United Community Banks, Inc. — Q1 2020 Form 10-Q
Reporting period: Three months ended March 31, 2020; balance-sheet comparisons are with December 31, 2019. The unaudited consolidated filing covers a regional banking and investment-advisory business operating in Georgia, South Carolina, North Carolina, and Tennessee. Amounts below are in U.S. dollars; financial statement figures are generally in millions unless stated otherwise.
Financial performance and position
| Metric | Q1 2020 / March 31, 2020 | Comparable period / prior year-end |
|---|---|---|
| Net interest revenue | $118.6 million | $115.6 million in Q1 2019 |
| Net interest margin, fully taxable equivalent | 4.07% | 4.10% in Q1 2019 |
| Provision for credit losses | $22.2 million | $3.3 million in Q1 2019 |
| Net income | $31.9 million; diluted EPS $0.40 | $44.3 million; diluted EPS $0.55 in Q1 2019 |
| Total assets | $13.09 billion | $12.92 billion at December 31, 2019 |
| Loans held for investment | $8.94 billion | $8.81 billion at December 31, 2019 |
| Total deposits | $11.03 billion | $10.90 billion at December 31, 2019 |
| Long-term debt | $212.8 million | $212.7 million at December 31, 2019; no FHLB advances outstanding |
| Shareholders’ equity | $1.64 billion | $1.64 billion at December 31, 2019 |
| Cash and cash equivalents | $520.5 million | $515.2 million at December 31, 2019 |
Net interest revenue increased 3% year over year, but the provision increase and higher operating expenses drove net income down 28%. Noninterest income rose 23% to $25.8 million, chiefly reflecting stronger mortgage activity. Noninterest expense increased 7% to $81.5 million. The filing reports a GAAP efficiency ratio of 56.15% and return on assets of 0.99% for the quarter.
Operating cash flow was negative $10.8 million, compared with positive $35.9 million in Q1 2019. Investing cash flow was negative $85.0 million and financing cash flow positive $101.1 million; cash increased $5.3 million during the quarter. Operating cash use included increases in other assets and accrued interest receivable and in loans held for sale. Financing cash inflows principally reflected a $137.8 million increase in deposits, partly offset by dividends and share repurchases.
Material changes and credit quality
- The allowance for credit losses on loans was $81.9 million, or 0.92% of loans, versus $62.1 million, or 0.70%, at year-end. Total allowance, including unfunded commitments, was $88.4 million. The increase reflects CECL adoption, the COVID-19 economic outlook, and loan growth.
- Net charge-offs were $8.1 million, compared with $3.1 million in Q1 2019; management attributed the increase primarily to one previously substandard loan. Nonperforming assets were $36.7 million, 0.28% of total assets, versus $35.8 million at year-end.
- Average loans grew 5% year over year, while average investment securities declined 13%. Management said asset growth and a more favorable funding mix helped net interest revenue; falling rates weighed on margin as loan yields declined faster than deposit costs.
- Mortgage gains and related fees increased to $8.3 million from $3.7 million. The company closed $388 million of mortgage loans versus $180 million a year earlier.
- United adopted CECL on January 1, 2020. Adoption increased the loan allowance by $6.9 million and the unfunded-commitment allowance by $1.9 million; the after-tax cumulative adjustment reduced retained earnings by $3.5 million. Prior-year figures remain under the earlier incurred-loss method.
Outlook, developments, and risks
- Management provided no specific earnings or financial guidance. It warned that the pandemic’s effects and duration were highly uncertain and that prolonged or worsening conditions could weaken borrower repayment, collateral values, loan demand, earnings, and asset quality.
- At quarter-end, COVID-related short-term deferrals covered $164 million of otherwise performing loans and were excluded from TDR classification under applicable relief. By April 30, deferrals had grown to approximately $1.40 billion. By May 1, the SBA had authorized 11,256 PPP loans totaling $1.20 billion; management expected significant PPP funding in Q2, primarily through the Federal Reserve’s PPP lending facility.
- Management reported sufficient liquidity, including $520.5 million in cash and cash equivalents, $1.42 billion in FHLB borrowing capacity, $1.49 billion in Federal Reserve discount-window capacity, and $1.98 billion in unpledged securities. It also said the bank maintained liquidity reserves intended to cover normal needs for at least 12 months and severely adverse conditions for at least 30 days.
- United and the Bank were categorized as well-capitalized at March 31. Consolidated CET1, total capital, and leverage ratios were 12.85%, 14.93%, and 10.40%, respectively. The company elected regulatory capital transition relief for CECL.
- United suspended common-stock repurchases in response to COVID-19 after buying back $20.8 million of stock during Q1. The board later approved a regular $0.18-per-share dividend, payable July 6, 2020.
- United agreed to acquire Three Shores Bancorporation, including Seaside National Bank & Trust, with completion expected in Q3 2020. The filing also describes COVID-related operational, credit, market, liquidity, cybersecurity, and PPP processing/guaranty risks. Management reported no material expected adverse effect from pending legal matters.
- Market volatility produced unrealized securities losses, which management attributed primarily to COVID-related uncertainty; no securities credit-loss allowance was recorded. Management assessed goodwill for impairment after the share price traded below book value late in the quarter and recorded no impairment, but said it would continue monitoring conditions.
Important facts for investors to verify
- How loan deferrals, PPP lending, borrower performance, and evolving economic forecasts affect future provisions, charge-offs, and the allowance.
- Whether low interest rates and changes in asset yields or deposit costs materially alter net interest margin and earnings.
- The scale and credit performance of the $1.20 billion of SBA-authorized PPP loans, including SBA guarantee and forgiveness outcomes.
- Liquidity and capital trends, including the use of CECL transition relief, as pandemic-related funding and credit needs develop.
- Progress, terms, integration costs, and expected completion of the Seaside acquisition, and any future goodwill or intangible-asset impairment assessment.
- Whether management resumes share repurchases and sustains the dividend amid changing economic conditions.