UNITED BANKSHARES INC quarterly report, Q3 FY2019

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Business context and reporting period

United Bankshares, Inc. (NASDAQ: UBSI) is a bank holding company with community banking and mortgage banking segments. This unaudited Form 10-Q covers the quarter and nine months ended September 30, 2019; comparative results are for 2018. Balance-sheet comparisons are against December 31, 2018. Amounts below are in U.S. dollars; financial figures are rounded to millions unless noted.

Financial results and position

  • Profit: Third-quarter net income was $66.0 million, up 2.4% from $64.4 million; diluted EPS was $0.65 versus $0.62. Nine-month net income was $196.8 million, up 2.3%, and diluted EPS was $1.93 versus $1.83.
  • Interest income and margin: Q3 interest income was $190.4 million, up 2.9%, but interest expense rose 33.4% to $48.4 million. Net interest income fell 4.6% to $141.9 million. Tax-equivalent net interest margin contracted to 3.27% from 3.56% in Q3 2018. For nine months, net interest income declined 1.2% to $436.6 million and tax-equivalent margin was 3.42%, down from 3.61%.
  • Other income and costs: Q3 other income rose 33.3% to $42.2 million, mainly reflecting mortgage banking activity. Nine-month other income increased 14.5% to $113.2 million. Other expense rose 3.0% in Q3 to $96.1 million and 3.1% for nine months to $285.8 million; nine-month costs included $5.1 million of FHLB prepayment penalties.
  • Credit costs and asset quality: Provision for loan losses was $5.0 million in Q3 and $15.4 million for nine months, versus $4.8 million and $16.2 million, respectively, in 2018. Nine-month net charge-offs were $15.1 million, down from $15.9 million. Nonperforming loans were $140.3 million, or 1.03% of loans, compared with $142.8 million, or 1.06%, at year-end. The allowance for loan losses was $77.1 million, or 0.57% of loans; coverage of nonperforming loans was 55.0%.
  • Cash flow: For nine months, operating activities provided $91.0 million, investing activities used $286.8 million, and financing activities provided $151.6 million. Cash and cash equivalents ended at $976.2 million, down $44.2 million from year-end; operating cash flow was below the $218.8 million reported for the comparable 2018 period.
  • Loans and assets: Total assets were $19.75 billion, up 2.6% from year-end. Portfolio loans, net of unearned income, grew 1.6% to $13.63 billion; loans held for sale increased 65.0% to $412.2 million. Growth was concentrated in residential real estate and consumer lending, while construction and land-development loans declined.
  • Funding, debt and liquidity: Deposits increased 0.7% to $14.10 billion. Total borrowings were approximately $2.04 billion, up 10.2%, including $1.67 billion of FHLB advances. The company reported $976.2 million of cash and cash equivalents, approximately $3.89 billion of available FHLB borrowing subject to collateral, and unused correspondent-bank lines of $230 million; its separate $20 million revolving line was undrawn.
  • Capital and shareholder returns: Shareholders’ equity was $3.35 billion, up 3.2%. Regulatory capital ratios were 14.44% risk-based, 12.28% Common Equity Tier 1 and Tier 1, and 10.20% leverage; all exceeded the stated well-capitalized thresholds. The quarterly dividend was $0.34 per share. The company repurchased approximately 977,000 shares for $34.1 million during the first nine months.

Material changes versus comparable periods

  • Mortgage banking was a major positive: Q3 mortgage banking income reached $24.0 million versus $13.3 million, and nine-month income was $59.4 million versus $46.5 million. The mortgage segment reported net income of $3.4 million for Q3 and $8.3 million for nine months, compared with losses in both 2018 periods.
  • Higher funding costs outweighed higher interest income. Management attributed margin pressure to the increased cost of funds, lower acquired-loan accretion, and changes in the mix of interest-bearing liabilities. Acquired-loan accretion was $7.2 million in Q3 versus $11.6 million a year earlier.
  • Q3 consolidated net income increased despite lower net interest income, supported by stronger mortgage banking revenue and lower income-tax expense. Nine-month net income also increased modestly.
  • Total assets and portfolio loans grew, but borrowing growth outpaced deposit growth. Noninterest-bearing deposits increased while some money-market and savings balances declined; larger time deposits increased.
  • Accumulated other comprehensive loss narrowed to $15.8 million from $57.0 million at year-end, largely reflecting improved unrealized gains on available-for-sale securities.

Outlook, commentary, risks and unusual items

  • Management stated it expects to meet obligations over the next 12 months, anticipates no material capital-expenditure commitments, and knows of no trends expected to materially change liquidity. The filing provides no specific earnings or revenue guidance.
  • Interest-rate risk remains a key exposure. Modeling estimated that an immediate, sustained 100-basis-point increase would reduce one-year net interest income by 0.33%; a 200-basis-point increase would reduce it by 1.09%. Management cautioned that model assumptions are uncertain and actual results may differ.
  • Credit risks include a large commercial relationship downgraded to special mention and another relationship transferred to nonaccrual while awaiting lawsuit settlement. Management considered the allowance adequate and reported no undisclosed known problem loans expected to materially affect results.
  • One trust-preferred CDO security generated $9,000 of Q3 other-than-temporary impairment. Management said it did not intend, and was not more likely than not required, to sell the affected securities before recovery; unrealized losses may nevertheless be realized if circumstances or plans change.
  • The company adopted lease accounting in 2019, recognizing $60.3 million of right-of-use assets and $64.0 million of lease liabilities at September 30. It was preparing for the expected January 1, 2020 adoption of the current expected credit losses standard; the eventual financial-statement impact was not yet quantified.
  • Loan commitments were approximately $3.83 billion; standby letters of credit were $137.0 million. Management said many commitments are expected to expire undrawn. Normal-course litigation was not expected by management to have a material financial effect. No material change to the risk factors disclosed in the 2018 Form 10-K was reported.
  • Controls and procedures were assessed as effective, with no material change in internal control over financial reporting reported during the quarter.

Important facts for investors to verify

  1. Whether mortgage banking production and gains can remain strong, and how sensitive earnings are to changes in mortgage rates and refinancing activity.
  2. Whether deposit pricing, funding mix and FHLB borrowing levels continue to pressure net interest margin, particularly as acquired-loan accretion declines.
  3. Credit trends by commercial portfolio, including the status of the downgraded and nonaccrual relationships, charge-offs, and the adequacy of the allowance.
  4. The quality and concentration of investment securities, including trust-preferred exposures and the company’s ability and intent to hold securities with unrealized losses.
  5. The impact of the January 2020 expected-credit-loss accounting adoption; the filing describes implementation work but does not provide a clear quantified estimate.
  6. Reconcile nonaccrual and nonperforming-loan disclosures across the filing: the credit-quality note reports total nonaccrual loans of $120.6 million, while MD&A cites nonaccrual loans of $69.9 million. The filing text does not clearly explain this difference.
  7. How liquidity and capital will evolve alongside dividends, share repurchases, loan growth and the increased use of borrowings.