10-K 1 d634368d10k.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, 2013

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 [    ]


Table of Contents

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, 2013, was approximately $1,213,705,516.

As of January 31, 2014, United Bankshares, Inc. had 68,767,594 shares of common stock outstanding with a par value of $2.50.

Documents Incorporated By Reference

Definitive Proxy Statement dated April 4, 2014 for the 2014 Annual Shareholders’ Meeting to be held on May 21, 2014, portions of which are incorporated by reference in Part III of this Form 10-K.

 

2


Table of Contents

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, 2013, 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

     16   

Item 1B.

  

UNRESOLVED STAFF COMMENTS

     25   

Item 2.

  

PROPERTIES

     25   

Item 3.

  

LEGAL PROCEEDINGS

     26   

Item 4.

  

MINE SAFETY DISCLOSURES

     26   
Part II      

Item 5.

  

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

     27   

Item 6.

  

SELECTED FINANCIAL DATA

     31   

Item 7.

  

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

     32   

Item 7A.

  

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

     61   

Item 8.

  

FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

     66   

Item 9.

  

CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURES

     127   

Item 9A.

  

CONTROLS AND PROCEDURES

     127   

Item 9B.

  

OTHER INFORMATION

     128   
Part III      

Item 10.

  

DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE

     129   

Item 11.

  

EXECUTIVE COMPENSATION

     129   

Item 12.

  

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

     129   

Item 13.

  

CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE

     129   

Item 14.

  

PRINCIPAL ACCOUNTING FEES AND SERVICES

     130   
Part VI      

Item 15.

  

EXHIBITS, FINANCIAL STATEMENT SCHEDULES

     131   

 

3


Table of Contents

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-nine banking institutions including its recent acquisition of Virginia Commerce Bancorp, Inc. which closed after the close of business on January 31, 2014. As of December 31, 2013, 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, financial planning, and brokerage services.

Employees

As of December 31, 2013, United and its subsidiaries had approximately 1,528 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, 2013, United’s consolidated assets approximated $8.7 billion and total shareholders’ equity approximated $1.04 billion.

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 merger with Virginia Commerce Bancorp, Inc. completed after the close of business on January 31, 2014.

 

4


Table of Contents

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 $193.2 million to $6.7 billion in 2013. The loan portfolio is comprised of commercial, real estate and consumer loans including credit card and home equity loans. Commercial real estate loans and construction loans increased $103.4 million or 4.19% and $119.7 million or 21.73%, respectively. Commercial loans (not secured by real estate) decreased $38.73 million or 2.81%. Consumer loans increased $28.31 million or 10.02%. Residential real estate 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. Underwriting standards require a comprehensive credit analysis and independent evaluation of virtually all larger balance commercial loans by the loan committee prior to approval.

 

5


Table of Contents

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, 2013, approximately $353.4 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 $353.4 million, $176.3 million is secured by first deeds of trust on residential real estate with $138.0 million of that total falling in a loan-to-value (LTV) range of 90% to 100% and $38.3 million above a LTV of 100%; $13.7 million is secured by subordinate deeds of trust on residential real estate with $5.9 million between a LTV of 90% to 100% and $7.8 million above a LTV of 100%; and $131.5 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 $131.5 million high loan to value commercial loans, $46.9 million are classified as Other Construction Loans and Land Loans, $31.1 million are Non-residential Secured, $15.2 million are Commercial Owner occupied properties, $19.5 million are 1-4 family Residential Secured properties, $9.9 million are Multi-family Residential Secured properties, $7.7 million are Residential Construction Loans and the remaining $1.2 million 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

 

6


Table of Contents

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, 2013, 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 $4.5 billion as of December 31, 2013. 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, 2013, approximately $2.2 billion or 33.1% 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, 2013, 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 2013, United originated $135.3 million of real estate loans for sale in the secondary market and sold $148.8 million of loans designated as held for sale in the secondary market. Net gains on the sales of these loans during 2013 were $2.57 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.

 

7


Table of Contents

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 “investment grade” rated municipal securities. Interest and dividends on securities for the years of 2013, 2012, and 2011 were $19.5 million, $20.9 million, and $27.1 million, respectively. For the years of 2013, 2012 and 2011, United recognized net losses on securities of $5.8 million, $6.9 million and $18.8 million, respectively. In the year 2013, United recognized other-than-temporary impairment (OTTI) charges of $7.3 million consisting primarily of $7.2 million on pooled trust preferred collateralized debt obligations (TRUP CDOs) and $137 thousand on equity securities. 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.

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 Morgantown MSA and the Wheeling 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, 2013, 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.

 

8


Table of Contents

Economic Characteristics of Primary Market Area

As of December 2013, West Virginia’s seasonally adjusted unemployment rate was 5.9% according to information from West Virginia’s Bureau of Employment Programs. The national unemployment rate was 6.7%. The number of unemployed state residents fell 1,300 to 46,700 for the month of December as compared to the month of November. Total unemployment was down 13,500 over the year of 2013. The state unemployment rate of 5.9% for December 2013 was a decrease from a rate of 6.0% for the month of November 2013 and a decline from 7.5% for December 2012. West Virginia’s not seasonally adjusted unemployment rate was 5.6% in December 2013. According to the latest forecast from the West Virginia University College of Business and Economics, West Virginia’s economy continues to improve, and the pace of improvement has exceeded that of the United States by several measures recently. The forecast calls for West Virginia’s economic recovery to continue, although at a somewhat slower rate that will likely fall short of the national pace on several key dimensions in the near-term. Employment in West Virginia is estimated to increase 1% per year through 2018, compared to the expected growth at the national level of 1.6% annually. Construction sector employment is expected to increase at an annual rate of 2.3% over the next five years. The service-producing side of the economy is expected to experience the strongest rate of job growth during the outlook period. Education and health services payrolls are expected to expand at a rate of 2.1% annually for the next five years. West Virginia’s unemployment is expected to continue to fall during the period, reaching a low of 4.5% by the end of 2018. However, this decline is attributable to not only job gains, but also to demographic trends, since a larger share of the state’s workforce will be retiring and exiting the labor force.

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 0.2 % for the month of December 2013 to 5.2%. After remaining unchanged in October, the drop in the unemployment rate in November and December continued the downward movement that began in September. As a result, the unemployment rate dropped to the April 2013 low of 5.2%. Virginia’s seasonally adjusted unemployment rate continues below the December national rate of 6.7%, which was down 0.3% from November and down 1.2% from last December. The labor force expanded by 6,198 in December after contracting the two previous months, as 14,818 additional people reported working and the number of unemployed fall by 8,620. Virginia’s not seasonally adjusted unemployment rate continues below the national unadjusted rate, which increased to 6.5% in December from 6.6% in November. Economists are predicting that in the near term, Virginia’s job growth is expected to expand at a slightly slower rate due in part to the federal government’s across-the-board budget cuts called sequestration. Employment growth is expected to accelerate to 1.1% in 2014; this projected rate, however, remains well below the 1.9% annualized growth rate Virginia posted from 1992-2007.

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 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.

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.

 

9


Table of Contents

The Board of Governors has broad authority to prohibit activities of bank holding companies and their non-banking subsidiaries that represent unsafe and unsound banking practices or which constitute violations of laws or regulations. The Board of Governors also can assess civil money penalties for certain activities conducted on a knowing and reckless basis, if those activities caused a substantial loss to a depository institution. The penalties can be as high as $1 million for each day the activity continues.

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. United Bank (WV) is subject to West Virginia banking statutes and regulations, and is primarily regulated by the West Virginia Division of Financial Institutions. United Bank (VA) is subject to the Virginia banking statutes and regulations, and is primarily regulated by the Virginia Bureau of Financial Institution. As members of the Federal Deposit Insurance Corporation (“FDIC”), United’s Banking Subsidiaries’ deposits are insured as required by federal law. Bank regulatory authorities regularly examine revenues, loans, investments, management practices, and other aspects of United’s Banking Subsidiaries. These examinations are conducted primarily to protect depositors and not shareholders. In addition to these regular examinations, United’s Banking Subsidiaries must furnish to regulatory authorities quarterly reports containing full and accurate statements of its affairs.

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.

SEC regulations require us to disclose certain types of business and financial data on a regular basis to the SEC and to our shareholders. We are required to file annual, quarterly and current reports with the SEC. We prepare and file an annual report on Form 10-K with the SEC that contains detailed financial and operating information, as well as a management response to specific questions about the our operations. SEC regulations require that our annual reports to shareholders contain certified financial statements and other specific items such as management’s discussion and analysis of the our financial condition and results of operations. We must also file quarterly reports with the SEC on Form 10-Q that contain detailed financial and operating information for the prior quarter and we must file current reports on Form 8-K to provide the pubic with information on recent material events.

In addition to periodic reporting to the SEC, we are subject to proxy rules and tender offer rules issued by the SEC. Our officers, directors and principal shareholders (holding 10% or more of our stock) must also submit reports to the SEC regarding their holdings of our stock and any changes to such holdings, and they are subject to short-swing profit liability.

Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010

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 is 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.

 

10


Table of Contents

On December 10, 2013, the banking agencies issued a final rule implementing Section 619 of the Dodd-Frank Act, commonly referred to as the “Volcker Rule”. The final rule requires banking entities to divest disallowed securities by July 21, 2015, unless, upon application, the Federal Reserve grants extensions to July 21, 2017. On January 14, 2014, the banking agencies approved an interim final rule to permit banking entities to retain interests in certain collateralized debt obligations backed primarily by trust preferred securities (Trup Cdos) from the prohibitions under the Volcker Rule.

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) and certain financial measures to assess an institution’s ability to withstand asset-related stress and funding-related stress. 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.

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. During 2013 the FDIC refunded any remaining prepaid risk-based assessment.

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 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.

 

11


Table of Contents

United’s FDIC insurance expense totaled $6.1 million, $6.1 million and $8.5 million in 2013, 2012 and 2011, 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%.

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 July 2, 2013, the Federal Reserve, United’s and its banking subsidiaries’ primary federal regulator, published final rules (the Basel III Capital Rules) establishing a new comprehensive capital framework for U.S. banking organizations. The rules implement the Basel Committee’s December 2010 framework known as “Basel III” for strengthening international capital standards as well as certain provisions of the Dodd-Frank Act. The Basel III Capital Rules substantially revise the risk-based capital requirements applicable to bank holding companies and depository institutions, including United and its banking subsidiaries, compared to the current U.S. risk-based capital rules. The Basel III Capital Rules define the components of capital and address other issues affecting the numerator in banking institutions’ regulatory capital ratios. The Basel III Capital Rules also address risk weights and other issues affecting the denominator in banking institutions’ regulatory capital ratios and replace the existing risk-weighting approach, which was derived from Basel I capital accords of the Basel Committee, with a more risk-sensitive approach based, in part, on the standardized approach in the Basel Committee’s 2004 “Basel II” capital accords. The Basel III Capital Rules also implement the requirements of Section 939A of the Dodd-Frank Act to remove references to credit ratings from the federal banking agencies’ rules. The Basel III Capital Rules are effective for United and its banking subsidiaries on January 1, 2015 (subject to a phase-in period).

The Basel III Capital Rules, among other things, (i) introduce a new capital measure called “Common Equity Tier 1” (CET1), (ii) specify that Tier 1 capital consist of CET1 and “Additional Tier 1 capital” instruments meeting specified requirements, (iii) define CET1 narrowly by requiring that most deductions/adjustments to regulatory capital measures be made to CET1 and not to the other components of capital and (iv) expand the scope of the deductions/adjustments from capital as compared to existing regulations.

 

12


Table of Contents

When fully phased in on January 1, 2019, the Basel III Capital Rules will require United and its banking subsidiaries to maintain (i) a minimum ratio of CET1 to risk-weighted assets of at least 4.5%, plus a 2.5% “capital conservation buffer” (which is added to the 4.5% CET1 ratio as that buffer is phased in, effectively resulting in a minimum ratio of CET1 to risk-weighted assets of at least 7% upon full implementation), (ii) a minimum ratio of Tier 1 capital to risk-weighted assets of at least 6.0%, plus the capital conservation buffer (which is added to the 6.0% Tier 1 capital ratio as that buffer is phased in, effectively resulting in a minimum Tier 1 capital ratio of 8.5% upon full implementation), (iii) a minimum ratio of Total capital (that is, Tier 1 plus Tier 2) to risk-weighted assets of at least 8.0%, plus the capital conservation buffer (which is added to the 8.0% total capital ratio as that buffer is phased in, effectively resulting in a minimum total capital ratio of 10.5% upon full implementation) and (iv) a minimum leverage ratio of 4%, calculated as the ratio of Tier 1 capital to average assets (as compared to a current minimum leverage ratio of 3% for banking organizations that either have the highest supervisory rating or have implemented the appropriate federal regulatory authority’s risk-adjusted measure for market risk).

The Basel III Capital Rules also provide for a “countercyclical capital buffer” that is applicable to only certain covered institutions and is not expected to have any current applicability to United and its banking subsidiaries.

The capital conservation buffer is designed to absorb losses during periods of economic stress. Banking institutions with a ratio of CET1 to risk-weighted assets above the minimum but below the capital conservation buffer (or below the combined capital conservation buffer and countercyclical capital buffer, when the latter is applied) will face constraints on dividends, equity repurchases and compensation based on the amount of the shortfall.

Under the Basel III Capital Rules, the initial minimum capital ratios as of January 1, 2015 will be as follows:

 

   

4.5% CET1 to risk-weighted assets.

 

   

6.0% Tier 1 capital to risk-weighted assets.

 

   

8.0% Total capital to risk-weighted assets.

