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UBSI > SEC Filings for UBSI > Form 10-Q on 8-Nov-2012All Recent SEC Filings

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Form 10-Q for UNITED BANKSHARES INC/WV


8-Nov-2012

Quarterly Report


Item 2. 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 harbor 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, involves 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; movements in interest rates; competitive pressures on product pricing and services; success and timing of business strategies; the nature and extent of governmental actions and reforms; and rapidly changing technology and evolving banking industry standards.

INTRODUCTION

The following discussion and analysis presents the significant changes in financial condition and the results of operations of United and its subsidiaries for the periods indicated below. This discussion and the unaudited consolidated financial statements and the notes to unaudited 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 September 30, 2012, but prior to the date these financial statements were issued, for potential recognition or disclosure required in these financial statements.

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

In addition, on July 8, 2011, United completed its acquisition of Centra Financial Holdings, Inc. (Centra) of Morgantown, West Virginia. The results of operations of Centra are included in the consolidated results of operations from the date of acquisition. As a result, the comparisons of the first nine months of 2012 to the first nine months 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.


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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.

Allowance for Credit Losses

As explained in Note 6, Allowance for Credit Losses to the unaudited Consolidated Financial Statements, allowance for credit losses represents management's estimate of the probable credit losses inherent in the lending portfolio. Determining the allowance for credit losses requires management to make estimates of losses that are highly uncertain and require a high degree of judgment. At September 30, 2012, the allowance for loan losses was $73.8 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 first nine months of 2012 net income by approximately $4.8 million, or $0.10 diluted per common share. Management's evaluation of the adequacy of the allowance for credit losses and the appropriate provision for credit losses is based upon a quarterly evaluation of the loan portfolio and lending related commitments. This evaluation is inherently subjective and requires significant estimates, including estimates related to the amounts and timing of future cash flows, value of collateral, losses on pools of homogeneous loans based on historical loss experience, and consideration of current economic trends, all of which are susceptible to constant and significant change. The allowance allocated to specific credits and loan pools grouped by similar risk characteristics is reviewed on a quarterly basis and adjusted as necessary based upon subsequent changes in circumstances. In determining the components of the allowance for credit losses, management considers the risk arising in part from, but not limited to, charge-off and delinquency trends, current economic and business conditions, lending policies and procedures, the size and risk characteristics of the loan portfolio, concentrations of credit, and other various factors. Additional information relating to United's allowance for credit losses including the methodology used to determine the allowance for credit losses is described in Note 6. A discussion of the factors leading to changes in the amount of the allowance for credit losses is included in the Provision for Credit Losses section of this Management's Discussion and Analysis of Financial Condition and Results of Operations (MD&A). Additional information relating to United's loans is included in Note 4, Loans to the unaudited Consolidated Financial Statements.

Investment Securities

Accounting estimates are used in the presentation of the investment portfolio and these estimates impact the presentation of United's financial condition and results of operations. United classifies its investments in debt and equity securities as either held to maturity or available for sale. Securities held to maturity are accounted for using historical costs, adjusted for amortization of premiums and accretion of discounts. Securities available for sale are accounted for at fair value, with the net unrealized gains and losses, net of income tax effects, presented as a separate


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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 pooled trust preferred securities, management estimates fair value based on a discounted cash flow methodology using appropriately adjusted discount rates reflecting nonperformance and liquidity risks. Due to the subjective nature of this valuation process, it is possible that the actual fair values of these securities could differ from the estimated amounts, thereby affecting United's financial position, results of operations and cash flows. The potential impact to United's financial position, results of operations or cash flows for changes in the valuation process cannot be reasonably estimated.

If the estimated value of investments is less than the cost or amortized cost, the investment is considered impaired and management evaluates whether an event or change in circumstances has occurred that may have a significant adverse effect on the fair value of the investment. If such an event or change has occurred, management must exercise judgment to determine the nature of the potential impairment (i.e., temporary or other-than-temporary) in order to apply the appropriate accounting treatment. If United intends to sell, or is more likely than not 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 3, Investment Securities, and Note 12, Fair Value Measurements, to the unaudited 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 15, Income Taxes, to the unaudited Consolidated Financial Statements for information regarding United's ASC topic 740 disclosures.


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Any material effect on the financial statements related to these critical accounting areas are further discussed in this MD&A.

