Item 2. Management’s Discussion and Analysis
Item 2.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
FORWARD-LOOKING STATEMENTS
Congress passed the Private Securities Litigation Act of 1995 to encourage corporations to provide investors with information about the company’s anticipated future financial performance, goals, and strategies. The act provides a safe haven for such disclosure; in other words, protection from unwarranted litigation if actual results are not the same as management expectations.
United desires to provide its shareholders with sound information about past performance and future trends. Consequently, any forward-looking statements contained in this report, in a report incorporated by reference to this report, or made by management of United in this report, in any other reports and filings, in press releases and in oral statements, involve numerous assumptions, risks and uncertainties. Forward-looking statements can be identified by the use of the words “expect,” “may,” “could,” “intend,” “project,” “estimate,” “believe,” “anticipate,” and other words of similar meaning. Such forward-looking statements are based on assumptions and estimates, which although believed to be reasonable, may turn out to be incorrect. Therefore, undue reliance should not be placed upon these estimates and statements. United cannot assure that any of these statements, estimates, or beliefs will be realized and actual results may differ from those contemplated in these “forward-looking statements.” United undertakes no obligation to publicly update any forward-looking statements, whether as a result of new information, future events, or otherwise.
PENDING ACQUISITION
On May 9, 2024, United entered into an Agreement and Plan of Merger (the “Merger Agreement”) with Piedmont Bancorp, Inc., a Georgia corporation (“Piedmont”). The Merger Agreement provides that, upon the terms and subject to the conditions set forth therein, Piedmont will merge with and into United (the “Merger”), with United as the surviving corporation in the Merger. Immediately following the Merger, Piedmont’s wholly-owned subsidiary, The Piedmont Bank, a state bank chartered under the laws of the State of Georgia, will merge with and into United’s wholly-owned subsidiary, United Bank, a state bank chartered under the laws of the Commonwealth of Virginia (the “Bank Merger”), with United Bank as the surviving bank in the Bank Merger. As of June 30, 2024, Piedmont has total assets of approximately $2.1 billion, total loans of approximately $1.8 billion, total liabilities of approximately $1.9 billion, total deposits of approximately $1.9 billion, and total shareholders’ equity of approximately $200 million as of June 30, 2024. Piedmont is the holding company for The Piedmont Bank, a Georgia state-chartered bank, with sixteen locations in the State of Georgia.
RECENT DEVELOPMENTS
During the first quarter of 2024, United consolidated its mortgage delivery channels by consolidating George Mason’s and Crescent’s mortgage origination and sales business with United Bank. United had previously exited the third-party origination (“TPO”) business during the fourth quarter of 2023 as part of this consolidation. United continues to offer mortgage products through its bank mortgage channel with previous George Mason offices re-branded under the United umbrella. The consolidation streamlined operations and will enhance the customer experience.
Based on this consolidation of its mortgage delivery channels and an analysis performed at June 30, 2024 in accordance with ASC 280, “Segment Reporting,” United has concluded that it operates only in one reportable segment – community banking.
INTRODUCTION
The following discussion and analysis presents the significant changes in financial condition and the results of operations of United and its subsidiaries for the periods indicated below. This discussion and the unaudited consolidated financial statements and the notes to unaudited Consolidated Financial Statements include the accounts of United Bankshares, Inc. and its wholly-owned subsidiaries, unless otherwise indicated. Management has evaluated all significant events and transactions that occurred after June 30, 2024, but prior to the date these financial statements were issued, for potential recognition or disclosure required in these financial statements.
This discussion and analysis should be read in conjunction with the unaudited Consolidated Financial Statements and accompanying notes thereto, which are included elsewhere in this document.
USE OF NON-GAAP FINANCIAL MEASURES
This discussion and analysis contains certain financial measures that are not recognized under GAAP. Under SEC Regulation G, public companies making disclosures containing financial measures that are not in accordance with GAAP must also disclose, along with each “non-GAAP” financial measure, certain additional information, including a reconciliation of the non-GAAP financial measure to the closest comparable GAAP financial measure, as well as a statement of the company’s reasons for utilizing the non-GAAP financial measure.
57
Table of Contents
Generally, United has presented a non-GAAP financial measure because it believes that this measure provides meaningful additional information to assist in the evaluation of United’s results of operations or financial position. Presentation of a non-GAAP financial measure is consistent with how United’s management evaluates its performance internally and this non-GAAP financial measure is frequently used by securities analysts, investors and other interested parties in the evaluation of companies in the banking industry. Specifically, this discussion contains certain references to financial measures identified as tax-equivalent (“FTE”) net interest income and return on average tangible equity. Management believes these non-GAAP financial measures to be helpful in understanding United’s results of operations or financial position.
Net interest income is presented in this discussion on a tax-equivalent basis. The tax-equivalent basis adjusts for the tax-favored status of income from certain loans and investments. Although this is a non-GAAP measure, United’s management believes this measure is more widely used within the financial services industry and provides better comparability of net interest income arising from taxable and tax-exempt sources. United uses this measure to monitor net interest income performance and to manage its balance sheet composition.
Average tangible equity is calculated as GAAP total shareholders’ equity minus total intangible assets. Tangible equity can thus be considered a more conservative valuation of the company. When considering net income, a return on average tangible equity can be calculated. Management provides a return on average equity to facilitate the understanding of as well as to assess the quality and composition of United’s capital structure. This measure, along with others, is used by management to analyze capital adequacy and performance.
However, this non-GAAP information should be considered supplemental in nature and not as a substitute for related financial information prepared in accordance with GAAP. Where the non-GAAP financial measure is used, the comparable GAAP financial measure, as well as reconciliation to that comparable GAAP financial measure, as well as a statement of the company’s reasons for utilizing the non-GAAP financial measure, can be found within this discussion and analysis. Investors should recognize that United’s presentation of this non-GAAP financial measure might not be comparable to a similarly titled measure at other companies.
APPLICATION OF CRITICAL ACCOUNTING POLICIES
The accounting and reporting policies of United conform with U.S. generally accepted accounting principles. In preparing the consolidated financial statements, management is required to make estimates, assumptions and judgments that affect the amounts reported in the financial statements and accompanying notes. These estimates, assumptions and judgments, which are reviewed with the Audit Committee of the Board, are based on information available as of the date of the financial statements. Actual results could differ from these estimates. These policies, along with the disclosures presented in the financial statement notes and in this financial review, provide information on how significant assets and liabilities are valued in the financial statements and how those values are determined. Based on the valuation techniques used and the sensitivity of financial statement amounts to the methods, assumptions, and estimates underlying those amounts, management has identified the determination of the allowance for loan and lease losses, the calculation of the income tax provision, and the use of fair value measurements to account for certain financial instruments to be the accounting areas that require the most subjective or complex judgments, and as such could be most subject to revision as new information becomes available.
United’s critical accounting policies involving the significant judgments and assumptions used in the preparation of the Consolidated Financial Statements as of June 30, 2024 were unchanged from the policies disclosed in United’s Annual Report on Form 10-K for the year ended December 31, 2023 within the section “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”
FINANCIAL CONDITION
United’s total assets as of June 30, 2024 were $29.96 billion, which was an increase of $30.94 million or less than 1% from December 31, 2023. This increase was mainly due to an increase of $259.92 million or 16.26% in cash and cash equivalents, an increase of $239.64 million or 1.12% in portfolio loans, and an increase of $10.21 million or 18.15% in loans held for sale. These increases in assets were partly offset by a $475.17 million or 11.52% decrease in investment securities. Total liabilities decreased $54.46 million or less than 1% from year-end 2023. Borrowings decreased $291.92 million or 14.70%, which were partially offset by a $247.12 million or 1.08% increase in deposits. Shareholders’ equity increased $85.39 million or 1.79%.
58
Table of Contents
The following discussion explains in more detail the changes in financial condition by major category.
Cash and Cash Equivalents
Cash and cash equivalents at June 30, 2024 increased $259.92 million or 16.26% from year-end 2023. In particular, interest-bearing deposits with other banks increased $275.73 million or 20.57% as United placed more cash in an interest-bearing account with the Federal Reserve while cash and due from banks decreased $15.85 million or 6.16%. Federal funds sold increased $38 thousand or 3.25%. During the first six months of 2024, net cash of $185.56 million and $220.11 million were provided by operating and investing activities, respectively, while net cash of $145.75 million was used in financing activities. See the unaudited Consolidated Statements of Cash Flows for data on cash and cash equivalents provided and used in operating, investing and financing activities for the first six months of 2024 and 2023.
