Business context and reporting period
United Community Banks, Inc. filed this unaudited Form 10-Q for the quarter and nine months ended September 30, 2020. The regional bank operated 163 banking offices across Florida, Georgia, South Carolina, North Carolina and Tennessee. On July 1, 2020, it acquired Three Shores Bancorporation, including Seaside National Bank & Trust; results include Seaside only from the acquisition date.
Financial performance and position
| Metric | Q3 2020 | Q3 2019 | Nine months 2020 | Nine months 2019 |
|---|---|---|---|---|
| Total revenue | $155.3 million | $145.3 million | $393.6 million | $417.6 million |
| Net interest revenue | $128.5 million | $119.3 million | $356.4 million | $352.8 million |
| Net interest margin, FTE | 3.27% | 4.12% | 3.55% | 4.11% |
| Provision for credit losses | $21.8 million | $3.1 million | $77.5 million | $9.7 million |
| Net income | $47.6 million | $48.4 million | $104.6 million | $136.7 million |
| Diluted earnings per common share | $0.52 | $0.60 | $1.25 | $1.70 |
- Revenue and costs: Q3 noninterest income rose 68% to $48.7 million, led by mortgage fees, which increased $16.5 million. Noninterest expense rose 16% to $96.0 million, reflecting the acquisition, higher mortgage compensation, and other costs. Q3 GAAP efficiency ratio was 54.14%.
- Balance sheet at September 30: Assets were $17.15 billion, loans $11.80 billion, deposits $14.60 billion, and shareholders’ equity $1.97 billion. Compared with December 31, 2019, assets increased 33%, loans 34%, deposits 34%, and equity 20%; acquisition activity and PPP lending contributed materially.
- Credit quality: Loan allowance was $134.3 million, or 1.14% of loans, versus $62.1 million, or 0.70%, at year-end. Total allowance including unfunded commitments was $146.2 million. Q3 net charge-offs were $2.5 million; nonperforming assets were $50.0 million, or 0.29% of assets, versus $35.8 million, or 0.28%, at year-end.
- Cash flow and liquidity: Nine-month operating cash flow was $53.6 million; investing cash outflow was $1.43 billion and financing cash inflow was $1.90 billion. Cash and cash equivalents ended at $1.05 billion, up from $515.2 million at year-end. Management said liquidity was sufficient; available borrowing capacity included $1.39 billion each from FHLB and Federal Reserve discount-window facilities, plus $2.19 billion of unpledged securities.
- Debt and capital: Long-term debt was $326.7 million, up from $212.7 million at year-end, including $100 million of senior debentures issued in 2020 and $15 million assumed with Three Shores. Regulatory capital ratios remained well-capitalized: consolidated CET1 12.31%, Tier 1 13.12%, and total capital 15.27%. The company also issued $100 million of preferred stock, receiving $96.4 million net.
Material changes versus prior periods
- Net income fell 2% year over year in Q3 and 23% for the first nine months; diluted EPS declined 13% and 26%, respectively. The nine-month decline reflected higher credit-loss provisions and pandemic-related conditions.
- Net interest revenue increased modestly, but margin compressed as asset yields fell faster than deposit costs, following Federal Reserve rate cuts; PPP loans and higher cash balances also weighed on yield. Lower deposit costs partly offset these pressures.
- Mortgage originations and related fees increased sharply: Q3 closed mortgage volume was $569 million versus $330 million a year earlier. Service charges declined, primarily due to lower overdraft activity.
- Loan growth included $1.32 billion of PPP loans at quarter-end. Three Shores added $2.13 billion of acquired assets and $1.99 billion of liabilities; United issued 8.13 million common shares and paid cash consideration as part of the transaction.
- CECL adoption on January 1, 2020 increased the allowance by $8.75 million, with a $3.53 million after-tax reduction to retained earnings. The new expected-loss method and pandemic forecasts drove materially higher 2020 provision expense.
Outlook, commentary, risks and unusual items
- The filing provides no specific quantitative earnings or revenue guidance. Management cautioned that the pandemic’s effects remain highly uncertain and could lead to weaker demand, prolonged low rates, higher expenses, borrower deterioration, additional credit losses, and pressure on collateral values.
- At September 30, about $364.8 million of loans remained on COVID-related short-term deferrals, generally up to 90 days. These qualifying modifications were generally not treated as new troubled debt restructurings. PPP loans carried a 100% SBA guarantee and were excluded from the CECL loss calculation.
- Management attributed the higher allowance to CECL, economic forecasts, loan growth, and acquisition-related balances. It noted model overlays for residential mortgage and income-producing commercial real estate portfolios; allowance estimates are judgmental and may change materially.
- United reported no goodwill impairment as of September 30 despite its stock trading below book value during much of the first nine months. Management planned to continue monitoring goodwill in its fourth-quarter assessment.
- Other notable items included $3.36 million of Q3 merger-related and other charges, a $1.50 million year-to-date contribution to the company foundation, and a $746,000 Q3 securities gain. Management did not expect pending litigation to have a material adverse effect. Off-balance-sheet commitments to extend credit were $2.99 billion, with $32.7 million of letters of credit.
- The board subsequently approved a $0.18 common dividend and extended the $50 million share repurchase authorization through December 31, 2021. Management identified LIBOR transition and third-party readiness as continuing operational risks.
Important facts for investors to verify
- Whether remaining COVID-19 deferrals resume regular payments and how borrower performance, nonperforming loans, charge-offs, and the CECL allowance evolve.
- How much PPP lending is forgiven or repaid, and the effect of PPP balances and deposits on reported loan growth, liquidity, and net interest margin.
- Whether mortgage-fee strength persists and offsets lower asset yields, and whether deposit costs can continue to adjust in a low-rate environment.
- Integration progress and final purchase-accounting values for Three Shores, including the acquired portfolio’s credit performance and goodwill.
- Capital and liquidity after acquisition-related growth, dividends, and any renewed share repurchases; the filing states acquired-business controls were still being integrated.