United Bankshares, Inc. — 2021 Q2 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2021. Financial statements are unaudited. Dollar amounts below are in millions unless stated otherwise.
Business context and reporting period
United is a regional bank holding company operating community banking and mortgage banking businesses. Results include Carolina Financial, acquired May 1, 2020, so comparisons with 2020 reflect a larger company and, in the prior-year periods, significant acquisition-related effects.
On June 2, 2021, United agreed to acquire Community Bankers Trust Corporation in an all-stock transaction at an exchange ratio of 0.3173 United shares per target share. The target reported $1.75 billion of assets, $1.21 billion of gross loans, and $1.49 billion of deposits at June 30. Closing was expected in Q4 2021, subject to shareholder and regulatory approvals.
Key financial metrics
| Metric | Q2 2021 | Q2 2020 | Six months 2021 | Six months 2020 |
|---|---|---|---|---|
| Net interest income | $186.5 | $170.6 | $377.5 | $312.1 |
| Net interest margin | 3.14% | 3.18% | 3.22% | 3.24% |
| Provision for credit losses | $(8.9) | $45.9 | $(8.7) | $73.0 |
| Other income | $62.8 | $88.4 | $155.4 | $125.2 |
| Other expense | $139.0 | $149.4 | $287.9 | $250.5 |
| Net income | $94.8 | $52.7 | $201.7 | $92.9 |
| Diluted earnings per share | $0.73 | $0.44 | $1.56 | $0.84 |
- Revenue and margins: Q2 interest income was $200.2 million; interest expense was $13.7 million. Net interest income rose 9.3% year over year in Q2 and 20.9% in the first half. The six-month increase reflected acquisition-related scale and lower funding costs, partly offset by lower asset yields. Q2 net interest margin declined 4 basis points year over year and 16 basis points sequentially.
- Profitability: Q2 annualized return on average assets was 1.41% and return on average equity was 8.69%; first-half figures were 1.52% and 9.32%, respectively. Non-GAAP return on average tangible equity was 14.95% for Q2 and 16.06% for the first half.
- Balance sheet and liquidity: Total assets were $27.19 billion at June 30, up 3.8% from year-end 2020. Cash and cash equivalents were $3.68 billion, including $3.37 billion in interest-bearing deposits at other banks. Deposits were $21.57 billion, up 4.8% since year-end; noninterest-bearing deposits grew 11.9%. Net loans were $16.67 billion, down 4.0%.
- Credit quality: Nonperforming loans and leases were $102.6 million, or 0.61% of loans, versus $132.2 million, or 0.75%, at year-end. The allowance for loan and lease losses was $217.5 million (1.29% of loans); including lending-related commitment reserves, the allowance for credit losses was $238.4 million. Q2 net charge-offs were $5.2 million; annualized net charge-offs were 0.12% of average loans.
- Debt and capital: Borrowings totaled $941.8 million: $127.7 million in repurchase agreements, $533.4 million in FHLB advances, and $280.7 million in other long-term borrowings. United reported a 15.93% risk-based capital ratio, 13.66% Common Equity Tier 1 and Tier 1 ratios, and a 10.33% leverage ratio, all above stated well-capitalized thresholds. Shareholders’ equity was $4.39 billion.
- Cash flow: First-half operating cash flow was $352.0 million, investing cash flow was $293.8 million, and financing cash flow was $822.6 million. Cash and cash equivalents increased $1.47 billion. The filing attributes financing inflows mainly to $984.7 million of deposit growth.
- Shareholder returns: The company declared $0.35 per share in Q2 dividends ($0.70 for the first half). It repurchased 306,204 shares for $10.0 million during the first half.
Material changes versus comparable periods
- Net income increased 80% in Q2 and more than doubled for the first half. Lower credit-loss provision expense was a major driver: 2021 included provision reversals, while 2020 included elevated pandemic-related provisioning and a $28.95 million provision on acquired Carolina Financial non-PCD loans.
- Q2 other income fell 28.9% year over year, primarily because mortgage banking income declined to $36.9 million from $68.2 million. Management cited mortgage derivative fair-value effects associated with a declining rate-lock pipeline. First-half other income rose 24.1%, supported by mortgage originations and sales and the Carolina Financial business.
- First-half other expense rose 14.9%, mainly reflecting Carolina Financial operations and higher mortgage-related compensation and commissions. Q2 expense declined 7.0%; the prior-year quarter included a $9.66 million data-processing contract termination penalty and other acquisition costs.
- Portfolio loans declined $703.4 million since year-end, while securities increased $325.3 million and cash increased $1.47 billion. Loan held-for-sale balances declined $142.1 million as first-half sales exceeded originations.
- COVID-related loan deferrals fell to 238 loans totaling $66.4 million at June 30 from 1,002 loans totaling $399.9 million at year-end 2020. PPP balances were $789.5 million across 7,513 loans; United recognized $20.3 million of net PPP fees in the first half.
Outlook, commentary, risks and contingencies
- Outlook: United said it expected to meet obligations over the next 12 months and reported no material capital-expenditure commitments. It did not provide specific earnings or revenue guidance. Management’s CECL forecast assumed gradual economic recovery through 2023; hotel and accommodations exposures were assigned a weaker outlook, with recovery risk extending into late 2023 or 2024.
- COVID-19 and credit: Management noted uncertainty about pandemic effects on customers, the economy, credit losses, fees, and interest income. Further losses on deferred loans could require additional provision expense. Management considered the allowance adequate based on information then available.
- Mortgage banking: Mortgage revenue and derivative fair values can vary with rates, pipeline volumes, loan sales, and prepayments. Mortgage servicing rights had a $250,000 temporary impairment, net of recoveries, during the first half.
- Interest-rate and funding risks: Management’s simulation estimated one-year net interest income would rise 1.16% under an immediate, sustained +100-basis-point shock and fall 0.82% under a -100-basis-point shock. Results are model-based and actual outcomes may differ. An extended downturn could increase reliance on more costly or volatile funding.
- LIBOR transition: United has LIBOR-linked loans, derivatives, borrowings, and other instruments and is planning a transition to alternative benchmarks. The filing warns that operational, legal, compliance, market, and customer risks could have a material adverse effect if the transition is not managed appropriately.
- Acquisition and legal matters: The Community Bankers Trust acquisition remained pending and subject to approvals and closing conditions. Management expected ordinary-course litigation to be resolved without a material financial effect. The company also disclosed possible regulatory enforcement or customer remediation relating to consumer products and fees; it could not assess the probability or estimate potential losses.
- Controls: Management concluded disclosure controls were effective as of June 30, 2021 and reported no material change in internal control over financial reporting during the quarter.
Most important facts for investors to verify
- Whether the Community Bankers Trust deal closed as expected, and its final consideration, integration costs, and contribution to earnings, deposits, and loans.
- Whether lower credit-loss provisions and improving nonperforming-loan trends persist, particularly as COVID deferrals end and hotel-related exposures work through recovery.
- How quickly PPP balances are forgiven and fees recognized, and whether core loan growth offsets portfolio runoff.
- Whether mortgage banking income normalizes after the Q2 decline and how rate changes affect derivatives, loan production, and mortgage servicing rights.
- Whether strong liquidity and capital remain intact amid deposit movements, funding-cost changes, and the LIBOR transition; also monitor unresolved consumer-product regulatory exposure.