Exhibit 99.1
Consolidated Financial Statements of United Bankshares, Inc.
as of December 31, 1997, and for each of the three years
in the period ended December 31, 1997, with the report of
independent auditors and management's discussion and analysis
5
UNITED BANKSHARES, INC. AND SUBSIDIARIES
DISTRIBUTION OF ASSETS, LIABILITIES AND SHAREHOLDERS' EQUITY
INTEREST RATES AND INTEREST DIFFERENTIAL:
The following table shows the daily average balance of major categories of
assets and liabilities for each of the three years ended December 31, 1997, 1996
and 1995 with the interest and rate earned or paid on such amount.
Year Ended Year Ended Year Ended
December 31 December 31 December 31
1997 1996 1995
-----------------------------------------------------------------------------------------
(Dollars in Average Avg. Average Avg. Average Avg.
Thousands) Balance Interest Rate Balance Interest Rate Balance Interest Rate
------- -------- ----- ------- -------- ----- ------- -------- ----
ASSETS
Earning assets:
Federal funds sold and securities
purchased under agreements to
resell and other short-term
investments $ 19,773 $ 1,024 5.18% $ 19,366 $ 1,020 5.27% $ 34,475 $ 2,113 6.13%
Investment Securities:
Taxable 705,019 46,208 6.55% 581,211 36,575 6.30% 528,352 32,900 6.23%
Tax exempt (1) 53,982 4,728 8.76% 59,801 5,372 8.98% 65,953 6,180 9.37%
---------- -------- ---- ---------- -------- ------ ---------- -------- ----
Total Securities 759,509 50,936 6.71% 641,012 41,947 6.55% 594,305 39,080 6.58%
Loans, net of unearned
income (1) (2) 2,371,389 206,002 8.69% 2,170,502 186,336 8.58% 1,969,861 172,592 8.76%
Allowance for possible loan
losses (28,980) (28,322) (28,506)
---------- ---------- ----------
Net Loans 2,342,409 8.79% 2,142,180 8.70% 1,941,355 8.89%
---------- -------- ---- ---------- -------- ------ ---------- -------- ----
Total earning assets 3,121,183 257,962 8.26% 2,802,558 229,303 8.18% 2,570,135 213,785 8.32%
-------- -------- --------
Other assets 207,145 210,953 187,716
---------- ---------- ----------
TOTAL ASSETS $3,328,328 $3,013,511 $2,757,851
========== ========== ==========
LIABILITIES
Interest-Bearing Funds:
Interest-bearing deposits $2,280,993 $102,682 4.50% $2,034,241 $ 86,413 4.25% $1,909,330 $ 80,101 4.20%
Federal funds purchased,
repurchase agreements
and other short-term
borrowings 195,390 8,909 4.56% 152,254 6,655 4.37% 121,832 5,500 4.51%
FHLB advances 93,452 5,469 5.85% 113,403 6,381 5.63% 75,744 4,515 5.96%
---------- -------- ---- ---------- -------- ------ ---------- -------- ----
Total Interest-Bearing Funds 2,569,835 117,060 4.56% 2,299,898 99,449 4.32% 2,106,906 90,116 4.28%
-------- -------- --------
Demand deposits 381,941 357,017 328,904
Accrued expenses and other
liabilities 40,695 41,941 33,123
---------- ---------- ----------
TOTAL LIABILITIES 2,992,471 2,698,856 2,468,933
Shareholders' Equity 335,857 314,655 288,918
---------- ---------- ----------
TOTAL LIABILITIES AND
SHAREHOLDERS' EQUITY $3,328,328 $3,013,511 $2,757,851
========== ========== ==========
NET INTEREST INCOME $140,902 $129,854 $123,669
======== ======== ========
INTEREST SPREAD 3.70% 3.86% 4.04%
NET INTEREST MARGIN 4.51% 4.63% 4.81%
(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.
6
UNITED BANKSHARES, INC. AND SUBSIDIARIES
RATE/VOLUME ANALYSIS
The following table sets forth a summary of the changes in interest earned and
interest paid detailing the amounts attributable to (i) changes in volume
(change in the average volume times the prior year's average rate), (ii) changes
in rate (change in the average rate times the prior year's average volume), and
(iii) changes in rate/volume (change in the average volume times the change in
average rate).
1997 Compared to 1996 1996 Compared to 1995
----------------------------------------------- ---------------------------------------
Increase (Decrease) Due to Increase (Decrease) Due to
Rate/ Rate/
Volume Rate Volume Total Volume Rate Volume Total
--------- ---------- -------- --------- --------- -------- -------- -------
(In thousands) (In thousands)
Interest income:
Federal funds sold, securities purchased
under agreements to resell and other
short-term investments $ 21 $ (17) $ $ 4 $ (926) $ (297) $ 130 $ (1,093)
Investment securities:
Taxable 7,806 1,450 309 9,565 3,292 409 41 3,742
Tax exempt (1) (523) (134) 13 (644) (577) (255) 24 (808)
Loans (1),(2) 17,414 2,059 193 19,666 17,851 (3,723) (384) 13,744
------- ------- ----- ------- ------- ------- ----- --------
TOTAL INTEREST INCOME 24,718 3,358 515 28,591 19,640 (3,866) (189) 15,585
------- ------- ----- ------- ------- ------- ----- --------
Interest expense:
Interest-bearing deposits $10,482 $ 5,161 $ 626 $16,269 $ 5,240 $ 1,005 $ 66 $ 6,311
Federal funds purchased, repurchase
agreements, and other short-term
borrowings 1,885 287 82 2,254 1,373 (175) (43) 1,155
FHLB advances (1,123) 256 (45) (912) 2,245 (253) (126) 1,866
------- ------- ----- ------- ------- ------- ----- --------
TOTAL INTEREST EXPENSE 11,244 5,704 663 17,611 8,858 577 (103) 9,332
------- ------- ----- ------- ------- ------- ----- --------
NET INTEREST INCOME $13,474 $(2,346) $(148) $10,980 $10,782 $(4,443) $(86) $ 6,253
======= ======= ===== ======= ======= ======= ==== =======
(1) Yields and interest income on tax exempt loans and investment securities are
computed on a fully tax-equivalent basis using the statutory federal income
tax rate of 35%.
(2) Nonaccruing loans are included in the daily average loan amounts
outstanding.
7
UNITED BANKSHARES, INC. AND SUBSIDIARIES
LOAN PORTFOLIO
TYPES OF LOANS
The following is a summary of loans outstanding at December 31:
1997 1996 1995 1994 1993
----------- ----------- ----------- ----------- --------
(In thousands)
Commercial, financial
and agricultural $ 467,223 $ 309,354 $ 283,743 $ 259,093 $ 264,893
Real estate mortgage 1,705,491 1,629,543 1,502,281 1,361,307 1,156,004
Real estate construction 150,030 90,817 66,810 60,600 54,094
Consumer 304,862 270,410 241,109 244,232 239,470
Less: Unearned interest (7,766) (5,923) (5,917) (7,995) (9,102)
------------- ------------ ------------ ------------ ------------
Total loans 2,619,840 2,294,201 2,088,026 1,917,237 1,705,359
Allowance for possible
loan losses (30,455) (27,942) (28,074) (28,109) (26,616)
------------- ------------- ------------- ------------- -------------
TOTAL LOANS, NET $2,589,385 $2,266,259 $2,059,952 $1,889,128 $1,678,743
========== ========== ========== ========== ==========
At December 31, 1997, real estate mortgage loans include $1,146,541 in single
family residential real estate loans and $511,801 in commercial real estate
loans.
The following is a summary of loans outstanding as a percent of total loans at
December 31:
1997 1996 1995 1994 1993
--------- ---------- ---------- ---------- -------
Commercial, financial
and agricultural 17.83% 13.48% 13.59% 13.51% 15.53%
Real estate mortgage 65.10% 71.03% 71.95% 71.00% 67.79%
Real estate construction 5.73% 3.96% 3.20% 3.16% 3.17%
Consumer 11.34% 11.53% 11.26% 12.33% 13.51%
------- -------- -------- ------- -------
TOTAL 100.00% 100.00% 100.00% 100.00% 100.00%
======= ======= ======= ======= =======
REMAINING LOAN MATURITIES
The following table shows the maturity of commercial, financial, and
agricultural loans and real estate construction outstanding as of December 31,
1997:
Less Than One To Greater Than
One Year Five Years Five Years Total
-------- ----------- ------------- -------
(In thousands)
Commercial, financial
and agricultural $162,104 $185,556 $119,563 $467,223
Real estate construction 143,863 4,884 1,283 150,030
-------- ---------- ---------- ----------
Total $305,967 $190,440 $120,846 $617,253
======== ======== ======== ========
8
UNITED BANKSHARES, INC. AND SUBSIDIARIES
At December 31, 1997, commercial, financial and agricultural loans maturing
within one to five years and in more than five years are interest sensitive as
follows:
One to Over
Five Years Five Years
----------- -------------
(In thousands)
Outstanding with fixed interest rates $111,181 $ 53,201
Outstanding with adjustable rates 74,375 66,362
---------- ----------
$185,556 $119,563
========== ==========
There were no real estate construction loans with maturities greater than one
year.
RISK ELEMENTS
Nonperforming Loans
Nonperforming loans include loans on which no interest is currently being
accrued, loans which are past due 90 days or more as to principal or interest
payments, and loans for which the terms have been modified due to a
deterioration in the financial position of the borrower. Management is not aware
of any other significant loans, groups of loans, or segments of the loan
portfolio not included below where there are serious doubts as to the ability of
the borrowers to comply with the present loan repayment terms. The following
table summarizes nonperforming loans for the indicated periods.
December 31
---------------------------------------------------------------------
1997 1996 1995 1994 1993
---------- ---------- ---------- ---------- ----------
(In thousands)
Nonaccrual loans $ 5,202 $ 5,848 $ 9,322 $ 6,428 $13,382
Troubled debt restructurings 95 744 1,595 2,657
Loans which are contractually past due 90
days or more as to interest or principal,
and are still accruing interest 12,181 5,831 4,692 2,861 3,860
-------- -------- -------- --------- ---------
TOTAL $17,383 $11,774 $14,758 $10,884 $19,899
======= ======= ======= ======= =======
Loans are designated as nonaccrual when, in the opinion of management, the
collection of principal or interest is doubtful. This generally occurs when a
loan becomes 90 days past due as to principal or interest unless the loan is
both well secured and in the process of collection. When interest accruals are
discontinued, unpaid interest credited to income in the current year is
reversed, and unpaid interest accrued in prior years is charged to the allowance
for loan losses. See Note D to the consolidated financial statements for
additional information regarding nonperforming loans and credit risk
concentration.
9
UNITED BANKSHARES, INC. AND SUBSIDIARIES
INVESTMENT PORTFOLIO
The following is a summary of the amortized cost of held to maturity securities
held to maturity at December 31,:
1997 1996 1995
------------ ------------ ------------
(In thousands)
U.S. Treasury and other U.S. Government
agencies and corporations $ 98,330 $ 82,375 $ 24,368
States and political subdivisions 51,180 54,954 58,351
Mortgage-backed securities 74,878 96,062 101,578
Other 6,923 1,885 6,252
---------- --------- ---------
TOTAL HELD TO MATURITY SECURITIES $231,311 $235,276 $190,549
======== ======== ========
The following is a summary of the amortized cost of available for sale
securities at December 31,:
1997 1996 1995
------------ ------------ ------------
(In thousands)
U.S. Treasury securities and obligations of
U.S. Government agencies and corporations $178,973 $149,275 $199,654
States and political subdivisions 4,093 1,316 8,161
Mortgage-backed securities 379,452 268,256 155,562
Marketable equity securities 4,300 3,655 2,662
Other 18,906 19,278 16,619
---------- ------------ ----------
TOTAL AVAILABLE FOR SALE SECURITIES $585,724 $441,780 $382,658
======== ======== ========
The fair value of mortgage-backed securities is affected by changes in interest
rates and prepayment risk. When interest rates decline, prepayment speeds
generally accelerate due to homeowners refinancing their mortgages at lower
interest rates. This may result in the proceeds being reinvested at lower
interest rates. Rising interest rates may decrease the assumed prepayment speed.
Slower prepayment speeds may extend the maturity of the security beyond its
estimated maturity. Therefore, investors may not be able to invest at current
higher market rates due to the extended expected maturity of the security.
United had a net unrealized gain of $3,066 on all mortgage-backed securities at
December 31, 1997, as compared to a net unrealized loss of $1,404 at December
31, 1996.
The following table sets forth the maturities of all securities (carrying value)
at December 31, 1997, and the weighted average yields of such securities
(calculated on the basis of the cost and the effective yields weighted for the
scheduled maturity of each security).
After 1 But After 5 But
Within 1 Year Within 5 Years Within 10 Years After 10 Years
---------------- ------------------ ------------------- ----------------
Amount Yield Amount Yield Amount Yield Amount Yield
------ ------- -------- ------- ------ -------- ------ -----
(In thousands)
U.S. Treasury and other
U.S. Government agencies
and corporations $57,482 5.01% $192,709 6.54% $214,221 7.38% $270,250 7.14%
States and political
subdivisions (1) 4,133 10.48% 12,422 8.28% 19,120 8.14% 19,704 8.57%
Other 2,173 8.20% 82 6.60% 34,535 5.59%
(1) Tax-equivalent adjustments (using a 35% federal rate) have been made in
calculating yields on obligations of states and political subdivisions.
NOTE: There are no securities with a single issuer whose book value in the
aggregate exceeds 10% of total shareholders' equity.
10
UNITED BANKSHARES, INC. AND SUBSIDIARIES
SHORT-TERM BORROWINGS
The following table shows the distribution of United's short-term borrowings and
the weighted average interest rates thereon at the end of each of the last three
years. Also provided are the maximum amount of borrowings and the average
amounts of borrowings as well as weighted average interest rates for the last
three years.
Federal Securities Sold
Funds Under Agreements
Purchased to Repurchase
--------- ----------------
(In thousands)
At December 31:
1997 $40,961 $184,718
1996 4,491 168,560
1995 26,378 109,180
Weighted average interest rate at year end:
1997 6.6% 4.5%
1996 6.8% 4.4%
1995 5.9% 4.2%
Maximum amount outstanding at any month's end:
1997 $47,900 $215,205
1996 33,510 177,133
1995 33,941 135,110
Average amount outstanding during the year:
1997 $24,550 $167,688
1996 20,685 126,173
1995 12,264 105,231
Weighted average interest rate during the year:
1997 5.6% 4.4%
1996 5.6% 4.2%
1995 6.0% 4.2%
At December 31, 1997, repurchase agreements include $161,408 in overnight
accounts. The remaining balance principally consists of agreements having
maturities ranging from 2-90 days. The rates offered on these funds vary
according to movements in the federal funds and short-term investment market
rates.
