SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------------------------------
FORM 10-Q
Quarterly Report Under Section 13 or 15(d)
of the Securities Exchange Act of 1934
For Quarter Ended June 30, 1998
Commission File Number: 0-13322
UNITED BANKSHARES, INC.
-----------------------
(Exact name of registrant as specified in its charter)
West Virginia 55-0641179
------------- ----------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
300 United Center
500 Virginia Street, East
Charleston, West Virginia 25301
------------------------- -----
(Address of Principal Executive Offices) Zip Code
Registrant's Telephone Number,
including Area Code: (304) 424-8761
--------------
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
--- ---
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Class-- Common Stock, $2.50 Par Value; 39,138,971 shares outstanding as of JULY
31, 1998.
1
UNITED BANKSHARES, INC. AND SUBSIDIARIES
FORM 10-Q
TABLE OF CONTENTS
PART I. FINANCIAL INFORMATION Page
- ------------------------------ ----
Item 1. Financial Statements
- ----------------------------
Consolidated Balance Sheets (Unaudited) June 30, 1998
and December 31, 1997 ....................................................6
Consolidated Statements of Income (Unaudited) for the
Three and Six Months Ended June 30, 1998 and 1997 ........................7
Consolidated Statement of Changes in Shareholders' Equity
(Unaudited) for the Six Months Ended June 30, 1998 .......................8
Condensed Consolidated Statements of Cash Flows (Unaudited)
for the Six Months Ended June 30, 1998 and 1997 ..........................9
Notes to Consolidated Financial Statements ..............................10
Information required by Item 303 of Regulation S-K
Item 2. Management's Discussion and Analysis of Financial
- ----------------------------------------------------------
Condition and Results of Operations...............................19
-----------------------------------
PART II. OTHER INFORMATION
- ---------------------------
Item 1. Legal Proceedings......................................Not Applicable
- -------------------------
Item 2. Changes in Securities..................................Not Applicable
- -----------------------------
Item 3. Defaults Upon Senior Securities .......................Not Applicable
- ---------------------------------------
Item 4. Submission of Matters to a Vote of Security Holders
- ------------------------------------------------------------
(a) The Annual Meeting of Shareholders was held on Monday, May 18, 1998:
(b) Not applicable as to election of directors because; i) proxies for the
meeting were solicited pursuant to Regulation 14 under the Securities and
Exchange Act of 1934; ii) there was no solicitation in opposition to the
nominees as listed in the proxy statement; iii) all of such nominees, as
listed in the proxy statement, were elected.
Item 5. Other Information ....................................Not Applicable
- --------------------------
Item 6. Exhibits and Reports on Form 8-K
- -----------------------------------------
(a) Exhibits required by Item 601 of Regulation S-K
Exhibit 11 - Computation of Earnings Per Share...................29
Exhibit 27 - Financial Data Schedule.............................30
2
(b) Reports on Form 8-K
On July 28, 1998, United Bankshares, Inc. filed a Form 8-K under Item
5 to report its financial condition and the results of operations for
the second quarter of 1998.
On August 3, 1998, United Bankshares, Inc. filed a Form 8-K to restate
the March 31, 1998 Form 10-Q and the 1997 Form 10-K in connection
with the merger of United Bankshares, Inc. and George Mason
Bankshares, Inc.
3
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
UNITED BANKSHARES, INC.
_______________________
(Registrant)
Date August 13, 1998 /s/ Richard M. Adams
__________________ ____________________________
Richard M. Adams
Chairman of the Board and
Chief Executive Officer
Date August 13, 1998 /s/ Steven E. Wilson
__________________ ____________________________
Steven E. Wilson
Executive Vice President,
Secretary, Treasurer and Chief
Financial Officer
4
PART I
FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS (UNAUDITED)
The June 30, 1998 and December 31, 1997, consolidated balance sheets of United
Bankshares, Inc. and Subsidiaries, and the related consolidated statements of
income for the three and six months ended June 30, 1998 and 1997, and the
related consolidated statement of changes in shareholders' equity for the six
months ended June 30, 1998, and the related condensed consolidated statements of
cash flows for the six months ended June 30, 1998 and 1997, and the notes to
consolidated financial statements appear on the following pages.
