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UCBI > SEC Filings for UCBI > Form 10-Q on 9-May-2014All Recent SEC Filings

Show all filings for UNITED COMMUNITY BANKS INC

Form 10-Q for UNITED COMMUNITY BANKS INC


9-May-2014

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, 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, 2013 as well as the following factors:

? the condition of the general business and economic environment;

? 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 deteriorate;

? our ability to maintain profitability;

? our ability to fully realize our deferred tax asset balances, including net operating loss carry-forwards;

? the risk that we may be required to increase the valuation allowance on our deferred tax asset in future periods;

? 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 lack of geographic diversification;

? 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;

? our accounting and reporting policies;

? 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;

? our reliance on third parties to provide key components of our business infrastructure;

? 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 Wall Street Reform and Consumer Protection Act of 2010 and related regulations;

? changes in laws and regulations or failures to comply with such laws and regulations;

? changes in regulatory capital requirements;

? the costs and effects of litigation, examinations, investigations, or similar matters, or adverse facts and developments related thereto, including possible dilution;

? regulatory or judicial proceedings, board resolutions, informal memorandums of understanding or formal enforcement actions imposed by regulators that may occur; and

? changes in tax laws, regulations and interpretations or challenges to our income tax provision.

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, 2014, United had total consolidated assets of $7.40 billion and total loans of $4.36 billion (excluding the loans acquired from Southern Community Bank ("SCB") that are covered by loss sharing agreements). United also had total deposits of $6.25 billion and shareholders' equity of $704 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 28 "community banks" with local bank presidents and boards in north Georgia, the Atlanta-Sandy Springs-Roswell, Georgia metropolitan statistical area, the Gainesville, Georgia metropolitan statistical area, coastal Georgia, western North Carolina, east Tennessee and the Greenville-Anderson-Mauldin, South Carolina metropolitan statistical area.

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 40.

United reported net income of $15.4 million for the first quarter of 2014. This compared to net income of $11.8 million for the first quarter of 2013. Diluted earnings per common share was $.25 for the first quarter of 2014, compared to diluted earnings per common share of $.15 for the first quarter of 2013. The increase in net income reflected a lower provision for credit losses and lower operating expenses. The increase in earnings per share also reflected a significant decrease in preferred stock dividends following the redemption of all of United's preferred stock.

Taxable equivalent net interest revenue was $54.2 million for the first quarter of 2014, compared to $54.6 million for the same period of 2013. The decrease in net interest revenue was primarily the result of continued lower yields on the loan portfolio, which were due to loan pricing competition. Net interest margin decreased from 3.37% for the three months ended March 31, 2013 to 3.21% for the same period in 2014.

United's provision for loan losses was $2.50 million for the three months ended March 31, 2014, compared to $11.0 million for the same period in 2013. Net charge-offs for the first quarter of 2014 were $4.04 million, compared to $12.4 million for the first quarter of 2013. The lower level of charge-offs and provision for loan losses in 2014 are the result of the accelerated disposition of classified assets in the second quarter of 2013 and generally improving credit conditions.

As of March 31, 2014, United's allowance for loan losses was $75.2 million, or 1.73% of loans, compared to $106 million, or 2.52% of loans, at March 31, 2013. Nonperforming assets of $30.8 million, which excludes assets that are covered by loss sharing agreements with the FDIC, decreased to .42% of total assets at March 31, 2014 from 1.65% as of March 31, 2013, mostly due to the second quarter 2013 classified asset sales. During the first quarter of 2014, $9.30 million in loans were placed on nonaccrual compared with $9.67 million in the first quarter of 2013.

Fee revenue of $12.2 million decreased $735,000, or 6%, from the first quarter of 2013. The quarterly decrease was due primarily to a $1.30 million, or 49% decrease in mortgage loan and related fees and a $195,000 decrease in customer derivative fees. Mortgage refinancing activity continued to decline with rising long-term interest rates. These revenue decreases were offset by a $410,000, or 53% increase in brokerage fees and a $495,000, or 7% increase in service charges and fees.

