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 June 30, 1996
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; 15,150,422 shares outstanding as of July
31, 1996.
UNITED BANKSHARES, INC. AND SUBSIDIARIES
FORM 10-Q
TABLE OF CONTENTS
Page
----
PART I. FINANCIAL INFORMATION
- ------------------------------
Item 1. Financial Statements
- --------------------------------------------------------------------------------
Consolidated Balance Sheets (Unaudited)
June 30, 1996 and December 31, 1995 ................................... 6
Consolidated Statements of Income (Unaudited) for the
Three and Six Months Ended June 30, 1996 and 1995 ..................... 7
Consolidated Statement of Changes in Shareholders' Equity
(Unaudited) for the Six Months Ended June 30, 1996 .................... 8
Condensed Consolidated Statements of Cash Flows (Unaudited)
for the Six Months Ended June 30, 1996 and 1995 ....................... 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............................ 20
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
- ---------------------------------------
2
UNITED BANKSHARES, INC. AND SUBSIDIARIES
FORM 10-Q
TABLE OF CONTENTS--Continued
Page
----
Item 4. Submission of Matters to a Vote of Security Holders
The following matters were submitted to a vote of security holders at the Annual
Meeting of Shareholders of the Registrant held on Monday, May 20, 1996:
(1) To approve, ratify and confirm the 1996 Incentive Stock Option Plan that
was approved by the Board of Directors of the Registrant at the regular November
1995 meeting. There were 9,043,534 affirmative votes cast, 10,970 negative
votes and 123,963 abstaining votes.
(2) Not applicable as to election of directors because; I) proxies for the
meeting were solicited pursuant to Regulation 14 under the Securities and
Exchange Act of 1934; ii) there was no solicitation in opposition to the
nominees as listed in the proxy statement; iii) all of such nominees, as listed
in the proxy statement, were elected.
- --------------------------------------------------------------------------------
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
(b) Reports on Form 8-K - On April 26, 1996, United Bankshares, Inc.
announced the consummation of the merger with Eagle Bancorp, 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 August 12, 1996 /s/ Richard M. Adams
--------------------- ---------------------------
Richard M. Adams, Chairman of
the Board and Chief Executive
Officer
Date August 12, 1996 /s/ Steven E. Wilson
--------------------- ---------------------------
Steven E. Wilson, Executive
Vice President, Treasurer and
Chief Financial Officer
4
PART I
FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS (UNAUDITED)
The June 30, 1996 and December 31, 1995, consolidated balance sheets of United
Bankshares, Inc. and Subsidiaries, and the related consolidated statements of
income for the three and six months ended June 30, 1996 and 1995, and the
related consolidated statement of changes in shareholders' equity for the six
months ended June 30, 1996, and the related condensed consolidated statements of
cash flows for the six months ended June 30, 1996 and 1995, and the notes to
consolidated financial statements, all of which have been restated to reflect
the merger of Eagle Bancorp, Inc. on April 12, 1996, under the pooling of
interests method of accounting, appear on the following pages.
5
CONSOLIDATED BALANCE SHEETS(UNAUDITED)
UNITED BANKSHARES, INC. AND SUBSIDIARIES
June 30 December 31
1996 1995
--------------- ---------------
ASSETS
Cash and due from banks $ 73,137,000 $ 85,864,000
Interest-bearing deposits with other banks 13,113,000
-------------- --------------
Total cash and cash equivalents 73,137,000 98,977,000
Securities available for sale at estimated
fair value (amortized cost-$179,361,000
at June 30, 1996 and $196,966,000 at
December 31, 1995) 179,013,000 199,130,000
Securities held to maturity(estimated fair
value -$172,774,000 at June 30, 1996
and $123,579,000 at December 31, 1995) 173,938,000 121,889,000
Loans
Commercial, financial, and agricultural 243,183,000 226,939,000
Real estate:
Single family residential 909,152,000 906,141,000
Commercial 332,214,000 334,791,000
Construction 29,768,000 26,225,000
Other 13,512,000 14,056,000
Installment 229,402,000 229,457,000
Loans held for sale at estimated fair value 38,254,000 345,000
-------------- --------------
1,795,485,000 1,737,954,000
Less: Unearned income (4,949,000) (4,968,000)
-------------- --------------
Loans, net of unearned income 1,790,536,000 1,732,986,000
Less: Allowance for loan losses (22,723,000) (22,545,000)
-------------- --------------
Net loans 1,767,813,000 1,710,441,000
Bank premises and equipment 34,181,000 34,766,000
Interest receivable 11,666,000 13,793,000
Other assets 36,149,000 31,234,000
-------------- --------------
TOTAL ASSETS $2,275,897,000 $2,210,230,000
============== ==============
LIABILITIES
Domestic deposits
Noninterest-bearing $ 250,007,000 $ 252,627,000
Interest-bearing 1,513,727,000 1,521,972,000
-------------- --------------
TOTAL DEPOSITS 1,763,734,000 1,774,599,000
Short-term borrowings
Federal funds purchased 42,984,000 26,378,000
Securities sold under agreements to
repurchase 62,970,000 55,789,000
Federal Home Loan Bank borrowings 124,589,000 75,497,000
Accrued expenses and other liabilities 33,875,000 28,733,000
-------------- --------------
TOTAL LIABILITIES 2,028,152,000 1,960,996,000
SHAREHOLDERS' EQUITY
Common stock, $2.50 par value;
Authorized-20,000,000 shares; issued and
outstanding-15,295,192 at June 30, 1996 and
15,295,275 at December 31, 1995, including
148,270 and 140,520 shares in treasury at
June 30, 1996 and December 31, 1995,
respectively 38,238,000 38,238,000
Surplus 41,639,000 41,861,000
Retained earnings 171,927,000 171,256,000
Net unrealized holding (loss)/gain on
securities available for sale (226,000) 1,409,000
Treasury stock (3,833,000) (3,530,000)
-------------- --------------
TOTAL SHAREHOLDERS' EQUITY 247,745,000 249,234,000
-------------- --------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $2,275,897,000 $2,210,230,000
============== ==============
See notes to consolidated financial statements.