5
CONSOLIDATED BALANCE SHEETS (UNAUDITED)
UNITED BANKSHARES, INC. AND SUBSIDIARIES
(In thousands, except per share data) June 30 December 31
1998 1997
---------- -----------
ASSETS
Cash and due from banks $ 115,118 $ 116,087
Interest-bearing deposits with other banks 8,719 8,725
Federal funds sold 56,052
---------- ----------
Total cash and cash equivalents 123,837 180,864
Securities available for sale at estimated fair
value (amortized cost-$531,023 at June 30,
1998 and $585,724 at December 31, 1997) 538,390 595,520
Securities held to maturity (estimated fair value
-$217,471 at June 30, 1998 and $234,329 at
December 31, 1997) 214,493 231,311
Loans
Commercial, financial, and agricultural 444,664 467,223
Real estate:
Single family residential 1,012,492 1,087,920
Commercial 535,757 482,568
Construction 145,369 140,266
Other 49,075 47,148
Installment 304,885 292,428
Loans held for sale at estimated fair value 397,051 97,619
---------- ----------
2,889,293 2,615,172
Less: Unearned income (7,469) (7,766)
---------- ----------
Loans, net of unearned income 2,881,824 2,607,406
Less: Allowance for loan losses (35,111) (30,455)
---------- ----------
Net loans 2,846,713 2,576,951
Bank premises and equipment 49,978 48,841
Interest receivable 24,380 20,979
Other assets 75,071 73,594
---------- ----------
TOTAL ASSETS $3,872,862 $3,728,060
========== ==========
LIABILITIES
Domestic deposits:
Noninterest-bearing $ 496,106 $ 494,733
Interest-bearing 2,504,373 2,432,317
---------- ----------
TOTAL DEPOSITS 3,000,479 2,927,050
Borrowings:
Federal funds purchased 34,157 40,961
Securities sold under agreements to repurchase 199,216 184,718
Federal Home Loan Bank borrowings 198,243 165,695
Other 5,226 5,000
Accrued expenses and other liabilities 71,749 49,162
---------- ----------
TOTAL LIABILITIES 3,509,070 3,372,586
SHAREHOLDERS' EQUITY
Common stock, $2.50 par value; Authorized -41,000,000
shares; issued - 39,153,568 at June 30, 1998 and
39,073,164 at December 31, 1997, including 38,617
and 161,814 shares in treasury at June 30, 1998
and December 31, 1997, respectively 97,884 97,683
Surplus 72,572 72,505
Retained earnings 189,127 181,601
Accumulated other comprehensive income 4,788 6,204
Treasury stock (579) (2,519)
---------- ----------
TOTAL SHAREHOLDERS' EQUITY 363,792 355,474
---------- ----------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $3,872,862 $3,728,060
========== ==========
See notes to consolidated unaudited financial statements.
6
CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
UNITED BANKSHARES, INC. AND SUBSIDIARIES
(In thousands, except per share data) Three Months Ended Six Months Ended
June 30 June 30
-------------------- ------------------------
1998 1997 1998 1997
------ ------ ------ ------
INTEREST INCOME
Interest and fees on loans $61,609 $49,322 $117,925 $ 97,173
Interest on federal funds sold and
other short-term investments 132 211 495 435
Interest and dividends on securities:
Taxable 11,481 10,907 23,705 21,048
Exempt from federal taxes 787 780 1,550 1,592
------- ------- -------- --------
TOTAL INTEREST INCOME 74,009 61,220 143,675 120,248
------- ------- -------- --------
INTEREST EXPENSE
Interest on deposits 28,631 24,890 56,498 48,412
Interest on short-term borrowings 2,373 1,969 5,028 3,595
Interest on Federal Home Loan
Bank borrowings 3,492 1,104 5,450 2,486
------- ------- -------- --------
TOTAL INTEREST EXPENSE 34,496 27,963 66,976 54,493
------- ------- -------- --------
NET INTEREST INCOME 39,513 33,257 76,699 65,755
PROVISION FOR POSSIBLE LOAN LOSSES 5,257 558 7,307 1,162
------- ------- -------- --------
NET INTEREST INCOME AFTER PROVISION
FOR POSSIBLE LOAN LOSSES 34,256 32,699 69,392 64,593
------- ------- -------- --------
OTHER INCOME
Trust department income 1,117 867 2,126 1,720
Other charges, commissions, and fees 4,256 3,876 8,667 7,577
Income (loss) from mortgage banking
operations 6,392 2,928 11,588 5,933
Gain (loss) on sales of securities (225) (1) 2,262 40
Other income 102 215 849 334
------- ------- -------- --------
TOTAL OTHER INCOME 11,642 7,885 25,492 15,604
------- ------- -------- --------
OTHER EXPENSES
Salaries and employee benefits 18,185 11,197 32,444 22,500
Net occupancy expense 1,931 2,426 5,476 4,713
Other expense 18,456 8,519 28,461 16,909
------- ------- -------- --------
TOTAL OTHER EXPENSES 38,572 22,142 66,381 44,122
------- ------- -------- --------
INCOME BEFORE INCOME TAXES 7,326 18,442 28,503 36,075
INCOME TAXES 504 6,316 7,935 12,085
------- ------- -------- --------
NET INCOME $ 6,822 $12,126 $ 20,568 $ 23,990
======= ======= ======== ========
Earnings per common share
Basic $0.17 $0.31 $0.53 $0.62
======= ======= ======== ========
Diluted $0.17 $0.31 $0.52 $0.61
======= ======= ======== ========
Dividends per share $0.18 $0.17 $0.35 $0.33
======= ======= ======== ========
Average outstanding shares
Basic 39,080,717 38,517,014 39,037,837 38,485,232
Diluted 39,805,419 39,077,226 39,731,926 39,128,076
See notes to consolidated unaudited financial statements.
