United Community Banks Inc (UCBIO) 2014 Q2 法說會逐字稿

Good morning, and welcome to United Community Banks' second-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 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 presentations for the second 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 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, and thank you for joining us for our second-quarter conference call. We had a solid second quarter, and overall I am very pleased with our results. We saw revenue bounce back after the expected seasonal dip in the first quarter. This increase in revenue, along with the elimination of the last of our preferred stock dividends, allowed us to achieve an 8% increase in earnings per share over the first quarter. I'll talk more in a moment about the drivers of our second-quarter results, but let me begin with some of the highlights.

We earned net income of $16.4 million, or $0.27 per share. This is up $0.02, or 8%, from the first quarter. Our return on assets increased to 88 basis points, moving us closer to our target of 1%, and our return on equity was 9%. We were able to hold our margin flat and took actions that should allow us to maintain or improve this level. Our efficiency ratio improved to 58.6%. We increased loans by $54 million, or 5% annualized. Just under half of the increase resulted from our acquisition of Business Carolina Incorporated, a specialty SBA lender. This transaction closed late in the quarter. We increased core transaction deposits by $52 million, or 6% annualized. Compared to a year ago, we were up $303 million, or 9%. Our provision for credit losses was $2.2 million, net charge-offs were $4.2 million, and the allowance ratio was 1.66%. Nonperforming assets were $24 million, or 32 basis points of assets; that is down over 20% from the first quarter. And all of our capital ratio strengthened during the quarter.

Now I will share some details and our outlook for the rest of the year. As you can see on page 12 of the investor presentation, core pre-tax, pre-credit earnings were $28.8 million, up $1.4 million from the first quarter and up $1.8 million from a year ago. The increase from the first quarter was due to higher net interest revenue and fee revenue, which were partially offset by higher expenses. We were able to hold our net interest margin level with the first quarter at 3.21%, which was better than we anticipated during our last call. During the second quarter, we executed certain balance sheet restructuring and hedging actions that will allow us to maintain our margin at or above this level going forward. This in turn will allow us to improve our earnings run rate through balance sheet growth.

Our growing core transaction deposit balances and our mix of loans and securities over time have improved our overall interest rate risk and sensitivity. These improvements have allowed us to restructure and reduce our securities portfolio, wholesale borrowing, and several forward-starting hedges that were put in place several years ago that were beginning to come effective but were no longer necessary.

At quarter end, we remain asset sensitive with a 200-basis-point ramp in interest rates over the next year, increasing net interest revenue by 2.3%. During the second quarter, we deleveraged and restructured our securities portfolio by selling low-yielding, floating-rate CMOs as well as fixed-rate corporate bonds that have been swapped to floating. The $4.4 million of gains from these securities sales were used to offset $4.4 million of charges from the repayment of a $44 million structured repurchase agreement, which was at an interest rate of 4%. Our investment portfolio remains very conservatively positioned in regards to interest rate risk. At the end of the second quarter, 31% of our securities portfolio was floating-rate loans. That compares with 39% at the end of the first quarter. Additionally, the affected duration of the securities portfolio at quarter end was 2.6 years, compared to 2.8 years last quarter and three years at the end of 2013. The combined effect of the hedge reductions, restructuring of our securities portfolio, and the repayment of the high-cost repurchase agreement will benefit net interest revenue and margin going forward. In this current rate environment, we expect our margin to continue at or slightly above the 3.21% level for the remainder of 2014. In the second quarter, we grew loans by $54 million, or 5% annualized. As I mentioned earlier, half of the increase came from our acquisition in South Carolina of an SBA lending company that will strengthen SBA and USDA lending across our footprint.

Let me take a moment to update you on our SBA business strategy. I'm very excited about the tremendous growth and fee revenue opportunities for United. As we discussed last quarter, we have significantly expanded our SBA USDA lending capabilities with the addition of Rich Bradshaw to lead that team and our specialized lending group. Our buildout of this business is progressing at a rapid pace, even faster than originally planned. Our upfront expenses are running higher as a result, but we should also see revenue grow at a faster pace in the coming quarters. Rich has already assembled an outstanding team of SBA lending specialists, underwriters, and closers to grow the business within, and more importantly, beyond our existing footprint. As part of the business plan, we sold the guaranteed portion of SBA loans this quarter for a gain of $744,000, which was included in other fee revenue. We expect these sales and gains to continue around that level through 2014.

