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FORM 10-K
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Annual Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
For the Fiscal Year Ended DECEMBER 31, 1998
Commission File Number: 0-13322
UNITED BANKSHARES, INC.
-----------------------
(Exact name of registrant as specified in its charter)
WEST VIRGINIA 55-0641179
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
300 UNITED CENTER
500 VIRGINIA STREET, EAST
CHARLESTON, WEST VIRGINIA 25301
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (304) 424-8704
Securities registered pursuant to section 12(b) of the Act: NONE
Securities registered pursuant to 12(g) of the Act:
COMMON STOCK, $2.50 PAR VALUE
-----------------------------
(Title of Class)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such report(s), and (2) has been subject to such
filing requirements for the past 90 days. YES [ X ] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in part III of this Form 10-K or any
amendment to this Form 10-K. [ ]
The aggregate market value of United Bankshares, Inc. common stock,
representing all of its voting stock, that was held by non-affiliates on
February 28, 1999 was approximately $930,578,305.
As of February 28, 1999, United Bankshares, Inc. had 43,293,652
shares of common stock outstanding with a par value of $2.50.
Documents Incorporated By Reference
1. Annual Report to Shareholders for the fiscal year ended December 31, 1998,
portions of which are incorporated by reference in Parts I, II and IV of this
Form 10-K.
2. Definitive Proxy Statement dated April 7, 1999 for the 1999 Annual
Shareholders' Meeting to be held on May 17, 1999, portions of which are
incorporated by reference in Part III of this Form 10-K.
Page 1 of 88 pages. Index to Exhibits is on page 31.
UNITED BANKSHARES, INC.
FORM 10-K
(Continued)
As of the date of filing this Annual report, neither the annual shareholders'
report for the year ended December 31, 1998, nor the proxy statement for the
annual United shareholders' meeting had been mailed to shareholders.
CROSS-REFERENCE INDEX
PART I Page
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Item 1. BUSINESS . . . . . . . . . . . . . . . . . . . . . . . . 3
Item 2. PROPERTIES . . . . . . . . . . . . . . . . . . . . . . . 3
Item 3. LEGAL PROCEEDINGS . . . . . . . . . . . . . . . . . . . 12
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS . . 12
PART II
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Item 5. MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED
SHAREHOLDER MATTERS . . . . . . . . . . . . . . . . . . 13
Item 6. SELECTED FINANCIAL DATA . . . . . . . . . . . . . . . . 16
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS . . . . . . . . . . 16
Item 7a QUALITATIVE AND QUANTITATIVE DISCLOSURES ABOUT
MARKET RISK . . . . . . . . . . . . . . . . . . . . . . 16
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA . . . . . . 26
Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
ON ACCOUNTING AND FINANCIAL DISCLOSURES . . . . . . . . 26
PART III
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Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT . . 27
Item 11. EXECUTIVE COMPENSATION . . . . . . . . . . . . . . . . 27
Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT . . . . . . . . . . . . . . . . . . . . . . 27
Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS . . . . 27
PART VI
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Item 14. EXHIBITS, FINANCIAL STATEMENTS, SCHEDULES AND REPORTS
ON FORM 8-K . . . . . . . . . . . . . . . . . . . . . 28
2
UNITED BANKSHARES, INC.
FORM 10-K, PART I
ITEM 1. BUSINESS
ITEM 2. PROPERTIES
The following discussion satisfies the reporting requirements of Items 1
and 2.
3
DESCRIPTION OF UNITED BANKSHARES, INC.
Organizational History and Subsidiaries
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United Bankshares, Inc. ("United") is a West Virginia corporation
registered as a bank holding company pursuant to the Bank Holding Company Act of
1956, as amended. United was incorporated on March 26, 1982, organized on
September 9, 1982, and began conducting business on May 1, 1984 with the
acquisition of three wholly-owned subsidiaries. In 1985 the subsidiary banks
were merged and renamed United National Bank ("UNB").
Since that time UNB has acquired through merger or consolidation the
following banks: Heritage Bancorp, Inc. (a holding company); First National Bank
of Ripley; Kanawha Banking and Trust Company; Ohio Valley National Bank; Elk
National Bank; Montgomery National Bank, the sole subsidiary of Liberty
Bancshares Inc., a bank holding company; First Bank of Ceredo, the bank
subsidiary of Financial Future Corporation, a bank holding company; CB&T
Westover Bank; the Star City Branch of Community Bank & Trust, N. A.; First
Empire Federal Savings & Loan Association, the sole subsidiary of Eagle Bancorp,
Inc., a bank holding company; the Shepherdstown and Charles Town Branches of
Community Trust Bank of West Virginia, N. A.; and Fed One Bank, the
federally-chartered savings association of Fed One Bancorp, Inc., a thrift
holding company.
On June 30, 1996 United formed United Mortgage Company, Inc., a
wholly-owned subsidiary of UNB. The business of United Mortgage Company, Inc. is
the origination of residential real estate loans for resale, the conducting of
mortgage loan servicing activities for certain loans, and generally the
activities commonly conducted by a mortgage banking company.
In December 1996, United Brokerage Services, Inc., a wholly-owned
subsidiary of UNB began operations. United Brokerage Services, Inc. is
a fully-disclosed broker/dealer and is a registered Investment Advisor
with the National Association of Securities Dealers, Inc. and the
Securities and Exchange Commission and a member of the Securities
Investor Protection Corporation. United Brokerage Services, Inc. offers
a wide range of investment products as well as comprehensive financial
planning and asset management services to the general public.
On August 9, 1990, United acquired BankFirst Corporation ("BankFirst"), a
one bank holding company based in McLean, Virginia.
On October 11, 1995, United acquired First Commercial Bank of
Arlington, Virginia ("FCB"). On March 18, 1996 First Commercial Bank's
name was changed to United Bank.
On August 1, 1997, United acquired First Patriot Bankshares
Corporation ("Patriot") of Reston, Virginia and its wholly-owned
subsidiary, Patriot National Bank. Patriot National Bank was merged
into United Bank.
4
On April 2, 1998, United acquired George Mason Bankshares, Inc.
("George Mason") of Fairfax, Virginia and its wholly-owned subsidiary,
George Mason Bank. Effective with the merger, George Mason Bank was
renamed United Bank.
Offices
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The headquarters of United are located in United Center at 500 Virginia
Street, East, Charleston, West Virginia.
The main office of UNB is located at 514 Market Street, Parkersburg, West
Virginia. United's corporate offices and UNB's executive offices are also
located in Parkersburg at Fifth and Avery Streets. Currently, UNB operates
fifty-three offices located throughout West Virginia and three in Ohio. UNB owns
all of these facilities except for two of the Ohio offices, two in the
Parkersburg area, three in the Charleston area, two in the Beckley area and one
in each Wheeling, Summersville and Clarksburg, all of which are leased under
operating leases. The main facility of UNB's Wheeling office is leased from
Ogden Newspapers, Inc. Additionally, UNB operates a loan production office
located in Bridgeport, West Virginia.
The main office of United Bank is located at 11185 Main Street, Fairfax,
Virginia, with twenty-three offices throughout the Northern Virginia, Maryland
and Washington, D.C. areas. United Bank leases all of these facilities under
operating lease agreements except for the two offices in Arlington and Reston,
which are owned facilities.
Employees
- ---------
As of December 31, 1998 United and its subsidiaries had approximately 1,154
full-time equivalent employees and officers. None of these employees is
represented by a collective bargaining unit, and management considers employee
relations to be excellent.
Business of United
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As a bank holding company registered under the Bank Holding Company Act of
1956, as amended, United's present business is community banking. As of December
31, 1998, United's consolidated assets approximated $4.6 billion and total
shareholders' equity approximated $422 million.
United is permitted to acquire other banks and bank holding companies, as
well as thrift institutions. United is also permitted to engage in certain
non-banking activities which are closely related to banking under the provisions
of the Bank Holding Company Act and the Federal Reserve Board's Regulation Y.
Management continues to consider such opportunities as they arise, and in this
regard, management from time to time makes inquiries, proposals, offers or
expressions of interest as to potential opportunities; although no agreements or
understandings to acquire other banks or bank holding companies or nonbanking
subsidiaries or to engage in other nonbanking activities, other than those
identified herein, presently exist.
5
Business of Subsidiary Banks
- ----------------------------
United, through its subsidiaries, engages primarily in community banking
and mortgage banking and additionally offers most types of business permitted by
law and regulation. Included among the banking services offered are the
acceptance of deposits in checking, savings, time and money market accounts; the
making and servicing of personal, commercial, floor plan and student loans; and
the making of construction and real estate loans. Also offered are individual
retirement accounts, safe deposit boxes, wire transfers and other standard
banking products and services. As a part of their lending function, UNB and
United Bank offer credit card services including accounts issued under the name
of certain correspondent banks.
UNB and United Bank each maintains a trust department which acts as trustee
under wills, trust and pension and profit sharing plans, as executors and
administrators of estates, and as guardians for estates of minors and
incompetents, and in addition performs a variety of investment and security
services. Trust services are available to customers of affiliate banks. UNB
provides services to its correspondent banks such as check clearing, safekeeping
and the buying and selling of federal funds.
United Brokerage Services, Inc., a wholly-owned subsidiary of UNB, is a
fully-disclosed broker/dealer and a registered Investment Advisor with the
National Association of Securities Dealers, Inc. and the Securities and Exchange
Commission and a member of the Securities Investor Protection Corporation.
United Brokerage Services, Inc. offers a wide range of investment products as
well as comprehensive financial planning and asset management services to the
general public.
UNB is a member of a regional network of automated teller machines known as
the MAC ATM network while United Bank participates in the MOST network. Through
MAC and MOST, all of United's subsidiary banks are participants in a network
known as Cirrus which provides banking on a nationwide basis.
Lending Activities
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United's total loan portfolio, net of unearned income, decreased $38
million, or 1.4%, to $2.65 billion in 1998 and is comprised of commercial, real
estate and consumer loans including credit card and home equity loans.
Commercial and commercial real estate loans increased $20.9 million or 4.3% and
$82.4 million or 16.7%, respectively, while consumer loans, net of unearned
income, declined $51 million or 14.4%. Residential real estate loans declined
$87.9 million or 7.6%.
Commercial Loans
- ----------------
The commercial loan portfolio consists of loans to corporate borrowers in
small to mid-size industrial and commercial companies, as well as automobile
dealers, service, retail and wholesale merchants.
6
Coal mining companies make up an insignificant portion of loans in the
portfolio. Collateral securing these loans includes equipment, machinery,
inventory, receivables, vehicles and commercial real estate. Commercial loans
are considered to contain a higher level of risk than other loan types although
care is taken to minimize these risks. Numerous risk factors impact this
portfolio including industry specific risks such as economy, new technology,
labor rates and cyclicality, as well as customer specific factors, such as cash
flow, financial structure, operating controls and asset quality. United
diversifies risk within this portfolio by closely monitoring industry
concentrations and portfolios to ensure that it does not exceed established
lending guidelines. Diversification is intended to limit the risk of loss from
any single unexpected economic event or trend. Underwriting standards require a
comprehensive review and independent evaluation of virtually all larger balance
commercial loans by the loan committee prior to approval.
Real Estate Loans
- -----------------
Commercial real estate loans consist of commercial mortgages, which
generally are secured by nonresidential and multi-family residential properties.
Also included in this portfolio are loans that are secured by owner-occupied
real estate, but made for purposes other than the construction or purchase of
real estate. Commercial real estate loans carry many of the same customers and
industry risks as the commercial loan portfolio. Real estate mortgage loans to
consumers are secured primarily by a first lien deed of trust. These loans are
traditional one-to-four family residential mortgages. The loans generally do not
exceed an 80% loan to value ratio at the loan origination date and most are at a
variable rate of interest. These loans are considered to contain normal risk.
Consumer Loans
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Consumer loans are secured by automobiles, boats, recreational vehicles,
and other personal property. Personal loans, home equity, student loans and
unsecured credit card receivables are also included as consumer loans. United
monitors the risk associated with these types of loans by monitoring such
factors as portfolio growth, lending policies and economic conditions.
Underwriting standards are continually evaluated and modified based upon these
factors.
Underwriting Standards
- ----------------------
United's loan underwriting guidelines and standards are updated
periodically and are presented for approval by each of the respective Boards of
Directors of its subsidiary banks. The purpose of the standards and guidelines
is to grant loans on a sound and collectible basis; to invest available funds in
a safe, profitable manner; to serve the legitimate credit needs of the
communities of United's primary market area; and ensure that all loan applicants
receive fair and equal treatment in the lending process. It is the intent of the
underwriting
7
guidelines and standards to: minimize loan losses by carefully investigating the
credit history of each applicant, verify the source of repayment and the ability
of the applicant to repay, collateralize those loans in which collateral is
deemed to be required, exercise care in the documentation of the application,
review, approval, and origination process, and administer a comprehensive loan
collection program. The above guidelines are adhered to and subject to the
experience, background and personal judgment of the loan officer assigned to the
loan application. A loan officer may grant, with justification, a loan with
variances from the underwriting guidelines and standards. However, the loan
officer may not exceed their respective lending authority without obtaining the
prior, proper approval from a superior, a regional supervisor, or the Loan
Committee, whichever is deemed appropriate for the nature of the variance.
Loan Origination and Processing
- -------------------------------
United generally originates loans within the primary market area of its
banking subsidiaries. United may from time to time make loans to borrowers
and/or on properties outside of its primary market area as an accommodation to
its customers. Processing of all loans is centralized in the Charleston, West
Virginia office. As of December 31, 1998, the balance of mortgage loans being
serviced by United for others was insignificant.
Secondary Markets
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United Mortgage Company, Inc. ("UMC"), a wholly-owned subsidiary of UNB,
and George Mason Mortgage Company ("GMMC"), a wholly-owned subsidiary of United
Bank, are engaged in the operation of a general mortgage and agency business,
including the conducting of mortgage loan servicing activities for certain
loans, the origination and acquisition of residential real estate loans for
resale and generally the activities commonly conducted by a mortgage banking
company. These loans are for single, owner-occupied residences with either
adjustable or fixed rate terms, with a variety of maturities tailored to
effectively serve its markets.
GMMC primarily originates permanent residential mortgage loans in the
northern Virginia market while UMC's originations are predominately in its West
Virginia markets. Mortgage loan originations are generally intended to be sold
in the secondary market.
During 1998, United originated $1.5 billion and purchased $960 million of
real estate loans for sale in the secondary market and sold $1.866 billion of
loans designated as held for sale in the secondary market. Proceeds received
from the sales of these loans during 1998 was $1.880 billion.
The principal sources of revenue from United's mortgage banking business
are: (i) loan origination fees; (ii) gains or losses from the sale of loans, if
any; (iii) interest earned on mortgage loans during the period that they are
held by United pending sale; and (iv) loan servicing fees.
8
Investment Activities
- ---------------------
United's investment policy stresses the management of the investment
securities portfolio, which includes both securities held to maturity and
securities available for sale, to maximize return over the long-term in a manner
that is consistent with good banking practices and relative safety of principal.
United currently does not engage in trading account activity. The
Asset/Liability Committee of United is responsible for the coordination and
evaluation of the investment portfolio.
Sources of funds for investment activities include "core deposits". Core
deposits include certain demand deposits, statement and special savings and NOW
accounts. These deposits are relatively stable and they are the lowest cost
source of funds available to United. Short-term borrowings have also been a
significant source of funds. These include federal funds purchased and
securities sold under agreements to repurchase and FHLB borrowings. Repurchase
agreements represent funds which are generally obtained as the result of a
competitive bidding process.
United's investment portfolio is comprised largely of mortgage-backed
securities. Additionally United has a substantial amount of U.S. Treasury
securities and obligations of U.S. Agencies and Corporations. Obligations of
States and Political Subdivisions are comprised of municipal securities with an
average quality of not less than an "A" rating.
During 1998, 1997 and 1996, United recognized net gains of $2.67 million,
$85 thousand, and $465 thousand, respectively, from the available for sale
portfolio. The net gain in 1998 included a $2.49 million gain recognized on an
available for sale equity security exchanged in an unaffiliated merger
transaction consummated at the end of the first quarter of 1998. Additionally,
the 1998 net gain included approximately $300 thousand of net losses from calls
of held to maturity securities.
At December 31, 1998, United had no open commitments to sell
mortgage-backed securities. As such, United is not exposed to significant risk
nor will it derive any significant benefit from changes in interest rates on the
price of the mortgage loan inventory.
Competition
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United faces a high degree of competition in all of the markets it serves.
These markets may generally be defined as Wood, Kanawha, Monongalia, Jackson,
Cabell, Hancock, Ohio, Marshall, Gilmer, Lewis, Webster, Boone, Logan, Nicholas,
Fayette and Raleigh Counties in West Virginia; Lawrence, Belmont, Jefferson and
Washington Counties in Ohio; Montgomery County in Maryland and Arlington,
Loudoun, Prince William and Fairfax Counties in Virginia, located adjacent to
the Washington D.C. area, which is in close proximity to West Virginia's eastern
panhandle. United competes in Ohio markets because of the close proximity to the
9
Ohio border of certain subsidiary offices. Included in United's West Virginia
markets are the five largest West Virginia Metropolitan Statistical Areas (MSA):
the Parkersburg MSA, the Charleston MSA, the Huntington MSA, the Wheeling MSA
and the Weirton MSA. United's Virginia markets include the Washington, D.C.
Metropolitan area. United considers the above counties and MSA's to be the
primary market area for the business of its banking subsidiaries.
With prior regulatory approval, West Virginia and Virginia banks are
permitted unlimited branch banking throughout the state. In addition, interstate
acquisitions of and by West Virginia and Virginia banks and bank holding
companies are permissible on a reciprocal basis, as well as reciprocal
interstate acquisitions by thrift institutions. These conditions serve to
intensify competition within United's market.
As of December 31, 1998, there were 57 bank holding companies in the State
of West Virginia registered with the Federal Reserve System and the West
Virginia Board of Banking and Financial Institutions and 69 bank holding
companies in the Commonwealth of Virginia registered with the Federal Reserve
System and the Virginia Corporation Commission. These holding companies are
headquartered in various West Virginia and Virginia cities and control banks
throughout West Virginia and Virginia, which compete for business as well as for
the acquisition of additional banks.
Economic Characteristics of Primary Market Area
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Although the market area of the banking subsidiaries encompasses a portion
of the coal fields located in southern West Virginia, an area of the state which
has been economically depressed, the coal related loans in the loan portfolio of
the banking subsidiaries constitute less than 2% of United's total loans
outstanding. The state of West Virginia has a more diversified economy than it
had during the peak periods of coal production with the chemical manufacturing
industry accounting for 19% of the entire manufacturing workforce and 33% of the
manufacturing wages, according to West Virginia state records. This diversified
economy has contributed to the positive trends in the number of payroll jobs
created and unemployment rates in recent years as the number of payroll jobs
increased 11,100 during calendar year 1998 and the state's overall unemployment
rate has declined from 10.5% in 1991 to 6.6% in December 1998 - the lowest
annual unemployment rate since 1978, according to available information from the
West Virginia Bureau of Employment Programs.
United's northern Virginia subsidiary banking offices are located in
markets that reflect very low unemployment rate levels and increased wage levels
over a year ago. According to information available from the Virginia Employment
Commission, Virginia's unemployment rate as of December 1998 was 2.7%. The 2.7%
rate was the lowest rate reported for the month of December in 29 years.
Additionally, the Virginia Employment Commission reported that record levels
were set with increased nonagricultural employment and increased manufacturing
salaries in December 1998.
10
Regulation and Supervision
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United, as a bank holding company, is subject to the restrictions of the
Bank Holding Company Act of 1956, as amended, and is registered pursuant to its
provisions. As such, United is subject to the reporting requirements of and
examination by the Board of Governors of the Federal Reserve System ("Board of
Governors").
The Bank Holding Company Act prohibits the acquisition by a bank holding
company of direct or indirect ownership of more than five percent of the voting
shares of any bank within the United States without prior approval of the Board
of Governors. With certain exceptions, a bank holding company also is prohibited
from acquiring direct or indirect ownership or control of more than five percent
of the voting shares of any company which is not a bank, and from engaging
directly or indirectly in business unrelated to the business of banking, or
managing or controlling banks.
The Board of Governors of the Federal Reserve System, in its Regulation Y,
permits bank holding companies to engage in non-banking activities closely
related to banking or managing or controlling banks. Approval of the Board of
Governors is necessary to engage in these activities or to make acquisitions of
corporations engaging in these activities. In addition, on a case by case basis,
the Board of Governors may approve other non-banking activities.
As a bank holding company doing business in West Virginia, United is also
subject to regulation and examination by the West Virginia Board of Banking and
Financial Institutions (the "West Virginia Banking Board") and must submit
annual reports to the department. Further, any acquisition application which
United must submit to the Board of Governors must also be submitted to the West
Virginia Banking Board for approval.
