United Community Banks Combines Solid Execution With An Ongoing M&A Growth Story

Banks are not very popular at the moment, and banks that lean heavily on M&A to drive growth are even less popular … and yet, United Community Banks (NASDAQ:UCBI) shares are up about 5% since my last update, outperforming the regional bank group by around 10%. UCBI management has continued its acquisitive ways, but has also been delivering on strong asset sensitivity and operating leverage, driving better-than-expected results for the year.

I continue to believe that UCBI operates in fundamentally attractive markets, and I like the company’s overall strategy with respect to lending and deposit-gathering, including meaningful operations in “second-tier” metro areas where there is still good population and income growth, but less competition from non-local banks. Valuation is challenged by the reliance on an M&A model, but I do believe the shares are still modestly undervalued.

 

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United Community Banks Combines Solid Execution With An Ongoing M&A Growth Story

United Community Banks Still Following A Tested Formula

 

It may seem like damning with faint praise, but there's nothing all that unusual about the business strategy that United Community Banks (UCBI) is following. A smaller bank still focused principally on commercial real estate lending, UCBI has used serial acquisitions of small banks to build its operations, and the company remains focused on attractive fast-growing markets in the Southeast.

It's been a while since I've written about United Community, but over the past five years, the company has more or less tracked the small bank sector. United Community operates in increasingly competitive markets, but the bank prioritizes high-touch customer service at a time when many larger banks are trying to shift more commercial lending to a digital-enabled "DIY" model. What's more, there's still room for the company to expand beyond CRE lending, with asset-backed lending, equipment finance, healthcare, and SBA lending all offering opportunities.

United Community doesn't jump off the page as being dramatically cheaper than other growth banks, but I do still believe that a lot of growth banks are trading with some worthwhile upside. Between attractive underlying markets, opportunities to expand the lending franchise, and more M&A in the future, I believe that UCBI could generate long-term earnings growth in the double digits, making the current 11.5x multiple on 2023 earnings (similar to banks with more modest growth expectations) worth a further look.

 

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United Community Banks Still Following A Tested Formula

United Community Banks Leveraging Its Deposit Base, Capital, And Service Model Effectively

Most banks these days are telling similar stories. While larger banks are focused on tightening up spending and holding down the fort until rates increase, smaller banks are by and large trying to take advantage of healthy demand for commercial real estate and business loans, while also looking for opportunities to deploy surplus capital into M&A to grow their business.

Insofar as all that goes, United Community Banks (NASDAQ:UCBI) isn't all that unusual. Nevertheless, I think there are some attributes about this bank that do stand out. The company has tried to prioritize customer service and that may pay off in the form of stickier deposits as rates rise. At the same time, management has been focusing a lot of its attention on growing specialty lending businesses that allow it to step away from the more intensely competitive commodity lending categories. UCBI also has the benefit of serving growing communities and leveraging a relatively attractive deposit base.

Like so many banks now, it's hard for me to argue that United Community Banks shares are undervalued. That said, they do seem priced for a high single-digit total return (which isn't bad), and this bank could see additional benefits if the new president's administration comes through with plans to lower corporate taxes, reduce regulation on banks, and stimulate economic growth.

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United Community Banks Leveraging Its Deposit Base, Capital, And Service Model Effectively

Seeking Alpha: Despite Setback, BB&T Has Plenty Of Growth Opportunities

The trouble with striking a good bargain is that sometimes it's a little too good to go through. While North Carolina-based BB&T (BBT) thought it had a deal to acquire most of the worthwhile assets of Florida's BankAtlantic (BBX), disaffected investors have successfully persuaded a Delaware judge to block the deal. Whether this deal goes through or not, though, BB&T has plenty of other fish in the sea as this under-rated bank continues to recover and acquire valuable assets.

A Judge Says "No"
BB&T had structured its deal with BankAtlantic along pretty aggressive lines. While the 9% deposit premium that BB&T offered for about $3.3 billion in deposits (and $2.1 billion in good loans) was on par with similar deals, including a deal whereby PNC (PNC) bought 19 branches and $350 million in deposits from BankAtlantic, this deal was basically going to hollow out BankAtlantic and leave it largely a holding company with some stressed/distressed assets.

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Despite Setback, BB&T Has Plenty Of Growth Opportunities