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, 2001
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; 41,266,638 shares outstanding as of
July 31, 2001.
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, 2001 and December 31, 2000........................................6
Consolidated Statements of Income (Unaudited) for the
Three and Six Months Ended June 30, 2001 and 2000..........................7
Consolidated Statement of Changes in Shareholders' Equity
(Unaudited) for the Six Months Ended June 30, 2001.........................8
Condensed Consolidated Statements of Cash Flows (Unaudited)
for the Six Months Ended June 30, 2001 and 2000............................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................................21
-----------------------------------
PART II. OTHER INFORMATION
Item 1. Legal Proceedings......................................Not Applicable
- -------------------------
Item 2. Changes in Securities..................................Not Applicable
- -----------------------------
Item 3. Defaults Upon Senior Securities........................Not Applicable
- ---------------------------------------
2
UNITED BANKSHARES, INC. AND SUBSIDIARIES
FORM 10-Q
TABLE OF CONTENTS--Continued
Page
----
Item 4. Submission of Matters to a Vote of Security Holders
- -----------------------------------------------------------
The following matters were submitted to a vote of security holders at the Annual
Meeting of Shareholders of the Registrant held on Monday, May 21, 2001:
(a) To approve, ratify and confirm the 2001 Incentive Stock Option Plan that
was approved by the Board of Directors of the Registrant at a regular
meeting held on February 26, 2001. There were 28,332,734 affirmative votes
cast, 6,275,654 negative votes and 668,776 abstaining votes.
(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
None
(b) Reports on Form 8-K
On June 14, 2001, United Bankshares, Inc. announced the signing of a
definitive merger agreement with Century Bancshares, Inc.
On July 18, 2001, United Bankshares, Inc. filed a Current Report
under Items 5 and 7 to report the results of operations for the
second quarter and first half of 2001.
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 10, 2001 /s/ Richard M. Adams
--------------- --------------------------
Richard M. Adams, Chairman of
the Board and Chief Executive
Officer
Date August 10, 2001 /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, 2001 and December 31, 2000, consolidated balance sheets of United
Bankshares, Inc. and Subsidiaries, the related consolidated statements of income
for the three and six months ended June 30, 2001 and 2000, the related
consolidated statement of changes in shareholders' equity for the six months
ended June 30, 2001, the related condensed consolidated statements of cash flows
for the six months ended June 30, 2001 and 2000, 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
2001 2000
----------------------------
Assets
Cash and due from banks $ 116,711 $ 142,801
Interest-bearing deposits with other banks 4,639 884
Federal funds sold 1,125
----------------------------
Total cash and cash equivalents 121,350 144,810
Securities available for sale at estimated fair value (amortized
cost-$1,158,561 at June 30, 2001 and $865,363 at December 31, 2000) 1,165,930 865,266
Securities held to maturity (estimated fair value-$283,723 at
June 30, 2001 and $378,405 at December 31, 2000) 284,987 380,068
Loans held for sale 198,591 203,831
Loans
Commercial, financial, and agricultural 600,318 564,887
Real estate:
Single family residential 1,308,037 1,352,955
Commercial 719,917 711,054
Construction 167,669 164,505
Other 84,209 84,742
Installment 327,874 319,351
----------------------------
3,208,024 3,197,494
Less: Unearned income (3,861) (5,000)
----------------------------
Loans net of unearned income 3,204,163 3,192,494
Less: Allowance for loan losses (41,197) (40,532)
----------------------------
Net loans 3,162,966 3,151,962
Bank premises and equipment 43,344 44,481
Accrued interest receivable 33,949 36,000
Other assets 83,490 78,129
----------------------------
TOTAL ASSETS $5,094,607 $4,904,547
============================
Liabilities
Domestic deposits:
Noninterest-bearing $ 536,287 $ 539,415
Interest-bearing 2,914,652 2,852,034
----------------------------
Total deposits 3,450,939 3,391,449
Borrowings:
Federal funds purchased 21,030 15,720
Securities sold under agreements to repurchase 364,810 313,349
Federal Home Loan Bank borrowings 750,427 706,512
Other borrowings 5,091 4,647
Accrued expenses and other liabilities 57,343 42,000
----------------------------
TOTAL LIABILITIES 4,649,640 4,473,677
Shareholders' equity
Common stock, $2.50 par value; Authorized-100,000,000 shares;
issued-43,381,769 at June 30, 2001 and December 31, 2000, including
2,073,601 and 1,616,498 shares in treasury at June 30, 2001 and
December 31, 2000, respectively 108,454 108,454
Surplus 84,117 85,032
Retained earnings 299,114 278,682
Accumulated other comprehensive income (loss) 132 (4,964)
Treasury stock, at cost (46,850) (36,334)
----------------------------
TOTAL SHAREHOLDERS' EQUITY 444,967 430,870
----------------------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $5,094,607 $4,904,547
============================
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
---------------------------- -----------------------------
2001 2000 2001 2000
---------------------------- -----------------------------
Interest income
Interest and fees on loans $ 69,166 $ 71,705 $ 140,308 $ 141,548
Interest on federal funds sold and other short-term
investments 247 90 494 202
Interest and dividends on securities:
Taxable 19,251 19,733 37,232 40,468
Tax-exempt 3,032 2,535 5,659 5,113
----------------------------- -----------------------------
Total interest income 91,696 94,063 183,693 187,331
Interest expense
Interest on deposits 30,964 30,258 64,114 59,304
Interest on short-term borrowings 3,531 5,007 7,347 8,894
Interest on Federal Home Loan Bank advances 10,972 13,367 21,783 26,976
----------------------------- -----------------------------
Total interest expense 45,467 48,632 93,244 95,174
----------------------------- -----------------------------
