FORM 10-K
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Annual Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
For the Fiscal Year Ended DECEMBER 31, 1997
Commission File Number: 0-13322
UNITED BANKSHARES, INC.
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(Exact name of registrant as specified in its charter)
WEST VIRGINIA 55-0641179
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(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
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (304) 424-8761
Securities registered pursuant to section 12(b) of the Act: NONE
Securities registered pursuant to 12(g) of the Act:
COMMON STOCK, $2.50 PAR VALUE
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(Title of Class)
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 report(s), and (2) has been subject to such
filing requirements for the past 90 days. YES [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in part III of this Form 10-K or any
amendment to this Form 10-K. [ ]
The aggregate market value of United Bankshares, Inc. common stock,
representing all of its voting stock, that was held by non-affiliates on
February 28, 1998 was approximately $581,969,282.
As of February 28, 1998, United Bankshares, Inc. had 30,020,176
shares of common stock outstanding with a par value of $2.50.
Documents Incorporated By Reference
1. Annual Report to Shareholders for the fiscal year ended December 31, 1997,
portions of which are incorporated by reference in Parts I, II and IV of this
Form 10-K.
2. Definitive Proxy Statement dated April 7, 1998 for the 1998 Annual
Shareholders' Meeting to be held on May 18, 1998, portions of which are
incorporated by reference in Part III of this Form 10-K.
Page 1 of 88 pages. Index to Exhibits is on page 32 .
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UNITED BANKSHARES, INC.
FORM 10-K
(Continued)
As of the date of filing this Annual report, neither the annual shareholders'
report for the year ended December 31, 1997, nor the proxy statement for the
annual United shareholders' meeting had been mailed to shareholders.
CROSS-REFERENCE INDEX
PART I Page
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Item 1. BUSINESS . . . . . . . . . . . . . . . . . . . . . . . . 3
Item 2. PROPERTIES . . . . . . . . . . . . . . . . . . . . . . . 3
Item 3. LEGAL PROCEEDINGS . . . . . . . . . . . . . . . . . . . 13
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS . . 13
PART II
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Item 5. MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED
SHAREHOLDER MATTERS . . . . . . . . . . . . . . . . . . 14
Item 6. SELECTED FINANCIAL DATA . . . . . . . . . . . . . . . . 18
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS . . . . . . . . . . 18
Item 7a QUALITATIVE AND QUANTITATIVE DISCLOSURES ABOUT
MARKET RISK . . . . . . . . . . . . . . . . . . . . . . 18
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA . . . . . . 28
Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
ON ACCOUNTING AND FINANCIAL DISCLOSURES . . . . . . . . 28
PART III
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Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT . . 29
Item 11. EXECUTIVE COMPENSATION . . . . . . . . . . . . . . . . 29
Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT . . . . . . . . . . . . . . . . . . . . . . 29
Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS . . . . 29
PART VI
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Item 14. EXHIBITS, FINANCIAL STATEMENTS, SCHEDULES AND REPORTS
ON FORM 8-K . . . . . . . . . . . . . . . . . . . . . 30
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UNITED BANKSHARES, INC.
FORM 10-K, PART I
ITEM 1. BUSINESS
ITEM 2. PROPERTIES
The following discussion satisfies the reporting requirements of Items
1 and 2.
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DESCRIPTION OF UNITED BANKSHARES, INC.
Organizational History and Subsidiaries
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United Bankshares, Inc. ("United") is a West Virginia corporation
registered as a bank holding company pursuant to the Bank Holding Company Act of
1956, as amended. United was incorporated on March 26, 1982 and organized on
September 9, 1982. United began conducting business on May 1, 1984 with the
acquisition of three wholly-owned subsidiaries. On October 1, 1985, these three
subsidiaries were merged and on November 1, 1985, were renamed United National
Bank ("UNB").
Since that time UNB has acquired through merger or consolidation the
following banks: Heritage Bancorp, Inc. (a holding company); First National Bank
of Ripley; Kanawha Banking and Trust Company; Ohio Valley National Bank; Elk
National Bank; Montgomery National Bank, the sole subsidiary of Liberty
Bancshares Inc., a bank holding company; First Bank of Ceredo, the bank
subsidiary of Financial Future Corporation, a bank holding company; CB&T
Westover Bank; the Star City Branch of Community Bank & Trust, N. A.; and First
Empire Federal Savings & Loan Association, the sole subsidiary of Eagle Bancorp,
Inc., a bank holding company.
On June 30, 1996 United formed United Mortgage Company, Inc., a
wholly-owned subsidiary of UNB, with its wholly-owned subsidiaries United
Mortgage Center, Inc. and United Home Lending Services, Inc. The business of
United Mortgage Company, Inc. and its subsidiaries is the origination of
residential real estate loans for resale, the conducting of mortgage loan
servicing activities for certain loans, and generally the activities commonly
conducted by a mortgage banking company.
On September 1, 1993, UBC Holding Company, ("UBC"), a United
subsidiary, was formed to effect the Financial Future Corporation transaction.
UBC is a second tier holding company with UNB currently being its only
subsidiary.
On August 9, 1990, United acquired BankFirst Corporation ("BankFirst"),
a one bank holding company based in McLean, Virginia. BankFirst was merged with
UBF Holding Company, Inc. ("UBF"), a United subsidiary formed to effect this
acquisition. UBF acquired Bank First, N.A. ("Bank First"), the subsidiary of
BankFirst.
On October 11, 1995, United formed Commercial Interim Bank, Inc.
("Interim Bank"), a state member bank located in Arlington, Virginia, to
facilitate the acquisition of First Commercial Bank of Arlington, Virginia
("FCB"). United then merged Bank First into Interim Bank from its wholly owned
subsidiary, UBF. Concurrent with the merger of Bank First into Interim Bank, UBF
was merged into United. United acquired FCB on October 31, 1995 and merged it
into Interim Bank. United then effected a name change of Interim Bank to First
Commercial Bank. On March 18, 1996 First Commercial Bank's name was changed to
United Bank.
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On August 1, 1997, United acquired First Patriot Bankshares Corporation
("Patriot") of Reston, Virginia and its wholly-owned subsidiary, Patriot
National Bank. Patriot was merged into UB Holding Company, Inc. ("UB"), a United
subsidiary formed to consummate this acquisition. Patriot National Bank was
merged into United Bank.
United National Bank-South ("UNB-S"), was formed on November 1, 1992,
as a part of United's acquisition of Summit Holding Corporation and its lead
bank, Raleigh County National Bank. On January 27, 1996, UNB-S was merged into
and became a part of UNB. Offices of UNB-S became branch offices of UNB.
In December 1996, United Brokerage Services, Inc., a wholly-owned
subsidiary of UNB began operations. United Brokerage Services, Inc. is
a fully-disclosed broker/dealer and is a registered Investment Advisor
with the National Association of Securities Dealers, Inc. and the
Securities and Exchange Commission and a member of the Securities
Investor Protection Corporation. United Brokerage Services, Inc. offers
a wide range of investment products as well as comprehensive financial
planning and asset management services to the general public.
Offices
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The headquarters of United are located in United Center at 500 Virginia
Street, East, Charleston, West Virginia.
The main office of UNB is located at 514 Market Street, Parkersburg,
West Virginia. United's corporate offices and UNB's executive offices are also
located in Parkersburg at Fifth and Avery Streets. Currently, UNB operates
forty-three offices located throughout West Virginia. UNB owns all of these
facilities except for two in the Parkersburg area, three in the Charleston area,
two in the Beckley area and one in each Wheeling, Summersville and Clarksburg,
all of which are leased under operating leases. The main facility of UNB's
Wheeling office is leased from Ogden Newspapers, Inc. Additionally, UNB operates
a loan production office located in Bridgeport, West Virginia.
The main office of United Bank is located at 3801 Wilson Boulevard,
Arlington, Virginia, with seven offices in Fairfax County and an office in each
of Loudoun and Prince William Counties. United Bank leases all of these
facilities under operating lease agreements except for the two offices in
Arlington and Reston, which are owned facilities.
Employees
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As of December 31, 1997 United and its subsidiaries had approximately
972 full-time equivalent employees and officers. None of these employees is
represented by a collective bargaining unit, and management considers employee
relations to be excellent.
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Business of United
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As a bank holding company registered under the Bank Holding Company Act
of 1956, as amended, United's present business is the operation of its bank
subsidiaries. As of December 31, 1997, United's consolidated assets approximated
$2.7 billion and total shareholders' equity approximated $279 million.
United is permitted to acquire other banks and bank holding companies,
as well as thrift institutions. United is also permitted to engage in certain
non-banking activities which are closely related to banking under the provisions
of the Bank Holding Company Act and the Federal Reserve Board's Regulation Y.
Management continues to consider such opportunities as they arise, and in this
regard, management from time to time makes inquiries, proposals, offers or
expressions of interest as to potential opportunities; although no agreements or
understandings to acquire other banks or bank holding companies or nonbanking
subsidiaries or to engage in other nonbanking activities, other than those
identified herein, presently exist.
Business of Subsidiary Banks
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All of United's subsidiary banks are full-service commercial banks and,
as such, engage in most types of business permitted by law and regulation.
Included among the banking services offered are the acceptance of deposits in
checking, savings, time and money market accounts; the making and servicing of
personal, commercial, floor plan and student loans; and the making of
construction and real estate loans. Also offered are individual retirement
accounts, safe deposit boxes, wire transfers and other standard banking products
and services. As a part of their lending function, UNB and United Bank offer
credit card services including accounts issued under the name of certain
correspondent banks.
UNB also maintains a trust department which acts as trustee under
wills, trust and pension and profit sharing plans, as executors and
administrators of estates, and as guardians for estates of minors and
incompetents, and in addition performs a variety of investment and security
services. UNB trust services are available to customers of affiliate banks. UNB
provides services to its correspondent banks such as check clearing, safekeeping
and the buying and selling of federal funds.
UNB is a member of a regional network of automated teller machines
known as the MAC ATM network while United Bank participates in the MOST network.
Through MAC and MOST, all of United's subsidiary banks are participants in a
network known as Cirrus which provides banking on a nationwide basis.
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Lending Activities
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United's total loan portfolio, net of unearned income, increased
$212.88 million, or 11.5%, to $2.06 billion in 1997 and is comprised of
commercial, real estate and consumer loans including credit card and home equity
loans. Commercial and real estate loans increased $119.89 million or 48.2% and
$89.11 million or 6.5%, respectively, while consumer loans, net of unearned
income, remained flat.
Commercial Loans
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The commercial loan portfolio consists of loans to corporate borrowers
in small to mid-size industrial and commercial companies, as well as automobile
dealers, service, retail and wholesale merchants. Coal mining companies make up
an insignificant portion of loans in the portfolio. Collateral securing these
loans includes equipment, machinery, inventory, receivables, vehicles and
commercial real estate. Commercial loans are considered to contain a higher
level of risk than other loan types although care is taken to minimize these
risks. Numerous risk factors impact this portfolio including industry specific
risks such as economy, new technology, labor rates and cyclicality, as well as
customer specific factors, such as cash flow, financial structure, operating
controls and asset quality. United diversifies risk within this portfolio by
closely monitoring industry concentrations and portfolios to ensure that it does
not exceed established lending guidelines. Diversification is intended to limit
the risk of loss from any single unexpected economic event or trend.
Underwriting standards require a comprehensive review and independent evaluation
of virtually all larger balance commercial loans by the loan committee prior to
approval with ongoing updates of the loan portfolio.
Real Estate Loans
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Commercial real estate loans consist of commercial mortgages, which
generally are secured by nonresidential and multi-family residential properties.
Also included in this portfolio are loans that are secured by owner-occupied
real estate, but made for purposes other than the construction or purchase of
real estate. Commercial real estate loans carry many of the same customers and
industry risks as the commercial loan portfolio. Real estate mortgage loans to
consumers are secured primarily by a first lien deed of trust. These loans are
traditional one-to-four family residential mortgages. The loans generally do not
exceed an 80% loan to value ratio at the loan origination date and most are at a
variable rate of interest. These loans are considered to contain normal risk.
Consumer Loans
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Consumer loans are secured by automobiles, boats, recreational
vehicles, and other personal property. Personal loans, home equity, student
loans and unsecured credit card receivables are also included as consumer loans.
United monitors the risk associated with these types of
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loans by monitoring such factors as portfolio growth, lending policies and
economic conditions. Underwriting standards are continually evaluated and
modified based upon these factors.
Underwriting Standards
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United's loan underwriting guidelines and standards are updated
periodically and are presented for approval by each of the respective Boards of
Directors of its subsidiary banks. The purpose of the standards and guidelines
is to grant loans on a sound and collectible basis; to invest available funds in
a safe, profitable manner; to serve the legitimate credit needs of the
communities of United's primary market area; and ensure that all loan applicants
receive fair and equal treatment in the lending process. It is the intent of the
underwriting guidelines and standards to: minimize loan losses by carefully
investigating the credit history of each applicant, verify the source of
repayment and the ability of the applicant to repay, collateralize those loans
in which collateral is deemed to be required, exercise care in the documentation
of the application, review, approval, and origination process, and administer a
comprehensive loan collection program. The above guidelines are adhered to and
subject to the experience, background and personal judgment of the loan officer
assigned to the loan application. A loan officer may grant and justify a loan
with slight variances from the underwriting guidelines and standards. However,
the loan officer may not exceed their respective lending authority without
obtaining the prior, proper approval from a superior, a regional supervisor, or
the Loan Committee, whichever is deemed appropriate for the nature of the
variance.
Loan Origination and Processing
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United generally originates loans within the primary market area of its
banking subsidiaries. United may from time to time make loans to borrowers
and/or on properties outside of its primary market area as an accommodation to
its customers. Processing of all loans is centralized in the Charleston, West
Virginia office. United, with the formation of United Home Lending Service,
Inc., has entered the mortgage banking business. As of December 31, 1997, the
balance of mortgage loans being serviced by United for others was $242.78
million.
Secondary Markets
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During 1997, United originated $143.19 million of real estate loans for
sale in the secondary market and sold $135.76 million of loans designated as
held for sale in the secondary market. Proceeds received from the sales of these
loans during 1997 was $138.28 million.
The principal sources of revenue from United's mortgage banking
business are: (i) loan origination fees; (ii) gains or losses from the sale of
loans, if any; (iii) interest earned on mortgage loans during the period that
they are held by United pending sale; (iv) loan servicing fees; and (v) gain or
loss on the close out of the hedge instrument used to offset the risk that
changes in interest rate may have on the value of United's mortgage loan
inventory.
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Investment Activities
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United's investment policy stresses the management of the investment
securities portfolio, which includes both securities held to maturity and
securities available for sale, to maximize return over the long-term in a manner
that is consistent with good banking practices and relative safety of principal.
United currently does not engage in trading account activity. The
Asset/Liability Committee of United is responsible for the coordination and
evaluation of the investment portfolio.
Sources of funds for investment activities include "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 and FHLB borrowings. Repurchase
agreements represent funds which are generally obtained as the result of a
competitive bidding process.
United's investment portfolio remains comprised largely of U.S.
Treasury securities and obligations of U.S. Agencies and Corporations.
Obligations of States and Political Subdivisions are comprised of municipal
securities with an average quality of not less than an "A" rating.
During 1997, United did not sell any securities. United incurred net
losses of $98 thousand from sales from the available for sale portfolio in 1996.
United enters into hedging transactions that utilize forward contracts
for the delivery of mortgage-backed securities as hedge vehicles to offset the
risk that a change in interest rates will result in a decrease in the value of
United's current mortgage loan inventory or its commitments to originate
mortgage loans (the "pipeline"). The risk of loss is then matched with the
appropriate hedge vehicle. United's policies generally require that it hedge
substantially all of its inventory of conforming and government loans. Realized
gains and losses on forward commitments are recorded in mortgage banking income
in the period settlement occurs. Unrealized gains or losses are considered in
the lower of cost or market valuation of loans held for sale.
At December 31, 1997, United had open commitments amounting to
approximately $2 million to sell mortgage-backed securities with varying
settlement dates generally not extending beyond March 1998. As such, United is
not exposed to significant risk nor will it derive any significant benefit from
changes in interest rates on the price of the mortgage loan inventory, net of
gains or losses of associated hedge positions.
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Operating Subsidiaries
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During 1996, UNB chartered two operating subsidiaries, United
Brokerage Services, Inc. and United Mortgage Company, Inc.
United Brokerage Services, Inc. is a fully-disclosed broker/dealer
and a registered Investment Advisor with the National Association of
Securities Dealers, Inc. and the Securities and Exchange Commission and
a member of the Securities Investor Protection Corporation. United
Brokerage Services, Inc. offers a wide range of investment products as
well as comprehensive financial planning and asset management services
to the general public.
United Mortgage Company, Inc. was formed in connection with the merger
of Eagle Bancorp, Inc. ("Eagle") with and into United and the related merger of
First Empire Federal Savings and Loan Association ("First Empire") with and into
UNB. In accordance with the merger agreement, UNB requested and received
regulatory approval to form and operate United Mortgage Company, Inc. The
business of United Mortgage Company, Inc. will be the origination and
acquisition of residential real estate loans for resale, the conducting of
mortgage loan servicing activities for certain loans, and generally the
activities commonly conducted by a mortgage banking company.
Competition
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United faces a high degree of competition in nearly all of the markets
it serves. These markets may generally be defined as Wood, Kanawha, Monongalia,
Jackson, Cabell, Hancock, Ohio, Marshall, Gilmer, Lewis, Webster, Boone, Logan,
Nicholas, Fayette and Raleigh Counties in West Virginia; Lawrence, Belmont,
Jefferson and Washington Counties in Ohio; and Arlington, Loudoun, Prince
William and Fairfax Counties in Virginia, located adjacent to the Washington
D.C. area, which is in close proximity to West Virginia's eastern panhandle.
United competes in Ohio markets because of the close proximity to the Ohio
border of certain subsidiary offices. Included in United's markets are the
Parkersburg Metropolitan Statistical Area (MSA), the Charleston MSA, the
Huntington MSA, the Wheeling MSA and the Weirton MSA. These represent the five
largest West Virginia MSA's. United considers the above counties and MSA's to be
the primary market area for the business of its banking subsidiaries.
West Virginia banks are permitted unlimited branch banking throughout
the state. In addition, interstate acquisitions of and by West Virginia banks
and bank holding companies are permissible on a reciprocal basis. West Virginia
also allows reciprocal interstate acquisitions by thrift institutions. These
conditions serve to intensify competition within United's market.
As of December 31, 1997, there were 53 bank holding companies in the
State of West Virginia registered with the Federal Reserve System and the West
Virginia Board of Banking and Financial Institutions and 86
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bank holding companies in the Commonwealth of Virginia registered with the
Federal Reserve System and the Virginia Corporation Commission. These holding
companies are headquartered in various West Virginia and Virginia cities and
control banks throughout West Virginia and Virginia, which compete for business
as well as for the acquisition of additional banks.
Economic Characteristics of Primary Market Area
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Although the market area of the banking subsidiaries encompass a
portion of the coal fields located in southern West Virginia, an area of the
state which has been economically depressed, the coal related loans in the loan
portfolio of the banking subsidiaries constitute less than 2% of United's total
loans outstanding. The state of West Virginia has a more diversified economy
than it had during the peak periods of coal production with the chemical
manufacturing industry accounting for 19% of the entire manufacturing workforce
and 33% of the manufacturing wages, according to West Virginia state records.
This diversified economy has contributed to the positive trends in the number of
payroll jobs created and unemployment rates in recent years as the number of
payroll jobs increased 13,600 during calendar year 1997 and the state's overall
unemployment rate has declined from 10.5% in 1991 to 6.5% in December 1997 - the
lowest unemployment rate in nearly 20 years, according to available information
from the West Virginia Bureau of Employment Programs.
United's northern Virginia subsidiary banks are located in markets that
reflect very low unemployment rate levels and increased wage levels over a year
ago. According to information available from the Virginia Employment Commission,
Virginia's unemployment rate as of December 1997 was 3.1%. The 3.1% rate was the
lowest rate reported in over 27 years. Additionally, the Virginia Employment
Commission reported that record levels were set with increased nonagricultural
employment and increased manufacturing salaries in December 1997.
Regulation and Supervision
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United, as a bank holding company, is subject to the restrictions of
the Bank Holding Company Act of 1956, as amended, and is registered pursuant to
its provisions. As such, United is subject to the reporting requirements of and
examination by the Board of Governors of the Federal Reserve System ("Board of
Governors").
The Bank Holding Company Act prohibits the acquisition by a bank
holding company of direct or indirect ownership of more than five percent of the
voting shares of any bank within the United States without prior approval of the
Board of Governors. With certain exceptions, a bank holding company also is
prohibited from acquiring direct or indirect ownership or control of more than
five percent of the voting shares of any company which is not a bank, and from
engaging directly or indirectly in business unrelated to the business of
banking, or managing or controlling banks.
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The Board of Governors of the Federal Reserve System, in its Regulation
Y, permits bank holding companies to engage in non-banking activities closely
related to banking or managing or controlling banks. Approval of the Board of
Governors is necessary to engage in these activities or to make acquisitions of
corporations engaging in these activities. In addition, on a case by case basis,
the Board of Governors may approve other non-banking activities.
As a bank holding company doing business in West Virginia, United is
also subject to regulation and examination by the West Virginia Board of Banking
and Financial Institutions (the "West Virginia Banking Board") and must submit
annual reports to the department. Further, any acquisition application which
United must submit to the Board of Governors must also be submitted to the West
Virginia Banking Board for approval.
United is also registered under and is subject to the requirements of
the Securities Exchange Act of 1934, as amended.
UNB, as national banking associations, is subject to supervision,
examination and regulation by the Office of the Comptroller of the Currency. UNB
is also a member of the Federal Reserve System, and as such, is subject to
applicable provisions of the Federal Reserve Act and regulations issued
thereunder.
United Bank, as a Virginia state member bank, is subject to
supervision, examination and regulation by the Federal Reserve System, and as
such, is subject to applicable provisions of the Federal Reserve Act and
regulations issued thereunder. United Bank is subject to regulation by the
Virginia Corporation Commission's Bureau of Financial Institutions.
The deposits of United's wholly-owned banking subsidiaries are insured
by the Federal Deposit Insurance Corporation ("FDIC") to the extent provided by
law. Accordingly, these banks are also subject to regulation by the FDIC.
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UNITED BANKSHARES, INC.
FORM 10-K, PART I
ITEM 3. LEGAL PROCEEDINGS
Litigation
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Information relating to litigation on page 29 of the Annual Report to
Shareholders for the year ended December 31, 1997, is incorporated herein by
reference.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
No matters were submitted to a vote of security holders during the
fourth quarter of the fiscal year covered by this report.
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UNITED BANKSHARES, INC.
FORM 10-K, PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED
SHAREHOLDER MATTERS
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Stock
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As of December 31, 1997, 20,000,000 shares of common stock, par value
$2.50 per share, were authorized for United, of which 14,983,758 were issued,
including 311,372 shares held as treasury shares. The outstanding shares are
held by approximately 5,225 shareholders of record as of December 31, 1997. At
the Special Shareholders' Meeting held on March 9, 1998, the shareholders of
United approved a proposal to increase United's authorized shares from
20,000,000 to 41,000,000. The unissued portion of United's authorized common
stock (subject to registration approval by the SEC) and the treasury shares are
available for issuance as the Board of Directors determines advisable. United
offers its shareholders the opportunity to invest dividends in shares of United
stock through its dividend reinvestment plan. United has also established stock
option plans and a stock bonus plan as incentive for certain eligible officers.
In addition to the above incentive plans, United is currently involved in
certain mergers in which additional shares will be issued and recognizes that
additional shares could be issued for other appropriate purposes.
On February 23, 1998, the Board of Directors approved a proposal to
amend United's Articles of Incorporation to increase the number of authorized
shares from 41,000,000 to 100,000,000. The proposed increase in authorized
shares is in response to the availability of shares for the aforementioned
incentive plans and the proposed merger with Fed One Bancorp, Inc., which is
expected to be consummated early during the fourth quarter of 1998. The
proposal, which will be presented for approval at a yet unscheduled special
shareholders meeting during 1998, will require the approval of a majority of the
outstanding shares of United common stock entitled to vote on the matter.
The Board of Directors believes that the availability of authorized but
unissued common stock of United is of considerable value if opportunities should
arise for the acquisition of another business through the issuance of United's
stock. Shareholders do not have preemptive rights, which allows United to issue
additional authorized shares without first offering them to current
shareholders.
United has only one class of stock and all voting rights are vested in
the holders of United's stock. On all matters subject to a vote of shareholders,
the shareholders of United will be entitled to one vote for each share of common
stock owned. Shareholders of United have cumulative voting rights with regard to
election of directors. At the present time, no senior securities of United are
outstanding, nor does the Board of Directors presently contemplate issuing
senior securities.
There are no preemptive or conversion rights or, redemption or sinking
fund provisions with respect to United's Stock. All of the issued and
outstanding shares of United's stock are fully paid and non-assessable.
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Dividends
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On November 24, 1997, the Board of Directors of United declared a two
for one stock split in the form of a 100% stock dividend payable on March 27,
1998, to shareholders of record as of March 13, 1998. The change in capital
structure due to the 100% stock dividend has been given retroactive effect in
the December 31, 1997 balance sheet and all references to shares and per share
data have been retroactively restated for the effect of the 100% stock dividend.
The shareholders of United are entitled to receive dividends when and
as declared by its Board of Directors. Dividends are paid quarterly. Dividends
were $0.68 per share in 1997, $0.62 per share in 1996 and $0.59 per share in
1995. Dividends are paid from funds legally available; therefore, the payment of
dividends is subject to the restrictions set forth in the West Virginia
Corporation Act. See "Market and Stock Prices of United" for quarterly dividend
information.
Payment of Dividends by United is dependent upon payment of dividends to it by
its subsidiary banks. The ability of national banks to pay dividends is subject
to certain limitations imposed by the national banking laws. Generally, the most
restrictive provision requires approval by the Office of the Comptroller of the
Currency ("OCC") if dividends declared in any year exceed the current year's net
income, as defined, plus the retained net profits of the two preceding years.
Payment of dividends by United's state member bank is regulated by the Federal
Reserve System and generally, the prior approval of the Federal Reserve Board
("FRB") is required if the total dividends declared by a state member bank in
any calendar year exceeds its net profits, as defined, for that year combined
with its retained net profits for the preceding two years. Additionally, prior
approval of both the OCC and the FRB is required when a national bank or state
member bank has deficit retained earnings but has sufficient current year's net
income, as defined, plus the retained net profits of the two preceding years.
The OCC and FRB may prohibit dividends if it deems the payment to be an unsafe
or unsound banking practice. The OCC has issued guidelines for dividend payments
by national banks, emphasizing that proper dividend size depends on the bank's
earnings and capital while the FRB has issued similar guidelines pertaining to
state member banks. See Note M - Notes to Consolidated Financial Statements,
which is incorporated herein by reference.
Market and Stock Prices of United
- ---------------------------------
United Bankshares, Inc. stock is traded over the counter on the
National Association of Securities Dealers Automated Quotations System
("NASDAQ") under the trading symbol UBSI.
The high and low prices listed on the following page are based upon
information available to United's management from NASDAQ listings. No attempt
has been made by United's management to ascertain the prices for every sale of
its stock during the periods indicated. However, based on
16
<PAGE>
the information available, United's management believes that the prices fairly
represent the amounts at which United's stock was traded during the periods
indicated, as adjusted for the 100% stock dividend paid on March 27, 1998 to
shareholders of record as of March 13, 1998.
The following table presents the dividends and high and low prices of
United's common stock during the periods set forth below:
United Historical
Basis
-----------------
1998 Dividends High Low
---- --------- ---- ---
First Quarter through
February 27, 1998 (1) $25.41 $23.13
1997
----
Fourth Quarter $0.18 $24.38 $21.80
Third Quarter $0.17 $23.63 $19.13
Second Quarter $0.17 $21.25 $17.19
First Quarter $0.16 $17.44 $16.13
1996
----
Fourth Quarter $0.16 $16.50 $14.63
Third Quarter $0.16 $15.13 $13.13
Second Quarter $0.15 $14.88 $13.38
First Quarter $0.15 $15.00 $14.25
(1) On February 24, 1998, United declared a dividend of $0.18 per share, payable
April 1, 1998, to shareholders of record as of March 13, 1998.
17
<PAGE>
UNITED BANKSHARES, INC.
FORM 10-K, PART II
ITEM 6. SELECTED FINANCIAL DATA
Information relating to selected financial data on page 37 of the
Annual Report to Shareholders for the year ended December 31, 1997, is
incorporated herein by reference.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Management's Discussion and Analysis of Financial Condition and Results
of Operations on pages 38 through 50 inclusive, of the Annual Report to
Shareholders for the year ended December 31, 1997, is incorporated herein by
reference.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Quantitative and Qualitative Disclosures About Market Risk on pages 43
through 45 inclusive, of the Annual Report to Shareholders for the year ended
December 31, 1997, is incorporated herein by reference.
18
<PAGE>
UNITED BANKSHARES, INC. AND SUBSIDIARIES
DISTRIBUTION OF ASSETS, LIABILITIES AND SHAREHOLDERS' EQUITY
INTEREST RATES AND INTEREST DIFFERENTIAL:
The following table shows the daily average balance of major categories of
assets and liabilities for each of the three years ended December 31, 1997, 1996
and 1995 with the interest and rate earned or paid on such amount.
<TABLE>
<CAPTION>
Year Ended Year Ended Year Ended
December 31 December 31 December 31
1997 1996 1995
---------------------------- -------------------------- --------------------------
(Dollars in Average Avg. Average Avg. Average Avg.
