United Community Banks Inc (UCBIO) 2006 Q3 法說會逐字稿

Good morning and welcome to the United Community Banks third 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 will 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 its filings with the SEC and included on their website, 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?

Thanks, and good morning, everyone. I'm pleased to tell you that 2006 continues to be a year of strong growth for United Community Banks. In the third quarter we achieved record earnings once again. We had strong loan growth and even stronger deposit growth while expanding our franchise in Georgia, North Carolina and Tennessee. Loans increased during the quarter by $155 million to $5 billion, up 17% over last year. They were funded more than 2:1 by customer deposit growth of $312 million. Net interest margin was 4.30%, up 13 basis points, compared to the third quarter of last year as rising short term interest rates positively affected our slightly asset sensitive balance sheet. And our margin was down four basis points from last quarter due to the deposit mix and Rex will have further comments on this in just a few moments.

Now let me just share a few other highlights for the quarter. Diluted earnings per share of $0.42 reflected a 17% increase compared to the third quarter of 2005. Net income increased 22% to $17.4 million. Return on tangible equity was 17.29% and return on assets was 1.09%. Asset quality continues to be very favorable. Non-performing assets remain at the low end of our historic average and total assets grew to $6.5 billion, up 13% from a year ago.

We continue to perform well by every financial measure and at the same time we are investing in the growth and value of the franchise. You've heard me say this many, many times before, that our strategy is to grow the franchise in a balanced way in our high growth footprint and to sustain strong financial performance at the same time. And we've done that. As our bank has grown, so have earnings per share, strongly and consistently averaging 17% over the last ten years. More than 70% of our growth is internally driven, primarily by growing our community banks with a focus on customer service. We grow from within, we grow through de novo expansion and occasionally we'll grow with an acquisition in the right markets with the right bankers.

By the "right markets", I mean North Georgia, Metro Atlanta, the Georgia coast, Western North Carolina and East Tennessee. This geographic footprint includes 18 of the 100 fastest growing counties in America including four in the top ten. By the "right bankers", I mean people who are already established and respected in their communities and who share our passion for customer service.

We find these bankers, or they find us, and then we provide them with the resources to grow their banks. This business model allows us to truly be a community bank in every market in which we serve. We see ourselves as 25 $250 million community banks with a focus on and a passion for customer service. Because we build around local bankers, nearly everyone who walks into one of our banks is a neighbor or a friend or someone that they have referred. That's how we know our customers and that's how we treat them and that's why our customer satisfaction is 91%, compared to an industry average of 75%.

In an industry where many of the products and services are similar, service is our brand and our competitive difference. I'll talk more about how we continue to execute our balanced growth strategy during the third quarter but first, I'll ask Rex to review the numbers. Rex?

Thank you, Jimmy. For the third quarter of 2006, net income rose $3.1 million to a record $17.4 million, up 22% from a year ago. Diluted earnings per share was $0.42, a 17% increase from $0.36 for the same period last year. The increase in earnings continues to be driven by strong revenue growth. Total revenue was up $8.8 million, or 14% from a year ago to $72.8 million.

Now let's look more closely at several key elements of our third quarter performance. Taxable equivalent net interest revenue of $64.4 million rose $9.4 million, or 17%, from the same period a year ago. This reflected strong loan growth funded by customer deposits and an expansion of debt interest margin.

On a consecutive quarter basis, net interest revenue increased $2 million, or 13%, on an annualized basis. The net interest margin increased 13 basis points, from 4.17% a year ago, to 4.30% in the third quarter of 2006. The margin was down four basis points from the second quarter. This slight decrease was due to the rising costs of deposits that we had anticipated earlier in the year as we continued to fund our loan growth with customer deposits. More than half of our $312 million in customer deposit growth came from core deposits. The balance of the growth in total deposits consisted of $143 million in large CDs and $21 million in brokerage CDs.

Year-to-date in 2006, we have more than funded our loan growth of $567 million with deposit growth of $832 million. Again, over half of the deposit growth was from core deposits.

