<PAGE>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
__________________________________
FORM 10-Q
Quarterly Report Under Section 13 or 15(d)
of the Securities Exchange Act of 1934
For Quarter Ended SEPTEMBER 30, 1998
Commission File Number: 0-13322
UNITED BANKSHARES, INC.
-----------------------
(Exact name of registrant as specified in its charter)
WEST VIRGINIA 55-0641179
------------- ----------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
300 UNITED CENTER
500 VIRGINIA STREET, EAST
CHARLESTON, WEST VIRGINIA 25301
- - --------------------------------------- -----
(Address of Principal Executive Offices) Zip Code
Registrant's Telephone Number,
including Area Code: (304) 424-8761
--------------
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
YES X No
--- ---
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Class -- Common Stock, $2.50 Par Value; 43,015,233 shares outstanding as of
OCTOBER 31, 1998.
1
<PAGE>
UNITED BANKSHARES, INC. AND SUBSIDIARIES
FORM 10-Q
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PART I. FINANCIAL INFORMATION Page
- - ------------------------------ ----
<S> <C>
Item 1. Financial Statements
- - ----------------------------
Consolidated Balance Sheets (Unaudited) September 30, 1998
and December 31, 1997 ........................................6
Consolidated Statements of Income (Unaudited) for the
Three and Nine Months Ended September 30, 1998 and 1997 ......7
Consolidated Statement of Changes in Shareholders' Equity
(Unaudited) for the Nine Months Ended September 30, 1998 .....8
Condensed Consolidated Statements of Cash Flows (Unaudited)
for the Nine Months Ended September 30, 1998 and 1997 ........9
Notes to Consolidated Financial Statements ..................10
Information required by Item 303 of Regulation S-K
Item 2. Management's Discussion and Analysis of Financial
- - ---------------------------------------------------------
Condition and Results of Operations....................9
-----------------------------------
PART II. OTHER INFORMATION
- - ---------------------------
Item 1. Legal Proceedings......................................Not Applicable
- - -------------------------
Item 2. Changes in Securities..................................Not Applicable
- - -----------------------------
Item 3. Defaults Upon Senior Securities .......................Not Applicable
- - ---------------------------------------
Item 4. Submission of Matters to a Vote of Security Holders
- - ------------------------------------------------------------
</TABLE>
The following matter was submitted to a vote of security holders at a special
meeting of Shareholders of the Registrant held on Monday, September 21, 1998:
(1) To consider and vote upon a proposal to amend the articles of incorporation
of United to increase the number of authorized shares of common stock, par value
$2.50 per share of United, from 41,000,000 to 100,000,000 shares. There were
30,070,829 affirmative votes cast, 838,255 negative votes, 306,949 abstaining
votes and 7,576,679 non-votes.
<TABLE>
<S> <C>
Item 5. Other Information .....................................Not Applicable
- - --------------------------
Item 6. Exhibits and Reports on Form 8-K
- - -----------------------------------------
(a) Exhibits required by Item 601 of Regulation S-K
Exhibit 11 - Computation of Earnings Per Share.........31
Exhibit 27 - Financial Data Schedule...................32
</TABLE>
2
<PAGE>
(b) Reports on Form 8-K
On July 28, 1998, United Bankshares, Inc. filed a Form 8-K under
Item 5 to report its financial condition and the results of operations for the
second quarter of 1998.
On August 3, 1998, United Bankshares, Inc. filed a Form 8-K to restate
the March 31, 1998 Form 10-Q and the 1997 Form 10-K in connection with the
merger of United Bankshares, Inc. and George Mason Bankshares, Inc.
3
<PAGE>
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, 1998 /s/ Richard M. Adams
----------------- ---------------------------
Richard M. Adams
Chairman of the Board and
Chief Executive Officer
Date November 13, 1998 /s/ Steven E. Wilson
----------------- ------------------------------
Steven E. Wilson
Executive Vice President,
Secretary, Treasurer and Chief
Financial Officer
4
<PAGE>
PART I
FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS (UNAUDITED)
The September 30, 1998 and December 31, 1997, consolidated balance sheets of
United Bankshares, Inc. and Subsidiaries, and the related consolidated
statements of income for the three and nine months ended September 30, 1998 and
1997, and the related consolidated statement of changes in shareholders' equity
for the nine months ended September 30, 1998, and the related condensed
consolidated statements of cash flows for the nine months ended September 30,
1998 and 1997, and the notes to consolidated financial statements appear on the
following pages.
5
<PAGE>
CONSOLIDATED BALANCE SHEETS(UNAUDITED)
UNITED BANKSHARES, INC. AND SUBSIDIARIES
<TABLE>
<CAPTION>
(In thousands, except per share data) September December 31
1998 1997
---------- -----------
<S> <C> <C>
ASSETS
Cash and due from banks $ 93,910 $ 116,087
Interest-bearing deposits with other banks 8,208 8,725
Federal funds sold 79,400 56,052
---------- ----------
Total cash and cash equivalents 181,518 180,864
Securities available for sale at estimated fair
value (amortized cost-$514,861 at September 30,
1998 and $585,724 at December 31, 1997) 522,908 595,520
Securities held to maturity(estimated fair value
-$219,590 at September 30, 1998 and $234,329 at
December 31, 1997) 215,334 231,311
Loans
Commercial, financial, and agricultural 441,569 467,223
Real estate:
Single family residential 951,776 1,087,920
Commercial 536,106 482,568
Construction 158,501 140,266
Other 47,650 47,148
Installment 303,020 292,428
Loans held for sale at estimated fair value 464,580 97,619
---------- ----------
2,903,202 2,615,172
Less: Unearned income (7,584) (7,766)
---------- ----------
Loans, net of unearned income 2,895,618 2,607,406
Less: Allowance for loan losses (37,370) (30,455)
---------- ----------
Net loans 2,858,248 2,576,951
Bank premises and equipment 49,197 48,841
Interest receivable 25,495 20,979
Other assets 69,567 73,594
---------- ----------
TOTAL ASSETS $3,922,267 $3,728,060
========== ==========
LIABILITIES
Domestic deposits:
Noninterest-bearing $ 452,850 $ 494,733
Interest-bearing 2,609,382 2,432,317
---------- ----------
TOTAL DEPOSITS 3,062,232 2,927,050
Borrowings:
Federal funds purchased 12,090 40,961
Securities sold under agreements to repurchase 216,532 184,718
Federal Home Loan Bank borrowings 203,420 165,695
Other 4,911 5,000
Accrued expenses and other liabilities 53,868 49,162
---------- ----------
TOTAL LIABILITIES 3,553,053 3,372,586
SHAREHOLDERS' EQUITY
Common stock, $2.50 par value; Authorized -100,000,000
shares; issued - 39,153,568 at September 30, 1998 and
39,073,164 at December 31, 1997, including 123,628
and 161,814 shares in treasury at September 30, 1998
and December 31, 1997, respectively 97,884 97,683
Surplus 71,985 72,505
Retained earnings 197,343 181,601
Accumulated other comprehensive income 5,230 6,204
Treasury stock (3,228) (2,519)
---------- ----------
TOTAL SHAREHOLDERS' EQUITY 369,214 355,474
---------- ----------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $3,922,267 $3,728,060
========== ==========
</TABLE>
See notes to consolidated unaudited financial statements.
