UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
__________________________________
FORM 10-Q
Quarterly Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
For Quarter Ended September 30, 2001
Commission File Number: 0-13322
United Bankshares, Inc.
-----------------------
(Exact name of registrant as specified in its charter)
West Virginia 55-0641179
------------- ----------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
300 United Center
500 Virginia Street, East
Charleston, West Virginia 25301
------------------------- -----
(Address of Principal Executive Offices) Zip Code
Registrant's Telephone Number, including Area Code: (304) 424-8704
--------------
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
--- ---
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Class- Common Stock, $2.50 Par Value; 41,058,287 shares outstanding as of
October 31, 2001.
1
UNITED BANKSHARES, INC. AND SUBSIDIARIES
FORM 10-Q
TABLE OF CONTENTS
Page
----
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
- ------------------------------
Consolidated Balance Sheets (Unaudited)
September 30, 2001 and December 31, 2000................................. 6
Consolidated Statements of Income (Unaudited) for the
Three and Nine Months Ended September 30, 2001 and 2000.................. 7
Consolidated Statement of Changes in Shareholders' Equity
(Unaudited) for the Nine Months Ended September 30, 2001................. 8
Condensed Consolidated Statements of Cash Flows (Unaudited)
for the Nine Months Ended September 30, 2001 and 2000.................... 9
Notes to Consolidated Financial Statements............................... 10
Information required by Item 303 of Regulation S-K
Item 2. Management's Discussion and Analysis of Financial
- -----------------------------------------------------------
Condition and Results of Operations.............................. 21
-----------------------------------
PART II. OTHER INFORMATION
Item 1. Legal Proceedings..................................... Not Applicable
- ---------------------------
Item 2. Changes in Securities................................. Not Applicable
- -------------------------------
Item 3. Defaults Upon Senior Securities....................... Not Applicable
- -----------------------------------------
2
UNITED BANKSHARES, INC. AND SUBSIDIARIES
FORM 10-Q
TABLE OF CONTENTS--Continued
Page
----
Item 4. Submission of Matters to a Vote of Security Holders.... Not Applicable
- ------------------------------------------------------------
Item 5. Other Information...................................... Not Applicable
- --------------------------
Item 6. Exhibits and Reports on Form 8-K
- -----------------------------------------
(a) Exhibits required by Item 601 of Regulation S-K
None
(b) Reports on Form 8-K
On October 22, 2001, United Bankshares, Inc. filed a Current Report
under Items 5 and 7 to report the results of operations for the
third quarter and first nine months of 2001.
3
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
UNITED BANKSHARES, INC.
-------------------------------------
(Registrant)
Date November 13, 2001 /s/ Richard M. Adams
------------------- -------------------------------------
Richard M. Adams, Chairman of
the Board and Chief Executive
Officer
Date November 13, 2001 /s/ Steven E. Wilson
-------------------- -------------------------------------
Steven E. Wilson, Executive
Vice President, Treasurer,
Secretary and Chief Financial Officer
4
PART I
FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS (UNAUDITED)
The September 30, 2001 and December 31, 2000, consolidated balance sheets of
United Bankshares, Inc. and Subsidiaries, the related consolidated statements of
income for the three and nine months ended September 30, 2001 and 2000, the
related consolidated statement of changes in shareholders' equity for the nine
months ended September 30, 2001, the related condensed consolidated statements
of cash flows for the nine months ended September 30, 2001 and 2000, and the
notes to consolidated financial statements appear on the following pages.
5
CONSOLIDATED BALANCE SHEETS (Unaudited)
UNITED BANKSHARES, INC. AND SUBSIDIARIES
(Dollars in thousands, except share and per share data) September 30 December 31
2001 2000
---------------- ----------------
Assets
Cash and due from banks $ 106,946 $ 142,801
Interest-bearing deposits with other banks 3,732 884
Federal funds sold 2,000 1,125
---------------- ----------------
Total cash and cash equivalents 112,678 144,810
Securities available for sale at estimated fair value (amortized
cost-$1,161,957 at September 30, 2001 and $865,363 at December 31, 2000) 1,189,026 865,266
Securities held to maturity (estimated fair value-$284,551 at
September 30, 2001 and $378,405 at December 31, 2000) 283,673 380,068
Loans held for sale 250,672 203,831
Loans
Commercial, financial, and agricultural 592,107 564,887
Real estate:
Single family residential 1,309,038 1,352,955
Commercial 727,009 711,054
Construction 165,806 164,505
Other 86,658 84,742
Installment 339,579 319,351
---------------- ----------------
3,220,197 3,197,494
Less: Unearned income (3,741) (5,000)
---------------- ----------------
Loans net of unearned income 3,216,456 3,192,494
Less: Allowance for loan losses (42,553) (40,532)
---------------- ----------------
Net loans 3,173,903 3,151,962
Bank premises and equipment 42,919 44,481
Accrued interest receivable 33,232 36,000
Other assets 79,787 78,129
---------------- ----------------
TOTAL ASSETS $5,165,890 $4,904,547
================ ================
Liabilities
Domestic deposits:
Noninterest-bearing $ 585,318 $ 539,415
Interest-bearing 2,898,826 2,852,034
---------------- ----------------
Total deposits 3,484,144 3,391,449
Borrowings:
Federal funds purchased 11,809 15,720
Securities sold under agreements to repurchase 445,683 313,349
Federal Home Loan Bank borrowings 705,278 706,512
Other borrowings 5,064 4,647
Accrued expenses and other liabilities 51,409 42,000
---------------- ----------------
TOTAL LIABILITIES 4,703,387 4,473,677
Shareholders' equity
Common stock, $2.50 par value; Authorized-100,000,000 shares;
issued-43,381,769 at September 30, 2001 and December 31, 2000, including
2,202,482 and 1,616,498 shares in treasury at September 30, 2001 and
December 31, 2000, respectively 108,454 108,454
Surplus 82,474 85,032
Retained earnings 309,393 278,682
Accumulated other comprehensive income (loss) 13,004 (4,964)
Treasury stock, at cost (50,822) (36,334)
---------------- ----------------
TOTAL SHAREHOLDERS' EQUITY 462,503 430,870
---------------- ----------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $5,165,890 $4,904,547
================ ================
See notes to consolidated unaudited financial statements.
6
CONSOLIDATED STATEMENTS OF INCOME (Unaudited)
UNITED BANKSHARES, INC. AND SUBSIDIARIES
(Dollars in thousands, except share and per share data) Three Months Ended Nine Months Ended
September 30 September 30
---------------------------- ----------------------------
2001 2000 2001 2000
---------------------------- ----------------------------
Interest income
Interest and fees on loans $ 66,862 $ 72,579 $ 207,170 $ 214,127
Interest on federal funds sold and other short-term
investments 140 562 634 764
Interest and dividends on securities:
Taxable 20,617 19,569 57,849 60,037
Tax-exempt 2,677 2,588 8,336 7,701
---------------------------- ----------------------------
Total interest income 90,296 95,298 273,989 282,629
Interest expense
Interest on deposits 28,943 32,237 93,057 91,541
Interest on short-term borrowings 3,630 5,786 10,977 14,680
Interest on Federal Home Loan Bank advances 11,148 13,142 32,931 40,118
---------------------------- ----------------------------
Total interest expense 43,721 51,165 136,965 146,339
---------------------------- ----------------------------
Net interest income 46,575 44,133 137,024 136,290
Provision for loan losses 4,145 4,439 8,787 10,837
---------------------------- ----------------------------
Net interest income after provision for loan losses 42,430 39,694 128,237 125,453
Other income
Income from mortgage banking operations 7,343 5,014 19,037 12,556
Service charges, commissions, and fees 6,764 5,661 19,428 16,388
Income from fiduciary activities 2,082 1,749 6,291 5,194
Security (losses) gains (647) 324 (1,223) 1,147
Other income 214 576 1,064 1,304
---------------------------- ----------------------------
Total other income 15,756 13,324 44,597 36,589
Other expense
Salaries and employee benefits 15,650 12,127 45,579 39,476
Net occupancy expense 2,565 2,861 7,906 8,892
Other expense 10,667 10,475 31,846 32,344
---------------------------- ----------------------------
Total other expense 28,882 25,463 85,331 80,712
---------------------------- ----------------------------
Income before income taxes 29,304 27,555 87,503 81,330
Income taxes 9,524 8,994 28,587 26,658
---------------------------- ----------------------------
Net income $ 19,780 $ 18,561 $ 58,916 $ 54,672
============================ ============================
Earnings per common share:
Basic $0.48 $0.44 $1.42 $1.30
============================ ============================
Diluted $0.48 $0.44 $1.41 $1.29
============================ ============================
Dividends per common share $0.23 $0.21 $0.68 $0.63
============================ ============================
Average outstanding shares:
Basic 41,264,394 41,842,460 41,476,627 42,020,696
Diluted 41,623,037 42,147,989 41,760,428 42,337,568
See notes to consolidated unaudited financial statements.
