SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 __________________________________ FORM 10-Q Quarterly Report Under Section 13 or 15(d) of the Securities Exchange Act of 1934 For Quarter Ended SEPTEMBER 30, 1998 Commission File Number: 0-13322 UNITED BANKSHARES, INC. ----------------------- (Exact name of registrant as specified in its charter) WEST VIRGINIA 55-0641179 ------------- ---------- (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 300 UNITED CENTER 500 VIRGINIA STREET, EAST CHARLESTON, WEST VIRGINIA 25301 - - --------------------------------------- ----- (Address of Principal Executive Offices) Zip Code Registrant's Telephone Number, including Area Code: (304) 424-8761 -------------- Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES X No --- --- Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date. Class -- Common Stock, $2.50 Par Value; 43,015,233 shares outstanding as of OCTOBER 31, 1998. 1 UNITED BANKSHARES, INC. AND SUBSIDIARIES FORM 10-Q TABLE OF CONTENTS PART I. FINANCIAL INFORMATION Page - - ------------------------------ ---- Item 1. Financial Statements - - ---------------------------- Consolidated Balance Sheets (Unaudited) September 30, 1998 and December 31, 1997 ........................................6 Consolidated Statements of Income (Unaudited) for the Three and Nine Months Ended September 30, 1998 and 1997 ......7 Consolidated Statement of Changes in Shareholders' Equity (Unaudited) for the Nine Months Ended September 30, 1998 .....8 Condensed Consolidated Statements of Cash Flows (Unaudited) for the Nine Months Ended September 30, 1998 and 1997 ........9 Notes to Consolidated Financial Statements ..................10 Information required by Item 303 of Regulation S-K Item 2. Management's Discussion and Analysis of Financial - - --------------------------------------------------------- Condition and Results of Operations....................9 ----------------------------------- PART II. OTHER INFORMATION - - --------------------------- Item 1. Legal Proceedings......................................Not Applicable - - ------------------------- Item 2. Changes in Securities..................................Not Applicable - - ----------------------------- Item 3. Defaults Upon Senior Securities .......................Not Applicable - - --------------------------------------- Item 4. Submission of Matters to a Vote of Security Holders - - ------------------------------------------------------------ The following matter was submitted to a vote of security holders at a special meeting of Shareholders of the Registrant held on Monday, September 21, 1998: (1) To consider and vote upon a proposal to amend the articles of incorporation of United to increase the number of authorized shares of common stock, par value $2.50 per share of United, from 41,000,000 to 100,000,000 shares. There were 30,070,829 affirmative votes cast, 838,255 negative votes, 306,949 abstaining votes and 7,576,679 non-votes. Item 5. Other Information .....................................Not Applicable - - -------------------------- Item 6. Exhibits and Reports on Form 8-K - - ----------------------------------------- (a) Exhibits required by Item 601 of Regulation S-K Exhibit 11 - Computation of Earnings Per Share.........31 Exhibit 27 - Financial Data Schedule...................32 2 (b) Reports on Form 8-K On July 28, 1998, United Bankshares, Inc. filed a Form 8-K under Item 5 to report its financial condition and the results of operations for the second quarter of 1998. On August 3, 1998, United Bankshares, Inc. filed a Form 8-K to restate the March 31, 1998 Form 10-Q and the 1997 Form 10-K in connection with the merger of United Bankshares, Inc. and George Mason Bankshares, Inc. 3 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. UNITED BANKSHARES, INC. ----------------------- (Registrant) Date November 13, 1998 /s/ Richard M. Adams ----------------- --------------------------- Richard M. Adams Chairman of the Board and Chief Executive Officer Date November 13, 1998 /s/ Steven E. Wilson ----------------- ------------------------------ Steven E. Wilson Executive Vice President, Secretary, Treasurer and Chief Financial Officer 4 PART I FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS (UNAUDITED) The September 30, 1998 and December 31, 1997, consolidated balance sheets of United Bankshares, Inc. and Subsidiaries, and the related consolidated statements of income for the three and nine months ended September 30, 1998 and 1997, and the related consolidated statement of changes in shareholders' equity for the nine months ended September 30, 1998, and the related condensed consolidated statements of cash flows for the nine months ended September 30, 1998 and 1997, and the notes to consolidated financial statements appear on the following pages. 5 CONSOLIDATED BALANCE SHEETS(UNAUDITED) UNITED BANKSHARES, INC. AND SUBSIDIARIES (In thousands, except per share data) September December 31 1998 1997 ---------- ----------- ASSETS Cash and due from banks $ 93,910 $ 116,087 Interest-bearing deposits with other banks 8,208 8,725 Federal funds sold 79,400 56,052 ---------- ---------- Total cash and cash equivalents 181,518 180,864 Securities available for sale at estimated fair value (amortized cost-$514,861 at September 30, 1998 and $585,724 at December 31, 1997) 522,908 595,520 Securities held to maturity(estimated fair value -$219,590 at September 30, 1998 and $234,329 at December 31, 1997) 215,334 231,311 Loans Commercial, financial, and agricultural 441,569 467,223 Real estate: Single family residential 951,776 1,087,920 Commercial 536,106 482,568 Construction 158,501 140,266 Other 47,650 47,148 Installment 303,020 292,428 Loans held for sale at estimated fair value 464,580 97,619 ---------- ---------- 2,903,202 2,615,172 Less: Unearned income (7,584) (7,766) ---------- ---------- Loans, net of unearned income 2,895,618 2,607,406 Less: Allowance for loan losses (37,370) (30,455) ---------- ---------- Net loans 2,858,248 2,576,951 Bank premises and equipment 49,197 48,841 Interest receivable 25,495 20,979 Other assets 69,567 73,594 ---------- ---------- TOTAL ASSETS $3,922,267 $3,728,060 ========== ========== LIABILITIES Domestic deposits: Noninterest-bearing $ 452,850 $ 494,733 Interest-bearing 2,609,382 2,432,317 ---------- ---------- TOTAL DEPOSITS 3,062,232 2,927,050 Borrowings: Federal funds purchased 12,090 40,961 Securities sold under agreements to repurchase 216,532 184,718 Federal Home Loan Bank borrowings 203,420 165,695 Other 4,911 5,000 Accrued expenses and other liabilities 53,868 49,162 ---------- ---------- TOTAL LIABILITIES 3,553,053 3,372,586 SHAREHOLDERS' EQUITY Common stock, $2.50 par value; Authorized -100,000,000 shares; issued - 39,153,568 at September 30, 1998 and 39,073,164 at December 31, 1997, including 123,628 and 161,814 shares in treasury at September 30, 1998 and December 31, 1997, respectively 97,884 97,683 Surplus 71,985 72,505 Retained earnings 197,343 181,601 Accumulated other comprehensive income 5,230 6,204 Treasury stock (3,228) (2,519) ---------- ---------- TOTAL SHAREHOLDERS' EQUITY 369,214 355,474 ---------- ---------- TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $3,922,267 $3,728,060 ========== ========== See notes to consolidated unaudited financial statements. 6 CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED) UNITED BANKSHARES, INC. AND SUBSIDIARIES (In thousands, except per share data) Three Months Ended Nine Months Ended September 30 September 30 ------------------------ ------------------------ 1998 1997 1998 1997 ----------- ---------- ----------- ----------- INTEREST INCOME Interest and fees on loans $ 66,282 $ 51,616 $ 184,207 $ 148,788 Interest on federal funds sold and other short-term investments 278 353 773 788 Interest and dividends on securities: Taxable 9,938 12,766 33,643 33,817 Exempt from federal taxes 819 741 2,369 2,333 ----------- ----------- ----------- ----------- TOTAL INTEREST INCOME 77,317 65,476 220,992 185,726 ----------- ----------- ----------- ----------- INTEREST EXPENSE Interest on deposits 29,981 26,682 86,479 75,094 Interest on short-term borrowings 2,842 2,517 7,870 6,173 Interest on Federal Home Loan Bank borrowings 3,611 1,317 9,061 3,742 ----------- ----------- ----------- ----------- TOTAL INTEREST EXPENSE 36,434 30,516 103,410 85,009 ----------- ----------- ----------- ----------- NET INTEREST INCOME 40,883 34,960 117,582 100,717 PROVISION FOR POSSIBLE LOAN LOSSES 3,316 1,011 10,623 2,173 ----------- ----------- ----------- ----------- NET INTEREST INCOME AFTER PROVISION FOR POSSIBLE LOAN LOSSES 37,567 33,949 106,959 98,544 ----------- ----------- ----------- ----------- OTHER