United Bankshares, Inc. — 2018 Form 10-K
Business context and reporting period. United Bankshares is a West Virginia-based financial holding company operating primarily in community banking and mortgage banking across West Virginia, Virginia, Washington, D.C., Maryland, and nearby markets. This filing covers the fiscal year ended December 31, 2018; fourth-quarter figures are identified separately. The 2018 results include Cardinal Financial, acquired in April 2017, for the full year, while 2017 included it only from the acquisition date.
Key financial metrics
| Metric | 2018 | 2017 |
|---|---|---|
| Total assets, year-end | $19.25 billion | $19.06 billion |
| Total loans, year-end | $13.42 billion | $13.01 billion |
| Total deposits, year-end | $13.99 billion | $13.83 billion |
| Total borrowings, year-end | $1.85 billion | $1.84 billion |
| Net interest income | $588.6 million | $549.0 million |
| Provision for loan losses | $22.0 million | $28.4 million |
| Net income | $256.3 million | $150.6 million |
| Diluted earnings per share | $2.45 | $1.54 |
| Operating cash flow | $292.5 million | $253.9 million |
- Net interest margin was 3.58%, unchanged year over year. The average yield on earning assets rose 29 basis points, while the average cost of funds rose 46 basis points.
- Return on average assets was 1.36% versus 0.85%; return on average equity was 7.84% versus 5.09%.
- Loans grew 3.16%, led by residential real estate loans (+16.86%) and consumer loans (+35.04%); commercial, financial and agricultural loans declined 3.31%.
- Cash and cash equivalents fell 38.76% to $1.02 billion as excess cash was deployed mainly into securities and loan growth. Investing activities used $871.5 million; financing activities used $66.8 million.
- Available-for-sale securities increased 22.79% to $2.34 billion. Shareholders’ equity was $3.25 billion. Regulatory capital ratios remained above well-capitalized thresholds: total risk-based capital 14.4%, CET1 12.2%, and leverage 10.1% at the holding-company level.
Material changes versus the prior comparable period
- Net income rose 70.2%, while pretax income increased 14.9%. The comparison was materially affected by a $37.7 million Tax Cuts and Jobs Act-related tax charge recorded in 2017; the effective tax rate was 21.7% in 2018 versus 47.1% in 2017.
- Net interest income increased 7.2%, reflecting higher earning-asset balances, including the full-year contribution from Cardinal, and higher asset yields. Higher funding costs partly offset those gains.
- Noninterest income decreased 2.2%, principally because investment securities activity shifted from a $5.6 million net gain in 2017 to a $2.6 million net loss in 2018. Noninterest expense was nearly flat at $368.2 million.
- Credit indicators improved overall: nonperforming loans declined to $142.8 million, or 1.06% of loans, from $168.7 million, or 1.30%. Net charge-offs were 0.17% of average loans versus 0.20%.
- United repurchased 2.87 million shares for approximately $100.9 million in 2018 and increased annual dividends per share to $1.36 from $1.33.
- In the fourth quarter, net income was $64.0 million, or $0.62 diluted EPS, versus $18.0 million, or $0.17, a year earlier. The prior-year quarter included the $37.7 million tax charge. Fourth-quarter net interest income declined 5.3% year over year, with higher funding costs and lower acquired-loan accretion; mortgage banking income also declined.
Outlook, commentary, risks and unusual items
- Management stated that liquidity was sufficient for depositors and customer credit needs, expected to meet obligations over the next 12 months, and had no material capital-expenditure commitments. The filing provides no numerical earnings or revenue guidance.
- Credit risk is concentrated in real estate-related lending: approximately $6.2 billion, or 45.9% of loans, was for real estate development and construction. Management considered the allowance adequate, but emphasized that estimates are subjective and actual losses may differ.
- The allowance for loan losses was $76.7 million, 0.57% of loans; coverage of nonperforming loans was 53.71%. Troubled debt restructurings totaled $59.4 million, including $48.9 million on nonaccrual. Management noted oil, gas and coal-related borrower exposures among restructurings.
- 2018 included $1.76 million in other-than-temporary investment impairment, primarily securities identified for sale; $1.46 million was recognized in the fourth quarter. Available-for-sale securities had $29.7 million in gross unrealized losses at year-end.
- Interest-rate sensitivity modeling estimated a 1.29% decline in one-year net interest income for an immediate, sustained 100-basis-point rate increase and a 2.71% decline for a 200-basis-point increase. Management cautioned that modeled outcomes depend on assumptions.
- Other material risks include economic weakness in the Mid-Atlantic region, real-estate values and borrower repayment capacity, deposit competition and funding costs, securities valuations, cybersecurity and third-party service-provider disruptions, regulation, and acquisition integration. The company disclosed routine legal proceedings and stated it expected no material financial effect.
- United adopted the new lease standard on January 1, 2019, recognizing approximately $67.0 million of lease assets and $70.7 million of lease liabilities. The expected 2020 adoption of the current expected credit loss standard (CECL) remained under evaluation; the filing does not provide a clear estimate of its financial impact.
Important facts for investors to verify
- How much of the earnings increase reflects recurring operating performance versus the unusually high 2017 tax expense, acquisition effects, and other one-time items.
- Whether deposit mix changes, rising deposit costs, and the fourth-quarter net interest income decline continue to pressure the net interest margin.
- Credit performance and collateral quality in commercial real estate, construction and development, and oil, gas and coal-related exposures; also monitor TDRs, delinquencies, and allowance coverage.
- The valuation, realized losses, and interest-rate sensitivity of the securities portfolio, including securities identified for sale and below-investment-grade trust preferred exposures.
- Liquidity and funding needs alongside share repurchases and dividends, including the maturity and refinancing profile of borrowings.
- Management’s CECL implementation estimate and the effect of lease accounting and other accounting changes on future reported results.
The consolidated financial statements received an unqualified audit opinion from Ernst & Young LLP, and the auditor also opined that internal control over financial reporting was effective as of December 31, 2018.