7
CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY (Unaudited)
UNITED BANKSHARES, INC. AND SUBSIDIARIES
(Dollars in thousands, except per share data)
Nine Months Ended September 30, 2001
------------------------------------------------------------------------------------
Common Stock Accumulated
--------------------- Other Total
Par Retained Comprehensive Treasury Shareholders'
Shares Value Surplus Earnings Income (Loss) Stock Equity
------------------------------------------------------------------------------------
Balance at January 1, 2001 43,381,769 $108,454 $85,032 $278,682 ($4,964) ($36,334) $430,870
Comprehensive income (loss):
Net income - - - 58,916 - - 58,916
Other comprehensive income, net of tax:
Unrealized gains on securities of
$16,863 net of reclassification
adjustment for losses included
in net income of $795 - - - - 17,658 - 17,658
Amortization of unrealized loss for
securities transferred from the
available for sale to the held to
maturity investment portfolio - - - - 310 - 310
-------------
Total comprehensive income 76,884
Purchase of treasury stock (785,000 shares) - - - - - (19,002) (19,002)
Cash dividends ($0.68 per share) - - - (28,205) - - (28,205)
Common stock options exercised
(199,016 shares) - - (2,558) - - 4,514 1,956
------------------------------------------------------------------------------------
Balance at September 30, 2001 43,381,769 $108,454 $82,474 $309,393 $ 13,004 ($50,822) $462,503
====================================================================================
See notes to consolidated unaudited financial statements.
8
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
UNITED BANKSHARES, INC. AND SUBSIDIARIES
(Dollars in thousands)
Nine Months Ended
September 30
-------------------------------
2001 2000
-------------------------------
NET CASH PROVIDED BY OPERATING ACTIVITIES $ 25,892 $ 22,915
INVESTING ACTIVITIES
Proceeds from maturities and calls of investment securities 29,192 19,238
Purchases of investment securities (1,000) (624)
Proceeds from sales of securities available for sale 157,886 108,676
Proceeds from maturities and calls of securities available for sale 240,196 72,810
Purchases of securities available for sale (627,478) (60,027)
Net purchases of bank premises and equipment (2,834) (1,731)
Net cash paid in branch divestiture (8,644)
Net change in loans (30,723) (44,231)
-------------------------------
NET CASH (USED IN) PROVIDED BY INVESTING ACTIVITIES (243,405) 94,111
-------------------------------
FINANCING ACTIVITIES
Cash dividends paid (27,486) (26,655)
Acquisition of treasury stock (19,002) (16,733)
Proceeds from exercise of stock options 1,956 2,258
Repayment of Federal Home Loan Bank borrowings (26,330) (770,427)
Proceeds from Federal Home Loan Bank borrowings 25,096 565,390
Changes in:
Deposits 102,307 52,152
Federal funds purchased, securities sold under agreements
To repurchase and other borrowings 128,840 24,068
-------------------------------
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES 185,381 (169,947)
-------------------------------
Decrease in cash and cash equivalents (32,132) (52,921)
Cash and cash equivalents at beginning of year 144,810 159,808
-------------------------------
Cash and cash equivalents at end of period $ 112,678 $ 106,887
===============================
See notes to consolidated unaudited financial statements.
9
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
UNITED BANKSHARES, INC. AND SUBSIDIARIES
1. GENERAL
The accompanying unaudited consolidated interim financial statements of United
Bankshares, Inc. and Subsidiaries ("United") have been prepared in accordance
with generally accepted accounting principles for interim financial information
and with the instructions for Form 10-Q and Article 10 of Regulation S-X.
Accordingly, the financial statements do not contain all of the information and
footnotes required by generally accepted accounting principles. The financial
statements presented in this report have not been audited. The accounting and
reporting policies followed in the presentation of these financial statements
are consistent with those applied in the preparation of the 2000 annual report
of United Bankshares, Inc. on Form 10-K. In the opinion of management,
adjustments necessary for a fair presentation of financial position and results
of operations for the interim periods have been made. Such adjustments are of a
normal and recurring nature.
On January 1, 2001, United adopted Financial Accounting Standards Board (FASB)
Statement No. 133, (SFAS No. 133), "Accounting for Derivative Instruments and
Hedging Activities" as amended by FASB Statement No. 137, (SFAS No. 137). The
provisions of this statement require that derivative instruments be carried at
fair value on the balance sheet. The statement continues to allow derivative
instruments to be used to hedge various risks and sets forth-specific criteria
to determine when hedge accounting can be used. The statement also provides
offsetting changes in fair value or cash flows of both the derivative and the
hedged asset or liability to be recognized in earnings in the same period;
however, any changes in fair value or cash flow that represent the ineffective
portion of a hedge are required to be recognized in earnings and cannot be
deferred. For derivative instruments not accounted for as hedges, changes in
fair value are required to be recognized in earnings. The adoption of this
standard did not materially impact the reported financial position or results of
operations of United based on the interpretive guidance issued by the FASB to
date. The FASB continues to issue interpretive guidance, which could require
changes in United's application of this standard in the future.
In September 2000, the FASB issued Statement No. 140 "Accounting for Transfers
and Servicing of Financial Assets and Extinguishments of Liabilities, a
replacement of FASB Statement No. 125" ("SFAS No. 140"). It revises the
standard for accounting for securitizations and other transfers of financial
assets and collateral and requires certain disclosures, but it carries over most
of SFAS's No. 125's provisions without reconsideration. United adopted the
disclosure provisions related to the securitization of financial assets on
December 31, 2000. All transactions entered into after March 31, 2001 will be
accounted for in accordance with this standard. The adoption of this standard
did not have a material impact on the financial position or results of
operations of United.
On April 1, 2001, United adopted Emerging Issues Task Force ("EITF") Issue No.
99-20, ("EITF 99-20"), which provides accounting guidance for the recognition of
interest income and impairment on purchased and retained interests in
securitized financial assets. EITF 99-20 requires that the holder of such
instruments recognize the excess of all cash flows attributable to the
beneficial interest using the effective yield method. In addition, EITF 99-20
provides a change in the determination of impairment, whereby, if the fair value
of the beneficial interest has declined below its carrying value, then an
impairment analysis should be
10
performed. If there has been an adverse change in the estimated cash flows from
the previous cash flows projected, then the condition for an other-than-
temporary impairment has been met and the beneficial interest should be written
down to the estimated fair value. On the date of adoption (i.e. April 1, 2001),
beneficial interests determined to have an other-than-temporary impairment in
accordance with EITF 99-20 were to be written down to the estimated fair value,
with the amount of the write-down reported as a cumulative effect of a change in
accounting principle on the Statement of Income. The adoption of this standard
did not have a material impact on the financial position or results of
operations of United.
