United Community Banks
Annual Report 2013

Plain-text annual report

2013 Annual Report United Community Banks, Inc. United Community Banks, Inc. FINANCIAL HIGHLIGHTS ($ in millions, except per share data) Core Earnings Summary Net interest revenue Core fee revenue Core operating expenses Core earnings (pre-tax, pre-credit) Provision for loan losses Foreclosed property costs Gain on bank-owned life insurance Severance costs Securities gains, net Loss on prepayment of borrowings Provision for litigation settlement Gain on sale of low income housing tax credits Interest on federal tax refund Income tax benefit (expense) Net income Preferred dividends and discount accretion Net income available to common shareholders Per Common Share Diluted earnings Book value Tangible book value Performance Measures Net interest margin Allowance for loan losses to loans Tangible common equity to assets (year-end) Tier I risk-based capital ratio (year-end) As of Year-End Loans Investment securities Total assets Deposits Shareholders’ equity Common shares outstanding (thousands) Beneficial owners Employees Banking offices 2013 2012 $ 219.6 53.9 163.5 110.0 (65.5) (7.9) 1.5 (2.3) .2 - - .5 - 236.7 273.2 (12.1) $ 261.1 $ 4.44 11.30 11.26 $ 229.8 53.4 166.0 117.2 (62.5) (14.0) - (2.3) 7.1 (6.7) (4.0) .7 1.1 (2.7) 33.9 (12.2) $ 21.7 $ 0.38 6.67 6.57 3.30 % 1.77 9.07 12.74 3.51 % 2.57 5.60 14.16 $ 4,329 2,312 7,425 6,202 796 59,432 16,650 1,506 102 $ 4,175 2,079 6,802 5,952 581 57,741 15,000 1,590 105 Letter to Shareholders 2013 was nothing less than a transformative year for United Community Banks. Before the year began, we had identified a number of critical initiatives that we believed we had to complete to put the last of the financial crisis behind us and execute our growth plans. We developed a thorough action plan to address each initiative and I am pleased to report that our bankers executed it flawlessly. Credit quality was improving steadily, but incrementally, at the end of 2012. We could have continued at that pace and in time would have reached our targets, but not without significant ongoing costs including further delays in pursuing strategic growth initiatives. The continuing process of cleaning up the loan portfolio was carrying a heavy price in valuable resources and masking the benefit of expense reductions. Credit-related memorandums of understanding We developed a thorough action plan to address each initiative and I am pleased to report that our bankers executed it flawlessly. (MOUs) with regulators were restricting our ability to redeem preferred stock and expand into new markets. Because of the full valuation allowance on our deferred tax asset, our balance sheet and tangible book value were not reflecting the tremendous value of our income tax benefits. We were growing loans, but intense competitive pressures were contributing to a shrinking margin in a low interest rate environment. We identified several major goals to restore our superior credit quality and to remove the restrictions that were keeping us from executing growth plans and maximizing the value of your investment in United. These goals included reducing our classified assets to less than 30 percent of our tier 1 regulatory capital plus our allowance for loan losses; reversing the valuation allowance on our deferred tax asset; terminating the MOUs; and redeeming our TARP preferred stock. It is a pleasure to report that we have accomplished these goals and are now focused on growing the business. Let me take a moment to describe our 2013 accomplishments in more detail, and how they affect us going forward. one Restoration of credit quality measures to among the industry’s best During the second quarter we completed sales of $172 million in classified assets, a momentous event for our company and the culmination of several quarters of planning and coordination with regulators. After these transactions our classified asset ratio (classified assets to tier 1 regulatory capital plus our allowance for loan losses) was below the 30 Our improved asset quality and sustained profitability led to the release of our $272 million deferred tax asset valuation allowance which added $4.69 to our tangible book value. percent target, and our ratio of nonperforming assets to total assets was not only much improved but was among the lowest in the country among banks of similar size. Accompanying benefits were significantly