6
CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
UNITED BANKSHARES, INC. AND SUBSIDIARIES
Three Months Ended Six Months Ended
June 30 June 30
-------------------------- --------------------------
1996 1995 1996 1995
------------ ------------ ------------ ------------
INTEREST INCOME
Interest and fees on loans $36,716,000 $35,596,000 $74,008,000 $70,319,000
Interest on federal funds sold 15,000 120,000 69,000 357,000
Interest and dividends on securities:
Taxable 4,169,000 4,707,000 8,222,000 9,523,000
Exempt from federal taxes 566,000 779,000 1,194,000 1,616,000
Other interest income 61,000 159,000 222,000 277,000
----------- ----------- ----------- -----------
TOTAL INTEREST INCOME 41,527,000 41,361,000 83,715,000 82,092,000
----------- ----------- ----------- -----------
INTEREST EXPENSE
Interest on deposits 15,745,000 15,748,000 31,543,000 29,947,000
Interest on short-term borrowings 901,000 1,005,000 1,825,000 1,853,000
Interest on Federal Home Loan
Bank borrowings 790,000 964,000 1,765,000 2,600,000
----------- ----------- ----------- -----------
TOTAL INTEREST EXPENSE 17,436,000 17,717,000 35,133,000 34,400,000
----------- ----------- ----------- -----------
NET INTEREST INCOME 24,091,000 23,644,000 48,582,000 47,692,000
PROVISION FOR POSSIBLE LOAN LOSSES 949,000 535,000 1,560,000 1,055,000
----------- ----------- ----------- -----------
NET INTEREST INCOME AFTER PROVISION
FOR POSSIBLE LOAN LOSSES 23,142,000 23,109,000 47,022,000 46,637,000
----------- ----------- ----------- -----------
OTHER INCOME
Trust department income 779,000 794,000 1,574,000 1,573,000
Other charges, commissions, and fees 2,836,000 2,467,000 5,436,000 4,818,000
Other income 124,000 234,000 252,000 505,000
Loss on sales of securities (48,000) (48,000)
(Loss)/gain on sales of loans (1,963,000) 288,000 (1,905,000) 322,000
----------- ----------- ----------- -----------
TOTAL OTHER INCOME 1,728,000 3,783,000 5,309,000 7,218,000
----------- ----------- ----------- -----------
OTHER EXPENSES
Salaries and employee benefits 8,115,000 6,454,000 14,841,000 12,994,000
Net occupancy expense 1,683,000 1,428,000 3,061,000 2,772,000
Other expense 8,394,000 6,190,000 15,102,000 12,906,000
----------- ----------- ----------- -----------
TOTAL OTHER EXPENSES 18,192,000 14,072,000 33,004,000 28,672,000
----------- ----------- ----------- -----------
INCOME BEFORE INCOME TAXES 6,678,000 12,820,000 19,327,000 25,183,000
INCOME TAXES 5,414,000 4,372,000 9,974,000 8,570,000
----------- ----------- ----------- -----------
NET INCOME $ 1,264,000 $ 8,448,000 $ 9,353,000 $16,613,000
=========== =========== =========== ===========
Earnings per common share $0.08 $0.56 $0.61 $1.11
=========== =========== =========== ===========
Dividends per share $0.31 $0.29 $0.61 $0.58
=========== =========== =========== ===========
Average outstanding shares 15,222,654 15,036,070 15,229,246 15,027,731
=========== =========== =========== ===========
See notes to consolidated financial statements.
7
CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY(UNAUDITED)
UNITED BANKSHARES, INC. AND SUBSIDIARIES
Six Months Ended June 30, 1996
------------------------------------------------------------------------------------------------
Net
Unrealized
Holding Gain
Common Stock (Loss) on
------------------------- Securities Total
Par Retained Available Treasury Shareholders'
Shares Value Surplus Earnings for Sale Stock Equity
----------- ------------ ----------- ------------- ----------- ------------ --------------
Balance at
January 1, 1996 15,295,275 $38,238,000 $41,861,000 $171,256,000 $1,409,000 ($3,530,000) $249,234,000
Net income 9,353,000 9,353,000
Cash dividends
($.61 per share) (8,300,000) (8,300,000)
Cash dividends of
acquired banks (382,000) (382,000)
Net change in
unrealized gain
on securities
available for sale (1,635,000) (1,635,000)
Purchase of treasury
stock (829,000) (829,000)
Common stock options
exercised (220,000) 526,000 306,000
Fractional shares
adjustment (83) (2,000) (2,000)
---------- ----------- ----------- ------------ ---------- ----------- -------------
Balance at
June 30, 1996 15,295,192 $38,238,000 $41,639,000 $171,927,000 $ (226,000) ($3,833,000) $247,745,000
========== =========== =========== ============ ========== =========== =============
See notes to consolidated financial statements
8
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
UNITED BANKSHARES, INC. AND SUBSIDIARIES
Six Months Ended
June 30
----------------------------
1996 1995
------------ -------------
NET CASH PROVIDED BY OPERATING ACTIVITIES $ 10,499,000 $ 18,964,000
INVESTING ACTIVITIES
Proceeds from maturities and calls of
securities held to maturity 11,350,000 14,438,000
Proceeds from sales of securities
available for sale 50,076,000
Proceeds from maturities and calls of
securities available for sale 49,362,000 28,782,000
Purchases of securities available for sale (81,662,000) (9,735,000)
Purchases of securities held to maturity (63,375,000) (2,511,000)
Proceeds from sales of loans 19,720,000
Net purchase of bank premises and equipment (841,000) (1,227,000)
Changes in:
Loans (54,171,000) (37,169,000)
------------ -------------
NET CASH (USED IN) PROVIDED BY INVESTING ACTIVITIES (89,261,000) 12,298,000
------------ -------------
FINANCING ACTIVITIES
Cash dividends paid (8,300,000) (6,849,000)
Cash dividends paid by acquired banks (382,000) (1,583,000)
Acquisition of treasury stock (829,000) (573,000)
Proceeds from exercise of stock options 306,000 223,000
Proceeds from Federal Home Loan Bank advances 49,092,000 55,618,000
Repayment of Federal Home Loan Bank advances (138,077,000)
Acquisition of fractional shares (2,000)
Changes in:
Deposits (10,750,000) 33,275,000
Federal funds purchased and securities
sold under agreements to repurchase 23,787,000 21,118,000
------------ -------------
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES 52,922,000 (36,848,000)
------------ -------------
(DECREASE)IN CASH AND CASH EQUIVALENTS (25,840,000) (5,586,000)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 98,977,000 95,022,000
------------ -------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 73,137,000 $ 89,436,000
============ =============
See notes to consolidated 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 1995 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.
