United Bankshares, Inc. — Q3 2011 Form 10-Q Summary
Business context and reporting period
Unaudited results cover the three and nine months ended September 30, 2011; balance-sheet comparisons are with December 31, 2010. United is a bank holding company. Comparisons are materially affected by its July 8 acquisition of Centra Financial Holdings, which added about $1.31 billion of assets, $1.04 billion of loans and $1.13 billion of deposits. Centra’s results are included from the acquisition date.
Financial performance and condition
| Metric | Q3 2011 / September 30, 2011 | Comparable period / change |
|---|---|---|
| Net income | $20.0 million; diluted EPS $0.40 | Q3 2010: $17.3 million; diluted EPS remained $0.40 |
| Nine-month net income | $55.4 million; diluted EPS $1.21 | Nine months 2010: $52.7 million; diluted EPS remained $1.21 |
| Net interest income | Q3: $70.8 million; nine months: $188.7 million | Up 20.0% and 5.1%, respectively, year over year |
| Net interest margin | 3.87% tax-equivalent for Q3 and nine months | Q3 2010: 3.60%; nine months 2010: 3.65% |
| Other income | Q3: $11.0 million; nine months: $39.0 million | Down 30.0% and 20.2%; reductions chiefly reflected investment-securities impairment charges |
| Provision for credit losses | Q3: $3.6 million; nine months: $12.9 million | Q3 2010: $6.1 million; nine months 2010: $19.4 million |
| Total assets / loans | Assets: $8.58 billion; gross loans: $6.26 billion | Assets up 19.9%; loans up 19.0% from year-end, largely due to Centra |
| Deposits / borrowings | Deposits: $6.93 billion; total borrowings: $615.8 million | Deposits up 21.3%; borrowings up 6.2% from year-end |
| Cash and cash equivalents | $668.5 million | Up $207.1 million from year-end |
| Shareholders’ equity | $972.8 million; equity/assets 11.34% | Equity up 22.7% from year-end, mainly from Centra and retained earnings |
| Cash flow, nine months | Operating +$78.9 million; investing +$95.4 million; financing +$32.8 million | Cash and cash equivalents increased $207.1 million |
Other key results: nine-month noninterest expense was $134.0 million, up less than 1%; Q3 expense was $48.9 million, up 11.3%, with acquisition-related staffing and operating costs contributing. The company paid $0.30 per share in Q3 dividends and $0.90 per share for the first nine months.
Material changes and credit quality
- Centra’s acquisition increased the scale of the balance sheet and issued 6.55 million United shares. The preliminary purchase accounting included approximately $61.4 million of goodwill and $10.4 million of core deposit intangibles; valuation adjustments remained subject to refinement.
- Nonperforming loans were $73.7 million, or 1.18% of loans, versus $67.2 million, or 1.28%, at year-end. Loans 90 or more days past due rose to $16.3 million from $6.8 million; nonaccrual loans declined to about $55.3 million in the financial statements’ credit-quality table, while MD&A cites $53.76 million. The filing text therefore does not provide a clear reconciled nonaccrual value.
- Troubled debt restructurings increased to $3.6 million from $0.4 million. Impaired loans rose to $110.0 million from $70.4 million. The allowance for loan losses was $73.5 million, equal to 1.17% of loans; its coverage of nonperforming loans was 99.71%.
- Net charge-offs were $12.4 million for nine months, down from $16.6 million in 2010. Management attributed lower provision and charge-offs chiefly to fewer commercial charge-offs and increased recoveries.
Outlook, risks, contingencies and unusual items
- Management said liquidity was sufficient, expected to meet obligations over the next 12 months, and anticipated no material capital-expenditure commitments. It reported that United and its banking subsidiaries were “well capitalized”; United’s risk-based capital ratio was 13.64%, Tier 1 capital ratio 12.39%, and leverage ratio 10.40%.
- Q3 included $7.9 million of net other-than-temporary impairment losses on investment securities; nine-month impairment losses were $14.1 million, versus $4.4 million in the prior-year period. The largest Q3 credit-related charge was $7.56 million on trust-preferred CDOs. Available-for-sale securities had $76.3 million of gross unrealized losses; $44.1 million of trust-preferred CDOs were valued using Level 3 inputs.
- Management’s interest-rate simulation estimated net interest income would rise 3.22% after an immediate sustained +100 basis-point shock, and fall 2.09% after a -100 basis-point shock. These are model estimates, not earnings guidance; management cautioned that assumptions are uncertain.
- Two putative class actions allege harm from debit-card overdraft practices. A West Virginia court denied dismissal as to the bank subsidiary but dismissed the holding company without prejudice; the company said it was too early to assess possible material impact and believes it has meritorious defenses.
- Off-balance-sheet exposures included approximately $1.72 billion of loan commitments and $128.1 million of standby letters of credit. The filing notes that commitments may expire undrawn and are not necessarily future cash requirements.
- Management identified loan-loss allowances, investment-security valuation and impairment, and income taxes as areas requiring significant estimates and judgment. It cited economic conditions, interest-rate changes, competition, government actions, and execution of business strategies among forward-looking risks. No specific earnings guidance was provided.
Most important facts for investors to verify
- How Centra integration, purchase-accounting refinements, and expected cost savings affect future earnings, capital and asset quality.
- Whether trust-preferred CDO and other impaired-security valuations, cash-flow assumptions and additional impairment charges change.
- Trends in past-due, nonaccrual, impaired and restructured loans, especially commercial real estate and construction exposures, and the adequacy of the allowance.
- Deposit stability, borrowing costs and liquidity as interest rates and funding conditions change; assess the sensitivity estimates alongside actual results.
- Developments and potential financial exposure in the overdraft class actions, and reconcile the differing nonaccrual-loan figures in the filing’s credit-quality discussion.