closures of many businesses that have led to a loss of revenues and a rapid increase in unemployment, material decreases in oil and gas prices, disrupted global supply chains, changes in consumer behavior because of the potential exposure to the virus, related emergency response legislation and an expectation that Federal Reserve policy will maintain a low interest rate environment for the foreseeable future.
On March 29, 2020, President Trump signed into law the Coronavirus Aid, Relief, and Economic Security Act, or the CARES Act, which authorized approximately $2 trillion in relief to businesses and workers that have been affected by events related to COVID-19. The CARES Act includes the Paycheck Protection Program (PPP), a nearly $350 billion program designed to aid small- and
medium-sized
businesses through federally guaranteed loans distributed through banks. These loans are intended to guarantee eight weeks of payroll and other costs to help those businesses remain viable and allow their workers to pay their bills. The CARES Act marked the third federal legislative response to the ongoing coronavirus outbreak, following the enactment on March 6, 2020 of supplemental appropriations in the “Coronavirus Preparedness and Response Supplemental Appropriations Act, 2020” and the enactment on March 18, 2020 of provisions relating to, among other things, paid sick leave and
COVID-19
testing in the “Families First Coronavirus Response Act.”
On April 16, 2020, the Small Business Administration (SBA) announced that all available funds under the PPP had been exhausted and applications were no longer being accepted. In response, President Trump signed into law the “Paycheck Protection Program and Health Care Enhancement Act” on April 24, 2020. This legislation provides additional fiscal year (FY) 2020 emergency supplemental funding to increase by $310 billion, the amount authorized and appropriated for commitments for the PPP authorized under section 7(a) of the Small Business Act, economic injury disaster loans and emergency grants under the CARES Act, to fund hospital and provider recovery and testing, and for other purposes. The SBA resumed accepting PPP loan applications on April 27, 2020 from approved lenders on behalf of any eligible borrower.
As of
mid-April,
United had processed over 3,000 loans totaling over $900 million under the PPP prior to all of the available “first round” funds for the program being exhausted. The SBA resumed accepting PPP loan applications on April 27, 2020 for the “second round” of funds from approved lenders on behalf of any eligible borrower. United has started processing loans under this “second round” of government funding.
. In the states where United operates, many jurisdictions have declared health emergencies. The resulting closures of
non-essential
businesses and related economic disruption has impacted our operations as well as the operations of our customers. Financial services have been identified as a Critical Infrastructure Sector by the Department of Homeland Security. Accordingly, our business remains open. To address the issues arising as a result of
COVID-19,
and in order to facilitate the continued delivery of essential services while maintaining a high level of safety for our customers as well as our employees, United has implemented the following policies:
| | • | Restricted all non-essential travel and large external gatherings and have instituted a mandatory quarantine period for anyone that has traveled to an impacted area. |
| | • | Temporarily closed all of our financial center lobbies and other corporate facilities to non-employees, except for certain limited cases by appointment only. United continues to serve our consumer and business customers through our drive-through facilities, ATMs, internet banking, mobile app and telephone customer service capabilities. |
| | • | Expanded remote-access availability so that our work-force has the capability to work from home or other remote locations. All activities are performed in accordance with our compliance and information security policies designed to ensure customer data and other information is properly safeguarded. |
| | • | Instituted mandatory social distancing policies for those employees not working remotely. Members of certain operations teams have been split into separate buildings or locations to create redundancy for key functions across the organization. |
United is currently unable to fully assess or predict the extent of the effects of
COVID-19
on our operations as the ultimate impact will depend on factors that are currently unknown and/or beyond our control.
Impact on our Financial Position and Results of Operations
. Significant uncertainties as to future economic conditions exist. While some industries have been impacted more severely than others, all businesses have been impacted to some degree. For the first quarter of 2020, the economic pressures, existing and forecasted, as of end of the quarter, coupled with the implementation of an expected loss methodology for determining United’s provision for credit losses as required by CECL contributed to an increased provision for credit losses for the quarter. Also, in United’s mortgage banking segment, a market disruption caused by the
COVID-19
pandemic resulted in significant losses on mortgage banking derivatives towards the end of the first quarter of 2020.
In addition, the economic pressures and uncertainties arising from the
COVID-19
pandemic may result in specific changes in consumer and business spending and borrowing and saving habits, affecting the demand for loans and other products and services United offers. Consumers affected by
COVID-19
may continue to demonstrate changed behavior even after the crisis is over. For example, consumers may decrease discretionary spending on a permanent or long-term basis, certain industries may take longer to recover (particularly those that rely on travel or large gatherings) as consumers may be hesitant to return to full social interaction, United lends to customers operating in such industries including energy, restaurants, hotels/lodging, aviation, entertainment, retail and commercial real estate, among others, that have been significantly impacted by
COVID-19
and we are continuing to monitor these customers closely. In response to the
COVID-19
pandemic, United has taken deliberate actions to increase
on-balance
sheet liquidity and increase capital ratio levels. In keeping with guidance from regulators, United is also actively working with
COVID-19
affected customers to waive fees from a variety of sources (overdraft fees, ATM fees, account maintenance fees, etc.) as well as affected borrowers to defer their payments, interest, and fees. These measures are thought, at this time, to be temporary in conjunction with the length of the expected
COVID-19
pandemic related economic crisis. The Company continues to monitor the impact of the
COVID-19
pandemic closely, as well as any effects that may result from the CARES Act and any subsequent legislation; however, the extent to which the
COVID-19
pandemic will impact United’s operations and financial results during the remainder of 2020 is highly uncertain.
ADOPTION OF THE CURRENT EXPECTED CREDIT LOSSES STANDARD
The Company has adopted Accounting Standards Update (ASU)
2016-13,
“Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments,” as amended, on January 1, 2020, as required by the Financial Accounting Standards Board (FASB). ASU No.
2016-13
was adopted by United using a modified retrospective approach. At the January 1, 2020 date of adoption, based on forecasts of macroeconomic conditions and exposures at that time, the aggregate impact to United was a net increase to the allowance for credit losses of $57.44 million and a decrease to retained earnings of $44.33 million, with the difference being an adjustment to deferred tax assets. United has elected to
phase-in
the impact to retained earnings using a five-year transition provision, allowed by the Federal Reserve Board and other federal banking agencies in response to the
COVID-19
pandemic, to delay for two years the full impact of ASU No.
2016-13
on regulatory capital, followed by a three-year transition period. The adoption of ASU No.
2016-13
had an insignificant impact on the Company’s held to maturity and available for sale securities portfolios.
ASU
2016-13
requires entities to report “expected” credit losses on financial instruments measured at amortized cost and other commitments to extend credit rather than the prior “incurred loss” model. These expected credit losses for financial assets held at the reporting date are to be based on historical experience, current conditions, and reasonable and supportable forecasts. Based on poor economic conditions at March 31, 2020, management recorded $27.12 million in provision for credit losses related to United’s loan portfolio, which will be discussed under the caption of “Provision for Credit Losses” in this Management’s Discussion and Analysis of Financial Condition and results of Operations.”
On May 1, 2020, United completed its acquisition of Carolina Financial Corporation (Carolina Financial). Carolina Financial was merged with and into United pursuant to the terms of the Agreement and Plan of Merger, dated November 17, 2019, by and between United and Carolina Financial (the Merger Agreement). The merger was accounted for under the acquisition method of accounting. The results of operations of Carolina Financial were not reflected in United’s results of operations for the first quarter of 2020, but will be included in the consolidated results of operations from the acquisition date.
Immediately following the Merger, CresCom Bank, a wholly-owned subsidiary of Carolina Financial, merged with and into United Bank, a wholly-owned subsidiary of United (the Bank Merger). United Bank survived the Bank Merger and continues to exist as a Virginia banking corporation.
The acquisition of Carolina Financial affords United the opportunity to expand its existing footprint in North Carolina and South Carolina. The merger resulted in a combined company with more than 200 locations in some of the best banking markets in the United States. As of March 31, 2020, Carolina Financial had $4.80 billion in assets with banking locations in North Carolina and South Carolina. CresCom Bank owns and operates Crescent Mortgage Company, which is based in Atlanta. Crescent Mortgage Company is approved to originate loans in 48 states partnering with community banks, credit unions and mortgage brokers.
TRANSITION FROM THE LONDON INTERBANK OFFERED RATE (LIBOR)
In 2017, the United Kingdom’s Financial Conduct Authority, which regulates LIBOR, publicly announced that it intends to stop persuading or compelling banks to submit the rates used to calculate LIBOR after 2021. Currently, it is unclear whether these banks, as a group or individually, will continue to submit the rates used to calculate LIBOR after 2021. It is also unclear whether LIBOR will continue to be viewed as an acceptable market benchmark, what rate or rates may become accepted alternatives to LIBOR, or what the effect of any such changes may be on the markets for LIBOR-indexed financial instruments.
Working groups comprised of various regulators and other industry groups have been formed in the United States and other countries in order to provide guidance on this topic. In particular, the Alternative Reference Rates Committee (ARRC) has been formed in the United States by the Federal Reserve Board and the Federal Reserve Bank of New York. The ARRC has identified the Secured Overnight Financing Rate (SOFR) as its preferred alternative reference rate for U.S. Dollar LIBOR. The ARRC has also published recommended fall-back language for LIBOR-linked financial instruments, among numerous other areas of guidance. At this time, however, it is unclear whether these recommendations will be broadly accepted by industry participants, whether they will continue to evolve, and what impact they will ultimately have on the broader markets that utilize LIBOR as a reference rate.
United has loans, derivative contracts, borrowings, and other financial instruments that are directly or indirectly dependent on LIBOR. The transition from LIBOR will cause changes to payment calculations for existing contracts that use LIBOR as the reference rate. These changes will create various risks surrounding the financial, operational, compliance and legal aspects associated with changing certain elements of existing contracts. United will also be subject to risks surrounding changes to models and systems that currently use LIBOR reference rates, as well as market and strategic risks that could arise from the use of alternative reference rates. Additionally, United could face reputational risks if this transition is not managed appropriately with its customers. While the full impact of the transition is not yet known, failure to adequately manage the transition could have a material adverse effect on our business, financial condition and results of operations.
