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 March 31, 2000
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) 424-8800
--------------
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; 41,922,379 shares outstanding as of April
30, 2000.
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)
March 31, 2000 and December 31, 1999.........................................6
Consolidated Statements of Income (Unaudited) for the
Three Months Ended March 31, 2000 and 1999...................................7
Consolidated Statement of Changes in Shareholders' Equity
(Unaudited) for the Three Months Ended March 31, 2000........................8
Condensed Consolidated Statements of Cash Flows (Unaudited)
for the Three Months Ended March 31, 2000 and 1999...........................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...................................17
-----------------------------------
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......................................Not Applicable
-------------------
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...............................26
(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 May 12, 2000 /s/ Richard M. Adams
---------------------- -------------------------------------
Richard M. Adams, Chairman of
the Board and Chief Executive
Officer
Date May 12, 2000 /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 March 31, 2000 and December 31, 1999, consolidated balance sheets of United
Bankshares, Inc. and Subsidiaries, and the related consolidated statements of
income for the three months ended March 31, 2000 and 1999, and the related
consolidated statement of changes in shareholders' equity for the three months
ended March 31, 2000, and the related condensed consolidated statements of cash
flows for the three months ended March 31, 2000 and 1999, 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) March 31 December 31
2000 1999
-----------------------------------
Assets
Cash and due from banks $ 104,881 $ 131,091
Interest-bearing deposits with other banks 3,275 8,317
Federal funds sold 2,000 20,400
-----------------------------------
Total cash and cash equivalents 110,156 159,808
Securities available for sale at estimated fair value (amortized
cost-$1,042,793 at March 31, 2000 and $1,256,946 at December 31, 1999) 999,456 1,207,363
Securities held to maturity (estimated fair value-$391,628 at
March 31, 2000 and $258,183 at December 31, 1999) 397,493 265,190
Loans held for sale 102,109 117,825
Loans
Commercial, financial, and agricultural 580,481 535,116
Real estate:
Single family residential 1,394,449 1,388,568
Commercial 685,705 701,421
Construction 141,720 144,634
Other 63,829 44,381
Installment 370,790 363,272
-----------------------------------
3,236,974 3,177,392
Less: Unearned income (6,729) (7,296)
-----------------------------------
Loans net of unearned income 3,230,245 3,170,096
Less: Allowance for loan losses (39,490) (39,599)
-----------------------------------
Net loans 3,190,755 3,130,497
Bank premises and equipment 47,574 48,696
Accrued interest receivable 35,287 36,357
Other assets 97,915 103,424
-----------------------------------
TOTAL ASSETS $4,980,745 $5,069,160
===================================
Liabilities
Domestic deposits:
Noninterest-bearing $ 515,164 $ 480,767
Interest-bearing 2,759,341 2,780,218
-----------------------------------
Total deposits 3,274,505 3,260,985
Borrowings:
Federal funds purchased 42,520 44,120
Securities sold under agreements to repurchase 306,185 349,129
Federal Home Loan Bank borrowings 914,578 953,347
Other borrowings 653 4,998
Accrued expenses and other liabilities 48,482 60,651
-----------------------------------
TOTAL LIABILITIES 4,586,923 4,673,230
Shareholders' equity
Common stock, $2.50 par value; Authorized-100,000,000 shares;
issued-43,381,769 at March 31, 2000 and December 31, 1999, including
1,362,890 and 894,661 shares in treasury at March 31, 2000 and
December 31, 1999, respectively 108,454 108,454
Surplus 86,381 87,260
Retained earnings 264,101 254,992
Accumulated other comprehensive income (33,439) (32,228)
Treasury stock, at cost (31,675) (22,548)
-----------------------------------
TOTAL SHAREHOLDERS' EQUITY 393,822 395,930
-----------------------------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $4,980,745 $5,069,160
===================================
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
March 31
------------------------------------
2000 1999
------------------------------------
Interest income
Interest and fees on loans $ 69,843 $ 67,651
Interest on federal funds sold and other short-term
investments 112 128
Interest and dividends on securities:
Taxable 20,735 16,231
