United Community Banks Inc (UCBIO) 2014 Q3 法說會逐字稿

Good morning and welcome to United Community Banks's third-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 presentation for the third 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, everyone. Thank you for joining our third-quarter conference call. I'm very pleased with our third-quarter results, which showed solid business growth, an expanding net interest margin, and a significant step forward on our goal of achieving a 1% return on assets.

As you know, over the past several years we've worked very diligently to recalibrate expenses to improve operating efficiency. We made tremendous progress eliminating some functions and streamlining others. At the same time, we made strategic investments in new lending talent and new business lines, such as specialized lending, that are driving revenue growth. The results of these initiatives became apparent in the third quarter, with improvement in nearly every financial measure. I'll talk more in a moment about the drivers of our third-quarter results, but let me begin with some highlights.

We earned net income of $17.6 million or $0.29 per share. This is up $0.02 or 7% from the second quarter and up a solid 38% from a year ago. Our return on assets increased to 85 basis points, a nice increase over the second quarter; and our return on common equity was 9.4%.

Total revenue was $69.4 million, up $2.5 million from the second quarter. After stabilizing our net interest margin in the second quarter, we saw a meaningful 11 basis point expansion in the third quarter to 3.32%.

Our efficiency ratio improved to 57.9% for the quarter. We increased loans by $159 million or 14% annualized. I'll have more to say on this in just a moment.

We increased core transaction deposits by $90 million or 10% annualized. Compared to a year ago, we are up nearly $300 million or 9%.

Our provision for credit losses was $2 million. Net charge-offs were $3.2 million, and the allowance ratio was 1.57%. Nonperforming assets declined to $22 million or 29 basis points of assets.

Our capital ratios continued to strengthen. And our Board last week increased our quarterly dividend from $0.03 to $0.05 per share, payable in January. Now I'll share some highlights and our outlook for the rest of the year.

As you can see on page 7 of the investor presentation, core pre-tax, pre-credit earnings were $30.3 million, up $1.5 million from the second quarter and up $1.4 million from a year ago. The increase from the second quarter was due to higher net interest revenue and fee revenue, which were partially offset by higher expenses.

We were able to increase our net interest margin by 11 basis points over the second quarter to 3.32%. This was mostly due to our balance sheet restructuring and hedging actions late in the second quarter to strengthen the margin and increase net interest revenue. As a result of these actions, our investment securities portfolio yield increased 13 basis points from the second quarter, and the average rate paid on interest-bearing liabilities decreased by 4 basis points.

In addition to benefiting from the second-quarter balance sheet restructuring, we were able to stop the decline in our loan yield. In fact, we increased the yield by 1 basis point in the third quarter.

Improvement in balance sheet composition also contributed to the higher margin, as the average balance of investment securities decreased $95 million, while the average balance of loans increased $70 million. Although the timing and extent of future rate increases remains unknown, our balance sheet is well positioned from an interest rate risk perspective.

At quarter-end we remained asset sensitive, with a 200 basis point ramp-up in interest rates over the next year expected to improve net interest revenue by 2.1%. We still hold a large balance of floating rate securities in our investment portfolio -- 31% of the portfolio, in fact, at the end of the third quarter. In this rate environment, we expect our margin to continue at the 3.3% range for the remainder of 2014 and into 2015.

Our third-quarter loan growth was a big contributor to our linked-quarter growth in net interest revenue. In my view this is one of the most notable highlights of the quarter. We grew loans by $159 million or 14% annualized.

Our new loan production was $453 million in the third quarter, as shown on page 14. Production was strong in nearly every category and market.

Over the past three quarters, our C&I and CRE production have continued to ramp up as a result of growth in our specialized lending businesses. Our investments in these areas are beginning to pay dividends with their added loan production.

Our healthcare lending business in Nashville did well in the third quarter, with $60 million in growth. Our SBA lending group increased loans by $31 million over the second quarter, and its pipeline of lending opportunities is strong entering the fourth quarter.

