United Community Banks, Inc. — FY 2016 Form 10-K
Reporting period: Fiscal year ended December 31, 2016; fourth-quarter results are also summarized. United is a Georgia bank holding company operating primarily through United Community Bank, with 139 banking locations across Georgia, South Carolina, North Carolina and Tennessee. Tidelands Bancshares was acquired July 1, 2016; 2015 included the Palmetto and MoneyTree acquisitions, so year-over-year growth reflects both acquisitions and organic activity.
Financial performance and position
| Metric | 2016 | 2015 | Change / context |
|---|---|---|---|
| Total revenue | $404.3 million | $326.3 million | Up 24% |
| Net interest revenue | $309.8 million | $257.4 million | Up 20%; net interest margin rose to 3.36% from 3.30% |
| Fee revenue | $93.7 million | $72.5 million | Up 29%, led by mortgage fees, service charges and government-guaranteed loan sales |
| Net income / diluted EPS | $100.7 million / $1.40 | $71.6 million / $1.09 | Operating diluted EPS, a non-GAAP measure, was $1.48 versus $1.27 |
| Operating expenses | $241.3 million | $211.2 million | Up 14%; growth largely reflects acquisitions and hiring |
| Loans / deposits at year-end | $6.92 billion / $8.64 billion | $6.00 billion / $7.87 billion | Loans up 15%; deposits up 10% |
| Cash and cash equivalents | $217.3 million | $240.4 million | Down $23.0 million |
| Operating cash flow | $138.7 million | $111.9 million | Investing cash outflow was $732.3 million; financing cash inflow was $570.6 million |
| Shareholders’ equity | $1.08 billion | $1.02 billion | Up $57.5 million |
Asset quality: The allowance for loan losses was $61.4 million, or 0.89% of loans, versus $68.4 million, or 1.14%, a year earlier. United recorded a $0.8 million release of provision for credit losses, compared with $3.7 million of provision expense in 2015. Net charge-offs were $6.8 million, or 0.11% of average loans. Nonperforming assets were $29.5 million, 0.28% of assets, versus $27.5 million, 0.29%, in 2015; the increase in dollars was primarily attributed to foreclosed properties acquired with Tidelands.
Funding, debt and capital: Year-end deposits included $327.5 million of brokered deposits. Federal Home Loan Bank advances were $709.2 million and long-term debt was $175.1 million; short-term borrowings were $5.0 million. Bank regulatory capital ratios remained above well-capitalized thresholds: the Bank reported CET1 of 12.66%, total capital of 13.48% and a leverage ratio of 9.63%. The Bank’s accumulated deficit means regulator pre-approval is required for dividends to the holding company.
Q4 2016: Net income was $27.2 million and diluted EPS was $0.38, versus $18.2 million and $0.25 in Q4 2015. Revenue was $106.2 million versus $94.7 million. Net interest margin was 3.34%, unchanged year over year. No provision for credit losses was recorded, compared with $0.3 million of expense in Q4 2015.
Material changes and unusual items
- Tidelands added approximately $440 million of assets and $440 million of liabilities at acquisition; the transaction generated $10.7 million of goodwill. Its results were consolidated for the second half of 2016.
- Mortgage originations rose to $718 million from $494 million, and mortgage and related fees increased 49% to $20.3 million. Gains on sales of government-guaranteed loans were $9.5 million, up from $6.3 million.
- Reported 2016 expenses included $8.1 million of merger-related and other charges. The 2015 total was $18.0 million, including $6.0 million of property impairment. 2016 also included a $976,000 deferred-tax-asset impairment related to cancelled nonqualified stock options.
- The net deferred tax asset was $154.3 million, including $112.8 million associated with net operating loss carryforwards. Management concluded it was more likely than not that nearly all would be realized and expects NOLs to be used within three to seven years; realization depends on future taxable income.
- United repurchased 764,000 shares during 2016 under a $50 million authorization; $36.3 million remained available at year-end. Common dividends declared were $0.30 per share for 2016, up from $0.22.
Outlook, risks and contingencies
- No specific earnings or growth guidance is provided. Management estimated a 2017 effective tax rate of approximately 37.4% and stated that the company was preparing for Durbin Amendment compliance by July 1, 2017. United expects to begin required formal stress-test filings in July 2018.
- Management described continued loan growth and improving credit quality, while noting competitive pressure on loan pricing. A 100-basis-point rate increase was modeled to reduce 12-month net interest revenue by 0.39% in an immediate shock and 0.81% in a gradual ramp scenario.
- Credit exposure is concentrated in real estate: commercial real estate represented about 42% of loans, commercial construction 9.2%, and more than 76% of loans were secured by real estate. The Bank’s commercial real estate concentrations exceed regulatory guidance levels that may draw heightened scrutiny.
- Other material risks include local economic and real-estate downturns, interest-rate and funding-market changes, loan-loss-estimate uncertainty, cybersecurity and third-party service-provider failures, acquisition integration, regulatory changes and the ability to realize deferred tax assets.
- Commitments to extend credit totaled $1.54 billion and letters of credit $26.9 million. These are off-balance-sheet exposures and do not necessarily represent future cash needs. Management said pending litigation was not expected to have a material adverse effect; no material legal proceeding terminated in Q4.
- The FDIC surcharge for institutions with at least $10 billion in assets applied to United at year-end. The company also exceeded the $10 billion threshold relevant to debit-card interchange restrictions, which it expected to reduce noninterest income upon implementation.
Key facts for investors to verify
- Separate acquisition-driven growth from organic loan, deposit and fee growth, and assess integration costs and performance of Tidelands.
- Review credit trends behind the lower allowance and provision release, including foreclosed properties, commercial real estate and construction exposures, and recoveries.
- Evaluate the support for the $154.3 million deferred tax asset and management’s assumptions for future taxable income and NOL utilization.
- Confirm funding and liquidity capacity, including the maturity and cost of FHLB advances, senior debt obligations, brokered deposits and restrictions on Bank dividends.
- Assess the earnings impact of interchange-fee restrictions, higher regulatory assessments and interest-rate changes.
- Compare GAAP results with management’s non-GAAP operating measures; operating results exclude specified merger and other items and are not a substitute for GAAP measures.