SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------------------------------
FORM 10-Q
Quarterly Report Under Section 13 or 15(d)
of the Securities Exchange Act of 1934
For Quarter Ended June 30, 1997
Commission File Number: 0-13322
United Bankshares, Inc.
(Exact name of registrant as specified in its charter)
West Virginia 55-0641179
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
300 United Center
500 Virginia Street, East
Charleston, West Virginia 25301
(Address of Principal Executive Offices) Zip Code
Registrant's Telephone Number,
including Area Code: (304) 424-8761
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
----- -----
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Class-- Common Stock, $2.50 Par Value; 14,956,827 shares outstanding as of July
31, 1997.
1
UNITED BANKSHARES, INC. AND SUBSIDIARIES
FORM 10-Q
TABLE OF CONTENTS
PART I. FINANCIAL INFORMATION Page
Item 1. Financial Statements
Consolidated Balance Sheets (Unaudited) June 30, 1997
and December 31, 1996 ....................................................5
Consolidated Statements of Income (Unaudited) for the
Three and Six Months Ended June 30, 1997 and 1996 ........................6
Consolidated Statement of Changes in Shareholders' Equity
(Unaudited) for the Six Months Ended June 30, 1997 .......................7
Condensed Consolidated Statements of Cash Flows (Unaudited)
for the Six Months Ended June 30, 1997 and 1996 ..........................8
Notes to Consolidated Financial Statements ...............................9
Information required by Item 303 of Regulation S-K
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations...............................15
PART II. OTHER INFORMATION
Item 1. Legal Proceedings......................................Not Applicable
Item 2. Changes in Securities..................................Not Applicable
Item 3. Defaults Upon Senior Securities .......................Not Applicable
Item 4. Submission of Matters to a Vote of Security Holders
(a) The Annual Meeting of Shareholders was held on Monday, May 19, 1997:
(b) Not applicable as to election of directors because; i) proxies for the
meeting were solicited pursuant to Regulation 14 under the Securities
and Exchange Act of 1934; ii) there was no solicitation in opposition
to the nominees as listed in the proxy statement; iii) all of such
nominees, as listed in the proxy statement, were elected.
Item 5. Other Information ....................................Not Applicable
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits required by Item 601 of Regulation S-K
Exhibit 11 - Computation of Earnings Per Share...................22
Exhibit 27 - Financial Data Schedule.............................23
(b) Reports on Form 8-K
None filed during the period.
2
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
UNITED BANKSHARES, INC.
(Registrant)
Date August 13, 1997 /s/ Richard M. Adams
_____________________ ___________________________
Richard M. Adams
Chairman of the Board and
Chief Executive Officer
Date August 13, 1997 /s/ Steven E. Wilson
_____________________ ___________________________
Steven E. Wilson
Executive Vice President,
Secretary, Treasurer and Chief
Financial Officer
3
PART I
FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS (UNAUDITED)
The June 30, 1997 and December 31, 1996, consolidated balance sheets of United
Bankshares, Inc. and Subsidiaries, and the related consolidated statements of
income for the three and six months ended June 30, 1997 and 1996, and the
related consolidated statement of changes in shareholders' equity for the six
months ended June 30, 1997, and the related condensed consolidated statements of
cash flows for the six months ended June 30, 1997 and 1996, and the notes to
consolidated financial statements appear on the following pages.
4
CONSOLIDATED BALANCE SHEETS (UNAUDITED)
UNITED BANKSHARES, INC. AND SUBSIDIARIES
(In thousands, except per share data) June 30 December 31
1997 1996
---------- -----------
ASSETS
Cash and due from banks $ 86,805 $ 86,328
Interest-bearing deposits with other banks 358 195
Federal funds sold 2,997
---------- ----------
Total cash and cash equivalents 87,163 89,520
Securities available for sale at estimated fair
value (amortized cost-$199,368 at June 30,
1997 and $160,161 at December 31, 1996) 201,902 161,629
Securities held to maturity (estimated fair value
-$184,082 at June 30, 1997 and $173,697 at
December 31, 1996) 181,872 170,702
Loans
Commercial, financial, and agricultural 254,367 248,762
Real estate:
Single family residential 921,779 953,000
Commercial 368,251 355,431
Construction 50,680 42,343
Other 21,678 19,748
Installment 229,845 232,004
Loans held for sale at estimated fair value 8 1,482
---------- ----------
1,846,608 1,852,770
Less: Unearned income (5,922) (5,165)
---------- ----------
Loans, net of unearned income 1,840,686 1,847,605
Less: Allowance for loan losses (22,249) (22,283)
---------- ----------
Net loans 1,818,437 1,825,322
Bank premises and equipment 33,294 33,550
Interest receivable 14,231 13,508
Other assets 35,882 32,646
---------- ----------
TOTAL ASSETS $2,372,783 $2,326,877
========== ==========
LIABILITIES
Domestic deposits:
Noninterest-bearing $ 249,144 $ 261,048
Interest-bearing 1,621,351 1,566,506
---------- ----------
TOTAL DEPOSITS 1,870,495 1,827,554
Short-term borrowings:
Federal funds purchased 25,951 4,491
Securities sold under agreements to repurchase 88,695 71,091
Federal Home Loan Bank borrowings 90,249 132,631
Accrued expenses and other liabilities 32,957 32,596
---------- ----------
TOTAL LIABILITIES 2,108,347 2,068,363
SHAREHOLDERS' EQUITY
Common stock, $2.50 par value; Authorized -20,000,000 shares; issued -
15,295,130 at June 30, 1997 and December 31, 1996, including 347,391
and 205,495 shares in treasury at June 30, 1997 and December 31,
1996, respectively 38,238 38,238
Surplus 41,302 41,438
Retained earnings 193,812 183,539
Net unrealized holding gain on securities available
for sale, net of deferred income taxes 1,647 954
Treasury stock (10,563) (5,655)
---------- ----------
TOTAL SHAREHOLDERS' EQUITY 264,436 258,514
---------- ----------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $2,372,783 $2,326,877
========== ==========
See notes to consolidated unaudited financial statements.
