<PAGE>
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 June 30, 2000
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; 41,839,131 shares outstanding as of July
31, 2000.
1
<PAGE>
UNITED BANKSHARES, INC. AND SUBSIDIARIES
FORM 10-Q
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
----------------------------
Consolidated Balance Sheets (Unaudited)
June 30, 2000 and December 31, 1999......................................................................6
Consolidated Statements of Income (Unaudited) for the
Three and Six Months Ended June 30, 2000 and 1999........................................................7
Consolidated Statement of Changes in Shareholders' Equity
(Unaudited) for the Six Months Ended June 30, 2000.......................................................8
Condensed Consolidated Statements of Cash Flows (Unaudited)
for the Six Months Ended June 30, 2000 and 1999..........................................................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...............................................................20
-----------------------------------
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
------------------------------------------------------------
(a) The Annual Meeting of Shareholders was held on Monday, May 15, 2000:
(b) Not applicable as to election of directors because; i) proxies for the
meeting were solicited pursuant to Regulation 14 under the Securities and
Exchange Act of 1934; ii) there was no solicitation in opposition to the
nominees as listed in the proxy statement; iii) all of such nominees, as
listed in the proxy statement, were elected.
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..............................................29
(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 August 11, 2000 /s/ Richard M. Adams
------------------------- --------------------------------------
Richard M. Adams, Chairman of
the Board and Chief Executive
Officer
Date August 11, 2000 /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 June 30, 2000 and December 31, 1999, consolidated balance sheets of United
Bankshares, Inc. and Subsidiaries, and the related consolidated statements of
income for the three and six months ended June 30, 2000 and 1999, and the
related consolidated statement of changes in shareholders' equity for the six
months ended June 30, 2000, and the related condensed consolidated statements of
cash flows for the six months ended June 30, 2000 and 1999, 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) June 30 December 31
2000 1999
-------------------------
<S> <C> <C>
Assets
Cash and due from banks $ 112,620 $ 131,091
Interest-bearing deposits with other banks 11,779 8,317
Federal funds sold 20,400
-------------------------
Total cash and cash equivalents 124,399 159,808
Securities available for sale at estimated fair value (amortized cost-
$1,004,031 at June 30, 2000 and $1,256,946 at December 31, 1999) 962,999 1,207,363
Securities held to maturity (estimated fair value-$377,482 at
June 30, 2000 and $258,183 at December 31, 1999) 390,318 265,190
Loans held for sale 153,701 117,825
Loans
Commercial, financial, and agricultural 567,970 535,116
Real estate:
Single family residential 1,378,571 1,388,568
Commercial 688,627 701,421
Construction 149,296 144,634
Other 74,028 44,381
Installment 369,508 363,272
-------------------------
3,228,000 3,177,392
Less: Unearned income (6,354) (7,296)
-------------------------
Loans net of unearned income 3,221,646 3,170,096
Less: Allowance for loan losses (39,324) (39,599)
-------------------------
Net loans 3,182,322 3,130,497
Bank premises and equipment 46,617 48,696
Accrued interest receivable 35,033 36,357
Other assets 95,662 103,424
-------------------------
TOTAL ASSETS $4,991,051 $5,069,160
=========================
Liabilities
Domestic deposits:
Noninterest-bearing $ 531,507 $ 480,767
Interest-bearing 2,739,418 2,780,218
-------------------------
Total deposits 3,270,925 3,260,985
Borrowings:
Federal funds purchased 15,355 44,120
Securities sold under agreements to repurchase 358,630 349,129
Federal Home Loan Bank borrowings 884,445 953,347
Other borrowings 3,359 4,998
Accrued expenses and other liabilities 56,202 60,651
-------------------------
TOTAL LIABILITIES 4,588,916 4,673,230
Shareholders' equity
Common stock, $2.50 par value; Authorized-100,000,000 shares;
issued-43,381,769 at June 30, 2000 and December 31, 1999, including
1,471,046 and 894,661 shares in treasury at June 30, 2000 and
December 31, 1999, respectively 108,454 108,454
Surplus 86,019 87,260
Retained earnings 273,412 254,992
Accumulated other comprehensive loss (31,817) (32,228)
Treasury stock, at cost (33,933) (22,548)
-------------------------
TOTAL SHAREHOLDERS' EQUITY 402,135 395,930
-------------------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $4,991,051 $5,069,160
=========================
</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 Six Months Ended
June 30 June 30
------------------------ ------------------------
2000 1999 2000 1999
------------------------ ------------------------
<S> <C> <C> <C> <C>
Interest income
Interest and fees on loans $ 71,705 $ 59,779 $ 141,548 $ 127,430
Interest on federal funds sold and other short-term investments 90 81 202 209
Interest and dividends on securities:
Taxable 19,733 25,431 40,468 41,662
Tax-exempt 2,535 1,731 5,113 3,225
------------------------ ------------------------
Total interest income 94,063 87,022 187,331 172,526
Interest expense
Interest on deposits 30,258 30,891 59,304 62,677
Interest on short-term borrowings 5,007 3,600 8,894 6,454
Interest on Federal Home Loan Bank advances 13,367 7,924 26,976 12,817
------------------------ ------------------------
Total interest expense 48,632 42,415 95,174 81,948
------------------------ ------------------------
Net interest income 45,431 44,607 92,157 90,578
Provision for loan losses 3,851 1,761 6,398 2,525
------------------------ ------------------------
Net interest income after provision for loan losses 41,580 42,846 85,759 88,053
