United Bankshares, Inc. — Q2 2016 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2016. Financial statements are unaudited; amounts below are in millions of dollars unless stated otherwise. United is a bank holding company whose principal activities are banking.
Financial performance and condition
| Metric | Q2 2016 / June 30, 2016 | Comparison |
|---|---|---|
| Net interest income | $102.7 | Up 7.1% from Q2 2015; first-half $201.0, up 5.4% |
| Net income | $31.8; diluted EPS $0.44 | Down from $34.8 and $0.50 in Q2 2015. First-half net income was $66.5 and EPS $0.94, versus $69.4 and $1.00 |
| Net interest margin | 3.67% for Q2; 3.66% first half | Up 5 basis points year over year for both periods |
| Provision for loan losses | $7.7 for Q2; $11.7 first half | Q2 provision was $5.7 in 2015; first-half provision was $11.1 |
| Assets / loans | Total assets $14.34 billion; gross loans $10.44 billion | Assets rose 14.0% and loans net of unearned income rose 11.1% from year-end, primarily due to the acquisition |
| Deposits / borrowings | Deposits $10.32 billion; total borrowings $1.91 billion | Deposits increased 10.4% and borrowings 32.5% from year-end, mainly reflecting the acquisition and funding activity |
| Cash and cash equivalents | $1.10 billion | Up $244.1 million from year-end |
| Shareholders’ equity | $2.01 billion | Up 17.6% from year-end, principally from acquisition-related stock issuance |
Q2 noninterest income declined 7.9% year over year to $18.0 million, mainly because the Durbin Amendment reduced debit-card fees. Q2 noninterest expense rose 12.3% to $64.9 million, including acquisition-related costs and other higher expenses. First-half operating cash flow was $74.9 million; investing activities used $92.1 million and financing activities provided $261.3 million. Cash dividends were $0.33 per share in Q2 and $0.66 for the first half.
Reported annualized returns were 1.00% on average assets and 6.99% on average equity for Q2; first-half returns were 1.06% and 7.51%, respectively. These measures were below the corresponding 2015 periods.
Material changes and acquisition
- United acquired 100% of Bank of Georgetown on June 3, 2016, expanding its Washington, D.C. market presence. The acquired bank had approximately $1.28 billion in assets, $999.8 million in loans and $971.4 million in deposits at closing.
- Consideration was approximately $264.5 million, primarily United shares. Preliminary acquisition accounting added $155.9 million of goodwill and $11.4 million of core deposit intangibles; fair-value estimates remain subject to refinement. Acquired loans received a preliminary $33.6 million downward fair-value adjustment, and no acquired allowance for loan losses carried over.
- From the acquisition date through June 30, the acquired Washington-area operations contributed $15.8 million of revenue and $6.7 million of net income. The filing’s unaudited pro forma first-half results, assuming the deal had closed at the start of each comparison period, show 2016 revenue of $254.5 million and net income of $65.8 million versus $248.1 million and $72.9 million in 2015. The filing cautions that these pro forma results are not indicative of actual or future results.
- First-half 2016 merger-related expenses were $4.7 million. Expense items included $1.6 million for terminating acquired-office leases, $2.2 million of other merger-related costs and $365,000 of severance charges.
Credit, liquidity, capital and risks
- Nonperforming loans were reported in MD&A at $113.1 million, or 1.08% of loans net of unearned income, down from $126.7 million and 1.35% at year-end. Nonperforming assets were $147.9 million, or 1.03% of assets, including $34.9 million of OREO. Impaired loans were $224.6 million.
- The allowance for loan losses was $72.4 million, or 0.70% of loans net of unearned income; the combined allowance and lending-commitment reserve was $73.8 million. First-half net charge-offs were $15.0 million versus $11.4 million in 2015; management attributed the increase mainly to a large commercial-loan charge-off in Q2. Management stated it considered the allowance adequate, while noting its estimation is judgmental and sensitive to changing conditions.
- Credit-data discrepancy to check: MD&A reports nonaccrual loans of $82.5 million at June 30, while the note’s nonaccrual-loan table totals $93.2 million. The supplied filing text does not reconcile these values clearly.
- Liquidity: management said liquidity was sufficient and expected the Company to meet obligations over the next 12 months. Available sources included approximately $1.95 billion of unused FHLB borrowing capacity, $264 million of correspondent-bank lines, and an unused $20 million revolving line. FHLB advances totaled $1.30 billion; the maturity schedule lists $995.6 million for 2016.
- Regulatory capital ratios at June 30 were 12.63% risk-based capital, 9.96% Common Equity Tier 1, 11.98% Tier 1 and 11.48% leverage. The filing states United was well-capitalized under applicable requirements.
- Interest-rate sensitivity modeling estimated net interest income would decline 0.95% with an immediate sustained 100-basis-point rise and 1.65% with a 200-basis-point rise; a 100-basis-point fall was estimated to increase it 1.23%. These are model estimates, not forecasts.
- Available-for-sale securities included $32.0 million of Level 3 trust-preferred CDOs, with $17.3 million of unrealized losses on that portfolio. Management attributed much of the loss to illiquidity and said it did not expect to sell the securities before recovery. Its sensitivity analysis estimated a 200-basis-point increase in discount rates would reduce their fair value by about 15%, or $4.8 million.
- Management cited the Durbin Amendment’s continuing effect on deposit-service fees and risks from economic conditions, interest rates, competition, strategy execution, regulation and technology. Acquisition-related fair values and acquired-loan cash-flow estimates are preliminary and judgmental.
- United reported routine legal proceedings and said, after consultation with counsel, it expected no material effect on financial position. It reported no material changes to the risk factors in its 2015 Form 10-K and stated disclosure controls were effective.
Outlook and items for investors to verify
The filing provides no numerical earnings or revenue guidance. Management stated it anticipated meeting obligations over the next 12 months, had no material capital-expenditure commitments, and knew of no trends expected to materially change liquidity. Management was still evaluating the potential effects of several newly issued accounting standards, including expected-credit-loss guidance effective for United in 2020.
- Verify the nonaccrual-loan figures and understand the $30.6 million gap between the note and MD&A.
- Track final Bank of Georgetown purchase accounting, acquired-loan performance, integration costs and whether anticipated cost savings and synergies are realized.
- Assess credit trends, especially commercial-loan charge-offs, criticized loans, acquired-loan estimates and allowance coverage.
- Monitor reliance on FHLB and other borrowings, the large 2016 FHLB maturity amount, and the composition and stability of deposits.
- Review valuation and credit developments in trust-preferred securities and other investments with unrealized losses, including the Level 3 valuation assumptions.
- Compare future fee income and expenses against the Durbin Amendment impact and the Q2 merger-related and OREO costs.