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UCBI > SEC Filings for UCBI > Form 10-Q on 9-May-2013All Recent SEC Filings

Show all filings for UNITED COMMUNITY BANKS INC | Request a Trial to NEW EDGAR Online Pro

Form 10-Q for UNITED COMMUNITY BANKS INC


9-May-2013

Quarterly Report


Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations

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", 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 or events, 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 for the year ended December 31, 2012, 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;

? 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;

? 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;

? 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 Act 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 FDIC on all FDIC-insured institutions in the future, similar to the assessment in 2009 that decreased our earnings;

? 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 Securities and Exchange Commission (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 March 31, 2013, United had total consolidated assets of $6.85 billion and total loans of $4.19 billion (excluding the loans acquired from Southern Community Bank ("SCB") that are covered by loss sharing agreements). United also had total deposits of $6.03 billion and shareholders' equity of $592 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-Sandy Springs-Roswell, Georgia metropolitan statistical area (the "Atlanta MSA"), the Gainesville, Georgia metropolitan statistical area (the "Gainesville MSA"), coastal Georgia, western North Carolina, east Tennessee and the Greenville-Anderson-Mauldin, South Carolina metropolitan statistical area (the "Greenville MSA").

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 37.

United reported a net income of $11.8 million for the first quarter of 2013. This compared to net income of $11.5 million for the first quarter of 2012. Diluted earnings per common share was $.15 for the first quarter of 2013, compared to diluted earnings per common share of $.15 for the first quarter of 2012.

Taxable equivalent net interest revenue was $54.7 million for the first quarter of 2013, compared to $58.9 million for the same period of 2012. The decrease in net interest revenue was primarily the result of the lower yields on the loan and securities portfolios, which were due to loan pricing competition and reinvestment of maturing securities proceeds at record low rates as well as $12.4 million in lower average investment securities balances for the quarter. The impact of the decrease in average earning asset yield was substantially offset by lower deposit rates. Net interest margin decreased from 3.53% for the three months ended March 31, 2012 to 3.38% for the same period in 2013.

United's provision for loan losses was $11.0 million for the three months ended March 31, 2013, compared to $15.0 million for the same period in 2012. Net charge-offs for the first quarter of 2013 were $12.4 million, compared to $15.9 million for the first quarter of 2012. United's credit quality indicators have continued to steadily improve leading to the lower provision for loan losses and net charge-offs in the first quarter of 2013.

As of March 31, 2013, United's allowance for loan losses was $106 million, or 2.52% of loans, compared to $114 million, or 2.75% of loans, at March 31, 2012. Nonperforming assets of $113 million, which excludes assets of SCB that are covered by loss sharing agreements with the FDIC, decreased to 1.65% of total assets at March 31, 2013 from 2.25% as of March 31, 2012. Nonperforming asset levels are impacted significantly by the inflow of new nonperforming loans and United's ability to liquidate foreclosed properties. During the first quarter of 2013, $9.67 million in loans were placed on nonaccrual compared with $32.4 million in the first quarter of 2012.

Fee revenue decreased $2.55 million, or 17%, from the first quarter of 2012. The decrease was due primarily to a decrease in other fee income. In the first quarter of 2012, United recognized $1.10 million in interest on a 2008 federal tax refund, and a $728,000 gain from the sale of low income housing tax credits. In addition, service charges and fees were down $380,000, or 5% from the first quarter of 2012, mostly in overdraft fees and other service charges and fees. United began assessing a new service fee on low balance demand deposit accounts in the first quarter of 2012 and those fees have trended downward since that time.

For the first quarter of 2013, operating expenses of $43.8 million were down $3.19 million from the first quarter of 2012. Lower salary and employee benefits accounted for $1.63 million of the decrease. In addition, foreclosed property write-downs and maintenance expenses were down $1.49 million from the first quarter of 2012. Expenses in general are down from a year ago reflecting management's efforts to reduce costs and improve operating efficiency.

