United Community Banks Inc (UCBIO) 2006 Q1 法說會逐字稿

Ladies and gentlemen welcome to the United Community Banks First Quarter 2006 Earnings Conference Call. Hosting the call today is Jimmy Tallent, President and Chief Executive Officer of United Community Banks and Rex Schuette, United's Chief Financial Officer. Please be aware that during this call Mr. Tallent and Mr. Schuette may make certain forward-looking statements about United Community Banks. Any forward-looking statements made today should be considered in light of the risks and uncertainties and other information provided by the Company in its filings with the SEC and included on their website.

And now we'll begin the conference call with Jimmy Tallent, , President and Chief Executive Officer of United Community Banks. Mr. Tallent?

Thank you and good morning. I'm pleased to be able to report an excellent start for the year. We achieved record earnings driven by strong loan growth, margin expansion and fee revenue growth while we continued to reinvest in the future of the franchise. Let me share a few highlights from the quarter. Total revenue increased 21% compared to the first quarter of 2005 to $68 million. Net income increased 19% to $16 million. Return on tangible equity was 17.6% and return on assets was 1.09%.

Loan and deposit growth continue to be solid across all of our markets. We added $186 million in loans this quarter which is a 17% increase on an annualized basis. Our asset quality continues to be very solid and remained at the low end of our tolerance levels. Deposits increased $271 million this quarter which more than funded our loan growth while we continue to focus on growing core deposits.

Our net interest margin of 4.33% was 13 basis points higher than the fourth quarter of 2005 and 28 basis points higher than the first quarter of 2005. In the first quarter we reached $6 billion in assets which is a milestone not just because we're here but because of how we got here. As you know, we grow internally which means organic growth within our markets as well as through selective de novo growth when we find the right people in the right markets and from time to time we do selective acquisitions with the right partners.

Our strategy is not to buy our growth but to grow what we buy. Seventy percent of our growth has been internally generated so we're continuing to execute our long term strategy as can be seen with our results during the first quarter when we had strong organic growth. We are going but not at the expense of our strong performance. As we expand the franchise as we are committed to double-digit earnings per share growth. We can achieve both because of the dedicated bankers throughout our organization who excel at their jobs and generate strong earnings growth where a portion can be reinvested when the opportunities occur. They did it again in the first quarter reducing diluted earnings per share of $0.39 which is a 15% increase over the same period of last year.

Now Rex will share additional financial information. Rex?

Thank you, Jimmy. For the first quarter of 2006 net income rose $2.6 million to a record 16 million, up 19% from the year ago. Diluted earnings per share was $0.39 a 15% increase from $0.34 for the same period last year. Total revenue on a tax equivalent basis was $68 million an increase of 21% from 56.1 million for the first quarter of 2005. Now lets look more closely at the key elements of our record performance for the first quarter.

Tax equivalent and net interest revenue of $59.7 million rose $11.5 million or 24% from the same period a year ago reflecting strong loan and deposit growth in a higher end interest margins. On a consecutive quarter basis net interest revenue increased $2.8 million or 20% on an annualized basis. Net interest margin for the first quarter increased 28 basis points to 4.33% from 4.05% a year ago. The margin was up 13 basis points from 4.20% for the fourth quarter of 2005.

To further rise in net interest margin this quarter was due primarily to the effect of rising short term interest rates on our asset sensitive balance sheet and our ability to grow deposits at rates below our wholesale funding sources. We more than funded our loan growth this quarter by deposits allowing us to reduce wholesale funding and over half of the deposit growth was core deposits and the balance was large CDs which were priced 40 to 60 basis points under market rates.

In our news release this morning we added information on time deposits and net interest margin. The balance sheet now breaks out time deposits both over and under $100,000 as well as broker deposits and we have added a schedule with an average balance sheet and net interest revenue analysis. We hope you find this information useful. Our balance sheet remains asset sensitive which should allow us to benefit modestly from any further increases in interest rates during the second quarter of 2006. However, as we continue efforts to fund loan growth with new deposits competitive pricing pressures combined with a flattening or falling prime interest rate could offset any gains as well as possibly compress our margins slightly in the second half of 2006.

