10-K 1 d448569d10k.htm FORM 10-K Form 10-K
Table of Contents

FORM 10-K

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

[ X ] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES

EXCHANGE ACT OF 1934

For the Fiscal Year Ended December 31, 2012

OR

[    ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES

EXCHANGE ACT OF 1934

For the transition period from             to             

Commission File Number: 0-13322

United Bankshares, Inc.

(Exact name of registrant as specified in its charter)

 

    West Virginia   55-0641179    

(State or other jurisdiction of

  incorporation or organization)

 

(I.R.S. Employer    

Identification No.) 

300 United Center

500 Virginia Street, East

Charleston, West Virginia

  25301    

(Address of principal executive offices)

  (Zip Code)    

Registrant’s telephone number, including area code: (304) 424-8704

Securities registered pursuant to section 12(b) of the Act:

 

Common Stock, $2.50 Par Value   NASDAQ Global Select Market
(Title of class)   (Name of exchange on which registered)

Securities registered pursuant to 12(g) of the Act: None

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes [ X ] No [    ]

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or
Section 15(d) of the Act. Yes [    ] No [ X ]

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [ X ] No [    ]


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UNITED BANKSHARES, INC.

FORM 10-K

(Continued)

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes [ X ] No [    ]

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of the registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [    ]

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definitions of “large accelerated filer,” “accelerated filer,” and “smaller reporting company” in Rule 12b-2 of the Exchange Act:

 

Large accelerated filer [ X ]    Accelerated filer [    ]

Non-accelerated filer   [    ]

   Smaller reporting company [    ]

  (Do not check if a smaller reporting company)

  

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes [    ] No [ X ]

The aggregate market value of United Bankshares, Inc. common stock, representing all of its voting stock that was held by non-affiliates on June 30, 2012, was approximately $1,185,388,421.

As of January 31, 2013, United Bankshares, Inc. had 50,276,573 shares of common stock outstanding with a par value of $2.50.

Documents Incorporated By Reference

Definitive Proxy Statement dated April 5, 2013 for the 2013 Annual Shareholders’ Meeting to be held on May 20, 2013, portions of which are incorporated by reference in Part III of this Form 10-K.

 

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UNITED BANKSHARES, INC.

FORM 10-K

(Continued)

 

As of the date of filing this Annual report, neither the annual shareholders’ report for the year ended December 31, 2012, nor the proxy statement for the annual United shareholders’ meeting has been mailed to shareholders.

CROSS-REFERENCE INDEX

 

          Page  
Part I      

Item 1.

  

BUSINESS

     4   

Item 1A.

  

RISK FACTORS

     13   

Item 1B.

  

UNRESOLVED STAFF COMMENTS

     19   

Item 2.

  

PROPERTIES

     20   

Item 3.

  

LEGAL PROCEEDINGS

     20   

Item 4.

  

MINE SAFETY DISCLOSURES

     20   
Part II      

Item 5.

  

MARKET FOR REGISTRANT’S COMMON STOCK, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

     21   

Item 6.

  

SELECTED FINANCIAL DATA

     25   

Item 7.

  

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

     26   

Item 7A.

  

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

     52   

Item 8.

  

FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

     57   

Item 9.

  

CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURES

     121   

Item 9A.

  

CONTROLS AND PROCEDURES

     121   

Item 9B.

  

OTHER INFORMATION

     121   
Part III       

Item 10.

  

DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE

     122   

Item 11.

  

EXECUTIVE COMPENSATION

     122   

Item 12.

  

SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS

     122   

Item 13.

  

CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE

     122   

Item 14.

  

PRINCIPAL ACCOUNTING FEES AND SERVICES

     123   
Part VI      

Item 15.

  

EXHIBITS, FINANCIAL STATEMENT SCHEDULES

     124   

 

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UNITED BANKSHARES, INC.

FORM 10-K, PART I

 

Item 1. BUSINESS

Organizational History and Subsidiaries

United Bankshares, Inc. (United) is a West Virginia corporation registered as a bank holding company pursuant to the Bank Holding Company Act of 1956, as amended. United was incorporated on March 26, 1982, organized on September 9, 1982, and began conducting business on May 1, 1984 with the acquisition of three wholly-owned subsidiaries. Since its formation in 1982, United has acquired twenty-eight banking institutions. As of December 31, 2012, United has two banking subsidiaries (the Banking Subsidiaries) “doing business” under the name of United Bank, one operating under the laws of West Virginia referred to as United Bank (WV) and the other operating under the laws of Virginia referred to as United Bank (VA). United’s Banking Subsidiaries offer a full range of commercial and retail banking services and products. United also owns nonbank subsidiaries which engage in other community banking services such as asset management, real property title insurance, investment banking, financial planning, and brokerage services.

Employees

As of December 31, 2012, United and its subsidiaries had approximately 1,529 full-time equivalent employees and officers. None of these employees are represented by a collective bargaining unit and management considers employee relations to be excellent.

Web Site Address

United’s web site address is “www.ubsi-inc.com”. United makes available free of charge on its web site the annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and amendments thereto, as soon as reasonably practicable after United files such reports with the Securities and Exchange Commission (SEC). The reference to United’s web site does not constitute incorporation by reference of the information contained in the web site and should not be considered part of this document. These reports are also available at the SEC’s Public Reference Room at 100 F Street, N.E., Washington, D.C. 20549. The public may obtain information on the operation of the public reference room by calling the SEC at 1-800-SEC-0330. The SEC also maintains a website at www.sec.gov that contains reports, proxy and information statements and other information regarding issuers that file electronically with the SEC.

Business of United

As a bank holding company registered under the Bank Holding Company Act of 1956, as amended, United’s present business is community banking. As of December 31, 2012, United’s consolidated assets approximated $8.4 billion and total shareholders’ equity approximated $992 million.

United is permitted to acquire other banks and bank holding companies, as well as thrift institutions. United is also permitted to engage in certain non-banking activities which are closely related to banking under the provisions of the Bank Holding Company Act and the Federal Reserve Board’s Regulation Y. Management continues to consider such opportunities as they arise, and in this regard, management from time to time makes inquiries, proposals, or expressions of interest as to potential opportunities, although no agreements or understandings to acquire other banks or bank holding companies or nonbanking subsidiaries or to engage in other nonbanking activities, other than those identified herein, presently exist. See Note B—Notes to Consolidated Financial Statements for a discussion of United’s recently announced merger agreement with Virginia Commerce Bancorp, Inc. and its acquisition of Centra Financial Holdings, Inc. which occurred on July 8, 2011.

 

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Business of Banking Subsidiaries

United, through its subsidiaries, engages primarily in community banking and offers most banking products and services permitted by law and regulation. Included among the banking services offered are the acceptance of deposits in checking, savings, time and money market accounts; the making and servicing of personal, commercial, floor plan and student loans; and the making of construction and real estate loans. Also offered are individual retirement accounts, safe deposit boxes, wire transfers and other standard banking products and services. As part of their lending function, the Banking Subsidiaries offer credit card services.

United Bank (WV) and United Bank (VA) each maintain a trust department which acts as trustee under wills, trusts and pension and profit sharing plans, as executor and administrator of estates, and as guardian for estates of minors and incompetents, and in addition performs a variety of investment and security services. Trust services are available to customers of affiliate banks. United Bank (WV) provides services to its correspondent banks such as check clearing, safekeeping and the buying and selling of federal funds.

United Brokerage Services, Inc., a wholly-owned subsidiary of United Bank (WV), is a fully-disclosed broker/dealer and a registered Investment Advisor with the National Association of Securities Dealers, Inc., the Securities and Exchange Commission, and a member of the Securities Investor Protection Corporation. United Brokerage Services, Inc. offers a wide range of investment products as well as comprehensive financial planning and asset management services to the general public.

United Bank (WV) and United Bank (VA) are members of a network of automated teller machines known as the New York Currency Exchange (NYCE) ATM network. The NYCE is an interbank network connecting the ATMs of various financial institutions in the United States and Canada.

United through its Banking Subsidiaries offers an Internet banking service, Smart Touch Online Banking, which allows customers to perform various transactions using a computer from any location as long as they have access to the Internet and a secure browser. Specifically, customers can check personal account balances, receive information about transactions within their accounts, make transfers between accounts, stop payment on a check, and reorder checks. Customers may also pay bills online and can make payments to virtually any business or individual. Customers can set up recurring fixed payments, one-time future payments or a one-time immediate payment. Customers can also set up their own merchants, view and modify that merchant list, view pending transactions and view their bill payment history with approximately three (3) months of history.

United also offers an automated telephone banking system, Telebanc, which allows customers to access their personal account(s) or business account(s) information from a touch-tone telephone.

Lending Activities

United’s loan portfolio, net of unearned income, increased $280.6 million to $6.5 billion in 2012. The loan portfolio is comprised of commercial, real estate and consumer loans including credit card and home equity loans. Commercial real estate loans and commercial loans (not secured by real estate) increased $172.6 million or 7.51% and $164.9 million or 13.60%, respectively. Residential real estate loans decreased $53.47 million or 2.8% . Construction and consumer loans were relatively flat.

Commercial Loans

The commercial loan portfolio consists of loans to corporate borrowers primarily in small to mid-size industrial and commercial companies, as well as automobile dealers, service, retail and wholesale merchants. Collateral securing these loans includes equipment, machinery, inventory, receivables, vehicles and commercial real estate. Commercial loans are considered to contain a higher level of risk than other loan types although care is taken to minimize these risks. Numerous risk factors impact this portfolio including industry specific risks such as economy, new technology, labor rates and cyclicality, as well as customer specific factors, such as cash flow, financial structure, operating controls and asset quality. United diversifies risk within this portfolio by closely monitoring industry concentrations and portfolios to ensure that it does not exceed established lending guidelines. Diversification is intended to limit the risk of loss from any single unexpected economic event or trend.

 

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Underwriting standards require a comprehensive credit analysis and independent evaluation of virtually all larger balance commercial loans by the loan committee prior to approval.

Real Estate Loans

Commercial real estate loans consist of commercial mortgages, which generally are secured by nonresidential and multi-family residential properties. Also included in this portfolio are loans that are secured by owner-occupied real estate, but made for purposes other than the construction or purchase of real estate. Commercial real estate loans are to many of the same customers and carry similar industry risks as the commercial loan portfolio. Real estate mortgage loans to consumers are secured primarily by a first lien deed of trust. These loans are traditional one-to-four family residential mortgages. The loans generally do not exceed an 80% loan to value ratio at the loan origination date and most are at a variable rate of interest. These loans are considered to be of normal risk. Also included in the category of real estate mortgage loans are home equity loans.

As of December 31, 2012, approximately $343.3 million or 5.3% of United’s loan portfolio were real estate loans that met the regulatory definition of a high loan-to-value loan. A high loan-to-value real estate loan is defined as any loan, line of credit, or combination of credits secured by liens on or interests in real estate that equals or exceeds a certain percentage established by United’s primary regulator of the real estate’s appraised value, unless the loan has other appropriate credit support. The certain percentage varies depending on the loan type and collateral. Appropriate credit support may include mortgage insurance, readily marketable collateral, or other acceptable collateral that reduces the loan-to-value ratio below the certain percentage. Of the $343.3 million, $172.8 million is secured by first deeds of trust on residential real estate with $138.7 million of that total falling in a loan-to-value (LTV) range of 90% to 100% and $34.2 million above a LTV of 100%; $16.1 million is secured by subordinate deeds of trust on residential real estate with $9.1 million between a LTV of 90% to 100% and $7.0 million above a LTV of 100%; and $100.9 million is secured by commercial real estate generally ranging from the regulatory limit for the type of commercial real estate up to a LTV of 100%. Of the $100.9 million high loan to value commercial loans, $25.7 million are classified as Other Construction Loans and Land Loans, $32.2 million are Non-residential Secured, $8.9 million are Commercial Owner occupied properties, $19.3 million are 1-4 family Residential Secured properties, $4.3 million are Multi-family Residential Secured properties, $8.2 million are Residential Construction Loans and the remaining $226 thousand are secured by farmland.

Consumer Loans

Consumer loans are secured by automobiles, boats, recreational vehicles, and other personal property. Personal loans, student loans and unsecured credit card receivables are also included as consumer loans. United monitors the risk associated with these types of loans by monitoring such factors as portfolio growth, lending policies and economic conditions. Underwriting standards are continually evaluated and modified based upon these factors.

Underwriting Standards

United’s loan underwriting guidelines and standards are updated periodically and are presented for approval by the respective Boards of Directors of each of its subsidiary banks. The purpose of the standards and guidelines is to grant loans on a sound and collectible basis; to invest available funds in a safe, profitable manner; to serve the legitimate credit needs of the communities of United’s primary market area; and to ensure that all loan applicants receive fair and equal treatment in the lending process. It is the intent of the underwriting guidelines and standards to: minimize loan losses by carefully investigating the credit history of each applicant, verify the source of repayment and the ability of the applicant to repay, collateralize those loans in which collateral is deemed to be required, exercise care in the documentation of the application, review, approval, and origination process, and administer a comprehensive loan collection program.

United’s underwriting standards and practices are designed to originate both fixed and variable rate loan products in a manner which is consistent with the prudent banking practices applicable to these exposures. Typically, both fixed and variable rate loan underwriting practices incorporate conservative methodology, including the use of stress testing for commercial loans, and other product appropriate measures designed to

 

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provide an adequate margin of safety for the full collection of both principal and interest within contractual terms. Consumer real estate secured loans are underwritten to the initial rate, and to a higher assumed rate commensurate with normal market conditions. Therefore, it is the intent of United’s underwriting standards to insure that adequate primary repayment capacity exists to address both future increases in interest rates, and fluctuations in the underlying cash flows available for repayment. Historically, and at December 31, 2012, United has not offered “teaser rate” loans, and had no loan portfolio products which were specifically designed for “sub-prime” borrowers. Management defines “sub-prime” borrowers as consumer borrowers with a credit score of less than 660.

The above guidelines are adhered to and subject to the experience, background and personal judgment of the loan officer assigned to the loan application. A loan officer may grant, with justification, a loan with variances from the underwriting guidelines and standards. However, the loan officer may not exceed his or her respective lending authority without obtaining the prior, proper approval as outlined in United’s loan policy from a superior, a regional supervisor or market president (dual approval per policy) or the Loan Committee, whichever is deemed appropriate for the nature of the variance.

Loan Concentrations

United has commercial loans, including real estate and owner-occupied, income-producing real estate and land development loans, of approximately $4.3 billion as of December 31, 2012. These loans are primarily secured by real estate located in West Virginia, southeastern Ohio, southwestern Pennsylvania, Virginia, Maryland and the District of Columbia. United categorizes these commercial loans by industry according to the North American Industry Classification System (NAICS) to monitor the portfolio for possible concentrations in one or more industries. As of the most recent fiscal year-end, United has one such industry classifications that exceeded 10% of total loans. As of December 31, 2012, approximately $1.8 billion or 27.9% of United’s total loan portfolio were for the purpose of renting or leasing real estate. The loans were originated by United’s subsidiary banks using underwriting standards as set forth by management. United’s loan administration policies are focused on the risk characteristics of the loan portfolio, including commercial real estate loans, in terms of loan approval and credit quality. It is the opinion of management that these loans do not pose any unusual risks and that adequate consideration has been given to the above loans in establishing the allowance for loan losses.

Secondary Markets

United generally originates loans within the primary market area of its banking subsidiaries. United may from time to time make loans to borrowers and/or on properties outside of its primary market area as an accommodation to its customers. Processing of all loans is centralized in the Charleston, West Virginia office. As of December 31, 2012, the balance of mortgage loans being serviced by United for others was insignificant.

United Bank (WV) engages in the origination and acquisition of residential real estate loans for resale. These loans are for single-family, owner-occupied residences with either adjustable or fixed rate terms, with a variety of maturities tailored to effectively serve its markets. United Bank (WV)’s originations are predominately in its West Virginia markets. Mortgage loan originations are generally intended to be sold in the secondary market on a best efforts basis.

During 2012, United originated $147.0 million of real estate loans for sale in the secondary market and sold $133.1 million of loans designated as held for sale in the secondary market. Net gains on the sales of these loans during 2012 were $2.47 million.

The principal sources of revenue from United’s mortgage banking business are: (i) loan origination fees; (ii) gains or losses from the sale of loans; and (iii) interest earned on mortgage loans during the period that they are held by United pending sale, if any.

 

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Investment Activities

United’s investment policy stresses the management of the investment securities portfolio, which includes both securities held to maturity and securities available for sale, to maximize return over the long-term in a manner that is consistent with good banking practices and relative safety of principal. United currently does not engage in trading account activity. The Asset/Liability Management Committee of United is responsible for the coordination and evaluation of the investment portfolio.

Sources of funds for investment activities include “core deposits”. Core deposits include certain demand deposits, statement and special savings and NOW accounts. These deposits are relatively stable and they are the lowest cost source of funds available to United. Short-term borrowings have also been a significant source of funds. These include federal funds purchased, securities sold under agreements to repurchase and FHLB borrowings. Repurchase agreements represent funds that are generally obtained as the result of a competitive bidding process.

United’s investment portfolio is comprised of a significant amount of U.S. Treasury securities and obligations of U.S. Agencies and Corporations as well as mortgage-backed securities. Obligations of States and Political Subdivisions are comprised of primarily “AAA” rated municipal securities. Interest and dividends on securities for the years of 2012, 2011, and 2010 were $20.9 million, $27.1 million, and $39.3 million, respectively. For the years of 2012, 2011 and 2010, United recognized net losses on securities of $6.9 million, $18.8 million and $7.8 million, respectively. In the year 2012, United recognized other-than-temporary impairment (OTTI) charges of $7.4 million consisting primarily of $6.0 million on pooled trust preferred collateralized debt obligations (TRUP CDOs) and $1.4 million on collateralized mortgage obligations (CMOs), which are not expected to be sold. In the year 2011, United recognized other-than-temporary impairment (OTTI) charges of $20.4 million consisting primarily of $17.3 million on pooled trust preferred collateralized debt obligations (TRUP CDOs) and $3.2 million on collateralized mortgage obligations (CMOs).

Competition

United faces a high degree of competition in all of the markets it serves. United considers all of West Virginia to be included in its market area. This area includes the five largest West Virginia Metropolitan Statistical Areas (MSA): the Parkersburg MSA, the Charleston MSA, the Huntington MSA, the Wheeling MSA and the Weirton MSA. United serves the Ohio counties of Lawrence, Belmont, Jefferson and Washington and Fayette county in Pennsylvania primarily because of their close proximity to the Ohio and Pennsylvania borders and United banking offices located in those counties or in nearby West Virginia. United’s Virginia markets include the Maryland, northern Virginia and Washington, D.C. MSA, the Winchester MSA, the Harrisonburg MSA, and the Charlottesville MSA. United considers all of the above locations to be the primary market area for the business of its banking subsidiaries.

With prior regulatory approval, West Virginia and Virginia banks are permitted unlimited branch banking throughout each state. In addition, interstate acquisitions of and by West Virginia and Virginia banks and bank holding companies are permissible on a reciprocal basis, as well as reciprocal interstate acquisitions by thrift institutions. These conditions serve to intensify competition within United’s market.

As of December 31, 2012, there were 68 bank holding companies operating in the State of West Virginia registered with the Federal Reserve System and the West Virginia Board of Banking and Financial Institutions and 101 bank holding companies operating in the Commonwealth of Virginia registered with the Federal Reserve System and the Virginia Corporation Commission. These holding companies are headquartered in various states and control banks throughout West Virginia and Virginia, which compete for business as well as for the acquisition of additional banks.

 

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Economic Characteristics of Primary Market Area

As of December 2012, West Virginia’s seasonally adjusted unemployment rate was 7.5% according to information from West Virginia’s Bureau of Employment Programs. The national unemployment rate was 7.8%. The number of unemployed state residents rose 1,100 to 59,700 for the month of December as compared to the month of November. Total unemployment was down 2,600 over the year of 2012. The state unemployment rate of 7.5% for December 2012 was an increase from a rate of 7.3% for the month of November 2012 but a decline from 7.8% for December 2011. West Virginia’s not seasonally adjusted unemployment rate was 7.4% in December 2012. West Virginia is expected to post modest job growth in 2013 according to the latest forecast from the West Virginia University College of Business and Economics. Overall, the state is likely to continue to expand during the next five years, assuming the national economy avoids recession. The forecast calls for West Virginia’s job growth to average 1.2% per year during the 2012-2017 period, sending the unemployment rate down to 5.7% by the end of the forecast period. Job losses in the energy sector are forecast to continue through the beginning of 2013 and then level off. All told, employment in the sector is expected to end down 1.5% on an annual basis through 2017. Gains in other sectors, however, are predicted to make up the difference. Employment in the professional and business services sector is predicted to rise by 15,000 jobs over the next five years. Construction jobs are forecast to rise by more than 5.1% per year, as residential housing starts to rebound. Healthcare sector employment growth is expected to continue to be strong as the state’s older population increases over the forecast period. Employment in the sector is projected to rise by an average annual rate of 2.4% by 2017. The leisure and hospitality sector will see short term employment gains. Over the five-year forecast window, employment in this sector is expected to fall slightly, ending down a fraction of a percent annually through 2017.

United’s Virginia subsidiary banking offices are located in markets that historically have reflected low unemployment rate levels. According to information available from the Virginia Employment Commission, Virginia’s seasonally adjusted unemployment rate decreased 0.1 percentage point for the month of December 2012 to 5.5%, the third consecutive monthly decline, and was 0.6 percentage point below the December 2011 rate of 6.1%. December’s seasonally adjusted unemployment rate of 5.5% is the lowest in four years when the December 2008 rate was 5.3%. The labor force expanded for the fourth consecutive month, as the additional people that reported working exceeded the drop in the number of unemployed. Virginia’s seasonally adjusted unemployment rate is below the December national rate of 7.8%, which was unchanged from November. Virginia’s unadjusted unemployment rate increased 0.1 percentage point in December to 5.4%, but was 0.5 percentage point below the December 2011 rate. The number of unemployed increased by 4,197, or 1.8%, while the labor force contracted by 15,054, as household employment declined by 19,251. Virginia’s not seasonally adjusted unemployment rate continues below the national unadjusted rate, which increased to 7.6% in December from 7.4% in November. Economists are predicting that overall employment is expected to modestly increase by 1.0% and 1.3% in 2013 and 2014, respectively. Employment in the professional and business services sector is forecast to increase by 1.8% in 2013. Construction employment is expected to grow by 0.7% in 2013, which would mark the first year of growth in this sector since 2006. Employment in trade, transportation and utilities is expected to increase by 0.9% in 2013.

Regulation and Supervision

United, as a bank holding company, is subject to the restrictions of the Bank Holding Company Act of 1956, as amended, and is registered pursuant to its provisions. As such, United is subject to the reporting requirements of and examination by the Board of Governors of the Federal Reserve System (Board of Governors).

The Bank Holding Company Act prohibits the acquisition by a bank holding company of direct or indirect ownership of more than five percent of the voting shares of any bank within the United States without prior approval of the Board of Governors. With certain exceptions, a bank holding company also is prohibited from acquiring direct or indirect ownership or control of more than five percent of the voting shares of any company which is not a bank, and from engaging directly or indirectly in business unrelated to the business of banking, or managing or controlling banks.