11
UNITED BANKSHARES, INC. AND SUBSIDIARIES
DEPOSITS
The average daily amount of deposits and rates paid on such deposits is
summarized for the years ended December 31:
1997 1996 1995
---------------- ------------------ ------------------
Amount Rate Amount Rate Amount Rate
------ ----- ------- ----- ------ -----
(In thousands)
Noninterest bearing
demand deposits $ 381,941 $ 357,017 $ 328,904
Interest bearing
demand deposits 174,274 2.63% 276,637 2.62% 427,812 2.57%
Savings deposits 788,112 3.11% 638,352 2.84% 487,855 3.20%
Time deposits 1,318,607 5.53% 1,119,252 5.46% 993,663 5.39%
------------ ------------ ------------
TOTAL $2,662,934 4.50% $2,391,258 4.25% $2,238,234 4.20%
========== ========== ==========
Maturities of time certificates of deposit of $100,000 or more outstanding at
December 31, 1997 are summarized as follows:
(In thousands)
3 months or less $ 66,292
Over 3 through 6 months 79,012
Over 6 through 12 months 71,046
Over 12 months 64,835
----------
TOTAL $281,185
==========
RETURN ON EQUITY AND ASSETS
The following table shows selected consolidated operating and capital ratios for
each of the three years ended December 31:
1997 1996 1995
-------- -------- ------
Return on average assets 1.47% 1.24% 1.42%
Return on average equity 14.56% 11.83% 13.47%
Dividend payout ratio (1) 49.69% 58.49% 49.21%
Average equity to average
assets ratio 10.09% 10.44% 10.48%
(1) Based on historical results of United before the effects of restatements for
pooling of interests business combinations.
12
UNITED BANKSHARES, INC. AND SUBSIDIARIES
SUMMARY OF LOAN LOSS EXPERIENCE
The following table summarizes United's loan loss experience for each of the
five years ended December 31:
1997 1996 1995 1994 1993
---------- ---------- ---------- ---------- -----------
(In thousands)
Balance of allowance for possible loan
losses at beginning of year $27,942 $28,074 $28,109 $26,616 $23,604
Allowance of purchased company at date
of acquisition 2,695 1,017 504
Loans charged off:
Commercial, financial and agricultural 1,352 2,293 2,044 982 1,449
Real estate 409 271 1,022 318 1,858
Real estate construction 63 1
Consumer and other 2,317 1,134 986 1,002 1,138
------- ------ -------- -------- --------
TOTAL CHARGE-OFFS 4,078 3,698 4,115 2,303 4,445
Recoveries:
Commercial, financial and agricultural 273 253 224 742 754
Real estate 249 213 177 338 337
Real estate construction 20 26
Consumer and other 254 309 304 321 412
------- ------- ------- ------- -------
TOTAL RECOVERIES 776 775 725 1,427 1,503
NET LOANS CHARGED OFF 3,302 2,923 3,390 876 2,942
Provision for loan losses (1) 3,120 2,791 2,338 2,369 5,450
-------- --------- --------- --------- ---------
BALANCE OF ALLOWANCE FOR POSSIBLE
LOAN LOSSES AT END OF YEAR $30,455 $27,942 $28,074 $28,109 $26,616
======= ======= ======= ======= =======
Totals loans outstanding at the end of period $2,619,840 $2,294,201 $2,088,026 $1,917,237 $1,705,359
Average loans outstanding during
period (net of unearned income) $2,371,389 $2,170,502 $1,969,861 $1,809,357 $1,617,842
Net charge-offs as a percentage of
average loans outstanding 0.14% 0.13% 0.17% 0.05% 0.18%
Allowance for possible loan losses as
a percentage of nonperforming loans 175.2% 237.3% 190.2% 258.3% 133.8%
13
UNITED BANKSHARES, INC. AND SUBSIDIARIES
SUMMARY OF LOAN LOSS EXPERIENCE--Continued
Allocation of allowance for
possible loan losses
December 31
------------------------------------------------------------
1997 1996 1995 1994 1993
--------- --------- --------- --------- ----------
Commercial, financial and
agricultural $ 9,608 $ 8,109 $ 7,597 $ 8,493 $ 9,059
Real estate 2,554 3,317 3,812 3,713 3,329
Real estate construction 506 511 729 685 662
Consumer and other 2,692 1,328 1,708 1,508 1,989
--------- --------- --------- --------- ---------
Total $15,360 $13,265 $13,846 $14,399 $15,039
======== ======= ======= ======= =======
The portion of the allowance for loan losses that is not specifically allocated
to individual credits has been apportioned among the separate loan portfolios
based on the relative risk and relative size of each portfolio.
% of Allowance per Category to Total Allocated Allowance
December 31
------------------------------------------------------------
1997 1996 1995 1994 1993
--------- --------- --------- --------- ----------
Commercial, financial and
agricultural 62.55% 61.13% 54.87% 58.98% 60.24%
Real estate 16.63% 25.01% 27.53% 25.79% 22.41%
Real estate construction 3.29% 3.85% 5.27% 4.76% 4.40%
Consumer and other 17.53% 10.01% 12.33% 10.47% 13.22%
------- -------- -------- ------- -------
Total 100.00% 100.00% 100.00% 100.00% 100.00%
======= ======= ======= ======= =======
14
UNITED BANKSHARES, INC. AND SUBSIDIARIES
SELECTED FINANCIAL DATA
(DOLLARS IN THOUSANDS EXCEPT PER SHARE DATA)
FIVE YEAR SUMMARY
----------------------------------------------------------------------------------
1997 1996 1995 1994 1993
--------- --------- --------- --------- -----------
Summary of Operations:
Total interest income $ 254,758 $ 226,085 $ 209,934 $ 181,296 $ 169,358
Total interest expense 117,060 99,449 90,116 67,299 64,877
Net interest income 137,698 126,636 119,818 113,997 104,481
Provision for loan losses 3,120 2,791 2,338 2,369 5,450
Other income 36,376 29,041 25,111 17,628 17,911
Other expense 96,757 95,728 83,605 76,361 72,707
Income taxes 25,178 19,763 19,877 17,539 13,761
Income before cumulative
effect of accounting change 49,019 37,395 39,109 35,356 30,474
Net income 49,019 37,395 39,109 35,356 32,020
Cash dividends(1) 20,344 17,847 13,817 12,604 10,918
Per common share: (2)
Income before cumulative
effect of accounting change:
Basic $1.27 $0.97 $1.02 $0.93 $0.82
Diluted 1.25 0.96 1.02 0.92 0.81
Net income:
Basic $1.27 $0.97 $1.02 $0.93 $0.86
Diluted 1.25 0.96 1.02 0.92 0.85
Cash dividends(1) 0.68 0.62 0.59 0.53 0.48
Book value per share 9.14 8.34 8.01 7.23 6.88
Selected Ratios:
Return on average
shareholders' equity 14.56% 11.83% 13.47% 13.05% 12.96%
Return on average assets 1.47% 1.24% 1.42% 1.36% 1.32%
Dividend payout ratio (2) 49.69% 58.49% 49.21% 50.61% 50.30%
Selected Balance Sheet Data:
Average assets $3,328,328 $3,013,511 $2,757,851 $2,591,597 $2,433,265
Investment securities 826,831 677,764 582,953 594,983 620,052
Total loans 2,619,840 2,294,201 2,088,026 1,917,237 1,705,359
Total assets 3,726,359 3,199,347 2,889,826 2,721,139 2,496,636
Total deposits 2,925,349 2,521,148 2,329,063 2,174,992 2,072,020
Long-term borrowings 5,695 29,621 39,497 84,374 32,564
Total borrowings
and other liabilities 445,536 355,341 253,602 273,737 163,736
Shareholders' equity 355,474 322,858 307,161 272,410 260,880
(1) Cash dividends are the amounts declared by United and do not include cash
dividends of acquired subsidiaries prior to the dates of consummation.
(2) All references to shares and per share data have been retroactively
restated for the effect of a two-for-one stock split effected in the form
of a 100% stock dividend distributed on March 27, 1998, to shareholders of
record as of March 13, 1998.
15
UNITED BANKSHARES, INC. AND SUBSIDIARIES
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 discussion and analysis presents the significant changes in
financial condition and the results of operations of United and its subsidiaries
for the periods indicated below. This discussion and the consolidated financial
statements and the notes to consolidated financial statements include the
accounts of United Bankshares, Inc. and its wholly-owned subsidiaries, and
reflect the merger of George Mason Bankshares, Inc. (George Mason) on April 2,
1998, under the pooling of interests method of accounting. Accordingly, all
prior period financial statements have been restated to include George Mason.
United exchanged 1.70 shares of its common stock or 9,024,238 shares of United
for each of the 5,308,551 common shares of George Mason.
This discussion and analysis should be read in conjunction with the consolidated
financial statements and accompanying notes thereto, which are included
elsewhere in this document.
The following broad overview of the financial condition and results of
operations is not intended to replace the more detailed discussion which is
presented under specific headings on the following pages.
16
1997 COMPARED TO 1996
OVERVIEW
In November 1997, United's Board of Directors approved a two-for-one stock split
effected in the form of a 100% stock dividend that was distributed on March 27,
1998, to shareholders of record as of March 13, 1998. The change in capital
structure due to the stock dividend has been given retroactive effect in the
December 31, 1997 balance sheet and all references to shares and per share data
reflect the effect of the dividend.
On August 1, 1997, United acquired 100% of the outstanding common stock of First
Patriot Bankshares Corporation, Reston, Virginia ("Patriot") for cash
consideration of approximately $39.22 million. The transaction was accounted for
using the purchase method of accounting and, accordingly, the following
discussion includes the financial position and results of operations of Patriot
from the effective merger date forward.
EARNINGS SUMMARY
For the year ended December 31, 1997, net income increased 31.1% to $49,019,000.
Net income per share of $1.25 for the year increased 30.2% from $0.96 in 1996.
Dividends per share increased 9.7% from $0.62 in 1996 to a record level of $0.68
per share in 1997. This was the twenty-fourth consecutive year of dividend
increases to shareholders.
United's return on average assets of 1.47% for 1997 compared very favorably with
regional and national peer grouping information provided by Wheat, First
Securities, Inc. of 1.32% and 1.18%. United's return on average shareholders'
equity of 14.56%, as compared with regional and national peer group information
of 16.20% and 15.58%, is indicative of United's very strong capital levels.
United, one of the nation's most profitable regional banking companies, has a
strong capital position, and is well positioned to take advantage of future
growth opportunities.
United has strong core earnings driven by a net interest margin of 4.51% for
1997. Net interest income increased by $11.06 million or 8.74% for the year
ended December 31, 1997 as compared to the same period for 1996. The provision
for loan losses of $3.12 million increased $329 million or 11.79% when compared
to the year ended December 31, 1996. Noninterest income, including income from
mortgage banking operations, increased $7.34 million or 25.26% for 1997 when
compared to 1996. Noninterest expenses increased $1.03 million or 1.07% for 1997
compared to the same period in 1996. The effective tax rate for the year ended
December 31, 1997 approximated 33.93% compared to 34.58% for 1996.
FINANCIAL CONDITION SUMMARY
Total assets were $3.73 billion at December 31, 1997, up $527.01 million or
16.5% compared with year-end 1996. Loans, net of unearned income,
17
reflected a $325.64 million increase from 1996 to 1997 due to the acquisition of
Patriot and internal growth. Investment securities reflected a $149.07 million
increase for 1997 as compared with year-end 1996 primarily as a result of
United's securitization of approximately $87 million of fixed rate mortgage
loans during 1997. All other assets increased $52.30 million. Approximately $26
million of the increase was due to goodwill associated with the third quarter
acquisition of Patriot.
Total deposits grew $404.20 million or 16.0% from year-end 1996 due to United's
offering of new deposit products introduced in late 1996 and the acquisition of
Patriot during the third quarter of 1997. Since December 31, 1996, United has
realized an increase of $302.93 million in interest-bearing deposits and a
$101.27 million increase in noninterest- bearing deposits. United's short-term
borrowings increased $56.20 million and its FHLB borrowings increased $29.06
million as United utilized these sources of funds to fund the cash acquisition
of Patriot and to help fund loan growth. Accrued expenses and other liabilities
increased $7.93 million or 19.2% since year-end 1996 as a result of the
acquisition of Patriot and higher merger expenses.
Shareholders' equity increased $32.62 million or 10.1% from December 31, 1996 to
December 31, 1997. United continues to maintain an appropriate balance between
capital adequacy and return to shareholders. At December 31, 1997, United's
regulatory capital ratios, including those of its bank subsidiaries, exceeded
the levels established for well- capitalized institutions.
The following discussion explains in more detail the results of operations and
changes in financial condition by major category.
NET INTEREST INCOME
Net interest income represents the primary component of United's earnings. It is
the difference between interest and fee income from earning assets and interest
expense incurred to fund these assets. Net interest income is impacted by
changes in the volume and mix of interest-earning assets and interest-bearing
liabilities, as well as changes in market interest rates. Such changes, and
their impact on net interest income in 1997, are summarized below.
For the years ended December 31, 1997 and 1996, net interest income approximated
$137,698,000 and $126,636,000, respectively. On a tax- equivalent basis the net
interest margin was strong at 4.51% in 1997 and 4.64% in 1996 which are well
above national peer group margins of 4.06% in 1997 and 4.18% in 1996.
Total interest income of $254,758,000 increased 12.7% in 1997 over 1996 as a
result of higher volumes of interest-earning assets and slightly higher yields.
Higher average loan volumes of approximately $201 million, resulting primarily
from the acquisition of Patriot, contributed to the increase. From December 31,
1996 to December 31,
18
1997, United experienced an increase in consumer loans of 12.7%, while
commercial loans showed an increase of 51.0%. Mortgage loans increased from 1996
by 7.9% due mainly to increased lending in United's Virginia market by one of
United's mortgage banking subsidiaries.
Total interest expense increased $17,611,000 or 17.7% in 1997 compared to 1996.