Looking further at loan growth, our new loan production was $357 million in the second quarter, shown on page 20 of our investor presentation. Production was strong in nearly every category. The acquisition of the SBA business unit added $26 million to our loan production totals, with $22 million in owner-occupied commercial real estate and $4 million in C&I. Geographically, these loans are included in the totals for South Carolina.

Last quarter, I reported that our C&I production of $75 million was the strongest we had seen to date. I am pleased to report that this record has already been surpassed with second-quarter production topping the first quarter by a fairly wide margin. We generated $115 million in new C&I loans and increased outstanding balances by $59 million. Although our production in the other commercial categories equaled or exceeded the first quarter, several large CRE loan payoffs decreased our income-producing CRE loans outstanding by $25.5 million from the first quarter.

On the residential construction side, we saw some seasonal increase in production but higher-than-normal payoff resulting in a $16 million reduction and outstanding balances. One particular payoff from the sale of our homebuilding company accounted for half of that decrease. Production in our residential mortgage and home equity lines of credit was up slightly from the first quarter. Geographically, our strongest loan production activity was in South Carolina and Atlanta. While we also had solid production in North Georgia, payoff activity again more than offset production and reduced loan balances by $29.7 million from the first quarter.

You'll find the trends on core fee revenue on page 12 of our investor presentation. Second-quarter core fee revenue was $13.9 million, up $2 million from the first quarter, with increases in every category. Interchange fees were up $445,000 on strong transaction volume. Mortgage fees were up $523,000 after a slow first quarter. We closed $69 million in mortgage loans in the second quarter, compared to $46 million in the first quarter and $95 million a year ago. New home purchases accounted for about 68% of second-quarter mortgage production compared with 66% last quarter, 49% a year ago. We saw a nice increase in customer swap fees of $414,000 in the second quarter. That total was up $357,000 from the first quarter but down about $74,000 from a year ago.

As I noted earlier, our SBA lending business produced $744,000 in gains from loan sales in the second quarter. We sold approximately $6 million in balances. With our new focus on growing the SBA business, we expect to have sales and related gains each quarter going forward while retaining servicing on sold loans. We continue to focus on growing fee revenue sources and expect to make further progress in this area.

In last quarter's call, I mentioned that we had added new leadership in treasury management services. Under this leadership, we are leveraging our diverse customer base and high customer satisfaction scores to grow merchant services, which will begin to produce results in the third quarter.

Let's turn now to core operating expenses presented on page 13 of the investor presentation. Core operating expenses are up $1.4 million from the first quarter. About $600,000 of that increase was one-timers, which I will cover in just a moment. We remain focused on controlling expenses while at the same time making strategic investments in key personnel to drive revenue growth. While direct salary costs were up on a linked quarter basis, total salaries and employee benefits cost of $24 million were down $223,000 from the first quarter. The decrease was driven by lower payroll taxes. We do expect to see some increase in staff costs in the third quarter as we continue to ramp up the SBA business and add other revenue producers.

Advertising and public relations expense is up $513,000 from the first quarter, reflecting the cost of new product initiatives and refreshing our branded marketing materials as well as our annual customer appreciation day. Since much of the increase was related to nonrecurring items, we would expect the expense categories to come down in the third quarter.

Professional fees were up $745,000 from the first quarter, mostly reflecting consulting and legal fees from various internal initiatives, including the acquisition of the SBA business unit. As I mentioned earlier, most of the $600,000 increase in the other expense category resulted from nonrecurring items. This includes a $375,000 charge from the consolidation and sale of one of our branch facilities which will be closing in the third quarter. A $107,000 write-down of our loss share identification indemnification asset and severance costs of $83,000. Our loss sharing agreement with the FDIC for commercial loans from our 2009 acquisition of Southern Community Bank expired in June on the five-year anniversary of the acquisition.

Our effective tax rate for the quarter was 37%, which is equal to the effective rate for the first quarter. We expect our effective tax rate to remain in this range for the rest of the year.

