Exhibit 99.2
Consolidated Financial Statements of United Bankshares, Inc.
as of March 31, 1998, and for each of the three months
ended March 31, 1998 and 1997, with management's
discussion and analysis
62
CONSOLIDATED BALANCE SHEETS(UNAUDITED)
UNITED BANKSHARES, INC. AND SUBSIDIARIES
(Dollars in thousands, except par value) March 31 December 31
1998 1997
---------- -----------
ASSETS
Cash and due from banks $ 112,069 $ 116,087
Interest-bearing deposits with other banks 154 8,725
Federal funds sold 12,116 56,052
----------- ----------
Total cash and cash equivalents 124,339 180,864
Securities available for sale at estimated fair
value (amortized cost-$578,322 at March 31,
1998 and $585,724 at December 31, 1997) 586,040 595,520
Securities held to maturity(estimated fair value
-$218,335 at March 31, 1998 and $234,329 at
December 31, 1997) 215,030 231,311
Loans
Commercial, financial, and agricultural 448,504 467,223
Real estate:
Single family residential 1,018,378 1,087,920
Commercial 524,428 482,568
Construction 150,919 140,266
Other 45,651 47,148
Installment 303,411 304,862
Loans held for sale at estimated fair value 297,711 97,619
---------- ----------
2,789,002 2,627,606
Less: Unearned income (7,611) (7,766)
---------- ----------
Loans, net of unearned income 2,781,391 2,619,840
Less: Allowance for loan losses (31,163) (30,455)
---------- ----------
Net loans 2,750,228 2,589,385
Bank premises and equipment 48,741 48,841
Interest receivable 24,119 20,979
Other assets 56,461 59,459
---------- ----------
TOTAL ASSETS $3,804,958 $3,726,359
========== ==========
LIABILITIES
Domestic deposits:
Noninterest-bearing $ 478,607 $ 494,733
Interest-bearing 2,471,407 2,430,616
---------- ----------
TOTAL DEPOSITS 2,950,014 2,925,349
Borrowings:
Federal funds purchased 34,788 40,961
Securities sold under agreements to repurchase 190,054 184,718
Federal Home Loan Bank borrowings 211,785 165,695
Other 3,911 5,000
Accrued expenses and other liabilities 50,763 49,162
---------- ----------
TOTAL LIABILITIES 3,441,315 3,370,885
SHAREHOLDERS' EQUITY
Common stock, $2.50 par value; Authorized -41,000,000 shares; issued -
39,153,568 at March 31, 1998 and 39,073,164 at December 31, 1997,
including 98,686 and 161,814 shares in treasury at March 31, 1998
and December 31,1997, respectively 97,884 97,683
Surplus 73,009 72,505
Retained earnings 189,347 181,601
Accumulated other comprehensive income 4,882 6,204
Treasury stock (1,479) (2,519)
---------- ----------
TOTAL SHAREHOLDERS' EQUITY 363,643 355,474
---------- ----------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $3,804,958 $3,726,359
========== ==========
See notes to consolidated unaudited financial statements.
63
CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
UNITED BANKSHARES, INC. AND SUBSIDIARIES
(Dollars in thousands, except per share data) Three Months Ended
March 31
--------------------------
1998 1997
---------- ----------
INTEREST INCOME
Interest and fees on loans $56,316 $47,850
Interest on federal funds sold and other
short term investments 363 224
Interest and dividends on securities:
Taxable 12,224 10,176
Exempt from federal taxes 763 812
---------- ----------
TOTAL INTEREST INCOME 69,666 59,062
---------- ----------
INTEREST EXPENSE
Interest on deposits 27,867 23,558
Interest on short-term borrowings 2,655 1,687
Interest on Federal Home Loan
Bank borrowings 1,958 1,321
---------- ----------
TOTAL INTEREST EXPENSE 32,480 26,566
---------- ----------
NET INTEREST INCOME 37,186 32,496
PROVISION FOR LOAN LOSSES 2,050 603
---------- ----------
NET INTEREST INCOME AFTER PROVISION
FOR LOAN LOSSES 35,136 31,893
---------- ----------
OTHER INCOME
Trust department income 1,009 853
Other charges, commissions, and fees 4,411 3,694
Income from mortgage banking operations 5,196 2,834
Other income 747 297
Investment securities gains 2,487 41
---------- ----------
TOTAL OTHER INCOME 13,850 7,719
---------- ----------
OTHER EXPENSES
Salaries and employee benefits 14,259 11,303
Net occupancy expense 3,545 2,827
Other expense 10,005 7,849
---------- ----------
TOTAL OTHER EXPENSES 27,809 21,979
---------- ----------
INCOME BEFORE INCOME TAXES 21,177 17,633
INCOME TAXES 7,431 5,769
---------- ----------
NET INCOME $13,746 $11,864
========== ==========
Earnings per common share
Basic $0.35 $0.31
========== ==========
Diluted $0.35 $0.30
========== ==========
Dividends per share $0.18 $0.16
========== ==========
Average outstanding shares
Basic 39,006,301 38,645,708
Diluted 39,634,040 39,170,480
See notes to consolidated unaudited financial statements.
