<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 September 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; 41,773,392 shares outstanding as of
October 31, 2000.
<PAGE>
UNITED BANKSHARES, INC. AND SUBSIDIARIES
FORM 10-Q
TABLE OF CONTENTS
Page
----
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
----------------------------
Consolidated Balance Sheets (Unaudited)
September 30, 2000 and December 31, 1999....................................6
Consolidated Statements of Income (Unaudited) for the
Three and Nine Months Ended September 30, 2000 and 1999.....................7
Consolidated Statement of Changes in Shareholders' Equity
(Unaudited) for the Nine Months Ended September 30, 2000....................8
Condensed Consolidated Statements of Cash Flows (Unaudited)
for the Nine Months Ended September 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
---------------------------------------
2
<PAGE>
UNITED BANKSHARES, INC. AND SUBSIDIARIES
FORM 10-Q
TABLE OF CONTENTS--Continued
Page
----
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............................29
(b) Reports on Form 8-K
On October 19, 2000, United Bankshares, Inc. filed a Current Report
under Items 5 and 7 to report the results of operations for the
third quarter of 2000.
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 10, 2000 /s/ Richard M. Adams
----------------- -------------------------------------
Richard M. Adams, Chairman of
the Board and Chief Executive Officer
Date November 10, 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 September 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 nine months ended September 30, 2000 and
1999, and the related consolidated statement of changes in shareholders' equity
for the nine months ended September 30, 2000, and the related condensed
consolidated statements of cash flows for the nine months ended September 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) September 30 December 31
2000 1999
-----------------------------
<S> <C> <C>
Assets
Cash and due from banks $ 104,197 $ 131,091
Interest-bearing deposits with other banks 2,690 8,317
Federal funds sold 20,400
----------------------------
Total cash and cash equivalents 106,887 159,808
Securities available for sale at estimated fair value (amortized
cost-$990,948 at September 30, 2000 and $1,256,946 at December 31,
1999) 967,554 1,207,363
Securities held to maturity (estimated fair value-$375,458 at
September 30, 2000 and $258,183 at December 31, 1999) 385,076 265,190
Loans held for sale 158,468 117,825
Loans
Commercial, financial, and agricultural 557,211 535,116
Real estate:
Single family residential 1,367,371 1,388,568
Commercial 710,629 701,421
Construction 148,790 144,634
Other 82,368 44,381
Installment 342,822 363,272
----------------------------
3,209,191 3,177,392
Less: Unearned income (5,653) (7,296)
----------------------------
Loans net of unearned income 3,203,538 3,170,096
Less: Allowance for loan losses (39,432) (39,599)
----------------------------
Net loans 3,164,106 3,130,497
Bank premises and equipment 45,501 48,696
Accrued interest receivable 36,257 36,357
Other assets 86,593 103,424
----------------------------
TOTAL ASSETS $4,950,442 $5,069,160
============================
Liabilities
Domestic deposits:
Noninterest-bearing $ 514,080 $ 480,767
Interest-bearing 2,799,057 2,780,218
----------------------------
Total deposits 3,313,137 3,260,985
Borrowings:
Federal funds purchased 8,870 44,120
Securities sold under agreements to repurchase 408,447 349,129
Federal Home Loan Bank borrowings 748,310 953,347
Other borrowings 4,998 4,998
Accrued expenses and other liabilities 45,058 60,651
----------------------------
TOTAL LIABILITIES 4,528,820 4,673,230
Shareholders' equity
Common stock, $2.50 par value; Authorized-100,000,000 shares;
issued-43,381,769 at September 30, 2000 and December 31, 1999,
including 1,556,377 and 894,661 shares in treasury at September 30,
2000 and December 31, 1999, respectively 108,454 108,454
Surplus 85,579 87,260
Retained earnings 283,161 254,992
Accumulated other comprehensive loss (20,230) (32,228)
Treasury stock, at cost (35,342) (22,548)
----------------------------
TOTAL SHAREHOLDERS' EQUITY 421,622 395,930
----------------------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $4,950,442 $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 Nine Months Ended
September 30 September 30
----------------------- ------------------------
2000 1999 2000 1999
----------------------- ------------------------
<S> <C> <C> <C> <C>
Interest income
Interest and fees on loans $72,579 $62,076 $214,127 $189,506
Interest on federal funds sold and other short-term
investments 562 150 764 359
Interest and dividends on securities:
Taxable 19,569 22,247 60,037 63,909
Tax-exempt 2,588 6,338 7,701 9,563
----------------------- ------------------------
Total interest income 95,298 90,811 282,629 263,337
Interest expense
Interest on deposits 32,237 30,281 91,541 92,958
Interest on short-term borrowings 5,786 5,309 14,680 11,763
Interest on Federal Home Loan Bank advances 13,142 10,232 40,118 23,049
