UNITED COMMUNITY BANKS INC quarterly report, Q2 FY2023

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United Community Banks, Inc. — Q2 2023 Form 10-Q

Reporting period: Quarter and six months ended June 30, 2023. Unaudited consolidated results. United provides commercial and consumer banking and investment advisory services through 209 branches in six southeastern states.

Financial performance

  • Q2 revenue: $213.9 million, up 3% from $206.8 million a year earlier. Net interest revenue was $200.3 million versus $178.9 million; noninterest income was $36.4 million versus $33.5 million.
  • Q2 earnings: Net income was $63.3 million versus $66.8 million; diluted EPS was $0.53 versus $0.61. Operating net income, a non-GAAP measure excluding merger-related and other charges, was $66.1 million versus $72.4 million; operating diluted EPS was $0.55 versus $0.66.
  • Six-month results: Revenue was $433.8 million versus $386.4 million; net income was $125.6 million versus $114.9 million; diluted EPS was $1.05 versus $1.04. Operating net income was $135.1 million versus $127.5 million.
  • Margins and funding costs: Q2 FTE net interest margin was 3.37%, up from 3.19% year over year but down from 3.61% in Q1 2023. Net interest spread fell to 2.47% from 3.08% a year earlier. Deposit interest expense rose to $89.2 million from $4.3 million in Q2 2022 as deposit pricing increased and the mix shifted toward higher-cost deposits. Six-month FTE margin was 3.49% versus 3.08%.
  • Credit costs: Q2 provision for credit losses was $22.8 million versus $5.6 million; six-month provision was $44.5 million versus $28.7 million. Management cited loan growth, higher net charge-offs and a less favorable commercial real estate price forecast.
  • Expenses: Q2 noninterest expense increased 10% to $132.4 million. Higher employee costs, FDIC assessments and intangible amortization were among the drivers. Q2 merger-related and other charges were $3.6 million.

Balance sheet, liquidity and capital

  • At June 30, total assets were $26.1 billion, loans held for investment were $17.4 billion, deposits were $22.3 billion and shareholders’ equity was $3.1 billion. Compared with December 31, 2022, loans rose from $15.3 billion and deposits from $19.9 billion, partly reflecting the Progress acquisition.
  • Cash and cash equivalents were $710.7 million. Six-month operating cash flow was $185.0 million; investing activities used $163.5 million and financing activities provided $42.3 million. Cash increased $63.9 million during the period.
  • There were no short-term borrowings or FHLB advances outstanding at quarter-end, compared with $158.9 million and $550.0 million, respectively, at year-end. Long-term debt was $324.8 million.
  • Management reported sufficient liquidity for expected needs and said the company maintained borrowing capacity of $1.75 billion from the FHLB, $2.70 billion at the Federal Reserve discount window and $2.26 billion through the Bank Term Funding Program. These capacities are subject to collateral and program conditions.
  • Approximately $8.21 billion of deposits were uninsured; $2.29 billion of that amount was collateralized by securities. Noninterest-bearing demand deposits declined to $7.0 billion from $7.6 billion at year-end.
  • United and the Bank were categorized as well-capitalized. Consolidated CET1, total capital and leverage ratios were 12.19%, 14.57% and 9.79%, respectively.

Material changes, credit quality and unusual items

  • United acquired Progress on January 3, 2023, adding 13 offices, $1.44 billion of loans and $1.33 billion of deposits. The acquisition added $145.5 million of goodwill; purchase accounting remained preliminary.
  • Nonperforming assets rose to $103.7 million, or 0.40% of assets, from $44.3 million, or 0.18%, at year-end. Nonaccrual loans increased to $102.6 million from $44.2 million, mainly due to several large commercial loans and higher nonaccrual manufactured housing loans.
  • Q2 net charge-offs were $8.4 million, compared with net recoveries of $1.1 million in Q2 2022. The allowance for credit losses on loans was $190.7 million, or 1.10% of loans, versus $159.4 million, or 1.04%, at year-end.
  • Investment securities totaled $5.91 billion. HTM securities had $421 million of net unrealized losses at quarter-end, primarily attributed to interest-rate changes; no allowance was recorded for HTM or AFS securities. United stated it did not intend, and did not expect to be required, to sell securities in unrealized-loss positions before recovery.
  • Mortgage loan gains and related fees fell 52% to $11.1 million for the first six months, reflecting lower mortgage demand amid rising rates. Q2 noninterest income included a $1.59 million gain on sale of a commercial insurance book of business.

Outlook, risks and contingencies

  • The filing provides no specific earnings or margin guidance. Management cautioned that results depend on deposit pricing and mix, interest rates, loan growth, credit conditions and economic forecasts; actual results may differ from forward-looking statements.
  • Management described rising deposit competition and a cumulative deposit beta of 32% for the current rate cycle, and increased the modeled deposit-beta assumption to 37%. Its rate-sensitivity estimates depend on assumptions and are not assurances of future results.
  • Interest-rate risk includes unrealized securities losses and the potential effect of deposit costs on margins. Credit risks include increased nonaccrual loans, charge-offs, commercial real estate exposures and uncertainty in CECL loss estimates.
  • First Miami was acquired on July 1, 2023, after quarter-end. At June 30 it had $992 million of assets, $618 million of loans and $836 million of deposits. Its results will be included beginning in Q3; purchase accounting and pro forma disclosures were not yet complete.
  • Commitments to extend credit were $4.76 billion and letters of credit were $55.7 million. Management said pending and threatened litigation was not expected to have a material adverse effect. The filing also identifies acquisition, cybersecurity, regulatory, liquidity and broader economic risks.

Key facts for investors to verify

  • Whether deposit pricing, deposit mix and deposit outflows pressure net interest margin further.
  • Whether the rise in nonaccrual loans and charge-offs persists, particularly in commercial real estate and manufactured housing.
  • How Progress integration, preliminary purchase accounting and First Miami’s Q3 contribution affect expenses, capital and earnings.
  • Whether liquidity resources and uninsured-deposit trends remain consistent with management’s assessment.
  • How securities valuations, unrealized losses and the new fair-value hedge affect tangible capital and reported results.
  • How much of reported operating earnings depends on non-GAAP adjustments and unusual items.