Item 2. Management’s Discussion and Analysis
Item 2.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
FORWARD-LOOKING STATEMENTS
Congress passed the Private Securities Litigation Act of 1995 to encourage corporations to provide investors with information about the company’s anticipated future financial performance, goals, and strategies. The act provides a safe haven for such disclosure; in other words, protection from unwarranted litigation if actual results are not the same as management expectations.
United desires to provide its shareholders with sound information about past performance and future trends. Consequently, any forward-looking statements contained in this report, in a report incorporated by reference to this report, or made by management of United in this report, in any other reports and filings, in press releases and in oral statements, involve numerous assumptions, risks and uncertainties. Forward-looking statements can be identified by the use of the words “expect,” “may,” “could,” “intend,” “project,” “estimate,” “believe,” “anticipate,” and other words of similar meaning. Such forward-looking statements are based on assumptions and estimates, which although believed to be reasonable, may turn out to be incorrect, such as statements about the potential impacts of the COVID-19 pandemic. Therefore, undue reliance should not be placed upon these estimates and statements. United cannot assure that any of these statements, estimates, or beliefs will be realized and actual results may differ from those contemplated in these “forward-looking statements.” United undertakes no obligation to publicly update any forward-looking statements, whether as a result of new information, future events, or otherwise.
CORONAVIRUS (“COVID-19”) PANDEMIC
During 2020, and to a lesser extent in 2021, the COVID-19 pandemic had a severe disruptive impact on the U.S. and global economy. As the pandemic is ongoing and dynamic in nature, there are many uncertainties related to COVID-19 including, among other things, the ongoing impact to our customers, employees and vendors; the impact to the financial services and banking industry; and the impact to the economy as a whole as well as the effect of actions taken, or that may yet be taken,
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or inaction by governmental authorities to contain the outbreak or to mitigate its impact (both economic and health-related). Refer to our 2021 Form 10-K for further information regarding (i) the impact of the COVID-19 pandemic on our operations and our results thereof, as well as the impact on our financial position and (ii) legislative and regulatory actions taken related to the COVID-19 pandemic, particularly as they relate to the banking and financial services industry.
As the COVID-19 pandemic continues to be on-going, there continues to be uncertainties related to its magnitude, duration and persistent effects. This is particularly the case with the emergence, contagiousness and threat of new and different strains of the virus as well as the availability, acceptance and effectiveness of vaccines. However, United is currently unable to fully assess or predict the extent of the effects of COVID-19 on its operations and results in the future as the ultimate impact will depend on factors that are currently unknown and/or beyond our control.
ACQUISITION
On December 3, 2021, United acquired 100% of the outstanding common stock of Community Bankers Trust Corporation (“Community Bankers Trust”), a Virginia corporation headquartered in Richmond, Virginia. Immediately following the Merger, Essex Bank, a wholly-owned subsidiary of Community Bankers Trust, merged with and into United Bank, a wholly-owned subsidiary of United. United Bank survived the Bank Merger and continues to exist as a Virginia banking corporation. The acquisition of Community Bankers Trust enhanced United’s existing presence in the DC Metro MSA and took United into new markets including Baltimore, Annapolis, Lynchburg, Richmond, and the Northern Neck of Virginia. It also strategically connected our Mid-Atlantic and Southeast footprints. The Community Bankers Trust merger was accounted for under the acquisition method of accounting. At consummation, Community Bankers Trust had assets of $1.79 billion, loans and leases, net of unearned income of $1.28 billion and deposits of $1.52 billion.
The results of operations of Community Bankers Trust are included in the consolidated results of operations from its date of acquisition. As a result of the Community Bankers Trust acquisitions, the third quarter and first nine months of 2022 were impacted by increased levels of average balances, income, and expense as compared to the third quarter and first nine months of 2021.
TRANSITION FROM THE LONDON INTERBANK OFFERED RATE (LIBOR)
In 2017, the United Kingdom’s Financial Conduct Authority, which regulates LIBOR, publicly announced its intention to stop persuading or compelling banks to submit the rates used to calculate LIBOR after 2021. ICE Benchmark Administration (the publisher of LIBOR) discontinued publication of the one-week and two-month U.S. Dollar LIBOR settings on December 31, 2021, and plans to discontinue publication of overnight, one-month, three-month, six-month, and twelve-month U.S. Dollar LIBOR settings on June 30, 2023. It is assumed that LIBOR will either cease to be provided by any administrator or will no longer be representative of an acceptable market benchmark after these respective dates. Additionally, the Federal Reserve Board, the Office of the Comptroller of the Currency, and the Federal Deposit Insurance Corporation have issued joint supervisory guidance encouraging banks to cease entering into any new contracts using LIBOR by December 31, 2021. Accordingly, United took steps to ensure compliance with the joint supervisory guidance, and no new contracts using LIBOR have been originated after December 31, 2021.
Working groups comprised of various regulators and other industry groups have been formed in the United States and other countries in order to provide guidance on this topic. In particular, the Alternative Reference Rates Committee (“ARRC”) has been formed in the United States by the Federal Reserve Board and the Federal Reserve Bank of New York. The ARRC has identified the Secured Overnight Financing Rate (“SOFR”) as its preferred alternative reference rate for U.S. Dollar LIBOR. The ARRC has also published recommended fall-back language for LIBOR-linked financial instruments, among numerous other areas of guidance. At this time, however, it is unclear to what extent these recommendations will be broadly accepted by industry participants, whether they will continue to evolve, and what other alternatives may be adopted by the broader markets that utilize LIBOR as a reference rate. United has formed a project team comprised of individuals across various lines of business throughout the company to identify risks, monitor market developments, evaluate replacement benchmark alternatives, and manage the company’s transition away from LIBOR. At this time, United is prioritizing SOFR and Prime as the preferred alternatives to LIBOR; however, these preferred alternatives could change over time based on market developments.
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United has loans, derivative contracts, borrowings, and other financial instruments that are directly or indirectly dependent on LIBOR. The transition from LIBOR will cause changes to payment calculations for existing contracts that use LIBOR as the reference rate. These changes will create various risks surrounding the financial, operational, compliance and legal aspects associated with changing certain elements of existing contracts. United will also be subject to risks surrounding changes to models and systems that currently use LIBOR reference rates, as well as market and strategic risks that could arise from the use of alternative reference rates. Additionally, United could face reputational risks if this transition is not managed appropriately with its customers. While the full impact of the transition is not yet known, failure to adequately manage the transition could have a material adverse effect on our business, financial condition and results of operations.
INTRODUCTION
The following discussion and analysis presents the significant changes in financial condition and the results of operations of United and its subsidiaries for the periods indicated below. This discussion and the unaudited consolidated financial statements and the notes to unaudited Consolidated Financial Statements include the accounts of United Bankshares, Inc. and its wholly-owned subsidiaries, unless otherwise indicated. Management has evaluated all significant events and transactions that occurred after September 30, 2022, but prior to the date these financial statements were issued, for potential recognition or disclosure required in these financial statements.
This discussion and analysis should be read in conjunction with the unaudited Consolidated Financial Statements and accompanying notes thereto, which are included elsewhere in this document.
USE OF NON-GAAP FINANCIAL MEASURES
This discussion and analysis contains certain financial measures that are not recognized under GAAP. Under SEC Regulation G, public companies making disclosures containing financial measures that are not in accordance with GAAP must also disclose, along with each “non-GAAP” financial measure, certain additional information, including a reconciliation of the non-GAAP financial measure to the closest comparable GAAP financial measure, as well as a statement of the company’s reasons for utilizing the non-GAAP financial measure.
Generally, United has presented a non-GAAP financial measure because it believes that this measure provides meaningful additional information to assist in the evaluation of United’s results of operations or financial position. Presentation of a non-GAAP financial measure is consistent with how United’s management evaluates its performance internally and this non-GAAP financial measure is frequently used by securities analysts, investors and other interested parties in the evaluation of companies in the banking industry. Specifically, this discussion contains certain references to financial measures identified as tax-equivalent (“FTE”) net interest income and return on average tangible equity. Management believes these non-GAAP financial measures to be helpful in understanding United’s results of operations or financial position.
Net interest income is presented in this discussion on a tax-equivalent basis. The tax-equivalent basis adjusts for the tax-favored status of income from certain loans and investments. Although this is a non-GAAP measure, United’s management believes this measure is more widely used within the financial services industry and provides better comparability of net interest income arising from taxable and tax-exempt sources. United uses this measure to monitor net interest income performance and to manage its balance sheet composition.
Average tangible equity is calculated as GAAP total shareholders’ equity minus total intangible assets. Tangible equity can thus be considered a more conservative valuation of the company. When considering net income, a return on average tangible equity can be calculated. Management provides a return on average equity to facilitate the understanding of as well as to assess the quality and composition of United’s capital structure. This measure, along with others, is used by management to analyze capital adequacy and performance.