INCOME Trust department income 1,162 930 3,288 2,650 Other charges, commissions, and fees 4,817 4,199 13,484 11,769 Income from mortgage banking operations 6,645 5,223 18,233 10,985 Gain on sales of securities 427 2,689 40 Other income 178 886 1,027 1,398 ----------- ----------- ----------- ----------- TOTAL OTHER INCOME 13,229 11,238 38,721 26,842 ----------- ----------- ----------- ----------- OTHER EXPENSES Salaries and employee benefits 15,086 12,928 47,530 35,430 Net occupancy expense 2,866 3,631 9,267 8,884 Other expense 11,194 9,717 38,730 26,085 ----------- ----------- ----------- ----------- TOTAL OTHER EXPENSES 29,146 26,276 95,527 70,399 ----------- ----------- ----------- ----------- INCOME BEFORE INCOME TAXES 21,650 18,911 50,153 54,987 INCOME TAXES 5,996 6,454 13,931 18,540 ----------- ----------- ----------- ----------- NET INCOME $ 15,654 $ 12,457 $ 36,222 $ 36,447 =========== =========== =========== =========== Earnings per common share Basic $ 0.40 $ 0.32 $ 0.93 $ 0.94 =========== =========== =========== =========== Diluted $ 0.39 $ 0.32 $ 0.91 $ 0.93 =========== =========== =========== =========== Dividends per share $ 0.19 $ .17 $ 0.55 $ 0.50 =========== =========== =========== =========== Average outstanding shares Basic 39,124,705 38,594,676 39,066,872 38,585,460 Diluted 39,820,423 39,379,922 39,753,867 39,196,408 See notes to consolidated unaudited financial statements. 7 CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY(UNAUDITED) UNITED BANKSHARES, INC. AND SUBSIDIARIES (In thousands, except per share data) Nine Months Ended September 30, 1998 ----------------------------------------------------------------------------------------------------- Common Stock Accumulated --------------------------- Other Total Par Retained Comprehensive Treasury Shareholders' Shares Value Surplus Earnings Income Stock Equity ------------- ------------ ------------ ------------ ------------- ------------- -------------- Balance at January 1, 1998, as reported 39,073,164 $97,683 $72,505 $181,601 $6,204 $ (2,519) $355,474 Net income 36,222 36,222 Other comprehensive income, net of tax: Change in net unrealized gain on available for sale securities, net of reclassification adjustment (974) (974) Cash dividends ($.55 per share) (19,721) (19,721) Pre-merger dividends of pooled company (759) (759) Purchase of treasury stock (137,300 shares) (3,610) (3,610) Fractional shares adjustment (7) (7) Sale of treasury stock (37,376 shares) 654 654 Common stock options exercised 80,404 201 (513) 2,247 1,935 ------------- ------------- ----------- ------------ ------------ ------------ ------------- Balance at September 30, 1998 39,153,568 $97,884 $71,985 $197,343 $5,230 $ (3,228) $369,214 ============= ============= =========== ============ ============ ============ ============= Disclosure of Reclassification Amount: Unrealized holding gains on available for sale securities arising during the period $ 774 Less: Reclassification adjustment for net gains realized in net income 1,748 ------------- Change in net unrealized gain on available for sale securities, net of tax $ (974) ============= See notes to consolidated unaudited financial statements. 8 CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) UNITED BANKSHARES, INC. AND SUBSIDIARIES (In thousands) Nine Months Ended September 30 ----------------------------- 1998 1997 --------- --------- NET CASH (USED IN) PROVIDED BY OPERATING ACTIVITIES $(332,372) $ 25,109 INVESTING ACTIVITIES Proceeds from maturities and calls of securities held to maturity 47,773 29,783 Proceeds from sales of securities available for sale 26,373 58,542 Proceeds from maturities and calls of securities available for sale 227,803 114,126 Purchases of securities available for sale (181,758) (294,957) Purchases of securities held to maturity (31,482) (27,345) Net purchase of bank premises and equipment (1,926) (3,630) Net cash of acquired branches & subsidiary 56,472 (28,929) Changes in loans 105,492 (40,875) --------- --------- NET CASH PROVIDED BY (USED IN)INVESTING ACTIVITIES 248,747 (193,285) --------- --------- FINANCING ACTIVITIES Cash dividends paid (19,321) (14,745) Pre-merger dividends of pooled company (1,474) (2,074) Acquisition of treasury stock (3,610) (5,793) Proceeds from exercise of stock options 1,935 2,228 Proceeds from sales of treasury stock 654 Proceeds from Federal Home Loan Bank advances 233,323 255,077 Repayment of Federal Home Loan Bank advances (195,598) (280,079) Acquisition of fractional shares (7) Changes in: Deposits 65,523 100,934 Other borrowings (89) Federal funds purchased and securities sold under agreements to repurchase 2,943 75,152 --------- --------- NET CASH PROVIDED BY FINANCING ACTIVITIES 84,279 130,700 --------- --------- INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 654 (37,476) CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 180,864 154,478 --------- --------- CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 181,518 $ 117,002 ========= ========= See notes to consolidated unaudited financial statements. 9 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) UNITED BANKSHARES, INC. AND SUBSIDIARIES 1. GENERAL The accompanying unaudited consolidated interim financial statements of United Bankshares, Inc. and Subsidiaries ("United") have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions for Form 10-Q and Article 10 of Regulation S-X. Accordingly, the financial statements do not contain all of the information and footnotes required by generally accepted accounting principles. The financial statements presented in this report have not been audited. The accounting and reporting policies followed in the presentation of these financial statements are consistent with those applied in the preparation of the 1997 annual report of United Bankshares, Inc. on Form 10-K. In the opinion of management, adjustments necessary for a fair presentation of financial position and results of operations for the interim periods have been made. Such adjustments are of a normal and recurring nature. In June 1996, the FASB issued Statement No. 125, (SFAS No. 125), "Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities," which supersedes SFAS No. 76, "Extinguishment of Debt." SFAS No. 125 prescribes the accounting treatment for securitization transactions based on a financial components approach with an emphasis on physical control, such as the ability to pledge or exchange the securitized assets, while prior rules emphasize the economic risks or rewards of ownership of the assets. Additionally, SFAS No. 125 applies to repurchase agreements, securities lending, loan participations, and other financial component transfers and exchanges, which had been delayed until after December 31, 1997, by FASB Statement No. 127, (SFAS No. 127), "Deferral of the Effective Date of Certain Provisions of FASB Statement No. 125, an amendment of FASB Statement No. 125." Under the financial components approach of SFAS No. 125, both the transferor and transferee will recognize on its balance sheet the assets and liabilities, or components thereof, that it controls and derecognize from the balance sheet the assets and liabilities that were surrendered or extinguished in the transfer. The adoption of the additional provisions of SFAS No. 125, as amended by SFAS No. 127, resulted in no material impact on United's financial condition or results of operations. In June 1997, the FASB issued Statement No. 130, (SFAS No. 130), "Reporting Comprehensive Income." This statement, which is effective for years beginning after December 15, 1997, requires companies to report and display comprehensive income and its components. United has disclosed the components of comprehensive income as outlined by 10 SFAS No. 130 in these financial statements and notes thereto. In June 1997, the FASB issued Statement No. 131, (SFAS No. 131), "Disclosures about Segments of an Enterprise and Related Information." SFAS No. 131 provides guidance for the way public enterprises report information about operating segments in annual financial statements and requires selected information about operating segments in interim financial reports. It also requires certain related disclosures about products and services, geographic areas and major customers. The segment and other information disclosures are required for years beginning after December 15, 1997. United is currently reviewing its methodology used for determining operating segment results. In February 1998, the FASB issued Statement No. 132, "Employers' Disclosures about Pension and Other Postretirement Benefits, an amendment of FASB Statements No. 87, 88 and 106." This statement revises employers' disclosures about pension and other postretirement benefit plans, but does not change the measurement or recognition of those plans. It standardizes the disclosure requirements to the extent practicable, requires additional information on changes in the benefit obligations and fair values of plan assets that will facilitate financial analysis and eliminates certain disclosures that are no longer as useful as they were when Statements No. 87, 88 and 106 were issued. This Statement is effective for fiscal years beginning after December 15, 1997. These disclosure requirements will have no material impact on United's financial position or results of operations. In June 1998, the Financial Accounting Standards Board issued Statement No. 133, "Accounting for Derivative Instruments and Hedging Activities", which is required to be adopted in years beginning after June 15, 1999. Because of United's minimal use of derivatives, management does not anticipate that the adoption of the new Statement will have a significant effect on earnings or the financial position of United. The new rules do not have a material effect on United's financial position and results of operations. 