United Community Banks Inc (UCBIO) 2004 Q2 法說會逐字稿

Please stand by.

Your conference call will begin momentarily.

Good morning, and welcome ladies and gentlemen, to United Community Banks' Second Quarter 2004, Earnings Conference Call.

At this time I would like to inform you, that all participants are on a listen only mode.

At the request of the company, we will open the conference up for Q&A following the presentation.

I will now turn the conference over to Jimmy Tallent, President and CEO of United Community Banks.

Please go ahead Mr. Tallent.

Good morning and thank you for joining United Community Bank's Second Quarter conference call.

I'm Jimmy Tallent, Chief Executive Officer, of United Community Banks, and with me is Rex Schuette, our Chief Financial Officer.

There are three topics on the agenda for today's call.

First briefing you on our second quarter's financial results.

Results have produced another record quarter for United Community Banks.

Second, updating you on several initiatives launched as part of our balanced growth strategy, that we believe will help fuel continued growth in coming quarters, including our recent acquisition of First Community Bank located on the south side of metro Atlanta.

And finally, reaffirming our earnings guidance for the remainder of 2004.

Following our presentation, we'll open the call for your questions.

But first I'd like Rex Schuette to review our forward-looking statement.

Thanks Jimmy.

The Earnings announcement that we released earlier this morning, is available on our Website, as well as other financial sites, and is being (inaudible) cast on our Website in the Investor Relations Section.

During the course of this conference call, we may make certain forward-looking statements.

These include all statements that are not statements of historic fact, but statements regarding the intent, belief or expectation of United Community Banks, and its Senior Management, with respect to trends affecting our operations, our financial, economic, and market conditions, and our growth and operating strategies.

Specifically of course, earnings expectations and estimates are forward-looking statements.

During the call we may refer to non-GAAP financial measures.

Our news release explains the difference between non-GAAP earnings measures, and measures calculated under GAAP.

We provide these non-GAAP measures because we believe they are helpful in analyzing the core performance trends at United Community Banks.

We filed our news release on Form 8-K earlier this morning, and we urge you to review the sections of the most recent Forms 10K and 10Q that describes the factors that may affect our future results of operations.

Any forward-looking statements contained in this news release, or the public statements of United Community Banks, or made by its senior management, should be considered in light of those factors.

Thank you Rex.

We've just completed another record quarter.

United Community Banks, again meeting our stated goals have sustained double-digit growth and operating earnings, and a return on tangible equity, above 18%.

For the second quarter, we achieved an 8% increase in total revenue, as compared to last year, a 15% increase in net operating income, an 11% increase in diluted operating earnings per share, and a return on tangible equity of 19.7%.

We achieved these results, I might add, in comparison to a very strong second quarter, at 2003, that included a record level of mortgage re-financing activities, and fee revenue.

Despite lower mortgage fee revenue, which was down 50% this quarter, from a year ago, we are able to continue to grow earnings.

Our rapid performance continues to be driven by the hard work and dedication of more than 1400 of community bankers, at our 78 banking offices, talented people who consistently and effectively implement this company's proven strategy.

It's a balanced growth strategy, and as you may recall from last quarter's conference call, it includes two key elements.

It starts with a focus on strong organic growth, organic growth which has accounted for more than 70%, of our overall growth through the years.

Organic growth includes internal growth, generated through our existing markets, as well as growth from de novo offices.

We generally establish a de novo office, when we have both elements present.

We see an opportunity in a market but equally as important, we have the opportunity to attract the right kind of community bankers, who know that market and share our values.

The second element of our growth strategy is selective mergers, and again the key is making certain the (inaudible) is right, and that we identify banks that share our passion for customer service, and our commitment to community banking.

Underlying it all, of course, is a philosophy that in everything we do, we'll maintain a constant focus on monitoring, and controlling operating expenses.

It's that strategy and our commitment to control expenses that makes me confident that we'll continue our track record of growth and performance.

Lets take a closer look at some of the other contributors to our second quarter's performance.

Now Rex will provide additional detail later in this call, but I'd like to mention some highlights.

At June 30th 2004, total loans were $3.3 billion, up 14% from last year, excluding acquisitions.

The growth in our loan portfolio was primarily the result of continuous strength and demand for loans within our existing markets.

