UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------------------------------
FORM 10-Q
Quarterly Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
For Quarter Ended SEPTEMBER 30, 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; 42,727,413 shares outstanding as of
OCTOBER 31, 1999.
1
<PAGE>
UNITED BANKSHARES, INC. AND SUBSIDIARIES
FORM 10-Q
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
<S> <C>
Consolidated Balance Sheets (Unaudited)
September 30, 1999 and December 31, 1998 ..........................................................6
Consolidated Statements of Income (Unaudited) for the
Three and Nine Months Ended September 30, 1999 and 1998............................................7
Consolidated Statement of Changes in Shareholders' Equity
(Unaudited) for the Nine Months Ended September 30, 1999...........................................8
Condensed Consolidated Statements of Cash Flows (Unaudited)
for the Nine Months Ended September 30, 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.........................................................19
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
<PAGE>
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...........................................31
(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 November 12, 1999 /s/ Richard M. Adams
- --------------------------- -------------------------------------
Richard M. Adams, Chairman of
the Board and Chief Executive
Officer
Date November 12, 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 September 30, 1999 and December 31, 1998, consolidated balance sheets of
United Bankshares, Inc. and Subsidiaries, and the related consolidated
statements of income for the three and nine months ended September 30, 1999 and
1998, and the related consolidated statement of changes in shareholders' equity
for the nine months ended September 30, 1999, and the related condensed
consolidated statements of cash flows for the nine months ended September 30,
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) SEPTEMBER 30 DECEMBER 31
1999 1998
----------------------------------
ASSETS
<S> <C> <C>
Cash and due from banks $ 122,532 $ 124,591
Interest-bearing deposits with other banks 13,105 6,807
Federal funds sold 9,900
----------------------------------
Total cash and cash equivalents 135,637 141,298
Securities available for sale at estimated fair value (amortized cost-$1,484,192
at September 30, 1999 and $557,574 at December 31, 1998) 1,445,351 565,165
Securities held to maturity (estimated fair value-$269,318 at
September 30, 1999 and $367,353 at December 31, 1998) 273,675 362,151
Loans held for sale 117,610 720,607
Loans
Commercial, financial, and agricultural 520,113 508,601
Real estate:
Single family residential 1,217,365 1,076,277
Commercial 694,786 574,666
Construction 141,715 141,026
Other 43,023 45,290
Installment 353,145 313,464
----------------------------------
2,970,147 2,659,324
Less: Unearned income (7,114) (6,933)
----------------------------------
Loans net of unearned income 2,963,033 2,652,391
Less: Allowance for loan losses (39,704) (39,189)
----------------------------------
Net loans 2,923,329 2,613,202
Bank premises and equipment 53,447 54,946
Accrued interest receivable 34,927 30,402
Other assets 97,939 80,128
----------------------------------
TOTAL ASSETS $5,081,915 $4,567,899
==================================
LIABILITIES
Domestic deposits:
Noninterest-bearing $ 501,800 $ 542,987
Interest-bearing 2,875,127 2,950,071
----------------------------------
Total deposits 3,376,927 3,493,058
Borrowings:
Federal funds purchased 6,316 7,260
Securities sold under agreements to repurchase 429,516 236,535
Federal Home Loan Bank borrowings 801,851 345,867
Other borrowings 5,797 5,244
Accrued expenses and other liabilities 57,552 58,404
----------------------------------
TOTAL LIABILITIES 4,677,959 4,146,368
SHAREHOLDERS' EQUITY
Common stock, $2.50 par value; Authorized-100,000,000 shares; issued-43,381,769
at September 30, 1999 and 43,256,833 at December 31, 1998, including 545,109
and 356 shares in treasury at September 30, 1999 and December 31, 1998,
respectively 108,454 108,142
Surplus 88,158 88,353
Retained earnings 246,365 220,111
Accumulated other comprehensive (loss) income (25,247) 4,934
Treasury stock, at cost (13,774) (9)
----------------------------------
TOTAL SHAREHOLDERS' EQUITY 403,956 421,531
==================================
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $5,081,915 $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 NINE MONTHS ENDED
SEPTEMBER 30 SEPTEMBER 30
------------------------------- ------------------------------
1999 1998 1999 1998
------------------------------- ------------------------------
INTEREST INCOME
<S> <C> <C> <C> <C>
Interest and fees on loans $62,076 $69,829 $189,506 $195,013
Interest on federal funds sold and other short-term investments
150 535 359 1,254
Interest and dividends on securities:
Taxable 22,247 12,733 63,909 42,125
Tax-exempt 6,338 823 9,563 2,381
------------------------------- ------------------------------
Total interest income 90,811 83,920 263,337 240,773
INTEREST EXPENSE
Interest on deposits 30,281 32,901 92,958 95,118
Interest on short-term borrowings 5,309 2,842 11,763 7,870
Interest on Federal Home Loan Bank advances 10,232 4,605 23,049 11,926
------------------------------- ------------------------------
Total interest expense 45,822 40,348 127,770 114,914
------------------------------- ------------------------------
Net interest income 44,989 43,572 135,567 125,859
Provision for loan losses 2,255 3,316 4,780 10,653
------------------------------- ------------------------------
Net interest income after provision for loan losses 42,734 40,256 130,787 115,206
OTHER INCOME
Income from mortgage banking operations 5,706 6,645 16,219 18,233
Service charges, commissions, and fees 5,365 5,035 14,522 14,015
Trust department income 1,392 1,162 3,984 3,288
Security gains (losses) (70) 427 1 2,782
Other income 450 201 1,209 1,079
------------------------------- ------------------------------
Total other income 12,843 13,470 35,935 39,397
OTHER EXPENSE
Salaries and employee benefits 14,878 16,074 44,932 50,618
Net occupancy expense 3,104 3,256 9,257 10,427
Other expense 11,395 11,658 33,079 40,077
------------------------------- ------------------------------
Total other expense 29,377 30,988 87,268 101,122
------------------------------- ------------------------------
Income before income taxes 26,200 22,738 79,454 53,481
Income taxes 8,500 6,397 26,797 15,172
------------------------------- ------------------------------
Net income $ 17,700 $16,341 $ 52,657 $ 38,309
=============================== ==============================
Earnings per common share:
Basic $0.41 $0.38 $1.22 $0.90
=============================== ==============================
Diluted $0.41 $0.38 $1.20 $0.88
=============================== ==============================
Dividends per common share $0.21 $0.19 $0.61 $0.55
=============================== ==============================
Average outstanding shares:
Basic 43,124,385 42,589,828 43,239,869 42,498,014
Diluted 43,708,483 43,507,635 43,817,913 43,410,699
</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>
NINE MONTHS ENDED SEPTEMBER 30, 1999
------------------------------------------------------------------------------------------
COMMON STOCK ACCUMULATED
------------------------- OTHER TOTAL
PAR RETAINED COMPREHENSIVE TREASURY SHAREHOLDERS'