United is also registered under and is subject to the requirements of the
Securities Exchange Act of 1934, as amended.
UNB, as national banking associations, is subject to supervision,
examination and regulation by the Office of the Comptroller of the Currency. UNB
is also a member of the Federal Reserve System, and as such, is subject to
applicable provisions of the Federal Reserve Act and regulations issued
thereunder.
United Bank, as a Virginia state member bank, is subject to supervision,
examination and regulation by the Federal Reserve System, and as such, is
subject to applicable provisions of the Federal Reserve Act and regulations
issued thereunder. United Bank is subject to regulation by the Virginia
Corporation Commission's Bureau of Financial Institutions.
The deposits of United's wholly-owned banking subsidiaries are
insured by the Federal Deposit Insurance Corporation ("FDIC") to the
extent provided by law. Accordingly, these banks are also subject to
11
regulation by the FDIC.
UNITED BANKSHARES, INC.
FORM 10-K, PART I
ITEM 3. LEGAL PROCEEDINGS
Litigation
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Information relating to litigation on page 33 of the Annual Report to
Shareholders for the year ended December 31, 1998, is incorporated herein by
reference.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
No matters were submitted to a vote of security holders during the fourth
quarter of the fiscal year covered by this report.
12
UNITED BANKSHARES, INC.
FORM 10-K, PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED
SHAREHOLDER MATTERS
13
Stock
- -----
As of December 31, 1998, 100,000,000 shares of common stock, par value
$2.50 per share, were authorized for United, of which 43,256,833 were issued,
including 356 shares held as treasury shares. The outstanding shares are held by
approximately 13,182 shareholders of record as of December 31, 1998. The
unissued portion of United's authorized common stock (subject to registration
approval by the SEC) and the treasury shares are available for issuance as the
Board of Directors determines advisable. United offers its shareholders the
opportunity to invest dividends in shares of United stock through its dividend
reinvestment plan. United has also established stock option plans and a stock
bonus plan as incentive for certain eligible officers. In addition to the above
incentive plans, United is occasionally involved in certain mergers in which
additional shares could be issued and recognizes that additional shares could be
issued for other appropriate purposes.
The Board of Directors believes that the availability of authorized but
unissued common stock of United is of considerable value if opportunities should
arise for the acquisition of another business through the issuance of United's
stock. Shareholders do not have preemptive rights, which allows United to issue
additional authorized shares without first offering them to current
shareholders.
United has only one class of stock and all voting rights are vested in the
holders of United's stock. On all matters subject to a vote of shareholders, the
shareholders of United will be entitled to one vote for each share of common
stock owned. Shareholders of United have cumulative voting rights with regard to
election of directors. At the present time, no senior securities of United are
outstanding, nor does the Board of Directors presently contemplate issuing
senior securities.
There are no preemptive or conversion rights or, redemption or sinking fund
provisions with respect to United's Stock. All of the issued and outstanding
shares of United's stock are fully paid and non-assessable.
Dividends
- ---------
On November 24, 1997, the Board of Directors of United declared a two for
one stock split in the form of a 100% stock dividend payable on March 27, 1998,
to shareholders of record as of March 13, 1998. The change in capital structure
due to the 100% stock dividend was given retroactive effect in the December 31,
1997 balance sheet and all references to shares and per share data reflect the
effect of the 100% stock dividend.
The shareholders of United are entitled to receive dividends when and as
declared by its Board of Directors. Dividends are paid quarterly. Dividends were
$0.75 per share in 1998, $0.68 per share in 1997 and $0.62 per share in 1996.
Dividends are paid from funds legally available; therefore, the payment of
dividends is subject to the restrictions set forth in the West Virginia
Corporation Act. See "Market and Stock Prices of United" for quarterly dividend
information.
14
Payment of Dividends by United is dependent upon payment of dividends to it by
its subsidiary banks. The ability of national banks to pay dividends is subject
to certain limitations imposed by the national banking laws. Generally, the most
restrictive provision requires approval by the Office of the Comptroller of the
Currency ("OCC") if dividends declared in any year exceed the current year's net
income, as defined, plus the retained net profits of the two preceding years.
Payment of dividends by United's state member bank is regulated by the Federal
Reserve System and generally, the prior approval of the Federal Reserve Board
("FRB") is required if the total dividends declared by a state member bank in
any calendar year exceeds its net profits, as defined, for that year combined
with its retained net profits for the preceding two years. Additionally, prior
approval of both the OCC and the FRB is required when a national bank or state
member bank has deficit retained earnings but has sufficient current year's net
income, as defined, plus the retained net profits of the two preceding years.
The OCC and FRB may prohibit dividends if it deems the payment to be an unsafe
or unsound banking practice. The OCC has issued guidelines for dividend payments
by national banks, emphasizing that proper dividend size depends on the bank's
earnings and capital while the FRB has issued similar guidelines pertaining to
state member banks. See Note M - Notes to Consolidated Financial Statements,
which is incorporated herein by reference.
Market and Stock Prices of United
- ---------------------------------
United Bankshares, Inc. stock is traded over the counter on the
National Association of Securities Dealers Automated Quotations System
("NASDAQ") under the trading symbol UBSI.
The high and low prices listed below page are based upon information
available to United's management from NASDAQ listings. No attempt has been made
by United's management to ascertain the prices for every sale of its stock
during the periods indicated. However, based on the information available,
United's management believes that the prices fairly represent the amounts at
which United's stock was traded during the periods indicated.
The following table presents the dividends and high and low prices of
United's common stock during the periods set forth below:
1999 Dividends High Low
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First Quarter through February 28, 1999 (1) $27.19 $22.75
1998
Fourth Quarter $0.20 $29.88 $20.75
Third Quarter $0.19 $31.50 $24.00
Second Quarter $0.18 $34.19 $23.25
First Quarter $0.18 $26.19 $22.75
1997
Fourth Quarter $0.18 $24.38 $21.80
Third Quarter $0.17 $23.63 $19.13
Second Quarter $0.17 $21.25 $17.19
First Quarter $0.16 $17.44 $16.13
(1) On February 22, 1999, United declared a dividend of $0.20 per share, payable
April 1, 1999, to shareholders of record as of March 12, 1999.
15
UNITED BANKSHARES, INC.
FORM 10-K, PART II
ITEM 6. SELECTED FINANCIAL DATA
Information relating to selected financial data on page 41 of the Annual
Report to Shareholders for the year ended December 31, 1998, is incorporated
herein by reference.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Management's Discussion and Analysis of Financial Condition and Results of
Operations on pages 41 through 55 inclusive, of the Annual Report to
Shareholders for the year ended December 31, 1998, is incorporated herein by
reference.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Quantitative and Qualitative Disclosures About Market Risk on pages 47
through 49 inclusive, of the Annual Report to Shareholders for the year ended
December 31, 1998, is incorporated herein by reference.
16
DISTRIBUTION OF ASSETS, LIABILITIES AND SHAREHOLDERS' EQUITY
INTEREST RATES AND INTEREST DIFFERENTIAL:
The following table shows the daily average balance of major categories of
assets and liabilities for each of the three years ended December 31, 1998, 1997
and 1996 with the interest and rate earned or paid on such amount.
Year Ended Year Ended Year Ended
December 31 December 31 December 31
1998 1997 1996
------------------------ ------------------------ -------------------------
(Dollars in Average Avg. Average Avg. Average Avg.
Thousands) Balance Interest Rate Balance Interest Rate Balance Interest Rate
------- -------- ----- ------- -------- ---- ------- -------- ----
ASSETS
Earning assets:
Federal funds sold and securities
purchased under agreements to
resell and other short-term
investments $ 28,270 $ 1,472 5.21% $ 27,991 $ 1,456 5.20% $ 28,327 $ 1,489 5.26%
Investment Securities:
Taxable 876,167 55,550 6.34% 884,541 57,868 6.54% 772,026 48,963 6.34%
Tax exempt (1) 66,019 5,262 7.97% 54,361 4,753 8.74% 60,195 5,398 8.97%
------ ----- ---- ------ ----- ---- ------ ----- ----
Total Securities 942,186 60,812 6.45% 938,902 62,621 6.67% 832,221 54,361 6.53%
Loans, net of unearned
income (1) (2) 3,053,948 267,186 8.75% 2,526,849 219,588 8.69% 2,299,556 198,018 8.61%
Allowance for loan losses (35,598) (30,438) (29,768)
------- ------- -------
Net Loans 3,018,350 8.85% 2,496,411 8.80% 2,269,788 8.72%
--------- ------- ---- --------- ------- ---- --------- ------- ----
Total earning assets 3,988,806 329,470 8.26% 3,463,304 283,665 8.19% 3,130,336 253,868 8.11%
------- ------- -------
Other assets 250,002 218,998 222,258
------- ------- -------
TOTAL ASSETS $4,238,808 $3,682,302 $3,352,594
========== ========== ==========
LIABILITIES
Interest-Bearing Funds:
Interest-bearing deposits $2,791,996 $128,976 4.62% $2,528,103 $113,472 4.49% $2,272,640 $ 96,475 4.25%
Federal funds purchased,
repurchase agreements
and other short-term
borrowings 228,923 10,732 4.69% 195,390 8,911 4.56% 152,254 6,661 4.37%
FHLB advances 282,741 15,646 5.53% 149,899 8,739 5.83% 162,608 9,120 5.61%
------- ------ ---- ------- ----- ---- ------- ----- ----
Total Interest-Bearing Funds 3,303,660 155,354 4.70% 2,873,392 131,122 4.56% 2,587,502 112,256 4.34%
------- ------- -------
Demand deposits 452,300 390,020 364,646
Accrued expenses and other
liabilities 70,572 43,403 44,990
------ ------ ------
TOTAL LIABILITIES 3,826,532 3,306,815 2,997,138
Shareholders' Equity 412,276 375,487 355,456
------- ------- -------
TOTAL LIABILITIES AND
SHAREHOLDERS' EQUITY $4,238,808 $3,682,302 $3,352,594
========== ========== ==========
NET INTEREST INCOME $174,116 $152,543 $141,612
======== ======== ========
INTEREST SPREAD 3.56% 3.62% 3.77%
NET INTEREST MARGIN 4.37% 4.40% 4.52%
(1) The interest income and the yields on nontaxable loans and investment
securities are presented on a tax-equivalent basis using the statutory
federal income tax rate of 35%.
(2) Nonaccruing loans are included in the daily average loan amounts
outstanding.
17
UNITED BANKSHARES, INC. AND SUBSIDIARIES
RATE/VOLUME ANALYSIS
The following table sets forth a summary of the changes in interest earned and
interest paid detailing the amounts attributable to (i) changes in volume
(change in the average volume times the prior year's average rate), (ii) changes
in rate (change in the average rate times the prior year's average volume), and
(iii) changes in rate/volume (change in the average volume times the change in
average rate).
1998 Compared to 1997 1997 Compared to 1996
-------------------------------- ---------------------------------
Increase (Decrease) Due to Increase (Decrease) Due to
-------------------------------- ----------------------------------
Rate/ Rate/
Volume Rate Volume Total Volume Rate Volume Total
------- ---- ------ ----- ------ ----- ------ -----
(In thousands) (In thousands)
Interest income:
Federal funds sold, securities purchased
under agreements to resell and other
short-term investments $ 15 $ 1 $ $ 16 $ (18) $ (14) $ (1) $ (33)
Investment securities:
Taxable (548) (1,787) 17 (2,318) 7,136 1,544 225 8,905
Tax exempt (1) 1,019 (420) (90) 509 (523) (135) 13 (645)
Loans (1),(2) 45,908 1,398 292 47,598 19,771 1,636 163 21,570
-------- ------- -------- ------- ------- ------- ------- -------
TOTAL INTEREST INCOME 46,394 (808) 219 45,805 26,366 3,031 400 29,797
-------- ------- -------- ------- ------- ------- ------- -------
Interest expense:
Interest-bearing deposits $ 11,845 $ 3,313 $ 346 $15,504 $10,845 $ 5,531 $ 621 $16,997
Federal funds purchased, repurchase
agreements, and other short-term
borrowings 1,529 251 43 1,823 1,885 287 82 2,254
FHLB advances 7,746 (446) (395) 6,905 (713) 356 (28) (385)
-------- ------- -------- ------- ------- ------- ------- -------
TOTAL INTEREST EXPENSE 21,120 3,118 (6) 24,232 12,017 6,174 675 18,866
-------- ------- -------- ------- ------- ------- ------- -------
NET INTEREST INCOME $ 25,274 $ 3,926 $ 225 $21,573 $14,349 $(3,143) $ (275) $10,931
======== ======= ======== ======= ======= ======= ======= =======
(1) Yields and interest income on tax exempt loans and investment securities
are computed on a fully tax-equivalent basis using the statutory federal
income tax rate of 35%.
(2) Nonaccruing loans are included in the daily average loan amounts
outstanding.
18
UNITED BANKSHARES, INC. AND SUBSIDIARIES
LOAN PORTFOLIO
TYPES OF LOANS
The following is a summary of loans outstanding at December 31:
1998 1997 1996 1995 1994
---- ---- ---- ---- ----
(In thousands)
Commercial, financial
and agricultural $ 508,601 $ 487,706 $ 328,248 $ 295,929 $ 267,516
Real estate mortgage 1,696,233 1,693,819 1,611,801 1,502,096 1,402,246
Real estate construction 141,026 150,429 90,817 66,810 60,600
Consumer 313,464 364,951 328,928 293,741 289,101
Less: Unearned interest (6,933) (7,066) (5,223) (5,427) (7,660)
------ ------ ------ ------ ------
Total loans 2,652,391 2,689,839 2,354,571 2,153,149 2,011,803
Allowance for possible
loan losses (39,189) (31,936) (29,376) (29,531) (29,521)
------- ------- ------- ------- -------
TOTAL LOANS, NET $2,613,202 $2,657,903 $2,325,195 $2,123,618 $1,982,282
========== ========== ========== ========== ==========
Loans held for sale $ 720,607 $ 97,619 $ 74,465 $ 55,827 $ 19,266
========== ========== ========== ========== ==========
The following is a summary of loans outstanding as a percent of total loans at
December 31:
1998 1997 1996 1995 1994
---- ---- ---- ---- ----
Commercial, financial
and agricultural 19.18% 18.13% 13.94% 13.74% 13.30%
Real estate mortgage 63.95% 62.97% 68.45% 69.76% 69.70%
Real estate construction 5.32% 5.59% 3.86% 3.10% 3.01%
Consumer 11.55% 13.31% 13.75% 13.40% 13.99%
------ ------ ------ ------ ------
TOTAL 100.00% 100.00% 100.00% 100.00% 100.00%
====== ====== ====== ====== ======
REMAINING LOAN MATURITIES
The following table shows the maturity of commercial, financial, and
agricultural loans and real estate construction outstanding as of December 31,
1998:
Less Than One To Greater Than
One Year Five Years Five Years Total
--------- ---------- ------------- -----
(In thousands)
Commercial, financial
and agricultural $184,775 $173,230 $150,596 $508,601
Real estate construction 141,026 141,026
------- -------- -------- -------
Total $325,801 $173,230 $150,596 $649,627
======== ======== ======== ========
19
UNITED BANKSHARES, INC. AND SUBSIDIARIES
At December 31, 1998, commercial, financial and agricultural loans maturing
within one to five years and in more than five years are interest sensitive as
follows:
One to Over
Five Years Five Years
---------- ----------
(In thousands)
Outstanding with fixed interest rates $ 66,226 $ 72,978
Outstanding with adjustable rates 107,004 77,618
------- ------
$173,230 $150,596
======== ========
There were no real estate construction loans with maturities greater than one
year.
RISK ELEMENTS
Nonperforming Loans
Nonperforming loans include loans on which no interest is currently being
accrued, loans which are past due 90 days or more as to principal or interest
payments, and loans for which the terms have been modified due to a
deterioration in the financial position of the borrower. Management is not aware
of any other significant loans, groups of loans, or segments of the loan
portfolio not included below where there are serious doubts as to the ability of
the borrowers to comply with the present loan repayment terms. The following
table summarizes nonperforming loans for the indicated periods.
December 31
--------------------------------------------
1998 1997 1996 1995 1994
---- ---- ---- ---- ----
(In thousands)
Nonaccrual loans $ 9,139 $ 5,815 $ 6,373 $10,062 $7,037
Troubled debt restructurings 95 744 1,595
Loans which are contractually past due 90
days or more as to interest or principal,
and are still accruing interest 9,528 12,877 6,317 5,070 3,268
----- ------ ----- ----- -----
TOTAL $18,667 $18,692 $12,785 $15,876 $11,900
======= ======= ======= ======= =======
Loans are designated as nonaccrual when, in the opinion of management, the
collection of principal or interest is doubtful. This generally occurs when a
loan becomes 90 days past due as to principal or interest unless the loan is
both well secured and in the process of collection. When interest accruals are
discontinued, unpaid interest credited to income in the current year is
reversed, and unpaid interest accrued in prior years is charged to the allowance
for loan losses. See Note D to the consolidated financial statements for
additional information regarding nonperforming loans, impaired loans and credit
risk concentration. Other real estate owned is not material.
20
UNITED BANKSHARES, INC. AND SUBSIDIARIES
INVESTMENT PORTFOLIO
The following is a summary of the amortized cost of held to maturity securities
held to maturity at December 31,:
1998 1997 1996
---- ---- ----
(In thousands)
U.S. Treasury and other U.S. Government
agencies and corporations $121,474 $123,186 $121,192
States and political subdivisions 82,011 51,560 55,332
Mortgage-backed securities 139,002 212,254 226,235
Other 19,664 7,816 2,480
------ ----- -----
TOTAL HELD TO MATURITY SECURITIES $362,151 $394,816 $405,239
======== ======== ========
The following is a summary of the amortized cost of available for sale
securities at December 31,:
1998 1997 1996
---- ---- ----
(In thousands)
U.S. Treasury securities and obligations of
U.S. Government agencies and corporations $198,151 $191,473 $164,322
States and political subdivisions 27,474 4,093 1,316
Mortgage-backed securities 279,618 379,452 268,256
Marketable equity securities 9,211 4,730 3,918
Other 43,120 22,161 21,792
-------- -------- --------
TOTAL AVAILABLE FOR SALE SECURITIES $557,574 $601,909 $459,604
======== ======== ========
The fair value of mortgage-backed securities is affected by changes in
interest rates and prepayment risk. When interest rates decline, prepayment
speeds generally accelerate due to homeowners refinancing their mortgages at
lower interest rates. This may result in the proceeds being reinvested at lower
interest rates. Rising interest rates may decrease the assumed prepayment speed.
Slower prepayment speeds may extend the maturity of the security beyond its
estimated maturity. Therefore, investors may not be able to invest at current
higher market rates due to the extended expected maturity of the security.
United had a net unrealized gain of $3,983 on all mortgage-backed securities at
December 31, 1998, as compared to a net unrealized gain of $5,057 at December
31, 1997.
The following table sets forth the maturities of all securities at December 31,
1998, and the weighted average yields of such securities (calculated on the
basis of the cost and the effective yields weighted for the scheduled maturity
of each security).
After 1 But After 5 But
Within 1 Year Within 5 Years Within 10 Years After 10 Years
--------------- ---------------- --------------- --------------
Amount Yield Amount Yield Amount Yield Amount Yield
------ ----- ------ ------ ------ ----- ------- ------
(In thousands)
U.S. Treasury and other U.S.
Government agencies and corporations $42,256 6.24% $124,495 6.19% $145,508 6.79% $ 8,539 6.48%
States and political subdivisions (1) 4,319 8.49% 10,769 8.27% 24,451 7.87% 69,952 7.34%
Mortgage-backed securities 7,154 6.57% 44,067 6.62% 72,513 6.57% 297,484 6.78%
Other 1,321 7.93% 4,178 4.04% 100 2.30% 70,211 6.18%
(1) Tax-equivalent adjustments (using a 35% federal rate) have been made in
calculating yields on obligations of states and political subdivisions.
NOTE: There are no securities with a single issuer whose book value in the
aggregate exceeds 10% of total shareholders' equity.
21
UNITED BANKSHARES, INC. AND SUBSIDIARIES
SHORT-TERM BORROWINGS
The following table shows the distribution of United's short-term borrowings and
the weighted average interest rates thereon at the end of each of the last three
years. Also provided are the maximum amount of borrowings and the average
amounts of borrowings as well as weighted average interest rates for the last
three years.
Federal Securities Sold
Funds Under Agreements
Purchased to Repurchase
----------- ---------------
(In thousands)
At December 31:
1998 $ 7,260 $236,535
1997 40,961 184,718
1996 4,491 168,560
Weighted average interest rate at year end:
1998 5.4% 4.4%
1997 6.6% 4.6%
1996 6.8% 4.3%
Maximum amount outstanding at any month's end:
1998 $35,416 $236,535
1997 47,900 215,205
1996 33,510 177,133
Average amount outstanding during the year:
1998 $24,334 $201,475
1997 24,550 167,688
1996 20,685 126,173
Weighted average interest rate during the year:
1998 5.6% 4.6%
1997 5.6% 4.4%
1996 5.6% 4.2%
At December 31, 1998, repurchase agreements include $119,061 in overnight
accounts. The remaining balance principally consists of agreements having
maturities ranging from 2-90 days. The rates offered on these funds vary
according to movements in the federal funds and short-term investment market
rates.