Historically, United has not engaged in significant mortgage banking activities
and did not generally originate or acquire loans for resale. However, with the
merger of Eagle Bancorp, Inc. ("Eagle") and the formation of United Mortgage
Company, Inc., and its wholly-owned subsidiary, United Home Lending Services,
Inc., United has begun mortgage banking activities. The business of United Home
Lending Services, Inc. is the origination and acquisition of residential real
estate loans for resale, the conducting of mortgage loan servicing activities
for certain loans, and, generally, the activities commonly conducted by a
mortgage banking company. Rights to service mortgage loans for others, whether
those rights were acquired through purchase or through origination are
recognized as separate assets upon subsequent sale of loans with servicing
rights retained. United allocates the total cost of the mortgage loans to the
mortgage servicing rights and the loans, based on their relative fair values, if
it is practicable to estimate those fair values. United periodically assesses
capitalized servicing rights for impairment based on the fair value of those
rights.
Eagle adopted Statement No. 122, "Accounting for Mortgage Servicing Rights"
(SFAS No. 122), an Amendment to Statement No. 65, "Accounting for Certain
Banking Activities," effective for its financial statements for the quarter
ended June 30, 1995. The impact of Eagle's adoption of SFAS No. 122 was an
increase in income before income taxes of approximately $412,000, representing
capitalization of servicing rights on the sale of mortgage loans.
10
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - continued
UNITED BANKSHARES, INC. AND SUBSIDIARIES
In October 1995, the Financial Accounting Standards Board ("FASB"), issued
Statement No. 123, (SFAS No. 123), "Accounting for Stock-Based Compensation,"
which is effective for fiscal years beginning after December 15, 1995. SFAS No.
123 defines a fair value based method of accounting for stock-based compensation
plans.
Under the fair value method, compensation expense is measured based upon the
estimated value of the award as of the grant date and is recognized over the
service period. SFAS No. 123 provides companies with the option of accounting
for stock-based compensation under APB Opinion No. 25, "Accounting for Stock
Issued to Employees," or applying the provisions of SFAS No. 123. United has
decided to continue to apply the provisions of APB No. 25 to account for stock-
based compensation. The disclosure requirements of SFAS No. 123 require
entities applying APB Opinion No. 25 to provide pro forma disclosures of net
income and earnings per share as if the fair value method of accounting had been
applied. The disclosure requirements of SFAS No. 123 are not applicable to
interim reporting.
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 emphasized 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. 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.
United does not expect the new rules to have a material effect on its financial
position and results of operations. SFAS No. 125 is effective for transactions
occurring after December 31, 1996.
2. BASIS OF PRESENTATION
The accompanying consolidated interim financial statements include the accounts
of United and its wholly-owned subsidiaries, UBC Holding Company, Inc. ("UBC"),
United Bank and United Venture Fund ("UVF"). UBC includes its wholly-owned
subsidiary, United National Bank ("UNB"). On June 1, 1996, United commenced
operations of a
11
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - continued
UNITED BANKSHARES, INC. AND SUBSIDIARIES
new wholly-owned subsidiary of UNB, United Mortgage Company, Inc. ("UMC") and
its wholly-owned subsidiaries, United Home Lending Services, Inc. ("UHLSI") and
United Mortgage Center, Inc. ("UMCI"). UHLSI will service loans and hold loans
available for sale. 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.
3. ACQUISITION
On April 12, 1996, United consummated the merger with Eagle Bancorp, Inc.,
Charleston, West Virginia ("Eagle"), in a common stock exchange accounted for
under the pooling of interests method of accounting and, accordingly, all prior
period financial statements have been restated to include the financial
condition and results of operations of Eagle. United exchanged 1.15 shares of
United common stock for each of the 2,729,377 common shares of Eagle or
3,138,704 shares.
The following are pro forma selected balance sheet categories as of March 31,
1996, and December 31, 1995, and results of operations for the three months
ended March 31, 1996, and the year ended December 31, 1995, giving effect to the
merger as though it had occurred at the beginning of the earliest period
presented. The pro forma information provided below does not purport to be
indicative of balances and results that would have been obtained if the
combination had occurred during the periods presented or of balances or results
that may occur in the future.
United Eagle Combined
-------------- ------------ --------------
For the Three Months
Ended March 31, 1996
(Unaudited):
Net interest income $ 20,886,000 $ 3,663,000 $ 24,549,000
Net income 7,504,000 584,000 8,088,000
Earnings per share $0.62 $0.21 $0.53
Net loans 1,358,650,000 366,885,000 1,725,535,000
Total assets 1,798,455,000 392,620,000 2,191,075,000
Total deposits $1,480,276,000 $304,159,000 $1,784,435,000
For the Year Ended
December 31, 1995:
Net interest income $ 81,690,000 $ 13,958,000 $ 95,648,000
Net income 28,079,000 4,738,000 32,817,000
Earnings per share $2.35 $1.74 $2.18
Net loans 1,374,006,000 358,980,000 1,732,986,000
Total assets 1,815,443,000 394,787,000 2,210,230,000
Total deposits $1,473,266,000 $301,333,000 $1,774,599,000
12
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - continued
UNITED BANKSHARES, INC. AND SUBSIDIARIES
4. SECURITIES AVAILABLE FOR SALE
The amortized cost and estimated fair value of securities available for sale at
June 30, 1996, by contractual maturity are as follows:
Estimated
Amortized Fair
Cost Value
------------ ------------
Due in one year or less $ 66,111,000 $ 66,340,000
Due after one year through five years 65,725,000 65,135,000
Due after five years through ten years 491,000 498,000
Due after ten years 43,523,000 42,080,000
Marketable equity securities 3,511,000 4,960,000
------------ ------------
Total $179,361,000 $179,013,000
============ ============
The preceding table includes $27,298,000 of mortgage-backed securities at
estimated fair value with an amortized cost of $28,476,000. Maturities of
mortgage-backed securities are based upon the estimated average life.
The amortized cost and estimated fair values of securities available for sale
are summarized as follows:
June 30, 1996
--------------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
------------ ---------- ---------- ------------
U.S. Treasury securities
and obligations of U.S.
Government corporations
and agencies $126,536,000 $ 471,000 $ 832,000 $126,175,000
Mortgage-backed securities 28,476,000 44,000 1,222,000 27,298,000
Marketable equity
securities 3,511,000 1,449,000 4,960,000
Other 20,838,000 6,000 264,000 20,580,000
------------ ---------- ---------- ------------
Total $179,361,000 $1,970,000 $2,318,000 $179,013,000
============ ========== ========== ============
At June 30, 1996, the cumulative net unrealized holding loss on available for
sale securities resulted in a decrease of $226,000 to shareholders' equity, net
of deferred income taxes.