The following discussion and analysis presents the significant changes in financial condition and the results of operations of United and its subsidiaries for the periods indicated below. This discussion and the unaudited consolidated financial statements and the notes to unaudited Consolidated Financial Statements include the accounts of United Bankshares, Inc. and its wholly-owned subsidiaries, unless otherwise indicated. Management has evaluated all significant events and transactions that occurred after March 31, 2020, but prior to the date these financial statements were issued, for potential recognition or disclosure required in these financial statements.
This discussion and analysis should be read in conjunction with the unaudited Consolidated Financial Statements and accompanying notes thereto, which are included elsewhere in this document.
USE OF
NON-GAAP
FINANCIAL MEASURES
This discussion and analysis contains certain financial measures that are not recognized under GAAP. Under SEC Regulation G, public companies making disclosures containing financial measures that are not in accordance with GAAP must also disclose, along with each
“non-GAAP”
financial measure, certain additional information, including a reconciliation of the
non-GAAP
financial measure to the closest comparable GAAP financial measure, as well as a statement of the company’s reasons for utilizing the
non-GAAP
financial measure.
Generally, United has presented a
non-GAAP
financial measure because it believes that this measure provides meaningful additional information to assist in the evaluation of United’s results of operations or financial position. Presentation of a
non-GAAP
financial measure is consistent with how United’s management evaluates its performance internally and this
non-GAAP
financial measure is frequently used by securities analysts, investors and other interested parties in the evaluation of companies in the banking industry. Specifically, this discussion contains certain references to financial measures identified as
tax-equivalent
(FTE) net interest income and return on average tangible equity. Management believes these
non-GAAP
financial measures to be helpful in understanding United’s results of operations or financial position.
Net interest income is presented in this discussion on a
tax-equivalent
basis. The
tax-equivalent
basis adjusts for the
tax-favored
status of income from certain loans and investments. Although this is a
non-GAAP
measure, United’s management believes this measure is more widely used within the financial services industry and provides better comparability of net interest income arising from taxable and
tax-exempt
sources. United uses this measure to monitor net interest income performance and to manage its balance sheet composition.
Average tangible equity is calculated as GAAP total shareholders’ equity minus total intangible assets. Tangible equity can thus be considered the most conservative valuation of the company. When considering net income, a return on average tangible equity can be calculated. Management provides a return on average equity to facilitate the understanding of as well as to assess the quality and composition of United’s capital structure. By removing the effect of intangible assets that result from merger and acquisition activity, the “permanent” items of shareholders’ equity are presented. This measure, along with others, is used by management to analyze capital adequacy and performance.
However, this
non-GAAP
information should be considered supplemental in nature and not as a substitute for related financial information prepared in accordance with GAAP. Where the
non-GAAP
financial measure is used, the comparable GAAP financial measure, as well as reconciliation to that comparable GAAP financial measure, as well as a statement of the company’s reasons for utilizing the
non-GAAP
financial measure, can be found within this discussion and analysis. Investors should recognize that United’s presentation of this
non-GAAP
financial measure might not be comparable to a similarly titled measure at other companies.
APPLICATION OF CRITICAL ACCOUNTING POLICIES
The accounting and reporting policies of United conform with U.S. generally accepted accounting principles. In preparing the consolidated financial statements, management is required to make estimates, assumptions and judgments that affect the amounts reported in the financial statements and accompanying notes. These estimates, assumptions and judgments, which are reviewed with the Audit Committee of the Board of Directors, are based on information available as of the date of the financial statements. Actual results could differ from these estimates. These policies, along with the disclosures presented in the financial statement notes and in this financial review, provide information on how significant assets and liabilities are valued in the financial statements and how those values are determined. Based on the valuation techniques used and the sensitivity of financial statement amounts to the methods, assumptions, and estimates underlying those amounts, management has identified the determination of the allowance for loan losses and the calculation of the income tax provision to be the accounting areas that require the most subjective or complex judgments, and as such could be most subject to revision as new information becomes available.
Allowance for Loan Losses
The allowance for loan losses is an estimate of the expected credit losses on financial assets measured at amortized cost to present the net amount expected to be collected as of the balance sheet date. Such allowance is based on the credit losses expected to arise over the life of the asset (contractual term). Determining the allowance for loan losses requires management to make estimates of expected credit losses that are highly uncertain and require a high degree of judgment. At March 31, 2020, the allowance for loan losses was $154.92 million and is subject to periodic adjustment based on management’s assessment of expected credit losses in the loan portfolio. Such adjustment from period to period can have a significant impact on United’s consolidated financial statements. To illustrate the potential effect on the financial statements of our estimates of the allowance for loan losses, a 10% increase in the allowance for loan losses would have required $15.5 million in additional allowance (funded by additional provision for loan losses), which would have negatively impacted the first quarter of 2020 net income by approximately $12.2 million,
after-tax
or $0.12 diluted per common share. Management’s evaluation of the adequacy of the allowance for loan losses and the appropriate provision for loan losses is based upon a quarterly evaluation of the loan portfolio. This evaluation is inherently subjective and requires significant estimates, including estimates related to the amounts and timing of future cash flows, value of collateral, losses on pools of homogeneous loans based on historical loss experience, and consideration of qualitative factors such as current economic trends, all of which are susceptible to constant and significant change. The allowance allocated to specific credits and loan pools grouped by similar risk characteristics is reviewed on a quarterly basis and adjusted as necessary based upon subsequent changes in circumstances. In determining the components of the allowance for loan losses, management considers the risk arising in part from, but not limited to, qualitative factors which include
charge-off
and delinquency trends, current business conditions and reasonable and supportable economic forecasts, lending policies and procedures, the size and risk characteristics of the loan portfolio, concentrations of credit, and other various factors. The methodology used to determine the allowance for loan losses is described in Note 6, Notes to Consolidated Financial Statements. A discussion of the factors leading to changes in the amount of the allowance for loan losses is included in the Provision for Credit Losses section of this Management’s Discussion and Analysis of Financial Condition and Results of Operations (MD&A).
United’s calculation of income tax provision is inherently complex due to the various different tax laws and jurisdictions in which we operate and requires management’s use of estimates and judgments in its determination. The current income tax liability also includes income tax expense related to our uncertain tax positions as required in ASC Topic 740, “Income Taxes.” Changes to the estimated accrued taxes can occur due to changes in tax rates, implementation of new business strategies, resolution of issues with taxing authorities and recently enacted statutory, judicial and regulatory guidance. These changes can be material to the Company’s operating results for any particular reporting period. The analysis of the income tax provision requires the assessments of the relative risks and merits of the appropriate tax treatment of transactions, filing positions, filing methods and taxable income calculations after considering statutes, regulations, judicial precedent and other information. United strives to keep abreast of changes in the tax laws and the issuance of regulations which may impact tax reporting and provisions for income tax expense.
United is also subject to audit by federal and state authorities. Because the application of tax laws is subject to varying interpretations, results of these audits may produce indicated liabilities which differ from United’s estimates and provisions. United continually evaluates its exposure to possible tax assessments arising from audits and records its estimate of probable exposure based on current facts and circumstances. The potential impact to United’s operating results for any of the changes cannot be reasonably estimated. See Note 16, Notes to Consolidated Financial Statements for information regarding United’s ASC Topic 740 disclosures.
Use of Fair Value Measurements
United determines the fair value of its financial instruments based on the fair value hierarchy established in ASC Topic 820, whereby the fair value of certain assets and liabilities is an exit price, representing the amount that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants. ASC Topic 820 establishes a three-level hierarchy for disclosure of assets and liabilities recorded at fair value. The classification of assets and liabilities within the hierarchy is based on whether the inputs in the methodology for determining fair value are observable or unobservable. Observable inputs reflect market-based information obtained from independent sources (Level 1 or Level 2), while unobservable inputs reflect management’s estimate of market data (Level 3). For assets and liabilities that are actively traded and have quoted prices or observable market data, a minimal amount of subjectivity concerning fair value is needed. Prices and values obtained from third party vendors that do not reflect forced liquidation or distressed sales are not adjusted by management. When quoted prices or observable market data are not available, management’s judgment is necessary to estimate fair value.
At March 31, 2020, approximately 14.86% of total assets, or $3.03 billion, consisted of financial instruments recorded at fair value. Of this total, approximately 82.77% or $2.51 billion of these financial instruments used valuation methodologies involving observable market data, collectively Level 1 and Level 2 measurements, to determine fair value. Approximately 17.23% or $521.76 million of these financial instruments were valued using unobservable market information or Level 3 measurements. Most of these financial instruments valued using unobservable market information were loans held for sale at our mortgage banking segment. At March 31, 2020, only $27.80 million or less than 1% of total liabilities were recorded at fair value. This entire amount was valued using methodologies involving observable market data. United does not believe that any changes in the unobservable inputs used to value the financial instruments mentioned above would have a material impact on United’s results of operations, liquidity, or capital resources. See Note 13 for additional information regarding ASC Topic 820 and its impact on United’s financial statements.
Any material effect on the financial statements related to these critical accounting areas is further discussed in this Management’s Discussion and Analysis of Financial Condition and Results of Operations.
United’s total assets as of March 31, 2020 were $20.37 billion, which was an increase of $708.33 million or 3.60% from December 31, 2019. The increase was mainly due to an increase of $499.34 million or 59.62% in cash and cash equivalents, an increase of $143.43 million or 1.05% in portfolio loans, an increase of $116.00 million or 29.93% in loans held for sale, and a $33.80 million increase in other assets. Investment securities remained flat, increasing $3.62 million or less than 1%. Total liabilities increased $728.46 million or 4.47% from
year-end
2019. Borrowings increased $474.64 million or 21.45%, deposits increased $161.75 million or 1.17%, and accrued expenses and other liabilities increased $86.52 million or 50.80%. Shareholders’ equity decreased $20.13 million or less than 1%.
The following discussion explains in more detail the changes in financial condition by major category.
