UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------------------------------
FORM 10-Q
Quarterly Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
For Quarter Ended MARCH 31, 1999
Commission File Number: 0-13322
UNITED BANKSHARES, INC.
(Exact name of registrant as specified in its charter)
WEST VIRGINIA 55-0641179
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
300 UNITED CENTER
500 VIRGINIA STREET, EAST
CHARLESTON, WEST VIRGINIA 25301
------------------------- -----
(Address of Principal Executive Offices) Zip Code
Registrant's Telephone Number, including Area Code: (304) 424-8704
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
YES X No
----- -----
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Class- Common Stock, $2.50 Par Value; 43,329,521 shares outstanding as of APRIL
30, 1999.
<PAGE>
UNITED BANKSHARES, INC. AND SUBSIDIARIES
FORM 10-Q
TABLE OF CONTENTS
<TABLE>
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Page
<S><C>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets (Unaudited)
March 31, 1999 and December 31, 1998 .................................................................6
Consolidated Statements of Income (Unaudited) for the
Three Months Ended March 31, 1999 and 1998 ...........................................................7
Consolidated Statement of Changes in Shareholders' Equity
(Unaudited) for the Three Months Ended March 31, 1999 ................................................8
Condensed Consolidated Statements of Cash Flows (Unaudited)
for the Three Months Ended March 31, 1999 and 1998 ...................................................9
Notes to Consolidated Financial Statements ..........................................................10
Information required by Item 303 of Regulation S-K
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations...........................................................17
PART II. OTHER INFORMATION
Item 1. Legal Proceedings..................................................................Not Applicable
Item 2. Changes in Securities..............................................................Not Applicable
Item 3. Defaults Upon Senior Securities ...................................................Not Applicable
</TABLE>
2
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UNITED BANKSHARES, INC. AND SUBSIDIARIES
FORM 10-Q
TABLE OF CONTENTS--CONTINUED
<TABLE>
<CAPTION
Page
<S><C>
Item 4. Submission of Matters to a Vote
of Security Holders ..............................................................Not Applicable
Item 5. Other Information ................................................................Not Applicable
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits required by Item 601 of Regulation S-K
Exhibit 27 - Financial Data Schedule....................................................28
(b) Reports on Form 8-K
None filed during the period.
</TABLE>
3
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
UNITED BANKSHARES, INC.
(Registrant)
Date May 14, 1999 /s/ Richard M. Adams
_____________ _______________________________
Richard M. Adams, Chairman of
the Board and Chief Executive
Officer
Date May 14, 1999 /s/ Steven E. Wilson
_____________ _______________________________
Steven E. Wilson, Executive
Vice President, Treasurer,
Secretary and Chief Financial Officer
4
<PAGE>
PART I
FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS (UNAUDITED)
The March 31, 1999 and December 31, 1998, consolidated balance sheets of United
Bankshares, Inc. and Subsidiaries, and the related consolidated statements of
income for the three months ended March 31, 1999 and 1998, and the related
consolidated statement of changes in shareholders' equity for the three months
ended March 31, 1999, and the related condensed consolidated statements of cash
flows for the three months ended March 31, 1999 and 1998, and the notes to
consolidated financial statements appear on the following pages.
5
<PAGE>
CONSOLIDATED BALANCE SHEETS (UNAUDITED)
UNITED BANKSHARES, INC. AND SUBSIDIARIES
<TABLE>
<CAPTION>
(Dollars in thousands, except par value) MARCH 31 DECEMBER 31
1999 1998
----------------------------
<S><C>
ASSETS
Cash and due from banks $ 107,125 $ 124,591
Interest-bearing deposits with other banks 6,947 6,807
Federal funds sold 9,900
----------------------------
Total cash and cash equivalents 114,072 141,298
Securities available for sale at estimated fair value (amortized
cost-$1,010,766 at March 31, 1999 and $557,574 at December 31, 1,013,400 565,165
1998)
Securities held to maturity (estimated fair value-$373,448 at
March 31, 1999 and $367,353 at December 31, 1998) 370,576 362,151
Loans held for sale 365,678 720,607
Loans
Commercial, financial, and agricultural 488,584 508,601
Real estate:
Single family residential 1,089,675 1,076,277
Commercial 617,430 574,666
Construction 136,838 141,026
Other 44,376 45,290
Installment 311,994 313,464
2,688,897 2,659,324
Less: Unearned income (6,797) (6,933)
----------------------------
Loans net of unearned income 2,682,100 2,652,391
Less: Allowance for loan losses (39,039) (39,189)
----------------------------
Net loans 2,643,061 2,613,202
Bank premises and equipment 53,496 54,946
Accrued interest receivable 34,661 30,402
Other assets 81,406 80,128
----------------------------
TOTAL ASSETS $4,676,350 $4,567,899
============================
LIABILITIES
Domestic deposits:
Noninterest-bearing $ 490,687 $ 542,987
Interest-bearing 2,948,046 2,950,071
----------------------------
Total deposits 3,438,733 3,493,058
Borrowings:
Federal funds purchased 14,573 7,260
Securities sold under agreements to repurchase 264,955 236,535
Federal Home Loan Bank borrowings 457,670 345,867
Other borrowings 3,909 5,244
Accrued expenses and other liabilities 69,184 58,404
----------------------------
TOTAL LIABILITIES 4,249,024 4,146,368
SHAREHOLDERS' EQUITY
Common stock, $2.50 par value; Authorized-100,000,000 shares; issued-
43,310,100 at March 31, 1999 and 42,256,833 at December 31, 1998,
including 356 shares in treasury at March 31, 1999 and December 31,
1998, respectively 108,275 108,142
Surplus 88,734 88,353
Retained earnings 228,614 220,111
Accumulated other comprehensive income 1,712 4,934
Treasury stock, at cost (9) (9)
----------------------------
TOTAL SHAREHOLDERS' EQUITY 427,326 421,531
============================
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $4,676,350 $4,567,899
============================
</TABLE>
SEE NOTES TO CONSOLIDATED UNAUDITED FINANCIAL STATEMENTS.
