UBSI

UNITED BANKSHARES INC - 10-Q Summary (Q3 2003)

Business Context and Reporting Period

This Form 10-Q covers the quarterly period ended September 30, 2003, and the nine-month period ended on the same date. United Bankshares, Inc. is a West Virginia-based financial holding company engaged primarily in community banking and mortgage banking operations. The company operates through subsidiary banks and recently completed the acquisition of Sequoia Bancshares, Inc. on October 10, 2003, expanding its footprint in Northern Virginia and Maryland.

Key Financial Metrics

Material Changes vs. Prior Period

• Profitability: Net income increased 2.54% in Q3 2003 compared to Q3 2002, and 2.84% for the nine-month period. Earnings per share (diluted) rose 5.77% for the quarter and 5.88% year-to-date.
• Net Interest Income: Net interest income declined 11.41% in Q3 and 8.37% for the nine months ended September 30, 2003, compared to the prior year. This was driven by a compression in the net interest margin (down 51 basis points in Q3) due to lower yields on earning assets (securities and loans) outpacing the reduction in the cost of funds.
• Noninterest Income: Noninterest income surged 52.97% in Q3 and 54.11% for the nine months. This growth was primarily fueled by a 41.34% increase in mortgage banking income, attributed to higher refinancing activity and loan sales in the secondary market.
• Expense Management: Noninterest expenses increased 6.49% in Q3 and 13.10% for the nine months. The increase was largely due to higher salaries and benefits in the mortgage banking segment tied to increased sales activity.
• Asset Quality: Nonperforming loans increased to $18.47 million (0.51% of loans) from $15.35 million at year-end 2002, driven by two large commercial loans. Net charge-offs for the nine months were $6.43 million, up from $5.76 million in the prior year.

Outlook, Risks, and Management Commentary

• Acquisition: On October 10, 2003, United acquired Sequoia Bancshares, Inc. for approximately $109 million (cash and stock). Sequoia's results are not included in the Q3 2003 financials but will be consolidated prospectively.
• Interest Rate Risk: Management identifies interest rate risk as the most significant market risk. The company utilizes an earnings simulation model and derivative instruments (including a $100 million interest rate swap) to manage exposure. A 100 basis point increase in rates is estimated to increase net interest income by 4.69%, while a 100 basis point decrease would reduce it by 3.24%.
• Capital Resources: United remains "well capitalized" with a risk-based capital ratio of 11.72% and a Tier 1 leverage ratio of 8.25%. The company continues a stock repurchase program and declared a quarterly dividend of $0.25 per share.
• Liquidity: Liquidity is considered sufficient, supported by core deposits, cash equivalents, and access to Federal Home Loan Bank advances. Cash and cash equivalents increased by $85.58 million during the nine-month period.
• Accounting Changes: The company adopted FIN 45 (Guarantees) and SFAS No. 150 (Financial Instruments) with no material impact on financial position. FIN 46 (Variable Interest Entities) adoption is deferred for certain pre-existing interests.

Investor Verification Checklist

• Mortgage Banking Volatility: Verify the sustainability of the 69.64% year-to-date increase in mortgage banking income, given its sensitivity to interest rate fluctuations and refinancing volumes.
• Commercial Loan Concentration: Review the specific details of the two large commercial loans that drove the increase in nonperforming assets and impaired loans.
• Net Interest Margin Compression: Assess management's strategy to mitigate further margin compression in a low-interest-rate environment.
• Sequoia Integration: Monitor the integration progress and financial impact of the Sequoia Bancshares acquisition in the Q4 2003 report.
• Derivative Exposure: Confirm the effectiveness of the $100 million interest rate swap in hedging against the long-term FHLB advance.