United Community Banks, Inc. (NasdaqGS:UCBI - News) today announced diluted earnings per share of 46 cents for the third quarter of 2007, a 10 percent increase from 42 cents a year ago. Total revenue on a taxable equivalent basis was $83.6 million for the quarter compared with $69.3 million for the third quarter of 2006, a 21 percent increase. Net income for the third quarter of 2007 was $22.5 million, compared with $17.4 million for the same period of 2006, up 29 percent. Return on tangible equity was 17.54 percent and return on assets was 1.11 percent for the third quarter, compared with 17.29 percent and 1.09 percent a year ago, respectively.
"We are pleased to report solid year-over-year performance, especially as the slow down in the residential real estate market makes this a challenging time for community banks," said Jimmy Tallent, president and chief executive officer. "We will continue to face challenges in the quarters to come; however, we are well-prepared to overcome obstacles that may come our way."
For the first nine months, diluted operating earnings per share increased 11 percent to $1.36 compared with $1.22 for the first nine months of 2006. Year-to-date taxable equivalent operating revenue increased 20 percent to $240.2 million versus $200.3 million for 2006. Net operating income for the first nine months of 2007 was $63.0 million, up 25 percent, compared with $50.4 million for 2006. Earnings measures for the first nine months of 2007 are presented on an operating basis that excludes a second quarter $15 million special provision for loan losses relating to two failed residential real estate developments near Spruce Pine, North Carolina. Because this provision was the result of a fraud-related matter that is considered an isolated and non-recurring event, management believes the presentation of operating earnings is useful for understanding underlying core earnings trends.
Loans increased by $987 million, or 20 percent, from a year ago. This increase included $267 million from the Southern National Bank acquisition in December 2006 and $534 million from the First Bank of the South acquisition in June 2007. Excluding acquired loans, core loan growth was 4 percent for the past 12 months and down slightly from the second quarter. "We have seen a softening in residential construction loans and the housing markets, particularly in the Atlanta region," Tallent said. "Last quarter, we targeted loan growth for the remainder of 2007 to be in the range of 4 to 8 percent annualized. Given the uncertainties and slow down in the housing market, we expect that loan growth during the fourth quarter will be below our targeted range."
Deposits increased $845 million, or 16 percent, from a year ago due to acquisitions. "Total deposits, excluding acquired deposits, decreased by less than $50 million from the prior year due to our banks intentionally letting non-relationship time deposits run off as loan demand declined," commented Tallent. "Excluding these time deposits, our customer deposits were up about $192 million from the prior year and down $41 million from the second quarter. We believe this is temporary. The number of customer relationships continue to increase and our customer satisfaction scores remain above 90 percent and at historical highs."
United added its 111th banking office during the third quarter with the opening of a third location in Savannah, Georgia. "We have slowed our expansion efforts from previous levels as we monitor loan growth trends in our markets," commented Tallent.
For the third quarter of 2007, taxable equivalent net interest revenue of $71.7 million reflected an increase of $10.8 million, or 18 percent, from the third quarter of 2006. The year-to-date increase was $29.4 million, or 17 percent, compared to the first nine months of 2006. Taxable equivalent net interest margin was 3.89 percent for the third quarter, compared with 3.94 percent for the second quarter of 2007 and 4.07 percent for the third quarter of 2006. "Consistent with the industry, our net interest margin continues to be under pressure due to the inverted interest rate curve and competitive pricing," stated Tallent. "The decrease over the past two quarters was primarily due to the higher level of non-accrual loans and a slight change in the mix of earning assets."
The third quarter provision for loan losses was $3.7 million. Net charge-offs were $5.2 million compared with $2.1 million for the second quarter and $1.3 million a year ago. Annualized net charge-offs to average loans was 35 basis points for the third quarter compared to 15 basis points for the second quarter and 11 basis points for the third quarter of 2006. "Two thirds of the charge-offs this quarter related to two credits that we actively worked to move out of the bank," Tallent said. "One of the credits was sold prior to quarter-end and the other is under contract for sale in the fourth quarter. We are adequately reserved to handle this level of charge-offs and will continue to aggressively move non-performing credits off of our balance sheet."
At quarter-end, non-performing assets totaled $63.3 million, including $23.6 million of fraud-related loans associated with the Spruce Pine developments. Excluding Spruce Pine loans, non-performing assets were $39.8 million, compared with $20.0 million at June 30, 2007 and $9.3 million a year ago. Excluding the Spruce Pine loans, non-performing assets as a percentage of total assets was 49 basis points at quarter-end compared with 25 basis points at June 30, 2007 and 14 basis points at September 30, 2006. The Spruce Pine non-performing assets as a percentage of total assets was 29 basis points. "We continued negotiations with borrowers during the third quarter and have been in contact with all of the borrowers or their counsel," commented Tallent. "We have not taken any charge-offs on these loans; however, we expect to begin the foreclosure process in the fourth quarter, as necessary, if ongoing negotiations fail to produce an acceptable outcome. We continue to believe that the $15 million special provision last quarter will be adequate."
