UCBI - United Community Banks: Expanding And Flourishing With United Viability And Sustainability

2023-03-23 05:39:08 ET

Summary

• United Community Banks, Inc. flourishes while remaining viable amidst market volatility.
• It maintains an impeccable financial positioning, allowing it to sustain its expansion.
• Near-term market prospects are relatively weaker, but the bank can get through it.
• Dividend payments are consistent and increasing with enticing yields.
• The stock price has been in a downtrend since the start of the year.

United Community Banks, Inc. (NASDAQ: UCBI) withstood market blows in 2022. Revenue streams expanded while margins remained stable. Also, its financial positioning remained in excellent shape. It was characterized by impressive loan growth and high cash reserves. It may incur cost pressures this year, given the inflation and recent M&As. But with its solid domestic market presence and adequate financial resources, UCBI remains a viable and sustainable company. This attribute allows it to sustain its current capacity, continued expansion, and dividend payments.

Meanwhile, the stock price seems divorced from the fundamentals. It is logical, though, given the relatively weaker market outlook in the first half. Even so, it becomes cheaper and may open an excellent entry point for interested investors.

Company Performance

United Community Banks, Inc. operates in a highly volatile and cyclical market landscape. As such, it is more open to the risks and advantages of economic changes. We can see how its performance varied in the past three years. But it was more visible in the second half of 2022 as macroeconomic headwinds intensified. Amidst all these, UCBI showed its durability to expand while remaining viable and sustainable.

Its operating revenue amounted to $813.16 million , a 41% year-over-year growth. It was also 47% higher than pre-pandemic levels. But what was noticeable here was despite pandemic disruptions, revenues remained stable. It was highest in 4Q 2022 with $240.83 million , a 68% year-over-year growth. With that, we can see that revenue increase accelerated in 2022. The quarterly increase since 4Q 2021 was also uninterrupted. Also, all components had a massive increase, showing prudent and efficient portfolio management and diversification. For easier checking, we will analyze how revenue components changed. Interest income on loans comprised 82% of the total revenues. It increased by over 30% in only a year, amounting to $673 million. But it was evident in 4Q 2022 with a 59% year-over-year increase. Interest rate hikes in the US were the primary growth driver. The Fed implemented a 75 bps increment for four consecutive quarters. In turn, UCBI became more active with its loan repricing, especially in long-duration portfolios. This wise move helped loans become more flexible to interest rate hikes, leading to higher loan yields. Loan repricing also helped stabilize organic loan growth. For instance, SBA/USDA loans increased by $11.4 million, amounting to almost $47 million . But what made loans solid was the impressive loan quality and diversification. Non-performing loans remained s table at 0.29% versus 0.28% in 4Q 2021. So, the company kept defaults and delinquencies stable and low. Even better, loan portfolio diversification is suitable in a high-interest environment. Its C&I loans were 42% of the total loans, which had more secure collaterals. Payments would be more consistent despite the potential recession.

Interest income on investment securities comprised 17% of the total interest income. It had the higher year-over-year growth in 4Q 2022 with 215%. Indeed, prudent investment portfolio diversification was integral in this segment. Most of them are debt securities, and 87% are backed by the government. They are in the form of state and municipal bonds, treasuries, and government-sponsored enterprises mortgage-backed securities. So, they are more inflation-linked and more secure amidst interest rate increases. They have higher yields and hedge against valuation decreases. Meanwhile, interest income on deposits was only 1% of the total interest income. But it more than tripled in a short period, also benefiting in a high-interest market landscape.

However, inflation and interest rate hikes also raised interest and non-interest expenses. Despite all these, UCBI stayed impeccable. Interest and non-interest expenses did not overwhelm revenue growth. Although the operating margin was only 44% versus 62% in 2021, it was higher than pre-pandemic levels. It shows that UCBI can stabilize its operations amidst macroeconomic fluctuations. Interest expenses stayed manageable so the margin of interest income and expense was still high at 93% versus 84% in 2019 and 95% in 2021. It also capitalized on continued expansion to capture more clients. The thing is, despite the changing macroeconomic conditions, UCBI remained a stable and viable bank.

