UNITED COMMUNITY BANKS INC quarterly report, Q3 FY2023

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United Community Banks, Inc. — Q3 2023 Form 10-Q

Reporting period: Quarter and nine months ended September 30, 2023. Unaudited consolidated results. United provides commercial and consumer banking and investment advisory services through 205 branches across six southeastern states. Results include Progress from January 3 and First Miami from July 1, 2023.

Key financial results

  • Third quarter: Net interest revenue was $202.6 million, up 1% from $199.8 million a year earlier. Net income was $47.9 million versus $81.2 million; diluted EPS was $0.39 versus $0.74. Operating net income, a non-GAAP measure excluding merger-related and other charges, was $55.0 million versus $82.5 million.
  • First nine months: Net interest revenue was $614.3 million, up 13%; net income was $173.5 million, down 12%; diluted EPS was $1.44, down 19%. Operating net income was $190.1 million versus $210.0 million.
  • Margins and efficiency: Q3 FTE net interest margin was 3.24%, down from 3.57%; net interest spread was 2.23%, down 116 basis points. Nine-month FTE margin was 3.41%, up from 3.25%. Q3 GAAP efficiency ratio rose to 61.32% from 48.41% (operating ratio: 57.43% versus 47.66%).
  • Revenue and expenses: Q3 noninterest income was essentially flat at $32.0 million; noninterest expense increased 28% to $144.5 million. For nine months, noninterest income fell 6% to $98.6 million and expenses rose 18% to $416.7 million. Merger-related and other charges were $9.2 million in Q3 and $21.4 million year to date.
  • Credit costs: Provision for credit losses was $30.3 million in Q3 versus $15.4 million, and $74.8 million for nine months versus $44.1 million. Q3 net charge-offs were $26.6 million, including a $19.0 million charge-off tied to a wholesale oil distributor borrower; Q3 2022 net charge-offs were $1.1 million.
  • Balance sheet at September 30: Assets were $26.9 billion; loans, $18.2 billion; deposits, $22.9 billion; shareholders’ equity, $3.18 billion. Compared with December 31, 2022, assets grew 12%, loans 19%, deposits 15%, and equity 18%, with acquisitions contributing to growth. Allowance for loan losses was $201.6 million, or 1.11% of loans, versus $159.4 million, or 1.04%.
  • Debt and liquidity: Long-term debt was $324.8 million, short-term borrowings $37.3 million, and there were no FHLB advances outstanding. Cash and cash equivalents were $759.5 million. Management reported borrowing capacity of $1.88 billion from FHLB, $2.73 billion at the Federal Reserve discount window, and $2.03 billion through the Bank Term Funding Program, plus $1.53 billion in unpledged securities. Management considered liquidity sufficient for foreseeable needs.
  • Cash flows, nine months: Operating activities provided $272.2 million; investing activities used $2.4 million; financing activities used $157.2 million. Cash and cash equivalents increased $112.7 million to $759.5 million.

Material changes and notable items

  • Higher loan yields and acquired loan balances supported interest revenue, but higher deposit costs, a less favorable deposit mix, and wholesale funding substantially increased interest expense. Management attributed the lower quarterly margin to deposit rates rising faster than loan yields.
  • Noninterest expense growth reflected acquisition-related staffing and operating costs, higher FDIC assessments, greater intangible amortization, and merger-related charges. Mortgage loan gains and related fees fell 41% for nine months, which management attributed to lower mortgage demand amid higher rates.
  • Nonperforming assets were $90.9 million, or 0.34% of assets, versus $44.3 million, or 0.18%, at year-end. Nonaccrual loans were $89.8 million, up from $44.2 million. The filing cites migration of some commercial, manufactured housing, and equipment-finance loans as contributors.
  • Unrealized losses remained substantial in securities: HTM securities had $526.4 million of net unrealized losses and a fair value of $1.99 billion. Management attributed losses primarily to interest rates, stated it did not intend or expect to be required to sell impaired-position securities before recovery, and recorded no securities ACL.
  • Deposits included $8.79 billion of uninsured balances, of which $2.28 billion was collateralized by securities. Noninterest-bearing deposits declined from year-end, while interest-bearing and time deposits grew.
  • Regulatory capital ratios remained above well-capitalized thresholds. Consolidated CET1 was 12.15% and total capital was 14.45% at quarter-end.

Outlook, risks, and contingencies

  • The filing provides no specific earnings, margin, or growth guidance. Management describes continued sensitivity to deposit pricing, interest rates, liquidity, credit quality, and the economic outlook; actual results may differ from forward-looking statements.
  • Management’s rate-sensitivity model estimated that a 200-basis-point rate increase would change 12-month net interest revenue by +0.42% in an immediate shock scenario but -1.09% in a gradual ramp scenario. Model outcomes depend on assumptions, including deposit pricing and behavior.
  • Key disclosed risks include economic and political conditions, borrower and real-estate stress, industry or loan concentrations, rate and liquidity volatility, competition for deposits, acquisition integration, cybersecurity and third-party service risks, regulatory changes, and litigation or examinations.
  • Off-balance-sheet commitments to extend credit were $4.61 billion and letters of credit $56.5 million. Management did not expect pending or threatened legal matters to have a material adverse effect. First Miami and Progress purchase accounting remained preliminary and subject to refinement.
  • The filing identifies no material changes to previously disclosed risk factors other than First Miami acquisition-related risks. Disclosure controls were assessed as effective at quarter-end.

Important facts for investors to verify

  • Whether deposit costs and mix continue to pressure net interest margin, and how deposit retention and pricing evolve.
  • Whether elevated charge-offs, nonaccrual loans, and NPAs persist, especially in commercial real estate, commercial and industrial, equipment finance, and manufactured housing.
  • How much of reported loan, deposit, and earnings growth reflects acquisitions versus organic performance, and whether integration costs and expected synergies develop as anticipated.
  • Whether liquidity capacity and uninsured-deposit trends remain consistent with management’s assessment, and how pledged securities and borrowing capacity change.
  • The effect of rate movements on securities values, tangible equity, and future earnings, including the assumptions underlying the interest-rate sensitivity model.
  • Reconcile non-GAAP operating measures with GAAP results; operating measures exclude merger-related and other charges and are not standardized.