Our veterinary and commercial real estate verticals both had solid loan production. In the third quarter we sold a portion of SBA loans for a gain of $945,000. This was included in other fee revenue. The total was up from $744,000 in the second quarter. Sales of the guaranteed portion of SBA loans are part of our SBA business strategy. Therefore, we expect these sales and gains to continue to grow from this level going forward in 2015.

In total we generated $264 million in commercial loan production and increased outstanding balances by $124 million during the third quarter. On the residential construction side we saw a nice increase in production over the second quarter, with a small increase in loan balances.

We saw a healthy increase in production in residential mortgage and home equity lines of credit, with both up solidly from the second quarter. Loan balances were up as well in these categories -- 2% and 7% annualized, respectively.

We also increased our indirect auto portfolio by $27 million. Challenges in the lending area continue, whether it's pricing, competition, or the weak economy. Our third-quarter loan production came together as a result of the investments we made in new business lines and very talented people to drive the execution.

Some of the production that closed in the third quarter had been approved some weeks or months earlier. The bottom line is all of our lenders and back-office support staff across our entire footprint executed flawlessly. They are the true difference makers.

You'll find the trends on core fee revenue on page 7. Third-quarter core fee revenue was $14.4 million, up $481,000 from the second quarter. Mortgage fees were up $301,000 from the second quarter. We closed $84 million in mortgage loans in the third quarter, up from $69 million in the second quarter and $77 million a year ago.

New home purchases accounted for about 63% of the third-quarter mortgage production compared with 68% last quarter and 59% a year ago. At $53 million, new home purchases accounted for a smaller portion of the total volume compared with second quarter. However, the volume of new home mortgages was the highest we have seen in several years. We continue to focus on growing our mortgage business by adding experienced lenders who have strong ties to the communities they serve.

As I noted earlier, our SBA lending business produced $945,000 in gains from loan sales in the third quarter, up from $744,000 in the second quarter. We continue to focus on growing fee revenue sources and expect to make further progress in this area.

Our core operating expenses are presented on page 8. Core operating expenses were up $966,000 from the second quarter. Most of the increase was in compensation expense, which was up $1.7 million from the second quarter. The increase in compensation expense reflects our investments in new revenue-producing talent as well as higher incentives.

About one-third of the linked-quarter increase in compensation expenses is in salaries, reflecting the addition of specialized lending talent and other strategic hires. The other two-thirds of the increase is due to hiring incentives and commissions that are directly related to the increases in loan production, core deposits, and mortgage fees, as well as overall growth in earnings.

The decrease in our FDIC assessment is the result of a lower assessment rate resulting from improved credit measures that factor into the rate calculation. Advertising and public relations expense is down $245,000 from the second quarter. The elevated second-quarter expense included the cost of new product initiatives, a refresh of our branded marketing materials, and our annual Customer Appreciation Day. The $585,000 decrease in other expense category resulted from non-recurring items in the second quarter.

Our effective tax rate for the third quarter was 36%, which is down from 37% from first and second quarters. The decrease reflects the release of a previously established reserve related to a tax return that is no longer subject to audit. We expect the effective tax rate for the fourth quarter to return to the level of the first and second quarters.

Now I want to make a couple of closing remarks, and then we'll open it up for questions. We had a very good third quarter by every financial measure, and our outlook for the fourth quarter is also very encouraging. We expect loan growth to continue in the mid- to upper single-digit range. We believe our margin will continue in the 3.3% range. The combination of solid loan growth and a stable margin will lift that interest revenue.

We see a modest increase in fee revenue, much of it coming from our growing SBA lending business as well as growth and seasonal patterns in other fee revenue sources. And although we expect some increase in expenses, we believe the rate of increase will be less than our revenue growth rate and well below the third-quarter expense growth rate.

Our strategies are working, and we are on track to achieve our goals. This is a tribute to the exceptional bankers with whom I am fortunate to be associated throughout this organization. Now, Lynne, Rex, David, and I will be pleased to answer any questions.

(Operator Instructions) Brad Milsaps, Sandler O'Neill.

Jimmy or Rex, I was going to see if you would maybe comment a little bit more on the nice loan growth you had during the quarter. It looks like a fair amount came from South Carolina.