Tax-exempt 2,578 1,494
------------------------------------
Total interest income 93,268 85,504
Interest expense
Interest on deposits 29,046 31,786
Interest on short-term borrowings 3,887 2,854
Interest on Federal Home Loan Bank advances 13,609 4,893
------------------------------------
Total interest expense 46,542 39,533
------------------------------------
Net interest income 46,726 45,971
Provision for loan losses 2,547 764
------------------------------------
Net interest income after provision for loan losses 44,179 45,207
Other income
Income from mortgage banking operations 3,383 4,418
Service charges, commissions, and fees 5,093 4,439
Trust department income 1,692 1,358
Security gains 318
Other income 315 424
------------------------------------
Total other income 10,801 10,639
Other expense
Salaries and employee benefits 13,739 15,006
Net occupancy expense 3,161 2,974
Other expense 11,243 10,841
------------------------------------
Total other expense 28,143 28,821
------------------------------------
Income before income taxes 26,837 27,025
Income taxes 8,849 9,864
------------------------------------
Net income $ 17,988 $ 17,161
====================================
Earnings per common share:
Basic $0.43 $0.40
====================================
Diluted $0.42 $0.39
====================================
Dividends per common share $0.21 $0.20
====================================
Average outstanding shares:
Basic 42,272,860 43,277,765
Diluted 42,657,425 43,961,407
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)
Three Months Ended March 31, 2000
----------------------------------------------------------------------------------------------
Common Stock Accumulated
------------------------- Other Total
Par Retained Comprehensive Treasury Shareholders'
Shares Value Surplus Earnings Income Stock Equity
----------------------------------------------------------------------------------------------
Balance at January 1, 2000 43,381,769 $108,454 $87,260 $254,992 ($32,228) ($22,548) $395,930
Comprehensive income:
Net income - - - 17,988 - - 17,988
Other comprehensive income, net of
tax:
Unrealized loss on securities of
$1,418, net of reclassification
adjustment for gains included in
net income of $207 - - - - (1,211) - (1,211)
------------
Total comprehensive income 16,777
Purchase of treasury stock
(539,500 shares) - - - - - (11,139) (11,139)
Cash dividends ($0.21 per share) - - - (8,879) - - (8,879)
Common stock options exercised
(71,271 shares) - - (879) - - 2,012 1,133
----------------------------------------------------------------------------------------------
Balance at March 31, 2000 43,381,769 $108,454 $86,381 $264,101 ($33,439) $ (31,675) $393,822
========== ========= ======= ======== ========= ============ ========
See notes to consolidated unaudited financial statements
8
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
UNITED BANKSHARES, INC. AND SUBSIDIARIES
(Dollars in thousands)
Three Months Ended
March 31
--------------------------------
2000 1999
--------------------------------
NET CASH PROVIDED BY OPERATING ACTIVITIES $ 32,742 $ 285,312
INVESTING ACTIVITIES
Proceeds from maturities and calls of investment securities 5,931 39,905
Purchases of investment securities (110) (48,348)
Proceeds from sales of securities available for sale 72,221 93,008
Proceeds from maturities and calls of securities available for sale 32,077 800
Purchases of securities available for sale (36,023) (475,922)
Net purchases of bank premises and equipment (595) (931)
Net change in loans (62,787) (4,828)
--------------------------------
NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES 10,714 (396,316)
FINANCING ACTIVITIES
Cash dividends paid (8,964) (8,596)
Proceeds from exercise of stock options 1,133 514
Acquisition of treasury stock (11,139)
Repayment of Federal Home Loan Bank borrowings (590,159) (538)
Proceeds from Federal Home Loan Bank borrowings 551,390 112,341
Changes in:
Deposits 13,520 (54,341)
Federal funds purchased, securities sold under agreements
to repurchase and other borrowings (48,889) 34,398
--------------------------------
NET CASH (USED IN) PROVIDED BY FINANCING ACTIVITIES (93,108) 83,778
--------------------------------
Decrease in cash and cash equivalents (49,652) (27,226)
Cash and cash equivalents at beginning of year 159,808 141,298
--------------------------------
Cash and cash equivalents at end of period $ 110,156 $ 114,072
================================
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 1999 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" as amended by FASB issued
Statement No. 137, (SFAS No. 137). 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 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.
