UCBI - United Community Banks: Let It Pull Back

Summary

• We love that United Community Banks, Inc. pays a growing dividend and is buying back shares, but the valuation is a bit stretched for the growth profile.
• Return metrics and asset quality is mixed here.
• Under $32, the risk-reward profile would improve, making United Community Banks, Inc. stock a fine buy in the regional bank space, but for now, we rate it a hold.

Our coverage of the regional bank earnings continues with a little-known bank network out of the Southeast. The company has its banking footprint in 5 states, and has slowly been in growth mode over the last few years. We see the rising rate environment as having a predictably favorable effect on net interest income in most banks, and as our readers are aware, we were pushing followers to purchase financials quite heavily in the late summer and fall of 2022. Here in 2023, we will start to see the separation of the top banking stocks from the average stocks. It will come down to those banks that are able to attract customer deposit dollars, expand their loan portfolio, while limiting losses.

Further, we will be pushing hardest the banks with the best return metrics and credit quality measures, while trying to recommend those banks that offer a dividend yield which beats both the two and the 10-year treasury. That is a tall order right now, as many of the banks we recommended have seen outsized gains in the last few months, and our traders have locked in a ton of profit. Here in 2023, we need to be more prudent. One name we have looked into is United Community Banks, Inc. ( UCBI ).

The stock has actually pulled back quite a bit since November, but we still view the stock as expensive on a valuation basis , and it has mixed operational metrics, along with a moderately low dividend yield of 2.4%. However, it is also buying back shares , which we love. The company also just picked up another $1.7 billion of assets by completing its merger with Progress Financial . Overall, we think this stock would be interesting under $32, but for now United Community Banks, Inc. is a hold, especially following the just-reported earnings.

Revenue trends

In the quarter, United Community Banks, Inc.'s operational results were strong in Q4. Thanks to continued loan growth, United Community Banks saw revenues continue to improve once again. Those higher rates are having a benefit, just as we predicted, with the bank's higher net interest margin this quarter helping performance. With Q4's revenues of $223.4 million, the company registered a 27% increase in this metric year-over-year, and 3% increase from the sequential Q3. With the other regional banks we have covered so far, we have seen mixed revenues versus last year, with some experiencing declines while others are improving. Overall, most banks are doing better than last year, but it is still mixed. The result was a miss versus expectations of $15 million . What is more, we saw weaker performance on earnings due to this result, despite strong margins. It is just too mixed to justify buying United Community Banks, Inc. here.

United Community Banks' earnings power and margins

The increase in revenues year-over-year was once again led by loan growth, though deposits were down, reflecting the very competitive landscape for customer dollars right now. There were also better margins thanks to higher those higher rates.

United Community Banks reported Q4 net income of $82.5 million, or $0.75 per share, which was a nice increase of $0.11, or 17%, from last year but flat from the sequential quarter. We think earnings continue to ramp up. We believe that 2023 will be even better than what we are seeing right now based on the trends we are seeing for banks, so long as the cost of funds does not increase so much it offsets the gains in yields on loans being issued.

With these higher rates, net interest margin is improving. Loan quality and moderate levels of loan loss provisions boosted performance. Margins should remain strong, with higher rates on loans issued relative to what is paid to deposit holders. Net interest margin was 3.76% and was up 19 basis points from the third quarter, due to increased interest rates and loan growth.

Loans grow in Q4, deposits decline

Regional banks often focus on traditional banking. That is, taking in deposits and lending them out at a higher rate, and collecting the difference. It is a model that has worked for thousands of years. With that said, in Q4 annualized loan growth was 12%. Total loans grew to $15.3 billion, up from $14.8 billion to start the quarter, and was up 30% from a year ago. This is very solid growth. However, the bank is taking in less capital to lend. Deposits fell to $19.8 billion versus $20.3 billion to start the quarter, and down from a high of $21.1 billion at the end of Q1 2022. This is something to watch closely.

Asset quality deteriorates slightly

So there was mixed performance on loans and deposits, but this quarter we saw loan loss provisions which hurt the bottom line. The provision for credit losses was quite large at $63.9 million for the year, versus a credit of $37.6 million last year. For Q4 provisions were $19.8 million as the bank prepares for losses in 2023 in a recession. But we like to look at a few metrics of asset quality, and they are mixed, with some trending in the right direction. Non-performing assets increased from Q3. They were 0.18% of assets, up from 0.15% of assets to start Q4.

Now, one trend we did not love was that the net charge-offs rose. They were up to $6.6 million, or 17 basis points as a percentage of average loans. This was up 14 basis points from the net charge-offs in Q3. Further the allowance for loan & lease losses increased to $159.4 million, or 1.04% of loans, up from 0.87% of loans last year and 1.00% of loans in Q3.

Now, aside from quality metrics we also like to look at certain return metrics which are critical. All of the metrics we followed improved sequentially from Q3. The return on average assets was 1.33%, up 1 basis point from 1.32%. The return on average equity was 10.86%, down from 11.02% sequentially. Finally, the efficiency ratio is an amazing 47.4%, the best it has been in years, and improved from 47.7% in Q3.

Final thoughts

This was a mixed quarter for United Community Banks, Inc. This is a bit of an under-the-radar name, but the bank pays growing dividend and is repurchasing shares. The valuation is relatively fair, but perhaps a touch stretched given the growth profile. All things considered we rate United Community Banks, Inc. a hold, but under $32 the risk-reward profile would improve, making UCBI stock a fine buy in the regional bank space.

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