Other income
Income from mortgage banking operations 4,159 6,095 7,542 10,513
Service charges, commissions, and fees 5,634 4,718 10,727 9,157
Trust department income 1,753 1,234 3,445 2,592
Security gains 505 71 823 71
Other income 413 335 728 759
------------------------ ------------------------
Total other income 12,464 12,453 23,265 23,092
Other expense
Salaries and employee benefits 13,610 15,048 27,349 30,054
Net occupancy expense 2,870 3,179 6,031 6,153
Other expense 10,626 10,843 21,869 21,684
------------------------ ------------------------
Total other expense 27,106 29,070 55,249 57,891
------------------------ ------------------------
Income before income taxes 26,938 26,229 53,775 53,254
Income taxes 8,815 8,433 17,664 18,297
------------------------ ------------------------
Net income $ 18,123 $ 17,796 $ 36,111 $ 34,957
======================== ========================
Earnings per common share:
Basic $ 0.43 $ 0.41 $ 0.86 $ 0.81
======================== ========================
Diluted $ 0.43 $ 0.40 $ 0.85 $ 0.79
======================== ========================
Dividends per common share $ 0.21 $ 0.20 $ 0.42 $ 0.40
======================== ========================
Average outstanding shares:
Basic 41,931,050 43,322,319 42,110,730 43,298,879
Diluted 42,264,141 44,013,035 42,449,089 43,976,863
</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>
Six Months Ended June 30, 2000
----------------------------------------------------------------------------------------
Accumulated
Common Stock Other Total
---------------------
Par Retained Comprehensive Treasury Shareholders'
Shares Value Surplus Earnings Loss Stock Equity
----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at January 1, 2000 43,381,769 $108,454 $87,260 $254,992 ($32,228) ($22,548) $395,930
Comprehensive income (loss):
Net income - - - 36,111 - - 36,111
Other comprehensive income
(loss), net of tax:
Unrealized loss on securities of
$247 net of reclassification
adjustment for gains included
in net income of $535 - - - - 288 - 288
Amortization of $123 on the
unrealized loss for securities
transferred from the available-
for-sale to the held-to-maturity
investment portfolio - - - - 123 - 123
-------------
Total comprehensive income 36,522
Purchase of treasury stock
(680,500 shares) - - - - - (14,181) (14,181)
Cash dividends ($0.42 per share) - - - (17,691) - - (17,691)
Common stock options exercised
(104,115 shares) - - (1,241) - - 2,796 1,555
---------------------------------------------------------------------------------------
Balance at June 30, 2000 43,381,769 $108,454 $86,019 $273,412 $ (31,817) $ (33,933) $402,135
========================================================================================
</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>
Six Months Ended
June 30
---------------------
2000 1999
---------------------
<S> <C> <C>
NET CASH PROVIDED BY OPERATING ACTIVITIES $ 13,155 $ 150,995
INVESTING ACTIVITIES
Proceeds from maturities and calls of investment securities 13,305 125,751
Purchases of investment securities (110) (53,964)
Proceeds from sales of securities available for sale 100,626 248,557
Proceeds from maturities and calls of securities available for sale 57,992 64,138
Purchases of securities available for sale (50,809) (831,781)
Net purchases of bank premises and equipment (1,050) (3,108)
Net change in loans (58,184) (158,516)
---------------------
NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES 61,770 (608,923)
---------------------
FINANCING ACTIVITIES
Cash dividends paid (17,843) (17,254)
Acquisition of treasury stock (14,181) (3,397)
Proceeds from exercise of stock options 1,555 1,349
Repayment of Federal Home Loan Bank borrowings (625,292) (1,076)
Proceeds from Federal Home Loan Bank borrowings 556,390 409,841
Changes in:
Deposits 9,940 (101,601)
Federal funds purchased, securities sold under agreements
to repurchase and other borrowings (20,903) 151,115
---------------------
NET CASH (USED IN) PROVIDED BY FINANCING ACTIVITIES (110,334) 438,977
---------------------
Decrease in cash and cash equivalents (35,409) (18,951)
Cash and cash equivalents at beginning of year 159,808 141,298
---------------------
Cash and cash equivalents at end of period $ 124,399 $ 122,347
=====================
</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 1999 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" as amended by FASB Statement No.
137 and No. 138. The provisions of SFAS No. 133 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. SFAS No. 133 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, 2001. SFAS No. 133, when implemented, is not expected to materially impact
the reported financial position or results of operations of United.
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>
June 30, 2000
--------------------------------------------------
Gross Gross Estimated
(In thousands) 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 $ 246,245 $ 11 $12,463 $233,793
State and political subdivisions 49,033 61 3,178 45,916
Mortgage-backed securities 629,973 1,150 25,319 605,804
Marketable equity securities 7,872 728 1,097 7,503
Other 70,908 - 925 69,983
--------------------------------------------------
Total $1,004,031 $1,950 $42,982 $962,999
==================================================
<CAPTION>
December 31, 1999
--------------------------------------------------
(In thousands) 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 $ 276,558 $ 15 $13,817 $ 262,756
State and political subdivisions 48,914 10 4,070 44,854
Mortgage-backed securities 693,828 324 24,256 669,896
Marketable equity securities 8,369 2,711 775 10,305
Other 229,277 - 9,725 219,552
--------------------------------------------------
Total $1,256,946 $3,060 $52,643 $1,207,363
==================================================
</TABLE>
The cumulative net unrealized holding loss on available for sale securities
resulted in a decrease to shareholders' equity of $26,671 and $32,228, net of
deferred income taxes at June 30, 2000 and December 31, 1999, respectively.