Core loans increased $387 million, or 14%, this past year, excluding acquisitions.

This is an example of the organic growth so critical to our balanced growth strategy.

Supplementing organic growth were selective mergers.

We added $90 million in new loans, for this past 12 months, primarily for the June 1st merger, with First Community Bank in metro Atlanta, and to a lesser extent through the fourth quarter 2003 acquisition of three banking offices, in western North Carolina.

In total, loans grew $477 million, or 17%, compared to a year ago.

We achieved this loan growth while maintaining as we have for years, excellent credit quality.

We will not sacrifice credit quality for the sake of growth.

That's a bedrock element of our culture, as is our long-time policy of securing loans with hard assets.

The next area of performance I would like to highlight is our core deposit program.

I'm very pleased that even though we operate in some very competitive markets, United Community Banks was able to fund a significant portion of our loan growth with core deposits.

During our first quarter conference call, I told you about a company-wide direct mail, and solicitation program, developed to increase our core deposit base.

This program rewards new customers for opening accounts, and rewards existing customers, and employees, if they refer a friend to United Community Banks.

This core deposit growth initiative leverages the strong customer satisfaction, that our community based model generates.

To me of course, these results, confirm that our service culture isn't just the right thing to do, but it is also a real competitive advantage, that contributes to profitability, and growth.

We track customer satisfaction monthly, and our 90 plus % satisfaction rates, are well above the industry 75% average.

I think that's one major reason why more than 95% of the customers we surveyed, tell us that they have, already, or would refer friends, family and neighbors to bank with us.

We are leveraging their satisfaction with our direct mail and refer a friend program, coupled with gifts, and employee's incentives.

Tests we began in January this year -- new account openings have added $125 million in core deposit balances, and we have added more than 23,000 new accounts.

In fact new account openings are up by more than 30% compared to the first half of 2003.

Now let me put this in some perspective.

In an environment where many banks are experiencing a decline in core deposits.

And when our own retail deposits, excluding acquisitions, were essentially flat last year, as compared to the prior year, we were able to grow core deposits on an annualized basis in the first half of 2004, by 10%.

This growth was the result of the core deposit program, and I'm proud of that performance.

And then a highlight here of the second quarter was our on-going focus, and execution to monitor and control operating expenses, even as we continue to grow our customer base.

In a quarter when total revenue grew by 8%, operating expenses grew by only 6%.

This positive operating leverage, which we've long maintained, contributed to the 11% growth in operating earnings per share that we reported for the second quarter.

Another highlight for the quarter was on June the 1st.

We completed the merger with First Community Bank, an excellent example of how selective mergers fit into our balanced growth plan.

First Community Bank has $190 million in assets, and shares our commitment to community banking.

They have a talented leadership team, and strengthen our position in the fast growing south side of metro Atlanta, adding five full-service banking offices in Fayette, Coweta County, and Fulton Counties.

We now have $1 billion of assets in the metro Atlanta market, and 23 banking offices.

And both the bank and its customers will benefit from an expanded selection of banking products and services.

So whether you look at our financial performance, or the proof points for our balanced growth strategy, the second quarter was a strong one for United Community Bank, and its shareholders.

Now let me ask Rex to provide additional detail, on our performance, Rex.

Thanks Jimmy.

For the second quarter, net operating earnings rose to a record $11.4 million.

That's up 15% from the 9.9 million of net operating income for the second quarter of 2003.

Diluted operating earnings per share reflecting the three-for-two stock split announced in the first $0.31 cents, up 11% percent from last year's second quarter.

Total revenue on a tax equivalent basis, was 47.1 million, up 8% from the 43.6 million for last year's second quarter.

And we achieved a return on tangible equity, of 19.7%, compared with 19.5% a year ago.

Return on assets was 1.07% slightly above the 1.06% a year earlier.

In the second quarter of 2004, and 2003, net operating income excluded merger related charges.

First lets review the merger charges for the second quarter of 2004.

We incurred pre-tax merger charges of 464,000 related to the acquisition of First Community Bank in Fairburn Georgia, which was completed on June 1st.

In the second quarter of 2003, we incurred pre-tax merger charges of 668,000 related to the acquisition of the First Georgia Bank, in Brunswick Georgia, which was completed on May 1st, 2003.