Cash and Cash Equivalents
Cash and cash equivalents at March 31, 2020 increased $499.34 million or 59.62% from
year-end
2019. In particular, interest-bearing deposits with other banks increased $436.34 million or 66.98% as United placed more cash in an interest-bearing account with the Federal Reserve. In addition, cash and due from banks increased $63.00 million or 34.01% due to an increase of $73.80 million in cash. Federal funds sold increased $3 thousand or less than 1%. During the first three months of 2020, net cash of $21.48 million and $600.22 million were provided by operating and financing activities, respectively, while net cash of $122.36 million was used in investing activities. See the unaudited Consolidated Statements of Cash Flows for data on cash and cash equivalents provided and used in operating, investing and financing activities for the first three months of 2020 and 2019.
Total investment securities at March 31, 2020 were flat from
year-end
2019, increasing $3.62 million or less than 1%. Securities available for sale were flat, decreasing $19.78 million or less than 1%. This change in securities available for sale reflects $132.75 million in sales, maturities and calls of securities, $91.12 million in purchases, and an increase of $22.93 million in market value. The majority of the purchase activity was related to U.S. Treasury securities and obligations of U.S. Government corporations and agencies. Securities held to maturity declined $220 thousand or 15.21% from
year-end
2019. Equity securities were $9.01 million at March 31, 2020, an increase of $119 thousand or 1.34% due mainly to a change in value. Other investment securities increased $23.49 million or 10.58% from
year-end
2019 due mainly to purchases of Federal Home Loan Bank (FHLB) stock and investment tax credits.
The following table summarizes the changes in the available for sale securities since
year-end
2019:
| | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | |
U.S. Treasury securities and obligations of U.S. Government corporations and agencies | | $ | | | | $ | | | | $ | | ) | | | | %) |
State and political subdivisions | | | | | | | | | | | | | | | | % |
Mortgage-backed securities | | | | | | | | | | | | ) | | | | %) |
| | | | | | | | | | | | ) | | | | %) |
Trust preferred collateralized debt obligations | | | | | | | | | | | | ) | | | | %) |
Single issue trust preferred securities | | | | | | | | | | | | ) | | | | %) |
| | | | | | | | | | | | ) | | | | %) |
| | | | | | | | | | | | | | | | | |
Total available for sale securities, at fair value | | $ | | | | $ | | | | $ | | ) | | | | %) |
| | | | | | | | | | | | | | | | | |
The following table summarizes the changes in the held to maturity securities since
year-end
2019:
| | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | |
U.S. Treasury securities and obligations of U.S. Government corporations and agencies | | $ | | | | $ | | | | $ | | | | | | % |
State and political subdivisions | | | | (1) | | | | | | | | ) | | | | %) |
Mortgage-backed securities | | | | | | | | | | | | | | | | % |
Single issue trust preferred securities | | | | | | | | | | | | | | | | % |
Other corporate securities | | | | | | | | | | | | | | | | % |
| | | | | | | | | | | | | | | | | |
Total held to maturity securities, at amortized cost | | $ | | | | $ | | | | $ | | ) | | | | %) |
| | | | | | | | | | | | | | | | | |
: (1) net of allowance for credit losses of $10 thousand.
At March 31, 2020, gross unrealized losses on available for sale securities were $34.71 million. Securities with the most significant gross unrealized losses at March 31, 2020 consisted primarily of asset-backed securities, corporate securities, and single issue trust preferred securities. The asset-backed securities are backed by Federal Family
Education Loan Program (FFELP) student loan collateral which includes a minimum of a 97% government repayment guaranty, as well as additional credit support and subordination in excess of the government guaranteed portion. The corporate securities mainly consist of debt issuances of corporations representing a variety of industries, including financial institutions. The single issue trust preferred securities relate to securities of financial institutions.
As of March 31, 2020, United’s mortgage-backed securities had an amortized cost of $1.37 billion, with an estimated fair value of $1.43 billion. The portfolio consisted primarily of $781.62 million in agency residential mortgage-backed securities with a fair value of $813.60 million and $589.29 million in commercial agency mortgage-backed securities with an estimated fair value of $615.10 million.
As of March 31, 2020, United’s corporate securities had an amortized cost of $647.31 million, with an estimated fair value of $617.01 million. The portfolio consisted of $6.05 million in Trup Cdos with a fair value of $4.18 million and $18.20 million in single issue trust preferred securities with an estimated fair value of $15.68 million. In addition to the trust preferred securities, the Company held positions in various other corporate securities, including asset-backed securities with an amortized cost of $283.50 million and a fair value of $261.94 million and other corporate securities, with an amortized cost of $339.56 million and a fair value of $335.21 million.
The Trup Cdos consisted of pools of trust preferred securities issued by trusts related to financial institutions. United’s Trup Cdos had a fair value of $4.18 million as of March 31, 2020. As of March 31, 2020, all of the Trup Cdos were rated below investment grade. United’s single issue trust preferred securities had a fair value of $15.68 million as of March 31, 2020. Of the $15.68 million, $10.18 million or 64.91% were investment grade; $0.76 million or 4.87% were split rated; and $4.74 million or 30.22% were unrated. The two largest exposures accounted for 70.39% of the $15.68 million. These included Truist Bank at $6.30 million and Emigrant Bank at $4.74 million. All single-issue trust preferred securities are currently receiving full scheduled principal and interest payments.
The following is a summary of available for sale single-issue trust preferred securities as of March 31, 2020:
During the first quarter of 2020, United did not recognize any impairment on investment securities. Management does not believe that any individual security with an unrealized loss as of March 31, 2020 is impaired. United believes the decline in value resulted from changes in market interest rates, credit spreads and liquidity, not an adverse change in the expected contractual cash flows. Based on a review of each of the securities in the investment portfolio, management concluded that it was not probable that it would be unable to realize the cost basis investment and appropriate interest payments on such securities. United has the intent and the ability to hold these securities until such time as the value recovers or the securities mature. However, United acknowledges that any impaired securities may be sold in future periods in response to significant, unanticipated changes in asset/liability management decisions, unanticipated future market movements or business plan changes.
Further information regarding the amortized cost and estimated fair value of investment securities, including remaining maturities as well as a more detailed discussion of management’s impairment analysis, is presented in Note 3 to the unaudited Notes to Consolidated Financial Statements.
Loans held for sale increased $116.00 million or 29.93% from
year-end
2019. Loan originations in the secondary market exceeded sales during the first three months of 2020. Loan originations for the first three months of 2020 were $733.61 million while loans sales were $617.61 million. Loans held for sale were $503.51 million at March 31, 2020 as compared to $387.51 million at
year-end
2019.
Loans, net of unearned income, increased $143.43 million or 1.05%. Since
year-end
2019, commercial, financial and agricultural loans increased $306.63 million or 4.11% as commercial loans (not secured by real estate) increased $220.52 million or 9.65% while commercial real estate loans increased $86.11 million or 1.67%. Consumer loans increased $26.19 million or 2.25% due to an increase in indirect automobile financing. Partially offsetting these increases in loans, net of unearned income, was a $172.04 million or 12.22% decrease in construction and land development loans while residential real estate loans remained flat from prior year, decreasing $18.05 million or less than 1%.
The following table summarizes the changes in the major loan classes since
year-end
2019:
| | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | |
| | $ | | | | $ | | | | $ | | | | | | % |
| | | | | | | | | | | | | | | | | |
Commercial, financial, and agricultural: | | | | | | | | | | | | | | | | |
Owner-occupied commercial real estate | | $ | | | | $ | | | | $ | | ) | | | | %) |
Nonowner-occupied commercial real estate | | | | | | | | | | | | | | | | % |
| | | | | | | | | | | | | | | | % |
| | | | | | | | | | | | | | | | | |
Total commercial, financial, and agricultural | | $ | | | | $ | | | | $ | | | | | | % |
| | | | | | | | | | | | ) | | | | %) |
Construction & land development | | | | | | | | | | | | ) | | | | %) |
| | | | | | | | | | | | | | | | |
| | | | | | | | | | | | ) | | | | %) |
| | | | | | | | | | | | | | | | % |
| | | | | | | | | | | | | | | | | |
| | $ | | | | $ | | | | $ | | | | | | % |
| | | | ) | | | | ) | | | | | | | | % |
| | | | | | | | | | | | | | | | | |
Total Loans, net of unearned income | | $ | | | | $ | | | | $ | | | | | | % |
| | | | | | | | | | | | | | | | | |
For a further discussion of loans see Note 4 to the unaudited Notes to Consolidated Financial Statements.
Other assets increased $33.80 million or 7.65% from
year-end
2019, mainly due to a $16.16 million increase in accounts receivables and a $7.39 million increase in deferred tax assets due to timing differences. In addition, derivative assets increased $13.81 million. Partially offsetting these increases were decreases of $2.06 million in income tax receivable and $1.58 million in core deposit intangibles.
Deposits represent United’s primary source of funding. Total deposits at March 31, 2020 increased $161.75 million or 1.17%. In terms of composition, noninterest-bearing deposits increased $216.18 million or 4.68% while interest-bearing deposits decreased $54.43 million or less than 1% from December 31, 2019.
Noninterest-bearing deposits consist of demand deposit and noninterest bearing money market (MMDA) account balances. The $216.18 million increase in noninterest-bearing deposits was due mainly to increases in commercial noninterest-bearing deposits of $107.95 million or 4.50% and personal noninterest-bearing deposits of $42.71 million or 5.74%. In addition, sweep activity to noninterest bearing MMDAs increased $88.30 million or 7.12%.
Interest-bearing deposits consist of interest-bearing checking (NOW), regular savings, interest-bearing MMDA, and time deposit account balances. Interest-bearing MMDAs decreased $122.67 million or 2.17% while NOW accounts increased $19.61 million or 5.27% since
year-end
2019. In particular, interest-bearing MMDAs decreased $122.67 million as commercial MMDAs decreased $110.02 million, brokered MMDAs decreased $3.25 million, and personal MMDAs decreased $75.16 million. Partially offsetting these decreases in interest-bearing MMDAs is an increase of $65.76 million in public MMDAs. Excluding sweep activity from NOW accounts to interest-bearing MMDAs to reduce United’s reserve requirement at its Federal Reserve Bank, NOW accounts increased $48.66 million or 2.67% mainly due to an $88.32 million increase in public funds NOW accounts. Partially offsetting this increase was a decrease of $32.19 million in commercial NOW accounts and a decrease of $7.48 million in personal NOW accounts.