The amortized cost and estimated fair value of securities available for sale at
June 30, 2000 and December 31, 1999, 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>
June 30, 2000 December 31, 1999
---------------------------- ------------------------
Estimated Estimated
Amortized Fair Amortized Fair
Cost Value Cost Value
---------------------------- ------------------------
<S> <C> <C> <C> <C>
Due in one year or less $ 27,553 $ 27,459 $ 6,668 $ 6,663
Due after one year through five years 75,000 73,239 112,839 110,581
Due after five years through ten years 274,277 260,996 333,612 318,462
Due after ten years 619,329 593,802 795,458 761,352
Marketable equity securities 7,872 7,503 8,369 10,305
---------------------------- ------------------------
Total $1,004,031 $962,999 $1,256,946 $1,207,363
============================ ========================
</TABLE>
The preceding table includes $605,804 and $669,896 of mortgage-backed securities
at June 30, 2000 and December 31, 1999, respectively, with an amortized cost of
$629,973 and $693,828 at June 30, 2000 and December 31, 1999, 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>
June 30, 2000
-----------------------------------------------
Gross Gross Estimated
(In thousands) 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 $ 56,248 $ 52 $ 1,564 $ 54,736
State and political subdivisions 95,956 696 3,990 92,662
Mortgage-backed securities 79,924 306 1,026 79,204
Other 158,190 7,310 150,880
-----------------------------------------------
Total $390,318 $1,054 $13,890 $377,482
===============================================
<CAPTION>
December 31, 1999
-----------------------------------------------
(In thousands) 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 $ 56,734 $ 36 $2,217 $ 54,553
State and political subdivisions 97,824 769 5,084 93,509
Mortgage-backed securities 90,850 380 886 90,344
Other 19,782 4 9 19,777
-----------------------------------------------
Total $265,190 $1,189 $8,196 $258,183
===============================================
</TABLE>
12
<PAGE>
The amortized cost and estimated fair value of securities held to maturity at
June 30, 2000, and December 31, 1999, 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>
June 30, 2000 December 31, 1999
------------------------ ------------------------
Estimated Estimated
Amortized Fair Amortized Fair
Cost Value Cost Value
------------------------ ------------------------
<S> <C> <C> <C> <C>
Due in one year or less $ 8,856 $ 8,961 $ 4,528 $ 4,522
Due after one year through five years 44,400 43,814 38,623 38,391
Due after five years through ten years 96,528 92,918 67,833 66,997
Due after ten years 240,534 231,789 154,206 148,273
------------------------ ------------------------
Total $390,318 $377,482 $265,190 $258,183
======================== ========================
</TABLE>
The preceding table includes $79,204 and $90,344 of mortgage-backed securities
at estimated fair value at June 30, 2000 and December 31, 1999, respectively,
with an amortized cost of $79,924 and $90,850 at June 30, 2000 and December 31,
1999, respectively.
Maturities of the mortgage-backed securities are based upon the estimated
average life. There were no sales of held to maturity securities.
At the end of the first quarter of 2000, debt securities with an amortized cost
of $146,229 and an estimated fair value of $138,122 were transferred into the
held to maturity category from the available for sale category. The cumulative
unrealized loss of $8,107 at the date of transfer will be retained in the
carrying value of the held to maturity securities. The cumulative unrealized
loss, net of deferred taxes, of $5,270 will be retained as a separate component
of shareholders' equity. Such amounts will be amortized over the estimated
remaining life of the securities. At June 30, 2000, the cumulative unrealized
loss balances, gross and net of deferred taxes, were $7,917 and $5,146,
respectively.
The carrying value of securities pledged to secure public deposits, securities
sold under agreements to repurchase, and for other purposes as required or
permitted by law, approximated $1,136,797 and $962,068 at June 30, 2000 and
December 31, 1999, respectively.
13
<PAGE>
4. NONPERFORMING LOANS
Nonperforming loans are summarized as follows:
<TABLE>
<CAPTION>
June 30, December 31,
2000 1999
---------- ------------
<S> <C> <C>
Loans past due 90 days or more and still
accruing interest $ 5,955 $ 8,415
Nonaccrual loans 11,156 12,327
---------- ------------
Total nonperforming loans $17,111 $20,742
========== ============
</TABLE>
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 Six Months Ended
June 30 June 30
-------------------------- --------------------------
2000 1999 2000 1999
---------- ------------ ---------- ------------
<S> <C> <C> <C> <C>
Balance at beginning of period $39,490 $39,039 $39,599 $39,189
Provision charged to expense 3,851 1,761 6,398 2,525
---------- ------------ ---------- ------------
43,341 40,800 45,997 41,714
Loans charged-off (4,389) (669) (7,248) (1,911)
Less recoveries 372 340 575 668
---------- ------------ ---------- ------------
Net Charge-offs (4,017) (329) (6,673) (1,243)
---------- ------------ ---------- ------------
Balance at end of period $39,324 $40,471 $39,324 $40,471
========== ============ ========== ============
</TABLE>
The average recorded investment in impaired loans during the quarter ended June
30, 2000 and for the year ended December 31, 1999 was approximately $17,610 and
$16,681, respectively. For the quarters ended June 30, 2000 and 1999, United
recognized interest income on the impaired loans of approximately $214 and $139,
respectively, substantially all of which was recognized using the accrual method
of income recognition.
