United Bankshares, Inc. — 2017 Form 10-K
Business context and reporting period. This annual filing covers the fiscal year ended December 31, 2017; quarterly figures are also reported. United is a community and mortgage banking holding company operating mainly in West Virginia, Virginia, the Washington, D.C. region, and nearby markets. Its acquisition of Cardinal Financial Corporation closed April 21, 2017, expanding its D.C.-area presence and adding George Mason Mortgage. United consolidated its banking subsidiaries in the fourth quarter.
Key financial metrics
Unless otherwise noted, dollar amounts below are in millions.
| Metric | 2017 | 2016 |
|---|---|---|
| Total assets, year-end | $19,059 | $14,509 |
| Total loans, year-end | $13,011 | $10,341 |
| Total deposits, year-end | $13,831 | $10,797 |
| Total borrowings, year-end | $1,842 | $1,382 |
| Net interest income | $549.0 | $425.3 |
| Provision for loan losses | $28.4 | $24.5 |
| Noninterest income | $131.6 | $70.0 |
| Noninterest expense | $367.4 | $248.2 |
| Income before taxes | $284.8 | $222.7 |
| Net income | $150.6 | $147.1 |
| Diluted EPS | $1.54 | $1.99 |
| Net interest margin | 3.58% | 3.62% |
| Return on average assets / equity | 0.85% / 5.09% | 1.10% / 7.67% |
- Cash flow and liquidity: Operating cash flow was $253.9 million; investing activities provided $266.7 million and financing activities used $289.0 million. Year-end cash and cash equivalents were $1.666 billion. Management said liquidity was sufficient and expected to meet obligations over the next 12 months.
- Capital: Shareholders’ equity was $3.241 billion. United reported regulatory capital ratios of 14.2% total risk-based capital, 12.0% Tier 1, 12.0% common Tier 1, and 10.1% leverage; it and United Bank were classified as well-capitalized.
- Credit: Nonperforming loans rose to $168.7 million, or 1.30% of loans, from $113.3 million, or 1.10%. The allowance for loan losses was $76.6 million, 0.59% of loans, and covered 45.4% of nonperforming loans. Net charge-offs were $24.6 million, or 0.20% of average loans.
- Dividends: Annual dividends were $1.33 per share, up from $1.32; the payout ratio increased to 87.5% from 67.1%.
Material changes versus 2016
- Assets increased 31.4%, loans 25.8%, and deposits 28.1%, primarily reflecting Cardinal. United said that excluding the acquisition, portfolio loans declined $496.0 million and deposits declined $313.8 million from year-end 2016.
- Net interest income rose 29.1%, largely from acquired earning assets and increased acquired-loan accretion. The average yield on earning assets increased, but the average cost of funds rose 16 basis points and net interest margin fell 4 basis points.
- Noninterest income increased 88.0%, principally from mortgage banking following Cardinal. Mortgage loan sales were $2.4 billion versus $156.6 million in 2016; reported mortgage banking income was $58.9 million.
- Noninterest expense increased 48.0%, largely due to Cardinal-related staffing and operating costs. Merger-related expense was $26.8 million versus $6.1 million.
- Net income increased 2.4%, but diluted EPS fell from $1.99 to $1.54, reflecting the share count increase from acquisition shares and the 2016 stock offering, as well as a one-time tax charge. Fourth-quarter net income was $18.0 million, including the tax charge.
Outlook, commentary, risks, and unusual items
- Tax Act: The 2017 fourth quarter included $37.7 million of additional tax expense from remeasuring deferred tax assets and liabilities after the federal corporate rate reduction. The amount was provisional and could be adjusted as guidance and tax filings were completed. The reported 2017 effective tax rate was 47.1%, versus 33.9% in 2016.
- Cardinal integration: Management estimated approximately $27 million in annual cost savings when fully phased in, excluding one-time merger costs. The filing cautions that savings may be delayed, reduced, or not achieved and integration could disrupt customers, employees, or operations.
- Asset quality and concentrations: Management attributed higher nonaccrual and restructured lending partly to oil, gas, and coal relationships. Real estate rental-purpose loans were approximately $5.0 billion, or 38.1% of total loans. Commercial real estate, borrower repayment capacity, and collateral values remain important risks.
- Other risks: The filing highlights interest-rate exposure, securities valuation and impairment risk, competition, regulatory and tax uncertainty, cybersecurity and third-party service-provider risks, and dependence on successful acquisition integration. Legal proceedings in the ordinary course were not expected by management to have a material financial effect.
- Interest-rate sensitivity: The company’s model estimated that an immediate, sustained 100-basis-point increase would reduce one-year net interest income by 0.48%; a 100-basis-point decrease would reduce it by 0.18%. These are model estimates, not guidance.
- Guidance: The filing provides no specific earnings or revenue forecast. Management stated it anticipated meeting obligations over the next 12 months and had no material capital-expenditure commitments.
The independent auditor gave an unqualified opinion on the consolidated financial statements and internal controls over financial reporting.
Important facts for investors to verify
- How much of future earnings reflects Cardinal’s continuing contribution, and whether the estimated $27 million of annual cost savings are realized against integration costs.
- Whether nonperforming loans, restructurings, and losses tied to energy-sector borrowers continue to rise, and whether the allowance and coverage remain adequate.
- How mortgage banking production, margins, and income perform after the acquisition-driven increase in loan sales.
- Any subsequent adjustments to the provisional Tax Act charge and the effect of the lower tax rate on ongoing earnings.
- Deposit retention and funding costs, particularly given the reported organic decline in deposits and higher deposit and borrowing costs.
- Whether dividends remain supported by earnings, liquidity, and regulatory capital as the payout ratio was 87.5%.