United Bankshares, Inc. — Q1 2015 Form 10-Q
Business context and period: Unaudited consolidated results for the three months ended March 31, 2015, compared with Q1 2014; balance-sheet changes are compared with December 31, 2014. United is a bank holding company. Q1 2015 results include Virginia Commerce Bancorp, acquired January 31, 2014, for an additional month versus the prior-year quarter.
Key financial results
Amounts below are in millions of dollars except per-share data and ratios.
| Metric | Q1 2015 | Comparison |
|---|---|---|
| Net interest income | $94.7 | Up 11.1% from Q1 2014 |
| Net interest margin | 3.61% | Down 9 basis points from 3.70% in Q1 2014; down from 3.77% in Q4 2014 |
| Provision for loan losses | $5.4 | Compared with $4.7 in Q1 2014 |
| Noninterest income | $18.2 | Down $8.2 from Q1 2014, which included an $9.0 gain on a branch building sale |
| Noninterest expense | $57.7 | Down 5.5% from Q1 2014 |
| Net income | $34.6 | Up 15.0% from $30.1 in Q1 2014 |
| Diluted EPS | $0.50 | Compared with $0.48 in Q1 2014 |
| Dividend per share | $0.32 | Unchanged from Q1 2014 |
| Return on average assets / equity | 1.16% / 8.38% | Compared with 1.14% / 8.57% in Q1 2014 |
| Efficiency ratio | 51.05% | Compared with 54.64% in Q1 2014 |
Financial condition, cash flow, and liquidity
- Total assets were $12.14 billion at March 31, down 1.5% from year-end 2014. Net loans were $8.97 billion, down 0.7%; total deposits were $9.08 billion, up 0.3%.
- Cash and cash equivalents were $667.5 million, down $85.6 million during the quarter. Operating cash flow was $53.9 million, investing cash flow was $86.8 million, and financing activities used $226.3 million.
- Total borrowings were $1.30 billion, down $239.2 million from year-end, mainly reflecting lower FHLB advances and short-term borrowings. FHLB advances were $705.0 million; the company reported approximately $2.51 billion in additional FHLB borrowing capacity, subject to collateral requirements.
- Shareholders’ equity was $1.68 billion, up 1.3% from year-end. Management reported Basel III capital ratios of 12.44% risk-based capital, 9.45% Common Equity Tier 1, 11.69% Tier 1, and 10.53% leverage, and characterized the company as well-capitalized.
- Management said liquidity was sufficient for depositor and customer needs and expected to meet obligations over the next 12 months. It reported no material capital-expenditure commitments or known material liquidity trends.
Material changes and credit quality
- Tax-equivalent net interest income rose 10.8% year over year, principally due to higher average earning assets associated with the Virginia Commerce acquisition. Average earning assets increased 13.6%; however, the average yield on earning assets declined 15 basis points and net interest margin contracted.
- Underlying noninterest income, excluding the prior-year property-sale gain and securities impairment and sale/call results, increased 5.5% year over year to $18.2 million. The filing attributes growth in part to trust and brokerage, deposit-service, and mortgage-banking income.
- Noninterest expense declined, partly because Q1 2014 included $3.64 million of merger severance expense. Q1 2015 included a $1.10 million charge related to historical tax credits.
- Nonperforming loans were $114.4 million, or 1.26% of loans, versus $109.0 million, or 1.20%, at year-end. Nonperforming assets were $151.9 million, or 1.25% of assets. Nonaccrual loans were $85.6 million in the detailed note; MD&A separately cites $75.9 million, so the filing text presents inconsistent values that should be checked.
- Allowance for loan losses was $75.6 million; the combined allowance and lending-commitment reserve was $77.05 million. Allowance coverage of nonperforming loans was 66.09%, down from 69.32% at year-end. Net charge-offs were $5.31 million, or 0.24% annualized of average loans.
- Available-for-sale trust-preferred CDOs had a $37.5 million fair value against $50.5 million amortized cost. United recognized $34,000 of credit-related impairment in Q1 on one such security and used Level 3 valuation inputs for the portfolio. Management cited illiquidity and market pricing as drivers of other unrealized losses; a modeled 200-basis-point increase in discount rates would reduce the CDO portfolio’s fair value by approximately 19%, or $7.24 million.
Outlook, risks, and contingencies
- The filing provides no specific earnings or revenue guidance. Management’s forward-looking statements identify economic and banking conditions, interest-rate movements, competition, execution of business strategies, regulation, and technology as risks.
- Interest-rate simulations estimated that an immediate, sustained 100- or 200-basis-point increase would reduce one-year net interest income by 0.93%; a 100-basis-point decrease would increase it by 2.67%. Management said these outcomes were within board policy limits and noted that model assumptions are uncertain.
- Loan commitments totaled approximately $2.69 billion; standby letters of credit were $149.2 million. Many commitments are expected to expire undrawn. Management believed ordinary-course litigation would be resolved without material financial effect.
- The company had $3.50 million of unrecognized tax benefits, plus accrued interest related to uncertain tax positions. Management could not reasonably estimate tax benefits it might recognize over the next 12 months.
- Management identified allowance estimates, securities valuation and impairment, and income-tax accounting as areas involving significant judgment. It reported disclosure controls were effective and no material change in internal control over financial reporting during the quarter.
Most important facts for investors to verify
- Reconcile the inconsistent nonaccrual-loan figures in the detailed credit-quality note and MD&A, and assess the quarter’s increase in nonperforming loans and decline in allowance coverage.
- Separate organic performance from acquisition-related effects, including the extra month of Virginia Commerce results and acquisition-accounting accretion.
- Assess the sustainability of net interest income growth given the lower net interest margin and the quarter-to-quarter decline in net interest income.
- Review assumptions, credit performance, liquidity discounts, and sensitivity in the Level 3 trust-preferred CDO valuations and impairment analysis.
- Confirm capital and liquidity capacity against the scheduled FHLB maturities, funding needs, and applicable collateral requirements.