Thousands) Balance Interest Rate Balance Interest Rate Balance Interest Rate
------- -------- ----- ------- -------- ----- ------- -------- ----
<S><C>
ASSETS
Earning assets:
Federal funds sold and securities
purchased under agreements to
resell and other short-term
investments $ 4,342 $ 184 4.25% $ 2,996 $ 157 5.24% $ 18,365 $ 1,107 6.03%
Investment Securities:
Taxable 354,312 23,828 6.73% 292,339 18,455 6.31% 297,963 18,516 6.21%
Tax exempt (1) 32,197 2,970 9.22% 38,282 3,603 9.41% 46,924 4,560 9.72%
---------- -------- ---- ---------- -------- ---- ---------- -------- ----
Total Securities 386,509 26,798 6.93% 330,621 22,058 6.67% 344,887 23,076 6.69%
Loans, net of unearned
income (1) (2) 1,905,706 165,705 8.70% 1,786,376 152,615 8.54% 1,673,568 144,594 8.64%
Allowance for possible loan
losses (23,314) (22,660) (22,685)
---------- ---------- ----------
Net Loans 1,882,392 8.80% 1,763,716 8.65% 1,650,883 8.76%
---------- -------- ---- ---------- -------- ---- ---------- -------- ----
Total earning assets 2,273,243 192,687 8.48% 2,097,333 174,830 8.34% 2,014,135 168,777 8.38%
Other assets 160,178 -------- 166,095 -------- 148,625 --------
---------- ---------- ----------
TOTAL ASSETS $2,433,421 $2,263,428 $2,162,760
========== ========== ==========
LIABILITIES
Interest-Bearing Funds:
Interest-bearing deposits $1,675,288 $ 74,400 4.44% $1,536,641 $ 63,917 4.16% $1,510,880 $ 62,231 4.12%
Federal funds purchased,
repurchase agreements
and other short-term
borrowings 117,290 5,275 4.50% 87,015 3,770 4.33% 83,016 3,809 4.59%
FHLB advances 82,556 4,824 5.84% 99,184 5,498 5.54% 69,580 4,127 5.93%
---------- -------- ---- ---------- -------- ---- ---------- -------- ----
Total Interest-Bearing Funds 1,875,134 84,499 4.51% 1,722,840 73,185 4.25% 1,663,476 70,167 4.22%
Demand deposits 257,210 -------- 251,641 -------- 234,455 --------
Accrued expenses and other
liabilities 33,071 34,292 28,115
---------- ---------- ----------
TOTAL LIABILITIES 2,165,415 2,008,773 1,926,046
Shareholders' Equity 268,006 254,655 236,714
---------- ---------- ----------
TOTAL LIABILITIES AND
SHAREHOLDERS' EQUITY $2,433,421 $2,263,428 $2,162,760
========== ========== ==========
NET INTEREST INCOME $108,188 $101,645 $ 98,610
======== ======== ========
INTEREST SPREAD 3.97% 4.09% 4.16%
NET INTEREST MARGIN 4.76% 4.85% 4.90%
</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.
19
<PAGE>
UNITED BANKSHARES, INC. AND SUBSIDIARIES
RATE/VOLUME ANALYSIS
The following table sets forth a summary of the changes in interest earned and
interest paid detailing the amounts attributable to (i) changes in volume
(change in the average volume times the prior year's average rate), (ii) changes
in rate (change in the average rate times the prior year's average volume), and
(iii) changes in rate/volume (change in the average volume times the change in
average rate).
<TABLE>
<CAPTION>
1997 Compared to 1996 1996 Compared to 1995
------------------------------------- --------------------------------------
Increase (Decrease) Due to Increase (Decrease) Due to
------------------------------------- --------------------------------------
Rate/ Rate/
Volume Rate Volume Total Volume Rate Volume Total
------ ---- ------ ----- ------ ---- ------ -----
(In thousands) (In thousands)
<S><C>
Interest income:
Federal funds sold, securities purchased
under agreements to resell and other
short-term investments $ 71 $ (30) $ 14 $ 27 $ (926) $ (145) $ 121 $ (950)
Investment securities:
Taxable 3,912 1,205 256 5,373 (349) 294 (6) (61)
Tax exempt (1) (573) (72) 12 (633) (840) (144) 27 (957)
Loans (1),(2) 10,266 2,645 179 13,090 9,881 (1,741) (119) 8,021
------- ------- ---- ------- ------ ------- ----- ------
TOTAL INTEREST INCOME 13,676 3,748 433 17,857 7,766 (1,736) 23 6,053
------- ------- ---- ------- ------ ------- ----- ------
Interest expense:
Interest-bearing deposits $ 5,767 $ 4,326 $390 $10,483 1,061 641 11 1,686
Federal funds purchased, repurchase
agreements, and other short-term
borrowings 1,312 143 50 1,505 183 (212) (10) (39)
FHLB advances (922) 298 (50) (674) 1,756 (270) (115) 1,371
------- ------- ---- ------- ------ ------- ----- ------
TOTAL INTEREST EXPENSE 6,157 4,767 390 11,314 3,000 132 (114) 3,018
------- ------- ---- ------- ------ ------- ----- ------
NET INTEREST INCOME $ 7,519 $(1,019) $ 43 $ 6,543 $4,766 $(1,868) $ 137 $3,035
======= ======= ==== ======= ====== ======= ===== ======
</TABLE>
(1) Yields and interest income on tax exempt loans and investment securities
are computed on a fully tax-equivalent basis using the statutory federal
income tax rate of 35%.
(2) Nonaccruing loans are included in the daily average loan amounts
outstanding.
20
<PAGE>
UNITED BANKSHARES, INC. AND SUBSIDIARIES
LOAN PORTFOLIO
TYPES OF LOANS
The following is a summary of loans outstanding at December 31:
<TABLE>
<CAPTION>
1997 1996 1995 1994 1993
----------- ----------- ----------- ----------- -----------
(In thousands)
<S><C>
Commercial, financial
and agricultural $ 368,654 $ 248,762 $ 218,800 $ 208,491 $ 218,559
Real estate mortgage 1,372,722 1,329,661 1,267,889 1,194,805 1,003,805
Real estate construction 93,918 42,343 21,808 17,523 14,651
Consumer 232,191 232,004 229,457 237,928 233,698
Less: Unearned interest (6,998) (5,165) (4,968) (6,472) (7,880)
---------- ---------- ---------- ---------- ----------
Total loans 2,060,487 1,847,605 1,732,986 1,652,275 1,462,574
Allowance for possible
loan losses (24,786) (22,283) (22,545) (22,304) (20,975)
---------- ---------- ---------- ---------- ----------
TOTAL LOANS, NET $2,035,701 $1,825,322 $1,710,441 $1,629,971 $1,441,599
========== ========== ========== ========== ==========
</TABLE>
At December 31, 1997, real estate mortgage loans include $936,498 in single
family residential real estate loans and $392,818 in commercial real estate
loans.
The following is a summary of loans outstanding as a percent of total loans at
December 31:
<TABLE>
<CAPTION>
1997 1996 1995 1994 1993
--------- ---------- ---------- ---------- ----------
<S><C>
Commercial, financial
and agricultural 17.89% 13.46% 12.59% 12.57% 14.86%
Real estate mortgage 66.62% 71.97% 72.96% 72.03% 68.25%
Real estate construction 4.56% 2.29% 1.25% 1.06% 1.00%
Consumer 10.93% 12.28% 13.20% 14.34% 15.89%
------- -------- -------- ------- -------
TOTAL 100.00% 100.00% 100.00% 100.00% 100.00%
======= ======= ======= ======= =======
</TABLE>
REMAINING LOAN MATURITIES
The following table shows the maturity of commercial, financial, and
agricultural loans and real estate construction outstanding as of December 31,
1997:
<TABLE>
<CAPTION>
Less Than One To Greater Than
One Year Five Years Five Years Total
--------- ---------- ------------ -----
(In thousands)
<S><C>
Commercial, financial
and agricultural $135,582 $128,384 $104,688 $368,654
Real estate construction 93,918 93,918
-------- -------- -------- --------
Total $229,500 $128,384 $104,688 $462,572
======== ======== ======== ========
</TABLE>
21
<PAGE>
UNITED BANKSHARES, INC. AND SUBSIDIARIES
At December 31, 1997, commercial, financial and agricultural loans maturing
within one to five years and in more than five years are interest sensitive as
follows:
One to Over
Five Years Five Years
---------- ----------
(In thousands)
Outstanding with fixed interest rates $ 70,049 $ 41,447
Outstanding with adjustable rates 58,335 63,241
-------- --------
$128,384 $104,688
======== ========
There were no real estate construction loans with maturities greater than one
year.
RISK ELEMENTS
Nonperforming Loans
Nonperforming loans include loans on which no interest is currently being
accrued, loans which are past due 90 days or more as to principal or interest
payments, and loans for which the terms have been modified due to a
deterioration in the financial position of the borrower. Management is not aware
of any other significant loans, groups of loans, or segments of the loan
portfolio not included below where there are serious doubts as to the ability of
the borrowers to comply with the present loan repayment terms. The following
table summarizes nonperforming loans for the indicated periods.
<TABLE>
<CAPTION>
December 31
---------------------------------------------------------------------
1997 1996 1995 1994 1993
---------- ---------- ---------- ---------- ----------
(In thousands)
<S><C>
Nonaccrual loans $ 4,156 $ 4,361 $ 6,298 $4,719 $ 9,687
Troubled debt restructurings 2,453
Loans which are contractually past due 90
days or more as to interest or principal,
and are still accruing interest 11,342 5,831 4,692 2,851 3,080
------- ------- ------- ------ -------
TOTAL $15,498 $10,192 $10,990 $7,570 $15,220
======= ======= ======= ====== =======
</TABLE>
Loans are designated as nonaccrual when, in the opinion of management, the
collection of principal or interest is doubtful. This generally occurs when a
loan becomes 90 days past due as to principal or interest unless the loan is
both well secured and in the process of collection. When interest accruals are
discontinued, unpaid interest credited to income in the current year is
reversed, and unpaid interest accrued in prior years is charged to the allowance
for loan losses. See Note D to the consolidated financial statements for
additional information regarding nonperforming loans and credit risk
concentration.
22
<PAGE>
UNITED BANKSHARES, INC. AND SUBSIDIARIES
INVESTMENT PORTFOLIO
The following is a summary of the amortized cost of held to maturity securities
held to maturity at December 31,:
<TABLE>
<CAPTION>
1997 1996 1995
------------ ------------ ------------
(In thousands)
<S><C>
U.S. Treasury and other U.S. Government
agencies and corporations $ 97,847 $ 77,704 $ 15,897
States and political subdivisions 32,650 36,136 43,324
Mortgage-backed securities 41,874 54,977 56,416
Other 6,923 1,885 6,252
-------- -------- --------
TOTAL HELD TO MATURITY SECURITIES $179,294 $170,702 $121,889
======== ======== ========
</TABLE>
The following is a summary of the amortized cost of available for sale
securities at December 31,:
<TABLE>
<CAPTION>
1997 1996 1995
------------ ------------ ------------
(In thousands)
<S><C>
U.S. Treasury securities and obligations of
U.S. Government agencies and corporations $142,688 $115,018 $150,460
Mortgage-backed securities 102,955 24,982 30,036
Marketable equity securities 4,300 3,655 2,662
Other 15,496 16,506 13,808
-------- -------- --------
TOTAL AVAILABLE FOR SALE SECURITIES $265,439 $160,161 $194,696
======== ======== ========
</TABLE>
The fair value of mortgage-backed securities is affected by changes in interest
rates and prepayment risk. When interest rates decline, prepayment speeds
generally accelerate due to homeowners refinancing their mortgages at lower
interest rates. This may result in the proceeds being reinvested at lower
interest rates. Rising interest rates may decrease the assumed prepayment speed.
Slower prepayment speeds may extend the maturity of the security beyond its
estimated maturity. Therefore, investors may not be able to invest at current
higher market rates due to the extended expected maturity of the security.
United had a net unrealized gain of $1,554 on all mortgage-backed securities at
December 31, 1997, as compared to a net unrealized loss of $977 at December 31,
1996.
The following table sets forth the maturities of all securities at December 31,
1997, and the weighted average yields of such securities (calculated on the
basis of the cost and the effective yields weighted for the scheduled maturity
of each security).
<TABLE>
<CAPTION>
After 1 But After 5 But
Within 1 Year Within 5 Years Within 10 Years After 10 Years
--------------- --------------- ----------------- --------------
Amount Yield Amount Yield Amount Yield Amount Yield
------ ----- ------ ----- ------ ----- ------ -----
(In thousands)
<S><C>
U.S. Treasury and other
U.S. Government agencies
and corporations $51,735 5.01% $129,004 6.54% $90,972 7.43% $115,421 7.15%
States and political
subdivisions (1) 4,133 10.48% 8,552 8.58% 8,608 8.90% 11,357 9.36%
Other 1,923 8.52% 82 6.60% 31,375 5.45%
</TABLE>
(1) Tax-equivalent adjustments (using a 35% federal rate) have been made in
calculating yields on obligations of states and political subdivisions.
NOTE: There are no securities with a single issuer whose book value in the
aggregate exceeds 10% of total shareholders' equity.
23
<PAGE>
UNITED BANKSHARES, INC. AND SUBSIDIARIES
SHORT-TERM BORROWINGS
The following table shows the distribution of United's short-term borrowings and
the weighted average interest rates thereon at the end of each of the last three
years. Also provided are the maximum amount of borrowings and the average
amounts of borrowings as well as weighted average interest rates for the last
three years.
<TABLE>
<CAPTION>
Federal Securities Sold
Funds Under Agreements
Purchased to Repurchase
--------- ----------------
(In thousands)
<S><C>
At December 31:
1997 $20,961 $109,909
1996 4,491 71,091
1995 26,378 55,789
Weighted average interest rate at year end:
1997 6.7% 4.4%
1996 6.8% 4.2%
1995 5.9% 4.4%
Maximum amount outstanding at any month's end:
1997 $27,900 $123,949
1996 33,510 79,664
1995 33,941 81,720
Average amount outstanding during the year:
1997 $21,725 $95,565
1996 20,685 66,463
1995 12,264 70,752
Weighted average interest rate during the year:
1997 5.6% 4.2%
1996 5.6% 4.0%
1995 6.0% 4.3%
</TABLE>
At December 31, 1997, repurchase agreements include $86,599 in overnight
accounts. The remaining balance principally consists of agreements having
maturities ranging from 2-90 days. The rates offered on these funds vary
according to movements in the federal funds and short-term investment market
rates.
24
<PAGE>
UNITED BANKSHARES, INC. AND SUBSIDIARIES
DEPOSITS
The average daily amount of deposits and rates paid on such deposits is
summarized for the years ended December 31:
<TABLE>
<CAPTION>
1997 1996 1995
--------------- ---------------- -----------------
Amount Rate Amount Rate Amount Rate
------ ---- ------ ---- ------ ----
(In thousands)
<S><C>
Noninterest bearing
demand deposits $ 257,210 $ 251,641 $ 234,455
Interest bearing
demand deposits 36,559 2.40% 127,867 2.50% 268,108 2.33%
Savings deposits 695,026 2.94% 581,117 2.69% 464,107 3.16%
Time deposits 943,703 5.55% 827,657 5.45% 778,665 5.31%
---------- ---------- ----------
TOTAL $1,932,498 4.44% $1,788,282 4.16% $1,745,335 4.12%
========== ========== ==========
</TABLE>
Maturities of time certificates of deposit of $100,000 or more outstanding at
December 31, 1997 are summarized as follows:
(In thousands)
3 months or less $ 47,974
Over 3 through 6 months 21,626
Over 6 through 12 months 59,444
Over 12 months 58,621
--------
TOTAL $187,665
========
RETURN ON EQUITY AND ASSETS
The following table shows selected consolidated operating and capital ratios for
each of the last three years ended December 31:
<TABLE>
<CAPTION>
1997 1996 1995
-------- -------- --------
<S><C>
Return on average assets 1.68% 1.35% 1.52%
Return on average equity 15.28% 11.98% 13.86%
Dividend payout ratio (1) 49.69% 58.49% 49.21%
Average equity to average
assets ratio 11.01% 11.25% 10.94%
</TABLE>
(1) Based on historical results of United before the effects of restatements for
pooling of interests business combinations.
25
<PAGE>
UNITED BANKSHARES, INC. AND SUBSIDIARIES
SUMMARY OF LOAN LOSS EXPERIENCE
The following table summarizes United's loan loss experience for each of the
five years ended December 31:
<TABLE>
<CAPTION>
1997 1996 1995 1994 1993
---------- ---------- ---------- ---------- ----------
(In thousands)
<S><C>
Balance of allowance for possible loan
losses at beginning of year $ 22,283 $ 22,545 $ 22,304 $ 20,975 $ 17,485
Allowance of purchased company at date
of acquisition 2,695 1,017 504
Loans charged off:
Commercial, financial and agricultural 1,223 2,207 1,952 788 1,088
Real estate 394 230 722 82 711
Real estate construction
Consumer and other 2,202 1,087 950 980 1,015
---------- ---------- ---------- ---------- ----------
TOTAL CHARGE-OFFS 3,819 3,524 3,624 1,770 2,814
Recoveries:
Commercial, financial and agricultural 218 219 189 577 438
Real estate 87 135 65 13 231
Real estate construction
Consumer and other 222 298 274 307 301
---------- ---------- ---------- ---------- ----------
TOTAL RECOVERIES 527 652 528 897 970
NET LOANS CHARGED OFF 3,292 2,872 3,096 873 1,844
Addition to allowance (1) 3,100 2,610 2,320 2,202 4,830
---------- ---------- ---------- ---------- ----------
BALANCE OF ALLOWANCE FOR POSSIBLE
LOAN LOSSES AT END OF YEAR $ 24,786 $ 22,283 $ 22,545 $ 22,304 $ 20,975
========== ========== ========== ========== ==========
Totals loans outstanding at the end of period $2,060,487 $1,847,605 $1,732,986 $1,652,275 $1,462,574
Average loans outstanding during
period (net of unearned income) $1,905,706 $1,786,376 $1,673,568 $1,556,844 $1,402,609
Net charge-offs as a percentage of
average loans outstanding 0.17% 0.16% 0.18% 0.06% 0.13%
Allowance for possible loan losses as
a percentage of nonperforming loans 159.9% 218.6% 205.1% 294.6% 137.8%
</TABLE>
(1) The amount charged to operations and the related balance in the allowance
for possible loan losses is based upon periodic evaluations of the loan
portfolio by management. These evaluations consider several factors
including, but not limited to, general economic conditions, loan portfolio
composition, prior loan loss experience and management's estimation of
future potential losses.
Quarterly reviews of individual loans as well as the loan portfolio as a
whole are made by management and the credit department. Management performs
extensive procedures in granting and monitoring loans on a continual basis.
Further, management believes that the allowance for loan losses is adequate
to absorb anticipated losses.
26
<PAGE>
UNITED BANKSHARES, INC. AND SUBSIDIARIES
SUMMARY OF LOAN LOSS EXPERIENCE--Continued
Allocation of allowance for
possible loan losses
<TABLE>
<CAPTION>
December 31
------------------------------------------------------------
1997 1996 1995 1994 1993
--------- --------- --------- --------- ----------
<S><C>
Commercial, financial and
agricultural $ 7,680 $7,175 $6,891 $7,526 $ 8,109
Real estate 265 667 771 613 476
Real estate construction
Consumer and other 2,149 1,072 1,484 1,313 1,733
------- ------ ------ ------ -------
Total $10,094 $8,914 $9,146 $9,452 $10,318
======= ====== ====== ====== =======
</TABLE>
The portion of the allowance for loan losses that is not specifically allocated
to individual credits has been apportioned among the separate loan portfolios
based on the relative risk and relative size of each portfolio.
% of Allowance per Category to Total Allocated Allowance
- --------------------------------------------------------
<TABLE>
<CAPTION>
December 31
------------------------------------------------------------
1997 1996 1995 1994 1993
--------- --------- --------- --------- ----------
<S><C>
Commercial, financial and
agricultural 76.08% 80.49% 74.62% 79.62% 78.59%
Real estate 2.63% 7.48% 8.66% 6.49% 4.61%
Real estate construction
Consumer and other 21.29% 12.03% 16.72% 13.89% 16.80%
------ ------ ------ ------ ------
Total 100.00% 100.00% 100.00% 100.00% 100.00%
====== ====== ====== ====== ======
</TABLE>
27
<PAGE>
UNITED BANKSHARES, INC.
FORM 10-K, PART II
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
(A) - FINANCIAL STATEMENTS REQUIRED BY REGULATION S-X
Information relating to financial statements on pages 9 through 36 inclusive
of the Annual Report to Shareholders for the year ended December 31, 1997, is
incorporated herein by reference.
(B) - SUPPLEMENTARY FINANCIAL INFORMATION
(1) Selected Quarterly Financial Data
Information relating to selected quarterly financial data on page 36 of the
Annual Report to Shareholders for the year ended December 31, 1997, is
incorporated herein by reference.
(2) Information on the Effects of Changing Prices
Information relating to effects of changing prices on page 42 of the Annual
Report to Shareholders for the year ended December 31, 1997, is incorporated
herein by reference.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURES
This item is omitted since it is not applicable.
28
<PAGE>
UNITED BANKSHARES, INC.
FORM 10-K, PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Information regarding directors and executive officers of the registrant on
pages 2 through 7 inclusive, of the Proxy Statement for the 1998 Annual
Shareholders' Meeting is incorporated herein by reference.
ITEM 11. EXECUTIVE COMPENSATION
Information regarding executive compensation on pages 8 through 11
inclusive, of the Proxy Statement for the 1998 Annual Shareholders' Meeting is
incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT
Information regarding security ownership of certain beneficial owners and
management on pages 2 through 6 inclusive, of the Proxy Statement for the 1998
Annual Shareholders' Meeting is incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information regarding certain relationships and related transactions on
pages 2, 3, 6, 14 and 15 of the Proxy Statement for the 1998 Annual
Shareholders' Meeting is incorporated herein by reference.
29
<PAGE>
UNITED BANKSHARES, INC.
FORM 10-K, PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON
FORM 8-K
(a) List of Documents Filed as Part of This Report:
(1) Financial Statements
The financial statements listed below are incorporated
herein by reference from the Annual Report to Shareholders for the year ended
December 31, 1997 at Item 8a. Page references are to such Annual report.
Financial Statements: Page References
- --------------------- ---------------
Report of Independent Auditors............................... 9
Consolidated Balance Sheets.................................. 10
Consolidated Statements of Income............................ 11
Consolidated Statements of Changes in Shareholders' Equity... 12
Consolidated Statements of Cash Flows........................ 13
Notes to Consolidated Financial Statements................... 14
(2) Financial Statement Schedules
United is not filing separate financial statement
schedules because of the absence of conditions under which they are required or
because the required information is included in the consolidated financial
statements or notes thereto.
(3) Exhibits Required by Item 601
Listing of Exhibits - See the Exhibits' Index on page 32
of this Form 10-K.
(b) Reports on Form 8-K
On November 7, 1997, United Bankshares, Inc. filed pro
forma financial information in connection with the pending merger of United
Bankshares, Inc. and George Mason Bankshares, Inc.
On November 25, 1997, United Bankshares, Inc. declared a
100% stock dividend to shareholders and modified the stock repurchase plan.
(c) Exhibits -- The exhibits to this Form 10-K begin on page
35.
(d) Consolidated Financial Statement Schedules -- All other
schedules for which provision is made in the applicable
accounting regulation of the Securities and Exchange
Commission are not required under the related
instructions or are inapplicable or pertain to items as
to which the required disclosures have been made
elsewhere in the financial statements and notes thereto,
and therefor have been omitted.
30
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15 (d) 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)
By /s/ Richard M. Adams
_____________________
Chairman of the Board
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the registrant and
in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
Signatures Title Date
<S><C>
/s/ Richard M. Adams Chairman of the Board, March 30, 1998
_____________________________ Director, Chief Execu-
tive Officer
/s/ Steven E. Wilson Chief Financial Officer March 30, 1998
_____________________________ Chief Accounting Officer
/s/ F.T. Graff, Jr. Director March 30, 1998
_____________________________
/s/ I.N. Smith, Jr. Director March 30, 1998
_____________________________
/s/ Thomas J. Blair, III Director March 30, 1998
_____________________________
/s/ H. Smoot Fahlgren Director March 30, 1998
_____________________________
/s/ Theodore J. Georgelas Director March 30, 1998
_____________________________
/s/ William W. Wagner Director March 30, 1998
_____________________________
/s/ Harry L. Buch Director March 30, 1998
_____________________________
/s/ Warren A. Thornhill, III Director March 30, 1998
_____________________________
/s/ Robert P. McLean Director March 30, 1998
_____________________________
/s/ Harold L. Wilkes Director March 30, 1998
_____________________________
/s/ P. Clinton Winter, Jr. Director March 30, 1998
_____________________________
/s/ R. Terry Butcher Director March 30, 1998
_____________________________
/s/ Charles E. Stealey Director March 30, 1998
_____________________________
</TABLE>
31
<PAGE>
UNITED BANKSHARES, INC.
FORM 10-K
INDEX TO EXHIBITS
ITEM 14.
<TABLE>
<CAPTION>
S-K Item 601 Sequential Page
Description Table Reference Number (a)
- ----------- --------------- ---------------
<S><C>
Articles of Incorporation and
Bylaws: (3)
(a) Bylaws (g)
(b) Articles of Incorporation (f)
Investments (4) N/A
Voting Trust Agreement (9) N/A
Material Contracts (10)
(a) Employment Agreement with
I. N. Smith, Jr. (b)
(b) Employment Agreement with
Richard M. Adams (e)
(c) Lease on Branch Office in
Charleston Town Center,
Charleston, West Virginia (b)
(d) Lease on United Center,
Charleston, West Virginia (h)
(e) Lease with Polymerland, Inc.
on UNB Square (h)
(f) Lease and Agreement between
Valley Savings and Loan
Company (Lessor) and Dorothy
Adams, Richard M. Adams and
Douglass H. Adams (Lessees) (c)
(g) Agreement between Dorothy
D. Adams (Lessors) and Valley
Savings and Loan Company (Lessees) (c)
</TABLE>
32
<PAGE>
<TABLE>
<CAPTION>
S-K Item 601 Sequential Page
Description Table Reference Number (a)
----------- --------------- ---------------
<S><C>
(h) Employment Contract with
Douglass H. Adams (d)
(i) Employment Contract with
Thomas A. McPherson (d)
(j) Data processing contract
with FISERV (k)
(k) Supplemental Retirement
Contract with Richard M.
Adams (i)
(l) Supplemental Retirement
Contract with Douglass H.
Adams (i)
(m) Executive Officer Change
of Control Agreements (j)
(n) Data processing contract
with ALTELL (l)
Statement Re: Computation of Per
Share Earnings (11) 82
Statement Re: Computation of
Ratios (12) 83
Annual Report to Security Holders,
et al. (13) 35
Letter Re: Change in accounting
principles (18) N/A
Previously Unfiled Documents (19) N/A
Subsidiaries of the Registrant (21) 84
Published Report Regarding Matters
Submitted to a Vote of Security
Holders (22) N/A
Consent of Ernst & Young LLP (23) 85
Power of Attorney (24) N/A
Financial Data Schedule (27.1) 86
Restated Financial Data Schedule (27.2) 87
</TABLE>
33
<PAGE>
<TABLE>
<CAPTION>
S-K Item 601 Sequential Page
Description Table Reference Number (a)
----------- --------------- ---------------
<S><C>
Restated Financial Data Schedule (27.3) 88
Additional Exhibits: (28) N/A
Footnotes
</TABLE>
(a) N/A = Not Applicable
(b) Incorporated into this filing by reference to Exhibit 10 of the 1985
Form 10-K for Intermountain Bankshares, Inc., File No. 0-12356
(c) Incorporated into this filing by reference to Exhibit 10 of the 1986
Form 10-K for United Bankshares, Inc., File No. 0-13322
(d) Incorporated into this filing by reference to Part II of Form S-4
Registration Statement of United Bankshares, Inc., Registration No.
33-19968 filed February 3, 1988
(e) Incorporated into this filing by reference to Exhibits to the 1988 10-K
for United Bankshares, Inc., File No. 0-13322
(f) Incorporated into this filing by reference to Exhibits to the 1989 10-K
for United Bankshares, Inc., File No. 0-13322
(g) Incorporated into this filing by reference to Exhibits to the 1990 10-K
for United Bankshares, Inc., File No. 0-13322
(h) Incorporated into this filing by reference to Exhibits to the 1991 10-K
for United Bankshares, Inc., File No. 0-13322
(i) Incorporated into this filing by reference to Exhibits to the 1992 10-K
for United Bankshares, Inc., File No. 0-13322
(j) Incorporated into this filing by reference to Exhibits to the 1993 10-K
for United Bankshares, Inc., File No. 0-13322
(k) Incorporated into this filing by reference to Exhibits to the 1994 10-K
as amended by Form 10K/A filed February 8, 1996, for United Bankshares,
Inc., File No. 0-13322
(l) Incorporated into this filing by reference to Exhibits to the 1996 10-K
for United Bankshares, Inc., File No. 0-13322
34
<PAGE>
UNITED BANKSHARES, INC. AND SUBSIDIARIES
SELECTED FINANCIAL DATA
(Dollars in thousands except per share data)
<TABLE>
<CAPTION>
Five Year Summary
----------------------------------------------------------------------------------
1997 1996 1995 1994 1993
--------- --------- --------- --------- ----------
<S><C>
SUMMARY OF OPERATIONS:
Total interest income $ 190,252 $ 172,358 $ 165,815 $ 147,637 $ 140,624
Total interest expense 84,499 73,185 70,167 55,672 55,037
Net interest income 105,753 99,173 95,648 91,965 85,587
Provision for loan losses 3,100 2,610 2,320 2,202 4,830
Other income 19,732 14,189 14,752 12,238 14,300
Other expense 59,949 63,549 57,481 55,908 56,107
Income taxes 21,497 16,691 17,782 15,709 12,482
Income before cumulative
effect of accounting change 40,939 30,512 32,817 30,384 26,468
Net income 40,939 30,512 32,817 30,384 27,797
Cash dividends(2) 20,344 17,847 13,817 12,604 10,918
PER COMMON SHARE: (1)
Income before cumulative
effect of accounting change:
Basic $1.37 $1.01 $1.10 $1.01 $0.88
Diluted 1.35 1.00 1.09 1.00 0.88
Net income:
Basic $1.37 $1.01 $1.10 $1.01 $0.92
Diluted 1.35 1.00 1.09 1.00 0.92
Cash dividends(2) 0.68 0.62 0.59 0.53 0.48
Book value per share 9.33 8.57 8.23 7.55 7.11
SELECTED RATIOS:
Return on average
shareholders' equity 15.28% 11.98% 13.86% 13.67% 13.41%
Return on average assets 1.68% 1.35% 1.52% 1.44% 1.39%
Dividend payout ratio (2) 49.69% 58.49% 49.21% 50.61% 50.30%
SELECTED BALANCE SHEET DATA:
Average assets $2,433,421 $2,263,428 $2,162,760 $2,107,476 $2,006,875
Investment securities 453,162 332,331 321,019 372,069 439,699
Total loans 2,060,487 1,847,605 1,732,986 1,652,275 1,462,574
Total assets 2,699,790 2,326,877 2,210,230 2,170,340 2,035,452
Total deposits 2,106,047 1,827,554 1,774,599 1,714,190 1,699,131
Long-term borrowings 3,695 25,621 34,497 84,374 32,564
Total borrowings
and other liabilities 314,305 240,809 186,397 230,516 122,274
Shareholders' equity 279,438 258,514 249,234 225,634 214,047
</TABLE>
(1) All references to shares and per share data have been retroactively
restated for the effect of a two-for-one stock split effected in the form
of a 100% stock dividend distributed on March 27, 1998, to shareholders of
record as of March 13, 1998.
(2) Cash dividends are the amounts declared by United and do not include cash
dividends of acquired subsidiaries prior to the dates of consummation.
