United Bankshares, Inc. — Q3 2018 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2018. Figures are unaudited; dollar amounts below are in millions unless stated otherwise. United operates community banking and mortgage banking businesses. Comparisons with 2017 are affected by the April 2017 Cardinal Financial acquisition, whose results are included only from its acquisition date.
Financial performance
| Metric | Q3 2018 | Q3 2017 | Nine months 2018 | Nine months 2017 |
|---|---|---|---|---|
| Net interest income | $148.8 | $150.3 | $441.9 | $394.1 |
| Provision for loan losses | $4.8 | $7.3 | $16.2 | $21.4 |
| Other income | $31.7 | $38.2 | $98.9 | $98.9 |
| Other expense | $93.3 | $96.7 | $277.2 | $271.6 |
| Net income | $64.4 | $56.7 | $192.4 | $132.6 |
| Diluted EPS | $0.62 | $0.54 | $1.83 | $1.39 |
| Dividend per share | $0.34 | $0.33 | $1.02 | $0.99 |
- Q3 net income increased about 14%; nine-month net income rose about 45%. Lower effective taxes and, for the year-to-date comparison, Cardinal-related growth and 2017 acquisition expenses contributed to the improvement.
- Net interest income fell 1% in Q3 as interest expense rose faster than interest income; it increased 12% for the first nine months. Tax-equivalent net interest margin was 3.56% in Q3, down 9 basis points year over year, and 3.61% year to date, up 9 basis points.
- Q3 other income declined 17%, principally reflecting lower mortgage banking activity and securities results. Nine-month other income was essentially unchanged. Mortgage banking income was $13.3 million for Q3 versus $20.4 million; nine-month amounts were $46.5 million versus $43.6 million.
- Effective tax rates were 21.77% for Q3 and 22.25% for the first nine months, compared with 32.91% and 33.68% in 2017, primarily due to the Tax Cuts and Jobs Act.
Financial position, funding and cash flow
- At September 30, total assets were $19.19 billion, up less than 1% from year-end 2017. Net loans were $13.20 billion, up 2.0%; deposits were $14.09 billion, up 1.9%.
- Loan growth was led by residential real estate (+13.1%) and other consumer loans (+27.7%); commercial, financial and agricultural loans declined 2.6%, and construction and land development loans declined 8.3%.
- Cash and cash equivalents were $1.25 billion, down $411.5 million from year-end. Available-for-sale securities totaled $2.18 billion, up 15.3%; their gross unrealized losses were $54.9 million. Management said it did not consider impaired securities other-than-temporarily impaired and intended and expected to be able to hold them until recovery or maturity.
- Deposits remained the primary funding source. Total borrowings were approximately $1.70 billion, down 7.8% from year-end; FHLB advances were $1.28 billion, with a stated weighted-average rate of 2.13%. The company reported about $3.99 billion in unused FHLB borrowing capacity, subject to collateral and applicable conditions, and $230 million in correspondent-bank lines.
- Nine-month cash flows: operations provided $218.8 million; investing used $592.2 million; financing used $38.0 million. Cash declined $411.5 million, mainly as cash was deployed into securities and loans. The company repurchased about 1.38 million shares for $50.9 million and paid $107.0 million in cash dividends.
- Shareholders’ equity was $3.25 billion. Regulatory capital ratios were 14.64% risk-based capital, 12.40% Common Equity Tier 1, 12.40% Tier 1 and 10.26% leverage; management reported the company was well-capitalized.
Material changes and credit quality
- The allowance for loan losses was $76.9 million, or 0.58% of loans, versus $76.6 million and 0.59% at year-end. Allowance coverage of nonperforming loans was 52.65%, compared with 45.41% at year-end. Nine-month provision expense and net charge-offs declined year over year.
- Management reported nonperforming loans of $146.1 million, or 1.10% of loans, versus $168.7 million, or 1.30%, at year-end; nonperforming assets were $164.9 million, or 0.86% of assets. Restructured loans increased to $63.6 million from $50.1 million. Management attributed the reduction in nonaccrual loans in part to restructurings and recognized losses on certain large commercial relationships.
- Cardinal integration affected balances, revenue and expenses. 2017 nine-month results included $25.0 million of merger-related expense; the 2018 period included additional staffing, branch and processing costs. FDIC insurance expense also rose because the bank was treated as a large institution.
- Accumulated other comprehensive loss widened to $76.7 million from $42.0 million at year-end, mainly reflecting lower fair values of available-for-sale securities. The company repurchased shares under its authorization for up to 2 million shares; 623,100 shares remained authorized for repurchase at September 30.
Outlook, risks and contingencies
- No earnings or revenue guidance was provided. Management stated it expected to meet obligations over the next 12 months and had no material capital-expenditure commitments or known trends expected to materially change liquidity.
- Interest-rate simulation estimated a 0.90% decline in one-year net interest income under an immediate, sustained 100-basis-point rate increase and a 1.89% decline under a 200-basis-point increase. A 100-basis-point decline was estimated to increase one-year net interest income 1.60%; outcomes depend on assumptions and actual results may differ.
- Key uncertainties include economic and banking-industry conditions, interest rates, competition, execution of business strategies, regulation and technology. Management identified credit-loss estimates, securities valuation, acquired-loan accounting and income taxes as significant judgment areas.
- Off-balance-sheet exposures included $3.86 billion of loan commitments, mostly expiring within one year, and $132.7 million of standby letters of credit. George Mason maintained a $0.5 million reserve for mortgage-loan repurchase claims. Management expected normal-course litigation to have no material effect on financial position.
- Management reported disclosure controls were effective and no material change in internal control over financial reporting during the quarter. The company expected to adopt the new lease standard on January 1, 2019; implementation and the balance-sheet impact were still being assessed.
Important facts for investors to verify
- Whether rising deposit and borrowing costs continue to pressure net interest income and margin.
- Trends in mortgage originations, sales and fair-value changes, given the sharp Q3 decline in mortgage banking income.
- Whether higher restructured-loan balances and commercial credit exposures lead to renewed provisions, charge-offs or deterioration in asset quality.
- The extent to which unrealized securities losses affect capital or become realized, and the assumptions supporting management’s ability to hold securities to recovery.
- How much reported year-over-year earnings growth reflects the Cardinal acquisition, lower taxes and prior-year merger costs, rather than ongoing organic improvement.
- The final balance-sheet effect of lease-standard adoption and the availability of contingent borrowing capacity under collateral and covenant requirements.