7
CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY (UNAUDITED)
UNITED BANKSHARES, INC. AND SUBSIDIARIES
(In thousands, except per share data)
Six Months Ended June 30, 1998
---------------------------------------------------------------------------------------------------
Common Stock Accumulated
-------------------- Other Total
Par Retained Comprehensive Treasury Shareholders'
Shares Value Surplus Earnings Income Stock Equity
---------- ------ ------- -------- ------------- -------- -------------
Balance at
January 1, 1998, as
reported 39,073,164 $97,683 $72,505 $181,601 $ 6,204 ($2,519) $355,474
Net income 20,568 20,568
Other comprehensive
income, net of tax:
Change in net
unrealized gain on
available for sale
securities, net of
reclassification
adjustment (1,416) (1,416)
Cash dividends
($.35 Per Share) (12,286) (12,286)
Pre-merger dividends
of pooled company (756) (756)
Fractional shares
adjustment (7) (7)
Sale of treasury
stock (37,376
shares) 654 654
Common stock options
exercised 80,404 201 74 1,286 1,561
---------- ------- ------- -------- ------- ------- --------
Balance at
June 30, 1998 39,153,568 $97,884 $72,572 $189,127 $ 4,788 ($579) $363,792
========== ======= ======= ======== ======= ======= ========
Disclosure of
Reclassification
Amount:
Unrealized holding
gains on available
for sale securities
arising during the
period $ 54
Less:
Reclassification
adjustment for
net gains realized
in net income 1,470
-------
Change in net
unrealized gain on
available for sale
securities, net of tax $(1,416)
=======
See notes to consolidated unaudited financial statements.
8
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
UNITED BANKSHARES, INC. AND SUBSIDIARIES
Six Months Ended
June 30
---------------------------
1998 1997
----------- ---------
NET CASH (USED IN) PROVIDED BY OPERATING ACTIVITIES $(266,371) $ 25,646
INVESTING ACTIVITIES
Proceeds from maturities and calls of
securities held to maturity 38,603 19,779
Proceeds from sales of securities
available for sale 44,899
Proceeds from maturities and calls of
securities available for sale 160,798 78,637
Purchases of securities available for sale (103,709) (179,651)
Purchases of securities held to maturity (21,988) (27,051)
Net purchase of bank premises and equipment (1,958) (2,599)
Net cash of acquired branches 56,472
Changes in loans 46,229 (35,628)
--------- ---------
NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES 174,447 (101,614)
--------- ---------
FINANCING ACTIVITIES
Cash dividends paid (10,181) (9,815)
Pre-merger dividends of pooled company (1,471) (1,362)
Acquisition of treasury stock (5,469)
Proceeds from exercise of stock options 1,561 1,236
Proceeds from sales of treasury stock 654
Proceeds from Federal Home Loan Bank advances 126,123 211,655
Repayment of Federal Home Loan Bank advances (93,575) (254,537)
Acquisition of fractional shares (7)
Changes in:
Deposits 3,873 114,515
Other borrowings 226
Federal funds purchased and securities
sold under agreements to repurchase 7,694 57,367
--------- ---------
NET CASH PROVIDED BY FINANCING ACTIVITIES 34,897 113,590
--------- ---------
(DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS (57,027) 37,622
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 180,864 154,478
--------- ---------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 123,837 $ 192,100
========= =========
See notes to consolidated unaudited financial statements.
9
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
UNITED BANKSHARES, INC. AND SUBSIDIARIES
1. GENERAL
The accompanying unaudited consolidated interim financial statements of United
Bankshares, Inc. and Subsidiaries ("United") have been prepared in accordance
with generally accepted accounting principles for interim financial information
and with the instructions for Form 10-Q and Article 10 of Regulation S-X.
Accordingly, the financial statements do not contain all of the information and
footnotes required by generally accepted accounting principles. The financial
statements presented in this report have not been audited. The accounting and
reporting policies followed in the presentation of these financial statements
are consistent with those applied in the preparation of the 1997 annual report
of United Bankshares, Inc. on Form 10-K. In the opinion of management,
adjustments necessary for a fair presentation of financial position and results
of operations for the interim periods have been made. Such adjustments are of a
normal and recurring nature.
In June 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
10
SFAS No. 130 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 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.
In June 1998, the Financial Accounting Standards Board issued Statement No. 133,
"Accounting for Derivative Instruments and Hedging Activities", which is
required to be adopted in years beginning after June 15, 1999. Because of
United's minimal use of derivatives, management does not anticipate that the
adoption of the new Statement will have a significant effect on earnings or the
financial position of United.
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 acquisition date forward.
11
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 merger, 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
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 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 Fed Fed One
United Mason Restated One Pro Forma
------ ------ -------- --- ---------
For the Three Months
Ended June 30, 1998:
Net interest income $ 39,513 $ 2,750 $ 42,263
Net income 6,822 725 7,547
Earnings per common
share:
Basic $0.17 $0.32 $0.18
Diluted $0.17 $0.30 $0.17
For the Three Months
Ended June 30, 1997:
Net interest income $ 25,397 $ 7,860 $ 33,257 $ 2,942 $ 36,199
Net income 10,120 2,006 12,126 818 12,944
Earnings per common
share:
Basic $0.34 $0.40 $0.31 $0.36 $0.31
Diluted $0.34 $0.38 $0.31 $0.35 $0.30
12
United
and
George Fed Fed One
United Mason Restated One Pro Forma
------ ------ -------- --- ---------
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:
June 30, 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 $168,127 $ 583 $174 $168,536
State and political subdivisions 4,501 91 4,592
Mortgage-backed securities 324,884 2,834 400 327,318
Marketable equity securities 7,131 4,654 197 11,588
Other 26,380 24 26,356
-------- ------ ---- --------
Total $531,023 $8,162 $795 $538,390
======== ====== ==== ========
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 $4,788 and $6,204, net of
deferred income taxes at June 30, 1998 and December 31, 1997, respectively.