35
<PAGE>
UNITED BANKSHARES, INC. AND SUBSIDIARIES
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, unless
otherwise indicated.
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 broad overview of the financial condition and results of
operations is not intended to replace the more detailed discussion which is
presented under specific headings on the following pages.
36
<PAGE>
1997 COMPARED TO 1996
OVERVIEW
In November 1997, United's Board of Directors approved a two-for-one stock split
effected in the form of a 100% stock dividend that was distributed on March 27,
1998, to shareholders of record as of March 13, 1998. The change in capital
structure due to the dividend has been given retroactive effect in the December
31, 1997 balance sheet and all references to shares and per share data have been
retroactively restated for the effect of the dividend.
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 following
discussion includes the financial position and results of operations of Patriot
from the effective merger date forward. At the time of consummation, Patriot had
assets of approximately $211 million, securities available for sale of $37
million, loans, net of unearned income, of $135 million, other assets of $34
million (including $26 million of goodwill), deposits of $154 million and other
liabilities of $57 million, all of which reflected purchase accounting
adjustments.
EARNINGS SUMMARY
For the year ended December 31, 1997, net income increased 34.2% to $40,939,000.
Net income per share of $1.35 for the year increased 35.0% from $1.00 in 1996.
Dividends per share increased 9.7% from $0.62 in 1996 to a record level of $0.68
per share in 1997. This was the twenty-fourth consecutive year of dividend
increases to shareholders.
United's return on average assets of 1.68% for 1997 compared very favorably with
regional and national peer grouping information provided by Wheat, First
Securities, Inc. of 1.32% and 1.18%. United's return on average shareholders'
equity of 15.28%, as compared with regional and national peer group information
of 16.20% and 15.58%, is indicative of United's very strong capital levels.
United, one of the nation's most profitable regional banking companies, has a
strong capital position, and is well positioned to take advantage of future
growth opportunities.
United has strong core earnings driven by a net interest margin of 4.76% for
1997. Net interest income increased by $6.58 million or 6.63% for the year ended
December 31, 1997 as compared to the same period for 1996. The provision for
loan losses of $3.10 million increased $0.49 million or 18.77% when compared to
the year ended December 31, 1996. Noninterest income, including income from
mortgage banking operations, increased $5.54 million or 39.07% for 1997 when
compared to 1996. Noninterest expenses decreased $3.60 million or 5.66% for 1997
compared to the same period in 1996. The effective tax rate for the year ended
December 31, 1997 approximated 34.43% compared to 35.36% for 1996.
37
<PAGE>
FINANCIAL CONDITION SUMMARY
Total assets were $2.70 billion at December 31, 1997, up $372.91 million or
16.0% compared with year-end 1996. Loans, net of unearned income, reflected a
$212.88 million increase from 1996 to 1997 due to the acquisition of Patriot and
internal growth. Investment securities reflected a $120.83 million increase for
1997 as compared with year-end 1996 as a result of United's securitization of
approximately $87 million of fixed rate mortgage loans during 1997. All other
assets increased $41.05 million. Approximately $26 million of the increase was
due to goodwill associated with the third quarter acquisition of Patriot.
Total deposits grew $278.49 million or 15.2% from year-end 1996 due to United's
offering of new deposit products introduced in late 1996 and the acquisition of
Patriot during the third quarter of 1997. Since December 31, 1996, United has
realized an increase of $221.61 million in interest-bearing deposits and a
$56.88 million increase in noninterest- bearing deposits. United's short-term
borrowings increased $55.29 million and its FHLB borrowings increased $10.06
million as United utilized these sources of funds to fund the cash acquisition
of Patriot and to help fund loan growth. Accrued expenses and other liabilities
increased $8.14 million or 25.0% since year-end 1996 as a result of the
acquisition of Patriot and higher merger expenses.
Shareholders' equity increased $20.92 million or 8.1% from December 31, 1996 to
December 31, 1997. United continues to maintain an appropriate balance between
capital adequacy and return to shareholders. At December 31, 1997, United's
regulatory capital ratios, including those of its bank subsidiaries, exceeded
the levels established for well- capitalized institutions.
The following discussion explains in more detail the results of operations and
changes in financial condition by major category.
NET INTEREST INCOME
Net interest income represents the primary component of United's earnings. It is
the difference between interest and fee income from earning assets and interest
expense incurred to fund these assets. Net interest income is impacted by
changes in the volume and mix of interest-earning assets and interest-bearing
liabilities, as well as changes in market interest rates. Such changes, and
their impact on net interest income in 1997, are summarized below.
For the years ended December 31, 1997 and 1996, net interest income approximated
$105,753,000 and $99,173,000, respectively. On a tax- equivalent basis the net
interest margin was strong at 4.76% in 1997 and 4.85% in 1996 which are well
above national peer group margins of 4.06% in 1997 and 4.18% in 1996.
Total interest income of $190,252,000 increased 10.4% in 1997 over 1996 as a
result of higher volumes of interest-earning assets and slightly
38
<PAGE>
higher yields. Higher average loan volumes of approximately $119 million,
resulting primarily from the acquisition of Patriot, contributed to the
increase. From December 31, 1996 to December 31, 1997, United experienced a
moderate increase in consumer loans of 5.4%, while commercial loans showed an
increase of 31.5%. Mortgage loans decreased slightly from 1996 by 1.9% due
mainly to the sale of real estate loans by United's mortgage banking subsidiary.
Total interest expense increased $11,314,000 or 15.5% in 1997 compared to 1996.
This increase was attributed primarily to United's acquisition of Patriot,
competitive pricing of interest-bearing deposits in its markets and continued
change in the retail deposit mix as customers shifted funds into products
offering higher yields. United's average interest-bearing deposits increased by
$138,647,000 or 9.0% in 1997, while its average FHLB advances decreased
$16,628,000 or 16.8% and average short-term borrowings increased $30,275,000 or
34.8%. The average cost of funds, which increased from 4.25% in 1996 to 4.51% in
1997, reflected the general upward trend in United's market interest rates
during 1997 due to competitive pressures.
PROVISION FOR LOAN LOSSES
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 of 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. See Note D to the Consolidated Financial
Statements for a discussion of concentrations of credit risk.
Nonperforming loans were $15,498,000 at December 31, 1997 and $10,192,000 at
December 31, 1996, an increase of 52.1%. This increase can be attributed to
United's acquisition of approximately $2.5 million of nonperforming loans from
the Patriot transaction in the third quarter of 1997 and decreasing consumer
credit quality trends. Loans past due 90 days or more increased $5,511,000 or
94.5% during 1997; nonaccrual loans decreased $205,000 or 4.7% since year-end
1996. Nonperforming loans represented 0.57% of total assets at the end of 1997,
as compared to 0.41% for United's national peer group.
At year-end 1997 and 1996, the allowance for loan losses was 1.20% and 1.21% of
total loans, net of unearned income. At December 31, 1997 and 1996, the ratio of
the allowance for loan losses to nonperforming loans was 159.9% and 218.6%,
respectively.
Management believes that the allowance for loan losses of $24,786,000 at
December 31, 1997, is adequate to provide for potential losses on existing loans
based on information currently available.
For the years ended December 31, 1997 and 1996, the provision for loan losses
was $3,100,000 and $2,610,000, respectively. The increase in the
39
<PAGE>
provision for 1997 when compared to 1996 was to conform the allowance for loan
losses on Patriot's loan portfolio with United's loan valuation policies and in
response to growth in the portfolio. The provision for loan losses charged to
operations is based on management's evaluation of individual credits, past loan
loss experience, and other factors which, in management's judgment, deserve
recognition in estimating possible loan losses. Such other factors considered by
management include growth and composition of the loan portfolio, known
deterioration in certain classes of loans or collateral, trends in delinquencies
and current economic conditions.
Total net charge-offs were $3,289,000 in 1997 and $2,872,000 in 1996, which
represents 0.17% and 0.16% of average loans for the respective years. United's
ratio of net charge-offs to average loans was better than its peer group's ratio
of 0.49% in 1997 and 0.23% in 1996.
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.
At December 31, 1997, impaired loans were $12,602,000, an increase of $2,285,000
or 22.1% from the $10,317,000 in impaired loans at December 31, 1996, due
primarily to the acquisition of Patriot in 1997. For further details, see Note D
to the Consolidated Financial Statements.
OTHER INCOME
Noninterest income has been and will continue to be an important factor for
improving United's profitability. Accordingly, management continues to evaluate
areas where noninterest income can be enhanced. Noninterest income increased
$5,543,000 or 39.1% for 1997 when compared to 1996. Other income consists of all
revenues which are not included in interest and fee income related to earning
assets. The increase in noninterest income for 1997 was primarily the result of
$3,135,000 of income generated from the sale and servicing of loans by United's
mortgage banking subsidiary as compared to a loss of $431,000 during the
subsidiary's first year of operation in 1996. Contributing to this increase in
income from the mortgage banking operations have been fees generated from the
$87 million loan securitization in 1997.
Service charges and fees from customer accounts increased $1,202,000 or 10.6% in
1997. This income includes charges and fees related to various banking services
provided by United. The increase was primarily due to a combination of increased
fees in bankcard accounts and an increased fee structure for sales of checking
related products.
Trust income increased $383,000 or 12.0% in 1997 due to an increased volume of
trust business.
40
<PAGE>
OTHER EXPENSE
Just as management continues to evaluate areas where noninterest income can be
enhanced, it strives to improve the efficiency of its operations and thus reduce
operating costs. United's cost control efforts have been very successful
resulting in an efficiency ratio of 46.5%, which is well below the 57.6%
reported by United's national peer group banks and its immediate in-market
competitors.
Other expense includes all items of expense other than interest expense, the
provision for loan losses and income tax expense. In total, other expense
decreased $3,600,000 or 5.7%.
Salaries and employee benefits expense decreased $1,359,000 or 4.7% in 1997 as
compared to 1996. The higher salaries and benefits costs for 1996 were
attributable to severance and benefit pay of displaced Eagle executive officers,
employment contracts and employees at locations where United consolidated
certain branches. As of December 31, 1997 and 1996, United employed 972 and 893
full-time equivalent employees, respectively.
Net occupancy expense in 1997 slightly exceeded 1996 levels by $167,000 or 2.8%
primarily due to the acquisition of Patriot, decreased rental income and an
increase in building rental expense and higher depreciation and real property
taxes for company-owned buildings. The overall changes in net occupancy expense
for 1997 were insignificant with no material increase or decrease in any one
expense category.
Remaining other expense decreased $2,408,000 or 8.4% in 1997 compared to 1996.
This decrease in other expense for 1997 related primarily to decreases in
deposit insurance expense due to the 1996 SAIF assessment.
INCOME TAXES
For the year ended December 31, 1997, income tax expense approximated
$21,497,000 compared to $16,691,000 for 1996. The increase of $4,806,000 or
28.8% for 1997 when compared to 1996 was primarily the result of increased
pretax income in 1997. United's effective tax rate approximated 34.4% in 1997
and 35.4% in 1996. This decrease was due to effective tax planning strategies.
At December 31, 1997, gross deferred tax assets totaled approximately $14.0
million. The allowance for loan losses and various accrued liabilities represent
the most significant temporary differences.
QUARTERLY RESULTS
The first and second quarters of 1997 showed large increases in earnings in
comparison to those same two quarters of 1996 as United returned to more normal
levels of core income and expenses after the Eagle merger. The 1996 results
contained significant reengineering and merger-related and one-time special
charges associated with the Eagle merger which distorted United's true financial
performance.
41
<PAGE>
In the third quarter of 1997, United reported a decrease in earnings from the
same period in 1996. Third quarter 1996 earnings were higher as a result of
legislation which relieved United of $3,086,000 in income tax expense that
related to the bad debt recapture associated with the Eagle merger.
Net income for the fourth quarter of 1997 was $10,426,000, an increase of 4.9%
from the $9,936,000 earned in the fourth quarter of 1996. On a per share basis,
fourth quarter earnings were $0.34 per share in 1997 and $0.33 per share in
1996. The increase in earnings was due primarily to an increase in net interest
income.
Additional quarterly financial data for 1997 and 1996 may be found in Note P to
the Consolidated Financial Statements.
THE EFFECT OF INFLATION
United's income statements generally reflect the effects of inflation. Since
interest rates, loan demand and deposit levels are impacted by inflation, the
resulting changes in the interest sensitive assets and liabilities are included
in net interest income. Similarly, operating expenses such as salaries, rents
and maintenance include changing prices resulting from inflation. One item that
would not reflect inflationary changes is depreciation expense. Subsequent to
the acquisition of depreciable assets, inflation causes price levels to rise;
therefore, historically presented dollar values do not reflect this inflationary
condition. With inflation levels at relatively low levels and monetary and
fiscal policies being implemented to keep the inflation rate increases within an
acceptable range, management expects the impact of inflation would continue to
be minimal in the near future.
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
42
<PAGE>
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. 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.
The difference between rate sensitive assets and rate sensitive liabilities for
specified periods of time is known as the "GAP." 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 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 $63,198,000 or 2.50% of the cumulative gap to related
earning assets.
To aid in interest rate management, United's lead bank, UNB, is a member of the
Federal Home Loan Bank of Pittsburgh (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
43
<PAGE>
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 December 31, 1997:
Change in
Interest Rates Percentage Change in
(basis points) Net Interest Income
-------------- --------------------
+200 1.94%
-200 -2.70%
Given an immediate, sustained 200 basis point upward shock to the yield curve
used in the simulation model, it is estimated net interest income for United
would increase by 1.94% over one year. A 200 basis point immediate, sustained
downward shock in the yield curve would decrease net interest income by an
estimated 2.70% over one year. All of these estimated changes in net interest
income are within the policy guidelines established by the Board of Directors.
44
<PAGE>
The following table shows the interest rate sensitivity GAP as of December
31, 1997:
INTEREST RATE SENSITIVITY GAP
<TABLE>
<CAPTION>
Days
------------------------------ Total 1 - 5 Over 5
0 - 90 91 - 180 181 - 365 One Year Years Years Total
------ -------- --------- -------- ----- ----- -----
(Dollars in Thousands)
<S><C>
ASSETS
INTEREST-EARNING ASSETS:
Federal funds sold and
securities purchased
under agreements to
resell and other short-
term investments $ 9,725 $ 9,725 $ 9,725
Investment and marketable
equity securities:
Taxable 19,990 $ 3,460 $ 1,818 25,268 $ 139,439 $255,805 420,512
Tax-exempt 1,090 3,196 4,286 9,158 19,206 32,650
Loans, net of unearned
income 666,093 165,950 307,717 1,139,760 615,057 305,670 2,060,487
---------- --------- --------- ---------- --------- -------- ----------
Total Interest-Earning
Assets $ 695,808 $ 170,500 $ 312,731 $1,179,039 $ 763,654 $580,681 $2,523,374
========== ========= ========= ========== ========= ======== ==========
LIABILITIES
INTEREST-BEARING FUNDS:
Savings and NOW
accounts $ 762,358 $ 762,358 $ 762,358
Time deposits of
$100,000 & over 47,974 $ 21,626 $ 59,444 129,044 $ 58,069 $ 552 187,665
Other time deposits 178,376 165,038 199,569 542,983 293,338 1,773 838,094
Federal funds purchased,
repurchase agreements
and other short-term
borrowing 130,870 130,870 130,870
FHLB advances 139,000 139,000 3,695 142,695
---------- --------- --------- ---------- --------- -------- ----------
Total Interest-Bearing
Funds $1,258,578 $ 186,664 $ 259,013 $1,704,255 $ 351,407 $ 6,020 $2,061,682
========== ========= ========= ========== ========= ======== ==========
Interest Sensitivity Gap $ (562,770) $ (16,164) $ 53,718 $ (525,216) $ 412,247 $574,661 $ 461,692
========== ========= ========= ========== ========= ======== ==========
Cumulative Gap $ (562,770) $(578,934) $(525,216) $ (525,216) $(112,969) $461,692 $ 461,692
========== ========= ========= ========== ========= ======== ==========
Cumulative Gap as
a Percentage of Total
Earning Assets (22.30%) (22.94%) (20.81%) (20.81%) (4.48%) 18.30% 18.30%
Management
Adjustments $ 735,518 $ (49,059) $ (98,045) $ 588,414 $(588,414) $ 0
Off-Balance
Sheet Activities
---------- --------- --------- ---------- --------- -------- ----------
Cumulative Management
Adjusted Gap and Off-
Balance Sheet Activities $ 172,748 $ 107,525 $ 63,198 $ 63,198 $(112,969) $461,692 $ 461,692
========== ========= ========= ========== ========= ======== ==========
Cumulative Management
Adjusted Gap and Off-
Balance Sheet Activities
as a Percentage of Total
Earning Assets 6.85% 4.26% 2.50% 2.50% (4.48%) 18.30% 18.30%
========== ========= ========= ========== ========= ======== ==========
</TABLE>
45
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
In the opinion of management, United maintains 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 as well as advances from the
FHLB. Repurchase agreements represent funds that are generally 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 and maturing loans 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
borrowings 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 FHLB
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 secured by bank
premises or stock of United's subsidiaries. United has no intention at this time
of utilizing any long-term funding sources other than FHLB advances and
long-term certificates of deposit.
Cash flows from operations in 1997 of $32,642,000 were 50.1% lower than the
$66,449,000 in 1996 primarily as a result of an increase of approximately
$28,594,000 of excess originations of loans for sale over proceeds from the sale
of loans. In 1997, investing activities resulted in a use of cash of
$180,573,000 as compared to 1996 in which investing activities resulted in a use
of cash of $160,168,000. The primary reason for the increase in the use of cash
for investing activities was that the net difference of security purchases over
proceeds from sales, maturities and calls of securities, increased from a net
use of $11,702,000 in 1996 to a net use of $76,400,000 in 1997 or an increase
46
<PAGE>
of $64,698,000. Additionally, as a use of cash for investing activities,
approximately $28,929,000 of net cash was paid by United during 1997 to acquire
all of the outstanding shares of Patriot. These increases in uses of cash for
investing activities were partially offset by a decline in net loan originations
of $73,303,000 in 1997 as compared to 1996. Financing activities resulted in a
source of cash in 1997 of $148,583,000 primarily due to an increase in deposits
of $122,735,000 and an increase in net borrowings from the FHLB of Pittsburgh
and other short-term borrowings of $9,804,000 and $40,071,000, respectively.
These sources of cash for financing activities were partially offset by payment
of $19,831,000 of cash dividends to shareholders and $5,754,000 for the purchase
of treasury stock for use in United's employee benefit plans. See the
Consolidated Statement of Cash Flows in the Consolidated Financial Statements.
United anticipates no problems in its ability to service its obligations over
the next 12 months. 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 to it. See Note G, Notes to Consolidated
Financial Statements.
Management is not aware of any current recommendations by regulatory authorities
which, if implemented, would have a material effect on liquidity, capital
resources or operations.
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 should help to protect net interest income against
fluctuations in interest rates.
United also seeks to maintain a proper relationship between capital and total
assets to support growth and sustain earnings. United's average equity to
average asset ratio was 11.01% in 1997 and 11.25% in 1996. United's risk-based
capital ratio was 13.46% in 1997 and 16.54% in 1996 which are both significantly
higher than the minimum regulatory requirements. United's Tier 1 capital and
leverage ratios of 12.21% and 9.21%, respectively, at December 31, 1997, are
also strong relative to its peers and are well above regulatory minimums to be
classified as a "well capitalized" institution. See Note M, Notes to
Consolidated Financial Statements.
COMMITMENTS
The following table indicates the outstanding loan commitments of United in the
categories stated:
December 31
1997
-------------
Lines of credit authorized, but unused $455,767,000
Letters of credit 36,243,000
------------
$492,010,000
============
47
<PAGE>
Past experience has shown that, of the foregoing commitments, approximately
12-15% can reasonably be expected to be funded within a one year period. For
more information, see Note J to the Consolidated Financial Statements.
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.
Based on a recent assessment, United determined that it will be required to
modify or replace portions of its software so that its computer systems will
function properly with respect to dates in the year 2000 and thereafter. United
currently believes that with modifications to existing software and conversions
to new software, the Year 2000 Issue will not pose significant operational
problems for its computer systems. However, if such modifications and
conversions 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.
United will utilize both internal and external resources to reprogram, or
replace, and test the Year 2000 modifications. United anticipates completing the
Year 2000 project within one year but not later than December 31, 1998, which is
prior to any anticipated impact on United's operating systems. The total cost of
the Year 2000 project is estimated at $2.0 million and is being funded through
cash flows, which will be expensed as incurred over the next two years. The Year
2000 costs are not expected to have a material adverse effect on United's
results of operations or cash flows. To date United has incurred and expensed
approximately $100,000 related to the assessment of, and preliminary efforts in
connection with, the Year 2000 project and the development of a Year 2000 plan
of operation.
48
<PAGE>
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.
1996 COMPARED TO 1995
The following Earnings Summary 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 the specific headings below.
EARNINGS SUMMARY
For the year ended December 31, 1996, net income decreased 7.0% to $30,512,000.
Net income per share of $1.00 for the year decreased 8.3% from $1.09 in 1995.
Dividends per share increased 6.0% from $0.59 in 1995 to a record level of $0.62
per share in 1996. This was the twenty-third consecutive year of dividend
increases to shareholders.
During 1996, United recorded approximately $6,845,000 of merger-related and
one-time special charges associated with the Eagle merger. These charges
included, among other items, severance pay and benefits for displaced Eagle
officers and employees, costs to consolidate duplicate facilities, employee
training, new product promotions, computer conversions and additional deposit
insurance as a result of the Savings Association Insurance Fund ("SAIF")
recapitalization legislation.
Despite these significant one-time expenses, United's return on average assets
of 1.35% compared very favorably with regional and national peer grouping
information provided by Wheat, First Securities, Inc. of 1.19% and 1.18%.
United's return on average shareholders' equity of 11.98%, as compared with
regional and national peer group information of 15.56% and 15.14%, is indicative
of United's very strong capital levels.
The following discussion explains in more detail the results of operations and
changes in financial condition by major category.
NET INTEREST INCOME
For the years ended December 31, 1996 and 1995, net interest income approximated
$99,173,000 and $95,648,000, respectively. On a tax-equivalent basis the net
interest margin was strong at 4.85% in 1996 and 4.90% in 1995.
49
<PAGE>
Total interest income of $172,358,000 increased 4.0% in 1996 over 1995 as a
result of higher volumes of interest-earning assets. Higher average loan volumes
of approximately $113 million, resulting primarily from an acquisition,
contributed to the increase. From December 31, 1995 to December 31, 1996, United
experienced a moderate increase in consumer loans of 1.1%, while commercial
loans and mortgage loans showed increases of 13.7% and 6.4%, respectively.
Total interest expense increased $3,018,000 or 4.3% in 1996. This increase was
attributed primarily to United's competitive pricing of interest-bearing
deposits in its markets and continued change in the retail deposit mix as
customers shifted funds into products offering higher yields. United's average
interest-bearing deposits increased by $25,761,000 or 1.7% in 1996, while its
average FHLB advances increased $29,604,000 or 42.6% and average short-term
borrowings increased $3,999,000 or 4.8%. United made greater use of FHLB
advances as the cost of those advances declined from 5.93% in 1995 to 5.54% in
1996. United utilized FHLB advances during 1996 to fund the growth in the
mortgage loan portfolio. The average cost of funds, which increased from 4.22%
in 1995 to 4.25% in 1996, reflected the general upward trend in market interest
rates during 1996.
PROVISION FOR LOAN LOSSES
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.
Nonperforming loans were $10,192,000 at December 31, 1996 and $10,990,000 at
December 31, 1995, a decrease of 7.3%. The level of nonperforming assets
decreased as a result of the charge-off of certain large balance commercial
credits. The components of nonperforming loans include nonaccrual loans and
loans that are contractually past due 90 days or more as to interest or
principal, but have not been placed on nonaccrual. Loans past due 90 days or
more increased $1,139,000 or 24.3% during 1996; nonaccrual loans decreased
$1,937,000 or 30.8% since year-end 1995. Nonperforming loans represented 0.44%
of total assets at the end of 1996, as compared to 0.52% for United's national
peer group. At year-end 1996 and 1995, the allowance for loan losses was 1.21%
and 1.30% of total loans, net of unearned income. At December 31, 1996 and 1995,
the ratio of the allowance for loan losses to nonperforming loans was 218.6% and
205.1%, respectively.
For the years ended December 31, 1996 and 1995, the provision for loan losses
was $2,610,000 and $2,320,000, respectively. The increase in the provision for
1996 when compared to 1995 was to conform the allowance for loan losses on
Eagle's loan portfolio with United's loan valuation policies and in response to
growth in the portfolio.
Total net charge-offs were $2,872,000 in 1996 and $3,096,000 in 1995, which
represents 0.16% and 0.18% of average loans for the respective years. United's
ratio of net charge-offs to average loans was better than its peer group's ratio
of 0.23% in 1996 and was comparable to its peer group's ratio of 0.19% in 1995.
50
<PAGE>
At December 31, 1996, impaired loans were $10,317,000, an increase of $1,525,000
or 17.4% from the $8,792,000 in impaired loans at December 31, 1995.
OTHER INCOME
Noninterest income decreased $563,000 or 3.8% for 1996 when compared to 1995.
Other income consists of all revenues which are not included in interest and fee
income related to earning assets. The decrease in noninterest income for 1996
was primarily the result of the approximate $2,000,000 loss on loans sold in
United's newly formed mortgage banking subsidiary. These sales were necessary to
strategically align the mortgage banking operations with United's interest rate
risk position. Excluding gains and losses on sales of securities and mortgage
banking activities, noninterest income increased $978,000 or 7.1% in 1996
primarily as a result of increased service charges and fees from customer
accounts.
Trust income increased $275,000 or 9.5% in 1996 due to repricing of services and
an increased volume of trust business.
Service charges, commissions and fees increased by $1,396,000 or 14.1% in 1996.
The increase was primarily attributable to conforming the former Eagle offices'
service charge and fee structures to United's and increased return check charges
and bankcard fees. This income includes charges and fees related to various
banking services provided by United. The increase was primarily due to a
combination of increased fees in bankcard accounts and an increased fee
structure for sales of checking related products.
Securities transactions resulted in a net loss of $98,000 in 1996. The proceeds
from these sales of approximately $17 million were reinvested in similar
securities yielding a higher rate of return. There were no securities sales in
1995.
OTHER EXPENSE
Other expense includes all items of expense other than interest expense, the
provision for loan losses and income tax expense. In total, other expense
increased $6,068,000 or 10.6%. The increase was primarily due to the one-time
and merger-related charges recorded in the first and second quarters and the
additional third quarter deposit insurance expense as a result of the SAIF
recapitalization legislation.
Salaries and employee benefits expense increased $2,887,000 or 11.2% in 1996.
Nearly all of the increase for 1996 was attributable to severance and benefit
pay of displaced Eagle executive officers, employment contracts and employees at
locations where United consolidated certain branches. As of December 31, 1996
and 1995, United employed 893 and 946 full-time equivalent employees,
respectively.
51
<PAGE>
Net occupancy expense in 1996 exceeded 1995 levels by $319,000 or 5.5% primarily
due to decreased rental income and an increase in real property repairs and
utilities expense. The overall changes in net occupancy expense for 1996 were
insignificant with no material increase or decrease in any one expense category.
Remaining other expense increased $2,862,000 or 11.1% in 1996 compared to 1995.
The increase in other expense for 1996 related primarily to the additional
deposit insurance expense as a result of the SAIF recapitalization legislation,
higher insurance expense, advertising, consulting and legal expense, losses on
sales and write-downs of assets, EDP fees, office supplies, and goodwill
amortization. Included in these increased costs was $1,483,000 of one-time
charges which related to reengineering costs incurred to improve efficiency,
productivity and strengthen United's competitiveness. Additionally, the added
expenses of a purchase accounting acquisition included in 1996, but not in the
first ten months of 1995, have contributed to the overall increase in
noninterest expense.
INCOME TAXES
For the year ended December 31, 1996, income taxes approximated $16,691,000
compared to $17,782,000 for 1995. The decrease of $1,091,000 or 6.7% for 1996
when compared to 1995 was primarily the result of decreased pretax income.
United's effective tax rates were approximately 35% for 1996 and 1995.
52
<PAGE>
Report Of Ernst & Young LLP
Independent Auditors
Board of Directors and Shareholders
United Bankshares, Inc. and Subsidiaries
We have audited the accompanying consolidated balance sheets of United
Bankshares, Inc. and subsidiaries as of December 31, 1997 and 1996, and the
related consolidated statements of income, changes in shareholders' equity and
cash flows for each of the three years in the period ended December 31, 1997.
These financial statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements based
on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of United Bankshares,
Inc. and subsidiaries at December 31, 1997 and 1996, and the consolidated
results of their operations and their cash flows for each of the three years in
the period ended December 31, 1997, in conformity with generally accepted
accounting principles.
