United Community Banks Inc. plans to cut back before it starts to grow in 2012.
Georgia’s biggest community bank was set to change its rugged course, landing
"Our number-one focus and top priority in 2012 must be and will be expense reduction," Jimmy Tallent, the company's president and CEO, said during a Thursday conference call. "It is imperative that we take a serious and diligent look at every single aspect of our business; every process, every location, how we do every single job, all in the name of operational efficiency and revenue growth."
Tallent assigned 75 executives to find ways to cut costs in operations and branches. He is targeting a $10 million improvement in annual results by the end of this year through cost cutting and higher fee revenue. The effort signals a shift from mid-2011 when
The company's self-described "tenacious" strategy is one that many small banks must embrace in 2012 as net interest margins compress and regulatory costs take a toll on the bottom line.
United Community is "doing what every bank in the country is going to have to do. That is, to say it as bluntly, shut branches and fire people," says Jeff Davis, an analyst at Guggenheim Securities. "Their story is more of a public action of what every institution is doing to offset an increasingly challenging revenue environment."
One of its largest investors is Corsair Capital LLC, a private equity firm that led the large recapitalization in the company in March. Observers say any bank with private equity that continues to play defense risks disappointing their new investors.
"If the earnings are there, the positive bias will remain," wrote Chris Marinac, an analyst at FIG Partners LLC, in an email. "The reason that cost reductions are so important is that investors are growing impatient, at least in my view."
Growth options are limited in Georgia, which is still muddling through an economic malaise. Observers say that investors need to be more patient with such banks.
"Most banks don't have the added challenge of being in a market that's very real estate focused," Davis says. "Their epicenter franchise is in north Georgia … so their real estate issues are slower to heal."
Most analysts are patient as the company heals.
"Like any board … of a public company, over the past few years I imagined the board of UCBI has decided that current management is the best available option for increasing shareholder value," says Brett Scheiner, an analyst at FBR Capital Markets. "Under Tallent's leadership, the company has … refilled its capital coffers. And while some credit concerns persist, he has tremendously improved the company's credit metrics."
Criticized assets are at about 65% of Tier 1 capital, says Jeff Harralson, an analyst at KBW Inc.'s Keefe, Bruyette & Woods Inc. He says management will need to cut the ratio to 50% before it can make acquisitions. "They're not able to buy banks like Corsair wants until that ratio improves," he says.
The company cut 10% its workforce before 2011 and purged more than $400 million in problem loans last year. This has appeased Corsair so far. "Corsair had made a long term investment in UCBI and is pleased with UCBI's progress" a Corsair spokesman wrote in an email Friday.
One of the company's biggest blows came earlier this month
"The DTA valuation allowance that they had to take was another black eye," says Michael Rose, an analyst at Raymond James.
Some analysts estimate that it takes five quarters of profitability before a company can recognize its deferred tax assets. It has been several years since the company has produced back-to-back quarters in the black.
If the company can sustain profits with no surprises, as management indicated on Thursday, then it may rebound in time for a consolidation wave.
"My guess is regulators don't want [them] acquiring other banks until they're clearly out of the woods," Davis says. "That will require another year of profits and reducing nonperforming assets further."
