United Community Banks, Inc. — Q2 2020 Form 10-Q
Business context and reporting period. This unaudited quarterly report covers the three and six months ended June 30, 2020. United is a regional bank operating across Georgia, South Carolina, North Carolina and Tennessee. Figures are in U.S. dollars; amounts below are rounded unless otherwise noted.
Financial performance and condition
- Earnings and revenue: Q2 net income was $25.1 million, or $0.32 per diluted share, versus $44.1 million and $0.55 a year earlier. Six-month net income was $57.0 million, or $0.71 per diluted share, versus $88.3 million and $1.10. Q2 total revenue was $116.0 million, down 17% year over year; six-month revenue was $238.2 million, down 13%.
- Net interest and margins: Q2 net interest revenue was $109.3 million versus $117.8 million; fully taxable-equivalent net interest margin was 3.42%, versus 4.12%. Six-month net interest revenue was $227.9 million versus $233.4 million, and margin was 3.73% versus 4.11%. Management attributed margin pressure mainly to falling rates reducing asset yields faster than deposit costs, plus low-yield PPP loans and higher cash balances.
- Credit costs and asset quality: Q2 provision for credit losses was $33.5 million versus $3.3 million; six-month provision was $55.7 million versus $6.6 million. The loan allowance was $103.7 million, or 1.02% of loans, at June 30, compared with $62.1 million, or 0.70%, at year-end. Q2 net charge-offs were $6.1 million versus $2.4 million. Nonperforming assets rose to $48.5 million, or 0.32% of assets, from $35.8 million, or 0.28%, at year-end.
- Other income and expenses: Q2 noninterest income increased 64% to $40.2 million, chiefly on higher mortgage activity; mortgage loan gains and related fees were $23.7 million versus $5.3 million. Q2 noninterest expense rose 3% to $84.0 million, including higher salaries, professional fees and a $1.0 million foundation contribution. The GAAP efficiency ratio was 55.86%.
- Balance sheet and liquidity: At June 30, assets were $15.0 billion, loans $10.1 billion, deposits $12.7 billion and shareholders’ equity $1.77 billion. Since December 31, 2019, assets rose from $12.9 billion, loans from $8.8 billion and deposits from $10.9 billion. Cash and cash equivalents increased to $1.33 billion from $515 million. Management said liquidity was sufficient; disclosed borrowing capacity included $1.40 billion from the FHLB and $1.42 billion from the Federal Reserve discount window, plus $1.91 billion in unpledged securities.
- Cash flow and funding: For the first six months, operating activities provided $15.6 million, investing activities used $1.15 billion, and financing activities provided $1.95 billion. Deposit growth contributed $1.81 billion of financing cash flow. Cash flows reflect substantial loan growth and securities activity.
- Debt and capital: Long-term debt was $311.6 million, up from $212.7 million at year-end, including $100 million of 5% fixed-to-floating senior debentures issued in Q2. The company also issued $100 million of 6.875% Series I preferred stock, receiving $96.7 million net. Consolidated regulatory ratios at June 30 included CET1 of 12.85% and total capital of 16.07%; the company and bank were categorized as well-capitalized.
Material changes and unusual items
- United adopted CECL on January 1, 2020. Adoption increased loan and unfunded-commitment allowances by a combined $8.75 million and reduced retained earnings by $3.53 million, net of tax. The subsequent allowance build reflected the worsening COVID-19 economic forecast, loan growth and management assumptions.
- Commercial and industrial loans included $1.10 billion of SBA-guaranteed PPP loans. United also reported $1.76 billion of COVID-related short-term loan deferrals, equal to 17% of total loans; these generally deferred payments for up to 90 days and were not treated as new TDRs under applicable relief.
- On July 1, 2020, after quarter-end, United completed its acquisition of Three Shores Bancorporation/Seaside National Bank & Trust. The acquired company had $2.16 billion of assets, $1.47 billion of loans and $1.79 billion of deposits at June 30. Consideration was $188 million, including $164 million in United shares and $24.1 million in cash. Purchase accounting and pro forma disclosures were not complete in this filing.
- Management reported no goodwill or other intangible asset impairment as of June 30, despite the stock trading below book value for much of the period; it said it would continue monitoring conditions.
Outlook, commentary and risks
The filing provides no specific earnings or revenue guidance. Management said the pandemic’s future effects were highly uncertain and that sustained or worsening conditions could reduce demand, prolong low interest rates, raise operating and credit losses, and weaken borrower finances and collateral values. Credit-loss estimates depend on forecasts and significant judgment and may change materially. Other identified risks include geographic and industry concentration, interest-rate and liquidity risks, LIBOR transition, acquisition integration, and regulatory or legal developments. Management reported no pending or threatened legal matter expected to have a material adverse effect and said disclosure controls were effective.
Key investor verification points
- Track performance and repayment outcomes of the $1.76 billion in COVID-19 deferrals, including migration to delinquency, nonaccrual status or TDR classification.
- Assess PPP loan forgiveness, repayment and deposit behavior, and the effect of PPP balances on loan growth and net interest margin.
- Review subsequent credit-loss provisions, charge-offs and CECL forecast assumptions, particularly unemployment and commercial real estate exposures.
- Monitor deposit retention, liquidity, capital ratios and the cost and terms of new debt and preferred stock.
- Check integration progress, purchase accounting and pro forma impacts from the July 1 Seaside acquisition.
- Distinguish GAAP results from management’s non-GAAP operating measures when comparing periods.