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However, this non-GAAP information should be considered supplemental in nature and not as a substitute for related financial information prepared in accordance with GAAP. Where the non-GAAP financial measure is used, the comparable GAAP financial measure, as well as reconciliation to that comparable GAAP financial measure, as well as a statement of the company’s reasons for utilizing the non-GAAP financial measure, can be found within this discussion and analysis. Investors should recognize that United’s presentation of this non-GAAP financial measure might not be comparable to a similarly titled measure at other companies.
APPLICATION OF CRITICAL ACCOUNTING POLICIES
The accounting and reporting policies of United conform with U.S. generally accepted accounting principles. In preparing the consolidated financial statements, management is required to make estimates, assumptions and judgments that affect the amounts reported in the financial statements and accompanying notes. These estimates, assumptions and judgments, which are reviewed with the Audit Committee of the Board of Directors, are based on information available as of the date of the financial statements. Actual results could differ from these estimates. These policies, along with the disclosures presented in the financial statement notes and in this financial review, provide information on how significant assets and liabilities are valued in the financial statements and how those values are determined. Based on the valuation techniques used and the sensitivity of financial statement amounts to the methods, assumptions, and estimates underlying those amounts, management has identified the determination of the allowance for loan and lease losses, the calculation of the income tax provision, and the use of fair value measurements to account for certain financial instruments to be the accounting areas that require the most subjective or complex judgments, and as such could be most subject to revision as new information becomes available.
United’s critical accounting policies involving the significant judgments and assumptions used in the preparation of the Consolidated Financial Statements as of September 30, 2022 were unchanged from the policies disclosed in United’s Annual Report on Form 10-K for the year ended December 31, 2021 within the section “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”
FINANCIAL CONDITION
United’s total assets as of September 30, 2022 were $29.05 billion, which was a decrease of $280.43 million or less than 1% from December 31, 2021. This decrease was mainly due to a decrease of $2.40 billion or 63.91% in cash and cash equivalents and a decrease of $294.34 million or 58.35% in loans held for sale. These decreases in assets were partially offset by an increase of $627.95 million or 14.62% in investment securities and an increase of $1.68 billion or 9.30% in portfolio loans and leases. Total liabilities were flat from year-end 2021, decreasing $1.89 million or less than 1%. Deposits decreased $486.89 million or 2.09%, accrued expenses and other liabilities decreased $8.85 million or 4.52% and the operating lease liability decreased $7.96 million or 9.17%. Mostly offsetting these decreases in liabilities was a $493.55 million or 52.16% increase in borrowings and an increase of $8.26 million in the allowance for lending-related commitments. Shareholders’ equity decreased $278.54 million or 5.90%.
The following discussion explains in more detail the changes in financial condition by major category.
Cash and Cash Equivalents
Cash and cash equivalents at September 30, 2022 decreased $2.40 billion or 63.91% from year-end 2021. In particular, interest-bearing deposits with other banks decreased $2.44 billion or 70.27% as United placed less cash in an interest-bearing account with the Federal Reserve. Partially offsetting this decrease in cash and cash equivalents was a $39.44 million or 13.94% increase in cash and due from banks. Federal funds sold increased $140 thousand or 15.10%. During the first nine months of 2022, net cash of $623.77 million was provided by operating activities while net cash of $2.82 billion and $206.95 million were used in investing and financing activities, respectively. See the unaudited Consolidated Statements of Cash Flows for data on cash and cash equivalents provided and used in operating, investing and financing activities for the first nine months of 2022 and 2021.
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Securities
Total investment securities at September 30, 2022 increased $627.95 million or 14.62%. Securities available for sale increased $605.39 million or 14.97%. This change in securities available for sale reflects $1.57 billion in purchases, $448.02 million in sales, maturities and calls of securities and a decrease of $505.57 million in market value. The majority of the purchase activity was related to securities of the U.S. Treasury and obligations of U.S. Government corporations and agencies, mortgage-backed securities, and asset-backed securities. Securities held to maturity were flat from year-end 2021. Equity securities were $7.31 million at September 30, 2022, a decrease of $5.09 million or 41.04% due mainly to sales. Other investment securities increased $27.65 million or 11.54% from year-end 2021 due to purchases of Federal Home Loan Bank (“FHLB”) and Federal Reserve Bank (“FRB”) stock as well as investment tax credits.
The following table summarizes the changes in the available for sale securities since year-end 2021:
September 30
December 31
(Dollars in thousands)
2022
2021
$ Change
% Change
U.S. Treasury securities and obligations of U.S. Government corporations and agencies
$
530,390
$
81,850
$
448,540
548.00
%
State and political subdivisions
702,454
847,298
(144,844
)
(17.09
%)
Mortgage-backed securities
1,917,459
1,828,244
89,215
4.88
%
Asset-backed securities
930,584
656,572
274,012
41.73
%
Single issue trust preferred securities
16,099
16,811
(712
)
(4.24
%)
Corporate securities
551,101
611,924
(60,823
)
(9.94
%)
Total available for sale securities, at fair value
$
4,648,087
$
4,042,699
$
605,388
14.97
%
The following table summarizes the changes in the held to maturity securities since year-end 2021:
September 30
December 31
(Dollars in thousands)
2022
2021
$ Change
% Change
State and political subdivisions
$
981
(1)
$
981
(1)
$
0
0.00
%
Other corporate securities
20
20
0
0.00
%
Total held to maturity securities, at amortized cost
$
1,001
$
1,001
$
0
0.00
%
(1)
net of allowance for credit losses of $19 thousand.
At September 30, 2022, gross unrealized losses on available for sale securities were $494.53 million. Securities with the most significant gross unrealized losses at September 30, 2022 consisted primarily of agency residential mortgage-backed securities, state and political subdivision securities, agency commercial mortgage-backed securities, asset-backed securities and other corporate securities.
As of September 30, 2022, United’s available for sale mortgage-backed securities had an amortized cost of $2.19 billion, with an estimated fair value of $1.92 billion. The portfolio consisted primarily of $1.42 billion in agency residential mortgage-backed securities with a fair value of $1.22 billion, $122.07 million in non-agency residential mortgage-backed securities with an estimated fair value of $112.88 million, and $656.64 million in commercial agency mortgage-backed securities with an estimated fair value of $589.06 million.
As of September 30, 2022, United’s available for sale state and political subdivisions securities had an amortized cost of $827.08 million, with an estimated fair value of $702.45 million. The portfolio relates to securities issued by various municipalities located throughout the United States, and no securities within the portfolio were rated below investment grade as of September 30, 2022.
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As of September 30, 2022, United’s available for sale corporate securities had an amortized cost of $1.57 billion, with an estimated fair value of $1.50 billion. The portfolio consisted of $17.33 million in single issue trust preferred securities with an estimated fair value of $16.10 million. In addition to the single issue trust preferred securities, the Company held positions in various other corporate securities, including asset-backed securities with an amortized cost of $961.94 million and a fair value of $930.58 million and other corporate securities, with an amortized cost of $592.13 million and a fair value of $551.10 million.
United’s available for sale single issue trust preferred securities had a fair value of $16.10 million as of September 30, 2022. Of the $16.10 million, $7.72 million or 47.94% were investment grade; $2.94 million or 18.24% were split rated; and $5.44 million or 33.82% were unrated. The two largest exposures accounted for 77.30% of the $16.10 million. These included Truist Bank at $7.00 million and Emigrant Bank at $5.44 million. All single issue trust preferred securities are currently receiving full scheduled principal and interest payments.
During the third quarter of 2022, United did not recognize any credit losses on its available for sale investment securities. Management does not believe that any individual security with an unrealized loss as of September 30, 2022 is impaired. United believes the decline in value resulted from changes in market interest rates, credit spreads and liquidity, not a deterioration of credit. Based on a review of each of the securities in the available for sale investment portfolio, management concluded that it was more likely than not that it would be able to realize the cost basis investment and appropriate interest payments on such securities. United has the intent and the ability to hold these securities until such time as the value recovers or the securities mature. As of September 30, 2022, there was no allowance for credit losses related to the Company’s available for sale securities. However, United acknowledges that any securities in an unrealized loss position may be sold in future periods in response to significant, unanticipated changes in asset/liability management decisions, unanticipated future market movements or business plan changes.
Further information regarding the amortized cost and estimated fair value of investment securities, including remaining maturities as well as a more detailed discussion of management’s impairment analysis, is presented in Note 3 to the unaudited Notes to Consolidated Financial Statements.
Loans held for sale
Loans held for sale were $210.08 million at September 30, 2022, a decrease of $294.34 million or 58.35% from year-end 2021. Loan sales in the secondary market exceeded originations during the first nine months of 2022. Loan originations for the first nine months of 2022 were $1.76 billion while loans sales were $2.06 billion.
Portfolio Loans
Loans, net of unearned income, increased $1.68 billion or 9.30%. Since year-end 2021, commercial, financial and agricultural loans increased $158.13 million or 1.42%. In particular, commercial real estate loans increased $82.77 million or 1.08% while commercial loans (not secured by real estate) increased $75.36 million or 2.18%. Construction and land development loans increased $609.95 million or 30.28%, residential real estate loans increased $699.19 million or 18.94%, and consumer loans increased $203.91 million or 17.10% due to an increase in indirect automobile financing.
