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| UCBI > SEC Filings for UCBI > Form 10-Q on 7-Nov-2012 | All Recent SEC Filings |
7-Nov-2012
Quarterly Report
Forward-looking Statements
This Form 10-Q contains forward-looking statements within the meaning of
Section 27A of the Securities Act of 1933, as amended, (the "Securities Act"),
and Section 21E of the Securities Exchange Act of 1934, as amended, (the
"Exchange Act"), about United and its subsidiaries. These forward-looking
statements are intended to be covered by the safe harbor for forward-looking
statements provided by the Private Securities Litigation Reform Act of 1995.
Forward-looking statements are not statements of historical fact, and can be
identified by the use of forward-looking terminology such as "believes",
"expects", "may", "will", "could", "should", "projects", "plans", "goal",
"targets", "potential", "estimates", "pro forma", "seeks", "intends", or
"anticipates" or the negative thereof or comparable terminology. Forward-looking
statements include discussions of strategy, financial projections, guidance and
estimates (including their underlying assumptions), statements regarding plans,
objectives, expectations or consequences of various transactions, and statements
about the future performance, operations, products and services of United and
its subsidiaries. We caution our shareholders and other readers not to place
undue reliance on such statements.
Our businesses and operations are and will be subject to a variety of risks, uncertainties and other factors. Consequently, actual results and experiences may differ materially from those contained in any forward-looking statements. Such risks, uncertainties and other factors that could cause actual results and experiences to differ from those projected include, but are not limited to, the risk factors set forth in our Annual Report on Form 10-K/A for the year ended December 31, 2011, as well as the following factors:
• our ability to maintain profitability;
• our ability to fully realize our deferred tax asset balances, including net operating loss carry-forwards;
• the condition of the banking system and financial markets;
• the results of our most recent internal credit stress test may not accurately predict the impact on our financial condition if the economy were to continue to deteriorate;
• our ability to raise capital as may be necessary;
• our ability to maintain liquidity or access other sources of funding;
• changes in the cost and availability of funding;
• the success of the local economies in which we operate;
• our concentrations of residential and commercial construction and development loans and commercial real estate loans are subject to unique risks that could adversely affect our earnings;
• changes in prevailing interest rates may negatively affect our net income and the value of our assets;
• the accounting and reporting policies of United;
• if our allowance for loan losses is not sufficient to cover actual loan losses;
• we may be subject to losses due to fraudulent and negligent conduct of our loan customers, third party service providers or employees;
• competition from financial institutions and other financial service providers;
• the U.S. Treasury may change the terms of our fixed rate cumulative perpetual preferred stock, Series B (the "Series B preferred stock");
• risks with respect to future expansion and acquisitions;
• if the conditions in the stock market, the public debt market and other capital markets deteriorate;
• the impact of the Dodd-Frank Wall Street Reform Act of 2010 and related regulations and other changes in financial services laws and regulations;
• the failure of other financial institutions;
• a special assessment that may be imposed by the Federal Deposit Insurance Corporation (the "FDIC") on all FDIC-insured institutions in the future, similar to the assessment in 2009 that decreased our earnings;
• the formal investigation by the Securities and Exchange Commission (the "SEC") or any penalty, sanction or further restatement of our previously issued financial statements that may result from such investigation;
• the costs and effects of litigation, examinations, investigations, or similar matters, or adverse facts and developments related thereto, including possible dilution; and
• regulatory or judicial proceedings, board resolutions, informal memorandums of understanding or formal enforcement actions imposed by regulators that may occur, or any such proceedings or enforcement actions that is more severe than we anticipate.
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 SEC. 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 Community Banks, Inc. ("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 Board of Governors of 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 September 30, 2012, United had total consolidated assets of $6.70 billion, total loans of $4.14 billion, excluding the loans acquired from Southern Community Bank ("SCB") that are covered by loss sharing agreements and therefore have a different risk profile. United also had total deposits of $5.82 billion and shareholders' equity of $585 million.
United's activities are primarily conducted by its wholly owned Georgia banking subsidiary, United Community Bank (the "Bank"). The Bank's operations are conducted under a community bank model that operates 27 "community banks" with local bank presidents and boards in north Georgia, the Atlanta, Georgia metropolitan statistical area (the "Atlanta MSA"), the Gainesville, Georgia metropolitan statistical area (the "Gainesville MSA"), coastal Georgia, western North Carolina, and east Tennessee.
Included in management's discussion and analysis are certain non-GAAP (accounting principles generally accepted in the United States of America ("GAAP")) performance measures. United's management believes that non-GAAP performance measures are useful in analyzing United's financial performance trends and therefore this section will refer to non-GAAP performance measures. A reconciliation of these non-GAAP performance measures to GAAP performance measures is included in the table on page 35.