6
<PAGE>
CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
UNITED BANKSHARES, INC. AND SUBSIDIARIES
<TABLE>
<CAPTION>
(In thousands, except per share
data) Three Months Ended Nine Months Ended
September 30 September 30
------------------------ ------------------------
1998 1997 1998 1997
----------- ---------- ----------- -----------
<S> <C> <C> <C> <C>
INTEREST INCOME
Interest and fees on loans $ 66,282 $ 51,616 $ 184,207 $ 148,788
Interest on federal funds sold
and other short-term investments 278 353 773 788
Interest and dividends on
securities:
Taxable 9,938 12,766 33,643 33,817
Exempt from federal taxes 819 741 2,369 2,333
----------- ----------- ----------- -----------
TOTAL INTEREST INCOME 77,317 65,476 220,992 185,726
----------- ----------- ----------- -----------
INTEREST EXPENSE
Interest on deposits 29,981 26,682 86,479 75,094
Interest on short-term
borrowings 2,842 2,517 7,870 6,173
Interest on Federal Home Loan
Bank borrowings 3,611 1,317 9,061 3,742
----------- ----------- ----------- -----------
TOTAL INTEREST EXPENSE 36,434 30,516 103,410 85,009
----------- ----------- ----------- -----------
NET INTEREST INCOME 40,883 34,960 117,582 100,717
PROVISION FOR POSSIBLE LOAN
LOSSES 3,316 1,011 10,623 2,173
----------- ----------- ----------- -----------
NET INTEREST INCOME AFTER
PROVISION FOR POSSIBLE LOAN
LOSSES 37,567 33,949 106,959 98,544
----------- ----------- ----------- -----------
OTHER INCOME
Trust department income 1,162 930 3,288 2,650
Other charges, commissions,
and fees 4,817 4,199 13,484 11,769
Income from mortgage
banking operations 6,645 5,223 18,233 10,985
Gain on sales of securities 427 2,689 40
Other income 178 886 1,027 1,398
----------- ----------- ----------- -----------
TOTAL OTHER INCOME 13,229 11,238 38,721 26,842
----------- ----------- ----------- -----------
OTHER EXPENSES
Salaries and employee benefits 15,086 12,928 47,530 35,430
Net occupancy expense 2,866 3,631 9,267 8,884
Other expense 11,194 9,717 38,730 26,085
----------- ----------- ----------- -----------
TOTAL OTHER EXPENSES 29,146 26,276 95,527 70,399
----------- ----------- ----------- -----------
INCOME BEFORE INCOME TAXES 21,650 18,911 50,153 54,987
INCOME TAXES 5,996 6,454 13,931 18,540
----------- ----------- ----------- -----------
NET INCOME $ 15,654 $ 12,457 $ 36,222 $ 36,447
=========== =========== =========== ===========
Earnings per common share
Basic $ 0.40 $ 0.32 $ 0.93 $ 0.94
=========== =========== =========== ===========
Diluted $ 0.39 $ 0.32 $ 0.91 $ 0.93
=========== =========== =========== ===========
Dividends per share $ 0.19 $ .17 $ 0.55 $ 0.50
=========== =========== =========== ===========
Average outstanding shares
Basic 39,124,705 38,594,676 39,066,872 38,585,460
Diluted 39,820,423 39,379,922 39,753,867 39,196,408
</TABLE>
See notes to consolidated unaudited financial statements.
7
<PAGE>
CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY(UNAUDITED)
UNITED BANKSHARES, INC. AND SUBSIDIARIES
(In thousands, except per share data)
<TABLE>
<CAPTION>
Nine Months Ended September 30, 1998
-----------------------------------------------------------------------------------------------------
Common Stock Accumulated
--------------------------- Other Total
Par Retained Comprehensive Treasury Shareholders'
Shares Value Surplus Earnings Income Stock Equity
------------- ------------ ------------ ------------ ------------- ------------- --------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at
January 1, 1998, as
reported 39,073,164 $97,683 $72,505 $181,601 $6,204 $ (2,519) $355,474
Net income 36,222 36,222
Other comprehensive
income, net of tax:
Change in net
unrealized gain on
available for sale
securities, net of
reclassification
adjustment (974) (974)
Cash dividends
($.55 per share) (19,721) (19,721)
Pre-merger dividends
of pooled company (759) (759)
Purchase of treasury
stock (137,300 shares) (3,610) (3,610)
Fractional shares
adjustment (7) (7)
Sale of treasury
stock (37,376
shares) 654 654
Common stock options
exercised 80,404 201 (513) 2,247 1,935
------------- ------------- ----------- ------------ ------------ ------------ -------------
Balance at
September 30, 1998 39,153,568 $97,884 $71,985 $197,343 $5,230 $ (3,228) $369,214
============= ============= =========== ============ ============ ============ =============
Disclosure of
Reclassification
Amount:
Unrealized holding
gains on available
for sale securities
arising during the
period $ 774
Less:
Reclassification
adjustment for
net gains realized
in net income 1,748
-------------
Change in net
unrealized gain on
available for sale
securities, net of tax $ (974)
=============
</TABLE>
See notes to consolidated unaudited financial statements.
8
<PAGE>
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
UNITED BANKSHARES, INC. AND SUBSIDIARIES
<TABLE>
<CAPTION>
(In thousands)
Nine Months Ended
September 30
-----------------------------
1998 1997
--------- ---------
<S> <C> <C>
NET CASH (USED IN) PROVIDED BY OPERATING
ACTIVITIES $(332,372) $ 25,109
INVESTING ACTIVITIES
Proceeds from maturities and calls of
securities held to maturity 47,773 29,783
Proceeds from sales of securities
available for sale 26,373 58,542
Proceeds from maturities and calls of
securities available for sale 227,803 114,126
Purchases of securities available for sale (181,758) (294,957)
Purchases of securities held to maturity (31,482) (27,345)
Net purchase of bank premises and
equipment (1,926) (3,630)
Net cash of acquired branches &
subsidiary 56,472 (28,929)
Changes in loans 105,492 (40,875)
--------- ---------
NET CASH PROVIDED BY (USED IN)INVESTING
ACTIVITIES 248,747 (193,285)
--------- ---------
FINANCING ACTIVITIES
Cash dividends paid (19,321) (14,745)
Pre-merger dividends of pooled company (1,474) (2,074)
Acquisition of treasury stock (3,610) (5,793)
Proceeds from exercise of stock options 1,935 2,228
Proceeds from sales of treasury stock 654
Proceeds from Federal Home Loan Bank
advances 233,323 255,077
Repayment of Federal Home Loan Bank
advances (195,598) (280,079)
Acquisition of fractional shares (7)
Changes in:
Deposits 65,523 100,934
Other borrowings (89)
Federal funds purchased and securities
sold under agreements to repurchase 2,943 75,152
--------- ---------
NET CASH PROVIDED BY FINANCING ACTIVITIES 84,279 130,700
--------- ---------
INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS 654 (37,476)
CASH AND CASH EQUIVALENTS AT BEGINNING OF
PERIOD 180,864 154,478
--------- ---------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 181,518 $ 117,002
========= =========
</TABLE>
See notes to consolidated unaudited financial statements.
9
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
UNITED BANKSHARES, INC. AND SUBSIDIARIES
1. GENERAL
The accompanying unaudited consolidated interim financial statements of United
Bankshares, Inc. and Subsidiaries ("United") have been prepared in accordance
with generally accepted accounting principles for interim financial information
and with the instructions for Form 10-Q and Article 10 of Regulation S-X.
Accordingly, the financial statements do not contain all of the information and
footnotes required by generally accepted accounting principles. The financial
statements presented in this report have not been audited. The accounting and
reporting policies followed in the presentation of these financial statements
are consistent with those applied in the preparation of the 1997 annual report
of United Bankshares, Inc. on Form 10-K. In the opinion of management,
adjustments necessary for a fair presentation of financial position and results
of operations for the interim periods have been made. Such adjustments are of a
normal and recurring nature.
In June 1996, the FASB issued Statement No. 125, (SFAS No. 125), "Accounting for
Transfers and Servicing of Financial Assets and Extinguishments of Liabilities,"
which supersedes SFAS No. 76, "Extinguishment of Debt." SFAS No. 125 prescribes
the accounting treatment for securitization transactions based on a financial
components approach with an emphasis on physical control, such as the ability to
pledge or exchange the securitized assets, while prior rules emphasize the
economic risks or rewards of ownership of the assets. Additionally, SFAS No.