6
<PAGE>
CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
UNITED BANKSHARES, INC. AND SUBSIDIARIES
<TABLE>
<CAPTION>
(Dollars in thousands, except per share data) THREE MONTHS ENDED
MARCH 31
----------------------------
1999 1998
----------------------------
<S><C>
INTEREST INCOME
Interest and fees on loans $67,651 $59,925
Interest on federal funds sold and other short-term
investments 128 465
Interest and dividends on securities:
Taxable 16,231 15,102
Exempt from federal taxes 1,494 767
----------------------------
Total interest income 85,504 76,259
INTEREST EXPENSE
Interest on deposits 31,786 30,697
Interest on short-term borrowings 2,854 2,655
Interest on Federal Home Loan Bank advances 4,893 2,883
----------------------------
Total interest expense 39,533 36,235
----------------------------
Net interest income 45,971 40,024
Provision for loan losses 764 2,080
----------------------------
Net interest income after provision for loan losses 45,207 37,944
OTHER INCOME
Income from mortgage banking operations 4,418 5,196
Service charges, commissions, and fees 4,439 4,554
Trust department income 1,358 1,009
Security gains 2,487
Other income 424 766
----------------------------
Total other income 10,639 14,012
OTHER EXPENSE
Salaries and employee benefits 15,006 15,318
Net occupancy expense 2,974 3,915
Other expense 10,841 10,462
----------------------------
Total other expense 28,821 29,695
----------------------------
Income before income taxes 27,025 22,261
Income taxes 9,864 7,840
----------------------------
Net income $17,161 $14,421
============================
Earnings per common share:
Basic $0.40 $0.34
============================
Diluted $0.39 $0.33
============================
Dividends per common share $0.20 $0.18
============================
Average outstanding shares:
Basic 43,277,765 42,397,282
Diluted 43,961,407 43,270,862
</TABLE>
SEE NOTES TO CONSOLIDATED UNAUDITED FINANCIAL STATEMENTS.
7
<PAGE>
CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY(UNAUDITED)
UNITED BANKSHARES, INC. AND SUBSIDIARIES
(Dollars in thousands, except per share data)
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31, 1999
-------------------------------------------------------------------------------------
COMMON STOCK ACCUMULATED
--------------------- OTHER TOTAL
PAR RETAINED COMPREHENSIVE TREASURY SHAREHOLDERS'
SHARES VALUE SURPLUS EARNINGS INCOME STOCK EQUITY
-------------------------------------------------------------------------------------
<S><C>
Balance at January 1, 1999 43,256,833 $ 108,142 $88,353 $220,111 $4,934 $(9) $421,531
Comprehensive income:
Net income - - - 17,161 - - 17,161
Other comprehensive income, net
of tax:
Unrealized loss on securities of
$3,222 - - - - (3,222) - (3,222)
--------
Total comprehensive income 13,939
Cash dividends ($0.20 per share) - - - (8,658) - - (8,658)
Common stock options exercised
(53,267 shares) 53,267 133 381 - - - 514
---------- --------- ------- -------- ------ ---- --------
Balance at March 31, 1999 43,310,100 $ 108,275 $88,734 $228,614 $1,712 $(9) $427,326
========== ========= ======= ======== ====== ==== ========
</TABLE>
SEE NOTES TO CONSOLIDATED UNAUDITED FINANCIAL STATEMENTS
8
<PAGE>
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
UNITED BANKSHARES, INC. AND SUBSIDIARIES
(Dollars in thousands)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31
------------------------
1999 1998
------------------------
<S><C>
NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES $147,083 $ (49,117)
INVESTING ACTIVITIES
Proceeds from maturities and calls of investment securities 39,905 46,354
Purchases of investment securities (48,348) (29,283)
Proceeds from sales of securities available for sale 93,008 26,287
Proceeds from maturities and calls of securities available for 800 54,032
sale
Purchases of securities available for sale (475,922) (66,653)
Proceeds from sales of loans 138,229 124
Purchases of loans (122,815)
Net purchases of bank premises and equipment (931) (1,755)
Net change in loans (4,828) 27,062
------------------------
NET CASH USED IN INVESTING ACTIVITIES (258,087) (66,647)
FINANCING ACTIVITIES
Cash dividends paid (8,596) (4,930)
Proceeds from exercise of stock options 514 1,341
Proceeds from sales of treasury stock 654
Repayment of Federal Home Loan Bank borrowings (538) (5,345)
Proceeds from Federal Home Loan Bank borrowings 112,341 46,123
Changes in:
Deposits (54,341) 29,958
Federal funds purchased, securities sold under agreements
to repurchase and other borrowings 34,398 (1,926)
------------------------
NET CASH PROVIDED BY FINANCING ACTIVITIES 83,778 64,036
------------------------
Decrease in cash and cash equivalents (27,226) (51,728)
Cash and cash equivalents at beginning of year 141,298 190,028
------------------------
Cash and cash equivalents at end of year $114,072 $138,300
========================
</TABLE>
SEE NOTES TO CONSOLIDATED UNAUDITED FINANCIAL STATEMENTS.
9
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
UNITED BANKSHARES, INC. AND SUBSIDIARIES
1. GENERAL
The accompanying unaudited consolidated interim financial statements of United
Bankshares, Inc. and Subsidiaries ("United") have been prepared in accordance
with generally accepted accounting principles for interim financial information
and with the instructions for Form 10-Q and Article 10 of Regulation S-X.
Accordingly, the financial statements do not contain all of the information and
footnotes required by generally accepted accounting principles. The financial
statements presented in this report have not been audited. The accounting and
reporting policies followed in the presentation of these financial statements
are consistent with those applied in the preparation of the 1998 annual report
of United Bankshares, Inc. on Form 10-K. In the opinion of management,
adjustments necessary for a fair presentation of financial position and results
of operations for the interim periods have been made. Such adjustments are of a
normal and recurring nature.
In June 1998, the FASB issued Statement No. 133, (SFAS No. 133), "ACCOUNTING FOR
DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES." The provisions of this statement
require that derivative instruments be carried at fair value on the balance
sheet. The statement continues to allow derivative instruments to be used to
hedge various risks and sets forth specific criteria to be used to determine
when hedge accounting can be used. The statement also provides offsetting
changes in fair value or cash flows of both the derivative and the hedged asset
or liability to be recognized in earnings in the same period; however, any
changes in fair value or cash flow that represent the ineffective portion of a
hedge are required to be recognized in earnings and cannot be deferred. For
derivative instruments not accounted for as hedges, changes in fair value are
required to recognized in earnings. The provisions of this statement become
effective for United beginning January, 1, 2000. This standard, when
implemented, is not expected to materially impact the reported financial
position or results of operations of United.
During 1998, the FASB issued Statement No. 134, (SFAS No. 134), "Accounting for
Mortgage-Backed Securities Retained After the Securitization of Mortgage Loans
Held for Sale by a Mortgage Banking Enterprise" (an amendment of Statement No.
65). SFAS No. 134 requires companies to classify all mortgage-backed securities
or other interests in the form of a security retained after a securitization of
mortgage loans held for sale based on its ability and intent to sell or hold
those investments. Any retained mortgage-backed securities that a company
commits to sell before or during the securitization process must be classified
as trading securities.
