Business context and reporting period
United Community Banks, Inc. (United) is a bank holding company operating primarily through United Community Bank, with 151 locations across Georgia, South Carolina, North Carolina and Tennessee. This unaudited Form 10-Q covers the three months ended March 31, 2018; comparisons are primarily with the first quarter of 2017. United completed its acquisition of NLFC Holdings Corp. on February 1, 2018, adding nationwide equipment-finance lending. Results also include prior acquisitions of Four Oaks and HCSB from their respective acquisition dates.
Key financial metrics
| Metric | Q1 2018 | Comparable / reference |
|---|---|---|
| Total revenue | $121.9 million | $104.8 million in Q1 2017; up 16% |
| Net interest revenue | $103.3 million | $83.6 million in Q1 2017; up 24% |
| Net interest margin (FTE) | 3.80% | 3.45% in Q1 2017 |
| Net income / diluted EPS | $37.7 million / $0.47 | $23.5 million / $0.33 in Q1 2017 |
| Operating net income / diluted EPS (non-GAAP) | $39.7 million / $0.50 | $28.2 million / $0.39 in Q1 2017 |
| Operating expenses | $73.5 million | $62.8 million in Q1 2017; up 17% |
| Cash flows | Operating +$72.5 million; investing +$37.0 million; financing −$71.5 million | Cash and cash equivalents ended at $352.3 million |
| Total assets / loans / deposits | $12.26 billion / $8.18 billion / $9.99 billion | At December 31, 2017: $11.92 billion / $7.74 billion / $9.81 billion |
| Shareholders’ equity | $1.36 billion | $1.30 billion at December 31, 2017 |
| Debt and borrowings | Long-term debt $326.0 million; FHLB advances $434.6 million; no short-term borrowings outstanding | At December 31, 2017: $120.5 million; $504.7 million; and $50.0 million, respectively |
| Capital ratios (consolidated) | CET1 11.34%; Tier 1 11.68%; total capital 13.59%; leverage 9.10% | Management reported capital levels as “well-capitalized” under Basel III |
Material changes versus comparable periods
- Net income increased 60% year over year, supported by loan growth, acquisitions and wider net interest margin. The effective tax rate fell to 22.2% from 44.0%, primarily reflecting the lower federal rate under the Tax Act; Q1 2017 also included a $3.4 million tax expense related to terminated cash-flow hedges.
- Average loans rose 16% year over year. Period-end loans increased $448.7 million from December 31, 2017, including approximately $359 million acquired with NLFC. NLFC contributed $3.6 million revenue and $0.8 million net income after acquisition; supplemental pro forma Q1 2018 revenue and net income were $124.8 million and $39.1 million, respectively.
- Fee revenue was nearly flat at $22.4 million. Service charges declined 16%, mainly due to the Durbin Amendment; mortgage fees rose 21%, while brokerage fees fell 38% amid a broker-dealer transition.
- Operating expenses rose $10.6 million year over year, principally from acquired operations, increased staffing and expansion of commercial banking. Merger-related and other charges were $2.1 million, principally severance, conversion, branch-closure, legal and professional costs.
- Available-for-sale securities declined to $2.42 billion from $2.62 billion at year-end. Q1 included a $21.4 million after-tax other comprehensive loss, primarily reflecting interest-rate-driven unrealized securities losses. Comprehensive income was $16.7 million versus $31.0 million in Q1 2017.
Outlook, risks and unusual items
- The filing provides no specific earnings or financial guidance. Management said liquidity was sufficient for expected cash-flow needs and described continued use of FHLB funding as anticipated.
- Management attributed the higher $3.8 million provision for credit losses (versus $0.8 million a year earlier) mainly to loan growth and the addition of NLFC loans to the allowance model. Net charge-offs were $1.5 million, compared with $1.7 million in Q1 2017.
- Nonperforming assets increased to $29.0 million from $26.9 million at year-end; NPAs were 0.24% of assets. Nonaccrual loans were $26.2 million, and $7.46 million of loans were placed on nonaccrual during the quarter. The allowance for loan losses was $61.1 million, or 0.75% of loans.
- Liquidity resources included $352 million of cash and cash equivalents, stated capacity for an additional $863 million of FHLB advances and $1.27 billion of Federal Reserve discount-window borrowing. Commitments to extend credit were $1.96 billion; letters of credit were $25.2 million.
- NLFC acquisition consideration was $130.2 million, including $84.5 million cash and $45.7 million in stock; preliminary goodwill recognized was $87.0 million. The acquired loans and liabilities include securitized funding, and the acquisition fair values remain subject to refinement.
- Management identified risks including economic deterioration, commercial real-estate and construction concentrations, interest-rate and funding pressures, credit-loss estimation, acquisition integration, cybersecurity and other operational risks, regulation, litigation, and realization of deferred tax assets. Adoption of the expected-credit-loss standard was expected to increase the allowance, but the amount had not yet been determined.
- Management said pending or threatened legal matters were not expected to have a material adverse effect. Disclosure controls were assessed as effective, with no significant subsequent changes to internal controls reported.
Important facts for investors to verify
- How much of reported growth and earnings reflects acquired businesses, and whether NLFC integration and preliminary purchase accounting change future results.
- Whether loan quality, nonaccrual balances and the allowance remain appropriate as the enlarged loan portfolio seasons.
- Whether margin gains persist as deposit and other funding costs respond to interest-rate changes; review the filing’s rate-sensitivity scenarios and deposit mix.
- The impact of unrealized securities losses, securities portfolio repositioning and any further changes in accumulated other comprehensive loss on reported equity and tangible book value.
- Whether the $86.5 million net deferred tax asset is realized as management expects, and the eventual impact of expected-credit-loss accounting adoption.
- Capital and liquidity capacity after acquisition-related funding, subordinated debt issuance and continued loan growth; assess the substantial off-balance-sheet credit commitments alongside available funding sources.