Community Banks' First Quarter 2020 Earnings Call. Hosting the call today are Chairman and Chief Executive Officer, Lynn Harton; Chief Financial Officer, Jefferson Harralson; Chief Banking Officer, Rich Bradshaw; and Chief Risk Officer, Rob Edwards.

United's presentation today includes references to operating earnings, pre-tax, 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 ucbi.com. Copies of the first quarter's earnings release and investor presentation were filed last night on Form 8-K with the SEC and a replay of this call will be available in the Investor Relations section of the company's website at ucbi.com.

Please be aware that during this call, forward-looking statements may be made by representatives of United. Any forward-looking statements should be considered in light of risks and uncertainties described on Page 3 of the company's 2019 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.

Lynn Harton -- President, Chief Executive Officer, and Chairman of the Board

Good morning. You know, normally I prefer to have a short earnings call and just let the numbers speak for themselves. But this quarter obviously the numbers don't tell the whole story, so I'm going to spend a bit more time on some other topics. So please just bear with me a few minutes.

I will start on Page 3 of the deck with how I'm viewing our response to the COVID crisis. Fundamentally, I'm focusing on all our employees, our customers and our risk management processes. Employees and customers because they are the drivers of our long-term value post-crisis. Risk management because that's what's going to drive our ability to come out of the crisis and shape to take advantage of the opportunities we expect. And my support for those areas comes from our comprehensive pandemic plan and our Board governance.

As I note on Slide 4, we have got an extraordinarily strong Board, including three members, who are actually active senior execs at major US banks during the last crisis. Their knowledge and challenge to the management team, along with the rest of our Board and an additional three of whom lived through the crisis as United Board members, continues to provide the right balance of oversight and support as we make our plans.

On Slide 5, I have also been pleased that at the thoroughness and responsiveness of our business continuity plan owners to both put our plan in place quickly and to make adjustments as need dictates.

Turning to our focus areas on Slide 7 through 9, I outlined several steps we have taken to support our teams. Currently, we have 54% of our branch teams working remotely and we have the ability to scale that up to 88%, if needed. I also described some of the other actions we have taken to make our teams understand that they are valued, supported and safe during this time.

One of these initiatives is our share of the good program you will see highlighted on Slide 8, where we encourage our teams to share encouragement with one another and with our customers.

Speaking of customers starting on Slide 11, we are being flexible and proactive in payment deferral options. We know we are good underwriters. We know how to select customers. So our goal is to support and bridge as many of them as possible to the recovery phase. That's one reason we committed early to be a leader with the PPP program. Our team was able to get approval for almost 7,000 loans totaling more than $960 million before the program ran out of funding.

In context, this equals more than 14% of our existing commercial loan portfolio. This was a tremendous effort involving hundreds of people across the Bank and I want to recognize the entire United team for going all in to support each other and our customers. We have also stepped up customer communication. We are adjusting fees, changing limits all with the goal of supporting our class and living our brand promise to be the Bank that service bill. [Phonetic] This is actually one of the most energizing and rewarding times of my career to be a banker. Our teams can see more clearly than ever how they are making a difference. This will pay off in the long-term.

And as you see on Slides 12 and 13, we are actually seeing it pay dividends today as we look at digital engagement across the Board, site traffic is up substantially, active online and mobile banking users are up, more customers continue to open up deposit accounts online and our social media connections are growing rapidly as well.

As we look at risk on Slide 15, we are relying on our three risk principles. When you arrive at a crisis is generally unexpected and the risk you enter a crisis with is the risk you are going to live with. There's really no time to make major adjustments. So we have tried to manage with a through the cycle approach in mind, avoiding concentrations, so as to not bet the Bank, taking only the risk we believe we understand and having a culture that rewards speaking up and addressing problems realistically.

Speaking of risk, Jefferson why don't you cover some of our portfolio statistics and then our performance numbers for the quarter. And after that, I'd like to come back for just a quick look forward before we open it up for questions.

Jefferson Harralson -- Chief Financial Officer

Thank you, Lynn. This quarter I'm making a change and starting with loans and credit on Page 17. Our ending balance of loans was up $122 million from 12/31 or 6% annualized. Of the $122 million about $60 million came from draw activity. These draws came in the middle and at the end of March at the beginning of the stress, but had been stable throughout April and into this week. Our commercial loans to commitments ratio moved to about 67% from 63% at year-end with the draws.