The Board of Governors, in its Regulation Y, permits bank holding companies to engage in preapproved non-banking activities closely related to banking or managing or controlling banks. Approval of the Board of

 

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Governors is necessary to engage in certain other non-banking activities which are not preapproved or to make acquisitions of corporations engaging in these activities. In addition, on a case-by-case basis, the Board of Governors may approve other non-banking activities.

On July 30, 2002, the President of the United States signed into law the Sarbanes-Oxley Act of 2002, a broad accounting, auditing, disclosure and corporate governance reform law. The legislation was passed in an effort to increase corporate responsibility by improving the accuracy and reliability of corporate disclosures pursuant to the securities laws and to allow stockholders to more easily and efficiently monitor the performance of companies and directors.

On October 3, 2008, the Emergency Economic Stabilization Act of 2008 (the EESA) was signed into law. EESA temporarily raised the limit on federal deposit insurance coverage from $100,000 to $250,000 per depositor. Separate from EESA, in October 2008, the Federal Deposit Insurance Corporation (FDIC) also announced the Temporary Liquidity Guarantee Program (TLGP) to guarantee eligible newly issued senior unsecured debt by FDIC-insured institutions through October 31, 2009. Under one component of this program, the Transaction Account Guaranty Program (TAGP), the FDIC temporarily provided a full guarantee on all noninterest-bearing transaction accounts held by any depositor, regardless of dollar amount, through December 31, 2009. The $250,000 deposit insurance coverage limit was scheduled to return to $100,000 on January 1, 2010, but was extended by congressional action until December 31, 2013. The TLGP expired on December 31, 2010 while the TAGP expired on June 30, 2010. Separate temporary unlimited coverage for noninterest-bearing transaction accounts became effective on December 31, 2010 and expired on December 31, 2012.

On July 21, 2010, President Obama signed the Dodd-Frank Wall Street Reform and Consumer Protection Act (the Dodd-Frank Act), into law. The Dodd-Frank Act significantly changes regulation of financial institutions and the financial services industry. The Dodd-Frank Act includes, among other things, provisions creating a Financial Services Oversight Council to identify emerging systemic risks and improve interagency cooperation; centralizing the responsibility for consumer financial protection by creating a new agency, the Consumer Financial Protection Bureau, which will be responsible for implementing, examining and enforcing compliance with federal consumer financial laws; permanently raising the current standard maximum deposit insurance amount to $250,000; establishing strengthened capital standards for banks, and disallowing trust preferred securities as qualifying for Tier 1 capital (subject to certain grandfather provisions for existing trust preferred securities); establishing new minimum mortgage underwriting standards; granting the Federal Reserve Board the power to regulate debit card interchange fees; and implementing corporate governance changes. Many aspects of the Dodd-Frank Act are subject to rulemaking that will take effect over several years, thus making it difficult to assess all the effects the Dodd-Frank Act will have on the financial industry, including United, at this time.

The following provisions of the Dodd-Frank Act will be applicable to United if United successfully completes the acquisition of Virginia Commerce Bancorp, Inc. and the assets of United’s Banking Subsidiaries exceed $10 billion:

• The Dodd-Frank Act created a new independent supervisory body, the Consumer Financial Protection Bureau (the “CFPB”) that is the primary regulator for federal consumer financial statutes. The Dodd-Frank Act also provided that for banks with total assets of more than $10 billion, the CFPB would have exclusive or primary authority to examine those banks for, and enforce compliance with the federal consumer financial laws. These laws may affect the ability of United to collect outstanding balances.

• The Durbin Amendment required the Federal Reserve to establish a cap on the rate merchants pay banks for electronic clearing of debit transactions (i.e. the interchange rate). The Federal Reserve issued final rules, effective October 1, 2011, for establishing standards, including a cap, for debit card interchange fees and prohibiting network exclusivity arrangements and routing restrictions. The final rule established standards for assessing whether debit card interchange fees received by debit card issuers were reasonable and proportional to the costs incurred by issuers for electronic debit transactions. Under the final rule, the maximum permissible interchange fee that an issuer may receive for an electronic debit transaction is the sum of 21 cents per transaction, a 1 cent fraud prevention adjustment, and 5 basis points multiplied by the value of the transaction.

 

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Following completion of the acquisition of Virginia Commerce Bancorp, Inc., United will be subject to the cap on the interchange fees under the Durbin Amendment which will result in lower debit card interchange fees.

• In June 2011, the banking agencies issued proposed guidance which described the manner in which stress testing should be employed as an integral component of risk management and as a component of capital and liquidity planning by certain banking organizations. Specifically, this proposed guidance applies to banking organizations with total consolidated assets of more than $10 billion and sets forth expectations that those banking organizations will conduct both regular periodic stress tests and ad hoc stress tests in response to emerging risks.

• On April 1, 2011, the FDIC’s revised deposit insurance assessment base changed from total domestic deposits to average total assets, minus average tangible equity. In addition, the Dodd-Frank Act created a two scorecard system, one for large depository institutions that have more than $10 billion in assets and another for highly complex institutions that have over $50 billion in assets. See details under the heading “Deposit Insurance” below.

As a bank holding company doing business in West Virginia, United is also subject to regulation and examination by the West Virginia Board of Banking and Financial Institutions (the West Virginia Banking Board) and must submit annual reports to the West Virginia Banking Board. Further, any acquisition application that United must submit to the Board of Governors must also be submitted to the West Virginia Banking Board for approval.

United is also under the jurisdiction of the SEC and certain state securities commissions in regard to the offering and sale of its securities. Generally, United must file under the Securities Exchange Act of 1933, as amended, to issue additional shares of its common stock. United is also registered under and is subject to the regulatory and disclosure requirements of the Securities Exchange Act of 1934, as amended, as administered by the SEC. United is listed on the NASDAQ Global Select Market under the quotation symbol “UBSI,” and is subject to the rules of the NASDAQ for listed companies.

United Bank (WV) and United Bank (VA), as state member banks, are subject to supervision, examination and regulation by the Federal Reserve System, and as such, are subject to applicable provisions of the Federal Reserve Act and regulations issued thereunder. Each Banking Subsidiary is subject to regulation by its state banking authority.

Deposit Insurance

The deposits of United’s Banking Subsidiaries are insured by the FDIC to the extent provided by law. Accordingly, these Banking Subsidiaries are also subject to regulation by the FDIC. The Banking Subsidiaries are subject to deposit insurance assessments to maintain the Deposit Insurance Fund (DIF) of the FDIC. The FDIC utilizes a risk-based assessment system that imposes insurance premiums based upon a risk matrix that takes into account a bank’s capital level and supervisory rating (CAMELS rating). The risk matrix utilizes four risk categories which are distinguished by capital levels and supervisory ratings.

In December 2008, the FDIC issued a final rule that raised assessment rates for the first quarter of 2009 by a uniform 7 basis points, resulting in a range between 12 and 50 basis points, depending upon the risk category. In March 2009, the FDIC issued final rules to further change the assessment system beginning in the second quarter of 2009. The changes commenced April 1, 2009 to ensure that riskier institutions bear a greater share of the increase in assessments, and are subsidized to a lesser degree by less risky institutions.

In May 2009, the FDIC issued a final rule which levied a special assessment applicable to all insured depository institutions totaling 5 basis points of each institution’s total assets less Tier 1 capital as of June 30, 2009, not to exceed 10 basis points of domestic deposits. The special assessment was part of the FDIC’s efforts to rebuild the DIF. United’s deposit insurance expense during 2009 included $3.6 million recognized in the second quarter related to the special assessment.

 

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In November 2009, the FDIC issued a rule that required all insured depository institutions, with limited exceptions, to prepay their estimated quarterly risk-based assessments for the fourth quarter of 2009 and for all of 2010, 2011 and 2012. The FDIC also adopted a uniform three-basis point increase in assessment rates effective on January 1, 2011; however, as further discussed below, the FDIC has elected to forego this increase under a new DIF restoration plan adopted in October 2010.

In December 2009, United paid $36.4 million in prepaid risk-based assessments, of which $17.9 million is remaining and included in other assets in the accompanying Consolidated Balance Sheet as of December 31, 2012.

In October 2010, the FDIC adopted a new DIF restoration plan to ensure that the fund reserve ratio reaches 1.35% by September 30, 2020, as required by the Dodd-Frank Act. Under the new restoration plan, the FDIC will update its loss and income projections at least semi-annually for the fund and, if needed, will increase or decrease assessment rates, following notice-and-comment rulemaking if required.

In November 2010, the FDIC issued a final rule to implement provisions of the Dodd-Frank Act that provide for temporary unlimited coverage for non-interest-bearing transaction accounts. The separate coverage for non-interest-bearing transaction accounts became effective on December 31, 2010 and terminated on December 31, 2012.

In April 2011, the FDIC implemented rulemaking under the Dodd-Frank Act to reform the deposit insurance assessment system. The final rule redefined the assessment base used for calculating deposit insurance assessments. Specifically, the rule bases assessments on an institution’s total assets less tangible capital, as opposed to total deposits. Since the new base is larger than the prior base, the FDIC also proposed lowering assessment rates so that the rules would not significantly alter the total amount of revenue collected from the industry. The new assessment scale ranges from 2.5 basis points for the least risky institutions to 45 basis points for the riskiest.

United’s FDIC insurance expense totaled $6.1 million, $8.5 million and $9.7 million in 2012, 2011 and 2010, respectively.

Capital Requirements

As a bank holding company, United is subject to consolidated regulatory capital requirements administered by the Federal Reserve Board. United’s Banking Subsidiaries are also subject to the capital requirements administered by the Federal Reserve Board. The Federal Reserve Board’s risk-based capital guidelines are based upon the 1988 capital accord (Basel I) of the Basel Committee on Banking Supervision (the Basel Committee). The requirements are intended to ensure that banking organizations have adequate capital given the risk levels of assets and off-balance sheet financial instruments. Under the requirements, banking organizations are required to maintain minimum ratios for Tier 1 capital and total capital to risk-weighted assets (including certain off-balance sheet items, such as letters of credit). For purposes of calculating the ratios, a banking organization’s assets and some of its specified off-balance sheet commitments and obligations are assigned to various risk categories.

United and its Banking Subsidiaries are currently required to maintain Tier 1 capital and “total capital” (the sum of Tier 1 and Tier 2 capital) equal to at least 4.0% and 8.0%, respectively, of its total risk-weighted assets (including various off-balance-sheet items, such as letters of credit). In addition, for a depository institution to be considered “well capitalized” under the regulatory framework for prompt corrective action, its Tier 1 and total capital ratios must be at least 6.0% and 10.0% on a risk-adjusted basis, respectively. Bank holding companies and banks are also required to comply with minimum leverage ratio requirements. The leverage ratio is the ratio of a banking organization’s Tier 1 capital to its total adjusted quarterly average assets (as defined for regulatory purposes). The requirements necessitate a minimum leverage ratio of 4.0% for United and its banking subsidiaries. In addition, for a depository institution to be considered “well capitalized” under the regulatory framework for prompt corrective action, its leverage ratio must be at least 5.0%.

 

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In 2004, the Basel Committee published a new capital accord (Basel II) to replace Basel I. A definitive final rule for implementing the advanced approaches of Basel II in the United States, which applies only to certain large or internationally active banking organizations, or “core banks” – defined as those with consolidated total assets of $250 billion or more or consolidated on-balance sheet foreign exposures of $10 billion or more, became effective as of April 1, 2008. United and its banking subsidiaries were not required to comply with the advanced approaches of Basel II.

On June 7, 2012, the federal bank regulatory agencies issued a series of proposed rules that would revise their risk-based and leverage capital requirements and their method for calculating risk-weighted assets to make them consistent with the agreements that were reached by the Basel Committee on Banking Supervision in “Basel III: A Global Regulatory Framework for More Resilient Banks and Banking Systems” (“Basel III”) and certain provisions of the Dodd-Frank Act. The proposed rules would apply to all depository institutions, top-tier bank holding companies with total consolidated assets of $500 million or more, and top-tier savings and loan holding companies (“banking organizations”). Among other things, the proposed rules establish a new common equity tier 1 minimum capital requirement of 4.5% and a higher minimum tier 1 capital requirement of 6.0% and assign higher risk weightings (150%) to exposures that are more than 90 days past due or are on nonaccrual status and certain commercial real estate facilities that finance the acquisition, development or construction of real property. Additionally, the U.S. implementation of Basel III contemplates that, for banking organizations with less than $15 billion in assets, the ability to treat trust preferred securities as tier 1 capital would be phased out over a ten-year period. The proposed rules also required unrealized gains and losses on certain securities holdings to be included for purposes of calculating regulatory capital requirements. The proposed rules limit a banking organization’s capital distributions and certain discretionary bonus payments if the banking organization does not hold a “capital conservation buffer” consisting of a specified amount of common equity tier 1 capital in addition to the amount necessary to meet its minimum risk-based capital requirements. The proposed rules indicated that the final rule would become effective on January 1, 2013, and the changes set forth in the final rules will be phased in from January 1, 2013 through January 1, 2019. However, the agencies have recently indicated that, due to the volume of public comments received, the final rule would not be in effect on January 1, 2013.

When fully phased in on January 1, 2019, Basel III requires banks to maintain the following new standards and introduces a new capital measure “Common Equity Tier 1”, or “CET1”. Basel III increases the CET1 to risk-weighted assets to 4.5%, and introduces a capital conservation buffer of an additional 2.5% of common equity to risk-weighted assets, raising the target CET1 to risk-weighted assets ratio to 7%. It requires banks to maintain a minimum ratio of Tier 1 capital to risk weighted assets of at least 6.0%, plus the capital conservation buffer effectively resulting in Tier 1 capital ratio of 8.5%. Basel III increases the minimum total capital ratio to 8.0% plus the capital conservation buffer, increasing the minimum total capital ratio to 10.5%. Basel III also introduces a non-risk adjusted tier 1 leverage ratio of 3%, based on a measure of total exposure rather than total assets, and new liquidity standards.

Failure to meet statutorily mandated capital guidelines or more restrictive ratios separately established for a financial institution could subject United to a variety of enforcement remedies, including issuance of a capital directive, the termination of deposit insurance by the FDIC, a prohibition on accepting or renewing brokered deposits, limitations on the rates of interest that the institution may pay on its deposits and other restrictions on its business. As described above, significant additional restrictions can be imposed on United if it would fail to meet applicable capital requirements.

 

Item 1A. RISK FACTORS

United is subject to risks inherent to the Company’s business. The material risks and uncertainties that management believes affect the Company are described below. Before making an investment decision, you should carefully consider the risks and uncertainties described below together with all of the other information included or incorporated by reference in this report. The risks and uncertainties described below are not the only ones facing the Company. Additional risks and uncertainties that management is not aware of or focused on or that management currently deems immaterial may also impair United’s business operations. This report is qualified in

 

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its entirety by these risk factors.

United’s business may be adversely affected by conditions in financial markets and economic conditions generally

United’s business is concentrated in the West Virginia, Northern Virginia and Shenandoah Valley Virginia market areas. As a result, its financial condition, results of operations and cash flows are subject to changes if there are changes in the economic conditions in these areas. A prolonged period of economic recession or other adverse economic conditions in these areas could have a negative impact on United. A significant decline in general economic conditions nationally, caused by inflation, recession, acts of terrorism, outbreak of hostilities or other international or domestic occurrences, unemployment, changes in securities markets, declines in the housing market, a tightening credit environment or other factors could impact these local economic conditions and, in turn, have a material adverse effect on United’s financial condition and results of operations which occurred during this past year.

Economic conditions began deteriorating during the latter half of 2007 and continued throughout 2012. Business activity across a wide range of industries and regions has been greatly reduced and many businesses are experiencing serious difficulties due to a lack of consumer spending and the lack of liquidity in credit markets. Unemployment has also increased significantly. As a result of this economic crisis, many lending institutions, including United, have experienced declines in the performance of their loans, including construction, land development and land loans, commercial loans and consumer loans. Moreover, competition among depository institutions for deposits and quality loans has increased significantly. In addition, the values of real estate collateral supporting many commercial loans and home mortgages have declined and may continue to decline. Overall, the general business environment has had an adverse effect on United’s business, and there can be no assurance that the environment will improve in the near term. Accordingly, until conditions improve, United’s business, financial condition and results of operations could continue to be adversely affected.

The value of certain investment securities is volatile and future declines or other-than-temporary impairments could have a materially adverse affect on future earnings and regulatory capital

Continued volatility in the fair value for certain investment securities, whether caused by changes in market conditions, interest rates, credit risk of the issuer, the expected yield of the security, or actual defaults in the portfolio could result in significant fluctuations in the value of the securities. This could have a material adverse impact on United’s accumulated other comprehensive income and shareholders’ equity depending on the direction of the fluctuations. Furthermore, future downgrades or defaults in these securities could result in future classifications as other-than-temporarily impaired. This could have a material impact on United’s future earnings, although the impact on shareholders’ equity will be offset by any amount already included in other comprehensive income for securities that were temporarily impaired.

There are no assurances as to adequacy of the allowance for credit losses

United believes that its allowance for credit losses is maintained at a level appropriate to absorb any probable losses in its loan portfolio given the current information known to management.

Management establishes the allowance based upon many factors, including, but not limited to:

 

   

historical loan loss experience;

 

   

industry diversification of the commercial loan portfolio;

 

   

the effect of changes in the local real estate market on collateral values;

 

   

the amount of nonperforming loans and related collateral security;

 

   

current economic conditions that may affect the borrower’s ability to pay and value of collateral;

 

   

volume, growth and composition of the loan portfolio; and

 

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other factors management believes are relevant.

These determinations are based upon estimates that are inherently subjective, and their accuracy depends on the outcome of future events, so ultimate losses may differ from current estimates. Changes in economic, operating and other conditions, including changes in interest rates, that are generally beyond United’s control, can affect the Company’s credit losses. With unfavorable economic conditions since the end of 2007, United’s credit losses have been on the rise. If the economic conditions do not improve or continue to decline, United’s credit losses could continue to increase, perhaps significantly. As a result, such losses could exceed United’s current allowance estimates. United can provide no assurance that its allowance is sufficient to cover actual credit losses should such losses differ substantially from our current estimates.

In addition, federal and state regulators, as an integral part of their respective supervisory functions, periodically review United’s allowance for credit losses.

Changes in interest rates may adversely affect United’s business

United’s earnings, like most financial institutions, are significantly dependent on its net interest income. Net interest income is the difference between the interest income United earns on loans and other assets which earn interest and the interest expense incurred to fund those assets, such as on savings deposits and borrowed money. Therefore, changes in general market interest rates, such as a change in the monetary policy of the Board of Governors of the Federal Reserve System or otherwise beyond those which are contemplated by United’s interest rate risk model and policy, could have an effect on net interest income. For more information concerning United’s interest rate risk model and policy, see the discussion under the caption “Quantitative and Qualitative Disclosures About Market Risk” under Item 7A.

United is subject to credit risk

There are risks inherent in making any loan, including risks with respect to the period of time over which the loan may be repaid, risks resulting from changes in economic and industry conditions, risks inherent in dealing with individual borrowers and risks resulting from uncertainties as to the future value of collateral. United seeks to mitigate the risk inherent in its loan portfolio by adhering to prudent loan approval practices. Although United believes that its loan approval criteria are appropriate for the various kinds of loans the Company makes, United may incur losses on loans that meet our loan approval criteria. Due to recent economic conditions affecting the real estate market, many lending institutions, including United, have experienced substantial declines in the performance of their loans, including construction, land development and land loans. The value of real estate collateral supporting many construction and land development loans, land loans, commercial and multi-family loans have declined and may continue to decline. United cannot assure that the economic conditions affecting customers and the quality of the loan portfolio will improve and thus, United’s financial condition and results of operations could continue to be adversely affected.

Loss of United’s Chief Executive Officer or other executive officers could adversely affect its business

United’s success is dependent upon the continued service and skills of its executive officers and senior management. If United loses the services of these key personnel, it could have a negative impact on United’s business because of their skills, years of industry experience and the difficulty of promptly finding qualified replacement personnel. The services of Richard M. Adams, United’s Chief Executive Officer, would be particularly difficult to replace. United and Mr. Adams are parties to an Employment Agreement providing for his continued employment by United through March 31, 2016.

United operates in a highly competitive market

United faces a high degree of competition in all of the markets it serves. United considers all of West Virginia to be included in its market area. This area includes the five largest West Virginia Metropolitan Statistical Areas (MSA): the Parkersburg MSA, the Charleston MSA, the Huntington MSA, the Wheeling MSA and the Weirton MSA. United serves the Ohio counties of Lawrence, Belmont, Jefferson and Washington and Fayette county in Pennsylvania primarily because of their close proximity to the Ohio and Pennsylvania borders

 

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and United banking offices located in those counties or in nearby West Virginia. United’s Virginia markets include the Maryland, northern Virginia and Washington, D.C. MSA, the Winchester MSA, the Harrisonburg MSA, and the Charlottesville MSA. United considers all of the above locations to be the primary market area for the business of its banking subsidiaries.

There is a risk that aggressive competition could result in United controlling a smaller share of these markets. A decline in market share could lead to a decline in net income which would have a negative impact on stockholder value.

Dividend payments by United’s subsidiaries to United and by United to its shareholders can be restricted

The declaration and payment of future cash dividends will depend on, among other things, United’s earnings, the general economic and regulatory climate, United’s liquidity and capital requirements, and other factors deemed relevant by United’s board of directors. Federal Reserve Board policy limits the payment of cash dividends by bank holding companies, without regulatory approval, and requires that a holding company serve as a source of strength to its banking subsidiaries.

United’s principal source of funds to pay dividends on its common stock is cash dividends from its subsidiaries. The payment of these dividends by its subsidiaries is also restricted by federal and state banking laws and regulations. As of December 31, 2012, an aggregate of approximately $27.6 million and $16.2 million was available for dividend payments from United Bank (WV) and United Bank (VA), respectively, to United without regulatory approval.

United may be adversely affected by the soundness of other financial institutions

Financial services institutions are interrelated as a result of trading, clearing, counterparty, or other relationships. United has exposure to many different industries and counterparties, and routinely executes transactions with counterparties in the financial services industry, including brokers and dealers, commercial banks, investment banks, mutual and hedge funds, or other institutional clients. Recent defaults by financial services institutions, and even rumors or questions about a financial institution or the financial services industry in general, have led to marketwide liquidity problems and could lead to losses or defaults by United or other institutions. Any such losses could adversely affect United’s financial condition or results of operations.

