United Bankshares, Inc. — Q2 2012 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2012. Unaudited consolidated results; dollar figures below are in millions unless stated otherwise. The Centra acquisition closed July 8, 2011, so 2012-versus-2011 comparisons include Centra only in 2012 and are not fully like-for-like.
Financial performance
| Metric | Q2 2012 | Q2 2011 | Six months 2012 | Six months 2011 |
|---|---|---|---|---|
| Net interest income | $69.1 | $58.6 | $138.0 | $118.0 |
| Provision for loan losses | $3.4 | $4.8 | $7.6 | $9.2 |
| Other income | $16.6 | $13.3 | $32.9 | $28.0 |
| Other expense | $51.3 | $41.7 | $101.5 | $85.1 |
| Net income | $21.0 | $17.5 | $42.1 | $35.3 |
| Diluted EPS | $0.42 | $0.40 | $0.84 | $0.81 |
| Tax-equivalent net interest margin | 3.76% | 3.83% | 3.77% | 3.88% |
- Net income increased about 21% in Q2 and 19% for the first half. Net interest income rose 18% and 17%, respectively, while lower loan-loss provisions helped earnings. The company attributed much of the net interest income increase to Centra-related growth in average earning assets.
- Net interest margin narrowed year over year despite lower funding costs: the average earning-asset yield fell 30 basis points in Q2 and 34 basis points in the first half. Noninterest expense increased 23% in Q2 and 19% for the first half, mainly reflecting Centra-related staffing, benefits and occupancy costs.
- Return on average assets was 1.00% for both the quarter and first half; return on average equity was 8.58% for Q2 and 8.60% for the first half.
Financial position, cash flow and asset quality
- At June 30, total assets were $8.46 billion, broadly unchanged from year-end 2011. Net loans were $6.24 billion, up 1.3%; total deposits were $6.86 billion, up 0.6%. Noninterest-bearing deposits grew $124 million while interest-bearing deposits declined $83 million.
- Cash and cash equivalents were $673 million. For the first half, operating activities provided $61.1 million, investing activities provided $8.4 million and financing activities used $32.2 million; cash increased $37.2 million.
- Total borrowings were $555 million, down 7.5% from year-end, largely because of $55.2 million in net FHLB advance repayments. The company reported $234 million of unused correspondent-bank lines and approximately $1.67 billion of additional FHLB borrowing capacity, subject to collateral availability.
- Capital remained above regulatory minimums: risk-based capital ratio 14.00%, Tier 1 capital ratio 12.74% and leverage ratio 10.43%. United and its banking subsidiaries were categorized as well capitalized. Shareholders’ equity was $981 million; the declared dividend was $0.31 per share for Q2.
- Nonperforming loans were $77.6 million, or 1.23% of loans, versus $79.7 million, or 1.28%, at year-end. Nonaccrual loans increased to $64.7 million from $61.4 million; impaired loans declined to $105.2 million from $128.0 million. Nonperforming assets totaled $126.2 million, including $48.6 million of other real estate owned.
- The allowance for loan losses was $73.4 million, equal to 1.16% of loans; its coverage of nonperforming loans was 94.64%. Management considered the allowance adequate, while noting estimates are judgmental and sensitive to economic conditions and collateral values.
Changes, outlook, risks and unusual items
- Credit costs improved year over year: first-half provision was $7.6 million versus $9.2 million, and net charge-offs were $8.0 million versus $9.1 million. Management cited fewer deteriorating consumer loans, but also reported increased nonaccrual loans, partly related to borrower deterioration and lower commercial real-estate values.
- Investment securities declined $101 million from year-end. The portfolio included trust-preferred collateralized debt obligations (TRUP CDOs) with $99.6 million amortized cost and $40.2 million fair value. United recorded $3.1 million of net other-than-temporary impairment losses in the first half, including $1.7 million in Q2; management’s Level 3 valuation relies on estimated cash flows and unobservable inputs.
- Management said it expected to meet obligations over the next 12 months, anticipated no material capital-expenditure commitments, and reported no known trends expected to materially change liquidity. The filing provides no quantified earnings guidance. Forward-looking results remain exposed to economic conditions, interest rates, competition, strategy execution, regulation and technology.
- Two putative class actions concern overdraft practices. A federal court denied a motion to dismiss in one case; in the state case, a question about applicability of West Virginia consumer-credit law was certified to the state supreme court. The company said potential loss could not be estimated and that it believed it had meritorious defenses.
- After quarter-end, a subsidiary gave notice to redeem $5.0 million of Sequoia Trust I securities for $5.23 million plus accrued interest, scheduled for August 20, 2012. The filing also reports that a 10% increase in the loan-loss allowance would have reduced first-half net income by approximately $4.8 million, or $0.09 per diluted share.
Key facts for investors to verify
- How much of the reported earnings and balance-sheet growth reflects Centra, and whether expense growth can be contained as integration continues.
- TRUP CDO credit performance, valuation assumptions and potential further impairment; the reported fair value depends partly on Level 3 estimates.
- Trends in construction and commercial real-estate credit quality, nonaccrual loans, OREO and allowance coverage.
- Developments and potential exposure in the overdraft class actions, for which the filing provides no loss estimate.
- Deposit mix, net interest margin sensitivity and capital/liquidity capacity as interest rates and funding conditions change.