Now lets turn to loan growth. At the end of the first quarter, loans totaled $4.6 billion up 707 million or 18% from a year ago. All of the loan growth was internal. I will not provide some additional detail on the 707 million increase in loans compared to a year ago first by geographic region. North Georgia had loan growth of $486 million which includes Hall County that had total loans of 290 million at quarter end.

Metropolitan Atlanta increased $127 million. Western North Carolina had growth of $45 million. Coastal Georgia was up 25 million and East Tennessee increased 24 million. Looking at consecutive quarters total loans increased by 186 million or 17% on an annualized basis. Here's the consecutive quarter growth by market. 124 million in North Georgia which includes 42 million for Hall County. 30 million in Metro Atlanta. 22 million in Western North Carolina and 14 million in Coastal Georgia.

Looking at growth by loan categories lets first review the year-over-year comparisons. Construction and land development loans grew by 480 million bringing the total to $1,856,000. Commercial loans increased by 163 million to $1,340,000 and residential mortgages increased by 55 million to $1,226,000. Looking at those same categories on a consecutive quarter basis. Construction and land development loans increased by 118 million. Commercial loans increased by 48 million and residential mortgages increased by 20 million.

Next, let me update you on the interest rate sensitivity of our balance sheet at quarter end. Our interest rate sensitivity reflects a 3.3% increase in net interest revenue based on a 200 basis point ramp up of interest rates. We're up about 120 basis points compared to a year ago and up about 130 basis points from last quarter. The increase was primarily due to our growth in prime daily loans coupled with our growth in time deposits which has reduced our wholesale overnight funding.

At quarter end total prime daily loans were $2.6 billion, up 140 million from year end. The investment securities portfolio effective duration was 2.6 years as compared to 2.5 years a year ago and the average life of the portfolio was 3.3 years as compared to 3.0 years a year ago. Fee revenue remains strong across all categories. For the first quarter total fee revenue of $11.8 million was up 1.6 million or 15% from a year ago. Services charges and fees on deposit accounts increased 739,000 to $6.4 million due the growth in transactions and new accounts resulting from our core deposit program and growth in ATM fees.

Brokerage fees nearly doubled from 442,000 to $850,000 due to the strong market activity. Operating expenses totaled $42.2 million up 7.4 million or 21% from the first quarter of 2005. Among the key components of the first quarters operating expenses was salaries and employee benefit costs of $27.6 million which increased 5.4 million or 24%. This was due to the increase in staff to support the significant de novo expansion and business growth.

At quarter end we had total staff of 1,735 up 177 from a year ago. Approximately 120 of that increase related to the nine offices opened in the past 12 months. Six offices were opened in 2005 and three in the first quarter of 2006. If you exclude the staff related to our expansion activities we had a core staff growth rate of 4% which compares favorably to our 18% growth in loans this past year.

The increases in other categories of operating expenses over the past year were related to the expansion of our franchise, branding awareness and business growth as we have outlined in our news release. Our operating efficiency ratio of 59.06% for the quarter was within our long term efficiency goal of 58 to 60% and continue to focus on controlling expenses as we balance growth opportunities throughout our markets.

Now let's look at credit quality. The first quarter provision for loan losses was $3.5 million up 1.1 million from last year and equal to the fourth quarter of 2005. Net charge-offs for the quarter were $1.2 million compared to 1.8 million for the fourth quarter of 2005 and 1.1 million for the first quarter of 2005. Net charge-offs to average loans were 11 basis points, compared to 16 basis points for the fourth quarter of 2005 and 12 basis points a year ago. Non-performing assets at quarter end totaled $8.4 million, compared with 13 million at the end of 2005 and 13.7 million a year ago. The decrease was the result of several loans and assets that were sold or paid down during the quarter.

