United Community Banks Inc (UCBIO) 2015 Q1 法說會逐字稿

Good morning and welcome to United Community Banks's first-quarter earnings and merger announcement conference call. Hosting the call today are Chairman and Chief Executive Officer, Jimmy Tallent; President and Chief Operating Officer, Lynn Harton; Chief Financial Officer, Rex Schuette; and Chief Credit Officer, Rob Edwards. Also on the call are Chief Risk Officer, Brad Miller; and Director of Mergers and Acquisitions, Chris Zych.

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 first quarter, as well as the Palmetto merger announcement and investor presentation, 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 statement 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 being on the call today. Today we will cover two items: our earnings for the quarter and our announcement of a merger agreement with Palmetto Bancshares. Palmetto is what we would call the ideal partner for expansion into the upstate South Carolina market. We're extremely excited about the management, teammates, customers, and business this combination will bring to the United franchise and about the value it will bring to our shareholders. More on the merger later in my comments.

First, let's discuss our earnings and business outlook. We are off to a great start for 2015. The solid first-quarter results reflect our investments in new talent across the Company and the successful execution of our business plans to grow revenue while controlling expenses. I will begin with some highlights.

Net income was $17.7 million or $0.29 per share. Earnings per share were up 16% from a year ago. Our return on assets was 94 basis points compared with 85 basis points a year ago.

Our return on common equity was 9.3% compared to 8.6% a year ago. Total revenue excluding the provision was $73.3 million, up $7 million or 10% from a year ago.

Our margin held steady with the fourth quarter at 3.31% and was up 10 basis points from a year ago. We had strong loan production of $423 million, with net loan growth of $116 million or 10% annualized.

Our provision for credit losses was $1.8 million. Net charge-offs were $2.6 million, and our allowance ratio was 1.46%. Nonperforming assets to total assets were 26 basis points, unchanged from the fourth quarter. We had three non-core items during the first quarter. First, we repaid $6 million of an expensive structured repurchase agreement and redeemed $15.5 million in high-rate trust preferred securities. In doing so we incurred prepayment charges totaling $1 million, resulting in reduced fee revenue.

Second, we closed out our loss share agreements with the FDIC related to our 2009 acquisition of Southern Community Bank. This resulted in a charge of $690,000 in other operating expenses. And third, early in the quarter we had an opportunity to sell securities at a gain of $1.5 million. Finally, in summary, all of our capital ratios remained very strong under the new Basel III rules.

Now I'll share some details on the quarter and outlook for the remainder of 2015. As you can see on page 5 of the investor presentation, core pre-tax, pre-credit earnings were $30.5 million, down $258,000 from the fourth quarter but up $3.2 million or 10.5% from a year ago. The decrease from the fourth quarter resulted mainly from two fewer days in the first quarter, which resulted in lower net interest revenue. This was partially offset by higher fee revenue.

Our net interest margin held steady with the fourth quarter at 3.31%. It was up 10 basis points from a year ago due to balance sheet restructuring and hedging actions taken late in the second quarter of 2014. Although we held the margin flat net interest revenue decreased $715,000 from the fourth quarter, primarily due to two fewer days of interest accrual.

Strong loan growth softened the impact on net interest revenue of the two fewer days in the first quarter. We grew loans by $116 million or 10% annualized. As shown on page 7 of the investor presentation, the growth was driven by new loan production of $423 million.

Production was strong in nearly every market and category. Three-quarters of the production or $314 million was driven by our Community Banks, with a balance of $108 million from our specialized lending group. Over half of the production was in our C&I and CRE loan portfolios. In fact, these categories have been very strong for the past four quarters, reflecting our investments in talent and leadership. We are very excited about the prospects of continuing to build these businesses.

Continuing with loan growth by categories, we generated $239 million in commercial loan production and increased outstanding balances by $81 million in the first quarter. We also added $46 million in net new loans in our indirect auto loan portfolio.

