UBSI - United Bankshares Is Weathering The Storm 5.6% Yield

2023-10-25 14:08:17 ET

Summary

• United Bankshares, Inc. stock has been cut in half in the past year along with other regional banks.
• Has performance troughed for this bank?
• United Bankshares shows impressive moves in asset quality.
• United Bankshares stock offers juicy income while we wait for capital appreciation.

Today we are looking into a little known financial company in United Bankshares, Inc. ( UBSI ). The stock has been cut in half in a year as regional banks have been smashed.

We have covered a number of these banks lately. With some we believe they offer solid entry points, where others we are neutral on. While we think the opportunity to short the space has passed, if you believe a major recession is coming, than you could take that risk. However, we see a mild recession at worst in store. That is our opinion based on our reading of the tea leaves. We also believe the market has priced in this scenario into the share prices of many of these banks.

The key metrics we have been examining suggest the sector is still healthy, even in this environment. We also surmise that margins are troughing. Where the real debate comes in will be whether there is a decline in loan activity at these higher rates. So far, as a whole, banks are still expanding loans. That is just a fact. Could this change? Sure, we suppose it could, but with our belief that the Fed is about done raising rates, we believe we see an acceptance of consumers and businesses of this new rate environment.

Our thesis will be wrong, however, if the Fed continues to raise rates. Another risk is if unemployment starts to surge, as that would hurt consumer and businesses, and their ability to repay loans. But so far in this tough climate, we have not seen a material deterioration in asset quality.

With that said, we are seeing weakening trends for United Bankshares from last year, but mostly improvement in key metrics from Q2, bucking the trend of the sector. We think shares are a buy following a strong Q3 with sequential improvement.

Revenue and earnings fall from a year ago

The bank's operational results were mixed in Q3 . There was continued loan growth from the sequential quarter, but the bank saw revenues fall due to lower net interest margins. With Q3 revenues of $262.1 million , the company registered a 4.1% decrease 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 drop in revenues year-over-year led to a year-over-year decline in earnings. However, and this is key, performance was up from the sequential Q2. That is strong. Net interest income improved sequentially. Net interest income increased $1.0 million, or less than 1%, from Q2 2023, but it was an increase. Revenues were down, though, as non-interest income dipped $1.5 million.

That said, earnings for Q3 2023 were $96.2 million, or $0.71 per share, versus earnings of $92.5 million, or $0.68 per share in the sequential Q2. But we are down from a year ago, as Q2 2022 earnings were $102.6 million, or $0.76 per share.

Have we seen the trough? It will depend on if margins can expand, which we think they can as yields on loans will continue to grow while the cost of funds, provided rates do not increase, should be peaking soon, if they have not already.

Loans and deposits grow in Q3

Average net loans and loans held for sale increased $245.6 million from Q2 2023, lending evidence so far that the tough macro is not slowing demand. Total deposits were up as well from the sequential quarter. Deposits grew to $22.7 billion from $22.3 billion. So, we have predicted margins will be troughing. It may be too soon to call it here, but we note the net interest margin of 3.54% was an increase of 3 basis points from the net interest margin of 3.51% for Q2 2023.

Asset quality and return metrics are strong

We also think that it is worth pointing out that United Bankshares still has strong asset quality. The provision for credit losses was $5.9 million for Q3 2023 as compared to $11.4 million for Q2. That is a positive. Non-performing loans were $42.7 million, or 0.20% of loans & leases, while total non-performing assets were $45.9 million or 0.16% of total assets. We are not seeing a degradation in most of these metrics this year so far. There is always variability, but at the start of 2023, non-performing loans were $58.6 million, or 0.29% of loans & leases and total non-performing assets were $60.7 million, or 0.21% of total assets. However, the allowance for loan & lease losses increased to $254.9 million, or 1.21% of loans & leases versus $234.7 million, or 1.14% of loans & leases to start the year.

Overall, the quarter was not perfect, but the asset quality is strong. We also think it is noteworthy that the return metrics improved from Q2. The return on average assets was 1.31%. The return on average equity was 8.14%, and the return on tangible equity was 13.71%. These numbers were all lower than Q3 2022, but are up from the sequential quarter's 1.26%, 7.96%, and 13.47%, for returns on average assets, average equity and average tangible equity, respectively.

Final thoughts

Compared to the many regional banks we have looked at, United Bankshares, Inc. was another strong performer. The stock is priced for a mild recession, and yet, many of the metrics we follow are showing improvement. After shares have been cut in half, the bank pays a nice dividend, which has been raised time and again, and is yielding 5.6%. In our opinion, United Bankshares, Inc. is another bank stock to choose from for income and future capital appreciation for the long term to scale into on future weakness.

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