Net interest income 46,229 45,431 90,449 92,157
Provision for loan losses 2,143 3,851 4,642 6,398
----------------------------- -----------------------------
Net interest income after provision for loan losses 44,086 41,580 85,807 85,759
Other income
Income from mortgage banking operations 6,469 4,159 11,694 7,542
Service charges, commissions, and fees 6,647 5,634 12,664 10,727
Income from fiduciary activities 2,194 1,753 4,209 3,445
Security (losses) gains (718) 505 (576) 823
Other income 304 413 850 728
----------------------------- -----------------------------
Total other income 14,896 12,464 28,841 23,265
Other expense
Salaries and employee benefits 15,446 13,610 29,929 27,349
Net occupancy expense 2,683 2,870 5,341 6,031
Other expense 11,324 10,626 21,179 21,869
----------------------------- -----------------------------
Total other expense 29,453 27,106 56,449 55,249
----------------------------- -----------------------------
Income before income taxes 29,529 26,938 58,199 53,775
Income taxes 9,745 8,815 19,063 17,664
----------------------------- -----------------------------
Net income $ 19,784 $ 18,123 $ 39,136 $ 36,111
============================= =============================
Earnings per common share:
Basic $0.48 $0.43 $0.94 $0.86
============================= =============================
Diluted $0.47 $0.43 $0.93 $0.85
============================= =============================
Dividends per common share $0.23 $0.21 $0.45 $0.42
============================= =============================
Average outstanding shares:
Basic 41,466,564 41,931,050 41,584,502 42,110,730
Diluted 41,823,411 42,264,141 41,914,814 42,449,089
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, 2001
---------------------------------------------------------------------------------------------
Common Stock Accumulated
------------------------- Other Total
Par Retained Comprehensive Treasury Shareholders'
Shares Value Surplus Earnings Income (Loss) Stock Equity
---------------------------------------------------------------------------------------------
Balance at January 1, 2001 43,381,769 $108,454 $85,032 $278,682 ($4,964) ($36,334) $430,870
Comprehensive income (loss):
Net income - - - 39,136 - - 39,136
Other comprehensive income (loss),
net of tax:
Unrealized gains on securities of
$4,478 net of reclassification
adjustment for losses included
in net income of $374 - - - - 4,852 - 4,852
Amortization of unrealized loss for
securities transferred from the
available for sale to the
held-to-maturity investment
portfolio - - - - 244 - 244
--------
Total comprehensive income 44,232
Purchase of treasury stock
(530,000 shares) - - - - - (12,153) (12,153)
Cash dividends ($0.45 per share) - - - (18,704) - - (18,704)
Common stock options exercised
(72,897 shares) - - (915) - - 1,637 722
-----------------------------------------------------------------------------------------
Balance at June 30, 2001 43,381,769 $108,454 $84,117 $299,114 $ 132 ($46,850) $444,967
=========================================================================================
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
--------------------------
2001 2000
--------------------------
NET CASH PROVIDED BY OPERATING ACTIVITIES $ 60,509 $ 13,155
INVESTING ACTIVITIES
Proceeds from maturities and calls of investment securities 27,784 13,305
Purchases of investment securities (1,000) (110)
Proceeds from sales of securities available for sale 96,524 100,626
Proceeds from maturities and calls of securities available for sale 129,808 57,992
Purchases of securities available for sale (451,326) (50,809)
Net purchases of bank premises and equipment (1,650) (1,050)
Net cash paid in branch divestiture (8,644)
Net change in loans (16,310) (58,184)
--------------------------
NET CASH (USED IN) PROVIDED BY INVESTING ACTIVITIES (224,814) 61,770
--------------------------
FINANCING ACTIVITIES
Cash dividends paid (17,956) (17,843)
Acquisition of treasury stock (12,153) (14,181)
Proceeds from exercise of stock options 722 1,555
Repayment of Federal Home Loan Bank borrowings (26,181) (625,292)
Proceeds from Federal Home Loan Bank borrowings 70,096 556,390
Changes in:
Deposits 69,102 9,940
Federal funds purchased, securities sold under agreements
to repurchase and other borrowings 57,215 (20,903)
--------------------------
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES 140,845 (110,334)
--------------------------
Decrease in cash and cash equivalents (23,460) (35,409)
Cash and cash equivalents at beginning of year 144,810 159,808
--------------------------
Cash and cash equivalents at end of period $ 121,350 $ 124,399
==========================
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 2000 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.
On January 1, 2001, United adopted Financial Accounting Standards Board (FASB)
Statement No. 133, (SFAS No. 133), "Accounting for Derivative Instruments and
Hedging Activities" as amended by FASB 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 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 adoption of this
standard did not materially impact the reported financial position or results of
operations of United based on the interpretive guidance issued by the FASB to
date. The FASB continues to issue interpretive guidance, which could require
changes in United's application of this standard in the future.
In September 2000, the FASB issued Statement No. 140 "Accounting for Transfers
and Servicing of Financial Assets and Extinguishments of Liabilities, a
replacement of FASB Statement No. 125" ("SFAS No. 140"). It revises the
standard for accounting for securitizations and other transfers of financial
assets and collateral and requires certain disclosures, but it carries over most
of SFAS's No. 125's provisions without reconsideration. United adopted the
disclosure provisions related to the securitization of financial assets on
December 31, 2000. All transactions entered into after March 31, 2001 will be
accounted for in accordance with this standard. The adoption of this standard
did not have a material impact on the financial position or results of
operations of United.
On April 1, 2001, United adopted Emerging Issues Task Force ("EITF") Issue No.