2. BASIS OF PRESENTATION
The accompanying consolidated interim financial statements include the accounts
of United and its wholly-owned subsidiaries. United considers all of its
principal business activities to be bank related. All significant intercompany
accounts and transactions have been eliminated in the consolidated financial
statements. Dollars are in thousands, except per share and share data.
10
<PAGE>
3. INVESTMENT SECURITIES
The amortized cost and estimated fair values of securities available for sale
are summarized as follows:
<TABLE>
<CAPTION>
MARCH 31, 1999
----------------------------------------------------
GROSS GROSS ESTIMATED
(IN THOUSANDS) AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
----------------------------------------------------
<S><C>
U.S. Treasury securities and
obligations of U.S. Government
corporations and agencies $213,953 $ 540 $1,255 $213,238
State and political subdivisions 38,791 579 38,212
Mortgage-backed securities 636,522 3,736 2,197 638,061
Marketable equity securities 9,211 4,199 220 13,190
Other 112,289 - 1,590 110,699
----------------------------------------------------
Total $1,010,766 $ 8,475 $5,841 $1,013,400
====================================================
<CAPTION>
DECEMBER 31, 1998
----------------------------------------------------
GROSS GROSS ESTIMATED
(IN THOUSANDS) AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
----------------------------------------------------
U.S. Treasury securities and
obligations of U.S. Government
corporations and agencies $198,151 $ 1,335 $162 $199,324
State and political subdivisions 27,474 194 188 27,480
Mortgage-backed securities 279,618 2,860 262 282,216
Marketable equity securities 9,211 4,104 239 13,076
Other 43,120 - 51 43,069
----------------------------------------------------
Total $557,574 $ 8,493 $902 $565,165
====================================================
</TABLE>
The cumulative net unrealized holding gain on available for sale securities
resulted in an increase to shareholders' equity of $1,712 and $4,934, net of
deferred income taxes at March 31, 1999 and December 31, 1998, respectively.
The amortized cost and estimated fair value of securities available for sale at
March 31, 1999 and December 31, 1998, by contractual maturity are shown on the
next page. 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.
11
<PAGE>
<TABLE>
<CAPTION>
MARCH 31, 1999 DECEMBER 31, 1998
---------------------------- ---------------------------
ESTIMATED ESTIMATED
AMORTIZED FAIR AMORTIZED FAIR
COST VALUE COST VALUE
---------------------------- ---------------------------
<S><C>
Due in one year or less $ 33,424 $ 33,575 $ 38,072 $ 38,321
Due after one year through five 91,310 91,609 113,410 114,343
years
Due after five years through ten 192,192 191,357 123,793 124,204
years
Due after ten years 684,629 683,669 273,088 275,221
Marketable equity securities 9,211 13,190 9,211 13,076
---------------------------- ---------------------------
Total $1,010,766 $1,013,400 $557,574 $565,165
=========================================================
</TABLE>
The preceding table includes $638,061 and $282,216 of mortgage-backed securities
at March 31, 1999 and December 31, 1998, respectively, with an amortized cost of
$636,522 and $279,618 at March 31, 1999 and December 31, 1998, respectively.
Maturities of mortgage-backed securities are based upon the estimated average
life.
The amortized cost and estimated fair values of securities held to maturity are
summarized as follows:
<TABLE>
<CAPTION>
MARCH 31, 1999
----------------------------------------------------
GROSS GROSS ESTIMATED
(IN THOUSANDS) AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
----------------------------------------------------
<S><C>
U.S. Treasury securities and
obligations of U.S. Government
corporations and agencies $134,537 $ 594 $481 $134,650
State and political subdivisions 95,467 2,297 792 96,972
Mortgage-backed securities 120,894 1,377 121 122,150
Other 19,678 11 13 19,676
----------------------------------------------------
Total $370,576 $ 4,279 $1,407 $373,448
====================================================
<CAPTION>
DECEMBER 31, 1998
----------------------------------------------------
GROSS GROSS ESTIMATED
(IN THOUSANDS) AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
----------------------------------------------------
U.S. Treasury securities and
obligations of U.S. Government
corporations and agencies $121,474 $1,225 $ 99 $122,600
State and political subdivisions 82,011 2,929 241 84,699
Mortgage-backed securities 139,002 1,506 121 140,387
Other 19,664 8 5 19,667
----------------------------------------------------
Total $362,151 $5,668 $466 $367,353
====================================================
</TABLE>
12
<PAGE>
The amortized cost and estimated fair value of securities held to maturity at
March 31, 1999, and December 31, 1998, by contractual maturity follow. Expected
maturities may differ from contractual maturities because the issuers may have
the right to call or prepay obligations with or without call or prepayment
penalties.
<TABLE>
<CAPTION>
MARCH 31, 1999 DECEMBER 31, 1998
---------------------------- ----------------------------
ESTIMATED ESTIMATED
AMORTIZED FAIR AMORTIZED FAIR
COST VALUE COST VALUE
---------------------------- ----------------------------
<S><C>
Due in one year or less $ 16,265 $ 16,342 $ 17,218 $ 17,349
Due after one year through five years 61,757 62,398 68,758 69,661
Due after five years through ten years 120,502 121,944 117,860 120,026
Due after ten years 172,052 172,764 158,315 160,317
---------------------------- ----------------------------
Total $370,576 $373,448 $362,151 $367,353
==========================================================
</TABLE>
The preceding table includes $122,150 and $140,387 of mortgage-backed securities
at estimated fair value at March 31, 1999 and December 31, 1998, respectively,
with an amortized cost of $120,894 and $139,002 at March 31, 1999 and December
31, 1998, respectively.
Maturities of the mortgage-backed securities are based upon the estimated
average life. There were no sales of held to maturity securities.
The amortized cost of securities pledged to secure public deposits, securities
sold under agreements to repurchase, and for other purposes as required or
permitted by law, approximated $454,064 and $414,275 at March 31, 1999 and
December 31, 1998, respectively.
4. NONPERFORMING LOANS
Nonperforming loans are summarized as follows:
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31, MARCH 31,
1999 1998 1998
-------------- ---------------------------
<S><C>
Loans past due 90 days or more and still accruing interest $17,851 $ 9,528 $ 9,632
Nonaccrual loans 11,313 9,139 7,950
-------------- ---------------------------
Total nonperforming loans $29,164 $18,667 $17,582
============== ===========================
</TABLE>
13
<PAGE>
5. ALLOWANCE FOR LOAN LOSSES
The adequacy of the allowance for loan losses is based on management's
evaluation of the relative risks inherent in the loan portfolio. A progression
of the allowance for loan losses for the periods presented is summarized as
follows:
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31
-----------------------------
1999 1998
-------------- --------------
<S><C>
Balance at beginning of period $39,189 $31,936
Provision charged to expense 764 2,080
-------------- --------------
39,953 34,016
Loans charged-off (1,241) (1,538)
Less recoveries 327 197
-------------- --------------
Net Charge-offs (914) (1,341)
-------------- --------------
Balance at end of period $39,039 $32,675
============== ==============
</TABLE>
The average recorded investment in impaired loans during the quarter ended March
31, 1999 and for the year ended December 31, 1998 was approximately $13,071 and
$10,343, respectively. For the quarters ended March 31, 1999 and 1998, United
recognized interest income on the impaired loans of approximately $117 and $160,
respectively, substantially all of which was recognized using the accrual method
of income recognition.