13
The amortized cost and estimated fair value of securities available for sale at
June 30, 1998 and December 31, 1997, by contractual maturity are as follows:
June 30, 1998 December 31, 1997
-------------------------- -------------------------
Estimated Estimated
Amortized Fair Amortized Fair
Cost Value Cost Value
--------- --------- --------- ---------
Due in one year or less $ 46,905 $ 47,131 $ 42,351 $42,794
Due after one year through
five years 115,153 115,396 133,994 134,480
Due after five years through
ten years 105,480 105,866 135,081 135,561
Due after ten years 256,354 258,409 266,588 268,234
Marketable equity securities 7,131 11,588 7,710 14,451
-------- -------- -------- --------
Total $531,023 $538,390 $585,724 $595,520
======== ======== ======== ========
The preceding table includes $327,318 and $382,158 of mortgage-backed securities
at June 30, 1998 and December 31, 1997, respectively, with an amortized cost of
$324,884 and $379,452 at June 30, 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:
June 30, 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 $ 90,964 $1,541 $ 9 $ 92,496
State and political subdivisions 61,539 1,952 47 63,444
Mortgage-backed securities 52,498 385 114 52,769
Other 9,492 730 8,762
-------- ------ ------ --------
Total $214,493 $3,878 $ 900 $217,471
======== ====== ====== ========
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
======== ======= ==== ========
14
The amortized cost and estimated fair value of securities held to maturity at
June 30, 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.
June 30, 1998 December 31, 1997
-------------------------- -------------------------
Estimated Estimated
Amortized Fair Amortized Fair
Cost Value Cost Value
--------- --------- --------- ---------
Due in one year or less $ 9,344 $ 9,408 $ 18,825 $ 18,887
Due after one year
through five years 61,989 62,874 72,750 73,640
Due after five years
through ten years 94,063 96,201 98,335 99,481
Due after ten years 49,097 48,988 41,401 42,321
-------- -------- -------- --------
Total $214,493 $217,471 $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 $384,451 and $415,206 at June 30, 1998 and
December 31, 1997, respectively.
5. NONPERFORMING LOANS
Nonperforming loans are summarized as follows:
June 30 December 31
1998 1997
-------- -----------
Loans past due 90 days or more
and still accruing interest $ 7,125 $12,181
Nonaccrual loans 7,664 5,202
------- -------
Total nonperforming loans $14,789 $17,383
======= =======
15
6. ALLOWANCE FOR LOAN LOSSES
The adequacy of the allowance for loan losses is based on management's
evaluation of the relative risks inherent in the loan portfolio. A progression
of the allowance for loan losses for the periods presented is summarized as
follows:
Three Months Ended Six Months Ended
------------------------ -----------------------
June 30 June 30
1998 1997 1998 1997
------- ------- ------- ------
Balance at beginning of period $31,163 $27,928 $30,455 $27,942
Provision charged to expense 5,257 558 7,307 1,162
------- ------- ------- -------
36,420 28,486 37,762 29,104
Loans charged-off (1,803) (775) (3,314) (1,489)
Less recoveries 494 195 663 291
------- ------- ------- -------
Net Charge-offs (1,309) (580) (2,651) (1,198)
------- ------- ------- -------
Balance at end of period $35,111 $27,906 $35,111 $27,906
======= ======= ======= =======
The average recorded investment in impaired loans during the quarter ended June
30, 1998 and for the year ended December 31, 1997 was approximately $11,814 and
$12,686, respectively. For the quarters ended June 30, 1998 and 1997, United
recognized interest income on the impaired loans of approximately $106 and $182,
respectively, substantially all of which was recognized using the accrual method
of income recognition.
At June 30, 1998, the recorded investment in loans that are considered to be
impaired under SFAS No. 114 was $11,340 (of which $7,664 were on a nonaccrual
basis). Included in this amount is $4,158 of impaired loans for which the
related allowance for loan losses is $511 and $7,182 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 $446 and $422 for the three months ended June 30,
1998 and 1997, respectively, and $801 and $719 for the six months ended June 30,
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.
16
8. EARNING ASSETS AND INTEREST-BEARING LIABILITIES
The following table shows the daily average balance of major categories
of assets and liabilities for each of the three month periods ended June 30,
1998, and June 30, 1997, with the interest rate earned or paid on such amount.