At quarter end non-performing assets included 6.3 million of non-performing and 2.1 million of [OREO]. There were no loans 90 days past due in accruing interest at quarter end. Non-performing assets as a percent of total assets were 14 basis points at quarter end compared with 22 basis points at December 31, 2005 and 26 basis points at March 31st, 2005. The current level of non-performing assets was well below our long term experience of 20 to 35 basis points and we could have some volatility in future quarters since we're at such low levels. Turning to capital at quarter end. All of our ratios are above the regulatory well capitalized level. The $40.5 million in equity that was raised during the fourth quarter of 2005 positions us well to continue our balanced growth strategy for several years.

This concludes my comments and I will now turn the call back to Jimmy.

Thank you, Rex. With the strength of this financial performance we continued reinvestment in the franchise as to opening three new banking offices during the first quarter. In every case we built around known and respected bankers in high growth communities.

During the first quarter we opened a commercial loan office in our North Georgia market located in Jasper, Georgia which is in Pickens County. Pickens County is just above the northern edge of the Metro Atlanta suburbs. These two markets are connected by the rapidly developing Interstate 575 corridor. [Ruth Pinion] will head up this commercial loan office in Jasper. Ruth is able to bring along another associate and combined that have over 50 years of banking experience in Pickens County.

We have been trying to get into this North Georgia market for years. Pickens County is one of the top 100 fastest growing counties in America. Of those 100 fastest growing counties in America 18 of those are in Georgia. United Communities Banks has locations in 13 of those 18. We hope to convert this lending facility into a full service bank by the end of the year.

We also opened a second banking office in Savannah. You may recall that we entered Savannah in 2003 by building around a prominent banker and his team in that community. First we opened a commercial loan office and then converted it to a full service bank in 2004. We were able to find the right bankers again to open this second office. [Willy Haslip] who has 27 years experience in the local market will lead this office. Willy was able to bring his team of five bankers with him from a large regional bank located just a block away from our new office. Combined they have 80 years of experience in that market and we added a fifth banking office in Hall County.

This time in Oakwood located at the southern end of the county because this new office is closer to the Metro Atlanta area the current commercial and residential growth is outstanding. The future is even brighter. We will replace the current temporary facility with a permanent banking office later this year. Again, we are able to reinvest the portion of what our banks earn due to the strong growth of our company which is driven by exceptional customer service.

Now I know you've heard me talk in the past about our stories on customer service but this is critically important to how we grow our company and build shareholder value. Our banks customer satisfaction scores are continuously above the 90% level. In fact, the results coming in from March and it was 91.4% and when you serve customers like we do in the markets like the ones we're in the opportunities for growth are excellent. Our footprint including all of Metro Atlanta is projected to add 522 people per day every day for the next five years.

So we have the right markets and the right model, but no matter how dynamic the markets or how good the model looks on paper when all is said and done we are succeeding because of our people. They deliver the customer satisfaction that we've talked about and they have built the service culture that is our competitive difference and advantage. Now in terms of guidance and our outlook for 2006. We anticipate earnings per share growth within our long term goal of 12 to 15%. We anticipate core loan growth will be at the upper end of our targeted range of 10 to 14% and our net interest margin could decrease slightly in the second half of 2006 due to the rates leveling off and further pricing competition for deposits as we continue to fund our loan growth.

In summary, we're very pleased with the first quarter. We are pleased with the financial results and record performance. We are pleased that our deposit growth continues to fund our loan growth. Our bankers understand how important this is for our Company and they're focus on growing core deposits is absolutely critical to our success and we operate in some of the best markets in the country with a team of bankers that are enthusiastic, conscientious and dedicated to our brand of customer service. That is the key to our future growth opportunities.

With that, let me thank you for your continued interest in United Community Banks and we'll open the call to your questions at this time.

Thank you, sir.

[OPERATOR INSTRUCTIONS]

Sir, our first question is from the line of Kevin Fitzsimmons with Sandler O'Neill.

Good morning Jimmy and Rex.

Good morning, Kevin.

Good morning, Kevin.

