United Community Banks, Inc. — Q2 2021 Form 10-Q
Business context and period: Regional banking and wealth-management company operating across Georgia, South Carolina, North Carolina, Tennessee and Florida. This unaudited filing covers the quarter and six months ended June 30, 2021; balance-sheet comparisons are with December 31, 2020. Dollar amounts below are U.S. dollars.
Financial results and position
| Metric | Q2 2021 | Comparable period |
|---|---|---|
| Total revenue | $187.8 million | $116.0 million in Q2 2020 |
| Net interest revenue | $138.4 million | $109.3 million in Q2 2020 |
| Net income | $70.3 million | $25.1 million in Q2 2020 |
| Diluted earnings per common share | $0.78 | $0.32 in Q2 2020 |
| Net interest margin, FTE | 3.19% | 3.42% in Q2 2020 |
| Noninterest expense | $95.5 million | $84.0 million in Q2 2020 |
For the first six months, net income was $144.0 million versus $57.0 million in 2020, and diluted EPS was $1.60 versus $0.71. Net interest revenue was $270.4 million versus $227.9 million; FTE net interest margin was 3.20% versus 3.73%. Six-month operating net income, a non-GAAP measure excluding merger-related and other charges, was $146.0 million versus $57.9 million.
- Balance sheet at June 30: Assets were $18.90 billion, deposits $16.33 billion, loans held for investment $11.39 billion, and shareholders’ equity $2.09 billion. Cash and cash equivalents were $1.42 billion.
- Funding and debt: Deposits rose $1.10 billion from year-end, including growth in noninterest-bearing demand deposits. Long-term debt declined to $261.9 million from $327.0 million, primarily following debt repayments.
- Cash flow, first half: Operating activities provided $162.5 million; investing activities used $1.34 billion, mainly for securities purchases; financing activities provided $989.4 million, primarily from deposit growth. Cash and cash equivalents decreased $189.2 million.
- Credit quality: The loan allowance was $111.6 million, or 0.98% of loans. Nonperforming assets were $46.3 million (0.25% of assets), down from $62.2 million at year-end. Net recoveries were $0.5 million in Q2; the six-month figure was $0.8 million.
- Capital and returns: The company reported a 12.59% CET1 ratio and a 9.26% leverage ratio and stated that the company and bank were well-capitalized. Q2 common dividend declared was $0.19 per share; 150,000 shares were repurchased during the quarter.
Changes versus prior periods
- Q2 net income increased substantially year over year, supported by higher net interest revenue and a $13.6 million release of credit-loss provision, compared with $33.5 million of provision expense in Q2 2020.
- Net interest revenue benefited from loan growth, PPP fee recognition and a lower-cost deposit mix. Margin nevertheless contracted as asset yields fell and excess deposits were deployed into lower-yielding cash and securities.
- Q2 noninterest income fell 11% year over year to $35.8 million, primarily because mortgage gains and related fees declined $12.5 million. Wealth-management fees and gains on other loan sales partly offset the decrease.
- Q2 noninterest expense rose 14% to $95.5 million, including higher salaries and benefits, reflecting Three Shores employees, mortgage production incentives and merit increases.
- Total securities increased to $4.93 billion from $3.65 billion at year-end as the company invested excess liquidity. Loans were broadly stable; PPP loans included in commercial and industrial loans declined to $472 million from $646 million.
Outlook, commentary and risks
- The filing provides no quantified earnings or margin guidance. Management said it expected certain downgraded borrowers, including senior-care and hotel businesses, to strengthen in the second half of 2021 as the economic outlook improved.
- Management attributed the lower allowance and negative provision to a more favorable economic forecast, while retaining qualitative adjustments for selected portfolios. Special-mention loans rose 24% from year-end to $370.0 million; substandard loans were $239.0 million.
- COVID-19 payment deferrals declined to $17.8 million from $70.7 million at year-end. The company reported substantially reopening branch lobbies while continuing to monitor pandemic effects.
- Acquisitions and expansion are material developments: FinTrust was acquired July 6, 2021 for $22.0 million total consideration; the Aquesta acquisition was pending, with a stated expected close in Q4 2021; Reliant was announced after quarter-end, with an expected close in Q1 2022. Regulatory and shareholder approvals and integration remain relevant uncertainties.
- Effective July 1, 2021, the bank moved its headquarters to Greenville, South Carolina, became a South Carolina-chartered bank, and the holding company elected financial-holding-company status. Through August 5, the company repurchased an additional 309,599 shares for $9.0 million.
- Disclosed risks include COVID-19 and economic conditions, credit and loan concentrations, interest-rate and liquidity risks, acquisition execution and integration, competition, cybersecurity, regulation, and potential litigation. Management said pending legal matters were not expected to have a material adverse effect; it reported no material change in previously disclosed risk factors.
Most important facts for investors to verify
- Whether margin pressure persists as rates, deposit mix, PPP loan forgiveness and securities deployment change.
- Whether the improved credit outlook and provision releases are sustainable, given higher criticized loan balances and remaining COVID-19 deferrals.
- Acquisition approvals, consideration, integration costs and eventual purchase-accounting effects for FinTrust, Aquesta and Reliant.
- Deposit stability, liquidity needs and the impact of continued securities growth and debt repayments.
- Performance excluding merger-related costs: operating results are non-GAAP and should be assessed alongside GAAP results.