United Community Banks Inc (UCBIO) 2010 Q4 法說會逐字稿

Good morning and welcome to United Community Banks fourth quarter 2010 conference call. Hosting the call today are President and Chief Executive Officer, Jimmy Tallent; Chief Financial Officer, Rex Schuette; and Chief Risk Officer, David Shearrow. United's presentation today includes references to core pre-tax, pre-credit earnings, operating earnings, and other non-GAAP financial information. Are each of these non-GAAP measures United has provided a reconciliation to GAAP in the Financial Highlights section of the news release and at the end of the investor presentation. Both are included on the website at UCBI.com.Copies of today's earnings release and investor presentation for the fourth quarter were filed on form 8-K with the SEC and a replay of this call will be available on the Company's investor relations page at UCBI.com. United has provided a reconciliation at the end of the investor presentation and then the news release. Please be aware that during this call, forward-looking statements may be made by United Community Banks. Any forward-looking statement should be considered in light of risks and uncertainties described on Page 3 of the Company's form 10-K and other information provided by the Company in its filings with the SEC and included on its website.

At this time we will begin the conference call with Jimmy Tallent.

Good morning everyone and thank you for joining us as we discussed United Community Banks key events and results for the fourth quarter.

First, the financial highlights. Our net operating loss continued its declining trend from $23.6 million or $0.28 per diluted share. This excludes a partial discovery of $11.8 million related to our 2007 fraud loss. Including the partial recovery, our loss was $16.4 million or $0.20 per share. Charge-offs for the fourth quarter were $47.7 million excluding the partial recovery. At quarter end, our allowance for loan losses was 3.79% of loans. The net interest margin was 3.58%, up 1 basis point from the third quarter, and up 18 basis points from the fourth quarter of 2009. Core pre-tax, pre-credit earnings were $27.6 million which compares to $29.9 million for the fourth quarter of 2009 and $27.5 million last quarter.

For the eighth consecutive quarter we saw good growth in core customer deposits. In the fourth quarter, they increased $77 million or 12% on an annualized basis. This brings our total core deposit growth for the year to $291 million or 12%. Our most challenged loan category, residential construction, was down $69 million for the third quarter. Last year's decline was $355 million and from its peak three years ago, it is down $1.1 billion. Commercial construction loans of $297 million at year end declined $66 million during the year and declined $230 million or 44% from three years ago. We continue to make good progress both in residential and commercial construction, the two areas that have been hit the hardest. Non-performing assets declined 8% from the third quarter to $321 million, the lowest level since 2008.

Now I'm going to ask David to provide more detail on credit and then Rex will follow with details on our financials. David?

Thank you, Jimmy, and good morning.

This quarter we provided $47.8 million for loan losses, down from $50.5 million in the third quarter. Net operating charge-offs were $47.7 million in the fourth quarter compared to $50 million last quarter. Non-performing assets decreased $27 million from $348 million last quarter to $321 million this quarter. Non-performing assets includes $179 million of non-performing loans and $142 million in foreclosed properties. The net inflow of new NPLs was $81 million this quarter, down 32% from $120 million last quarter. We had no accruing loans that were past due 90 days. The ratio of non-performing assets to total assets was 4.32% compared to 4.96% last quarter.

Our performing classified loans decreased $38 million or 7% to $512 million on a linked quarter basis. The decreases were in all loan categories, but concentrated in residential construction, C&I, and commercial construction. The decline in performing classified loans was due to both a reduction in new downgrades and an increase in loans being upgraded. Accruing TDRs totaled $85 million and increased $35 million from last quarter. The increase was concentrated in commercial construction and CRE. Our 30 to 89 day past due loans were 1.26% flat from 1.24% last quarter. This is an encouraging sign as our past dues remain at the lowest levels we've seen in the past two years. The market to sell foreclosed properties to investors and retail buyers remained challenging in the fourth quarter.

We sold $34 million of foreclosed properties this quarter versus $40 million in the third quarter. In addition, we sold non-performing notes totaling $3.1 million in the fourth quarter, compared to $2.4 million last quarter. Foreclosed property write-downs and losses on sales totaled $16 million compared to $14 million last quarter. The foreclosed property write-downs were composed of $8 million related to losses on sales and $8 million of write-downs on remaining foreclosed property inventory. Overall, we continued the trend of aggressively recognizing losses . At quarter end, foreclosed properties had been written down to 64% of their loan balance at the time the loan was placed on non-accrual. Non-performing loans were written down to 67% of their book balance at the time of non-accrual. Segmenting the residential construction portions of our NPLs and foreclosed properties, these balances have been written down to 51% and 58% respectively of their original loan balance. These aggressive write-downs will help expedite asset sales in the future.

