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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, 2001
Commission File Number: 0-13322
United Bankshares, Inc.
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(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
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(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
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(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, 2002 was approximately $1,054,678,000.
As of February 28, 2002, United Bankshares, Inc. had 42,893,103 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, 2001
portions of which are incorporated by reference in Parts I, II and IV of this
Form 10-K.
2. Definitive Proxy Statement dated April 8, 2002 for the 2002 Annual
Shareholders' Meeting to be held on May 20, 2002, portions of which are
incorporated by reference in Part III of this Form 10-K.
Page 1 of 108 pages. Index to Exhibits is on page 29 .
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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, 2001, nor the proxy statement for the
annual United shareholders' meeting had been mailed to shareholders.
CROSS-REFERENCE INDEX
Page
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Part I
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Item 1. BUSINESS................................................... 3
Item 2. PROPERTIES................................................. 3
Item 3. LEGAL PROCEEDINGS.......................................... 10
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS........ 10
Part II
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Item 5. MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED
SHAREHOLDER MATTERS........................................ 11
Item 6. SELECTED FINANCIAL DATA.................................... 13
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS........................ 13
Item 7a. QUALITATIVE AND QUANTITATIVE DISCLOSURES ABOUT
MARKET RISK................................................ 13
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA................ 23
Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
ON ACCOUNTING AND FINANCIAL DISCLOSURES.................... 23
Part III
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Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT......... 24
Item 11. EXECUTIVE COMPENSATION..................................... 24
Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT................................................. 24
Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS............. 24
Part VI
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Item 14. EXHIBITS, FINANCIAL STATEMENTS, SCHEDULES AND REPORTS
ON FORM 8-K............................................... 25
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.
DESCRIPTION OF UNITED BANKSHARES, INC.
Organizational History and Subsidiaries
- ---------------------------------------
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. Since its formation in 1982, United has acquired
twenty-five banking institutions. At December 31, 2001, United had two banking
subsidiaries, United National Bank (UNB) and United Bank. At the close of
business on March 22, 2002, UNB converted its national banking association
charter to a State of West Virginia charter with membership in the Federal
Reserve System. Upon conversion, United has two banking subsidiaries (the
Banking Subsidiaries) each named United Bank, one operating under the laws of
West Virginia and the other operating under the laws of Virginia. United also
owns nonbank subsidiaries that engage in mortgage banking, asset management,
investment banking and financial planning.
Offices
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United is headquartered in the United Center at 500 Virginia Street, East,
Charleston, West Virginia. United's executive offices are located in
Parkersburg, West Virginia at Fifth and Avery Streets. United operates
eighty-three offices--fifty offices located throughout West Virginia, thirty
offices throughout the Northern Virginia, Maryland and Washington, D.C. areas
and three in Ohio. United owns all its West Virginia facilities except for two
in the Parkersburg area, three in the Wheeling area, three in the Charleston
area, two in the Beckley area and one each in Summersville and Clarksburg, all
of which are leased under operating leases. United leases all of its facilities
under operating lease agreements in the Northern Virginia, Maryland and
Washington, D.C. areas except for two offices, one each in Fairfax and Vienna,
Virginia which are owned facilities.
Employees
- ---------
As of December 31, 2001 United and its subsidiaries had approximately 1,361
full-time equivalent employees and officers. A collective bargaining unit
represents none of these employees, and management considers employee relations
to be excellent.
3
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 and mortgage banking.
As of December 31, 2001, United's consolidated assets approximated $5.6 billion
and total shareholders' equity approximated $507 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.
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, the Banking
Subsidiaries offer credit card services including accounts issued under the name
of certain correspondent banks.
The Banking Subsidiaries each maintain 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. United
Bank (WV) 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 United Bank
(WV), 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.
United Bank (WV) is a member of a regional network of automated teller
machines known as the MAC ATM network while United Bank (VA) participates in the
MOST network. Through MAC and MOST, the Banking Subsidiaries are participants in
a network known as Cirrus, which provides banking on a nationwide basis.
Lending Activities
- ------------------
United's loan portfolio, net of unearned income, increased $309.8 million
to $3.50 billion in 2001 due
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mainly to the acquisition of Century Bancshares, Inc. (Century) in the fourth
quarter of 2001. The loan portfolio is comprised of commercial, real estate and
consumer loans including credit card and home equity loans. Including the
acquisition of Century, commercial and commercial real estate loans increased
$97.2 million or 17.2% and $180.1 million or 25.3%, respectively. Consumer
loans, net of unearned income, increased $37.5 million or 11.9% while
residential real estate loans decreased $39.2 million or 2.9%.
As of December 31, 2001, approximately $321 million or 7.9% of United's
loan portfolio were real estate loans that met the regulatory definition of a
high loan-to-value loan. A high loan-to-value real estate loan is defined as any
loan, line of credit, or combination of credits secured by liens on or interests
in real estate that equals or exceeds 90% of the real estate's appraised value,
unless the loan has other appropriate credit support. Appropriate credit support
may include mortgage insurance, readily marketable collateral, or other
acceptable collateral that reduces the loan-to-value ratio below 90%.
Commercial Loans
- ----------------
The commercial loan portfolio consists of loans to corporate borrowers
primarily in small to mid-size industrial and commercial companies, as well as
automobile dealers, service, retail and wholesale merchants. Collateral securing
these loans include 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 credit analysis 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
- --------------
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
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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 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, 2001, the balance of mortgage loans being
serviced by United for others was insignificant.
Secondary Markets
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United Bank (WV) and George Mason Mortgage, LLC (GMMC), a wholly-owned
subsidiary of United Bank (VA), 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 United Bank (WV)'s originations are predominately
in its West Virginia markets. Mortgage loan originations are generally intended
to be sold in the secondary market.
During 2001, United originated $2.3 billion of real estate loans for sale
in the secondary market and sold $2.2 billion of loans designated as held for
sale in the secondary market. Proceeds received from the sales of these loans
during 2001 were $2.2 billion.
The principal sources of revenue from United's mortgage banking business
are: (i) loan origination
6
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.
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 that 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.
United recognized net losses of $518 thousand and $13.86 million for the
years of 2001 and 2000, respectively, from the available for sale portfolio. A
significant portion of the losses for 2000 was the result of United's
restructuring of its available for sale investment portfolio late during the
fourth quarter of 2001. United used a majority of the proceeds of approximately
$433 million from the sales to acquire investment securities that provided an
increased yield above those sold.
At December 31, 2001, 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, Brooke, Hancock, Ohio, Marshall, Gilmer, Harrison, 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, Alexandria, Loudoun, Prince William and Fairfax Counties
in Virginia, located adjacent to the Washington D.C. area, which is in close
proximity to Jefferson and Berkeley Counties in West Virginia's eastern
panhandle. United competes in Ohio markets because of the close proximity to the
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,
7
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, 2001, there were 60 bank holding companies operating in
the State of West Virginia registered with the Federal Reserve System and the
West Virginia Board of Banking and Financial Institutions and 74 bank holding
companies operating 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
- -----------------------------------------------
West Virginia's unemployment rate for all of 2001 averaged 4.9%, which was
the lowest average annual unemployment rate since the current statistical system
began in 1976, according to available information from the West Virginia Bureau
of Employment Programs. 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 17% of the entire manufacturing workforce
and 29% of the manufacturing wages, according to West Virginia state records.
This diversified economy has contributed to a positive trend in unemployment
rates in recent years as the state's overall unemployment rate has declined from
10.5% in 1991 to 4.5% in December 2001. West Virginia's unemployment rate for
all of 2001 averaged 4.9%, which was the lowest average annual unemployment rate
since the current statistical system began in 1976, 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 2001 was 3.6%. The 3.6%
December 2001 unemployment rate, while above December 2000's 1.9% rate, was
still well below the U.S. December 2001 unemployment level of 5.4%. The 2001
unemployment rate average of 3.0% compared to 2.2% for 2000. Most of the 2001
unemployment increase came in the second half of the year, especially after
September 11. The Northern Virginia metropolitan area's unemployment rate was at
2.7%, second lowest among Virginia's eight metropolitan areas, as of December
2001.
Regulation and Supervision
- --------------------------
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").
8
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.
On November 12, 1999 the Gramm-Leach-Bliley Act was signed into law. The
Act modernizes the regulatory framework for financial services in the United
States and allows banks, securities firms, and insurance companies to affiliate
more directly than they have been permitted to do in the past. Under the Act, a
bank holding company may become a "financial holding company" to offer a much
broader range of financial products and services than had been previously
possible under the traditional banking structure, provided that the bank holding
company meets certain certification requirements of the Federal Reserve. United
is presently in the process of analyzing the opportunities, requirements, and
pitfalls the Act presents.
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 that
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.
The Banking Subsidiaries, as state member banks, are subject to
supervision, examination and regulation by the Federal Reserve System, and as
such, are subject to applicable provisions of the Federal Reserve Act and
regulations issued thereunder. Each bank is subject to regulation by their state
banking authority.
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 regulation by the FDIC.
9
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, 2001, 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.
10
UNITED BANKSHARES, INC.
FORM 10-K, PART II
Item 5. Market for Registrant's Common Stock and Related Shareholder Matters
Stock
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As of December 31, 2001, 100,000,000 shares of common stock, par value
$2.50 per share, were authorized for United, of which 43,381,769 were issued,
including 455,258 shares held as treasury shares. The outstanding shares are
held by approximately 11,474 shareholders of record as of December 31, 2001. 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
- ---------
The shareholders of United are entitled to receive dividends when and as
declared by its Board of Directors. Dividends are paid quarterly. Dividends were
$0.91 per share in 2001, $0.84 per share in 2000 and $0.82 per share in 1999.
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.
Payment of dividends by United is dependent upon payment of dividends to it
by its subsidiary banks.
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Payment of dividends by United's state member banks 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 the FRB is required when a 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 FRB may prohibit dividends
if it deems the payment to be an unsafe or unsound banking practice. The FRB has
issued guidelines for dividend payments by state member banks emphasizing that
proper dividend size depends on the bank's earnings and capital. See Note O -
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 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:
2002 Dividends High Low
---- --------- ------ ------
First Quarter through February 28, 2002 (1) $29.50 $27.56
2001
----
Fourth Quarter $0.23 $29.50 $26.25
Third Quarter $0.23 $28.33 $23.20
Second Quarter $0.23 $27.00 $21.55
First Quarter $0.22 $23.25 $19.44
2000
----
Fourth Quarter $0.21 $22.13 $17.25
Third Quarter $0.21 $20.88 $18.38
Second Quarter $0.21 $22.38 $16.38
First Quarter $0.21 $24.44 $17.00
(1) On February 25, 2002, United declared a dividend of $0.23 per share, payable
April 1, 2002, to shareholders of record as of March 8, 2002.
12
UNITED BANKSHARES, INC.
FORM 10-K, PART II
Item 6. Selected Financial Data
Information relating to selected financial data on page 43 of the Annual
----
Report to Shareholders for the year ended December 31, 2001, 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 44 through 57 inclusive, of the Annual Report to
---- ----
Shareholders for the year ended December 31, 2001, is incorporated herein by
reference.
Item 7a. Quantitative and Qualitative Disclosures About Market Risk
Quantitative and Qualitative Disclosures About Market Risk on pages 50
----
through 52 inclusive, of the Annual Report to Shareholders for the year ended
----
December 31, 2001, is incorporated herein by reference.
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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, 2001, 2000
and 1999 with the interest and rate earned or paid on such amount.
Year Ended Year Ended
December 31, 2001 December 31, 2000
---------------------------- -----------------------------
Average Avg. Average Avg.
Balance Interest Rate Balance Interest Rate
---------------------------- -----------------------------
ASSETS
Earning Assets:
Federal funds sold, securities
repurchased under agreements to
resell & other short-term investments $ 15,637 $ 674 4.31% $ 17,362 $ 1,171 6.74%
Investment Securities:
Taxable 1,187,212 77,390 6.52% 1,163,824 79,190 6.80%
Tax-exempt (1) (2) 193,758 14,856 7.67% 198,943 14,282 7.18%
---------------------------- -----------------------------
Total Securities 1,380,970 92,246 6.68% 1,362,767 93,472 6.86%
Loans, net of unearned
Income (1) (2) (3) 3,421,881 279,330 8.16% 3,320,065 294,297 8.86%
Allowance for loan losses (41,790) (39,437)
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Net loans 3,380,091 8.26% 3,280,628 8.98%
---------------------------- -----------------------------
Total earning assets 4,776,698 $372,250 7.79% 4,660,757 $388,940 8.34%
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Other assets 264,498 275,848
---------- ----------
TOTAL ASSETS $5,041,196 $4,936,605
========== ==========
LIABILITIES
Interest-Bearing Funds:
Interest-bearing deposits $2,911,237 $117,605 4.04% $2,775,938 $125,847 4.53%
Federal funds purchased, repurchase
agreements & other short-term
borrowings 410,531 14,188 3.46% 370,679 19,898 5.37%
FHLB advances 696,346 43,714 6.28% 851,486 52,021 6.11%
---------------------------- -----------------------------
Total Interest-Bearing Funds 4,018,114 175,507 4.37% 3,998,103 197,766 4.95%
-------- --------
Demand deposits 495,681 473,205
Accrued expenses and other liabilities 70,568 55,992
---------- ----------
TOTAL LIABILITIES 4,584,363 4,527,300
SHAREHOLDERS' EQUITY 456,833 409,305
---------- ----------
TOTAL LIABILITIES AND
SHAREHOLDERS' EQUITY $5,041,196 $4,936,605
========== ==========
NET INTEREST INCOME $196,743 $191,174
======== ========
INTEREST SPREAD 3.42% 3.40%
NET INTEREST MARGIN 4.12% 4.11%
Year Ended
December 31, 1999
----------------------------
Average Avg.