In July 2001, the FASB issued Statement No. 141 ("SFAS No. 141"), "Business
Combinations", and Statement No. 142 ("SFAS No. 142"), "Goodwill and Other
Intangible Assets". SFAS No. 141, which supercedes Accounting Principles Board
Opinion No. 16, requires that the purchase method of accounting be used for all
business combinations initiated after June 30, 2001. SFAS No. 141 also
establishes specific criteria for the recognition of intangible assets
separately from goodwill, and requires that unallocated negative goodwill to be
written off immediately as an extraordinary gain. SFAS No. 142, which supercedes
Accounting Principles Board Opinion No. 17, requires that goodwill and
intangible assets with indefinite useful lives no longer be amortized, but
instead tested for impairment at least annually in accordance with the
provisions of SFAS No.142. SFAS No. 142 also requires that intangible assets
with definite useful lives be amortized over their respective estimated useful
lives to their estimated residual values, and reviewed for impairment in
accordance with the FASB's Statement No. 121 ("SFAS No. 121"), "Accounting for
the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed
Of". Essentially, the provisions of SFAS No. 141 are effective immediately,
while the provisions of SFAS No. 142 will be effective for fiscal years
beginning after December 15, 2001 (i.e. January 1, 2002). Management estimates
the benefit associated with the elimination of goodwill amortization in 2002 to
be approximately $1.7 million after tax, or $.04 per diluted share. During
2002, United will perform the required impairment tests of goodwill and
indefinite lived intangible assets in accordance with the new standard. The
result of such tests is not anticipated to have a material impact on the
financial position or results of operations of United based on current
information.
2. BASIS OF PRESENTATION
The accompanying consolidated interim financial statements include the accounts
of United and its wholly-owned subsidiaries. United considers all of its
principal business activities to be bank related. All significant intercompany
accounts and transactions have been eliminated in the consolidated financial
statements. Dollars are in thousands, except per share and share data.
3. ACQUISITION
On June 14, 2001, United entered into an agreement with Century Bancshares, Inc.
("Century") headquartered in Washington, D.C. to acquire 100% of the outstanding
common stock of Century. Under the agreement, Century shareholders will receive
0.45 shares of United Bankshares, Inc. common stock plus $3.43 in cash for each
share of Century common stock. The transaction, valued at approximately $67,676
at the time of the agreement, will be accounted for using the purchase method of
accounting. It is anticipated that the proposed acquisition will be consummated
during the fourth quarter of 2001. Consummation of the transaction is subject
to approval of the shareholders of Century and the receipt of all required
regulatory approvals, as well as other customary conditions.
11
At September 30, 2001, Century had consolidated assets of approximately $413,437
and shareholders' equity of $25,199.
4. INVESTMENT SECURITIES
The amortized cost and estimated fair values of securities available for sale
are summarized as follows:
September 30, 2001
-------------------------------------------------------------
Gross Gross Estimated
(In thousands) Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
-------------------------------------------------------------
U.S. Treasury securities and obligations
of U.S. Government corporations and
agencies $ 85,544 $ 2,465 $ 410 $ 87,599
State and political subdivisions 52,601 923 36 53,488
Mortgage-backed securities 866,776 25,039 101 891,714
Marketable equity securities 8,325 872 1,485 7,712
Other 148,711 1,341 1,539 148,513
-------------------------------------------------------------
Total $1,161,957 $30,640 $3,571 $1,189,026
=============================================================
December 31, 2000
-------------------------------------------------------------
Gross Gross Estimated
(In thousands) Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
-------------------------------------------------------------
U.S. Treasury securities and obligations
of U.S. Government corporations and
agencies $160,702 $ 519 $1,797 $159,424
State and political subdivisions 52,095 307 575 51,827
Mortgage-backed securities 574,292 4,984 2,666 576,610
Marketable equity securities 8,551 1,107 1,024 8,634
Other 69,723 952 68,771
-------------------------------------------------------------
Total $865,363 $6,917 $7,014 $865,266
=============================================================
The cumulative net unrealized holding gain, net of deferred income taxes on
available for sale securities resulted in an increase of $13,004 to
shareholders' equity at September 30, 2001. The cumulative net unrealized
holding loss, net of deferred income taxes on available for sale securities
resulted in a decrease of $4,964 to shareholders' equity at December 31, 2000.
The amortized cost and estimated fair value of securities available for sale at
September 30, 2001 and December 31, 2000, by contractual maturity are shown as
follows. Expected maturities may differ from contractual maturities because the
issuers may have the right to call or prepay obligations with or without call or
prepayment penalties.
12
September 30, 2001 December 31, 2000
-------------------------------- --------------------------------
Estimated Estimated
Amortized Fair Amortized Fair
Cost Value Cost Value
-------------------------------- --------------------------------
Due in one year or less $ 21,067 $ 21,220 $ 20,690 $ 20,661
Due after one year through five years 36,730 37,777 68,436 68,238
Due after five years through ten years 99,264 101,968 146,984 147,021
Due after ten years 996,571 1,020,349 620,702 620,712
Marketable equity securities 8,325 7,712 8,551 8,634
-------------------------------- ------------------------------
Total $1,161,957 $1,189,026 $865,363 $865,266
================================ ==============================
The preceding table includes $891,714 and $576,610 of mortgage-backed
securities at September 30, 2001 and December 31, 2000, respectively, with an
amortized cost of $866,776 and $574,292 at September 30, 2001 and December 31,
2000, respectively. Maturities of mortgage-backed securities are based upon the
estimated average life.
With the adoption of SFAS No. 133, "Accounting for Derivative Instruments and
Hedging Activities" as amended by SFAS No. 137, debt securities with an
amortized cost of $71,293 and an estimated fair value of $71,668 were
transferred into the available for sale category from the held to maturity
category.
The amortized cost and estimated fair values of securities held to maturity are
summarized as follows:
September 30, 2001
-------------------------------------------------------------
Gross Gross Estimated
(In thousands) Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
-------------------------------------------------------------
U.S. Treasury securities and obligations
of U.S. Government corporations and
agencies $ 30,645 $ 424 $ 31,069
State and political subdivisions 90,933 2,750 $ 192 93,491
Mortgage-backed securities 4,600 175 4,775
Other 157,495 1,659 3,938 155,216
-------------------------------------------------------------
Total $283,673 $5,008 $4,130 $284,551
=============================================================
13
December 31, 2000
-------------------------------------------------------------
Gross Gross Estimated
(In thousands) Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
-------------------------------------------------------------
U.S. Treasury securities and obligations
of U.S. Government corporations and
agencies $ 55,724 $ 225 $ 176 $ 55,773
State and political subdivisions 93,006 1,508 854 93,660
Mortgage-backed securities 70,279 654 285 70,648
Other 161,059 110 2,845 158,324
-------------------------------------------------------------
Total $380,068 $2,497 $4,160 $378,405
=============================================================
The amortized cost and estimated fair value of securities held to maturity at
September 30, 2001, and December 31, 2000, by contractual maturity follow.
Expected maturities may differ from contractual maturities because the issuers
may have the right to call or prepay obligations with or without call or
prepayment penalties.