United is subject to extensive government regulation and supervision

United is subject to extensive federal and state regulation, supervision and examination. Banking regulations are primarily intended to protect depositors’ funds, federal deposit insurance funds and the banking system as a whole, not shareholders. These regulations affect United’s lending practices, capital structure, investment practices, dividend policy, operations and growth, among other things. These regulations also impose obligations to maintain appropriate policies, procedures and controls, among other things, to detect, prevent and report money laundering and terrorist financing and to verify the identities of United’s customers. Congress and federal regulatory agencies continually review banking laws, regulations and policies for possible changes. Changes to statutes, regulations or regulatory policies, including changes in interpretation or implementation of statutes, regulations or policies, could affect United in substantial and unpredictable ways. Such changes could subject the Company to additional costs, limit the types of financial services and products United may offer and/or increase the ability of nonbanks to offer competing financial services and products, among other things. United expends substantial effort and incurs costs to improve its systems, audit capabilities, staffing and training in order to satisfy regulatory requirements, but the regulatory authorities may determine that such efforts are insufficient. Failure to comply with relevant laws, regulations or policies could result in sanctions by regulatory agencies, civil money penalties and/or reputation damage, which could have a material adverse effect on United’s business, financial condition and results of operations. While the Company has policies and procedures designed to prevent any such violations, there can be no assurance that such violations will not occur. As an example, the FDIC imposed higher assessments on deposits in 2009 based on the adequacy of the deposit insurance fund, conditions of the banking industry and as a result of changes in specific programs. The Dodd-Frank Act changed the FDIC’s assessment base for federal deposit insurance from the amount of insured deposits to consolidated average assets

 

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less tangible capital. It is possible that United’s deposit insurance premiums could increase even more in the future under this new requirement.

In the normal course of business, United and its subsidiaries are routinely subject to examinations and challenges from federal and state tax authorities regarding the amount of taxes due in connection with investments that the Company has made and the businesses in which United has engaged. Recently, federal and state taxing authorities have become increasingly aggressive in challenging tax positions taken by financial institutions. These tax positions may relate to tax compliance, sales and use, franchise, gross receipts, payroll, property and income tax issues, including tax base, apportionment and tax credit planning. The challenges made by tax authorities may result in adjustments to the timing or amount of taxable income or deductions or the allocation of income among tax jurisdictions. If any such challenges are made and are not resolved in the Company’s favor, they could have a material adverse effect on United’s financial condition and results of operations.

United may elect or be compelled to seek additional capital in the future, but capital may not be available when it is needed

United is required by federal and state regulatory authorities to maintain adequate levels of capital to support the Company’s operations. In addition, United may elect to raise additional capital to support the Company’s business or to finance acquisitions, if any, or United may otherwise elect to raise additional capital. In that regard, a number of financial institutions have recently raised considerable amounts of capital as a result of deterioration in their results of operations and financial condition arising from the turmoil in the mortgage loan market, deteriorating economic conditions, declines in real estate values and other factors, which may diminish United’s ability to raise additional capital.

United’s ability to raise additional capital, if needed, will depend on conditions in the capital markets, economic conditions and a number of other factors, many of which are outside the Company’s control, and on United’s financial performance. Accordingly, United cannot be assured of its ability to raise additional capital if needed or on terms acceptable to the Company. If United cannot raise additional capital when needed, it may have a material adverse effect on the Company’s financial condition, results of operations and prospects.

United’s information systems may experience an interruption or breach in security

United relies heavily on communications and information systems to conduct its business. In addition, as part of its business, United collects, processes and retains sensitive and confidential client and customer information. United’s facilities and systems, and those of our third party service providers, may be vulnerable to security breaches, acts of vandalism, computer viruses, misplaced or lost data, programming and/or human errors, or other similar events. Any failure, interruption or breach in security of these systems could result in failures or disruptions in the Company’s customer relationship management, general ledger, deposit, loan and other systems. While United has policies and procedures designed to prevent or limit the effect of the failure, interruption or security breach of its information systems, there can be no assurance that any such failures, interruptions or security breaches will not occur or, if they do occur, that they will be adequately addressed. The occurrence of any failures, interruptions or security breaches of the Company’s information systems could damage United’s reputation, result in a loss of customer business, subject United to additional regulatory scrutiny, or expose the Company to civil litigation and possible financial liability, any of which could have a material adverse effect on United’s financial condition and results of operations.

The Dodd-Frank Act may adversely affect United’s business, financial condition and results of operations.

The Dodd-Frank Act significantly changes regulation of financial institutions and the financial services industry. The Dodd-Frank Act includes, among other things, provisions creating a Financial Services Oversight Council to identify emerging systemic risks and improve interagency cooperation; centralizing the responsibility for consumer financial protection by creating a new agency, the Consumer Financial Protection Bureau, which will be responsible for implementing, examining and enforcing compliance with federal consumer financial laws; permanently raising the current standard maximum deposit insurance amount to $250,000; establishing

 

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strengthened capital standards for banks, and disallowing trust preferred securities as qualifying for Tier 1 capital (subject to certain grandfather provisions for existing trust preferred securities); establishing new minimum mortgage underwriting standards; granting the Federal Reserve Board the power to regulate debit card interchange fees; and implementing corporate governance changes. Many aspects of the Dodd-Frank Act are subject to rulemaking that will take effect over several years, thus making it difficult to assess all the effects the Dodd-Frank Act will have on the financial industry, including United, at this time. However, it is possible that United’s interest expense could increase and deposit insurance premiums could change, and steps may need to be taken to increase qualifying capital. United expects that operating and compliance costs will increase and could adversely affect its financial condition and results of operations.

The rules effecting debit card interchange fees under the Durbin Amendment will negatively impact our electronic banking income.

The Durbin Amendment required the Federal Reserve to establish a cap on the rate merchants pay banks for electronic clearing of debit transactions (i.e. the interchange rate). The Federal Reserve issued final rules, effective October 1, 2011, for establishing standards, including a cap, for debit card interchange fees and prohibiting network exclusivity arrangements and routing restrictions. The final rule established standards for assessing whether debit card interchange fees received by debit card issuers were reasonable and proportional to the costs incurred by issuers for electronic debit transactions. Under the final rule, the maximum permissible interchange fee that an issuer may receive for an electronic debit transaction is the sum of 21 cents per transaction, a 1 cent fraud prevention adjustment, and 5 basis points multiplied by the value of the transaction. Following completion of the acquisition of Virginia Commerce Bancorp, Inc., United will be subject to the cap on the interchange fees under the Durbin Amendment which will result in lower debit card interchange fees.

The short-term and long-term impact of the changing regulatory capital requirements and anticipated new capital rules is uncertain.

On June 7, 2012, the Federal Reserve, FDIC and OCC approved proposed rules that would substantially amend the regulatory risk-based capital rules applicable to the Company and the Bank. The proposed rules implement the “Basel III” regulatory capital reforms and changes required by the Dodd-Frank Act. The proposed rules were subject to a public comment period that has expired and there is no date set for the adoption of final rules.

Various provisions of the Dodd-Frank Act increase the capital requirements of bank holding companies, such as the Company. The leverage and risk-based capital ratios of these entities may not be lower than the leverage and risk-based capital ratios for insured depository institutions. The proposed rules include new minimum risk-based capital and leverage ratios, which would be phased in during 2013 and 2014, and would refine the definition of what constitutes “capital” for purposes of calculating those ratios. The proposed new minimum capital level requirements applicable to the Company and the Bank under the proposals would be: (i) a new common equity Tier 1 capital ratio of 4.5%; (ii) a Tier 1 capital ratio of 6% (increased from 4%); (iii) a total capital ratio of 8% (unchanged from current rules); and (iv) a Tier 1 leverage ratio of 4% for all institutions. The proposed rules would also establish a “capital conservation buffer” of 2.5% above the new regulatory minimum capital ratios, and would result in the following minimum ratios: (i) a common equity Tier 1 capital ratio of 7.0%, (ii) a Tier 1 capital ratio of 8.5%, and (iii) a total capital ratio of 10.5%. The new capital conservation buffer requirement would be phased in beginning in January 2016 at 0.625% of risk-weighted assets and would increase each year until fully implemented in January 2019. Moreover, the proposed reforms seek to eliminate trust preferred securities from Tier 1 capital over a ten-year period. An institution would be subject to limitations on paying dividends, engaging in share repurchases, and paying discretionary bonuses if its capital level falls below the buffer amount. These limitations would establish a maximum percentage of eligible retained income that could be utilized for such actions. Additionally, the U.S. implementation of Basel III contemplates that, for banking organizations with less than $15 billion in assets, the ability to treat trust preferred securities as tier 1 capital would be phased out over a ten-year period.

 

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While the proposed Basel III changes and other regulatory capital requirements will likely result in generally higher regulatory capital standards, it is difficult at this time to predict when or how any new standards will ultimately be applied to United.

In addition, in the current economic and regulatory environment, regulators of banks and bank holding companies have become more likely to impose capital requirements on bank holding companies and banks that are more stringent than those required by applicable existing regulations.

The application of more stringent capital requirements for United could, among other things, result in lower returns on invested capital, require the raising of additional capital, and result in additional regulatory actions if United were to be unable to comply with such requirements. Furthermore, the imposition of liquidity requirements in connection with the implementation of Basel III could result in our having to lengthen the term of our funding, restructure our business models, and/or increase our holdings of liquid assets. Implementation of changes to asset risk weightings for risk based capital calculations, items included or deducted in calculating regulatory capital and/or additional capital conservation buffers could result in management modifying its business strategy and could limit our ability to make distributions, including paying dividends.

United’s business is dependent on technology, and an inability to invest in technological improvements may adversely affect United’s results of operations and financial condition.

The financial services industry is undergoing rapid technological changes with frequent introductions of new technology-driven products and services. In addition to better serving customers, the effective use of technology increases efficiency and enables financial institutions to reduce costs. United has made significant investments in data processing, management information systems and internet banking accessibility. United’s future success will depend in part upon United’s ability to create additional efficiencies in its operations through the use of technology. There can be no assurance that United’s technological improvements will increase United’s operational efficiency or that United will be able to effectively implement new technology-driven products and services or be successful in marketing these products and services to its customers.

In addition, these changes may also require United to invest significant management attention and resources to evaluate and make any changes necessary to comply with new statutory and regulatory requirements which may negatively impact United’s financial condition and results of operation. United is currently reviewing the provisions of the Dodd-Frank Act and assessing their probable impact on United and its operations.

Failure to maintain effective internal controls over financial reporting in the future could impair United’s ability to accurately and timely report its financial results or prevent fraud, resulting in loss of investor confidence and adversely affecting United’s business and stock price.

Effective internal controls over financial reporting are necessary to provide reliable financial reports and prevent fraud. Management believes that United’s internal controls over financial reporting are currently effective. Management will continually review and analyze the Company’s internal controls over financial reporting for Sarbanes-Oxley Section 404 compliance. Any failure to maintain, in the future, an effective internal control environment could impact United’s ability to report its financial results on an accurate and timely basis, which could result in regulatory actions, loss of investor confidence, and adversely impact United’s business and stock price.

 

Item 1B. UNRESOLVED STAFF COMMENTS

None

 

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Item 2. PROPERTIES

Offices

United is headquartered in the United Center at 500 Virginia Street, East, Charleston, West Virginia. United’s executive offices are located in Parkersburg, West Virginia at Fifth and Avery Streets. United operates one hundred and fifteen (115) full service offices—fifty-six (56) offices located throughout West Virginia, fifty-four (54) offices in the Shenandoah Valley region of Virginia and the Northern Virginia, Maryland and Washington, D.C. metropolitan area, four (4) in southwestern Pennsylvania and one (1) in southeastern Ohio. United owns all of its West Virginia facilities except for two in the Wheeling area, two in the Charleston area, two in the Beckley area, three in the Morgantown area and one each in Parkersburg, Charles Town, Martinsburg and Clarksburg, all of which are leased under operating leases. United owns most of its facilities in the Shenandoah Valley region of Virginia except for ten offices, three in Winchester, one each in Charlottesville, Front Royal, Harrisonburg, Staunton, Waynesboro, Weyers Cave and Woodstock, all of which are leased under operating leases. United leases all of its facilities under operating lease agreements in the Northern Virginia, Maryland and Washington, D.C. areas except for four offices, one each in Fairfax, Alexandria, and Vienna, Virginia and one in Bethesda, Maryland, which are owned facilities. United owns all of its Pennsylvania facilities. In Ohio, United owns its one facility in Bellaire. United leases operations centers in the Charleston, West Virginia and Chantilly, Virginia areas.

 

Item 3. LEGAL PROCEEDINGS

On October 24, 2012, United Bankshares, Inc. and its wholly owned subsidiary, United Bank, Inc. of West Virginia, agreed to settle two class actions. The class actions alleged that United Bank improperly posted, processed, and paid consumer checking account debit card transactions, which allegedly resulted in the assessment of improper overdraft fees. These cases are virtually identical to cases filed against more than 70 other United States banks over the last three years.

The first case has been consolidated, with similar cases against a myriad of other banks, into a federal multidistrict litigation pending in the United States District Court for the Southern District of Florida that is known as In re Checking Account Overdraft Litigation, Case No. 1:09-md-02036-JLK. The second case is pending in the Circuit Court of Jackson County, West Virginia. Without admitting liability or any wrongdoing and to avoid further litigation expense, United Bankshares, Inc. and United Bank, Inc. of West Virginia agreed to settle these cases in exchange for a payment of $3.3 million and an agreement to pay certain settlement-related expenses. The settlement is subject to court approval. As of December 31, 2012, the $3.3 million settlement amount was fully accrued by the Company.

In the normal course of business, United and its subsidiaries are currently involved in various legal proceedings. Management is vigorously pursuing all its legal and factual defenses and, after consultation with legal counsel, believes that all such litigation will be resolved with no material effect on United’s financial position.

 

Item 4. MINE SAFETY DISCLOSURES

Not applicable.

 

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UNITED BANKSHARES, INC.

FORM 10-K, PART II

 

Item 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

Stock

As of January 31, 2013, 100,000,000 shares of common stock, par value $2.50 per share, were authorized for United, of which 50,867,630 were issued, including 591,057 shares held as treasury shares. The outstanding shares are held by approximately 6,886 shareholders of record, as well as 16,123 shareholders in street name as of January 31, 2013. The unissued portion of United’ s authorized common stock (subject to registration approval by the SEC) and the treasury shares are available for issuance as the Board of Directors determines advisable. United offers its shareholders the opportunity to invest dividends in shares of United stock through its dividend reinvestment plan. United has also established stock option plans and a stock bonus plan as incentive for certain eligible officers. In addition to the above incentive plans, United is occasionally involved in certain mergers in which additional shares could be issued and recognizes that additional shares could be issued for other appropriate purposes.

In May of 2006, United’s Board of Directors approved a new stock repurchase plan, whereby United could buy up to 1,700,000 shares of its common stock in the open market. During 2012 and 2011, no shares were repurchased under the plan.

The Board of Directors believes that the availability of authorized but unissued common stock of United is of considerable value if opportunities should arise for the acquisition of other businesses through the issuance of United’s stock. Shareholders do not have preemptive rights, which allow United to issue additional authorized shares without first offering them to current shareholders.

Currently, United has only one voting class of stock issued and outstanding and all voting rights are vested in the holders of United’s common stock. On all matters subject to a vote of shareholders, the shareholders of United will be entitled to one vote for each share of common stock owned. Shareholders of United have cumulative voting rights with regard to election of directors.

On December 23, 2008, the shareholders of United authorized the issuance of preferred stock up to 50,000,000 shares with a par value of $1.00 per share. The authorized preferred stock may be issued by the Company’s Board of Directors in one or more series, from time to time, with each such series to consist of such number of shares and to have such voting powers, full or limited, or no voting powers, and such designations, preferences and relative, participating, optional or other special rights, and the qualifications, limitations or restrictions thereof, as shall be stated in the resolution or resolutions providing for the issuance of such series adopted by the Board of Directors. Currently, no shares of preferred stock have been issued.

The authorization of preferred stock will not have an immediate effect on the holders of the Company’s common stock. The actual effect of the issuance of any shares of preferred stock upon the rights of the holders of common stock cannot be stated until the Board of Directors determines the specific rights of any shares of preferred stock. However, the effects might include, among other things, restricting dividends on common stock, diluting the voting power of common stock, reducing the market price of common stock or impairing the liquidation rights of the common stock without further action by the shareholders. Holders of the common stock will not have preemptive rights with respect to the preferred stock.

There are no preemptive or conversion rights or, redemption or sinking fund provisions with respect to United’s stock. All of the issued and outstanding shares of United’s stock are fully paid and non-assessable.

Dividends

The shareholders of United are entitled to receive dividends when and as declared by its Board of

 

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Directors. Dividends have been paid quarterly. Dividends were $1.24 per share in 2012, $1.21 per share in 2011 and $1.20 per share in 2010. See “Market and Stock Prices of United” for quarterly dividend information.

The payment of dividends is subject to the restrictions set forth in the West Virginia Corporation Act and the limitations imposed by the Federal Reserve Board. Payment of dividends by United is dependent upon receipt of dividends from its Banking Subsidiaries. Payment of dividends by United’s state member Banking Subsidiaries is regulated by the Federal Reserve System and generally, the prior approval of the Federal Reserve Board (FRB) is required if the total dividends declared by a state member bank in any calendar year exceeds its net profits, as defined, for that year combined with its retained net profits for the preceding two years. Additionally, prior approval of the FRB is required when a state member bank has deficit retained earnings but has sufficient current year’s net income, as defined, plus the retained net profits of the two preceding years. The FRB may prohibit dividends if it deems the payment to be an unsafe or unsound banking practice. The FRB has issued guidelines for dividend payments by state member banks emphasizing that proper dividend size depends on the bank’s earnings and capital. See Note S, Notes to Consolidated Financial Statements.

Market and Stock Prices of United

United Bankshares, Inc. stock is traded over the counter on the National Association of Securities Dealers Automated Quotations System, Global Select Market (NASDAQ) under the trading symbol UBSI. The closing sale price reported for United’s common stock on February 19, 2013, the last practicable date, was $26.19.

The high and low prices listed below are based upon information available to United’s management from NASDAQ listings. No attempt has been made by United’s management to ascertain the prices for every sale of its stock during the periods indicated. However, based on the information available, United’s management believes that the prices fairly represent the amounts at which United’s stock was traded during the periods reflected.

The following table presents the dividends and high and low prices of United’s common stock during the periods set forth below:

 

2013

   Dividends     High      Low  

First Quarter through February 19, 2013

   $ 0.31 (1)    $   26.21       $   24.80   

2012

                   

Fourth Quarter

   $ 0.31      $ 25.80       $ 23.02   

Third Quarter

   $ 0.31      $ 26.40       $ 22.54   

Second Quarter

   $ 0.31      $ 29.45       $ 23.87   

First Quarter

   $ 0.31      $ 30.91       $ 27.36   

2011

                   

Fourth Quarter

   $ 0.31      $ 29.29       $ 19.06   

Third Quarter

   $ 0.30      $ 25.21       $ 18.78   

Second Quarter

   $ 0.30      $ 27.46       $ 22.36   

First Quarter

   $ 0.30      $ 30.84       $ 25.66   

 

  (1) 

On February 19, 2013, United declared a dividend of $0.31 per share, payable April 1, 2013, to shareholders of record as of March 8, 2013.

 

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Stock Performance Graph

The following Stock Performance Graph and related information shall not be deemed “soliciting material” or to be “filed” with the Securities and Exchange Commission, nor shall such information be incorporated by reference into any future filing under the Securities Act of 1933 or Securities Exchange Act of 1934, each as amended, except to the extent that United specifically incorporates it by reference into such filing.

The following graph compares United’s cumulative total shareholder return (assuming reinvestment of dividends) on its common stock for the five-year period ending December 31, 2012, with the cumulative total return (assuming reinvestment of dividends) of the Standard and Poor’s Midcap 400 Index and with the NASDAQ Bank Index. The cumulative total shareholder return assumes a $100 investment on December 31, 2007 in the common stock of United and each index and the cumulative return is measured as of each subsequent fiscal year-end. There is no assurance that United’s common stock performance will continue in the future with the same or similar trends as depicted in the graph.

 

LOGO

 

     Period Ending  
     12/31/07      12/31/08      12/31/09      12/31/10      12/31/11      12/31/12  

United Bankshares, Inc.

     100.00         123.44         78.87         120.76         122.80         110.89   

NASDAQ Bank Index

     100.00         78.54         65.73         75.02         67.17         79.70   

S&P Mid-Cap Index

     100.00         63.79         87.57         110.87         108.97         128.41   

 

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Issuer Repurchases

The table below includes certain information regarding United’s purchase of its common shares during the three months ended December 31, 2012:

 

Period   

Total
Number of
Shares
Purchased

(1) (2)

     Average Price
Paid per Share
    

Total Number of
Shares Purchased as
Part of Publicly
Announced

Plans (3)

     Maximum
Number of
Shares that May
Yet be Purchased
Under the Plans
(3)
 

10/01 – 10/31/2012

     0       $ 00.00         0         322,200   

11/01 – 11/30/2012

     117       $ 25.31         0         322,200   

12/01 – 12/31/2012

     0       $ 00.00         0         322,200   
  

 

 

       

Total

     117       $ 25.31         
  

 

 

       

 

  (1)

Includes shares exchanged in connection with the exercise of stock options under United’s stock option plans. Shares are purchased pursuant to the terms of the applicable stock option plan and not pursuant to a publicly announced stock repurchase plan. For the quarter ended December 31, 2012, no shares were exchanged by participants in United’s stock option plans.

 

  (2)

Includes shares purchased in open market transactions by United for a rabbi trust to provide payment of benefits under a deferred compensation plan for certain key officers of United and its subsidiaries. For the quarter ended December 31, 2012, the following shares were purchased for the deferred compensation plan: November 2012 –117 shares at an average price of $25.31.

 

  (3)

In May of 2006, United’s Board of Directors approved a repurchase plan to repurchase up to 1,700,000 shares of United’s common stock on the open market (the 2006 Plan). The timing, price and quantity of purchases under the plans are at the discretion of management and the plan may be discontinued, suspended or restarted at any time depending on the facts and circumstances.

 

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Item 6. SELECTED FINANCIAL DATA

The following consolidated selected financial data is derived from United’s audited financial statements as of and for the five years ended December 31, 2012. The selected financial data should be read in conjunction with Management’s Discussion and Analysis of Financial Condition and Results of Operations and the Consolidated Financial Statements and related notes contained elsewhere in this report.