This acquisition as you recall, provided us with an entrance into the fast-growing coastal Georgia markets, and set the stage for expansion in late 2003, with a de novo bank in Savannah Georgia.

Heading these merger charges back to operating expenses, reported GAAP net income for the second quarter of 2004, of $11 million or $0.30 per diluted share, compared to 9.5 million, $0.27 per diluted share, reported for the second quarter of 2003.

When you look at the six-month comparisons, keep in mind that 2003's first quarter also included $840,000 of pre-tax merger charges for the March 31st acquisition of First Central Bank, in Lenoir City Tennessee.

Combined with the second quarter, this brought a total pre-tax merger charges for the first half of 2003, to $1.5 million.

So for comparison purposes, reported net income, and diluted earnings per share for the first six months of 2003, were $17.5 million and $0.51 respectively, and for the first six months of 2004, were $22 million and $0.60 respectively.

Now I will return to operating earnings, and the other key elements of our performance, for the second quarter.

Tax equivalent net interest revenue for the second quarter rose $4.5 million or 13%, to 39.2 million.

Other (ph) net interest margin for the second quarter was 3.95% down slightly from the 3.99% a year ago.

United Community Bank has maintained a net interest margin near the 4% level, for the last seven quarters, thereby allowing our strong core business growth, to drive this quarter's increase, in interest revenue.

We expect our margin to remain at the 4% level, till the remainder of 2004.

Loan balances at the end of the second quarter grew, as Jimmy noted earlier, at $477 million, or 17%, since last year's second quarter.

This is due to a strong 14% growth in core loans, across all of our market.

First Community Bank merger and the acquisition of the three banking offices in western North Carolina, added in 90 million in loans, bringing our total loan growth to 17%.

Let me rate down the 477 million in loan growth by geographic regions.

North Georgia had growth of a 155 million.

Metropolitan Atlanta had an increase of a 184 million, with 80 million coming from the First Community Bank merger.

Western North Carolina had growth of 90 million, which includes 10 million from the acquisitions over three branches, in the fourth quarter of 2003.

Coastal Georgia, growth was 15 million, and East Tennessee had an increase of 33 million.

Looking at consecutive quarters, and excluding First Community Bank acquisition, total loans increased by 111 million, or 14% on an annualized basis.

Here is the breakdown of growth by market.

33 million in North Georgia, 38 million in metro Atlanta, excluding First Community Bank, 21 million in western North Carolina, 6 million in coastal Georgia, and 14 million in east Tennessee.

Looking at our growth by loan categories let's first review the year over year comparisons.

Construction and land development loans grew by $267 million, bringing the total to $1.106 million.

Commercial loans increased by 141 million, to $1.38 million and residential mortgages increased by 75 million to $1.51 million.

Looking at the same categories on a consecutive quarter basis, construction and land development loans increased by a 101 million.

And residential mortgages increased by $15 million.

Next I'll update you on an interest rate sensitivity of our balance sheet, at quarter end.

The asset's sensitive by approximately 3.5%, on net interest revenue, which is about the same as a year ago, and up slightly from last quarter, based on a ramp up in interest rates of 200 basis points over the next 12 months.

We continue to add prime daily floating rate loans, which stood at $1.6 billion at quarter end and up from 1.1 billion a year ago.

Currently, we have a 100 million of prime daily floating rate loans with floors, so there is minimal impact if rates continue to rise.

That said, we just received our long awaited action by Fed, when they recently raised the overnight rates by 25 basis points.

With our current asset sensitivity, we would benefit from future rate increases, which will improve our margin and net interest revenue slightly allowing us some flexibility to price our deposits for future growth.

There continues to be constant pressure to manage our loan and deposit spreads, by trying to add deposits, to fund our loan growth.

Moving to fee revenue.

For the second quarter, total fee revenue of $9.6 million, was down 700,000 from last year, due to the slowdown in mortgage refinancing activities.

Mortgage loan and related fees for the quarter of $1.6 million, and down 1.8 million from a year ago.

This decline was anticipated as we continued to experience a lower level of mortgage refinancing volumes, since the rise in long-term interest rates, starting in the third quarter of last year.

We have added new products and mortgage originators to help offset the decline in refinancing activities.

The results have been positive.