At March 31, 1999, the recorded investment in loans that are considered to be
impaired under SFAS No. 114 was $15,217 (of which $11,313 were on a nonaccrual
basis). Included in this amount is $3,639 of impaired loans for which the
related allowance for loan losses is $875 and $11,578 of impaired loans that do
not have an allowance for credit losses due to management's estimate that the
fair value of the underlying collateral of these loans is sufficient for full
repayment of the loan and interest.
The amount of interest income that would have been recorded under the original
terms for the above loans was $515 and $372 for the quarters ended March 31,
1999 and 1998, respectively.
6. COMMITMENTS AND CONTINGENT LIABILITIES
United and its subsidiaries are currently involved, in the normal course of
business, in various legal proceedings. Management is vigorously pursuing all of
its legal and factual defenses and, after consultation with legal counsel,
believes that all such litigation will be resolved without material effect on
financial position or results of operations.
14
<PAGE>
7. LINE OF BUSINESS REPORTING
United's principal business activities are community banking and mortgage
banking. The following information is based on United's current management
structure and presents results of operations as if the community banking and
mortgage banking segments were operated on a stand alone basis. The results are
not necessarily comparable with similar information of other companies.
<TABLE>
<CAPTION>
GENERAL
MORTGAGE COMMUNITY CORPORATE
BANKING BANKING AND OTHER* CONSOLIDATED
--------------------------------------------------
(IN THOUSANDS)
<S><C>
MARCH 31, 1999
Net interest income $ 940 $ 44,550 $ 481 $ 45,971
Provision for loan losses 14 750 - 764
Net interest income after provision for loan losses 926 43,800 481 45,207
Noninterest income 6,280 5,740 (1,381) 10,639
Noninterest expense 4,601 23,724 496 28,821
Income (loss) before income taxes 2,605 25,816 (1,396) 27,025
Income tax expense 951 8,788 125 9,864
Net income (loss) 1,654 17,028 (1,521) 17,161
Average total assets 210,655 4,597,789 (243,600) 4,564,844
MARCH 31, 1998
Net interest income $ 460 $ 39,080 $ 484 $ 40,024
Provision for loan losses - 2,080 - 2,080
Net interest income after provision for loan losses 460 37,000 484 37,944
Noninterest income 5,714 5,729 2,569 14,012
Noninterest expense 5,363 23,811 521 29,695
Income before income taxes 811 18,918 2,532 22,261
Income tax expense 314 6,637 889 7,840
Net income 497 12,281 1,643 14,421
Average total assets 156,492 4,059,286 (187,553) 4,028,225
</TABLE>
* General corporate and other includes intercompany eliminations
15
<PAGE>
8. EARNING ASSETS AND INTEREST-BEARING LIABILITIES
The following table shows the daily average balance of major categories of
assets and liabilities for each of the three month periods ended March 31, 1999
and March 31, 1998 with the interest rate earned or paid on such amount.
<TABLE>
<CAPTION>
THREE MONTHS ENDED THREE MONTHS ENDED
MARCH 31, 1999 MARCH 31, 1998
-------------------------------- ------------------------------
AVERAGE AVG. AVERAGE AVG.
(DOLLARS IN THOUSANDS) BALANCE INTEREST RATE BALANCE INTEREST RATE
-------------------------------- ------------------------------
<S><C>
ASSETS
Earning Assets:
Federal funds sold and securities repurchased
under agreements to resell and other
short-term investments $ 8,869 $ 128 5.83% $ 35,108 $ 465 5.37%
Investment Securities:
Taxable 976,046 16,231 6.65% 941,064 15,102 6.42%
Tax-exempt (1) 119,149 2,299 7.72% 55,507 1,180 8.46%
-------------------------------- ------------------------------
Total Securities 1,095,195 18,530 6.77% 996,871 16,282 6.53%
Loans, net of unearned income (1) (2) 3,236,283 68,111 8.48% 2,793,378 60,522 8.67%
Allowance for loan losses (39,105) (31,965)
---------- ----------
Net loans 3,197,178 8.58% 2,761,399 8.77%
-------------------------------- ------------------------------
Total earning assets 4,301,242 $ 86,769 8.12% 3,793,378 $ 77,269 8.15%
--------------------- -------------------
Other assets 263,602 234,847
---------- ----------
TOTAL ASSETS $4,564,844 $4,028,225
========== ==========
LIABILITIES
Interest-Bearing Funds:
Interest-bearing deposits $2,946,308 $ 31,786 4.38% $2,710,408 $ 30,697 4.59%
Federal funds purchased, repurchase
agreements and other short-term
Borrowings 268,726 2,854 4.31% 204,884 2,655 5.26%
FHLB advances 384,030 4,893 5.17% 218,998 2,883 5.34%
-------------------------------- ------------------------------
Total Interest-Bearing Funds 3,599,064 39,533 4.45% 3,134,290 36,235 4.69%
--------------------- -------------------
Demand deposits 463,998 441,137
Accrued expenses and other liabilities 71,420 48,954
---------- ----------
TOTAL LIABILITIES 4,134,482 3,624,981
SHAREHOLDERS' EQUITY 430,362 403,844
---------- ----------
TOTAL LIABILITIES AND
SHAREHOLDERS' EQUITY $4,564,844 $4,028,225
========== ==========
NET INTEREST INCOME $ 47,236 $ 41,034
========= =========
INTEREST SPREAD 3.67% 3.46%
NET INTEREST MARGIN 4.39% 4.36%
</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.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
The following is a broad overview of the financial condition and results of
operations and is not intended to replace the more detailed discussion which is
presented under specific headings on the following pages.
OVERVIEW
Net income for the first quarter of 1999 was $17.16 million or $0.39 per share
compared to $14.42 million or $0.33 per share for the first quarter of 1998.
This represents a 19.00% increase in net income and an 18.18% increase in
earnings per share. United's annualized return on average assets was 1.52% and
return on average shareholders' equity was 16.17% as compared to 1.45% and
14.48% for 1998.
