United Community Banks Inc (UCBIO) 2014 Q1 法說會逐字稿

Good morning and welcome to United Community Banks's first-quarter conference call. Hosting our 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 pre-tax 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 first 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.

Now 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 4 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 first-quarter conference call. Overall, I am pleased with our first-quarter results. We saw an expected seasonal dip in revenue, which we were able to offset by reducing operating expenses. This, along with lower preferred stock dividends, allowed us to achieve solid growth in earnings per share.

I'll talk more in a moment about the drivers of our first-quarter results, but I will begin with some highlights. We earned net income of $15.4 million; net income available to common shareholders was $15 million, up $2 million or 15% from the fourth quarter.

We earned $0.25 per share, up $0.03 or 14% from the fourth quarter. We grew loans by $27 million or 2% annualized. We increased core transaction deposits by $135 million or 16% annualized.

Compared to a year ago, we are up $278 million or 8%. Our provision for credit losses was $2.5 million and our net charge-offs were $4 million -- both are down from the fourth quarter. Nonperforming assets were $31 million or 42 basis points of assets, down slightly from the fourth quarter.

I am delighted to report that early in the first quarter, all of our preferred stock was redeemed. Our efficiency ratio improved to 59% and following the redemption of our preferred stock, all of our capital ratios remain solid.

Now I will share some details of those results and our outlook for the rest of the year. As you can see on page 11 of the investor presentation, core pre-tax, pre-credit earnings were $27.4 million, down approximately $600,000 from the fourth quarter and up $1.1 million from a year ago.

The decrease from the fourth quarter was primarily related to lower net interest revenue and fee revenue, resulting from two fewer days in the quarter and normal seasonal patterns. We were able to offset most of the decrease by controlling expenses.

As expected, our net interest margin was down slightly from the fourth quarter to 3.21%. This was mostly due to hedge ineffectiveness gains and losses, which we reclassified from fee revenue to net interest revenue in the fourth quarter. You may recall from our fourth quarter call that hedge ineffectiveness gains increased our fourth quarter margin by 3 basis points.

In combination, the shift in hedge ineffectiveness gains and losses and the two fewer accruing days caused a quarter-to-quarter decrease in net interest revenue and margin from the fourth quarter.

We continue to experience pricing pressure on loans. Pricing pressure is likely to remain near term, making continued loan growth important to increasing net interest revenue. We will maintain pricing discipline while at the same time remaining competitive. In the first quarter, we grew loans by $27 million or 2% annualized. Most of the growth came late in the quarter and therefore had little impact on net interest revenue for the three-month period.

Our new loan production, which is shown on page 19, was solid, even though net growth came in lower than we had targeted. First-quarter C&I production was the strongest quarter we've seen to date. We generated $75 million in new C&I loans and increase balances by $23 million.

On the retail and construction side, we saw some slowing of production in residential mortgage and residential construction loans. The slowdown in residential construction is seasonal and we expect that to pick back up as we move through the spring season.

The slowdown in residential mortgage and home equity lines of credit reflects our discontinuance of introductory rates that we have on those products. Geographically, our strongest loan growth was in Greenville and Atlanta, and we also had solid production in our Coastal and North Georgia markets.

Late in the quarter, we added new talent and leadership to help achieve our loan growth targets for the rest of the year. We are excited about that, and I'll talk more about it in just a few minutes.

We reported early in the quarter the bank paid dividends to the holding company to redeem our preferred stock. As part of our strategy to fund the cash dividends, we sold $100 million in floating-rate CMOs that were yielding approximately 70 basis points. Later in the quarter, we experienced strong core deposit growth, which we invested primarily in fixed-rate securities. Floating-rate instruments now account for 39% of the total securities portfolio compared with 41% at the end of 2013.

You'll find the trends on core fee revenue on page 11 of our investor presentation. First quarter core fee revenue was $11.9 million, down $1.3 million from the fourth quarter due to decreases in service charges and fees, lower mortgage activity, and lower customer swap fees.

We saw a seasonal dip in overdraft and interchange fees that was partially offset by higher service charges resulting from new service fees initiated in early January. The combined effect was a $268,000 decrease in service charges and fees compared to the fourth quarter.

Mortgage fees declined $359,000 from the fourth quarter due to a slowdown in production. We closed $46 million in mortgage loans in the first quarter compared to $55 million in the fourth quarter and $70 million in the first quarter of 2013. New home purchases accounted for about two-thirds of first-quarter mortgage production. That compares with 43% a year ago.

We expect to see origination activity pick up as we move into the spring season, and that would be consistent with forecasts published by the Mortgage Bankers Association. Customer swap fees were down $360,000 from the fourth quarter. Also contributing to the overall decline in fee revenue this quarter was a $297,000 gain in the fourth quarter for equity investments owned by our holding company. I mentioned this in our fourth quarter conference call.