Let me now provide some detail on our portfolio by segment. First, commercial loans. Our total commercial loan portfolio of $2.5 billion has remained relatively flat for the past five quarters. Within our total commercial portfolio, we had $72 million of NPLs, down $7 million last quarter. Total commercial net charge-offs were $13.3 million for the fourth quarter compared to $17.4 million last quarter. The decline this quarter was primarily due to decreased charge-offs related to commercial real estate. Our challenges in the commercial portfolio have generally been dispersed across our footprint in a mixture of loan and property types.

This quarter, our charge-offs were more geographically concentrated in Atlanta. In the third quarter we completed yet another extensive review of this portfolio including all watched relationships and all past relationships over $750,000. While we continue to experience some negative migration in this portfolio, we are also seeing some improvements in a number of relationships which should lead to upgrades in 2011. In addition, CRE charge-offs have decreased and losses remain low below those experienced in our residential construction portfolio. In summary, with 56% of our CRE portfolio being owner-occupied, a modest average loan size of $447,000, and diversified property types, we remain well-positioned to work through any challenges in this portion of our portfolio here.

Moving on to our residential mortgage portfolio. We ended the quarter at $1.3 billion, down $37 million from last quarter and $148 million from a year ago. In this portfolio, we had $51 million of NPLs down $7 million from last quarter. Net charge-offs were $9 million for the fourth quarter up from $7.7 million last quarter. Elevated NPLs and charge-offs in the residential mortgage portfolio are due to continued pressure from unemployment in our markets and depressed housing prices. It's important to note that to date we have not experienced any systematic documentation issues in our residential mortgage portfolio which might lead to foreclosure process , nor do we expect any issues since these loans were originated and closed in our local banks.

Home equity is included within our residential mortgage portfolio. This portfolio, which totaled $335 million, declined $5 million from last quarter. Net charge-offs were $1.3 million in the fourth quarter, down from $2.2 million last quarter. Home equity line usage remained flat at 62% in the fourth quarter compared to last quarter. Overall residential mortgage early delinquency was up slightly from last quarter and we expect high unemployment to continue to impact this portfolio in 2011. Nevertheless, given the economic environment, residential mortgages continue to hold up fairly well.

Our total residential construction portfolio of $695 million is $69 million from the third quarter and down $355 million from a year ago. Looking at credit quality, our residential construction portfolio had $54.5 million of NPLs and $24.5 million in net charge-offs for the fourth quarter. NPLs declined $24.8 million and net charge-offs increased $600,000 from the third quarter. North Georgia residential construction remained our most stressed portfolio with $10.4 million in net charge-offs in the fourth quarter. However, North Georgia residential construction charge-offs were down $4.1 million of 28% compared to the third quarter. North Georgia represents $339 million of this loan category. It breaks down into $52 million in houses under construction, and $287 million in dirt loans. The $52 million of houses under construction is down $8 million from the third quarter and consisted of $21 million in pre-sold and $31 million in spec. The $287 million of dirt loans was down $21 million from last quarter and included $88 million in acquisition and development loans, $159 million in finished lots, and $40 million in land loans. The Atlanta MSA represents $133 million of this loan category and breaks down into $48 million in houses under construction and $85 million in dirt loans.

At quarter end our allowance for loan losses was $175 million or 3.79% of loans . As Jimmy mentioned, we reported an $11.8 million partial recovery related to our 2007 fraud loss that resulted from two failed real estate developments in Western North Carolina. This recovery was it used to offset our operating loan loss provision in the quarter. Our allowance coverage to non-performing loans was 98% compared to 80% last quarter. Excluding impaired loans with no allocated reserve, our allowance coverage to non-performing loans was 274% compared with 257% last quarter here. Based on recent loss and early delinquency trends we do not expect any near-term reserve building. Based on recent loss and early to liquidity trends we do not expect any mid-term reserve building.

In summary, while credit remains a challenge, we saw an improvement in virtually all major credit metrics. We were encouraged by the decline in classified loans, new NPL inflow, and net operating charge-offs this quarter, and past dues held steady. Looking ahead, we expect to see this improvement continue, although not necessarily on a straight line.

And with that, I'll turn the call over to Rex.

Thank you, David, and good morning everyone.