Recent Developments

On March 11, 2013, the United States Department of Treasury ("Treasury"), the holder of all 180,000 shares of outstanding Fixed Rate Cumulative Preferred Stock, Series B (the "Securities") issued by United, announced that it had auctioned all of the Securities in a private transaction with unaffiliated third party investors. United received no proceeds from this transaction. The clearing price in the auction was $962.50 per share of the Securities (which have a $1,000 liquidation preference). The closing of the sale of the Securities occurred on March 28, 2013.


The sale of the Securities had no effect on the terms of the outstanding Securities, including United's obligation to satisfy accrued and unpaid dividends prior to payment of any dividend or other distribution to holders of junior stock, including United's common stock, and an increase in the dividend rate from 5% to 9%, effective December 15, 2013 and commencing with the dividend payment on February 15, 2014. Further, the sale of the Securities has no effect on the United's capital, regulatory capital, financial condition or results of operations. Upon the closing of the sale of the Securities, United is no longer subject to various executive compensation and corporate governance requirements to which participants in Treasury's Capital Purchase Program were subject while Treasury held the Securities.

The sale of Securities did not include the sale of a warrant to purchase 219,909 shares of the United's common stock at an exercise price of $61.40, which expires on December 15, 2018 and the Treasury may continue to hold or sell in its discretion, subject to applicable securities laws and United's right to repurchase the warrant at fair market value under the terms of the agreements with Treasury.

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 37.


Table 1 - Financial Highlights
Selected Financial Information

                                                                                                 First
                          2013                               2012                               Quarter
(in thousands, except
per share                 First        Fourth         Third        Second         First         2013-2012
data; taxable
equivalent)              Quarter       Quarter       Quarter       Quarter       Quarter         Change
INCOME SUMMARY
Interest revenue        $  62,134     $  64,450     $  65,978     $  66,780     $  70,221
Interest expense            7,475         8,422         8,607         9,944        11,357
Net interest revenue       54,659        56,028        57,371        56,836        58,864               (7 )%
Provision for loan
losses                     11,000        14,000        15,500        18,000        15,000
Fee revenue                12,826        14,761        13,764        12,867        15,379              (17 )
Total revenue              56,485        56,789        55,635        51,703        59,243
Operating expenses         43,770        50,726        44,783        44,310        46,955               (7 )
Income before income
taxes                      12,715         6,063        10,852         7,393        12,288                3
Income tax expense            950           802           284           894           760
Net income                 11,765         5,261        10,568         6,499        11,528                2
Preferred dividends
and discount
accretion                   3,052         3,045         3,041         3,032         3,030
Net income available
to common
shareholders            $   8,713     $   2,216     $   7,527     $   3,467     $   8,498                3
PERFORMANCE MEASURES
Per common share:
Diluted income          $     .15     $     .04     $     .13     $     .06     $     .15                -
Book value                   6.85          6.67          6.75          6.61          6.68                3
Tangible book value
(2)                          6.76          6.57          6.64          6.48          6.54                3
Key performance
ratios:
Return on equity
(1)(3)                       8.51 %        2.15 %        7.43 %        3.51 %        8.78 %
Return on assets (3)          .70           .31           .63           .37           .66
Net interest margin
(3)                          3.38          3.44          3.60          3.43          3.53
Efficiency ratio            64.97         71.69         62.95         63.84         63.31
Equity to assets             8.60          8.63          8.75          8.33          8.19
Tangible equity to
assets (2)                   8.53          8.55          8.66          8.24          8.08
Tangible common
equity to assets (2)         5.66          5.67          5.73          5.45          5.33
Tangible common
equity to
risk-weighted assets
(2)                          8.45          8.26          8.44          8.37          8.21
ASSET QUALITY *
Non-performing loans    $  96,006     $ 109,894     $ 115,001     $ 115,340     $ 129,704
Foreclosed properties      16,734        18,264        26,958        30,421        31,887
Total non-performing
assets (NPAs)             112,740       128,158       141,959       145,761       161,591
Allowance for loan
losses                    105,753       107,137       107,642       112,705       113,601
Net charge-offs            12,384        14,505        20,563        18,896        15,867
Allowance for loan
losses to loans              2.52 %        2.57 %        2.60 %        2.74 %        2.75 %
Net charge-offs to
average loans (3)            1.21          1.39          1.99          1.85          1.55
NPAs to loans and
foreclosed properties        2.68          3.06          3.41          3.51          3.88
NPAs to total assets         1.65          1.88          2.12          2.16          2.25
AVERAGE BALANCES ($
in millions)
Loans                   $   4,197     $   4,191     $   4,147     $   4,156     $   4,168                1
Investment securities       2,141         2,088         1,971         2,145         2,153               (1 )
Earning assets              6,547         6,482         6,346         6,665         6,700               (2 )
Total assets                6,834         6,778         6,648         6,993         7,045               (3 )
Deposits                    5,946         5,873         5,789         5,853         6,028               (1 )
Shareholders' equity          588           585           582           583           577                2
Common shares - basic
(thousands)                58,081        57,971        57,880        57,840        57,764
Common shares -
diluted (thousands)        58,081        57,971        57,880        57,840        57,764
AT PERIOD END ($ in
millions)
Loans *                 $   4,194     $   4,175     $   4,138     $   4,119     $   4,128                2
Investment securities       2,141         2,079         2,025         1,984         2,202               (3 )
Total assets                6,849         6,802         6,699         6,737         7,174               (5 )
Deposits                    6,026         5,952         5,823         5,822         6,001                -
Shareholders' equity          592           581           585           576           580                2
Common shares
outstanding
(thousands)                57,767        57,741        57,710        57,641        57,603