125 applies to repurchase agreements, securities lending, loan participations,
and other financial component transfers and exchanges, which had been delayed
until after December 31, 1997, by FASB Statement No. 127, (SFAS No. 127),
"Deferral of the Effective Date of Certain Provisions of FASB Statement No. 125,
an amendment of FASB Statement No. 125." Under the financial components
approach of SFAS No. 125, both the transferor and transferee will recognize on
its balance sheet the assets and liabilities, or components thereof, that it
controls and derecognize from the balance sheet the assets and liabilities that
were surrendered or extinguished in the transfer. The adoption of the additional
provisions of SFAS No. 125, as amended by SFAS No. 127, resulted in no material
impact on United's financial condition or results of operations.
In June 1997, the FASB issued Statement No. 130, (SFAS No. 130), "Reporting
Comprehensive Income." This statement, which is effective for years beginning
after December 15, 1997, requires companies to report and display comprehensive
income and its components. United has disclosed the components of comprehensive
income as outlined by
10
<PAGE>
SFAS No. 130 in these financial statements and notes thereto.
In June 1997, the FASB issued Statement No. 131, (SFAS No. 131), "Disclosures
about Segments of an Enterprise and Related Information." SFAS No. 131 provides
guidance for the way public enterprises report information about operating
segments in annual financial statements and requires selected information about
operating segments in interim financial reports. It also requires certain
related disclosures about products and services, geographic areas and major
customers. The segment and other information disclosures are required for years
beginning after December 15, 1997. United is currently reviewing its methodology
used for determining operating segment results.
In February 1998, the FASB issued Statement No. 132, "Employers' Disclosures
about Pension and Other Postretirement Benefits, an amendment of FASB Statements
No. 87, 88 and 106." This statement revises employers' disclosures about
pension and other postretirement benefit plans, but does not change the
measurement or recognition of those plans. It standardizes the disclosure
requirements to the extent practicable, requires additional information on
changes in the benefit obligations and fair values of plan assets that will
facilitate financial analysis and eliminates certain disclosures that are no
longer as useful as they were when Statements No. 87, 88 and 106 were issued.
This Statement is effective for fiscal years beginning after December 15, 1997.
These disclosure requirements will have no material impact on United's financial
position or results of operations.
In June 1998, the Financial Accounting Standards Board issued Statement No. 133,
"Accounting for Derivative Instruments and Hedging Activities", which is
required to be adopted in years beginning after June 15, 1999. Because of
United's minimal use of derivatives, management does not anticipate that the
adoption of the new Statement will have a significant effect on earnings or the
financial position of United.
The new rules do not have a material effect on United's financial position and
results of operations.
2. BASIS OF PRESENTATION
The accompanying consolidated interim financial statements include the accounts
of United and its wholly-owned subsidiaries. United considers all of its
principal business activities to be bank related. All significant intercompany
accounts and transactions have been eliminated in the consolidated financial
statements. Dollars are in thousands, except per share and share data.
11
<PAGE>
On August 1, 1997, United acquired 100% of the outstanding common stock of First
Patriot Bankshares Corporation, Reston, Virginia ("Patriot") for cash
consideration of approximately $39.22 million. The transaction was accounted for
using the purchase method of accounting and, accordingly, the information
included herein includes the financial position and results of operations of
Patriot from the effective acquisition date forward.
On April 2, 1998, United consummated its merger with George Mason Bankshares,
Inc., Fairfax, Virginia ("George Mason") in a common stock exchange accounted
for under the pooling of interests method of accounting. United exchanged 1.70
shares of United common stock for each of the 5,277,301 common shares of George
Mason or approximately 8,971,412 shares, unadjusted for cash paid in lieu of
fractional shares. As of the date of merger, George Mason reported total assets
of $1,023,467, total net loans of $600,490, deposits of $839,562 and
shareholders' equity of $78,925. All statements and notes thereto have been
restated to give effect to the merger of United and George Mason as though they
had always been combined.
3. ACQUISITIONS
On October 1, 1998, United consummated its merger with Fed One Bancorp, Inc.,
Wheeling, West Virginia ("Fed One") in a common stock exchange accounted for
under the pooling of interests method of accounting. United exchanged 1.50
shares of United common stock for each of the 2,629,538 common shares of Fed One
or approximately 3,944,307 shares, unadjusted for cash paid in lieu of
fractional shares. As of the date of merger, Fed One reported total assets of
$372,782, total net loans of $163,450, deposits of $261,200 and shareholders'
equity of $49,757.
The following represents unaudited selected pro forma financial information
regarding the effects of the transactions as though United and Fed One had been
combined for all periods presented:
<TABLE>
<CAPTION>
United
(In thousands, except per share data) and
Fed Fed One
United One Pro Forma
---------- --------- ---------
<S> <C> <C> <C>
For the Nine Months
Ended September 30, 1998:
Net interest income $117,582 $8,277 $125,859
Net income 36,222 2,087 38,309
Earnings per common share:
Basic $ 0.93 $ 0.91 $ 0.90
Diluted $ 0.91 $ 0.86 $ 0.88
</TABLE>
12
<PAGE>
<TABLE>
<CAPTION>
United
and
Fed Fed One
United One Pro Forma
-------- ------- ---------
<S> <C> <C> <C>
For the Nine Months
Ended September 30, 1997:
Net interest income $100,717 $ 8,787 $109,504
Net income 36,447 2,442 38,889
Earnings per common share:
Basic $ 0.94 $ 1.08 $ 0.93
Diluted $ 0.93 $ 1.03 $ 0.90
For the Year Ended
December 31, 1997:
Net interest income $137,698 $11,632 $149,330
Net income 49,019 3,242 52,261
Earnings per common share:
Basic $ 1.27 $ 1.43 $ 1.24
Diluted $ 1.25 $ 1.36 $ 1.22
</TABLE>
4. INVESTMENT SECURITIES
The amortized cost and estimated fair values of securities available for sale
are summarized as follows:
<TABLE>
<CAPTION>
September 30, 1998
--------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
U.S. Treasury securities and
obligations of U.S. Government
corporations and agencies $194,839 $ 1,910 $ 15 $196,734
State and political subdivisions 4,769 165 4,934
Mortgage-backed securities 263,239 3,582 227 266,594
Marketable equity securities 8,676 2,857 180 11,353
Other 43,338 45 43,293
-------- --------- --------- ---------
Total $514,861 $ 8,514 $467 $522,908
========= ========= ========= =========
</TABLE>
<TABLE>
<CAPTION>
December 31, 1997
--------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
U.S. Treasury securities and
obligations of U.S. Government
corporations and agencies $178,973 $ 595 $272 $179,296
State and political subdivisions 4,093 106 4,199
Mortgage-backed securities 379,452 3,099 393 382,158
Marketable equity securities 4,300 6,741 11,041
Other 18,906 80 18,826
--------- --------- --------- ---------
Total $585,724 $10,541 $745 $595,520
========= ========= ========= =========
</TABLE>
13
<PAGE>
The cumulative net unrealized holding gain on available for sale securities
resulted in an increase to shareholders' equity of $5,230 and $6,204, net of
deferred income taxes at September 30, 1998 and December 31, 1997, respectively.
The amortized cost and estimated fair value of securities available for sale at
September 30, 1998 and December 31, 1997, by contractual maturity are as
follows:
<TABLE>
<CAPTION>
September 30, 1998 December 31, 1997
-------------------- --------------------
Estimated Estimated
Amortized Fair Amortized Fair
Cost Value Cost Value
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Due in one year or less $ 47,179 $ 47,542 $ 42,351 $ 42,794
Due after one year through
five years 117,765 119,254 133,994 134,480
Due after five years through
ten years 109,834 110,618 135,081 135,561
Due after ten years 231,407 234,141 266,588 268,234
Marketable equity securities 8,676 11,353 7,710 14,451
--------- --------- --------- ---------
Total $514,861 $522,908 $585,724 $595,520
========= ========= ========= =========
</TABLE>
The preceding table includes $266,594 and $382,158 of mortgage-backed securities
at September 30, 1998 and December 31, 1997, respectively, with an amortized
cost of $263,239 and $379,452 at September 30, 1998 and December 31, 1997,
respectively. Maturities of mortgage-backed securities are based upon the
estimated average life.