Three Months Ended Three Months Ended
June 30 June 30
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 $ 8,965 $ 132 5.95% $ 15,571 $ 211 5.50%
Investment Securities:
Taxable 714,653 11,481 6.43% 662,858 10,907 6.58%
Tax-exempt (1) 57,168 1,211 8.47% 54,260 1,200 8.85%
---------- ------- ----- ---------- ------- -----
Total Securities 771,821 12,692 6.58% 717,118 12,107 6.75%
Loans, net of unearned
income (1) (2) 2,848,918 62,106 8.73% 2,307,099 49,701 8.62%
Allowance for loan
losses (33,196) (27,878)
---------- ----------
Net loans 2,815,722 8.84% 2,279,221 8.84%
---------- ------- ----- ---------- ------- -----
Total earning assets 3,596,508 $74,930 8.34% 3,011,910 $62,019 8.24%
------- ----- ------- -----
Other assets 228,094 191,401
---------- ----------
TOTAL ASSETS $3,824,602 $3,203,311
========== ==========
LIABILITIES
Interest-Bearing Funds:
Interest-bearing deposits $2,478,969 $28,631 4.63% $2,234,588 $24,890 4.47%
Federal funds purchased,
repurchase agreements
and other short-term
borrowings 223,809 2,373 4.25% 175,146 1,969 4.51%
FHLB advances 239,044 3,492 5.86% 74,189 1,104 5.97%
---------- ------- ----- ---------- ------- -----
Total Interest-Bearing Funds 2,941,822 34,496 4.70% 2,483,923 27,963 4.52%
------- ----- ------- -----
Demand deposits 436,458 354,680
Accrued expenses and other
liabilities 81,554 37,065
---------- ----------
TOTAL LIABILITIES 3,459,834 2,875,668
Shareholders' Equity 364,768 327,643
---------- ----------
TOTAL LIABILITIES AND
SHAREHOLDERS' EQUITY $3,824,602 $3,203,311
========== ==========
NET INTEREST INCOME $40,434 $34,056
======= =======
INTEREST SPREAD 3.64% 3.72%
NET INTEREST MARGIN 4.50% 4.54%
(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.
17
The following table shows the daily average balance of major categories
of assets and liabilities for each of the six month periods ended June 30, 1998,
and June 30, 1997, with the interest rate earned or paid on such amount.
Six Months Ended Six Months Ended
June 30 June 30
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 $ 18,115 $ 495 5.52% $ 16,249 $ 435 5.40%
Investment Securities:
Taxable 737,987 23,705 6.42% 647,342 21,048 6.50%
Tax-exempt (1) 56,342 2,385 8.47% 55,129 2,449 8.88%
--------- -------- ----- ---------- -------- -----
Total Securities 794,329 26,090 6.57% 702,471 23,497 6.69%
Loans, net of unearned
income (1) (2) 2,737,011 119,019 8.70% 2,290,725 97,920 8.55%
Allowance for loan
losses (31,862) (27,903)
---------- ----------
Net loans 2,705,149 8.80% 2,262,822 8.77%
---------- -------- ----- ---------- -------- -----
Total earning assets 3,517,593 $145,604 8.28% 2,981,542 $121,852 8.17%
-------- ----- -------- -----
Other assets 224,697 188,788
---------- ----------
TOTAL ASSETS $3,742,290 $3,170,330
========== ==========
LIABILITIES
Interest-Bearing Funds:
Interest-bearing deposits $2,468,674 $ 56,498 4.62% $2,204,087 $ 48,412 4.43%
Federal funds purchased,
repurchase agreements
and other short-term
borrowings 214,400 5,028 4.73% 162,496 3,595 4.46%
FHLB advances 197,270 5,450 5.57% 85,686 2,486 5.85%
---------- -------- ----- ---------- -------- -----
Total Interest-Bearing Funds 2,880,344 66,976 4.69% 2,452,269 54,493 4.48%
-------- ----- -------- -----
Demand deposits 434,541 353,936
Accrued expenses and other
liabilities 63,813 36,851
---------- ----------
TOTAL LIABILITIES 3,378,698 2,843,056
Shareholders' Equity 363,592 327,274
---------- ----------
TOTAL LIABILITIES AND
SHAREHOLDERS' EQUITY $3,742,290 $3,170,330
========== ==========
NET INTEREST INCOME $ 78,628 $ 67,359
======== ========
INTEREST SPREAD 3.59% 3.69%
NET INTEREST MARGIN 4.51% 4.56%
(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.
18
ITEM 2. 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 half of 1998 was $20.57 million or $0.52 per share
compared to $23.99 million or $0.61 per share for the first half of 1997. This
represents a 14.26% decrease in net income and a 14.75% decrease in earnings per
share. The decrease was due to the recognition of approximately $8 million of
merger-related charges relating to the second quarter merger with George Mason.
One-time charges of approximately $7 million were also incurred to align George
Mason's operations and to conform certain policies to those of United and to
align certain other operating components within the new organizational
structure. Excluding these merger-related and one-time charges, United's core
earnings for the first half of 1998 were $0.72 per share. United's annualized
return on average assets was 1.11% and return on average shareholders' equity
was 11.41% as compared 1.53% and 14.78% for 1997, respectively.
United has strong core earnings driven by a net interest margin of 4.51% for the
first six months of 1998. Net interest income increased by $10.94 million or
16.64% for the first six months of 1998 as compared to the same period for 1997.
