Major TARP Catalyst for This Community Bank Stock

NEW YORK (TheStreet) -- United Community Banks (UCBI) announced a lovely year-end present for its common shareholders Monday, which could provide quite a boost for the shares.

United Community of Blairsville, Ga. announced it had repurchased $75 million in senior preferred shares originally issued to the U.S. Treasury for bailout assistance received in December 2008.  The company also said it had received approval from regulators to complete the full redemption of $180 million in TARP preferred shares -- which the Treasury had sold to other investors -- by mid-January, while also redeeming another $16.8 million in other preferred shares.

The company said it plans to use cash on hand and to issue $40 million in short-term debt to fund the preferred repurchases.

The TARP preferred redemption alone will save the company $9 million a year in dividend payments, since the shares had a coupon of 5.00%.  The short-term debt being issued will have a much lower interest rate. 

United Community Banks -- the holding company -- had $7.2 billion in total assets as of Sept. 30.  The holding company's main subsidiary is United Community Bank.

Another key item for United Community Banks is the lifting of a memorandum of understanding (MOU) with the Federal Deposit Insurance Corp. and the Georgia Department of Banking and Finance (GDBF).  This MOU required the company's main banking subsidiary -- United Community Bank --  to maintain a Tier 1 leverage ratio of at least 8% and a total risk-based capital ratio of at least 10%, and also required UCBI to seek regulatory approval for any payments of dividends up to the holding company.

United Community Bank was very strongly capitalized as of Sept. 30, with a Tier 1 leverage ratio of 10.17% and a total risk-based capital ratio of 15.74%.

The holding company is still operating under an MOU from the Federal Reserve and the GDBF, requiring the approval of the Federal Reserve Bank of Atlanta before issuing debt, paying dividends, or buying back any shares.  But with these approvals having been given before the announcement on Monday, United Community Banks said it "expects the Federal Reserve Bank of Atlanta and the GDBF to terminate their joint informal MOU with the company in the near future."

Following the announcement, KBW analyst Jefferson Harralson reiterated his "outperform" rating for United Community, while raising his price target for the shares to $20 from $18.  The analyst also raised 2014 earnings estimate for UCBI to $1.16 from $1.00, while raising his 2015 EPS estimate to $1.30 from $1.27.

Harralson had expected United Community Banks to redeem half the TARP shares by the end of 2014, with the other half being redeemed during the first half of 2015.

Considering the bank's strong level of capital, the coming full redemption of all preferred stock and the expected lifting of the Fed's MOU, Harralson in a note to clients on Monday wrote, "We expect UCBI to return to the M&A table in 2014."

The earlier-than-expected TARP redemption is "likely due to UCBI's robust momentum in increasing profitability and core fundamentals," the analyst wrote.

UCBI's second-quarter results saw a big boost from a $256 million tax benefit as it reversed its deferred tax valuation allowance.

For the third quarter, the company reported earnings of $15.5 million, or 21 cents a share, increasing from $10.6 million, or 13 cents a share, in the third quarter of 2012.  United Community's third-quarter return on average assets was 0.86%, improving from 0.64% a year earlier, according to Thomson Reuters Bank Insight.  The company's third-quarter return on tangible common equity was 9.51%, down from 11.01% a year earlier, reflecting the significantly boost to capital from the second-quarter DTA recapture.

Shares of United Community Banks closed at $17.77 Monday, returning 88% this year.  The shares trade for 16.2 times the consensus 2014 EPS estimate of $1.10, and for 14.2 times the consensus 2015 EPS estimate of $125.


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Interested in more on United Community Banks? See TheStreet Ratings report card for this stock.

-- Written by Philip van Doorn in Jupiter, Fla.

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Philip W. van Doorn is a member of TheStreet's banking and finance team, commenting on industry and regulatory trends. He previously served as the senior analyst for TheStreet.com Ratings, responsible for assigning financial strength ratings to banks and savings and loan institutions. Mr. van Doorn previously served as a loan operations officer at Riverside National Bank in Fort Pierce, Fla., and as a credit analyst at the Federal Home Loan Bank of New York, where he monitored banks in New York, New Jersey and Puerto Rico. Mr. van Doorn has additional experience in the mutual fund and computer software industries. He holds a bachelor of science in business administration from Long Island University.

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