UBSI

United Bankshares Inc. 10-Q Summary: Quarter Ended June 30, 1999

Business Context and Reporting Period

This Form 10-Q covers the quarterly period ended June 30, 1999, and the six months ended June 30, 1999, for United Bankshares, Inc. and its subsidiaries. The company operates primarily in community banking and mortgage banking. The financial statements are unaudited. As of July 31, 1999, there were 43,240,443 shares of common stock outstanding.

Key Financial Metrics

Material Changes vs. Prior Period

• Profitability Surge: Net income increased 59.1% year-over-year for the six-month period. This was driven by a 65.6% reduction in the provision for loan losses and a 17.5% decrease in noninterest expenses.
• Expense Reduction: The significant drop in expenses in 1998 was due to one-time merger-related charges of approximately $7.1 million (pre-tax) associated with the acquisition of George Mason Bankshares, Inc., which were not present in the 1999 period.
• Asset Growth: Total assets grew 9.6% from year-end 1998, primarily due to a $761.4 million increase in investment securities. This was funded by a $560.1 million increase in borrowed funds (FHLB and short-term borrowings).
• Loan Portfolio: Portfolio loans increased $235.4 million. However, "Loans held for sale" decreased $574.0 million due to securitizations and sales in the secondary market.
• Equity Decline: Shareholders' equity decreased $23.9 million (5.7%) from year-end 1998, primarily due to a $39.5 million unrealized loss (net of tax) on the available-for-sale securities portfolio caused by rising interest rates.

Outlook, Risks, and Management Commentary

• Interest Rate Risk: Management identifies interest rate risk as the most significant market risk. The company is currently liability-sensitive in the one-year horizon. Simulations indicate that a 200 basis point rise in rates would increase net interest income by 0.36%, while a 200 basis point drop would decrease it by 4.75%.
• Credit Quality: Nonperforming loans increased to $24.03 million (0.48% of total assets) from $18.67 million at year-end 1998, largely due to a single collateralized commercial loan moving to nonaccrual status. The allowance for loan losses remains adequate at 1.40% of total loans.
• Year 2000 Compliance: United has completed assessment, remediation, and testing phases for its internal systems. Total project costs are estimated at $4 million, with $2.4 million incurred to date. Management believes the risk of material adverse impact is mitigated, though third-party failures remain a contingency risk.
• Capital Position: Despite the equity decline from unrealized losses, the company remains "well-capitalized" with a risk-based capital ratio of 12.37% and a Tier 1 leverage ratio of 8.09%, both well above regulatory minimums.

Investor Verification Checklist

• Securities Valuation: Verify the impact of the $39.5 million unrealized loss on available-for-sale securities on future capital ratios if rates remain elevated.
• Loan Securitization: Review the terms of the $370 million in loan securitizations completed in 1999 to understand retained risk and "excess spread" income stability.
• Nonperforming Loans: Monitor the specific commercial loan that drove the increase in nonaccruals to ensure it does not signal broader credit deterioration.
• Expense Normalization: Confirm that the 1999 expense reduction is sustainable and not solely a result of the absence of 1998 merger costs.
• Liquidity Sources: Assess reliance on borrowed funds (FHLB and short-term), which increased significantly to fund asset growth, and the stability of these funding sources.