United had strong core earnings driven by a net interest margin of 4.39% for the
first three months of 1999. Net interest income increased $5.95 million or
14.86% for the first three months of 1999 as compared to the same period for
1998. The provision for loan losses decreased $1.32 million or 63.27% when
comparing the first three months of 1999 to the first three months of 1998.
Noninterest income, including income from mortgage banking operations, but
excluding investment securities gains, decreased 7.69% for the first three
months of 1999 when compared to the first three months of 1998. Noninterest
expenses decreased $874 thousand or 2.94% for the first three months compared to
the same period in 1998. United's effective tax rate was 36.5% and 35.2% in 1999
and 1998.
Total assets were $4.68 billion at March 31, 1999, a $108.45 million or 2.37%
increase from year-end, and up $503.73 million or 12.07% from one year ago. In
terms of asset composition since year-end 1998, the March 31, 1999 balance sheet
reflects a $27.23 million decrease in cash and cash equivalents and a $456.66
million increase in investment securities. During the quarter, approximately
$205 million of mortgage loans previously held for sale were securitized with
approximately $71 million of available-for-sale securities being retained in the
investment portfolio and the remainder being sold to a third party. Overall,
loans held for sale decreased $354.93 million due to loan sales in the secondary
market as well as the previously mentioned securitization. Portfolio loans, net
of unearned income increased $29.71 million. All other categories of assets were
moderately flat compared to year-end 1998.
Non-interest bearing deposits decreased $52.30 million compared to year-end
while interest-bearing deposits remained relatively flat for the quarter.
United's total borrowed funds increased $146.20 million or 24.58% as short-term
borrowings increased $35.73 million and FHLB borrowings increased $111.80
million as United utilized the increased borrowings to fund increased investment
and loan activity. Accrued expenses and other liabilities increased $10.78
million or 18.46% since year-end 1998 primarily as a result of increased accrued
interest payable due to the higher volume of borrowed funds during the first
quarter of 1999.
Shareholders' equity increased $5.80 million or 1.37% as compared to December
31, 1998 as United continued to balance capital adequacy and returns to
shareholders. At March 31, 1999, United's regulatory capital ratios, including
those of its bank subsidiaries, exceeded the levels established for
well-capitalized institutions.
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RESULTS OF OPERATIONS
NET INTEREST INCOME
Net interest income increased $5.95 million or 14.86% during the first quarter
of 1999, when compared to the same period of 1998. The net interest margin
continues to drive United's core profitability and momentum. A $508 million
increase in average earning assets versus a $465 million increase in average
interest-bearing liabilities for the first quarter of 1999 contributed to the
continued strong net interest margin. Additionally, the yield on average earning
assets only decreased by 3 basis points while the cost of funds decreased 24
basis points. United's tax-equivalent net interest margin was 4.39% for the
first quarter of 1999, 3 basis points higher than the first three months of
1998. The slightly higher net interest margin from one year ago was primarily
the result of a combination of higher average investment securities at an
increased return and a decrease in the cost of borrowed funds when comparing the
two periods.
PROVISION FOR LOAN LOSSES
Nonperforming loans were $29.16 million at March 31, 1999 and $18.67 million at
December 31, 1998. This decline in credit quality within the nonperforming
category along with other trends impacted qualitative changes to risk factors as
more fully described below. Nonperforming loans represented 0.62% of total
assets at the end of the first quarter of 1999, as compared to 0.41% for United
at year end 1998. The components of nonperforming loans include nonaccrual loans
and loans which are contractually past due 90 days or more as to interest or
principal, but have not been put on a nonaccrual basis. Loans past due 90 days
or more increased $8.32 million during the first quarter of 1999 due to a small
number of individually insignificant commercial credits in the amount of
approximately $4.3 million and a single large, well- collateralized commercial
loan of approximately $5.3 million becoming 90 days past due at the end of the
quarter. These few specific credits are considered well-collateralized, have no
allowance allocated to them and no losses are anticipated from these loans.
Subsequent to March 31, 1999, United experienced an improvement in credit
quality as $3.3 million of the $9.6 million of the past due credits became
current. Nonaccrual loans increased $2.17 million or 23.79% since year-end 1998
due to a single loan being classified as nonaccrual. As of March 31, 1999,
management does not anticipate that the current period's decline in credit
quality to be an ongoing trend. Total nonperforming assets of $32.82 million,
including OREO of $3.66 million at March 31, 1999, represented 0.70% of total
assets at the end of the first quarter.
At March 31, 1999, impaired loans were $15.22 million, an increase of $4.30
million or 39.30% from the $10.92 million in impaired loans at December 31,
1998. For further details, see Note 5 to the unaudited consolidated financial
statements.
United evaluates the adequacy of the allowance for loan losses on a quarterly
basis and its loan administration policies are focused upon the risk
characteristics of the loan portfolio. United's process for evaluating the
allowance is a formal company-wide process that focuses on early identification
of potential problem credits and procedural discipline in managing and
accounting for those credits.
Allocations are made for specific commercial loans based upon management's
estimate of the borrowers' ability to repay and other factors impacting
collectibility. Other commercial loans not specifically reviewed on an
individual basis are evaluated based on historical loan loss percentages applied
to loan pools that have been
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<PAGE>
segregated by risk. Allocations for loans other than commercial loans are made
based upon historical loss experience adjusted for current conditions. The
unallocated portion of the allowance for loan losses provides for risk arising
in part from, but not limited to, declines in credit quality resulting from
sudden economic or industry shifts and changing economic trends. Differences
between actual loan loss experience and estimates are reviewed on a quarterly
basis and adjustments are made to those estimates. United's formal company wide
process at March 31, 1999, produced increased allocations within almost all loan
categories. The components of the allowance allocated to commercial and real
estate construction loans increased $1.0 million and $202 thousand,
respectively, as a result of changes in historical loss experience factors for
risk rated loan pools in response to changes in economic trends in United's
market areas. Specific allocations for commercial loans, also increased as a
result of individual credit reviews. The components of the allowance allocated
to consumer loans increased $478 thousand, as a result of changes in historical
loss experience factors; particularly the impact on the loss trends due to
increased charge-offs in these loan pools during 1998. The component of the
allowance allocated to real estate loans decreased $142 thousand as a result of
changes in historical loss experience and delinquency factors.
At March 31, 1999 and December 31, 1998, the allowance for loan losses was 1.45%
and 1.47% of total loans, net of unearned income, respectively. At March 31,
1999 and December 31, 1998, the ratio of the allowance for loan losses to
nonperforming loans was 133.9% and 209.9%, respectively. United anticipates that
the current ratio will improve due to the improvement in credit quality
subsequent to March 31, 1999.
Management believes that the allowance for loan losses of $39.04 million at
March 31, 1999, is adequate to provide for potential losses on existing loans
based on information currently available.
