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 March 31, 2002
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) 424-8800
--------------
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; 42,736,142 shares outstanding as of April
30, 2002.
1
UNITED BANKSHARES, INC. AND SUBSIDIARIES
FORM 10-Q
TABLE OF CONTENTS
Page
----
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
- --------------------------------------------------------------------------------------------------------
Consolidated Balance Sheets as of
March 31, 2002 (Unaudited) and December 31, 2001...................................................... 6
Consolidated Statements of Income (Unaudited) for the
Three Months Ended March 31, 2002 and 2001............................................................ 7
Consolidated Statement of Changes in Shareholders' Equity
(Unaudited) for the Three Months Ended March 31, 2002................................................. 8
Condensed Consolidated Statements of Cash Flows (Unaudited)
for the Three Months Ended March 31, 2002 and 2001 ................................................... 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............................................................ 23
-----------------------------------
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 February 28, 2002, United Bankshares, Inc. filed a Current
Report under Items 5 and 7 to announce a plan to repurchase up
to 1.72 million shares of its common stock on the open market.
On April 18, 2002, United Bankshares, Inc. filed a Current
Report under Items 5 and 7 to report the results of operations
for the first quarter of 2002.
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 May 13, 2002 /s/ Richard M. Adams
------------ -----------------------------
Richard M. Adams, Chairman of
the Board and Chief Executive
Officer
Date May 13, 2002 /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 March 31, 2002 and December 31, 2001, consolidated balance sheets of United
Bankshares, Inc. and Subsidiaries, and the related consolidated statements of
income for the three months ended March 31, 2002 and 2001, and the related
consolidated statement of changes in shareholders' equity for the three months
ended March 31, 2002, and the related condensed consolidated statements of cash
flows for the three months ended March 31, 2002 and 2001, and the notes to
consolidated financial statements appear on the following pages.
5
CONSOLIDATED BALANCE SHEETS
UNITED BANKSHARES, INC. AND SUBSIDIARIES
(Dollars in thousands, except par value) March 31 December 31
2002 2001
-------------------------------
(Unaudited) (Note 1)
Assets
Cash and due from banks $ 94,495 $ 156,058
Interest-bearing deposits with other banks 4,785 1,536
Federal funds sold 97,026
-------------------------------
Total cash and cash equivalents 196,306 157,594
Securities available for sale at estimated fair value (amortized
cost-$1,193,288 at March 31, 2002 and $1,133,715 at December 31, 2001) 1,197,491 1,147,280
Securities held to maturity (estimated fair value-$273,577 at
March 31, 2002 and $280,865 at December 31, 2001) 276,092 281,436
Loans held for sale 223,388 368,625
Loans 3,494,492 3,505,385
Less: Unearned income (3,037) (3,051)
-------------------------------
Loans net of unearned income 3,491,455 3,502,334
Less: Allowance for loan losses (47,889) (47,408)
-------------------------------
Net loans 3,443,566 3,454,926
Bank premises and equipment 47,813 48,394
Goodwill 81,392 80,848
Accrued interest receivable 30,651 32,012
Other assets 60,882 60,660
-------------------------------
TOTAL ASSETS $5,557,581 $5,631,775
===============================
Liabilities
Domestic deposits:
Noninterest-bearing $ 636,541 $ 653,785
Interest-bearing 3,182,360 3,134,008
-------------------------------
Total deposits 3,818,901 3,787,793
Borrowings:
Federal funds purchased 13,904 43,831
Securities sold under agreements to repurchase 463,265 477,796
Federal Home Loan Bank borrowings 681,176 736,455
Mandatorily redeemable capital securities of subsidiary trust 8,872 8,800
Other borrowings 5,885 5,501
Accrued expenses and other liabilities 59,942 65,070
-------------------------------
TOTAL LIABILITIES 5,051,945 5,125,246
Shareholders' equity
Common stock, $2.50 par value; Authorized-100,000,000 shares; issued-43,381,769
at March 31, 2002 and December 31, 2001, including 569,552 and 455,258 shares
in treasury at March 31, 2002 and December 31, 2001, respectively 108,454 108,454
Surplus 81,161 84,122
Retained earnings 332,529 320,577
Accumulated other comprehensive (loss) income (1,539) 4,351
Treasury stock, at cost (14,969) (10,975)
-------------------------------
TOTAL SHAREHOLDERS' EQUITY 505,636 506,529
-------------------------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $5,557,581 $5,631,775
===============================
See notes to consolidated unaudited financial statements.
