United Bankshares: Post-Merger Growth and Balance Sheet Resilience (UBSI) - UBSI Stock Research Report

## Executive Summary / Key Takeaways * United Bankshares, Inc. (UBSI) has significantly expanded its footprint and asset base through the recent acquisition of Piedmont Bancorp, Inc., driving substantial growth in loans and deposits. * The merger has positively impacted net interest income and margin, primarily due to increased earning assets and favorable funding costs, despite initial acquisition-related expenses weighing on net income. * UBSI maintains a strong capital position, well exceeding regulatory requirements, providing a solid foundation for continued growth and shareholder returns, including a consistent dividend history. * While asset quality remains a focus, particularly concerning potential risks in the office real estate portfolio and broader economic uncertainties, the company's allowance for credit losses is managed through detailed modeling and qualitative adjustments. * UBSI's strategic focus includes leveraging its expanded community banking network, managing interest rate risk through disciplined balance sheet management, and enhancing digital service offerings to compete effectively in its diverse markets. ## Setting the Scene: A Growing Regional Force United Bankshares, Inc. stands as a prominent regional bank holding company, primarily operating through its subsidiary, United Bank. With a history stretching back over 50 years, marked by a notable record of consecutive annual dividend increases, UBSI has built its franchise through a blend of organic growth and strategic acquisitions across the Mid-Atlantic and Southeast United States. The company's core business revolves around community banking, offering a comprehensive suite of financial products and services, including deposit accounts, a variety of loan products (commercial, real estate, consumer), mortgage banking, and ancillary services like trust and brokerage. UBSI's strategic approach has historically centered on disciplined growth, a strong emphasis on credit quality, and cultivating core deposit relationships to ensure a stable and low-cost funding base. This strategy has been complemented by targeted branch expansion in attractive markets, such as the additions in Virginia and Maryland in recent years, aimed at enhancing its retail presence and deposit gathering capabilities. A pivotal moment in the company's recent history was the consummation of the Piedmont Bancorp, Inc. acquisition on January 10, 2025. This merger brought sixteen additional locations in Georgia under the United Bank umbrella, significantly expanding UBSI's geographic footprint and scale. The transaction, accounted for under the acquisition method, immediately added approximately $2.30 billion in total assets, including $2.08 billion in loans and $2.11 billion in deposits, fundamentally reshaping UBSI's balance sheet and operational scope. The strategic rationale cited for the merger underscores the pursuit of expected synergies and potential earnings enhancements from the combined entity. In the competitive landscape, UBSI operates alongside a mix of larger regional banks like Truist Financial (TICKER:TFC), PNC Financial Services Group (TICKER:PNC), Fifth Third Bancorp (TICKER:FITB), and Regions Financial Corporation (TICKER:RF), as well as numerous smaller community banks and increasingly, fintech firms. While larger peers often possess advantages in scale and advanced digital infrastructure, UBSI leverages its extensive branch network and community-focused model to foster strong customer loyalty. Competition for both loans and deposits remains keen across its markets, with pricing and terms often aggressive, particularly in commercial real estate lending. Management has noted instances of "irrational pricing" from some peers, emphasizing UBSI's commitment to maintaining pricing and structure discipline over simply chasing growth volume. The ability to attract and retain low-cost core deposits is particularly critical in this environment, and UBSI's branch strategy and focus on relationship banking are key competitive responses. Regarding technological differentiation, UBSI's focus is on providing a full range of services through various delivery channels, including an "upgraded... digital platform" and efforts to expand its "digital bank platform, with a very distinct and readily usable identity." While specific proprietary technologies or quantifiable performance metrics demonstrating a unique technological moat are not detailed, the strategic intent is clearly to enhance customer access and operational efficiency through digital means. The competitive analysis suggests that while UBSI is investing in digital capabilities, it may lag some larger peers in terms of digital efficiency and innovation speed, potentially resulting in higher operating costs per transaction compared to more technologically advanced rivals. The company's approach appears to be centered on adopting and integrating standard, effective banking technologies to support its community banking model and compete on service and convenience across its physical and digital channels. ## Performance Reflecting Strategic Expansion and Market Dynamics The first quarter of 2025 provides the initial glimpse into UBSI's performance following the Piedmont acquisition, and the results clearly reflect the transformative impact of the merger. Net income for Q1 2025 stood at $84.31 million, a decrease from $86.81 million in Q1 2024 and $94.41 million in Q4 2024. This decline, however, is largely attributable to significant acquisition-related costs totaling $30.04 million recognized in the quarter, including an $18.73 million provision for credit losses on purchased non-PCD loans from Piedmont. Excluding these one-time costs provides a clearer picture of the underlying operational performance of the combined entity. Net interest income, the core earnings engine, saw substantial growth, increasing by $37.57 million, or 16.88%, from $222.49 million in Q1 2024 to $260.06 million in Q1 2025. This expansion was primarily fueled by a significant increase in average earning assets, which grew by $2.48 billion (9.51%) year-over-year, largely due to the acquired Piedmont loan and investment portfolios. Average net loans alone increased by $1.94 billion (9.14%). Contributing to the improved net interest margin was a 31 basis point decrease in the average cost of funds compared to Q1 2024, driven by lower costs on average interest-bearing deposits and short-term borrowings. The net interest margin expanded to 3.69% in Q1 2025, up from 3.44% in Q1 2024 and 3.49% in Q4 2024, benefiting from both asset growth and lower funding costs. Acquired loan accretion income also provided a notable boost, contributing $5.99 million to interest income in Q1 2025, compared to $2.51 million in Q1 2024. Noninterest income experienced a decrease, falling by $2.66 million (8.25%) from $32.21 million in Q1 2024 to $29.55 million in Q1 2025. This was primarily driven by a significant decline in income from mortgage banking activities, reflecting lower origination and sale volumes ($2.48 million in Q1 2025 vs. $5.30 million in Q1 2024), and the absence of mortgage loan servicing income following the sale of the servicing portfolio in the latter half of 2024. Partially offsetting these declines was an increase in income from bank-owned life insurance, benefiting from death proceeds and policies acquired from Piedmont. Noninterest expense saw a considerable increase of $12.83 million (9.12%), rising from $140.74 million in Q1 2024 to $153.57 million in Q1 2025. As noted, this was largely due to $11.31 million in merger-related expenses. Beyond merger costs, increases were seen in employee compensation (due to acquired employees and merger-related expenses), equipment expense, data processing expense (reflecting the larger operational scale), the reserve for unfunded commitments (including those acquired from Piedmont), consulting fees, and core deposit intangible amortization. The decrease in FDIC insurance expense provided a partial offset, due to a prior period assessment accrual in Q1 2024. Overall, while Q1 2025 net income was impacted by acquisition costs, the underlying revenue generation, particularly net interest income, demonstrates the immediate scale benefits of the Piedmont merger.