This increase was attributed primarily to United's acquisition of Patriot,
competitive pricing of interest-bearing deposits in its markets and continued
change in the retail deposit mix as customers shifted funds into products
offering higher yields. United's average interest-bearing deposits increased by
$246,752,000 or 12.1% in 1997, while its average FHLB advances decreased
$19,951,000 or 17.6% and average short-term borrowings increased $43,136,000 or
28.3%. The average cost of funds, which increased from 4.32% in 1996 to 4.56% in
1997, reflected the general upward trend in United's market interest rates
during 1997 due to competitive pressures.
PROVISION FOR LOAN LOSSES
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 of 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. See Note D to the Consolidated Financial
Statements for a discussion of concentrations of credit risk.
Nonperforming loans were $17,383,000 at December 31, 1997 and $11,774,000 at
December 31, 1996, an increase of 47.6%. This increase can be attributed to
United's acquisition of approximately $2.5 million of nonperforming loans from
the Patriot transaction in the third quarter of 1997 and decreasing consumer
credit quality trends. Loans past due 90 days or more increased $6,350,000 or
108.9% during 1997; nonaccrual loans decreased $646,000 or 11.1% since year-end
1996. Nonperforming loans represented 0.47% of total assets at the end of 1997,
as compared to 0.41% for United's national peer group.
At year-end 1997 and 1996, the allowance for loan losses was 1.16% and 1.22% of
total loans, net of unearned income. At December 31, 1997 and 1996, the ratio of
the allowance for loan losses to nonperforming loans was 175.2% and 237.3%,
respectively.
Management believes that the allowance for loan losses of $30,455,000 at
December 31, 1997, is adequate to provide for potential losses on existing loans
based on information currently available.
For the years ended December 31, 1997 and 1996, the provision for loan losses
was $3,120,000 and $2,791,000, respectively. The increase in the provision for
1997 when compared to 1996 was due to the acquisition of nonperforming credits
in Patriot's loan portfolio and in response to growth in the portfolio. The
provision for loan losses charged to
19
operations is based on management's evaluation of individual credits, past loan
loss experience, and other factors which, in management's judgment, deserve
recognition in estimating possible loan losses. Such other factors considered by
management include growth and composition of the loan portfolio, known
deterioration in certain classes of loans or collateral, trends in delinquencies
and current economic conditions.
Total net charge-offs were $3,302,000 in 1997 and $2,923,000 in 1996, which
represents 0.14% and 0.13% of average loans for the respective years. United's
ratio of net charge-offs to average loans was better than its peer group's ratio
of 0.49% in 1997 and 0.23% in 1996.
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.
At December 31, 1997, impaired loans were $13,648,000, an increase of $1,749,000
or 14.7% from the $11,899,000 in impaired loans at December 31, 1996, due
primarily to the acquisition of Patriot in 1997. For further details, see Note D
to the Consolidated Financial Statements.
OTHER INCOME
Noninterest income has been and will continue to be an important factor for
improving United's profitability. Accordingly, management continues to evaluate
areas where noninterest income can be enhanced. Noninterest income increased
$7,335,000 or 25.3% for 1997 when compared to 1996. Other income consists of all
revenues which are not included in interest and fee income related to earning
assets. The increase in noninterest income for 1997 was primarily the result of
$15,095,000 of income generated from the sale and servicing of loans by United's
mortgage banking subsidiaries as compared to income of $9,809,000 during 1996.
Contributing to this increase in income from the mortgage banking operations
have been fees generated from the $87 million loan securitization in 1997.
Service charges and fees from customer accounts increased $2,186,000 or 15.4% in
1997. This income includes charges and fees related to various banking services
provided by United. The increase was primarily due to increased fees in bankcard
accounts, ATM surcharges and overdraft fees and an increased fee structure for
sales of checking related products.
Trust income increased $383,000 or 12.0% in 1997 due to an increased volume of
trust business.
OTHER EXPENSE
Just as management continues to evaluate areas where noninterest income can be
enhanced, it strives to improve the efficiency of its operations and thus reduce
operating costs. United's cost control efforts have
20
been very successful resulting in an efficiency ratio of 52.9%, which is well
below the 57.6% reported by United's national peer group banks and its immediate
in-market competitors.
Other expense includes all items of expense other than interest expense, the
provision for loan losses and income tax expense. In total, other expense
increased $1,029,000 or 1.1%.
Salaries and employee benefits expense increased $1,103,000 or 2.3% in 1997 as
compared to 1996. The higher salaries and benefits costs for 1997 were
attributable to commissions and salaries expense at United's mortgage banking
subsidiaries due to higher commissions on the increased volume of mortgage loans
originated during the year for sale in the secondary market. At December 31,
1997 and 1996, United employed 1,294 and 1,189 full-time equivalent employees,
respectively.
Net occupancy expense in 1997 slightly exceeded 1996 levels by $579,000 or 6.3%
primarily due to the acquisition of Patriot, decreased rental income and an
increase in building rental expense and higher depreciation and real property
taxes for company-owned buildings. The overall changes in net occupancy expense
for 1997 were insignificant with no material increase or decrease in any one
expense category.
Remaining other expense decreased $653,000 or 1.7% in 1997 compared to 1996.
This decrease in other expense for 1997 related primarily to decreases in
deposit insurance expense due to the 1996 SAIF assessment.
INCOME TAXES
For the year ended December 31, 1997, income tax expense approximated
$25,178,000 compared to $19,763,000 for 1996. The increase of $5,415,000 or
27.4% for 1997 when compared to 1996 was primarily the result of increased
pretax income in 1997. United's effective tax rate approximated 33.9% in 1997
and 34.6% in 1996. This decrease was due to effective tax planning strategies.
At December 31, 1997, gross deferred tax assets totaled approximately $17.0
million. The allowance for loan losses and various accrued liabilities represent
the most significant temporary differences.
QUARTERLY RESULTS
The first and second quarters of 1997 showed large increases in earnings in
comparison to those same two quarters of 1996 as United returned to more normal
levels of core income and expenses after the Eagle merger. The 1996 results
contained significant reengineering and merger-related and one-time special
charges associated with the Eagle merger which distorted United's true financial
performance.
In the third quarter of 1997, United reported a decrease in earnings from the
same period in 1996. Third quarter 1996 earnings were higher as a result of
legislation which relieved United of $3,086,000 in income tax expense that
related to the bad debt recapture associated with the
21
Eagle merger.
Net income for the fourth quarter of 1997 was $12,572,000, an increase of 5.0%
from the $11,969,000 earned in the fourth quarter of 1996. On a per share basis,
fourth quarter earnings were $0.32 per share in 1997 and $0.31 per share in
1996. The increase in earnings was due primarily to an increase in net interest
income.
Additional quarterly financial data for 1997 and 1996 may be found in Note P to
the Consolidated Financial Statements.
THE EFFECT OF INFLATION
United's income statements generally reflect the effects of inflation. Since
interest rates, loan demand and deposit levels are impacted by inflation, the
resulting changes in the interest sensitive assets and liabilities are included
in net interest income. Similarly, operating expenses such as salaries, rents
and maintenance include changing prices resulting from inflation. One item that
would not reflect inflationary changes is depreciation expense. Subsequent to
the acquisition of depreciable assets, inflation causes price levels to rise;
therefore, historically presented dollar values do not reflect this inflationary
condition. With inflation levels at relatively low levels and monetary and
fiscal policies being implemented to keep the inflation rate increases within an
acceptable range, management expects the impact of inflation would continue to
be minimal in the near future.
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
22
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. 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.
The difference between rate sensitive assets and rate sensitive liabilities for
specified periods of time is known as the "GAP."
As shown in the interest rate sensitivity gap table in this section, United was
liability sensitive (excess of liabilities over assets) in the one year horizon.
On the surface, this would indicate that rising market interest rates would
reduce United's earnings and declining market interest rates would increase
earnings. United, however, has not experienced the kind of earnings volatility
indicated from the cumulative gap. This is because a significant portion of
United's retail deposit base does not reprice on a contractual basis. Management
has estimated, based upon historical analyses, that 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 asset
sensitive in the one year horizon in the amount of $37,072,000 or 1.06% of the
cumulative gap to related earning assets.
To aid in interest rate risk management, United's subsidiary banks are members
of the Federal Home Loan Bank (FHLB). The use of FHLB advances provides United
with a low risk means of matching maturities of earning assets and
interest-bearing funds to achieve a desired interest rate spread over the life
of the earning assets.
Interest rate risk management focuses on maintaining consistent growth in net
interest income within Board-approved policy limits. United's Asset/Liability
Management Committee (ALCO), which includes senior management representatives
and reports to the Board of Directors, monitors and manages interest rate risk
to maintain an acceptable level of change to net interest income as a result of
changes in interest rates. Policy established for interest rate risk is stated
in terms of the change in net interest income over a twelve month horizon given
an immediate and sustained increase or decrease in interest rates. The current
limits approved by the Board of Directors are plus or minus 10% for each 100
basis point increase or decrease in interest rates.
23
The following table shows United's estimated earnings sensitivity profile after
management's adjustments as of December 31, 1997:
Change in
Interest Rates Percentage Change in
(basis points) Net Interest Income
-------------- --------------------
+200 2.29%
-200 -2.93%
Given an immediate, sustained 200 basis point upward shock to the yield curve
used in the simulation model, it is estimated net interest income for United
would increase by 2.29% over one year. A 200 basis point immediate, sustained
downward shock in the yield curve would decrease net interest income by an
estimated 2.93% over one year. All of these estimated changes in net interest
income are within the policy guidelines established by the Board of Directors.
24
The following table shows the interest rate sensitivity GAP as of December
31, 1997:
INTEREST RATE SENSITIVITY GAP
DAYS
---------------------------------- TOTAL 1 - 5 OVER 5
0 - 90 91 - 180 181 - 365 ONE YEAR YEARS YEARS TOTAL
----------------------- ---------- --------- ---------- ----------- ---------
(DOLLARS IN THOUSANDS)
ASSETS
INTEREST-EARNING ASSETS:
Federal funds sold and
securities purchased
under agreements to
resell and other short-
term investments $ 64,777 $ 64,777 $ 64,777
Investment and marketable
equity securities:
Taxable 49,427 $ 37,090 $ 48,935 135,452 $ 358,726 $277,274 771,452
Tax-exempt 1,090 3,196 4,286 13,028 38,065 55,379
Loans, net of unearned
income 960,470 181,162 327,603 1,469,235 798,937 351,668 2,619,840
---------- --------- --------- ---------- ---------- -------- ----------
Total Interest-Earning
Assets $1,074,674 $ 219,342 $ 379,734 $1,673,750 $1,170,691 $667,007 $3,511,448
========== ========= ========= ========== ========== ======== ==========
LIABILITIES
INTEREST-BEARING FUNDS:
Savings and NOW
accounts $1,006,561 $1,006,561 $1,006,561
Time deposits of
$100,000 & over 66,292 $ 79,012 $ 71,046 216,350 $ 64,283 $ 552 281,185
Other time deposits 373,967 144,144 250,779 768,890 372,207 1,773 1,142,870
Federal funds purchased,
repurchase agreements
and other short-term
borrowing 230,679 230,679 230,679
FHLB advances 159,000 500 500 160,000 2,000 3,695 165,695
---------- --------- --------- ---------- ---------- -------- ----------
Total Interest-Bearing
Funds $1,836,499 $ 223,656 $ 322,325 $2,382,480 $ 438,490 $ 6,020 $2,826,990
========== ========= ========= ========== ========== ======== ==========
Interest Sensitivity Gap $ (761,825) $ (4,314) $ 57,409 $ (708,730) $ 732,201 $660,987 $ 684,458
========== ========= ========= ========== ========== ======== ==========
Cumulative Gap $ (761,825) $(766,139) $(708,730) $ (708,730) $ 23,471 $684,458 $ 684,458
========== ========= ========= ========== ========== ======== ==========
Cumulative Gap as
a Percentage of Total
Earning Assets (21.70%) (21.82%) (20.18%) (20.18%) 0.67% 19.49 19.49%
Management
Adjustments $ 932,252 $ (62,181) $(124,269) $ 745,802 $ (745,802) $ 0
Off-Balance
Sheet Activities
---------- --------- --------- ---------- ---------- -------- ----------
Cumulative Management
Adjusted Gap and Off-
Balance Sheet Activities $ 170,427 $ 103,932 $ 37,072 $ 37,072 $ 23,471 $684,458 $ 684,458
========== ========= ========= ========== ========== ======== ==========
Cumulative Management
Adjusted Gap and Off-
Balance Sheet Activities
as a Percentage of Total
Earning Assets 4.85% 2.96% 1.06% 1.06% 0.67% 19.49 19.49%
========== ========= ========= ========== ========== ======== ==========
25
LIQUIDITY AND CAPITAL RESOURCES
In the opinion of management, United maintains 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 as well as advances from the
FHLB. Repurchase agreements represent funds that are generally 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 and maturing loans 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
borrowings and a geographically dispersed network of branches 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 FHLB
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 secured by bank
premises or stock of United's subsidiaries. United has no intention at this time
of utilizing any long-term funding sources other than FHLB advances and
long-term certificates of deposit.
Cash flows from operations in 1997 of $26,422,000 were 5.9% lower than the
$28,069,000 in 1996 primarily as a result of an increase of approximately
$9,333,000 of excess originations of loans for sale over proceeds from the sale
of loans. In 1997, investing activities resulted in a use of cash of
$291,787,000 as compared to 1996 in which investing activities resulted in a use
of cash of $292,096,000. The primary reason for the decrease in the use of cash
for investing activities was a decrease of $29,773,000 in net portfolio loans
originated that was partially offset by $28,929,000 net cash paid by United
during 1997 to acquire all of the outstanding shares of Patriot. Financing
activities
26
resulted in a source of cash in 1997 of $291,751,000 primarily due to an
increase in deposits of $248,443,000 and an increase in net borrowings from the
FHLB of Pittsburgh and other short-term borrowings of $28,804,000 and
$37,982,000, respectively. These sources of cash for financing activities were
partially offset by payment of $19,831,000 of cash dividends to shareholders and
$5,754,000 for the purchase of treasury stock for use in United's employee
benefit plans. See the Consolidated Statement of Cash Flows in the Consolidated
Financial Statements.
United anticipates no problems in its ability to service its obligations over
the next 12 months. 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 to it. See Note G, Notes to Consolidated
Financial Statements.
Management is not aware of any current recommendations by regulatory authorities
which, if implemented, would have a material effect on liquidity, capital
resources or operations.
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 should help to protect net interest income against
fluctuations in interest rates.
