United Bankshares, Inc. Announces Earnings for the Third Quarter and First Nine Months of 2017

United Bankshares, Inc. (NASDAQ: UBSI), today reported earnings for the third quarter and the first nine months of 2017. Earnings for the third quarter of 2017 were $56.7 million or $0.54 per diluted share, as compared to earnings of $41.5 million or $0.54 per diluted share for the third quarter of 2016. Earnings for the first nine months of 2017 were $132.6 million or $1.39 per diluted share as compared to earnings of $108.0 million or $1.48 per diluted share for the first nine months of 2016.

Third quarter of 2017 results produced an annualized return on average assets of 1.19% and an annualized return on average equity of 6.89%, respectively. For the first nine months of 2017, United’s return on average assets was 1.03% while the return on average equity was 6.22%. United’s annualized returns on average assets and average equity were 1.17% and 8.10%, respectively, for the third quarter of 2016 while the returns on average assets and average equity were 1.10% and 7.73%, respectively, for the first nine months of 2016.

“We are pleased to announce record earnings of almost $57 million for the third quarter of 2017,” stated Richard M. Adams, United’s Chairman of the Board and Chief Executive Officer. “In addition, our return on average assets of 1.19% for the quarter compares very favorably to United’s Federal Reserve peer group’s most recently reported return on average assets of 0.96%.”

On April 21, 2017, United completed its acquisition of Cardinal Financial Corporation (Cardinal) of Tysons Corner, Virginia. On June 3, 2016, United completed its acquisition of Bank of Georgetown of Washington, D.C. Both the results of operations of Cardinal and Bank of Georgetown are included in the consolidated results of operations from their respective dates of acquisition. As a result of the Cardinal acquisition, the third quarter and first nine months of 2017 were impacted by increased levels of average balances, income, and expense as compared to the third quarter and first nine months of 2016 which were impacted by increased levels of average balances, income, and expense due to the Bank of Georgetown acquisition. In addition, the third quarter and first nine months of 2017 included $532 thousand and $25.0 million, respectively, of merger-related expenses from the Cardinal acquisition. The third quarter and first nine months of 2016 included $924 thousand and $5.6 million, respectively, of merger-related expenses due to the Bank of Georgetown acquisition.

Net interest income for the third quarter of 2017 was $150.3 million, which was an increase of $39.2 million or 35% from the third quarter of 2016. The $39.2 million increase in net interest income occurred because total interest income increased $48.4 million while total interest expense only increased $9.2 million from the third quarter of 2016. Tax-equivalent net interest income, which adjusts for the tax-favored status of income from certain loans and investments, for the third quarter of 2017 was $152.4 million, an increase of $39.7 million or 35% from the third quarter of 2016 due mainly to an increase in average earning assets from the Cardinal acquisition. Average earning assets for the third quarter of 2017 increased $4.0 billion or 32% from the third quarter of 2016 due mainly to a $3.2 billion or 31% increase in average net loans. Average short-term investments increased $436.7 million or 54% while average investment securities increased $360.3 million or 25%. The third quarter of 2017 average yield on earning assets increased 22 basis points from the third quarter of 2016 due to additional loan accretion of $7.7 million on acquired loans and higher market interest rates. Partially offsetting the increases to tax-equivalent net interest income for the third quarter of 2017 was an increase of 19 basis points in the average cost of funds as compared to the third quarter of 2016 due to the higher market interest rates. The net interest margin of 3.65% for the third quarter of 2017 was an increase of 9 basis points from the net interest margin of 3.56% for the third quarter of 2016.

Net interest income for the first nine months of 2017 was $394.1 million, which was an increase of $82.1 million or 26% from the first nine months of 2016. The $82.1 million increase in net interest income occurred because total interest income increased $102.6 million while total interest expense only increased $20.5 million from the first nine months of 2016. Tax-equivalent net interest income for the first nine months of 2017 was $400.3 million, an increase of $83.7 million or 26% from the first nine months of 2016. This increase in tax-equivalent net interest income was primarily attributable to an increase in average earning assets from the Cardinal acquisition. Average earning assets increased $3.5 billion or 30% from the first nine months of 2016 as average net loans increased $2.5 billion or 26% for the first nine months of 2017. Average investment securities increased $340.9 million or 26%. Partially offsetting the increases to tax-equivalent net interest income for the first nine months of 2017 was an increase of 15 basis points in the average cost of funds as compared to the first nine months of 2016 due to higher market interest rates. In addition, the first nine months of 2017 average yield on earning assets decreased a basis point from the first nine months of 2016 due to the replacement of maturing higher-yielding investment securities with those at a lower current interest rate despite an increase of $11.6 million from accretion on acquired loans. The net interest margin of 3.52% for the first nine months of 2017 was a decrease of 10 basis points from the net interest margin of 3.62% for the first nine months of 2016.