2. BASIS OF PRESENTATION The accompanying consolidated interim financial statements include the accounts of United and its wholly-owned subsidiaries. United considers all of its principal business activities to be bank related. All significant intercompany accounts and transactions have been eliminated in the consolidated financial statements. Dollars are in thousands, except per share and share data. 11 On August 1, 1997, United acquired 100% of the outstanding common stock of First Patriot Bankshares Corporation, Reston, Virginia ("Patriot") for cash consideration of approximately $39.22 million. The transaction was accounted for using the purchase method of accounting and, accordingly, the information included herein includes the financial position and results of operations of Patriot from the effective acquisition date forward. On April 2, 1998, United consummated its merger with George Mason Bankshares, Inc., Fairfax, Virginia ("George Mason") in a common stock exchange accounted for under the pooling of interests method of accounting. United exchanged 1.70 shares of United common stock for each of the 5,277,301 common shares of George Mason or approximately 8,971,412 shares, unadjusted for cash paid in lieu of fractional shares. As of the date of merger, George Mason reported total assets of $1,023,467, total net loans of $600,490, deposits of $839,562 and shareholders' equity of $78,925. All statements and notes thereto have been restated to give effect to the merger of United and George Mason as though they had always been combined. 3. ACQUISITIONS On October 1, 1998, United consummated its merger with Fed One Bancorp, Inc., Wheeling, West Virginia ("Fed One") in a common stock exchange accounted for under the pooling of interests method of accounting. United exchanged 1.50 shares of United common stock for each of the 2,629,538 common shares of Fed One or approximately 3,944,307 shares, unadjusted for cash paid in lieu of fractional shares. As of the date of merger, Fed One reported total assets of $372,782, total net loans of $163,450, deposits of $261,200 and shareholders' equity of $49,757. The following represents unaudited selected pro forma financial information regarding the effects of the transactions as though United and Fed One had been combined for all periods presented: United (In thousands, except per share data) and Fed Fed One United One Pro Forma ---------- --------- --------- For the Nine Months Ended September 30, 1998: Net interest income $117,582 $8,277 $125,859 Net income 36,222 2,087 38,309 Earnings per common share: Basic $ 0.93 $ 0.91 $ 0.90 Diluted $ 0.91 $ 0.86 $ 0.88 12 United and Fed Fed One United One Pro Forma -------- ------- --------- For the Nine Months Ended September 30, 1997: Net interest income $100,717 $ 8,787 $109,504 Net income 36,447 2,442 38,889 Earnings per common share: Basic $ 0.94 $ 1.08 $ 0.93 Diluted $ 0.93 $ 1.03 $ 0.90 For the Year Ended December 31, 1997: Net interest income $137,698 $11,632 $149,330 Net income 49,019 3,242 52,261 Earnings per common share: Basic $ 1.27 $ 1.43 $ 1.24 Diluted $ 1.25 $ 1.36 $ 1.22 4. INVESTMENT SECURITIES The amortized cost and estimated fair values of securities available for sale are summarized as follows: September 30, 1998 -------------------------------------------- Gross Gross Estimated Amortized Unrealized Unrealized Fair Cost Gains Losses Value --------- --------- --------- --------- U.S. Treasury securities and obligations of U.S. Government corporations and agencies $194,839 $ 1,910 $ 15 $196,734 State and political subdivisions 4,769 165 4,934 Mortgage-backed securities 263,239 3,582 227 266,594 Marketable equity securities 8,676 2,857 180 11,353 Other 43,338 45 43,293 -------- --------- --------- --------- Total $514,861 $ 8,514 $467 $522,908 ========= ========= ========= ========= December 31, 1997 -------------------------------------------- Gross Gross Estimated Amortized Unrealized Unrealized Fair Cost Gains Losses Value --------- --------- --------- --------- U.S. Treasury securities and obligations of U.S. Government corporations and agencies $178,973 $ 595 $272 $179,296 State and political subdivisions 4,093 106 4,199 Mortgage-backed securities 379,452 3,099 393 382,158 Marketable equity securities 4,300 6,741 11,041 Other 18,906 80 18,826 --------- --------- --------- --------- Total $585,724 $10,541 $745 $595,520 ========= ========= ========= ========= 13 The cumulative net unrealized holding gain on available for sale securities resulted in an increase to shareholders' equity of $5,230 and $6,204, net of deferred income taxes at September 30, 1998 and December 31, 1997, respectively. The amortized cost and estimated fair value of securities available for sale at September 30, 1998 and December 31, 1997, by contractual maturity are as follows: September 30, 1998 December 31, 1997 -------------------- -------------------- Estimated Estimated Amortized Fair Amortized Fair Cost Value Cost Value --------- --------- --------- --------- Due in one year or less $ 47,179 $ 47,542 $ 42,351 $ 42,794 Due after one year through five years 117,765 119,254 133,994 134,480 Due after five years through ten years 109,834 110,618 135,081 135,561 Due after ten years 231,407 234,141 266,588 268,234 Marketable equity securities 8,676 11,353 7,710 14,451 --------- --------- --------- --------- Total $514,861 $522,908 $585,724 $595,520 ========= ========= ========= ========= The preceding table includes $266,594 and $382,158 of mortgage-backed securities at September 30, 1998 and December 31, 1997, respectively, with an amortized cost of $263,239 and $379,452 at September 30, 1998 and December 31, 1997, respectively. Maturities of mortgage-backed securities are based upon the estimated average life. The amortized cost and estimated fair values of securities held to maturity are summarized as follows: September 30, 1998 -------------------------------------------- Gross Gross Estimated Amortized Unrealized Unrealized Fair Cost Gains Losses Value --------- --------- --------- --------- U.S. Treasury securities and obligations of U.S. Government corporations and agencies $ 91,476 $1,655 $ $ 93,131 State and political subdivisions 68,726 2,839 11 71,554 Mortgage-backed securities 45,680 514 8 46,186 Other 9,452 733 8,719 --------- --------- --------- --------- Total $215,334 $5,008 $752 $219,590 ========= ========= ========= ========= December 31, 1997 -------------------------------------------- Gross Gross Estimated Amortized Unrealized Unrealized Fair Cost Gains Losses Value --------- ---------- ---------- --------- U.S. Treasury securities and obligations of U.S. Government corporations and agencies $ 98,330 $ 570 $ 22 $ 98,878 State and political subdivisions 51,180 2,131 21 53,290 Mortgage-backed securities 74,878 529 169 75,238 Other 6,923 6,923 --------- ---------- ---------- --------- Total $231,311 $3,230 $212 $234,329 ========= ========== ========== ========= 14 The amortized cost and estimated fair value of securities held to maturity at September 30, 1998, and December 31, 1997, by contractual maturity follow. Expected maturities may differ from contractual maturities because the issuers may have the right to call or prepay obligations with or without call or prepayment penalties. September 30, 1998 December 31, 1997 -------------------- -------------------- Estimated Estimated Amortized Fair Amortized Fair Cost Value Cost Value --------- --------- --------- --------- Due in one year or less $ 13,457 $ 13,576 $ 18,825 $ 18,887 Due after one year through five years 56,212 57,356 72,750 73,640 Due after five years through ten years 94,766 97,332 98,335 99,481 Due after ten years 50,899 51,326 41,401 42,321 -------- -------- -------- -------- Total $215,334 $219,590 $231,311 $234,329 ======== ======== ======== ======== Maturities of the mortgage-backed securities are based upon the estimated average life. There were no sales of held to maturity securities. The amortized cost of securities pledged to secure public deposits, securities sold under agreements to repurchase, and for other purposes as required or permitted by law, approximated $381,429 and $415,206 at September 30, 1998 and December 31, 1997, respectively. 