United Community Banks Inc (UCBIO) 2006 Q2 法說會逐字稿

Good morning, and welcome to the United Community Bank's Second Quarter 2006 Earnings Conference Call.

Hosting the call today is Jimmy Tallent, President and Chief Executive Officer of United Community Banks and Rex Schuette, 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, uncertainties and other information provided by the company in it's filings with the SEC, and included on their website at www.ucbi.com.

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

Mr. Tallent?

Thank you, and good morning to everyone.

I am pleased to tell you that 2006 continues to be a strong year for United Community Banks.

In the second quarter we achieved record earnings driven by strong loan growth and margin expansion.

Loans and deposits both increased this quarter by more than $200 million, and our net interest margin was up 22 basis points compared to last year.

Let me share a few highlights from the quarter.

Total revenue increased 16% compared to the second quarter of 2005 to $71 million.

Net income increased 23% to $17 million.

Return on tangible equity was 17.68% and return on assets was 1.10%.

As I mentioned loan and deposit growth continued to be solid across all of our markets.

We added $226 million in loans this quarter which is a 20% increase on an annualized basis.

Deposits increased $228 million this quarter which funded our loan growth as we continued to focus on programs to grow core deposits.

Our asset quality continues to be strong and all of our indicators remain at the low-end of our historic average.

Our net interest margin is also an important driver of our results.

At 4.34% it is 22 basis points higher than the second quarter of 2005.

During the second quarter total assets grew to $6.3 billion, but United Community Banks is not just about growing, it's about growing the right way.

You've heard me say this before and I'll say it again, our strategy is not to buy growth, but to grow what we buy.

And we strategically pursue de novo growth and from time to time selective acquisitions.

When we find the right partners in the right markets.

But most of the time we aggressively market and grow the United brand within our core markets.

Over the past 10 years 70% of our growth has been internally generated, and during the second quarter of 2006 as well as the past five quarters, all of our growth was organic.

So we're continuing to execute our long-term strategy while we focus on funding that growth with deposits.

In doing so, over the past six months we developed an incentive program that rewards our lenders for growing customer deposits.

This cash incentive is in addition to their normal annual bonus and will be paid out quarterly.

The program will begin in August.

And we hope and expect to see positive results later this year.

It is also important to note that our growth does not come at the expense of performance.

Our bankers understand that this company's core value is customer service and they live that principle first and foremost.

Taking care of the customer's continues to allow us to grow the franchise while maintaining double-digit earnings per share growth.

And the second quarter was no exception, with a 17% increase in earnings per share to $0.41.

Now Rex will share additional, financial details.

Rex?

Thank you, Jimmy.

For the second quarter of 2006 net income rose $3.2 million to a record $16.9 million up 23% from a year ago.

As Jimmy mentioned, earnings per share was $0.41, a 17% increase from $0.35 for the same period last year.

Our earnings continue to be driven by strong revenues.

Revenue was up $10 million or 16% to $71 million for the quarter.

Now lets look more closely at several key elements of our second quarter's performance.

Actual equivalent, net interest revenue of $62.3 million rose $11.1 million or 22% from the same period a year ago.

This reflected strong loan growth funded by customer deposits and an expansion of our net interest margin.

On a consecutive quarter basis net interest revenue increased $2.6 million or 17% on an annualized basis.

Net interest margin for the second quarter increased 22 basis points to 4.34% from 4.12% a year ago.

The margin was up one basis point from the first quarter of 2006.

The increase in margin was due to our asset sensitivity and the rise in short-term rates by the Fed.

Half of our 228 million of deposit growth this quarter came from core deposits.

The balance consisted of $77 million of large CDs that were priced 40 to 60 basis points under market rates and 37 million of brokered CDs.

Year-to-date we have more than funded our loan growth of 412 million with customer deposit growth of 480 million.

Again, over half of this deposit growth was core.

Our balance sheet remains asset sensitive.

This should allow us to benefit modestly from any further increases in interest rates during the second half 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 second quarter loans totaled $4.8 billion, up 737 million or 18% from a year ago.

I will now provide some additional detail on the 737 million increase in loans compared to a year ago, first by geographic region.

North Georgia had loan growth of $463 million, which includes $216 million for Hall County.

Our Hall County bank had loans totaling 311 million at quarter end.

