UBSI - United Bankshares: Normalization Of Provisioning And Mortgage Income To Undermine Top-Line Growth

• Mortgage banking income appears to have normalized during the first quarter of the year. It will likely remain at the first quarter’s level for the remainder of the year.
• Threats of a recession will likely lead to a sequential increase in the provisioning expense.
• The net interest income will likely continue to grow due to margin expansion and strength in regional job markets.
• The December 2022 target price suggests a high upside from the current market price. Further, UBSI is offering a good dividend yield for a bank-holding company.

Earnings of United Bankshares, Inc. (UBSI) will most probably dip this year on the back of a fall in mortgage banking income. Further, higher provisioning will likely drag earnings. On the other hand, mid-single-digit loan growth and slight margin expansion will support the bottom line. Overall, I'm expecting United Bankshares to report earnings of $2.50 per share for 2022, down 12% year-over-year. Compared to my last report on the company, I've tweaked downwards my earnings estimate mostly because mortgage banking income missed my expectations for the first quarter of the year. The December 2022 target price suggests a small upside from the current market price. Therefore, I'm maintaining a hold rating on United Bankshares.

Mortgage Banking Income Has Normalized Faster than Expected

Mortgage banking income for the first quarter of 2022 dipped by more than I expected. In fact, United Bankshares’ non-interest income for the first quarter of 2022 almost halved from a year ago period. During the first quarter, mortgage banking income dropped to the level of the pre-monetary-easing cycle, as shown below.

Therefore, it seems like the party ended sooner than I expected. With interest rates set to continue to rise, mortgage banking income will likely remain stable at the first quarter’s level throughout the remainder of the year. Meanwhile, other fee income will likely continue to grow at a normal rate.

Overall, I'm expecting United Bankshares to report a total noninterest income of $205 million for 2022. In my last report on United Bankshares, I estimated a noninterest income of $259 million for 2022. I have reduced my estimate mostly because of the first quarter’s surprise.

Loan Growth to Decelerate but Remain Moderately High

United Bankshares' loan growth continued to remain strong in the March-ending quarter, for a second consecutive quarter. As mentioned in the earnings presentation , loan pipelines continued to remain very strong at the end of March 2022. Therefore, similar performance can be expected for the second quarter of the year. However, loan growth will likely slow down in the second half of the year because of rising interest rates that will dampen credit demand. The demand for residential mortgages will likely be the most affected by higher interest rates.

On the other hand, strong job markets will likely support loan growth. United Bankshares operates in West Virginia, Virginia (including Washington DC), North Carolina, and South Carolina. All these states have stronger job markets than the national average, as shown below.

The management mentioned in the presentation that it expects mid-single digit loan growth for the last three quarters of 2022. Considering these factors and management’s guidance, I'm expecting the margin to increase by 6.0% by the end of 2022 from the end of 2021. The acquisition of Community Bankers Trust (ESXB) on December 3, 2021, increased the loan portfolio size by around $1.3 billion. Due to the timing of the acquisition (late 2021), the average loan balance for 2022 will be much higher than the average balance for last year, despite the lower year-end 2021 to year-end 2022 loan growth.

Meanwhile, deposits will likely grow mostly in line with loans for the last three quarters of 2022. The following table shows my balance sheet estimates.

In my last report on United Bankshares, I estimated earnings of $2.54 per share for 2022. I have now tweaked downwards my earnings estimate mostly because I've revised downwards the noninterest income estimate for the year.

Actual earnings may differ materially from estimates because of the risks and uncertainties related to inflation, and consequently the timing and magnitude of interest rate hikes. Further, the threat of a recession can increase the provisioning for expected loan losses beyond my expectation.

Current Market Price is Close to the Year-End Target Price

United Bankshares is offering a dividend yield of 4.2% at the current quarterly dividend rate of $0.36 per share. The earnings and dividend estimates suggest a payout ratio of 58% for 2022, which is in line with the five-year average of 61%. Therefore, the earnings outlook presents no threats to the dividend level.

I’m using the historical price-to-tangible book (“P/TB”) and price-to-earnings (“P/E”) multiples to value United Bankshares. The stock has traded at an average P/TB ratio of 1.82x in the past, as shown below.

The stock has traded at an average P/E ratio of around 13.5x in the past, as shown below.

Equally weighting the target prices from the two valuation methods gives a combined target price of $36.7 , which implies a 6.2% upside from the current market price. Adding the forward dividend yield gives a total expected return of 10.4%. As this expected return is not high enough for me, I’m maintaining a hold rating on United Bankshares.

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