Before we open the call for your questions, I want to make a couple of closing comments. In the second quarter, we took steps to stabilize our net interest margin. We also continued to invest in new businesses where we see outstanding growth opportunities. This combination will drive earnings growth in the quarters and years to come. I am especially delighted with the progress and outlook for our SBA business.

We are positioning ourselves to become a top performer in this business nationwide. We are already bearing much of the cost, and now we look forward to the revenue growth. We had a slight uptick in the expenses in the second quarter, mostly as a result of our continued investment in revenue producers and some one-time items. Even so, we continue to improve operating efficiency. As reflected in our lower efficiency ratio of 58.6%, our people have done an outstanding job of controlling costs. Our efficiency ratio remains consistently within the same range as before the financial crisis. I am very proud of the dedication of our bankers who continue to perform with commitment and discipline, day in and day out.

Even more impressive about this team is the steady improvement in our industry-leading customer satisfaction scores. In the second quarter, J.D. Power announced that we earned their award for the highest customer satisfaction in the Southeastern United States; and nationwide we came in second, missing the top spot by just two points. We believe this competitive distinction, combined with our business strategies and ongoing progress, speaks very well for the future of this organization. I am very excited about the opportunities ahead for us.

Now Lynn, Rex, David, and I will be pleased to answer any questions.

(Operator Instructions) Jefferson Harralson, KBW.

I was hoping to dig into the SBA business. Did you - from selling $6 million of loans, it sounds like you may have originated about $8 million. How fast do you expect that to ramp up? Is there - where can it get to? Is there some non-competes in place that's going to keep that flat for the rest of the year? Or I guess I'll stop there and just let you guys answer from here.

Jefferson, to give you a sense of the scale of what we're doing with SBA, if you go back 120 days ago, we had one producer in 2.5 FTEs in a support role. So today, as we sit today, we've got 12 producers, 12 people on the support side in terms of credit closing, et cetera, and only nine of those came from the acquisition of BCI. We are very proud of this team. We've obviously got to give them a little bit of time to ramp up production, but by the fourth quarter we would expect in the range of $30 million in production in Q4.

Okay. All right. Thanks. Now I'll ask on the overall loan growth - the origination and the production is very strong, obviously. It's not all getting to the bottom line. You guys had sort of guided to upper single-digit loan growth of three quarters ago, and it seems like the capacity is still there to do that, but paydowns are getting in the way. Can you talk about the potential to take this overall loan growth rate up to high single digit, or is it just the paydowns are too high to get there in the near term?

You hit that right on the head. The positives - monthly production is on a steady upward trend ever since February. Our senior credit committee approvals are up 12% quarter over quarter. Now, that doesn't translate directly into growth; we don't close every deal we approve, but still that's a good indicator. Our C&I business is strong, up $59 million. Only 40% of that came from our specialty groups and 60% came from our community banks, which I think is another great marker for the future in terms of the business there. Our income property group is strong. We don't break that out separately, but it was up $18 million for the quarter, and we are actively recruiting for another producer in Atlanta in that business.

But, as you said, the payoffs have been more than we expected. A couple of examples - we had two stabilized hotels, $15 million. They were sold; that the owner hadn't planned to sell, but the offers were too good to pass up. We've had two construction projects that we expected to hold through stabilization that sold at the end of construction, again because of the cap rates. On the C&I side, even we've had three fairly large borrowers sell the business to national operators that we didn't expect. So that's really the delta. We feel very good about production and the direction and momentum and certainly SBA. It's just going to turn on the paydown side what happens in the third quarter.

Okay. Thank you.

Brad Milsaps, Sandler O'Neill.

Just wanted to see if you guys could talk about capital plans. The TCE ratio well above 9.5% now. Just curious what your thoughts are on maybe potential for M&A versus maybe buying back the stock versus organic growth. Just any additional color there would be greatly appreciated.

Brad, this is Jimmy, and thank you for the question. Of course, when we look at our capital management there are several factors that we feel we must take into consideration. We are pleased that capital is growing at a very nice pace. Earnings plus the DTA were [captured]. As you know, we reinstituted our cash dividend to our common shareholders at the first of the month, which basically represents 10%, 11% of earnings. I'm sure over time that that will probably increase.

