United Community Banks, Inc. — Q1 2021 Form 10-Q
Business context and reporting period. This unaudited filing covers the three months ended March 31, 2021, with balance-sheet comparisons to December 31, 2020 and income comparisons to Q1 2020. United provides commercial and consumer banking and investment advisory services through 161 branches across Georgia, South Carolina, North Carolina, Tennessee, and Florida. The results include Seaside National Bank & Trust, acquired in July 2020.
Key financial metrics
Dollar amounts below are rounded to millions except per-share data and ratios.
| Metric | Q1 2021 / March 31, 2021 | Comparable period / prior quarter |
|---|---|---|
| Net interest revenue | $132.1 million | $118.6 million in Q1 2020 |
| Net interest margin, FTE | 3.22% | 4.07% in Q1 2020; 3.55% in Q4 2020 |
| Total revenue | $189.1 million | $122.2 million in Q1 2020 |
| Net income; diluted EPS | $73.7 million; $0.82 | $31.9 million; $0.40 in Q1 2020 |
| Operating net income, non-GAAP | $74.9 million; operating diluted EPS $0.83 | $32.5 million; $0.41 in Q1 2020 |
| Efficiency ratio, GAAP | 53.55% | 56.15% in Q1 2020 |
| Total assets | $18.56 billion | $17.79 billion at Dec. 31, 2020 |
| Loans held for investment | $11.68 billion | $11.37 billion at Dec. 31, 2020 |
| Total deposits | $15.99 billion | $15.23 billion at Dec. 31, 2020 |
| Long-term debt | $311.6 million | $327.0 million at Dec. 31, 2020 |
| Shareholders’ equity | $2.03 billion | $2.01 billion at Dec. 31, 2020 |
| Operating cash flow | $34.7 million | $(10.8) million in Q1 2020 |
Material changes and management commentary
- Net income more than doubled year over year. Higher net interest revenue reflected Seaside, loan growth including PPP lending, accelerated recognition of PPP fees on forgiveness or repayment, and a more favorable deposit mix. These factors were partly offset by lower asset yields and reduced purchase-loan accretion.
- Net interest margin fell to 3.22% from 4.07%, which management attributed primarily to historically low rates and the effect of falling rates on its asset-sensitive balance sheet. PPP loans also pressured margin because of their low contractual yields.
- Noninterest income increased 73% to $44.7 million, principally from mortgage gains and fees, up $14.3 million, amid strong originations and refinancing activity. Wealth management fees also rose following the Seaside acquisition.
- Noninterest expense increased 17% to $95.2 million, mainly reflecting higher compensation, mortgage commissions, and Seaside employees and operating costs. The $1.5 million of merger-related and other charges was excluded from management’s non-GAAP operating results.
- The company recorded a $12.3 million release of credit-loss provision, versus $22.2 million of expense in Q1 2020. Management cited an improved economic forecast and credit trends; net recoveries were $0.3 million versus $8.1 million of net charge-offs a year earlier.
- Loans grew 3% from year-end; deposits rose 5%. PPP loans totaled $883 million at quarter-end. Securities increased to $4.33 billion, about 23% of assets, as the bank invested liquidity from deposit growth.
Credit, liquidity, capital, risks, and outlook
- Nonperforming assets were $56.5 million, down from $62.2 million at year-end, but above $36.7 million in Q1 2020. Nonperforming loans were 0.48% of loans. The loan allowance was $126.9 million, or 1.09% of loans, compared with 0.92% a year earlier.
- Remaining COVID-19-related payment deferrals declined to $48.1 million from $70.7 million at year-end. Total troubled debt restructurings were $59.3 million. The allowance depends on forecasts and management judgments and could change materially.
- Cash and cash equivalents were $1.33 billion, down from $1.61 billion at year-end. Q1 investing cash outflow of $1.04 billion chiefly reflected securities purchases and loan growth; deposit inflows provided $761.6 million of financing cash. Management stated liquidity was sufficient and reported substantial secured borrowing capacity and unpledged securities.
- United and the Bank were categorized as well-capitalized. Consolidated CET1 and total capital ratios were 12.34% and 14.92%, respectively; the Bank’s were 12.80% and 13.66%.
- Q1 included a $37.7 million after-tax unrealized loss on available-for-sale securities in other comprehensive income, primarily associated with interest-rate changes. Management said it did not intend, and did not expect to be required, to sell securities in unrealized-loss positions before recovery.
- No quantified earnings guidance was provided in the supplied filing text. Management described an improved pandemic outlook but continued monitoring borrower impacts and providing customer assistance. Risks include further COVID-19 effects, economic and credit deterioration, low or changing interest rates, margin pressure, loan and industry concentrations, liquidity and funding conditions, regulatory matters, and operational and cybersecurity risks.
- Subsequent to quarter-end, the company repurchased 150,000 shares for $5.1 million and scheduled repayment of $50 million of 2022 senior debentures during Q2 2021. Management reported no material change to previously disclosed risk factors and no pending or threatened legal matter expected to materially affect financial condition or results.
Important facts for investors to verify
- Whether mortgage banking revenue and strong refinancing volumes are sustainable as rates and mortgage prepayments change.
- How margin, deposit costs, and PPP loan forgiveness or fee recognition develop in subsequent quarters.
- Whether the credit-loss release is supported by realized credit performance, especially given classified-loan levels, remaining deferrals, and the forecast assumptions used in the allowance.
- The size and causes of further securities valuation changes and their effect on accumulated other comprehensive income and capital.
- Execution and cost effects of the Seaside integration, and the impact of the planned debt redemption and post-quarter share repurchases.
- Reconcile non-GAAP operating measures to GAAP results; operating net income excludes merger-related and other charges and is not a GAAP measure.