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| UCBI > SEC Filings for UCBI > Form 10-Q on 7-May-2009 | All Recent SEC Filings |
7-May-2009
Quarterly Report
• our limited ability to raise capital or maintain liquidity;
• our ability to pay dividends;
• our past operating results may not be indicative of future operating results;
• our business is subject to the success of the local economies in which we operate;
• our concentration of construction and land development loans is subject to unique risks that could adversely affect our earnings;
• we may face risks with respect to future expansion and acquisitions or mergers;
• changes in prevailing interest rates may negatively affect our net income and the value of our assets;
• if our allowance for loan losses is not sufficient to cover actual loan losses, earnings would decrease;
• competition from financial institutions and other financial service providers may adversely affect our profitability;
• we may be subject to losses due to fraudulent and negligent conduct of our loan customers, third party service providers or employees;
• business increases, productivity gains and other investments are lower than expected or do not occur as quickly as anticipated;
• competitive pressures among financial services companies increase significantly;
• the success of our business strategy;
• the strength of the United States economy in general;
• changes in trade, monetary and fiscal policies and laws, including interest rate policies of the Board of Governors of the Federal Reserve System;
• inflation or market conditions fluctuate;
• conditions in the stock market, the public debt market and other capital markets deteriorate;
• financial services laws and regulations change;
• technology changes and United fails to adapt to those changes;
• consumer spending and saving habits change;
• unanticipated regulatory or judicial proceedings occur; and
• United is unsuccessful at managing the risks involved in the foregoing.
Additional information with respect to factors that may cause actual results to differ materially from those contemplated by such forward-looking statements may also be included in other reports that United files with the Securities and Exchange Commission. United cautions that the foregoing list of factors is not exclusive and not to place undue reliance on forward-looking statements. United does not intend to update any forward-looking statement, whether written or oral, relating to the matters discussed in this Form 10-Q.
Overview
The following discussion is intended to provide insight into the results of
operations and financial condition of United and its subsidiaries and should be
read in conjunction with the consolidated financial statements and accompanying
notes.
United is a bank holding company registered with the Federal Reserve under the
Bank Holding Company Act of 1956 that was incorporated under the laws of the
state of Georgia in 1987 and commenced operations in 1988. At March 31, 2009,
United had total consolidated assets of $8.1 billion, total loans of
$5.6 billion, total deposits of $6.6 billion and stockholders' equity of
$889 million.
United's activities are primarily conducted by its wholly owned Georgia banking
subsidiary (the "Bank") and Brintech, Inc., a consulting firm providing
professional services to the financial services industry. The Bank operations
are conducted under a community bank model that operates 27 "community banks"
with local bank presidents and boards in north Georgia, the Atlanta metropolitan
statistical area ("MSA"), the Gainesville MSA, coastal Georgia, western North
Carolina, and east Tennessee.
United reported a net loss of $103.8 million for the first quarter of 2009,
which included a non-recurring, non-cash charge of $70 million for goodwill
impairment and severance costs of $2.9 million for a reduction in workforce.
United's net operating loss, which excludes the non-recurring goodwill
impairment and severance charges was $32.0 million for the first quarter of
2009. This compared with net income of $16.1 million for the first quarter of
2008. Diluted operating loss per common share was $.71 for the first quarter of
2009, compared with diluted earnings per common share of $.34 for the first
quarter of 2008. The goodwill impairment charge and severance costs in the first
quarter of 2009 represented $1.45 and $.04, respectively, of the per share loss
for the quarter of 2009 bringing the net loss per diluted share to $2.20. The
first quarter of 2009 operating loss reflects the current recessionary economic
environment and credit losses primarily resulting from the weak housing market.
Operating loss and operating loss per diluted share are non-GAAP performance
measures. United's management believes that operating performance is useful in
analyzing the company's financial performance trends since it excludes items
that are non-recurring in nature. A reconciliation of these operating
performance measures to GAAP performance measures is included in the financial
highlights table on page 16.
Earnings decreased primarily as a result of the goodwill impairment charge,
severance costs and a higher provision for loan losses related to the increase
in charge-offs within the loan portfolio combined with margin compression due to
an increase in non-performing assets, competitive deposit pricing and the
ongoing effect of efforts to maintain liquidity. Although the margin was down
from a year ago, it was up 38 basis points from the fourth quarter of 2008,
reflecting improvement in loan and deposit pricing. Housing sales remain at low
levels, leaving a surplus of finished housing and lot inventory in our markets,
most notably in the Atlanta MSA. This decline in housing sales negatively
affects both the cash flows of our residential construction and land development
customers, and the demand for new land development loans.
Nonperforming assets, of $334.5 million, increased to 4.11% of total assets as
of March 31, 2009, compared to 1.07 % as of March 31, 2008 and 2.94% as of
December 31, 2008. This increase is a reflection of the continuing effects of
declining home sales in the Atlanta MSA, which itself is indicative of the
regional economic slowdown that is occurring in much of the Southeast.