13
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - continued
UNITED BANKSHARES, INC. AND SUBSIDIARIES
The book and estimated fair value of securities available for sale at December
31, 1995, by contractual maturity are as follows:
Estimated
Amortized Fair
Cost Value
------------ ------------
Due in one year or less $105,885,000 $106,262,000
Due after one year through five years 52,928,000 53,684,000
Due after five years through ten years 169,000 172,000
Due after ten years 35,322,000 35,191,000
Marketable equity securities 2,662,000 3,821,000
------------ ------------
Total $196,966,000 $199,130,000
============ ============
The amortized cost and estimated fair values of securities available for sale
are summarized as follows:
December 31, 1995
--------------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
------------ ---------- ---------- ------------
U.S. Treasury securities
and obligations of U.S.
Government corporations
and agencies $150,460,000 $1,438,000 $341,000 $151,557,000
Mortgage-backed securities 30,036,000 165,000 54,000 30,147,000
Marketable equity
securities 2,662,000 1,159,000 3,821,000
Other 13,808,000 21,000 224,000 13,605,000
------------ ---------- -------- ------------
Total $196,966,000 $2,783,000 $619,000 $199,130,000
============ ========== ======== ============
5. SECURITIES HELD TO MATURITY
The amortized cost and estimated fair values of securities held to maturity are
summarized as follows:
June 30, 1996
--------------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
------------ ---------- ---------- ------------
U.S. Treasury securities
and obligations of U.S.
Government corporations
and agencies $ 78,005,000 $ $ 382,000 $ 77,623,000
State and political
subdivisions 38,488,000 1,096,000 156,000 39,428,000
Mortgage-backed securities 55,530,000 33,000 1,755,000 53,808,000
Other 1,915,000 1,915,000
------------ ---------- ---------- ------------
Total $173,938,000 $1,129,000 $2,293,000 $172,774,000
============ ========== ========== ============
14
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - continued
UNITED BANKSHARES, INC. AND SUBSIDIARIES
December 31, 1995
--------------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
------------ ---------- ---------- ------------
U.S. Treasury securities
and obligations of U.S.
Government corporations
and agencies $ 15,897,000 $ 22,000 $ 169,000 $ 15,750,000
State and political
subdivisions 43,324,000 2,124,000 33,000 45,415,000
Mortgage-backed securities 56,416,000 348,000 617,000 56,147,000
Other 6,252,000 15,000 6,267,000
------------ ---------- ---------- ------------
Total $121,889,000 $2,509,000 $ 819,000 $123,579,000
============ ========== ========== ============
The amortized cost and estimated fair value of securities held to maturity at
June 30, 1996, and December 31, 1995, by contractual maturity, are shown below.
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.
June 30, 1996 December 31, 1995
-------------------------- --------------------------
Estimated Estimated
Amortized Fair Amortized Fair
Cost Value Cost Value
------------ ------------ ------------ ------------
Due in one year or less $ 11,360,000 $ 11,348,000 $ 11,603,000 $ 11,697,000
Due after one year
through five years 64,126,000 63,528,000 56,320,000 56,688,000
Due after five years
through ten years 77,971,000 77,846,000 27,568,000 28,356,000
Due after ten years 20,481,000 20,052,000 26,398,000 26,838,000
------------ ------------ ------------ ------------
Total $173,938,000 $172,774,000 $121,889,000 $123,579,000
============ ============ ============ ============
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 $164,829,000 and $176,855,000 at June 30, 1996
and December 31, 1995, respectively.
15
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - continued
UNITED BANKSHARES, INC. AND SUBSIDIARIES
6. NONPERFORMING LOANS
Nonperforming loans are summarized as follows:
June 30 December 31
1996 1995
------- -----------
(in thousands)
Loans past due 90 days or more
and still accruing interest $6,856 $4,692
Nonaccrual loans 5,122 6,298
------- -------
$11,978 $10,990
======= =======
7. ALLOWANCE FOR POSSIBLE LOAN LOSSES
The adequacy of the allowance for possible loan losses is based on management's
evaluation of the relative risks inherent in the loan portfolio. A progression
of the allowance for possible loan losses for the periods presented is
summarized as follows:
Three Months Ended Six Months Ended
June 30, June 30,
-------------------- ------------------
1996 1995 1996 1995
--------- --------- -------- --------
(in thousands)
Balance at beginning of
period $22,715 $22,527 $22,545 $22,304
Provision charged to expense 949 535 1,560 1,055
------- ------- ------- -------
23,664 23,062 24,105 23,359
Loans charged-off (1,182) (721) (1,781) (1,160)
Less recoveries 241 168 399 310
------- ------- ------- -------
Net Charge-offs (941) (553) (1,382) (850)
------- ------- ------- -------
Balance at end of period $22,723 $22,509 $22,723 $22,509
======= ======= ======= =======
The average recorded investment in impaired loans during the quarter ended June
30, 1996 and for the year ended December 31, 1995 was approximately $8,644,000
and $9,545,000, respectively. For the quarters ended June 30, 1996 and 1995,
United recognized interest income on the impaired loans of approximately $84,000
and $207,000, respectively, substantially all of which was recognized using the
accrual method of income recognition.
At June 30, 1996, the recorded investment in loans that are considered to be
impaired under SFAS No. 114 was $8,560,000 (of which $5,059,000 were on a
nonaccrual basis). Included in this amount is $5,180,000 of impaired loans for
which the related
16
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - continued
UNITED BANKSHARES, INC. AND SUBSIDIARIES
allowance for possible loan losses is $1,587,000 and $3,380,000 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 $408,000 and $283,000 for the quarters ended June
30, 1996 and 1995, respectively.
United had commercial real estate loans, including owner occupied, income
producing real estate and land development loans, of approximately $332,214,000
and $334,791,000 as of June 30, 1996 and December 31, 1995, respectively. The
loans are primarily secured by real estate located in West Virginia,
Southeastern Ohio, and Virginia. The loans were originated by United's
subsidiary banks using underwriting standards as set forth by management.
United's loan administration policies are focused on the risk characteristics of
the loan portfolio, including commercial real estate loans, in terms of loan
approval and credit quality. It is the opinion of management that these loans
do not pose any unnecessary risks and that adequate consideration has been given
to the above loans in establishing the allowance for possible loan losses.
8. COMMITMENTS AND CONTINGENT LIABILITIES
United has outstanding commitments which include, among other things,
commitments to extend credit and letters of credit undertaken in the normal
course of business. Outstanding standby letters of credit amounted to
approximately $17,199,000 and $17,047,000 at June 30, 1996 and December 31,
1995, respectively.