September 30, 2001 December 31, 2000
-------------------------------- --------------------------------
Estimated Estimated
Amortized Fair Amortized Fair
Cost Value Cost Value
-------------------------------- --------------------------------
Due in one year or less $ 1,959 $ 1,974 $ 7,711 $ 7,725
Due after one year through five years 32,447 33,825 47,862 48,563
Due after five years through ten years 75,340 77,239 90,590 90,365
Due after ten years 173,927 171,513 233,905 231,752
-------------------------------- --------------------------------
Total $283,673 $284,551 $380,068 $378,405
================================ ================================
The preceding table includes $4,600 and $70,279 of mortgage-backed securities at
September 30, 2001 and December 31, 2000, respectively, with an estimated fair
value of $4,775 and $70,648 at September 30, 2001 and December 31, 2000,
respectively.
Maturities of the mortgage-backed securities are based upon the estimated
average life. There were no sales of held to maturity securities.
At March 31, 2000, debt securities with an amortized cost of $146,229 and an
estimated fair value of $138,122 were transferred into the held to maturity
category from the available for sale category. The cumulative unrealized loss
of $8,107 at the date of transfer will be retained in the carrying value of the
held to maturity securities. The cumulative unrealized loss, net of deferred
taxes, of $5,270 will be retained as a separate component of shareholders'
equity. Such amounts will be amortized over the estimated remaining life of the
securities. At September 30, 2001, the cumulative unrealized loss balances,
gross and net of deferred taxes, were $7,064 and $4,592, respectively.
The carrying value of securities pledged to secure public deposits, securities
sold under agreements to repurchase, and for other purposes as required or
permitted by law, approximated $978,392 and $788,899 at September 30, 2001 and
December 31, 2000, respectively.
14
5. NONPERFORMING LOANS
Nonperforming loans are summarized as follows:
September 30, December 31,
2001 2000
--------------- --------------
Loans past due 90 days or more and still accruing interest $ 6,759 $ 4,717
Nonaccrual loans 8,386 8,131
--------------- --------------
Total nonperforming loans $15,145 $12,848
=============== ==============
6. ALLOWANCE FOR LOAN LOSSES
The adequacy of the allowance for loan losses is based on management's
evaluation of the relative risks inherent in the loan portfolio. A progression
of the allowance for loan losses for the periods presented is summarized as
follows:
Three Months Ended Nine Months Ended
September 30 September 30
---------------------------- -----------------------------
2001 2000 2001 2000
------------ ------------ ------------ -------------
Balance at beginning of period $41,197 $39,324 $40,532 $ 39,599
Provision charged to expense 4,145 4,439 8,787 10,837
------------ ------------ ------------ -------------
45,342 43,763 49,319 50,436
Loans charged-off (3,105) (4,543) (8,267) (11,791)
Less: Recoveries 316 212 1,501 787
------------ ------------ ------------ -------------
Net Charge-offs (2,789) (4,331) (6,766) (11,004)
------------ ------------ ------------ -------------
Balance at end of period $42,553 $39,432 $42,553 $ 39,432
============ ============ ============ =============
The average recorded investment in impaired loans during the quarter ended
September 30, 2001 and for the year ended December 31, 2000 was approximately
$9,370 and $15,557, respectively. For the quarters ended September 30, 2001 and
2000, United recognized interest income on the impaired loans of approximately
$138 and $214, respectively, substantially all of which was recognized using the
accrual method of income recognition.
At September 30, 2001, the recorded investment in loans that are considered to
be impaired under SFAS No. 114 was $10,574 (of which $8,386 was on a nonaccrual
basis). Included in this amount is $7,164 of impaired loans for which the
related allowance for loan losses is $851 and $3,410 of impaired loans that do
not have an allowance for credit losses due to management's estimate that the
fair value of the underlying collateral of these loans is sufficient for full
repayment of the loan and interest.
The amount of interest income that would have been recorded under the original
terms for the above loans was $320 and $528 for the quarters ended September 30,
2001 and 2000, respectively, $669 and $1,083 for the nine months ended
September 30, 2001 and 2000, respectively.
15
7. COMMITMENTS AND CONTINGENT LIABILITIES
United and its subsidiaries are currently involved, in the normal course of
business, in various legal proceedings. Management is vigorously pursuing all
of its legal and factual defenses and, after consultation with legal counsel,
believes that all such litigation will be resolved without material effect on
financial position or results of operations.
8. LINE OF BUSINESS REPORTING
United's principal business activities are community banking and mortgage
banking. The following information is based on United's current management
structure and presents results of operations as if the community banking and
mortgage banking segments were operated on a stand alone basis. The results are
not necessarily comparable with similar information of other companies.
General
Mortgage Community Corporate
Banking Banking and Other* Consolidated
------------------------------------------------------------
(In thousands)
Three months ended September 30, 2001
- --------------------------------------
Net interest income $ 2,043 $ 44,252 $ 280 $ 46,575
Provision for loan losses - 4,145 - 4,145
Net interest income after provision for loan losses 2,043 40,107 280 42,430
Non-interest income 7,343 8,455 (42) 15,756
Non-interest expense 5,625 22,863 394 28,882
Income (loss) before income taxes 3,761 25,699 (156) 29,304
Income tax expense 950 8,625 (51) 9,524
Net income (loss) 2,811 17,074 (105) 19,780
Average total assets 196,812 4,786,914 78,407 5,062,133
Three months ended September 30, 2000
- --------------------------------------
Net interest income $ 922 $ 43,062 $ 149 $ 44,133
Provision for loan losses 11 4,428 - 4,439
Net interest income after provision for loan losses 911 38,634 149 39,694
Non-interest income 5,014 7,986 324 13,324
Non-interest expense 3,950 21,778 (265) 25,463
Income before income taxes 1,975 24,842 738 27,555
Income tax expense 586 8,168 240 8,994
Net income 1,389 16,674 498 18,561
Average total assets 206,834 4,825,602 (99,444) 4,932,992
16
General
Mortgage Community Corporate
Banking Banking and Other* Consolidated
------------------------------------------------------------
(In thousands)
Nine months ended September 30, 2001
- -------------------------------------
Net interest income $ 5,470 $ 130,946 $ 608 $ 137,024
Provision for loan losses - 8,787 - 8,787
Net interest income after provision for loan losses 5,470 122,159 608 128,237
Non-interest income 19,037 25,513 47 44,597
Non-interest expense 15,804 68,133 1,394 85,331
Income (loss) before income taxes 8,703 79,539 (739) 87,503
Income tax expense 2,245 26,582 (240) 28,587
Net income (loss) 6,458 52,957 (499) 58,916
Average total assets 192,782 4,743,411 22,651 4,958,844
Nine months ended September 30, 2000
- -------------------------------------
Net interest income $ 2,438 $ 133,104 $ 748 $ 136,290
Provision for loan losses 38 10,799 - 10,837
Net interest income after provision for loan losses 2,400 122,305 748 125,453
Non-interest income 12,556 21,861 2,172 36,589
Non-interest expense 10,618 70,095 (1) 80,712
Income before income taxes 4,338 74,071 2,921 81,330
Income tax expense 1,357 24,339 962 26,658
Net income 2,981 49,732 1,959 54,672
Average total assets 137,463 4,859,095 (46,293) 4,950,265
* General corporate and other includes intercompany eliminations
9. COMPREHENSIVE INCOME
The components of total comprehensive income for the three and nine months ended
September 30, 2001 and 2000 are as follows:
Three Months Ended Nine Months Ended
September 30 September 30
-------------------------- -------------------------
2001 2000 2001 2000
------------ ----------- ----------- -----------
Net Income $19,780 $18,561 $58,916 $54,672
Other Comprehensive Income, Net of Tax:
Unrealized gain on available for sale
securities arising during the period 12,385 11,091 16,863 11,007
Less: Reclassification adjustment for
losses included in net income 421 374 795 746
Amortization on the unrealized loss for
securities transferred from the available
for sale to the held to maturity
investment portfolio 66 122 310 245
------------ ----------- ----------- -----------
Total Comprehensive Income $32,652 $30,148 $76,884 $66,670
============ =========== =========== ===========
17
10. EARNINGS PER SHARE
The reconciliation of the numerator and denominator of basic earnings per share
with that of diluted earnings per share is presented as follows:
Three Months Ended Nine Months Ended
September 30 September 30
------------------------------------ -----------------------------------
(Dollars in thousands, except per share) 2001 2000 2001 2000
---------------- ---------------- ---------------- ----------------
Basic
Net Income $ 19,780 $ 18,561 $ 58,916 $ 54,672
================ ================ ================ ================
Average common shares outstanding 41,264,394 41,842,460 41,476,627 42,020,696
================ ================ ================ ================
Earnings per basic common share $ 0.48 $ 0.44 $ 1.42 $ 1.30
Diluted
Net Income $ 19,780 $ 18,561 $ 58,916 $ 54,672
================ ================ ================ ================
Average common shares outstanding 41,264,394 41,842,460 41,476,627 42,020,696
Equivalents from stock options 358,643 305,529 283,801 316,872
---------------- ---------------- ---------------- ----------------
Average diluted shares outstanding 41,623,037 42,147,989 41,760,428 42,337,568
================ ================ ================ ================
Earnings per diluted common share $ 0.48 $ 0.44 $ 1.41 $ 1.29
18
11. EARNING ASSETS AND INTEREST-BEARING LIABILITIES
The following table shows the daily average balance of major categories of
assets and liabilities for each of the three month periods ended September 30,
2001 and September 30, 2000 with the interest rate earned or paid on such
amount.
