United Bankshares, Inc. — Q2 2015 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2015. Unaudited consolidated results; dollar amounts below are in millions unless noted. United is a bank holding company. Its 2014 comparison includes Virginia Commerce Bancorp only from its January 31, 2014 acquisition date, affecting year-over-year comparisons.
Financial performance
| Metric | Q2 2015 | Q2 2014 | Six months 2015 | Six months 2014 |
|---|---|---|---|---|
| Net interest income | $95.9 | $93.9 | $190.7 | $179.2 |
| Provision for loan losses | $5.7 | $6.2 | $11.1 | $10.9 |
| Noninterest income | $19.5 | $19.0 | $37.7 | $45.4 |
| Noninterest expense | $57.7 | $57.1 | $115.4 | $118.1 |
| Net income | $34.8 | $33.2 | $69.4 | $63.4 |
| Diluted EPS | $0.50 | $0.48 | $1.00 | $0.96 |
- Net income rose about 5% in Q2 and 10% year to date. Six-month diluted EPS increased from $0.96 to $1.00. The quarterly dividend remained $0.32 per share.
- Tax-equivalent net interest margin was 3.62% in Q2, down 7 basis points year over year; six-month margin was 3.61%, down 9 basis points. Lower funding costs and higher average earning assets supported net interest income, while lower loan yields pressured margin.
- Six-month noninterest income fell 17%, principally because 2014 included an $8.98 million gain on the sale of a former branch building. Excluding that gain and specified securities impairment and sale items, management reported underlying noninterest income up 2.8% year over year.
- Six-month operating cash flow was $72.4 million; investing cash flow was $69.9 million and financing cash flow was $21.8 million. Cash and cash equivalents ended at $917.1 million, up $164.0 million from year-end 2014.
Financial position, credit and liquidity
- Total assets were $12.41 billion at June 30, up less than 1% from year-end. Gross loans were $9.10 billion, approximately flat; deposits rose 2.6% to $9.28 billion.
- Total borrowings declined 11.5% to $1.36 billion, largely reflecting net FHLB repayments. Shareholders’ equity was $1.69 billion. Reported regulatory capital ratios were 12.51% risk-based capital, 9.54% Common Equity Tier 1, 11.77% Tier 1 and 10.65% leverage; United said it exceeded applicable “well-capitalized” thresholds.
- Nonperforming loans were $120.5 million, or 1.33% of loans, versus $109.0 million, or 1.20%, at year-end. The allowance for loan losses was $75.2 million; coverage of nonperforming loans declined to 62.43% from 69.32%. Six-month net charge-offs increased to $11.4 million from $10.1 million.
- Management considered liquidity sufficient for depositors and customers and expected to meet obligations over the next 12 months. Available sources included cash, securities, deposits and borrowing facilities; approximately $2.43 billion of additional FHLB borrowing capacity was reported, subject to collateral availability.
Management commentary, outlook and risks
- No earnings guidance was provided. Management reported no known trends or commitments expected to materially change liquidity and no material capital expenditure commitments.
- Credit risks include rising nonaccrual loans and higher net charge-offs. Nonaccrual loans increased from year-end, including transfers of a $5.5 million residential loan and $4.5 million of loans to a heavy-duty hydraulic lifting system business.
- Investment valuation is a notable risk: available-for-sale trust-preferred CDOs had $50.0 million amortized cost and $36.6 million fair value, including $13.4 million unrealized loss. Management attributed losses largely to illiquidity and reported no Q2 credit-related impairment charge; the securities use Level 3 valuation inputs. A modeled 200-basis-point increase in discount rates would reduce their fair value by about 18%, or $6.7 million.
- Interest-rate simulations estimated net interest income would decline 1.36% under an immediate, sustained 100-basis-point increase and 1.76% under a 200-basis-point increase; a 100-basis-point decline was estimated to increase it 3.42%. These are model estimates, not forecasts.
- Other notable items: first-half 2015 included a $1.1 million charge related to historical tax credits and higher pension expense. The company reported a $4.0 million liability for uncertain tax benefits. Management expected ordinary-course litigation to have no material financial effect; no material changes to previously disclosed risk factors were reported.
Important facts for investors to verify
- Whether worsening nonaccrual loans and charge-offs continue, and whether allowance coverage remains adequate.
- Performance and valuation assumptions for the Level 3 trust-preferred CDO portfolio, including exposure to financial institutions and potential impairment.
- Whether net interest margin pressure persists as loan yields, funding costs and rates change.
- How much of earnings growth reflects recurring operations versus acquisition-related effects and prior-period unusual items.
- Capital and liquidity capacity under stress, including the terms and collateral requirements of available FHLB funding.