United also 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 10.09% in 1997 and 10.44% in 1996. United's risk-based
capital ratio was 13.33% in 1997 and 15.76% in 1996 which are both significantly
higher than the minimum regulatory requirements. United's Tier 1 capital and
leverage ratios of 12.16% and 8.87%, respectively, at December 31, 1997, are
also strong relative to its peers and are well above regulatory minimums to be
classified as a "well capitalized" institution. See Note M, Notes to
Consolidated Financial Statements.
COMMITMENTS
The following table indicates the outstanding loan commitments of United in the
categories stated:
December 31
1997
-----------
Lines of credit authorized, but unused $648,543,000
Letters of credit 50,699,000
------------
$699,242,000
============
Past experience has shown that, of the foregoing commitments, approximately
12-15% can reasonably be expected to be funded within a one year period. For
more information, see Note J to the Consolidated Financial Statements.
27
YEAR 2000 ISSUE
The Year 2000 Issue is the result of computer programs being written using two
digits rather than four to define the applicable year. Any of a company's
hardware, date-driven automated equipment or computer programs that have
time-sensitive software may recognize a date using "00" as the year 1900 rather
than the year 2000. This faulty recognition could result in a system failure or
miscalculations causing disruptions of operations, including, among other
things, a temporary inability to process transactions, send invoices or engage
in similar normal business activities.
Based on a recent assessment, United determined that it will be required to
modify or replace portions of its software so that its computer systems will
function properly with respect to dates in the year 2000 and thereafter. United
currently believes that with modifications to existing software and conversions
to new software, the Year 2000 Issue will not pose significant operational
problems for its computer systems. However, if such modifications and
conversions are not made, or are not completed timely, the Year 2000 Issue could
have a material impact on United's operations.
United has initiated formal communications with all of its significant suppliers
and customers to determine the extent to which United's interface systems are
vulnerable to those third parties' failure to remediate their own Year 2000
Issues. United's total Year 2000 project costs and estimates to complete include
the estimated costs and time associated with the impact of third party Year 2000
Issues based on presently available information. However, there can be no
guarantee that the systems and applications of other companies on which United's
systems rely will be timely converted or that a failure to convert by another
company, or a conversion that is incompatible with United's systems and
applications, would not have a material adverse effect on United.
United will utilize both internal and external resources to reprogram, or
replace, and test the Year 2000 modifications. United anticipates completing the
Year 2000 project by December 31, 1998, which is prior to any anticipated impact
on United's operating systems. The total cost of the Year 2000 project is
estimated at $2.6 million and is being funded through cash flows, which will be
expensed as incurred over the next two years. The Year 2000 costs are not
expected to have a material adverse effect on United's results of operations or
cash flows. To date United has incurred and expensed approximately $105,000
related to the assessment of, and preliminary efforts in connection with, the
Year 2000 project and the development of a Year 2000 plan of operation.
The costs of the Year 2000 project and the date on which United believes it will
complete the Year 2000 modifications are based on management's best estimates,
which were derived utilizing numerous assumptions of future events, including
the continued availability of certain resources, third party vendor modification
plans and other factors.
28
There can be no guarantee, however, that these estimates will be achieved and
actual results could differ materially from those anticipated. Specific factors
that might cause such material differences include, but are not limited to, the
availability and cost of trained programming personnel, the ability to locate
and correct all relevant computer coding, and similar uncertainties.
1996 COMPARED TO 1995
The following Earnings Summary is a broad overview of the financial condition
and results of operations and is not intended to replace the more detailed
discussion which is presented under the specific headings below.
EARNINGS SUMMARY
For the year ended December 31, 1996, net income decreased 4.4% to $37,395,000.
Net income per share of $0.96 for the year decreased 5.9% from $1.02 in 1995.
Dividends per share increased 6.0% from $0.59 in 1995 to a record level of $0.62
per share in 1996. This was the twenty- third consecutive year of dividend
increases to shareholders.
During 1996, United recorded approximately $6,845,000 of merger-related and
one-time special charges associated with the Eagle merger. These charges
included, among other items, severance pay and benefits for displaced Eagle
officers and employees, costs to consolidate duplicate facilities, employee
training, new product promotions, computer conversions and additional deposit
insurance as a result of the Savings Association Insurance Fund ("SAIF")
recapitalization legislation.
Despite these significant one-time expenses, United's return on average assets
of 1.24% compared very favorably with regional and national peer grouping
information provided by Wheat, First Securities, Inc. of 1.19% and 1.18%.
United's return on average shareholders' equity of 11.83%, as compared with
regional and national peer group information of 15.56% and 15.14%, is indicative
of United's very strong capital levels.
The following discussion explains in more detail the results of operations and
changes in financial condition by major category.
NET INTEREST INCOME
For the years ended December 31, 1996 and 1995, net interest income approximated
$126,636,000 and $119,818,000, respectively. On a tax- equivalent basis the net
interest margin was strong at 4.64% in 1996 and 4.81% in 1995.
Total interest income of $226,085,000 increased 7.7% in 1996 over 1995 as a
result of higher volumes of interest-earning assets. Higher average loan volumes
of approximately $201 million, resulting primarily from an acquisition,
contributed to the increase. From December 31, 1995 to December 31, 1996, United
experienced a double-digit increase in
29
consumer loans of 12.2%, while commercial loans and mortgage loans showed
increases of 9.0% and 9.6%, respectively.
Total interest expense increased $9,333,000 or 10.4% in 1996. This increase was
attributed primarily to United's competitive pricing of interest-bearing
deposits in its markets and continued change in the retail deposit mix as
customers shifted funds into products offering higher yields. United's average
interest-bearing deposits increased by $124,911,000 or 6.5% in 1996, while its
average FHLB advances increased $37,659,000 or 49.7% and average short-term
borrowings increased $30,422,000 or 25.0%. United made greater use of FHLB
advances as the cost of those advances declined from 5.96% in 1995 to 5.63% in
1996. United utilized FHLB advances during 1996 to fund the growth in the
mortgage loan portfolio. The average cost of funds, which increased from 4.28%
in 1995 to 4.32% in 1996, reflected the general upward trend in market interest
rates during 1996.
PROVISION FOR LOAN LOSSES
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.
Nonperforming loans were $11,774,000 at December 31, 1996 and $14,758,000 at
December 31, 1995, a decrease of 20.2%. The level of nonperforming assets
decreased as a result of the charge-off of certain large balance commercial
credits. The components of nonperforming loans include nonaccrual loans and
loans that are contractually past due 90 days or more as to interest or
principal, but have not been placed on nonaccrual. Loans past due 90 days or
more increased $1,139,000 or 24.3% during 1996; nonaccrual loans decreased
$3,474,000 or 37.3% since year-end 1995. Nonperforming loans represented 0.37%
of total assets at the end of 1996, as compared to 0.52% for United's national
peer group. At year-end 1996 and 1995, the allowance for loan losses was 1.22%
and 1.34% of total loans, net of unearned income. At December 31, 1996 and 1995,
the ratio of the allowance for loan losses to nonperforming loans was 237.3% and
190.2%, respectively.
For the years ended December 31, 1996 and 1995, the provision for loan losses
was $2,791,000 and $2,338,000, respectively. The increase in the provision for
1996 when compared to 1995 was to conform the allowance for loan losses on
Eagle's loan portfolio with United's loan valuation policies and in response to
growth in the portfolio.
Total net charge-offs were $2,923,000 in 1996 and $3,390,000 in 1995, which
represents 0.13% and 0.17% of average loans for the respective years. United's
ratio of net charge-offs to average loans was better than its peer group's ratio
of 0.23% in 1996 and was comparable to its peer group's ratio of 0.19% in 1995.
At December 31, 1996, impaired loans were $11,899,000, an increase of $83,000 or
0.1% from the $11,816,000 in impaired loans at December 31, 1995.
30
OTHER INCOME
Noninterest income increased $3,930,000 or 15.7% for 1996 when compared to 1995.
Other income consists of all revenues which are not included in interest and fee
income related to earning assets. The increase in noninterest income for 1996
was primarily the result of increased service charges and fees from customer
accounts related to various banking services provided by United that included,
among other services, fees in bankcard accounts, an increased fee structure for
sales of checking related products, and brokerage services. Additionally, income
from mortgage banking increased as United expanded its secondary market loan
originations in the Washington Metropolitan area.
Trust income increased $275,000 or 9.5% in 1996 due to repricing of services and
an increased volume of trust business.
Service charges, commissions and fees increased by $2,199,000 or 18.3% in 1996.
The increase was primarily attributable to conforming the former Eagle offices'
service charge and fee structures to United's and increased return check charges
and bankcard fees. This income includes charges and fees related to various
banking services provided by United. The increase was primarily due to a
combination of increased fees in bankcard accounts and an increased fee
structure for sales of checking related products.
Income from mortgage banking operations increased $2,428,000 or 32.9% from
$7,378,000 in 1995 to $ 9,806,000 in 1996 due to increased originations and
sales during 1996. The principal sources of revenue from United's mortgage
banking business are: (i) loan origination fees; (ii) gains or losses from the
sale of loans, if any; (iii) interest earned on mortgage loans during the period
that they are held by United pending sale; (iv) loan servicing fees; and (v)
gain or loss on the close out of the hedge instrument used to offset the risk
that changes in interest rate may have on the value of United's mortgage loan
inventory.
Securities transactions resulted in a net gain of $528,000 in 1996 compared to a
net gain of $833,000 in 1995. The securities sold were the result of liquidity
needs, changes in market interest rates, changes in prepayment and term
extension risk and other general asset/liability management considerations.
OTHER EXPENSE
Other expense includes all items of expense other than interest expense, the
provision for loan losses and income tax expense. In total, other expense
increased $12,123,000 or 14.5%. The increase was primarily due to the one-time
and merger-related charges recorded in the first and second quarters, the
additional third quarter deposit insurance expense as a result of the SAIF
recapitalization legislation and higher salaries and benefits associated with
the expansion of United's secondary market lending.
31
Salaries and employee benefits expense increased $7,084,000 or 17.6% in 1996.
The increase for 1996 was attributable to a $3,100,000 increase in salaries and
benefits related to the expansion of United's mortgage banking subsidiaries with
nearly all of the balance of the increase associated with severance and benefit
pay of displaced Eagle executive officers, employment contracts and employees at
locations where United consolidated certain branches.
Net occupancy expense in 1996 exceeded 1995 levels by $947,000 or 11.6%
primarily due to decreased rental income and an increase in real property
repairs and utilities expense. The overall changes in net occupancy expense for
1996 were insignificant with no material increase or decrease in any one expense
category.
Remaining other expense increased $4,092,000 or 11.6% in 1996 compared to 1995.
The increase in other expense for 1996 related primarily to the additional
deposit insurance expense as a result of the SAIF recapitalization legislation,
higher insurance expense, advertising, consulting and legal expense, losses on
sales and write-downs of assets, EDP fees, office supplies, and goodwill
amortization. Included in these increased costs was $1,483,000 of one-time
charges which related to reengineering costs incurred to improve efficiency,
productivity and strengthen United's competitiveness. Additionally, the added
expenses of a purchase accounting acquisition included in 1996, but not in the
first ten months of 1995, have contributed to the overall increase in
noninterest expense.
INCOME TAXES
For the year ended December 31, 1996, income taxes approximated $19,763,000
compared to $19,877,000 for 1995. The decrease of $114,000 or 0.6% for 1996 when
compared to 1995 was primarily the result of decreased pretax income. United's
effective tax rates were 34.6% for 1996 and 33.7% for 1995.
32
REPORT OF ERNST & YOUNG LLP
INDEPENDENT AUDITORS
Board of Directors and Shareholders
United Bankshares, Inc. and Subsidiaries
We have audited the accompanying consolidated balance sheets of United
Bankshares, Inc. and subsidiaries as of December 31, 1997 and 1996, and the
related consolidated statements of income, changes in shareholders' equity and
cash flows for each of the three years in the period ended December 31, 1997.
These financial statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements based
on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of United Bankshares,
Inc. and subsidiaries at December 31, 1997 and 1996, and the consolidated
results of their operations and their cash flows for each of the three years in
the period ended December 31, 1997, in conformity with generally accepted
accounting principles.
/s/ Ernst & Young LLP
Charleston, West Virginia
February 27, 1998, except
for Note O, as to which
the date is March 27, 1998,
and Note B, as to which
the date is July 29, 1998
33
CONSOLIDATED BALANCE SHEETS
UNITED BANKSHARES, INC. AND SUBSIDIARIES
(Dollars in thousands, except par value)
December 31
------------------------------------
1997 1996
---------- ----------
ASSETS
Cash and due from banks $ 116,087 $ 127,486
Interest-bearing deposits with other banks 8,725 195
Federal funds sold 56,052 26,797
---------- ----------
Total cash and cash equivalents 180,864 154,478
Securities available for sale at estimated fair value (amortized
cost-$585,724 at December 31, 1997 and $441,780 at
December 31, 1996) 595,520 442,488
Securities held to maturity (estimated fair
value-$234,329 at December 31, 1997
and $239,054 at December 31, 1996) 231,311 235,276
Loans 2,627,606 2,300,124
Less: Unearned income (7,766) (5,923)
---------- ---------
Loans net of unearned income 2,619,840 2,294,201
Less: Allowance for loan losses (30,455) (27,942)
---------- ---------
Net loans 2,589,385 2,266,259
Bank premises and equipment 48,841 43,569
Accrued interest receivable 20,979 17,988
Other assets 59,459 39,289
---------- ----------
TOTAL ASSETS $3,726,359 $3,199,347
========== ==========
LIABILITIES
Domestic deposits:
Noninterest-bearing $ 494,733 $ 393,463
Interest-bearing 2,430,616 2,127,685
---------- ----------
TOTAL DEPOSITS 2,925,349 2,521,148
Borrowings:
Federal funds purchased 40,961 4,491
Securities sold under agreements
to repurchase 184,718 168,560
Federal Home Loan Bank borrowings 165,695 136,631
Other 5,000 4,429
Accrued expenses and other liabilities 49,162 41,230
---------- ----------
TOTAL LIABILITIES 3,370,885 2,876,489
SHAREHOLDERS' EQUITY
Common stock, $2.50 par value;
Authorized-41,000,000 shares at December 31,
1997 and 20,000,000 at December 31, 1996;
issued-39,073,164 at December 31, 1997 and
19,395,276 at December 31, 1996, including
161,814 and 32,386 shares in treasury at
December 31, 1997 and 1996, respectively 97,683 48,488
Surplus 72,505 71,506
Retained earnings 181,601 204,634
Net unrealized holding gain on securities available
for sale, net of deferred income taxes 6,204 151
Treasury stock, at cost (2,519) (1,921)
---------- ----------
TOTAL SHAREHOLDERS' EQUITY 355,474 322,858
---------- ----------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $3,726,359 $3,199,347
========== ==========
See notes to consolidated financial statements.
