United Community Banks, Inc. — 2013 Form 10-K
Reporting period: Fiscal year ended December 31, 2013; fourth-quarter results are also summarized below. United is a Georgia-based bank holding company operating community banks across Georgia, western North Carolina, east and central Tennessee, and South Carolina.
Financial performance and position
| Metric | FY 2013 | FY 2012 |
|---|---|---|
| GAAP net income | $273.1 million | $33.9 million |
| Net income available to common shareholders | $261.1 million | $21.7 million |
| Diluted earnings per share | $4.44 | $0.38 |
| Net interest revenue, taxable-equivalent | $219.6 million | $229.8 million |
| Net interest margin | 3.30% | 3.51% |
| Fee revenue | $56.6 million | $56.1 million |
| Operating expenses | $174.3 million | $186.8 million |
| Provision for credit losses | $65.5 million | $62.5 million |
| Net charge-offs | $93.7 million | $69.8 million |
| Net cash from operating activities | $191.7 million | $183.1 million |
- FY 2013 pretax income was $35.0 million. The reported net income was substantially increased by a $238.2 million income-tax benefit, primarily from reversing $272 million of the deferred-tax-asset valuation allowance in the second quarter. The year-end net deferred tax asset was $258.5 million.
- At year-end, assets were $7.43 billion, loans $4.33 billion, deposits $6.20 billion, and shareholders’ equity $795.7 million. Cash and cash equivalents were $228.9 million, down from $251.1 million a year earlier.
- Year-end funding included $53.2 million of short-term borrowings, $120.1 million of Federal Home Loan Bank advances, and $129.9 million of long-term debt. The company reported regulatory capital ratios of 12.74% Tier 1 risk-based, 13.99% total risk-based, and 9.08% leverage; the Bank was categorized as well-capitalized.
- Cash flows were $191.7 million provided by operations, $482.8 million used in investing, and $268.9 million provided by financing. Investing outflows included securities purchases and loan growth; financing inflows primarily reflected deposit growth and FHLB advances.
- Fourth-quarter 2013 net income was $15.9 million, or $0.22 per diluted share. Net interest margin was 3.26%; provision for credit losses was $3.0 million and operating expenses were $41.6 million.
Material changes and business developments
- Loans increased $154 million, or 4%, from year-end 2012. Growth included $88 million associated with Greenville and Nashville market expansion, $56 million in home-equity lending, and purchases of $202 million of indirect auto loans, partly offset by classified-loan sales.
- Core transaction deposits, excluding public funds, grew $224 million. Total deposits rose $249 million; brokered deposits increased to $424.7 million from $245.0 million.
- Credit quality improved markedly: nonperforming assets fell to $31.0 million, or 0.42% of assets, from $128.2 million, or 1.88%. Nonperforming loans declined to $26.8 million from $109.9 million. The allowance for loan losses fell to $76.8 million, or 1.77% of loans, from $107.1 million, or 2.57%.
- In the second quarter, United sold approximately $172 million of classified assets. The bulk transaction involved $130.9 million of recorded assets sold for $77.5 million, producing $53.5 million of net charge-offs. The disposition reduced legacy problem assets but contributed to higher full-year net charge-offs.
- The Bank MOU was terminated by state and federal regulators in December 2013; the holding-company MOU was terminated in January 2014. The Bank nevertheless remained subject to restrictions on dividends to United because of its accumulated deficit and required regulatory approval.
- United redeemed $75 million of Series B preferred stock in December, leaving $105 million outstanding at year-end; it redeemed the remainder on January 10, 2014. Series A preferred stock was fully redeemed in December. United also issued $40 million of 6% senior debentures and repaid $35 million of subordinated debt during 2013.
Outlook, commentary, risks, and unusual items
- Management gave no specific operating earnings or revenue guidance. It expected an approximately 37.5% tax rate in 2014 and said it expected to use net operating loss carryforwards within five to seven years. Realization of the deferred tax asset depends on future taxable earnings and remains subject to valuation-allowance reassessment and potential Section 382 ownership-change limits.
- Management described improving credit measures, loan growth, cost reduction, and the restoration of the deferred tax asset as progress against strategic goals. It also noted continuing loan-pricing competition, low reinvestment yields, fragile local economic conditions, and weaker mortgage refinancing activity as rates rose.
- Credit and concentration risks remain significant: more than 80% of loans were secured by real estate; commercial real estate was 41% of loans and residential construction was 8%. Regulators had identified the Bank’s commercial real estate concentrations as above supervisory guidance levels. The $441 million home-equity portfolio includes interest-only lines with potential payment-reset and balloon risks.
- Other key risks include interest-rate and funding-market changes, liquidity and capital access, loan-loss-estimate uncertainty, cybersecurity and third-party service-provider exposures, and the ability to realize deferred tax assets. Basel III requirements were scheduled to begin phasing in during 2015.
- United reported a $4.0 million litigation reserve established in 2012 related to threatened litigation. It also disclosed disputed Fletcher warrant and registration-failure claims and related reserves; the company denied liability. Management stated that pending legal matters were not expected to materially affect consolidated financial condition or results.
- United paid no common-stock dividends in 2013. The independent auditor issued an unqualified opinion, and management and the auditor concluded internal control over financial reporting was effective as of year-end.
Important facts for investors to verify
- How much of 2013’s reported earnings is repeatable excluding the large deferred-tax valuation-allowance reversal and the effects of classified-asset sales?
- Whether future taxable income supports realization of the $258.5 million deferred tax asset, and whether ownership changes could constrain use of tax attributes.
- Whether credit improvement persists and the allowance remains adequate after the sharp decline in nonperforming assets and the reduced reserve ratio.
- Whether real-estate concentrations, home-equity payment resets, and indirect auto-loan growth produce additional losses or regulatory constraints.
- The post-redemption capital, funding costs, liquidity, and dividend capacity, including the terms and covenants of the $50 million Synovus revolving credit facility and the status of Series D preferred-stock redemption announced for March 2014.
- The outcome and potential financial impact of Fletcher-related claims and any other litigation contingencies.