The Basel III Capital Rules provide for a number of deductions from and adjustments to CET1. These include, for example, the requirement that mortgage servicing rights, deferred tax assets dependent upon future taxable income and significant investments in non-consolidated financial entities be deducted from CET1 to the extent that any one such category exceeds 10% of CET1 or all such categories in the aggregate exceed 15% of CET1. Under current capital standards, the effects of accumulated other comprehensive income items included in capital are excluded for the purposes of determining regulatory capital ratios. Under the Basel III Capital Rules, the effects of certain accumulated other comprehensive items are not excluded; however, non-advanced approaches banking organizations, including United and its banking subsidiaries, may make a one-time permanent election to continue to exclude these items. United and its banking subsidiaries expect to make this election in order to avoid significant variations in the level of capital depending upon the impact of interest rate fluctuations on the fair value of United’s securities portfolio. The Basel III Capital Rules also preclude certain hybrid securities, such as trust preferred securities, as Tier 1 capital of bank holding companies, subject to phase-out. However, the Basel III Capital Rules grandfathers non-qualifying capital instruments in the Tier 1 capital of bank holding companies with total consolidated assets of less than $15 billion as of December 31, 2009 (subject to limits). Non-qualifying capital instruments under the final rule include trust preferred securities and cumulative perpetual preferred stock issued before May 19, 2010 that bank holding companies included in Tier 1 capital under the limitations for restricted capital elements in the general risk-based capital rules. As a result, beginning in 2015, United’s and its banking subsidiaries’ trust preferred securities will be subject to a limit of 25 percent of Tier 1 capital elements excluding any non-qualifying capital instruments and after all regulatory capital deductions and adjustments applied to Tier 1 capital, which is substantially similar to the limit in the general risk-based capital rules. Trust preferred securities no longer included in United’s and its banking subsidiaries’ Tier 1 capital may be included as a component of Tier 2 capital on a permanent basis without phase-out.

 

13


Table of Contents

Implementation of the deductions and other adjustments to CET1 will begin on January 1, 2015 and will be phased-in over a 4-year period (beginning at 40% in on January 1, 2015 and an additional 20% per year thereafter). The implementation of the capital conservation buffer will begin on January 1, 2016 at the 0.625% level and be phased in over a four-year period (increasing by that amount on each subsequent January 1, until it reaches 2.5% on January 1, 2019).

The Basel III Capital Rules prescribe a standardized approach for risk weightings that expand the risk-weighting categories from the current four Basel I-derived categories (0%, 20%, 50% and 100%) to a much larger and more risk-sensitive number of categories, depending on the nature of the assets, generally ranging from 0% for U.S. government and agency securities, to 600% for certain equity exposures, and resulting in higher risk weights for a variety of asset categories. Specific changes to current rules impacting United’s determination of risk-weighted assets include, among other things:

 

   

Applying a 150% risk weight instead of a 100% risk weight for certain high volatility commercial real estate acquisition, development and construction loans.

 

   

Assigning a 150% risk weight to exposures (other than residential mortgage exposures) that are 90 days past due.

 

   

Providing for a 20% credit conversion factor for the unused portion of a commitment with an original maturity of one year or less that is not unconditionally cancellable (currently set at 0%).

 

   

Providing for a risk weight, generally not less than 20% with certain exceptions, for securities lending transactions based on the risk weight category of the underlying collateral securing the transaction.

 

   

Providing for a 100% risk weight for claims on securities firms.

 

   

Eliminating the current 50% cap on the risk weight for OTC derivatives.

In addition, the Basel III Capital Rules also provide more advantageous risk weights for derivatives and repurchase-style transactions cleared through a qualifying central counterparty and increases the scope of eligible guarantors and eligible collateral for purposes of credit risk mitigation.

Management believes that, as of December 31, 2013, United and its banking subsidiaries would meet all capital adequacy requirements under the Basel III Capital Rules on a fully phased-in basis if such requirements were currently effective.

The Basel III Capital Rules adopted in July of 2013 do not address the proposed Liquidity Coverage Ratio Test and Net Stable Funding Ratio Test called for by the proposed Basel III framework.

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 below, significant additional restrictions can be imposed on United if it would fail to meet applicable capital requirements.

 

14


Table of Contents

Prompt Corrective Action

The Federal Deposit Insurance Corporation Improvement Act of 1991 (“FDICIA”) establishes a new regulatory scheme, which ties the level of supervisory intervention by bank regulatory authorities primarily to a depository institution’s capital category. Among other things, FDICIA authorizes regulatory authorities to take “prompt corrective action” with respect to depository institutions that do not meet minimum capital requirements. FDICIA establishes five capital tiers: well capitalized, adequately capitalized, undercapitalized, significantly undercapitalized and critically undercapitalized.

By regulation, an institution is “well-capitalized” if it has a total risk-based capital ratio of ten percent (10%) or greater, a Tier 1 risk-based capital ratio of six percent (6%) or greater and a Tier 1 leverage ratio of five percent (5%) or greater and is not subject to a regulatory order, agreement or directive to meet and maintain a specific capital level for any capital measure. United’s Banking Subsidiaries were “well capitalized” institutions as of December 31, 2013. Well-capitalized institutions are permitted to engage in a wider range of banking activities, including among other things, the accepting of “brokered deposits,” and the offering of interest rates on deposits higher than the prevailing rate in their respective markets.

The Basel III Capital Rules revise the current prompt corrective action requirements effective January 1, 2015 by (i) introducing a CET1 ratio requirement at each level (other than critically undercapitalized), with the required CET1 ratio being 6.5% for well-capitalized status; (ii) increasing the minimum Tier 1 capital ratio requirement for each category (other than critically undercapitalized), with the minimum Tier 1 capital ratio for well-capitalized status being 8% (as compared to the current 6%); and (iii) eliminating the current provision that provides that a bank with a composite supervisory rating of 1 may have a 3% leverage ratio and still be adequately capitalized. The Basel III Capital Rules do not change the total risk-based capital requirement for any prompt corrective action category.

Community Reinvestment Act

The Community Reinvestment Act of 1977 (“CRA”) requires depository institutions to assist in meeting the credit needs of their market areas consistent with safe and sound banking practice. Under the CRA, each depository institution is required to help meet the credit needs of its market areas by, among other things, providing credit to low- and moderate-income individuals and communities. Depository institutions are periodically examined for compliance with the CRA and are assigned ratings. Banking regulators take into account CRA ratings when considering approval of a proposed transaction. Each of United’s Banking Subsidiaries received a rating of “satisfactory” in their most recent CRA examination.

Deposit Acquisition Limitation

Under West Virginia banking law, an acquisition or merger is not permitted if the resulting depository institution or its holding company, including its affiliated depository institutions, would assume additional deposits to cause it to control deposits in the State of West Virginia in excess of twenty five percent (25%) of such total amount of all deposits held by insured depository institutions in West Virginia. This limitation may be waived by the Commissioner of Banking by showing good cause.

Consumer Laws and Regulations

In addition to the banking laws and regulations discussed above, bank subsidiaries are also subject to certain consumer laws and regulations that are designed to protect consumers in transactions with banks. Among the more prominent of such laws and regulations are the Truth in Lending Act, the Truth in Savings Act, the Electronic Funds Transfer Act, the Expedited Funds Availability Act, the Equal Credit Opportunity Act, the Fair Credit Reporting Act, and the Fair Housing Act. These laws and regulations mandate certain disclosure requirements and regulate the manner in which financial institutions must deal with customers when taking deposits or making loans to such customers. Bank subsidiaries must comply with the applicable provisions of these consumer protection laws and regulations as part of their ongoing customer relations.

 

15


Table of Contents

As discussed above, the Dodd-Frank Act centralized responsibility for consumer financial protection by creating the CFPB, and giving it responsibility for implementing, examining and enforcing compliance with federal consumer protection laws. The CFPB has broad rulemaking, supervisory and enforcement authority over consumer financial products and services, including deposit products, residential mortgages, home-equity loans, and credit cards. The CFPB’s functions include investigating consumer complaints, rulemaking, supervising and examining banks’ consumer transactions, and enforcing rules related to consumer financial products and services. Banks with less than $10 billion in assets, such as United’s Banking Subsidiaries, will be subject to these federal consumer financial laws, but will continue to be examined for compliance by the Federal Reserve, its primary federal banking regulator.

 

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 its entirety by these risk factors.

RISKS RELATING TO UNITED’S BUSINESS

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 Bankshares. 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.

The U.S. economy was in recession from December 2007 through June 2009. Business activity across a wide range of industries and regions in the U.S. was greatly reduced. Although economic conditions have improved, certain sectors, such as real estate and manufacturing, remain weak and unemployment remains high. Continued declines in real estate values, home sales volumes, and financial stress on borrowers as a result of the uncertain economic environment could have an adverse effect on United’s borrowers or its customers, which could adversely affect United’s financial condition and results of operations. In addition, local governments and many businesses are still experiencing difficulty due to lower consumer spending and decreased liquidity in the credit markets. Deterioration in local economic conditions, particularly within United’s geographic regions and markets, could drive losses beyond that which is provided for in its allowance for loan losses. United may also face the following risks in connection with these events:

 

   

Economic conditions that negatively affect housing prices and the job market have resulted, and may continue to result, in deterioration in credit quality of United’s loan portfolios, and such deterioration in credit quality has had, and could continue to have, a negative impact on United’s business.

 

   

Market developments may affect consumer confidence levels and may cause adverse changes in payment patterns, causing increases in delinquencies and default rates on loans and other credit facilities.

 

16


Table of Contents
   

The processes United uses to estimate allowance for loan losses and reserves may no longer be reliable because they rely on complex judgments that may no longer be capable of accurate estimation.

 

   

United’s ability to assess the creditworthiness of its customers may be impaired if the models and approaches it uses to select, manage and underwrite its customers become less predictive of future charge-offs.

 

   

United expects to face increased regulation of its industry, and compliance with such regulation may increase its costs, limit its ability to pursue business opportunities, and increase compliance challenges.

As the above conditions or similar ones continue to exist or worsen, United could experience continuing or increased adverse effects on its financial condition and results of operations.

The value of certain investment securities is volatile and future declines or other-than-temporary impairments could have a materially adverse effect 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 as well as any regulatory rulemaking such as the Volcker Rule which could exclude or limit the holdings of certain investment 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, defaults or prepayments, including the liquidation of the underlying collateral in certain 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 loan losses.

United believes that its allowance for loan 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

 

   

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 United’s loan losses. Continuing deterioration in economic conditions affecting borrowers, new information regarding existing loans, identification of additional problem loans and other factors, both within and outside of United’s control, may require an increase in the allowance for credit losses. United can provide no assurance that its allowance is sufficient to cover actual loan losses should such losses differ substantially from our current estimates.

 

17


Table of Contents

In addition, federal and state regulators, as an integral part of their respective supervisory functions, periodically review United’s allowance for loan losses, and may require an increase in the provision for loan losses or the recognition of further loan charge-offs, based on judgments different than those of management. Furthermore, if charge-offs in future periods exceed the allowance for loan losses, United will need additional provisions to increase the allowance for loan losses. Any increases in the allowance for loan losses will result in a decrease in net income and, possibly, capital, and may have a material adverse effect on United’s business, financial condition and results of operations.

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, 2017.

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 Morgantown MSA and the Wheeling 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.

 

18


Table of Contents

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.

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. The Dodd-Frank Act, enacted in July 2010, instituted major changes to the banking and financial institutions regulatory regimes. Other 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.

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.

 

19


Table of Contents

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 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. As a result of the completion of the acquisition of Virginia Commerce Bancorp, Inc. which resulted in United having assets more than $10 billion, United is subject to the cap on the interchange fees under the Durbin Amendment which will result in lower debit card interchange fees.

United will be subject to higher regulatory capital requirements and failure to comply with these standards may impact dividend payments, equity repurchases and executive compensation.

On July 2, 2013, the Federal Reserve published final rules that substantially amend the regulatory risk-based capital rules applicable to United, United Bank (West Virginia) and United Bank (Virginia). The rules implement the “Basel III” regulatory capital reforms and changes required by the Dodd-Frank Act, or the Basel III Capital Rules. The new rules are effective for United and its banking subsidiaries on January 1, 2015 (subject to a phase-in period for certain of the new rules).

The Basel III Capital Rules, among other things, (i) introduce a new capital measure called “Common Equity Tier 1”, or CET1, (ii) specify that Tier 1 capital consists of CET1 and “Additional Tier 1 Capital” instruments meeting specified requirements, (iii) define CET1 narrowly by requiring that most deductions/ adjustments to regulatory capital measures be made to CET1 and not to the other components of capital and (iv) expand the scope of the deductions/adjustments from capital as compared to existing regulations, and particularly as applied to CET1.

 

20


Table of Contents

Under the Basel III Capital Rules, the initial minimum capital and leverage ratios as of January 1, 2015 will be as follows:

 

   

4.5% CET1 to risk-weighted assets.

 

   

6.0% Tier 1 capital to risk-weighted assets.

 

   

8.0% Total capital to risk-weighted assets.

 

   

4.0% Tier 1 capital to average assets.

In addition to raising minimum capital and leverage ratios, the Basel III Capital Rules also establish a capital conservation buffer that is designed to absorb losses during periods of economic stress. The capital conservation buffer will be phased in from January 1, 2016 to January 1, 2019 in equal annual installments, and when fully implemented the capital conservation buffer will effectively add 2.5% to each of the minimum capital ratios. Banking institutions with a ratio of CET1 to risk-weighted assets above the minimum but below the capital conservation buffer will face constraints on dividends, equity repurchases and compensation based on the amount of the shortfall.

With respect to United’s banking subsidiaries, the Basel III Capital Rules also revise the “prompt corrective action” regulations pursuant to Section 38 of the Federal Deposit Insurance Act, by (i) introducing a CET1 ratio requirement at each level (other than critically undercapitalized), with the required CET1 ratio being 6.5% for well-capitalized status; (ii) increasing the minimum Tier 1 capital ratio requirement for each category, with the minimum Tier 1 capital ratio for well-capitalized status being 8% (as compared to the current 6%); and (iii) eliminating the current provision that provides that a bank with a composite supervisory rating of 1 may have a 3% leverage ratio and still be adequately capitalized. The Basel III Capital Rules do not change the total risk-based capital requirement for any “prompt corrective action” category.

