UNITED COMMUNITY BANKS INC annual report, FY2014

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United Community Banks, Inc. — 2014 Form 10-K

Reporting period: Fiscal year ended December 31, 2014; fourth-quarter figures are for the three months ended December 31, 2014. United is a Georgia bank holding company operating through United Community Bank, with 103 locations across Georgia, western North Carolina, Tennessee and South Carolina.

Financial performance and condition

  • Full-year earnings: Net income was $67.6 million, or $1.11 per diluted share, versus $273.1 million, or $4.44 per share, in 2013. The comparison is distorted by 2013’s $272 million deferred-tax valuation-allowance reversal; 2013 also included a $26.8 million pretax loss on classified-asset sales. The filing reports 2014 pretax income of $107.1 million and income-tax expense of $39.5 million.
  • Fourth quarter: Net income was $18.2 million, or $0.30 per diluted share. Taxable-equivalent net interest revenue was $58.3 million, up 4% year over year; net interest margin was 3.31%, up 5 basis points year over year. Provision for credit losses was $1.8 million.
  • Revenue and expenses: Full-year GAAP net interest revenue was $222.9 million, up from $218.2 million in 2013; fee revenue was $55.6 million, down 2%. Operating expenses were $162.9 million, down 7%, reflecting lower foreclosed-property and regulatory costs, partly offset by higher salaries. The annual net interest margin declined to 3.26% from 3.30%; the operating efficiency ratio improved to 58.26% from 63.14%.
  • Loans and deposits: Year-end loans were $4.67 billion, up $343 million (8%) from 2013; deposits were $6.33 billion, up $125 million. Core transaction deposits, excluding public funds, grew $252 million. Total assets were $7.57 billion and shareholders’ equity was $739.6 million.
  • Credit quality: Nonperforming assets fell to $19.6 million, or 0.26% of assets, from $31.0 million, or 0.42%, in 2013. Nonperforming loans were $17.9 million; none were more than 90 days past due and still accruing. The loan-loss allowance was $71.6 million, or 1.53% of loans, compared with $76.8 million, or 1.77%. Net charge-offs were $13.9 million, or 0.31% of average loans.
  • Cash flow and liquidity: Operating cash flow was $101.9 million; investing cash flow was negative $237.5 million and financing cash flow was positive $99.4 million. Cash and cash equivalents ended the year at $192.7 million. Management said liquidity was sufficient for expected needs; disclosed additional borrowing capacity included $791 million of FHLB capacity and $753 million at the Federal Reserve discount window.
  • Debt and capital: At year-end, FHLB advances were $270.1 million, long-term debt was $129.9 million, and repurchase agreements were $6.0 million. Consolidated Tier 1 and total risk-based capital ratios were 12.05% and 13.30%, respectively; the Bank was categorized as well-capitalized. Basel III rules took effect January 1, 2015, and management said the company and Bank would meet fully phased-in requirements based on year-end 2014 positions.
  • Shareholder returns: United declared $0.11 per common share in 2014. It redeemed approximately $121.6 million of preferred stock during the year and repurchased a warrant for $12.0 million.

Material changes and notable items

  • Loan growth reflected new specialized lending activities, including SBA, USDA, healthcare, asset-based and commercial real estate lending, as well as $169 million of indirect auto loan purchases. The Business Carolina acquisition, completed in June 2014, added a specialty SBA/USDA lender; United paid $31.3 million in cash.
  • Second-quarter balance-sheet restructuring included selling about $237 million of securities, repaying $44 million of structured repurchase agreements and terminating interest-rate swaps. The actions reduced funding costs and supported the investment portfolio yield; the company recorded $4.45 million of borrowing-prepayment losses.
  • Mortgage fees fell 24% for the year as refinancing activity weakened; mortgage originations were $276 million versus $297 million in 2013. Purchase loans represented 63% of 2014 production, versus 48% in 2013.
  • Allowance methodology changes in 2014 incorporated a loss-emergence period and fully allocated the previously unallocated allowance. Management said the methodology changes did not materially affect the total allowance or provision.

Outlook, risks and contingencies

  • Management expected a 2015 effective tax rate of approximately 37.8% and estimated that net operating loss carryforwards could be used within four to six years. The $215.5 million net deferred tax asset depends on future taxable income; a shortfall could require a valuation allowance and materially affect results.
  • On January 27, 2015, United agreed to acquire MoneyTree Corporation and First National Bank, which had $425 million in assets, $354 million in deposits and $253 million in loans at year-end. Consideration was approximately $52 million, 80% United stock and 20% cash; closing was expected in the second quarter of 2015, subject to approvals and shareholder approval.
  • Key risks include concentrated exposure to local economies and real estate: commercial real estate was $1.76 billion (38% of loans), residential construction and development was $299 million, and more than 80% of loans were secured by real estate. The filing also highlights interest-rate, funding, credit-reserve, cybersecurity/vendor, regulatory and acquisition-integration risks.
  • The Bank’s negative retained earnings require regulatory pre-approval for dividends to United. United said it would need DBF and FDIC approval for Bank dividends in 2015. Commercial real estate concentrations exceed regulatory guidance levels, potentially prompting additional scrutiny or constraints.
  • Fourth-quarter unusual items included a $1.2 million reversal of a litigation reserve, a $492,000 charge to reimburse the FDIC for interest claimed on an earlier loss-sharing certificate, and $350,000 of severance charges. Management did not expect ordinary-course litigation to have a material adverse effect. The filing states that internal control over financial reporting was effective and the auditors issued an unqualified opinion.

Important facts for investors to verify

  • Assess recurring earnings apart from the 2013 tax-allowance reversal and classified-asset sale, and distinguish GAAP from management’s non-GAAP operating measures.
  • Review the deferred tax asset’s realizability assumptions, NOL carryforward schedules and potential ownership-change limitations.
  • Track credit performance and reserve adequacy as loan growth expands in specialized lending and indirect auto; monitor real-estate and home-equity exposures.
  • Confirm regulatory capital and dividend capacity under Basel III, including any effect of future acquisitions or required Bank dividend approvals.
  • Monitor execution, purchase accounting, regulatory approval and expected closing of the MoneyTree transaction, as well as funding and integration costs.