22
UNITED BANKSHARES, INC. AND SUBSIDIARIES
DEPOSITS
The average daily amount of deposits and rates paid on such deposits is
summarized for the years ended December 31:
1998 1997 1996
------------- ------------- ---------------
Amount Rate Amount Rate Amount Rate
------ ---- ------ ---- ------ ----
(In thousands)
Noninterest bearing
demand deposits $ 452,300 $ 390,020 $ 364,646
Interest bearing
demand deposits 312,317 2.37% 205,040 2.64% 306,854 2.63%
Savings deposits 817,852 3.49% 858,980 3.07% 717,040 2.84%
Time deposits 1,661,827 5.60% 1,464,083 5.53% 1,248,746 5.45%
--------- --------- ---------
TOTAL $3,244,296 4.62% $2,918,123 4.49% $2,637,286 4.25%
========== ========== =========
Maturities of time certificates of deposit of $100,000 or more outstanding at
December 31, 1998 are summarized as follows:
(In thousands)
3 months or less $ 57,730
Over 3 through 6 months 35,585
Over 6 through 12 months 98,410
Over 12 months 75,015
------
TOTAL $266,740
========
RETURN ON EQUITY AND ASSETS
The following table shows selected consolidated operating and capital ratios for
each of the last three years ended December 31:
1998 1997 1996
Return on average assets 1.05% 1.42% 1.18%
Return on average equity 10.77% 13.92% 11.17%
Dividend payout ratio (1) 63.77% 49.69% 58.49%
Average equity to average
assets ratio 9.73% 10.20% 10.60%
(1) Based on historical results of United before the effects of restatements
for pooling of interests business combinations.
23
UNITED BANKSHARES, INC. AND SUBSIDIARIES
SUMMARY OF LOAN LOSS EXPERIENCE
The following table summarizes United's loan loss experience for each of the
five years ended December 31:
1998 1997 1996 1995 1994
---- ---- ---- ---- ----
(In thousands)
Balance of allowance for possible loan
losses at beginning of year $31,936 $29,376 $29,531 $29,521 $28,048
Allowance of purchased company at date
of acquisition 2,695 1,017
Loans charged off:
Commercial, financial and agricultural 800 1,352 2,310 2,051 1,094
Real estate 3,070 447 406 1,049 322
Real estate construction 63 1
Consumer and other 2,400 2,436 1,199 1,075 1,090
------- ------- ------- ------- -------
TOTAL CHARGE-OFFS 6,270 4,235 3,915 4,238 2,507
Recoveries:
Commercial, financial and agricultural 729 292 283 245 798
Real estate 217 263 237 189 344
Real estate construction 20 26
Consumer and other 421 265 359 319 328
------- ------- ------- ------- -------
TOTAL RECOVERIES 1,367 820 879 773 1,496
NET LOANS CHARGED OFF 4,903 3,415 3,036 3,465 1,011
Addition to allowance (1) 12,156 3,280 2,881 2,458 2,484
------- ------- ------- ------- ------
BALANCE OF ALLOWANCE FOR POSSIBLE
LOAN LOSSES AT END OF YEAR $39,189 $31,936 $29,376 $29,531 $29,521
======= ======= ======= ======= =======
Totals loans outstanding at the end of period $2,652,391 $2,689,839 $2,354,571 $2,153,149 $2,011,803
Average loans outstanding during
period (net of unearned income) $2,668,460 $2,472,293 $2,245,292 $2,052,268 $1,874,533
Net charge-offs as a percentage of
average loans outstanding 0.18% 0.14% 0.14% 0.17% 0.05%
Allowance for possible loan losses as
a percentage of nonperforming loans 209.9% 170.9% 229.8% 186.0% 248.1%
(1) The amount charged to operations and the related balance in the allowance
for possible loan losses is based upon periodic evaluations of the loan
portfolio by management. These evaluations consider several factors
including, but not limited to, general economic conditions, loan portfolio
composition, prior loan loss experience and management's estimation of
future potential losses.
Quarterly reviews of individual loans as well as the loan portfolio as
a whole are made by management and the credit department. Management
performs extensive procedures in granting and monitoring loans on a
continual basis. Further, management believes that the allowance for loan
losses is adequate to absorb anticipated losses.
24
UNITED BANKSHARES, INC. AND SUBSIDIARIES
SUMMARY OF LOAN LOSS EXPERIENCE--Continued
Allocation of allowance for
possible loan losses
December 31
---------------------------------------------
1998 1997 1996 1995 1994
---- ---- ---- ---- ----
Commercial, financial and
agricultural $13,772 $10,115 $ 8,261 $ 7,736 $ 8,618
Real estate 3,587 3,452 4,239 4,845 4,761
Real estate construction 1,086 674 511 729 685
Consumer and other 3,747 3,221 1,688 1,993 1,747
Unallocated 16,997 14,474 14,677 14,228 13,710
------ ------ ------ ------ ------
Total $39,189 $31,936 $29,376 $29,531 $29,521
======= ======= ======= ======= =======
25
UNITED BANKSHARES, INC.
FORM 10-K, PART II
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
(A) - FINANCIAL STATEMENTS REQUIRED BY REGULATION S-X
Information relating to financial statements on pages 13 through 40 inclusive
of the Annual Report to Shareholders for the year ended December 31, 1998, is
incorporated herein by reference.
(B) - SUPPLEMENTARY FINANCIAL INFORMATION
(1) Selected Quarterly Financial Data
Information relating to selected quarterly financial data on page 40 of the
Annual Report to Shareholders for the year ended December 31, 1998, is
incorporated herein by reference.
(2) Information on the Effects of Changing Prices
Information relating to effects of changing prices on page 47 of the Annual
Report to Shareholders for the year ended December 31, 1998, is incorporated
herein by reference.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURES
This item is omitted since it is not applicable.
26
UNITED BANKSHARES, INC.
FORM 10-K, PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Information regarding directors and executive officers of the registrant on
pages 2 through 7 inclusive, of the Proxy Statement for the 1999 Annual
Shareholders' Meeting is incorporated herein by reference.
ITEM 11. EXECUTIVE COMPENSATION
Information regarding executive compensation on pages 8 through 11
inclusive, of the Proxy Statement for the 1999 Annual Shareholders' Meeting is
incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT
Information regarding security ownership of certain beneficial owners and
management on pages 2 through 6 inclusive, of the Proxy Statement for the 1999
Annual Shareholders' Meeting is incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information regarding certain relationships and related transactions on
pages 2, 3, 6, 14 and 15 of the Proxy Statement for the 1999 Annual
Shareholders' Meeting is incorporated herein by reference.
27
UNITED BANKSHARES, INC.
FORM 10-K, PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS
ON FORM 8-K
(a) List of Documents Filed as Part of This Report:
(1) Financial Statements
The financial statements listed below are incorporated herein by
reference from the Annual Report to Shareholders for the year ended December 31,
1998 at Item 8a. Page references are to such Annual report.
Financial Statements: Page References
Report of Independent Auditors................................ 13
Consolidated Balance Sheets................................... 14
Consolidated Statements of Income............................ 15
Consolidated Statements of Changes in Shareholders' Equity.... 16
Consolidated Statements of Cash Flows......................... 17
Notes to Consolidated Financial Statements.................... 18
(2) Financial Statement Schedules
United is not filing separate financial statement schedules because of
the absence of conditions under which they are required or because the required
information is included in the consolidated financial statements or notes
thereto.
(3) Exhibits Required by Item 601
Listing of Exhibits - See the Exhibits' Index on page 31 of this Form
10-K.
(b) Reports on Form 8-K
On December 2, 1998, United Bankshares, Inc. filed thirty days
post-merger combined results in connection with the merger of
United Bankshares, Inc. and Fed One Bancorp, Inc.
On December 30, 1998, United Bankshares, Inc. filed a revised
earnings estimate for the fourth quarter and the year ending
December 31, 1998.
(c) Exhibits -- The exhibits to this Form 10-K begin on page 34.
(d) Consolidated Financial Statement Schedules -- All other schedules
for which provision is made in the applicable accounting regulation of
the Securities and Exchange Commission are not required under the
related instructions or are inapplicable or pertain to items as to
which the required disclosures have been made elsewhere in the
financial statements and notes thereto, and therefor have been
omitted.
28
SIGNATURES
Pursuant to the requirements of Section 13 or 15 (d) of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned thereunto duly authorized.
UNITED BANKSHARES, INC.
(Registrant)
By /s/ Richard M. Adams
-------------------------
Chairman of the Board
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the registrant and
in the capacities and on the dates indicated.
Signatures Title Date
/s/ Richard M. Adams Chairman of the Board, March 30, 1999
----------------------------- Director, Chief and
Executive Officer
/s/ Steven E. Wilson Chief Financial Officer March 30, 1999
- ------------------------------ Chief Accounting Officer
/s/ Bernard H. Clineburg Director March 30, 1999
- ------------------------------
/s/ I.N. Smith, Jr. Director March 30, 1999
- ------------------------------
/s/ James W. Word, Jr. Director March 30, 1999
- ------------------------------
/s/ G. Ogden Nutting Director March 30, 1999
- ------------------------------
/s/ Theodore J. Georgelas Director March 30, 1999
- ------------------------------
/s/ Warren A. Thornhill, III Director March 30, 1999
- ------------------------------
/s/ Alan E. Groover Director March 30, 1999
- ------------------------------
/s/ William W. Wagner Director March 30, 1999
- ------------------------------
/s/ Harry L. Buch Director March 30, 1999
- ------------------------------
/s/ H. Smoot Fahlgren Director March 30, 1999
- ------------------------------
/s/ Russell L. Isaacs Director March 30, 1999
- ------------------------------
/s/ F.T. Graff, Jr. Director March 30, 1999
- ------------------------------
29
SIGNATURES
(continued)
/s/ John M. McMahon Director March 30, 1999
- ------------------------------
/s/ P. Clinton Winter, Jr. Director March 30, 1999
- ------------------------------
/s/ C. Barrie Cook Director March 30, 1999
- ------------------------------
/s/ Robert G. Astorg Director March 30, 1999
- ------------------------------
/s/ Thomas J. Blair, III Director March 30, 1999
- ------------------------------
/s/ Arthur Kellar Director March 30, 1999
- ------------------------------
/s/ William A. Hazel Director March 30, 1999
- ------------------------------
30
UNITED BANKSHARES, INC.
FORM 10-K
INDEX TO EXHIBITS
ITEM 14.
S-K Item 601 Sequential Page
Description Table Reference Number (a)
- ----------- --------------- ---------------
Articles of Incorporation and
Bylaws: (3)
(a) Bylaws (g)
(b) Articles of Incorporation (f)
Investments (4) N/A
Voting Trust Agreement (9) N/A
Material Contracts (10)
(a) Employment Agreement with
I. N. Smith, Jr. (b)
(b) Employment Agreement with
Richard M. Adams (e)
(c) Lease on Branch Office in
Charleston Town Center,
Charleston, West Virginia (b)
(d) Lease on United Center,
Charleston, West Virginia (h)
(e) Lease with Polymerland, Inc.
on UNB Square (h)
(f) Lease and Agreement between
Valley Savings and Loan
Company (Lessor) and Dorothy
Adams, Richard M. Adams and
Douglass H. Adams (Lessees) (c)
(g) Agreement between Dorothy
D. Adams (Lessors) and Valley
Savings and Loan Company (Lessees) (c)
31
S-K Item 601 Sequential Page
Description Table Reference Number (a)
- ----------- --------------- ---------------
(h) Employment Contract with
Douglass H. Adams (d)
(i) Employment Contract with
Thomas A. McPherson (d)
(j) Data processing contract
with FISERV (k)
(k) Supplemental Retirement
Contract with Richard M.
Adams (i)
(l) Supplemental Retirement
Contract with Douglass H.
Adams (i)
(m) Executive Officer Change
of Control Agreements (j)
(n) Data processing contract
with ALTELL (l)
(o) Employment Contract with
Bernard H. Clineburg (m)
Statement Re: Computation of
Ratios (12) 84
Annual Report to Security Holders,
et al. (13) 34
Letter Re: Change in accounting
principles (18) N/A
Previously Unfiled Documents (19) N/A
Subsidiaries of the Registrant (21) 84
Published Report Regarding Matters
Submitted to a Vote of Security
Holders (22) N/A
Consent of Ernst & Young LLP (23.1) 86
Consent of KPMG LLP (23.2) 87
Power of Attorney (24) N/A
Financial Data Schedule (27) 88
32
S-K Item 601 Sequential Page
Description Table Reference Number (a)
----------- --------------- ---------------
Additional Exhibits: (28) N/A
Footnotes
- ---------
(a) N/A = Not Applicable
(b) Incorporated into this filing by reference to Exhibit 10 of the 1985 Form
10-K for Intermountain Bankshares, Inc., File No. 0-12356
(c) Incorporated into this filing by reference to Exhibit 10 of the 1986 Form
10-K for United Bankshares, Inc., File No. 0-13322
(d) Incorporated into this filing by reference to Part II of Form S-4
Registration Statement of United Bankshares, Inc., Registration No. 33-19968
filed February 3, 1988
(e) Incorporated into this filing by reference to Exhibits to the 1988 10-K for
United Bankshares, Inc., File No. 0-13322
(f) Incorporated into this filing by reference to Exhibits to the 1989 10-K for
United Bankshares, Inc., File No. 0-13322
(g) Incorporated into this filing by reference to Exhibits to the 1990 10-K for
United Bankshares, Inc., File No. 0-13322
(h) Incorporated into this filing by reference to Exhibits to the 1991 10-K for
United Bankshares, Inc., File No. 0-13322
(i) Incorporated into this filing by reference to Exhibits to the 1992 10-K for
United Bankshares, Inc., File No. 0-13322
(j) Incorporated into this filing by reference to Exhibits to the 1993 10-K for
United Bankshares, Inc., File No. 0-13322
(k) Incorporated into this filing by reference to Exhibits to the 1994 10-K as
amended by Form 10K/A filed February 8, 1996, for United Bankshares, Inc.,
File No. 0-13322
(l) Incorporated into this filing by reference to Exhibits to the 1996 10-K for
United Bankshares, Inc., File No. 0-13322
(m) Incorporated into this filing by reference to Part II of Form S-4
Registration Statement of United Bankshares, Inc., Registration No.
333-44993 filed January 27, 1998
33
UNITED BANKSHARES, INC. AND SUBSIDIARIES
SELECTED FINANCIAL DATA
(DOLLARS IN THOUSANDS EXCEPT PER SHARE DATA)
FIVE YEAR SUMMARY
---------------------------------------------
1998 1997 1996 1995 1994
---- ---- ---- ---- ----
SUMMARY OF OPERATIONS:
TOTAL INTEREST INCOME $ 325,647 $ 280,452 $ 250,641 $ 232,956 $ 200,013
TOTAL INTEREST EXPENSE 155,354 131,122 112,256 101,441 75,884
NET INTEREST INCOME 170,293 149,330 138,385 131,515 124,129
PROVISION FOR LOAN LOSSES 12,156 3,280 2,881 2,458 2,484
OTHER INCOME 41,752 37,068 29,654 25,735 18,250
OTHER EXPENSE 137,964 103,852 104,385 90,732 82,487
INCOME TAXES 17,523 27,005 21,054 21,701 19,188
NET INCOME 44,402 52,261 39,719 42,359 38,220
CASH DIVIDENDS(1) 28,317 20,344 17,847 13,817 12,604
PER COMMON SHARE:
NET INCOME:
BASIC $1.04 $1.24 $0.94 $1.01 $0.85
DILUTED 1.02 1.22 0.93 1.00 0.84
CASH DIVIDENDS(1) 0.75 0.68 0.62 0.59 0.53
BOOK VALUE PER SHARE 9.74 9.35 8.59 8.27 7.99
SELECTED RATIOS:
RETURN ON AVERAGE
SHAREHOLDERS' EQUITY 10.77% 13.92% 11.17% 12.80% 12.79%
RETURN ON AVERAGE ASSETS 1.05% 1.42% 1.18% 1.38% 1.33%
DIVIDEND PAYOUT RATIO (1) 63.77% 49.69% 58.49% 49.21% 50.61%
SELECTED BALANCE SHEET DATA:
AVERAGE ASSETS $4,238,807 $3,682,302 $3,352,594 $3,077,631 $2,867,680
INVESTMENT SECURITIES 927,316 1,006,735 865,020 771,181 756,100
LOANS HELD FOR SALE 720,607 97,619 74,465 55,827 19,266
TOTAL LOANS 2,652,291 2,689,839 2,354,571 2,153,149 2,011,803
TOTAL ASSETS 4,567,899 4,094,836 3,541,244 3,224,123 3,024,604
TOTAL DEPOSITS 3,493,058 3,185,963 2,770,833 2,570,630 2,413,533
LONG-TERM BORROWINGS 240,867 46,674 44,877 44,445 91,374
TOTAL BORROWINGS
AND OTHER LIABILITIES 653,310 512,817 407,579 304,232 309,942
SHAREHOLDERS' EQUITY 421,531 396,056 362,832 349,261 301,129
(1) CASH DIVIDENDS ARE THE AMOUNTS DECLARED BY UNITED AND DO NOT INCLUDE CASH
DIVIDENDS OF ACQUIRED SUBSIDIARIES PRIOR TO THE DATES OF CONSUMMATION.
34
UNITED BANKSHARES, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
FORWARD-LOOKING STATEMENTS
Congress passed the Private Securities Litigation Act of 1995 to encourage
corporations to provide investors with information about the company's
anticipated future financial performance, goals, and strategies. The act
provides a safe harbor for such disclosure, in other words, protection from
unwarranted litigation if actual results are not the same as management
expectations.
United desires to provide its shareholders with sound information about past
performance and future trends. Consequently, any forward-looking statements
contained in this report, in a report incorporated by reference to this report,
or made by management of United in this report, in any other reports and
filings, in press releases and in oral statements, involves numerous
assumptions, risks and uncertainties. Actual results could differ materially
from those contained in or implied by United's statements for a variety of
factors including, but not limited to: changes in economic conditions; movements
in interest rates; competitive pressures on product pricing and services;
success and timing of business strategies; the nature and extent of governmental
actions and reforms; and rapidly changing technology and evolving banking
industry standards and the inability of United or others to remediate Year 2000
concerns in a timely fashion.
INTRODUCTION
The following discussion and analysis presents the significant changes in
financial condition and the results of operations of United and its subsidiaries
for the periods indicated below. This discussion and the consolidated financial
statements and the notes to consolidated financial statements include the
accounts of United Bankshares, Inc. and its wholly-owned subsidiaries, and
reflect the mergers of Fed One Bancorp, Inc. (Fed One) on October 1, 1998, and
George Mason Bankshares, Inc. (George Mason) on April 2, 1998, under the pooling
of interests method of accounting. Accordingly, all prior period financial
statements have been restated to include Fed One and George Mason.
This discussion and analysis should be read in conjunction with the consolidated
financial statements and accompanying notes thereto, which are included
elsewhere in this document.
The following broad overview of the financial condition and results of
operations is not intended to replace the more detailed discussion which is
presented under specific headings on the following pages.
35
1998 COMPARED TO 1997
EARNINGS SUMMARY
For the year ended December 31, 1998, operating earnings were $52,596 compared
to $52,261 for the year ended December 31, 1997. On a diluted per share basis,
operating earnings were $1.21 in 1998 compared to $1.22 in 1997.
Operating earnings represent earnings before merger-related charges, net of
income taxes, of $8.2 million for the year ended December 31, 1998. These
charges were primarily associated with the pooling of interests acquisitions of
George Mason Bankshares, Inc. (headquartered in Fairfax, Virginia) and Fed One
Bancorp, Inc. (headquartered in Wheeling, West Virginia). After these charges,
diluted earnings were $1.02 for the year ended December 31, 1998, compared to
$1.22 for the year ended December 31, 1997.
These operating results represent a return on average shareholders' equity of
12.76% and a return on average assets of 1.24%, respectively, for the year ended
December 31, 1998. These operating ratios compare favorably with national peer
grouping information provided by Keefe, Bruyette, & Woods, of 13.33% and 1.14%,
respectively. United, one of the nation's most profitable regional banking
companies, has a strong capital position, and is well positioned to take
advantage of future growth opportunities.
Growth in operating earnings was led by a 14% increase in net interest income
and a 26% increase in noninterest income, other than mortgage banking income.
