United Bankshares, Inc. — 2014 Form 10-K
Business context and reporting period
United Bankshares is a community-bank holding company operating in West Virginia, Virginia, parts of Ohio and Pennsylvania, and the Washington, D.C. region. This annual filing covers the fiscal year ended December 31, 2014; fourth-quarter figures are noted separately. The financial statements were audited by Ernst & Young, which issued unqualified opinions on the financial statements and internal controls.
Results include Virginia Commerce Bancorp from its acquisition date, January 31, 2014. The acquisition expanded United’s Washington, D.C.-area presence and materially increased reported assets, loans, deposits, earnings and share count.
Key financial metrics
| Metric | 2014 | 2013 |
|---|---|---|
| Total assets at year-end | $12.33 billion | $8.74 billion |
| Total loans, net of unearned income | $9.10 billion | $6.70 billion |
| Total deposits | $9.05 billion | $6.62 billion |
| Total borrowings | $1.54 billion | $1.01 billion |
| Shareholders’ equity | $1.66 billion | $1.04 billion |
| Net interest income | $375.7 million | $269.8 million |
| Net income | $129.9 million | $85.6 million |
| Diluted earnings per share | $1.92 | $1.70 |
| Net interest margin | 3.71% | 3.68% |
| Return on average assets / equity | 1.11% / 8.13% | 1.02% / 8.43% |
| Operating cash flow | $144.8 million | $142.2 million |
- Total interest income was $418.5 million, interest expense $42.8 million, and provision for loan losses $21.9 million. Total other income was $81.0 million and other expense was $239.8 million. The filing’s GAAP efficiency ratio was 52.52%, versus 57.09% in 2013; its non-GAAP ratio was 48.31%, versus 52.16%.
- Cash and cash equivalents were $753.1 million at year-end. Cash flow was $144.8 million from operations, negative $204.8 million from investing, and positive $396.5 million from financing, resulting in a $336.4 million increase in cash.
- Regulatory capital ratios at year-end were 13.15% total risk-based capital, 12.26% Tier 1 risk-based capital and 10.31% Tier 1 leverage. United and its bank subsidiaries were categorized as well capitalized.
- Dividends were $1.28 per share for 2014, up from $1.25. The company reported its 41st consecutive year of dividend increases.
Material changes versus the prior comparable period
- Assets rose 41.1%, loans 35.8%, deposits 36.6%, borrowings 53.1% and shareholders’ equity 59.0%, principally reflecting the Virginia Commerce acquisition. United issued 18.33 million shares for the transaction. Excluding the acquisition, portfolio loans grew organically by $395.6 million and deposits by $403.3 million.
- Net income increased 51.7% and diluted EPS rose 12.9%. Net interest income increased 39.2%, primarily from the larger earning-asset base; average cost of funds declined, while average earning-asset yield fell 4 basis points. Acquisition-related fair-value accretion contributed $14.7 million to tax-equivalent net interest income.
- Other expense rose 24.9%, mainly from acquired operations, including higher compensation, occupancy, data processing and FDIC insurance costs. Provision for loan losses increased to $21.9 million from $19.3 million.
- Credit quality indicators were mixed: nonperforming loans increased to $109.0 million from $81.1 million, and impaired loans rose to $267.1 million, largely because of acquired Virginia Commerce loans. Net charge-offs were $20.6 million, or 0.24% of average loans, compared with $19.0 million, or 0.29%.
Outlook, management commentary, risks and unusual items
- Management said liquidity was sufficient for depositor and customer needs and anticipated meeting obligations over the next 12 months. It reported no material capital-expenditure commitments or known trends expected to materially change liquidity. No specific earnings or revenue guidance was provided.
- Management said it believed capital requirements were met, including on a fully phased-in Basel III basis. Basel III took effect for United on January 1, 2015, with phased-in capital requirements and potential limits on dividends, share repurchases and compensation if buffers are not maintained.
- Interest-rate risk is significant. The company’s model estimated that an immediate, sustained 100-basis-point rate increase would reduce one-year net interest income by 1.31%, while a 100-basis-point decrease would increase it by 2.90%. These are model estimates, not forecasts.
- Credit concentration merits attention: approximately $3.5 billion, or 38.1% of loans, financed renting or leasing real estate. Management identified commercial real estate, construction and development lending, local economic conditions, borrower credit quality and allowance-estimation uncertainty as risks.
- Investment securities included $51.3 million amortized cost of pooled trust preferred CDOs, valued at $39.6 million. United recognized $6.5 million of 2014 impairment charges on these securities and used Level 3 valuation inputs. Management cited illiquidity and credit risk; further cash-flow deterioration or valuation changes could affect earnings, equity and capital.
- Unusual 2014 items included an $8.98 million pretax gain on a branch-building sale, $6.48 million of net other-than-temporary impairment charges, a $1.97 million penalty to prepay a high-cost FHLB advance, and $5.29 million of merger-related expenses. The fourth quarter reported net income of $33.26 million and diluted EPS of $0.48; it also included the prepayment penalty and $0.70 million of impairment charges.
- Other disclosed risks include regulatory and consumer-protection costs, competition, cybersecurity and vendor disruption, changing interest rates, tax examinations, acquisition integration and potential litigation. Management believed routine legal proceedings would have no material financial effect. The filing notes that the Durbin Amendment interchange-fee cap applies following the acquisition.
Most important facts for investors to verify
- How much of the reported earnings growth and margin performance is sustainable after acquisition-related fair-value accretion, the building-sale gain, impairment charges and merger costs.
- Whether nonperforming, impaired and restructured loans—especially acquired credits and commercial real estate exposures—continue to rise, and whether the allowance adequately reflects expected losses.
- The valuation assumptions, credit performance and potential capital or earnings effects of trust preferred CDOs and other below-investment-grade securities.
- Deposit retention and funding costs, the level and terms of borrowings, and the company’s resilience to interest-rate changes and Basel III requirements.
- Acquisition integration, realized cost savings and fee-income trends; the filing’s pro forma results are not predictive and exclude expected synergies.
- Dividend capacity and parent-company access to bank-subsidiary distributions, which are subject to regulatory and capital restrictions.