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.
17
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - continued
UNITED BANKSHARES, INC. AND SUBSIDIARIES
9. 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 June 30,
1996, and June 30, 1995, with the interest rate earned or paid on such
amount.
Three Months Ended Three Months Ended
June 30 June 30
1996 1995
----------------------------- ----------------------------
(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 $ 5,652 $ 93 6.62% $ 13,588 $ 251 7.41%
Investment Securities:
Taxable 273,126 4,169 6.11% 302,359 4,715 6.24%
Tax-exempt (1) 38,322 871 9.09% 49,173 1,228 9.99%
---------- ------- ---- ---------- -------- ----
Total Securities 311,448 5,040 6.47% 351,532 5,943 6.76%
Loans, net of unearned
income (1) (2) 1,755,870 36,978 8.47% 1,668,740 35,914 8.63%
Allowance for possible loan
losses (22,742) (22,624)
---------- ----------
Net loans 1,733,128 8.58% 1,646,116 8.75%
---------- ------- ---- ---------- -------- ----
Total earning assets 2,050,228 $42,111 8.26% 2,011,236 $42,108 8.39%
------- ---- -------- ----
Other assets 157,706 146,326
---------- ----------
TOTAL ASSETS $2,207,934 $2,157,562
========== ==========
LIABILITIES
Interest-Bearing Funds:
Interest-bearing deposits $1,562,464 $15,745 4.05% $1,518,563 $15,748 4.16%
Federal funds purchased,
repurchase agreements and
other short-term borrowing 86,002 901 4.22% 85,152 1,009 4.75%
FHLB advances 56,606 790 5.61% 60,386 960 6.38%
---------- ------- ---- ---------- -------- ----
Total Interest-Bearing Funds 1,705,072 17,436 4.12% 1,664,101 17,717 4.27%
------- ---- -------- ----
Demand deposits 222,386 230,941
Accrued expenses and other
liabilities 26,868 28,909
---------- ----------
TOTAL LIABILITIES 1,954,326 1,923,951
Shareholders' Equity 253,608 233,611
---------- ----------
TOTAL LIABILITIES AND
SHAREHOLDERS' EQUITY $2,207,934 $2,157,562
========== ==========
NET INTEREST INCOME $24,675 $24,391
======= ========
INTEREST SPREAD 4.14% 4.12%
NET INTEREST MARGIN 4.84% 4.86%
(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
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - continued
UNITED BANKSHARES, INC. AND SUBSIDIARIES
9. 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 six month periods ended June 30,
1996, and June 30, 1995, with the interest rate earned or paid on such
amount.
Six Months Ended Six Months Ended
June 30 June 30
1996 1995
----------------------------- ----------------------------
(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 $ 8,971 $ 291 6.56% $ 17,883 $ 581 6.55%
Investment Securities:
Taxable 271,359 8,222 6.06% 308,827 9,557 6.19%
Tax-exempt (1) 39,731 1,837 9.24% 50,669 2,517 9.94%
---------- ------- ---- ---------- -------- ----
Total Securities 311,090 10,059 6.47% 359,496 12,074 6.73%
Loans, net of unearned
income (1) (2) 1,747,681 74,629 8.63% 1,661,107 70,932 8.61%
Allowance for possible loan
losses (22,713) (22,571)
---------- ----------
Net loans 1,724,968 8.75% 1,638,536 8.73%
---------- ------- ---- ---------- -------- ----
Total earning assets 2,045,029 $84,979 8.39% 2,015,915 $83,587 8.35%
------- ---- -------- ----
Other assets 155,061 147,361
---------- ----------
TOTAL ASSETS $2,200,090 $2,163,276
========== ==========
LIABILITIES
Interest-Bearing Funds:
Interest-bearing deposits $1,542,164 $31,543 4.14% $1,508,182 $29,948 4.00%
Federal funds purchased,
repurchase agreements and
other short-term borrowing 84,239 1,825 4.38% 80,671 1,863 4.66%
FHLB advances 64,799 1,765 5.51% 82,297 2,590 6.35%
---------- ------- ---- ---------- -------- ----
Total Interest-Bearing Funds 1,691,202 35,133 4.20% 1,671,150 34,401 4.15%
------- ---- -------- ----
Demand deposits 227,663 233,336
Accrued expenses and other
liabilities 28,011 27,516
---------- ----------
TOTAL LIABILITIES 1,946,876 1,932,002
Shareholders' Equity 253,214 231,274
---------- ----------
TOTAL LIABILITIES AND
SHAREHOLDERS' EQUITY $2,200,090 $2,163,276
========== ==========
NET INTEREST INCOME $49,846 $49,186
======= ========
INTEREST SPREAD 4.19% 4.20%
NET INTEREST MARGIN 4.92% 4.91%
(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.
19
UNITED BANKSHARES, INC. AND SUBSIDIARIES
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
United Bankshares, Inc. ("United") is a multi-bank holding company. United's
wholly-owned banking subsidiaries include UBC Holding Company, Inc. ("UBC") and
United Bank. UBC includes its wholly-owned subsidiary, United National Bank
("UNB"), and its wholly-owned subsidiary, United Mortgage Company, Inc. ("UMC")
and its wholly-owned subsidiaries, United Mortgage Center, Inc. ("UMCI") and
United Home Lending Services, Inc. ("UHLSI"). United also owns all of the stock
of United Venture Fund, Inc. ("UVF"). UVF is a West Virginia Capital Company
formed to make loans and equity investments in qualified companies under the
West Virginia Capital Company Act and to promote economic welfare and
development in the State of West Virginia.
United is a registered bank holding company subject to the supervision of and
examination by the Federal Reserve Board under the Bank Holding Company Act of
1956, as amended. Its present business is the operation of its wholly-owned
subsidiaries.
The following discussion and analysis present the significant changes in
financial condition and the results of operations of United and its subsidiaries
for the periods indicated below. This discussion and analysis should be read in
conjunction with the unaudited financial statements and accompanying notes
thereto which are included elsewhere in this document. All references to United
in this discussion and analysis are considered to refer to United and its
wholly-owned subsidiaries, unless otherwise indicated.
The following Earnings Summary 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.
EARNINGS SUMMARY
Nonrecurring restructuring charges associated with the Eagle Bancorp, Inc.
