UNITED BANKSHARES INC annual report, FY2023

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United Bankshares, Inc. — 2023 Form 10-K

Business and period: United Bankshares is a West Virginia financial holding company whose principal businesses are community banking and mortgage banking, primarily through United Bank. It serves markets across the Mid-Atlantic and Southeast. This annual report covers the fiscal year ended December 31, 2023; comparisons are primarily with 2022.

Financial performance and condition

  • Scale and balance sheet: Total assets were $29.93 billion, up 1.48% year over year. Loans, net of unearned income, were $21.36 billion, up 3.90%; shareholders’ equity was $4.77 billion, up 5.65%.
  • Earnings: Net income was $366.3 million, down 3.51% from $379.6 million. Diluted EPS was $2.71 versus $2.80. Return on average assets was 1.25% (1.31% in 2022); return on average equity was 7.87% (8.25%). Return on average tangible equity, a non-GAAP measure, was 13.33% versus 14.11%.
  • Net interest income and margin: GAAP net interest income rose 2.62% to $919.9 million. Tax-equivalent net interest margin increased to 3.56% from 3.50%. Average earning-asset yield rose to 5.41%, while average cost of funds rose to 2.69%; rising deposit and borrowing costs substantially offset higher asset yields.
  • Other income and expenses: Noninterest income declined 11.75% to $135.3 million, mainly reflecting lower mortgage banking income and realized securities losses. Noninterest expense was $560.2 million, up less than 1%; FDIC expense rose to $30.4 million, including a $12.0 million special assessment accrued in the fourth quarter.
  • Cash flow: Operating activities provided $435.2 million; investing activities provided $39.0 million; financing activities used $51.9 million. Cash and cash equivalents ended the year at $1.60 billion, up $422.3 million.
  • Funding and debt: Deposits were $22.82 billion, up 2.31%. Noninterest-bearing deposits fell $1.05 billion (14.59%), while interest-bearing deposits increased $1.57 billion (10.37%); time deposits over $100,000 rose 94.13%. Borrowings totaled $1.99 billion, down 15.82%, mainly after net repayment of FHLB advances. Approximately $1.50 billion of FHLB advances mature in 2024.
  • Credit quality: The allowance for loan and lease losses was $259.2 million, or 1.21% of loans, compared with $234.7 million and 1.14% in 2022. Net charge-offs were $6.7 million versus $0.1 million. Nonperforming assets were $48.1 million, down from $60.7 million; the comparison is affected by adoption of accounting guidance that changed treatment of certain restructured loans. Commercial real estate and construction loans are significant exposures: real estate and construction together represented approximately 46.4% of loans.
  • Capital and liquidity: United reported regulatory capital ratios of 15.38% total risk-based, 13.14% CET1, 13.14% Tier 1 risk-based, and 11.39% leverage, and stated that United Bank was well-capitalized. Available FHLB borrowing capacity was approximately $6.74 billion subject to collateral conditions, plus $2.67 billion without additional collateral; $2.67 billion of Federal Reserve Discount Window capacity was also available. Management said liquidity was sufficient to meet depositor and customer needs.
  • Shareholder returns: The 2023 dividend was $1.45 per share, compared with $1.44 in 2022. No shares were repurchased under the public repurchase plan during 2023; 4,371,239 shares remained available under the plan.

Material changes from 2022

  • Net income and diluted EPS declined despite higher net interest income. Credit-loss provision increased to $31.2 million from $18.8 million, while noninterest income decreased by $18.0 million.
  • Higher market rates lifted asset yields but drove a sharp increase in funding costs: interest expense rose to $481.4 million from $105.6 million. Deposit interest expense was $391.1 million versus $80.2 million.
  • Mortgage banking activity weakened: loan sales were $861.5 million versus $2.20 billion, and mortgage banking income fell to $26.6 million from $42.7 million. Lower mortgage compensation and production-related expenses helped offset this decline.
  • Available-for-sale securities declined 15.33% to $3.79 billion, reflecting sales, maturities and calls; their year-end gross unrealized losses were $363.6 million. United recorded $7.7 million of net securities losses in 2023, including a $7.24 million loss on the sale of approximately $187 million of securities.
  • Deposits increased overall, but funding composition shifted away from noninterest-bearing balances and toward interest-bearing accounts and time deposits. Borrowings fell as FHLB advances were repaid.
  • Year-end accumulated other comprehensive loss improved to $259.7 million from $332.7 million, chiefly as the fair value of available-for-sale securities recovered. Management attributed remaining securities losses primarily to interest rates, credit spreads and liquidity, and reported no 2023 credit-loss allowance on AFS securities.

Outlook, commentary and risks

  • The filing provides no specific company earnings or revenue guidance. Management said it expected to meet obligations over the next 12 months and reported no material known trend expected to change liquidity, but noted that actual results may differ from forward-looking statements.
  • United planned to consolidate George Mason and Crescent mortgage origination and sales operations with United Bank in early 2024. It exited the third-party origination business in the fourth quarter of 2023; the company said the consolidation is intended to streamline operations and improve customer experience.
  • Management’s credit-loss forecasts assumed real GDP growth of 1.4% in 2024 and 1.8% in 2025, with unemployment at 4.1% in both years. It identified greater loss risk in office loans amid hybrid and remote work, and in commercial-other and construction portfolios under weaker economic conditions.
  • Key risks include deposit competition and withdrawals, rising funding costs, interest-rate and securities-value changes, commercial real estate and office credit exposure, economic deterioration, cybersecurity and third-party service-provider disruptions, regulatory and compliance obligations, and mortgage servicing or loan repurchase claims. The bank also faces extensive regulatory oversight.
  • The FDIC special assessment was accrued in 2023, with collection expected over eight quarterly periods beginning in 2024; the amount and duration could be adjusted by the FDIC. Legal proceedings are described as arising in the ordinary course, and management, after consulting counsel, expects no material effect on financial position.
  • Ernst & Young issued unqualified opinions on the financial statements and internal control over financial reporting. Management and the auditor reported effective internal control as of year-end.

Important facts for investors to verify

  • Whether deposit repricing, time-deposit growth and reduced noninterest-bearing balances continue to pressure funding costs and net interest margin.
  • Trends in office and other commercial real estate credit, construction exposures, criticized loans, charge-offs and required credit-loss reserves.
  • Whether AFS securities unrealized losses remain interest-rate-driven and whether liquidity or balance-sheet needs could prompt further sales and realized losses.
  • Execution, cost and earnings effects of the planned mortgage-channel consolidation, including the TPO exit and the reduced mortgage-servicing portfolio.
  • Actual FDIC special-assessment expense and the status of 2024 FHLB maturities, refinancing and available collateral-dependent borrowing capacity.
  • Quarterly earnings after the fourth-quarter decline to $79.4 million and $0.59 diluted EPS, including the effect of the special FDIC assessment and higher interest expense.