Securities
Total investment securities at June 30, 2024 decreased $475.17 million or 11.52%. Securities available for sale decreased $470.65 million or 12.43%. This change in securities available for sale reflects $748.89 million in purchases, $1.22 billion in sales, maturities and calls of securities, and a decrease of $295 thousand in market value. The majority of the sales activity was related to mortgage-backed securities. Equity securities were $11.09 million at June 30, 2024, an increase of $2.15 million or 24.02% due mainly to a net increase in fair value, in particular, the Visa C shares. Other investment securities decreased $6.67 million or 2.02% from year-end 2023, due to a redemption of FHLB stock due to a decline in FHLB borrowings.
The following table summarizes the changes in the available for sale securities since year-end 2023:
(Dollars in thousands)
June 30
2024
December 31
2023
$ Change
% Change
U.S. Treasury securities and obligations of U.S. Government corporations and agencies
$
333,159
$
484,950
$
(151,791
)
(31.30
%)
State and political subdivisions
515,906
533,831
(17,925
)
(3.36
%)
Mortgage-backed securities
1,438,709
1,599,850
(161,141
)
(10.07
%)
Asset-backed securities
763,345
860,638
(97,293
)
(11.30
%)
Single issue trust preferred securities
14,569
15,141
(572
)
(3.78
%)
Other corporate securities
250,038
291,967
(41,929
)
(14.36
%)
Total available for sale securities, at fair value
$
3,315,726
$
3,786,377
$
(470,651
)
(12.43
%)
The following table summarizes the changes in the held to maturity securities since year-end 2023:
(Dollars in thousands)
June 30
2024
December 31
2023
$ Change
% Change
State and political subdivisions
$
981
(1)
$
983
(2)
$
(2
)
(0.20
%)
Other corporate securities
20
20
0
0.00
%
Total held to maturity securities, at amortized cost
$
1,001
$
1,003
$
(2
)
(0.20
%)
(1)
net of allowance for credit losses of $19 thousand.
(2)
net of allowance for credit losses of $17 thousand.
At June 30, 2024, gross unrealized losses on available for sale securities were $364.14 million. Securities with the most significant gross unrealized losses at June 30, 2024 consisted primarily of agency residential mortgage-backed securities, state and political subdivision securities, agency commercial mortgage-backed securities and corporate securities.
As of June 30, 2024, United’s available for sale mortgage-backed securities had an amortized cost of $1.67 billion, with an estimated fair value of $1.44 billion. The portfolio consisted primarily of $1.13 billion in agency residential mortgage-backed securities with a fair value of $955.31 million, $89.85 million in non-agency residential mortgage-backed securities with an estimated fair value of $81.78 million, and $453.29 million in commercial agency mortgage-backed securities with an estimated fair value of $401.62 million.
59
Table of Contents
As of June 30, 2024, United’s available for sale state and political subdivisions securities had an amortized cost of $599.74 million, with an estimated fair value of $515.91 million. The portfolio relates to securities issued by various municipalities located throughout the United States, and no securities within the portfolio were rated below investment grade as of June 30, 2024.
As of June 30, 2024, United’s available for sale corporate securities had an amortized cost of $1.07 billion, with an estimated fair value of $1.03 billion. The portfolio consisted of $16.40 million in single issue trust preferred securities with an estimated fair value of $14.57 million. In addition to the single issue trust preferred securities, the Company held positions in various other corporate securities, including asset-backed securities with an amortized cost of $767.12 million and a fair value of $763.35 million and other corporate securities, with an amortized cost of $285.65 million and a fair value of $250.04 million.
United’s available for sale single issue trust preferred securities had a fair value of $14.57 million as of June 30, 2024. Of the $14.57 million, $7.26 million or 49.80% were investment grade; $2.99 million or 20.53% were split rated; and $4.32 million or 29.67% were unrated. The two largest exposures accounted for 79.47% of the $14.57 million. These included Truist Bank at $7.26 million and Emigrant Bank at $4.32 million. All single issue trust preferred securities are currently receiving full scheduled principal and interest payments.
During the second quarter of 2024, United did not recognize any credit losses on its available for sale investment securities. Management does not believe that any individual security with an unrealized loss as of June 30, 2024 is impaired. United believes the decline in value resulted from changes in market interest rates, credit spreads and liquidity, not a deterioration of credit. Based on a review of each of the securities in the available for sale investment portfolio, management concluded that it was more-likely-than-not that it would be able to realize the cost basis investment and appropriate interest payments on such securities. United has the intent and the ability to hold these securities until such time as the value recovers or the securities mature. As of June 30, 2024, there was no allowance for credit losses related to the Company’s available for sale securities. However, United acknowledges that any securities in an unrealized loss position may be sold in future periods in response to significant, unanticipated changes in asset/liability management decisions, unanticipated future market movements or business plan changes. During the second quarter of 2024, United sold approximately $103 million of available for sale securities, with an average yield of 2.4%, at a loss of $6.81 million. Approximately $95 million of the sale proceeds were reinvested in available for sale securities with an average yield of 5.3%.
Further information regarding the amortized cost and estimated fair value of investment securities, including remaining maturities as well as a more detailed discussion of management’s impairment analysis, is presented in Note 3 to the unaudited Notes to Consolidated Financial Statements.
Loans Held for Sale
Loans held for sale were $66.48 million at June 30, 2024, an increase of $10.21 million or 18.15% from year-end 2023. Loan originations in the secondary market exceeded sales during the first six months of 2024. Loan originations for the first six months of 2024 were $362.23 million while loans sales were $352.01 million.
Portfolio Loans
Loans, net of unearned income, increased $239.64 million or 1.12%. Since year-end 2023, commercial, financial and agricultural loans increased $229.70 million or 1.93% as a result of a $352.57 million or 4.24% increase in commercial real estate loans, which was partially offset by a $122.87 million or 3.44% decrease in commercial loans (not secured by real estate). Residential real estate loans increased $136.45 million or 2.59%, construction and land development loans increased $16.24 million or less than 1%, and consumer loans decreased $145.14 million or 13.63% due to a decrease in indirect automobile financing.
60
Table of Contents
The following table summarizes the changes in the major loan classes since year-end 2023:
June 30
December 31
(Dollars in thousands)
2024
2023
$ Change
% Change
Loans held for sale
$
66,475
$
56,261
$
10,214
18.15
%
Commercial, financial, and agricultural:
Owner-occupied commercial real estate
$
1,601,076
$
1,598,231
$
2,845
0.18
%
Nonowner-occupied commercial real estate
7,068,067
6,718,343
349,724
5.21
%
Other commercial loans
3,449,571
3,572,440
(122,869
)
(3.44
%)
Total commercial, financial, and agricultural
$
12,118,714
$
11,889,014
$
229,700
1.93
%
Residential real estate
5,407,684
5,271,236
136,448
2.59
%
Construction & land development
3,164,480
3,148,245
16,235
0.52
%
Consumer:
Bankcard
9,629
9,962
(333
)
(3.34
%)
Other consumer
909,920
1,054,728
(144,808
)
(13.73
%)
Total gross loans
$
21,610,427
$
21,373,185
$
237,242
1.11
%
Less: Unearned income
(11,700
)
(14,101
)
2,401
(17.03
%)
Total Loans, net of unearned income
$
21,598,727
$
21,359,084
$
239,643
1.12
%
For a further discussion of loans see Note 4 to the unaudited Notes to Consolidated Financial Statements.
Other Assets
Other assets increased $4.56 million or 1.65% from year-end 2023. Income tax receivable increased $3.31 million due to timing differences, deferred tax assets increased $5.37 million due to an increase in the deferred tax rate during the second quarter of 2024, and accounts receivable increased $280 thousand. Partially offsetting these increases in other assets was a $4.20 million decrease in dealer reserve due to a decrease in indirect automobile financing, a $1.82 million decrease in core deposit intangibles due to amortization, and a $605 thousand decrease in other prepaid assets.
Deposits
Deposits represent United’s primary source of funding. Total deposits at June 30, 2024 increased $247.12 million or 1.08%. In terms of composition, noninterest-bearing deposits decreased $217.37 million or 3.53% while interest-bearing deposits increased $464.49 million or 2.79% from December 31, 2023.