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The following table summarizes the changes in the major loan classes since year-end 2021:
September 30
December 31
(Dollars in thousands)
2022
2021
$ Change
% Change
Loans held for sale
$
210,075
$
504,416
$
(294,341
)
(58.35
%)
Commercial, financial, and agricultural:
Owner-occupied commercial real estate
$
1,748,357
$
1,733,176
$
15,181
0.88
%
Nonowner-occupied commercial real estate
6,024,873
5,957,288
67,585
1.13
%
Other commercial loans
3,537,722
3,462,361
75,361
2.18
%
Total commercial, financial, and agricultural
$
11,310,952
$
11,152,825
$
158,127
1.42
%
Residential real estate
4,390,748
3,691,560
699,188
18.94
%
Construction & land development
2,624,117
2,014,165
609,952
30.28
%
Consumer:
Bankcard
8,660
8,913
(253
)
(2.84
%)
Other consumer
1,388,008
1,183,844
204,164
17.25
%
Total gross loans
$
19,722,485
$
18,051,307
$
1,671,178
9.26
%
Less: Unearned income
(22,405
)
(27,659
)
5,254
(19.00
%)
Total Loans, net of unearned income
$
19,700,080
$
18,023,648
$
1,676,432
9.30
%
For a further discussion of loans see Note 4 to the unaudited Notes to Consolidated Financial Statements.
Other Assets
Other assets increased $101.88 million or 44.00% from year-end 2021 as a result of a $109.47 million increase in deferred tax assets due to a decrease in the fair value of available-for-sale securities. Partially offsetting this increase were decreases of $1.25 million in income tax receivable due to timing differences, a $4.04 million in other real estate owned properties (“OREO”) due to sales and write downs, and $4.14 million in core deposit intangibles due to amortization.
Deposits
Deposits represent United’s primary source of funding. Total deposits at September 30, 2022 decreased $486.89 million or 2.09%. In terms of composition, noninterest-bearing deposits increased $122.26 million or 1.63% while interest-bearing deposits decreased $609.15 million or 3.84% from December 31, 2021.
Noninterest-bearing deposits, which consist of noninterest-bearing demand deposit and noninterest-bearing money market (“MMDA”) account balances, increased $122.26 million from year-end 2021 due to a $228.26 million increase in commercial noninterest-bearing deposits.
Interest-bearing deposits consist of interest-bearing transaction accounts, regular savings, interest-bearing MMDA, and time deposit account balances. Interest-bearing transaction accounts increased $100.70 million or 1.93% since year-end 2021 as the result of an increase of $132.53 million in nonpersonal interest-bearing transaction accounts partially offset by a $72.95 million decrease in personal interest-bearing transaction accounts. Regular savings accounts increased $100.26 million or 6.11% mainly as a result of a $89.52 million increase in personal savings accounts and a $10.04 million increase in commercial savings accounts. Interest-bearing MMDAs decreased $160.41 million or 2.52%. In particular, commercial MMDAs decreased $176.66 million, brokered MMDAs decreased $31.85 million, and public funds MMDAs decreased $15.00 million while personal MMDAs increased $63.10 million.
Time deposits under $100,000 decreased $166.66 million or 16.16% from year-end 2021. This decrease in time deposits under $100,000 was the result of a $162.70 million decrease in fixed rate Certificates of Deposits (“CDs”) under $100,000 and a $5.31 million decrease in CDs under $100,000 obtained through the use of deposit listing services.
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Since year-end 2021, time deposits over $100,000 decreased $483.04 million or 30.17% as fixed rate CDs decreased $378.23 million, CDARS over $100,000 decreased $43.01 million, public funds CDs over $100,000 decreased $50.79 million, and brokered certificates of deposits decreased $10.52 million.
The table below summarizes the changes by deposit category since year-end 2021:
September 30
December 31
(Dollars in thousands)
2022
2021
$ Change
% Change
Noninterest-bearing accounts
$
7,618,823
$
7,496,560
(1)
$
122,263
1.63
%
Interest-bearing transaction accounts
5,319,043
5,218,342
(1)
100,701
1.93
%
Regular savings
1,741,664
1,641,404
100,260
6.11
%
Money market accounts
6,201,478
6,361,887
(160,409
)
(2.52
%)
Time deposits under $100,000
864,348
1,031,008
(166,660
)
(16.16
%)
Time deposits over $100,000 (1)
1,118,021
1,601,062
(483,041
)
(30.17
%)
Total deposits
$
22,863,377
$
23,350,263
$
(486,886
)
(2.09
%)
(1)
For December 31, 2021, $1,483,987 was reclassed from noninterest-bearing accounts to interest-bearing transaction accounts.
(2)
Includes time deposits of $250,000 or more of $405,717 and $640,752 at September 30, 2022 and December 31, 2021, respectively.
Borrowings
Total borrowings at September 30, 2022 increased $493.55 million or 52.16% since year-end 2021. During the first nine months of 2022, short-term borrowings increased $13.63 million or 10.58% due to an increase in securities sold under agreements to repurchase. Long-term borrowings increased $479.91 million or 58.71% from year-end 2021 due to an increase in FHLB advances of $478.65 million.
The table below summarizes the change in the borrowing categories since year-end 2021:
September 30
December 31
(Dollars in thousands)
2022
2021
$ Change
% Change
Short-term securities sold under agreements to repurchase
$
142,476
$
128,844
$
13,632
10.58
%
FHLB advances
1,010,846
532,199
478,647
89.94
%
Subordinated debt
9,887
9,872
15
0.15
%
Issuances of trust preferred capital securities
276,575
275,323
1,252
0.45
%
Total borrowings
$
1,439,784
$
946,238
$
493,546
52.16
%
For a further discussion of borrowings see Notes 10 and 11 to the unaudited Notes to Consolidated Financial Statements.
Accrued Expenses and Other Liabilities
Accrued expenses and other liabilities at September 30, 2022 decreased $8.85 million or 4.52% from year-end 2021. In particular, income tax payable decreased $3.21 million, business franchise taxes decreased $2.65 million, both due to timing differences, incentives payables decreased $2.72 million due to payments, and accrued employee expense decreased $5.53 million. Partially offsetting these decreases was a $1.85 million increase in interest payable due mainly to an increase in FHLB borrowings and rising interest rates, a $7.74 million increase in accrued mortgage escrow liabilities due primarily to a growth in residential real estate loans and a $1.89 million increase in dividends payable.
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Shareholders’ Equity
Shareholders’ equity at September 30, 2022 was $4.44 billion, which was a decrease of $278.54 million or 5.90% from year-end 2021.
Retained earnings increased $133.49 million or 9.60% from year-end 2021. Earnings net of dividends for the first nine months of 2022 were $133.49 million.
Accumulated other comprehensive income decreased $347.42 million or 7,107.53% from year-end 2021 due to a decrease of $387.77 million in the fair value of United’s available for sale investment portfolio, net of deferred income taxes, primarily the result of an increase in market interest rates. Partially offsetting this decrease was a $38.36 million increase in the fair value of cash flow hedges, net of deferred income taxes. The after-tax accretion of pension costs was $1.98 million for the first nine months of 2022.
Treasury stock increased $79.78 million or 46.76% from year-end 2021. During the first nine months of 2022, United repurchased 2,259,546 shares of its common stock on the open market under repurchase plans approved by United’s Board of Directors at a cost of $78.37 million or an average price per share of $34.69.
RESULTS OF OPERATIONS
Overview
Below is a summary of United’s consolidated results of operations for the time periods presented:
Three Months Ended
Nine Months Ended
(Dollars in thousands except per share amounts)
September
2022
September
2021
June
2022
September
2022
September
2021
Interest income
$
263,683
$
194,080
$
227,771
$
694,249
$
599,923
Interest expense
23,061
12,501
12,868
47,222
40,867
Net interest income
240,622
181,579
214,903
647,027
559,056
Provision for credit losses
7,671
(7,829
)
(1,807
)
2,454
(16,565
)
Noninterest income
32,749
68,631
43,608
122,382
224,075
Noninterest expense
137,196
142,283
141,174
417,545
430,186
Income before income taxes
128,504
115,756
119,144
349,410
369,510
Income taxes
25,919
23,604
23,531
69,548
75,624
Net income
$
102,585
$
92,152
$
95,613
$
279,862
$
293,886
PER COMMON SHARE :
Net income:
Basic
$
0.76
$
0.71
$
0.71
$
2.07
$
2.28
Diluted
0.76
0.71
0.71
2.06
2.27
Net income for the third quarter of 2022 was $102.59 million or $0.76 per diluted share, as compared to $92.15 million or $0.71 per diluted share for the prior year third quarter. Net income for the second quarter of 2022 was $95.61 million or $0.71 per diluted share. Net income for the first nine months of 2022 was $279.86 million or $2.06 per diluted share compared to $293.89 million or $2.27 per diluted share for the first nine months of 2021.
