Business context and reporting period
United Community Banks, Inc. is a regional bank holding company operating across Georgia, South Carolina, North Carolina, Tennessee and Florida. This unaudited Form 10-Q covers the quarter and six months ended June 30, 2022; balance-sheet comparisons are to December 31, 2021. Results include Reliant, acquired January 1, 2022. Figures below are in U.S. dollars; “million” and “billion” are used for readability.
Key financial metrics
| Metric | Q2 2022 | Q2 2021 | Six months 2022 | Six months 2021 |
|---|---|---|---|---|
| Total revenue | $206.8 million | $187.8 million | $386.4 million | $376.9 million |
| Net interest revenue | $178.9 million | $138.4 million | $342.7 million | $270.4 million |
| Provision for (release of) credit losses | $5.6 million | $(13.6) million | $28.7 million | $(25.9) million |
| Net income | $66.8 million | $70.3 million | $114.9 million | $144.0 million |
| Diluted earnings per common share | $0.61 | $0.78 | $1.04 | $1.60 |
| Net interest margin, FTE | 3.19% | 3.19% | 3.08% | 3.20% |
- Q2 noninterest income declined 7% to $33.5 million, mainly due to weaker mortgage gains and fees; noninterest expense rose 26% to $120.8 million, including $7.1 million of merger-related and other charges.
- Management’s non-GAAP operating net income was $72.4 million in Q2 and $127.5 million for the first half, excluding merger-related and other charges. These measures are not GAAP and are not directly comparable across companies.
- At June 30, total assets were $24.2 billion, loans $14.5 billion, deposits $20.9 billion, long-term debt $324.4 million, and shareholders’ equity $2.65 billion. Cash and cash equivalents were $1.22 billion.
- Loan and lease allowance for credit losses was $136.9 million, or 0.94% of loans, compared with $102.5 million, or 0.87%, at year-end. Including the allowance for unfunded commitments, total ACL was $153.0 million.
- Six-month operating cash flow was $347.4 million; investing cash outflow was $1.53 billion and financing cash inflow was $83.5 million. Cash and cash equivalents decreased by $1.10 billion during the period.
- Regulatory capital ratios remained above well-capitalized thresholds: consolidated CET1 was 12.00% and the Bank’s CET1 was 12.46%. Management said liquidity was sufficient for expected requirements; disclosed borrowing capacity included $1.45 billion at the FHLB and $2.52 billion at the Federal Reserve discount window.
Material changes versus comparable periods
- Q2 net interest revenue increased about 29% year over year, supported by acquired and organic loan growth, securities investment and higher rates. Q2 net interest margin was unchanged at 3.19%; management noted that prior-year accelerated PPP fee accretion had boosted the comparison period.
- First-half net income fell about 20%. The comparison was affected by a $28.7 million provision in 2022 versus a $25.9 million release in 2021; 2022 provision included $18.3 million to establish ACL on Reliant non-PCD loans and unfunded commitments.
- Loan balances increased 24% from year-end, and deposits increased 14%, with Reliant contributing substantially to growth. Reliant added approximately $2.32 billion in loans and $2.50 billion in deposits at acquisition.
- Mortgage loan gains and related fees fell 37% in Q2 and 31% for the first half, reflecting higher rates and reduced refinancing activity. Wealth management fees rose 57% in Q2, largely reflecting FinTrust.
- Accumulated other comprehensive loss widened to $264.2 million from $26.5 million at year-end, primarily reflecting interest-rate-driven unrealized securities losses. The company transferred $1.29 billion of AFS securities to HTM in the first half; management reported no securities ACL and said it did not intend, nor expect to be required, to sell securities in unrealized-loss positions before recovery.
- Shares outstanding rose from 89.3 million at year-end to 106.0 million, principally due to the Reliant stock acquisition. Tangible book value per share was $16.68 versus $18.49 at June 30, 2021.
Outlook, commentary, risks and contingencies
- The company announced an agreement to acquire Progress Financial Corporation, with approximately $1.84 billion in assets, $1.34 billion in loans and $1.65 billion in deposits as of June 30. Closing was expected in Q4 2022, subject to regulatory and shareholder approvals and customary conditions. The filing does not provide earnings guidance.
- Interest-rate sensitivity increased: a modeled immediate 200-basis-point rate increase indicated an 11.36% increase in 12-month net interest revenue, while a 200-basis-point decrease indicated a 12.74% decline. Results depend on assumptions about loan and deposit repricing and may differ from actual outcomes.
- Credit risks include economic deterioration, inflation, rising rates and commercial real estate exposures; management applied qualitative ACL adjustments to income-producing commercial real estate and equipment finance. ACL estimates rely on forecasts and judgment and may change.
- Off-balance-sheet commitments to extend credit were $4.48 billion and letters of credit were $50.3 million. Management said these amounts do not necessarily represent future cash needs because commitments may expire unused.
- Management did not expect pending or threatened legal matters to have a material adverse effect. The company reported it was well-capitalized and its disclosure controls were effective at quarter-end.
- Principal disclosed risks include acquisition execution and integration, competition, cybersecurity and third-party dependencies, liquidity and interest-rate risk, geographic and industry concentrations, regulatory or legal developments, and adverse economic conditions.
Important facts for investors to verify
- Progress acquisition status, approval conditions, expected closing timing, and the eventual purchase accounting and integration costs.
- How much future earnings growth reflects organic performance versus acquisitions, and whether expense growth and merger costs moderate.
- Deposit pricing and mix, loan growth and yields, and net interest margin as rates and competition change.
- Credit quality trends, criticized and nonperforming loans, charge-offs, and whether the ACL remains adequate under changing economic forecasts.
- Potential implications of the large securities unrealized losses, AFS-to-HTM transfers, and accumulated other comprehensive loss for capital and liquidity.
- Reconcile the reported cash-flow movements and assess available liquidity, contingent borrowing capacity, and the use of off-balance-sheet commitments.