United Bankshares, Inc. — Q3 2015 Form 10-Q
Business context and reporting period. United Bankshares is a bank holding company. This unaudited quarterly report covers the three and nine months ended September 30, 2015; balance-sheet comparisons are to December 31, 2014. Dollar amounts below are in millions unless stated otherwise. The 2014 Virginia Commerce acquisition affects period comparisons, and 2015 includes an additional month of its results versus the first nine months of 2014.
Financial performance and condition
| Metric | Q3 2015 | Q3 2014 | Nine months 2015 | Nine months 2014 |
|---|---|---|---|---|
| Interest income | $106.3 | $106.9 | $316.4 | $306.8 |
| Net interest income | $96.3 | $95.9 | $287.0 | $275.2 |
| Provision for loan losses | $5.2 | $4.7 | $16.3 | $15.6 |
| Other income | $17.8 | $16.2 | $55.5 | $61.5 |
| Other expense | $57.7 | $57.7 | $173.1 | $175.8 |
| Net income | $35.0 | $33.3 | $104.5 | $96.6 |
| Diluted earnings per share | $0.50 | $0.48 | $1.50 | $1.44 |
| Net interest margin, tax-equivalent | 3.53% | 3.66% | 3.59% | 3.69% |
- Growth and returns: Net income rose about 5% year over year in Q3 and 8% for the nine-month period. Nine-month return on average assets was 1.14% and return on average equity was 8.25% (versus 1.12% and 8.22% in 2014).
- Balance sheet at September 30: Total assets were $12.56 billion, up 1.85% from year-end. Gross loans were $9.19 billion, up 0.75%; deposits were $9.50 billion, up 5.08%; and shareholders’ equity was $1.71 billion, up 3.24%.
- Cash flow: For the first nine months, operating activities provided $127.7 million, investing activities provided $4.3 million and financing activities provided $123.4 million. Cash and cash equivalents increased $255.4 million to $1.01 billion.
- Funding and debt: Total borrowings declined $278.9 million, or 18.1%, to $1.26 billion, mainly from lower FHLB advances and short-term borrowings. FHLB advances were $664.9 million, with a weighted-average rate of 0.43%; the company reported approximately $2.56 billion of unused FHLB borrowing capacity subject to collateral and conditions.
- Capital and distributions: United reported a 12.71% risk-based capital ratio, 9.73% Common Equity Tier 1 ratio, 11.97% Tier 1 ratio and 10.59% leverage ratio, above the stated well-capitalized thresholds. The quarterly dividend was $0.32 per share; nine-month dividends were $0.96 per share.
Material changes versus the comparable period
- Net interest income increased 4.3% for the first nine months, supported by larger average earning assets, including the acquisition, and lower funding costs. However, the tax-equivalent net interest margin narrowed 10 basis points for the nine months and 13 basis points in Q3, as asset yields declined.
- Deposit-service fees fell 7.4% for the nine months and 18.6% in Q3. Management attributed the decline in part to the Durbin Amendment becoming effective for United on July 1, 2015, reducing debit-card transaction and overdraft fee income.
- Nine-month other income declined 9.8%, chiefly reflecting the absence of the $9.0 million gain on a branch-building sale recorded in 2014, lower securities gains and differences in impairment charges. Excluding specified unusual securities and property-sale items, management said noninterest income declined 1.5% year over year.
- Provision expense and net charge-offs increased year over year. Net charge-offs were $16.3 million for the nine months versus $14.1 million in 2014; management cited increased recognition of purchased-loan impairments.
- Nonperforming loans were reported at $125.0 million, or 1.36% of loans, versus $109.0 million, or 1.20%, at year-end. The allowance for loan losses was nearly unchanged at $75.5 million, while its coverage of nonperforming loans declined to 60.36% from 69.32%.
Outlook, commentary, risks and unusual items
- Management said liquidity was sufficient to meet depositor and customer credit needs, expected to meet obligations over the next 12 months, and had no material capital-expenditure commitments. The filing provides no specific earnings or revenue guidance.
- Management considered the $76.7 million combined allowance for loan losses and lending-related commitments adequate based on information available, while emphasizing that estimates depend on uncertain credit, collateral and economic assumptions.
- Investment risk includes trust-preferred collateralized debt obligations (Trup CDOs): $49.9 million amortized cost and $35.7 million fair value, with $14.2 million unrealized loss. Management reported no Q3 credit-related impairment on these securities and attributed remaining valuation losses mainly to illiquidity and market factors. The portfolio is valued using Level 3 inputs; management estimated a 200-basis-point discount-rate increase would reduce its fair value by about 18%, or $6.3 million.
- Interest-rate sensitivity modeling estimated net interest income would decrease 1.34% under an immediate, sustained 100-basis-point rise and 1.78% under a 200-basis-point rise; a 100-basis-point decline was estimated to increase it 1.80%. Management noted model assumptions are uncertain and said the estimates were within board policy limits.
- Other notable items: 2014 included $5.8 million of securities impairment charges and $5.3 million of merger-related expenses; 2015 included $34,000 of nine-month impairment charges and a $1.1 million expense related to historical tax credits. The effective tax rate was 31.78% for the 2015 nine-month period versus 33.47% in 2014, partly due to tax-reserve releases.
- United disclosed ordinary-course legal proceedings and said, after consultation with counsel, it expected no material effect on financial position. It reported no material changes to the risk factors in its 2014 Form 10-K. Forward-looking statements remain subject to economic, interest-rate, competitive, regulatory and execution risks.
Important facts for investors to verify
- Reconcile the credit-quality disclosures: the loan-class table totals nonaccrual loans at $97.1 million, while MD&A states $87.4 million. Confirm the correct amount and its relationship to the reported $125.0 million of nonperforming loans.
- Review the trend in nonperforming loans, net charge-offs, specific impaired-loan allowances and coverage, especially given the increase in commercial-credit losses and lower reserve coverage.
- Assess the valuation assumptions and potential loss exposure in the Level 3 Trup CDO portfolio, including the difference between amortized cost and fair value and sensitivity to discount rates and credit performance.
- Track the continuing effect of the Durbin Amendment on deposit fees, as well as net interest margin pressure from lower loan yields and reinvestment at lower rates.
- Confirm that reported capital ratios, deposit growth, available borrowing capacity and liquidity remain adequate as funding costs, interest rates and credit conditions change.