fintrustbrokerageservices’ unitedcommunity’banks,’inc.(ucbi...

United Community Banks, Inc. (UCBI)

Initiation of Coverage

Fintrust Brokerage Services

Equity Research

December 17, 2014

1 Fintrust Brokerage Services www.Fintrustadvisors.com 124 Verdae Blvd, Ste. #504 864-288-2849 Equity Research Greenville, SC 29607

Please see pages 23 and 24 of this publication for important certification and disclosure information.

Company Summary: Headquartered in Blairsville, United Community Banks, Inc. (UCBI, or United) is the third-largest bank holding company in Georgia. United has assets of $7.5 billion and operates 103 banking offices and 28 ‘community banks’ throughout north Georgia (its largest contiguous market where UCBI has 34% deposit market share), the Atlanta region, coastal Georgia, western North Carolina, east Tennessee and western South Carolina, its newest market. Long-standing management has skillfully guided the Bank through recession. In mid-2013, UCBI sold off $172 million of recession-legacy classified assets, and since then has (1) lowered its credit related operating costs, enjoyed a $274 million deferred tax asset valuation reversal, enlarged its loan origination capabilities and improved profitability and earnings growth. In 3Q 2014, United posted 4.6% y-o-y loan growth, 10.4% EBT expansion, a 12 basis point sequential improvement in NIM to 3.32%, and ROAA of 0.96%, up from 0.86% last year. As a result of these improvements, management reinstated a common stock dividend in 2Q 2014, and just recently increased its payout ratio to ~ 20%. Each of the Bank’s capital ratios are strong: Tier 1, Total Capital and the Leverage ratio stand at 12.58%, 13.83%, and 9.08%, respectively.

Fintrust Recommendation

Fintrust Rating: BUY Target Price: $19.87 Current Share Price: $17.56 Expected Return 13.2% 52 Week Price Range $20.28 - $14.86 Fintrust Brokerage Services, LLC rates companies a BUY, HOLD, SELL, or SHORT.

• A BUY rating is given when the security is expected to outperform the broad equity market as measured by the S&P 500 on a risk adjusted basis over the next year.

• A HOLD rating is given when the security is expected to perform in line with the broad equity market as measured by the S&P 500 on a risk adjusted basis over the next year.

• A SELL rating is given when the security is expected to perform below the broad equity market as measured by the S&P 500 on a risk adjusted basis over the next year.

• A SELL SHORT is given when the security is expected to decline in value over the next year.

The distribution of ratings across Fintrust’s entire company universe is 55.6% Buy, 33.3% Hold, 11.1%Sell, and 0% Short

Valuation EPS (13A) $4.44 EPS (‘14E) $1.12 EPS (‘15E) $1.32 P/E (13) 3.9x P/E (14) 15.7x P/E (15) 13.3x Est. 2014-2015 Growth 17.9% Price / TBV 1.45X

Industry: Financial Services GICS Sector/ Sub code: Financials Sector / Banks (GIC Code: 40 / Sub code: 4010)

Analyst Notes: Analysis by Bruce Roberts (917) 701-3357 & Allen Gillespie, CFA (864) 288-2849

• Fintrust Brokerage Services is commencing coverage of United Community Banks, Inc., ‘a community bank with large bank resources’, with a BUY rating and $19.87 year-end 2015 target price (1.44x TBV) representing 13.2% potential upside. We expect the share price to move in tandem with TBV, which we estimate will reach $13.80 by the end of 2015, up from $12.15 currently.

• The Bank’s asset quality is strong. For example, non-accruing loans / average loans fell to

0.41%, well below the 0.62% level posted in 2013, and well below its peer average of 1.43%. • Through strong cost controls – United’s efficiency ratio stands at just 58.3% - United has

generated above-average ROAA, despite generating below-average loan yield and net interest margin. In 3Q 2014, ROAA was 0.96% versus 0.91% for similarly-sized banks.

• The Bank’s operational platform is currently able to support assets of over $10 billion, and management is targeting $300 million to $1 billion (assets) metro market M&A opportunities in the bank’s current 4-state footprint. An acquisition could be both a new market and a ‘fill-in’ transaction. Any acquisition would need to be immediately EPS accretive and tangible-book-dilutive for 3 years or less.

• We recommend purchase of United to long-term risk tolerant investors. Risks include, but

are not limited to (1) the potential that interest rates continue to languish into 2015 (2) United is unable to grow its loan portfolio quickly enough to stimulate the substantial rate of EPS growth that we envision (17.9% in 2015) (3) credit quality reverses course, and erodes, and (3) that regulatory bodies promulgate new banking rules unfavorable to the industry.

Key Figures Key figures pricing data reflects previous trading day’s closing price. Other applicable data are trailing 12-months unless otherwise specified.

ROE 9.41% ROA 0.96% Loans / Deposit Ratio 73.2% Payout Ratio 20.0% Revenue (000’s) $288,600 Net Income (000’s) $67,961 Outstanding (mi) 60.8 Shares Short (mil) nmf Market Capitalization ($ mil) $1,067 Gross Loans ($ mil) $4,569 Beta 1.38x




Equity Research

December 17, 2014


Over the first 3 quarters of 2014, United has produced increasingly robust results reflecting its emergence from the after effects of the recession. During the 2Q 2013 – Q1 2014 period, the Bank took the crucial steps of (1) selling off the bulk ($172 million) of its classified loans, such that non-accrual loans fell to 0.41% of gross loans in 3Q 2014, down from 2.63% in 2012, (2) redeeming all of its outstanding and costly TARP-related Preferred Stock ($197 million), (3) adding loan producing bankers in several verticals, especially industrial and SBA, (4) expanding into South Carolina (Greenville) and Nashville Tennessee, (5) completing the acquisition of a SBA / USDA lending group (‘Business Carolina, Inc.’) with ~ $25 million in loans and, (6) lastly, concluding the 2nd quarter 2014 formation of a national SBA sales team (the Bank has set a goal of becoming a top-10 SBA lender, nationally, by 2016, generating $140 - $150 million in loan originations, up from ~ $40 million today). The payoffs from these actions have been substantial. The improvement in credit quality has lowered its cost of borrowed money and FDIC insurance, enabled the Bank to reinstate a common stock dividend in 2Q 2014 and has positioned the Bank to refocus outwardly on the (mostly metro) M&A landscape. Concurrently, loan growth has reaccelerated and management has indicated its guidance for mid-to-high-single digit loan growth in 4Q 2014 and 2015. Combined with a restructured, higher-yielding investment loan portfolio, United is generating strong bottom-line results: In 3Q 2014, pretax income rose 10.2% y-o-y, and 6.2% sequentially, and the Bank generated a 0.96% annualized ROA, closing in on its stated goal of 1.0% (last year, ROA was 0.86%), an expansion driven by a step-up in loan growth and investment securities yield, thereby generating the highest net interest margin (NIM), 3.32%, in 7 quarters.