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:
March 31, 2000
-----------------------------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
(In thousands) Cost Gains Losses Value
-----------------------------------------------------------------
U.S. Treasury securities and obligations
of U.S. Government corporations and
agencies $ 256,588 $ 4 $13,064 $243,528
State and political subdivisions 49,328 59 3,158 46,229
Mortgage-backed securities 657,811 728 27,406 631,133
Marketable equity securities 8,161 1,493 1,584 8,070
Other 70,905 409 70,496
-----------------------------------------------------------------
Total $1,042,793 $2,284 $45,621 $999,456
=================================================================
December 31, 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 $ 276,558 $ 15 $13,817 $ 262,756
State and political subdivisions 48,914 10 4,070 44,854
Mortgage-backed securities 693,828 324 24,256 669,896
Marketable equity securities 8,369 2,711 775 10,305
Other 229,277 9,725 219,552
-----------------------------------------------------------------
Total $1,256,946 $3,060 $52,643 $1,207,363
=================================================================
The cumulative net unrealized holding loss on available for sale securities
resulted in a decrease to shareholders' equity of $33,439 and $32,228, net of
deferred income taxes at March 31, 2000 and December 31, 1999, respectively.
The amortized cost and estimated fair value of securities available for sale at
March 31, 2000 and December 31, 1999, 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
March 31, 2000 December 31, 1999
---------------------------------- ----------------------------------
Estimated Estimated
Amortized Fair Amortized Fair
Cost Value Cost Value
---------------------------------- ----------------------------------
Due in one year or less $ 13,346 $ 13,338 $ 6,668 $ 6,663
Due after one year through five years 93,439 91,324 112,839 110,581
Due after five years through ten years 296,979 283,074 333,612 318,462
Due after ten years 630,660 603,650 795,458 761,352
Marketable equity securities 8,369 8,070 8,369 10,305
---------------------------------- ----------------------------------
Total $1,042,793 $999,456 $1,256,946 $1,207,363
================================== ==================================
The preceding table includes $631,133 and $669,896 of mortgage-backed securities
at March 31, 2000 and December 31, 1999, respectively, with an amortized cost of
$657,811 and $693,828 at March 31, 2000 and December 31, 1999, 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:
March 31, 2000
-----------------------------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
(In thousands) Cost Gains Losses Value
-----------------------------------------------------------------
U.S. Treasury securities and obligations
of U.S. Government corporations and
agencies $ 56,377 $ 25 $1,590 $ 54,812
State and political subdivisions 97,470 706 4,271 93,905
Mortgage-backed securities 85,639 370 1,098 84,911
Other 158,007 7 158,000
-----------------------------------------------------------------
Total $397,493 $1,101 $6,966 $391,628
=================================================================
December 31, 1999
-----------------------------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
(In thousands) Cost Gains Losses Value
-----------------------------------------------------------------
U.S. Treasury securities and obligations
of U.S. Government corporations and
agencies $ 56,734 $ 36 $2,217 $ 54,553
State and political subdivisions 97,824 769 5,084 93,509
Mortgage-backed securities 90,850 380 886 90,344
Other 19,782 4 9 19,777
-----------------------------------------------------------------
Total $265,190 $1,189 $8,196 $258,183
=================================================================
12
The amortized cost and estimated fair value of securities held to maturity at
March 31, 2000, and December 31, 1999, 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.
March 31, 2000 December 31, 1999
---------------------------------- ----------------------------------
Estimated Estimated
Amortized Fair Amortized Fair
Cost Value Cost Value
---------------------------------- ----------------------------------
Due in one year or less $ 8,059 $ 8,028 $ 4,528 $ 4,522
Due after one year through five years 37,346 36,703 38,623 38,391
Due after five years through ten years 104,123 100,654 67,833 66,997
Due after ten years 247,965 246,243 154,206 148,273
---------------------------------- ----------------------------------
Total $397,493 $391,628 $265,190 $258,183
================================== ==================================
The preceding table includes $84,911 and $90,344 of mortgage-backed securities
at estimated fair value at March 31, 2000 and December 31, 1999, respectively,
with an amortized cost of $85,639 and $90,850 at March 31, 2000 and December 31,
1999, respectively.
Maturities of the mortgage-backed securities are based upon the estimated
average life. There were no sales of held to maturity securities.
At the end of the quarter, debt securities with an amortized cost of $146,229
and an estimated fair value of $138,122 were transferred into the held to
maturity category from the available for sale category. The cumulative
unrealized loss of $8,107 at the date of transfer will be retained in the
carrying value of the held to maturity securities. The cumulative unrealized
loss, net of deferred taxes, of $5,270 will be retained as a separate component
of shareholders' equity. Such amounts will be amortized over the estimated
remaining life of the securities.
