United Community Banks Inc (UCBIO) 2013 Q4 法說會逐字稿

Good morning and welcome to United Community Bank's fourth-quarter conference call. Hosting the call today are President and Chief Executive Officer, Jimmy Tallent; Chief Operating Officer, Lynn Harton; Chief Financial Officer, Rex Schuette; and Chief Risk Officer, David Shearrow.

United's presentation today includes references to core pretax, pre-credit earnings and other non-GAAP financial information. For each of these non-GAAP financial measures United has provided 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 this morning 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.

Please be aware that during this call forward-looking statements may be made by United Community Banks. Any forward-looking statements should be considered in light of risks and uncertainties described on page four 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 for our fourth-quarter conference call. We had significant accomplishments in the quarter and throughout 2013 and I look forward to discussing them with you today. Let me begin with some highlights from the quarter.

We earned net income of $15.9 million or $0.22 per share. We grew loans by $62 million or 6% annualized. We increased the core transaction deposits by $22 million or 3% annualized. For the year, we were up $224 million or 7%.

Our provision for credit losses was $3 million and our charge-offs were $4.4 million, which are the same as the third quarter. Nonperforming assets were $31 million, or 42 basis points of assets, which is similar to the third quarter.

As I am sure you have already read, we received regulatory approval to retire all of our preferred stock without issuing common stock. We redeemed $75 million of our [own TARP] Series B preferred on December 27 and redeemed the remaining $105 million on January 10. As of today, the only preferred stock that remains outstanding is $16.6 million of Series D preferred that is callable later in the first quarter.

Our efficiency ratio was up slightly from the third quarter to 60% and I will explain that in a few minutes. And all of our capital ratios remain solid.

I want to take a moment here to reflect on the accomplishments of the full year of 2013. They are significant to setting the stage for where we will go from here. We began 2013 with a number of specific goals that we believe we had to accomplish to move forward with our strategic growth plans. I have shared our progress on those goals throughout the year.

As we entered the fourth quarter we had accomplished all but two: the full redemption of our TARP preferred stock at the termination of our MOUs with the regulators. The TARP has now been completely redeemed as I mentioned. The bank MOU was terminated just before year-end by the FDIC and state regulators and last week the holding company MOU was terminated by the Federal Reserve Bank and state regulators.

This and other progress of the past year has been nothing less than transformative for United. It has positioned us to return to offense as a financial services leader in our markets. As we work to resolve legacy challenges, we have also been setting the stage for that return.

As one example, during 2013 we added highly-skilled relationship managers in strategic markets as well as key back office support managers. We also expanded our commercial and retail offerings with new products specifically tailored to meet the financial needs of business and retail customers in existing and new markets where there is opportunity.

As part of the strategy we launched a new healthcare group in Nashville, Tennessee, and added commercial lenders in Greenville, South Carolina. The geographic expansion and new talent are beginning to achieve a substantial return on investment.

At the end of the year our Nashville healthcare group had $28 million in loans outstanding and in Greenville we had more than $116 million in loans closed during the year with $60 million outstanding at year-end. Also, with the recent regulatory approval that allows us to take deposits, Greenville is now generating solid deposit growth.

We did all of this while improving our overall operating efficiency and while maintaining one of the highest customer satisfaction ratings in the country. Now I will review the drivers of the fourth quarter and discuss our plans going forward.

Core pretax, pre-credit earnings were $27.9 million, down approximately $1 million from the quarter. You can see this on page 10 of the investor presentation. The decrease was driven by lower mortgage fees and slightly higher operating expenses, which I will discuss in a moment.

Our net interest margin remained unchanged from the third quarter at 3.26%. We achieved a $1.6 million increase in net interest revenue by growing earning assets. There are a few items that affect the comparability of the third- and fourth-quarter margins. You may remember from our October call that our third-quarter note issuance overlapped the repayment of the subdebt and, therefore, reduced our margin last quarter by two basis points.

In the fourth quarter, we reclassified hedged and effectiveness gains and losses from other fee revenue to net interest revenue. These reclassifications are small and have been reflected in all prior-period results. In the fourth quarter they added approximately 3 basis points to the margin.

We continue to experience pricing pressure on loans. That is likely to remain the case in the near-term, making loan growth critical to increasing net interest revenue. In the fourth quarter we grew loans by $62 million or 6% annualized.

Similar to the third quarter, we had net loan growth in every loan category. Our new loan production is shown on page 18. Most of the net new loan growth for the fourth quarter was in the Metro Atlanta and South Carolina regions.