Most of my comments today will refer to pages within our investor presentation package and schedules attached earnings release. Core pre-tax, pre-credit earnings on Page 21 for the fourth quarter of 2010 were $27.6 million, down $2.4 million from a year ago and level with the last quarter. Most of the decrease from last year occurred in net interest revenue due to declining loan and securities balances . The decline in earning asset balances more than offset the 18 basis point improvement in the net interest margin. Net interest revenue of $60.1 million was down $3.8 million from a year ago and about the same as last quarter.

For the fourth quarter, our margin was 3.58% up one basis point on a linked quarter and up 18 basis points compared to our margin of 3.4% for the fourth quarter of 2009. The primary driver of our margin expansion from a year ago continues to be maintaining our loan pricing while lowering our time deposit pricing. Our margin, however, was again negatively impacted by the excess liquidity that average $429 million during the fourth quarter. We continued to invest this excess liquidity in commercial paper and other short-term funds at a slightly negative spread which reduced our margin by 30 basis points this quarter compared to 19 basis points last quarter.

On Pages 22 and 23, we show our margin trend for the past five quarters and the impact of credit costs. Credit costs continue to significantly lower our margin, net interest revenue, and core earnings, but at a declining level for the past two quarters. The decline is primarily due to the improvement in credit quality as noted by David earlier. A positive factor impacting our margin continues to be core deposit growth as shown on Page 24. Core customer transaction deposits this quarter were up $77 million which brings the total growth for the year to $291 million or 12%. The lower levels of net interest revenue from a year ago were significantly influenced by the reduction in average loan balances of $128 million and $589 million as compared to last quarter and the fourth quarter of 2009 respectively. This decline in loan balances continues to dampen our net interest margin and puts pressure on net interest revenue.

Turning to fee revenue and operating expenses, as noted on Page 21, core fee revenue of $11.8 million for the third quarter was down $843,000 from last quarter, but level with the fourth quarter of 2009. Excluded from core fee revenue, our gain from the sale of low-income housing tax credits of $682,000 in the fourth quarter of 2010 and $684,000 in the fourth quarter of 2009. Also excluded from the fourth quarter of 2009, core fee revenue was $2 million in security gains. Service charge fees were down $1.2 million year over year, due to lower fees associated with our courtesy overdraft services resulting from the recent change to Regulation E, requiring customers to opt in before using these services. The lower level of overdraft fees was partially offset by higher ATM fees related to the increase in transactions and number of customers are utilizing the product . Our opt in rates for overdraft services have been very favorable at 84%, leading us to conclude, excluding any future legislation, that the negative impact going forward will be minimal.

Mortgage loan fees of $1.9 million were up $217,000 from last year due to higher refinancing activity. Refinancing activity in the fourth quarter fell slightly below the third quarter level resulting in a $203,000 decrease in mortgage fees. Other fee revenue of $2.1 million excluding gains from the sale of tax closing credits, was up $678,000 for the fourth quarter of 2009 and down $78,000 from last quarter. The variances between periods were mostly due to the ineffectiveness of terminated cash flow hedges that resulted in the accelerated recognition of deferred gains in the third and fourth quarters of 2010.

Looking at core operating expenses on Page 21, they totaled $44.3 million for the fourth quarter and declined $1.4 million from a year ago and were down $838,000 from the third quarter of 2010. The primary items excluded from core operating expenses were for closed property costs and for the third quarter of 2010, the goodwill impairment charge. Page 25 of the investor package reconciles core earnings to our net operating losses from continuing operations. The details of operating expenses are noted on the income statement and commented on in our earnings release. Here some of the key items. Salaries and employee benefit costs of $23.8 million decreased $284,000 from the fourth quarter of 2009, mostly due to lower stock-based compensation expense since we did not have an annual grant of equity compensation awards in 2010. FDIC assessments of $3.3 million for the fourth quarter were down $412,000 from last year due to a decrease in average insured deposits resulting from lower broker deposits and time deposit attrition. Credit related foreclosed property costs are excluded from our core expenses. They were $20.6 million for the fourth quarter of 2010 compared to $14.4 million for the fourth quarter of 2009 and $19.8 million for the third quarter of 2010.

Foreclosed property costs this quarter included $15.8 million for write-downs and $4.8 million for maintenance, property taxes, and other related costs as shown on Page 25 of the investor presentation . Other operating expenses of $3.9 million decreased $530,000 from the fourth quarter of 2009, primarily due to lower ATM network charges and appraisal fees. With the exception of advertising and professional fees, all other expense categories were flat or down from a year ago due to the successful efforts to control discretionary spending.