Now let's turn to loan growth. At the end of the third quarter, loans totaled $5 billion, up $711 million, or 17%, from a year ago. I will now provide additional detail on the $711 million increase in loans compared to a year ago, first by geographic region. North Georgia had loan growth of $396 million, which includes $144 million for Hall county. Our Hall county bank had loans totaling $353 million at quarter end. Metropolitan Atlanta market increased $161 million. Western North Carolina grew $88 million, including $8 million received through the purchase of two branches. Coastal Georgia grew $49 million and East Tennessee increased $17 million.

Looking at consecutive quarters, total loans increased by $155 million, or 13%, on an annualized basis. Here's the consecutive quarter growth by market: $76 million in North Georgia, which includes $42 million for Hall county; $26 million in Metro Atlanta; $7 million in Coastal Georgia; $35 million in Western North Carolina, again including $8 million from the acquired branches; and, $11 million in East Tennessee.

Looking at growth by loan categories, let's first review the year-over-year comparisons. Construction and land development loans grew by $448 million, bringing the total to $2.1 billion. Commercial loans increased by $167 million to $1.4 billion and residential mortgages increased by $85 million to $1.3 billion. Looking at those same categories on a consecutive quarter basis, construction and land development loans increased by $70 million, commercial loans increased by $44 million and residential mortgages increased by $38 million.

Next let me update you on the interest rate sensitivity of our balance sheet at quarter end. Our interest rate sensitivity reflects a 2.3% increase in net interest revenue over the next 12 months based on a 200 basis point ramp up of interest rates. This is down about 100 basis points from a year ago and down about 110 basis points from last quarter. At quarter end, total prime daily loans were $2.8 billion, up from $2.4 billion a year ago.

In the third quarter, we took steps to reduce our exposure to lower interest rates by putting on fixed rate received slots, having an aggregate notional value of $415 million and adding interest rate floors having an aggregate notional value of $500 million.

At quarter end, our interest rate sensitivity model indicates that a 200 basis point ramp down in interest rates would cause a 1% decrease in net interest revenue as compared to a 6% decrease at June 30, 2006, and a year ago.

We're continuing to monitor our interest sensitivity position and may take further steps in light of this uncertain interest rate environment. The investment securities portfolio effective duration was 2.8 years as compared to 2.2 years at September 30, 2005. The average life was 3.5 years as compared to 2.8 years a year ago.

Turning to fee revenue, it dropped slightly in the third quarter to $12.1 million from $12.4 million in the third quarter of 2005, primarily due to lower mortgage fees and losses from the sale of securities. Mortgage fees were down from a very strong quarter a year ago, primarily due to a less favorable interest rate environment, leading to lower refinancing activities. Also impacting fee revenue was a $290,000 charge for the prepayment of Federal Home Loan Bank advances that was part of our balance sheet management activities.

Service charges and fees on deposit accounts increased $287,000 to $6.9 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 usage fees.

Next, operating expenses totaled $44.9 million, up $3.6 million, or 9%, from the third quarter of 2005. Holding the growth in operating expenses to 9% while revenue grew 14% yielded a 5% operating leverage for the quarter. A key component of operating expenses was salaries and employee benefit costs of $29.6 million. This was an increase of $3.3 million, or 12%, due to the increase in staff to support our significant de novo expansion efforts and business growth. At quarter end, we had total staff of 1,843, up 148 staff, or 9%, from a year ago. Nearly 66 staff, or 45% of that increase, related to six new offices opened in the past 12 months and the two branches acquired in North Carolina.

Communications and equipment expense of $3.9 million reflected an increase of $379,000 due to further investments and upgrades in technology and equipment to support business growth and additional offices.

Advertising and public relations expense of $1.9 million increased $199,000, again reflecting the cost of successful initiatives to raise core deposits and generate brand awareness in new markets. Occupancy expense increased $202,000 to $2.9 million, reflecting the cost of operating additional banking offices added through de novo expansion. Our operating efficiency ratio was 58.4% for the quarter and was within our long term goal of 58 to 60%.