lower costs from work-out related expenses including charge-offs, loan loss provisions, foreclosed property management, and legal and appraisal fees. Our improved asset quality and sustained profitability over several quarters led to the release of our $272 million deferred tax asset valuation allowance in the second quarter. This reversal allowed our substantial tax benefit to be reflected on the balance sheet and added $4.69 to our tangible book value, which was important to our stock valuation. Stock prices trade at multiples of tangible book value, so our stock price was understated as long as the valuation allowance was in place. During 2013 our stock price increased 88 percent. Achieving our goals and laying the foundation for strong performance Since mid-2010 we had been subject to two informal memorandums of understanding with regulators. The MOU with the Federal Deposit Insurance Corporation (FDIC) and Georgia Department of Banking and Finance (GDBF) was lifted in December 2013, and the MOU with the Federal Reserve Bank and the GDBF was lifted a month later. These were pivotal events that lowered our deposit insurance costs, freed us to expand into new markets through acquisitions and branching, removed other restrictions and reporting requirements, and allowed us to re-establish dividends from the bank to the holding company for the first time since 2008. As we knew would be the case when we adopted our aggressive plan in late 2012, achieving one goal led to achieving another. The dramatic improvement in credit quality led to the lifting of the MOUs, which allowed us to re-establish the bank dividend to the holding company, which was critical to redeeming the preferred stock that we had issued in late 2008 under the U.S. Treasury’s Troubled Asset Relief Program (TARP). Bank dividends, along with cash on hand and short-term debt, financed our redemption of $180 million in preferred stock in late 2013 and early 2014, shortly before the dividend rate was set to increase – another significant cost savings. In March 2014 we redeemed the remaining $16.6 million of outstanding preferred stock, marking the end of these costly obligations. The full $197 million redemption was accomplished without issuing common stock that would have diluted the holdings of our shareholders. two Redeeming the preferred stock was critical to maximizing earnings per share. So were reducing credit-related and FDIC insurance expenses, as we did significantly with our classified asset improvements and MOU releases, and finding other ways to lower costs. Our improved credit measures and stronger earnings performance led to lower borrowing costs, and in the third quarter we refinanced $35 million in subordinated debt with senior notes at a one and a half percent lower rate. These and other expense reductions contributed to an operating efficiency ratio of 60 percent at the end of 2013, compared to 72 percent a year before. We have over the past year cited a goal of a one percent return on assets by the fourth quarter of 2014, but the timing may be delayed into 2015 due to the preferred stock redemption. Payment of preferred stock dividends is not included in the return on assets calculation, whereas borrowing costs for trust preferred securities are included. Redeeming our preferred stock had a tremendous impact on our top priority of improving earnings per share. With the preferred stock As we knew would be the case when we adopted our aggressive plan in late 2012, achieving one goal led to achieving another. redemptions now behind us, we return our attention to improving return on assets, which at .86 percent in the fourth quarter is well down the path toward achieving our goal. While making significant headway in resolving credit quality, efficiency and regulatory challenges, we also focused on reinvesting in strategic business growth on four major fronts: quality loans, other strategic business growth, specialized revenue-producing talent, and outstanding service. Strategic growth: talent, markets and products In late 2012 we opened a loan production office in Greenville, South Carolina, where Lynn Harton has deep market knowledge and relationships from his years of financial services leadership in the state. Greenville and the state of South Carolina consistently rank high nationally for having a favorable business climate. During 2013 we opened a full-service office, added new