----------------------- ------------------------
Total interest expense 51,165 45,822 146,339 127,770
----------------------- ------------------------
Net interest income 44,133 44,989 136,290 135,567
Provision for loan losses 4,439 2,255 10,837 4,780
----------------------- ------------------------
Net interest income after provision for loan losses 39,694 42,734 125,453 130,787
Other income
Income from mortgage banking operations 5,014 5,706 12,556 16,219
Service charges, commissions, and fees 5,661 5,365 16,388 14,522
Trust department income 1,749 1,392 5,194 3,984
Security gains 324 (70) 1,147 1
Other income 576 450 1,304 1,209
----------------------- ------------------------
Total other income 13,324 12,843 36,589 35,935
Other expense
Salaries and employee benefits 12,127 14,878 39,476 44,932
Net occupancy expense 2,861 3,104 8,892 9,257
Other expense 10,475 11,395 32,344 33,079
----------------------- ------------------------
Total other expense 25,463 29,377 80,712 87,268
----------------------- ------------------------
Income before income taxes 27,555 26,200 81,330 79,454
Income taxes 8,994 8,500 26,658 26,797
----------------------- ------------------------
Net income $18,561 $17,700 $ 54,672 $ 52,657
======================= ========================
Earnings per common share:
Basic $0.44 $0.41 $1.30 $1.22
======================= ========================
Diluted $0.44 $0.41 $1.29 $1.20
======================= ========================
Dividends per common share $0.21 $0.21 $0.63 $0.61
======================= ========================
Average outstanding shares:
Basic 41,842,460 43,124,385 42,020,696 43,239,869
Diluted 42,147,989 43,708,483 42,337,568 43,817,913
</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, 2000
----------------------------------------------------------------------------------------------
Common Stock Accumulated
---------------------- 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 - - - 54,672 - - 54,672
Other comprehensive income (loss),
net of tax:
Unrealized gains on securities of
$11,007 net of reclassification
adjustment for gains included
in net income of $746 - - - - 11,753 - 11,753
Amortization of $245 on the
unrealized loss for securities
transferred from the
available-for-sale to the
held-to-maturity investment
portfolio - - - - 245 - 245
--------
Total comprehensive income 66,670
Purchase of treasury stock
(811,500 shares) - - - - - (16,733) (16,733)
Cash dividends ($0.63 per share) - - - (26,503) - - (26,503)
Common stock options exercised
(149,784 shares) - - (1,681) - - 3,939 2,258
-------------------------------------------------------------------------------------------
Balance at September 30, 2000 43,381,769 $108,454 $85,579 $283,161 $ (20,230) $ (35,342) $421,622
===========================================================================================
</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
-------------------------
2000 1999
-------------------------
<S> <C> <C>
NET CASH PROVIDED BY OPERATING ACTIVITIES $ 22,915 $ 205,670
INVESTING ACTIVITIES
Proceeds from maturities and calls of investment securities 19,238 144,558
Purchases of investment securities (624) (56,068)
Proceeds from sales of securities available for sale 108,676 261,429
Proceeds from maturities and calls of securities available for sale 72,810 110,262
Purchases of securities available for sale (60,027) (923,516)
Net purchases of bank premises and equipment (1,731) (5,155)
Net change in loans (44,231) (235,638)
-------------------------
NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES 94,111 (704,128)
-------------------------
FINANCING ACTIVITIES
Cash dividends paid (26,655) (25,971)
Acquisition of treasury stock (16,733) (15,592)
Proceeds from exercise of stock options 2,258 1,944
Repayment of Federal Home Loan Bank borrowings (770,427) (1,462)
Proceeds from Federal Home Loan Bank borrowings 565,390 457,446
Changes in:
Deposits 52,152 (116,158)
Federal funds purchased, securities sold under agreements
to repurchase and other borrowings 24,068 192,590
-------------------------
NET CASH (USED IN) PROVIDED BY FINANCING ACTIVITIES (169,947) 492,797
-------------------------
Decrease in cash and cash equivalents (52,921) (5,661)
Cash and cash equivalents at beginning of year 159,808 141,298
-------------------------
Cash and cash equivalents at end of period $ 106,887 $ 135,637
=========================
</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>
September 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 $249,989 - $ 9,178 $240,811
State and political subdivisions 49,002 $ 80 2,602 46,480
Mortgage-backed securities 613,253 7,113 17,487 602,879
Marketable equity securities 7,551 708 1,368 6,891
Other 71,153 - 660 70,493
-----------------------------------------------------------------
Total $990,948 $7,901 $31,295 $967,554
=================================================================
<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 $15,206 and $32,228, net of
deferred income taxes at September 30, 2000 and December 31, 1999, respectively.