As Lynn mentioned, we have $961 million of PPP loans coming onto the Q2 balance sheet, which represents about 14% of our existing commercial book. As far as funding goes, we expect a significant portion of the PPP loans will be funded this week and early next week. We expect to use a mix of available cash, the PPP liquidity facility, and perhaps, some FHLB funding as well depending on timing. In our initial planning, we are estimating that 70% of the PPP loans will be forgiven to the borrower within six months.

On the credit side, we have booked approximately $900 million in loan deferrals as of Friday or about 10% of our loan book. Of the $900 million in loan deferrals about $169 million comes from Navitas. To give you some transparency later in the deck, we have some additional information on Navitas, Seaside, as well as our restaurant, hotel and senior care portfolios that we are carefully monitoring.

Specifically, our restaurant book and our hotel book each separately make up about 3% of loans or about 6% in total, and again, in the back there are some more detail on these exposures. Navitas makes up about 8.5% of our loan book and we did execute a $22 million sale of Navitas loans in February at a 6% gain. Rob is here to talk more about our credit in the Q&A if you like. For our credit philosophy is that we are very selective in the customers we choose and believe they will fare better than most. We are also very disappointed on the size of our individual exposures and very selective on the size of each book relative to capital.

On Page 18, we look at our credit for the quarter. Our net loan losses in the quarter were higher than we have been running at $8.1 million and annualized at 37 basis points in losses. The main driver of the increase net charge-offs was a $6.4 million loss on a single loan. This $6.4 million loan was in our leveraged loan book of which we have about $73 million left. The company was in the pulmonary medical testing business, it had significant private equity money behind it but struggled, the PE walked away and the company subsequently failed.

All right, let's turn the page to allowance for credit losses on Page 19. We adopted CECL on January 1 and we declined on the opportunity to go back to the incurred last method. In the first quarter, we posted our loan loss provision of $22.2 million. Our allowance for credit losses is up 19% from January 1 and up 35% from year end. In terms of dollars, our allowance for credit losses was up $14 million from January 1 and up about $23 million from year end.

I want to share with you a little bit of how we are thinking about CECL. We believe the future is unknowable and that the models are based on historical economic correlations, but neither we nor anyone else has seen an environment like this one. Throughout the quarter, we considered and ran many scenarios and stress our input and assumptions, and of course, we will continue to do so as the public health crisis continues to play out.

Moving to Page 20, capital. Before I talk about the numbers, I will talk about strategy for a bit. As the pandemic became increasingly apparent, we stopped our buybacks and began reviewing our contingency plans and rerunning our capital on liquidity stress models, and we feel comfortable with where we are. Our capital ratios are flat in the quarter and up about 40 basis points to 50 basis points from last year.

Moving to Page 21, again, I will mention that we just don't know how long this environment is going to last or how bad this is going to get. But we do believe that we are coming into the cycle from a position of strength. We are coming to the cycle with more capital than our peers. We also come into the cycle with about 20% more profitability than peers as measured by pre-tax, pre-provision ROA in Q4. I would also argue that we are more liquid than our peers with our 81% loan-to-deposit ratio and with almost no wholesale funding in place, we have a lot of flexibility on the balance sheet. We also have very strong core funding with 33% of our deposits in DDA in the first quarter and we have one of the lowest cost deposit basis in the Southeast.

Moving on to our net interest income results. We had 150 basis points of rate cuts in March that affected the end of the quarter. So we had about two-month of what I would call a normal quarter and the crisis started impacting our March numbers. Our net interest income grew 7% annualized and our NIM increased by 14 basis points. This increase had to the help of an unusual amount of accretion in the quarter, accretion income moved to $7.6 million in Q1 from $3.4 million last quarter and added 15 basis points to the NIM versus the last quarter and contributed 26 basis points in total.

The switch to CECL had the initial impact of shortening the timeframe of which we accrete a loan alone, specifically now we accrete to the contractual maturity versus the expected resolution date which was often longer. We have $15 million left to accrete to the margin, and we are expecting $3 million to $3.5 million next quarter, depending on prepayments or about 10 basis points. Excluding accretion, our core NIM was down only 1 basis point versus last quarter to 3.81% and the NII itself was down 2% versus last quarter. Our core NIM benefited from the run-off and sale of our low yielding indirect portfolio last quarter that helped the NIM by about 3 basis points. We also had some positive remix on the funding side with strong core deposit growth and shrinkage in average CDs. We had more than $165 million of DDA growth that more than funded our $112 million of loan growth. All in, our cost of funds moved to 95 basis points from 103 basis points last quarter or down about 8 basis points.