The Basel III Capital Rules prescribe a standardized approach for risk weightings that expand the risk-weighting categories from the current four Basel I-derived categories (0%, 20%, 50% and 100%) to a much larger and more risk-sensitive number of categories, depending on the nature of the assets, generally ranging from 0% for U.S. government and agency securities, to 600% for certain equity exposures, and resulting in higher risk weights for a variety of asset categories. In particular, the Basel III Capital Rules increase risk weights that apply to past-due exposures and high volatility commercial real estate loans.

The Basel III changes will result in generally higher minimum capital ratios that require United and its subsidiaries to maintain capital buffers above minimum requirements to avoid restrictions on capital distributions and executive bonus payments. In addition, the application of more stringent capital requirements for United, United Bank (West Virginia) and United Bank (Virginia) 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. 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 United’s ability to make distributions, including paying dividends.

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.

 

21


Table of Contents

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.

United could face unanticipated environmental liabilities or costs related to real property owned or acquired through foreclosure. Compliance with federal, state and local environmental laws and regulations, including those related to investigation and clean-up of contaminated sites, could have a negative effect on expenses and results of operations.

A significant portion of United’s loan portfolio is secured by real property. During the ordinary course of business, United may foreclose on and take title to properties securing certain loans. In doing so, there is a risk that hazardous or toxic substances could be found on these properties. If hazardous or toxic substances are found, United may be liable for remediation costs, as well as for personal injury and property damage. Environmental laws may require United to incur substantial expenses and may materially reduce the affected property’s value or limit United’s ability to use or sell the affected property. In addition, future laws or more stringent interpretations or enforcement policies with respect to existing laws may increase exposure to environmental liability. Although United has policies and procedures to perform an environmental review before initiating any foreclosure action on real property, these reviews may not be sufficient to detect all potential environmental hazards. The remediation costs and any other financial liabilities associated with an environmental hazard could have a material adverse effect on results of operations.

The Standard & Poor’s downgrade in the U.S. government’s sovereign credit rating, and in the credit ratings of instruments issued, insured or guaranteed by certain related institutions, agencies and instrumentalities, creates risks to United’s net income, capital levels, financial condition and liquidity and causes uncertainties in general economic conditions that may adversely impact it.

In August 2011, Standard & Poor’s downgraded the United States long-term debt ratings and downgraded the credit ratings of certain long-term debt instruments issued by Fannie Mae and Freddie Mac and other U.S. government agencies linked to long-term U.S. debt. Instruments of this nature are key assets on the balance sheets of financial institutions, including United. These downgrades could adversely affect the market value of such instruments, and could adversely impact United’s ability to obtain funding that is collateralized by affected instruments, as well as affecting the pricing of that funding when it is available. In addition, these downgrades could materially affect financial markets and economic conditions, which may affect United’s net income, financial condition and liquidity and result in future changes in capital requirements or United’s investment portfolio in response to management’s assessment of the related risk weightings. United cannot predict if, when or how these changes to the credit ratings will affect economic conditions. As a result, it is possible that these changes could result in a significant adverse impact to United, and could affect other risks to which it is subject.

New accounting or tax pronouncements or interpretations may be issued by the accounting profession, regulators or other government bodies which could change existing accounting methods. Changes in accounting methods could negatively impact United’s results of operations and financial condition.

Current accounting and tax rules, standards, policies and interpretations influence the methods by which financial institutions conduct business, implement strategic initiatives and tax compliance, and govern financial reporting and disclosures. These laws, regulations, rules, standards, policies, and interpretations are constantly evolving and may change significantly over time. Events that may not have a direct impact on United, such as the bankruptcy of major U.S. companies, have resulted in legislators, regulators and authoritative bodies, such as the Financial Accounting Standards Board, the SEC, the Public Company Accounting Oversight Board, and various taxing authorities, responding by adopting and/or proposing substantive revision to laws, regulations, rules, standards, policies, and interpretations. New accounting pronouncements and varying interpretations of accounting pronouncements have occurred and may occur in the future. A change in accounting standards may adversely affect reported financial condition and results of operations.

 

22


Table of Contents

United’s business continuity plans or data security systems could prove to be inadequate, resulting in a material interruption in, or disruption to, its business and a negative impact on results of operations.

United relies heavily on communications and information systems to conduct its business. Any failure, interruption or breach in security of these systems, whether due to severe weather, natural disasters, cyber attack, acts of war or terrorism, criminal activity or other factors, could result in failures or disruptions in general ledger, deposit, loan, customer relationship management and other systems. While United has disaster recovery and other 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 United’s information systems could damage its reputation, result in a loss of customer business, subject it to additional regulatory scrutiny or expose it to civil litigation and possible financial liability, any of which could have a material adverse effect on results of operations.

The negative economic effects caused by terrorist attacks, including cyber attacks, potential attacks and other destabilizing events would likely contribute to the deterioration of the quality of United’s loan portfolio and could reduce its customer base, level of deposits, and demand for its financial products such as loans.

High inflation, natural disasters, acts of terrorism, including cyber attacks, an escalation of hostilities or other international or domestic occurrences, and other factors could have a negative impact on the economy of the Mid-Atlantic regions in which United operates. An additional economic downturn in its markets would likely contribute to the deterioration of the quality of United’s loan portfolio by impacting the ability of its customers to repay loans, the value of the collateral securing loans, and may reduce the level of deposits in its bank and the stability of its deposit funding sources. An additional economic downturn could also have a significant impact on the demand for United’s products and services. The cumulative effect of these matters on United’s results of operations and financial condition would likely be adverse and material.

United’s vendors could fail to fulfill their contractual obligations, resulting in a material interruption in, or disruption to, its business and a negative impact on results of operations.

United has entered into subcontracts for the supply of current and future services, such as data processing, mortgage loan processing and servicing, and certain property management functions. These services must be available on a continuous and timely basis and be in compliance with any regulatory requirements. Failure to do so could substantially harm United’s business.

United often purchases services from vendors under agreements that typically can be terminated on a periodic basis. There can be no assurance, however, that vendors will be able to meet their obligations under these agreements or that United will be able to compel them to do so. Risks of relying on vendors include the following:

 

   

If an existing agreement expires or a certain service is discontinued by a vendor, then United may not be able to continue to offer its customers the same breadth of products and its operating results would likely suffer unless it is able to find an alternate supply of a similar service.

 

   

Agreements United may negotiate in the future may commit it to certain minimum spending obligations. It is possible United will not be able to create the market demand to meet such obligations.

 

   

If market demand for United’s products increases suddenly, its current vendors might not be able to fulfill United’s commercial needs, which would require it to seek new arrangements or new sources of supply, and may result in substantial delays in meeting market demand.

 

   

United may not be able to control or adequately monitor the quality of services it receives from its vendors. Poor quality services could damage United’s reputation with its customers.

 

23


Table of Contents

Potential problems with vendors such as those discussed above could have a significant adverse effect on United’s business, lead to higher costs and damage its reputation with its customers and, in turn, have a material adverse effect on its financial condition and results of operations.

United’s potential inability to integrate companies it may acquire in the future could have a negative effect on its expenses and results of operations.

On occasion, United may engage in a strategic acquisition when it believes there is an opportunity to strengthen and expand its business. To fully benefit from such acquisition, however, United must integrate the administrative, financial, sales, lending, collections and marketing functions of the acquired company. If United is unable to successfully integrate an acquired company, it may not realize the benefits of the acquisition, and its financial results may be negatively affected. A completed acquisition may adversely affect United’s financial condition and results of operations, including its capital requirements and the accounting treatment of the acquisition. Completed acquisitions may also lead to significant unexpected liabilities after the consummation of these acquisitions.

RISKS ASSOCIATED WITH UNITED’S COMMON STOCK

United’s stock price can be volatile.

Stock price volatility may make it more difficult for United shareholders to resell their common stock when they want and at prices they find attractive. United’s stock price can fluctuate significantly in response to a variety of factors, including, among other things:

 

   

Actual or anticipated negative variations in quarterly results of operations;

 

   

Negative recommendations by securities analysts;

 

   

Poor operating and stock price performance of other companies that investors deem comparable to United;

 

   

News reports relating to negative trends, concerns and other issues in the financial services industry or the economy in general;

 

   

Negative perceptions in the marketplace regarding United and/or its competitors;

 

   

New technology used, or services offered, by competitors;

 

   

Adverse changes in interest rates or a lending environment with prolonged low interest rates;

 

   

Adverse changes in the real estate market;

 

   

Negative economic news;

 

   

Failure to integrate acquisitions or realize anticipated benefits from acquisitions;

 

   

Adverse changes in government regulations; and

 

   

Geopolitical conditions such as acts or threats of terrorism or military conflicts.

General market fluctuations, industry factors and general economic and political conditions and events, such as economic slowdowns or recessions, interest rate changes or credit loss trends, could also cause United’s stock price to decrease regardless of operating results.

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, 2013, an aggregate of approximately $32.5 million and $14.8 million was available for dividend payments from United Bank (WV) and United Bank (VA), respectively, to United without regulatory approval.

 

24


Table of Contents

An investment in United common stock is not an insured deposit.

United common stock is not a bank deposit and, therefore, is not insured against loss by the Federal Deposit Insurance Corporation, any other deposit insurance fund or by any other public or private entity. Investment in United common stock is inherently risky for the reasons described in this section and elsewhere in this prospectus and joint proxy statement and is subject to the same market forces that affect the price of common stock in any company. As a result, someone who acquires United common stock, could lose some or all of their investment.

Certain banking laws may have an anti-takeover effect.

Provisions of federal banking laws, including regulatory approval requirements, could make it more difficult to be acquired by a third party, even if perceived to be beneficial to United’s shareholders. These provisions effectively inhibit a non-negotiated merger or other business combination, which could adversely affect the market price of United’s common stock.

 

Item 1B. UNRESOLVED STAFF COMMENTS

None

 

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 thirteen (113) full service offices—fifty-six (56) offices located throughout West Virginia, fifty-two (52) 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 three in the Wheeling area, two in the Charleston area, two in the Beckley area, and one each in Morgantown, 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, two 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.

 

25


Table of Contents
Item 3. LEGAL PROCEEDINGS

United and its subsidiaries are currently involved in various legal proceedings in the normal course of business. 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.

 

26


Table of Contents

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, 2014, 100,000,000 shares of common stock, par value $2.50 per share, were authorized for United, of which 69,197,977 were issued, including 430,383 shares held as treasury shares. The outstanding shares are held by approximately 7,621 shareholders of record, as well as 19,992 shareholders in street name as of January 31, 2014. The numbers above include the shares issued to the former Virginia Commerce Bancorp, Inc. shareholders as a result of the acquisition. 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 2013 and 2012, 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.

 

27


Table of Contents

Dividends

The shareholders of United are entitled to receive dividends when and as declared by its Board of Directors. Dividends have been paid quarterly. Dividends were $1.25 per share in 2013, $1.24 per share in 2012 and $1.21 per share in 2011. 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 24, 2014, the last practicable date, was $28.89.

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:

 

2014

   Dividends     High      Low  

First Quarter through February 24, 2014

   $ 0.32 (1)    $   31.57       $   28.23   

2013

                   

Fourth Quarter

   $ 0.32      $ 32.71       $ 28.06   

Third Quarter

   $ 0.31      $ 29.45       $ 26.04   

Second Quarter

   $ 0.31      $ 26.84       $ 24.46   

First Quarter

   $ 0.31      $ 27.24       $ 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   

 

(1) On February 24, 2014, United declared a dividend of $0.32 per share, payable April 1, 2014, to shareholders of record as of March 14, 2014.

 

28


Table of Contents

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, 2013, 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, 2008 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  
     12/31/08      12/31/09      12/31/10      12/31/11      12/31/12      12/31/13  

United Bankshares, Inc.

     100.00         63.90         97.83         99.49         89.83         121.30   

NASDAQ Bank Index

     100.00         83.68         95.51         85.51         101.43         143.66   

S&P Mid-Cap Index

     100.00         137.26         173.77         170.79         201.15         268.36   

 

29


Table of Contents

Issuer Repurchases

The table below includes certain information regarding United’s purchase of its common shares during the three months ended December 31, 2013:

 

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 – 10/31/2013

     0       $ 00.00         0         322,200   

11/01 – 11/30/2013

     44       $ 29.45         0         322,200   

12/01 – 12/31/2013

     0       $ 00.00         0         322,200   
  

 

 

       

Total

     44       $ 29.45         
  

 

 

       

 

  (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, 2013, 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, 2013, the following shares were purchased for the deferred compensation plan: November 2013 –44 shares at an average price of $29.45.

 

  (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.