The amortized cost and estimated fair value of securities available for sale at
September 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>
September 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 $ 30,749 $ 30,717 $ 6,668 $ 6,663
Due after one year through five years 74,421 73,389 112,839 110,581
Due after five years through ten years 271,932 262,681 333,612 318,462
Due after ten years 606,295 593,876 795,458 761,352
Marketable equity securities 7,551 6,891 8,369 10,305
---------------------------------- ----------------------------------
Total $990,948 $967,554 $1,256,946 $1,207,363
================================== ==================================
</TABLE>
The preceding table includes $602,879 and $669,896 of mortgage-backed securities
at September 30, 2000 and December 31, 1999, respectively, with an amortized
cost of $613,253 and $693,828 at September 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>
September 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 $ 55,843 $ 40 $ 1,096 $ 54,787
State and political subdivisions 95,712 837 3,160 93,389
Mortgage-backed securities 74,648 346 695 74,299
Other 158,873 - 5,890 152,983
-----------------------------------------------------------------
Total $385,076 $1,223 $10,841 $375,458
=================================================================
</TABLE>
<TABLE>
<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
September 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>
September 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 $ 7,931 $ 8,319 $ 4,528 $ 4,522
Due after one year through five years 48,540 48,238 38,623 38,391
Due after five years through ten years 90,955 89,030 67,833 66,997
Due after ten years 237,650 229,871 154,206 148,273
-------------------------------- ----------------------------------
Total $385,076 $375,458 $265,190 $258,183
================================ ==================================
</TABLE>
The preceding table includes $74,648 and $90,344 of mortgage-backed securities
at estimated fair value at September 30, 2000 and December 31, 1999,
respectively, with an amortized cost of $74,299 and $90,850 at September 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 September 30, 2000, the cumulative
unrealized loss balances, gross and net of deferred taxes, were $7,729 and
$5,024, 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 $1,074,832 and $962,068 at September 30, 2000 and
December 31, 1999, respectively.
13
<PAGE>
4. NONPERFORMING LOANS
Nonperforming loans are summarized as follows:
<TABLE>
September 30, December 31,
2000 1999
------------------ -----------------
<S> <C> <C>
Loans past due 90 days or more and still accruing interest $ 6,666 $ 8,415
Nonaccrual loans 10,062 12,327
------------------ -----------------
Total nonperforming loans $16,728 $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 Nine Months Ended
September 30 September 30
--------------------------------------- ----------------------------------------
2000 1999 2000 1999
----------------- ----------------- ------------------ -----------------
<S> <C> <C> <C> <C>
Balance at beginning of period $39,324 $40,471 $ 39,599 $39,189
Provision charged to expense 4,439 2,255 10,837 4,780
----------------- ----------------- ------------------ -----------------
43,763 42,726 50,436 43,969
Loans charged-off (4,543) (3,032) (11,791) (4,943)
Less recoveries 212 10 787 678
----------------- ----------------- ------------------ -----------------
Net Charge-offs (4,331) (3,022) (11,004) (4,265)
----------------- ----------------- ------------------ -----------------
Balance at end of period $39,432 $39,704 $ 39,432 $39,704
================= ================= ================== =================
</TABLE>
The average recorded investment in impaired loans during the quarter ended
September 30, 2000 and for the year ended December 31, 1999 was approximately
$15,927 and $16,681, respectively. For the quarters ended September 30, 2000
and 1999, United recognized interest income on the impaired loans of
approximately $167 and $33, respectively, substantially all of which was
recognized using the accrual method of income recognition.