The amortized cost and estimated fair values of securities held to maturity are
summarized as follows:
<TABLE>
<CAPTION>
September 30, 1998
--------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
U.S. Treasury securities and
obligations of U.S. Government
corporations and agencies $ 91,476 $1,655 $ $ 93,131
State and political subdivisions 68,726 2,839 11 71,554
Mortgage-backed securities 45,680 514 8 46,186
Other 9,452 733 8,719
--------- --------- --------- ---------
Total $215,334 $5,008 $752 $219,590
========= ========= ========= =========
</TABLE>
<TABLE>
<CAPTION>
December 31, 1997
--------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
--------- ---------- ---------- ---------
<S> <C> <C> <C> <C>
U.S. Treasury securities and
obligations of U.S. Government
corporations and agencies $ 98,330 $ 570 $ 22 $ 98,878
State and political subdivisions 51,180 2,131 21 53,290
Mortgage-backed securities 74,878 529 169 75,238
Other 6,923 6,923
--------- ---------- ---------- ---------
Total $231,311 $3,230 $212 $234,329
========= ========== ========== =========
</TABLE>
14
<PAGE>
The amortized cost and estimated fair value of securities held to maturity at
September 30, 1998, and December 31, 1997, by contractual maturity follow.
Expected maturities may differ from contractual maturities because the issuers
may have the right to call or prepay obligations with or without call or
prepayment penalties.
<TABLE>
<CAPTION>
September 30, 1998 December 31, 1997
-------------------- --------------------
Estimated Estimated
Amortized Fair Amortized Fair
Cost Value Cost Value
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Due in one year or less $ 13,457 $ 13,576 $ 18,825 $ 18,887
Due after one year
through five years 56,212 57,356 72,750 73,640
Due after five years
through ten years 94,766 97,332 98,335 99,481
Due after ten years 50,899 51,326 41,401 42,321
-------- -------- -------- --------
Total $215,334 $219,590 $231,311 $234,329
======== ======== ======== ========
</TABLE>
Maturities of the mortgage-backed securities are based upon the estimated
average life. There were no sales of held to maturity securities.
The amortized cost of securities pledged to secure public deposits, securities
sold under agreements to repurchase, and for other purposes as required or
permitted by law, approximated $381,429 and $415,206 at September 30, 1998 and
December 31, 1997, respectively.
5. NONPERFORMING LOANS
Nonperforming loans are summarized as follows:
<TABLE>
<CAPTION>
September 30 December 31
1998 1997
------------ -----------
<S> <C> <C>
Loans past due 90 days or more
and still accruing interest $ 8,595 $12,181
Nonaccrual loans 8,396 5,202
------------ -----------
Total nonperforming loans $16,991 $17,383
============ ===========
</TABLE>
15
<PAGE>
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:
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
-------------------- --------------------
September 30 September 30
1998 1997 1998 1997
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Balance at beginning of period $35,111 $27,906 $30,455 $27,942
Allowance of purchased subsidiary 2,695 2,695
Provision charged to expense 3,316 1,011 10,623 2,173
--------- --------- --------- ---------
38,427 31,612 41,078 32,810
Loans charged-off (1,250) (1,233) (4,564) (2,722)
Less recoveries 193 261 856 552
--------- --------- --------- ---------
Net Charge-offs (1,057) (972) (3,708) (2,170)
--------- --------- --------- ---------
Balance at end of period $37,370 $30,640 $37,370 $30,640
========= ========= ========= =========
</TABLE>
The average recorded investment in impaired loans during the quarter ended
September 30, 1998 and for the year ended December 31, 1997 was approximately
$10,550 and $12,686, respectively. For the quarters ended September 30, 1998
and 1997, United recognized interest income on the impaired loans of
approximately $78 and $283, respectively, substantially all of which was
recognized using the accrual method of income recognition.
At September 30, 1998, the recorded investment in loans that are considered to
be impaired was $9,761 (of which $8,396 were on a nonaccrual basis). Included in
this amount is $4,229 of impaired loans for which the related allowance for loan
losses is $608 and $5,532 of impaired loans that do not have an allowance for
credit losses due to management's estimate that the fair value of the underlying
collateral of these loans is sufficient for full repayment of the loan and
interest.
The amount of interest income which would have been recorded under the original
terms for the above loans was $255 and $608 for the three months ended September
30, 1998 and 1997, respectively, and $1,057 and $1,273 for the nine months ended
September 30, 1998 and 1997, respectively.
7. COMMITMENTS AND CONTINGENT LIABILITIES
United and its subsidiaries are currently involved, in the normal course of
business, in various legal proceedings. Management is vigorously pursuing all
of its legal and factual defenses and, after consultation with legal counsel,
believes that all such litigation will be resolved without material effect on
financial position or results of operations.
16
<PAGE>
8. EARNING ASSETS AND INTEREST-BEARING LIABILITIES
The following table shows the daily average balance of major categories of
assets and liabilities for each of the three month periods ended September 30,
1998, and September 30, 1997, with the interest rate earned or paid on such
amount.
<TABLE>
<CAPTION>
THREE MONTHS ENDED THREE MONTHS ENDED
SEPTEMBER 30 SEPTEMBER 30
1998 1997
----------------------------------- -----------------------------------
(Dollars in Average Avg. Average Avg.
Thousands) Balance Interest Rate Balance Interest Rate
<S> <C> <C> <C> <C> <C> <C>
ASSETS
Earning Assets:
Federal funds sold and
securities purchased
under agreements to
resell and other short-
term investments $ 18,180 $ 278 6.08% $ 25,250 $ 353 5.55%
Investment Securities:
Taxable 676,311 9,938 5.88% 759,882 12,766 6.72%
Tax-exempt (1) 68,856 1,260 7.32% 52,356 1,140 8.71%
----------- --------- --------- ---------- --------- ---------
Total securities 745,167 11,198 6.01% 812,238 13,906 6.85%
Loans, net of unearned
income (1) (2) 2,966,150 66,738 8.96% 2,395,854 51,970 8.68%
Allowance for loan
losses (35,281) (29,550)
----------- ----------
Net loans 2,930,869 9.07% 2,366,304 8.71%
----------- --------- --------- ---------- --------- ---------
Total earning assets 3,694,216 $ 78,214 8.43% 3,203,792 $ 62,229 8.27%
----------- --------- --------- ---------- --------- ---------
Other assets 249,256 216,484
----------- ----------
TOTAL ASSETS $3,943,472 $3,420,276
=========== ==========
LIABILITIES
Interest-Bearing Funds:
Interest-Bearing deposits $2,560,584 $ 29,981 4.65% $2,328,441 $ 26,682 4.55%
Federal funds purchased,
repurchase agreements
and other short-term
borrowings 239,739 2,842 4.70 % 225,587 2,517 4.43%
FHLB advances 261,391 3,611 5.48% 84,271 1,317 6.20%
----------- --------- --------- ---------- --------- ---------
Total Interest-Bearing Funds 3,061,714 36,434 4.72% 2,638,299 30,516 4.59%
----------- --------- --------- --------- ---------
Demand deposits 442,984 400,533
Accrued expenses and other 67,679 42,385
----------- ----------
TOTAL LIABILITIES 3,572,377 3,081,217
Shareholders' Equity 371,095 339,059
----------- ----------
TOTAL LIABILITIES AND
SHAREHOLDERS' EQUITY $3,943,472 $3,420,276
=========== ==========
NET INTEREST INCOME $ 41,780 $ 35,713
========= =========
INTEREST SPREAD 3.71% 3.68%
NET INTEREST MARGIN 4.52% 4.42%
</TABLE>
(1) The interest income and the yields on nontaxable loans and investment
securities are presented on a tax-equivalent basis using the statutory federal
income tax rate of 35%.
(2) Nonaccruing loans are included in the daily average loan amounts
outstanding.
17
<PAGE>
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,
1998, and September 30, 1997, with the interest rate earned or paid on such
amount.
<TABLE>
<CAPTION>
Three Months Ended Three Months Ended
September 30 September 30
1998 1997
------------------------------------- -------------------------------------
(Dollars in Average Avg. Average Avg.
