United Bankshares, Inc. — Q1 2016 Form 10-Q
Business context and reporting period
United Bankshares, Inc. is a bank holding company. This unaudited filing covers the three months ended March 31, 2016, with comparisons to Q1 2015 and, for balance-sheet items, December 31, 2015. Financial statement amounts below are in millions of dollars unless otherwise indicated.
Financial performance and position
- Earnings: Net income was $34.7 million, essentially flat versus $34.6 million a year earlier. Basic and diluted EPS were both $0.50. The quarterly dividend was $0.33 per share, up from $0.32.
- Net interest: Net interest income rose 3.7% to $98.3 million. Tax-equivalent net interest income was $99.8 million, up 3.6%; net interest margin improved to 3.64% from 3.61% in Q1 2015.
- Other income and expenses: Noninterest income fell 9.9% to $16.4 million, mainly reflecting lower deposit-service fees. Noninterest expense was nearly flat at $58.1 million. The efficiency ratio improved to 50.63% from 51.05%.
- Credit costs: Provision for loan losses declined to $4.0 million from $5.4 million; net charge-offs were $4.3 million, or 0.18% of average loans on an annualized basis. The allowance for loan losses was $75.5 million, 0.80% of loans net of unearned income.
- Assets and lending: Total assets were $12.61 billion, up less than 1% from year-end. Gross loans were $9.39 billion, essentially unchanged; construction and land-development loans decreased 4.0%, while other consumer loans increased 7.7%.
- Funding and liquidity: Deposits totaled $9.32 billion, down 0.2% from year-end; noninterest-bearing deposits rose 3.4%, while interest-bearing deposits declined 1.7%. Cash and cash equivalents were $904.8 million. The company reported $57.9 million of operating cash flow, $13.8 million from investing activities, and $24.2 million used in financing activities; cash increased $47.5 million.
- Debt and capital: Total borrowings were $1.45 billion, up 1.0% from year-end. United reported $2.37 billion of available FHLB borrowing capacity, subject to collateral requirements. Regulatory ratios were 12.85% risk-based capital, 9.90% Common Equity Tier 1, 12.12% Tier 1, and 10.84% leverage; each exceeded the filing’s stated well-capitalized threshold. Shareholders’ equity was $1.74 billion.
Material changes and management commentary
Management attributed higher net interest income primarily to increased average earning assets and loan accretion. It said the Durbin Amendment, effective for United from July 2015, reduced debit-card fees; deposit-service fees declined 18.4% year over year. Higher mortgage production supported mortgage-banking income. The effective tax rate rose to 34.00% from 30.65%, with the comparison affected by historical tax credits recognized in Q1 2015.
United’s agreement to acquire Bank of Georgetown for United shares had received regulatory and target-shareholder approval. The bank had $1.3 billion in assets at March 31, and closing was expected June 3, 2016. Management said it expected to meet obligations over the next 12 months, had no material capital-expenditure commitments, and identified no material liquidity trend. No specific earnings guidance was provided.
Risks, contingencies, and unusual items
- Credit quality and allowance estimates depend on management’s judgments and economic assumptions. Management identified additional inherent loss related to oil-and-gas exposure within other commercial loans.
- Available-for-sale trust-preferred collateralized debt obligations had $49.3 million amortized cost and $32.6 million fair value, including $17.2 million of gross unrealized losses. Management reported no Q1 2016 impairment charge and attributed remaining losses chiefly to illiquidity, while using Level 3 valuation inputs. Its sensitivity analysis estimated a 17% fair-value decline under a 200-basis-point increase in discount rates.
- Loan commitments were approximately $2.55 billion; standby letters of credit were $124.9 million. Management said commitments often expire undrawn. The company also had $2.15 million of unrecognized tax benefits and ordinary-course legal proceedings, which management did not expect to have a material financial effect.
- Interest-rate simulations estimated a 0.66% decrease in one-year net interest income under an immediate, sustained 100-basis-point rate increase, and a 1.77% increase under a 100-basis-point decrease. These are model estimates, not forecasts.
- Management reported effective disclosure controls and no material change in internal control over financial reporting. The filing reported no material change to the risk factors in the 2015 Form 10-K.
Important facts for investors to verify
- Completion and integration of the Bank of Georgetown acquisition, including final consideration and any related costs.
- Whether the Durbin Amendment’s fee impact and loan growth trends continue to pressure or support earnings.
- Credit performance, especially oil-and-gas-related commercial exposure, nonperforming loans, charge-offs, and allowance adequacy.
- Trust-preferred securities’ valuation assumptions, liquidity, and potential impairment; reconcile reported nonperforming-loan measures across the MD&A and credit-quality disclosures.
- Funding mix, borrowing costs, and capital ratios as rates and balance-sheet composition change.