The carrying value of securities pledged to secure public deposits, securities
sold under agreements to repurchase, and for other purposes as required or
permitted by law, approximated $910,129 and $962,068 at March 31, 2000 and
December 31, 1999, respectively.
4. NONPERFORMING LOANS
Nonperforming loans are summarized as follows:
March 31, December 31,
2000 1999
----------------- -----------------
Loans past due 90 days or more and still accruing interest $ 7,951 $12,327
Nonaccrual loans 13,110 8,415
----------------- -----------------
Total nonperforming loans $21,061 $20,742
================= =================
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
March 31
---------------------------------------
2000 1999
----------------- -----------------
Balance at beginning of period $39,599 $39,189
Provision charged to expense 2,547 764
----------------- -----------------
42,146 39,953
Loans charged-off (2,859) (1,241)
Less recoveries 203 327
----------------- -----------------
Net Charge-offs (2,656) (914)
----------------- -----------------
Balance at end of period $39,490 $39,039
================= =================
The average recorded investment in impaired loans during the quarter ended March
31, 2000 and for the year ended December 31, 1999 was approximately $16,755 and
$16,681, respectively. For the quarters ended March 31, 2000 and 1999, United
recognized interest income on the impaired loans of approximately $211 and $117,
respectively, substantially all of which was recognized using the accrual method
of income recognition.
At March 31, 2000, the recorded investment in loans that are considered to be
impaired under SFAS No. 114 was $17,868 (of which $13,110 were on a nonaccrual
basis). Included in this amount is $7,396 of impaired loans for which the
related allowance for loan losses is $1,547 and $10,472 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 $555 and $515 for the quarters ended March 31,
2000 and 1999, 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)
March 31, 2000
- --------------
Net interest income $ 1,470 $ 44,910 $ 346 $ 46,726
Provision for loan losses 16 2,531 - 2,547
Net interest income after provision for loan losses 1,454 42,379 346 44,179
Noninterest income 3,430 6,024 1,347 10,801
Noninterest expense 3,178 24,859 106 28,143
Income before income taxes 1,706 23,544 1,587 26,837
Income tax expense 337 7,989 523 8,849
Net income 1,369 15,555 1,064 17,988
Average total assets 91,906 4,891,166 (8,320) 4,974,752
March 31, 1999
- --------------
Net interest income $ 940 $ 44,550 $ 481 $ 45,971
Provision for loan losses 14 750 - 764
Net interest income after provision for loan losses 926 43,800 481 45,207
Noninterest income 6,280 5,740 (1,381) 10,639
Noninterest expense 4,601 23,724 496 28,821
Income (loss) before income taxes 2,605 25,816 (1,396) 27,025
Income tax expense 951 8,788 125 9,864
Net income (loss) 1,654 17,028 (1,521) 17,161
Average total assets 210,655 4,398,376 (44,187) 4,564,844
* General corporate and other includes intercompany eliminations
15
8. EARNING ASSETS AND INTEREST-BEARING LIABILITIES
The following table shows the daily average balance of major categories of
assets and liabilities for each of the three month periods ended March 31, 2000
and March 31, 1999 with the interest rate earned or paid on such amount.