SHARES VALUE SURPLUS EARNINGS INCOME (LOSS) STOCK EQUITY
------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at January 1, 1999 43,256,833 $ 108,142 $88,353 $220,111 $4,934 $(9) $421,531
Comprehensive income (loss):
Net income - - - 52,657 - - 52,657
Other comprehensive income
(loss), net of tax:
Unrealized loss on
securities of $30,182 net
of reclassification
adustment for gains
included in net income
of $1 - - - - (30,181) - (30,181)
----------------
Total comprehensive income 22,476
(loss)
Purchase of treasury stock
(615,800 shares) (15,592) (15,592)
Cash dividends ($0.61 per share) - - - (26,403) - - (26,403)
Common stock options exercised
(195,983 shares) 124,936 312 (195) - - 1,827 1,944
------------------------------------------------------------------------------------------
Balance at September 30, 1999 43,381,769 $ 108,454 $88,158 $246,365 $(25,247) $(13,774) $403,956
==========================================================================================
</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>
NINE MONTHS ENDED
SEPTEMBER 30
---------------------------
1999 1998
---------------------------
<S> <C> <C>
NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES $ 205,670 $ (329,871)
INVESTING ACTIVITIES
Proceeds from maturities and calls of investment securities 144,558 108,058
Purchases of investment securities (56,068) (74,820)
Proceeds from sales of securities available for sale 261,429 26,412
Proceeds from maturities and calls of securities available for sale 110,262 240,133
Purchases of securities available for sale (923,516) (202,789)
Proceeds from sales of loans 2,283
Purchases of loans (15,917)
Net purchases of bank premises and equipment (5,155) (2,003)
Net cash of acquired branches 56,472
Net change in loans (235,638) 121,786
---------------------------
NET CASH (USED IN) PROVIDED BY INVESTING ACTIVITIES (704,128) 259,615
---------------------------
FINANCING ACTIVITIES
Cash dividends paid (25,971) (19,321)
Proceeds from sales of treasury stock 654
Acquisition of treasury stock (15,592) (3,609)
Proceeds from exercise of stock options 1,944 2,298
Pre-merger transactions of pooled companies 4,788
Repayment of Federal Home Loan Bank borrowings (1,462) (195,598)
Proceeds from Federal Home Loan Bank borrowings 457,446 228,779
Acquisition of fractional shares (7)
Changes in:
Deposits (116,158) 67,810
Federal funds purchased, securities sold under agreements
to repurchase and other borrowings 192,590 2,854
---------------------------
NET CASH PROVIDED BY FINANCING ACTIVITIES 492,797 88,648
---------------------------
(Decrease) increase in cash and cash equivalents (5,661) 18,392
Cash and cash equivalents at beginning of year 141,298 190,028
---------------------------
Cash and cash equivalents at end of period $135,637 $208,420
===========================
</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 be recognized in earnings. The provisions of this statement become
effective for United beginning January, 1, 2001. 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. The provisions of this statement become effective for
United on January, 1, 1999.
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>
SEPTEMBER 30, 1999
---------------------------------------------------------------
GROSS GROSS ESTIMATED
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
---------------------------------------------------------------
<S> <C> <C> <C> <C>
U.S. Treasury securities and
obligations of U.S. Government
corporations and agencies $298,821 $ 129 $ 8,410 $ 290,540
State and political subdivisions 47,175 10 3,337 43,848
Mortgage-backed securities 911,219 832 24,516 887,535
Marketable equity securities 8,736 3,922 583 12,075
Other 218,241 - 6,888 211,353
---------------------------------------------------------------
Total $1,484,192 $4,893 $43,734 $1,445,351
===============================================================
DECEMBER 31, 1998
---------------------------------------------------------------
GROSS GROSS ESTIMATED
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 loss on available for sale securities
resulted in a decrease to shareholders' equity of $25,247 at September 30, 1999
and the cumulative net unrealized holding gain on available for sale securities
resulted in an increase of $4,934 at December 31, 1998. Both of these amounts
are net of deferred income taxes.
The amortized cost and estimated fair value of securities available for sale at
September 30, 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>
SEPTEMBER 30, 1999 DECEMBER 31, 1998
---------------------------------- ----------------------------------
ESTIMATED ESTIMATED
AMORTIZED FAIR AMORTIZED FAIR
COST VALUE COST VALUE
---------------------------------- ----------------------------------
<S> <C> <C> <C> <C>
Due in one year or less $ 9,083 $ 9,105 $ 38,072 $ 38,321
Due after one year through five years 135,988 134,732 113,410 114,343
Due after five years through ten years 313,903 304,890 123,793 124,204
Due after ten years 1,016,482 984,549 273,088 275,221
Marketable equity securities 8,736 12,075 9,211 13,076
---------------------------------- ----------------------------------
Total $1,484,192 $1,445,351 $557,574 $565,165
================================== ==================================
</TABLE>
The preceding table includes $887,535 and $282,216 of mortgage-backed securities
at September 30, 1999 and December 31, 1998, respectively, with an amortized
cost of $911,219 and $279,618 at September 30, 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>
SEPTEMBER 30, 1999
---------------------------------------------------------------
GROSS GROSS ESTIMATED
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
---------------------------------------------------------------
<S> <C> <C> <C> <C>
U.S. Treasury securities and
obligations of U.S. Government
corporations and agencies $56,879 $ 80 $1,519 $55,440
State and political subdivisions 99,557 1,065 3,942 96,680
Mortgage-backed securities 97,531 623 664 97,490
Other 19,708 - - 19,708
---------------------------------------------------------------
Total $273,675 $ 1,768 $6,125 $269,318
===============================================================
DECEMBER 31, 1998
---------------------------------------------------------------
GROSS GROSS ESTIMATED
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
September 30, 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>
SEPTEMBER 30, 1999 DECEMBER 31, 1998
---------------------------------- ----------------------------------
ESTIMATED ESTIMATED
AMORTIZED FAIR AMORTIZED FAIR
COST VALUE COST VALUE
---------------------------------- ----------------------------------
<S> <C> <C> <C> <C>
Due in one year or less $ 5,861 $ 5,870 $ 17,218 $ 17,349
Due after one year through five years 35,164 40,242 68,758 69,661
Due after five years through ten years 69,828 69,572 117,860 120,026
Due after ten years 162,822 153,634 158,315 160,317
---------------------------------- ----------------------------------
Total $273,675 $269,318 $362,151 $367,353
================================== ==================================
</TABLE>
The preceding table includes $97,490 and $140,387 of mortgage-backed securities
at estimated fair value at September 30, 1999 and December 31, 1998,
respectively, with an amortized cost of $97,531 and $139,002 at September 30,
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 $660,226 and $414,275 at September 30, 1999 and
December 31, 1998, respectively.