I was just wondering, I've got just two quick questions. Number one. Rex, could you on the margin guidance it seems like it's partially assuming rates leveling off if there is at least one or two Fed hike rates left here could that guidance of it coming down in the second half be a little conservative number one and then Jimmy if you could talk a little bit about what you appetite is for M&A here. I know the company's basically taken the better part of the year off from M&A and is your outlook on that changing? I'm sure it depends a lot on the relevant pricing expectations that are out there. Thank you.

Kevin, thanks. The first question you had was on our guidance on the margin and as I indicated just a few minutes ago we expect that the market based on where the Fed is right now that it could stay at or around the same level right now. Again, it's probably one to two more increases built-in in the short term in the market with the expectation that it flattens out in the second half of the year and that's what we have in our model is that it's flattening out in the second half of year.

So we do think it will tail off in the second half of the year from the levels of that now. We could see a slight expansion but really with the pricing you see on deposits we expect to stay at this level into the second quarter and then that taper off next quarter - in the third and fourth quarter.

And when you talk about tapering off and slight [inaudible] are we talking like 2 to 5 basis points of that magnitude?

I think you probably going to see anywhere from 4 to 5 - offer of 8 or 9 basis points probably in the next quarter - or would be the third quarter again after the rates flatten off.

Okay.

Kevin, in regards to the M&A let me first say again that our focus is organic growth. Has been. Will be as we go forward. Certainly there's areas within our footprint that we would be interested in teaming up with the right bank but again we go back to those metrics. First, it's got to be in our predetermined footprint that we've told everyone that we see United Community Bank in the years to come the right management team is critical. The right loan mix is critical and certainly the right price is critical. So that's still our basic metric that we follow. We're not in a position that we have to do anything. We've certainly identified within the markets some key banks that we feel would make great partners but all of those things have to be aligned before we would be able to do a merger.

Are you starting to see more interest or more books coming across your desk - but just is it the case maybe that fourth criteria isn't quite there yet in terms of the price?

I think certainly price has been an issue. I mean we have looked at - been approached a number of times over 2005 and price has been a major issue. Also is the balance sheet composition. Some of the opportunities that we've looked at and the way I would describe it is basically loan production office funded with wholesale funds. It's just not part of an overall bank that we see in building and merging within the company but certainly if we do an acquisition that price will be within the confines of being accretive ideally within that first year. These were some very low metrics relative to cost saves because we're not going to stretch. We don't have to do that.

Okay, great. Thank you, very much.

And sir our next question is from the line of John Pandtle with Raymond James.

Hey guys, how are you?

Hello, John.

Good morning, John.

Rex, my question relates to the long lost reserve and certainly understand the formulaic approach that you have to take in that. We certainly see some banks taking that percentage down. You have pretty significant coverage of non-performers at this point. I just wondered if maybe you could talk about your experience with your auditors and kind of what you view going forward in terms of the reserve.

When you look at our reserve you can see that we dropped about 3 basis points John from first quarter of last year 125 down to 122, but it's been about 122 for the past four quarters on our allowance ratio. The MTA coverage - the non-performing loan coverage at quarter end is just unusually high just because of the low level - as I commented earlier on our non-performing assets at quarter end. As far as looking at it with our auditors, our auditors are very comfortable with our methodology. In looking at it I think that we would probably continue at around this level going forward in the low 120s again based on our methodology right now. So even though you see a little spike again because of the small numbers we're talking about here that's just one component of the methodology.

Okay, and then separately from [ACLOVE] standpoint of view have you begun to take any steps in terms of sensitivity positioning with the expectation of flat to potentially lower rates several months out? I guess I was thinking about any swaps or hedges et cetera?

Our swap book is about 340 million at quarter end. That's come down from a year ago if you look at it a year ago. We are looking at that John in the context of rates flattening out and looking to extend the loan portfolio to swaps in the second and third quarter to balance that off. I feel like we like our sensitivity probably in the 1% range. One to two at max. We're up a little high right and we're looking at that currently.

Okay and then finally Jimmy. Would you if you could touch on what you're seeing in terms of loan pricing within your major markets and where you feel like your position from a competitive standpoint within the pricing environment?

