United Bankshares, Inc. — 2012 Form 10-K Summary
Business context and reporting period
Community banking holding company operating primarily in West Virginia and Virginia, with additional markets in Ohio, Pennsylvania, Maryland and the Washington, D.C. area. This annual report covers the fiscal year ended December 31, 2012; financial comparisons are generally with 2011. United completed its Centra Financial Holdings acquisition in July 2011, affecting year-over-year comparisons.
Financial performance and condition
- Profit: Net income was $82.6 million, up 9.3% from $75.6 million. Diluted EPS was $1.64 versus $1.61.
- Net interest and revenue: Net interest income rose 6.5% to $277.7 million. Tax-equivalent net interest margin declined 6 basis points to 3.81%. Noninterest income increased 30.4% to $66.3 million, partly reflecting lower securities impairment losses; excluding securities transactions, it rose 5.1%.
- Expenses and returns: Noninterest expense increased 11.2% to $204.7 million, largely reflecting Centra-related costs and a $3.3 million litigation accrual. Efficiency ratio worsened to 54.08% from 51.81%. Return on average assets was 0.98%; return on average equity was 8.35%.
- Loans and credit: Loans, net of unearned income, grew 4.5% to $6.51 billion, led by commercial real estate and other commercial lending. Nonperforming loans rose to $92.8 million, or 1.43% of loans, from $79.7 million, or 1.28%. Nonperforming assets were $142.3 million, or 1.69% of assets. The allowance for loan losses was $73.9 million, 1.13% of loans; net charge-offs were $17.8 million.
- Cash flow and liquidity: Operating activities provided $129.4 million; investing activities used $208.1 million and financing activities used $125.2 million. Cash and cash equivalents fell $203.9 million to $432.1 million. Deposits decreased 1.0% to $6.75 billion. Management said liquidity was sufficient and expected to meet obligations over the next 12 months.
- Debt and capital: Total borrowings were approximately $599.9 million, nearly unchanged year over year. Shareholders’ equity was $992.3 million. United reported a 13.67% total risk-based capital ratio, 12.44% Tier 1 risk-based ratio and 10.62% Tier 1 leverage ratio; it and its banks were categorized as well capitalized.
- Shareholder distributions: Dividends were $1.24 per share, up from $1.21; the payout ratio was 75.48%.
Material changes versus 2011
- Net income improved, supported by higher net interest income and reduced securities impairment charges. Net interest margin nevertheless compressed as asset yields declined.
- Loans increased while deposits and total assets edged down. Deposit mix shifted substantially from money-market and time deposits toward checking and noninterest-bearing deposits.
- Credit quality weakened on nonperforming-loan measures, although impaired loans fell and nonperforming assets remained below the cited peer-group level.
- Investment securities declined 11.5% to $729.4 million. United recorded $7.4 million of net other-than-temporary impairment charges in 2012, versus $20.4 million in 2011, primarily on pooled trust-preferred securities.
Outlook, risks, contingencies and unusual items
- No company earnings or margin guidance is provided. Management described expected modest economic and employment growth in its markets and said it anticipated no material change in liquidity or asset-liability policies.
- After year-end, United agreed to acquire Virginia Commerce Bancorp (VCBI) under a January 29, 2013 agreement. Each VCBI share is to convert into 0.5442 United shares; VCBI had approximately $2.82 billion in assets. Completion remained prospective at the filing date.
- Key risks include regional economic weakness, commercial and real-estate credit exposure, rising nonperforming loans, uncertain allowance estimates, interest-rate sensitivity, securities valuation and further impairment, intense competition, regulatory and capital-rule changes, and technology or cybersecurity disruption. About 27.9% of loans financed renting or leasing real estate.
- United accrued $3.3 million to settle two overdraft-fee class actions without admitting liability; court approval was pending. Management said other ordinary-course litigation was not expected to have a material effect.
- Management and Ernst & Young reported effective internal control over financial reporting; the auditor issued unqualified opinions on the financial statements and controls.
Important facts for investors to verify
- Whether the VCBI transaction received approvals, closed, and produced expected strategic and financial benefits.
- Subsequent trends in nonperforming loans, charge-offs, allowance coverage and commercial real-estate concentrations.
- Performance and valuation assumptions for trust-preferred securities, including further impairment exposure.
- Whether loan growth and deposit-mix changes are sustainable without materially increasing funding costs or liquidity risk.
- Whether expense growth, margin pressure, and the 75.48% dividend payout remain manageable as regulatory requirements evolve.