Thousands) Balance Interest Rate Balance Interest Rate
<S> <C> <C> <C> <C> <C> <C>
ASSETS
Earning Assets:
Federal funds sold and
securities purchased
under agreements to
resell and other short-
term investments $ 18,137 $ 773 5.70% $ 19,254 $ 788 5.47%
Investment Securities:
Taxable 717,203 33,643 6.25% 685,267 33,817 6.51%
Tax-exempt (1) 60,559 3,645 8.03% 54,195 3,589 8.73%
----------- --------- --------- ---------- --------- ---------
Total Securities 777,762 37,288 6.39% 739,462 37,406 6.67%
Loans, net of unearned
income (1) (2) 2,814,230 185,756 8.80% 2,324,539 149,886 8.50%
Allowance for loan
losses (33,014) (28,456)
----------- ----------
Net loans 2,781,216 8.91% 2,296,083 8.73%
----------- --------- --------- ---------- --------- ---------
Total earning assets 3,577,115 $223,817 8.34% 3,054,799 $188,080 8.12%
----------- --------- --------- ---------- --------- ---------
Other assets 232,988 197,948
----------- ----------
TOTAL ASSETS $3,810,103 $3,252,747
=========== ==========
LIABILITIES
Interest-Bearing Funds:
Interest-bearing deposits $2,499,647 $ 86,479 4.63% $2,245,993 $ 75,094 4.47%
Federal funds purchased,
repurchase agreements
and other short-term
borrowings 222,939 7,870 4.72% 183,711 6,173 4.49%
FHLB advances 218,879 9,061 5.53% 85,210 3,742 5.87%
----------- --------- --------- ---------- --------- ---------
Total Interest-Bearing Funds 2,941,465 103,410 4.70% 2,514,914 85,009 4.52%
----------- --------- --------- ---------- --------- ---------
Demand deposits 437,386 368,154
Accrued expenses and other
liabilities 65,116 38,644
----------- ----------
TOTAL LIABILITIES 3,443,967 2,921,712
Shareholders' Equity 366,136 331,035
----------- ----------
TOTAL LIABILITIES AND
SHAREHOLDERS' EQUITY $3,810,103 $3,252,747
----------- ----------
NET INTEREST INCOME $120,407 $103,071
========= =========
INTEREST SPREAD 3.64% 3.60%
NET INTEREST MARGIN 4.49% 4.51%
</TABLE>
(1) The interest income and the yields on nontaxable loans and investment
securities are presented on a tax-equivalent basis using the statutory federal
income tax rate of 35%.
(2) Nonaccruing loans are included in the daily average loan amounts
outstanding.
18
<PAGE>
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: changes in economic conditions; movements in interest rates;
competitive pressures on product pricing and services; success and timing of
business strategies; the nature and extent of governmental actions and
reforms; and rapidly changing technology and evolving banking industry
standards.
INTRODUCTION
The following discussion and analysis presents the significant changes in
financial condition and the results of operations of United and its subsidiaries
for the periods indicated below. This discussion and the consolidated financial
statements and the notes to consolidated financial statements include the
accounts of United Bankshares, Inc. and its wholly-owned subsidiaries, and
reflect the merger of George Mason Bankshares, Inc. (George Mason) on April 2,
1998, under the pooling of interests method of accounting. Accordingly, all
prior period financial statements have been restated to include George Mason.
United exchanged 1.70 shares of its common stock or 9,024,238 shares of United
for each of the 5,308,551 common shares of George Mason.
This discussion and analysis should be read in conjunction with the consolidated
financial statements and accompanying notes thereto, which are included
elsewhere in this document.
The following 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 nine months of 1998 was $36.22 million or $0.91 per share
compared to $36.45 million or $0.93 per share for the first nine months of 1997.
This represents a 0.63% decrease in net income and a 2.15% decrease in earnings
per share. The decrease was due to the recognition of approximately $8 million
of merger-related charges relating to the second quarter merger with George
Mason. One-time charges of approximately $7 million were also incurred to align
George Mason's operations and to conform certain policies to those of United and
to align certain other operating components within the new organizational
structure. Excluding these merger-related and one-time charges, United's core
earnings for the first nine months of 1998 were $1.11 per share. United's
annualized return on average assets was 1.27% and return on average
shareholders' equity was 13.23% as compared to 1.50% and 14.77% for 1997,
respectively.
United has strong core earnings driven by a net interest margin of 4.49% for the
first three quarters of 1998. Net interest income increased by $16.87 million
or 16.74% for the first nine months of 1998 as compared to the same period for
1997. The provision for loan losses increased $8.45 million or 388.86% when
comparing the first nine months of 1998 to the first nine months of 1997.
Noninterest income, including income from mortgage banking operations and
securities gains, increased $11.88 million or 44.26% for the first nine months
of 1998 when compared to the first nine months of 1997. Noninterest expenses
increased $25.13 million or 35.69% for the first nine months compared to the
same period in 1997.
19
<PAGE>
Total assets were $3.92 billion at September 30, 1998, up $194.21 million or
5.21% compared with year-end, and up 10.47% from September 30, 1997. Loans, net
of unearned income, reflected a $288.21 million increase while investment
securities reflected an $88.59 million decrease for the first nine months of
1998 as compared with year-end 1997 as those funds continue to fund strong loan
growth. All other categories of assets were moderately flat compared to year-
end 1997.
Total deposits grew $135.18 million or 4.62% from year-end due to United's
continued offering of new deposit products. Since December 31, 1997, United has
realized an increase of $177.07 million in interest-bearing deposits while
demand deposits have declined by $41.88 million. United's short-term borrowings
increased $2.85 million while its FHLB borrowings increased $37.73 million as
United utilized the increased borrowing to fund loan growth. Accrued expenses
and other liabilities have increased $4.71 million since year-end 1997 primarily
as a result of increased accrued interest payable due to the higher volume of
interest-bearing deposits and borrowed funds as well as the previously mentioned
George Mason merger-related charges.
Shareholders' equity increased $13.74 million or 3.87% as compared with December
31, 1997. United continues to maintain an appropriate balance between capital
adequacy and return to shareholders. At September 30, 1998, United's regulatory
capital ratios, including those of its bank subsidiaries, exceeded the levels
established for well-capitalized institutions.
RESULTS OF OPERATIONS
NET INTEREST INCOME
Net interest income increased $5.92 million or 16.94% in the third quarter of
1998 and $16.87 million or 16.74% for the first nine months of 1998, when
compared to the same periods of 1997. The net interest margin continues to
drive United's core profitability and momentum. The increases were primarily
attributable to higher levels of average earning assets of $490.42 million for
the third quarter of 1998 and $522.32 million for the first nine months of 1998,
when compared to the third quarter and first nine months of 1997, respectively.
United's tax-equivalent net interest margin was 4.52% and 4.49% for the third
quarter and first nine months of 1998, respectively. For the quarter ended
September 30, 1998, United's net interest margin was 2 basis points higher than
the immediately preceding quarter, and 10 basis points higher than the third
quarter of 1997. The higher net interest margin from one year ago was the
result of an increased average loan portfolio at higher rates offset by a
smaller increase in the average deposit and wholesale funding balances with a
lower increase in the costs of funding.
PROVISION FOR LOAN LOSSES
For the quarters ended September 30, 1998 and 1997, the provision for loan
losses was $3.32 million and $1.01 million, respectively, while the first nine
months provisions were $10.62 million for 1998 as compared to $2.17 million for
1997. The increase in provision expense over last year's amounts is due to the
trend of increased net charge-offs, certain increases in commercial nonaccrual
loans, as well as anticipated
20
<PAGE>
increased consumer delinquency in light of projected economic conditions. The
allowance for loan losses as a percentage of loans, net of unearned income,
approximated 1.29% at September 30, 1998 and 1.17% at December 31, 1997, and
1.24% at September 30, 1997. Charge-offs exceeded recoveries during the third
quarter of 1998 and 1997 and resulted in net charge-offs of $1.06 million and
$972 thousand, respectively. Charge-offs exceeded recoveries by $3.71 million
for the first nine months of 1998 as compared to net charge-offs of
$2.17 million for the first nine months of 1997. Note 6 to the accompanying
unaudited consolidated financial statements provides a progression of the
allowance for loan losses.
