Business context and reporting period
United Community Banks, Inc. is a Georgia bank holding company operating primarily through United Community Bank in Georgia, North Carolina, South Carolina and Tennessee. This unaudited Form 10-Q covers the quarter and six months ended June 30, 2015. MoneyTree Corporation and its First National Bank subsidiary were acquired on May 1, 2015; their results are included from that date.
Financial performance and position
Unless noted otherwise, amounts are in millions. Comparisons are with the corresponding 2014 period.
| Metric | Q2 2015 | Q2 2014 | Six months 2015 | Six months 2014 |
|---|---|---|---|---|
| Total revenue, GAAP | $77.4 | $66.5 | $148.5 | $130.0 |
| Net interest revenue | $61.0 | $54.6 | $118.2 | $108.4 |
| Provision for credit losses | $0.9 | $2.2 | $2.7 | $4.7 |
| Net income | $17.8 | $16.4 | $35.5 | $31.8 |
| Diluted EPS | $0.28 | $0.27 | $0.57 | $0.52 |
| Operating expenses | $48.4 | $40.5 | $91.5 | $79.6 |
Q2 taxable-equivalent net interest margin was 3.30%, versus 3.21%; the six-month margin was also 3.30%, versus 3.21%. Management attributed improved net interest revenue primarily to loan growth, higher securities yields and lower funding costs. Fee revenue increased 22% in Q2 to $17.3 million and 25% for the half to $32.9 million, reflecting mortgage activity and gains on sales of government-guaranteed loans, among other factors. Q2 GAAP results included $3.17 million of MoneyTree merger costs; excluding these costs, management reported operating net income of $20.0 million for the quarter and $37.7 million for the half (non-GAAP).
Six-month cash flows: operating activities provided $56.5 million; investing activities used $230.3 million, including loan growth and securities purchases; financing activities provided $186.0 million. Cash and cash equivalents were $204.9 million at June 30, 2015, up from $192.7 million at year-end 2014.
At June 30, 2015, total assets were $8.25 billion, loans $5.17 billion, deposits $6.81 billion and shareholders’ equity $827.2 million. Compared with December 31, 2014, loans increased $501 million, deposits $481 million and assets $679 million; these comparisons include the acquisition. The allowance for loan losses was $70.1 million, or 1.36% of loans, versus 1.53% at year-end 2014 and 1.66% a year earlier. Nonperforming assets were $21.2 million, or 0.26% of assets, compared with $23.7 million and 0.32% at June 30, 2014.
Deposits were the principal funding source. Period-end borrowings included $25.0 million of short-term borrowings, $385.1 million of Federal Home Loan Bank advances and $113.9 million of long-term debt. Management reported $1.03 billion of additional FHLB borrowing capacity and $818 million of Federal Reserve discount-window capacity, subject to qualifying collateral. Basel III capital ratios at June 30 were 11.86% common equity Tier 1, 11.86% Tier 1, 13.07% total capital and 9.09% Tier 1 leverage; the company and bank were described as well capitalized.
Material changes versus prior periods
- Net income, revenue and net interest revenue increased year over year, supported by loan growth and the margin improvement. Average loans rose 15% in Q2; period-end loans were up 17% year over year.
- Credit costs declined: Q2 net charge-offs were $978,000 versus $4.18 million, while six-month net charge-offs were $3.54 million versus $8.21 million. Nonperforming assets fell year over year, though they increased from year-end 2014.
- Operating expenses increased 19% in Q2 and 15% for the half. Drivers included MoneyTree expenses and merger charges, strategic staffing, and higher lending support costs. First-half expenses also included a $690,000 FDIC loss-sharing settlement charge and a $420,000 loss on a fraudulent home-equity transaction.
- Shareholders’ equity rose $87.7 million from year-end, reflecting acquisition-related stock issuance, earnings net of dividends and an increase in available-for-sale securities value. Q2 other comprehensive income included a $6.29 million after-tax loss, primarily from unrealized available-for-sale securities movements.
Outlook, commentary and risks
- No formal earnings or margin guidance is provided. Management said it expects approximately $1.9 million in annual interest savings from repayment of certain high-cost borrowings. It also expects additional integration costs in the second half of 2015 and anticipates cost savings and synergies from MoneyTree, without quantifying them.
- United had agreed to acquire Palmetto Bancshares for a transaction valued at approximately $262 million based on the July 31 share price. The transaction, then expected to close September 1, 2015, remained subject to shareholder and customary conditions; regulatory approvals had been received.
- On July 30, 2015, after quarter-end, United announced a proposed $85 million senior-note offering to help finance Palmetto cash consideration and for general corporate purposes, potentially including repayment or redemption of other debt. The filing describes expected issuance; completion is not established in the provided text.
- Key stated risks include local economic conditions and geographic concentration; commercial real estate and construction lending; interest-rate, funding and liquidity exposure; loan-loss allowance estimates; acquisition execution and integration; cybersecurity and third-party service risks; and the ability to realize the $196 million net deferred tax asset. Management said nearly all of that asset was more likely than not to be realized, but warned that a material change in taxable-income estimates could require a valuation-allowance increase.
- Commitments to extend credit totaled $1.05 billion and letters of credit $21.7 million at June 30. Management said pending or threatened litigation was not expected to have a material adverse effect. Disclosure controls were deemed effective; MoneyTree was excluded from the internal-control assessment under SEC guidance.
Important facts for investors to verify
- How much of loan, deposit and revenue growth reflects organic performance versus MoneyTree, and how integration costs and expected synergies develop.
- Completion, final terms, financing and integration risks for the Palmetto acquisition, including the announced senior-note offering.
- Credit trends following growth in loans, including nonperforming assets, criticized loans, charge-offs and allowance coverage; acquired loans were recorded without a brought-forward allowance.
- Whether net interest margin and funding costs hold up amid competitive loan pricing, interest-rate changes and increased FHLB advances.
- Realization assumptions for the deferred tax asset and potential valuation-allowance changes; also review the effects of securities valuation movements on equity.