United Bankshares, Inc. — FY 2019 Form 10-K
Reporting period: Fiscal year ended December 31, 2019; filed March 2, 2020. United is a West Virginia financial holding company focused on community banking and mortgage banking, principally through United Bank and George Mason Mortgage. It reported approximately $19.7 billion in assets, $3.4 billion in shareholders’ equity, and 138 full-service offices.
Financial performance and position
| Metric | FY 2019 | FY 2018 | Change / context |
|---|---|---|---|
| Total interest income | $762.6 million | $717.7 million | Up 6.2% |
| Net interest income | $577.9 million | $588.6 million | Down 1.8%; tax-equivalent net interest margin was 3.39%, down 19 basis points |
| Provision for loan losses | $21.3 million | $22.0 million | Down 3.2% |
| Noninterest income | $150.5 million | $128.7 million | Up 16.9%, led by mortgage banking |
| Noninterest expense | $382.7 million | $368.2 million | Up 3.9% |
| Net income | $260.1 million | $256.3 million | Up 1.5% |
| Diluted earnings per share | $2.55 | $2.45 | Up 4.1% |
| Return on average assets / equity | 1.34% / 7.80% | 1.36% / 7.84% | Both slightly lower |
Balance sheet at year-end: Assets were $19.66 billion, up 2.1%; net loans were $13.64 billion, up 2.2%; and investment securities were $2.67 billion, up 5.0%. Deposits declined 1.0% to $13.85 billion. Total borrowings rose 19.6% to $2.21 billion, including $1.84 billion in long-term borrowings. Shareholders’ equity increased 3.5% to $3.36 billion.
Credit quality: Nonperforming loans declined to $131.1 million, or 0.96% of loans, from $142.8 million, or 1.06%. Nonperforming assets were $146.6 million, or 0.75% of assets. The allowance for loan losses was $77.1 million, 0.56% of loans; coverage of nonperforming loans improved to 58.79% from 53.71%. Commercial real estate and construction loans represented approximately 43.4% of total loans.
Cash flow and capital: Operating activities provided $147.7 million; investing activities used $379.0 million; and financing activities provided $48.5 million. Cash and cash equivalents fell $182.9 million to $837.5 million. Management said liquidity was sufficient and expected the company to meet obligations over the next 12 months. United reported holding-company regulatory ratios of 14.70% total risk-based capital, 12.53% CET1, and 10.48% leverage, above well-capitalized thresholds. The annual dividend was $1.37 per share.
Material changes and notable items
- Higher funding costs outweighed asset growth: interest expense increased 43.1% to $184.6 million, as deposit and borrowing costs rose. Average earning assets grew 3.7%, but net interest margin compressed.
- Mortgage banking income increased to $77.0 million from $58.1 million. Mortgage originations for sale were $2.57 billion and sales were $2.44 billion. The segment earned $10.2 million versus a $2.3 million loss in 2018, reflecting lower mortgage rates, refinancing activity, and reduced operating costs.
- Community banking segment income declined to $258.4 million from $268.7 million. Expenses included $5.1 million of penalties for prepaying FHLB advances and $589,000 of merger costs.
- United repurchased 1.01 million shares under repurchase plans for approximately $35.2 million. The board authorized a new plan for up to 4.0 million shares; all 4.0 million remained available at year-end.
- In the fourth quarter, net income was $63.3 million versus $64.0 million a year earlier; diluted EPS was $0.62 in both periods. Net interest income fell 3.7%, while noninterest income rose 24.9%, mainly from mortgage banking.
Outlook, risks, and contingencies
- Pending acquisition: United agreed to acquire Carolina Financial Corporation in a stock transaction at an exchange ratio of 1.13 United shares per Carolina Financial share. Carolina Financial had $4.71 billion in assets at year-end. United expected closing in the second quarter of 2020, subject to required conditions and approvals.
- Expected credit losses: The CECL standard took effect for United on January 1, 2020. Management estimated the allowance for credit losses could increase 20%–30%; the precise effects on earnings, liquidity, and regulatory capital were still being finalized.
- Interest-rate and benchmark exposure: A modeled immediate, sustained 100-basis-point rate increase implied a 1.09% reduction in one-year net interest income; a 200-basis-point increase implied a 2.37% reduction. LIBOR transition affected loans, derivatives, borrowings, and other instruments, with operational, legal, and financial effects not yet clear.
- Other principal risks: Real estate and commercial credit concentrations, economic weakness in the Mid-Atlantic region, securities valuation and impairment, deposit competition, cybersecurity and third-party service-provider disruptions, regulatory changes, and the ability to integrate acquisitions. Certain trust-preferred collateralized debt obligations were below investment grade.
- Contingencies: Management believed ordinary-course litigation would be resolved without material effect. It could not estimate potential losses from increased regulatory scrutiny of consumer products. Off-balance-sheet unused loan commitments totaled $3.61 billion and letters of credit $150.2 million; actual funding needs may be lower because commitments can expire undrawn.
- No formal earnings guidance was provided. Management stated it anticipated meeting obligations over the next 12 months and had no material capital-expenditure commitments.
Important facts for investors to verify
- Whether the Carolina Financial transaction closed as planned, and its final consideration, integration costs, and realized benefits.
- The actual CECL opening allowance adjustment and subsequent effects on credit costs, earnings, and regulatory capital.
- Trends in deposit pricing, borrowing levels, net interest margin, and liquidity following the 2019 increase in funding costs and borrowings.
- Credit performance and collateral values in commercial real estate, construction, and consumer auto lending; compare future nonperforming loans, charge-offs, and allowance coverage.
- Execution of the LIBOR transition and exposure to below-investment-grade securities, including Trup CDOs.
- Whether mortgage banking income and refinance volumes remain sustainable, and how share repurchases and dividends are balanced against capital needs.
Audit and controls: Ernst & Young issued unqualified opinions on the consolidated financial statements and internal control over financial reporting; management also concluded controls were effective.