UNITED BANKSHARES INC quarterly report, Q1 FY2019

United Bankshares, Inc. — Q1 2019 Form 10-Q

Reporting period: Three months ended March 31, 2019; balance-sheet comparisons are to December 31, 2018. United is a bank holding company with community banking and mortgage banking segments. Financial statements are unaudited; dollar amounts below are in millions unless noted.

Key financial results

Tax-equivalent net interest margin was 3.46%, down 15 basis points year over year and 4 basis points sequentially. Average earning assets grew 4.1%, but the average cost of funds rose 73 basis points year over year. Return on average assets was 1.34% (1.35% in Q1 2018); return on average equity was 7.88% (7.65%).

Financial position, cash flow and capital

• Total assets were $19.65 billion, up 2.05% from year-end 2018. Portfolio loans, net of unearned income, were $13.57 billion, up 1.12%; construction and land development loans rose 5.46% and residential real estate loans rose 1.39%.
• Deposits were $14.16 billion, up 1.18%. Interest-bearing deposits increased 2.20%, while noninterest-bearing deposits declined 1.05%. Deposits over $100,000 grew 8.58%.
• Total borrowings were $1.97 billion, up 6.28%, principally reflecting a $339 million increase in long-term FHLB advances. FHLB advances totaled $1.60 billion; the company reported approximately $3.70 billion of additional FHLB borrowing capacity subject to collateral requirements.
• Cash and cash equivalents were $1.17 billion, up $152.3 million during the quarter. Operating cash flow was $93.2 million, versus $158.5 million in Q1 2018; investing activities used $175.9 million and financing activities provided $234.9 million.
• Shareholders’ equity was $3.29 billion. Regulatory capital ratios were 14.19% total risk-based, 12.02% Common Equity Tier 1 and Tier 1, and 10.16% leverage; each exceeded the stated well-capitalized thresholds.
• The board declared a $0.34-per-share dividend. United repurchased 354,000 shares under its public plan for approximately $11.62 million.

Material changes and credit quality

• Net income and EPS improved despite essentially flat net interest income, as lower expenses and income taxes more than offset higher funding costs.
• Nonperforming loans declined to $135.8 million, or 1.00% of loans, from $142.8 million, or 1.06%, at year-end. Nonperforming assets were $153.2 million, or 0.78% of assets. Nonaccrual loans were $63.4 million.
• The allowance for loan losses was $76.9 million, or 0.57% of loans; coverage of nonperforming loans was 56.64%, versus 53.71% at year-end. Net charge-offs were $4.8 million; the annualized net charge-off ratio was 0.14%. Management considered the allowance adequate, while noting that estimates depend on economic and borrower information.
• Mortgage banking reported $1.0 million net income versus a $2.4 million loss in Q1 2018. Mortgage banking income was $13.7 million, down from $14.6 million, and mortgage loan sales fell to $349.5 million from $567.6 million.

Outlook, risks and unusual items

• No specific earnings guidance is provided. Management stated that it expects to meet obligations over the next 12 months, considers liquidity sufficient, and has no material capital-expenditure commitments or known material trends expected to change liquidity.
• Interest-rate simulation estimated that an immediate, sustained 100-basis-point rate increase would reduce one-year net interest income by 1.83%; a 200-basis-point increase would reduce it by 3.89%. Management said modeled outcomes remained within board policy limits; actual outcomes may differ because of assumptions and market conditions.
• United adopted lease accounting on January 1, 2019, recognizing right-of-use assets and lease liabilities. At March 31, these were $63.1 million and $66.9 million, respectively; prior periods were not restated.
• Other notable items included $0.6 million of bank-owned life insurance death benefits and a $17.7 million after-tax improvement in other comprehensive income, primarily from available-for-sale securities valuation changes.
• Management cited higher FDIC assessment expense after United Bank became a large institution. Risks include economic and banking-industry conditions, interest rates, competition, strategy execution, regulation and technology. Risk factors were reported unchanged from the 2018 Form 10-K.
• United is involved in ordinary-course litigation; management, after consulting counsel, did not expect a material financial effect. Loan commitments were approximately $4.04 billion and standby letters of credit $131.5 million; commitments are not necessarily expected to be drawn. Management was evaluating the expected-credit-loss accounting standard, effective for United in 2020, and had not quantified its potential impact.

Most important facts for investors to verify

• Whether deposit and borrowing costs continue to outpace asset yields, pressuring the 3.46% net interest margin.
• Whether loan growth, delinquencies, charge-offs and reserve coverage remain stable, particularly in commercial real estate and construction lending.
• How deposit mix and reliance on FHLB advances evolve, including the cost and availability of secured borrowing capacity.
• Whether mortgage banking production and earnings recover, and whether reported results are affected by fair-value changes or unusual items.
• The eventual allowance and capital impact of the forthcoming expected-credit-loss standard, and the sensitivity of earnings to interest-rate changes.