commercial lenders, and by year-end produced outstanding loan balances of $61 million and unfunded loan commitments of another $132 million. In the second quarter of 2013 we entered Nashville, Tennessee with experienced lenders in that market’s busy healthcare sector, and by year-end added $28 million in outstanding loan balances. Demographic trends are driving growth in healthcare, and we will leverage our new expertise in that sector across the United footprint. In 2012 we introduced a home equity line of credit with a low introductory rate for the first year, followed by a reset to prime plus. At the end of 2013 the product had over $196 million in balances, of which $84 million had reset. Early in 2013 we introduced SmarterMortgage, an in-house product that allows customers to refinance conveniently and with low closing costs, and by year-end had booked over 1,000 new loans totaling $141 million. Not only did these new products create new balances; they also, and even more importantly, brought us many new customer relationships. We are investing our strong deposit growth into these three mostly variable-interest mortgage products, and they are helping diversify the loan portfolio and reduce exposure to rising interest rates. Not only did these new products create new balances; they also, and even more importantly, brought us many new customer relationships. We worked hard and successfully to improve operating efficiency, while at the same time making sensible and opportunistic strategic investments in our future. Our entry into Nashville and expansion in Greenville are examples of such opportunities, and we see more ahead including growing the mortgage business, particularly in our newer and more metropolitan markets. To that end, in the third quarter of 2013 we hired a 29-year mortgage banking veteran as president of United Community Mortgage Services. Under his leadership we will make mortgage banking an even stronger part of our relationship strategy. We also added new leadership in advisory and treasury services, and are already seeing tremendous progress. To support our retail banking focus and centralize consumer underwriting, we added a senior retail credit officer with over 30 years of experience in these disciplines. We have added seasoned bankers in many back office support functions. This new talent enhances our already solid banking team and provides a strong and dependable platform for growth. Customer service Products and delivery systems look much alike from bank to bank – but there is a difference in service, and that is an area where United Community Bank continues to excel. I know we aren’t the only company to make such a claim, but don’t take it from me; third-party research Products and delivery systems look much alike from bank to bank – but there is a difference in service, and that is an area where United Community Bank continues to excel. organizations have repeatedly verified our competitive service difference. In early 2012, Customer Service Profiles awarded United the highest customer satisfaction rating of all banks they studied nationwide. In early 2013 another well known and highly respected national market research company cited us as having the second-highest customer satisfaction score in the Southeast. With a score of 835, we missed the top spot by one point. In early 2014 it happened again, with United being recognized in the March issue of Fortune magazine as one of the top customer service champions across all industries. The countless ways that our people serve customers so well, with genuine care consistently day-in and day-out, is absolutely extraordinary. The story continues, and that speaks very well for our future. four Looking forward The achievements of 2013 have laid vital groundwork for the future. They are as important as they are long in coming – the culmination of five years of hard work and perseverance among our bankers. They stood their ground and executed through hard times, while adapting to changes in our industry along the way. They did more with less: 2013 total operating expenses were 7 percent or $12 million lower than in 2012; and 33 percent or $87 million lower than in 2011. They kept a steadfast focus on customers, who rewarded them – awarded all of us – by remaining loyal to our bank. A look back at these difficult years is encouraging in one very important sense; it shows what this team is