KBRA Affirms Ratings for United Community Banks, Inc.

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 Blairsville, Georgia-based United Community Banks, Inc. (NASDAQ: UCBI). 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 Outlook for the long-term ratings is revised to Stable from Positive.

Key Credit Considerations

UCBI's ratings are supported by its regionally diversified bank franchise that operates principally in strong, demographically attractive growth markets in the Southeastern United States. This bank franchise has been a key contributor to UCBI's history of competitive returns, and we view the company's core ROA of >0.90% in recent times, while certainly tracking lower compared to prior periods (consistent with broader industry trends), as solid considering the challenging interest rate environment, competitive funding dynamics, and a modest uptick in credit costs. Also supporting UCBI's ratings is a strong core capital profile. In this sense, the company’s core capital ratios continue to be managed to higher-than-peer levels (a goal consistently communicated by its management team), as they have for the vast majority of UCBI’s contemporary operating history. Respective CET1 and TCE ratios of 12.4% and 8.5% as of 1Q24 are approximately 30 bps and 10 bps higher than rating category peer medians, and given low single digit forecasted loan growth in 2024 as well as limited appetite for share buybacks, KBRA believes that UCBI’s capital ratios are likely to stay near current levels or even rise incrementally in the short-to-intermediate term. KBRA also views UCBI’s funding profile favorably, highlighted by a granular, low-cost deposit base that benefits from a favorable composition (i.e., significant amounts of small-dollar consumer/retail deposits as well as noninterest-bearing balances). That said, the difference in cost between UCBI’s deposit base vs. that of peers, which has at times been sizable, has narrowed in recent periods. While we admit that the cost performance of UCBI’s deposit base has somewhat underperformed our expectations (an admittedly high bar) in the current rising rate cycle, we continue to view the company’s deposit franchise as a rather strong one and recognize that certain strategic (and prudent) decisions undertaken by management in 2023 to protect liquidity may partly explain the narrowing cost delta vs. peer.

After years of historically strong asset quality, signs of credit normalization have begun to appear in a select number of UCBI’s loan verticals that we (and UCBI’s management team, for that matter) have always recognized as potentially containing higher risk. As such, we find it generally unsurprising that a significant proportion of the moderate credit degradation at UCBI in recent times has been isolated to the company’s Navitas (equipment financing), manufactured housing, senior care, and SNC loan books. Importantly, UCBI’s “core” bank loan portfolio has continued to perform well from a credit quality standpoint, including its investor CRE subsegment. Consistent with industry developments, UCBI’s earnings trended lower throughout 2023 and into 1Q24 due to NIM contraction, rising provision expense, and subdued fee income. However, as mentioned, we judge the company’s FY23 core ROA of 0.94% as fundamentally solid and remind readers that UCBI’s earnings profile should be framed in the backdrop of an earning asset composition that is more conservative than most (1Q24 loan-to-deposit ratio of 79%).

Rating Sensitivities

Given the revision of the Outlook to Stable from Positive, positive rating momentum is limited in the short-to-intermediate term. Greater than peer deterioration in asset quality that materially impacts earnings power or capital levels could pressure the ratings. Additionally, challenges related to the execution of the company’s historically active M&A strategy or failure to effectively integrate acquired banks would be viewed negatively.

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