United Bankshares, Inc. — 2020 Form 10-K
Business context and reporting period. This annual report covers the fiscal year ended December 31, 2020; quarterly figures below compare Q4 2020 with Q4 2019. United is a community and mortgage banking company operating primarily in the Mid-Atlantic and Southeast. On May 1, 2020, it acquired Carolina Financial, expanding its North and South Carolina footprint. The acquisition’s results are included from the closing date.
Financial performance and position
- Profit: 2020 net income was $289.0 million, up 11.1% from $260.1 million in 2019. Diluted EPS was $2.40, down from $2.55, reflecting in part the larger share count after issuing 28.0 million shares for the acquisition. Q4 net income was $92.4 million, or $0.71 per diluted share, versus $63.3 million, or $0.62, a year earlier.
- Interest income and margins: Net interest income rose 19.4% to $689.8 million as interest expense fell and earning assets grew. Tax-equivalent net interest margin declined to 3.24% from 3.39%; net interest spread increased to 2.95% from 2.87%.
- Other income and expenses: Noninterest income increased 135.7% to $354.7 million, mainly due to mortgage banking. Noninterest expense rose 51.1% to $578.2 million, including $54.2 million of acquisition-related costs, higher mortgage production costs, and $10.4 million of FHLB prepayment penalties.
- Credit quality: Provision for credit losses was $106.6 million, versus $21.3 million in 2019. The year-end allowance for loan and lease losses was $235.8 million, or 1.34% of loans, versus $77.1 million, or 0.56%, in 2019. Nonperforming loans and leases were $132.2 million, 0.75% of loans, compared with $131.1 million, 0.96%. Net charge-offs were 0.14% of average loans.
- Balance sheet and funding: Assets were $26.18 billion, up 33.2%; loans were $17.59 billion, up 28.3%; and deposits were $20.59 billion, up 48.6%. Cash and cash equivalents were $2.21 billion. Total borrowings were approximately $1.01 billion, down 54.5% from year-end 2019; long-term borrowings were $864.4 million. Shareholders’ equity was $4.30 billion.
- Cash flow and liquidity: Operating activities provided $140.4 million; investing activities provided $137.6 million; and financing activities provided $1.09 billion. Cash and cash equivalents increased $1.37 billion during the year. Management stated liquidity was sufficient; United reported $6.65 billion of unused FHLB borrowing capacity, subject to collateral requirements, and $230 million of unused correspondent-bank lines.
- Capital and distributions: At year-end, United reported a 15.55% total risk-based capital ratio, 13.30% CET1 ratio, and 10.34% leverage ratio. United Bank was classified as well capitalized. The annual dividend was $1.40 per share; 2020 was the company’s 47th consecutive year of dividend increases.
Material changes versus 2019
- Carolina Financial added approximately $5.0 billion of assets, $3.29 billion of loans and $3.87 billion of deposits at acquisition. The acquisition also contributed $318.8 million of goodwill; purchase-accounting fair values remained preliminary at year-end.
- Mortgage banking income rose to $266.1 million from $77.0 million. United originated $6.53 billion and sold $6.26 billion of mortgage loans for sale in the secondary market.
- United adopted CECL on January 1, 2020. Adoption increased the allowance for credit losses by $57.4 million and reduced retained earnings by $44.3 million; COVID-19-related forecasts and acquired loans further increased credit provisions.
- Average funding costs fell, but net interest margin narrowed. Year-end borrowings declined following repayment of FHLB advances, while deposits increased substantially through the acquisition and organic growth.
Outlook, commentary, risks and unusual items
- Outlook: The filing provides no specific earnings or revenue guidance. Management said the pandemic’s future effects were uncertain and could include continued borrower stress, reduced fee income, credit losses and pressure on net interest income.
- COVID-19 and PPP: United processed nearly 9,000 PPP loans totaling more than $1.29 billion and recognized $16.26 million in PPP net fee income. At year-end, 8,743 PPP loans totaling about $1.18 billion remained outstanding. The company also reported 1,002 eligible pandemic-related loan modifications outstanding, totaling about $399.9 million. PPP forgiveness, SBA guarantee compliance and potential related litigation remain risks.
- Credit and concentration risks: Approximately 43.4% of loans were in real estate and construction; hotel and traveler-accommodation loans were $668.2 million, or 3.79% of the portfolio. Management highlighted higher expected loss risk in hotels. Further recession, unemployment, collateral deterioration or extended payment relief could raise defaults and provisions.
- Interest-rate and market risks: The one-year model estimated net interest income would fall 2.61% under an immediate, sustained 100-basis-point rate increase and 4.32% under a 200-basis-point increase. The LIBOR transition may affect loans, derivatives and borrowings; some trust-preferred debt also references LIBOR.
- Other notable items: The company recorded a $1.38 million temporary impairment on mortgage servicing rights. Management expected ordinary-course litigation to have no material effect; it also noted possible regulatory scrutiny or customer remediation related to consumer products and fees, with potential losses not reasonably estimable. The financial-statement and internal-control audits received unqualified opinions; management and the auditor reported effective internal control over financial reporting.
Most important facts for investors to verify
- Whether Carolina Financial integration delivers expected cost savings and earnings benefits, and whether preliminary acquisition accounting or goodwill estimates change.
- Whether CECL reserves adequately reflect evolving borrower conditions, especially in commercial real estate, construction, hospitality and pandemic-modified loans.
- PPP forgiveness progress, fee recognition, SBA guarantee exposure and any material claims or litigation.
- Whether mortgage banking earnings normalize from 2020’s unusually high origination and sale volumes, and how mortgage servicing rights respond to prepayments and rates.
- Deposit stability, liquidity access and the sustainability of margins as rates and funding conditions change.
- Capital and dividend capacity, including the effects of regulatory limits and the company’s CECL capital transition election.