Mortgage banking income increased 67% as originations reached $1.5 billion in
1998. These increases were offset by a charge of $9.7 million to adjust for a
decline in market value of certain junior lien mortgage loans when an unrelated
financial institution was unable to fulfill a commitment to purchase the loans
for securitization.
Operating earnings were also reduced by a $9 million increase in the provision
for loan losses due to increasing levels of nonperforming assets, a 16% increase
in other expenses, after merger-related charges, due primarily to the timing of
a purchase acquisition and increased incentive compensation payments.
United has strong core earnings driven by a net interest margin of 4.37% for
1998. Net interest income increased by $20.96 million or 14.04% for the year
ended December 31, 1998 as compared to the same period for 1997. The provision
for loan losses of $12.16 million increased $8.88 million or 270.61% when
compared to the year ended December 31, 1997. Noninterest income, including
income from mortgage banking operations, increased $4.68 million or 12.64% for
1998 when compared to 1997. Noninterest expenses increased $34.11 million or
32.85% for 1998 compared to the same period in 1997. The effective tax rate for
the year ended December 31, 1998 approximated 28.30% compared to 34.07% for
1997.
36
FINANCIAL CONDITION SUMMARY
Total assets were $4.57 billion at December 31, 1998, up $473.06 million or
11.55% compared with year-end 1997. Loans, net of unearned income, reflected a
$37.45 million decrease from 1997 to 1998 due to an increased emphasis being
placed on secondary market lending activity. Loans held for sale increased $623
million. Cash and cash equivalents declined $48.73 million while investment
securities reflected a $79.42 million decrease for 1998 as compared with
year-end 1997, primarily as a result of United's use of these sources of funds
to fund a portion of the growth in loans held for sale during the year.
Total deposits grew $307.10 million or 9.64% from year-end 1997 due to United's
offering of new deposit products introduced during 1998. Since December 31,
1997, United has realized an increase of $266.63 million in interest-bearing
deposits and a $40.47 million increase in noninterest-bearing deposits. United's
short-term borrowings increased $18.12 million and its FHLB borrowings increased
$115.08 million as United utilized these sources of funds to fund the
origination by its mortgage banking subsidiary of mortgage loans for sale in the
secondary market and portfolio loans. Accrued expenses and other liabilities
increased $7.06 million or 13.74% since year-end 1997.
Shareholders' equity increased $25.48 million or 6.43% from December 31, 1997 to
December 31, 1998. United continues to maintain an appropriate balance between
capital adequacy and return to shareholders. At December 31, 1998, United's
regulatory capital ratios, including those of its bank subsidiaries, exceeded
the levels established for well-capitalized institutions.
The following discussion explains in more detail the results of operations and
changes in financial condition by major category.
NET INTEREST INCOME
Net interest income represents the primary component of United's earnings. It is
the difference between interest and fee income from earning assets and interest
expense incurred to fund these assets. Net interest income is impacted by
changes in the volume and mix of interest-earning assets and interest-bearing
liabilities, as well as changes in market interest rates. Such changes, and
their impact on net interest income in 1998, are summarized below.
For the years ended December 31, 1998 and 1997, net interest income approximated
$155.35 million and $131.12 million, respectively. On a tax-equivalent basis the
net interest margin was strong at 4.37% in 1998 and 4.40% in 1997 which are
above national peer group margins of 4.36% in 1998 and 4.06% in 1997.
Total interest income of $325.65 million increased 16.12% in 1998 over 1997 as a
result of higher volumes of interest-earning assets and slightly higher yields.
Higher average volume of loans held for sale of
37
approximately $623 million, resulting primarily from the origination of
mortgage loans for sale in the secondary market, contributed to the increase.
From December 31, 1997 to December 31, 1998, United experienced an increase in
commercial loans of 4.28%, while consumer loans showed a decrease of 14.35% and
mortgage loans decreased 7.5%. Loans held for sale increased $623 million or
638% due mainly to significant growth of mortgage loans originated and purchased
for sale in the secondary market.
Total interest expense increased $24.23 million or 18.48% in 1998 compared to
1997. This increase was attributed primarily to competitive pricing of
interest-bearing deposits in United's markets and continued change in the retail
deposit mix as customers shifted funds into products offering higher yields.
United's average interest-bearing deposits increased by $263.89 million or
10.44% in 1998, while its average FHLB advances increased $132.84 million or
88.62% and average short-term borrowings increased $33.53 million or 17.16%. The
average cost of funds, which increased from 4.56% in 1997 to 4.70% in 1998,
reflected the general upward trend in United's market interest rates during 1998
due to competitive pressures.
PROVISION FOR LOAN LOSSES
Nonperforming loans were $18.67 million at December 31, 1998 and $18.69 million
at December 31, 1997. Although total nonperforming loans have remained
relatively constant with the previous year, the components of this category
reflected significant changes. While loans past due 90 days or more decreased
$3.35 million or 26.01%, nonaccrual loans increased $3.32 million or 57.16%
during the same period. This deterioration in credit quality within the
nonperforming category along with other trends impacted qualitative changes to
risk factors as more fully described below. Nonperforming loans represented
0.41% of total assets at the end of 1998, as compared to 0.39% for United's
national peer group.
At December 31, 1998, impaired loans were $10.92 million, a decrease of $3.34
million or 23.40% from the $14.26 million in impaired loans at December 31,
1997, due primarily to the acquisition of Patriot in 1997. For further details,
see Note D to the Consolidated Financial Statements.
See Note D to the Consolidated Financial Statements for a discussion of
concentrations of credit risk.
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.
38
Allocations are made for specific commercial loans based upon management's
estimate of the borrowers' ability to repay and other factors impacting
collectibility. Other commercial loans not specifically reviewed on an
individual basis are evaluated based on historical loan percentages applied to
loan pools that have been segregated by risk. Allocations for loans other than
commercial loans are made based upon historical loss experience adjusted for
current conditions. The unallocated portion of the allowance for loan losses
provides for risk arising in part from, but not limited to, declines in credit
quality resulting from sudden economic or industry shifts and changing economic
trends. Differences between actual loan loss experience and estimates are
reviewed on a quarterly basis and adjustments are made to those estimates.
United's formal company wide process at December 31, 1998, produced increased
allocations within all loan categories. The components of the allowance
allocated to commercial and real estate construction loans increased $3.7
million and $412 thousand, respectively, as a result of changes in historical
loss experience factors for risk rated loan pools in response to changes in
economic trends in United's market areas. Specific allocations for commercial
loans, also increased as a result of individual credit reviews. The components
of the allowance allocated to consumer and real estate loans increased $526
thousand and $135 thousand, respectively, as a result of changes in historical
loss experience factors; particularly the impact on the loss trends due to
increased charge-offs in these loan pools during 1998.
At year-end 1998 and 1997, the allowance for loan losses was 1.47% and 1.18% of
total loans, net of unearned income, respectively. At December 31, 1998 and
1997, the ratio of the allowance for loan losses to nonperforming loans was
209.9% and 170.9%, respectively.
Management believes that the allowance for loan losses of $39.19 million at
December 31, 1998, is adequate to provide for potential losses on existing loans
based on information currently available.
For the years ended December 31, 1998 and 1997, the provision for loan losses
was $12.16 million and $3.28 million, respectively.
Total net charge-offs were $4.9 million in 1998 and $3.4 million in 1997, which
represents 0.18% and 0.14% of average loans for the respective years. United's
ratio of net charge-offs to average loans was better than its peer group's ratio
of 0.24% in 1998 and 0.49% in 1997.
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.
39
OTHER INCOME
Noninterest income has been and will continue to be an important factor for
improving United's profitability. Accordingly, management continues to evaluate
areas where noninterest income can be enhanced. Noninterest income increased
$4.68 million or 12.64% for 1998 when compared to 1997. Other income consists of
all revenues which are not included in interest and fee income related to
earning assets. The increase in noninterest income for 1998 was primarily the
result of a $1.01 million increase in trust department income, a $2.06 million
increase in charges, commissions and fees on customer accounts and $2.37 million
of net gains on securities, which included a $2.49 million recognized gain on an
available for sale equity security exchanged in an unaffiliated merger
transaction consummated at the end of the first quarter of 1998. These increases
in noninterest income were partially offset by a $922 thousand decline in
mortgage banking income as a result of a fourth quarter lower of cost or market
accounting adjustment of $9.66 million for certain junior lien mortgage loans
due to the unanticipated failure of an unrelated financial institution to
purchase the loans for securitization. Income from mortgage banking operations
was $23.87 million for 1998 as compared to $15.13 million for 1997, before the
$9.66 million adjustment described above. An increase in loan originations of
$633 million and from $886 million in 1997 to $1.5 billion in 1998 was the
driving force behind the significant growth in mortgage banking income, before
the $9.66 million adjustment.
Service charges and fees from customer accounts increased $2,063,000 or 12.16%
in 1998. This income includes charges and fees related to various banking
services provided by United. The increase was primarily due to increased fees in
bankcard accounts, ATM surcharges and overdraft fees and an increased fee
structure for sales of checking related products.
Trust income increased $1.01 million or 28.36% in 1998 due to an increased
volume of trust business.
OTHER EXPENSE
Just as management continues to evaluate areas where noninterest income can be
enhanced, it strives to improve the efficiency of its operations and thus reduce
operating costs. United's cost control efforts have been very successful
resulting in an efficiency ratio of 62.8% (55.8% before merger-related charges),
which is well below the 60.1% reported by United's national peer group banks and
its immediate in-market competitors.
Other expense includes all items of expense other than interest expense, the
provision for loan losses and income tax expense. In total, other expense
increased $34.11 million or 32.85%. During 1998, United's true financial
performance was distorted by merger-related and one-time charges associated with
the George Mason and Fed One acquisitions as well as charges associated with the
purchase acquisition of branches in the eastern panhandle of West Virginia.
These charges, which totaled
40
$13.7 million ($8.2 million after tax), consisted primarily of employee
benefits, severance, facilities and conversion costs to effect the merger.
Salaries and employee benefits expense increased $17.28 million or 33.05% in
1998 as compared to 1997. The higher salaries and benefits costs for 1998 were
attributable to an increase of $5.04 million in commissions and salaries expense
at United's mortgage banking subsidiaries due to the increased volume of
mortgage loans originated during the year for sale in the secondary market as
well as approximately $5.9 million of severance pay and related benefits of
displaced employees in the George Mason and Fed One mergers. At December 31,
1998 and 1997, United employed 1,154 and 1,294 full-time equivalent employees,
respectively.
Net occupancy expense in 1998 exceeded 1997 levels by $1.63 million or 14.72%
primarily due to the third quarter 1997 purchase acquisition of Patriot, a $781
thousand increase in building rental expense and higher depreciation,
maintenance and real property taxes of approximately $800 thousand for
company-owned buildings. The overall changes in net occupancy expense for 1998
were insignificant with no material increase or decrease in any one expense
category.
Remaining other expense increased $15.2 million or 37.55% in 1998 compared to
1997. This overall increase was primarily due to the aforementioned
merger-related expenses associated with the George Mason and Fed One mergers and
the costs associated with branch purchases. These costs included data processing
conversion and other operational costs. Other expense categories that reflected
increases over 1997 were goodwill amortization, equipment and communication
expense associated with office expansion and the Year 2000 readiness program,
bankcard and ATM processing fees, and certain other general business taxes and
licenses.
INCOME TAXES
For the year ended December 31, 1998, United's effective tax rate approximated
28% compared to 35% in 1997. The decrease was primarily the result of nontaxable
distributions from restructuring and reorganizational initiatives. In future
years (beyond 1998) the estimated effective tax rate is expected to return to
approximately 35%.
QUARTERLY RESULTS
The first and third quarters of 1998 showed large increases in earnings in
comparison to those same two quarters of 1997 as United returned to more normal
levels of core income and expenses after merger transactions. On a per share
basis, first quarter 1998 earnings were $0.33 per share compared to $0.30 in
1997 while third quarter 1998 earnings were $0.38 compared to $0.31 per share in
1997. The annual 1998 results, specifically the second and fourth quarters of
1998, contained significant merger-related and one-time charges associated with
the George Mason and Fed One mergers which distorted United's true financial
performance.
41
In the second quarter of 1998, United reported a decrease in earnings from the
same period in 1997. Second quarter 1998 earnings were lower as a result of the
recognition of approximately $7.1 million of merger-related and one-time charges
associated with the George Mason merger.
Net income for the fourth quarter of 1998 was $6.1 million, a decrease of 54.43%
from the $13.4 million earned in the fourth quarter of 1997. On a per share
basis, fourth quarter earnings were $0.14 per share in 1998 and $0.31 per share
in 1997. The decrease in earnings for the fourth quarter of 1998 was due
primarily to approximately $6.6 million of merger-related charges associated
with the Fed One merger and a mark-to-market accounting adjustment of $9.66
million for certain junior lien mortgage loans due to the unanticipated failure
of an unrelated financial institution to purchase the loans for securitization.
Additional quarterly financial data for 1998 and 1997 may be found in Note P to
the Consolidated Financial Statements.
THE EFFECT OF INFLATION
United's income statements generally reflect the effects of inflation. Since
interest rates, loan demand and deposit levels are impacted by inflation, the
resulting changes in the interest sensitive assets and liabilities are included
in net interest income. Similarly, operating expenses such as salaries, rents
and maintenance include changing prices resulting from inflation. One item that
would not reflect inflationary changes is depreciation expense. Subsequent to
the acquisition of depreciable assets, inflation causes price levels to rise;
therefore, historically presented dollar values do not reflect this inflationary
condition. With inflation levels at relatively low levels and monetary and
fiscal policies being implemented to keep the inflation rate increases within an
acceptable range, management expects the impact of inflation would continue to
be minimal in the near future.
MARKET RISK
The objective of United's Asset/Liability Management function is to maintain
consistent growth in net interest income within United's policy guidelines. This
objective is accomplished through the management of balance sheet liquidity and
interest rate risk exposures due to changes in economic condition, interest rate
levels and customer preferences.
Management considers interest rate risk to be United's most significant market
risk. Interest rate risk is the exposure to adverse changes in the net interest
income of United as a result of changes in interest rates. Consistency in
United's earnings is largely dependent on the effective management of interest
rate risk.
United employs a variety of measurement techniques to identify and manage its
exposure to changing interest rates. One such technique utilizes an earnings
simulation model to analyze net interest income sensitivity to movements in
interest rates. The model is based on actual cash flows and repricing
characteristics for on and off-balance
42
sheet instruments and incorporates market-based assumptions regarding the impact
of changing interest rates on the prepayment rate of certain assets and
liabilities. The model also includes executive management projections for
activity levels in product lines offered by United. Assumptions based on the
historical behavior of deposit rates and balances in relation to changes in
interest rates are also incorporated into the model. These assumptions are
inherently uncertain and, as a result, the model cannot precisely measure net
interest income or precisely predict the impact of fluctuations in interest
rates on net interest income. Actual results will differ from simulated results
due to timing, magnitude and frequency of interest rate changes as well as
changes in market conditions and management strategies.
Interest sensitive assets and liabilities are defined as those assets or
liabilities that mature or are repriced within a designated time-frame. The
principal function of interest rate risk management is to maintain an
appropriate relationship between those assets and liabilities that are sensitive
to changing market interest rates. United closely monitors the sensitivity of
its assets and liabilities on an on-going basis and projects the effect of
various interest rate changes on its net interest margin.
The difference between rate sensitive assets and rate sensitive liabilities for
specified periods of time is known as the "GAP."
As shown in the interest rate sensitivity gap table in this section, United was
liability sensitive (excess of liabilities over assets) in the one year horizon.
On the surface, this would indicate that rising market interest rates would
reduce United's earnings and declining market interest rates would increase
earnings. United, however, has not experienced the kind of earnings volatility
indicated from the cumulative gap. This is because a significant portion of
United's retail deposit base does not reprice on a contractual basis. Management
has estimated, based upon historical analyses, that savings deposits are less
sensitive to interest rate changes than are other forms of deposits. The GAP
table presented herein has been adjusted to show the estimated differences in
interest rate sensitivity which result when the retail deposit base is assumed
to reprice in a manner consistent with historical trends. (See "Management
Adjustments" in the GAP table). Using these estimates, United was asset
sensitive in the one year horizon in the amount of $395 million or 9.15% of the
cumulative gap to related earning assets.
To aid in interest rate risk 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
43
management representatives and reports to the Board of Directors, monitors and
manages interest rate risk to maintain an acceptable level of change to net
interest income as a result of changes in interest rates. Policy established for
interest rate risk is stated in terms of the change in net interest income over
a twelve month horizon given an immediate and sustained increase or decrease in
interest rates. The current limits approved by the Board of Directors are plus
or minus 10% for each 100 basis point increase or decrease in interest rates.
The following table shows United's estimated earnings sensitivity profile after
management's adjustments as of December 31, 1998 and 1997:
Change in
Interest Rates Percentage Change in
(basis points) Net Interest Income
-------------- --------------------
1998 1997
-------- --------
+200 0.32% 2.15%
-200 -4.52% -2.68%
Given an immediate, sustained 200 basis point upward shock to the yield curve
used in the simulation model, it is estimated net interest income for United
would increase by 0.32% over one year as of December 31, 1998, as compared to an
increase of 2.15% as of December 31, 1997. A 200 basis point immediate,
sustained downward shock in the yield curve would decrease net interest income
by an estimated 4.52% over one year as of December 31, 1998, as compared to a
decrease of 2.68% as of December 31, 1997. All of these estimated changes in net
interest income are within the policy guidelines established by the Board of
Directors.
44
The following table shows the interest rate sensitivity GAP as of December
31, 1998:
INTEREST RATE SENSITIVITY GAP
DAYS
----------------------------- TOTAL 1 - 5 OVER 5
0 - 90 91 - 180 181 - 365 ONE YEAR YEARS YEARS TOTAL
------- -------- --------- --------- ----- ------ ------
(DOLLARS IN THOUSANDS)
ASSETS
Interest-Earning Assets:
Federal funds sold and
securities purchased
under agreements to
resell and other short-
term investments $ 16,707 $ 16,707 $ 16,707
Investment and marketable
equity securities:
Taxable 22,812 $ 10,586 $ 15,189 48,587 $ 140,869 $ 628,368 817,824
Tax-exempt 1,107 1,300 4,542 6,949 41,817 60,726 109,492
Loans, net of unearned
income 1,633,075 179,108 329,062 2,141,245 818,073 413,680 3,372,998
--------- ------- ------- --------- ------- ------- ---------
Total Interest-Earning
Assets $1,673,701 $190,995 $348,793 $2,213,488 $1,000,759 $1,102,774 $4,317,021
========== ======== ======== ========== ========== ========== ==========
LIABILITIES
Interest-Bearing Funds:
Savings and NOW
accounts $1,219,826 $1,219,826 $1,219,826
Time deposits of
$100,000 & over 57,730 $ 35,585 $ 98,410 191,725 $ 74,175 $ 840 266,740
Other time deposits 264,067 305,580 418,354 988,001 472,223 3,281 1,463,505
Federal funds purchased,
repurchase agreements
and other short-term
borrowing 249,039 249,039 249,039
FHLB advances 105,000 105,000 46,867 194,000 345,867
------- ------- ------ ------- -------
Total Interest-Bearing
Funds $1,895,662 $ 341,165 $ 516,764 $2,753,591 $ 593,265 $198,121 $3,544,977
========== ========= ========= ========== ========= ======== ==========
Interest Sensitivity Gap $ (221,961)$(150,171) $(167,971) (540,103) $ 407,494 $904,653 $ 772,044
========== ========= ========= ======== ========= ======== ==========
Cumulative Gap $ (221,961)$(372,132) $(540,103) $ (540,103) $(132,609) $772,044 $ 772,044
========== ========= ========= ========== ========= ======== ==========
Cumulative Gap as
a Percentage of Total
Earning Assets (5.14%) (8.62%) (12.51%) (12.51%) (3.07%) 17.88% 17.88%
Management
Adjustments $1,168,847 $ (77,962) $ (155,807) $ 935,078 $ (935,078) $ 0
Off-Balance
Sheet Activities ---------- --------- ---------- ---------- ---------- -------- --------
Cumulative Management
Adjusted Gap and Off-
Balance Sheet Activities $ 946,886 $ 718,753 $ 394,975 $ 394,975 $ (132,609) $ 772,044 $ 772,044
========= ========= ========= ========= ========== ========= ==========
Cumulative Management
Adjusted Gap and Off-
Balance Sheet Activities
as a Percentage of Total
Earning Assets 21.93% 16.65% 9.15% 9.15% (3.07%) 17.88% 17.88%
===== ===== ==== ==== ===== ===== =====
45
LIQUIDITY AND CAPITAL RESOURCES
In the opinion of management, United maintains liquidity which is sufficient to
satisfy its depositors' requirements and the credit needs of its customers. Like
all banks, United depends upon its ability to renew maturing deposits and other
liabilities on a daily basis and to acquire new funds in a variety of markets. A
significant source of funds available to United is "core deposits". Core
deposits include certain demand deposits, statement and special savings and NOW
accounts. These deposits are relatively stable and they are the lowest cost
source of funds available to United. Short-term borrowings have also been a
significant source of funds. These include federal funds purchased and
securities sold under agreements to repurchase as well as advances from the
FHLB. Repurchase agreements represent funds that are generally obtained as the
result of a competitive bidding process.
