United Bankshares: A Great Unknown Stock (NASDAQ:UBSI)

We have been bullish on United Bankshares, Inc. (NASDAQ:UBSI) and the stock has pulled back under $40 recently. The broader market is having its best January in years, but we think this market is going to pull back, and hard, later this quarter as the Fed is still raising rates and earnings outlooks have been pretty poor. We are still in a bear market, despite bulls fighting back. The higher rate environment is just starting to drive margin improvement for banks, and when combined with outstanding loan growth, the company is in great shape to deliver earnings gains in the next few years. The company just reported earnings and we wanted to revisit the name. We like a buy in shares under $40, as this sports a 3.7% dividend yield. Let us discuss.

Revenue growth continues

The bank’s operational results were pretty strong in Q4. There was continued loan growth and the bank saw revenues continue to improve once again. The higher interest rates are having a benefit on margins, and helping the bank deliver big revenue gains and strong earnings.

With Q4 revenues of $274 million, the company registered a 17.9% increase in this metric year-over-year. Many other regional banks have covered this earnings season have seen mixed revenues versus last year, while some are improving. Overall, most banks are doing better than expected, but it is still mixed. The result was about a $3 million beat against expectations.

United Bankshares’ Q4 earnings

The spike in revenues year-over-year was once again led by loan growth and strong margins thanks to higher those higher rates. It was a record Q4 for net interest income for the bank. Overall, Q4 net income was $99.8 million, or $0.74 per share, which was a $0.02, decline from the sequential quarter. It was also a 7% increase from last year’s Q4. We think earnings continue to ramp up. We believe that 2023 will be even better than what we saw in 2022. Noninterest income was lower however, similar to most other regional banks. We also saw loan loss provisions weigh on earnings.

Net interest income was $249.4 million, and rose due to strong margins. The net interest rate spread (or margin) was 3.87%. In Q3, there was a net interest margin of 3.78%, so this was a 9 basis point widening. While the yield on loans is rising nicely, the bank has had to pay more for deposits as the competition for deposit dollars has intensified. The provision for credit losses ramped to $16.4 million from $7.7 million, as loans are growing but the risk of a bad economy has banks playing defense.

Loans grow in Q4, deposits slip

Bringing in deposits and lending them out at a higher rate, and collecting the difference, is bread and butter banking and this is what this bank does best. Annualized loan growth was 18% in Q4, very strong. Total loans grew to $20.6 billion, up from $18.0 billion to start the year. This is strong growth. But with the competition for deposits, we saw a decline in deposits on hand. Deposits dipped to $22.3 billion versus $23.3 billion a year ago. Additionally, the interest paid on deposits has gone up, increasing the cost of funds, but we expect yields on loans to improve.

Asset quality and return metrics are strong

The asset quality metrics we look at improved nicely this quarter. Non-performing loans fell as a percentage of all loans. They were just $58.6 million, or 0.29% of loans, down from $90.8 million, or 0.50% of loans to start the year. This is a new low for the bank, as it was even lower than the 0.35% of loans in Q3. Total non-performing assets improved as well. Non-performing assets were down to $60.7 million or 0.21% of total assets. This is a big improvement from $105.6 million, or 0.36% of total assets to start the year, and improved from the 0.29% of total assets in Q3. Really nice progress here.

The allowance for loan & lease losses was $234.7 million, or 1.14% of loans. But the actual amount is misleading as there are so many more loans on the books. While the amount is higher, the percent of loans with allowances was down from 1.20% of all loans to start the year. The only real negative was an uptick in net charge-offs to $1.2 million in Q4 versus $0.1 million to start the year.

We are impressed with the asset quality metrics, but also the return metrics are pretty strong. All of the metrics we follow are up from the start of the year. The return on average assets was 1.36%. The return on average equity was 8.80%, and the return on tangible equity was 15.28%. These numbers were all slightly lower than Q3 however, but still strong. That said, the efficiency ratio did improve to 49.07% from 50.19% in Q3. This is the strongest this metric has been in many years.

Final thoughts

This was another strong quarter for United Bankshares, Inc. The bank pays a nice dividend, which has been raised time and again, and is yielding 3.7%. While this is a relatively unknown company to many readers, this stock is a reliable name for any long-term dividend growth portfolio.