5
CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
UNITED BANKSHARES, INC. AND SUBSIDIARIES
(In thousands, except per share data) Three Months Ended Six Months Ended
June 30 June 30
------------------------ ----------------------
1997 1996 1997 1996
------ ------ ------ -----
INTEREST INCOME
Interest and fees on loans $39,616 $36,716 $78,533 $74,008
Interest on federal funds sold and
other short-term investments 55 76 118 291
Interest and dividends on securities:
Taxable 5,179 4,169 9,967 8,222
Exempt from federal taxes 495 566 1,027 1,194
------- ------- ------- -------
TOTAL INTEREST INCOME 45,345 41,527 89,645 83,715
------- ------- ------- -------
INTEREST EXPENSE
Interest on deposits 17,872 15,745 34,824 31,543
Interest on short-term borrowings 1,130 901 2,014 1,825
Interest on Federal Home Loan
Bank borrowings 946 790 2,268 1,765
------- ------- ------- -------
TOTAL INTEREST EXPENSE 19,948 17,436 39,106 35,133
------- ------- ------- -------
NET INTEREST INCOME 25,397 24,091 50,539 48,582
PROVISION FOR POSSIBLE LOAN LOSSES 550 949 1,150 1,560
------- ------- ------- -------
NET INTEREST INCOME AFTER PROVISION
FOR POSSIBLE LOAN LOSSES 24,847 23,142 49,389 47,022
------- ------- ------- -------
OTHER INCOME
Trust department income 867 779 1,720 1,574
Other charges, commissions, and fees 2,968 2,836 5,854 5,436
Income (loss) from mortgage banking
operations 313 (1,903) 607 (1,780)
Loss on sales of securities (48) (48)
Other income 54 64 103 127
------- ------- ------- -------
TOTAL OTHER INCOME 4,202 1,728 8,284 5,309
------- ------- ------- -------
OTHER EXPENSES
Salaries and employee benefits 6,478 8,115 13,029 14,841
Net occupancy expense 1,489 1,683 2,921 3,061
Other expense 5,575 8,394 11,219 15,102
------- ------- ------- -------
TOTAL OTHER EXPENSES 13,542 18,192 27,169 33,004
------- ------- ------- -------
INCOME BEFORE INCOME TAXES 15,507 6,678 30,504 19,327
INCOME TAXES 5,387 5,414 10,336 9,974
------- ------- ------- -------
NET INCOME $10,120 $ 1,264 $20,168 $ 9,353
======= ======= ======= =======
Earnings per common share $0.67 $0.08 $1.33 $0.61
Dividends per share $0.33 $0.31 $0.66 $0.61
Average outstanding shares 15,093,963 15,222,654 15,125,204 15,229,246
See notes to consolidated unaudited financial statements.
6
CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY (UNAUDITED)
UNITED BANKSHARES, INC. AND SUBSIDIARIES
(In thousands, except per share data)
Six Months Ended June 30, 1997
---------------------------------------------------------------------------------------------------
Net
Unrealized
Holding
Common Stock Gain on
----------------------- Securities Total
Par Retained Available Treasury Shareholders'
Shares Value Surplus Earnings for Sale Stock Equity
---------- --------- ------- -------- -------- -------- ---------
Balance at
January 1, 1997 15,295,130 $38,238 $41,438 $183,539 $954 ($5,655) $258,514
Net income 20,168 20,168
Cash dividends
($.66 per share) (9,895) (9,895)
Net change in
unrealized gain
on securities
available for sale 693 693
Purchase of treasury
stock (160,600
shares) (5,469) (5,469)
Common stock options
exercised (136) 561 425
---------- ------- ------- -------- -------- -------- ----------
Balance at
June 30, 1997 15,295,130 $38,238 $41,302 $193,812 $1,647 ($10,563) $264,436
========== ======= ======= ======== ====== ======== ==========
See notes to consolidated unaudited financial statements.
7
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
UNITED BANKSHARES, INC. AND SUBSIDIARIES
Six Months Ended
June 30
-------------------------------
1997 1996
----------- ----------
NET CASH PROVIDED BY OPERATING ACTIVITIES $ 19,155 $ 10,499
INVESTING ACTIVITIES
Proceeds from maturities and calls of
securities held to maturity 13,894 11,350
Proceeds from sales of securities
available for sale 50,076
Proceeds from maturities and calls of
securities available for sale 78,637 49,362
Purchases of securities available for sale (117,796) (81,662)
Purchases of securities held to maturity (25,000) (63,375)
Net purchase of bank premises and equipment (1,850) (841)
Changes in loans 5,724 (54,171)
-------- --------
NET CASH USED IN INVESTING ACTIVITIES (46,391) (89,261)
-------- --------
FINANCING ACTIVITIES
Cash dividends paid (9,815) (8,300)
Cash dividends paid by acquired banks (382)
Acquisition of treasury stock (5,469) (829)
Proceeds from exercise of stock options 425 306
Proceeds from Federal Home Loan Bank advances 211,655 181,762
Repayment of Federal Home Loan Bank advances (254,037) (132,670)
Acquisition of fractional shares (2)
Changes in:
Deposits 43,056 (10,750)
Federal funds purchased and securities
sold under agreements to repurchase 39,064 23,787
-------- --------
NET CASH PROVIDED BY FINANCING ACTIVITIES 24,879 52,922
-------- --------
DECREASE IN CASH AND CASH EQUIVALENTS (2,357) (25,840)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 89,520 98,977
-------- --------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 87,163 $ 73,137
========= ========
See notes to consolidated unaudited financial statements.