64
CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY(UNAUDITED)
UNITED BANKSHARES, INC. AND SUBSIDIARIES
(Dollars in thousands, except per share data)
Three Months Ended March 31, 1998
---------------------------------------------------------------------------------------------
Common Stock Accumulated
------------------- Other Total
Par Retained Comprehensive Treasury Shareholders'
Shares Value Surplus Earnings Income Stock Equity
---------- ------ ------- -------- ------------- --------- -------------
Balance at
January 1, 1998 39,073,164 $97,683 $72,505 $181,601 $ 6,204 ($2,519) $355,474
Net income 13,746 13,746
Other comprehensive
income, net of tax:
Change in net
unrealized gain on
available for sale
securities, net of
reclassification
adjustment (1,322) (1,322)
Cash dividends
($.18 per share) (5,252) (5,252)
Pre-merger dividends
of pooled company (748) (748)
Sale of treasury
stock (37,376
shares) 654 654
Common stock options
exercised 80,404 201 504 386 1,091
---------- ------- ------- -------- ------- --------- --------
Balance at
March 31, 1998 39,153,568 $ 97,884 $73,009 $189,347 $ 4,882 ($1,479) $363,643
========== ======== ======= ======== ======= ======== ========
Disclosure of
Reclassification
Amount:
Unrealized holding
gains on available
for sale securities
arising during the
period $ 295
Less:
Reclassification
adjustment for
gains realized
in net income 1,617
-------
Change in net
unrealized gain on
available for sale
securities, net of tax $(1,322)
=======
See notes to consolidated unaudited financial statements
65
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
UNITED BANKSHARES, INC. AND SUBSIDIARIES
(Dollars in thousands) Three Months Ended
March 31
------------------------
1998 1997
--------- --------
NET CASH (USED IN) PROVIDED BY OPERATING ACTIVITIES $(174,447) $ 38,268
INVESTING ACTIVITIES
Proceeds from maturities and calls of
securities held to maturity 27,089 10,725
Proceeds from maturities and calls of
securities available for sale 44,981 45,795
Proceeds from sales of securities available for sale 26,287 10,843
Purchases of securities available for sale (61,756) (98,233)
Purchases of securities held to maturity (10,735) (12,051)
Pet purchase of bank premises and equipment (1,700) (1,162)
Net change in loans 29,649 (21,659)
--------- ---------
NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES 53,815 (65,742)
--------- ---------
FINANCING ACTIVITIES
Cash dividends paid (4,930) (4,850)
Acquisition of treasury stock (3,551)
Proceeds from exercise of stock options 1,091 511
Proceeds from sales of treasury stock 654
Pre-merger dividends of pooled companies (1,471) (654)
Proceeds from Federal Home Loan Bank advances 46,123 150,055
Repayment of Federal Home Loan Bank advances (33) (204,018)
Changes in:
Deposits 24,599 93,556
Federal funds purchased and securities
sold under agreements to repurchase (1,926) (22,010)
---------- ---------
NET CASH PROVIDED BY FINANCING ACTIVITIES 64,107 9,039
--------- --------
(DECREASE) IN CASH AND CASH EQUIVALENTS (56,525) (18,435)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 180,864 154,478
--------- --------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 124,339 $136,043
========= ========
See notes to consolidated unaudited financial statements.
66
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
UNITED BANKSHARES, INC. AND SUBSIDIARIES
1. GENERAL
The accompanying unaudited consolidated interim financial statements of United
Bankshares, Inc. and Subsidiaries ("United") have been prepared in accordance
with generally accepted accounting principles for interim financial information
and with the instructions for Form 10-Q and Article 10 of Regulation S-X.
Accordingly, the financial statements do not contain all of the information and
footnotes required by generally accepted accounting principles. The financial
statements presented in this report have not been audited. The accounting and
reporting policies followed in the presentation of these financial statements
are consistent with those applied in the preparation of the financial statements
for the year ended 1997. In the opinion of management, adjustments necessary for
a fair presentation of financial position and results of operations for the
interim periods have been made. Such adjustments are of a normal and recurring
nature.
In June 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, which had been delayed until
after December 31, 1997, by FASB Statement No. 127, (SFAS No. 127), "DEFERRAL OF
THE EFFECTIVE DATE OF CERTAIN PROVISIONS OF FASB STATEMENT NO. 125, AN AMENDMENT
OF FASB STATEMENT NO. 125." 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 adoption of the additional provisions of SFAS
No. 125, as amended by SFAS No. 127, resulted in no material impact on United's
financial condition or 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 has disclosed the components of comprehensive
income as outlined by SFAS No. 130 included in these financial statements and
notes thereto.
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
67
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.