Metropolitan Atlanta increased 159 million, Western North Carolina had growth of 67 million, Coastal Georgia was 30 million, and East Tennessee increased 18 million.

Looking at consecutive quarters, total loans increased by $226 million or 20% on an annualized basis.

Here is the consecutive quarter growth by market, 109 million in North Georgia, which includes 21 million for Hall County, 70 million in Metro Atlanta, 16 million in Coastal Georgia, 26 million in Western North Carolina, and 5 million in Eastern Tennessee.

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

Construction and land development loans grew by 514 million, bringing the total to $2 billion.

Commercial loans increased by 146 million to $1.4 billion, and residential mortgages increased by 66 million to $1.3 billion.

Looking at the same categories on a consecutive quarter basis, construction and land development loans increased by $138 million, commercial loans increased by 46 million, and residential mortgages increased by 35 million.

Next, let me update you on our interest rate sensitivity of balance sheet at quarter end.

Our interest rate sensitivity reflects a 3.4% increase over the next 12 months in net interest revenue, based on a 200 basis point ramp up of interest rates.

Our interest rate sensitivity is at about the same levels as a year ago and last quarter.

At quarter end, total prime daily loans were $2.8 billion, up 150 million from last quarter.

The investment securities portfolio, effective duration was 2.8 years, compared to 1.9 years at June 30, 2005.

The average life was 3.5 years, compared to 2.3 years, a year ago.

Turning to fee revenue, fee revenue dipped slightly in the second quarter, but when you adjust for some one-time items it was up 5%.

Total fee revenue of $12 million was down $200,000 or 2% from a year ago.

This decrease was primarily due to 530,000 in gains from the sale of two banking offices in the second quarter of 2005, and 280,000 in charges for the prepayment of Federal Home Loan Bank advances in the second quarter of 2006.

The prepayment was part of our balance sheet management activities.

The key driver for fee revenue growth this quarter was service charges and fees on deposit accounts, which increased 548,000 to $6.8 million.

This increase was primarily due to the growth in transactions and new accounts, resulting from our core deposit program, and higher ATM and debit card usage fees.

Next, operating expenses totaled $43.5 million, up 4.7 million or 12% from the second quarter of 2005.

Holding the growth in operating expenses to 12%, while growing revenue 16% yielded a 4% operating leverage this quarter.

A key component of operating expenses was salaries and employee benefit costs of $28.3 million, which increased 3 million or 12%.

The increase was due to higher staff levels to support the significant de novo expansion efforts and business growth, increase in insurance and other health-related benefits, and expensing of options this year.

At quarter end we had total staff of 1,773, up 114 or 7% from a year ago.

Nearly 70 staff or 60% of that increase, related to eight new offices opened in the past 12 months.

Three of these offices opened in the first half of 2006.

If you exclude the staff related to our expansion activities our core staff growth rate was 3%.

Communications and equipment expense of $3.7 million reflected an increase of 600,000 due to the further investments and upgrades in technology and equipment to support business growth and additional banking offices.

Advertising and public relations expenses of $1.9 million increased 250,000, reflecting the cost of successful initiatives to raise core deposits, and generate brand awareness in new markets.

Occupancy expense of 2.9 million increased $200,000, again, reflecting the cost of operating additional banking offices that were added through our de novo expansion.

The increase in other operating expenses was primarily due to $300,000 of write-downs on foreclosed properties and higher costs to support business growth.

Our operating efficiency ratio of 58.53% for the quarter, was within our long-term goal of 58 to 60%.

Now, let's look at credit quality.

The second quarter provision for loan losses was $3.7 million, up 900,000 from last year.

Net chargeoffs for the quarter were $1 million, compared to 1.2 million for the first quarter of 2006, and 1.4 million a year earlier.

Net chargeoffs to average loans were nine basis points, compared to 11 basis points for the first quarter of 2006, and 14 basis points for the second quarter of 2005.

Non-performing assets at quarter end totaled $8.8 million, compared with 8.4 million at the end of the first quarter, and 13.5 million a year ago.

The decrease from a year ago was the result of several non-performing loans and assets, that were sold or paid down in the first quarter of this year.

At quarter end, non-performing assets included $6.5 million of non-performing loans and 2.3 million of [Orial].

