United Bankshares, Inc. — Q3 2010 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2010. Interim financial statements are unaudited; balance-sheet comparisons are with December 31, 2009. Dollar amounts below are in millions unless stated otherwise.
Business context and financial performance
United is a bank holding company. Net interest income is its primary earnings component; the filing does not present a single total-revenue measure.
| Metric | Q3 2010 | Q3 2009 | Nine months 2010 | Nine months 2009 |
|---|---|---|---|---|
| Interest income | $79.9 | $90.4 | $246.2 | $277.7 |
| Net interest income | $59.0 | $61.3 | $179.6 | $184.4 |
| Provision for credit losses | $6.1 | $8.1 | $19.4 | $39.3 |
| Total other income | $15.7 | $6.5 | $48.8 | $39.8 |
| Noninterest expense | $43.9 | $43.7 | $132.8 | $131.2 |
| Net income | $17.3 | $12.1 | $52.7 | $49.9 |
| Diluted EPS | $0.40 | $0.28 | $1.21 | $1.15 |
| Net interest margin | 3.60% | 3.60% | 3.65% | 3.60% |
Q3 annualized return on average assets was 0.91% and return on average equity was 8.73%; nine-month figures were 0.93% and 9.04%, respectively. The nine-month effective tax rate was 30.94%, versus 7.13% in 2009, which included an $11.5 million tax benefit related to net operating loss carryforwards and a concluded tax examination.
Financial position, liquidity and capital
- Total assets were $7.57 billion, down 3.0% from year-end 2009. Net loans were $5.25 billion, down 7.3%; management attributed the decline primarily to soft loan demand.
- Total deposits were $5.70 billion, down 4.6%. Noninterest-bearing deposits rose $48.0 million, while interest-bearing deposits fell $320.7 million, including reductions in time deposits.
- Total borrowings were $1.03 billion, up 3.1%. Short-term borrowings rose $106.6 million; long-term borrowings declined $75.6 million, mainly from FHLB repayments. FHLB advances were $512.0 million.
- Cash and cash equivalents were $712.6 million, up $262.8 million. For the nine months, operating activities provided $70.7 million, investing activities provided $469.7 million, and financing activities used $277.5 million. Investing cash flow included $396.7 million from net loan reductions.
- Shareholders’ equity was $784.6 million, up 3.0%; the equity-to-assets ratio was 10.36%. The company reported it and its banking subsidiaries were “well capitalized”; United’s risk-based capital ratio was 13.36%, Tier 1 capital ratio 11.97%, and leverage ratio 9.70%.
- Cash dividends were $0.30 per share for Q3 and $0.90 per share for the first nine months. Management said liquidity was sufficient and anticipated meeting obligations over the next 12 months; it reported no material capital-expenditure commitments.
Material changes and credit quality
- Compared with Q3 2009, net income and diluted EPS increased, while net interest income declined 3.8%. Lower interest income from reduced average loans and investments more than offset lower funding costs. The nine-month net interest margin improved five basis points to 3.65%.
- Other income increased substantially year over year, mainly because investment impairment charges were lower than in 2009. Q3 2010 included $1.9 million of net other-than-temporary impairment (OTTI) losses; the comparable 2009 quarter included $11.0 million. Nine-month 2010 included $4.4 million of net OTTI losses and $2.0 million of net gains on securities sales/calls.
- The nine-month credit-loss provision declined from 2009, in part because 2009 included a $17.6 million provision for loans with fraudulent collateral. Nine-month net charge-offs were $16.6 million versus $33.2 million in 2009; 2010 annualized net charge-offs were 0.40% of average loans.
- Nonperforming loans were $71.4 million, or 1.34% of loans, versus $72.3 million at year-end 2009. Nonaccrual loans increased to $58.3 million; other real estate owned rose to $50.6 million. Total nonperforming assets were $122.0 million, or 1.61% of assets.
- The loan-loss allowance was $70.9 million, or 1.33% of loans; combined loan and lending-commitment allowances were $72.8 million. Loan-loss allowance coverage of nonperforming loans was 99.35%. Management judged the allowance adequate but emphasized its dependence on estimates and economic conditions.
- Available-for-sale securities had $88.9 million of gross unrealized losses. Trust-preferred collateralized debt obligations (CDOs) had $128.2 million amortized cost and $49.5 million fair value; their valuation used Level 3 inputs. Management recognized further credit and noncredit OTTI and said it did not intend, nor expect to be required, to sell impaired debt securities before recovery.
Outlook, risks and unusual items
- The filing provides no quantified earnings or revenue guidance. Management cited soft loan demand, historically low market rates, reduced reinvestment opportunities, and lower earning-asset yields. It said modeled interest-rate scenarios were within board policy limits; modeled net interest income increased 2.73% under a sustained +100-basis-point shock and 2.02% under a -100-basis-point shock.
- The Dodd-Frank Act was identified as a material new risk. Management said rulemaking could increase operating and compliance costs, affect deposit-insurance premiums and interest expense, and require changes to capital planning.
- Management identified allowance estimates, securities valuation and impairment, derivatives, and income taxes as critical accounting areas. It warned actual outcomes may differ from estimates.
- United reported loan commitments of approximately $1.67 billion and standby letters of credit of $121.1 million; many commitments were expected to expire undrawn. It recorded a $1.17 million liability for uncertain tax benefits.
- An adverse judgment in a class-action suit involving a previously securitized mortgage trust may be paid from residual trust cash flows; United said it could not determine when or for how long cash flows to it might be interrupted. Management said ordinary-course litigation was not expected to have a material financial effect.
- Other notable 2009 comparability items included a $3.63 million special FDIC assessment and the fraudulent-collateral loan provision. Q3 2010 also included a $430,000 favorable tax adjustment from statute-of-limitations expiration. United made a discretionary $9.1 million pension-plan contribution in Q3.
Most important facts for investors to verify
- Whether loan demand, nonaccrual loans and OREO trends improve, and whether the $72.8 million combined credit-loss allowance remains adequate.
- How trust-preferred CDO and other impaired-security cash-flow assumptions affect fair values, future OTTI charges and accumulated other comprehensive income.
- Whether deposit outflows continue, and how increased short-term borrowings affect funding costs and liquidity.
- The implementation and financial impact of Dodd-Frank, including implications for capital treatment of trust-preferred securities and regulatory costs.
- The outcome and cash-flow effects of the mortgage-securitization class action, along with changes in tax exposures and other contingencies.