United Community Banks Inc (UCBIO) 2007 Q2 法說會逐字稿

Good morning, and welcome to the United Community Banks' Second Quarter 2007 Earnings Conference Call.

Hosting the call today is Jimmy Tallent, President and Chief Executive Officer of United Community Banks, Rex Schuette, Chief Financial Officer, and David Shearrow, Chief Risk Officer.

Please be aware that during the call, Mr.

Tallent, Mr.

Schuette and Mr.

Shearrow 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 described on page 4 of the Company's Form 10-K and other information provided by the Community -- Company in its filings with the SEC and included on their Web site, www.ucbi.com.

And now, we will begin the conference with Mr.

Jim Tallent, President and Chief Executive Officer of United Community Banks.

Mr.

Tallent?

Thank you and good morning.

We are pleased to report strong year-over-year operating performance for the second quarter of 2007.

We achieved record operating earnings while continuing to build the franchise by opening two de novo offices and completing the acquisition of First Bank of the South, which added five offices in metro Atlanta.

Our operating results exclude the impact of the previously announced special $15 million fraud related loan loss provision that we took in the second quarter.

This special provision lowered reported net income to $11.9 million for the second quarter, reducing after-tax earnings by a $9.2 million or $0.20 per share.

This also lowered diluted earnings per share to $0.26 for the quarter.

In addition, we classified the entire $23.6 million in fraudulent lot loans to non-accrual status.

Before Rex comments on our operating earnings in more detail, I want to take a moment to review a few of the highlights from the second quarter.

Net interest revenue increased 16% or $9.5 million from the second quarter of 2006.

Total operating revenue rose 21% over the second quarter of last year to $80.8 million.

Net operating income for the quarter rose 24% compared to the second quarter of 2006 to $21.1 million.

Operating return on assets was 1.12% for the second quarter of this year compared to 1.10% a year ago.

And operating earnings per share was $0.46, up 12% from a year ago.

Year-over-year, our core loan growth excluding acquisitions was 8%.

As we mentioned in our last earnings conference call, we experienced unusually slow loan growth during the first quarter at 2% annualized.

Second quarter growth was 5% annualized, just under our target due to the continued slowdown in construction lending.

Having said that, we continue to remain cautiously optimistic about the outlook for loan growth.

And our most recent acquisition, First Bank of the South, will enable us to diversify our loan portfolio into areas other than the housing market.

Our new bank based in Gwinnett has a strong team of C&I lenders that can and will expand their experience throughout the Atlanta region.

We will also look for opportunities to grow loans and deposits through our two de novo offices that were opened in other high growth areas in this region during the second quarter.

One is located in Lula, near Gainesville, Georgia and the other is just off of Interstate 575 approaching Atlanta in Cherokee County.

We have added five new offices in 2007 and look to slow the opening of additional offices for the remainder of the year.

I will comment on our expansion efforts and outlook for 2007 during my closing comments.

Now, I will turn the call over to Rex to review the numbers with you in more detail.

Thanks, Jimmy.

During the second quarter, net operating income totaled $21.1 million.

This was an increase of 24% or $4.1 million over the second quarter of 2006.

Diluted operating earnings per share rose 12% to $0.46.

Net interest revenue and fee revenue continue to be the drivers for increased earnings as well as controlling expense growth.

Tax equivalent net interest revenue was up 16% or $9.5 million over the second quarter of 2006 and totaled $68 million.

Net interest margin for the second quarter was 3.94% compared to 3.99% for the first quarter of 2007 and 4.07% for the second quarter of 2006.

The five basis point decrease this quarter was primarily due to our asset mix for slower loan growth and adding $50 million of BOLI investments, whereby the earnings in those securities were reflected in other fee revenue and not in our margin.

The BOLI investments lowered our net interest margin by 3 basis points and the asset mix by another 2.

Also, the addition of the Spruce Pine and other loans to non-accrual status and the related interest reversals lowered our margin by 2 basis points.

The impact of the non-accruals was offset by the Gwinnett Bank acquisition and its mix of higher demand deposits.