5. NONPERFORMING LOANS Nonperforming loans are summarized as follows: September 30 December 31 1998 1997 ------------ ----------- Loans past due 90 days or more and still accruing interest $ 8,595 $12,181 Nonaccrual loans 8,396 5,202 ------------ ----------- Total nonperforming loans $16,991 $17,383 ============ =========== 15 6. ALLOWANCE FOR LOAN LOSSES The adequacy of the allowance for loan losses is based on management's evaluation of the relative risks inherent in the loan portfolio. A progression of the allowance for loan losses for the periods presented is summarized as follows: Three Months Ended Nine Months Ended -------------------- -------------------- September 30 September 30 1998 1997 1998 1997 --------- --------- --------- --------- Balance at beginning of period $35,111 $27,906 $30,455 $27,942 Allowance of purchased subsidiary 2,695 2,695 Provision charged to expense 3,316 1,011 10,623 2,173 --------- --------- --------- --------- 38,427 31,612 41,078 32,810 Loans charged-off (1,250) (1,233) (4,564) (2,722) Less recoveries 193 261 856 552 --------- --------- --------- --------- Net Charge-offs (1,057) (972) (3,708) (2,170) --------- --------- --------- --------- Balance at end of period $37,370 $30,640 $37,370 $30,640 ========= ========= ========= ========= The average recorded investment in impaired loans during the quarter ended September 30, 1998 and for the year ended December 31, 1997 was approximately $10,550 and $12,686, respectively. For the quarters ended September 30, 1998 and 1997, United recognized interest income on the impaired loans of approximately $78 and $283, respectively, substantially all of which was recognized using the accrual method of income recognition. At September 30, 1998, the recorded investment in loans that are considered to be impaired was $9,761 (of which $8,396 were on a nonaccrual basis). Included in this amount is $4,229 of impaired loans for which the related allowance for loan losses is $608 and $5,532 of impaired loans that do not have an allowance for credit losses due to management's estimate that the fair value of the underlying collateral of these loans is sufficient for full repayment of the loan and interest. The amount of interest income which would have been recorded under the original terms for the above loans was $255 and $608 for the three months ended September 30, 1998 and 1997, respectively, and $1,057 and $1,273 for the nine months ended September 30, 1998 and 1997, respectively. 7. COMMITMENTS AND CONTINGENT LIABILITIES United and its subsidiaries are currently involved, in the normal course of business, in various legal proceedings. Management is vigorously pursuing all of its legal and factual defenses and, after consultation with legal counsel, believes that all such litigation will be resolved without material effect on financial position or results of operations. 16 8. EARNING ASSETS AND INTEREST-BEARING LIABILITIES The following table shows the daily average balance of major categories of assets and liabilities for each of the three month periods ended September 30, 1998, and September 30, 1997, with the interest rate earned or paid on such amount. THREE MONTHS ENDED THREE MONTHS ENDED SEPTEMBER 30 SEPTEMBER 30 1998 1997 ----------------------------------- ----------------------------------- (Dollars in Average Avg. Average Avg. Thousands) Balance Interest Rate Balance Interest Rate ASSETS Earning Assets: Federal funds sold and securities purchased under agreements to resell and other short- term investments $ 18,180 $ 278 6.08% $ 25,250 $ 353 5.55% Investment Securities: Taxable 676,311 9,938 5.88% 759,882 12,766 6.72% Tax-exempt (1) 68,856 1,260 7.32% 52,356 1,140 8.71% ----------- --------- --------- ---------- --------- --------- Total securities 745,167 11,198 6.01% 812,238 13,906 6.85% Loans, net of unearned income (1) (2) 2,966,150 66,738 8.96% 2,395,854 51,970 8.68% Allowance for loan losses (35,281) (29,550) ----------- ---------- Net loans 2,930,869 9.07% 2,366,304 8.71% ----------- --------- --------- ---------- --------- --------- Total earning assets 3,694,216 $ 78,214 8.43% 3,203,792 $ 62,229 8.27% ----------- --------- --------- ---------- --------- --------- Other assets 249,256 216,484 ----------- ---------- TOTAL ASSETS $3,943,472 $3,420,276 =========== ========== LIABILITIES Interest-Bearing Funds: Interest-Bearing deposits $2,560,584 $ 29,981 4.65% $2,328,441 $ 26,682 4.55% Federal funds purchased, repurchase agreements and other short-term borrowings 239,739 2,842 4.70 % 225,587 2,517 4.43% FHLB advances 261,391 3,611 5.48% 84,271 1,317 6.20% ----------- --------- --------- ---------- --------- --------- Total Interest-Bearing Funds 3,061,714 36,434 4.72% 2,638,299 30,516 4.59% ----------- --------- --------- --------- --------- Demand deposits 442,984 400,533 Accrued expenses and other 67,679 42,385 ----------- ---------- TOTAL LIABILITIES 3,572,377 3,081,217 Shareholders' Equity 371,095 339,059 ----------- ---------- TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $3,943,472 $3,420,276 =========== ========== NET INTEREST INCOME $ 41,780 $ 35,713 ========= ========= INTEREST SPREAD 3.71% 3.68% NET INTEREST MARGIN 4.52% 4.42% (1) The interest income and the yields on nontaxable loans and investment securities are presented on a tax-equivalent basis using the statutory federal income tax rate of 35%. (2) Nonaccruing loans are included in the daily average loan amounts outstanding. 17 The following table shows the daily average balance of major categories of assets and liabilities for each of the nine month periods ended September 30, 1998, and September 30, 1997, with the interest rate earned or paid on such amount. Three Months Ended Three Months Ended September 30 September 30 1998 1997 ------------------------------------- ------------------------------------- (Dollars in Average Avg. Average Avg. Thousands) Balance Interest Rate Balance Interest Rate ASSETS Earning Assets: Federal funds sold and securities purchased under agreements to resell and other short- term investments $ 18,137 $ 773 5.70% $ 19,254 $ 788 5.47% Investment Securities: Taxable 717,203 33,643 6.25% 685,267 33,817 6.51% Tax-exempt (1) 60,559 3,645 8.03% 54,195 3,589 8.73% ----------- --------- --------- ---------- --------- --------- Total Securities 777,762 37,288 6.39% 739,462 37,406 6.67% Loans, net of unearned income (1) (2) 2,814,230 185,756 8.80% 2,324,539 149,886 8.50% Allowance for loan losses (33,014) (28,456) ----------- ---------- Net loans 2,781,216 8.91% 2,296,083 8.73% ----------- --------- --------- ---------- --------- --------- Total earning assets 3,577,115 $223,817 8.34% 3,054,799 $188,080 8.12% ----------- --------- --------- ---------- --------- --------- Other assets 232,988 197,948 ----------- ---------- TOTAL ASSETS $3,810,103 $3,252,747 =========== ========== LIABILITIES Interest-Bearing Funds: Interest-bearing deposits $2,499,647 $ 86,479 4.63% $2,245,993 $ 75,094 4.47% Federal funds purchased, repurchase agreements and other short-term borrowings 222,939 7,870 4.72% 183,711 6,173 4.49% FHLB advances 218,879 9,061 5.53% 85,210 3,742 5.87% ----------- --------- --------- ---------- --------- --------- Total Interest-Bearing Funds 2,941,465 103,410 4.70% 2,514,914 85,009 4.52% ----------- --------- --------- ---------- --------- --------- Demand deposits 437,386 368,154 Accrued expenses and other liabilities 65,116 38,644 ----------- ---------- TOTAL LIABILITIES 3,443,967 2,921,712 Shareholders' Equity 366,136 331,035 ----------- ---------- TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $3,810,103 $3,252,747 ----------- ---------- NET INTEREST INCOME $120,407 $103,071 ========= ========= INTEREST SPREAD 3.64% 3.60% NET INTEREST MARGIN 4.49% 4.51% (1) The interest income and the yields on nontaxable loans and investment securities are presented on a tax-equivalent basis using the statutory federal income tax rate of 35%. (2) Nonaccruing loans are included in the daily average loan amounts outstanding. 