Regular savings increased $8.83 million or 1.00% from
year-end
2019 mainly due to an $11.32 million increase in personal savings accounts while commercial savings accounts decreased $2.08 million.
Time deposits under $100,000 remained flat, decreasing $4.34 million or less than 1% from
year-end
2019. This decrease in time deposits under $100,000 was the result of a $3.90 million decrease in Certificate of Deposit Account Registry Service (CDARS) balances and a $2.04 million decrease in fixed CDs under $100,000.
Since
year-end
2019, time deposits over $100,000 increased $44.15 million or 2.76% as fixed rate CDs increased $46.66 million and public funds CDs over $100,000 increased $50.01 million. These increases in time deposits over $100,000 were partly offset by a $47.54 million decrease in CDARS and a $4.99 million decrease in brokered certificates of deposits.
The table below summarizes the changes by deposit category since
year-end
2019:
| | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | |
| | $ | | | | $ | | | | $ | | | | | | % |
Interest-bearing checking | | | | | | | | | | | | | | | | % |
| | | | | | | | | | | | | | | | % |
| | | | | | | | | | | | ) | | | | %) |
Time deposits under $100,000 | | | | | | | | | | | | ) | | | | %) |
Time deposits over $100,000 (1) | | | | | | | | | | | | | | | | % |
| | | | | | | | | | | | | | | | | |
| | $ | | | | $ | | | | $ | | | | | | % |
| | | | | | | | | | | | | | | | | |
| (1) | Includes time deposits of $250,000 or more of $ 879,063 and $803,414 at March 31, 2020 and December 31, 2019, respectively. |
Total borrowings at March 31, 2020 increased $474.64 million or 21.45% since
year-end
2019. During the first three months of 2020, short-term borrowings increased $224.91 million or 60.03% due to a $225.00 million increase in short term FHLB advances. Short-term securities sold under agreements to repurchase remained flat, decreasing $93 thousand or less than 1%. Long-term borrowings increased $249.73 million or 13.59% from
year-end
2019 due to a $249.42 million increase in long-term FHLB advances as new borrowings exceeded repayments.
The table below summarizes the change in the borrowing categories since
year-end
2019:
| | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | |
| | $ | | | | $ | | | | $ | | | | | | % |
Short-term securities sold under agreements to repurchase | | | | | | | | | | | | ) | | | | %) |
| | | | | | | | | | | | | | | | % |
| | | | | | | | | | | | | | | | % |
Issuances of trust preferred capital securities | | | | | | | | | | | | | | | | % |
| | | | | | | | | | | | | | | | | |
| | $ | | | | $ | | | | $ | | | | | | % |
| | | | | | | | | | | | | | | | | |
For a further discussion of borrowings see Notes 9 and 10 to the unaudited Notes to Consolidated Financial Statements.
Accrued Expenses and Other Liabilities
Accrued expenses and other liabilities at March 31, 2020 increased $86.52 million or 50.80% from
year-end
2019. In particular, accounts payable associated with George Mason increased $62.25 million due to timing differences and derivative liabilities increased $24.73 million. In addition, accrued mortgage escrow liabilities increased $4.87 million and business franchise taxes increased $2.24 million. Partially offsetting these increases was a decrease of $6.01 million in incentives payables due to payments and a $1.34 million decrease in income taxes payable due to timing differences.
Shareholders’ equity at March 31, 2020 was $3.34 billion, which was a decrease of $20.13 million or less than 1% from
year-end
2019.
Retained earnings decreased $39.75 million or 3.51% from
year-end
2019. Earnings net of dividends for the first three months of 2020 were $4.58 million. Amount recognized in retained earnings for the adoption of ASU No.
2016-13
was $44.33 million.
Accumulated other comprehensive income increased $18.70 million or 53.62% from
year-end
2019 due mainly to an increase of $17.59 million in United’s available for sale investment portfolio, net of deferred income taxes. The
after-tax
accretion of pension costs was $1.11 million for the first quarter of 2020.
Net income for the first quarter of 2020 were $40.18 million as compared to earnings of $63.64 million for the first quarter of 2019. The lower amount of net income was driven primarily by a higher provision for loan losses resulting from an adverse future macroeconomic forecast as a result of the
COVID-19
pandemic. Diluted earnings per share were $0.40 for the first quarter of 2020 and $0.62 for the first quarter of 2019.
United’s annualized return on average assets for the first three months of 2020 was 0.82% and return on average shareholders’ equity was 4.82% as compared to 1.34% and 7.88% for the first three months of 2019. For the first three months of 2020, United’s annualized return on average tangible equity was 8.77%, as compared to 14.64% for the first three months of 2019.
| | | | | | | | | |
| | | |
| | | | | | |
Return on Average Tangible Equity: | | | | | | | | |
| | $ | | | | $ | | |
| | | | | | | | |
Average Total Shareholders’ Equity (GAAP) | | $ | | | | $ | | |
Less: Average Total Intangibles | | | | ) | | | | ) |
| | | | | | | | | |
(b) Average Tangible Equity (non-GAAP) | | $ | | | | $ | | |
Return on Tangible Equity (non-GAAP) [(a) / (b)] x 366 or 365/ (c) | | | | % | | | | % |
Net interest income for the first three months of 2020 was $141.52 million, a decrease of $2.65 million or 1.84% from net interest income of $144.17 million for the first three months of 2019. The decrease of $2.65 million in net interest income occurred because total interest income decreased $8.62 million while total interest expense only decreased $5.97 million from the first quarter of 2019.
The provision for credit losses was $27.12 million for the first three months of 2020 as compared to $5.00 million for the first three months of 2019. This increase was due to mainly the adoption of the Current Expected Credit Loss (CECL) accounting standard by United on January 1, 2020 and the reasonable and supportable forecasts for future macroeconomic scenarios used in the estimation of expected credit losses adversely impacted by the
COVID-19
pandemic. Noninterest income was $36.81 million for the first three months of 2020, an increase of $5.58 million or 17.88% from the first three months of 2019. Noninterest expense for the first three months of 2020 increased $11.71 million or 13.09% from the first three months of 2019. Income taxes decreased $7.44 million or 42.93% for the first three months of 2020 as compared to the first three months of 2019. The effective tax rate was 19.75% and 21.40% for the first quarter of 2020 and 2019, respectively.
The following discussion explains in more detail the results of operations by major category.
United operates in two business segments: community banking and mortgage banking.
Net income attributable to the community banking segment for the first quarter of 2020 was $42.05 million compared to net income of $64.89 million for the first quarter of 2019. As previously mentioned, the lower amount of net income was driven primarily by a higher provision for loan losses resulting from an adverse future macroeconomic forecast as a result of the
COVID-19
pandemic.
Net interest income of $140.42 million for the first quarter of 2020 was a decrease of $5.47 million or 3.75% from $145.89 million for the same period of 2019. Generally, net interest income for the first quarter of 2020 decreased from the first quarter of 2019 due to a decline in the average yield on earning assets due to a decline in market interest rates. Provision for loan losses was $27.12 million for the three months ended March 31, 2020, an increase of $22.12 million or 442.81% from a provision of $5.00 million for the same period of 2019. As previously mentioned, this increase was due to mainly the adoption of the CECL accounting standard by United on January 1, 2020 and the reasonable and supportable forecasts for future macroeconomic scenarios used in the estimation of expected credit losses adversely impacted by the
COVID-19
pandemic. Noninterest income increased $1.91 million for the first quarter of 2020 to $19.57 million as compared to $17.65 million for the first quarter of 2019. The increase of $1.91 million was due mainly to an increase of $561 thousand from income from bank-owned life insurance policies (BOLI) due to the recognition of death benefits of $1.19 million in the first quarter of 2020 as compared to death benefits of
$600 thousand for the first quarter of 2019. In addition, fees from trust services and fees from brokerage services increased. Noninterest expense was $80.46 million for the first quarter of 2020, compared to $75.99 million for the same period of 2019. The increase of $4.47 million in noninterest expense was primarily attributable to increases in employee compensation, employee benefits, equipment expense, data processing and other expense, which includes merger-related expenses from the announced acquisition of Carolina Financial.
The mortgage banking segment reported net income of $1.11 million for the first quarter of 2020, compared to net income of $1.04 million for the first quarter of 2019. Noninterest income, which consists mainly of realized and unrealized gains associated with the fair value of commitments and loans held for sale, was $21.19 million for the first quarter of 2020, compared to $16.11 million for the first quarter of 2019. Noninterest expense increased $5.92 million for the first quarter of 2020 to $20.76 million as compared to $14.84 million for the first quarter of 2019. Noninterest expense consists mainly of salaries, commissions and benefits of mortgage segment employees.
The following discussion explains in more detail the consolidated results of operations by major category.
Net interest income represents the primary component of United’s earnings. It is the difference between interest income from earning assets and interest expense incurred to fund these assets. Net interest income is impacted by changes in the volume and mix of interest-earning assets and interest-bearing liabilities, as well as changes in market interest rates. Such changes, and their impact on net interest income in 2020 and 2019, are presented below.
Net interest income for the first quarter of 2020 was $141.52 million, a decrease of $2.65 million or 1.84% from the first quarter of 2019. The $2.65 million decrease in net interest income occurred because total interest income decreased $8.62 million while total interest expense decreased $5.97 million from the first quarter of 2019. On a linked-quarter basis, net interest income for the first quarter of 2020 was relatively flat from the fourth quarter of 2019, increasing $235 thousand or less than 1%. The $235 thousand increase in net interest income occurred because total interest income decreased $3.39 million while total interest expense decreased $3.62 million from the fourth quarter of 2019.
