United Bankshares, Inc. — 2011 Form 10-K
Reporting period: Fiscal year ended December 31, 2011; fourth-quarter results are also disclosed. The company is a community banking holding company operating primarily in West Virginia and Virginia, with offices in nearby states. Amounts below are U.S. dollars.
Business context and material change
On July 8, 2011, United acquired Centra Financial Holdings for approximately $170 million, primarily in stock. Centra contributed about $1.3 billion of assets, including $1.0 billion of loans and $1.1 billion of deposits, at acquisition. Its results are included from the acquisition date, so year-over-year comparisons reflect both the transaction and underlying operating changes.
Key financial metrics
| Metric | 2011 | 2010 | Change or context |
|---|---|---|---|
| Total assets, year-end | $8.45 billion | $7.16 billion | Up 18.1%, mainly due to Centra |
| Net interest income | $260.7 million | $238.2 million | Up 9.5%; net interest margin was 3.87%, versus 3.64% |
| Net income | $75.6 million | $71.9 million | Up 5.1% |
| Diluted earnings per share | $1.61 | $1.65 | Down; share issuance for Centra increased average diluted shares |
| Noninterest income | $50.8 million | $62.2 million | Down 18.3%, mainly due to higher securities impairment losses |
| Noninterest expense | $184.0 million | $182.2 million | Up 1.0%; efficiency ratio improved to 51.81% from 53.87% |
| Operating cash flow | $118.6 million | $100.8 million | Cash and cash equivalents ended at $636.0 million |
| Loans, net of unearned income | $6.24 billion | $5.26 billion | Up 18.6%, primarily from Centra |
| Deposits | $6.82 billion | $5.71 billion | Up 19.4%, primarily from Centra |
| Total borrowings | $600.1 million | $579.7 million | Up 3.5% |
| Shareholders’ equity | $968.8 million | $793.0 million | Up 22.2%, largely from acquisition shares and retained earnings |
Annual interest income was $316.5 million and total other income was $50.8 million. Fourth-quarter 2011 net income was $20.3 million, or $0.40 diluted per share, compared with $19.3 million, or $0.44 per share, in fourth-quarter 2010. The filing does not provide a separate full-year revenue measure labeled “revenue”; net interest income plus other income was $311.6 million in 2011.
Credit, liquidity, capital and other financial indicators
- Nonperforming assets were $131.4 million, or 1.56% of assets, versus $112.0 million, or 1.57%, a year earlier. Nonperforming loans rose to $79.7 million from $67.2 million; loans 90 days or more past due and still accruing increased to $16.2 million from $6.8 million.
- The allowance for loan losses was $73.9 million, 1.18% of loans, compared with 1.39% in 2010. Coverage of nonperforming loans was 92.7%, down from 108.6%. Net charge-offs increased to $16.3 million from $8.7 million; the 2010 comparison benefited from a $15 million insurance recovery related to prior fraudulent loans.
- United reported $20.4 million of net other-than-temporary impairment charges on securities in 2011, principally $17.3 million on pooled trust-preferred CDOs and $3.2 million on mortgage-related securities. Available-for-sale securities had $68.9 million of gross unrealized losses at year-end.
- Management said liquidity was sufficient to meet depositor and customer needs and expected to meet obligations over the next 12 months. Cash and cash equivalents were $636.0 million; unused correspondent-bank credit lines totaled $274 million, and approximately $2.0 billion of additional FHLB borrowing capacity was available subject to collateral and other conditions.
- United reported a 13.83% total risk-based capital ratio, 12.57% Tier 1 risk-based ratio and 10.22% Tier 1 leverage ratio, and said it and its subsidiary banks were well capitalized.
- Cash dividends were $1.21 per share for 2011, versus $1.20 in 2010. The dividend payout ratio was 75.16%.
Management commentary, outlook and risks
Management attributed stronger net interest income to Centra’s added earning assets and lower funding costs, although yields on earning assets continued to decline in the low-rate environment. Management provided no specific earnings or revenue guidance. It anticipated meeting near-term obligations and reported no material capital-expenditure commitments.
Key disclosed risks include weak regional economic conditions and real estate values; commercial real estate and construction-credit concentrations; possible further loan losses and uncertainty in allowance estimates; volatility and impairment risk in investment securities, particularly trust-preferred CDOs; interest-rate sensitivity; competition; regulatory changes, including Dodd-Frank and Basel III implementation; and potential increases in compliance costs. Two putative class actions challenged debit-card overdraft practices. The company said it could not estimate a possible loss at that stage and believed it had meritorious defenses.
The independent auditor issued unqualified opinions on the financial statements and internal control over financial reporting; management and the auditor reported controls effective as of year-end.
Most important facts for investors to verify
- How much of 2011’s asset, deposit, loan and earnings growth is attributable to Centra, and how the acquisition performs after integration and purchase accounting.
- Whether rising past-due loans, impaired loans, nonperforming assets and net charge-offs signal further deterioration, and whether the allowance remains adequate.
- The valuation assumptions, cash-flow expectations and potential further impairment exposure for pooled trust-preferred CDOs and other securities with unrealized losses.
- The sustainability of net interest margin and earnings as rates, loan yields, funding costs and loan demand change.
- Capital and liquidity effects of regulatory changes, borrowing capacity conditions, deposit maturities and the company’s dividend payout.
- Developments in overdraft litigation and any subsequent estimate or disclosure of potential exposure.