8
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 1996 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 February 1997, the FASB issued Statement No. 128, (SFAS No. 128), "Earnings
Per Share," which simplifies the standards for computing earnings per share
previously found in APB Opinion No. 15, (APB No. 15), "Earnings Per Share," and
makes them comparable to international EPS standards. It replaces the
presentation of primary EPS with a presentation of basic EPS. It also requires
dual presentation of basic and diluted EPS on the face of the income statement
for all entities with complex capital structures and requires a reconciliation
of the numerator and denominator of the basic and diluted EPS computation.
United does not expect application of the new rules to produce per share amounts
that are materially different from amounts calculated under current rules. This
statement is effective for financial periods ending after December 15, 1997,
including interim periods; earlier application is not permitted. SFAS No. 128
requires restatement of all prior period EPS data presented.
In June 1996, the FASB issued Statement No. 125, (SFAS No. 125), "Accounting for
Transfers and Servicing of Financial Assets and Extinguishments of Liabilities,"
which supersedes SFAS No. 76, "Extinguishment of Debt." SFAS No. 125 prescribes
the accounting treatment for securitization transactions based on a financial
components approach with an emphasis on physical control, such as the ability to
pledge or exchange the securitized assets, while prior rules emphasize the
economic risks or rewards of ownership of the assets. Additionally, SFAS No. 125
applies to repurchase agreements, securities lending, loan participations, and
other financial component transfers and exchanges. Under the financial
components approach of SFAS No. 125, both the transferor and transferee will
recognize on its balance sheet the assets and liabilities, or components
thereof, that it controls and derecognize from the balance sheet the assets and
liabilities that were surrendered or extinguished in the transfer.
The new rules do not have a material effect on United's financial position and
results of operations. SFAS No. 125 is effective for transactions occurring
after December 31, 1996.
9
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. SUBSEQUENT EVENT
On August 1, 1997, United acquired 100% of the outstanding common stock of with
First Patriot Bankshares Corporation, Reston, Virginia ("Patriot") for cash
consideration of $17.00 per share. The transaction, valued at approximately
$39,220, is being accounted for using the purchase method of accounting. The
acquisition is not expected to materially impact United's financial position or
results of operations.
At June 30, 1997, Patriot had consolidated assets of approximately $192,932 and
shareholders' equity of $15,419.
4. INVESTMENT SECURITIES
The amortized cost and estimated fair values of securities available for sale
are summarized as follows:
June 30, 1997
---------------------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
--------- ---------- ---------- ---------
U.S. Treasury securities and
obligations of U.S. Government
corporations and agencies $112,420 $331 $444 $112,307
Mortgage-backed securities 68,650 514 615 68,549
Marketable equity securities 4,049 2,945 6,994
Other 14,249 2 199 14,052
--------- ---------- ---------- ---------
Total $199,368 $3,792 $1,258 $201,902
========= ========== ========== =========
December 31, 1996
---------------------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
--------- ---------- ---------- ---------
U.S. Treasury securities and
obligations of U.S. Government
corporations and agencies $115,018 $443 $444 $115,017
Mortgage-backed securities 24,982 92 565 24,509
Marketable equity securities 3,655 2,158 5,813
Other 16,506 7 223 16,290
--------- ---------- ---------- ---------
Total $160,161 $2,700 $1,232 $161,629
========= ========== ========== =========
10
The cumulative net unrealized holding gain on available for sale securities
resulted in an increase to shareholders' equity of $1,647 and $954, net of
deferred income taxes at June 30, 1997 and December 31, 1996, respectively.
The amortized cost and estimated fair values of securities held to maturity are
summarized as follows:
June 30, 1997
---------------------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
--------- ---------- ---------- ---------
U.S. Treasury securities and
obligations of U.S. Government
corporations and agencies $93,771 $1,494 $127 $95,138
State and political subdivisions 31,769 1,178 24 32,923
Mortgage-backed securities 49,429 130 441 49,118
Other 6,903 6,903
--------- ---------- ---------- ----------
Total $181,872 $2,802 $592 $184,082
========= ========== ========== ==========
December 31, 1996
---------------------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
--------- ---------- ---------- ---------
U.S. Treasury securities and
obligations of U.S. Government
corporations and agencies $77,704 $2,131 $87 $79,748
State and political subdivisions 36,136 1,487 32 37,591
Mortgage-backed securities 54,977 250 754 54,473
Other 1,885 1,885
--------- ---------- ---------- ----------
Total $170,702 $3,868 $873 $173,697
========= ========== ========== ==========
The amortized cost of securities pledged to secure public deposits, securities
sold under agreements to repurchase, and for other purposes as required or
permitted by law, approximated $229,015 and $204,254 at June 30, 1997 and
December 31, 1996, respectively.