Going forward, we expect our margin will increase around 3 basis points for the full quarter impact of Gwinnett's higher demand deposits.

For the balance of 2007, we expect to maintain our margin at or near that level.

Total loans increased 25% year-over-year.

This includes $800 million from the acquisition of Southern National Bank in the fourth quarter of 2006 and First Bank of the South in June of 2007.

Excluding these acquisitions, core loan growth was about $390 million or 8%.

A slowdown in construction lending during the first half of 2007 left our linked quarter loan growth at 5% on an annualized basis.

Included in the press release within the financial highlights section, we added a page to show you loans outstanding by loan category and by region for the past five quarters, as well as growth rates on a linked quarter basis and year-over-year.

We also included information excluding acquisitions and hope that this information will be useful for your review of our core growth rates.

Additionally, we had one internal reporting change.

With the expansion of metro Atlanta, we have decided to include our Hall County Bank, which includes the Gainesville MSA, with the other ten banks in the metro Atlanta markets.

We now have 11 banks and 47 offices in the new combined market we call the Atlanta region.

All the prior period amounts have been reclassified for consistency.

Deposits increased $1.38 billion or 28% year-over-year, which includes $928 million from the acquisitions.

Excluding acquisitions, customer deposits grew 9% over the past year.

Over the past two quarters, we have taken several steps to reduce our funding costs.

This included a shift to lower cost wholesale borrowings and reducing CD balances, especially those with single deposit relationships.

As a consequence, total customer deposits were down slightly.

Still, for the first six months of 2007, we grew customer transaction, money market savings and NOW accounts by $143 million, more than funding our core loan growth of $90 million.

Our strong growth of customer deposits in 2006 afforded us the ability to be more diligent in the pricing of deposits and managing our margin.

As a result, the level of wholesale borrowings has increased in the first half of 2007 while our loan to deposit ratio remains below the 100% level.

In addition, as part of our balance sheet management activities during the second quarter, we terminated $25 million of higher cost federal home loan bank borrowings that had an interest rate about 100 basis points above the market.

At quarter end, our interest rate sensitivity reflects a 1.7% increase in net interest revenue over the next 12 months, based on a 200 basis point ramp up of interest rates.

This is down from 3.4% a year ago and up 20 basis points from the first quarter of 2007.

Also at quarter end, a 200 basis point ramp down on interest rates would have caused an 80 basis point decrease in net interest revenue, which compares to a 30 basis point decrease last quarter and a significant improvement from last year, which showed a 620 basis point decline.

With the end of the fed rate increases in June 2006, we restructured our derivative portfolio to lower our exposure to falling interest rates.

The slight rise in interest sensitivity this past quarter was due to the Gwinnett acquisition.

The effective duration of the investment security portfolio was 2.7 years at quarter end compared to 2.3 years at March 2007 and 2.8 years at June 2006.

The average life of our investment securities was 3.4 years at quarter end as compared to 2.9 years at March 2007 and 3.5 years at June 2006.

We continue to see strong fee revenue growth in the second quarter across all categories.

Service charges and fees on deposit accounts of $8 million increased 17% due to a pricing increase implemented early this year as well as growth in transaction volumes and new accounts and higher ATM and debit card usage.

Mortgage loan fee showed a 45% increase year-over-year due to higher volumes and pricing of mortgages sold.

Consulting fees were up $669,000 due to strong growth in our advisory services practice.

Other fee revenue of $2.4 million was up $1 million primarily due to $600,000 of earnings on our BOLI investments that I mentioned earlier.

Also included in fee revenue this quarter were some balance sheet management activities that I mentioned earlier.

We terminated a $25 million borrowing that will save us a 100 basis points in funding costs.

The termination charge of $1.2 million, which is offset by securities gain.

Looking at operating expenses, they were $47.7 million for the quarter.

This was an increase of $8.1 million or 20% over the second quarter of 2006.

The news release provides details of the increase by each expense category.

The key drivers of the overall growth in expenses were the two acquisitions and the 12 de novo offices we opened in 2006 and 2007.

We are continually monitoring revenue growth and expenses and cutting discretionary spending where appropriate.