We took steps as well to lower our funding costs. I mentioned earlier that we repaid the remaining $6 million balance of our structured repurchase agreement. We had been paying interest for this at a rate of 4%. I also mentioned that we redeemed $15.5 million in trust preferred securities. These carried an average interest rate of 11%. Through both of these redemptions, we incurred prepayment charges of $1 million. The good news is we will reduce our annual interest expense cost by $1.9 million.

At quarter-end our balance sheet remains asset sensitive. A 200 basis point ramp-up in interest rates over the next year is expected to improve net interest revenue by 2.6%. We still hold a large balance of floating-rate securities to assist us in managing our exposure to rising interest rates. At the end of the first quarter 32% of our investment portfolio was in floating-rate securities.

Looking forward, we expect loan pricing pressures to continue and our margin to decline slightly for the remainder of 2015. At the same time we expect loan growth to drive increases in net interest revenue going forward.

You'll find the trends on core fee revenue on page 5 of our investor presentation. First-quarter core fee revenue was $15.1 million, up $567,000 from the fourth quarter. The increase was spread among several categories: mortgage fees were up $644,000 from the fourth quarter and $1.4 million from a year ago, even though the first quarter typically is slow for the mortgage business. The increases reflect our strategic focus on mortgage growth by adding lenders in metro markets.

We closed $88 million in mortgage loans in the quarter, up from $77 million in the fourth quarter and $46 million a year ago. Production was about evenly split between home purchase mortgages and refinancing activity.

We also saw strong growth in our advisory services business. First-quarter fee revenue in this area was up approximately $375,000 or 32% from the fourth quarter and a year ago. Our growing SBA business produced $1.140 million in fee revenue from loan sales during the quarter, up $218,000 from the fourth quarter. Sales of a portion of our SBA loan production and the resulting gains in fee revenue will remain a core part of our SBA business strategy. We see momentum continuing to build throughout the year.

Other fee revenue is up $161,000 from the fourth quarter and up $554,000 from a year ago. This is mostly due to an increase in customer derivative activity as commercial customers sought to lock in low fixed rates on their loans.

I want to say how pleased I am with the growth we are seeing in fee revenue. The strategic investments that we have made over the past three years are starting to pay off. We expect these areas to continue to drive momentum going forward.

Core operating expenses are on page 5 of the investor presentation. They total $42.2 million, up $110,000 from the fourth quarter and up $3.4 million from a year ago. Most of the increase from a year ago reflects our investments in new specialized lending talent.

As I noted earlier, we had non-core expense items during the first quarter of 2015 and two during the fourth quarter of 2014 that we excluded from core earnings. These non-core items are summarized as a line item below core operating expenses on page 5 of our investor presentation.

In the first quarter, as noted earlier, the primary item was the FDIC payment of $690,000 to terminate our loss share agreements related to the 2009 acquisition of Southern Community Bank. Going forward, the closure of these agreements allows us to avoid future administrative and processing costs. More importantly, it allows us to retain the full benefit of a steady stream of recoveries on previously charged-off loans. We expect to fully recover the $690,000 within two years.

You may recall that in the fourth quarter of 2014, we recognized a charge of $492,000 for an accrued interest adjustment relating to our initial FDIC loss share filing in 2009. We also released $1.2 million of a previously established litigation reserve.

As expected, our effective tax rate for the first quarter was 37%, the same as before the fourth and the first quarters of 2014. We expect the rate to remain in this range for the rest of 2015.

And now an update on the First National Bank acquisition in Tennessee. We received all regulatory approvals and have scheduled the closing for May 1. We are very excited about this bank and bankers, under the leadership of David Allen. This will double our size in East Tennessee and provides the opportunity to capture additional growth in this dynamic market. We are pleased to welcome this team to the United family. In summary, it's been a great first quarter and a great start for the year.

Now I want to talk about our acquisition of Palmetto Bancshares. I will refer to our investor presentation and the announcement that was released earlier today. Palmetto is a high-quality franchise headquartered in Greenville, South Carolina. It was founded 108 years ago and has deep community roots, as you would expect. the Company today has $1.2 billion in assets and 25 banking locations across nine counties, primarily in the Greenville and Spartanburg MSA. Based on total assets, it is one of the largest South Carolina-based banks and the largest bank headquartered in the upstate area.