Three Months Ended Three Months Ended
March 31, 2000 March 31, 1999
-------------------------------- -------------------------------
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 $ 6,996 $ 112 6.46% $ 8,869 $ 128 5.83%
Investment Securities:
Taxable 1,229,866 20,735 6.78% 976,046 16,231 6.65%
Tax-exempt (1) (2) 201,342 3,607 7.20% 119,149 2,299 7.72%
-------------------------------- -------------------------------
Total Securities 1,431,208 24,342 6.84% 1,095,195 18,530 6.77%
Loans, net of unearned income (1) (2) (3) 3,288,222 71,689 8.75% 3,236,283 68,111 8.48%
Allowance for loan losses (39,609) (39,105)
------------- ------------
Net loans 3,248,613 8.80% 3,197,178 8.58%
-------------------------------- -------------------------------
Total earning assets 4,686,817 $96,143 8.22% 4,301,242 $86,769 8.12%
---------------- ----------------
Other assets 287,935 263,602
------------- ------------
TOTAL ASSETS $4,974,752 $4,564,844
============= ============
LIABILITIES
Interest-Bearing Funds:
Interest-bearing deposits $2,770,075 $29,046 4.22% $2,946,308 $31,786 4.38%
Federal funds purchased, repurchase
agreements and other short-term
borrowings 322,221 3,887 4.85% 268,726 2,854 4.31%
FHLB advances 960,393 13,609 5.70% 384,030 4,893 5.17%
-------------------------------- -------------------------------
Total Interest-Bearing Funds 4,052,689 46,542 4.62% 3,599,064 39,533 4.45%
---------------- ----------------
Demand deposits 462,542 463,998
Accrued expenses and other liabilities 58,664 71,420
------------- ------------
TOTAL LIABILITIES 4,573,895 4,134,482
SHAREHOLDERS' EQUITY 400,857 430,362
------------- ------------
TOTAL LIABILITIES AND
SHAREHOLDERS' EQUITY $4,974,752 $4,564,844
============= ============
NET INTEREST INCOME $49,601 $47,236
============ ============
INTEREST SPREAD 3.60% 3.67%
NET INTEREST MARGIN 4.23% 4.39%
(1) The interest income and the yields on federally nontaxable loans and
investment securities are presented on a tax-equivalent basis using the
statutory federal income tax rate of 35%.
(2) The interest income and the yields on state nontaxable loans and investment
securities are presented on a tax-equivalent basis using the statutory state
income tax rate of 9%.
(3) Nonaccruing loans are included in the daily average loan amounts
outstanding.
16
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
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 quarter of 2000 was $17.99 million or $0.42 per share
compared to $17.16 million or $0.39 per share for the first quarter of 1999.
This represents a 4.82% increase in net income and an 8.02% increase in earnings
per share. United's annualized return on average assets was 1.45% and return on
average shareholders' equity was 18.05% for the first quarter of 2000 as
compared to 1.52% and 16.17% for the first quarter of 1999.
United had strong core earnings driven by a net interest margin of 4.23% for the
first three months of 2000. Tax-equivalent net interest income increased $2.37
million or 5.01% for the first three months of 2000 as compared to the same
period for 1999. The provision for loan losses increased $1.78 million over the
previous year quarter due to the addition to the loan portfolio of a large block
of junior-lien mortgage loans previously held for sale. Noninterest income
increased $162 thousand or 1.52% for the first three months of 2000 when
compared to the first three months of 1999. Noninterest expenses decreased $678
thousand or 2.35% for the first three months of 2000 compared to the same period
in 1999. United's effective tax rate was 32.97% and 36.50% in 2000 and 1999,
respectively.
Total assets fell slightly to $4.98 billion at March 31, 2000, an $88.42 million
or 1.74% decrease from year end due to a planned de-leveraging of the balance
sheet. In terms of asset composition since year end 1999, the March 31, 2000
balance sheet reflects a $49.65 million decrease in cash and cash equivalents
and a $75.60 million decrease in investment securities. Overall, loans held for
sale decreased $15.72 million as loan sales in the secondary market exceeded
originations. Portfolio loans, net of unearned income grew $60.15 million or
1.90%. All other categories of assets were moderately flat compared to year end
1999.
Noninterest-bearing deposits increased $34.40 million compared to year end while
interest-bearing deposits decreased $20.88 million for the quarter. United's
total borrowed funds decreased $87.66 million or 6.49% as short-term borrowings
decreased $48.89 million and FHLB borrowings decreased $38.77 million as United
repaid borrowings to restructure the balance sheet. Accrued expenses and other
liabilities decreased $12.17 million or 20.06% since year end 1999 primarily as
a result of decreased accrued interest payable due to a lower volume of
interest-bearing funds during the first quarter of 2000.
Shareholders' equity decreased $2.11 million or 0.53% as compared to December
31, 1999 as United continued to balance capital adequacy and returns to
shareholders. At March 31, 2000, United's regulatory capital ratios, including
those of its bank subsidiaries, exceeded the levels established for well-
capitalized institutions.
