United Community Banks, Inc. — Q3 2011 Form 10-Q
Business context and reporting period. Unaudited results cover the three and nine months ended September 30, 2011, compared with the same 2010 periods. United is a Georgia-based bank holding company operating 27 community banks in Georgia, western North Carolina and east Tennessee. Unless stated otherwise, dollar amounts below are in millions.
Financial results and condition
| Metric | Q3 2011 | Q3 2010 | Nine months 2011 | Nine months 2010 |
|---|---|---|---|---|
| Net interest revenue, GAAP | $58.9 | $59.5 | $173.3 | $181.4 |
| Provision for loan losses | $36.0 | $50.5 | $237.0 | $187.0 |
| Fee revenue | $11.5 | $12.9 | $37.2 | $36.1 |
| Net loss | $(6.2) | $(236.4) | $(141.1) | $(329.2) |
| Net loss available to common shareholders | $(9.2) | $(239.0) | $(149.9) | $(337.0) |
| Loss per common share, diluted | $(0.16) | $(12.62) | $(4.41) | $(17.82) |
Q3 2011 taxable-equivalent net interest margin was 3.55%, versus 3.57% a year earlier; the nine-month margin was 3.42%, versus 3.56%. Q3 operating expenses were $46.5 million. The filing’s “total revenue” line includes provision for loan losses as a deduction; it reports $34.4 million for Q3 2011 and negative $26.4 million for the first nine months of 2011.
- Balance sheet at September 30: assets $7.16 billion; loans before allowance $4.11 billion; deposits $6.01 billion; shareholders’ equity $848.2 million. Loans were down 14% year over year; total deposits were approximately flat year over year.
- Credit: allowance for loan losses was $146.1 million, or 3.55% of loans. Nine-month net charge-offs were $265.6 million, including substantial losses associated with the asset-disposition plan. Nonperforming assets were $188.7 million, or 2.64% of assets, versus $347.7 million and 4.96% a year earlier. Nonaccrual loans were $144.5 million, compared with $217.8 million.
- Cash flow and liquidity: nine-month operating cash flow was $148.9 million; investing cash outflow was $349.9 million and financing cash outflow was $149.2 million. Cash and equivalents declined from $649.5 million at year-end 2010 to $299.2 million. Management reported $826 million of excess liquidity, including $230 million in cash equivalents and $596 million in floating-rate securities, and stated liquidity was sufficient for expected cash needs.
- Debt and capital: period-end short-term borrowings were $102.9 million, FHLB advances $40.6 million and long-term debt $120.2 million. The bank’s Tier 1 risk-based capital ratio was 13.80%, total risk-based capital 15.07%, and leverage ratio 8.84%. The bank’s regulatory MOU requires at least 8% Tier 1 leverage and 10% total risk-based capital.
Material changes and unusual items
- Q3 2011’s $25 million provision related to United’s largest lending relationship, a $76.6 million relationship placed on nonaccrual and classified as impaired. Management planned updated collateral appraisals in Q4 2011.
- The 2011 Problem Asset Disposition Plan included an April bulk loan sale. United recorded $186 million of charge-offs when loans were transferred for sale in Q1; proceeds exceeded the initial estimate, reducing Q2 charge-offs by $7.27 million. Foreclosed property write-downs were $53.5 million for the first nine months, versus $17.7 million in 2010.
- Q3 2010 net loss included a $210.6 million goodwill impairment charge. The 2010 nine-month results also included a $45.3 million pretax loss on the Fletcher transaction. These items make headline year-over-year loss comparisons less representative of underlying performance.
- First-quarter 2011 private placement raised $362 million net of costs. Preferred shares converted into voting and non-voting common shares in June; the company also completed a 1-for-5 reverse stock split. Share-count comparisons and per-share data reflect the split.
- Deposits declined $463.9 million from December 2010, including a reduction in brokered deposits. Management said it was lowering rates and calling callable brokered deposits to reduce excess liquidity, while noting this could cause some deposit attrition.
Outlook, commentary and risks
Management said the nine-month loss primarily reflected first-quarter credit actions under the disposition plan and characterized the Q3 loss as driven by the single large lending relationship, not representative of earnings expectations. It described United as at or near sustainable profitability and expected asset-quality improvement to continue; these are management assessments, not quantified guidance. No specific earnings guidance is provided.
Key risks include continued real-estate and construction-market weakness, collateral valuation and loan-loss-estimate uncertainty, liquidity and funding access, and the ability to sustain profitability. United reported $264 million in net deferred tax assets and said it expected to realize them, but disclosed an SEC inquiry about whether an additional valuation allowance is needed. A Section 382 ownership change could materially limit use of tax benefits; management said the private placement did not trigger one, but the company is close to the threshold. The bank and holding company are subject to regulatory MOUs. The holding-company MOU restricts additional debt, cash dividends, certain debt payments and stock repurchases without prior regulatory approval. Management said it believed the company and bank were in compliance. The filing reports no pending or threatened legal proceeding expected by management to cause a material adverse effect.
Important facts for investors to verify
- Updated appraisals, repayment prospects and any further reserve needs for the $76.6 million lending relationship.
- Subsequent charge-offs, nonperforming assets and foreclosure costs, including whether credit improvement continues after the bulk sale.
- Realizability of the $264 million deferred tax asset, the SEC’s inquiry and potential Section 382 ownership-change effects.
- Current liquidity and deposit trends, the composition and yield of excess liquidity, and progress reducing brokered funding.
- Compliance with both regulatory MOUs, capital-ratio headroom, and approvals required for holding-company payments or actions.
- Distinguish GAAP losses from management’s non-GAAP operating measures and account for the reverse split and major 2010 impairment when comparing periods.