But there's other factors that we strongly consider as we look at the overall capital management. First, the amount of capital that we will need to support the organic growth of the Company. Capital that would be needed possibly in acquisitions, stock buybacks maybe at some point. So we factor in a number of these components when we think of capital management.

Sure, I appreciate that. Any thoughts on just kind of the M&A environment in general? What - is it - obviously your own share price into consideration, seller expectations. How are you guys kind of seeing the market at this point?

Well, certainly, Brad, there's significant amount of conversations going on. We believe that M&A will certainly play a role in our future growth. Our strategy really has not changed: we still look within our four states that we operate in today. We would be biased toward expansion into metro markets. The size would probably be $300 million to $1 billion range; would probably be in our wheelhouse, could be in new markets, could be in fill-ins, could be markets that we need to add bulk. So yes, we continue to survey and strategize as well as have conversations with potential partners.

Great. And then just one final question maybe for Rex. Sorry if I missed it, but with the paydowns this quarter were there any prepayment fees or loan fees that would've been out of the ordinary that helps you guys out this quarter?

No, there wasn't a significant amount of fees related to any of the prepayments that came through that helped in the loan interest income line that comes in there. So it wasn't a significant amount at all related to that.

Great. Thank you very much.

Michael Rose, Raymond James.

Got one for Rex. Obviously a little bit balance sheet restructuring this quarter. Are there other opportunities there, and how should we think about those opportunities?

I think - as Jimmy indicated, I think we have a great opportunity to sell off some securities in combination with some low-yielding securities mixed in there to get a gain to repay down about $44 million of our structured repo. There's still $6 million of that outstanding. We are still looking at that later this year; if there is an opportunity, we would definitely proceed to do that also. And, again, in our parent company, we do have some trucks there. There's about $50 million, averaging about 9.3% sitting on that side also at the same time.

But I think we look at this on a very active basis each month and quarter going through ALCO looking at opportunities and continue to look for further opportunities where we can leverage. Again, I think the best part about that transaction is, again, we are able to deleverage the security portfolio at the same time, reducing it by $120 million and still retain our interest revenue. So we will continue to look, but there's nothing immediate out there other than those two items.

Okay. And maybe a couple of questions on the loan side for Lynn. Outside of the SBA group that you picked up this quarter, what do trends look like in South Carolina? Maybe if you can update us then, too, on the healthcare efforts up in Nashville. And then, when can we expect to see the decline in balances in North Georgia begin to level off? Thanks.

Sure. So we feel very good about the trends in South Carolina. All those businesses are going well. Healthcare continues to grow. It's probably a little slower, and that's not than we anticipated at the beginning of the year, and that's really by our choice. That's the one area where we have seen credit terms get stretched beyond our tolerance. We've got an outstanding team there. Again, they're continuing to grow, but it's probably going to be a little slower than we anticipated. And in terms of North Georgia, the production is continuing. The growth is really driven by lot and land payoffs. So we think we are pretty close to a bottoming in that trend at this point.

Jennifer Demba, SunTrust Robinson

Question on the North Georgia-Western North Carolina economy. I think everybody is pretty familiar with what's gone on in Atlanta in the last couple of years. But could you talk about the economy up there and what has changed in the last six to 12 months?

I'll give you just a quick overview, and Lynn will add on too. I think what I have seen, Jennifer, is stabilization in real estate. In some of the very rural markets, it's still - on the lending side, it's still slow. In some of those pockets that would have a larger city, in - within that rural market, we've begin to see some growth; but, again, it's slow. I think tourism has increased. I think second homes and retirement homes, we see some increase there out of Florida as well as out of the Northern states. So I guess either way I would size it is that the stabilization seems to be apparent, and it's a slow growth at this point. Lynn can -

Yes, I completely agree. The economies are clearly better there. Our C&I business in both markets is actually already flat to slightly up. It's just that both markets were historically driven by real estate, and that continues to pay down, and that's not necessarily a bad thing. We are seeing more construction loans, good construction loans that we are participating in. But so, again, clearly the economy is better. Our customer relationships are strong. We have excellent fee income growth in both of those markets and continue to feel really good about our position here.