Let's talk a little on our philosophy and culture of risk here. We have been derisking our securities portfolio and balance sheet for two years at least. We sold and let our CLOs run-off from a peak as high as about $330 million in 2017. We also ran off our indirect auto portfolio to zero, a portfolio that peaked at around $440 million also in 2017. We maintained our liquidity with our low 80% loan-to-deposit ratio. We also delevered our balance sheets since 2018, freeing up capital and liquidity, as we ran-off about $700 million in FHLB borrowings from its peak in 2018. The combination of these things also took our TCE from the low 9% range two years ago to 10.2% this quarter.

Moving on to Page 23 and fee income. The first quarter is typically our weakest quarter for fee income being seasonally slower for both SBA and mortgage. Our fee income was down $4 million from last quarter, but it was also up $5 million from the year ago quarter at $25.8% million. As the crisis set in, we saw a sharp drop in rates in turmoil in the markets including significant illiquidity in certain asset classes throughout the quarter. Our lock volume was over $800 million in the quarter well above our previous record. With the refi environment, we had to writedown the value of our mortgage servicing asset by $4.3 million as the expected life of our loan service shortened dramatically. All said, it was a great quarter for mortgage.

As I mentioned and as I know you are aware, there was volatility and illiquidity at times in the credit markets this quarter. That, of course, affected the gain on loan sold right on the UC [Phonetic] at $1.7 million. In February, we sold $22.2 million of Navitas loans at a 6% gain, usually in Q1, you would see us with about a $1 million or so in SBA loan sale gains, but we elected not to sell this quarter because the pricing narrowed and we preferred to hold them. For Q2 and the rest of the year, we are not expecting Navitas loan sales, but we be monitoring market conditions.

Moving to expenses briefly, total expenses were down $800,000 versus Q4 excluding merger charges.

And with that, I will pass it back to Lynn to conclude our prepared remarks.

Lynn Harton -- President, Chief Executive Officer, and Chairman of the Board

Thank you, Jefferson. Clearly, the shutdown has caused the most serious economic stoppage of our lifetimes combined with the most massive government intervention in history and we simply don't know at this point what the ultimate ramifications for our customer base will be. But I do believe, and I want to close my prepared remarks with this, that we will be able to accelerate many of our long-term goals, as we execute over the next several quarters. The investments we have made in technology will show results and we are already seeing how we can digitize our business even more quickly than we imagined.

Our branch delivery system will be able to be improved more rapidly as well. Our brand will be strengthened, as service and connection will stand out in this environment. And by the way, we just found out late yesterday that we were recognized by J.D. Power for having the highest retail banking satisfaction in the Southeast for 2020. That's the sixth time in the past seven years, we have received that honor, which is a truly amazing testament to our team and how they live our brand out every day. And finally, we believe that M&A opportunities post-crisis will likely increase for the type of service oriented banks we like to partner with.

And speaking of M&A on Slide 26, I have a few comments about our Seaside acquisition, which we announced right before the COVID crisis began. As we have progressed, our decision to partner with Seaside has only been reinforced. We are in constant contact with their team and that time together continues to prove the similarities of our cultures. We both remain focused on serving our clients and I believe that both during and after the crisis, we will be better together.

And with that, I'd like to open it up for questions.

Questions and Answers:

Operator

[Operator Instructions] And our first question comes from the line of Brad Milsaps from Piper Sandler. You may begin.

Brad Milsaps -- Piper Sandler -- Analyst

Hey. Good morning, guys.

Lynn Harton -- President, Chief Executive Officer, and Chairman of the Board

Good morning.

Jefferson Harralson -- Chief Financial Officer

Good morning.

Brad Milsaps -- Piper Sandler -- Analyst

Jefferson, you guys did a nice job hanging onto the net interest margin this quarter in light of everything happened -- a lot of it happened in late March. Just curious, if you maybe had spot rates for maybe loan yields and deposit costs at the end of the quarter, just trying to get a sense of directionally kind of how -- what kind of pressure might be on the horizon?

Jefferson Harralson -- Chief Financial Officer

Yeah. So I might get back to you on the spot rate, but we will talk about the margin a little bit. I think that our margin will be directionally down when we had unusual amount of accretion. So as you probably have -- you had 26 basis points this quarter, the run rate is probably closer to 10 basis points. So I think maybe down 15 basis points from the accretion piece of it. The LIBOR rate has been irrationally high as it moved with fed funds and so we have $3 billion on LIBOR loans. I would expect that to come down or even without -- within or rate cuts obviously. We have a very significant number of CDs coming due at high prices. We have $300 million at $190 million, so you should see a continuation of the cost of funds moving down. So it's an extraordinary moving parts of timing at PPP inside, so not given and you didn't ask for specific margin guidance. But I can get back to you with what I think the spot rates are for the yields and the costs.