As I mentioned on earlier calls, we remain committed to growing our fee revenue sources. We've seen solid business growth in advisory services, and believe that will continue as we move through the year.

In 2013, we brought new leadership to treasury management, where we see opportunities to leverage our customer base and high customer satisfaction scores to grow merchant services and other businesses. I mentioned earlier that our first-quarter efficiency ratio was 59%, which is an improvement of 1% from the fourth quarter. You can see on page 12 of the presentation that first-quarter core operating expenses were $38.7 million, which was $2.4 million less than in the fourth quarter.

This decrease compensated for most of the first-quarter revenue decline. There were decreases in every expense category compared to the fourth quarter. The most significant decreases were in salaries and employee benefits, occupancy, professional fees, FDIC assessments, and regulatory charges.

Salaries and employee benefits were down $376,000 from the fourth quarter, even though payroll taxes always run high in the first quarter. We may see some fluctuation in this area as we continue to invest strategically in experienced bankers who can help grow our business.

First quarter occupancy expenses were $3.4 million, down $357,000 from the fourth quarter. As I mentioned in our last call, the decrease was due to a fourth-quarter write-off of leasehold improvements associated with the consolidation of two offices into one. Our FDIC insurance assessment was down $451,000 from the fourth quarter, which was a little lower than we expected. A small portion of the decrease was related to finalizing our fourth quarter assessment.

Professional fees were down $675,000 from the fourth quarter to $1.4 million. About half of the decrease was lower legal fees, with the other half evenly split between consulting and accounting fees. We expect a similar run rate going forward due to the lower level of loan workout activity and that, of course, is a benefit of our bulk sale of classified assets a year ago.

Our effective tax rate for the quarter was 37%, which is within the range we mentioned on our call in January, and up from 35% in the fourth quarter. The increase is due to revenue from tax-exempt sources making up a much smaller proportion of pre-tax income. We expect our effective tax rate to remain in this range for the rest of the year. Our lower preferred stock dividends in the first quarter had a very positive impact on earnings per share. With all of our preferred stock now redeemed, those dividends will be down another $439,000 in the second quarter.

Before we open the call for your questions, I want to briefly discuss a couple of items. Given what we see on loan pricing today, we expect our margin will continue to be under some pressure through the balance of 2014. Again, loan growth is key to offsetting a declining margin and growing net interest revenue.

Loan growth started more slowly than we would've liked in the first quarter, but the quarter ended with solid new commercial business that will fund up in the months ahead. We believe this strengthening pipeline and new business strategies will put us back on track to achieving our loan growth goals for the year.

I said earlier that we recently added some outstanding new lending talent in the first quarter. King Purnell joined us in February as Regional President of our Tennessee operations. His track record in banking and business leadership covers 35 years, most recently in Tennessee, where he managed commercial real estate lending for a large bank. He will apply his talents and experience to driving growth in our markets along the I-75 corridor, where he knows the territory very well.

Then in late March, David Sheldon joined our Greenville team as a leader of the new structured Finance Group. David's banking career covers 40 years, most of it in Greenville, where he has established asset-based lending programs with other financial institutions. I am excited to have David add his experience, skill, and leadership to our lending team and help grow our asset-based lending business.

In late March, Rich Bradshaw joined the Greenville team as President of our specialized lending group. This includes SBA lending, structured finance, healthcare, and corporate banking. Rich has more than 20 years of banking experience and an especially strong background in SBA lending. We believe this fits well with our small business focus and, combined with our Community Bank's style of service, has outstanding growth potential. Rich is building a team to expand our SBA lending capabilities and drive loan growth across each of these business groups.

We are excited to have these highly skilled bankers on our team and look forward to working with them to grow our business. With their strategic talents and expertise, they will help us attract and serve new customers, serve existing customers better, and achieve our growth targets.

This time last year, our focus was on resolving legacy credit-related problems, a major undertaking that has been completed. Other challenges have remained in regard to interest rates and the economic environment. Our team has kept expenses down and strengthened the business pipeline.

We have strategically added people and initiatives to drive revenue growth. Our business strategies are working, and that's why I believe we are on track to achieve our business targets and our financial goals for the year.

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

(Operator Instructions) Jennifer Demba, SunTrust Robinson Humphrey.

Thanks, good morning. Question on the mortgage operation -- have you totally built that out in Atlanta and other markets at this point, Jimmy, or are you still hiring on that front?

Let me ask Lynn to address that, Jennifer.

Great question, Jennifer. We have not yet begun the hiring process. We got several teams that are lined up. But -- we are also -- to be able to do that, we need to make some improvements in our products and our backroom operations. So we are doing all that together, and we believe we will begin hiring other producers in this quarter, in the second quarter.