This year, United Community Banks, Inc. may still face macroeconomic headwinds as interest and mortgage rates stay elevated. Yet, the continued US inflation relaxation may help the bank stabilize its non-interest segment. Its near-term performance may be affected, but there may be improvements in the second half or in 2024. In the long run, interest and mortgage rates may start to decrease as the Fed eases its monetary policy. It may become less complex for UCBI to manage and diversify loans, deposits, and investment securities.

Why United Community Banks, Inc. May Remain A Solid Bank

We already saw how United Community Banks, Inc. withstood market headwinds. This year, it still faces headwinds as recessionary fears persist. Again, interest and mortgage rates remain high, an effort to stabilize prices, especially in the real estate market. Thankfully, we can expect a sprinkle of hope as the conservative approach of the Fed pays off. Inflation has already relaxed, landing at 6%, 34% lower than the 2022 peak. Since inflation stays higher than pre-pandemic levels, the Fed may keep its contractionary monetary policy. But given the improvement, increments may start to decrease. In fact, the recent increase was only 25 bps. We may expect this trend to continue and may eventually decrease in 2024. The relaxing inflation and interest rate increments may lead to more stable yields and expenses for the company. The property market is another concern since the company engages in commercial and residential real estate loans. But I disagree with the anticipations of a massive crash. Note that property inventories remain low, so shortages stay high. We can attribute it to the conservative view of property builders over the past decade. Home prices and mortgages may remain manageable.

What impresses me about UCBI is its impeccable financial positioning. Its stellar Balance Sheet shows UCBI can sustain its continued expansion and withstand more market blows. For example, its loans and deposits are both increasing with its expansion and active loan repricing. But the loan-to-deposit ratio of 76% shows it has more room to reprice loans and deposits. It has high reserves to compensate for potential defaults and delinquencies. Also, its conservative approach can be seen in its provisions, 1.18% of the total loans versus 0.97% in the comparative quarter. Even better, cash and investments remain high, comprising 29% of the total assets. They are also more than enough to cover borrowings despite the massive increase. We can attribute the decreased cash and increased borrowings to interest rate hikes, branch openings, and M&As. Hence, it has adequate capacity to sustain its size and keep expanding amidst macroeconomic volatility, The bank is highly viable and sustainable.

Stock Price Assessment

The stock price of United Community Banks, Inc. has been in a downtrend since 4Q 2022. Market headwinds appear to overwhelm its fundamentals and expansion. At $28.48, it is 20% lower than last year’s value. But it opens an opportunity for interested investors to buy stocks at a lower price. We can see it in its PB Ratio with a current BVPS of 25.42 and PB Ratio of 1.12x. It is way lower than the average of 1.30x. The current BVPS and the average PB Ratio will give a target price of $32.96.

Meanwhile, dividend payments are decent and consistent, making it a secure dividend stock. It has impressive yields of 3.34%, better than the S&P 600 and NASDAQ average of 1.45% and 1.48%. Also, its payouts remain well-covered, given the Dividend Payout Ratio of 37%. To assess the stock price better, we will use the DCF Model.

FCFF $233,000,000

Cash $196,000,000

Borrowings $1,080,000,000

Perpetual Growth Rate 4.8%

WACC 9.2%

Common Shares Outstanding 106,220,000

Stock Price $28.48

Derived Value $35.54

The derived value adheres to our supposition of potential undervaluation. There may be a 25% upside in the next 12-18 months. So, interested investors may see it as an opportunity to buy shares at a discount.

Bottomline

United Community Banks, Inc. is an impressive bank with a robust performance. It continues to expand to increase its domestic market presence while remaining viable and sustainable. It has adequate reserves to sustain its expansion and cover borrowings and dividends. Even better, the stock price appears undervalued with enticing upside potential. The recommendation is that United Community Banks, Inc. stock is a buy.

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