United Community Banks, Inc. — Q1 2023 Form 10-Q
Reporting period: Three months ended March 31, 2023; balance-sheet comparisons are with December 31, 2022. The unaudited results include Progress Financial from its January 3, 2023 acquisition. United provides commercial and consumer banking and wealth services through 207 branches across six southeastern states.
Key financial results
| Metric | Q1 2023 | Comparable period / change |
|---|---|---|
| Total revenue | $219.9 million | Up 22% year over year |
| Net interest revenue | $211.5 million | Up 29% year over year |
| Net interest margin, FTE | 3.61% | 2.97% in Q1 2022; 3.76% in Q4 2022 |
| Net income | $62.3 million | $48.0 million in Q1 2022 |
| Diluted EPS | $0.52 | $0.43 in Q1 2022 |
| Operating net income and diluted EPS (non-GAAP) | $69.0 million; $0.58 | $55.1 million; $0.50 in Q1 2022 |
| Provision for credit losses | $21.8 million | $23.1 million in Q1 2022 |
| Noninterest income | $30.2 million | Down 22% year over year |
| Noninterest expenses | $139.8 million | Up 17% year over year |
| Operating cash flow | $90.1 million | $200.5 million in Q1 2022 |
Financial position, capital and liquidity
- Total assets were $25.9 billion, loans held for investment were $17.1 billion, and deposits were $22.0 billion at quarter-end. Assets and loans increased from year-end partly due to Progress.
- Shareholders’ equity was $3.08 billion, up from $2.70 billion at year-end; tangible book value per common share, a non-GAAP measure, was $17.59.
- Long-term debt was $324.7 million; short-term borrowings were $7.2 million and FHLB advances were $30.0 million, compared with $158.9 million and $550.0 million, respectively, at year-end.
- Cash and cash equivalents totaled $777.7 million. Q1 investing cash flow was positive $181.3 million and financing cash flow was negative $140.6 million. Deposits increased $793.2 million in the cash-flow statement, while United repaid net FHLB advances of $615 million.
- Management said liquidity was sufficient for foreseeable cash needs. Disclosed borrowing capacity included $1.53 billion from the FHLB, $2.54 billion at the Federal Reserve discount window and $1.88 billion through the Bank Term Funding Program, plus $1.52 billion of unpledged securities. These are funding capacities, not cash balances.
- United and the Bank were classified as well-capitalized. Consolidated CET1 was 12.08%, total capital 14.40%, and leverage 9.65% at March 31, 2023.
Material changes and management commentary
- Net interest revenue and margin rose year over year as loan growth, Progress and higher asset yields more than offset increased funding costs. Interest expense increased to $68.0 million from $7.3 million; deposit costs and wholesale funding contributed to the increase.
- Management said customer deposit attrition appeared to have ceased in Q1; March-end customer deposits, excluding Progress, were up at a 10% annualized rate from year-end. Deposit competition and the possibility of further funding-cost increases remain relevant.
- Noninterest income fell mainly because mortgage loan gains and related fees declined 72% to $4.5 million amid lower production. Noninterest expenses rose, with approximately half of the year-over-year increase in operating expenses attributed to Progress.
- Net charge-offs were $7.1 million, versus $3.0 million in Q1 2022. Nonperforming assets increased to $73.4 million from $44.3 million at year-end; nonaccrual loans rose to $72.8 million from $44.2 million. Management attributed the increase primarily to a small number of larger loans moving to nonaccrual.
- The loan-loss allowance was $176.5 million, or 1.03% of loans, compared with $159.4 million, or 1.04%, at year-end. Total allowance including unfunded commitments was $197.9 million.
- Investment securities were $5.92 billion, about 23% of assets. HTM securities had $2.21 billion fair value against $2.58 billion carrying value, including $377.5 million of unrealized losses; AFS securities had $312.5 million of unrealized losses. United said losses were primarily interest-rate-related and that it did not intend, nor expect to be required, to sell securities before recovery. No securities ACL was recorded.
- Approximately $8.00 billion of deposits were uninsured; $2.39 billion of that amount was collateralized by investment securities.
- United completed the Progress acquisition for stock in January, adding 13 offices, $1.44 billion of loans and $1.33 billion of deposits. It recorded $145.5 million of goodwill and a $40.0 million core deposit intangible. United also agreed to acquire First Miami and expected to complete the transaction in Q3 2023; completion and integration are subject to risks.
Outlook, risks and contingencies
The filing provides no specific earnings, revenue or margin guidance. Management described the balance sheet as asset-sensitive, but emphasized that actual results may differ from interest-rate simulation estimates. A 200-basis-point rate increase was modeled to raise 12-month net interest revenue by 5.69% under an immediate shock and 3.19% under a gradual ramp; the model assumes, among other things, no change in deposit size or composition. Management reported a 22% cumulative deposit beta for the current rising-rate cycle.
Key risks identified include deposit competition and liquidity, interest-rate changes, credit deterioration, economic and real estate conditions, industry or geographic concentrations, acquisition execution, cybersecurity, third-party dependencies, regulatory changes and litigation. The company reported $4.88 billion of commitments to extend credit and $58.9 million of letters of credit, which carry potential credit exposure if drawn. Management did not expect pending or threatened legal matters to materially adversely affect financial condition or results. No material changes to previously disclosed risk factors were reported apart from risks associated with First Miami.
Important facts for investors to verify
- Whether deposit balances and funding costs remain stable, particularly given uninsured deposits and industry competition.
- Whether the increase in nonaccrual loans and net charge-offs continues, and whether the allowance remains adequate as the portfolio grows.
- How much unrealized securities loss exposure could affect liquidity or capital if securities had to be sold; review pledged collateral and available borrowing capacity.
- Whether margin and earnings hold up as deposit betas, wholesale funding use and interest rates change.
- Progress integration costs and performance, and First Miami’s closing timing, approvals, and expected financial impact.
- Non-GAAP operating results alongside GAAP results; Q1 operating measures exclude $8.6 million of merger-related and other charges before tax.