Business context and reporting period
United Community Banks, Inc. (UCBI) filed this unaudited Form 10-Q for the quarter and nine months ended September 30, 2019. The Georgia-based bank holding company operated 147 branches across Georgia, South Carolina, North Carolina and Tennessee. Results include First Madison Bank & Trust (FMBT) from its May 1, 2019 acquisition.
Financial performance and position
| Metric | 2019 | Prior comparable period |
|---|---|---|
| Q3 net income | $48.4 million; diluted EPS $0.60 | $43.7 million; diluted EPS $0.54 |
| Q3 total revenue | $145.3 million | $134.5 million |
| Q3 net interest margin, FTE | 4.12% | 3.95% |
| Nine-month net income | $136.7 million; diluted EPS $1.70 | $121.0 million; diluted EPS $1.51 |
| Nine-month net interest revenue | $352.8 million; NIM, FTE 4.11% | $323.9 million; NIM, FTE 3.88% |
- Profitability and costs: Q3 noninterest income was $29.0 million, up 20% year over year, led by mortgage fees. Noninterest expense was $82.9 million, up 7%. The GAAP efficiency ratio was 55.64%; the company-reported operating ratio, excluding specified merger and other charges, was 53.90%.
- Credit: Q3 provision for credit losses was $3.1 million versus $1.8 million; nine-month provision was $9.65 million versus $7.40 million. Nine-month net charge-offs were $8.29 million, or 0.13% of average loans, compared with $4.33 million, or 0.07%. Allowance for loan losses was $62.5 million, 0.70% of loans, at September 30.
- Balance sheet: Total assets were $12.81 billion, loans $8.90 billion, deposits $10.76 billion and shareholders’ equity $1.61 billion. Since year-end 2018, loans rose about 6% and deposits about 2%. Noninterest-bearing deposits increased $318 million; interest-bearing deposits declined $95.6 million, including a $462 million reduction in brokered deposits.
- Debt and capital: FHLB advances were $40 million, down from $160 million at year-end; long-term debt was $240.2 million, down from $267.2 million. Regulatory capital ratios remained above well-capitalized thresholds: consolidated CET1 was 12.44% and total capital 14.47%; the Bank’s were 14.15% and 14.82%, respectively.
- Cash flow and liquidity: For the first nine months, operating cash flow was $96.1 million, investing cash flow was positive $126.1 million and financing cash flow was negative $188.4 million; cash and cash equivalents ended at $361.1 million. Management said liquidity was sufficient. Available stated borrowing capacity included $1.17 billion of additional FHLB advances and $1.55 billion at the Federal Reserve discount window, plus $1.79 billion of unpledged securities.
Material changes versus prior periods
- Q3 net income increased about 11% year over year; nine-month net income increased about 13%. Management attributed stronger net interest revenue and margin to loan growth, shifting assets from securities to higher-yielding loans, and reduced borrowings. Higher deposit costs partly offset these gains.
- Mortgage activity strengthened: Q3 originations totaled $330 million versus $237 million a year earlier. United also retained more SBA/USDA guaranteed loans, reducing gains from loan sales.
- Nonperforming assets rose to $30.9 million (0.24% of assets) from $25.1 million (0.20%) at year-end 2018; nonaccrual loans increased to $30.8 million from $23.8 million.
- Available-for-sale securities declined to $2.27 billion from $2.63 billion as part of management’s balance-sheet deleveraging strategy. FMBT added $245 million of assets and $213 million of liabilities; acquisition goodwill was $20.3 million.
Outlook, risks, contingencies and unusual items
- The filing provides no quantified earnings or revenue guidance. Management noted that Federal Reserve rate reductions had begun to affect loan yields; equipment-finance loan growth was expected to moderate that pressure. Interest-rate simulation projected a 2.91% increase in 12-month net interest revenue under an immediate 100-basis-point rise and a 4.36% decrease under an immediate 100-basis-point decline, versus the modeled base case.
- CECL adoption was scheduled for 2020. Management expected the allowance for credit losses to increase under the new methodology, but had not determined the impact.
- Q3 and nine-month merger-related and other charges included a $2.94 million loss on termination and settlement of the acquired defined-benefit pension plan, along with acquisition, conversion, branch-closure and executive-retirement costs. The pension plan was funded with a $4.90 million contribution.
- Key disclosed risks include economic and local-market conditions, credit deterioration, interest-rate and liquidity exposure, acquisition integration, competition, cybersecurity and third-party systems, regulation, CECL implementation, litigation, and restrictions on Bank dividends to the holding company. Management did not expect pending litigation to have a material adverse effect; no material risk-factor changes from the 2018 Form 10-K were reported.
- The Board approved a $0.18 quarterly dividend payable January 6, 2020, and a new $50 million share-repurchase authorization through December 31, 2020. The company repurchased $13.0 million of shares in the first nine months of 2019.
Important facts for investors to verify
- Whether rising nonaccrual loans, nonperforming assets and charge-offs persist, particularly in commercial and equipment-finance portfolios.
- The effect of deposit pricing and interest-rate changes on margin, funding costs and the company’s modeled rate sensitivity.
- CECL adoption’s eventual allowance, capital and earnings impact; management had not yet quantified it.
- FMBT integration costs, realized synergies and final purchase-accounting adjustments; acquired fair values were preliminary.
- Whether reported operating results remain comparable after excluding merger and other charges; these are non-GAAP measures defined by management.
- The company’s ability to maintain liquidity and capital while funding loan growth, dividends and repurchases, including reliance on Bank dividends subject to regulatory limits.