Three Months Ended Three Months Ended
September 30, 2001 September 30, 2000
----------------------------- ---------------------------
Average Avg. Average Avg.
(Dollars in thousands) Balance Interest Rate Balance Interest Rate
----------------------------- ---------------------------
ASSETS
Earning Assets:
Federal funds sold and securities repurchased
under agreements to resell and other
short-term investments $ 17,259 $ 140 3.21% $ 30,354 $ 562 7.37%
Investment Securities:
Taxable 1,246,383 20,617 6.56% 1,151,658 19,569 6.76%
Tax-exempt (1) 190,267 3,676 7.67% 195,268 3,611 7.36%
------------------------------ ---------------------------
Total Securities 1,436,650 24,293 6.71% 1,346,926 23,180 6.85%
Loans, net of unearned income (1) (2) 3,372,893 68,783 8.12% 3,318,295 74,417 8.94%
Allowance for loan losses (41,242) (39,358)
------------ ---------
Net loans 3,331,651 8.16% 3,278,937 9.05%
----------------------------- --------------------------
Total earning assets 4,785,560 $93,216 7.76% 4,656,217 $98,159 8.41%
------------- -------------
Other assets 276,573 276,775
------------ ----------
TOTAL ASSETS $5,062,133 $4,932,992
============ ==========
LIABILITIES
Interest-Bearing Funds:
Interest-bearing deposits $2,911,041 $28,943 3.94% $2,755,411 $32,237 4.65%
Federal funds purchased, repurchase
agreements and other short-term
borrowings 426,878 3,630 3.37% 408,705 5,786 5.63%
FHLB advances 703,754 11,148 6.28% 828,107 13,142 6.31%
------------------------------ ---------------------------
Total Interest-Bearing Funds 4,041,673 43,721 4.29% 3,992,223 51,165 5.10%
-------------- -------------
Demand deposits 494,209 472,398
Accrued expenses and other liabilities 72,873 58,295
------------ -----------
TOTAL LIABILITIES 4,608,755 4,522,916
SHAREHOLDERS' EQUITY 453,378 410,076
============ ==========
TOTAL LIABILITIES AND
SHAREHOLDERS' EQUITY $5,062,133 $4,932,992
============ ==========
NET INTEREST INCOME $49,495 $46,994
=========== ===========
INTEREST SPREAD 3.47% 3.31%
NET INTEREST MARGIN 4.14% 4.04%
(1) The interest income and the yields on federally nontaxable loans and
investment securities are presented on a tax-equivalent basis using the
statutory federal income tax rate of 35%.
(2) The interest income and the yields on state nontaxable loans and
investment securities are presented on a tax-equivalent basis using the
statutory state income tax rate of 9%.
(3) Nonaccruing loans are included in the daily average loan amounts
outstanding.
19
The following table shows the daily average balance of major categories of
assets and liabilities for each of the nine month periods ended September 30,
2001 and September 30, 2000 with the interest rate earned or paid on such
amount.
Nine Months Ended Nine Months Ended
September 30, 2001 September 30, 2000
------------------------------ ----------------------------
Average Avg. Average Avg.
(Dollars in thousands) Balance Interest Rate Balance Interest Rate
------------------------------ ----------------------------
ASSETS
Earning Assets:
Federal funds sold and securities repurchased
under agreements to resell and other
short-term investments $ 18,059 $ 634 4.69% $ 15,178 $ 764 6.73%
Investment Securities:
Taxable 1,149,455 57,849 6.73% 1,183,222 60,037 6.78%
Tax-exempt (1) 193,785 11,428 7.88% 198,458 10,726 7.22%
-------------------------------- -----------------------------
Total Securities 1,343,240 69,277 6.90% 1,381,680 70,763 6.84%
Loans, net of unearned income (1) (2) 3,371,677 212,763 8.43% 3,313,335 219,352 8.85%
Allowance for loan losses (41,106) (39,431)
------------ -----------
Net loans 3,330,571 8.53% 3,273,904 8.95%
------------------------------- -----------------------------
Total earning assets 4,691,870 $282,674 8.06% 4,670,762 $290,879 8.32%
--------------- --------------
Other assets 266,974 279,503
------------ -----------
TOTAL ASSETS $4,958,844 $4,950,265
============ ===========
LIABILITIES
Interest-Bearing Funds:
Interest-bearing deposits $2,892,888 $ 93,057 4.30% $2,760,854 $ 91,541 4.43%
Federal funds purchased, repurchase
agreements and other short-term
borrowings 369,637 10,977 3.97% 369,604 14,680 5.31%
FHLB advances 695,622 32,931 6.33% 889,139 40,118 6.03%
------------------------------- -----------------------------
Total Interest-Bearing Funds 3,958,147 136,965 4.63% 4,019,597 146,339 4.86%
-------------- --------------
Demand deposits 484,716 470,882
Accrued expenses and other liabilities 67,636 55,838
------------ -----------
TOTAL LIABILITIES 4,510,499 4,546,317
SHAREHOLDERS' EQUITY 448,345 403,948
------------ -----------
TOTAL LIABILITIES AND
SHAREHOLDERS' EQUITY $4,958,844 $4,950,265
============ ===========
NET INTEREST INCOME $145,709 $144,540
========== ==========
INTEREST SPREAD 3.43% 3.46%
NET INTEREST MARGIN 4.14% 4.13%
(1) The interest income and the yields on federally nontaxable loans and
investment securities are presented on a tax-equivalent basis using the
statutory federal income tax rate of 35%.
(2) The interest income and the yields on state nontaxable loans and
investment securities are presented on a tax-equivalent basis using the
statutory state income tax rate of 9%.
(3) Nonaccruing loans are included in the daily average loan amounts
outstanding.
20
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
FORWARD-LOOKING STATEMENTS
Congress passed the Private Securities Litigation Act of 1995 to encourage
corporations to provide investors with information about the company's
anticipated future financial performance, goals, and strategies. The act
provides a safe harbor for such disclosure, in other words, protection from
unwarranted litigation if actual results are not the same as management
expectations.
United desires to provide its shareholders with sound information about past
performance and future trends. Consequently, any forward-looking statements
contained in this report, in a report incorporated by reference to this report,
or made by management of United in this report, in any other reports and
filings, in press releases and in oral statements, involves numerous
assumptions, risks and uncertainties.
