UNITED COMMUNITY BANKS INC quarterly report, Q2 FY2016

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Business context and reporting period

United Community Banks, Inc. is a bank holding company operating primarily through United Community Bank across Georgia, the Carolinas, and Tennessee. This unaudited Form 10-Q covers the quarter and six months ended June 30, 2016, with comparisons to 2015 and, for balance-sheet items, December 31, 2015. Results include the 2015 acquisitions of Palmetto and MoneyTree from their respective acquisition dates.

Financial results and condition

  • Earnings: Second-quarter net income was $25.3 million, up 42% year over year; diluted EPS was $0.35 versus $0.28. First-half net income was $47.6 million, up 34%, and diluted EPS was $0.66 versus $0.57. Operating net income, a company-defined non-GAAP measure excluding merger-related and other charges, was $26.0 million for the quarter and $49.9 million for the half-year.
  • Revenue and margin: Second-quarter total revenue was $98.7 million, up 28%; first-half revenue was $192.5 million, up 30%. Net interest revenue rose 23% to $74.9 million in the quarter and 27% to $149.9 million in the first half. Fully taxable-equivalent net interest margin was 3.35% for the quarter versus 3.30%, and 3.38% for the half-year versus 3.30%. Fee revenue increased 36% in the quarter and 28% in the half-year.
  • Expenses and returns: Second-quarter operating expenses increased 20% to $58.1 million; first-half expenses rose 27% to $115.9 million. The increases reflect acquired operations, additional staffing and lending investment, and higher operating costs. GAAP return on assets was 1.04% in the quarter (0.89% in Q2 2015); the GAAP efficiency ratio was 59.02% (61.63%).
  • Credit quality: United recorded a $0.3 million release of credit-loss provision in Q2, compared with a $0.9 million provision in Q2 2015; the first-half release was $0.5 million versus a $2.7 million provision. The allowance for loan losses was $64.3 million, or 1.02% of loans, compared with $68.4 million, or 1.14%, at year-end. Q2 net charge-offs were $1.73 million, up from $0.98 million. Nonperforming assets were $27.5 million, approximately flat with year-end; nonperforming loans declined to $21.3 million from $22.7 million.
  • Balance sheet and funding: At June 30, assets were $9.93 billion, loans $6.29 billion, deposits $7.86 billion, and shareholders’ equity $1.06 billion. Loans increased $291 million from year-end; deposits declined $16 million. Cash and cash equivalents were $207.6 million. Federal Home Loan Bank advances rose to $735.1 million from $430.1 million; long-term debt was $164.1 million. The company reported sufficient liquidity, including $326 million of additional FHLB capacity and $1.01 billion of Federal Reserve discount-window capacity.
  • Cash flow and capital: For the first half, operating cash flow was $30.3 million, investing cash flow was negative $312.1 million, and financing cash flow was positive $249.1 million; cash and equivalents fell $32.7 million to $207.6 million. United and its bank subsidiary were classified as well-capitalized. Consolidated common equity tier 1 capital was 11.44%, total capital 12.38%, and leverage 8.53%.

Material changes versus comparable periods

Growth in earnings, net interest revenue, and fees was substantially supported by a larger balance sheet, including the Palmetto and MoneyTree acquisitions, alongside loan growth. Average loans were up 23% year over year in Q2. Management cited modest margin improvement from higher short-term rates and asset yields, while loan pricing remained competitive. Higher volumes and acquired operations also drove materially higher expenses. The allowance and allowance-to-loan ratio declined, while quarterly net charge-offs increased year over year. The 2015 comparison also included a $1.04 million debt-prepayment loss in the first half that did not recur in 2016.

During the first half, United redeemed its $10.0 million Series H preferred stock and repurchased 460,000 common shares for approximately $8.2 million of equity reduction (cash-flow statement reports $3.8 million of purchases paid and $4.4 million unsettled at period-end). The quarterly dividend was $0.07 per share.

Outlook, commentary, risks, and unusual items

  • Outlook: The filing provides no specific earnings or revenue guidance. Management said liquidity was sufficient for expected cash-flow needs and that it expected continued use of FHLB funding.
  • Acquisition: On July 1, 2016, United completed its acquisition of Tidelands Bancshares, which had $446 million of assets, $321 million of loans, and $398 million of deposits at June 30. United paid approximately $2.22 million to Tidelands shareholders, redeemed preferred stock for $8.98 million at a reported 56% discount, and assumed trust-preferred obligations. Purchase accounting was not yet finalized.
  • Capital allocation: A repurchase program authorized up to $50 million through December 31, 2017; $41.8 million remained available at quarter-end. United repurchased another 304,000 shares in July.
  • Risks and contingencies: Management highlighted economic and local-market conditions, geographic and real-estate/construction lending concentrations, loan-loss reserve adequacy, interest rates, funding costs and liquidity, deferred-tax-asset realization, cybersecurity and third-party dependencies, regulation, and acquisition integration. Commitments to extend credit totaled $1.36 billion and letters of credit $20.8 million; actual funding needs may be lower because some commitments expire unused. Management did not expect pending litigation to have a material adverse effect.
  • Notable judgments/items: Management concluded nearly all of its $158 million net deferred tax asset was more likely than not to be realized; that conclusion depends on forecasts and could change materially. Merger-related charges were $1.18 million in Q2 and $3.83 million in the first half. The company expects $1.52 million of previously deferred cash-flow-hedge losses to increase interest expense over the next 12 months. The 2016 credit-loss standard was issued but its impact was still under evaluation.

Investor verification priorities

  1. Separate acquisition-driven growth from organic loan, deposit, revenue, and expense trends; assess Tidelands integration and finalized purchase accounting.
  2. Review credit migration, charge-offs, nonperforming assets, and whether the lower allowance remains adequate as the loan portfolio grows.
  3. Test the assumptions supporting realization of the $158 million deferred tax asset and monitor potential valuation-allowance changes.
  4. Track funding mix, rising FHLB advances and brokered deposits, liquidity capacity, and sensitivity to interest-rate changes.
  5. Reconcile GAAP performance with management’s non-GAAP operating measures and examine the sustainability of fee gains and lower credit provisions.