In February 1998, the FASB issued Statement No. 132, "EMPLOYERS' DISCLOSURES
ABOUT PENSION AND OTHER POSTRETIREMENT BENEFITS, AN AMENDMENT OF FASB STATEMENTS
NO. 87, 88 AND 106." This statement revises employers' disclosures about pension
and other postretirement benefit plans, but does not change the measurement or
recognition of those plans. It standardizes the disclosure requirements to the
extent practicable, requires additional information on changes in the benefit
obligations and fair values of plan assets that will facilitate financial
analysis and eliminates certain disclosures that are no longer as useful as they
were when Statements No. 87, 88 and 106 were issued. This Statement is effective
for fiscal years beginning after December 15, 1997. These disclosure
requirements will have no material impact on United's financial position or
results of operations.
The new rules do not have a material effect on United's financial position and
results of operations.
2. BASIS OF PRESENTATION
The accompanying consolidated interim financial statements include the accounts
of United and its wholly-owned subsidiaries. United considers all of its
principal business activities to be bank related. All significant intercompany
accounts and transactions have been eliminated in the consolidated financial
statements. Dollars are in thousands, except per share and share data.
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 information
included herein includes the financial position and results of operations of
Patriot from the effective merger date forward.
On April 2, 1998, United consummated its 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. United exchanged 1.70
shares of United common stock for each of the 5,277,301 common shares of George
Mason or approximately 8,971,412 shares, unadjusted for cash paid in lieu of
fractional shares. As of the date of acquisition, George Mason reported total
assets of $1,023,467,000, total net loans of $600,490,000, deposits of
$839,562,000 and shareholders' equity of $78,925,000. All statements and notes
thereto have been restated to give effect to the merger of United and George
Mason as though they had always been combined.
3. ACQUISITIONS
68
United has entered into an agreement with Fed One Bancorp, Inc., Wheeling, West
Virginia ("Fed One") to exchange 1.50 shares 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 transaction as though United and Fed One had been
combined for all periods presented:
United
(In thousands, except per share data) and
George Fed Fed One
United Mason Restated One Proforma
-------- ------- -------- ------- --------
For the Three Months
Ended March 31, 1998:
Net interest income $ 28,712 $ 8,474 $ 37,186 $ 2,838 $ 40,024
Net income 10,962 2,784 13,746 675 14,421
Earnings per common
share:
Basic $0.37 $0.53 $0.35 $0.30 $0.34
Diluted $0.36 $0.51 $0.35 $0.28 $0.33
For the Three Months
Ended March 31, 1997:
Net interest income $ 25,142 $ 7,354 $ 32,496 $ 2,950 $ 35,446
Net income 10,048 1,816 11,864 821 12,685
Earnings per common
share:
Basic $0.33 $0.36 $0.31 $0.36 $0.30
Diluted $0.33 $0.35 $0.30 $0.34 $0.30
For the Year Ended
December 31, 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
4. INVESTMENT SECURITIES
The amortized cost and estimated fair values of securities available for sale
are summarized as follows:
March 31, 1998
-----------------------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
--------- ---------- ---------- ----------
U.S. Treasury securities and
obligations of U.S. Government
corporations and agencies $191,500 $ 578 $227 $191,851
State and political subdivisions 4,260 100 1 4,359
Mortgage-backed securities 356,224 2,985 305 358,904
Marketable equity securities 10,791 4,693 40 15,444
Other 15,547 65 15,482
--------- ---------- ---------- ---------
Total $578,322 $8,356 $638 $586,040
========= ========== ========== =========
69
December 31, 1997
----------------------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
--------- ---------- ---------- ----------
U.S. Treasury securities and
obligations of U.S. Government
corporations and agencies $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
========= ========== ========== =========
The cumulative net unrealized holding gain on available for sale securities
resulted in an increase to shareholders' equity of $4,882 and $6,204, net of
deferred income taxes at March 31, 1998 and December 31, 1997, respectively.
The amortized cost and estimated fair value of securities available for sale at
March 31, 1998 and December 31, 1997, by contractual maturity are as follows:
March 31, 1998 December 31, 1997
----------------------------------------------------------
Estimated Estimated
Amortized Fair Amortized Fair
Cost Value Cost Value
--------- ---------- ---------- ----------
Due in one year or less $ 42,616 $ 42,650 $ 42,351 $42,794
Due after one year through
five years 142,847 144,278 134,224 134,730
Due after five years through
ten years 123,194 123,774 135,081 135,561
Due after ten years 258,874 259,894 269,748 271,394
Marketable equity securities 10,791 15,444 4,300 11,041
--------- ---------- ---------- ---------
Total $578,322 $586,040 $585,724 $595,520
========= ========== ========== =========
The preceding table includes $358,904 and $382,158 of mortgage-backed securities
at March 31, 1998 and December 31, 1997, respectively, with an amortized cost of
$356,224 and $379,452 at March 31, 1998 and December 31, 1997, respectively.