On a linked-quarter basis, net interest income for the third quarter of 2017 increased $14.0 million or 10% from the second quarter of 2017. The $14.0 million increase in net interest income occurred because total interest income increased $16.6 million while total interest expense only increased $2.6 million from the second quarter of 2017. United’s tax-equivalent net interest income for the third quarter of 2017 increased $13.6 million or 10% due mainly to increases in the average yield on and the average balance of earning assets. The third quarter of 2017 average yield on earning assets increased 25 basis points from the second quarter of 2017 due to additional loan accretion of $5.5 million on acquired loans. Average earning assets increased $426.5 million or 3% for the linked-quarter due to the Cardinal acquisition. Average net loans increased $492.6 million or 4% while average investment securities increased $40.6 million or 2%. Average short-term investments decreased $106.8 million or 8%. Partially offsetting the increases to tax-equivalent net interest income for the third quarter of 2017 was an increase of 7 basis points in the average cost of funds as compared to the second quarter of 2017 due to higher market interest rates. The net interest margin of 3.65% for the third quarter of 2017 was an increase of 21 basis points from the net interest margin of 3.44% for the second quarter of 2017.

For the quarters ended September 30, 2017 and 2016, the provision for loan losses was $7.3 million and $7.0 million, respectively, while the provision for the first nine months of 2017 was $21.4 million as compared to $18.7 million for the first nine months of 2016. Net charge-offs were $5.3 million and $19.3 million for the third quarter and first nine months of 2017, respectively, as compared to $6.8 million and $21.8 million for the third quarter and first nine months of 2016, respectively. Annualized net charge-offs as a percentage of average loans were 0.16% and 0.21% for the third quarter and first nine months of 2017, respectively.

Noninterest income for the third quarter of 2017 was $38.2 million, which was an increase of $19.2 million or 101% from the third quarter of 2016. The increase was due mainly to an increase of $19.4 million in income from mortgage banking activities due to increased production and sales of mortgage loans in the secondary market. As part of the Cardinal acquisition, United acquired Cardinal’s mortgage banking subsidiary, George Mason Mortgage, LLC (George Mason). George Mason is the largest locally headquartered home mortgage lender in the D.C. Metro region with offices located in Virginia, Maryland, North Carolina, South Carolina and the District of Columbia. Partially offsetting this increase was a decrease of $1.1 million in income from bank-owned insurance policies due to death benefits recorded during the third quarter of 2016.

Noninterest income for the first nine months of 2017 was $98.9 million, which was an increase of $45.5 million or 85% from the first nine months of 2016. Once again, the increase was mainly due to increased production and sales of mortgage loans in the secondary market as a result of the acquisition of Cardinal and its mortgage banking subsidiary, George Mason. Income from mortgage banking activities for the first nine months of 2017 increased $41.1 million from the first nine months of 2016. Also, net gains on the sales, calls and redemption of investment securities for the first nine months of 2017 increased $5.0 million from the first nine months of 2016 due mainly to a net gain of $3.8 million on the redemption of an investment security during the first quarter of 2017. Partially offsetting these increases was a decrease of $1.0 million in income from bank-owned insurance policies due to death benefits recorded during the first nine months of 2016.

On a linked-quarter basis, noninterest income for the third quarter of 2017 decreased $2.3 million or 6% from the second quarter of 2017 due mainly to a decline of $2.2 million in income from mortgage banking activities despite increased production and sales of mortgage loans in the secondary market. The decline was due mainly to the impact of Accounting Standards Codification (ASC) 815 “Derivatives and Hedging” (ASC 815-10-S99-1), formerly Staff Accounting Bulletin (SAB) 109, accounting requirement to record unrealized gains associated with George Mason’s locked mortgage loan pipeline which creates a timing difference in the recognition of income as the loans are sold. The impact of ASC 815-10-S99-1 resulted in a decline of $4.5 million in income for the third quarter of 2017 versus an increase of $1.0 million in income for the second quarter of 2017.

Noninterest expense for the third quarter of 2017 was $96.7 million, an increase of $33.9 million or 54% from the third quarter of 2016 due mainly to the additional employees and branch offices from the Cardinal acquisition as most major categories of noninterest expense showed increases. In particular, employee compensation increased $20.1 million, employee benefits increased $2.1 million, net occupancy expenses increased $2.4 million, and data processing expense increased $1.7 million. In addition, other real estate owned (OREO) expense increased $1.4 million due to declines in the fair value of OREO properties.

Noninterest expense for the first nine months of 2017 was $271.6 million, an increase of $85.9 million or 46% from the first nine months of 2016 due mainly to the additional employees and branch offices from the Cardinal acquisition. Employee compensation increased $54.1 million which includes an increase of $12.1 million in merger severance charges. Otherwise, employee compensation increased due to higher employee incentives and commissions expense mainly related to the mortgage banking production of George Mason. Employee benefits increased $6.0 million, net occupancy expenses increased $9.1 million which includes an increase of $4.4 million for the termination of leases and a reduction in value of leasehold improvements for closed offices and data processing expense increased $4.0 million which included a contract termination penalty of $525 thousand. In addition, other merger-related expenses increased $3.0 million.