Adding Palmetto to United reflects our strategy of expanding in fast-growing, highly attractive Southeastern markets. The combination of our two Companies significantly enhances United's position in Greenville and the upstate area, where we have already invested heavily.

Lynn Harton, our President and Chief Operating Officer, is based there; as are Rob Edwards, our Chief Credit Officer; Rich Bradshaw, our President of Specialized Lending, and several other key members of our leadership team. In total United has approximately 70 bankers in the Greenville area with decades of experience in that market. Adding the exceptional presence and leadership of Palmetto will greatly strengthen our footprint, our capabilities, and our opportunity to grow our business and build shareholder value.

Speaking plainly, this is a transaction that we very much like. There is no doubt that it propels United forward several years faster than we could have done on our own and saves us millions of dollars of ongoing expense.

It is meaningfully accretive. Fully phased in for cost savings, it will provide double-digit earnings per share accretion. It will enhance our return on assets and tangible equity, and it will provide an internal rate of return north of 20%. Our capital levels will remain very strong and, importantly, the acquisition is low risk. Palmetto is located in a market we know, with people we know, with customers we know -- and where we have been able to structure the right transaction that we can feel comfortable about, with extensive due diligence and prudent conservatism in our assumptions.

On page 5 you will see that Palmetto shareholders will have the option to receive $19.25 in cash or 0.97 shares of United common stock for each share of Palmetto common stock. The cash and stock elections will ultimately be prorated to ensure a 30% cash and a 70% stock transaction. Using our 10-day average closing price as of yesterday, the implied price per share is $18.53, bringing the aggregate value to approximately $240 million, including $3 million for options. We expect a closing sometime early in the fourth quarter.

On page 6 you will see how Palmetto's footprint is contiguous to that of United, and how strongly we will add to our presence in South Carolina. The next page refers to the immediate scale that we will have in these markets and just how attractive the markets are. Companies with national or regional headquarters in the upstate include BMW, General Electric, Michelin, and several others. In fact, the upstate boasts the highest international investment per capita in the nation, with more than 375 international firms. The area is recognized for a vibrant economy that helps drive a high quality of life.

Page 8 provides an overview of Palmetto, much of which we've already discussed. We are really excited about the experienced Palmetto team -- the deep market relationships that they've earned, the comprehensive strategic plan that they have successfully executed, and the strong balance sheet that they have built.

On page 9 you'll see the loan compositions and deposits of Palmetto and United, both separately and combined. You'll notice the similarities between our loan portfolios, meaning that our lending expertise will be complementary and mutually beneficial. You'll also see the very low-cost deposit base that Palmetto brings to United, lowering our costs as well. Combined, deposits -- excluding jumbo and brokerage CDs -- will comprise 86% of our total deposit base. That's something to be proud of.

Page 10 notes that Palmetto's loan portfolio was reviewed by our credit team in addition to an independent third party, who found the underwriting to be strong and the portfolio high-quality. The estimated credit loan mark is 1.9% or $15 million, and the estimated OREO mark is 50% or $3 million. The Palmetto team has done an excellent job building sound credit quality.

Page 11 shows our key assumptions and the transaction's value-added financial impact that I discussed earlier. We expect cost savings of $15 million to be fully realized in 2016 and thereafter. These estimates are the result of a very thorough analysis that we performed in conjunction with Palmetto's management.

We also have reflected the benefit of forgone expenses totaling approximately $5 million for planned organic expansion over the next few years. Our plans included de novo branches, additional infrastructure, and office space.

We are confident that we have identified the appropriate cost synergies while preserving business growth momentum. We expect dilution of tangible book value of less than 7% -- but we expect to earn that back, including one-time merger expenses, within five years.

On page 12 we review benefits for investors, customers, and employees. For investors we have the opportunity and expectation to meaningfully enhance shareholder value through this combination. For customers, we expect a seamless transition. Both of our Companies have customer-focused cultures and high-value financial products and services. For employees, we expect high retention of customer-facing bankers and to share the value creation from the strength and focus of the combined franchise.