18 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS FORWARD-LOOKING STATEMENTS Congress passed the Private Securities Litigation Act of 1995 to encourage corporations to provide investors with information about the company's anticipated future financial performance, goals, and strategies. The act provides a safe harbor for such disclosure, in other words, protection from unwarranted litigation if actual results are not the same as management expectations. United desires to provide its shareholders with sound information about past performance and future trends. Consequently, any forward-looking statements contained in this report, in a report incorporated by reference to this report, or made by management of United in this report, in any other reports and filings, in press releases and in oral statements, involves numerous assumptions, risks and uncertainties. Actual results could differ materially from those contained in or implied by United's statements for a variety of factors including: changes in economic conditions; movements in interest rates; competitive pressures on product pricing and services; success and timing of business strategies; the nature and extent of governmental actions and reforms; and rapidly changing technology and evolving banking industry standards. INTRODUCTION The following discussion and analysis presents the significant changes in financial condition and the results of operations of United and its subsidiaries for the periods indicated below. This discussion and the consolidated financial statements and the notes to consolidated financial statements include the accounts of United Bankshares, Inc. and its wholly-owned subsidiaries, and reflect the merger of George Mason Bankshares, Inc. (George Mason) on April 2, 1998, under the pooling of interests method of accounting. Accordingly, all prior period financial statements have been restated to include George Mason. United exchanged 1.70 shares of its common stock or 9,024,238 shares of United for each of the 5,308,551 common shares of George Mason. This discussion and analysis should be read in conjunction with the consolidated financial statements and accompanying notes thereto, which are included elsewhere in this document. The following is a broad overview of the financial condition and results of operations and is not intended to replace the more detailed discussion which is presented under specific headings on the following pages. OVERVIEW Net income for the nine months of 1998 was $36.22 million or $0.91 per share compared to $36.45 million or $0.93 per share for the first nine months of 1997. This represents a 0.63% decrease in net income and a 2.15% decrease in earnings per share. The decrease was due to the recognition of approximately $8 million of merger-related charges relating to the second quarter merger with George Mason. One-time charges of approximately $7 million were also incurred to align George Mason's operations and to conform certain policies to those of United and to align certain other operating components within the new organizational structure. Excluding these merger-related and one-time charges, United's core earnings for the first nine months of 1998 were $1.11 per share. United's annualized return on average assets was 1.27% and return on average shareholders' equity was 13.23% as compared to 1.50% and 14.77% for 1997, respectively. United has strong core earnings driven by a net interest margin of 4.49% for the first three quarters of 1998. Net interest income increased by $16.87 million or 16.74% for the first nine months of 1998 as compared to the same period for 1997. The provision for loan losses increased $8.45 million or 388.86% when comparing the first nine months of 1998 to the first nine months of 1997. Noninterest income, including income from mortgage banking operations and securities gains, increased $11.88 million or 44.26% for the first nine months of 1998 when compared to the first nine months of 1997. Noninterest expenses increased $25.13 million or 35.69% for the first nine months compared to the same period in 1997. 19 Total assets were $3.92 billion at September 30, 1998, up $194.21 million or 5.21% compared with year-end, and up 10.47% from September 30, 1997. Loans, net of unearned income, reflected a $288.21 million increase while investment securities reflected an $88.59 million decrease for the first nine months of 1998 as compared with year-end 1997 as those funds continue to fund strong loan growth. All other categories of assets were moderately flat compared to year- end 1997. Total deposits grew $135.18 million or 4.62% from year-end due to United's continued offering of new deposit products. Since December 31, 1997, United has realized an increase of $177.07 million in interest-bearing deposits while demand deposits have declined by $41.88 million. United's short-term borrowings increased $2.85 million while its FHLB borrowings increased $37.73 million as United utilized the increased borrowing to fund loan growth. Accrued expenses and other liabilities have increased $4.71 million since year-end 1997 primarily as a result of increased accrued interest payable due to the higher volume of interest-bearing deposits and borrowed funds as well as the previously mentioned George Mason merger-related charges. Shareholders' equity increased $13.74 million or 3.87% as compared with December 31, 1997. United continues to maintain an appropriate balance between capital adequacy and return to shareholders. At September 30, 1998, United's regulatory capital ratios, including those of its bank subsidiaries, exceeded the levels established for well-capitalized institutions. RESULTS OF OPERATIONS NET INTEREST INCOME Net interest income increased $5.92 million or 16.94% in the third quarter of 1998 and $16.87 million or 16.74% for the first nine months of 1998, when compared to the same periods of 1997. The net interest margin continues to drive United's core profitability and momentum. The increases were primarily attributable to higher levels of average earning assets of $490.42 million for the third quarter of 1998 and $522.32 million for the first nine months of 1998, when compared to the third quarter and first nine months of 1997, respectively. United's tax-equivalent net interest margin was 4.52% and 4.49% for the third quarter and first nine months of 1998, respectively. For the quarter ended September 30, 1998, United's net interest margin was 2 basis points higher than the immediately preceding quarter, and 10 basis points higher than the third quarter of 1997. The higher net interest margin from one year ago was the result of an increased average loan portfolio at higher rates offset by a smaller increase in the average deposit and wholesale funding balances with a lower increase in the costs of funding. PROVISION FOR LOAN LOSSES For the quarters ended September 30, 1998 and 1997, the provision for loan losses was $3.32 million and $1.01 million, respectively, while the first nine months provisions were $10.62 million for 1998 as compared to $2.17 million for 1997. The increase in provision expense over last year's amounts is due to the trend of increased net charge-offs, certain increases in commercial nonaccrual loans, as well as anticipated 20 increased consumer delinquency in light of projected economic conditions. The allowance for loan losses as a percentage of loans, net of unearned income, approximated 1.29% at September 30, 1998 and 1.17% at December 31, 1997, and 1.24% at September 30, 1997. Charge-offs exceeded recoveries during the third quarter of 1998 and 1997 and resulted in net charge-offs of $1.06 million and $972 thousand, respectively. Charge-offs exceeded recoveries by $3.71 million for the first nine months of 1998 as compared to net charge-offs of $2.17 million for the first nine months of 1997. Note 6 to the accompanying unaudited consolidated financial statements provides a progression of the allowance for loan losses. United's sound credit quality, as compared to peers, is evidenced by the low level of nonperforming assets at September 30, 1998. Nonperforming loans decreased $392 thousand or 2.26% to $16.99 million at September 30, 1998 compared to $17.38 million at year-end 1997. Nonperforming loans, as a percentage of loans, net of unearned income, decreased from 0.67% to 0.59% when comparing these two respective periods. The components of nonperforming loans include nonaccrual loans and loans which are contractually past due 90 days or more as to interest or principal, but have not been put on a nonaccrual basis. Loans