Analyst’s Notes....Continued

3.38%

3.31%

3.26% 3.26% 3.21%

3.21%

3.32%

3.10%

3.15%

3.20%

3.25%

3.30%

3.35%

3.40%

$52.50 $53.00 $53.50 $54.00 $54.50 $55.00 $55.50 $56.00 $56.50 $57.00 $57.50

1Q13 2Q13 3Q13 4Q13 1Q14 2Q14 3Q14

UCBI: Net Interest Revenue and NIM Rise in 3Q 2014

Net Interest Revenue Net Interest Margin -‐ NIM




Equity Research

December 17, 2014


United Community Banks Overview United is the 3rd largest bank holding company headquartered in Georgia, with 1,515 employees. UCBI commenced operations in 1988 in Blairsville, GA., and has grown both organically and thru acquisition related activities to 103 locations, $7.52 billion in assets $736 million of shareholder’s equity and $4.5 billion and $2.2 billion in loans and investment securities, respectively. UCBI operates in 4 southeast states: Georgia, western North Carolina, east and central Tennessee and northwestern South Carolina (Greenville). In addition to traditional community banking products, UCBI owns an insurance agency and provides retail brokerage services through an affiliation with a 3rd party broker / dealer.

• United is focused on remaining a community bank. United operates 28 community banks with local bank presidents (each with an average of 20 years community banking experience) and boards in north Georgia, the Atlanta-Sandy Spring-Roswell Georgia SA, the Gainesville Georgia metropolitan MSA, coastal Georgia, western North Carolina, east Tennessee, and the Greenville-Anderson-Mauldin South Carolina MSA. North Georgia and Atlanta Georgia represent 11 and 10, respectively, of the 28 community banks (71% of the bank’s total deposits are located in the two areas).

• The bank’s deposit shares by state are as follows: Georgia (2.54%), North Carolina (0.27%), Tennessee (0.22%), and South

Carolina (0.03%). The Bank’s 2nd quarter 2014 FDIC deposit shares by market are as follows.

Market Offices Deposit Market Share Rank

North Georgia 22 35% 1 Atlanta 36 4% 6 Gainesville 5 12% 4 Coastal Georgia 8 5% 7 West North Carolina 19 8% 3 East Tennessee 8 2% 8 Greenville, S. Carolina 1 1% 25

Sources: SNL and FDIC • The Bank’s lending strategy is to focus on small business, Commercial and Industrial (‘C&I’), mortgage lending and

specialized lending such as health care (veterinarian and dental), franchises, owner occupied CRE and industrial. In 3Q 2014, United funded new loans and advances of $453.1 million, the most in at least 6 quarters, including $141.4 million in South Carolina. By loan type, in 3Q 2014, United funded $150 million in C&I loans, almost 3X more than any other category. As we discuss later on, even during the recent recession, United demonstrated a penchant for underwriting credit worthy C&I assets. In 2013, the Bank added bankers and entered new markets. Last year, United opened a full-service office in South Carolina, adding new commercial lenders - and ended 3Q 2014 with a $337 million loan portfolio in the state. The Bank plans to open a 2nd Greenville office this coming January. In 2Q 2013, United entered the Nashville, Tennessee market with lenders in that market’s healthcare sector. Bank CEO Jimmy Tallent indicated to us that the Nashville market has ~ $100 million in loans outstanding and that the bank expects to double that amount.

• According to FDIC data, in 3Q 2014, 26% of peer revenues were comprised of non-interest income, versus 19% for United.

Senior management has indicated to us that they are focused on fee based revenue growth enhancement. In 3Q 2013, the bank hired a 29-year mortgage banking veteran to run United Community Mortgage Services to enhance the Bank’s mortgage banking effort. Also in 2013, the bank added leadership in treasury and advisory services (United provides retail brokerage products through an affiliation with a 3rd-party broker / dealer). Senior management has indicated to us that they view their current banking ‘infrastructure’ as sufficient to support over $10 billion in assets, and that they estimate that they can cut $30 million in costs over the next 2 – 3 years. In 3Q 2014, the bank produced an enviable 58.3% efficiency ratio, versus 61.7% for its peers.

• Regarding near-term expansion objectives, Bank CEO Jimmy Tallent told us that (1) United seeks a partner for the I-85

corridor, with an interest in Raleigh and Durham, North Carolina; (2) has an interest in fill-ins in the Chattanooga – Knoxville ‘axis’ in Tennessee; (3) has a desire to enhance its coastal Georgia / Savannah presence up through Charleston, South Carolina; and (4) seeks further expansion in Atlanta Georgia over the next 2-3 years, where 30% of the Bank’s footprint is now




Equity Research

December 17, 2014


•

• located. According to Mr. Tallent, United is the 11th largest bank in Atlanta, while seeking to become the 5th or 6th largest in ‘a few years’.

• United operates in an attractive footprint with regard to population growth. Regarding growth potential in its current markets, 3

of 7 markets – Greenville, western North Carolina, and Coastal Georgia – are expected to experience 2014 – 2019 per annum population growth of 4% or better (the U.S. is expected to grow 3% per annum). The 3 markets represent 1.7 million, or 20% of the 8.7 million people in the bank’s geographic ‘footprint’ while just 2% of the bank’s ‘population’ is expected to grow less than 3% per annum.