Liquid assets are cash and those items readily convertible to cash. All banks
must maintain sufficient balances of cash and near-cash items to meet the
day-to-day demands of customers. Other than cash and due from banks, the
available for sale securities portfolio and maturing loans are the primary
sources of liquidity.
The goal of liquidity management is to ensure the ability to access funding
which enables United to efficiently satisfy the cash flow requirements of
depositors and borrowers and meet United's cash needs. Liquidity is managed by
monitoring funds availability from a number of primary sources. Substantial
funding is available from cash and cash equivalents, unused short-term
borrowings and a geographically dispersed network of branches providing access
to a diversified and substantial retail deposit market.
Short-term needs can be met through a wide array of sources such as
correspondent and downstream correspondent federal funds and utilization of FHLB
advances.
Other sources of liquidity available to United to provide long-term as well as
short-term funding alternatives, in addition to FHLB advances, are long-term
certificates of deposit, lines of credit, and borrowings secured by bank
premises or stock of United's subsidiaries. United has no intention at this time
of utilizing any long-term funding sources other than FHLB advances and
long-term certificates of deposit.
Cash flows used for operations in 1998 was $99.78 million as compared to cash
flows provided by operating of $31.01 million in 1997 primarily as a result of
an increase of approximately $119.73 million of excess originations of loans for
sale over proceeds from the sale of loans. In 1998, investing activities
resulted in a use of cash of $305.23 million as compared to 1997 in which
investing activities resulted in a use of cash of $318.03 million. The primary
reason for the use of cash for investing activities during 1998 was $897.25
million increase in loans acquired for sale in the secondary market. Financing
activities resulted in a source of cash in 1998 of $356.28 million primarily due
to an
46
increase in deposits of $237.42 million and an increase in net borrowings from
the FHLB of Pittsburgh and other short-term borrowings of $115.08 million and
$18.36 million, respectively. These sources of cash for financing activities
were partially offset by payment of $24.65 million of cash dividends to
shareholders. See the Consolidated Statement of Cash Flows in the Consolidated
Financial Statements.
United anticipates no problems in its ability to service its obligations over
the next 12 months. There are no known trends, demands, commitments, or events
that will result in or that are reasonably likely to result in United's
liquidity increasing or decreasing in any material way. United also has
significant lines of credit available to it. See Note G, Notes to Consolidated
Financial Statements.
Management is not aware of any current recommendations by regulatory authorities
which, if implemented, would have a material effect on liquidity, capital
resources or operations.
The asset and liability committee monitors liquidity to ascertain that a strong
liquidity position is maintained. In addition, variable rate loans are a
priority. These policies should help to protect net interest income against
fluctuations in interest rates.
United also seeks to maintain a proper relationship between capital and total
assets to support growth and sustain earnings. United's average equity to
average asset ratio was 9.73% in 1998 and 10.20% in 1997. United's risk-based
capital ratio was 12.63% in 1998 and 14.06% in 1997 which are both significantly
higher than the minimum regulatory requirements. United's Tier 1 capital and
leverage ratios of 11.43% and 8.52%, respectively, at December 31, 1998, are
also strong relative to its peers and are well above regulatory minimums to be
classified as a "well capitalized" institution. See Note M, Notes to
Consolidated Financial Statements.
COMMITMENTS
The following table indicates the outstanding loan commitments of United in the
categories stated:
December 31
1998
-----------
Lines of credit authorized, but unused $892,388,000
Letters of credit 54,408,000
------------
$946,796,000
============
Past experience has shown that, of the foregoing commitments, approximately
12-15% can reasonably be expected to be funded within a one year period. For
more information, see Note J to the Consolidated Financial Statements.
47
YEAR 2000 ISSUE
The Year 2000 Issue is the result of computer programs being written using two
digits rather than four to define the applicable year. Any of a company's
hardware, date-driven automated equipment or computer programs that have
time-sensitive software may recognize a date using "00" as the year 1900 rather
than the year 2000. This faulty recognition could result in a system failure or
miscalculations causing disruptions of operations, including, among other
things, a temporary inability to process transactions, send invoices or engage
in similar normal business activities.
United's plan to resolve the Year 2000 Issue involves the following four phases:
assessment, remediation, testing and implementation. To date United has fully
completed the assessment of all information technology and non-information
technology systems that could be significantly affected by the Year 2000 Issue
and its internal remediation and testing phases were completed by December 31,
1998. Its external remediation and testing phases being performed by United's
primary data processor are expected to be completed by June 30, 1999.
The completed assessment indicated that most of United's significant information
technology systems could be affected. That assessment also indicated that
software and hardware used in the operating equipment also are at risk. Based on
its assessments, United determined that it will be required to modify or replace
approximately 40% of its hardware and certain software so that those systems
will properly utilize dates beyond December 31, 1999. United presently believes
that with modifications or replacements of existing software and certain
hardware, the Year 2000 Issue can be mitigated. However, if such modifications
and replacements are not made, or are not completed timely, the Year 2000 Issue
could have a material impact on United's operations.
United has initiated formal communications with all of its significant suppliers
and customers to determine the extent to which United's interface systems are
vulnerable to those third parties' failure to remediate their own Year 2000
Issues. United's total Year 2000 project costs and estimates to complete include
the estimated costs and time associated with the impact of third party Year 2000
Issues based on presently available information. However, there can be no
guarantee that the systems and applications of other companies on which United's
systems rely will be timely converted or that a failure to convert by another
company, or a conversion that is incompatible with United's systems and
applications, would not have a material adverse effect on United.
To date, United has obtained information about the Year 2000 compliance status
of all of its significant suppliers and vendors. To date, United is not aware of
any external agent with a Year 2000 Issue that would materially impact United's
results of operations, liquidity or capital resources.
48
United is utilizing both internal and external resources to reprogram, or
replace, and test the Year 2000 modifications. United anticipates completion of
the remediation and testing phases of the Year 2000 project to be completed by
June 30, 1999, which is prior to any anticipated impact on United's operating
systems. United expects to complete its implementation phase by mid 1999 with
all information technology and non-information technology systems expected to be
compliant by June 30, 1999.
The total cost of the Year 2000 project is estimated at $4 million and is being
funded through cash flows. The Year 2000 costs are not expected to have a
material adverse effect on United's results of operations or cash flows. To
date, United has incurred approximately $2.4 million of expense and
capitalizable costs related to the assessment of, and preliminary efforts in
connection with, the Year 2000 project and the development of a Year 2000 plan
of operation.
The costs of the Year 2000 project and the date on which United believes it will
complete the Year 2000 modifications are based on management's best estimates,
which were derived utilizing numerous assumptions of future events, including
the continued availability of certain resources, third party vendor modification
plans and other factors. There can be no guarantee, however, that these
estimates will be achieved and actual results could differ materially from those
anticipated. Specific factors that might cause such material differences
include, but are not limited to, the availability and cost of trained
programming personnel, the ability to locate and correct all relevant computer
coding, and similar uncertainties.
Until the Year 2000 event actually occurs and for a period of time thereafter,
there can be no assurance that there will be no problem related to the Year 2000
Issue. The Year 2000 technology challenge is an unprecedented event. If Year
2000 issues are not adequately addressed by United and third parties, United
could face, among other things, business disruptions, operational problems,
financial losses, legal liability and similar risks, and United's business,
operations, and financial position could be materially, adversely affected.
United is developing contingency plans for implementation in the event that
mission critical third party vendors or other third parties fail to adequately
address Year 2000 issues. Such plans principally involve internal remediation or
identifying alternate vendors. There can be no assurance that any such plans
will fully mitigate any such failures or problems.
The costs of the Year 2000 project and the schedule for achieving compliance are
based on management's best estimates, which were derived using numerous
assumptions of future events such as the availability of certain resources
(including appropriately trained personnel and other internal and external
resources), third party vendor plans and other factors. However, there can be no
guarantee that these estimates will be achieved at the cost disclosed or within
the timeframes indicated, and actual results could differ materially from those
anticipated.
49
Factors that might cause such material differences include, but are
not limited to: the availability and cost of personnel trained in this area; the
ability to identify and convert all relevant systems; results of Year 2000
testing; adequate resolution of Year 2000 issues by governmental agencies,
businesses or other third parties that are service providers, suppliers,
borrowers or customers of United; unanticipated system costs; the need to
replace hardware; the adequacy of and ability to implement contingency plans;
and similar uncertainties.
1997 COMPARED TO 1996
The following Earnings Summary is a broad overview of the financial condition
and results of operations and is not intended to replace the more detailed
discussion which is presented under the specific headings below.
On August 1, 1997, United acquired 100% of the outstanding common stock of First
Patriot Bankshares Corporation, Reston, Virginia ("Patriot") for cash
consideration of approximately $39.22 million. The transaction was accounted for
using the purchase method of accounting and, accordingly, the following
discussion includes the financial position and results of operations of Patriot
from the effective merger date forward.
EARNINGS SUMMARY
For the year ended December 31, 1997, net income increased 31.6% from $39.72
million in 1996 to $52.26 million. Net income per diluted share of $1.22 for the
year increased 31.7% from $0.93 in 1996. Dividends per share increased 9.7% from
$0.62 in 1996 to $0.68 per share in 1997. This was the twenty-fourth consecutive
year of dividend increases to shareholders.
During 1996, United recorded approximately $6.85 million of merger-related and
one-time special charges associated with the Eagle merger. These charges
included, among other items, severance pay and benefits for displaced Eagle
officers and employees, costs to consolidate duplicate facilities, employee
training, new product promotions, computer conversions and additional deposit
insurance as a result of the Savings Association Insurance Fund ("SAIF")
recapitalization legislation.
United's return on average assets of 1.42% for 1997 compared very favorably with
regional and national peer grouping information provided by Wheat, First
Securities, Inc. of 1.32% and 1.18%. United's return on average shareholders'
equity for 1997 of 13.92%, as compared with regional and national peer group
information of 16.20% and 15.58%, is indicative of United's very strong capital
levels.
50
The following discussion explains in more detail the results of operations and
changes in financial condition by major category.
NET INTEREST INCOME
For the years ended December 31, 1997 and 1996, net interest income approximated
$149.33 million and $138.39 million, respectively. On a tax-equivalent basis the
net interest margin declined to 4.40% in 1997 from 4.52% in 1996.
Total interest income of $280.45 million increased 11.9% in 1997 over 1996 as a
result of higher volumes of interest-earning assets. Higher average loan volumes
of approximately $227 million, resulting primarily from an acquisition,
contributed to the increase. From December 31, 1996 to December 31, 1997, United
experienced a double-digit increase in consumer and commercial loans of 11.0%
and 48.6%, respectively, while mortgage loans showed increases of 9.1%.
Total interest expense increased $18.87 million or 16.8% in 1997. This increase
was attributed primarily to United's competitive pricing of interest-bearing
deposits in its markets and continued change in the retail deposit mix as
customers shifted funds into products offering higher yields. United's average
interest-bearing deposits increased by $255.46 million or 11.2% in 1997, the
average short-term borrowings increased $43.14 million or 28.3%, while its
average FHLB advances decreased $12.71 million or 7.8%. United utilized the
increased retail deposit base and short-term borrowings during 1997 to fund the
growth in the mortgage loan portfolio. The average cost of funds, which
increased from 4.34% in 1996 to 4.56% in 1997, reflected the general upward
trend in market interest rates during 1997.
PROVISION FOR LOAN LOSSES
United evaluates the adequacy of the allowance for loan losses on a quarterly
basis and its loan administration policies are focused upon the risk
characteristics of the loan portfolio.
Nonperforming loans were $18.69 million at December 31, 1997 and $12.79 million
at December 31, 1996, an increase of 46.2%. This increase can be attributed to
United's acquisition of approximately $2.5 million of nonperforming loans from
the Patriot transaction in the third quarter of 1997 and decreasing consumer
credit quality trends. Loans past due 90 days or more increased $6.56 million or
103.9% during 1997 and nonaccrual loans decreased $558 thousand or 8.8% since
year-end 1996.
At year-end 1997 and 1996, the allowance for loan losses was 1.18% and 1.21% of
total loans, net of unearned income. At December 31, 1997 and 1996, the ratio of
the allowance for loan losses to nonperforming loans was 170.9% and 229.8%,
respectively.
For the years ended December 31, 1997 and 1996, the provision for loan losses
was $3.28 million and $2.88 million, respectively. The increase in the provision
for 1997 when compared to 1996 was due to the
51
acquisition of nonperforming credits in Patriot's loan portfolio and in response
to growth in the portfolio.
Total net charge-offs were $3.42 million in 1997 and $3.04 million in 1996,
which represents 0.14% of average loans for each respective year. United's ratio
of net charge-offs to average loans was better than its peer group's ratio of
0.49% in 1997 and 0.23% in 1996.
At December 31, 1997, impaired loans were $14.26 million, an increase of $1.84
million or 14.8% from the $12.42 million in impaired loans at December 31, 1996.
OTHER INCOME
Noninterest income increased $7.41 million or 25.0% for 1997 when compared to
1996. Other income consists of all revenues which are not included in interest
and fee income related to earning assets. The increase in noninterest income for
1997 was primarily the result of $15.13 million of income generated from the
sale and servicing of loans by United's mortgage banking subsidiaries as
compared to income of $9.81 million during 1996. Contributing to this increase
in income from the mortgage banking operations have been fees generated from the
$87 million loan securitization in 1997.
Trust income increased $383 thousand or 12.0% in 1997 due to repricing of
services and an increased volume of trust business.
Service charges, commissions and fees increased by $2.16 million or 14.6% in
1997. This income includes charges and fees related to various banking services
provided by United. The increase was primarily due to increased fees in bankcard
accounts, ATM surcharges and overdraft fees and an increased fee structure for
sales of checking related products.
Income from mortgage banking operations increased $5.32 million or 54.3% from
$9.81 million in 1996 to $15.13 million in 1997 due to increased originations
and sales during 1997. The principal sources of revenue from United's mortgage
banking business are: (i) loan origination fees; (ii) gains or losses from the
sale of loans, if any; and (iii) interest earned on mortgage loans during the
period that they are held by United pending sale.
Securities transactions resulted in a net gain of $85 thousand in 1997 compared
to a net gain of $465 thousand in 1996. The securities sold were the result of
liquidity needs, changes in market interest rates, changes in prepayment and
term extension risk and other general asset/liability management considerations.
OTHER EXPENSE
Other expense includes all items of expense other than interest expense, the
provision for loan losses and income tax expense. In total, other expense
decreased $533 thousand or 0.5%. The 1997 decrease was
52
primarily due to the one-time and merger-related charges recorded in the first
and second quarters of 1996 and the additional third quarter 1996 deposit
insurance expense as a result of the SAIF recapitalization legislation.
Salaries and employee benefits expense increased $1.35 million or 2.7% in 1997.
The increase for 1997 was attributable to an increase in salaries and benefits
related to the expansion of United's mortgage banking subsidiaries due to higher
commissions on the increased volume of mortgage loans originated during the year
for sale in the secondary market.
Net occupancy expense in 1997 exceeded 1996 levels by $633 thousand or 6.1%
primarily due to the acquisition of Patriot and decreased rental income and an
increase in real property repairs and utilities expense. The overall changes in
net occupancy expense for 1997 were insignificant with no material increase or
decrease in any one expense category.
Remaining other expense decreased $2.52 million or 5.9% in 1997 compared to
1996. The decrease in other expense for 1997 related primarily to the decreases
in deposit insurance expense as a result of the SAIF recapitalization
legislation and lower legal and accounting costs associated with merger and
acquisition transactions.
INCOME TAXES
For the year ended December 31, 1997, income taxes approximated $27 million
compared to $21.1 million for 1996. The increase of $5.9 million or 28.3% for
1997 when compared to 1996 was primarily the result of increased pretax income.
United's effective tax rates were 34.1% for 1997 and 34.6% for 1996.
53
REPORT OF ERNST & YOUNG LLP
INDEPENDENT AUDITORS
Board of Directors and Shareholders
United Bankshares, Inc. and Subsidiaries
We have audited the accompanying consolidated balance sheets of United
Bankshares, Inc. and subsidiaries as of December 31, 1998 and 1997, and the
related consolidated statements of income, changes in shareholders' equity and
cash flows for each of the three years in the period ended December 31, 1998.
These financial statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements based
on our audits. We did not audit the financial statements of Fed One Bancorp,
Inc., a wholly-owned subsidiary, which statements reflect total assets
constituting 9% in 1997 and net interest income constituting 8% in 1997 and 1996
of the related consolidated totals. These statements were audited by other
auditors whose report has been furnished to us, and our opinion, insofar as it
relates to data included for Fed One Bancorp, Inc., is based solely on the
report of the other auditors.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits and the report of other auditors provide a reasonable
basis for our opinion.
In our opinion, based on our audits and the report of other auditors, the
financial statements referred to above present fairly, in all material respects,
the consolidated financial position of United Bankshares, Inc. and subsidiaries
at December 31, 1998 and 1997, and the consolidated results of their operations
and their cash flows for each of the three years in the period ended December
31, 1998, in conformity with generally accepted accounting principles.
/s/ Ernst & Young LLP
Charleston, West Virginia
February 26, 1999
54
REPORT OF KPMG LLP
INDEPENDENT AUDITORS
Board of Directors and Shareholders
Fed One Bancorp, Inc. And Subsidiary
We have audited the accompanying consolidated statement of financial condition
of Fed One Bancorp, Inc. And subsidiary of December 31, 1997, and the related
consolidated statements of income, shareholders' equity and cash flows for each
of the years in the two-year period ended December 31, 1997. These consolidated
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Fed One Bancorp,
Inc. And subsidiary as of December 31, 1997, and the results of their operations
and their cash flows for each of the years in the two-year period ended December
31, 1997, in conformity with generally accepted accounting principles.
/s/ KPMG LLP
Pittsburgh, Pennsylvania
January 29, 1998, except
as to Note 20, which is as
Of February 18, 1998
55
CONSOLIDATED BALANCE SHEETS
UNITED BANKSHARES, INC. AND SUBSIDIARIES
(Dollars in thousands, except par value)
December 31
----------------
1998 1997
----- ------
ASSETS
Cash and due from banks $ 124,591 $ 118,396
Interest-bearing deposits with other banks 6,807 15,580
Federal funds sold 9,900 56,052
----- ------
Total cash and cash equivalents 141,298 190,028
Securities available for sale at estimated
fair value (amortized cost-$557,574
at December 31, 1998 and $601,909 at
December 31, 1997) 565,165 611,919
Securities held to maturity (estimated fair
value-$367,353 at December 31, 1998
and $399,995 at December 31, 1997) 362,151 394,816
Loans held for sale 720,607 97,619
Loans 2,659,324 2,696,905
Less: Unearned income (6,933) (7,066)
------ ------
Loans net of unearned income 2,652,391 2,689,839
Less: Allowance for loan losses (39,189) (31,936)
------- -------
Net loans 2,613,202 2,657,903
Bank premises and equipment 54,946 55,374
Accrued interest receivable 30,402 23,922
Other assets 80,128 63,255
------ ------
TOTAL ASSETS $4,567,899 $4,094,836
========== ==========
LIABILITIES
Domestic deposits:
Noninterest-bearing $ 542,987 $ 502,517
Interest-bearing 2,950,071 2,683,446
--------- ---------
TOTAL DEPOSITS 3,493,058 3,185,963
Borrowings:
Federal funds purchased 7,260 40,961
Securities sold under agreements
to repurchase 236,535 184,718
Federal Home Loan Bank borrowings 345,867 230,791
Other borrowings 5,244 5,000
Accrued expenses and other liabilities 58,404 51,347
------ ------
TOTAL LIABILITIES 4,146,368 3,698,780
SHAREHOLDERS' EQUITY
Common stock, $2.50 par value;
Authorized-100,000,000 shares;
issued-43,256,833 at December 31, 1998 and
42,635,898 at December 31, 1997, including
356 and 161,814 shares in treasury at
December 31, 1998 and 1997, respectively 108,142 106,590
Surplus 88,353 80,803
Retained earnings 220,111 204,849
Accumulated other comprehensive income 4,934 6,333
Treasury stock, at cost (9) (2,519)
-- ------
TOTAL SHAREHOLDERS' EQUITY 421,531 396,056
------- -------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $4,567,899 $4,094,836
========== ==========
See notes to consolidated financial statements.
