United Community Banks, Inc. — Q3 2015 Form 10-Q
Reporting period: Three and nine months ended September 30, 2015. Financial statements are unaudited. United is a regional bank holding company operating primarily in Georgia, South Carolina, North Carolina and Tennessee.
Business context and material changes
- Completed the MoneyTree acquisition on May 1, 2015 and Palmetto Bancshares acquisition on September 1, 2015. Their results are included only from their respective acquisition dates. The acquisitions expanded the footprint and materially increased reported assets, loans, deposits and shares outstanding.
- At September 30, United reported $9.41 billion in assets, $6.02 billion in loans, $7.91 billion in deposits and $1.01 billion in shareholders’ equity, versus $7.53 billion, $4.57 billion, $6.24 billion and $736 million, respectively, at September 30, 2014.
- In October, United announced that it would exit its Nashville-based corporate healthcare lending business and agreed to sell $190 million of loans originated by that team.
Financial performance
| Metric | Q3 2015 | Q3 2014 | Nine months 2015 | Nine months 2014 |
|---|---|---|---|---|
| Total revenue, GAAP | $83.0 million | $69.0 million | $231.5 million | $199.0 million |
| Net interest revenue, GAAP | $65.4 million | $56.6 million | $183.7 million | $164.9 million |
| Net income | $17.9 million | $17.6 million | $53.4 million | $49.4 million |
| Diluted EPS | $0.27 | $0.29 | $0.84 | $0.81 |
| Provision for credit losses | $0.7 million | $2.0 million | $3.4 million | $6.7 million |
| Operating expenses | $54.3 million | $41.4 million | $145.8 million | $120.9 million |
- Q3 revenue rose about 20% year over year, led by loan growth and higher fee revenue. Q3 fee revenue increased 27% to $18.3 million; mortgage-related fees and gains on sales of government-guaranteed loans were notable contributors.
- Q3 net interest margin was 3.26%, down from 3.32% a year earlier; the nine-month margin was 3.29%, up from 3.25%. Management cited strong loan growth and lower funding costs, partly offset by lower loan yields from low rates, competition and a shift toward floating-rate lending.
- Q3 GAAP net income was modestly higher, but diluted EPS declined as the average share count increased following acquisition-related stock issuance and merger costs. Merger-related charges were $5.74 million in Q3 and $8.92 million year to date. Excluding those charges, management reported operating net income of $21.7 million for Q3 and $59.4 million year to date; these are non-GAAP measures.
- Operating expenses increased 31% in Q3, reflecting the acquired banks, higher staffing and incentive costs, and merger expenses. Year-to-date expenses also included a $690,000 FDIC loss-sharing settlement charge and a $420,000 loss from a fraudulent home-equity transaction.
Cash flow, liquidity, debt and capital
- For the first nine months, operating cash flow was $102.6 million; investing activities used $224.7 million, principally reflecting loan growth and securities purchases; financing activities provided $136.4 million. Cash and cash equivalents ended the period at $206.9 million, up from $192.7 million at year-end 2014.
- Total deposits were $7.91 billion. Period-end borrowings included $18.8 million of short-term borrowings, $200.1 million of FHLB advances and $165.6 million of long-term debt. United issued $50 million of 5% senior notes due 2022 and $35 million of 5.5% senior notes due 2027, and repaid $48.5 million of trust preferred securities during the first nine months.
- Management stated liquidity was sufficient. Available contingent capacity included approximately $1.20 billion of additional FHLB advances and $866 million of Federal Reserve discount-window borrowing capacity, subject to qualifying collateral and applicable terms.
- United reported Basel III common equity Tier 1 and Tier 1 ratios of 11.03%, total capital of 12.09%, and a Tier 1 leverage ratio of 9.00% at September 30; management described capital levels as “well-capitalized.”
- Common dividends declared were $0.06 per share in Q3 and $0.16 per share for the first nine months.
Credit quality, outlook and risks
- Management attributed lower provisions and net charge-offs to improving credit indicators. Q3 net charge-offs were $1.42 million versus $3.16 million a year earlier; the allowance for loan losses was $69.1 million, or 1.15% of loans, compared with 1.57% a year earlier. The acquired loan balances had no allowance at acquisition; credit marks were incorporated into acquisition-date fair values.
- Nonperforming assets were $27.7 million, or 0.29% of assets, compared with $21.9 million a year earlier. The increase from year-end was primarily associated with foreclosed properties acquired with Palmetto. Nonaccrual loans were $20.1 million and foreclosed properties were $7.7 million at quarter-end.
- No specific numerical earnings or revenue guidance is provided. Management expects additional systems-conversion and integration expenses in coming quarters and anticipates further cost savings and business synergies from the acquisitions; those expected benefits are not reflected in the pro forma figures.
- Key exposures include commercial real estate and construction lending, interest-rate and funding-cost changes, geographic concentration, acquisition integration, loan-loss estimation, and realization of the $197 million net deferred tax asset. Management said nearly all of that asset was more likely than not to be realized, but a change in taxable-income expectations could require a valuation allowance and materially affect results.
- Off-balance-sheet commitments to extend credit totaled $1.34 billion and letters of credit $22.0 million. Management did not expect pending or threatened litigation, in aggregate, to have a material adverse effect. The filing identifies broad economic, regulatory, cybersecurity, competition and funding risks; it reports no material change in previously disclosed risk factors.
Most important facts for investors to verify
- How much of the reported growth and earnings improvement reflects acquired businesses versus organic growth, and how acquisition integration costs and expected synergies develop.
- Whether margin pressure from lower loan yields and competitive pricing is offset by funding-cost management and growth in noninterest-bearing deposits.
- Whether asset quality, acquired-loan fair-value marks, foreclosed-property balances and allowance coverage remain adequate as the enlarged loan portfolio seasons.
- The sustainability and quality of fee revenue, particularly mortgage production and government-guaranteed loan sale gains, and the cost and execution effects of exiting healthcare lending.
- Whether liquidity, capital ratios and deferred-tax-asset realization remain resilient under adverse economic, interest-rate or credit conditions.