Maturities of mortgage-backed securities are based upon the estimated average
life.
The amortized cost and estimated fair values of securities held to maturity are
summarized as follows:
March 31, 1998
----------------------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
--------- ---------- ---------- ----------
U.S. Treasury securities and
obligations of U.S. Government
corporations and agencies $ 91,442 $1,797 $ 17 $ 93,222
State and political subdivisions 53,514 2,094 41 55,567
Mortgage-backed securities 60,641 605 159 61,087
Other 9,433 974 8,459
--------- ---------- ---------- ----------
Total $215,030 $4,496 $1,191 $218,335
========= ========== ========== ==========
70
December 31, 1997
----------------------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
--------- ---------- ---------- ----------
U.S. Treasury securities and
obligations of U.S. Government
corporations and agencies $ 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
========= ========== ========== ==========
The amortized cost and estimated fair value of securities held to maturity at
March 31, 1998, and December 31, 1997, by contractual maturity follow. Expected
maturities may differ from contractual maturities because the issuers may have
the right to call or prepay obligations with or without call or prepayment
penalties.
March 31, 1998 December 31, 1997
----------------------------------------------------------
Estimated Estimated
Amortized Fair Amortized Fair
Cost Value Cost Value
--------- ---------- ---------- ----------
Due in one year or less $ 4,479 $ 4,535 $ 18,825 $ 18,887
Due after one year
through five years 73,511 74,541 72,750 73,640
Due after five years
through ten years 94,437 96,888 98,335 99,481
Due after ten years 42,603 42,371 41,401 42,321
--------- --------- --------- ---------
Total $215,030 $218,335 $231,311 $234,329
========= ========= ========= =========
Maturities of the mortgage-backed securities are based upon the estimated
average life. There were no sales of held to maturity securities.
The amortized cost of securities pledged to secure public deposits, securities
sold under agreements to repurchase, and for other purposes as required or
permitted by law, approximated $394,128 and $415,206 at March 31, 1998 and
December 31, 1997, respectively.
5. NONPERFORMING LOANS
Nonperforming loans are summarized as follows:
March 31 December 31
1998 1997
---------- -----------
Loans past due 90 days or more
and still accruing interest $ 9,035 $12,181
Nonaccrual loans 7,499 5,202
------- -------
Total nonperforming loans $16,534 $17,383
======= =======
6. ALLOWANCE FOR LOAN LOSSES
71
The adequacy of the allowance for loan losses is based on management's
evaluation of the relative risks inherent in the loan portfolio. A progression
of the allowance for loan losses for the periods presented is summarized as
follows:
Three Months Ended
March 31
------------------------
1998 1997
------- -------
Balance at beginning of period $30,455 $27,942
Provision charged to expense 2,050 603
------- -------
32,505 28,545
Loans charged-off (1,511) (714)
Less recoveries 169 97
------- -------
Net Charge-offs (1,342) (617)
------- -------
Balance at end of period $31,163 $27,928
======= =======
The average recorded investment in impaired loans during the quarter ended March
31, 1998 and for the year ended December 31, 1997 was approximately $13,289 and
$12,686, respectively. For the quarters ended March 31, 1998 and 1997, United
recognized interest income on the impaired loans of approximately $160 and $137,
respectively, substantially all of which was recognized using the accrual method
of income recognition.
At March 31, 1998, the recorded investment in loans that are considered to be
impaired under SFAS No. 114 was $13,133 (of which $7,499 were on a nonaccrual
basis). Included in this amount is $5,386 of impaired loans for which the
related allowance for loan losses is $1,246 and $7,747 of impaired loans that do
not have an allowance for credit losses due to management's estimate that the
fair value of the underlying collateral of these loans is sufficient for full
repayment of the loan and interest.
The amount of interest income which would have been recorded under the original
terms for the above loans was $372 and $317 for the quarters ended March 31,
1998 and 1997, respectively.
7. COMMITMENTS AND CONTINGENT LIABILITIES
United and its subsidiaries are currently involved, in the normal course of
business, in various legal proceedings. Management is vigorously pursuing all of
its legal and factual defenses and, after consultation with legal counsel,
believes that all such litigation will be resolved without material effect on
financial position or results of operations.
72
8. EARNING ASSETS AND INTEREST-BEARING LIABILITIES
The following table shows the daily average balance of major categories of
assets and liabilities for each of the three month periods ended March 31, 1998,
and March 31, 1997, with the interest rate earned or paid on such amount.
Three Months Ended Three Months Ended
March 31 March 31
1998 1997
-------------------------- -----------------------------
(Dollars in Average Avg. Average Avg.