And on a consecutive quarter basis, mortgage fees ramp approximately $300,000.

Additionally, we were able to grow fee revenue and other products and services, which helped to offset a good portion of this year over year decline.

Service charges and fees on deposit accounts of $5.3 million were up 600,000.

Acquisitions accounted for a portion of the increase but we also saw healthy growth in transactions and new accounts, reflecting the success of the core deposit program, Jimmy mentioned earlier.

And consulting fees of 1.4 million were up $250,000 due to the addition of two new business practices, and growth in general consulting revenue.

Additionally our brokerage business continues to grow, and fees totaled to $0.5 million, up about a $100,000.

Next I will comment on operating expenses.

Disciplined (ph) expense control is a key element of our balance growth strategy.

By monitoring and controlling expense growth, we are able to maintain a positive operating leverage.

This is a key contributor to our strong financial performance.

Total operating expenses excluding merger charges, for the second quarter were $29.4 million, up 1.7 million, or 6% from the second quarter of 2003.

When comparing our expense growth of 6%, to the 8% increase in total revenue, we were able to generate a positive operating leverage of 2% for the quarter, which contributed significantly, to the 11% growth in operating earnings per share.

Let's review the key components of operating expenses this quarter.

Salaries and employee benefits totaled $18.7 million, an increase of 1.1 million or 6%, from last year's second quarter.

Approximately 800,000 of the increase resulted from acquisitions, with a balance due to normal merit increases that were partially offset by low incentive compensation, resulting from a slowdown in mortgage refinancing activities, I mentioned earlier.

At June 30th, total staff was about 1,440, an increase of a 107 people from a year ago.

Approximately a 100 of this increase was a result of the First Community Bank merger, acquisitions of the three banking offices in Western North Carolina, four de novo offices opened in Cartersville, Georgia, Athens, Tennessee, and Burnsville and Spruce Pine in North Carolina, and the opening of a de novo bank in Savannah, Georgia.

Communication and equipment expenses, totaled 2.7 million, an increase of 600,000 or 27%.

This increase was due to the acquisitions and the investments we made in technology equipment to support the business growth, and enhance our operating efficiency.

All other operating expenses totaled $8 million, and were comparable to last year.

Next, let's look at credit quality, the second quarter's provision for loan losses, was $1.8 million, up 300,00 from a year earlier, and unchanged from the first quarter of 2004.

The allowance to loans ratio, was 1.27% down slightly from 1.31 a year ago, and equal to the last quarter.

Net charge-offs for the quarter were 800,000, down $300,000 compared to the $1.1 million last year, and up about a 150,000 from the first quarter of 2004.

Net charge-offs to average loans were 10 basis points for the second quarter, as compared to 16 basis points for the second quarter 2003, and 8 basis points for the first quarter.

The charge-offs and ratios for the second quarter are low compared to the United's historical experience.

Over the last two years for example, net charge-offs averaged about 15 basis points, and this is more in line with our expectation for the remainder of the year.

Non-performing assets of $8.8 million were up 600,000 from a year ago, and up $1.6 million from the first quarter of 2004.

The current quarter's total includes 7.2 million of non-performing loans and 1.6 million of other real estate owned.

The 1.6 million increase from last quarter is due to the addition of First Community Banks' non-performing assets.

We expect to work these loans and assets off our books with no anticipated losses.

Non-performing assets as a percentage of total assets were 19 basis points at June 30th, 2004, as compared to 19 basis points at the year-end, 2003, and 21 basis points a year ago.

Even though non-performing assets have increased this quarter, both the level of assets and ratios are well below our peers and national averages.

And we would expect this continued up and down movement in the level of non-performing assets, at these historic low levels.

Keep in mind that we have grown loans by $477 million this past year, and our ratio to total assets of 19 basis points is the same as last year-end and slightly down from a year ago.

Our allowance to non-performing loan coverage ratio was 593% at quarter end, as compared to 473% at June 30th, 2003 and 579% at March 31st, 2004.

Our credit quality remains excellent and our outlook for credit quality continues to remain strong.

All of our capital ratios for regulatory purposes are above the well-capitalized level.

Internally, our guidelines are 100 basis points above these regulatory, well-capitalized levels.