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## Balance Sheet Strength and Credit Quality Management UBSI's balance sheet reflects the impact of the Piedmont acquisition, with total assets increasing by $2.76 billion (9.21%) from $30.02 billion at year-end 2024 to $32.79 billion at March 31, 2025. This growth was broad-based, with significant increases in portfolio loans ($2.19 billion, or 10.10%), cash and cash equivalents, investment securities, and goodwill. The loan portfolio composition at March 31, 2025, shows a diversified mix, including substantial commercial real estate (owner-occupied and nonowner-occupied), other commercial, residential real estate, and construction and land development loans. The Piedmont acquisition contributed significantly to the growth across most loan categories. Credit quality remains a key focus, managed through ongoing monitoring, risk categorization, and a comprehensive allowance for credit losses (ACL) methodology. Nonperforming assets totaled $71.25 million at March 31, 2025, a slight decrease from $73.73 million at December 31, 2024. The ratio of the allowance for loan and lease losses to nonperforming loans stood at a robust 444.89% at March 31, 2025, up from 370.36% at year-end 2024, indicating strong coverage. The ACL increased by $38.58 million (14.19%) from year-end 2024 to $310.42 million at March 31, 2025. This increase was primarily driven by the initial allowance recorded for loans acquired from Piedmont ($18.73 million for non-PCD and $17.52 million for PCD loans). Beyond the acquisition impact, increases in the allowance were seen across commercial real estate, residential real estate, and construction segments, reflecting increased outstanding balances and adjustments from the reasonable and supportable forecast. Management's qualitative adjustments to the ACL consider current conditions, including government efficiency efforts, potential tariffs, economic and business conditions, collateral values, and concentrations of credit. The economic forecast assumptions used in the models were adjusted in Q1 2025, with a slight downward revision to projected real GDP growth for 2025 and a slight upward shift in the unemployment rate forecast for 2025. Management specifically highlighted "Greater risk of loss in the office portfolio due to continued hybrid and remote work that may be exacerbated by future economic conditions," which factored into their analysis. An individually evaluated United-originated office loan also required an increased allocation due to specific collection concerns. The investment securities portfolio, while experiencing unrealized losses ($286.60 million at March 31, 2025) primarily due to rising interest rates and market conditions, is not deemed credit impaired by management, who asserts the intent and ability to hold these securities to recovery or maturity. The portfolio includes a significant allocation to agency mortgage-backed securities and state and political subdivision securities. Management actively monitors potential extension risk in the mortgage-related securities portfolio in a rising rate environment, noting that their fixed-rate CMOs are projected to have moderate extension risk. ## Liquidity and Robust Capital Position UBSI maintains a strong liquidity position, deemed sufficient by management to meet depositor and borrower needs. Key sources of funding include a substantial and growing base of core deposits, supplemented by access to wholesale funding markets through repurchase agreements and Federal Home Loan Bank (FHLB) advances. As of March 31, 2025, UBSI had significant unused borrowing capacity at the FHLB (approximately $8.14 billion) and unused lines of credit from correspondent banks ($280.00 million). The company also has access to the FRB Discount Window ($4.59 billion capacity). Cash and cash equivalents increased significantly in Q1 2025, reaching $2.61 billion, supported by net cash provided by operating and financing activities. The increase in interest-bearing deposits held at the Federal Reserve Bank reflects the influx of deposits, particularly from the Piedmont acquisition, and strategic balance sheet management.

