United Bankshares, Inc. — Q2 2014 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2014. The unaudited consolidated results include Virginia Commerce Bancorp from its acquisition on January 31, 2014; comparisons with 2013 therefore reflect a materially larger company.
Financial performance
Unless otherwise noted, amounts are in millions of dollars. “Revenue” below means net interest income plus other income.
| Metric | Q2 2014 | Q2 2013 | Six months 2014 | Six months 2013 |
|---|---|---|---|---|
| Revenue | $113.1 | $85.3 | $224.9 | $170.5 |
| Net interest income | $93.9 | $66.2 | $179.2 | $133.0 |
| Net income | $33.2 | $22.2 | $63.4 | $43.8 |
| Diluted EPS | $0.48 | $0.44 | $0.96 | $0.87 |
| Net interest margin, tax-equivalent | 3.69% | 3.65% | 3.70% | 3.70% |
- Reported net interest income rose 41.9% in Q2 and 34.7% in the first half year over year, mainly reflecting Virginia Commerce’s contribution and larger earning assets. Tax-equivalent net interest income was $95.5 million in Q2 and $182.4 million for the half year.
- Q2 provision for loan losses was $6.2 million, versus $5.0 million; six-month provision was $10.9 million, versus $10.1 million. Net charge-offs were $5.6 million in Q2 and $10.1 million for the half year.
- Noninterest expense increased 17.9% in Q2 and 22.3% in the first half year, principally due to the acquisition. First-half expense included $3.64 million of merger severance charges.
- Annualized return on average assets and equity were 1.13% and 8.16% in Q2, respectively; first-half returns were 1.14% and 8.36%.
Financial position, liquidity and capital
- At June 30, total assets were $12.05 billion, up 38.0% from year-end 2013. Gross loans were $8.89 billion, up 32.3%; deposits were $8.75 billion, up 32.1%; and shareholders’ equity was $1.64 billion, up 57.4%. These increases primarily reflect the Virginia Commerce acquisition.
- Cash and cash equivalents totaled $715.4 million, compared with $416.6 million at year-end. First-half operating cash flow was $57.5 million; cash increased $298.8 million overall.
- Total borrowings were $1.59 billion, up 58.4% from year-end. This included $861.3 million of FHLB advances and $466.5 million of repurchase-agreement borrowings. The company reported approximately $2.27 billion of unused FHLB borrowing capacity, subject to collateral conditions.
- Management said liquidity was sufficient and anticipated meeting obligations over the next 12 months. The company reported no material capital-expenditure commitments.
- United reported it and its banking subsidiaries were “well capitalized.” At June 30, United’s risk-based capital ratio was 13.46%, Tier 1 capital ratio 12.54%, and leverage ratio 10.64%. Management said the company would meet Basel III capital requirements on a fully phased-in basis if then effective.
- The quarterly dividend was $0.32 per share; first-half dividends were $0.64 per share.
Material changes and unusual items
- United acquired Virginia Commerce for approximately $585.5 million, including 18.33 million United shares. The acquired company had approximately $2.77 billion of assets, $2.10 billion of loans and $2.02 billion of deposits at closing. The acquisition added $336.0 million of goodwill; total goodwill was $710.2 million at June 30. Purchase-price allocations remained subject to refinement.
- First-half 2014 results included an $8.98 million pretax gain from the sale of a former branch building. Excluding that gain and securities transaction and impairment items, management reported first-half noninterest income of $36.9 million, down 2.7% year over year.
- United recognized $1.06 million of first-half other-than-temporary impairment charges on investment securities, including $421,000 in Q2, related to a trust-preferred collateralized debt obligation. The company used Level 3 estimates for these securities, citing illiquid markets; a 200-basis-point increase in assumed discount rates would reduce their fair value by an estimated 18%, or $8.6 million.
- The Volcker Rule may require divestiture of certain trust-preferred CDO holdings by July 21, 2015, subject to possible extensions. The filing says the company considered it more likely than not that it would have to sell four such securities before recovery of amortized cost.
- Credit quality indicators included $87.2 million of nonperforming loans (0.98% of loans) and $130.5 million of nonperforming assets (1.08% of assets) at June 30. The allowance for loan losses was $75.0 million; management noted acquired loans were recorded at fair value and Virginia Commerce’s former allowance did not carry over. A significant oil-and-gas exploration relationship contributed to higher provision and charge-offs.
Outlook, risks and contingencies
- No general earnings or revenue guidance is provided. Management expected a 33% effective tax rate on 2014 future earnings.
- Management identified economic and banking conditions, interest rates, competition, execution of business strategies, regulation and technology as factors that could cause actual results to differ from forward-looking statements.
- Interest-rate simulations estimated that an immediate, sustained +100-basis-point shock would reduce one-year net interest income by 0.25%; a +200-basis-point shock would increase it by 0.33%; and a −100-basis-point shock would increase it by 1.19%. The filing cautions that model assumptions are uncertain.
- Outstanding loan commitments were approximately $2.47 billion and standby letters of credit $163.8 million. These are off-balance-sheet exposures; many commitments may expire undrawn.
- Management reported ordinary-course legal proceedings and, after consulting counsel, expected no material effect on financial position. It reported no material changes to the risk factors in the 2013 Form 10-K.
- Disclosure controls were assessed as effective, with no material change in internal control over financial reporting during the quarter.
Investor verification priorities
- Separate acquisition-driven growth from organic performance; compare pro forma results, which the filing says are not indicative of actual or future results.
- Track merger integration, expected cost savings and synergies, and whether acquisition-related expense declines after severance and other integration costs.
- Review acquired-loan credit performance, oil-and-gas exposure, nonperforming and impaired loans, charge-offs, and allowance adequacy; acquired-loan accounting makes standard coverage comparisons less meaningful.
- Assess trust-preferred CDO valuation assumptions, impairment judgments, possible Volcker Rule divestitures and sensitivity to discount rates.
- Monitor funding mix and borrowing levels, FHLB maturities and collateral availability, and the company’s capital ratios as Basel III rules take effect.
- Reconcile the filing’s nonaccrual-loan figures: one table reports $55.98 million at June 30, while MD&A cites $55.15 million. The filing text does not provide a clear reconciliation.