(1) Net income 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

                                      2013                                 2012
(in thousands, except per share      First          Fourth         Third          Second        First
 data; taxable
equivalent)                         Quarter        Quarter        Quarter        Quarter       Quarter
Interest revenue reconciliation
Interest revenue - taxable
equivalent                         $   62,134     $   64,450     $   65,978     $   66,780     $ 70,221
Taxable equivalent adjustment            (365 )         (381 )         (419 )         (444 )       (446 )
Interest revenue (GAAP)            $   61,769     $   64,069     $   65,559     $   66,336     $ 69,775
Net interest revenue
reconciliation
Net interest revenue - taxable
equivalent                         $   54,659     $   56,028     $   57,371     $   56,836     $ 58,864
Taxable equivalent adjustment            (365 )         (381 )         (419 )         (444 )       (446 )
Net interest revenue (GAAP)        $   54,294     $   55,647     $   56,952     $   56,392     $ 58,418
Total revenue reconciliation
Total operating revenue            $   56,485     $   56,789     $   55,635     $   51,703     $ 59,243
Taxable equivalent adjustment            (365 )         (381 )         (419 )         (444 )       (446 )
Total revenue (GAAP)               $   56,120     $   56,408     $   55,216     $   51,259     $ 58,797
Income before taxes
reconciliation
Income before taxes                $   12,715     $    6,063     $   10,852     $    7,393     $ 12,288
Taxable equivalent adjustment            (365 )         (381 )         (419 )         (444 )       (446 )
Income before taxes (GAAP)         $   12,350     $    5,682     $   10,433     $    6,949     $ 11,842
Income tax expense
reconciliation
Income tax expense                 $      950     $      802     $      284     $      894     $    760
Taxable equivalent adjustment            (365 )         (381 )         (419 )         (444 )       (446 )
Income tax expense (GAAP)          $      585     $      421     $     (135 )   $      450     $    314
Book value per common share
reconciliation
Tangible book value per common
share                              $     6.76     $     6.57     $     6.64     $     6.48     $   6.54
Effect of goodwill and other
intangibles                               .09            .10            .11            .13          .14
Book value per common share
(GAAP)                             $     6.85     $     6.67     $     6.75     $     6.61     $   6.68
Average equity to assets
reconciliation
Tangible common equity to assets         5.66 %         5.67 %         5.73 %         5.45 %       5.33 %
Effect of preferred equity               2.87           2.88           2.93           2.79         2.75
Tangible equity to assets                8.53           8.55           8.66           8.24         8.08
Effect of goodwill and other
intangibles                               .07            .08            .09            .09          .11
Equity to assets (GAAP)                  8.60 %         8.63 %         8.75 %         8.33 %       8.19 %
Tangible common equity to
risk-weighted assets
reconciliation
Tangible common equity to
risk-weighted assets                     8.45 %         8.26 %         8.44 %         8.37 %       8.21 %
Effect of other comprehensive
income                                    .49            .51            .36            .28          .10
Effect of trust preferred                1.15           1.15           1.17           1.19         1.15
Effect of preferred equity               4.22           4.24           4.29           4.35         4.23
Tier I capital ratio
(Regulatory)                            14.31 %        14.16 %        14.26 %        14.19 %      13.69 %


