UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------------------------------
FORM 10-Q
Quarterly Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
For Quarter Ended June 30, 1999
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) 424-8704
--------------
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; 43,240,443 shares outstanding as of July
31, 1999.
1
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, 1999 and December 31, 1998 .................................................................6
Consolidated Statements of Income (Unaudited) for the
Three and Six Months Ended June 30, 1999 and 1998...................................................7
Consolidated Statement of Changes in Shareholders' Equity
(Unaudited) for the Six Months Ended June 30, 1999 .................................................8
Condensed Consolidated Statements of Cash Flows (Unaudited)
for the Six Months Ended June 30, 1999 and 1998 .....................................................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..........................................................19
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
Item 4. Submission of Matters to a Vote of Security Holders
- ------------------------------------------------------------
(a) The Annual Meeting of Shareholders was held on Monday, May 17, 1999:
(b) 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 27 - Financial Data Schedule.....................................................31
(b) Reports on Form 8-K
None filed during the period.
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 13, 1999 /s/ Richard M. Adams
------------------------- ------------------------
Richard M. Adams,
Chairman of the
Board and Chief Executive
Officer
Date August 13, 1999 /s/ Steven E. Wilson
------------------------- ------------------------
Steven E. Wilson, Executive
Vice President, Treasurer,
Secretary and Chief
Financial Officer
4
PART I
FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS (UNAUDITED)
The June 30, 1999 and December 31, 1998, 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, 1999 and 1998, and the
related consolidated statement of changes in shareholders' equity for the six
months ended June 30, 1999, and the related condensed consolidated statements of
cash flows for the six months ended June 30, 1999 and 1998, and the notes to
consolidated financial statements appear on the following pages.
5
CONSOLIDATED BALANCE SHEETS (Unaudited)
UNITED BANKSHARES, INC. AND SUBSIDIARIES
(Dollars in thousands, except par value) June 30 December 31
1999 1998
-----------------------
ASSETS
Cash and due from banks $ 116,956 $ 124,591
Interest-bearing deposits with other banks 5,391 6,807
Federal funds sold 9,900
-----------------------
Total cash and cash equivalents 122,347 141,298
Securities available for sale at estimated fair value
(amortized cost-$1,451,549 at June 30, 1999 and
$557,574 at December 31, 1998) 1,398,339 565,165
Securities held to maturity (estimated fair
value-$286,835 at June 30, 1999 and $367,353 at
December 31, 1998) 290,372 362,151
Loans held for sale 145,562 720,607
Loans
Commercial, financial, and agricultural 522,254 508,601
Real estate:
Single family residential 1,173,604 1,076,277
Commercial 686,892 574,666
Construction 137,380 141,026
Other 42,141 45,290
Installment 334,174 313,464
-----------------------
2,896,445 2,659,324
Less: Unearned income (7,533) (6,933)
-----------------------
Loans net of unearned income 2,888,912 2,652,391
Less: Allowance for loan losses (40,471) (39,189)
-----------------------
Net loans 2,848,441 2,613,202
Bank premises and equipment 53,427 54,946
Accrued interest receivable 31,528 30,402
Other assets 115,224 80,128
-----------------------
TOTAL ASSETS $5,005,240 $4,567,899
=======================
LIABILITIES
Domestic deposits:
Noninterest-bearing $ 516,114 $ 542,987
Interest-bearing 2,875,370 2,950,071
-----------------------
Total deposits 3,391,484 3,493,058
Borrowings:
Federal funds purchased 64,921 7,260
Securities sold under agreements to repurchase 330,223 236,535
Federal Home Loan Bank borrowings 754,632 345,867
Other borrowings 5,010 5,244
Accrued expenses and other liabilities 61,374 58,404
-----------------------
TOTAL LIABILITIES 4,607,644 4,146,368
SHAREHOLDERS' EQUITY
Common stock, $2.50 par value; Authorized-100,000,000
shares; issued-43,380,912 at June 30, 1999 and
43,256,833 at December 31, 1998, including 117,806
and 356 shares in treasury at June 30, 1999 and
December 31, 1998, respectively 108,452 108,142
Surplus 88,983 88,353
Retained earnings 237,744 220,111
Accumulated other comprehensive (loss) income (34,586) 4,934
Treasury stock, at cost (2,997) (9)
-----------------------
TOTAL SHAREHOLDERS' EQUITY 397,596 421,531
=======================
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $5,005,240 $4,567,899
=======================
See notes to consolidated unaudited financial statements.