Pricing is always competitive John and regardless to which market that we're located in but we still see fairly rational pricing. We look at credits number one based on the credit quality and then the pricing of course is second. Our loan growth has been very strong and we've been very, very pleased with that so quite honestly it allows us to be a little bit more selective on the pricing component but we've not really seen any major change relative to just the loan pricing in any one of our markets.

Okay, thank you.

And sir our next question is from the line of Jefferson Harralson.

Hi, thanks.

Hello, Jefferson.

Good morning Jefferson.

I guess you've got the question about the deposit promotions going on is pretty impressive deposits growing deposits to keep up with your loan. What type of things are your promotions currently that are driving that growth?

Well in January of 2004 when we began our core deposit initiative with the direct mail and the incentives with employees and customers continues to be in place today. Continuing to get very good results from that. I think the second point of that is the internal focus through our lenders - our in [inaudible] particularly our lenders and we're beginning to see that really payoff. We hope to be able to incentivize our lenders on core deposit growth again in the very near future something that we've been working on for some time. There's not one silver bullet we don't feel is changing. It's re-energizing various programs but the absolute most critical thing that we do is to continue to build on that core deposit base and I think we're really beginning to get that throughout the entire management team of United Community Banks.

Can I ask you about the - sort of your list out pipeline? You have such success in Hall County and it seems like you're having similar success in Savannah. Is there opportunities for the main street deal or just from other large banks or you think that type of quality hiring is going to continue?

Well that's our number one priority is really the acquisition of people Jefferson. I'm not sure we will see anything relative to the main street. We have looked into that area already and quite honestly been able to acquire some people over the last year or two. Anytime there is a major bank purchasing a community within our footprint that really generates opportunities for United. We will always take advantage of those. Not at the expense of our earnings per share growth still staying within that 12 to 15% range year after year but that is community banking at its best and we're very fortunate I feel to have a reputation that attracts these kinds of bankers because the Savannah operation literally we've got 80 years of banking experience there within that market. So we feel like we can hit the ground running.

And lastly a follow-up on Kevin's question on M&A. Now you guys are 6 billion in assets. Are you - would you move up I guess the higher end of the bank side that you're willing to buy.

Well we are very disciplined staying in that - you know as far as the maximum we've said anywhere from the 1 to $400 million. It could slide - slightly above the 400 million but it will stay within that range Jefferson. Ideally we like to acquire the banks with all the metrics that I mentioned earlier but I like to see those when we acquire those that basically have a small market share within that given market and that allows us to really throw in the resources of the larger company behind them. We found it will accelerate that growth which in turn will accelerate the profitability of the banks but you won't see us outside of that band that we have been talking about for a number of years now.

Okay, thanks a lot guys.

And sir our next question if from the line of Jennifer Demba.

Good morning. Rex, it looks like your tax rate was a bit higher this quarter. I was wondering if you could give us some color on that and what would I expect going forward?

Jennifer the tax rate is up about 50 basis points this quarter when you look back into the fourth quarter. It's almost all attributable to the expensing of options and part of the options which are incentive stock options you can't not tax benefit that expense that goes through the P&L. So there's a probably about 100,000 a quarter impact in taxes related to the non-deductibility of the expenses we're amortizing for the portion of the option.

Okay and could you go over the sequential loan growth you guys saw by market again?

Sure. By the quarter?

Yes, for the fourth quarter.

For the fourth quarter 186 million. We have 30 million in Metro Atlanta. 124 million in North Georgia. Coastal Georgia was 14 million and 22 million in North Carolina.

Anything coming from Tennessee?

Tennessee was just flat or down just a little bit with some payoffs so it was about flat. Down a little bit about four.

Okay, thank you.

And sir we have a question from the line of Andy Stapp with Cohen Brothers.

Good morning guys. Nice quarter.

Thanks, Andy.

Could you provide some color on your thoughts on a possible real estate bubble in the Atlanta market and to the extent that there is one your exposure to it?