("Eagle") merger during the second quarter of 1996 obscured base core earnings
results. Net income for the second quarter of 1996 was $1.26 million or $.08
per share compared to $8.45 million or $.56 per share for the second quarter of
1995. This represents an 85.04% decrease in net income and an 85.71% decrease in
earnings per share. Net income per share for the first half of 1996 was $.61
per share, or a 45.05% decrease from the $1.11 for the first six months of 1996.
Net income for the first
20
half of 1996 was $9.35 million, which is a 43.70% decrease from the $16.61
million earned in the same period last year. United's annualized return on
average assets was 0.85% and return on average shareholders' equity was 7.45% as
compared 1.54% and 14.37% for 1995, respectively.
During the second quarter of 1996, United recorded nonrecurring pretax charges
of approximately $5.9 million that consisted of restructuring and merger
charges. Merger related charges recorded during the second quarter of 1996
included, among other items, $3,086,000 of income tax expense related to bad
debt recapture. Additional merger related expenses included $607,000 of costs
associated with severance pay and benefits for retiring and involuntarily
terminated executive officers of Eagle. In addition, costs incurred to
consolidate duplicate facilities, eliminate redundancies, and conform operations
were incurred. United remains committed to reduce operating costs and improve
margins. With the aid of an independent consultant, United began implementation
of a company wide plan to reduce operating costs, increase revenues, and improve
efficiency and productivity to strengthen United's competitiveness. As a result
of the identification of additional opportunities to restructure and streamline
operations, United consolidated four branch offices in certain markets where
United and Eagle overlapped in providing services and identified three
additional branch offices to be closed during the year. Costs associated with
the branch consolidations and branch closings include, among other things,
severance and benefit payments of approximately $751,000 for the work force
reduction and approximately $445,000 of facility consolidation costs for the
write down of leases and other fixed assets. Additionally, United incurred costs
of approximately $341,000 associated with employee training and new product
promotions. Costs incurred during the quarter included $697,000 for training,
legal, accounting and computer conversion costs for the startup of United's
mortgage banking subsidiary.
The estimated cost savings and revenue enhancements of the restructuring actions
are expected to exceed $3 million pretax annually, when fully realized.
Approximately 92% of the incurred charges will require cash outlays which will
occur primarily in 1996 and early 1997. Total expenditures amounted to $3.9
million through June 30, 1996. Cash flows from operating activities have funded
and are expected to fund all incurred charges.
United has strong core earnings driven by a net interest margin of 4.92% for the
first six months of 1996. Net interest income increased $890,000 or 1.87% for
the first six months of 1996 as compared to the same period for 1995. The
provision for possible loan losses increased $505,000 or 47.87% when comparing
the first
21
six months of 1996 to the first six months of 1995. The additional loan loss
provision was to conform the allowance for loan losses on Eagle's loan portfolio
with United's loan valuation policies. Noninterest income, including losses on
sales of securities and loans held for sale, decreased 26.45% for the first six
months of 1996 when compared to the first six months of 1995. This overall
decrease in noninterest income is primarily attributed to the approximate
$2,000,000 write down to estimated fair value of loans held for sale at June 30,
1996. Noninterest expenses increased $4,332,000 or 15.11% for the first six
months compared to the same period in 1995. This increase was due to the
restructuring and merger related charges. However, exclusive of the charges
incurred during 1996, noninterest expenses actually decreased $1,595,000 or
5.56%. Income taxes, excluding the bad debt recapture associated with the Eagle
merger, were lower for the first six months than for the same period of 1995 due
to lower pretax earnings for the period. The effective tax rate, excluding the
bad debt reserve recapture, was 35.6% for the first six months as compared to
34.0% for first six months of 1995 and was slightly higher primarily due to
lower levels of tax-exempt income.
The following discussion explains in more detail the results of operations and
changes in financial position by major category.
NET INTEREST INCOME
Net interest income increased slightly in the second quarter and first six
months of 1996, when compared to the same period of 1995. The net interest
margin is the main factor in United's core profitability momentum. Net interest
income before the provision for possible loan losses increased $389,000 or 1.65%
and $890,000 or 1.87% for the second quarter and first six months of 1996 as
compared to the same periods of 1995. The increase is largely due to an
interest recovery of $343,000 on a nonaccrual loan. Excluding the aforementioned
item, net interest income increased slightly due to the repricing of variable
rate loans at higher interest rates. United's tax-equivalent net interest
margin fell slightly from 4.86% in the second quarter of 1995 to 4.84% in the
second quarter of 1996. Alternatively, the tax-equivalent net interest margin
increased from 4.91% to 4.92% when comparing the first half of 1995 to the same
period of 1996. The combination of higher average volumes of loans at slightly
higher rates compared to the first six months of 1995 have helped United
generate a slightly stronger interest margin.
22
PROVISION FOR POSSIBLE LOAN LOSSES
For the quarters ended June 30, 1996 and 1995, the provision for possible loan
losses was $949,000 and $535,000, respectively, while the first six months
provisions were $1,560,000 for 1996 as compared to $1,055,000 for 1995. The
increase in provision in the second quarter of 1996 was to conform the allowance
for possible loan losses on Eagle's loan portfolio with United's loan valuation
policies. The allowance for possible loan losses as a percentage of loans, net
of unearned income, approximated 1.27% at June 30, 1996, 1.30% at December 31,
1995, and 1.35% at June 30, 1995. Credit quality is another major factor in
United's profitability. United's continued excellent credit quality is evidenced
by the low level of nonperforming assets at the end of the second quarter of
1996. Charge-offs exceeded recoveries during the second quarter of 1996 and
1995 and resulted in net charge-offs of $941,000 and $553,000, respectively.
The first six months of 1996 charge-offs exceeded recoveries by $1,382,000 as
compared to $850,000 for the first half of 1995. Note 7 to the accompanying
unaudited consolidated financial statements provides a progression of the
allowance for possible loan losses. Loans, net of unearned income, increased by
$57,550,000 or 3.32% as compared to year-end 1995.
Nonperforming loans were $11,978,000 at June 30, 1996 and $10,990,000 at year-
end 1995. Nonperforming loans, as a percentage of loans, net of unearned
income, increased from 0.63% to 0.67% 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 non-accrual basis. Loans past due 90 days
or more increased $2,164,000 or 46.12% during the first half of 1996; while
nonaccrual loans decreased $1,176,000 or 18.67% since year-end 1995. Even with
the increase in nonperforming loans, total nonperforming assets represented less
than 0.62% of total assets at the end of the second quarter.
As of June 30, 1996, the ratio of the allowance for possible loan losses to
nonperforming loans was 189.7% as compared to 205.1% as of December 31, 1995.
