United Bankshares, Inc. — Q1 2013 Form 10-Q
Reporting period: Three months ended March 31, 2013. Unaudited consolidated financial statements; dollar amounts below are in millions unless stated otherwise.
Business context
United is a bank holding company operating through its banking subsidiaries. On January 29, 2013, it agreed to acquire Virginia Commerce Bancorp (VCBI), which had approximately $2.88 billion of assets and 28 banking offices at quarter-end. VCBI shareholders would receive 0.5442 United shares per VCBI share. The filing describes a pending transaction, not a completed acquisition.
Financial results and position
| Metric | Q1 2013 / March 31, 2013 | Comparable period / prior year-end |
|---|---|---|
| Net income | $21.58 million | $21.01 million in Q1 2012 |
| Diluted EPS | $0.43 | $0.42 in Q1 2012 |
| Net interest income | $66.82 million; tax-equivalent margin 3.75% | $68.97 million and 3.78% in Q1 2012 |
| Noninterest income | $18.35 million | $16.33 million in Q1 2012 |
| Noninterest expense | $48.25 million | $50.26 million in Q1 2012 |
| Provision for loan losses | $5.19 million | $4.13 million in Q1 2012 |
| Total assets | $8.31 billion | $8.42 billion at December 31, 2012 |
| Net loans | $6.39 billion | $6.44 billion at December 31, 2012 |
| Deposits | $6.68 billion | $6.75 billion at December 31, 2012 |
| Total borrowings | $553.73 million | $599.89 million at December 31, 2012 |
| Shareholders’ equity | $1.00 billion | $992.25 million at December 31, 2012 |
Net income rose about 2.7% year over year. Annualized return on average assets was 1.05% versus 1.00%, and return on average equity was 8.72% versus 8.63%. The declared quarterly dividend was $0.31 per share, unchanged from Q1 2012.
Operating cash flow was $44.01 million, investing cash flow was $18.27 million, and financing activities used $131.72 million. Cash and cash equivalents fell $69.43 million to $362.65 million, mainly as deposits and short-term borrowings declined. Management said liquidity was sufficient and expected to meet obligations over the next 12 months. Available funding included $234 million of correspondent-bank lines and approximately $1.81 billion of unused FHLB borrowing capacity, subject to collateral requirements.
United reported regulatory capital ratios of 13.82% risk-based capital, 12.58% Tier 1 capital, and 10.80% leverage; it and its bank subsidiaries were categorized as well capitalized. Management reported an equity-to-assets ratio of 12.03%.
Material changes and credit quality
- Net interest income fell 3.1% year over year as interest income declined more than interest expense. Management cited lower earning-asset yields, including lower loan yields; reduced funding costs partly offset the pressure. Tax-equivalent net interest margin slipped to 3.75% from 3.78%.
- Noninterest income increased 12.4%, supported by bank-owned life insurance income, including a death benefit, and higher mortgage banking activity. Mortgage loan sales were $53.60 million versus $24.95 million in Q1 2012. Deposit-service fees declined.
- Noninterest expense declined 4.0%, reflecting lower compensation and certain operating costs; employee benefits increased, primarily from pension and health costs.
- Nonperforming loans were $87.42 million, or 1.35% of loans, versus $92.80 million, or 1.43%, at year-end. Nonperforming assets were $136.27 million, or 1.64% of assets. Net charge-offs were $4.93 million; annualized net charge-offs were 0.31% of average loans.
- The allowance for loan losses was $74.16 million, 1.15% of loans, with coverage of nonperforming loans at 84.83%. Management considered the $76.04 million combined allowance and commitment reserve adequate, while emphasizing that the estimate is judgmental and sensitive to economic and borrower conditions.
- Deposits decreased 1.0% from year-end, and borrowings declined 7.7%, primarily from repayment of $60 million of short-term FHLB advances. Portfolio loans were down less than 1%; construction and land-development loans grew 3.0%, while other commercial loans fell 5.6%.
Outlook, risks and unusual items
- No numerical earnings or revenue guidance was provided. Management said it expected to meet obligations over the next 12 months and reported no known material liquidity trends or commitments for capital expenditures.
- Interest-rate simulations estimated a 3.37% increase in one-year net interest income under an immediate, sustained 100-basis-point rate increase and a 0.73% increase under a 100-basis-point decrease. These are model estimates, dependent on assumptions, not forecasts.
- United recorded $834,000 of Q1 credit-related impairment on pooled trust-preferred CDOs. Their fair value was $39.84 million against $93.32 million amortized cost; $45.73 million of cumulative noncredit impairment remained in accumulated other comprehensive income. The securities are Level 3 valuations using significant unobservable inputs. Management’s sensitivity analysis estimated that a 200-basis-point increase in discount rates would reduce their fair value by about 15%.
- A $3.3 million settlement of overdraft-fee class actions was fully accrued, subject to court approval. The company reported other ordinary-course legal proceedings and stated it did not expect them to materially affect financial position.
- Forward-looking results are subject to economic conditions, interest rates, competition, execution of business strategies, governmental actions, and technology and industry changes. Management identified credit-loss estimation, securities valuation and impairment, and income taxes as significant judgment areas.
Important facts for investors to verify
- Progress, approvals, consideration, integration plans and expected costs or benefits for the proposed VCBI acquisition.
- Whether loan-credit trends, nonperforming assets, charge-offs and the allowance remain consistent with management’s adequacy assessment.
- Valuation assumptions and impairment exposure for trust-preferred securities, especially the Level 3 CDO portfolio and related credit performance.
- Sources and stability of deposits, available borrowing capacity, collateral requirements and liquidity as funding balances change.
- Performance excluding unusual items, particularly the bank-owned life insurance death benefit and securities impairment charges.
- The status and final cost of the overdraft-fee settlement, and resolution of uncertain tax positions.