Earnings for the third quarter of 2022 as compared to the third quarter of 2021 increased primarily due to the acquisition of Community Bankers Trust Corporation (“Community Bankers Trust”), organic loan growth and a rising interest rate environment. Earnings for the first nine months of 2022 as compared to the first nine months of 2021 decreased primarily due to lower income from mortgage banking activities primarily as a result of the rising rate environment The increase in earnings for the third quarter of 2022 from the second quarter of 2022 was due mainly to loan growth and net interest margin expansion.
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For the third quarter of 2022, United’s annualized return on average assets was 1.41% and return on average shareholders’ equity was 8.96% as compared to 1.33% and 8.23% for the third quarter of 2021. United’s annualized return on average assets was 1.32% and return on average shareholders’ equity was 8.33% for the second quarter of 2022. United’s annualized return on average assets for the first nine months of 2022 was 1.29% and return on average shareholders’ equity was 8.07% as compared to 1.46% and 8.95% for the first nine months of 2021. For the third quarter and first nine months of 2022, United’s annualized return on average tangible equity was 15.46% and 13.73%, respectively, as compared to 14.03% and 15.36% for the third quarter and first nine months of 2021, respectively. United’s annualized return on average tangible equity was 14.23% for the second quarter of 2022.
Three Months Ended
Nine Months Ended
(Dollars in thousands)
September 30,
September 30,
June 30,
September 30,
September 30,
2022
2021
2022
2022
2021
Return on Average Tangible Equity:
(a) Net Income (GAAP)
$
102,585
$
92,152
$
95,613
$
279,862
$
293,886
(b) Number of Days
92
92
91
273
273
Average Total Shareholders’ Equity (GAAP)
$
4,542,100
$
4,440,107
$
4,606,186
$
4,635,858
$
4,389,087
Less: Average Total Intangibles
(1,910,054
)
(1,833,449
)
(1,911,705
)
(1,910,957
)
(1,831,364
)
(c) Average Tangible Equity (non-GAAP)
$
2,632,046
$
2,606,658
$
2,694,481
$
2,724,901
$
2,557,723
Return on Average Tangible Equity (non- GAAP)
15.46
%
14.03
%
14.23
%
13.73
%
15.36
%
[(a) / (b)] x 365/ (c)
Net interest income for the third quarter of 2022 was $240.62 million, which was an increase of $59.04 million, or 32.52%, from the third quarter of 2021. Net interest income for the first nine months of 2022 was $647.03 million, an increase of $87.97 million or 15.74% from the first nine months of 2021. Mainly, these increases in net interest income for 2022 compared to 2021 were due to the impact of higher average earning assets, driven primarily by the Community Bankers Trust acquisition and organic loan growth, the impact of rising market interest rates on earning assets and a change in the asset mix to higher earning assets. Net interest income for the third quarter of 2022 increased $25.72 million, or 11.97%, from the second quarter of 2022. The increase in net interest income was primarily due to the impact of rising market interest rates on earning assets and a change in the asset mix to higher earning assets.
The provision for credit losses was $7.67 million and $2.45 million for the third quarter and first nine months of 2022, respectively, while the provision for credit losses was a net benefit of $7.83 million and $16.57 million for the third quarter and first nine months of 2021. The provision for credit losses was a net benefit of $1.81 million for the second quarter of 2022. The higher amounts for 2022 compared to 2021 were mainly due to an increase in total loans outstanding.
For the third quarter of 2022, noninterest income was $32.75 million, which was a decrease of $35.88 million or 52.28% from the third quarter of 2021. Noninterest income for the first nine months of 2022 was $122.38 million which was a decrease of $101.69 million or 45.38% from the first nine months of 2021. Noninterest income for the third quarter of 2022 decreased $10.86 million, or 24.90%, from the second quarter of 2022. These decreases in noninterest income were primarily due to decreased income from mortgage banking activities due to a lower volume of mortgage loan originations and sales in the secondary market mainly the result of a rising interest rate environment.
For the third quarter of 2022, noninterest expense decreased $5.08 million or 3.58% from the third quarter of 2021. For the first nine months of 2022, noninterest expense decreased $12.64 million or 2.94% from the first nine months of 2021. These decreases were due mainly to lower employee compensation expense as a result of lower employee commissions, incentives and overtime related to mortgage banking production. Noninterest expense for the third quarter of 2022 decreased $3.98 million, or 2.82%, from the second quarter of 2022 due mainly to a decrease in the expense for the reserve for unfunded loan commitments.
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Income taxes for the third quarter of 2022 were $25.92 million as compared to $23.60 million for the third quarter of 2021. Income tax expense was $23.53 million for the second quarter of 2022. For the first nine months of 2022 and 2021 income tax expense was $69.55 million and $75.62 million, respectively. For the quarters ended September 30, 2022 and June 30, 2022, United’s effective tax rate was 20.17%, and 19.75%, respectively. For the quarter ended September 30, 2021, United’s effective tax rate was 20.39%. The effective tax rate for the first nine months of 2022 and 2021 was 19.90% and 20.47%, respectively.
Business Segments
United operates in two business segments: community banking and mortgage banking.
Community Banking
Net income attributable to the community banking segment for the third quarter of 2022 was $108.66 million compared to net income of $81.88 million for the third quarter of 2021. Net income attributable to the community banking segment for the first nine months of 2022 was $288.83 million compared to net income of $253.88 million for the first nine months of 2021. The higher net income within the community banking segment in 2022 was due primarily to the impact of the Community Bankers Trust acquisition, organic loan growth and the positive impact of rising market interest rates on the net interest margin. On a linked quarter basis, net income attributable to the community banking segment for the third quarter of 2022 increased $11.52 million from the second quarter of 2022 primarily due to organic loan growth and net interest margin expansion.
Net interest income increased $60.10 million to $239.54 million for the third quarter of 2022, compared to $179.44 million for the same period of 2021. Net interest income increased $90.78 million to $640.82 million for the first nine months of 2022, compared to $550.04 million for the same period of 2021. Generally, net interest income for the third quarter and first nine months of 2022 increased from the third quarter and first nine months of 2021 due to an increase in average earning assets as a result of the Community Bankers Trust acquisition and organic loan growth. On a linked quarter basis, net interest income for the third quarter of 2022 increased $27.95 million from the second quarter of 2022 primarily due to higher interest income on earning assets driven by rising market interest rates and a change in the asset mix to higher earning assets.
Provision for credit losses was $7.67 million for the three months ended September 30, 2022 compared to a net benefit of $7.83 million for the same period of 2021. Provision for credit losses was $2.45 million for the nine months ended September 30, 2022 compared to a net benefit of $16.57 million for the same period of 2021. The provision for credit losses was $7.67 million for the third quarter of 2022 as compared to a net benefit of $1.81 million for the second quarter of 2022. Theses increases in the provision for credit losses was primarily due to an increase in loans outstanding.
Noninterest income decreased $941 thousand for the third quarter of 2022 to $23.78 million as compared to $24.71 million for the third quarter of 2021. Noninterest income for the first nine months of 2022 was relatively flat from the first nine months of 2021, increasing $374 thousand or less than 1%. On a linked quarter basis, noninterest income for the third quarter of 2022 decreased $3.12 million from the second quarter of 2022 due mainly to lower income from bank-owned life insurance policies (“BOLI”). The decrease in BOLI income was primarily due to lower death benefits from the second quarter of 2022 and the impact of lower market values of underlying investments in the third quarter of 2022.
Noninterest expense was $119.57 million for the third quarter of 2022, compared to $109.14 million for the same period of 2021, an increase of $10.43 million. Noninterest expense was $353.36 million for the nine months ended September 30, 2022, compared to $322.61 million for the same period of 2021, an increase of $30.75 million. These increases in noninterest expense for the first nine months of 2022 were primarily attributable to the additional employees and branch
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offices from the Community Bankers Trust acquisition as most major categories of noninterest expense showed increases. On a linked quarter basis, noninterest expense for the third quarter of 2022 was relatively flat from the second quarter of 2022, increasing $320 thousand or less than 1% from the second quarter of 2022.
Mortgage Banking
The mortgage banking segment reported net losses of $3.34 million and $4.28 million for the third quarter and the first nine months of 2022, respectively, as compared to net income of $12.42 million and $40.42 million for the third quarter and first nine months of 2021. Noninterest income, which consists mainly of realized and unrealized gains associated with the fair value of commitments and loans held for sale, was $13.75 million for the third quarter of 2022 as compared to $45.02 million for the third quarter of 2021. Noninterest income for the first nine months of 2022 was $58.61 million as compared to $152.30 million for the first nine months of 2021. The decreases in 2022 were due mainly to lower originations and sales of mortgage loans driven by the rising rate environment and a lower margin on loans sold in the secondary market. Noninterest expense consists mainly of salaries, commissions and benefits of mortgage segment employees. Noninterest expense was $20.66 million for the third quarter of 2022 as compared $31.79 million for the third quarter of 2021. Noninterest expense was $71.89 million for the first nine months of 2022 as compared to $109.36 million for the first nine months of 2021. These decreases were primarily due to a decrease in employee compensation due to lower employee incentives and commissions related to a decrease in mortgage banking production.