For the first quarter of 2014, operating expenses of $39.1 million were down $4.72 million from the first quarter of 2013. The decrease was primarily related to a decrease of $2.22 million in foreclosed property expense, driven by decreased volume due to the classified asset sales in the second quarter of 2013. In addition, lower workout and collection costs and lower costs of operating our ATM network, resulted in lower other expense for the first quarter of 2014 compared to the same period in 2013. Professional fees decreased $939,000 from the first quarter of 2013, and FDIC assessments and regulatory charges decreased $1.15 million from the same period a year ago. Management continues its efforts to reduce costs and improve operating efficiency.

Recent Developments

On March 25, 2014, the Company completed the sale of 640,000 shares of common stock and received approximately $12.2 million in net proceeds after discounts and expenses. The proceeds will be used for general corporate purposes, including the repurchase of the warrant originally issued to Fletcher International, Ltd. ("Fletcher") and resolution of all other claims in connection with the settlement agreement with the Chapter 11 Trustee for Fletcher.

On January 10, 2014, United redeemed the remaining $105 million of its Series B Preferred Stock. The Series B Preferred Stock was originally issued to the U.S. Department of the Treasury under the Troubled Asset Relief Program Capital Purchase Program. The redemption price for shares of the Series B Preferred Stock was the stated liquidation value of $1,000 per share, plus accrued and unpaid dividends that had been earned thereon to, but not including, the redemption date.

On March 3, 2014, United redeemed all of its $16.6 million in outstanding Series D Preferred Stock at its par value. Following the redemption, United no longer has any preferred stock outstanding.

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 which involve the use of estimates and require significant judgments 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 40.

Table 1 - Financial Highlights
Selected Financial Information
                                                                                                      First
                           2014                                 2013                                 Quarter
(in thousands, except
per share                  First        Fourth         Third         Second            First         2014-2013
data; taxable
equivalent)               Quarter       Quarter       Quarter       Quarter           Quarter         Change
INCOME SUMMARY
Interest revenue         $  60,495     $  61,695     $  61,426     $   62,088        $  62,114
Interest expense             6,326         5,816         7,169          7,157            7,540
  Net interest revenue      54,169        55,879        54,257         54,931           54,574               (1 ) %
Provision for credit
losses                       2,500         3,000         3,000         48,500           11,000
Fee revenue                 12,176        13,519        14,225         15,943           12,911               (6 )
  Total revenue             63,845        66,398        65,482         22,374           56,485
Operating expenses          39,050        41,614        40,097         48,823           43,770              (11 )
Income (loss) before
income taxes                24,795        24,784        25,385        (26,449 )         12,715               95
Income tax expense
(benefit)                    9,395         8,873         9,885       (256,413 )            950
Net income                  15,400        15,911        15,500        229,964           11,765               31
Preferred dividends
and discount accretion         439         2,912         3,059          3,055            3,052
Net income available
to common
  shareholders           $  14,961     $  12,999     $  12,441     $  226,909        $   8,713               72
PERFORMANCE MEASURES
 Per common share:
  Diluted income         $     .25     $     .22     $     .21     $     3.90        $     .15               67
  Book value                 11.66         11.30         10.99          10.90             6.85               70
  Tangible book value
(2)                          11.63         11.26         10.95          10.82             6.76               72
 Key performance
ratios:
  Return on common
equity (1)(3)                 8.64 %        7.52 %        7.38 %       197.22 %           8.51 %
  Return on assets (3)         .85           .86           .86          13.34              .70
  Net interest margin
(3)                           3.21          3.26          3.26           3.33             3.37
  Efficiency ratio           59.05         60.02         58.55          68.89            64.97
  Equity to assets            9.52         11.62         11.80          11.57  (4)        8.60
  Tangible equity to
assets (2)                    9.50         11.59         11.76          11.53  (4)        8.53
  Tangible common
equity to assets (2)          9.22          8.99          9.02           8.79  (4)        5.66
  Tangible common
equity to risk-
    weighted assets
(2)                          13.57         13.17         13.34          13.16             8.45
ASSET QUALITY *
 Non-performing loans    $  25,250     $  26,819     $  26,088     $   27,864        $  96,006
 Foreclosed properties       5,594         4,221         4,467          3,936           16,734
  Total non-performing
assets (NPAs)               30,844        31,040        30,555         31,800          112,740
 Allowance for loan
losses                      75,223        76,762        80,372         81,845          105,753
 Net charge-offs             4,039         4,445         4,473         72,408           12,384
 Allowance for loan
losses to loans               1.73 %        1.77 %        1.88 %         1.95 %           2.52 %
 Net charge-offs to
average loans (3)              .38           .41           .42           6.87             1.21
 NPAs to loans and
foreclosed properties          .71           .72           .72            .76             2.68
 NPAs to total assets          .42           .42           .42            .44             1.65
AVERAGE BALANCES ($ in
millions)
 Loans                   $   4,356     $   4,315     $   4,250     $    4,253        $   4,197                4
 Investment securities       2,320         2,280         2,178          2,161            2,141                8
 Earning assets              6,827         6,823         6,615          6,608            6,547                4
 Total assets                7,384         7,370         7,170          6,915            6,834                8
 Deposits                    6,197         6,190         5,987          5,983            5,946                4
 Shareholders' equity          703           856           846            636              588               20
 Common shares - basic
(thousands)                 60,059        59,923        59,100         58,141           58,081
 Common shares -
diluted (thousands)         60,061        59,925        59,202         58,141           58,081
AT PERIOD END ($ in
millions)
 Loans *                 $   4,356     $   4,329     $   4,267     $    4,189        $   4,194                4
 Investment securities       2,302         2,312         2,169          2,152            2,141                8
 Total assets                7,398         7,425         7,243          7,163            6,849                8
 Deposits                    6,248         6,202         6,113          6,012            6,026                4
 Shareholders' equity          704           796           852            829              592               19
 Common shares
outstanding
(thousands)                 60,092        59,432        59,412         57,831           57,767