capable of in years to come. While the future looks brighter, it is not without challenges. The economic recovery continues, but on its own slow pace. Our industry is seeing loan growth, albeit gradual. Interest margins are narrow and regulations have increased. Pricing pressure will likely remain near-term from competition and the low interest rate environment. With credit quality under control, our attention is laser-focused on advancing the business and earnings. That means growth from targeted high-opportunity areas including commercial, SBA, asset-based and mortgage lending, and, on the fee revenue side, financial advisory and brokerage services. We look for continued solid performance from the mix of floating and fixed rate securities in our investment portfolio. Floating rate securities are part of our overall interest rate risk A look back at these difficult years is encouraging in one very important sense; it shows what this team is capable of in years to come. management program. We are well prepared for an eventual rise in interest rates. We are carefully managing expenses while strategically investing in markets, services and talent. With the release of the MOUs we are able to evaluate acquisition opportunities that can add value in and around our footprint. Much has changed for the better. We leave behind the troubles of the financial crisis but carry forward the lessons learned and the valuable experience gained through the process. We move ahead with strong risk management practices, a well diversified loan portfolio and an exceptional team of bankers unmatched in the industry. I am grateful for the strong support of our customers, the wise counsel of our board members, and the remarkable character of our employees. As for our shareholders, the first priority, always and especially after these recent years, is to reward your loyalty by increasing the value of your investment in United Community Banks. Sincerely, Jimmy Tallent five CONSOLIDATED STATEMENT OF OPERATIONS (in thousands, except per share data) 2013 2012 2011 INTEREST REVENUE: Loans, including fees Investment securities: Taxable Tax exempt Deposits in banks and short-term investments Total interest revenue INTEREST EXPENSE: Deposits: NOW Money market Savings Time Total deposit interest expense Short-term borrowings Federal Home Loan Bank advances Long-term debt Total interest expense Net interest revenue Provision for credit losses Net interest revenue after provision for credit losses FEE REVENUE: Service charges and fees Mortgage loan and other related fees Brokerage fees Securities gains, net Losses on prepayment of borrowings Other Total fee revenue Total revenue OPERATING EXPENSES: Salaries and employee benefits Occupancy Communications and equipment FDIC assessments and other regulatory charges Professional fees Postage, printing and supplies Advertising and public relations Amortization of intangibles Foreclosed property Other Total operating expenses Income (loss) before income taxes Income tax expense (benefit) Net income (loss) Preferred stock dividends Net income (loss) available to common shareholders Income (loss) per common share: Basic Diluted Weighted average common shares outstanding: Basic Diluted six $ 200,893 $ 217,378 $ 244,020 40,331 827 3,789 245,840 43,657 956 3,986 265,977 55,251 1,009 2,321 302,601 1,759 2,210 133 10,464 14,566 2,071 68 10,977 27,682 218,158 65,500 152,658 31,997 9,925 4,465 186 - 10,025 56,598 209,256 96,233 13,930 13,233 9,219 9,617 3,283 3,718 2,031 7,869 15,171 174,304 34,952 (238,188) 237,140 12,078 $ 261,062 2,049 2,518 150 19,097 23,814 2,987 907 10,201 37,909 228,068 62,500 165,568 31,670 10,483 3,082 7,078 (6,681) 10,480 56,112 221,680 96,026 14,304 12,940 10,097 8,792 3,899 3,855 2,917 13,993 19,951 186,774 34,906 1,050 33,856 12,148 $ 21,708 3,998 5,456 234 39,114 48,802 4,250 2,042 10,544 65,638 236,963 251,000 (14,037) 29,110 5,419 2,986 842 (791) 7,341 44,907 30,870 100,095 15,645 13,135 14,259 9,727 4,256 4,291 3,016 78,905 18,270 261,599 (230,729) (3,983) (226,746) 11,838 $ (238,584) $ 4.44 4.44 $ .38 .38 $ $ (5.97) (5.97) 58,787 58,845 57,857 57,857 39,943 39,943 CONSOLIDATED BALANCE SHEET (in thousands, except per share data) ASSETS Cash and due from banks Interest-bearing deposits in banks Short-term investments Cash and cash equivalents Securities available-for-sale Securities held-to-maturity (fair value $485,585 and $261,131) Mortgage