/s/ Ernst & Young LLP
_____________________
Charleston, West Virginia
February 27, 1998, except
for Note O, as to which
the date is March 27, 1998
53
<PAGE>
Consolidated Balance Sheets
United Bankshares, Inc. and Subsidiaries
<TABLE>
<CAPTION>
(Dollars in thousands, except par value) December 31
--------------------------
1997 1996
----------- -----------
<S><C>
Assets
Cash and due from banks $ 80,447 $ 86,328
Interest-bearing deposits with other banks 8,725 195
Federal funds sold 1,000 2,997
----------- -----------
Total cash and cash equivalents 90,172 89,520
Securities available for sale at estimated fair value (amortized
cost --$265,439 at December 31, 1997 and $160,161 at
December 31, 1996) 273,868 161,629
Securities held to maturity (estimated fair value--$181,185 at
December 31, 1997 and $173,697 at December 31, 1996) 179,294 170,702
Loans 2,067,485 1,852,770
Less: Unearned income (6,998) (5,165)
----------- -----------
Loans net of unearned income 2,060,487 1,847,605
Less: Allowance for loan losses (24,786) (22,283)
----------- -----------
Net loans 2,035,701 1,825,322
Bank premises and equipment 39,490 33,550
Accrued interest receivable 16,040 13,508
Other assets 65,225 32,646
----------- -----------
Total Assets $ 2,699,790 $ 2,326,877
=========== ===========
Liabilities
Domestic deposits:
Noninterest-bearing $ 317,930 $ 261,048
Interest-bearing 1,788,117 1,566,506
----------- -----------
Total Deposits 2,106,047 1,827,554
Borrowings:
Federal funds purchased 20,961 4,491
Securities sold under agreements
to repurchase 109,909 71,091
Federal Home Loan Bank borrowings 142,695 132,631
Accrued expenses and other liabilities 40,740 32,596
----------- -----------
Total Liabilities 2,420,352 2,068,363
Shareholders' Equity
Common stock, $2.50 par value;
Authorized--41,000,000 shares at December 31,
1997 and 20,000,000 at December 31, 1996; issued--
30,590,260 at December 31, 1997 and 15,295,130
at December 31, 1996, including 622,744
and 205,495 shares in treasury at
December 31, 1997 and 1996, respectively 76,476 38,238
Surplus 41,014 41,438
Retained earnings 165,896 183,539
Net unrealized holding gain on securities available
for sale, net of deferred income taxes 5,479 954
Treasury stock, at cost (9,427) (5,655)
----------- -----------
Total Shareholders' Equity 279,438 258,514
----------- -----------
Total Liabilities and Shareholders' Equity $ 2,699,790 $ 2,326,877
=========== ===========
</TABLE>
See notes to consolidated financial statements
54
<PAGE>
Consolidated Statements of Income
United Bankshares, Inc. and Subsidiaries
<TABLE>
<CAPTION>
(Dollars in thousands, except per share data) Year Ended December 31
-------------------------------------------
1997 1996 1995
------------ ------------ ------------
<S><C>
Interest Income
Interest and fees on loans $ 164,310 $ 151,404 $ 143,228
Interest on federal funds sold and other
short-term investments 184 157 1,107
Interest and dividends on securities:
Taxable 23,828 18,455 18,516
Exempt from federal taxes 1,930 2,342 2,964
------------ ------------ ------------
Total Interest Income 190,252 172,358 165,815
------------ ------------ ------------
Interest Expense
Interest on deposits 74,400 63,917 62,231
Interest on short-term borrowings 5,275 3,770 3,809
Interest on Federal Home Loan Bank advances 4,824 5,498 4,127
------------ ------------ ------------
Total Interest Expense 84,499 73,185 70,167
------------ ------------ ------------
Net Interest Income 105,753 99,173 95,648
Provision for Loan Losses 3,100 2,610 2,320
------------ ------------ ------------
Net Interest Income After
Provision for Loan Losses 102,653 96,563 93,328
------------ ------------ ------------
Other Income
Trust department income 3,569 3,186 2,911
Service charges, commissions, and fees 12,500 11,298 9,902
Other income (loss) 3,663 (295) 1,939
------------ ------------ ------------
Total Other Income 19,732 14,189 14,752
------------ ------------ ------------
Other Expense
Salaries and employee benefits 27,384 28,743 25,856
Net occupancy expense 6,238 6,071 5,752
Other expense 26,327 28,735 25,873
------------ ------------ ------------
Total Other Expense 59,949 63,549 57,481
------------ ------------ ------------
Income Before Income Taxes 62,436 47,203 50,599
Income Taxes 21,497 16,691 17,782
------------ ------------ ------------
Net Income $ 40,939 $ 30,512 $ 32,817
============ ============ ============
Earnings per common share:
Basic $ 1.37 $ 1.01 $ 1.10
============ ============ ============
Diluted $ 1.35 $ 1.00 $ 1.09
============ ============ ============
Dividends per common share $ 0.68 $ 0.62 $ 0.59
============ ============ ============
Average outstanding shares:
Basic 29,954,116 30,281,260 29,966,308
Diluted 30,271,992 30,435,674 30,134,572
</TABLE>
See notes to consolidated financial statements
55
<PAGE>
Consolidated Statements of Changes in Shareholders' Equity
United Bankshares, Inc. and Subsidiaries
<TABLE>
<CAPTION>
(Dollars in thousands, except per share data) Net Unrealized
Holding
Common Stock (Loss) Gain
-------------------- on Securities Total
Par Retained Available Treasury Shareholders'
Shares Value Surplus Earnings for Sale Stock Equity
---------- ------- ------- -------- --------- --------- ------------
<S><C>
Balance at January 1, 1995 15,093,157 $37,733 $36,726 $154,985 $ (464) $(3,346) $225,634
Net income 32,817 32,817
Cash dividends ($0.59 per share) (13,817) (13,817)
Net change in unrealized holding loss
on securities available for sale 1,873 1,873
Fractional shares adjustment (7)
Acquisition of First Commercial Bank 202,125 505 5,558 6,063
Purchase of treasury stock
(47,500 shares) (1,273) (1,273)
Common stock options
exercised (44,500 shares) (423) 1,089 666
Pre-merger dividends of
pooled company (2,729) (2,729)
---------- ------ ------ ------- ----- ------- -------
Balance at December 31, 1995 15,295,275 38,238 41,861 171,256 1,409 (3,530) 249,234
Net income 30,512 30,512
Cash dividends ($0.62 per share) (17,847) (17,847)
Net change in unrealized holding
gain on securities available for sale (455) (455)
Fractional shares adjustment (145) (4) (4)
Purchase of treasury stock
(113,000 shares) (3,395) (3,395)
Common stock options
exercised (48,025 shares) (419) 1,270 851
Pre-merger dividends of
pooled company (382) (382)
---------- ------ ------ ------- ----- ------- -------
Balance at December 31, 1996 15,295,130 38,238 41,438 183,539 954 (5,655) 258,514
Net income 40,939 40,939
Cash dividends ($0.68 per share) (20,344) (20,344)
Net change in unrealized holding
gain on securities available for sale 4,525 4,525
Purchase of treasury stock
(167,100 shares) (5,754) (5,754)
Common stock options
exercised (45,232 shares) (424) 1,376 952
Sale of treasury stock (15,991 shares) 606 606
Two-for-one stock split effected
in the form of a 100%
stock dividend 15,295,130 38,238 (38,238)
---------- ------- ------- --------- ------- ------- --------
Balance at December 31, 1997 30,590,260 $76,476 $41,014 $ 165,896 $ 5,479 $(9,427) $279,438
========== ======= ======= ========= ======= ======= ========
</TABLE>
See notes to consolidated financial statements.
56
<PAGE>
Consolidated Statements of Cash Flows
United Bankshares, Inc. and Subsidiaries
<TABLE>
<CAPTION>
(Dollars in thousands) Year Ended December 31
-----------------------------------------
1997 1996 1995
--------- -------- --------
<S><C>
Operating Activities
Net income $ 40,939 $ 30,512 $ 32,817
Adjustments to reconcile net income to
net cash provided by operating activities:
Provision for loan losses 3,100 2,610 2,320
Provision for depreciation 3,486 3,080 2,926
Amortization, net of accretion 2,082 1,091 35
(Gain) loss on sales of bank premises and equipment (534) 140 (35)
Net losses on sales of securities available for sale 98
Loans originated for sale (143,195) (26,157) (9,438)
Proceeds from loans sold 138,283 49,839 10,053
(Gain) loss on sales of loans (2,521) 728 (1,012)
Deferred income tax expense (benefit) 387 (9) 141
Originations of student loans (465)
Proceeds from sales of student loans 4,580
Changes in:
Interest receivable (949) 285 (766)
Other assets (10,181) (3,461) 2,601
Accrued expenses and other liabilities 1,745 3,113 2,227
--------- -------- --------
Net Cash Provided By Operating Activities 32,642 66,449 41,404
--------- -------- --------
Investing Activities
Proceeds from maturities and calls of investment securities 24,950 23,053 32,624
Purchases of investment securities (33,488) (78,177) (6,995)
Proceeds from sales of securities available for sale 16,518
Proceeds from maturities and calls of securities available for sale 149,275 203,395 108,706
Purchases of securities available for sale (217,137) (176,491) (70,746)
Proceeds from sales of loans 49,127
Net purchases of bank premises and equipment (2,085) (2,004) (1,972)
Net cash paid for acquired subsidiary (28,929) (1,742)
Net change in loans (73,159) (146,462) (90,117)
--------- -------- --------
Net Cash (Used In) Provided By Investing Activities (180,573) (160,168) 18,885
--------- -------- --------
Financing Activities
Cash dividends paid (19,831) (16,541) (10,273)
Acquisition of treasury stock (5,754) (3,395) (1,273)
Proceeds from exercise of stock options 952 851 666
Proceeds from sales of treasury stock 606
Pre-merger dividends of pooled company (382) (2,729)
Repayment of Federal Home Loan Bank borrowings (280,359) (414,007) (379,134)
Proceeds from Federal Home Loan Bank borrowings 290,163 471,141 316,257
Purchase of fractional shares (4)
Changes in:
Time deposits 96,950 25,161 127,570
Other deposits 25,785 28,023 (117,776)
Federal funds purchased and securities sold
under agreements to repurchase 40,071 (6,585) 10,358
--------- -------- --------
Net Cash Provided By (Used In) Financing Activities 148,583 84,262 (56,334)
--------- -------- --------
Increase (Decrease) In Cash and Cash Equivalents 652 (9,457) 3,955
Cash and Cash Equivalents at Beginning of Year 89,520 98,977 95,022
--------- -------- --------
Cash and Cash Equivalents at End of Year $ 90,172 $ 89,520 $ 98,977
========= ======== ========
</TABLE>
See notes to consolidated financial statements.
57
<PAGE>
Notes to Consolidated Financial Statements
December 31, 1997
Note A--Summary of Significant Accounting Policies
Nature of Operations: United Bankshares, Inc. is a multi-bank holding company
headquartered in Charleston, West Virginia. The principal markets of United
Bankshares, Inc. and subsidiaries (United) are located in Parkersburg,
Charleston, Huntington, Morgantown and Wheeling, West Virginia and Arlington,
Fairfax, Loudoun and Prince William counties, Virginia. United considers all of
its principal business activities to be bank related.
Basis of Presentation: The consolidated financial statements and the notes to
consolidated financial statements include the accounts of United Bankshares,
Inc. and its wholly-owned subsidiaries. All significant intercompany accounts
and transactions have been eliminated in the consolidated financial statements.
Certain prior period data has been reclassified to conform with the current
period presentation. The reclassifications had no effect on net income or
shareholders' equity.
The accounting and reporting policies of United conform with generally accepted
accounting principles. The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the amounts reported in the financial
statements and accompanying notes. Actual results could differ from those
estimates. A description of the significant accounting policies is presented
below.
Cash Flow Information: United considers cash and due from banks,
interest-bearing deposits with other banks and federal funds sold as cash and
cash equivalents.
Securities: Management determines the appropriate classification of securities
at the time of purchase. Debt securities that United has the positive intent and
the ability to hold to maturity are carried at amortized cost. Securities to be
held for indefinite periods of time and all marketable equity securities are
classified as available for sale and carried at fair value. Unrealized holding
gains and losses on securities classified as available for sale are carried as a
separate component of shareholders' equity, net of deferred income taxes.
Gains or losses on sales of securities are recognized by the specific
identification method and are reported separately in the statements of income.
58
<PAGE>
Note A--Summary of Significant Accounting Policies--continued
Loans: Interest on loans is accrued and credited to operations using methods
that produce a level yield on principal amounts outstanding. Loan origination
and commitment fees and related direct loan origination costs are deferred and
amortized as an adjustment of loan yield over the estimated life of the related
loan.
The accrual of interest income on commercial and most consumer loans generally
is discontinued when a loan becomes 90 days past due as to principal or
interest. When interest accruals are discontinued, unpaid interest recognized in
income in the current year is reversed, and interest accrued in prior years is
charged to the allowance for loan losses. Management may elect to continue the
accrual of interest when the estimated net realizable value of collateral
exceeds the principal balance and accrued interest, and the loan is in the
process of collection.
Consistent with United's existing method of income recognition for loans,
interest on impaired loans, except those classified as nonaccrual, is recognized
as income using the accrual method. United's method of income recognition for
impaired loans that are classified as nonaccrual is to recognize interest income
on the cash basis or apply the cash receipt to principal when the ultimate
collectibility of principal is in doubt.
The principal sources of revenue from United's mortgage banking business are:
(i) loan origination fees; (ii) gains or losses from the sale of loans, if any;
(iii) interest earned on mortgage loans during the period that they are held by
United pending sale; (iv) loan servicing fees; and (v) gain or loss on the
close-out of the hedge instrument used to offset the risk that changes in
interest rate may have on the value of United's mortgage loan inventory.
Derivative Financial Instruments: United enters into hedging transactions that
utilize forward contracts for the delivery of mortgage-backed securities as
hedge vehicles to offset the risk that a change in interest rates will result in
a decrease in the value of United's current mortgage loan inventory or its
commitments to originate mortgage loans (the "pipeline"). The risk of loss is
then matched with the appropriate hedge vehicle. United's policies generally
require that it hedge substantially all of its inventory of conforming and
government loans. Realized gains and losses on forward commitments are recorded
in mortgage banking income in the period settlement occurs. Unrealized gains or
losses are considered in the lower of cost or market valuation of loans held for
sale.
Loans Held for Sale: Loans held for sale consist of one-to-four family
residential loans originated for sale in the secondary market and are carried at
the lower of cost or fair value determined on an aggregate basis.
59
<PAGE>
Note A--Summary of Significant Accounting Policies--continued
Allowance for Loan Losses: 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. The allowance for loan losses
related to loans that are identified as impaired is 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. In providing for loan
losses, United considers all significant factors that affect the collectibility
of loans. Such factors considered by management include, among others, growth
and composition of the loan portfolio, known deterioration in certain classes of
loans or collateral, trends in delinquencies, and current economic conditions.
This evaluation is inherently subjective and requires management to make
estimates of the amounts and timing of future cash flows.
Management believes that the allowance for loan losses is adequate to provide
for potential losses on existing loans based on information currently available.
Bank Premises and Equipment: Bank premises and equipment are stated at cost,
less allowances for depreciation and amortization. The provision for
depreciation is computed principally by the straight-line method over the
estimated useful lives of the respective assets.
Income Taxes: Deferred income taxes are provided for temporary differences
between the tax basis of an asset or liability and its reported amount in the
financial statements at the statutory tax rate.
Intangible Assets: Intangible assets relating to the estimated value of the
deposit base of the acquired institutions are being amortized on an accelerated
basis over a 7 to 10 year period. The excess of the purchase price over the fair
market value of the net assets of the banks acquired (goodwill) is being
amortized on a straight-line basis over 15 to 20 years. The carrying amount of
goodwill is evaluated if facts and circumstances suggest that it may be
impaired. If this evaluation indicates that goodwill will not be recoverable, as
determined based on the estimated undiscounted cash flows of the entity acquired
over the remaining amortization period, the carrying amount of goodwill will be
reduced.
At December 31, 1997 and 1996, deposit base intangibles and goodwill
approximated $37,332,000 and $11,959,000 net of accumulated amortization of
approximately $12,318,000 and $9,888,000.
Trust Assets and Income: Assets held in a fiduciary or agency capacity for
subsidiary bank customers are not included in the balance sheets since such
items are not assets of the subsidiary banks. Trust department income is
reported on a cash basis. Reporting such income on an accrual basis would not
materially affect United's consolidated financial position or its results of
operations as reported herein.
60
<PAGE>
Notes to Consolidated Financial Statements
Note A--Summary of Significant Accounting Policies--continued
Earnings Per Common Share: In 1997, United adopted FASB Statement No. 128 (SFAS
No. 128), "Earnings Per Share." SFAS No. 128 requires the presentation of basic
and diluted earnings per common share for all periods. Basic earnings per common
share is calculated by dividing net income by the weighted average number of
shares of common stock outstanding for the respective period. For diluted
earnings per common share, the weighted average number of shares of common stock
outstanding for the respective period is increased by the number of shares of
common stock which would be issued assuming the exercise of common stock
options. The dilutive effect of stock options approximated 317,876, 154,414 and
168,264 shares in 1997, 1996 and 1995, respectively. Prior period earnings per
common share amounts have been restated to reflect the adoption of SFAS No. 128.
The results of this change were insignificant.
New Accounting Standards: 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. 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 new rules have not had a material effect on United's
financial position and 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 is reviewing the components of comprehensive
income as outlined by SFAS No. 130 and plans to disclose the information as
required.
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.
These standards, when implemented, are not expected to materially impact the
reported financial position or results of operations of United.
61
<PAGE>
Note B--Mergers and Acquisitions
United has entered into an agreement with George Mason Bankshares, Inc.,
Fairfax, Virginia ("George Mason") to exchange 1.70 shares, as adjusted for the
100% stock dividend, of United common stock for each of the 5,277,301 common
shares of George Mason. The transaction will be accounted for using the pooling
of interests method of accounting. It is anticipated that the proposed merger
will be consummated early during the second quarter of 1998.
Additionally, United has entered into an agreement with Fed One Bancorp, Inc.,
Wheeling, West Virginia ("Fed One") to exchange 1.50 shares, as adjusted for the
100% stock dividend, of United common stock for each of the 2,373,181 common
shares of Fed One. The transaction will be accounted for using the pooling of
interests method of accounting. It is anticipated that the proposed merger will
be consummated early during the fourth quarter of 1998.
The following represents unaudited selected pro forma financial information
regarding the effects of the transactions as though United, George Mason and Fed
One had been combined for all periods presented:
<TABLE>
<CAPTION>
(In thousands, except per share data) United United,
and George
George Mason and
George Mason Fed Fed One
United Mason Combined One Combined
-------- ------- --------- ------- --------
<S><C>
1997
Net interest income $105,753 $31,945 $137,698 $11,632 $149,330
Net income 40,939 8,080 49,019 3,242 52,261
Earnings per common share:
Basic $1.37 $1.58 $1.27 $1.43 $1.24
Diluted $1.35 $1.54 $1.25 $1.36 $1.22
1996
Net interest income $ 99,173 $27,463 $126,636 $11,749 $138,385
Net income 30,512 6,883 37,395 2,324 39,719
Earnings per common share:
Basic $1.01 $1.38 $0.97 $0.97 $0.94
Diluted $1.00 $1.35 $0.96 $0.94 $0.93
1995
Net interest income $ 95,648 $24,170 $119,818 $11,697 $131,515
Net income 32,817 6,292 39,109 3,250 42,359
Earnings per common share:
Basic $1.10 $1.30 $1.02 $1.24 $1.01
Diluted $1.09 $1.28 $1.02 $1.20 $1.00
</TABLE>
The data set forth above is not necessarily indicative of the results of
operations or the combined financial position of United that would have resulted
had the merger been consummated at the beginning of the applicable periods
indicated, nor is it necessarily indicative of the results of operations in
future periods or the future financial position of the combined entities.
62
<PAGE>
Note B--Mergers and Acquisitions--continued
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 $39.2 million. The transaction has been accounted
for using the purchase method of accounting.
At consummation, Patriot had assets of approximately $211 million, loans of $135
million, deposits of $154 million and shareholders' equity of $11 million, all
of which reflected purchase accounting adjustments. The results of operations of
Patriot, which are not significant, have been included in the consolidated
results of operations from the date of acquisition.
Note C--Investment Securities
The amortized cost and estimated fair values of securities available for sale
are summarized as follows:
<TABLE>
<CAPTION>
(In thousands) December 31, 1997
------------------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
--------- ---------- ---------- ---------
<S><C>
U.S. Treasury securities and obligations of
U.S. Government corporations and agencies $142,688 $ 500 $239 $142,949
Mortgage-backed securities 102,955 1,527 20 104,462
Marketable equity securities 4,300 6,741 11,041
Other 15,496 80 15,416
-------- ------ ---- --------
Total $265,439 $8,768 $339 $273,868
======== ====== ==== ========
</TABLE>
<TABLE>
<CAPTION>
(In thousands) December 31, 1996
-----------------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
--------- ---------- ---------- ---------
<S><C>
U.S. Treasury securities and obligations of
U.S. Government corporations and agencies $115,018 $ 443 $ 444 $115,017
Mortgage-backed securities 24,982 92 565 24,509
Marketable equity securities 3,655 2,158 5,813
Other 16,506 7 223 16,290
-------- ------ ------ --------
Total $160,161 $2,700 $1,232 $161,629
======== ====== ====== ========
</TABLE>
63
<PAGE>
Note C--Investment Securities--continued
The amortized cost and estimated fair value of securities available for sale at
December 31, 1997, by contractual maturity are as follows:
(In thousands) Estimated
Amortized Fair
Cost Value
--------- ---------
Due in one year or less $ 36,604 $ 37,043
Due after one year through five years 86,721 87,031
Due after five years through ten years 20,861 20,868
Due after ten years 116,953 117,885
Marketable equity securities 4,300 11,041
-------- --------
Total $265,439 $273,868
======== ========
The table above includes $104,462,000 of mortgage-backed securities at estimated
fair value with an amortized cost of $102,955,000. Maturities of mortgage-backed
securities are based upon the estimated average life.
Gross realized gains and losses from sales of securities available for sale were
$96,000 and $194,000, respectively, in 1996. There were no sales in 1997 and
1995.
The amortized cost and estimated fair values of securities held to maturity are
summarized as follows:
<TABLE>
<CAPTION>
(In thousands) December 31, 1997
---------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
--------- ---------- ---------- ---------
<S><C>
U.S. Treasury securities and obligations of U.S.
Government corporations and agencies $ 97,847 $ 551 $ 22 $ 98,376
State and political subdivisions 32,650 1,323 8 33,965
Mortgage-backed securities 41,874 154 107 41,921
Other 6,923 6,923
-------- ------ ---- --------
Total $179,294 $2,028 $137 $181,185
======== ====== ==== ========
</TABLE>
<TABLE>
<CAPTION>
(In thousands) December 31, 1996
---------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
--------- ---------- ---------- ---------
<S><C>
U.S. Treasury securities and obligations of U.S.
Government corporations and agencies $ 77,704 $2,131 $ 87 $ 79,748
State and political subdivisions 36,136 1,487 32 37,591
Mortgage-backed securities 54,977 250 754 54,473
Other 1,885 1,885
-------- ------ ---- --------
Total $170,702 $3,868 $873 $173,697
======== ====== ==== ========
</TABLE>
64
<PAGE>
Note C--Investment Securities--continued
The amortized cost and estimated fair value of debt securities held to maturity
at December 31, 1997 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.
(In thousands) Estimated
Amortized Fair
Cost Value
--------- ---------
Due in one year or less $ 18,825 $ 18,887
Due after one year through five years 52,448 53,033
Due after five years through ten years 78,794 79,399
Due after ten years 29,227 29,866
-------- --------
Total $179,294 $181,185
======== ========
The table above includes $41,874,000 of mortgage-backed securities with an
estimated fair value of $41,921,000 at December 31, 1997. Maturities of the
mortgage-backed securities are based upon the estimated average life.
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 $277,098,000 and $204,254,000 at December 31,
1997 and 1996, respectively.
Note D--Loans
Major classifications of loans are as follows:
(In thousands) December 31
------------------------
1997 1996
--------- ---------
Commercial, financial, and agricultural $ 368,654 $ 248,762
Real estate:
Single family residential 929,490 953,000
Commercial 392,818 355,431
Construction 93,918 42,343
Other 43,406 19,748
Installment 232,191 232,004
---------- ----------
2,060,477 1,851,288
Loans held for sale 7,008 1,482
---------- ----------
Total gross loans $2,067,485 $1,852,770
========== ==========
An analysis of the allowance for loan losses follows:
(In thousands) Year Ended December 31
------------------------------
1997 1996 1995
------- ------- -------
Balance at beginning of year $22,283 $22,545 $22,304
Allowance of purchased subsidiaries 2,695 1,017
Provision for loan losses 3,100 2,610 2,320
------- ------- -------
28,078 25,155 25,641
------- ------- -------
Loans charged off 3,819 3,524 3,624
Recoveries 527 652 528
------- ------- -------
Net charge offs 3,292 2,872 3,096
------- ------- -------
Balance at end of year $24,786 $22,283 $22,545
======= ======= =======
65
<PAGE>
Note D--Loans--continued
United's lending is centered in the West Virginia and Virginia markets and is
focused on retail consumer and small and middle market commercial lending.
United has commercial real estate loans, including owner occupied, income
producing real estate and land development loans, of approximately $392,818,000
and $355,431,000 as of December 31, 1997 and 1996, respectively. The loans are
primarily secured by real estate located in West Virginia, Southeastern Ohio,
and Virginia. The loans were originated by United's subsidiary banks using
underwriting standards as set forth by management. United's loan administration
policies are focused on the risk characteristics of the loan portfolio,
including commercial real estate loans, in terms of loan approval and credit
quality. It is the opinion of management that these loans do not pose any
unusual risks and that adequate consideration has been given to the above loans
in establishing the allowance for loan losses.
At December 31, 1997, the recorded investment in loans that were considered to
be impaired was $12,602,000 (of which $4,156,000 was on a nonaccrual basis).
Included in this amount was $5,319,000 of impaired loans for which the related
allowance for credit losses was $1,438,000 and $7,283,000 of impaired loans that
did not have an allowance for credit losses. At December 31, 1996, the recorded
investment in loans that were considered to be impaired was $10,317,000 (of
which $4,361,000 was on a nonaccrual basis). Included in this amount was
$5,631,000 of impaired loans for which the related allowance for credit losses
was $1,451,000 and $4,686,000 of impaired loans that did not have an allowance
for credit losses.
The average recorded investment in impaired loans during the years ended
December 31, 1997, 1996 and 1995 was approximately $11,482,000, $9,442,000 and
$9,545,000, respectively.
The amount of interest income that would have been recorded on impaired loans
under the original terms was $1,471,000, $1,464,000 and $1,045,000 for the years
ended December 31, 1997, 1996 and 1995, respectively. For the years ended
December 31, 1997, 1996 and 1995, United recognized interest income on those
impaired loans of approximately $907,000, $638,000 and $412,000, respectively,
substantially all of which was recognized using the accrual method of income
recognition.
United's subsidiary banks have made loans, in the normal course of business, to
the directors and officers of United and its subsidiaries, and to their
associates. Such related party loans were made on substantially the same terms,
including interest rates and collateral, as those prevailing at the time for
comparable transactions with unrelated persons and did not involve more than
normal risk of collectibility. The aggregate dollar amount of these loans was
$83,660,000 and $72,367,000 at December 31, 1997 and 1996, respectively. During
1997, $36,929,000 of new loans were made, repayments totaled $30,045,000, and
other changes due to the change in composition of United's board members and
executive officers approximated $4,409,000.
66
<PAGE>
Note E--Bank Premises and Equipment and Leases
Bank premises and equipment are summarized as follows:
(In thousands) December 31
---------------------
1997 1996
------- -------
Land $ 8,921 $ 7,892
Buildings and improvements 35,540 34,414
Leasehold improvements 5,002 5,784
Furniture, fixtures, and equipment 31,701 30,093
------- -------
81,164 78,183
Less allowance for depreciation and
amortization 41,674 44,633
------- -------
Net bank premises and equipment $39,490 $33,550
======= =======
United and certain banking subsidiaries have entered into various noncancelable
operating leases. These noncancelable operating leases are subject to renewal
options under various terms and some leases provide for periodic rate
adjustments based on cost-of-living index changes. Rent expense for
noncancelable operating leases approximated $2,019,000, $1,908,000 and
$1,822,000 for the years ended December 31, 1997, 1996, and 1995, respectively.
Future minimum payments, by year and in the aggregate, under noncancelable
operating leases with initial or remaining terms of one year or more, for years
subsequent to December 31, 1997, consisted of the following:
(In thousands)
Year Amount
---- -------
1998 $ 2,333
1999 2,196
2000 1,801
2001 1,766
2002 1,368
Thereafter 1,236
-------
Total minimum lease payments $10,700
=======
Note F--Deposits
The book value of deposits consisted of the following:
(In thousands) December 31
--------------------------
1997 1996
---------- ----------
Noninterest-bearing checking $ 317,930 $ 261,048
Interest-bearing checking 52,506 62,783
Regular savings 288,504 293,755
Money market accounts 421,348 362,223
Time deposits under $100,000 838,094 709,309
Time deposits over $100,000 187,665 138,436
---------- ----------
Total deposits $2,106,047 $1,827,554
========== ==========
Interest paid on deposits and borrowings approximated $82,959,000, $72,568,000
and $63,167,000 in 1997, 1996 and 1995, respectively.
67
<PAGE>
Note F--Deposits--continued
At December 31, 1997, the scheduled maturities of time deposits are as follows:
(In thousands)
Year Amount
---- ----------
1998 $ 668,860
1999 297,332
2000 37,119
2001 9,481
2002 and thereafter 12,967
----------
Total minimum lease payments $1,025,759
==========
United's subsidiary banks have received deposits, in the normal course of
business, from the directors and officers of United and its subsidiaries, and
their associates. Such related party deposits were accepted on substantially the
same terms, including interest rates and maturities, as those prevailing at the
time for comparable transactions with unrelated persons. The aggregate dollar
amount of these deposits was $21,253,000 and $18,335,000 at December 31, 1997
and 1996, respectively.
Note G--Borrowings
United's lead subsidiary, United National Bank (UNB), is a member of the Federal
Home Loan Bank of Pittsburgh (FHLB). Membership in the FHLB makes available
short-term and long-term borrowings from collateralized advances. At December
31, 1997, United had approximately $549,633,000 of available borrowings in the
form of collateralized advances from the FHLB at prevailing interest rates.
At December 31, 1997, $139,000,000 of FHLB advances with an interest rate of
6.50% had an overnight maturity. Additionally, $3,695,000 of FHLB advances with
a weighted average interest rate of 6.06% are scheduled to mature from fourteen
to twenty years.
UNB also has various unused lines of credit available from certain of its
correspondent banks in the aggregate amount of $128,000,000. These lines of
credit, which bear interest at prevailing market rates, permit UNB to borrow
funds in the overnight market, and are renewable annually subject to certain
conditions.
At December 31, 1997 and 1996, borrowings and the related weighted average
interest rate were as follows:
<TABLE>
<CAPTION>
(In thousands) 1997 1996
--------------------- ----------------------
Weighted Weighted
Average Average
Amount Rate Amount Rate
-------- -------- -------- --------
<S><C>
Federal funds purchased $ 20,961 6.73% $ 4,491 6.81%
Securities sold under agreements
to repurchase 109,909 4.37% 71,091 4.16%
FHLB advances 142,695 6.49% 132,631 6.63%
-------- --------
Total $273,565 $208,213
======== ========
</TABLE>
68
<PAGE>
Note G--Borrowings--continued
Information concerning securities sold under agreements to repurchase (in
thousands) is summarized as follows:
1997 1996
-------- -------
Average balance during the year $ 95,565 $66,463
Average interest rate during the year 4.24% 4.04%
Maximum month-end balance during the year $123,949 $79,664
Note H--Income Taxes
The income tax provisions included in the consolidated statements of income are
summarized as follows:
(In thousands) Year Ended December 31
------------------------------------
1997 1996 1995
------- ------- -------
Current expense:
Federal $20,163 $15,271 $15,313
State 947 1,429 2,328
Deferred expense (benefit):
Federal and State 387 (9) 141
------- ------- -------
Income taxes $21,497 $16,691 $17,782
======= ======= =======
The following is a reconciliation of income tax expense to the amount computed
by applying the statutory federal income tax rate to income before income taxes:
<TABLE>
<CAPTION>
(In thousands) Year Ended December 31
----------------------------------------------------------------
1997 1996 1995
----------------- ------------------ ------------------
Amount % Amount % Amount %
------- ---- ------- ---- ------- ----
<S><C>
Tax on income before taxes at
statutory federal rate $21,853 35.0% $16,521 35.0% $17,710 35.0%
Plus: State income taxes net of
federal tax benefits 632 1.0 929 2.0 1,619 3.2
------- ---- ------- ---- ------- ----
22,485 36.0 17,450 37.0 19,329 38.2
Increase (decrease) resulting from:
Tax-exempt interest income (1,410) (2.3) (1,464) (3.1) (1,683) (3.3)
Other items-net 422 0.7 705 1.5 136 0.2
------- ---- ------- ---- ------- ----
Income taxes $21,497 34.4% $16,691 35.4% $17,782 35.1%
======= ==== ======= ==== ======= ====
</TABLE>
Federal income tax benefit applicable to securities transactions approximated
$34,000 in 1996. There were no securities transactions in 1997 and 1995.