Noninterest-bearing deposits consist of demand deposit and noninterest bearing money market (“MMDA”) account balances. The $217.37 million decrease in noninterest-bearing deposits was due mainly to a $137.37 million or 3.06% decrease in commercial noninterest-bearing deposits, a $32.34 million or 54.47% decrease in official checks, and a $17.12 million or 1.25% decrease in personal noninterest deposits. Public noninterest-bearing deposits increased $2.82 million or 1.79%.
Interest-bearing deposits consist of interest-bearing transaction, regular savings, interest-bearing MMDA, and time deposit account balances. Interest-bearing transaction accounts increased $46.44 million or less than 1% since year-end 2023. In particular, commercial interest-bearing transaction accounts increased $121.36 million and public interest-bearing transaction accounts increased $58.34 million while personal interest-bearing transaction accounts decreased $133.27 million. Regular savings accounts decreased $60.06 million or 4.46% mainly as a result of a $51.47 million decrease in personal savings accounts and a $10.30 million decrease in commercial savings accounts. Interest-bearing MMDAs increased $308.85 million or 4.86%. In particular, commercial MMDAs increased $203.57 million while personal MMDAs and public funds MMDAs increased $76.08 million and $29.20 million, respectively.
Time deposits under $100,000 increased $76.24 million or 7.15% from year-end 2023. This increase in time deposits under $100,000 was the result of a $82.58 million increase in fixed rate Certificates of Deposits (“CDs”) under $100,000. Partially offsetting this increase in deposits under $100,000 was a $5.09 million decrease in CDs under $100,000 obtained through the use of deposit listing services.
61
Table of Contents
Since year-end 2023, time deposits over $100,000 increased $93.03 million or 4.11% as fixed rate CDs increased $198.54 million, public funds CDs increased $35.88 million, and CDARS over $100,000 increased $9.12 million. Partially offsetting these increases in time deposits over $100,000, was a decrease of $149.81 million in brokered CDs.
The table below summarizes the changes by deposit category since year-end 2023:
June 30
December 31
(Dollars in thousands)
2024
2023
$ Change
% Change
Demand deposits
$
5,931,712
$
6,149,080
$
(217,368
)
(3.53
%)
Interest-bearing checking
5,694,570
5,648,135
46,435
0.82
%
Regular savings
1,285,200
1,345,258
(60,058
)
(4.46
%)
Money market accounts
6,658,303
6,349,453
308,850
4.86
%
Time deposits under $100,000
1,142,328
1,066,092
76,236
7.15
%
Time deposits over $100,000 (1)
2,354,327
2,261,301
93,026
4.11
%
Total deposits
$
23,066,440
$
22,819,319
$
247,121
1.08
%
(1)
Includes time deposits of $250,000 or more of $993,694 and $842,118 at June 30, 2024 and December 31, 2023, respectively.
Borrowings
Total borrowings at June 30, 2024 decreased $291.92 million or 14.70% since year-end 2023. During the first six months of 2024, short-term borrowings increased $7.42 million or 3.79% due to an increase in securities sold under agreements to repurchase. Long-term borrowings decreased $299.34 million or 16.73% from year-end 2023 due to maturities of advances obtained from the FHLB during the first six months of 2024.
The table below summarizes the change in the borrowing categories since year-end 2023:
June 30
December 31
(Dollars in thousands)
2024
2023
$ Change
% Change
Short-term securities sold under agreements to repurchase
$
203,519
$
196,095
$
7,424
3.79
%
Long-term FHLB advances
1,210,343
1,510,487
(300,144
)
(19.87
%)
Issuances of trust preferred capital securities
279,421
278,616
805
0.29
%
Total borrowings
$
1,693,283
$
1,985,198
$
(291,915
)
(14.70
%)
For a further discussion of borrowings see Notes 10 and 11 to the unaudited Notes to Consolidated Financial Statements.
Accrued Expenses and Other Liabilities
Accrued expenses and other liabilities at June 30, 2024 decreased $2.12 million or less than 1% from year-end 2023. In particular, business franchise taxes decreased $4.96 million, incentives payable decreased $7.06 million due to payments, and taxes payable decreased $493 thousand due to timing differences. Partially offsetting these decreases in accrued expenses and other liabilities was an increase of $8.37 million in accrued loan expenses, which correlates to the increase in the loan portfolio, and a $1.01 million increase in interest payable due to an increase in CDs.
Shareholders’ Equity
Shareholders’ equity at June 30, 2024 was $4.86 billion, which was an increase of $85.39 million or 1.79% from year-end 2023.
62
Table of Contents
Retained earnings increased $82.90 million or 4.75% from year-end 2023. Earnings net of dividends for the first six months of 2024 were $82.90 million.
Accumulated other comprehensive income decreased $1.55 million or less than 1% from year-end 2023 due to a decrease of $2.17 million in the fair value of cash flow hedges, net of deferred income taxes, and a decrease of $226 thousand in the fair value of United’s available for sale investment portfolio, net of deferred income taxes. Partially offsetting these decreases was the after-tax accretion of pension costs of $848 thousand for the first six months of 2024.
RESULTS OF OPERATIONS
Overview
The following table sets forth certain consolidated income statement information of United:
Three Months Ended
Six Months Ended
(Dollars in thousands except per share amounts)
June
2024
June
2023
March
2024
June
2024
June
2023
Interest income
$
374,184
$
345,932
$
369,180
$
743,364
$
675,235
Interest expense
148,469
118,471
146,691
295,160
213,454
Net interest income
225,715
227,461
222,489
448,204
461,781
Provision for credit losses
5,779
11,440
5,740
11,519
18,330
Noninterest income
30,223
35,178
32,212
62,435
67,922
Noninterest expense
134,774
135,288
140,742
275,516
272,707
Income before income taxes
115,385
115,911
108,219
223,604
238,666
Income taxes
18,878
23,452
21,405
40,283
47,900
Net income
$
96,507
$
92,459
$
86,814
$
183,321
$
190,766
Net income for the second quarter and first six months of 2024 was $96.51 million and $183.32 million, respectively, as compared to earnings of $92.46 million and $190.77 million for the second quarter and first six months of 2023. Earnings for the second quarter of 2024 as compared to the second quarter of 2023 increased primarily due to lower provision for credit losses and income tax expense. Earnings for the first six months of 2024 as compared to the first six months of 2023 decreased due mainly to lower net interest income and higher noninterest expense.
Diluted earnings per share were $0.71 for the second quarter of 2024 and $0.68 for the second quarter of 2023. Diluted earnings per share were $1.35 for the first six months of 2024 as compared to $1.41 for the first six months of 2023.
On a linked-quarter basis, net income for the first quarter of 2024 was $86.81 million or $0.64 per diluted share. Earnings for the second quarter of 2024 as compared to the first quarter of 2024 increased primarily due to higher net interest income and lower noninterest expense and income tax expense.
As previously mentioned, United announced during the second quarter of 2024 that it entered into a definitive merger agreement with Piedmont. Expenses of $1.27 million related to the announced Piedmont acquisition were recorded in the second quarter of 2024. United also recognized a $6.87 million gain on a VISA share exchange during the second quarter of 2024, of which $4.65 million was realized through the sale of eligible shares and the remainder of which related to shares held at fair value at quarter-end. Additionally, during the second quarter of 2024, United sold $102.72 million of AFS investment securities at a loss of $6.81 million. The first quarter of 2024 included $1.81 million of noninterest expense related to the FDIC’s revised loss estimates to the Deposit Insurance Fund.
For the second quarter of 2024, United’s annualized return on average assets was 1.32% and return on average shareholders’ equity was 7.99% as compared to 1.26% and 7.96% for the second quarter of 2023. United’s annualized return on average assets was 1.19% and return on average shareholders’ equity was 7.25% for the first quarter of 2024. United’s annualized return on average assets for the first six months of 2024 was 1.25% and return on average shareholders’ equity was 7.62% as
63
Table of Contents
compared to 1.31% and 8.34% for the first six months of 2023. For the second quarter and first half of 2024, United’s annualized return on average tangible equity, a non-GAAP measure, was 13.12% and 12.55%, respectively, as compared to 13.47% and 14.20% for the second quarter and first half of 2023, respectively. United’s annualized return on average tangible equity was 11.98% for the first quarter of 2024.