Brad Milsaps -- Piper Sandler -- Analyst

Okay. Great. That would be helpful. And you brought up PPP for a moment, I think, you noted in the slide deck that you thought kind of most of your loan growth would just be kind of limited to that program. You guys had tremendous production again this quarter, didn't necessarily translate to a lot of net growth. But would you back away from kind of where we are now, kind of your mid-single digit kind of loan growth excluding the PPP program or do you think there's opportunities, if you guys can take advantage out there, given as strong as your capital is, all the liquidity as kind of being in a better seat than most banks?

Richard W. Bradshaw -- Chief Banking Officer

So, Brad. This is Rich. You bring up a great question. So number one, we are being cautious and very selective. However to your point, we do see an opportunity. There are a lot of long-term strong companies out there and we really feel like the big banks are going to take their eye off them that's a great opportunity for us. We will look for those companies to demonstrate the impact of COVID-19 on them now and on the future, and what their action plan is, so providing they could do that we would be supportive of those requests.

Brad Milsaps -- Piper Sandler -- Analyst

You might want talk about the hires you made in the first quarter as well...

Richard W. Bradshaw -- Chief Banking Officer

Sure. So a couple of things on that, normally, we would be leading off with that, but it's a different world. We were extremely successful in Q1 and have lift out in Atlanta. We lifted out a team leader, Craig Dowdy and four CRM's, Commercial Relationship Managers out of SunTrust. And we also -- and I say, SunTrust because put it in perspective we have one from BB&T. So all through this, but they came -- that was the makeup and really excited they came on very late in March and they brought on deals and deposits right away, and they have also jumped in on our PPP program. So from that perspective, we are excited about what they bring to the table.

Brad Milsaps -- Piper Sandler -- Analyst

Okay. Great. Maybe one final one, Jefferson, would you expect kind of weighted average fee on the PPP launch [Phonetic] to be around 3% for you guys?

Jefferson Harralson -- Chief Financial Officer

That's in the ballpark.

Brad Milsaps -- Piper Sandler -- Analyst

Okay. Great. I will hop back in queue. Thank you.

Jefferson Harralson -- Chief Financial Officer

All right.

Operator

And our next question will come from the line of Jennifer Demba from SunTrust. You may begin.

Brandon King -- SunTrust -- Analyst

Hey. This is Brandon King on for Jennifer. I see as you disclose your deferral rate for the Navitas portfolio, but I'm wondering what the deferral rates per industry were for the broader portfolio?

Richard W. Bradshaw -- Chief Banking Officer

So, this is Rob. So if you go to the back of the deck, -- let's go to back of the deck, there is, we have broken out deferral rates, talk some about restaurants and hotels. So we've listed some of those and then also senior cares at the back of the package. So that's probably a good place to start and then maybe just I would break out for you kind of the overall Bank is at right around 9% deferral rate and Navitas is around 22%. So that's probably kind of, within those maybe five different categories. That's a good way to think about it.

Brandon King -- SunTrust -- Analyst

Okay. Were there any other sectors that stood out from what you were seeing?

Robert A. Edwards -- Chief Risk Officer

No. There's a variety of different numbers, but those are the ones that when, of course, when we put the deck together that we got focused on and seemed to be some of the high watermarks. And then, of course, the Navitas ones separate, we have listed also if you are -- if you look at Page 28, we have listed the top five sector deferral rates for Navitas specifically there.

Brandon King -- SunTrust -- Analyst

Okay.

Jefferson Harralson -- Chief Financial Officer

Yeah.

Brandon King -- SunTrust -- Analyst

And then one more question. As far as your internal stress test results, how did -- how does your loan loss reserve now compared to the losses you are seeing in those stress test?

Robert A. Edwards -- Chief Risk Officer

Well, it's a great question. Thanks for asking. We had a -- we run so many. I mean, we have run stress test of the last cycle. We run stress test specifically to our losses in the last cycle. We've run various CCAR [Phonetic] stress test. So we have run, I don't know, 20 different, probably, capital stress tests. And -- but we do feel like, we have very significant capital and for any reasonable -- continuing to run stress test, I'm looking at the new Moody's results, but we feel comfortable where our capital is, and we believe that -- for almost any reasonable loss scenario that our capital is fine.

Brandon King -- SunTrust -- Analyst

All right. Thank you very much for the color.

Operator

And our next question comes from the line of Tyler Stafford from Stephens. You may begin.

Tyler Stafford -- Stephens -- Analyst

Hey, guys. Good morning.