99-20, ("EITF 99-20"), which provides accounting guidance for the recognition of
interest income and impairment on purchased and retained interests in
securitized financial assets. EITF 99-20 requires that the holder of such
instruments recognize the excess of all cash flows attributable to the
beneficial interest using the effective yield method. In addition, EITF 99-20
provides a change in the determination of impairment, whereby, if the fair value
of the beneficial interest has declined below its carrying value, then an
impairment analysis should be
10
performed. If there has been an adverse change in the estimated cash flows from
the previous cash flows projected, then the condition for an other-than-
temporary impairment has been met and the beneficial interest should be written
down to the estimated fair value. On the date of adoption (i.e. April 1, 2001),
beneficial interests determined to have an other-than-temporary impairment in
accordance with EITF 99-20 were to be written down to the estimated fair value,
with the amount of the write-down reported as a cumulative effect of a change in
accounting principle on the Statement of Income. The adoption of this standard
did not have a material impact on the financial position or results of
operations of United.
In July 2001, the FASB issued Statement No. 141 ("SFAS No. 141"), "Business
Combinations", and Statement No. 142 ("SFAS No. 142"), "Goodwill and Other
Intangible Assets". SFAS No. 141, which supercedes Accounting Principles Board
Opinion No. 16, requires that the purchase method of accounting be used for all
business combinations initiated after June 30, 2001. SFAS No. 141 also
establishes specific criteria for the recognition of intangible assets
separately from goodwill, and requires that unallocated negative goodwill to be
written off immediately as an extraordinary gain. SFAS No. 142, which supercedes
Accounting Principles Board Opinion No. 17, requires that goodwill and
intangible assets with indefinite useful lives no longer be amortized, but
instead tested for impairment at least annually in accordance with the
provisions of SFAS No.142. SFAS No. 142 also requires that intangible assets
with definite useful lives be amortized over their respective estimated useful
lives to their estimated residual values, and reviewed for impairment in
accordance with the FASB's Statement No. 121 ("SFAS No. 121"), "Accounting for
the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed
Of". Essentially, the provisions of SFAS No. 141 are effective immediately,
while the provisions of SFAS No. 142 will be effective for fiscal years
beginning after December 15, 2001 (i.e. January 1, 2002). Management estimates
the benefit associated with the elimination of goodwill amortization in 2002 to
be approximately $1.7 million after tax, or $.04 per diluted share. During 2002,
United will perform the required impairment tests of goodwill and indefinite
lived intangible assets in accordance with the new standard. The result of such
tests is not anticipated to have a material impact on the financial position or
results of operations of United based on current information.
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.
3. ACQUISITION
On June 14, 2001, United entered into an agreement with Century Bancshares, Inc.
("Century"), headquartered in Washington, D.C. to acquire 100% of the
outstanding common stock of Century. Under the agreement, Century shareholders
will receive 0.45 shares of United Bankshares, Inc. common stock plus $3.43 in
cash for each share of Century common stock. The transaction, valued at
approximately $67,676 at the time of the agreement, will be accounted for using
the purchase method of accounting. It is anticipated that the proposed
acquisition will be consummated during the fourth quarter of 2001. Consummation
of the transaction is subject to approval of the shareholders of Century and the
receipt of all required regulatory approvals, as well as other customary
conditions.
11
At June 30, 2001, Century had consolidated assets of approximately $415,028 and
shareholders' equity of $25,063.
4. INVESTMENT SECURITIES
The amortized cost and estimated fair values of securities available for sale
are summarized as follows:
June 30, 2001
-----------------------------------------------------------------
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 $ 126,286 $ 944 $ 643 $ 126,587
State and political subdivisions 52,820 218 1,051 51,987
Mortgage-backed securities 833,712 11,939 2,200 843,451
Marketable equity securities 8,415 946 756 8,605
Other 137,328 92 2,120 135,300
-----------------------------------------------------------------
Total $1,158,561 $14,139 $6,770 $1,165,930
=================================================================
December 31, 2000
-----------------------------------------------------------------
(In thousands) Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
-----------------------------------------------------------------
U.S. Treasury securities and obligations
of U.S. Government corporations and
agencies $160,702 $ 519 $1,797 $ 159,424
State and political subdivisions 52,095 307 575 51,827
Mortgage-backed securities 574,292 4,984 2,666 576,610
Marketable equity securities 8,551 1,107 1,024 8,634
Other 69,723 952 68,771
-----------------------------------------------------------------
Total $865,363 $ 6,917 $7,014 $ 865,266
=================================================================
The cumulative net unrealized holding loss on available for sale securities
resulted in an increase of $132 and a decrease of $4,964 to shareholders'
equity, net of deferred income taxes at June 30, 2001 and December 31, 2000,
respectively.
The amortized cost and estimated fair value of securities available for sale at
June 30, 2001 and December 31, 2000, by contractual maturity are shown as
follows. 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.
12
June 30, 2001 December 31, 2000
---------------------------------- ----------------------------------
Estimated Estimated
Amortized Fair Amortized Fair
Cost Value Cost Value
---------------------------------- ----------------------------------
Due in one year or less $ 20,099 $ 20,223 $ 20,690 $ 20,661
Due after one year through five years 73,830 74,321 68,436 68,238
Due after five years through ten years 144,675 145,114 146,984 147,021
Due after ten years 911,406 917,638 620,702 620,712
Marketable equity securities 8,551 8,634 8,551 8,634
--------------------------- -------------------------
Total $1,158,561 $1,165,930 $865,363 $865,266
=========================== =========================
The preceding table includes $843,451 and $576,610 of mortgage-backed securities
at June 30, 2001 and December 31, 2000, respectively, with an amortized cost of
$833,712 and $574,292 at June 30, 2001 and December 31, 2000, respectively.
Maturities of mortgage-backed securities are based upon the estimated average
life.