I think you mentioned healthcare. But just kind of curious to see -- you know, any additional color there on kind of what you saw as the major drivers? Were there any sort of larger loans in there that might have skewed it a bit more? Just any additional color there would be greatly appreciated.

Brad, let me just ask Lynn to address that.

Sure. Thanks, Jimmy. Thanks, Brad.

So, yes, that really was very broad-based growth there -- what you see as designated as South Carolina and corporate. The local Bank in Greenville was up $9 million. Our Corporate banking unit there, which is focused on middle-market clients in the Southeast, was up $4 million.

Income property, which -- we do construction and stabilization of either Class A apartments or credit tenant-related office or retail -- that was up $27 million. And they continue to benefit from a pretty good pipeline of commitments that are still in the funding stage.

ABL, which is a new business for us that's included in that group, was up $1 million. And, again, it's very new business. Healthcare, as Jimmy mentioned earlier, was $60 million. That's the only place where you have relatively larger commitments. Probably those tend to average about $15 million.

But what we are seeing there is that new team that we have expanded in last year has -- is really starting to gain some traction. And then SBA was benefiting from about -- we had about $10 million in production from our new national group. And then they also benefited from some funding of previous made commitments, which is probably the only unusual piece of it. So, again, it's a very stable, very balanced broad-based growth coming out of that group.

Okay. Great. And just to follow up on the margin -- I appreciate your guidance there. Rex, I was just curious how much sort of mix change weighed in on that guidance. In other words, it looked like on average the bond portfolio was down linked-quarter, point-to-point maybe up a bit. Just kind of curious on what your thoughts there are on bringing that down further as you kind of balance the mix versus maybe some pressure on loan pricing, etc.?

Very good, Brad. I'll be glad to respond to that. A couple of things are happening. As we talked last quarter, we did have the restructuring, which was a combination of things -- selling off some low rate securities, and that's why you see some of the security portfolio coming down. We added a smaller portion to that.

And that part really gets balanced a little bit with our overall core deposit growth. So we had very good core deposit growth in quarter of $90 million, which helped -- funded the loan growth of $159 million. And we are able to really keep our mix down on securities, which was planned as part of that restructuring.

So it is a shift in mix when you look at it, helping the margin, when we look at roughly about $96 million down on leverage average loans and up about $70 million on securities -- I mean, and up about $70 million on average on loans. That part there probably contributed about 5 basis points of our margin improvement.

We also had, again, the benefit of our funding mix, where we, again, pay down some repos as well as our line of credit during the quarter. And that contributed about 3 basis points. Our average balance sheet was down because of, again, pulling securities down. That was another 2 basis points; and then another basis point is roughly in our CD funding mix coming in a little bit lower with repricing.

We think that will continue. Most of these items are run rate items, not one items; and they come back out again the next quarter. So this really adjusted our base run rate into the 330 range, which we think will continue in Q4.

Great. That's very helpful. Thank you, guys.

Jennifer Demba, SunTrust Robinson Humphrey.

Nice quarter. Jimmy, when you look at this SBA business, can you give us some thoughts about how big a business you could see it becoming over the next couple of years? And what's your comfort level in terms of percentage on your earnings base coming from this business line?

Sure, Jennifer. Obviously we are very pleased, very excited about the SBA business. But I think Lynn -- let me just ask him to give you a little bit more of that granularity that you are looking for.

Sure thing. Thanks, Jimmy and Jennifer.

So we are building the business, so it's new. We are very pleased with where we are. We are probably ahead of where we thought we would be in terms of both our sales and servicing infrastructure. We had previously disclosed a new production target for the fourth quarter of $30 million. We are highly confident that we will hit that.

We are highly confident that we will grow that as we go into 2015. We've said we would like to be in the top 10 by 2016, which would equate to roughly $150 million in annual production by 2016. So that's kind of the scope and scale of what we're shooting for in production.