Balance Interest Rate
----------------------------
ASSETS
Earning Assets:
Federal funds sold, securities
repurchased under agreements to
resell & other short-term investments $ 8,390 $ 522 6.22%
Investment Securities:
Taxable 1,295,851 85,392 6.59%
Tax-exempt (1) (2) 202,435 14,402 7.11%
----------------------------
Total Securities 1,498,286 99,794 6.66%
Loans, net of unearned
Income (1) (2) (3) 3,110,785 262,622 8.44%
Allowance for loan losses (39,615)
----------
Net loans 3,071,170 8.55%
----------------------------
Total earning assets 4,577,846 $362,938 7.93%
--------
Other assets 289,675
----------
TOTAL ASSETS $4,867,521
==========
LIABILITIES
Interest-Bearing Funds:
Interest-bearing deposits $2,890,065 $122,651 4.24%
Federal funds purchased, repurchase
agreements & other short-term
borrowings 367,342 17,104 4.66%
FHLB advances 653,579 34,647 5.30%
----------------------------
Total Interest-Bearing Funds 3,910,986 174,402 4.46%
--------
Demand deposits 468,238
Accrued expenses and other liabilities 68,478
----------
TOTAL LIABILITIES 4,447,702
SHAREHOLDERS' EQUITY 419,819
----------
TOTAL LIABILITIES AND
SHAREHOLDERS' EQUITY $4,867,521
==========
NET INTEREST INCOME $188,536
========
INTEREST SPREAD 3.47%
NET INTEREST MARGIN 4.12%
(1) The interest income and the yields on federally nontaxable loans and
investment securities are presented on a tax-equivalent basis using
the statutory federal income tax rate of 35%.
(2) The interest income and the yields on state nontaxable loans and
investment securities are presented on a tax-equivalent basis using
the statutory state income tax rate of 9%.
(3) Nonaccruing loans are included in the daily average loan amounts
outstanding.
14
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).
2001 Compared to 2000 2000 Compared to 1999
---------------------------------------- ----------------------------------------
Increase (Decrease) Due to Increase (Decrease) Due to
---------------------------------------- ----------------------------------------
Rate/ Rate/
Volume Rate Volume Total Volume Rate Volume Total
-------- -------- ------- -------- -------- ------- ------ -------
Interest income:
Federal funds sold, securities purchased
under agreements to resell and other
short-term investments ($116) ($423) $ 42 ($497) $ 558 $ 44 $ 47 $ 649
Investment securities:
Taxable 1,591 (3,325) (67) (1,801) (8,701) 2,782 (283) (6,202)
Tax exempt (1), (2) (372) 972 (25) 575 (249) 131 (2) (120)
Loans (1),(2),(3) 8,923 (23,187) (703) (14,967) 17,911 12,885 879 31,675
------- -------- ------- -------- -------- ------- ------ -------
TOTAL INTEREST INCOME 10,026 (25,963) (753) (16,690) 9,519 15,842 641 26,002
------- -------- ------- -------- -------- ------- ------ -------
Interest expense:
Interest-bearing deposits $ 6,134 ($13,708) ($668) ($8,242) ($4,843) $ 8,370 ($331) $ 3,196
Federal funds purchased, repurchase
agreements, and other short-term
borrowings 2,139 (7,087) (762) (5,710) 155 2,615 24 2,794
FHLB advances & other
long-term borrowings (9,478) 1,432 (261) (8,307) 10,491 5,283 1,600 17,374
------- -------- ------- -------- -------- ------- ------ -------
TOTAL INTEREST EXPENSE (1,205) (19,363) (1,691) (22,259) 5,803 16,268 1,293 23,364
------- -------- ------- -------- -------- ------- ------ -------
NET INTEREST INCOME $11,231 ($6,600) $ 938 $ 5,569 $ 3,716 ($426) ($652) $ 2,638
======= ======== ======= ======== ======== ======= ====== =======
(1) Yields and interest income on federally tax exempt loans and investment
securities are computed on a fully tax-equivalent basis using the statutory
federal income tax rate of 35%.
(2) Yields and interest income on state tax exempt loans and investment
securities are computed on a fully tax-equivalent basis using the statutory
state income tax rate of 9%.
(3) Nonaccruing loans are included in the daily average loan amounts
outstanding.
15
UNITED BANKSHARES, INC. AND SUBSIDIARIES
LOAN PORTFOLIO
TYPES OF LOANS
The following is a summary of loans outstanding at December 31:
2001 2000 1999 1998 1997
----------- ----------- ----------- ----------- -----------
(In thousands)
Commercial, financial
and agricultural $ 662,070 $ 564,887 $ 535,116 $ 508,601 $ 487,706
Real estate mortgage 2,293,318 2,148,751 2,134,370 1,696,233 1,693,819
Real estate construction 195,063 164,505 144,634 141,026 150,429
Consumer 354,934 319,351 363,272 313,464 364,951
Less: Unearned interest (3,051) (5,000) (7,296) (6,933) (7,066)
----------- ----------- ----------- ----------- -----------
Total loans 3,502,334 3,192,494 3,170,096 2,652,391 2,689,839
Allowance for loan losses (47,408) (40,532) (39,599) (39,189) (31,936)
----------- ----------- ----------- ----------- -----------
TOTAL LOANS, NET $ 3,454,926 $ 3,151,962 $ 3,130,497 $ 2,613,202 $ 2,657,903
=========== =========== =========== =========== ===========
Loans held for sale $ 368,625 $ 203,831 $ 117,825 $ 720,607 $ 97,619
=========== =========== =========== =========== ===========
The following is a summary of loans outstanding as a percent of total loans at
December 31:
2001 2000 1999 1998 1997
------ ------ ------ ------ ------
Commercial, financial
and agricultural 18.90% 17.69% 16.88% 19.18% 18.13%
Real estate mortgage 65.48% 67.31% 67.33% 63.95% 62.97%
Real estate construction 5.57% 5.15% 4.56% 5.32% 5.59%
Consumer 10.05% 9.85% 11.23% 11.55% 13.31%
------ ------ ------ ------ ------
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,
2001:
Less Than One To Greater Than
One Year Five Years Five Years Total
--------- ---------- ------------ --------
(In thousands)
Commercial, financial
and agricultural $356,813 $184,464 $120,793 $662,070
Real estate construction 195,063 195,063
-------- -------- -------- --------
Total $551,876 $184,464 $120,793 $857,133
======== ======== ======== ========
16
UNITED BANKSHARES, INC. AND SUBSIDIARIES
At December 31, 2001, 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 $ 99,120 $ 86,427
Outstanding with adjustable rates 85,344 34,366
-------- --------
$184,464 $120,793
======== ========
There were no real estate construction loans with maturities greater than one
year.
RISK ELEMENTS
Nonperforming Assets
Nonperforming assets include loans and securities on which no interest is
currently being accrued, principal or interest has been in default for a period
of 90 days or more and, in the case of 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 or securities, groups of
loans or securities, or segments of the loan or investment portfolio not
included below or disclosed elsewhere herein where there are serious doubts as
to the ability of the borrowers or issuers to comply with the present repayment
terms of the debt. The following table summarizes nonperforming assets for the
indicated periods.
December
-----------------------------------------------
2001 2000 1999 1998 1997
------- ------- ------- ------- -------
(In thousands)
Nonaccrual loans $ 8,068 $ 8,131 $12,327 $ 9,139 $ 5,815
Loans which are contractually past due 90
days or more as to interest or
principal,and are still accruing interest 9,522 4,717 8,415 9,528 12,877
------- ------- ------- ------- -------
Total Nonperforming Loans 17,590 12,848 20,742 18,667 18,692
Nonaccrual investment securities 10,000
Other real estate owned 2,763 2,109 3,764 3,850 2,519
------- ------- ------- ------- -------
TOTAL NONPERFORMING ASSETS $30,353 $14,957 $24,506 $22,517 $21,211
======= ======= ======= ======= =======
Loans and securities are designated as nonaccrual when, in the opinion of
management, the collection of principal or interest is doubtful. This generally
occurs when a loan or security becomes 90 days past due as to principal or
interest unless the loan or security 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, in the case of loans, unpaid
interest accrued in prior years is charged to the allowance for loan losses. See
Note E to the consolidated financial statements for additional information
regarding nonperforming loans, impaired loans and credit risk concentration.
17
UNITED BANKSHARES, INC. AND SUBSIDIARIES
INVESTMENT PORTFOLIO
The following is a summary of the amortized cost of held to maturity securities
at December 31,:
2001 2000 1999
-------- -------- --------
(In thousands)
U.S. Treasury and other U.S. Government
agencies and corporations $ 29,935 $ 55,724 $ 56,734
States and political subdivisions 89,540 93,006 97,824
Mortgage-backed securities 4,278 70,279 90,850
Other 157,683 161,059 19,782
-------- -------- --------
TOTAL HELD TO MATURITY SECURITIES $281,436 $380,068 $265,190
======== ======== ========
The following is a summary of the amortized cost of available for sale
securities at December 31,:
2001 2000 1999
---------- -------- ----------
(In thousands)
U.S. Treasury securities and obligations of
U.S. Government agencies and corporations $ 61,082 $160,702 $ 276,558
States and political subdivisions 62,188 52,095 48,914
Mortgage-backed securities 861,799 574,292 693,828
Marketable equity securities 8,254 8,551 8,369
Other 140,392 69,723 229,277
---------- -------- ----------
TOTAL AVAILABLE FOR SALE SECURITIES $1,133,715 $865,363 $1,256,946
========== ======== ==========
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 net unrealized gains of $15,800 and $2,318 on all mortgage-backed
securities at December 31, 2001 and 2000, respectively.
The following table sets forth the maturities of all securities at December 31,
2001, 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
------- ----- ------- ----- ------- ----- -------- -----
(Dollars in thousands)
U.S. Treasury and other U.S.
Government agencies and
corporations $21,892 4.00% $18,538 5.88% $25,527 6.10% $ 25,423 7.12%
States and political subdivisions(1) 1,922 8.28% 13,936 7.97% 53,129 7.32% 82,007 7.54%
Mortgage-backed securities 673 7.50% 11,453 6.25% 94,859 6.49% 774,760 6.93%
Other (2) 50 8.00% 22,174 6.31% 23,456 6.61% 258,917 6.65%
(1) Tax-equivalent adjustments (using a 35% federal rate) have been made in
calculating yields on obligations of states and political subdivisions.
(2) Includes marketable equity securities available for sale.
NOTE: There are no securities with a single issuer whose book value in the
aggregate exceeds 10% of total shareholders' equity.
18
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
--------- ----------------
(Dollars in thousands)
At December 31:
2001 $43,831 $477,796
2000 15,720 313,349
1999 44,120 349,129
Weighted average interest rate at year end:
2001 1.7% 2.0%
2000 6.6% 5.2%
1999 5.0% 5.0%
Maximum amount outstanding at any month's end:
2001 $43,831 $503,887
2000 45,515 417,866
1999 64,921 440,281
Average amount outstanding during the year:
2001 $16,290 $390,545
2000 15,332 351,816
1999 27,774 335,908
Weighted average interest rate
During the year:
2001 2.9% 3.5%
2000 6.3% 5.3%
1999 5.4% 4.6%
At December 31, 2001, repurchase agreements include $346,957 in overnight
accounts. The remaining balance principally consists of agreements having
maturities under 2 years. The rates offered on these funds vary according to
movements in the federal funds and short-term investment market rates.
19
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:
2001 2000 1999
----------------- ----------------- -----------------
Amount Rate Amount Rate Amount Rate
---------- ---- ---------- ---- ---------- ----
(Dollars in thousands)
Noninterest bearing
demand deposits $ 495,681 $ 473,205 $ 468,238
Interest bearing
demand deposits 463,925 0.91% 354,771 1.35% 335,231 1.60%
Savings deposits 759,424 2.71% 784,005 3.65% 865,351 3.36%
Time deposits 1,687,888 5.50% 1,637,162 5.65% 1,689,483 5.28%
---------- ---------- ----------
TOTAL $3,406,918 4.04% $3,249,143 4.53% $3,358,303 4.24%
========== ========== ==========
Maturities of time certificates of deposit of $100,000 or more outstanding at
December 31, 2001 are summarized as follows:
(In thousands)
3 months or less $ 91,024
Over 3 through 6 months 90,804
Over 6 through 12 months 108,261
Over 12 months 108,843
--------
TOTAL $398,932
========
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:
2001 2000 1999
----- ----- -----
Return on average assets 1.59% 1.19% 1.44%
Return on average equity 17.51% 14.41% 16.73%
Dividend payout ratio (1) 47.63% 59.83% 50.35%
Average equity to average
assets ratio 9.06% 8.29% 8.62%
(1) Based on historical results of United before the effects of restatements for
pooling of interests business combinations.
20
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:
2001 2000 1999 1998 1997
---------- ---------- ---------- ---------- ----------
(Dollars in thousands)
Balance of allowance for possible loan
losses at beginning of year $ 40,532 $ 39,599 $ 39,189 $ 31,936 $ 29,376
Allowance of purchased company at date
of acquisition 4,673 2,695
Loans charged off:
Commercial, financial and agricultural 2,578 2,482 3,896 800 1,352
Real estate 7,090 10,570 3,290 3,070 447
Real estate construction 76
Consumer and other 2,615 2,793 2,050 2,400 2,436
---------- ---------- ---------- ---------- ----------
TOTAL CHARGE-OFFS 12,359 15,845 9,236 6,270 4,235
Recoveries:
Commercial, financial and agricultural 681 374 341 729 292
Real estate 557 226 156 217 263
Real estate construction 1
Consumer and other 490 433 349 421 265
---------- ---------- ---------- ---------- ----------
TOTAL RECOVERIES 1,729 1,033 846 1,367 820
---------- ---------- ---------- ---------- ----------
NET LOANS CHARGED OFF 10,630 14,812 8,390 4,903 3,415
Provision for loan losses 12,833 15,745 8,800 12,156 3,280
---------- ---------- ---------- ---------- ----------
BALANCE OF ALLOWANCE FOR
LOAN LOSSES AT END OF YEAR $ 47,408 $ 40,532 $ 39,599 $ 39,189 $ 31,936
========== ========== ========== ========== ==========
Loans outstanding at the end of period
(gross) (1) $3,505,385 $3,197,494 $3,170,096 $2,652,391 $2,689,839
Average loans outstanding during
period (net of unearned income)(1) $3,218,191 $3,198,090 $2,975,116 $2,668,460 $2,472,293
Net charge-offs as a percentage of
average loans outstanding 0.33% 0.46% 0.28% 0.18% 0.14%
Allowance for loan losses as
a percentage of nonperforming loans 269.5% 315.5% 190.9% 209.9% 170.9%
(1) Excludes loans held for sale.
