United Bankshares, Inc. — FY 2013 Form 10-K
Reporting period: Year ended December 31, 2013. This is an annual filing, not a standalone fourth-quarter report. United is a community banking holding company operating primarily in West Virginia, Virginia, and nearby markets; year-end assets were $8.74 billion.
Financial performance and position
- Earnings: Net income was $85.6 million, or $1.70 per diluted share, versus $82.6 million and $1.64 in 2012. Return on average assets was 1.02% (0.98% in 2012); return on average equity was 8.43% (8.35%).
- Interest income and margins: Total interest income was $306.2 million, down 5.5%; interest expense fell 21.4% to $36.3 million. GAAP net interest income declined 2.8% to $269.8 million. Tax-equivalent net interest margin was 3.68%, down from 3.81%, reflecting lower asset yields despite lower funding costs.
- Noninterest income and expense: Noninterest income was $67.8 million, up 2.3%, and included $7.3 million of net other-than-temporary impairment (OTTI) losses on securities. Excluding security impairment and sale/call results, management reported noninterest income of $73.6 million, nearly flat year over year. Noninterest expense fell 5.5% to $193.4 million; the efficiency ratio improved to 52.92% from 54.08%.
- Credit costs and asset quality: The loan-loss provision was $19.3 million, compared with $17.9 million. Net charge-offs were $19.0 million, or 0.29% of average loans. Nonperforming loans declined to $81.1 million (1.21% of loans) from $92.8 million (1.43%); nonperforming assets were $119.3 million, or 1.37% of assets. The allowance for loan losses was $74.2 million, 1.11% of loans, and covered 91.46% of nonperforming loans.
- Balance sheet and funding: Loans rose 3.0% to $6.70 billion; investment securities increased 21.9% to $889.3 million. Deposits declined 2.0% to $6.62 billion, while total borrowings rose 67.8% to $1.01 billion, largely reflecting increased FHLB advances. Shareholders’ equity increased 5.0% to $1.04 billion.
- Cash flow and liquidity: Operating activities provided $142.2 million; investing activities used $373.1 million; financing activities provided $215.5 million. Cash and cash equivalents ended at $416.6 million, down $15.5 million. Management said liquidity was sufficient and obligations over the next 12 months could be met. Available funding included $234 million in unused correspondent-bank lines and approximately $1.41 billion in unused FHLB borrowing capacity, subject to collateral requirements.
- Capital and dividends: United’s total risk-based capital ratio was 13.7%, Tier 1 risk-based ratio 12.5%, and leverage ratio 10.7%; the banks were reported well-capitalized. The annual dividend rose to $1.25 per share from $1.24. The dividend payout ratio was 73.55%.
Material changes and unusual items
- Year-end total assets increased 3.7%. Loan growth and a larger securities portfolio were partly funded by a substantial increase in borrowings as deposits declined.
- Fourth-quarter 2013 net income was $19.7 million, or $0.39 per diluted share, versus $21.2 million, or $0.42, a year earlier. Fourth-quarter results included $6.36 million of OTTI charges; the filing attributes the charges principally to certain trust-preferred CDO securities.
- United recorded $7.33 million of OTTI losses for 2013, primarily on pooled trust-preferred CDOs. At year-end, those CDOs had $73.9 million amortized cost and $43.4 million fair value; management used cash-flow estimates and Level 3 valuation inputs for this illiquid portfolio.
- The 2012 comparison included a $3.3 million accrual for settlement of class-action claims. United said current ordinary-course litigation was expected to resolve without a material effect on financial position.
- After year-end, United completed its acquisition of Virginia Commerce Bancorp on January 31, 2014. Virginia Commerce had approximately $2.77 billion in assets, $2.10 billion in loans, and $2.02 billion in deposits at closing; its results are not included in 2013 operations. United issued approximately 18.3 million shares and paid $33.3 million to repurchase and cancel a Treasury warrant. On February 20, 2014, United sold a former branch building and reported an approximately $8.9 million pretax gain.
Outlook, risks, and contingencies
- Management provided no specific earnings or revenue guidance. It said liquidity should cover expected obligations for the next 12 months and that no material capital expenditure commitments were anticipated.
- Management highlighted sensitivity to interest rates: its year-end simulation estimated net interest income would rise 0.21% under an immediate, sustained 100-basis-point rate increase and fall 0.80% under a 100-basis-point decrease. These are model estimates, not forecasts.
- Key risks include regional economic and real-estate weakness, commercial real-estate and construction lending, credit-loss estimation, interest-rate changes, securities valuation and impairment, funding and deposit trends, regulatory changes, cybersecurity and vendor disruptions, and acquisition integration.
- Approximately $2.2 billion, or 33.1% of total loans, financed renting or leasing real estate. The filing also identifies $353.4 million of loans meeting the regulatory definition of high loan-to-value real-estate loans.
- Basel III capital rules were scheduled to begin taking effect in 2015, with phase-in through 2019. Management believed United and its banks would meet fully phased-in requirements based on year-end 2013 positions; actual effects could depend on rule implementation and portfolio composition.
- Off-balance-sheet commitments included $2.50 billion of unused credit commitments and $114.7 million of standby letters of credit. The filing notes that commitments may expire undrawn and are not necessarily expected cash outflows.
Important facts for investors to verify
- Review subsequent filings for Virginia Commerce purchase accounting, integration costs, realized synergies, and the effect of the additional shares on per-share earnings and capital.
- Track net interest margin, asset yields, funding costs, deposit balances, and the increased reliance on FHLB and other borrowings.
- Assess credit trends in commercial real estate and construction lending, including delinquencies, restructurings, charge-offs, and allowance coverage.
- Monitor trust-preferred CDO fair values, OTTI charges, and the assumptions supporting the Level 3 cash-flow valuations.
- Confirm that dividends remain supported by earnings, subsidiary-bank distributions, liquidity, and applicable capital requirements.