• The Bank views community banking and customer service as its key competitive weapons, and refers to itself as ‘The Bank

That Service Built’. The Bank has a quarterly Sales and Service Champion program, wherein the top 10 performing individuals are recognized. In March, 2014, J.D. Power and Fortune Magazine listed the Bank among the top 50 companies (out of 600 evaluated brands, across all industries) that have demonstrated the ability to provide superior customer service. The Bank is consistently ranked first in Southeast banking customer satisfaction surveys.

Revived Loan Growth

As of 3Q 2014, 79.5% of United’s loan portfolio is secured by real estate, compared to 69.7% for its peer group. On the other hand, United has a lower relative exposure to industrial loans; 14.2% of UCBI’s portfolio is made up of C&I loans compared to 18.0% for its peer group, although the proportion of C&I loans has increased from 10% in 2011. Since 2011, the Bank has focused on loan diversification, reducing its land exposure, and focusing on small business, consumer lending, C&I, owner occupied CRE and specialized lending such as Health Care and Small Business (‘SBA’) and asset-based lending. With respect to SBA loans, in 2Q 2014 UCBI acquired a specialty SBA business in Columbia, South Carolina, and furthermore the Bank’s strategy is to sell such loans and retain servicing rights on the sold loans. Geographically, the Bank’s fastest loan growth is occurring in Greenville, South Carolina and Atlanta, Georgia. The potential for accelerating loan growth is considerable: A greater proportion of the Bank’s earning assets is comprised of investment securities: Loans / total assets is 60.9% versus 65.4% for its Peer Group. Like other Banks, UCBI is facing strong competition for high quality loans, especially fixed-rate loans. Nonetheless, since 2013, the portfolio has expanded by $239.6 million to $4.57 billion, and the pace of expansion has hastened in every quarter, as follows (loans added by quarter): Quarter Loan Added / Quarter Q1 2014 $26.4 million Q2 2014 $54.5 million Q3 2014 $158.6 million Furthermore, the Bank, while grappling with severe credit quality issues, generated enhanced loan growth from 2102 – 2014 as follows (note that from 2007 to 2011, the loan portfolio shrunk 31% to $4.1 billion):

Year Loan Added / Year 2012 $65.4 million 2013 $154.3 million YTD 2014 $239.6 million





Equity Research

December 17, 2014


Due to a focus on various business loan verticals, C&I loans have risen steadily to $650 million, and represent 14% of total loans, up from 11% ($472 million) at year-end 2013. C&I, Consumer Installment and Commercial Construction loans have expanded $177.9 million, $40.9 million and $31.9 million, respectively, while CRE and Residential Mortgage loans are largely unchanged, and Residential Construction loan declined by 6.5%. The increase in C&I loans represents 74% of the total loan portfolio expansion since year-end 2013. Geographically, loan growth in South Carolina accounted for the lion’s share of total portfolio expansion, ending 3Q 2014 with $337.4 million in loans, up from $88.5 million in 2013, an increase driven by lending initiatives in Greenville.

1,821,414

428,249

164,155

1,134,902

448,391

112,503

1,756,710

471,961

148,903

1,315,964

328,579 307,149

1,758,660

649,853

180,794

1,324,387

307,178 348,014

$0

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Commercial Real Estate

C&I Commerical ConstrucUon

ResidenUal Mortgage

ResidenUal ConstrucUon

Consumer installment

United Loan Por=olio by Category ($ 000s)

2011 2012 2013 1Q 2014 2Q 2014 3Q 2014





Equity Research

December 17, 2014


In 2013 and 2014, the Bank beefed up its Consumer Installment loan portfolios by aggressively adding to its Indirect Auto loan portfolio, driven by purchases of indirect auto loan pools. By the end of 3Q 2014, UCBI had $348 million in Consumer Installment loans, up 3-fold since 2011. Indirect auto lending accounted for $242.7 million, or 69.7% of the total Consumer Installment loan portfolio, up from $186.1 million y-o-y, although the sequential pace of auto lending has slowed in 2014 due to a very competitive rate and loan term market place. Over the last 3 quarters the bank has shifted its loan portfolio towards floating rate, which now comprises 43% of the portfolio.

14.8% 16.7%

17.8% 18.0% 18.6% 19.8%

21.8%

0.0%

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10.0%

15.0%

20.0%

25.0%

$0 $100 $200 $300 $400 $500 $600 $700 $800 $900

$1,000

1Q13 2Q13 3Q13 4Q13 1Q14 2Q14 3Q14

United: C&I and Indirect Auto Rise to 22%

C&I Loans Indirect Auto % of Total Loans





Equity Research

December 17, 2014


SBA Lending Developments

United seeks to expand fee revenues by investing in mortgage, advisory services and SBA capabilities. United has 2 SBA lending divisions – a national group and an in-footprint group. The national group is focused on a number of industry verticals including franchising, dental and veterinary. Total bank fee income was $14.4 million, up $269,000 sequentially, due to the Bank’s expanding SBA lending business and related gain on sales of SBA loans. In 3Q 2014, United generated $0.95 million in SBA loan sale gains, up from no gains last year. The Bank expects SBA guaranteed loan sales and gains to expand as 2015 unfolds. Management expects SBA production to be ~ $30 million in 4Q 2014 (up from ~ $10 million in 3Q), and longer term, the Bank is targeting a top-10 position (nationally) in SBA loan production, reaching $150 million by 2016. Generally, United expects to retain half of the ongoing SBA loan production. The SBA loans are generally priced at a floating rate of prime + 1 ½ - 2%.