Generally, net interest income for the first quarter of 2020 decreased from the first quarter of 2019 due to a larger decline in the yield on average earning assets in comparison to the cost of average interest-bearing liabilities. Both of these declines were due to a decrease in market interest rates for the first quarter of 2020 from the first quarter of 2019. For the purpose of this remaining discussion, net interest income is presented on a
tax-equivalent
basis to provide a comparison among all types of interest earning assets. The
tax-equivalent
basis adjusts for the
tax-favored
status of income from certain loans and investments. Although this is a
non-GAAP
measure, United’s management believes this measure is more widely used within the financial services industry and provides better comparability of net interest income arising from taxable and
tax-exempt
sources. United uses this measure to monitor net interest income performance and to manage its balance sheet composition.
Tax-equivalent
net interest income for the first quarter of 2020 was $142.30 million, a decrease of $2.86 million or 1.97% from the first quarter of 2019. This decrease was due mainly to a decrease of 33 basis points in the average yield on earning assets due primarily to a decline in interest rates as compared to the first quarter of 2019 partially offset by an increase of $1.00 million in loan accretion on acquired loans. Loan accretion on acquired loans was $9.55 million and $8.54 million for the first quarter of 2020 and 2019, respectively. Partially offsetting the decrease to
tax-equivalent
net interest income for the first quarter of 2020 was an increase in average earning assets as compared to the first quarter of 2019. Average earning assets for the first quarter of 2020 increased $372.45 million or 2.20% from the first quarter of 2019 due mainly to an increase of $302.42 million or 2.22% in average net loans. In addition,
average investment securities for the first quarter of 2020 increased $94.45 million or 3.71% from the first quarter of 2019. Partially offsetting these increases was a decrease in average short-term investments of $24.42 million or 3.31%. In addition, the average cost of funds for the first quarter of 2020 decreased 21 basis points from the first quarter of 2019. The net interest margin of 3.30% for the first quarter of 2020 was a decrease of 16 basis points from the net interest margin of 3.46% for the first quarter of 2019.
On a linked-quarter basis, net interest income for the first quarter of 2020 was relatively flat from the fourth quarter of 2019, increasing $235 thousand or less than 1%. United’s
tax-equivalent
net interest income for the first quarter of 2020 was also relatively flat from the fourth quarter of 2019, increasing $166 thousand or less than 1% due mainly to a decrease of 13 basis points in the average cost of funds and a change in the mix of average earning assts and interest-bearing liabilities. Average earning assets were flat, increasing $130.68 million or less than 1%. Specifically, average short-term investments increased $118.59 million or 19.90% while average investment securities decreased $41.09 million or 1.53%. Average net loans were relatively flat for the quarter, increasing $53.18 million or less than 1%. Virtually offsetting the increases was a decline of 7 basis points in the average yield on earning assets. Loan accretion on acquired loans increased $905 thousand. Loan accretion on acquired loans was $9.55 million and $8.64 million for the first quarter of 2020 and fourth quarter of 2019, respectively. The net interest margin of 3.30% for the first quarter of 2020 was relatively stable from the fourth quarter of 2019, increasing one basis point from the net interest margin of 3.29% for the fourth quarter of 2019.
United’s
tax-equivalent
net interest income also includes the impact of acquisition accounting fair value adjustments.
The following table provides the discount/premium and net accretion impact to
tax-equivalent
net interest income for the three months ended March 31, 2020, March 31, 2019 and December 31, 2019:
The following tables reconcile the difference between net interest income and
tax-equivalent
net interest income for the three months ended March 31, 2020, March 31, 2019 and December 31, 2019.
| | | | | | | | | | | | | |
| | | |
| | | | | | | | | |
Net interest income, GAAP basis | | $ | | | | $ | | | | $ | | |
Tax-equivalent adjustment (1) | | | | | | | | | | | | |
| | | | | | | | | | | | | |
Tax-equivalent net interest income | | $ | | | | $ | | | | $ | | |
| | | | | | | | | | | | | |
| (1) | The tax-equivalent adjustment combines amounts of interest income on federally nontaxable loans and investment securities using the statutory federal income tax rate of 21% for the three months ended March 31, 2020 and 2019 and December 31, 2019. All interest income on loans and investment securities was subject to state income taxes. |
Provision for Credit Losses
For the quarters ended March 31, 2020 and 2019, the provision for loan losses was $27.12 million and $5.00 million, respectively. Net charge-offs were $6.69 million for the first quarter of 2020 as compared to net charge-offs of $4.81 million for the same quarter in 2019. The higher amount of provision expense for the first quarter of 2020 compared to the first quarter of 2019 was mainly due to the adoption of ASU
2016-13
standard, known as CECL, by United on January 1, 2020 and the reasonable and supportable forecasts for future macroeconomic scenarios used in the estimation of expected credit losses adversely impacted by the
COVID-19
pandemic. The higher amount of net charge-offs was due to a large
charge-off
on a commercial credit in the first quarter of 2020 as compared to the first quarter of 2019. On a linked-quarter basis, the provision for loan losses increased $21.25 million due mainly to the adverse impact of the
COVID-19
pandemic under CECL while net charge-offs increased $780 thousand from the fourth quarter of 2019. Annualized net charge-offs as a percentage of average loans were 0.20% for the first quarter of 2020.
At March 31, 2020, nonperforming loans were $132.56 million or 0.96% of loans, net of unearned income which was very comparable to nonperforming loans of $131.07 million or 0.96% of loans, net of unearned income at December 31, 2019. The components of nonperforming loans include: 1) nonaccrual loans, 2) loans which are contractually past due 90 days or more as to interest or principal, but have not been put on a nonaccrual basis and 3) loans whose terms have been restructured for economic or legal reasons due to financial difficulties of the borrowers.
Loans past due 90 days or more were $7.05 million at March 31, 2020, a decrease of $2.44 million or 25.74% from $9.49 million at
year-end
2019. This decrease was primarily due to several larger consumer loans that were repaid in the quarter ended March 31, 2020. At March 31, 2020, nonaccrual loans were $64.04 million, which was a slight increase of $827 thousand or 1.31% from $63.21 million at
year-end
2019. Restructured loans were $61.47 million at March 31, 2020, an increase of $3.10 million or 5.31% from $58.37 million at
year-end
2019. The increase was mainly due to ten loans totaling $10.25 million being considered restructured under CECL partially offset by repayments and charge-offs of previously recognized impairments. The loss potential on these loans has been properly evaluated and allocated within the Company’s allowance for loan losses.
Nonperforming assets include nonperforming loans and real estate acquired in foreclosure or other settlement of loans (OREO). Total nonperforming assets of $148.41 million, including OREO of $15.85 million at March 31, 2020, represented 0.73% of total assets.
United maintains an allowance for loan losses and a reserve for lending-related commitments. The combined allowance for loan losses and reserve for lending-related commitments is considered the allowance for credit losses. At March 31, 2020, the allowance for credit losses was $162.67 million as compared to $78.79 million at December 31, 2019.
At March 31, 2020, the allowance for loan losses was $154.92 million as compared to $77.06 million at December 31, 2019. As a percentage of loans, net of unearned income, the allowance for loan losses was 1.12% at March 31, 2020 and 0.56% at December 31, 2019. The ratio of the allowance for loan losses to nonperforming loans or coverage ratio was 116.87% and 58.79% at March 31, 2020 and December 31, 2019, respectively. The increase in these ratios was due mainly to the adoption of CECL which caused a change in the Company’s methodology for determining the allowance for loan losses as well as the adverse impact of the
COVID-19
pandemic on reasonable and supportable forecasts for future macroeconomic scenarios used in the estimation of expected credit losses.
United continues to evaluate risks which may impact its loan portfolios. As a result of the
COVID-19
pandemic and resulting economic uncertainty given the rapidly changing economic impact, the Company reviewed its loan portfolio segments, assessing the likely impact of
COVID-19
on each segment and established relevant qualitative adjustment factors. Qualitative adjustments account for the Company’s view of the future. If current conditions underlying any qualitative adjustment factor were deemed to be materially different than historical conditions, then an adjustment was made for that factor.
The first quarter of 2020 qualitative adjustments include analyses of the following:
| | • | – This includes portfolio trends related to business conditions; past due, nonaccrual, and graded loans; and concentrations. |
| | • | – United considered the impact of COVID-19 (negative) as well as the CARES Act (positive) when making determinations related to factor adjustments, such as collateral values and past due loans, and the reasonable and supportable forecast. This is in contrast with the CECL adoption date (January 1, 2020) estimate as neither of these items were relevant for United’s footprint at the beginning of the year. |
| | • | Reasonable and supportable forecasts portfolio-by-portfolio basis by relating the correlation of real GDP and the unemployment rate to loss rates to forecasts of those variables. Assumptions for the economic variables were the following: |
| | • | 10- 15% decline in GDP in the second quarter of 2020 followed by a recovery in the third quarter of 2020 with GDP stabilizing in 2021. |
| | • | 10- 15% unemployment rate in the second quarter of 2020 with sharp recovery as businesses begin to reopen and again stabilizing in 2021. |
| | • | Forecasts account for United’s best estimate of economic impact from government stimulus. |
| | • | Reversion to historical loss data occurs via a straight-line method during the year following the one-year reasonable and supportable forecast period. |
Allocations are made for specific commercial loans based upon management’s estimate of the borrowers’ ability to repay and other factors impacting collectibility. Other commercial loans not specifically reviewed on an individual basis are evaluated based on historical loss percentages applied to loan pools that have been segregated by risk. Allocations for loans other than commercial loans are made based upon historical loss experience adjusted for current environmental conditions. The allowance for credit losses includes estimated lifetime losses within the portfolio due to uncertainties in economic conditions, delays in obtaining information, including unfavorable information about a borrower’s financial condition, the difficulty in identifying triggering events that correlate perfectly to subsequent loss rates, and risk factors that have not yet fully manifested themselves in loss allocation factors.