With the adoption of SFAS No. 133, "Accounting for Derivative Instruments and
Hedging Activities" as amended by SFAS No. 137, debt securities with an
amortized cost of $71,293 and an estimated fair value of $71,668 were
transferred into the available for sale category from the held to maturity
category.
The amortized cost and estimated fair values of securities held to maturity are
summarized as follows:
June 30, 2001
-----------------------------------------------------------
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 $ 31,393 $ 14 $ 286 $ 31,121
State and political subdivisions 91,330 1,763 837 92,256
Mortgage-backed securities 4,821 75 4,896
Other 157,443 334 2,327 155,450
----------------------------------------------------------
Total $284,987 $2,186 $3,450 $283,723
==========================================================
13
December 31, 2000
-----------------------------------------------------------
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 $ 55,724 $ 225 $ 176 $ 55,773
State and political subdivisions 93,006 1,508 854 93,660
Mortgage-backed securities 70,279 654 285 70,648
Other 161,059 110 2,845 158,324
----------------------------------------------------------
Total $380,068 $2,497 $4,160 $378,405
==========================================================
The amortized cost and estimated fair value of securities held to maturity at
June 30, 2001, and December 31, 2000, 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, 2001 December 31, 2000
-------------------------- ---------------------------
Estimated Estimated
Amortized Fair Amortized Fair
Cost Value Cost Value
-------------------------- ---------------------------
Due in one year or less $ 1,701 $ 2,115 $ 7,711 $ 7,725
Due after one year through five years 30,740 31,907 47,862 48,563
Due after five years through ten years 73,999 74,573 90,590 90,365
Due after ten years 178,547 175,128 233,905 231,752
------------------------- -------------------------
Total $284,987 $283,723 $380,068 $378,405
========================= =========================
The preceding table includes $4,821 and $70,279 of mortgage-backed securities at
June 30, 2001 and December 31, 2000, respectively, with an estimated fair value
of $4,896 and $70,648 at June 30, 2001 and December 31, 2000, respectively.
Maturities of the mortgage-backed securities are based upon the estimated
average life. There were no sales of held to maturity securities.
At March 31, 2000, 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. At June 30, 2001, the cumulative unrealized loss balances, gross
and net of deferred taxes, were $7,165 and $4,657, respectively.
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 $873,435 and $788,899 at June 30, 2001 and
December 31, 2000, respectively.
14
5. NONPERFORMING LOANS
Nonperforming loans are summarized as follows:
June 30, December 31,
2001 2000
-------- ------------
Loans past due 90 days or more and still accruing interest $ 5,143 $ 4,717
Nonaccrual loans 6,062 8,131
------- -------
Total nonperforming loans $11,205 $12,848
======= =======
6. ALLOWANCE FOR LOAN LOSSES
The adequacy of the allowance for loan losses is based on management's
evaluation of the relative risks inherent in the loan portfolio. A progression
of the allowance for loan losses for the periods presented is summarized as
follows:
Three Months Ended Six Months Ended
June 30 June 30
------------------------------ ------------------------------
2001 2000 2001 2000
-------- -------- -------- --------
Balance at beginning of period $41,191 $39,490 $40,532 $39,599
Provision charged to expense 2,143 3,851 4,642 6,398
------- ------- ------- -------
43,334 43,341 45,174 45,997
Loans charged-off (2,490) (4,389) (5,162) (7,248)
Less: Recoveries 353 372 1,185 575
------- ------- ------- -------
Net Charge-offs (2,137) (4,017) (3,977) (6,673)
------- ------- ------- -------
Balance at end of period $41,197 $39,324 $41,197 $39,324
======= ======= ======= =======
The average recorded investment in impaired loans during the quarter ended June
30, 2001 and for the year ended December 31, 2000 was approximately $9,320 and
$15,557, respectively. For the quarters ended June 30, 2001 and 2000, United
recognized interest income on the impaired loans of approximately $59 and $214,
respectively, substantially all of which was recognized using the accrual method
of income recognition.
At June 30, 2001, the recorded investment in loans that are considered to be
impaired under SFAS No. 114 was $8,181 (of which $6,062 was on a nonaccrual
basis). Included in this amount is $4,724 of impaired loans for which the
related allowance for loan losses is $653 and $3,457 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 $31 and $528 for the quarters ended June 30, 2001
and 2000, respectively, $349 and $1,083 for the six months ended June 30, 2001
and 2000, respectively.
15
7. COMMITMENTS AND CONTINGENT LIABILITIES
United and its subsidiaries are currently involved, in the normal course of
business, in various legal proceedings. Management is vigorously pursuing all
of its legal and factual defenses and, after consultation with legal counsel,
believes that all such litigation will be resolved without material effect on
financial position or results of operations.