Analyst’s Notes....Continued Analyst’s Notes....Continued




Equity Research

December 17, 2014


Investment Securities

Total investment securities increased $53 million on a y-o-y basis to $2.22 billion, representing 29.6% of total assets, versus 20.9% for its Peer Group. In 3Q 2014, taxable securities generated an average interest rate of 2.20%, up from 1.80% in 3Q 2013, an increase attributable to active balance sheet management initiatives taken in 2Q 2014. More specifically, in 2Q 2014, United sold $237 million in mostly low-yielding variable rate CMOs and fixed rate corporate bonds that had been swapped to a floating rate, and purchased higher yielding floating rate CMOs and fixed rate MBS securities, while paying down costly short term borrowings. At quarter-end, held-to-maturity securities were $432 million, and 31% of the securities portfolio was invested in floating-rate securities or fixed-rate securities that were swapped to floating rates in order to manage exposure to rising interest rates.

Liabilities

In 3Q 2014, total deposits increased 2.1%, or $127.8 million y-o-y to $6.24 billion, while total earnings assets expanded $323.3 million. United bridged the funding gap by acquiring $282.2 million of added borrowed money, principally FHLB advances which equaled $330.1 million at quarter’s end. The increase in relatively low-cost FHLB advances drove the cost of borrowed funds down to 3.78% from 5.76% last year. Regarding deposits, $4.53 billion, or 73% of total deposits are core (non-time) deposits, which grew 9.2% y-o-y in 3Q 2014. Time deposits, totaled $1.71 billion, down $258 million, or 13.1% over 3Q 2013. In 3Q 2014, UCBI incurred $4.6 million in deposit expense, which equates to an annual rate of 0.26%, down from 0.31% last year, and down sharply from 0.51% at year-end 2012. In 3Q 2014, average interest bearing liabilities expanded $150 million, or 3% on a y-o-y basis, to $5.02 billion, while average non-interest bearing liabilities expanded $173 million, or 12.7% y-o-y, to $1.62 billion. The average cost for interest bearing liabilities was 0.50%, down from 0.58% last year, stimulating an 8 basis point y-o-y increase in net interest-rate spread to 3.19% from 3.11% last year. NIM, a measure of the profitability of a bank’s balance sheet that reflects the positive impact of funding a portion of interest-earning assets with non-interest bearing liabilities and stockholder’s equity, rose as well. In 3Q 2014, NIM expanded to 3.32% from 3.26% last year, reflecting balance sheet management activities, and a $55 million y-o-y increase in non-interest-bearing liabilities.

61%

66% 69% 70% 71%

73%

54% 56% 58% 60% 62% 64% 66% 68% 70% 72% 74%

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2011 2012 2013 1Q14 2Q14 3Q14

Non Time Deposits Expand to 73% (deposits $000s)

Total Deposits Core Deposits / Total Deposits





Equity Research

December 17, 2014


Liquidity Management

As the Bank has increased the soundness of its financial condition, its liability-related liquidity management options have expanded. United currently has qualifying collateral to increase FHLB advances by $516 million and Federal Reserve discount window capacity of $607 million. Currently, the Bank employs $330 million of FHLB advances. According to the 3Q 2014 Uniform Bank Performance Report (‘UBPR’), United’s core deposits (as defined by UBPR) equal 76.7% of total assets versus a 69.6% ratio for its Peer group, suggesting a more stable liability base. As well, net loans and leases / deposits are 71.9% and 82.8%, for United and the Peer Group, respectively. In addition, United has a slightly lower usage rate of non-core funding of long term assets (non-core liabilities less short term investments / long term assets) at 10.9% versus 12.7% for Peers. On the other hand, the Bank’s Short-term Assets / Short-Term Liabilities ratio, at 52.3%, is less than Peers at 155.6%. However, the Bank’s increasing financial strength, significant short term money borrowing capability and deposit-attracting track record indicate the Bank’s considerable ability to roll over short term liabilities and hence maintain good liquidity while holding relatively less low-interest bearing ST assets.

Recovery from Recession

Capping its emergence from the negative impact on credit quality driven by the recession, in 2Q 2013, United reversed a $275 million valuation allowance on its net deferred tax asset following 6 consecutive quarters of profitability. The reversal was based on the conclusion that the Bank’s emerging profitability was sustainable and growing, a view supported by the significant classified asset sale in the same quarter which removed impediments to project credit costs and forecast profitability. Consequently, management has indicated that the bank is likely to fully use its net federal operating loss carry forwards within 4 – 6 years and will generate sufficient future taxable income to fully realize its deferred tax asset. In 3Q 2014, substandard loans equaled 3.3% of total loans, down from 11.1% in 2010. In the aftermath of the Great Recession, the Bank stumbled with respect to its underwriting of Residential and Commercial construction loans. In 2010, Residential Construction loans comprised 15% of total loans outstanding, but 31% of total performing substandard loans, while Commercial Construction loans comprised 6% of total loans, but 18% of total performing substandard loans. As well, in 2010, C&I loans represented 10% of total loans, but just 3% of total performing substandard loans. Generally, for the remaining loan categories, percentages of total loans and total substandard loans were consistent, suggesting that the Bank did a better job underwriting C&I loans than it did underwriting both commercial and residential construction loans. Note: performing ‘’substandard’ loans embody a ‘well defined’ weakness, that if not corrected, could cause UCBI to sustain ‘some loss’.

11% 8.0%

6.3% 4.0% 3.8% 3.3% 3.3%

0.0%

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2010 2011 2012 2013 1Q 2014 2Q 2014 3Q 2014

United: Performing Substandard Loans / Loans

C&I Commerical ConstrucUon ResidenUal ConstrucUon Total Loans





Equity Research

December 17, 2014


In 2013, NCO increased y-o-y driven by a significant classified asset disposition ($172 million) in 2Q 2013. By 3Q 2014, NCO / total loans dropped to 0.28%, down considerably from a cycle peak of 7.2% in 2011.

In 2006 and 2007, Construction loans accounted for 43% and 40% of the Bank’s entire allowance for loan loss reserves (ALL), respectively. Such loans also accounted for ~ 40% of total loans outstanding in each year. By 2010, Construction loans accounted for 21.5% of total loans, but 57% of the ALL. Fast forwarding to 3Q 2014, Construction loans equaled 10.7% of total loans, but 25.7% of the ALL. This data point along with a persistent substandard-to-loan ratio suggests that the Residential Construction loan portfolio is still under pressure, although an analysis of substandard construction loans suggests that the pressure is unwinding.

