United Bankshares Inc. 10-Q Summary: Quarter Ended September 30, 2007
Business Context and Reporting Period
This Form 10-Q covers the quarterly period ended September 30, 2007, and the nine-month period ended September 30, 2007, for United Bankshares, Inc. and its subsidiaries. The company is a West Virginia-based bank holding company. A material event during this period was the acquisition of Premier Community Bankshares, Inc. on July 14, 2007, which significantly expanded the company's footprint into the Metro DC area and Virginia markets.
Key Financial Metrics
| Metric | Q3 2007 (Three Months) | Q3 2006 (Three Months) | YTD 2007 (Nine Months) | YTD 2006 (Nine Months) |
|---|---|---|---|---|
| Net Income | $25.80 million | $14.17 million | $74.72 million | $64.23 million |
| Earnings Per Share (Diluted) | $0.60 | $0.34 | $1.79 | $1.53 |
| Total Assets | $7.69 billion | $6.63 billion (Q3 2006 avg) | $7.69 billion (Sep 30) | $6.72 billion (Dec 31 2006) |
| Total Deposits | $5.35 billion | $4.83 billion (Dec 31 2006) | $5.35 billion (Sep 30) | $4.83 billion (Dec 31 2006) |
| Total Loans (Net) | $5.54 billion | $4.76 billion (Dec 31 2006) | $5.54 billion (Sep 30) | $4.76 billion (Dec 31 2006) |
| Net Interest Margin | 3.75% | 3.87% | 3.78% | 3.87% |
| Return on Average Assets | 1.37% (Annualized) | 0.85% (Annualized) | 1.45% (Annualized) | 1.29% (Annualized) |
| Return on Average Equity | 13.91% (Annualized) | 8.83% (Annualized) | 14.81% (Annualized) | 13.38% (Annualized) |
Material Changes vs. Prior Period
- Acquisition Impact: The acquisition of Premier Community Bankshares drove a 14.4% increase in total assets and a 16.2% increase in portfolio loans compared to year-end 2006. Premier contributed approximately $759 million in loans and $716 million in deposits.
- Profitability: Net income for the nine months ended September 30, 2007, increased 16.3% compared to the same period in 2006. This growth was aided by the Premier acquisition and improved noninterest income.
- Noninterest Income: Noninterest income rose $14.47 million (33.4%) year-to-date. This increase was largely due to a $787,000 gain on the termination of interest rate swaps in 2007, contrasting with a $4.60 million loss on similar transactions in 2006. Fee income from deposit services also increased significantly.
- Noninterest Expense: Total noninterest expense decreased 1.48% year-to-date, despite $1.33 million in merger-related costs. This reduction was primarily due to a decrease in prepayment penalties on FHLB advances ($786,000 in 2007 vs. $8.26 million in 2006) and lower pension expenses.
- Asset Quality: Nonperforming loans increased to $22.79 million (0.41% of loans) from $14.19 million at year-end 2006. The increase is attributed to loans acquired from Premier and specific residential real estate construction credits. Net charge-offs were $4.15 million for the nine months ended September 30, 2007, compared to $1.50 million in the prior year.
Guidance, Outlook, and Risks
- Management Commentary: Management views the Premier acquisition as a strategic move to enter the economically attractive Metro DC area. The company maintains a "well capitalized" status with risk-based capital ratios significantly above regulatory minimums (11.26% total risk-based capital).
- Interest Rate Risk: The company utilizes an earnings simulation model to manage interest rate risk. As of September 30, 2007, a 100 basis point upward shock to interest rates is estimated to increase net interest income by 1.09% over one year. A 100 basis point downward shock is estimated to decrease net interest income by 0.29%.
- Dividends: The Board declared a quarterly dividend of $0.28 per share, marking the 34th consecutive year of dividend increases.
- Risks and Contingencies:
- Credit Risk: Specific attention is drawn to impaired loans, particularly in the residential real estate construction sector, where charge-offs of $3.02 million were recognized year-to-date.
- Market Risk: The company holds a significant portfolio of mortgage-backed securities ($796 million amortized cost). While most are fixed-rate CMOs with low extension risk, a portion of the portfolio is subject to price volatility in a rising rate environment.
- Tax Uncertainty: The company has recorded a $5.9 million liability for uncertain tax positions under FIN 48.
Investor Verification Checklist
- Acquisition Integration: Verify the progress of integrating Premier Community Bankshares and the realization of projected synergies.
- Asset Quality Trends: Monitor the specific residential real estate construction credits identified as impaired and the trajectory of net charge-offs in this sector.
- Interest Rate Sensitivity: Review the company's hedging strategy and the impact of potential interest rate shifts on the net interest margin, given the current 3.75% margin.
- Capital Adequacy: Confirm that the company maintains its "well capitalized" status as it grows its asset base through acquisitions and organic loan growth.
- Noninterest Income Stability: Assess the sustainability of noninterest income growth, distinguishing between recurring fee income and one-time gains from derivative terminations.