United's sound credit quality, as compared to peers, is evidenced by the low
level of nonperforming assets at September 30, 1998. Nonperforming loans
decreased $392 thousand or 2.26% to $16.99 million at September 30, 1998
compared to $17.38 million at year-end 1997. Nonperforming loans, as a
percentage of loans, net of unearned income, decreased from 0.67% to 0.59% when
comparing these two respective periods. The components of nonperforming loans
include nonaccrual loans and loans which are contractually past due 90 days or
more as to interest or principal, but have not been put on a nonaccrual basis.
Loans past due 90 days or more decreased $3.59 million or 29.44% during the
first nine of 1998 and nonaccrual loans increased $3.19 million or 61.40% since
year-end 1997. Total nonperforming assets of $20.92 million, including OREO of
$3.93 million at September 30, 1998, represented 0.53% of total assets, which
was equal to the ratio at December 31, 1997.
As of September 30, 1998, the ratio of the allowance for loan losses to
nonperforming loans was 219.9% as compared to 175.2% as of December 31, 1997.
Management believes that the allowance for loan losses of $37.37 million as of
September 30, 1998, is adequate to provide for potential losses on existing
loans based on information currently available.
United evaluates the adequacy of the allowance for loan losses on a quarterly
basis. The provision for loan losses charged to operations is based on
management's evaluation of individual credits, the past loan loss experience,
and other factors which, in management's judgment, deserve recognition in
estimating loan losses. Such other factors considered by management, among
other things, included growth and composition of the loan portfolio, known
deterioration in certain classes of loans or collateral, trends in
delinquencies, and current economic conditions. United's loan administration
policies are focused upon the risk characteristics of the loan portfolio, both
in terms of loan approval and credit quality.
OTHER INCOME
Other income consists of all revenues which are not included in interest and fee
income related to earning assets. Noninterest income has been and will continue
to be an important factor for improving United's profitability. Recognizing the
importance, management continues to evaluate areas where noninterest income can
be enhanced. Noninterest income increased $1.99 million or 17.72% for the third
quarter of 1998 when compared to the third quarter of 1997. Additionally, the
$38.72 million of noninterest income for the first nine months of 1998, reflects
an increase of $11.88 million or 44.26% over the first nine months of 1997.
Excluding income from mortgage banking operations and
21
<PAGE>
investment securities transactions, noninterest income increased $142 thousand
or 2.36% for the third quarter and $1.98 million or 12.53% for the first nine
months of 1998.
The overall increase in noninterest income for the first nine months of 1998 was
primarily due to a combination of a $7.25 million or 65.98% increase in income
from mortgage banking operations and a $2.49 million recognized gain on an
available for sale equity security exchanged in an unaffiliated merger
transaction consummated at the end of the first quarter of 1998, with increases
in the categories of return check charges, bankcard income and brokerage and
trust department commissions as a result of increased transactions in those
areas.
OTHER EXPENSES
Just as management continues to evaluate areas where noninterest income can be
enhanced, it strives to improve the efficiency of its operations to reduce
costs. Other expenses include all items of expense other than interest expense,
the provision for loan losses, and income taxes. Other expenses increased
$2.87 million or 10.92% and $25.13 million or 35.69% for the quarter and nine
months ended September 30, 1998, as compared to the same periods in 1997. These
increases resulted primarily from the third quarter 1997 acquisition of First
Patriot Bankshares Corporation and previously mentioned George Mason merger-
related charges recognized during the second quarter of 1998. These charges
consisted primarily of employee benefits, severance, facilities and conversion
costs to effect the merger.
Total salaries and benefits increased by 16.69% or $2.16 million and 34.15% or
$12.10 million for the third quarter and first nine months of 1998 when compared
to the same periods of 1997. The higher salaries and benefits costs for 1998
were attributable to commissions and salaries expense at United's mortgage
banking subsidiaries due to increased volume of mortgage loans originated during
the year for sale in the secondary market as well as severance and benefit pay
of displaced employees in the George Mason merger.
Net occupancy expense decreased $765 thousand or 21.07% for the third quarter of
1998 when compared to the third quarter of 1997 due to the ongoing consolidation
of common banking offices from United's recent mergers and acquisitions. For
the nine months ended September 30, 1998, net occupancy expense remained
relatively flat with only a $383 thousand or 4.31% increase over the first nine
months of 1997.
Other expenses increased $1.48 million or 15.20% and $12.65 million or 48.48%
for the third quarter and first nine months of 1998, respectively, as compared
to the same periods of 1997. This overall increase was primarily due to the
aforementioned merger-related expenses associated with the George Mason merger
and United's third quarter 1997 purchase acquisition of Patriot.
MARKET RISK
The objective of United's Asset/Liability Management function is to maintain
consistent growth in net interest income within United's policy guidelines.
This objective is accomplished through the management of
22
<PAGE>
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 (excess of liabilities over assets) in the one year horizon.
On the surface, this would indicate that rising market interest rates would
reduce United's earnings and declining market interest rates would increase
earnings. United, however, has not experienced the kind of earnings volatility
indicated from the cumulative gap. This is because a significant portion of
United's retail deposit base does not reprice on a contractual basis.
Management has estimated, based upon historical analyses, that United's savings
deposits are less sensitive to interest rate changes than are other forms of
deposits. The GAP table presented herein has been adapted to show the estimated
differences in interest rate sensitivity which result when the retail deposit
base is assumed to reprice in a manner consistent with historical trends. (See
"Management Adjustments" in the GAP table). Using these estimates, United was
asset sensitive in the one year horizon in the amount of $394,379,000 or 10.60%
of the cumulative gap to related earning assets.
23
<PAGE>
To aid in interest rate management, United's subsidiary banks are members of the
Federal Home Loan Bank (FHLB). The use of FHLB advances provides United with a
low risk means of matching maturities of earning assets and interest-bearing
funds to achieve a desired interest rate spread over the life of the earning
assets.
Interest rate risk management focuses on maintaining consistent growth in net
interest income within Board-approved policy limits. United's Asset/Liability
Management Committee (ALCO), which includes senior management representatives
and reports to the Board of Directors, monitors and manages interest rate risk
to maintain an acceptable level of change to net interest income as a result of
changes in interest rates. Policy established for interest rate risk is stated
in terms of the change in net interest income over a twelve month horizon given
an immediate and sustained increase or decrease in interest rates. The current
limits approved by the Board of Directors are plus or minus 10% for each 100
basis point increase or decrease in interest rates.
The following table shows United's estimated earnings sensitivity profile after
management's adjustments as of September 30, 1998:
Change in
Interest Rates Percentage Change in
(basis points) Net Interest Income
-------------- ---------------------
+200 3.40%
-200 -3.74%
Given an immediate, sustained 200 basis point upward shock to the yield curve
used in the simulation model, it is estimated net interest income for United
would increase by 3.40% over one year. A 200 basis point immediate, sustained
downward shock in the yield curve would decrease net interest income by an
estimated 3.74% over one year. All of these estimated changes in net interest
income are within the policy guidelines established by the Board of Directors.
