UNITED COMMUNITY BANKS INC quarterly report, Q3 FY2016

Vollständiges Dokument

United Community Banks, Inc. — Q3 2016 Form 10-Q

Reporting period: Three and nine months ended September 30, 2016. Unaudited consolidated results. United is a regional bank holding company operating primarily in Georgia, South Carolina, North Carolina, and Tennessee.

Business context and reporting period

On July 1, 2016, United completed its acquisition of Tidelands Bancshares, adding seven branches in coastal South Carolina. Results include Tidelands from the acquisition date. The company also continued to include Palmetto and MoneyTree, acquired in 2015. Comparisons are affected by these acquisitions.

Financial performance and condition

  • Q3 revenue and earnings: Total revenue was $105.7 million, up 27% from $83.0 million in Q3 2015. Net income was $25.9 million, up 45% from $17.9 million; diluted EPS was $0.36 versus $0.27.
  • Nine-month results: Total revenue was $298.1 million, up 29%; net income was $73.4 million, up 38%. Diluted EPS was $1.02 versus $0.84.
  • Net interest: Q3 net interest revenue was $79.0 million, up 21%; fully taxable equivalent net interest margin was 3.34% versus 3.26%. For the first nine months, net interest revenue was $228.9 million, up 25%, and margin was 3.36% versus 3.29%. Management attributed growth mainly to acquisitions, loan growth, a more favorable asset mix, and higher investment yields; it also noted pricing pressure on new and renewed loans.
  • Fees, expenses, and margins: Q3 fee revenue rose 44% to $26.4 million, led by service charges, mortgage fees, loan-sale gains, and other fees. Operating expenses increased 18% to $64.0 million, reflecting acquired operations, hiring, and higher activity-related costs. The GAAP efficiency ratio was 60.78% versus 64.65%; the operating ratio, excluding merger-related and other charges, was 57.79% versus 57.81%.
  • Credit costs and asset quality: United recorded a $0.3 million release of provision for credit losses in Q3, versus $0.7 million of expense in Q3 2015. Net charge-offs were $1.36 million, or 0.08% of average loans on an annualized basis. The allowance for loan losses was $63.0 million, 0.94% of loans, compared with $68.4 million, or 1.14%, at year-end 2015. Nonperforming assets were $30.8 million, 0.30% of assets, versus $27.5 million, 0.29%, at year-end; the increase primarily reflected foreclosed properties acquired with Tidelands.
  • Balance sheet and funding: At September 30, total assets were $10.30 billion, loans $6.73 billion, deposits $8.44 billion, and shareholders’ equity $1.08 billion. Since December 31, 2015, loans grew 12% and deposits 7%. Cash and cash equivalents were $226.2 million. Borrowings included $449.4 million of FHLB advances, $175.0 million of long-term debt, and $35.1 million of short-term borrowings.
  • Cash flow: For the first nine months, operating cash flow was $84.9 million, investing cash outflow $249.1 million, and financing cash inflow $150.0 million. Cash and cash equivalents declined $14.2 million to $226.2 million. Investing outflows included $453.5 million of net loan growth; financing included a $169.2 million net increase in deposits.
  • Capital and shareholder returns: The company and bank remained “well-capitalized.” At September 30, consolidated common equity tier 1 and total capital ratios were 11.04% and 11.90%; the bank’s were 12.44% and 13.30%. United paid $0.22 per share in dividends during the first nine months and repurchased 764,000 shares for $13.7 million, with $36.3 million remaining under its $50 million repurchase authorization.

Material changes versus comparable periods

  • Growth in earnings, net interest revenue, loans, deposits, and fee revenue reflects both acquired businesses and organic activity; acquisition effects make year-over-year comparisons less like-for-like.
  • Q3 and nine-month merger-related and other charges were $3.15 million and $6.98 million, respectively, compared with $5.74 million and $8.92 million in 2015. Management’s non-GAAP operating net income was $27.8 million for Q3 and $77.8 million year to date, versus $21.7 million and $59.4 million.
  • Credit allowance coverage declined from year-end, while nonperforming loans decreased modestly and foreclosed properties increased. The filing attributes the increase in foreclosed property largely to Tidelands.
  • Shareholders’ equity increased $61 million from year-end, reflecting earnings and improved unrealized securities values, partly offset by dividends, repurchases, and redemption of Series H preferred stock.

Outlook, commentary, and risks

  • The filing provides no specific earnings or financial guidance. Management said liquidity was sufficient for expected cash flow needs and anticipated continued use of FHLB advances.
  • At September 30, United reported capacity for an additional $703 million of FHLB advances and $1.10 billion of Federal Reserve discount-window borrowing, subject to qualifying collateral; brokered and retail deposits were also identified as potential funding sources.
  • Management identified general economic and market conditions, funding costs and access, interest-rate sensitivity, credit-loss estimates, geographic and commercial real estate/construction lending concentrations, acquisitions and integration, cybersecurity and third-party systems, regulation, litigation, and realization of deferred tax assets as risks.
  • The $156 million net deferred tax asset is largely expected by management to be realized, but that conclusion depends on forecasts of future taxable income. A material shortfall could require a larger valuation allowance and adversely affect results.
  • United extended its historical loss look-back period for collective loan-loss estimates from eight to 17 quarters beginning in Q3 2016, with plans to add one quarter each quarter. Allowance estimates involve judgment and may be adjusted by regulators.
  • Other notable items: Q3 included $7.5 million of acquired Tidelands foreclosed properties; other fee revenue included a $638,000 vendor payment for disputed trust fees in Q2. Management stated pending legal matters were not expected to have a material adverse effect. No material changes to previously disclosed risk factors were reported.

Important facts for investors to verify

  • Separate organic growth from acquisition-driven growth, particularly for loans, deposits, fees, and operating expenses; assess Tidelands integration and the preliminary purchase accounting.
  • Track credit quality and allowance adequacy, including acquired foreclosed properties, commercial real estate and construction exposure, and the change in the allowance methodology.
  • Review recurring versus nonrecurring fee income and merger costs, including the vendor payment and management’s non-GAAP adjustments.
  • Assess funding mix, interest-rate sensitivity, and the availability and collateral requirements of disclosed contingent borrowing capacity.
  • Evaluate the assumptions supporting realization of the deferred tax asset and the capital impact of dividends and remaining share repurchases.