5. NONPERFORMING LOANS
Nonperforming loans are summarized as follows:
June 30 December 31
1997 1996
-------- -----------
Loans past due 90 days or more
and still accruing interest $ 6,394 $ 5,831
Nonaccrual loans 5,939 4,361
------- -------
Total nonperforming loans $12,333 $10,192
======= =======
11
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
----------------------- -----------------------
1997 1996 1997 1996
------- ------- ------- ------
Balance at beginning of period $22,282 $22,715 $22,283 $22,545
Provision charged to expense 550 949 1,150 1,560
------- ------- ------- -------
22,832 23,664 23,433 24,105
Loans charged-off (772) (1,182) (1,456) (1,781)
Less recoveries 189 241 272 399
------- ------- ------- -------
Net Charge-offs (583) (941) (1,184) (1,382)
------- ------- ------- -------
Balance at end of period $22,249 $22,723 $22,249 $22,723
======= ======= ======= =======
The average recorded investment in impaired loans during the quarter ended June
30, 1997 and for the year ended December 31, 1996 was approximately $11,134 and
$9,442, respectively. For the quarters ended June 30, 1997 and 1996, United
recognized interest income on the impaired loans of approximately $182 and $84,
respectively, substantially all of which was recognized using the accrual method
of income recognition.
At June 30, 1997, the recorded investment in loans that are considered to be
impaired under SFAS No. 114 was $12,111 (of which $5,939 were on a nonaccrual
basis). Included in this amount is $5,508 of impaired loans for which the
related allowance for loan losses is $993 and $6,603 of impaired loans that do
not have an allowance for credit losses due to management's estimate that the
fair value of the underlying collateral of these loans is sufficient for full
repayment of the loan and interest.
The amount of interest income which would have been recorded under the original
terms for the above loans was $395 and $408 for the three months ended June 30,
1997 and 1996, respectively, and $665 and $627 for the six months ended June 30,
1997 and 1996, respectively.
7. COMMITMENTS AND CONTINGENT LIABILITIES
United and its subsidiaries are currently involved, in the normal course of
business, in various legal proceedings. Management is vigorously pursuing all of
its legal and factual defenses and, after consultation with legal counsel,
believes that all such litigation will be resolved without material effect on
financial position or results of operations.
12
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
June 30, 1997, and June 30, 1996, with the interest rate earned or paid
on such amount.
Three Months Ended Three Months Ended
June 30 June 30
1997 1996
------------------------------- -----------------------------
(Dollars in Average Avg. Average Avg.
Thousands) Balance Interest Rate Balance Interest Rate
---------- ------- -------- ---- ------- -------- ----
ASSETS
Earning Assets:
Federal funds sold and
securities purchased
under agreements to
resell and other short-
term investments $ 4,186 $ 55 5.27% $ 5,652 $ 93 6.62%
Investment Securities:
Taxable 307,182 5,179 6.74% 273,126 4,169 6.11%
Tax-exempt (1) 32,538 760 9.35% 38,322 871 9.09%
---------- ------- ------ ---------- ------- ------
Total Securities 339,720 5,939 6.99% 311,448 5,040 6.47%
Loans, net of unearned
income (1) (2) 1,863,672 39,953 8.59% 1,755,870 36,978 8.47%
Allowance for loan
losses (22,233) (22,742)
---------- ----------
Net loans 1,841,439 8.69% 1,733,128 8.58%
---------- ------- ------ ---------- ------- ------
Total earning assets 2,185,345 $45,947 8.42% 2,050,228 $42,111 8.26%
------- ------ ------- ------
Other assets 143,691 157,706
---------- ----------
TOTAL ASSETS $2,329,036 $2,207,934
========== ==========
LIABILITIES
Interest-Bearing Funds:
Interest-bearing deposits $1,628,947 $17,872 4.40% $1,562,464 $15,745 4.05%
Federal funds purchased,
repurchase agreements
and other short-term
borrowings 103,305 1,130 4.39% 86,002 901 4.22%
FHLB advances 63,486 946 5.98% 56,606 790 5.61%
---------- ------- ------ ---------- ------- ------
Total Interest-Bearing Funds 1,795,738 19,948 4.46% 1,705,072 17,436 4.12%
------- ------ ------- ------
Demand deposits 240,695 222,386
Accrued expenses and other
liabilities 30,154 26,868
---------- ----------
TOTAL LIABILITIES 2,066,587 1,954,326
Shareholders' Equity 262,449 253,608
---------- ----------
TOTAL LIABILITIES AND
SHAREHOLDERS' EQUITY $2,329,036 $2,207,934
========== ==========
NET INTEREST INCOME $25,999 $24,675
======= =======
INTEREST SPREAD 3.97% 4.14%
NET INTEREST MARGIN 4.76% 4.84%
(1) The interest income and the yields on nontaxable loans and
investment securities are presented on a tax-equivalent basis
using the statutory federal income tax rate of 35%.
(2) Nonaccruing loans are included in the daily average loan amounts
outstanding.
13
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, 1997, and June 30, 1996, with the interest rate earned or paid on
such amount.
Six Months Ended Six Months Ended
June 30 June 30
1997 1996
------------------------------- -----------------------------
(Dollars in Average Avg. Average Avg.