loans held for sale Loans, net of unearned income Less allowance for loan losses Loans, net Assets covered by loss sharing agreements with the FDIC Premises and equipment, net Bank-owned life insurance Accrued interest receivable Intangible assets Foreclosed property Net deferred tax asset Derivative financial instruments Other assets 2013 2012 $ 71,230 119,669 37,999 228,898 1,832,217 479,742 10,319 4,329,266 (76,762) 4,252,504 22,882 163,589 80,670 19,598 3,480 4,221 258,518 23,833 44,948 $ 66,536 124,613 60,000 251,149 1,834,593 244,184 28,821 4,175,008 (107,137) 4,067,871 47,467 168,920 81,867 18,659 5,510 18,264 - 658 34,296 Total assets $ 7,425,419 $ 6,802,259 LIABILITIES AND SHAREHOLDERS’ EQUITY Liabilities: Deposits: Demand NOW Money market Savings Time: Less than $100,000 Greater than $100,000 Brokered Total deposits Short-term borrowings Federal Home Loan Bank advances Long-term debt Derivative financial instruments Unsettled securities purchases Accrued expenses and other liabilities $ 1,388,512 1,427,939 1,227,575 251,125 892,961 588,689 424,704 6,201,505 53,241 120,125 129,865 46,232 29,562 49,174 $ 1,252,605 1,316,453 1,149,912 227,308 1,055,271 705,558 245,033 5,952,140 52,574 40,125 124,805 12,543 - 38,667 Total liabilities 6,629,704 6,220,854 Commitments and contingencies Shareholders’ equity: Preferred stock, $1 par value; 10,000,000 shares authorized; Series A, $10 stated value, 0 and 21,700 shares issued and outstanding Series B, $1,000 stated value, 105,000 and 180,000 shares issued and outstanding Series D, $1,000 stated value, 16,613 shares issued and outstanding Common stock, $1 par value; 100,000,000 shares authorized; 46,243,345 and 42,423,870 shares issued and outstanding Common stock, non-voting $1 par value; 30,000,000 shares authorized; 13,188,206 and 15,316,794 shares issued and outstanding Common stock issuable; 241,832 and 133,238 shares Capital surplus Accumulated deficit Accumulated other comprehensive loss - 105,000 16,613 217 178,557 16,613 46,243 42,424 13,188 3,930 1,078,676 (448,091) (19,844) 15,317 3,119 1,057,951 (709,153) (23,640) Total shareholders’ equity 795,715 581,405 Total liabilities and shareholders’ equity $ 7,425,419 $ 6,802,259 seven SELECTED FINANCIAL DATA - QUARTERLY CORE SUMMARY (in millions, except per share data; taxable equivalent) Q-4 Q-3 Q-2 Q-1 2013 CORE EARNINGS SUMMARY Net interest revenue Core fee revenue (1) Core revenue (1) Core operating expenses (2) Core earnings (pre-tax, pre-credit) (1)(2) Provision for loan losses Foreclosed property costs: Write downs and gains/losses from sales Other expenses Severance costs Securities gains, net Gain on bank-owned life insurance Provision for litigation settlement Gain on sale of low income housing tax credits Income tax (expense) benefit Net income Preferred dividends and discount accretion Net income available to common shareholders PERFORMANCE MEASURES Per common share: Diluted earnings Book value Tangible book value (3) Key performance ratios: Net interest margin (4) Return on assets (4) Return on common equity (4)(5) Tangible equity to assets (period end) (3) Tangible common equity to assets (period end) (3) ASSET QUALITY* Nonperforming loans Foreclosed properties Total nonperforming assets (NPAs) Allowance for loan losses Net charge-offs Allowance for loan losses to loans Net charge-offs to average loans (4) NPAs to loans and foreclosed properties NPAs to total assets AT PERIOD END Loans* Investment securities Total assets Deposits Shareholders’ equity Common shares outstanding $ 55.9 $ 13.2 69.1 41.2 27.9 (3.0) 54.2 $ 14.0 68.2 39.3 28.9 (3.0) 54.9 $ 14.1 69.0 42.1 26.9 (48.5) .4 (.6) - .1 - - - (8.9) 15.9 2.9 .3 (.5) (.4) - .1 - - (9.9) 15.5 3.1 $ 13.0 $ 12.4 $ (4.3) (.8) (1.6) - 1.4 - .5 256.4 230.0 3.1 226.9 $ 54.6 $ 12.6 67.2 40.9 26.3 (11.0) (1.1) (1.2) (.4) .1 - - - (.9) 11.8 3.1 8.7 $ $ .22 $ .21 $ 3.90 $ .15 $ 11.30 11.26 10.99 10.95 10.90 10.82 6.85 6.76 3.26 % .86 7.52 10.71 9.07 3.26 % .86 7.38 11.73 9.01 3.33 % 13.34 197.22 11.51 8.78 3.37 % .70 8.51 8.58 5.72 2012 Q-4 56.1 14.6 70.7 41.5 29.2 (14.0) (3.2) (1.4) (.5) - - (4.0) - (.8) 5.3 3.1 2.2 .04 6.67 6.57 3.45 % .31 2.15 8.47 5.60 $ 26.8 $ 26.1 $ 27.9 $ 4.2 31.0 76.8 4.4 1.77 % .41 .72 .42 4.5 30.6 80.4 4.5 1.88 % .42 .72 .42 3.9 31.8 81.8 72.4 1.95 % 6.87 .76 .44 96.0 $ 16.7 112.7 105.8 12.4 109.9 18.3 128.2 107.1 14.5 2.52 % 1.21 2.68 1.65 2.57 % 1.39 3.06 1.88 $ 4,329 $ 