4. NONPERFORMING LOANS
Nonperforming loans are summarized as follows:
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1999 1998
------------------- -------------------
<S> <C> <C> <C>
Loans past due 90 days or more and still accruing interest $9,872 $ 9,528
Nonaccrual loans 11,059 9,139
------------------- -------------------
Total nonperforming loans $20,931 $18,667
=================== ===================
</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 NINE MONTHS ENDED
SEPTEMBER 30 SEPTEMBER 30
------------------------------------ ------------------------------------
1999 1998 1999 1998
----------------- ------------------ ------------------------------------
<S> <C> <C> <C> <C>
Balance at beginning of period $40,471 $36,627 $39,189 $31,936
Provision charged to expense 2,255 3,316 4,780 10,653
----------------- ------------------ ------------------------------------
42,726 39,943 43,969 42,589
Loans charged-off (3,032) (1,313) (4,943) (4,684)
Less recoveries 10 232 678 957
----------------- ------------------ ------------------------------------
Net Charge-offs (3,022) (1,081) (4,265) (3,727)
----------------- ------------------ ------------------------------------
Balance at end of period $39,704 $38,862 $39,704 $38,862
================= ================== ====================================
</TABLE>
The average recorded investment in impaired loans during the quarter ended
September 30, 1999 and for the year ended December 31, 1998 was approximately
$17,931 and $10,343, respectively. For the quarters ended September 30, 1999 and
1998, United recognized interest income on the impaired loans of approximately
$33 and $78, respectively, substantially all of which was recognized using the
accrual method of income recognition.
At September 30, 1999, the recorded investment in loans that are considered to
be impaired under SFAS No. 114 was $13,972 (of which $11,059 were on a
nonaccrual basis). Included in this amount is $3,063 of impaired loans for which
the related allowance for loan losses is $778 and $10,909 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 $395 and $255 for the quarters ended September 30,
1999 and 1998, respectively, $1,193 and $1,057 for the nine months ended
September 30, 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
-------------------------------------------------------------
THREE MONTHS ENDED SEPTEMBER 30, 1999
<S> <C> <C> <C> <C>
Net interest income $ 853 $ 43,791 $ 345 $ 44,989
Provision for loan losses 5 2,250 - 2,255
Net interest income after provision for loan losses 848 41,541 345 42,734
Noninterest income 5,726 8,423 (1,306) 12,843
Noninterest expense 4,702 24,522 153 29,377
Income (loss) before income taxes 1,872 25,442 (1,114) 26,200
Income tax expense 609 7,843 48 8,500
Net income (loss) 1,263 17,599 (1,162) 17,700
Average total assets 113,921 4,947,194 (51,021) 5,010,094
THREE MONTHS ENDED SEPTEMBER 30, 1998
Net interest income $ 672 $ 42,576 $ 324 $ 43,572
Provision for loan losses 16 3,300 - 3,316
Net interest income after provision for loan losses 656 39,276 324 40,256
Noninterest income 6,635 5,641 1,194 13,470
Noninterest expense 5,410 25,163 415 30,988
Income before income taxes 1,881 19,754 1,103 22,738
Income tax expense 528 5,564 305 6,397
Net income 1,353 14,190 798 16,341
Average total assets 178,492 4,388,126 (249,725) 4,316,893
NINE MONTHS ENDED SEPTEMBER 30, 1999
Net interest income $ 2,648 $ 130,778 $ 2,141 $ 135,567
Provision for loan losses 30 4,750 - 4,780
Net interest income after provision for loan losses 2,618 126,028 2,141 130,787
Noninterest income 17,966 22,954 (4,985) 35,935
Noninterest expense 14,063 72,652 553 87,268
Income (loss) before income taxes 6,521 76,330 (3,397) 79,454
Income tax expense 2,206 24,141 450 26,797
Net income (loss) 4,315 52,189 (3,847) 52,657
Average total assets 156,711 4,802,105 (151,670) 4,807,146
</TABLE>
15
<PAGE>
<TABLE>
<CAPTION>
GENERAL
MORTGAGE COMMUNITY CORPORATE
BANKING BANKING AND OTHER* CONSOLIDATED
-------------------------------------------------------------
<S> <C> <C> <C> <C>
NINE MONTHS ENDED SEPTEMBER 30, 1998
Net interest income $ 1,839 $ 122,810 $ 1,210 $ 125,859
Provision for loan losses 23 10,630 - 10,653
Net interest income after provision for loan losses 1,816 112,180 1,210 115,206
Noninterest income 18,462 17,050 3,885 39,397
Noninterest expense 15,229 82,754 3,139 101,122
Income (loss) before income taxes 5,049 46,476 1,956 53,481
Income tax expense 1,367 8,987 4,818 15,172
Net income (loss) 3,682 37,489 (2,862) 38,309
Average total assets 174,699 4,224,503 (217,995) 4,181,207
</TABLE>
* General corporate and other includes intercompany eliminations
8. COMPREHENSIVE INCOME
In June 1997, the FASB issued Statement No. 130, (SFAS No. 130), "REPORTING
COMPREHENSIVE INCOME" effective for years beginning after December 15, 1997.