Turning to capital, as shown on Page 27, our regulatory Tier 1 risk based capital ratio for the bank was 10.7% at the end of the quarter . The leverage ratio was 7.5%, and the total risk-based capital ratio was 12.5%. For the Holding Company our regulatory ratios were as follows -- Tier 1 risk-based capital was 9.7%, leverage ratio was 6.8%, and total risk-based capital ratio was 12.1%. And our tangible common equity to assets was 6.4% and risk weighted assets was 9.1%. As disclosed earlier this month, our regulators requested that we defer the January interest payments on our trust preferred securities to preserve past at the Holding Company. We are in discussions with our regulators to resolve the TARP payment for February but at this time no decision has been made for deferral. As Jimmy will comment on shortly, we are actively working on a capital plan that will address liquidity, credit, and capital going forward.

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

Thanks. Rex.

As challenging as 2010 was for our Company, we have made solid progress in key areas. As David outlined in his comments, we are seeing solid improvement in almost every credit metric. NPAs are down, classified and watch list loans are down, and our non-performing loan inflow is down. Our concentration of a residential construction loans is approaching a much more appropriate level at 15% of the portfolio. When we exclude extraordinary items our net charge-offs have steadily declined each quarter in 2010 and that trend is expected to continue. Our non-performing assets are at their lowest level since the end of 2008. Our new loans closed during 2010 were $320 million , the largest contributors to this growth are owner-occupied real estate and C&I. As Rex stated, our net interest margin has steadily improved despite the credit headwinds, and maintaining abnormally high levels of liquidity. We are particularly pleased that our pre-tax, pre-credit core earnings continue to hold steady even with our loan balances declining by almost $600 million from a year ago.

Two other areas I want to spotlight our customer satisfaction and core deposit growth. The past several years have not been kind to the banking industry when it comes to customer satisfaction. The industry average rating stands around 76%. By comparison, United's customer satisfaction scores have been on the rise for the past three years. We ended 2010 with an average customer satisfaction score of 94.96%, the highest level in eight years. According to customer service profiles which assesses banks throughout the United States, this is the highest rating in the country. That's quite a testament to our people and our validation that we have not neglected customer service as we work through these issues with problem assets, far from it, and again, to the great credit of our bankers.

In the area of core deposits, our United Express marketing effort has continued to be a huge success. Because of an aggressive effort to out our franchise, we attracted more than 10,000 new net personal accounts during 2010. We also focused on the small business sector that resulted into nearly 10,000 new small business accounts. As of this more than 66,000 new services, and we achieved a total growth of core deposits of $291 million in 2010, $77 million of this growth occurred in the fourth quarter. This growth comes on top of 2009, when we brought in 9900 net new core deposit accounts, bringing our total growth to more than 33,000 net new deposit accounts, $517 million in core deposits in just two years. We are pleased with our progress we have made on core deposits, our core earnings, and the positive trends in our credit metrics. But, I continue to be dissatisfied with the overall level of credit issues and how long it is taken to resolve them.

Our focus, our goal, our commitment has not changed. Fix the credit issues and return to profitability. Since our October call we have been carefully considering various alternatives available to us to strengthen our capital position and allow us to further de-risk our balance sheet. We are encouraged by the progress that we've made and the interest that we have received. And working closely with the regulators, we expect to announce a capital plan by the end of the first quarter.

With that, I will ask the operator to open the call to your questions.

(Operator Instructions)

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

Just a few questions. Jimmy, you just mentioned how you're -- we're seeing improvement in most metrics but you're unsatisfied with the pace. Are you looking toward, over the next few quarters, getting more aggressive on sales of NPAs or is it going to be more just strategic type sales or are you going to look more toward bulk-type transactions? Thanks.

Kevin, we will continue to look at all options . We've been successful in selling these basically one by one. We have had online auctions. We've sold in packages particularly in the Atlanta market to investors. Investors particularly in non-metro areas that by a sizable package are much more difficult to find certainly at this time, but all options are open and we're continuing to survey that. And hopefully, we'll even be able to get more aggressive in 2011.

And just one follow-up. You mentioned that you're looking at alternatives to raising capitals and you expect to by the end of this quarter. How do you look at the TARP part of the equation, in that I would assume if you do raise you want to raise so it takes that into consideration. But maybe the government may be ready later to let you out of TARP. Is there a way to run that by the government, talk with the government, in terms of raising enough so it's contingent that if you get back to profitability by a certain point, you don't face the prospect of any further raises. Thanks.

