Business context and reporting period
United Bankshares, Inc. is a community-banking holding company operating through United Bank subsidiaries in West Virginia and Virginia, with additional offices in Pennsylvania and Ohio. This Form 10-K reports the fiscal year ended December 31, 2015; fourth-quarter figures are identified separately below. Results include Virginia Commerce Bancorp, acquired January 31, 2014, for a full year in 2015 versus 11 months in 2014.
Financial performance and position
| Metric | FY 2015 | FY 2014 |
|---|---|---|
| Net interest income | $384.1 million | $375.7 million |
| Net interest margin, tax-equivalent basis | 3.58% | 3.71% |
| Net income | $138.0 million | $129.9 million |
| Diluted earnings per share | $1.98 | $1.92 |
| Provision for loan losses | $22.6 million | $21.9 million |
| Noninterest income | $73.6 million | $81.0 million |
| Noninterest expense | $231.7 million | $239.8 million |
| Return on average assets / equity | 1.12% / 8.10% | 1.11% / 8.13% |
- At year-end, total assets were $12.58 billion, loans net of unearned income were $9.38 billion, deposits were $9.34 billion, total borrowings were approximately $1.44 billion, and shareholders’ equity was $1.71 billion. Cash and cash equivalents were $857.3 million.
- Loans grew 3.07% year over year, deposits 3.27%, and assets 2.02%. Construction and land-development loans rose 12.34%; consumer loans rose 16.80%.
- 2015 cash flows were $178.3 million provided by operating activities, $189.7 million used in investing activities, and $115.7 million provided by financing activities. Cash and cash equivalents increased $104.3 million.
- Capital ratios at December 31, 2015 were 12.59% total risk-based capital, 9.67% common equity Tier 1, 11.87% Tier 1 risk-based capital, and 10.70% leverage. The company and banking subsidiaries were reported as well capitalized.
- Fourth-quarter 2015 net income was $33.5 million, or $0.48 per diluted share, versus $33.3 million and $0.48 per share in fourth-quarter 2014. Tax-equivalent net interest income was $98.8 million, down 3.19% year over year; the quarter’s provision for loan losses was $6.3 million.
Material changes versus the prior comparable period
- Net income increased 6.2% and diluted EPS rose from $1.92 to $1.98. Net interest income grew 2.24%, supported by higher average earning assets and lower interest expense, but the net interest margin declined 13 basis points to 3.58%.
- Noninterest income fell 9.06%, reflecting the Durbin Amendment’s effect on debit-card fees from July 2015, lower securities gains, and the absence of 2014’s $9.0 million gain on sale of a former branch. Deposit-service fees declined $4.4 million; management also cited lower overdraft-fee income.
- Noninterest expense declined 3.40%, partly because 2014 included $5.3 million of merger-related costs and a $2.0 million FHLB prepayment penalty. In 2015, pension expense increased, and the company recorded a $1.26 million charge related to historical tax credits.
- Nonperforming loans increased to $126.7 million, or 1.35% of loans, from $109.0 million, or 1.20%. Nonperforming assets were $158.9 million, or 1.26% of assets. Net charge-offs rose to $22.4 million from $20.6 million; the allowance for loan losses was $75.7 million, 0.81% of loans.
- Investment securities declined 8.50% to approximately $1.20 billion. Gross unrealized losses on available-for-sale securities were $20.4 million; pooled trust-preferred CDOs had $49.4 million amortized cost and $34.7 million fair value. The company recognized $47,000 of net other-than-temporary impairment charges in 2015, compared with $6.5 million in 2014.
Outlook, commentary, risks and contingencies
- Management said liquidity was sufficient for depositor needs and customer credit demand, and expected the company to meet obligations over the next 12 months. No material capital-expenditure commitments or material anticipated changes in liquidity were identified.
- United announced a proposed acquisition of Bank of Georgetown, which had $1.2 billion in assets at December 31, 2015. Closing was expected in mid-2016, subject to regulatory and shareholder approvals. United estimated approximately $18 million in annual cost savings when fully phased in, excluding one-time merger costs; realization and integration remain uncertain.
- Management highlighted interest-rate risk, credit risk, real-estate values, and the concentration of lending in commercial real estate. Loans for renting or leasing real estate were about $3.6 billion, or 38.8% of total loans. West Virginia’s energy sector was weak, with coal job losses and a slowdown in natural gas cited as local economic concerns.
- Other material risks include changing regulation and capital requirements, cybersecurity and third-party service-provider disruptions, competition, acquisition integration, and possible additional loan-loss provisions. Management’s allowance estimates are judgmental; a 10% increase in the allowance would, according to the filing, have reduced 2015 after-tax net income by about $4.8 million.
- The filing reports routine legal proceedings; management, after consulting counsel, expected no material effect on financial position. Ernst & Young issued unqualified opinions on the financial statements and internal control over financial reporting.
Important facts for investors to verify
- Whether the increase in nonperforming loans and lower allowance coverage develops into higher provisions or charge-offs.
- Whether loan and deposit growth can offset margin pressure and the continuing impact of debit-card fee limits.
- The quality and valuation sensitivity of trust-preferred securities, including Level 3 CDO valuations and remaining impairment exposure.
- Bank of Georgetown’s approval, closing, integration costs, and progress toward the stated savings estimate.
- Capital and liquidity headroom, including upcoming time-deposit maturities and the company’s reliance on deposits and borrowings.
- The sustainability of the dividend: 2015 dividends were $1.29 per share, with a 65% payout ratio; subsidiary dividends and future distributions are subject to regulatory limits.