At September 30, 2000, the recorded investment in loans that are considered to
be impaired under SFAS No. 114 was $14,294 (of which $10,062 was on a nonaccrual
basis). Included in this amount is $6,630 of impaired loans for which the
related allowance for loan losses is $1,447 and $7,664 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 $671 and $395 for the quarters ended September 30,
2000 and 1999, respectively, and $1,755 and $1,193 for the nine months ended
September 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 September 30, 2000
-------------------------------------
Net interest income $ 922 $ 43,062 $ 149 $ 44,133
Provision for loan losses 11 4,428 - 4,439
Net interest income after provision for loan losses 911 38,634 149 39,694
Noninterest income 5,014 7,986 324 13,324
Noninterest expense 3,950 21,778 (265) 25,463
Income (loss) before income taxes 1,975 24,842 738 27,555
Income tax expense 586 8,168 240 8,994
Net income (loss) 1,389 16,674 498 18,561
Average total assets 206,834 4,825,602 (99,444) 4,932,992
Three months ended September 30, 1999
-------------------------------------
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 5,706 8,443 (1,306) 12,843
Noninterest expense 4,702 24,522 153 29,377
Income (loss) before income taxes 1,852 25,462 (1,114) 26,200
Income tax expense 609 7,843 48 8,500
Net income (loss) 1,243 17,619 (1,162) 17,700
Average total assets 113,921 4,947,194 (51,021) 5,010,094
</TABLE>
15
<PAGE>
<TABLE>
<CAPTION>
General
Mortgage Community Corporate
Banking Banking and Other* Consolidated
------------------------------------------------------------------------
(In thousands)
<S> <C> <C> <C> <C>
Nine months ended September 30, 2000
------------------------------------
Net interest income $ 2,438 $ 133,104 $ 748 $ 136,290
Provision for loan losses 38 10,799 - 10,837
Net interest income after provision for loan losses 2,400 122,305 748 125,453
Noninterest income 12,556 21,861 2,172 36,589
Noninterest expense 10,618 70,095 (1) 80,712
Income (loss) before income taxes 4,338 74,071 2,921 81,330
Income tax expense 1,357 24,339 962 26,658
Net income (loss) 2,981 49,732 1,959 54,672
Average total assets 137,463 4,859,095 (46,293) 4,950,265
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 16,219 24,701 (4,985) 35,935
Noninterest expense 14,063 72,652 553 87,268
Income (loss) before income taxes 4,774 78,077 (3,397) 79,454
Income tax expense 2,206 24,141 450 26,797
Net income (loss) 2,568 53,936 (3,847) 52,657
Average total assets 156,711 4,802,105 (151,670) 4,807,146
</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 nine months ended
September 30, 2000 and 1999 are as follows:
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30 September 30
--------------------------------- --------------------------------------
2000 1999 2000 1999
----------------- ---------------- ---------------- --------------
<S> <C> <C> <C> <C>
Net Income $ 18,561 $ 17,700 $ 54,672 $ 52,657
Other Comprehensive Income (Loss), Net of Tax:
Unrealized gain (loss) on available-for-
sale securities arising during the period 11,091 9,385 11,007 (30,182)
Less: Reclassification adjustment for
gains (losses) included in net income 374 (46) 746 1
Amortization on the unrealized loss for
securities transferred from the
available-for-sale to the held to
maturity investment portfolio 122 245
----------------- ---------------- ---------------- ----------------
Total Comprehensive Income $ 30,148 $ 27,039 $ 66,670 $ 22,476
================= ================ ================ ================
</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 September 30,
2000 and September 30, 1999 with the interest rate earned or paid on such
amount.