This statement requires companies to report and display comprehensive income and
its components in the financial statements. For United, comprehensive income
consists of net income reported on the consolidated statements of income and
changes in the fair value of available for sale securities reported as a
component of shareholders' equity, net of any realized after-tax gain or loss on
sales or calls of investment securites included in consolidated net income.
The components of total comprehensive income for the three and nine months ended
September 30, 1999 and 1998 are as follows:
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30 SEPTEMBER 30
----------------------------------- ----------------------------------
1999 1998 1999 1998
------------------ ---------------- ----------------- ----------------
<S> <C> <C> <C> <C>
Net Income $ 17,700 $ 16,341 $ 52,657 $ 38,309
Other Comprehensive Income, Net of Tax:
Unrealized gain (loss) on available for
sale securities arising during the period 9,385 149 (30,182) (2,807)
Less: Reclassification adjustment for
(losses) gains included in net income (46) 278 1 1,808
------------------ ---------------- ----------------- ----------------
Total Comprehensive Income $ 27,039 $ 16,768 $ 22,476 $ 37,310
================== ================ ================= ================
</TABLE>
16
<PAGE>
9. EARNING ASSETS AND INTEREST-BEARING LIABILITIES
The following table shows the daily average balance of major categories of
assets and liabilities for each of the three month periods ended September 30,
1999 and September 30, 1998 with the interest rate earned or paid on such
amount.
<TABLE>
<CAPTION>
THREE MONTHS ENDED THREE MONTHS ENDED
SEPTEMBER 30, 1999 SEPTEMBER 30, 1998
------------------------------------- ------------------------------------
AVERAGE AVG. AVERAGE AVG.
BALANCE INTEREST RATE BALANCE INTEREST RATE
------------------------------------- ------------------------------------
<S> <C> <C> <C> <C> <C> <C>
ASSETS
Earning Assets:
Federal funds sold and securities
repurchased under agreements to resell and
other short-term investments $ 9,362 $ 150 6.37% $ 37,193 $ 535 5.72%
Investment Securities:
Taxable 1,371,410 22,247 6.49% 852,397 12,733 5.98%
Tax-exempt (1)(2) 345,317 7,812 9.05% 69,156 1,266 7.32%
------------------------------------- ------------------------------------
Total Securities 1,716,727 30,059 7.00% 921,553 13,999 6.08%
Loans, net of unearned income (1)(2) 3,025,441 63,542 8.36% 3,133,108 70,285 8.93%
Allowance for loan losses (40,433) (36,785)
-------------- --------------
Net loans 2,985,008 8.47% 3,096,323 9.04%
------------------------------------- ------------------------------------
Total earning assets 4,711,097 $ 93,751 7.93% 4,055,069 $ 84,819 8.33%
------------------------ -----------------------
Other assets 298,997 261,824
-------------- --------------
TOTAL ASSETS $5,010,094 $4,316,893
============== ==============
LIABILITIES
Interest-Bearing Funds:
Interest-bearing deposits $2,878,331 $ 30,281 4.17% $2,812,714 $ 32,901 4.64%
Federal funds purchased, repurchase
Agreements and other short-term
Borrowings 438,637 5,309 4.80% 239,739 2,842 4.70%
FHLB advances 759,047 10,232 5.35% 329,103 4,605 5.55%
------------------------------------- ------------------------------------
Total Interest-Bearing Funds 4,076,015 45,822 4.46% 3,381,556 40,348 4.73%
------------------------ -----------------------
Demand deposits 465,750 442,336
Accrued expenses and other liabilities 66,791 69,816
-------------- --------------
TOTAL LIABILITIES 4,608,556 3,903,708
SHAREHOLDERS' EQUITY 401,538 413,185
-------------- --------------
TOTAL LIABILITIES AND
SHAREHOLDERS' EQUITY $5,010,094 $4,316,893
============== ==============
NET INTEREST INCOME $ 47,929 $ 44,471
============= =============
INTEREST SPREAD 3.47% 3.60%
NET INTEREST MARGIN 3.99% 4.39%
</TABLE>
(1) The interest income and the yields on federally nontaxable loans and
investment securities are presented on a tax-equivalent basis using the
statutory federal income tax rate of 35%.
(2) The interest income and the yields on state nontaxable loans and investment
securities are presented on tax-equivalent basis using the statutory state
income tax rate of 9%.
(3) Nonaccruing loans are included in the daily average loan amounts
outstanding.
17
<PAGE>
The following table shows the daily average balance of major categories of
assets and liabilities for each of the nine month periods ended September 30,
1999 and September 30, 1998 with the interest rate earned or paid on such
amount.
<TABLE>
<CAPTION>
NINE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, 1999 SEPTEMBER 30, 1998
------------------------------------- ------------------------------------
AVERAGE AVG. AVERAGE AVG.
BALANCE INTEREST RATE BALANCE INTEREST RATE
------------------------------------- ------------------------------------
<S> <C> <C> <C> <C> <C> <C>
ASSETS
Earning Assets:
Federal funds sold and securities
repurchased under agreements to resell and
other short-term investments $ 7,784 $ 359 6.16% $ 30,211 $ 1,254 5.55%
Investment Securities:
Taxable 1,294,742 63,909 6.58% 894,813 42,125 6.28%
Tax-exempt (1) (2) 201,908 12,774 8.44% 60,859 3,663 8.03%
------------------------------------- ------------------------------------
Total Securities 1,496,650 76,683 6.83% 955,672 45,788 6.39%
Loans, net of unearned income (1) (2) 3,061,948 191,869 8.35% 2,984,104 196,562 8.78%
Allowance for loan losses (39,567) (34,501)
-------------- --------------
Net loans 3,022,381 8.46% 2,949,603 8.89%
------------------------------------- ------------------------------------
Total earning assets 4,526,815 $ 268,911 7.92% 3,935,486 $ 243,604 8.25%
------------------------ -----------------------
Other assets 280,331 245,721
-------------- --------------
TOTAL ASSETS $4,807,146 $4,181,207
============== ==============
LIABILITIES
Interest-Bearing Funds:
Interest-bearing deposits $2,911,417 $ 92,958 4.27% $2,752,024 $ 95,118 4.62%
Federal funds purchased, repurchase
agreements and other short-term
borrowings 346,738 11,763 4.54% 222,939 7,870 4.72%
FHLB advances 589,270 23,049 5.23% 284,458 11,926 5.61%
------------------------------------- ------------------------------------
Total Interest-Bearing Funds 3,847,425 127,770 4.44% 3,259,421 114,914 4.71%
------------------------ -----------------------
Demand deposits 466,915 446,385
Accrued expenses and other liabilities 70,799 67,893
-------------- --------------
TOTAL LIABILITIES 4,385,139 3,773,699
SHAREHOLDERS' EQUITY 422,007 407,508
-------------- --------------
TOTAL LIABILITIES AND
SHAREHOLDERS' EQUITY $4,807,146 $4,181,207
============== ==============
NET INTEREST INCOME $ 141,141 $ 128,690
============= =============
INTEREST SPREAD 3.48% 3.54%
NET INTEREST MARGIN 4.16% 4.37%
</TABLE>
(1) The interest income and the yields on federally nontaxable loans and
investment securities are presented on a tax-equivalent basis using the
statutory federal income tax rate of 35%.