 

30


Table of Contents
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, 2013. 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)    2013      2012      2011      2010      2009  

Summary of Operations:

              

Total interest income

   $ 306,154       $ 323,897       $ 316,522       $ 323,382       $ 365,845   

Total interest expense

     36,313         46,190         55,794         85,196         120,374   

Net interest income

     269,841         277,707         260,728         238,186         245,471   

Provision for loan losses

     19,267         17,862         17,141         13,773         46,065   

Other income

     67,828         66,292         50,837         62,203         53,970   

Other expense

     193,358         204,656         184,048         182,212         175,127   

Income taxes

     39,416         38,874         34,766         32,457         10,951   

Net income

     85,628         82,607         75,610         71,947         67,298   

Cash dividends

     62,981         62,351         56,827         52,300         50,837   

Per common share:

              

Net income:

              

Basic

     1.70         1.64         1.62         1.65         1.55   

Diluted

     1.70         1.64         1.61         1.65         1.55   

Cash dividends

     1.25         1.24         1.21         1.20         1.17   

Book value per share

     20.66         19.74         19.29         18.18         17.53   

Selected Ratios:

              

Return on average shareholders’ equity

     8.43%         8.35%         8.50%         9.19%         8.81%   

Return on average assets

     1.02%         0.98%         0.97%         0.95%         0.85%   

Dividend payout ratio

     73.55%         75.48%         75.16%         72.69%         75.54%   

Selected Balance Sheet Data:

              

Average assets

   $ 8,419,456       $ 8,399,513       $ 7,780,836       $ 7,533,974       $ 7,925,506   

Investment securities

     889,342         729,402         824,219         794,715         966,920   

Loans held for sale

     4,236         17,762         3,902         6,869         5,284   

Total loans

     6,704,583         6,511,416         6,230,777         5,260,326         5,736,809   

Total assets

     8,735,324         8,420,013         8,451,470         7,155,719         7,805,101   

Total deposits

     6,621,571         6,752,986         6,819,010         5,713,534         5,971,100   

Long-term borrowings

     575,697         284,926         345,366         386,458         771,935   

Total liabilities

     7,693,592         7,427,762         7,482,626         6,362,707         7,043,551   

Shareholders’ equity

     1,041,732         992,251         968,844         793,012         761,550   

 

31


Table of Contents
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.

SUBSEQUENT EVENT

After the close of business on January 31, 2014, United acquired 100% of the outstanding common stock of Virginia Commerce Bancorp, Inc. (Virginia Commerce), a Virginia corporation headquartered in Arlington, Virginia. The results of operations of Virginia Commerce will be included in the consolidated results of operations from the date of acquisition. The acquisition of Virginia Commerce enhances United’s existing footprint in the Washington, D.C. MSA. Virginia Commerce was merged with and into George Mason Bankshares, Inc., a wholly-owned subsidiary of United (the Merger) in a transaction to be accounted for under the acquisition method of accounting. At consummation, Virginia Commerce had assets of approximately $2.77 billion, loans of $2.10 billion, and deposits of $2.02 billion. In addition, on February 20, 2014, United sold a former branch building for approximately $11.1 million and recognized a before-tax gain of approximately $8.9 million.

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, 2013, 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.

USE OF NON-GAAP FINANCIAL MEASURES

This discussion and analysis contains certain financial measures that are not recognized under GAAP. Under SEC Regulation G, public companies making disclosures containing financial measures that are not in accordance with GAAP must also disclose, along with each “non-GAAP” financial measure, certain additional information, including a reconciliation of the non-GAAP financial measure to the closest comparable GAAP financial measure, as well as a statement of the company’s reasons for utilizing the non-GAAP financial measure.

Generally, United has presented these non-GAAP financial measures because it believes that these measures provide meaningful additional information to assist in the evaluation of United’s results of operations or financial position. Presentation of these non-GAAP financial measures is consistent with how United’s management evaluates its performance internally and these non-GAAP financial measures are frequently used by securities analysts, investors and other interested

 

32


Table of Contents

parties in the evaluation of companies in the banking industry. Specifically, this discussion contains certain references to financial measures identified as tax-equivalent net interest income and noninterest income 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. Management believes these non-GAAP financial measures to be helpful in understanding United’s results of operations or financial position. However, this non-GAAP information should be considered supplemental in nature and not as a substitute for related financial information prepared in accordance with GAAP.

Where non-GAAP financial measures are used, the comparable GAAP financial measure, as well as reconciliation to that comparable GAAP financial measure, as well as a statement of the company’s reasons for utilizing the non-GAAP financial measure, can be found within this discussion and analysis. Investors should recognize that United’s presentation of these non-GAAP financial measures might not be comparable to similarly titled measures at other companies.

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.

Allowance for Loan Losses

The allowance for loan losses represents management’s estimate of the probable credit losses inherent in the lending portfolio. Determining the allowance for loan losses requires management to make estimates of losses that are highly uncertain and require a high degree of judgment. At December 31, 2013, the allowance for loan losses was $74.2 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 2013 net income by approximately $4.8 million, after-tax or $0.10 diluted per common share. Management’s evaluation of the adequacy of the allowance for loan losses and the appropriate provision for loan losses is based upon a quarterly evaluation of the loan portfolio. 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 loan 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 loan 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 loan losses is included in the Provision for Loan 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.

 

33


Table of Contents

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 as either held to maturity or available for sale and its equity securities as 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 shareholders’ 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 trust preferred securities (Trup Cdos), 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 they 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 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.

 

34


Table of Contents

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, 2013, approximately 9.87% of total assets, or $862.58 million, consisted of financial instruments recorded at fair value. Of this total, approximately 91.15% or $786.25 million of these financial instruments used valuation methodologies involving observable market data, collectively Level 1 and Level 2 measurements, to determine fair value. Approximately 8.85% or $76.33 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 Trup Cdos classified as available-for-sale. At December 31, 2013, only $1.19 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.

2013 COMPARED TO 2012

FINANCIAL CONDITION SUMMARY

United’s total assets as of December 31, 2013 were $8.74 billion which was an increase of $315.31 million or 3.74% from December 31, 2012. The increase was primarily the result of a $193.17 million or 2.97% increase in portfolio loans and a $159.94 million or 21.93% increase in investment securities. Partially offsetting these increases in total assets was a $15.46 million or 3.58% decrease in cash and cash equivalents, a $13.53 million or 76.15% decrease in loans held for sale, and a $6.57 million or 2.00% decrease in other assets. The increase in total assets is reflected in a corresponding increase in total liabilities of $265.83 million or 3.58% from year-end 2012. The increase in total liabilities was due mainly to an increase of $406.56 million or 67.77% in borrowings, which was partially offset by a $131.42 million or 1.95% decrease in deposits and a $9.81 million or 13.39% decrease in accrued expenses from year-end 2012. Shareholders’ equity increased $49.48 million or 4.99% from year-end 2012.

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, 2013 decreased $15.46 million or 3.58% from year-end 2012 due to a decrease of $22.73 million or 14.43% in cash and due from banks and a decrease of $302 thousand or 29.58% in federal funds sold. Partially offsetting this decrease in cash and cash equivalents was an increase in interest-bearing deposits with other banks of $7.57 million or 2.77% as United placed more excess cash in an interest-bearing account with the Federal Reserve. During the year of 2013, net cash of $142.20 million and $215.45 million were provided by operating activities and financing activities, respectively. Net cash of $373.11 million was used in investing activities. Further details related to changes in cash and cash equivalents are presented in the Consolidated Statements of Cash Flows.

 

35


Table of Contents

Securities

Total investment securities at December 31, 2013 increased $159.94 million or 21.93% from year-end 2012. Securities available for sale increased $149.66 million or 23.92%. This change in securities available for sale reflects $697.05 million in sales, maturities and calls of securities, $845.91 million in purchases, and a decrease of $2.30 million in market value. Securities held to maturity decreased $2.50 million or 5.76% from year-end 2012 due to calls and maturities of securities. Other investment securities increased $12.78 million or 21.20% from year-end 2012 due to net purchases of $13.13 million in FHLB stock.

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

 

                                                  
     2013      2012      2011  
     (In thousands)  

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

   $ 172,324       $ 336,747       $ 303,484   

States and political subdivisions

     60,861         76,765         94,794   

Mortgage-backed securities

     474,104         126,338         225,069   

Asset-backed securities

     9,257         11,729         0   

Marketable equity securities

     3,299         6,660         4,341   

Trust preferred collateralized debt obligations

     73,862         94,794         104,161   

Single issue trust preferred securities

     14,346         15,286         15,242   

Corporate securities

     4,996         4,996         4,994   
  

 

 

    

 

 

    

 

 

 

TOTAL AVAILABLE FOR SALE SECURITIES, at amortized cost

   $ 813,049       $ 673,315       $ 752,085   
  

 

 

    

 

 

    

 

 

 

TOTAL AVAILABLE FOR SALE SECURITIES, at fair value

   $ 775,284       $ 625,625       $ 696,518   
  

 

 

    

 

 

    

 

 

 

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

 

                                                  
     2013      2012      2011  
     (In thousands)   

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

   $   10,762       $   10,916       $   11,062   

States and political subdivisions

     10,367         12,515         12,794   

Mortgage-backed securities

     50         61         77   

Single issue trust preferred securities

     19,766         19,750         32,116   

Other corporate securities

     20         225         3,240   
  

 

 

    

 

 

    

 

 

 

TOTAL HELD TO MATURITY SECURITIES, at amortized cost

   $ 40,965       $ 43,467       $ 59,289   
  

 

 

    

 

 

    

 

 

 

TOTAL HELD TO MATURITY SECURITIES, at fair value

   $ 38,293       $ 42,695       $ 56,181   
  

 

 

    

 

 

    

 

 

 

At December 31, 2013, gross unrealized losses on available for sale securities were $44.00 million. Securities in an unrealized loss position at December 31, 2013 consisted primarily of Trup Cdos, agency residential mortgage-backed securities, agency commercial mortgage-backed securities and single issue trust preferred securities. The Trup Cdos and the single issue trust preferred securities relate mainly to underlying securities of financial institutions. The agency commercial mortgage-backed securities relate to income-producing multifamily properties and provide a guaranty of full and timely payments of principal and interest by Fannie Mae.

As of December 31, 2013, United’s mortgage-backed securities had an amortized cost of $474.15 million, with an estimated fair value of $466.49 million. The portfolio consisted primarily of $215.84 million in agency residential mortgage-backed securities with a fair value of $216.52 million, $16.37 million in non-agency residential mortgage-backed securities with an estimated fair value of $16.53 million, and $241.95 million in commercial agency mortgage-backed securities with an estimated fair value of $233.43 million. As of December 31, 2013, United’s asset-backed securities had an amortized cost of $9.26 million, with an estimated fair value of $9.23 million.

As of December 31, 2013, United’s corporate securities had an amortized cost of $116.29 million, with an estimated fair value of $80.84 million. The portfolio consisted primarily of $73.86 million in Trup Cdos with a fair value of $43.45 million and $34.11 million in single issue trust preferred securities with an estimated fair value of $28.29 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 $3.30 million and a fair value of $3.87 million, only one of which was individually significant.

 

36


Table of Contents

The Trup Cdos consisted of pools of trust preferred securities issued by trusts related primarily to 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 the Trup Cdos; however, the Company does not own any income notes. The senior and mezzanine tranches of Trup Cdos 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 have failed. Generally, senior tranches have the greatest protection, with mezzanine tranches subordinated to the senior tranches, and income notes subordinated to the mezzanine tranches. The fair value of senior tranches represents $15.06 million of the Company’s pooled securities, while mezzanine tranches represent $58.80 million. Of the $58.80 million in mezzanine tranches, $13.74 million are now in the Senior position as the Senior notes have been paid to a zero balance. As of December 31, 2013, $6.58 million of the Trup Cdos were investment grade, $5.00 million were split-rated, and the remaining $62.28 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, 2013, United’s single issue trust preferred securities had an amortized cost of $34.11 million. Of the $34.11 million, $10.90 million or 31.95% were investment grade; $632 thousand or 1.85% were unrated; $7.91 million or 23.20% were split rated; and $14.67 million or 43.00% were below investment grade. The two largest exposures accounted for 50.70% of the $34.11 million. These included Wells Fargo at $9.90 million and SunTrust Bank at $7.39 million. All single-issue trust preferred securities, with the exception of two securities totaling $632 thousand, are currently receiving full scheduled principal and interest payments.

The following two tables provide a summary of Trup Cdos with at least one rating below investment grade as of December 31, 2013:

 

Description

  

Tranche

  

Class

  

Moodys

  

S&P

  

Fitch

   Amortized
Cost Basis
     Fair
Value
     Unrealized
Loss
(Gain)
    Credit-
Related
OTTI
 

SECURITY 1

   Senior    Sr    Ca    NR    WD    $ 3,485       $ 2,651       $ 834      $ 1,219   

SECURITY 2

   Senior (org Mezz)    B    Ca    NR    WD      7,350         3,537         3,813        6,476   

SECURITY 3

   Senior (org Mezz)    Mez    C    NR    WD      0         0         0        61   

SECURITY 4

   Mezzanine    C    C    NR    C      1,252         493         759        1,546   

SECURITY 5

   Mezzanine    C-2    Ca    NR    C      1,978         585         1,393        184   

SECURITY 6

   Mezzanine    C-1    Ca    NR    C      1,916         884         1,032        1,316   

SECURITY 7

   Mezzanine    B-1    Caa2    NR    C      4,487         2,112         2,375        41   

SECURITY 8

   Mezzanine    B-1    Ca    NR    C      3,676         2,153         1,523        1,651   

SECURITY 9

   Senior (org Mezz)    Mez    Ca    NR    C      0         0         0        3,214   

SECURITY 10

   Mezzanine    B    Ca    NR    D      5,411         640         4,771        10,589   

SECURITY 11

   Mezzanine    B-1    Ca    NR    D      2,385         2,385         0        7,606   

SECURITY 12

   Senior (org Mezz)    Mez    Caa3    NR    C      1,780         1,990         (210     588   

SECURITY 13

   Senior (org Mezz)    Mez    Caa3    NR    C      1,164         1,161         3        406   

SECURITY 14

   Mezzanine    B-1    Ca    NR    C      3,617         1,301         2,316        422   

SECURITY 15

   Mezzanine    B    Caa3    NR    C      6,436         2,200         4,236        3,531   

SECURITY 16

   Mezzanine    B-2    Ca    NR    C      3,822         1,400         2,422        1,179   

SECURITY 17

   Mezzanine    B-1    Ca    NR    C      2,250         1,260         990        750   

SECURITY 18

   Senior    A-3    Aa2    B+    A      5,000         3,500         1,500        0   

SECURITY 19

   Senior (org Mezz)    B    Ba1    NR    BB      3,446         2,240         1,206        0   

SECURITY 20

   Mezzanine    B-2    NR    CCC+    CCC      3,280         3,280         0        720   

SECURITY 21

   Mezzanine    B-1    NR    CCC-    CCC      2,050         2,050         0        450   

SECURITY 22

   Mezzanine    B-1    Caa1    NR    C      2,500         1,050         1,450        0   
                 

 

 

    

 

 

    

 

 

   

 

 

 
                  $ 67,285       $ 36,872       $ 30,413      $ 41,949   
                 

 

 

    

 

 

    

 

 

   

 

 

 

 

37


Table of Contents

Desc.