(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. (4) Calculated as of period-end.

* Excludes loans and foreclosed properties covered by loss sharing agreements with the FDIC.

Table 1 Continued - Non-GAAP Performance Measures

Reconciliation
Selected Financial Information

                                    2014                                2013
(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                        $  60,495     $  61,695     $  61,426     $   62,088     $  62,114
Taxable equivalent adjustment          (357 )        (380 )        (370 )         (368 )        (365 )
  Interest revenue (GAAP)         $  60,138     $  61,315     $  61,056     $   61,720     $  61,749
Net interest revenue
reconciliation
Net interest revenue - taxable
equivalent                        $  54,169     $  55,879     $  54,257     $   54,931     $  54,574
Taxable equivalent adjustment          (357 )        (380 )        (370 )         (368 )        (365 )
  Net interest revenue (GAAP)     $  53,812     $  55,499     $  53,887     $   54,563     $  54,209
Total revenue reconciliation
Total operating revenue           $  63,845     $  66,398     $  65,482     $   22,374     $  56,485
Taxable equivalent adjustment          (357 )        (380 )        (370 )         (368 )        (365 )
  Total revenue (GAAP)            $  63,488     $  66,018     $  65,112     $   22,006     $  56,120
Income (loss) before taxes
reconciliation
Income (loss) before taxes        $  24,795     $  24,784     $  25,385     $  (26,449 )   $  12,715
Taxable equivalent adjustment          (357 )        (380 )        (370 )         (368 )        (365 )
  Income (loss) before taxes
(GAAP)                            $  24,438     $  24,404     $  25,015     $  (26,817 )   $  12,350
Income tax expense (benefit)
reconciliation
Income tax expense (benefit)      $   9,395     $   8,873     $   9,885     $ (256,413 )   $     950
Taxable equivalent adjustment          (357 )        (380 )        (370 )         (368 )        (365 )
  Income tax expense (benefit)
(GAAP)                            $   9,038     $   8,493     $   9,515     $ (256,781 )   $     585
Book value per common share
reconciliation
Tangible book value per common
share                             $   11.63     $   11.26     $   10.95     $    10.82     $    6.76
Effect of goodwill and other
intangibles                             .03           .04           .04            .08           .09
  Book value per common share
(GAAP)                            $   11.66     $   11.30     $   10.99     $    10.90     $    6.85
Average equity to assets
reconciliation
Tangible common equity to
assets                                 9.22 %        8.99 %        9.02 %         8.79 %        5.66 %
Effect of preferred equity              .28          2.60          2.74           2.74          2.87
  Tangible equity to assets            9.50         11.59         11.76          11.53          8.53
Effect of goodwill and other
intangibles                             .02           .03           .04            .04           .07
  Equity to assets (GAAP)              9.52 %       11.62 %       11.80 %        11.57 %        8.60 %
Tangible common equity to risk-weighted
assets
reconciliation
Tangible common equity to
risk-weighted assets                  13.57 %       13.17 %       13.34 %        13.16 %        8.45 %
Effect of other comprehensive
income                                  .36           .39           .49            .29           .49
Effect of deferred tax
limitation                            (3.91 )       (4.25 )       (4.72 )        (4.99 )           -
Effect of trust preferred              1.03          1.04          1.09           1.11          1.15
Effect of preferred equity                -          2.38          4.01           4.11          4.22
  Tier I capital ratio
(Regulatory)                          11.05 %       12.73 %       14.21 %        13.68 %       14.31 %