<TABLE>
<CAPTION>
Three Months Ended Three Months Ended
September 30, 2000 September 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 $ 30,354 $ 562 7.37% $ 9,362 $ 150 6.37%
Investment Securities:
Taxable 1,151,658 19,569 6.76% 1,371,410 22,247 6.49%
Tax-exempt (1) 195,268 3,611 7.36% 345,317 7,812 9.05%
----------------------------------- ---------------------------------
Total Securities 1,346,926 23,180 6.85% 1,716,727 30,059 7.00%
Loans, net of unearned income (1) (2) 3,318,295 74,417 8.94% 3,025,441 63,542 8.36%
Allowance for loan losses (39,358) (40,433)
--------------- -------------
Net loans 3,278,937 9.05% 2,985,008 8.47%
----------------------------------- ---------------------------------
Total earning assets 4,656,217 $98,159 8.41% 4,711,097 $93,751 7.93%
------------------- ------------------
Other assets 276,775 298,997
--------------- -------------
TOTAL ASSETS $4,932,992 $5,010,094
=============== =============
LIABILITIES
Interest-Bearing Funds:
Interest-bearing deposits $2,755,411 $32,237 4.65% $2,878,331 $30,281 4.17%
Federal funds purchased, repurchase
agreements and other short-term
borrowings 408,705 5,786 5.63% 438,637 5,309 4.80%
FHLB advances 828,107 13,142 6.31% 759,047 10,232 5.35%
----------------------------------- ---------------------------------
Total Interest-Bearing Funds 3,992,223 51,165 5.10% 4,076,015 45,822 4.46%
------------------- ------------------
Demand deposits 472,398 465,750
Accrued expenses and other liabilities 58,295 66,791
--------------- -------------
TOTAL LIABILITIES 4,522,916 4,608,556
SHAREHOLDERS' EQUITY 410,076 401,538
--------------- -------------
TOTAL LIABILITIES AND
SHAREHOLDERS' EQUITY $4,932,992 $5,010,094
=============== =============
NET INTEREST INCOME $46,994 $47,929
============ ============
INTEREST SPREAD 3.31% 3.47%
NET INTEREST MARGIN 4.04% 3.99%
</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 nine month periods ended September 30,
2000 and September 30, 1999 with the interest rate earned or paid on such
amount.
<TABLE>
<CAPTION>
Nine Months Ended Nine Months Ended
September 30, 2000 September 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 $ 15,178 $ 764 6.73% $ 7,784 $ 359 6.16%
Investment Securities:
Taxable 1,183,222 60,037 6.78% 1,294,742 63,909 6.58%
Tax-exempt (1) 198,458 10,726 7.22% 201,908 12,774 8.44%
------------------------------------ ----------------------------------
Total Securities 1,381,680 70,763 6.84% 1,496,650 76,683 6.83%
Loans, net of unearned income (1) (2) 3,313,335 219,352 8.85% 3,061,948 191,869 8.35%
Allowance for loan losses (39,431) (39,567)
------------- ------------
Net loans 3,273,904 8.95% 3,022,381 8.46%
------------------------------------ ----------------------------------
Total earning assets 4,670,762 $290,879 8.32% 4,526,815 $268,911 7.92%
------------------- -------------------
Other assets 279,503 280,331
-------------- ------------
TOTAL ASSETS $4,950,265 $4,807,146
============= ============
LIABILITIES
Interest-Bearing Funds:
Interest-bearing deposits $2,760,854 $ 91,541 4.43% $2,911,417 $ 92,958 4.27%
Federal funds purchased, repurchase
agreements and other short-term
borrowings 369,604 14,680 5.31% 346,738 11,763 4.54%
FHLB advances 889,139 40,118 6.03% 589,270 23,049 5.23%
------------------------------------ ----------------------------------
Total Interest-Bearing Funds 4,019,597 146,339 4.86% 3,847,425 127,770 4.44%
------------------- -------------------
Demand deposits 470,882 466,915
Accrued expenses and other liabilities 55,838 70,799
-------------- ------------
TOTAL LIABILITIES 4,546,317 4,385,139
SHAREHOLDERS' EQUITY 403,948 422,007
-------------- ------------
TOTAL LIABILITIES AND
SHAREHOLDERS' EQUITY $4,950,265 $4,807,146
============= ============
NET INTEREST INCOME $144,540 $141,141
============= =============
INTEREST SPREAD 3.46% 3.48%
NET INTEREST MARGIN 4.13% 4.16%
</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 nine months of 2000 was $54.67 million or $1.29 per
share compared to $52.66 million or $1.20 per share for the first nine months of
1999. This represents a 3.83% increase in net income and a 7.50% increase in
earnings per share. Net income for the third quarter of 2000 was $18.56 million
or $0.44 per share compared to $17.70 million or $0.41 per share for the third
quarter of 1999. United's annualized return on average assets for the first nine
months of 2000 was 1.48% and return on average shareholders' equity was 18.08%
as compared to 1.46% and 16.68% for the first nine months of 1999.
The net interest margin was 4.13% for the first nine months of 2000 compared to
4.16% for the first nine months of 1999. Tax-equivalent net interest income
modestly increased $3.40 million or 2.41% for the first nine months of 2000 as
compared to the same period for 1999. The provision for loan losses increased
$6.06 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 classified
as securities held for sale. Noninterest income remained stable for the first
nine months of 2000 when compared to the first nine months of 1999. Noninterest
expenses decreased $6.56 million or 7.51% for the first nine months of 2000
compared to the same period in 1999. United's effective tax rate was 32.8% and
33.7% in 2000 and 1999, respectively.
