United Bankshares, Inc. — Form 10-Q Summary
Reporting period: Quarter and nine months ended September 30, 2014. Financial statements are unaudited; amounts below are in millions of dollars unless stated otherwise.
Business context and reporting period
United is a bank holding company. Results include Virginia Commerce Bancorp (VCBI) from its January 31, 2014 acquisition date, so year-over-year growth reflects the acquisition as well as underlying performance. VCBI added approximately $2.77 billion of assets, including $2.01 billion of acquired loans, and expanded United’s Washington, D.C. area presence. The purchase price was approximately $585.5 million; preliminary acquisition goodwill was $337.9 million.
Financial results and position
| Metric | Q3 2014 | Q3 2013 | Nine months 2014 | Nine months 2013 |
|---|---|---|---|---|
| Net interest income | $95.9 | $67.6 | $275.2 | $200.7 |
| Provision for loan losses | $4.7 | $4.8 | $15.6 | $14.9 |
| Other income | $16.3 | $18.3 | $62.0 | $55.8 |
| Other expense | $57.8 | $48.6 | $176.3 | $145.4 |
| Net income | $33.3 | $22.2 | $96.6 | $66.0 |
| Diluted EPS | $0.48 | $0.44 | $1.44 | $1.31 |
- Tax-equivalent net interest margin was 3.66% in Q3, versus 3.65% a year earlier; nine-month margin was 3.69%, versus 3.68%. Net interest income growth was principally driven by VCBI-related increases in earning assets.
- Q3 annualized return on average assets was 1.10% and return on average equity was 7.96%; nine-month measures were 1.12% and 8.22%, respectively.
- At September 30, total assets were $12.09 billion, loans net of unearned income were $9.02 billion, deposits were $8.75 billion, and shareholders’ equity was $1.65 billion. Compared with year-end 2013, assets rose 38%, loans 34%, deposits 32%, and equity 59%, mainly due to VCBI.
- Cash and cash equivalents were $591.3 million. Nine-month cash flows were $99.5 million provided by operations, $115.6 million used in investing, and $190.8 million provided by financing; cash increased $174.7 million.
- Total borrowings were $1.61 billion, up $601.0 million from year-end, largely reflecting the acquisition and increased FHLB advances. FHLB advances totaled $930.7 million, with a weighted-average rate of 0.45%; the filing reports approximately $2.28 billion of additional FHLB borrowing capacity subject to collateral requirements.
- Allowance for loan losses was $75.7 million, or 0.84% of loans; allowance coverage of nonperforming loans was 77.34%. Nonperforming loans were $97.9 million, or 1.09% of loans, and nonperforming assets were $140.3 million, including $42.4 million of OREO.
- United reported it and its banking subsidiaries were “well capitalized.” At September 30, United’s risk-based capital ratio was 13.39%, Tier 1 capital ratio 12.49%, and leverage ratio 10.57%.
- The quarterly dividend was $0.32 per share; dividends for the first nine months totaled $0.96 per share.
Material changes versus comparable periods
- Q3 net income rose 50% year over year; nine-month net income rose 46%. Reported earnings per share increased more modestly, partly because shares outstanding expanded substantially following issuance of 18.33 million shares for VCBI.
- Nine-month other income included an $8.98 million pretax gain on a branch-building sale and $5.77 million of net other-than-temporary impairment (OTTI) losses on securities. Q3 included $4.71 million of OTTI losses. Q3 other income therefore declined 11% year over year despite higher customer fees.
- Nine-month noninterest expense increased 21%, primarily due to VCBI operating costs and $5.29 million of merger-related expenses and charges. Q3 noninterest expense increased 19% year over year.
- On a pro forma basis assuming VCBI had been acquired at the start of each comparison period, nine-month 2014 revenue was $346.6 million and net income $89.5 million, compared with $347.4 million and $90.0 million in 2013. Management cautioned that these pro forma figures are not indicative of actual or future results and do not reflect anticipated synergies.
Outlook, commentary, risks and unusual items
- No specific earnings guidance was provided. Management expected an effective tax rate of approximately 33% on remaining 2014 earnings, anticipated meeting obligations over the next 12 months, and reported no material capital-expenditure commitments.
- Management said the allowance was adequate, while emphasizing that estimates are judgmental and sensitive to economic conditions and borrower information. Acquired VCBI loans were recorded at fair value, including an approximately $90.4 million downward loan fair-value adjustment; VCBI’s prior allowance did not carry over.
- Credit measures warrant attention: nonperforming loans increased from $81.1 million at year-end 2013, troubled debt restructurings rose to $13.5 million, and impaired loans increased substantially, partly because of acquired VCBI credits. The filing’s MD&A cites nonaccrual loans of $67.7 million, while the detailed balance-sheet note reports $68.5 million; investors should verify the reconciliation.
- United recognized $4.71 million of Q3 credit-related OTTI on a trust-preferred CDO after a trustee notified the Company that collateral would be liquidated. The auction was scheduled for Q4 2014, with proceeds expected to be below amortized cost. The remaining trust-preferred CDO portfolio had a $38.8 million fair value and was valued using Level 3 inputs; management’s sensitivity analysis estimated a 19% fair-value decline from a 200-basis-point increase in discount rates.
- United sold four trust-preferred CDOs to comply with the Volcker Rule, generating a $1.3 million net gain, and said it did not expect further direct impact from the rule. Subsequent to quarter-end, United gave notice to redeem $27.0 million of trust-preferred securities in December 2014, funded with excess cash; those securities would cease to qualify as Tier 1 capital upon notice.
- Interest-rate sensitivity modeling estimated that an immediate, sustained 100-basis-point rate increase would reduce one-year net interest income by 0.74%; a 100-basis-point decrease would increase it by 1.98%. Management noted that actual results may differ from model estimates.
- Management stated it believed Basel III capital requirements would be met on a fully phased-in basis. The filing identifies economic conditions, interest rates, competition, execution of business strategies, regulatory actions and technology changes among forward-looking risks. Management reported no material change from the risk factors in the 2013 Form 10-K and no expected material effect from ongoing legal proceedings.
Important facts for investors to verify
- How much of reported earnings and balance-sheet growth reflects VCBI, and whether expected cost savings and synergies are being realized.
- The reconciliation of nonaccrual loan amounts in the MD&A and detailed financial-statement note, and the trend in acquired impaired loans, nonperforming assets and allowance coverage.
- The outcome of the trust-preferred CDO collateral auction, subsequent impairment or valuation changes, and the sensitivity of Level 3 valuations to credit and liquidity assumptions.
- The effect of the announced trust-preferred redemptions on funding costs, cash, and regulatory capital, as well as capital ratios under Basel III.
- Whether underlying fee income and operating costs improve after excluding the branch-sale gain, securities impairments and gains, merger costs, and acquisition-related expenses.