United’s review of the allowance for loan losses at March 31, 2020 produced increased allocations in each of the four loan categories, primarily due to implementation of CECL and the adverse impact of the
COVID-19
pandemic on reasonable and supportable forecasts for future macroeconomic scenarios used in the estimation of expected credit losses. The allocation related to the commercial, financial & agricultural loan pool increased $29.49 million. The residential real estate allocation increased $21.63 million. The real estate construction and development loan pool allocation increased $15.44 million. The consumer loan pool experienced an increase of $11.61 million.
An allowance is established for estimated lifetime losses for loans that are individually assessed. Nonperforming commercial loans and leases are regularly reviewed to identify probable credit losses. A loan is individually assessed for expected credit losses when, based on current information and events, it is probable that the Company will not be able to collect all amounts contractually due. Measuring expected credit losses of a loan requires judgment and estimates, and the eventual outcomes may differ from those estimates. Expected credit losses are measured based upon the present value of expected future cash flows from the loan discounted at the loan’s effective rate, the loan’s observable market price or the fair value of collateral if the loan is collateral dependent. When the selected measure is less than the recorded investment in the loan, an expected credit loss has occurred. The allowance for loans that were individually assessed was $12.20 million at March 31, 2020 and $16.50 million at December 31, 2019. In comparison to the prior
year-end,
this element of the allowance decreased by $4.30 million primarily due to
charge-off
of previously recognized allocations for probable credit losses on individually assessed loans.
Management believes that the allowance for credit losses of $162.67 million at March 31, 2020 is adequate to provide for probable losses on existing loans and lending-related commitments based on information currently available. United’s loan administration policies are focused on the risk characteristics of the loan portfolio in terms of loan approval and credit quality. The commercial loan portfolio is monitored for possible concentrations of credit in one or more industries. Management has lending limits as a percentage of capital per type of credit concentration in an effort to ensure adequate diversification within the portfolio. Most of United’s commercial loans are secured by real estate located in West Virginia, southeastern Ohio, Pennsylvania, Virginia, Maryland and the District of Columbia. It is the opinion of management that these commercial loans do not pose any unusual risks and that adequate consideration has been given to these loans in establishing the allowance for credit losses.
The provision for credit losses related to held to maturity and available for sale investment securities for the first three months of 2020 was immaterial. There was no provision for credit losses related to held to maturity and available for sale investment securities for the first three months of 2019.
Management is not aware of any potential problem loans, trends or uncertainties, which it reasonably expects, will materially impact future operating results, liquidity, or capital resources which have not been disclosed. Additionally, management has disclosed all known material credits, which cause management to have serious doubts as to the ability of such borrowers to comply with the loan repayment schedules.
Other income consists of all revenues, which are not included in interest and fee income related to earning assets. Noninterest income has been and will continue to be an important factor for improving United’s profitability. Recognizing the importance, management continues to evaluate areas where noninterest income can be enhanced.
Noninterest income for the first quarter of 2020 was $36.81 million, an increase of $5.58 million or 17.88% from the first quarter of 2019. The increase was due mainly to an increase in income from mortgage banking activities. Income from mortgage banking activities totaled $17.63 million for the first quarter of 2020 compared to $13.68 million for the first quarter of 2019. The increase of $3.95 million or 28.87% for the first quarter of 2020 was mainly due to increased loan sales. Mortgage loan sales were $617.61 million in the first quarter of 2020 as compared to $349.49 million in the first quarter of 2019. Mortgage loans originated for sale were $733.61 million for the first quarter of 2020 as compared to $345.40 million for the first quarter of 2019.
Income from bank-owned life insurance (BOLI) for the first quarter of 2020 was $2.39 million, an increase of $561 thousand from the first quarter of 2019 due to an increase in death benefits. For the first quarter of 2020, United recognized death benefits from BOLI of $1.19 million as compared to death benefits of $600 thousand for the first quarter of 2019.
Fees from brokerage services for the first quarter of 2020 increased $392 thousand or 15.53% from the first quarter of 2019. This increase was due to increased volume of transactions.
On a linked-quarter basis, noninterest income for the first quarter of 2020 decreased $436 thousand or 1.17% from the fourth quarter of 2019 due mainly to decreases in fees from deposit services and income from BOLI. Fees from deposit services declined $592 thousand from seasonality while income from BOLI decreased $518 thousand due to a decline in death benefits. Mostly offsetting these decreases were increases of $448 thousand in fees from brokerage services due to increased volume and $388 thousand in other income. Income from mortgage banking activities was flat from the fourth quarter of 2019, increasing $84 thousand or less than 1%. On a linked quarter-basis, an increase in net gains on the sale of mortgage loans in the secondary market by George Mason were virtually offset by losses on mortgage loan derivatives due to a market disruption as a result of the
COVID-19
pandemic.
Just as management continues to evaluate areas where noninterest income can be enhanced, it strives to improve the efficiency of its operations to reduce costs. Other expenses include all items of expense other than interest expense, the provision for credit losses, and income taxes. Noninterest expense for the first quarter of 2020 was $101.13 million, which was an increase of $11.71 million or 13.09% from the first quarter of 2019.
Employee compensation for the first quarter of 2020 increased $5.59 million or 14.36% when compared to the first quarter of 2019. This increase was primarily due to an increase in commissions expense related to the increase in production and sales of mortgage loans at George Mason.
Employee benefits expense for the first quarter of 2020 increased $1.36 million or 14.37% from the first quarter of 2019. This increase was primarily due to higher levels of Federal Insurance Contributions Act (FICA) and penion expense.
Equipment expense increased $530 thousand or 15.99% for the first quarter of 2020, as compared to the same period in the prior year. The increase was due mainly to higher maintenance costs.
Other expense for the first quarter of 2020 increased $4.99 million or 26.79% from the first quarter of 2019. Within other expense, merger-related expenses associated with the announced Carolina Financial acquisition were $1.56 million, expense associated with income tax credits increased $1.33 million which reduces the effective tax rate, and the expense for the reserve for unfunded commitments increased $897 thousand.
Partially offsetting these increases for the first quarter of 2020 from the first quarter of 2019 were decreases in Federal Deposit Insurance Corporation (FDIC) insurance expense of $900 thousand due to lower premiums and other real estate owned (OREO) expense of $510 thousand due to fewer declines in fair value of OREO properties.
On a linked-quarter basis, noninterest expense for the first quarter of 2020 increased $4.23 million or 4.37% from the fourth quarter of 2019. The increase was due to increases of $1.67 million in employee benefits expense due in large part to higher pension costs, FDIC expense increased $1.40 million due to a Small Bank Assessment Credit in 2019 and $1.14 million in other expense. Within other expense, expense for the reserve for unfunded commitments increased $1.01 million, merger-related expenses from the announced merger with Carolina Financial increased $971 thousand and expense associated with income tax credits increased $720 thousand was partially offset by a decline in donations of $1.20 million. One million dollars was donated by United to West Virginia University Children’s Medicine in the fourth quarter of 2019. Partially offsetting these increases in noninterest expense was a decrease in OREO expense of $544 thousand due to fewer declines in fair value of OREO properties.
For the first quarter of 2020, income tax expense was $9.89 million, a decrease of $7.44 million from the first quarter of 2019 mainly due to a decrease in earnings and the effective tax rate. On a linked-quarter basis, income tax expense for the first quarter of 2020 decreased $2.58 million from the fourth quarter of 2019 due to a decline in earnings partially offset by a higher effective tax rate. United’s effective tax rate was 19.75% for the first quarter of 2020 and 21.40% and 16.46% for the first and fourth quarters of 2019, respectively. For further details related to income taxes, see Note 16 of the unaudited Notes to Consolidated Financial Statements contained within this document.
Contractual Obligations, Commitments, Contingent Liabilities and
Off-Balance
Sheet Arrangements
United has various financial obligations, including contractual obligations and commitments, that may require future cash payments. Please refer to United’s Annual Report on Form
10-K
for the year ended December 31, 2019 for disclosures with respect to United’s fixed and determinable contractual obligations. There have been no material changes outside the ordinary course of business since
year-end
2019 in the specified contractual obligations disclosed in United’s Annual Report on Form
10-K.
United also enters into derivative contracts, mainly to protect against adverse interest rate movements on the value of certain assets or liabilities, under which it is required to either pay cash to or receive cash from counterparties depending on changes in interest rates. Derivative contracts are carried at fair value and not notional value on the consolidated balance sheet. Because the derivative contracts recorded on the balance sheet at March 31, 2020 do not present the amounts that may ultimately be paid under these contracts, they are excluded from the contractual obligations table in the 2019 Form
10-K
report. Further discussion of derivative instruments is presented in Note 12 to the unaudited Notes to Consolidated Financial Statements.
United is a party to financial instruments with
off-balance-sheet
risk in the normal course of business to meet the financing needs of its customers. These financial instruments include loan commitments and standby letters of credit. United’s maximum exposure to credit loss in the event of nonperformance by the counterparty to the financial instrument for the loan commitments and standby letters of credit is the contractual or notional amount of those instruments. United uses the same policies in making commitments and conditional obligations as it does for
on-balance
sheet instruments. Since many of the commitments are expected to expire without being drawn upon, the total commitment amount does not necessarily represent future cash requirements. Further discussion of
off-balance
sheet commitments is included in Note 11 to the unaudited Notes to Consolidated Financial Statements.
In the opinion of management, United maintains liquidity that is sufficient to satisfy its depositors’ requirements and the credit needs of its customers. Like all banks, United depends upon its ability to renew maturing deposits and other liabilities on a daily basis and to acquire new funds in a variety of markets. A significant source of funds available to United is “core deposits”. Core deposits include certain demand deposits, statement and special savings and NOW accounts. These deposits are relatively stable, and they are the lowest cost source of funds available to United. Short-term borrowings have also been a significant source of funds. These include federal funds purchased and securities sold under agreements to repurchase as well as advances from the FHLB. Repurchase agreements represent funds which are obtained as the result of a competitive bidding process.
Liquid assets are cash and those items readily convertible to cash. All banks must maintain sufficient balances of cash and near-cash items to meet the
day-to-day
demands of customers and United’s cash needs. Other than cash and due from banks, the available for sale securities portfolio and maturing loans are the primary sources of liquidity.