At June 30, 2000, the recorded investment in loans that are considered to be
impaired under SFAS No. 114 was $17,353 (of which $11,156 was on a nonaccrual
basis). Included in this amount is $7,329 of impaired loans for which the
related allowance for loan losses is $1,550 and $10,024 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 $528 and $599 for the quarters ended June 30, 2000
and 1999, respectively, $1,083 and $1,114 for the six months ended June 30, 2000
and 1999, respectively.
14
<PAGE>
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.
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> <C> <C> <C>
Three months ended June 30, 2000
--------------------------------
Net interest income $ 808 $ 44,370 $ 253 $ 45,431
Provision for loan losses 11 3,840 - 3,851
Net interest income after provision for loan losses 797 40,530 253 41,580
Noninterest income 4,022 7,942 500 12,464
Noninterest expense 3,490 23,457 159 27,106
Income (loss) before income taxes 1,329 25,015 594 26,938
Income tax expense 434 8,184 197 8,815
Net income (loss) 895 16,831 397 18,123
Average total assets 113,648 4,865,383 (35,860) 4,943,171
Three months ended June 30, 1999
--------------------------------
Net interest income $ 855 $ 42,437 $ 1,315 $ 44,607
Provision for loan losses 11 1,750 - 1,761
Net interest income after provision for loan losses 854 40,687 1,315 42,846
Noninterest income 5,960 8,791 (2,298) 12,453
Noninterest expense 4,760 24,406 (96) 29,070
Income (loss) before income taxes 2,044 25,072 (887) 26,229
Income tax expense 646 7,509 278 8,433
Net income (loss) 1,398 17,563 (1,165) 17,796
Average total assets 146,619 4,837,545 (142,675) 4,841,489
</TABLE>
15
<PAGE>
<TABLE>
<CAPTION>
General
Mortgage Community Corporate
Banking Banking and Other* Consolidated
----------------------------------------------------------
(In thousands)
<S> <C> <C> <C> <C>
Six months ended June 30, 2000
------------------------------
Net interest income $ 1,516 $ 90,042 $ 599 $ 92,157
Provision for loan losses 27 6,371 - 6,398
Net interest income after provision for loan losses 1,489 83,671 599 85,759
Noninterest income 7,452 13,966 1,847 23,265
Noninterest expense 6,668 48,317 264 55,249
Income (loss) before income taxes 2,273 49,320 2,182 53,775
Income tax expense 771 16,171 722 17,664
Net income (loss) 1,502 33,149 1,460 36,111
Average total assets 102,777 4,875,934 (19,717) 4,958,994
Six months ended June 30, 1999
------------------------------
Net interest income $ 1,795 $ 86,987 $ 1,796 $ 90,578
Provision for loan losses 25 2,500 - 2,525
Net interest income after provision for loan losses 1,770 84,487 1,796 88,053
Noninterest income 12,240 14,531 (3,679) 23,092
Noninterest expense 9,361 48,130 400 57,891
Income (loss) before income taxes 4,649 50,888 (2,283) 53,254
Income tax expense 1,597 16,298 402 18,297
Net income (loss) 3,052 34,590 (2,685) 34,957
Average total assets 178,460 4,718,329 (192,862) 4,703,927
</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 two components: (1) 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 securities included in
consolidated net income and (2) the after-tax amortization of the unrealized
loss on debt securities transferred into the held to maturity category from the
available for sale category.
16
<PAGE>
The components of total comprehensive income for the three and six months ended
June 30, 2000 and 1999 are as follows:
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30 June 30
------------------------- --------------------------
2000 1999 2000 1999
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Net Income $18,123 $ 17,796 $36,111 $ 34,957
Other Comprehensive Income (Loss), Net of Tax:
Unrealized gain (loss) on available for sale
securities arising during the period 1,171 (36,344) (247) (39,566)
Less: Reclassification adjustment for gains
included in net income 328 46 535 46
Amortization on the unrealized loss for securities
transferred from the available-for-sale to the held
to maturity investment portfolio 123 123
---------- ---------- ---------- ----------
Total Comprehensive Income (Loss) $19,745 $(18,502) $36,522 $ (4,563)
========== ========== ========== ==========
</TABLE>
17
<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 June 30, 2000
and June 30, 1999 with the interest rate earned or paid on such amount.
<TABLE>
<CAPTION>
Three Months Ended Three Months Ended
June 30, 2000 June 30, 1999
--------------------------------- ---------------------------------
Average Avg. Average Avg.