That includes limiting our de novo expansion for the remainder of 2007.

We remain within our long-term efficiency ratio goal of 56% to 58%, with a 56.6% ratio for the second quarter.

All of our regulatory capital ratios are above our internal guidelines at quarter end, which are 100 basis points above the well-capitalized level.

We had a slight decline in the ratios this quarter due to the Gwinnett acquisition, but still continue to grow capital at a solid pace.

And our tangible equity to assets ratio was 6.65%, well above our target of 5.50% to 6%.

Last week, the Board of Directors increased the authorized level of our stock repurchase plan to 2 million shares.

With our stock price at its current level and our reduced need for capital to support loan growth, increasing the authorization presents an attractive use of excess capital we are generating through earnings.

We plan to initiate the program immediately and fund the purchases by issuing trust preferred securities during the third quarter.

Now, I will turn the call over to David, who will discuss our credit quality and outlook.

David?

Thank you, Rex.

I'd like to start by giving you a brief update on the Spruce Pine, North Carolina lot loans.

Our exposure was 23.6 million in these broad related loans that were put on non-accrual in the second quarter.

We provided an extensive update during our July 12 conference call, but I'd like to recap a few key items.

We provided a special allowance equal to about two thirds of the lot loan balances.

Our strategy continues to be, first, to work with those borrowers who work with us and recognize their obligations, second, to participate with the other banks and the North Carolina Attorney General and the FBI in the discovery process, and third, to aggressively pursue all avenues of collection on these loans.

The ultimate resolution in collection will likely take some time given the complexity of the situation in the 83 borrowers involved.

We've also performed an extensive review of what happened.

As part of that review, we've enhanced our portfolio reporting to better detect unusual portfolio concentrations and growth trends by market.

These reports are being reviewed by our regional credit teams and executive management.

We have strengthened our lending policy in connection with the lot loans and have consolidated the authority to underwrite and review pre-development lot loans under a limited number of senior managers.

We have also thoroughly reviewed our lot loan portfolio for any similar concentrations in a single development.

Through that process, we identified 321 developments across the Company with lots greater than $100,000, of which the two largest had 21 lots each outstanding.

Behind Spruce Pine, the next three largest developments in dollars outstanding were $2.3 million, $2.1 million, and $1.4 million.

Currently 19 of the 83 borrowers representing $7.3 million of the Spruce Pine loans are current.

Now, let me move on and address the credit outlook for United.

Net charge-offs for the quarter were $2.1 million compared with $1.5 million in the first quarter of 2007, and $1 million in the second quarter of 2006.

As we have said on previous calls, we have been at unsustainably low levels of net charge-offs and have expected charge-offs to rise to the 15 to 18 basis points level.

Non-performing assets at quarter end were made up of $30.8 million of non-performing loans, which includes $23.6 million for the Spruce Pine loans, and $12.8 million of other real estate owned.

Excluding Spruce Pine loans, non-performing assets totaled $20 million at quarter end.

Non-performing assets as a percentage of assets were 54 basis points at quarter end, or 25 basis points excluding the Spruce Pine loans.

This is in comparison to 20 basis points last quarter and 14 basis points in the second quarter of 2006.

The allowance for loan losses at quarter end was 1.29%, excluding the Spruce Pine allowance, up 2 basis points from last quarter, and up 7 basis points a year ago.

In terms of credit outlook, we continue to see a challenging environment in our residential real estate markets.

Lot supplies remain excessive in most of our markets and many of our builders are working down their inventories.

On the other hand, liquidity in the market remains ample, which given our conservative collateral positions has enabled us to quickly exit problem credits when they have risen.

Nevertheless, given the continuing challenges in the market, we expect NPAs to remain within our historical guidance of 20 to 35 basis points for the next few quarters.

With that, I'll turn the call back over to Jimmy for closing remarks.

Thanks, David.

In June, we completed our acquisition of First Bank of the South that gave us our 27th community bank and added five offices in metro Atlanta.

More importantly, we added to the United family 70 seasoned bankers including two key leaders, Glenn White and Steve Williams.

With the First Bank acquisition, we have encircled Metro Atlanta, which has been one of our goals.