• Despite the Bank’s classified asset sales, UCBI’s total loan portfolio retains a heavy concentration of residential construction loans. As of 3Q 2014, Construction and Land Development real estate loans were equal to 10.8% of total loans, but 6.4% of peer loans, according to FDIC statistics (in 2010, such loans equaled 22.2% and 9.4% of UCBI and peer loan totals).

7.17%

1.66% 2.19%

0.37% 0.38% 0.28%

0.00%

1.00%

2.00%

3.00%

4.00%

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6.00%

7.00%

8.00%

2011 2012 2013 1Q 2014 2Q 2014 3Q 2014

United: NCO / Total Loans vs. Peers

NCO / Average Total Loans -‐ United NCO / AverageTotal Loans -‐ Peers





Equity Research

December 17, 2014


Asset Quality

While not yet returning to pre-recession levels, the Bank’s asset quality has improved sharply, including over the last 5 quarters, and United’s asset quality now matches or exceeds its peers in several aspects. Through a combination of classified asset sales and an improving credit / economic environment, over the 3Q 2013 – 3Q 2014 period, the Bank’s loan portfolio has strengthened. For example, by year-end 2013, NPA / total assets dropped to 0.42% from a high of 4.81% in 2009, and to 0.29% at 3Q 2014 (note that NPA / total assets were 0.19% in 2006). In 2013, the provision for loan losses (PLL) dipped to $65.5 million, from a high of $310 million in 2009. In 3Q 2014, the PLL dropped to $8.0 million, annualized. With $172 million in classified loan sales behind it, the Bank’s asset quality is far superior than it has been since before the recession. In addition, the bank’s asset quality compares favorably to its Peers: for example, the Bank (1) has better reserve coverage, (2) has a lower level of non-accruing loans and (2) we estimate that the bank is more aggressively charging off impaired loans versus its peers, hence rapidly strengthening its balance sheet.

3Q 2014 Asset Quality Assessment United FDIC Peer Group Reserves (ALL) / Total Loans 1.57% 1.46% ALL / Non-Accrual Loans 3.8X 1.0X Non-Accrual Loans / Total Loans 0.41% 1.51% Net Charge offs (NCO) / Average Loans 0.28% 0.27% NCO / Non-Accrual Loans 16.8% 4.3% Restructured Debt (TDR) in Compliance 89.9% 53.0%

• In Q3 2014, NCO were $3.16 million, compared to $4.47 million last year. • Due to ongoing improvement in credit quality, NPA, which are $18.8 million, declined to 0.29% of total assets, down from

0.42% last year, or $30.6 million. • In 3Q 2014, $7.67 million in loans were placed on non-accrual status, versus $9.96 million in 3Q 2013. • Regarding profitability, ROA peaked at 1.11% in 2002, before plunging to (6.61) % in 2010. It recovered to 0.95% in 3Q 2014.

3.10% 2.63%

0.62% 0.58% 0.47% 0.41%

8.0%

6.3%

4.0% 3.8% 3.3% 3.3%

0.00% 1.00% 2.00% 3.00% 4.00% 5.00% 6.00% 7.00% 8.00% 9.00%

2011 2012 2013 1Q 2014 2Q 2014 3Q 2014

United: Improved Credit Quality

Non Accrual Loans / Gross Loans Substandard Loans / Loans





Equity Research

December 17, 2014


Financial Review

2013 Results

2013 was highlighted by 3 overarching developments: (1) the Bank sold off its problem loans emanating from the recession, (2) the bank significantly lowered its cost structure, and (3) United added significant resources to its loan production platform, a development that has begun to bear fruit in 2014. The year was transformative for the bank, during which, in 2Q 2013, UCBI sold $172 million in classified assets, substantially raising its overall credit quality, which led to a series of positive developments, including the 2013 reversal of a large tax deferred asset valuation allowance. As a result, the company’s shares rose 88% last year. Highlights of the year were as follows:

ü UCBI’s classified asset ratio (to Tier 1 capital plus the ALL) dropped to 27% from 50% a year earlier. ü NPAs fell to 0.72%, or $31.0 million, down from 3.07%, or $128 million in 2012. ü Due to improving conditions, the bank’s deferred tax asset valuation was released, adding $4.69 to TBV. ü Several Memorandums of Understanding with the FDIC and the Georgia Department of Banking and Finance (‘DBF’), extant

since 2010, were lifted (1) lowering borrowing rates (2) removing various restrictions vis a vis acquiring other banks and paying a dividend to the Bank’s holding company for the first time since 2008, and (3) enabling UCBI to fully pay off its expensive TARP preferred stock as of March 2014, boosting EPS.

ü With the approval of the DBF, in 4Q 2014, the Bank paid a $50 million dividend to United, despite negative retained earnings, a sign of improved financial condition.

ü In 2013, the bank entered the Greenville South Carolina market (its 1st S.C. market) and the Nashville, Tennessee market with a focus on the healthcare sector, a new industry vertical which UCBI plans on extending throughout its footprint.

ü While credit quality soared in 2013, organic loan growth in longer-standing markets was disappointing. In 2013, gross loans grew to $4.33 billion, an increase of $154 million. Of that amount $88 million (57%) came from the 2 new markets of S.C. and TN, while $56 million (36%) was generated by HELOC (home equity LOC) promotions, suggesting that other lines of businesses generated $10 million of added loans. In addition, United purchased $202 million of indirect auto loans during 2013. Excluding South Carolina and indirect auto loan purchases, total gross loans fell 3.1% to $4.05 billion.