We also saw solid production across the rest of our footprint with $50 million in north Georgia, $26 million in western North Carolina, and $23 million in Tennessee. Our new healthcare group in Nashville and our South Carolina commercial lenders added $41 million in net loan growth during the fourth quarter. We saw a solid increase in C&I lending, continuing a steady trend over the prior five quarters.

On the retail side, solid growth continues with our in-house mortgage product we introduced a year ago and with our home equity line of credit. During the fourth quarter, we funded $84 million in balances under these programs.

As for our securities portfolio, we continue to reinvest most of the cash flows into floating rate securities where available. Floating rate securities account for 42% of the total securities portfolio.

And now to core fee revenue. You will find the trends on page 10 of our investor presentation. Fourth-quarter core fee revenue was $13.2 million, down $747,000 from the third quarter due to a slowdown in mortgage refinancing activity. Mortgage fees declined by $841,000.

We closed $55 million in mortgage loans in the fourth quarter compared to $77 million in the third quarter and $100 million in the fourth quarter of 2012. Most of our other fee revenue categories remained flat from the third quarter with the exception of brokerage fees, which were up $87,000, and other fee revenue, which was up $297,000 due to unrealized gains on equity investments owned by the holding company.

As I have mentioned on earlier calls, we see a great opportunity to grow the brokerage business within our footprint and are especially encouraged by the results of the past three quarters.

Core operating expenses are on page 11. They totaled $41.2 million in the fourth quarter, an increase of $1.9 million from the third quarter but down $296,000 from a year ago. The increase from the third quarter is mostly in salary and employee benefits.

A little more than half of this increase is due to higher incentive compensation from meeting certain financial targets and, during the fourth quarter, completing strategic initiatives. Another $600,000 of the increase is due to lower amount of deferred, direct loan origination costs.

We continue to invest in experienced bankers who can help grow our business and revenue. To this end, and as I have said before, we will see some fluctuation in personnel expense moving forward.

Fourth-quarter occupancy expenses were $3.7 million, up $356,000 from the third quarter. The increase was due to a write-off of leasehold improvements associated with the consolidation of two offices into one. Our FDIC insurance assessment was down $600,000 for the third quarter and we expect an additional $200,000 decline in the first quarter of 2014.

Professional fees were down $548,000 from the third quarter to $2.1 million. About half of the decrease was lower legal fees, which we expect to continue trending downward with lower loan workout activity. Consulting fees were down from the third quarter as well.

Our fourth-quarter operating efficiency ratio was up slightly to 60% from 58.5% last quarter. The increase in incentive costs in the fourth quarter drove this increase. Our core efficiency ratio on a run rate basis still remains around the third-quarter level.

Our effective tax rate for the quarter was 35%, down from 38% in the third quarter. We reported that our third-quarter effective tax rate was elevated from 35% to 38% by the effect of a net tax charge during the third quarter.

In 2014, we expect our effective tax rate to increase to the 37.5% range due to our expectation of higher pretax income. Pretax income was lower in 2013 by the loss resulting from the class asset sales during the second quarter. Consequently, tax exempt revenue represented a much larger portion of our pretax earnings in 2013 than it will in 2014. Our effective tax rate in 2014 will be about 2.5% higher as a result.

Before we open the call for your questions, I want to make a few closing comments. As I said earlier in the call, 2013 was a transformational year for United. We began the year with a clear understanding of the goals we needed to accomplish, things we had to achieve to move our company forward.

We had a strategic plan of action for how to accomplish those goals and our bankers delivered on every one. I find it encouraging to look back at the year just completed, especially as we look forward, because it shows what this team is capable of in 2014 and beyond. The look back shows how much can change in just one year with a solid actionable plan and a talented and energized team.

Today we are no longer restricted by the MOUs. Our balance sheet is clean. Our capital ratios are strong. We have entered new growth margins. We have added skilled bankers to an already talented team. We have recalibrated our expense base and we are building earnings momentum.

I am so very proud of all that our bankers have accomplished this past year. Going forward, the redemption of our preferred stock will have a significant positive impact on earnings per share and we redeemed it without a diluted common equity raise.

I have mentioned to you many times our 95% customer satisfaction rating is something that we are very proud of and never take for granted. In banking, satisfying customers means earning and maintaining their trust, confidence, and loyalty.