Okay. Do you have a goal in terms of the size of operation, a fee income goal or anything like that?

Long-term goal is -- we think relative to peers, we are doing about half the revenue in production that we should be, given the size of our Company and the quality of our brand. That's not something that you're going to do overnight. But we think over a 6- to 8-quarter period, we ought to double what we're doing today.

Great, thank you.

Jefferson Harralson, KBW.

Thanks, guys. My question's on loan pricing. It seems like a recurring theme, but maybe even more of a theme this quarter -- could you just maybe dig a little deeper for us there and let us know what's going on within loan pricing in your markets.

Sure. Let me just -- I'll start with that, Jefferson, and then ask Lynn or David or both to comment. Certainly pricing continues to be very, very challenging. Certainly, the type of credits that we target -- which, obviously, are on the upper end -- you've got a number of banks that are chasing those.

And certainly there's times where we will have to compromise our pricing, though we are not going to compromise our underwriting standards. But that's the market that we operate in, and that's just the business environment that we are all dealing with. Lynn, David?

I think that's exactly right. Probably the biggest change going on right now is in the fixed-rate pricing, and one of the reasons our derivative business was down this quarter is some of our competitors -- larger banks, primarily -- are doing a lot of fixed-rate financing on balance sheet.

So that's an issue we are dealing with. On terms of the spreads themselves, they seem to have flattened out, so we are not seeing as much spread compression, but we are seeing more fixed-rate competition.

So just kind of 10-year terms on that?

Yes.

Okay. Thanks, guys.

Michael Rose, Raymond James. Christopher Marinac, FIG Partners.

Thanks, good morning. Jimmy, I was noticing the continued increase in Atlanta of loans relative to North Georgia having slight declines. Do you think that can reverse as this year plays out?

Chris, I'm sorry. You were breaking up. Could you ask that again?

Can you hear me now? The low numbers in North Georgia have been declining the last few quarters. And Atlanta continues to increase. Is that a trend that we should expect to continue, or do you think that there may be some reversal, particularly in the North Georgia trend?

Well, the outstandings decreased, and we will continue to see some of that over the next few quarters, I believe, Chris. And that is the result of more of the residential real estate that's continuing to either payoff or actually exit the bank. That's the biggest headwind with that, though we are continuing to see, what I believe to be, decent production, but I would suspect we will see the North Georgia balances maybe continue to retreat downward at a slower pace as we move out on the time horizon.

Okay, great. And then as a follow-up, can you just remind us on the indirect auto -- is any of that being sourced within your markets, or is that all [oncoming] external?

The indirect portfolio we have been buying is Southeast originated. A small piece of it would come as far as Texas, but most of it is originated in Florida, Georgia, Alabama. The states either that were in footprint or contiguous to where we are.

David, should we expect that to get larger as this year plays out as a percentage or stay about the same?

I think, as a percentage, it will stay about the same. You could see a little bit of an increase there from where we are currently, but given the pace of payoff on that portfolio, how rapidly it turns, I think we are getting to a place where the growth there will be fairly nominal.

And, really, relative to the overall balance sheet, shouldn't really increase much more from where it is. Although it could, in a given quarter, increase by maybe a percent, something like that.

Okay. Great, thank you.

Taylor Brodarick, Guggenheim Securities.

Great, thank you. Jimmy, when you were reviewing all the significant strategic actions taken over the last year. Kind of what's your thoughts on whether it's M&A, what your wish list would be, markets, or even other actions like the trust preferreds, and kind of love to get some color there. Thanks.

Sure, Taylor, great question. Certainly in the M&A arena, we have certainly interest there. It's still falls within the guidelines that I have shared before, the low risk, strategically positioned as well as financially compelling.

Our view today would be -- when you asked about the geography, it's certainly focused on the more metro markets, and we think that that will provide opportunities for us over time. Conversations have been going on with various banks, continue to go on. But I do see that that has good potential as we move through 2014.

Great. And I guess part of that discussion -- if there's no deal that come off it, would you consider, along with the Board, talking about reinstituting the dividend in the near future?

Sure. There are really -- when we look at the capital management, there's a number of components there. To begin with, our capital is building at a nice pace; the earnings of course, but also the BPA accretion that adds to it each quarter. But there's many factors to consider as far as capital management -- certainly supporting our organic growth as we look at acquisitions of cash dividend, stock buyback.

So all of that is kind of baked in. A modest cash dividend would be appropriate at an appropriate time. Is it now is kind of the question, and certainly that's something our Board is discussing.

Great, thank you, Jimmy.

Matt Olney, Stephens.

Thanks. I want to go back to expenses, and on previous conference calls you've highlighted some items on the expense side that would decrease, and we've seen this play out the last few quarters with professional fees coming down, FDIC assessments coming down. From what we have seen today in the first quarter, is there anything else that would fall out in 2014 from current levels that could help offset the investments you are making for the new hires?