United reported a net income of $10.6 million for the third quarter of 2012. This compared to a net loss of $11.3 million for the third quarter of 2011. Diluted earnings per common share was $.13 for the third quarter of 2012, compared to diluted loss per common share of $.25 for the third quarter of 2011.
For the nine months ended September 30, 2012, United reported net income of $28.6 million. This compared to a net loss of $237 million for the first nine months of 2011, which reflects the credit losses taken in the first quarter associated with United's problem asset disposition plan (the "Problem Asset Disposition Plan"). United's Board of Directors adopted the Problem Asset Disposition Plan in the first quarter of 2011 following a private placement transaction that raised $380 million in new capital (the "Private Placement"). Diluted earnings per common share was $.34 for the nine months ended September 30, 2012, compared with a loss per common share of $7.23 for the same period in 2011.
United's provision for loan losses was $15.5 million for the three months ended September 30, 2012, compared to $36.0 million for the same period in 2011. The third quarter 2011 provision for loan losses included $25.0 million specifically related to United's largest lending relationship. Net charge-offs for the third quarter of 2012 were $20.6 million, compared to $17.5 million for the third quarter of 2011. For the nine months ended September 30, 2012, United's provision for loan losses was $48.5 million, compared to $237 million for the same period of 2011. Net charge-offs for the first nine months of 2012 were $55.3 million, compared to $266 million for the first nine months of 2011.
Since the execution of the Problem Asset Disposition Plan in the first quarter of 2011, United's allowance for loan losses analysis has indicated a lower allowance requirement each quarter than the previous quarter resulting in provisions for loan losses that fall below the amount of net charge-offs. The only exception was the third quarter of 2011 due to the classification of United's largest lending relationship. As United's historical loss experience and other credit measures have improved, the amount of estimated loss inherent in the loan portfolio, as measured by United's quarterly analysis of the allowance for loan losses, has decreased accordingly. In addition, third quarter 2012 net charge-offs included $4.71 million of charge-offs related to note sales and short sales of the collateral underlying certain notes of which $3.57 million of specific reserves had been established in the second quarter.
During the first quarter of 2011, performing substandard loans with a pre-charge down carrying amount of $166 million and nonperforming loans with a pre-charge down carrying amount of $101 million were collectively written down to the expected sales proceeds of $80.6 million, in conjunction with a bulk loan sale that was part of the Problem Asset Disposition Plan (the "Bulk Loan Sale"). United recognized net charge-offs of $186 million related to the transfer of loans to the held for sale classification in the first quarter. The Bulk Loan Sale was completed on April 18, 2011. Proceeds from the sale were greater than originally estimated, resulting in a reduction of second quarter 2011 charge-offs of $7.27 million.
As of September 30, 2012, United's allowance for loan losses was $108 million, or 2.60% of loans, compared to $146 million, or 3.55% of loans, at September 30, 2011. Nonperforming assets of $142 million, which excludes assets of SCB that are covered by loss sharing agreements with the FDIC, decreased to 2.12% of total assets at September 30, 2012 from 2.74% as of September 30, 2011. Nonperforming asset levels are impacted significantly by the inflow of new nonperforming loans and United's ability to liquidate foreclosed properties. During the third quarter of 2011, United classified its largest lending relationship of $76.6 million, which caused nonperforming assets to increase for that period. Since that time, nonperforming assets have trended downward.
Taxable equivalent net interest revenue was $57.4 million for the third quarter of 2012, compared to $59.3 million for the same period of 2011. The decrease in net interest revenue was primarily the result of the lower yields on the loan and securities portfolios, which were due to intense loan pricing competition and reinvestment of maturing securities proceeds at record low rates as well as $179
million in lower average investment securities balances for the quarter. Average loans for the quarter declined $46.7 million from the third quarter of 2011. The impact of the decrease in average loan balances was substantially offset by lower deposit rates. Net interest margin increased from 3.55% for the three months ended September 30, 2011 to 3.60% for the same period in 2012. For the nine months ended September 30, 2012, taxable equivalent net interest revenue was $173 million, compared to $175 million for the same period of 2011. Net interest margin increased from 3.42% for the nine months ended September 30, 2011 to 3.52% for the same period in 2012.
Fee revenue increased $2.27 million, or 20%, from the third quarter of 2011 and increased $4.77 million, or 13%, from the first nine months of 2011. The quarterly and year to date increases were due to higher mortgage loan and related fees as well as an increase in service charges and fees. Mortgage refinancing activity continued to accelerate through the third quarter of 2012, as mortgage rates fell to record low levels. New service fees on demand deposit accounts that became effective January 1, 2012 more than offset lower overdraft fees.