Fee revenue decreased $1.4 million, or 10%, from the first quarter of 2008. With
the exception of mortgage fees, all other fee revenue sources decreased from the
first quarter of 2008. Mortgage fees were up $688,000, or 35%, reflecting higher
refinancing activity resulting from the low interest rate environment. In terms
of mortgage production, United closed 996 loans totaling $174 million in the
first quarter of 2009 which set a new company record. The decrease in the other
fee revenue categories primarily reflects the weak economy.
Operating expenses, excluding the $70 million goodwill impairment charge and
$2.9 million in severance costs, increased $5.0 million, or 11%, from the first
quarter of 2008, primarily due to higher expenses associated with and writedowns
on foreclosed real estate properties and higher FDIC insurance premiums.
Effective January 1, 2009, the FDIC raised deposit insurance rates on all
insured depository institutions by seven basis points on the balance of insured
deposits. United's first quarter expenses do not contain any provision for the
one-time special assessment that is currently proposed by the FDIC.
Critical Accounting Policies
The accounting and reporting policies of United are in accordance with
accounting principles generally accepted in the United States of America
("GAAP") and conform to general practices within the banking industry. The more
critical accounting and reporting policies include United's accounting for the
allowance for loan losses, intangible assets and income taxes. In particular,
United's accounting policies related to allowance for loan losses, intangibles
and income taxes involve the use of estimates and require significant judgment
to be made by management. Different assumptions in the application of these
policies could result in material changes in United's consolidated financial
position or consolidated results of operations. See "Asset Quality and Risk
Elements" herein for additional discussion of United's accounting methodologies
related to the allowance.
Table 1 - Financial Highlights
Selected Financial Information
First
2009 2008 Quarter
First Fourth Third Second First 2009-2008
(in thousands, except per share data; taxable equivalent) Quarter Quarter Quarter Quarter Quarter Change
INCOME SUMMARY
Interest revenue $ 103,562 $ 108,434 $ 112,510 $ 116,984 $ 129,041
Interest expense 46,150 56,561 53,719 55,231 62,754
Net interest revenue 57,412 51,873 58,791 61,753 66,287 (13 )%
Provision for loan losses 65,000 85,000 76,000 15,500 7,500
Fee revenue 12,846 10,718 13,121 15,105 14,197 (10 )
Total revenue 5,258 (22,409 ) (4,088 ) 61,358 72,984 NM
Operating expenses (1) 52,569 52,439 56,970 49,761 47,529 11
Operating (loss) income before taxes (47,311 ) (74,848 ) (61,058 ) 11,597 25,455 NM
Income tax (benefit) expense (15,335 ) (28,101 ) (21,184 ) 4,504 9,377
Net operating (loss) income (1) (31,976 ) (46,747 ) (39,874 ) 7,093 16,078 NM
Noncash goodwill impairment charge 70,000 - - - -
Severance costs, net of tax benefit 1,797 - - - -
Net (loss) income (103,773 ) (46,747 ) (39,874 ) 7,093 16,078 NM
Preferred dividends 2,554 712 4 4 4
Net (loss) income available to common shareholders $ (106,327 ) $ (47,459 ) $ (39,878 ) $ 7,089 $ 16,074 NM
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PERFORMANCE MEASURES Per common share: Diluted operating (loss) earnings (1) $ (.71 ) $ (.99 ) $ (.84 ) $ .15 $ .34 NM Per share impact of goodwill impairment charge (1.45 ) - - - - Per share impact of severance costs (.04 ) - - - - Diluted (loss) earnings (2.20 ) (.99 ) (.84 ) .15 .34 NM Cash dividends declared - - - .09 .09 Stock dividends declared (5) 1 for 130 1 for 130 1 for 130 - - Book value 14.70 16.95 17.12 17.75 18.50 (21 ) Tangible book value (3) 9.65 10.39 10.48 11.03 11.76 (18 ) Key performance ratios: Return on tangible equity (2)(3) NM % NM % NM % 5.86 % 13.16 % Return on equity (2)(4) NM NM NM 3.41 7.85 Return on assets (4) NM NM NM .34 .78 Net interest margin (4) 3.08 2.70 3.17 3.32 3.55 Operating efficiency ratio (3) 79.29 81.34 79.35 65.05 59.03 Equity to assets 11.64 10.08 10.28 10.33 10.30 Tangible equity to assets (3) 8.30 6.59 6.65 6.77 6.73 Tangible common equity to assets (3) 6.13 6.23 6.65 6.77 6.73 ASSET QUALITY Net charge-offs $ 43,281 $ 74,028 $ 55,736 $ 14,313 $ 7,075 Non-performing loans (NPLs) 259,155 190,723 139,266 123,786 67,728 Foreclosed properties 75,383 59,768 38,438 28,378 22,136 Total non-performing assets (NPAs) 334,538 250,491 177,704 152,164 89,864 Allowance for loan