United Bankshares Is A Winner (NASDAQ:UBSI)

We see the rising rate environment as having a predictably favorable effect on net interest income in most banks, and for the last few months, we have been pushing financials, hard. We think they are a great investing opportunity after being crushed in 2022.

One bank that we called a buy for its dividend in September was United Bankshares, Inc. (NASDAQ:UBSI). The stock is up 18% since that call. Winning. We think there is more upside ahead, but it is wise to let shares pull back before purchasing some. Wait for a day or two of weakness.

We are still in a bear market, even if the bulls are fighting back. It is our opinion that the higher rate environment is just starting to drive margin improvement, and when combined with outstanding loan growth, the company is in great shape to deliver earnings gains in the next few years. For banks, growing loan loss provisions are a concern, given the economic woes we are seeing right now possibly impacting borrowers’ ability to pay bank their loans. Banks are being proactive in setting aside reserves, just in case. In this column, we check back in on operational performance following the recently reported earnings.

United Bankshares, Inc. is a good buy under $40 and pays a 3.5% dividend yield. Let us discuss.

Revenue growth continues

In the just-reported quarter, the bank’s operational results were strong in Q3. Thanks to continued loan growth and deposit strength, the bank saw revenues continue to improve once again. Those higher rates are having a benefit, just as we predicted, with the bank’s higher net interest margin this quarter helping performance.

With Q3’s revenues of $274 million, the company registered a 9.7% increase in this metric year-over-year. Many other regional banks 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 $7 million beat against expectations. What is more, we saw strong performance in earnings once again.

United Bankshares Q3 earnings

The increase in revenues year-over-year was once again led by loan and deposit growth, and better margins thanks to higher those higher rates.

United Bankshares reported Q3 net income of $102.6 million, or $0.76 per share, which was a nice increase of $0.05, or 7%, from the sequential quarter. It was also a 7% increase from last year’s Q3. We think earnings continue to ramp up. We believe that 2023 will be even better than what we are seeing right now based on the trends we are seeing for banks.

With these higher rates, net interest margin is improving. Loan quality and moderate levels of loan loss provisions boosted performance. Margins should remain strong, with higher rates on loans issued relative to what is paid to deposit holders. The so-called spread, as it were. It is getting so much better. Last year, the net interest rate spread (or margin) was 2.98%. In Q2, there was a net interest margin of 3.38%. Here in Q3, net interest margin was a huge 3.78%. What an improvement, and it is all due to the higher interest rates. The provision for credit losses was a detriment, but it was done to have reserves just in case. The provisions were $7.7 million, versus credits last quarter and a year ago. One thing that was a big benefit was that loans and deposits both grew.

Loans and deposits grow in Q3

Taking in deposits and lending them out at a higher rate, and collecting the difference, is the bread and butter banking. It is a model that has worked for millennia. Annualized loan growth was 16%. Total loans grew to $19.7 billion, up from $18.0 billion to start the year. This is very solid growth, and loans were up from $16.7 billion a year ago. Further, the bank is taking in more capital to lend. Deposits rose to $22.9 billion versus $21.8 billion a year ago.

Asset quality improves

This quarter we saw loan loss provisions which hurt the bottom line. But we like to look at a few metrics of asset quality, and they are all trending in the right direction. This has us very bullish. Non-performing loans fell as a percentage of all loans. They were $69.7 million, or 0.35% of loans, down from $90.8 million, or 0.50% of loans to start the year. This is a new low for the bank. Winning like never before.

Total non-performing assets also improved. Overall non-performing assets were down to $80.4 million or 0.298% of total assets. This is a huge improvement from $105.6 million, or 0.36% of total assets to start the year. So despite the possible economic woes, United Bankshares is simply killing it.

Now, one trend we did not love was that the allowance for loan & lease losses increased for the first time in many quarters. The allowance for loan losses in Q3 was $219.6 million, or 1.11% of loans. But the actual amount is misleading. While the amount is higher, the percent of loans with allowances was 1.20% of all loans to start the year, despite being less at $216.0 million, or 1.20% of loans at the beginning of the year. Further, net charge-offs were actually recoveries, and were $1.79 million.

We also like to look at certain return metrics which are key. All of the metrics we followed improved sequentially from Q2. The return on average assets was 1.41, up 9 basis points from 1.32%. The return on average equity was 8.96%, up from 8.23% sequentially. We will also point out that the return on tangible equity jumped from 14.23% in Q2 to 15.46%. Finally, the efficiency ratio is an amazing 50.19%, the best it has been in years, and improved from 54.61% in Q2.

Take home

This was a great quarter for United Bankshares, Inc. This remains a high-quality, under-the-radar name. The bank pays a healthy dividend, which has been raised time and again. There has been a generation of consecutive dividend growth. Loans are growing, deposits are strong. Higher interest rates, as we predicted, are having a huge benefit, as margins expanded dramatically, helping drive strong earnings growth. Take advantage of any pullback in United Bankshares, Inc. here and do some buying.