In 2013, loans, investment securities and deposits advanced 3.7%, 11.2% and 4.2%, respectively. However, in 2013, UCBI earned $219.7 million in net interest revenue, down 4.4% y-o-y, a drop elicited by falling rates on most interest earning assets; for example, average loan interest rates fell to 4.73% from 5.23% in 2012, reflecting the continuing effect of the low interest rate environment and competition for a limited number of quality lending opportunities. Nonetheless, in 2013, average interest earning assets rose 1.5% y-o-y to $6.65 billion, the first y-o-y increase in at least 5 years. C&I, Residential Mortgage and Consumer Installment loans all increased in 2013, while CRE and both Commercial and Residential Construction loan balances dropped. In particular, the largest loan category increase was Consumer Installment, spurred by significant indirect auto loan sales growth, which expanded to $196 million, up from $38 million in 2012, representing growth, without which, the bank’s total loan portfolio would not have expanded. In 2013, UCBI entered the South Carolina market and ended the year with $88.5 million in loans in that state. The sales of a substantial amount of classified assets in 2013 caused PLL to rise marginally over 2012, to $65.5 million, or 1.55% of outstanding loans. Total Fee Revenue advanced 1% in 2013 to $56.6 million, highlighted by a 34% jump in Brokerage Fees, to $4.5 million, stimulated by a general improvement in the equities market and heightened customer demand for income producing brokerage products. Operating expenses declined 7% year-on-year to $174.3 million, largely reflecting lower foreclosed property losses and write-downs associated with the decline in volume of foreclosed properties following the 2Q 2013 classified assets sale. UCBI enjoyed a $238 million income tax benefit (a non-cash event) in 2013 due to a reversal of $272 million of its deferred tax valuation allowance following nine straight quarters of positive results and improving asset quality. As a result, total assets and shareholders’ equity grew 9.2% and 36.8%, respectively, although on an average daily basis, total assets grew 3% in 2013. In 2013, UCBI generated $4.44 in GAAP EPS, reflecting the impact of the DTA valuation reversal.





Equity Research

December 17, 2014


Strong 3Q 2014 Results

The results of the steps taken in 2013 were borne out in 3Q 2014, the bank’s best quarter in years, wherein the Bank posted the strongest loan and core deposit growth in many quarters, an expanded net interest margin (through higher securities yield), sequential growth in fee revenues and continued improving asset quality metrics. United initiated a quarterly cash dividend in 2Q 2014, and increased it to $0.05 per share in 3Q 2014, up from $0.03. Historically the bank’s dividend payout ratio has been ~ 20%. In terms of earnings, the Bank posted $17.6 million in net income, up 13.5% over the same period last year. EPS were $0.29, versus $0.21 in 3Q 2013.

Average gross loans advance to $4.45 billion, up 1.6% sequentially and 4.6% y-o-y, while average earning assets expanded 3.1% y-o-y to $6.82 billion, in line with the 3.1% y-o-y increase in interest revenue. In the quarter, United fully offset a 24 y-o-y basis point drop in loan yield with a 40 basis point increase in investment securities yield, which was itself boosted by slower mortgage backed securities (‘MBS’) prepayment activity, and 2Q 2014 balance sheet management activity. Hence the average yield on interest earning assets was unchanged y-o-y. Average total assets expanded 2.8% to $7.37 billion. United added $159 million in net loans in the quarter, the best result in at least 7 quarters, driven by $132 million growth in specialized lending, which includes health care, corporate, SBA, asset-based and CRE. C&I, income-producing CRE and indirect auto loans were up $96 million, $27 million and $27 million, respectively. The Bank’s SBA loan portfolio advanced $31 million over 2Q 2014. Health care related loans in the Nashville Tennessee area increased $60 million. In the quarter, United funded $453.1 million in new loans and advances, the strongest amount of the past 5 quarters. By region, South Carolina is the most rapid-growing, generating $141.4 million, or 31.2% of the bank’s quarterly loan funding, up from 24.7% in 2Q 2014. South Carolina now comprises 7% of the Bank’s total loan portfolio, or $337 million (note that United has ~ just $23 million in total deposits in South Carolina). Of lending verticals of note, indirect auto lending made up 15% of total retail loans and 5.3% of all loans, equating to $243 million, a figure which is 27.9% higher than last year. In 3Q 2014, indirect auto represented $51.3 million of the bank’s new loan funding, or 11.3% of the $453.1 million total.

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United: Selected Credit Expenses ($000s)

9 Mos 2013 9 Mos 2014

Analyst’s Notes....Continued Analyst’s Notes....Continued




Equity Research

December 17, 2014


Interest revenue for the quarter, at $63.3 million, jumped 3.1% y-o-y, while Interest expense, at $6.4 million dropped 11.1%, yielding a 5.0% y-o-y increase in net interest revenues to $57.0 million, up from $54.3 million last year. The average cost of interest-bearing liabilities fell to 0.50% in 3Q 2014, down from 0.58% last year. As a result of (1) active balance sheet management in 2Q 2014 and (2) a 1 basis point increase in loan yield (the first such increase in years) to 4.45%, NIM, at 3.32%, rose 11 basis points sequentially, and 5 basis points y-o-y. In the quarter, average loans grew $70 million, while average securities portfolio dropped $95 million. The asset mix change added ~ 5 basis points to the NIM this quarter, while short term borrowing pay downs contributed another 3 basis points. With regard to balance sheet adjustments, in 2Q 2014, United sold $237 million in mostly low-‐yielding variable rate CMOs and fixed rate corporate bonds that had been swapped to a floating rate, and purchased higher yielding floating rate CMOs and fixed rate MBS securities, while paying down costly short term borrowings. Furthermore, in 2Q 2014, United terminated $300

million (notional value) of cash flow hedges of LIBOR based wholesale borrowings and indexed money market deposits, lowering its deposit and wholesale borrowing costs, thereby raising net interest revenue and NIM.

The Bank has guided for similar NIM levels in 4Q 2014 and 2015. In terms of analyzing changes in interest revenues and expenses based on volume and rate, during the 3rd quarter, the entire y-o-y increase in interest revenue of $1.9 million was driven by rate increase in the Bank’s taxable securities portfolio. The y-o-y drop in loan yield to 4.45%, from 4.69%, fully offset a healthy increase in the loan portfolio. As the y-o-y downward drift in loan yield evaporates over the next several quarters, the positive interest revenue generating impact of loan growth should be more fully realized.