Now, relative to gains, our goal is to make it more of a balanced business that provides both loan growth as well as gains. So we continue to believe our strategy long-term is to sell about half of our production; retain the balance, if that helps us build a more balanced and consistent business; and also lets us be more aggressive in some of the products that SBA offers that really don't lend themselves to being sold, such as cap lines, and 504 loans, and even some fixed-rate exposure. So that's kind of our general targets over the next two years.

Thanks so much.

Kevin Fitzsimmons, Hovde Group.

Jimmy, can you talk about M&A generally? Are you more excited about it today, less excited about it?

And the reason I'm asking that is I know in past quarters, it seemed like you were ramping up the talk in terms of the anticipated opportunity. But we seem to have more players getting involved in it; we had an Alabama bank step into Metro Atlanta just a few days ago. So it's a more competitive environment for that.

So I just wanted to get your sense on the opportunities you think are out there, and by market, where you are more excited, where you are less excited. Thanks.

Sure, sure. Thank you for the question, Kevin.

As far as our view and my view on the M&A, it's still -- I believe will play a role in our future growth. The strategies that we have talked about in the past would be -- an acquisition possibility would be within our four-state footprint, where we operate. We would be biased toward the metro markets within those states.

Size-wise, probably between $300 million and $1 billion in assets is kind of our view of the appropriate size. This could be in new markets that we have strategically identified within those four states. Could be fill-ins. Could be markets where we believe we just need greater bulk.

But, really, our view on the M&A has not changed. Certainly, we are focused every day of operating our Company on an organic basis. As M&A opportunities come about, we are absolutely interested; but they've got to be strategic. They've got to be financially beneficial and what we believe to be a low risk transaction.

We would be looking for immediate EPS accretion. We would be looking for any tangible book dilution -- to earn that back in that three-year time horizon. But we've made a lot of investments, Kevin, over the last couple of years in particular to really grow our business. And on any acquisition we will be very methodical, because it's got to hit all of those particular triggers.

Jimmy, just let me follow up that last point you made about making investments. You've been out of the M&A game for a while now, and we've had some banks have hiccups when they go through the regulatory process. Can you just talk about your confidence in terms of compliance and BSA infrastructure -- that everything is ready to go if you stepped in tomorrow with a deal?

Sure, I'll be glad to give you some thoughts there. We have just completed our annual safety and soundness examination. Very, very pleased with the results there.

Really, in the last 60, 75 days, we have completed our compliance, BSA, money laundering -- all of those particular examinations. And I am extremely pleased with the outcome of those items.

So I believe from a regulatory standpoint that I don't see any obstacles in our way of doing a transaction, so long as it's a transaction that we truly can add value and earnings growth to the Company.

Okay. All right. Great, Jimmy. Thanks.

Taylor Brodarick, Guggenheim Securities.

Great. Thank you. Lynn, if you don't mind, one more SBA question. Thanks for the color about how much you are going to hold in a balance sheet and how much you are going to sell. What advantages, I guess, for the SBA lending team are there for being part of a bank now? What's the competitive landscape in the Carolinas for an advantage?

You were breaking up a little bit, but if I understood, the question is the advantages of being in the Bank?

Correct.

So what we are doing -- we really are operating in two lines of business. We've got the national business that is focused on specific verticals -- franchising, dental, veterinary, etc.

And then we've got a dedicated footprint SBA group that's really partnering with the banks to both identify and close opportunities, and really led by the core business Carolina group that we acquired in late June. And right now what we are seeing is great pipelines out of both of those groups. So we think it's a great strategy for partnering with our Banks; and it's a great strategy on the national piece, as long as you stay in those dedicated verticals.

Rex, for the improvement in the commercial loan yields, did I miss any other detail you provided? Did the mix shift between floating-rate and fixed-rate product that you are putting on?

Sure. Again, you are breaking up for some reason, but I think I understand the question -- just talking about the commercial loan yield and income tax -- the fixed/floating and what we are looking at there.

As you noted and, I think, Jimmy commented, we are up 1 basis point in yield, which -- it's been a while since we have seen yield accretion in the loan portfolio. Our new and renewed this quarter -- again, we had a very strong quarter of loan growth, but the new and renewed is the same as last quarter -- a little over 4%. That's benefiting the margin, obviously.

