UBSI

United Bankshares Inc. 10-Q Summary: Quarter Ended June 30, 2003

Business Context and Reporting Period

This Form 10-Q covers the quarterly period ended June 30, 2003, and the six-month period ended on that date. United Bankshares, Inc. operates primarily through two segments: community banking and mortgage banking. The company is headquartered in Charleston, West Virginia, and reported 41,356,466 shares of common stock outstanding as of July 31, 2003.

Key Financial Metrics

Material Changes vs. Prior Period

• Profitability: Net income increased 3.0% year-over-year for the six-month period, driven by a 54.7% surge in noninterest income, primarily from mortgage banking operations.
• Net Interest Margin Compression: The net interest margin declined to 3.79% (YTD 2003) from 4.19% (YTD 2002) due to lower yields on earning assets (down 93 basis points) which outpaced the decline in the cost of funds (down 57 basis points).
• Mortgage Banking Growth: Income from mortgage banking operations nearly doubled, increasing 92.96% year-over-year to $26.24 million, fueled by a 112% increase in loan originations due to refinancing activity.
• Expense Management: Noninterest expenses rose 16.9% year-over-year, largely attributed to higher salaries and benefits tied to increased mortgage sales activity.
• Asset Composition: Total assets decreased slightly to $5.75 billion from year-end 2002, reflecting a reduction in loans held for sale and portfolio loans, partially offset by increases in securities and other assets (including a $30 million purchase of bank-owned life insurance).

Guidance, Outlook, Risks, and Unusual Items

• Acquisition Activity: On April 4, 2003, United entered into an agreement to acquire Sequoia Bancshares, Inc. for approximately $112 million. The transaction is expected to close in the fourth quarter of 2003, subject to regulatory and shareholder approval.
• Capital Management: The Board approved a new plan to repurchase up to 1.65 million shares of common stock. During the first half of 2003, the company repurchased 633,812 shares for $18.49 million.
• Dividends: A quarterly dividend of $0.25 per share was declared, marking the 30th consecutive year of dividend increases.
• Interest Rate Risk: Management identifies interest rate risk as the most significant market risk. Simulation models indicate that a 100 basis point increase in rates would increase net interest income by 8.97%, while a 100 basis point decrease would reduce it by 3.23%.
• Accounting Changes: The company is evaluating the impact of FASB Interpretation No. 46 (FIN 46) regarding the consolidation of variable interest entities (trust preferred securities). It is probable that United will de-consolidate certain business trusts in the third quarter of 2003.
• Credit Quality: Nonperforming loans decreased to 0.38% of total loans. However, impaired loans increased to $15.59 million, primarily due to specific large commercial credits.

Investor Verification Checklist

• Acquisition Closing: Verify the status of the Sequoia Bancshares acquisition and any associated regulatory hurdles or financing requirements.
• Mortgage Segment Sustainability: Assess the sustainability of the mortgage banking income surge given its dependence on low interest rates and refinancing volumes.
• Interest Rate Sensitivity: Review the company's hedging strategies (including the new $100 million interest rate swap) to mitigate the risk of further margin compression in a rising rate environment.
• Allowance Adequacy: Monitor the allowance for loan losses relative to the increase in impaired commercial loans and the economic outlook for the company's primary markets.
• FIN 46 Impact: Confirm the financial statement impact of the anticipated de-consolidation of trust preferred securities in the third quarter.