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United 3Q 2014: More Loans, Beber Yield

New Loans Funded and Advances Net Interest Margin -‐ NIM Loan Yield SecuriUes Yield





Equity Research

December 17, 2014


Loan provisions (PPL) dropped to $2.0 million in 3Q 2014, down from $3.0 million last year. Fee revenue of $14.4 million increased $187,000, or 1%, from the third quarter of 2013. The increase was due primarily to $945,000 in gains from the sales of Small Business Administration loans in the third quarter of 2014. United began selling the guaranteed portion of SBA / United States Department of Agriculture loans in the second quarter of 2014 as part of its emphasis on growing the SBA lending business (in late 2Q 2014, United completed the acquisition of Business Carolina, Inc., an SBA / USDA lending operation based in Columbia, South Carolina. The purchase added ~ $25 million in SBA / USDA loans to the Bank’s portfolio). The gains from the sales of SBA loans were partially offset by decreases in overdraft charges and interchange fees and lower mortgage revenue, brokerage and customer derivatives fees. The decline in mortgage fees, which declined 15% y-o-y to $2.2 million, is due to a lower level of refinancing activity, driven by rising long term rates (nonetheless, new purchase mortgage activity has increased in recent quarters). United exhibited strong cost control management, posting an efficiency ratio of just 58.3% in 3Q 2014. 3Q 2014 operating expenses grew $1.27 million y-o-y to $41.4 million, a 3.2% rise, driven by higher salaries and benefits expense – up 11% y-o-y - the result of hiring talent in specialized lending areas as well as higher incentive compensation related to higher lending and better earnings performance. Such expenses grew $2.58 million y-o-y. Partially offsetting the increase in salaries was a $1.27 million drop in FDIC insurance assessments, which declined following (1) the termination of the Bank’s informal MOU with the FDIC late 4Q 2013 and (2) continual improvement in credit quality. Net, net United generated a 10.2% y-o-y increase in EBT to $28.0 million, up from $25.4 million in 3Q 2013. Taxes accounted for just 37.1% of EBT, down from 38.9% last year. Consequently net income rose 13.5%. In the quarter, United generated a 0.96% annualized ROA, closing in on its stated goal of 1.0%. Last year, ROA was 0.86%. Lastly, as of 3Q 2014, United no longer has any preferred stock outstanding, and in November, 2014, United completed a settlement whereby it repurchased a warrant granted in 2010 to issue 1.4 million common shares.

Fintrust Earnings Forecast & Valuation Analysis: United Community Banks We expect United’s current momentum to continue into 2015. In 4Q 2014, we estimate that United will generate $19.0 million and $0.31 in net income and EPS, respectively. We estimate that United’s earnings growth will accelerate in 2015, and that 2015 net income and EPS will be $80.3 million and $1.32, respectively, versus $67.9 million and $1.12 in 2014E. This represents a 17.9% y-o-y advance in EPS next year. Behind our expectation of strong 2015 growth is the assumption that interest and fees earned on loans will jump 11.5% to $219.8 million from $197.2 million this year, a result of (1) a 6.9% increase in average gross loans to $4.83 billion, highlighted by 5.0%, 10.0%, 5.0% and 10.0% y-o-y increases in CRE, C&I, residential mortgage and consumer installment loans, combined with (2) a 10 basis point increase in loan yield in 2015, to 4.55%. Due to expectations of rising rates, we forecast that total interest expense will rise 2.0% next year, such that NII – net interest income – will advance a healthy 10.5% in 2015. Stimulated by improving credit quality and lower NCO, we expect that the bank will need to take $4.8 million in provisions (PLL), down from $7.8 million this year, resulting in a 12.3% increase in y-o-y NII after PLL. We estimate that non-interest income will advance 3.6%, to $57.6 million, highlighted by a 10% y-o-y increase in mortgage banking income, and that operating expenses will expand 5.2% to $171.3 million. Management has indicated that it foresees roughly $30 million in potential operating costs over the next 2-3 years, hence our estimate of operating expense may prove to be high, providing the bank with a ‘wildcard’ opportunity to exceed our earnings estimates. Our forecast indicates that the Bank will achieve its stated goal of > 1% ROA; we estimate that ROA and ROE will be 1.03% and 10.08% in 2015, and that United will post NIM and net interest spread of 3.39% and 3.26%, respectively, up from 3.33% and 3.20% in 4Q 2014.

Analyst’s Notes....Continued Analyst’s Notes....Continued Analyst’s Notes....Continued




Equity Research

December 17, 2014


With regard to valuation, we estimate that the bank will post $13.80 in TBV / share for 2015, and that based on peer book value ratios, that United arguably deserves to trade at a peer mean ratio of 1.44X, if not higher, given its superior earnings growth potential. At 1.44x $13.80, we estimate that United’s shares could trade for $19.87 in one year, representing a 13.2% share price-gain.




Equity Research

December 17, 2014


As the preceding comparison chart illustrates, United exhibits superior ROAA and asset credit characteristics (non-accrual loans / loans = 0.41%). On the other hand, the bank’s NIM ratio is below average, driven by lower earnings yield. Specifically, United’s loan yield, at 4.45%, is sharply lower than its peers at 5.20%. To the extent that the Bank’s goals of making more SBA and other specialty loans is successful, competitive pressure on the bank’s loan yield should ease up.

Company versus Market Comparison Chart:



Corporate Governance:

• The majority of United’s 8 Board members are considered independent under NASDAQ listing requirements.

• The entire Board stands for election annually.

Nominees receiving the greatest number of votes shall be deemed elected even if the nominee doesn’t receive a majority of the votes cast (plurality voting). However, under certain circumstances such nominees may be asked to resign, if for example, the votes cast resulted from a campaign directed specifically against the election of an individual nominee.

• With regard to the long-term equity incentive award plan to a group of Senior Executive Officers, the Compensation Committee set the annual performance target level for 2014 at an 85 basis point ROAA, and thereafter at 1.0% Under the award plan, 70% of the restricted stock units awarded are performance-based.