6
CONSOLIDATED STATEMENTS OF INCOME (Unaudited)
UNITED BANKSHARES, INC. AND SUBSIDIARIES
(Dollars in thousands, except per share data) Three Months Ended
March 31
--------------------------
2002 2001
--------------------------
Interest income
Interest and fees on loans $63,789 $71,142
Interest on federal funds sold and other short-term investments 362 247
Interest and dividends on securities:
Taxable 18,637 17,981
Tax-exempt 2,450 2,627
--------------------------
Total interest income 85,238 91,997
Interest expense
Interest on deposits 21,799 33,150
Interest on short-term borrowings 2,360 3,816
Interest on long-term borrowings 10,431 10,811
--------------------------
Total interest expense 34,590 47,777
--------------------------
Net interest income 50,648 44,220
Provision for loan losses 2,227 2,499
--------------------------
Net interest income after provision for loan losses 48,421 41,721
Other income
Income from mortgage banking operations 6,450 5,225
Service charges, commissions, and fees 7,155 6,017
Income from fiduciary activities 2,274 2,015
Security (losses) gains (304) 142
Other income 362 546
--------------------------
Total other income 15,937 13,945
Other expense
Salaries and employee benefits 17,614 14,483
Net occupancy expense 2,639 2,658
Other expense 11,777 9,855
--------------------------
Total other expense 32,030 26,996
--------------------------
Income before income taxes 32,328 28,670
Income taxes 10,507 9,318
--------------------------
Net income $ 21,821 $ 19,352
==========================
Earnings per common share:
Basic $ 0.51 $ 0.46
==========================
Diluted $ 0.50 $ 0.46
==========================
Dividends per common share $ 0.23 $ 0.22
==========================
Average outstanding shares:
Basic 42,899,060 41,703,350
Diluted 43,548,650 42,020,236
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)
Three Months Ended March 31, 2002
----------------------------------------------------------------------------------------
Common Stock Accumulated
------------------------- Other Total
Par Retained Comprehensive Treasury Shareholders'
Shares Value Surplus Earnings Income (Loss) Stock Equity
----------------------------------------------------------------------------------------
Balance at January 1, 2002 43,381,769 $ 108,454 $84,122 $320,577 $4,351 ($10,975) $506,529
Comprehensive income (loss):
Net income - - - 21,821 - - 21,821
Other comprehensive income
(loss), net of tax:
Unrealized losses on
securities of $6,264 net
of reclassification
adjustment for losses
included in net income of $198 - - - - (6,066) - (6,066)
Amortization of the
unrealized loss for
securities transferred
from the
available-for-sale to the
held-to-maturity
investment portfolio - - - - 176 - 176
--------------
Total comprehensive income 15,931
Purchase of treasury stock
(317,000 shares) - - - - - (9,094) (9,094)
Cash dividends ($0.23 per share) - - - (9,869) - - (9,869)
Common stock options exercised
(202,706 shares) - - (2,961) - - 5,100 2,139
----------------------------------------------------------------------------------------
Balance at March 31, 2002 43,381,769 $ 108,454 $81,161 $332,529 ($1,539) ($14,969) $505,636
========================================================================================
See notes to consolidated unaudited financial statements
8
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
UNITED BANKSHARES, INC. AND SUBSIDIARIES
(Dollars in thousands)
Three Months Ended
March 31
------------------------
2002 2001
------------------------
NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES $ 164,941 $ (1,869)
INVESTING ACTIVITIES
Proceeds from maturities and calls of investment securities 5,596 23,702
Purchases of investment securities (7) (1,000)
Proceeds from sales of securities available for sale 35,871 16,048
Proceeds from maturities and calls of securities available for sale 107,520 49,248
Purchases of securities available for sale (203,429) (132,862)
Net purchases of bank premises and equipment (815) (610)
Net cash paid in branch divestiture (8,644)
Net change in loans 12,664 20,643
-----------------------
NET CASH USED IN INVESTING ACTIVITIES (42,600) (33,475)
FINANCING ACTIVITIES
Cash dividends paid (9,891) (9,174)
Proceeds from exercise of stock options 2,139 418
Acquisition of treasury stock (9,094) (4,967)
Repayment of Federal Home Loan Bank borrowings (55,170) (25,156)
Proceeds from Federal Home Loan Bank borrowings 225 90
Changes in:
Deposits 32,236 80,864
Federal funds purchased, securities sold under agreements
to repurchase and other borrowings (44,074) 4,035
-----------------------
NET CASH (USED IN) PROVIDED BY FINANCING ACTIVITIES (83,629) 46,110
-----------------------
Increase in cash and cash equivalents 38,712 10,766
Cash and cash equivalents at beginning of year 157,594 144,810
-----------------------
Cash and cash equivalents at end of period $ 196,306 $155,576
=======================
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 as of March 31, 2002 and 2001 and the three month periods
then ended have not been audited. The consolidated balance sheet as of December
31, 2001 has been extracted from the audited financial statements included in
United's 2001 Annual Report to Shareholders. The accounting and reporting
policies followed in the presentation of these financial statements are
consistent with those applied in the preparation of the 2001 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.
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.
2. MERGERS AND ACQUISITIONS
On December 7, 2001, United acquired 100% of the outstanding common stock of
Century Bancshares, Inc., Washington, D.C. (Century). The results of operations
of Century, which are not significant, have been included in the consolidated
results of operations from the date of acquisition. As a result of this
acquisition, United increased its presence in Northern Virginia, Washington,
D.C., and Montgomery County, Maryland by adding 11 full service offices.
The aggregate purchase price was $63.8 million, including $15.1 million of cash,
and 1.98 million shares of common stock valued at $48.7 million. The value of
the 1.98 million common shares issued was determined based on the average market
price of United's common shares over the period including the two days before
and after the terms of the acquisition were agreed to and announced. At
consummation, Century had assets of approximately $414 million, loans of $295
million, deposits of $330 million and shareholders' equity of $20 million.
10
3. INVESTMENT SECURITIES
The amortized cost and estimated fair values of securities available for sale
are summarized as follows:
March 31, 2002
-------------------------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
-------------------------------------------------------------
U.S. Treasury securities and
obligations of U.S. Government
corporations and agencies $ 61,113 $ 442 $ 803 $ 60,752
State and political subdivisions 62,592 179 1,328 61,443
Mortgage-backed securities 927,893 12,210 5,844 934,259
Marketable equity securities 8,164 1,313 806 8,671
Other 133,526 498 1,658 132,366
-------------------------------------------------------------
Total $1,193,288 $ 14,642 $10,439 $1,197,491
=============================================================
December 31, 2001
-------------------------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
-------------------------------------------------------------
U.S. Treasury securities and
obligations of U.S. Government
corporations and agencies $61,082 $ 651 $ 288 $ 61,445
State and political subdivisions 62,188 341 1,075 61,454
Mortgage-backed securities 861,799 17,587 1,919 877,467
Marketable equity securities 8,254 906 1,306 7,854
Other 140,392 767 2,099 139,060
-------------------------------------------------------------
Total $1,133,715 $20,252 $6,687 $1,147,280
=============================================================
The cumulative net unrealized losses on available for sale securities resulted
in a decrease of $1,539 and an increase of $4,351 in shareholders' equity, net
of deferred income taxes at March 31, 2002 and December 31, 2001, respectively.
