United Bankshares, Inc. — Q1 2011 Form 10-Q
Reporting period: Three months ended March 31, 2011. Unaudited consolidated results; amounts below are in millions of dollars unless stated otherwise. United is a bank holding company. Comparisons are with Q1 2010 for operating results and December 31, 2010 for balance-sheet measures.
Business context and financial performance
- Profit: Net income was $17.9 million, up 2.7% from $17.4 million; diluted EPS was $0.41 versus $0.40. Annualized return on average assets was 1.02% and return on average equity was 9.04%.
- Interest income and margin: Interest income declined to $73.9 million from $84.1 million, while interest expense fell to $14.5 million from $23.6 million. Net interest income was $59.4 million, down 1.9%. Tax-equivalent net interest margin rose to 3.92% from 3.65%.
- Other income and expenses: Other income was $14.7 million, down 5.9%; it included $2.1 million of net securities impairment losses. Other expense was $43.5 million, down slightly. Income before taxes was $26.1 million and the effective tax rate was 31.5%.
- Credit costs: The loan-loss provision was $4.4 million, versus $6.9 million. Net charge-offs were $4.5 million, compared with $6.5 million.
- Cash flow: Operating activities provided $36.6 million, investing activities provided $19.0 million, and financing activities provided $13.7 million. Cash and cash equivalents increased $69.4 million to $530.8 million.
Financial position, funding, and credit quality
- Size and loans: Total assets were $7.19 billion, up less than 1% from year-end. Gross loans were $5.23 billion, down 0.7%; net loans were $5.15 billion. The loan portfolio decline was led by residential real estate loans.
- Deposits and liquidity: Deposits were essentially flat at $5.71 billion. Noninterest-bearing deposits increased $153.8 million, while interest-bearing deposits declined $155.4 million. Management said liquidity was sufficient to meet depositor and customer needs and anticipated meeting obligations over the next 12 months.
- Borrowings: Total borrowings were $607.5 million, up $27.9 million. Short-term borrowings rose $78.1 million, including a $73.5 million increase in repurchase agreements; long-term borrowings fell $50.2 million, mainly from FHLB repayments. The company reported substantial unused FHLB borrowing capacity, subject to collateral requirements.
- Capital: Shareholders’ equity was $799.5 million. United reported risk-based capital of 13.86%, Tier 1 capital of 12.45%, and a leverage ratio of 10.51%; it and its banking subsidiaries were categorized as well capitalized. The quarterly dividend was $0.30 per share.
- Asset quality: Nonperforming loans rose to $73.0 million, or 1.40% of loans, from $67.2 million, or 1.28%, at year-end. Nonperforming assets were $117.3 million, including $44.4 million of other real estate owned. The allowance for loan losses was $73.0 million, or 1.40% of loans, and covered 100.02% of nonperforming loans, down from 108.63% at year-end.
- Restructurings: Troubled debt restructurings increased to $3.7 million from $0.4 million at year-end; $1.1 million was on nonaccrual status.
Material changes, outlook, and risks
- Compared with Q1 2010, lower asset yields and reduced average earning assets weighed on net interest income; lower funding costs partly offset the decline. The filing reports a 27-basis-point year-over-year increase in tax-equivalent net interest margin.
- United recognized $2.1 million of credit-related other-than-temporary impairment on certain trust-preferred collateralized debt obligations (TRUP CDOs). Available-for-sale securities had $80.2 million of gross unrealized losses, including $71.7 million related to TRUP CDOs. These securities were valued using Level 3 inputs and management cash-flow assumptions; actual values may differ.
- United had agreed to acquire Centra Financial Holdings in a stock transaction. The filing estimated consideration of approximately $182.1 million and expected closing in early Q3 2011, subject to shareholder and regulatory approvals and other conditions.
- In April 2011, United and United Bank were named in two putative class actions concerning overdraft practices. The company said it was too early to assess whether the cases could have a material adverse effect and stated it believed it had defenses.
- No formal earnings guidance is provided in the supplied filing text. Management described capital and liquidity as sound, but identified economic conditions, interest rates, credit quality, securities valuations, competition, regulation, and execution of business strategies as risks to results. Forward-looking statements are subject to these and other uncertainties.
Most important facts for investors to verify
- Progress, final terms, approvals, integration plans, and financing or dilution implications of the Centra acquisition.
- Credit trends behind rising nonperforming loans and restructurings, and whether the allowance remains adequate as losses and collateral values develop.
- TRUP CDO exposure, impairment assumptions, Level 3 valuations, and any further credit or noncredit impairment.
- Deposit mix and the increase in short-term repurchase-agreement funding, along with available collateral and liquidity capacity.
- Developments and potential financial effects of the overdraft class actions.