  # of Issuers
Currently
Performing

(1)
  Deferrals
as % of
Original
Collateral
  Defaults
as a % of
Original
Collateral
  Expected Deferrals
and Defaults as a
% of Remaining
Performing
Collateral (2)
  Projected
Recovery/Cure
Rates on
Deferring
Collateral
  Excess
Subordination as
% of Performing
Collateral
  Amortized Cost
as a % of Par
Value
  Discount as
a % of Par
Value (3)

1

  7   10.7%   13.3%   8.2%   65 - 85%   (59.4)%   72.3%   27.7%

2

  7   2.2%   9.7%   7.0%   0 - 90%   (72.6)%   51.9%   48.1%

3

  0   1.9%   3.6%   0.0%   0%   0.0%   0.0%   100.0%

4

  33   18.8%   13.4%   6.7%   0 - 90%   (12.8)%   43.1%   56.9%

5

  39   10.4%   12.9%   7.5%   60 - 90%   (6.2)%   91.3%   8.7%

6

  45   7.5%   19.0%   6.7%   0 - 90%   (19.2)%   58.5%   41.5%

7

  22   3.0%   17.3%   7.2%   0 - 60%   (12.5)%   85.0%   15.0%

8

  28   3.2%   21.8%   6.8%   50 - 75%   (26.8)%   68.3%   31.7%

9

  N/A   N/A   N/A   N/A   N/A   N/A   N/A   N/A

10

  8   4.6%   14.6%   6.4%   10%   (67.9)%   33.8%   66.2%

11

  14   8.3%   20.9%   10.4%   50 - 90%   (27.6)%   23.9%   76.2%

12

  7   0.0%   19.5%   5.9%   N/A   (4.0)%   79.6%   20.4%

13

  7   0.0%   19.5%   5.9%   N/A   (4.0)%   89.3%   10.7%

14

  32   27.2%   7.5%   7.4%   15 - 90%   (5.2)%   89.0%   11.0%

15

  16   5.1%   19.0%   9.5%   15 - 90%   (35.9)%   64.4%   35.6%

16

  16   6.1%   17.9%   6.9%   0 - 90%   (25.6)%   76.4%   23.6%

17

  28   9.9%   15.0%   7.8%   0 - 90%   (9.9)%   75.0%   25.0%

18

  29   7.2%   12.9%   6.6%   15%   54.6%   100.0%   0.0%

19

  5   0.6%   4.6%   8.0%   90%   30.2%   100.0%   0.0%

20

  18   4.5%   4.0%   7.1%   0%   23.1%   82.0%   18.0%

21

  14   9.3%   0.0%   6.4%   15%   10.9%   82.0%   18.0%

22

  33   4.9%   11.5%   7.8%   50 - 90%   (0.2)%   100.0%   0.0%

(1) “Performing” refers to all outstanding issuers less issuers that have either defaulted or are currently deferring their interest payment.

(2) “Expected Deferrals and Defaults” refers to projected future defaults on performing collateral and does not include the projected defaults on deferring collateral.

(3) The “Discount” in the table above represents the Par Value less the Amortized Cost. This metric generally approximates the level of OTTI that has been incurred on these securities.

The Company defines “Excess Subordination” as all outstanding collateral less the sum of (i) 100% of the defaulted collateral, (ii) the sum of the projected net loss amounts for each piece of the deferring but not defaulted collateral and (iii) the amount of each Trup Cdo’s debt that is either senior to or pari passu with our security’s priority level.

The calculation of excess subordination in the above table does not consider the OTTI the Company has recognized on these securities. While the ratio of excess subordination provides some insight on overall collateralization levels, the Company completes an expected cash flow analysis each quarter to determine whether an adverse change in future cash flows has occurred under ASC 320. The standard specifies that a cash flow projection can be present-valued at the security specific effective interest rate and the resulting present value compared to the amortized cost in order to quantify the credit component of impairment. The Company utilizes the cash flow models to determine the net realizable value and assess whether additional OTTI has occurred.

 

38


Table of Contents

While the ratio of excess subordination provides some insight on overall collateralization levels, the Company does not utilize this ratio to calculate OTTI. The ratio of excess subordination represents only one component of the projected cash flow. The Company believes the excess subordination is limited as it does not consider the following:

 

   

Waterfall structure and redirection of cash flows

 

   

Excess interest spread

 

   

Cash reserves

The collateral backing of a particular tranche can be increased by decreasing the more senior liabilities of the Trup Cdo tranche. This occurs when collateral deterioration due to defaults and deferrals triggers alternative waterfall provisions of the cash flow. The waterfall structure of the bond requires the excess spread to be rerouting away from the most junior classes of debt (which includes the income notes) in order to pay down the principal of the most senior liabilities. As these senior liabilities are paid down, the senior and mezzanine tranches become better secured (due to the rerouting away from the income notes). Therefore, variances will exist between the calculated excess subordination measure and the amount of OTTI recognized due to the impact of the specific structural features of each bond as it relates to the cash flow models.

The following is a summary of available for sale single-issue trust preferred securities with at least one rating below investment grade as of December 31, 2013:

 

Security

   Moodys    S&P    Fitch    Amortized
Cost
     Fair
Value
     Unrealized
Gain/Loss
 

Emigrant

   NR    NR    CCC    $ 5,657       $ 4,260       ($ 1,397

Bank of America

   Ba1    NR    BB+      4,570         3,950         (620

M&T Bank

   NR    BBB    BB+      2,983         3,285         302   

Citigroup

   Ba1    BB+    BB+      504         502         (2

Bank of America

   Ba1    BB+    BB+      500         503         3   
           

 

 

    

 

 

    

 

 

 
            $ 14,214       $ 12,500       ($ 1,714
           

 

 

    

 

 

    

 

 

 

Additionally, the Company owns two single-issue trust preferred securities that are classified as held-to-maturity and include at least one rating below investment grade. These securities include SunTrust Bank ($7.39 million) and Royal Bank of Scotland ($972 thousand).

During 2013, United recognized net other-than-temporary impairment charges totaling $7.33 million on certain Trup Cdos and one marketable equity security. Other than these securities, management does not believe that any other individual security with an unrealized loss as of December 31, 2013 is other-than-temporarily impaired. United believes the decline in value resulted from changes in market interest rates, credit spreads and liquidity, not an adverse change in the expected contractual 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.

Further information regarding the amortized cost and estimated fair value of investment securities, including remaining maturities as well as a more detailed discussion of management’s other-than-temporary impairment analysis, is presented in Note C, Notes to Consolidated Financial Statements.

Loans

Loans held for sale decreased $13.53 million or 76.15% as loan sales exceeded loan originations in the secondary market during the year of 2013. Portfolio loans, net of unearned income, increased $193.17 million or 2.97% from year-end 2012 mainly due to a $119.69 million or 21.73% increase in construction and land development loans, a $28.31 million or 10.02% increase in consumer loans, and a $64.69 million or 1.68% increase in the total commercial, financial and

 

39


Table of Contents

agricultural loans category. Within the commercial, financial and agricultural loans category, commercial real estate loans increased $177.37 million or 10.19% while commercial loans (not secured by real estate) and owner-occupied commercial real estate loans decreased $38.73 million or 2.81% and $73.94 million or 10.14%, respectively. Partially offsetting these increases in portfolio loans was a decrease of $16.87 million or less than 1% in residential real estate loans.

A summary of loans outstanding is as follows:

 

     December 31  
     2013      2012      2011      2010      2009  

Commercial, financial & agricultural

   $ 3,911,103       $ 3,846,409       $ 3,508,966       $ 2,837,692       $ 3,003,298   

Residential real estate

     1,821,378         1,838,252         1,891,725         1,700,380         1,859,439   

Construction & land development

     670,364         550,677         549,877         470,934         559,602   

Consumer

     310,754         282,442         283,712         254,345         318,439   

Less: Unearned interest

     (9,016)         (6,364)         (3,503)         (3,025)         (3,969)   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total loans

     6,704,583         6,511,416         6,230,777         5,260,326         5,736,809   

Allowance for loan losses

     (74,198)         (73,901)         (73,874)         (73,033)         (67,853)   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

TOTAL LOANS, NET

   $   6,630,385       $   6,437,515       $   6,156,903       $   5,187,293       $   5,668,956   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Loans held for sale

   $ 4,236       $ 17,762       $ 3,902       $ 6,869       $ 5,284   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

The following table shows the maturity of commercial, financial, and agricultural loans and real estate construction and land development loans as of December 31, 2013:

 

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

Commercial, financial & agricultural

   $ 788,763       $ 1,365,791       $ 1,756,549       $ 3,911,103   

Construction & land development

     316,037         146,398         207,929         670,364   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $   1,104,800       $   1,512,189       $   1,964,478       $   4,581,467   
  

 

 

    

 

 

    

 

 

    

 

 

 

At December 31, 2013, 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

   $ 284,511       $ 918,201       $ 665,929       $ 1,868,641   

Outstanding with adjustable rates

     820,289         593,988         1,298,549         2,712,826   
  

 

 

    

 

 

    

 

 

    

 

 

 
   $   1,104,800       $   1,512,189       $   1,964,478       $   4,581,467   
  

 

 

    

 

 

    

 

 

    

 

 

 

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

Other Assets

Other assets decreased $6.57 million or 2.00% from year-end 2012 mainly as a result of decreases in prepaid FDIC assessments of $16.38 million due to a refund by the FDIC of unused accrued insurance premiums, OREO of $11.30 million due to sales and write-downs, deferred tax assets of $6.24 million, and core deposit intangibles of $1.97 million due to amortization. Partially offsetting these decreases from year-end 2012 was an increase in United’s net pension asset due to an increase in the discount rate used in the year-end valuation and more than expected return on the plan assets, resulting in an $18.00 million pension asset. In addition, income tax receivable increased $2.26 million due to timing differences in payments and cash surrender values of bank-owned life insurance policies increased $3.47 million due to an increase in the cash surrender value.

 

40


Table of Contents

Deposits

Deposits represent United’s primary source of funding. Total deposits at December 31, 2013 decreased $131.42 million or 1.95% from year-end 2012. In terms of composition, noninterest-bearing deposits increased $50.11 million or 2.75% due to an increase in non-interest bearing commercial deposits while interest-bearing deposits decreased $181.52 million or 3.68% from December 31, 2012.

Within the interest-bearing deposits category, time deposits under $100,000 decreased $148.30 million or 14.32%, time deposits over $100,000 decreased $72.34 million or 7.57%, and interest-bearing checking accounts decreased $14.51 million or 1.20% due in large part to historically low interest rates. The $148.30 million decrease in time deposits under $100,000 is the result of fixed rate certificate of deposits (CDs) declining $149.80 million. The $72.34 million decrease in time deposits over $100,000 is due to an $84.17 million decrease in fixed rate CDs over $100,000 which was partially offset by a $15.28 million increase in Deposit Account Registry Service (CDARS) balances over $100,000. The $14.51 million decrease in interest-bearing checking accounts is due to decreases in personal and commercial interest-bearing checking accounts of $31.85 million and $6.81 million, respectively, which were partially offset by a $24.16 million increase in state and municipal interest-bearing checking accounts. Partially offsetting these decreases in interest-bearing deposits is a $32.85 million or 6.28% increase in regular savings accounts mainly due to an increase of $31.02 million in personal savings accounts. In addition, interest-bearing money market accounts (MMDAs) increased $20.77 million or 1.73%, mainly due to $36.28 million and $7.86 million increases in commercial MMDAs and public MMDAs, respectively, which were partially offset by a $23.36 million decrease in personal MMDAs.