Thousands) Balance Interest Rate Balance Interest Rate
------- -------- ---- ------- -------- ----
ASSETS
Earning Assets:
Federal funds sold and
securities purchased
under agreements to
resell and other short-
term investments $ 27,366 $ 363 5.38% $ 16,875 $ 224 5.38%
Investment Securities:
Taxable 761,581 12,224 6.42% 631,655 10,176 6.44%
Tax-exempt (1) 55,507 1,174 8.46% 56,008 1,249 8.92%
---------- ------- ------ ---------- ------- ------
Total Securities 817,088 13,368 6.56% 687,663 11,425 6.65%
Loans, net of unearned
income (1) (2) 2,623,860 56,913 8.68% 2,273,362 48,206 8.48%
Allowance for loan
losses (30,513) (27,926)
---------- ----------
Net loans 2,593,347 8.90% 2,245,436 8.71%
---------- ------- ------ ---------- ------- ------
Total earning assets 3,437,801 $70,674 8.22% 2,949,974 $59,855 8.12%
------- ------ ------- ------
Other assets 221,267 186,401
---------- ----------
TOTAL ASSETS $3,659,068 $3,136,375
========== ==========
LIABILITIES
Interest-Bearing Funds:
Interest-bearing deposits $2,458,265 $27,867 4.60% $2,173,250 $23,558 4.40%
Federal funds purchased,
repurchase agreements
and other short-term
borrowing 204,887 2,655 5.26% 147,103 1,687 4.65%
FHLB advances 155,032 1,958 5.12% 100,307 1,321 5.34%
---------- ------- ------ ---------- ------- ------
Total Interest-Bearing Funds 2,818,184 32,480 4.67% 2,420,660 26,566 4.45%
------- ------ ------- ------
Demand deposits 432,604 351,663
Accrued expenses and other
liabilities 45,873 37,532
---------- ----------
TOTAL LIABILITIES 3,296,661 2,809,855
Shareholders' Equity 362,407 326,520
---------- ----------
TOTAL LIABILITIES AND
SHAREHOLDERS' EQUITY $3,659,068 $3,136,375
========== ==========
NET INTEREST INCOME $38,164 $33,258
======= =======
INTEREST SPREAD 3.55% 3.66%
NET INTEREST MARGIN 4.51% 4.58%
(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.
73
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
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 is a broad overview of the financial condition and results of
operations and is not intended to replace the more detailed discussion which is
presented under specific headings on the following pages.
OVERVIEW
Net income for the first quarter of 1998 was $13.75 million or $0.35 per share
compared to $11.86 million or $0.30 per share for the first quarter of 1997.
This represents a 15.94% increase in net income and a 16.67% increase in
earnings per share. United's annualized return on average assets was 1.52% and
return on average shareholders' equity was 15.37% as compared to 1.53% and
14.74% for 1997, respectively.
United has strong core earnings driven by a net interest margin of 4.51% for the
first three months of 1998. Net interest income increased $4.69 million or
14.43% for the first three months of 1998 as compared to the same period for
1997. The provision for loan losses increased $1.45 million or 239.97% when
comparing the first three months of 1998 to the first three months of 1997.
Noninterest income, including income from mortgage banking operations, but
excluding investment securities gains, increased 47.99% for the first three
months of 1998 when compared to the first three months of 1997. Noninterest
expenses increased $5.83 million or 26.52% for the first three months compared
to the same period in 1997. Income taxes were higher for the first three months
than for the same period of 1997 due to higher earnings before taxes.
Total assets were $3.80 billion at March 31, 1998, an $78.60 million or 2.11%
increase from year-end, and up $584.96 million or 18.17% from one year ago. In
terms of asset composition since year-end 1997, the March 31, 1998 balance sheet
reflects a $56.5 million decrease in cash and cash equivalents and a $25.76
million decrease in investment securities
74
as those funds were used to fund strong loan growth of $161.55 million or 6.17%
for the quarter. All other categories of assets were moderately flat compared to
year-end 1997.
Total deposits when compared to year-end showed an increase of $24.67 million.
United's total borrowed funds increased $44.16 million or 11.14% as short-term
borrowings decreased $44.16 million and FHLB borrowings increased $46.09 million
as United utilized the increased borrowings to fund loan growth. Accrued
expenses and other liabilities reflect a $1.60 million or 3.26% increase since
year-end 1997 primarily as a result of increased accrued interest payable due to
the higher volume of interest-bearing deposits and borrowed funds at slightly
higher interest rates for the first quarter of 1998.
Shareholders' equity reflected an increase of $8.17 million or 2.30% as compared
to December 31, 1997 as United continues to maintain an appropriate balance
between capital adequacy and returns to shareholders. At March 31, 1998,
United's regulatory capital ratios, including those of its bank subsidiaries,
exceeded the levels established for well-capitalized institutions.
RESULTS OF OPERATIONS
NET INTEREST INCOME
Net interest income increased $4.69 million or 14.43% in the first quarter of
1998, when compared to the same period of 1997. The increase was primarily
attributable to United's third quarter 1997 purchase acquisition of Patriot. The
net interest margin continues to drive United's core profitability and momentum.