(2) The interest income and the yields on state nontaxable loans and investment
securities are presented on a tax-equivalent basis using the statutory
state income tax rate of 9%.
(3) Nonaccruing loans are included in the daily average loan amounts
18
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
FORWARD-LOOKING STATEMENTS
Congress passed the Private Securities Litigation Act of 1995 to encourage
corporations to provide investors with information about the company's
anticipated future financial performance, goals, and strategies. The act
provides a safe harbor for such disclosure, in other words, protection from
unwarranted litigation if actual results are not the same as management
expectations.
United desires to provide its shareholders with sound information about past
performance and future trends. Consequently, any forward-looking statements
contained in this report, in a report incorporated by reference to this report,
or made by management of United in this report, in any other reports and
filings, in press releases and in oral statements, involves numerous
assumptions, risks and uncertainties.
Actual results could differ materially from those contained in or implied by
United's statements for a variety of factors including, but not limited to:
changes in economic conditions; movements in interest rates; competitive
pressures on product pricing and services; success and timing of business
strategies; the nature and extent of governmental actions and reforms; and
rapidly changing technology and evolving banking industry standards and the
inability of United or others to remediate Year 2000 concerns in a timely
fashion.
INTRODUCTION
The following is a broad overview of the financial condition and results of
operations and is not intended to replace the more detailed discussion which is
presented under specific headings on the following pages.
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.
OVERVIEW
Net income for the nine months of 1999 was $52.66 million or $1.20 per share
compared to $38.31 million or $0.88 per share for the first nine months of 1998.
This represents a 37.45% increase in net income and a 36.18% increase in
earnings per share. Net income for the third quarter of 1999 was $17.70 million
or $0.41 per share compared to $16.34 million or $0.38 per share for the third
quarter of 1998. The year-to-date results for 1998 include the recognition of
approximately $7.1 million ($4.3 million after-tax) of merger-related costs for
the acquisition of George Mason Bankshares, Inc. United's annualized return on
average assets for the first nine months of 1999 was 1.46% and return on average
shareholders' equity was 16.68% as compared to 1.22% and 12.57% for the first
nine months of 1998.
United had strong core earnings driven by a net interest margin of 4.16% for the
first nine months of 1999. Net interest income increased $9.71 million or 7.71%
for the first nine months of 1999 as compared to the same period for 1998. The
provision for loan losses decreased $5.87 million or 55.13% when comparing the
first nine months of 1999 to the first nine months of 1998. Noninterest income,
including income from mortgage banking operations, but excluding investment
securities gains, remained relatively flat for the first nine months of 1999
when compared to the first nine months of 1998. Noninterest expenses decreased
19
<PAGE>
$13.85 million or 13.70% for the first half of 1999 compared to the same period
in 1998. United's effective tax rate was 33.7% and 28.4% in 1999 and 1998.
Total assets were $5.08 billion at September 30, 1999, a $514.02 million or
11.25% increase from year end, and up $786.87 million or 18.32% from one year
ago. In terms of asset composition since year end 1998, the September 30, 1999
balance sheet reflects a $5.66 million decrease in cash and cash equivalents and
a $791.71 million increase in investment securities. Loans held for sale
decreased $603 million since year end due to loan sales in the secondary market
in addition to loan securitizations of approximately $370 million completed
during 1999. Portfolio loans, net of unearned income, increased $310.64 million.
Interest receivable increased $4.52 million or 14.88 % since year end due to the
growth in the investment and loan portfolios. Other assets increased $17.81
million due mainly to a $16 million increase in deferred taxes associated with
the net unrealized loss on the available for sale securities portfolio. All
other categories of assets were moderately flat compared to year end 1998.
Noninterest and interest bearing deposits decreased $41.19 million and $74.94
million, repectively, compared to year end. United's total borrowed funds
increased $648.57 million or 15.87%. Short-term borrowings increased $192.59
million and FHLB borrowings increased $455.98 million as United utilized the
borrowings to fund investment and loan growth. Accrued expenses and other
liabilities were moderately flat compared to year end 1998.
Shareholders' equity decreased $17.58 million or 4.17% from to December 31, 1998
due primarily to purchases of treasury stock and a decline in the fair value of
United's securities available for sale portfolio of approximately $30.18
million, net of deferred income taxes. United continued to balance capital
adequacy and returns to shareholders. At September 30, 1999, United's regulatory
capital ratios, including those of its bank subsidiaries, exceeded the levels
established for well-capitalized institutions.
RESULTS OF OPERATIONS
NET INTEREST INCOME
Net interest income increased $1.42 million or 3.25% in the third quarter of
1999 and $9.71 million or 7.71% for the first nine months of 1999, when compared
to the same periods of 1998. The net interest margin continues to drive United's
core profitability and momentum. The increases were primarily attributable to
higher levels of average earning assets of $656.03 million for the third quarter
of 1999 and $591.33 million for the nine months of 1999, when compared to the
third quarter and first nine months of 1998, respectively. United's
tax-equivalent net interest margin was 3.99% and 4.16% for the third quarter and
first nine months of 1999, respectively. For the quarter ended September 30,
1999, United's net interest margin was 4 basis points lower than the immediately
preceding quarter, and 40 basis points less than the third quarter of 1998. The
lower net interest margin from one year ago was the result of increased average
wholesale funding balances as well as a decrease in the yield on the loan
portfolio due to the securitization of certain high loan to value loans.