 

     Five Year Summary  
(Dollars in thousands, except per share data)    2012      2011      2010      2009      2008  

Summary of Operations:

              

Total interest income

   $ 323,897       $ 316,522       $ 323,382       $ 365,845       $ 429,911   

Total interest expense

     46,190         55,794         85,196         120,374         177,119   

Net interest income

     277,707         260,728         238,186         245,471         252,792   

Provision for loan losses

     17,862         17,141         13,773         46,065         25,155   

Other income

     66,292         50,837         62,203         53,970         67,303   

Other expense

     204,656         184,048         182,212         175,127         171,073   

Income taxes

     38,874         34,766         32,457         10,951         36,913   

Net income

     82,607         75,610         71,947         67,298         86,954   

Cash dividends

     62,351         56,827         52,300         50,837         50,231   

Per common share:

              

Net income:

              

Basic

     1.64         1.62         1.65         1.55         2.01   

Diluted

     1.64         1.61         1.65         1.55         2.00   

Cash dividends

     1.24         1.21         1.20         1.17         1.16   

Book value per share

     19.74         19.29         18.18         17.53         16.97   

Selected Ratios:

              

Return on average shareholders’ equity

     8.35%         8.50%         9.19%         8.81%         11.12%   

Return on average assets

     0.98%         0.97%         0.95%         0.85%         1.09%   

Dividend payout ratio

     75.48%         75.16%         72.69%         75.54%         57.77%   

Selected Balance Sheet Data:

              

Average assets

   $   8,399,513       $   7,780,836       $   7,533,974       $   7,925,506       $   8,007,068   

Investment securities

     729,402         824,219         794,715         966,920         1,291,822   

Loans held for sale

     17,762         3,902         6,869         5,284         868   

Total loans

     6,511,416         6,230,777         5,260,326         5,736,809         6,014,155   

Total assets

     8,420,013         8,451,470         7,155,719         7,805,101         8,102,091   

Total deposits

     6,752,986         6,819,010         5,713,534         5,971,100         5,647,954   

Long-term borrowings

     284,926         345,366         386,458         771,935         852,685   

Total liabilities

     7,427,762         7,482,626         6,362,707         7,043,551         7,365,379   

Shareholders’ equity

     992,251         968,844         793,012         761,550         736,712   

 

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Item 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

FORWARD-LOOKING STATEMENTS

Congress passed the Private Securities Litigation Act of 1995 to encourage corporations to provide investors with information about the company’s anticipated future financial performance, goals, and strategies. The act provides a safe haven for such disclosure; in other words, protection from unwarranted litigation if actual results are not the same as management expectations.

United desires to provide its shareholders with sound information about past performance and future trends. Consequently, any forward-looking statements contained in this report, in a report incorporated by reference to this report, or made by management of United in this report, in any other reports and filings, in press releases and in oral statements, involve numerous assumptions, risks and uncertainties. Actual results could differ materially from those contained in or implied by United’s statements for a variety of factors including, but not limited to: changes in economic conditions; business conditions in the banking industry; movements in interest rates; competitive pressures on product pricing and services; success and timing of business strategies; the nature and extent of governmental actions and reforms; and rapidly changing technology and evolving banking industry standards.

INTRODUCTION

The following discussion and analysis presents the significant changes in financial condition and the results of operations of United and its subsidiaries for the periods indicated below. This discussion and the consolidated financial statements and the notes to consolidated financial statements include the accounts of United Bankshares, Inc. and its wholly-owned subsidiaries, unless otherwise indicated. Management has evaluated all significant events and transactions that occurred after December 31, 2012, but prior to the date these financial statements were issued, for potential recognition or disclosure required in these financial statements.

This discussion and analysis should be read in conjunction with the consolidated financial statements and accompanying notes thereto, which are included elsewhere in this document.

In addition, on July 8, 2011, United completed its acquisition of Centra Financial Holdings, Inc. (Centra) of Morgantown, West Virginia. The results of operations of Centra are included in the consolidated results of operations from the date of acquisition. As a result, the comparisons for the year of 2012 to the same time period of 2011 are impacted by increased levels of average balances, income, expense, and asset quality results due to the acquisition. At consummation, Centra had assets of approximately $1.3 billion, loans of $1.0 billion, deposits of $1.1 billion and shareholders’ equity of $131 million.

APPLICATION OF CRITICAL ACCOUNTING POLICIES

The accounting and reporting policies of United conform with U.S. generally accepted accounting principles. In preparing the consolidated financial statements, management is required to make estimates, assumptions and judgments that affect the amounts reported in the financial statements and accompanying notes. These estimates, assumptions and judgments, which are reviewed with the Audit Committee of the Board of Directors, are based on information available as of the date of the financial statements. Actual results could differ from these estimates. These policies, along with the disclosures presented in the financial statement notes and in this financial review, provide information on how significant assets and liabilities are valued in the financial statements and how those values are determined. Based on the valuation techniques used and the sensitivity of financial statement amounts to the methods, assumptions, and estimates underlying those amounts, management has identified the determination of the allowance for credit losses, the valuation of investment securities and the related other-than-temporary impairment analysis, and the calculation of the income tax provision to be the accounting areas that require the most subjective or complex judgments, and as such could be most subject to revision as new information becomes available. The most significant accounting policies followed by United are presented in Note A, Notes to Consolidated Financial Statements.

 

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Allowance for Credit Losses

The allowance for credit losses represents management’s estimate of the probable credit losses inherent in the lending portfolio. Determining the allowance for credit losses requires management to make forecasts of losses that are highly uncertain and require a high degree of judgment. At December 31, 2012, the allowance for loan losses was $73.9 million and is subject to periodic adjustment based on management’s assessment of current probable losses in the loan portfolio. Such adjustment from period to period can have a significant impact on United’s consolidated financial statements. To illustrate the potential effect on the financial statements of our estimates of the allowance for loan losses, a 10% increase in the allowance for loan losses would have required $7.4 million in additional allowance (funded by additional provision for credit losses), which would have negatively impacted the year of 2012 net income by approximately $4.8 million, or $0.10 diluted per common share. Management’s evaluation of the adequacy of the allowance for credit losses and the appropriate provision for credit losses is based upon a quarterly evaluation of the loan portfolio and lending related commitments. This evaluation is inherently subjective and requires significant estimates, including estimates related to the amounts and timing of future cash flows, value of collateral, losses on pools of homogeneous loans based on historical loss experience, and consideration of current economic trends, all of which are susceptible to constant and significant change. The allowance allocated to specific credits and loan pools grouped by similar risk characteristics is reviewed on a quarterly basis and adjusted as necessary based upon subsequent changes in circumstances. In determining the components of the allowance for credit losses, management considers the risk arising in part from, but not limited to, charge-off and delinquency trends, current economic and business conditions, lending policies and procedures, the size and risk characteristics of the loan portfolio, concentrations of credit, and other various factors. The methodology used to determine the allowance for credit losses is described in Note A, Notes to Consolidated Financial Statements. A discussion of the factors leading to changes in the amount of the allowance for credit losses is included in the Provision for Credit Losses section of this Management’s Discussion and Analysis of Financial Condition and Results of Operations (MD&A). For a discussion of concentrations of credit risk, see Item 1, under the caption of Loan Concentrations in this Form 10-K.

Investment Securities

Accounting estimates are used in the presentation of the investment portfolio and these estimates impact the presentation of United’s financial condition and results of operations. United classifies its investments in debt and equity securities as either held to maturity or available for sale. Securities held to maturity are accounted for using historical costs, adjusted for amortization of premiums and accretion of discounts. Securities available for sale are accounted for at fair value, with the net unrealized gains and losses, net of income tax effects, presented as a separate component of stockholders’ equity. When available, fair values of securities are based on quoted prices or prices obtained from third party vendors. Third party vendors compile prices from various sources and may determine the fair value of identical or similar securities by using pricing models that consider observable market data. Prices obtained from third party vendors that do not reflect forced liquidation or distressed sales are not adjusted by management. Where prices reflect forced liquidation or distressed sales, as is the case with United’s portfolio of pooled trust preferred securities, management estimates fair value based on a discounted cash flow methodology using appropriately adjusted discount rates reflecting nonperformance and liquidity risks. Due to the subjective nature of this valuation process, it is possible that the actual fair values of these securities could differ from the estimated amounts, thereby affecting United’s financial position, results of operations and cash flows. The potential impact to United’s financial position, results of operations or cash flows for changes in the valuation process cannot be reasonably estimated.

If the estimated value of investments is less than the cost or amortized cost, the investment is considered impaired and management evaluates whether an event or change in circumstances has occurred that may have a significant adverse effect on the fair value of the investment. If such an event or change has occurred, management must exercise judgment to determine the nature of the potential impairment (i.e., temporary or other-than-temporary) in order to apply the appropriate accounting treatment. If United intends to sell, or is more likely than not will be required to sell an impaired debt security before recovery of its amortized cost basis less any current period credit loss, other-than-temporary impairment is recognized in earnings. The amount recognized in earnings is equal to the entire difference between the security’s amortized cost basis and its fair value at the balance sheet date. If United does not intend to sell, and is not more likely than not they will be required to sell the impaired debt security prior to recovery of its amortized cost basis less any current-period credit loss, the other-than-temporary impairment is separated into the following: 1) the amount representing the credit loss, which is recognized in earnings, and 2) the amount related to all other factors, which is recognized in other comprehensive income. Given the recent disruptions in the financial markets, the decision to recognize other-than-temporary impairment on investment securities has become more difficult as complete information is not always available and market conditions and

 

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other relevant factors are subject to rapid changes. Therefore, the other-than-temporary impairment assessment has become a critical accounting policy for United. For additional information on management’s consideration of investment valuation and other-than-temporary impairment, see Note C and Note T, Notes to Consolidated Financial Statements.

Income Taxes

United’s calculation of income tax provision is inherently complex due to the various different tax laws and jurisdictions in which we operate and requires management’s use of estimates and judgments in its determination. The current income tax liability also includes income tax expense related to our uncertain tax positions as required in ASC topic 740, “Income Taxes.” Changes to the estimated accrued taxes can occur due to changes in tax rates, implementation of new business strategies, resolution of issues with taxing authorities and recently enacted statutory, judicial and regulatory guidance. These changes can be material to the Company’s operating results for any particular reporting period. The analysis of the income tax provision requires the assessments of the relative risks and merits of the appropriate tax treatment of transactions, filing positions, filing methods and taxable income calculations after considering statutes, regulations, judicial precedent and other information. United strives to keep abreast of changes in the tax laws and the issuance of regulations which may impact tax reporting and provisions for income tax expense. United is also subject to audit by federal and state authorities. Because the application of tax laws is subject to varying interpretations, results of these audits may produce indicated liabilities which differ from United’s estimates and provisions. United continually evaluates its exposure to possible tax assessments arising from audits and records its estimate of probable exposure based on current facts and circumstances. The potential impact to United’s operating results for any of the changes cannot be reasonably estimated. See Note L, Notes to Consolidated Financial Statements for information regarding United’s ASC topic 740 disclosures.

Use of Fair Value Measurements

United determines the fair value of its financial instruments based on the fair value hierarchy established in ASC topic 820, whereby the fair value of certain assets and liabilities is an exit price, representing the amount that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants. ASC topic 820 establishes a three-level hierarchy for disclosure of assets and liabilities recorded at fair value. The classification of assets and liabilities within the hierarchy is based on whether the inputs in the methodology for determining fair value are observable or unobservable. Observable inputs reflect market-based information obtained from independent sources (Level 1 or Level 2), while unobservable inputs reflect management’s estimate of market data (Level 3). For assets and liabilities that are actively traded and have quoted prices or observable market data, a minimal amount of subjectivity concerning fair value is needed. Prices and values obtained from third party vendors that do not reflect forced liquidation or distressed sales are not adjusted by management. When quoted prices or observable market data are not available, management’s judgment is necessary to estimate fair value.

At December 31, 2012, approximately 8.65% of total assets, or $728.46 million, consisted of financial instruments recorded at fair value. Of this total, approximately 90.86% or $661.91 million of these financial instruments used valuation methodologies involving observable market data, collectively Level 1 and Level 2 measurements, to determine fair value. Approximately 9.14% or $66.55 million of these financial instruments were valued using unobservable market information or Level 3 measurements. Most of these financial instruments valued using unobservable market information were pooled trust preferred investment securities classified as available-for-sale. At December 31, 2012, only $4.28 million or less than 1% of total liabilities were recorded at fair value. This entire amount was valued using methodologies involving observable market data. United does not believe that any changes in the unobservable inputs used to value the financial instruments mentioned above would have a material impact on United’s results of operations, liquidity, or capital resources. See Note T for additional information regarding ASC topic 820 and its impact on United’s financial statements.

Any material effect on the financial statements related to these critical accounting areas is further discussed in this Management’s Discussion and Analysis of Financial Condition and Results of Operations.

 

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2012 COMPARED TO 2011

FINANCIAL CONDITION SUMMARY

United’s total assets as of December 31, 2012 were $8.42 billion which was a decrease of $31.46 million or less than 1% from December 31, 2011. The decrease was primarily the result of a $203.93 million or 32.06% decrease in cash and cash equivalents, a $94.82 million or 11.50% decrease in investment securities and a $22.71 million or 6.45% decrease in other assets. Partially offsetting these decreases in total assets was an increase in portfolio loans of $280.64 million or 4.50% and an increase of $13.86 million or 355.20% in loans held for sale. The decrease in total assets is reflected in a corresponding decrease in total liabilities of $54.86 million or less than 1% while shareholders’ equity increased $23.41 million or 2.42%. The decrease in total liabilities was due mainly to a $66.02 million decrease in deposits, and a $60.44 million decrease in long-term borrowings, which were partially offset by increases of $60.20 million and $11.60 million in short-term borrowings and accrued expenses and other liabilities, respectively.

The following discussion explains in more detail the changes in financial condition by major category.

Cash and Cash Equivalents

Cash and cash equivalents at December 31, 2012 decreased $203.93 million or 32.06% from year-end 2011. Of this total decrease, interest-bearing deposits with other banks decreased $232.85 million or 45.98% as United placed less excess cash in an interest-bearing account with the Federal Reserve. Partially offsetting this decrease in interest-bearing deposits with other banks is a $28.91 million or 22.48% increase in cash and due from banks and a $12 thousand or 1.19% increase in federal funds sold. During the year of 2012, net cash of $129.44 million was provided by operating activities. Net cash of $208.14 million and $125.22 million were used in investing activities and financing activities, respectively. Further details related to changes in cash and cash equivalents are presented in the Consolidated Statements of Cash Flows.

Securities

Total investment securities at December 31, 2012 decreased $94.82 million or 11.50% from year-end 2011. Securities available for sale decreased $70.89 million or 10.18%. This change in securities available for sale mainly reflects $2.00 billion in sales, maturities and calls of securities, $1.93 billion in purchases, and an increase of $5.46 million in market value. Securities held to maturity decreased $15.82 million or 26.69% from year-end 2011 due primarily to calls and maturities of securities. Other investment securities decreased $8.10 million or 11.84% from year-end 2011 due to the redemption of Federal Home Loan Bank (FHLB) stock.

The following is a summary of available for sale securities at December 31:

 

     2012      2011      2010  
     (In thousands)  

U.S. Treasury and obligations of U.S. Government corporations and agencies

   $   336,747       $   303,484       $   103,851   

States and political subdivisions

     76,765         94,794         81,801   

Mortgage-backed securities

     126,338         225,069         386,125   

Asset-backed securities

     11,729         0         0   

Marketable equity securities

     6,660         4,341         5,794   

Trust preferred collateralized debt obligations

     94,794         104,161         124,632   

Single issue trust preferred securities

     15,286         15,242         15,594   

Corporate securities

     4,996         4,994         0   
  

 

 

    

 

 

    

 

 

 

TOTAL AVAILABLE FOR SALE SECURITIES, at amortized cost

   $ 673,315       $ 752,085       $ 717,797   
  

 

 

    

 

 

    

 

 

 

TOTAL AVAILABLE FOR SALE SECURITIES, at fair value

   $ 625,625       $ 696,518       $ 653,276   
  

 

 

    

 

 

    

 

 

 

 

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The following is a summary of held to maturity securities at December 31:

 

     2012      2011      2010  
     (In thousands)   

U.S. Treasury and obligations of U.S. Government corporations and agencies

   $ 10,916       $ 11,062       $ 11,200   

States and political subdivisions

     12,515         12,794         20,288   

Mortgage-backed securities

     61         77         94   

Single issue trust preferred securities

     19,750         32,116         32,122   

Other corporate securities

     225         3,240         3,332   
  

 

 

    

 

 

    

 

 

 

TOTAL HELD TO MATURITY SECURITIES, at amortized cost

   $ 43,467       $ 59,289       $ 67,036   
  

 

 

    

 

 

    

 

 

 

TOTAL HELD TO MATURITY SECURITIES, at fair value

   $   42,695       $   56,181       $   62,315   
  

 

 

    

 

 

    

 

 

 

At December 31, 2012, gross unrealized losses on available for sale securities were $58.72 million. Securities in an unrealized loss position at December 31, 2012 consisted primarily of pooled trust preferred collateralized debt obligations (TRUP CDOs), single issue trust preferred securities and non-agency residential mortgage-backed securities. The TRUP CDOs and the single issue trust preferred securities relate mainly to securities of financial institutions.

As of December 31, 2012, United’s mortgage-backed securities had an amortized cost of $126.40 million, with an estimated fair value of $131.63 million. The portfolio consisted primarily of $101.83 million in agency residential mortgage-backed securities with a fair value of $106.58 million and $24.57 million in non-agency residential mortgage-backed securities with an estimated fair value of $25.05 million. As of December 31, 2012, United’s asset-backed securities had an amortized cost of $11.73 million, with an estimated fair value of $11.71 million.

As of December 31, 2012, United’s corporate securities had an amortized cost of $141.71 million, with an estimated fair value of $80.99 million. The portfolio consisted primarily of $94.79 million in pooled trust preferred securities with a fair value of $40.61 million and $35.04 million in single issue trust preferred securities with an estimated fair value of $28.49 million. In addition to the trust preferred securities, the Company held positions in various other corporate securities, including marketable equity securities, with an amortized cost of $11.88 million and a fair value of $11.89 million, only one of which was individually significant.

The pooled trust preferred securities consisted of positions in 23 different securities. The underlying issuers in the pools were primarily financial institutions and to a lesser extent, insurance companies. The Company has no exposure to Real Estate Investment Trusts (REITs) in its investment portfolio. The Company owns both senior and mezzanine tranches in pooled trust preferred securities; however, the Company does not own any income notes. The senior and mezzanine tranches of trust preferred collateralized debt obligations generally have some protection from defaults in the form of over-collateralization and excess spread revenues, along with waterfall structures that redirect cash flows in the event certain coverage test requirements are failed. Generally, senior tranches have the greatest protection, with mezzanine tranches subordinated to the senior tranches, and income notes subordinated to the mezzanine tranches. Senior tranches represent $17.63 million of the Company’s pooled securities, while mezzanine tranches represent $77.17 million. Of the $77.17 million in mezzanine tranches, $11.73 million are now in the Senior position as the Senior notes have been paid to a zero balance. As of December 31, 2012, $9.14 million of the pooled trust preferred securities were investment grade, $5.00 million were split-rated, and the remaining $80.65 million were below investment grade. In terms of capital adequacy, the Company allocates additional risk-based capital to the below investment grade securities.

As of December 31, 2012, United’s single issue trust preferred securities had an amortized cost of $35.04 million. Of the $35.04 million, $10.89 million or 31.09% were investment grade; $633 thousand or 1.81% were unrated; $7.90 million or 22.55% were split rated; and $15.61 million or 44.55% were below investment grade. The two largest exposures accounted for 49.32% of the $35.04 million. These included Wells Fargo at $9.89 million and SunTrust Bank at $7.39 million. All single-issue trust preferred securities, with the exception of two securities totaling $633 thousand, are currently receiving full scheduled principal and interest payments.

During the year of 2012, United recognized net other-than-temporary impairment charges totaling $7.38 million on certain TRUP CDOs and non-agency residential mortgage-backed securities, which are not expected to be sold. Other than these securities, management does not believe that any other individual security with an unrealized loss as of December 31, 2012 is other-than-temporarily impaired. United believes the decline in value resulted from changes in market interest rates, credit

 

30


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spreads and liquidity, not an adverse change in the expected cash flows. Based on a review of each of the securities in the investment portfolio, management concluded that it was not probable that it would be unable to realize the cost basis investment and appropriate interest payments on such securities. United has the intent and the ability to hold these securities until such time as the value recovers or the securities mature. However, United acknowledges that any impaired securities may be sold in future periods in response to significant, unanticipated changes in asset/liability management decisions, unanticipated future market movements or business plan changes.

More information relating to investment securities is presented in Note C, Notes to Consolidated Financial Statements.

Loans

Loans held for sale increased $13.86 million or 355.20% as loan originations exceeded loan sales in the secondary market during the year of 2012. Portfolio loans, net of unearned income, increased $280.64 million or 4.50% from year-end 2011 mainly due to a $337.44 million or 9.62% increase in the total commercial, financial and agricultural loans category. Within the commercial, financial and agricultural loans category, commercial real estate loans increased $172.57 million or 7.51% while commercial loans (not secured by real estate) increased $164.88 million or 13.60%. Partially offsetting these increases in portfolio loans was a decrease of $53.47 million or 2.83% in residential real estate loans.

A summary of loans outstanding is as follows:

 

     December 31  
     2012      2011      2010      2009      2008  

Commercial, financial & agricultural

   $ 3,846,409       $ 3,508,966       $ 2,837,692       $ 3,003,298       $ 3,167,458   

Residential real estate

     1,838,252         1,891,725         1,700,380         1,859,439         1,915,355   

Construction & land development

     550,677         549,877         470,934         559,602         601,995   

Consumer

     282,442         283,712         254,345         318,439         335,750   

Less: Unearned interest

     (6,364)         (3,503)         (3,025)         (3,969)         (6,403)   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total loans

     6,511,416         6,230,777         5,260,326         5,736,809         6,014,155   

Allowance for loan losses

     (73,901)         (73,874)         (73,033)         (67,853)         (61,494)   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

TOTAL LOANS, NET

   $   6,437,515       $   6,156,903       $   5,187,293       $   5,668,956       $   5,952,661   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Loans held for sale

   $ 17,762       $ 3,902       $ 6,869       $ 5,284       $ 868   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

The following table shows the maturity of commercial, financial, and agricultural loans and real estate construction and land development loans as of December 31, 2012:

 

     Less Than      One To      Over         
(In thousands)    One Year      Five Years      Five Years      Total  

Commercial, financial & agricultural

   $ 995,043       $ 1,200,570       $ 1,650,796       $ 3,846,409   

Construction & land development

     271,483         155,013         124,181         550,677   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $   1,266,526       $   1,355,583       $   1,774,977       $   4,397,086   
  

 

 

    

 

 

    

 

 

    

 

 

 

At December 31, 2012, commercial, financial and agricultural loans and real estate construction and land development loans by maturity are as follows:

 

     Less Than      One to      Over         
(In thousands)    One Year      Five Years      Five Years      Total  

Outstanding with fixed interest rates

   $ 368,587       $ 791,590       $ 670,054       $ 1,830,231   

Outstanding with adjustable rates

     897,939         563,993         1,104,923         2,566,855   
  

 

 

    

 

 

    

 

 

    

 

 

 
   $   1,266,526       $   1,355,583       $   1,774,977       $   4,397,086   
  

 

 

    

 

 

    

 

 

    

 

 

 

More information relating to loans is presented in Note D, Notes to Consolidated Financial Statements.

 

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Other Assets

Other assets decreased $22.71 million or 6.45% from year-end 2011 due mainly to a $6.15 million decrease in income tax receivable and a $6.22 million decrease in United’s net pension asset due to a decline in the discount rate used in the year-end valuation and a less than expected return on the plan assets. In addition, deferred tax assets decreased $2.30 million, OREO decreased $2.28 million, prepaid regulatory assessments decreased $5.54 million and core deposit intangibles decreased $2.84 million due to amortization. Partially offsetting these decreases from year-end 2011 was an increase of $5.84 million in cash surrender values of bank-owned life insurance policies.