Our average tangible equity to assets for the quarter was 5.74%, down from 6.03% a year earlier, primarily due to the reduction in the market-to-market value of the available for-sale securities portfolio.

We actively manage and monitor our capital levels and ratios and we are comfortable with our capital ratios at these levels.

As I noted last quarter, as part of our capital planning, we filed $150 million Universal Shelf (ph) that became effective in June.

Currently, we do not anticipate issuing a secondary offering before the second half of 2005.

Our shelf is effective.

So that if our balance sheet, growth or other factors outpace our internal capital generation, we can go to market earlier, if needed.

We may, from time to time issue small amounts of capital, responding to institutional bio-requests that will supplement our long-term capital goals and liquidity.

In conclusion, our second quarter performance, in many respects, is a replay of what we discussed in earlier calls.

We have established an effective and balanced growth strategy and we are continuing to implement it diligently and consistently.

During the second quarter, we hit our targets to sustain double-digit operating EPS growth and return on tangible equity above 18%.

And we achieved yet another record setting at operating income performance.

We achieved strong growth in key areas such as revenue and loans and we continue to add new customer relationships to our core deposit programs.

But at the same time, we maintained our focus on operating expense controls, credit quality and our community-based business model.

Now, let me turn the call back to Jimmy.

Thanks Rex.

I want to echo Rex's comments about the effectiveness of United Community Banks' strategy for growth and profitability in achieving our second quarter's performance.

We have established a strong track record of performance and growth.

And I'm proud of it.

And I'm especially proud of our team of bankers who work diligently every day to achieve those results.

But to me, the story isn't just the numbers.

It's the balance growth strategy that achieved those numbers and our long-standing commitment to stick to the basics of that strategy.

The story is our continued focus on strong organic growth and our community banking model.

The second quarter's loan and core deposit growth reaffirmed the validity of that focus.

I know we've made several acquisitions over the past 10 years.

But don't lose sight that more than 70% of the growth in our $4.5 billion bank has been organic.

The story is our refusal to chase de novo growth and even acquisitions unless we can find the right people in the right locations.

People who share our passion and commitment to personal service and community banking.

We are enjoying the benefit of that approach in the five de novo offices we opened last year.

So far, these banking offices are ahead of target and have added over $60 million in loans and $20 million in deposits.

We're very pleased with the growth and the new business generated by these de novo offices.

Opening a de novo office is easy.

But bringing one to profitability in just 18 to 24 months as we do is the difficult part.

And again, the stories about our disciplined approach to selective mergers.

Too often, when regional banks acquire community banks, they do it for what we consider the wrong reasons.

They want to bring big bank efficiencies and bureaucracy for the new bank.

We certainly do bring some efficiency as well as a broader range of banking products and services.

But we feel it's the community banking model that continues to make our bank a success.

We merge, but we maintain.

We maintain the strength that made that bank successful.

And that will make it even more successful as a member of the United Community Banks family.

Looking ahead, we remain committed to our long-term goals of achieving EPS growth in the 12% to 15% range.

And delivering an 18% plus return on tangible equity.

We believe United Community Banks is on target to meet those goals for 2004.

We're comfortable with the analysts' consensus of earning $1.27 for 2004.

That is within our target of 12% to 15% growth over 2003.

We anticipate that for the balance of the year, core loan growth will continue in the range of 10% to 14%.

And that our net interest margin will remain near the 4% level.

Our outlook is based on a continued, stable economic environment in our markets combined with maintaining strong credit quality.

As Rex explained, we are well positioned for additional increases in short-term interest rates.

And we should benefit slightly if and when they occur.

With that, I'll conclude these opening comments and open the lines to your questions.

Thank you for your continued interest in our company.

Thank you Mr. Tallent.

The Q&A session will begin at this time.

[Operator Instructions].

Our first question comes from Jennifer Demba of SunTrust Robinson Humphrey.

Please pose your question.

Thank you.

Rex, you were going pretty fast through some of your speech.

Can you go over the part where you talked about floors on your loans?

Yes.

As I indicated earlier, Jennifer, we have about 100 million floors currently left right now with the last rate increase we had.

So, it probably has a minimal impact with another 25 basis points.

So, it drops another 40 million and another 25 would drop down to about 30 million.

OK.

And another separate question.

You said that consulting fees were up sequentially this quarter.