(Dollars in thousands) 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 $ 8,019 $ 90 4.50% $ 5,117 $ 81 6.34%
Investment Securities:
Taxable 1,168,489 19,733 6.79% 1,532,424 25,431 6.64%
Tax-exempt (1) 198,799 3,508 7.10% 138,773 2,663 7.68%
---------------------------------- --------------------------------
Total Securities 1,367,288 23,241 6.84% 1,671,197 28,094 6.72%
Loans, net of unearned income (1) (2) 3,333,430 73,246 8.85% 2,926,437 60,216 8.25%
Allowance for loan losses (39,326) (39,147)
---------- ----------
Net loans 3,294,104 8.95% 2,887,290 8.36%
---------------------------------- --------------------------------
Total earning assets 4,669,411 $96,577 8.32% 4,563,604 $88,391 7.76%
------------------- -----------------
Other assets 273,760 277,885
---------- ----------
TOTAL ASSETS $4,943,171 $4,841,489
========== ==========
LIABILITIES
Interest-Bearing Funds:
Interest-bearing deposits $2,757,133 $30,258 4.41% $2,910,361 $30,891 4.26%
Federal funds purchased, repurchase
agreements and other short-term borrowings 377,458 5,007 5.34% 330,983 3,600 4.36%
FHLB advances 879,589 13,367 6.11% 620,613 7,924 5.12%
---------------------------------- --------------------------------
Total Interest-Bearing Funds 4,014,180 48,632 4.87% 3,861,957 42,415 4.41%
------------------- -----------------
Demand deposits 477,688 470,978
Accrued expenses and other liabilities 50,528 74,237
---------- ----------
TOTAL LIABILITIES 4,542,396 4,407,172
SHAREHOLDERS' EQUITY 400,775 434,317
---------- ----------
TOTAL LIABILITIES AND
SHAREHOLDERS' EQUITY $4,943,171 $4,841,489
========== ==========
NET INTEREST INCOME $47,945 $45,976
======= =======
INTEREST SPREAD 3.45% 3.35%
NET INTEREST MARGIN 4.13% 4.03%
</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
outstanding.
18
<PAGE>
The following table shows the daily average balance of major categories of
assets and liabilities for each of the six month periods ended June 30, 2000 and
June 30, 1999 with the interest rate earned or paid on such amount.
<TABLE>
<CAPTION>
Six Months Ended Six Months Ended
June 30, 2000 June 30, 1999
--------------------------------- ---------------------------------
Average Avg. Average Avg.
(Dollars in thousands) 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 $ 7,507 $ 202 5.41% $ 6,983 $ 209 6.05%
Investment Securities:
Taxable 1,199,177 40,468 6.79% 1,255,772 41,662 6.64%
Tax-exempt (1) 200,070 7,115 7.15% 129,015 4,962 7.69%
--------------------------------- --------------------------------
Total Securities 1,399,247 47,583 6.84% 1,384,787 46,624 6.73%
Loans, net of unearned income (1) (2) 3,310,826 144,936 8.80% 3,080,504 128,327 8.33%
Allowance for loan losses (39,467) (39,126)
---------- ----------
Net loans 3,271,359 8.90% 3,041,378 8.44%
--------------------------------- --------------------------------
Total earning assets 4,678,113 $192,721 8.27% 4,433,148 $175,160 7.90%
------------------ -----------------
Other assets 280,881 270,779
---------- ----------
TOTAL ASSETS $4,958,994 $4,703,927
========== ==========
LIABILITIES
Interest-Bearing Funds:
Interest-bearing deposits $2,763,604 59,304 4.32% $2,928,235 $ 62,677 4.32%
Federal funds purchased, repurchase
agreements and other short-term
borrowings 349,839 8,894 5.11% 300,027 6,454 4.34%
FHLB advances 919,991 26,976 5.90% 502,975 12,817 5.14%
--------------------------------- --------------------------------
Total Interest-Bearing Funds 4,033,434 95,174 4.75% 3,731,237 81,948 4.43%
------------------ -----------------
Demand deposits 470,115 467,507
Accrued expenses and other liabilities 54,597 72,837
---------- ----------
TOTAL LIABILITIES 4,558,146 4,271,581
SHAREHOLDERS' EQUITY 400,848 432,346
---------- ----------
TOTAL LIABILITIES AND
SHAREHOLDERS' EQUITY $4,958,994 $4,703,927
========== ==========
NET INTEREST INCOME $ 97,547 $ 93,212
======== ========
INTEREST SPREAD 3.52% 3.47%
NET INTEREST MARGIN 4.18% 4.20%
</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
outstanding.
19
<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.
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.
OVERVIEW
Net income for the first half of 2000 was $36.11 million or $0.85 per share
compared to $34.96 million or $0.79 per share for the first half of 1999. This
represents a 3.30% increase in net income and a 7.60% increase in earnings per
share. Net income for the second quarter of 2000 was $18.12 million or $0.43 per
share compared to $17.80 million or $0.40 per share for the second quarter of
1999. United's annualized return on average assets for the first six months of
2000 was 1.46% and return on average shareholders' equity was 18.12% as compared
to 1.50% and 16.30% for the first six months of 1999.
The net interest margin was 4.18% for the first six months of 2000 compared to
4.20% for the first six months of 1999. Tax-equivalent net interest income
increased $4.34 million or 4.65% for the first six months of 2000 as compared to
the same period for 1999. The provision for loan losses increased $3.87 million
over the previous year-to-date due to the addition to the loan portfolio of a
large block of junior-lien mortgage loans previously held for sale. Noninterest
income remained stable for the first six months of 2000 when compared to the
first six months of 1999. Noninterest expenses decreased $2.64 million or 4.56%
for the first six months of 2000 compared to the same period in 1999. United's
effective tax rate was 32.85% and 34.36% in 2000 and 1999, respectively.
