United Bankshares, Inc. — Q2 2019 Form 10-Q
Reporting period: Three and six months ended June 30, 2019. Unaudited consolidated results cover community banking and mortgage banking. Unless otherwise noted, amounts below are in U.S. dollars; financial statement amounts are generally reported in thousands.
Financial results and condition
| Metric | Q2 2019 | Comparable period | Six months 2019 | Comparable period |
|---|---|---|---|---|
| Net interest income | $150.6 million | $149.1 million; Q2 2018 | $294.7 million | $293.2 million; H1 2018 |
| Net income | $67.2 million | $66.3 million; Q2 2018 | $130.8 million | $128.0 million; H1 2018 |
| Diluted EPS | $0.66 | $0.63; Q2 2018 | $1.28 | $1.22; H1 2018 |
| Tax-equivalent net interest margin | 3.53% | 3.67%; Q2 2018 | 3.50% | 3.64%; H1 2018 |
| Provision for loan losses | $5.4 million | $6.2 million; Q2 2018 | $10.4 million | $11.4 million; H1 2018 |
- Q2 net income rose about 1.4% year over year; first-half net income increased about 2.2%. Higher mortgage-banking income and lower tax expense supported results.
- Interest income increased, but deposit and borrowing costs rose substantially. For Q2, total interest income grew $21.2 million year over year while interest expense rose $19.8 million. Average cost of funds increased 61 basis points; the margin contracted 14 basis points.
- Noninterest income was $39.8 million in Q2, up 10.5%, and $71.0 million for H1, up 5.7%, principally reflecting mortgage banking. Noninterest expense rose 7.3% in Q2 and 3.1% in H1.
- Unusual expense: A $5.1 million FHLB prepayment penalty was recorded in Q2. Higher FDIC insurance assessments also contributed to expense growth.
- Total assets were $19.88 billion at June 30, up 3.3% from year-end 2018. Portfolio loans, net of unearned income, were $13.64 billion, up 1.6%; loans held for sale were $370.6 million, up 48.3% as mortgage originations exceeded sales.
- Deposits totaled $14.40 billion, up 2.9% from year-end. Interest-bearing deposits increased $495.5 million, while noninterest-bearing deposits declined $86.2 million. Time deposits over $100,000 rose 24.0%, including growth in brokered CDs and CDARS.
- Total borrowings were approximately $1.91 billion, up 3.0% from year-end. Long-term FHLB advances were $1.55 billion; the filing reports a 2.22% weighted-average rate on these advances. FHLB borrowing capacity was approximately $3.91 billion, subject to collateral and other conditions.
- Cash and cash equivalents were $1.25 billion, up $233.2 million from year-end. H1 operating cash flow was $31.8 million, down from $98.5 million in H1 2018; investing used $177.4 million and financing provided $378.7 million.
- Shareholders’ equity was $3.33 billion. Regulatory capital ratios were 14.32% total risk-based, 12.17% Common Equity Tier 1 and Tier 1, and 10.18% leverage; each exceeded the stated well-capitalized thresholds.
Credit quality, risks, and outlook
- Nonperforming loans were reported at $142.6 million, or 1.05% of loans, at June 30, broadly level with year-end; nonperforming assets were $157.1 million, or 0.79% of total assets. OREO was $14.5 million.
- The allowance for loan losses was $76.4 million, or 0.56% of loans, versus 0.57% at year-end. The allowance-to-nonperforming-loans coverage ratio was 53.58%. Management considered the $78.15 million combined allowance and lending-commitment reserve adequate based on information then available.
- Commercial real estate and other commercial loans are substantial portfolio exposures. A commercial loan was downgraded to special mention, and a large nonperforming relationship moved to nonaccrual while awaiting resolution of a lawsuit. Management cited no known undisclosed trends or problem loans expected to materially affect results.
- United had $3.91 billion of loan commitments, $133.9 million of standby letters of credit, and $5.1 million of commercial letters of credit. Commitments may expire undrawn; actual funding needs can differ from stated amounts.
- Management said liquidity was sufficient and expected to meet obligations over the next 12 months, with no material capital expenditure commitments or known material liquidity trends. No earnings or revenue guidance was provided.
- Interest-rate sensitivity modeling estimated one-year net interest income declines of 0.70% under an immediate, sustained +100-basis-point shock and 1.97% under +200 basis points; a -200-basis-point shock was estimated to reduce it 1.80%. Management cautioned that modeling assumptions are uncertain and actual results may differ.
- United adopted lease accounting on January 1, 2019, recognizing right-of-use assets and lease liabilities; the adoption reduced opening retained earnings by $1.05 million. The expected-credit-loss standard (CECL) was scheduled for adoption January 1, 2020; implementation was underway, but the financial impact was not yet quantified.
- Management expected ordinary-course litigation to resolve without material financial effect. The filing reported no material change to the risk factors in the 2018 Form 10-K and stated disclosure controls were effective.
Most important facts for investors to verify
- How deposit pricing, large time-deposit growth and rising funding costs affect future net interest margin.
- Whether mortgage-banking gains and the elevated loans-held-for-sale balance are sustainable as originations and secondary-market sales change.
- The trend in criticized, nonaccrual and impaired loans, allowance coverage, and exposure to commercial real estate and acquired credit-impaired loans.
- The financial impact of CECL adoption and the effect of FHLB funding, scheduled maturities and collateral requirements on liquidity and expense.
- The filing presents different nonaccrual-loan totals: the credit-quality note lists $119.7 million, while MD&A describes $71.1 million. Verify the definitions and reconciliation before relying on either figure.