Bringing Palmetto's team together with ours is critical to the transition process and the long-term success of this partnership. To that end, we could not be more pleased to announce that Sam Erwin, Palmetto's Chairman, President, and CEO; as well as Lee Dixon, the Company's Chief Operating and Risk Officer, will be joining the United team in key executive leadership positions. Sam will become CEO and President of South Carolina, and Lee will become an Executive Vice President.

Let me close with the bottom line. This merger creates significant benefits for United Community Banks, including meaningful earnings per share accretion; improved profitability; attractive internal rates of return; an earnback in less than five years; an improved growth profile; and a higher franchise value.

We anticipate and expect a low-risk integration; reasonable, clearly identified cost savings; and the ability to leverage existing infrastructure and management already in the market. We are very excited about this partnership. Now we'll be glad to answer any questions.

(Operator Instructions) Jefferson Harralson, KBW.

Thanks, guys, and congratulations. I wanted to ask you about the cost savings of 39%. It seems on the high end of what we usually see for what is kind of an out-of-market deal, I guess, as far as the branch footprint goes. Can you talk about what makes it different, or what makes the 39% achievable?

Jefferson, this is Lynn. First, we went through -- as Jimmy mentioned earlier, we went through line by line, position by position with Sam and Lee, who, obviously, we highly respect; and who, as Jimmy mentioned, will be joining us; to come up with the numbers. And frankly, our number was a little less than what they thought was achievable.

If you look at Palmetto, really, the way they had positioned the Company, they had really positioned it more for growth. And it's probably got the infrastructure of a bank 2 to 2 1/2 times its size.

Appropriately, through the crisis they put a lot of money and credit, and compliance, and other areas that was the right and proper thing to do. And we did the same; it's just we don't need to do that twice.

And as Jimmy mentioned, we do have even some in-market synergies with both lease expense -- expenses that we have in Greenville that we have invested there from kind of a regional headquarters perspective that we'll also get some cost savings on our side. So we agree; at first glance it looks a little on the high side, but we are very confident in achieving those numbers.

Jefferson, I would add, too, with that, that I think given our efficiency and cost structure that we've been able to really demonstrate now over the last few years -- in addition to the reinvestment of some of those -- still having a respectable efficiency. So we're very confident that this cost saves -- they are real, they are actionable, and they will be executed.

Okay. Thanks, guys. I'll just ask for a follow-up on the SBA business. Do you have handy what -- the amount of SBA loans that you originated this quarter? And, if possible, how much you sold?

Sure. Absolutely. And we are very excited about what's going on there. So in the first quarter -- and a lot of people don't know this, but the first quarter is traditionally the slowest quarter for SBA lending. The fourth quarter is always the highest quarter. So any SBA business you look at, the first quarter is the weakest quarter.

We actually closed $27 million in the first quarter, which is slightly up; we closed about $26 million in the fourth quarter. We funded $19.3 million. We sold a gross amount of $16.4 million -- which the guaranteed portion then was $12.4 million. Our pipeline is very strong. So I couldn't really be more confident in or complementary of the SBA team, and kind of where they are at, and where they are going the rest of the year.

Okay. Thanks, guys.

Michael Rose, Raymond James.

Just going back to the cost save question, it looks like $5 million is reflective of forgone expenses related to branches you expected to build. When I think about kind of on a core basis, the sub-58% efficiency target for this year, did that contemplate the $5 million?

If I understand the question correctly, Michael, our $15 million are the 39% cost saves. That does not include what we see as the investment costs that we would have and the length of time to expand into that market. So that's not part of that number.

I guess what I'm trying to ask is: on a core basis, ex this deal, did your plan -- which called for a sub-58% efficiency ratio this year -- incorporate $5 million of de novo branch costs in the Greenville market?

Yes, it does. But keep in mind, that's a build-up over time. So it's not $5 million in 2016. So it's the plan that we had to build it out over time. So a portion of that -- call it maybe 20% in 2016, and the rest of it builds over five years. So it was not -- so that's the way we had modeled it out, and that's what we had planned to invest. Correct.

Okay. That's helpful. I appreciate that color. And then can you just talk about how this deal -- and I'm sorry if I missed it -- how this deal came together? Was it a negotiated deal? Was it a shopped transaction? Any thoughts or color there?