Income taxes paid approximated $21,876,000, $14,035,000 and $19,052,000 in 1997,
1996 and 1995, respectively.
69
<PAGE>
Note H--Income Taxes--continued
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. Significant components of
United's deferred tax assets and liabilities (included in other assets) at
December 31, 1997 and 1996 are as follows:
(In thousands) 1997 1996
------- -------
Deferred tax assets:
Allowance for loan losses $ 9,321 $ 8,889
Accrued benefits payable 1,366 1,600
Other accrued liabilities 2,874 2,213
Net deferred loan fees 295 488
Other real estate owned 117 69
Other 363
------- -------
Total deferred tax assets 13,973 13,622
------- -------
Deferred tax liabilities:
Premises and equipment 2,498 1,784
Core deposit intangibles 887 417
Income tax allowance for loan losses 1,462 1,462
Prepaid assets 169 149
Deferred mortgage points 1,663 1,582
Securities available for sale 2,950 514
Other 492 441
------- -------
Total deferred tax liabilities 10,121 6,349
------- -------
Net deferred tax assets $ 3,852 $ 7,273
======= =======
Note I--Employee Benefit Plans
United has a defined benefit retirement plan covering substantially all
employees. The benefits are based on years of service and the average of the
employee's highest five consecutive plan years of basic compensation paid during
the ten plan years preceding the date of determination. United's funding policy
is to contribute annually the maximum amount that can be deducted for federal
income tax purposes. Contributions are intended to provide not only for benefits
attributed to service to date, but also for those expected to be earned in the
future.
Net periodic pension cost included the following components:
<TABLE>
<CAPTION>
(In thousands) Year Ended December 31
---------------------------------------
1997 1996 1995
------- ------- -------
<S><C>
Service cost $ 739 $ 861 $ 718
Interest cost on projected benefit obligation 1,451 1,439 1,263
Actual return on plan assets (4,402) (2,849) (3,499)
Net amortization and deferral 2,395 1,014 1,852
------- ------- -------
Net periodic pension cost $ 183 $ 465 $ 334
======= ======= =======
</TABLE>
70
<PAGE>
Note I--Employee Benefit Plans--continued
The following table sets forth the funded status of United's defined benefit
plan and amounts recognized in the respective consolidated balance sheets:
<TABLE>
<CAPTION>
(In thousands) December 31
--------------------------
1997 1996
-------- --------
<S><C>
Vested benefit obligation $(16,986) $(15,715)
Nonvested benefit obligation (452) (408)
-------- --------
Accumulated benefit obligation (17,438) (16,123)
Effect of future pay increases (4,472) (5,046)
-------- --------
Projected benefit obligation for services rendered to date (21,910) (21,169)
Plan assets at fair value, primarily marketable securities 27,040 23,109
-------- --------
Excess of plan assets over projected benefit obligation 5,130 1,940
Unrecognized net gain from past experience different from
that assumed and effects of changes in assumptions (5,318) (1,877)
Unrecognized prior service cost 325 388
Unrecognized transition asset (695) (826)
-------- --------
Accrued pension liability included in other liabilities $ (558) $ (375)
======== ========
</TABLE>
At December 31, 1997, the weighted average discount rate and rate of increase in
future compensation levels used in determining the actuarial present value of
the projected benefit obligation was 7.25% and 4.5%. At December 31, 1996, the
weighted average discount rate and rate of increase in future compensation
levels used in determining the actuarial present value of the projected benefit
obligation was 7.5% and 4.5%. The weighted average expected long-term rate of
return on United's plan assets was 9.00% for the years ended December 31, 1997,
1996 and 1995.
The United Savings and Stock Investment Plan (the Plan) is a deferred
compensation plan under Section 401(k) of the Internal Revenue Code. All
employees who complete one year of service are eligible to participate in the
Plan. Each participant may contribute from 1% to 10% of pre-tax earnings to his
or her account which may be invested in any of four investment options chosen by
the employee. United matches 100% of the first 2% of salary deferred and 25% of
the next 2% of salary deferred with United common stock. Vesting is 100% for
employee deferrals and the United match at the time the employee makes his/her
deferral. United's expense relating to the Plan approximated $410,000, $330,000
and $297,000 in 1997, 1996 and 1995, respectively.
71
<PAGE>
Note I--Employee Benefit Plans--continued
The assets of United's defined benefit plan and 401(k) Plan each include
investments in United common stock. At December 31, 1997, the combined plan
assets included 679,518 shares of United common stock with an approximate fair
value of $16,223,000.
United has certain other deferred compensation plans covering various key
employees. Periodic charges are made to operations so that the present value of
the liability due each employee is fully recorded as of the date of their
retirement. Amounts charged to expense have not been significant in any year.
United has three incentive stock option plans for key employees, the 1988, 1991
and 1996 plans. The plans provide for the granting of stock options of up to
200,000, 1,000,000 and 1,200,000 shares of common stock, respectively. No
further grants will be made under the 1988 and 1991 plans. At December 31, 1997,
779,122 options were available for future grant under the 1996 plan. Under the
provisions of the plans, the option price per share shall not be less than the
fair market value of United's common stock on the date of grant. Accordingly, no
compensation expense is recognized for these options.
The following table summarizes information about stock options outstanding at
December 31, 1997:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
------------------------- ------------------------
Weighted-
Average Weighted- Weighted-
Remaining Average Average
Range of Number Contractual Exercise Number Exercise
Exercise Prices Outstanding Life Price Exercisable Price
---------------- ----------- ----------- --------- ----------- ---------
<S><C>
$ 5.50 to $ 7.00 40,600 3 years $ 6.62 40,600 $ 6.62
$ 6.88 to $15.00 610,232 6 years 12.18 565,056 11.95
$14.88 to $22.00 417,374 9 years 18.56 99,844 14.88
</TABLE>
The following is a summary of activity of United's Incentive Stock Option Plans:
<TABLE>
<CAPTION>
Stock
Options Range of Exercise Prices
--------- ------------------------
<S><C>
Outstanding at January 1, 1995 769,350 $13.50 $ 5.50
Granted 200,000 15.00
Exercised 89,000 13.50 5.50
Forfeited 18,900 13.50 9.88
---------
Outstanding at December 31, 1995 861,450 15.00 5.50
Granted 218,972 14.88
Exercised 96,050 13.50 5.50
Forfeited 4,130 15.00 11.50
---------
Outstanding at December 31, 1996 980,242 15.00 5.50
Granted 215,500 22.00
Exercised 91,136 15.00 6.63
Forfeited 36,400 15.00 11.50
---------
Outstanding at December 31, 1997 1,068,206 $22.00 $ 5.50
=========
Exercisable at:
December 31, 1995 527,274 $13.50 $ 5.50
December 31, 1996 619,998 $15.00 $ 5.50
December 31, 1997 705,500 $15.00 $ 5.50
</TABLE>
72
<PAGE>
Note I--Employee Benefit Plans--continued
Because the exercise price of the option granted is equal to the market price of
the underlying stock on the date of grant, no compensation expense is
recognized. Pro forma net income and earnings per share, determined as if United
had recognized compensation expense for its employee stock options under the
fair value method, have not been presented because the effect of applying the
fair value method prescribed by SFAS 123 to the 1997, 1996 and 1995 options
awarded produces amounts that are not materially different from amounts reported
herein.
The estimated fair value of the options at the date of grant was $10.12, $5.88,
and $5.69 for the options granted during 1997, 1996, and 1995, respectively. The
fair value of the options was estimated at the date of grant using a
Black-Scholes option pricing model with the following weighted average
assumptions for 1997, 1996, and 1995, respectively: risk-free interest rates of
6.44%, 6.78%, and 6.24%; dividend yields of 3.08%, 4.10%, and 4.00%; volatility
factors of the expected market price of United's common stock of 0.182, 0.185,
and 0.185; and a weighted average expected option life of 7 years.
United provides postemployment and postretirement benefits for certain employees
at subsidiaries acquired in prior years. United accounts for such costs as
expense when paid. Accounting for such costs when paid does not produce results
materially different from those which would result if such costs were accrued
during the period of employee service. United does not anticipate providing
postemployment or postretirement benefits to its currently active employees
after employment or retirement except on a fully contributory basis.
Note J--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
73
<PAGE>
Note J--Commitments and Contingent Liabilities--continued
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 $455,767,000 and $337,582,000 of loan commitments outstanding as
of December 31, 1997 and 1996, 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
$36,243,000 and $24,837,000 as of December 31, 1997 and 1996, respectively.
At December 31, 1997, United had open commitments amounting to approximately
$2,000,000 to sell mortgage-backed securities with varying settlement dates
generally not extending beyond March 1998. As such, United is not exposed to
significant risk nor will it derive any significant benefit from changes in
interest rates on the price of the mortgage loan inventory, net of gains or
losses of associated hedge positions.
Management does not anticipate any material losses as a result of these loan
commitments, standby letters of credit and forward contracts for the delivery of
mortgage-backed securities.
In the normal course of business, United and its subsidiaries are currently
involved in various legal proceedings. Management is vigorously pursuing all its
legal and factual defenses and, after consultation with legal counsel, believes
that all such litigation will be resolved with no material effect on United's
financial position or results of operations.
74
<PAGE>
Note K--United Bankshares, Inc. (Parent Company Only) Financial Information
Condensed Balance Sheets
<TABLE>
<CAPTION>
(In thousands) December 31
--------------------
1997 1996
------- --------
<S><C>
Assets
Cash $ 6,834 $ 12,958
Securities available for sale 16,742 10,813
Securities held to maturity 1,521 1,520
Investment in subsidiaries:
Bank subsidiaries 250,087 238,902
Non-bank subsidiaries 1,303 1,264
Loans 14,300
Other assets 1,297 272
-------- --------
Total Assets $292,084 $265,729
======== ========
Liabilities and Shareholders' Equity
Accrued expenses and other liabilities $ 12,646 $ 7,215
Shareholders' equity (including a net unrealized holding
gain of $5,479 and $954 on securities available for sale at
December 31, 1997 and 1996, respectively) 279,438 258,514
-------- --------
Total Liabilities and Shareholders' Equity $292,084 $265,729
======== ========
</TABLE>
Condensed Statements of Income
<TABLE>
<CAPTION>
(In thousands) Year Ended December 31
-----------------------------------------
1997 1996 1995
------- ------- -------
<S><C>
Income
Dividends from bank subsidiaries $ 69,637 $17,847 $26,496
Interest and fees on loans 85
Management fees:
Bank subsidiaries 3,476 3,467 3,018
Non-bank subsidiaries 12 12 12
Other income 707 557 268
-------- ------- -------
Total Income 73,917 21,883 29,794
Expenses
Operating expenses 5,516 4,725 4,606
-------- ------- -------
Income Before Income Taxes and (Excess Dividends)
Equity in Undistributed Net Income of Subsidiaries 68,401 17,158 25,188
Applicable income tax benefit (424) (12) (269)
-------- ------- -------
Income Before (Excess Dividends) Equity in
Undistributed Net Income of Subsidiaries 68,825 17,170 25,457
Equity in (excess dividends) undistributed net
income of subsidiaries:
Bank subsidiaries (27,925) 13,302 7,349
Non-bank subsidiaries 39 40 11
-------- ------- -------
Net Income $ 40,939 $30,512 $32,817
======== ======= =======
</TABLE>
75
<PAGE>
Note K--United Bankshares, Inc. (Parent Company Only) Financial
Information--continued
Condensed Statements of Cash Flows
<TABLE>
<CAPTION>
(In thousands) Year Ended December 31
-----------------------------------------
1997 1996 1995
-------- -------- --------
<S><C>
Operating Activities:
Net income $ 40,939 $ 30,512 $ 32,817
Adjustments to reconcile net income to net cash
provided by operating activities:
Equity in excess dividends (undistributed
net income) of subsidiaries 27,886 (13,342) (7,360)
Depreciation and net amortization 11 26 33
Net gain on sales of investment securities (24)
Net change in other assets and liabilities 2,276 (106) 790
-------- -------- --------
Net Cash Provided by Operating Activities 71,112 17,066 26,280
-------- -------- --------
Investing Activities
Net purchases of securities available for sale (1,346) 1,585 (8,439)
Purchase of loans (14,300)
Increase in investment in subsidiaries (1) (2,400)
Cash paid in acquisition of subsidiary (37,562) (5,280)
-------- -------- --------
Net Cash (Used in) Provided by Investing Activities (53,209) 1,585 (16,119)
-------- -------- --------
Financing Activities
Cash dividends paid (19,831) (16,541) (10,273)
Pre-merger dividends of pooled company (382) (2,729)
Acquisition of treasury stock (5,754) (3,395) (1,273)
Proceeds from the sale of treasury stock 606
Proceeds from exercise of stock options 952 851 666
Purchase of fractional shares (4)
-------- -------- --------
Net Cash Used in Financing Activities (24,027) (19,471) (13,609)
-------- -------- --------
Decrease in Cash and Cash Equivalents (6,124) (820) (3,448)
Cash and Cash Equivalents at Beginning of Year 12,958 13,778 17,226
-------- -------- --------
Cash and Cash Equivalents at End of Year $ 6,834 $ 12,958 $ 13,778
======== ======== ========
</TABLE>
76
<PAGE>
Note L--Other Income and Expense
The following details certain items of other income and expense for the periods
indicated:
<TABLE>
<CAPTION>
(In thousands) Year Ended December 31
-----------------------------------
1997 1996 1995
------ ------ ------
<S><C>
Other income:
Service charges and fees on deposits $8,672 $8,014 $7,063
Bankcard 2,717 2,048 1,739
Net income (loss) from mortgage banking operations 3,135 (431) 1,012
Loss on sales of investment securities (98)
Other income 528 234 927
Other expense:
Data processing $2,146 $2,974 $2,548
FDIC insurance expense 119 2,986 2,364
Legal and consulting 871 2,138 2,595
Advertising 1,618 2,173 1,747
Goodwill amortization 2,750 1,915 1,551
Equipment expense 3,512 3,191 3,021
</TABLE>
Note M--Regulatory Matters
The subsidiary banks are required to maintain average reserve balances with
their respective Federal Reserve Bank. The average amount of those reserve
balances for the year ended December 31, 1997, was approximately $23,698,000.
The primary source of funds for the dividends paid by United Bankshares, Inc. to
its shareholders is dividends received from its subsidiary banks. Dividends paid
by United's subsidiary banks are subject to certain regulatory limitations.
Generally, the most restrictive provision requires regulatory approval if
dividends declared in any year exceed that year's net income, as defined, plus
the retained net profits of the two preceding years.
During 1998, the retained net profits available for distribution to United
Bankshares, Inc., as dividends without regulatory approval, are approximately
$3,876,000, plus net income for the interim period through the date of
declaration.
Under Federal Reserve regulation, the banking subsidiaries are also limited as
to the amount they may loan to affiliates, including the parent company. Loans
from the banking subsidiaries to the parent company are limited to 10% of the
banking subsidiaries' capital and surplus, as defined, or $13,475,000 at
December 31, 1997, and must be secured by qualifying collateral.
United's subsidiary banks are subject to various regulatory capital requirements
administered by federal banking agencies. Pursuant to capital adequacy
guidelines, United's subsidiary banks must meet specific capital guidelines that
involve quantitative measures of the banks' assets, liabilities, and certain
off-balance sheet items as cal-
77
<PAGE>
Note M--Regulatory Matters--continued
culated under regulatory accounting practices. United's subsidiary banks'
capital amounts and classifications are also subject to qualitative judgments by
the regulators about components, risk weightings, and other factors.
Quantitative measures established by regulation to ensure capital adequacy
require United to maintain minimum amounts and ratios of total and Tier I
capital, as defined in the regulations, to risk-weighted assets, as defined, and
of Tier I capital, as defined, to average assets, as defined. Management
believes, as of December 31, 1997, that United exceeds all capital adequacy
requirements to which it is subject.
As of December 31, 1997, the most recent notification from its regulators,
United and its subsidiary banks were categorized as well capitalized. To be
categorized as well capitalized, United must maintain minimum total risk-based,
Tier I risk-based, and Tier I leverage ratios as set forth in the following
table. There are no conditions or events since that notification that management
believes have changed United's category.
United's and United's lead bank's, United National Bank, capital amounts (in
thousands of dollars) and ratios are presented in the following table.
<TABLE>
<CAPTION>
Actual
------------------
Amount Ratio
------- -----
<S><C>
As of December 31, 1997:
Total Capital (to Risk-
Weighted Assets):
United Bankshares $261,646 13.5%
United National Bank 204,907 12.5%
Tier I Capital (to Risk-
Weighted Assets):
United Bankshares 237,342 12.2%
United National Bank 184,451 11.3%
Tier I Capital
(to Average Assets):
United Bankshares 237,342 9.2%
United National Bank 184,451 8.1%
As of December 31, 1996:
Total Capital (to Risk-
Weighted Assets):
United Bankshares $263,759 16.5%
United National Bank 231,697 15.2%
Tier I Capital (to Risk-
Weighted Assets):
United Bankshares 243,827 15.3%
United National Bank 212,635 13.9%
Tier I Capital
(to Average Assets):
United Bankshares 243,827 10.8%
United National Bank 212,635 9.8%
</TABLE>
<TABLE>
<CAPTION>
For Capital To Be Well
Adequacy Purposes Capitalized
------------------------------------------ -------------------------------------------
Amount Ratio Amount Ratio
------- ----- ------- -----
<S><C>
As of December 31, 1997:
Total Capital (to Risk-
Weighted Assets):
United Bankshares $155,546 (greater than or equal to)8.0% $194,433 (greater than or equal to)10.0%
United National Bank 130,917 (greater than or equal to)8.0% 163,647 (greater than or equal to)10.0%
Tier I Capital (to Risk-
Weighted Assets):
United Bankshares 77,773 (greater than or equal to)4.0% 116,660 (greater than or equal to) 6.0%
United National Bank 65,459 (greater than or equal to)4.0% 98,188 (greater than or equal to) 6.0%
Tier I Capital
(to Average Assets):
United Bankshares 103,037 (greater than or equal to)4.0% 128,796 (greater than or equal to) 5.0%
United National Bank 91,559 (greater than or equal to)4.0% 114,449 (greater than or equal to) 5.0%
As of December 31, 1996:
Total Capital (to Risk-
Weighted Assets):
United Bankshares $127,564 (greater than or equal to)8.0% $159,455 (greater than or equal to)10.0%
United National Bank 122,000 (greater than or equal to)8.0% 152,500 (greater than or equal to)10.0%
Tier I Capital (to Risk-
Weighted Assets):
United Bankshares 63,782 (greater than or equal to)4.0% 95,673 (greater than or equal to) 6.0%
United National Bank 61,000 (greater than or equal to)4.0% 91,500 (greater than or equal to) 6.0%
Tier I Capital
(to Average Assets):
United Bankshares 90,537 (greater than or equal to)4.0% 113,171 (greater than or equal to) 5.0%
United National Bank 86,902 (greater than or equal to)4.0% 108,627 (greater than or equal to) 5.0%
</TABLE>
78
<PAGE>
Note N--Fair Values of Financial Instruments
The following methods and assumptions were used by United in estimating its fair
value disclosures for financial instruments:
Cash and Cash Equivalents: The carrying amounts reported in the balance sheet
for cash and cash equivalents approximate those assets' fair values.
Securities: The estimated fair values of securities are based on quoted market
prices, where available. If quoted market prices are not available, fair values
are based on quoted market prices of comparable instruments.
Loans: The estimated fair values of variable-rate loans that reprice frequently
with no significant change in credit risk are based on carrying values. The fair
values of certain mortgage loans (e.g., one-to-four family residential), credit
card loans, and other consumer loans are based on quoted market prices of
similar loans sold in conjunction with securitization transactions, adjusted for
differences in loan characteristics. The fair values of other loans (e.g.,
commercial real estate and rental property mortgage loans, commercial and
industrial loans, financial institution loans, and agricultural loans) are
estimated using discounted cash flow analyses, using interest rates currently
being offered for loans with similar terms to borrowers of similar credit
worthiness.
Off-Balance Sheet Instruments: Fair values of United's loan commitments are
based on fees currently charged to enter into similar agreements, taking into
account the remaining terms of the agreements and the counterparties' credit
standing. The estimated fair values of these commitments approximate their
carrying values. The fair value of forward contracts for the delivery of
mortgage-backed securities in connection with its mortgage banking activities is
based upon quoted market prices or prices of similar instruments when available.
Deposits: The fair values of demand deposits (e.g., interest and noninterest
checking, regular savings and certain types of money market accounts) are, by
definition, equal to the amount payable on demand at the reporting date (i.e.,
their carrying amounts). The carrying amounts of variable-rate, fixed-term money
market accounts and certificates of deposit approximate their fair values at the
reporting date. Fair values of fixed-rate certificates of deposit are estimated
using a discounted cash flow calculation that applies interest rates currently
being offered on certificates to a schedule of aggregated expected monthly
maturities on time deposits.
Short-term Borrowings: The carrying amounts of federal funds purchased,
borrowings under repurchase agreements, and other short-term borrowings
approximate their fair values.
79
<PAGE>
Note N--Fair Values of Financial Instruments--continued
Federal Home Loan Bank Borrowings: The fair values of United's Federal Home Loan
Bank borrowings are estimated using discounted cash flow analyses, based on
United's current incremental borrowing rates for similar types of borrowing
arrangements.
The estimated fair values of United's financial instruments are summarized
below:
<TABLE>
<CAPTION>
(In thousands) December 31, 1997 December 31, 1996
--------------------------- ---------------------------
Carrying Fair Carrying Fair
Amount Value Amount Value
---------- ---------- ---------- ----------
<S><C>
Cash and cash equivalents $ 90,172 $ 90,172 $ 89,520 $ 89,520
Securities available for sale 273,868 273,868 161,629 161,629
Securities held to maturity 179,294 181,185 170,702 173,505
Loans 2,035,701 2,052,751 1,825,322 1,835,619
Deposits 2,106,047 2,107,804 1,827,554 1,827,609
Short-term borrowings 130,870 130,870 75,582 75,582
FHLB borrowings 142,695 142,781 132,631 132,553
</TABLE>
<TABLE>
<CAPTION>
(In thousands) December 31, 1997 December 31, 1996
------------------------- -------------------------
Notional Fair Notional Fair
Amount Value Amount Value
-------- ------- -------- -------
<S><C>
Off-Balance Sheet:
Forward contracts related to mortgage
banking operations $ 1,425 $ 1,426 6,000 6,022
</TABLE>
Note O--Stock Split
In November 1997, United's Board of Directors approved a two-for-one stock split
effected in the form of a 100% stock dividend to be distributed on March 27,
1998, to shareholders of record as of March 13, 1998. The change in capital
structure due to the dividend has been given retroactive effect in the December
31, 1997 balance sheet and all references to shares and per share data have been
retroactively restated for the effect of the 100% stock dividend.
80
<PAGE>
Note P--Quarterly Financial Data (Unaudited)
Quarterly financial data for 1997 and 1996 is summarized below:
<TABLE>
<CAPTION>
(Dollars in thousands except per share data) 1st Quarter 2nd Quarter 3rd Quarter 4th Quarter
----------- ----------- ----------- -----------
<S><C>
1997
Interest income $44,300 $45,345 $48,825 $51,782
Interest expense 19,158 19,948 21,953 23,440
Net interest income 25,142 25,397 26,872 28,342
Provision for loan losses 600 550 1,000 950
Income from mortgage
banking operations 294 313 1,858 670
Other noninterest income 3,788 3,889 4,326 4,594
Noninterest expense 13,627 13,542 16,263 16,517
Income taxes 4,949 5,387 5,448 5,713
Net income 10,048 10,120 10,345 10,426
Per share data:
Average shares outstanding (000s):
Basic 30,071 29,898 29,906 29,960
Diluted 30,325 30,188 30,295 30,348
Net income per share: (1)
Basic $0.33 $0.34 $0.35 $0.35
Diluted $0.33 $0.34 $0.34 $0.34
Dividends per share $0.16 $0.17 $0.17 $0.18
1996
Interest income $42,188 $41,527 $44,609 $44,034
Interest expense 17,697 17,436 18,865 19,187
Net interest income 24,491 24,091 25,744 24,847
Provision for loan losses 611 949 600 450
Income (loss) from mortgage
banking operations 58 (1,963) 802 672
Other noninterest income 3,523 3,691 3,753 3,653
Noninterest expense 14,812 18,192 16,540 14,005
Income taxes (2) 4,560 5,414 1,936 4,781
Net income 8,089 1,264 11,223 9,936
Per share data:
Average shares outstanding (000s):
Basic 30,293 30,293 30,303 30,237
Diluted 30,436 30,445 30,459 30,426
Net income per share: (1)
Basic $0.27 $0.04 $0.37 $0.33
Diluted $0.27 $0.04 $0.37 $0.33
Dividends per share $0.15 $0.15 $0.16 $0.16
</TABLE>
(1) Earnings per share amounts have been restated to comply with SFAS No. 128.
(2) In the second quarter of 1996, United recorded additional income tax expense
of $3,086 due to the recapture of Eagle's bad debt reserve into taxable income.
However, as a result of legislation enacted during the third quarter of 1996,
United was relieved of the liability.
81
Exhibit 11
Statement Re: Computation of Earnings Per Share
UNITED BANKSHARES, INC. AND SUBSIDIARIES
Earnings Per Share
<TABLE>
<CAPTION>
For the Year Ended December 31
1997 1996 1995
---- ---- ----
<S><C>
BASIC:
- ------
Average Number of Common Shares 29,954,116 30,281,260 29,966,308
=========== =========== ===========
Net Income $40,939,000 $30,512,000 $32,817,000
Preferred Dividends
----------- ----------- -----------
Available to Common Shares $40,939,000 $30,512,000 $32,817,000
=========== =========== ===========
Earnings Per Common Share: $1.37 $1.01 $1.10
=========== =========== ===========
DILUTED:
- --------
Average Number of Common Shares 29,954,116 30,281,260 29,966,308
Average Number of Common Share Equivalents 317,876 154,414 168,264
----------- ----------- -----------
Average Shares and Share Equivalents Outstanding 30,271,992 30,435,674 30,134,572
=========== =========== ===========
Net Income $40,939,000 $30,512,000 $32,817,000
Preferred Dividends
----------- ----------- -----------
Available to Common Shares $40,939,000 $30,512,000 $32,817,000
=========== =========== ===========
Earnings Per Common Share - assuming dilution: $1.35 $1.00 $1.09
=========== =========== ===========
</TABLE>
82
Exhibit 12
Computation of Ratios
<TABLE>
<S><C>
Net Income Per Share = Net Income/Average Common Shares
Outstanding
Cash Dividends Per Share = Dividends Paid/Average Common Shares
Outstanding
Book Value Per Share = Total Shareholders' Equity/Average
Common Shares Outstanding
Return on Average Assets = Net Income/Average Assets
Return on Average Shareholders' = Net Income/Average Shareholders'
Equity Equity
Net Interest Margin = Net Interest Income/Average Earning
Assets
Noninterest Expense to Average = Noninterest Expense/Average Assets
Assets
Efficiency Ratio = Noninterest Expense/(Net Interest Income
Plus Noninterest Income)
Average Loans to Deposits = Average Net Loans/Average Deposits
Outstanding
Dividend Payout = Dividends Declared/Net Income
Average Shareholders' Equity to = Average Shareholders' Equity/Average
Average Assets Assets
Tier I Capital Ratio = Shareholders' Equity--Intangible
Assets--Securities Mark-to-market
Capital Reserve (Tier I Capital)/
Risk Adjusted Assets
Total Capital Ratio = Tier I Capital Plus Allowance for Loan
Losses/Risk Adjusted Assets
Tier I Leverage Ratio = Tier I Capital/Average Assets
Net Charge-offs to Average Loans = (Gross Charge-offs Less Recoveries)/
Average Net Loans
Non-performing Loans to Period End = (Nonaccrual Loans Plus Loans Past Due
Loans 90 Days or Greater)/Gross Loans Net
of Unearned Interest)
Non-performing Assets to Period End = (Nonaccrual Loans Plus Loans Past Due
Assets 90 Days or Greater Plus Other Real
Estate)/Total Assets
Allowance for Loan Losses to Period = Loan Loss Reserve/(Gross Loans Net
End Loans of Unearned Interest
Allowance for Loan Losses to Non- = Loan Loss Reserve/(Nonaccrual Loans Performing
Loans Plus Loans Past Due 90 days or Greater)
</TABLE>
83
Report Of Ernst & Young LLP
Independent Auditors
Board of Directors and Shareholders
United Bankshares, Inc. and Subsidiaries
We have audited the accompanying consolidated balance sheets of United
Bankshares, Inc. and subsidiaries as of December 31, 1997 and 1996, and the
related consolidated statements of income, changes in shareholders' equity and
cash flows for each of the three years in the period ended December 31, 1997.
These financial statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements based
on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of United Bankshares,
Inc. and subsidiaries at December 31, 1997 and 1996, and the consolidated
results of their operations and their cash flows for each of the three years in
the period ended December 31, 1997, in conformity with generally accepted
accounting principles.