Deposits

Deposits represent United’s primary source of funding. Total deposits at December 31, 2012 remained flat, decreasing $66.02 million or less than 1% from year-end 2011. In terms of composition, noninterest-bearing deposits increased $205.25 million or 12.68% while interest-bearing deposits decreased $271.27 million or 5.22% from December 31, 2011.

The increase in noninterest-bearing deposits was due mainly to increases in commercial noninterest-bearing deposits of $135.92 million or 12.10% and personal noninterest-bearing deposits of $31.47 million or 8.25%. Partially offsetting these increases was a $22.64 million or 24.81% decrease in public noninterest-bearing deposits.

The decrease in interest-bearing deposits was due mainly to a $946.78 million or 44.03% decrease in interest-bearing MMDAs, a $178.15 million or 14.68% decrease in time deposits under $100,000, and a $121.65 million or 11.29% decrease in time deposits over $100,000 due in large part to historically low interest rates. The $946.78 million decrease in interest-bearing MMDAs is mainly due to a $741.96 million or 53.83% decrease in personal MMDAs, a $172.11 million or 24.32% decrease in commercial MMDAs and a $32.71 million or 50.98% decrease in public funds MMDAs. The $178.15 million decrease in time deposits under $100,000 is the result of fixed rate certificate of deposits (CDs) declining $176.72 million. The $121.65 million decrease in time deposits over $100,000 is due to a $54.47 million decrease in Deposit Account Registry Service (CDARS) balances over $100,000 and a $74.11 million decrease in fixed rate CDs over $100,000. Partially offsetting these decreases in interest-bearing deposits was a $925.79 million or 325.22% increase in interest-bearing checking deposits due to increases in state and municipal interest-bearing checking accounts of $173.37 million, personal interest-bearing checking accounts of $666.44 million and commercial interest-bearing checking accounts of $85.98 million. In addition, regular savings accounts increased $49.52 million or 10.45% mainly due to an increase of $47.52 million in personal savings accounts.

The table below summarizes the changes by deposit category since year-end 2011:

 

     December 31      December 31                
     2012      2011      $ Change      % Change  

(Dollars in thousands)

           

Demand deposits

   $ 1,824,411       $ 878,838       $ 945,573         107.59%   

Interest-bearing checking

     1,210,463         284,670         925,793         325.22%   

Regular savings

     523,336         473,819         49,517         10.45%   

Money market accounts

     1,203,341         2,890,445           (1,687,104)         (58.37%)   

Time deposits under $100,000

     1,035,815         1,213,964         (178,149)         (14.68%)   

Time deposits over $100,000

     955,620         1,077,274         (121,654)         (11.29%)   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total deposits

   $   6,752,986       $   6,819,010       $ (66,025)         (0.97%)   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

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At December 31, 2012, the scheduled maturities of time deposits are as follows:

 

Year

   Amount  

(In thousands)

  

2013

   $ 1,266,724   

2014

     345,245   

2015

     204,881   

2016

     95,713   

2017 and thereafter

     78,872   
  

 

 

 

TOTAL

   $   1,991,435   
  

 

 

 

Maturities of time certificates of deposit of $100,000 or more outstanding at December 31, 2012 are summarized as follows:

 

     Amount  
(In thousands)   

3 months or less

   $ 367,372   

Over 3 through 6 months

     124,799   

Over 6 through 12 months

     168,676   

Over 12 months

     294,773   
  

 

 

 

TOTAL

   $      955,620   
  

 

 

 

The average daily amount of deposits and rates paid on such deposits is summarized for the years ended December 31:

 

     2012      2011      2010  
            Interest                    Interest                    Interest         
     Amount      Expense      Rate      Amount      Expense      Rate      Amount      Expense      Rate  
     (Dollars in thousands)   

Demand deposits

   $ 1,720,098       $ 0         0.00%       $ 476,460       $ 0         0.00%       $ 320,915       $ 0         0.00%   

NOW and money market deposits

     2,405,678         8,161         0.34%         3,084,146         9,019         0.29%         2,675,969         11,365         0.42%   

Savings deposits

     521,039         562         0.11%         447,166         423         0.09%         380,081         332         0.09%   

Time deposits

     2,129,445         23,525         1.10%         2,233,065         29,633         1.33%         2,349,119         43,966         1.87%   
  

 

 

    

 

 

       

 

 

    

 

 

       

 

 

    

 

 

    

TOTAL

   $   6,776,260       $   32,248         0.48%       $   6,240,837       $   39,075         0.63%       $   5,726,084       $   55,663         0.97%   
  

 

 

    

 

 

       

 

 

    

 

 

       

 

 

    

 

 

    

More information relating to deposits is presented in Note I, Notes to Consolidated Financial Statements.

Borrowings

Total borrowings at December 31, 2012 were flat, decreasing $244 thousand or less than 1% during the year of 2012. Since year-end 2011, short-term borrowings increased $60.20 million or 23.63% due to a $100 million increase in overnight FHLB advances, which was partially offset by a $1.67 million decrease in federal funds purchased and a $38.13 million decrease in securities sold under agreements to repurchase. Long-term borrowings decreased $60.44 million or 17.50% since year-end 2011 due mainly to a net repayment of $55.40 million in long-term FHLB advances.

The table below summarizes the changes by borrowing category since year-end 2011:

 

     December 31      Amount      Percentage  
     2012      2011      Change      Change  

(Dollars in thousands)

           

Federal funds purchased

   $ 5,446       $ 7,120       $ (1,674)         (23.51%)   

Securities sold under agreements to repurchase

     209,516         247,646         (38,130)         (15.40%)   

Short-term FHLB advances

     100,000         0         100,000         100.00%   

Long-term FHLB advances

     86,411         141,809         (55,398)         (39.07%)   

Issuances of trust preferred capital securities

     198,515         203,557         (5,042)         (2.48%)   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total borrowings

   $ 599,888       $ 600,132       $ (244)         (0.04%)   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

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For a further discussion of borrowings see Notes J and K, Notes to Consolidated Financial Statements.

Accrued Expenses and Other Liabilities

Accrued expenses and other liabilities at December 31, 2012 increased $11.60 million or 18.82% from year-end 2011. In particular, income taxes payable increased $4.91 million due to higher earnings while other accrued expenses increased $4.78 million due mainly to an accrual of $3.30 million with respect to a litigation settlement related to overdraft claims against United. In addition, United’s net pension asset declined due to a decline in the discount rate used in the year-end valuation and a less than expected return on the plan assets, resulting in a $3.68 million liability at year-end 2012. Partially offsetting these increases in accrued expenses and other liabilities was a $1.54 million decrease in interest payable due to a decline in long-term borrowings and interest-bearing time deposits.

Shareholders’ Equity

Shareholders’ equity at December 31, 2012 increased $23.41 million or 2.42% from December 31, 2011 as United continued to balance capital adequacy and the return to shareholders. The increase in shareholders’ equity was due mainly to earnings net of dividends which equaled $20.26 million for the year of 2012.

Accumulated other comprehensive income increased $1.01 million or 1.51% due mainly to an increase of $3.55 million, net of deferred income tax, in the fair value of United’s available for sale investment portfolio. In addition, the accretion of pension costs for the year of 2012 was $2.52 million while the after-tax non-credit portion of OTTI losses for the year of 2012 was $1.57 million. Partially offsetting these increases to accumulated other comprehensive income is an after tax adjustment to United’s pension asset resulting in a decline of $6.63 million.

EARNINGS SUMMARY

Net income for the year 2012 was $82.61 million or $1.64 per diluted share compared to $75.61 million or $1.61 per diluted share for the year of 2011.

United’s return on average assets for the year of 2012 was 0.98% and return on average shareholders’ equity was 8.35% as compared to 0.97% and 8.50% for the year of 2011.

As previously stated, United completed its acquisition of Centra during the third quarter of 2011. As a result, comparisons for the year of 2012 to the same time period in 2011 are impacted by increased levels of average balances, income, and expense due to the acquisition. The results for the year of 2012 included an accrual of $3.3 million with respect to a settlement of claims asserted in class actions against United Bank, Inc. of West Virginia. In addition, the results for year of 2012 included noncash, before-tax, other-than-temporary impairment charges of $7.38 million on certain investment securities. The results for the year of 2011 included before-tax, other-than-temporary impairment charges of $20.41 million on certain investment securities.

Net interest income for the year of 2012 was $277.71 million, an increase of $16.98 million or 6.51% from the prior year. The provision for loan losses was $17.86 million for the year 2012 as compared to $17.14 million for the year of 2011.

Noninterest income was $66.29 million for the year of 2012, up $15.46 million or 30.40% when compared to the year of 2011. Included in noninterest income for the year of 2012 and 2011 were the previously mentioned noncash before-tax other-than-temporary impairment charges of $7.38 million and $20.41 million, respectively. Noninterest expense was $204.66 million, an increase of $20.61 million or 11.20% for the year of 2012 when compared to 2011.

Income tax expense for the year of 2012 was $38.87 million as compared to $34.77 million for the year of 2011. United’s effective tax rate was approximately 32.0% and 31.5% for years ended December 31, 2012 and 2011, respectively, as compared to 31.1% for 2010.

The following discussion explains in more detail the results of operations by major category.

 

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Net Interest Income

Net interest income represents the primary component of United’s earnings. It is the difference between interest income from earning assets and interest expense incurred to fund these assets. Net interest income is impacted by changes in the volume and mix of interest-earning assets and interest-bearing liabilities, as well as changes in market interest rates. Such changes, and their impact on net interest income in 2012 and 2011, are presented below.

Net interest income for the year of 2012 was $277.71 million, which was an increase of $16.98 million or 6.51% from the year of 2011. The $16.98 million increase in net interest income occurred because total interest income increased $7.38 million while total interest expense declined $9.60 million from the year of 2011. For the purpose of this remaining discussion, net interest income is presented on a tax-equivalent basis to provide a comparison among all types of interest earning assets. The tax-equivalent basis adjusts for the tax-favored status of income from certain loans and investments. Although this is a non-GAAP measure, United’s management believes this measure is more widely used within the financial services industry and provides better comparability of net interest income arising from taxable and tax-exempt sources. United uses this measure to monitor net interest income performance and to manage its balance sheet composition.

Tax-equivalent net interest income for the year of 2012 was $284.12 million, an increase of $16.81 million or 6.29% from the year of 2011. The net interest margin for the year of 2012 was 3.81%, down 6 basis points from a net interest margin of 3.87% for the year of 2011.

Tax-equivalent interest income for the year of 2012 was $330.31 million, a $7.20 million or 2.22% increase from the year of 2011. This increase was primarily attributable to an increase in average earning assets from the Centra acquisition. Average earning assets increased $553.61 million or 8.02% from the year of 2011. Average net loans increased $600.91 million or 10.64% for the year of 2012. Partially offsetting the increases to tax-equivalent interest income for the year of 2012 was a decline of 25 basis points in the average yield on earning assets as compared to the year of 2011. The average yield on earning assets was 4.43% for the year of 2012 and 4.68% for the year of 2011. In addition, average investments for the year of 2012 decreased $44.50 million or 5.50% from the year of 2011 due to sales, calls and maturities.

Interest expense for the year of 2012 was $46.19 million, a decrease of $9.60 million or 17.21% from the year of 2011. The decline in interest expense for the year of 2012 was attributable to a decrease of 22 basis points in the average cost of funds for the year of 2012 as a result of lower market interest rates. In particular, the average cost of interest-bearing deposits was 0.64%, a decline of 18 basis points from 0.82% for the year of 2011 and the average cost of long-term borrowings was 4.45% for the year of 2012, a decrease of 34 basis points from 4.79% for the year of 2011. In addition, United repaid approximately $61 million in long-term borrowings. Partially offsetting these decreases to interest expense was an increase of $268.70 million or 5.00% in average interest-bearing liabilities due mainly to increases of $283.36 million and $24.13 million, respectively, in average interest-bearing deposits and short-term borrowings. The average cost of short-term borrowings was 0.11% for the year of 2012, up 5 basis points from 0.06% for the year of 2011.

The following table reconciles the difference between net interest income and tax-equivalent net interest income for the year ended December 31, 2012, 2011 and 2010.

 

     Year Ended  
     December 31      December 31      December 31  
(Dollars in thousands)    2012      2011      2010  

Net interest income, GAAP basis

   $ 277,707       $ 260,728       $ 238,186   

Tax-equivalent adjustment (1)

     6,413         6,587         5,906   
  

 

 

    

 

 

    

 

 

 

Tax-equivalent net interest income

   $ 284,120       $ 267,315       $ 244,092   
  

 

 

    

 

 

    

 

 

 

 

  (1)

The tax-equivalent adjustment combines amounts of interest income on federally nontaxable loans and investment securities using the statutory federal income tax rate of 35%. All interest income on loans and investment securities was subject to state income taxes.

 

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The following table shows the consolidated daily average balance of major categories of assets and liabilities for each of the three years ended December 31, 2012, 2011 and 2010 with the consolidated interest and rate earned or paid on such amount. The interest income and yields on federally nontaxable loans and investment securities are presented on a tax-equivalent basis using the statutory federal income tax rate of 35%. Interest income on all loans and investment securities was subject to state taxes.

 

     Year Ended
December 31, 2012
     Year Ended
December 31, 2011
     Year Ended
December 31, 2010
 
(Dollars in thousands)    Average
Balance
    Interest
(1)
     Avg.
Rate
(1)
     Average
Balance
    Interest
(1)
     Avg.
Rate
(1)
     Average
Balance
    Interest
(1)
     Avg.
Rate

(1)
 

ASSETS

                       

Earning Assets:

                       

Federal funds sold, securities repurchased under agreements to resell & other short-term investments

   $ 439,481      $ 1,169         0.27%       $ 442,282      $ 1,255         0.28%       $ 407,908      $ 1,267         0.31%   

Investment Securities:

                       

Taxable

     664,437        17,364         2.61%         707,897        23,069         3.26%         791,600        34,564         4.37%   

Tax-exempt

     99,706        5,421         5.44%         100,743        6,130         6.08%         106,981        7,257         6.78%   
  

 

 

    

 

 

    

 

 

 

Total Securities

     764,143        22,785         2.98%         808,640        29,199         3.61%         898,581        41,821         4.65%   

Loans, net of unearned

Income (2)

     6,322,740        306,356         4.85%         5,721,510        292,655         5.11%         5,471,297        286,200         5.23%   

Allowance for loan losses

     (73,549           (73,231           (69,643     
  

 

 

         

 

 

         

 

 

      

Net loans

     6,249,191           4.90%         5,648,279           5.18%         5,401,654           5.30%   
  

 

 

    

 

 

    

 

 

 

Total earning assets

     7,452,815      $ 330,310         4.43%         6,899,201      $ 323,109         4.68%         6,708,143      $ 329,288         4.91%   
    

 

 

         

 

 

         

 

 

    

Other assets

     946,698              881,635              825,831        
  

 

 

         

 

 

         

 

 

      

TOTAL ASSETS

   $ 8,399,513            $ 7,780,836            $ 7,533,974        
  

 

 

         

 

 

         

 

 

      

LIABILITIES

                       

Interest-Bearing Funds:

                       

Interest-bearing deposits

   $ 5,056,162      $ 32,248         0.64%       $ 4,772,801      $ 39,075         0.82%       $ 4,597,335      $ 55,663         1.21%   

Short-term borrowings

     280,706        303         0.11%         256,578        166         0.06%         288,704        167         0.06%   

Long- term borrowings

     306,606        13,639         4.45%         345,395        16,553         4.79%         682,507        29,366         4.30%   
  

 

 

    

 

 

    

 

 

 

Total Interest-Bearing Funds

     5,643,474        46,190         0.82%         5,374,774        55,794         1.04%         5,568,546        85,196         1.53%   
    

 

 

         

 

 

         

 

 

    

Noninterest-bearing deposits

     1,720,098              1,468,036              1,128,749        

Accrued expenses and other liabilities

     46,113              48,087              54,029        
  

 

 

         

 

 

         

 

 

      

TOTAL LIABILITIES

     4,409,685              6,890,897              6,751,324        

SHAREHOLDERS’ EQUITY

     989,828              889,939              782,650        
  

 

 

         

 

 

         

 

 

      

TOTAL LIABILITIES AND

SHAREHOLDERS’ EQUITY

   $ 8,399,513            $ 7,780,836            $ 7,533,974        
  

 

 

         

 

 

         

 

 

      

NET INTEREST INCOME

     $ 284,120            $ 267,315            $ 244,092      
    

 

 

         

 

 

         

 

 

    

INTEREST SPREAD

          3.61%              3.64%              3.38%   

NET INTEREST MARGIN

          3.81%              3.87%              3.64%   

 

  (1)

The interest income and the yields on federally nontaxable loans and investment securities are presented on a tax-equivalent basis using the statutory federal income tax rate of 35%.

  (2)

Nonaccruing loans are included in the daily average loan amounts outstanding.

 

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The following table sets forth a summary for the periods indicated of the changes in consolidated interest earned and interest paid detailing the amounts attributable to (i) changes in volume (change in the average volume times the prior year’s average rate), (ii) changes in rate (change in the average rate times the prior year’s average volume), and (iii) changes in rate/volume (change in the average volume times the change in average rate).

 

     2012 Compared to 2011      2011 Compared to 2010  
     Increase (Decrease) Due to      Increase (Decrease) Due to  
                   Rate/                           Rate/         
(In thousands)    Volume      Rate      Volume      Total      Volume      Rate      Volume      Total  

Interest income:

                       

Federal funds sold, securities purchased under agreements to resell and other short-term investments

   $ (8)       $ (44)       $ (34)       $ (86)       $ 107       $ (122)       $ 3       $ (12)   

Investment securities:

                       

Taxable

     (1,417)         (4,601)         313         (5,705)         (3,658)         (8,787)         950         (11,495)   

Tax-exempt (1)

     (63)         (645)         (1)         (709)         (423)         (749)         45         (1,127)   

Loans (1),(2)

     31,127         (15,815)         (1,611)         13,701         13,071         (6,482)         (134)         6,455   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

TOTAL INTEREST INCOME

     29,639         (21,105)           (1,333)         7,201         9,097         (16,140)         864         (6,179)   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Interest expense:

                       

Interest-bearing deposits

   $ 2,324       $ (8,591)       $ (560)       $ (6,827)       $ 2,123       $ (17,930)       $ (781)       $ (16,588)   

Short-term borrowings

     14         128         (5)         137         (19)         0         18         (1)   

Long-term borrowings

     (1,858)         (1,174)         118         (2,914)         (14,496)         3,344           (1,661)         (12,813)   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

TOTAL INTEREST EXPENSE

     480         (9,637)         (447)         (9,604)           (12,392)           (14,586)         (2,424)           (29,402)   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

NET INTEREST INCOME

   $   29,159       $   (11,468)       $ (886)       $   16,805       $ 21,489       $ (1,554)       $ 3,288       $ 23,223   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

  (1)

Yields and interest income on federally tax-exempt loans and investment securities are computed on a fully tax-equivalent basis using the statutory federal income tax rate of 35%.

  (2)

Nonaccruing loans are included in the daily average loan amounts outstanding.

Provision for Loan Losses

At December 31, 2012, nonperforming loans were $92.80 million or 1.43% of loans, net of unearned income compared to nonperforming loans of $79.66 million or 1.28% of loans, net of unearned income at December 31, 2011. The components of nonperforming loans include: 1) nonaccrual loans, 2) loans which are contractually past due 90 days or more as to interest or principal, but have not been put on a nonaccrual basis and 3) loans whose terms have been restructured for economic or legal reasons due to financial difficulties of the borrowers.

Loans past due 90 days or more were $18.07 million at December 31, 2012, an increase of $1.89 million or 11.67% from $16.18 million at year-end 2011. The increase in loans past due 90 days or more was primarily due to an increase in commercial past due relationships. At December 31, 2012, nonaccrual loans were $71.56 million, an increase of $11.67 million or 19.48% from $59.89 million at year-end 2011. The increase in nonaccrual loans was primarily due to the deterioration in financial condition of two large relationships which necessitated transfer of the relationships to nonaccrual status. Restructured loans were $3.17 million at December 31, 2012 as compared to $3.59 million at year-end 2011. The decrease in restructured loans was mainly due to the repayment of a restructured consumer loan. The loss potential on these loans has been properly evaluated and allocated within United’s allowance for loan losses.

Nonperforming assets include nonperforming loans and real estate acquired in foreclosure or other settlement of loans (OREO). Total nonperforming assets of $142.29 million, including OREO of $49.48 million at December 31, 2012, represented 1.69% of total assets which compares favorably to United’s most recently reported Federal Reserve peer group

 

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banking companies’ (bank holding companies with total assets between $3 and $10 billion) percentage of 2.21% at September 30, 2012.

Management is not aware of any other significant loans or securities, groups of loans or securities, or segments of the loan or investment portfolio not included below or disclosed elsewhere herein where there are serious doubts as to the ability of the borrowers or issuers to comply with the present repayment terms of the debt. The following table summarizes nonperforming assets for the indicated periods.

 

     December 31  
     2012      2011      2010      2009      2008  
     (In thousands)   

Nonaccrual loans

   $ 71,559       $ 59,892       $ 59,996       $ 50,856       $ 42,317   

Loans which are contractually past due 90 days or more as to interest or principal, and are still accruing interest

     18,068         16,179         6,798         20,314         11,881   

Restructured loans (1)

     3,175         3,592         437         1,087         0   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total nonperforming loans

     92,802         79,663         67,231         72,257         54,198   

Other real estate owned

     49,484         51,760         44,770         40,058         19,817   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

TOTAL NONPERFORMING ASSETS

   $   142,286       $   131,423       $   112,001       $   112,315       $   74,015   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

(1) Restructured loans with an aggregate balance of $375 thousand and $1.53 million at December 31, 2012 and 2011, respectively, were on nonaccrual status, but are not included in the “Nonaccrual loans” category. A restructured loan with a balance of $437 thousand at December 31, 2010 was past due 90 days or more, but was not included in the “Loans which are contractually past due 90 days or more as to interest or principal, and are still accruing interest“category.

Loans are designated as impaired when, in the opinion of management, the collection of principal and interest in accordance with the loan contract is doubtful. At December 31, 2012, impaired loans were $95.39 million, which was a decrease of $32.65 million or 25.50% from the $128.04 million in impaired loans at December 31, 2011. This decrease in impaired loans was due mainly to decreased outstanding principal associated with impaired loans in the Company’s non-owner occupied commercial real estate, residential real estate and construction and land development portfolios as a result of repayment of principal through the sale of associated collateral combined with improved borrower collateral positions which led to reduction of impairments. The loss potential on these loans has been properly evaluated and allocated within United’s allowance for loan losses. For further details on impaired loans, see Note E, Notes to Consolidated Financial Statements.

United maintains an allowance for loan losses and a reserve for lending-related commitments. The combined allowance for loan losses and reserve for lending-related commitments is referred to as the allowance for credit losses. At December 31, 2012, the allowance for credit losses was $75.56 million as compared to $75.73 million at December 31, 2011.