Total assets were $4.95 billion at September 30, 2000, a $118.72 million or
2.34% decrease from year end due to the continued restructuring of the balance
sheet. In terms of asset composition since year end 1999,
20
<PAGE>
the September 30, 2000 balance sheet reflects a $52.92 million decrease in cash
and cash equivalents and a $119.92 million decrease in investment securities.
Overall, loans held for sale increased $40.64 million as loan originations
exceeded sales in the secondary market. Portfolio loans, net of unearned income
grew $33.44 million. Other assets declined $16.83 million due mainly to the
amortization of goodwill, other intangibles and prepaid expenses, a decline in
deferred taxes associated with an increase in value of investment securities
held for sale 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 $52.15 million since year end. In terms of
composition, noninterest-bearing deposits increased $33.31 million while
interest-bearing deposits increased $18.84 million compared to year end 1999.
Overall, United's total borrowed funds decreased $180.97 million or 13.39% as
short-term borrowings increased $24.07 million while FHLB borrowings decreased
$205.04 million. United repaid the higher costing FHLB borrowings to
restructure the balance sheet to better manage interest rate risk. Accrued
expenses and other liabilities decreased $15.59 million or 25.71% since year end
1999 primarily as a result of a timing difference in the payment of income
taxes.
Shareholders' equity increased $25.69 million or 6.49% as compared to December
31, 1999 as United continued to balance capital adequacy and returns to
shareholders. At September 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 interest income increased $4.41 million or 4.71% in the third
quarter of 2000 and $21.97 million or 8.17% for the first nine months of 2000
when compared to the same periods of 1999. Tax-equivalent net interest income
remained relatively flat for the third quarter of 2000 and first nine months of
2000 when compared to the same periods of 1999 as increased deposit and funding
costs resulting from six Federal Funds rate increases since mid 1999 have offset
the growth in interest income. United's tax-equivalent net interest margin was
4.04% and 4.13% for the third quarter and first nine months of 2000,
respectively, compared to 3.99% and 4.16% for the same time periods in 1999,
respectively. The increase in the margin percentage from the 1999 results
reflected a changing earning asset mix from investment securities to higher
yielding loans.
PROVISION FOR LOAN LOSSES
Credit quality improved for the first nine months of 2000 and remains sound.
Nonperforming loans were $16.73 million at September 30, 2000 and $20.74 million
at December 31, 1999. Nonperforming loans represented 0.34% of total assets at
the end of the first nine 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 $1.75 million and $2.27 million,
respectively during the first nine months of 2000. Total nonperforming assets of
$18.24 million, including OREO of $1.52 million, represented 0.37% of total
assets at September 30, 2000.
21
<PAGE>
At September 30, 2000, impaired loans were $14.29 million, a decrease of $1.35
million or 9.45% 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 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 September 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 $2.4
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 $1.1
million as a result of changes in volume and historical loss experience. The
real estate construction pool allocation increased $191 thousand as a result of
changes in volume factors for this pool. The components of the allowance
allocated to commercial loans decreased $488 thousand as a result of a decrease
in specific allocations on larger commercial loans.
At September 30, 2000 and December 31, 1999, the allowance for loan losses was
1.23% and 1.25% of period-end loans, net of unearned income, respectively. At
September 30, 2000 and December 31, 1999, the ratio of the allowance for loan
losses to nonperforming loans was 235.7% and 190.9%, respectively.
Management believes that the allowance for loan losses of $39.43 million at
September 30, 2000, is adequate to provide for losses on existing loans based on
information currently available.
For the quarters ended September 30, 2000 and 1999, the provision for loan
losses was $4.44 million and $2.26 million, respectively, while the provision
for the first nine months was $10.84 million for 2000 as compared to $4.78
million for 1999. Total net charge-offs were $4.33 million in the third quarter
of 2000 and $3.02 million during the same time period in 1999, which represents
0.13% and 0.10% of average loans for the respective quarters. Net charge-offs
were $11.00 million for the first nine months of 2000 as compared to net charge-
offs of $4.27 million for the first nine months of 1999. The increases in
provision and net charge-offs were primarily attributed to the addition to the
loan portfolio, as of October 1, 1999, of approximately $230 million of junior-
lien mortgage loans previously classified as securities held for sale. Such
increased provision and charge-offs were offset by increased interest income
recognized on the reclassed loans. 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.
