United Community Banks, Inc. — Q3 2014 Form 10-Q
Business context and reporting period. United is a Georgia bank holding company operating through United Community Bank, with community banking markets in Georgia, North Carolina, Tennessee and South Carolina. This unaudited filing covers the quarter and nine months ended September 30, 2014; comparisons are principally with the corresponding 2013 periods. Amounts below are in millions unless otherwise stated.
Financial performance and condition
| Metric | Q3 2014 | Q3 2013 | Nine months 2014 | Nine months 2013 |
|---|---|---|---|---|
| Total revenue, GAAP | $69.0 | $65.1 | $199.0 | $143.2 |
| Net interest revenue, GAAP | $56.6 | $53.9 | $164.9 | $162.7 |
| Provision for credit losses | $2.0 | $3.0 | $6.7 | $62.5 |
| Operating expenses | $41.4 | $40.1 | $120.9 | $132.7 |
| Net income | $17.6 | $15.5 | $49.4 | $257.2 |
| Diluted earnings per share | $0.29 | $0.21 | $0.81 | $4.24 |
| Net interest margin, taxable-equivalent | 3.32% | 3.26% | 3.25% | 3.32% |
Q3 taxable-equivalent net interest revenue was $57.0 million, up 5% year over year. The efficiency ratio was 57.96% for Q3 and 58.54% year to date. Q3 return on assets was 0.95%; year-to-date return on common equity was 9.02%.
- Balance sheet at September 30: total assets $7.53 billion; loans $4.57 billion; deposits $6.24 billion; shareholders’ equity $736.4 million; cash and cash equivalents $216.1 million.
- Funding and debt: FHLB advances were $330.1 million, long-term debt $129.9 million, and short-term borrowings $6.0 million. Deposits increased $39.2 million from December 31, 2013.
- Cash flows, first nine months: operating cash flow $63.0 million; investing cash flow use $161.4 million; financing cash flow $85.5 million. Cash and cash equivalents declined $12.8 million from year-end 2013.
- Credit: allowance for loan losses was $71.9 million, or 1.57% of loans, versus $80.4 million, or 1.88%, a year earlier. Nonperforming assets were $21.9 million, 0.29% of total assets, versus $30.6 million and 0.42% a year earlier. Q3 net charge-offs were $3.2 million.
- Capital: consolidated Tier 1 capital ratio was 12.07%, total risk-based capital 13.32%, and leverage ratio 8.72%. United reported no preferred stock outstanding at quarter-end.
Material changes and notable items
- Q3 net income improved 14% year over year, while year-to-date net income fell sharply from 2013. The comparison is distorted by a $272 million deferred-tax valuation-allowance reversal in 2013; 2013 also included unusually high credit costs related to classified-asset dispositions.
- Q3 net interest margin improved to 3.32% from 3.26%, following Q2 balance-sheet actions and loan growth. Year-to-date margin declined to 3.25% from 3.32%, mainly due to lower loan yields from pricing competition.
- Loans grew 7% year over year to $4.57 billion. Commercial and industrial, commercial construction and indirect auto lending contributed to growth. The portfolio remains concentrated in real estate: more than 75% of loans were secured by real estate, and 56% of loans were commercial.
- Fee revenue was nearly flat in Q3 but declined 5% year to date. Lower mortgage-related fees were partly offset in Q3 by $945,000 of gains on SBA loan sales. Nine-month revenue also included $4.66 million of securities gains and a $4.45 million loss on prepayment of borrowings; management described these as related balance-sheet management actions.
- Operating expenses rose 3% in Q3, primarily from higher salaries and benefits, partly offset by lower FDIC assessments. They declined 9% year to date, reflecting lower foreclosed-property, professional and regulatory costs.
- United acquired substantially all assets of Business Carolina, an SBA/USDA lender, in June 2014 for $31.2 million cash. The acquisition included loans with a purchase-date fair value of $24.8 million and $1.5 million of goodwill.
- Shareholders’ equity declined from $795.7 million at December 31, 2013 to $736.4 million, primarily reflecting redemption of the remaining preferred stock during 2014. United paid $1.8 million in common dividends during the first nine months and reported a $0.06-per-share common dividend declaration in its equity statement.
Outlook, risks and contingencies
- Management expected an effective tax rate of approximately 37% for the remainder of 2014. It concluded that realization of the $225 million net deferred tax asset was more likely than not, based on projected future taxable income; it stated that a materially different outlook could require an increased valuation allowance and adversely affect results.
- No broader earnings or revenue guidance is provided in the supplied filing text. Management said the Q2 balance-sheet restructuring and Q3 loan growth had improved Q3 margin and net interest revenue, and expected continued use of FHLB advances as a funding source.
- Management considered liquidity sufficient at quarter-end. In addition to $216 million of cash and cash equivalents, United reported capacity to increase FHLB advances by $516 million and Federal Reserve discount-window capacity of $607 million, subject to qualifying collateral. It also cited brokered and retail deposits as potential funding sources.
- Key disclosed risks include economic and local-market conditions, real-estate and construction loan concentrations, loan-loss estimates, interest-rate and funding-cost changes, liquidity and capital access, deferred-tax-asset realization, acquisitions, cybersecurity and third-party systems, regulation, and litigation. Management stated that no material changes had occurred to previously disclosed risk factors.
- Commitments to extend credit totaled $852.6 million and letters of credit $20.5 million. Management did not expect pending or threatened lawsuits, individually or in aggregate, to have a material adverse effect. The filing reported effective disclosure controls and no significant internal-control changes.
Most important facts for investors to verify
- Whether loan growth, particularly in commercial and real-estate-related categories, remains consistent with underwriting standards and does not reverse recent asset-quality improvement.
- Whether the $225 million deferred tax asset is supported by achievable taxable-income forecasts; future performance could change the required valuation allowance.
- Whether Q3 margin improvement is sustainable amid loan-pricing pressure, rising funding costs, and the effects of securities and derivative repositioning.
- How liquidity and capital evolve after preferred-stock redemptions, including dependence on FHLB and other wholesale funding.
- The recurring earnings contribution of SBA lending and loan-sale gains, separately from securities gains and debt-prepayment costs.