Business Context and Reporting Period
Company: United Community Banks, Inc. (United)
Reporting Period: Fiscal Year Ended December 31, 2009
Business Overview: United is a bank holding company operating 27 community banks across 107 locations in Georgia, North Carolina, and Tennessee. The company focuses on retail and corporate banking, mortgage lending, and financial consulting. In June 2009, United acquired substantially all assets and liabilities of Southern Community Bank (SCB) from the FDIC in a transaction that resulted in an $11.4 million gain.
Key Financial Metrics
| Metric | 2009 | 2008 |
|---|---|---|
| Net Interest Revenue (Taxable Equivalent) | $245.2 million | $238.7 million |
| Provision for Loan Losses | $310.0 million | $184.0 million |
| Net Operating Loss | $(138.6) million | $(63.5) million |
| Net Loss (GAAP) | $(228.3) million | $(63.5) million |
| Diluted Loss Per Share (GAAP) | $(3.95) | $(1.35) |
| Total Assets (Year-End) | $8.0 billion | $8.6 billion |
| Total Loans (Year-End) | $5.2 billion | $5.7 billion |
| Total Deposits (Year-End) | $6.6 billion | $7.0 billion |
| Shareholders' Equity (Year-End) | $962.3 million | $989.4 million |
| Net Interest Margin | 3.29% | 3.18% |
| Return on Assets | (2.76%) | (0.76%) |
| Return on Equity | (34.40%) | (7.82%) |
Material Changes vs. Prior Period
- Significant Losses: The company reported a GAAP net loss of $228.3 million in 2009, compared to $63.5 million in 2008. This deterioration was driven by a $310 million provision for loan losses (up from $184 million) and $95 million in non-cash goodwill impairment charges.
- Asset Quality Deterioration: Non-performing assets (NPAs) rose to $384.9 million (4.81% of total assets) from $250.5 million (2.92%) in 2008. Net charge-offs increased to $276.7 million from $151.2 million.
- Portfolio Reduction: Total loans decreased by $553 million (10%) as management actively reduced exposure to residential construction loans, which fell from 26% to 20% of the portfolio.
- Capital Actions: In Q3 2009, United issued 44.5 million shares of common stock for $211.1 million to bolster capital. The company also participated in the TARP Capital Purchase Program in 2008, issuing Series B Preferred Stock.
- Acquisition Gain: The acquisition of SCB in Q2 2009 generated a $11.4 million gain, partially offsetting operating losses.
Guidance, Outlook, Risks, and Unusual Items
- Unusual Items: The 2009 results included a $95 million goodwill impairment charge (split between Q1 and Q3) and $2.9 million in severance costs. These were excluded from the company's "operating" loss metric of $138.6 million.
- Regulatory Risks: The FDIC examiners preliminarily indicated an expectation to enter into an informal memorandum of understanding with the bank due to capital and classified loan levels. The company is subject to restrictions on dividends and capital distributions under TARP and Federal Reserve resolutions.
- Outlook: Management expects continued elevated levels of non-performing assets and substantial charge-offs in 2010 due to the ongoing recession and weak housing markets, particularly in the Atlanta MSA.
- Key Risks: Concentrations in residential construction (20% of loans) and commercial real estate (34% of loans) pose significant risks. The company faces potential further goodwill impairment if economic conditions or stock prices deteriorate further.
Important Facts for Investor Verification
- Allowance Adequacy: Verify the sufficiency of the $155.6 million allowance for loan losses (3.02% of loans) against the rising trend of net charge-offs (5.03% of average loans) and the specific exposure to residential construction in the Atlanta market.
- Regulatory Status: Confirm the final status of the FDIC examination and whether a formal Memorandum of Understanding (MOU) or enforcement action has been issued, which could restrict business operations.
- Capital Ratios: Verify that the company remains "well-capitalized" under regulatory guidelines (Tier 1 risk-based capital ratio of 12.41% and leverage ratio of 8.50% as of year-end) despite the net loss.
- Goodwill Impairment: Assess the sensitivity of the remaining goodwill balance ($210.6 million) to further declines in stock price or earnings forecasts, given the $95 million impairment already taken in 2009.
- TARP Restrictions: Review the specific covenants attached to the Series B Preferred Stock issued to the Treasury, including dividend restrictions and executive compensation limits.