Lynn Harton -- President, Chief Executive Officer, and Chairman of the Board

Good morning, Tyler.

Tyler Stafford -- Stephens -- Analyst

Hey. I wanted to start on fees, Jefferson. So, I guess, what do you expect the impact of the PPP, I guess, distraction to be on the -- just the normal SBA gain sale revenue over the near-term to be?

Jefferson Harralson -- Chief Financial Officer

Yeah. I might pass that over to Rich on...

Richard W. Bradshaw -- Chief Banking Officer

Sure. There are some -- we had an existing pipeline rolling into Q2, obviously, 95% of the effort right now is focused on PPP. I will say that the secondary market has come back a little bit from first quarter, about half the buyers are active in the ranges in gain on sale or 106 to 107 currently.

Jefferson Harralson -- Chief Financial Officer

And we do not sell loans that, you noticed, probably, in the first quarter and we had $25 million origination, so there's a bit of backlog for Q2.

Tyler Stafford -- Stephens -- Analyst

Okay. So you would expect to sell SBA loans, but not Navitas loans?

Jefferson Harralson -- Chief Financial Officer

Correct.

Tyler Stafford -- Stephens -- Analyst

Okay. And why not sell Navitas loans at this point?

Jefferson Harralson -- Chief Financial Officer

Just I don't know what the market will be for Navitas loan. Let's say, we are just going to watch the market, watch the credit markets, and see where the bid might be. That's a good thing about having flexibility on your balance sheet that we can hold these loans if we want to. We have been selling loans late last year and early this year at that 6% gain. I don't know what that gain would be now and if we, and so for now, we are going to plan on holding them and if the gain continues to be in that 5% to 6% range, we may consider it.

Also think of it another way, we have 8.5% of our loans in Navitas right now. We are going to have at least $1 billion for PPP loans for some short period of time. We are going to add Seaside in there too. So that percentage of 8.5% is going to come down a decent amount. So we have a lot of room to get to that 10% level as well. So we are not -- so that's how we are thinking about. We may sell, but we don't need to for our 10% gain.

Richard W. Bradshaw -- Chief Banking Officer

And I was going to add, we are expecting another good performance for mortgage.

Jefferson Harralson -- Chief Financial Officer

Right.

Lynn Harton -- President, Chief Executive Officer, and Chairman of the Board

And back on Navitas just for natural condition of what's going on is, their volumes down about 30% anyway and they are really looking as an opportunity to up credit quality during this time. There's a lot of their competitors, as Jefferson said, don't have a balance sheet. So we expect volume to be down any way. We expect credit quality to be up, in terms of the new originations. So that's part of it as well.

Tyler Stafford -- Stephens -- Analyst

Okay. That's helpful. Maybe sticking with Navitas, do you know how much of that portfolio today that equipment is idle right now versus being actively used?

Jefferson Harralson -- Chief Financial Officer

That is the -- probably the best measure of that would be the deferral piece and as you can see in there in the deferral segments, it would be what you would expect, a fitness and beauty salons, for example, obviously they can't operate and so. But there's -- they are still seeing a fair amount of activity, I mean, whether landscapers, whether short-haul trucks. So it's -- there are businesses still operating and businesses need equipment, and this is essential use equipment. So it's hard to give what they are -- what we are doing on the deferral side is, we have got an automated portal set up to request the deferral and then contacting the clients and requesting the first deferral is for 90 days, but during that time, we are requesting touch payments.

So, a small payment just to kind of keep contact, keep,, engaged with the client and we are just taking a wait and see. I mean, because, obviously, these are customers, they want to be back in business, they want to open back up, but in many cases, they have got to get the government to allow them to open back up. And our expectation is honestly that as we -- at the end of the 90 days, a lot of those will be deferred again and we will probably increase those touch payments and it's just going to be bridging those clients back into recovery.

Tyler Stafford -- Stephens -- Analyst

Okay. And I do appreciate all the details around the Navitas kind of breakdown by deferment in the hotels and restaurants in the back. And I guess, maybe just shifting over to my last question, If -- I totally appreciate that you guys are entering this recessionary environment with a significantly higher capital position than most of your peers. But as I sit back and look at, the reserve ratio that you guys built to of 99 basis points and then kind of add up some of the different portfolios that you laid out in your deck of Navitas at 8.5%, the hotels at 3%, restaurants at 3%, senior care at 5%, and then, I think, retail CRE is somewhere around 3.5%, and then, you gave us some syndicated credits and leverage details.

