United Community Banks, Inc. — 2018 Form 10-K
Reporting period: Fiscal year ended December 31, 2018; includes fourth-quarter results. United is a southeastern U.S. community bank holding company operating principally in Georgia, South Carolina, North Carolina and Tennessee, with national SBA/USDA and equipment-finance lending. It reported $12.6 billion in assets at year-end.
Financial performance and position
| Metric | 2018 | 2017 | Change / context |
|---|---|---|---|
| Net income | $166.1 million | $67.8 million | GAAP diluted EPS was $2.07 versus $0.92. Operating net income, a non-GAAP measure, was $172.0 million versus $120.3 million. |
| Total revenue | $522.2 million | $440.4 million | Up 19%; net interest revenue and noninterest income. |
| Net interest revenue | $438.8 million | $356.0 million | Up 23%; fully taxable-equivalent net interest margin rose to 3.91% from 3.52%. |
| Provision for credit losses | $9.5 million | $3.8 million | Increase primarily reflected loan growth and the acquired NLFC portfolio. |
| Noninterest expenses | $306.3 million | $267.6 million | Up 14%, largely due to acquisitions, staffing and business investment. |
| Loans / deposits | $8.38 billion / $10.53 billion | $7.74 billion / $9.81 billion | Loans up $648 million; deposits up $727 million. |
| Operating cash flow | $270.0 million | $208.0 million | Investing activities used $359.5 million; financing activities provided $102.5 million. |
| Capital and credit quality | Equity $1.46 billion; CET1 12.16% consolidated | Equity $1.30 billion; CET1 11.98% | Bank classified as well-capitalized. Nonperforming assets were $25.1 million, or 0.20% of assets; allowance for loan losses was $61.2 million, 0.73% of loans. |
At year-end, long-term debt was $267.2 million and FHLB advances were $160 million; there were no short-term borrowings outstanding. Brokered deposits increased to $683.7 million from $371.0 million. Cash and cash equivalents were $327.3 million. Management stated liquidity was sufficient and reported capacity for additional FHLB advances and Federal Reserve borrowing, as well as unpledged securities.
Material changes versus prior period
- Net interest revenue benefited from loan growth, acquisitions and rising rates, including higher yields on floating-rate loans. The average cost of interest-bearing liabilities also rose, to 0.82% from 0.49%.
- Net income comparisons are materially affected by 2017’s $38.2 million tax expense from remeasuring deferred tax assets after federal tax reform. The 2018 effective tax rate was 23.1%, versus 60.8% in 2017.
- The February 2018 NLFC acquisition added nationwide equipment-finance lending; it contributed $24.3 million in revenue and $7.1 million in net income after acquisition. United recorded $87.4 million of related goodwill.
- Noninterest income rose 5%, although debit-card interchange restrictions contributed to lower service charges and fees. Noninterest expenses increased 14% alongside acquired operations and expanded staffing.
- Asset quality remained favorable overall: nonperforming assets declined from $26.9 million to $25.1 million and net charge-offs were 0.07% of average loans versus 0.08%.
Outlook, risks and unusual items
- The filing provides no quantified earnings or growth guidance. Management described continued emphasis on core deposit growth, lending, and selective expansion; results remain sensitive to interest rates, deposit pricing and competition.
- Key risks include commercial-loan and real-estate concentration, geographic concentration in the Southeast, borrower defaults, adequacy of loan-loss reserves, acquisition integration and goodwill, and access to deposits and wholesale funding.
- United expected to adopt CECL in 2020 and said the allowance could increase; the impact had not yet been determined. The 2019 capital conservation buffer became fully effective, and management reported capital ratios above well-capitalized thresholds.
- Brokered deposits rose substantially; $543.9 million of brokered time deposits were due within one year at December 31, 2018. The company also disclosed LIBOR transition uncertainty, cybersecurity and third-party service-provider risks, and interest-rate sensitivity.
- In February 2019, United agreed to acquire First Madison Bank & Trust for $52 million cash, subject to approvals, with a second-quarter 2019 closing expected. It also reported $4.65 million of 2019 share repurchases through February 27.
- Unusual comparisons include the 2017 tax-remeasurement charge and acquisition-related costs. The 2018 securities portfolio had $38.3 million of gross unrealized losses on available-for-sale securities, which management attributed primarily to interest rates; no other-than-temporary impairment was recorded. The 2018 audit opinion was unqualified, and management and the auditor reported effective internal control over financial reporting.
Important facts for investors to verify
- Whether margin growth can persist as deposit and wholesale funding costs rise, and how much growth depends on acquired balances.
- The quality, performance and integration of the NLFC equipment-finance portfolio, and the assumptions supporting acquisition goodwill and credit reserves.
- Brokered-deposit maturities, renewal costs and concentration, alongside the liquidity available from pledged and unpledged assets.
- Commercial real-estate and business-loan concentrations, criticized/classified loans, and the potential effect of CECL adoption.
- Regulatory approval, final terms and expected contribution of the First Madison acquisition; dividend and repurchase capacity under applicable capital rules.