United Bankshares, Inc.

Moat: 2/5

Understandability: 3/5

Balance Sheet Health: 4/5

United Bankshares, Inc., is a regional bank holding company primarily engaged in community banking and mortgage banking activities across the Mid-Atlantic and Southeast regions of the United States.

Investor Relations Previous Earnings Calls

The moat, understandability, and balance sheet health scores reflect a conservative evaluation to ensure a margin of safety in any assessment.

United Bankshares Inc. (UBSI) is a bank holding company that faces a relatively fragmented market with intense regional and national competition. This makes building a wide economic moat difficult.

Business Overview

Revenue Distribution: UBSI generates revenue primarily through net interest income, which is the difference between the interest earned on its loans and the interest paid on its deposits. It also earns fees and commissions from various banking activities, including loan origination, mortgage servicing, and investment management. A smaller portion of income is derived from non-interest income like mortgage banking.
Industry Trends: The banking industry is currently grappling with the following issues:
- Interest rate volatility: Rapid and unpredictable shifts in interest rates are making it more difficult to project profitability and manage the mismatch between interest income and interest expense.
- Technology disruption: Fintech companies and neobanks are continuously innovating and presenting a challenge to traditional banking services with digital solutions.
- Economic Uncertainty: The economy and the possibility of a recession may lead to higher defaults and make credit losses more likely.
- Regulatory Scrutiny: Banks are subject to intense regulation, which has increased after the banking crisis of 2008, requiring them to hold more reserves, as well as more scrutiny around their lending and trading activities. The government has continued pushing for greater transparency as well.
Competitive Landscape: The banking sector is highly competitive, with regional and national banks vying for the same customers and the same revenue opportunities. This intense competition has reduced the net interest margins of banks and put pressure on their fee structures, while the proliferation of alternative lending sources continues to take a bite out of loans.
What Makes UBSI Different: While UBSI isn’t unique in any specific way, it does have a few differentiators. A strong management team, loyal base of operations, and consistent profitability, plus an adequate risk profile, could make them less susceptible to larger issues if they materialize.

Financial Analysis

Profitability: UBSI shows a consistent profitability throughout the years. However, their returns are not anything spectacular. Their ROA for the first quarter of 2024 was approximately 1%, and their ROE about 9%. These returns are reasonable, but not high enough to establish a wide moat. Also, these returns are affected by accounting conventions such as loan charge-offs.
Margins: UBSI has consistently seen its Net Interest Margin to be between 2.7% and 3.4%. While these are stable, it also signifies a lack of pricing power and can reduce the moat.
Revenue Trends: Revenue growth is relatively stable and modest. In recent years, net interest income has been rising with interest rates, but so is interest expense, making the improvement in revenue not that much, since the bank relies primarily on spread between interest rate for loans and the rates they pay for deposits, so the spread isn’t that big. The increase is not necessarily indicative of improving profitability and growth.
Debt and Leverage: In the most recent report UBSI has more than 80 percent of total assets financed with debt. This gives them a lot of leverage and has resulted in some positive returns, but the same leverage could be detrimental during economic hardships.
Capital: The company’s capital is adequate. Their common equity tier 1 ratio at the end of the first quarter of 2024 was 10.2 percent, which is significantly above the regulatory requirements.

Moat Rating: 2 / 5

UBSI has some factors that could act as a moat, like regional dominance in some markets and sticky deposits. But these factors aren’t strong enough to create a defensible economic moat.

UBSI has a narrow moat due to:

Somewhat sticky customer base: While the ease of switching between banks is low for consumers, they can still do so. Hence, its not strong enough to be categorized under Switching Costs moat category.
Local presence and customer relationships: In specific local communities, UBSI is well ingrained and is thus well-positioned to keep its customers for long. However, these customer relationships aren’t impossible for competitors to break into, given that they have a wider network.
Scale advantages: Banks that have larger assets, generate better profitability due to economies of scale, but UBSI is still smaller compared to some other national players like JP Morgan or Citigroup.
Regional Dominance: In markets such as North Carolina and the Mid-Atlantic States, UBSI has gained a decent share, and this scale and geographic location allow them to produce better revenue than some others.