It looks like around 25%, 26% of the total portfolio are just some of these type hotbed-type portfolios and I'm not trying to imply that you guys are under reserve. But I'm just trying to better understand what went into your CECL calculation and assumption. And well, I guess, why do you feel comfortable that 99 basis points, at least specially relative to some of your other peers that at least so far have built reserves a little bit higher at this point?

Robert A. Edwards -- Chief Risk Officer

Yeah. So, Tyler it's Rob. I would say a couple of things. One is, you do have to understand, and I think, Jefferson mentioned it in his comments, and I think he said it appropriately. So the models are built-off of correlations from past experience. And so we are in a situation where just as you look at the models, you have to understand that there may be moments of disconnect. But I would say this also, we are also -- usually you get like one set of scenarios from we use Moody's for the economic forecast, usually get one a month and we are now in a situation where we are getting one a week.

And so it's -- keep in mind, CECL is built-off of what you think is going to happen in the future and based on what happened in the past, and it's because of the element of deferral and government stimulus, it really is a challenge to know for sure what is going to happen in the future. We -- at quarter end, we kind of looked at it, and said, we are in the hotel space, but we are in it at a 50% loan-to-value with some really strong operators with strong liquidity. We feel good about that.

We are in the leverage loan business, but we are in it in a very small way at $70 million and while it is leveraged it's generally leveraged at less than 4 times and that's based on commitments, not based on outstandings. Most of ours would come way down when -- if you would measure what I call true leverage, which is the outstanding to cash flow -- outstanding debt to cash flow. So I feel, we don't have -- so we have that $70 million, I would say, is negligible in the portfolio and then, we don't have any oil and gas exposure. So I feel really good about the specific components that we mentioned. And then, also good that some of the components that other folks are having to talk about are not in the book at all.

Tyler Stafford -- Stephens -- Analyst

Okay. That's very helpful. Maybe just one more on that. Could you provide what the new CECL reserve for the Navitas portfolio is?

Robert A. Edwards -- Chief Risk Officer

So it's $15 million.

Tyler Stafford -- Stephens -- Analyst

$15 million. Perfect. All right. Thanks, guys. Appreciate it.

Lynn Harton -- President, Chief Executive Officer, and Chairman of the Board

Yeah. Thanks, Tyler.

Operator

And our next question will come from the line of Kevin Fitzsimmons from DA Davidson. You may begin.

Kevin Fitzsimmons -- D.A. Davidson -- Analyst

Hey, guys. Good morning.

Jefferson Harralson -- Chief Financial Officer

Good morning.

Kevin Fitzsimmons -- D.A. Davidson -- Analyst

So you mentioned a few times, Jefferson, PPP, could you just kind of walk through how we should expect the noise to occur the next few quarters. So I would suspect that a lot of banks have talked about the second quarter will have elevated expenses, you will have higher average balances because of the loans, you will have a dilutive impact to the margin because of the 1% carry on those loans. But then whether it occurs in late second quarter or it occurs from third quarter, you will have the origination fees come through, which I would think come through the margin. But I think some companies are having it come through the income, if you can just talk with some of that?

Jefferson Harralson -- Chief Financial Officer

Yes. I think, our -- the fees that we earn here will come through the margin. I think, you -- for the second quarter, I think, you laid it out very well. We are not expecting any -- we are expecting to amortize that fee over the two years of the loan. And as I mentioned in the prepared remarks, I think about 70% of these will be forgiven within six months that kind of gets you right to that end the third quarter or early fourth quarter that you will see some of these fees are starting to come in. So I would expect that you would get kind of one-eight [Phonetic] of the fee roughly in Q2 and you would get kind of 70% of those fees split between Q3 and Q4. That's how I am thinking about it currently.

On expenses, we're -- we probably run some over time expenses. Now I don't think it's going to be super meaningful. On the expense line, I do expect our expenses to be flat to down going forward. So I don't think that the PPP you are going to really see that by itself in the expense line.

Kevin Fitzsimmons -- D.A. Davidson -- Analyst

Okay. Great. And then one just follow-up on the allowance ratio, so -- on Tyler's question, so I know from past acquisitions it's obviously been loans that are marked that you typically you have to factor it in, but now with the post CECL world, I would suspect that that's all been adjusted. I wanted to just clarify because I know you said at one point you guys adopted CECL, but I thought your -- I thought I heard you said another point that you delayed the impact of it, so I just want to clarify that?

Lynn Harton -- President, Chief Executive Officer, and Chairman of the Board

No. We adopted, we declined to delay the impact, and there was another question on there as far as the CECL.