21
UNITED BANKSHARES, INC. AND SUBSIDIARIES
SUMMARY OF LOAN LOSS EXPERIENCE--Continued
Allocation of allowance for loan losses
December 31
---------------------------------------------------
2001 2000 1999 1998 1997
Commercial, financial and
Agricultural $22,605 $12,762 $14,432 $13,772 $10,115
Real estate 10,795 12,713 9,861 3,587 3,452
Real estate construction 2,097 1,372 754 1,086 674
Consumer and other 4,004 3,533 2,735 3,747 3,221
Unallocated 7,907 10,152 11,817 16,997 14,474
------- ------- ------- ------- -------
Total $47,408 $40,532 $39,599 $39,189 $31,936
======= ======= ======= ======= =======
22
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 11 through 41
-- --
inclusive of the Annual Report to Shareholders for the year ended December 31,
2001, is incorporated herein by reference.
(b) - SUPPLEMENTARY FINANCIAL INFORMATION
(1) Selected Quarterly Financial Data
Information relating to selected quarterly financial data on page 42 of the
--
Annual Report to Shareholders for the year ended December 31, 2001, is
incorporated herein by reference.
(2) Information on the Effects of Changing Prices
Information relating to effects of changing prices on page 49 of the Annual
--
Report to Shareholders for the year ended December 31, 2001, 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.
23
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 4 inclusive, pages 14 though 16 inclusive, and page 19 , of the
- - -- -- --
Proxy Statement for the 2002 Annual Shareholders' Meeting is incorporated herein
by reference.
Item 11. EXECUTIVE COMPENSATION
Information regarding executive compensation on pages 10 through 13
-- --
inclusive, of the Proxy Statement for the 2002 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 4 inclusive and pages 9 and 11 , of the Proxy
- - - --
Statement for the 2002 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 , 7 , 8 , and 13 of the Proxy Statement for the 2002 Annual
- - - --
Shareholders' Meeting is incorporated herein by reference.
24
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,
2001 at Item 8a. Page references are to such Annual report.
Financial Statements: Page References
- -------------------- ---------------
Report of Independent Auditors............................... 11
Consolidated Balance Sheets.................................. 12
Consolidated Statements of Income............................ 13
Consolidated Statements of Changes in Shareholders' Equity... 14
Consolidated Statements of Cash Flows........................ 15
Notes to Consolidated Financial Statements................... 16
(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 29 of this
--
Form 10-K.
(b) Reports on Form 8-K
On December 10, 2001, United Bankshares, Inc. filed a Current
Report under Items 5 and 7 to report the completion of its
acquisition of Century Bancshares, Inc.
On January 22, 2002, United Bankshares, Inc. filed a Current
Report under Items 5 and 7 to report the results of operations
for the fourth quarter and year of 2002.
On February 28, 2002, United Bankshares, Inc. filed a Current
Report under Items 5 and 7 to announce a stock repurchase plan.
25
(c) Exhibits -- The exhibits to this Form 10-K begin on page 79.
--
(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.
26
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, Director, March 26, 2002
- ---------------------------------- and Chief Executive Officer
/s/ Steven E. Wilson Chief Financial Officer March 26, 2002
- ---------------------------------- Chief Accounting Officer
/s/ F.T. Graff, Jr. Director March 26, 2002
- ----------------------------------
/s/ Theodore J. Georgelas Director March 26, 2002
- ----------------------------------
/s/ I.N. Smith, Jr. Director March 26, 2002
- ----------------------------------
/s/ P. Clinton Winter, Jr. Director March 26, 2002
- ----------------------------------
/s/ Warren A. Thornhill, III Director March 26, 2002
- ----------------------------------
/s/ G. Ogden Nutting Director March 26, 2002
- ----------------------------------
/s/ Russell L. Isaacs Director March 26, 2002
- ---------------------------------
/s/ William C. Pitt, III Director March 26, 2002
- ----------------------------------
/s/ James W. Word, Jr. Director March 26, 2002
- ----------------------------------
/s/ Joseph S. Bracewell Director March 26, 2002
- ----------------------------------
27
SIGNATURES
(continued)
Signatures Title Date
/s/ John M. McMahon Director March 26, 2002
- ----------------------------------
/s/ Alan E. Groover Director March 26, 2002
- ----------------------------------
/s/ Thomas J. Blair, III Director March 26, 2002
- ----------------------------------
/s/ H. Smoot Fahlgren Director March 26, 2002
- ----------------------------------
/s/ Harry L. Buch Director March 26, 2002
- ----------------------------------
28
UNITED BANKSHARES, INC.
FORM 10-K
INDEX TO EXHIBITS
Item 14.
Sequential
S-K Item 601 Page
Description Table Reference Number (a)
- ----------- --------------- ----------
Articles of Incorporation and
Bylaws: (3)
(a) Bylaws (e)
(b) Articles of Incorporation (d)
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 (10.1) 79
(c) Supplemental Retirement
Agreement with
Richard M. Adams (10.2) 93
(d) Lease on Branch Office in
Charleston Town Center,
Charleston, West Virginia (b)
(e) Lease on United Center,
Charleston, West Virginia (f)
(f) Employment Contract with
Douglass H. Adams (c)
29
Sequential
S-K Item 601 Page
Description Table Reference Number (a)
- ----------- --------------- ----------
(g) Data processing contract
with FISERV (j)
(h) Supplemental Retirement
Contract with
Douglass H. Adams (g)
(i) Executive Officer Change (h)
of Control Agreements (j)
(j) Employment Contract with
Bernard H. Clineburg (i)
(k) Employment Contract with
Joseph S. Bracewell (10.3) 101
Statement Re: Computation of
Ratios (12) 106
Annual Report to Security Holders,
et al. (13) 32
Letter Re: Change in accounting
principles (18) N/A
Previously Unfiled Documents (19) N/A
Subsidiaries of the Registrant (21) 107
Published Report Regarding Matters
Submitted to a Vote of Security
Holders (22) N/A
Consent of Ernst & Young LLP (23) 108
30
Sequential
S-K Item 601 Page
Description Table Reference Number (a)
- ----------- --------------- ----------
Power of Attorney (24) N/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 Part II of Form S-4
Registration Statement of United Bankshares, Inc., Registration No.
33-19968 filed February 3, 1988
(d) Incorporated into this filing by reference to Exhibits to the 1989 10-K for
United Bankshares, Inc., File No. 0-13322
(e) Incorporated into this filing by reference to Exhibits to the 1990 10-K for
United Bankshares, Inc., File No. 0-13322
(f) Incorporated into this filing by reference to Exhibits to the 1991 10-K for
United Bankshares, Inc., File No. 0-13322
(g) Incorporated into this filing by reference to Exhibits to the 1992 10-K for
United Bankshares, Inc., File No. 0-13322
(h) Incorporated into this filing by reference to Exhibits to the 1993 10-K for
United Bankshares, Inc., File No. 0-13322
(i) 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
(j) Incorporated into this filing by reference to Exhibits to the 2000 10-K for
United Bankshares, Inc., File No. 0-13322
31
UNITED BANKSHARES, INC. AND SUBSIDIARIES
SELECTED FINANCIAL DATA
(Dollars in thousands, except per share data)
Five Year Summary
------------------------------------------------------------------
2001 2000 1999 1998 1997
---------- ---------- ---------- ---------- ----------
Summary of Operations:
Total interest income $ 360,610 $ 377,847 $ 354,665 $ 325,647 $ 280,452
Total interest expense 175,507 197,766 174,402 155,354 131,122
Net interest income 185,103 180,081 180,263 170,293 149,330
Provision for loan losses 12,833 15,745 8,800 12,156 3,280
Other income 62,205 33,786 51,078 41,752 37,068
Other expense 115,745 110,422 117,519 137,964 103,852
Income taxes 38,739 28,724 34,774 17,523 27,005
Net income 79,991 58,976 70,248 44,402 52,261
Cash dividends(1) 38,096 35,286 35,367 28,317 20,344
Per common share:
Net income:
Basic 1.93 1.41 1.63 1.04 1.24
Diluted 1.90 1.40 1.61 1.02 1.22
Cash dividends(1) 0.91 0.84 0.82 0.75 0.68
Book value per share 11.80 10.32 9.32 9.74 9.35
Selected Ratios:
Return on average
shareholders' equity 17.51% 14.41% 16.73% 10.77% 13.92%
Return on average assets 1.59% 1.19% 1.44% 1.05% 1.42%
Dividend payout ratio (1) 47.63% 59.83% 50.35% 63.77% 49.69%
Selected Balance Sheet Data:
Average assets $5,041,196 $4,936,605 $4,867,521 $4,238,808 $3,682,302
Investment securities 1,428,716 1,245,334 1,472,553 927,316 1,006,735
Loans held for sale 368,625 203,831 117,825 720,607 97,619
Total loans 3,502,334 3,192,494 3,170,096 2,652,391 2,689,839
Total assets 5,631,775 4,904,547 5,069,160 4,567,899 4,094,836
Total deposits 3,787,793 3,391,449 3,260,985 3,493,058 3,185,963
Long-term borrowings 809,977 698,204 343,847 240,867 46,674
Total borrowings
and other liabilities 1,337,453 1,082,228 1,412,245 653,310 512,817
Shareholders' equity 506,529 430,870 395,930 421,531 396,056
(1) Cash dividends are the amounts declared by United and do not include cash
dividends of acquired subsidiaries prior to the dates of consummation.
32
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 haven for such disclosure; in other words, protection from
unwarranted litigation if actual results are not the same as management
expectations.
United desires to provide its shareholders with sound information about past
performance and future trends. Consequently, any forward-looking statements
contained in this report, in a report incorporated by reference to this report,
or made by management of United in this report, in any other reports and
filings, in press releases and in oral statements, involves numerous
assumptions, risks and uncertainties. Actual results could differ materially
from those contained in or implied by United's statements for a variety of
factors including, but not limited to: changes in economic conditions; movements
in interest rates; competitive pressures on product pricing and services;
success and timing of business strategies; the nature and extent of governmental
actions and reforms; and rapidly changing technology and evolving banking
industry standards.
INTRODUCTION
The following 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, unless
otherwise indicated.
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.
2001 COMPARED TO 2000
OVERVIEW
At the close of business on December 7, 2001, United acquired 100% of the
outstanding common stock of Century Bancshares, Inc., Washington, D.C. (Century)
in a transaction valued at approximately $63.8 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 Century from the effective merger date forward. At consummation, Century had
assets of approximately $414 million, loans of $295 million, deposits of $330
million and shareholders' equity of $20 million.
33
EARNINGS SUMMARY
For the year ended December 31, 2001, net income increased 35.63% to $80.0
million from $59.0 million for the year ended December 31, 2000. On a diluted
per share basis, net income of $1.90 for 2001 increased 35.71% from $1.40 in
2000.
Results for 2000 include the recognition of approximately $20.09 million ($13.51
million after tax) of balance sheet restructuring and other charges. Excluding
these charges, United earned $72.5 million or $1.72 per diluted share for the
year 2000.
The 2001 results represented a return on average shareholders' equity of 17.51%
and a return on average assets of 1.59%. These key financial performance
indicators compare favorably with national peer grouping information provided by
Keefe, Bruyette, & Woods, of 16.39% and 1.25%, respectively. United continues to
be one of the nation's best-performing regional banking companies.
Dividends per share increased from $0.84 in 2000 to a record level of $0.91 per
share in 2001. United paid approximately $37.0 million in dividends to common
shareholders in 2001 compared with $35.5 million in 2000. This was the
twenty-eighth consecutive year of dividend increases to shareholders.
Net interest income grew $5.0 million or 2.79% for the year of 2001 when
compared to 2000. Noninterest income increased $28.4 million or 84.11% for 2001
when compared to 2000 while noninterest expense increased $5.3 million or 4.82%
over the same time period. However, for the year 2000, noninterest income
included balance sheet restructuring losses of $15.01 million ($10.10 million
after tax) resulting from losses on sales and write-downs on securities, while
noninterest expense includes other significant charges of $3.99 million ($2.68
million after tax), primarily related to litigation expense of $1.63 million
($1.09 million after tax) and $2.36 million ($1.59 million after tax) of other
charges that mostly include salary incentive and benefit plan costs.
The effective tax rate of 32.63% for the year ended December 31, 2001 was
comparable to 32.75% for 2000.
FINANCIAL CONDITION SUMMARY
Including the acquisition of Century, United's total assets as of December 31,
2001 were $5.63 billion, an increase of $727.2 million or 14.83% from year end
2000. United's available for sale securities portfolio increased $282.01 million
while securities held to maturity decreased $98.63 million as compared to year
end 2000. Total loans, including loans held for sale, increased $474.6 million
or 13.98%. Cash and cash equivalents increased $12.78 million while nonearning
assets increased $63.31 million in 2001.