/s/ Ernst & Young LLP
_____________________
Charleston, West Virginia
February 27, 1998, except
for Note O, as to which
the date is March 27, 1998
84
<PAGE>
Consolidated Balance Sheets
United Bankshares, Inc. and Subsidiaries
<TABLE>
<CAPTION>
(Dollars in thousands, except par value) December 31
--------------------------
1997 1996
----------- -----------
<S><C>
Assets
Cash and due from banks $ 80,447 $ 86,328
Interest-bearing deposits with other banks 8,725 195
Federal funds sold 1,000 2,997
----------- -----------
Total cash and cash equivalents 90,172 89,520
Securities available for sale at estimated fair value (amortized
cost --$265,439 at December 31, 1997 and $160,161 at
December 31, 1996) 273,868 161,629
Securities held to maturity (estimated fair value--$181,185 at
December 31, 1997 and $173,697 at December 31, 1996) 179,294 170,702
Loans 2,067,485 1,852,770
Less: Unearned income (6,998) (5,165)
----------- -----------
Loans net of unearned income 2,060,487 1,847,605
Less: Allowance for loan losses (24,786) (22,283)
----------- -----------
Net loans 2,035,701 1,825,322
Bank premises and equipment 39,490 33,550
Accrued interest receivable 16,040 13,508
Other assets 65,225 32,646
----------- -----------
Total Assets $ 2,699,790 $ 2,326,877
=========== ===========
Liabilities
Domestic deposits:
Noninterest-bearing $ 317,930 $ 261,048
Interest-bearing 1,788,117 1,566,506
----------- -----------
Total Deposits 2,106,047 1,827,554
Borrowings:
Federal funds purchased 20,961 4,491
Securities sold under agreements
to repurchase 109,909 71,091
Federal Home Loan Bank borrowings 142,695 132,631
Accrued expenses and other liabilities 40,740 32,596
----------- -----------
Total Liabilities 2,420,352 2,068,363
Shareholders' Equity
Common stock, $2.50 par value;
Authorized--41,000,000 shares at December 31,
1997 and 20,000,000 at December 31, 1996; issued--
30,590,260 at December 31, 1997 and 15,295,130
at December 31, 1996, including 622,744
and 205,495 shares in treasury at
December 31, 1997 and 1996, respectively 76,476 38,238
Surplus 41,014 41,438
Retained earnings 165,896 183,539
Net unrealized holding gain on securities available
for sale, net of deferred income taxes 5,479 954
Treasury stock, at cost (9,427) (5,655)
----------- -----------
Total Shareholders' Equity 279,438 258,514
----------- -----------
Total Liabilities and Shareholders' Equity $ 2,699,790 $ 2,326,877
=========== ===========
</TABLE>
See notes to consolidated financial statements
85
<PAGE>
Consolidated Statements of Income
United Bankshares, Inc. and Subsidiaries
<TABLE>
<CAPTION>
(Dollars in thousands, except per share data) Year Ended December 31
-------------------------------------------
1997 1996 1995
------------ ------------ ------------
<S><C>
Interest Income
Interest and fees on loans $ 164,310 $ 151,404 $ 143,228
Interest on federal funds sold and other
short-term investments 184 157 1,107
Interest and dividends on securities:
Taxable 23,828 18,455 18,516
Exempt from federal taxes 1,930 2,342 2,964
------------ ------------ ------------
Total Interest Income 190,252 172,358 165,815
------------ ------------ ------------
Interest Expense
Interest on deposits 74,400 63,917 62,231
Interest on short-term borrowings 5,275 3,770 3,809
Interest on Federal Home Loan Bank advances 4,824 5,498 4,127
------------ ------------ ------------
Total Interest Expense 84,499 73,185 70,167
------------ ------------ ------------
Net Interest Income 105,753 99,173 95,648
Provision for Loan Losses 3,100 2,610 2,320
------------ ------------ ------------
Net Interest Income After
Provision for Loan Losses 102,653 96,563 93,328
------------ ------------ ------------
Other Income
Trust department income 3,569 3,186 2,911
Service charges, commissions, and fees 12,500 11,298 9,902
Other income (loss) 3,663 (295) 1,939
------------ ------------ ------------
Total Other Income 19,732 14,189 14,752
------------ ------------ ------------
Other Expense
Salaries and employee benefits 27,384 28,743 25,856
Net occupancy expense 6,238 6,071 5,752
Other expense 26,327 28,735 25,873
------------ ------------ ------------
Total Other Expense 59,949 63,549 57,481
------------ ------------ ------------
Income Before Income Taxes 62,436 47,203 50,599
Income Taxes 21,497 16,691 17,782
------------ ------------ ------------
Net Income $ 40,939 $ 30,512 $ 32,817
============ ============ ============
Earnings per common share:
Basic $ 1.37 $ 1.01 $ 1.10
============ ============ ============
Diluted $ 1.35 $ 1.00 $ 1.09
============ ============ ============
Dividends per common share $ 0.68 $ 0.62 $ 0.59
============ ============ ============
Average outstanding shares:
Basic 29,954,116 30,281,260 29,966,308
Diluted 30,271,992 30,435,674 30,134,572
</TABLE>
See notes to consolidated financial statements
86
<PAGE>
Consolidated Statements of Changes in Shareholders' Equity
United Bankshares, Inc. and Subsidiaries
<TABLE>
<CAPTION>
(Dollars in thousands, except per share data) Net Unrealized
Holding
Common Stock (Loss) Gain
-------------------- on Securities Total
Par Retained Available Treasury Shareholders'
Shares Value Surplus Earnings for Sale Stock Equity
---------- ------- ------- -------- --------- --------- ------------
<S><C>
Balance at January 1, 1995 15,093,157 $37,733 $36,726 $154,985 $ (464) $(3,346) $225,634
Net income 32,817 32,817
Cash dividends ($0.59 per share) (13,817) (13,817)
Net change in unrealized holding loss
on securities available for sale 1,873 1,873
Fractional shares adjustment (7)
Acquisition of First Commercial Bank 202,125 505 5,558 6,063
Purchase of treasury stock
(47,500 shares) (1,273) (1,273)
Common stock options
exercised (44,500 shares) (423) 1,089 666
Pre-merger dividends of
pooled company (2,729) (2,729)
---------- ------ ------ ------- ----- ------- -------
Balance at December 31, 1995 15,295,275 38,238 41,861 171,256 1,409 (3,530) 249,234
Net income 30,512 30,512
Cash dividends ($0.62 per share) (17,847) (17,847)
Net change in unrealized holding
gain on securities available for sale (455) (455)
Fractional shares adjustment (145) (4) (4)
Purchase of treasury stock
(113,000 shares) (3,395) (3,395)
Common stock options
exercised (48,025 shares) (419) 1,270 851
Pre-merger dividends of
pooled company (382) (382)
---------- ------ ------ ------- ----- ------- -------
Balance at December 31, 1996 15,295,130 38,238 41,438 183,539 954 (5,655) 258,514
Net income 40,939 40,939
Cash dividends ($0.68 per share) (20,344) (20,344)
Net change in unrealized holding
gain on securities available for sale 4,525 4,525
Purchase of treasury stock
(167,100 shares) (5,754) (5,754)
Common stock options
exercised (45,232 shares) (424) 1,376 952
Sale of treasury stock (15,991 shares) 606 606
Two-for-one stock split effected
in the form of a 100%
stock dividend 15,295,130 38,238 (38,238)
---------- ------- ------- --------- ------- ------- --------
Balance at December 31, 1997 30,590,260 $76,476 $41,014 $ 165,896 $ 5,479 $(9,427) $279,438
========== ======= ======= ========= ======= ======= ========
</TABLE>
See notes to consolidated financial statements.
87
<PAGE>
Consolidated Statements of Cash Flows
United Bankshares, Inc. and Subsidiaries
<TABLE>
<CAPTION>
(Dollars in thousands) Year Ended December 31
-----------------------------------------
1997 1996 1995
--------- -------- --------
<S><C>
Operating Activities
Net income $ 40,939 $ 30,512 $ 32,817
Adjustments to reconcile net income to
net cash provided by operating activities:
Provision for loan losses 3,100 2,610 2,320
Provision for depreciation 3,486 3,080 2,926
Amortization, net of accretion 2,082 1,091 35
(Gain) loss on sales of bank premises and equipment (534) 140 (35)
Net losses on sales of securities available for sale 98
Loans originated for sale (143,195) (26,157) (9,438)
Proceeds from loans sold 138,283 49,839 10,053
(Gain) loss on sales of loans (2,521) 728 (1,012)
Deferred income tax expense (benefit) 387 (9) 141
Originations of student loans (465)
Proceeds from sales of student loans 4,580
Changes in:
Interest receivable (949) 285 (766)
Other assets (10,181) (3,461) 2,601
Accrued expenses and other liabilities 1,745 3,113 2,227
--------- -------- --------
Net Cash Provided By Operating Activities 32,642 66,449 41,404
--------- -------- --------
Investing Activities
Proceeds from maturities and calls of investment securities 24,950 23,053 32,624
Purchases of investment securities (33,488) (78,177) (6,995)
Proceeds from sales of securities available for sale 16,518
Proceeds from maturities and calls of securities available for sale 149,275 203,395 108,706
Purchases of securities available for sale (217,137) (176,491) (70,746)
Proceeds from sales of loans 49,127
Net purchases of bank premises and equipment (2,085) (2,004) (1,972)
Net cash paid for acquired subsidiary (28,929) (1,742)
Net change in loans (73,159) (146,462) (90,117)
--------- -------- --------
Net Cash (Used In) Provided By Investing Activities (180,573) (160,168) 18,885
--------- -------- --------
Financing Activities
Cash dividends paid (19,831) (16,541) (10,273)
Acquisition of treasury stock (5,754) (3,395) (1,273)
Proceeds from exercise of stock options 952 851 666
Proceeds from sales of treasury stock 606
Pre-merger dividends of pooled company (382) (2,729)
Repayment of Federal Home Loan Bank borrowings (280,359) (414,007) (379,134)
Proceeds from Federal Home Loan Bank borrowings 290,163 471,141 316,257
Purchase of fractional shares (4)
Changes in:
Time deposits 96,950 25,161 127,570
Other deposits 25,785 28,023 (117,776)
Federal funds purchased and securities sold
under agreements to repurchase 40,071 (6,585) 10,358
--------- -------- --------
Net Cash Provided By (Used In) Financing Activities 148,583 84,262 (56,334)
--------- -------- --------
Increase (Decrease) In Cash and Cash Equivalents 652 (9,457) 3,955
Cash and Cash Equivalents at Beginning of Year 89,520 98,977 95,022
--------- -------- --------
Cash and Cash Equivalents at End of Year $ 90,172 $ 89,520 $ 98,977
========= ======== ========
</TABLE>
See notes to consolidated financial statements.
88
<PAGE>
Notes to Consolidated Financial Statements
December 31, 1997
Note A--Summary of Significant Accounting Policies
Nature of Operations: United Bankshares, Inc. is a multi-bank holding company
headquartered in Charleston, West Virginia. The principal markets of United
Bankshares, Inc. and subsidiaries (United) are located in Parkersburg,
Charleston, Huntington, Morgantown and Wheeling, West Virginia and Arlington,
Fairfax, Loudoun and Prince William counties, Virginia. United considers all of
its principal business activities to be bank related.
Basis of Presentation: The consolidated financial statements and the notes to
consolidated financial statements include the accounts of United Bankshares,
Inc. and its wholly-owned subsidiaries. All significant intercompany accounts
and transactions have been eliminated in the consolidated financial statements.
Certain prior period data has been reclassified to conform with the current
period presentation. The reclassifications had no effect on net income or
shareholders' equity.
The accounting and reporting policies of United conform with generally accepted
accounting principles. The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the amounts reported in the financial
statements and accompanying notes. Actual results could differ from those
estimates. A description of the significant accounting policies is presented
below.
Cash Flow Information: United considers cash and due from banks,
interest-bearing deposits with other banks and federal funds sold as cash and
cash equivalents.
Securities: Management determines the appropriate classification of securities
at the time of purchase. Debt securities that United has the positive intent and
the ability to hold to maturity are carried at amortized cost. Securities to be
held for indefinite periods of time and all marketable equity securities are
classified as available for sale and carried at fair value. Unrealized holding
gains and losses on securities classified as available for sale are carried as a
separate component of shareholders' equity, net of deferred income taxes.
Gains or losses on sales of securities are recognized by the specific
identification method and are reported separately in the statements of income.
Loans: Interest on loans is accrued and credited to operations using methods
that produce a level yield on principal amounts outstanding. Loan origination
and commitment fees and related direct loan origination costs are deferred and
amortized as an adjustment of loan yield over the estimated life of the related
loan.
The accrual of interest income on commercial and most consumer loans generally
is discontinued when a loan becomes 90 days past due as to principal or
interest. When interest accruals are discontinued, unpaid interest recognized in
income in the current year is reversed, and interest accrued in prior years is
charged to the allowance for loan losses. Management may elect to continue the
accrual of interest when the estimated net realizable value of collateral
exceeds the principal balance and accrued interest, and the loan is in the
process of collection.
Consistent with United's existing method of income recognition for loans,
interest on impaired loans, except those classified as nonaccrual, is recognized
as income using the accrual method. United's method of income recognition for
impaired loans that are classified as nonaccrual is to recognize interest income
on the cash basis or apply the cash receipt to principal when the ultimate
collectibility of principal is in doubt.
The principal sources of revenue from United's mortgage banking business are:
(i) loan origination fees; (ii) gains or losses from the sale of loans, if any;
(iii) interest earned on mortgage loans during the period that they are held by
United pending sale; (iv) loan servicing fees; and (v) gain or loss on the
close-out of the hedge instrument used to offset the risk that changes in
interest rate may have on the value of United's mortgage loan inventory.
89
<PAGE>
Note A--Summary of Significant Accounting Policies (continued)
Derivative Financial Instruments: United enters into hedging transactions that
utilize forward contracts for the delivery of mortgage-backed securities as
hedge vehicles to offset the risk that a change in interest rates will result in
a decrease in the value of United's current mortgage loan inventory or its
commitments to originate mortgage loans (the "pipeline"). The risk of loss is
then matched with the appropriate hedge vehicle. United's policies generally
require that it hedge substantially all of its inventory of conforming and
government loans. Realized gains and losses on forward commitments are recorded
in mortgage banking income in the period settlement occurs. Unrealized gains or
losses are considered in the lower of cost or market valuation of loans held for
sale.
Loans Held for Sale: Loans held for sale consist of one-to-four family
residential loans originated for sale in the secondary market and are carried at
the lower of cost or fair value determined on an aggregate basis.
Allowance for Loan Losses: 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. The allowance for loan losses
related to loans that are identified as impaired is 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. In providing for loan
losses, United considers all significant factors that affect the collectibility
of loans. Such factors considered by management include, among others, growth
and composition of the loan portfolio, known deterioration in certain classes of
loans or collateral, trends in delinquencies, and current economic conditions.
This evaluation is inherently subjective and requires management to make
estimates of the amounts and timing of future cash flows.
Management believes that the allowance for loan losses is adequate to provide
for potential losses on existing loans based on information currently available.
Bank Premises and Equipment: Bank premises and equipment are stated at cost,
less allowances for depreciation and amortization. The provision for
depreciation is computed principally by the straight-line method over the
estimated useful lives of the respective assets.
Income Taxes: Deferred income taxes are provided for temporary differences
between the tax basis of an asset or liability and its reported amount in the
financial statements at the statutory tax rate.
Intangible Assets: Intangible assets relating to the estimated value of the
deposit base of the acquired institutions are being amortized on an accelerated
basis over a 7 to 10 year period. The excess of the purchase price over the fair
market value of the net assets of the banks acquired (goodwill) is being
amortized on a straight-line basis over 15 to 20 years. The carrying amount of
goodwill is evaluated if facts and circumstances suggest that it may be
impaired. If this evaluation indicates that goodwill will not be recoverable, as
determined based on the estimated undiscounted cash flows of the entity acquired
over the remaining amortization period, the carrying amount of goodwill will be
reduced.
At December 31, 1997 and 1996, deposit base intangibles and goodwill
approximated $37,332,000 and $11,959,000 net of accumulated amortization of
approximately $12,318,000 and $9,888,000.
Trust Assets and Income: Assets held in a fiduciary or agency capacity for
subsidiary bank customers are not included in the balance sheets since such
items are not assets of the subsidiary banks. Trust department income is
reported on a cash basis. Reporting such income on an accrual basis would not
materially affect United's consolidated financial position or its results of
operations as reported herein.
90
<PAGE>
Notes to Consolidated Financial Statements
Note A--Summary of Significant Accounting Policies--continued
Earnings Per Common Share: In 1997, United adopted FASB Statement No. 128 (SFAS
No. 128), "Earnings Per Share." SFAS No. 128 requires the presentation of basic
and diluted earnings per common share for all periods. Basic earnings per common
share is calculated by dividing net income by the weighted average number of
shares of common stock outstanding for the respective period. For diluted
earnings per common share, the weighted average number of shares of common stock
outstanding for the respective period is increased by the number of shares of
common stock which would be issued assuming the exercise of common stock
options. The dilutive effect of stock options approximated 317,876, 154,414 and
168,264 shares in 1997, 1996 and 1995, respectively. Prior period earnings per
common share amounts have been restated to reflect the adoption of SFAS No. 128.
The results of this change were insignificant.
New Accounting Standards: 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. 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 new rules have not had a material effect on United's
financial position and 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 is reviewing the components of comprehensive
income as outlined by SFAS No. 130 and plans to disclose the information as
required.
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.
These standards, when implemented, are not expected to materially impact the
reported financial position or results of operations of United.
Note B--Mergers and Acquisitions
United has entered into an agreement with George Mason Bankshares, Inc.,
Fairfax, Virginia ("George Mason") to exchange 1.70 shares, as adjusted for the
100% stock dividend, of United common stock for each of the 5,277,301 common
shares of George Mason. The transaction will be accounted for using the pooling
of interests method of accounting. It is anticipated that the proposed merger
will be consummated early during the second quarter of 1998.
Additionally, United has entered into an agreement with Fed One Bancorp, Inc.,
Wheeling, West Virginia ("Fed One") to exchange 1.50 shares, as adjusted for the
100% stock dividend, of United common stock for each of the
91
<PAGE>
2,373,181 common shares of Fed One. The transaction will be accounted for using
the pooling of interests method of accounting. It is anticipated that the
proposed merger will be consummated early during the fourth quarter of 1998.
The following represents unaudited selected pro forma financial information
regarding the effects of the transactions as though United, George Mason and Fed
One had been combined for all periods presented:
<TABLE>
<CAPTION>
(In thousands, except per share data) United United,
and George
George Mason and
George Mason Fed Fed One
United Mason Combined One Combined
-------- ------- --------- ------- --------
<S><C>
1997
Net interest income $105,753 $31,945 $137,698 $11,632 $149,330
Net income 40,939 8,080 49,019 3,242 52,261
Earnings per common share:
Basic $1.37 $1.58 $1.27 $1.43 $1.24
Diluted $1.35 $1.54 $1.25 $1.36 $1.22
1996
Net interest income $ 99,173 $27,463 $126,636 $11,749 $138,385
Net income 30,512 6,883 37,395 2,324 39,719
Earnings per common share:
Basic $1.01 $1.38 $0.97 $0.97 $0.94
Diluted $1.00 $1.35 $0.96 $0.94 $0.93
1995
Net interest income $ 95,648 $24,170 $119,818 $11,697 $131,515
Net income 32,817 6,292 39,109 3,250 42,359
Earnings per common share:
Basic $1.10 $1.30 $1.02 $1.24 $1.01
Diluted $1.09 $1.28 $1.02 $1.20 $1.00
</TABLE>
The data set forth above is not necessarily indicative of the results of
operations or the combined financial position of United that would have resulted
had the merger been consummated at the beginning of the applicable periods
indicated, nor is it necessarily indicative of the results of operations in
future periods or the future financial position of the combined entities.
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 $39.2 million. The transaction has been accounted
for using the purchase method of accounting.
At consummation, Patriot had assets of approximately $211 million, loans of $135
million, deposits of $154 million and shareholders' equity of $11 million, all
of which reflected purchase accounting adjustments. The results of operations of
Patriot, which are not significant, have been included in the consolidated
results of operations from the date of acquisition.
92
<PAGE>
Notes to Consolidated Financial Statements
Note C--Investment Securities
The amortized cost and estimated fair values of securities available for sale
are summarized as follows:
<TABLE>
<CAPTION>
(In thousands) December 31, 1997
------------------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
--------- ---------- ---------- ---------
<S><C>
U.S. Treasury securities and obligations of
U.S. Government corporations and agencies $142,688 $ 500 $239 $142,949
Mortgage-backed securities 102,955 1,527 20 104,462
Marketable equity securities 4,300 6,741 11,041
Other 15,496 80 15,416
-------- ------ ---- --------
Total $265,439 $8,768 $339 $273,868
======== ====== ==== ========
</TABLE>
<TABLE>
<CAPTION>
(In thousands) December 31, 1996
-----------------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
--------- ---------- ---------- ---------
<S><C>
U.S. Treasury securities and obligations of
U.S. Government corporations and agencies $115,018 $ 443 $ 444 $115,017
Mortgage-backed securities 24,982 92 565 24,509
Marketable equity securities 3,655 2,158 5,813
Other 16,506 7 223 16,290
-------- ------ ------ --------
Total $160,161 $2,700 $1,232 $161,629
======== ====== ====== ========
</TABLE>
The amortized cost and estimated fair value of securities available for sale at
December 31, 1997, by contractual maturity are as follows:
(In thousands) Estimated
Amortized Fair
Cost Value
--------- ---------
Due in one year or less $ 36,604 $ 37,043
Due after one year through five years 86,721 87,031
Due after five years through ten years 20,861 20,868
Due after ten years 116,953 117,885
Marketable equity securities 4,300 11,041
-------- --------
Total $265,439 $273,868
======== ========
The table above includes $104,462,000 of mortgage-backed securities at estimated
fair value with an amortized cost of $102,955,000. Maturities of mortgage-backed
securities are based upon the estimated average life.
Gross realized gains and losses from sales of securities available for sale were
$96,000 and $194,000, respectively, in 1996. There were no sales in 1997 and
1995.
93
<PAGE>
Note C--Investment Securities (continued)
The amortized cost and estimated fair values of securities held to maturity are
summarized as follows:
<TABLE>
<CAPTION>
(In thousands) December 31, 1997
---------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
--------- ---------- ---------- ---------
<S><C>
U.S. Treasury securities and obligations of U.S.
Government corporations and agencies $ 97,847 $ 551 $ 22 $ 98,376
State and political subdivisions 32,650 1,323 8 33,965
Mortgage-backed securities 41,874 154 107 41,921
Other 6,923 6,923
-------- ------ ---- --------
Total $179,294 $2,028 $137 $181,185
======== ====== ==== ========
</TABLE>
<TABLE>
<CAPTION>
(In thousands) December 31, 1996
---------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
--------- ---------- ---------- ---------
<S><C>
U.S. Treasury securities and obligations of U.S.
Government corporations and agencies $ 77,704 $2,131 $ 87 $ 79,748
State and political subdivisions 36,136 1,487 32 37,591
Mortgage-backed securities 54,977 250 754 54,473
Other 1,885 1,885
-------- ------ ---- --------
Total $170,702 $3,868 $873 $173,697
======== ====== ==== ========
</TABLE>
The amortized cost and estimated fair value of debt securities held to maturity
at December 31, 1997 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.
(In thousands) Estimated
Amortized Fair
Cost Value
--------- ---------
Due in one year or less $ 18,825 $ 18,887
Due after one year through five years 52,448 53,033
Due after five years through ten years 78,794 79,399
Due after ten years 29,227 29,866
-------- --------
Total $179,294 $181,185
======== ========
The table above includes $41,874,000 of mortgage-backed securities with an
estimated fair value of $41,921,000 at December 31, 1997. Maturities of the
mortgage-backed securities are based upon the estimated average life.
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 $277,098,000 and $204,254,000 at December 31,
1997 and 1996, respectively.
94
<PAGE>
Notes to Consolidated Financial Statements
Note D--Loans
Major classifications of loans are as follows:
(In thousands) December 31
------------------------
1997 1996
--------- ---------
Commercial, financial, and agricultural $ 368,654 $ 248,762
Real estate:
Single family residential 929,490 953,000
Commercial 392,818 355,431
Construction 93,918 42,343
Other 43,406 19,748
Installment 232,191 232,004
---------- ----------
2,060,477 1,851,288
Loans held for sale 7,008 1,482
---------- ----------
Total gross loans $2,067,485 $1,852,770
========== ==========
An analysis of the allowance for loan losses follows:
(In thousands) Year Ended December 31
------------------------------
1997 1996 1995
------- ------- -------
Balance at beginning of year $22,283 $22,545 $22,304
Allowance of purchased subsidiaries 2,695 1,017
Provision for loan losses 3,100 2,610 2,320
------- ------- -------
28,078 25,155 25,641
------- ------- -------
Loans charged off 3,819 3,524 3,624
Recoveries 527 652 528
------- ------- -------
Net charge offs 3,292 2,872 3,096
------- ------- -------
Balance at end of year $24,786 $22,283 $22,545
======= ======= =======
United's lending is centered in the West Virginia and Virginia markets and is
focused on retail consumer and small and middle market commercial lending.
United has commercial real estate loans, including owner occupied, income
producing real estate and land development loans, of approximately $392,818,000
and $355,431,000 as of December 31, 1997 and 1996, respectively. The loans are
primarily secured by real estate located in West Virginia, Southeastern Ohio,
and Virginia. The loans were originated by United's subsidiary banks using
underwriting standards as set forth by management. United's loan administration
policies are focused on the risk characteristics of the loan portfolio,
including commercial real estate loans, in terms of loan approval and credit
quality. It is the opinion of management that these loans do not pose any
unusual risks and that adequate consideration has been given to the above loans
in establishing the allowance for loan losses.
95
<PAGE>
Note D--Loans (continued)
At December 31, 1997, the recorded investment in loans that were considered to
be impaired was $12,602,000 (of which $4,156,000 was on a nonaccrual basis).
Included in this amount was $5,319,000 of impaired loans for which the related
allowance for credit losses was $1,438,000 and $7,283,000 of impaired loans that
did not have an allowance for credit losses. At December 31, 1996, the recorded
investment in loans that were considered to be impaired was $10,317,000 (of
which $4,361,000 was on a nonaccrual basis). Included in this amount was
$5,631,000 of impaired loans for which the related allowance for credit losses
was $1,451,000 and $4,686,000 of impaired loans that did not have an allowance
for credit losses.
The average recorded investment in impaired loans during the years ended
December 31, 1997, 1996 and 1995 was approximately $11,482,000, $9,442,000 and
$9,545,000, respectively.
The amount of interest income that would have been recorded on impaired loans
under the original terms was $1,471,000, $1,464,000 and $1,045,000 for the years
ended December 31, 1997, 1996 and 1995, respectively. For the years ended
December 31, 1997, 1996 and 1995, United recognized interest income on those
impaired loans of approximately $907,000, $638,000 and $412,000, respectively,
substantially all of which was recognized using the accrual method of income
recognition.
United's subsidiary banks have made loans, in the normal course of business, to
the directors and officers of United and its subsidiaries, and to their
associates. Such related party loans were made on substantially the same terms,
including interest rates and collateral, as those prevailing at the time for
comparable transactions with unrelated persons and did not involve more than
normal risk of collectibility. The aggregate dollar amount of these loans was
$83,660,000 and $72,367,000 at December 31, 1997 and 1996, respectively. During
1997, $36,929,000 of new loans were made, repayments totaled $30,045,000, and
other changes due to the change in composition of United's board members and
executive officers approximated $4,409,000.
Note E--Bank Premises and Equipment and Leases
Bank premises and equipment are summarized as follows:
(In thousands) December 31
---------------------
1997 1996
------- -------
Land $ 8,921 $ 7,892
Building and improvements 35,540 34,414
Leasehold improvements 5,002 5,784
Furniture, fixtures, and equipment 31,701 30,093
------- -------
81,164 78,183
Less allowance for depreciation and
amortization 41,674 44,633
------- -------
Net bank premises and equipment $39,490 $33,550
======= =======
United and certain banking subsidiaries have entered into various noncancelable
operating leases. These noncancelable operating leases are subject to renewal
options under various terms and some leases provide for periodic rate
adjustments based on cost-of-living index changes. Rent expense for
noncancelable operating leases approximated $2,019,000, $1,908,000 and
$1,822,000 for the years ended December 31, 1997, 1996, and 1995, respectively.
96
<PAGE>
Notes to Consolidated Financial Statements
Note E--Bank Premises and Equipment and Leases (continued)
Future minimum payments, by year and in the aggregate, under noncancelable
operating leases with initial or remaining terms of one year or more, for years
subsequent to December 31, 1997, consisted of the following:
(In thousands)
Year Amount
---- -------
1998 $ 2,333
1999 2,196
2000 1,801
2001 1,766
2002 1,368
Thereafter 1,236
-------
Total minimum lease payments $10,700
=======
Note F--Deposits
The book value of deposits consisted of the following:
(In thousands) December 31
--------------------------
1997 1996
---------- ----------
Noninterest-bearing checking $ 317,930 $ 261,048
Interest-bearing checking 52,506 62,783
Regular savings 288,504 293,755
Money market accounts 421,348 362,223
Time deposits under $100,000 838,094 709,309
Time deposits over $100,000 187,665 138,436
---------- ----------
Total deposits $2,106,047 $1,827,554
========== ==========
Interest paid on deposits and borrowings approximated $82,959,000, $72,568,000
and $63,167,000 in 1997, 1996 and 1995, respectively.
At December 31, 1997, the scheduled maturities of time deposits are as follows:
(In thousands)
Year Amount
---- ----------
1998 $ 668,860
1999 297,332
2000 37,119
2001 9,481
2002 and thereafter 12,967
----------
Total minimum lease payments $1,025,759
==========
97
<PAGE>
Note F--Deposits (continued)
United's subsidiary banks have received deposits, in the normal course of
business, from the directors and officers of United and its subsidiaries, and
their associates. Such related party deposits were accepted on substantially the
same terms, including interest rates and maturities, as those prevailing at the
time for comparable transactions with unrelated persons. The aggregate dollar
amount of these deposits was $21,253,000 and $18,335,000 at December 31, 1997
and 1996, respectively.
Note G--Borrowings
United's lead subsidiary, United National Bank (UNB), is a member of the Federal
Home Loan Bank of Pittsburgh (FHLB). Membership in the FHLB makes available
short-term and long-term borrowings from collateralized advances. At December
31, 1997, United had approximately $549,633,000 of available borrowings in the
form of collateralized advances from the FHLB at prevailing interest rates.
At December 31, 1997, $139,000,000 of FHLB advances with an interest rate of
6.50% had an overnight maturity. Additionally, $3,695,000 of FHLB advances with
a weighted average interest rate of 6.06% are scheduled to mature from fourteen
to twenty years.
UNB also has various unused lines of credit available from certain of its
correspondent banks in the aggregate amount of $128,000,000. These lines of
credit, which bear interest at prevailing market rates, permit UNB to borrow
funds in the overnight market, and are renewable annually subject to certain
conditions.