Equity Research

December 17, 2014






Equity Research

December 17, 2014


Recommendation: We recommend purchase of UCBI shares for risk tolerant investors mindful of the risks inherent in the banking industry. The Bank emerged in 2013 from the languishing credit crisis of the Great recession with a strong credit profile, increased regulatory capital and free of its legacy TARP preferred securities. Management has admirably executed its plan to leverage the Bank’s balance sheet by adding more bankers and lending verticals, and acceleration in loan growth became evident in 3Q 2014. We expect the bank to generate mid-to-high single digit loan growth, and solid double-digit net income and EPS growth in 2015. Our 2015 EPS estimate of $1.32 is on the high end of other analyst recommendations, however we estimate that with additional cost cutting measures that the Bank’s CEO indicated is likely, that our estimates ultimately may prove prescient if not conservative. Out target price - $19.78 – is arrived at by applying an Peer-average 1.44X multiple to year-end 2015 TBV of $13.80, and implies ~ 18% y-o-y return to shareholders, before consideration of the recently reinstated common stock dividend. We strongly recommend that investors refer to this report and the latest 10K for risk factors to consider.

Analyst’s Notes....Continued Analyst’s Notes....Continued Analyst’s Notes....Continued




Equity Research

December 17, 2014


Important Disclosures:

Analyst Certification: We hereby certify that the views expressed in this research report accurately reflect our personal views about the subject company and its securities. We also certify that we have not, will not, nor are presently receiving direct and/or indirect compensation in exchange for any specific recommendation in this report. In addition, said analysts have not received compensation from any subject company in the last 12 months.

Ownership and Material Conflicts of Interest:

An analyst or a member of his household may not purchase the securities of a subject company 30 days before or 5 days after the issuance of the research analyst’s report or a change in ratings or price targets, trade inconsistent with the views expressed by the research analyst, and all transactions in the subject company (ies) securities for the research analyst’s personal trading account must be approved.

The research analyst nor a member of his household own any of the securities of the subject company including any options, rights, warrants, futures or long or short positions. Neither the research analyst nor a member of his household own 1% or more of any of the securities of the subject company based upon the same standards used to compute beneficial ownership for the purpose of reporting requirements under 13(d) of the Securities Act of 1934, as amended.

The research analyst or household member is not an officer, director, or advisory board member of the subject company.

The research analyst has not made a public appearance in front of more than 15 person to discuss the subject company and does not know or have reason to know at the time of this publication of any other material conflict of interest.

The firm has no knowledge of any material conflict of interest involving the company mentioned in this report.

Receipt of Compensation:

The firm does not engage in investment banking activities.

The subject company (ies) has not been a client in the past 12 months preceding the date of distribution of this research report and is not currently a client. The firm has not received non-investment banking compensation for products or services or other non-securities services from the subject company or any affiliated company.

The research analysts at the firm do not receive any compensation based on investment banking revenues and may be paid a bonus based upon the overall profitability of the firm.

Investment Banking Relationships:

The firm has not managed or co-managed a public offering or received investment banking compensation in the past 12 months regarding the subject company (ies).

The firm does not expect to receive or intend to seek investment banking compensation in the next 3 months from the subject company (ies).




Equity Research

December 17, 2014


Additional Important Disclosures... Securities offered through Fintrust Brokerage Services, LLC (Member FINRA and SIPC) and Investment Advisory Services offered through Fintrust Investment Advisory Services, LLC. Any views expressed in this message are those of the individual sender, except where the message states otherwise and the sender is authorized to state them to be the views of any such entity. Trade instructions may not be accepted via email. This material does not constitute an offer to sell, solicitation of an offer to buy, recommendation to buy or representation as the suitability or appropriateness of any security, financial product or instrument, unless explicitly stated as such in the text of the email. Past performance is not necessarily indicative of future returns. Performance numbers have not necessarily been independently reviewed or audited and therefore we make no representation as to its accuracy. Any reference to the terms of any contracts should be treated as preliminary only and subject to our formal written confirmation. This report is prepared for general circulation. This report is not produced based on any individual persons or entities investment objectives or financial situation and opinions expressed by the analyst are subject to change without notice. This report is not provided to any particular individual with a view toward their individual circumstances. Investors should consider this report as only a single factor in making an investment decision. Securities prices fluctuate and investors may receive back less than originally invested and are not guaranteed.

This information should not be construed as legal, regulatory, tax, or accounting advice. Any reference to the terms of any contracts should be treated as preliminary only and subject to our formal written confirmation This message (and any attached materials) is for the sole use of the intended recipient(s) and may contain information that is privileged, confidential and exempt from disclosure under applicable law. Any review, dissemination, distribution or duplication of this communication is strictly prohibited. If you are not the intended recipient, please contact the sender immediately by reply e-mail and destroy all copies of the original message. No part of this document may be copied, photocopied, or duplicated in any form or other means redistributed or quote without the prior written consent of the firm. This report and its contents are the property of Fintrust Brokerage Services, LLC and are protected by applicable copyright, trade secret or other intellectual property laws. United States law, 17 U.S.C. Sec.501 et seq, provides for civil and criminal penalties for copyright infringement. The firm does not make market in securities. The firm does not buy or sell the subject company (ies) securities for its own account. The firm does not buy or sell subject company (ies) securities on a principal basis with customers. The firm’s employees, or customers, may buy or sell the subject company (ies) securities. Although the statements of fact in this report have been obtained from and are based upon outside sources that the firm believes to be reliable, the firm does not guarantee the accuracy or completeness of material contained in this report. Any such estimates or forecasts contained in this report may not be met. Past performance is not an indication of future results. Calculations of price targets are based on a combination of one or more methodologies generally accept among financial analysts, including but not limited to, analysis of multiples and/or discounted cash flows (whether in whole or in part), or any other method which may be applied. Rating, target price and price history information on the subject company (ies) in this report is available upon request. To receive any additional information upon which this report is based please contact (864) 288-2849, or write to: Fintrust Brokerage Services, LLC attn: Research Department 124 Verdae Blvd, Ste. 504 Greenville, SC 29607

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