past due 90 days or more decreased $3.59 million or 29.44% during the first nine of 1998 and nonaccrual loans increased $3.19 million or 61.40% since year-end 1997. Total nonperforming assets of $20.92 million, including OREO of $3.93 million at September 30, 1998, represented 0.53% of total assets, which was equal to the ratio at December 31, 1997. As of September 30, 1998, the ratio of the allowance for loan losses to nonperforming loans was 219.9% as compared to 175.2% as of December 31, 1997. Management believes that the allowance for loan losses of $37.37 million as of September 30, 1998, is adequate to provide for potential losses on existing loans based on information currently available. United evaluates the adequacy of the allowance for loan losses on a quarterly basis. The provision for loan losses charged to operations is based on management's evaluation of individual credits, the past loan loss experience, and other factors which, in management's judgment, deserve recognition in estimating loan losses. Such other factors considered by management, among other things, included growth and composition of the loan portfolio, known deterioration in certain classes of loans or collateral, trends in delinquencies, and current economic conditions. United's loan administration policies are focused upon the risk characteristics of the loan portfolio, both in terms of loan approval and credit quality. OTHER INCOME Other income consists of all revenues which are not included in interest and fee income related to earning assets. Noninterest income has been and will continue to be an important factor for improving United's profitability. Recognizing the importance, management continues to evaluate areas where noninterest income can be enhanced. Noninterest income increased $1.99 million or 17.72% for the third quarter of 1998 when compared to the third quarter of 1997. Additionally, the $38.72 million of noninterest income for the first nine months of 1998, reflects an increase of $11.88 million or 44.26% over the first nine months of 1997. Excluding income from mortgage banking operations and 21 investment securities transactions, noninterest income increased $142 thousand or 2.36% for the third quarter and $1.98 million or 12.53% for the first nine months of 1998. The overall increase in noninterest income for the first nine months of 1998 was primarily due to a combination of a $7.25 million or 65.98% increase in income from mortgage banking operations and a $2.49 million recognized gain on an available for sale equity security exchanged in an unaffiliated merger transaction consummated at the end of the first quarter of 1998, with increases in the categories of return check charges, bankcard income and brokerage and trust department commissions as a result of increased transactions in those areas. OTHER EXPENSES Just as management continues to evaluate areas where noninterest income can be enhanced, it strives to improve the efficiency of its operations to reduce costs. Other expenses include all items of expense other than interest expense, the provision for loan losses, and income taxes. Other expenses increased $2.87 million or 10.92% and $25.13 million or 35.69% for the quarter and nine months ended September 30, 1998, as compared to the same periods in 1997. These increases resulted primarily from the third quarter 1997 acquisition of First Patriot Bankshares Corporation and previously mentioned George Mason merger- related charges recognized during the second quarter of 1998. These charges consisted primarily of employee benefits, severance, facilities and conversion costs to effect the merger. Total salaries and benefits increased by 16.69% or $2.16 million and 34.15% or $12.10 million for the third quarter and first nine months of 1998 when compared to the same periods of 1997. The higher salaries and benefits costs for 1998 were attributable to commissions and salaries expense at United's mortgage banking subsidiaries due to increased volume of mortgage loans originated during the year for sale in the secondary market as well as severance and benefit pay of displaced employees in the George Mason merger. Net occupancy expense decreased $765 thousand or 21.07% for the third quarter of 1998 when compared to the third quarter of 1997 due to the ongoing consolidation of common banking offices from United's recent mergers and acquisitions. For the nine months ended September 30, 1998, net occupancy expense remained relatively flat with only a $383 thousand or 4.31% increase over the first nine months of 1997. Other expenses increased $1.48 million or 15.20% and $12.65 million or 48.48% for the third quarter and first nine months of 1998, respectively, as compared to the same periods of 1997. This overall increase was primarily due to the aforementioned merger-related expenses associated with the George Mason merger and United's third quarter 1997 purchase acquisition of Patriot. MARKET RISK The objective of United's Asset/Liability Management function is to maintain consistent growth in net interest income within United's policy guidelines. This objective is accomplished through the management of 22 balance sheet liquidity and interest rate risk exposures due to changes in economic condition, interest rate levels and customer preferences. Management considers interest rate risk to be United's most significant market risk. Interest rate risk is the exposure to adverse changes in the net interest income of United as a result of changes in interest rates. Consistency in United's earnings is largely dependent on the effective management of interest rate risk. United employs a variety of measurement techniques to identify and manage its exposure to changing interest rates. One such technique utilizes an earnings simulation model to analyze net interest income sensitivity to movements in interest rates. The model is based on actual cash flows and repricing characteristics for on and off-balance sheet instruments and incorporates market-based assumptions regarding the impact of changing interest rates on the prepayment rate of certain assets and liabilities. The model also includes executive management projections for activity levels in product lines offered by United. Assumptions based on the historical behavior of deposit rates and balances in relation to changes in interest rates are also incorporated into the model. These assumptions are inherently uncertain and, as a result, the model cannot precisely measure net interest income or precisely predict the impact of fluctuations in interest rates on net interest income. Actual results will differ from simulated results due to timing, magnitude and frequency of interest rate changes as well as changes in market conditions and management strategies. Interest sensitive assets and liabilities are defined as those assets or liabilities that mature or are repriced within a designated time-frame. The principal function of interest rate risk management is to maintain an appropriate relationship between those assets and liabilities that are sensitive to changing market interest rates. The difference between rate sensitive assets and rate sensitive liabilities for specified periods of time is known as the "GAP." United closely monitors the sensitivity of its assets and liabilities on an on-going basis and projects the effect of various interest rate changes on its net interest margin. As shown in the interest rate sensitivity gap table in this section, United was liability sensitive (excess of liabilities over assets) in the one year horizon. On the surface, this would indicate that rising market interest rates would reduce United's earnings and declining market interest rates would increase earnings. United, however, has not experienced the kind of earnings volatility indicated from the cumulative gap. This is because a significant portion of United's retail deposit base does not reprice on a contractual basis. Management has estimated, based upon historical analyses, that United's savings deposits are less sensitive to interest rate changes than are other forms of deposits. The GAP table presented herein has been adapted to show the estimated differences in interest rate sensitivity which result when the retail deposit base is assumed to reprice in a manner consistent with historical trends. (See "Management Adjustments" in the GAP table). Using these estimates, United was asset sensitive in the one year horizon in the amount of $394,379,000 or 10.60% of the cumulative gap to related earning assets. 