24
<PAGE>
The following table shows the interest rate sensitivity GAP as of September
30, 1998:
INTEREST RATE SENSITIVITY GAP
<TABLE>
<CAPTION>
DAYS
---------------------------------- TOTAL 1 - 5 OVER 5
0 - 90 91 - 180 181 - 365 ONE YEAR YEARS YEARS TOTAL
---------- --------- ---------- ---------- --------- --------- ----------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
ASSETS
Interest-Earning Assets:
Federal funds sold and
securities purchased
under agreements to
resell and other short-
term investments $ 87,608 $ 87,608 $ 87,608
Investment and Marketable
Equity Securities:
Taxable 14,063 $ 20,872 $ 22,196 57,131 $163,840 $ 443,611 664,582
Tax-exempt 3,868 3,868 11,626 58,166 73,660
Loans, net of unearned
income 1,299,243 176,531 327,089 1,802,863 747,176 345,579 2,895,618
---------- --------- ---------- ---------- -------- --------- ----------
Total Interest-Earning
Assets $1,400,914 $ 197,403 $ 353,153 $1,951,470 $922,642 $ 847,356 $3,721,468
========== ========= ========== ========== ======== ========= ==========
LIABILITIES
Interest-Bearing Funds:
Savings and NOW
accounts $1,044,408 $1,044,408 $1,044,408
Time deposits of
$100,000 & over 82,764 $ 33,022 $ 91,507 207,293 $ 73,594 $ 834 281,721
Other time deposits 274,907 244,700 346,165 865,772 414,600 2,881 1,283,253
Federal funds purchased,
repurchase agreements
and other borrowings 233,500 233,500 33 233,533
FHLB advances 500 500 1,000 91,500 110,920 203,420
---------- --------- ---------- ---------- -------- --------- ----------
Total Interest-Bearing
Funds $1,635,579 $ 278,222 $ 438,172 $2,351,973 $579,695 $ 114,667 $3,046,335
========== ========= ========== ========== ======== ========= ==========
Interest Sensitivity Gap $ (234,665) $ (80,819) $ (85,019) $ (400,503) $342,947 $ 732,689 $ 675,133
========== ========= ========== ========== ======== ========= ==========
Cumulative Gap $ (234,665) $(315,484) $ (400,503) $ (400,503) $(57,556) $ 675,133 $ 675,133
========== ========= ========== ========== ======== ========= ==========
Cumulative Gap as
a Percentage of Total
Earning Assets -6.31% -8.48% -10.76% -10.76% -1.55% 18.14% 18.14%
Management
Adjustments 993,603 (66,273) (132,447) 794,882 (794,882) 0
Off-Balance
Sheet Activities
---------- --------- ---------- ---------- -------- --------- ----------
Cumulative Management
Adjusted Gap and
Off-Balance Sheet
Activities $ 758,938 $ 611,845 $ 394,379 $ 394,379 $(57,556) $ 675,133 $ 675,133
========== ========= ========== ========== ======== ========= ==========
Cumulative Management
Adjusted Gap and
Off-Balance Sheet
Activities as a
Percentage of Total
Earning Assets 20.39% 16.44% 10.60% 10.60% -1.55% 18.14% 18.14%
</TABLE>
25
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
United maintains, in the opinion of management, liquidity which is sufficient to
satisfy its depositors' requirements and the credit needs of its customers.
Like all banks, United depends upon its ability to renew maturing deposits and
other liabilities on a daily basis and to acquire new funds in a variety of
markets. A significant source of funds available to United is "core deposits."
Core deposits include certain demand deposits, statement and special savings and
NOW accounts. These deposits are relatively stable and they are the lowest cost
source of funds available to United. Short-term borrowings have also been a
significant source of funds. These include federal funds purchased and
securities sold under agreements to repurchase. Repurchase agreements represent
funds which are obtained as the result of a competitive bidding process.
Liquid assets are cash and those items readily convertible to cash. All banks
must maintain sufficient balances of cash and near-cash items to meet the day-
to-day demands of customers. Other than cash and due from banks, the available
for sale securities portfolio, loans held for sale and maturing loans and
investments are the primary sources of liquidity.
The goal of liquidity management is to ensure the ability to access funding
which enables United to efficiently satisfy the cash flow requirements of
depositors and borrowers and meet United's cash needs. Liquidity is managed by
monitoring funds availability from a number of primary sources. Substantial
funding is available from cash and cash equivalents, unused short-term borrowing
and a geographically dispersed network of subsidiary banks providing access to a
diversified and substantial retail deposit market.
Short-term needs can be met through a wide array of sources such as
correspondent and downstream correspondent federal funds and utilization of
Federal Home Loan Bank advances.
Other sources of liquidity available to United to provide long-term as well as
short-term funding alternatives, in addition to FHLB advances, are long-term
certificates of deposit, lines of credit, and borrowings that are secured by
bank premises or stock of United's subsidiaries. United has no intention at this
time to utilize any long-term funding sources other than FHLB advances and long-
term certificate of deposits for funding in the normal course of business.
For the nine months ended September 30, 1998, United used $332.37 million of
cash for operations. Cash used for operations for the nine months ended
September 30, 1998, included, among other things, an increase of approximately
$367 million in loans held for sale. During the same period, net cash of
$248.75 million was provided by investing activities which was primarily due to
$88.71 million of excess proceeds from sales and maturities of securities over
purchases and $105.49 million of net repayments over originations in the loan
portfolio. During the first nine months of 1998 net cash of $84.28 million was
provided by financing activities, primarily due to an increase in deposits of
$65.52 million as well as net FHLB advances of approximately $37.73 million and
a $2.94 increase in other short-term borrowings. These amounts were offset by
payment of approximately $19.32 million in
26
<PAGE>
cash dividends and $3.61 million repurchase of treasury stock for United's
employee benefit plans. The net effect of this activity was a increase in cash
and cash equivalents of $654 thousand for the first nine months of 1998.
United anticipates no difficulty in meeting its obligations over the next 12
months and has no material commitments for capital expenditures. There are no
known trends, demands, commitments, or events that will result in or that are
reasonably likely to result in United's liquidity increasing or decreasing in
any material way. United also has significant lines of credit available.
The Asset and Liability Committee monitors liquidity to ascertain that a strong
liquidity position is maintained. In addition, variable rate loans are a
priority. These policies help to protect net interest income against
fluctuations in interest rates. No changes are anticipated in the policies of
United's Asset and Liability Committee.
INCOME TAXES
Income tax expense for the three months ended September 30, 1998 and 1997 was
$6.00 million and $6.45 million, respectively. Income tax expense for the nine
months ended September 30, 1998 and 1997 was $13.93 million and $18.54 million,
respectively. The decrease between the periods compared was primarily the result
of certain strategic income tax initiatives implemented in the second quarter of
1998 that reduced the effective tax rate for 1998 from 35% to approximately 28%.
In future years (beyond 1998) the estimated effective tax rate is expected to
return to 35%.
CAPITAL
Total shareholders' equity increased $13.74 million to $369.21 million, which is
an increase of 3.87% from December 31, 1997. United's equity to assets ratio
was 9.41% at September 30, 1998 and 9.54 at December 31, 1997. Capital and
reserves to total assets was 10.37% at September 30, 1998 and 10.35% at December
31, 1997.
Cash dividends of $0.19 per common share for the third quarter of 1998 and
$0.545 for the nine month period ended September 30, 1998, represent increases
of 11.76% and 9.00%, respectively, over the $.17 paid for third quarter of 1997
and $0.50 paid for the first nine months of 1997. Total cash dividends paid were
approximately $7.44 million for the third quarter of 1998 and $19.72 million for
the first nine months of 1998, an increase of 46.21% and 31.65% over the
comparable periods of 1997.
United seeks to maintain a proper relationship between capital and total assets
to support growth and sustain earnings. United's average equity to average
assets ratio was 9.41% at September 30, 1998 and 9.91% at September 30, 1997.
United's risk-based capital ratios of 12.63% at September 30, 1998 and 13.35% at
December 31, 1997, are both significantly higher than the minimum regulatory
requirements. United's tier I capital and leverage ratios of 11.38% and 8.15%,
respectively, at September 30, 1998, are also well above regulatory minimum
requirements.
27
<PAGE>
YEAR 2000 ISSUE
The Year 2000 Issue is the result of computer programs being written using two
digits rather than four to define the applicable year. Any of a company's
hardware, date-driven automated equipment or computer programs that have time-
sensitive software may recognize a date using "00" as the year 1900 rather than
the year 2000. This faulty recognition could result in a system failure or
miscalculations causing disruptions of operations, including, among other
things, a temporary inability to process transactions, send invoices or engage
in similar normal business activities.