The following discussion explains in more detail the consolidated results of operations by major category.
Net Interest Income
Net interest income represents the primary component of United’s earnings. It is the difference between interest income from earning assets and interest expense incurred to fund these assets. Net interest income is impacted by changes in the volume and mix of interest-earning assets and interest-bearing liabilities, as well as changes in market interest rates. Such changes, and their impact on net interest income in 2022 and 2021, are presented below.
Net interest income for the third quarter of 2022 was $240.62 million, which was an increase of $59.04 million or 32.52% from the third quarter of 2021. The $59.04 million increase in net interest income occurred because total interest income increased $69.60 million while total interest expense increased $10.56 million from the third quarter of 2021. Net interest income for the first nine months of 2022 was $647.03 million, which was an increase of $87.97 million or 15.74% from the first nine months of 2021. The $87.97 million increase in net interest income occurred because total interest income increased $94.33 million while total interest expense increased $6.36 million from the first nine months of 2021. On a linked-quarter basis, net interest income for the third quarter of 2022 increased $25.72 million or 11.97% from the second quarter of 2022. The $25.72 million increase in net interest income occurred because total interest income increased $35.91 million while total interest expense increased $10.19 million from the second quarter of 2022.
For the purpose of this remaining discussion, net interest income is presented on a tax-equivalent basis to provide a comparison among all types of interest earning assets. The tax-equivalent basis adjusts for the tax-favored status of income from certain loans and investments. Although this is a non-GAAP measure, United’s management believes this measure is more widely used within the financial services industry and provides better comparability of net interest income arising from taxable and tax-exempt sources. United uses this measure to monitor net interest income performance and to manage its balance sheet composition.
Tax-equivalent net interest income for the third quarter of 2022 was $241.73 million, an increase of $59.09 million or 32.35% from the third quarter of 2021. The increase in tax-equivalent net interest income was primarily due to the impact of higher average earning assets, driven by the Community Bankers Trust acquisition and organic loan growth, the impact of rising market interest rates on earning assets and a change in the asset mix to higher earning assets. These increases were partially offset by higher interest expense primarily driven by deposit rate repricing, lower Paycheck Protection
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Program (“PPP”) loan fee income and lower acquired loan accretion income. Average earning assets for the third quarter of 2022 increased $1.08 billion, or 4.42%, from the third quarter of 2021 due to a $2.47 billion increase in average net loans and a $1.51 billion increase in average investment securities partially offset by a $2.91 billion decrease in average short-term investments. The interest rate spread for the third quarter of 2022 increased 71 basis points from the third quarter of 2021 to 3.58% due to a 96 basis point increase in the average yield on earning assets partially offset by a 25 basis point increase in the average cost of funds. Net PPP loan fee income was $1.62 million and $7.85 million for the third quarter of 2022 and 2021, respectively, a decrease of $6.23 million. Acquired loan accretion income was $4.07 million and $8.15 million for the third quarter of 2022 and 2021, respectively, a decrease of $4.09 million. The net interest margin of 3.78% for the third quarter of 2022 was an increase of 80 basis points from the net interest margin of 2.98% for the third quarter of 2021.
Tax-equivalent net interest income for the first nine months of 2022 was $650.35 million, an increase of $88.11 million or 15.67% from the first nine months of 2021. This increase in tax-equivalent net interest income was primarily due to the impact of rising market interest rates on earning assets, an increase in average earning assets from the Community Bankers Trust acquisition, organic loan growth and a change in the asset mix to higher earning assets. These increases were partially offset by lower PPP loan fee income and lower acquired loan accretion income. Average earning assets for the first nine months of 2022 increased $1.75 billion, or 7.33%, from the first nine months of 2021 due to a $1.54 billion increase in average investment securities and a $1.34 billion increase in average net loans partially offset by a $1.13 billion decrease in average short-term investments. The interest rate spread for the first nine months of 2022 increased 22 basis points from the first nine months of 2021 due to a 26 basis point increase in the average yield on earning assets partially offset by a 3 basis point increase in the average cost of funds. Net PPP loan fee income was $9.28 million and $28.19 million for the first nine months of 2022 and 2021, respectively, a decrease of $18.90 million. Acquired loan accretion income was $13.60 million and $27.62 million for the first nine months of 2022 and 2021, respectively, a decrease of $14.02 million. The net interest margin of 3.38% for the first nine months of 2022 was an increase of 24 basis points from the net interest margin of 3.14% for the first nine months of 2021.
On a linked-quarter basis, tax-equivalent net interest income for the third quarter of 2022 increased $25.72 million, or 11.91% from the second quarter of 2022. The increase in tax-equivalent net interest income was primarily due to higher interest income on earning assets driven by rising market interest rates and a change in the asset mix to higher earning assets. This increase in tax-equivalent net interest income was partially offset by higher interest expense primarily driven by deposit rate repricing as well as due to lower PPP loan fee income and lower acquired loan accretion. The interest rate spread of 3.58% for the third quarter of 2022 increased 31 basis points from the second quarter of 2022 due to a 56 basis point increase in the average yield on earning assets partially offset by a 25 basis point increase in the average cost of funds. Average earning assets for the third quarter of 2022 were relatively flat from the second quarter of 2022, decreasing $188.13 or less than 1% as a decrease of $818.46 million in short-term investments was mostly offset by an increase in higher yielding average net loans of $627.57 million. Net PPP loan fee income decreased $1.94 million to $1.62 million for the third quarter of 2022. Acquired loan accretion income decreased $1.33 million to $4.07 million for the third quarter of 2022. The net interest margin of 3.78% for the third quarter of 2022 was an increase of 40 basis points from the net interest margin of 3.38% for the second quarter of 2022.
United’s tax-equivalent net interest income also includes the impact of acquisition accounting fair value adjustments. The following table provides the discount/premium and net accretion impact to tax-equivalent net interest income for the three months ended September 30, 2022, September 30, 2021 and June 30, 2022 and the nine months ended September 30, 2022 and September 30, 2021:
Three Months Ended
September 30
September 30
June 30
(Dollars in thousands)
2022
2021
2022
Loan accretion
$
4,065
$
8,154
$
5,398
Certificates of deposit
552
898
738
Long-term borrowings
(348
)
170
274
Total
$
4,269
$
9,222
$
6,410
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Nine Months Ended
September 30
September 30
(Dollars in thousands)
2022
2021
Loan accretion
$
13,602
$
27,623
Certificates of deposit
2,328
3,397
Long-term borrowings
85
518
Tax-equivalent net interest income
$
16,015
$
31,538
The following tables reconcile the difference between net interest income and tax-equivalent net interest income for the three months ended September 30, 2022, September 30, 2021 and June 30, 2022 and the nine months ended September 30, 2022 and September 30, 2021.
Three Months Ended
September 30
September 30
June 30
(Dollars in thousands)
2022
2021
2022
Net interest income, GAAP basis
$
240,622
$
181,579
$
214,903
Tax-equivalent adjustment (1)
1,105
1,059
1,104
Tax-equivalent net interest income
$
241,727
$
182,638
$
216,007
Nine Months Ended
September 30
September 30
(Dollars in thousands)
2022
2021
Net interest income, GAAP basis
$
647,027
$
559,056
Tax-equivalent adjustment (1)
3,318
3,181
Tax-equivalent net interest income
$
650,345
$
562,237
(1)
The tax-equivalent adjustment combines amounts of interest income on federally nontaxable loans and investment securities using the statutory federal income tax rate of 21% for the three months and nine months ended September 30, 2022 and 2021 and the three months ended June 30, 2022. All interest income on loans and investment securities was subject to state income taxes.
The following tables show the unaudited consolidated daily average balance of major categories of assets and liabilities for the three-month and nine-month periods ended September 30, 2022 and 2021, respectively, with the interest and rate earned or paid on such amount. The interest income and yields on federally nontaxable loans and investment securities are presented on a tax-equivalent basis using the statutory federal income tax rate of 21% for the three-month and nine-month period ended September 30, 2022 and 2021. Interest income on all loans and investment securities was subject to state income taxes.