11
The amortized cost and estimated fair value of securities available for sale at
March 31, 2002 and December 31, 2001 by contractual maturity are shown below.
Expected maturities may differ from contractual maturities because the issuers
may have the right to call or prepay obligations with or without call or
prepayment penalties. Maturities of mortgage-backed securities with an estimated
fair value of $934,259 and $877,467 at March 31, 2002 and December 31, 2001,
respectively, and an amortized cost of $927,893 and $861,799 at March 31, 2002
and December 31, 2001, respectively, are shown below based upon an estimated
average life.
March 31, 2002 December 31, 2001
------------------------------ ---------------------------
Estimated Estimated
Amortized Fair Amortized Fair
Cost Value Cost Value
------------------------------ ---------------------------
<c>
Due in one year or less $ 15,301 $ 15,322 $ 22,995 $ 23,089
Due after one year through five years 36,693 37,299 32,635 33,372
Due after five years through ten years 133,670 134,652 122,749 124,049
Due after ten years 999,460 1,001,547 947,082 958,916
Marketable equity securities 8,164 8,671 8,254 7,854
------------------------------ ---------------------------
Total $1,193,288 $1,197,491 $1,133,715 $1,147,280
============================== ===========================
As permitted, upon adopting SFAS No. 133 on January 1, 2001, 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:
March 31, 2002
-------------------------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
-------------------------------------------------------------
U.S. Treasury securities and
obligations of U.S. Government
corporations and agencies $ 25,697 $ 102 $ 354 $ 25,445
State and political subdivisions 88,555 1,527 1,114 88,968
Mortgage-backed securities 3,914 105 4,019
Other 157,926 686 3,467 155,145
-------------------------------------------------------------
Total $276,092 $ 2,420 $4,935 $273,577
=============================================================
12
December 31, 2001
-----------------------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
-----------------------------------------------------------
U.S. Treasury securities and
obligations of U.S. Government
corporations and agencies $ 29,935 $ 285 $ $19 $ 30,201
State and political subdivisions 89,540 1,491 1,057 89,974
Mortgage-backed securities 4,278 132 4,410
Other 157,683 1,534 2,937 156,280
-----------------------------------------------------------
Total $281,436 $ 3,442 $4,013 $280,865
===========================================================
The amortized cost and estimated fair value of debt securities held to maturity
at March 31, 2002 and December 31, 2001 by contractual maturity are shown below.
Expected maturities may differ from contractual maturities because the issuers
may have the right to call or prepay obligations with or without call or
prepayment penalties. Maturities of mortgage-backed securities with an amortized
cost of $$3,914 and $4,278 at March 31, 2002 and December 31, 2001,
respectively, and an estimated fair value of $4,019 and $4,410 at March 31, 2002
and December 31, 2001, respectively are shown below based upon an estimated
average life. There were no sales of held to maturity securities.
<cAPTION>
March 31, 2002 December 31, 2001
------------------------------ --------------------------
Estimated Estimated
Amortized Fair Amortized Fair
Cost Value Cost Value
------------------------------- --------------------------
Due in one year or less $ 1,182 $ 1,588 $ 1,448 $ 1,477
Due after one year through five years 32,326 33,667 32,729 33,837
Due after five years through ten years 70,091 70,897 72,922 74,216
Due after ten years 172,493 167,425 174,337 171,335
------------------------------- --------------------------
Total $276,092 $273,577 $281,436 $280,865
=============================== ==========================
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 $981,454 and $992,341 at March 31, 2002 and
December 31, 2001, respectively.
13
4. LOANS
Major classifications of loans are as follows:
March 31, 2002 December 31, 2001
-------------- -----------------
Commercial, financial and agricultural $ 667,883 $ 662,070
Real estate:
Single-family residential 1,278,445 1,313,784
Commercial 912,792 891,118
Construction 189,626 195,063
Other 87,991 88,416
Installment 357,755 354,934
--------------- -----------------
Total gross loans $ 3,494,492 $ 3,505,385
=============== =================
The table above does not include loans held for sale of $223,388 and $368,625 at
March 31, 2002 and December 31, 2001, respectively.
5. ALLOWANCE FOR LOAN LOSSES
The allowance for loan losses is management's estimate of the probable credit
losses inherent in the loan portfolio. Management's evaluation of the adequacy
of the allowance for loan losses and the appropriate provision for loan losses
is based upon a quarterly evaluation of the portfolio. This evaluation is
inherently subjective and requires significant estimates, including the amounts
and timing of estimated future cash flows, estimated losses on pools of loans
based on historical loss experience, and consideration of current economic
trends, all of which are susceptible to constant and significant change. The
amounts allocated to specific credits and loan pools grouped by similar risk
characteristics are reviewed on a quarterly basis and adjusted as necessary
based upon subsequent changes in circumstances. In determining the components of
the allowance for loan losses, management considers the risk arising in part
from, but not limited to, charge-off and delinquency trends, current economic
and business conditions, lending policies and procedures, the size and risk
characteristics of the loan portfolio, concentrations of credit, and other
various factors. Loans deemed to be uncollectible are charged against the
allowance for loan losses, while recoveries of previously charged-off amounts
are credited to the allowance for loan losses.
A progression of the allowance for loan losses for the periods presented is
summarized as follows:
Three Months Ended
March 31
---------------------------
2002 2001
--------- ---------
Balance at beginning of period $ 47,408 $ 40,532
Provision charged to expense 2,227 2,499
--------- ---------
49,635 43,031
Loans charged off (2,403) (2,672)
Less recoveries 657 832
--------- ---------
Net Charge-offs (1,746) (1,840)
--------- ---------
Balance at end of period $47,889 $41,191
========= =========
14
The average recorded investment in impaired loans during the quarter ended March
31, 2002 and for the year ended December 31, 2001 was approximately $12,355 and
$12,654, respectively. For the quarters ended March 31, 2002 and 2001, United
recognized interest income on the impaired loans of approximately $53 and $121,
respectively, substantially all of which was recognized using the accrual method
of income recognition.