6
CONSOLIDATED STATEMENTS OF INCOME (Unaudited)
UNITED BANKSHARES, INC. AND SUBSIDIARIES
(Dollars in thousands, except per share data)
Three Months Ended Six Months Ended
June 30 June 30
---------------------- ---------------------
1999 1998 1999 1998
---------------------- ---------------------
INTEREST INCOME
Interest and fees on loans $59,779 $65,259 $127,430 $125,184
Interest on federal funds sold and other
short-term investments 81 254 209 719
Interest and dividends on securities:
Taxable 25,431 14,290 41,662 29,392
Exempt from federal taxes 1,731 791 3,225 1,558
---------------------- ---------------------
Total interest income 87,022 80,594 172,526 156,853
INTEREST EXPENSE
Interest on deposits 30,891 31,520 62,677 62,217
Interest on short-term borrowings 3,600 2,373 6,454 5,028
Interest on Federal Home Loan Bank advances 7,924 4,438 12,817 7,321
--------------------- ---------------------
Total interest expense 42,415 38,331 81,948 74,566
--------------------- ---------------------
Net interest income 44,607 42,263 90,578 82,287
Provision for loan losses 1,761 5,257 2,525 7,337
---------------------- ---------------------
Net interest income after provision for loan
losses 42,846 37,006 88,053 74,950
OTHER INCOME
Income from mortgage banking operations 6,095 6,392 10,513 11,588
Service charges, commissions, and fees 4,718 4,426 9,157 8,980
Trust department income 1,234 1,117 2,592 2,126
Security gains (losses) 71 (132) 71 2,355
Other income 335 112 759 878
---------------------- ---------------------
Total other income 12,453 11,915 23,092 25,927
OTHER EXPENSE
Salaries and employee benefits 15,048 19,226 30,054 34,544
Net occupancy expense 3,179 2,331 6,153 6,246
Other expense 10,843 18,882 21,684 29,344
---------------------- ---------------------
Total other expense 29,070 40,439 57,891 70,134
---------------------- ---------------------
Income before income taxes 26,229 8,482 53,254 30,743
Income taxes 8,433 935 18,297 8,775
--------------------- =====================
Net income $ 17,796 $ 7,547 $ 34,957 $ 21,968
====================== =====================
Earnings per common share:
Basic $0.41 $0.18 $0.81 $0.52
====================== =====================
Diluted $0.40 $0.17 $0.79 $0.51
====================== =====================
Dividends per common share $0.20 $0.18 $0.40 $0.36
====================== =====================
Average outstanding shares:
Basic 43,322,319 42,517,226 43,298,879 42,451,708
Diluted 44,013,035 43,462,278 43,976,863 43,373,341
See notes to consolidated unaudited financial statements.
7
CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY(Unaudited)
UNITED BANKSHARES, INC. AND SUBSIDIARIES
(Dollars in thousands, except per share data)
Six Months Ended June 30, 1999
-----------------------------------------------------------------------------
Common Stock Accumulated
------------------ Other Total
Par Retained Comprehensive Treasury Shareholders'
Shares Value Surplus Earnings Income(Loss) Stock Equity
-----------------------------------------------------------------------------
Balance at January 1, 1999 43,256,833 $108,142 $88,353 $220,111 $4,934 $(9) 421,531
Comprehensive income (loss):
Net income - - - 34,957 - - 34,957
Other comprehensive
income (loss), net
of tax:
Unrealized loss on
securities of
$39,566 net of
reclassification
adjustment for
gains included
in net income
of $46 - - - - (39,520) - (39,520)
-----------
Total comprehensive income (loss) (4,563)
Purchase of treasury
stock (133,000 shares) (3,397) (3,397)
Cash dividends ($0.40
per share) - - - (17,324) - - (17,324)
Common stock options
exercised (139,629
shares) 124,079 310 630 - - 409 1,349
-----------------------------------------------------------------------------------
Balance at June 30,
1999 43,380,912 $108,452 $88,983 $ 237,744 $(34,586) $(2,997) $397,596
===================================================================================
See notes to consolidated unaudited financial statements
8
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
UNITED BANKSHARES, INC. AND SUBSIDIARIES
(Dollars in thousands)
Six Months Ended
June 30
-------------------
1999 1998
-------------------
NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES $150,995 $(264,875)
INVESTING ACTIVITIES
Proceeds from maturities and calls of investment
securities 125,751 75,824
Purchases of investment securities (53,964) (63,326)
Proceeds from sales of securities available for sale 248,557 10,820
Proceeds from maturities and calls of securities
available for sale 64,138 160,798
Purchases of securities available for sale (831,781) (109,928)
Proceeds from sales of loans 2,158
Purchases of loans (14,709)
Net purchases of bank premises and equipment (3,108) (2,031)
Net cash of acquired branches 56,472
Net change in loans (158,516) 57,224
-------------------
NET CASH (USED IN) PROVIDED BY INVESTING ACTIVITIES (608,923) 173,302
-------------------
FINANCING ACTIVITIES
Cash dividends paid (17,254) (10,181)
Pre-merger dividends of pooled companies (2,211)
Acquisition of treasury stock (3,397)
Proceeds from exercise of stock options 1,349 1,879
Proceeds from sales of treasury stock 654
Repayment of Federal Home Loan Bank borrowings (1,076) (93,575)
Proceeds from Federal Home Loan Bank borrowings 409,841 131,182
Acquisition of fractional shares (7)
Changes in:
Deposits (101,601) 5,177
Federal funds purchased, securities sold under
agreements to repurchase and other borrowings 151,115 7,920
-------------------
NET CASH PROVIDED BY FINANCING ACTIVITIES 438,977 40,838
-------------------
Decrease in cash and cash equivalents (18,951) (50,735)
Cash and cash equivalents at beginning of year 141,298 190,028
-------------------
Cash and cash equivalents at end of period $122,347 $ 139,293
===================
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 1998 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 1998, the FASB issued Statement No. 133, (SFAS No. 133), "Accounting for
Derivative Instruments and Hedging Activities." The provisions of this statement
require that derivative instruments be carried at fair value on the balance
sheet. The statement continues to allow derivative instruments to be used to
hedge various risks and sets forth specific criteria to be used to determine
when hedge accounting can be used. The statement also provides offsetting
changes in fair value or cash flows of both the derivative and the hedged asset
or liability to be recognized in earnings in the same period; however, any
changes in fair value or cash flow that represent the ineffective portion of a
hedge are required to be recognized in earnings and cannot be deferred. For
derivative instruments not accounted for as hedges, changes in fair value are
required to be recognized in earnings. The provisions of this statement become
effective for United beginning January, 1, 2001. This standard, when
implemented, is not expected to materially impact the reported financial
position or results of operations of United.
During 1998, the FASB issued Statement No. 134, (SFAS No. 134), "Accounting for
Mortgage-Backed Securities Retained After the Securitization of Mortgage Loans
Held for Sale by a Mortgage Banking Enterprise" (an amendment of Statement No.