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Three Months Ended
Three Months Ended
September 30, 2022
September 30, 2021
(Dollars in thousands)
Average
Balance
Interest
(1)
Avg. Rate
(1)
Average
Balance
Interest
(1)
Avg. Rate
(1)
ASSETS
Earning Assets:
Federal funds sold and securities purchased under agreements to resell and other short-term investments
$
918,691
$
6,834
2.95
%
$
3,825,264
$
2,548
0.26
%
Investment Securities:
Taxable
4,687,528
29,149
2.49
%
3,215,719
12,999
1.62
%
Tax-exempt
400,400
2,783
2.78
%
363,966
2,327
2.56
%
Total Securities
5,087,928
31,932
2.51
%
3,579,685
15,326
1.71
%
Loans, net of unearned income (2)
19,645,486
226,022
4.57
%
17,174,856
177,265
4.10
%
Allowance for loan losses
(213,824
)
(217,472
)
Net loans
19,431,662
4.62
%
16,957,384
4.15
%
Total earning assets
25,438,281
$
264,788
4.14
%
24,362,333
$
195,139
3.18
%
Other assets
3,396,154
3,075,377
TOTAL ASSETS
$
28,834,435
$
27,437,710
LIABILITIES
Interest-Bearing Liabilities:
Interest-bearing deposits
$
15,308,177
$
17,660
0.46
%
$
14,968,675
$
9,803
0.26
%
Short-term borrowings
137,985
493
1.42
%
123,526
167
0.54
%
Long-term borrowings
894,940
4,908
2.18
%
813,976
2,531
1.23
%
Total Interest-Bearing Liabilities
16,341,102
23,061
0.56
%
15,906,177
12,501
0.31
%
Noninterest-bearing deposits
7,664,032
6,864,085
Accrued expenses and other liabilities
287,201
227,341
TOTAL LIABILITIES
24,292,335
22,997,603
SHAREHOLDERS’ EQUITY
4,542,100
4,440,107
TOTAL LIABILITIES AND
SHAREHOLDERS’ EQUITY
$
28,834,435
$
27,437,710
NET INTEREST INCOME
$
241,727
$
182,638
INTEREST RATE SPREAD
3.58
%
2.87
%
NET INTEREST MARGIN
3.78
%
2.98
%
(1)
The interest income and the yields on federally nontaxable loans and investment securities are presented on a tax-equivalent basis using the statutory federal income tax rate of 21%.
(2)
Nonaccruing loans are included in the daily average loan amounts outstanding.
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Nine Months Ended
Nine Months Ended
September 30, 2022
September 30, 2021
(Dollars in thousands)
Average
Balance
Interest
(1)
Avg. Rate
(1)
Average
Balance
Interest
(1)
Avg. Rate
(1)
ASSETS
Earning Assets:
Federal funds sold and securities repurchased under agreements to resell and other short-term investments
$
1,887,158
$
14,004
0.99
%
$
3,012,429
$
6,198
0.28
%
Investment Securities:
Taxable
4,540,767
71,212
2.09
%
3,085,050
40,371
1.74
%
Tax-exempt
421,440
8,266
2.62
%
337,590
6,639
2.62
%
Total Securities
4,962,207
79,478
2.14
%
3,422,640
47,010
1.83
%
Loans, net of unearned income (2)
19,068,898
604,085
4.23
%
17,742,054
549,896
4.14
%
Allowance for loan losses
(214,813
)
(228,163
)
Net loans
18,854,085
4.28
%
17,513,891
4.20
%
Total earning assets
25,703,450
$
697,567
3.63
%
23,948,960
$
603,104
3.37
%
Other assets
3,358,118
3,032,927
TOTAL ASSETS
$
29,061,568
$
26,981,887
LIABILITIES
Interest-Bearing Liabilities:
Interest-bearing deposits
$
15,599,135
$
35,972
0.31
%
$
14,841,957
$
32,800
0.30
%
Short-term borrowings
136,014
911
0.90
%
134,092
527
0.53
%
Long-term borrowings
841,693
10,339
1.64
%
820,426
7,540
1.23
%
Total Interest-Bearing Liabilities
16,576,842
47,222
0.38
%
15,769,475
40,867
0.35
%
Non-interest bearing deposits
7,573,667
6,561,334
Accrued expenses and other liabilities
275,201
234,991
TOTAL LIABILITIES
24,425,710
22,592,800
SHAREHOLDERS’ EQUITY
4,635,858
4,389,087
TOTAL LIABILITIES AND
SHAREHOLDERS’ EQUITY
$
29,061,568
$
26,981,887
NET INTEREST INCOME
$
650,345
$
562,237
INTEREST RATE SPREAD
3.25
%
3.02
%
NET INTEREST MARGIN
3.38
%
3.14
%
(1)
The interest income and the yields on federally nontaxable loans and investment securities are presented on a tax-equivalent basis using the statutory federal income tax rate of 21%.
(2)
Nonaccruing loans are included in the daily average loan amounts outstanding.
Provision for Credit Losses
United’s provision for credit losses was $7.67 million and $2.45 million for the third quarter and first nine months of 2022, respectively, while the provision for credit losses was net benefit of $7.83 million and $16.57 million, respectively, for the third quarter and first nine months of 2021. United’s provision for credit losses relates to its portfolio of loans and leases, held-to-maturity securities and interest receivable on loans which are discussed in more detail in the following paragraphs.
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For the quarter ended September 30, 2022, the provision for loan and lease losses was $7.67 million as compared to a net benefit of $7.82 million for the quarter ended September 30, 2021. The provision for loan and lease losses for the first nine months of 2022 was $2.46 million as compared to a net benefit of $16.34 million for the first nine months of 2021. The higher amount of provision expense for 2022 compared to 2021 was mainly due to an increase in overall loans outstanding. Net charge-offs were $1.79 million for the third quarter of 2022 as compared to net recoveries of $1.17 million for the same quarter in 2021. The higher amount of net charge-offs for the third quarter of 2022 as compared to the third quarter of 2021 was primarily due to charge-offs recognized on several large commercial credits in the third quarter of 2022 as well as several large commercial recoveries in the third quarter of 2021. Net recoveries for the first nine months of 2022 were $1.13 million as compared to net charge-offs of $8.59 million for the first nine months of 2021. The lower amount of net charge-offs for the first nine months of 2022 as compared to the first nine months of 2021 was primarily due to charge-offs recognized on several large commercial credits in the first nine months of 2021. On a linked-quarter basis, the provision for loan and lease losses was a net benefit of $1.81 million for the second quarter of 2022. Net recoveries were $941 thousand for the second quarter of 2022. Annualized net charge-offs (recoveries) as a percentage of average loans and leases, net of unearned income were 0.04% and (0.01%) for the third quarter and first nine months of 2022, respectively, compared to (0.03%) and 0.07% for the third quarter and first nine months of 2021. Annualized net recoveries as a percentage of average loans and leases, net of unearned income was (0.02%) for the second quarter of 2022.
As of September 30, 2022, nonperforming loans and leases were $69.65 million or 0.35% of loans and leases, net of unearned income as compared to $90.76 million or 0.50% of loans, net of unearned income at December 31, 2021. The components of nonperforming loans and leases include: 1) nonaccrual loans and leases, 2) loans and leases which are contractually past due 90 days or more as to interest or principal, but have not been put on a nonaccrual basis and 3) loans and leases whose terms have been restructured for economic or legal reasons due to financial difficulties of the borrowers.
Loans past due 90 days or more were $18.25 million at September 30, 2022, a decrease of $625 thousand or 3.31% from $18.88 million at year-end 2021. This slight decrease was primarily due to a large delinquent commercial credit being brought current. At September 30, 2022, nonaccrual loans were $28.24 million, which was a decrease of $7.78 million or 21.60% from $36.03 million at year-end 2021. This decrease was due to the repayment of several mid-sized commercial nonaccrual loans as well as the return to accrual status for two commercial relationships. Restructured loans were $23.15 million at September 30, 2022, a decrease of $12.70 million or 35.42% from $35.86 million at year-end 2021. The decrease was mainly due to the repayment of five large commercial relationships during the first nine months of 2022. The loss potential on these loans has been properly evaluated and allocated within the Company’s allowance for loan losses.
Nonperforming assets include nonperforming loans and real estate acquired in foreclosure or other settlement of loans (“OREO”). Total nonperforming assets of $80.43 million, including OREO of $10.78 million at September 30, 2022, represented 0.28% of total assets as compared to non-performing assets of $105.59 million, including OREO of $14.82 million, or 0.36% of total assets at December 31, 2021.
United maintains an allowance for loan and lease losses and a reserve for lending-related commitments. The combined allowance for loan losses and reserve for lending-related commitments is considered the allowance for credit losses. At September 30, 2022, the allowance for credit losses was $259.31 million as compared to $247.46 million at December 31, 2021.
At September 30, 2022, the allowance for loan and lease losses was $219.61 million as compared to $216.02 million at December 31, 2021. The slight increase in the allowance for loan and lease losses was due mainly to an increase in outstanding loans. As a percentage of loans and leases, net of unearned income, the allowance for loan losses was 1.11% at September 30, 2022 and 1.20% at December 31, 2021. The ratio of the allowance for loan and lease losses to nonperforming loans and leases or coverage ratio was 315.29% and 238.00% at September 30, 2022 and December 31, 2021, respectively. The increase in this ratio was due mainly to a decline in nonperforming loans.
United continues to evaluate risks which may impact its loan and lease portfolios. Reserves are initially determined based on losses identified from the PD/LGD and Cohort models which utilize the Company’s historical information. Then, any qualitative adjustments are applied to account for the Company’s view of the future. If current conditions underlying any qualitative adjustment factor were deemed to be materially different than historical conditions, an adjustment was made for that factor.
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The third quarter of 2022 qualitative adjustments include analyses of the following:
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Past events – This includes portfolio trends related to economic and business conditions; past due, nonaccrual, and adversely classified loans and leases; and concentrations of credit.
