United Bankshares, Inc. — Q1 2021 Form 10-Q
Reporting period: Three months ended March 31, 2021; unaudited. United is a regional bank holding company with community banking and mortgage banking segments. Comparisons with Q1 2020 are affected by the Carolina Financial acquisition, completed May 1, 2020, whose results are included in Q1 2021 but not Q1 2020.
Financial results and position
| Metric | Q1 2021 / March 31, 2021 | Comparable period / prior year-end |
|---|---|---|
| Net interest income | $191.0 million | $141.5 million in Q1 2020; +34.9% |
| Net interest margin | 3.30% | 3.30% in Q1 2020; 3.33% in Q4 2020 |
| Other income | $92.6 million | $36.8 million in Q1 2020; +151.5% |
| Income before taxes | $134.5 million | $50.1 million in Q1 2020 |
| Net income / diluted EPS | $106.9 million / $0.83 | $40.2 million / $0.40 in Q1 2020 |
| Operating cash flow | $80.6 million | $21.5 million in Q1 2020 |
| Total assets | $27.03 billion | $26.18 billion at Dec. 31, 2020 |
| Loans and leases, net of unearned income | $17.37 billion | $17.59 billion at Dec. 31, 2020; down 1.3% |
| Deposits | $21.40 billion | $20.59 billion at Dec. 31, 2020; up 3.9% |
| Total borrowings | $959.4 million | $1.01 billion at Dec. 31, 2020; down 4.7% |
| Cash and cash equivalents | $2.96 billion | $2.21 billion at Dec. 31, 2020 |
| Shareholders’ equity | $4.33 billion | $4.30 billion at Dec. 31, 2020 |
Mortgage banking income rose to $65.4 million from $17.6 million, driven by higher mortgage production and sales, acquisition effects, and mortgage-related fair-value activity. Mortgage originations for sale were $1.93 billion and loan sales were $1.84 billion. Expenses increased 47.3% year over year to $148.9 million, mainly reflecting the acquisition and higher mortgage compensation and commissions.
Credit costs fell sharply: provision for credit losses was $0.1 million versus $27.1 million in Q1 2020. Net charge-offs were $4.5 million, or 0.10% annualized of average loans. The allowance for loan and lease losses was $231.6 million, 1.33% of loans; nonperforming loans and leases were $116.2 million, or 0.67% of loans. Nonperforming assets, including $18.7 million of OREO, were $134.9 million, or 0.50% of assets.
Regulatory capital ratios were above well-capitalized thresholds: risk-based capital 15.68%, Common Equity Tier 1 13.43%, Tier 1 13.43%, and leverage 10.38%. The company declared a $0.35-per-share dividend and repurchased 306,204 shares under its public plan.
Material changes and management commentary
- Net income increased substantially, reflecting higher mortgage banking income, the Carolina Financial acquisition, increased net interest income, and a much smaller credit-loss provision. The comparison is not like-for-like because the acquisition closed after Q1 2020.
- Net interest income benefited from acquired assets, PPP activity, and lower funding costs. The average cost of funds fell 95 basis points year over year, partly offset by a 65-basis-point decline in average earning-asset yield. Q1 PPP fee income was $11.3 million.
- Deposits grew, especially noninterest-bearing balances. Portfolio loans declined, led by residential real estate and commercial real estate; construction and land-development loans increased.
- Management attributed the lower allowance and provision partly to improved economic forecasts and loan performance. It still identified elevated potential losses in hotel and accommodations lending, with a longer expected recovery than other portfolios.
- COVID-19 relief modifications covered 5,967 loans totaling about $3.18 billion; 407 modifications, totaling $193.4 million, remained in deferral at quarter-end. The company reported 8,946 PPP loans with balances of about $1.20 billion.
- United stated it expected to meet obligations over the next 12 months and had no material capital-expenditure commitments. No specific earnings or financial guidance was provided.
Risks, contingencies, and unusual items
- COVID-19’s effects on borrowers, credit losses, fee income, and funding needs remained uncertain. Management warned that further credit-loss expense could adversely affect capital; deposit outflows or higher wholesale funding costs could pressure liquidity and net interest margin.
- LIBOR transition affects loans, derivatives, borrowings, and other instruments. The company cited financial, operational, legal, compliance, market, and customer risks if the transition is not managed effectively.
- Interest-rate simulation estimated a 1.58% decline in one-year net interest income under an immediate, sustained +100-basis-point shock and a 0.55% decline under a -100-basis-point shock. Results depend on assumptions and may differ from actual outcomes.
- Mortgage servicing rights are sensitive to prepayment and discount-rate assumptions; their estimated fair value was $26.2 million, compared with a $22.0 million carrying amount. No temporary MSR impairment was recorded in Q1.
- Management said ordinary-course litigation was not expected to materially affect financial position. It could not assess the probability or estimate potential losses from certain consumer-product and fee-related regulatory matters.
Important facts for investors to verify
- How much of the earnings increase reflects sustainable banking operations versus mortgage volume, derivative/fair-value effects, PPP fees, and acquisition accounting.
- Whether loan deferrals, criticized credits, hotel and accommodations exposure, and nonperforming-loan trends lead to higher future credit costs.
- Whether deposit growth persists and how cash deployment, loan growth, and funding costs affect net interest margin and returns.
- The company’s progress in integrating Carolina Financial and realizing anticipated synergies, alongside the effect of acquisition-related goodwill and purchase-accounting marks.
- Its LIBOR transition plan, interest-rate exposure, and sensitivity to mortgage prepayments and securities valuations.