UNITED BANKSHARES INC annual report, FY2016

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United Bankshares, Inc. — 2016 Form 10-K

Business context and reporting period

United Bankshares is a community banking holding company operating United Bank in West Virginia and Virginia, with 128 full-service offices. This annual report covers the year ended December 31, 2016; quarterly figures below identify the fourth quarter where relevant. The audited statements received an unqualified opinion, and management and the auditor reported effective internal control over financial reporting.

United completed its acquisition of Bank of Georgetown on June 3, 2016, expanding its Washington, D.C. presence. Cardinal Financial Corporation was a pending transaction at year-end, not a completed acquisition.

Financial performance and position

  • Revenue and earnings: Net interest income was $425.3 million, up 10.7% from 2015; total noninterest income was $70.0 million, down 4.9%. Net income increased 6.6% to $147.1 million, while diluted EPS rose slightly to $1.99 from $1.98. Fourth-quarter net income was $39.1 million, or $0.51 per diluted share, versus $33.5 million, or $0.48, a year earlier.
  • Margins and returns: Tax-equivalent net interest margin improved to 3.62% from 3.58%. Return on average assets was 1.10% (1.12% in 2015); return on average equity was 7.67% (8.10%).
  • Costs and credit: Noninterest expense increased 7.1% to $248.2 million, including $6.13 million of merger and acquisition expenses. Provision for loan losses was $24.5 million, compared with $22.6 million; net charge-offs increased to $27.5 million from $22.4 million. Nonperforming loans declined to $113.3 million, or 1.10% of loans, from $126.7 million, or 1.35%.
  • Assets, funding and debt: Total assets grew 15.4% to $14.51 billion, largely following the Georgetown acquisition. Loans were $10.34 billion, up 10.2%; deposits were $10.80 billion, up 15.6%. Total borrowings declined 3.9% to $1.38 billion. Shareholders’ equity increased 30.5% to $2.24 billion, reflecting the acquisition, stock offering and retained earnings.
  • Cash and liquidity: Cash and cash equivalents rose $577.2 million to $1.43 billion. Operating activities provided $166.7 million, investing activities provided $31.0 million and financing activities provided $379.5 million. Management said liquidity was sufficient and obligations over the next 12 months could be met. Available sources included $264 million in unused correspondent-bank lines and approximately $2.80 billion of unused FHLB borrowing capacity, subject to collateral availability.
  • Capital and shareholder returns: United reported total risk-based capital of 14.9%, CET1 of 12.2%, Tier 1 capital of 14.2% and leverage of 12.2%; its banking subsidiaries were classified as well capitalized. Annual dividends rose to $1.32 per share from $1.29. In December, United issued 4.33 million shares and received net proceeds of approximately $199.9 million.

Material changes versus 2015

  • Growth in assets, loans, deposits and net interest income primarily reflected the Bank of Georgetown acquisition, whose results were included from June 3, 2016. Organic loan growth was $17.3 million; organic deposit growth was $483.8 million.
  • Interest income increased $46.7 million, while interest expense increased $5.5 million, supporting higher net interest income. Acquired-loan accretion contributed $20.8 million in 2016 versus $10.8 million in 2015.
  • Noninterest income fell mainly because the Durbin Amendment reduced deposit-service fees; those fees declined 13.5% to $32.9 million. Higher merger-related and operating costs contributed to increased expenses.
  • Return measures declined despite higher net income, while diluted EPS was nearly flat as the average share count increased following the acquisition and stock issuance.
  • Credit trends were mixed: nonperforming loans improved, but net charge-offs rose, including a $6.6 million commercial relationship charge-off. The allowance for loan losses was $72.8 million, or 0.70% of loans; management cited 0.90% when excluding acquired loans.

Outlook, risks and unusual items

  • Cardinal transaction: The announced merger was expected to expand United’s Washington, D.C. footprint. Cardinal reported $4.21 billion in assets and 30 offices at year-end. United estimated approximately $27 million in annual cost savings once fully phased in, excluding one-time costs. Closing remained subject to shareholder and regulatory approvals and other conditions; the filing cautions that integration, timing, costs and expected savings are uncertain. A $13.5 million termination fee could apply in specified circumstances involving failure to obtain approval due to a required capital raise.
  • Credit and geographic exposure: Approximately 40.1% of loans, or $4.1 billion, financed renting or leasing real estate. Management highlighted risks from real-estate values, borrower repayment capacity and economic weakness in West Virginia, particularly in the energy sector. The coal, oil and gas exposure cited for allowance analysis was $58.4 million, net of impaired loans.
  • Investment securities: Available-for-sale securities had $29.3 million of gross unrealized losses. Trust-preferred CDOs had $48.6 million amortized cost and $33.6 million fair value; management said it did not expect to be required to sell them before recovery, but valuation relies on significant judgments and market liquidity is limited. The filing recorded $33,000 of 2016 OTTI charges.
  • Interest-rate sensitivity: The company’s model estimated that an immediate, sustained 100-basis-point rate increase would reduce one-year net interest income by 1.05%, while a 200-basis-point increase would reduce it by 2.05%. A 100-basis-point decrease was estimated to increase one-year net interest income by 1.87%. These are model estimates, not guidance.
  • Other risks and contingencies: The filing identifies regulatory and capital requirements, cybersecurity and third-party service-provider risks, competition, credit and interest-rate risk, and potential tax challenges. United reported routine legal proceedings and regulatory inquiries and expected no material financial effect. Management provided no specific earnings guidance; it said liquidity should meet near-term obligations and that inflation’s near-term impact was expected to remain minimal.
  • Unusual balance-sheet item: Goodwill increased to $863.8 million, including preliminary Georgetown acquisition goodwill of $152.8 million. Purchase accounting values remained subject to refinement.

Important facts for investors to verify

  • Whether Cardinal’s approvals, closing conditions, integration plan and estimated $27 million savings were achieved, and the final transaction costs.
  • Organic loan and deposit growth, credit performance, charge-offs and adequacy of the allowance, particularly given real-estate concentration and regional economic exposure.
  • Performance and valuation of trust-preferred securities and other investments with unrealized losses, including any subsequent impairment or sale.
  • Capital, liquidity and funding after acquisition activity, including deposit mix, borrowing costs and the availability of collateral-dependent FHLB capacity.
  • Whether net interest margin and returns improve, and how interest-rate changes affect earnings relative to the company’s model estimates.