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Current conditions – United considered the impact of inflation, supply chain disruptions, rising interest rates, increased oil and gas prices and the potential impact of the geopolitical situation when making determinations related to factor adjustments, such as changes in economic and business conditions, collateral values and external factors.
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Reasonable and supportable forecasts – The forecast is determined on a portfolio-by-portfolio basis by relating the correlation of real GDP and the unemployment rate to loss rates to forecasts of those variables. The reasonable and supportable forecast selection is subjective in nature and requires more judgment compared to the other components of the allowance. Assumptions for the economic variables were the following:
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The forecast for real GDP shifted downward in the third quarter, from a projection of 1.70% for 2022 as of mid-June 2022 to 0.20% for 2022 as of mid-September with a steeper increasing future trendline as compared to the second quarter of 2022. The unemployment rate forecast shifted slightly upward compared to the second quarter of 2022 with an increasing trend expected throughout 2023 and 2024.
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Reversion to historical loss data occurs via a straight-line method during the year following the one-year reasonable and supportable forecast period.
United’s review of the allowance for loan and lease losses at September 30, 2022 produced increased reserves in three of the four loan categories as compared to December 31, 2021. The residential real estate reserve increased $6.30 million. The real estate construction and development loan pool reserve increased $2.97 million. The consumer loan pool reserve increased $2.25 million. Each of these increases were primarily due to increased outstanding balances. The allowance related to the commercial, financial & agricultural loan pool decreased $7.93 million. This decrease is due to improvement in historical loss rates and a decrease in allocations established for individually assessed loans.
An allowance is established for estimated lifetime losses for loans that are individually assessed. Nonperforming commercial loans and leases are regularly reviewed to identify expected credit losses. A loan is individually assessed for expected credit losses when the loan does not share similar characteristics with other loans in the portfolio. Measuring expected credit losses of a loan requires judgment and estimates, and the eventual outcomes may differ from those estimates. Expected credit losses are measured based upon the present value of expected future cash flows from the loan discounted at the loan’s effective rate or the fair value of collateral if the loan is collateral dependent. When the selected measure is less than the recorded investment in the loan, an expected credit loss has occurred. The allowance for loans and leases that were individually assessed was $2.92 million at September 30, 2022 and $6.53 million at December 31, 2021. In comparison to the prior year-end, this element of the allowance decreased $3.61 million due to repayment of individually assessed loans, improved borrowers’ financial conditions such that individual assessments were no longer necessary and improved collateral valuations.
Management believes that the allowance for credit losses of $259.31 million at September 30, 2022 is adequate to provide for expected losses on existing loans and lending-related commitments based on information currently available. United’s loan administration policies are focused on the risk characteristics of the loan portfolio in terms of loan approval and credit quality. The commercial loan portfolio is monitored for possible concentrations of credit in one or more industries. Management has lending limits as a percentage of capital per type of credit concentration in an effort to ensure adequate diversification within the portfolio. Most of United’s commercial loans are secured by real estate located in West Virginia, southeastern Ohio, Pennsylvania, Virginia, Maryland, North Carolina, South Carolina, and the District of Columbia. It is the opinion of management that these commercial loans do not pose any unusual risks and that adequate consideration has been given to these loans in establishing the allowance for credit losses.
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The provision for credit losses related to held to maturity securities for the third quarter and first nine months of 2022 and 2021 was immaterial. The allowance for credit losses related to held to maturity securities was $19 thousand as of September 30, 2022 and December 31, 2021. There was no provision for credit losses recorded on available for sale investment securities for the third quarter and first nine months of 2022 and 2021 and no allowance for credit losses on available for sale investment securities as of September 30, 2022 and December 31, 2021. Due to loan interest payment deferrals granted by United under the CARES Act, United assessed the collectability of the accrued interest receivables on these deferring loans as of September 30, 2022. As a result of this assessment, United released all of its remaining $8 thousand in reserves in the first nine months of 2022 as compared to the release of $3 thousand and $224 thousand for the third quarter and first nine months of 2021. The allowance for accrued interest receivables not expected to be collected as of December 31, 2021 was $8 thousand.
Management is not aware of any potential problem loans or leases, trends or uncertainties, which it reasonably expects, will materially impact future operating results, liquidity, or capital resources which have not been disclosed. Additionally, management has disclosed all known material credits, which cause management to have serious doubts as to the ability of such borrowers to comply with the loan repayment schedules.
Other Income
Other income consists of all revenues, which are not included in interest and fee income related to earning assets. Noninterest income has been and will continue to be an important factor for improving United’s profitability. Recognizing the importance, management continues to evaluate areas where noninterest income can be enhanced.
Noninterest income for the third quarter of 2022 was $32.75 million, a decrease of $35.88 million or 52.28% from the third quarter of 2021. Noninterest income for the first nine months of 2022 was $122.38 million, a decrease of $101.69 million or 45.38% from the first nine months of 2021. Both differences from the third quarter and first nine months of 2021 were due mainly to a decrease in income from mortgage banking activities primarily as a result of lower mortgage loan originations and sales volume driven by a rising interest rate environment and a lower margin on loans sold in the secondary market.
Income from mortgage banking activities totaled $6.42 million for the third quarter of 2022 compared to $42.01 million for the same period of 2021, a decline of $35.59 million or 84.71%. For the first nine months of 2022 and 2021, income from mortgage banking activities was $38.07 million and $144.35 million, respectively. The decreases for 2022 as compared to 2021 were due mainly to lower mortgage loan origination and sale volume driven by the rising rate environment and a lower margin on loans sold in the secondary market. For the three months ended September 30, 2022 and 2021, mortgage loan sales were $281.76 million and $1.45 billion, respectively. For the nine months ended September 30, 2022 and 2021, mortgage loan sales were $2.06 billion and $5.16 billion, respectively.
Income from bank-owned life insurance (“BOLI”) for the third quarter of 2022 decreased $1.08 million from the third quarter of 2021. The decrease was due mainly to the impact of lower market values of underlying investments in the third quarter of 2022. Income from BOLI for the first nine months of 2022 increased $2.17 million from the first nine months of 2021. This increase was due mainly to an increase of $2.64 million in proceeds from death benefits and the addition of approximately $31 million in BOLI from the Community Bankers Trust acquisition.
Fees from deposit services for the first nine months of 2022 increased $2.87 million or 10.17% from the first nine months of 2021. This increase was due primarily to higher income from overdraft fees and debit card fee income.
Fees from brokerage services for the first nine months of 2022 were $12.68 million, an increase of $823 thousand or 6.94% from the first nine months of 2021. Bankcard fees and merchant discounts for the first nine months of 2022 increased $1.00 million or 25.66% from the first nine months of 2021. Both of these increases were due to higher volume.
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On a linked-quarter basis, noninterest income for the third quarter of 2022 decreased $10.86 million, or 24.90%, from the second quarter of 2022. The decrease in noninterest income was primarily due to decreases of $6.02 million in income from mortgage banking activities, $2.65 million in income from BOLI, $1.39 million in net (losses) gains on investment securities and $761 thousand in fees from deposit services. The decrease in income from mortgage banking activities was mainly due to lower mortgage loan origination and sale volume driven by the rising rate environment and a lower margin on loans sold in the secondary market. The decrease in BOLI income was primarily due to lower death benefits from the second quarter of 2022 and the impact of lower market values of underlying investments in the third quarter of 2022. The decrease in fees from deposit services reflects changes to United’s overdraft policy implemented during the third quarter of 2022.
Other Expenses
Just as management continues to evaluate areas where noninterest income can be enhanced, it strives to improve the efficiency of its operations to reduce costs. Other expenses include all items of expense other than interest expense, the provision for credit losses, and income taxes. Noninterest expense decreased $5.09 million or 3.58% for the third quarter of 2022 compared to the same period in 2021. For the first nine months of 2022, noninterest expense was $417.55 million, which was a decrease of $12.64 million or 2.94% from the first nine months of 2021.
Employee compensation for the third quarter and first nine months of 2022 decreased $7.84 million or 11.62% and $23.56 million or 11.30%, respectively, from the third quarter and first nine months of 2021. The decreases for 2022 were due mainly to lower employee commissions, incentives and overtime related to a decline in mortgage banking production partially offset by additional employees from the Community Bankers Trust acquisition.
Employee benefits expense for the third quarter of 2022 decreased $2.38 million or 18.14% from the third quarter of 2021. Employee benefits expense for the first nine months of 2022 decreased $7.40 million or 17.20% as compared to the first nine months of 2021. These decreases were primarily due to lower amounts of expense for postretirement benefits.
Net occupancy expense for the third quarter and first nine months of 2022 increased $942 thousand or 9.11% and $2.29 million or 7.31%, respectively, as compared to the same time periods in 2021. The increases were due primarily to increases in building depreciation and maintenance expenses mainly as a result of the offices added in the Community Bankers Trust acquisition.