Three Months Ended
Six Months Ended
(Dollars in thousands)
June 30,
June 30,
March 31,
June 30,
June 30,
2024
2023
2024
2024
2023
Return on Average Tangible Equity:
(a) Net Income (GAAP)
$
96,507
$
92,459
$
86,814
$
183,321
$
190,766
(b) Number of Days
91
91
91
182
181
Average Total Shareholders’ Equity (GAAP)
$
4,857,893
$
4,659,094
$
4,816,476
$
4,837,306
$
4,614,909
Less: Average Total Intangibles
(1,900,164
)
(1,906,053
)
(1,901,074
)
(1,900,619
)
(1,906,689
)
(c) Average Tangible Equity (non-GAAP)
$
2,957,729
$
2,753,041
$
2,915,402
$
2,936,687
$
2,708,220
Return on Average Tangible Equity (non-GAAP)
[(a) / (b)] x 366 or 365/ (c)
13.12
%
13.47
%
11.98
%
12.55
%
14.20
%
Net interest income for the second quarter of 2024 was $225.72 million, which was relatively flat from the second quarter of 2023, decreasing $1.75 million or less than 1%. The slight decrease of $1.75 million in net interest income occurred because total interest income increased $28.25 million while total interest expense increased $30.00 million from the second quarter of 2023. Net interest income for the first half of 2024 was $448.20 million, a decrease of $13.58 million or 2.94% from the first half of 2023. The decrease of $13.58 million in net interest income occurred because total interest income increased $68.13 million while total interest expense increased $81.71 million from the first half of 2023.
The provision for credit losses was $5.78 million and $11.52 million for the second quarter and first half of 2024, respectively, while the provision for credit losses was $11.44 million and $18.33 million for the second quarter and first half of 2023. The decrease in the provision for credit losses was mainly due to a more substantial increase in reserves for future expected losses in 2023 as compared to 2024. The provision for credit losses was $5.74 million for the first quarter of 2024.
For the second quarter of 2024, noninterest income was $30.22 million, which was a decrease of $4.96 million or 14.09% from the second quarter of 2023. Noninterest income for the first six months of 2024 was $62.44 million which was a decrease of $5.49 million or 8.08% from the first six months of 2023. These decreases in noninterest income were due mainly to net gain of $8.15 million and $8.31 million, respectively, from the sale of MSRs in the second quarter and first six months of 2023. In addition, the second quarter and first six months of 2024 saw declines in income from mortgage banking of $4.01 million and $5.09 million, respectively, due to lower mortgage loan origination and sale volume as well as a lower quarter-end valuation of mortgage derivatives. Partially offsetting these declines for the same time periods were reductions in net losses on investment securities transactions of $7.12 million and $7.42 million, respectively. Noninterest income for the second quarter of 2024 decreased $1.99 million, or 6.17%, from the first quarter of 2024. This decrease in noninterest income was primarily due to a decrease in income from mortgage banking activities of $1.40 million driven by lower mortgage loan sale volume and a lower margin.
For the second quarter of 2024, noninterest expense was relatively flat from the second quarter of 2023, decreasing $514 thousand or less than 1%. Several categories of noninterest expense decreased which were largely offset by increases in other categories, none of which were significant. For the first six months of 2024, noninterest expense increased $2.81 million or 1.03% from the first six months of 2023 driven primarily by an increase of $3.88 million in employee compensation due to higher employee incentives and base salaries. Noninterest expense for the second quarter of 2024 decreased $5.97 million, or 4.24%, from the first quarter of 2024. The decrease in noninterest expense was primarily driven by decreases in employee benefits of $2.52 million, FDIC insurance expense of $1.40 million as well as smaller decreases in other categories of noninterest expense.
Income taxes for the second quarter of 2024 were $18.88 million as compared to $23.45 million for the second quarter of 2023. Income tax expense was $21.41 million for the first quarter of 2024. For the first six months of 2024 and 2023 income tax expense was $40.28 million and $47.90 million, respectively. For the quarters ended June 30, 2024 and March 31, 2024, United’s effective tax rate was 16.36% and 19.78%, respectively. For the quarter ended June 30, 2023, United’s effective tax rate was 20.23%. The effective tax rate for the first six months of 2024 and 2023 was 18.02% and 20.07%, respectively.
64
Table of Contents
The following discussion explains in more detail the consolidated results of operations by major category.
Net Interest Income
Net interest income represents the primary component of United’s earnings. It is the difference between interest income from earning assets and interest expense incurred to fund these assets. Net interest income is impacted by changes in the volume and mix of interest-earning assets and interest-bearing liabilities, as well as changes in market interest rates. Such changes, and their impact on net interest income in 2024 and 2023, are presented below.
Net interest income for the second quarter of 2024 was $225.72 million, which was relatively flat from the second quarter of 2023, decreasing $1.75 million less than 1%. The decrease of $1.75 million in net interest income occurred because total interest income increased $28.25 million while total interest expense increased $30.00 million from the second quarter of 2023. Net interest income for the first half of 2024 was $448.20 million, a decrease of $13.58 million or 2.94% from the first half of 2023. The decrease of $13.58 million in net interest income occurred because total interest income increased $68.13 million while total interest expense increased $81.71 million from the first half of 2023. On a linked-quarter basis, net interest income for the second quarter of 2024 increased $3.23 million or 1.45% from the first quarter of 2024. The $3.23 million increase in net interest income occurred because total interest income increased $5.00 million while total interest expense increased $1.78 million from the first quarter of 2024.
For the purpose of this remaining discussion, net interest income is presented on a tax-equivalent basis to provide a comparison among all types of interest earning assets. The tax-equivalent basis adjusts for the tax-favored status of income from certain loans and investments. Although this is a non-GAAP measure, United’s management believes this measure is more widely used within the financial services industry and provides better comparability of net interest income arising from taxable and tax-exempt sources. United uses this measure to monitor net interest income performance and to manage its balance sheet composition.
Tax-equivalent net interest income for the second quarter of 2024 was $226.58 million which was relatively flat from the second quarter of 2023, decreasing of $2.02 million or less than 1%. The slight decrease in tax-equivalent net interest income was primarily due to higher interest expense driven by deposit rate repricing, an increase in average interest-bearing deposits and a decrease in acquired loan accretion income. The decrease was largely offset by the impact of rising market interest rates on earning assets, organic loan growth and a decrease in average long-term borrowings. The yield on average interest-bearing deposits increased 81 basis points from the second quarter of 2023. Average interest-bearing deposits increased $1.22 billion from the second quarter of 2023. Acquired loan accretion income for the second quarter of 2024 decreased $671 thousand from the second quarter of 2023. The yield on average earning assets increased 46 basis points from the second quarter of 2023 to 5.79% driven by an increase in the yield on average net loans of 36 basis points. Average net loans increased $911.95 million from the second quarter of 2023. Average long-term borrowings decreased $1.02 billion from the second quarter of 2023. The net interest margin for the second quarter of 2024 and 2023 was 3.50% and 3.51%, respectively.
Tax-equivalent net interest income for the first six months of 2024 was $449.94 million, a decrease of $14.12 million or 3.04% from the first six months of 2023. The decrease in tax-equivalent net interest income was primarily due to higher interest expense driven by deposit rate repricing, an increase in average interest-bearing deposits and a decrease in acquired loan accretion income. The decrease was partially offset by the impact of rising market interest rates on earning assets, organic loan growth and a decrease in average long-term borrowings. The yield on average interest-bearing deposits increased 104 basis points from the first half of 2023. Average interest-bearing deposits increased $1.35 billion from the first half of 2023. Acquired loan accretion income for the first half of 2024 of $4.91 million was a decrease of $1.28 million from the first half of 2023. The yield on average earning assets increased 53 basis points from the first half of 2023 to 5.74% driven by an increase in the yield on average net loans of 44 basis points. Average net loans increased $856.17 million from the first half of 2023. Average long-term borrowings decreased $967.12 million from the first half of 2023. The net interest margin for the first half of 2024 and 2023 was 3.47% and 3.57%, respectively.