Total deposits at December 31, 2001 increased $396.34 million or 11.69% since
year end 2000. In terms of composition, interest-bearing deposits increased
$281.97 million while noninterest-bearing deposits increased $114.37 million
from December 31, 2000. United's total borrowed funds increased $232.16 million,
or 22.32%, as short-term borrowings increased $193.41 million. United increased
these borrowings to take advantage of lower short-term interest rates. FHLB
borrowings increased $29.94 million. Accrued expenses and other liabilities
increased $23.07 million or 54.93% since year end 2000.
Shareholders' equity increased $75.66 million or 17.56% from December 31, 2000
translating into a book
34
value per share of $11.80. The increase in shareholders' equity was due to net
retained earnings in excess of dividends for the year of $41.90 million and a
decrease in treasury stock of $25.36 million as 1,981,423 shares were issued
from treasury stock for the acquisition of Century. During 2001, 1,080,000
shares were repurchased under a plan announced by United in May of 2000
authorizing the repurchase of up to 1.675 million shares of its common stock on
the open market. Through December 31, 2001, 1,299,300 shares have been
repurchased since the plan's inception. United continues to balance capital
adequacy and the return to shareholders. At December 31, 2001, 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 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 2001, are summarized below.
Tax-equivalent net interest income of $196.74 million for the year 2001
increased $5.57 million from $191.17 million for the year of 2000. The main
reason for the increase from the previous year was due to an increase in average
earning assets of $115.94 million. United's tax-equivalent net interest margin
was 4.12% for the year of 2001 and 4.11% for the same time period in 2000.
United maintains a fairly balanced portfolio of interest-rate sensitive assets
and liabilities in order to manage interest rate risk and thus minimize the
impact of fluctuating interest rates. In 2001, the net interest margin
percentage increased one basis point for the year despite 11 Federal Funds
interest rate reductions. In 2000, the net interest margin percentage declined
only one basis point for the year despite six Federal Funds rate increases from
mid 1999 through mid 2000.
Total interest income of $360.61 million decreased 4.56% for the year 2001 as a
result of a lower yield on average interest-earning assets. Overall, the yield
on average interest-earning assets decreased 55 basis points from 8.34% in 2000
to 7.79% in 2001. The yield on average loans, net of unearned income, decreased
71 basis points to 8.16% in the year 2001 from to 8.87% in 2000. The yield on
average securities was 6.68% for the year 2001 as compared to 6.86% for 2000.
Total interest expense decreased $22.26 million or 11.26% in 2001 compared to
2000. This decrease was attributed primarily to changes in the funding mix
during 2001. During 2001, United utilized lower cost deposits and short-term
wholesale funding sources to support asset growth rather than long-term, higher
cost FHLB advances. The average cost of funds decreased from 4.95% in 2000 to
4.37% in 2001. United's average interest-bearing deposits increased $135.30
million and average short-term borrowings increased $39.85 million while average
FHLB and other long-term borrowings decreased $155.14 million.
Provision for Loan Losses
Although weakening economic conditions caused an increase in nonperforming loans
during the year of 2001, United's credit quality continues to compare favorably
with peer and industry averages. Nonperforming loans
35
were $17.59 million or 0.50% of loans, net of unearned income, at December 31,
2001 compared to $12.85 million or 0.40% of loans, net of unearned income at
December 31, 2000. Nonperforming loans represented 0.31% of total assets at the
end of the year 2001, as compared to 0.26% for United at the end of 2000. The
components of nonperforming loans include nonaccrual loans and loans that are
contractually past due 90 days or more as to interest or principal, but have not
been put on a nonaccrual basis. Nonaccrual loans remained relatively flat while
loans past due 90 days or more increased $4.81 million or 101.87% since year end
2000. Total nonperforming assets of $30.35 million, including nonperforming
securities of $10.0 million and OREO of $2.76 million at December 31, 2001,
represented 0.54% of total assets at the end of 2001.
At December 31, 2001, impaired loans were $12.59 million, which was a very
slight increase from the $12.50 million of impaired loans at December 31, 2000.
For further details, along with a discussion of concentrations of credit risk,
see Note E to the Consolidated Financial Statements.
United evaluates the adequacy of the allowance for loan losses on a quarterly
basis and its loan administration policies are focused upon the risk
characteristics of the loan portfolio. United's process for evaluating the
allowance is a formal company-wide process that focuses on early identification
of potential problem credits and procedural discipline in managing and
accounting for those credits. This process determines the appropriate level of
the allowance for loan losses, allocation among loan types, and the resulting
provision for loan losses.
At December 31, 2001, the allowance for loan losses was $47.41 million, compared
to $40.53 million at December 31, 2000. As a percentage of loans, net of
unearned income, the allowance for loan losses was 1.35% and 1.27% at December
31, 2001 and 2000, respectively. The ratio of the allowance for loan losses to
nonperforming loans was 269.5% and 315.5% at December 31, 2001 and 2000,
respectively, which reflects the impact of the increase in nonperforming loans.
For the years ended December 31, 2001 and 2000, the provision for loan losses
was $12.83 million and $15.75 million, respectively. Net charge-offs were $10.63
million for the year of 2001 as compared to net charge-offs of $14.81 million
for the year of 2000. The decreases in provision and net charge-offs for the
year were based upon management's ongoing evaluation of the adequacy for the
loan losses and were primarily attributed to lower losses on junior-lien
mortgage loans.
Allocations are made for specific commercial loans based upon management's
estimate of the borrower's ability to repay and other factors impacting
collectibility. Other commercial loans not specifically reviewed on an
individual basis are evaluated based on historical loss percentages, which are
adjusted for current conditions and applied to loan pools that have been
segregated by risk. Allocations for loans other than commercial loans are made
based upon historical loss experience adjusted for current conditions.
Differences between actual loan loss experience and estimates are reviewed on a
quarterly basis and adjustments are made to those estimates. United's formal
company-wide process at December 31, 2001 produced increased allocations within
three of four loan categories from December 31, 2000. The components of the
allowance allocated to commercial loans and consumer loans increased $9.8
million and $471 thousand, respectively, as a result of changes in the
composition and risk profile resulting from the Century merger, declining
economic conditions and changes in historical loss factors. The real estate
construction loan pool allocation increased $725 thousand as a result of
increased loan volume and changes in historical loss factors. The components of
the allowance allocated to real estate loans decreased $1.9 million as a result
of changes in volume and historical loss factors.
36
The unallocated portion of the allowance for loan losses has continually
declined over the past four years as more seasoned loss data has been developed
about specific pools of loans to facilitate assignment of the allowance to more
specific segments within the loan portfolio. Changes in economic conditions,
more specifically the events of September 11, 2001, and the economic downturn
that had begun prior to that date and continued throughout the fourth quarter of
2001, caused United to further refine its systematic methodology in the
determination of the allowance for loan losses to specific loans or groups.
Management believes that the allowance for loan losses of $47.41 million at
December 31, 2001 is adequate to provide for probable losses on existing loans
based on information currently available.
Management is not aware of any potential problem loans, trends or uncertainties
that 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 that cause management to
have serious doubts as to the ability of such borrowers to comply with the loan
repayment schedules.
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. Other income consists of all
revenues that are not included in interest and fee income related to earning
assets. Noninterest income, excluding securities gains and losses, increased
31.63% for the year of 2001 when compared to the year of 2000. These results
were achieved primarily due to a combination of increased revenues from the
mortgage banking, wealth management and deposit services areas.
Income from mortgage banking operations increased $10.18 million or 62.29% from
the previous year. Mortgage loan origination activity increased 93.71% or $1.14
billion for the year of 2001 as compared to the same period in 2000 due to
declining interest rates. The higher level of originations during 2001 resulted
in increased loan sales in the secondary market of 94.07% or $1.06 billion
compared to last year.
Service charges, commissions and fees from customer accounts increased $4.22
million or 18.65% from 2000. This income includes charges and fees related to
various banking services provided by United.
Trust income and brokerage commissions increased $1.16 million or 16.45% due to
an increased volume of trust and brokerage business. United continues its
efforts to broaden the scope and activity of its trust and brokerage service
areas, especially in the northern Virginia market, to provide additional sources
of fee income that complement United's traditional banking products and
services.
During 2001, United incurred a net loss on the sale of investment securities of
$518 thousand as compared to a net loss of $13.86 million during 2000. United
restructured its balance sheet in the fourth quarter of 2000 by selling lower
yielding, fixed-rate securities that had been carried as available for sale.
Sales and write-downs of securities from this restructuring resulted in loss of
approximately $15.01 million ($10.10 million after-tax) in the fourth quarter of
2000.
Overall, noninterest income, including net losses from securities transactions,
increased $28.42 million or 84.11% for 2001 when compared to 2000.
37
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 43.1%, which is well below the 57.4%
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. Noninterest expense increased
$5.32 million or 4.82% for the year ended December 31, 2001 as compared to the
year ended 2000. Results for 2000 include one-time charges of $3.99 million
associated with litigation and employee salary incentive and benefit plans.
Excluding these charges, total noninterest expense increased $9.31 million or
8.75% from 2000.
Total salaries and benefits increased $7.94 million or 14.92% for the year of
2001 compared to the year of 2000. The results for 2000 include one-time charges
of $960 thousand. The increase was due mainly to higher sales activity in the
mortgage banking segment, since compensation and incentives for its personnel
are significantly tied to activity levels. Excluding the one-time expenses,
total salaries and benefits increased $8.90 million or 17.04% from 2000. At
December 31, 2001 and 2000, United employed 1,361 and 1,253 full-time equivalent
employees, respectively.
Net occupancy expense in 2001 decreased from 2000 levels by $1.27 million or
10.80%. The lower net occupancy expense for 2001 was due mainly to decreases in
both real property taxes on owned premises and rental expense on leased offices.
Remaining other expense decreased $1.34 million or 2.95% in 2001 compared to
2000. The results for 2000 include one-time charges of approximately $2.92
million. Excluding the aforementioned one-time expenses, other expense increased
$1.58 million or 3.72% due mainly to expenses related to the Century merger and
planning initiatives.
Income Taxes
For the year ended December 31, 2001, income taxes were $38.74 million, compared
to $28.72 million for 2000. The increase of $10.02 million or 34.87% was
primarily the result of increased pretax income. For the years ended December
31, 2001 and 2000, United's effective tax rates were 32.63% and 32.75%,
respectively.
Quarterly Results
All four quarters of 2001 showed large increases in earnings in comparison to
each of the same four quarters of 2000. On a per share basis, first quarter 2001
earnings were $0.46 per share, compared to $0.42 in 2000, second quarter 2001
earnings were $0.47 per share, compared to $0.43 in 2000, third quarter 2001
earnings were $0.48, compared to $0.44 per share in 2000 while fourth quarter
2001 earnings were $0.49, compared to $0.11 per share in 2000.
Net income for the fourth quarter of 2001 was $21.08 mi1lion, compared to $4.30
million earned in the fourth quarter of 2000. The results for the fourth quarter
of 2000 included balance sheet restructuring and
38
other one-time charges of approximately $20.09 million ($13.51 million after
tax).
Additional quarterly financial data for 2001 and 2000 may be found in Note R 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 projected cash flows and repricing
characteristics for on- and off-balance-sheet instruments and incorporates
market-based assumptions regarding the impact of changing interest rates on the
prepayment rate of certain assets and liabilities. The model also includes
executive management projections for activity levels in product lines offered by
United. Assumptions based on the historical behavior of deposit rates and
balances in relation to changes in interest rates are also incorporated into the
model. These assumptions are inherently uncertain and, as a result, the model
cannot precisely measure net interest income or precisely predict the impact of
fluctuations in interest rates on net interest income. Actual results will
differ from simulated results due to timing, magnitude and frequency of interest
rate changes as well as changes in market conditions and management strategies.
Interest-sensitive assets and liabilities are defined as those assets or
liabilities that mature or are repriced within a designated time frame. The
principal function of interest rate risk management is to maintain an
appropriate relationship between those assets and liabilities that are sensitive
to changing market interest rates. United closely monitors the sensitivity of
its assets and liabilities on an ongoing basis and projects the effect of
various interest rate changes on its net interest margin.
39
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.
This indicates 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
that result when the retail deposit base is assumed to reprice in a manner
consistent with historical trends. (See "Management Adjustments" in the GAP
table.) Using these estimates, United was liability-sensitive in the one-year
horizon in the amount of $124 million or (2.33%) 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 borrowings provides United
with a low risk means of matching maturities of earning assets and
interest-bearing funds to achieve a desired interest rate spread over the life
of the earning assets.
Interest rate risk management focuses on maintaining consistent growth in net
interest income within Board-approved policy limits. United's Asset/Liability
Management Committee (ALCO), which includes senior management representatives,
reports to the Board of Directors and monitors and manages interest rate risk to
maintain an acceptable level of change to net interest income as a result of
changes in interest rates. Policy established for interest rate risk is stated
in terms of the change in net interest income over a one-year and two-year
horizon given an immediate and sustained increase or decrease in interest rates.
The current limits approved by the Board of Directors are structured on a staged
basis with each stage requiring specific actions.
The following table shows United's estimated earnings sensitivity profile after
management's adjustments as of December 31, 2001 and 2000:
Change in Percentage Change in Net Interest Income
Interest Rates -----------------------------------------
(basis points) December 31, 2001 December 31, 2000
- -------------- ----------------- -------------------
+200 -1.61% -2.62%
-200 0.24% -3.57%
Given an immediate, sustained 200 basis point upward shock to the yield curve
used in the simulation model, it is estimated that net interest income for
United would decrease by 1.61% over one year as of December 31, 2001, as
compared to a decrease of 2.62% as of December 31, 2000. A 200 basis point
immediate, sustained downward shock in the yield curve would increase net
interest income by an estimated 0.24% over one year as of December 31, 2001, as
compared to a decrease of 3.57% as of December 31, 2000. All of these estimated
changes in net interest income are within the policy guidelines established by
the Board of Directors.