And you talked about two new business practices.

Can you give us some color on that?

As we indicated, that was a year/year, up about 250,000.

But it is up on sequential quarter also.

We added two new business practices with Brentec (ph), our consulting firm.

One related to our financial service practice that we've expanded, providing not only additional strategic planning, but also in the context of adding a reporting capability for, primarily, in the small bank area.

So in the Community Bank area they now can access and have a porting package that they're able to set aside with our risk management factors and we've expanded the risk management factors Brentec (ph) also.

Those are the two key business practices.

OK, thanks, good quarter.

Thank you.

Our next question comes from Peyton Green of FTN Midwest Research.

Please pose your question.

Hi good morning.

Like a couple of unrelated questions.

One - if you could talk about the cost of brokerage.

And it had decent performance year/year but late quarter was down.

And then also separate from that, Jimmy, if you could talk a little bit about what your existing customers are doing.

Are they picking up their activity, no change, or in terms of the loan growth going forward, how much of it is you taking business, versus just working your existing customers better?

OK, Rex you want to ...

The first question Peyton is on our brokerage services.

We - as indicated, we're up about a 100,000 year/year.

On a linked quarter we were down about 200,000 compared to last quarter, which was probably a record quarter for us in the - the brokerage business.

We've expanded our relationship with Reliance Trust and going through some conversions this quarter, which slowed it down a little.

So we expect the pace to pick up -- continue again in the third and fourth quarters of this year.

Jimmy, did you ...

Peyton in regards to a little curve on the lending side, we still see a strong consistent loan growth in all of our markets.

We have picked up a couple - two or three new lenders that have portfolios that they were able to bring with them.

But we've seen growth in all of our markets.

Another thing, I think that may be reflected too, usually the second quarter is usually reflective of folks that are maybe constructing houses, and because of the weather, and so forth it's a little slower process.

And then those loans are drawn down in that second quarter.

So we have seen a consistency over all of our markets.

OK, and then Rex, on the expense side, in terms of the run rate going forward, how much of a bump do you think we'll see in the third quarter from the acquisition?

We will see - the acquisition closed on June 1st so that we have one less of it in our totals for second quarter.

So that would probably be a 3 to 400,000-type month bump in run rate on that.

That's relating to the First Community Bank acquisition.

OK, that's plus 3 to 400 a month?

Right.

OK, great.

And then are there any jumps in professional fees related to Sarbanes-Oxley, over the balance of the year, or is that going to stay down around the $800,000 level?

There could be a little bit of increase in that number Peyton, and we actually are moving very diligently on the project right now, trying to get it completed by the end of September with testing in the fourth quarter.

Peyton, I think all the banks - our size and larger, especially - it's a significant task to go through this and complete all the testing and the processes that are required for it.

OK, and I just cant recall - stopping my head - but your professional fees seemed like they're slated to go down year/year.

And I mean is there anything in particular that was in '03, that's not recurring in '04.

No, I think its just timing of items that we had.

We had - there could have been some follow-on last year.

We had the acquisitions completed in the second quarter, from all the miscellaneous fees with that, that came through Peyton.

OK, great.

Thank you.

[Operator Instructions].

Our next question comes from Christopher Marinac of FIG Partners.

Please pose your question.

Hi guys.

This is actually David (ph) for Chris.

We were just curious about which areas you seem to think are most attractive for expansion either de novo or acquisitions?

David you know, we're out now, guess, probably the metro Atlanta market certainly has our attention, given you know, the Nashville commerce acquisition as well as Soft trust (ph).

Our goal is to ultimately circle the city.

We're very methodical in that and certainly want to be very rational in any type of acquisition.

We'd be able to backfield with some de novos through that particular area within our footprint.

You know, we continue to look at the coast of Georgia, certainly the Eastern part of Tennessee, as well as north Carolina, but the de novo strategy is to totally driven by people, and we've got our finger crossed that there may be some opportunities with these two large bank acquisitions in Atlanta.

Great.

Thanks.

If there are no further questions, I will now turn the conference back to Jimmy Tallent.

Again, we want to thank you for your interest in United Community Banks, and we hope you all have a great day.

Thank you.

Ladies and gentleman this concludes the conference for today.

Thank you all for participating and have a nice day.

All parties may now disconnect.