United Bankshares, Inc. — 2010 Form 10-K
Reporting period: Fiscal year ended December 31, 2010; comparisons are primarily with 2009. United is a community-banking holding company operating through banks in West Virginia and Virginia, with additional operations in southeastern Ohio. It reported approximately $7.16 billion in assets and $793.0 million in shareholders’ equity at year-end.
Financial results and position
| Metric | 2010 | 2009 |
|---|---|---|
| Total interest income | $323.4 million | $365.8 million |
| Net interest income | $238.2 million | $245.5 million |
| Net interest margin, tax-equivalent | 3.64% | 3.59% |
| Provision for credit losses | $13.8 million | $46.1 million |
| Noninterest income | $62.2 million | $54.0 million |
| Noninterest expense | $182.2 million | $175.1 million |
| Net income | $71.9 million | $67.3 million |
| Diluted earnings per share | $1.65 | $1.55 |
| Return on average assets / equity | 0.95% / 9.19% | 0.85% / 8.81% |
- Balance sheet: Assets fell 8.3% to $7.16 billion, mainly as loans declined $476.5 million (8.3%) and investment securities declined $172.2 million (17.8%). Total loans were $5.26 billion; deposits were $5.71 billion.
- Funding and debt: Total borrowings declined 41.7% to $579.7 million, chiefly following repayment of $385.0 million in long-term FHLB advances. Deposits declined 4.3%; noninterest-bearing deposits rose 8.6%, while interest-bearing deposits fell 7.3%.
- Cash flow: Operating activities provided $100.8 million and investing activities provided $631.9 million; financing activities used $721.1 million. Cash and cash equivalents increased $11.6 million to $461.4 million.
- Credit quality: Nonperforming loans were $67.2 million (1.28% of loans), versus $72.3 million (1.26%) in 2009. Nonperforming assets were $112.0 million, or 1.57% of assets. The allowance for loan losses was $73.0 million, 1.39% of loans, and covered nonperforming loans by 108.6%.
- Capital and liquidity: United and its banks were reported as well-capitalized. United’s total risk-based capital ratio was 13.65%, Tier 1 risk-based ratio 12.25%, and leverage ratio 9.92%. Management said liquidity was sufficient and expected to meet obligations over the next 12 months; it reported $285 million in unused correspondent-bank lines and approximately $1.78 billion of additional FHLB borrowing capacity subject to collateral conditions.
- Shareholder returns: The annual dividend increased to $1.20 per share from $1.17; the payout ratio was 72.69%.
Changes versus 2009 and notable items
- Net income increased 6.9%, despite lower net interest income, while the provision for credit losses fell substantially from 2009’s elevated level. The 2010 provision included a $15.0 million insurance recovery for fraudulent loans charged off in 2009; net charge-offs were $8.7 million, compared with $39.7 million in 2009.
- Net interest income declined 3.0%. Lower funding costs partly offset lower asset yields and reduced average earning assets; tax-equivalent margin rose five basis points to 3.64%.
- Net investment-security losses were $7.8 million, including $9.8 million of net other-than-temporary impairment charges, partly offset by $2.0 million of net gains on security sales. Impairment charges included $7.3 million on pooled trust-preferred securities. The portfolio also had $91.0 million of gross unrealized securities losses at year-end.
- Noninterest expense increased 4.1%, including a 102.9% increase in OREO expense to $11.1 million. The efficiency ratio increased to 53.87% from 51.35%.
- The 2009 comparison included an $11.5 million income-tax benefit related to net operating loss carryforwards and a concluded tax examination, as well as a $3.6 million special FDIC assessment. The effective tax rate was about 31% in 2010 versus 14% in 2009.
Outlook, risks and contingencies
- Management described the regional recovery as underway but expected slow growth, and cautioned that economic weakness, unemployment, declining real-estate values and soft loan demand could continue to pressure borrowers, credit quality and earnings. The filing provides no numerical earnings guidance.
- United agreed to acquire Centra Financial Holdings, with $1.4 billion in assets, for estimated aggregate consideration of approximately $197.7 million, primarily in United shares. The transaction was expected to close early in the third quarter of 2011, subject to Centra shareholder and regulatory approvals and other conditions.
- Key risks include commercial real-estate and construction exposures, allowance-estimation uncertainty, securities valuation and further impairments, interest-rate changes, competition, deposit funding, and regulatory changes. Dodd-Frank implementation and potential future capital and liquidity rules were identified as uncertainties that could raise costs or affect returns.
- Commercial real estate renting or leasing loans were about $1.3 billion, or 24.0% of total loans. Approximately $319.1 million of real-estate loans met the regulatory high-loan-to-value definition.
- Off-balance-sheet commitments included $1.56 billion of unused credit commitments and $119.2 million of letters of credit. Management believed ongoing litigation would be resolved without a material effect, though fourth-quarter expense included a $470,000 anticipated litigation loss.
- Ernst & Young issued unqualified opinions on the financial statements and internal control over financial reporting; management also assessed those controls as effective.
Important facts for investors to verify
- Whether the $15.0 million insurance recovery is nonrecurring and how underlying credit costs, delinquencies, nonaccrual loans and OREO evolve after 2010.
- Recoverability and valuation assumptions for pooled trust-preferred and other impaired securities, including the impact of further defaults or market-price changes.
- Centra’s final purchase terms, approvals, closing date, integration costs and realized strategic or financial benefits.
- Deposit trends, upcoming time-deposit maturities, available borrowing capacity and the sustainability of liquidity and capital ratios.
- Dividend capacity and the effect of regulatory changes, including Dodd-Frank and future capital requirements, on costs and distributions.