40
The following table shows the interest rate sensitivity GAP as of December
31, 2001:
Interest Rate Sensitivity Gap
Days
-------------------------------------- Total 1-5 Over 5
0-90 91-180 181-365 One Year Years Years Total
------------------------------------------------------------------------------------------------
ASSETS
Interest-Earning Assets:
Federal funds sold and
securities purchased
under agreements to
resell and other
short-term investments $ 1,536 $ 1,536 $ 1,536
Investment and marketable
equity securities
Taxable 137,343 $ 2,758 $ 9,015 149,116 $ 370,846 $ 757,760 1,277,722
Tax-exempt 505 1,475 677 2,657 6,459 141,878 150,994
Loans, net of unearned
income 1,528,741 89,880 158,920 1,777,541 1,231,425 861,993 3,870,959
------------------------------------------------------------------------------------------------
Total Interest-Earning
Assets $1,668,125 $ 94,113 $ 168,612 $ 1,930,850 $ 1,608,730 $1,761,631 $5,301,211
================================================================================================
LIABILITIES
Interest-Bearing Funds:
Savings and NOW accounts $1,377,598 $ 1,377,598 $1,377,598
Time deposits of
$100,000 & over 91,607 $ 52,338 $ 146,673 290,618 $ 107,579 $ 1,219 399,416
Other time deposits 323,734 275,093 380,182 979,009 375,377 2,608 1,356,994
Federal funds purchased,
repurchase agreements
and other short-term
borrowings 406,288 406,288 120,840 527,128
FHLB advances and trust
preferred securities 55,180 180 758 56,118 104,936 584,201 745,255
------------------------------------------------------------------------------------------------
Total Interest-Bearing
Funds $2,254,407 $ 327,611 $ 527,613 $ 3,109,631 $ 708,732 $ 588,028 $4,406,391
================================================================================================
Interest Sensitivity Gap ($586,282) ($233,498) ($359,001) ($1,178,781) $ 899,998 $1,173,603 $ 894,820
================================================================================================
Cumulative Gap ($586,282) ($819,780) ($1,178,781) ($1,178,781) ($278,783) $ 894,820 $ 894,820
================================================================================================
Cumulative Gap as a
Percentage of
Total Earning Assets (11.06%) (15.46%) (22.24%) (22.24%) (5.26%) 16.88% 16.88%
Management Adjustments $1,319,057 ($87,981) ($175,830) $ 1,055,246 ($1,055,246) $ 0
Off-Balance Sheet Activities
------------------------------------------------------------------------------------------------
Cumulative Management
Adjusted Gap and
Off-Balance Sheet
Activities $ 732,775 $ 411,296 ($123,535) ($123,535) ($278,783) $ 894,820 $ 894,820
================================================================================================
Cumulative Management
Adjusted Gap and Off-
Balance Sheet
Activities as
a Percentage of Total
Earning Assets 13.82% 7.76% (2.33%) (2.33%) (5.26%) 16.88% 16.88%
================================================================================================
41
Liquidity and Capital Resources
In the opinion of management, United maintains liquidity that 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 that
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 2001 were $57.17 million as compared to cash
flows provided by operations of $743 thousand in 2000 primarily as a result of
approximately $149.99 million of excess originations of mortgage loans over
proceeds from the sale of loans. In 2001, net cash of $115.91 million was used
in investing activities as compared to 2000 in which investing activities
provided cash of $216.64 million. Cash used in investing activities in 2001 was
primarily due to $91.57 million of excess purchases of investment securities
over net proceeds from calls and maturities of investment securities. In 2000,
cash was provided by investing activities due mainly to excess net proceeds from
calls and maturities of securities over purchases of investment securities by
$256.10 million. Financing activities resulted in a source of cash in 2001 of
$185.86 million primarily due to an increase in short-term borrowings and
deposits of $165.23 million and $73.35 million, respectively. For the year of
2000, net cash of $232.38 million was used in financing activities, primarily
due to the net repayment of approximately $246.84 million of FHLB borrowings,
payment of $35.47 million in cash dividends and $18.38 million for acquisitions
of United shares under the stock repurchase programs. The net effect of this
activity was an increase in cash and cash equivalents of $12.78 million for the
year of 2001 and a decrease in cash and cash equivalents of $15.00 million for
the year of 2000. See the Consolidated Statement of Cash Flows in the
Consolidated Financial Statements.
42
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 H, Notes to Consolidated
Financial Statements.
The Asset and Liability Committee monitors liquidity to ascertain that a
liquidity position within certain prescribed parameters is maintained. In
addition, variable rate loans are a priority. These policies help to protect net
interest income against fluctuations in interest rates. No changes are
anticipated in the policies of United's Asset and Liability Committee.
United also seeks to maintain a proper relationship between capital and total
assets to support growth and sustain earnings. United has historically generated
attractive returns on shareholders' equity. United's average equity to average
asset ratio was 9.06% in 2001 and 8.29% in 2000. United's risk-based capital
ratio was 11.37% in 2001 and 11.77% in 2000, which are both significantly higher
than the minimum regulatory requirements. United's Tier 1 capital and leverage
ratios of 10.01% and 7.95%, respectively, at December 31, 2001, are also well
above regulatory minimums to be classified as a "well-capitalized" institution.
See Note O, Notes to Consolidated Financial Statements.
Commitments
At December 31, 2001 United had outstanding loan commitments of $937,933,000
pertaining to lines of credit authorized but unused, and $103,446,000 of letters
of credit to its various customers in the normal course of business.
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 L to the Consolidated Financial Statements.
2000 COMPARED TO 1999
EARNINGS SUMMARY
For the year ended December 31, 2000, operating earnings were $72.5 million
compared to $70.2 million for the year ended December 31, 1999. On a diluted per
share basis, operating earnings were $1.72 in 2000 compared to $1.61 in 1999.
Operating earnings represent earnings before balance sheet restructuring and
other charges of approximately $20.09 million ($13.51 million after tax)
incurred during the fourth quarter of 2000. United restructured its balance
sheet by selling lower yielding, fixed-rate securities, which had been carried
as available for sale. A majority of the proceeds of the sale was reinvested in
higher yielding, fixed-rate securities with an average maturity comparable with
those securities sold. A portion of the sale proceeds was also used to pay down
short-term borrowings and to repurchase shares of United's common stock. Losses
on sales and write-downs of securities totaled $15.01 million ($10.10 million
after tax) during the fourth quarter of 2000.
In addition to the restructuring losses, United incurred other significant
charges during the fourth quarter of
43
2000. United incurred litigation expense of $1.63 million ($1.09 million after
tax) as a result of a building operating lease settlement. Other significant
charges, which related primarily to employee salary incentive and benefit plans,
totaled approximately $2.36 million ($1.59 million after tax). After these
charges, diluted earnings per share were $1.40 for the year ended December 31,
2000, compared to $1.61 for the year ended December 31, 1999.
Operating earnings represent a return on average shareholders' equity of 17.66%
and a return on average assets of 1.47% for the year ended December 31, 2000.
These operating ratios compare favorably with national peer grouping information
provided by Keefe, Bruyette, & Woods, of 14.82% and 1.16%, respectively.
Dividends per share increased from $0.82 in 1999 to a record level of $0.84 per
share in 2000. United paid approximately $35.3 million in dividends to common
shareholders in 2000 compared with $35.4 million in 1999.
The growth in operating earnings for the year of 2000 was a result of reducing
noninterest expenses while maintaining a stable net interest margin in a
challenging banking environment. Net interest income remained flat for the year
of 2000 when compared to 1999 as increased deposit and funding costs resulting
from six Federal Funds rate increases from mid-1999 through mid-2000 offset
growth in interest income. Noninterest income, including income from mortgage
banking operations, decreased $2.28 million or 4.47% for 2000 when compared to
1999 as the higher interest rates and a slowing economy caused a decline in
mortgage banking results. Noninterest expenses decreased $11.09 million or 9.43%
for 2000 compared to the same period in 1999.
The effective tax rate for the year ended December 31, 2000 approximated 32.75%
compared to 33.12% for 1999.
FINANCIAL CONDITION SUMMARY
Total assets were $4.90 billion at December 31, 2000, down $164.61 million or
3.25% compared with year end 1999. United's available for sale securities
portfolio decreased $342.10 million while securities held to maturity increased
$114.88 million as compared to year end 1999. Loans held for sale increased $86
million during 2000. Loans, net of unearned income, reflected a $22.40 million
increase from 1999 to 2000 due mainly to a 6% growth rate in the commercial loan
portfolio. Cash and cash equivalents decreased $15.00 million while nonearning
assets increased $30.80 million in 2000 as compared with year end 1999.
Total deposits grew $130.46 million or 4% from year end 1999 as United realized
increases of $71.82 million and $58.65 million in interest-bearing deposits and
noninterest-bearing deposits, respectively. United's short-term borrowings
decreased $64.53 million and its FHLB borrowings declined $246.84 million as
United repaid these borrowings to restructure the balance sheet to better manage
interest rate risk.
Shareholders' equity increased $34.94 million or 8.82% from December 31, 1999
due to net retained earnings in excess of dividends for the year of $23.69
million and an increase in the fair value of United's securities available for
sale portfolio of approximately $26.90 million, net of deferred income taxes.
During 2000, United completed a plan announced in 1999 to repurchase up to 1.75
million shares of its common stock on the open market. In May of 2000, United
announced a new plan to repurchase up to an additional 1.675
44
million shares of its common stock on the open market, of which 219,300 shares
have been repurchased since its implementation. At December 31, 2000, 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 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 2000, are summarized below.
Tax-equivalent interest income increased $26.0 million or 7.2% from $362.94
million for the year of 1999 to $388.94 million for the year of 2000. For the
years ended December 31, 2000 and 1999, tax-equivalent net interest income was
$191.17 million and $188.54 million, respectively. The main reason for only a
slight increase in tax-equivalent net interest income from the previous year was
increased deposit and funding costs resulting from six Federal Funds rate
increases from mid 1999 through mid 2000, which predominantly offset the growth
in interest income. United's tax-equivalent net interest margin was 4.11% for
the year of 2000 and 4.12% for the same time period in 1999.
Total interest income of $377.85 million increased 6.54% in 2000 over 1999 as a
result of a higher yield on average interest-earning assets. Overall, the yield
on average interest-earning assets increased 41 basis points from 7.93% in 1999
to 8.34% in 2000. The yield on average loans, net of unearned income, increased
43 basis points to 8.87% in the year 2000 from to 8.44% in 1999. The yield on
average securities was 6.86% for the year 2000 as compared to 6.66% for 1999.
The average volume of interest-earning assets remained relatively flat,
increasing only $82.91 million in the year of 2000.
Total interest expense increased $23.36 million or 13.40% in 2000 compared to
1999. This increase was attributed primarily to increased average wholesale
funding balances at higher average interest rates than in 1999. The average cost
of funds increased from 4.46% in 1999 to 4.95% in 2000 due to higher interest
rates. United's average FHLB borrowings increased $197.91 million and average
short-term borrowings increased $2.79 million as average interest-bearing
deposits decreased $114.13 million.
Provision for Loan Losses
For the years ended December 31, 2000 and 1999, the provision for loan losses
was $15.75 million and $8.80 million, respectively. Net charge-offs were $14.81
million for the year of 2000 as compared to net charge-offs of $8.39 million for
the year of 1999. The increases in provision and net charge-offs for the year
were primarily attributed to the addition of junior-lien mortgage loans to the
loan portfolio as of October 1, 1999. The increased provision and charge-offs
were offset by increased interest income recognized on these high-interest rate
loans. At December 31, 2000, the balance of these junior-lien mortgage loans
approximated $173 million.
45
At year end 2000 and 1999, the allowance for loan losses was 1.27% and 1.25% of
total loans, net of unearned income, respectively. At December 31, 2000 and
1999, the ratio of the allowance for loan losses to nonperforming loans was
315.5% and 190.9%, respectively, reflecting the impact of the significant
decline in nonperforming loans.
Other Income
Noninterest income, excluding securities gains and losses and mortgage banking
results, increased 11.79% for the year of 2000 when compared to the year of
1999. These results were achieved primarily due to a combination of increased
revenues from the deposit services area and the trust department.
Service charges, commissions and fees from customer accounts increased $2.54
million or 12.78% from 1999 due mainly to a new checking account product
introduced late in 1999. This income includes charges and fees related to
various banking services provided by United.
Trust income and brokerage commissions increased $812 thousand or 16.43% and
$222 thousand or 20.50%, respectively, in 2000 due to an increased volume of
trust and brokerage business. United significantly broadened the scope and
activity of its trust and brokerage service areas, especially in the northern
Virginia market, to provide additional sources of fee income that complement
United's traditional banking products and services.
Mortgage banking results declined from the previous year due to higher interest
rates and a slowing economy, both of which adversely impacted the demand for
mortgage loan originations and the fees received on the sale of those mortgage
loans in the secondary market. Originations of mortgage loans fell 5% or $67.4
million for the year of 2000 as compared to the same period in 1999 while
proceeds from sales of mortgage loans declined 21% or $302.4 million in the year
of 2000 compared to last year.
During 2000, United incurred a net loss on the sale of investment securities of
$13.86 million as compared to a net gain of $677 thousand during 1999. As
previously mentioned, United restructured its balance sheet in the fourth
quarter of 2000 by selling lower yielding, fixed-rate securities which had been
carried as available for sale. Sales and write-downs of securities from this
restructuring resulted in loss of approximately $15.01 million ($10.10 million
after-tax) during the fourth quarter of 2000.
