Analyst notes
In addition to Memphis, Tenn.-based First Horizon Corp. and Blairsville, Ga.-based United Community Banks Inc., several other banks in the US Southeast are likely to take a hit from the bankruptcy of a wholesale oil distributor.
At a recent industry conference, First Horizon said it expects charge-offs to be about $100 million for the third quarter after a client with a $70 million credit filed for Chapter 7 bankruptcy in mid-August. The company's top executive called the event an "idiosyncratic loss."
United Community disclosed in a regulatory filing that it expects charge-offs to increase in the third quarter due to its 8.7% participation in the $218.5 million nationally syndicated credit, led by First Horizon, to the wholesale oil distributor. United Community expects minimal recovery on the exposure, leading to a third-quarter charge-off of about $19 million on the relationship.
Given that United Community previously classified the loan as nonperforming/substandard, "the loss was not a surprise, only the timing and amount (nearly 100% loss)," Janney Montgomery Scott analyst Christopher Marinac wrote in a note.
First Horizon and United Community did not specify the name of the client, but it is presumably Mountain Express Oil, which entered Chapter 7 liquidation on Aug. 24 after initially filing for Chapter 11 bankruptcy in March, said Raymond James analyst Michael Rose and Piper Sandler analyst Stephen Scouten.
Several banks across the Southeast are also participants in the credit, spreading the effect of the "idiosyncratic" event, Rose said.
While many banks are confident about credit, "we believe similar issues could arise in the coming quarters as we enter into a potential credit cycle," Rose wrote in a note.
Meanwhile, Scouten, who covers United Community, believes that the issue is "isolated and company-specific," given the conditions around the bankruptcy.
"Obviously the optics around any concentrated [net charge-off] are detrimental, but for the time being, this appears to be more of a one-off issue," Scouten wrote in a note.
Upgrades
Piper Sandler analyst Nathan Race upgraded Kansas City, Mo.-based UMB Financial Corp. to "overweight" from "neutral" with a price target of $74.
The upgrade was based on the shares' discounted valuation, the analyst said.
"We believe [the] valuation has been overly punished since the handful of bank failures in March due to [the company's] above average amount of uninsured deposits that is a function of its commercial and more unique institutional business lines," Race wrote in a note.
Considering several catalysts, Race expects multiple expansion above peers and closer to UMB Financial's historical premium in the future. The catalysts are a more resilient net interest income trajectory relative to peers, increased revenue diversity, above-average organic balance sheet growth, benign credit quality and well-controlled operating expenses, the analyst said.
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Hovde Group analyst David Bishop upgraded Wheeling, W.Va.-based WesBanco Inc. to "outperform" with a $30 price target.
The rating change followed a material year-to-date underperformance of the company's shares compared to peers, which "leaves the risk-reward equation more skewed to the reward side," the analyst said.
WesBanco is challenged by near-term headwinds from additional net interest margin compression. However, "we do like the bank's longer-term growth profile that supplements its relatively stable, slower growth legacy West [Virginia] markets that serve to buoy overall deposit levels/costs," Bishop wrote in a note.
The analyst lowered his 2023 earnings per share estimate by 10 cents to $2.49 and 2024 EPS estimate by 12 cents to $2.50.