PROVISION FOR LOAN LOSSES
Nonperforming loans were $20.93 million at September 30, 1999 and $18.67 million
at December 31, 1998. Nonperforming loans represented 0.42% of total assets at
the end of the third quarter of 1999, as compared to 0.41% for United at year
end 1998. The components of nonperforming loans include nonaccrual loans
20
<PAGE>
and loans which are contractually past due 90 days or more as to interest or
principal, but have not been put on a nonaccrual basis. Nonaccrual loans
modestly increased $344 thousand or 3.61% since year end 1998. Total
nonperforming assets of $24.20 million, including OREO of $3.27 million at
September 30, 1999, represented 0.48% of total assets at the end of the third
quarter.
At September 30, 1999, impaired loans were $13.97 million, an increase of $3.05
million or 27.93% 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 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, inherent
uncertainties in the estimation process. 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 September 30,
1999, produced increased allocations within three of four loan categories. The
components of the allowance allocated to real estate, consumer and real estate
construction loans increased $265 thousand, $108 thousand and $90 thousand,
respectively, as a result of changes in historical loss experience and volume
factors for these loan pools. The components of the allowance allocated to
commercial loans decreased $557 thousand as a result of a lower level of
classified assets and decreases in specific allocations for commercial loans as
a result of individual credit reviews.
At September 30, 1999 and December 31, 1998, the allowance for loan losses was
1.34% and 1.48% of total loans, net of unearned income, respectively. At
September 30, 1999 and December 31, 1998, the ratio of the allowance for loan
losses to nonperforming loans was 189.7% and 209.9%, respectively
Management believes that the allowance for loan losses of $39.70 million at
September 30, 1999, is adequate to provide for losses on existing loans based on
information currently available.
For the quarters ended September 30, 1999 and 1998, the provision for loan
losses was $2.26 million and $3.32 million, respectively, while the provision
for the first nine months was $4.78 million for 1999 as compared to $10.65
million for 1998. Total net charge-offs were $3.02 million in the third quarter
of 1999 and $1.08 million during the same time period in 1998, which represents
0.11% and 0.03% of average loans for the respective quarters. Half of the loss
in the third quarter of 1999 was due to the charge-off of approximately $1.5
million associated with a single borrower. Charge-offs exceeded recoveries by
$4.27 million for the first nine months of 1999 as compared to net charge-offs
of $3.73 million for the first nine months of 1998. Note 5 to the accompanying
unaudited consolidated financial statements provides a progression of the
allowance for loan losses.
21
<PAGE>
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 $627 thousand or 4.65% for the third
quarter of 1999 when compared to the third quarter of 1998 due mainly to the
slowdown in the mortgage banking sector in response to higher interest rates.
Noninterest income decreased $3.46 million or 8.79% for the first nine months of
1999 when compared to the same period in 1998 due mainly to a 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. Revenues from the trust department
increased $230 thousand or 19.79% for the third quarter of 1999 and $696
thousand or 21.17% for the first nine months of 1999 when compared to the same
time periods in 1998. Other charges, commissions and fee revenue increased for
the quarter, up $647 thousand or 13.71% over the second quarter of 1999, due
mainly to a new checking account product introduced during the quarter.
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 $1.61
million or 5.20% and $13.85 million or 13.70% for the quarter and nine months
ended September 30, 1999, as compared to the same periods in 1998. The
year-to-date figures for 1998 include merger-related charges recognized during
the second quarter of 1998 for the acquisition of George Mason. These charges
consisted primarily of employee benefits, severance, facilities, and information
system costs to effect the merger.
Total salaries and benefits decreased by 7.44% or $1.20 million and 11.23% or
$5.69 million for the third quarter and first nine months of 1999 when compared
to the same periods of 1998. The higher salaries and benefits costs for 1998
were attributable to commissions and salaries expense at United's mortgage
banking subsidiaries due to higher commissions on the increased volume of
mortgage loans originated during the year for sale in the secondary market as
well as severance and benefit pay of displaced employees in the George Mason
merger.
Net occupancy expense for the third quarter and the first nine months of 1999
decreased by $152 thousand or 4.67% and $1.17 million or 11.22% when compared to
the third quarter and first nine months of 1998, respectively. The higher
expense in 1998 was due to the costs associated with consolidating common
banking offices from the George Mason merger.
Other expenses decreased $263 thousand or 2.26% and $7 million or 17.46% for the
third quarter and first nine months of 1999, as compared to the same periods of
1998. This overall decrease for the nine months ended figures was primarily due
to higher legal, data processing and other related expenses associated with
22
<PAGE>
the second quarter of 1998 merger with George Mason.
MARKET RISK
The objective of United's Asset/Liability Management function is to manage
interest rate risk and 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 subjective and uncertain in natureand,
as a result, the model cannot precisely measure net interest income or precisely
predict the impact of fluctuations in interest rates on net interest income.
Actual results will differ from simulated results due to timing, magnitude and
frequency of interest rate changes as well as changes in market conditions and
management strategies.
Interest sensitive assets and liabilities are defined as those assets or
liabilities that mature or are repriced within a designated time- frame. The
principal function of interest rate risk management is to maintain an
appropriate relationship between those assets and liabilities that are sensitive
to changing market interest rates. The difference between rate sensitive assets
and rate sensitive liabilities for specified periods of time is known as the
"GAP." United closely monitors the sensitivity of its assets and liabilities on
an on-going basis and projects the effect of various interest rate changes on
its net interest margin.
As shown in the interest rate sensitivity gap table in this section, United was
liability sensitive (more liabilities repricing than assets) in the one year
horizon. 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 $600 million or
(12.46%) 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 intention that these loans
would be securitized and resold back to the third party lender.