65). SFAS No. 134 requires companies to classify all mortgage-backed securities
or other interests in the form of a security retained after a securitization of
mortgage loans held for sale based on its ability and intent to sell or hold
those investments. Any retained mortgage-backed securities that a company
commits to sell before or during the securitization process must be classified
as trading securities.
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.
10
3. INVESTMENT SECURITIES
The amortized cost and estimated fair values of securities available for sale
are summarized as follows:
June 30, 1999
-------------------------------------------
Gross Gross Estimated
(In thousands) Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
-------------------------------------------
U.S. Treasury securities
and obligations of U.S.
Government corporations
and agencies $259,337 $ 62 $7,344 $252,055
State and political
subdivisions 49,333 26 2,515 46,844
Mortgage-backed securities 821,715 935 40,020 782,630
Marketable equity securities 9,040 5,549 187 14,402
Other 312,124 - 9,716 302,408
-------------------------------------------
Total $1,451,549 $6,572 $59,782 $1,398,339
===========================================
December 31, 1998
-------------------------------------------
Gross Gross Estimated
(In thousands) Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
-------------------------------------------
U.S. Treasury securities
and obligations of U.S.
Government corporations
and agencies $198,151 $1,335 $162 $199,324
State and political
subdivisions 27,474 194 188 27,480
Mortgage-backed securities 279,618 2,860 262 282,216
Marketable equity securities 9,211 4,104 239 13,076
Other 43,120 - 51 43,069
-------------------------------------------
Total $557,574 $8,493 $902 $565,165
===========================================
The cumulative net unrealized holding loss on available for sale securities
resulted in a decrease to shareholders' equity of $34,586 at June 30, 1999 and
the cumulative net unrealized holding gain on available for sale securities
resulted in an increase of $4,934 at December 31, 1998. Both of these amounts
are net of deferred income taxes.
The amortized cost and estimated fair value of securities available for sale at
June 30, 1999 and December 31, 1998, by contractual maturity are shown on the
next page. 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.
11
June 30, 1999 December 31, 1998
------------------------ -----------------------
Estimated Estimated
Amortized Fair Amortized Fair
Cost Value Cost Value
------------------------ -----------------------
Due in one year or less $ 15,611 $ 15,648 $ 38,072 $ 38,321
Due after one year through
five years 119,376 118,322 113,410 114,343
Due after five years through
ten years 264,348 255,517 123,793 124,204
Due after ten years 1,043,174 994,450 273,088 275,221
Marketable equity securities 9,040 14,402 9,211 13,076
------------------------ -----------------------
Total $1,451,549 $1,398,339 $557,574 $565,165
======================== =======================
The preceding table includes $782,630 and $282,216 of mortgage-backed securities
at June 30, 1999 and December 31, 1998, respectively, with an amortized cost of
$821,715 and $279,618 at June 30, 1999 and December 31, 1998, 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:
June 30, 1999
-------------------------------------------
Gross Gross Estimated
(In thousands) Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
-------------------------------------------
U.S. Treasury securities
and obligations of U.S.
Government corporations
and agencies $62,616 $ 77 $1,684 $61,009
State and political
subdivisions 100,245 1,210 3,144 98,311
Mortgage-backed securities 107,310 722 717 107,315
Other 20,201 7 8 20,200
-------------------------------------------
Total $290,372 $2,016 $5,553 $286,835
===========================================
December 31, 1998
-------------------------------------------
Gross Gross Estimated
(In thousands) Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
-------------------------------------------
U.S. Treasury securities and
obligations of U.S.
Government corporations and
agencies $121,474 $1,225 $ 99 $122,600
State and political
subdivisions 82,011 2,929 241 84,699
Mortgage-backed securities 139,002 1,506 121 140,387
Other 19,664 8 5 19,667
-------------------------------------------
Total $362,151 $5,668 $466 $367,353
===========================================
12
The amortized cost and estimated fair value of securities held to maturity at
June 30, 1999, and December 31, 1998, 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.
June 30, 1999 December 31, 1998
------------------------ -----------------------
Estimated Estimated
Amortized Fair Amortized Fair
Cost Value Cost Value
------------------------ -----------------------
Due in one year or less $ 14,156 $ 14,183 $ 17,218 $ 17,349
Due after one year through
five years 41,515 41,599 68,758 69,661
Due after five years through
ten years 69,993 69,759 117,860 120,026
Due after ten years 164,708 161,294 158,315 160,317
------------------------ ----------------------
Total $290,372 $286,835 $362,151 $367,353
======================== =======================
The preceding table includes $107,315 and $140,387 of mortgage-backed securities
at estimated fair value at June 30, 1999 and December 31, 1998, respectively,
with an amortized cost of $107,310 and $139,002 at June 30, 1999 and December
31, 1998, respectively.
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 $538,262 and $414,275 at June 30, 1999 and
December 31, 1998, respectively.
4. NONPERFORMING LOANS
Nonperforming loans are summarized as follows:
June 30, December 31,
1999 1998
-------------------------
Loans past due 90 days or more and still
accruing interest $ 7,433 $ 9,528
Nonaccrual loans 16,599 9,139
-------------------------
Total nonperforming loans $24,032 $18,667
=========================
13
5. 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 Six Months Ended
June 30 June 30
------------------------- ------------------------
1999 1998 1999 1998
------------------------- ------------------------
Balance at beginning of period $39,039 $32,675 $39,189 $31,936
Provision charged to expense 1,761 5,257 2,525 7,337
------------------------- ------------------------
40,800 37,932 41,714 39,273
Loans charged-off (669) (1,833) (1,911) (3,371)
Less recoveries 340 528 668 725
------------------------- ------------------------
Net Charge-offs (329) (1,305) (1,243) (2,646)
------------------------- ------------------------
Balance at end of period $40,471 $36,627 $40,471 $36,627
========================= ========================
The average recorded investment in impaired loans during the quarter ended June
30, 1999 and for the year ended December 31, 1998 was approximately $18,554 and
$10,343, respectively. For the quarters ended June 30, 1999 and 1998, United
recognized interest income on the impaired loans of approximately $139 and $106,
respectively, substantially all of which was recognized using the accrual method
of income recognition.