And I have a follow-up on operating expenses. In terms of the outlook for next year, Jimmy, it sounds like it may be hard to get some net reduction that your investment will offset that. Is that a fair expectation if we look at 2014 expenses -- 2015 expenses versus 2014?

Jennifer, let me just kind of give you a little color as to my view on that, and certainly it's baked into the efficiency ratio. And if you go back a year ago and look at it then and look at it today, from 69% to 58%, a tremendous improvement. Our people have done what I believe to be a fabulous job there. I don't know if we have put a stake in the sand and said the efficiency ratio needs to be X. Certainly, we want to continue to drive that lower. But I think we are at that point now where the revenue growth, because of the reduction of the cost, investment in new revenue producers, we should see the revenue begin to move in an upward trajectory.

I think second quarter was very much the proof of our strategy. When you take out those one-time expenses, you basically see revenue up about $2.8 million; you see expense up $900,000. So that's really I guess the way I would look at it. We expect that to continue as we go forward, and the investments in revenue generation hopefully will actually start paying off. And that in itself will help to drive the efficiency ratio even down further.

Thanks so much for the color.

Christopher Marinac, FIG Partners.

I think Lynn may have mentioned this at the tail end of his remarks a few minutes ago. But in North Georgia, you still are seeing paydowns, and that's influencing these numbers. But the North Georgia does seem to have an acceleration of new loan growth. I just wanted you to expand on that for a moment.

You're right on track. We are seeing good production in North Georgia. So, again, we are not sure exactly when it bottoms out and turns, but we continue to feel good about the activity of the teams in this market.

Great. Can you talk a little bit about new loan price - pricing in sort of this loan yields and how that is hurting new loans that are coming on board?

Sure. I think as you can see in the our rates are (inaudible) in the press release, we drop down two basis points on our loan yield - overall loan yield from 446 to 444. That's probably the smallest drop, Chris, we've had in probably six or seven quarters on a linked basis. Some of that, again, is driven in the mix that both Jimmy and Lyn talked about. We did see a new and renewed loan pricing come down a little bit in Q2 versus Q1 overall. But, again, still up high enough to keep our overall loan yield in the 440s -- 446 to 444 range. We do see pricing that continues every quarter, but, again, I think we're looking to try and maintain it where we can maintain it. But the pricing pressure will continue, so we'll see that come down a little bit each quarter, but not to the lengths I think we've had in prior quarters, of the 10- to 15-basis-point drop.

Okay, great. That's helpful. Jimmy, just from a big-picture perspective, for potential acquisitions that are out there, how does pricing feel to you in terms of what [solid] expectations are? Has that varied at all in terms of how the last year has unfolded?

Certainly, Chris, the pricing has increased. Expectation has increased. But I still think that general dynamics of consolidation and probably the reasons for consideration are as strong as ever. Certainly, we have gotten a number of calls and certainly have initiated a number of calls ourselves. But, yes, I think we will see pricing continue to maybe strengthen for a period of time. But you still have an economy and a market that's hyper-competitive. Loan growth is still challenged. Cost of operation, which would include compliance and so forth, is very tough. Probably somewhat of a Board of Directors and maybe even managements that are either tired or feel like hooking their wagon to another company, I think, is really what will ultimately drive that. So yes, I think pricing will continue to strengthen, but I think there will be lots of opportunities over the quarters ahead.

Okay, great. Thank you for that as well. And just one last quick one - the FDA production you had, is that included on the new loans funded we see on slide 20?

Yes.

Okay, great. That's what I thought. Thanks, guys. Appreciate all the color.

Thank you. And with that, I am not showing any further questions in the queue. I would like to turn the call back over to Mr. Jimmy Tallent for any closing remarks.

Thank you, operator, and thank all of you for your questions today and your interest in United Community Banks. I do want to recognize once again our team of United bankers and the fabulous job that you all continue to do day in and day out, and just say thank you for that. Thanks for being on the call today. We hope all of you have a great day, and we look forward to talking with you next quarter.

Ladies and gentlemen, thank you for participating in today's conference. This does conclude the program, and you may all disconnect. Have a good day, everyone.