56
CONSOLIDATED STATEMENTS OF INCOME
UNITED BANKSHARES, INC. AND SUBSIDIARIES
(Dollars in thousands, except per share data)
Year Ended December 31
-------------------------------------
1998 1997 1996
---- ---- ----
INTEREST INCOME
Interest and fees on loans $ 265,205 $ 218,039 $ 196,680
Interest on federal funds sold and other
short-term investments 1,472 1,456 1,489
Interest and dividends on securities:
Taxable 55,550 57,868 48,963
Exempt from federal taxes 3,420 3,089 3,509
----- ----- -----
TOTAL INTEREST INCOME 325,647 280,452 250,641
------- ------- -------
INTEREST EXPENSE
Interest on deposits 128,976 113,472 96,475
Interest on short-term borrowings 10,732 8,911 6,661
Interest on Federal Home Loan Bank advances 15,646 8,739 9,120
------ ----- ------
TOTAL INTEREST EXPENSE 155,354 131,122 112,256
------- ------- -------
NET INTEREST INCOME 170,293 149,330 138,385
PROVISION FOR LOAN LOSSES 12,156 3,280 2,881
------ ----- -----
NET INTEREST INCOME AFTER PROVISION
FOR LOAN LOSSES 158,137 146,050 135,504
------- ------- -------
OTHER INCOME
Income from mortgage banking operations 14,211 15,133 9,809
Service charges, commissions, and fees 19,024 16,961 14,804
Trust department income 4,581 3,569 3,186
Security gains 2,370 85 465
Other income 1,566 1,320 1,390
----- ----- -----
TOTAL OTHER INCOME 41,752 37,068 29,654
------ ------ ------
OTHER EXPENSE
Salaries and employee benefits 69,550 52,272 50,920
Net occupancy expense 12,733 11,099 10,466
Other expense 55,681 40,481 42,999
------ ------ ------
TOTAL OTHER EXPENSE 137,964 103,852 104,385
------- ------- -------
INCOME BEFORE INCOME TAXES 61,925 79,266 60,773
INCOME TAXES 17,523 27,005 21,054
------ ------ ------
NET INCOME $ 44,402 $ 52,261 $ 39,719
=========== =========== ===========
Earnings per common share:
Basic $ 1.04 $ 1.24 $ 0.94
=========== =========== ===========
Diluted $ 1.02 $ 1.22 $ 0.93
=========== =========== ===========
Dividends per common share $ 0.75 $ 0.68 $ 0.62
=========== =========== ===========
Average outstanding shares:
Basic 42,757,638 42,032,566 42,351,562
Diluted 43,461,222 42,768,461 42,813,415
See notes to consolidated financial statements.
57
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
UNITED BANKSHARES, INC. AND SUBSIDIARIES
(Dollars in thousands, except per share data)
Common Stock Accumulated
------------------- Other Total
Par Retained Comprehensive Treasury Shareholders'
Shares Value Surplus Earnings Income Stock Equity
----- ------ -------- -------- -------------- -------- --------------
Balance at January 1, 1996 21,251,010 $ 53,128 $ 82,979 $ 212,218 $2,192 ($1,256) $349,261
Comprehensive Income:
Net income 39,719 39,719
Other comprehensive income, net of tax
Unrealized loss on securities of $2,305
net of reclassification adjustment for
gains included in net income of $302 (2,003) (2,003)
-------
Total comprehensive income 37,716
Cash dividends ($0.62 per share) (17,847) (17,847)
Fractional shares adjustment (145) (4) (4)
Retirement of treasury stock (2,550) (7) (35) 42
Purchase of treasury stock (113,000 shares) (3,395) (3,395)
Common stock options
exercised (540,473 shares) 156,079 390 1,225 (100) 2,688 4,203
Pre-merger transactions of
pooled companies (165,094) (413) (3,043) (3,646) (7,102)
-------- ---- ------ ------ --- ------- ------
Balance at December 31, 1996 21,239,300 53,098 81,122 230,344 189 (1,921) 362,832
Comprehensive Income:
Net income 52,261 52,261
Other comprehensive income, net of tax
Unrealized gain on securities of $6,199
net of reclassification adjustment for
gains included in net income of $55 6,144 6,144
-------
Total comprehensive income 58,405
Cash dividends ($0.68 per share) (20,344) (20,344)
Purchase of treasury stock (167,100 shares) (5,754) (5,754)
Common stock options
exercised (484,672 shares) 141,306 353 1,007 (167) 4,550 5,743
Sale of treasury stock (15,991 shares) 606 606
Pre-merger transactions of
pooled companies (62,658) (156) (1,326) (3,950) (5,432)
Two-for-one stock split effected in the form
of a 100% stock dividend 21,317,950 53,295 (53,295)
---------- ------ ------ ------- ------ ------ -------
Balance at December 31, 1997 42,635,898 106,590 80,803 204,849 6,333 (2,519) 396,056
Comprehensive Income:
Net income 44,402 44,402
Other comprehensive income, net of tax
Unrealized gain on securities of $335
net of reclassification adjustment for
gains included in net income of $1,734 (1,399) (1,399)
-------
Total comprehensive income 43,003
Cash dividends ($0.75 per share) (28,317) (28,317)
Fractional shares adjustment (213) (7) (7)
Purchase of treasury stock (137,300 shares) (3,610) (3,610)
Common stock options
exercised (546,530 shares) 285,148 712 (1,174) (202) 5,466 4,802
Sale of treasury stock (37,376 shares) 654 654
Pre-merger transactions of
pooled companies 336,000 840 8,731 (621) 8,950
------- --- ----- ---- ------ ----- -----
Balance at December 31, 1998 43,256,833 $108,142 $ 88,353 $ 220,111 $4,934 ($ 9) $421,531
========== ======== ========= ========= ====== ===== ========
See notes to consolidated financial statements.
58
CONSOLIDATED STATEMENTS OF CASH FLOWS
UNITED BANKSHARES, INC. AND SUBSIDIARIES
(Dollars in thousands)
Year Ended December 31
----------------------------------
1998 1997 1996
---- ---- ----
OPERATING ACTIVITIES
Net income $ 44,402 $ 52,261 $ 39,719
Adjustments to reconcile net income to
net cash provided by operating activities:
Provision for loan losses 12,156 3,280 2,881
Provision for depreciation 7,739 6,590 5,601
Amortization, net of accretion 5,913 2,770 1,029
(Gain) loss on sales of bank premises and equipment (116) (534) 140
Gain on sales and calls of securities (2,370) (85) (465)
Loans originated for sale (1,541,187) (885,615) (641,764)
Proceeds from loans sold 1,405,524 869,678 652,123
Gain on sales of loans (13,910) (13,925) (9,108)
Deferred income tax benefit (2,788) (555) (117)
Changes in:
Trading securities 5,693
Loans held for sale 5,154 (7,211) (24,417)
Interest receivable (6,415) (563) 441
Other assets (7,049) 1,376 (5,539)
Accrued expenses and other liabilities (6,832) 3,545 5,089
------ ----- -----
NET CASH (USED IN) PROVIDED BY OPERATING ACTIVITIES (99,779) 31,012 31,306
------- ------- -----
INVESTING ACTIVITIES
Proceeds from maturities and calls of
investment securities 142,854 77,365 63,049
Purchases of investment securities (110,002) (67,886) (132,629)
Proceeds from sales of securities available for sale 106,132 174,579
Proceeds from maturities and calls of
securities available for sale 340,318 155,689 228,551
Purchases of securities available for sale (294,657) (366,344) (431,406)
Proceeds from sales of loans 471,978 287 294
Purchases of loans (943,680) (46,429) (16,886)
Net purchases of bank premises and equipment (6,765) (4,894) (4,445)
Net cash received from (paid for) acquired
subsidiary/branch 56,472 (28,929)
Net change in loans 38,249 (143,024) (183,553)
------ -------- --------
NET CASH USED IN INVESTING ACTIVITIES (305,233) (318,033) (302,446)
-------- -------- --------
FINANCING ACTIVITIES
Cash dividends paid (24,651) (19,831) (16,541)
Acquisition of treasury stock (3,610) (5,754) (3,395)
Proceeds from exercise of stock options 4,802 5,743 4,203
Proceeds from sales of treasury stock 654 606
Pre-merger transactions of pooled companies 8,237 (7,368) (7,230)
Repayment of Federal Home Loan Bank borrowings (227,164) (281,359) (415,007)
Proceeds from Federal Home Loan Bank borrowings 342,240 324,940 473,416
Purchase of fractional shares (7) (4)
Changes in:
Time deposits 129,364 170,481 153,249
Other deposits 108,057 87,192 46,986
Federal funds purchased, securities sold under
agreements to repurchase and other borrowings 18,360 37,982 39,566
------ ------ ------
NET CASH PROVIDED BY FINANCING ACTIVITIES 356,282 312,632 275,243
------- ------- -------
(DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS (48,730) 25,611 4,103
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 190,028 164,417 160,314
------- ------- -------
CASH AND CASH EQUIVALENTS AT END OF YEAR $141,298 $ 190,028 $ 164,417
======== =========== ===========
See notes to consolidated financial statements.
59
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
UNITED BANKSHARES, INC. AND SUBSIDIARIES
December 31, 1998
NOTE A--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Nature of Operations: United Bankshares, Inc. is a multi-bank holding
company headquartered in Charleston, West Virginia. The principal
markets of United Bankshares, Inc. and subsidiaries (United) are located
in Parkersburg, Charleston, Huntington, Morgantown and Wheeling, West
Virginia and Arlington, Fairfax, Loudoun and Prince William counties,
Virginia. United's principal business activities are community banking
and mortgage banking.
Basis of Presentation: The consolidated financial statements and the
notes to consolidated financial statements include the accounts of
United Bankshares, Inc. and its wholly-owned subsidiaries. All
significant intercompany accounts and transactions have been eliminated
in the consolidated financial statements.
The accounting and reporting policies of United conform with generally accepted
accounting principles. The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the amounts reported in the financial
statements and accompanying notes. Actual results could differ from those
estimates. A description of the significant accounting policies is presented
below.
Certain prior period data has been reclassified to conform with the current
period presentation. The reclassifications had no effect on net income or
shareholders' equity.
Cash Flow Information: United considers cash and due from banks,
interest-bearing deposits with other banks and federal funds sold as cash and
cash equivalents.
Securities: Management determines the appropriate classification of securities
at the time of purchase. Debt securities that United has the positive intent and
the ability to hold to maturity are carried at amortized cost. Securities to be
held for indefinite periods of time and all marketable equity securities are
classified as available for sale and carried at fair value. Unrealized holding
gains and losses on securities classified as available for sale are carried as a
separate component of other comprehensive income, net of deferred income taxes.
Gains or losses on sales of securities are recognized by the specific
identification method and are reported separately in the statements of income.
60
NOTE A--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - continued
Loans: Interest on loans is accrued and credited to operations using methods
that produce a level yield on principal amounts outstanding. Loan origination
and commitment fees and related direct loan origination costs are deferred and
amortized as an adjustment of loan yield over the estimated life of the related
loan.
The accrual of interest income on commercial and most consumer loans generally
is discontinued when a loan becomes 90 days past due as to principal or
interest. When interest accruals are discontinued, unpaid interest recognized in
income in the current year is reversed, and interest accrued in prior years is
charged to the allowance for loan losses. Management may elect to continue the
accrual of interest when the estimated net realizable value of collateral
exceeds the principal balance and accrued interest, and the loan is in the
process of collection.
Consistent with United's existing method of income recognition for loans,
interest on impaired loans, except those classified as nonaccrual, is recognized
as income using the accrual method. United's method of income recognition for
impaired loans that are classified as nonaccrual is to recognize interest income
on the cash basis or apply the cash receipt to principal when the ultimate
collectibility of principal is in doubt.
The principal source of revenue from United's mortgage banking business are: (i)
loan origination fees; (ii) gains or losses from the sale of loans, if any;
(iii) interest earned on mortgage loans during the period that they are held by
United pending sale; (iv) loan servicing fees; and (v) gain or loss on the
close-out of the hedge instrument used to offset the risk that changes in
interest rate may have on the value of United's mortgage loan inventory.
Loans Held for Sale: Loans held for sale consist of one-to-four family
residential loans originated for sale in the secondary market and are carried at
the lower of cost or fair value determined on an aggregate basis. Gains and
losses on sales of loans held for sale are included in mortgage banking income.
Allowance for Loan Losses: Management's evaluation of the adequacy of the
allowance for loan losses and the appropriate provision for loan losses is based
upon a quarterly evaluation of the portfolio. The allowance for loan losses
related to loans that are identified as impaired is based on the present value
of expected future cash flows using the loan's effective interest rate, or as a
practical expedient, at the loan's observable market price or the fair value of
the collateral if the loan is collateral dependent.
In determining the adequacy of the allowance for loan losses, management makes
allocations to specific commercial loans classified by management as to risk.
The amount allocated to a specific loan is based upon management's estimate of
the borrowers' ability to repay, the collateral securing the credit and other
borrower specific factors that may impact collectibility. Other commercial loans
not specifically reviewed on an individual basis are evaluated based on loan
pools using management's
61
NOTE A--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -continued
internal risk ratings. Allocations for these commercial pools are determined
based upon historical loss experience adjusted for current conditions.
Allocations for loans, other than commercial loans, are developed on a total
portfolio level based upon historical loss experience adjusted for current
conditions. While allocations are made to specific loans and pools of loans, the
allowance is available for all loan losses.
The unallocated component of the allowance provides for risk arising in part
from, but not limited to, declines in credit quality resulting from sudden
economic or industry shifts and changing economic trends. The amounts allocated
to specific credits, and the unallocated component of the allowance are reviewed
on a quarterly basis and adjusted as necessary based upon subsequent changes in
circumstances. This evaluation is inherently subjective and requires management
to make estimates of the amounts and timing of future cash flows.
Bank Premises and Equipment: Bank premises and equipment are stated at cost,
less allowances for depreciation and amortization. The provision for
depreciation is computed principally by the straight-line method over the
estimated useful lives of the respective assets.
Income Taxes: Deferred income taxes are provided for temporary differences
between the tax basis of an asset or liability and its reported amount in the
financial statements at the statutory tax rate.
Intangible Assets: Intangible assets relating to the estimated value of the
deposit base of the acquired institutions are being amortized on an accelerated
basis over a 7 to 10 year period. The excess of the purchase price over the fair
market value of the net assets of the banks acquired (goodwill) is being
amortized on a straight-line basis over 15 to 20 years. The carrying amount of
intangible assets is evaluated if facts and circumstances suggest that they may
be impaired. If this evaluation indicates that intangible assets will not be
recoverable, as determined based on the estimated undiscounted cash flows of the
entity acquired over the remaining amortization period, the carrying amount of
intangible assets will be reduced.
At December 31, 1998 and 1997, deposit base intangibles and goodwill
approximated $45,197,000 and $39,175,000 net of accumulated amortization of
approximately $18,698,000 and $14,368,000.
Trust Assets and Income: Assets held in a fiduciary or agency capacity for
customers are not included in the balance sheets since such items are not assets
of the company. Trust income is reported on a cash basis. Reporting such income
on an accrual basis would not materially affect United's consolidated financial
position or its results of operations as reported herein.
Earnings Per Common Share: Basic earnings per common share is calculated by
dividing net income by the weighted average number of shares of common stock
outstanding for the respective period. For diluted earnings
62
NOTE A--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - continued
per common share, the weighted average number of shares of common stock
outstanding for the respective period is increased by the number of shares of
common stock which would be issued assuming the exercise of common stock
options. The dilutive effect of stock options approximated 703,584, 735,895 and
461,853 shares in 1998, 1997 and 1996, respectively.
Operating Segments - United operates in the community banking and mortgage
banking businesses. Business results are based upon United's management
accounting practices and as provided to the chief operating decision maker for
determination of resource allocation and performance.
New Accounting Standards: In June 1997, the Financial Accounting
Standards Board (FASB) issued Statement No. 130, (SFAS No. 130),
"Reporting Comprehensive Income" which requires companies to report and
display comprehensive income and its components. United adopted the
provisions of this statement in 1998. These disclosure requirements had
no impact on financial position or results of operations.
In June 1997, the FASB issued Statement No. 131, (SFAS No. 131), "Disclosures
about Segments of an Enterprise and Related Information." SFAS No. 131 provides
guidance for the way public enterprises report information about operating
segments in annual financial statements and requires selected information about
operating segments in interim financial reports. It also requires certain
related disclosures about products and services, geographic areas and major
customers. United adopted the provisions of this statement for 1998 annual
reporting. These disclosure requirements had no impact on financial position or
results of operations.
In June 1998, the FASB issued Statement No. 133, (SFAS No. 133), "Accounting for
Derivative Instruments and Hedging Activities." The provisions of this statement
require that derivative instruments be carried at fair value on the balance
sheet. The statement continues to allow derivative instruments to be used to
hedge various risks and sets forth specific criteria to be used to determine
when hedge accounting can be used. The statement also provides offsetting
changes in fair value or cash flows of both the derivative and the hedged asset
or liability to be recognized in earnings in the same period; however, any
changes in fair value or cash flow that represent the ineffective portion of a
hedge are required to be recognized in earnings and cannot be deferred. For
derivative instruments not accounted for as hedges, changes in fair value are
required to be recognized in earnings. The provisions of this statement become
effective for United beginning on January 1, 2000. This standard, when
implemented, is not expected to materially impact the reported financial
position or results of operations of United.
During 1998, the FASB issued Statement No. 134, (SFAS No. 134), "Accounting for
Mortgage-Backed Securities Retained After the Securitization of Mortgage Loans
Held for Sale by a Mortgage Banking
63
NOTE A--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - continued
Enterprise" (an amendment of Statement No. 65). SFAS No. 134 requires companies
to classify all mortgage-backed securities or other interests in the form of a
security retained after a securitization of mortgage loans held for sale based
on its ability and intent to sell or hold those investments. Any retained
mortgage-backed securities that a company commits to sell before or during the
securitization process must be classified as trading securities. Management does
not believe that this statement will have a material impact on results of
operations or the financial position of United.
NOTE B--MERGERS AND ACQUISITIONS
On October 1, 1998, United consummated its merger with Fed One Bancorp, Inc.,
Wheeling, West Virginia ("Fed One") in a common stock exchange accounted for
under the pooling of interests method of accounting. United exchanged 1.50
shares of United common stock for each of the 2.6 million common shares of Fed
One or approximately 3.9 million shares. As of the date of merger, Fed One
reported total assets of $373 million, total net loans of $163 million, deposits
of $261 million and shareholders' equity of $50 million. All statements and
notes thereto have been restated to give effect to the merger of United and Fed
One as though they had always been combined.
The following represents unaudited selected pro forma financial information
regarding the effects of the transactions as though United, and Fed One had been
combined for all periods presented:
United
(In thousands, except per share data) and
Fed Fed One
United One Combined
------- ------ ----------
Nine Months Ended September 30, 1998
Net interest income $117,582 $8,277 $ 125,859
Net income 36,222 2,087 38,309
Earnings per common share:
Basic $ 0.93 $ 0.91 $ 0.90
Diluted $ 0.91 $ 0.86 $ 0.88
1997
Net interest income $137,698 $11,632 $ 149,330
Net income 49,019 3,242 52,261
Earnings per common share:
Basic $ 1.27 $ 1.43 $ 1.24
Diluted $ 1.25 $ 1.36 $ 1.22
1996
Net interest income $126,636 $11,749 $ 138,385
Net income 37,395 2,324 39,719
Earnings per common share:
Basic $ 0.97 $ 0.97 $ 0.94
Diluted $ 0.96 $ 0.94 $ 0.93
64
NOTE B--MERGERS AND ACQUISITIONS - continued
The data set forth above is not necessarily indicative of the results of
operations or the combined financial position of United that would have resulted
had the merger been consummated at the beginning of the applicable periods
indicated, nor is it necessarily indicative of the results of operations in
future periods or the future financial position of the combined entities.
On April 2, 1998, United consummated its merger with George Mason Bankshares,
Inc., Fairfax, Virginia ("George Mason") in a common stock exchange accounted
for under the pooling of interests method of accounting. United exchanged 1.70
shares of United common stock for each of the 5.3 million common shares of
George Mason or approximately 9.0 million shares, adjusted for cash paid in lieu
of fractional shares. As of the date of merger, George Mason reported total
assets of $1.02 billion, total net loans of $600 million, deposits of $840
million and shareholders' equity of $79 million. United's historical financial
information has been restated for the George Mason merger and this is reflected
in the "United" information presented herein.
In the second and fourth quarters of 1998, as a direct result of the George
Mason and Fed One acquisitions, United recorded merger-related costs of $13.7
million ($8.2 million after tax). The charges to operating expenses consisted of
employee benefit obligations, costs to eliminate duplicate facilities and
equipment, contract terminations, conversion costs and professional fees.
The merger-related charges consisted of:
(In thousands) 1998
----
Contract termination costs $ 3,747
Conversion expenses 3,333
Duplicate facilities and equipment 2,488
Employee benefit obligations 2,182
Professional fees 1,411
Other expenses 496
---
Total merger-related charges $ 13,657
--------
During 1998, $13.7 million of merger-related costs were incurred and charged
against the accrual.
