United Community Banks, Inc. — Q2 2017 Form 10-Q
Business context and period. This unaudited quarterly report covers the three and six months ended June 30, 2017. United is a Georgia bank holding company operating primarily through United Community Bank, with 134 locations across Georgia, the Carolinas and east Tennessee. Unless stated otherwise, financial amounts below are in millions.
Financial results and key metrics
| Metric | Q2 2017 | Q2 2016 | Six months 2017 | Six months 2016 |
|---|---|---|---|---|
| Total revenue | $108.0 | $98.7 | $212.9 | $192.5 |
| Net interest revenue | $85.1 | $74.9 | $168.7 | $149.9 |
| Net income | $28.3 | $25.3 | $51.8 | $47.6 |
| Diluted EPS | $0.39 | $0.35 | $0.72 | $0.66 |
| Net interest margin, FTE | 3.47% | 3.35% | 3.46% | 3.38% |
| Operating expenses | $63.2 | $58.1 | $126.1 | $115.9 |
Management also reported non-GAAP operating net income of $29.4 million for Q2 and $57.6 million for the first half, excluding specified merger-related, retirement and tax items. The reported Q2 efficiency ratio was 57.89%; the operating ratio was 56.21%.
- Balance sheet at June 30: Assets were $10.84 billion, loans $7.04 billion, deposits $8.74 billion, and shareholders’ equity $1.13 billion. Compared with December 31, 2016, assets increased about $129 million, loans $120 million, deposits $98 million and equity $57 million.
- Credit quality: Allowance for loan losses was $59.5 million, or 0.85% of loans, versus $61.4 million, or 0.89%, at year-end. Q2 provision expense was $0.8 million, compared with a $0.3 million provision release a year earlier. Q2 net charge-offs were $1.6 million; nonperforming assets were $25.8 million, or 0.24% of assets, versus $29.5 million and 0.28% at year-end.
- Cash flow and liquidity: For the first half, operating cash flow was $97.6 million, investing cash outflow $122.6 million, and financing cash inflow $40.9 million. Cash and cash equivalents ended at $233.2 million. Management said liquidity was sufficient; available capacity included $713 million of additional FHLB advances and $1.21 billion of Federal Reserve discount-window borrowing.
- Funding and capital: Deposits were $8.74 billion, FHLB advances $669.1 million and long-term debt $175.4 million; short-term borrowings were zero at quarter-end. Consolidated regulatory ratios were 11.86% common equity tier 1, 11.91% Tier 1, 12.70% total capital and 8.97% leverage; management characterized capital as well-capitalized. The common dividend declared was $0.09 per share for Q2.
Material changes versus comparable periods
- Q2 net income rose 12% and diluted EPS increased from $0.35 to $0.39; first-half net income rose 9%. Growth reflected higher net interest and fee revenue, partly offset by higher expenses.
- Q2 net interest revenue increased 14%; management attributed the increase to loan growth, the Tidelands acquisition and higher yields on floating-rate loans and securities. Q2 average loans were up 13% year over year. Funding costs also rose: the average cost of interest-bearing liabilities was 0.48%, versus 0.39%.
- Q2 fee revenue was nearly flat year over year at $23.7 million; first-half fee revenue increased 9% to $45.8 million, supported by mortgage and other fees. Operating expenses rose 9% in both the quarter and first half, primarily reflecting Tidelands-related costs, compensation and lending activity.
- Nonperforming loans increased to $23.1 million from $21.5 million at year-end, while foreclosed properties fell to $2.7 million from $7.9 million. Management attributed the improvement in total nonperforming assets largely to sales of foreclosed properties, including properties received in the Tidelands acquisition.
Outlook, commentary, risks and unusual items
- No specific earnings or financial guidance is provided. Management expects the Four Oaks Fincorp acquisition, announced in June, to close in Q4 2017, subject to regulatory and shareholder approvals and customary conditions. The acquisition was valued at approximately $124 million based on the cited share price. United completed the HCSB acquisition on July 31, 2017, after the reporting date, for approximately $69 million; purchase accounting was not finalized.
- Q2 merger-related and other charges were $1.83 million, primarily executive retirement costs. First-half charges of $3.88 million also included severance, branch closures and technology write-offs. The first-half effective tax rate was 40.3%, including a $3.40 million tax expense from reversal of a disproportionate tax effect associated with terminated cash flow hedges.
- Management estimated that $591,000 of losses related to terminated cash flow hedges would increase interest expense over the next 12 months. United also purchased $200 million of interest-rate caps in Q2 as an economic hedge against rising rates. Its sensitivity analysis estimated that a 100-basis-point rate increase would reduce net interest revenue by 0.6% under a gradual ramp; a 100-basis-point decrease would reduce it by 8.4% under an immediate shock.
- Key disclosed risks include economic and local-market conditions; commercial real estate and construction concentration; credit-loss estimation; interest rates, funding costs and liquidity; deferred-tax-asset realization; acquisition execution and integration; cybersecurity and third-party systems; competition; regulation and litigation. Management said pending legal matters were not expected to materially affect financial condition or results. It also reported no material change in previously disclosed risk factors and effective disclosure controls.
- Management expects nearly all of its $120 million net deferred tax asset to be realized, but this depends on forecasts of future taxable income; a valuation allowance increase could materially adversely affect results. The filing also notes that adoption of the expected-credit-loss standard is expected to increase the allowance, though the amount was not yet determined.
Important facts for investors to verify
- Whether loan growth and the higher net interest margin persist as deposit and other funding costs rise.
- Whether credit performance supports the allowance level, particularly given the increase in nonperforming loans and real-estate and construction exposures.
- Integration progress and financial effects of HCSB, and approval, closing timing, purchase accounting and integration costs for Four Oaks.
- How future taxable income, tax-law changes and related assumptions affect realization of the deferred tax asset and the effective tax rate.
- Liquidity and capital capacity after acquisitions, dividend payments and any future share repurchases; $36.3 million of repurchase authorization remained at June 30, 2017.