Kevin Fitzsimmons -- D.A. Davidson -- Analyst

Just on the allowance ratio, whether there was any kind of caveat or clarifying points to make based on past acquisitions on that when we are looking at it versus peer?

Lynn Harton -- President, Chief Executive Officer, and Chairman of the Board

I think that's the bring over of the -- so I -- if you go back to our Q4 deck, I think the number that we brought over from acquisition was in the $3.5 million range. So, but you are right, Kevin, all that's been as a part of the transition from incurred loss to CECL, you do bring over that purchase -- the purchase discount goes away from effectively, it's sort of its hidden and subtracted from the loans and now it's a on the purchase credit impaired, it's part of the allowance and it was, I think, the number was around $3 million that we brought over.

Jefferson Harralson -- Chief Financial Officer

Yeah. And you maybe thinking a little bit on the accretion side that I mentioned that we have $15 million of purchase accretion that we are still running through that were positive.

Kevin Fitzsimmons -- D.A. Davidson -- Analyst

Right. Got it. Okay. That's all I had. Thank you, guys.

Lynn Harton -- President, Chief Executive Officer, and Chairman of the Board

Yeah.

Operator

And our next question comes from the line of Michael Rose from Raymond James. You may begin.

Michael Rose -- Raymond James -- Analyst

Hey, guys. Sorry if you addressed this, I got on late, but mortgage piece was really good at this quarter, if you back up the MSR impacts from both quarters. Can you just give an update on kind of where pipelines are today and maybe what should expect from a mix and a volume perspective, as we move to the second quarter? Thanks.

Richard W. Bradshaw -- Chief Banking Officer

Michael, hi. This is Rich. So the mortgage, we expect to continue to have a strong Q2 based on the pipelines. So we feel good about that. I will tell you that we are being cautious and in terms of our portfolio, what we put on our books, non-government, we have tightened up the credit criteria, increasing FICO scores and reducing maximum loan sizes.

Michael Rose -- Raymond James -- Analyst

Okay. And then maybe just one follow up, I think, you mentioned earlier in the call, that you brought on another team and you expect to be opportunistic. What areas would you expect to be opportunistic, as I assume some of those at risk portfolios would be de-emphasize at this point. So, I guess, where do you see the greatest opportunities, as you look out the next couple of quarters and maybe if you can size it? Thanks.

Richard W. Bradshaw -- Chief Banking Officer

Well, it's interest -- this is, Rich, again. It's interesting. So there's certainly are going to be opportunities. And I would say, it's not -- you are not going to take an unusual answer, but the PPP thing has given us a real opportunity. So the big banks have not come out all that favorable, in many of our rural areas the smaller banks don't have the PPP program. So we are getting just a lot of feedback and actually not just feedback, people are moving accounts right now, because they feel better about what we have been able to do in this program and come through for the communities that we serve.

Lynn Harton -- President, Chief Executive Officer, and Chairman of the Board

Yeah. Because this really is -- as you said Michael, I mean, we've put up clearly a pause on all these highly affected areas and it's really just kind of core C&I long-term companies that really we are seeing the opportunity with. It's hard to size it, but it's a real thing and we are seeing it every week.

Michael Rose -- Raymond James -- Analyst

Got it. So generally on the small business front. Okay. That's helpful. Thanks for taking my question, guys.

Lynn Harton -- President, Chief Executive Officer, and Chairman of the Board

Thanks.

Operator

Thank you. And our next question comes from the line of Catherine Mealor from KBW. You may begin.

Catherine Mealor -- KBW -- Analyst

Thanks. Good morning.

Lynn Harton -- President, Chief Executive Officer, and Chairman of the Board

Good morning.

Jefferson Harralson -- Chief Financial Officer

Good morning.

Catherine Mealor -- KBW -- Analyst

Just a quick clarification on back to Navitas, did you think that when you mentioned that originations volumes are down, would you expect to continue to grow Navitas balances from here?

Lynn Harton -- President, Chief Executive Officer, and Chairman of the Board

Yeah. I will start with that. I do, so for -- Navitas applications are down. So we would expect lower originations. That said now we are not selling Navitas loans so it adds a little bit. We are not planning on selling anyway Navitas loans so it adds a little bit to the balance. So I would expect a slight positive growth in Navitas balances throughout the year.

Catherine Mealor -- KBW -- Analyst

Okay. Great. And then you also mentioned that the Navitas CECL reserve is $15 -- I think $15 million. What was that compared to year-end?

Robert A. Edwards -- Chief Risk Officer

Yeah. So Catherine, this is Rob. It was really up from 12.5% to 15%.