Well Andy that's a good question and one that not only are we asked on a very frequent basis but one that we ask our sales on a continuous basis. First of all we have a lot of check and balances within our overall footprint in regards to real estate lending. When we look at our markets we also use outside services to help sell us the inventories on the houses. The inventories on lots. Today, we don't have the first quarter results and those won't be available until next week but what we're seeing is a continuous eight months of inventory supply on both the north and south of Atlanta and that's been pretty static now for some time and still is on the low end over a long period of history. The lot inventory seems to be creeping up slightly on the south end of Atlanta.

Again, something that we're continuing to focus on but then you look within those sub-markets. Today, we feel comfortable where we are. We feel comfortable with the real estate - our real estate lending in Metro Atlanta as well as throughout the entire footprint. The interesting statistic that is published through the federal government is the MSA of the 200 fastest and highest growth and market appreciation in America out of those top 200 Atlanta is number 200 which I think is probably fairly significant. Last quarter they were like 165 in the highest appreciation within those markets. So we feel very comfortable where we are. We continue to monitor it. Manage it very, very closely.

Okay great and could you discuss your de novo expansion plans for the balance of the year?

Yes. Currently, we have under construction one location that is in Forsythe County which is basically the Cummings market. They'll be a second one there later on this year. We're looking at a couple of other possibilities. Again, this is a people driven decision. Savannah is a wonderful example because we can bring in those experienced bankers within that market. Put them in that brick and mortar and they hit the ground running and therefore allows that profitability to come very, very quickly. So - but to answer your question right now we're looking at - it seems for sure but again that is a people driven decision.

Okay and lastly. Have you seen any change in the underwriting standards during the quarter compared to prior quarters by your competition?

No. I think they continue to be fairly consistent. Certainly, our underwriting standards have not changed period. There is incidences from time to time that we feel there may be a relaxing some of their underwriting standards but the bottom line is just been business as usual. Nothing that's really dramatically changed within the markets relative to the underwriting or the pricing.

Okay. That's all for me. Thanks.

Thank you.

[OPERATOR INSTRUCTIONS]

And sir, we have a question from the line of Peyton Green.

Good morning. Jimmy, when you look out over the next year or two years what do you see emerging as the biggest risk out there that may not be in the conventional wisdom outlook for the marketplace to operate in or just banking in general?

Well when you ask the risk obviously that's always the lending. If you - I guess better maybe let me rephrase your question. I think hopefully this is what you're asking. What am I worried about?

Sure.

I worry about the loan quality. I worry about the rates flattening and the funding costs. It's more expensive. Obviously I worry about making sure that we maintain and enhance our reputation that attracts bankers into our organization. I mean there's a multitude of things that I worry but that's what they pay me for I guess, but when I back away from everything Peyton, I think we're so very fortunate to be operating within the markets that our footprint resides as well as where we would like to expand our footprint.

These are great growth markets. It's markets that we feel that we really understand the lending needs within those markets. Some great opportunities for continued organic growth. I think wonderful opportunities for us to methodically and strategically expand our company within our defined footprint while we continue to grow shareholder value on a consistent dependable course that is ahead of the peer over a long period of time.

Okay and I guess just to kind of follow-up. I mean if the national economy fell into a recession over the next couple of years do you feel like your marketplace would measurably outperform the overall economy?

Well that's a good question. It always has particularly the North Georgia, Western North Carolina markets and I've been here 21 years and through the ups and downs we have never seen a blink. Certainly the Metro Atlanta market is one that we want to make sure that we continue to focus on very, very carefully but I really believe when you look at housing, price appreciation relative to housing and also the overall dirt valuation I think we're in some very, very special markets.

Okay. All right. Thank you, very much.

And that concludes our question and answer portion of today's conference. Back over to the group for any further comments.

Well let me first say thank you again for your interest in United Community Banks. We sincerely appreciate your being with us today. We look forward to visiting with you in our second quarter conference call in July. Again, thanks for being with us and hope you have a great day.

Ladies and gentlemen, we thank you for your participation in today's conference. This concludes your presentation and you may now disconnect.