17
RESULTS OF OPERATIONS
NET INTEREST INCOME
For the quarters ended March 31, 2000 and 1999, tax-equivalent net interest
income was $49.60 million and $47.24 million, respectively. These results
represent an increase of $2.37 million or 5.01% during the first quarter of 2000
when compared to the prior-year quarter. United's tax-equivalent net interest
margin was 4.23% for the first three months of 2000 and 4.39% for the same
period in 1999. The decline in the margin percentage reflected a changing
earning asset mix since the first quarter of 1999 primarily related to the
securitization of higher yielding high loan-to-value mortgage loans. As a
result of the securitization, interest income on the securities was recognized
at a projected loss-adjusted yield that was significantly less than the
contractual yields of the underlying assets. Should the actual performance of
the underlying assets in future periods differ from the current projections,
interest income recognized on those assets may be materially different.
Additionally, an increase in the cost of borrowed funds on a higher average
volume for the first quarter of 2000 also contributed to the decline in the net
interest margin in the quarter-to-quarter comparison.
PROVISION FOR LOAN LOSSES
Credit quality remained relatively stable for the first quarter of 2000.
Nonperforming loans were $21.06 million at March 31, 2000 and $20.74 million at
December 31, 1999. Nonperforming loans represented 0.42% of total assets at the
end of the first quarter of 2000, as compared to 0.41% for United at year end
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. Loans past due 90 days or more
decreased $464 thousand during the first quarter of 2000 while nonaccrual loans
increased $783 thousand since year end 1999. Total nonperforming assets of
$24.83 million, including OREO of $3.76 million at March 31, 2000, represented
0.50% of total assets at the end of the first quarter.
At March 31, 2000, impaired loans were $17.87 million, an increase of $2.23
million or 14.22% from the $15.64 million in impaired loans at December 31,
1999. 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 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, declines in credit
quality resulting from sudden economic or industry shifts and changing economic
trends. Differences between actual loan loss experience and estimates are
reviewed on a quarterly basis and adjustments are made to those estimates.
United's formal
18
company-wide process at March 31, 2000 produced increased allocations within
three of four loan categories. The components of the allowance allocated to real
estate increased $1.7 million, as a result of the addition to the loan portfolio
of a large block of junior-lien mortgage loans previously held for sale and
corresponding changes in historical loss factors. The components of the
allowance allocated to commercial loans increased $1.1 million as a result of
the increased level of impaired assets. The consumer loan pool allocation
remained stable, increasing by $80 thousand as a result of changes in volume and
historical loss experience. The real estate construction pool allocation
decreased $151 thousand as a result of changes in volume factors for this pool.
At March 31, 2000 and December 31, 1999, the allowance for loan losses was 1.22%
and 1.25% of period-end loans, net of unearned income, respectively. At March
31, 2000 and December 31, 1999, the ratio of the allowance for loan losses to
nonperforming loans was 187.5% and 190.9%, respectively.
Management believes that the allowance for loan losses of $39.49 million at
March 31, 2000, is adequate to provide for potential losses on existing loans
based on information currently available.
For the quarters ended March 31, 2000 and 1999, the provision for loan losses
was $2.55 million and $764 thousand, respectively. Total net charge-offs were
$2.66 million in the first three months of 2000 and $914 thousand during the
same time period in 1999, which represents 0.08% and 0.03% of average loans for
the respective quarters. The increases in provision and net charge-offs were
primarily attributed to the addition to the loan portfolio of approximately $230
million of junior-lien mortgage loans previously held for sale. Note 5 to the
accompanying unaudited consolidated financial statements provides a progression
of the allowance for loan losses.
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 $162 thousand or 1.52% for the first
quarter of 2000 when compared to the same period in 1999 even though mortgage
banking income decreased $1.04 million or 23.43% in the quarter-to-quarter
comparison. Mortgage loan origination activity fell 37.74% or $123.31 million
for the first three months of 2000 as compared to the same period in 1999 due to
the impact of declining demand due to rising interest rates. Fewer originations
resulted in a decline of loan sales in the secondary market of 50.33% or $221.82
million during the first quarter of 2000 in comparison to the prior-year
quarter. Excluding income from mortgage banking operations, noninterest income
increased $1.20 million or 19.24% for the first quarter of 2000 primarily due to
a combination of increased revenues from the trust department and the deposit
services area. Trust fees increased $334 thousand or 24.59% while deposit
charges increased $638 thousand or 16.87% compared to the first quarter of 1999.
19
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 $678
thousand or 2.35% for the first quarter ended March 31, 2000 as compared to the
same period in 1999.