65
Table of Contents
On a linked-quarter basis, tax-equivalent net interest income for the second quarter of 2024 increased $3.22 million, or 1.44%, from the first quarter of 2024. The increase in tax-equivalent net interest income was driven by a higher yield on average net loans, organic loan growth and a decrease in average long-term borrowings partially offset by higher interest expense driven by the impact of deposit rate repricing. The net interest spread increased 3 basis points to 2.52% for the second quarter of 2024 driven by an increase in the yield on average earning assets of 9 basis points partially offset by an increase in the average cost of funds of 6 basis points. The yield on average net loans increased 6 basis points to 6.14% for the second quarter of 2024. The first quarter of 2024 included a $593 thousand interest reversal due to a commercial & industrial loan relationship placed on nonaccrual whereas the second quarter of 2024 included a $654 thousand interest recovery from a commercial real estate nonaccrual loan payoff. Average net loans were relatively flat, increasing $127.58 million or less than 1% from the first quarter of 2024. Average long-term borrowings decreased $209.83 million, or 13.99%, from the first quarter of 2024. The yield on average interest-bearing deposits increased 8 basis points to 3.18% for the second quarter of 2024. The net interest margin of 3.50% for the second quarter of 2024 was an increase of 6 basis points from the net interest margin of 3.44% for the first quarter of 2024.
United’s tax-equivalent net interest income also includes the impact of acquisition accounting fair value adjustments. The following table provides the discount/premium and net accretion impact to tax-equivalent net interest income for the three months ended June 30, 2024, June 30, 2023 and March 31, 2024 and the six months ended June 30, 2024 and June 30, 2023:
Three Months Ended
June 30
June 30
March 31
(Dollars in thousands)
2024
2023
2024
Loan accretion
$
2,406
$
3,077
$
2,506
Certificates of deposit
67
309
171
Long-term borrowings
(330
)
(335
)
(331
)
Total
$
2,143
$
3,051
$
2,346
Six Months Ended
June 30
June 30
(Dollars in thousands)
2024
2023
Loan accretion
$
4,912
$
6,196
Certificates of deposit
238
665
Long-term borrowings
(661
)
(688
)
Tax-equivalent net interest income
$
4,489
$
6,173
The following tables reconcile the difference between net interest income and tax-equivalent net interest income for the three months ended June 30, 2024, June 30, 2023 and March 31, 2024 and the six months ended June 30, 2024 and June 30, 2023.
Three Months Ended
June 30
June 30
March 31
(Dollars in thousands)
2024
2023
2024
Net interest income, GAAP basis
$
225,715
$
227,461
$
222,489
Tax-equivalent adjustment (1)
867
1,144
872
Tax-equivalent net interest income
$
226,582
$
228,605
$
223,361
Six Months Ended
June 30
June 30
(Dollars in thousands)
2024
2023
Net interest income, GAAP basis
$
448,204
$
461,781
Tax-equivalent adjustment (1)
1,739
2,279
Tax-equivalent net interest income
$
449,943
$
464,060
(1)
The tax-equivalent adjustment combines amounts of interest income on federally nontaxable loans and investment securities using the statutory federal income tax rate of 21% for the three months and six months ended June 30, 2024 and 2023 and the three months ended March 31, 2024. All interest income on loans and investment securities was subject to state income taxes.
66
Table of Contents
The following table shows the unaudited consolidated daily average balance of major categories of assets and liabilities for the three-month periods ended June 30, 2024 and 2023, respectively, with the interest and rate earned or paid on such amount. The interest income and yields on federally nontaxable loans and investment securities are presented on a tax-equivalent basis using the statutory federal income tax rate of 21% for the three-month period ended June 30, 2024 and 2023. Interest income on all loans and investment securities was subject to state income taxes.
Three Months Ended
Three Months Ended
June 30, 2024
June 30, 2023
(Dollars in thousands)
Average
Balance
Interest
(1)
Avg. Rate
(1)
Average
Balance
Interest
(1)
Avg. Rate
(1)
ASSETS
Earning Assets:
Federal funds sold and securities purchased under agreements to resell and other short-term investments
$
930,453
$
12,787
5.53
%
$
994,072
$
12,706
5.13
%
Investment Securities:
Taxable
3,496,310
33,968
3.89
%
4,274,123
36,721
3.44
%
Tax-exempt
209,114
1,488
2.85
%
387,918
2,718
2.80
%
Total Securities
3,705,424
35,456
3.83
%
4,662,041
39,439
3.38
%
Loans, net of unearned income (2)(3)
21,639,898
326,808
6.07
%
20,705,509
294,931
5.71
%
Allowance for loan losses
(263,050
)
(240,611
)
Net loans
21,376,848
6.14
%
20,464,898
5.78
%
Total earning assets
26,012,725
$
375,051
5.79
%
26,121,011
$
347,076
5.33
%
Other assets
3,357,439
3,317,801
TOTAL ASSETS
$
29,370,164
$
29,438,812
LIABILITIES
Interest-Bearing Liabilities:
Interest-bearing deposits
$
16,740,124
$
132,425
3.18
%
$
15,520,461
$
91,577
2.37
%
Short-term borrowings
206,234
2,206
4.30
%
177,315
1,489
3.37
%
Long-term borrowings
1,290,405
13,838
4.31
%
2,307,485
25,405
4.42
%
Total Interest-Bearing Liabilities
18,236,763
148,469
3.27
%
18,005,261
118,471
2.64
%
Noninterest-bearing deposits
5,976,971
6,500,259
Accrued expenses and other liabilities
298,537
274,198
TOTAL LIABILITIES
24,512,271
24,779,718
SHAREHOLDERS’ EQUITY
4,857,893
4,659,094
TOTAL LIABILITIES AND
SHAREHOLDERS’ EQUITY
$
29,370,164
$
29,438,812
NET INTEREST INCOME
$
226,582
$
228,605
INTEREST RATE SPREAD
2.52
%
2.69
%
NET INTEREST MARGIN
3.50
%
3.51
%
(1)
The interest income and the yields on federally nontaxable loans and investment securities are presented on a tax-equivalent basis using the statutory federal income tax rate of 21%.
(2)
Nonaccruing loans are included in the daily average loan amounts outstanding.
(3)
Loans held for sale and leases are included in the daily average loan amounts outstanding.
67
Table of Contents
The following table shows the unaudited consolidated daily average balance of major categories of assets and liabilities for the three-month periods ended June 30, 2024 and March 31, 2024, respectively, with the interest and rate earned or paid on such amount. The interest income and yields on federally nontaxable loans and investment securities are presented on a tax-equivalent basis using the statutory federal income tax rate of 21% for the three-month period ended June 30, 2024 and March 31, 2024. Interest income on all loans and investment securities was subject to state income taxes.
Three Months Ended
Three Months Ended
June 30, 2024
March 31, 2024
(Dollars in thousands)
Average
Balance
Interest
(1)
Avg. Rate
(1)
Average
Balance
Interest
(1)
Avg. Rate
(1)
ASSETS
Earning Assets:
Federal funds sold and securities purchased under agreements to resell and other short-term investments
$
930,453
$
12,787
5,53
%
$
882,656
$
12,303
5.61
%
Investment Securities:
Taxable
3,496,310
33,968
3.89
%
3,743,157
34,722
3.71
%
Tax-exempt
209,114
1,488
2.85
%
212,375
1,474
2.78
%
Total Securities
3,705,424
35,456
3.83
%
3,955,532
36,196
3.66
%
Loans, net of unearned income (2)(3)
21,639,898
326,808
6.07
%
21,508,611
321,553
6.01
%
Allowance for loan losses
(263,050
)
(259,341
)
Net loans
21,376,848
6.14
%
21,249,270
6.08
%
Total earning assets
26,012,725
$
375,051
5.79
%
26,087,458
$
370,052
5.70
%
Other assets
3,357,439
3,344,925
TOTAL ASSETS
$
29,370,164
$
29,432,383
LIABILITIES
Interest-Bearing Liabilities:
Interest-bearing deposits
$
16,740,124
$
132,425
3.18
%
$
16,663,765
$
128,377
3.10
%
Short-term borrowings
206,234
2,206
4.30
%
203,570
2,082
4.11
%
Long-term borrowings
1,290,405
13,838
4.31
%
1,500,237
16,232
4.35
%
Total Interest-Bearing Liabilities
18,236,763
148,469
3.27
%
18,367,572
146,691
3.21
%
Noninterest-bearing deposits
5,976,971
5,941,866
Accrued expenses and other liabilities
298,537
306,469
TOTAL LIABILITIES
24,512,271
24,615,907
SHAREHOLDERS’ EQUITY
4,857,893
4,816,476
TOTAL LIABILITIES AND
SHAREHOLDERS’ EQUITY
$
29,370,164
$
29,432,383
NET INTEREST INCOME
$
226,582
$
223,361
INTEREST RATE SPREAD
2.52
%
2.49
%
NET INTEREST MARGIN
3.50
%
3.44
%
(1)
The interest income and the yields on federally nontaxable loans and investment securities are presented on a tax-equivalent basis using the statutory federal income tax rate of 21%.
