United Bankshares, Inc. — Q2 2010 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2010. The interim financial statements are unaudited. Unless otherwise indicated, dollar amounts below are in millions.
Business context and key financial metrics
United is a bank holding company. At June 30, 2010, total assets were $7.46 billion, down 4.4% from December 31, 2009. Loans and deposits declined during the first half as loan demand remained soft and time deposits fell.
| Metric | Q2 2010 | Q2 2009 | First half 2010 | First half 2009 |
|---|---|---|---|---|
| Net interest income | $60.2 | $62.2 | $120.6 | $123.1 |
| Provision for credit losses | $6.4 | $23.3 | $13.3 | $31.3 |
| Noninterest income | $17.6 | $17.9 | $33.2 | $33.2 |
| Noninterest expense | $45.2 | $45.7 | $88.9 | $87.5 |
| Net income | $17.9 | $8.2 | $35.3 | $37.8 |
| Diluted EPS | $0.41 | $0.19 | $0.81 | $0.87 |
- Q2 earnings improved year over year, while first-half net income fell 6.5%. First-half 2009 included an $11.5 million tax benefit; comparison is also affected by unusually high 2009 credit-loss provision tied to fraudulent-collateral loans.
- Tax-equivalent net interest margin was 3.69% in Q2 and 3.67% for the first half, versus 3.67% and 3.61%, respectively, in 2009. GAAP net interest income nevertheless declined as lower asset yields and smaller average earning assets outweighed lower funding costs.
- First-half operating cash flow was $63.5 million; investing activities provided $308.9 million, largely from loan repayments and securities cash flows; financing activities used $371.9 million, principally from deposit outflows and FHLB repayments. Cash and cash equivalents ended at $450.3 million.
- At June 30, total deposits were $5.61 billion, down 6.0% from year-end; loans, net of unearned income, were $5.46 billion, down 4.8%. Total borrowings were $1.00 billion, up 0.8%; shareholders’ equity was $777.6 million.
- Management reported a 0.94% first-half return on average assets and 9.20% return on average equity. Regulatory capital ratios were 13.08% risk-based, 11.73% Tier I, and 9.62% leverage; the company described itself and its banking subsidiaries as well capitalized.
Material changes, credit and investment risks
- Nonperforming loans were $73.9 million, or 1.35% of loans, versus $72.3 million at year-end; nonaccrual loans rose to $64.8 million. Nonperforming assets were $109.9 million, or 1.47% of assets. OREO was $36.0 million.
- The allowance for loan losses was $69.2 million, equal to 1.27% of loans; allowance coverage of nonperforming loans was 93.59%. First-half net charge-offs were $11.9 million, compared with $28.3 million in 2009, which included the fraudulent-collateral loans.
- United recorded $2.6 million of net other-than-temporary impairment losses in earnings for the first half, primarily related to certain trust-preferred collateralized debt obligations (CDOs). An additional $9.6 million of noncredit impairment on these securities was recorded in other comprehensive income in Q2. Available-for-sale securities had $91.6 million of gross unrealized losses at quarter-end. CDO fair values rely on Level 3 cash-flow estimates and discount rates of approximately 9%–29%.
- OREO expense increased to $4.3 million for the first half, mainly due to declines in property values. Management said the allowance was adequate but noted that its estimates depend on economic conditions, collateral values, and other judgments.
- Deposits declined chiefly because large and small time deposits, including CDARS and brokered balances, ran off. Noninterest-bearing deposits increased. Management cited available liquidity sources including $450.3 million of cash and cash equivalents, $285 million of correspondent-bank lines, and $1.47 billion of unused FHLB borrowing capacity subject to collateral availability.
Outlook, commentary and contingencies
- No earnings or revenue guidance was provided. Management stated it expected to meet obligations over the next 12 months, considered liquidity sufficient, and anticipated no material capital-expenditure commitments or material change in liquidity trends.
- Management identified credit-loss allowances, investment-security valuation and impairment, derivatives, and income taxes as areas requiring significant judgment. Actual results may differ from estimates. Forward-looking factors include economic conditions, interest rates, competition, government actions, and technology changes.
- Off-balance-sheet commitments included $1.53 billion of loan commitments, mostly expiring within one year, and $121.7 million of standby letters of credit. Commitment amounts are not necessarily expected cash outflows.
- The company reported $1.2 million of unrecognized tax benefits. It was subject to federal and state tax audits for 2006–2008. Management believed routine legal proceedings would be resolved without material effect; it reported no material changes to previously disclosed risk factors.
- A securitization trust was subject to an adverse judgment in an ongoing class action. United received $458,000 from its retained securitization interest in the first half but could not determine when or for how long residual cash flows might be interrupted.
Important facts for investors to verify
- Whether the rise in nonaccrual loans and continued loan contraction persist, and how charge-offs, delinquencies, and allowance coverage evolve.
- Whether trust-preferred CDO impairment assumptions and Level 3 valuations remain supportable, including the effect of further defaults or deferrals.
- How deposit outflows, borrowing mix, collateral availability, and FHLB repayments affect liquidity and funding costs.
- How earnings compare after accounting for the prior-year tax benefit and unusually high prior-year credit provision.
- The outcome and potential cash-flow effects of the securitization-trust class action, and the resolution of outstanding tax matters.