There were no loans 90-days past due and accruing interest at quarter end.

Non-performing assets as a percentage of total assets were 14 basis points at quarter end, the same as last quarter and considerably lower than the 24 basis points at June 30, 2005.

The current level of non-performing assets is below our long-term experience level of 20 to 35 basis points, and we expect some increase 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 we raised during the fourth quarter of 2005 along with our steady growth in earnings should support our balanced growth strategy for several years.

However, as we forecasted the level of our regulatory total capital, we would expect to issue trust preferred or sub-debt later this year or early 2007 based on our loan growth projections.

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

Thank you, Rex.

With the support of this strong financial performance we continue to reinvest some of our earnings for the future growth of our company.

We feel strongly, this makes good business sense.

Yesterday we announced a de novo expansion into Cleveland, Tennessee which is about 30 miles Northeast of Chattanooga and adjoins our existing franchise along the high-growth, Interstate 75 Corridor.

As always we will build around well known and respected local bankers.

President [Mickey Torbett], and Executive Vice President, [DeWayne Morrow] have a combined 50 years of banking experience in the Cleveland market, and they will lead our new bank.

They will bring with them eight other bankers who have over 130 years of experience in the local market.

United Community Bank, Cleveland which will be United's 25th Community Bank, will open next week for business as a full service bank on August 1st.

The Cleveland MSA is consistently among the State's leaders in the number of manufacturing companies in the surrounding market areas which include companies like Whirlpool, McKee Foods which makes Little Debbie Cakes, [Uracell] and Mayfield Dairy.

Also a key driver of industrial development is steady population growth and a strong work force of over 320,000 people within a 25-mile radius of Cleveland, Tennessee.

The favorable business climate in Cleveland, in Bradley County makes this an outstanding area to continue our growth in the East Tennessee markets.

We now have two banks and nine banking offices stretching North along I75 from Cleveland to the Knoxville area.

Giving us a significant foothold in East Tennessee.

In addition to Cleveland we currently have three de novo banking offices in planning stages or under construction.

For our Forsyth County Bank in Metro Atlanta we will complete a new main office building incoming next month.

Forsyth County is the fifth fastest growing county in the United States.

And we will continue to expand in the Southern part of the county when we complete our third banking office in Forsyth County by early 2007.

We hired [Anita Whitehead] last year, who is veteran banker of that area.

And she continues to develop customer relations even though the customers have to travel to our North Forsyth location, some 20 miles away.

And for our Savannah bank in Coastal Georgia, we will be adding a third banking office on the South side of the city in early 2007.

These investments are designed to grow our business and to strengthen our brand in key markets.

During the second quarter we also announced an agreement to purchase two branches from another bank in Sylva, in Bryson City, North Carolina.

We are already in these high-growth communities and know the banking environment and will know it even better now because we are retaining the existing employees who have established relationships with their customers.

This will allow us to ensure a seamless transition and a positive experience for our new customers.

We expect to complete this transaction in September.

Once again, our strong financial performance is enabling us to invest a portion of what our banks earn.

Thereby allowing our company to expand into new high-growth markets led by exceptional, local-community bankers.

Service is the backbone and the distinguishing characteristic of our business as we grow and build shareholder value.

Our customer satisfaction scores are consistently above the 90% level.

In fact, the results are in for June and we had 91% customer satisfaction.

We're providing outstanding service to our customers in the right markets including 13 of the 100 fastest-growing counties in the Nation.

In terms of guidance and outlook for the second half of 2006 we anticipate continued strong earnings per share growth at the upper-end of our long-term goal of 12 to 15%.

We anticipate core loan growth for the third and fourth quarters to be slightly above our targeted range of 10 to 14% as compared to last year.

And we expect our net interest margin could decrease slightly in the second half of 2006, due to short-term rates leveling off, and further pricing competition for deposits, as we continue to fund our loan growth.

In summary, we are very pleased with the record-setting second quarter and first half of 2006.

We are especially pleased that we continued to fund our loan growth with customer deposits.

Our bankers understand that their focus on growing core deposits is absolutely critical to our success.

We operate in outstanding markets with talented bankers, who live the United brand of personal, caring service.

That's who we are, that is why we have the good fortune to consistently produce strong financial results.