Overall, noninterest income, including net gains and losses from the sale of
securities and income from mortgage banking operations, decreased $2.28 million
or 4.47% for 2000 when compared to 1999.
Other Expense
Noninterest expense, excluding one-time charges of $3.99 million recognized in
the fourth quarter of 2000, decreased $11.09 million or 9.43% for the year ended
December 31, 2000 as compared to the year ended 1999. Including these one-time
charges, total noninterest expense declined $7.10 million or 6.04% from 1999.
Total salaries and benefits, excluding one-time charges of $960 thousand,
decreased by 13.14% or $7.90 million for the year of 2000 compared to year of
1999. The decline was due to lower sales activity in the mortgage banking
segment as compensation and incentives for its personnel are significantly tied
to activity
46
levels and an SFAS No. 87 pension benefit as a result of excess earnings within
United's plan. Including the one-time expenses, total salaries and benefits
declined $6.94 million or 11.54% from 1999. At December 31, 2000 and 1999,
United employed 1,253 and 1,387 full-time equivalent employees, respectively.
Net occupancy expense in 2000, excluding one-time charges of $108 thousand,
decreased from 1999 levels by $527 thousand or 4.32%. The overall change in net
occupancy expense for 2000 was mainly due to decreased building repair and
maintenance expenses.
Remaining other expense, excluding one-time charges of approximately $2.92
million, decreased $2.66 million or 5.89% in 2000 compared to 1999. Including
the aforementioned one-time expenses, other expense remained relatively flat
from 1999.
United's cost control efforts have been very successful, resulting in an
efficiency ratio of 44.8%, which was well below the 57.6% reported by United's
national peer group banks and its immediate in-market competitors.
Income Taxes
For the years ended December 31, 2000 and 1999, United's effective tax rate
approximated 33%.
47
REPORT OF ERNST & YOUNG LLP
INDEPENDENT AUDITORS
Board of Directors and Shareholders
United Bankshares, Inc.
We have audited the accompanying consolidated balance sheets of United
Bankshares, Inc. and subsidiaries as of December 31, 2001 and 2000, 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, 2001.
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 conducted our audits in accordance with auditing standards generally accepted
in the United States. 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 financial statements referred to above present fairly, in
all material respects, the consolidated financial position of United Bankshares,
Inc. and subsidiaries at December 31, 2001 and 2000, and the consolidated
results of their operations and their cash flows for each of the three years in
the period ended December 31, 2001, in conformity with accounting principles
generally accepted in the United States.
/s/ Ernst & Young LLP
Charleston, West Virginia
February 15, 2002
48
CONSOLIDATED BALANCE SHEETS
UNITED BANKSHARES, INC. AND SUBSIDIARIES
(Dollars in thousands, except par value) December 31
--------------------------
2001 2000
--------------------------
Assets
Cash and due from banks $ 156,058 $ 142,801
Interest-bearing deposits with other banks 1,536 884
Federal funds sold 1,125
--------------------------
Total cash and cash equivalents 157,594 144,810
Securities available for sale at estimated fair value (amortized cost-$1,133,715
at December 31, 2001 and $865,363 at December 31, 2000) 1,147,280 865,266
Securities held to maturity (estimated fair value-$280,865 at
December 31, 2001 and $378,405 at December 31, 2000) 281,436 380,068
Loans held for sale 368,625 203,831
Loans 3,505,385 3,197,494
Less: Unearned income (3,051) (5,000)
--------------------------
Loans net of unearned income 3,502,334 3,192,494
Less: Allowance for loan losses (47,408) (40,532)
--------------------------
Net loans 3,454,926 3,151,962
Bank premises and equipment 48,394 44,481
Accrued interest receivable 32,012 36,000
Other assets 141,508 78,129
--------------------------
TOTAL ASSETS $ 5,631,775 $ 4,904,547
==========================
Liabilities
Domestic deposits:
Noninterest-bearing $ 653,785 $ 539,415
Interest-bearing 3,134,008 2,852,034
--------------------------
Total deposits 3,787,793 3,391,449
Borrowings:
Federal funds purchased 43,831 15,720
Securities sold under agreements to repurchase 477,796 313,349
Federal Home Loan Bank borrowings 736,455 706,512
Mandatorily redeemable capital securities of subsidiary trust 8,800
Other borrowings 5,501 4,647
Accrued expenses and other liabilities 65,070 42,000
--------------------------
TOTAL LIABILITIES 5,125,246 4,473,677
Shareholders' Equity
Common stock, $2.50 par value; Authorized-100,000,000 shares; issued-43,381,769
at December 31, 2001 and December 31, 2000, including 455,258 and 1,616,498
shares in treasury at December 31, 2001 and December 31, 2000, respectively 108,454 108,454
Surplus 84,122 85,032
Retained earnings 320,577 278,682
Accumulated other comprehensive income (loss) 4,351 (4,964)
Treasury stock, at cost (10,975) (36,334)
--------------------------
TOTAL SHAREHOLDERS' EQUITY 506,529 430,870
--------------------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 5,631,775 $ 4,904,547
==========================
See notes to consolidated financial statements
49
CONSOLIDATED STATEMENTS OF INCOME
UNITED BANKSHARES, INC. AND SUBSIDIARIES
(Dollars in thousands, except per share data) Year Ended December 31
-------------------------------------------
2001 2000 1999
------------ ------------ -----------
Interest income
Interest and fees on loans $ 271,819 $ 287,277 $ 258,404
Interest on federal funds sold and other short-term investments 674 1,171 522
Interest and dividends on securities:
Taxable 77,390 79,190 85,392
Tax-exempt 10,727 10,209 10,347
------------ ------------ -----------
Total interest income 360,610 377,847 354,665
Interest expense
Interest on deposits 117,605 125,847 122,651
Interest on short-term borrowings 14,188 19,898 17,104
Interest on Federal Home Loan Bank borrowings 43,714 52,021 34,647
------------ ------------ -----------
Total interest expense 175,507 197,766 174,402
------------ ------------ -----------
Net interest income 185,103 180,081 180,263
Provision for loan losses 12,833 15,745 8,800
------------ ------------ -----------
Net interest income after provision for loan losses 172,270 164,336 171,463
Other income
Income from mortgage banking operations 26,518 16,340 22,392
Service charges, commissions, and fees 26,624 22,402 19,863
Trust department income 8,213 7,053 6,020
Security (losses) and gains (518) (13,864) 677
Other income 1,368 1,855 2,126
------------ ------------ -----------
Total other income 62,205 33,786 51,078
Other expense
Salaries and employee benefits 61,109 53,174 60,111
Net occupancy expense 10,514 11,787 12,206
Other expense 44,122 45,461 45,202
------------ ------------ -----------
Total other expense 115,745 110,422 117,519
------------ ------------ -----------
Income before income taxes 118,730 87,700 105,022
Income taxes 38,739 28,724 34,774
------------ ------------ -----------
Net income $ 79,991 $ 58,976 $ 70,248
============ ============ ===========
Earnings per common share:
Basic $ 1.93 $ 1.41 $ 1.63
============ ============ ===========
Diluted $ 1.90 $ 1.40 $ 1.61
============ ============ ===========
Dividends per common share $ 0.91 $ 0.84 $ 0.82
============ ============ ===========
Average outstanding shares:
Basic 41,497,304 41,958,956 43,100,977
Diluted 42,064,919 42,260,270 43,722,081
See notes to consolidated financial statements
50
CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY
UNITED BANKSHARES, INC. AND SUBSIDIARIES
(Dollars in thousands, except Common Stock Accumulated
per share data) ---------------------- Other Total
Par Retained Comprehensive Treasury Shareholders'
Shares Value Surplus Earnings Income (Loss) Stock Equity
--------------------------------------------------------------------------------------
Balance at January 1, 1999 $43,256,833 $108,142 $88,353 $220,111 $ 4,934 $ (9) $421,531
Comprehensive income:
Net income 70,248 70,248
Other comprehensive income, net of tax:
Unrealized loss on securities of
$36,722 net of reclassification
adjustment for gains included in net
income of $440 (37,162) (37,162)
--------
Total comprehensive income 33,086
Purchase of treasury stock
(1,049,800 shares) (26,196) (26,196)
Common dividends declared ($0.82 per
share) (35,367) (35,367)
Common stock options exercised
(281,960 shares) 124,936 312 (1,093) 3,657 2,876
--------------------------------------------------------------------------------------
Balance at December 31, 1999 43,381,769 108,454 87,260 254,992 (32,228) (22,548) 395,930
Comprehensive income:
Net income 58,976 58,976
Other comprehensive income, net of tax:
Unrealized gain on securities of
$17,884 net of reclassification
adjustment for losses included in net
income of $9,012 26,896 26,896
Amortization of the unrealized loss for
securities transferred from the
available for sale to the held to
maturity investment portfolio 368 368
--------
Total comprehensive income 86,240
Purchase of treasury stock (919,500 shares) (18,384) (18,384)
Common dividends declared ($0.84 per
share) (35,286) (35,286)
Common stock options exercised (197,663
shares) (2,228) 4,598 2,370
--------------------------------------------------------------------------------------
Balance at December 31, 2000 43,381,769 108,454 85,032 278,682 (4,964) (36,334) 430,870
Comprehensive income:
Net income 79,991 79,991
Other comprehensive income, net of tax:
Unrealized gain on securities of $8,543
net of reclassification adjustment for
losses included in net income of $337 8,880 8,880
Amortization of the unrealized loss
for securities transferred from the
available for sale to the held to
maturity investment portfolio 435 435
--------
Total comprehensive income 89,306
Acquisition of Century Bancshares, Inc.
(1,981,423 shares) 2,274 46,468 48,742
Purchase of treasury stock
(1,080,000 shares) (27,059) (27,059)
Common dividends declared ($0.91 per
share) (38,096) (38,096)
Common stock options exercised (259,817
shares) (3,184) 5,950 2,766
--------------------------------------------------------------------------------------
Balance at December 31, 2001 $43,381,769 $108,454 $84,122 $320,577 $ 4,351 ($10,975) $506,529
======================================================================================
See notes to consolidated financial statements
51
CONSOLIDATED STATEMENTS OF CASH FLOWS
UNITED BANKSHARES, INC. AND SUBSIDIARIES
(Dollars in thousands) Year Ended December 31
---------------------------------------
2001 2000 1999
----------- ----------- -----------
OPERATING ACTIVITIES
Net income $ 79,991 $ 58,976 $ 70,248
Adjustments to reconcile net income to net cash provided by operating
activities:
Provision for loan losses 12,833 15,745 8,800
Provision for depreciation 5,971 6,999 8,028
Amortization of premiums on investment securities, net of accretion 2,760 2,517 3,370
Gain on sales of bank premises and equipment (1,255) (376) (1,475)
Loss (Gain) on securities transactions 518 13,864 (677)
Loans originated for sale (2,303,269) (1,189,255) (1,232,556)
Proceeds from sales of loans 2,153,283 1,110,209 1,388,507
Gain on sales of loans (14,155) (8,210) (13,576)
Deferred income tax benefit (3,258) (6,445) (4,475)
Changes in:
Loans held for sale (652) 1,038 6,154
Interest receivable 6,416 357 (5,955)
Other assets (7,696) 3,659 (891)
Accrued expenses and other liabilities 11,345 (8,335) 903
----------- ----------- -----------
NET CASH (USED IN) PROVIDED BY OPERATING ACTIVITIES (57,168) 743 226,405
----------- ----------- -----------
INVESTING ACTIVITIES
Proceeds from maturities and calls of investment securities 31,626 26,435 152,045
Purchases of investment securities (1,000) (2,630) (55,101)
Proceeds from sales of securities available for sale 208,755 541,672 336,558
Proceeds from maturities and calls of securities available for sale 403,002 126,897 146,794
Purchases of securities available for sale (733,952) (436,277) (964,059)
Net cash paid in branch divestiture (8,644)
Net cash of acquired subsidiary 5,617
Net purchases of bank premises and equipment (3,505) (2,522) 423
Net change in loans (17,808) (36,932) (290,824)
----------- ----------- -----------
NET CASH (USED IN) PROVIDED BY INVESTING ACTIVITIES (115,909) 216,643 (674,164)
----------- ----------- -----------
FINANCING ACTIVITIES
Dividends paid (36,990) (35,468) (34,999)
Acquisition of treasury stock (27,059) (18,384) (26,196)
Proceeds from exercise of stock options 2,766 2,370 2,876
Repayment of Federal Home Loan Bank borrowings (46,537) (697,565) (141,618)
Proceeds from Federal Home Loan Bank borrowings 55,100 450,730 749,098
Changes in:
Time deposits (99,102) 106,582 (128,286)
Other deposits 172,452 23,882 (103,814)
Federal funds purchased, securities sold under agreements to
repurchase and other borrowings 165,231 (64,531) 149,208
----------- ----------- -----------
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES 185,861 (232,384) 466,269
----------- ----------- -----------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 12,784 (14,998) 18,510
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 144,810 159,808 141,298
----------- ----------- -----------
CASH AND CASH EQUIVALENTS AT END OF YEAR $ 157,594 $ 144,810 $ 159,808
=========== =========== ===========
See notes to consolidated financial statements
52
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
UNITED BANKSHARES, INC. AND SUBSIDIARIES
December 31, 2001
NOTE A--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Nature of Operations: United Bankshares, Inc. is a multi-bank holding company
- --------------------
headquartered in Charleston, West Virginia. United's principal business
activities are community banking and mortgage banking. The principal markets of
United Bankshares, Inc. and subsidiaries (United) are Parkersburg, Charleston,
Huntington, Morgantown and Wheeling, West Virginia and Arlington, Fairfax,
Loudoun and Prince William counties, Virginia. United's mortgage banking
activities are primarily through its wholly owned subsidiary, George Mason
Mortgages, LLC.
