United Bankshares, Inc. — Q2 2011 Form 10-Q
Reporting period: Three and six months ended June 30, 2011. Unaudited consolidated financial statements; balance-sheet comparisons are to December 31, 2010. Unless stated otherwise, amounts below are in millions of dollars.
Business context and financial performance
United is a bank holding company. On July 8, 2011, after quarter-end, it acquired Centra Financial Holdings, adding approximately $1.31 billion of assets, $1.04 billion of loans and $1.13 billion of deposits. The transaction was valued at approximately $170 million, including $161.4 million in United shares and $8.4 million in cash. The filing reports that the combined company had approximately $8.5 billion in assets after the acquisition.
| Metric | Q2 2011 | Q2 2010 | Six months 2011 | Six months 2010 |
|---|---|---|---|---|
| Net interest income | $58.6 | $60.2 | $118.0 | $120.6 |
| Provision for loan losses | $4.8 | $6.4 | $9.2 | $13.3 |
| Noninterest income | $13.3 | $17.6 | $28.0 | $33.2 |
| Noninterest expense | $41.7 | $45.2 | $85.1 | $88.9 |
| Net income | $17.5 | $17.9 | $35.3 | $35.3 |
| Diluted EPS | $0.40 | $0.41 | $0.81 | $0.81 |
Q2 total interest income was $72.4 million, versus $82.2 million a year earlier; lower interest expense partly offset the decline. Tax-equivalent net interest margin was 3.83% for Q2 and 3.88% for the first half, compared with 3.69% and 3.67%, respectively, in 2010. The company reported first-half return on average assets of 1.00% and return on average equity of 8.85%.
Financial position, cash flow and capital
- At June 30, total assets were $7.13 billion, down 0.3% from year-end; net loans were $5.18 billion, broadly flat. Commercial, financial and agricultural loans rose 2.1%, while residential real estate loans fell 2.1% and construction and land-development loans fell 8.1%.
- Deposits were $5.73 billion, up 0.3%. Noninterest-bearing deposits increased $232.3 million, while interest-bearing deposits declined $217.3 million. Total borrowings fell $42.2 million to $537.5 million, primarily reflecting $50.2 million of FHLB repayments.
- Cash and cash equivalents were $508.1 million, up $46.7 million from year-end. For the first half, operating activities provided $55.1 million, investing activities provided $44.3 million, and financing activities used $52.7 million. Dividends paid were $26.2 million.
- Shareholders’ equity was $804.2 million, up 1.4%. The company reported it and its bank subsidiaries were “well capitalized”; United’s risk-based capital ratio was 13.91%, Tier 1 capital ratio 12.51%, and leverage ratio 10.51% at June 30.
- Management said liquidity was sufficient and expected to meet obligations over the next 12 months. Disclosed funding capacity included $285 million in correspondent-bank lines and approximately $1.77 billion of unused FHLB borrowing capacity, subject to collateral requirements.
Material changes and credit quality
- First-half net income was essentially unchanged year over year; Q2 net income declined 2.6%. Lower net interest income and noninterest income were partly offset by lower credit-loss provisions and operating expenses.
- Noninterest income fell 15.6% in the first half. Net investment securities losses were $5.0 million, including $6.2 million of net other-than-temporary impairment charges, partly offset by $1.2 million of securities gains. Q2 impairment charges were $4.1 million. Management attributed much of the decline in bankcard fees and processing costs to the sale of the merchant business in Q4 2010.
- First-half provision expense declined to $9.2 million from $13.3 million; net charge-offs were $9.1 million, compared with $11.9 million. Nonperforming loans were $64.0 million, or 1.22% of loans, versus $67.2 million, or 1.28%, at year-end. Nonperforming assets were $109.7 million, including $45.7 million of other real estate owned.
- The allowance for loan losses was $73.1 million, or 1.39% of loans, and covered nonperforming loans by 114.29%. Troubled debt restructurings increased to $3.9 million from $0.4 million at year-end; the June balance was on nonaccrual status.
- Available-for-sale securities had $79.7 million of gross unrealized losses. The largest disclosed risks included trust-preferred collateralized debt obligations, single-issuer trust-preferred securities and non-agency mortgage-backed securities. These valuations include significant management assumptions; $47.5 million of available-for-sale trust-preferred CDOs were Level 3 fair-value assets.
Outlook, risks, contingencies and unusual items
The filing provides no formal earnings or revenue guidance. Management cited weak loan demand, historically low rates and limited attractive reinvestment opportunities as pressures on interest income, while lower funding costs helped support margins. Forward-looking results may be affected by economic conditions, interest rates, competition, execution of business strategies, regulation and technology. Interest-rate simulations estimated that an immediate, sustained 100-basis-point increase would raise one-year net interest income 4.44%, while a 100-basis-point decrease would lower it 0.23%; management cautioned that these are model-based estimates.
Two putative class actions filed in April 2011 allege harm from overdraft practices. The company said it believes it has meritorious defenses, but it was too early to assess whether the cases could materially affect financial condition. The filing also reports $980,000 of unrecognized tax benefits and $205,000 of accrued interest on uncertain tax positions. Management identified the loan-loss allowance, investment-security valuations and income-tax provision as areas involving significant estimation judgment. No material changes to reported risk factors were disclosed.
Important facts for investors to verify
- Assess the Centra acquisition’s purchase accounting, integration costs, share issuance and contribution to earnings after closing.
- Track credit performance, especially the increased TDR balance, real-estate exposures, nonperforming assets and adequacy of the loan-loss allowance.
- Review potential further impairment and valuation changes in trust-preferred CDOs and other securities with unrealized losses and Level 3 inputs.
- Monitor net interest margin and funding costs as rates and loan demand change; the filing’s sensitivity estimates depend on assumptions and are not forecasts.
- Follow the overdraft class actions and tax examinations for any change in expected exposure.
- Reconcile nonaccrual-loan disclosures: the credit-quality table reports $55.1 million at June 30, while MD&A cites $51.2 million. The filing text does not explain this difference clearly.