Accordingly, management believes that the allowance for loan losses of
$22,723,000 as of June 30, 1996, is adequate to provide for potential losses on
existing loans based on information currently available.
United evaluates the adequacy of the allowance for possible 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 possible loan losses. Such other factors considered by management,
among
23
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. The decrease realized in total noninterest income for the second
quarter and first half of 1996, was $2,055,000 or 54.32%, and $1,909,000 or
26.45%, respectively. Primarily, all of the decrease in noninterest income was
the result of the approximate $2,000,000 write down to estimated fair value of
loans held for sale at June 30, 1996. Excluding gains and losses on sales of
securities and loans held for sale, noninterest income increased $366,000 or
5.31%.
The decrease in noninterest income was partially offset in the areas of fees
from customer accounts for which a fee is charged. Other customer charges
increased by $618,000 or 12.83% due to increased return check charges and
bankcard fees.
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 possible loan losses, and income taxes. Other expenses
increased $4,120,000 or 29.28% and $4,332,000 or 15.11% for the second quarter
and six months ending June 30, 1996 as compared to the same periods in 1995.
The increases were due to the one-time merger and restructuring charges of
$5,927,000 incurred during the second quarter of 1996.
Total salaries and benefits increased by 25.74% or $1,661,000 and 14.21% or
$1,847,000, for the second quarter and first six months of 1996 when compared to
the same period of 1995. Of this increase $1,358,000 was attributable to
severance and benefit pay of displaced Eagle executive officers and employees at
locations where United consolidated certain branches.
24
In addition, net occupancy expense increased by $255,000 or 17.86% and $289,000
or 10.43% when compared to the second quarter and first six months of 1995. The
increases were due to higher costs in all areas of occupancy with no significant
increase in any one category.
Other expenses increased $2,204,000 or 35.61% and $2,196,000 or 17.02% for the
second quarter and first six months of 1996 as compared to the same period of
1995. The increase in other expenses for the quarter related primarily to
higher OREO write downs, advertising, consulting and legal, losses on sales of
assets, EDP fees, office supplies, and goodwill amortization. Included in these
increased costs were $1,483,000 of one-time restructuring charges which relate
to United's plan to reduce operating costs, increase revenues, and improve
efficiency and productivity to strengthen United's competitiveness. The above
increases were partially offset by decreases in B&O taxes and FDIC insurance.
INCOME TAXES
Income tax expense for the three months ended June 30, 1996 and 1995 was
$5,414,000 and $4,372,000, respectively. Income tax expense for the six months
ended June 30, 1996 and 1995 was $9,974,000 and $8,570,000, respectively. These
increases of $1,042,000 or 23.83% for the second quarter and $1,404,000 or
16.38% for the first six months were the result of the $3,086,000 one-time bad
debt recapture in connection with the Eagle merger, which was offset by
decreased pretax income. United's effective tax rate, excluding the bad debt
reserve recapture, was 34.7% for the second quarter of 1996 compared to 34.1%
for the second quarter of 1995. The effective tax rate, excluding the bad debt
reserve recapture, for the first six months of 1996 was 35.6% as compared to
34.0% for the first six months of 1995.
INTEREST RATE SENSITIVITY
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 asset and liability management is to maintain an
appropriate relationship between those assets and liabilities that are sensitive
to changing market interest rates. This relationship has become very important,
given the volatility in interest rates over the last several years, due to the
potential impact on earnings. United closely monitors the sensitivity of its
assets and liabilities on an ongoing basis and projects the effect of various
interest rate changes on its net interest margin.
25
The difference between rate sensitive assets and rate sensitive liabilities for
specified periods of time is known as the "gap". A primary objective of
Asset/Liability Management is managing interest rate risk. At United, interest
rate risk is managed to minimize the impact of fluctuating interest rates on
earnings. As shown in the interest rate sensitivity gap table contained herein,
United was liability sensitive (excess of liabilities over assets) in the one
year horizon. 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 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
less liability sensitive in the one year horizon in the amount of $(115,283,000)
or -5.38% of the cumulative gap to related total earning assets. The primary
method of measuring the sensitivity of earnings to changing market interest
rates is to simulate expected cash flows using varying assumed interest rates
while also adjusting the timing and magnitude of non-contractual deposit
repricing to more accurately reflect anticipated pricing behavior. These
simulations include adjustments for the lag in prime-linked loan repricing and
the spread and volume elasticity of interest-bearing deposit accounts, regular
savings and money market deposit accounts. To aid in interest rate management,
United's lead bank, UNB, is a member of the Federal Home Loan Bank of Pittsburgh
(FHLB). The use of FHLB advances provides United with a relatively low risk
means to match maturities of earning assets and interest-bearing funds to
achieve a desired interest rate spread over the life of the earning assets. At
June 30, 1996, United had $124,589,000 in FHLB advances.
Additionally, United uses certain off-balance-sheet instruments known as
interest rate swaps, to further aid in interest rate risk management. The use
of interest rate swaps is a cost-effective means of synthetically altering the
repricing structure of balance sheet items. At June 30, 1996, the total
notional amount of the interest rate swap in effect was $50 million. The
current maturity of the swap portfolio is seven months. During the six month
period ended June 30, 1996, interest rate swaps reduced net interest income by
$255,000 as compared to a decrease of $402,000 for the same period in 1995.