(2)
Nonaccruing loans are included in the daily average loan amounts outstanding.
(3)
Loans held for sale and leases are included in the daily average loan amounts outstanding.
68
Table of Contents
The following table shows the unaudited consolidated daily average balance of major categories of assets and liabilities for the six-month periods ended June 30, 2024 and 2023, respectively, with the interest and rate earned or paid on such amount. The interest income and yields on federally nontaxable loans and investment securities are presented on a tax-equivalent basis using the statutory federal income tax rate of 21% for the six-month period ended June 30, 2024 and 2023. Interest income on all loans and investment securities was subject to state income taxes.
Six Months Ended
Six Months Ended
June 30, 2024
June 30, 2023
(Dollars in thousands)
Average
Balance
Interest
(1)
Avg. Rate
(1)
Average
Balance
Interest
(1)
Avg. Rate
(1)
ASSETS
Earning Assets:
Federal funds sold and securities repurchased under agreements to resell and other short-term investments
$
906,555
$
25,090
5.57
%
$
965,393
$
23,689
4.95
%
Investment Securities:
Taxable
3,619,733
68,690
3.80
%
4,339,132
72,980
3.36
%
Tax-exempt
210,745
2,962
2.81
%
387,795
5,458
2.81
%
Total Securities
3,830,478
71,652
3.74
%
4,726,927
78,438
3.32
%
Loans, net of unearned income (2)(3)
21,574,254
648,361
6.04
%
20,694,619
575,387
5.60
%
Allowance for loan losses
(261,196
)
(237,726
)
Net loans
21,313,058
6.11
%
20,456,893
5.67
%
Total earning assets
26,050,091
$
745,103
5.74
%
26,149,213
$
677,514
5.21
%
Other assets
3,350,473
3,324,719
TOTAL ASSETS
$
29,400,564
$
29,473,932
LIABILITIES
Interest-Bearing Liabilities:
Interest-bearing deposits
$
16,701,944
$
260,802
3.14
%
$
15,354,468
$
160,169
2.10
%
Short-term borrowings
204,902
4,288
4.21
%
171,994
2,646
3.10
%
Long-term borrowings
1,395,321
30,070
4.33
%
2,362,437
50,639
4.32
%
Total Interest-Bearing Liabilities
18,302,167
295,160
3.24
%
17,888,899
213,454
2.41
%
Non-interest bearing deposits
5,959,418
6,697,549
Accrued expenses and other liabilities
301,673
272,575
TOTAL LIABILITIES
24,563,258
24,859,023
SHAREHOLDERS’ EQUITY
4,837,306
4,614,909
TOTAL LIABILITIES AND
SHAREHOLDERS’ EQUITY
$
29,400,564
$
29,473,932
NET INTEREST INCOME
$
449,943
$
464,060
INTEREST RATE SPREAD
2.50
%
2.80
%
NET INTEREST MARGIN
3.47
%
3.57
%
(1)
The interest income and the yields on federally nontaxable loans and investment securities are presented on a tax-equivalent basis using the statutory federal income tax rate of 21%.
(2)
Nonaccruing loans are included in the daily average loan amounts outstanding.
(3)
Loans held for sale and leases are included in the daily average loan amounts outstanding.
69
Table of Contents
Provision for Credit Losses
The provision for credit losses was $5.78 million and $11.52 million for the second quarter and first half of 2024, respectively, as compared to a provision for credit losses of $11.44 million and $18.33 million for the second quarter and first half of 2023, respectively. On a linked-quarter basis, the provision for credit losses for the first quarter of 2024 was $5.74 million. United’s provision for credit losses relates to its portfolio of loans and leases, held-to-maturity securities and interest receivable on loans which are discussed in more detail in the following paragraphs.
For the quarter ended June 30, 2024, the provision for loan and lease losses was $5.78 million as compared to a provision for loan and lease losses of $11.44 million for the quarter ended June 30, 2023. The provision for loan and lease losses for the first six months of 2024 was $11.52 million as compared to a provision for loan and lease losses of $18.33 million for the first six months of 2023. The lower amount of provision expense for the second quarter and first half of 2024 compared to the second quarter and first half of 2023 was mainly due to a more substantial increase in reserves for future expected losses in 2023 as compared to 2024. Net charge-offs were $1.26 million for the second quarter of 2024 as compared to net charge-offs of $1.21 million for the same quarter in 2023. Net charge-offs for the first six months of 2024 were $3.33 million as compared to net charge-offs of $2.35 million for the first six months of 2023. The higher amount of net charge-offs for 2024 as compared to 2023 was primarily due to an increase in charge-offs and reduction in offsetting recoveries for the commercial real estate nonowner-occupied portfolio as well as reduction in recoveries for the other commercial portfolio. On a linked-quarter basis, the provision for loan and lease losses of $5.78 million for the second quarter of 2024 was relatively flat from the provision for loan and lease losses of $5.74 million for the first quarter of 2024. Net charge-offs were $2.07 million for the first quarter of 2024.
Annualized net charge-offs as a percentage of average loans and leases, net of unearned income for the second quarter and first half of 2024 were 0.02% and 0.03% as compared to annualized net charge-offs of 0.02% for both the second quarter and first half of 2023. Annualized net charge-offs as a percentage of average loans and leases, net of unearned income for the first quarter of 2024 were 0.04%.
The following table shows a summary of United’s nonperforming assets including nonperforming loans and other real estate owned (“OREO”) at June 30, 2024 and December 31, 2023:
June 30
December 31
(In thousands)
2024
2023
Nonaccrual loans
$
52,929
$
30,919
Loans past due 90 days of more
12,402
14,579
Total nonperforming loans
$
65,331
$
45,498
Other real estate owned
2,156
2,615
Total nonperforming assets
$
67,487
$
48,113
The increase of $22.01 million in nonaccrual loans from December 31, 2023 to June 30, 2024 was due mainly to the transfer to nonaccrual of one significant commercial lending relationship.
United maintains an allowance for loan and lease losses and a reserve for lending-related commitments. The combined allowance for loan losses and reserve for lending-related commitments is considered the allowance for credit losses. At June 30, 2024, the allowance for credit losses was $308.16 million as compared to $303.94 million at December 31, 2023.
At June 30, 2024, the allowance for loan and lease losses was $267.42 million as compared to $259.24 million at December 31, 2023. The increase in the allowance for loan and lease losses was primarily driven by increased outstanding loan balances for the commercial real estate non-owner occupied and residential real estate loan segments as well as increased reasonable and supportable forecast adjustments for the commercial real estate non-owner occupied loan segment, especially as it pertains to office loans. As a percentage of loans and leases, net of unearned income, the allowance for loan losses was 1.24% at June 30, 2024 and 1.21% at December 31, 2023. The ratio of the allowance for loan and lease losses to nonperforming loans and leases or coverage ratio was 409.34% and 569.78% at June 30, 2024 and December 31, 2023, respectively. The decrease in this ratio was due mainly to an increase in nonperforming loans.
70
Table of Contents
United continues to evaluate risks which may impact its loan and lease portfolios. Reserves are initially determined based on losses identified from the PD/LGD and Cohort models which utilize the Company’s historical information. Then, any qualitative adjustments are applied to account for the Company’s view of current conditions, the future and other factors.
The second quarter of 2024 qualitative adjustments include analyses of the following:
•
Current conditions – United considered the impact of inflation, interest rates, the banking regulatory environment, geopolitical conflict and the presidential election when making determinations related to factor adjustments for the external environment. United also considered portfolio trends related to economic and business conditions, collateral values for dependent loans; past due, nonaccrual and graded loans and leases; and concentrations of credit.
•
Reasonable and supportable forecasts – The forecast is determined on a portfolio-by-portfolio basis by relating the correlation of real GDP and the unemployment rate to loss rates to forecasts of those variables. The reasonable and supportable forecast selection is subjective in nature and requires more judgment compared to the other components of the allowance. Assumptions for the economic variables were the following:
•
The forecast for real GDP in the second quarter remained consistent with the first quarter projections of 2.10% for 2024, 2.00% for 2025 and 2.00% for 2026.. The unemployment rate remained the same for 2024 at 4.00% while 2025 shifted up slightly to 4.20% from 4.10% and 2026 also increased slightly to 4.10% from 4.00% .