34
CONSOLIDATED STATEMENTS OF INCOME
UNITED BANKSHARES, INC. AND SUBSIDIARIES
(Dollars in thousands, except per share data)
Year Ended December 31
-------------------------------------------
1997 1996 1995
-------- -------- --------
INTEREST INCOME
Interest and fees on loans $204,453 $184,998 $170,904
Interest on federal funds sold and other
short-term investments 1,024 1,020 2,113
Interest and dividends on securities:
Taxable 46,208 36,575 32,900
Exempt from federal taxes 3,073 3,492 4,017
-------- -------- --------
TOTAL INTEREST INCOME 254,758 226,085 209,934
-------- -------- --------
INTEREST EXPENSE
Interest on deposits 102,682 86,413 80,101
Interest on short-term borrowings 8,909 6,655 5,500
Interest on Federal Home Loan Bank advances 5,469 6,381 4,515
-------- -------- --------
TOTAL INTEREST EXPENSE 117,060 99,449 90,116
-------- -------- --------
NET INTEREST INCOME 137,698 126,636 119,818
PROVISION FOR LOAN LOSSES 3,120 2,791 2,338
-------- -------- --------
NET INTEREST INCOME AFTER PROVISION
FOR LOAN LOSSES 134,578 123,845 117,480
-------- -------- --------
OTHER INCOME
Trust department income 3,569 3,186 2,911
Service charges, commissions, and fees 16,411 14,225 12,026
Other income 16,396 11,630 10,174
-------- -------- -------
TOTAL OTHER INCOME 36,376 29,041 25,111
-------- -------- --------
OTHER EXPENSE
Salaries and employee benefits 48,396 47,293 40,209
Net occupancy expense 9,714 9,135 8,188
Other expense 38,647 39,300 35,208
-------- -------- --------
TOTAL OTHER EXPENSE 96,757 95,728 83,605
-------- -------- --------
INCOME BEFORE INCOME TAXES 74,197 57,158 58,986
INCOME TAXES 25,178 19,763 19,877
-------- -------- --------
NET INCOME $ 49,019 $ 37,395 $ 39,109
======== ======== ========
Earnings per common share:
Basic $1.27 $0.97 $1.02
======== ======== ========
Diluted $1.25 $0.96 $1.02
======== ======== ========
Dividends per common share $0.68 $0.62 $0.59
======== ======== ========
Average outstanding shares:
Basic 38,632,616 38,747,260 38,182,408
Diluted 39,191,892 39,085,274 38,471,372
See notes to consolidated financial statements.
35
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
UNITED BANKSHARES, INC. AND SUBSIDIARIES
(Dollars in thousands, except per share data)
Net Unrealized
Holding
Common Stock (Loss) Gain Treasury
------------------ on Securities Stock and Total
Par Retained Available Unearned Shareholders'
Shares Value Surplus Earnings for Sale ESOP Equity
------ ----- ------- -------- -------- --------- -------------
Balance at January 1, 1995 18,910,151 $47,275 $64,225 $166,602 $(4,373) $(1,319) $272,410
Net income 39,109 39,109
Cash dividends ($0.59 per share) (13,817) (13,817)
Net change in unrealized holding loss
on securities available for sale 6,534 6,534
Fractional shares adjustmen (7)
Acquisition of First Commercial Bank 202,125 505 5,558 6,063
ESOP shares earned 81 81
Purchase of treasury stock (48,775 shares) (1,294) (1,294)
Common stock options
exercised (181,572 shares) 129,623 325 695 1,276 2,296
Pre-merger dividends of
pooled companies (4,221) (4,221)
---------- ------- ------- -------- ------- ------- --------
Balance at December 31, 1995 19,241,892 48,105 70,478 187,673 2,161 (1,256) 307,161
Net income 37,395 37,395
Cash dividends ($0.62 per share) (17,847) (17,847)
Net change in unrealized holding gain
on securities available for sale (2,010) (2,010)
Fractional shares adjustment (145) (4) (4)
Retirement of treasury stock (2,550) (7) (35) 42
Purchase of treasury stock (113,000 shares) (3,395) (3,395)
Common stock options
exercised (282,259 shares) 156,079 390 1,067 2,688 4,145
Pre-merger dividends of
pooled companies (2,587) (2,587)
---------- ------- ------- -------- ------- ------- --------
Balance at December 31, 1996 19,395,276 48,488 71,506 204,634 151 (1,921) 322,858
Net income 49,019 49,019
Cash dividends ($0.68 per share) (20,344) (20,344)
Net change in unrealized holding gain
on securities available for sale 6,053 6,053
Purchase of treasury stock (167,100 shares) (5,754) (5,754)
Common stock options
exercised (243,902 shares) 141,306 353 999 4,550 5,902
Sale of treasury stock (15,991 shares) 606 606
Pre-merger dividends of
pooled companies (2,866) (2,866)
Two-for-one stock split effected in the form
of a 100% stock dividend 19,536,582 48,842 (48,842)
---------- ------- ------- -------- ------- ------- --------
Balance at December 31, 1997 39,073,164 $97,683 $72,505 $181,601 $ 6,204 $(2,519) $355,474
========== ======= ======= ======== ======= ======= ========
See notes to consolidated financial statements.
36
CONSOLIDATED STATEMENTS OF CASH FLOWS
UNITED BANKSHARES, INC. AND SUBSIDIARIES
(Dollars in thousands)
Year Ended December 31
-----------------------------------------------------
1997 1996 1995
----------- ----------- ------------
OPERATING ACTIVITIES
Net income $ 49,019 $ 37,395 $ 39,109
Adjustments to reconcile net income to
net cash provided by operating activities:
Provision for loan losses 3,120 2,791 2,338
Provision for depreciation 5,645 4,690 4,058
Net amortization (accretion) 2,770 1,029 (46)
(Gain) loss on sales of bank premises and equipment (534) 140 (35)
Gain on sales of securities available for sale (42) (462) (653)
Gain on sales of loans (13,925) (9,108) (7,670)
Deferred income tax expense (benefit) (552) (139) (279)
Originations of student loans (465)
Proceeds from sales of student loans 4,580
Changes in:
Trading securities 5,693 (394)
Loans held for sale (23,154) (18,638) (36,561)
Interest receivable (490) 359 22
Other assets 1,497) (5,293) 917
Accrued expenses and other liabilities 3,068 5,032 5,453
-------- -------- --------
NET CASH PROVIDED BY OPERATING ACTIVITIES 26,422 28,069 5,794
------- -------- --------
INVESTING ACTIVITIES
Proceeds from maturities and calls of
investment securities 37,412 30,002 51,173
Purchases of investment securities (34,405) (81,008) (17,371)
Proceeds from sales of securities available for sale 103,039 169,579 106,293
Proceeds from maturities and calls of
securities available for sale 149,275 203,395 108,706
Purchases of securities available for sale (358,523) (424,229) (216,192)
Proceeds from sales of loans 49,127
Net purchases of bank premises and equipment (3,386) (3,792) (5,432)
Net cash paid for acquired subsidiary (28,929) (1,742)
Net change in loans (156,270) (186,043) (136,733)
-------- -------- --------
NET CASH USED IN INVESTING ACTIVITIES (291,787) (292,096) (62,171)
-------- --------- --------
FINANCING ACTIVITIES
Cash dividends paid (19,831) (16,541) (10,273)
Acquisition of treasury stock (5,754) (3,395) (1,294)
Proceeds from exercise of stock options 4,294 4,145 2,296
Proceeds from sales of treasury stock 606
Pre-merger dividends of pooled company (2,793) (2,330) (4,142)
Purchase of fractional shares (4)
Changes in:
Time deposits 145,483 131,872 207,113
Other deposits 102,960 60,442 (103,657)
Federal Home Loan Bank borrowings 28,804 56,134 (63,877)
Federal funds purchased and securities sold
under agreements to repurchase 37,982 39,566 31,976
------- -------- --------
NET CASH PROVIDED BY FINANCING ACTIVITIES 291,751 269,889 58,142
-------- -------- --------
INCREASE IN CASH AND CASH EQUIVALENTS 26,386 5,862 1,765
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 154,478 148,616 146,851
-------- -------- --------
CASH AND CASH EQUIVALENTS AT END OF YEAR $180,864 $154,478 $148,616
======== ======== ========
See notes to consolidated financial statements.
37
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
UNITED BANKSHARES, INC. AND SUBSIDIARIES
December 31, 1997
NOTE A--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Nature of Operations: United Bankshares, Inc. is a multi-bank holding
company headquartered in Charleston, West Virginia. The principal
markets of United Bankshares, Inc. and subsidiaries (United) are located
in Parkersburg, Charleston, Huntington, Morgantown and Wheeling, West
Virginia and Arlington, Fairfax, Loudoun and Prince William counties,
Virginia. United considers all of its principal business activities to
be bank related.
Basis of Presentation: The consolidated financial statements and the notes to
consolidated financial statements include the accounts of United Bankshares,
Inc. and its wholly-owned subsidiaries, which have been restated to reflect the
merger of George Mason Bankshares, Inc. (George Mason) on April 2, 1998, under
the pooling of interests method of accounting. All significant intercompany
accounts and transactions have been eliminated in the consolidated financial
statements.
Certain prior period data has been reclassified to conform with the current
period presentation. The reclassifications had no effect on net income or
shareholders' equity.
The accounting and reporting policies of United conform with generally accepted
accounting principles. The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the amounts reported in the financial
statements and accompanying notes. Actual results could differ from those
estimates. A description of the significant accounting policies is presented
below.
Cash Flow Information: United considers cash and due from banks,
interest-bearing deposits with other banks and federal funds sold as cash and
cash equivalents.
Securities: Management determines the appropriate classification of securities
at the time of purchase. Debt securities that United has the positive intent and
the ability to hold to maturity are carried at amortized cost. Securities to be
held for indefinite periods of time and all marketable equity securities are
classified as available for sale and carried at fair value. Unrealized holding
gains and losses on securities classified as available for sale are carried as a
separate component of shareholders' equity, net of deferred income taxes.
Gains or losses on sales of securities are recognized by the specific
identification method and are reported separately in the statements of income.
38
NOTE A--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - continued
Loans: Interest on loans is accrued and credited to operations using methods
that produce a level yield on principal amounts outstanding. Loan origination
and commitment fees and related direct loan origination costs are deferred and
amortized as an adjustment of loan yield over the estimated life of the related
loan.
The accrual of interest income on commercial and most consumer loans generally
is discontinued when a loan becomes 90 days past due as to principal or
interest. When interest accruals are discontinued, unpaid interest recognized in
income in the current year is reversed, and interest accrued in prior years is
charged to the allowance for loan losses. Management may elect to continue the
accrual of interest when the estimated net realizable value of collateral
exceeds the principal balance and accrued interest, and the loan is in the
process of collection.
Consistent with United's existing method of income recognition for loans,
interest on impaired loans, except those classified as nonaccrual, is recognized
as income using the accrual method. United's method of income recognition for
impaired loans that are classified as nonaccrual is to recognize interest income
on the cash basis or apply the cash receipt to principal when the ultimate
collectibility of principal is in doubt.
The principal sources of revenue from United's mortgage banking business are:
(i) loan origination fees; (ii) gains or losses from the sale of loans, if any;
(iii) interest earned on mortgage loans during the period that they are held by
United pending sale; (iv) loan servicing fees; and (v) gain or loss on the
close-out of the hedge instrument used to offset the risk that changes in
interest rate may have on the value of United's mortgage loan inventory.
Unrealized gains or losses are considered in the lower of cost or market
valuation of loans held for sale.
Loans Held for Sale: United's policies generally require that it presell
substantially all of its inventory of conforming and government loans. Loans
held for sale consist of one-to-four family residential loans originated for
sale in the secondary market and are carried at the lower of cost or fair value
determined on an aggregate basis.
Allowance for Loan Losses: Management's evaluation of the adequacy of the
allowance for loan losses and the appropriate provision for loan losses is based
upon a quarterly evaluation of the portfolio. The allowance for loan losses
related to loans that are identified as impaired is based on the present value
of expected future cash flows using the loan's effective interest rate, or as a
practical expedient, at the loan's observable market price or the fair value of
the collateral if the loan is collateral dependent. In providing for loan
losses, United considers all significant factors that affect the collectibility
of loans. Such factors considered by management include,
39
NOTE A--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - continued
among others, growth and composition of the loan portfolio, known deterioration
in certain classes of loans or collateral, trends in delinquencies, and current
economic conditions. This evaluation is inherently subjective and requires
management to make estimates of the amounts and timing of future cash flows.
Management believes that the allowance for loan losses is adequate to provide
for potential losses on existing loans based on information currently available.
Bank Premises and Equipment: Bank premises and equipment are stated at cost,
less allowances for depreciation and amortization. The provision for
depreciation is computed principally by the straight-line method over the
estimated useful lives of the respective assets.
Income Taxes: Deferred income taxes are provided for temporary differences
between the tax basis of an asset or liability and its reported amount in the
financial statements at the statutory tax rate.
Intangible Assets: Intangible assets relating to the estimated value of the
deposit base of the acquired institutions are being amortized on an accelerated
basis over a 7 to 10 year period. The excess of the purchase price over the fair
market value of the net assets of the banks acquired (goodwill) is being
amortized on a straight-line basis over 15 to 20 years. The carrying amount of
goodwill is evaluated if facts and circumstances suggest that it may be
impaired. If this evaluation indicates that goodwill will not be recoverable, as
determined based on the estimated undiscounted cash flows of the entity acquired
over the remaining amortization period, the carrying amount of goodwill will be
reduced.
At December 31, 1997 and 1996, deposit base intangibles and goodwill
approximated $37,332,000 and $11,959,000 net of accumulated amortization of
approximately $12,318,000 and $9,888,000.
Trust Assets and Income: Assets held in a fiduciary or agency capacity for
subsidiary bank customers are not included in the balance sheets since such
items are not assets of the subsidiary banks. Trust department income is
reported on a cash basis. Reporting such income on an accrual basis would not
materially affect United's consolidated financial position or its results of
operations as reported herein.