26
UNITED BANKSHARES, INC. AND SUBSIDIARIES
The following table shows the interest rate sensitivity GAP as of June 30,
1996:
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:
Investment and Marketable
Equity Securities:
Taxable $ 36,547 $ 15,317 $ 24,172 $ 76,036 $ 107,463 $130,964 $ 314,463
Tax-exempt 2,584 2,349 2,708 7,641 14,906 15,941 38,488
Loans, net of unearned
income 521,091 101,154 191,957 814,202 560,230 416,104 1,790,536
---------- --------- ---------- ---------- --------- -------- ----------
Total Interest-Earning
Assets $ 560,222 $ 118,820 $ 218,837 $ 897,879 $ 682,599 $563,009 $2,143,487
========== ========= ========== ========== ========= ======== ==========
LIABILITIES
Interest-Bearing Funds:
Savings and NOW
accounts $ 680,355 $ 680,355 $ 680,355
Time deposits of
$100,000 & over 49,545 $ 30,469 $ 32,954 112,968 $ 30,064 $ 233 143,265
Other time deposits 193,930 141,869 171,155 506,954 165,837 17,316 690,107
Federal funds purchased,
repurchase agreements
and other short-term
borrowing 105,954 105,954 105,954
FHLB advances 124,000 124,000 589 124,589
---------- --------- ---------- ---------- --------- -------- ----------
Total Interest-Bearing
Funds $1,153,784 $ 172,338 $ 204,109 $1,530,231 $ 196,490 $ 17,549 $1,744,270
========== ========= ========== ========== ========= ======== ==========
Interest Sensitivity
Gap $ (593,562) $ (53,518) $ 14,728 $ (632,352) $ 486,109 $545,460 $ 399,217
========== ========= ========== ========== ========= ======== ==========
Cumulative Gap $ (593,562) $(647,080) $ (632,352) $ (632,352) $(146,243) $399,217 $ 399,217
========== ========= ========== ========== ========= ======== ==========
Cumulative Gap as
a Percentage of Total
Earning Assets -27.69% -30.19% -29.50% -29.50% -6.82% 18.62% 18.62%
Management
Adjustments 646,337 (43,111) (86,157) 517,069 (517,069) 0
Off-Balance
Sheet Activities (50,000) 50,000 0 0
---------- --------- ---------- ---------- --------- -------- ----------
Cumulative Management
Adjusted Gap and
Off-Balance Sheet
Activities $ 2,775 $ (93,854) $ (115,283) $ (115,283) $(146,243) $399,217 $ 399,217
========== ========= ========== ========== ========= ======== ==========
Cumulative Management
Adjusted Gap and
Off-Balance Sheet
Activities as a
Percentage of Total
Earning Assets 0.13% -4.38% -5.38% -5.38% -6.82% 18.62% 18.62%
27
UNITED BANKSHARES, INC. AND SUBSIDIARIES
The following table shows the interest rate sensitivity GAP as of December
31, 1995:
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 $ 13,113 $ 13,113 $ 13,113
Investment and Marketable
Equity Securities:
Taxable 39,736 $ 34,112 $ 55,174 129,022 $ 96,461 $ 52,212 277,695
Tax-exempt 3,462 2,546 2,919 8,927 14,803 19,594 43,324
Loans, net of unearned
income 534,165 88,129 162,399 784,693 559,942 388,351 1,732,986
---------- --------- ---------- ---------- --------- -------- ----------
Total Interest-Earning
Assets $ 590,476 $ 124,787 $ 220,492 $ 935,755 $ 671,206 $460,157 $2,067,118
========== ========= ========== ========== ========= ======== ==========
LIABILITIES
Interest-Bearing Funds:
Savings and NOW
accounts $ 675,629 $ 675,629 $ 675,629
Time deposits of
$100,000 & over 56,474 $ 24,605 $ 25,335 106,414 $ 26,068 132,482
Other time deposits 185,538 129,738 158,089 473,365 216,999 $ 23,497 713,861
Federal funds purchased,
repurchase agreements
and other short-term
borrowing 82,167 82,167 82,167
FHLB advances 74,915 15 30 74,960 239 298 75,497
---------- --------- ---------- ---------- --------- -------- ----------
Total Interest-Bearing
Funds $1,074,723 $ 154,358 $ 183,454 $1,412,535 $ 243,306 $ 23,795 $1,679,636
========== ========= ========== ========== ========= ======== ==========
Interest Sensitivity
Gap $ (484,247) $ (29,571) $ 37,038 $ (476,780) $ 427,900 $437,309 $ 387,482
========== ========= ========== ========== ========= ======== ==========
Cumulative Gap $ (484,247) $(513,818) $ (476,780) $ (476,780) $ (48,880) $387,482 $ 387,482
========== ========= ========== ========== ========= ======== ==========
Cumulative Gap as
a Percentage of Total
Earning Assets -23.43% -24.86% -23.06% -23.06% -2.36% 18.75% 18.75%
Management
Adjustments 564,955 (37,664) (75,327) 451,964 (451,964) 0
Off-Balance
Sheet Activities (50,000) (50,000) 50,000 0
---------- --------- ---------- ---------- --------- -------- ----------
Cumulative Management
Adjusted Gap and
Off-Balance Sheet
Activities $ 30,708 $ (36,527) $ (74,816) $ (74,816) $ (48,880) $387,482 $ 387,482
========== ========= ========== ========== ========= ======== ==========
Cumulative Management
Adjusted Gap and
Off-Balance Sheet
Activities as a
Percentage of Total
Earning Assets 1.49% -1.77% -3.62% -3.62% -2.36% 18.75% 18.75%
28
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 are "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 the six months ended June 30, 1996, United generated $10,499,000 of cash
from operations, which is indicative of solid earnings performance. During the
same period, net cash of $89,261,000 was used in investing activities which was
primarily
29
due to $54,171,000 of net loan originations and $34,249,00 of net purchases of
securities. During the first six months of 1996, net cash of $52,922,000 was
provided by financing activities, primarily due to additional borrowings of
$49,092,000 of FHLB advances and an increase in other short-term borrowings of
$23,787,000. The increases in FHLB advances and other short-term borrowings
were used to offset a $10,750,000 decrease in deposits and to fund net loan
originations, including originations of loans held for sale. The net effect of
this activity was a decrease in cash and cash equivalents of $25,840,000 for the
first six months of 1996.
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.
Total shareholders' equity decreased $1,489,000 to $247,745,000, which is a
decrease of 0.60% from December 31, 1995. United's equity to assets ratio was
10.89% at June 30, 1996 and 11.28% at December 31, 1995. Capital and reserves
to total assets decreased from 12.30% at December 31, 1995, to 11.88% at June
30, 1996.
The dividends of $0.31 per common share for the second quarter of 1996 and $0.61
for the six month period ended June 30, 1996 represent an increase of 6.90% and
5.17% over the $.29 paid for first quarter of 1996 and $0.58 paid for the first
six months of 1995. Total cash dividends paid were $4,696,000 for the second
quarter and $8,300,000 for the first six months of 1996, an increase of 37.23%
and 21.19% over the comparable periods of 1995.
United seeks to maintain a proper relationship between capital and total assets
in order to support growth and sustain earnings. United's average equity to
average asset ratio was 11.51% at June 30, 1996 and 10.69% at June 30, 1995.
United's risk-based capital ratios of 16.50% at June 30, 1996 and 15.91% at
December 31, 1995, are both significantly higher then the minimum regulatory
requirements. United's Tier I capital and leverage ratios of 15.25% and 10.32%,
respectively, at June 30, 1996, are also well above regulatory minimum
requirements.
30