Total salaries and benefits decreased by 8.44% or $1.27 million for the first
quarter of 2000 when compared to the same period of 1999. The decline was due
mainly to lower sales activity in the mortgage banking segment as compensation
and incentives for its personnel are significantly tied to activity levels.
Net occupancy expense for the first quarter of 2000 increased by $187 thousand
or 6.29% when compared to the first quarter of 1999. The overall change in net
occupancy expense for the first quarter of 2000 was due mainly to higher rental
and occupancy expense on leased offices.
Other expense, excluding non-core items, remained relatively flat, increasing
$156 thousand or 1.47% for the first quarter of 2000 as compared to the same
period of 1999.
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
20
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 $446 million or
(9.42%) of the cumulative gap to related earning assets.
During 1998, United purchased fixed-rate junior-lien mortgage loans from an
unrelated third party financial institution with the intention that these loans
would be securitized and resold 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. During 1999, to better manage risk,
United securitized approximately $205 million of these loans and retained a
portion of the resultant securities. At March 31, 2000, the retained resultant
securities approximated $59 million and are carried in the available for sale
investment portfolio. The remainder of these junior-lien mortgages were moved
to the loan portfolio and the balance at March 31, 2000, approximated $207
million.
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 one-year and two-year
horizon given an immediate and sustained increase or decrease in interest rates.
The current limits approved by the Board of Directors are structured on a staged
basis with each stage requiring specific actions.
The following table shows United's estimated earnings sensitivity profile after
management's adjustments as of March 31, 2000 and March 31, 1999:
Change in Percentage Change in Net Interest Income
Interest Rates -------------------------------------------
(basis points) March 31, 2000 March 31, 1999
-------------- ---------------- ----------------
+200 -3.97% 0.59%
-200 3.71% -6.22%
21
At March 31, 2000, given an immediate, sustained 200 basis point upward shock to
the yield curve used in the simulation model, it was estimated net interest
income for United would decrease by 3.97% over one year as compared to an
increase of 0.59% at March 31, 1999. A 200 basis point immediate, sustained
downward shock in the yield curve would increase net interest income by an
estimated 3.71% over one year at March 31, 2000 as compared to a decrease of
6.22% at March 31, 1999. All of these estimated changes in net interest income
are and were within the policy guidelines established by the Board of Directors.
22
The following table shows the interest rate sensitivity GAP as of March 31,
2000:
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 $ 5,275 $ 5,275 $ 5,275
Investment and Marketable
Equity Securities
Taxable 80,421 $ 11,784 $ 29,638 $ 121,843 $ 238,213 $ 893,194 1,253,250
Tax-exempt 295 2,394 2,689 11,543 129,467 143,699
Loans, net of unearned
income 1,280,657 180,699 333,811 1,795,167 801,806 735,381 3,332,354
-------------------------------------------------------------------------------------------------------
Total Interest-Earning
Assets $ 1,366,648 $ 192,483 $ 365,843 $ 1,924,974 $1,051,562 $1,758,042 $4,734,578
============ ============ ============ ============ ========== ========== ==========
LIABILITIES
Interest-Bearing Funds:
Savings and NOW accounts $ 1,162,266 $ 1,162,266 $1,162,266
Time deposits of
$100,000 & over 46,555 $ 20,363 $ 55,669 122,587 $ 52,746 $ 597 175,930
Other time deposits 325,918 248,677 338,492 913,087 504,552 3,506 1,421,145
Federal funds purchased,
Repurchase agreements
and other short-term
borrowings 314,858 24,500 339,358 10,000 349,358
FHLB advances 565,000 122,000 51,000 738,000 48,052 128,526 914,578
-------------------------------------------------------------------------------------------------------
Total Interest-Bearing Funds $ 2,414,597 $ 391,040 $ 469,661 $ 3,275,298 $ 615,350 $ 132,629 $4,023,277
============ ============ ============ ============ ========== ========== ==========
Interest Sensitivity Gap ($1,047,949) ($198,557) ($103,818) ($1,350,324) $ 436,212 $1,625,413 $ 711,301
============ ============ ============ ============ ========== ========== ==========
Cumulative Gap ($1,047,949) ($1,246,506) ($1,350,324) ($1,350,324) ($914,112) $ 711,301 $ 711,301
============ ============ ============ ============ ========== ========== ==========
Cumulative Gap as a
Percentage of (22.13%) (26.33%) (28.52%) (28.52%) (19.31%) 15.02% 15.02%
Total Earning Assets
Management Adjustments $ 1,130,177 ($ 75,383) ($ 150,653) $ 904,141 ($904,141) $ 0
Off-Balance Sheet Activities
-------------------------------------------------------------------------------------------------------
Cumulative Management
Adjusted Gap and Off-
Balance Sheet Activities $ 82,228 ($191,712) ($ 446,183) ($ 446,183) ($914,112) $ 711,301 $ 711,301
============ ============ ============ ============ ========== ========== ==========
Cumulative Management
Adjusted Gap and Off-
Balance Sheet Activities
as a Percentage of Total
Earning Assets 1.74% (4.05%) (9.42%) (9.42%) (19.31%) 15.02% 15.02%
============ ============ ============ ============ ========== ========== ==========
23
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. 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. In the normal course of
business, United through ALCO, evaluates these as well as other alternative
funding strategies that may be utilized to meet short-term and long-term funding
needs.