•
Greater risk of loss is probable in the office portfolio due to continued hybrid and remote work that may be exacerbated by future economic conditions as well as higher interest rates, cap rates and the uncertainty surrounding appraised values of the collateral. United recognized this greater risk of loss by increasing the loss multiple relating to the historical loss experience of the office portfolio.
•
Reversion to historical loss data occurs via a straight-line method during the year following the one-year reasonable and supportable forecast period.
United’s review of the allowance for loan and lease losses at June 30, 2024 produced increased reserves in two of the four loan categories as compared to December 31, 2023. The allowance related to the commercial, financial & agricultural loan pool, consisting of the owner and non-owner occupied commercial real estate and other commercial loan segments, increased $5.86 million due to increased outstanding balances and increased reasonable and supportable forecast adjustments particularly as it pertains to office loans. The residential real estate segment reserve increased $4.20 million due primarily to increased outstanding balances. The real estate construction and development loan segment reserve decreased $45 thousand due to improved historical loss rates. The consumer loan segment reserve decreased $1.83 million primarily due to a decrease in outstanding balances.
An allowance is established for estimated lifetime losses for loans that are individually assessed. Nonperforming commercial loans and leases are regularly reviewed to identify expected credit losses. A loan is individually assessed for expected credit losses when the loan does not share similar characteristics with other loans in the portfolio. Measuring expected credit losses of a loan requires judgment and estimates, and the eventual outcomes may differ from those estimates. Expected credit losses are measured based upon the present value of expected future cash flows from the loan discounted at the loan’s effective rate or the fair value of collateral if the loan is collateral dependent. When the selected measure is less than the recorded investment in the loan, an expected credit loss has occurred. The allowance for loans and leases that were individually assessed was $15.63 million at June 30, 2024 and $13.15 million at December 31, 2023. In comparison to the prior year-end, this element of the allowance increased $2.48 million due to the downgrade of a commercial real estate non-owner occupied relationship secured by office collateral.
71
Table of Contents
Management believes that the allowance for credit losses of $308.16 million at June 30, 2024 is adequate to provide for expected losses on existing loans and lending-related commitments based on information currently available. United’s loan administration policies are focused on the risk characteristics of the loan portfolio in terms of loan approval and credit quality. The commercial loan portfolio is monitored for possible concentrations of credit in one or more industries. Management has lending limits as a percentage of capital per type of credit concentration in an effort to ensure adequate diversification within the portfolio. Most of United’s commercial loans are secured by real estate located in West Virginia, southeastern Ohio, Pennsylvania, Virginia, Maryland, North Carolina, South Carolina, and the District of Columbia. It is the opinion of management that these commercial loans do not pose any unusual risks and that adequate consideration has been given to these loans in establishing the allowance for credit losses.
The provision for credit losses related to held to maturity securities for the second quarter and first half of 2024 and 2023 was immaterial. The allowance for credit losses related to held to maturity securities was $19 thousand and $17 thousand as of June 30, 2024 and December 31, 2023, respectively. There was no provision for credit losses recorded on available for sale investment securities for the second quarter and first half of 2024 and 2023 and no allowance for credit losses on available for sale investment securities as of June 30, 2024 and December 31, 2023.
Management is not aware of any potential problem loans or leases, trends or uncertainties, which it reasonably expects, will materially impact future operating results, liquidity, or capital resources which have not been disclosed. Additionally, management has disclosed all known material credits, which cause management to have serious doubts as to the ability of such borrowers to comply with the loan repayment schedules.
Other Income
Other income consists of all revenues, which are not included in interest and fee income related to earning assets. Noninterest income has been and will continue to be an important factor for improving United’s profitability. Recognizing the importance, management continues to evaluate areas where noninterest income can be enhanced.
Noninterest income for the second quarter of 2024 was $30.22 million, a decrease of $4.96 million or 14.09% from the second quarter of 2023. Noninterest income for the first half of 2024 was $62.44 million, a decrease of $5.49 million or 8.08% from the first half of 2023. Both decreases were driven by decreases in mortgage loan servicing income and mortgage banking income partially offset by an increase in fees from brokerage services and lower net losses on investment securities transactions.
Mortgage loan servicing income for the second quarter and first half of 2024 decreased $9.06 million or 92.04% and $10.55 million or 87.03% from the second quarter and first half of 2023, respectively. The second quarter and first half of 2023 included net gains on the sale of MSRs of $8.15 million and $8.31 million, respectively. In addition, mortgage loan servicing income has declined due to lower mortgage balances serviced since the sale of the MSRs.
Income from mortgage banking activities totaled $3.90 million for the second quarter of 2024 compared to $7.91 million for the same period of 2023, a decline of $4.01 million or 50.66%. For the first half of 2024 and 2023, income from mortgage banking activities was $9.20 million and $14.29 million, respectively. The decreases for 2024 as compared to 2023 were due mainly to lower mortgage loan origination and sale volume and a lower quarter-end valuation of mortgage derivatives. For the three months ended June 30, 2024 and 2023, mortgage loan sales were $163.27 million and $248.71 million, respectively. For the six months ended June 30, 2024 and 2023, mortgage loan sales were $352.01 million and $415.22 million, respectively. Mortgage loans originated for sale were $185.32 million and $362.23 million for the second quarter and first half of 2024, respectively, as compared to $271.83 million and $449.64 million for the second quarter and first half of 2023, respectively.
Fees from brokerage services for the second quarter and first half of 2024 increased $1.04 million or 26.57% and $2.11 million or 25.97%, respectively, from the second quarter and first half of 2023. The increase was primarily due to higher volume.
72
Table of Contents
United recorded a net loss on investment securities of $218 thousand for the second quarter of 2024 as compared to a net loss on investment securities of $7.34 million for the second quarter of 2023. For the first six months of 2024, net losses on investment securities were $317 thousand as compared to net losses on investment securities of $7.74 million for the first six months of 2023. During the second quarter of 2024, United sold approximately $103 million of AFS investment securities at a net loss of $6.81 million. Additionally, during the second quarter of 2024, United recognized a $6.87 million gain on the VISA share exchange, of which $4.65 million was realized through the sale of eligible shares and the remainder of which related to shares held at fair value at quarter-end which will be eligible to be sold in the third quarter of 2024. In the second quarter of 2023, United sold approximately $187 million of AFS investment securities resulting in a net loss of $7.24 million.
On a linked-quarter basis, noninterest income for the second quarter of 2024 decreased $1.99 million, or 6.17%, from the first quarter of 2024. The decrease in noninterest income was primarily due to a decrease in income from mortgage banking activities of $1.40 million driven by lower mortgage loan sale volume and a lower margin.
Other Expenses
Just as management continues to evaluate areas where noninterest income can be enhanced, it strives to improve the efficiency of its operations to reduce costs. Other expenses include all items of expense other than interest expense, the provision for credit losses, and income taxes. Noninterest expense for the second quarter of 2024 was $134.78 million, which was relatively flat from the second quarter of 2023, decreasing $514 thousand or less than 1%. For the first half of 2024, noninterest expense was $275.52 million, which was an increase of $2.81 million or 1.03% from the first half of 2023.
Employee compensation for the first half of 2024 increased $3.88 million or 3.40% from the first half of 2023. The increase in employee compensation was driven by higher employee incentives, base salaries and employee severance. The employee severance expense is related to the previously announced mortgage delivery channel consolidation.
Employee benefits expense for the first half of 2024 increased $1.15 million or 4.47% as compared to the first half of 2023. This increase was primarily due to higher amounts of expense for postretirement benefits partially offset by lower health insurance costs.
Equipment expense for the first half of 2024 decreased $621 thousand or 4.13% as compared to the first half of 2023. This decrease was primarily due to lower depreciation expense partially offset by an increase in maintenance expense.
Mortgage loan servicing expense and impairment expense for the second quarter and first half of 2024 decreased $688 thousand or 40.49% and $1.56 million or 43.46%, respectively, from the second quarter and first half of 2023. The decreases in 2024 were due primarily to a lower amount of mortgage loans serviced as a result of the sale of MSRs in the second quarter and first half of 2023.
FDIC insurance expense for the first half of 2024 increased $2.36 million or 25.73% from the first half of 2023. The increase in FDIC insurance expense was driven by $1.81 million of expense recognized in the first quarter of 2024 for the FDIC special assessment.