A $488 million increase in average earning assets versus a $397 million increase
in average interest-bearing liabilities for the first quarter of 1998 when
compared to the first quarter of 1997 contributed to the continued strong net
interest margin. Additionally, the yield on those average earning assets
increased by 10 basis points while the increase in the cost of funds was 22
basis points higher when compared to the first quarter of 1997. United's
tax-equivalent net interest margin was 4.51% for the first quarter of 1998, 7
basis points lower than the first three months of 1997. The slightly lower net
interest margin from one year ago was primarily the result of a combination of
higher average interest-bearing funds at increased costs when comparing the two
periods.
PROVISION FOR LOAN LOSSES
For the quarter ended March 31, 1998 and 1997, the provision for loan losses was
$2.05 million and $603 thousand, respectively. Charge-offs exceeded recoveries
by $1.34 million and $617 thousand, respectively, during the first quarter of
1998 and 1997. United increased the provision for loan losses to cover net
charge-offs and strong loan growth as loans, net of unearned income, increased
by $161.55 million or 6.17% as compared to year-end 1997. The allowance for loan
losses as a percentage of loans, net of unearned income, approximated 1.12% at
March 31, 1998 and 1.17% at December 31, 1997. Note 6 to the accompanying
unaudited consolidated financial statements provides a progression of the
allowance for loan losses.
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Credit quality is another major factor in United's profitability. United's
continued excellent credit quality is evidenced by the low level of
nonperforming assets at the end of the first quarter of 1998. Nonperforming
loans of $16.5 million decreased at March 31, 1998 when compared to
nonperforming loans of $17.4 million at year-end 1997. Nonperforming loans, as a
percentage of loans, net of unearned income, decreased from 0.67% to 0.59% when
comparing these two respective periods. The components of nonperforming loans
include nonaccrual loans and loans which are contractually past due 90 days or
more as to interest or principal, but have not been put on a nonaccrual basis.
Loans past due 90 days or more decreased $3.15 million or 25.83% during the
first quarter of 1998 and nonaccrual loans increased $2.30 million or 44.15%
since year-end 1997. Total nonperforming assets of $19.22 million, including
OREO of $2.69 million at March 31, 1998, represented 0.51% of total assets at
the end of the first quarter.
As of March 31, 1998, the ratio of the allowance for loan losses to
nonperforming loans was 188.48% as compared to 175.20% as of December 31, 1997.
Accordingly, management believes that the allowance for loan losses of $31.2
million as of March 31, 1998, is adequate to provide for potential losses on
existing loans based on information currently available.
United evaluates the adequacy of the allowance for loan losses on a quarterly
basis. The provision for loan losses charged to operations is based on
management's evaluation of individual credits, the past loan loss experience,
and other factors which, in management's judgment, deserve recognition in
estimating loan losses. Such other factors considered by management, among other
things, included growth and composition of the loan portfolio, known
deterioration in certain classes of loans or collateral, trends in
delinquencies, and current economic conditions. United's loan administration
policies are focused upon the risk characteristics of the loan portfolio, both
in terms of loan approval and credit quality.
OTHER INCOME
Other income consists of all revenues which are not included in interest and fee
income related to earning assets. Noninterest income has been and will continue
to be an important factor for improving United's profitability. Recognizing the
importance, management continues to evaluate areas where noninterest income can
be enhanced. Noninterest income increased $6.13 million or 79.43% for the first
quarter of 1998 when compared to the first quarter of 1997. Excluding income
from mortgage banking operations and investment securities gains, noninterest
income increased $1.3 million or 27.31% for the first quarter primarily due to a
combination of United's third quarter 1997 purchase acquisition of Patriot and a
higher volume of customer transactions on accounts which are subject to a fee.
The overall increase in noninterest income was primarily due to a $2.49 million
recognized gain on an available for sale equity security exchanged in an
unaffiliated merger transaction consummated at the end of the first quarter of
1998 as well as a $2.36 million increase in mortgage banking operations as a
result of the George Mason Bankshares
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merger. Other items of noninterest income responsible for the overall increase
were in the areas of income from return check charges, bankcard income and trust
department commissions.
OTHER EXPENSES
Just as management continues to evaluate areas where noninterest income can be
enhanced, it strives to improve the efficiency of its operations to reduce
costs. Other expenses include all items of expense other than interest expense,
the provision for loan losses, and income taxes. Other expenses increased $5.83
million or 26.52% for the first quarter ending March 31, 1998 as compared to the
same periods in 1997 primarily due to United's third quarter 1997 purchase
acquisition of Patriot.
Total salaries and benefits increased by 26.15% or $2.96 million for the first
quarter of 1998, when compared to the same period of 1997.
Net occupancy expense for the first quarter of 1998 increased by $718 thousand
or 25.40% when compared to the first quarter of 1997. The overall change in net
occupancy expense for the first quarter of 1998 is primarily due to increases in
all areas of occupancy expense due to the previously mentioned purchase
transaction.