At December 31, 1997 and 1996, borrowings and the related weighted average
interest rate were as follows:
<TABLE>
<CAPTION>
(In thousands) 1997 1996
--------------------- ----------------------
Weighted Weighted
Average Average
Amount Rate Amount Rate
-------- -------- -------- --------
<S><C>
Federal funds purchased $ 20,961 6.73% $ 4,491 6.81%
Securities sold under agreements
to repurchase 109,909 4.37% 71,091 4.16%
FHLB advances 142,695 6.49% 132,631 6.63%
-------- --------
Total $273,565 $208,213
======== ========
</TABLE>
Information concerning securities sold under agreements to repurchase (in
thousands) is summarized as follows:
1997 1996
-------- -------
Average balance during the year $ 95,565 $66,463
Average interest rate during the year 4.24% 4.04%
Maximum month-end balance during the year $123,949 $79,664
98
<PAGE>
Notes to Consolidated Financial Statements
Note H--Income Taxes
The income tax provisions included in the consolidated statements of income are
summarized as follows:
(In thousands) Year Ended December 31
------------------------------------
1997 1996 1995
------- ------- -------
Current expense:
Federal $20,163 $15,271 $15,313
State 947 1,429 2,328
Deferred expense (benefit):
Federal and State 387 (9) 141
------- ------- -------
Income taxes $21,497 $16,691 $17,782
======= ======= =======
The following is a reconciliation of income tax expense to the amount computed
by applying the statutory federal income tax rate to income before income taxes:
<TABLE>
<CAPTION>
(In thousands) Year Ended December 31
----------------------------------------------------------------
1997 1996 1995
----------------- ------------------ ------------------
Amount % Amount % Amount %
------- ---- ------- ---- ------- ----
<S><C>
Tax on income before taxes at
statutory federal rate $21,853 35.0% $16,521 35.0% $17,710 35.0%
Plus: State income taxes net of
federal tax benefits 632 1.0 929 2.0 1,619 3.2
------- ---- ------- ---- ------- ----
22,485 36.0 17,450 37.0 19,329 38.2
Increase (decrease) resulting from:
Tax-exempt interest income (1,410) (2.3) (1,464) (3.1) (1,683) (3.3)
Other items-net 422 0.7 705 1.5 136 0.2
------- ---- ------- ---- ------- ----
Income taxes $21,497 34.4% $16,691 35.4% $17,782 35.1%
======= ==== ======= ==== ======= ====
</TABLE>
Federal income tax benefit applicable to securities transactions approximated
$34,000 in 1996. There were no securities transactions in 1997 and 1995.
Income taxes paid approximated $21,876,000, $14,035,000 and $19,052,000 in 1997,
1996 and 1995, respectively.
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. Significant
99
<PAGE>
Note H--Income Taxes (continued)
components of United's deferred tax assets and liabilities (included in other
assets) at December 31, 1997 and 1996 are as follows:
(In thousands) 1997 1996
------- -------
Deferred tax assets:
Allowance for loan losses $ 9,321 $ 8,889
Accrued benefits payable 1,366 1,600
Other accrued liabilities 2,874 2,213
Net deferred loan fees 295 488
Other real estate owned 117 69
Other 363
------- -------
Total deferred tax assets 13,973 13,622
------- -------
Deferred tax liabilities:
Premises and equipment 2,498 1,784
Core deposit intangibles 887 417
Income tax allowance for loan losses 1,462 1,462
Prepaid assets 169 149
Deferred mortgage points 1,663 1,582
Securities available for sale 2,950 514
Other 492 441
------- -------
Total deferred tax liabilities 10,121 6,349
------- -------
Net deferred tax assets $ 3,852 $ 7,273
======= =======
Note I--Employee Benefit Plans
United has a defined benefit retirement plan covering substantially all
employees. The benefits are based on years of service and the average of the
employee's highest five consecutive plan years of basic compensation paid during
the ten plan years preceding the date of determination. United's funding policy
is to contribute annually the maximum amount that can be deducted for federal
income tax purposes. Contributions are intended to provide not only for benefits
attributed to service to date, but also for those expected to be earned in the
future.
Net periodic pension cost included the following components:
<TABLE>
<CAPTION>
(In thousands) Year Ended December 31
---------------------------------------
1997 1996 1995
------- ------- -------
<S><C>
Service cost $ 739 $ 861 $ 718
Interest cost on projected benefit obligation 1,451 1,439 1,263
Actual return on plan assets (4,402) (2,849) (3,499)
Net amortization and deferral 2,395 1,014 1,852
------- ------- -------
Net periodic pension cost $ 183 $ 465 $ 334
======= ======= =======
</TABLE>
100
<PAGE>
Notes to Consolidated Financial Statements
Note I--Employee Benefit Plans--continued
The following table sets forth the funded status of United's defined benefit
plan and amounts recognized in the respective consolidated balance sheets:
<TABLE>
<CAPTION>
(In thousands) December 31
--------------------------
1997 1996
-------- --------
<S><C>
Vested benefit obligation $(16,986) $(15,715)
Nonvested benefit obligation (452) (408)
-------- --------
Accumulated benefit obligation (17,438) (16,123)
Effect of future pay increases (4,472) (5,046)
-------- --------
Projected benefit obligation for services rendered to date (21,910) (21,169)
Plan assets at fair value, primarily marketable securities 27,040 23,109
-------- --------
Excess of plan assets over projected benefit obligation 5,130 1,940
Unrecognized net gain from past experience different from
that assumed and effects of changes in assumptions (5,318) (1,877)
Unrecognized prior service cost 325 388
Unrecognized transition asset (695) (826)
-------- --------
Accrued pension liability included in other liabilities $ (558) $ (375)
======== ========
</TABLE>
At December 31, 1997, the weighted average discount rate and rate of increase in
future compensation levels used in determining the actuarial present value of
the projected benefit obligation was 7.25% and 4.5%. At December 31, 1996, the
weighted average discount rate and rate of increase in future compensation
levels used in determining the actuarial present value of the projected benefit
obligation was 7.5% and 4.5%. The weighted average expected long-term rate of
return on United's plan assets was 9.00% for the years ended December 31, 1997,
1996 and 1995.
The United Savings and Stock Investment Plan (the Plan) is a deferred
compensation plan under Section 401(k) of the Internal Revenue Code. All
employees who complete one year of service are eligible to participate in the
Plan. Each participant may contribute from 1% to 10% of pre-tax earnings to his
or her account which may be invested in any of four investment options chosen by
the employee. United matches 100% of the first 2% of salary deferred and 25% of
the next 2% of salary deferred with United common stock. Vesting is 100% for
employee deferrals and the United match at the time the employee makes his/her
deferral. United's expense relating to the Plan approximated $410,000, $330,000
and $297,000 in 1997, 1996 and 1995, respectively.
The assets of United's defined benefit plan and 401(k) Plan each include
investments in United common stock. At December 31, 1997, the combined plan
assets included 679,518 shares of United common stock with an approximate fair
value of $16,223,000.
United has certain other deferred compensation plans covering various key
employees. Periodic charges are made to operations so that the present value of
the liability due each employee is fully recorded as of the date of their
retirement. Amounts charged to expense have not been significant in any year.
101
<PAGE>
Note I--Employee Benefit Plans (continued)
United has three incentive stock option plans for key employees, the 1988, 1991
and 1996 plans. The plans provide for the granting of stock options of up to
200,000, 1,000,000 and 1,200,000 shares of common stock, respectively. No
further grants will be made under the 1988 and 1991 plans. At December 31, 1997,
779,122 options were available for future grant under the 1996 plan. Under the
provisions of the plans, the option price per share shall not be less than the
fair market value of United's common stock on the date of grant. Accordingly, no
compensation expense is recognized for these options.
The following table summarizes information about stock options outstanding at
December 31, 1997:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
------------------------- ------------------------
Weighted-
Average Weighted- Weighted-
Remaining Average Average
Range of Number Contractual Exercise Number Exercise
Exercise Prices Outstanding Life Price Exercisable Price
---------------- ----------- ----------- --------- ----------- ---------
<S><C>
$ 5.50 to $ 7.00 40,600 3 years $ 6.62 40,600 $ 6.62
$ 6.88 to $15.00 610,232 6 years 12.18 565,056 11.95
$14.88 to $22.00 417,374 9 years 18.56 99,844 14.88
</TABLE>
The following is a summary of activity of United's Incentive Stock Option Plans:
<TABLE>
<CAPTION>
Stock
Options Range of Exercise Prices
--------- ------------------------
<S><C>
Outstanding at January 1, 1995 769,350 $13.50 $ 5.50
Granted 200,000 15.00
Exercised 89,000 13.50 5.50
Forfeited 18,900 13.50 9.88
---------
Outstanding at December 31, 1995 861,450 15.00 5.50
Granted 218,972 14.88
Exercised 96,050 13.50 5.50
Forfeited 4,130 15.00 11.50
---------
Outstanding at December 31, 1996 980,242 15.00 5.50
Granted 215,500 22.00
Exercised 91,136 15.00 6.63
Forfeited 36,400 15.00 11.50
---------
Outstanding at December 31, 1997 1,068,206 $22.00 $ 5.50
=========
Exercisable at:
December 31, 1995 527,274 $13.50 $ 5.50
December 31, 1996 619,998 $15.00 $ 5.50
December 31, 1997 705,500 $15.00 $ 5.50
</TABLE>
102
<PAGE>
Notes to Consolidated Financial Statements
Note I--Employee Benefit Plans--continued
Because the exercise price of the option granted is equal to the market price of
the underlying stock on the date of grant, no compensation expense is
recognized. Pro forma net income and earnings per share, determined as if United
had recognized compensation expense for its employee stock options under the
fair value method, have not been presented because the effect of applying the
fair value method prescribed by SFAS 123 to the 1997, 1996 and 1995 options
awarded produces amounts that are not materially different from amounts reported
herein.
The estimated fair value of the options at the date of grant was $10.12, $5.88,
and $5.69 for the options granted during 1997, 1996, and 1995, respectively. The
fair value of the options was estimated at the date of grant using a
Black-Scholes option pricing model with the following weighted average
assumptions for 1997, 1996, and 1995, respectively: risk-free interest rates of
6.44%, 6.78%, and 6.24%; dividend yields of 3.08%, 4.10%, and 4.00%; volatility
factors of the expected market price of United's common stock of 0.182, 0.185,
and 0.185; and a weighted average expected option life of 7 years.
United provides postemployment and postretirement benefits for certain employees
at subsidiaries acquired in prior years. United accounts for such costs as
expense when paid. Accounting for such costs when paid does not produce results
materially different from those which would result if such costs were accrued
during the period of employee service. United does not anticipate providing
postemployment or postretirement benefits to its currently active employees
after employment or retirement except on a fully contributory basis.
Note J--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
$455,767,000 and $337,582,000 of loan commitments outstanding as of December 31,
1997 and 1996, 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
$36,243,000 and $24,837,000 as of December 31, 1997 and 1996, respectively.
At December 31, 1997, United had open commitments amounting to approximately
$2,000,000 to sell mortgage-backed securities with varying settlement dates
generally not extending beyond March 1998. As such, United is
103
<PAGE>
Note J--Commitments and Contingent Liabilities (continued)
not exposed to significant risk nor will it derive any significant benefit from
changes in interest rates on the price of the mortgage loan inventory, net of
gains or losses of associated hedge positions.
Management does not anticipate any material losses as a result of these loan
commitments, standby letters of credit and forward contracts for the delivery of
mortgage-backed securities.
In the normal course of business, United and its subsidiaries are currently
involved in various legal proceedings. Management is vigorously pursuing all its
legal and factual defenses and, after consultation with legal counsel, believes
that all such litigation will be resolved with no material effect on United's
financial position or results of operations.
Note K--United Bankshares, Inc. (Parent Company Only) Financial Information
Condensed Balance Sheets
<TABLE>
<CAPTION>
(In thousands) December 31
--------------------
1997 1996
------- --------
<S><C>
Assets
Cash $ 6,834 $ 12,958
Securities available for sale 16,742 10,813
Securities held to maturity 1,521 1,520
Investment in subsidiaries:
Bank subsidiaries 250,087 238,902
Non-bank subsidiaries 1,303 1,264
Loans 14,300
Other assets 1,297 272
-------- --------
Total Assets $292,084 $265,729
======== ========
Liabilities and Shareholders' Equity
Accrued expenses and other liabilities $ 12,646 $ 7,215
Shareholders' equity (including a net unrealized holding
gain of $5,479 and $954 on securities available for sale at
December 31, 1997 and 1996, respectively) 279,438 258,514
-------- --------
Total Liabilities and Shareholders' Equity $292,084 $265,729
======== ========
</TABLE>
104
<PAGE>
Notes to Consolidated Financial Statements
Note K--United Bankshares, Inc. (Parent Company Only) Financial Information
(continued)
Condensed Statements of Income
<TABLE>
<CAPTION>
(In thousands) Year Ended December 31
-----------------------------------------
1997 1996 1995
------- ------- -------
<S><C>
Income
Dividends from bank subsidiaries $ 69,637 $17,847 $26,496
Interest and fees on loans 85
Management fees:
Bank subsidiaries 3,476 3,467 3,018
Non-bank subsidiaries 12 12 12
Other income 707 557 268
-------- ------- -------
Total Income 73,917 21,883 29,794
Expenses
Operating expenses 5,516 4,725 4,606
-------- ------- -------
Income Before Income Taxes and (Excess Dividends)
Equity in Undistributed Net Income of Subsidiaries 68,401 17,158 25,188
Applicable income tax benefit (424) (12) (269)
-------- ------- -------
Income Before (Excess Dividends) Equity in
Undistributed Net Income of Subsidiaries 68,825 17,170 25,457
Equity in (excess dividends) undistributed net
income of subsidiaries:
Bank subsidiaries (27,925) 13,302 7,349
Non-bank subsidiaries 39 40 11
-------- ------- -------
Net Income $ 40,939 $30,512 $32,817
======== ======= =======
</TABLE>
105
Note K--United Bankshares, Inc. (Parent Company Only) Financial Information
(continued)
Condensed Statements of Cash Flows
<TABLE>
<CAPTION>
(In thousands) Year Ended December 31
-----------------------------------------
1997 1996 1995
-------- -------- --------
<S><C>
Operating Activities:
Net income $ 40,939 $ 30,512 $ 32,817
Adjustments to reconcile net income to net cash
provided by operating activities:
Equity in excess dividends (undistributed
net income) of subsidiaries 27,886 (13,342) (7,360)
Depreciation and net amortization 11 26 33
Net gain on sales of investment securities (24)
Net change in other assets and liabilities 2,276 (106) 790
-------- -------- --------
Net Cash Provided by Operating Activities 71,112 17,066 26,280
-------- -------- --------
Investing Activities
Net purchases of securities available for sale (1,346) 1,585 (8,439)
Purchase of loans (14,300)
Increase in investment in subsidiaries (1) (2,400)
Cash paid in acquisition of subsidiary (37,562) (5,280)
-------- -------- --------
Net Cash (Used in) Provided by Investing Activities (53,209) 1,585 (16,119)
-------- -------- --------
Financing Activities
Cash dividends paid (19,831) (16,541) (10,273)
Pre-merger dividends of pooled company (382) (2,729)
Acquisition of treasury stock (5,754) (3,395) (1,273)
Proceeds from the sale of treasury stock 606
Proceeds from exercise of stock options 952 851 666
Purchase of fractional shares (4)
-------- -------- --------
Net Cash Used in Financing Activities (24,027) (19,471) (13,609)
-------- -------- --------
Decrease in Cash and Cash Equivalents (6,124) (820) (3,448)
Cash and Cash Equivalents at Beginning of Year 12,958 13,778 17,226
-------- -------- --------
Cash and Cash Equivalents at End of Year $ 6,834 $ 12,958 $ 13,778
======== ======== ========
</TABLE>
106
<PAGE>
Notes to Consolidated Financial Statements
Note L--Other Income and Expense
The following details certain items of other income and expense for the periods
indicated:
<TABLE>
<CAPTION>
(In thousands) Year Ended December 31
-----------------------------------
1997 1996 1995
------ ------ ------
<S><C>
Other income:
Service charges and fees on deposits $8,672 $8,014 $7,063
Bankcard 2,717 2,048 1,739
Net income (loss) from mortgage banking operations 3,135 (431) 1,012
Loss on sales of investment securities (98)
Other income 528 234 927
Other expense:
Data processing $2,146 $2,974 $2,548
FDIC insurance expense 119 2,986 2,364
Legal and consulting 871 2,138 2,595
Advertising 1,618 2,173 1,747
Goodwill amortization 2,750 1,915 1,551
Equipment expense 3,512 3,191 3,021
</TABLE>
Note M--Regulatory Matters
The subsidiary banks are required to maintain average reserve balances with
their respective Federal Reserve Bank. The average amount of those reserve
balances for the year ended December 31, 1997, was approximately $23,698,000.
The primary source of funds for the dividends paid by United Bankshares, Inc. to
its shareholders is dividends received from its subsidiary banks. Dividends paid
by United's subsidiary banks are subject to certain regulatory limitations.
Generally, the most restrictive provision requires regulatory approval if
dividends declared in any year exceed that year's net income, as defined, plus
the retained net profits of the two preceding years.
During 1998, the retained net profits available for distribution to United
Bankshares, Inc., as dividends without regulatory approval, are approximately
$3,876,000, plus net income for the interim period through the date of
declaration.
Under Federal Reserve regulation, the banking subsidiaries are also limited as
to the amount they may loan to affiliates, including the parent company. Loans
from the banking subsidiaries to the parent company are limited to 10% of the
banking subsidiaries' capital and surplus, as defined, or $13,475,000 at
December 31, 1997, and must be secured by qualifying collateral.
United's subsidiary banks are subject to various regulatory capital requirements
administered by federal banking agencies. Pursuant to capital adequacy
guidelines, United's subsidiary banks must meet specific capital guidelines that
involve quantitative measures of the banks' assets, liabilities, and certain
off-balance sheet items as calculated under regulatory accounting practices.
United's subsidiary banks' capital amounts and classifications are also subject
to qualitative judgments by the regulators about components, risk weightings,
and other factors.
Quantitative measures established by regulation to ensure capital adequacy
require United to maintain minimum amounts and ratios of total and Tier I
capital, as defined in the regulations, to risk-weighted assets, as defined, and
107
<PAGE>
Note M--Regulatory Matters (continued)
of Tier I capital, as defined, to average assets, as defined. Management
believes, as of December 31, 1997, that United exceeds all capital adequacy
requirements to which it is subject.
As of December 31, 1997, the most recent notification from its regulators,
United and its subsidiary banks were categorized as well capitalized. To be
categorized as well capitalized, United must maintain minimum total risk-based,
Tier I risk-based, and Tier I leverage ratios as set forth in the following
table. There are no conditions or events since that notification that management
believes have changed United's category.
United's and United's lead bank's, United National Bank, capital amounts (in
thousands of dollars) and ratios are presented in the following table.
<TABLE>
<CAPTION>
Actual
------------------
Amount Ratio
------- -----
<S><C>
As of December 31, 1997:
Total Capital (to Risk-
Weighted Assets):
United Bankshares $261,646 13.5%
United National Bank 204,907 12.5%
Tier I Capital (to Risk-
Weighted Assets):
United Bankshares 237,342 12.2%
United National Bank 184,451 11.3%
Tier I Capital
(to Average Assets):
United Bankshares 237,342 9.2%
United National Bank 184,451 8.1%
As of December 31, 1996:
Total Capital (to Risk-
Weighted Assets):
United Bankshares $263,759 16.5%
United National Bank 231,697 15.2%
Tier I Capital (to Risk-
Weighted Assets):
United Bankshares 243,827 15.3%
United National Bank 212,635 13.9%
Tier I Capital
(to Average Assets):
United Bankshares 243,827 10.8%
United National Bank 212,635 9.8%
</TABLE>
<TABLE>
<CAPTION>
For Capital To Be Well
Adequacy Purposes Capitalized
------------------------------------------ -------------------------------------------
Amount Ratio Amount Ratio
------- ----- ------- -----
<S><C>
As of December 31, 1997:
Total Capital (to Risk-
Weighted Assets):
United Bankshares $155,546 (greater than or equal to)8.0% $194,433 (greater than or equal to)10.0%
United National Bank 130,917 (greater than or equal to)8.0% 163,647 (greater than or equal to)10.0%
Tier I Capital (to Risk-
Weighted Assets):
United Bankshares 77,773 (greater than or equal to)4.0% 116,660 (greater than or equal to) 6.0%
United National Bank 65,459 (greater than or equal to)4.0% 98,188 (greater than or equal to) 6.0%
Tier I Capital
(to Average Assets):
United Bankshares 103,037 (greater than or equal to)4.0% 128,796 (greater than or equal to) 5.0%
United National Bank 91,559 (greater than or equal to)4.0% 114,449 (greater than or equal to) 5.0%
As of December 31, 1996:
Total Capital (to Risk-
Weighted Assets):
United Bankshares $127,564 (greater than or equal to)8.0% $159,455 (greater than or equal to)10.0%
United National Bank 122,000 (greater than or equal to)8.0% 152,500 (greater than or equal to)10.0%
Tier I Capital (to Risk-
Weighted Assets):
United Bankshares 63,782 (greater than or equal to)4.0% 95,673 (greater than or equal to) 6.0%
United National Bank 61,000 (greater than or equal to)4.0% 91,500 (greater than or equal to) 6.0%
Tier I Capital
(to Average Assets):
United Bankshares 90,537 (greater than or equal to)4.0% 113,171 (greater than or equal to) 5.0%
United National Bank 86,902 (greater than or equal to)4.0% 108,627 (greater than or equal to) 5.0%
</TABLE>
108
<PAGE>
Notes to Consolidated Financial Statements
Note N--Fair Values of Financial Instruments
The following methods and assumptions were used by United in estimating its fair
value disclosures for financial instruments:
Cash and Cash Equivalents: The carrying amounts reported in the balance sheet
for cash and cash equivalents approximate those assets' fair values.
Securities: The estimated fair values of securities are based on quoted market
prices, where available. If quoted market prices are not available, fair values
are based on quoted market prices of comparable instruments.
Loans: The estimated fair values of variable-rate loans that reprice frequently
with no significant change in credit risk are based on carrying values. The fair
values of certain mortgage loans (e.g., one-to-four family residential), credit
card loans, and other consumer loans are based on quoted market prices of
similar loans sold in conjunction with securitization transactions, adjusted for
differences in loan characteristics. The fair values of other loans (e.g.,
commercial real estate and rental property mortgage loans, commercial and
industrial loans, financial institution loans, and agricultural loans) are
estimated using discounted cash flow analyses, using interest rates currently
being offered for loans with similar terms to borrowers of similar credit
worthiness.
Off-Balance Sheet Instruments: Fair values of United's loan commitments are
based on fees currently charged to enter into similar agreements, taking into
account the remaining terms of the agreements and the counterparties' credit
standing. The estimated fair values of these commitments approximate their
carrying values. The fair value of forward contracts for the delivery of
mortgage-backed securities in connection with its mortgage banking activities is
based upon quoted market prices or prices of similar instruments when available.
Deposits: The fair values of demand deposits (e.g., interest and noninterest
checking, regular savings and certain types of money market accounts) are, by
definition, equal to the amount payable on demand at the reporting date (i.e.,
their carrying amounts). The carrying amounts of variable-rate, fixed-term money
market accounts and certificates of deposit approximate their fair values at the
reporting date. Fair values of fixed-rate certificates of deposit are estimated
using a discounted cash flow calculation that applies interest rates currently
being offered on certificates to a schedule of aggregated expected monthly
maturities on time deposits.
Short-term Borrowings: The carrying amounts of federal funds purchased,
borrowings under repurchase agreements, and other short-term borrowings
approximate their fair values.
Federal Home Loan Bank Borrowings: The fair values of United's Federal Home Loan
Bank borrowings are estimated using discounted cash flow analyses, based on
United's current incremental borrowing rates for similar types of borrowing
arrangements.
109
<PAGE>
Note N--Fair Values of Financial Statements (continued)
The estimated fair values of United's financial instruments are summarized
below:
<TABLE>
<CAPTION>
(In thousands) December 31, 1997 December 31, 1996
--------------------------- ---------------------------
Carrying Fair Carrying Fair
Amount Value Amount Value
---------- ---------- ---------- ----------
<S><C>
Cash and cash equivalents $ 90,172 $ 90,172 $ 89,520 $ 89,520
Securities available for sale 273,868 273,868 161,629 161,629
Securities held to maturity 179,294 181,185 170,702 173,505
Loans 2,035,701 2,052,751 1,825,322 1,835,619
Deposits 2,106,047 2,107,804 1,827,554 1,827,609
Short-term borrowings 130,870 130,870 75,582 75,582
FHLB borrowings 142,695 142,781 132,631 132,553
</TABLE>
<TABLE>
<CAPTION>
(In thousands) December 31, 1997 December 31, 1996
------------------------- -------------------------
Notional Fair Notional Fair
Amount Value Amount Value
-------- ------- -------- -------
<S><C>
Off-Balance Sheet:
Forward contracts related to mortgage
banking operations $ 1,425 $ 1,426 6,000 6,022
</TABLE>
Note O--Stock Split
In November 1997, United's Board of Directors approved a two-for-one stock split
effected in the form of a 100% stock dividend to be distributed on March 27,
1998, to shareholders of record as of March 13, 1998. The change in capital
structure due to the dividend has been given retroactive effect in the December
31, 1997 balance sheet and all references to shares and per share data have been
retroactively restated for the effect of the 100% stock dividend.
110
<PAGE>
Notes to Consolidated Financial Statements
Note P--Quarterly Financial Data (Unaudited)
Quarterly financial data for 1997 and 1996 is summarized below:
<TABLE>
<CAPTION>
(Dollars in thousands except per share data) 1st Quarter 2nd Quarter 3rd Quarter 4th Quarter
----------- ----------- ----------- -----------
<S><C>
1997
Interest income $44,300 $45,345 $48,825 $51,782
Interest expense 19,158 19,948 21,953 23,440
Net interest income 25,142 25,397 26,872 28,342
Provision for loan losses 600 550 1,000 950
Income from mortgage
banking operations 294 313 1,858 670
Other noninterest income 3,788 3,889 4,326 4,594
Noninterest expense 13,627 13,542 16,263 16,517
Income taxes 4,949 5,387 5,448 5,713
Net income 10,048 10,120 10,345 10,426
Per share data:
Average shares outstanding (000s):
Basic 30,071 29,898 29,906 29,960
Diluted 30,325 30,188 30,295 30,348
Net income per share: (1)
Basic $0.33 $0.34 $0.35 $0.35
Diluted $0.33 $0.34 $0.34 $0.34
Dividends per share $0.16 $0.17 $0.17 $0.18
1996
Interest income $42,188 $41,527 $44,609 $44,034
Interest expense 17,697 17,436 18,865 19,187
Net interest income 24,491 24,091 25,744 24,847
Provision for loan losses 611 949 600 450
Income (loss) from mortgage
banking operations 58 (1,963) 802 672
Other noninterest income 3,523 3,691 3,753 3,653
Noninterest expense 14,812 18,192 16,540 14,005
Income taxes (2) 4,560 5,414 1,936 4,781
Net income 8,089 1,264 11,223 9,936
Per share data:
Average shares outstanding (000s):
Basic 30,293 30,293 30,303 30,237
Diluted 30,436 30,445 30,459 30,426
Net income per share: (1)
Basic $0.27 $0.04 $0.37 $0.33
Diluted $0.27 $0.04 $0.37 $0.33
Dividends per share $0.15 $0.15 $0.16 $0.16
</TABLE>
(1) Earnings per share amounts have been restated to comply with SFAS No. 128.
(2) In the second quarter of 1996, United recorded additional income tax expense
of $3,086 due to the recapture of Eagle's bad debt reserve into taxable income.
However, as a result of legislation enacted during the third quarter of 1996,
United was relieved of the liability.
111
<PAGE>
Selected Financial Data
<TABLE>
<CAPTION>
(Dollars in thousands except per share data) Five Year Summary
------------------------------------------------------------------
1997 1996 1995 1994 1993
-------- -------- -------- -------- --------
<S><C>
Summary of Operations:
Total interest income $190,252 $172,358 $165,815 $147,637 $140,624
Total interest expense 84,499 73,185 70,167 55,672 55,037
Net interest income 105,753 99,173 95,648 91,965 85,587
Provision for loan losses 3,100 2,610 2,320 2,202 4,830
Other income 19,732 14,189 14,752 12,238 14,300
Other expense 59,949 63,549 57,481 55,908 56,107
Income taxes 21,497 16,691 17,782 15,709 12,482
Income before cumulative
effect of accounting change 40,939 30,512 32,817 30,384 26,468
Net income 40,939 30,512 32,817 30,384 27,797
Cash dividends (2) 20,344 17,847 13,817 12,604 10,918
Per common share: (1)
Income before cumulative effect of
accounting change:
Basic $1.37 $1.01 $1.10 $1.01 $0.88
Diluted 1.35 1.00 1.09 1.00 0.88
Net income:
Basic $1.37 $1.01 $1.10 $1.01 $0.92
Diluted 1.35 1.00 1.09 1.00 0.92
Cash dividends (2) 0.68 0.62 0.59 0.53 0.48
Book value per share 9.33 8.57 8.23 7.55 7.11
Selected Ratios:
Return on average
shareholders' equity 15.28% 11.98% 13.86% 13.67% 13.41%
Return on average assets 1.68% 1.35% 1.52% 1.44% 1.39%
Dividend payout ratio (2) 49.69% 58.49% 49.21% 50.61% 50.30%
Selected Balance Sheet Data:
Average assets $2,433,421 $2,263,428 $2,162,760 $2,107,476 $2,006,875
Investment securities 453,162 332,331 321,019 372,069 439,699
Total loans 2,060,487 1,847,605 1,732,986 1,652,275 1,462,574
Total assets 2,699,790 2,326,877 2,210,230 2,170,340 2,035,452
Total deposits 2,106,047 1,827,554 1,774,599 1,714,190 1,699,131
Long-term borrowings 3,695 25,621 34,497 84,374 32,564
Total borrowings and other liabilities 314,305 240,809 186,397 230,516 122,274
Shareholders' equity 279,438 258,514 249,234 225,634 214,047
</TABLE>
(1) All references to shares and per share data have been retroactively restated
for the effect of a two-for-one stock split effected in the form of a 100% stock
dividend distributed on March 27, 1998, to shareholders of record as of March
13, 1998.
(2) Cash dividends are the amounts declared by United and do not include cash
dividends of acquired subsidiaries prior to the dates of consummation.
112
<PAGE>
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, unless
otherwise indicated.
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 broad overview of the financial condition and results of
operations is not intended to replace the more detailed discussion which is
presented under specific headings on the following pages.
1997 Compared to 1996
Overview
In November 1997, United's Board of Directors approved a two-for-one stock split
effected in the form of a 100% stock dividend that was distributed on March 27,
1998, to shareholders of record as of March 13, 1998. The change in capital
structure due to the dividend has been given retroactive effect in the December
31, 1997, balance sheet and all references to shares and per share data have
been retroactively restated for the effect of the dividend.