For the quarters ended March 31, 1999 and 1998, the provision for loan losses
was $764 thousand and $2.08 million, respectively. Total net charge-offs were
$914 thousand in the first three months of 1999 and $1.34 million during the
same time period in 1998, which represents 0.03% and 0.05% of average loans for
the respective quarters. Note 5 to the accompanying unaudited consolidated
financial statements provides a progression of the allowance for loan losses.
Management is not aware of any potential problem loans, trends or uncertainties
which it reasonably expects will materially impact future operating results,
liquidity, or capital resources which have not been disclosed. Additionally,
management has disclosed all known material credits which cause management to
have serious doubts as to the ability of such borrowers to comply with the loan
repayment schedules.
OTHER INCOME
Other income consists of all revenues which are not included in interest and fee
income related to earning assets. Noninterest income has been and will continue
to be an important factor for improving United's profitability. Recognizing the
importance, management continues to evaluate areas where noninterest income can
be enhanced. Noninterest income decreased $3.37 million or 24.07% for the first
quarter of 1999 when compared to the same period in 1998 due mainly to a
conservative market value adjustment of $2.3 million on high loan-to-value
mortgage loans held for sale at March 31, 1999 and a recognized gain on an
available for sale equity security of $2.49 million in the first quarter of
1998, Excluding the mark-to-market adjustment and investment securities gains,
noninterest income increased $1.50 million or 13.02% for the first quarter of
1999 primarily due to a combination of increased revenues from United's mortgage
banking operations and trust department. Normal secondary market mortgage
lending income increased $1.61
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<PAGE>
million or 30.95% while trust fees and commissions increased $349 thousand or
34.59% in comparison from the first quarter of 1998.
Other items of noninterest income which increased in the first quarter of 1999
when compared to the first quarter of 1998 were fees from the sale of checkbooks
and the use of ATM machines and check cards.
OTHER EXPENSES
Just as management continues to evaluate areas where noninterest income can be
enhanced, it strives to improve the efficiency of its operations to reduce
costs. Other expenses include all items of expense other than interest expense,
the provision for loan losses, and income taxes. Other expenses decreased $874
thousand or 2.94% for the first quarter ending March 31, 1999 as compared to the
same periods in 1998.
Total salaries and benefits decreased by 2.04% or $312 thousand for the first
quarter of 1999, when compared to the same period of 1998 as a result of a
decline in the number of employees from the consolidation of certain duplicate
office locations related to United's 1998 merger transactions.
Net occupancy expense for the first quarter of 1999 decreased by $941 thousand
or 24.04% when compared to the first quarter of 1998. The overall change in net
occupancy expense for the first quarter of 1999 is primarily due to decreases in
utilities, building rental and real property tax expense from the consolidation
of certain banking offices related to the 1998 mergers.
Other expense increased $379 thousand or 3.62% for the first quarter of 1999, as
compared to the same period of 1998. This overall increase was primarily due to
an increase in bank marketing and product advertising expense.
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
20
<PAGE>
rates on net interest income. Actual results will differ from simulated results
due to timing, magnitude and frequency of interest rate changes as well as
changes in market conditions and management strategies.
Interest sensitive assets and liabilities are defined as those assets or
liabilities that mature or are repriced within a designated time- frame. The
principal function of interest rate risk management is to maintain an
appropriate relationship between those assets and liabilities that are sensitive
to changing market interest rates. The difference between rate sensitive assets
and rate sensitive liabilities for specified periods of time is known as the
"GAP." United closely monitors the sensitivity of its assets and liabilities on
an on-going basis and projects the effect of various interest rate changes on
its net interest margin.
As shown in the interest rate sensitivity gap table in this section, United was
liability sensitive (more liabilities repricing than assets) in the one year
horizon. On the surface, this would indicate that rising market interest rates
would reduce United's earnings and declining market interest rates would
increase earnings. United, however, has not experienced the kind of earnings
volatility indicated from the cumulative gap. This is because a significant
portion of United's retail deposit base does not reprice on a contractual basis.
Management has estimated, based upon historical analyses, that United's savings
deposits are less sensitive to interest rate changes than are other forms of
deposits. The GAP table presented herein has been adapted to show the estimated
differences in interest rate sensitivity which result when the retail deposit
base is assumed to reprice in a manner consistent with historical trends. (See
"Management Adjustments" in the GAP table). Using these estimates, United was
liability sensitive in the one year horizon in the amount of $74 million or
- -1.68% of the cumulative gap to related earning assets.
During 1998, United purchased fixed-rate junior-lien mortgage loans from a
unrelated third party financial institution with the intent to securitize these
loans and resell the securitized loans back to the third party lender. However,
the third party was unable to repurchase the loans and United inherited
approximately $456 million of these mortgage loans which United held for sale on
its balance sheet as of December 31, 1998. Except for approximately $56 million
of these loans which will be retained in its loan portfolio, United continued
its plan to securitize the remaining loans and either resell the securitized
loans or hold the securities in its available-for-sale investment portfolio. One
securitization occurred during the first quarter of 1999 which resulted in
approximately $205 million of these mortgage loans held for sale being
securitized with approximately $71 million of available-for-sale securities
being retained in the investment portfolio and the remainder being sold to a
independent third party. Subsequent to March 31, 1999, United completed a second
securitization in which approximately $165 million of mortgage loans held for
sale were securitized and retained in United's available-for-sale investment
portfolio.
By securitizing these mortgage loans, United effectively removed these loans
from its balance sheet by creating investment securities supported by steadier
cash flows, which United either sold to independent third parties or retained in
its own investment portfolio. As a part of this process, United provides credit
enhancement, in the form of overcollateralization, with respect to the
investment security created. As a result, United does maintain a certain level
of credit, prepayment and interest rate risk associated with these securitized
loans, however, the risk maintained by United is less than that which would be
maintained had United held these loans on its balance sheet until the loans
matured.
In return for this risk exposure, United will receive on-going income from each
securitization that is determined as a function of the "excess spread" derived
from the securitized loans. The "excess spread", generally, is calculated as the
difference between (a) the interest at the stated rate paid by borrowers and (b)
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the sum of pass-through interest paid to third-party investors and various fees,
including trustee, insurance, servicing, and other similar costs. The "excess
spread" represents income to be recognized by United over the life of the
securitized loan pool.
To further aid in interest rate management, United's subsidiary banks are
members of the Federal Home Loan Bank (FHLB). The use of FHLB advances provides
United with a low risk means of matching maturities of earning assets and
interest-bearing funds to achieve a desired interest rate spread over the life
of the earning assets.