For the third quarter of 2012, operating expenses of $44.8 million were down $1.74 million from the third quarter of 2011. Lower salary and employee benefits accounted for $2.34 million of the decrease and were partially offset by 893,000 in higher foreclosed property costs. For the nine months ended September 30, 2012, operating expenses of $136 million were down $74.5 million from the same period of 2011. Foreclosed property costs were down $60.2 million from the first nine months of 2011, due to the writedowns taken in 2011 associated with the Problem Asset Disposition Plan. In addition, salaries and employee benefits were down $4.18 million and FDIC assessments and other regulatory charges were down $4.07 million for the nine months ended September 30, 2012 compared to the same period in 2011.
Recent Developments
On October 3, 2012, United completed a private offering (the "Offering") of $35 million aggregate principal amount of 9.0% Senior Notes due 2017 (the "Notes"). The Notes were sold to three institutional purchasers (the "Purchasers") at an offering price of 100% of face amount. Sandler O'Neill & Partners, L.P. served as the placement agent. The proceeds from the Offering of the Notes will be used for general corporate purposes and, principally, to repay $30.5 million in subordinated debt of United that matures on December 15, 2012.
The Notes were issued pursuant to an indenture (the "Indenture"), dated as of October 3, 2012, between United and Wilmington Trust, National Association, as trustee. Interest on the Notes will be payable semi-annually on April 15 and October 15 of each year, beginning on April 15, 2013. The Notes are not redeemable and will mature on October 15, 2017. The Indenture contains covenants that, among other things, limit the ability of United to create liens on the stock of its bank subsidiary.
In connection with the Offering, United agreed to use its commercially reasonable efforts to file within 90 days with the SEC and cause to become effective, a resale registration statement for the benefit of the Purchasers relating to their potential resale of the Notes.
As previously disclosed on United's Current Report on Form 8-K filed on October 22, 2012, United's Audit Committee, after a thorough and a competitive process, authorized management to engage PricewaterhouseCoopers LLP ("PwC") as its independent registered public accounting firm for the year ending December 31, 2013. PwC will replace the current independent registered public accounting firm, Porter Keadle Moore, LLC, upon the completion of the audit for the year ending December 31, 2012.
Critical Accounting Policies
The accounting and reporting policies of United are in accordance with 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, fair value measurements, and income taxes. In particular, United's accounting policies related to allowance for loan losses, fair value measurements 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 for loan losses.
GAAP Reconciliation and Explanation
This Form 10-Q contains non-GAAP financial measures, which are performance measures determined by methods other than in accordance with GAAP. Such non-GAAP financial measures include, among others the following: taxable equivalent interest revenue, taxable equivalent net interest revenue, tangible book value per share, tangible equity to assets, tangible common equity to assets and tangible common equity to risk-weighted assets. Management uses these non-GAAP financial measures because it believes they are useful for evaluating our operations and performance over periods of time, as well as in managing and evaluating our business and in discussions about our operations and performance. Management believes these non-GAAP financial measures provide users of our financial information with a meaningful measure for assessing our financial results and credit trends, as well as comparison to financial results for prior periods. These non-GAAP financial measures should not be considered as a substitute for operating results determined in accordance with GAAP and may not be comparable to other similarly titled financial measures used by other companies. A reconciliation of these operating performance measures to GAAP performance measures is included in on the table on page 35.
Table 1 - Financial Highlights
Selected Financial Information
2012 2011 Third
Quarter For the Nine YTD