The table below summarizes the changes by deposit category since year-end 2012:

 

     December 31      December 31                
     2013      2012      $ Change      % Change  

(Dollars In thousands)

           

Demand deposits

   $ 1,874,520       $ 1,824,411       $ 50,109         2.75%   

Interest-bearing checking

     1,195,956         1,210,463         (14,507)         (1.20%)   

Regular savings

     556,183         523,336         32,847         6.28%   

Money market accounts

     1,224,116         1,203,341         20,775         1.73%   

Time deposits under $100,000

     887,516         1,035,815           (148,299)         (14.32%)   

Time deposits over $100,000

     883,280         955,620         (72,340)         (7.57%)   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total deposits

   $   6,621,571       $   6,752,986       $ (131,415)         (1.95%)   
  

 

 

    

 

 

    

 

 

    

 

 

 

At December 31, 2013, the scheduled maturities of time deposits are as follows:

 

Year

   Amount  

(In thousands)

  

2014

   $ 1,144,254   

2015

     359,750   

2016

     131,322   

2017

     82,823   

2018 and thereafter

     52,647   
  

 

 

 

TOTAL

   $   1,770,796   
  

 

 

 

Maturities of time certificates of deposit of $100,000 or more outstanding at December 31, 2013 are summarized as follows:

 

     Amount  
( In thousands)   

3 months or less

   $ 400,290   

Over 3 through 6 months

     77,866   

Over 6 through 12 months

     151,567   

Over 12 months

     253,557   
  

 

 

 

TOTAL

   $      883,280   
  

 

 

 

 

41


Table of Contents

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

 

     2013      2012      2011  
            Interest                    Interest                    Interest         
     Amount      Expense      Rate      Amount      Expense      Rate      Amount      Expense      Rate  
     (Dollars in thousands)   

Demand deposits

   $ 1,782,257       $ 0         0.00%       $ 1,720,098       $ 0         0.00%       $ 476,460       $ 0         0.00%   

NOW and money market deposits

     2,403,748         7,380         0.31%         2,405,678         8,161         0.34%         3,084,146         9,019         0.29%   

Savings deposits

     565,359         631         0.11%         521,039         562         0.11%         447,166         423         0.09%   

Time deposits

     1,859,155         18,520         1.00%         2,129,445         23,525         1.10%         2,233,065         29,633         1.33%   
  

 

 

    

 

 

       

 

 

    

 

 

       

 

 

    

 

 

    

TOTAL

   $   6,610,519       $   26,531         0.40%       $   6,776,260       $   32,248         0.48%       $   6,240,837       $   39,075         0.63%   
  

 

 

    

 

 

       

 

 

    

 

 

       

 

 

    

 

 

    

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

Borrowings

Total borrowings at December 31, 2013 increased $406.56 million or 67.77% during the year of 2013. Since year-end 2012, short-term borrowings increased $115.79 million or 36.76% due to a $115 million increase in overnight FHLB advances and a $22.24 million increase in fed funds purchased, which were partially offset by a $21.45 million decrease in securities sold under agreements to repurchase. Long-term borrowings increased $290.77 million or 102.05% since year-end 2012 as a result of a $290.66 million increase in long-term FHLB advances.

The table below summarizes the changes by borrowing category since year-end 2012:

 

     December 31      Amount      Percentage  
     2013      2012      Change      Change  

(Dollars in thousands)

           

Federal funds purchased

   $ 27,685       $ 5,446       $ 22,239         408.35%   

Securities sold under agreements to repurchase

     188,069         209,516         (21,447)         (10.24%)   

Short-term FHLB advances

     215,000         100,000         115,000         115.00%   

Long-term FHLB advances

     377,069         86,411         290,658         336.37%   

Issuances of trust preferred capital securities

     198,628         198,515         113         0.06%   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total borrowings

   $ 1,006,451       $ 599,888       $ 406,563         67.77%   
  

 

 

    

 

 

    

 

 

    

 

 

 

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, 2013 decreased $9.81 million or 13.39% from year-end 2012 mainly due to a $4.03 million decrease in income taxes payable due to timing differences in payments and a $3.09 million decrease in derivative liabilities. In addition, United’s net pension liability declined $3.68 million due to an increase in the discount rate used in the year-end valuation and a higher than expected return on the plan assets, resulting in a $18 million pension asset at year-end 2013. Partially offsetting these decreases in accrued expenses and other liabilities was a $1.82 million increase in deferred compensation.

Shareholders’ Equity

Shareholders’ equity at December 31, 2013 increased $49.48 million or 4.99% from December 31, 2012 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 $22.65 million for the year of 2013.

 

42


Table of Contents

Accumulated other comprehensive income increased $22.70 million or 34.53% due mainly to an increase of $13.20 million in the after tax adjustment to United’s pension asset and a reversal of $3.74 million in after-tax non-credit OTTI losses due to investment sales. In addition, the accretion of pension costs for the year of 2013 was $3.05 million while the after-tax non-credit portion of OTTI losses for the year of 2013 was $4.34 million. Partially offsetting these increases to accumulated other comprehensive income is a decrease of $1.49 million, net of deferred income tax, in the fair value of United’s available for sale investment portfolio.

EARNINGS SUMMARY

Net income for the year 2013 was $85.63 million or $1.70 per diluted share compared to $82.61 million or $1.64 per diluted share for the year of 2012.

United’s return on average assets for the year of 2013 was 1.02% and return on average shareholders’ equity was 8.43% as compared to 0.98% and 8.35% for the year of 2012.

The results for the year of 2013 included noncash, before-tax, other-than-temporary impairment charges of $7.33 million on certain investment securities. The results for year of 2012 included noncash, before-tax, other-than-temporary impairment charges of $7.38 million on certain investment securities. In addition, 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.

Net interest income for the year of 2013 was $269.84 million, a decrease of $7.87 million or 2.83% from the prior year. The provision for loan losses was $19.27 million for the year 2013 as compared to $17.86 million for the year of 2012.

Noninterest income was $67.83 million for the year of 2013, up $1.54 million or 2.32% when compared to the year of 2012. Included in noninterest income for the year of 2013 and 2012 were the previously mentioned noncash before-tax other-than-temporary impairment charges of $7.33 million and $7.38 million, respectively. Noninterest expense was $193.36 million, a decrease of $11.30 million or 5.52% for the year of 2013 when compared to 2012.

Income tax expense for the year of 2013 was $39.42 million as compared to $38.87 million for the year of 2012. United’s effective tax rate was approximately 31.5% and 32.0% for years ended December 31, 2013 and 2012, respectively, as compared to 31.5% for 2011.

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

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 2013 and 2012, are presented below.

Net interest income for the year of 2013 was $269.84 million, which was a decrease of $7.87 million or 2.83% from the year of 2012. The $7.87 million decrease in net interest income occurred because total interest income decreased $17.74 million while total interest expense declined $9.88 million from the year of 2012. 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.

 

43


Table of Contents

Tax-equivalent net interest income for the year of 2013 was $275.84 million, a decrease of $8.28 million or 2.91% from the year of 2012. The net interest margin for the year of 2013 was 3.68%, down 13 basis points from a net interest margin of 3.81% for the year of 2012.

Tax-equivalent interest income for the year of 2013 was $312.15 million, an $18.16 million or 5.50% decrease from the year of 2012 due mainly to a decrease in the average yield on earning assets. The year of 2013 average yield on earning assets was 4.16%, a decrease of 27 basis points from 4.43% for the year of 2012. In addition, average short-term investments declined $203.60 million or 46.33% for the year. Average earning assets were flat from the year of 2012, increasing $46.60 or less than 1%. Average net loans grew $220.25 million or 3.52% and average investment securities increased $29.94 million or 3.92% for the year which were mostly offset by the decline in average short-term investments.

Interest expense for the year of 2013 was $36.31 million, a decrease of $9.88 million or 21.38% from the year of 2012. The decline in interest expense for the year of 2013 was attributable to a decrease of 17 basis points in the average cost of funds for the year of 2013 as a result of lower market interest rates. In particular, the average cost of interest-bearing deposits was 0.55%, a decline of 9 basis points from 0.64% for the year of 2012 and the average cost of long-term borrowings was 2.32% for the year of 2013, a decrease of 213 basis points from 4.45% for the year of 2012. In addition, average interest-bearing liabilities declined $71.96 million or 1.28% due mainly to a decrease of $227.90 million in average interest-bearing deposits. The average cost of short-term borrowings was 0.25% for the year of 2013, up 14 basis points from 0.11% for the year of 2012.

The following table reconciles the difference between net interest income and tax-equivalent net interest income for the year ended December 31, 2013, 2012 and 2011.

 

     Year Ended  
     December 31      December 31      December 31  
(Dollars in thousands)    2013      2012      2011  

Net interest income, GAAP basis

   $ 269,841       $ 277,707       $ 260,728   

Tax-equivalent adjustment (1)

     5,999         6,413         6,587   
  

 

 

    

 

 

    

 

 

 

Tax-equivalent net interest income

   $ 275,840       $ 284,120       $ 267,315   
  

 

 

    

 

 

    

 

 

 

 

  (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.

 

44


Table of Contents

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, 2013, 2012 and 2011 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, 2013
     Year Ended
December 31, 2012
     Year Ended
December 31, 2011
 
(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

   $ 235,880      $ 613         0.26%       $ 439,481      $ 1,169         0.27%       $ 442,282      $ 1,255         0.28%   

Investment Securities:

                       

Taxable

     712,582        16,646         2.34%         664,437        17,364         2.61%         707,897        23,069         3.26%   

Tax-exempt

     81,505        4,403         5.40%         99,706        5,421         5.44%         100,743        6,130         6.08%   
  

 

 

    

 

 

    

 

 

 

Total Securities

     794,087        21,049         2.65%         764,143        22,785         2.98%         808,640        29,199         3.61%   

Loans, net of unearned

Income (2)

     6,544,104        290,491         4.44%         6,322,740        306,356         4.85%         5,721,510        292,655         5.11%   

Allowance for loan losses

     (74,661           (73,549           (73,231     
  

 

 

         

 

 

         

 

 

      

Net loans

     6,469,443           4.49%         6,249,191           4.90%         5,648,279           5.18%   
  

 

 

    

 

 

    

 

 

 

Total earning assets

     7,499,410      $ 312,153         4.16%         7,452,815      $ 330,310         4.43%         6,899,201      $ 323,109         4.68%   
    

 

 

         

 

 

         

 

 

    

Other assets

     920,046              946,698              881,635        
  

 

 

         

 

 

         

 

 

      

TOTAL ASSETS

   $ 8,419,456            $ 8,399,513            $ 7,780,836        
  

 

 

         

 

 

         

 

 

      

LIABILITIES

                       

Interest-Bearing Funds:

                       

Interest-bearing deposits

   $ 4,828,262      $ 26,531         0.55%       $ 5,056,162      $ 32,248         0.64%       $ 4,772,801      $ 39,075         0.82%   

Short-term borrowings

     360,621        895         0.25%         280,706        303         0.11%         256,578        166         0.06%   

Long- term borrowings

     382,628        8,887         2.32%         306,606        13,639         4.45%         345,395        16,553         4.79%   
  

 

 

    

 

 

    

 

 

 

Total Interest-Bearing Funds

     5,571,511        36,313         0.65%         5,643,474        46,190         0.82%         5,374,774        55,794         1.04%   
    

 

 

         

 

 

         

 

 

    

Noninterest-bearing deposits

     1,782,257              1,720,098              1,468,036        

Accrued expenses and other liabilities

     49,688              46,113              48,087        
  

 

 

         

 

 

         

 

 

      

TOTAL LIABILITIES

     7,403,456              4,409,685              6,890,897        

SHAREHOLDERS’ EQUITY

     1,016,000              989,828              889,939        
  

 

 

         

 

 

         

 

 

      

TOTAL LIABILITIES AND

SHAREHOLDERS’ EQUITY

   $ 8,419,456            $ 8,399,513            $ 7,780,836        
  

 

 

         

 

 

         

 

 

      

NET INTEREST INCOME

     $ 275,840            $ 284,120            $ 267,315      
    

 

 

         

 

 

         

 

 

    

INTEREST SPREAD

          3.51%              3.61%              3.64%   

NET INTEREST MARGIN

          3.68%              3.81%              3.87%   

 

  (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.

 

45


Table of Contents

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).

 

     2013 Compared to 2012     2012 Compared to 2011  
     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

   $ (550   $ (44   $ 38      $ (556   $ (8   $ (44   $ (34   $ (86

Investment securities:

                

Taxable

     1,257        (1,794     (181     (718     (1,417     (4,601     313        (5,705

Tax-exempt (1)

     (990     (40     12        (1,018     (63     (645     (1     (709

Loans (1),(2)

     10,792        (25,622     (1,035     (15,865     31,127        (15,815     (1,611     13,701   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

TOTAL INTEREST INCOME

     10,509        (27,500     (1,166)        (18,157     29,639        (21,105     (1,333     7,201   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Interest expense:

                

Interest-bearing deposits

   $ (1,459   $ (4,551   $ 293      $ (5,717   $ 2,324      $ (8,591   $ (560   $ (6,827

Short-term borrowings

     88        393        111        592        14        128        (5     137   

Long-term borrowings

     3,383        (6,531     (1,604     (4,752     (1,858     (1,174     118        (2,914
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

TOTAL INTEREST EXPENSE

     2,012        (10,689     (1,200     (9,877     480        (9,637)        (447     (9,604)   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

NET INTEREST INCOME

   $ 8,497      $ (16,811)      $ 34      $ (8,280   $ 29,159      $ (11,468   $ (886   $ 16,805   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

  (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, 2013, nonperforming loans were $81.13 million or 1.21% of loans, net of unearned income compared to nonperforming loans of $92.80 million or 1.43% of loans, net of unearned income at December 31, 2012. 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 $11.04 million at December 31, 2013, a decrease of $7.02 million or 38.88% from $18.07 million at year-end 2012. The decrease in loans past due 90 days or more was primarily due to the transfer of several large relationships to nonaccrual. At December 31, 2013, nonaccrual loans were $61.93 million, a decrease of $9.63 million or 13.46% from $71.56 million at year-end 2012. The decrease in nonaccrual loans was primarily due to several offsetting factors. As mentioned above, nonaccrual loans increased due to the transfer of several large relationships delinquent in excess of 90 days or more into nonaccrual. This was offset by charge-offs recognized on several impaired nonaccrual relationships, transfer of a significant nonaccrual relationship back to accrual status and foreclosure on several properties which led to a transfer from nonaccrual to other real estate owned. Restructured loans were $8.16 million at December 31, 2013 as compared to $3.17 million restructured loans at year-end 2012. The increase of $4.98 million was due to the restructure of six commercial real estate loans and one residential real estate loan. The loss potential on these loans has been properly evaluated and allocated within the company’s allowance for loan losses.

 

46


Table of Contents

Nonperforming assets include nonperforming loans and real estate acquired in foreclosure or other settlement of loans (OREO). Total nonperforming assets of $119.31 million, including OREO of $38.18 million at December 31, 2013, represented 1.37% of total assets which compares favorably to United’s most recently reported Federal Reserve peer group banking companies’ (bank holding companies with total assets between $3 and $10 billion) percentage of 1.52% at September 30, 2013.

