United Bankshares, Inc. — Q3 2013 Form 10-Q
Reporting period: Three and nine months ended September 30, 2013. Unaudited consolidated results; balance-sheet comparisons are with December 31, 2012. Amounts below are in millions unless noted.
Business context and financial performance
United is a bank holding company. It reported total assets of $8.514 billion and continued to grow loans and securities while deposits declined. The company also had a pending agreement to acquire Virginia Commerce Bancorp (VCBI), a Northern Virginia-based bank holding company.
| Metric | Q3 2013 | Q3 2012 | Nine months 2013 | Nine months 2012 |
|---|---|---|---|---|
| Net interest income | $67.63 | $70.01 | $200.66 | $208.04 |
| Provision for loan losses | $4.78 | $4.35 | $14.92 | $11.92 |
| Noninterest income | $18.34 | $16.63 | $55.78 | $49.55 |
| Noninterest expense | $48.59 | $53.87 | $145.38 | $155.38 |
| Net income | $22.17 | $19.33 | $65.97 | $61.39 |
| Diluted EPS | $0.44 | $0.38 | $1.31 | $1.22 |
Tax-equivalent net interest margin was 3.65% in Q3, down 22 basis points year over year and unchanged from Q2; the nine-month margin was 3.68%, down 12 basis points year over year. Management attributed pressure on net interest income mainly to lower asset yields, partly offset by reduced funding costs. Return on average assets and return on average equity were 1.04% and 8.64% in Q3, respectively, versus 0.92% and 7.76% a year earlier. The quarterly dividend was $0.31 per share, unchanged year over year.
Financial position, liquidity and cash flow
- Total assets rose 1.1% from year-end 2012 to $8.514 billion. Net loans were $6.521 billion, up 1.3%; growth was concentrated in construction and land development loans, up 16.4%, and nonowner-occupied commercial real estate, up 6.9%.
- Total deposits fell 2.2% to $6.606 billion, including a 3.1% decline in interest-bearing deposits. Total borrowings increased 37.5% to $824.7 million, primarily reflecting higher FHLB advances.
- Cash and cash equivalents declined $90.0 million to $342.0 million. For the nine months, operating cash flow was $106.7 million, investing cash outflow was $229.2 million, and financing cash inflow was $32.5 million. FHLB borrowing proceeds of $275.0 million supported financing cash flow.
- Shareholders’ equity was $1.018 billion, up 2.6%; equity to assets was 11.95%. United reported regulatory capital ratios of 13.80% risk-based capital, 12.57% Tier 1 capital and 10.80% leverage, and said it was well capitalized.
- Management said liquidity was sufficient for depositor and customer needs and expected to meet obligations over the next 12 months. Available funding included $1.576 billion of unused FHLB borrowing capacity, subject to collateral requirements, and $234 million of correspondent-bank lines.
Material changes and asset quality
- Net income increased year over year despite lower net interest income, reflecting higher noninterest income and lower expenses. Noninterest income benefited from substantially lower securities impairment losses than in 2012; excluding securities transactions and impairment, nine-month noninterest income rose 2.6%.
- Noninterest expense declined 6.4% for the nine months, with management citing prior-year bank subsidiary merger efficiencies and the absence of the $3.3 million overdraft-litigation settlement accrual recorded in 2012.
- Provision expense and net charge-offs increased year over year. Nine-month net charge-offs were $14.25 million, or 0.29% of average loans. Management linked higher credit costs mainly to losses on two large commercial relationships.
- Nonperforming loans were $83.1 million, or 1.26% of loans, compared with $92.8 million, or 1.43%, at year-end. Nonperforming assets were $125.7 million, or 1.48% of assets. TDRs rose to $7.34 million from $3.18 million, principally following restructuring of four commercial real estate loans.
- The allowance for loan losses was $74.6 million, 1.13% of loans; coverage of nonperforming loans was 89.71%, up from 79.63% at year-end. Management considered the allowance adequate, while noting estimation uncertainty.
Outlook, risks, contingencies and unusual items
- VCBI transaction: The announced stock-for-stock merger would exchange each VCBI common share for 0.5442 United shares. Both shareholder approvals were obtained in October 2013, after quarter-end; regulatory approvals and other customary closing conditions remained outstanding when described in the filing. VCBI had approximately $2.76 billion in assets and 28 banking offices. United expected the deal to expand its Washington, D.C. metropolitan footprint.
- Investment securities: Available-for-sale securities had $52.4 million of gross unrealized losses. Trust-preferred CDOs had $89.4 million amortized cost and $47.1 million fair value, including $45.3 million of cumulative noncredit OTTI in AOCI. Management recorded $971,000 of net OTTI in the first nine months, none in Q3, and said it did not intend to sell the impaired securities before recovery. Trup CDO fair values use significant unobservable inputs; management estimated a 200-basis-point increase in discount rates would reduce their fair value by about 16%.
- Interest-rate and regulatory risk: A modeled immediate, sustained +100 bp rate shock was estimated to increase one-year net interest income 1.45%; a -100 bp shock was estimated to reduce it 0.31%. These are model estimates, not forecasts. Basel III rules take effect beginning in 2015 with phase-in; management believed United would meet fully phased-in capital requirements based on September 2013 figures. Trust-preferred capital treatment will be limited under the rules.
- Legal and off-balance-sheet matters: The overdraft class-action settlement for $3.3 million received final court approval in October 2013; the amount had been accrued in 2012 and transferred to escrow in Q2 2013. Management said other ordinary-course litigation was not expected to materially affect financial position. Loan commitments totaled $2.486 billion and standby letters of credit $122.8 million; actual funding needs may be lower because commitments can expire undrawn.
- Forward-looking caveats: Results may be affected by economic conditions, interest rates, competition, government actions, strategy execution and technology changes. Allowance estimates, securities valuations and income-tax positions involve significant judgment. The filing provides no numerical earnings guidance.
Most important facts for investors to verify
- Whether and when VCBI received regulatory approval and closed, and the transaction’s eventual integration costs, dilution and contribution.
- Trup CDO cash-flow assumptions, valuation sensitivity, rating quality and whether further impairment or realized losses emerge.
- Whether credit deterioration in the large commercial relationships, construction lending or restructured loans leads to higher charge-offs and provisions.
- Deposit trends and the sustainability and cost of the increased FHLB funding as loans grow and cash balances decline.
- Net interest margin trends, capital adequacy under Basel III phase-in, and the accuracy of modeled interest-rate sensitivity.