8. 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, 2001
- --------------------------------
Net interest income $ 1,893 $ 44,121 $ 215 $ 46,229
Provision for loan losses - 2,143 - 2,143
Net interest income after provision for loan losses 1,893 41,978 215 44,086
Noninterest income 6,469 8,351 76 14,896
Noninterest expense 5,440 23,590 423 29,453
Income (loss) before income taxes 2,922 26,739 (132) 29,529
Income tax expense 755 9,033 (43) 9,745
Net income (loss) 2,167 17,706 (89) 19,784
Average total assets 199,469 4,760,335 1,389 4,961,193
Three months ended June 30, 2000
- --------------------------------
Net interest income $ 808 $ 44,370 $ 253 $ 45,431
Provision for loan losses 11 3,840 - 3,851
Net interest income after provision for loan losses 797 40,530 253 41,580
Noninterest income 4,022 7,942 500 12,464
Noninterest expense 3,490 23,457 159 27,106
Income before income taxes 1,329 25,015 594 26,938
Income tax expense 434 8,184 197 8,815
Net income 895 16,831 397 18,123
Average total assets 113,648 4,865,383 (35,860) 4,943,171
16
General
Mortgage Community Corporate
Banking Banking and Other* Consolidated
------------------------------------------------------------------------
(In thousands)
Six months ended June 30, 2001
- ------------------------------
Net interest income $ 3,426 $ 86,695 $ 328 $ 90,449
Provision for loan losses - 4,642 - 4,642
Net interest income after provision for loan losses 3,426 82,053 328 85,807
Noninterest income 11,694 17,058 89 28,841
Noninterest expense 10,179 45,271 999 56,449
Income (loss) before income taxes 4,941 53,840 (582) 58,199
Income tax expense 1,295 17,957 (189) 19,063
Net income (loss) 3,646 35,883 (393) 39,136
Average total assets 190,767 4,720,775 (5,227) 4,906,315
Six months ended June 30, 2000
- ------------------------------
Net interest income $ 1,516 $ 90,042 $ 599 $ 92,157
Provision for loan losses 27 6,371 - 6,398
Net interest income after provision for loan losses 1,489 83,671 599 85,759
Noninterest income 7,452 13,966 1,847 23,265
Noninterest expense 6,668 48,317 264 55,249
Income before income taxes 2,273 49,320 2,182 53,775
Income tax expense 771 16,171 722 17,664
Net income 1,502 33,149 1,460 36,111
Average total assets 102,777 4,875,934 (19,717) 4,958,994
* General corporate and other includes intercompany eliminations
9. COMPREHENSIVE INCOME
The components of total comprehensive income for the three and six months ended
June 30, 2001 and 2000 are as follows:
Three Months Ended Six Months Ended
June 30 June 30
----------------------------- ----------------------------
2001 2000 2001 2000
-------- -------- -------- --------
Net Income $19,784 $18,123 $39,136 $36,111
Other Comprehensive Income (Loss), Net of Tax:
Unrealized (loss) gain on available for
sale securities arising during the period (4,078) 1,827 4,478 823
Less: Reclassification adjustment for
losses (gains) included in net income 467 (328) 374 (535)
Amortization on the unrealized loss for
securities transferred from the
available-for-sale to the held to
maturity investment portfolio 122 123 244 123
------- ------- ------- -------
Total Comprehensive Income $16,295 $19,745 $44,232 $36,522
======= ======= ======= =======
17
10. EARNINGS PER SHARE
The reconciliation of the numerator and denominator of basic earnings per share
with that of diluted earnings per share is presented as follows:
Three Months Ended Six Months Ended
June 30 June 30
------------------------------ -----------------------------
(Dollars in thousands, except per share) 2001 2000 2001 2000
-------- -------- -------- --------
Basic
Net Income $ 19,784 $ 18,123 $ 39,136 $ 36,111
========== ========== ========== ==========
Average common shares outstanding 41,466,564 41,931,050 41,584,502 42,110,730
========== ========== ========== ==========
Earnings per basic common share $ 0.48 $ 0.43 $ 0.94 $ 0.86
Diluted
Net Income $ 19,784 $ 18,123 $ 39,136 $ 36,111
========== ========== ========== ==========
Average common shares outstanding 41,466,564 41,931,050 41,584,502 42,110,730
Equivalents from stock options 356,847 333,091 330,312 338,359
---------- ---------- ---------- ----------
Average diluted shares outstanding 41,823,411 42,264,141 41,914,814 42,449,089
========== ========== ========== ==========
Earnings per diluted common share $ 0.47 $ 0.43 $ 0.93 $ 0.85
18
11. 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, 2001
and June 30, 2000 with the interest rate earned or paid on such amount.
Three Months Ended Three Months Ended
June 30, 2001 June 30, 2000
--------------------------------------------------------------------
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 $ 20,726 $ 247 4.79% $ 8,019 $ 90 4.50%
Investment Securities:
Taxable 1,147,411 19,251 6.73% 1,168,489 19,733 6.79%
Tax-exempt (1) 195,272 4,099 8.42% 198,799 3,508 7.10%
-----------------------------------------------------------------
Total Securities 1,342,683 23,350 6.98% 1,367,288 23,241 6.84%
Loans, net of unearned income (1) (2) 3,382,268 70,996 8.41% 3,333,430 73,246 8.85%
Allowance for loan losses (41,172) (39,326)
---------- ----------
Net loans 3,341,096 8.51% 3,294,104 8.95%
----------------------------- -----------------------------
Total earning assets 4,704,505 $94,593 8.05% 4,669,411 $96,577 8.32%
-------------- --------------
Other assets 256,688 273,760
---------- ----------
TOTAL ASSETS $4,961,193 $4,943,171
========== ==========
LIABILITIES
Interest-Bearing Funds:
Interest-bearing deposits $2,901,303 $30,964 4.28% $2,757,133 $30,258 4.41%
Federal funds purchased, repurchase
agreements and other short-term
borrowings 360,921 3,531 3.92% 377,458 5,007 5.34%
FHLB advances 696,163 10,972 6.32% 879,589 13,367 6.11%
----------------------------- -----------------------------
Total Interest-Bearing Funds 3,958,387 45,467 4.61% 4,014,180 48,632 4.87%
-------------- --------------
Demand deposits 479,983 477,688
Accrued expenses and other liabilities 70,498 50,528
---------- ----------
TOTAL LIABILITIES 4,508,868 4,542,396
SHAREHOLDERS' EQUITY 452,325 400,775
---------- ----------
TOTAL LIABILITIES AND
SHAREHOLDERS' EQUITY $4,961,193 $4,943,171
========== ==========
NET INTEREST INCOME $49,126 $47,945
======= =======
INTEREST SPREAD 3.44% 3.45%
NET INTEREST MARGIN 4.18% 4.13%
(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.
