United Bankshares, Inc. — Q2 2013 Form 10-Q
Business context and reporting period. United Bankshares, Inc. is a bank holding company. This unaudited filing covers the three and six months ended June 30, 2013; balance-sheet comparisons are against December 31, 2012. Financial amounts below are in millions of dollars unless otherwise noted.
Financial performance and position
| Metric | Q2 2013 | Q2 2012 | Six months 2013 | Six months 2012 |
|---|---|---|---|---|
| Net interest income | $66.2 | $69.1 | $133.0 | $138.0 |
| Noninterest income | $19.1 | $16.6 | $37.4 | $32.9 |
| Provision for loan losses | $5.0 | $3.4 | $10.1 | $7.6 |
| Noninterest expense | $48.5 | $51.3 | $96.8 | $101.5 |
| Income before taxes | $31.8 | $31.0 | $63.5 | $61.9 |
| Net income | $22.2 | $21.0 | $43.8 | $42.1 |
| Diluted earnings per share | $0.44 | $0.42 | $0.87 | $0.84 |
- Tax-equivalent net interest margin was 3.65% in Q2, down from 3.76% a year earlier; first-half margin was 3.70%, versus 3.77%. Management attributed lower net interest income mainly to reduced yields on earning assets.
- Annualized return on assets and return on equity were 1.07% and 8.81% in Q2; first-half returns were 1.06% and 8.76%.
- At June 30, total assets were $8.48 billion, net loans $6.49 billion, deposits $6.58 billion, total borrowings $833.3 million, and shareholders’ equity $1.01 billion. Since year-end, assets rose $60.3 million, loans rose $55.8 million, deposits fell $175.2 million, and borrowings rose $233.4 million.
- Cash and cash equivalents were $379.0 million, down $53.0 million since year-end. First-half cash provided by operating activities was $72.3 million; investing activities used $153.3 million; financing activities provided $27.9 million.
- First-half dividends were $0.62 per share. Q2 dividend was $0.31 per share.
Material changes and credit quality
- Net income increased 5.6% in Q2 and 4.1% for the first half year over year. Higher noninterest income and lower operating expenses more than offset lower net interest income and increased loan-loss provisions.
- Noninterest income growth included improved mortgage banking and trust/brokerage income, plus lower securities impairment losses than in 2012. First-half noninterest expense declined 4.7%, partly reflecting reduced staffing and costs following a 2012 subsidiary merger.
- Loan-loss provision rose to $10.1 million for the first half, from $7.6 million. Management cited losses on two large commercial relationships. First-half net charge-offs were $9.5 million, versus $8.0 million.
- Nonperforming loans were $94.0 million, or 1.43% of loans, compared with $92.8 million and 1.43% at year-end. Nonaccrual loans were $75.8 million. Troubled debt restructurings increased to $7.9 million from $3.2 million.
- The allowance for loan losses was $74.6 million, or 1.14% of loans; coverage of nonperforming loans was 79.3%. Management considered the allowance adequate, while noting that its estimates involve significant judgment.
Outlook, risks and unusual items
- No earnings guidance was provided. Management said liquidity should be sufficient for obligations over the next 12 months, reported no material capital-expenditure commitments, and stated that the company and its banking subsidiaries would meet Basel III capital requirements on a fully phased-in basis if then effective.
- United had agreed to acquire Virginia Commerce Bancorp, headquartered in Arlington, Virginia, in a stock transaction: each Virginia Commerce share was to convert into 0.5442 United shares. Virginia Commerce reported approximately $2.84 billion in assets and 28 banking offices as of June 30. The proposed acquisition was intended to expand United’s Washington, D.C. metropolitan-area presence; completion remained subject to the merger process.
- Investment securities had $57.4 million of gross unrealized losses at June 30, including $48.0 million on pooled trust preferred CDOs. These CDOs were valued using Level 3 inputs; management reported that a 200-basis-point increase in discount rates would reduce their fair value by approximately 15%. Management said it expected to recover amortized cost and did not intend to sell impaired debt securities, but actual values and recoveries may differ.
- First-half other-than-temporary impairment charges were $971,000, compared with $3.12 million in the first half of 2012. Q2 charges were $137,000, versus $1.74 million in Q2 2012. A $598,000 reduction in tax reserves occurred in Q2 following expiration of a statute of limitations.
- Interest-rate sensitivity modeling estimated that an immediate, sustained 100-basis-point rate increase would raise one-year net interest income by 1.92%; a 100-basis-point decline would reduce it by 0.89%. These are model estimates, not forecasts.
- A $3.3 million overdraft-fee class-action settlement had been accrued in 2012 and transferred to escrow in Q2 2013. Preliminary court approval had been granted; final approval was scheduled for October 18, 2013. Management said other ordinary-course litigation was not expected to materially affect financial position.
- Management identified credit-loss estimates, investment-security valuation and impairment, and income taxes as critical accounting areas. Forward-looking results remain exposed to economic conditions, interest rates, competition, government actions, and execution risks.
Important facts for investors to verify
- Progress, regulatory approvals, consideration and integration costs for the proposed Virginia Commerce acquisition.
- Subsequent trends in deposits, borrowing reliance, liquidity and the maturity or renewal of $352 million in overnight FHLB advances included in FHLB borrowings.
- Credit performance behind the increased provision, nonaccrual loans and restructurings, including any further losses in the large commercial relationships cited by management.
- Valuation assumptions, credit performance and impairment exposure for pooled trust preferred securities and other securities with unrealized losses.
- Final court approval and distribution of the overdraft-fee settlement, and implementation of Basel III capital requirements.