United Community Banks, Inc. — 2019 First-Quarter 10-Q
Reporting period: Three months ended March 31, 2019; unaudited. United is a regional bank holding company operating 149 branches across Georgia, South Carolina, North Carolina and Tennessee, alongside commercial banking and other financial services businesses.
Financial performance and position
| Metric | Q1 2019 | Q1 2018 or prior period |
|---|---|---|
| Total revenue | $133.3 million | $121.9 million; up 9% year over year |
| Net interest revenue | $115.6 million | $103.3 million; up 12% |
| Net interest margin, fully taxable equivalent | 4.10% | 3.80% |
| Provision for credit losses | $3.3 million | $3.8 million |
| Noninterest income | $21.0 million | $22.4 million; down 6% |
| Noninterest expenses | $76.1 million | $73.5 million; up 4% |
| Net income | $44.3 million; diluted EPS $0.55 | $37.7 million; diluted EPS $0.47 |
| Operating net income (non-GAAP) | $44.8 million; operating diluted EPS $0.56 | $39.7 million; operating diluted EPS $0.50 |
| Net cash from operating activities | $35.9 million | $72.5 million |
Management attributed higher net interest revenue and margin to loan growth, rising rates on floating-rate loans, and a full-quarter contribution from Navitas equipment-financing loans. Average loans rose 5% year over year to $8.43 billion. The GAAP efficiency ratio was 55.32%, return on assets 1.44%, and return on common equity 11.85%.
At March 31, 2019, total assets were $12.51 billion, loans $8.49 billion, deposits $10.53 billion, and shareholders’ equity $1.51 billion. Compared with December 31, 2018, loans increased from $8.38 billion, while assets declined from $12.57 billion and deposits were essentially flat. Cash and cash equivalents were $325.5 million. Investing activities provided $112.7 million, while financing activities used $150.4 million; the quarter-end cash balance declined $1.8 million.
FHLB advances were $40.0 million, down from $160.0 million at year-end; long-term debt was $257.3 million, versus $267.2 million. Management described the reduction in securities and wholesale borrowings as balance-sheet deleveraging. The company reported regulatory capital ratios above applicable “well-capitalized” thresholds: consolidated CET1 12.44% and total capital 14.55%; the bank’s respective ratios were 13.35% and 14.04%.
Material changes and credit quality
- Net income increased 18% year over year. Operating net income increased 13%, excluding merger-related and other charges as defined by the company.
- Noninterest income declined mainly because mortgage loan and related fees fell 30%, primarily reflecting a lower fair value of mortgage servicing rights. Mortgage production was $180 million, compared with $191 million.
- Noninterest expenses rose 4%; salary and benefits increased 11% and communications and equipment costs increased 25%. Management cited Navitas being included for the full quarter, compensation and technology-related costs. Lower merger charges, professional fees and FDIC assessments partly offset increases.
- Net charge-offs were $3.13 million, compared with $1.50 million a year earlier; annualized net charge-offs to average loans increased to 0.15% from 0.08%. Equipment-financing charge-offs were $1.42 million, which management said was in line with expectations.
- The allowance for loan losses was $61.6 million, or 0.73% of loans, versus $61.2 million, also 0.73%, at year-end. Nonperforming assets were $24.8 million, or 0.20% of assets, compared with $25.1 million and 0.20% at year-end.
Outlook, risks and unusual items
- The filing provides no specific earnings or revenue guidance. Management said liquidity was sufficient for expected cash needs and maintained unencumbered liquid assets intended to cover at least 12 months under normal conditions and 30 days under severely adverse conditions. It cited $1.20 billion of additional FHLB capacity, $1.56 billion of Federal Reserve discount-window capacity, and $1.88 billion of unpledged investment securities.
- CECL adoption was expected for fiscal years beginning after December 15, 2019. Management expected the allowance for credit losses to increase under the lifetime expected-loss approach, but had not yet determined the impact; model development and parallel testing were ongoing.
- On May 1, 2019, after quarter-end, United completed its acquisition of First Madison Bank & Trust for $52.1 million in cash. First Madison had $244 million in assets, $199 million in loans and $213 million in deposits as of March 31. Purchase accounting and pro forma disclosures were not yet complete.
- United repurchased 305,052 shares for approximately $7.8 million during the quarter; $42.2 million remained authorized under its repurchase program through December 31, 2019. The quarterly dividend declared was $0.16 per share.
- Key disclosed risks include interest-rate and liquidity exposure, credit losses and allowance estimates, regional economic concentration, acquisition integration, competition, cybersecurity and third-party reliance, regulation, and the potential effect of CECL. Management said pending litigation was not expected to have a material adverse effect. No material risk-factor changes were reported, and disclosure controls were assessed as effective.
Important facts for investors to verify
- Whether loan growth and the higher net interest margin persist as deposit costs reprice; deposit interest expense rose substantially year over year.
- Credit trends behind the increase in net charge-offs, particularly in equipment finance, and whether the allowance remains adequate as the portfolio grows.
- The eventual CECL transition impact on reserves, earnings and capital.
- First Madison’s purchase accounting, integration progress, and expected contribution to earnings and costs after the acquisition.
- Cash-flow trends and the sustainability of liquidity and capital levels alongside dividends and share repurchases.