At June 30, 1999, the recorded investment in loans that are considered to be
impaired under SFAS No. 114 was $21,891 (of which $16,599 were on a nonaccrual
basis). Included in this amount is $9,545 of impaired loans for which the
related allowance for loan losses is $3,210 and $12,346 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 that would have been recorded under the original
terms for the above loans was $599 and $446 for the quarters ended June 30, 1999
and 1998, respectively, $1,114 and $818 for the six months ended June 30, 1999
and 1998, respectively.
6. 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.
14
7. LINE OF BUSINESS REPORTING
United's principal business activities are community banking and mortgage
banking. The following information is based on United's current management
structure and presents results of operations as if the community banking and
mortgage banking segments were operated on a stand alone basis. The results are
not necessarily comparable with similar information of other companies.
General
Mortgage Community Corporate
Banking Banking and Other* Consolidated
-----------------------------------------
(In thousands)
THREE MONTHS ENDED JUNE 30, 1999
Net interest income $ 855 $42,437 $ 1,315 $ 44,607
Provision for loan losses 11 1,750 - 1,761
Net interest income after provision
for loan losses 854 40,687 1,315 42,846
Noninterest income 5,960 8,791 (2,298) 12,453
Noninterest expense 4,760 24,406 (96) 29,070
Income (loss) before income taxes 2,044 25,072 (887) 26,229
Income tax expense 646 7,509 278 8,433
Net income (loss) 1,398 17,563 (1,165) 17,796
Average total assets 146,619 4,837,545 (142,675) 4,841,489
THREE MONTHS ENDED JUNE 30, 1998
Net interest income $ 707 $41,154 $ 402 $ 42,263
Provision for loan losses 7 5,250 - 5,257
Net interest income after provision
for loan losses 700 35,904 402 37,006
Noninterest income 6,113 5,680 122 11,915
Noninterest expense 4,456 33,780 2,203 40,439
Income before income taxes 2,357 7,804 (1,679) 8,482
Income tax expense (benefit) 525 (3,214) 3,624 935
Net income 1,832 11,018 (5,303) 7,547
Average total assets 188,871 4,221,499 (214,366) 4,196,004
SIX MONTHS ENDED JUNE 30, 1999
Net interest income $ 1,795 $86,987 $ 1,796 $ 90,578
Provision for loan losses 25 2,500 - 2,525
Net interest income after provision
for loan losses 1,770 84,487 1,796 88,053
Noninterest income 12,240 14,531 (3,679) 23,092
Noninterest expense 9,361 48,130 400 57,891
Income (loss) before income taxes 4,649 50,888 (2,283) 53,254
Income tax expense 1,597 16,298 402 18,297
Net income (loss) 3,052 34,590 (2,685) 34,957
Average total assets 178,460 4,718,329 (192,862) 4,703,927
15
General
Mortgage Community Corporate
Banking Banking and Other* Consolidated
------------------------------------------
SIX MONTHS ENDED JUNE 30, 1998
Net interest income $ 1,167 $80,234 $ 886 $ 82,287
Provision for loan losses 7 7,330 - 7,337
Net interest income after provision
for loan losses 1,160 72,904 886 74,950
Noninterest income 11,827 11,409 2,691 25,927
Noninterest expense 9,819 57,591 2,724 70,134
Income (loss) before income taxes 3,168 26,722 853 30,743
Income tax expense 839 3,423 4,513 8,775
Net income (loss) 2,329 23,299 (3,660) 21,968
Average total assets 172,771 4,140,841 (201,448) 4,112,164
* General corporate and other includes intercompany eliminations
8. COMPREHENSIVE INCOME
In June 1997, the FASB issued Statement No. 130, (SFAS No. 130), "Reporting
Comprehensive Income" effective for years beginning after December 15, 1997.
This statement requires companies to report and display comprehensive income and
its components in the financial statements. For United, comprehensive income
consists of net income reported on the consolidated statements of income and
changes in the fair value of available for sale securities reported as a
component of shareholders' equity, net of any realized after-tax gain or loss on
sales or calls of investment securites included in consolidated net income.
The components of total comprehensive income for the three and six months ended
June 30, 1999 and 1998 are as follows:
Three Months Ended Six Months Ended
June 30 June 30
------------------------ -----------------------
1999 1998 1999 1998
------------ ----------- ----------- -----------
Net Income $ 17,796 $ 7,547 $ 34,957 $ 21,968
Other Comprehensive Income (Loss),
Net of Tax:
Unrealized loss on available
for sale securities arising
during the period (36,344) (58) (39,566) (1,558)
Less: Reclassification
adjustment for gains (losses)
included in net income 46 (86) 46 1,531
------------ ----------- ----------- -----------
Total Comprehensive Income (Loss) $ (18,502) $ 7,403 $ (4,563) $ 21,941
============ =========== =========== ===========
16
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, 1999
and June 30, 1998 with the interest rate earned or paid on such amount.
Three Months Ended Three Months Ended
June 30, 1999 June 30, 1998
-------------------------- -------------------------
Average Avg. Average Avg.