23 To aid in interest rate management, United's subsidiary banks are members of the Federal Home Loan Bank (FHLB). The use of FHLB advances provides United with a low risk means of matching maturities of earning assets and interest-bearing funds to achieve a desired interest rate spread over the life of the earning assets. Interest rate risk management focuses on maintaining consistent growth in net interest income within Board-approved policy limits. United's Asset/Liability Management Committee (ALCO), which includes senior management representatives and reports to the Board of Directors, monitors and manages interest rate risk to maintain an acceptable level of change to net interest income as a result of changes in interest rates. Policy established for interest rate risk is stated in terms of the change in net interest income over a twelve month horizon given an immediate and sustained increase or decrease in interest rates. The current limits approved by the Board of Directors are plus or minus 10% for each 100 basis point increase or decrease in interest rates. The following table shows United's estimated earnings sensitivity profile after management's adjustments as of September 30, 1998: Change in Interest Rates Percentage Change in (basis points) Net Interest Income -------------- --------------------- +200 3.40% -200 -3.74% Given an immediate, sustained 200 basis point upward shock to the yield curve used in the simulation model, it is estimated net interest income for United would increase by 3.40% over one year. A 200 basis point immediate, sustained downward shock in the yield curve would decrease net interest income by an estimated 3.74% over one year. All of these estimated changes in net interest income are within the policy guidelines established by the Board of Directors. 24 The following table shows the interest rate sensitivity GAP as of September 30, 1998: INTEREST RATE SENSITIVITY GAP DAYS ---------------------------------- TOTAL 1 - 5 OVER 5 0 - 90 91 - 180 181 - 365 ONE YEAR YEARS YEARS TOTAL ---------- --------- ---------- ---------- --------- --------- ---------- (IN THOUSANDS) ASSETS Interest-Earning Assets: Federal funds sold and securities purchased under agreements to resell and other short- term investments $ 87,608 $ 87,608 $ 87,608 Investment and Marketable Equity Securities: Taxable 14,063 $ 20,872 $ 22,196 57,131 $163,840 $ 443,611 664,582 Tax-exempt 3,868 3,868 11,626 58,166 73,660 Loans, net of unearned income 1,299,243 176,531 327,089 1,802,863 747,176 345,579 2,895,618 ---------- --------- ---------- ---------- -------- --------- ---------- Total Interest-Earning Assets $1,400,914 $ 197,403 $ 353,153 $1,951,470 $922,642 $ 847,356 $3,721,468 ========== ========= ========== ========== ======== ========= ========== LIABILITIES Interest-Bearing Funds: Savings and NOW accounts $1,044,408 $1,044,408 $1,044,408 Time deposits of $100,000 & over 82,764 $ 33,022 $ 91,507 207,293 $ 73,594 $ 834 281,721 Other time deposits 274,907 244,700 346,165 865,772 414,600 2,881 1,283,253 Federal funds purchased, repurchase agreements and other borrowings 233,500 233,500 33 233,533 FHLB advances 500 500 1,000 91,500 110,920 203,420 ---------- --------- ---------- ---------- -------- --------- ---------- Total Interest-Bearing Funds $1,635,579 $ 278,222 $ 438,172 $2,351,973 $579,695 $ 114,667 $3,046,335 ========== ========= ========== ========== ======== ========= ========== Interest Sensitivity Gap $ (234,665) $ (80,819) $ (85,019) $ (400,503) $342,947 $ 732,689 $ 675,133 ========== ========= ========== ========== ======== ========= ========== Cumulative Gap $ (234,665) $(315,484) $ (400,503) $ (400,503) $(57,556) $ 675,133 $ 675,133 ========== ========= ========== ========== ======== ========= ========== Cumulative Gap as a Percentage of Total Earning Assets -6.31% -8.48% -10.76% -10.76% -1.55% 18.14% 18.14% Management Adjustments 993,603 (66,273) (132,447) 794,882 (794,882) 0 Off-Balance Sheet Activities ---------- --------- ---------- ---------- -------- --------- ---------- Cumulative Management Adjusted Gap and Off-Balance Sheet Activities $ 758,938 $ 611,845 $ 394,379 $ 394,379 $(57,556) $ 675,133 $ 675,133 ========== ========= ========== ========== ======== ========= ========== Cumulative Management Adjusted Gap and Off-Balance Sheet Activities as a Percentage of Total Earning Assets 20.39% 16.44% 10.60% 10.60% -1.55% 18.14% 18.14% 25 LIQUIDITY AND CAPITAL RESOURCES United maintains, in the opinion of management, liquidity which is sufficient to satisfy its depositors' requirements and the credit needs of its customers. Like all banks, United depends upon its ability to renew maturing deposits and other liabilities on a daily basis and to acquire new funds in a variety of markets. A significant source of funds available to United is "core deposits." Core deposits include certain demand deposits, statement and special savings and NOW accounts. These deposits are relatively stable and they are the lowest cost source of funds available to United. Short-term borrowings have also been a significant source of funds. These include federal funds purchased and securities sold under agreements to repurchase. Repurchase agreements represent funds which are obtained as the result of a competitive bidding process. Liquid assets are cash and those items readily convertible to cash. All banks must maintain sufficient balances of cash and near-cash items to meet the day- to-day demands of customers. Other than cash and due from banks, the available for sale securities portfolio, loans held for sale and maturing loans and investments are the primary sources of liquidity. The goal of liquidity management is to ensure the ability to access funding which enables United to efficiently satisfy the cash flow requirements of depositors and borrowers and meet United's cash needs. Liquidity is managed by monitoring funds availability from a number of primary sources. Substantial funding is available from cash and cash equivalents, unused short-term borrowing and a geographically dispersed network of subsidiary banks providing access to a diversified and substantial retail deposit market. Short-term needs can be met through a wide array of sources such as correspondent and downstream correspondent federal funds and utilization of Federal Home Loan Bank advances. Other sources of liquidity available to United to provide long-term as well as short-term funding alternatives, in addition to FHLB advances, are long-term certificates of deposit, lines of credit, and borrowings that are secured by bank premises or stock of United's subsidiaries. United has no intention at this time to utilize any long-term funding sources other than FHLB advances and long- term certificate of deposits for funding in the normal course of business. For the nine months ended September 30, 1998, United used $332.37 million of cash for operations. Cash used for operations for the nine months ended September 30, 1998, included, among other things, an increase of approximately $367 million in loans held for sale. During the same period, net cash of $248.75 million was provided by investing activities which was primarily due to $88.71 million of excess proceeds from sales and maturities of securities over purchases and $105.49 million of net repayments over originations in the loan portfolio. During the first nine months of 1998 net cash of $84.28 million was provided by financing activities, primarily due to an increase in deposits of $65.52 million as well as net FHLB advances of approximately $37.73 million and a $2.94 increase in other short-term borrowings. These amounts were offset by payment of approximately $19.32 million in 26 cash dividends and $3.61 million repurchase of treasury stock for United's employee benefit plans. The net effect of this activity was a increase in cash and cash equivalents of $654 thousand for the first nine months of 1998. United anticipates no difficulty in meeting its obligations over the next 12 months and has no material commitments for capital expenditures. There are no known trends, demands, commitments, or events that will result in or that are reasonably likely to result in United's liquidity increasing or decreasing in any material way. United also has significant lines of credit available. The Asset and Liability Committee monitors liquidity to ascertain that a strong liquidity position is maintained. In addition, variable rate loans are a priority. These policies help to protect net interest income against fluctuations in interest rates. No changes are anticipated in the policies of United's Asset and Liability Committee. INCOME TAXES Income tax expense for the three months ended September 30, 1998 and 1997 was $6.00 million and $6.45 million, respectively. Income tax