Interest rate risk management focuses on maintaining consistent growth in net
interest income within Board-approved policy limits. United's Asset/Liability
Management Committee (ALCO), which includes senior management representatives
and reports to the Board of Directors, monitors and manages interest rate risk
to maintain an acceptable level of change to net interest income as a result of
changes in interest rates. Policy established for interest rate risk is stated
in terms of the change in net interest income over a 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 March 31, 1999 and March 31, 1998:
Change in Percentage Change in Net Interest Income
Interest Rates ------------------------------------------
(basis points) March 31, 1999 March 31, 1998
-------------- -------------- --------------
+200 0.59% 2.29%
-200 -6.22% -2.93%
For March 31, 1999, 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 0.59% over one year as compared to 2.29% for
March 31, 1998. A 200 basis point immediate, sustained downward shock in the
yield curve would decrease net interest income by an estimated 6.22% over one
year for March 31, 1999 as compared to 2.93% for March 31, 1998. All of these
estimated changes in net interest income are and were within the policy
guidelines established by the Board of Directors.
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<PAGE>
The following table shows the interest rate sensitivity GAP as of March 31,
1999:
<TABLE>
<CAPTION>
INTEREST RATE SENSITIVITY GAP
DAYS
---------------------------------- TOTAL 1-5 OVER 5
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 $ 6,947 $ 6,947 $ 6,947
Investment and Marketable
Equity Securities
Taxable $ 76,161 $ 18,032 $ 58,140 $ 152,333 $ 235,760 $ 862,204 $1,250,297
Tax-exempt 0 3,767 50 3,817 11,152 118,710 133,679
Loans, net of unearned
income 1,296,295 176,955 325,378 1,798,628 797,339 451,811 3,047,778
--------------------------------------------------------------------------------------
Total Interest-Earning Assets $1,379,403 $198,754 $383,568 $1,961,725 $1,044,251 $1,432,725 $4,438,701
========== ======== ======== ========== ========== ========== ==========
LIABILITIES
INTEREST-BEARING FUNDS:
Savings and NOW $1,222,458 $1,222,458 $1,222,458
accounts
Time deposits of
$100,000 & over 63,159 $ 31,129 $ 85,834 180,122 $ 66,817 $ 58 246,997
Other time deposits 356,800 317,497 425,906 1,070,203 408,173 215 1,478,591
Federal funds purchased,
Repurchase agreements
and other short-term
borrowings 283,437 283,437 283,437
FHLB advances 205,027 1,098 5,000 211,125 53,656 192,889 457,670
--------------------------------------------------------------------------------------
Total Interest-Bearing Funds $2,100,881 $349,723 $516,741 $2,967,345 $528,646 $ 193,162 $3,689,153
========== ======== ======== ========== ======== ========== ==========
INTEREST SENSITIVITY GAP ($721,478) ($150,969) ($133,173) ($1,005,620) $515,605 $1,239,563 $ 749,548
========== ========== ========== =========== ======== ========== =========
CUMULATIVE GAP ($721,478) ($872,447) ($1,005,620) ($1,005,620) ($409,015) $ 749,548 $ 749,548
========== ========== ============ ============ ========== ========== =========
Cumulative Gap as a
Percentage of (16.25%) (19.66%) (22.66%) (22.66%) (11.04%) 16.89% 16.89%
Total Earning Assets
Management Adjustments $1,163,932 ($77,634) ($155,152) ($931,146) $ 0
Off-Balance Sheet Activities
--------------------------------------------------------------------------------------
CUMULATIVE MANAGEMENT
ADJUSTED GAP AND OFF-
BALANCE SHEET ACTIVITIES $ 442,454 $213,851 ($ 74,474) ($ 74,474) ($490,015) $749,548 $ 749,548
========== ======== ========== ========== ========== ======== =========
CUMULATIVE MANAGEMENT
ADJUSTED GAP AND OFF-
BALANCE SHEET ACTIVITIES
AS A PERCENTAGE OF TOTAL
EARNING ASSETS 9.97% 4.82% (1.68%) (1.68%) (11.04%) 16.89% 16.89%
===== ===== ======= ======= ======== ====== ======
</TABLE>
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LIQUIDITY AND CAPITAL RESOURCES
United maintains, in the opinion of management, liquidity which is sufficient to
satisfy its depositors' requirements and the credit needs of its customers. Like
all banks, United depends upon its ability to renew maturing deposits and other
liabilities on a daily basis and to acquire new funds in a variety of markets. A
significant source of funds available to United is "core deposits". Core
deposits include certain demand deposits, statement and special savings and NOW
accounts. These deposits are relatively stable and they are the lowest cost
source of funds available to United. Short-term borrowings have also been a
significant source of funds. These include federal funds purchased and
securities sold under agreements to repurchase. Repurchase agreements represent
funds which are obtained as the result of a competitive bidding process.
Liquid assets are cash and those items readily convertible to cash. All banks
must maintain sufficient balances of cash and near-cash items to meet the
day-to-day demands of customers. Other than cash and due from banks, the
available for sale securities portfolio, loans held for sale and maturing loans
and investments are the primary sources of liquidity.
The goal of liquidity management is to ensure the ability to access funding
which enables United to efficiently satisfy the cash flow requirements of
depositors and borrowers and meet United's cash needs. Liquidity is managed by
monitoring funds availability from a number of primary sources. Substantial
funding is available from cash and cash equivalents, unused short-term borrowing
and a geographically dispersed network of subsidiary banks providing access to a
diversified and substantial retail deposit market.
Short-term needs can be met through a wide array of sources such as
correspondent and downstream correspondent federal funds and utilization of
Federal Home Loan Bank advances.
Other sources of liquidity available to United to provide long-term as well as
short-term funding alternatives, in addition to FHLB advances, are long-term
certificates of deposit, lines of credit, and borrowings that are secured by
bank premises or stock of United's subsidiaries. United has no intention at this
time to utilize any long-term funding sources other than FHLB advances and
long-term certificate of deposits for funding in the normal course of business.
For the three months ended March 31, 1999, cash flows from operations provided
United $147.08 million of cash primarily as a result of $120.31 million of
excess proceeds from sales of mortgage loans in the secondary market during the
first quarter of 1999. During the same period, net cash of $258.09 million was
used for investing activities which was primarily due to $390.56 million of
excess purchases of investment securities over net proceeds from calls and
maturities of investment securities which more than offset the $138.23 million
of excess net proceeds from the sale of securitized loans over net repayments
from portfolio loans of $4.83 million. During the first three months of 1999,
net cash of $83.78 million was generated by financing activities, primarily due
to additional borrowings of approximately $146.20 million that consisted of
$111.80 million of new FHLB advances and $35.73 million in increased short-term
borrowings from federal funds purchased and securities sold under agreements to
repurchase. These sources of funds were partially offset by payment of $8.60
million in cash dividends. The net effect of this activity was a decrease in
cash and cash equivalents of $27.23 million for the first three months of 1999.