The TARP is part of the overall consideration, but at the same time, Kevin, the TARP today is still a very inexpensive form of capital. And as we return back to the profitability and capital accumulation, at that point in time, I think will also allow us to repay the TARP. So certainly, we balance that as we have continued to look at overall capital plan. But I would tell you it's not a key component.

Okay. Thanks.

Thank you. Our next questions comes from the line of Brett Scheiner, with FBR capital markets.

Couple questions. One, can you give inflows to NPAs gross this quarter and last quarter?

The inflow this quarter on NPL inflow was $81 million and I guess, when you say inflow to NPAs you're talking about ending NPAs?

Net of charge of new non-accrual loans.

Right, new non-accrual loans were $81 million this quarter, they were $120 million last quarter.

Okay, great. Thank you very much. And then also, I know you have addressed this in the past, but maybe one last comment on the deferred tax asset. You're certainly not in a net profit position at this point. Any color around necessary timing to keep the deferred tax asset?

Yes, Brett, Rex here. I'd be surprised that I didn't get the question, so --.

Fair enough.

We expect that call -- that question coming. Our position, as we talked in the past, hasn't changed this quarter with respect to our sales looking at the DTA as well as our auditors looking at the DTA that we do not need evaluation reserve. Keep in mind that this is a GAAP issue not a regulatory issue because it's deducted from regulatory capital. We do an extensive amount of documentation each quarter looking at our DTA, reviewing it, looking in the context of profitability assessing that forecast compared to the prior forecast and looking forward which is a key part of that of looking at it with respect to being able to earn out of the DTA.

And again, we have reviewed this documentation with our auditors each quarter and really prior to quarter ends, so we don't have any surprises. And we did that this quarter, and they're in concurrence with where were at with respect to valuation reserves. Part of it relates to the overall attributes as you get into it and again under SEC and really under GAAP definition of more likely than not of being able to utilize it. But we still believe very strongly that we have a lot of positive attributes with respect to our history of earnings. Our enhancement of core earnings over the past two years, which has helped to again cover credit costs. Additionally, looking at our facilities again in our markets and access and our franchise of growing both for our core deposit franchise and again just a strong presence in that area. And we weigh that against some of the negative attributes of the size. Obviously the DTA is $167 million at year end compared to $147 million last quarter end. But again as we look at it, we still believe very strongly we'll absolutely be able to utilize that DTA.

Okay, thanks very much. And then one last question. I know you'll address this as you mentioned by the end of the first quarter, but can you talk about Holdco liquidity with the bank leverage ratio falling below 8%?

The liquidity of the Parent Company is just a little over $9 million in cash sitting there. This again, as I mentioned just earlier, is that we're reviewing with the regulators. We have ample liquidity to cover our debt service and dividend payments really into the fourth quarter. So again, we're really going back to regulators, the Fed here, to discuss further with respect to our TARP payment in February.

Alright, thanks so much. Looking forward to the details from that capital plan.

Thank you.

Thank you. Our next question comes from Christopher Marinac, with FIG Partners .

I wanted to ask about your classified assets that we can piece together from the release here relative to capital and what regulators are telling you about that. Is there feedback any different than it would have been the past three to six months?

Would you mind restating that, Chris? You kind of cut out there.

I was looking at the amount of classified assets relative to your capital reserves and was curious if your feedback from regulators has been any different currently than it had been previously.

Basically, classified assets to Tier 1 capital plus reserve. Is that correct?

Yes.

Now I wouldn't say that there's any real different feedback from the regulators. It's a continuing concern. Our level of classifieds are much higher than we would like and they would like. And so it's obviously something that we're very much so focused on, but I don't think there feedback that we're getting is really any different now than it was six months ago or even a year ago. I would point out that our overall ratio is down this quarter from last, that regulatory ratio from 121 down to 117.

Cannot help you on the argument on the TARP deferral? Does that have any merit there?

Chris, I don't think it's -- again you're dealing with the FDIC and state on the classified assets then you're dealing with the Fed which is really separate looking at just pure -- they're really looking at it in fairly basic terms as just pure liquidity at the parent company.

Very well, thanks.

Okay, Chris.

Thank you. I am showing no further questions at this time. I'd like to turn the call back over to Jimmy Tallent.

Thank you, operator. We appreciate everybody's interest in being on the call this morning. We're all available for further follow-up if you have additional questions. Thanks again, and hope all of you have a great day.

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