And, again, within that we have -- roughly about 43% is floating, so just under $2 billion of our loans are floating. And again, about 60%, 57% fixed.

That number has swung over the past two quarters, improving on the floating fixed basis. So we have been improving, getting more floating-rate loans overall over the past three quarters. And, again, within there we have very few floors. Within the floating rate portfolio, there is only 16% of those that have floors.

Again, most of those come off within 200 basis points. So it really doesn't have a significant impact with respect to rate forecasts as we look at an interest rate sensitivity.

Great. Thank you, Rex. And Jimmy, would you just mind refreshing me -- just kind of look at the performance of the Company and where you are trading at tangible book. Has the Board put in place an authorization for share buybacks? Maybe just your thoughts on that.

Sure. Really, when we talk about share buyback, in my view it's certainly much broader than that. I think we have to think of it more in the context of capital management, which several factors fall within that category.

First, we are very fortunate to be growing capital at a very nice pace -- growing our regulatory capital, even at a faster pace, given the DTA recapture. As you know, the Board reinstituted the cash dividend payment in second quarter. We announced just a few days ago where the Board had increased that from $0.03 to $0.05 per share.

And really, the historical payout of the Company has usually been somewhere in that 18% to 20% of earnings. So that's kind of the thinking behind that.

But, now, the other considerations that we factor in is, first, the amount of capital that we'll need to support just our organic growth; certainly, the capital to support acquisitions and the possibilities of those; stock buyback -- you know, at some point, given all the parameters around that, may be appropriate. So really it's a broader context within the capital management. And we look at all those components.

Great. Thank you, Jimmy. I guess one more question -- congrats to David Shearrow for the retirement. I was kind of curious, as you look to, it looks like, split his role into two different positions -- is that advice from regulators? Or is it just reduced bandwidth to be able to do both jobs?

Well, really, it's the latter. Certainly, David has just done a phenomenal job in both of these areas. He and I have talked about it over the past year or so about the possibilities of maybe splitting that into a more enterprise/risk role, and then the credit role somewhat independent.

But since he has decided to retire -- and we have not been able to change his mind -- we think probably the timing is appropriate to look at that division. Again, you don't find many David Shearrows out there that can do both of those. But given the size of the Company, given the regulatory environment, the focus now on risk enterprisewide, and then the credit arena within itself -- just seems to be the appropriate thing to do.

Great. Thank you, Jimmy. Appreciate it.

Nancy Bush NAB Research, LLC

Jimmy, I had a question for you. As you know, we are in the midst of a particularly nasty political season here in Georgia, and the Georgia economy is being painted in a pretty tough light. I just wanted to get your views on that and whether you are seeing good growth in the state? Or is it choppy, and which markets might be better?

Sure. Well, you know, Nancy, in the middle of a political season, we hear all types of good and bad. You know, I know the numbers that's been posted about the unemployment having increased and now maybe come down a little bit, and still one of the highest in the country. That's one factor.

But the other factor is I believe Georgia has added 55,000 new jobs. So from my personal view, I see Georgia continuing to improve economically. We continue to have probably 23 Fortune 500 companies headquartered in and around the Atlanta market. All 500 are represented in those markets.

So I think we'll see Georgia continue to heal and improve. Certainly, people moving into Georgia is still at a pretty strong pace. And I think that now, the diversification of our industry base is important; but without question, Georgia was hit very, very hard with the recession. So much of that was built around the residential real estate component. But I feel pretty good about where our economy is, and I think it will only improve from this point forward.

Okay. Thank you. And secondly, if I could just ask about duration on the securities portfolio. I mean, always when I hear balance sheet restructuring, I get a little nervous. So if you could just tell us where your duration has moved over the past couple of quarters?

Nancy, I would be glad to. Our duration increased very slightly from last quarter -- it's at 3.65 years right now, up from 3.6.

Okay.

And really, from the beginning of the year, it's at about the same level. As we've indicated in past calls, I think we had a little bit of a unique portfolio in that we have almost a third of the portfolio is floating-rate securities that are in balance in there because of our excess liquidity with our core deposit growth.