Thousands) Balance Interest Rate Balance Interest Rate
---------- ------- -------- ---- ------- -------- ----
ASSETS
Earning Assets:
Federal funds sold and
securities purchased
under agreements to
resell and other short-
term investments $ 4,391 $ 118 5.44% $ 8,971 $ 291 6.56%
Investment Securities:
Taxable 300,184 9,967 6.64% 271,359 8,222 6.06%
Tax-exempt (1) 33,818 1,580 9.34% 39,731 1,837 9.24%
---------- ------- ------ ---------- ------- ------
Total Securities 334,002 11,547 6.91% 311,090 10,059 6.47%
Loans, net of unearned
income (1) (2) 1,856,788 79,192 8.57% 1,747,681 74,629 8.63%
Allowance for loan
losses (22,252) (22,713)
---------- ----------
Net loans 1,834,536 8.68% 1,724,968 8.75%
---------- ------- ------ ---------- ------- ------
Total earning assets 2,172,929 $90,857 8.40% 2,045,029 $84,979 8.39%
------- ------ ------- ------
Other assets 141,584 155,061
---------- ----------
TOTAL ASSETS $2,314,513 $2,200,090
========== ==========
LIABILITIES
Interest-Bearing Funds:
Interest-bearing deposits $1,610,529 $34,824 4.36% $1,542,164 $31,543 4.14%
Federal funds purchased,
repurchase agreements
and other short-term
borrowings 93,246 2,014 4.35% 84,239 1,825 4.38%
FHLB advances 78,316 2,268 5.84% 64,799 1,765 5.51%
---------- ------- ------ ---------- ------- ------
Total Interest-Bearing Funds 1,782,091 39,106 4.43% 1,691,202 35,133 4.20%
------- ------ ------- ------
Demand deposits 240,395 227,663
Accrued expenses and other
liabilities 30,011 28,011
---------- ----------
TOTAL LIABILITIES 2,052,537 1,946,876
Shareholders' Equity 262,016 253,214
---------- ----------
TOTAL LIABILITIES AND
SHAREHOLDERS' EQUITY $2,314,513 $2,200,090
========== ==========
NET INTEREST INCOME $51,751 $49,846
======= =======
INTEREST SPREAD 3.97% 4.19%
NET INTEREST MARGIN 4.77% 4.92%
(1) The interest income and the yields on nontaxable loans and
investment securities are presented on a tax-equivalent basis
using the statutory federal income tax rate of 35%.
(2) Nonaccruing loans are included in the daily average loan amounts
outstanding.
14
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 half of 1997 was $20.17 million or $1.33 per share
compared to $9.35 million or $0.61 per share for the first half of 1996. This
represents a 115.72% increase in net income and a 118.03% increase in earnings
per share. United's annualized return on average assets was 1.76% and return on
average shareholders' equity was 15.52% as compared 0.85% and 7.45% for 1996,
respectively.
United has strong core earnings driven by a net interest margin of 4.77% for the
first six months of 1997. Net interest income increased by $1.96 million or
4.03% for the first six months of 1997 as compared to the same period for 1996.
The provision for loan losses decreased $410 thousand or 26.28% when comparing
the first six months of 1997 to the first six months of 1996. Noninterest
income, including income from mortgage banking operations, increased $2.97
million or 56.03% for the first six months of 1997 when compared to the first
six months of 1996. Noninterest expenses decreased $5.83 million or 17.68% for
the first six months compared to the same period in 1996. The effective tax rate
for the three months and six months ended June 30, 1997 approximated 34%.
Total assets were $2.37 billion at June 30, 1997, up $45.91 million or 1.97%
compared with year-end, and up 4.26% from June 30, 1996. Loans, net of unearned
income, reflected a $6.92 million decrease while investment securities reflected
a $51.44 million increase for the second quarter of 1997 as compared with
year-end 1996 as a result of United's securitization of approximately $46
million of fixed rate mortgage loans during the second quarter of 1997. Other
assets increased $3.24 million while cash and cash equivalents declined $2.36
million. All other categories of assets were moderately flat compared to
year-end 1996.
Total deposits grew $42.94 million or 2.35% from year-end due to United's
continued offering of new deposit products introduced in late 1996. Since
December 31, 1996, United has realized an increase of $54.85 million in
interest-bearing deposits that resulted from a combination of overall deposit
growth and a shift of approximately $12 million from noninterest-bearing to
interest-bearing deposits. United's short-term borrowings increased $39.06
million while its FHLB borrowings decreased $42.38 million as United utilized
the increase in deposits to pay down the higher cost FHLB borrowings. Accrued
expenses and other liabilities remained virtually flat to year-end 1996 with an
increase of only 1.11%.
Shareholders' equity increased $5.9 million or 2.29% as compared with December
31, 1996. United continues to maintain an appropriate balance between capital
adequacy and return to shareholders. A primary tool used for capital management
has been the common stock repurchase program. At June 30, 1997, United's
regulatory capital ratios, including those of its bank subsidiaries, exceeded
the levels established for well- capitalized institutions.
15
RESULTS OF OPERATIONS
NET INTEREST INCOME
Net interest income increased $1.31 million or 5.42% in the second quarter of
1997 and $1.96 million or 4.03% for the first six months of 1997, when compared
to the same periods of 1996. The net interest margin continues to drive United's
core profitability and momentum. The increases were primarily attributable to
higher levels of average earning assets of $135 million for the second quarter
of 1997 and $128 million for the first half of 1997, when compared to the second
quarter and first half of 1996, respectively. United's tax-equivalent net
interest margin was 4.76% and 4.77% for the second quarter and first six months
of 1997, respectively. For the quarter ended June 30, 1997, United's net
interest margin was 2 basis points lower than the immediately preceding quarter,
and 8 basis points less than the second quarter of 1996. The lower net interest
margin from one year ago was the result of increased average deposit and
wholesale funding balances at higher rates offset by a smaller increase in the
yield on the loan portfolio.