Other expense for the first half of 2024 decreased $2.50 million or 3.82% from the first half of 2023. Within other expenses, the most significant decrease was $4.55 million in the expense for the reserve for unfunded loan commitments. In addition, advertising expense and the amortization of intangibles also declined. Partially offsetting these decreases were increases in the amortization of investment tax credits and loan collection expense. Included in the first half of 2024 were the previously mentioned $1.27 million in merger expenses related to the Piedmont acquisition.
On a linked-quarter basis, noninterest expense for the second quarter of 2024 decreased $5.97 million, or 4.24%, from the first quarter of 2024. The decrease in noninterest expense was primarily driven by decreases in employee benefits of $2.52 million, FDIC insurance expense of $1.40 million, net occupancy expense of $943 thousand, employee compensation of $792 thousand and other noninterest expense of $1.04 million. The decrease in employee benefits was primarily driven by
73
Table of Contents
lower Federal Insurance Contributions Act (“FICA”) and postretirement benefit costs. The decrease in FDIC insurance expense was primarily due to the inclusion in the first quarter of 2024 of the $1.81 million of additional expense related to the FDIC special assessment. Net occupancy expense declined due to lower building rental, maintenance and utilities expenses. The decline in employee compensation expense was primarily due to a decline in commission expense related to lower mortgage banking production. The decrease in other noninterest expense was primarily driven by a $904 thousand decrease in expense related to community development lending programs as well as lower amounts of certain general operating expenses, none of which were significant, partially offset by the $1.27 million in merger-related expenses. Partially offsetting these decreases in noninterest expense was an increase of $695 thousand in equipment expense due to higher maintenance costs.
Income Taxes
For the second quarter of 2024, income tax expense was $18.88 million as compared to $23.45 million in the second quarter of 2023. On a linked-quarter basis, income tax expense decreased $2.53 million from the first quarter of 2024. For the first half of 2024, income tax expense was $40.28 million as compared to $47.90 million in the first half of 2023. These decreases were due primarily to the impact of discrete tax benefits recognized in the second quarter of 2024. United’s effective tax rate was 16.36% for the second quarter of 2024, 20.23% for the second quarter of 2023 and 19.78% for the first quarter of 2024. For the first half of 2024 and 2023, United’s effective tax rate was 18.02% and 20.07%, respectively.
Liquidity and Capital Resources
In the opinion of management, United maintains liquidity that is sufficient to satisfy its depositors’ requirements and the credit needs of its customers. Like all banks, United depends upon its ability to renew maturing deposits and other liabilities on a daily basis and to acquire new funds in a variety of markets. A significant source of funds available to United is “core deposits”. Core deposits include certain demand deposits, statement and special savings and NOW accounts. These deposits are relatively stable, and they are the lowest cost source of funds available to United. Short-term borrowings have also been a significant source of funds. These include federal funds purchased and securities sold under agreements to repurchase as well as advances from the FHLB. Repurchase agreements represent funds which are obtained as the result of a competitive bidding process.
Liquid assets are cash and those items readily convertible to cash. All banks must maintain sufficient balances of cash and near-cash items to meet the day-to-day demands of customers and United’s cash needs. Other than cash and due from banks, the available for sale securities portfolio and maturing loans are the primary sources of liquidity.
The goal of liquidity management is to ensure the ability to access funding which enables United to efficiently satisfy the cash flow requirements of depositors and borrowers and meet United’s cash needs. Liquidity is managed by monitoring funds’ availability from a number of primary sources. Substantial funding is available from cash and cash equivalents, unused short-term borrowing and a geographically dispersed network of branches providing access to a diversified and substantial retail deposit market.
Short-term needs can be met through a wide array of outside sources such as correspondent and downstream correspondent federal funds and utilization of Federal Home Loan Bank advances.
Other sources of liquidity available to United to provide long-term as well as short-term funding alternatives, in addition to FHLB advances, are long-term certificates of deposit, lines of credit, borrowings that are secured by bank premises or stock of United’s subsidiaries and issuances of trust preferred securities. In the normal course of business, United through its Asset Liability Committee evaluates these as well as other alternative funding strategies that may be utilized to meet short-term and long-term funding needs.
During the first half of 2024, United increased its interest-bearing deposit balance at the FRB by $297.01 million to $1.54 billion. The change in the balance at the FRB was mostly the result of a $247.12 million increase in total deposits and $469.94 million of net sales, maturities, and paydowns in the available for sale debt securities portfolio partially offset by a $300.14 million decrease in FHLB advances.
74
Table of Contents
For the six months ended June 30, 2024, cash of $185.56 million was provided by operating activities due mainly to net income of $183.32 million. Net cash of $220.11 million was provided by investing activities which was primarily due to $465.56 million of net proceeds from the sales of investment securities over purchases partially offset by portfolio loan growth of $238.18 million. During the first six months of 2024, net cash of $145.75 million was used in financing activities due primarily to a net repayment of $300.00 million in FHLB advances and cash dividends paid of $100.32 million partially offset by growth in deposits of $247.36 million. The net effect of the cash flow activities was an increase in cash and cash equivalents of $259.92 million for the first half of 2024.
At June 30, 2024, United had an unused borrowing amount at the FHLB of approximately $7.26 billion subject to delivery of collateral after certain trigger points, $3.17 billion without the delivery of additional collateral. United has various unused lines of credit available from certain of its correspondent banks in the aggregate amount of $280 million, all of which was available at June 30, 2024. United also has a $20 million unsecured, revolving line of credit with an unrelated financial institution to provide for general liquidity needs, all of which was available at June 30, 2024. At June 30, 2024, United’s borrowing capacity for the FRB Discount Window was $4.71 billion. United did not have any borrowings from the FRB’s Discount Window, or its new Bank Term Funding Program, during the first half of 2024.
United anticipates it can meet its obligations over the next 12 months and has no material commitments for capital expenditures. United also has lines of credit available. See Notes 10 and 11 to the accompanying unaudited Notes to Consolidated Financial Statements for more details regarding the amounts available to United under lines of credit.
The Asset Liability Committee monitors liquidity to ascertain that a liquidity position within certain prescribed parameters is maintained. No changes are anticipated in the policies of United’s Asset Liability Committee.
United’s capital position is financially sound. United seeks to maintain a proper relationship between capital and total assets to support growth and sustain earnings. United has historically generated attractive returns on shareholders’ equity. United is well-capitalized based upon regulatory guidelines. United’s risk-based capital ratio is 15.84% at June 30, 2024 while its Common Equity Tier 1 capital, Tier 1 capital and leverage ratios are 13.48%, 13.48% and 11.61%, respectively. The June 30, 2024 ratios reflects United’s election of a five-year transition provision, allowed by the Federal Reserve Board and other federal banking agencies in response to the COVID-19 pandemic, to delay for two years the full impact of CECL on regulatory capital, followed by a three-year transition period. The regulatory requirements for a well-capitalized financial institution are a risk-based capital ratio of 10.0%, a Common Equity Tier 1 capital ratio of 6.5%, a Tier 1 capital ratio of 8.0% and a leverage ratio of 5.0%.
Total shareholders’ equity was $4.86 billion at June 30, 2024, which was an increase of $85.39 million or 1.79% from December 31, 2023. This increase is primarily due to an increase of $82.90 million in retained earnings (net income less dividends declared).
United’s equity to assets ratio was 16.21% at June 30, 2024 as compared to 15.94% at December 31, 2023. The primary capital ratio, capital and reserves to total assets and reserves, was 17.06% at June 30, 2024 as compared to 16.79% at December 31, 2023. United’s average equity to average asset ratio was 16.54% for the second quarter of 2024 as compared to 15.83% the second quarter of 2023. United’s average equity to average asset ratio was 16.45% for the first half of 2024 as compared to 15.66% for the first half of 2023. All of these financial measurements reflect a financially sound position.
During the second quarter of 2024, United’s Board of Directors declared a cash dividend of $0.37 per share. Cash dividends were $0.74 per common share for the first six months of 2024. Total cash dividends declared were $50.20 million for the second quarter of 2024 and $100.42 million for the first six months of 2024 as compared to $48.63 million for the second quarter of 2023 and $97.35 million for the first six months of 2023, respectively.
75
Table of Contents
Text extracted from the filing as submitted to EDGAR. Formatting, tables and exhibits are simplified for reading; the original document is authoritative for anything you rely on.