Other expense increased $2.16 million or 27.47% for the first quarter of 1998,
as compared to the same period of 1997. This overall increase was primarily due
to increases in all areas of other noninterest expense due to the previously
mentioned purchase transaction and merger expenses associated with United's
April 2, 1998, consummation of the George Mason transaction.
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
77
into the model. These assumptions are inherently uncertain and, as a result, the
model cannot precisely measure net interest income or precisely predict the
impact of fluctuations in interest rates on net interest income. Actual results
will differ from simulated results due to timing, magnitude and frequency of
interest rate changes as well as changes in market conditions and management
strategies.
Interest sensitive assets and liabilities are defined as those assets or
liabilities that mature or are repriced within a designated time- frame. The
principal function of interest rate risk management is to maintain an
appropriate relationship between those assets and liabilities that are sensitive
to changing market interest rates. The difference between rate sensitive assets
and rate sensitive liabilities for specified periods of time is known as the
"GAP." United closely monitors the sensitivity of its assets and liabilities on
an on-going basis and projects the effect of various interest rate changes on
its net interest margin.
As shown in the interest rate sensitivity gap table in this section, United was
liability sensitive (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 United's savings deposits
are less sensitive to interest rate changes than are other forms of deposits.
The GAP table presented herein has been adapted to show the estimated
differences in interest rate sensitivity which result when the retail deposit
base is assumed to reprice in a manner consistent with historical trends. (See
"Management Adjustments" in the GAP table). Using these estimates, United was
asset sensitive in the one year horizon in the amount of $151,729,000 or 4.22%
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.
78
The following table shows United's estimated earnings sensitivity profile after
management's adjustments as of March 31, 1998:
Change in
Interest Rates Percentage Change in
(basis points) Net Interest Income
-------------- --------------------
+200 1.98%
-200 -2.57%
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 1.98% over one year. A 200 basis point immediate, sustained
downward shock in the yield curve would decrease net interest income by an
estimated 2.57% over one year. All of these estimated changes in net interest
income are within the policy guidelines established by the Board of Directors.
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The following table shows the interest rate sensitivity GAP as of March 31,
1998:
Interest Rate Sensitivity Gap
Days
---------------------------------------- Total 1 - 5 Over 5
0 - 90 91 - 180 181 - 365 One Year Years Years Total
----------- ------------ ------------- ------------ --------- ---------- ----------
(In Thousands)
ASSETS
Interest-Earning Assets:
Federal funds sold and
securities purchased
under agreements to
resell and other short-
term investments $ 12,270 $ 12,270 $ 12,270
Investment and Marketable
Equity Securities:
Taxable 121,185 $ 13,429 $ 76,396 211,010 $ 274,787 $257,759 743,556
Tax-exempt 4,895 4,895 13,727 38,892 57,514
Loans, net of unearned
income 1,104,956 176,536 305,291 1,586,386 814,998 380,007 2,781,391
----------- ---------- ---------- ---------- ---------- -------- ----------
Total Interest-Earning
Assets $1,238,014 $ 194,860 $ 381,687 $1,814,561 $1,103,512 $676,658 $3,594,731
========== ========= ========== ========== ========== ======== ==========
LIABILITIES
Interest-Bearing Funds:
Savings and NOW
accounts $1,000,888 $1,000,888 $1,000,888
Time deposits of
$100,000 & over 86,763 $ 50,438 $ 80,725 217,926 $ 82,548 $ 611 301,085
Other time deposits 284,162 246,398 254,095 784,655 382,836 1,943 1,169,434
Federal funds purchased,
repurchase agreements
and other short-term
borrowing 228,753 228,753 228,753
FHLB advances 175,000 500 500 176,000 35,785 211,785
----------- ---------- ---------- ---------- ---------- -------- ----------
Total Interest-Bearing
Funds $1,775,566 $ 297,336 $ 335,320 $2,408,222 $ 501,169 $ 2,554 $2,911,945
========== ========= ========== ========== ========== ======== ==========
Interest Sensitivity Gap $ (537,552) $(102,477) $ 46,367 $ (593,662) $ 602,343 $674,104 $ 682,785
========== ========= ========== ========== ========== ======== ==========
Cumulative Gap $ (537,552) $(640,028) $ (593,662) $ (593,662) $ (8,681) $682,785 $ 682,785
========== ========= ========== ========== =========== ======== ==========
Cumulative Gap as
a Percentage of Total
Earning Assets -14.95% -17.80% -16.51% -16.51% .24% 18.99% 18.99%
Management
Adjustments 931,739 (62,147) (124,201) 745,391 (745,391) 0
Off-Balance
Sheet Activities
---------- --------- ---------- ---------- ---------- -------- ----------
Cumulative Management
Adjusted Gap and
Off-Balance Sheet
Activities $ 394,187 $ 229,564 $ 151,729 $ 151,729 $ 8,681 $682,785 $ 682,785
========== ========= ========== ========== ========== ======== ==========
Cumulative Management
Adjusted Gap and
Off-Balance Sheet
Activities as a
Percentage of Total
Earning Assets 10.97% 6.39% 4.22% 4.22% 0 .24% 18.99% 18.99%
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LIQUIDITY AND CAPITAL RESOURCES
United maintains, in the opinion of management, liquidity which is sufficient to
satisfy its depositors' requirements and the credit needs of its customers. Like
all banks, United depends upon its ability to renew maturing deposits and other
liabilities on a daily basis and to acquire new funds in a variety of markets. A
significant source of funds available to United are "core deposits." Core
deposits include certain demand deposits, statement and special savings and NOW
accounts. These deposits are relatively stable and they are the lowest cost
source of funds available to United. Short-term borrowings have also been a
significant source of funds. These include federal funds purchased and
securities sold under agreements to repurchase. Repurchase agreements represent
funds which are obtained as the result of a competitive bidding process.