PROVISION FOR LOAN LOSSES
For the quarters ended June 30, 1997 and 1996, the provision for loan losses was
$550 thousand and $949 thousand, respectively, while the first six months
provisions were $1.15 million for 1997 as compared to $1.56 million for 1996.
The allowance for loan losses as a percentage of loans, net of unearned income,
approximated 1.21% at June 30, 1997 and December 31, 1996, and 1.27% at June 30,
1996. Charge-offs exceeded recoveries during the second quarter of 1997 and 1996
and resulted in net charge-offs of $583 thousand and $941 thousand,
respectively. Charge-offs exceeded recoveries by $1.18 million for the first six
months of 1997 as compared to net charge-offs of $1.38 million for the first six
months of 1996. Note 6 to the accompanying unaudited consolidated financial
statements provides a progression of the allowance for loan losses. Loans, net
of unearned income, decreased by $6.92 million or 0.37% as compared to year-end
1996 as a result of the loan securitization that occurred during the second
quarter. Approximately $46 million of fixed rate mortgage loans were subject to
a swap transaction whereby the loans were sold and replaced with U.S. Government
Agency investment securities in the available for sale category.
United's continued excellent credit quality is evidenced by the low level of
nonperforming assets at June 30, 1997. Nonperforming loans increased $2.14
million or 21.01% to $12.33 million at June 30, 1997 compared to $10.19 million
at year-end 1996 primarily due to several individually insignificant commercial
and consumer loans being classified as nonaccrual during the quarter. These
loans are adequately collateralized and management does not expect any
significant losses related to these loans. Nonperforming loans, as a percentage
of loans, net of unearned income, increased from 0.55% to 0.67% when comparing
these two respective periods. The components of nonperforming loans include
nonaccrual loans and loans which are contractually past due 90 days or more as
to interest or principal, but have not been put on a nonaccrual basis. Loans
past due 90 days or more increased $563 thousand or 9.66% during the first six
months of 1997 and nonaccrual loans increased $1.58 million or 36.18% since
year-end 1996. Total nonperforming assets of $14.23 million, including OREO of
$1.90 million at June 30, 1997, represented 0.60% of total assets, which was
equal to the ratio at March 31, 1997 and June 30, 1996, but slightly higher than
the 0.53% at December 31, 1996.
As of June 30, 1997, the ratio of the allowance for loan losses to nonperforming
loans was 180.4% as compared to 218.6% as of December 31, 1996. Management
believes that the allowance for loan losses of $22.25 million as of June 30,
1997, is adequate to provide for potential losses on existing loans based on
information currently available.
16
United evaluates the adequacy of the allowance for loan losses on a quarterly
basis. The provision for loan losses charged to operations is based on
management's evaluation of individual credits, the past loan loss experience,
and other factors which, in management's judgment, deserve recognition in
estimating loan losses. Such other factors considered by management, among other
things, included growth and composition of the loan portfolio, known
deterioration in certain classes of loans or collateral, trends in
delinquencies, and current economic conditions. United's loan administration
policies are focused upon the risk characteristics of the loan portfolio, both
in terms of loan approval and credit quality.
OTHER INCOME
Other income consists of all revenues which are not included in interest and fee
income related to earning assets. Noninterest income has been and will continue
to be an important factor for improving United's profitability. Recognizing the
importance, management continues to evaluate areas where noninterest income can
be enhanced. Noninterest income increased $2.47 million or 143.14% for the
second quarter of 1997 when compared to the second quarter of 1996.
Additionally, the $8.28 million of noninterest income for the first six months
of 1997, reflects an increase of $2.97 million or 56.03% over the first six
months of 1996. Excluding income from mortgage banking operations, noninterest
income increased $258 thousand or 7.11% for the second quarter and $588 thousand
or 8.29% for the first half of 1997, primarily due to a combination of Eagle's
former offices conforming to United's higher fee structure and a higher volume
of customer transactions on accounts which are subject to a fee.
The overall increase in noninterest income was primarily due to an increase in
income from mortgage banking operations due a loan securitization of
approximately $46 million during the quarter, with slight increases in the
categories of return check charges, bankcard income and trust department
commissions as a result of increased transactions in those areas.
OTHER EXPENSES
Just as management continues to evaluate areas where noninterest income can be
enhanced, it strives to improve the efficiency of its operations to reduce
costs. Other expenses include all items of expense other than interest expense,
the provision for loan losses, and income taxes. Other expenses decreased $4.65
million or 25.56% and $5.83 million or 17.68% for the quarter and six months
ended June 30, 1997, as compared to the same periods in 1996.
Total salaries and benefits decreased by 20.17% or $1.64 million and 12.21% or
$1.81 million for the second quarter and first six months of 1997 when compared
to the same periods of 1996. The higher salaries and benefits costs for 1996
were attributable to severance and benefit pay of displaced Eagle executive
officers and employees at locations where United consolidated certain branches.
Net occupancy expense for the second quarter and first six months of 1997
decreased by $194 thousand or 11.54% and $140 thousand or 4.58%, respectively,
when compared to the second quarter and first six months of 1996. The overall
decline in net occupancy expense for the second quarter and first half of 1997
was primarily due to a decrease in building rental expense and to lower utility
bills and building maintenance.