(in thousands, except per share Third Second First Fourth Third 2012-2011 Months Ended 2012-2011
data; taxable equivalent) Quarter Quarter Quarter Quarter Quarter Change 2012 2011 Change
INCOME SUMMARY
Interest revenue $ 65,978 $ 66,780 $ 70,221 $ 71,905 $ 74,543 $ 202,979 $ 227,439
Interest expense 8,607 9,944 11,357 12,855 15,262 29,908 52,820
Net interest revenue 57,371 56,836 58,864 59,050 59,281 (3 ) % 173,071 174,619 (1 ) %
Provision for loan losses 15,500 18,000 15,000 14,000 36,000 48,500 237,000
Fee revenue 13,764 12,867 15,379 12,667 11,498 20 42,010 37,241 13
Total revenue 55,635 51,703 59,243 57,717 34,779 166,581 (25,140 )
Operating expenses 44,783 44,310 46,955 51,080 46,520 (4 ) 136,048 210,519 (35 )
Income (loss) before income taxes 10,852 7,393 12,288 6,637 (11,741 ) 30,533 (235,659 )
Income tax expense (benefit) 284 894 760 (3,264 ) (402 ) 1,938 988
Net income (loss) 10,568 6,499 11,528 9,901 (11,339 ) 28,595 (236,647 )
Preferred dividends and discount accretion 3,041 3,032 3,030 3,025 3,019 9,103 8,813
Net income (loss) available to common
shareholders $ 7,527 $ 3,467 $ 8,498 $ 6,876 $ (14,358 ) $ 19,492 $ (245,460 )
PERFORMANCE MEASURES
Per common share:
Diluted income (loss) $ .13 $ .06 $ .15 $ .12 $ (.25 ) $ .34 $ (7.23 )
Book value 6.75 6.61 6.68 6.62 6.77 - 6.75 6.77 -
Tangible book value (2) 6.64 6.48 6.54 6.47 6.61 - 6.64 6.61 -
Key performance ratios:
Return on equity (1)(3) 7.43 % 3.51 % 8.78 % 7.40 % (15.06 ) % 6.57 % (151.32 )%
Return on assets (3) .63 .37 .66 .56 (.64 ) .53 (4.37 )
Net interest margin (3) 3.60 3.43 3.53 3.51 3.55 3.52 3.42
Efficiency ratio 62.95 63.84 63.31 71.23 65.73 63.36 99.39
Equity to assets 8.75 8.33 8.19 8.28 8.55 8.42 7.58
Tangible equity to assets (2) 8.66 8.24 8.08 8.16 8.42 8.32 7.47
Tangible common equity to assets (2) 5.73 5.45 5.33 5.38 5.65 5.50 3.23
Tangible common equity to risk- weighted
assets (2) 8.44 8.37 8.21 8.25 8.52 8.44 8.52
ASSET QUALITY *
Non-performing loans $ 115,001 $ 115,340 $ 129,704 $ 127,479 $ 144,484 $ 115,001 $ 144,484
Foreclosed properties 26,958 30,421 31,887 32,859 44,263 26,958 44,263
Total non-performing assets (NPAs) 141,959 145,761 161,591 160,338 188,747 141,959 188,747
Allowance for loan losses 107,642 112,705 113,601 114,468 146,092 107,642 146,092
Net charge-offs 20,563 18,896 15,867 45,624 17,546 55,326 265,603
Allowance for loan losses to loans 2.60 % 2.74 % 2.75 % 2.79 % 3.55 % 2.60 % 3.55 %
Net charge-offs to average loans (3) 1.99 1.85 1.55 4.39 1.68 1.80 8.28
NPAs to loans and foreclosed properties 3.41 3.51 3.88 3.87 4.54 3.41 4.54
NPAs to total assets 2.12 2.16 2.25 2.30 2.74 2.12 2.74
AVERAGE BALANCES ($ in millions)
Loans $ 4,147 $ 4,156 $ 4,168 $ 4,175 $ 4,194 (1 ) $ 4,157 $ 4,352 (4 )
Investment securities 1,971 2,145 2,153 2,141 2,150 (8 ) 2,089 1,952 7
Earning assets 6,346 6,665 6,700 6,688 6,630 (4 ) 6,569 6,817 (4 )
Total assets 6,648 6,993 7,045 7,019 7,000 (5 ) 6,894 7,246 (5 )
Deposits 5,789 5,853 6,028 6,115 6,061 (4 ) 5,890 6,329 (7 )
Shareholders' equity 582 583 577 581 598 (3 ) 580 549 6
Common shares - basic (thousands) 57,880 57,840 57,764 57,646 57,599 57,826 33,973
Common shares - diluted (thousands) 57,880 57,840 57,764 57,646 57,599 57,826 33,973
AT PERIOD END ($ in millions)
Loans * $ 4,138 $ 4,119 $ 4,128 $ 4,110 $ 4,110 1 $ 4,138 $ 4,110 1
Investment securities 2,025 1,984 2,202 2,120 2,123 (5 ) 2,025 2,123 (5 )
Total assets 6,699 6,737 7,174 6,983 6,894 (3 ) 6,699 6,894 (3 )
Deposits 5,823 5,822 6,001 6,098 6,005 (3 ) 5,823 6,005 (3 )
Shareholders' equity 585 576 580 575 583 - 585 583 -
Common shares outstanding (thousands) 57,710 57,641 57,603 57,561 57,510 57,710 57,510
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(1) Net loss available to common shareholders, which is net of preferred stock dividends, divided by average realized common equity, which excludes accumulated other comprehensive income (loss). (2) Excludes effect of acquisition related intangibles and associated amortization. (3) Annualized.
* Excludes loans and foreclosed properties covered by loss sharing agreements with the FDIC.
Table 1 Continued - Non-GAAP Performance Measures Reconciliation
Selected Financial Information
2012 2011 For the Nine
(in thousands, except per share Third Second First Fourth Third Months Ended
data; taxable equivalent) Quarter Quarter Quarter Quarter Quarter 2012 2011
. . .
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