At December 31, 2012, the allowance for loan losses was $73.90 million as compared to $73.87 million at December 31, 2011. As a percentage of loans, net of unearned income, the allowance for loan losses was 1.13% at December 31, 2012 and 1.19% of loans, net of unearned income at December 31, 2011. The ratio of the allowance for loan losses to nonperforming loans or coverage ratio was 79.63% and 92.73% at December 31, 2012 and December 31, 2011, respectively. For United, this ratio at December 31, 2012 decreased from the ratio at December 31, 2011 because nonperforming loans increased $13.14 million or 16.49% while the allowance for loan losses was relatively flat from year-end 2011. Adjustments to risk grades and qualitative risk factors within the allowance for loan loss analysis were based on delinquency and loss trends of such loans and resulted in increased allowance allocations of $2.33 million or 3.27%. The increased allocations did not increase the overall level of the reserve because of a decrease in the estimate for imprecision of $2.31 million. The decrease in the estimate for imprecision is attributable to refined methodology utilized by the Bank to fully allocate amounts reserved for losses inherent in the Bank’s portfolio. The Company’s detailed methodology and analysis indicated an increase in the allocated allowance for loan losses primarily due to increased loss allocations on impaired loans.

For the years ended December 31, 2012 and 2011, the provision for loan losses was $17.86 million and $17.14 million, respectively. Net charge-offs were $17.84 million for the year of 2012 as compared to net charge-offs of $16.30 million for the year of 2011. Annualized net charge-offs as a percentage of average loans were 0.28% for the year of 2012. This ratio

 

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compares favorably to United’s most recently reported Federal Reserve peer group’s net charge-offs to average loans percentage of 0.64% for the third quarter of 2012. The reserve for lending-related commitments at December 31, 2012 was $1.66 million, a decrease of $197 thousand or 10.63% from December 31, 2011. Changes to the reserve for lending-related commitments are recorded in other expense in the Consolidated Statements of Income.

The following table summarizes United’s credit loss experience for each of the five years ended December 31:

 

     2012     2011     2010     2009     2008  
     (Dollars in thousands)   

Balance of allowance for credit losses at beginning of year

   $ 75,727      $ 75,039      $ 70,010      $ 63,603      $ 58,744   

Loans charged off:

          

Commercial, financial & agricultural (2)

     7,028        4,892        5,495        22,626        5,710   

Residential real estate (2)

     8,882        7,069        9,334        9,695        6,505   

Construction & land development (2)

     3,099        6,290        9,298        6,288        6,375   

Consumer (2)

     1,546        1,354        1,635        2,468        2,608   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

TOTAL CHARGE-OFFS

     20,555        19,605        25,762        41,077        21,198   

Recoveries:

          

Commercial, financial & agricultural (2)

     1,544        2,565        16,158        669        318   

Residential real estate (2)

     821        248        493        272        215   

Construction & land development (2)

     54        136        21        89        23   

Consumer (2)

     301        356        346        389        346   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

TOTAL RECOVERIES

     2,720        3,305        17,018        1,419        902   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

NET LOANS CHARGED OFF

     17,835        16,300        8,744        39,658        20,296   

Provision for credit losses

     17,665        16,988        13,773        46,065        25,155   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

BALANCE OF ALLOWANCE FOR CREDIT LOSSES AT END OF YEAR

   $ 75,557      $ 75,727      $ 75,039      $ 70,010      $ 63,603   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Loans outstanding at the end of period (gross) (1)

   $ 6,517,780      $ 6,234,280      $ 5,263,351      $ 5,740,778      $ 6,020,558   

Average loans outstanding during period (net of unearned income) (1)

   $ 6,314,146      $ 5,718,639      $ 5,467,927      $ 5,883,995      $ 5,863,858   

Net charge-offs as a percentage of average loans outstanding

     0.28     0.29     0.16     0.67     0.35

Allowance for credit losses, as a percentage of nonperforming loans

     81.42     95.06     111.6     96.89     117.35

 

  (1)

Excludes loans held for sale.

  (2)

Certain loan amounts were reclassified in prior years to conform with the new disclosure rules about the Credit Quality of Financing Receivables and the Allowance for Credit Losses in Accounting Standards Codification (ASC) topic 310.

United evaluates the adequacy of the allowance for credit losses and its loan administration policies are focused upon the risk characteristics of the loan portfolio and lending-related commitments. United’s process for evaluating the allowance is a formal company-wide process that focuses on early identification of potential problem credits and procedural discipline in managing and accounting for those credits. This process determines the appropriate level of the allowance for credit losses, allocation among loan types and lending-related commitments, and the resulting provision for credit losses. The provision for credit losses includes the provision for loan losses and a provision for lending-related commitments included in other expenses.

Allocations are made for specific commercial loans based upon management’s estimate of the borrowers’ ability to repay and other factors impacting collectibility. Other commercial loans not specifically reviewed on an individual basis are evaluated based on historical loss percentages applied to loan pools that have been segregated by risk. Allocations for loans other than commercial loans are made based upon historical loss experience adjusted for current environmental conditions. The allowance for credit losses includes estimated probable inherent but undetected losses within the portfolio due to uncertainties in economic conditions, delays in obtaining information, including unfavorable information about a borrower’s financial condition, the difficulty in identifying triggering events that correlate perfectly to subsequent loss rates, and risk

 

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factors that have not yet fully manifested themselves in loss allocation factors. In addition, a portion of the allowance accounts for the inherent imprecision in the allowance for credit losses analysis.

The following table presents the allocation of United’s allowance for credit losses for each of the five years ended December 31:

 

     2012      2011      2010      2009      2008  
     (In thousands)   

Commercial, financial & agricultural (1)

   $ 37,264       $ 36,120       $ 37,490       $ 43,467       $ 39,550   

Residential real estate (1)

     14,895         13,880         11,653         6,971         4,144   

Construction & land development (1)

     18,858         19,151         18,738         12,184         10,169   

Consumer (1)

     2,620         2,151         2,161         3,545         4,920   

Allowance for estimated imprecision

     264         2,572         2,991         1,686         2,711   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Allowance for loan losses

   $ 73,901       $ 73,874       $ 73,033       $ 67,853       $ 61,494   

Reserve for lending-related commitments

     1,656         1,853         2,006         2,157         2,109   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Allowance for credit losses

   $   75,557       $   75,727       $   75,039       $   70,010       $   63,603   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

(1) Certain loan amounts were reclassified in 2010 to conform with the new disclosure rules about the Credit Quality of Financing Receivables and the Allowance for Credit Losses in Accounting Standards Codification (ASC) topic 310.

The following is a summary of loans outstanding as a percent of total loans at December 31:

 

     2012      2011      2010      2009      2008  

Commercial, financial & agricultural (1)

     59.07%         56.31%         53.95%         52.35%         52.66%   

Residential real estate (1)

     28.23%         30.36%         32.32%         32.41%         31.85%   

Construction & land development (1)

     8.46%         8.83%         8.95%         9.76%         10.01%   

Consumer (1)

     4.24%         4.50%         4.78%         5.48%         5.48%   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

     100.00%         100.00%         100.00%         100.00%         100.00%   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

(1) Certain loan amounts were reclassified in prior years to conform with the new disclosure rules about the Credit Quality of Financing Receivables and the Allowance for Credit Losses in Accounting Standards Codification (ASC) topic 310.

United’s formal company-wide review of the allowance for loan losses at December 31, 2012 produced increased allocations in four of the six loan categories. The allowance allocated to commercial real estate nonowner-occupied loans increased by $1.23 million due to an increase in historical loss rates and outstanding loan balances. The allocation related to the residential real estate loan pool increased by $1.02 million due to an increase in historical loss rates, as well as the consumer loan pool which experienced an increase in allocation of $469 thousand due to an increase in historical loss rates. The commercial real estate owner-occupied loan pool allocation increased by $207 thousand due to an increase in historical loss rates and specific allocation for impaired loans. Offsetting these increases was a decrease in the other commercial loan pool allocation of $292 thousand driven by a combination of lower outstanding balances and a decrease in specific allocations for floorplan lending. The real estate construction and development allocation decreased $293 thousand due to a change in qualitative factors within the allowance calculation. In summary, the overall level of the allowance for loan losses was stable in comparison to year-end 2011 as a result of offsetting factors within the portfolio as described above.

An allowance is established for probable credit losses on impaired loans via specific allocations. Nonperforming commercial loans and leases are regularly reviewed to identify impairment. A loan or lease is impaired when, based on current information and events, it is probable that the Company will not be able to collect all amounts contractually due. Measuring impairment of a loan requires judgment and estimates, and the eventual outcomes may differ from those estimates. Impairment is measured based upon the present value of expected future cash flows from the loan discounted at the loan’s effective rate, the loan’s observable market price or the fair value of collateral if the loan is collateral dependent. When the selected measure is less than the recorded investment in the loan, an impairment has occurred. The allowance for impaired loans was $14.20 million at December 31, 2012 and $11.16 million at December 31, 2011. Compared to the prior year-end, this element of the allowance increased by $3.04 million primarily due to increased specific allocations for the nonowner-occupied commercial real estate, other commercial loan, and real estate construction and development loan pools.

 

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An allowance is also recognized for imprecision inherent in loan loss migration models and other estimates of loss. There are many factors affecting the allowance for loan losses and reserve for lending-related commitments; some are quantitative while others require qualitative judgment. Although management believes its methodology for determining the allowance adequately considers all of the potential factors to identify and quantify probable losses in the portfolio, the process includes subjective elements and is therefore susceptible to change. This estimate for imprecision has been established to recognize the variance, within a reasonable margin, of the loss estimation process. The estimate for imprecision decreased at December 31, 2012 by $2.31 million to $264 thousand. This estimate for imprecision represents 0.35% of the Company’s total allowance for credit losses and in as much as this variance approximates a pre-determined narrow parameter, the methodology has confirmed that the Company’s allowance for credit losses is at an appropriate level.

Management believes that the allowance for credit losses of $75.56 million at December 31, 2012 is adequate to provide for probable losses on existing loans and lending-related commitments based on information currently available.

United’s loan administration policies are focused on the risk characteristics of the loan portfolio in terms of loan approval and credit quality. The commercial loan portfolio is monitored for possible concentrations of credit in one or more industries. Management has lending limits as a percentage of capital per type of credit concentration in an effort to ensure adequate diversification within the portfolio. Most of United’s commercial loans are secured by real estate located in West Virginia, southeastern Ohio, Pennsylvania, Virginia, Maryland and the District of Columbia. It is the opinion of management that these commercial loans do not pose any unusual risks and that adequate consideration has been given to these loans in establishing the allowance for credit losses.

Management is not aware of any potential problem loans, trends or uncertainties, which it reasonably expects, will materially impact future operating results, liquidity, or capital resources which have not been disclosed. Additionally, management has disclosed all known material credits, which cause management to have serious doubts as to the ability of such borrowers to comply with the loan repayment schedules.

Other Income

Other income consists of all revenues, which are not included in interest and fee income related to earning assets. Noninterest income has been and will continue to be an important factor for improving United’s profitability. Recognizing the importance, management continues to evaluate areas where noninterest income can be enhanced.

Noninterest income was $66.29 million for the year of 2012, up $15.46 million or 30.40% from the year of 2011. Net losses on investment securities transactions for the year of 2012 were $6.93 million compared to net losses of $18.84 million for the year of 2011. Included in net losses on investment securities for the year of 2012 were before-tax other-than-temporary impairment charges of $7.38 million on certain investment securities consisting primarily of $5.97 million on pooled trust preferred collateralized debt obligations (TRUP CDOs) and $1.41 million on collateralized mortgage obligations (CMOs) and a before-tax, net gain of $446 thousand on the sale of investment securities. Included in net losses on investment securities for the year of 2011 were before-tax other-than-temporary impairment charges of $20.41 million on certain investment securities consisting primarily of $17.25 million on pooled trust preferred collateralized debt obligations (TRUP CDOs) and $3.16 million on collateralized mortgage obligations (CMOs) and a before-tax, net gain of $1.58 million on the sale of investment securities. Excluding the results of the investment security transactions, noninterest income for the year of 2012 would have increased $3.55 million or 5.09% from the year of 2011.

Revenue from trust income and brokerage commissions increased $2.50 million or 18.75% due mainly to increased brokerage volume and the value of assets under management. United continues its efforts to broaden the scope and activity of its trust and brokerage service areas, especially in the northern Virginia market, to provide additional sources of fee income that complement United’s traditional banking products and services. The northern Virginia market provides a relatively large number of potential customers with high per capita incomes.

Mortgage banking income increased $1.52 million or 159.56% due to increased mortgage loan production and sales in the secondary market during the year of 2012 as compared to 2011. Mortgage loan sales were $133.11 million in 2012 as compared to $72.02 million in 2011.

 

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Fees from deposit services were $41.83 million for the year of 2012 which was relatively flat from the year of 2011, decreasing $278 thousand or less than 1%. In particular, automated teller machine (ATM) fees decreased $1.63 million and overdraft or insufficient funds (NSF) fees declined $869 thousand. Virtually offsetting these declines were increases in check card income of $2.35 million and account analysis fees of $351 thousand.

Income from bank owned life insurance policies decreased $247 thousand or 4.67% due mainly to a smaller increase in the cash surrender values of the insurance policies in 2012 as compared to 2011. Fees from bankcard transactions increased $424 thousand or 16.49% as compared to the year of 2011 due to a higher volume of transactions. Other income decreased $753 thousand or 21.13% for the year of 2012 as compared to last year’s income mainly due to a decrease of $332 thousand from derivatives not in a hedging relationship as a result of a change in value. A corresponding amount of expense is included in other expense in the income statement.

Other Expense

Just as management continues to evaluate areas where noninterest income can be enhanced, it strives to improve the efficiency of its operations to reduce costs. Other expense includes all items of expense other than interest expense, the provision for credit losses and income tax expense. Noninterest expense for the year of 2012 was $204.66 million, an increase of $20.61 million or 11.20% from the year of 2011. This increase was mainly the result of the Centra merger.

Employee compensation for the year of 2012 increased $6.79 million or 10.51% from the year of 2011 due mainly to the additional employees from the Centra merger. Also included in employee compensation was expense for stock options of $1.91 million for the year of 2012 as compared to $1.13 million for the year of 2011.

Employee benefits expense increased $3.82 million or 22.01% due mainly an increase of $3.09 million in pension expense due to a change in the discount rate used in the valuation process. Also, health insurance expense increased $369 thousand and Federal Insurance Contributions Act (FICA) expense increased $170 thousand due mainly to the additional employees from Centra. United uses certain valuation methodologies to measure the fair value of the assets within United’s pension plan which are presented in Note M, Notes to Consolidated Financial Statements. The funded status of United’s pension plan is based upon the fair value of the plan assets compared to the projected benefit obligation. The determination of the projected benefit obligation and the associated periodic benefit expense involves significant judgment and estimation of future employee compensation levels, the discount rate and the expected long-term rate of return on plan assets. If United assumes a 1% increase or decrease in the estimation of future employee compensation levels while keeping all other assumptions constant, the benefit cost associated with the pension plan would increase by approximately $4.28 million and $2.94 million, respectively. If United assumes a 1% increase or decrease in the discount rate while keeping all other assumptions constant, the benefit cost associated with the pension plan would increase by approximately $1.87 million and $5.54 million, respectively. If United assumes a 1% increase or decrease in the expected long-term rate of return on plan assets while keeping all other assumptions constant, the benefit cost associated with the pension plan would increase by approximately $2.57 million and $4.57 million, respectively.

Net occupancy expense increased $1.83 million or 9.85% for the year of 2012 as compared to the year of 2011. The higher net occupancy expense for 2012 was due mainly to the additional offices acquired from Centra. In particular, building rental expense increased $687 thousand, real property taxes increased $370 thousand, building maintenance increased $353 thousand, and building depreciation increased $294 thousand.

Other real estate owned (OREO) expense increased $1.55 million or 22.09% for the year of 2012 as compared to the year of 2011. The increase from 2011 was due mainly to decreases in the fair values of OREO properties. Equipment expense increased $331 thousand or 4.15% for the year of 2012 as compared to the year of 2011 due to a higher depreciation and maintenance expense as a result of the Centra merger.

Data processing expense increased $895 thousand or 7.69% for the year of 2012 as compared to the year of 2011 due to the additional processing as a result of the Centra merger and the conversion to a new servicer. Bankcard processing fees increased $264 thousand or 25.12% as a result of higher volume of transactions. FDIC insurance expense decreased $2.40 million or 28.39% for the year of 2012 as compared to the year of 2011 due mainly to lower premiums.

 

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Other expenses increased $7.53 million or 15.91% for the year of 2012 as compared to the year of 2011. This increase was due mainly to the previously mentioned accrual of $3.3 million with respect to class actions against United Bank, Inc. of West Virginia. The additional increase from the year of 2011 was due mainly to higher general operating expenses as a result of the Centra merger. In particular, ATM expense for the year of 2012 increased $1.90 million and consulting, legal expense increased $1.42 million, office supplies increased $624 thousand and amortization expense on intangibles increased $423 thousand.

United’s efficiency ratio was 54.08% for the year of 2012 as compared to 51.81% for the year of 2011.

Income Taxes

For the year ended December 31, 2012, income taxes were $38.87 million, compared to $34.77 million for 2011. United’s effective tax rate was approximately 32.0% and 31.5% for years ended December 31, 2012 and 2011, respectively, as compared to 31.1% for 2010. For further details related to income taxes, see Note L, Notes to Consolidated Financial Statements.

Quarterly Results

Net income for the first quarter of 2012 was $21.01 million or $0.42 per diluted share compared to $17.89 million or $0.41 per diluted share in 2011. The results for the first quarter of 2012 included noncash, before-tax, other-than-temporary impairment charges of $1.38 million on certain investment securities. The results for the first quarter of 2011 included noncash, before-tax, other-than-temporary impairment charges of $2.11 million on certain investment securities.

For the second quarter of 2012, net income was $21.05 million or $0.42 per diluted share compared to $17.45 million or $0.40 per diluted share in 2011. The results of the second quarter of 2012 included noncash, before-tax, other-than-temporary impairment charges of $1.74 million on certain investment securities. The results of the second quarter of 2011 included before-tax net gains of $630 thousand on the sale of investment securities and noncash, before-tax, other-than-temporary impairment charges of $4.10 million on certain investment securities.

In the third quarter of 2012, net income was $19.33 million or $0.38 per diluted share as compared to $20.02 million or $0.40 per diluted share in the third quarter of 2011. The results of the third quarter of 2012 included an accrual of $3.3 million with respect to a settlement of claims asserted in class actions against United Bank, Inc. of West Virginia. In addition, the results for the third quarter of 2012 included noncash, before-tax, other-than-temporary impairment charges of $2.26 million on certain investment securities. The results of the third quarter of 2011 included before-tax, other-than-temporary impairment charges of $7.92 million on certain investment securities and before-tax net gains of $445 thousand on the sale of investment securities.

Fourth quarter of 2012 net income was $21.21 million or $0.42 per diluted share, an increase from net income of $20.26 million or $0.40 per diluted share in the fourth quarter of 2011. The results for the fourth quarter of 2012 included noncash, before-tax, other-than-temporary impairment charges of $2.00 million on certain investment securities. In comparison, the results for the fourth quarter of 2011 included noncash, before-tax, other-than-temporary impairment charges of $6.29 million on certain investment securities.

Tax-equivalent net interest income for the fourth quarter of 2012 was $71.30 million, a decrease of $2.42 million or 3.28% from the fourth quarter of 2011 due mainly to a decrease in the average yield on earning assets. The fourth quarter of 2012 average yield on earning assets decreased 22 basis points from the fourth quarter of 2011. In addition, average earning assets decreased $142.88 million or 1.89% from the fourth quarter of 2011 as average short-term investments and average investment securities declined $270.26 million and $83.79 million, respectively. Average net loans did increase $211.17 million or 3.41% for the fourth quarter of 2012 from the fourth quarter of 2011, partially offsetting the decreases in average short-term investments and investment securities. Partially offsetting the decreases to tax-equivalent net interest income for the fourth quarter of 2012 was a decline of 20 basis points in the average cost of funds as compared to the fourth quarter of 2011. The net interest margin for the fourth quarter of 2012 was 3.83%, which was a decrease of 5 basis points from a net

 

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interest margin of 3.88% for the fourth quarter of 2011.

For the fourth quarter of 2012, the provision for credit losses was $5.82 million while net charge-offs were $5.79 million.

Noninterest income for the fourth quarter of 2012 was $16.75 million, which was an increase of $4.87 million from the fourth quarter of 2011. Included in noninterest income for the fourth quarter of 2012 were noncash, before-tax, other-than-temporary impairment charges of $2.00 million on certain investment securities as compared to noncash, before-tax other-than-temporary impairment charges of $6.29 million on certain investment securities for the fourth quarter of 2011. Excluding the results of the noncash, other-than-temporary impairment charges as well as net gains and losses from sales and calls of investment securities, noninterest income for the fourth quarter of 2012 would have increased $275 thousand or 1.51% from the fourth quarter of 2011. This increase for the fourth quarter of 2012 was due primarily to increases of $362 thousand in income from trust and brokerage services due to increases in volume and the value of assets under management and $469 thousand in mortgage banking income due to increased production and sales of mortgage loans in the secondary market. Partially offsetting these increases was a decrease of $524 thousand in fees from deposit services.

Noninterest expense for the fourth quarter of 2012 was $49.27 million, a decrease of $756 thousand or 1.51% from the fourth quarter of 2011. Merger expenses of $744 thousand related to the acquisition of Centra were included in the results for the fourth quarter of 2011. In addition, equipment expense for the fourth quarter of 2012 declined $728 thousand due to lower amounts of maintenance and depreciation expense. Partially offsetting these amounts were increases of $516 thousand and $404 thousand in employee compensation and benefits expense, respectively.

Additional quarterly financial data for 2012 and 2011 may be found in Note V, Notes to Consolidated Financial Statements.

The Effect of Inflation

United’s income statements generally reflect the effects of inflation. Since interest rates, loan demand and deposit levels are impacted by inflation, the resulting changes in the interest-sensitive assets and liabilities are included in net interest income. Similarly, operating expenses such as salaries, rents and maintenance include changing prices resulting from inflation. One item that would not reflect inflationary changes is depreciation expense. Subsequent to the acquisition of depreciable assets, inflation causes price levels to rise; therefore, historically presented dollar values do not reflect this inflationary condition. With inflation levels at relatively low levels and monetary and fiscal policies being implemented to keep the inflation rate increases within an acceptable range, management expects the impact of inflation would continue to be minimal in the near future.

The Effect of Regulatory Policies and Economic Conditions

United’s business and earnings are affected by the monetary and fiscal policies of the United States government, its agencies and various other governmental regulatory authorities. The Federal Reserve Board regulates the supply of money in order to influence general economic conditions. Among the instruments of monetary policy available to the Federal Reserve Board are (i) conducting open market operations in United States government obligations, (ii) changing the discount rate on financial institution borrowings, (iii) imposing or changing reserve requirements against financial institution deposits, and (iv) restricting certain borrowings and imposing or changing reserve requirements against certain borrowings by financial institutions and their affiliates. These methods are used in varying degrees and combinations to affect directly the availability of bank loans and deposits, as well as the interest rates charged on loans and paid on deposits.