Actual results could differ materially from those contained in or implied by
United's statements for a variety of factors including, but not limited to:
changes in economic conditions; movements in interest rates; competitive
pressures on product pricing and services; success and timing of business
strategies; the nature and extent of governmental actions and reforms; and
rapidly changing technology and evolving banking industry standards.
INTRODUCTION
The following is a broad overview of the financial condition and results of
operations and is not intended to replace the more detailed discussion, which is
presented under specific headings on the following pages.
OVERVIEW
Net income for the first nine months of 2001 was $58.92 million or $1.41 per
diluted share compared to $54.67 million or $1.29 per share for the first nine
months of 2000. This represents a 7.77% increase in net income and a 9.30%
increase in earnings per share. Net income for the third quarter of 2001 was
$19.78 million or $0.48 per share compared to $18.56 million or $0.44 per share
for the third quarter of 2000. United's annualized return on average assets for
the first nine months of 2001 was 1.55% and return on average shareholders'
equity was 17.31% as compared to 1.48% and 18.08% for the first nine months of
2000.
The net interest margin was 4.14% for the first nine months of 2001 compared to
4.13% for the first nine months of 2000. Tax-equivalent net interest income
increased $1.17 million for the first nine months of 2001 as compared to the
same period for 2000. The provision for loan losses decreased $2.05 million
over the previous year-to-date due to a lower level of nonperfoming loans at
September 30, 2001 as well as a lower level of new loan volume when comparing
the two periods. Noninterest income increased $8.01 million or 21.89% for the
first nine months of 2001 when compared to the first nine months of 2000.
Noninterest expenses increased $4.62 million or 5.72% for the first nine months
of 2001 compared to the same period in 2000. United's effective tax rate was
32.7% and 32.8% in 2001 and 2000, respectively.
21
Total assets were $5.17 billion at September 30, 2001, a $261.34 million or
5.33% increase from year end. In terms of asset composition since year end 2000,
the September 30, 2001 balance sheet reflects a $32.13 million decrease in cash
and cash equivalents and a $227.37 million increase in investment securities.
Loans held for sale increased $46.84 million as mortgage loan originations
exceeded sales in the secondary market during the first nine months of 2001.
Portfolio loans, net of unearned income grew $23.96 million. All other
categories of assets were moderately flat compared to year end 2000.
Total deposits at September 30, 2001 have increased $92.70 million since year
end. In terms of composition, interest-bearing deposits increased $46.79
million while noninterest-bearing deposits increased $45.90 million from
December 31, 2000. United's total borrowed funds increased $127.61 million or
12.27% as short-term borrowings increased $128.84 million. United increased
these borrowings to take advantage of lower short-term interest rates. FHLB
borrowings decreased $1.23 million. Accrued expenses and other liabilities
increased $9.41 million or 22.40% since year end 2000.
Shareholders' equity increased $31.63 million or 7.34% as compared to December
31, 2000 as United continued to balance capital adequacy and returns to
shareholders. At September 30, 2001, United's regulatory capital ratios,
including those of its bank subsidiaries, continued to exceed the levels
established for well-capitalized institutions.
RESULTS OF OPERATIONS
NET INTEREST INCOME
Tax-equivalent net interest income increased $2.50 million or 5.32% and $1.17
million or 0.81% for the third quarter and first nine months of 2001,
respectively, when compared to the same periods of 2000. The net interest margin
for the third quarter 2001 of 4.14% was a 10 basis points increase over the
previous year's quarter net interest margin of 4.04%. In the third quarter of
2001, the cost of United's short-term borrowed funds declined 226 basis points
when compared to the third quarter of 2000. United's tax-equivalent net interest
margin for the first nine months of 2001 was also 4.14% compared to 4.13% for
the same time period in 2000. In the nine months ended comparison, the cost of
United's short-term borrowed funds declined 134 basis points from the previous
year-to-date.
PROVISION FOR LOAN LOSSES
United's asset quality continues to compare favorably with peer and industry
averages. Consistent with a weakening economy, nonperforming assets rose from
year end, but remain below September 30, 2000 levels. Nonperforming loans were
$15.15 million at September 30, 2001 as compared to $12.85 million at December
31, 2000 and $16.73 million at September 30, 2000. The components of
nonperforming loans include nonaccrual loans and loans which are contractually
past due 90 days or more as to interest or principal, but have not been put on a
nonaccrual basis. During the first nine months of 2001, nonaccrual loans
remained relatively stable while loans past due 90 days or more increased $2.04
million due mainly to two large commercial credits. However, both credits are
well collateralized and provided for through United's loan loss allocation
process. Compared to September 30, 2000, nonaccrual loans declined $1.68
million and loans past due 90 days or more remained relatively flat. Total
nonperforming assets were $17.77 million or 0.34% of total assets at September
30, 2001, including OREO of $2.62 million, compared to
22
$14.96 million or 0.30% of total assets at December 31, 2000 and $18.2 million
or 0.37% of total assets at September 30, 2000.
At September 30, 2001, impaired loans were $10.57 million, a decrease of $1.93
million or 15.44% from the $12.50 million in impaired loans at December 31,
2000. For further details, see Note 6 to the unaudited consolidated financial
statements.
United evaluates the adequacy of the allowance for loan losses on a quarterly
basis and its loan administration policies are focused upon the risk
characteristics of the loan portfolio. United's process for evaluating the
allowance is a formal company-wide process that focuses on early identification
of potential problem credits and procedural discipline in managing and
accounting for those credits.
Allocations are made for specific commercial loans based upon management's
estimate of the borrowers' ability to repay and other factors impacting
collectibility. Other commercial loans not specifically reviewed on an
individual basis are evaluated based on historical loan percentages, which are
adjusted for current conditions and applied to loan pools that have been
segregated by risk. Allocations for loans other than commercial loans are made
based upon historical loss experience adjusted for current conditions.
At September 30, 2001 and December 31, 2000, the allowance for loan losses was
1.32% and 1.27% of period-end loans, net of unearned income, respectively. At
September 30, 2001 and December 31, 2000, the ratio of the allowance for loan
losses to nonperforming loans was 281.0% and 315.5%, respectively.
Management believes that the allowance for loan losses of $42.55 million at
September 30, 2001 is adequate to provide for probable losses on existing loans
based on information currently available.
For the quarters ended September 30, 2001 and 2000, the provision for loan
losses was $4.15 million and $4.44 million, respectively, while the provision
for the first nine months was $8.79 million for 2001 as compared to $10.84
million for 2000. Net charge-offs were $2.80 million for the third quarter of
2001 as compared to net charge-offs of $4.33 million for the previous year
quarter which represented 0.08% and 0.13% of average loans for the respective
quarters. Net charge-offs for the first nine months of 2001 were $6.77 million
as compared to $11.00 million for the first nine months of 2000. Note 6 to the
accompanying unaudited consolidated financial statements provides a progression
of the allowance for loan losses.
Management is not aware of any potential problem loans, trends or uncertainties
which it reasonably expects will materially impact future operating results,
liquidity, or capital resources which have not been disclosed. Additionally,
management has disclosed all known material credits which cause management to
have serious doubts as to the ability of such borrowers to comply with the loan
repayment schedules.
OTHER INCOME
Other income consists of all revenues that are not included in interest and fee
income related to earning assets. Noninterest income has been and will continue
to be an important factor for improving United's profitability. Recognizing the
importance, management continues to evaluate areas where noninterest income can
be enhanced. Noninterest income, excluding security transactions, increased
$3.40 million or 26.18% and $10.38 million or 29.28% for the third quarter and
first nine months of 2001, respectively, when
23
compared to the third quarter and first nine months of 2000. These increased
revenues were primarily the result of an expanded volume of trust and mortgage
banking services.
