UBSI

United Bankshares Inc. 10-Q Summary: Quarter Ended June 30, 2004

Business Context and Reporting Period

This Form 10-Q covers the quarterly period ended June 30, 2004, and the six-month period ended June 30, 2004, for United Bankshares, Inc. and its subsidiaries. The company operates primarily in community banking. A significant corporate event occurred shortly after the reporting period: on July 7, 2004, United closed the sale of its wholly-owned mortgage banking subsidiary, George Mason Mortgage, LLC, to Cardinal Financial Corporation. Consequently, the mortgage banking segment is reported as discontinued operations for all periods presented.

Key Financial Metrics

Note: Balance sheet figures are as of June 30, 2004. Cash flow from operating activities for the six months ended June 30, 2004, was a net use of $7.47 million, while financing activities provided $103.83 million.

Material Changes vs. Prior Period

• Earnings Growth: Net income increased 6.18% in Q2 2004 and 5.23% for the first six months compared to the prior year periods. This growth was driven primarily by increased net interest income and a significantly lower provision for loan losses.
• Loan Portfolio: Portfolio loans increased by $222.94 million (5.64%) year-over-year, driven by growth in single-family residential and installment loans.
• Asset Quality: Nonperforming loans decreased to $16.81 million (0.40% of loans) from $18.58 million (0.46%) at year-end 2003. Net charge-offs for the first six months of 2004 were $1.83 million, a significant improvement over $4.29 million in the same period in 2003.
• Divestiture Impact: The sale of the mortgage banking subsidiary resulted in a shift of significant assets and liabilities to discontinued operations. The transaction is expected to generate a net gain of approximately $16 million in Q3 2004.

Outlook, Risks, and Management Commentary

• Divestiture Strategy: Management sold the mortgage banking subsidiary to capitalize on historically low interest rates and mitigate exposure to predicted rate increases. Proceeds were used to prepay $132.5 million in Federal Home Loan Bank (FHLB) advances, incurring a $16 million prepayment penalty but reducing annual interest expense by approximately $8.3 million.
• Interest Rate Risk: Management identifies interest rate risk as the most significant market risk. As of June 30, 2004, a 100 basis point increase in rates is estimated to increase net interest income by 3.05% over one year, while a 100 basis point decrease would increase income by 0.45%.
• Capital Position: The company remains "well capitalized" with a risk-based capital ratio of 11.30% and a Tier I capital ratio of 10.11%, both well above regulatory minimums.
• Dividends: The company declared a cash dividend of $0.25 per share for Q2 2004, marking the 31st consecutive year of dividend increases.
• Stock Repurchases: The company repurchased 629,534 shares of common stock during the first six months of 2004 under a plan to repurchase up to 1.65 million shares.

Key Facts for Investor Verification

• Discontinued Operations: Verify the classification of the George Mason Mortgage sale as discontinued operations and the timing of the $16 million gain recognition in Q3 2004.
• Prepayment Penalty: Confirm the $16 million pre-tax charge associated with the prepayment of FHLB advances in Q3 2004 and its impact on future earnings.
• Allowance Adequacy: Review the allowance for loan losses ($50.38 million) relative to the 1.21% coverage ratio and the specific allocation methodologies used for commercial and real estate loans.
• Interest Rate Sensitivity: Assess the company's earnings simulation model assumptions regarding prepayment speeds and yield curve shifts.
• Stock Repurchase Plan: Monitor the remaining capacity under the 1.65 million share repurchase plan (approximately 612,000 shares remaining as of June 30, 2004).