United’s business and earnings are also affected by general and local economic conditions. For most of 2012 and 2011, certain credit markets experienced difficult conditions and volatility. Downturns in the credit market can cause a decline in the value of certain loans and securities, a reduction in liquidity and a tightening of credit. A downturn in the credit market often signals a weakening economy that can cause job losses and thus distress on borrowers and their ability to repay loans. Uncertainties in credit markets and the economy present significant challenges for the financial services industry.

Regulatory policies and economic conditions have had a significant effect on the operating results of financial institutions in the past and are expected to continue to do so in the future; however, United cannot accurately predict the nature, timing or extent of any effect such policies or economic conditions may have on its future business and earnings.

 

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Contractual Obligations, Commitments, Contingent Liabilities and Off-Balance Sheet Arrangements

United has various financial obligations, including contractual obligations and commitments, that may require future cash payments. The table below presents, by payment date, significant known contractual obligations to third parties as of December 31, 2012:

 

            Total Payments Due by Period  
(In thousands)                         Three to         
     Total      One Year
or Less
     One to
Three Years
     Five
Years
     Over Five
Years
 

Deposits without a stated maturity (1)

   $ 4,761,551       $ 4,761,551         0         0         0   

Time deposits (2) (3)

     2,027,580         1,283,892       $ 565,913       $ 175,990       $ 1,785   

Short-term borrowings (2)

     314,964         314,964         0         0         0   

Long-term borrowings (2) (3)

     411,693         37,607         45,521         14,060         314,505   

Operating leases

     36,604         7,385         11,511         7,971         9,737   

 

  (1)

Excludes interest.

  (2)

Includes interest on both fixed and variable rate obligations. The interest associated with variable rate obligations is based upon interest rates in effect at December 31, 2012. The interest to be paid on variable rate obligations is affected by changes in market interest rates, which materially affect the contractual obligation amounts to be paid.

  (3)

Excludes carrying value adjustments such as unamortized premiums or discounts.

As of December 31, 2012, United recorded a liability for uncertain tax positions, including interest and penalties, of $2.11 million. This liability represents an estimate of tax positions that United has taken in its tax returns which may ultimately not be sustained upon examination by tax authorities. Since the ultimate amount and timing of any future cash settlements cannot be predicted with reasonable certainty, this estimated liability is excluded from the contractual obligations table.

United also enters into derivative contracts, mainly to protect against adverse interest rate movements on the value of certain assets or liabilities, under which it is required to either pay cash to or receive cash from counterparties depending on changes in interest rates. Derivative contracts are carried at fair value and not notional value on the consolidated balance sheet. Because the derivative contracts recorded on the balance sheet at December 31, 2012 do not represent the amounts that may ultimately be paid under these contracts, they are excluded from the preceding table. Further discussion of derivative instruments is included in Note P, Notes to Consolidated Financial Statements.

United is a party to financial instruments with off-balance-sheet risk in the normal course of business to meet the financing needs of its customers. These financial instruments include loan commitments and standby letters of credit. United’s maximum exposure to credit loss in the event of nonperformance by the counterparty to the financial instrument for the loan commitments and standby letters of credit is the contractual or notional amount of those instruments. United uses the same policies in making commitments and conditional obligations as it does for on-balance sheet instruments. Since many of the commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements.

 

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The following table details the amounts of significant commitments and letters of credit as of December 31, 2012:

 

(In thousands)    Amount  

Commitments to extend credit:

  

Revolving open-end secured by 1-4 residential

   $ 430,893   

Credit card and personal revolving lines

     122,346   

Commercial

     1,620,138   
  

 

 

 

Total unused commitments

   $ 2,173,377   
  

 

 

 

Financial standby letters of credit

   $ 63,657   

Performance standby letters of credit

     33,199   

Commercial letters of credit

     250   
  

 

 

 

Total letters of credit

   $ 97,106   
  

 

 

 

Commitments generally have fixed expiration dates or other termination clauses, generally within one year, and may require the payment of a fee. Further discussion of commitments is included in Note O, Notes to Consolidated Financial Statements.

Liquidity

In the opinion of management, United maintains liquidity that is sufficient to satisfy its depositors’ requirements and the credit needs of its customers. Like all banks, United depends upon its ability to renew maturing deposits and other liabilities on a daily basis and to acquire new funds in a variety of markets. A significant source of funds available to United is “core deposits.” Core deposits include certain demand deposits, statement and special savings and NOW accounts. These deposits are relatively stable and they are the lowest cost source of funds available to United. Short-term borrowings have also been a significant source of funds. These include federal funds purchased and securities sold under agreements to repurchase as well as advances from the FHLB. Repurchase agreements represent funds that are obtained as the result of a competitive bidding process.

Liquid assets are cash and those items readily convertible to cash. All banks must maintain sufficient balances of cash and near-cash items to meet the day-to-day demands of customers and United’s cash needs. Other than cash and due from banks, the available for sale securities portfolio and maturing loans are the primary sources of liquidity.

The goal of liquidity management is to ensure the ability to access funding that enables United to efficiently satisfy the cash flow requirements of depositors and borrowers and meet United’s cash needs. Liquidity is managed by monitoring funds availability from a number of primary sources. Substantial funding is available from cash and cash equivalents, unused short-term borrowings, and a geographically dispersed network of branches providing access to a diversified and substantial retail deposit market.

Short-term needs can be met through a wide array of outside sources such as correspondent and downstream correspondent federal funds and utilization of Federal Home Loan Bank advances.

Other sources of liquidity available to United to provide long-term as well as short-term funding alternatives, in addition to FHLB advances, are long-term certificates of deposit, lines of credit, borrowings that are secured by bank premises or stock of United’s subsidiaries and issuances of trust preferred securities. In the normal course of business, United through its Asset Liability Committee evaluates these as well as other alternative funding strategies that may be utilized to meet short-term and long-term funding needs. See Notes J and K, Notes to Consolidated Financial Statements.

Cash flows provided by operations in 2012 were $129.44 million as compared to $118.57 million of cash provided by operations during 2011 due in large part to an increase in net income of $6.98 million. In 2012, net cash of $208.14 million was used in investing activities which was primarily due to loan growth of $298.47 million which was partially offset by net cash received of $85.62 million for excess net proceeds from sales, calls and maturities of investment securities over purchases. In 2011, net cash of $158.34 million was provided by investing activities which was mainly due to net cash

 

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received of $49.09 million for the acquisition of Centra. In addition, net cash of $76.59 million was received for excess of net proceeds from sales, calls and maturities of investment securities over purchases. During the year of 2012, net cash of $125.22 million was used in financing activities due primarily to a decline of $62.80 million in deposits, the repayment of long-term borrowings in the amount of $60.55 million, and the payment of $62.33 million for cash dividends. During the year of 2011, net cash of $102.29 million was used in financing activities. Cash used in financing activities included a decrease in deposits of $24.27 million, the repayment of FHLB borrowings in the amount of $60.37 million and the payment of cash dividends in the amount of $54.34 million for the year of 2011. Sources of cash from financing activities included an increase in short-term borrowings in the amount of $32.99 million for the year of 2011. The net effect of the cash flow activities was a decrease in cash and cash equivalents of $203.93 million for the year of 2012 as compared to an increase in cash and cash equivalents of $174.61 million for the year of 2011. See the Consolidated Statement of Cash Flows in the Consolidated Financial Statements.

United anticipates it can meet its obligations over the next 12 months and has no material commitments for capital expenditures. There are no known trends, demands, commitments, or events that will result in or that are reasonably likely to result in United’s liquidity increasing or decreasing in any material way. United also has lines of credit available. See Notes J and K, Notes to Consolidated Financial Statements for more detail regarding the amounts available to United under its lines of credit.

The Asset Liability Committee monitors liquidity to ascertain that a liquidity position within certain prescribed parameters is maintained. No changes are anticipated in the policies of United’s Asset and Liability Committee.

Capital Resources

United’s capital position is financially sound. United seeks to maintain a proper relationship between capital and total assets to support growth and sustain earnings. United has historically generated attractive returns on shareholders’ equity. Based on regulatory requirements, United and its banking subsidiaries are categorized as “well capitalized” institutions. United’s risk-based capital ratios of 13.67% at December 31, 2012 and 13.83% at December 31, 2011, were both significantly higher than the minimum regulatory requirements. United’s Tier I capital and leverage ratios of 12.44% and 10.62%, respectively, at December 31, 2012, are also well above minimum regulatory requirements. See Note S, Notes to Consolidated Financial Statements.

Total year-end 2012 shareholders’ equity increased $23.41 million or 2.42% to $992.25 million from $968.84 million at December 31, 2011. United’s equity to assets ratio was 11.78% at December 31, 2012 as compared to 11.46% at December 31, 2011. The primary capital ratio, capital and reserves to total assets and reserves, was 12.57% at December 31, 2012, as compared to 12.25% at December 31, 2011. United’s average equity to average asset ratio was 11.78% and 11.44% for the years ended December 31, 2012 and 2011, respectively. All these financial measurements reflect a financially sound position.

During the fourth quarter of 2012, United’s Board of Directors declared a cash dividend of $0.31 per share. Dividends per share of $1.24 for the year of 2012 represented an increase over the $1.21 per share paid for 2011. Total cash dividends declared to common shareholders were approximately $62.35 million for the year of 2012 as compared to $56.83 million for the year of 2011. The year 2012 was the thirty-ninth consecutive year of dividend increases to United shareholders.

The following table shows selected consolidated operating and capital ratios for each of the last three years ended December 31:

 

     2012      2011      2010  

Return on average assets

     0.98%         0.97%         0.95%   

Return on average equity

     8.35%         8.50%         9.19%   

Dividend payout ratio

     75.48%         75.16%         72.69%   

Average equity to average assets ratio

     11.78%         11.44%         10.39%   

 

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2011 COMPARED TO 2010

FINANCIAL CONDITION SUMMARY

United’s total assets as of December 31, 2011 were $8.45 billion which was an increase of $1.30 billion or 18.11% from December 31, 2010, primarily the result of the acquisition of Centra Financial Holdings Inc. (Centra) on July 8, 2011. Portfolio loans increased $970.45 million or 18.45%, mainly the result of the Centra acquisition which added approximately $1.02 billion, including purchase accounting amounts, in portfolio loans. Since year-end 2010, commercial, financial and agricultural loans increased $671.27 million or 23.66% as commercial real estate loans increased $497.37 million and commercial loans (not secured by real estate) increased $173.90 million. In addition, residential real estate loans and construction and land development loans increased $191.35 million or 11.25% and $78.94 million or 16.76%, respectively, while other consumer loans increased $29.37 million or 11.55%. The increases were due primarily to the Centra merger. Cash and cash equivalents increased $174.61 million or 37.85% mainly due to a $161.05 million or 46.64% increase in interest-bearing deposits with other banks as United placed its excess cash in an interest-bearing account with the Federal Reserve. In addition, cash and due from banks increased $13.28 million or 11.51% and federal funds sold increased $291 thousand or 40.53%. During the year of 2011, net cash of $118.57 million and $158.34 million was provided by operating activities and investing activities, respectively, while net cash of $102.29 million was used in financing activities. Investment securities increased $29.50 million or 3.71% due mainly to a $43.24 million or 6.62% increase in securities available for sale. This change in securities available for sale reflects $1.49 billion in sales, maturities and calls of securities, $1.42 billion in purchases, and a $9.50 million increase in market value. Securities held to maturity decreased $7.75 million or 11.56% from year-end 2010 due to calls and maturities of securities. Other investment securities decreased $5.99 million or 8.05% from year-end 2010. In addition, goodwill increased $63.85 million or 20.48%, other assets increased $37.17 million or 11.81%, and bank premises and equipment increased $21.06 million or 38.04% mainly the result of the Centra acquisition.

The increase in total assets is reflected in a corresponding increase in total liabilities of $1.12 billion or 17.60% from year-end 2010. The increase in total liabilities was due mainly to an increase of $1.11 billion or 19.35% and $20.46 million or 3.53% in deposits and borrowings, respectively, mainly due to the Centra acquisition. In terms of composition, noninterest-bearing deposits increased $415.91 million or 34.57% while interest-bearing deposits increased $689.57 million or 15.29% from December 31, 2010. Since year-end 2010, short-term borrowings increased $61.55 million or 31.86% due to a $64.55 million increase in securities sold under agreements to repurchase. Long-term borrowings decreased $41.09 million or 10.63% since year-end 2010 as long-term FHLB advances decreased $60.37 million or 29.86% due to repayments. Partially offsetting this decrease in long-term FHLB advances, United assumed $20 million of junior subordinated debt securities in the Centra merger. Accrued expenses and other liabilities at December 31, 2011 decreased $5.86 million or 8.69% from year-end 2010 mainly as a result of a $9.08 million decrease in income taxes payable due to a timing difference in payments. Partially offsetting this decrease was an increase of $2.48 million in dividends payable.

Shareholders ‘equity increased $175.83 million or 22.17% from year-end 2010 mainly as a result of the Centra acquisition. The Centra transaction added approximately $161 million as 6,548,473 shares were issued from United’s authorized but unissued shares for the merger at a cost of $170 million. Earnings net of dividends for the year of 2011 were $18.78 million. Accumulated other comprehensive income decreased $6.10 million due mainly due to an after tax-adjustment to United’s pension asset resulting in a decline of $13.38 million. Partially offsetting this decrease was an increase of $6.17 million, net of deferred income tax, in the fair value of United’s available for sale investment portfolio. In addition, the accretion of pension costs for the year of 2011 was $1.46 million while the after-tax non-credit portion of OTTI losses for the year of 2011 was $354 thousand.

EARNINGS SUMMARY

Net income for the year of 2011 was $75.61 million or $1.61 per diluted share compared to $71.95 million or $1.65 per diluted share for the year of 2010.

United’s return on average assets for the year of 2011 was 0.97% and return on average shareholders’ equity was 8.50% as compared to 0.95% and 9.19% for the year of 2010.

As previously mentioned, United completed its acquisition of Centra during the third quarter of 2011. The financial results of

 

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Centra are included in United’s results from the July 8, 2011 acquisition date. As a result, comparisons for the fourth quarter and year of 2011 to the same time periods of 2010 are impacted by increased levels of average balances, income, expense, and asset quality results due to the acquisition. At consummation, Centra had assets of approximately $1.3 billion, loans of $1.0 billion, deposits of $1.1 billion and shareholders’ equity of $131 million. In addition, the results for the year of 2011 included before-tax, other-than-temporary impairment charges of $20.41 million on certain investment securities.

During the fourth quarter of 2010, United recovered funds from its insurance carrier in the amount of $15.00 million related to claims it made under its insurance policies for losses United incurred as a result of fraudulent loans previously charged-off in 2009. The $15.00 million of insurance proceeds were recorded as a recovery within United’s allowance for loan losses which resulted in provision for loan losses of $13.77 million for the year of 2010. Also, the results for the year of 2010 included noncash, before-tax, other-than-temporary impairment charges of $9.82 million on certain investment securities. The results for the year of 2010 included before-tax, net gains of $2.01 million on the sale of investment securities.

Net interest income for the year of 2011 was $260.73 million, an increase of $22.54 million or 9.46% from the year of 2010. The provision for loan losses was $17.14 million for the year of 2011 as compared to $13.77 million for the year of 2010.

Noninterest income was $50.84 million for the year of 2011, down $11.37 million or 18.27% when compared to the year of 2010. Included in noninterest income for the year of 2011 and 2010 were the previously mentioned noncash before-tax other-than-temporary impairment charges of $20.41 million and $9.82 million, respectively. Noninterest expense was $184.05 million, an increase of $1.84 million or 1.01% for the year of 2011 when compared to 2010.

Income tax expense for the year of 2011 was $34.77 million as compared to $32.46 million for the year of 2010. United’s effective tax rate was approximately 31.5% and 31.1% for years ended December 31, 2011 and 2010, respectively, as compared to 14.0% for 2009.

The following discussion explains in more detail the results of operations by major category.

Net Interest Income

Net interest income for the year of 2011 was higher than the year of 2010 due mainly to a lower amount of average interest-bearing liabilities due to the net repayment of FHLB advances at the end of 2010 and the beginning of 2011 as well as an increase in average earnings assets as a result of the Centra merger. Generally, prior to the Centra merger, net interest income had declined in 2011 from the same time periods in 2010 as interest income has declined more than interest expense. The lower amount of net interest income had been due largely to a decrease in average earning assets as a result of less loan demand due to current economic conditions and a lack of desirable reinvestment options for securities as they mature or are called. Yields on earning assets have also declined from 2010 due to lower reinvestment rates on loans and securities as a result of historically low market interest rates. United has been able to lower its funding costs on deposits and short-term borrowings from 2010 due to these lower market interest rates even to the point of outpacing the decline in the yield on earning assets.

Net interest income for the year of 2011 was $260.73 million, an increase of $22.54 million or 9.46% from the year of 2010. The $22.54 million increase in net interest income occurred because total interest income declined $6.86 million while total interest expense declined $29.40 million from the year of 2010. For the purpose of this remaining discussion, net interest income is presented on a tax-equivalent basis to provide a comparison among all types of interest earning assets. The tax-equivalent basis adjusts for the tax-favored status of income from certain loans and investments. Although this is a non-GAAP measure, United’s management believes this measure is more widely used within the financial services industry and provides better comparability of net interest income arising from taxable and tax-exempt sources. United uses this measure to monitor net interest income performance and to manage its balance sheet composition.

Tax-equivalent net interest income for the year of 2011 was $267.32 million, an increase of $23.22 million or 9.51% from the year of 2010. The net interest margin for the year of 2011 was 3.87%, up 23 basis points from a net interest margin of 3.64% for the year of 2010.

Tax-equivalent interest income for the year of 2011 was $323.11 million, a $6.18 million or 1.88% decrease from the year of

 

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2010. This decrease was primarily attributable to a decrease of 23 basis points in the average yield on earning assets for the year of 2011 as compared to the year of 2010. Partially offsetting this decrease was an increase in average earning assets of $191.06 million or 2.85% for the year of 2011 due to the Centra merger. Average net loans increased $246.63 million or 4.57% for the year of 2011 while average investments decreased $89.94 million or 10.01%. Average short-term investments increased $34.37 million or 8.43% as a result of United placing its excess cash in an interest-bearing account with the Federal Reserve.

Interest expense for the year of 2011 was $55.79 million, a decrease of $29.40 million or 34.51% from the year of 2010. The decline in interest expense for the year of 2011 was attributable to decreases in average interest-bearing liabilities and United’s average cost of funds. Average interest-bearing liabilities declined $193.77 million or 3.48% due mainly to the net repayment of approximately $360 million in Federal Home Loan Bank advances towards the end of 2010 and the beginning of 2011. In addition, the average cost of funds for the year of 2011 decreased 49 basis points from the year of 2010 as a result of lower market interest rates. The average cost of interest-bearing deposits was 0.82% for the year of 2011, down 39 basis points from 1.21% for the year of 2010 while the average cost of short-term borrowings was 0.06% for the year of 2011 which was equal to the year of 2010. The average cost of long-term borrowings was 4.79% for the year of 2011, an increase of 49 basis points from 4.30% for the year of 2010. Average interest-bearing deposits increased $175.47 million or 3.82% while average short-term borrowings decreased $32.13 million or 11.13%.

Provision for Loan Losses

For the years ended December 31, 2011 and 2010, the provision for loan losses was $17.14 million and $13.77 million, respectively. Net charge-offs were $16.30 million for the year of 2011 as compared to net charge-offs of $8.74 million for the year of 2010. As previously mentioned, United recovered funds from its insurance carrier in the amount of $15.00 million during the fourth quarter of 2010 related to claims it made under its insurance policies for losses United incurred as a result of fraudulent loans in the amount of $17.55 million previously charged-off in 2009. The $15.00 million of insurance proceeds were recorded as a recovery within United’s allowance for loan losses which resulted in a provision for loan losses of $13.77 million for the year of 2010. Net charge-offs and the provision for loan losses for the year of 2009 included the above mentioned $17.55 million for loans with fraudulent collateral made to three affiliated companies of a commercial customer.

At December 31, 2011, the allowance for loan losses was $73.87 million as compared to $73.03 million at December 31, 2010. As a percentage of loans, net of unearned income, the allowance for loan losses was 1.18% at December 31, 2011 and 1.39% of loans, net of unearned income at December 31, 2010. The ratio of the allowance for loan losses to nonperforming loans or coverage ratio was 92.73% and 108.63% at December 31, 2011 and December 31, 2010, respectively.

Other Income

Noninterest income was $50.84 million for the year of 2011, down $11.37 million or 18.27% from the year of 2010. Net losses on investment securities transactions for the year of 2011 were $18.84 million compared to net losses of $7.81 million for the year of 2010. Included in net losses on investment securities for the year of 2011 were before-tax other-than-temporary impairment charges of $20.41 million on certain investment securities consisting primarily of $17.25 million on pooled trust preferred collateralized debt obligations (TRUP CDOs) and $3.16 million on collateralized mortgage obligations (CMOs) and a before-tax, net gain of $1.58 million on the sale of investment securities. Included in net losses on investment securities for the year of 2010 was a before-tax, net gain of $2.01 million on the sale of investment securities and noncash, before-tax, other-than-temporary impairment charges of $9.82 million on certain investment securities consisting primarily of $7.32 million on TRUP CDOs, $1.20 million on CMOs and $1.29 million on a certain investment security carried at cost. Excluding the results of the investment security transactions, noninterest income for the year of 2011 would have been flat from the year of 2010, decreasing $337 thousand or less than 1% from the year of 2010.

Revenue from trust income and brokerage commissions decreased $294 thousand or 2.16% due mainly to a decrease in brokerage volume.

Fees from deposit services were $41.02 million for the year of 2011, an increase of $1.80 million or 4.58% as compared to the year of 2010 due mainly to the Centra merger. In particular, automated teller machine (ATM) fees increased $1.25

 

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million, service charges on deposit accounts increased $793 thousand, check card income increased $660 thousand and account analysis fees increased $217 thousand. Partially offsetting these increases was a decrease of $1.18 million in overdraft or insufficient funds (NSF) fees due mainly to Regulation E. Regulation E, which became effective in the third quarter of 2010, requires banks to notify customers when an ATM or debit-card transaction will result in an overdraft or NSF fee.

For the year of 2011, income from bank owned life insurance policies increased $613 thousand or 13.12% due mainly to an increase in the cash surrender values of the insurance policies as well as additional policies acquired in the Centra merger. Fees from bankcard transactions decreased $1.12 million or 23.38% as compared to the year of 2010 due to the sale of United’s merchant business in the fourth quarter of 2010. A similar amount of expense reduction in bankcard processing costs is included in other expense in the income statement as a result of the sale of United’s merchant business. Mortgage banking income increased $290 thousand or 43.81% due to an increase in mortgage loan sales in the secondary market during the year of 2011 as compared to 2010. Mortgage loan sales were $72.02 million in 2011 as compared to $47.60 million in 2010. Other income decreased $1.55 million or 30.36% for the year of 2011 as compared to the year of 2010 mainly due to a decrease of $1.87 million from derivatives not in a hedging relationship as a result of a change in value. A corresponding amount of expense is included in other expense in the income statement.

Other Expense

Noninterest expense for the year of 2011 was $184.05 million, an increase of $1.84 million or 1.01% from the year of 2010.