And now let's look at credit quality. The third quarter provision for loan losses was $3.7 million and was equal to the second quarter of 2006 and up $300,000 from a year ago. Net charge-offs for the quarter were $1.3 million compared to $1 million for the second quarter of 2006 and $1.4 million a year ago. Net charge-offs to average loans was 11 basis points compared to nine basis points for the second quarter of 2006 and 13 basis points for the third quarter of 2005. Non-performing assets at quarter end totaled $9.3 million compared with $8.8 million at the end of the second quarter of 2006 and $13.6 million a year ago.

At quarter end, non-performing assets included $8.3 million of non-performing loans and $1 million of [OREO]. There were no loans 90 days past due and accruing interest at quarter end. Non-performing assets as a percentage of total assets was 14 basis points at quarter end, the same as last quarter and considerably lower than the 24 basis points at September 30, 2005. The current level of non-performing assets is well below our long term experience level 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 levels.

Jimmy, this concludes my comments and I'll now turn the call back to you.

Thank you, Rex. You're familiar by now with our balanced growth strategy of growing organically by de novo expansion and by acquisition. We put all three parts of this strategy to work during the third quarter. In July we announced our de novo expansion in the high growth Interstate 75 corridor between Chattanooga and Knoxville, Tennessee. United Community Bank - Cleveland, Tennessee opened August 1 as our 25th community bank and is led by President Mickey Torbett and Executive Vice-President DeWayne Morrow. Both are well known and respected in this market. They brought to United a team of eight bankers with 180 years of combined experience in the Cleveland area, where we plan to open two additional offices in 2007. With steady growth and a very strong industrial base, Cleveland, Tennessee is an outstanding market and a natural choice to continue our expansion in East Tennessee where we now have nine banking offices in seven counties.

Now turning our attention back to Georgia, in September we announced an agreement to acquire Southern Bancorp, with $346 million in assets, with banking offices in Cherokee and Cobb counties. Cherokee was the seventh fastest growing large county in the country from 2000 to 2006 and is expected to grow by 34% in the next five years.

Steve Holcomb, who will lead the United team in Cherokee, was born in the and has spent most of his 32-year banking career there. His Cherokee team of 13 bankers have over 300 years of experience in that market. Because of Steve Holcomb's deep roots and his strong leadership in Cherokee county, we are splitting the Cherokee and Cobb offices to form our 26th community bank, United Community Bank - Cherokee. Total deposits in Cherokee county are $2.8 billion and United's market share ranking will improve from 15th to 9th with this acquisition.

The top five regional banks have over 50% of the market share and we plan to continue to move that ranking higher as we expand our presence by two offices in this very attractive market in 2007.

In Cobb county, we will add Southern's Marietta office and team of bankers to our existing bank which has four offices in Cobb county. Total deposits in Cobb county are almost $10 billion and our deposit share ranking in Cobb county will move from 14th to 7th. We will also gain a presence for the first time in downtown Marietta, which is an established and growing economic center within Metro Atlanta. Three Fortune 500 companies have their headquarters in Cobb county and over 100 have a presence there.

In addition, the top five regional banks have over 60% deposit market share and we have an excellent opportunity to continue to gain market share with the Marietta office.

In September, we completed the acquisition of two Western North Carolina banking offices in Bryson City and Sylva, which have $8 million in loans and $38 million in deposits. We were already in these high growth communities so we knew the banking environment and now we know it even better with the addition of nine new local Community bankers. That's a formidable United team with deep roots in these markets. We consolidated the Bryson City office that we acquired into our existing and more spacious United office that is less than a mile away, and our new bankers have settled in very comfortably. In Sylva, we added an attractive location near the downtown market. We now have 19 banking offices in 12 Western North Carolina counties.

In Cumming, Georgia, which is located in Forsyth county on the north side of metro Atlanta, we opened a new banking office at the end of August. Now this will serve as the main office for our Forsyth county bank. Also, we plan to open another banking office in Forsyth county in early 2007. We have a great opportunity to expand in this market where the top five regional banks hold over 70% of the deposit market share. Forsyth county has deposits of $2.1 billion and is projected to grow 37% between 2006 and 2011, making it one of the ten fastest growing counties in the United States. From 2002 through 2005, Forsyth county was the fastest growing county in Georgia and one of the fastest growing in the entire country.