With that, let me thank you for your continued interest in United Community Banks, and open the call to your questions.

[OPERATOR INSTRUCTIONS]

Your first question comes from the line of Kevin Fitzsimmons with Sandler O'Neill.

Please proceed.

Good morning, everyone.

Good morning, Kevin.

I was wondering, first just on the margin, if you can give a little color on what you think is supporting that so far.

I know -- I think a quarter ago we got a similar kind of statement that the margin could begin compressing, and you have really demonstrated that you're able to keep it fairly stable and even expand it.

So what is the real differentiating factor there, because we've seen other companies that, other asset-sensitive companies that have had several quarters of margin expansion that have shifted into compression mode already?

And then secondly, if you could just comment on what your outlook on the production and the pipeline is for construction and lending, generally, in your footprint?

Thanks.

Hi, Kevin.

Rex.

I'll take the first part of the question on margin and let Jimmy respond back on the construction.

As we've commented in the past, with respect to the margin, our assumptions are based on an outlook on rates as well, Kevin.

And again, we had three increases this past quarter which continues to fuel our margin and help keep it up there at the 434 level.

I think what we're looking at an outlook is an expectation with the flattening of the rates as well as I think we're seeing a little more pricing pressure with respect to some of our transaction accounts and money market accounts underneath it.

As I noted on the call we continue to benefit on being able to price our CDs below market that is helping us also in the 40 to 60 basis point range.

So that continues, but again we're seeing a little pressure on that side that that is coming down just a little bit in the market.

Kevin, in regards to construction lending, we continue to see consistency throughout our markets.

This quarter we did see a little bit of a bulge and really if you -- when you dissect that going from 36% to 41, I think it explains itself pretty clearly.

First of all Hall County which was responsible for 2% of that going from 36 to 38, that may be a little bit of an anomaly because again with their growth over the last 12 months we certainly don't foresee that the next 12 because you give payoffs and churn and so forth.

Then you have North Georgia, which also attributed to 2% of that gain as well.

And that's largely because our banks have a large market share and we're very blessed to be fortunate to be able to be, in many instances the lender of choice.

And given the robust growth in the North Georgia markets I think probably explains that.

And then of course, the last part which was about the 1% was the Metro Atlanta.

And Metro Atlanta continues to be very consistent.

We've got very good job growth.

Second-home purchasing is still very strong in our markets.

The retiree migration continues to be as strong as we have ever seen that.

So we look for basically a normal quarter that we have been experiencing for many, many years, because again this is a -- our geography represents a magnet that continues to attract a lot of people all over the country.

Would you -- Jimmy, would you say it's fair to say that while there may be some slowdown or moderations due to higher rates, it's just because of the demographics it's likely to hold up better or do you think it will keep the same pace?

Well, you know we think probably the right word would be stable.

When we look throughout our geography and if you just focus on just the Metro market because you can get a lot of very good information there from third-party firms, we do see a little bit of an increase in lot inventory as well as housing inventory.

I'm only talking about two or three months additional gain.

But when you also look at the starts and closings they still run very much parallel to one another.

When I talk about these markets again, we continue to see a lot of retiree migration within our markets whether it be the coast or the mountains or on some lake.

And if I had to identify an area that possibly was moderating some, it would be that 350 to $550,000 home.

But still, there are a lot of pockets throughout our markets, particularly in the Metro Atlanta, whereby if you got -- if you're located in the right locations with the right product in that right price range, it continues to be very consistent.

Okay.

Thank you.

Your next question comes from the line of Jennifer Demba with Suntrust Robinson Humphrey.

Please proceed.

Good morning.

Great quarter.

Thank you, Jennifer.

I've got a few questions.

Number-one, a housekeeping question.

Rex, you said you had a $300,000 write-down on a foreclosed property?

Yes, in the second quarter, it was over 300,000.

Correct.

Okay.

And then my second question is could you update us on the profitability of the Hall County operation, I think you expected it to breakeven sometime in the second half?

We're right on target Jennifer.

Again, we have now built out the -- four of those five locations as far as permanent facilities.

Our South Hall location will be under construction, hopefully within the next 30 days.

Our loans there in Hall County at the end of the quarter were about $311 million, our deposits are about 230.

So certainly our original game plan of profitability in the second half of '06, we feel very, very comfortable with that.