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 September 30, 2012, approximately 9.09% of total assets, or $761.65 million, consisted of financial instruments recorded at fair value. Of this total, approximately 92.07% or $701.24 million of these financial instruments used valuation methodologies involving observable market data, collectively Level 1 and Level 2 measurements, to determine fair value. Approximately 7.93% or $60.40 million of these financial instruments were valued using unobservable market information or Level 3 measurements. Most of these financial instruments valued using unobservable market information were pooled trust preferred investment securities classified as available-for-sale. At September 30, 2012, only $5.30 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 12, Fair Value Measurements, to the unaudited Consolidated Financial Statements for additional information regarding ASC topic 820 and its impact on United's financial statements.

FINANCIAL CONDITION

United's total assets as of September 30, 2012 were $8.38 billion which was a decrease of $70.09 million or less than 1% from December 31, 2011. The decrease was primarily the result of a $199.68 million or 31.40% decrease in cash and cash equivalents, a $57.51 million or 6.98% decrease in investment securities and a $12.26 million or 3.48% decrease in other assets. Partially offsetting these decreases in total assets was an increase in portfolio loans of $191.84 million or 3.08% and an increase of $9.00 million or 230.73% in loans held for sale. The decrease in total assets is reflected in a corresponding decrease in total liabilities of $89.68 million or 1.20% while shareholders' equity increased $19.59 million or 2.02%. The decrease in total liabilities was due mainly to a $65.09 million and a $60.37 million decrease in deposits and long-term borrowings, respectively, which were partially offset by a $33.72 million increase in short-term borrowings.

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

Cash and Cash Equivalents

Cash and cash equivalents at September 30, 2012 decreased $199.68 million or 31.40% from year-end 2011. Of this total decrease, interest-bearing deposits with other banks decreased $209.09 million or 41.29% 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 $9.40 million or 7.31% increase in cash and due from banks and a $12 thousand


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or 1.19% increase in federal funds sold. During the first nine months of 2012, net cash of $89.20 million was provided by operating activities. Net cash of $153.35 million and $135.53 million were used in investing activities and financing activities, respectively. See the unaudited Consolidated Statements of Cash Flows for data on cash and cash equivalents provided and used in operating, investing and financing activities for the first nine months of 2012 and 2011.

Securities

Total investment securities at September 30, 2012 decreased $57.51 million or 6.98% from year-end 2011. Securities available for sale decreased $46.37 million or 6.66%. This change in securities available for sale mainly reflects $1.42 billion in sales, maturities and calls of securities, $1.37 billion in purchases, and an increase of $1.95 million in market value. Securities held to maturity decreased $6.36 million or 10.73% from year-end 2011 due primarily to calls and maturities of securities. Other investment securities decreased $4.77 million or 6.98% from year-end 2011.

The following table summarizes the changes in the available for sale securities since year-end 2011:

                                            September 30       December 31                        %
(Dollars in thousands)                          2012              2011          $ Change        Change
U.S. Treasury securities and obligations
of U.S. Government corporations and
agencies                                   $      352,553     $     303,547     $  49,006         16.14 %
State and political subdivisions                   84,926            98,848       (13,922 )      (14.08 %)
Mortgage-backed securities                        139,185           230,945       (91,760 )      (39.73 %)
Asset-backed securities                            12,779                 0        12,779        100.00 %
Marketable equity securities                        6,076             3,959         2,117         53.47 %
Trust preferred collateralized debt
obligations                                        37,368            42,369        (5,001 )      (11.80 %)
Single issue trust preferred securities            11,928            11,760           168          1.43 %
Corporate securities                                5,330             5,090           240          4.72 %

Total available for sale securities, at
fair value                                 $      650,145     $     696,518     $ (46,373 )       (6.66 %)

The following table summarizes the changes in the held to maturity securities since year-end 2011:

                                             September 30       December 31         $             %
(Dollars in thousands)                           2012              2011           Change        Change
U.S. Treasury securities and obligations
of U.S. Government corporations and
agencies                                    $       10,954     $      11,062     $   (108 )       (0.98 %)
State and political subdivisions                    14,689            12,794        1,895         14.81 %
Mortgage-backed securities                              65                77          (12 )      (15.58 %)
Single issue trust preferred securities             26,996            32,116       (5,120 )      (15.94 %)
Other corporate securities                             225             3,240       (3,015 )      (93.06 %)

Total held to maturity securities, at
amortized cost                              $       52,929     $      59,289     $ (6,360 )      (10.73 %)

At September 30, 2012, gross unrealized losses on available for sale securities were $65.39 million. Securities in an unrealized loss position at September 30, 2012 consisted primarily of pooled trust preferred collateralized debt obligations (TRUP CDOs), single issue trust preferred securities and non-agency residential mortgage-backed securities. The TRUP CDOs and the single issue trust preferred securities relate mainly to securities of financial institutions.