Earnings Per Common Share: In 1997, United adopted FASB Statement No.
128 (SFAS No. 128), "EARNINGS PER SHARE." SFAS No. 128 requires the
presentation of basic and diluted earnings per common share for all
periods. Basic earnings per common share is calculated by dividing net
income by the weighted average number of shares of common stock
outstanding for the respective period. For diluted earnings per common
share, the weighted average number of shares of common stock outstanding
for the respective period is increased by the number of shares of common
40
NOTE A--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - continued
stock which would be issued assuming the exercise of common stock options. The
dilutive effect of stock options approximated 559,276, 338,014 and 288,964
shares in 1997, 1996 and 1995, respectively.
New Accounting Standards: 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 have not had a material effect on United's
financial position and results of operations.
In June 1997, the FASB issued Statement No. 130, (SFAS No. 130), "REPORTING
COMPREHENSIVE INCOME." This statement, which is effective for years beginning
after December 15, 1997, requires companies to report and display comprehensive
income and its components. United plans to disclose the information as
required.
In June 1997, the FASB issued Statement No. 131, (SFAS No. 131), "DISCLOSURES
ABOUT SEGMENTS OF AN ENTERPRISE AND RELATED INFORMATION." SFAS No. 131 provides
guidance for the way public enterprises report information about operating
segments in annual financial statements and requires selected information about
operating segments in interim financial reports. It also requires certain
related disclosures about products and services, geographic areas and major
customers. The segment and other information disclosures are required for years
beginning after December 15, 1997. United is currently reviewing its methodology
used for determining operating segment results.
These standards, when implemented, are not expected to materially impact the
reported financial position or results of operations of United.
NOTE B--MERGERS AND ACQUISITIONS
On April 2, 1998, United consummated the merger with George Mason Bankshares,
Inc., Fairfax, Virginia ("George Mason"), in a common stock exchange accounted
for under the pooling of interests method of accounting and, accordingly, all
prior period financial statements have been restated to include George Mason.
United exchanged 1.70 shares of its common stock for each of the 5,308,551
common shares of George Mason.
41
NOTE B--MERGERS AND ACQUISITIONS - continued
Additionally, United has entered into an agreement with Fed One Bancorp, Inc.,
Wheeling, West Virginia ("Fed One") to exchange 1.50 shares, as adjusted for the
100% stock dividend, of United common stock for each of the 2,373,181 common
shares of Fed One. The transaction will be accounted for using the pooling of
interests method of accounting. It is anticipated that the proposed merger will
be consummated early during the fourth quarter of 1998.
The following represents unaudited selected pro forma financial information
regarding the effects of the transactions as though United, George Mason and Fed
One had been combined for all periods presented:
United
(In thousands, except per share data) and
George United Fed Fed One
United Mason Restated One Pro Forma
------ ------ -------- --- ---------
1997
----
Net interest income $105,753 $31,945 $137,698 $11,632 $149,330
Net income 40,939 8,080 49,019 3,242 52,261
Earnings per common share:
Basic $1.37 $1.58 $1.27 $1.43 $1.24
Diluted $1.35 $1.54 $1.25 $1.36 $1.22
1996
----
Net interest income $ 99,173 $27,463 $126,636 $11,749 $138,385
Net income 30,512 6,883 37,395 2,324 39,719
Earnings per common share:
Basic $1.01 $1.38 $0.97 $0.97 $0.94
Diluted $1.00 $1.35 $0.96 $0.94 $0.93
1995
----
Net interest income $ 95,648 $24,170 $119,818 $11,697 $131,515
Net income 32,817 6,292 39,109 3,250 42,359
Earnings per common share:
Basic $1.10 $1.30 $1.02 $1.24 $1.01
Diluted $1.09 $1.28 $1.02 $1.20 $1.00
The data set forth above is not necessarily indicative of the results of
operations or the combined financial position of United that would have resulted
had the merger been consummated at the beginning of the applicable periods
indicated, nor is it necessarily indicative of the results of operations in
future periods or the future financial position of the combined entities.
On August 1, 1997, United acquired 100% of the outstanding common stock of First
Patriot Bankshares Corporation, Reston, Virginia ("Patriot") for cash
consideration of approximately $39.2 million. The transaction has been accounted
for using the purchase method of accounting.
The results of operations of Patriot, which are not significant, have been
included in the consolidated results of operations from the date of acquisition.
42
NOTE C--INVESTMENT SECURITIES
The amortized cost and estimated fair values of securities available for sale
are summarized as follows:
December 31, 1996
----------------------------------------------------------------
(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 $178,973 $ 595 $ 272 $179,296
State and political
subdivisions 4,093 106 4,199
Mortgage-backed
securities 379,452 3,099 393 382,158
Marketable equity
securities 4,300 6,741 11,041
Other 18,906 80 18,826
-------- ------- ------ --------
Total $585,724 $10,541 $ 745 $595,520
======== ======= ====== ========
December 31, 1996
----------------------------------------------------------------
(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 $149,275 $ 509 $ 504 $149,280
State and political
subdivisions 1,316 14 6 1,324
Mortgage-backed
securities 268,256 738 1,985 267,009
Marketable equity
securities 3,655 2,158 5,813
Other 19,278 7 223 19,062
-------- ------- ------ --------
Total $441,780 $ 3,426 $2,718 $442,488
======== ======= ====== ========
43
NOTE C--INVESTMENT SECURITIES - continued
The amortized cost and estimated fair value of securities available for sale at
December 31, 1997, by contractual maturity are as follows:
Estimated
(In thousands) Amortized Fair
Cost Value
--------- ---------
Due in one year or less $ 42,351 $ 42,794
Due after one year through five years 134,244 134,730
Due after five years through ten years 135,081 135,561
Due after ten years 269,748 271,394
Marketable equity securities 4,300 11,041
-------- --------
Total $585,724 $595,520
======== ========
The table above includes $382,158,000 of mortgage-backed securities at estimated
fair value with an amortized cost of $379,452,000. Maturities of mortgage-backed
securities are based upon the estimated average life.
Gross realized gains and losses from sales of securities available for sale were
$71,000 and $29,000; $824,000 and $362,000; and $773,000 and $120,000,
respectively, in 1997, 1996 and 1995.
The amortized cost and estimated fair values of securities held to maturity are
summarized as follows:
December 31, 1997
----------------------------------------------------------------
(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 $ 98,330 $ 570 $ 22 $ 98,878
State and political
subdivisions 51,180 2,131 21 53,290
Mortgage-backed
securities 74,878 529 169 75,238
Other 6,923 6,923
-------- ------ ------ --------
Total $231,311 $3,230 $ 212 $234,329
======== ====== ====== ========
December 31, 1997
----------------------------------------------------------------
(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 $ 82,375 $2,187 $ 87 $ 84,475
State and political
subdivisions 54,954 1,935 100 56,789
Mortgage-backed
securities 96,062 773 930 95,905
Other 1,885 1,885
-------- ------ ------ --------
Total $235,276 $4,895 $1,117 $239,054
======== ====== ====== ========
44
NOTE C--INVESTMENT SECURITIES - continued
The amortized cost and estimated fair value of debt securities held to maturity
at December 31, 1997 by contractual maturity, are shown below. Expected
maturities may differ from contractual maturities because the issuers may have
the right to call or prepay obligations with or without call or prepayment
penalties.
Estimated
(In thousands) Amortized Fair
Cost Value
--------- ---------
Due in one year or less $ 18,825 $ 18,887
Due after one year through five years 72,750 73,640
Due after five years through ten years 98,335 99,481
Due after ten years 41,401 42,321
-------- --------
Total $231,311 $234,329
======== ========
The table above includes $74,878,000 of mortgage-backed securities with an
estimated fair value of $75,238,000 at December 31, 1997. Maturities of the
mortgage-backed securities are based upon the estimated average life.
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 $415,206,000 and $340,729,000 at December 31,
1997 and 1996, respectively.
NOTE D--LOANS
Major classifications of loans are as follows:
(In thousands) December 31
------------------------------------------
1997 1996
---------- -----------
Commercial, financial, and
agricultural $ 467,223 $ 309,354
Real estate:
Single family residential 1,087,920 1,110,611
Commercial 482,568 437,481
Construction 140,266 74,546
Other 47,148 23,257
Installment 304,862 270,410
---------- ----------
2,529,987 2,225,659
Loans held for sale 97,619 74,465
---------- ----------
Total gross loans $2,627,606 $2,300,124
========== ==========
A progression of the allowance for loan losses follows:
(In thousands) Year Ended December 31
-----------------------------
1997 1996 1995
------- ------- ------
Balance at beginning of year $27,942 $28,074 $28,109
Allowance of purchased subsidiaries 2,695 1,017
Provision for loan losses 3,120 2,791 2,338
------- ------- -------
33,757 30,865 31,464
------- ------- -------
Loans charged off 4,078 3,698 4,115
Recoveries 776 775 725
------- ------- -------
Net charge offs 3,302 2,923 3,390
------- ------- -------
Balance at end of year $30,455 $27,942 $28,074
======= ======= =======
45
NOTE D--LOANS - continued
United's lending is centered in the West Virginia and Washington D.C. Markets
and is focused on retail consumer and small and middle market commercial
lending.
United has commercial real estate loans, including owner occupied, income
producing real estate and land development loans, of approximately $482,568,000
and $437,481,000 as of December 31, 1997 and 1996, respectively. The loans are
primarily secured by real estate located in West Virginia, Southeastern Ohio,
Virginia and Maryland. The loans were originated by United's subsidiary banks
using underwriting standards as set forth by management. United's loan
administration policies are focused on the risk characteristics of the loan
portfolio, including commercial real estate loans, in terms of loan approval and
credit quality. It is the opinion of management that these loans do not pose any
unusual risks and that adequate consideration has been given to the above loans
in establishing the allowance for loan losses.
At December 31, 1997, the recorded investment in loans that were considered to
be impaired was $13,648,000 (of which $5,202,000 was on a nonaccrual basis).
Included in this amount was $6,365,000 of impaired loans for which the related
allowance for credit losses was $1,596,000 and $7,283,000 of impaired loans that
did not have an allowance for credit losses. At December 31, 1996, the recorded
investment in loans that were considered to be impaired was $11,899,000 (of
which $5,848,000 was on a nonaccrual basis). Included in this amount was
$7,118,000 of impaired loans for which the related allowance for credit losses
was $1,674,000 and $4,781,000 of impaired loans that did not have an allowance
for credit losses.
The average recorded investment in impaired loans during the years ended
December 31, 1997, 1996 and 1995 was approximately $12,686,000, $11,509,000 and
$11,887,000, respectively.
The amount of interest income that would have been recorded on impaired loans
under the original terms was $1,660,000, $1,658,000 and $1,608,000 for the years
ended December 31, 1997, 1996 and 1995, respectively. For the years ended
December 31, 1997, 1996 and 1995, United recognized interest income on those
impaired loans of approximately $987,000, $798,000 and $709,000, respectively,
substantially all of which was recognized using the accrual method of income
recognition.
United's subsidiary banks have made loans, in the normal course of business, to
the directors and officers of United and its subsidiaries, and to their
associates. Such related party loans were made on substantially the same terms,
including interest rates and collateral, as those prevailing at the time for
comparable transactions with unrelated persons and did not involve more than
normal risk of collectibility. The aggregate dollar amount of these loans was
$102,435,000 and $88,257,000 at December 31, 1997 and 1996, respectively. During
1997, $41,279,000 of new loans were made, repayments totaled $31,510,000, and
other changes due to the change in composition of United's board members and
executive officers approximated $4,409,000.
46
NOTE E--BANK PREMISES AND EQUIPMENT AND LEASES
Bank premises and equipment are summarized as follows:
December 31
------------------------------
(In thousands) 1997 1996
-------- ------
Land $ 9,972 $ 9,132
Buildings and improvements 42,599 40,262
Leasehold improvements 5,002 5,784
Furniture, fixtures, and equipment 40,563 39,190
------- -------
98,136 94,368
Less allowance for depreciation
and amortization 49,295 50,799
------- -------
Net bank premises and equipment $48,841 $43,569
======= =======
United and certain banking subsidiaries have entered into various noncancelable
operating leases. These noncancelable operating leases are subject to renewal
options under various terms and some leases provide for periodic rate
adjustments based on cost-of-living index changes. Rent expense for
noncancelable operating leases approximated $4,316,000, $3,952,000 and
$3,373,000 for the years ended December 31, 1997, 1996, and 1995, respectively.
Future minimum payments, by year and in the aggregate, under non-cancelable
operating leases with initial or remaining terms of one year or more, for years
subsequent to December 31, 1997, consisted of the following:
Year Amount
---- ------
(In thousands)
1998 $ 4,630
1999 3,693
2000 3,210
2001 3,080
2002 2,409
Thereafter 3,075
-------
Total minimum lease payments $20,097
=======
NOTE F--DEPOSITS
The book value of deposits consisted of the following:
(In thousands) December 31
---------------------------------
1997 1996
---------- ----------
Noninterest-bearing checking $ 494,733 $ 393,463
Interest-bearing checking 113,947 111,785
Regular savings 391,361 353,352
Money market accounts 501,253 465,040
Time deposits under $100,000 1,142,870 977,195
Time deposits over $100,000 281,185 220,313
---------- ----------
Total deposits $2,925,349 $2,521,148
========== ==========
Interest paid on deposits and borrowings approximated $115,426,000, $98,193,000
and $82,301,000 in 1997, 1996 and 1995, respectively.
47
NOTE F--DEPOSITS - continued
At December 31, 1997, the scheduled maturities of time deposits, in thousands,
are as follows:
Year Amount
---- ----------
1998 $ 982,073
1999 338,114
2000 56,508
2001 24,553
2002 and thereafter 22,807
----------
Total $1,424,055
==========
United's subsidiary banks have received deposits, in the normal course of
business, from the directors and officers of United and its subsidiaries, and
their associates. Such related party deposits were accepted on substantially the
same terms, including interest rates and maturities, as those prevailing at the
time for comparable transactions with unrelated persons. The aggregate dollar
amount of these deposits was $25,878,000 and $27,043,000 at December 31, 1997
and 1996, respectively.
NOTE G--BORROWINGS
United's subsidiaries are members of the Federal Home Loan Bank (FHLB).
Membership in the FHLB makes available short-term and long-term borrowings from
collateralized advances. At December 31, 1997, United had approximately
$644,633,000 of available borrowings in the form of collateralized advances from
the FHLB at prevailing interest rates.