The goal of liquidity management is to ensure the ability to access funding which enables United to efficiently satisfy the cash flow requirements of depositors and borrowers and meet United’s cash needs. Liquidity is managed by monitoring funds’ availability from a number of primary sources. Substantial funding is available from cash and cash equivalents, unused short-term borrowing and a geographically dispersed network of branches providing access to a diversified and substantial retail deposit market.
Short-term needs can be met through a wide array of outside sources such as correspondent and downstream correspondent federal funds and utilization of Federal Home Loan Bank advances.
Other sources of liquidity available to United to provide long-term as well as short-term funding alternatives, in addition to FHLB advances, are long-term certificates of deposit, lines of credit, borrowings that are secured by bank premises or stock of United’s subsidiaries and issuances of trust preferred securities. In the normal course of business, United through its Asset Liability Committee evaluates these as well as other alternative funding strategies that may be utilized to meet short-term and long-term funding needs.
For the three months ended March 31, 2020, cash of $21.48 million was provided by operating activities due mainly to net income of $40.18 million for the quarter. In addition, increases of $88.12 million in accrued expenses and $27.12 million in the provision for credit losses added cash to the net income amount. Partially offsetting these increases to cash was a decrease of $116.00 million in cash from mortgage banking activities as originations exceeded proceeds from the sales of mortgage loans in the secondary market. Net cash of $122.36 million was used in investing activities which was primarily due to net loan growth of $140.53 million partially offset by $16.42 million of proceeds from sales of investment securities over purchases. During the first three months of 2020, net cash of $600.22 million was provided by financing activities due primarily to net growth of $161.89 million in deposits, net advances of $225.00 million in overnight FHLB advances and net advances of $250.00 million in long-term FHLB advances. These funding activities were partially offset by cash dividends paid of $36.25 million for the quarter. The net effect of the cash flow activities was an increase in cash and cash equivalents of $499.34 million for the first three months of 2020.
United anticipates it can meet its obligations over the next 12 months and has no material commitments for capital expenditures. United also has lines of credit available. See Notes 9 and 10 to the accompanying unaudited Notes to Consolidated Financial Statements for more details regarding the amounts available to United under lines of credit.
The Asset Liability Committee monitors liquidity to ascertain that a liquidity position within certain prescribed parameters is maintained. No changes are anticipated in the policies of United’s Asset Liability Committee.
United’s capital position is financially sound. United seeks to maintain a proper relationship between capital and total assets to support growth and sustain earnings. United has historically generated attractive returns on shareholders’ equity. United is well-capitalized based upon regulatory guidelines. United’s risk-based capital ratio is 14.47% at March 31, 2020 while its Common Equity Tier 1 capital, Tier 1 capital and leverage ratios are 12.26%, 12.26% and 10.44%, respectively. The March 31, 2020 ratios reflects United’s election of a five-year transition provision, allowed by the Federal Reserve Board and other federal banking agencies in response to the
COVID-19
pandemic, to delay for two years the full impact of CECL on regulatory capital, followed by a three-year transition period. The regulatory requirements for a well-capitalized financial institution are a risk-based capital ratio of 10.0%, a Common Equity Tier 1 capital ratio of 6.5%, a Tier 1 capital ratio of 8.0% and a leverage ratio of 5.0%.
Total shareholders’ equity was $3.34 billion at March 31, 2020, which was relatively flat from December 31, 2019, a decrease of $20.13 million or less than 1%. This decrease was primarily due to a cumulative effective adjustment of $44.33 million to retained earnings for the adoption of ASU
2016-13
by United on January 1, 2020 partially offset by the retention of $4.58 million in net earnings. Partially offsetting this net decrease to retained earnings was an increase of $18.70 million in accumulated other comprehensive income due mainly to an
after-tax
increase in the fair value of available for sale securities.
United’s equity to assets ratio was 16.41% at March 31, 2020 as compared to 17.11% at December 31, 2019. The primary capital ratio, capital and reserves to total assets and reserves, was 17.08% at March 31, 2020 as compared to 17.44% at December 31, 2019. United’s average equity to average asset ratio was 17.10% for the first quarter of 2020 as compared to 17.02% the first quarter of 2019. All of these financial measurements reflect a financially sound position.
During the first quarter of 2020, United’s Board of Directors declared a cash dividend of $0.35 per share. Total cash dividends declared were $35.60 million for the first quarter of 2020 which was an increase of $845 thousand or 2.43% from dividends declared of $34.76 million for the first quarter of 2019.
| Item 3. | QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK |
The objective of United’s Asset Liability Management function is to maintain consistent growth in net interest income within United’s policy guidelines. This objective is accomplished through the management of balance sheet liquidity and interest rate risk exposures due to changes in economic conditions, interest rate levels and customer preferences.
Management considers interest rate risk to be United’s most significant market risk. Interest rate risk is the exposure to adverse changes in United’s net interest income as a result of changes in interest rates. United’s earnings are largely dependent on the effective management of interest rate risk.
Management of interest rate risk focuses on maintaining consistent growth in net interest income within Board-approved policy limits. United’s Asset/Liability Management Committee (ALCO), which includes senior management representatives and reports to the Board of Directors, monitors and manages interest rate risk to maintain an acceptable level of change to net interest income as a result of changes in interest rates. Policy established for interest rate risk is stated in terms of the change in net interest income over a
one-year
and
two-year
horizon given an immediate and sustained increase or decrease in interest rates. The current limits approved by the Board of Directors are structured on a staged basis with each stage requiring specific actions.
United employs a variety of measurement techniques to identify and manage its exposure to changing interest rates. One such technique utilizes an earnings simulation model to analyze the sensitivity of net interest income to movements in interest rates. The model is based on actual cash flows and repricing characteristics for on and
off-balance
sheet instruments and incorporates market-based assumptions regarding the impact of changing interest rates on the prepayment rate of certain assets and liabilities. The model also includes executive management projections for activity levels in product lines offered by United. Assumptions based on the historical behavior of deposit rates and balances in relation to changes in interest rates are also incorporated into the model. Rate scenarios could involve parallel or nonparallel shifts in the yield curve, depending on historical, current, and expected conditions, as well as the need to capture any material effects of explicit or embedded options. These assumptions are inherently uncertain and, as a result, the model cannot precisely measure net interest income or precisely predict the impact of fluctuations in interest rates on net interest income. Actual results will differ from simulated results due to timing, magnitude and frequency of interest rate changes as well as changes in market conditions and management’s strategies.
Interest sensitive assets and liabilities are defined as those assets or liabilities that mature or are repriced within a designated time frame. The principal function of managing interest rate risk is to maintain an appropriate relationship between those assets and liabilities that are sensitive to changing market interest rates. The difference between rate sensitive assets and rate sensitive liabilities for specified periods of time is known as the “GAP.” Earnings-simulation analysis captures not only the potential of these interest sensitive assets and liabilities to mature or reprice, but also the probability that they will do so. Moreover, earnings-simulation analysis considers the relative sensitivities of these balance sheet items and projects their behavior over an extended period of time. United closely monitors the sensitivity of its assets and liabilities on an
on-going
basis and projects the effect of various interest rate changes on its net interest margin.
The following table shows United’s estimated earnings sensitivity profile as of March 31, 2020 and December 31, 2019:
| | | | | | | | | |
Change in Interest Rates (basis points) | | Percentage Change in Net Interest Income | |
| | | | |
| | | | %) | | | | %) |
| | | | % | | | | %) |
| | | | %) | | | | % |
| | | | %) | | | | %) |
At March 31, 2020, given an immediate, sustained 100 basis point upward shock to the yield curve used in the simulation model, net interest income for United is estimated to increase by 0.49% over one year as compared to a decrease of 1.09% at December 31, 2019. A 200 basis point immediate, sustained upward shock in the yield curve would decrease net interest income by an estimated 0.62% over one year as of March 31, 2020, as compared to a decrease of 2.37% as of December 31, 2019. A 100 basis point immediate, sustained downward shock in the yield curve would decrease net interest income by an estimated 0.87% over one year as of March 31, 2020 as compared to an increase of 0.86%, over one year as of December 31, 2019. A 200 basis point immediate, sustained downward shock in the yield curve would decrease net interest income by an estimated 1.22% over one year as of March 31, 2020 as compared to a decrease of 1.34% over one year as of December 31, 2019.
In addition to the one year earnings sensitivity analysis, a
two-year
analysis is also performed. Compared to the one year analysis, United is projected to show improved performance in year two within the upward rate shock scenarios. Given an immediate, sustained 100 basis point upward shock to the yield curve used in the simulation model, net interest income for United is estimated to increase by 3.33% in year two as of March 31, 2020. A 200 basis point immediate, sustained upward shock in the yield curve would increase net interest income by an estimated 3.61% in year two as of March 31, 2020. A 100 basis point immediate, sustained downward shock in the yield curve would decrease net interest income by an estimated 3.59% in year two as of March 31, 2020. A 200 basis point immediate, sustained downward shock in the yield curve would decrease net interest income by an estimated 3.95% in year two as of March 31, 2020.
This analysis does not include the potential increased refinancing activities, which should lessen the negative impact on net income from falling rates. While it is unlikely market rates would immediately move 100 or 200 basis points upward or downward on a sustained basis, this is another tool used by management and the Board of Directors to gauge interest rate risk. All of these estimated changes in net interest income are and were within the policy guidelines established by the Board of Directors.
To further aid in interest rate management, United’s subsidiary bank is a member of the Federal Home Loan Bank (FHLB). The use of FHLB advances provides United with a low risk means of matching maturities of earning assets and interest-bearing funds to achieve a desired interest rate spread over the life of the earning assets. In addition, United uses credit with large regional banks and trust preferred securities to provide funding.
