Business context and reporting period
United Community Banks, Inc. is a Georgia-based bank holding company operating primarily through United Community Bank, with 27 community banks across Georgia, North Carolina, Tennessee and South Carolina. This unaudited Form 10-Q covers the quarter and nine months ended September 30, 2013. Unless otherwise noted, dollar amounts below are in millions.
Financial performance and condition
| Metric | Q3 2013 | Q3 2012 | Nine months 2013 | Nine months 2012 |
|---|---|---|---|---|
| Net interest revenue, GAAP | $54.0 | $57.0 | $162.5 | $171.8 |
| Net interest margin, taxable-equivalent | 3.26% | 3.60% | 3.32% | 3.52% |
| Provision for loan losses | $3.0 | $15.5 | $62.5 | $48.5 |
| Fee revenue | $14.1 | $13.8 | $43.3 | $42.0 |
| Operating expenses | $40.1 | $44.8 | $132.7 | $136.0 |
| Net income | $15.5 | $10.6 | $257.2 | $28.6 |
| Diluted earnings per common share | $0.21 | $0.13 | $4.24 | $0.34 |
- Quarter: Total GAAP revenue was $65.1, up from $55.2 a year earlier. Net income available to common shareholders was $12.4; preferred dividends and discount accretion were $3.1.
- Nine-month earnings are substantially tax-driven: The $257.2 net income includes a $246.7 income tax benefit, principally reflecting reversal of a $272 million deferred-tax-asset valuation allowance in Q2. The filing cautions that interim results are not necessarily indicative of full-year results.
- Balance sheet at September 30: Assets were $7.24 billion; loans, net of allowance, $4.19 billion; deposits $6.11 billion; shareholders’ equity $852 million; and cash and cash equivalents $264 million.
- Credit reserve and asset quality: The allowance for loan losses was $80.4 million, or 1.88% of loans, versus $107.6 million, or 2.60%, at September 30, 2012. Nine-month net charge-offs were $89.3 million, compared with $55.3 million a year earlier. Nonperforming assets fell to $30.6 million (0.42% of assets) from $142.0 million (2.12%) a year earlier; the filing excludes FDIC-covered assets from these measures.
- Cash flow: Nine-month operating cash flow was $162.3 million; investing activities used $288.3 million; financing activities provided $138.9 million. Cash increased $13.0 million from year-end 2012.
- Debt and liquidity: Long-term debt was $129.9 million, including $40 million of new 6% senior notes; short-term borrowings were $53.8 million and FHLB advances $0.1 million. The company reported $1.11 billion of additional FHLB advance capacity and $599 million of Federal Reserve discount-window capacity, subject to qualifying collateral and applicable requirements.
- Capital: Consolidated Tier 1 risk-based, total risk-based and leverage ratios were 14.21%, 15.47% and 10.03%, respectively. The Bank’s corresponding ratios were 14.48%, 15.74% and 10.17%.
Material changes versus prior comparable periods
- Q3 net income rose to $15.5 million from $10.6 million, while net interest revenue declined 5% and net interest margin fell 34 basis points. Management attributed margin pressure primarily to competitive loan pricing, low introductory rates and reinvestment of maturing securities at lower yields; lower funding costs provided only a partial offset.
- Year-to-date net income rose sharply from $28.6 million to $257.2 million, mainly because of the deferred tax benefit. This is not a comparable indication of underlying operating earnings; nine-month pretax income was $10.5 million versus $29.2 million in 2012.
- In Q2, United accelerated sales of classified loans and foreclosed assets to resolve legacy credit issues. A bulk sale had $130.9 million of recorded assets, $77.5 million of proceeds and $53.5 million of net charge-offs. The sales helped reduce nonperforming assets and classified loans but contributed to higher year-to-date provisions and charge-offs.
- Loans grew 3% year over year to $4.27 billion. Growth in residential mortgages and consumer installment loans (including indirect auto loans) offset declines in commercial and construction lending. Deposits increased 5% year over year; core transaction deposits grew while time deposits declined, and brokered deposits increased to $419 million.
- United issued $40 million of 6% senior notes and used the proceeds to redeem $35 million of 7.5% subordinated notes. It also received $19.4 million from warrant exercises. Shareholders’ equity increased from $581.4 million at December 31, 2012 to $852.2 million.
Outlook, management commentary and risks
- Management reported continued credit-quality improvement and expects charge-offs to decline, while acknowledging that allowance estimates depend on judgments about credit quality, collateral and economic conditions.
- Management expected an effective tax rate of approximately 35.25% for the remainder of 2013, estimated NOL utilization within five to seven years, and expected to exit its three-year cumulative loss position in Q1 2014. These expectations depend on future taxable income; the company warned that weaker-than-forecast results could require a renewed valuation allowance with a material adverse effect.
- The Bank and holding company remained subject to informal memorandums of understanding with regulators. These impose capital requirements and restrictions, including limits on dividends, additional debt and certain payments without regulatory approval. Management stated it believed the entities were in compliance.
- Key risks include interest-rate and funding-cost changes, real-estate and construction loan concentrations, loan-loss-estimate uncertainty, local economic conditions, the ability to realize deferred tax assets, potential tax-law changes or ownership change under Section 382, regulatory actions, and access to capital and liquidity. The filing identifies no material change to previously disclosed risk factors other than tax-law and tax-provision risks.
- Management stated that pending or threatened litigation was not expected to have a material adverse effect. No formal earnings or revenue guidance is provided in the supplied filing text.
Most important facts for investors to verify
- How much of reported earnings and equity improvement reflects the one-time deferred-tax valuation-allowance reversal, and what assumptions support future realization of the deferred tax asset?
- Whether credit quality continues to improve after the classified-asset sales, including subsequent nonperforming loans, charge-offs, delinquencies and allowance coverage.
- Whether loan growth and deposit mix can support net interest income as asset yields remain pressured and brokered deposits rise.
- Current compliance with the holding-company and Bank MOUs, related capital requirements, and any regulatory restrictions on dividends, debt or preferred-security payments.
- Actual liquidity availability and funding costs, including the terms and collateral requirements for FHLB and Federal Reserve borrowing capacity.