For the three months ended March 31, 2000, cash flows from operations provided
United with $32.74 million of cash primarily as a result of $17.27 million of
excess proceeds from sales of mortgage loans in the secondary market during the
first quarter of 2000. During the same period, net cash of $10.71 million was
provided by investing activities which was primarily due to $74.10 million of
excess net proceeds from calls and maturities of investment securities over
purchases of investment securities which slightly offset net growth in portfolio
loans of $62.79 million. During the first three months of 2000, net cash of
$93.11 million was used in financing activities, primarily due to the net
repayment of approximately $87.66 million of borrowings, payment of $8.96
million in cash dividends and $11.14 million for acquisitions of United shares
under the stock repurchase program. The net effect of this activity was a
decrease in cash and cash equivalents of $49.65 million for the first three
months of 2000.
United anticipates it can meet 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 lines of credit available.
24
The Asset and Liability Committee monitors liquidity to ascertain that a
liquidity position within certain prescribed parameters 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 $2.11 million to $393.82 million from
$395.93 million at December 31, 1999. Included in the shareholders' equity
balance at March 31, 2000 is the previously mentioned cumulative unrealized
loss, net of deferred taxes, of $5.33 million for the transfer of debt
securities from the available for sale portfolio into the held to maturity
portfolio. This amount will be amortized over the estimated remaining life of
the securities. Since year end, United has experienced only a slight reduction
of $1.21 million, 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 quarter, 539,500 shares were repurchased under a
plan announced by United in 1999 to repurchase up to 1.75 million shares of its
common stock on the open market. Through March 31, 2000, 1,589,300 shares have
been repurchased since the repurchase plan's implementation in May of 1999.
United's equity to assets ratio was 7.91% at March 31, 2000, as compared to
7.81% at December 31, 1999. Capital and reserves to total assets was 8.70% at
March 31, 2000, as compared to 8.53% at December 31, 1999.
Cash dividends of $0.21 per common share for the first quarter of 2000 represent
an increase of 5% over the $0.20 paid for first quarter of 1999. Total cash
dividends were approximately $8.85 million for the first quarter of 2000, an
increase of 2.20% over the comparable period of 1999.
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 8.06% at March 31, 2000 and 9.43% at March 31, 1999. United's
risk-based capital ratios of 11.30% at March 31, 2000 and 11.41% at December 31,
1999, are both significantly higher than the minimum regulatory requirements.
United's Tier I capital and leverage ratios of 10.25% and 7.81%, respectively,
at March 31, 2000, are also well above regulatory minimum requirements.
YEAR 2000 ISSUE
In prior years, United discussed the nature and progress of its plans to become
Year 2000 ready. In late 1999, United completed its remediation and testing of
the Year 2000 project. As a result of those planning and implementation
efforts, United experienced no significant disruptions in mission critical
information technology and non-information technology systems and believes those
systems successfully responded to the Year 2000 date change. United had minimal
expenses during the first quarter of 2000 in connection with its Year 2000
efforts. United is not aware of any material problems resulting from Year 2000
issues and does not anticipate any continued business impact related to this
issue. United will continue to monitor its mission critical computer
applications and those of its vendors throughout the year 2000 to ensure that
any latent Year 2000 matters that may arise are addressed promptly.
25