United Community Banks, Inc. — Q3 2018 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2018. Unaudited consolidated results. Unless otherwise stated, amounts are in U.S. dollars; financial figures below are in millions.
Business context and reporting period
United is a regional bank holding company operating through United Community Bank, with 150 locations in Georgia, South Carolina, North Carolina and Tennessee. The February 1, 2018 acquisition of NLFC, a nationwide equipment-finance lender, contributed to year-over-year balance-sheet and earnings growth; results include NLFC only from its acquisition date. The filing also includes the November 2017 Four Oaks acquisition.
Financial results and key metrics
| Metric | Q3 2018 | Q3 2017 | Nine months 2018 | Nine months 2017 |
|---|---|---|---|---|
| Total revenue | $134.5 | $109.3 | $386.4 | $322.2 |
| Net interest revenue | $112.1 | $89.8 | $323.9 | $258.5 |
| Net interest margin, FTE | 3.95% | 3.54% | 3.88% | 3.49% |
| Provision for credit losses | $1.8 | $1.0 | $7.4 | $2.6 |
| Noninterest expense | $77.7 | $65.7 | $228.0 | $191.7 |
| Net income | $43.7 | $27.9 | $121.0 | $79.7 |
| Diluted EPS | $0.54 | $0.38 | $1.51 | $1.10 |
| Operating net income, non-GAAP | $44.1 | $30.2 | $126.2 | $87.9 |
At September 30, total assets were $12.41 billion, loans and leases were $8.23 billion, deposits were $10.23 billion, and shareholders’ equity was $1.40 billion. Compared with December 31, 2017, loans increased $491 million and deposits increased $422 million. Cash and cash equivalents were $312 million.
For the first nine months, operating cash flow was $200.2 million; investing activities used $170.2 million and financing activities used $32.3 million. Net cash decreased $2.3 million. Financing included $98.2 million net proceeds from subordinated debt issuance, $423 million net deposit growth, and $29.6 million of cash dividends paid.
At September 30, short-term borrowings were zero, FHLB advances were $300 million, and long-term debt was $285.1 million, up from $120.5 million at year-end. The increase chiefly reflects the $100 million subordinated notes issued in January and acquired securitized debt. Regulatory capital ratios remained above well-capitalized thresholds: consolidated CET1 11.99%, Tier 1 12.25%, total capital 14.15%, and leverage 9.46%.
Material changes versus comparable periods
- Q3 net income increased 56% year over year and nine-month net income increased 52%. Management attributed the improvement principally to the reduced federal tax rate under the Tax Cuts and Jobs Act; the lower effective tax rate was 23.1% for Q3 2018 versus 36.0% in Q3 2017, and 23.6% versus 38.9% for the respective nine-month periods.
- Net interest revenue rose 25% for both Q3 and the nine-month period. Management cited acquisition-related loan growth, rising rates on floating-rate loans, and improved earning-asset mix. Interest expense also increased as deposit and borrowing costs rose.
- Noninterest income increased 18% in Q3 and 5% year to date, with acquisition-related equipment-finance fees and mortgage growth contributing. Year-to-date service charges declined 9%, partly due to the Durbin Amendment’s debit interchange fee limits.
- Noninterest expense increased 18% in Q3 and 19% year to date, mainly from acquired operations, added staff and compensation, technology and professional costs, and higher regulatory assessments. Q3 merger-related and other charges fell to $0.1 million from $3.2 million; year-to-date charges were $4.4 million.
- Available-for-sale securities had $62.0 million of gross unrealized losses at quarter-end, versus $19.8 million at December 31, 2017; the filing attributes losses primarily to interest-rate changes. The nine-month after-tax other comprehensive loss was $37.8 million.
Outlook, risks and unusual items
The filing provides no formal earnings or revenue guidance. Management said liquidity was sufficient for expected cash requirements. It reported $929 million of additional FHLB borrowing capacity against qualifying collateral and $1.40 billion of Federal Reserve discount-window capacity. Management’s liquidity policy targets coverage for at least 12 months under normal conditions and 30 days under severely adverse conditions.
Credit quality indicators improved overall: nonperforming assets were $23.9 million, or 0.19% of assets, compared with $26.9 million, or 0.23%, at year-end; net charge-offs for the first nine months were $4.3 million versus $4.9 million a year earlier. The allowance for loan losses was $60.9 million, or 0.74% of loans. Management said the higher year-to-date provision largely reflected portfolio growth and initial allowance establishment for acquired NLFC loans. The allowance is an estimate subject to judgment and possible regulatory adjustment.
Interest-rate risk remains material. The company’s modeled 12-month net interest revenue impact at September 30 was negative 0.12% under an immediate 100-basis-point increase and negative 5.08% under a 100-basis-point decrease; actual outcomes may differ from model assumptions. Other disclosed risks include commercial real estate and construction concentrations, geographic concentration, acquisition integration, funding costs and liquidity, cybersecurity and third-party systems, regulation, and realization of deferred tax assets. Management expects the new expected-credit-loss accounting standard to increase the allowance, but had not determined the amount.
Commitments to extend credit totaled $2.09 billion and letters of credit $25.9 million; these are contractual amounts and do not necessarily represent future cash outflows. The Bank also had $8.76 million of unfunded commitments to certain limited partnerships. Management did not expect pending legal matters, individually or in aggregate, to materially adversely affect results or financial condition. No material risk-factor changes were reported.
Subsequent events: the company redeemed two trust preferred securities for a combined $7.43 million on October 1, 2018. In November, the board approved a $0.16 quarterly dividend and increased the share repurchase authorization to $50 million, extending it through December 31, 2019.
Most important facts for investors to verify
- Separate underlying operating growth from acquisition contributions and the substantial tax-rate benefit; GAAP and non-GAAP operating net income are not interchangeable.
- Track deposit pricing, brokered-deposit reliance, borrowing costs, and whether net interest margin remains resilient as rates and competition change.
- Assess acquired NLFC equipment-finance credit performance, loan concentrations, allowance coverage, and trends in classified, past-due, and nonaccrual loans.
- Review the impact of unrealized securities losses on tangible equity and the company’s interest-rate sensitivity assumptions.
- Monitor integration expenses, the expected adoption impact of the credit-loss standard, liquidity capacity, and the company’s ability to realize its deferred tax asset.