At March 31, 2002, the recorded investment in loans that are considered to be
impaired under SFAS No. 114 was $12,118 (of which $7,824 was on a nonaccrual
basis). Included in this amount is $4,698 of impaired loans for which the
related allowance for loan losses is $1,005 and $7,420 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 $121 and $319 for the quarters ended March 31,
2002 and 2001, respectively.
6. RISK ELEMENTS
Nonperforming assets are summarized as follows:
March 31. December 31,
2002 2001
---------- -------------
Nonaccrual loans $ 7,824 $ 8,068
Loans past due 90 days or more and still accruing interest 6,540 9,522
---------- ------------
Total nonperforming loans 14,364 17,590
Nonaccrual investment securities 10,000 10,000
Other real estate owned 4,099 2,763
---------- ------------
Total nonperforming assets $ 28,463 $ 30,353
========== ============
7. INTANGIBLE ASSETS
In July of 2001, the Financial Accounting Standards Board (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 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. SFAS No. 142
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. However, SFAS No. 142 did not
supercede FASB Statement No. 72, "Accounting for Certain Acquisitions of Banking
or Thrift Institutions," and therefore, any goodwill accounted for in accordance
with this Statement will continue to be amortized until further guidance is
issued from the FASB. SFAS No. 142 also requires that intangible assets with
definite useful lives (such as core deposit intangibles) be amortized over their
respective estimated useful lives to their estimated residual values, and
reviewed for impairment. SFAS No. 142 requires that a transitional impairment
test of goodwill and indefinite-lived intangible assets be performed within
15
six months of adoption and any resulting impairment loss be reported as a change
in accounting principle. Effective January 1, 2002, United adopted SFAS No. 142,
and discontinued the amortization of certain intangibles. No transitional
impairment loss was recorded. Total goodwill of $80,848 as of December 31, 2001
is comprised of goodwill recorded in the community banking segment. In
accordance with the new disclosure requirements of SFAS No. 142, the following
information is presented regarding intangible assets subject to amortization and
those not subject to amortization.
As of December 31, 2001
--------------------------------------------------------------
Gross Carrying Accumulated Net Carrying
Amount Amortization Amount
------------------ ------------------- -----------------
Amortized intangible assets:
Goodwill subject to amortization $ 6,030 ($ 1,041) $ 4,989
Core deposit intangible assets 14,143 (6,427) 7,716
------------------ ------------------- -----------------
Total $20,173 ($ 7,468) $12,705
================== =================== =================
Goodwill not subject to amortization $98,163 ($22,304) $75,859
================== =================== =================
The following table conforms prior period amounts, adjusted to exclude
amortization expense recognized in those periods related to certain intangible
assets that are no longer amortized, to the current year presentation:
Three Months Ended
March 31
----------------------------
2002 2001
------------- -----------
Reported net income $ 21,821 $19,352
Add back: Amortization of intangibles 545
------------- -----------
Adjusted net income $ 21,821 $19,897
============= ===========
Basic earnings per share:
Reported net income $ 0.51 $ 0.46
Amortization of intangibles $ 0.01
------------- -----------
Adjusted net income $ 0.51 $ 0.47
============= ===========
Diluted earnings per share:
Reported net income $ 0.50 $ 0.46
Amortization of intangibles $ 0.01
------------- -----------
Adjusted net income $ 0.50 $ 0.47
============= ===========
United incurred amortization expense of $585 for the quarter ended March 31,
2002 related to intangible assets. The following table sets forth the
anticipated amortization expense for intangible assets for each of the next five
years:
Year Amount
--------
2002 $ 1,890
2003 1,708
2004 1,532
2005 1,355
2006 1,177
16
8. BORROWINGS
United's subsidiary banks are members of the Federal Home Loan Bank (FHLB).
Membership in the FHLB makes available short-term and long-term borrowings from
collateralized advances. All FHLB borrowings are collateralized by a similar
amount of single-family residential mortgage loans. At March 31, 2002, United
had approximately $486,505 of additional available borrowings in the form of
collateralized advances from the FHLB at prevailing interest rates.
At March 31, 2002, $681,176 of FHLB advances with a weighted average interest
rate of 6.09% are scheduled to mature from one to twenty years. At March 31,
2002, the scheduled maturities of FHLB advances are as follows:
Year Amount
----------
2002 $ 1,210
2003 910
2004 13,500
2005 90,000
2006 and thereafter 575,556
----------
Total $ 681,176
==========
United, through its parent company, has available funds of $50,000 to provide
for general liquidity needs under a one year renewable collateralized line of
credit with SunTrust Bank. The line of credit carries a LIBOR-based indexed
floating rate of interest. At March 31, 2002, United had an outstanding balance
under the line of credit of $4,000 at an interest rate of 2.58%.
United also has various unused lines of credit available from certain of its
correspondent banks in the aggregate amount of $215,000. These lines of credit,
which bear interest at prevailing market rates, permit United to borrow funds in
the overnight market, and are renewable annually subject to certain conditions.
9. TRUST PREFERRED SECURITIES
As part of the acquisition of Century, United assumed all the obligations of
Century and its subsidiaries. One such subsidiary, Century Capital Trust I (the
Trust) is a statutory business trust formed during the first quarter of 2000.
The Trust issued $8.8 million of capital securities (the Capital Securities) to
a third party and received net cash proceeds of $8.536 million after considering
the underwriter's discount. The Trust invested the proceeds in an equivalent
amount of junior subordinated debt securities of Century, now United, bearing an
interest rate equal to the rate on the Capital Securities. These debt
securities, which are the only assets of the Trust, are subordinate and junior
in right of payment to all present and future senior indebtedness (as defined in
the indenture) and certain other financial obligations of Century, now United.
United fully and unconditionally guarantees the Trust's obligations under the
Capital Securities.