We will group our 10 Metro banks along with our Hall County bank into one Atlanta region under Glenn White, who has been named executive vice present of the holding company.

With these changes, Steve Williams will serve as President and CEO of United Community Bank Gwinnett and will also manage our C&I lending for the Atlanta region.

Steve is actively pursuing C&I lenders with experience in these markets as we focus on the growth opportunities for small business and commercial lending.

Gary Guthrie, who previously was responsible for our real estate offices in Atlanta, has been promoted to President of the real estate division for the entire Atlanta region.

We feel these changes provide a great opportunity for us to manage our real estate risk, while continuing to grow our C&I lending, therefore diversify our loan portfolio.

As Rex mentioned, our Board has increased the level of our stock repurchase program to 2 million shares.

Both the Board and management believe that our current share price does not reflect the long-term prospects for our Company, and therefore represents an attractive investment.

The decision to initiate and increase the share repurchase program highlights our continuing confidence in United's superior performance and our commitment to promoting long-term shareholder value.

It is no secret that we encountered some challenges in the second quarter.

We faced those challenges with thorough and decisive actions.

Though there is still a lot of work to do in the collection process, we have taken the financial impact this quarter.

This allows us to continue our focus on what has made United Community Bank what it is today, and that is customer service.

Now, let me turn to our guidance for the remainder of 2007.

We expect our net interest margin to continue near the 4% level and we expect loan growth to be in the range of 4% to 8%.

In light of this slower loan growth, we expect our operating earnings per share growth for 2007 to be in the range of 10% to 12%.

On a co-earnings basis, we are pleased with our 12% operating earnings per share growth this quarter.

We remain optimistic that we will deliver another year of superior operating performance and we will accomplish this by basic blocking and tackling.

We will grow core customer deposits, we will grow high quality loans, we will control discretionary spending, we will move our existing de novos to earlier profitability and slow our expansion in the near term, and we will maintain our loan portfolio quality, while managing our net interest margin.

We are in some of the best growth markets in the country and are positioned well to build shareholder value with future growth, as well as top-notch customer service and financial performance.

Service and performance go hand-in-hand for United bankers, whose top priority is superior customer satisfaction.

During June, they earned an astonishing 93% customer satisfaction score, the highest score since we began measuring our performance in 2003.

We have seven locations that achieved 100% satisfaction.

It just doesn't get any better than that.

In closing, I want to thank and congratulate our employees for doing even better in what they have always done so well, and that is serving the customers in a sincere and effortless way that sets us apart from our competition.

With that, I will now open the call for your questions.

(OPERATOR INSTRUCTIONS)

And your first question comes from the line of Kevin Fitzsimmons of Sandler O'Neill Asset Management.

Good morning guys.

Good morning,Kevin.

Good morning, Kevin.

Good morning.

I was wondering if you could talk about credit, give a little more color on credit, excluding Spruce Pine, was wondering if you can -- that increase in non-performers this quarter we saw, taking away Spruce Pine, if you can give a little color on where that came from either by market or by loan type, and if you could also give us a sense for what is going on with your watch list as well?

Thanks.

Kevin, let me kind of frame the NPAs for us.

$43.6 million is the overall dollar amount.

If you deduct the Penland, which is $23.6 million, would leave you with $20 million of NPAs.

First Bank of the South, when that merger was completed, brought over $2 million of NPAs, of which half of that is actually under contract and then the foreclosure on the property in [Oconee], which was about a $5 million piece of dirt.

If you deduct all of that out, then you're looking at NPAs being approximately $13 million or just a little bit less.

I'll ask David to talk about the color on the quality.

Yes, in general, Kevin, as Kevin -- or as Jimmy just said, first of all, that would -- that $13 million would compare to $14 million last quarter.

But, if you look at the composition of our NPAs right now, outside of the large $5 million one that Jimmy mentioned, which is a residential A&D, it's pretty much a mixed bag.

It's both commercial real estate, it is some residential real estate, it's a variety and it's also spread fairly evenly throughout our footprint.

So, it's not highly concentrated, it will be a little more concentrated in the Atlanta market and others, but not substantially so.