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UBSI's capital position is robust and comfortably exceeds the minimum requirements to be considered "well-capitalized" by regulatory standards. At March 31, 2025, the company's Risk-based capital ratio was 15.69%, Common Equity Tier 1 capital was 13.26%, Tier 1 capital was 13.26%, and the Leverage ratio was 11.32%. Total shareholders equity increased by $321.23 million (6.43%) from year-end 2024, primarily driven by the issuance of 7.86 million shares for the Piedmont acquisition ($280.95 million) and retained earnings ($30.97 million). The increase in Accumulated Other Comprehensive Income also contributed, mainly due to an improvement in the fair value of available for sale securities.

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The company continues its commitment to shareholder returns. A cash dividend of $0.37 per share was declared for Q1 2025, representing a 6.22% increase in total dividends declared compared to Q1 2024. UBSI also actively repurchased shares during the quarter, acquiring 567,405 shares at an average price of $34.93.

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## Strategic Outlook and Risk Considerations UBSI's strategic outlook is centered on integrating the Piedmont acquisition, leveraging the expanded market presence, and driving operational efficiencies to enhance profitability. The goodwill recognized in the Piedmont merger reflects the expected synergies and potential earnings from the combination, which management aims to realize. The amortization of acquired core deposit intangibles will continue to impact noninterest expense over the next decade, with anticipated expenses of $9.363 million in 2025 and declining thereafter. Management anticipates meeting its obligations over the next 12 months and has no material capital expenditure commitments currently planned. The company's earnings sensitivity analysis indicates that its balance sheet is positioned to benefit from rising interest rates, with estimated increases in net interest income under upward rate shock scenarios, while downward shocks are projected to have a more limited negative impact, all within Board-approved policy limits. This positioning is a direct result of ongoing asset-liability management strategies. Key risks that could impact UBSI's performance include general economic, political, and market conditions, particularly changes in interest rates and inflation. Credit risk remains paramount, influenced by asset quality trends, concentrations (including the noted risk in the office portfolio), and the effectiveness of credit loss modeling under various economic forecasts. Regulatory changes, including potential requirements for higher capital levels or enforcement actions related to consumer products, also pose risks. Operational and technological risks, including cybersecurity threats, are inherent in the banking business. While the Piedmont integration is expected to yield synergies, execution risk associated with combining operations and retaining customers/employees exists. Despite these risks, UBSI's history of disciplined growth, focus on core deposits, strong capital position, and strategic expansion through M&A provide a foundation for navigating the current environment and pursuing future opportunities. ## Conclusion United Bankshares, Inc. has embarked on a new chapter marked by significant expansion through the Piedmont acquisition, reinforcing its position as a leading regional community bank. The first quarter of 2025 results demonstrate the immediate scale benefits, particularly in driving net interest income growth and expanding the margin, albeit with the expected impact of merger-related costs on near-term earnings. UBSI's balance sheet strength, characterized by robust capital ratios and ample liquidity, provides a solid foundation for absorbing potential economic headwinds and supporting future initiatives. While credit quality requires diligent management, especially in light of evolving economic forecasts and specific portfolio risks like office real estate, the company's proactive approach to the allowance for credit losses and strong coverage ratios offer reassurance. The strategic focus on integrating acquired operations, maintaining core deposit strength, and enhancing digital capabilities positions UBSI to compete effectively. For investors, UBSI represents a well-capitalized regional bank with a demonstrated commitment to growth and shareholder returns, underpinned by a long history of dividend consistency, making it a compelling consideration in the current banking landscape.