For financial reporting purposes, the Trust is treated as a subsidiary of United
and consolidated in the corporate financial statements. The Capital Securities
are presented as a separate category of long-term debt on the
17
Consolidated Balance Sheets entitled "Mandatorily redeemable capital securities
of subsidiary trust." The Capital Securities are not included as a component of
stockholders' equity in the Consolidated Balance Sheets. For regulatory
purposes, the $8.8 million of Capital Securities are included in Tier 1 capital
in accordance with regulatory reporting requirements.
The Capital Securities pay cash dividends semiannually at an annual rate of
10.875% of the liquidation preference. Dividends to the holders of the Capital
Securities are included in the Consolidated Statements of Income as interest
expense. Under the provisions of the subordinated debt, United has the right to
defer payment of interest on the subordinated debt at any time, or from time to
time, for periods not exceeding five years. If interest payments on the
subordinated debt are deferred, the dividends on the Capital Securities are also
deferred. Interest on the subordinated debt is cumulative.
Subject to the prior approval of the Federal Reserve Board, the Capital
Securities, the assets of the Trust, and the common securities issued by the
Trust are redeemable at the option of United in whole or in part on or after
March 8, 2010, or at any time, in whole but not in part, from the date of
issuance, upon the occurrence of certain events.
10. COMMITMENTS AND CONTINGENT LIABILITIES
United is a party to financial instruments with off-balance-sheet risk in the
normal course of business to meet the financing needs of its customers and to
alter its own exposure to fluctuations in interest rates. These financial
instruments include loan commitments, standby letters of credit, forward
contracts for the delivery of mortgage-backed securities and interest rate swap
agreements. The instruments involve, to varying degrees, elements of credit and
interest rate risk in excess of the amount recognized in the financial
statements.
United's maximum exposure to credit loss in the event of nonperformance by the
counterparty to the financial instrument for the loan commitments and standby
letters of credit is the contractual or notional amount of those instruments.
United uses the same policies in making commitments and conditional obligations
as it does for on-balance sheet instruments.
Commitments to extend credit are agreements to lend to a customer as long as
there is no violation of any condition established in the commitment contract.
Commitments generally have fixed expiration dates or other termination clauses
and may require the payment of a fee. Since many of the commitments are expected
to expire without being drawn upon, the total commitment amounts do not
necessarily represent future cash requirements. The amount of collateral
obtained, if deemed necessary upon the extension of credit, is based on
management's credit evaluation of the counterparty. United had approximately
$1,277,845 and $937,455 of loan commitments outstanding as of March 31, 2002 and
December 31, 2001, respectively, substantially all of which expire within one
year.
Commercial and standby letters of credit are agreements used by United's
customers as a means of improving their credit standing in their dealings with
others. Under these agreements, United guarantees certain financial commitments
of its customers. United has issued commercial and standby letters of credit of
$100,848 and $103,446 as of March 31, 2002 and December 31, 2001, respectively.
18
In accordance with current interpretations of FASB Statement No. 133 "Accounting
for Derivative Instruments and Hedging Activities", United is required to
recognize its commitments with borrowers (interest rate lock commitments) and
investors (best efforts commitments) on loans originated for sale in its
mortgage banking operations. These commitments are entered into with the
borrower and investor to manage the inherent interest rate and pricing risk
associated with selling loans in the secondary market. These derivatives are
accounted for by recognizing the fair value of the contracts and commitments on
the balance sheet as either a freestanding asset or liability. Changes in the
fair value of best efforts commitments on specific loans closed and held for
sale are recorded in other comprehensive income within shareholders' equity, net
of income tax. Amounts are reclassified from other comprehensive income into the
income statement in the period or periods that the hedged transaction affects
earnings.
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.
11. 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
------------------------------------------------------------
March 31, 2002
- --------------
Net interest income $ 2,314 $ 47,593 $ 741 $ 50,648
Provision for loan losses - 2,227 - 2,227
Net interest income after provision for loan losses 2,314 45,366 741 48,421
Noninterest income 6,450 9,467 20 15,937
Noninterest expense 5,688 26,766 (424) 32,030
Income before income taxes 3,076 28,067 1,185 32,328
Income tax expense 788 9,313 406 10,507
Net income 2,288 18,754 779 21,821
Average total assets 205,548 5,280,091 (5,798) 5,479,841
19
General
Mortgage Community Corporate
Banking Banking And Other* Consolidated
--------------------------------------------------------
March 31, 2001
- --------------
Net interest income $ 1,534 $ 42,573 $ 113 $ 44,220
Provision for loan losses - 2,499 - 2,499
Net interest income after provision for loan losses 1,534 40,074 113 41,721
Noninterest income 5,225 8,707 13 13,945
Noninterest expense 4,739 21,681 576 26,996
Income before income taxes 2,020 27,100 (450) 28,670
Income tax expense 540 8,924 (146) 9,318
Net income 1,480 18,176 (304) 19,352
Average total assets 179,969 4,682,002 (11,785) 4,850,186
* General corporate and other includes intercompany eliminations
12. COMPREHENSIVE INCOME
The components of total comprehensive income for the three months ended March
31, 2002 and 2001 are as follows:
Three Months Ended
March 31
---------------------
2002 2001
--------- ---------
Net Income $ 21,821 $ 19,352
Other Comprehensive Income, Net of Tax:
Unrealized (loss) gain on available-for-sale
securities arising during the period (6,264) 8,555
Less: Reclassification adjustment for losses
(gains) included in net income 198 (92)
Amortization of the unrealized loss for
securities transferred from the available-
for-sale to the held to maturity investment
portfolio 176 122
--------- ---------
Total Comprehensive Income $ 15,931 $ 27,937
========= =========
20
13. 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
March 31
------------------------------
2002 2001
------------ -------------
Basic
Net Income $ 21,821 $ 19,352
============ ============
Average common shares outstanding 42,899,060 41,703,350
============ ============
Earnings per basic common share $ 0.51 $ 0.46
Diluted
Net Income $ 21,821 $ 19,352
============ ============
Average common shares outstanding 42,899,060 41,703,350
Equivalents from stock options 649,590 316,886
------------ ------------
Average diluted shares outstanding 43,548,650 42,020,236
============ ============
Earnings per diluted common share $ 0.50 $ 0.46
21
14. EARNING ASSETS AND INTEREST-BEARING LIABILITIES
The following table shows the daily average balance of major categories of
assets and liabilities for each of the three month periods ended March 31, 2002
and March 31, 2001 with the interest rate earned or paid on such amount.
