United Community Banks, Inc. — Q1 2012 Form 10-Q
Reporting period: Three months ended March 31, 2012; interim financial statements are unaudited. United is a Georgia bank holding company operating primarily through United Community Bank across Georgia, western North Carolina and east Tennessee. Figures below are in U.S. dollars; “million” and “billion” are used for readability.
Financial results and condition
| Metric | Q1 2012 / March 31, 2012 | Comparable period / prior date |
|---|---|---|
| Net income (loss) | $11.5 million | $(237.3) million in Q1 2011 |
| Net income (loss) available to common shareholders; diluted EPS | $8.5 million; $0.15 | $(240.1) million; $(13.00) in Q1 2011 |
| Net interest revenue (taxable equivalent); net interest margin | $58.9 million; 3.53% | $56.4 million; 3.30% in Q1 2011 |
| Provision for loan losses; net charge-offs | $15.0 million; $15.9 million | $190.0 million; $231.6 million in Q1 2011 |
| Fee revenue; operating expenses | $15.4 million; $47.0 million | $11.8 million; $115.3 million in Q1 2011 |
| Total assets; loans; deposits | $7.17 billion; $4.13 billion; $6.00 billion | At March 31, 2011: $7.71 billion; $4.19 billion; $6.60 billion |
| Cash and cash equivalents; shareholders’ equity | $427.6 million; $579.5 million | At December 31, 2011: $378.4 million; $575.5 million |
| Debt and borrowings | FHLB advances $215.1 million; long-term debt $120.2 million; short-term borrowings $101.9 million | At December 31, 2011: $40.6 million; $120.2 million; $102.6 million |
| Allowance for loan losses | $113.6 million, or 2.75% of loans | $133.1 million, or 3.17%, at March 31, 2011 |
| Nonperforming assets | $161.6 million, or 2.25% of assets | $138.1 million, or 1.79%, at March 31, 2011 |
Net cash provided by operating activities was $33.2 million; investing activities used $57.5 million; financing activities provided $73.5 million. Cash and cash equivalents increased $49.2 million during the quarter. The filing also reports an efficiency ratio of 63.31% and return on assets of 0.66% for Q1 2012.
Changes and drivers
- The large year-over-year earnings improvement is not a clean comparison: Q1 2011 included the costs of an accelerated problem-asset disposition, including a $190 million loan-loss provision, $232 million of net charge-offs and $64.9 million of foreclosed-property expense. The bulk loan sale closed in April 2011.
- Taxable-equivalent net interest revenue increased 4% year over year, and net interest margin rose 23 basis points. Lower funding costs—including a decline in the average cost of interest-bearing liabilities from 1.32% to 0.85%—were partly offset by lower asset yields and a $431 million decline in average loans.
- Fee revenue rose 30%, with increases in service charges, mortgage fees and other revenue. Other revenue included $1.1 million of interest on a 2008 federal tax refund, a $728,000 gain on low-income housing tax credits and a $300,000 positive investment mark. A $482,000 FHLB prepayment loss largely offset securities gains.
- Operating expenses fell 59%, primarily because Q1 2011 included unusually large foreclosed-property write-downs and sale losses. Excluding foreclosed-property costs, expenses declined 14%.
- Deposits declined $97.4 million from year-end and $597 million year over year. Demand deposits increased year over year, while time and brokered deposits declined. Total loans increased $18.0 million from year-end but were down $66.8 million year over year; management reported $131 million of new loans funded in Q1.
- Capital ratios at March 31 included a 13.68% consolidated Tier 1 risk-based ratio, 15.41% total risk-based ratio and 8.94% leverage ratio. The Bank’s corresponding ratios were 13.70%, 14.96% and 8.96%.
Outlook, risks and contingencies
- No specific earnings or revenue guidance is provided. Management said loan growth might return as the portfolio stabilizes, but also described weak loan demand and continued uncertainty in the economy. Management considered liquidity sufficient for expected cash needs and reported $878 million of excess liquidity, including cash and floating-rate securities.
- Credit remains a central risk. Nonperforming loans were $129.7 million, up from $127.5 million at year-end and $83.8 million a year earlier. New nonperforming-loan inflows slowed to $32.4 million from $45.7 million in Q4 2011. TDRs totaled $159 million; $32.7 million were not performing under modified terms. Impaired loans were $294 million. More than 85% of loans were secured by real estate, and management identified construction, development and commercial real estate concentrations as risks.
- United maintained a full valuation allowance against its $274 million net deferred tax asset; no net deferred tax asset was reported. Realization of tax benefits depends on future evidence and could be affected by an ownership change.
- The holding company and Bank are subject to informal regulatory memoranda. The Bank MOU requires minimum Tier 1 leverage and total risk-based capital ratios of 8% and 10%, respectively, and regulatory consent before Bank dividends. United said it believed it was in compliance. Holding-company debt, dividends and certain other payments require prior Federal Reserve approval; quarterly approvals for preferred-stock and trust-preferred payments had continued.
- Interest-rate simulation estimated that a 200-basis-point increase would raise next-12-month net interest revenue about 1.1%, while a 25-basis-point decrease would reduce it about 0.5%; actual results may differ from model assumptions. Market risk disclosures were otherwise reported as not materially changed.
- Unrealized losses on available-for-sale securities were $15.3 million, including $14.6 million on corporate bonds; management attributed losses mainly to rates and, for corporate bonds, rating downgrades, and reported no impairment charges. A proposed accounting update on government-acquisition indemnification assets had not yet been assessed.
- Management reported no pending or threatened legal proceeding expected to materially adversely affect the company. It also reported effective disclosure controls and no material change in previously disclosed risk factors.
Important facts for investors to verify
- How much of future earnings reflects recurring net interest and fee income versus unusual items, including the tax-refund interest and investment-related gains?
- Whether nonperforming loans, TDRs, impaired loans and criticized credit classifications improve, particularly in the largest lending relationship and real-estate-related portfolios.
- Whether the allowance remains adequate as charge-offs and collateral values evolve, and how much of the dramatic year-over-year improvement stems from the nonrecurring 2011 disposition plan.
- Whether deposit trends, excess liquidity and wholesale funding—including increased FHLB advances—remain sustainable and cost-effective.
- Whether the $274 million deferred-tax-asset valuation allowance, regulatory restrictions, and required approvals for payments or dividends change.
- Reconcile reported cash-flow descriptions against the cash-flow statement: the statement shows financing cash provided of $73.5 million, while the MD&A narrative describes financing cash as used.