In the fourth quarter we were notified by a respected market research organization that our customer service earned national recognition. Our bankers have done an exceptional job serving their customers, and I will say it again, I could not be more proud of them.

Our accomplishments over the past year give reason for optimism for the year to come. At the same time, we recognize that the economy, while better than it was, is still challenged and uncertain in some markets. We believe the lending environment will include continued pressure on the margin. We look for overall net loan growth in the mid to upper single-digit range with the strongest demand and metro Atlanta, coastal Georgia, and our new markets of Greenville and Nashville.

We expect continued improvement in credit quality with net charge-offs and provisions at or below the third and fourth quarter of 2013 levels. We look for continued solid performance from the mix of floating and fixed rate securities in our investment portfolio. As to fee revenue, we anticipate middle single-digit growth, driven in part by higher brokerage fee revenue from our addition of investment advisers and by increased derivative fee revenue from deeper penetration of our commercial customer base.

We expect a decrease in mortgage fee revenue due to lower volumes in the first half of the year. At the same time, we also see opportunities to grow our mortgage business as we add originators in metro markets and obtain better pricing. We believe operating expenses will be lower, driven primarily by lower FDIC assessments, professional fees, and credit-related costs. We will manage personnel expense carefully while investing in opportunities to drive revenue growth.

The achievements of 2013 are the culmination of several years of hard work, diligence, and dedication by our bankers. They have stood their ground during difficult times and positioned us to look forward with optimism. They have kept a steadfast focus on our customers while executing and adapting to the changes in our industry.

After the most difficult economic time any of us have ever experienced, they have reestablished United's strength and confidence. The coming year won't be without challenges, but we are battle tested and ready. We are also ready for and excited about the opportunities to capitalize on them in ways that better serve our customers as well as rewarding our shareholders.

Those are my prepared remarks. And now Lynn, Rex, David, and I will be pleased to answer any questions.

(Operator Instructions) Jefferson Harralson, KBW.

I wanted to ask questions on the -- kind of your growth businesses, your newer growth initiatives. So can you just talk about the healthcare team, what the loan balances are there, what the type of projects they are doing or the size of the loans? Kind of just give us the nature of that healthcare business.

Sure, Jefferson. Right now we have got two RMs and a portfolio manager, a credit person there. So it is a small team, but very experienced, tremendous depth of experience in the business.

Our typical loan size is ranged from $10 million to $20 million. That's kind of our sweet spot. So typically doing either -- it is a mixture of -- we have done some healthcare REITS, some business acquisition, and some business expansion. They are typically in the Southeast but headquartered in Nashville. So it is not local doctor type of things, but it is more healthcare service businesses that would be broader in scope.

It has been a great business and we are expecting continued growth out of that operation for 2014.

All right. I know I have asked some of these guys, but I have the same question of the nature and the scope of what the South Carolina guys are doing?

Sure. So really there is three pieces of the South Carolina piece. One is a local community business and we are very excited about that. We are getting ready to open our first local office and we have got a community bank RM there, a local president. And that is getting traction, particularly as we open the new office. So that would be normal community bank style business.

We've also got corporate business there and we are at about $8 million in that business now with about $17 million unfunded that will fund up over time as we sit. We have got a very experienced corporate banker there and looking to add to that team.

Then we've got our income property group who -- that group has been with us the longest and so we've got about $40 million outstanding and about $60 million unfunded. Typically, those projects would be $10 million to $15 million in size.

We have got multifamily, office; it's very high-end developers. Again, primarily in South Carolina, but also throughout the Southeast. People that we have done business with for 20 years plus. So it's really those three elements there in Greenville.

Excellent. Thanks guys I will pass it on to someone else.

Robert Madsen, Stephens.

Hey, guys. You have made several moves recently to lower the cost of your capital structure. Could you talk a little bit about what is left you might consider paying off or refinancing?

This is Rex, I will take that. As we talked and as Jimmy noted in his earlier comments, we paid off all of the TARP, the $180 million. Made a small Series A position of a couple hundred thousand. What is left out there is a Series D preferred stock of about $16.5 million, a little over $16.5 million.

Additionally, we have in our structure roughly about $53 million of TRuPS and that averages about the 8.8%. And the preferred stock is about 10% right now.

So our intentions in looking at that later in the quarter, the preferred stock isn't callable till later in the quarter and we will look at that. Our intentions are not to pay 10%, whether we renegotiate or lower it. That is in our view right now.