Three Months Ended Three Months Ended
March 31, 2002 March 31, 2001
-------------------------------------- ----------------------------------
Average Avg. Average Avg.
Balance Interest Rate Balance Interest Rate
-------------------------------------- ----------------------------------
ASSETS
Earning Assets:
Federal funds sold and securities repurchased
under agreements to resell and other
short-term investments $ 82,273 $ 362 1.78% $ 16,178 $ 247 6.19%
Investment Securities:
Taxable 1,227,663 18,637 6.07% 1,052,439 17,981 6.93%
Tax-exempt (1) (2) 194,554 3,504 7.20% 195,878 3,652 7.56%
-------------------------------------- ----------------------------------
Total Securities 1,422,217 22,141 6.23% 1,248,317 21,633 7.03%
Loans, net of unearned income (1) (2) (3) 3,687,109 65,538 7.17% 3,359,725 72,985 8.76%
Allowance for loan losses (47,599) (40,901)
----------- ----------
Net loans 3,639,510 7.27% 3,318,824 8.87%
-------------------------------------- ----------------------------------
Total earning assets 5,144,000 $ 88,041 6.89% 4,583,319 $ 94,865 8.33%
---------------------- --------------------
Other assets 335,841 266,867
----------- ----------
TOTAL ASSETS $ 5,479,841 $4,850,186
=========== ==========
LIABILITIES
Interest-Bearing Funds:
Interest-bearing deposits $ 3,149,777 $ 21,799 2.81% $2,865,822 $ 33,150 4.69%
Federal funds purchased, repurchase
agreements and other short-term
borrowings 471,483 2,360 2.03% 319,938 3,816 4.84%
FHLB advances and other long-term
borrowings 690,699 10,431 6.12% 686,763 10,811 6.38%
----------------------------------- --------------------------------
Total Interest-Bearing Funds 4,311,959 34,590 3.25% 3,872,523 47,777 5.00%
------------------- ------------------
Demand deposits 582,420 479,797
Accrued expenses and other liabilities 70,758 58,736
----------- ----------
TOTAL LIABILITIES 4,965,137 4,411,056
SHAREHOLDERS' EQUITY 514,704 439,130
----------- ----------
TOTAL LIABILITIES AND
SHAREHOLDERS' EQUITY $ 5,479,841 $4,850,186
=========== ==========
NET INTEREST INCOME $ 53,451 $ 47,088
========== =========
INTEREST SPREAD 3.64% 3.33%
NET INTEREST MARGIN 4.16% 4.10%
(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.
22
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following is a broad overview of the financial condition and results of
operations and is not intended to replace the more detailed discussion which is
presented under specific headings on the following pages.
OVERVIEW
Net income for the first quarter of 2002 was $21.82 million or $0.50 per share
compared to $19.35 million or $0.46 per share for the first quarter of 2001.
This represents a 12.76% increase in net income and an 8.70% increase in
earnings per share. United's annualized return on average assets was 1.61% and
return on average shareholders' equity was 17.19% for the first quarter of 2002
as compared to 1.62% and 17.87% for the first quarter of 2001.
The net interest margin for the first quarter 2002 was 4.16%, a 6 basis points
increase over the first quarter of 2001's net interest margin of 4.10%. The
margin increase was primarily attributable to a $560.68 million or 12.23%
increase in average earning assets resulting mainly from the Century Bancshares
acquisition that was consummated on December 7, 2001. Tax-equivalent net
interest income increased $6.36 million or 13.51% for the first three months of
2002 as compared to the same period for 2001. For the quarters ended March 31,
2002 and 2001, the provision for loan losses was $2.23 million and $2.50
million, respectively. Noninterest income increased $1.99 million or 14.28% for
the first three months of 2002 when compared to the first three months of 2001.
Noninterest expenses increased $5.03 million or 18.65% for the first three
months of 2002 compared to the same period in 2001. United's effective tax rate
was 32.50% for the first quarters of 2002 and 2001.
Total assets decreased to $5.56 billion at March 31, 2002, a $74.19 million or
1.32% decrease from year end. In terms of asset composition since year end 2001,
the March 31, 2002 balance sheet reflects a $38.71 million increase in cash and
cash equivalents and a $44.87 million increase in investment securities.
Overall, loans held for sale decreased $145.24 million as loan sales in the
secondary market exceeded originations. Portfolio loans, net of unearned income
declined $10.88 million from December 31, 2001. All other categories of assets
were moderately flat compared to year end 2001.
Interest-bearing deposits increased $48.35 million compared to year end while
noninterest-bearing deposits decreased $17.24 million. United's total borrowed
funds decreased $99.28 million as FHLB borrowings decreased $55.28 million while
short-term borrowings decreased $44.07 million. Accrued expenses and other
liabilities decreased $5.13 million since year end 2001.
Shareholders' equity was $505.64 million at March 31, 2002, which was relatively
flat from year end as United continued to balance capital adequacy and returns
to shareholders. At March 31, 2002, United's regulatory capital ratios,
including those of its bank subsidiaries, exceeded the levels established for
well-capitalized institutions.