United anticipates no difficulty in meeting its obligations over the next 12
months and has no material commitments for capital expenditures. There are no
known trends, demands, commitments, or events that
24
<PAGE>
will result in or that are reasonably likely to result in United's liquidity
increasing or decreasing in any material way. United also has significant lines
of credit available.
The Asset and Liability Committee monitors liquidity to ascertain that a strong
liquidity position is maintained. In addition, variable rate loans are a
priority. These policies help to protect net interest income against
fluctuations in interest rates. No changes are anticipated in the policies of
United's Asset and Liability Committee.
CAPITAL
Total shareholders' equity increased $5.80 million to $427.33 million, which is
an increase of 1.37% from December 31, 1998. United's equity to assets ratio was
9.14% at March 31, 1999, as compared to 9.23% at December 31, 1998. Capital and
reserves to total assets was 9.97% at March 31, 1999, as compared to 10.09% at
December 31, 1998.
Cash dividends of $0.20 per common share for the first quarter of 1999 represent
an increase of 11.11% over the $0.18 paid for first quarter of 1998. Total cash
dividends were approximately $8.66 million for the first quarter of 1999, an
increase of 64.87% over the comparable period of 1998.
United seeks to maintain a proper relationship between capital and total assets
to support growth and sustain earnings. United's average equity to average asset
ratio was 9.43% at March 31, 1999 and 10.03% at March 31, 1998. United's
risk-based capital ratios of 13.00% at March 31, 1999 and 12.63% at December 31,
1998, are both significantly higher than the minimum regulatory requirements.
United's Tier I capital and leverage ratios of 11.74% and 8.42%, respectively,
at March 31, 1999, are also well above regulatory minimum requirements.
YEAR 2000 ISSUE
The Year 2000 Issue is the result of computer programs being written using two
digits rather than four to define the applicable year. Any of a company's
hardware, date-driven automated equipment or computer programs that have
time-sensitive software may recognize a date using "00" as the year 1900 rather
than the year 2000. This faulty recognition could result in a system failure or
miscalculations causing disruptions of operations, including, among other
things, a temporary inability to process transactions, send invoices or engage
in similar normal business activities.
United's plan to resolve the Year 2000 Issue involves the following four phases:
assessment, remediation, testing and implementation. To date United has fully
completed the assessment of all information technology and non-information
technology systems that could be significantly affected by the Year 2000 Issue
and its internal remediation and testing phases were completed by December 31,
1998. Its external remediation and testing phases being performed by United's
primary data processor are expected to be completed by June 30, 1999.
The completed assessment indicated that most of United's significant information
technology systems could be affected. That assessment also indicated that
software and hardware used in the operating equipment also are at risk. Based on
its assessments, United determined that it will be required to modify or replace
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<PAGE>
approximately 40% of its hardware and certain software so that those systems
will properly utilize dates beyond December 31, 1999. United presently believes
that with modifications or replacements of existing software and certain
hardware, the Year 2000 Issue can be mitigated. However, if such modifications
and replacements are not made, or are not completed timely, the Year 2000 Issue
could have a material impact on United's operations.
United has initiated formal communications with all of its significant suppliers
and customers to determine the extent to which United's interface systems are
vulnerable to those third parties' failure to remediate their own Year 2000
Issues. United's total Year 2000 project costs and estimates to complete include
the estimated costs and time associated with the impact of third party Year 2000
Issues based on presently available information. However, there can be no
guarantee that the systems and applications of other companies on which United's
systems rely will be timely converted or that a failure to convert by another
company, or a conversion that is incompatible with United's systems and
applications, would not have a material adverse effect on United.
To date, United has obtained information about the Year 2000 compliance status
of all of its significant suppliers and vendors. To date, United is not aware of
any external agent with a Year 2000 Issue that would materially impact United's
results of operations, liquidity or capital resources.
United is utilizing both internal and external resources to reprogram, or
replace, and test the Year 2000 modifications. United anticipates completion of
the remediation and testing phases of the Year 2000 project to be completed by
June 30, 1999, which is prior to any anticipated impact on United's operating
systems. United expects to complete its implementation phase by mid 1999 with
all information technology and non-information technology systems expected to be
compliant by June 30, 1999.
The total cost of the Year 2000 project is estimated at $4 million and is being
funded through cash flows. The Year 2000 costs are not expected to have a
material adverse effect on United's results of operations or cash flows. To
date, United has incurred approximately $2.4 million of expense and
capitalizable costs related to the assessment of, and preliminary efforts in
connection with, the Year 2000 project and the development of a Year 2000 plan
of operation.
The costs of the Year 2000 project and the date on which United believes it will
complete the Year 2000 modifications are based on management's best estimates,
which were derived utilizing numerous assumptions of future events, including
the continued availability of certain resources, third party vendor modification
plans and other factors. There can be no guarantee, however, that these
estimates will be achieved and actual results could differ materially from those
anticipated. Specific factors that might cause such material differences
include, but are not limited to, the availability and cost of trained
programming personnel, the ability to locate and correct all relevant computer
coding, and similar uncertainties.
Until the Year 2000 event actually occurs and for a period of time thereafter,
there can be no assurance that there will be no problem related to the Year 2000
Issue. The Year 2000 technology challenge is an unprecedented event. If Year
2000 issues are not adequately addressed by United and third parties, United
could face, among other things, business disruptions, operational problems,
financial losses, legal liability and similar risks, and United's business,
operations, and financial position could be materially, adversely affected.
26
<PAGE>
United is developing contingency plans for implementation in the event that
mission critical third party vendors or other third parties fail to adequately
address Year 2000 issues. Such plans principally involve internal remediation or
identifying alternate vendors. There can be no assurance that any such plans
will fully mitigate any such failures or problems.
The costs of the Year 2000 project and the schedule for achieving compliance are
based on management's best estimates, which were derived using numerous
assumptions of future events such as the availability of certain resources
(including appropriately trained personnel and other internal and external
resources), third party vendor plans and other factors. However, there can be no
guarantee that these estimates will be achieved at the cost disclosed or within
the timeframes indicated, and actual results could differ materially from those
anticipated.
Factors that might cause such material differences include, but are not limited
to: the availability and cost of personnel trained in this area; the ability to
identify and convert all relevant systems; results of Year 2000 testing;
adequate resolution of Year 2000 issues by governmental agencies, businesses or
other third parties that are service providers, suppliers, borrowers or
customers of United; unanticipated system costs; the need to replace hardware;
the adequacy of and ability to implement contingency plans; and similar
uncertainties.
27
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