Other expenses decreased $2.82 million or 33.58% and $3.88 million or 25.71% for
the second quarter and first six months of 1997, as compared to the same periods
of 1996. This overall decrease was primarily due to decreases in advertising
costs, merger related legal and accounting fees, FDIC insurance, OREO expense,
gains on sale of assets, office supply expense and data processing fees. Most
other major categories of other expense were flat for the period.
17
LIQUIDITY AND CAPITAL RESOURCES
United maintains, in the opinion of management, liquidity which is sufficient to
satisfy its depositors' requirements and the credit needs of its customers. Like
all banks, United depends upon its ability to renew maturing deposits and other
liabilities on a daily basis and to acquire new funds in a variety of markets. A
significant source of funds available to United is "core deposits." Core
deposits include certain demand deposits, statement and special savings and NOW
accounts. These deposits are relatively stable and they are the lowest cost
source of funds available to United. Short-term borrowings have also been a
significant source of funds. These include federal funds purchased and
securities sold under agreements to repurchase. Repurchase agreements represent
funds which are obtained as the result of a competitive bidding process.
Liquid assets are cash and those items readily convertible to cash. All banks
must maintain sufficient balances of cash and near-cash items to meet the
day-to-day demands of customers. Other than cash and due from banks, the
available for sale securities portfolio, loans held for sale and maturing loans
and investments are the primary sources of liquidity.
The goal of liquidity management is to ensure the ability to access funding
which enables United to efficiently satisfy the cash flow requirements of
depositors and borrowers and meet United's cash needs. Liquidity is managed by
monitoring funds availability from a number of primary sources. Substantial
funding is available from cash and cash equivalents, unused short-term borrowing
and a geographically dispersed network of subsidiary banks providing access to a
diversified and substantial retail deposit market.
Short-term needs can be met through a wide array of sources such as
correspondent and downstream correspondent federal funds and utilization of
Federal Home Loan Bank advances.
Other sources of liquidity available to United to provide long-term as well as
short-term funding alternatives, in addition to FHLB advances, are long-term
certificates of deposit, lines of credit, and borrowings that are secured by
bank premises or stock of United's subsidiaries. United has no intention at this
time to utilize any long-term funding sources other than FHLB advances and
long-term certificate of deposits for funding in the normal course of business.
On August 1, 1997, United acquired all of the outstanding common stock of First
Patriot Bankshares Corporation for $17.00 per share or approximately $39 million
in cash. United will utilize FHLB advances to fund this acquisition and
anticipates that income from continuing operations will provide a significant
source of funds to repay the borrowing.
For the six months ended June 30, 1997, United generated $19.16 million of cash
from operations, which is indicative of solid earnings performance. Cash from
operations for the six months ended June 30, 1997, included, among other things,
approximately $72 million of proceeds from the sale of loans held for sale.
During the same period, net cash of $46.39 million was used in investing
activities which was primarily due to $50.27 million of net purchases of
securities. During the first six months of 1997 net cash of $24.88 million was
provided for by financing activities, primarily due to a $43.06 million increase
in deposits and a $39.06 increase in other short-term borrowings. These sources
of funds were partially offset by the net repayment of approximately $42.38
million of FHLB advances, payment of approximately $9.90 million in cash
dividends and $5.47 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 $2.36 million for the first six months of 1997.
18
United anticipates no difficulty in meeting its obligations over the next 12
months and has no material commitments for capital expenditures. There are no
known trends, demands, commitments, or events that will result in or that are
reasonably likely to result in United's liquidity increasing or decreasing in
any material way. United also has significant lines of credit available.
The Asset and Liability Committee monitors liquidity to ascertain that a strong
liquidity position is maintained. In addition, variable rate loans are a
priority. These policies help to protect net interest income against
fluctuations in interest rates. No changes are anticipated in the policies of
United's Asset and Liability Committee.
INTEREST RATE SENSITIVITY
United seeks to achieve consistent growth in net interest income and net income
while managing volatility arising from shifts in interest rates. Interest
sensitive assets and liabilities are defined as those assets or liabilities that
mature or are repriced within a designated time-frame. The principal function of
asset and liability management is to maintain an appropriate relationship
between those assets and liabilities that are sensitive to changing market
interest rates.
The difference between rate sensitive assets and rate sensitive liabilities for
specified periods of time is known as the "gap".
At United, interest rate risk is managed to minimize the impact of fluctuating
interest rates on earnings. At June 30, 1997, the results of United's internal
interest sensitivity analysis indicated that United was liability sensitive
(liabilities reprice more quickly than assets) in the one year horizon. United,
however, has not experienced the kind of repricing pattern indicated from the
cumulative gap because a significant portion of United's retail deposit base
does not reprice on a contractual basis. Management has estimated, based upon
historical analyses, that savings deposits are less sensitive to interest rate
changes than are other forms of deposits. The GAP table presented herein has
been adjusted to show the results of management's assumption that the retail
deposit base is less sensitive to interest rate changes and reprices in a manner
consistent with historical trends. (See Management Adjustments in the GAP
table.) Using these estimates, United was asset sensitive in the one year
horizon in the amount of $65.7 million or 2.96% of the cumulative gap to related
total earning assets.