23
RESULTS OF OPERATIONS
NET INTEREST INCOME
For the quarters ended March 31, 2002 and 2001, tax-equivalent net interest
income was $53.45 million and $47.09 million, respectively. These results
represent an increase of $6.36 million or 13.51% during the first quarter of
2002 when compared to the prior-year quarter. United's tax-equivalent net
interest margin was 4.16% for the first three months of 2002 and 4.10% for the
same period in 2001. The margin increase was primarily attributable to a $560.68
million or 12.23% increase in average earning assets resulting mainly from the
Century Bancshares acquisition that was consummated on December 7, 2001. On a
linked quarter basis, net interest income increased $2.42 million or 4.74% while
the net interest margin increased 9 basis points from 4.07% in the fourth
quarter of 2001.
PROVISION FOR LOAN LOSSES
United's credit quality continues to be sound. Nonperforming loans were $14.36
million or 0.41% of loans, net of unearned income at March 31, 2002 as compared
to $17.59 million or 0.50% of loans, net of unearned income, at December 31,
2001. 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. Nonaccrual loans and loans past due
90 days or more were $7.82 million and $6.54 million, respectively at March 31,
2002 as compared to $8.10 million and $9.52 million, respectively at year end
2001. Total nonperforming assets of $28.46 million, including nonperforming
securities of $10.0 million and OREO of $4.10 million at March 31, 2002,
represented 0.51% of total assets at the end of the first quarter. For a summary
of nonperforming assets, see Note 6 to the unaudited consolidated financial
statements.
At March 31, 2002, impaired loans were $12.12 million, which was a decrease from
the $12.59 million in impaired loans at December 31, 2001. For further details,
see Note 5 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. This process determines the appropriate level of
the allowance for loan losses, allocation among loan types, and the resulting
provision for loan losses.
At March 31, 2002, the allowance for loan losses was $47.89 million, compared to
$47.41 million at December 31, 2001. As a percentage of loans, net of unearned
income, the allowance for loan losses was 1.37% and 1.35% at March 31, 2002 and
December 31, 2001, respectively. The ratio of the allowance for loan losses to
nonperforming loans was 333.4% and 269.5% at March 31, 2002 and December 31,
2001, respectively.
For the quarters ended March 31, 2002 and 2001, the provision for loan losses
was $2.23 million and $2.50 million, respectively. Total net charge-offs were
$1.75 million in the first three months of 2002 and $1.84 million during the
same time period in 2001, which represents 0.05% and 0.06% of average loans for
the respective quarters. Note 5 to the accompanying unaudited consolidated
financial statements provides a progression of the allowance for loan losses.
24
In determining the adequacy of the allowance for loan losses, management makes
allocations to specific commercial loans classified by management as to risk.
Management determines the loan's risk by considering the borrowers' ability to
repay, the collateral securing the credit and other borrower-specific factors
that may impact collectibility. Specific loss allocations are based on the
present value of expected future cash flows using the loan's effective interest
rate, or as a practical expedient, at the loan's observable market price or the
fair value of the collateral if the loan is collateral-dependent. Other
commercial loans not specifically reviewed on an individual basis are evaluated
based on loan pools, which are grouped by similar risk characteristics using
management's internal risk ratings. Allocations for these commercial loan pools
are determined based upon historical loss experience adjusted for current
conditions and risk factors. Allocations for loans, other than commercial loans,
are developed by applying historical loss experience adjusted for current
conditions and risk factor to loan pools grouped by similar risk
characteristics. While allocations are made to specific loans and pools of
loans, the allowance is available for all loan losses.
United's formal company-wide process at March 31, 2002 produced increased
allocations within two of four loan categories from December 31, 2001. The
components of the allowance allocated to commercial loans increased $350
thousand, as a result of adjustments primarily made to account for economic
conditions and specific allocations of large loans. The consumer loan pool
allocation increased $228 thousand as a result of changes in historical loss
factors. The real estate construction loan pool allocation decreased $76
thousand as a result of decreased loan volume. The components of the allowance
allocated to real estate loans decreased $359 thousand as a result of changes in
loan volume.
Management believes that the allowance for loan losses of $47.89 million at
March 31, 2002 is adequate to provide for probable losses on existing loans
based on information currently available.
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 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 $1.99 million or 14.28% for the first
quarter of 2002 when compared to the same period in 2001.
Deposit services fees increased $1.14 million or 18.91% while wealth management
fees increased $259 thousand or 12.85% compared to the first quarter of 2001.
Income from mortgage banking operations increased $1.23 million or 23.44% for
the first three months of 2002 as compared to the same period in 2001 due to
increased loan sales in the secondary market as lower interest rates more
favorably impacted mortgage refinancing and home purchasing subsequent to March
31, 2001. Sales of mortgage loans were $655.02 million for the first quarter of
2002 as compared to $391.07 million for the first quarter of 2001, an increase
of 67.50%. However, mortgage loans sold in the secondary market during the first
quarter of 2002 declined from their peak in the fourth quarter of 2001. As a
result, noninterest income for the
25
first quarter of 2002 declined $1.67 million or 9.49% from the fourth quarter of
2001.
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. Noninterest expense increased
$5.03 million or 18.65% for the quarter compared to the prior year's first
quarter and $1.62 million or 5.31% compared to the linked quarter mainly due to
increased employee salaries and benefits from the Century Bancshares
acquisition.
Total salaries and benefits increased by 21.62% or $3.13 million for the first
quarter of 2002 when compared to the same period of 2001. On a linked quarter
basis, salaries and benefits increased $2.08 million or 13.42% from the fourth
quarter of 2001.
Net occupancy expense for the first quarter of 2002 remained relatively flat
when compared to the first quarter of 2001.
Other expense decreased $1.92 million or 19.50% for the first quarter of 2002
when compared to the previous year quarter. United divested of a branch office
and sold other bank premises during the first quarter of 2001 for a total gain
of $1.24 million.
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
26
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 asset-sensitive in the one year
horizon in the amount of $71 million or 1.33% of the cumulative gap to related
earning assets. At December 31, 2001, United was liability-sensitive in the
one-year horizon in the amount of $124 million or (2.33%) of the cumulative gap
to related earning assets.