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 accounting
principles generally accepted in the United States. In preparing the
consolidated financial statements, management is required 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 year amounts have been reclassified to conform to 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 estimated fair value. Unrealized
holding gains and losses on securities classified as available for sale are
carried as a separate component of Accumulated Other Comprehensive Income
(Loss), 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.
Loans: Loans are reported at the principal amount outstanding, net of unearned
- -----
income. Interest on loans is accrued and credited to operations using methods
that produce a level yield on individual 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 to 120
53
NOTE A--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - continued
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.
Loans Held for Sale: Loans held for sale consist of one-to-four family
- -------------------
residential loans originated for sale in the secondary market and 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.
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; and
(iii) interest earned on mortgage loans during the period that they are held by
United pending sale.
Allowance for Loan Losses: The allowance for loan losses is management's
- -------------------------
estimate of the probable credit losses inherent in the loan portfolio.
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. This evaluation is inherently subjective and requires significant
estimates, including the amounts and timing of estimated future cash flows,
estimated losses on pools of loans based on historical loss experience, and
consideration of current economic trends, all of which are susceptible to
constant and significant change. The amounts allocated to specific credits and
loan pools grouped by similar risk characteristics are reviewed on a quarterly
basis and adjusted as necessary based upon subsequent changes in circumstances.
In determining the components of the allowance for loan losses, management
considers the risk arising in part from, but not limited to, charge-off and
delinquency trends, current economic and business conditions, lending policies
and procedures, the size and risk characteristics of the loan portfolio,
concentrations of credit, and other various factors. Loans deemed to be
uncollectible are charged against the allowance for loan losses, while
recoveries of previously charged-off amounts are credited to the allowance for
loan losses.
In determining the adequacy of the allowance for loan losses, management makes
allocations to specific commercial loans classified by management as to risk.
Management determines the loan's risk by considering the borrowers' ability to
repay, the collateral securing the credit and other borrower-specific factors
that may impact collectibility. Specific loss allocations are 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. Other
commercial loans not specifically reviewed on an individual basis are evaluated
based on loan pools, which are grouped by similar risk characteristics using
management's internal risk ratings. Allocations for these commercial loan pools
are determined based upon historical loss experience adjusted for current
conditions and risk factors. Allocations for loans, other than commercial loans,
are developed by applying historical loss experience adjusted for current
conditions and risk factor to loan pools grouped by similar risk
characteristics. While allocations are
54
NOTE A--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - continued
made to specific loans and pools of loans, the allowance is available for all
loan losses. Management believes that the allowance for loan losses is adequate
to provide for probable losses on existing loans based on information currently
available.
Asset Securitization: As further discussed in Note D, United previously sold
- --------------------
residential mortgage loans in a securitization transaction and retained an
interest-only strip, and lower-rated subordinated classes of asset-backed
securities, all of which are retained interests in the securitized assets. These
retained interests in securitized assets are recorded at their estimated fair
values in securities available for sale. Since quoted market prices are
generally not available for retained interests, United estimates fair values
based on the present value of future expected cash flows using management's best
estimates of key assumptions--credit losses, prepayment speeds, forward yield
curves, and discount rates commensurate with the risks involved.
On April 1, 2001, United adopted Emerging Issues Task Force (EITF) Issue No.
99-20 (EITF 99-20) which provides accounting guidance for the recognition of
interest income and impairment on purchased and retained interests in
securitized financial assets. EITF 99-20 requires that the holder of such
instruments recognize the excess of all cash flows attributable to the
beneficial interest using the effective yield method. In addition, EITF 99-20
provides a change in the determination of impairment, whereby, if the fair value
of the beneficial interest has declined below its carrying value, then an
impairment analysis should be performed. If there has been an adverse change in
the estimated cash flows from the previous cash flows projected, then the
condition for an other-than-temporary impairment has been met and the beneficial
interest should be written down to the estimated fair value. The adoption of
this standard did not have a material impact on the financial position or
results of operations of United.
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 (included in other assets) 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. Management reviewed
intangible assets on a periodic basis and evaluated changes in facts and
circumstances that may indicate impairment in the carrying value.
In July of 2001, the Financial Accounting Standards Board (FASB) issued
Statement No. 141 (SFAS No. 141), "Business Combinations," and Statement No. 142
(SFAS No. 142), "Goodwill and Other Intangible Assets." SFAS No. 141 requires
that the purchase method of accounting be used for all business combinations
initiated after June 30, 2001. SFAS No. 141 also establishes specific criteria
for the recognition of intangible assets separately from goodwill. SFAS No. 142
requires that goodwill and intangible assets with indefinite useful lives no
longer be amortized, but instead tested for impairment at least annually in
55
NOTE A--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - continued
accordance with the provisions of SFAS No.142. However, SFAS No. 142 did not
supercede FASB Statement No. 72, "Accounting for Certain Acquisitions of Banking
or Thrift Institutions," and therefore, any goodwill accounted for in accordance
with this Statement will continue to be amortized until further guidance is
issued from the FASB. SFAS No. 142 also requires that intangible assets with
definite useful lives (such as core deposit intangibles) be amortized over their
respective estimated useful lives to their estimated residual values, and
reviewed for impairment. The provisions of SFAS No. 142 are effective January 1,
2002 and management estimates the benefit associated with the elimination of
goodwill amortization in 2002 to be approximately $1.2 million after tax, or
$.03 per diluted share. SFAS No. 142 requires that a transitional impairment
test of goodwill and indefinite-lived intangible assets be performed within six
months of adoption and any resulting impairment loss be reported as a change in
accounting principle. Based on preliminary tests performed, no recording of
impairment loss is anticipated.
At December 31, 2001 and 2000, deposit base intangibles and goodwill
approximated $88,240,000 and $38,710,000, net of accumulated amortization of
approximately $28,469,000 and $25,185,000.
Stock Options: United has stock option plans for certain employees that are
- -------------
accounted for under the intrinsic value method. Because the exercise price at
the date of the grant is equal to the market value of the stock, no compensation
expense is recognized.
Treasury Stock: United records common stock purchased for treasury at cost. At
- --------------
the date of subsequent reissue, the treasury stock account is reduced by the
cost of such stock using the weighted average cost method.
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 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 that
would be issued assuming the exercise of common stock options. The dilutive
effect of stock options approximated 567,615, 301,314 and 621,104 shares in
2001, 2000 and 1999, respectively.
Operating Segments: United operates in the community banking and mortgage
- ------------------
banking businesses. Business results are based upon United's management
accounting practices and are provided to the chief operating decision maker for
determination of resource allocation and performance.
New Accounting Standards: On January 1, 2001, United adopted FASB Statement No.
- ------------------------
133 (SFAS No. 133) "Accounting for Derivative Instruments and Hedging
Activities," as amended by FASB Statement No. 137 (SFAS No. 137). The adoption
of this standard did not materially impact the reported financial position or
results of operations of United. The provisions of this statement require that
derivative instruments be
56
NOTE A--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - continued
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 determine when hedge accounting can be used.
In accordance with current interpretations of SFAS No. 133, United is required
to recognize its commitments with borrowers (interest rate lock commitments) and
investors (best efforts commitments) on loans originated for sale in its
mortgage banking operations. These commitments are entered into with the
borrower and investor to manage the inherent interest rate and pricing risk
associated with selling loans in the secondary market. These derivatives are
accounted for by recognizing the fair value of the contracts and commitments on
the balance sheet as either a freestanding asset or liability, with a
corresponding offset recorded in other comprehensive income within shareholders'
equity, net of income tax. Amounts are reclassified from other comprehensive
income into the income statement in the period or periods that the hedged
transaction affects earnings.
In August of 2001, the FASB issued Statement No. 144 (SFAS No. 144), "Accounting
for the Impairment or Disposal of Long-Lived Assets." The adoption of this
standard is not expected to have a material impact on the financial position or
results of operations of United.
NOTE B--MERGERS AND ACQUISITIONS
On December 7, 2001, United acquired 100% of the outstanding common stock of
Century Bancshares, Inc., Washington, D.C. (Century). The results of operations
of Century, which are not significant, have been included in the consolidated
results of operations from the date of acquisition. As a result of this
acquisition, United increased its presence in Northern Virginia, Washington,
D.C., and Montgomery County, Maryland by adding 11 full service offices.
The aggregate purchase price was $63.8 million, including $15.1 million of cash,
and 1.98 million shares of common stock valued at $48.7 million. The value of
the 1.98 million common shares issued was determined based on the average market
price of United's common shares over the period including the two days before
and after the terms of the acquisition were agreed to and announced. At
consummation, Century had assets of approximately $414 million, loans of $295
million, deposits of $330 million and shareholders' equity of $20 million.
57
NOTE C--INVESTMENT SECURITIES
The amortized cost and estimated fair values of securities available for sale
are summarized as follows:
December 31, 2001
-------------------------------------------------
(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 $ 61,082 $ 651 $ 288 $ 61,445
State and political subdivisions 62,188 341 1,075 61,454
Mortgage-backed securities 861,799 17,587 1,919 877,467
Marketable equity securities 8,254 906 1,306 7,854
Other 140,392 767 2,099 139,060
-------------------------------------------------
Total $1,133,715 $20,252 $6,687 $1,147,280
=================================================
December 31, 2000
-------------------------------------------------
(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 $160,702 $ 519 $ 1,797 $159,424
State and political subdivisions 52,095 307 575 51,827
Mortgage-backed securities 574,292 4,984 2,666 576,610
Marketable equity securities 8,551 1,107 1,024 8,634
Other 69,723 952 68,771
-------------------------------------------------
Total $865,363 $6,917 $ 7,014 $865,266
=================================================
The amortized cost and estimated fair value of securities available for sale at
December 31, 2001 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.
Maturities of mortgage-backed securities with an amortized cost of $861,799,000
and an estimated fair value of $877,467,000 at December 31, 2001 are shown below
based upon an estimated average life.
Estimated
(In thousands) Amortized Fair
Cost Value
---------- ----------
Due in one year or less $ 22,995 $ 23,089
Due after one year through five years 32,635 33,372
Due after five years through ten years 122,749 124,049
Due after ten years 947,082 958,916
Marketable equity securities 8,254 7,854
---------- ----------
Total $1,133,715 $1,147,280
========== ==========
Gross realized gains and losses from sales of securities available for sale were
$2,382,000 and $1,605,000; $2,316,000 and $15,676,000; and $1,759,000 and
$1,076,000, respectively, in 2001, 2000 and 1999.
58
NOTE C--INVESTMENT SECURITIES - continued
The amortized cost and estimated fair values of securities held to maturity are
summarized as follows:
December 31, 2001
-----------------------------------------------
(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 $ 29,935 $ 285 $ 19 $ 30,201
State and political subdivisions 89,540 1,491 1,057 89,974
Mortgage-backed securities 4,278 132 4,410
Other 157,683 1,534 2,937 156,280
-----------------------------------------------
Total $281,436 $3,442 $4,013 $280,865
===============================================
December 31, 2000
-----------------------------------------------
(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 $ 55,724 $ 225 $ 176 $ 55,773
State and political subdivisions 93,006 1,508 854 93,660
Mortgage-backed securities 70,279 654 285 70,648
Other 161,059 110 2,845 158,324
-----------------------------------------------
Total $380,068 $2,497 $4,160 $378,405
===============================================
The amortized cost and estimated fair value of debt securities held to maturity
at December 31, 2001 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. Maturities of mortgage-backed securities with an amortized cost of
$4,278,000 and an estimated fair value of $4,410,000 at December 31, 2001 are
shown below based upon an estimated average life.
Estimated
(In thousands) Amortized Fair
Cost Value
--------- ---------
Due in one year or less $ 1,448 $ 1,477
Due after one year through five years 32,729 33,837
Due after five years through ten years 72,922 74,216
Due after ten years 174,337 171,335
-------- --------
Total $281,436 $280,865
======== ========
As permitted, upon adopting SFAS No. 133 on January 1, 2001, debt securities
with an amortized cost of $71,293,000 and an estimated fair value of $71,668,000
were transferred into the available for sale category from the held to maturity
category.
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 $992,341,000 and $788,899,000 at December 31,
2001 and 2000, respectively.
59
NOTE D--ASSET SECURITIZATION
During 1999, United sold residential mortgage loans in a securitization
transaction and recognized a pretax gain of $467,000. In that securitization,
United retained subordinated interests that represent United's right to future
cash flows arising after the investors in the securitization trust have received
the return for which they contracted. United does not receive annual servicing
fees from this securitization because the loans are serviced by an independent
third-party. The investors and the securitization trust have no recourse to
United's other assets for failure of debtors to pay when due; however, United's
retained interests are subordinate to investors' interests. The value of the
retained interests is subject to credit, prepayment, and
interest rate risks on the underlying financial assets. At the date of
securitization, key economic assumptions used in measuring the fair value of the
retained interests were as follows: a weighted-average life of 5.3 years,
expected cumulative credit losses of 15%, and discount rates of 8% to 18%.
For the years ended December 31, 2001 and 2000, United received cash of
$10,926,000 and $13,325,000, respectively, on the retained interest in the
securitization.