At December 31, 1997, $159,000,000 of FHLB advances with an interest rate of
6.42% had an overnight maturity. Additionally, $6,695,000 of FHLB advances with
a weighted average interest rate of 6.08% are scheduled to mature from fourteen
to twenty years.
United also has various unused lines of credit available from certain of its
correspondent banks in the aggregate amount of $200,882,000. These lines of
credit, which bear interest at prevailing market rates, permit United to borrow
funds in the overnight market, and are renewable annually subject to certain
conditions.
At December 31, 1997 and 1996, borrowings and the related weighted average
interest rate were as follows:
1997 1996
--------------------- ----------------------
Weighted Weighted
(In thousands) Average Average
Amount Rate Amount Rate
------ -------- ------ --------
Federal funds purchased $ 40,961 6.58% $ 4,491 6.81%
Securities sold under
agreements to repurchase 184,718 4.53% 168,560 4.44%
FHLB advances 165,695 6.41% 136,631 6.61%
Other 5,000 5.22% 4,429 5.02%
-------- --------
Total $396,374 $314,111
======== ========
48
NOTE G--BORROWINGS - continued
Information concerning securities sold under agreements to repurchase (in
thousands) is summarized as follows:
1997 1996
-------- --------
Average balance during the year $167,688 $126,173
Average interest rate during the year 4.40% 4.20%
Maximum month-end balance during the year $215,205 $177,133
NOTE H--INCOME TAXES
The income tax provisions included in the consolidated statements of income are
summarized as follows:
(In thousands) Year Ended December 31
---------------------------------------
1997 1996 1995
-------- -------- --------
Current expense:
Federal $24,579 $18,331 $17,717
State 1,151 1,571 2,439
Deferred expense (benefit):
Federal and State (552) (139) 133
Change in valuation allowance (412)
------- ------- -------
Income taxes $25,178 $19,763 $19,877
======= ======= =======
The following is a reconciliation of income tax expense to the amount computed
by applying the statutory federal income tax rate to income before income taxes:
Year Ended December 31
-----------------------------------------------------------------------
(In thousands) 1997 1996 1995
------------------ ------------------ ------------------
Amount % Amount % Amount %
------ --- ------ --- ------ ---
Tax on income before taxes
at statutory federal rate $25,969 35.0% $20,005 35.0% $20,645 35.0%
Plus: State income taxes
net of federal tax
benefits 632 0.9 929 1.6 1,619 2.7
------- ---- ------- ---- ------- ----
26,601 35.9 20,934 36.6 22,264 37.7
Increase (decrease) resulting from:
Tax-exempt interest
income (1,898) (2.6) (1,855) (3.2) (2,041) (3.5)
Other items-net 475 0.6 684 1.2 (346) (0.6)
------- ---- ------- ---- ------- ----
Income taxes $25,178 33.9% $19,763 34.6% $19,877 33.6%
======= ==== ======= ==== ======= ====
Federal income tax expense applicable to securities transactions approximated
$15,000, $179,000 and $283,000 in 1997, 1996 and 1995, respectively.
Income taxes paid approximated $25,452,000, $17,264,000 and $21,262,000 in 1997,
1996 and 1995, respectively.
49
NOTE H--INCOME TAXES - continued
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. Significant components of
United's deferred tax assets and liabilities (included in other assets) at
December 31, 1997 and 1996 are as follows:
(In thousands) 1997 1996
-------- --------
Deferred tax assets:
Allowance for loan losses $11,031 $10,461
Accrued benefits payable 1,725 1,903
Other accrued liabilities 2,874 2,213
Net deferred loan fees 295 488
Other real estate owned 117 69
Other 976 727
------- -------
Total deferred tax assets 17,018 15,861
------- -------
Deferred tax liabilities:
Premises and equipment 2,790 2,235
Core deposit intangibles 887 417
Income tax allowance for
loan losses 1,462 1,462
Prepaid assets 169 149
Deferred mortgage points 1,663 1,582
Securities available for sale 3,324 99
Other 625 585
------- -------
Total deferred tax
liabilities 10,920 6,529
------- -------
Net deferred tax assets $ 6,098 $ 9,332
======= =======
NOTE I--EMPLOYEE BENEFIT PLANS
United has a defined benefit retirement plan covering substantially all
employees. The benefits are based on years of service and the average of the
employee's highest five consecutive plan years of basic compensation paid during
the ten plan years preceding the date of determination. United's funding policy
is to contribute annually the maximum amount that can be deducted for federal
income tax purposes. Contributions are intended to provide not only for benefits
attributed to service to date, but also for those expected to be earned in the
future.
Net periodic pension cost included the following components:
(In thousands) Year Ended December 31,
--------------------------------
1997 1996 1995
-------- -------- --------
Service cost $ 739 $ 861 $ 718
Interest cost on projected
benefit obligation 1,451 1,439 1,263
Actual return on plan assets (4,402) (2,849) (3,499)
Net amortization and deferral 2,395 1,014 1,852
-------- -------- -------
Net periodic pension cost $ 183 $ 465 $ 334
======= ======= =======
50
NOTE I--EMPLOYEE BENEFIT PLANS - continued
The following table sets forth the funded status of United's defined benefit
plan and amounts recognized in the respective consolidated balance sheets:
(In thousands) December 31
1997 1996
--------- --------
Vested benefit obligation $(16,986) $(15,715)
Nonvested benefit obligation (452) (408)
-------- --------
Accumulated benefit obligation (17,438) (16,123)
Effect of future pay increases (4,472) (5,046)
-------- --------
Projected benefit obligation for
services rendered to date (21,910) (21,169)
Plan assets at fair value, primarily
marketable securities 27,040 23,109
-------- --------
Excess of plan assets over projected
benefit obligation 5,130 1,940
Unrecognized net gain from past
experience different from that assumed
and effects of changes in assumptions (5,318) (1,877)
Unrecognized prior service cost 325 388
Unrecognized transition asset (695) (826)
-------- --------
Accrued pension liability included
in other liabilities $ (558) $ (375)
======== ========
At December 31, 1997, the weighted average discount rate and rate of increase in
future compensation levels used in determining the actuarial present value of
the projected benefit obligation was 7.25% and 4.5%. At December 31, 1996, the
weighted average discount rate and rate of increase in future compensation
levels used in determining the actuarial present value of the projected benefit
obligation was 7.5% and 4.5%. The weighted average expected long-term rate of
return on United's plan assets was 9.00% for the years ended December 31, 1997,
1996 and 1995.
The United Savings and Stock Investment Plan (the Plan) is a deferred
compensation plan under Section 401(k) of the Internal Revenue Code. All
employees who complete one year of service are eligible to participate in the
Plan. Each participant may contribute from 1% to 10% of pre-tax earnings to his
or her account which may be invested in any of four investment options chosen by
the employee. United matches 100% of the first 2% of salary deferred and 25% of
the next 2% of salary deferred with United common stock. Vesting is 100% for
employee deferrals and the United match at the time the employee makes his/her
deferral. United's expense relating to the Plan approximated $1,285,000,
$925,000 and $709,000 in 1997, 1996 and 1995, respectively.
51
NOTE I--EMPLOYEE BENEFIT PLANS - continued
The assets of United's defined benefit plan and 401(k) Plan each include
investments in United common stock. At December 31, 1997, the combined plan
assets included 679,518 shares of United common stock with an approximate fair
value of $16,223,000.
United has certain other deferred compensation plans covering various key
employees. Periodic charges are made to operations so that the present value of
the liability due each employee is fully recorded as of the date of their
retirement. Amounts charged to expense have not been significant in any year.
United has various incentive stock option plans for key employees, the 1988,
1991 and 1996 plans. The plans provide for the granting of stock options of up
to 200,000, 1,000,000, 1,200,000 and 1,351,500 shares of common stock,
respectively. No further grants will be made under any of the plans authorized
prior to the 1996 plan. At December 31, 1997, 779,122 options were available for
future grant under the 1996 plan. Under the provisions of the plans, the option
price per share shall not be less than the fair market value of United's common
stock on the date of grant. Accordingly, no compensation expense is recognized
for these options.
The following table summarizes information about stock options outstanding at
December 31, 1997:
Options Outstanding Options Exercisable
- --------------------------------------------------------------------------------------------
Weighted-
Average Weighted- Weighted-
Remaining Average Average
Range of Number Contractual Exercise Number Exercise
Exercise Prices Outstanding Life Price Exercisable Price
- --------------------------------------------------------------------------------------------
$ 5.50 to $ 7.00 40,600 3 years $ 6.62 40,600 $ 6.62
$ 6.88 to $15.00 610,232 6 years 12.18 565,056 11.95
$14.88 to $22.00 417,374 9 years 18.56 99,844 14.88
$ 5.72 to $12.79 578,000 7 years 9.17 578,000 9.17
The following is a summary of activity of United's Incentive Stock Option Plans:
Stock Range of
Options Exercise Prices
--------- ---------------
Outstanding at January 1, 1995 1,818,250 $13.50 $ 5.50
Granted 385,300 15.00 6.96
Exercised 321,900 13.50 5.50
Forfeited 32,500 13.50 5.88
---------
Outstanding at December 31, 1995 1,849,150 15.00 5.50
Granted 402,572 14.88 9.79
Exercised 524,450 13.50 5.50
Forfeited 16,030 15.00 6.96
---------
Outstanding at December 31, 1996 1,711,242 15.00 5.50
Granted 439,900 22.00 12.65
Exercised 458,336 15.00 5.72
Forfeited 46,600 15.00 6.96
---------
Outstanding at December 31, 1997 1,646,206 $22.00 $ 5.50
=========
Exercisable at:
December 31, 1995 1,448,674 $13.50 $ 5.50
December 31, 1996 1,337,398 $15.00 $ 5.50
December 31, 1997 1,283,500 $15.00 $ 5.50
52
NOTE I--EMPLOYEE BENEFIT PLANS - continued
Because the exercise price of the option granted is equal to the market price of
the underlying stock on the date of grant, no compensation expense is
recognized. Pro forma net income and earnings per share, determined as if United
had recognized compensation expense for its employee stock options under the
fair value method, have not been presented because the effect of applying the
fair value method prescribed by SFAS 123 to the 1997, 1996 and 1995 options
awarded produces amounts that are not materially different from amounts reported
herein.
The estimated fair value of the options at the date of grant was $3.96, $2.53,
and $2.16 for the options granted during 1997, 1996, and 1995, respectively. The
fair value of the options was estimated at the date of grant using a
Black-Scholes option pricing model with the following weighted average
assumptions for 1997, 1996, and 1995, respectively: risk- free interest rates of
6.44%, 6.78%, and 6.24%; dividend yields of 3.08%, 4.10%, and 4.00%; volatility
factors of the expected market price of United's common stock of 0.182, 0.185,
and 0.185; and a weighted average expected option life of 7 years.
United provides postemployment and postretirement benefits for certain employees
at subsidiaries acquired in prior years. United accounts for such costs as
expense when paid. Accounting for such costs when paid does not produce results
materially different from those which would result if such costs were accrued
during the period of employee service. United does not anticipate providing
postemployment or postretirement benefits to its currently active employees
after employment or retirement except on a fully contributory basis.
NOTE J--COMMITMENTS AND CONTINGENT LIABILITIES
United is a party to financial instruments with off-balance-sheet risk in the
normal course of business to meet the financing needs of its customers and to
alter its own exposure to fluctuations in interest rates. These financial
instruments include loan commitments, standby letters of credit, forward
contracts for the delivery of mortgage-backed securities and interest rate swap
agreements. The instruments involve, to varying degrees, elements of credit and
interest rate risk in excess of the amount recognized in the financial
statements.
United's maximum exposure to credit loss in the event of nonperformance by the
counterparty to the financial instrument for the loan commitments and standby
letters of credit is the contractual or notional amount of those instruments.
United uses the same policies in making commitments and conditional obligations
as it does for on-balance sheet instruments.
Commitments to extend credit are agreements to lend to a customer as long as
there is no violation of any condition established in the commitment contract.
Commitments generally have fixed expiration dates or other termination clauses
and may require the payment of a fee. Since many of the commitments are expected
to expire without being drawn upon, the total
53
NOTE J--COMMITMENTS AND CONTINGENT LIABILITIES - continued
commitment amounts do not necessarily represent future cash requirements. The
amount of collateral obtained, if deemed necessary upon the extension of credit,
is based on management's credit evaluation of the counterparty. United had
approximately $648,543,000 and $506,721,000 of loan commitments outstanding as
of December 31, 1997 and 1996, respectively, substantially all of which expire
within one year.
Commercial and standby letters of credit are agreements used by United's
customers as a means of improving their credit standing in their dealings with
others. Under these agreements, United guarantees certain financial commitments
of its customers. United has issued commercial and standby letters of credit of
$50,699,000 and $41,977,000 as of December 31, 1997 and 1996, respectively.
Management does not anticipate any material losses as a result of these loan
commitments and standby letters of credit.
In the normal course of business, United and its subsidiaries are currently
involved in various legal proceedings. Management is vigorously pursuing all its
legal and factual defenses and, after consultation with legal counsel, believes
that all such litigation will be resolved with no material effect on United's
financial position or results of operations.