On August 1, 1997, United acquired 100% of the outstanding common stock of First
Patriot Bankshares Corporation, Reston, Virginia ("Patriot") for cash
consideration of approximately $39.2 million. The transaction has been accounted
for using the purchase method of accounting.
At consummation, Patriot had assets of approximately $211 million, loans of $135
million, deposits of $154 million and shareholders' equity of $11 million, all
of which reflected purchase accounting adjustments. The results of operations of
Patriot, which are not significant, have been included in the consolidated
results of operations from the date of acquisition.
65
NOTE C--INVESTMENT SECURITIES
The amortized cost and estimated fair values of securities available for sale
are summarized as follows:
December 31, 1998
------------------------------------------------
(In thousands) Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
--------- ---------- ----------- --------
U.S. Treasury securities
and obligations of U.S.
Government corporations
and agencies $198,151 $ 1,335 $ 162 $199,324
State and political
subdivisions 27,474 194 188 27,480
Mortgage-backed
securities 279,618 2,860 262 282,216
Marketable equity
securities 9,211 4,104 239 13,076
Other 43,120 51 43,069
------ ------ -- ------
Total $557,574 $ 8,493 $ 902 $565,165
======== ======== ======== ========
December 31, 1997
-----------------------------------------
(In thousands) Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
--------- ---------- ---------- ---------
U.S. Treasury securities
and obligations of U.S.
Government corporations
and agencies $191,473 $ 595 $ 293 $191,775
State and political
subdivisions 4,093 106 4,199
Mortgage-backed
securities 379,452 3,099 393 382,158
Marketable equity
securities 4,730 6,977 11,706
Other 22,161 80 22,081
------ ----- -- ------
Total $601,909 $ 10,777 $ 767 $611,919
======== ======== ======== ========
The amortized cost and estimated fair value of securities available for sale at
December 31, 1998 by contractual maturity, are shown below. Expected maturities
may differ from contractual maturities because the issuers may have the right to
call or prepay obligations with or without call or prepayment penalties.
Estimated
(In thousands) Amortized Fair
Cost Value
-------- --------
Due in one year or less $ 38,072 $ 38,321
Due after one year through five years 113,410 114,343
Due after five years through ten years 123,793 124,204
Due after ten years 273,088 275,221
Marketable equity securities 9,211 13,076
----- ------
Total $557,574 $565,165
======== ========
The table above includes $282,216,000 of mortgage-backed securities at estimated
fair value with an amortized cost of $279,618,000. Maturities of mortgage-backed
securities are based upon the estimated average life.
66
NOTE C--INVESTMENT SECURITIES - continued
Gross realized gains and losses from sales of securities available for sale were
$3,020,000 and $354,000; $115,000 and $30,000; and $829,000 and $364,000,
respectively, in 1998, 1997 and 1996.
The amortized cost and estimated fair values of securities held to maturity are
summarized as follows:
December 31, 1998
-------------------------------------------
(In thousands) Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
--------- ----------- --------- ---------
U.S. Treasury securities
and obligations of U.S.
Government corporations
and agencies $121,474 $1,225 $ 99 $122,600
State and political
subdivisions 82,011 2,929 241 84,699
Mortgage-backed
securities 139,002 1,506 121 140,387
Other 19,664 8 5 19,667
-------- ------ ------- --------
Total $362,151 $5,668 $ 466 $367,353
======== ====== ======= ========
December 31, 1997
-------------------------------------------
(In thousands) Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
--------- ---------- --------- -----------
U.S. Treasury securities
and obligations of U.S.
Government corporations
and agencies $123,186 $ 784 $ 78 $123,892
State and political
subdivisions 51,560 2,143 21 53,682
Mortgage-backed
securities 212,254 2,807 456 214,605
Other 7,816 7,816
-------- ------ ------- --------
Total $394,816 $5,734 $ 555 $399,995
======== ====== ======= ========
The amortized cost and estimated fair value of debt securities held to maturity
at December 31, 1998 by contractual maturity, are shown below. Expected
maturities may differ from contractual maturities because the issuers may have
the right to call or prepay obligations with or without call or prepayment
penalties.
Estimated
(In thousands) Amortized Fair
Cost Value
---------- -----------
Due in one year or less $ 17,218 $ 17,349
Due after one year through five years 68,758 69,661
Due after five years through ten years 117,860 120,026
Due after ten years 158,315 160,317
------- -------
Total $362,151 $367,353
======== ========
The table above includes $140,387,000 of mortgage-backed securities at estimated
fair value with an amortized cost of $139,002,000 at December 31, 1998.
Maturities of the mortgage-backed securities are based upon the estimated
average life.
67
NOTE C--INVESTMENT SECURITIES - continued
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 $414,275,000 and $428,806,000 at December 31,
1998 and 1997, respectively.
NOTE D--LOANS
Major classifications of loans are as follows:
(In thousands) December 31
-------------------
1998 1997
---- ----
Commercial, financial, and
agricultural $ 508,601 $ 487,706
Real estate:
Single family residential 1,076,277 1,164,170
Commercial 574,666 492,265
Construction 141,026 140,665
Other 45,290 47,148
Installment 313,464 364,951
------- -------
Total gross loans $2,659,324 $2,696,905
========== ==========
The table above does not include loans held for sale of $720,607,000 and
$97,619,000 at December 31, 1998 and 1997, respectively. At December 31, 1998,
United recorded a charge of $9,664,000 to reduce the carrying value of those
loans to the lower of cost or market.
An analysis of the allowance for loan losses follows:
(In thousands) Year Ended December 31
---------------------------
1998 1997 1996
------- -------- ------
Balance at beginning of year $31,936 $29,376 $29,531
Allowance of purchased subsidiaries 2,695
Provision for loan losses 12,156 3,280 2,881
------ ----- -----
44,092 35,351 32,412
------ ------ ------
Loans charged off 6,270 4,235 3,915
Recoveries 1,367 820 879
----- --- ---
Net charge offs 4,903 3,415 3,036
----- ----- -----
Balance at end of year $39,189 $31,936 $29,376
======= ======= =======
United has commercial loans, including real estate and owner occupied, income
producing real estate and land development loans, of approximately
$1,083,267,000 and $979,971,000 as of December 31, 1998 and 1997, respectively.
The loans are primarily secured by real estate located in West Virginia,
Southeastern Ohio, and Virginia. The loans were originated by United's
subsidiary banks using underwriting standards as set forth by management.
United's loan administration policies are focused on the risk characteristics of
the loan portfolio, including commercial real estate loans, in terms of loan
approval and credit quality. It is the opinion of management that these loans do
not pose any unusual risks and that adequate consideration has been given to the
above loans in establishing the allowance for loan losses.
At December 31, 1998, the recorded investment in loans that were considered to
be impaired was $10,924,000 (of which $9,139,000 was on a nonaccrual basis).
Included in this amount was $4,966,000 of impaired
68
NOTE D--LOANS - continued
loans for which the related allowance for credit losses was $774,000 and
$5,958,000 of impaired loans that did not have an allowance for credit losses.
At December 31, 1997, the recorded investment in loans that were considered to
be impaired was $14,261,000 (of which $5,815,000 was on a nonaccrual basis).
Included in this amount was $6,365,000 of impaired loans for which the related
allowance for credit losses was $1,596,000 and $7,896,000 of impaired loans that
did not have an allowance for credit losses.
The average recorded investment in impaired loans during the years ended
December 31, 1998, 1997 and 1996 was approximately $10,343,000, $13,264,000 and
$12,005,000, respectively.
The amount of interest income that would have been recorded on impaired loans
under the original terms was $1,809,000, $1,710,000 and $1,708,000 for the years
ended December 31, 1998, 1997 and 1996, respectively. For the years ended
December 31, 1998, 1997 and 1996, United recognized interest income on those
impaired loans of approximately $461,000, $1,008,000 and $816,000, respectively,
substantially all of which was recognized using the accrual method of income
recognition.
United's subsidiary banks have made loans, in the normal course of business, to
the directors and officers of United and its subsidiaries, and to their
associates. Such related party loans were made on substantially the same terms,
including interest rates and collateral, as those prevailing at the time for
comparable transactions with unrelated persons and did not involve more than
normal risk of collectibility. The aggregate dollar amount of these loans was
$123,262,000 and $106,019,000 at December 31, 1998 and 1997, respectively.
During 1998, $65,970,000 of new loans were made, repayments totaled $41,022,000,
and other changes due to the change in composition of United's board members and
executive officers approximated $7,705,000.
NOTE E--BANK PREMISES AND EQUIPMENT AND LEASES
Bank premises and equipment are summarized as follows:
December 31
------------------
(In thousands) 1998 1997
---- ----
Land $ 11,537 $ 11,144
Buildings and improvements 47,546 49,643
Leasehold improvements 10,587 5,798
Furniture, fixtures, and equipment 46,987 44,661
------- -------
116,657 111,246
Less allowance for depreciation
and amortization 61,711 55,872
------- -------
Net bank premises and equipment $ 54,946 $ 55,374
======== ========
United and certain banking subsidiaries have entered into various noncancelable
operating leases. These noncancelable operating leases are subject to renewal
options under various terms and some leases pro-
69
NOTE E--BANK PREMISES AND EQUIPMENT AND LEASES
vide for periodic rate adjustments based on cost-of-living index changes. Rent
expense for noncancelable operating leases approximated $5,129,000, $4,417,000
and $4,010,000 for the years ended December 31, 1998, 1997, and 1996,
respectively.
Future minimum payments, by year and in the aggregate, under non-cancelable
operating leases with initial or remaining terms of one year or more, for years
subsequent to December 31, 1998, consisted of the following:
Year Amount
---- -------
(In thousands)
1999 $ 3,821
2000 3,347
2001 3,146
2002 2,505
2003 1,301
Thereafter 2,451
-----
Total minimum lease payments $16,571
=======
NOTE F--DEPOSITS
The book value of deposits consisted of the following:
(In thousands) December 31
---------------------
1998 1997
--------- ---------
Noninterest-bearing checking $ 542,987 $ 502,517
Interest-bearing checking 119,146 128,636
Regular savings 435,767 457,336
Money market accounts 664,913 519,088
Time deposits under $100,000 1,463,505 1,271,732
Time deposits over $100,000 266,740 306,654
------- -------
Total deposits $3,493,058 $3,185,963
========== ==========
Interest paid on deposits and borrowings approximated $153,283,000, $129,219,000
and $111,139,000 in 1998, 1997 and 1996, respectively.
At December 31, 1998, the scheduled maturities of time deposits are as follows:
Year Amount
---- ----------
(In thousands)
1999 $1,179,726
2000 462,847
2001 43,978
2002 23,015
2003 and thereafter 20,679
------
Total $1,730,245
==========
United's subsidiary banks have received deposits, in the normal course of
business, from the directors and officers of United and its subsidiaries, and
their associates. Such related party deposits were accepted on substantially the
same terms, including interest rates and maturities, as those prevailing at the
time for comparable transactions with unrelated persons. The aggregate dollar
amount of these deposits was $20,066,000 and $25,878,000 at December 31, 1998
and 1997, respectively.
70
NOTE G--BORROWINGS
United's subsidiary banks are members of the Federal Home Loan Bank (FHLB).
Membership in the FHLB makes available short-term and long-term borrowings from
collateralized advances. All FHLB borrowings are collateralized by a similar
amount of single family residential mortgage loans. At December 31, 1998, United
had approximately $461,205,000 of additional available borrowings in the form of
collateralized advances from the FHLB at prevailing interest rates.
At December 31, 1998, $105,000,000 of FHLB advances with an interest rate of
5.00% had an overnight maturity. Additionally, $240,867,000 of FHLB advances
with a weighted average interest rate of 5.18% are scheduled to mature from one
to twenty years.
United also has various unused lines of credit available from certain of its
correspondent banks in the aggregate amount of $261,500,000. These lines of
credit, which bear interest at prevailing market rates, permit United to borrow
funds in the overnight market, and are renewable annually subject to certain
conditions.
At December 31, 1998 and 1997, borrowings and the related weighted average
interest rate were as follows:
1998 1997
---------------------- ---------------------
Weighted Weighted
(In thousands) Average Average
Amount Rate Amount Rate
------ -------- ------ --------
Federal funds purchased $ 7,260 5.56% $ 40,961 6.58%
Securities sold under
agreements to repurchase 236,535 4.59% 184,718 4.53%
FHLB advances 345,867 5.12% 230,791 6.27%
Other 5,244 3.60% 5,000 5.22%
----- -----
Total $594,906 $ 461,470
======== =========
Information concerning securities sold under agreements to repurchase (in
thousands)is summarized as follows:
1998 1997
---- ----
Average balance during the year $201,475 $167,688
Average interest rate during the year 4.66% 4.04%
Maximum month-end balance during the year $236,535 $215,205
NOTE H--INCOME TAXES
The income tax provisions included in the consolidated statements of income are
summarized as follows:
(In thousands) Year Ended December 31
----------------------------
1998 1997 1996
---- ---- ----
Current expense:
Federal $ 18,906 $ 26,324 $ 19,639
State 1,405 1,236 1,532
Deferred benefit:
Federal and State (2,788) (555) (117)
------ ---- ----
Income taxes $ 17,523 $ 27,005 $ 21,054
======== ======== ========
71
NOTE H--INCOME TAXES - continued
The following is a reconciliation of income tax expense to the amount computed
by applying the statutory federal income tax rate to income before income taxes:
Year Ended December 31
-------------------------------------------------------
(In thousands) 1998 1997 1996
------------------ -------------- ----------------
Amount % Amount % Amount %
------- ----- ------ ----- ------- -----
Tax on income before taxes
at statutory federal rate $ 21,674 35.0% $ 27,743 35.0% $21,270 35.0%
Plus: State income taxes
net of federal tax
benefits 913 1.5 820 1.0 996 1.6
--- --- --- --- --- ---
22,587 36.5 28,563 36.0 22,266 36.6
Increase (decrease) resulting from:
Tax-exempt interest
income (2,201) (3.6) (1,898) (2.4) (1,855) (3.1)
Nontaxable distributions
from reorganizations (5,775) (9.3)
Intangible amortization 1,152 1.9 668 0.8 643 1.1
Other items-net 1,760 2.8 (328) (0.4)
----- --- ---- ---- ------- ----
Income taxes $17,523 28.3% $27,005 34.1% $21,054 34.6%
======= ==== ======= ==== ======= ====
Federal income tax expense applicable to securities transactions approximated
$830,000 in 1998, $29,000 in 1997 and $180,000 in 1996.
Income taxes paid approximated $25,387,000, $27,315,000 and $18,772,000 in 1998,
1997 and 1996, respectively.
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. Significant components of
United's deferred tax assets and liabilities (included in other assets) at
December 31, 1998 and 1997 are as follows:
(In thousands) 1998 1997
---- ----
Deferred tax assets:
Allowance for loan losses $14,266 $11,299
Accrued benefits payable 1,539 1,725
Other accrued liabilities 4,449 3,850
Other real estate owned 639 117
Other 103 118
--- ---
Total deferred tax assets 20,996 17,109
------ ------
Deferred tax liabilities:
Premises and equipment 2,660 2,965
Core deposit intangibles 574 832
Income tax allowance for
loan losses 1,305 1,462
Deferred mortgage points 1,920 1,663
Securities available for sale 2,657 3,409
Other 2,356 794
----- ---
Total deferred tax
liabilities 11,472 11,125
------ ------
Net deferred tax assets $ 9,524 $ 5,984
======= =======
72
NOTE I--EMPLOYEE BENEFIT PLANS
United has a defined benefit retirement plan covering substantially all
employees. The benefits are based on years of service and the average of the
employee's highest five consecutive plan years of basic compensation paid during
the ten plan years preceding the date of determination. United's funding policy
is to contribute annually the maximum amount that can be deducted for federal
income tax purposes. Contributions are intended to provide not only for benefits
attributed to service to date, but also for those expected to be earned in the
future.
Net periodic pension cost included the following components:
(In thousands) Year Ended December 31,
----------------------------
1998 1997 1996
------ ------ -------
Service cost $ 799 $ 739 $ 861
Interest cost 1,609 1,451 1,439
Expected return on plan assets (2,121) (1,939) (1,767)
Amortization of transition asset (131) (131) (131)
Amortization of prior service cost 63 63 63
-- -- --
Net periodic pension cost $ 219 $ 183 $ 465
======= ======= =======
A reconciliation of the changes in benefit obligation and plan assets for the
defined benefit retirement plan is as follows:
(In thousands) December 31
----------------
1998 1997
---- ----
Benefit obligation at beginning
of year $ 21,910 $ 21,169
Service cost 799 739
Interest cost 1,609 1,452
Actuarial(gain)loss 2,183 (706)
Benefits paid (848) (744)
---- ----
Benefit obligation at end of year 25,653 21,910
Fair Value of plan assets at
beginning of year 27,040 23,109
Actual return on plan assets 4,817 4,402
Employer contribution 273
Benefits paid (848) (744)
---- ----
Fair Value of plan assets at
end of year 31,009 27,040
Funded status 5,356 5,130
Unrecognized net actuarial gain (5,785) (5,318)
Unrecognized prior service cost 262 325
Unrecognized net transition asset (564) (695)
---- ----
Accrued pension liability included in
other liabilities $ (731) $ (558)
======== ========
73
NOTE I--EMPLOYEE BENEFIT PLANS - continued
At December 31, 1998, the weighted average discount rate and rate of increase in
future compensation levels used in determining the actuarial present value of
the projected benefit obligation was 7.0% and 4.5%. At December 31, 1997, the
weighted average discount rate and rate of increase in future compensation
levels used in determining the actuarial present value of the projected benefit
obligation was 7.25% and 4.5%. The weighted average expected long-term rate of
return on United's plan assets was 9.00% for the years ended December 31, 1998,
1997 and 1996.
The United Savings and Stock Investment Plan (the Plan) is a deferred
compensation plan under Section 401(k) of the Internal Revenue Code. All
employees who complete one year of service are eligible to participate in the
Plan. Each participant may contribute from 1% to 10% of pre-tax earnings to his
or her account which may be invested in any of four investment options chosen by
the employee. United matches 100% of the first 2% of salary deferred and 25% of
the next 2% of salary deferred with United common stock. Vesting is 100% for
employee deferrals and the United match at the time the employee makes his/her
deferral. United's expense relating to the Plan approximated $1,175,000,
$1,285,000 and $925,000 in 1998, 1997 and 1996, respectively.
The assets of United's defined benefit plan and 401(k) Plan each include
investments in United common stock. At December 31, 1998, the combined plan
assets included 790,643 shares of United common stock with an approximate fair
value of $20,952,000. Dividends paid on United common stock held by the plans
approximated $562,000 for the year ended December 31, 1998.
United has certain other deferred compensation plans covering various key
employees. Periodic charges are made to operations so that the present value of
the liability due each employee is fully recorded as of the date of their
retirement. Amounts charged to expense have not been significant in any year.
United has various incentive stock option plans for key employees, the 1988,
1991 and 1996 plans. The plans provide for the granting of stock options of up
to 200,000, 1,000,000 and 1,200,000 shares of common stock, respectively. No
further grants will be made under the 1988 and 1991 plans. At December 31, 1998,
527,100 options were available for future grant under the 1996 plan. Under the
provisions of the plans, the option price per share shall not be less than the
fair market value of United's common stock on the date of grant. Accordingly, no
compensation expense is recognized for these options.
The following table summarizes information about stock options outstanding at
December 31, 1998:
Options Outstanding Options Exercisable
- ---------------------------------------------------------------------------------------
Weighted-
Average Weighted- Weighted-
Remaining Average Average
Range of Number Contractual Exercise Number Exercise
Exercise Prices Outstanding Life Price Exercisable Price
- ----------------------------------------------------------------------------------------
$ 2.98 to $ 27.00 1,632,291 6 years $14.88 1,275,776 $12.04
74
NOTE I--EMPLOYEE BENEFIT PLANS - continued
The following is a summary of activity of United's Incentive Stock Option Plans:
Stock Range of
Options Exercise Prices
-------- -----------------
Outstanding at January 1, 1996 2,171,821 $ 15.00 $ 2.98
Granted 441,910 14.88 9.79
Exercised 540,473 13.50 2.98
Forfeited 18,430 15.00 2.98
---------
Outstanding at December 31, 1996 2,054,828 15.00 2.98
Granted 445,488 22.00 12.58
Exercised 484,672 15.00 2.98
Forfeited 46,600 15.00 6.96
---------
Outstanding at December 31, 1997 1,969,044 22.00 2.98
Granted 236,600 27.00
Exercised 546,530 22.00 2.98
Forfeited 26,823 22.00 14.88
---------
Outstanding at December 31, 1998 1,632,291 $ 27.00 $ 2.98
=========
Exercisable at:
December 31, 1996 1,538,784 $15.00 $ 2.98
December 31, 1997 1,504,863 $15.00 $ 2.98
December 31, 1998 1,275,776 $22.00 $ 2.98
Because the exercise price of the option granted is equal to the market price of
the underlying stock on the date of grant, no compensation expense is
recognized. The following pro forma disclosures present United's net income and
diluted earnings per share, determined as if United had recognized compensation
expense for its employee stock options under the fair value method
Year Ended December 31,
--------------------------
1998 1997 1996
---- ---- ----
Pro forma net income $44,187 $52,039 $39,485
Pro forma diluted earnings per share $1.02 $1.22 $0.92
The estimated fair value of the options at the date of grant was $5.73, $3.96,
and $2.53 for the options granted during 1998, 1997, and 1996, respectively. The
fair value of the options was estimated at the date of grant using a
Black-Scholes option pricing model with the following weighted average
assumptions for 1998, 1997, and 1996, respectively: risk-free interest rates of
4.76%, 6.44%, and 6.78%; dividend yields of 3.04%, 3.08%, and 4.10%; volatility
factors of the expected market price of United's common stock of 0.210, 0.185,
and 0.185; and a weighted average expected option life of 7 years.