2,312 7,425 6,202 796 59.4 4,267 $ 2,169 7,243 6,113 852 59.4 4,189 $ 2,152 7,163 6,102 829 57.8 4,194 $ 2,141 6,849 6,026 592 57.8 4,175 2,079 6,802 5,952 581 57.7 (1) Excludes net securities gains and losses, losses from the prepayment of borrowings, gains from the sale of low income housing tax credits and gain on bank owned life insurance. (2) Excludes foreclosed property costs and severance costs. (3) Excludes the effect of acquisition related intangible assets. (4) Annualized. (5) Net income available to common shareholders, which is net of preferred dividends, divided by average realized common equity, which excludes accumulated other comprehensive income (loss). * Excludes loans and foreclosed properties covered by loss sharing agreements with the FDIC. eight CORPORATE INFORMATION Financial Information Analysts and investors seeking financial information should contact: Rex S. Schuette Executive Vice President and Chief Financial Officer (706) 781-2265 rex_schuette@ucbi.com This Annual Report contains forward- looking statements that involve risk and uncertainty and actual results could differ materially from the anticipated results or other expectations expressed in the forward-looking statements. A discussion of factors that could cause actual results to differ materially from those expressed in the forward-looking statements is included in the Annual Report on Form 10-K filed with the Securities and Exchange Commission. This Annual Report also contains financial measures that were prepared on a basis different from accounting principles generally accepted in the United States (“GAAP”). References to operating earnings, pre-tax, pre-credit earnings and core earnings are non- GAAP financial measures. Management has included such non-GAAP financial measures because such non-GAAP measures exclude certain non-recurring revenue and expense items and therefore provide a meaningful basis for analyzing financial trends. A reconciliation of these measures to financial measures determined using GAAP is included in the Annual Report on Form 10-K filed with the Securities and Exchange Commission. Board of Directors W.C. Nelson, Jr. Chairman Owner, Nelson Tractor Co. Jimmy C. Tallent President Chief Executive Officer Robert H. Blalock Owner, Blalock Insurance Agency, Inc. Clifford V. Brokaw Managing Director Corsair Capital L. Cathy Cox President, Young Harris College Steven J. Goldstein Retired Chief Financial Officer Federal Home Loan Bank of Atlanta STOC K PRICE Quarter High Low Close Average Daily Volume 2012 4th $ 9.49 $ 8.01 $ 9.44 202,871 2013 1st $ 11.57 $ 9.59 $ 11.34 195,803 2nd 3rd 4th 12.94 16.04 18.56 10.15 12.15 14.82 12.42 14.99 17.75 184,922 341,270 421,948 Investor Information Investor information including this report, Form 10-K, quarterly financial results, press releases and various other reports are available online at www.ir.ucbi.com. Alternatively, shareholders may contact Investor Relations at (866) 270-5900 or investor_relations@ucbi.com. Stock Exchange United Community Banks, Inc. (Ticker: UCBI) common stock is listed for trading on the NASDAQ Global Select Market. Registrar Transfer Agent IST Shareholder Services 433 S. Carlton Ave. Wheaton, Illinois 60187 (630) 480-0393 Email: info@ilstk.com www.istshareholderservices.com Independent Registered Public Accountants PricewaterhouseCoopers LLP Atlanta, Georgia Legal Counsel Troutman Sanders LLP Atlanta, Georgia Equal Opportunity Employer United Community Banks is an equal opportunity employer. All matters regarding recruiting, hiring, training, compensation, benefits, promotions, transfers and other personnel policies will remain free from discriminatory practices. United Community Banks, Inc. © 2014. Thomas A. Richlovsky Retired Chief Financial Officer Treasurer National City Corporation Tim R. Wallis President Chief Executive Officer Wallis Printing Company Robert L. Head, Jr. Director Emeritus Owner, Head Westgate Executive Officers Jimmy C. Tallent President Chief Executive Officer H. Lynn Harton Executive Vice President Chief Operating Officer Rex S. Schuette Executive Vice President Chief Financial Officer David P. Shearrow Executive Vice President Chief Risk Officer Bill M. Gilbert Director of Banking United Community Banks, Inc. 125 Highway 515 East | Blairsville, Georgia 30512 706.781.2265 | 866.270.7200 | ucbi.com nine ucbi.com 

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