Employee compensation for the year of 2011 increased $4.05 million or 6.68% from the year of 2010 due mainly to the additional employees from the Centra merger. Also included in employee compensation was expense for stock options of $1.13 million for the year of 2011 as compared to $1.05 million for the year of 2010.

Employee benefits expense increased $609 thousand or 3.64% due mainly to the additional employees from the Centra merger. Specifically within employee benefits expense was an increase of $387 thousand in Federal Insurance Contributions Act (FICA) expense and $162 thousand in pension expense.

Net occupancy expense increased $1.35 million or 7.83% for the year of 2011 as compared to the year of 2010. The higher net occupancy expense for 2011 was due mainly to the additional offices acquired from Centra. In particular building rental expense increased $684 thousand while building depreciation increased $420 thousand.

Other real estate owned (OREO) expense decreased $4.12 million or 37.04% for the year of 2011 as compared to the year of 2010. The decrease from 2010 was due mainly to fewer reductions to the fair values of OREO properties and fewer losses on sales. Equipment expense increased $1.96 million or 32.62% for the year of 2011 as compared to the year of 2010 due to a higher depreciation and maintenance expense as a result of the Centra merger.

Data processing expense increased $817 thousand or 7.55% for the year of 2011 as compared to the year of 2010 due to the additional processing as a result of the Centra merger. Bankcard processing fees decreased $2.23 million or 68.00% as a result of the sale of United’s merchant business in the fourth quarter of 2010. FDIC insurance expense decreased $1.22 million or 12.56% for the year of 2011 as compared to the year of 2010 due mainly to lower premiums.

Other expenses increased $623 thousand or 1.33% for the year of 2011 as compared to the year of 2010 generally due to additional expenses from the Centra merger. For the year of 2011, merger expenses increased $1.02 million, consulting and legal expenses increased $708 thousand, amortization on intangibles increased $545 thousand, ATM expense increased $387 thousand, operational losses increased $374 thousand, and business and occupational (B&O) taxes increased $359 thousand. Partially offsetting these increases was a decrease in expense from derivatives not in hedge relationships of $1.87 million due to a change in their fair value.

United’s efficiency ratio was 51.81% for the year of 2011 which was comparable to 53.87% for the year of 2010.

 

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Income Taxes

For the year ended December 31, 2011, income taxes were $34.77 million, compared to $32.46 million for 2010. United’s effective tax rate was approximately 31.5% and 31.1% for years ended December 31, 2011 and 2010, respectively, as compared to 14.0% for 2009.

 

Item 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

The objective of United’s Asset/Liability Management function is to maintain consistent growth in net interest income within United’s policy guidelines. This objective is accomplished through the management of balance sheet liquidity and interest rate risk exposures due to changes in economic conditions, interest rate levels and customer preferences.

Interest Rate Risk

Management considers interest rate risk to be United’s most significant market risk. Interest rate risk is the exposure to adverse changes in United’s net interest income as a result of changes in interest rates. United’s earnings are largely dependent on the effective management of interest rate risk.

Management of interest rate risk focuses on maintaining consistent growth in net interest income within Board-approved policy limits. United’s Asset/Liability Management Committee (ALCO), which includes senior management representatives and reports to the Board of Directors, monitors and manages interest rate risk to maintain an acceptable level of change to net interest income as a result of changes in interest rates. Policy established for interest rate risk is stated in terms of the change in net interest income over a one-year and two-year horizon given an immediate and sustained increase or decrease in interest rates. The current limits approved by the Board of Directors are structured on a staged basis with each stage requiring specific actions.

United employs a variety of measurement techniques to identify and manage its exposure to changing interest rates. One such technique utilizes an earnings simulation model to analyze the sensitivity of net interest income to movements in interest rates. The model is based on actual cash flows and repricing characteristics for on and off-balance sheet instruments and incorporates market-based assumptions regarding the impact of changing interest rates on the prepayment rate of certain assets and liabilities. The model also includes executive management projections for activity levels in product lines offered by United. Assumptions based on the historical behavior of deposit rates and balances in relation to changes in interest rates are also incorporated into the model. Rate scenarios could involve parallel or nonparallel shifts in the yield curve, depending on historical, current, and expected conditions, as well as the need to capture any material effects of explicit or embedded options. These assumptions are inherently uncertain and, as a result, the model cannot precisely measure net interest income or precisely predict the impact of fluctuations in interest rates on net interest income. Actual results will differ from simulated results due to timing, magnitude and frequency of interest rate changes as well as changes in market conditions and management’s strategies.

Interest sensitive assets and liabilities are defined as those assets or liabilities that mature or are repriced within a designated time frame. The principal function of managing interest rate risk is to maintain an appropriate relationship between those assets and liabilities that are sensitive to changing market interest rates. The difference between rate sensitive assets and rate sensitive liabilities for specified periods of time is known as the “GAP.” Earnings-simulation analysis captures not only the potential of these interest sensitive assets and liabilities to mature or reprice, but also the probability that they will do so. Moreover, earnings-simulation analysis considers the relative sensitivities of these balance sheet items and projects their behavior over an extended period of time. United closely monitors the sensitivity of its assets and liabilities on an on-going basis and projects the effect of various interest rate changes on its net interest margin.

 

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The following table shows United’s estimated consolidated earnings sensitivity profile as of December 31, 2012 and 2011:

 

    Change in

Interest Rates

 

Percentage Change in Net Interest Income

 (basis points)

 

December 31, 2012

 

December 31, 2011

        +200

  7.93%   8.61%

        +100

  3.67%   3.58%

        -100

  (0.60%)   (1.43%)

        -200

  ---   ---

Given an immediate, sustained 100 basis point upward shock to the yield curve used in the simulation model, it is estimated that net interest income for United would increase by 3.67% over one year as of December 31, 2012, as compared to an increase of 3.58% as of December 31, 2011. A 200 basis point immediate, sustained upward shock in the yield curve would increase net interest income by an estimated 7.93% over one year as of December 31, 2012, as compared to an increase of 8.61% as of December 31, 2011. A 100 basis point immediate, sustained downward shock in the yield curve would decrease net interest income by an estimated 0.60% over one year as of December 31, 2012 as compared to a decrease of 1.43% over one year as of December 31, 2011. With the federal funds rate at 0.25% at December 31, 2012 and 2011, management believed a 200 basis point immediate, sustained decline in rates was highly unlikely.

This analysis does not include the potential increased refinancing activities, which should lessen the negative impact on net income from falling rates. While it is unlikely market rates would immediately move 100 or 200 basis points upward or downward on a sustained basis, this is another tool used by management and the Board of Directors to gauge interest rate risk. All of these estimated changes in net interest income are and were within the policy guidelines established by the Board of Directors.

To further aid in interest rate management, United’s subsidiary banks are members of the Federal Home Loan Bank (FHLB). The use of FHLB advances provides United with a low risk means of matching maturities of earning assets and interest-bearing funds to achieve a desired interest rate spread over the life of the earning assets. In addition, United uses credit with large regional banks and trust preferred securities to provide funding.

As part of its interest rate risk management strategy, United may use derivative instruments to protect against adverse price or interest rate movements on the value of certain assets or liabilities and on future cash flows. These derivatives commonly consist of interest rate swaps, caps, floors, collars, futures, forward contracts, written and purchased options. Interest rate swaps obligate two parties to exchange one or more payments generally calculated with reference to a fixed or variable rate of interest applied to the notional amount. United accounts for its derivative activities in accordance with the provisions of ASC topic 815, “Derivatives and Hedging.”

Extension Risk

At December 31, 2012, United’s mortgage related securities portfolio had an amortized cost of $126 million, of which approximately $51 million or 41% were fixed rate collateralized mortgage obligations (CMOs). These fixed rate CMOs consisted primarily of planned amortization class (PACs), sequential-pay and accretion directed (VADMs) bonds having an average life of approximately 1.9 years and a weighted average yield of 5.99%, under current projected prepayment assumptions. These securities are expected to have very little extension risk in a rising rate environment. Current models show that an immediate, sustained upward shock of 300 basis points in rates, the average life of these securities would only extend to 2.9 years. The projected price decline of the fixed rate CMO portfolio in rates up 300 basis points would be 5%, less than the price decline of a 2 year treasury note. By comparison, the price decline of a 30-year current coupon mortgage backed security (MBS) for an immediate, sustained upward shock of 300 basis points would be approximately 17%.

United had approximately $27 million in 15-year mortgage backed securities with a projected yield of 4.80% and a projected average life of 2.7 years as of December 31, 2012. This portfolio consisted of seasoned 15-year mortgage paper with a weighted average loan age (WALA) of 7.6 years and a weighted average maturity (WAM) of 7.1 years.

United had approximately $4 million in 20-year mortgage backed securities with a projected yield of 4.84% and a projected average life of 2.8 years on December 31, 2012. This portfolio consisted of seasoned 20-year mortgage paper with a weighted average loan age (WALA) of 9.8 years and a weighted average maturity (WAM) of 9.6 years.

 

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United had approximately $5 million in 30-year mortgage backed securities with a projected yield of 6.74% and a projected average life of 3.8 years on December 31, 2012. This portfolio consisted of seasoned 30-year mortgage paper with a weighted average loan age (WALA) of 13.7 years and a weighted average maturity (WAM) of 15.1 years.

The remaining 29% of the mortgage related securities portfolio at December 31, 2012, included adjustable rate securities (ARMs), balloon securities, and 10-year mortgage backed pass-through securities.

 

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MANAGEMENT’S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING

Management of United Bankshares, Inc. (the Company) is responsible for establishing and maintaining effective internal control over financial reporting as defined in Rules 13a-15(f) under the Securities Exchange Act of 1934. The Company’s internal control over financial reporting is designed to provide reasonable assurance to the Company’s management and board of directors regarding the preparation and fair presentation of published financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Therefore, even those systems determined to be effective can provide only reasonable assurance with respect to financial statement preparation and presentation.

Management assessed the effectiveness of the Company’s internal control over financial reporting as of December 31, 2012. In making this assessment, management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in Internal Control – Integrated Framework. Based on our assessment, we believe that, as of December 31, 2012, the Company’s internal control over financial reporting is effective based on those criteria.

Ernst & Young LLP, the independent registered public accounting firm who audited the Company’s consolidated financial statements has also issued an attestation report on the effectiveness of the Company’s internal control over financial reporting as of December 31, 2012. Ernst & Young’s report on the effectiveness of the Company’s internal control over financial reporting appears on the following page.

 

 

/s/ Richard M. Adams

   

/s/ Steven E. Wilson

Richard M. Adams, Chairman of the Board

and Chief Executive Officer

   

Steven E. Wilson, Executive Vice

President, Treasurer, Secretary and Chief

Financial Officer

February 28, 2013

 

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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Audit Committee of the Board of Directors and the

Shareholders of United Bankshares, Inc.

We have audited United Bankshares, Inc. and subsidiaries’ internal control over financial reporting as of December 31, 2012, based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (the COSO criteria). United Bankshares, Inc. and subsidiaries’ management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting included in the accompanying Management’s Report on Internal Control Over Financial Reporting. Our responsibility is to express an opinion on the company’s internal control over financial reporting based on our audit.

We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.

A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the company’s assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

In our opinion, United Bankshares, Inc. and subsidiaries maintained, in all material respects, effective internal control over financial reporting as of December 31, 2012, based on the COSO criteria.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheets of United Bankshares, Inc. and subsidiaries as of December 31, 2012 and 2011, and the related consolidated statements of income, comprehensive income, changes in shareholders’ equity, and cash flows for each of the three years in the period ended December 31, 2012 and our report dated February 28, 2013 expressed an unqualified opinion thereon.

 

/s/ Ernst & Young LLP

Charleston, West Virginia

February 28, 2013

 

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Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Audit Committee of the Board of Directors and the

Shareholders of United Bankshares, Inc.

We have audited the accompanying consolidated balance sheets of United Bankshares, Inc. and subsidiaries as of December 31, 2012 and 2011, and the related consolidated statements of income, comprehensive income, changes in shareholders’ equity, and cash flows for each of the three years in the period ended December 31, 2012. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of United Bankshares, Inc. and subsidiaries at December 31, 2012 and 2011, and the consolidated results of their operations and their cash flows for each of the three years in the period ended December 31, 2012, in conformity with U.S. generally accepted accounting principles.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), United Bankshares, Inc.’s internal control over financial reporting as of December 31, 2012, based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated February 28, 2013 expressed an unqualified opinion thereon.

 

/s/ Ernst & Young LLP

Charleston, West Virginia

February 28, 2013

 

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CONSOLIDATED BALANCE SHEETS

UNITED BANKSHARES, INC. AND SUBSIDIARIES

(Dollars in thousands, except par value)

 

      December 31
2012
     December 31
2011
 

Assets

     

Cash and due from banks

       $ 157,539               $ 128,627       

Interest-bearing deposits with other banks

     273,517             506,367       

Federal funds sold

     1,021             1,009       
  

 

 

    

 

 

 

Total cash and cash equivalents

     432,077             636,003       

Securities available for sale at estimated fair value (amortized cost-$673,315 at December 31, 2012 and $752,085 at December 31, 2011)

     625,625             696,518       

Securities held to maturity (estimated fair value-$42,695 at December 31, 2012 and $56,181 at December 31, 2011)

     43,467             59,289       

Other investment securities

     60,310             68,412       

Loans held for sale

     17,762             3,902       

Loans

     6,517,780             6,234,280       

Less: Unearned income

     (6,364)             (3,503)       
  

 

 

    

 

 

 

Loans net of unearned income

     6,511,416             6,230,777       

Less: Allowance for loan losses

     (73,901)             (73,874)       
  

 

 

    

 

 

 

Net loans

     6,437,515             6,156,903       

Bank premises and equipment

     72,170             76,442       

Goodwill

     375,583             375,626       

Accrued interest receivable

     26,302             26,461       

Other assets

     329,202             351,914       
  

 

 

    

 

 

 

TOTAL ASSETS

       $ 8,420,013               $ 8,451,470       
  

 

 

    

 

 

 

Liabilities

     

Deposits:

     

Noninterest-bearing

       $ 1,824,411               $ 1,619,162       

Interest-bearing

     4,928,575             5,199,848       
  

 

 

    

 

 

 

Total deposits

     6,752,986             6,819,010       

Borrowings:

     

Federal funds purchased

     5,446             7,120       

Securities sold under agreements to repurchase

     209,516             247,646       

Federal Home Loan Bank borrowings

     186,411             141,809       

Other long-term borrowings

     198,515             203,557       

Allowance for lending-related commitments

     1,656             1,853       

Accrued expenses and other liabilities

     73,232             61,631       
  

 

 

    

 

 

 

TOTAL LIABILITIES

     7,427,762             7,482,626       

Shareholders’ Equity

     

Preferred stock, $1.00 par value; Authorized-50,000,000 shares; none issued

     0             0       

Common stock, $2.50 par value; Authorized-100,000,000 shares; issued- 50,867,630 at December 31, 2012 and 2011, including 591,057 and 654,682 shares in treasury at December 31, 2012 and 2011, respectively

     127,169             127,169       

Surplus

     238,739             238,761       

Retained earnings

     712,299             692,043       

Accumulated other comprehensive loss

     (65,748)             (66,758)       

Treasury stock, at cost

     (20,208)             (22,371)       
  

 

 

    

 

 

 

TOTAL SHAREHOLDERS’ EQUITY

     992,251             968,844       
  

 

 

    

 

 

 

TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY

       $  8,420,013               $  8,451,470       
  

 

 

    

 

 

 

See notes to consolidated financial statements

 

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CONSOLIDATED STATEMENTS OF INCOME

UNITED BANKSHARES, INC. AND SUBSIDIARIES

(Dollars in thousands, except per share data)

      Year Ended December 31  
     2012      2011      2010  

Interest income

        

Interest and fees on loans

       $  301,840               $  288,213               $  282,834       

Interest on federal funds sold and other short-term investments

     1,169             1,255             1,267       

Interest and dividends on securities:

        

Taxable

     17,364             23,069             34,564       

Tax-exempt

     3,524             3,985             4,717       
  

 

 

    

 

 

    

 

 

 

Total interest income

     323,897             316,522             323,382       

Interest expense

        

Interest on deposits

     32,248             39,075             55,663       

Interest on short-term borrowings

     303             166             167       

Interest on long-term borrowings

     13,639             16,553             29,366       
  

 

 

    

 

 

    

 

 

 

Total interest expense

     46,190             55,794             85,196       
  

 

 

    

 

 

    

 

 

 

Net interest income

     277,707             260,728             238,186       

Provision for loan losses

     17,862             17,141             13,773       
  

 

 

    

 

 

    

 

 

 

Net interest income after provision for loan losses

     259,845             243,587             224,413       

Other income

        

Fees from trust and brokerage services

     15,845             13,343             13,637       

Fees from deposit services

     41,832             42,110             39,220       

Bankcard fees and merchant discounts

     2,996             2,572             4,786       

Other service charges, commissions, and fees

     2,229             1,849             1,918       

Income from bank-owned life insurance

     5,039             5,286             4,673       

Income from mortgage banking

     2,471             952             662       

Other income

     2,810             3,563             5,116       

Total other-than-temporary impairment losses

     (4,955)             (20,958)             (40,756)       

Portion of loss recognized in other comprehensive income

     (2,421)             544             30,941       
  

 

 

    

 

 

    

 

 

 

Net other-than-temporary impairment losses

     (7,376)             (20,414)             (9,815)       

Net gains on sales/calls of investment securities

     446             1,576             2,006       
  

 

 

    

 

 

    

 

 

 

Net investment securities losses

     (6,930)             (18,838)             (7,809)       
  

 

 

    

 

 

    

 

 

 

Total other income

     66,292             50,837             62,203       

Other expense

        

Employee compensation

     71,402             64,611             60,564       

Employee benefits

     21,178             17,358             16,749       

Net occupancy expense

     20,428             18,596             17,246       

Other real estate owned (OREO) expense

     8,556             7,008             11,131       

Equipment expense

     8,307             7,976             6,014       

Data processing expense

     12,532             11,637             10,820       

Bankcard processing expense

     1,315             1,051             3,284       

FDIC insurance expense

     6,064             8,468             9,684       

Other expense

     54,874             47,343             46,720       
  

 

 

    

 

 

    

 

 

 

Total other expense

     204,656             184,048             182,212       
  

 

 

    

 

 

    

 

 

 

Income before income taxes

     121,481             110,376             104,404       

Income taxes

     38,874             34,766             32,457       
  

 

 

    

 

 

    

 

 

 

Net income

       $ 82,607               $ 75,610               $ 71,947       
  

 

 

    

 

 

    

 

 

 

 

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CONSOLIDATED STATEMENTS OF INCOME

UNITED BANKSHARES, INC. AND SUBSIDIARIES

(Dollars in thousands, except per share data)

 

      Year Ended December 31  
     2012      2011      2010  

Earnings per common share:

        

Basic

       $ 1.64               $ 1.62               $ 1.65       
  

 

 

    

 

 

    

 

 

 

Diluted

       $ 1.64               $ 1.61               $ 1.65       
  

 

 

    

 

 

    

 

 

 

Dividends per common share

       $ 1.24               $ 1.21               $ 1.20       
  

 

 

    

 

 

    

 

 

 

Average outstanding shares:

        

Basic

     50,265,620             46,803,432             43,547,965       

Diluted

     50,298,019             46,837,363             43,625,183       

See notes to consolidated financial statements

 

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CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

UNITED BANKSHARES, INC. AND SUBSIDIARIES

(Dollars in thousands)

 

      Year Ended December 31  
     2012      2011      2010  

Net income

       $ 82,607               $ 75,610               $ 71,947       

Change in net unrealized (loss) gain on available-for-sale (AFS) securities, net of tax

     5,120             5,820             2,109       

Accretion of the net unrealized loss on the transfer of AFS securities to held-to-maturity (HTM) securities, net of tax

     4             5             90       

Change in cash flow hedge derivatives, net of tax

     0             0             4,999       

Change in defined benefit pension plan, net of tax

     (4,114)             (11,927)             529       
  

 

 

    

 

 

    

 

 

 

Comprehensive income, net of tax

       $  83,617               $  69,508               $  79,674       
  

 

 

    

 

 

    

 

 

 

 

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CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS’ EQUITY

UNITED BANKSHARES, INC. AND SUBSIDIARIES

(Dollars in thousands, except per share data)

 

                             Accumulated              
    Common Stock                 Other           Total  
          Par           Retained     Comprehensive     Treasury     Shareholders’  
    Shares     Value     Surplus     Earnings     Income (Loss)     Stock     Equity  
 

 

 

 

Balance at January 1, 2010

    44,319,157        110,798        95,284        653,613        (68,383)        (29,762)        761,550   

Net income

    0        0        0        71,947        0        0        71,947   

Other comprehensive income, net of tax

    0        0        0        0        7,727        0        7,727   
             

 

 

 

Total comprehensive income, net of tax

                79,674   

Stock based compensation expense

    0        0        1,050        0        0        0        1,050   

Purchase of treasury stock (8,910 shares)

    0        0        0        0        0        (249)        (249)   

Distribution of treasury stock for deferred compensation plan (28,466 shares)

    0        0        0        0        0        520        520   

Common dividends declared ($1.20 per share)

    0        0        0        (52,300)        0        0        (52,300)   

Common stock options exercised (164,341 shares)

    0        0        (2,903)        0        0        5,670        2,767   
 

 

 

 

Balance at December 31, 2010

    44,319,157        110,798        93,431        673,260        (60,656)        (23,821)        793,012   

Net income

    0        0        0        75,610        0        0        75,610   

Other comprehensive income, net of tax

    0        0        0        0        (6,102)        0        (6,102)   
             

 

 

 

Total comprehensive income, net of tax

                69,508   

Acquisition of Centra Financial Holdings, Inc.

    6,548,473        16,371        145,049        0        0        0        161,420   

Stock based compensation expense

    0        0        1,133        0        0        0        1,133   

Purchase of treasury stock (676 shares)

    0        0        0        0        0        (18)        (18)   

Distribution of treasury stock for deferred compensation plan (3,069 shares)

    0        0        0        0        0        74        74   

Cash dividends ($1.21 per share)

    0        0        0        (56,827)        0        0        (56,827)   

Common stock options exercised (40,447 shares)

    0        0        (852)        0        0        1,394        542   
 

 

 

 

Balance at December 31, 2011

    50,867,630        127,169        238,761        692,043        (66,758)        (22,371)        968,844   

Net income

    0        0        0        82,607        0        0        82,607   

Other comprehensive income, net of tax

    0        0        0        0        1,010        0        1,010   
             

 

 

 

Total comprehensive income, net of tax

                83,617   

Stock based compensation expense

    0        0        1,908        0        0        0        1,908   

Purchase of treasury stock (455 shares)

    0        0        0        0        0        (13)        (13)   

Distribution of treasury stock for deferred compensation plan (4,710 shares)

    0        0        0        0        0        130        130   

Cash dividends ($1.24 per share)

    0        0        0        (62,351)        0        0        (62,351)   

Grant of restricted stock (52,700 shares)

    0        0        (1,816)        0        0        1,816        0   

Forfeiture of restricted stock (840 shares)

    0        0        29        0        0