United Bankshares, Inc. — Q3 2022 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2022. Unaudited consolidated results are for a bank holding company operating community banking and mortgage banking segments. Unless noted, dollar amounts below are in millions.
Business context and financial results
The December 2021 acquisition of Community Bankers Trust expanded United’s Mid-Atlantic footprint and increased its average balances. Accordingly, comparisons with 2021 reflect acquisition effects as well as changes in rates and business volumes.
| Metric | Q3 2022 | Q3 2021 | Nine months 2022 | Nine months 2021 |
|---|---|---|---|---|
| Net interest income | $240.6 | $181.6 | $647.0 | $559.1 |
| Noninterest income | $32.7 | $68.6 | $122.4 | $224.1 |
| Net interest income plus noninterest income | $273.4 | $250.2 | $769.4 | $783.1 |
| Provision for credit losses | $7.7 | ($7.8) benefit | $2.5 | ($16.6) benefit |
| Noninterest expense | $137.2 | $142.3 | $417.5 | $430.2 |
| Net income | $102.6 | $92.2 | $279.9 | $293.9 |
| Diluted earnings per share | $0.76 | $0.71 | $2.06 | $2.27 |
Financial position, liquidity and capital
- Assets and loans: Total assets were $29.05 billion, down less than 1% from year-end 2021. Net portfolio loans rose 9.3% to $19.70 billion; growth included residential real estate, construction and consumer lending. Loans held for sale declined 58.4% to $210.1 million.
- Deposits and borrowings: Deposits declined 2.1% to $22.86 billion. Total borrowings increased 52.2% to $1.44 billion, mainly because FHLB advances rose $478.6 million to $1.01 billion. United reported $7.07 billion in additional FHLB borrowing capacity, subject to collateral requirements, and $230 million in correspondent-bank lines; its separate $20 million revolving line was undrawn.
- Cash flow: For the first nine months, operating activities provided $623.8 million; investing activities used $2.82 billion, primarily reflecting loan growth and securities purchases; financing activities used $207.0 million. Cash and cash equivalents fell $2.40 billion to $1.36 billion.
- Capital: Shareholders’ equity was $4.44 billion, down 5.9% from year-end. Regulatory ratios were 14.43% risk-based capital, 12.39% Common Equity Tier 1 and Tier 1 capital, and 10.67% leverage—above the stated well-capitalized thresholds. The equity-to-assets ratio was 15.29%.
- Credit quality: Nonperforming loans and leases were $69.7 million, or 0.35% of loans, versus $90.8 million, or 0.50%, at year-end 2021. The allowance for loan and lease losses was $219.6 million, 1.11% of loans; including reserves for lending-related commitments, the allowance for credit losses was $259.3 million. Management considered it adequate.
Material changes and notable items
- Q3 net interest income increased 32.5% year over year; nine-month net interest income rose 15.7%. Management attributed growth to acquisition-related balances, organic loan growth, higher rates on earning assets and asset-mix changes. Q3 net interest margin was 3.78%, versus 2.98%; the nine-month margin was 3.38%, versus 3.14%.
- Noninterest income fell 52.3% in Q3 and 45.4% for the nine-month period, chiefly because higher rates reduced mortgage originations, secondary-market sales and margins. Mortgage banking income was $6.4 million in Q3 versus $42.0 million, and $38.1 million for nine months versus $144.4 million. The mortgage banking segment reported a Q3 loss of $3.3 million and a nine-month loss of $4.3 million.
- Q3 net income increased 11.3% year over year, but nine-month net income declined 4.8%. Lower mortgage banking income drove the year-to-date decline. Noninterest expense decreased year over year, partly due to lower mortgage-related commissions and incentives.
- Available-for-sale securities had $494.5 million of gross unrealized losses at quarter-end; the company attributed these primarily to rising interest rates and reported no related credit-loss allowance. Accumulated other comprehensive loss increased to $352.3 million, substantially reflecting the after-tax decline in securities values. Management said it intended and was able to hold the securities until recovery or maturity, while noting future sales remain possible.
- United recorded a $5 million estimated litigation liability related to a former commercial customer. Management said it was pursuing defenses and expected no material effect from litigation overall; estimates may change as matters develop.
Outlook, risks and contingencies
- No quantitative earnings or margin guidance is provided. Management stated it expects to meet obligations over the next 12 months and considers liquidity sufficient for depositors and customer credit needs.
- Management’s allowance forecasts considered inflation, supply-chain disruption, higher rates, energy prices and geopolitical risks. Its 2022 GDP forecast was revised from 1.70% to 0.20%, with unemployment projected to trend upward through 2023 and 2024.
- Interest-rate simulation estimated one-year net interest income would decline 0.50% under an immediate, sustained +100-basis-point shock and 3.97% under +200 basis points; results are model-based and depend on assumptions. Rising rates also create extension risk for mortgage-related securities.
- The bank received a “Needs to Improve” Community Reinvestment Act rating following a Fair Housing Act violation cited in the Washington, D.C. metro area; the matter is also under Department of Justice investigation. The rating restricts certain expansion, including some acquisitions and branch openings, until a higher rating. A new CRA examination began in October 2022; timing and outcome are uncertain.
- United disclosed ongoing legal proceedings and regulatory scrutiny of consumer products and fees. It also identified risks from the LIBOR transition, including financial, operational, legal, compliance and customer-reputation risks. No new LIBOR contracts were originated after December 31, 2021.
Investor verification priorities
- Track deposit balances and funding costs, including the increased reliance on FHLB advances, as rates and liquidity conditions change.
- Assess whether loan growth, credit quality and allowance levels remain consistent with the company’s economic assumptions and emerging borrower stress.
- Monitor the securities portfolio’s unrealized losses, accumulated other comprehensive loss, and any sales or capital effects.
- Evaluate mortgage banking earnings under lower origination volumes and the ongoing rate environment.
- Follow developments in the CRA rating, Fair Housing Act/DOJ matter, and the $5 million litigation accrual.