In the TRuPS at 8.8%, that is netting about 6% after tax. That is right now very good to Tier 1 capital as we continue to look at growth and expansion plans. So that is pretty much our view right now looking at what is sitting out there.

We also have some senior notes we put on this past year, as well as senior notes we put on in the prior year which is at a higher rate. And we could look at that and also possibly lower the rate on that later in the year.

Okay. Do you have a cash at the holdco number available?

The cash at the holdco right now is right around $35 million or so.

Okay.

And, again, we can supplement that. We added senior notes last year. It is more than ample to cover paying down the existing preferred stock and having over two years or cash flow debt service currently.

Okay. Then I guess switching gears. Could you talk a little bit about the new hires that you made in the fourth quarter or even in the 2013 and then give us your thoughts about the loan pipeline headed into 2014?

Sure, I will start that on the line side. As we talked about, we have hired the healthcare team in Nashville; the Greenville team, which we feel very good about.

Really we have got a great story to attract talent that we think is only getting better, so we anticipate continuing to make strategic hires as we go through the year. Right at the end of the year we hired a new producer in Cleveland, Tennessee, as well as one more additional producer in Greenville, so I think you will see us continue to add on the production side as we go through the year. We feel very good about that.

Pipelines continue to be good. So we feel -- continue to feel good about the $500 million growth goals from the second quarter of 2013 that we put out. That continues to be our target and we continue to feel like pipelines will support that.

Okay, great. Thanks, guys.

Christopher Marinac, FIG Partners.

-- on loan the pipeline, but I guess I wanted to ask a little bit more about will we see the regional areas differ from what we have seen the last couple of quarters? Now, obviously South Carolina and your other category have led the way here recently, but just curious if you expect more coming from North Georgia, Atlanta, North Carolina, etc.?

Certainly expect to see -- the growth leaders in the past have been Atlanta and the coastal Georgia piece. This past quarter coastal Georgia was off, primarily because of the payoffs of a couple credits that we -- larger credits that we wanted to pay off. So I think you will see Atlanta continue to be a leader.

I think you will see coastal Georgia step up further. We expect Tennessee to step up further from where it has been, so you will see that change. We think that north Georgia -- we don't expect growth out of North Georgia, but we expect the declines to moderate and be essentially flat. So I think you will see production come up out of those areas.

I think the major themes will stay the same, but you will see some slight movements in that type of manner.

Great, Lynn, that's helpful. I guess just to follow-up on sort of your thought about being able to lower deposit costs further just to cross footprint.

As far as deposit costs across the footprint, I think we are seeing our CD deposit pricing monthly come in around 18 basis points and that is about a year average life on that duration. We don't see much of a decline on that coming through.

Again, I'd say in the other money markets and interest-bearing categories there that it is pretty well near the bottom. Our money market is it about 17 basis points and our interest bearing now is at about 14, so it is going to moderate around those levels.

I think the CD pricing with the maturities coming off in the 40, 50 basis point range still will help to benefit that category in particular, but I think the rest will be moderate where it is at in the third and fourth quarter.

Okay, great, Rex. Thanks guys very much.

Taylor Brodarick, Guggenheim Securities.

Great, thank you. It looks like the residential construction and residential land sort of have stabilized. And I don't know if it is just the worst has passed or is there any opportunity for growth in those books?

Yes, actually there is; this is Lynn. We are seeing some growth out of our residential construction book. We centralized that; got a very experienced leader in Atlanta. And we have actually been strategically trying to expand that over the last year.

We have done more production, significantly more production this year, but the outstandings are just now starting to grow. The turnover, which is a good thing, is very fast so the home sales have been very fast. We are actually strategically looking to enter the national market on the construction side, so we are targeting some experience, the right builders there.

You're not going to see dramatic growth in those areas and certainly not dramatic growth at all in the land piece, but on the construction side we think there is some moderate opportunity for growth.

Okay. Then, hearing the positive commentary about Nashville, is there -- would it make sense to sort of follow the Greenville plan and try to build a deposit-gathering capacity in middle Tennessee?

Yes, we think the first kind of natural step would probably be to add a private banker to add on to that team, which of course would add the deposit piece to that. So we are considering that, yes.

Great. Great, thank you very much.

Kyle Oliver, Raymond James.

Thanks for taking the call. Just looking at your branch footprint and where it is today, is there anywhere in your markets that you would feel -- I know you built out in Nashville and South Carolina. But is there anywhere else where you would be looking to grow from here or any surrounding markets that you would be interested in being in over time?