In North Carolina, we will enter the Hendersonville market with a new de novo banking office by the end of the year. We've already hired four seasoned bankers this past quarter. That group of bankers is led by John Goins, who has over 20 years of experience and was previously a regional manager in the Western North Carolina markets and has lived in Hendersonville for 12 years.

All of these investments are designed to grow our business and to strengthen our brand in key markets. We can only do this by reinvesting a portion of what our banks earn. In other words, we can invest in the future because of the success of our existing banks, success built on service.

Now in terms of guidance and our outlook for the fourth quarter of 2006, we anticipate earnings per share growth slightly above our long term goal of 12 to 15%. For 2007, we expect the growth to be within the range of 12 to 15%. We anticipate core loan growth for the fourth quarter of 2006 and for full year 2007 to be within a range of 10 to 12%. Our net interest margin has benefited from rising short term interest rates; however, we expect our margin next year will continue to stabilize and possibly compress slightly from our current level, due to further pricing competition for deposits. This outlook assumes that short term rates hold at the current levels and we continue to have a stable economic environment and strong credit quality.

In summary, we're very pleased with the record-setting third quarter and the first nine months of 2006. You've heard me say it, and I'll say it again that the key to our success is the way our 1,800 bankers go about their business. We have talented people who live and breathe the United brand of personal and caring service. We intend to grow that brand and the positive impact that it has and can have on our customers and the communities that they live in.

Thank you for your continued interest in United Community Banks and I'll now 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, Jimmy and Rex.

Hello, Kevin.

Hi, Kevin.

I was wondering if you could address two areas. First, the whole area of construction and commercial real estate lending is definitely an area that is warranting a little more concern these days. And if you could just give a little color on your comfort level with the kind of pace of growth you had this quarter and why you think you should still have a double digit pace growth going forward and why you think it will hold up from a credit standpoint too. Just different things you're seeing out there, as opposed to the fear that seems to be kind of hitting all banks in that area. And then secondly, if you could just address the margin. It seems that other asset sensitive banks have incurred a little more significant margin compression and, kind of signal that we could still have more compression going forward. And I was wondering - you mentioned the (slops) in the floors but are there other kinds of levers that you're pulling that you think are - is going to let your margin hold up better than others? Thanks.

Kevin, let me address the construction lending question and then Rex will talk about the margin. First, let me say thank you for the question. It's an excellent question and one that we certainly focus on every single day.

Construction lending has been one of our core competencies ever since we have been in business. I think one has to look at our markets. I think we have excellent demographics. Our economy continues to be very solid. Certainly, we're beginning to see a slight softness. I think everyone is, today.

When you really drill into our numbers, our lending is basically in the starter home market, particularly in the Metro Atlanta area. And when you look at the home sales in Metro Atlanta, on the north side, 85% of the houses sold, south side is in the mid 90s, that price range is $400,000 or less. So it's absolutely in the sweet spot of where we are and what we've been doing for a long, long time. We have very consistent underwriting. I think we have very strong internal monitoring and controls to manage the risk.

We also pay tremendous attention to the overall market. Again, we have various entities that help assimilate what's going on in the markets. When you look at, say Metro Atlanta, for example, we continue to have very solid population growth, net job increase over 54,000 year over year. If you break that down into two parts, let's say the north Atlanta and the south Atlanta, and maybe look at four metrics that we follow very closely, the starts and closings. In north Atlanta, we see this past quarter where actually the starts as well as closings are down. We think that probably has to do with some builder and developer discipline.

We do see some creep on the housing supply. Nine and a half months today, a year ago, it was about 8-1/2 months' supply. Now the historical low was five months. So, again, we see creep, but it's not something today that we're majorly concerned about. Lot supplies - also we continue to see a little bit of creep there on the north side. When you look at the total inventory that is finished and vacant - that's the house that's got a "For Sale" sign in the yard, there's 3.8 months of supply available. A year ago, it was three months.