As part of its interest rate risk management strategy, United may use derivative instruments to protect against adverse price or interest rate movements on the value of certain assets or liabilities and on future cash flows. These derivatives commonly consist of interest rate swaps, caps, floors, collars, futures, forward contracts, written and purchased options. Interest rate swaps obligate two parties to exchange one or more payments generally calculated with reference to a fixed or variable rate of interest applied to the notional amount. United accounts for its derivative activities in accordance with the provisions of ASC Topic 815, “Derivatives and Hedging.”
A key feature of most mortgage loans is the ability of the borrower to repay principal earlier than scheduled. This is called a prepayment. Prepayments arise primarily due to sale of the underlying property, refinancing, or foreclosure. In general, declining interest rates tend to increase prepayments, and rising interest rates tend to slow prepayments. Like other fixed-income securities, when interest rates rise, the value of mortgage- related securities generally declines. The rate of prepayments on underlying mortgages will affect the price and volatility of mortgage-related securities and may shorten or extend the effective maturity of the security beyond what was anticipated at the time of purchase. If interest rates rise, United’s holdings of mortgage-related securities may experience reduced returns if the borrowers of the underlying mortgages pay off their mortgages later than anticipated. This is generally referred to as extension risk.
At March 31, 2020, United’s mortgage related securities portfolio had an amortized cost of $1.4 billion, of which approximately $1.1 billion or 77% were fixed rate collateralized mortgage obligations (CMOs). These fixed rate CMOs consisted primarily of planned amortization class (PACs),
sequential-pay
and accretion directed (VADMs) bonds having an average life of approximately 3.4 years and a weighted average yield of 2.50%, under current projected prepayment assumptions. These securities are expected to have very little extension risk in a rising rate environment. Current models show that an immediate, sustained upward shock of 300 basis points, the average life of these securities would only extend to 4.4 years. The projected price decline of the fixed rate CMO portfolio in rates up 300 basis points would be 9.2%, or less than the price decline of a
4-
year treasury note. By comparison, the price decline of a
30-year
current coupon mortgage backed security (MBS) in rates higher by 300 basis points would be approximately 15.1%.
United had approximately $139 million in balloon and other securities with a projected yield of 2.44% and a projected average life of 3.9 years on March 31, 2020. This portfolio consisted primarily of Fannie Mae Delegated Underwriting and Servicing (DUS) mortgage backed securities (MBS) with a weighted average loan age (WALA) of 5.4 years and a weighted average maturity (WAM) of 4.3 years.
United had approximately $18 million in
15-year
mortgage backed securities with a projected yield of 3.05% and a projected average life of 3 years as of March 31, 2020. This portfolio consisted of seasoned
15-year
mortgage paper with a weighted average loan age (WALA) of 7.4 years and a weighted average maturity (WAM) of 10.1 years.
United had approximately $40 million in
20-year
mortgage backed securities with a projected yield of 2.51% and a projected average life of 3.7 years on March 31, 2020. This portfolio consisted of seasoned
20-year
mortgage paper with a weighted average loan age (WALA) of 4.6 years and a weighted average maturity (WAM) of 15.1 years.
United had approximately $44 million in
30-year
mortgage backed securities with a projected yield of 2.67% and a projected average life of 3.8 years on March 31, 2020. This portfolio consisted of seasoned
30-year
mortgage paper and Home Equity Conversion Mortgages with a weighted average loan age (WALA) of 2.9 years and a weighted average maturity (WAM) of 26.8 years.
The remaining 6% of the mortgage related securities portfolio at March 31, 2020, included adjustable rate securities (ARMs),
10-year
mortgage backed pass-through securities and other fixed rate mortgage backed securities.
Evaluation of Disclosure Controls and Procedures
As of March 31, 2020, an evaluation was performed under the supervision of and with the participation of United’s management, including the Chief Executive Officer (CEO) and Chief Financial Officer (CFO), of the effectiveness of the design and operation of United’s disclosure controls and procedures. Based on that evaluation, United’s management, including the CEO and CFO, concluded that United’s disclosure controls and procedures as of March 31, 2020 were effective in ensuring that information required to be disclosed in the Quarterly Report on Form
10-Q
was recorded, processed, summarized and reported within the time period required by the Securities and Exchange Commission’s rules and forms.
Limitations on the Effectiveness of Controls
United’s management, including the CEO and CFO, does not expect that United’s disclosure controls and internal controls will prevent all errors and fraud. While United’s disclosure controls and procedures are designed to provide reasonable assurance of achieving their objective, a control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within the Company have been detected. These inherent limitations include the realities that judgments in decision-making can be faulty, and that breakdowns can occur because of simple error or mistake. Additionally, controls can be circumvented by the individual acts of some persons, by collusion of two or more people, or by management override of the controls.
Changes in Internal Controls
There have been no changes in United’s internal control over financial reporting (as defined in Rules
13a-15(e)
and
15d-15(f)
under the Exchange Act) that occurred during the quarter ended March 31, 2020, or in other factors that have materially affected or are reasonably likely to materially affect United’s internal control over financial reporting.
PART II - OTHER INFORMATION
United and its subsidiaries are currently involved in various legal proceedings in the normal course of business. Management is vigorously pursuing all its legal and factual defenses and, after consultation with legal counsel, believes that all such litigation will be resolved with no material effect on United’s financial position.
In addition to the other information set forth in this report, please refer to United’s Annual Report on Form
10-K
for the year ended December 31, 2019 for disclosures with respect to United’s risk factors which could materially affect United’s business, financial condition or future results. The risks described in the Annual Report on Form
10-K
are not the only risks facing United. Additional risks and uncertainties not currently known to United or that United currently deems to be immaterial also may materially adversely affect United’s business, financial condition and/or operating results.
The following risk factor supplements the “Risk Factors” section in Item 1A of United’s Annual Report on Form
10-K
for the year ended December 31, 2019:
United’s business, financial condition, liquidity and results of operations have been, and will likely continue to be, adversely affected by the
COVID-19
pandemic. The
COVID-19
pandemic has created economic and financial disruptions that have adversely affected, and are likely to continue to adversely affect, United’s business, financial condition, liquidity and results of operations. The extent to which the
COVID-19
pandemic will continue to negatively affect United’s business, financial condition, liquidity and results of operations will depend on future developments, which are highly uncertain and cannot be predicted, including the scope and duration of the pandemic, the continued effectiveness of United’s business continuity plan, the direct and indirect impact of the pandemic on United’s employees, customers, clients, counterparties and service providers, as well as other market participants, and actions taken by governmental authorities and other third parties in response to the pandemic.
The
COVID-19
pandemic has contributed to:
| | • | Increased unemployment and decreased consumer confidence and business generally, leading to an increased risk of delinquencies, defaults and foreclosures. |
| | • | Ratings downgrades, credit deterioration and defaults in many industries, including natural resources, hospitality, transportation and commercial real estate. |
| | • | A sudden and significant reduction in the valuation of the equity, fixed-income and commodity markets and the significant increase in the volatility of those markets. |
| | • | A decrease in the rates and yields on U.S. Treasury securities, which may lead to decreased net interest income. |
| | • | Increased demands on capital and liquidity. |
| | • | A reduction in the value of the assets that the Company manages or otherwise administers or services for others, affecting related fee income and demand for the Company’s services. |
| | • | Heightened cybersecurity, information security and operational risks as a result of work-from-home arrangements. |
Governmental authorities have taken unprecedented measures to provide economic assistance to individual households and businesses, stabilize the markets and support economic growth. The success of these measures is unknown and they may not be sufficient to fully mitigate the negative impact of the
COVID-19
pandemic. Additionally, some measures, such as a suspension of mortgage and other loan payments and foreclosures, may have a negative impact on United’s business, financial condition, liquidity and results of operations. United also faces an increased risk of litigation and governmental and regulatory scrutiny as a result of the effects of
COVID-19
on market and economic conditions and actions governmental authorities take in response to those conditions.
The length of the pandemic and the efficacy of the extraordinary measures being put in place to address it are unknown. Until the pandemic subsides, the Company expects continued draws on lines of credit, reduced revenues in our trust operations and other businesses and increased customer and client defaults, including defaults in unsecured loans.
Even after the pandemic subsides, the U.S. economy may experience a recession, and United anticipates the Company’s businesses would be materially and adversely affected by a prolonged recession. To the extent the pandemic adversely affects United’s business, financial condition, liquidity or results of operations, it may also have the effect of heightening many of the other risks described in the section entitled “Risk Factors” in United’s Annual Report on Form
10-K
for the year ended December 31, 2019 and any subsequent Quarterly Reports on Form
10-Q.
| Item 2. | UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS |
There have been no United equity securities sales during the quarter ended March 31, 2020 that were not registered. The table below includes certain information regarding United’s purchase of its common shares during the quarter ended March 31, 2020:
| | | | | | | | | | | | | | | | | |
| | Total Number
of Shares
Purchased | | | Average Price
Paid
per Share | | | Total Number of
Shares
Purchased as
Part of Publicly
Announced
Plans (3) | | | Maximum Number
of Shares that May
Yet be Purchased
Under the Plans (3) | |
| | | | | | $ | | | | | | | | | | |
| | | | | | $ | | | | | | | | | | |
| | | | | | $ | | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
| | | | | | $ | | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
| (1) | Includes shares exchanged in connection with the exercise of stock options or the vesting of restricted stock under United’s long-term incentive plans. Shares are purchased pursuant to the terms of the applicable plan and not pursuant to a publicly announced stock repurchase plan. For the quarter ended March 31, 2020 – 19,310 shares at an average price of $31.50 were exchanged by participants in United’s long-term incentive plans. |
| (2) | Includes shares purchased in open market transactions by United for a rabbi trust to provide payment of benefits under a deferred compensation plan for certain key officers of United and its subsidiaries. For the quarter ended March 31, 2020, the following shares were purchased for the deferred compensation plan: February 2020 – 4 shares at an average price of $38.24. |
| (3) | In October 2019, United’s Board of Directors approved a repurchase plan to repurchase up to 4,000,000 shares of United’s common stock on the open market (the 2019 Plan). The timing, price and quantity of purchases under the plans are at the discretion of management and the plan may be discontinued, suspended or restarted at any time depending on the facts and circumstances. |