So we feel very comfortable where we are managing it. Again, we don't stretch out, take risk. And again, with some of the restructuring, it really was coming back into some of lower-duration securities at the same time.

Great. Like you very much.

Matt Olney, Stephens Inc.

Going back to the capital discussion, I'm just curious -- your opinion about what kind of capital levels you are targeting longer-term at the Bank?

Rex, do you want to address that?

I'd be glad to. I think some of the requirements coming up now in the Basel III and looking longer-term -- I think our overall position is very strong, where we are at on a Tier I common ratio, as we have in our deck there. You can see where we are at at 11%.

So I think -- and our total risk-based capital is another component. So the differential in there obviously is the allowance category in regulatory as well as our trust preferred securities that make up that difference.

So we spend a great deal of time, as Jimmy noted, in our strategic planning, looking at our overall capital ratios. I think we continue to build a significant amount of excess regulatory capital each quarter. We have $190 million of NOL DTA sitting there at quarter-end that will come in over the next three years, basically.

So we are building a lot of capital at the same time. I think our target levels are at these levels here, and it will continue to build and give us ample room for growth as well as M&A activity, also. So I think we are in a very good position overall on our capital structure, Matt.

I think, also, just to comment there too, Rex -- just to remind everyone: the amount of capital that we utilized back -- less than nine months ago, almost $200 million to pay off the TARP -- pay off some expensive preferred. So we've then utilizing that and certainly have been able to grow that back to a nice level.

That's helpful. Thank you. And then as far -- going back to the SBA question, you may have mentioned this and I missed it. Remind me what the average yields are within that SBA product?

They are typically floating and typically in the prime plus 1.5 to 2 range.

Okay. Thank you, guys. Great quarter.

Michael Rose, Raymond James.

Just wanted to get a sense for -- I know you guys are getting close to the 1% ROA, but as we move beyond that target, have you guys talked internally, and are you ready to share any kind of intermediate- to longer-term goals, either on the profitability front or the efficiency front that could guide us to where you think you are going, assuming rates stay where they are? Thanks.

Michael, we think about it every day, but we probably are not ready to just disclose that. Certainly the 1% is where our focus has been now for about a year and a half. That is just step one of other steps to take in place.

And I would -- you know, once again, with our strategies over the last several quarters, as we have reduced the operating expense but reinvested a great deal of that back into the revenue generation, I really believe we are more on the front end of that. Certainly, as the economy improves, that's going to be a very positive. I believe when we see rates move up will be another positive for earnings power. But yes, we think about it every day. And I'm sure once we hit the 1%, then we'll put a stake in the ground where our next step will be.

Okay. That's all I had. Thanks for taking my questions.

Jefferson Harralson, KBW.

I had one quick one and then a follow-up. The quick one is -- I think I just missed it. But what was your SBA origination this quarter?

This quarter new originations were approximately 10 million.

Okay. And this year, you guys have been investing in mortgage, SBA, the Greenville middle market, Nashville. Do you expect the pace of that investment to lessen in 2015, or is it 2015 another buildout year?

No, I would see, Jefferson, those investments continuing to grow into 2015. Certainly, the assembling of these various teams -- the traction that some had got -- some are even getting as we speak. So I feel pretty positive and pretty bullish on that going into 2015. Lynn?

I certainly agree. Our next focus really is to take the same strategy into Atlanta. We've added an ABL lender there. We've added an income property lender. We are recruiting heavily for middle-market lenders there.

So we think that's our next focus. It will take a couple or three quarters to hit in, just like this last round did. But we think this is a great model, and we plan on continuing to do this to supplement the core local banks that are also investing in new people as well.

Okay. Thanks, guys.

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

Thank you, operator. Let me just thank everyone for being on the call today, and for your questions, and certainly for your interest and support. Once again I want to recognize our team of 1,500 bankers, who every single day perform at a very, very high level, and the passion and the commitment that they always show for the Company.

Once again, thank you for being on the call. We hope everyone has 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. You may all disconnect. Everyone have a great day.