United Bankshares, Inc. — Q1 2020 Form 10-Q
Business context and reporting period. Unaudited results cover the three months ended March 31, 2020, compared with Q1 2019; balance-sheet changes are versus December 31, 2019. United operates community banking and mortgage banking businesses. Amounts below are in millions of dollars unless stated otherwise.
Financial performance and condition
| Metric | Q1 2020 / March 31, 2020 | Comparable / prior date |
|---|---|---|
| Net interest income | $141.5 | $144.2 in Q1 2019 |
| Net interest margin | 3.30% | 3.46% in Q1 2019 |
| Provision for credit losses | $27.1 | $5.0 in Q1 2019 |
| Net income; diluted EPS | $40.2; $0.40 | $63.6; $0.62 in Q1 2019 |
| Noninterest income | $36.8 | $31.2 in Q1 2019 |
| Noninterest expense | $101.1 | $89.4 in Q1 2019 |
| Operating cash flow | $21.5 | $93.2 in Q1 2019 |
| Total assets | $20,370 | $19,662 at December 31, 2019 |
| Deposits | $14,014 | $13,852 at December 31, 2019 |
| Total borrowings | $2,687 | $2,213 at December 31, 2019 |
| Shareholders’ equity | $3,344 | $3,364 at December 31, 2019 |
Credit quality and liquidity. Gross loans were $13,856 million, up 1.0% from year-end; net loans were $13,701 million. The allowance for loan losses was $154.9 million, or 1.12% of loans, versus $77.1 million, or 0.56%, at year-end. Nonperforming loans were $132.6 million (0.96% of loans); nonperforming assets were $148.4 million (0.73% of assets). Cash and cash equivalents increased to $1,336.8 million. The bank reported $3,117 million of unused FHLB borrowing capacity, subject to collateral conditions.
Capital and shareholder returns. Regulatory ratios were 14.47% total risk-based capital, 12.26% Common Equity Tier 1 and Tier 1 capital, and 10.44% leverage. The quarterly dividend declared was $0.35 per share.
Material changes versus comparable periods
- Net income fell approximately 37% and diluted EPS declined from $0.62 to $0.40. Management attributed the main pressure to higher credit-loss provisioning amid CECL adoption and COVID-19 uncertainty.
- Net interest income declined 1.8% year over year, with lower asset yields partly offset by lower funding costs. Noninterest income rose 17.9%, principally as mortgage banking income increased to $17.6 million from $13.7 million; mortgage loan sales also increased.
- Noninterest expense rose 13.1%, including higher compensation and benefits, merger-related expense, and other costs. The quarter included $1.56 million of expenses related to the Carolina Financial acquisition.
- Cash and cash equivalents rose by $499 million, while borrowings increased by $475 million, including new FHLB advances. Deposits increased by $162 million.
- On January 1, United adopted CECL. The adoption increased the allowance for credit losses by $57.4 million and reduced retained earnings by $44.3 million, net of related tax effects. The company elected regulatory-capital transition relief.
Outlook, commentary, risks and unusual items
- COVID-19: Management said the pandemic’s effects on the remainder of 2020 were highly uncertain. Its Q1 CECL forecast assumed a 10%–15% GDP decline and 10%–15% unemployment in Q2 2020, followed by recovery and stabilization in 2021; these are allowance assumptions, not earnings guidance. The filing provides no formal earnings guidance.
- United offered eligible borrowers payment deferrals of up to 90 days, extendable to a maximum of 180 days, and temporarily waived certain customer fees. It reported processing more than 3,000 Paycheck Protection Program loans totaling over $900 million by mid-April, after quarter-end.
- Management identified exposure to industries affected by the pandemic, including energy, hospitality, restaurants, aviation, entertainment, retail and commercial real estate. The filing cites risks of borrower defaults, credit deterioration, liquidity demands, lower rates, market volatility, operational and cybersecurity risks, and a prolonged recession.
- Mortgage-market disruption produced significant mortgage derivative losses near quarter-end, although reported mortgage banking income increased year over year. Management said it found no goodwill impairment at March 31, but a sustained stock-price decline or other impairment indicators could prompt testing and a possible charge.
- United completed the Carolina Financial acquisition on May 1, 2020, after quarter-end. Carolina Financial had $4.8 billion in assets, $3.2 billion in gross loans and $3.6 billion in deposits at March 31; its results are excluded from Q1. United also disclosed LIBOR transition risks. Regulatory matters may lead to enforcement or customer remediation, but potential losses could not be reasonably estimated; management did not expect ordinary-course litigation to have a material effect.
Most important facts for investors to verify
- Whether the CECL allowance and its economic assumptions remain adequate as borrower performance and the pandemic’s effects develop.
- Trends in delinquencies, nonperforming loans, charge-offs, loan deferrals and exposures to highly affected industries.
- Deposit stability, FHLB funding costs and availability, liquidity needs, and the sustainability of regulatory capital ratios after transition relief.
- Mortgage banking derivative results and valuations, and whether Q1 mortgage income levels are repeatable.
- Carolina Financial integration, realized synergies and costs, and the effect of the acquisition on future earnings and capital.
- Potential outcomes of regulatory or consumer-product matters, LIBOR contract conversion, and any future goodwill impairment assessment.