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 following
discussion includes the financial position and results of operations of Patriot
from the effective merger date forward. At the time of consummation, Patriot had
assets of approximately $211 million, securities available for sale of $37
million, loans, net of unearned income, of $135 million, other assets of $34
million (including $26 million of goodwill), deposits of $154 million and other
liabilities of $57 million, all of which reflected purchase accounting
adjustments.
113
<PAGE>
Earnings Summary
For the year ended December 31, 1997, net income increased 34.2% to $40,939,000.
Net income per share of $1.35 for the year increased 35.0% from $1.00 in 1996.
Dividends per share increased 9.7% from $0.62 in 1996 to a record level of $0.68
per share in 1997. This was the twenty-fourth consecutive year of dividend
increases to shareholders.
United's return on average assets of 1.68% for 1997 compared very favorably with
regional and national peer grouping information provided by Wheat, First
Securities, Inc. of 1.32% and 1.18%. United's return on average shareholders'
equity of 15.28%, as compared with regional and national peer group information
of 16.20% and 15.58%, is indicative of United's very strong capital levels.
United, one of the nation's most profitable regional banking companies, has a
strong capital position, and is well positioned to take advantage of future
growth opportunities.
United has strong core earnings driven by a net interest margin of 4.76% for
1997. Net interest income increased by $6.58 million or 6.63% for the year ended
December 31, 1997 as compared to the same period for 1996. The provision for
loan losses of $3.10 million increased $0.49 million or 18.77% when compared to
the year ended December 31, 1996. Noninterest income, including income from
mortgage banking operations, increased $5.54 million or 39.07% for 1997 when
compared to 1996. Noninterest expenses decreased $3.60 million or 5.66% for 1997
compared to the same period in 1996. The effective tax rate for the year ended
December 31, 1997 approximated 34.43% compared to 35.36% for 1996.
Financial Condition Summary
Total assets were $2.70 billion at December 31, 1997, up $372.91 million or
16.0% compared with year-end 1996. Loans, net of unearned income, reflected a
$212.88 million increase from 1996 to 1997 due to the acquisition of Patriot and
internal growth. Investment securities reflected a $120.83 million increase for
1997 as compared with year-end 1996 as a result of United's securitization of
approximately $87 million of fixed rate mortgage loans during 1997. All other
assets increased $41.05 million. Approximately $26 million of the increase was
due to goodwill associated with the third quarter acquisition of Patriot.
Total deposits grew $278.49 million or 15.2% from year-end 1996 due to United's
offering of new deposit products introduced in late 1996 and the acquisition of
Patriot during the third quarter of 1997. Since December 31, 1996, United has
realized an increase of $221.61 million in interest-bearing deposits and a
$56.88 million increase in noninterest-bearing deposits. United's short-term
borrowings increased $55.29 million and its FHLB borrowings increased $10.06
million as United utilized these sources of funds to fund the cash acquisition
of Patriot and to help fund loan growth. Accrued expenses and other liabilities
increased $8.14 million or 25.0% since year-end 1996 as a result of the
acquisition of Patriot and higher merger expenses.
Shareholders' equity increased $20.92 million or 8.1% from December 31, 1996 to
December 31, 1997. United continues to maintain an appropriate balance between
capital adequacy and return to shareholders. At December 31, 1997, United's
regulatory capital ratios, including those of its bank subsidiaries, exceeded
the levels established for well-capitalized institutions.
The following discussion explains in more detail the results of operations and
changes in financial condition by major category.
114
<PAGE>
Management's Discussion and Analysis of Financial Condition and Results of
Operations
Net Interest Income
Net interest income represents the primary component of United's earnings. It is
the difference between interest and fee income from earning assets and interest
expense incurred to fund these assets. Net interest income is impacted by
changes in the volume and mix of interest-earning assets and interest-bearing
liabilities, as well as changes in market interest rates. Such changes, and
their impact on net interest income in 1997, are summarized below.
For the years ended December 31, 1997 and 1996, net interest income approximated
$105,753,000 and $99,173,000, respectively. On a tax-equivalent basis the net
interest margin was strong at 4.76% in 1997 and 4.85% in 1996 which are well
above national peer group margins of 4.06% in 1997 and 4.18% in 1996.
Total interest income of $190,252,000 increased 10.4% in 1997 over 1996 as a
result of higher volumes of interest-earning assets and slightly higher yields.
Higher average loan volumes of approximately $119 million, resulting primarily
from the acquisition of Patriot, contributed to the increase. From December 31,
1996 to December 31, 1997, United experienced a moderate increase in consumer
loans of 5.4%, while commercial loans showed an increase of 31.5%. Mortgage
loans decreased slightly from 1996 by 1.9% due mainly to the sale of real estate
loans by United's mortgage banking subsidiary.
Total interest expense increased $11,314,000 or 15.5% in 1997 compared to 1996.
This increase was attributed primarily to United's acquisition of Patriot,
competitive pricing of interest-bearing deposits in its markets and continued
change in the retail deposit mix as customers shifted funds into products
offering higher yields. United's average interest-bearing deposits increased by
$138,647,000 or 9.0% in 1997, while its average FHLB advances decreased
$16,628,000 or 16.8% and average short-term borrowings increased $30,275,000 or
34.8%. The average cost of funds, which increased from 4.25% in 1996 to 4.51% in
1997, reflected the general upward trend in United's market interest rates
during 1997 due to competitive pressures.
Provision for Loan Losses
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 of 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. See Note D to the Consolidated Financial
Statements for a discussion of concentrations of credit risk.
Nonperforming loans were $15,498,000 at December 31, 1997 and $10,192,000 at
December 31, 1996, an increase of 52.1%. This increase can be attributed to
United's acquisition of approximately $2.5 million of nonperforming loans from
the Patriot transaction in the third quarter of 1997 and decreasing consumer
credit quality trends. Loans past due 90 days or more increased $5,511,000 or
94.5% during 1997; nonaccrual loans decreased $205,000 or 4.7% since year-end
1996. Nonperforming loans represented 0.57% of total assets at the end of 1997,
as compared to 0.41% for United's national peer group.
At year-end 1997 and 1996, the allowance for loan losses was 1.20% and 1.21% of
total loans, net of unearned income. At December 31, 1997 and 1996, the ratio of
the allowance for loan losses to nonperforming loans was 159.9% and 218.6%,
respectively.
Management believes that the allowance for loan losses of $24,786,000 at
December 31, 1997, is adequate to provide for potential losses on existing loans
based on information currently available.
115
<PAGE>
For the years ended December 31, 1997 and 1996, the provision for loan losses
was $3,100,000 and $2,610,000, respectively. The increase in the provision for
1997 when compared to 1996 was to conform the allowance for loan losses on
Patriot's loan portfolio with United's loan valuation policies and in response
to growth in the portfolio. The provision for loan losses charged to operations
is based on management's evaluation of individual credits, past loan loss
experience, and other factors which, in management's judgment, deserve
recognition in estimating possible loan losses. Such other factors considered by
management include growth and composition of the loan portfolio, known
deterioration in certain classes of loans or collateral, trends in delinquencies
and current economic conditions.
Total net charge-offs were $3,289,000 in 1997 and $2,872,000 in 1996, which
represents 0.17% and 0.16% of average loans for the respective years. United's
ratio of net charge-offs to average loans was better than its peer group's ratio
of 0.49% in 1997 and 0.23% in 1996.
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.
At December 31, 1997, impaired loans were $12,602,000, an increase of $2,285,000
or 22.1% from the $10,317,000 in impaired loans at December 31, 1996, due
primarily to the acquisition of Patriot in 1997. For further details, see Note D
to the Consolidated Financial Statements.
Other Income
Noninterest income has been and will continue to be an important factor for
improving United's profitability. Accordingly, management continues to evaluate
areas where noninterest income can be enhanced. Noninterest income increased
$5,543,000 or 39.1% for 1997 when compared to 1996. Other income consists of all
revenues which are not included in interest and fee income related to earning
assets. The increase in noninterest income for 1997 was primarily the result of
$3,135,000 of income generated from the sale and servicing of loans by United's
mortgage banking subsidiary as compared to a loss of $431,000 during the
subsidiary's first year of operation in 1996. Contributing to this increase in
income from the mortgage banking operations have been fees generated from the
$87 million loan securitization in 1997.
Service charges and fees from customer accounts increased $1,202,000 or 10.6% in
1997. This income includes charges and fees related to various banking services
provided by United. The increase was primarily due to a combination of increased
fees in bankcard accounts and an increased fee structure for sales of checking
related products.
Trust income increased $383,000 or 12.0% in 1997 due to an increased volume of
trust business.
Other Expense
Just as management continues to evaluate areas where noninterest income can be
enhanced, it strives to improve the efficiency of its operations and thus reduce
operating costs. United's cost control efforts have been very successful
resulting in an efficiency ratio of 46.5%, which is well below the 57.6%
reported by United's national peer group banks and its immediate in-market
competitors.
Other expense includes all items of expense other than interest expense, the
provision for loan losses and income tax expense. In total, other expense
decreased $3,600,000 or 5.7%.
116
<PAGE>
Management's Discussion and Analysis of Financial
Condition and Results of Operations
Salaries and employee benefits expense decreased $1,359,000 or 4.7% in 1997 as
compared to 1996. The higher salaries and benefits costs for 1996 were
attributable to severance and benefit pay of displaced Eagle executive officers,
employment contracts and employees at locations where United consolidated
certain branches. As of December 31, 1997 and 1996, United employed 972 and 893
full-time equivalent employees, respectively.
Net occupancy expense in 1997 slightly exceeded 1996 levels by $167,000 or 2.8%
primarily due to the acquisition of Patriot, decreased rental income and an
increase in building rental expense and higher depreciation and real property
taxes for company-owned buildings. The overall changes in net occupancy expense
for 1997 were insignificant with no material increase or decrease in any one
expense category.
Remaining other expense decreased $2,408,000 or 8.4% in 1997 compared to 1996.
This decrease in other expense for 1997 related primarily to decreases in
deposit insurance expense due to the 1996 SAIF assessment.
Income Taxes
For the year ended December 31, 1997, income tax expense approximated
$21,497,000 compared to $16,691,000 for 1996. The increase of $4,806,000 or
28.8% for 1997 when compared to 1996 was primarily the result of increased
pretax income in 1997. United's effective tax rate approximated 34.4% in 1997
and 35.4% in 1996. This decrease was due to effective tax planning strategies.
At December 31, 1997, gross deferred tax assets totaled approximately $14.0
million. The allowance for loan losses and various accrued liabilities represent
the most significant temporary differences.
Quarterly Results
The first and second quarters of 1997 showed large increases in earnings in
comparison to those same two quarters of 1996 as United returned to more normal
levels of core income and expenses after the Eagle merger. The 1996 results
contained significant reengineering and merger-related and one-time special
charges associated with the Eagle merger which distorted United's true financial
performance.
In the third quarter of 1997, United reported a decrease in earnings from the
same period in 1996. Third quarter 1996 earnings were higher as a result of
legislation which relieved United of $3,086,000 in income tax expense that
related to the bad debt recapture associated with the Eagle merger.
Net income for the fourth quarter of 1997 was $10,426,000, an increase of 4.9%
from the $9,936,000 earned in the fourth quarter of 1996. On a per share basis,
fourth quarter earnings were $0.34 per share in 1997 and $0.33 per share in
1996. The increase in earnings was due primarily to an increase in net interest
income.
Additional quarterly financial data for 1997 and 1996 may be found in Note P to
the Consolidated Financial Statements.
The Effect of Inflation
United's income statements generally reflect the effects of inflation. Since
interest rates, loan demand and deposit levels are impacted by inflation, the
resulting changes in the interest sensitive assets and liabilities are included
in net interest income. Similarly, operating expenses such as salaries, rents
and maintenance include changing prices resulting from inflation. One item that
would not reflect inflationary changes is depreciation expense. Subsequent to
the acquisition of depreciable assets, inflation causes price levels to rise;
therefore, historically presented dollar values do not reflect this inflationary
condition. With inflation levels at relatively low levels and monetary and
fiscal policies being implemented to keep the inflation rate increases within an
acceptable range, management expects the impact of inflation would continue to
be minimal in the near future.
117
<PAGE>
Market Risk
The objective of United's Asset/Liability Management function is to maintain
consistent growth in net interest income within United's policy guidelines. This
objective is accomplished through the management of balance sheet liquidity and
interest rate risk exposures due to changes in economic condition, interest rate
levels and customer preferences.
Management considers interest rate risk to be United's most significant market
risk. Interest rate risk is the exposure to adverse changes in the net interest
income of United as a result of changes in interest rates. Consistency in
United's earnings is largely dependent on the effective management of interest
rate risk.
United employs a variety of measurement techniques to identify and manage its
exposure to changing interest rates. One such technique utilizes an earnings
simulation model to analyze net interest income sensitivity to movements in
interest rates. The model is based on actual cash flows and repricing
characteristics for on and off-balance sheet instruments and incorporates
market-based assumptions regarding the impact of changing interest rates on the
prepayment rate of certain assets and liabilities. The model also includes
executive management projections for activity levels in product lines offered by
United. Assumptions based on the historical behavior of deposit rates and
balances in relation to changes in interest rates are also incorporated into the
model. These assumptions are inherently uncertain and, as a result, the model
cannot precisely measure net interest income or precisely predict the impact of
fluctuations in interest rates on net interest income. Actual results will
differ from simulated results due to timing, magnitude and frequency of interest
rate changes as well as changes in market conditions and management strategies.
Interest sensitive assets and liabilities are defined as those assets or
liabilities that mature or are repriced within a designated time-frame. The
principal function of interest rate risk management is to maintain an
appropriate relationship between those assets and liabilities that are sensitive
to changing market interest rates. 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.
The difference between rate sensitive assets and rate sensitive liabilities for
specified periods of time is known as the "GAP."
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 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 $63,198,000 or 2.50% of the
cumulative gap to related earning assets.
To aid in interest rate management, United's lead bank, UNB, is a member of the
Federal Home Loan Bank of Pittsburgh (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.
118
<PAGE>
Management's Discussion and Analysis of Financial
Condition and Results of Operations
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 December 31, 1997:
Change in
Interest Rates Percentage Change in
(basis points) Net Interest Income
-------------- --------------------
+200 1.94%
-200 -2.70%
Given an immediate, sustained 200 basis point upward shock to the yield curve
used in the simulation model, it is estimated net interest income for United
would increase by 1.94% over one year. A 200 basis point immediate, sustained
downward shock in the yield curve would decrease net interest income by an
estimated 2.70% over one year. All of these estimated changes in net interest
income are within the policy guidelines established by the Board of Directors.
119
<PAGE>
The following table shows the interest rate sensitivity GAP as of December 31,
1997:
<TABLE>
<CAPTION>
Interest Rate Sensitivity Gap
Days
--------------------------------- Total 1 - 5 Over 5
(Dollars in thousands) 0 - 90 91 - 180 181 - 365 One Year Years Years Total
-------- -------- --------- -------- --------- -------- ----------
<S><C>
Assets
Interest-Earning Assets:
Federal funds sold and
securities purchased
under agreements to
resell and other short-
term investments $ 9,725 $ 9,725 $ 9,725
Investment and marketable
equity securities:
Taxable 19,990 $ 3,460 $ 1,818 25,268 $ 139,439 $255,805 420,512
Tax-exempt 1,090 3,196 4,286 9,158 19,206 32,650
Loans, net of unearned
income 666,093 165,950 307,717 1,139,760 615,057 305,670 2,060,487
--------- --------- --------- ---------- --------- -------- ----------
Total Interest-Earning
Assets $ 695,808 $ 170,500 $ 312,731 $1,179,039 $ 763,654 $580,681 $2,523,374
========= ========= ========= ========== ========= ======== ==========
Liabilities
Interest-Bearing Funds:
Savings and NOW
accounts $ 762,358 $ 762,358 $ 762,358
Time deposits of
$100,000 & over 47,974 $ 21,626 $ 59,444 129,044 $ 58,069 $ 552 187,665
Other time deposits 178,376 165,038 199,569 542,983 293,338 1,773 838,094
Federal funds purchased,
repurchase agreements
and other short-term
borrowing 130,870 130,870 130,870
FHLB advances 139,000 139,000 3,695 142,695
---------- --------- --------- ---------- --------- -------- ----------
Total Interest-Bearing
Funds $1,258,578 $ 186,664 $ 259,013 $1,704,255 $ 351,407 $ 6,020 $2,061,682
========== ========= ========= ========== ========= ======== ==========
Interest Sensitivity Gap $ (562,770) $ (16,164) $ 53,718 $ (525,216) $ 412,247 $574,661 $ 461,692
========== ========= ========= ========== ========= ======== ==========
Cumulative Gap $ (562,770) $(578,934) $(525,216) $ (525,216) $(112,969) $461,692 $ 461,692
========== ========= ========= ========== ========= ======== ==========
Cumulative Gap as
a Percentage of Total
Earning Assets (22.30%) (22.94%) (20.81%) (20.81%) (4.48%) 18.30% 18.30%
Management
Adjustments $ 735,518 $ (49,059) $ (98,045) $ 588,414 $(588,414) $ 0
Off-Balance
Sheet Activities
---------- --------- --------- ---------- --------- -------- ----------
Cumulative Management
Adjusted Gap and Off-
Balance Sheet Activities $ 172,748 $ 107,525 $ 63,198 $ 63,198 $(112,969) $461,692 $ 461,692
========== ========= ========= ========== ========= ======== ==========
Cumulative Management
Adjusted Gap and Off-
Balance Sheet Activities
as a Percentage of Total
Earning Assets 6.85% 4.26% 2.50% 2.50% (4.48%) 18.30% 18.30%
========== ========= ========= ========== ========= ======== ==========
</TABLE>
120
<PAGE>
Management's Discussion and Analysis of Financial
Condition and Results of Operations
Liquidity and Capital Resources
In the opinion of management, United maintains 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 as well as advances from the
FHLB. Repurchase agreements represent funds that are generally 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 and maturing loans 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
borrowings 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 FHLB
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 secured by bank
premises or stock of United's subsidiaries. United has no intention at this time
of utilizing any long-term funding sources other than FHLB advances and
long-term certificates of deposit.
Cash flows from operations in 1997 of $32,642,000 were 50.1% lower than the
$66,449,000 in 1996 primarily as a result of an increase of approximately
$28,594,000 of excess originations of loans for sale over proceeds from the sale
of loans. In 1997, investing activities resulted in a use of cash of
$180,573,000 as compared to 1996 in which investing activities resulted in a use
of cash of $160,168,000. The primary reason for the increase in the use of cash
for investing activities was that the net difference of security purchases over
proceeds from sales, maturities and calls of securities, increased from a net
use of $11,702,000 in 1996 to a net use of $76,400,000 in 1997 or an increase of
$64,698,000. Additionally, as a use of cash for investing activities,
approximately $28,929,000 of net cash was paid by United during 1997 to acquire
all of the outstanding shares of Patriot. These increases in uses of cash for
investing activities were partially offset by a decline in net loan originations
of $73,303,000 in 1997 as compared to 1996. Financing activities resulted in a
source of cash in 1997 of $148,583,000 primarily due to an increase in deposits
of $122,735,000 and an increase in net borrowings from the FHLB of Pittsburgh
and other short-term borrowings of $9,804,000 and $40,071,000, respectively.
These sources of cash for financing activities were partially offset by payment
of $19,831,000 of cash dividends to shareholders and $5,754,000 for the purchase
of treasury stock for use in United's employee benefit plans. See the
Consolidated Statement of Cash Flows in the Consolidated Financial Statements.
United anticipates no problems in its ability to service its obligations over
the next 12 months. 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 to it. See Note G, Notes to Consolidated
Financial Statements.
121
<PAGE>
Management is not aware of any current recommendations by regulatory authorities
which, if implemented, would have a material effect on liquidity, capital
resources or operations.
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 should help to protect net interest income against
fluctuations in interest rates.
United also seeks to maintain a proper relationship between capital and total
assets to support growth and sustain earnings. United's average equity to
average asset ratio was 11.01% in 1997 and 11.25% in 1996. United's risk-based
capital ratio was 13.46% in 1997 and 16.54% in 1996 which are both significantly
higher than the minimum regulatory requirements. United's Tier 1 capital and
leverage ratios of 12.21% and 9.21%, respectively, at December 31, 1997, are
also strong relative to its peers and are well above regulatory minimums to be
classified as a "well capitalized" institution. See Note M, Notes to
Consolidated Financial Statements.
Commitments
The following table indicates the outstanding loan commitments of United in the
categories stated:
December 31
1997
------------
Lines of credit authorized, but unused $455,767,000
Letters of credit 36,243,000
------------
$492,010,000
============
Past experience has shown that, of the foregoing commitments, approximately
12-15% can reasonably be expected to be funded within a one year period. For
more information, see Note J to the Consolidated Financial Statements.
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.
Based on a recent assessment, United determined that it will be required to
modify or replace portions of its software so that its computer systems will
function properly with respect to dates in the year 2000 and thereafter. United
currently believes that with modifications to existing software and conversions
to new software, the Year 2000 Issue will not pose significant operational
problems for its computer systems. However, if such modifications and
conversions 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
122
<PAGE>
Management's Discussion and Analysis of Financial
Condition and Results of Operations
will be timely converted or that a failure to convert by another company, or a
conversion that is incompatible with United's systems and applications, would
not have a material adverse effect on United.
United will utilize both internal and external resources to reprogram, or
replace, and test the Year 2000 modifications. United anticipates completing the
Year 2000 project within one year but not later than December 31, 1998, which is
prior to any anticipated impact on United's operating systems. The total cost of
the Year 2000 project is estimated at $2.0 million and is being funded through
cash flows, which will be expensed as incurred over the next two years. The Year
2000 costs are not expected to have a material adverse effect on United's
results of operations or cash flows. To date United has incurred and expensed
approximately $100,000 related to the assessment of, and preliminary efforts in
connection with, the Year 2000 project and the development of a Year 2000 plan
of operation.
The costs of the Year 2000 project and the date on which United believes it will
complete the Year 2000 modifications are based on management's best estimates,
which were derived utilizing numerous assumptions of future events, including
the continued availability of certain resources, third party vendor modification
plans and other factors. There can be no guarantee, however, that these
estimates will be achieved and actual results could differ materially from those
anticipated. Specific factors that might cause such material differences
include, but are not limited to, the availability and cost of trained
programming personnel, the ability to locate and correct all relevant computer
coding, and similar uncertainties.
1996 Compared to 1995
The following Earnings Summary 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 the specific headings below.
Earnings Summary
For the year ended December 31, 1996, net income decreased 7.0% to $30,512,000.
Net income per share of $1.00 for the year decreased 8.3% from $1.09 in 1995.
Dividends per share increased 6.0% from $0.59 in 1995 to a record level of $0.62
per share in 1996. This was the twenty-third consecutive year of dividend
increases to shareholders.
During 1996, United recorded approximately $6,845,000 of merger-related and
one-time special charges associated with the Eagle merger. These charges
included, among other items, severance pay and benefits for displaced Eagle
officers and employees, costs to consolidate duplicate facilities, employee
training, new product promotions, computer conversions and additional deposit
insurance as a result of the Savings Association Insurance Fund ("SAIF")
recapitalization legislation.
Despite these significant one-time expenses, United's return on average assets
of 1.35% compared very favorably with regional and national peer grouping
information provided by Wheat, First Securities, Inc. of 1.19% and 1.18%.
United's return on average shareholders' equity of 11.98%, as compared with
regional and national peer group information of 15.56% and 15.14%, is indicative
of United's very strong capital levels.
The following discussion explains in more detail the results of operations and
changes in financial condition by major category.
123
<PAGE>
Net Interest Income
For the years ended December 31, 1996 and 1995, net interest income approximated
$99,173,000 and $95,648,000, respectively. On a tax-equivalent basis the net
interest margin was strong at 4.85% in 1996 and 4.90% in 1995.
Total interest income of $172,358,000 increased 4.0% in 1996 over 1995 as a
result of higher volumes of interest-earning assets. Higher average loan volumes
of approximately $113 million, resulting primarily from an acquisition,
contributed to the increase. From December 31, 1995 to December 31, 1996, United
experienced a moderate increase in consumer loans of 1.1%, while commercial
loans and mortgage loans showed increases of 13.7% and 6.4%, respectively.
Total interest expense increased $3,018,000 or 4.3% in 1996. This increase was
attributed primarily to United's competitive pricing of interest-bearing
deposits in its markets and continued change in the retail deposit mix as
customers shifted funds into products offering higher yields. United's average
interest-bearing deposits increased by $25,761,000 or 1.7% in 1996, while its
average FHLB advances increased $29,604,000 or 42.6% and average short-term
borrowings increased $3,999,000 or 4.8%. United made greater use of FHLB
advances as the cost of those advances declined from 5.93% in 1995 to 5.54% in
1996. United utilized FHLB advances during 1996 to fund the growth in the
mortgage loan portfolio. The average cost of funds, which increased from 4.22%
in 1995 to 4.25% in 1996, reflected the general upward trend in market interest
rates during 1996.
Provision for Loan Losses
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.
Nonperforming loans were $10,192,000 at December 31, 1996 and $10,990,000 at
December 31, 1995, a decrease of 7.3%. The level of nonperforming assets
decreased as a result of the charge-off of certain large balance commercial
credits. The components of nonperforming loans include nonaccrual loans and
loans that are contractually past due 90 days or more as to interest or
principal, but have not been placed on nonaccrual. Loans past due 90 days or
more increased $1,139,000 or 24.3% during 1996; nonaccrual loans decreased
$1,937,000 or 30.8% since year-end 1995. Nonperforming loans represented 0.44%
of total assets at the end of 1996, as compared to 0.52% for United's national
peer group. At year-end 1996 and 1995, the allowance for loan losses was 1.21%
and 1.30% of total loans, net of unearned income. At December 31, 1996 and 1995,
the ratio of the allowance for loan losses to nonperforming loans was 218.6% and
205.1%, respectively.
For the years ended December 31, 1996 and 1995, the provision for loan losses
was $2,610,000 and $2,320,000, respectively. The increase in the provision for
1996 when compared to 1995 was to conform the allowance for loan losses on
Eagle's loan portfolio with United's loan valuation policies and in response to
growth in the portfolio.
Total net charge-offs were $2,872,000 in 1996 and $3,096,000 in 1995, which
represents 0.16% and 0.18% of average loans for the respective years. United's
ratio of net charge-offs to average loans was better than its peer group's ratio
of 0.23% in 1996 and was comparable to its peer group's ratio of 0.19% in 1995.
At December 31, 1996, impaired loans were $10,317,000, an increase of $1,525,000
or 17.4% from the $8,792,000 in impaired loans at December 31, 1995.
Other Income
Noninterest income decreased $563,000 or 3.8% for 1996 when compared to 1995.
Other income consists of all revenues which are not included in interest and fee
income related to earning assets. The decrease in noninterest
124
<PAGE>
Management's Discussion and Analysis of Financial
Condition and Results of Operations
income for 1996 was primarily the result of the approximate $2,000,000 loss on
loans sold in United's newly formed mortgage banking subsidiary. These sales
were necessary to strategically align the mortgage banking operations with
United's interest rate risk position. Excluding gains and losses on sales of
securities and mortgage banking activities, noninterest income increased
$978,000 or 7.1% in 1996 primarily as a result of increased service charges and
fees from customer accounts.
Trust income increased $275,000 or 9.5% in 1996 due to repricing of services and
an increased volume of trust business.
Service charges, commissions and fees increased by $1,396,000 or 14.1% in 1996.
The increase was primarily attributable to conforming the former Eagle offices'
service charge and fee structures to United's and increased return check charges
and bankcard fees. This income includes charges and fees related to various
banking services provided by United. The increase was primarily due to a
combination of increased fees in bankcard accounts and an increased fee
structure for sales of checking related products.
Securities transactions resulted in a net loss of $98,000 in 1996. The proceeds
from these sales of approximately $17 million were reinvested in similar
securities yielding a higher rate of return. There were no securities sales in
1995.
Other Expense
Other expense includes all items of expense other than interest expense, the
provision for loan losses and income tax expense. In total, other expense
increased $6,068,000 or 10.6%. The increase was primarily due to the one-time
and merger-related charges recorded in the first and second quarters and the
additional third quarter deposit insurance expense as a result of the SAIF
recapitalization legislation.
Salaries and employee benefits expense increased $2,887,000 or 11.2% in 1996.
Nearly all of the increase for 1996 was attributable to severance and benefit
pay of displaced Eagle executive officers, employment contracts and employees at
locations where United consolidated certain branches. As of December 31, 1996
and 1995, United employed 893 and 946 full-time equivalent employees,
respectively.
Net occupancy expense in 1996 exceeded 1995 levels by $319,000 or 5.5% primarily
due to decreased rental income and an increase in real property repairs and
utilities expense. The overall changes in net occupancy expense for 1996 were
insignificant with no material increase or decrease in any one expense category.
Remaining other expense increased $2,862,000 or 11.1% in 1996 compared to 1995.
The increase in other expense for 1996 related primarily to the additional
deposit insurance expense as a result of the SAIF recapitalization legislation,
higher insurance expense, advertising, consulting and legal expense, losses on
sales and write-downs of assets, EDP fees, office supplies, and goodwill
amortization. Included in these increased costs was $1,483,000 of one-time
charges which related to reengineering costs incurred to improve efficiency,
productivity and strengthen United's competitiveness. Additionally, the added
expenses of a purchase accounting acquisition included in 1996, but not in the
first ten months of 1995, have contributed to the overall increase in
noninterest expense.
Income Taxes
For the year ended December 31, 1996, income taxes approximated $16,691,000
compared to $17,782,000 for 1995. The decrease of $1,091,000 or 6.7% for 1996
when compared to 1995 was primarily the result of decreased pretax income.
United's effective tax rates were approximately 35% for 1996 and 1995.
125
Exhibit 21
SUBSIDIARIES OF THE REGISTRANT
TITLE STATE OF INCORPORATION
- ----- ----------------------
UBC Holding Company, Inc. West Virginia
United National Bank West Virginia
United Bank Virginia
United Venture Fund, Inc. West Virginia
UB Holding Company, Inc. West Virginia
126
Exhibit 23
CONSENT OF INDEPENDENT AUDITORS
We consent to the incorporation by reference in this Annual Report
(Form 10-K) of United Bankshares, Inc. and Subsidiaries of our report dated
February 27, 1998, included in the 1997 Annual Report to Shareholders of United
Bankshares, Inc. and Subsidiaries
We also consent to the incorporation by reference in the Registration
Statements pertaining to the Incentive Stock Option Plan (Form S-8, No.
33-22941) and the Savings and Stock Investment Plan (Form S-8, No. 33-32522) of
United Bankshares, Inc. of our report dated February 27, 1998, with respect to
the consolidated financial statements of United Bankshares, Inc. and
Subsidiaries incorporated by reference in the Annual Report on Form 10-K for the
year ended December 31, 1997.
/s/ ERNST & YOUNG LLP
Charleston, West Virginia
March 27, 1998
127
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