United Community Banks, Inc. — 2019 Form 10-K
Reporting period: Fiscal year ended December 31, 2019; fourth-quarter results are also summarized. United is a regional bank holding company serving Georgia, South Carolina, North Carolina and Tennessee, with nationwide SBA/USDA lending and equipment finance operations. It reported $12.9 billion in year-end assets. The filing was signed February 27, 2020.
Financial performance and position
- Full-year earnings: Net income was $185.7 million, up from $166.1 million in 2018; diluted GAAP EPS was $2.31 versus $2.07. Operating net income, a non-GAAP measure, was $191.4 million and operating diluted EPS was $2.38.
- Revenue and margins: Total revenue rose to $561.0 million from $522.2 million. Net interest revenue increased to $469.4 million from $438.8 million, and fully taxable-equivalent net interest margin improved to 4.07% from 3.91%. Noninterest income was $104.7 million, up 13%; noninterest expense was $322.2 million, up 5%. The GAAP efficiency ratio improved to 55.77% from 57.31%.
- Fourth quarter: Net income was $49.0 million and diluted EPS was $0.61, compared with $45.1 million and $0.56 a year earlier. Revenue was $143.3 million versus $135.8 million. Net interest margin was 3.93%, down from 3.97% in Q4 2018.
- Credit costs and asset quality: The 2019 provision for credit losses was $13.2 million versus $9.5 million; net charge-offs were $12.2 million versus $6.1 million, or 0.14% versus 0.07% of average loans. Nonperforming assets increased to $35.8 million from $25.1 million, and nonperforming loans rose to 0.40% of loans from 0.28%. The allowance for loan losses was $62.1 million, or 0.70% of loans, compared with $61.2 million, or 0.73%.
- Balance sheet and funding: Year-end loans were $8.81 billion, deposits $10.90 billion, cash and cash equivalents $515.2 million, and shareholders’ equity $1.64 billion. Loans and deposits increased 5% and 3%, respectively, from year-end 2018. Customer deposits excluding brokered deposits grew; brokered deposits declined to $160.7 million from $683.7 million.
- Debt and capital: Long-term debt was $212.7 million, down from $267.2 million; no FHLB advances were outstanding at year-end, versus $160 million in 2018. Consolidated CET1, total risk-based capital and leverage ratios were 12.97%, 15.01% and 10.34%, respectively. Both the holding company and the Bank were classified as well-capitalized.
- Cash flows: Operating activities provided $153.9 million, investing activities provided $163.2 million, and financing activities used $129.2 million. Cash and cash equivalents increased by $187.9 million during the year.
Material changes and notable items
- United acquired First Madison Bank & Trust on May 1, 2019, paying $52.1 million in cash and recording $20.3 million of goodwill. The acquisition added four Athens-area branches and contributed to loan and deposit growth. The Navitas equipment-finance business, acquired in 2018, contributed for a full year in 2019.
- Management attributed higher net interest revenue and margin mainly to loan growth and higher loan yields, including equipment finance. It also reduced securities and wholesale funding under a deleveraging strategy; average wholesale borrowings and brokered deposits fell.
- Mortgage gains and related fees increased to $27.1 million from $19.0 million, reflecting increased production and investment in mortgage operations. BOLI income included $1.65 million of death benefits in Q4. Net securities losses of $1.02 million reflected sales of lower-yielding securities. Merger-related and other charges included a $2.94 million pension-plan termination and settlement charge.
- United sold its indirect auto loan portfolio, which had totaled $207.7 million at year-end 2018, and reported no indirect auto loans at year-end 2019.
- CECL was adopted January 1, 2020. The company reported an $8.75 million increase in the allowance for credit losses, including $3.59 million reclassified from the fair-value mark on acquired credit-deteriorated loans, and a $3.53 million after-tax reduction to retained earnings.
Outlook, risks and contingencies
Management said it intended to continue comparable quarterly cash dividends, subject to board approval and regulatory and financial conditions. The board authorized up to $50 million of stock repurchases through December 31, 2020; by February 26, 2020, $9.40 million had been repurchased. The filing provides no numeric earnings or growth guidance.
Key disclosed risks include the concentration of lending in the southeastern U.S.; commercial lending and real-estate exposure; rising credit losses and the judgment involved in loan-loss estimates; interest-rate, deposit-cost and LIBOR-transition risks; liquidity and capital needs; competition and acquisition integration; cybersecurity and third-party systems; and evolving regulatory requirements. The company also identified potential economic impacts from trade actions and pandemics, including coronavirus, as uncertainties. Off-balance-sheet commitments to extend credit and letters of credit totaled approximately $2.15 billion. Management reported no material pending legal proceedings and did not expect ordinary-course litigation to have a material adverse effect.
The independent auditor issued unqualified opinions on the financial statements and internal control over financial reporting. Management and the auditor concluded that internal controls were effective as of December 31, 2019. The auditor identified the evaluation of qualitative adjustments to the loan-loss allowance as a critical audit matter, emphasizing the estimation judgment involved.
Most important facts for investors to verify
- Whether rising nonperforming loans, charge-offs and equipment-finance losses persist, and how CECL changes reserves and reported earnings.
- Whether loan growth and yields can offset higher deposit costs, given the Q4 margin decline and interest-rate sensitivity.
- The sustainability of mortgage-related revenue and other noninterest income, including the effect of mortgage prepayments on servicing-right valuations.
- Funding composition, liquidity under stress, and the holding company’s capacity to pay dividends when the Bank paid no dividend upstream in 2019.
- Post-acquisition performance and integration, capital allocation under the buyback authorization, and the use and comparability of management’s non-GAAP operating measures.