Business Context and Reporting Period
Company: United Bankshares, Inc.
Filing Type: Form 10-K (Annual Report)
Period Ended: December 31, 2008
Business Overview: United is a West Virginia-based bank holding company operating primarily in West Virginia, Northern Virginia, and the Shenandoah Valley. It operates through two banking subsidiaries, United Bank (WV) and United Bank (VA), offering commercial and retail banking, trust, and brokerage services. As of December 31, 2008, the company had approximately 1,531 full-time equivalent employees and operated 114 full-service offices.
Key Financial Metrics
| Metric | 2008 | 2007 |
|---|---|---|
| Total Assets | $8.10 billion | $7.99 billion |
| Total Loans (Net) | $5.95 billion | $5.74 billion |
| Total Deposits | $5.65 billion | $5.35 billion |
| Net Interest Income | $252.79 million | $225.42 million |
| Net Income | $86.95 million | $90.67 million |
| Diluted EPS | $2.00 | $2.15 |
| Return on Average Assets | 1.09% | 1.28% |
| Return on Average Equity | 11.12% | 12.99% |
| Net Interest Margin | 3.70% | 3.76% |
| Allowance for Credit Losses | $63.60 million | $58.74 million |
| Nonperforming Assets | $74.02 million (0.91% of assets) | $34.69 million |
Material Changes vs. Prior Period
- Profitability Decline: Net income decreased 4.1% to $86.95 million, driven primarily by a significant increase in the provision for credit losses ($25.16 million in 2008 vs. $5.33 million in 2007) and noncash other-than-temporary impairment charges of $9.89 million on investment securities.
- Asset Growth: Total assets increased 1.34% to $8.10 billion. Loan portfolio growth of 3.81% was offset by a 7.38% decrease in investment securities due to sales, maturities, and market value declines.
- Deposit Growth: Total deposits grew 5.57% to $5.65 billion, largely driven by a 21.11% increase in time deposits under $100,000, attributed to stock market volatility.
- Asset Quality Deterioration: Nonperforming loans more than doubled to $54.20 million (0.90% of loans), and nonaccrual loans increased 199.8% to $42.32 million. Net charge-offs rose to $20.30 million from $6.61 million in 2007.
- Interest Rate Environment: Net interest income increased 12.1% due to lower funding costs, but the net interest margin compressed 6 basis points to 3.70% as yields on earning assets declined faster than the cost of funds.
Guidance, Outlook, and Risks
- TARP Decision: On January 27, 2009, United announced it would not participate in the U.S. Treasury's Troubled Asset Relief Program (TARP) Capital Purchase Program, despite receiving preliminary approval for up to $197.28 million. Management cited restrictions on future dividend increases, earnings dilution, and program uncertainty as outweighing the benefits.
- FDIC Participation: United elected to participate in the FDIC's Transaction Account Guarantee Program and is eligible for the debt guarantee program.
- Key Risks:
- Credit Risk: Deteriorating economic conditions have increased loan losses, particularly in commercial real estate and construction sectors. Management notes that ultimate losses may differ from current estimates.
- Investment Portfolio: Significant unrealized losses exist in the investment portfolio, particularly in corporate securities (trust preferred securities). While management does not currently deem these other-than-temporarily impaired, they acknowledge the risk of future sales if market conditions worsen.
- Interest Rate Risk: Earnings are sensitive to interest rate changes. A 100 basis point upward shock is estimated to increase net interest income by 4.58%, while a 100 basis point downward shock would decrease it by 0.50%.
- Capital Position: United remains "well-capitalized" under regulatory guidelines, with a total risk-based capital ratio of 10.99% and a Tier 1 leverage ratio of 8.51%.
Investor Verification Checklist
- Allowance Adequacy: Verify if the $63.60 million allowance for credit losses is sufficient given the doubling of nonperforming loans and the 199% increase in nonaccrual loans.
- Investment Impairments: Review the $99.61 million in gross unrealized losses on investment securities, specifically the $101.18 million in pooled trust preferred securities that are split-rated or below investment grade.
- Loan Concentrations: Assess the risk exposure in commercial real estate and construction loans, which comprised 30.6% of the total loan portfolio ($1.87 billion).
- Dividend Sustainability: Confirm the ability to maintain the 35-year streak of dividend increases ($1.16 per share in 2008) without TARP capital, given the decline in net income and increased credit costs.
- Regulatory Compliance: Note the disclosure of a temporary non-compliance with a financial covenant on a line of credit regarding the ratio of allowance for loan losses to nonperforming assets, which management expects to resolve in Q1 2009.