losses 143,990 122,271 111,299 91,035 89,848 Allowance for loan losses to loans 2.56 % 2.14 % 1.91 % 1.53 % 1.51 % Net charge-offs to average loans (4) 3.09 5.09 3.77 .97 .48 NPAs to loans and foreclosed properties 5.86 4.35 3.03 2.55 1.50 NPAs to total assets 4.11 2.94 2.20 1.84 1.07 AVERAGE BALANCES Loans $ 5,675,054 $ 5,784,139 $ 5,889,168 $ 5,933,143 $ 5,958,296 (5 ) Investment securities 1,712,654 1,508,808 1,454,740 1,507,240 1,485,515 15 Earning assets 7,530,230 7,662,536 7,384,287 7,478,018 7,491,480 1 Total assets 8,312,648 8,449,097 8,146,880 8,295,748 8,305,621 - Deposits 6,780,531 6,982,229 6,597,339 6,461,361 6,051,069 12 Shareholders' equity 967,505 851,956 837,487 856,727 855,659 13 Common shares - basic 48,324 47,844 47,417 47,158 47,052 Common shares - diluted 48,324 47,844 47,417 47,249 47,272 AT PERIOD END Loans $ 5,632,705 $ 5,704,861 $ 5,829,937 $ 5,933,141 $ 5,967,839 (6 ) Investment securities 1,719,033 1,617,187 1,400,827 1,430,588 1,508,402 14 Total assets 8,140,909 8,520,765 8,072,543 8,264,051 8,386,255 (3 ) Deposits 6,616,488 7,003,624 6,689,335 6,696,456 6,175,769 7 Shareholders' equity 888,853 989,382 816,880 837,890 871,452 2 Common shares outstanding 48,487 48,009 47,596 47,096 47,004 |
(1) Excludes the non-recurring goodwill impairment charge of $70 million and severance costs of $2.9 million, net of income tax benefit of $1.1 million in the first quarter of 2009.
(2) Net income available to common shareholders, which excludes preferred stock dividends, divided by average realized common equity, which excludes accumulated other comprehensive income (loss).
(3) Excludes effect of acquisition related intangibles and associated amortization.
(4) Annualized.
(5) Number of new shares issued for shares currently held. NM - Not meaningful.
Results of Operations
United reported a net loss of $103.8 million for the first quarter of 2009,
which included a non-recurring, non-cash goodwill impairment charge of
$70 million and severance costs of $2.9 million. This compared to net income of
$16.1 million for the same period in 2008. The first quarter 2009 diluted loss
per share was $2.20, of which $1.45 related to the goodwill impairment charge.
This compared to diluted earnings per share of $.34 for the first quarter of
2008. The loss in the first quarter of 2009 reflects the continuing effect of
the economic recession and the weak housing market.
Net Interest Revenue (Taxable Equivalent)
Net interest revenue (the difference between the interest earned on assets and
the interest paid on deposits and borrowed funds) is the single largest
component of total revenue. United actively manages this revenue source to
provide optimal levels of revenue while balancing interest rate, credit and
liquidity risks. Net interest revenue for the three months ended March 31, 2009
was $57.4 million, down $8.9 million, or 13%, from last year but up $5.5 million
from the fourth quarter of 2008. Average loans decreased $283 million, or 5%,
from the first quarter last year. The decrease in the loan portfolio was a
result of the slowdown in the housing market, particularly in the Atlanta MSA
where period-end loans decreased $318 million from March 31, 2008. Much of the
decrease was intentional as management sought to rebalance the loan portfolio by
reducing the concentration of residential construction loans, particularly in
the Atlanta MSA where the housing market has been under considerable stress.
Period-end loans in north Georgia and North Carolina decreased $57 million and
$8 million, respectively. In contrast, coastal Georgia increased $21 million,
the Gainesville MSA increased $7 million and east Tennessee increased
$20 million from the first quarter of 2008.
Average interest-earning assets for the first quarter 2009 increased
$38.8 million, or 1%, over the same period in 2008. The increase in
interest-earning assets, which was primarily in the investment securities
portfolio and other short-term investments, was partially funded by
interest-bearing sources. Average interest-bearing liabilities decreased
$63.4 million from the first quarter of 2008 with the Series B preferred stock
of $180 million, issued in the fourth quarter as part of the U.S. Treasury's
Capital Purchase Program funding the balance sheet growth and replacing a
portion of the borrowed funds. Dividends on the Series B preferred shares are
not included in net income (loss) but are subtracted from net income (loss) in
the determination of net income (loss) available to common shareholders.