Total assets were $4.99 billion at June 30, 2000, a $78.11 million or 1.54%
decrease from year end due to the continued restructuring of the balance sheet,
but up $10.31 million from the previous quarter end. In terms of asset
composition since year end 1999, the June 30, 2000 balance sheet reflects a
$35.41 million
20
<PAGE>
decrease in cash and cash equivalents and a $119.24 million decrease in
investment securities. Overall, loans held for sale increased $32.85 million as
loan originations exceeded sales in the secondary market. Portfolio loans, net
of unearned income grew $51.55 million. Other assets declined $7.76 million due
mainly to the amortization of goodwill, other intangibles and prepaid expenses
as well as sales of real estate acquired in satisfaction of debts previously
contracted. All other categories of assets were moderately flat compared to year
end 1999.
Total deposits have grown $9.94 million since year end. In terms of
composition, noninterest-bearing deposits increased $50.74 million while
interest-bearing deposits decreased $40.80 million compared to year end 1999.
United's total borrowed funds decreased $89.81 million or 6.65% as short-term
borrowings decreased $20.90 million and FHLB borrowings decreased $68.90
million. United repaid these borrowings to restructure the balance sheet to
better manage interest rate risk. Accrued expenses and other liabilities
decreased $4.45 million or 7.34% since year end 1999 primarily as a result of a
timing difference in the payment of income taxes.
Shareholders' equity increased $6.21 million or 1.57% as compared to December
31, 1999 as United continued to balance capital adequacy and returns to
shareholders. At June 30, 2000, United's regulatory capital ratios, including
those of its bank subsidiaries, continued to exceed the levels established for
well-capitalized institutions.
RESULTS OF OPERATIONS
NET INTEREST INCOME
Tax-equivalent net interest income increased $1.97 million or 4.28% in the
second quarter of 2000 and $4.34 million or 4.65% for the first six months of
2000, when compared to the same periods of 1999. United's tax-equivalent net
interest margin was 4.13% and 4.18% for the second quarter and first half of
2000, respectively, compared to 4.03% and 4.20% for the same time periods in
1999, respectively. The increase in the margin percentage for the quarter-to-
quarter comparison reflected a changing earning asset mix from investment
securities to higher yielding loans.
PROVISION FOR LOAN LOSSES
Credit quality improved for the first half of 2000 and remains sound.
Nonperforming loans were $17.11 million at June 30, 2000 and $20.74 million at
December 31, 1999. Nonperforming loans represented 0.34% of total assets at the
end of the first six months of 2000, as compared to 0.41% for United at year end
1999. 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 and
nonaccrual loans decreased $2.46 million and $1.17 million, respectively during
the first half of 2000. Total nonperforming assets of $19.87 million, including
OREO of $2.75 million, represented 0.40% of total assets at June 30, 2000.
At June 30, 2000, impaired loans were $17.35 million, an increase of $1.71
million or 10.93% from the $15.64 million in impaired loans at December 31,
1999. 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
21
<PAGE>
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 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. 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 June 30, 2000 produced
increased allocations within three of four loan categories from December 31,
1999. The components of the allowance allocated to real estate increased $1.3
million, as a result of the addition to the loan portfolio of a large block of
junior-lien mortgage loans previously held for sale and corresponding changes in
historical loss factors. The consumer loan pool allocation increased by $518
thousand as a result of changes in volume and historical loss experience. The
real estate construction pool allocation increased $152 thousand as a result of
changes in volume factors for this pool. The components of the allowance
allocated to commercial loans decreased $203 thousand as a result of a decrease
in specific allocations on larger commercial loans.
At June 30, 2000 and December 31, 1999, the allowance for loan losses was 1.22%
and 1.25% of period-end loans, net of unearned income, respectively. At June
30, 2000 and December 31, 1999, the ratio of the allowance for loan losses to
nonperforming loans was 229.8% and 190.9%, respectively.
Management believes that the allowance for loan losses of $39.32 million at June
30, 2000, is adequate to provide for losses on existing loans based on
information currently available.
For the quarters ended June 30, 2000 and 1999, the provision for loan losses was
$3.85 million and $1.76 million, respectively, while the provision for the first
six months was $6.40 million for 2000 as compared to $2.53 million for 1999.
Total net charge-offs were $4.0 million in the second quarter of 2000 and $329
thousand during the same time period in 1999, which represents 0.12% and 0.02%
of average loans for the respective quarters. Charge-offs exceeded recoveries by
$6.67 million for the first six months of 2000 as compared to net charge-offs of
$1.24 million for the first six months of 1999. The increases in provision and
net charge-offs were primarily attributed to the addition to the loan portfolio
of approximately $230 million of junior-lien mortgage loans previously held for
sale. Note 5 to the accompanying unaudited consolidated financial statements
provide 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 that are not included in interest and fee
income related to earning
22
<PAGE>
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 remained stable for the second quarter and first half of 2000
when compared to the second quarter and first half of 1999. Mortgage loan
origination activity fell 29.61% or $204.70 million for the first six months of
2000 as compared to the same period in 1999 due to rising interest rates. Fewer
originations resulted in a decline of loan sales in the secondary market of
44.14% or $355.91 million during the first half of 2000 in comparison to the
same time period in 1999. Excluding income from mortgage banking operations and
gains on the sale of investment securities, noninterest income increased $2.39
million or 18.59% for the first six months of 2000 primarily due to a
combination of increased revenues from the trust department and the deposit
services area. Trust fees increased $853 thousand or 32.91% while deposit
charges increased $1.57 million or 17.15% compared to the first half of 1999.
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 $1.96
million or 6.76% and $2.64 million or 4.56% for the quarter and six months ended
June 30, 2000, as compared to the same periods in 1999.