23
<PAGE>
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 $79 million
of these loans which were retained in its loan portfolio, United completed its
plan to securitize the remaining loans and sold some of the resulting securities
and placed the remaining 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 an independent third party. During the second quarter of 1999, United
completed a second securitization in which approximately $165 million of
mortgage loans held for sale were securitized and placed 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 more
predictable cash flows, which United either sold to independent third parties or
placed in its own investment portfolio. As a result, United does maintain a
certain level of prepayment and interest rate risk associated with these
securities, however, the risk maintained by United is less than that which would
be maintained had United held these assets as 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)
the sum of pass-through interest paid to third-party investors and various fees,
including trustee, 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.
24
<PAGE>
The following table shows United's estimated earnings sensitivity profile after
management's adjustments as of September 30, 1999 and September 30, 1998:
<TABLE>
<CAPTION>
Change in
Interest Rates Percentage Change in Net Interest Income
(basis points) September 30, 1999 September 30, 1998
--------------- ------------------------------------------------------
<S> <C> <C>
+200 -3.31% 3.40%
-200 5.60% -3.74%
</TABLE>
For September 30, 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 decrease by 3.31% over one year as compared to
an increase of 3.40% for September 30, 1998. A 200 basis point immediate,
sustained downward shock in the yield curve would increase net interest income
by an estimated 5.60% over one year for September 30, 1999 as compared to a
decrease of 3.74% for September 30, 1998. All of these estimated changes in net
interest income are and were within the policy guidelines established by the
Board of Directors.
25
<PAGE>
The following table shows the interest rate sensitivity GAP as of September 30,
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> <C> <C> <C> <C> <C> <C>
ASSETS
INTEREST-EARNING ASSETS:
Federal funds sold and
Securities purchased
under agreements to
resell and other
short-term investments $ 5,781 $ 2,300 $ 8,081 $ 5,024 $ 13,105
Investment and
Marketable
Equity Securities
Taxable 88,591 16,298 $42,339 147,228 282,774 $ 1,145,620 1,575,622
Tax-exempt 1,572 581 2,153 12,759 128,492 143,404
Loans, net of unearned
income 1,140,470 174,682 327,571 1,642,723 817,960 619,960 3,080,643
-------------------------------------------------------------------------------------------
Total Interest-Earning
Assets $1,234,842 $194,852 $370,491 $1,800,185 $1,118,517 $1,894,072 $4,812,774
===========================================================================================
LIABILITIES
INTEREST-BEARING FUNDS:
Savings and NOW accounts
$1,192,569 $1,192,569 $1,192,569
Time deposits of
$100,000 & over 44,496 $26,306 $72,391 143,193 $ 57,670 $ 653 201,516
Other time deposits 339,533 305,083 449,468 1,094,084 384,288 2,670 1,481,042
Federal funds
purchased,
Repurchase agreements
and other short-term
borrowings 362,453 63,000 425,453 23,500 448,953
FHLB advances 346,000 50,000 75,750 471,750 36,232 293,869 801,851
-------------------------------------------------------------------------------------------
Total Interest-Bearing
Funds $2,285,051 $444,389 $597,609 $3,327,049 $501,690 $297,192 $4,125,931
===========================================================================================
INTEREST SENSITIVITY GAP ($1,050,209) ($249,537) ($227,118) ($1,526,864) $616,827 $1,596,880 $686,843
===========================================================================================
CUMULATIVE GAP ($1,050,209)($1,299,746) ($1,526,864) ($1,526,864) ($910,037) $686,843 $ 686,843
===========================================================================================
Cumulative Gap as a
Percentage of (21.82%) (27.01%) (31.73%) (31.73%) (18.91%) 14.27% 14.27%
Total Earning Assets
Management Adjustments $1,158,828 ($ 77,294) ($ 154,472) $927,062 ($927,062) $ 0
Off-Balance Sheet
Activities
CUMULATIVE MANAGEMENT
ADJUSTED GAP AND
OFF-BALANCE SHEET
ACTIVITIES $ 108,619 ($218,211) ($ 599,802) ($599,802) ($910,037) $686,843 $686,843
===========================================================================================
CUMULATIVE MANAGEMENT
ADJUSTED GAP AND
OFF-BALANCE SHEET
ACTIVITIES AS A
PERCENTAGE OF TOTAL
EARNING ASSETS 2.26% (4.53%) (12.46%) (12.46%) (18.91%) 14.27% 14.27%
===========================================================================================
</TABLE>
26
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
United maintains, in the opinion of management, liquidity which is sufficient to
satisfy its depositors' requirements and the credit needs of its customers. Like
all banks, United depends upon its ability to renew maturing deposits and other
liabilities on a daily basis and to acquire new funds in a variety of markets. A
significant source of funds available to United is "core deposits". Core
deposits include certain demand deposits, statement and special savings and NOW
accounts. These deposits are relatively stable and they are the lowest cost
source of funds available to United. Short-term borrowings have also been a
significant source of funds. These include federal funds purchased and
securities sold under agreements to repurchase. Repurchase agreements represent
funds which are obtained as the result of a competitive bidding process.
Liquid assets are cash and those items readily convertible to cash. All banks
must maintain sufficient balances of cash and near-cash items to meet the
day-to-day demands of customers. Other than cash and due from banks, the
available for sale securities portfolio, loans held for sale, maturing loans,
and maturing 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 branches banks providing access to a
diversified and substantial retail deposit market.
Short-term needs can be met through a wide array of sources such as
correspondent and downstream correspondent federal funds and utilization of
Federal Home Loan Bank advances.
Other sources of liquidity available to United to provide long-term as well as
short-term funding alternatives, in addition to FHLB advances, are long-term
certificates of deposit, lines of credit, and borrowings that are secured by
bank premises or stock of United's subsidiaries. United has no intention at this
time to utilize any long-term funding sources other than FHLB advances and
long-term certificate of deposits for funding in the normal course of business.
For the nine months ended September 30, 1999, cash flows from operations
provided United $205.67 million of cash primarily as a result of $153.27 million
of excess proceeds from sales of mortgage loans in the secondary market during
the first nine months of 1999. During the same period, net cash of $704.13
million was used for investing activities which was primarily due to $463.34
million of excess purchases of investment securities over net proceeds from
calls and maturities of investment securities and $235.64 million of net
portfolio loan originations. During the first nine months of 1999, net cash of
$492.80 million was generated by financing activities, primarily due to
additional borrowings of approximately $648.57 million that consisted of $455.98
million of new FHLB advances and $192.04 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 $25.97
million in cash dividends, $15.59 million for acquisitions of United shares
under the stock repurchase program and a $116.16 million decrease in deposits.
