United Bankshares, Inc. — Q2 2020 Form 10-Q
Business context and period. Unaudited results cover the quarter and six months ended June 30, 2020. United operates community banking and mortgage banking businesses. On May 1, it acquired Carolina Financial Corporation, expanding its presence in North and South Carolina and adding Crescent Mortgage. Carolina Financial’s results are included only from the acquisition date.
Key financial results and condition
| Metric | Q2 2020 | Prior comparable period |
|---|---|---|
| Net interest income | $170.6 million | $150.6 million in Q2 2019 |
| Other income | $88.4 million | $39.8 million in Q2 2019 |
| Net income | $52.7 million | $67.2 million in Q2 2019 |
| Diluted EPS | $0.44 | $0.66 in Q2 2019 |
| Net interest margin, tax-equivalent | 3.18% | 3.53% in Q2 2019 |
For the six months, net interest income was $312.1 million versus $294.7 million; other income was $125.2 million versus $71.0 million; net income was $92.9 million versus $130.8 million; and diluted EPS was $0.84 versus $1.28. Six-month net interest margin was 3.24%, down from 3.50%. Reported revenue, defined here as net interest income plus other income, was $259.0 million for Q2 and $437.3 million for the first half.
Balance sheet at June 30: Total assets were $26.23 billion, up 33.4% from year-end 2019. Net loans were $17.78 billion; total deposits were $19.89 billion; total borrowings were approximately $1.81 billion; and shareholders’ equity was $4.20 billion. Cash and cash equivalents were $2.06 billion, including $1.79 billion of interest-bearing deposits with other banks.
Cash flow and liquidity: First-half operating cash flow was $72.1 million, investing cash flow was negative $157.3 million, and financing cash flow was positive $1.31 billion. Cash and cash equivalents increased $1.23 billion. Management said liquidity was sufficient and expected the company to meet obligations over the next 12 months. The bank also reported approximately $4.28 billion of available FHLB borrowing capacity, subject to collateral requirements.
Credit and capital: The allowance for loan losses was $215.1 million, or 1.20% of loans; the allowance for credit losses including lending-related commitments was $227.1 million. Nonperforming loans were $156.3 million, or 0.87% of loans, and nonperforming assets were $186.2 million, or 0.71% of assets. The allowance-to-nonperforming-loan ratio was 137.67%. Regulatory capital ratios were 14.77% risk-based capital, 12.58% Common Equity Tier 1 and Tier 1, and 10.67% leverage.
Material changes and notable items
- Carolina Financial added $5.01 billion of assets, $3.29 billion of gross loans and $3.87 billion of deposits at acquisition. United issued 28.0 million shares as part of the transaction; preliminary acquisition goodwill was $316.8 million. Purchase accounting values remain subject to refinement.
- Credit-loss provision rose to $45.9 million in Q2 from $5.4 million a year earlier, and to $73.0 million for the first half from $10.4 million. The increase reflected the new CECL expected-loss standard, COVID-19 economic forecasts, and a $28.95 million provision on acquired non-PCD loans. CECL adoption reduced opening retained earnings by $44.3 million.
- Mortgage banking income was $68.2 million in Q2, up from $21.7 million, driven by higher production and sales, mortgage derivative results, and the acquired business. Mortgage loan sales were $1.59 billion in Q2 versus $585.4 million a year earlier. United recorded a $710,000 temporary mortgage-servicing-rights impairment.
- Merger-related expenses were $46.45 million in Q2 and $48.01 million in the first half. Q2 also included a $9.66 million penalty to terminate Carolina Financial’s data-processing contract.
- United processed more than 8,000 Paycheck Protection Program loans totaling over $1.3 billion and recognized $4.8 million of related fee income. It reported 5,504 COVID-related loan modifications covering approximately $3.26 billion of loans; qualifying CARES Act modifications were excluded from TDR classification under the applicable relief provisions.
- Quarterly cash dividends were $0.35 per share; first-half dividends were $0.70 per share.
Outlook, risks and contingencies
The filing gives no specific earnings or revenue guidance. Management described the effect of COVID-19 as highly uncertain. Its credit forecast anticipated a sharp GDP rebound in Q3 2020, a return to normal growth by mid-2022, and elevated unemployment with gradual recovery extending beyond 2022. Management warned that further deterioration could increase credit losses and affect loan demand, fee income, liquidity and capital.
Risks include exposure to industries adversely affected by the pandemic—including energy, restaurants, hotels, aviation, entertainment, retail and commercial real estate—and uncertainty over customer payment deferrals and PPP loan guarantees. The filing also identifies mortgage servicing, repurchase and foreclosure-related risks; possible PPP litigation or SBA guarantee disputes; and operational, legal and reputational risks from the LIBOR transition. Management said ordinary-course legal proceedings were not expected to have a material financial effect; it could not assess the probability or amount of potential losses from certain regulatory matters.
Investor verification priorities
- Track subsequent-quarter credit provisions, delinquencies, nonaccruals, TDRs, charge-offs and performance of COVID-modified loans.
- Assess whether Carolina Financial integration, preliminary purchase accounting and stated cost savings deliver expected benefits; separate acquired growth from organic trends.
- Evaluate the sustainability of mortgage banking gains and volumes, mortgage-servicing-rights valuations, and related repurchase or servicing exposures.
- Monitor deposit growth and mix, cash deployment, borrowing capacity, capital ratios and the impact of the CECL transition on regulatory capital.
- Review the accuracy of economic assumptions underlying the allowance and the possible consequences of a prolonged downturn, PPP guarantee issues and LIBOR replacement.