The provision for loan losses increased $6.15 million or 528.83% when comparing
the first six months of 1998 to the first six months of 1997. Noninterest
income, including income from mortgage banking operations, increased $9.89
million or 63.37% for the first six months of 1998 when compared to the first
six months of 1997. Noninterest expenses increased $22.26 million or 50.45% for
the first six months compared to the same period in 1997.
Total assets were $3.87 billion at June 30, 1998, up $144.80 million or 3.88%
compared with year-end, and up 16.09% from June 30, 1997. Loans, net of unearned
income, reflected a $274.42 million increase while investment securities
reflected a $73.95 million decrease for the first
19
half of 1998 as compared with year-end 1997 as those funds continue to fund
strong loan growth. Cash and cash equivalents declined $57.03 million. All other
categories of assets were moderately flat compared to year-end 1997.
Total deposits grew $73.43 million or 2.51% from year-end due to United's
continued offering of new deposit products. Since December 31, 1997, United has
realized an increase of $72.06 million in interest-bearing deposits while demand
deposits have remained relatively flat. United's short-term borrowings increased
$7.92 million while its FHLB borrowings increased $32.55 million as United
utilized the increased borrowing to fund loan growth. Accrued expenses and other
liabilities have increased $22.59 million 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 as well as the previously mentioned
George Mason merger-related charges.
Shareholders' equity increased $8.32 million or 2.34% as compared with December
31, 1997. United continues to maintain an appropriate balance between capital
adequacy and return to shareholders. At June 30, 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 $6.26 million or 18.81% in the second quarter of
1998 and $10.94 million or 16.64% for the first six months of 1998, when
compared to the same periods of 1997. The net interest margin continues to drive
United's core profitability and momentum. The increases were primarily
attributable to higher levels of average earning assets of $584.60 million for
the second quarter of 1998 and $536.05 million for the first half of 1998, when
compared to the second quarter and first half of 1997, respectively. United's
tax-equivalent net interest margin was 4.50% and 4.51% for the second quarter
and first six months of 1998, respectively. For the quarter ended June 30, 1998,
United's net interest margin was 4 basis points lower than the immediately
preceding quarter, and 5 basis points less than the second quarter of 1997. The
lower net interest margin from one year ago was the result of increased average
deposit and wholesale funding balances at higher rates offset by a smaller
increase in the yield on the loan portfolio.
PROVISION FOR LOAN LOSSES
For the quarters ended June 30, 1998 and 1997, the provision for loan losses was
$5.26 million and $558 thousand, respectively, while the first six months
provisions were $7.3 million for 1998 as compared to $1.16 million for 1997. The
increase in provision expense over last year's numbers is due to the trend of
increased net charge-offs as well as anticipated increased consumer delinquency
in light of projected economic conditions. The allowance for loan losses as a
percentage of loans, net of unearned income, approximated 1.22% at June 30, 1998
and 1.17% at December 31, 1997, and 1.20% at June 30, 1997. Charge-offs exceeded
recoveries during the second quarter of 1998 and 1997 and resulted in net
charge-offs of $1.31 million and $580 thousand,
20
respectively. Charge-offs exceeded recoveries by $2.65 million for the first six
months of 1998 as compared to net charge-offs of $1.20 million for the first six
months of 1997. Note 6 to the accompanying unaudited consolidated financial
statements provides a progression of the allowance for loan losses.
United's continued excellent credit quality is evidenced by the low level of
nonperforming assets at June 30, 1998. Nonperforming loans decreased $2.59
million or 14.92% to $14.79 million at June 30, 1998 compared to $17.38 million
at year-end 1997. Nonperforming loans, as a percentage of loans, net of unearned
income, decreased from 0.67% to 0.51% 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 $5.06 million or 41.51% during the first six months of 1998
and nonaccrual loans increased $2.46 million or 47.33% since year-end 1997.
Total nonperforming assets of $19.15 million, including OREO of $4.36 million at
June 30, 1998, represented 0.49% of total assets, which was slightly less than
the ratio at December 31, 1997 of 0.53%.
As of June 30, 1998, the ratio of the allowance for loan losses to nonperforming
loans was 237.4% as compared to 175.2% as of December 31, 1997. Management
believes that the allowance for loan losses of $35.11 million as of June 30,
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 $3.76 million or 47.65% for the second
quarter of 1998 when compared to the second quarter of 1997. Additionally, the
$25.49 million of noninterest income for the first six months of 1998, reflects
an increase of $9.89 million or 63.37% over the first six months of 1997.
Excluding income from mortgage banking operations and investment securities
transactions, noninterest income increased $517 thousand or 10.43% for the
second quarter and $2.01 million or 20.88% for the first half of 1998.
The overall increase in noninterest income for the first six months of 1998 was
primarily due to a combination of a $5.66 million increase in
21
income from mortgage banking operations and 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, with slight
increases in the categories of return check charges, bankcard income and trust
department commissions as a result of increased transactions in those areas.
