UNITED COMMUNITY BANKS INC quarterly report, Q1 FY2016

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United Community Banks, Inc. — Q1 2016 Form 10-Q

Unaudited results for the three months ended March 31, 2016; comparisons are with Q1 2015 unless otherwise noted. United is a regional bank holding company operating primarily through United Community Bank across Georgia, the Carolinas, and Tennessee. The 2016 results include the acquired Palmetto and MoneyTree businesses; their results were included from their 2015 acquisition dates. Dollar amounts below are in millions unless stated otherwise.

Financial performance

  • Revenue and earnings: GAAP total revenue was $93.8, up from $71.1. Net income was $22.3 versus $17.7; diluted EPS was $0.31 versus $0.29. Net income available to common shareholders was $22.3, after $21,000 of preferred dividends.
  • Net interest: GAAP net interest revenue was $75.0 versus $57.2; fully taxable-equivalent net interest revenue was $75.2 versus $57.6. Net interest margin rose to 3.41% from 3.31%, and net interest spread to 3.30% from 3.18%. Management attributed the increase to acquired and organic loan growth, higher yields on some floating-rate assets, and lower funding costs.
  • Fees: Fee revenue increased 19% to $18.6. Service charges rose to $10.1 and mortgage fees to $3.3; brokerage fees fell to $1.1 and securities gains declined to $0.4 from $1.5.
  • Credit costs and expenses: The company recorded a $0.2 release of provision for credit losses, compared with $1.8 of provision expense in Q1 2015. Operating expenses rose 34% to $57.9, including $2.7 of merger-related charges. Operating net income, a non-GAAP measure excluding merger-related charges, was $23.9; operating diluted EPS was $0.33.
  • Cash flow: Operating activities provided $2.4, investing activities used $195.5, and financing activities provided $135.6. Cash and cash equivalents declined $57.5 during the quarter to $182.8. Investing outflows included $246.7 of securities purchases and a $101.8 net increase in loans; financing included $87.2 of net deposit growth and $80.0 of net FHLB advances.

Financial position, liquidity, and capital

  • Balance sheet at March 31: Assets were $9.78 billion, loans $6.11 billion, deposits $7.96 billion, and shareholders’ equity $1.03 billion. Since December 31, 2015, assets rose $164.9 million, loans $110.7 million, deposits $87.1 million, and equity $15.4 million.
  • Funding and debt: FHLB advances were $510.1 million, up from $430.1 million at year-end; long-term debt was $164.0 million. Brokered deposits increased to $439.5 million from $339.0 million. The company reported no repurchase agreements outstanding on its balance sheet at March 31.
  • Liquidity: Management reported $182.8 million in cash and cash equivalents, additional FHLB borrowing capacity of $954 million and Federal Reserve discount-window capacity of $988 million, subject to qualifying collateral. Management considered liquidity sufficient for expected cash requirements.
  • Capital: United reported a consolidated common equity tier 1 ratio of 11.32%, total capital ratio of 12.31%, and leverage ratio of 8.44%; the bank subsidiary’s respective ratios were 12.47%, 13.46%, and 9.28%. Both were described as well-capitalized under applicable Basel III rules.

Changes, credit quality, and management commentary

  • Year-over-year balance-sheet and revenue growth reflect, in part, the 2015 MoneyTree and Palmetto acquisitions. Average loans increased 27% and average earning assets 26% year over year. Common shares outstanding also increased materially, affecting EPS comparisons.
  • Management cited expanded staffing and specialized lending, acquisition-related costs, and higher lending and technology support costs as drivers of expense growth. Q1 merger-related charges were $2.65 million, primarily related to Palmetto integration.
  • Net charge-offs were $2.14 million versus $2.56 million; the annualized ratio to average loans was 0.14% versus 0.22%. The allowance for loan losses was $66.3 million, or 1.09% of loans, down from $68.4 million, or 1.14%, at year-end. Nonperforming assets were $27.6 million, 0.28% of assets, versus $27.5 million and 0.29% at year-end. Nonaccrual loans were $22.4 million; no non-PCI loans more than 90 days past due were still accruing.
  • Management said recoveries remained elevated and cited improved TDR performance and generally strong credit quality in explaining the provision release. It cautioned that allowance estimates depend on judgment and could change, including following regulatory review. More than 76% of loans were real-estate secured; commercial real estate and construction exposures, geographic concentration, and local economic conditions remain relevant risks.
  • Interest-rate risk remains material. The company’s model showed that a 200-basis-point increase would reduce projected 12-month net interest revenue by 0.3% under an immediate shock and 1.6% under a gradual ramp; the comparable 2015 modeled outcomes were increases of 2.5% and 2.6%. Results depend on assumptions about repricing and prepayments.
  • Management concluded that nearly all of the $180 million net deferred tax asset was more likely than not to be realized; realization depends on future taxable income. A $4.42 million valuation allowance remained for certain state tax credits, and a larger allowance could materially affect results.

Outlook, subsequent events, and contingencies

  • The filing provides no specific earnings or revenue guidance. Management discusses plans and forward-looking expectations but cautions that actual results may differ.
  • On April 4, 2016, United announced an agreement to acquire Tidelands Bancshares, with approximately $466 million in assets, $325 million in loans, and $421 million in deposits at December 31, 2015. Closing was expected in Q3 2016, subject to regulatory, shareholder, and customary approvals. Consideration included approximately $2.22 million cash for Tidelands shareholders and $8.98 million to redeem Treasury-held preferred stock; United would also assume trust preferred obligations subject to the stated conditions.
  • On May 2, 2016, United announced Corsair Capital’s sale of 7.30 million shares; Corsair received the proceeds and no longer held United shares. After quarter-end, 4.03 million shares were transferred from non-voting to voting shares.
  • Off-balance-sheet commitments to extend credit totaled $1.29 billion and letters of credit $20.8 million. Management said pending and threatened litigation was not expected to have a material adverse effect, while noting outcomes cannot be predicted. The company also identified risks including funding costs and access, interest rates, credit losses, cybersecurity and third-party systems, regulation, acquisitions, and deferred-tax-asset realization.

Most important facts for investors to verify

  • How much of year-over-year earnings and loan growth is sustainable organic growth versus the acquired Palmetto and MoneyTree contribution, and how integration costs develop.
  • Whether expense growth moderates and whether reported operating results, which exclude merger-related charges, reconcile appropriately to GAAP results.
  • Credit trends behind the provision release, including commercial real estate and construction exposures, TDR performance, and the adequacy of the allowance as loans grow.
  • Funding mix and liquidity, particularly rising brokered deposits and FHLB advances, and sensitivity of net interest revenue to rate changes.
  • Realization assumptions for the $180 million deferred tax asset and the approvals, costs, and debt obligations associated with the proposed Tidelands acquisition.