The primary method of measuring the sensitivity of earnings to changing market
interest rates is to simulate expected cash flows using varying assumed interest
rates while also adjusting the timing and magnitude of non-contractual deposit
repricing to more accurately reflect anticipated pricing behavior. These
simulations include adjustments for the lag in prime-linked loan repricing and
the spread and volume elasticity of interest-bearing deposit accounts, regular
savings and money market deposit accounts. To aid in interest rate management,
United's lead bank, UNB, is a member of the Federal Home Loan Bank of Pittsburgh
(FHLB). The use of FHLB advances provides United with a relatively low risk
means to match maturities of earning assets and interest-bearing funds to
achieve a desired interest rate spread over the life of the earning assets. At
June 30, 1997, United had $90.25 million in FHLB advances, which declined from
$132.63 million at December 31, 1996, as United utilized funds available from
lower cost deposits to pay down FHLB borrowings during the first six months of
1997.
19
The following table shows the interest rate sensitivity GAP as of June 30,
1997:
Interest Rate Sensitivity Gap
Days
---------------------------------- Total 1 - 5 Over 5
0 - 90 91 - 180 181 - 365 One Year Years Years Total
----------------------- ---------- ---------- ---------- ---------- ----------
(In Thousands)
ASSETS
Interest-Earning Assets:
Federal funds sold and
securities purchased
under agreements to
resell and other short-
term investments $ 358 $ 358 $ 358
Investment and Marketable
Equity Securities:
Taxable 12,973 $ 10,731 $ 17,813 41,517 $ 114,625 $195,863 352,005
Tax-exempt 723 1,161 1,418 3,302 11,768 16,699 31,769
Loans, net of unearned
income 581,818 142,278 269,762 993,858 523,206 323,622 1,840,686
--------- --------- --------- ---------- --------- -------- ----------
Total Interest-Earning
Assets $ 595,872 $ 154,170 $ 288,993 $1,039,035 $ 649,599 $536,184 $2,224,818
========= ======== ========= ========== ========= ======== ==========
LIABILITIES
Interest-Bearing Funds:
Savings and NOW
accounts $ 701,965 $ 701,965 $ 701,965
Time deposits of
$100,000 & over 36,746 $ 30,051 $ 39,220 106,017 $ 53,863 $ 634 160,514
Other time deposits 192,011 158,427 147,115 497,553 258,339 2,980 758,872
Federal funds purchased,
repurchase agreements
and other short-term
borrowing 114,646 114,646 114,646
FHLB advances 86,600 86,600 3,649 90,249
----------- --------- --------- ---------- --------- -------- ----------
Total Interest-Bearing
Funds $1,131,968 $ 188,478 $ 186,335 $1,506,781 $ 312,202 $ 7,263 $1,826,246
========== ========= ========= ========== ========= ======== ==========
Interest Sensitivity Gap $ (536,096) $ (34,308) $ 102,658 $ (467,746) $ 337,397 $528,921 $ 398,572
========== ========= ========= ========== ========= ======== ==========
Cumulative Gap $ (536,096) $(570,404) $(467,746) $ (467,746) $(130,349) $398,572 $ 398,572
========== ========= ========= ========== ========= ======== ==========
Cumulative Gap as
a Percentage of Total
Earning Assets -24.10% -25.64% -21.02% -21.02% -5.86% 17.91% 17.91%
Management
Adjustments 666,866 (44,480) (88,893) 533,493 (533,493) 0
Off-Balance
Sheet Activities
---------- --------- --------- ---------- --------- -------- ----------
Cumulative Management
Adjusted Gap and
Off-Balance Sheet
Activities $ 130,770 $ 51,982 $ 65,747 $ 65,747 $(130,349) $398,572 $ 398,572
========== ========= ========= ========== ========= ======== ==========
Cumulative Management
Adjusted Gap and
Off-Balance Sheet
Activities as a
Percentage of Total
Earning Assets 5.88% 2.34% 2.96% 2.96% -5.86% 17.91% 17.91%
20
INCOME TAXES
Income tax expense for the three months ended June 30, 1997 and 1996 was $5.39
million and $5.41 million, respectively. Income tax expense for the six months
ended June 30, 1997 and 1996 was $10.34 million and $9.97 million, respectively.
Income tax expense for the second quarter and first six months of 1996 included
$3.09 million of one-time bad debt recapture in connection with the Eagle
merger, which was offset by decreased pretax income. However, as a result of
legislation passed during the third quarter of 1996, United was relieved of the
$3.09 million of additional income tax expense recorded in the second quarter of
1996, that related to bad debt recapture associated with the Eagle Bancorp, Inc.
CAPITAL
Total shareholders' equity increased $5.92 million to $264.44 million, which is
an increase of 2.29% from December 31, 1996. United's equity to assets ratio was
11.11% at both June 30, 1997 and December 31, 1996. Capital and reserves to
total assets was 12.05% at June 30, 1997 and 12.07% at December 31, 1996.
Cash dividends of $0.33 per common share for the second quarter of 1997 and
$0.66 for the six month period ended June 30, 1997, represent increases of 6.45%
and 8.20%, respectively, over the $.31 paid for second quarter of 1996 and $0.61
paid for the first six months of 1996. Total cash dividends paid were
approximately $4.93 million for the second quarter of 1997 and $9.90 million for
the first six months of 1997, an increase of 4.98% and 19.22% over the
comparable periods of 1996.
United seeks to maintain a proper relationship between capital and total assets
to support growth and sustain earnings. United's average equity to average
assets ratio was 11.32% at June 30, 1997 and 11.51% at June 30, 1996. United's
risk-based capital ratios of 16.50% at June 30, 1997 and 16.52% at December 31,
1996, are both significantly higher than the minimum regulatory requirements.
United's tier I capital and leverage ratios of 15.25% and 10.78%, respectively,
at June 30, 1997, are also well above regulatory minimum requirements.
21