United Community Banks, Inc. — Q1 2022 Form 10-Q
Reporting period: Three months ended March 31, 2022; financial statements are unaudited. The company provides commercial and consumer banking and investment advisory services across a 198-branch network in Georgia, South Carolina, North Carolina, Tennessee, and Florida.
Financial performance and condition
| Metric | Q1 2022 / March 31, 2022 | Comparable period / prior year-end |
|---|---|---|
| Net interest revenue | $163.8 million | $132.1 million in Q1 2021 |
| Net interest margin, FTE | 2.97% | 3.22% in Q1 2021 |
| Provision for credit losses | $23.1 million expense | $12.3 million release in Q1 2021 |
| Noninterest income | $39.0 million | $44.7 million in Q1 2021 |
| Noninterest expense | $119.3 million | $95.2 million in Q1 2021 |
| Net income / diluted EPS | $48.0 million / $0.43 | $73.7 million / $0.82 in Q1 2021 |
| Net income—operating, non-GAAP | $55.1 million | $74.9 million in Q1 2021 |
| Total assets | $24.37 billion | $20.95 billion at Dec. 31, 2021 |
| Loans held for investment | $14.32 billion | $11.76 billion at Dec. 31, 2021 |
| Total deposits | $21.06 billion | $18.24 billion at Dec. 31, 2021 |
| Long-term debt | $324.2 million | $247.4 million at Dec. 31, 2021 |
| Shareholders’ equity | $2.70 billion | $2.22 billion at Dec. 31, 2021 |
Q1 operating cash flow was $200.5 million; investing activities used $902.4 million, and financing activities provided $290.0 million. Cash and cash equivalents ended the quarter at $1.91 billion, down from $2.32 billion at year-end. Management said liquidity was sufficient for expected cash flow needs. The company reported $1.41 billion of FHLB borrowing capacity, $2.05 billion of Federal Reserve discount-window capacity, and $4.64 billion of unpledged investment securities.
At March 31, the consolidated CET1, Tier 1, total capital, and leverage ratios were 11.88%, 12.46%, 14.34%, and 8.89%, respectively. The company and Bank were categorized as well-capitalized.
Material changes and key drivers
- Net interest revenue rose 24% year over year, principally from acquired and organic loan growth, securities income, lower deposit rates, and a more favorable deposit mix. The margin nevertheless compressed, which management attributed largely to the low-rate environment and a greater proportion of securities in earning assets.
- Reported net income fell 35% year over year. The increase in provision expense, lower mortgage-related income, higher operating costs, and merger-related charges contributed to the decline. Diluted EPS also reflected a higher weighted-average share count.
- Noninterest income declined 13%, including a $6.4 million decrease in mortgage gains and related fees and $3.7 million of net securities losses. Wealth management fees increased 68%, mainly following the FinTrust acquisition.
- Noninterest expense increased 25%; salaries and benefits rose $10.4 million, while merger-related and other charges rose $7.5 million to $9.0 million, primarily associated with Reliant.
- Reliant was acquired on January 1, 2022, adding $2.96 billion of assets, including $2.32 billion of loans, and $2.50 billion of deposits. Its results are included from the acquisition date. Acquisition accounting values remain preliminary; goodwill recorded was $299.2 million.
- Net interest margin was 2.97%, up from 2.81% in Q4 2021 but below 3.22% in Q1 2021. Loans increased 22% from year-end, and deposits increased 15%, with acquisition activity a significant factor in both.
Outlook, risks, and unusual items
- The filing gives no specific earnings or revenue guidance. Management describes its liquidity as adequate and maintains a target unencumbered liquid-asset reserve intended to cover at least 12 months under normal conditions and 30 days under severely adverse conditions.
- Interest-rate sensitivity modeling estimated a 11.93% increase in 12-month net interest revenue under an immediate 200-basis-point increase and a 7.93% decrease under an immediate 200-basis-point decrease. These are model estimates subject to assumptions, not forecasts.
- During Q1, the company transferred $1.11 billion of available-for-sale securities to held-to-maturity. Securities experienced substantial rate-related unrealized losses; accumulated other comprehensive loss increased to $175.3 million from $26.5 million at year-end. Management said it did not intend, and did not expect to be required, to sell securities in unrealized loss positions before recovery of amortized cost. Transfer-date losses are to be recognized over the securities’ remaining lives as a yield adjustment.
- The Reliant acquisition drove $18.3 million of initial provision for acquired non-PCD loans and unfunded commitments. Total ACL for loans was $132.8 million, or 0.93% of loans, at quarter-end. Nonperforming assets were $40.8 million, versus $32.9 million at year-end; management attributed much of the increase to Reliant.
- Off-balance-sheet commitments to extend credit totaled $4.36 billion and letters of credit $57.8 million. The company also had $37.9 million of unrecorded commitments for future capital calls. Management does not expect pending legal matters to have a material adverse effect.
- On May 4, 2022, the company announced an agreement to acquire Progress Financial Corporation, with $1.86 billion of assets and $1.27 billion of loans at March 31. Closing was expected in Q4 2022, subject to approvals and customary conditions.
- Key disclosed risks include economic and borrower deterioration, interest-rate and liquidity risk, geographic and industry concentration, acquisition integration, credit-loss estimate uncertainty, cybersecurity, competition, and regulatory or legal developments. The filing states there were no material changes to previously disclosed risk factors.
Most important facts for investors to verify
- Whether post-acquisition revenue and expense growth translates into improved operating returns, while distinguishing GAAP results from the company’s non-GAAP operating measures.
- Whether net interest margin and deposit costs respond as expected to changing rates; review the assumptions behind interest-rate sensitivity estimates.
- Whether credit quality, criticized loans, charge-offs, and the allowance remain consistent with management’s forecasts as the acquired loan portfolios season.
- Whether securities-related AOCI losses, liquidity, and the held-to-maturity classification remain manageable, including the effect of losses accreted into future yield.
- Reliant integration and purchase-accounting revisions, and the regulatory, shareholder, execution, and integration risks associated with the announced Progress acquisition.