United Bankshares Inc. 10-Q Summary: Period Ended June 30, 2009
Business Context and Reporting Period
This Form 10-Q covers the quarterly period ended June 30, 2009, and the six-month period ended on that date. United Bankshares, Inc. is a bank holding company headquartered in Charleston, West Virginia, operating primarily through its subsidiary banks. The company reported 43,412,345 shares of common stock outstanding as of July 31, 2009.
Key Financial Metrics
| Metric | Six Months Ended June 30, 2009 | Six Months Ended June 30, 2008 |
|---|---|---|
| Net Income | $37.79 million ($0.87 diluted EPS) | $50.84 million ($1.17 diluted EPS) |
| Net Interest Income | $123.13 million | $125.43 million |
| Provision for Credit Losses | $31.28 million | $6.45 million |
| Noninterest Income | $33.24 million | $37.79 million |
| Noninterest Expense | $87.51 million | $82.84 million |
| Total Assets (June 30, 2009) | $7.85 billion | $8.10 billion (Dec 31, 2008) |
| Total Loans (Net of unearned income) | $5.89 billion | $6.01 billion (Dec 31, 2008) |
| Total Deposits | $5.74 billion | $5.65 billion (Dec 31, 2008) |
| Shareholders' Equity | $756.38 million | $736.71 million (Dec 31, 2008) |
| Return on Average Assets | 0.96% | 1.29% |
| Return on Average Equity | 10.07% | 13.12% |
Material Changes vs. Prior Period
- Profitability Decline: Net income decreased by approximately 25.7% compared to the first half of 2008. This was primarily driven by a significant increase in the provision for credit losses and a decline in noninterest income.
- Credit Losses: The provision for credit losses surged to $31.28 million (vs. $6.45 million in 2008). This included a specific $17.55 million provision for three loans with fraudulent collateral made to affiliated companies of a commercial customer. Net charge-offs were $28.35 million, compared to $6.03 million in the prior year.
- Asset Quality: Nonperforming assets increased to $102.68 million (1.31% of total assets) from $74.02 million at year-end 2008. This increase was largely due to a $22.41 million rise in Other Real Estate Owned (OREO) resulting from foreclosures.
- Expense Increases: Noninterest expenses rose 5.65% year-over-year. Notable increases included FDIC insurance expense (up $4.56 million due to a special assessment) and employee benefits (up $2.63 million due to pension costs).
- Investment Portfolio: Total investment securities decreased by $153.60 million. The company recorded $1.23 million in other-than-temporary impairment (OTTI) losses on investment securities.
Guidance, Outlook, and Risks
- Management Commentary: Management attributes the deterioration in results to the current economic environment, high unemployment, and specific fraudulent loan activity. The company maintains that its allowance for credit losses ($66.53 million) is adequate to cover probable losses.
- Capital Position: The company remains "well capitalized" with a risk-based capital ratio of 11.49% and a Tier 1 capital ratio of 10.34%, both well above regulatory minimums.
- Liquidity: Liquidity is considered sufficient to meet depositor and borrower needs. The company reduced short-term borrowings by $351.75 million during the period, primarily by repaying overnight FHLB advances.
- Risks and Contingencies:
- Credit Risk: Continued economic weakness poses a risk to loan performance, particularly in commercial and real estate sectors.
- Legal Proceedings: The company is involved in various legal proceedings but believes they will not have a material effect on financial position.
- Regulatory Assessments: The company faced a special FDIC assessment of $3.63 million in the second quarter.
- Investment Valuation: Significant unrealized losses exist in the available-for-sale securities portfolio, particularly in trust preferred collateralized debt obligations, though management does not currently deem them other-than-temporarily impaired.
Investor Verification Checklist
- Fraudulent Loan Provision: Verify the details and recovery potential of the $17.55 million provision related to the three affiliated commercial loans with fraudulent collateral.
- Allowance Adequacy: Assess whether the $66.53 million allowance for credit losses is sufficient given the 38.72% increase in nonperforming assets and the specific charge-offs taken.
- Investment Portfolio Impairment: Review the $81.47 million in gross unrealized losses on available-for-sale securities, specifically the $55.21 million loss on trust preferred collateralized debt obligations, to evaluate potential future OTTI charges.
- OREO Disposition: Monitor the $42.22 million in Other Real Estate Owned (OREO) and the company's ability to liquidate these assets without further significant write-downs.
- FDIC Assessment Impact: Confirm if the special FDIC assessment of $3.63 million was a one-time event or indicative of future regulatory cost increases.