United Bankshares, Inc. — Q3 2016 Form 10-Q
Reporting period: Three and nine months ended September 30, 2016. Unaudited consolidated results; financial amounts below are in millions unless stated otherwise.
Business context and reporting period
United is a bank holding company. Results include Bank of Georgetown from its acquisition on June 3, 2016, which expanded United’s Washington, D.C. presence. On August 17, 2016, United agreed to acquire Cardinal Financial Corporation; the proposed exchange ratio is 0.71 United shares per Cardinal share, subject to the merger agreement.
Financial performance and position
- Q3 earnings: Net income was $41.5 million, up 18.4% from $35.0 million; diluted EPS was $0.54 versus $0.50.
- Nine-month earnings: Net income was $108.0 million, up 3.3% from $104.5 million; diluted EPS was $1.48 versus $1.50.
- Revenue and net interest: Q3 net interest income was $111.1 million (+15.3% year over year); total other income was $19.0 million (+6.8%). Nine-month net interest income was $312.1 million (+8.8%), while other income was $53.4 million (−3.8%). Net interest margin on a tax-equivalent basis was 3.56% for Q3 and 3.62% for nine months, each 3 basis points above the comparable 2015 period. The Q3 margin declined 11 basis points from Q2.
- Expenses and credit provision: Q3 noninterest expense rose 8.8% to $62.8 million; nine-month expense rose 7.3% to $185.7 million. Provision for loan losses was $7.0 million in Q3 and $18.7 million for nine months, versus $5.2 million and $16.3 million, respectively.
- Returns: Q3 annualized return on assets/equity was 1.17%/8.10%; nine-month return was 1.10%/7.73%.
- Balance sheet at September 30: Assets were $14.34 billion, up 14.1% from year-end 2015; loans net of unearned income were $10.44 billion (+11.2%); deposits were $10.58 billion (+13.2%); and shareholders’ equity was $2.03 billion (+18.5%). Growth principally reflects the Georgetown acquisition.
- Liquidity and cash flow: Cash and cash equivalents were $1.12 billion, up $261.2 million since year-end. Nine-month operating cash flow was $123.9 million; investing activities used $96.5 million; financing activities provided $233.8 million. Management said liquidity was sufficient and obligations over the next 12 months could be met.
- Debt and capital: Total borrowings were $1.64 billion, up 14.0% since year-end; deposits remained the primary funding source. Regulatory capital ratios were 12.79% risk-based, 10.13% Common Equity Tier 1, 12.14% Tier 1, and 10.49% leverage, above stated well-capitalized thresholds. Q3 dividend was $0.33 per share.
Material changes versus comparable periods
- Bank of Georgetown added approximately $1.28 billion of assets at acquisition, including $968.2 million of loans and $971.7 million of deposits; the transaction added $156.4 million of preliminary goodwill. Its post-acquisition operations contributed $67.6 million of revenue and $33.3 million of net income through September 30.
- Q3 and nine-month net interest income benefited from acquisition-related balances, loan growth, and acquired-loan accretion. Nine-month loan accretion was $12.8 million, versus $7.0 million a year earlier.
- Nine-month noninterest income declined, mainly because deposit-service fees fell following the Durbin Amendment’s application to United from July 2015. Q3 other income was supported by bank-owned life insurance death benefits.
- Merger-related expenses were $0.9 million in Q3 and $5.6 million for nine months. Nine-month results also included $1.6 million of lease termination charges associated with Georgetown office closures.
Outlook, risks, contingencies, and unusual items
- No earnings guidance was provided. Management identified economic conditions, banking-industry conditions, interest rates, competition, execution and timing of business strategies, regulation, and technology changes as factors that could cause actual results to differ from forward-looking statements.
- Credit indicators were mixed: nonperforming loans were $109.7 million (1.05% of loans), down from $126.7 million (1.35%) at year-end; nonaccrual loans were $77.7 million in MD&A, while the note’s table reports $87.7 million, so the filing text contains inconsistent values. Net charge-offs were $21.8 million for nine months, up from $16.3 million; management attributed the increase primarily to two commercial relationships. Impaired loans increased to $331.7 million, largely due to the acquisition.
- The allowance for loan losses was $72.7 million, or 0.70% of loans; management considered it adequate. A 10% increase in the allowance, the filing estimates, would have reduced Q3 after-tax net income by about $4.7 million, or $0.06 per diluted share.
- Available-for-sale trust-preferred collateralized debt obligations had $49.2 million amortized cost and $32.1 million fair value, with $17.1 million net unrealized loss. Management attributed the loss chiefly to illiquidity and reported no Q3 credit-related impairment charge; valuation relies on Level 3 assumptions. A 200-basis-point increase in discount rates was estimated to reduce their fair value by about 17% ($5.3 million).
- United disclosed approximately $2.76 billion of loan commitments and $123.4 million of standby letters of credit. Management believed ongoing litigation would have no material effect; no material changes to the risk factors in the 2015 Form 10-K were reported.
- Interest-rate simulations estimated a 0.47% decline in one-year net interest income under an immediate, sustained 100-basis-point rate increase and a 1.68% increase under a 100-basis-point decline. These are model estimates, not forecasts.
Most important facts for investors to verify
- Reconcile the filing’s differing reported nonaccrual-loan amounts and review detailed credit-quality trends, especially commercial loan charge-offs and the acquired portfolio.
- Assess whether Georgetown’s earnings contribution and expected synergies can be sustained, and confirm Cardinal merger terms, timing, approvals, and integration costs.
- Evaluate recurring earnings excluding acquisition-related loan accretion, merger expenses, and insurance death benefits.
- Review the Level 3 valuation assumptions and credit exposure in trust-preferred securities, alongside the allowance’s sensitivity to changing loss estimates.
- Monitor deposit funding mix, borrowing costs and maturities, rate sensitivity, and capital ratios as the balance sheet expands.