United's plan to resolve the Year 2000 Issue involves the following four phases:
assessment, remediation, testing and implementation. To date United has fully
completed the assessment of all information technology and non-information
technology systems that could be significantly affected by the Year 2000 Issue
and anticipates that its internal remediation and testing phases will be
completed by December 31, 1998. Its external remediation and testing phases
being performed by United's primary data processor will be completed by June
30, 1999.
The completed assessment indicated that most of United's significant information
technology systems could be affected. That assessment also indicated that
software and hardware used in the operating equipment also are at risk. Based
on its assessments, United determined that it will be required to modify or
replace approximately 40% of its hardware and certain software so that those
systems will properly utilize dates beyond December 31, 1999. United presently
believes that with modifications or replacements of existing software and
certain hardware, the Year 2000 Issue can be mitigated. However, if such
modifications and replacements are not made, or are not completed timely, the
Year 2000 Issue could have a material impact on United's operations.
United has initiated formal communications with all of its significant suppliers
and customers to determine the extent to which United's interface systems are
vulnerable to those third parties' failure to remediate their own Year 2000
Issues. United's total Year 2000 project costs and estimates to complete
include the estimated costs and time associated with the impact of third party
Year 2000 Issues based on presently available information. However, there can
be no guarantee that the systems and applications of other companies on which
United's systems rely will be timely converted or that a failure to convert by
another company, or a conversion that is incompatible with United's systems and
applications, would not have a material adverse effect on United.
To date, United has obtained information about the Year 2000 compliance status
of all of its significant suppliers and vendors, except for two vendors
classified as having "Mission Critical" systems. To date, United is not aware
of any external agent with a Year 2000 Issue that would materially impact
United's results of operations, liquidity or capital resources. United
continues to monitor their compliance as well as maintaining contact with the
two vendors who have not responded to date.
United is utilizing both internal and external resources to reprogram, or
replace, and test the Year 2000 modifications. United anticipates completion of
the remediation and testing phases of the Year 2000 project to be completed by
June 30, 1999, which is prior to any anticipated impact on United's
operating systems. United expects to
28
<PAGE>
complete its implementation phase by mid 1999 with all information technology
systems and all non-information technology systems expected to be compliant by
September 30, 1999.
The total cost of the Year 2000 project is estimated at $3 million and is
being funded through cash flows. The Year 2000 costs are not expected to have a
material adverse effect on United's results of operations or cash flows. To
date, United has incurred approximately $1.8 million of expense and
capitalizable costs related to the assessment of, and preliminary efforts in
connection with, the Year 2000 project and the development of a Year 2000 plan
of operation.
The costs of the Year 2000 project and the date on which United believes it will
complete the Year 2000 modifications are based on management's best estimates,
which were derived utilizing numerous assumptions of future events, including
the continued availability of certain resources, third party vendor modification
plans and other factors. There can be no guarantee, however, that these
estimates will be achieved and actual results could differ materially from those
anticipated. Specific factors that might cause such material differences
include, but are not limited to, the availability and cost of trained
programming personnel, the ability to locate and correct all relevant computer
coding, and similar uncertainties.
Until the Year 2000 event actually occurs and for a period of time thereafter,
there can be no assurance that there will be no problem related to the Year 2000
Issue. The Year 2000 technology challenge is an unprecedented event. If Year
2000 issues are not adequately addressed by United and third parties, United
could face, among other things, business disruptions, operational problems,
financial losses, legal liability and similar risks, and United's business,
operations, and financial position could be materially, adversely affected.
United is developing contingency plans for implementation in the event that
mission critical third party vendors or other third parties fail to adequately
address Year 2000 issues. Such plans principally involve internal remediation
or identifying alternate vendors. There can be no assurance that any such plans
will fully mitigate any such failures or problems.
The costs of the Year 2000 project and the schedule for achieving compliance are
based on management's best estimates, which were derived using numerous
assumptions of future events such as the availability of certain resources
(including appropriately trained personnel and other internal and external
resources), third party vendor plans and other factors. However, there can be no
guarantee that these estimates will be achieved at the cost disclosed or within
the timeframes indicated, and actual results could differ materially from those
anticipated. Factors that might cause such material differences include, but are
not limited to: the availability and cost of personnel trained in this area; the
ability to identify and convert all relevant systems; results of Year 2000
testing; adequate resolution of Year 2000 issues by governmental agencies,
businesses or other third parties that are service providers, suppliers,
borrowers or customers of United; unanticipated system costs; the need to
replace hardware; the adequacy of and ability to implement contingency plans;
and similar uncertainties.
29
<PAGE>
Exhibit 11
Statement Re: Computation of Earnings Per Share
UNITED BANKSHARES, INC. AND SUBSIDIARIES
<TABLE>
<CAPTION>
For the Quarter Ended For the Nine Months Ended
September 30 September 30
------------------------ ------------------------
1998 1997 1998 1997
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
BASIC:
- - ------
Average Number of Common Shares 39,124,705 38,594,676 39,066,872 38,585,460
Net Income $15,654,000 $12,457,000 $36,222,000 $36,447,000
Preferred Dividends
----------- ----------- ----------- -----------
Available to Common Shares $15,654,000 $12,457,000 $36,222,000 $36,447,000
=========== =========== =========== ===========
Basic Earnings Per Common Share: $ 0.40 $ 0.32 $ 0.93 $ 0.94
=========== =========== =========== ===========
DILUTED:
- - --------
Average Number of Common Shares 39,124,705 38,594,676 39,066,872 38,585,460
Average Number of Common Share
Equivalents 695,718 785,246 686,995 610,948
----------- ----------- ----------- -----------
Average Shares and Share
Equivalents Outstanding 39,820,423 39,379,922 39,753,867 39,196,408
=========== =========== =========== ===========
Net Income $15,654,000 $12,457,000 $36,222,000 $36,447,000
Preferred Dividends
----------- ----------- ----------- -----------
Available to Common Shares $15,654,000 $12,457,000 $36,222,000 $36,447,000
=========== =========== =========== ===========
Diluted Earnings Per Common Share $ 0.39 $ 0.32 $ 0.91 $ 0.93
=========== =========== =========== ===========
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 9
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> SEP-30-1998
<CASH> 93,910,000
<INT-BEARING-DEPOSITS> 8,208,000
<FED-FUNDS-SOLD> 79,400,000
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 522,895,000
<INVESTMENTS-CARRYING> 215,347,000
<INVESTMENTS-MARKET> 219,590,000
<LOANS> 2,895,618,000
<ALLOWANCE> 37,270,000
<TOTAL-ASSETS> 3,922,267,000
<DEPOSITS> 3,062,232,000
<SHORT-TERM> 234,500,000
<LIABILITIES-OTHER> 53,868,000
<LONG-TERM> 202,453,000
97,884,000
0
<COMMON> 0
<OTHER-SE> 271,330,000
<TOTAL-LIABILITIES-AND-EQUITY> 3,922,267,000
<INTEREST-LOAN> 184,207,000
<INTEREST-INVEST> 36,012,000
<INTEREST-OTHER> 773,000
<INTEREST-TOTAL> 220,992,000
<INTEREST-DEPOSIT> 86,479,000
<INTEREST-EXPENSE> 103,410,000
<INTEREST-INCOME-NET> 117,582,000
<LOAN-LOSSES> 10,623,000
<SECURITIES-GAINS> 2,689,000
<EXPENSE-OTHER> 95,527,000
<INCOME-PRETAX> 50,153,000
<INCOME-PRE-EXTRAORDINARY> 50,153,000
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 36,222,000
<EPS-PRIMARY> 0.93
<EPS-DILUTED> 0.91
<YIELD-ACTUAL> 4.49
<LOANS-NON> 8,396,000
<LOANS-PAST> 8,595,000
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 30,455,000
<CHARGE-OFFS> 4,564,000
<RECOVERIES> 856,000
<ALLOWANCE-CLOSE> 37,370,000
<ALLOWANCE-DOMESTIC> 17,333,000
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 20,037,000
</TABLE>
