United Community Banks, Inc. — Q1 2013 Form 10-Q
Reporting period: Three months ended March 31, 2013. The interim financial statements are unaudited. Unless noted otherwise, amounts below are U.S. dollars.
Business context and results
United is a Georgia-based bank holding company operating through United Community Bank, with 27 community banks across Georgia, western North Carolina, east Tennessee and South Carolina. At quarter-end, it reported $6.85 billion in assets, $4.19 billion in loans and $6.03 billion in deposits.
- Profit: Net income was $11.8 million, versus $11.5 million a year earlier. Net income available to common shareholders was $8.7 million; diluted EPS was $0.15, unchanged year over year.
- Revenue and margins: GAAP total revenue was $56.1 million, down 5% from $58.8 million. Net interest revenue was $54.3 million, down 7%; net interest margin fell to 3.38% from 3.53%. Net interest revenue on a taxable-equivalent basis was $54.7 million.
- Credit costs: Provision for loan losses was $11.0 million, compared with $15.0 million. Net charge-offs were $12.4 million versus $15.9 million; the annualized net charge-off rate declined to 1.21% from 1.55%.
- Expenses and operating measures: Operating expenses decreased 7% to $43.8 million. Efficiency ratio was 64.97%, compared with 63.31%; return on assets was 0.70% versus 0.66%, and return on equity was 8.51% versus 8.78%.
- Cash flow: Operating activities provided $53.6 million; investing activities used $88.4 million; financing activities provided $30.7 million. Cash and cash equivalents ended the quarter at $247.0 million, down $4.1 million from year-end 2012.
- Balance sheet and funding: Total assets rose from $6.80 billion at December 31, 2012, but were down from $7.17 billion a year earlier. Deposits were $6.03 billion; long-term debt was $124.8 million, short-term borrowings $52.0 million, and FHLB advances $0.1 million. Shareholders’ equity was $592.2 million.
- Capital and liquidity: Consolidated Tier 1 and total risk-based capital ratios were 14.31% and 15.87%; the bank’s were 14.72% and 15.98%. Management said liquidity was sufficient and reported capacity for additional FHLB advances of $1.35 billion and Federal Reserve discount-window borrowing of $617 million, subject to applicable conditions.
Material changes and asset quality
- Lower loan and securities yields, plus lower average interest-earning assets, reduced net interest revenue. Lower funding costs partially offset the decline: the average cost of interest-bearing liabilities fell to 0.61% from 0.85%.
- Fee revenue fell 17% to $12.8 million, primarily because prior-year other income included $1.10 million of interest on a federal tax refund and a $728,000 gain on low-income housing tax credits. Mortgage-related fees increased 26%.
- Management attributed lower expenses partly to cost reductions and fewer employees: headcount fell by 167 year over year to 1,540. Foreclosed-property expenses also declined.
- Nonperforming assets, excluding FDIC-covered assets, declined to $112.7 million from $161.6 million a year earlier; nonperforming loans were $96.0 million versus $129.7 million. The allowance for loan losses was $105.8 million, or 2.52% of loans, compared with $113.6 million, or 2.75%, a year earlier.
- Credit quality improved overall, but performing substandard loans increased to $271.7 million from $261.9 million at year-end. More than 85% of loans are secured by real estate, making the portfolio sensitive to real-estate conditions.
- Core deposits increased year over year, including noninterest-bearing demand deposits, while non-brokered time deposits declined. Brokered deposits increased to $332.2 million from $167.5 million a year earlier.
Outlook, risks and unusual items
- The filing provides no specific earnings or revenue guidance. Management described improving credit trends and continued efforts to manage loan and deposit pricing, costs and liquidity; results for the quarter are not necessarily indicative of full-year results.
- United maintained a full valuation allowance against its net deferred tax assets—$271 million at March 31, 2013—and reported no net deferred tax asset. Management cited historical losses as significant negative evidence, while noting recent profitability and asset-quality improvements as positive evidence.
- The bank remained subject to an informal regulatory MOU requiring minimum Tier 1 leverage of 8% and total risk-based capital of 10%, and regulatory consent before paying cash dividends to the parent. The holding company’s MOU restricts additional debt, dividends and certain payments or repurchases without prior Federal Reserve approval. Management stated it believed both entities were in compliance.
- The Treasury sold its 180,000 Series B preferred shares to third-party investors; United received no proceeds and the preferred terms were unchanged. The dividend rate increases from 5% to 9% effective December 15, 2013, with the higher rate commencing with the February 2014 payment.
- Principal disclosed risks include credit losses and real-estate concentrations, interest-rate and funding changes, liquidity and capital access, profitability, realization of tax assets, regulatory actions, litigation, and local economic conditions. The filing reported no material change in previously disclosed risk factors and no pending or threatened legal matter expected by management to materially affect results or financial condition.
Most important facts for investors to verify
- Whether lower asset yields and net interest margin continue to pressure earnings, and whether funding-cost reductions can offset that pressure.
- Whether improving nonperforming assets and charge-offs persist, particularly given the increase in performing substandard loans and the real-estate concentration.
- Deposit mix and reliance on brokered deposits, alongside the availability and conditions of disclosed borrowing capacity.
- Regulatory MOU compliance and any impact on capital distributions, funding or operations; also the Series B preferred dividend step-up and its effect on common shareholders.
- Any change in the full deferred-tax-asset valuation allowance, which depends on management’s assessment of positive and negative evidence.