22
<PAGE>
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 assets. Noninterest income has been and will continue
to be an important factor for improving United's profitability. Recognizing the
importance, management continues to evaluate areas where noninterest income can
be enhanced. Noninterest income increased 3.75% for the third quarter of 2000
while remaining relatively flat for the first nine months of 2000 when compared
to the third quarter and first nine months of 1999. Mortgage loan origination
activity fell 19% or approximately $187 million for the first nine months of
2000 as compared to the same period in 1999 due to rising interest rates and a
slowing economy. Fewer originations resulted in a decline of loan sales in the
secondary market of 32% or approximately $371 million during the first nine
months 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 $3.17 million or 16.09% for the first nine months
of 2000 primarily due to a combination of increased revenues from the trust
department and the deposit services area. Trust fees increased $1.21 million or
30.37% while deposit charges increased $1.87 million or 12.85% compared to the
first nine months 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 $3.91
million or 13.32% and $6.56 million or 7.51% for the quarter and nine months
ended September 30, 2000, as compared to the same periods in 1999. The
efficiency ratio was a low 41.37% and 43.41% for the third quarter and first
nine months of 2000, respectively. This ratio compares very favorably to
regional and national peer group banking companies.
Total salaries and benefits decreased by 18.49% or $2.75 million and 12.14% or
$5.46 million for the third quarter and first nine months of 2000 when compared
to the same periods of 1999. The decline was due to lower sales activity in the
mortgage banking segment as compensation and incentives for its personnel are
significantly tied to activity levels and a SFAS No. 87 pension benefit as a
result of excess earnings within United's plan.
Net occupancy expense for the of 2000 decreased by $243 thousand or 7.83% and
$365 thousand or 3.94% for the third quarter and first nine months of 2000 when
compared to the third quarter and first nine 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 $920 thousand or 8.07% and $735 thousand or 2.22% for
the third quarter and first nine months of 2000, respectively, as compared to
the same periods of 1999.
23
<PAGE>
Market Risk
The objective of United's Asset/Liability Management function is to maintain
consistent growth in net interest income within United's policy guidelines.
This objective is accomplished through the management of balance sheet liquidity
and interest rate risk exposures due to changes in economic condition, interest
rate levels and customer preferences.
Management considers interest rate risk to be United's most significant market
risk. Interest rate risk is the exposure to adverse changes in the net interest
income of United as a result of changes in interest rates. Consistency in
United's earnings is largely dependent on the effective management of interest
rate risk.
United employs a variety of measurement techniques to identify and manage its
exposure to changing interest rates. One such technique utilizes an earnings
simulation model to analyze net interest income sensitivity to movements in
interest rates. The model is based on actual cash flows and repricing
characteristics for on and off-balance sheet instruments and incorporates
market-based assumptions regarding the impact of changing interest rates on the
prepayment rate of certain assets and liabilities. The model also includes
executive management projections for activity levels in product lines offered by
United. Assumptions based on the historical behavior of deposit rates and
balances in relation to changes in interest rates are also incorporated into the
model. These assumptions are inherently uncertain and, as a result, the model
cannot precisely measure net interest income or precisely predict the impact of
fluctuations in interest rates on net interest income. Actual results will
differ from simulated results due to timing, magnitude and frequency of interest
rate changes as well as changes in market conditions and management strategies.