Liquid assets are cash and those items readily convertible to cash. All banks
must maintain sufficient balances of cash and near-cash items to meet the
day-to-day demands of customers. Other than cash and due from banks, the
available for sale securities portfolio, loans held for sale and maturing loans
and investments are the primary sources of liquidity.
The goal of liquidity management is to ensure the ability to access funding
which enables United to efficiently satisfy the cash flow requirements of
depositors and borrowers and meet United's cash needs. Liquidity is managed by
monitoring funds availability from a number of primary sources. Substantial
funding is available from cash and cash equivalents, unused short-term borrowing
and a geographically dispersed network of subsidiary banks providing access to a
diversified and substantial retail deposit market.
Short-term needs can be met through a wide array of sources such as
correspondent and downstream correspondent federal funds and utilization of
Federal Home Loan Bank advances.
Other sources of liquidity available to United to provide long-term as well as
short-term funding alternatives, in addition to FHLB advances, are long-term
certificates of deposit, lines of credit, and borrowings that are secured by
bank premises or stock of United's subsidiaries. United has no intention at this
time to utilize any long-term funding sources other than FHLB advances and
long-term certificate of deposits for funding in the normal course of business.
For the three months ended March 31, 1998, United utilized $174.45 million of
cash for operations primarily as a result of acquiring approximately $117
million of mortgage loans held for sale in the secondary market. During the same
period, net cash of $53.82 million was generated from investing activities which
was primarily due to $16.35 million of excess net proceeds from calls and
maturities of investment securities over purchases of investment securities and
$29.65 of net repayments from portfolio loans. During the first three months of
1998, net cash of $64.11 million was generated by financing activities,
primarily due to additional borrowings of approximately $46.12 million of new
FHLB advances. These sources of funds were partially offset by payment of $4.93
million in cash dividends. The net
81
effect of this activity was a decrease in cash and cash equivalents of $56.53
million for the first three months of 1998.
United anticipates no difficulty in meeting its obligations over the next 12
months and has no material commitments for capital expenditures. There are no
known trends, demands, commitments, or events that will result in or that are
reasonably likely to result in United's liquidity increasing or decreasing in
any material way. United also has significant lines of credit available.
The Asset and Liability Committee monitors liquidity to ascertain that a strong
liquidity position is maintained. In addition, variable rate loans are a
priority. These policies help to protect net interest income against
fluctuations in interest rates. No changes are anticipated in the policies of
United's Asset and Liability Committee.
CAPITAL
Total shareholders' equity increased $8.17 million to $363.64 million, which is
an increase of 2.30% from December 31, 1997. United's equity to assets ratio was
9.56% at March 31, 1998, as compared to 9.54% at December 31, 1997. Capital and
reserves to total assets was 10.38% at March 31, 1998, as compared to 10.36% at
December 31, 1997.
Cash dividends of $0.18 per common share for the first quarter of 1998 represent
an increase of 12.50% over the $0.16 paid for first quarter of 1997. Total cash
dividends were approximately $5.25 million for the first quarter of 1998, an
increase of 5.76% over the comparable period of 1997.
United seeks to maintain a proper relationship between capital and total assets
to support growth and sustain earnings. United's average equity to average asset
ratio was 9.91% at March 31, 1998 and 10.41% at March 31, 1997. United's
risk-based capital ratios of 13.45% at March 31, 1998 and 13.35% at December 31,
1997, are both significantly higher than the minimum regulatory requirements.
United's Tier I capital and leverage ratios of 12.26% and 12.16%, respectively,
at March 31, 1998, are also well above regulatory minimum requirements.
YEAR 2000 ISSUE
The Year 2000 Issue is the result of computer programs being written using two
digits rather than four to define the applicable year. Any of a company's
hardware, date-driven automated equipment or computer programs that have
time-sensitive software may recognize a date using "00" as the year 1900 rather
than the year 2000. This faulty recognition could result in a system failure or
miscalculations causing disruptions of operations, including, among other
things, a temporary inability to process transactions, send invoices or engage
in similar normal business activities.
United 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
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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 $250,000
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. 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.
83