(Dollars in thousands) Balance Interest Rate Balance Interest Rate
-------------------------- -------------------------
ASSETS
Earning Assets:
Federal funds sold and
securities repurchase
under agreements to
resell and other
short-term investments $ 5,117 $ 81 6.34% $ 18,306 $ 254 5.57%
Investment Securities:
Taxable 1,532,424 25,431 6.64% 891,949 14,290 6.40%
Tax-exempt (1) 138,773 2,663 7.68% 57,468 1,217 8.47%
-------------------------- -------------------------
Total Securities 1,671,197 28,094 6.72% 949,417 15,507 6.53%
Loans, net of unearned
income (1)(2) 2,926,437 60,216 8.25% 3,022,107 65,756 8.70%
Allowance for loan losses (39,147) (34,700)
---------- ----------
Net loans 2,887,290 8.36% 2,987,407 8.80%
-------------------------- -------------------------
Total earning assets 4,563,604 $ 88,391 7.76% 3,955,130 $ 81,517 8.24%
----------------- ----------------
Other assets 277,885 240,874
---------- ----------
TOTAL ASSETS $4,841,489 $4,196,004
========== ==========
LIABILITIES
Interest-Bearing Funds:
Interest-bearing deposits $2,910,361 $ 30,891 4.26% $2,731,822 $ 31,520 4.63%
Federal funds purchased,
repurchase agreements and
other short-term borrowings 330,983 3,600 4.36% 223,809 2,373 4.25%
FHLB advances 620,613 7,924 5.12% 304,063 4,438 5.85%
---------------------------- ---------------------------
Total Interest-Bearing Funds 3,861,957 42,415 4.41% 3,259,694 38,331 4.72%
----------------- ---------------
Demand deposits 470,978 445,562
Accrued expenses and other
liabilities 74,237 84,680
---------- ----------
TOTAL LIABILITIES 4,407,172 3,789,936
SHAREHOLDERS' EQUITY 434,317 406,068
---------- ----------
TOTAL LIABILITIES AND
SHAREHOLDERS' EQUITY $4,841,489 $4,196,004
========== ==========
NET INTEREST INCOME $ 45,976 $ 43,186
======== ========
INTEREST SPREAD 3.35% 3.52%
NET INTEREST MARGIN 4.03% 4.37%
(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 six month periods ended June 30, 1999 and
June 30, 1998 with the interest rate earned or paid on such amount.
Six Months Ended Six Months Ended
June 30, 1999 June 30, 1998
-------------------------- -------------------------
Average Avg. Average Avg.
(Dollars in thousands) Balance Interest Rate Balance Interest Rate
-------------------------- -------------------------
ASSETS
Earning Assets:
Federal funds sold and
securities repurchased
under agreements to resell
and other short-term
investments $ 6,983 $ 209 6.05% $ 26,662 $ 719 5.44%
Investment Securities:
Taxable 1,255,772 41,662 6.64% 916,372 29,392 6.41%
Tax-exempt (1) 129,015 4,962 7.69% 56,642 2,397 8.46%
---------------------------- ------------------------
Total Securities 1,384,787 46,624 6.73% 973,014 31,789 6.53%
Loans, net of unearned
income (1) (2) 3,080,504 128,327 8.33% 2,908,376 126,278 8.68%
Allowance for loan losses (39,126) (33,349)
---------- ----------
Net loans 3,041,378 8.44% 2,875,027 8.78%
--------------------------- -------------------------
Total earning assets 4,433,148 $ 175,160 7.90% 3,874,703 $158,786 8.20%
----------------- ---------------
Other assets 270,779 237,461
========== =========
TOTAL ASSETS $4,703,927 $4,112,164
========== ==========
LIABILITIES
Interest-Bearing Funds:
Interest-bearing deposits $2,928,235 $ 62,677 4.32% $2,721,176 $ 62,217 4.61%
Federal funds purchased,
repurchase agreements and
other short-term borrowings 300,027 6,454 4.34% 214,400 5,028 4.73%
FHLB advances 502,975 12,817 5.14% 261,765 7,321 5.64%
-------------------------- -------------------------
Total Interest-Bearing Funds 3,731,237 81,948 4.43% 3,197,341 74,566 4.70%
--------------- --------------
Demand deposits 467,507 443,360
Accrued expenses and other
liabilities 72,837 66,863
---------- ----------
TOTAL LIABILITIES 4,271,581 3,707,564
SHAREHOLDERS' EQUITY 432,346 404,600
---------- ----------
TOTAL LIABILITIES AND
SHAREHOLDERS' EQUITY $4,703,927 $4,112,164
=========== ===========
NET INTEREST INCOME $ 93,212 $ 84,220
======== ========
INTEREST SPREAD 3.47% 3.50%
NET INTEREST MARGIN 4.20% 4.38%
(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, but not limited to:
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 and the
inability of United or others to remediate Year 2000 concerns in a timely
fashion.
INTRODUCTION
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 first half of 1999 was $34.96 million or $0.79 per share
compared to $21.97 million or $0.51 per share for the first half of 1998. This
represents a 59.13% increase in net income and a 54.91% increase in earnings per
share. Net income for the second quarter of 1999 was $17.80 million or $0.40 per
share compared to $7.55 million or $0.17 per share for the second quarter of
1998. The second quarter and first half results for 1998 include the recognition
of approximately $7.1 million ($4.3 million after-tax) of merger-related costs
for the acquisition of George Mason Bankshares, Inc. United's annualized return
on average assets for the first six months of 1999 was 1.50% and return on
average shareholders' equity was 16.30% as compared to 1.08% and 10.95% for the
first six months of 1998.
United had strong core earnings driven by a net interest margin of 4.20% for the
first six months of 1999. Net interest income increased $8.29 million or 10.08%
for the first six months of 1999 as compared to the same period for 1998. The
provision for loan losses decreased $4.81 million or 65.59% when comparing the
first six months of 1999 to the first six months of 1998. Noninterest income,
including income from mortgage banking operations, but excluding investment
securities gains, decreased 2.34% for the first six months of 1999 when compared
to the first six months of 1998. Noninterest expenses decreased $12.24 million
or 17.46% for the first half of 1999 compared to the same period in 1998.
