United Community Banks, Inc.

Good morning and welcome to United Community Bank's 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, free tax, free 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 8K with the SEC. Thank you for joining us. At this time, I will turn the call over to Lynn Harton.

Well, 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'll start on page three of the deck with how I'm viewing our response to the COVID crisis. Fundamentally, I'm focusing on 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 in 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 four, we've got an extraordinarily strong board. including three members who were actually active senior execs at major U.S. banks during the last crisis. Their knowledge and challenge to the management team, along with the rest of our board, 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 five, I've also been pleased 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 slides seven through nine, I outline 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 describe 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 the Good program you'll see highlighted on slide 8, where we encourage our teams to share encouragement with one another and with our customers. And speaking of customers, starting on slide 11, we're 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've also stepped up customer communication. We're adjusting fees, changing limits, all with the goal of supporting our clients and living our brand promise to be the bank that's service-filled. You know, this is actually one of the most energizing and rewarding times in 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 can see on slides 12 and 13, we're 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're relying on our three risk principles. When you arrive at a crisis, it's generally unexpected. And the risk you enter a crisis with is the risk you're going to live with. There's really no time to make major adjustments. So we've 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.

Thank you, Len. 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 1231, 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 have 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's 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, but 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 disciplined 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 increased 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 1st, and we declined on the opportunity to go back to the incurred loss method. In the first quarter, we posted a loan loss provision of $22.2 million. Our Allowance for Credit Losses is up 19% from January 1st and up 35% from year end. In terms of dollars, our Allowance for Credit Losses was up $14 million from January 1st and up about $23 million from year end. I want to share with you a little bit of how we're 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 stressed our inputs 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'll 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 and liquidity stress models, and we feel comfortable with where we are. Our capital ratios were flat in the quarter and up about 40 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're coming into the cycle from a position of strength. We come into 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 and 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 bases 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 months 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 NEM increased by 14 basis points. This increase had 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 NEM versus 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 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 to $3.5 million next quarter, depending on prepayments or about 10 basis points. Excluding accretion, our core NEM was down only one basis point versus last quarter to 3.81%, and the NII itself was down 2% versus last quarter. Our core NIM benefited from the runoff and sale of our low-yielding indirect portfolio last quarter that helped NIM by about three 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 eight basis points. Let's talk a little on our philosophy and culture of risk here. We have been de-risking 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 delivered our balance sheet 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 in 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 and turmoil in the markets, including significant illiquidity in certain asset classes throughout the quarter. Our lock volume was over $800 million in the quarter last Well above our previous record. With the refi environment, we had to write down 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 loans sold line item that you see at $1.7 million. In February, we sold $22 million of Navitas loans at a 6% gain. Usually in Q1, you would see us with about $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 will be monitoring market conditions. Moving to expenses briefly, total expenses were down $800,000 versus Q4, excluding merger charges. And with that, I'll pass it back to Lynn to conclude our prepared remarks.