Kyle, this is Jimmy. We are constantly looking at the footprint and, in some cases, to get greater density within our existing footprint. For example, the coast offers, we believe, some opportunity. There are some pockets in the north Atlanta market that we have an interest in. The Charleston, South Carolina, market would be of interest.

But I don't think you will see us stray from our basic footprint, but just try to get a deeper entrance into some of those markets that maybe we don't have quite the market share or the distribution that we would like to have.

Okay, great. Now with the MOU and everything behind you, would you be looking at M&A to go to those markets? Or do a de novo?

Then, looking at fee income, would you be interested in acquiring that that way, either through insurance or brokerage or wealth management?

The answer would be yes, Kyle. The possibility of acquisitions in some of those markets certainly have a strong interest to us. In some cases would be through a de novo process.

It is still a people driven business and I think that it is exemplified very clearly with our expansion into the Nashville as well as the Greenville market. But we would be open to all those various avenues. Again, as we have said in the past, that in regards to any M&A activity there is three components that we are looking for. First, a good strategic fit, financially compelling, and then it being a low-risk transaction.

All right, great. Thanks for taking my call.

Jennifer Demba, SunTrust.

This is Michael Young on for Jennifer. Just had a question about your residential HELOC product. You started it a little while ago now and with the lower introductory rate, as those rates are starting to reset over time, what are you seeing in terms of either matriculation out of the product or into another product, etc.?

Actually the timing is good on that. We just did a review on that. We're actually seeing those balances stick in the high 80% range, which is on the high end of what we expected, so a little better than we expected actually. It is turning out to work out pretty well for us.

What is the pricing that they are sort of resetting to, at least in this first tranche?

It is typically prime based. It ranges from prime to prime plus a half, depending on LTV and credit score. I think the weighted average is what, Rex? Right in the --

In the mid-3s.

Mid-3s?

Mid to upper 3s.

And do you see any opportunities for that to actually expand now that valuations are recovering? Do you see people expanding the size of their home equity loans at all?

We are continuing to see good growth in that product and certainly it has been a core product. We expect it to continue to be a core product, so it's continuing to go well for us.

Okay, thank you very much.

Kevin Fitzsimmons, Sandler O'Neill.

This is [Joe Adams] on the line for Kevin. I got a quick question; I want to talk a little bit about spread revenues.

I know you guys are expecting an increase in 2014, but I was wondering if you could give a little color on what kind of balance sheet growth you're anticipating. Then just as a follow-up, we saw the secured portfolio jump a little bit in 4Q. Curious where that goes from here, if it is going to continue to move higher or kind of level off.

Thank you, Joe. I think we commented, Jimmy commented on the call on the balance sheet growth and overall. Lynn made a comment on them, too. So I think that mix is going to continue on the commercial CRE and again in some of the mortgage product also.

I think the impact on fee revenue -- we do see that margin, as we commented, we expect margin to -- that it will curtail down a little bit. We will have a slight decrease going into 2014 that could be in the 5 to 10 basis point range. We do see that hitting an inflection point later in the year, a lot of it driven again, Joe, by loan pricing that we are all seeing in the market out there.

And you will notice that in the numbers for the quarter when you look at the yields on the loan yields. So we do see that lessening, coming down a little still further into 2014, but we do see offsetting that the loan growth we believe will offset that and we will see, again, increase in net interest revenue as we go throughout 2014.

On the securities portfolio, we had some excess liquidity in the fourth quarter. Again, part of our portfolio, a small portion of the portfolio, was in CLOs which is managed by a third party. Some of the volume in the fourth quarter related to that that had a higher yield in the 210, 215 range, and we don't see that continuing into 2014.

I think that we see purchasing traditional either combination of asset-backed, CLO, or mortgage-backed security and that it will probably be in the range closer to the yield that we have in the portfolio. So we don't see the pop-up continuing on a linked quarter going into 2014 -- level off going into 2014.

Great, very helpful. Thanks guys.

Thank you. I am not showing any further questions in queue. I would now like to turn the call over to Jimmy Tallent for closing remarks.

Thank you, operator. And thank all of you for being on the call today. Thank you for your questions.

We are excited about 2014, where we are positioned at. Again, I want to say thank you to all of our team of bankers who have just continued to do an exceptional job.

Thanks for being on the call. We look forward to our sharing the results of the first quarter here in about three months. Thank you and have a great day.

That does conclude today's conference call. You may now disconnect. Thank you and have a great day.