Catherine Mealor -- KBW -- Analyst

Got it. Okay. Great. The rest of my questions were answered. Thank you.

Operator

And our next question comes from the line of Christopher Marinac from Janney Montgomery. You may begin.

Christopher Marinac -- Janney Montgomery -- Analyst

Thanks, and thanks for the detail both on the call, as well as in the disclosures. Rob, if we go back to the $900 million deferrals kind of companywide. How do you consider that in the big picture? Should we think about as kind of a de facto [Phonetic] criticized number and that those loans kind of get worked out from here and that number comes down or with the $900 million growth, just kind of curious how you think about it in the big picture?

Robert A. Edwards -- Chief Risk Officer

So anecdotally I think it's interesting to think about and I -- there's a -- there's a numbers way to think about it and then there's a real life way to think about it. And you may have heard that the Georgia Governor opened Georgia back up for business and the day after that happened we were on the phone with some regulators that live in Atlanta and they were talking about how their -- one guy said his daughter, another guy said his wife, as soon as the order was lifted they all reached out to the beauty salon to make their reservations to get into crank those businesses back up.

So it's hard to say, Chris, I mean, I don't want to be evasive. But I think, people are ready to get out. We are sensing a wave here in the Carolinas and in the Southeast of people ready to kind of get back to normal. And I -- so it's hard to say that some percentage of these people that had deferrals. We sent everybody home and told them not to go and there's clearly a pent up demand for these businesses, people are going to go back out to eat, they are going to get their hair cut, that's they are going to start traveling again. And so it's just really hard to have any element of predictability around it.

Lynn Harton -- President, Chief Executive Officer, and Chairman of the Board

Because, I mean, it's clearly, as we all know, this is not a borrower specific. I have got a problem, I can't run my -- I'm a bad manager of my business. This is a broad economic shutdown. So we are not looking at deferrals in the normal way. I mean, if we -- if we are not looking at these, at this point as TDRs. We are supportive of clients deferring their payments. We know they want to get back into the business. And I think that's where as it comes to the reserve and all these other things, we have just got to see some of these data work its way back out to see what really happens.

And again, we would like to be more definitive, but it's just not a normal environment. If you think about unemployment rising like it is, but yet unemployment benefits covers, probably, for most people 70% to 80% of what they are making, we are seeing very few mortgage and HELOC deferrals, which would you -- would normally expect to see problems exist stop -- start there. So we are, we're obviously, very trying to stay very close to these clients, so that we understand what's going on with them, but we are not viewing them as special assets by any means at this point.

Christopher Marinac -- Janney Montgomery -- Analyst

Got you. That's very helpful. I appreciate that a lot. And then just a follow-up as it pertains to the PPP, is it possible or even likely that you would take some type of expense accrual just against those fees as they particularly a couple of months from now as they start to come in on forgiveness. Just curious on if a legal reserve or just unanticipated expenses to set aside would make sense?

Lynn Harton -- President, Chief Executive Officer, and Chairman of the Board

Yeah. Chris, that's a -- it's a great question and we have been thinking about a little bit. It is a nice earnings that should come in a lot in the second half of the year. And there is room to set aside possibly a legal reserve or possibly some provision or really anything, is just a -- it will add to our profitability in a short-term way in he second half of the year. So we haven't decided what to do with that if anything, but there is that ability to do so and we will look more into it in the third quarter and fourth quarter.

Christopher Marinac -- Janney Montgomery -- Analyst

Sounds great. Thanks for all the time this morning.

Lynn Harton -- President, Chief Executive Officer, and Chairman of the Board

Thank you.

Operator

Thank you. I am not showing any further questions at this time.

Lynn Harton -- President, Chief Executive Officer, and Chairman of the Board

Great. Well, thank you all for joining the call. We appreciate your support, your interest, great questions and we will look forward to talking again soon. Have a great day.

Operator

[Operator Closing Remarks]

Duration: 44 minutes

Call participants:

Lynn Harton -- President, Chief Executive Officer, and Chairman of the Board

Jefferson Harralson -- Chief Financial Officer

Richard W. Bradshaw -- Chief Banking Officer

Robert A. Edwards -- Chief Risk Officer

Brad Milsaps -- Piper Sandler -- Analyst

Brandon King -- SunTrust -- Analyst

Tyler Stafford -- Stephens -- Analyst

Kevin Fitzsimmons -- D.A. Davidson -- Analyst

Michael Rose -- Raymond James -- Analyst

Catherine Mealor -- KBW -- Analyst

Christopher Marinac -- Janney Montgomery -- Analyst

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