The net effect of this activity was a decrease in cash and cash equivalents of
$5.66 million for the first nine months of 1999.
United anticipates no difficulty in meeting its obligations over the next 12
months and has no material
27
<PAGE>
commitments for capital expenditures. There are no known trends, demands,
commitments, or events that will result in or that are reasonably likely to
result in United's liquidity increasing or decreasing in any material way.
United also has significant lines of credit available. As part of its Year 2000
contingency plan, United has established lines of credit at the Federal Reserve
Bank Discount Window for both of its subsidiary banks in case of any unexpected
cash needs.
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 decreased $17.58 million to $403.96 million, which is
a decrease of 4.17% from December 31, 1998. Since year end, United has
experienced a $30.18 million reduction, net of deferred income taxes, in the
fair value of its available for sale investment portfolio due primarily to
increased market interest rates. During the second quarter of 1999, United
announced a new plan to repurchase up to 1.75 million shares of its common stock
on the open market, of which 615,800 shares were repurchased since its
implementation in May of 1999. United's equity to assets ratio was 7.95% at
September 30, 1999, as compared to 9.23% at December 31, 1998. Capital and
reserves to total assets was 8.73% at September 30, 1999, as compared to 10.09%
at December 31, 1998.
Cash dividends of $0.21 per common share for the third quarter of 1999 and $0.61
for the nine month period ended September 30, 1999, both represent increases of
10.53% and 10.91%, respectively, over the $0.19 paid for third quarter of 1998
and $0.55 paid for the first nine months of 1998. Total cash dividends paid were
approximately $9.03 million for the third quarter of 1999 and $26.40 million for
the first nine months of 1999, an increase of 21.43% and 33.89% over the
comparable periods 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 8.78% at September 30, 1999 and 9.75% at September 30, 1998. United's
risk-based capital ratios at September 30, 1999 and December 31, 1998 are
both significantly higher than the minimum regulatory requirements. United's
Tier I capital and leverage ratios at September 30, 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 digits 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
28
<PAGE>
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 have been completed.
The completed assessment indicated that most of United's significant information
technology systems could be affected. That assessment also indicated that
software and hardware used in the operating equipment also are at risk. Based on
its assessments, United determined that it will be required to modify or replace
approximately 40% of its hardware and certain software so that those systems
will properly utilize dates beyond December 31, 1999. United presently believes
that with modifications or replacements of existing software and certain
hardware, the Year 2000 Issue can be mitigated. However, if such modifications
and replacements are not made, or are not completed timely, the Year 2000 Issue
could have a material impact on United's operations.
United has initiated formal communications with all of its significant suppliers
and customers to determine the extent to which United's interface systems are
vulnerable to those third parties' failure to remediate their own Year 2000
Issues. United's total Year 2000 project costs and estimates to complete include
the estimated costs and time associated with the impact of third party Year 2000
Issues based on presently available information. However, there can be no
guarantee that the systems and applications of other companies on which United's
systems rely will be timely converted or that a failure to convert by another
company, or a conversion that is incompatible with United's systems and
applications, would not have a material adverse effect on United.
To date, United has obtained information about the Year 2000 compliance status
of all of its significant suppliers and vendors. 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 has completed the
remediation and testing phases of the Year 2000 project as well as the
implementation phase with all information technology and non-information
technology systems being compliant with the Year 2000.
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 $2.7 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
29
<PAGE>
unprecedented event. If Year 2000 issues are not adequately addressed by United
and third parties, United could face, among other things, business disruptions,
operational problems, financial losses, legal liability and similar risks, and
United's business, operations, and financial position could be materially,
adversely affected.
United has developed 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. The first phrase of testing on these contingency
plans were successfully completed during the third quarter of 1999. The first
critical date of "9-9-99" passed without any problems as all systems performed
properly and all work was completed without any interruption in service to
customers. Final adaptation and testing of United's contingency plans will take
place during the fourth quarter of 1999. However, there can be no assurance that
any contingency plans will fully mitigate any failures or problems associated
with external and internal sources.
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.
30
<TABLE> <S> <C>
<ARTICLE> 9
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> SEP-30-1999
<CASH> 122,532,000
<INT-BEARING-DEPOSITS> 13,105,000
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 1,445,351,000
<INVESTMENTS-CARRYING> 273,675,000
<INVESTMENTS-MARKET> 269,318,000
<LOANS> 3,080,939,000
<ALLOWANCE> 39,704,000
<TOTAL-ASSETS> 5,081,915,000
<DEPOSITS> 3,376,927,000
<SHORT-TERM> 889,879,000
<LIABILITIES-OTHER> 57,552,000
<LONG-TERM> 353,601,000
0
0
<COMMON> 108,454,000
<OTHER-SE> 295,502,000
<TOTAL-LIABILITIES-AND-EQUITY> 5,081,915,000
<INTEREST-LOAN> 189,506,000
<INTEREST-INVEST> 73,472,000
<INTEREST-OTHER> 359,000
<INTEREST-TOTAL> 263,337,000
<INTEREST-DEPOSIT> 92,958,000
<INTEREST-EXPENSE> 127,770,000
<INTEREST-INCOME-NET> 135,567,000
<LOAN-LOSSES> 4,780,000
<SECURITIES-GAINS> 1,000
<EXPENSE-OTHER> 87,268,000
<INCOME-PRETAX> 79,454,000
<INCOME-PRE-EXTRAORDINARY> 79,454,000
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 52,657,000
<EPS-BASIC> 1.22
<EPS-DILUTED> 1.20
<YIELD-ACTUAL> 4.16
<LOANS-NON> 11,059,000
<LOANS-PAST> 9,872,000
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 39,189,000
<CHARGE-OFFS> 4,943,000
<RECOVERIES> 678,000
<ALLOWANCE-CLOSE> 39,704,000
<ALLOWANCE-DOMESTIC> 26,622,000
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 13,082,000
</TABLE>
