KBRA Affirms Ratings for United Community Banks, Inc.

1 Jun 2023   |   New York


KBRA affirms the senior unsecured debt rating of BBB+, the subordinated debt rating of BBB, the preferred shares rating of BBB-, and the short-term debt rating of K2 for Greenville, South Carolina-based United Community Banks, Inc. (NASDAQ: UCBI or “the company”). In addition, KBRA affirms the deposit and senior unsecured debt ratings of A-, the subordinated debt rating of BBB+, and the short-term deposit and debt ratings of K2 for the bank subsidiary, United Community Bank (“the bank”). The Outlook for all long-term ratings is Positive.

Key Credit Considerations

UCBI's ratings are supported by a financial profile which is highlighted by an attractive core deposit franchise and core capital metrics that exceed most peers'. With respect to the former, UCBI's funding profile is anchored by a granular, low-cost deposit base that reflects a high proportion of noninterest-bearing balances (34% of total) and a meaningful portion of retail/consumer accounts. Furthermore, a comparatively more liquid balance sheet entering 2023 (loan-to-deposit ratio of 77%) provided the company with flexibility on the funding front in 1Q23; one which allowed for favorable performance dynamics despite industry volatility centered in March. In this regard, while we recognize the funding environment for U.S. banks remains fluid, deposit flows at UCBI in 1Q23 were positive, total cost of deposits (1.10% in 1Q23) remained firmly below peer, and estimated uninsured and uncollateralized deposits are a comparatively low 24% of total. Additionally, when accounting for $6.0 billion of available contingent liquidity combined with on-balance sheet sources, UCBI’s coverage of its uninsured deposits is an estimated 128%. The company's capital position is also supportive of the ratings, and we view UCBI’s capital profile as a durable one, reinforced by core capital metrics (12.1% CET1 ratio at 1Q23) that have consistently been, and are expected to remain, stronger than peers'. Going forward, KBRA notes the maintenance of the Positive Outlook is largely, but not exclusively, predicated on our expectation that, despite a challenging industry environment, UCBI will remain a relative outperformer with respect to funding and capital/liquidity management. Asset quality remains strong, though we expect losses to normalize at the company as well as the industry at large, and early-stage delinquency indicators have been on the rise in the bank’s Navitas and manufactured housing portfolios. Still, UCBI is less exposed to investor CRE than some and reflects a greater exposure to C&I lending than select peer institutions.

KBRA also views the expansion of UCBI’s ‘higher touch’ community-oriented business model across a broader geographical footprint favorably; expansion which has been inspired by M&A and coincided with a consistently conservative financial profile. With a 198-branch network spanning six states across the demographically attractive Southeastern U.S., UCBI now sports a top 10 deposit market share in Georgia, South Carolina, and Tennessee. KBRA also notes the positive attributes of UCBI’s acquisitive strategy in recent years, namely improved deposit market share, a more diversified geographic footprint with increased density in core markets, and a diversification of business lines. Concerning business line diversification, we highlight UCBI’s multi-year buildout of its wealth management business ($4.4 billion AUA/AUM), which has proven additive to an already varied fee income stream. That said, frequent M&A activity is not without risks, in our view, and after eight deals in seven years (with an additional deal pending), UCBI has acquired a fair amount of loans that were otherwise not originated internally by the company. While not our base case, with a LLR of 1.03%, the company is somewhat less insulated from a material rise in credit costs should they occur.

Rating Sensitivities

The maintenance of a financial profile that is more conservative than peer, characterized most importantly by funding, liquidity, and capital positions largely consistent with those reflected today, if in conjunction with further sustainable (and profitable) revenue diversification, pending merger execution, and continued favorable asset quality, could lead to an upgrade over time. Alternatively, any unexpected deterioration in the company’s funding profile, asset quality, faulty merger execution, or more aggressive than anticipated capital management would likely reverse positive ratings momentum.

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