United Bankshares, Inc. — Q1 2018 Form 10-Q
Business context and period. Unaudited results cover the three months ended March 31, 2018; balance-sheet comparisons are with December 31, 2017. United operates community banking and mortgage banking. Comparisons with Q1 2017 are materially affected by the April 2017 acquisition of Cardinal Financial, including mortgage subsidiary George Mason Mortgage.
Key financial results
Amounts are in millions except per-share data and ratios.
| Metric | Q1 2018 | Q1 2017 / prior period |
|---|---|---|
| Net interest income | $144.0 | $107.6, up 33.8% year over year |
| Net interest margin | 3.61% | 3.43% in Q1 2017; 3.77% in Q4 2017 |
| Provision for loan losses | $5.2 | $5.9 |
| Other income | $31.2 | $20.1 |
| Other expense | $90.5 | $62.8 |
| Income before taxes | $79.6 | $59.0 |
| Income taxes / effective tax rate | $17.9 / 22.48% | $20.2 / 34.25% |
| Net income | $61.7 | $38.8 |
| Diluted earnings per share | $0.59 | $0.48 |
| Operating cash flow | $158.5 | $65.0 |
- Balance sheet and liquidity: Total assets were $18.62 billion, down 2.3% from year-end. Cash and cash equivalents were $1.14 billion, down $527.0 million. Deposits were $13.65 billion, down 1.3%; total borrowings were $1.56 billion, down 15.1%. Shareholders’ equity was $3.25 billion.
- Lending and credit: Gross portfolio loans were $13.00 billion, essentially flat with year-end; net loans were $12.91 billion. Allowance for loan losses was $76.7 million, or 0.59% of loans. Nonperforming loans were $157.6 million (1.21% of loans) and nonperforming assets were $180.4 million (0.97% of assets), both lower than year-end. Net charge-offs were $5.2 million, or 0.16% of average loans on an annualized basis.
- Capital and shareholder returns: Regulatory ratios were 14.62% risk-based capital, 12.38% Common Equity Tier 1 and Tier 1 capital, and 10.48% leverage; the company reported each above applicable “well-capitalized” thresholds. The quarterly dividend was $0.34 per share.
- Cash flows: Investing activities used $187.0 million, mainly reflecting net securities purchases; financing activities used $498.5 million, including net short-term borrowing repayments, deposit outflows and dividends. Cash declined by $527.0 million during the quarter.
Material changes and management commentary
- Net income rose 59% year over year, but the comparison includes Cardinal and George Mason only in 2018. Management attributed higher interest income and expense mainly to acquired balances, with higher market rates also increasing funding costs. Acquired-loan accretion was $10.8 million versus $4.2 million a year earlier.
- Mortgage banking income was $14.6 million versus $0.7 million in Q1 2017, primarily reflecting George Mason; mortgage loan sales were $567.6 million versus $31.2 million. The mortgage banking segment reported a $2.4 million net loss, with $18.4 million of expense.
- Other expense increased 43.9%, mainly due to Cardinal-related staffing, branches and operating costs. Q1 2017 included $1.23 million of Cardinal merger expenses. Q1 2017 also included a $3.77 million net gain on a securities redemption; Q1 2018 recorded a $0.49 million net securities loss.
- The lower effective tax rate primarily reflects the Tax Cuts and Jobs Act, which reduced the federal corporate rate. United recorded a $37.7 million deferred tax expense in Q4 2017 to remeasure deferred tax balances; management said provisional tax-law accounting could be adjusted as further information becomes available.
- Available-for-sale securities increased to $2.09 billion. Their net-of-tax unrealized loss reduced other comprehensive income by $16.8 million during the quarter. Management reported $38.2 million of gross unrealized losses and said it did not consider the securities impaired other than a $0.3 million impairment on one investment. It sold seven trust-preferred CDO securities during the quarter.
Outlook, risks and contingencies
- No specific earnings or revenue guidance was provided. Management said it expects to meet obligations over the next 12 months, considers liquidity sufficient, and has no material capital-expenditure commitments or known material liquidity trends.
- Interest-rate simulation estimated that an immediate, sustained 100-basis-point increase would reduce one-year net interest income by 0.24%; a 200-basis-point increase would reduce it by 0.57%. These are model estimates, subject to assumptions and uncertainty. Management identified interest-rate risk as its most significant market risk.
- Credit risk, valuation of securities and acquired loans, tax estimates, competition, economic conditions, interest rates and changing banking technology are among the stated risks. Loan commitments outstanding were approximately $4.00 billion; standby letters of credit were $142.5 million. Management said many commitments expire undrawn.
- United is involved in ordinary-course legal proceedings; management, after consulting counsel, expected no material financial effect. No material changes to the risk factors in the 2017 Form 10-K were reported.
Important facts for investors to verify
- Separate acquisition-driven growth from underlying performance, especially net interest income, mortgage banking revenue, expenses and per-share results.
- Track whether deposit outflows and higher funding costs continue, and assess the company’s liquidity and borrowing needs alongside the decline in cash.
- Review credit trends, including nonperforming loans, the allowance, charge-offs and the oil, gas and coal exposure; reconcile the different nonaccrual presentations in the filing’s tables and discussion.
- Monitor securities valuation and accumulated other comprehensive loss, particularly trust-preferred CDO exposures and the effect of interest-rate changes.
- Assess mortgage banking profitability and production, the provisional tax accounting, and the sensitivity of results to acquired-loan accretion and interest rates.