UNITED COMMUNITY BANKS INC quarterly report, Q3 FY2021

Full document

Business context and reporting period

United Community Banks, Inc. filed this unaudited Form 10-Q for the quarter and nine months ended September 30, 2021. The company provides commercial and consumer banking and investment advisory services across five southeastern states; it reported 162 branches and $19.5 billion in assets at quarter-end. Comparisons are primarily with the three and nine months ended September 30, 2020, or with December 31, 2020 for balance-sheet measures.

Financial results and condition

  • Profit: Third-quarter net income was $73.8 million, or $0.82 per diluted share, up from $47.6 million, or $0.52, a year earlier. Nine-month net income was $217.8 million, or $2.42 per diluted share, versus $104.6 million, or $1.25. Operating net income, a non-GAAP measure excluding merger-related and other charges, was $74.9 million for the quarter and $220.9 million year to date.
  • Revenue and margin: Third-quarter total revenue was $192.2 million, up 24%; net interest revenue rose 10% to $141.0 million, while noninterest income fell 18% to $40.1 million. Nine-month revenue was $569.0 million, up 45%, and net interest revenue rose 15% to $411.5 million. FTE net interest margin declined to 3.12% from 3.27% for the quarter and to 3.17% from 3.55% year to date.
  • Credit costs and asset quality: The company recorded an $11.0 million release of credit-loss provision in the quarter and a $36.9 million release for the first nine months, compared with provisions of $21.8 million and $77.5 million, respectively, in 2020. Management attributed the releases to an improved economic forecast and low net charge-offs/net recoveries. Quarter net charge-offs were $0.6 million, versus $2.5 million. Nonperforming assets were $45.3 million (0.23% of assets), down from $62.2 million at year-end; the loan allowance was $99.6 million, or 0.89% of loans, versus $137.0 million, or 1.20%.
  • Cash flow and liquidity: For the nine months, operating cash flow was $282.9 million, investing cash outflow was $1.56 billion and financing cash inflow was $1.48 billion. Cash and cash equivalents totaled $1.82 billion at quarter-end. Deposits were $16.87 billion, up from $15.23 billion at year-end; management said liquidity was sufficient for expected cash needs. It reported $1.29 billion of FHLB borrowing capacity and $4.12 billion of unpledged securities available as collateral.
  • Balance sheet, debt and capital: Total assets were $19.48 billion, up from $17.79 billion at year-end; loans were $11.19 billion, down from $11.37 billion. Securities increased to $5.33 billion from $3.65 billion. Long-term debt declined to $247.1 million from $327.0 million following repayments. Shareholders’ equity was $2.12 billion. The company and bank remained “well-capitalized”; consolidated CET1 was 12.63% and total capital was 14.93%.

Material changes versus prior comparable periods

  • Quarterly earnings growth reflected higher net interest revenue and a credit-loss provision release, partly offset by lower mortgage income and higher expenses. Year-to-date comparisons also reflect the July 2020 Three Shores acquisition.
  • Mortgage loan gains and related fees fell 45% in the quarter to $13.8 million as refinancing demand and mortgage rate locks eased; wealth management fees rose 82% to $5.6 million, reflecting acquired businesses, including FinTrust.
  • Deposit growth and PPP loan forgiveness expanded liquidity and funded securities purchases. The securities portfolio grew to about 27% of assets from 20% at year-end; average earning assets shifted toward lower-yielding securities and cash, contributing to margin compression.
  • Commercial and industrial loans declined partly as PPP balances fell to $150 million from $646 million at year-end. Remaining COVID-19 payment deferrals declined to $8.9 million from $70.7 million.
  • Accumulated other comprehensive income moved from $37.7 million at year-end to a $1.9 million loss, mainly reflecting unrealized losses on available-for-sale securities. The filing says securities losses were primarily due to interest-rate changes and that the company did not intend, and did not expect to be required, to sell affected securities before recovery.

Outlook, management commentary and risks

  • The filing provides no specific earnings or financial guidance. Management described improving economic forecasts and reduced pandemic-related credit pressure, but noted elevated special-mention and substandard loan levels in certain portfolios and applied qualitative credit-reserve factors.
  • Interest-rate risk remains relevant: management cited the asset-sensitive balance sheet and low-rate environment as pressures on margin. Its model estimated that a 100-basis-point rate increase would raise 12-month net interest revenue by 4.78% in an immediate shock scenario; a 100-basis-point decrease would reduce it by 4.35%. These are model estimates, not forecasts.
  • FinTrust was acquired July 6, 2021 for $21.7 million total consideration; it had $2.10 billion in assets under management at quarter-end. Aquesta was acquired October 1, after quarter-end, for $132 million total consideration. The proposed Reliant acquisition, announced July 14, remained subject to approvals and other conditions and was expected to close in the first quarter of 2022.
  • Other risks identified include COVID-19 effects, economic and geographic concentration, credit quality, interest-rate changes, acquisition execution and integration, competition, cybersecurity and third-party service-provider exposure, regulation, liquidity and capital availability. Management said pending legal matters were not expected to have a material adverse effect. It also stated disclosure controls were effective and reported no material change in internal control over financial reporting.

Important facts for investors to verify

  1. Whether margin pressure persists as excess liquidity is invested and PPP loan fees are recognized; separately assess the sustainability of unusually large provision releases.
  2. Credit quality trends, reserve adequacy, commercial real estate and other criticized exposures, and any renewed deterioration in pandemic-affected borrowers.
  3. How mortgage-market normalization affects fee income and whether wealth-management growth offsets weaker mortgage revenue.
  4. Integration, purchase accounting, costs and expected returns for FinTrust and Aquesta, and approval, timing, financing and integration risks for the proposed Reliant transaction.
  5. Interest-rate sensitivity assumptions, unrealized securities losses, deposit composition and liquidity, and continued compliance with capital requirements.
  6. Non-GAAP operating results exclude merger-related and other charges; compare them with GAAP results and review the company’s reconciliation and definitions.