United Community Banks, Inc. — 2015 Form 10-K
Business context and reporting period. The filing covers the fiscal year ended December 31, 2015, with fourth-quarter comparisons. United is a Georgia-based bank holding company operating primarily through United Community Bank across Georgia, western North Carolina, upstate South Carolina and east Tennessee. It completed acquisitions of MoneyTree/First National Bank on May 1, 2015, and Palmetto Bancshares/The Palmetto Bank on September 1, 2015. Acquired results are included only from their respective closing dates.
Financial performance and position
| Metric | 2015 | 2014 |
|---|---|---|
| GAAP revenue | $326.3 million | $269.9 million |
| Net income | $71.6 million; diluted EPS $1.09 | $67.6 million; diluted EPS $1.11 |
| Operating net income, non-GAAP | $83.2 million; diluted EPS $1.27 | $67.6 million; diluted EPS $1.11 |
| Net interest revenue, fully taxable equivalent | $258.7 million | $224.4 million |
| Net interest margin, fully taxable equivalent | 3.30% | 3.26% |
| Fee revenue | $72.5 million | $55.6 million |
| GAAP operating expenses | $211.2 million, including $18.0 million of merger-related and other charges | $162.9 million |
| Provision for credit losses | $3.7 million | $8.5 million |
| Net charge-offs | $6.3 million; 0.12% of average loans | $13.9 million; 0.31% |
Fourth quarter: GAAP net income available to common shareholders was $18.2 million, or $0.25 per diluted share, versus $18.2 million, or $0.30 per share, in fourth-quarter 2014. Operating diluted EPS was $0.33 versus $0.30. Fully taxable equivalent net interest revenue was $74.0 million, up 27% year over year; net interest margin was 3.34%. Provision for credit losses was $0.3 million, compared with $1.8 million.
Balance sheet at December 31, 2015: Total assets were $9.63 billion, loans $6.00 billion, deposits $7.88 billion and shareholders’ equity $1.02 billion. Year-end cash and cash equivalents were $240.4 million. The allowance for loan losses was $68.4 million, or 1.14% of loans, versus $71.6 million, or 1.53%, a year earlier. Nonperforming assets rose to $27.5 million (0.29% of assets) from $19.6 million (0.26%), primarily due to foreclosed property assumed in the Palmetto acquisition.
Cash flow and funding: Operating activities provided $111.9 million; investing activities used $400.4 million; financing activities provided $336.2 million. The net increase in cash was $47.7 million. Year-end funding included $430.1 million in Federal Home Loan Bank advances, $165.6 million in long-term debt and $16.6 million in repurchase agreements. Management considered liquidity sufficient for expected cash requirements and reported additional collateral capacity for FHLB advances and Federal Reserve borrowing.
Capital and returns: At year-end, the consolidated CET1 and Tier 1 capital ratios were 11.45%, total capital was 12.50%, and the Tier 1 leverage ratio was 8.34%; the Bank was categorized as well-capitalized. Common dividends were $0.22 per share in 2015 versus $0.11 in 2014. Due to the Bank’s accumulated deficit, regulatory pre-approval was required for dividends to the holding company.
Material changes versus prior period
- Assets increased 27%, loans 28% and deposits 25% year over year, driven substantially by the two acquisitions as well as organic and specialized-lending growth. The acquisition-related comparison is not on a full-year pro forma basis.
- Palmetto added approximately $1.15 billion in assets and generated $114.4 million of goodwill; MoneyTree added approximately $459 million in assets and generated $14.7 million of goodwill. United issued equity as acquisition consideration, contributing to a 15-million increase in year-end common shares outstanding versus 2014.
- Net interest revenue rose 15% on a fully taxable equivalent basis, supported by loan growth and lower funding costs. Average loan yield declined 21 basis points, but the average cost of interest-bearing liabilities fell from 0.50% to 0.38%.
- Fee revenue increased 31%, led by acquired business, mortgage fees and gains on sales of government-guaranteed loans. Mortgage originations were $494 million versus $276 million in 2014.
- GAAP expenses rose 30%, mainly from acquired operations, staffing and integration costs, plus $5.97 million of impairment on properties held for future branch expansion. Operating efficiency ratio, excluding specified items, was 58.51% versus 58.26%.
- Credit costs continued to improve: provision fell to $3.7 million from $8.5 million, and net charge-offs declined. Nonperforming assets nevertheless increased, largely reflecting acquired foreclosed property.
- 2013 results are not a straightforward comparator: that year included a $272 million deferred-tax valuation-allowance reversal and a large classified-asset sale. The company reported $273.1 million of 2013 GAAP net income.
Outlook, commentary and risks
- No specific earnings, revenue or margin guidance is provided. Management expected a 2016 effective tax rate of approximately 37.9% and anticipated using net operating loss carryforwards over the next three to seven years, subject to actual taxable income and other limitations.
- Management expected integration work and related costs to continue for several quarters and anticipated further cost savings and business synergies from the acquisitions; those expected benefits were not reflected in the filing’s pro forma information.
- The $197.6 million net deferred tax asset is a significant estimate-sensitive item, including about $155.8 million related to net operating loss carryforwards. Failure to generate sufficient taxable income, or an ownership change under Section 382, could impair its value.
- Credit exposures are concentrated geographically and in real estate: more than 77% of loans were secured by real estate; commercial real estate was approximately $2.32 billion (39% of loans), and residential construction and development was $352 million. Home-equity lines also carry interest-only draw-period and payment-reset risks.
- Other cited risks include interest-rate and funding-cost changes, competition, cybersecurity and third-party service-provider failures, regulatory and capital requirements, acquisition integration, and potential limits on dividends. The company noted that its commercial real estate concentrations exceeded levels drawing elevated regulatory scrutiny.
- United reported no pending or threatened legal matter that management believed would materially adversely affect consolidated financial condition or results. Management and the independent auditor concluded internal control over financial reporting was effective as of year-end.
Important facts for investors to verify
- Compare acquisition-adjusted performance with reported results, and assess whether anticipated Palmetto and MoneyTree synergies offset integration costs and higher recurring expenses.
- Review loan growth and underwriting by category, especially commercial real estate, construction, indirect auto and home-equity lines; track nonperforming assets, criticized loans, charge-offs and allowance coverage.
- Assess the sustainability of the net interest margin and funding mix as interest rates change, including brokered deposits, FHLB advances and deposit pricing.
- Evaluate realizability of the deferred tax asset and net operating loss carryforwards, including Section 382 ownership-change exposure and the forecast assumptions supporting management’s conclusion.
- Confirm regulatory dividend restrictions, capital-buffer headroom and debt maturities; review the effect of share issuance and potential dilution on per-share results.
- Reconcile non-GAAP operating measures with GAAP results. The filing excludes merger-related and other charges from certain operating measures, and those measures may not be comparable with similarly titled measures at other companies.