United Bankshares, Inc. — Q1 2012 Form 10-Q
Reporting period: Three months ended March 31, 2012; balance-sheet comparisons are to December 31, 2011. The unaudited filing covers the company and subsidiaries, whose principal activities are banking. Amounts below are in U.S. dollars; financial statement amounts are shown in millions unless noted.
Business context and period comparability
United completed its acquisition of Centra Financial Holdings on July 8, 2011. Centra’s results are included in Q1 2012 but not Q1 2011, so year-over-year comparisons reflect the acquisition as well as underlying performance. Centra added approximately $1.3 billion of assets at acquisition. The filing gives no formal earnings guidance.
Key financial metrics
| Metric | Q1 2012 / March 31, 2012 | Comparable period / prior year-end |
|---|---|---|
| Total assets | $8.53 billion | $8.45 billion at Dec. 31, 2011 |
| Total revenue (net interest income plus other income) | $85.29 million | $74.01 million in Q1 2011 |
| Net interest income | $68.97 million | $59.36 million in Q1 2011 |
| Net interest margin, tax-equivalent | 3.78% | 3.92% in Q1 2011; 3.88% in Q4 2011 |
| Net income / diluted EPS | $21.01 million / $0.42 | $17.89 million / $0.41 in Q1 2011 |
| Provision for loan losses | $4.13 million | $4.44 million in Q1 2011 |
| Operating cash flow | $32.94 million | $36.64 million in Q1 2011 |
| Cash and cash equivalents | $789.83 million | $636.00 million at Dec. 31, 2011 |
| Loans, net of unearned income | $6.20 billion | $6.24 billion at Dec. 31, 2011 |
| Deposits | $6.88 billion | $6.82 billion at Dec. 31, 2011 |
| Total borrowings | $608.63 million | $600.13 million at Dec. 31, 2011 |
| Shareholders’ equity | $976.30 million | $968.84 million at Dec. 31, 2011 |
Net income rose about 17% year over year, while diluted EPS rose from $0.41 to $0.42; average diluted shares increased to 50.30 million from 43.70 million. Annualized return on average assets was 1.00% and return on average equity was 8.63%, compared with 1.02% and 9.04% in Q1 2011. The quarterly dividend was $0.31 per share, versus $0.30 a year earlier.
Material changes and operating trends
- Net interest income increased 16.2% year over year, primarily reflecting higher average earning assets after Centra and a lower average cost of funds. The average yield on earning assets declined 39 basis points, and the tax-equivalent net interest margin narrowed 14 basis points year over year.
- Other income increased 11.4% to $16.33 million. Trust and brokerage and deposit service fees grew; reported other income included $1.38 million of net other-than-temporary impairment charges on securities.
- Noninterest expense increased 15.6% to $50.26 million, driven principally by Centra-related staffing, benefits, occupancy and operating costs. OREO expense increased to $2.33 million. Management said quarterly expenses were nearly flat sequentially.
- Loans declined 0.6% from year-end, with residential real estate and other commercial balances down, partly offset by 3.5% growth in construction and land development lending. Noninterest-bearing deposits grew, while interest-bearing time deposits declined and money market balances increased.
- Nonperforming loans were $76.19 million, or 1.23% of loans, versus $79.66 million, or 1.28%, at year-end. Nonperforming assets were $126.05 million, including $49.86 million of OREO, or 1.48% of assets. Net charge-offs were $4.00 million, an annualized 0.26% of average loans.
Liquidity, capital, risks and outlook
- Cash and cash equivalents increased $153.83 million during the quarter. Investing activities provided $64.00 million and financing activities provided $56.88 million; financing included deposit growth and higher short-term borrowings, offset partly by $15.57 million in dividends paid.
- Management said liquidity was sufficient and expected to meet obligations over the next 12 months; it reported no material capital expenditure commitments or known trends expected to materially change liquidity. Available funding includes cash, deposits, correspondent lines and FHLB advances. The company reported $269 million of unused correspondent-bank lines and approximately $1.94 billion of available FHLB borrowing capacity, subject to collateral and other conditions.
- Management reported the company and banking subsidiaries as well capitalized. At March 31, risk-based capital was 14.09%, Tier 1 capital 12.81%, leverage 10.40%, and equity-to-assets 11.45%.
- Investment valuation is a notable risk: available-for-sale securities had $67.09 million of gross unrealized losses. The portfolio included $40.78 million fair value of pooled trust preferred CDOs, valued using significant unobservable inputs. Management recognized $1.22 million of Q1 credit-related impairment on these CDOs and $154,000 on non-agency mortgage-backed securities. A modeled 200-basis-point increase in CDO discount rates would reduce their fair value by approximately 14%.
- Credit quality, real estate collateral values, interest-rate movements, deposit competition and the uncertain fair value of less-liquid securities are risks. The filing also describes two putative class actions concerning debit-card overdraft practices; possible loss could not be estimated. Unrecognized tax benefits were $2.08 million, with related accrued interest of $737,000.
- Interest-rate simulations estimated net interest income would rise 3.51% under an immediate sustained 100-basis-point rate increase and decline 1.11% under a 100-basis-point decrease over one year. These are model estimates, not forecasts. Management identified no material changes to the risk factors in its 2011 Form 10-K.
- Management’s forward-looking statements are subject to economic, interest-rate, competitive, regulatory and technology risks. Disclosure controls were concluded effective, and the filing reported no material change in internal control over financial reporting during the quarter.
Investor verification priorities
- Review the Centra acquisition’s contribution to earnings and expenses, and distinguish acquisition effects from organic growth; reported comparisons are not like-for-like.
- Assess the assumptions, ratings and cash-flow sensitivity underlying pooled trust preferred CDO valuations and impairment judgments.
- Track credit trends, especially construction and commercial real estate exposures, OREO, nonaccrual loans, charge-offs and allowance coverage. The filing’s nonaccrual figures differ between its loan table and MD&A; reconcile the reported values.
- Monitor margin pressure, deposit mix and funding costs, and whether the large cash position and available borrowing capacity remain available on stated terms.
- Follow the overdraft class actions and uncertain tax positions; the filing provides no reliable estimate of potential litigation loss or future tax-benefit recognition.