19
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, 2001 and
June 30, 2000 with the interest rate earned or paid on such amount.
Six Months Ended Six Months Ended
June 30, 2001 June 30, 2000
----------------------------------------------------------------------
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 $ 18,465 $ 494 5.40% $ 7,507 $ 202 5.41%
Investment Securities:
Taxable 1,100,187 37,232 6.82% 1,199,177 40,468 6.79%
Tax-exempt (1) 195,573 7,752 7.99% 200,070 7,115 7.15%
------------------------------ ------------------------------
Total Securities 1,295,760 44,984 7.00% 1,399,247 47,583 6.84%
Loans, net of unearned income (1) (2) 3,371,059 143,981 8.58% 3,310,826 144,936 8.80%
Allowance for loan losses (41,037) (39,467)
---------- ----------
Net loans 3,330,022 8.69% 3,271,359 8.90%
------------------------------ ------------------------------
Total earning assets 4,644,247 $189,459 8.19% 4,678,113 $192,721 8.27%
--------------- ---------------
Other assets 262,068 280,881
---------- ----------
TOTAL ASSETS $4,906,315 $4,958,994
========== ==========
LIABILITIES
Interest-Bearing Funds:
Interest-bearing deposits $2,883,661 $ 64,114 4.48% $2,763,604 59,304 4.32%
Federal funds purchased, repurchase
agreements and other short-term
borrowings 340,542 7,347 4.35% 349,839 8,894 5.11%
FHLB advances 691,489 21,783 6.35% 919,991 26,976 5.90%
------------------------------ ------------------------------
Total Interest-Bearing Funds 3,915,692 93,244 4.80% 4,033,434 95,174 4.75%
--------------- ---------------
Demand deposits 479,891 470,115
Accrued expenses and other liabilities 64,974 54,597
---------- ----------
TOTAL LIABILITIES 4,460,557 4,558,146
SHAREHOLDERS' EQUITY 445,758 400,848
---------- ----------
TOTAL LIABILITIES AND
SHAREHOLDERS' EQUITY $4,906,315 $4,958,994
========== ==========
NET INTEREST INCOME $ 96,215 $ 97,547
======== ========
INTEREST SPREAD 3.39% 3.52%
NET INTEREST MARGIN 4.14% 4.18%
(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.
20
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.
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 2001 was $39.14 million or $0.93 per diluted
share compared to $36.11 million or $0.85 per share for the first half of 2000.
This represents an 8.39% increase in net income and a 9.41% increase in earnings
per share. Net income for the second quarter of 2001 was $19.78 million or $0.47
per share compared to $18.12 million or $0.43 per share for the second quarter
of 2000. United's annualized return on average assets for the first six months
of 2001 was 1.61% and return on average shareholders' equity was 17.70% as
compared to 1.46% and 18.12% for the first six months of 2000.
The net interest margin was 4.14% for the first six months of 2001 compared to
4.18% for the first six months of 2000. Tax-equivalent net interest income
decreased $1.33 million or 1.37% for the first six months of 2001 as compared to
the same period for 2000. The provision for loan losses decreased $1.76 million
over the previous year-to-date due to a lower level of nonperforming loans as
well as a decrease in net charge-offs when comparing the two periods.
Noninterest income increased $5.58 million or 23.97% for the first six months of
2001 when compared to the first six months of 2000. Noninterest expenses
increased $1.20 million or 2.17% for the first six months of 2001 compared to
the same period in 2000. United's effective tax rate was 32.75% and 32.85% in
2001 and 2000, respectively.
Total assets were $5.09 billion at June 30, 2001, a $190.06 million or 3.88%
increase from year end. In terms of asset composition since year end 2000, the
June 30, 2001 balance sheet reflects a $23.46 million
21
decrease in cash and cash equivalents and a $205.58 million increase in
investment securities. Loans held for sale decreased $5.24 million as loan sales
in the secondary market exceeded originations during the first half of 2001.
Portfolio loans, net of unearned income grew $11.67 million. Other assets
increased $5.36 million due mainly to an increase in deferred taxes. All other
categories of assets were moderately flat compared to year end 2000.
Total deposits have grown $59.49 million since year end. In terms of
composition, interest-bearing deposits increased $62.62 million while
noninterest-bearing deposits remained relatively flat from December 31, 2000.
United's total borrowed funds increased $101.13 million or 9.72% as short-term
borrowings and FHLB borrowings increased $57.22 million and $43.92 million,
respectively. United increased these borrowings to take advantage of lower
interest rates. Accrued expenses and other liabilities increased $15.34 million
or 36.53% since year end 2000.
Shareholders' equity increased $14.10 million or 3.27% as compared to December
31, 2000 as United continued to balance capital adequacy and returns to
shareholders. At June 30, 2001, United's regulatory capital ratios, including
those of its bank subsidiaries, continued to exceed the levels established for
well-capitalized institutions.
RESULTS OF OPERATIONS
NET INTEREST INCOME
Tax-equivalent net interest income increased $1.18 million or 2.46% in the
second quarter of 2001 while decreasing $1.33 million or 1.37% for the first six
months of 2001, when compared to the same periods of 2000. United's tax-
equivalent net interest margin was 4.18% and 4.14% for the second quarter and
first half of 2001, respectively, compared to 4.13% and 4.18% for the same time
periods in 2000, respectively. In the second quarter of 2001, the cost of
United's short-term borrowed funds declined 142 basis points when compared to
the second quarter of 2000. In the six months ended comparison, the cost of
United's short-term borrowed funds declined 76 basis points from the previous
year-to-date; however, that decrease was more than offset by an increase the
cost of United's other interest-bearing funds.