The above mentioned factors do give UBSI an advantage, but not enough to protect it against the brutal competition. The fact that there are so many banks and financial institutions vying for the same customers makes it difficult for any company to have an impenetrable moat.

Risks

Several legitimate risks could harm UBSI’s moat and operations:

Interest Rate Risk: As a bank, most of their profit comes from the difference between interest rates and their returns on capital, therefore changes in interest rates, particularly from the Federal Reserve, could affect profits negatively. This is particularly true as the bank’s loan portfolio is primarily fixed-rate loans.
Credit Risk: Banks rely on the ability to pick good loans for good returns. The current economic uncertainty, combined with high debt level of some individuals, makes credit risk a clear danger. As such, any downturn in the economy can trigger a jump in non-performing loans which could hurt the bank’s results and even force them to increase their loss provisions.
Technological Disruption: The banking sector is constantly being disrupted by new Fintech companies that offer innovative new banking methods and products. It will be difficult for UBSI to keep up with constant innovation, which requires time and money to implement changes.
Regulatory Changes: Since the banking sector is highly regulated, any adverse change in regulatory norms could harm the bank’s operations. The bank also needs to follow strict regulations which limit how it can operate, and this could limit its flexibility in creating value.
Economic Recession The most significant threat to all banks is a recession, wherein the defaults and delinquencies go up and banks make losses due to credit write offs.

Business Resilience

Despite these risks, UBSI seems quite well-positioned for a few reasons:

Diversified Revenue Streams: Although net interest income is the main source of income, they also get fee income from mortgage, investing activities, and more. This can help them diversify their business model.
Disciplined Management: Management focuses on running a smooth business and not being too aggressive in their growth. They have a consistent approach to their business and this stability could help them against many threats.
Strong Capitalization: UBSI maintains a strong capitalization ratio and is well-capitalized and thus can withstand a substantial economic downturn. The Common Equity Tier 1 ratio has remained relatively consistent over the last few years, which implies that they keep taking steps to meet regulatory capital standards and maintain their overall financial health.
Regional Foothold: Being a regional bank, they are well embedded in local communities and their customers are more likely to have ties with them rather than choosing another competitor.

Understandability Rating: 3 / 5

UBSI is a fairly typical bank, with typical operations, revenues, and business model. However, the banking industry is complex as it is and has lots of nuances that are difficult to understand. Therefore, a rating of 3 is most appropriate.

Balance Sheet Health: 4 / 5

UBSI has maintained an adequate balance sheet with a decent level of capital and reasonable leverage. While they have a high level of debt, compared to the market cap, they have historically maintained a stable interest coverage ratio and the management has also consistently reduced their exposure to riskier parts of their loan portfolio which means they should be able to withstand any downturns with minimal issues. This gives them a healthy rating.

Recent Concerns/Controversies

UBSI reported a decrease in their net income to $86 million in the recent quarter, a decrease from $109 million in the previous quarter. This implies they are still facing challenges with net interest margins.
The bank also stated that the operating expense was also a contributing factor that was the reason for the low income for the quarter, but they are also implementing policies that could help reduce their costs in future.
UBSI’s stock is currently at about a 4-year low price. However, management did not comment on stock price fluctuation, but on their long term prospects, which are still strong, in their opinion.
The Federal Reserve has maintained a high rate of interest to tackle inflation. Although UBSI’s operations improve when interest rates rise, they are also cognizant of the increased risks of their portfolio in times of high interest rates.
Management did not comment directly on the future profitability. However, they stated that they were well-positioned to make use of the new interest rate environment and continue to deliver to the shareholders over the long term. They also mentioned that the current market situation is temporary and will return to normal once market dynamics change.
Overall, management seemed very confident in the company’s strategic position and their ability to make their way through any future challenges, while generating value for the investors.