Results of Operations

United reported net income of $11.8 million for the first quarter of 2013. This compared to net income of $11.5 million for the same period in 2012. For the first quarter of 2013, diluted earnings per common share was $.15 compared to $.15 for the first quarter of 2012.

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. Taxable equivalent net interest revenue for the three months ended March 31, 2013 was $54.7 million, down $4.21 million, or 7%, from the first quarter of 2012. The decrease in net interest revenue for the first quarter of 2013 compared to the first quarter of 2012 was mostly due to lower yields on the securities and loan portfolios and a smaller balance of interest-earning assets. United continues its intense focus on loan and deposit pricing in an effort to maintain a steady level of net interest revenue.

While average loans increased $28.3 million, or 1%, from the first quarter of last year, the yield on loans decreased 46 basis points. The decreasing balances in the loan portfolio stabilized in 2012 and United began achieving modest loan growth; however, there is a high level of competition for quality lending relationships, which continues to put pressure on loan pricing. The increase in residential real estate loans is primarily the result of the promotion of a new home equity line product in mid-2012 and the introduction of a new low-cost mortgage product in early 2013; however, the low introductory rate on these products also contributed to the lower yield on average loans.

Average interest-earning assets for the first quarter of 2013 decreased $152 million, or 2%, from the same period in 2012, due primarily to the decrease in reverse repurchase agreements included in average short-term investments. The average yield on interest-earning assets for the three months ended March 31, 2013 was 3.84%, down 37 basis points from 4.21% for the same period of 2012. For the first quarter of 2013, the yield on loans decreased 46 basis points and the yield on securities decreased 56 basis points from the same period a year ago, as management was unable to reinvest the cash proceeds of maturing securities at yields comparable to those of the securities they replaced. Partially offsetting the lower loan and securities yields was a higher average yield on other interest-earnings assets due to the use of reverse repurchase agreements including collateral swap transactions where United enters into a repurchase agreement and reverse repurchase agreement or offsetting securities lending transactions simultaneously with the same counterparty subject to a master netting agreement. In these transactions, the offsetting balances are netted on the balance sheet.

Average interest-bearing liabilities decreased $414 million, or 8%, from the first quarter of 2012 due to the rolling off of higher-cost brokered deposits and certificates of deposit as noninterest bearing demand deposits increased $201 million and overall funding needs decreased. The average cost of interest-bearing liabilities for the first quarter of 2013 was .61% compared to .85% for the same period of 2012, reflecting United's concerted efforts to reduce deposit pricing. Also contributing to the overall lower rate on interest-bearing liabilities was a shift in the mix of deposits away from more expensive time deposits toward lower-rate transaction deposits.

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 an indication of the profitability of a company's balance sheet, and is defined as net interest revenue as a percent of average total interest-earning assets, which includes . . .

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