United Bankshares, Inc. — Q2 2017 Form 10-Q
Business context and reporting period. This unaudited quarterly report covers the three and six months ended June 30, 2017. United is a bank holding company. On April 21, 2017, it acquired Cardinal Financial Corporation, including mortgage lender George Mason Mortgage, expanding its Washington, D.C. area presence and adding a mortgage banking segment. Results include Cardinal only from the acquisition date, so comparisons with 2016 are affected by different acquisition timing.
Key financial results
| Metric | Q2 2017 | Q2 2016 | Six months 2017 | Six months 2016 |
|---|---|---|---|---|
| Net interest income | $136.2 million | $102.7 million | $243.9 million | $201.0 million |
| Other income | $40.5 million | $18.0 million | $60.7 million | $34.4 million |
| Total revenue (net interest income plus other income) | $176.8 million | $120.7 million | $304.5 million | $235.4 million |
| Provision for loan losses | $8.3 million | $7.7 million | $14.2 million | $11.7 million |
| Net income | $37.1 million | $31.8 million | $75.9 million | $66.5 million |
| Diluted earnings per share | $0.37 | $0.44 | $0.84 | $0.94 |
| Dividend per common share | $0.33 | $0.33 | $0.66 | $0.66 |
- Margins and returns: Tax-equivalent net interest margin was 3.44% in both Q2 and the first half of 2017, down from 3.67% and 3.66%, respectively, in 2016. Q2 annualized return on average assets was 0.82% and return on average equity was 4.93%; first-half results were 0.94% and 5.80%.
- Expenses and earnings quality: Other expense was $112.1 million in Q2 and $175.0 million for the first half, up 72.9% and 42.4% year over year, largely reflecting Cardinal-related operating costs and merger expenses. Merger-related expenses were $23.2 million in Q2 and $24.5 million in the first half. Mortgage banking income was $22.5 million in Q2 and $23.2 million for the first half, primarily reflecting George Mason. Net income rose year over year, but diluted EPS fell as the acquisition increased average shares outstanding.
- Balance sheet at June 30: Assets were $19.04 billion, up 31.2% from December 31, 2016; portfolio loans were $13.39 billion, up 29.5%; deposits were $13.97 billion, up 29.4%; and shareholders’ equity was $3.24 billion, up 44.8%. These increases were primarily acquisition-related. Goodwill was $1.49 billion, including preliminary Cardinal goodwill of $620.0 million.
- Debt and liquidity: Total borrowings were approximately $1.69 billion, including $1.12 billion of FHLB advances and $241.8 million of other long-term borrowings. Cash and cash equivalents were $1.41 billion. Management said liquidity was sufficient and expected the company to meet obligations over the following 12 months. Available unused FHLB borrowing capacity was approximately $5.57 billion, subject to collateral requirements.
- Cash flow: For the first half, operating activities provided $35.9 million, investing activities provided $179.3 million, and financing activities used $238.7 million. Cash and cash equivalents decreased $23.5 million to $1.41 billion.
- Capital: At June 30, regulatory capital ratios were 13.62% risk-based capital, 11.44% Common Equity Tier 1, 11.44% Tier 1, and 10.37% leverage. The filing reported each above its applicable “well-capitalized” threshold.
Material changes versus prior periods
- Cardinal added substantial loans, deposits, assets, borrowings, goodwill, staff, and branches; the acquisition also brought George Mason and created the mortgage banking reporting segment.
- Net interest income and revenue increased, mainly from higher average earning assets following the acquisition. Net interest margin declined year over year, reflecting higher funding costs and lower yields on investment securities.
- Noninterest income growth was principally mortgage-banking-related. Noninterest expenses rose sharply, including $12.8 million of Cardinal severance costs, $5.8 million of lease and leasehold-improvement charges for closed offices, and a $0.5 million data-processing contract termination penalty in the first half.
- The trust-preferred securities no longer qualified as Tier 1 regulatory capital after Cardinal pushed consolidated assets above $15 billion; they were classified as Tier 2 capital.
Outlook, commentary, risks, and contingencies
- The filing provides no specific earnings or revenue guidance. Management described liquidity and capital as sound and anticipated meeting obligations over the next 12 months; it reported no material capital-expenditure commitments or known material liquidity trends.
- Credit quality warrants attention: nonperforming loans were $154.2 million, or 1.15% of loans, versus $113.3 million, or 1.10%, at year-end 2016. Nonaccrual loans increased, with management citing downgraded oil, gas, and coal relationships. Troubled debt restructurings rose to $49.0 million from $21.2 million. The allowance for loan losses was $73.0 million, 0.54% of loans, versus 0.70% at year-end; management considered the allowance adequate.
- Available-for-sale securities had $21.2 million of gross unrealized losses. Trust-preferred collateralized debt obligations had a $9.7 million unrealized loss and $38.1 million fair value; management attributed remaining losses primarily to illiquidity and said its cash-flow analysis indicated no adverse change for the quarter. These securities were valued using Level 3 inputs; management estimated a 200-basis-point increase in discount rates would reduce their fair value by about 17%, or $6.5 million.
- Off-balance-sheet exposures included $4.37 billion of loan commitments and $151.0 million of standby letters of credit. Management said commitments often expire undrawn. Various legal proceedings were described as ordinary-course matters, with management expecting no material financial effect. The filing reported no material changes to previously disclosed risk factors.
- Forward-looking results remain subject to economic and banking conditions, interest-rate movements, competition, execution of business strategies, government actions, and technology changes. The filing emphasizes estimation uncertainty in credit-loss allowances, acquired-loan accounting, securities valuation, and taxes.
Important facts for investors to verify
- How Cardinal integration, cost savings, and merger-related charges progress, and whether mortgage banking income is sustainable.
- Credit performance in oil, gas, and coal exposures; movements in nonaccrual loans, restructurings, charge-offs, and allowance coverage.
- Returns and EPS trends after the share issuance for Cardinal, given lower reported EPS despite higher net income.
- Funding costs, deposit composition, net interest margin, and sensitivity to rate changes; the company’s rate-shock model estimated higher net interest income in rising-rate scenarios and lower income in a 100-basis-point decline.
- Valuation assumptions and possible impairment exposure in trust-preferred securities and the preliminary Cardinal purchase-price allocation and goodwill.