Results of Operations

United reported net income of $15.4 million for the first quarter of 2014. This compared to net income of $11.8 million for the same period in 2013. For the first quarter of 2014, diluted earnings per common share was $.25 compared to $.15 for the first quarter of 2013.

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, 2014 was $54.2 million, down $405,000, or 1%, from the first quarter of 2013. The decrease in net interest revenue for the first quarter of 2014 compared to the first quarter of 2013 was mostly due to lower yields on the loan portfolio offset partially by higher investment securities interest revenue and lower deposit costs. United continues to focus on loan and deposit pricing in an effort to maintain a steady level of net interest revenue.

While average loans increased $159 million, or 4%, from the first quarter of last year, the yield on loans decreased 47 basis points, reflecting the continuing effect of the low interest rate environment and competition for a limited number of quality lending opportunities. Although residential real estate loans increased primarily as the result of the promotion of a new home equity line product beginning in mid-2012 and the introduction of a new low-cost mortgage product in early 2013, the low introductory rate on these products also contributed to the lower yield on average loans. United discontinued the introductory rates on these products in late 2013.

Average interest-earning assets for the first quarter of 2014 increased $280 million, or 4%, from the same period in 2013, due primarily to the increase in loans and securities. Average investment securities for the first quarter of 2014 increased $180 million from a year ago consistent with general growth in the balance sheet as management has maintained the investment portfolio at approximately 31 percent of total assets over the last year. The average yield on the investment portfolio increased 14 basis points from a year ago. Early in the first quarter management sold approximately $100 million in low-yielding variable-rate CMO's to fund a portion of the dividend paid from the bank to the holding company. The proceeds from the dividend were used to redeem preferred stock. Later in the quarter, accumulating liquidity resulting from strong core deposit growth led management to purchase higher yielding CLO's and fixed rate securities. These transactions, along with slowing prepayment activity in United's mortgage backed securities, which were mostly purchased at a premium, increased the overall yield in the investment portfolio. The higher investment securities yields did not completely offset the decline in loan yields, which drove the average yield on interest-earning assets for the first quarter of 2014 to 3.58%, down 26 basis points from 3.84% in the first quarter of 2013. The yield on other interest-earning assets increased 42 basis points although the average balance declined from the first quarter of 2013. United utilizes reverse repurchase agreements including collateral swap transactions where the company enters into a repurchase agreement and reverse repurchase agreement 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 increased $230 million, or 5%, from the first quarter of 2013. Much of the increase in interest-bearing liabilities was a result of funding the redemption of United's preferred stock. United redeemed all $196 million in preferred stock in a series of transactions beginning late in the fourth quarter and extending to early March. Average noninterest bearing deposits increased $159 million from the first quarter of 2013 to the first quarter of 2014. The average cost of interest-bearing liabilities for the first quarter of 2014 was .50% compared to .62% for the same period of 2013, 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. United was able to reduce the effective rate on brokered deposits in the first quarter of 2014 to a negative .23% by swapping the fixed rates on longer-term brokered time deposits to LIBOR minus a spread.

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 . . .

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