Total salaries and benefits decreased by 9.56% or $1.44 million and 9.00% or
$2.71 million for the second quarter and first six months of 2000 when compared
to the same periods of 1999. The decline was due mainly to lower sales activity
in the mortgage banking segment as compensation and incentives for its personnel
are significantly tied to activity levels.
Net occupancy expense for the second quarter of 2000 decreased by $309 thousand
or 9.72% while remaining relatively flat for the first six months of 2000 when
compared to the second quarter and first six months of 1999, respectively.
Items within the net occupancy category that declined significantly from last
year included building maintenance costs and utilities expense.
Other expenses decreased $217 thousand or 2.00% and remained flat for the second
quarter and first six months of 2000, as compared to the same periods of 1999.
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
23
<PAGE>
characteristics for on and off-balance sheet instruments and incorporates
market-based assumptions regarding the impact of changing interest rates on the
prepayment rate of certain assets and liabilities. The model also includes
executive management projections for activity levels in product lines offered by
United. Assumptions based on the historical behavior of deposit rates and
balances in relation to changes in interest rates are also incorporated into the
model. These assumptions are inherently uncertain and, as a result, the model
cannot precisely measure net interest income or precisely predict the impact of
fluctuations in interest rates on net interest income. Actual results will
differ from simulated results due to timing, magnitude and frequency of interest
rate changes as well as changes in market conditions and management strategies.
Interest sensitive assets and liabilities are defined as those assets or
liabilities that mature or are repriced within a designated time- frame. The
principal function of interest rate risk management is to maintain an
appropriate relationship between those assets and liabilities that are sensitive
to changing market interest rates. The difference between rate sensitive assets
and rate sensitive liabilities for specified periods of time is known as the
"GAP." United closely monitors the sensitivity of its assets and liabilities on
an on-going basis and projects the effect of various interest rate changes on
its net interest margin.
As shown in the interest rate sensitivity gap table in this section, United was
liability sensitive (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 $125 million or
(2.63%) of the cumulative gap to related earning assets.
During 1998, United purchased fixed-rate junior-lien mortgage loans from an
unrelated third party financial institution with the intention that these loans
would be securitized and resold 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. During 1999, to better manage risk,
United securitized approximately $205 million of these loans and retained a
portion of the resultant securities. At June 30, 2000, the retained resultant
securities approximated $57 million and are carried in the available for sale
investment portfolio. The remainder of these junior-lien mortgages were moved
to the loan portfolio and the balance at June 30, 2000, approximated $196
million.
To further aid in interest rate management, United's subsidiary banks are
members of the Federal Home Loan Bank (FHLB). The use of FHLB advances provides
United with a low risk means of matching maturities of earning assets and
interest-bearing funds to achieve a desired interest rate spread over the life
of the earning assets.
Interest rate risk management focuses on maintaining consistent growth in net
interest income within Board-approved policy limits. United's Asset/Liability
Management Committee (ALCO), which includes senior management representatives
and reports to the Board of Directors, monitors and manages interest rate risk
to maintain an acceptable level of change to net interest income as a result of
changes in interest rates. Policy established for interest rate risk is stated
in terms of the change in net interest income over a one-year and two-year
horizon given an immediate and sustained increase or decrease in interest rates.
The current
24
<PAGE>
limits approved by the Board of Directors are structured on a staged basis with
each stage requiring specific actions.
The following table shows United's estimated earnings sensitivity profile after
management's adjustments as of June 30, 2000 and June 30, 1999:
<TABLE>
<CAPTION>
Change in
Interest Rates Percentage Change in Net Interest Income
------------------------------------------
(basis points) June 30, 2000 June 30, 1999
-------------- ------------- -------------
<S> <C> <C>
+200 -3.00% 0.36%
-200 0.79% -4.75%
</TABLE>
For June 30, 2000, 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 3.00% over one year as compared to an
increase of 0.36% for June 30, 1999. A 200 basis point immediate, sustained
downward shock in the yield curve would increase net interest income by an
estimated 0.79% over one year for June 30, 2000 as compared to a decrease of
4.75% for June 30, 1999. 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 June 30, 2000:
<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 $ 11,779 $ 11,779 $ 11,779
Investment and Marketable
Equity Securities
Taxable $ 70,518 $ 15,999 $ 43,084 129,601 $ 212,902 $ 868,942 1,211,445
Tax-exempt 2,468 890 3,358 10,481 128,033 141,872
Loans, net of unearned
income 1,142,697 170,252 314,067 1,627,016 925,101 823,230 3,375,347
-------------------------------------------------------------------------------------------------
Total Interest-Earning Assets $1,224,994 $ 188,719 $ 358,041 $ 1,771,754 $1,148,484 $1,820,205 $4,740,443
=================================================================================================
LIABILITIES
Interest-Bearing Funds:
Savings and NOW accounts $1,140,352 $ 1,140,352 $1,140,352
Time deposits of
$100,000 & over 48,010 $ 15,304 $ 42,137 105,451 $ 60,686 $ 687 166,824
Other time deposits 316,017 218,306 327,681 862,004 566,303 3,935 1,432,242
Federal funds purchased,
repurchase agreements
and other short-term
borrowings 237,573 116,271 13,500 367,344 10,000 377,344
FHLB advances 221,000 40,000 261,000 57,973 565,472 884,445
-------------------------------------------------------------------------------------------------
Total Interest-Bearing Funds $1,962,952 $ 389,882 $ 383,317 $ 2,736,151 $ 694,962 $ 570,094 $4,001,207
=================================================================================================
Interest Sensitivity Gap ($737,958) ($201,163) ($ 25,276) ($ 964,397) $ 453,522 $1,250,111 $ 739,236
=================================================================================================
Cumulative Gap ($737,958) ($939,121) ($964,397) ($ 964,397) ($510,875) $ 739,236 $ 739,236
=================================================================================================
Cumulative Gap as a
Percentage of
Total Earning Assets (15.57%) (19.81%) (20.34%) (20.34%) (10.78%) 15.59% 15.59%
Management Adjustments $1,049,822 ($ 70,023) ($ 139,941) $ 839,858 ($839,858) $ 0
Off-Balance Sheet Activities
Cumulative Management
Adjusted Gap and Off-
Balance Sheet Activities $ 311,864 $ 40,678 ($ 124,539) ($124,539) ($510,875) $ 739,236 $ 739,236
=================================================================================================
Cumulative Management
Adjusted Gap and Off-
Balance Sheet Activities
as a Percentage of Total
Earning Assets 6.58% 0.86% (2.63%) (2.63%) (10.78%) 15.59% 15.59%
=================================================================================================
</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 and maturing loans and
investments are the primary sources of liquidity.