OTHER EXPENSES
Just as management continues to evaluate areas where noninterest income can be
enhanced, it strives to improve the efficiency of its operations to reduce
costs. Other expenses include all items of expense other than interest expense,
the provision for loan losses, and income taxes. Other expenses increased $16.43
million or 74.20% and $22.26 million or 50.45% for the quarter and six months
ended June 30, 1998, as compared to the same periods in 1997, resulting from the
third quarter 1997 acquisition of First Patriot Bankshares Corporation and
previously mentioned George Mason merger-related charges recognized during the
second quarter of 1998. These charges consisted primarily of employee benefits,
severance, facilities, system and other costs to effect the merger.
Total salaries and benefits increased by 62.41% or $6.99 million and 44.20% or
$9.94 million for the second quarter and first six months of 1998 when compared
to the same periods of 1997. The higher salaries and benefits costs for 1998
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 as
well as severance and benefit pay of displaced employees in the George Mason
merger.
Net occupancy expense for the second quarter of 1998 decreased by $495 thousand
or 20.40% while increasing $763 thousand or 16.19%, for the first six months of
1998 when compared to the second quarter and first six months of 1997,
respectively.
Other expenses increased $9.94 million or 116.65% and $11.55 million or 68.32%
for the second quarter and first six months of 1998, as compared to the same
periods of 1997. This overall increase was primarily due to the aforementioned
merger-related expenses associated with the George Mason merger and United's
third quarter 1997 purchase acquisition of Patriot.
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.
22
United employs a variety of measurement techniques to identify and manage its
exposure to changing interest rates. One such technique utilizes an earnings
simulation model to analyze net interest income sensitivity to movements in
interest rates. The model is based on actual cash flows and repricing
characteristics for on and off-balance sheet instruments and incorporates
market-based assumptions regarding the impact of changing interest rates on the
prepayment rate of certain assets and liabilities. The model also includes
executive management projections for activity levels in product lines offered by
United. Assumptions based on the historical behavior of deposit rates and
balances in relation to changes in interest rates are also incorporated into the
model. These assumptions are inherently uncertain and, as a result, the model
cannot precisely measure net interest income or precisely predict the impact of
fluctuations in interest rates on net interest income. Actual results will
differ from simulated results due to timing, magnitude and frequency of interest
rate changes as well as changes in market conditions and management strategies.
Interest sensitive assets and liabilities are defined as those assets or
liabilities that mature or are repriced within a designated time- frame. The
principal function of interest rate risk management is to maintain an
appropriate relationship between those assets and liabilities that are sensitive
to changing market interest rates. The difference between rate sensitive assets
and rate sensitive liabilities for specified periods of time is known as the
"GAP." United closely monitors the sensitivity of its assets and liabilities on
an on-going basis and projects the effect of various interest rate changes on
its net interest margin.
As shown in the interest rate sensitivity gap table in this section, United was
liability sensitive (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 $244,181,000 or 6.70%
of the cumulative gap to related earning assets.
To aid in interest rate management, United's subsidiary banks are members of the
Federal Home Loan Bank (FHLB). The use of FHLB advances provides United with a
low risk means of matching maturities of earning assets and interest-bearing
funds to achieve a desired interest rate spread over the life of the earning
assets.
Interest rate risk management focuses on maintaining consistent growth in net
interest income within Board-approved policy limits. United's
23
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.
The following table shows United's estimated earnings sensitivity profile after
management's adjustments as of June 30, 1998:
Change in
Interest Rates Percentage Change in
(basis points) Net Interest Income
-------------- ---------------------
+200 5.42%
-200 -5.71%
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 5.42% over one year. A 200 basis point immediate, sustained
downward shock in the yield curve would decrease net interest income by an
estimated 5.71% 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 June 30,
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 $ 8,719 $ 8,719 $ 8,719
Investment and Marketable
Equity Securities:
Taxable 21,203 $ 11,368 $ 19,565 52,136 $ 164,782 $469,834 686,752
Tax-exempt 4,339 4,339 12,603 49,189 66,131
Loans, net of unearned
income 1,292,547 171,705 318,820 1,783,072 769,060 329,692 2,881,824
---------- --------- --------- ---------- --------- -------- ----------
Total Interest-Earning
Assets $1,322,469 $ 187,412 $ 338,385 $1,848,266 $ 946,445 $848,715 $3,643,426
========== ========= ========= ========== ========= ======== ==========
LIABILITIES
Interest-Bearing Funds:
Savings and NOW
accounts $1,045,195 $1,045,195 $1,045,195
Time deposits of
$100,000 & over 54,557 $ 36,676 $ 101,943 193,176 $ 75,146 $ 6,057 274,379
Other time deposits 233,593 231,799 327,353 792,745 390,183 1,871 1,184,799
Federal funds purchased,
repurchase agreements
and other short-term
borrowing 238,599 238,599 238,599
FHLB advances 134,000 500 134,500 63,743 198,243
---------- --------- --------- ---------- --------- -------- ----------
Total Interest-Bearing
Funds $1,705,944 $ 268,475 $ 429,796 $2,404,215 $ 529,072 $ 7,928 $2,941,215
========== ========= ========= ========== ========= ======== ==========
Interest Sensitivity Gap $ (383,475) $ (81,063) $ (91,411) $(555,949) $ 417,373 $840,787 $ 702,211
========== ========= ========= ========= ========= ======== ==========