PROVISION FOR LOAN LOSSES
United's asset quality remains sound with the nonperforming asset level at 0.27%
of total assets at the end of the second quarter 2001 improving from 0.30% at
year end 2000. Nonperforming loans were $11.21 million at June 30, 2001 as
compared to $12.85 million at December 31, 2000. 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. During the first half of 2001, nonaccrual loans decreased $2.07 million
while loans past due 90 days or more increased $426 thousand. Total
nonperforming assets were $13.47 million including OREO of $2.26 million.
At June 30, 2001, impaired loans were $8.18 million, a decrease of $4.32 million
or 34.56% from the $12.50 million in impaired loans at December 31, 2000. For
further details, see Note 6 to the unaudited consolidated financial statements.
22
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, which are
adjusted for current conditions and 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 company-wide
process at June 30, 2001 produced increased allocations within two of four loan
categories. The components of the allowance allocated to commercial loans
increased $113 thousand, as a result of changes to specific loss allocations on
larger loans. The real estate construction loan pool allocation increased by
$152 thousand as a result of changes in volume and historic loss factors. The
consumer loan pool allocation decreased $229 thousand as a result of changes in
historical loss factors for this pool. The components of the allowance allocated
to real estate loans decreased $639 thousand as a result of changes in volume
and historical loss factors.
At June 30, 2001 and December 31, 2000, the allowance for loan losses was 1.29%
and 1.27% of period-end loans, net of unearned income, respectively. At June
30, 2001 and December 31, 2000, the ratio of the allowance for loan losses to
nonperforming loans was 367.7% and 315.5%, respectively.
Management believes that the allowance for loan losses of $41.20 million at June
30, 2001 is adequate to provide for probable losses on existing loans based on
information currently available.
For the quarters ended June 30, 2001 and 2000, the provision for loan losses was
$2.14 million and $3.85 million, respectively, while the provision for the first
six months was $4.64 million for 2001 as compared to $6.40 million for 2000. Net
charge-offs were $2.14 million for the second quarter of 2001 as compared to net
charge-offs of $4.02 million for the previous year quarter which represented
0.06% and 0.12% of average loans for the respective quarters. Net charge-offs
for the first half of 2001 were $3.98 million as compared to $6.67 million for
the first half of 2000. Note 6 to the accompanying unaudited consolidated
financial statements provide 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 that 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
23
profitability. Recognizing the importance, management continues to evaluate
areas where noninterest income can be enhanced. Noninterest income, excluding
security transactions, increased $3.66 million or 30.56% and $6.98 million or
31.08% for the second quarter and first half of 2001, respectively, when
compared to the second quarter and first half of 2000. These increased revenues
were primarily the result of an expanded volume of trust and mortgage banking
services.
Income from mortgage banking activities increased $2.31 million or 55.54% for
the second quarter of 2001 as compared to the second quarter of 2000. On a
year-to-date basis, mortgage banking income increased $4.15 million or 55.05%
over last year's results. Mortgage loan origination activity increased 100.66%
or $489.88 million for the first six months of 2001 as compared to the same
period in 2000 due to declining interest rates. More originations resulted in
increased loan sales in the secondary market of 118.08% or $531.93 million
during the first half of 2001 in comparison to the same time period in 2000.
Income from trust services increased $373 thousand or 27.77% for the second
quarter of 2001 when compared to the second quarter of 2000 while increasing
$725 thousand or 27.01% for the first half of 2001 when compared to the first
half of 2000.
Total noninterest income, including security transactions, increased $2.43
million or 19.51% and $5.58 million or 23.97% for the second quarter and first
half of 2001, respectively, when compared to the second quarter and first half
of 2000. Included in the security transactions' totals for 2001 is a $1.17
million impairment charge recognized during the second quarter related to an
other-than-temporary decline in the fair value of retained interests in
securitized assets as of June 30, 2001. This decline is a result of an increase
in the level of prepayment activity during the second quarter of 2001 and the
corresponding increase in the prepayment assumption utilized in the valuation of
those securities.
OTHER EXPENSES
Just as management continues to evaluate areas where noninterest income can be
enhanced, it strives to improve the efficiency of its operations to reduce
costs. Other expenses include all items of expense other than interest expense,
the provision for loan losses, and income taxes. Other expenses increased $2.35
million or 8.66% and $1.20 million or 2.17% for the quarter and six months ended
June 30, 2001, as compared to the same periods in 2000.
Total salaries and benefits increased by 13.49% or $1.84 million and 9.43% or
$2.58 million for the second quarter and first six months of 2001 when compared
to the same periods of 2000. The increase was due mainly to higher 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 second quarter and first half of 2001 decreased
$187 thousand or 6.52% and $690 thousand or 11.44%, respectively, when compared
to the second quarter and first six months of 2000. The lower net occupancy
expense for 2001 was due mainly to decreases in both real property taxes on
owned premises and rental expense on leased offices.
Other expenses increased $698 thousand or 6.57% for the second quarter while
decreasing $690 thousand or 3.16% for the first six months of 2001, as compared
to the same periods of 2000. The lower expense for the first half of 2001 was
due mainly to a divestiture of a branch office and the sale of other bank
premises during the first quarter for a total gain of $1.24 million.
24
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. This indicates 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 $767 million or (15.80%) of
the cumulative gap to related earning assets. At December 31, 2000, United was
asset sensitive in the one year horizon in the amount of $117 million or 2.51%
of the cumulative gap to related earning assets.
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.
25
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 June 30, 2001 and June 30, 2000:
Change in Percentage Change in Net Interest Income
Interest Rates ----------------------------------------
(basis points) June 30, 2001 June 30, 2000
-------------- --------------- --------------
+200 -4.96% -3.00%
-200 -0.38% 0.79%
For June 30, 2001, 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 decrease by 4.96% over one year as compared to an
decrease of 3.00% for June 30, 2000. A 200 basis point immediate, sustained
downward shock in the yield curve would decrease net interest income by an
estimated 0.38% over one year for June 30, 2001 as compared to a increase of
0.79% for June 30, 2000. All of these estimated changes in net interest income
are and were within the policy guidelines established by the Board of Directors.
