United Bankshares Inc. 10-Q Summary: Quarter Ended June 30, 2008
Business Context and Reporting Period
This Form 10-Q covers the quarterly period ended June 30, 2008, and the six-month period ended June 30, 2008, for United Bankshares, Inc. (United), a West Virginia-based financial holding company. The company operates primarily through its subsidiary banks in West Virginia, Virginia, Ohio, and Maryland. The reporting period includes the impact of the July 2007 acquisition of Premier Community Bankshares, Inc., which expanded United's presence in the Metro DC area.
Key Financial Metrics
| Metric | Six Months Ended June 30, 2008 | Six Months Ended June 30, 2007 |
|---|---|---|
| Net Income | $50.84 million | $48.92 million |
| Earnings Per Share (Diluted) | $1.17 | $1.19 |
| Net Interest Income (Tax-Equivalent) | $133.03 million | $113.58 million |
| Net Interest Margin | 3.72% | 3.79% |
| Provision for Credit Losses | $6.45 million | $1.20 million |
| Noninterest Income | $37.79 million | $31.44 million |
| Noninterest Expense | $82.84 million | $63.99 million |
| Total Assets (as of June 30, 2008) | $8.05 billion | $7.99 billion (Dec 31, 2007) |
| Total Loans (as of June 30, 2008) | $5.85 billion | $5.80 billion (Dec 31, 2007) |
| Total Deposits (as of June 30, 2008) | $5.47 billion | $5.35 billion (Dec 31, 2007) |
| Shareholders' Equity (as of June 30, 2008) | $772.86 million | $761.20 million (Dec 31, 2007) |
Material Changes vs. Prior Period
- Profitability: Net income increased 3.9% year-over-year for the six-month period, driven by a 17.1% increase in tax-equivalent net interest income. However, earnings per share declined slightly due to an increase in average shares outstanding.
- Asset Growth: Total assets remained relatively flat, increasing less than 1% from year-end 2007. Loan portfolio growth was modest (0.9%), with increases in commercial real estate and construction loans offset by declines in installment and consumer loans.
- Expense Growth: Noninterest expenses rose significantly by 29.5% year-over-year. This increase was primarily attributed to the Premier acquisition, resulting in higher salaries, occupancy, and data processing costs.
- Credit Quality: The provision for credit losses increased substantially to $6.45 million from $1.20 million in the prior year period. Net charge-offs rose to $6.03 million, largely due to a $2.75 million charge-off on an automobile floor plan credit. Nonperforming loans increased to $49.37 million (0.84% of loans) from $28.33 million at year-end 2007.
- Investment Portfolio: Unrealized losses on available-for-sale securities increased to $36.32 million, primarily due to market interest rate changes and tight liquidity affecting mortgage-backed securities and corporate securities.
Guidance, Outlook, and Risks
Management Commentary: Management maintains that the allowance for credit losses of $59.16 million is adequate. The company continues to focus on balancing capital adequacy with shareholder returns, evidenced by a 35th consecutive year of dividend increases. Liquidity is considered sufficient, supported by core deposits and unused borrowing lines.
Risks and Contingencies:
- Credit Risk: Increased nonperforming assets and impaired loans, particularly in commercial real estate construction and automobile floor plans, pose a risk to future earnings.
- Interest Rate Risk: United is exposed to changes in net interest income due to interest rate fluctuations. Simulations indicate a 200 basis point decrease in rates could reduce net interest income by 7.81% over one year.
- Market Risk: The investment portfolio holds significant mortgage-backed securities and corporate securities with unrealized losses. While management does not believe these are other-than-temporarily impaired, further market volatility could impact fair values.
- Regulatory Risk: The company is subject to audits by federal and state tax authorities, with an estimated liability of $8.28 million for uncertain tax positions.
Investor Verification Checklist
- Credit Quality Trends: Verify the trajectory of nonperforming loans and the specific exposure to the automobile floor plan and commercial real estate construction sectors.
- Allowance Adequacy: Assess the sufficiency of the $59.16 million allowance for credit losses given the 75% increase in impaired loans year-over-year.
- Expense Management: Monitor whether noninterest expense growth stabilizes following the Premier acquisition integration.
- Investment Portfolio Valuation: Review the composition of the $36.32 million in unrealized losses on available-for-sale securities and management's intent to hold these assets.
- Interest Rate Sensitivity: Evaluate the impact of potential rate cuts on net interest income, given the sensitivity analysis showing a 7.81% decline in a 200 basis point drop scenario.