Well, they were represented by an investment banking firm. Honestly, we go back for the last couple of years, Michael, where Lynn and I were having conversations with the bank, and investors, and so forth.

I think it's a process that they probably have gone through over the last two or three years. One of the points that Lynn was making today: when you are $1 billion, and you are positioned to be a $3 billion bank, you have a pretty sizable infrastructure cost. And to grow their earnings at the rate that I know was their desire is a challenge.

So I think that there's a combination of a number of things, that being one. The merger with United is what we believe to be the perfect marriage from all the reasons we already discussed. And I think they just felt it was time to explore that opportunity.

I might add, certainly it was competitive. This is one of the most attractive franchises in the state, so as you can imagine, it would have been competitive. But I know -- I believe from both Boards' perspective -- I know from our Board's perspective, our combination was clearly viewed as the most strategically attractive for all the reasons that Jimmy indicated.

You know, at the end of the day, we've got a transaction the makes us more profitable; it lets us grow faster; it positions us as a company, in conjunction with our strategy, as a more metropolitan franchise; and earns returns significantly in excess of our cost of capital. So I think that's what both Boards looked at and believed in.

Okay. That's helpful. And then just one final question as it relates to both the mortgage and the SBA business -- obviously, both had good quarters. Have you continued to add to that? And maybe what's the outlook from an expense perspective in adding staff in those areas or other areas going forward? Thanks.

Sure. On the SBA side we are pretty much fully staffed now. And so from here on out it's really ramping up more the revenue side than the expense side.

On the mortgage side we are still recruiting, but with the -- frankly, the new mortgage loan officers, and new training tools and new marketing that we put in place, we are actually ahead of where we expected to be in production with a fewer number of originators. So we think we've got room if we want to continue to add in that business.

Okay. Great. Thanks for taking my questions.

Kevin Fitzsimmons, Hovde Group.

Just a couple quick questions. Jimmy, can you talk a little bit about -- I think we talked a little bit about this last call with you, but with that pending deal, and now this is a larger deal, can you just us give a sense for -- because you guys had been out of the M&A game for quite some time; and then you took the first step with a smaller deal, and now one coming in while it's still pending.

Just gives a sense that you've touched base with the regulators. And obviously, I'm sure you are very comfortable or they are very comfortable with where you guys are in the process. And then if you can dovetail into the whole $10 billion asset threshold question, because I think bolting all this together is going to put you over $9 billion, and how you view that threshold? Thanks.

Sure, Kevin. Thanks for the question. Yes, certainly we meet with our regulator on a very regular basis, giving them updates about the Company: our views of potential M&A, our strategic vision, all of those kind of things. Certainly this transaction was discussed with our regulators, really, some time ago.

You do bring up a really good point on the fact that First National Bank in Tennessee -- we closed it May 1. We have the conversion schedule into July. And Palmetto would be scheduled to close, we believe, in early fourth quarter.

What you'll see today is a self-imposed -- I should say self-imposed timeout, because these are two important transactions. We want to be 100% focused on the execution of these. Of course, the Palmetto -- we have senior management there on the ground, but also their senior management there as well. We want that to be integrated and all of those things to perfection.

In regards to the $10 billion mark, let me just ask Brad, our Chief Risk Officer, if you would, to address that -- Brad?

Sure, Jimmy. As we've set out in our strategic plan, we've incrementally increased the staff in the necessary areas as we approached $10 billion -- specifically in the areas of BSA, compliance, risk management. We expect to add an additional 7 to 10 members to the staff, most of which had already been budgeted for this year.

We've already been running DFAST stress tests for the last two years. And we have some flexibility in our securities portfolio to maintain our size under $10 billion. And we'll, of course, be mindful of the timing and the size of any transaction that would put us over the $10 billion mark to maximize our Durbin interchange fees.

So basically we have been staffing up for some time for the $10 billion.

This is Lynn. Just to add some color to that, some of the key areas that we have been focused on -- so, for example, compliance -- if you look at our 2015 budget versus 2013 actuals, we are up 23%. We are up 31% in credit and risk. We are up 50% in treasury function.