Income from mortgage banking activities increased $2.33 million or 46.45% for
the third quarter of 2001 as compared to the third quarter of 2000. On a year-
to-date basis, mortgage banking income increased $6.48 million or 51.62% over
last year's results. Mortgage loan origination activity increased 88.17% or
$720.12 million for the first nine months of 2001 as compared to the same period
in 2000 due to declining interest rates. More originations resulted in
increased loan sales in the secondary market of 92.05% or $719.28 million during
the first nine months of 2001 in comparison to the same time period in 2000.
Income from trust services increased $333 thousand or 19.04% for the third
quarter of 2001 when compared to the third quarter of 2000 while increasing
$1.10 million or 21.12% for the first nine months of 2001 when compared to the
first nine months of 2000.
Total noninterest income, including security transactions, increased $2.43
million or 18.25% and $8.01 million or 21.89% for the third quarter and first
nine months of 2001, respectively, when compared to the third quarter and first
nine months of 2000. Included in the year-to-date 2001 security transactions'
total is $2.40 million of impairment charges related to an other-than-temporary
decline in the fair value of available for sale securities of which $1.17
million pertains to retained interests in securitized assets. This decline is a
result of an increase in the level of prepayment activity during the second
quarter of 2001 and the corresponding increase in the prepayment assumption
utilized in the valuation of those securities.
OTHER EXPENSES
Just as management continues to evaluate areas where noninterest income can be
enhanced, it strives to improve the efficiency of its operations to reduce
costs. Other expenses include all items of expense other than interest expense,
the provision for loan losses, and income taxes. Other expenses increased $3.42
million or 13.43% and $4.62 million or 5.72% for the quarter and nine months
ended September 30, 2001, respectively, as compared to the same periods in 2000.
Total salaries and benefits increased by 29.05% or $3.52 million and 15.46% or
$6.10 million for the third quarter and first nine months of 2001 when compared
to the same periods of 2000. The increase was due mainly to higher sales
activity in the mortgage banking segment as compensation and incentives for its
personnel are significantly tied to activity levels.
Net occupancy expense for the third quarter and first nine months of 2001
decreased $296 thousand or 10.35% and $986 thousand or 11.09%, respectively,
when compared to the third quarter and first nine months of 2000. The lower net
occupancy expense for 2001 was due mainly to decreases in both real property
taxes on owned premises and rental expense on leased offices.
Other expenses remained relatively flat for the third quarter and first nine
months of 2001 as compared to the same periods of 2000.
24
Market Risk
The objective of United's Asset/Liability Management function is to maintain
consistent growth in net interest income within United's policy guidelines.
This objective is accomplished through the management of balance sheet liquidity
and interest rate risk exposures due to changes in economic condition, interest
rate levels and customer preferences.
Management considers interest rate risk to be United's most significant market
risk. Interest rate risk is the exposure to adverse changes in the net interest
income of United as a result of changes in interest rates. Consistency in
United's earnings is largely dependent on the effective management of interest
rate risk.
United employs a variety of measurement techniques to identify and manage its
exposure to changing interest rates. One such technique utilizes an earnings
simulation model to analyze net interest income sensitivity to movements in
interest rates. The model is based on actual cash flows and repricing
characteristics for on and off-balance sheet instruments and incorporates
market-based assumptions regarding the impact of changing interest rates on the
prepayment rate of certain assets and liabilities. The model also includes
executive management projections for activity levels in product lines offered by
United. Assumptions based on the historical behavior of deposit rates and
balances in relation to changes in interest rates are also incorporated into the
model. These assumptions are inherently uncertain and, as a result, the model
cannot precisely measure net interest income or precisely predict the impact of
fluctuations in interest rates on net interest income. Actual results will
differ from simulated results due to timing, magnitude and frequency of interest
rate changes as well as changes in market conditions and management strategies.
Interest sensitive assets and liabilities are defined as those assets or
liabilities that mature or are repriced within a designated time- frame. The
principal function of interest rate risk management is to maintain an
appropriate relationship between those assets and liabilities that are sensitive
to changing market interest rates. The difference between rate sensitive assets
and rate sensitive liabilities for specified periods of time is known as the
"GAP." United closely monitors the sensitivity of its assets and liabilities on
an on-going basis and projects the effect of various interest rate changes on
its net interest margin.
As shown in the interest rate sensitivity gap table in this section, United was
liability sensitive (more liabilities repricing than assets) in the one year
horizon. This indicates that rising market interest rates would reduce United's
earnings and declining market interest rates would increase earnings. United,
however, has not experienced the kind of earnings volatility indicated from the
cumulative gap. This is because a significant portion of United's retail
deposit base does not reprice on a contractual basis. Management has estimated,
based upon historical analyses, that United's savings deposits are less
sensitive to interest rate changes than are other forms of deposits. The GAP
table presented herein has been adapted to show the estimated differences in
interest rate sensitivity which result when the retail deposit base is assumed
to reprice in a manner consistent with historical trends. (See "Management
Adjustments" in the GAP table). Using these estimates, United was liability
sensitive in the one year horizon in the amount of $418 million or (8.46%) of
the cumulative gap to related earning assets. At December 31, 2000, United was
asset sensitive in the one year horizon in the amount of $117 million or 2.51%
of the cumulative gap to related earning assets.
25
To further aid in interest rate management, United's subsidiary banks are
members of the Federal Home Loan Bank (FHLB). The use of FHLB advances provides
United with a low risk means of matching maturities of earning assets and
interest-bearing funds to achieve a desired interest rate spread over the life
of the earning assets.
Interest rate risk management focuses on maintaining consistent growth in net
interest income within Board-approved policy limits. United's Asset/Liability
Management Committee (ALCO), which includes senior management representatives
and reports to the Board of Directors, monitors and manages interest rate risk
to maintain an acceptable level of change to net interest income as a result of
changes in interest rates. Policy established for interest rate risk is stated
in terms of the change in net interest income over a one-year and two-year
horizon given an immediate and sustained increase or decrease in interest rates.
The current limits approved by the Board of Directors are structured on a staged
basis with each stage requiring specific actions.
The following table shows United's estimated earnings sensitivity profile after
management's adjustments as of September 30, 2001 and September 30, 2000:
Change in Percentage Change in Net Interest Income
Interest Rates -------------------------------------------------
(basis points) September 30, 2001 September 30, 2000
--------------- ------------------------ -----------------------
+200 -1.22% -2.23%
-200 -0.04% 1.17%
For September 30, 2001, given an immediate, sustained 200 basis point upward
shock to the yield curve used in the simulation model, it is estimated net
interest income for United would decrease by 1.22% over one year as compared to
an decrease of 2.23% for September 30, 2000. A 200 basis point immediate,
sustained downward shock in the yield curve would decrease net interest income
by an estimated 0.04% over one year for September 30, 2001 as compared to a
increase of 1.17% for September 30, 2000. All of these estimated changes in net
interest income are and were within the policy guidelines established by the
Board of Directors.
