United Bankshares, Inc. — Q3 2012 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2012. The interim financial statements are unaudited; amounts below are in U.S. dollars, with financial figures generally converted from thousands to millions.
Business context and reporting period
United is a bank holding company whose principal activities are banking. Comparisons of nine-month 2012 results with 2011 are affected by the July 2011 acquisition of Centra Financial Holdings, whose operations were included from the acquisition date. United finalized Centra’s purchase-price allocation during Q3 2012, increasing goodwill by $3.93 million and reducing acquired loans by $5.93 million, with a corresponding $2.00 million increase in deferred taxes.
Financial performance and position
| Metric | Q3 / September 30, 2012 | Comparable period / change |
|---|---|---|
| Net income | $19.33 million; diluted EPS $0.38 | Q3 2011: $20.02 million; $0.40 per diluted share |
| Nine-month net income | $61.39 million; diluted EPS $1.22 | Nine months 2011: $55.35 million; $1.21 per diluted share |
| Net interest income | Q3: $70.01 million | Down 1.0% year over year; nine-month amount $208.04 million, up 10.2% |
| Tax-equivalent net interest margin | Q3: 3.87% | Unchanged year over year; nine-month margin 3.80% versus 3.87% |
| Provision for loan losses | Q3: $4.35 million | Q3 2011: $3.64 million; nine-month 2012: $11.92 million versus $12.87 million |
| Noninterest income / expense | Q3: $16.63 million / $53.87 million | Q3 2011: $10.98 million / $48.87 million; nine-month income $49.55 million and expense $155.38 million |
| Assets / loans | Total assets $8.38 billion; net loans $6.35 billion | Assets down 0.8% from year-end 2011; portfolio loans up 3.1% |
| Deposits / borrowings | Deposits $6.75 billion; total borrowings $573.48 million | Deposits down 1.0% and borrowings down 4.4% from year-end 2011 |
| Cash and cash equivalents | $436.33 million | Down $199.68 million from year-end 2011 |
| Shareholders’ equity | $988.43 million | Up 2.0% from year-end 2011; equity-to-assets ratio 11.79% |
Nine-month operating cash flow was $89.20 million; investing activities used $153.35 million and financing activities used $135.53 million. The resulting decrease in cash and cash equivalents was $199.68 million. The allowance for loan losses was $73.75 million, or 1.15% of loans net of unearned income; allowance coverage of nonperforming loans was 74.93%.
Annualized return on average assets and equity were 0.92% and 7.76%, respectively, for Q3, compared with 0.95% and 8.26% a year earlier. Nine-month figures were 0.97% and 8.32%, versus 0.98% and 8.62%. The quarterly dividend was $0.31 per share; dividends for the first nine months totaled $0.93 per share.
Material changes versus comparable periods
- Q3 net income and diluted EPS declined year over year, while nine-month net income increased. Nine-month results benefited from the larger post-Centra operating base; Centra also contributed to higher expenses.
- Q3 net interest income fell slightly as lower asset yields and reduced average short-term investments and securities outweighed lower funding costs. Nine-month net interest income increased, aided by acquisition-related growth in average earning assets and lower funding costs; margin nevertheless narrowed.
- Credit quality weakened on key measures: nonperforming loans rose to $98.43 million, or 1.53% of loans, from $79.66 million, or 1.28%, at year-end. Management attributed increased nonaccrual loans in part to deterioration in two large relationships. Impaired loans declined to $102.24 million from $128.04 million.
- Funding composition shifted: noninterest-bearing deposits increased $188.04 million while interest-bearing deposits declined $253.12 million. Cash balances fell, while portfolio loans grew, particularly nonowner-occupied commercial real estate and other commercial loans.
- Nine-month net investment-security losses were $5.19 million, including $5.37 million of net other-than-temporary impairment (OTTI), compared with $12.50 million of losses and $14.13 million of OTTI in 2011. Q3 OTTI was $2.26 million versus $7.92 million a year earlier.
Outlook, risks, contingencies and unusual items
- Outlook and liquidity: No earnings guidance was provided. Management said liquidity was sufficient, expected to meet obligations over the next 12 months, and identified no material capital-expenditure commitments or known material trends expected to change liquidity. Available funding includes $234 million of correspondent-bank lines, an unused $10 million unsecured line, and approximately $1.84 billion of FHLB borrowing capacity subject to collateral requirements.
- Capital: United and its banking subsidiaries were categorized as well capitalized. At September 30, the company reported a 13.75% risk-based capital ratio, 12.51% Tier 1 capital ratio and 10.60% leverage ratio.
- Credit and securities risk: Gross unrealized losses on available-for-sale securities were $65.39 million. The portfolio included $96.10 million amortized cost of trust-preferred CDOs valued at $37.37 million; these securities use Level 3 valuation inputs. Management’s sensitivity analysis indicated a 200-basis-point increase in discount rates would reduce their total fair value by about 14%. Q3 credit-related OTTI included $1.79 million on trust-preferred CDOs and $0.47 million on a non-agency mortgage-backed security.
- Legal settlement: On October 24, 2012, United agreed to settle two overdraft-fee class actions for $3.3 million plus certain settlement expenses, without admitting liability. The settlement was fully accrued at September 30 and remained subject to court approval.
- Off-balance-sheet commitments: Loan commitments totaled approximately $2.04 billion, mostly expiring within one year; standby letters of credit were $99.00 million. Actual funding needs may be lower because commitments can expire undrawn.
- Other exposures: United reported $2.00 million of unrecognized tax benefits; the amount and timing of any future settlement were uncertain. Management identified the allowance for credit losses, investment-security valuations and income taxes as significant estimation areas. Forward-looking results are exposed to economic conditions, interest-rate movements, competition, regulatory changes and execution of business strategies.
- Controls and reporting: Management concluded disclosure controls were effective at quarter-end and reported no material change in internal control over financial reporting during the quarter.
Most important facts for investors to verify
- Whether nonaccrual and other nonperforming loans continue to rise, especially exposures tied to the two large relationships; also monitor charge-offs, allowance coverage and collateral recoveries.
- How the trust-preferred CDO and other impaired-security valuations perform against management’s cash-flow assumptions, and whether further OTTI is recorded.
- Whether deposit trends, loan growth and available borrowing capacity support liquidity as cash balances decline and commitments remain substantial.
- Final court approval and total cost of the overdraft litigation settlement, including settlement-related expenses.
- Underlying earnings trends excluding acquisition effects, security impairment charges and the litigation accrual; assess margin pressure and the trajectory of operating expenses.