"Non-performing assets, until recently, were at unsustainably low levels and at the lower end of our historic 20 to 35 basis point range," Tallent said. "During this quarter, excluding the Spruce Pine loans, non-performing assets increased above this range to 49 basis points. Most of the rise was construction-related due to softening in the market. Overall, our credit quality this quarter is a reflection of the current environment. Our markets are affected by the slow down in housing and construction and we continue to see a buildup of lot inventory in the Atlanta region and a standstill in new construction lending. Although we don't know the length of this current cycle, it may be several quarters before we return to our historical range of non-performing assets. Even with the rise in non-performers, our credit quality ratios compare favorably to our peers and we have an experienced team to handle these issues."
Fee revenue of $15.6 million for the third quarter reflected an increase of $3.5 million, or 29 percent, from $12.1 million for the third quarter of 2006. Service charges and fees on deposit accounts of $7.9 million increased $941,000, or 14 percent, from the third quarter of 2006 due to growth in transactions and new accounts and higher ATM and debit card usage. Consulting fees increased $341,000 to $2.4 million, 17 percent from a year ago and a record quarter, reflecting strong growth in the advisory services practice. Other fee revenue of $2.1 million included $720,000 of earnings from bank-owned life insurance that was added in the second quarter of 2007.
Operating expenses of $48.2 million reflected an increase of $6.7 million, or 16 percent, from the third quarter of 2006. Salaries and employee benefit costs totaled $29.7 million, which was $3.6 million, or 14 percent, higher than the third quarter of 2006. Acquisitions accounted for approximately $2 million of the increase, with the rest primarily due to staffing new banking office locations. Professional fees increased $982,000 to $1.9 million, reflecting higher fees associated with corporate initiatives, loan work-outs and foreclosures. Occupancy expense increased $672,000 to $3.6 million attributable to the higher costs of operating additional banking offices. Other expenses of $5.2 million were $1.4 million higher than a year ago; half of this increase was due to higher FDIC insurance premiums beginning in the third quarter of 2007 and the balance was primarily from acquisitions and new banking offices.
"Our operating efficiency ratio of 55.3 percent for the quarter was better than our long-term efficiency target range of 56 to 58 percent," Tallent said. "This ratio shows that despite the environmental difficulties, we have been able to maintain disciplined expense controls."
"Last quarter, the Board of Directors increased the level of our stock purchase program to 2 million shares," noted Tallent. "During the third quarter, we purchased 1.3 million shares at an average cost of $24.43. With our stock price at its current level and slower balance sheet growth, we believe that purchasing our stock is an attractive use of capital. Therefore, the Board has authorized an increase in the stock purchase program to 3 million shares through December 2008. We will continue to monitor our stock price and purchase shares to demonstrate our commitment to enhancing shareholder value."
"We remain committed to building long-term shareholder value through our ability to deliver strong growth in earnings per share, to expand the franchise and to provide superior customer service," said Tallent. "With the continued slower pace of loan growth, the outlook for the full year of 2007 is for operating earnings per share growth of 9 to 11 percent."
"Although these are very challenging times for financial institutions, every economic cycle is temporary," stated Tallent. "At the same time, we recognize that our outlook for 2008 will be tempered by the slower pace of loan growth. We will provide an update to this outlook with our year-end results during the January conference call. The current conditions in the banking industry and our overall performance confirm that our operating model works and will enable us to manage through this cycle. The structure, principles and philosophies that brought us to where we are today remain in place. We are always committed to the unparalleled service that our customers have come to expect from us."
United Community Banks will hold a conference call on Tuesday, October 23, 2007, at 11 a.m. ET to discuss the contents of this news release, as well as business highlights for the quarter and the financial outlook for 2007. The telephone number for the conference call is (866) 202-3109 and the pass code is "UCBI." The conference call will also be available by web cast within the Investor Relations section of the company's web site at www.ucbi.com.
About United Community Banks, Inc.
Headquartered in Blairsville, United Community Banks is the third-largest bank holding company in Georgia. United Community Banks has assets of $8.2 billion and operates 27 community banks with 111 banking offices located throughout north Georgia, the Atlanta region, coastal Georgia, western North Carolina and east Tennessee. The company specializes in providing personalized community banking services to individuals and small to mid-size businesses. United Community Banks also offers the convenience of 24-hour access through a network of ATMs, telephone and on-line banking. United Community Banks common stock is listed on the Nasdaq Global Select Market under the symbol UCBI. Additional information may be found at the company's web site at www.ucbi.com.
This news release contains forward-looking statements, as defined by Federal Securities Laws, including statements about financial outlook and business environment. These statements are provided to assist in the understanding of future financial performance and such performance involves risks and uncertainties that may cause actual results to differ materially from those in such statements. Any such statements are based on current expectations and involve a number of risks and uncertainties. For a discussion of some factors that may cause such forward-looking statements to differ materially from actual results, please refer to the section entitled "Forward Looking Statements" on page 4 of United Community Banks, Inc.'s annual report filed on Form 10-K with the Securities and Exchange Commission.