On a linked-quarter basis, noninterest expense for the third quarter of 2017 decreased $15.5 million or 14% from the second quarter of 2017 generally due to a decline of $22.6 million in merger-related expenses. Partially offsetting this decrease was an increase in OREO expense of $2.2 million due to declines in the fair value of OREO properties.

For the third quarter of 2017, income tax expense was $27.8 million as compared to $18.8 million for the third quarter of 2016. This increase was mainly due to higher earnings and a higher effective tax rate as the result of a reduction in the income tax expense for the third quarter of 2016 due to an increase in United’s deferred tax rate. For the first nine months of 2017, income tax expense was $67.4 million as compared to $53.1 million for the first nine months of 2016 due to higher earnings and a higher effective tax rate. On a linked-quarter basis, income tax expense increased $8.5 million due to higher earnings partially offset by a decline in the effective tax rate due to the Cardinal acquisition. United’s effective tax rate was approximately 32.9% for the third quarter of 2017, 34.25% for the second quarter of 2017 and 31.2% for the third quarter of 2016. For the first nine months of 2017 and 2016, United's effective tax rate was approximately 33.7% and 33.0%, respectively.

United’s asset quality continues to be sound. At September 30, 2017, nonperforming loans were $168.4 million, or 1.28% of loans, net of unearned income as compared to nonperforming loans of $113.3 million, or 1.10% of loans, net of unearned income, at December 31, 2016. As of September 30, 2017, the allowance for loan losses was $74.9 million or 0.57% of loans, net of unearned income, as compared to $72.8 million or 0.70% of loans, net of unearned income, at December 31, 2016. Total nonperforming assets of $195.2 million, including OREO of $26.8 million at September 30, 2017, represented 1.02% of total assets as compared to nonperforming assets of $144.8 million or 1.00% of total assets at December 31, 2016.

United continues to be well-capitalized based upon regulatory guidelines. United’s estimated risk-based capital ratio is 14.3% at September 30, 2017 while its estimated Common Equity Tier 1 capital, Tier 1 capital and leverage ratios are 12.0%, 12.0% and 10.1%, respectively. 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%.

During the third quarter of 2017, United’s Board of Directors declared a cash dividend of $0.33 per share. United has increased its dividend to shareholders for 43 consecutive years. United is one of only two major banking companies in the USA to have achieved such a record.

United has consolidated assets of approximately $19.1 billion with 144 full service offices in West Virginia, Virginia, Maryland, Ohio, Pennsylvania and Washington, D.C. United Bankshares stock is traded on the NASDAQ Global Select Market under the quotation symbol “UBSI.”

Cautionary Statements

The Company is required under generally accepted accounting principles to evaluate subsequent events through the filing of its September 30, 2017 consolidated financial statements on Form 10-Q. As a result, the Company will continue to evaluate the impact of any subsequent events on critical accounting assumptions and estimates made as of September 30, 2017 and will adjust amounts preliminarily reported, if necessary.

Use of non-GAAP Financial Measures

This press release contains certain financial measures that are not recognized under U.S. generally accepted accounting principles ("GAAP"). Generally, United has presented these “non-GAAP” financial measures because it believes that these measures provide meaningful additional information to assist in the evaluation of United’s results of operations or financial position. Presentation of these non-GAAP financial measures is consistent with how United’s management evaluates its performance internally and these non-GAAP financial measures are frequently used by securities analysts, investors and other interested parties in the evaluation of companies in the banking industry.

Specifically, this press release contains certain references to financial measures identified as tax-equivalent (FTE) net interest income, tangible equity and tangible book value per share. 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 press release 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. The tax-equivalent adjustment combines amounts of interest income on federally nontaxable loans and investment securities using the statutory federal income tax rate of 35%.

Tangible common equity is calculated as GAAP total shareholders’ equity minus total intangible assets. Tangible common equity can thus be considered the most conservative valuation of the company. Tangible common equity is also presented on a per common share basis. Management provides these amounts to facilitate the understanding of as well as to assess the quality and composition of United’s capital structure. By removing the effect of intangible assets that result from merger and acquisition activity, the “permanent” items of common equity are presented. These two measures, along with others, are used by management to analyze capital adequacy.

Where non-GAAP financial measures are used, the comparable GAAP financial measure, as well as reconciliation to that comparable GAAP financial measure can be found in the attached financial information tables to this press release. Investors should recognize that United’s presentation of these non-GAAP financial measures might not be comparable to similarly titled measures at other companies. These non-GAAP financial measures should not be considered a substitute for GAAP basis measures and United strongly encourages a review of its condensed consolidated financial statements in their entirety.

Forward-Looking Statements

This press release contains certain forward-looking statements, including certain plans, expectations, goals and projections, which are subject to numerous assumptions, risks and uncertainties. Actual results could differ materially from those contained in or implied by such statements for a variety of factors including: changes in economic conditions; movements in interest rates; competitive pressures on product pricing and services; success and timing of business strategies; the nature and extent of governmental actions and reforms; and rapidly changing technology and evolving banking industry standards.

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