As of September 30, 2012, United's mortgage-backed securities had an amortized cost of $135.51 million, with an estimated fair value of $139.26 million. The portfolio consisted primarily of $108.05 million in agency residential mortgage-backed securities with a fair value of $113.70 million and $27.46 million in non-agency residential mortgage-backed securities with an estimated fair value of $25.56 million.


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As of September 30, 2012, United's corporate securities had an amortized cost of $143.59 million, with an estimated fair value of $77.81 million. The portfolio consisted primarily of $96.07 million in pooled trust preferred securities with a fair value of $37.37 million and $42.27 million in single issue trust preferred securities with an estimated fair value of $34.89 million. In addition to the trust preferred securities, the Company held positions in various other corporate securities with an amortized cost of $5.22 million and a fair value of $5.56 million, only one of which was individually significant.

The pooled trust preferred securities consisted of positions in 23 different securities. The underlying issuers in the pools were primarily financial institutions and to a lesser extent, insurance companies. The Company has no exposure to Real Estate Investment Trusts (REITs) in its investment portfolio. The Company owns both senior and mezzanine tranches in pooled trust preferred securities and does not own any income notes. The senior and mezzanine tranches of trust preferred collateralized debt obligations generally have some protection from defaults in the form of over-collateralization and excess spread revenues, along with waterfall structures that redirect cash flows in the event certain coverage test requirements are failed. Generally, senior tranches have the greatest protection, with mezzanine tranches subordinated to the senior tranches, and income notes subordinated to the mezzanine tranches. Senior tranches represent $17.69 million of the Company's pooled securities, while mezzanine tranches represent $78.41 million. Of the $78.41 million in mezzanine tranches, $11.84 million are now in the senior position as the senior notes have been paid to a zero balance. As of September 30, 2012, $9.21 million of the pooled trust preferred securities were investment grade, $5.00 million were split-rated, and the remaining $81.89 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 September 30, 2012, United's single issue trust preferred securities had an amortized cost of $42.27 million. Of the $42.27 million, $10.89 million or 25.77% were investment grade; $7.90 million or 18.68% were split-rated; $15.60 million or 36.90% were below investment grade; and $7.88 million or 18.65% were unrated. The three largest exposures accounted for 58.02% of the $42.27 million. These included Wells Fargo at $9.89 million, SunTrust Bank at $7.38 million and Peoples Bancorp, Inc. at $7.25 million. All single-issue trust preferred securities, with the exception of two securities totaling $633 thousand, are currently receiving full scheduled principal and interest payments.

During the first nine months of 2012, United recognized net other-than-temporary impairment charges totaling $4.75 million and $622 thousand, respectively, on certain TRUP CDOs and non-agency residential mortgage-backed securities, which are not expected to be sold. Other than these securities, management does not believe that any other individual security with an unrealized loss as of September 30, 2012 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 3 to the unaudited Notes to Consolidated Financial Statements.


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Loans

Loans held for sale increased $9.00 million or 230.73% as loan originations exceeded loan sales in the secondary market during the first nine months of 2012. Portfolio loans, net of unearned income, increased $191.84 million or 3.08% from year-end 2011 mainly due to a $222.77 million or 6.35% increase in the total commercial, financial and agricultural loans category, and a $7.41 million or 1.35% increase in construction and land development loans. Within the commercial, financial and agricultural loans category, commercial real estate loans increased $160.82 million or 7.00% while commercial loans (not secured by real estate) increased $61.95 million or 5.11%. Partially offsetting these increases in portfolio loans was a decrease of $37.39 million or 1.98% in residential real estate loans.

The following table summarizes the changes in the loan categories since year-end 2011:

                                         September 30        December 31                           %
(Dollars in thousands)                       2012                2011           $ Change         Change
Loans held for sale                     $       12,905       $      3,902       $   9,003         230.73 %

Commercial, financial, and
agricultural:
Owner-occupied commercial real
estate                                  $      723,969       $    743,502       $ (19,533 )        (2.63 %)
Nonowner-occupied commercial real
estate                                       1,733,615          1,553,259         180,356          11.61 %
Other commercial loans                       1,274,150          1,212,205          61,945           5.11 %

Total commercial, financial, and
. . .
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