54
NOTE K - UNITED BANKSHARES, INC. (PARENT COMPANY ONLY) FINANCIAL
INFORMATION
CONDENSED BALANCE SHEETS
(In thousands) December 31
----------------------
1997 1996
-------- --------
Assets
Cash $ 6,834 $ 12,958
Securities available for sale 16,742 10,813
Securities held to maturity 1,521 1,520
Investment in subsidiaries:
Bank subsidiaries 326,123 303,246
Non-bank subsidiaries 1,303 1,264
Loans 14,300
Other assets 1,297 272
-------- --------
Total Assets $368,120 $330,073
======== ========
Liabilities and Shareholders' Equity
Accrued expenses and other liabilities $ 12,646 $ 7,215
Shareholders' equity (including a net
unrealized holding gain of $6,204 and
$151 on securities available for sale at
December 31, 1997 and 1996, respectively) 355,474 322,858
-------- --------
Total Liabilities and Shareholders' Equity $368,120 $330,073
======== ========
CONDENSED STATEMENTS OF INCOME
(In thousands) Year Ended December 31
-------------------------------
1997 1996 1995
-------- -------- --------
Income
Dividends from bank subsidiaries $ 69,637 $17,847 $26,496
Interest and fees on loans 85
Management fees:
Bank subsidiaries 3,476 3,467 3,018
Non-bank subsidiaries 12 12 12
Other income 707 557 268
-------- ------- -------
Total Income 73,917 21,883 29,794
Expenses
Operating expenses 5,516 4,725 4,606
-------- ------- -------
Income Before Income Taxes and (Excess
Dividends) Equity in Undistributed Net
Income of Subsidiaries 68,401 17,158 25,188
Applicable income tax benefit (424) (12) (269)
-------- ------- -------
Income Before (Excess Dividends) Equity in
Undistributed Net Income of Subsidiaries 68,825 17,170 25,457
Equity in (excess dividends) undistributed net
income of subsidiaries:
Bank subsidiaries (19,845) 20,185 13,641
Non-bank subsidiaries 39 40 11
-------- ------- -------
Net Income $ 49,019 $37,395 $39,109
======== ======= =======
55
NOTE K - UNITED BANKSHARES, INC. (PARENT COMPANY ONLY) FINANCIAL
INFORMATION - continued
CONDENSED STATEMENTS OF CASH FLOWS
(In thousands) Year Ended December 31
------------------------------
1997 1996 1995
-------- -------- --------
Operating Activities
Net income $ 49,019 $ 37,395 $ 39,109
Adjustments to reconcile net income to net
cash provided by operating activities:
Equity in excess dividends (undistributed
net income)of subsidiaries 19,806 (20,225) (13,652)
Depreciation and net amortization 11 26 33
Net gain on sales of investment
securities (24)
Net change in other assets and liabilities 2,276 (106) 790
-------- -------- --------
Net Cash Provided by Operating Activities 71,112 17,066 26,280
-------- -------- --------
Investing Activities
Net purchases of securities available
for sale (1,346) 1,585 (8,439)
Purchase of loans (14,300)
Increase in investment in subsidiaries (1) (2,400)
Cash paid in acquisition of subsidiary (37,562) (5,280)
-------- -------- --------
Net Cash (Used in) Provided by Investing
Activities (53,209) 1,585 (16,119)
-------- -------- --------
Financing Activities
Cash dividends paid (19,831) (16,541) (10,273)
Pre-merger dividends of pooled company (382) (2,729)
Acquisition of treasury stock (5,754) (3,395) (1,273)
Proceeds from the sale of treasury stock 606
Proceeds from exercise of stock options 952 851 666
Purchase of fractional shares (4)
-------- -------- --------
Net Cash Used in Financing Activities (24,027) (19,471) (13,609)
-------- -------- --------
Decrease in Cash and Cash Equivalents (6,124) (820) (3,448)
Cash and Cash Equivalents at Beginning
of Year 12,958 13,778 17,226
-------- -------- --------
Cash and Cash Equivalents at End of Year $ 6,834 $ 12,958 $ 13,778
======== ======== ========
56
NOTE L--OTHER INCOME AND EXPENSE
The following details certain items of other income and expense for the periods
indicated:
Year Ended December 31
--------------------------------
(In thousands) 1997 1996 1995
-------- -------- -------
Other income:
- ------------
Service charges and
fees on deposits $11,426 $10,578 $8,287
Bankcard 2,845 2,108 1,739
Net income from mortgage
banking operations 15,095 9,809 7,378
Gain on sales of investment securities 42 528 833
Other income 1,259 1,296 1,963
Other expense:
- -------------
Data processing $3,532 $3,820 $3,701
FDIC insurance expense 207 2,997 2,800
Legal and consulting 1,644 2,848 3,379
Advertising 2,680 2,997 2,086
Goodwill amortization 2,802 1,966 1,603
Equipment expense 5,961 5,402 4,085
NOTE M--REGULATORY MATTERS
The subsidiary banks are required to maintain average reserve balances with
their respective Federal Reserve Bank. The average amount of those reserve
balances for the year ended December 31, 1997, was approximately $35,261,000.
The primary source of funds for the dividends paid by United Bankshares, Inc. to
its shareholders is dividends received from its subsidiary banks. Dividends paid
by United's subsidiary banks are subject to certain regulatory limitations.
Generally, the most restrictive provision requires regulatory approval if
dividends declared in any year exceed that year's net income, as defined, plus
the retained net profits of the two preceding years.
During 1998, the retained net profits available for distribution to United
Bankshares, Inc., as dividends without regulatory approval, are approximately
$19,764,000, plus net income for the interim period through the date of
declaration.
Under Federal Reserve regulation, the banking subsidiaries are also limited as
to the amount they may loan to affiliates, including the parent company. Loans
from the banking subsidiaries to the parent company are limited to 10% of the
banking subsidiaries' capital and surplus, as defined, or $15,705,000 at
December 31, 1997, and must be secured by qualifying collateral.
United's subsidiary banks are subject to various regulatory capital requirements
administered by federal banking agencies. Pursuant to capital adequacy
guidelines, United's subsidiary banks must meet specific capital guidelines that
involve quantitative measures of the banks' assets, liabilities, and certain
off-balance sheet items as cal-
57
NOTE M--REGULATORY MATTERS - continued
culated under regulatory accounting practices. United's subsidiary banks'
capital amounts and classifications are also subject to qualitative judgments by
the regulators about components, risk weightings, and other factors.
Quantitative measures established by regulation to ensure capital adequacy
require United to maintain minimum amounts and ratios of total and Tier I
capital, as defined in the regulations, to risk-weighted assets, as defined, and
of Tier I capital, as defined, to average assets, as defined. Management
believes, as of December 31, 1997, that United exceeds all capital adequacy
requirements to which it is subject.
As of December 31, 1997, the most recent notification from its regulators,
United and its subsidiary banks were categorized as well capitalized. To be
categorized as well capitalized, United must maintain minimum total risk-based,
Tier I risk-based, and Tier I leverage ratios as set forth in the following
table. There are no conditions or events since that notification that management
believes have changed United's category.
United's and United's lead bank's, United National Bank, capital amounts (in
thousands of dollars) and ratios are presented in the following table.
For Capital
Actual Adequacy Purposes
----------------- ----------------------------------
Amount Ratio Amount Ratio
-------- ----- -------- -----
AS OF DECEMBER 31, 1997:
- -----------------------
Total Capital (to Risk-
Weighted Assets):
United Bankshares $342,473 13.3% $205,583 (greater than or equal to) 8.0%
United National Bank 204,907 12.5% 130,917 (greater than or equal to) 8.0%
Tier I Capital (to Risk-
Weighted Assets):
United Bankshares 312,500 12.2% 102,791 (greater than or equal to) 4.0%
United National Bank 184,451 11.3% 65,459 (greater than or equal to) 4.0%
Tier I Capital
(to Average Assets):
United Bankshares 312,500 8.9% 140,915 (greater than or equal to) 4.0%
United National Bank 184,451 8.1% 91,559 (greater than or equal to) 4.0%
AS OF DECEMBER 31, 1996:
- -----------------------
Total Capital (to Risk-
Weighted Assets):
United Bankshares $334,361 15.8% $169,760 (greater than or equal to) 8.0%
United National Bank 231,697 15.2% 122,000 (greater than or equal to) 8.0%
Tier I Capital (to Risk-
Weighted Assets):
United Bankshares 308,770 14.6% 84,880 (greater than or equal to) 4.0%
United National Bank 212,635 13.9% 61,000 (greater than or equal to) 4.0%
Tier I Capital
(to Average Assets):
United Bankshares 308,770 9.9% 124,532 (greater than or equal to) 4.0%
United National Bank 212,635 9.8% 86,902 (greater than or equal to) 4.0%
To Be Well
Capitalized
----------------------------
Amount Ratio
-------- -----
AS OF DECEMBER 31, 1997:
- -----------------------
Total Capital (to Risk-
Weighted Assets):
United Bankshares $256,979 (greater than or equal to) 10.0%
United National Bank 163,647 (greater than or equal to) 10.0%
Tier I Capital (to Risk-
Weighted Assets):
United Bankshares 154,187 (greater than or equal to) 6.0%
United National Bank 98,188 (greater than or equal to) 6.0%
Tier I Capital
(to Average Assets):
United Bankshares 176,144 (greater than or equal to) 5.0%
United National Bank 114,449 (greater than or equal to) 5.0%
AS OF DECEMBER 31, 1996:
- -----------------------
Total Capital (to Risk-
Weighted Assets):
United Bankshares $212,200 (greater than or equal to) 10.0%
United National Bank 152,500 (greater than or equal to) 10.0%
Tier I Capital (to Risk-
Weighted Assets):
United Bankshares 127,320 (greater than or equal to) 6.0%
United National Bank 91,500 (greater than or equal to) 6.0%
Tier I Capital
(to Average Assets):
United Bankshares 155,666 (greater than or equal to) 5.0%
United National Bank 108,627 (greater than or equal to) 5.0%
58
NOTE N--FAIR VALUES OF FINANCIAL INSTRUMENTS
The following methods and assumptions were used by United in estimating its fair
value disclosures for financial instruments:
Cash and Cash Equivalents: The carrying amounts reported in the balance sheet
for cash and cash equivalents approximate those assets' fair values.
Securities: The estimated fair values of securities are based on quoted market
prices, where available. If quoted market prices are not available, fair values
are based on quoted market prices of comparable instruments.
Loans: The estimated fair values of variable-rate loans that reprice frequently
with no significant change in credit risk are based on carrying values. The fair
values of certain mortgage loans (e.g., one-to-four family residential), credit
card loans, and other consumer loans are based on quoted market prices of
similar loans sold in conjunction with securitization transactions, adjusted for
differences in loan characteristics. The fair values of other loans (e.g.,
commercial real estate and rental property mortgage loans, commercial and
industrial loans, financial institution loans, and agricultural loans) are
estimated using discounted cash flow analyses, using interest rates currently
being offered for loans with similar terms to borrowers of similar credit
worthiness.
Off-Balance Sheet Instruments: Fair values of United's loan commitments are
based on fees currently charged to enter into similar agreements, taking into
account the remaining terms of the agreements and the counterparties' credit
standing. The estimated fair values of these commitments approximate their
carrying values.
Deposits: The fair values of demand deposits (e.g., interest and non-interest
checking, regular savings and certain types of money market accounts) are, by
definition, equal to the amount payable on demand at the reporting date (i.e.,
their carrying amounts). The carrying amounts of variable-rate, fixed-term money
market accounts and certificates of deposit approximate their fair values at the
reporting date. Fair values of fixed-rate certificates of deposit are estimated
using a discounted cash flow calculation that applies interest rates currently
being offered on certificates to a schedule of aggregated expected monthly
maturities on time deposits.
Short-term Borrowings: The carrying amounts of federal funds purchased,
borrowings under repurchase agreements, and other short-term borrowings
approximate their fair values.
Federal Home Loan Bank Borrowings: The fair values of United's Federal Home Loan
Bank borrowings are estimated using discounted cash flow analyses, based on
United's current incremental borrowing rates for similar types of borrowing
arrangements
59
NOTE N--FAIR VALUES OF FINANCIAL INSTRUMENTS - continued
The estimated fair values of United's financial instruments are summarized
below:
December 31,1997 December 31,1996
------------------------- -------------------------
(In thousands) Carrying Fair Carrying Fair
Amount Value Amount Value
------------------------- -------------------------
Cash and cash equivalents $ 180,864 $ 180,864 $ 154,478 $ 154,478
Securities available for sale 595,520 595,520 442,488 442,488
Securities held to maturity 231,311 234,329 235,276 239,054
Loans 2,589,385 2,607,314 2,266,259 2,278,292
Deposits 2,925,349 2,925,023 2,521,148 2,521,865
Short-term borrowings 230,679 230,679 177,480 177,480
FHLB borrowings 165,695 165,693 136,631 136,521
NOTE O--STOCK SPLIT
In November 1997, United's Board of Directors approved a two-for-one stock split
effected in the form of a 100% stock dividend to be distributed on March 27,
1998, to shareholders of record as of March 13, 1998. The change in capital
structure due to the dividend has been given retroactive effect in the December
31, 1997 balance sheet and all references to shares and per share data have been
retroactively restated for the effect of the 100% stock dividend.
60
NOTE P - QUARTERLY FINANCIAL DATA (UNAUDITED)
Quarterly financial data for 1997 and 1996 is summarized below (dollars in
thousands except for per share data):
1st Quarter 2nd Quarter 3rd Quarter 4th Quarter
----------- ----------- ----------- -----------
1997
- ----
Interest income $59,030 $61,220 $65,476 $69,032
Interest expense 26,530 27,963 30,516 32,051
Net interest income 32,500 33,257 34,960 36,981
Provision for loan losses 604 558 1,011 947
Income from mortgage
banking operations 2,973 2,896 5,533 3,693
Other noninterest income 4,746 4,989 5,705 5,841
Noninterest expense 21,981 22,142 26,276 26,358
Income taxes 5,770 6,316 6,454 6,638
Net income 11,864 12,126 12,457 12,572
Per share data:
- --------------
Average shares outstanding (000s):
Basic 38,646 38,517 38,595 38,790
Diluted 39,170 39,077 39,380 39,445
Net income per share: (1)
Basic $0.31 $0.31 $0.32 $0.32
Diluted $0.30 $0.31 $0.32 $0.32
Dividends per share $0.16 $0.17 $0.17 $0.18
1996
- ----
Interest income $54,256 $54,025 $58,865 $58,939
Interest expense 23,276 23,307 25,925 26,941
Net interest income 30,980 30,718 32,940 31,998
Provision for loan losses 792 949 600 450
Income (loss) from mortgage
banking operations 2,733 813 3,436 2,827
Other noninterest income 4,839 4,550 4,654 5,189
Noninterest expense 23,056 26,165 24,647 21,860
Income taxes (2) 5,196 6,081 2,751 5,735
Net income 9,508 2,886 13,032 11,969
Per share data:
- --------------
Average shares outstanding (000s):
Basic 38,405 38,744 38,806 38,780
Diluted 39,065 39,180 39,211 39,152
Net income per share: (1)
Basic $0.25 $0.07 $0.34 $0.31
Diluted $0.24 $0.07 $0.33 $0.31
Dividends per share $0.15 $0.15 $0.16 $0.16
(1) Earnings per share amounts have been restated to comply with SFAS No. 128.
(2) In the second quarter of 1996, United recorded additional income tax expense
of $3,086 due to the recapture of Eagle's bad debt reserve into taxable income.
However, as a result of legislation enacted during the third quarter of 1996,
United was relieved of the liability.
61