Those are some of the key areas that you need to invest in in order to go over the $10 billion. But we are not sitting here saying that we have all of it, but that's a scoping of some of the investments we've already made. The rest of the things we've got in our strategic plan, as Brad laid out. So we know that it's there, and we want to be ready for it.

Just as a quick follow-up, Lynn, can you touch base on just loan growth -- what loan growth looks like in that Greenville market? Because I cover Palmetto, and the one thing -- they've done a great job overhauling the bank and cleaning it up; but the one thing that's been the problem over the last several quarters is just growing the loan book. And a big part of that, as I understood it, was just that it was so competitive that -- paydowns were always such a big headwind for them, that you always had such a high hurdle to put net positive loan growth.

So is it that competitive? Are you guys in a different ballpark from what they were doing in terms of loan growth? Thanks.

Sure, great question. First of all, it is very competitive. It's certainly no more competitive than Atlanta, or Savannah, or Knoxville, and all those other places that we are competing in and winning.

I think a couple of things as I've gotten to know the team even better there. Number one, some of their paydowns had been similar, frankly, to some of our historic paydowns that are now lessening. And they are changing the mix of their book of business. So some of their higher-risk credits that previous management had been involved with -- those were some of the biggest paydowns they've got, and then they are nearing the end of that piece.

Secondly, I've been really impressed with the team they have brought in over the last year on the lending side. And it takes a little while for those to gain traction. So we went through their pipelines, we've seen their first-quarter results, and we really feel confident that they are gaining traction.

Of course, we also do have slightly higher lending limits that will be additive to their team. Most of the team they've brought on had come from larger banks, and they've been a bit hampered on the lending -- on the size capacity. We bring products -- asset-based lending, for example, that they have teammates that are familiar with and just haven't been able to fully utilize that product.

And then, as Jimmy mentioned, the joint presence of leadership. And Sam and I have been knocking heads against each other. We think that gives us a little -- if we call jointly on some, we think that gives us a little extra that's not baked into the deal. So one way of answering -- saying it is competitive, but their momentum is building, and we're confident in that.

There's another component of that, too, that, Lynn, you may want to comment on -- that with our combined presence and really the opportunity to even bring additional lenders on board.

Yes, that's very true. That is something we have not put in the numbers, but we do know that a number of very high-quality lenders that either we have worked with before or know well that, frankly, need a larger platform because of the scope of their business to operate in. And we are pretty confident, based on inbound calls that we have already been getting, that we can attract some of those -- a good number of those, potentially -- into what we think now is the best lending platform in the upstate. So that's not in our numbers, but we are also excited about that.

Okay. Thank you very much, guys.

Christopher Marinac, FIG Partners.

Thanks. I was curious -- I guess pro forma for the two acquisitions here, Jimmy and Rex -- what do you think you will do with the loan-to-deposit ratio? Will we kind of seek to move that up from sort of 75% to 80%-plus? And is that a source of future earnings as 2015 develops?

Yes, Chris. I would agree. I think they have an exceptionally strong core deposit base -- again, with their low deposit rate on top of it. So I think we will benefit from that.

As Jimmy indicated, again, hoping to close sometime by early fourth quarter. I think it does give us an opportunity, as we continue to build loans, as Lynn just indicated. I think there some opportunity for us there to continue to grow.

So I think the mix will continue to see increase and, again, more focused on the core deposit base that they have also combined with our base. And you see in our base, we have had excellent core deposit this quarter: a little over $200 million of core deposit growth, over half of that in DDA, more than funding our loan growth at the same time. So I think we feel very comfortable where we are at -- and, again, trying to utilize our core deposit base for future growth.

Okay. Great. And just one point of clarification -- when you look at cash flows of the portfolio and the accretable yield, as you get to those decisions in the future, is any of that embedded in the payback period and accretion numbers that we see in today's presentation?

Are you looking at the purchase adjustments that we would have with Palmetto?

Correct.

