United Bankshares, Inc. — Q1 2017 Form 10-Q
Reporting period: Three months ended March 31, 2017. Unaudited consolidated results; dollar amounts below are in millions unless otherwise noted. United is a bank holding company. The filing was signed May 9, 2017.
Financial performance and condition
| Metric | Q1 2017 / March 31, 2017 | Comparable period / prior year-end |
|---|---|---|
| Total assets | $14,762.3 | $14,508.9 at Dec. 31, 2016 |
| Net interest income | $107.6 | $98.3 in Q1 2016 |
| Net income | $38.8 | $34.7 in Q1 2016 |
| Diluted EPS | $0.48 | $0.50 in Q1 2016 |
| Tax-equivalent net interest margin | 3.43% | 3.64% in Q1 2016 |
| Cash and cash equivalents | $1,667.3 | $1,434.5 at Dec. 31, 2016 |
| Deposits | $11,062.3 | $10,796.9 at Dec. 31, 2016 |
| Total borrowings | $1,341.0 | $1,381.6 at Dec. 31, 2016 |
| Shareholders’ equity | $2,252.9 | $2,235.7 at Dec. 31, 2016 |
- Total interest income rose 11.3% year over year to $120.8 million; interest expense rose 28.7% to $13.1 million. Provision for loan losses was $5.9 million, up from $4.0 million.
- Other income was $20.1 million, including a $3.8 million gain from redemption of an investment security. Other expense was $62.8 million, including $1.2 million in Cardinal-related merger expenses. Income before taxes was $59.0 million; income tax expense was $20.2 million.
- Operating cash flow was $65.0 million; investing activities used $32.0 million; financing activities provided $199.8 million. Cash and cash equivalents increased $232.8 million during the quarter.
- Net loans were $10,336.2 million, up $67.8 million from year-end. The allowance for loan losses was $72.9 million, or 0.70% of loans net of unearned income. The allowance including lending-commitment reserves was $73.8 million.
- Annualized return on average assets was 1.09%, versus 1.13% in Q1 2016; return on average equity was 6.98%, versus 8.06%. The quarterly dividend was $0.33 per share, unchanged year over year.
Material changes and developments
- Net income increased 11.8% year over year, but diluted EPS declined from $0.50 to $0.48. Management attributed the per-share decline primarily to 4.33 million shares issued in a December 2016 public offering.
- Tax-equivalent net interest income grew 9.4% year over year, helped by higher average earning assets following the 2016 Bank of Georgetown acquisition. Margin fell 21 basis points year over year and 19 basis points from Q4 2016, reflecting lower earning-asset yields and higher funding costs.
- United completed its acquisition of Cardinal Financial Corporation on April 21, 2017, after the reporting date. Cardinal had $4.30 billion of assets and 29 offices at March 31. Its results are excluded from Q1 2017 and will be consolidated from the acquisition date. The deal expands United’s Washington, D.C. metropolitan presence.
- Deposits increased 2.46% and total borrowings declined 2.94% from year-end. Cash growth chiefly reflected higher interest-bearing deposits with the Federal Reserve.
- Net charge-offs were $5.8 million, versus $4.3 million in Q1 2016. Nonperforming assets were reported at $151.2 million, or 1.02% of assets. The allowance for loan losses was broadly unchanged.
Outlook, risks and unusual items
- No earnings or revenue guidance is provided. Management said liquidity was sufficient, expected to meet obligations over the next 12 months, and identified no material commitments for capital expenditures or known trends expected to materially change liquidity.
- Management described capital as sound. At March 31, regulatory ratios were 14.94% total risk-based capital, 12.27% Common Equity Tier 1, 14.29% Tier 1, and 12.05% leverage—above the stated well-capitalized thresholds. Following Cardinal’s acquisition, trust preferred securities will move from Tier 1 to Tier 2 capital treatment; the change is expected in Q2 2017 reporting.
- Credit quality warrants monitoring: nonaccrual loans increased with downgrades involving several oil, gas and coal industry relationships; troubled debt restructurings increased to $24.0 million. Management cited uncertainty in estimates used for credit-loss reserves, acquired loans, taxes, and securities valuation.
- Available-for-sale securities had $24.8 million of gross unrealized losses. The portfolio included $48.1 million amortized cost of trust-preferred CDOs, carried at $36.9 million fair value; these were valued using significant unobservable inputs. Management stated it did not intend, and was not more likely than not required, to sell these securities before recovery. A 200-basis-point increase in discount rates was estimated to reduce their fair value by about 17%, or $6.3 million.
- A $44,000 credit-related impairment charge was recorded on one non-agency residential mortgage-backed security. Legal proceedings were described as ordinary-course matters expected by management to have no material financial effect. No material changes to the risk factors in the 2016 Form 10-K were reported.
- Interest-rate simulations estimated a 0.67% decline in one-year net interest income under an immediate, sustained 100-basis-point rate increase, and a 1.07% increase under a 100-basis-point decline. These are model estimates, not forecasts.
Important facts for investors to verify
- Reconcile reported nonperforming-loan figures: MD&A reports $121.34 million of nonperforming loans, while its narrative gives $90.60 million of nonaccrual loans; the credit-quality table reports $102.12 million of nonaccrual loans. Confirm definitions and figures in the full filing.
- Assess Cardinal’s purchase accounting, integration costs, expected synergies, and post-close effect on capital, funding, and earnings; Q1 excludes Cardinal’s operating results.
- Track net interest margin, funding costs, loan accretion, and performance as interest rates change.
- Monitor trends in criticized and nonperforming loans, particularly commercial and energy-related exposures, and the adequacy of loan-loss allowances.
- Review the valuation assumptions and potential liquidity or credit risks of trust-preferred CDOs and other securities with unrealized losses.