South side has very similar metrics so, again, we feel comfortable, no question. We continue to watch that and monitor it but today, again, given our geography, given the population growth, given the retiree migration, we feel very comfortable with our lending. Though, again, let me emphasize, we watch, we monitor this very, very closely. Rex?

So, Jimmy, your outlook for loan growth kind of embeds this softening kind of continuing. Not falling off a cliff, but you have it kind of continuing?

We do, Kevin. We think that we certainly will see some softness in the construction, but we're very confident today that we can still grow loans 10 to 12%. We feel like if we can operate within our range of efficiencies as we have communicated, maintaining solid loan quality as well as manage our de novo expansion or possibly adjust if need be, we're still very confident that we can grow earnings per share in that 10 to 15% range.

Great, thank you.

Kevin, I'll have a couple of comments on net interest margin that you asked. As we've indicated over the past three calls, we've had some concern that we're going to have margin compression as our outlook. And, again, that was really focused, because we continue to drive to fund our loan growth and we have competitive pricing in our markets. We're entering new markets with our de novos. We've added 12 offices over the past seven quarters. And, again, it's deposit driven, so we've seen our mix change a little bit over the past year.

We still have very strong core deposit growth as we've noted in our numbers. Again, when you look at our average balance sheet, our transaction accounts on an annualized rate of increase, 9% in the quarter and 13% on a year-over-year basis. So we still see very strong transaction account growth as well as core deposits, the remainder of the core deposits. So, again, our outlook is again that we'll see some stabilization of our net interest margin, again assuming a flat rate environment, and we might see some small amount of compression looking forward into 2007.

[OPERATOR INSTRUCTIONS] Your next question comes from the line of Jennifer Demba with Robinson, Humphrey. Please proceed.

Good morning.

Jennifer.

Good morning, Jennifer.

Just some questions about fee income growth looking at sequential trends. Rex, you guys had a similar FHLB advance prepayment charge in the second quarter. Isn't that correct?

Yes. No, we didn't have any in the second quarter. I'm sorry, we did have a small one in the second quarter, right.

Was it a similar amount?

It was a little over $280,000 last quarter.

Okay. And your consulting fees bumped up quite a bit from second quarter to third quarter. Anything going on there? I'm assuming we shouldn't consider that a run rate going forward.

No, it's probably a record quarter for Brintech. Again, they had very strong growth in their risk management practice in the quarter as well as their general consulting practice. We've added two consultants in each of those practices this year to really step up the opportunities that we see out there. So it's a little bit higher than the run rate that we expect out there, but again, a very strong quarter.

Okay. And finally, could you talk about the increase in NPAs? You've had an increase, kind of, over the last couple of quarters. Nothing dramatic but any larger loans there or just some smaller stuff?

Jennifer, our NPAs continue to be pretty consistent. We've not had any major surprises. Our largest NPA's a little over $600,000. We have a lot, well, I shouldn't say the words "a lot." But we have loans coming in, loans going out. I think what you're noticing there, and I would certainly want to remind everyone on the call, is at this low level it will be lumpy from time to time. But we feel very confident, very comfortable today with our credit quality and, again, it remains right at our historical low.

One more question. Around when do you anticipate the Southern Bancorp deal will close?

It is scheduled now for December 1 or 2. 1st.

Okay. Great quarter, thank you.

Thank you.

Thanks, Jennifer.

Your next question comes from the line of Peyton Green with FTN Midwest Securities. Please proceed.

Okay, thank you. Jimmy, I was wondering if you could comment a little bit on the M&A conditions out there. With the difficult environment that is persisting for a lot of banks, do you think there's going to be more M&A opportunity or are expectations still too high? And is the de novo activity that you are embarking on over the next 12 months or so, does that reflect that? Or is it just simply you have more capacity, given the infrastructure that you've put in place over the last couple of years?