We've already looked at the preliminary numbers on that. And I don't think it will be a significant number for accretion versus the non-accretable discount we have looked at already. But there will be a little bit of accretion coming in. But I don't think it will be a material number, Chris, in a number that's not a pro forma.

But even which, it's not part of what you are laying out, you'd say?

If you could repeat that -- I didn't hear you.

It's not included in what we are seeing on this accretion?

Yes. Right. It's not included right now. That's incremental.

Got it. I just wanted to clarify that question. A final follow-up, just back to the earnings from this quarter: when you look at the loan growth in the loan five categories you laid out to us, will the mix on particularly the specialty side be the same as this year develops? Or will we see that perhaps being less in other traditional areas, catching up as second and third quarter come to fruition?

So if you look at production on slide 7, we are seeing solid increases in production across -- if you take out South Carolina, which includes the specialized lending, it's up 21%. And we see continuing momentum there.

You may recall, last quarter we announced an additional region or LPO in Atlanta. What's not in here is the FNB team, who -- as Jimmy mentioned earlier -- we are very impressed with, and the more time we spend with them, we are more impressed with.

So we feel good about the traditional markets, if you will, continuing to pick up. And if you look at the production, by far the majority of it is coming out of the traditional markets.

Now, we don't foresee the specialized lending slowing. We think it will continue at its current pace. It's not going to continue at the current growth rate that it's at. If you look at a year ago, doubling -- we are not going to continue to double it. But it will continue at this kind of production rate that we're at today.

Great. Thanks, Lynn. Appreciate it.

Nancy Bush, NAB Research.

A couple of questions. Did you disclose the restructuring costs?

Chris?

Restructuring costs in this deal -- should see it in the package -- is about $20 million.

Okay. And that's slanted primarily toward what?

There's certainly -- in terms of the breakout?

Right.

It's mainly, if you want to put it in two larger categories, or three larger categories, maybe -- it's professional fees, as you would imagine. We have a certain amount that we have built in for the employment side.

There's contracts certainly in place there that we are settling. And then DP is a large chunk of that. It's probably 20% of that number in terms of the contract terminations and so forth that we'll be having to settle.

Okay. And also I go back to this 39% of their base that you anticipate saving. I think that was question number one. That would certainly anticipate, or it would seem to me, that it's more than HR; it's more than back-office, etc. Are there additional things in there that I'm missing?

Nancy -- again, Chris -- you've hit it right on the head. It's basically going to be a lot of operational redundancies that we've identified there. And you're right; it's just their basic operations and DP. Those are the two main components of it. You can probably call that two-thirds of it there within that piece. And the rest is somewhat choppy, honestly.

Okay. And then just one final question: I think you said that the IRR would exceed 20%. Can you tell me how you or what you think your internal cost of capital is -- how you figure it, and where is it?

You're right. We did disclose greater than 20%. Our internal cost of capital is around 9%.

Okay. Thanks very much.

Jennifer Demba, SunTrust Robinson Humphrey.

Hello, this is Michael Young in for Jennifer. I just had a quick question as it pertains to crossing the $10 billion asset threshold: have you done any preliminary work around what that will mean from a Durbin Amendment perspective in terms of your fee income?

Yes, we have. Brad?

Yes, Mike. Right now, looking at our numbers, we think it would be about a $6 million to $7 million impact. Of course, it's a number that can change. And it's a number that we'll stay closely on top of as we near $10 billion.

Okay. Perfect. Are there any offsets to that? Any programs or anything that you could implement, or is it just too early for that?

It's probably a little early on that, Mike. But certainly crossing over the $10 billion mark -- that's got to be part of the cost that you would include in the transaction to make sure that all the numbers lined up and it became accretive to our shareholders. I'm not sure there's a way of lessening that in any meaningful way.

Okay. Thanks.

Thank you. I'm 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. Once again, thank you all for being on the call. Thank you for your interest in United Community Banks. I'm very proud of our people and what they have accomplished this quarter.

We're very excited about our partnering with Palmetto Bank. I'm very proud about where United Community Bank is today. Thanks again, and I hope you have a great day.

Ladies and gentlemen, this concludes today's conference. Thanks for your participation. Have a wonderful day.