United Community Banks, Inc. — Q3 2022 Form 10-Q
Unaudited results for the quarter and nine months ended September 30, 2022. The company provides commercial and consumer banking and investment advisory services, primarily across the southeastern United States. Financial amounts below are in millions unless otherwise noted.
Financial performance
| Metric | Q3 2022 | Q3 2021 | Nine months 2022 | Nine months 2021 |
|---|---|---|---|---|
| Net interest revenue | $199.8 | $141.0 | $542.5 | $411.5 |
| Net interest margin (FTE) | 3.57% | 3.12% | 3.25% | 3.17% |
| Total revenue | $216.3 | $192.2 | $602.7 | $569.0 |
| Provision for (release of) credit losses | $15.4 | $(11.0) | $44.1 | $(36.9) |
| Noninterest expense | $112.8 | $96.7 | $352.8 | $287.5 |
| Net income | $81.2 | $73.8 | $196.0 | $217.8 |
| Diluted EPS | $0.74 | $0.82 | $1.78 | $2.42 |
Q3 net income rose 10%, while diluted EPS fell 10%, reflecting a larger average share count following acquisitions. Nine-month net income declined 10%. Management also reported operating net income, a non-GAAP measure excluding merger-related and other charges: $82.5 million for Q3 and $210.0 million for the nine months.
Financial position, credit, and liquidity
- At September 30, total assets were $23.7 billion, loans held for investment were $14.9 billion, deposits were $20.3 billion, long-term debt was $324.5 million, and shareholders’ equity was $2.63 billion.
- Loans increased from $11.76 billion at year-end 2021, largely reflecting acquisitions and growth. Deposits increased from $18.24 billion at year-end, but fell from $21.06 billion at June 30, 2022; management cited attrition, particularly in public funds and NOW and money-market accounts.
- Cash and cash equivalents were $484.0 million, down from $2.32 billion at year-end 2021. For the first nine months, operating cash flow was $508.4 million, investing cash outflow was $1.84 billion, and financing cash outflow was $499.3 million. Management said liquidity was sufficient; stated borrowing capacity included $1.54 billion from the FHLB and $2.44 billion at the Federal Reserve discount window, plus $4.58 billion of unpledged securities.
- The allowance for credit losses on loans was $148.5 million, or 1.00% of loans, compared with $102.5 million, or 0.87%, at year-end. Total allowance, including unfunded commitments, was $167.3 million. Nonperforming assets were $35.5 million, or 0.15% of assets; nonaccrual loans were 0.23% of loans.
- Regulatory capital ratios remained above applicable well-capitalized thresholds. Consolidated CET1 was 12.13%, Tier 1 capital 12.68%, total capital 14.62%, and leverage 9.41%.
Material changes and notable items
- Net interest revenue increased 42% in Q3 year over year, driven by acquired and organic loan growth, securities investment, and higher market rates. The company described its balance sheet as asset-sensitive; deposit costs also rose, but more slowly than yields on earning assets.
- Q3 noninterest income fell 20%, principally because mortgage gains and related fees declined 54% amid higher interest rates and lower refinance activity. Mortgage loans sold fell 71% year over year. Nine-month noninterest income declined 14% and included $3.7 million of net securities losses.
- Q3 noninterest expenses increased 17%; nine-month expenses increased 23%. Acquisitions, added staff, merit increases, and expanded operating costs contributed. Nine-month merger-related and other charges were $17.9 million, versus $4.1 million a year earlier, including Reliant integration and systems-conversion costs.
- Reliant was acquired January 1, 2022, adding $2.32 billion of loans and $2.50 billion of deposits at acquisition. The acquisition added $299 million of goodwill; purchase accounting fair values remained preliminary. United announced an agreement to acquire Progress, which had $1.74 billion of assets, $1.41 billion of loans, and $1.50 billion of deposits at September 30. Closing was expected in Q1 2023, subject to regulatory approval and customary conditions.
- Rising rates drove substantial securities valuation losses: AOCI was a loss of $337.1 million at quarter-end, versus a loss of $26.5 million at year-end 2021. During the first nine months, $1.29 billion of AFS securities was transferred to HTM. Management attributed unrealized losses primarily to interest-rate changes and said it did not intend, and did not expect to be required, to sell impaired securities before recovery.
Outlook, risks, and contingencies
The filing provides no specific earnings or financial guidance. Management noted a less favorable economic outlook in Q3 and increased the credit-loss provision. Risks highlighted include economic deterioration, inflation, rate changes and deposit competition, credit concentrations, liquidity and interest-rate exposure, acquisition integration and approval, cybersecurity, regulatory matters, and potential legal claims. The company reported no pending or threatened legal matter expected to have a material adverse effect. It also disclosed $4.59 billion of commitments to extend credit and $53.5 million of letters of credit; these contractual amounts do not necessarily represent expected cash draws.
Important facts for investors to verify
- Whether rising deposit costs and deposit outflows offset continued asset-yield benefits, and how NIM evolves.
- Whether credit quality deteriorates as economic forecasts change, particularly in commercial real estate and other criticized portfolios; review allowance assumptions and charge-offs.
- The duration and potential capital effects of securities unrealized losses, including the AFS/HTM mix and liquidity implications.
- Progress acquisition timing, required approvals, integration costs, and final Reliant purchase accounting adjustments.
- Underlying expense trends and the comparability of management’s non-GAAP operating measures with GAAP results.