Kind of looking at the watch list, we continue -- we do see a continued uptick in watch list critics, although saying that it's not a significant increase.

We are watching it closely, we are in the midst of a tougher cycle.

And so, we are trying to scrutinize all of our loans closely right now.

But, I wouldn't characterize our watch list increases being alarming in any sense.

It is an uptick, but not overly substantial.

Okay, great.

Thank you.

And one quick follow-up, can you also give a little more color on the expenses?

You alluded to a couple of times the -- trying to control discretionary expenses, and if you can just maybe give a couple of areas on where you might be able to do that versus your run rate you had this past quarter?

All right, Kevin.

I think a couple of things just to point out on expenses, when you look at it year over year, we had a little over $8 million increase as I mentioned, and of that, $2.3 million was acquisition, there was about another $1.5 million if you look at our de novos on a year-over-year basis that's in that total.

So, well over half of that number is coming from those two categories.

Additionally, when you look at it on staffing, staffing is the key driver of it, Kevin.

If you look at our staffing at quarter end, it is a little over 2000, 2017.

We are up 244 staff year-over-year.

Of that, 118 is related to acquisitions and 60 is related to our de novos for 2006 and 2007.

That leaves about 66 people or about a 4% growth.

So, we've been focused on holding down our headcount as well as de novos additionally from the -- from second quarter.

From first quarter to second quarter, we actually had a 13 decrease across the bank.

So, we are trying to hold down the staffing count in particular.

So, we look at probably holding flat on expenses overall, maybe up 1% on the linked-quarter basis going forward, so to keep pretty close to the same number.

We see within that, probably the other big item was professional fees, was up considerably both on a linked-quarter year-over-year.

A lot of that is driven again by some of our work-outs and foreclosures.

We see that number probably continuing.

That's an area we are looking at trying to reduce also at the same time.

Okay, great.

Thank you very much guys.

Your next question comes from the line of Jennifer Demba of SunTrust.

Good morning.

Good morning.

Good morning.

Just wondering, can you give us a little more color on how aggressive you want to be with your share repurchases here in the third and fourth quarter, and does your revised earnings growth guidance include share repurchases?

Jennifer, in looking at the share repurchases, we are probably looking at 1 million to 1.5 million shares doing that probably in the third quarter still.

We will monitor it as that proceeds and then look at it in the fourth quarter.

It will have little impact in the third quarter probably from an EPS standpoint, and again, depending on the level of repurchases, as we monitor that in the market also.

So, we don't expect it to have a significant impact on the rest of the year as far as EPS.

It could be $0.01 or so over the balance of the next two quarters, a little bit higher possibly on a full year impact into next year depending on the level of it, Jennifer.

Okay.

And could you talk about your loan growth in North Carolina and coastal Georgia, it was obviously a lot better than Atlanta and North Georgia?

Can you just kind of talk about what is going on down there, or up there?

Well, let me talk about the coast first, Jennifer.

That market continues to be relatively strong.

Certainly it attracts people from all over the country.

It appears to be having some additional momentum of people maybe relocating from Florida for various reasons into that coastal area.

But, when you look at Savannah, you look at Brunswick, particularly the economic growth with the ports and the gulfstream and so forth, it's just a very solid market, and we expect that to continue.

North Caroline continues to perform, again we are in some excellent markets there, markets that may seem to be somewhat off the beaten path.

But, really, when you start looking at the [boulevards] and the highlands, these kind of markets frankly -- it's attracting a lot of people there, and therefore creating lending opportunities.

Okay, thanks.

And your next question comes from the line of Terry Maltese of Sandler O'Neill Asset Management.

Hi guys, good morning, my questions were already asked, so thank you.

Okay, thank you, Terry.

You are welcome, Terry.

And you have no further questions at this time, I would now like to turn the call back over to management for closing remarks.

Well, thank you for being with us today.

We truly appreciate your interest in United Community Banks.

We look forward to talking with you at the third quarter.

Again, thanks for being with us and hope you have a great day.

Thank you for your participation in today's conference.

This concludes the presentation and you may now disconnect.