26
The following table shows the interest rate sensitivity GAP as of June 30, 2001:
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 $ 4,639 $ 4,639 $ 4,639
investments
Investment and Marketable
Equity Securities
Taxable $ 98,590 $ 18,271 $ 32,726 149,587 $ 336,149 $ 821,864 1,307,600
Tax-exempt 731 1,847 2,578 12,580 128,159 143,317
Loans, net of unearned
income 802,137 95,372 168,957 1,066,466 1,385,568 950,720 3,420,754
-----------------------------------------------------------------------------------------------------------
Total Interest-Earning
Assets $ 905,366 $ 114,374 $ 203,530 $ 1,223,270 $1,734,297 $1,900,743 $4,858,310
===========================================================================================================
LIABILITIES
Interest-Bearing Funds:
Savings and NOW accounts $ 1,244,952 $ 1,244,952 $1,244,952
Time deposits of
$100,000 & over 91,674 $ 58,428 $ 162,979 313,081 $ 72,634 $ 823 386,538
Other time deposits 307,896 277,835 383,492 969,223 311,773 2,166 1,283,162
Federal funds purchased,
repurchase agreements
and other short-term
borrowings 326,428 10,000 336,428 54,503 390,931
FHLB advances 70,047 20,143 90,190 72,500 587,737 750,427
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Total Interest-Bearing
Funds $ 2,040,997 $ 356,406 $ 556,471 $ 2,953,874 $ 511,410 $ 590,726 $4,056,010
===========================================================================================================
Interest Sensitivity Gap $(1,135,631) $ (242,032) $ (352,941) $(1,730,604) $1,222,887 $1,310,017 $ 802,300
===========================================================================================================
Cumulative Gap $(1,135,631) $(1,377,663) $(1,730,604) $(1,730,604) $ (507,717) $ 802,300 $ 802,300
===========================================================================================================
Cumulative Gap as a Percentage
of Total Earning Assets
(23.38%) (28.36%) (35.62%) (35.62%) (10.45%) 16.51% 16.51%
Management Adjustments $ 1,204,026 $ (80,309) $ (160,497) $ 963,220 $ (963,220) $ 0
Off-Balance Sheet Activities
Cumulative Management Adjusted
Gap and Off-Balance Sheet
Activities $ 68,395 $ (253,946) $ (767,384) $ (767,384) $ (507,717) $ 802,300 $ 802,300
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Cumulative Management Adjusted
Gap and Off-Balance Sheet
Activities as a Percentage of
Total Earning Assets
1.41% (5.23%) (15.80%) (15.80%) (10.45%) 16.51% 16.51%
===========================================================================================================
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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 six months ended June 30, 2001, United generated $60.51 million of cash
from operations, which is indicative of solid earnings performance. In addition,
cash from operations for the first half of 2001 included $11.85 million of
excess sales of mortgage loans in the secondary market over originations. During
the same period, net cash of $224.81 million was used in investing activities
which was primarily due to $198.21 million of excess purchases of investment
securities over net proceeds from calls and maturities of investment securities.
During the first six months of 2001, net cash of $140.85 million was provided by
financing activities, primarily due to additional borrowings of approximately
$101.13 and growth in deposits of $69.10 million. The additional borrowings
consisted of $49.91 million of new FHLB advances and $57.22 million in increased
short-term borrowings mainly from federal funds purchased and securities sold
under agreements to repurchase. These sources of funds were partially offset by
payment of $17.96 million in cash dividends and $12.15 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 $23.46 million for the
first six months of 2001.
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
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are reasonably likely to result in United's liquidity increasing or decreasing
in any material way. United also has lines of credit available.
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 increased $14.10 million to $444.97 million from
$430.87 million at December 31, 2000. Included in the shareholders' equity
balance at June 30, 2001 is the previously mentioned cumulative unrealized loss,
net of deferred taxes, of $4.66 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 an increase of $5.10 million, net of
deferred income taxes, in the fair value of its available for sale investment
portfolio due primarily to decreased market interest rates. During the first
half of 2001, 530,000 shares were repurchased under a plan announced by United
in May of 2000 to repurchase up to 1.675 million shares of its common stock on
the open market. Through June 30, 2001, 749,300 shares have been repurchased
since the plan's implementation. United's equity to assets ratio was 8.73% at
June 30, 2001, as compared to 8.79% at December 31, 2000. The primary capital
ratio, capital and reserves to total assets and reserves, was 9.47% at June 30,
2001, as compared to 9.53% at December 31, 2000.
During the second quarter of 2001, United's Board of Directors declared a cash
dividend of 23c per share, a 10% increase over the 21c per share paid in the
second quarter of 2000. Cash dividends of $0.45 per common share for the first
half of 2001 represent an increase of 7% over the $0.42 paid for first half of
2000. Total cash dividends declared were approximately $9.53 million for the
second quarter of 2001 and $18.71 million for the first six months of 2001, an
increase of 8.15% and 5.73% over the comparable periods of 2000.
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 9.09% at June 30, 2001 and 8.08% at June 30, 2000. Based on
regulatory requirements, United and its banking subsidiaries are categorized as
"well capitalized" institutions. United's risk-based capital ratio of 11.77% at
June 30, 2001 and December 31, 2000, is significantly higher than the minimum
regulatory requirements. United's Tier I capital and leverage ratios of 10.69%
and 8.27%, respectively, at June 30, 2001, are also well above regulatory
minimum requirements.
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