OREO expense for the third quarter of 2022 increased $1.28 million or 299.07% from the third quarter of 2021 due mainly to additional declines in the fair value of OREO properties. OREO expense for the first nine months of 2022 decreased $2.55 million or 56.81% due mainly to fewer declines in the fair value of OREO properties.
Equipment expense increased $3.29 million or 17.18% for the first nine months of 2022 as compared to the first nine months of 2021. The increase was due mainly to higher maintenance costs and depreciation expense primarily due to the Community Bankers Trust acquisition.
Data processing expense for the third quarter and first nine months of 2022 increased $1.00 million or 15.15% and $1.94 million or 9.42%, respectively, from the third quarter and first nine months of 2021 due additional processing as a result of the Community Bankers Trust acquisition.
Mortgage loan servicing expense and impairment for the third quarter and first nine months of 2022 decreased $1.41 million or 43.22% and $4.76 million or 47.42%, respectively, from the same time periods in 2021 due to the recovery of past temporary impairment and lower amortization expense of mortgage servicing rights.
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Federal Deposit Insurance Corporation (“FDIC”) expense for the third quarter and first nine months of 2022 increased $1.14 million or 59.53% and $3.02 million or 52.80%, respectively, from the third quarter and first nine months of 2021 due a higher assessment base.
Other expense for the third quarter of 2022 increased $1.41 million or 4.47% from the third quarter of 2021. Within other expenses, the most significant increase for third quarter of 2022 as compared to the third quarter of 2021 was an accrual of $5 million related to a litigation matter with a former commercial customer. Partially offsetting this increase was a decrease of $7.17 million in the expense for the reserve for unfunded loan commitments. For the first nine months of 2022, other expense increased $15.25 million or 17.71% from the first nine months of 2021. This increase in other expense for the first nine months of 2022 from the first nine months of 2021 resulted from the previously mentioned litigation accrual in the third quarter of 2022, an increase of $2.31 million in the expense for the reserve for unfunded loan commitments as well higher amounts of certain general operating expenses.
On a linked-quarter basis, noninterest expense for the third quarter of 2022 decreased $3.98 million, or 2.82%, from the second quarter of 2022. The decrease in noninterest expense was primarily due to decreases of $3.01 million in employee compensation and $2.69 million in other expense. The decrease in employee compensation was primarily due to lower employee commissions related to mortgage banking production. Within other expense, the expense for the reserve for unfunded loan commitments declined $8.78 million, The decrease in the reserve for unfunded loan commitments reflects a decrease in the outstanding balance of loan commitments at quarter-end driven by loan fundings. Partially offsetting this decrease in other expense was the previously mentioned accrual related to a litigation matter with a former commercial customer included in the third quarter of 2022.
Income Taxes
For the third quarter of 2022, income tax expense was $25.92 million as compared to $23.60 million for the third quarter of 2021 primarily due to higher earnings partially offset by a slightly lower effective tax rate. For the first nine months of 2022, income tax expense was $69.55 million as compared to $75.62 million for the first nine months of 2021 primarily due to lower earnings and a lower effective tax rate. On a linked-quarter basis, income tax expense increased $2.39 million primarily due to increased earnings and a slightly higher effective tax rate. United’s effective tax rate was 20.17% for the third quarter of 2022, 20.39% for the third quarter of 2021 and 19.75% for the second quarter of 2022. For the first nine months of 2022 and 2021, United’s effective tax rate was 19.90% and 20.47%, respectively. For further details related to income taxes, see Note 17 of the unaudited Notes to Consolidated Financial Statements contained within this document.
Liquidity and Capital Resources
In the opinion of management, United maintains liquidity that is sufficient to satisfy its depositors’ requirements and the credit needs of its customers. Like all banks, United depends upon its ability to renew maturing deposits and other liabilities on a daily basis and to acquire new funds in a variety of markets. A significant source of funds available to United is “core deposits”. Core deposits include certain demand deposits, statement and special savings and NOW accounts. These deposits are relatively stable, and they are the lowest cost source of funds available to United. Short-term borrowings have also been a significant source of funds. These include federal funds purchased and securities sold under agreements to repurchase as well as advances from the FHLB. Repurchase agreements represent funds which are obtained as the result of a competitive bidding process.
Liquid assets are cash and those items readily convertible to cash. All banks must maintain sufficient balances of cash and near-cash items to meet the day-to-day demands of customers and United’s cash needs. Other than cash and due from banks, the available for sale securities portfolio and maturing loans are the primary sources of liquidity.
The goal of liquidity management is to ensure the ability to access funding which enables United to efficiently satisfy the cash flow requirements of depositors and borrowers and meet United’s cash needs. Liquidity is managed by monitoring
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funds’ availability from a number of primary sources. Substantial funding is available from cash and cash equivalents, unused short-term borrowing and a geographically dispersed network of branches providing access to a diversified and substantial retail deposit market.
Short-term needs can be met through a wide array of outside sources such as correspondent and downstream correspondent federal funds and utilization of Federal Home Loan Bank advances.
Other sources of liquidity available to United to provide long-term as well as short-term funding alternatives, in addition to FHLB advances, are long-term certificates of deposit, lines of credit, borrowings that are secured by bank premises or stock of United’s subsidiaries and issuances of trust preferred securities. In the normal course of business, United through its Asset Liability Committee evaluates these as well as other alternative funding strategies that may be utilized to meet short-term and long-term funding needs.
For the first nine months ended September 30, 2022, cash of $623.77 million was provided by operating activities due mainly to net income of $279.86 million. In addition, mortgage banking activities added cash of $294.34 million to the net income amount as sales of mortgage loans in the secondary market exceeded originations. Net cash of $2.82 billion was used in investing activities which was primarily due to net loan growth of $1.67 billion and purchases of investment securities over proceeds from sales of $1.16 billion. During the first nine months of 2022, net cash of $206.95 million was used in financing activities due primarily to a net withdrawal of $484.56 million in deposits, cash dividends paid of $144.48 million, net repurchases of $79.46 million in treasury stock partially offset by net advances of $480.00 million in FHLB advances. The net effect of the cash flow activities was a decrease in cash and cash equivalents of $2.40 billion for the first nine months of 2022.
United anticipates it can meet its obligations over the next 12 months and has no material commitments for capital expenditures. United also has lines of credit available. See Notes 10 and 11 to the accompanying unaudited Notes to Consolidated Financial Statements for more details regarding the amounts available to United under lines of credit.
The Asset Liability Committee monitors liquidity to ascertain that a liquidity position within certain prescribed parameters is maintained. No changes are anticipated in the policies of United’s Asset Liability Committee.
United’s capital position is financially sound. United seeks to maintain a proper relationship between capital and total assets to support growth and sustain earnings. United has historically generated attractive returns on shareholders’ equity. United is well-capitalized based upon regulatory guidelines. United’s risk-based capital ratio is 14.43% at September 30, 2022 while its Common Equity Tier 1 capital, Tier 1 capital and leverage ratios are 12.39%, 12.39% and 10.67%, respectively. The September 30, 2022 ratios reflects United’s election of a five-year transition provision, allowed by the Federal Reserve Board and other federal banking agencies in response to the COVID-19 pandemic, to delay for two years the full impact of CECL on regulatory capital, followed by a three-year transition period. The regulatory requirements for a well-capitalized financial institution are a risk-based capital ratio of 10.0%, a Common Equity Tier 1 capital ratio of 6.5%, a Tier 1 capital ratio of 8.0% and a leverage ratio of 5.0%.
Total shareholders’ equity was $4.44 billion at September 30, 2022, which was a decrease of $278.54 million or 5.90% from December 31, 2021. This decrease is primarily due to a decrease of $347.42 million in accumulated other comprehensive income due mainly to an after-tax decrease in the fair value of available for sale securities as a result of a rising interest rate environment. In addition, treasury stock increased $79.78 million or 46.76% due to the repurchase of 2,259,546 shares of United common stock under stock repurchase plans approved by United’s Board of Directors. Partially offsetting these decreases was an increase of $133.49 million in retained earnings (net income less dividends declared).
United’s equity to assets ratio was 15.29% at September 30, 2022 as compared to 16.09% at December 31, 2021. The primary capital ratio, capital and reserves to total assets and reserves, was 16.03% at September 30, 2022 as compared to 16.79% at December 31, 2021. United’s average equity to average asset ratio was 15.75% for the third quarter of 2022 as compared to 16.18% for the third quarter of 2021. United’s average equity to average asset ratio was 15.95% for the first nine months of 2022 as compared to 16.27% for the first nine months of 2021. All of these financial measurements reflect a financially sound position.
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During the third quarter of 2022, United’s Board of Directors declared a cash dividend of $0.36 per share. Cash dividends were $1.08 per common share for the first nine months of 2022. Total cash dividends declared were $48.56 million for the third quarter of 2022 and $146.37 million for the first nine months of 2022 as compared to $45.27 million for the third quarter of 2021 and $135.79 million for the first nine months of 2021.
Text extracted from the filing as submitted to EDGAR. Formatting, tables and exhibits are simplified for reading; the original document is authoritative for anything you rely on.