Probably there's a small piece in there if you look at it on a linked quarter basis, where there still some further opportunity. Obviously, in the first quarter, you have the payroll taxes, which is about $0.5 million impact. That will come down over the next few quarters. Additionally, within there, on our loan production, as that continues to increase, our deferred cost under FAS-91 will help pay for some of that, also. There's probably $300,000 to $400,000 run rate there that would pick up that would reduce the salaries.

And I think, overall, when you look at the expenses, they're pretty well at a pretty firm run rate, I think there's maybe a little more in professional fees, not a lot. And FDIC, I think, is a pretty true run rate going into the balance of the year -- other than growth in assets will impact that a little bit. So I think we are at a pretty good point, inflection point, right now on our run rate.

And going back to the margin, you mentioned there would be some pressure there, primarily from the loan yields. Are there any mitigants to that that could help offset that margin pressure?

I think the margin pressure has probably a couple components, as Jimmy indicated. I think the competitive loan pricing, even though we had a very positive first quarter, which really helped that margin a little bit, our average new and renewed pricing this quarter was 4.40% compared to probably sub-4% over the past four or five quarters. So that part helped us, but I think as we continue and focus on loan growth, that is going to get squeezed.

We have a little bit of benefit still with respect to our CD pricing, but, again, that's pricing on average probably around 15 basis points a month on our new and renewed. That will help us a little bit, but it's already -- most of the CDs coming in now are probably averaging about 30 basis points. So we'll have a little impact in reducing our costs from that standpoint.

And, again, we've done other actions as we continue to look at swaps, customer swaps. Even though the volume was down this quarter, we expect that to pick up some going into the balance of the year. Again, it's competitive, with fixed rates out there, but we think there's some opportunity. So I do see it still, as Jimmy indicated, still seeing compression in the balance of the year, with loan growth being a driver in competitive loan pricing.

Let me add a point there, too, Matt. I think it's also good to look back, particularly over the last year, when we have been able to reduce the core expense run rate of the company substantially. And really even further back than that. But while that was being accomplished, we were also adding a number of new strong leaderships and drivers in specific businesses as well as adding additional revenue generation folks.

So we kind of traded that out, so to speak, from the expense side, and reinvested while we have been bringing that overall cost basis down. So we also have a strong eye on the revenue generation as well.

Maybe one other point on that, Matt, in the context of margin is relating overall to our interest rate sensitivity and looking at our sensitivity, so we are fairly conservative in light of we're knowing that rates are going to rise sometime in 2015, and maybe earlier, but definitely 2015. And in that, we are balancing both on our loan portfolio with respect to fixed and floating, as well as in our securities portfolio.

As Jimmy indicated, we have 39% of our securities in floating. That, obviously, is fairly conservative when you look peer results there, but again, it puts us in an excellent position when rates do begin to rise. And part of our interest sensitivity has that taken into consideration. So as rates do rise, we will have anywhere from a 3% to 5.5%, 6% positive benefit on a 100 or 200 basis point ramp.

Great, thank you.

Michael Rose, Raymond James.

Sorry about before. Just a question on -- I don't know if you touched on this, but I didn't see it in the slide deck this time -- kind of a path to the 1% ROA. Is there any kind of update there and have any of the drivers materially changed and can you comment maybe on timing around achievability? Thanks.

Sure. Certainly one of the key elements today would be the loan growth, Michael, as we continue to move through 2014. But, really, to give you a little more color on that 1% goal, 1% ROA run rate by Q4, you know, when we set that goal, initially, that was before the capital rules were being finalized. And at the point in time, the trust preferred was actually going to not qualify for Tier 1.

When it was finalized, it became Tier 1 capital, and initially in our ROA plan, our process would've been to pay off the trust preferred. By doing so, of course, helps ROA. When all was said and done and the plans were finalized, it certainly made much more economic sense to pay off the preferred -- the trust preferred. The benefit to that is the EPS growth and it accelerates from that.

So obviously, EPS is what drives economic value and shareholder value. We still have the 1% target by Q4 of 2014; there is a chance that that could be pushed out a quarter or so. But the end result is EPS is actually accelerating.

Okay. That's helpful, thanks for taking my question.

Thank you. I'm not showing any further questions in queue. I'd like to turn the call back over to Jimmy Tallent for any further remarks.

Thank you, operator. We would like to just thank everyone for being on the call today -- certainly your continued interest in United Community Banks. If there's additional questions that could be answered for you, we certainly ask you to call any of the four of us. Again, thank you for being on the call today and we hope you have a great day.

Ladies and gentlemen, thank you for participating in today's conference. This concludes today's program. You may all disconnect. Everyone have a great day.