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  
     2013      2012      2011      2010      2009  
     (In thousands)   

Nonaccrual loans

   $ 61,928       $ 71,559       $ 59,892       $ 59,996       $ 50,856   

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

     11,044         18,068         16,179         6,798         20,314   

Restructured loans (1)

     8,157         3,175         3,592         437         1,087   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total nonperforming loans

     81,129         92,802         79,663         67,231         72,257   

Other real estate owned

     38,182         49,484         51,760         44,770         40,058   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

TOTAL NONPERFORMING ASSETS

   $ 119,311       $ 142,286       $ 131,423       $ 112,001       $ 112,315   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

(1) Restructured loans with an aggregate balance of $861 thousand, $375 thousand, and $1.53 million at December 31, 2013, 2012 and 2011, respectively, were on nonaccrual status, but are not included in the “Nonaccrual loans” 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, 2013, impaired loans were $92.66 million, which was a decrease of $2.73 million or 2.86% from the $95.39 million in impaired loans at December 31, 2012. This decrease in impaired loans was due mainly to decreased outstanding principal associated with impaired loans in the Company’s commercial owner-occupied real estate portfolio as a result of the repayment of loans secured by various convenience stores in Virginia considered impaired at December 31, 2012. The loss potential on these loans has been properly evaluated and allocated within the Company’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 are referred to as the allowance for credit losses. At December 31, 2013, the allowance for credit losses was $76.34 million which was comparable to $75.56 million at December 31, 2012.

At December 31, 2013, the allowance for loan losses was $74.20 million as compared to $73.90 million at December 31, 2012. As a percentage of loans, net of unearned income, the allowance for loan losses was 1.11% at December 31, 2013 and December 31, 2012. The ratio of the allowance for loan losses to nonperforming loans or coverage ratio was 91.46% and 79.63% at December 31, 2013 and December 31, 2012, respectively. For United, this ratio at December 31, 2013 increased from the ratio at December 31, 2012 because nonperforming loans decreased $11.67 million or 12.58% while the allowance for loan losses increased $297 thousand from year-end 2012. Adjustments to risk grades within the allowance for loan loss analysis are based on delinquency and loss trends of such loans and resulted in increased allowance allocations of $517 thousand or less than 1%. The increase in allocations was due to increased historical loss rates in certain loan segments during the year. The Company’s detailed methodology and analysis indicated only a minor increase in the allowance for loan losses primarily because of the offsetting factors of changes within risk grades of loans and decreased loss allocations on impaired loans.

For the years ended December 31, 2013 and 2012, the provision for loan losses was $19.27 million and $17.86 million, respectively. Net charge-offs were $18.97 million for the year of 2013 as compared to net charge-offs of $17.84 million for the year of 2012. Annualized net charge-offs as a percentage of average loans were 0.29% for the year of 2013. The reserve for lending-related commitments at December 31, 2013 was $2.14 million, an increase of $487 thousand or 29.41% from December 31, 2012. Changes to the reserve for lending-related commitments are recorded in other expense in the Consolidated Statements of Income.

 

47


Table of Contents

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

 

     2013     2012     2011     2010     2009  
     (Dollars in thousands)   

Balance of allowance for credit losses at beginning of year

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

Loans charged off:

          

Commercial, financial & agricultural (2)

     14,207        7,028        4,892        5,495        22,626   

Residential real estate (2)

     4,111        8,882        7,069        9,334        9,695   

Construction & land development (2)

     896        3,099        6,290        9,298        6,288   

Consumer (2)

     1,792        1,546        1,354        1,635        2,468   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

TOTAL CHARGE-OFFS

     21,006        20,555        19,605        25,762        41,077   

Recoveries:

          

Commercial, financial & agricultural (2)

     847        1,544        2,565        16,158        669   

Residential real estate (2)

     698        821        248        493        272   

Construction & land development (2)

     73        54        136        21        89   

Consumer (2)

     418        301        356        346        389   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

TOTAL RECOVERIES

     2,036        2,720        3,305        17,018        1,419   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

NET LOANS CHARGED OFF

     18,970        17,835        16,300        8,744        39,658   

Provision for credit losses

     19,754        17,665        16,988        13,773        46,065   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

BALANCE OF ALLOWANCE FOR

CREDIT LOSSES AT END OF YEAR

   $ 76,341      $ 75,557      $ 75,727      $ 75,039      $ 70,010   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

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

   $ 6,713,599      $ 6,517,780      $ 6,234,280      $ 5,263,351      $ 5,740,778   

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

   $ 6,537,360      $ 6,314,146      $ 5,718,639      $ 5,467,927      $ 5,883,995   

Net charge-offs as a percentage of average loans outstanding

     0.29     0.28     0.29     0.16     0.67

Allowance for credit losses, as a percentage of nonperforming loans

     94.10     81.42     95.06     111.61     96.89

 

  (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 unidentified 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 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.

 

48


Table of Contents

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

 

     2013      2012      2011      2010      2009  
     (In thousands)   

Commercial, financial & agricultural (1)

   $ 35,562       $ 37,264       $ 36,120       $ 37,490       $ 43,467   

Residential real estate (1)

     16,694         14,895         13,880         11,653         6,971   

Construction & land development (1)

     18,953         18,858         19,151         18,738         12,184   

Consumer (1)

     2,945         2,620         2,151         2,161         3,545   

Allowance for estimated imprecision

     44         264         2,572         2,991         1,686   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Allowance for loan losses

   $ 74,198       $ 73,901       $ 73,874       $ 73,033       $ 67,853   

Reserve for lending-related commitments

     2,143         1,656         1,853         2,006         2,157   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Allowance for credit losses

   $   76,341       $   75,557       $   75,727       $   75,039       $   70,010   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

(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:

 

     2013      2012      2011      2010      2009  

Commercial, financial & agricultural (1)

     58.33%         59.07%         56.31%         53.95%         52.35%   

Residential real estate (1)

     27.17%         28.23%         30.36%         32.32%         32.41%   

Construction & land development (1)

     10.00%         8.46%         8.83%         8.95%         9.76%   

Consumer (1)

     4.50%         4.24%         4.50%         4.78%         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, 2013 produced increased allocations in five of the six loan categories. The commercial real estate owner-occupied loan pool allocation increased by $1.78 million due to an increase in historical loss rates and allocation applied to watch-rated loans. The other commercial loan pool allocation increased by $406 thousand due to offsetting factors of an increase in historical loss rates and a decrease in specific impairments due to charge-offs related to previously recognized impairments. The allocation related to the residential real estate loan pool increased by $1.80 million due to an increase in impairment recognition. The allowance allocated to real estate construction and development increased by $95 thousand due to an increase in outstanding loan balances within the portfolio. The consumer loan pool experienced an increase in allocation of $325 thousand due to an increase in impairment recognition as well as an increase in outstanding loan balances. Offsetting these increases was a decrease in the commercial real estate nonowner-occupied loan pool allocation of $3.88 million driven by a combination of lower outstanding balances in classified loan segments and lower historical loss rates. In summary, the overall level of the allowance for loan losses was stable in comparison to year-end 2012 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 $12.48 million at December 31, 2013 and $14.20 million at December 31, 2012. In comparison to the prior year-end, this element of the allowance decreased by $1.72 million primarily due to decreased specific allocations for the other commercial loan pool.

 

49


Table of Contents

Management believes that the allowance for credit losses of $76.34 million at December 31, 2013 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 $67.83 million for the year of 2013, up $1.54 million or 2.32% from the year of 2012. Net losses on investment securities transactions for the year of 2013 were $5.81 million compared to net losses of $6.93 million for the year of 2012. Included in net losses on investment securities for the year of 2013 were noncash, before-tax other-than-temporary impairment charges of $7.33 million consisting primarily of $7.19 million on pooled trust preferred collateralized debt obligations (Trup Cdos) and $137 thousand on equity securities partially offset by a before-tax, net gain of $1.52 million on the sale of investment securities. Included in net losses on investment securities for the year of 2012 were noncash, before-tax other-than-temporary impairment charges of $7.38 million on certain investment securities consisting primarily of $5.97 million on Trup Cdos and $1.41 million on collateralized mortgage obligations (Cmos) as well as a before-tax, net gain of $446 thousand on the sale of investment securities. Excluding the results of the investment security transactions, noninterest income for the year of 2013 was flat from the year of 2012, increasing $415 thousand or less than 1%. Although excluding the results of security transactions is a non-GAAP measure, United’s management believes noninterest income without noncash, before-tax, other-than-temporary impairment charges and net securities gains or losses on sales and calls is more indicative of United’s performance because it isolates income that is primarily customer relationship driven and is more indicative of normalized operations. In addition, these items can fluctuate greatly from quarter to quarter and are difficult to predict.

 

50


Table of Contents

The following table reconciles the difference between noninterest income and noninterest income excluding the results of security transactions for the years ended December 31, 2013, 2012 and 2011.

 

     Year Ended  
(Dollars in thousands)    2013     2012     2011  

Total Non-Interest Income, GAAP basis

   $ 67,828      $ 66,292      $ 50,837   

Less: Net other-than-temporary impairment losses

     (7,332     (7,376     (20,414

Less: Net gains on sales/calls of investment securities

     1,523        446        1,576   
  

 

 

   

 

 

   

 

 

 

Non-Interest Income excluding the results of noncash, other than-temporary impairment charges and net gains and losses from sales and calls of investment securities

   $ 73,637      $ 73,222      $ 69,675   
  

 

 

   

 

 

   

 

 

 

Revenue from trust income and brokerage commissions increased $602 thousand or 3.80% 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 $100 thousand or 4.05% due to increased mortgage loan production and sales in the secondary market during the year of 2013 as compared to 2012. Mortgage loan sales were $148.79 million in 2013 as compared to $133.11 million in 2012.

Fees from deposit services were $40.25 million for the year of 2013, a decrease of $1.59 million or 3.79% from the year of 2012. In particular, overdraft or insufficient funds (NSF) fees declined $1.62 million and automated teller machine (ATM) fees decreased $331 thousand. Partially offsetting these declines was an increase in check card income of $593 thousand.

Income from bank owned life insurance policies increased $749 thousand or 14.86% due in 2013 as compared to 2012 due to a death benefit. Fees from bankcard transactions increased $595 thousand or 19.86% as compared to the year of 2012 due to a higher volume of transactions.

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 2013 was $193.36 million, a decrease of $11.30 million or 5.52% from the year of 2012.

Employee compensation for the year of 2013 decreased $3.33 million or 4.66% from the year of 2012. The decrease was due to the reduction in employees from a merger of banking subsidiaries in the second quarter of 2012. Included in employee compensation was expense for stock options of $1.79 million for the year of 2013 as compared to $1.91 million for the year of 2012.

Employee benefits expense increased $1.79 million or 8.46% due mainly an increase of $941 thousand in pension expense due to a change in the discount rate used in the valuation process. Also, health insurance expense increased $497 thousand and Federal Insurance Contributions Act (FICA) expense increased $140 thousand. 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 $766 thousand and decrease by approximately $672 thousand, 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 decrease by approximately $1.91 million and increase by approximately $2.21 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 decrease and increase, respectively, by approximately $1.07 million.

 

51


Table of Contents

Net occupancy expense decreased $610 thousand or 2.99% for the year of 2013 as compared to the year of 2012. In particular, building rental expense decreased $458 thousand due to the closure or consolidation of branches from the merger of banking subsidiaries. In addition, real property taxes decreased $206 thousand and utilities expense declined $112 thousand.

Other real estate owned (OREO) expense decreased $2.12 million or 24.72% for the year of 2013 as compared to the year of 2012 as reductions to fair value and losses on sales declined from 2012.

Equipment expense decreased $559 thousand or 6.73% for the year of 2013 as compared to the year of 2012 due to lower depreciation and maintenance expense as a result of the closure or consolidation of branches from the merger of banking subsidiaries.

Data processing expense decreased $1.14 million or 9.08% for the year of 2013 as compared to the year of 2012 due to a change in servicers. In 2012, there was an overlap of servicers which increased costs.

Other expenses decreased $5.48 million or 9.99% for the year of 2013 as compared to the year of 2012. Included in the results of 2012 was the previously mentioned accrual of $3.3 million with respect to class actions against United Bank, Inc. of West Virginia. Otherwise, the decrease for the year of 2013 was due mainly to lower general operating expenses as a result of the merger of banking subsidiaries in 2012. In particular, office supplies decreased $976 thousand, advertising expense decreased $494 thousand, and postage decreased $284 thousand. In addition, ATM costs and amortization expense on core deposit intangibles decreased $727 thousand and $883 thousand respectively. Partially offsetting these decreases in other expenses for the year of 2013 was an increase in merger expenses of $1.25 million.

United’s efficiency ratio was 52.92% for the year of 2013 as compared to 54.08% for the year of 2012.

Income Taxes

For the year ended December 31, 2013, income taxes were $39.42 million, compared to $38.87 million for 2012. United’s effective tax rate was approximately 31.5% and 32.0% for years ended December 31, 2013 and 2012, respectively, as compared to 31.5% for 2011. For further details related to income taxes, see Note L, Notes to Consolidated Financial Statements.

Quarterly Results

Net income for the first quarter of 2013 was $21.58 million or $0.43 per diluted share compared to $21.01 million or $0.42 per diluted share in 2012. The results for the first quarter of 2013 included noncash, before-tax, other-than-temporary impairment charges of $834 thousand on certain investment securities. 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.

For the second quarter of 2013, net income was $22.22 million or $0.44 per diluted share compared to $21.05 million or $0.42 per diluted share in 2012. The results of the second quarter of 2013 included noncash, before-tax, other-than-temporary impairment charges of $137 thousand on certain investment securities. 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.

In the third quarter of 2013, net income was $22.17 million or $0.44 per diluted share as compared to $19.33 million or $0.38 per diluted share in the third quarter of 2012. 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. No noncash, before-tax, other-than-temporary impairment charges were recognized during the third quarter of 2013.