United's effective tax rate was 34.4% and 28.6% in 1999 and 1998.
19
Total assets were $5.01 billion at June 30, 1999, a $437.34 million or 9.57%
increase from year end, and up $758.54 million or 17.86% from one year ago. In
terms of asset composition since year end 1998, the June 30, 1999 balance sheet
reflects a $18.95 million decrease in cash and cash equivalents and a $761.40
million increase in investment securities. During the quarter, United completed
a loan securitization in which approximately $165 million of mortgage loans held
for sale were securitized and retained in United's available for sale investment
portfolio. Overall, loans held for sale decreased $573.95 million since year end
due to loan sales in the secondary market in addition to loan securitizations of
approximately $370 million completed during 1999. Portfolio loans, net of
unearned income increased $235.43 million. Other assets increased $35.10 million
due mainly to a $15 million purchase of long-term insurance benefits for certain
key executive officers. All other categories of assets were moderately flat
compared to year end 1998.
Noninterest and interest bearing deposits decreased $26.87 million and $74.70,
repectively, compared to year end. United's total borrowed funds increased
$560.11 million or 11.22%. Short-term borrowings increased $151.12 million and
FHLB borrowings increased $408.77 million as United utilized the borrowings to
fund investment and loan growth. Accrued expenses and other liabilities
increased $2.97 million or 5.09% since year end 1998 primarily as a result of
increased accrued interest payable due to the higher volume of borrowed funds
during the first half of 1999.
Shareholders' equity decreased $23.94 million or 5.68% from to December 31, 1998
due to a decline in the fair value of United's securities available for sale
portfolio of approximately $39.5 million, net of deferred income taxes. United
continued to balance capital adequacy and returns to shareholders. At June 30,
1999, 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 $2.34 million or 5.55% in the second quarter of
1999 and $8.29 million or 10.08% for the first six months of 1999, when compared
to the same periods of 1998. 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 $608.47 million for the second
quarter of 1999 and $558.45 million for the first half of 1999, when compared to
the second quarter and first half of 1998, respectively. United's tax-equivalent
net interest margin was 4.03% and 4.20% for the second quarter and first six
months of 1999, respectively. For the quarter ended June 30, 1999, United's net
interest margin was 36 basis points lower than the immediately preceding
quarter, and 34 basis points less than the second quarter of 1998. The lower net
interest margin from one year ago was the result of increased average wholesale
funding balances as well as a decrease in the yield on the loan portfolio due to
the securitization of certain high loan to value loans.
PROVISION FOR LOAN LOSSES
Nonperforming loans were $24.03 million at June 30, 1999 and $18.67 million at
December 31, 1998. This decline in credit quality within the nonperforming
category along with other trends impacted qualitative changes to risk factors as
more fully described below. However, nonperforming loans decreased $5.13 million
when compared to the preceding quarter ending March 31, 1999. Nonperforming
loans represented 0.48% of total assets at the end of the second quarter of
1999, as compared to 0.41% for United at year end
20
1998 and 0.62% at the end of the first quarter of 1999. 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. Nonaccrual loans increased $7.46 million or 81.63% since year
end 1998 primarily due to a single collateralized commercial loan being
classified as nonaccrual. Total nonperforming assets of $27.26 million,
including OREO of $3.23 million at June 30, 1999, represented 0.54% of total
assets at the end of the second quarter.
At June 30, 1999, impaired loans were $21.89 million, an increase of $10.97
million or 100.46% the $10.92 million in impaired loans at December 31,
1998. For further details, see Note 5 to the unaudited consolidated financial
statements.
United evaluates the adequacy of the allowance for loan losses on a quarterly
basis and its loan administration policies are focused upon the risk
characteristics of the loan portfolio. United's process for evaluating the
allowance is a formal company-wide process that focuses on early identification
of potential problem credits and procedural discipline in managing and
accounting for those credits.
Allocations are made for specific commercial loans based upon management's
estimate of the borrowers' ability to repay and other factors impacting
collectibility. Other commercial loans not specifically reviewed on an
individual basis are evaluated based on historical loan loss percentages applied
to loan pools that have been segregated by risk. Allocations for loans other
than commercial loans are made based upon historical loss experience adjusted
for current conditions. The unallocated portion of the allowance for loan losses
provides for risk arising in part from, but not limited to, inherent
uncertainties in the estimation process. Differences between actual loan loss
experience and estimates are reviewed on a quarterly basis and adjustments are
made to those estimates. United's formal company wide process at June 30, 1999,
produced increased allocations within two of four loan categories. The
components of the allowance allocated to commercial and real estate construction
loans increased $2.4 million and $387 thousand, respectively, as a result of
changes in historical loss experience factors for these loan pools and as a
result of increases in specific allocations for commercial loans as a result of
individual credit reviews. The components of the allowance allocated to consumer
and real estate construction decreased $338 thousand and $76 thousand,
respectively, as a result of changes in volume and historical loss experience
factors.
At June 30, 1999 and December 31, 1998, the allowance for loan losses was 1.40%
and 1.48% of total loans, net of unearned income, respectively. At June 30, 1999
and December 31, 1998, the ratio of the allowance for loan losses to
nonperforming loans was 168.4% and 209.9%, respectively
Management believes that the allowance for loan losses of $40.47 million at June
30, 1999, is adequate to provide for losses on existing loans based on
information currently available.
For the quarters ended June 30, 1999 and 1998, the provision for loan losses was
$1.76 million and $5.26 million, respectively, while the provision for the first
six months was $2.53 million for 1999 as compared to $7.33 million for 1998.
