UCBIO - United Community Banks Offers Solid 8.7% Yielding Preferred Shares

2023-06-12 06:56:53 ET

Summary

• United Community Banks reported healthy Q1 financial results with total interest income increasing by over $100 million compared to the same quarter a year ago.
• The bank's balance sheet shows considerable steps taken to protect itself during Q1, including reducing outside borrowing by $670 million and increasing deposits by $2 billion.
• United Community Banks' stable operating results and conservative balance sheet management should give investors confidence in the bank's ability to weather industry challenges.

United Community Banks ( UCBI ) is another regional bank that has been beat up by the recent events in the industry. During the failures of Silicon Valley Bank and Signature Bank, United’s preferred shares (UCBIO) dropped and created an attractive yield. After reviewing the bank’s first quarter financials, I am bullish on their 8.7% yielding preferred shares.

United Community Banks saw healthy first quarter financial results. Total interest income increased by more than $100 million compared to the same quarter a year ago to nearly $280 million for the first quarter. Interest expenses increased by only $61 million, mainly due to an increased cost of deposits. This led to net interest income (the bank calls it net interest revenue) increasing by nearly $50 million to more than $211 million. When incorporating operating costs, such as salaries, United Community still finished with a net income of $62 million, $14 million higher than the same quarter the previous year.

United Community Banks' balance sheet shows the bank took considerable steps to protect itself during the first quarter. The most significant step was to reduce outside borrowing by $670 million to just over $360 million. This moved was financed by a $2 billion increase in deposits. The bank also increased its loans by more than $1.7 billion and finished the quarter with $777 million in cash, up by about $100 million. Ultimately, shareholder equity increased by more than $300 million during the quarter.

Part of United Community Banks' growth in the first quarter was sourced by its acquisition of Progress Bank. The bank engaged in an all stock acquisition , which brought in $1.7 billion of assets and $1.6 billion in liabilities at a value of $271 million. United Community is also engaged in a pending all stock merger with First Miami Bancorp for $116 million. Based on the 2021 financials from First Miami , this is a small acquisition that is immaterial towards United Community’s current financial structure.

United Community Banks' loan composition consists of mostly commercial real estate, residential mortgages, and C&I loans. While concern over the commercial real estate sector looms, half of the CRE loans at United Community are owner occupied, providing an additional interest for those owners to stay current. Additionally, less than 0.5% of all loans is in non accrual status.

Even better, United Community Banks' performing loans are producing stable results. Year over year net interest spreads are nearly identical. Therefore, for every basis point United Community’s borrowing cost have gone up, their interest-bearing asset returns have matched. It also helps that the bank has $9 billion more in interest bearing assets than liabilities.

Like any regional bank, a bank run originating from uninsured deposits is the primary risk facing the institution. United Community has $8 billion of uninsured deposits at the end of the first quarter. Fortunately, the bank has over $2 billion in securities pledged against those deposits along with more than $7 billion in available liquidity.

United Community Bank does have a lower cash balance than the average commercial bank, but its leverage is exceptional. At 7.4 to 1, the bank has the lowest leverage of any regional bank I’ve reviewed. Additionally, the 77% loan to deposit ratio is higher than the commercial banking industry, but under most of the regional banks that offer preferred shares. It's fair to say that United Community Banks is managing its capital in a very conservative manner.

United Community Banks' stable operating results should give investors confidence that the bank is going to weather the recent storm. Should higher interest rates persist and erode the bank’s margins, management can lean into the conservative balance sheet and utilize leverage to provide liquidity when necessary. Preferred share investors can collect a premium income while waiting for their securities to recover in value.

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