Interest sensitive assets and liabilities are defined as those assets or
liabilities that mature or are repriced within a designated time- frame. The
principal function of interest rate risk management is to maintain an
appropriate relationship between those assets and liabilities that are sensitive
to changing market interest rates. 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 $94 million or
(1.99%) 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
24
<PAGE>
retained a portion of the resultant securities. At September 30, 2000, the
retained resultant securities approximated $61 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 September 30,
2000, approximated $185 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 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 September 30, 2000 and September 30, 1999:
<TABLE>
<CAPTION>
Change in
Interest Rates Percentage Change in Net Interest Income
(basis points) ------------------------------------------------------
----------------- September 30, 2000 September 30, 1999
------------------------- --------------------------
<S> <C> <C>
+200 -2.23% -3.31%
-200 1.17% 5.60%
</TABLE>
For September 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 2.23% over one year as compared to
an decrease of 3.31% for September 30, 1999. A 200 basis point immediate,
sustained downward shock in the yield curve would increase net interest income
by an estimated 1.17% over one year for September 30, 2000 as compared to a
increase of 5.60% for September 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 September 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 $ 2,690 $ 2,690 $ 2,690
Investment and Marketable
Equity Securities
Taxable 75,871 $ 14,957 $ 38,007 128,835 $ 421,092 $ 660,512 1,210,439
Tax-exempt 3,385 3,385 11,055 127,751 142,191
Loans, net of unearned
income 1,165,097 169,711 313,944 1,648,752 909,299 803,955 3,362,006
----------------------------------------------------------------------------------------------------
Total Interest-Earning Assets $1,243,658 $ 188,053 $ 351,951 $ 1,783,662 $1,341,446 $1,592,218 $4,717,326
====================================================================================================
LIABILITIES
Interest-Bearing Funds:
Savings and NOW accounts $1,106,084 $ 1,106,084 $1,106,084
Time deposits of
$100,000 & over 59,942 $ 46,525 $ 131,238 237,705 $ 123,461 $ 1,398 362,564
Other time deposits 233,440 236,356 343,979 813,775 513,069 3,565 1,330,409
Federal funds purchased,
repurchase agreements
and other short-term
borrowings 369,465 13,994 28,856 412,315 10,000 422,315
FHLB advances 97,046 65,000 162,046 107,892 478,372 748,310
----------------------------------------------------------------------------------------------------
Total Interest-Bearing Funds $1,865,977 $ 296,875 $ 569,073 $ 2,731,925 $ 754,422 $ 483,335 $3,969,682
====================================================================================================
Interest Sensitivity Gap $(622,319) $(108,822) $ (217,122) $ (948,263) $ 587,024 $1,108,883 $ 747,644
====================================================================================================
Cumulative Gap $(622,319) $(731,141) $ (948,263) $ (948,263) $ (361,239) $ 747,644 $ 747,644
====================================================================================================
Cumulative Gap as a Percentage
of Total Earning Assets (13.19)% (15.50)% (20.10)% (20.10)% (7.66)% 15.85% 15.85%
Management Adjustments $1,068,101 $ (71,242) $ (142,378) $ 854,481 $ (854,481) $ 0
Off-Balance Sheet Activities
Cumulative Management Adjusted
Gap and Off-Balance Sheet
Activities $ 445,782 $ 265,717 $ (93,782) $ (93,782) $ (361,239) $ 747,644 $ 747,644
====================================================================================================
Cumulative Management Adjusted
Gap and Off-Balance Sheet
Activities as a Percentage of
Total Earning Assets 9.45% 5.63% (1.99)% (1.99)% (7.66)% 15.85% 15.85%
====================================================================================================
</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 nine months ended September 30, 2000, cash flows from operations
provided cash of $22.92 million to United. During the same period, net cash of
$94.11 million was provided by investing activities which was primarily due to
$140.07 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 $44.23 million. During the first nine months of 2000, net
cash of $169.95 million was used in financing activities, primarily due to the
net repayment of approximately $205.04 million of FHLB borrowings, payment of
$26.66 million in cash dividends and $16.73 million for acquisitions of United
shares under the stock repurchase programs. The net effect of this activity was
a decrease in cash and cash equivalents of $52.92 million for the first nine
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.
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The Asset and Liability Committee monitors liquidity to ascertain that a
liquidity position within certain 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 $25.69 million to $421.62 million from
$395.93 million at December 31, 1999. Included in the shareholders' equity
balance at September 30, 2000 is the previously mentioned cumulative unrealized
loss, net of deferred taxes, of $5.02 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 an $11.75 million
increase, net of deferred income taxes, in the fair value of its available for
sale investment portfolio. During the first nine months of 2000, United
completed a plan announced 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, of which 111,300 shares have been repurchased since its
implementation. United's equity to assets ratio was 8.52% at September 30, 2000,
as compared to 7.81% at December 31, 1999. Capital and reserves to total assets
was 9.24% at September 30, 2000, as compared to 8.53% at December 31, 1999.
Cash dividends were $0.21 and $0.63 per common share for the third quarter of
2000 and nine month period ended September 30, 2000, respectively. Total cash
dividends paid were approximately $8.81 million for the third quarter of 2000
and $26.50 million for the first nine months of 2000.
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 8.16% at September 30, 2000 and 8.78% at September 30, 1999.
Based on regulatory requirements, United and its banking subsidiaries are
categorized as "well capitalized" institutions. United's risk-based capital
ratios of 11.85% at September 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 10.79% and 8.20%, respectively, at September 30,
2000, are also well above regulatory minimum requirements.
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