United Community Banks, Inc. — Q2 2019 Form 10-Q
Business context and reporting period. Unaudited results cover the quarter and six months ended June 30, 2019, compared with the corresponding 2018 periods. United provides commercial and consumer banking and investment advisory services through 147 branches across Georgia, South Carolina, North Carolina and Tennessee. The May 1, 2019 acquisition of First Madison Bank & Trust (FMBT) added four Georgia offices; its results are included from the acquisition date.
Key financial results
| Metric | Q2 2019 | Q2 2018 | Six months 2019 | Six months 2018 |
|---|---|---|---|---|
| Total revenue | $139.1 million | $130.0 million | $272.4 million | $251.9 million |
| Net interest revenue | $117.8 million | $108.5 million | $233.4 million | $211.8 million |
| Provision for credit losses | $3.25 million | $1.80 million | $6.55 million | $5.60 million |
| Net income | $44.1 million | $39.6 million | $88.3 million | $77.3 million |
| Diluted earnings per share | $0.55 | $0.49 | $1.10 | $0.97 |
| Net interest margin, fully taxable equivalent | 4.12% | 3.90% | 4.11% | 3.85% |
Q2 net income increased 11% year over year; six-month net income increased 14%. Management attributed stronger net interest revenue and margin chiefly to loan growth, acquired loans, rising rates on an asset-sensitive balance sheet, and a greater share of noninterest-bearing deposits. Higher deposit costs partly offset these benefits. Q2 noninterest income rose 5%, while noninterest expense rose 6% year over year. Operating net income, a non-GAAP measure excluding specified charges, was $47.2 million for Q2 and $92.1 million for the first half.
Financial position, cash flow and capital
- At June 30, 2019, total assets were $12.78 billion, loans $8.84 billion, deposits $10.59 billion and shareholders’ equity $1.57 billion. Since December 31, 2018, loans grew about 5%; deposits grew slightly. FMBT and organic growth contributed to loan growth.
- Cash and cash equivalents were $275.8 million, down from $327.3 million at year-end. For the first half, operating cash flow was $48.7 million (versus $116.4 million in 2018); investing cash flow was positive $67.2 million, while financing cash flow was negative $167.4 million.
- Debt and borrowing balances included $160 million of FHLB advances, $248.0 million of long-term debt and $40 million of short-term borrowings. Management reported sufficient liquidity, including capacity for additional FHLB advances of $1.04 billion, Federal Reserve discount-window borrowing of $1.50 billion, and $1.92 billion in unpledged securities available as collateral.
- The loan-loss allowance was $62.2 million, or 0.70% of loans, versus $61.2 million, or 0.73%, at year-end. Net charge-offs were $2.44 million in Q2 and $5.57 million for the first half; the first-half annualized ratio rose to 0.13% from 0.07%.
- Nonperforming assets were $26.7 million, or 0.21% of assets, versus $25.1 million, or 0.20%, at year-end. Nonaccrual loans increased to $26.6 million from $23.8 million. Performing classified loans were $110.9 million, up from $90.8 million at March 31, 2019.
- Consolidated regulatory capital ratios remained above “well-capitalized” thresholds: common equity tier 1 was 12.13%, tier 1 capital 12.38%, total capital 14.17%, and leverage 9.97%. Tangible book value per share, a non-GAAP measure, was $15.38.
Material changes and notable items
- FMBT contributed $2.3 million of revenue and $1.2 million of net income after its May 1 acquisition. The transaction involved $52.1 million cash consideration and $20.3 million of goodwill; purchase accounting remains preliminary.
- Higher interest expense on deposits was a material offset to revenue growth: first-half deposit interest expense was $33.1 million versus $14.4 million in 2018. Noninterest expense growth reflected compensation, technology costs, acquisition-related staffing and other investments.
- Q2 merger-related and other charges were $4.1 million; first-half charges were $4.8 million. They included FMBT costs, branch closures and executive retirement charges. The company repurchased $7.84 million of shares in the first half, with $42.2 million remaining under its authorization at June 30.
- Available-for-sale securities generated $22.4 million of after-tax unrealized gains in Q2, contributing to a positive shift in accumulated other comprehensive income. Management said unrealized security losses were primarily interest-rate related and reported no impairment charges.
- United adopted the new lease standard on January 1, 2019, recording a $23.8 million right-of-use asset and $26.8 million lease liability, and reducing equity by $549,000 net of tax.
Outlook, risks and contingencies
The filing provides no specific earnings or financial guidance. Management planned further parallel testing and model development ahead of CECL adoption, effective for United in 2020. It expects the new methodology to increase the allowance for credit losses, but had not yet determined the impact.
Key disclosed risks include interest-rate changes and deposit pricing, credit deterioration and higher charge-offs, geographic concentration in its regional markets, acquisition integration, liquidity and access to capital, cybersecurity and third-party service disruptions, regulatory or accounting changes, and the transition from LIBOR. The bank had $2.15 billion of commitments to extend credit and $29.3 million of letters of credit; these are contractual exposures and do not necessarily represent future cash needs. Management did not expect pending or threatened litigation to materially affect financial condition or results. No material changes to previously disclosed risk factors were reported.
After quarter-end, the board declared a regular $0.17-per-share dividend, payable October 5, 2019. United also repurchased 60,000 shares for $1.59 million during August through August 7.
Important facts for investors to verify
- Whether rising deposit costs, competition for deposits and changes in interest rates sustain or compress net interest margin.
- Whether higher charge-offs, nonaccrual loans and classified credits persist, and how the allowance evolves with loan growth and the Navitas equipment-finance portfolio.
- The final FMBT purchase accounting, integration costs, and contribution to ongoing earnings and expenses.
- The eventual CECL allowance increase and implementation effects; the filing does not provide a clear quantified estimate.
- Liquidity and funding trends, including deposit mix, short-term borrowing, securities sales and available contingent borrowing capacity.