Okay.

And last question.

You mentioned the cash incentives for gathering deposits will start up in the August timeframe.

Can you give us a hypothetical on what someone could earn, just give us a hypothetical idea of how much they could earn maybe a year if they did "x"?

Well, I don't know that I could give you in the hypothetical because it's the composition of those deposits.

Obviously checking account is a very generous reward.

Money market is a little less and of course certificates of deposits are even less.

This is our thinking there, we have 260 lenders within United Community Banks, and probably I could call any one of those right now and ask them what their outstanding are in the portfolio and they probably could tell me within $1,000.

I probably could ask them that same question in regard to the deposits that those loan customers represent, and probably would not get an answer.

So, our focus there is on our existing customer base, and certainly new customers coming in.

The model is built off of profitability to the company of which the lender will share in that.

It is of size with the right composition, I can assure you a lot of the lender's eyes are very wide right now, and a lot of enthusiasm in regards to support of the program.

Great.

Thank you.

Your next question comes from the line of Christopher Marinac with FIG Partners.

Please proceed.

Thank you.

Good morning, guys.

Hello, Chris.

Good morning, Chris.

I just want to get some more color on the Cleveland market, and just where some of those folks came from.

I apologize if you mentioned that up front.

Chris, this was a local community bank that had been there for many years, very successful, that was acquired by a large regional bank.

The people that came with us enjoy the community banking environment.

We'll open up the doors with about 180 years of experience there in Cleveland.

Cleveland, Tennessee has been a market that really -- I've been wanting to get into for a number of years.

We've looked at others -- the possibility of partnership with some banks for various reasons, pricing primarily, that did not work out.

And when this opportunity came about and we were contacted, then we moved very quickly once we fully got to know and understand what these people who have the bank, and what they stand for.

I am very excited about the prospects in Cleveland, Tennessee.

We'll open up here in just a few days in somewhat of a strip center.

We have acquired, or actually under contract another -- a piece of property whereby we'll build an existing building.

I am sure we will expand at least one other time if not two.

But we will be disciplined in that approach.

I do know this, their customer base is calling them, look them up in order to do business.

So we've got great people and a great market, and we're very fortunate to be partnered with this group.

Great.

Thanks, I appreciate that.

And my follow-up is, could you talk at all about how hub sales and pricing in residential has been, whether it would be for primary residences or second homes around your communities?

Well, as I had mentioned earlier in the call, it continues to be very consistent.

Again, we have the retiree migration that continues to funnel into the Southeast.

We continue to see just general population growth.

A lot of that is fueled with the economic engine there in Atlanta.

I think that's probably even further demonstrated, there's been a recent study that came out, but really every study that I look at validates the fact that maybe we're in the right place at the right time.

But the South-eastern part of the United States is going to continue to grow.

As a matter of fact this particular study says that two thirds of the population growth over the next 25 years is going to probably locate in five of the Southeast States, Georgia being one.

If you look at number seven and number nine I think that's Tennessee and North Carolina.

So we're just very, very fortunate to be located in these markets when you can reside whereby you've got very strong metropolitan areas such as Atlanta and Knoxville.

You've got the Coast of Georgia, which is a true magnet for a lot of people to have second homes, to retire on the Coast.

You've got the mountains, you've got the lakes.

And when you add all of that up it's kind of the place to be.

Great.

Thanks Jimmy, appreciate it.

You're welcome.

Your next question comes from the line of Bill McCrystal with McConnell, Budd & Romano.

Please proceed.

Good morning, Rex, Jimmy.

Hello, Bill.

Good morning, Bill.

Hello, Bill.

I wonder if you could comment generally about the construction, commercial real estate issue with the regulatory agencies.

Your thoughts on what eventual -- guidelines will be with that and what if anything you are doing maybe from a contingency standpoint to deal with that?

Well first of all in regards to the proposed guidance.

Really if you look back at the history of that, to a large degree this guidance has been in place for many, many years.

And as we drill through that, it basically boils down to assessing a financial institution's capital adequacy in regards to its risk management practices.

For United Community Banks construction lending has been and will continue to be a core competency.

One that we have done many, many, many years.

We feel comfortable with that.

We feel like we understand that type of lending.

Certainly we're located in those high-growth markets, as I mentioned earlier.