expense for the nine months ended September 30, 1998 and 1997 was $13.93 million and $18.54 million, respectively. The decrease between the periods compared was primarily the result of certain strategic income tax initiatives implemented in the second quarter of 1998 that reduced the effective tax rate for 1998 from 35% to approximately 28%. In future years (beyond 1998) the estimated effective tax rate is expected to return to 35%. CAPITAL Total shareholders' equity increased $13.74 million to $369.21 million, which is an increase of 3.87% from December 31, 1997. United's equity to assets ratio was 9.41% at September 30, 1998 and 9.54 at December 31, 1997. Capital and reserves to total assets was 10.37% at September 30, 1998 and 10.35% at December 31, 1997. Cash dividends of $0.19 per common share for the third quarter of 1998 and $0.545 for the nine month period ended September 30, 1998, represent increases of 11.76% and 9.00%, respectively, over the $.17 paid for third quarter of 1997 and $0.50 paid for the first nine months of 1997. Total cash dividends paid were approximately $7.44 million for the third quarter of 1998 and $19.72 million for the first nine months of 1998, an increase of 46.21% and 31.65% over the comparable periods of 1997. United seeks to maintain a proper relationship between capital and total assets to support growth and sustain earnings. United's average equity to average assets ratio was 9.41% at September 30, 1998 and 9.91% at September 30, 1997. United's risk-based capital ratios of 12.63% at September 30, 1998 and 13.35% at December 31, 1997, are both significantly higher than the minimum regulatory requirements. United's tier I capital and leverage ratios of 11.38% and 8.15%, respectively, at September 30, 1998, are also well above regulatory minimum requirements. 27 YEAR 2000 ISSUE The Year 2000 Issue is the result of computer programs being written using two digits rather than four to define the applicable year. Any of a company's hardware, date-driven automated equipment or computer programs that have time- sensitive software may recognize a date using "00" as the year 1900 rather than the year 2000. This faulty recognition could result in a system failure or miscalculations causing disruptions of operations, including, among other things, a temporary inability to process transactions, send invoices or engage in similar normal business activities. United's plan to resolve the Year 2000 Issue involves the following four phases: assessment, remediation, testing and implementation. To date United has fully completed the assessment of all information technology and non-information technology systems that could be significantly affected by the Year 2000 Issue and anticipates that its internal remediation and testing phases will be completed by December 31, 1998. Its external remediation and testing phases being performed by United's primary data processor will be completed by June 30, 1999. The completed assessment indicated that most of United's significant information technology systems could be affected. That assessment also indicated that software and hardware used in the operating equipment also are at risk. Based on its assessments, United determined that it will be required to modify or replace approximately 40% of its hardware and certain software so that those systems will properly utilize dates beyond December 31, 1999. United presently believes that with modifications or replacements of existing software and certain hardware, the Year 2000 Issue can be mitigated. However, if such modifications and replacements are not made, or are not completed timely, the Year 2000 Issue could have a material impact on United's operations. United has initiated formal communications with all of its significant suppliers and customers to determine the extent to which United's interface systems are vulnerable to those third parties' failure to remediate their own Year 2000 Issues. United's total Year 2000 project costs and estimates to complete include the estimated costs and time associated with the impact of third party Year 2000 Issues based on presently available information. However, there can be no guarantee that the systems and applications of other companies on which United's systems rely will be timely converted or that a failure to convert by another company, or a conversion that is incompatible with United's systems and applications, would not have a material adverse effect on United. To date, United has obtained information about the Year 2000 compliance status of all of its significant suppliers and vendors, except for two vendors classified as having "Mission Critical" systems. To date, United is not aware of any external agent with a Year 2000 Issue that would materially impact United's results of operations, liquidity or capital resources. United continues to monitor their compliance as well as maintaining contact with the two vendors who have not responded to date. United is utilizing both internal and external resources to reprogram, or replace, and test the Year 2000 modifications. United anticipates completion of the remediation and testing phases of the Year 2000 project to be completed by June 30, 1999, which is prior to any anticipated impact on United's operating systems. United expects to 28 complete its implementation phase by mid 1999 with all information technology systems and all non-information technology systems expected to be compliant by September 30, 1999. The total cost of the Year 2000 project is estimated at $3 million and is being funded through cash flows. The Year 2000 costs are not expected to have a material adverse effect on United's results of operations or cash flows. To date, United has incurred approximately $1.8 million of expense and capitalizable costs related to the assessment of, and preliminary efforts in connection with, the Year 2000 project and the development of a Year 2000 plan of operation. The costs of the Year 2000 project and the date on which United believes it will complete the Year 2000 modifications are based on management's best estimates, which were derived utilizing numerous assumptions of future events, including the continued availability of certain resources, third party vendor modification plans and other factors. There can be no guarantee, however, that these estimates will be achieved and actual results could differ materially from those anticipated. Specific factors that might cause such material differences include, but are not limited to, the availability and cost of trained programming personnel, the ability to locate and correct all relevant computer coding, and similar uncertainties. Until the Year 2000 event actually occurs and for a period of time thereafter, there can be no assurance that there will be no problem related to the Year 2000 Issue. The Year 2000 technology challenge is an unprecedented event. If Year 2000 issues are not adequately addressed by United and third parties, United could face, among other things, business disruptions, operational problems, financial losses, legal liability and similar risks, and United's business, operations, and financial position could be materially, adversely affected. United is developing contingency plans for implementation in the event that mission critical third party vendors or other third parties fail to adequately address Year 2000 issues. Such plans principally involve internal remediation or identifying alternate vendors. There can be no assurance that any such plans will fully mitigate any such failures or problems. The costs of the Year 2000 project and the schedule for achieving compliance are based on management's best estimates, which were derived using numerous assumptions of future events such as the availability of certain resources (including appropriately trained personnel and other internal and external resources), third party vendor plans and other factors. However, there can be no guarantee that these estimates will be achieved at the cost disclosed or within the timeframes indicated, and actual results could differ materially from those anticipated. Factors that might cause such material differences include, but are not limited to: the availability and cost of personnel trained in this area; the ability to identify and convert all relevant systems; results of Year 2000 testing; adequate resolution of Year 2000 issues by governmental agencies, businesses or other third parties that are service providers, suppliers, borrowers or customers of United; unanticipated system costs; the need to replace hardware; the adequacy of and ability to implement contingency plans; and similar uncertainties. 29