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 March 31, 2002 and December 31, 2001:
Change in
Interest Rates Percentage Change in Net Interest Income
(basis points) ----------------------------------------
-------------- March 31, 2002 December 31, 2001
-------------- -----------------
+200 -1.27% -1.61%
-200 -2.65% 0.24%
At March 31, 2002, given an immediate, sustained 200 basis point upward shock to
the yield curve used in the simulation model, it was estimated net interest
income for United would decrease by 1.27% over one year as compared to an
decrease of 1.61% at December 31, 2001. A 200 basis point immediate, sustained
downward shock in the yield curve would decrease net interest income by an
estimated 2.65% over one year at March 31, 2002 as compared to an increase of
0.24% at December 31, 2001. All of these estimated changes in net interest
income are and were within the policy guidelines established by the Board of
Directors.
27
The following table shows the interest rate sensitivity GAP as of March 31,
2002:
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 $ 101,811 $ 101,811 $ 101,811
Investment and Marketable
Equity Securities
Taxable 94,553 $ 15,243 $ 31,145 140,941 $ 365,990 $ 816,654 1,323,585
Tax-exempt 422 973 540 1,935 14,025 134,038 149,998
Loans, net of unearned income 1,448,256 96,033 169,819 1,714,108 1,155,024 845,711 3,714,843
----------------------------------------------------------------------------------------------
Total Interest-Earning Assets $1,645,042 $ 112,249 $ 201,504 $ 1,958,795 $ 1,535,039 $1,796,403 $5,290,237
========== =========== ============ ============ ============ ========== ==========
LIABILITIES
Interest-Bearing Funds:
Savings and NOW accounts $1,412,031 $ 1,412,031 $1,412,031
Time deposits of
$100,000 & over 122,459 $ 49,740 $ 140,073 312,272 $ 161,838 $ 227 474,337
Other time deposits 349,247 221,176 314,147 884,570 411,042 380 1,295,992
Federal funds purchased,
repurchase agreements 358,214 4,000 362,214 120,840 483,054
and other short-term
borrowings
FHLB advances and other
long-term borrowings 228 228 755 1,211 106,660 582,177 690,048
----------------------------------------------------------------------------------------------
Total Interest-Bearing Funds $2,242,179 $ 271,144 $ 458,975 $ 2,972,298 $ 800,380 $ 582,784 $4,355,462
========== ========== ============ ============ ============ ========== ==========
Interest Sensitivity Gap ($597,137) ($158,895) ($257,471) ($1,013,502) $ 734,659 $1,213,619 $ 934,775
========== ========== ============ ============ ============ ========== ==========
Cumulative Gap ($597,137) ($756,032) ($1,013,502) ($1,013,502) ($278,843) $ 934,776 $ 934,775
========== ========== ============ ============ ============ ========== ==========
Cumulative Gap as a Percentage of (11.29%) (14.29%) (19.16%) (19.16%) (5.27%) 17.67% 17.67%
Total Earning Assets
Management Adjustments $1,335,112 ($ 90,386) ($ 180,636) $ 1,084,090 ($1,084,090) $ 0
Off-Balance Sheet Activities
----------------------------------------------------------------------------------------------
Cumulative Management
Adjusted Gap and
Off-Balance Sheet Activities $ 757,975 $ 508,694 $ 70,587 $ 70,587 ($278,844) $ 934,775 $ 934,775
========== ========== ============ ============ ============ ========== ==========
Cumulative Management Adjusted Gap
and Off-Balance Sheet Activities
as a Percentage of Total Earning
Assets 14.33% 9.62% 1.33% 1.33% (5.27%) 17.67% 17.67%
====== ===== ===== ===== ====== ====== ======
28
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 three months ended March 31, 2002, cash of $164.94 million was provided
from operations primarily as a result of $145.15 million of excess sales of
mortgage loans in the secondary market over originations. During the same
period, net cash of $42.60 million was used in investing activities which was
primarily due to $54.45 million of excess purchases of investment securities
over net proceeds from calls and maturities of investment securities. During the
first three months of 2002, net cash of $83.63 million was used in financing
activities, primarily due to net repayment of approximately $54.95 million of
FHLB borrowings, payment of $9.89 million in cash dividends and $9.09 million
for acquisitions of United shares under the stock repurchase program. The net
effect of this activity was an increase in cash and cash equivalents of $38.71
million for the first three months of 2002.
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.
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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
At March 31, 2002, total shareholders' equity was $505.64 million. Since year
end, United has experienced a decrease of $5.89 million, net of deferred income
taxes, in the fair value of its available for sale investment portfolio. During
the quarter, 317,000 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 March 31, 2002, 1,616,300 shares have been repurchased
since the plan's implementation. On February 28, 2002, United announced a new
plan to repurchase up to 1.72 million shares of its common stock once the prior
plan is completed. United's equity to assets ratio was 9.10% at March 31, 2002,
as compared to 8.99% at December 31, 2001. The primary capital ratio, capital
and reserves to total assets and reserves, was 9.87% at March 31, 2002, as
compared to 9.75% at December 31, 2001.
Cash dividends of $0.23 per common share for the first quarter of 2002
represents an increase of 5% over the $0.22 paid for first quarter of 2001.
Total cash dividends declared were approximately $9.87 million for the first
quarter of 2002, an increase of 7.58% over the comparable period of 2001.
United seeks to maintain a proper relationship between capital and total assets
to support growth and sustain earnings. United has historically generated
attractive returns on shareholders' equity. United's average equity to average
asset ratio was 9.39% at March 31, 2002 and 9.05% at March 31, 2001. Based on
regulatory requirements, United and its banking subsidiaries are categorized as
"well capitalized" institutions. United's risk-based capital ratios of 11.71% at
March 31, 2002 and 11.37% at December 31, 2001, are both significantly higher
than the minimum regulatory requirements. United's Tier I capital and leverage
ratios of 10.31% and 7.74%, respectively, at March 31, 2002, are also well above
regulatory minimum requirements.
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