Total net charge-offs were $329 thousand in the second quarter of 1999 and $1.31
million during the same time period in 1998, which represents 0.02% and 0.05% of
average loans for the respective quarters. Charge-offs exceeded recoveries by
$1.24 million for the first six months of 1999 as compared to net charge-offs of
$2.65 million for the first six months of 1998. Note 5 to the accompanying
unaudited consolidated financial statements provides a progression of the
allowance for loan losses.
21
Management is not aware of any potential problem loans, trends or uncertainties
which it reasonably expects will materially impact future operating results,
liquidity, or capital resources which have not been disclosed. Additionally,
management has disclosed all known material credits which cause management to
have serious doubts as to the ability of such borrowers to comply with the loan
repayment schedules.
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 $538 thousand or 4.52% for the second
quarter of 1999 when compared to the second quarter of 1998. However,
noninterest income decreased $2.84 million or 10.93% for the first six months of
1999 when compared to the same period in 1998 due mainly to a conservative
market value adjustment of $2.3 million on high loan-to-value mortgage loans
held for sale at March 31, 1999 and a recognized gain on an available for sale
equity security of $2.49 million in the first quarter of 1998. Excluding the
lower of cost or market adjustment and investment securities gains, noninterest
income increased $1.76 million or 7.47% for the first half of 1999 primarily due
to a combination of increased revenues from United's mortgage banking operations
and trust department.
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 decreased $11.37
million or 28.11% and $12.24 million or 17.46% for the quarter and six months
ended June 30, 1999, as compared to the same periods in 1998, due to
merger-related charges recognized during the second quarter of 1998 for the
acquisition of George Mason. These charges consisted primarily of employee
benefits, severance, facilities, system and other costs to effect the merger.
Total salaries and benefits decreased by 21.73% or $4.18 million and 13.00% or
$4.49 million for the second quarter and first six months of 1999 when compared
to the same periods of 1998. The higher salaries and benefits costs for 1998
were attributable to commissions and salaries expense at United's mortgage
banking subsidiaries due to higher commissions on the 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 for the second quarter of 1999 increased by $848 thousand
or 36.38% while decreasing $93 thousand or 1.49%, for the first six months of
1999 when compared to the second quarter and first six months of 1998,
respectively.
Other expenses decreased $8.04 million or 42.57% and $7.66 million or 26.10% for
the second quarter and first six months of 1999, as compared to the same periods
of 1998. This overall decrease was primarily due to the aforementioned
merger-related expenses associated with the George Mason merger in the second
quarter of 1998.
22
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 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 (more liabilities repricing than 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
liability sensitive in the one year horizon in the amount of $577 million or
(12.20%) of the cumulative gap to related earning assets.
During 1998, United purchased fixed-rate junior-lien mortgage loans from a
unrelated third party financial institution with the intent to securitize these
loans and resell the securitized loans back to the third party lender. However,
the third party was unable to repurchase the loans and United inherited
approximately $456 million of these mortgage loans which United held for sale on
its balance sheet as of December 31, 1998. Except for approximately $79 million
of these loans which were retained in its loan portfolio, United
23
completed its plan to securitize the remaining loans and either resell the
securitized loans or hold the securities in its available for sale investment
portfolio. One securitization occurred during the first quarter of 1999 which
resulted in approximately $205 million of these mortgage loans held for sale
being securitized with approximately $71 million of available for sale
securities being retained in the investment portfolio and the remainder being
sold to an independent third party. During the second quarter of 1999, United
completed a second securitization in which approximately $165 million of
mortgage loans held for sale were securitized and retained in United's available
for sale investment portfolio.
By securitizing these mortgage loans, United effectively removed these loans
from its balance sheet by creating investment securities supported by more
predictable cash flows, which United either sold to independent third parties or
retained in its own investment portfolio. As a part of this process, United
provides credit enhancement, in the form of overcollateralization, with respect
to the investment security created. As a result, United does maintain a certain
level of credit, prepayment and interest rate risk associated with these
securitized loans, however, the risk maintained by United is less than that
which would be maintained had United held these loans on its balance sheet until
the loans matured.
In return for this risk exposure, United will receive on-going income from each
securitization that is determined as a function of the "excess spread" derived
from the securitized loans. The "excess spread", generally, is calculated as the
difference between (a) the interest at the stated rate paid by borrowers and (b)
the sum of pass-through interest paid to third-party investors and various fees,
including trustee, insurance, servicing, and other similar costs. The "excess
spread" represents income to be recognized by United over the life of the
securitized loan pool.
To further 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 June 30, 1999 and June 30, 1998:
Change in
Interest Rates Percentage Change in Net Interest
(basis points) Income
------------------ ------------------------------------
June 30, 1999 June 30, 1998
------------- -------------
+200 0.36% 5.42%
-200 -4.75% -5.71%
24
For June 30, 1999, 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 0.36% over one year as compared to an
increase of 5.42% for June 30, 1998. A 200 basis point immediate, sustained
downward shock in the yield curve would decrease net interest income by an
estimated 4.75% over one year for June 30, 1999 as compared to a decrease of
5.71% for June 30, 1998. All of these estimated changes in net interest income
are and were within the policy guidelines established by the Board of Directors.