Cumulative Gap $ (383,475) $(464,538) $(555,949) $(555,949) $(138,576) $702,211 $ 702,211
========== ========= ========= ========= ========= ======== ==========
Cumulative Gap as
a Percentage of Total
Earning Assets -10.53% -12.75% -15.26% -15.26% -3.80% 19.27% 19.27%
Management
Adjustments 1,000,163 (66,711) (133,322) 800,130 (800,130) 0
Off-Balance
Sheet Activities
---------- --------- --------- ---------- --------- -------- ----------
Cumulative Management
Adjusted Gap and
Off-Balance Sheet
Activities $ 616,688 $ 468,914 $ 244,181 $ 244,181 $(138,576) $702,211 $ 702,211
========= ========= ========= ========== ========= ======== ==========
Cumulative Management
Adjusted Gap and
Off-Balance Sheet
Activities as a
Percentage of Total
Earning Assets 16.93% 12.87% 6.70% 6.70% -3.80% 19.27% 19.27%
25
LIQUIDITY AND CAPITAL RESOURCES
United maintains, in the opinion of management, liquidity which is sufficient to
satisfy its depositors' requirements and the credit needs of its customers. Like
all banks, United depends upon its ability to renew maturing deposits and other
liabilities on a daily basis and to acquire new funds in a variety of markets. A
significant source of funds available to United is "core deposits." Core
deposits include certain demand deposits, statement and special savings and NOW
accounts. These deposits are relatively stable and they are the lowest cost
source of funds available to United. Short-term borrowings have also been a
significant source of funds. These include federal funds purchased and
securities sold under agreements to repurchase. Repurchase agreements represent
funds which are obtained as the result of a competitive bidding process.
Liquid assets are cash and those items readily convertible to cash. All banks
must maintain sufficient balances of cash and near-cash items to meet the
day-to-day demands of customers. Other than cash and due from banks, the
available for sale securities portfolio, loans held for sale and maturing loans
and investments are the primary sources of liquidity.
The goal of liquidity management is to ensure the ability to access funding
which enables United to efficiently satisfy the cash flow requirements of
depositors and borrowers and meet United's cash needs. Liquidity is managed by
monitoring funds availability from a number of primary sources. Substantial
funding is available from cash and cash equivalents, unused short-term borrowing
and a geographically dispersed network of subsidiary banks providing access to a
diversified and substantial retail deposit market.
Short-term needs can be met through a wide array of sources such as
correspondent and downstream correspondent federal funds and utilization of
Federal Home Loan Bank advances.
Other sources of liquidity available to United to provide long-term as well as
short-term funding alternatives, in addition to FHLB advances, are long-term
certificates of deposit, lines of credit, and borrowings that are secured by
bank premises or stock of United's subsidiaries. United has no intention at this
time to utilize any long-term funding sources other than FHLB advances and
long-term certificate of deposits for funding in the normal course of business.
For the six months ended June 30, 1998, United used $266.37 million of cash for
operations. Cash from operations for the six months ended June 30, 1998,
included, among other things, an increase of approximately $299 million in loans
held for sale. During the same period, net cash of $174.45 million was provided
by investing activities which was primarily due to $73.70 million of excess
proceeds from sales and maturities of securities over purchases. During the
first six months of 1998 net cash of $34.90 million was provided by financing
activities, primarily due to net FHLB advances of approximately $32.55 million
as well as a $3.87 million increase in deposits and a $7.69 increase in other
short-term borrowings. These amounts were offset by payment of approximately
$10.18 million in cash dividends. The net effect of this activity was a decrease
in cash and cash equivalents of $57.03 million
26
for the first six 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.
INCOME TAXES
Income tax expense for the three months ended June 30, 1998 and 1997 was $504
thousand and $6.31 million, respectively. Income tax expense for the six months
ended June 30, 1998 and 1997 was $7.94 million and $12.09 million, respectively.
The decrease between the periods compared was primarily the result of decreased
pretax income. United implemented certain strategic income tax initiatives in
the second quarter of 1998 that reduced the effective tax rate for 1998 from 35%
to approximately 28%. In future years (beyond 1998) the estimated effective tax
rate is expected to return to 35%.
CAPITAL
Total shareholders' equity increased $8.32 million to $363.79 million, which is
an increase of 2.34% from December 31, 1997. United's equity to assets ratio was
9.39% at June 30, 1998 and 9.54% at December 31, 1997. Capital and reserves to
total assets was 10.30% at June 30, 1998 and 10.35% at December 31, 1997.
Cash dividends of $0.18 per common share for the second quarter of 1998 and
$0.35 for the six month period ended June 30, 1998, represent increases of 5.88%
and 6.06%, respectively, over the $.17 paid for second quarter of 1997 and $0.33
paid for the first six months of 1997. Total cash dividends paid were
approximately $7.03 million for the second quarter of 1998 and $12.29 million
for the first six months of 1998, an increase of 42.68% and 24.16% over the
comparable periods 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
assets ratio was 9.72% at June 30, 1998 and 10.32% at June 30, 1997. United's
risk-based capital ratios of 13.03% at June 30, 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 11.78% and 8.18%, respectively,
at June 30, 1998, are also well above regulatory minimum requirements.
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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 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 within one year but not later than 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.
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