 

52


Table of Contents

Fourth quarter of 2013 net income was $19.66 million or $0.39 per diluted share, a decrease from net income of $21.21 million or $0.42 per diluted share in the fourth quarter of 2012. The results for the fourth quarter of 2013 included noncash, before-tax, other-than-temporary impairment charges of $6.36 million on certain investment securities. In comparison, 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.

Tax-equivalent net interest income for the fourth quarter of 2013 was $70.66 million which was relatively flat from the fourth quarter of 2012, decreasing $646 thousand or less than 1%. The slight decrease was due mainly to a decline in the average yield on earning assets. The fourth quarter of 2013 average yield on earning assets decreased 27 basis points from the fourth quarter of 2012. Partially offsetting this decrease to tax-equivalent net interest income for the fourth quarter of 2013 was an increase of $256.63 million or 3.46% in average earning assets from the fourth quarter of 2012. Average net loans and average investment securities increased $179.64 million or 2.81% and $108.80 million or 14.74%, respectively, while short-term investments declined $31.82 million or 11.59%. In addition, the average cost of funds for the fourth quarter of 2013 declined 13 basis points as compared to the fourth quarter of 2012. The net interest margin for the fourth quarter of 2013 was 3.66%, which was a decrease of 17 basis points from a net interest margin of 3.83% for the fourth quarter of 2012.

For the fourth quarter of 2013, the provision for loan losses was $4.34 million while net charge-offs were $4.72 million. For the fourth quarter of 2012, the provision for loan losses was $5.95 million while net charge-offs were $5.79 million.

Noninterest income for the fourth quarter of 2013 was $12.05 million, which was a decrease of $4.70 million from the fourth quarter of 2012. Included in noninterest income for the fourth quarter of 2013 were noncash, before-tax, other-than-temporary impairment charges of $6.36 million on certain investment securities as compared to $2.00 million for the fourth quarter of 2012. 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 2013 decreased $1.01 million or 5.47% from the fourth quarter of 2012. This decrease for the fourth quarter of 2013 was due primarily to decreases of $589 thousand in mortgage banking income due to decreased sales of mortgage loans in the secondary market and $534 thousand in fees from deposit services due to lower overdraft fee income.

Noninterest expense for the fourth quarter of 2013 was $47.98 million, a decrease of $1.30 million or 2.63% from the fourth quarter of 2012. The decrease for the fourth quarter of 2013 was mainly due to declines of $1.03 million in employee compensation due to lower expense for incentives and $602 thousand for other real estate owned (OREO) expense due to fewer declines in the fair value of OREO properties as compared to the fourth quarter of 2012. Partially offsetting these decreases was an increase of $568 thousand in employee benefits expense due mainly to higher health insurance and pension costs. Also included in noninterest expense for the fourth quarter of 2013 was an increase in merger expenses of $449 thousand.

Additional quarterly financial data for 2013 and 2012 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.

 

53


Table of Contents

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 2013 and 2012, 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.

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, 2013:

 

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

Deposits without a stated maturity (1)

   $ 4,850,776       $ 4,850,776       $ 0       $ 0       $ 0   

Time deposits (2) (3)

     1,794,293         1,156,672         500,441         136,617         563   

Short-term borrowings (2)

     430,758         430,758         0         0         0   

Long-term borrowings (2) (3)

     691,972         328,779         19,254         14,058         329,881   

Operating leases

     43,656         8,181         12,933         11,250         11,292   

 

  (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, 2013. 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, 2013, United recorded a liability for uncertain tax positions, including interest and penalties, of $2.51 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, 2013 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.

 

54


Table of Contents

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.

The following table details the amounts of significant commitments and letters of credit as of December 31, 2013:

 

(In thousands)    Amount  

Commitments to extend credit:

  

Revolving open-end secured by 1-4 residential

   $ 384,441   

Credit card and personal revolving lines

     129,695   

Commercial

     1,989,957   
  

 

 

 

Total unused commitments

   $ 2,504,093   
  

 

 

 

Financial standby letters of credit

   $ 85,303   

Performance standby letters of credit

     29,361   

Commercial letters of credit

     0   
  

 

 

 

Total letters of credit

   $ 114,664   
  

 

 

 

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.

 

55


Table of Contents

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 2013 were $142.20 million as compared to $129.44 million of cash provided by operations during 2012 due in large part to increases in proceeds from loan sales of $15.78 and in net income of $3.02 million. In 2013, net cash of $373.11 million was used in investing activities which was primarily due to loan growth of $212.14 million and net purchases of $185.40 million in investment securities over sales, calls and maturities. 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. During the year of 2013, net cash of $215.45 million was provided by financing activities due primarily to proceeds of $345 million from FHLB long-term borrowings and an increase of $115 million in short term FHLB borrowings. Partially offsetting this source of cash in financing activities was cash used due to a decline in deposits of $131.25 million and the payment of $62.43 million for cash dividends. 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. The net effect of the cash flow activities was a decrease in cash and cash equivalents of $15.46 million for the year of 2013 as compared to a decrease in cash and cash equivalents of $203.93 million for the year of 2012. 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 13.71% at December 31, 2013 and 13.67% at December 31, 2012, were both significantly higher than the minimum regulatory requirements. United’s Tier I capital and leverage ratios of 12.51% and 10.72%, respectively, at December 31, 2013, are also well above minimum regulatory requirements. See Note S, Notes to Consolidated Financial Statements.

Total year-end 2013 shareholders’ equity increased $49.48 million or 4.99% to $1.04 billion from $992.25 million at December 31, 2012. United’s equity to assets ratio was 11.93% at December 31, 2013 as compared to 11.78% at December 31, 2012. The primary capital ratio, capital and reserves to total assets and reserves, was 12.69% at December 31, 2013, as compared to 12.57% at December 31, 2012. United’s average equity to average asset ratio was 12.07% and 11.78% for the years ended December 31, 2013 and 2012, respectively. All these financial measurements reflect a financially sound position.

During the fourth quarter of 2013, United’s Board of Directors declared a cash dividend of $0.32 per share. Dividends per share of $1.25 for the year of 2013 represented an increase over the $1.24 per share paid for 2012. Total cash dividends declared to common shareholders were approximately $62.98 million for the year of 2013 as compared to $62.35 million for the year of 2012. The year 2013 was the fortieth consecutive year of dividend increases to United shareholders.

 

56


Table of Contents

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

 

     2013      2012      2011  

Return on average assets

     1.02%         0.98%         0.97%   

Return on average equity

     8.43%         8.35%         8.50%   

Dividend payout ratio

     73.55%         75.48%         75.16%   

Average equity to average assets ratio

     12.07%         11.78%         11.44%   

2012 COMPARED TO 2011

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.

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. Of the $203.93 million decrease in cash and cash equivalents, 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. Investment securities decreased $94.82 million due mainly to a $70.89 million or 10.18% decrease in securities available for sale. 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. 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.

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 $280.64 million increase in portfolio loans was 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.

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. 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. 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

 

57


Table of Contents

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. 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 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.

Net Interest Income

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

 

58


Table of Contents

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.

Provision for Loan Losses

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 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.

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.

 

59


Table of Contents

Other Income

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.

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

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.

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.

 

60


Table of Contents

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.

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.

 

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

 

61


Table of Contents

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.

The following table shows United’s estimated consolidated earnings sensitivity profile as of December 31, 2013 and 2012:

 

    Change in

Interest Rates

 

Percentage Change in Net Interest Income

 (basis points)

 

December 31, 2013

 

December 31, 2012

        +200

  2.01%   7.93%

        +100

  0.21%   3.67%

        -100

  (0.80%)   (0.60%)

        -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 0.21% over one year as of December 31, 2013, as compared to an increase of 3.67% as of December 31, 2012. A 200 basis point immediate, sustained upward shock in the yield curve would increase net interest income by an estimated 2.01% over one year as of December 31, 2013, as compared to an increase of 7.93% as of December 31, 2012. A 100 basis point immediate, sustained downward shock in the yield curve would decrease net interest income by an estimated 0.80% over one year as of December 31, 2013 as compared to a decrease of 0.60% over one year as of December 31, 2012. With the federal funds rate at 0.25% at December 31, 2013 and 2012, 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.”

 

62


Table of Contents

Extension Risk

At December 31, 2013, United’s mortgage related securities portfolio had an amortized cost of $474 million, of which approximately $187 million or 39% 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 5.1 years and a weighted average yield of 3.26%, 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 would only extend the average life of these securities to 6 years. The projected price decline of the fixed rate CMO portfolio in rates up 300 basis points would be 13.9%, less than the price decline of a 7 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 22%.

United had approximately $214 million in balloon securities with a projected yield of 1.93% and a projected average life of 6.1 years on December 31, 2013. This portfolio consisted primarily of Fannie Mae Delegated Underwriting and Servicing (DUS) mortgage backed securities (MBS) with a weighted average loan age (WALA) of 11 months and a weighted average maturity (WAM) of 6.8 years.

United had approximately $18 million in 15-year mortgage backed securities with a projected yield of 4.78% and a projected average life of 2.1 years as of December 31, 2013. This portfolio consisted of seasoned 15-year mortgage paper with a weighted average loan age (WALA) of 8.6 years and a weighted average maturity (WAM) of 6.1 years.

United had approximately $3 million in 20-year mortgage backed securities with a projected yield of 4.86% and a projected average life of 2.6 years on December 31, 2013. This portfolio consisted of seasoned 20-year mortgage paper with a weighted average loan age (WALA) of 10.8 years and a weighted average maturity (WAM) of 8.7 years.

United had approximately $4 million in 30-year mortgage backed securities with a projected yield of 6.75% and a projected average life of 3.9 years on December 31, 2013. This portfolio consisted of seasoned 30-year mortgage paper with a weighted average loan age (WALA) of 14.8 years and a weighted average maturity (WAM) of 13.8 years.

The remaining 10% of the mortgage related securities portfolio at December 31, 2013, included adjustable rate securities (ARMs), 10-year mortgage backed pass-through securities and other fixed rate mortgage backed securities.

 

63


Table of Contents

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, 2013. 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 (1992 framework). Based on our assessment, we believe that, as of December 31, 2013, 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, 2013. 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

March 3, 2014

 

64


Table of Contents

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, 2013, based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (1992 framework) (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, 2013, 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, 2013 and 2012, 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, 2013 and our report dated March 3, 2014 expressed an unqualified opinion thereon.

 

/s/ Ernst & Young LLP
Charleston, West Virginia
March 3, 2014

 

65


Table of Contents
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, 2013 and 2012, 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, 2013. 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, 2013 and 2012, and the consolidated results of their operations and their cash flows for each of the three years in the period ended December 31, 2013, 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, 2013, based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (1992 framework) and our report dated March 3, 2014 expressed an unqualified opinion thereon.

 

/s/ Ernst & Young LLP
Charleston, West Virginia
March 3, 2014

 

66


Table of Contents

CONSOLIDATED BALANCE SHEETS

UNITED BANKSHARES, INC. AND SUBSIDIARIES

(Dollars in thousands, except par value)

 

      December 31
2013
     December 31
2012
 

Assets

     

Cash and due from banks

       $ 134,808               $ 157,539       

Interest-bearing deposits with other banks

     281,090             273,517       

Federal funds sold

     719             1,021       
  

 

 

    

 

 

 

Total cash and cash equivalents

     416,617             432,077       

Securities available for sale at estimated fair value (amortized cost-$813,049 at December 31, 2013 and $673,315 at December 31, 2012)

     775,284             625,625       

Securities held to maturity (estimated fair value-$38,293 at December 31, 2013 and $42,695 at December 31, 2012)

     40,965             43,467       

Other investment securities

     73,093             60,310       

Loans held for sale

     4,236             17,762       

Loans

     6,713,599             6,517,780       

Less: Unearned income

     (9,016)             (6,364)       
  

 

 

    

 

 

 

Loans net of unearned income

     6,704,583             6,511,416       

Less: Allowance for loan losses

     (74,198)             (73,901)       
  

 

 

    

 

 

 

Net loans

     6,630,385             6,437,515       

Bank premises and equipment

     69,897             72,170       

Goodwill

     375,547             375,583       

Accrued interest receivable

     26,666             26,302       

Other assets

     322,634             329,202       
  

 

 

    

 

 

 

TOTAL ASSETS

       $ 8,735,324               $ 8,420,013       
  

 

 

    

 

 

 

Liabilities

     

Deposits:

     

Noninterest-bearing

       $ 1,874,520               $ 1,824,411       

Interest-bearing

     4,747,051             4,928,575       
  

 

 

    

 

 

 

Total deposits

     6,621,571             6,752,986       

Borrowings:

     

Federal funds purchased

     27,685             5,446       

Securities sold under agreements to repurchase

     188,069             209,516       

Federal Home Loan Bank borrowings

     592,069             186,411       

Other long-term borrowings

     198,628             198,515       

Allowance for lending-related commitments

     2,143             1,656       

Accrued expenses and other liabilities

     63,427             73,232       
  

 

 

    

 

 

 

TOTAL LIABILITIES

     7,693,592             7,427,762       

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, 2013 and 2012, including 437,363 and 591,057 shares in treasury at December 31, 2013 and 2012, respectively

     127,169             127,169       

Surplus

     237,674             238,739       

Retained earnings

     734,945             712,299       

Accumulated other comprehensive loss

     (43,047)             (65,748)       

Treasury stock, at cost

     (15,009)             (20,208)       
  

 

 

    

 

 

 

TOTAL SHAREHOLDERS’ EQUITY

     1,041,732             992,251       
  

 

 

    

 

 

 

TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY

       $  8,735,324               $  8,420,013       
  

 

 

    

 

 

 

See notes to consolidated financial statements