United Community Banks, Inc. — 2011 Form 10-K Summary
Reporting period: Fiscal year ended December 31, 2011; filed March 13, 2012. The filing also reports fourth-quarter 2011 results. United is a Georgia bank holding company operating 27 community banks at 106 locations across Georgia, western North Carolina and east Tennessee.
Financial performance and condition
- Annual results: Net loss was $226.7 million, or $5.97 per diluted common share; net loss available to common shareholders was $238.6 million after preferred dividends. For 2010, net loss was $502.3 million and diluted loss per share was $27.09.
- Fourth quarter: Net income was $9.9 million and income available to common shareholders was $6.9 million, or $0.12 per diluted share. In Q4 2010, net loss was $173.1 million and loss available to common shareholders was $175.7 million.
- Net interest and fees: 2011 GAAP net interest revenue was $232.0 million ($233.7 million taxable-equivalent); operating fee revenue was $49.9 million. Net interest margin was 3.44%, down from 3.56% in 2010. Lower average loans and excess liquidity weighed on revenue and margin, partly offset by reduced deposit costs.
- Credit costs and asset quality: Provision for loan losses was $251.0 million, versus $223.0 million in 2010; net charge-offs were $311.2 million, versus $203.9 million. The allowance was $114.5 million, or 2.79% of loans, compared with $174.7 million, or 3.79%, at year-end 2010. Nonperforming assets fell to $160.3 million from $321.3 million, or 2.30% of assets versus 4.42%.
- Balance sheet: Total assets were $6.98 billion, down 4%; loans were $4.11 billion, down 11%; and deposits were $6.10 billion, down 6%. Shareholders’ equity was $575.5 million, up from $468.6 million, reflecting the 2011 capital raise partly offset by the annual loss.
- Cash flow and liquidity: Operating cash flow was $185.5 million; investing cash flow was negative $397.5 million and financing cash flow negative $59.0 million. Cash and cash equivalents ended at $378.4 million, down from $649.5 million. Management said liquidity was sufficient; it reported approximately $888 million of excess liquidity, including cash equivalents and floating-rate securities.
- Debt and capital: Year-end long-term debt was $120.2 million, FHLB advances $40.6 million and repurchase agreements/other short-term borrowings $102.6 million. Consolidated Tier 1 and total risk-based capital ratios were 13.69% and 15.41%; the Bank’s were 13.60% and 14.87%. The Bank was categorized as well-capitalized, but is subject to higher MOU capital floors.
- Margins and operating costs: Operating expenses were $261.6 million, up from $243.0 million in 2010, primarily due to foreclosed-property costs. Annual return on assets was negative 3.15%; the operating efficiency ratio was 92.27%.
Material changes versus the prior year
- The Problem Asset Disposition Plan drove substantial first-quarter credit charges and a bulk loan sale completed in April. Loans with a carrying amount of approximately $267 million were written down in anticipation of sale; the transaction removed problem assets and helped reduce reported NPAs.
- United sold or accelerated disposition of foreclosed properties, reducing foreclosed property balances to $32.9 million from $142.2 million. Despite the smaller balance, 2011 foreclosed-property expense rose to $78.9 million from $65.7 million, including $57.4 million of writedowns and $11.0 million of net sale losses.
- Average loans declined $654 million, while average investment securities increased $546 million. Year-end investment securities grew to $2.12 billion from $1.49 billion; excess liquidity and weak loan demand contributed to the shift.
- Deposits declined, including brokered deposits from $676.8 million to $178.6 million, as United allowed higher-rate time deposits to run off and sought more low-cost core transaction deposits.
- A first-quarter private placement raised $362 million net of transaction costs. Preferred shares issued in the placement converted into voting and non-voting common shares after shareholder approval, materially increasing the common share count. United also completed a 1-for-5 reverse stock split in June 2011.
Outlook, risks and unusual items
- Management said the loan portfolio began to stabilize in Q4 and suggested loan growth could return, but the filing provides no quantified earnings or growth guidance.
- United’s loan book remained concentrated in real estate: commercial real estate loans were $1.82 billion, or 44% of loans; residential construction loans were $448 million, or 11%. More than 85% of loans were secured by real estate. Weak property values, local economic conditions and construction exposure remain key credit risks.
- United entered an informal Holding Company MOU in November 2011; the Bank remains subject to a separate MOU. The holding company generally needs regulatory approval to incur debt, pay cash dividends, make certain debt payments or repurchase stock. The Bank must maintain at least an 8% Tier 1 leverage ratio and 10% total risk-based capital ratio and obtain regulator consent before paying dividends to the parent. United said the Bank could not pay cash dividends to the parent in 2012 due to its accumulated deficit.
- No cash dividends were paid on common stock in 2011. United also disclosed restrictions on distributions under its Treasury TARP agreement and regulatory approvals required for preferred-stock and trust-preferred payments.
- A full valuation allowance of $273.0 million was maintained against deferred tax assets, including approximately $226.7 million of tax benefits related to operating loss carryforwards. Use of these tax assets depends on future taxable income and may be limited by ownership-change rules under Section 382.
- United restated its 2010 annual and first three 2011 quarterly reports in February 2012 to reflect the deferred tax valuation allowance. Management and the auditor identified a material weakness in tax accounting controls as of December 31, 2011; the auditor concluded internal control over financial reporting was ineffective at that date. Management reported remediation measures and believed controls were effective as of the filing date, but the auditor did not audit controls after year-end.
- Other unusual items include the 2011 bulk-sale-related charge-offs and writedowns; the 2010 $210.6 million goodwill impairment, $157.4 million valuation-allowance charge and $45.3 million Fletcher transaction loss; and $5.0 million of 2011 income from hedge ineffectiveness. Fair-value estimates for impaired loans and foreclosed assets involved significant judgment in markets with few orderly comparable transactions.
- Management did not expect ordinary-course legal proceedings to have a material adverse effect. The filing identifies risks from funding access, interest-rate changes, regulatory actions, capital needs and economic weakness; it does not provide a formal forward outlook.
Most important facts for investors to verify
- Review the February 2012 restatements and confirm the effect of the deferred-tax valuation allowance on prior-period earnings, equity and regulatory capital.
- Track subsequent credit performance: charge-offs, allowance coverage, nonperforming loans/assets, troubled debt restructurings and collateral values, including performance of the largest lending relationships.
- Confirm compliance with both regulatory MOUs, capital floors, dividend restrictions and any changes to regulatory approvals or enforcement status.
- Assess the durability of reported liquidity and funding, including brokered-deposit runoff, deposit mix, securities concentration and the ability of the parent to meet obligations without Bank dividends.
- Evaluate the sustainability of Q4 profitability and management’s expectation of a loan-growth inflection against loan demand, net interest margin and ongoing asset-disposition costs.
- Check the realization prospects and Section 382 constraints for the $273.0 million deferred-tax valuation allowance and related tax attributes.