Let me answer the de novo piece first. Again, Peyton, this is a people driven decision, certainly supported with the financial capabilities of the company because as we have said many times that earnings per share growth, that range is kind of the guiding light. And we have been very fortunate, very blessed to have excellent bankers with long term relationships joining our team. So certainly, that's our preference. That's something that we can't plan or budget because we don't know when that may happen to create the opportunity.

We want to be opportunistic. We want to be in a position to take advantage of talented people that believe in the same principles that we do. And once we have those people, we can put the brick and mortar around them. So, again, that's something that has been very beneficial to our company and I think certainly, ultimately to the shareholders on an earnings standpoint.

From the M&A standpoint, Peyton, we continue to look at various opportunities. Again, we're very disciplined in that. It's been two years since we've actually done an acquisition. Southern National that we did was somewhat unique. Cherokee county has been a market that we've been trying to develop a method in which to get into in a really strong, profound way, with a leader of Steve Holcomb coming on board and bringing in that particular bank. Given his knowledge, his 32 years of experience in that market, 300 years of experience with his entire team, we're excited about that.

We're very disciplined in our pricing. This particular bank, which has very strong earnings, sub-S. When you look at what our actual purchase price was, it's actually about 2.85 times book value, once the warrants and options were exercised, less than 20 times earnings. So, again, that model in which we're looking for must be within our footprint, must have the leadership that we're looking for, must fit a niche in a market that we feel we can expand on and grow organically for a long period of time. That's what Southern National brought to us.

Certainly pricing is very expensive in most cases, certainly in metropolitan areas. As I have said a number of times, one, when you're looking at an opportunity, as you drill into that balance sheet, the question that we always ask ourselves, not the asset side, but the liability side -- what do those deposits look like? Are they really core or are they CDs? So that's kind of some color on that, Peyton.

Okay. And I guess to follow up on that, are you seeing less M&A opportunities where the institution that's selling can facilitate growth going forward versus in the past when there might have been more, I guess, "partnership" opportunities around and so now there's just more talent available because of the frustration with larger banks? I guess it seems like you're having more people constantly come your way.

Well, we've been the benefactor in some very strategic markets that have generated people and attracted them to United. But I think there's probably as many sellers out there today as I have seen. Pricing is again a major issue. We're in some uncertain times, given to where the interest rates, the prime, has gotten to a point. I think they're looking at their balance sheet. How they can continue to maintain that level of earnings growth, certainly if interest rates were to start to come down? So I think that's going on in the minds of a lot of our bank CEOs out there.

Again, the opportunities that we have enjoyed have been people that have come out of, in many cases, a larger bank purchasing the local community bank. And they prefer to work in that hometown community bank environment that United attempts to offer them.

Okay, great. Thank you. And then, Rex, if you could just give me the loan and deposit totals for Hall county, that would be great. Thank you very much.

As of quarter end, the loans were $353 million and deposits are at about $254 million at quarter end.

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

Thanks, guys. Good morning.

Hi, Chris.

I wanted to ask you about your outlets for problem loans, Jimmy, when you've had them in recent years and how different is it today, compared to 10 to 15 years ago? And have you had to employ any of those newer techniques here recently?

No, not really, Chris. We're very aggressive. Number 1, once a person, if they can't pay, what we say around here -- "If you can't pay you can't stay." So we get aggressive in liquidating, getting that collateral into our hands and then having the ability to liquidate it, usually in a fairly quick manner. We've not had to employ any other techniques, for example, I guess, selling loans at a discount and so forth.

Again, I think that is somewhat of a reflection of the markets in which we reside because there's still a lot of interest in acquiring if it's real estate, certainly that, or a home. But we've not changed our methods of collection at all. It's been just business as usual.

Okay, very well. That's all. Thank you.

Thank you.

There are no further questions at this time. I would now like to turn the presentation back over to Mr. Jimmy Tallent.

Thank you. We appreciate all of you joining us this morning and also, we're very pleased to report another strong quarter. We also want to wish all of you a safe and happy holiday season. We look forward to speaking with you again in January. Hope you have a great day.

Thank you for your participation in today's conference. This concludes the presentation. You may now disconnect. Good day.