The banking industry uses two ratios to measure relative profitability of net
interest revenue. The net interest spread measures the difference between the
average yield on interest-earning assets and the average rate paid on
interest-bearing liabilities. The interest rate spread eliminates the effect of
non-interest-bearing deposits and gives a direct perspective on the effect of
market interest rate movements. The net interest margin is defined as net
interest revenue as a percent of average total interest-earning assets and takes
into account the positive effect of investing non-interest-bearing deposits and
capital.
For the three months ended March 31, 2009 and 2008, the net interest spread was
2.74% and 3.15%, respectively, while the net interest margin was 3.08% and
3.55%, respectively. The compression of the spread and margin was primarily the
result of a rise in non-performing assets and higher than normal deposit pricing
resulting from competition for deposits due to liquidity pressures affecting the
banking industry as a whole. The compression of the spread and margin was also
due to the lowering of the prime interest rate initiated by actions of the
Federal Reserve beginning in September 2007 and the resulting decrease in the
repricing of our interest earning assets faster than our interest-bearing
liabilities. Also contributing to the lower spread and net interest margin was a
shift in earning-asset mix from loans to investment securities. These factors
continued to compress the net interest margin and the net interest spread
through most of the fourth quarter of 2008 leading to a net interest margin of
2.70% in the fourth quarter. Deposit pricing competition began to ease late in
the fourth quarter and United intensified its focus on loan pricing to ensure
that it was being adequately compensated for the credit risk it was taking. The
combined effect of the easing of deposit pricing competition and widening credit
spreads in United's loan portfolio led to the 38 basis point increase in the net
interest margin from the fourth quarter of 2008 to the first quarter of 2009.
The average yield on interest-earning assets for the first quarter of 2009 was
5.56%, compared with 6.92% in the first quarter of 2008. Loan yields were down
153 basis points compared with the first quarter of 2008, due to the effect of
the Federal Reserve's policy of lowering interest rates to stimulate the economy
on United's primarily prime-based loan portfolio and the higher level of
non-performing loans.
The average cost of interest-bearing liabilities for the first quarter was 2.82%
compared to 3.77% from the same period of 2008. Throughout much of early 2008,
United was unable to reduce deposit rates commensurate with the rate declines in
its loan portfolio. This trend became more visible in the third and fourth
quarters of 2008 when industry liquidity pressures led to increased competition
for deposits and did not allow United to reduce deposit rates to correspond with
the Federal Reserve's actions to lower interest rates. Late in the fourth
quarter of 2008, liquidity pressures began to ease, allowing United to lower its
deposit rates and still maintain its liquidity position.
The following table shows the relationship between interest revenue and expense, and the average amounts of interest-earning assets and interest-bearing liabilities for the three months ended March 31, 2009 and 2008. Table 2 - Average Consolidated Balance Sheets and Net Interest Analysis
For the Three Months Ended March 31,
2009 2008
Average Avg. Average Avg.
(dollars in thousands, taxable equivalent) Balance Interest Rate Balance Interest Rate
Assets:
Interest-earning assets:
Loans, net of unearned income (1)(2) $ 5,675,054 $ 81,749 5.84 % $ 5,958,296 $ 109,252 7.37 %
Taxable securities (3) 1,682,603 20,433 4.86 1,448,224 18,628 5.15
Tax-exempt securities (1)(3) 30,051 522 6.95 37,291 648 6.95
Federal funds sold and other
interest-earning assets 142,522 858 2.41 47,669 513 4.30
Total interest-earning assets 7,530,230 103,562 5.56 7,491,480 129,041 6.92
Non-interest-earning assets:
Allowance for loan losses (128,798 ) (92,025 )
Cash and due from banks 104,411 154,706
Premises and equipment 179,495 181,355
Other assets (3) 627,310 570,105
Total assets $ 8,312,648 $ 8,305,621
Liabilities and Shareholders' Equity:
Interest-bearing liabilities:
Interest-bearing deposits:
NOW $ 1,358,149 $ 3,337 1.00 $ 1,462,116 $ 8,587 2.36
Money market 477,325 2,237 1.90 439,049 2,913 2.67
Savings 172,708 127 .30 184,812 227 .49
Time less than $100,000 1,942,897 17,217 3.59 1,553,313 18,223 4.72
Time greater than $100,000 1,393,188 12,825 3.73 1,365,307 16,370 4.82
Brokered 786,171 6,011 3.10 374,402 4,291 4.61
Total interest-bearing deposits 6,130,438 41,754 2.76 5,378,999 50,611 3.78
Federal funds purchased and other
borrowings 150,517 553 1.49 551,812 4,318 3.15
Federal Home Loan Bank advances 204,941 1,074 2.13 661,498 5,745 3.49
Long-term debt 150,997 2,769 7.44 107,996 2,080 7.75
. . .
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