United Community Banks, Inc. — 2017 Form 10-K
Business and period: Annual report for the year ended December 31, 2017, with fourth-quarter results discussed separately. United is a community-focused bank holding company operating through United Community Bank across Georgia, North Carolina, South Carolina and Tennessee. The Bank had 156 community-bank locations at year-end. Results include acquisitions of HCSB (July 2017) and Four Oaks (November 2017), as well as Tidelands for the comparable period beginning July 2016.
Key financial results
| Metric | 2017 | 2016 |
|---|---|---|
| Net interest revenue | $356.0 million | $309.8 million |
| Net interest margin, fully taxable equivalent | 3.52% | 3.36% |
| Fee revenue | $88.3 million | $93.7 million |
| Net income, GAAP | $67.8 million; diluted EPS $0.92 | $100.7 million; diluted EPS $1.40 |
| Operating net income, non-GAAP | $120.3 million; diluted EPS $1.63 | $106.7 million; diluted EPS $1.48 |
| Operating cash flow | $208.0 million | $139.9 million |
Fourth-quarter 2017 net income was a loss of $11.9 million, or diluted EPS of $(0.16), compared with income of $27.2 million, or $0.38 per diluted share, in fourth-quarter 2016. Fourth-quarter operating net income, a non-GAAP measure, was $32.5 million, or $0.42 per diluted share.
- Balance sheet: Year-end assets were $11.92 billion, loans $7.74 billion, deposits $9.81 billion and shareholders’ equity $1.30 billion. Loans increased 12% and deposits 14% from year-end 2016, reflecting acquisitions and organic growth.
- Credit and margins: Provision for credit losses was $3.8 million, versus a $0.8 million provision release in 2016. Net charge-offs were $6.0 million, or 0.08% of average loans. The allowance for loan losses was $58.9 million, 0.76% of loans, versus $61.4 million, 0.89%, in 2016. Nonperforming assets fell to $26.9 million from $29.5 million.
- Expenses and fee income: GAAP operating expenses rose 11% to $267.6 million, largely due to acquisitions and higher staffing. Fee revenue declined 6%; debit-card interchange restrictions and lower mortgage fees were significant factors.
- Cash flow: Operating activities provided $208.0 million; investing activities used $45.5 million and financing activities used $65.5 million. Cash and cash equivalents ended the year at $314.3 million, up from $217.3 million.
- Funding and capital: Year-end FHLB advances were $504.7 million, short-term borrowings $50.0 million and long-term debt $120.5 million. The Bank was classified as well-capitalized; consolidated CET1 and total capital ratios were 11.98% and 13.06%, respectively. Management reported ample liquidity and significant available secured borrowing capacity.
Changes, outlook and material items
- Net interest revenue grew 15% on a fully taxable equivalent basis, driven by loan growth, acquired balances and higher asset yields; the annual net interest margin improved 16 basis points.
- GAAP net income fell 33% year over year, primarily because the Tax Act required a $38.2 million fourth-quarter deferred-tax-asset remeasurement charge. The 2017 effective tax rate was 60.8%; management estimated an approximately 23.5% effective tax rate for 2018. The reported $88.0 million net deferred tax asset depends on future taxable income, and some Tax Act accounting remained provisional.
- Operating net income and operating EPS are non-GAAP measures that exclude specified merger-related and other items, including the tax remeasurement; they should not be treated as substitutes for GAAP results.
- 2017 included $13.9 million of merger-related and other charges, including acquisition costs, property impairment, executive retirement costs and branch closures. United completed the HCSB and Four Oaks acquisitions during 2017. In February 2018 it completed the Navitas acquisition; purchase-accounting and pro forma details were not yet available in this filing.
- After year-end, United issued $100 million of subordinated notes, initially at 4.5% interest and qualifying as Tier 2 capital. The Bank’s accumulated deficit requires regulatory pre-approval for dividends to the holding company. The Board extended its $50 million share-repurchase authorization through December 31, 2018; $36.3 million remained available at year-end.
- Key risks include concentrations in commercial real estate (46% of loans) and construction lending, geographic concentration, interest-rate and funding-cost changes, credit-loss estimation, cybersecurity and third-party service risks, and regulatory and tax changes. The company said pending or threatened litigation was not expected to have a material adverse effect. Commitments to extend credit totaled $1.91 billion; these are not necessarily expected cash outflows.
- No specific earnings or growth guidance is provided in the filing beyond the cited 2018 tax-rate estimate. Management said credit quality remained favorable and stable. The independent auditor gave unqualified opinions on the financial statements and internal control over financial reporting; management also concluded controls were effective.
Important facts for investors to verify
- How recurring earnings, margins and funding costs evolve after acquisition-related growth and rising rates; compare GAAP results with the company’s non-GAAP adjustments.
- Whether the $88.0 million deferred tax asset and related tax attributes are realized, and whether final Tax Act accounting changes the reported amounts.
- Credit quality and reserve adequacy, particularly in commercial real estate, construction, home-equity lines and acquired loan portfolios.
- Integration, purchase accounting and performance of HCSB, Four Oaks and the subsequent Navitas acquisition, including resulting goodwill and capital needs.
- Liquidity and capital distribution capacity, including regulatory approval requirements for Bank dividends, debt service and the remaining repurchase authorization.