25
The following table shows the interest rate sensitivity GAP as of June 30, 1999:
Interest Rate Sensitivity Gap
Days
---------------------------------- Total 1-5 Over 5
0-90 91-180 181-365 One Year Years Years Total
-----------------------------------------------------------------------------------
ASSETS
Interest-Earning Assets:
Federal funds sold and
Securities purchased under
agreements to resell and
other short-term investments $ 3,391 $ 2,000 $ 5,391 $ 5,391
Investment and Marketable
Equity Securities
Taxable $ 97,455 $17,056 44,312 158,823 $266,304 $1,116,495 1,541,622
Tax-exempt 3,229 581 3,810 12,751 130,528 147,089
Loans, net of
unearned income
1,189,866 172,426 323,196 1,685,488 785,629 563,357 3,034,474
-----------------------------------------------------------------------------------
Total
Interest-Earning
Assets $1,293,941 $ 189,482 $370,089 $1,853,512 $1,064,684 $1,810,380 $4,728,576
===================================================================================
LIABILITIES
Interest-Bearing
Funds:
Savings and NOW accounts $1,210,401 $1,210,401 $1,210,401
Time deposits of $100,000 & over 55,758 $32,852 $90,888 179,498 $ 45,731 $ 518 225,747
Other time deposits 332,706 319,984 468,498 1,121,188 315,840 2,194 1,439,222
Federal funds purchased, Repurchase
agreements and other short-term
borrowings 361,654 15,000 376,654 23,500 400,154
FHLB advances 365,000 25,000 80,000 470,000 96,307 188,325 754,632
-----------------------------------------------------------------------------------
Total
Interest-Bearing
Funds $2,325,519 $ 377,836 $654,386 $3,357,741 $481,378 $191,037 $4,030,156
===================================================================================
Interest
Sensitivity Gap ($1,031,578) ($188,354) ($284,297) ($1,504,229) $583,306 $1,619,343 $698,420
===================================================================================
Cumulative Gap ($1,031,578)($1,219,932)($1,504,299) ($1,504,229) ($920,923) $698,420 $ 698,420
===================================================================================
Cumulative Gap as a Percentage of
Total Earning
Assets (21.82%) (25.80%) (31.81%) (31.81%) (19.48%) 14.77% 14.77%
Management
Adjustments $1,159,428 ($77,334) ($154,552) $927,542 ($927,542) $0
Off-Balance Sheet
Activities
Cumulative
Management
Adjusted Gap
and Off-Balance
Sheet Activities $ 127,850 ( $137,838) ($ 576,687) ($576,687) ($920,923) $698,420 $698,420
===================================================================================
Cumulative
Management
Adjusted Gap
and Off-Balance
Sheet Activities
as a Percentage
of Total Earning
Assets 2.70% (2.92%) (12.20%) (12.20%) (19.48%) 14.77% 14.77%
===================================================================================
26
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 branches 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 six months ended June 30, 1999, cash flows from operations provided
United $151.00 million of cash primarily as a result of $122.64 million of
excess proceeds from sales of mortgage loans in the secondary market during the
first half of 1999. During the same period, net cash of $608.92 million was used
for investing activities which was primarily due to $447.30 million of excess
purchases of investment securities over net proceeds from calls and maturities
of investment securities and $158.52 million of net portfolio loan originations.
During the first six months of 1999, net cash of $438.98 million was generated
by financing activities, primarily due to additional borrowings of approximately
$559.88 million that consisted of $408.77 million of new FHLB advances and
$151.12 million in increased short-term borrowings from federal funds purchased
and securities sold under agreements to repurchase. These sources of funds were
partially offset by payment of $17.25 million in cash dividends, $3.40 million
for acquisitions of United shares under the stock repurchase program and a
$101.60 million decrease in deposits. The net effect of this activity was a
decrease in cash and cash equivalents of $18.95 million for the first six months
of 1999.
United anticipates no difficulty in meeting its obligations over the next 12
months and has no material
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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.
CAPITAL
Total shareholders' equity decreased $23.94 million to $397.60 million, which is
a decrease of 5.68% from December 31, 1998. Since year end, United has
experienced a $39.52 million reduction, net of deferred income taxes, in the
fair value of its available for sale investment portfolio due primarily to
increased market interest rates. During the second quarter of 1999, United
announced a new plan to repurchase up to 1.75 million shares of its common stock
on the open market, of which 133,000 shares were repurchased during the quarter.
United's equity to assets ratio was 7.95% at June 30, 1999, as compared to 9.23%
at December 31, 1998. Capital and reserves to total assets was 8.76% at June 30,
1999, as compared to 10.09% at December 31, 1998.
Cash dividends of $0.20 per common share for the second quarter of 1999 and
$0.40 for the six month period ended June 30, 1999, both represent increases of
11.12% over the $.18 paid for second quarter of 1998 and $0.36 paid for the
first six months of 1998. Total cash dividends paid were approximately $8.67
million for the second quarter of 1999 and $17.36 million for the first six
months of 1999, an increase of 23.22% and 41.02% over the comparable periods of
1998.
United seeks to maintain a proper relationship between capital and total assets
to support growth and sustain earnings. United's average equity to average asset
ratio was 9.20% at June 30, 1999 and 9.84% at June 30, 1998. United's risk-based
capital ratios of 12.37% at June 30, 1999 and 12.63% at December 31, 1998, are
both significantly higher than the minimum regulatory requirements. United's
Tier I capital and leverage ratios of 11.14% and 8.09%, respectively, at June
30, 1999, are also well above regulatory minimum requirements.
YEAR 2000 ISSUE
The Year 2000 Issue is the result of computer programs being written using two
digits rather than four digits 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 its internal remediation and testing phases were completed by December 31,
1998. Its external remediation and testing phases being performed by United's
primary data processor have been completed.
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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. 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 is utilizing both internal and external resources to reprogram, or
replace, and test the Year 2000 modifications. United has completed the
remediation and testing phases of the Year 2000 project as well as the
implementation phase with all information technology and non-information
technology systems being compliant with the Year 2000.
The total cost of the Year 2000 project is estimated at $4 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 $2.4 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
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and similar risks, and United's business, operations, and financial position
could be materially, adversely affected.
United has developed contingency plans for implementation in the event that
mission critical third party vendors or other third parties fail to adequately
address Year 2000 issues. United will be testing those plans during the third
quarter of 1999. 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.
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