The goal of liquidity management is to ensure the ability to access funding
which enables United to efficiently satisfy the cash flow requirements of
depositors and borrowers and meet United's cash needs. Liquidity is managed by
monitoring funds availability from a number of primary sources. Funding is
available from cash and cash equivalents, unused short-term borrowing and a
geographically dispersed network of subsidiary banks providing access to a
diversified and substantial retail deposit market.
Short-term needs can be met through a wide array of sources such as
correspondent and downstream correspondent federal funds and utilization of
Federal Home Loan Bank advances.
Other sources of liquidity available to United to provide long-term as well as
short-term funding alternatives, in addition to FHLB advances, are long-term
certificates of deposit, lines of credit, and borrowings that are secured by
bank premises or stock of United's subsidiaries. In the normal course of
business, United through ALCO evaluates these as well as other alternative
funding strategies that may be utilized to meet short-term and long-term funding
needs.
For the six months ended June 30, 2000, cash flows from operations provided cash
of $13.16 million to United. Cash from operations for the first half of 2000
was used to fund a $35.85 million increase in loans held for sale. During the
same period, net cash of $61.77 million was provided by investing activities
which was primarily due to $121.00 million of excess net proceeds from calls and
maturities of investment securities over purchases of investment securities
which offset net growth in portfolio loans of $51.55 million. During the first
six months of 2000, net cash of $110.33 million was used in financing
activities, primarily due to the net repayment of approximately $89.81 million
of borrowings, payment of $17.84 million in cash dividends and $14.18 million
for acquisitions of United shares under the stock repurchase program. The net
effect of this activity was a decrease in cash and cash equivalents of $35.41
million for the first six months of 2000.
United anticipates it can meet its obligations over the next 12 months and has
no material commitments for capital expenditures. There are no known trends,
demands, commitments, or events that will result in or that are reasonably
likely to result in United's liquidity increasing or decreasing in any material
way. United also has lines of credit available.
The Asset and Liability Committee monitors liquidity to ascertain that a
liquidity position within certain
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prescribed parameters is maintained. In addition, variable rate loans are a
priority. These policies help to protect net interest income against
fluctuations in interest rates. No changes are anticipated in the policies of
United's Asset and Liability Committee.
CAPITAL
Total shareholders' equity increased $6.21 million to $402.14 million from
$395.93 million at December 31, 1999. Included in the shareholders' equity
balance at June 30, 2000 is the previously mentioned cumulative unrealized loss,
net of deferred taxes, of $5.15 million associated with debt securities
transferred from the available for sale portfolio into the held to maturity
portfolio. This amount will be amortized over the estimated remaining life of
the securities. Since year end, United has experienced little change; net of
deferred income taxes, in the fair value of its available for sale investment
portfolio despite increased market interest rates. During the first half of
2000, 680,500 treasury shares were repurchased under a plan announced by United
in 1999 to repurchase up to 1.75 million shares of its common stock on the open
market. In May of 2000, United announced a new plan to repurchase up to an
additional 1.675 million shares of its common stock on the open market. United's
equity to assets ratio was 8.06% at June 30, 2000, as compared to 7.81% at
December 31, 1999. Capital and reserves to total assets was 8.78% at June 30,
2000, as compared to 8.53% at December 31, 1999.
Cash dividends of $0.21 per common share for the second quarter of 2000 and
$0.42 for the six month period ended June 30, 2000, both represent increases of
5% over the $0.20 paid for second quarter of 1999 and $0.40 paid for the first
six months of 1999. Total cash dividends paid were approximately $8.81 million
for the second quarter of 2000 and $17.69 million for the first six months of
2000, an increase of 1.67% and 2.12% over the comparable periods of 1999.
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 8.08% at June 30, 2000 and 9.20% at June 30, 1999. United's
risk-based capital ratios of 11.48% at June 30, 2000 and 11.41% at December 31,
1999, are both significantly higher than the minimum regulatory requirements.
United's Tier I capital and leverage ratios of 10.43% and 8.01%, respectively,
at June 30, 2000, are also well above regulatory minimum requirements.
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