26
The following table shows the interest rate sensitivity GAP as of September 30,
2001:
Interest Rate Sensitivity Gap
Days
------------------------------------------- Total 1-5 Over 5
0-90 91-180 181-365 One Year Years Years Total
---------------------------------------------------------------------------------------------------
ASSETS
Interest-Earning Assets:
Federal funds sold and
Securities purchased
under agreements to
resell and other
short-term
investments $ 5,732 $ 5,732 $ 5,732
Investment and Marketable
Equity Securities
Taxable 114,879 $ 3,591 $ 11,691 130,161 $ 337,481 $ 860,634 1,328,276
Tax-exempt 1,479 1,479 13,376 129,568 144,423
Loans, net of unearned
income 1,190,516 76,909 139,923 1,407,348 1,173,526 886,254 3,467,128
---------------------------------------------------------------------------------------------------
Total Interest-Earning Assets $ 1,311,127 $ 81,979 $ 151,614 $ 1,544,720 $1,524,383 $1,876,456 $4,945,559
===================================================================================================
LIABILITIES
Interest-Bearing Funds:
Savings and NOW accounts
$ 1,226,876 $ 1,226,876 $1,226,876
Time deposits of
$100,000 & over 118,756 $ 47,640 $ 132,401 298,797 $ 71,060 $ 543 370,400
Other time deposits 356,532 262,150 349,221 967,903 331,993 1,654 1,301,550
Federal funds purchased,
repurchase agreements
and other short-term
borrowings 371,357 371,357 91,199 462,556
FHLB advances 45,086 45,086 97,500 562,692 705,278
---------------------------------------------------------------------------------------------------
Total Interest-Bearing Funds $ 2,118,607 $ 309,790 $ 481,622 $ 2,910,019 $ 591,752 $ 564,889 $4,066,660
===================================================================================================
Interest Sensitivity Gap ($807,480) ($227,811) ($330,008) ($1,365,299) $ 932,631 $1,311,567 $ 878,899
===================================================================================================
Cumulative Gap ($807,480) ($1,035,291) ($1,365,299) ($1,365,299) ($432,668) $ 878,899 $ 878,899
===================================================================================================
Cumulative Gap as a Percentage
of (16.33%) (20.93%) (27.61%) (27.61%) (8.75%) 17.77% 17.77%
Total Earning Assets
Management Adjustments $ 1,183,616 ($78,947) ($157,776) $946,893 ($946,893) $ 0
Off-Balance Sheet Activities
Cumulative Management Adjusted
Gap and Off-Balance Sheet
Activities $ 376,136 $ 69,378 ($ 418,406) ($418,406) ($432,668) $ 878,899 $ 878,899
==================================================================================================
Cumulative Management Adjusted
Gap and Off-Balance Sheet
Activities as a Percentage of
Total Earning Assets
7.61% 1.40% (8.46%) (8.46%) (8.75%) 17.77% 17.77%
==================================================================================================
27
LIQUIDITY AND CAPITAL RESOURCES
United maintains, in the opinion of management, liquidity which is sufficient to
satisfy its depositors' requirements and the credit needs of its customers.
Like all banks, United depends upon its ability to renew maturing deposits and
other liabilities on a daily basis and to acquire new funds in a variety of
markets. A significant source of funds available to United is "core deposits".
Core deposits include certain demand deposits, statement and special savings and
NOW accounts. These deposits are relatively stable and they are the lowest cost
source of funds available to United. Short-term borrowings have also been a
significant source of funds. These include federal funds purchased and
securities sold under agreements to repurchase. Repurchase agreements represent
funds, which are obtained as the result of a competitive bidding process.
Liquid assets are cash and those items readily convertible to cash. All banks
must maintain sufficient balances of cash and near-cash items to meet the day-
to-day demands of customers. Other than cash and due from banks, the available
for sale securities portfolio, loans held for sale and maturing loans and
investments are the primary sources of liquidity.
The goal of liquidity management is to ensure the ability to access funding
which enables United to efficiently satisfy the cash flow requirements of
depositors and borrowers and meet United's cash needs. Liquidity is managed by
monitoring funds availability from a number of primary sources. Funding is
available from cash and cash equivalents, unused short-term borrowing and a
geographically dispersed network of subsidiary banks providing access to a
diversified and substantial retail deposit market.
Short-term needs can be met through a wide array of sources such as
correspondent and downstream correspondent federal funds and utilization of
Federal Home Loan Bank advances.
Other sources of liquidity available to United to provide long-term as well as
short-term funding alternatives, in addition to FHLB advances, are long-term
certificates of deposit, lines of credit, and borrowings that are secured by
bank premises or stock of United's subsidiaries. In the normal course of
business, United through ALCO evaluates these as well as other alternative
funding strategies that may be utilized to meet short-term and long-term funding
needs.
For the nine months ended September 30, 2001, United generated $25.89 million of
cash from operations, which is indicative of solid earnings performance. Cash
used in operations for the first nine months of 2001 included $36.22 million of
excess originations of mortgage loans over sales in the secondary market. During
the same period, net cash of $243.41 million was used in investing activities
which was primarily due to $201.20 million of excess purchases of investment
securities over net proceeds from calls and maturities of investment securities.
During the first nine months of 2001, net cash of $185.38 million was provided
by financing activities, primarily due to additional borrowings of approximately
$127.61 and growth in deposits of $102.31 million. The additional borrowings
consisted of $128.84 million of short-term borrowings mainly from federal funds
purchased and securities sold under agreements to repurchase. These sources of
funds were partially offset by payment of $27.49 million in cash dividends and
$19.00 million for acquisitions of United shares under the stock repurchase
program. The net effect of this activity was a decrease in cash and cash
equivalents of $32.13 million for the first nine months of 2001.
28
United anticipates it can meet its obligations over the next 12 months and has
no material commitments for capital expenditures. There are no known trends,
demands, commitments, or events that will result in or that are reasonably
likely to result in United's liquidity increasing or decreasing in any material
way. United also has lines of credit available.
The Asset and Liability Committee monitors liquidity to ascertain that a
liquidity position within certain prescribed parameters is maintained. In
addition, variable rate loans are a priority. These policies help to protect
net interest income against fluctuations in interest rates. No changes are
anticipated in the policies of United's Asset and Liability Committee.
CAPITAL
Total shareholders' equity increased $31.63 million to $462.50 million from
$430.87 million at December 31, 2000. Included in the shareholders' equity
balance at September 30, 2001 is the previously mentioned cumulative unrealized
loss, net of deferred taxes, of $4.59 million for the transfer of debt
securities from the available for sale portfolio into the held to maturity
portfolio. This amount will be amortized over the estimated remaining life of
the securities. Since year end, United has experienced an increase of $17.66
million, net of deferred income taxes, in the fair value of its available for
sale investment portfolio due primarily to decreased market interest rates.
During the first nine months of 2001, 785,000 shares were repurchased under a
plan announced by United in May of 2000 to repurchase up to 1.675 million shares
of its common stock on the open market. Through September 30, 2001, 1,004,300
shares have been repurchased since the plan's implementation. United's equity
to assets ratio was 8.95% at September 30, 2001, as compared to 8.79% at
December 31, 2000. The primary capital ratio, capital and reserves to total
assets and reserves, was 9.70% at September 30, 2001, as compared to 9.53% at
December 31, 2000.
During the third quarter of 2001, United's Board of Directors declared a cash
dividend of 23 cents per share, a 10% increase over the 21 cents per share paid
in the third quarter of 2000. Cash dividends of 68 cents per common share for
the first nine months of 2001 represent an increase of 8% over the 63 cents paid
for first nine months of 2000. Total cash dividends declared were approximately
$9.50 million for the third quarter of 2001 and $28.21 million for the first
nine months of 2001, an increase of 6.42% and 7.81% over the comparable periods
of 2000.
United seeks to maintain a proper relationship between capital and total assets
to support growth and sustain earnings. United's average equity to average
asset ratio was 9.04% at September 30, 2001 and 8.16% at September 30, 2000.
Based on regulatory requirements, United and its banking subsidiaries are
categorized as "well capitalized" institutions. United's risk-based capital
ratio of 11.91% at September 30, 2001 and December 31, 2000, is significantly
higher than the minimum regulatory requirements. United's Tier I capital and
leverage ratios of 10.80% and 8.21%, respectively, at September 30, 2001, are
also well above regulatory minimum requirements.
29