United provides postemployment and postretirement benefits for certain employees
at subsidiaries acquired in prior years. United accounts for such costs as
expense when paid. Accounting for such costs when paid does not produce results
materially different from those which would result if such costs were accrued
during the period of employee service. United does not anticipate providing
postemployment or postretirement benefits to its currently active employees
after employment or retirement except on a fully contributory basis.
75
NOTE J--COMMITMENTS AND CONTINGENT LIABILITIES
United is a party to financial instruments with off-balance-sheet risk in the
normal course of business to meet the financing needs of its customers and to
alter its own exposure to fluctuations in interest rates. These financial
instruments include loan commitments, standby letters of credit, forward
contracts for the delivery of mortgage-backed securities and interest rate swap
agreements. The instruments involve, to varying degrees, elements of credit and
interest rate risk in excess of the amount recognized in the financial
statements.
United's maximum exposure to credit loss in the event of nonperformance by the
counterparty to the financial instrument for the loan commitments and standby
letters of credit is the contractual or notional amount of those instruments.
United uses the same policies in making commitments and conditional obligations
as it does for on-balance sheet instruments.
Commitments to extend credit are agreements to lend to a customer as long as
there is no violation of any condition established in the commitment contract.
Commitments generally have fixed expiration dates or other termination clauses
and may require the payment of a fee. Since many of the commitments are expected
to expire without being drawn upon, the total commitment amounts do not
necessarily represent future cash requirements. The amount of collateral
obtained, if deemed necessary upon the extension of credit, is based on
management's credit evaluation of the counterparty. United had approximately
$892,388,000 and $670,369,000 of loan commitments outstanding as of December 31,
1998 and 1997, respectively, substantially all of which expire within one year.
Commercial and standby letters of credit are agreements used by United's
customers as a means of improving their credit standing in their dealings with
others. Under these agreements, United guarantees certain financial commitments
of its customers. United has issued commercial and standby letters of credit of
$54,408,000 and $50,769,000 as of December 31, 1998 and 1997, respectively.
At December 31, 1997, United had open commitments amounting to approximately
$2,000,000 to sell mortgage-backed securities with varying settlement dates that
did not extend beyond March 1998. As such, United is not exposed to significant
risk nor will it derive any significant benefit from changes in interest rates
on the price of the mortgage loan inventory, net of gains or losses of
associated hedge positions.
Management does not anticipate any material losses as a result of these loan
commitments, standby letters of credit and forward contracts for the delivery of
mortgage-backed securities.
In the normal course of business, United and its subsidiaries are currently
involved in various legal proceedings. Management is vigorously pursuing
all its legal and factual defenses and, after consultation with legal
counsel, believes that all such litigation will be resolved with no
material effect on United's financial position or results of operations.
76
NOTE K - UNITED BANKSHARES, INC. (PARENT COMPANY ONLY) FINANCIAL
INFORMATION
CONDENSED BALANCE SHEETS
(In thousands) December 31
----------------
1998 1997
---- ----
Assets
Cash $ 26,459 $ 6,834
Securities available for sale 13,076 16,742
Securities held to maturity 2,178 1,521
Investment in subsidiaries:
Bank subsidiaries 378,912 366,705
Non-bank subsidiaries 1,347 1,303
Loans 12,836 14,300
Other assets 1,897 1,297
----- -----
Total Assets $436,705 $408,702
-------- --------
Liabilities and Shareholders' Equity
Accrued expenses and other liabilities $ 15,174 $ 12,646
Shareholders' equity (including a net
unrealized holding gain of $4,934 and
$6,333 on securities available for sale at
December 31, 1998 and 1997, respectively) 421,531 396,056
------- -------
Total Liabilities and Shareholders' Equity $436,705 $408,702
======== ========
CONDENSED STATEMENTS OF INCOME
(In thousands) Year Ended December 31
---------------------------
1998 1997 1996
---- ---- ----
Income
Dividends from bank subsidiaries $ 40,558 $ 69,637 $ 17,847
Interest and fees on loans 1,394 85
Management fees:
Bank subsidiaries 3,928 3,476 3,467
Non-bank subsidiaries 12 12 12
Other income 2,937 707 557
----- --- ---
Total Income 48,829 73,917 21,883
Expenses
Operating expenses 7,337 5,516 4,725
----- ----- -----
Income Before Income Taxes and Equity
In Undistributed Net Income (Excess
Dividends) of Subsidiaries 41,492 68,401 17,158
Applicable income tax expense (benefit) 105 (424) (12)
--- ---- ---
Income Before Equity in Undistributed
Net Income (Excess Dividends) of
Subsidiaries 41,387 68,825 17,170
Equity in undistributed net income
(excess dividends) of subsidiaries:
Bank subsidiaries 2,971 (16,603) 22,509
Non-bank subsidiaries 44 39 40
-- -- --
Net Income $ 44,402 $ 52,261 $ 39,719
======== ======== ========
77
NOTE K - UNITED BANKSHARES, INC. (PARENT COMPANY ONLY) FINANCIAL
INFORMATION - continued
CONDENSED STATEMENTS OF CASH FLOWS
(In thousands) Year Ended December 31
------------------------------
1998 1997 1996
---- ---- ----
Operating Activities
Net income $ 44,402 $ 52,261 $ 39,719
Adjustments to reconcile net income to net
cash provided by operating activities:
Equity in (undistributed net income)
excess dividends of subsidiaries (3,015) 16,564 (22,549)
Depreciation and net amortization 10 11 26
Net gain on sales of investment
securities (2,912) (24)
Net change in other assets and liabilities (771) 2,276 (106)
---- ----- ----
Net Cash Provided by Operating Activities 37,714 71,112 17,066
------ ------ ------
Investing Activities
Net proceeds from maturities (purchases)
of securities 3,563 (1,346) 1,585
Purchase of loans (14,300)
Principal repayments on loans 1,464
(Increase) decrease in investment in
subsidiaries (8,541) 2,576 3,496
Cash paid in acquisition of subsidiary (37,562)
------- ------- ------
Net Cash (Used in) Provided by Investing
Activities (3,514) (50,632) 5,081
------ ------- -----
Financing Activities
Cash dividends paid (24,651) (19,831) (16,541)
Acquisition of treasury stock (3,610) (5,754) (3,395)
Proceeds from the sale of treasury stock 654 606
Proceeds from exercise of stock options 4,802 5,743 4,203
Pre-merger transactions of pooled companies 8,237 (7,368) (7,230)
Purchase of fractional shares (7) (4)
------- ------ -------
Net Cash Used in Financing Activities (14,575) (26,604) (22,967)
------- ------- -------
Increase (decrease) in Cash and Cash
Equivalents 19,625 (6,124) (820)
Cash and Cash Equivalents at Beginning
of Year 6,834 12,958 13,778
----- ------ ------
Cash and Cash Equivalents at End of Year $ 26,459 $ 6,834 $ 12,958
======== ======== ========
78
NOTE L--OTHER EXPENSE
The following details certain items of other expense for the periods indicated:
Year Ended December 31
-------------------------------
(In thousands) 1998 1997 1996
---- ---- ----
Other expense:
Data processing $ 5,710 $ 3,659 $ 4,021
FDIC insurance expense 576 366 3,080
Legal and consulting 2,909 1,931 2,954
Advertising 3,011 2,856 3,100
Goodwill amortization 4,395 3,063 2,247
Equipment expense 10,188 6,622 5,973
NOTE M--REGULATORY MATTERS
The subsidiary banks are required to maintain average reserve balances with
their respective Federal Reserve Bank. The average amount of those reserve
balances for the year ended December 31, 1998, was approximately $38,987,000.
The primary source of funds for the dividends paid by United Bankshares, Inc. to
its shareholders is dividends received from its subsidiary banks. Dividends paid
by United's subsidiary banks are subject to certain regulatory limitations.
Generally, the most restrictive provision requires regulatory approval if
dividends declared in any year exceed that year's net income, as defined, plus
the retained net profits of the two preceding years.
During 1999, the retained net profits available for distribution to United
Bankshares, Inc., as dividends without regulatory approval, are approximately
$13,195,000, plus net income for the interim period through the date of
declaration.
Under Federal Reserve regulation, the banking subsidiaries are also limited as
to the amount they may loan to affiliates, including the parent company. Loans
from the banking subsidiaries to the parent company are limited to 10% of the
banking subsidiaries' capital and surplus, as defined, or $37,702,000 at
December 31, 1998, and must be secured by qualifying collateral.
United's subsidiary banks are subject to various regulatory capital requirements
administered by federal banking agencies. Pursuant to capital adequacy
guidelines, United's subsidiary banks must meet specific capital guidelines that
involve various quantitative measures of the banks' assets, liabilities, and
certain off-balance sheet items as calculated under regulatory accounting
practices. United's subsidiary banks' capital amounts and classifications are
also subject to qualitative judgments by the regulators about components, risk
weightings, and other factors.
Quantitative measures established by regulation to ensure capital adequacy
require United to maintain minimum amounts and ratios of total and Tier I
capital, as defined in the regulations, to risk-weighted
79
NOTE M--REGULATORY MATTERS - continued
assets, as defined, and of Tier I capital, as defined, to average assets, as
defined. At of December 31, 1998, United exceeds all capital adequacy
requirements to which it is subject.
At December 31, 1998, the most recent notification from its regulators, United
and its subsidiary banks were categorized as well capitalized. To be categorized
as well capitalized, United must maintain minimum total risk-based, Tier I
risk-based, and Tier I leverage ratios as set forth in the following table.
There are no conditions or events since that notification that management
believes would impact United's well capitalized status.
United's and its subsidiary bank's, United National Bank and United Bank,
capital amounts (in thousands of dollars) and ratios are presented in the
following table.
For Capital To Be Well
Actual Adequacy Purposes Capitalized
---------------- ------------------ ------------------
Amount Ratio Amount Ratio Amount Ratio
------ ------- ------ ------ ------ -----
C>
AS OF DECEMBER 31, 1998:
Total Capital (to Risk-
Weighted Assets):
United Bankshares $411,096 12.6% $260,382 >=8.0% $325,478 >=10.0%
United National Bank 255,053 11.0% 184,828 >=8.0% 231,035 >=10.0%
United Bank 112,556 12.2% 73,855 >=8.0% 92,318 >=10.0%
Tier I Capital (to Risk-
Weighted Assets):
United Bankshares 371,907 11.4% 130,191 >=4.0% 195,287 >=6.0%
United National Bank 228,927 9.9% 92,414 >=4.0% 138,621 >=6.0%
United Bank 101,016 10.9% 36,927 >=4.0% 55,391 >=6.0%
Tier I Capital
(to Average Assets):
United Bankshares 371,907 8.5% 176,362 >=4.0% 220,453 >=5.0%
United National Bank 228,927 7.4% 123,510 >=4.0% 154,388 >=5.0%
United Bank 101,016 7.3% 55,334 >=4.0% 69,167 >=5.0%
AS OF DECEMBER 31, 1997:
Total Capital (to Risk-
Weighted Assets):
United Bankshares $383,320 14.1% $217,765 >=8.0% $272,206 >=10.0%
United National Bank 241,783 13.5% 142,930 >=8.0% 178,662 >=10.0%
United Bank 106,770 11.7% 72,845 >=8.0% 91,056 >=10.0%
Tier I Capital (to Risk-
Weighted Assets):
United Bankshares 351,384 12.9% 108,882 >=4.0% 163,323 >=6.0%
United National Bank 219,846 12.3% 71,465 >=4.0% 107,197 >=6.0%
United Bank 97,004 10.7% 36,423 >=4.0% 54,634 >=6.0%
Tier I Capital
(to Average Assets):
United Bankshares 351,384 9.0% 155,512 >=4.0% 194,390 >=5.0%
United National Bank 219,846 8.3% 106,007 >=4.0% 132,509 >=5.0%
United Bank 97,004 7.6% 51,082 >=4.0% 63,852 >=5.0%
NOTE N--FAIR VALUES OF FINANCIAL INSTRUMENTS
The following methods and assumptions were used by United in estimating its fair
value disclosures for financial instruments:
Cash and Cash Equivalents: The carrying amounts reported in the balance sheet
for cash and cash equivalents approximate those assets' fair values.
80
NOTE N--FAIR VALUES OF FINANCIAL INSTRUMENTS - continued
Securities: The estimated fair values of securities are based on quoted market
prices, where available. If quoted market prices are not available, fair values
are based on quoted market prices of comparable instruments.
Loans: The estimated fair values of variable-rate loans that reprice frequently
with no significant change in credit risk are based on carrying values. The fair
values of certain mortgage loans (e.g., one-to-four family residential), credit
card loans, and other consumer loans are based on quoted market prices of
similar loans sold in conjunction with securitization transactions, adjusted for
differences in loan characteristics. The fair values of other loans (e.g.,
commercial real estate and rental property mortgage loans, commercial and
industrial loans, financial institution loans, and agricultural loans) are
estimated using discounted cash flow analyses, using interest rates currently
being offered for loans with similar terms to borrowers of similar credit
worthiness.
Off-Balance Sheet Instruments: Fair values of United's loan commitments are
based on fees currently charged to enter into similar agreements, taking into
account the remaining terms of the agreements and the counterparties' credit
standing. The estimated fair values of these commitments approximate their
carrying values. The fair value of forward contracts for the delivery of
mortgage-backed securities in connection with its mortgage banking activities is
based upon quoted market prices or prices of similar instruments when available.
Deposits: The fair values of demand deposits (e.g., interest and non-interest
checking, regular savings and certain types of money market accounts) are, by
definition, equal to the amount payable on demand at the reporting date (i.e.,
their carrying amounts). The carrying amounts of variable-rate, fixed-term money
market accounts and certificates of deposit approximate their fair values at the
reporting date. Fair values of fixed-rate certificates of deposit are estimated
using a discounted cash flow calculation that applies interest rates currently
being offered on certificates to a schedule of aggregated expected monthly
maturities on time deposits.
Short-term Borrowings: The carrying amounts of federal funds purchased,
borrowings under repurchase agreements, and other short-term borrowings
approximate their fair values.
Federal Home Loan Bank Borrowings: The fair values of United's Federal Home Loan
Bank borrowings are estimated using discounted cash flow analyses, based on
United's current incremental borrowing rates for similar types of borrowing
arrangements
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NOTE N--FAIR VALUES OF FINANCIAL INSTRUMENTS - continued
The estimated fair values of United's financial instruments are summarized
below:
December 31,1998 December 31,1997
------------------------- -------------------------
(In thousands) Carrying Fair Carrying Fair
Amount Value Amount Value
------------------------- -------------------------
Cash and cash equivalents $ 141,298 $ 141,298 $ 190,028 $ 190,028
Securities available for sale 565,165 565,165 611,919 611,919
Securities held to maturity 362,151 367,353 394,816 399,995
Loans 2,652,391 2,736,168 2,689,839 2,777,932
Deposits 3,493,058 3,505,547 3,185,963 3,184,790
Short-term borrowings 249,039 249,039 230,679 230,679
FHLB borrowings 345,867 346,134 230,791 230,789
NOTE O--LINE OF BUSINESS REPORTING
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.
General
Mortgage Community Corporate
(In thousands) Banking Banking and Other Consolidated
- ----------------------------------------------------------------------------------
1998
Net Interest Income $ 2,763 $ 165,813 $ 1,717 $ 170,293
Provision for Loan Losses 25 12,131 12,156
Net Interest Income after
Provision for Loan Losses 2,738 153,682 1,717 158,137
Noninterest Income 24,052 14,727 2,973 41,752
Noninterest Expense 19,872 112,959 5,133 137,964
Income (Loss)
Before Income Taxes 6,918 55,450 (443) 61,925
Income Tax Expense 1,878 15,557 88 17,523
Net Income (Loss) 5,040 39,893 (531) 44,402
Average Total Assets 190,168 4,190,512 (141,872) 4,238,808
- ----------------------------------------------------------------------------------
1997
Net Interest Income $ 1,979 $ 146,045 $ 1,306 $ 149,330
Provision for Loan Losses 19 3,261 3,280
Net Interest Income after
Provision for Loan Losses 1,960 142,784 1,306 146,050
Noninterest Income 14,403 22,658 7 37,068
Noninterest Expense 14,591 86,123 3,138 103,852
Income (Loss)
Before Income Taxes 1,772 79,319 (1,825) 79,266
Income Tax Expense (Benefit) 691 26,957 (643) 27,005
Net Income (Loss) 1,081 52,362 (1,182) 52,261
Average Total Assets 138,363 3,656,891 (112,952) 3,682,302
- ----------------------------------------------------------------------------------
1996
Net Interest Income $ 2,679 $ 134,226 $ 1,480 $ 138,385
Provision for Loan Losses (14) 2,895 2,881
Net Interest Income after
Provision for Loan Losses 2,693 131,331 1,480 135,504
Noninterest Income 9,750 19,871 33 29,654
Noninterest Expense 12,154 90,229 2,002 104,385
Income (Loss)
Before Income Taxes 289 60,973 (489) 60,773
Income Tax Expense (Benefit) 149 20,985 (80) 21,054
Net Income (Loss) 140 39,988 (409) 39,719
Average Total Assets 100,858 3,373,117 (121,381) 3,352,594
- ----------------------------------------------------------------------------------
General corporate and other includes intercompany eliminations.
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NOTE P - QUARTERLY FINANCIAL DATA (UNAUDITED)
Quarterly financial data for 1998 and 1997 is summarized below (dollars in
thousands except for per share data):
1st Quarter 2nd Quarter 3rd Quarter 4th Quarter
----------- ----------- ----------- -----------
1998
- ----
Interest income $76,259 $80,594 $83,920 $84,874
Interest expense 36,235 38,331 40,348 40,440
Net interest income 40,024 42,263 43,572 44,434
Provision for loan losses 2,080 5,257 3,316 1,503
Income (loss) from mortgage
banking operations 5,196 6,392 6,645 (4,022)
Other noninterest income 8,816 5,523 6,825 6,377
Noninterest expense 29,695 40,439 30,988 36,842
Income taxes 7,840 935 6,397 2,351
Net income (2) 14,421 7,547 16,341 6,093
Per share data:
- ---------------
Average shares outstanding (000s):
Basic 42,397 42,517 42,590 43,061
Diluted 43,271 43,462 43,508 43,771
Net income per share:
Basic $0.34 $0.18 $0.38 $0.14
Diluted $0.33 $0.17 $0.38 $0.14
Dividends per share (1) $0.18 $0.18 $0.19 $0.20
1st Quarter 2nd Quarter 3rd Quarter 4th Quarter
----------- ----------- ----------- -----------
1997
- ----
Interest income $65,220 $67,604 $72,000 $75,628
Interest expense 29,770 31,405 34,145 35,802
Net interest income 35,450 36,199 37,855 39,826
Provision for loan losses 634 608 1,051 987
Income from mortgage
banking operations 2,973 2,896 5,533 3,693
Other noninterest income 4,896 5,130 5,878 6,069
Noninterest expense 23,714 23,894 28,073 28,171
Income taxes 6,286 6,779 6,882 7,058
Net income 12,685 12,944 13,260 13,372
Per share data:
- ---------------
Average shares outstanding (000s):
Basic 42,067 41,925 41,941 42,123
Diluted 42,792 42,583 42,922 42,974
Net income per share:
Basic $0.30 $0.31 $0.32 $0.32
Diluted $0.30 $0.30 $0.31 $0.31
Dividends per share (1) $0.16 $0.17 $0.17 $0.18
(1) Cash dividends are the amounts declared by United and do not include cash
dividends of acquired subsidiaries prior to the dates of consummation.
(2) For further information see the related discussion "Quarterly Results"
included in Management's Discussion and Analysis.
83