Key economic assumptions used in measuring the fair value of the retained
interests at December 31, 2001 and 2000 were as follows:
December 31
------------------------------
2001 2000
-------------- -------------
Weighted average life (in years) 3.6 3.8
Prepayment speed assumption (annual rate) 17.13% - 35.99% 13.50%
Cumulative default rate (annual rate) 16.00% 17.00%
Residual cash flows discount rate (annual rate) 5.57% - 14.52% 7.08% - 17.73%
At December 31, 2001 and 2000, key economic assumptions and the sensitivity of
the current fair value of residual cash flows to immediate 10% and 20% adverse
changes in those assumptions are as follows:
December 31
-----------------
2001 2000
------- -------
Fair value of retained interests $48,690 $56,030
Prepayment curve:
Decline in fair value of 10% adverse change $ 1,204 $ 1,622
Decline in fair value of 20% adverse change $ 2,287 $ 3,091
Default curve:
Decline in fair value of 10% adverse change $ 2,598 $ 2,720
Decline in fair value of 20% adverse change $ 5,299 $ 5,756
Discount rate:
Decline in fair value of 10% adverse change $ 1,422 $ 2,036
Decline in fair value of 20% adverse change $ 2,767 $ 3,939
These sensitivities are hypothetical and should be used with caution. As the
figures indicate, changes in fair value based on a 10% variation in assumptions
generally cannot be extrapolated because the relationship of the change in the
assumption to the change in the fair value may not be linear. Also, the effect
of a variation
60
NOTE D--ASSET SECURITIZATION - continued
in a particular assumption on the fair value of the retained interests is
calculated without changing any other assumption; in reality, changes in one
factor may result in changes in another factor (for example, increases in market
interest rates may result in lower prepayments) that might magnify or counteract
the sensitivities.
The following table presents quantitative information about delinquencies, net
credit losses, and components of the underlying securitized financial assets:
Principal Amount of
(In thousands) Total Principal Loans 60 Days
Amount of Loans or More Past Due Average Balances Net Credit Losses
------------------- ------------------- ------------------- -----------------
At December 31, During the Year
----------------------------------------- ---------------------------------------
Type of Loan 2001 2000 2001 2000 2001 2000 2001 2000
------------ -------- -------- ------ ------ -------- -------- ------ ------
Residential mortgage
loans (fixed-rate) $109,105 $152,797 $2,479 $2,368 $131,066 $169,958 $6,549 $8,297
NOTE E--LOANS
Major classifications of loans are as follows:
(In thousands) December 31
--------------------------
2001 2000
---------- ----------
Commercial, financial and agricultural $ 662,070 $ 564,887
Real estate:
Single-family residential 1,313,784 1,352,955
Commercial 891,118 711,054
Construction 195,063 164,505
Other 88,416 84,742
Installment 354,934 319,351
---------- ----------
Total gross loans $3,505,385 $3,197,494
========== ==========
The table above does not include loans held for sale of $368,625,000 and
$203,831,000 at December 31, 2001 and 2000, respectively.
An analysis of the allowance for loan losses follows:
Year Ended December 31
-------------------------------
(In thousands) 2001 2000 1999
------- ------- -------
Balance at beginning of period $40,532 $39,599 $39,189
Allowance of purchased subsidiaries 4,673
Provision charged to expense 12,833 15,745 8,800
------- ------- -------
58,038 55,344 47,989
------- ------- -------
Loans charged off 12,359 15,845 9,236
Less recoveries 1,729 1,033 846
------- ------- -------
Net charge-offs 10,630 14,812 8,390
------- ------- -------
Balance at end of period $47,408 $40,532 $39,599
======= ======= =======
61
NOTE E--LOANS - continued
The higher provision and charge-offs in 2001 and 2000 relate to losses from
certain junior-lien mortgages reclassified from available for sale securities to
portfolio loans in October 2000.
United has commercial loans, including real estate and owner-occupied,
income-producing real estate and land development loans, of approximately
$1,553,188,000 and $1,275,941,000 as of December 31, 2001 and 2000,
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, 2001, the recorded investment in loans that were considered to
be impaired was $12,593,000 (of which $8,068,000 was on a nonaccrual basis).
Included in this amount was $5,643,000 of impaired loans for which the related
allowance for loan losses was $639,000, and $6,950,000 of impaired loans that
did not have an allowance for credit losses. At December 31, 2000, the recorded
investment in loans that were considered to be impaired was $12,504,000 (of
which $8,131,000 was on a nonaccrual basis). Included in this amount was
$4,711,000 of impaired loans for which the related allowance for credit losses
was $872,000, and $7,793,000 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, 2001, 2000 and 1999 was approximately $12,654,000, $15,557,000 and
$16,681,000, respectively.
The amount of interest income that would have been recorded on impaired loans,
which are on nonaccrual, under the original terms was $723,000, $1,519,000 and
$2,237,000 for the years ended December 31, 2001, 2000 and 1999, respectively.
For the years ended December 31, 2001, 2000 and 1999, United recognized interest
income on those impaired loans of approximately $373,000, $649,000 and $560,000,
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
$107,305,000 and $124,512,000 at December 31, 2001 and 2000, respectively.
During 2001, $52,861,000 of new loans were made, repayments totaled $68,791,000,
and other changes due to the change in composition of United's board members and
executive officers approximated $1,277,000.
62
NOTE F--BANK PREMISES AND EQUIPMENT AND LEASES
Bank premises and equipment are summarized as follows:
December 31
---------------------
(In thousands) 2001 2000
-------- --------
Land $ 11,799 $ 10,248
Buildings and improvements 47,115 44,440
Leasehold improvements 12,188 9,763
Furniture, fixtures and equipment 60,079 52,629
-------- --------
131,181 117,080
Less allowance for depreciation and amortization 82,787 72,599
-------- --------
Net bank premises and equipment $ 48,394 $ 44,481
======== ========
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 provide for periodic rate
adjustments based on cost-of-living index changes. Rent expense for
noncancelable oper- ating leases approximated $4,813,000, $4,858,000 and
$4,916,000 for the years ended December 31, 2001, 2000 and 1999, respectively.
Future minimum payments, by year and in the aggregate, under noncancelable
operating leases with initial or remaining terms of one year or more, for years
subsequent to December 31, 2001, consisted of the following:
Year Amount
- ---- -------
(Dollars in thousands)
2002 $ 4,251
2003 3,059
2004 2,337
2005 1,835
2006 1,433
Thereafter 4,625
-------
Total minimum lease payments $17,540
=======
NOTE G--DEPOSITS
The book value of deposits consisted of the following:
(In thousands) December 31
--------------------------
2001 2000
---------- ----------
Noninterest-bearing checking $ 653,785 $ 539,415
Interest-bearing checking 128,211 87,369
Regular savings 367,602 345,369
Money market accounts 881,784 713,184
Time deposits under $100,000 1,357,479 1,316,655
Time deposits over $100,000 398,932 389,457
---------- ----------
Total deposits $3,787,793 $3,391,449
========== ==========
63
NOTE G--DEPOSITS- continued
Interest paid on deposits and borrowings approximated $179,338,000, $192,543,000
and $172,907,000 in 2001, 2000 and 1999, respectively.
At December 31, 2001, the scheduled maturities of time deposits are as follows:
Year Amount
- ---- ----------
(Dollars in thousands)
2002 $1,272,622
2003 318,144
2004 112,354
2005 30,320
2006 and thereafter 22,971
----------
Total $1,756,411
==========
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 $18,736,000 and $19,493,000 at December 31, 2001
and 2000, respectively.
NOTE H--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, 2001, United
had approximately $561,558,000 of additional available borrowings in the form of
collateralized advances from the FHLB at prevailing interest rates.
At December 31, 2001, $55,000,000 of FHLB advances with an interest rate of
1.88% had an overnight maturity. Additionally, $681,455,000 of FHLB advances
with a weighted average interest rate of 6.40% are scheduled to mature from one
to twenty years. At December 31, 2001, the scheduled maturities of FHLB advances
are as follows:
Year Amount
--------
(Dollars in thousands)
2002 $ 56,118
2003 773
2004 13,785
2005 90,000
2006 and thereafter 575,779
--------
Total $736,455
========
United also has various unused lines of credit available from certain of its
correspondent banks in the aggregate amount of $201,500,000. 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.
64
NOTE H--BORROWINGS- continued
At December 31, 2001 and 2000, borrowings and the related weighted average
interest rates were as follows:
2001 2000
---------------------- ----------------------
Weighted Weighted
(Dollars in thousands) Average Average
Amount Rate Amount Rate
---------- -------- ---------- --------
Federal funds purchased $ 43,831 1.66% $ 15,720 6.55%
Securities sold under
agreements to repurchase 477,796 2.04% 313,349 5.16%
FHLB advances 736,455 6.06% 706,512 6.30%
Mandatorily redeemable
capital securities of
subsidiary trust 8,800 10.88%
Other 5,501 1.51% 4,647 5.72%
---------- ----------
Total $1,272,383 $1,040,228
========== ==========
Information concerning securities sold under agreements to repurchase (in
thousands) is summarized as follows:
2001 2000
-------- --------
Average balance during the year $390,545 $351,816
Average interest rate during the year 3.46% 5.32%
Maximum month-end balance during the year $503,887 $417,866
NOTE I--TRUST PREFERRED SECURITIES
As part of the acquisition of Century, United assumed all the obligations of
Century and its subsidiaries. One such subsidiary, Century Capital Trust I (the
Trust) is a statutory business trust formed during the first quarter of 2000.
The Trust issued $8.8 million of capital securities (the Capital Securities) to
a third party and received net cash proceeds of $8.536 million after considering
the underwriter's discount. The Trust invested the proceeds in an equivalent
amount of junior subordinated debt securities of Century, now United, bearing an
interest rate equal to the rate on the Capital Securities. These debt
securities, which are the only assets of the Trust, are subordinate and junior
in right of payment to all present and future senior indebtedness (as defined in
the indenture) and certain other financial obligations of Century, now United.
United fully and unconditionally guarantees the Trust's obligations under the
Capital Securities.
For financial reporting purposes, the Trust is treated as a subsidiary of United
and consolidated in the corporate financial statements. The Capital Securities
are presented as a separate category of long-term debt on the Consolidated
Balance Sheets entitled "Mandatorily redeemable capital securities of subsidiary
trust." The Capital Securities are not included as a component of stockholders'
equity in the Consolidated Balance Sheets. For regulatory purposes, the $8.8
million of Capital Securities are included in Tier 1 capital in accordance with
regulatory reporting requirements.
The Capital Securities pay cash dividends semiannually at an annual rate of
10.875% of the liquidation preference. Dividends to the holders of the Capital
Securities are included in the Consolidated Statements of Income as interest
expense. Under the provisions of the subordinated debt, United has the right to
defer payment of interest on the subordinated debt at any time, or from time to
time, for periods not exceeding five
65
NOTE I--TRUST PREFERRED SECURITIES- continued
years. If interest payments on the subordinated debt are deferred, the dividends
on the Capital Securities are also deferred. Interest on the subordinated debt
is cumulative.
Subject to the prior approval of the Federal Reserve Board, the Capital
Securities, the assets of the Trust, and the common securities issued by the
Trust are redeemable at the option of United in whole or in part on or after
March 8, 2010, or at any time, in whole but not in part, from the date of
issuance, upon the occurrence of certain events.
NOTE J--INCOME TAXES
The income tax provisions included in the consolidated statements of income are
summarized as follows:
(In thousands) Year Ended December 31
----------------------------------------
2001 2000 1999
-------- -------- --------
Current expense:
Federal $ 40,585 $ 33,579 $ 36,424
State 1,412 1,590 2,825
Deferred benefit:
Federal and State (3,258) (6,445) (4,475)
-------- -------- --------
Income taxes $ 38,739 $ 28,724 $ 34,774
======== ======== ========
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
----------------------------------------------------
(Dollars in thousands) 2001 2000 1999
--------------- --------------- ---------------
Amount % Amount % Amount %
-------- ---- -------- ---- -------- ----
Tax on income before taxes
at statutory federal rate $ 41,556 35.0% $ 30,695 35.0% $ 36,758 35.0%
Plus: State income taxes
net of federal tax Benefits 917 0.8 1,034 1.2 1,836 1.7
-------- ---- -------- ---- -------- ----
42,473 35.8 31,729 36.2 38,594 36.7
Increase (decrease) resulting from:
Tax-exempt interest income (3,465) (2.9) (3,380) (3.9) (3,087) (2.9)
Intangible amortization 742 0.6 768 0.9 778 0.7
Other items-net (1,011) (0.9) (393) (0.4) (1,511) (1.4)
-------- ---- -------- ---- -------- ----
Income taxes $ 38,739 32.6% $ 28,724 32.8% $ 34,774 33.1%
======== ==== ======== ==== ======== ====
66
NOTE J--INCOME TAXES - continued
Federal income tax benefit applicable to securities transactions in 2001 and
2000 approximated $181,000 and $4,852,000, respectively. Federal income tax
expense applicable to securities transactions approximated $237,000 in 1999.
Income taxes paid approximated $31,576,000, $36,065,000 and $34,333,000 in 2001,
2000 and 1999, 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, 2001 and 2000 are as follows:
(In thousands) 2001 2000
------- -------
Deferred tax assets:
Allowance for loan losses $16,269 $14,060
Securities available for sale 2,898
Accrued benefits payable 1,524 1,497
Other accrued liabilities 5,114 4,315
Interest in securitization trust 473 6,499
Net operating loss carryforward 2,491
Other 2,408 2,335
------- -------
Total deferred tax assets 28,279 31,604
------- -------
Deferred tax liabilities:
Premises and equipment 792 1,588
Purchase accounting intangibles 745 329
Income tax allowance for
loan losses 462 717
Deferred mortgage points 2,480 2,177
Securities available for sale 2,307
Other 749 794
------- -------
Total deferred tax
liabilities 7,535 5,605
------- -------
Net deferred tax assets $20,744 $25,999
======= =======
NOTE K--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.
67
NOTE K--EMPLOYEE BENEFIT PLANS - continued
Net periodic pension cost included the following components:
(In thousands) Year Ended December 31,
-----------------------------
2001 2000 1999
------- ------- -------
Service cost $ 1,426 $ 1,344 $ 1,448
Interest cost 2,179 2,050 1,725
Expected return on plan assets (4,420) (4,075) (2,749)
Amortization of transition asset (131) (131) (131)
Recognized net actuarial gain (1,045) (1,136) (222)
Amortization of prior service cost 63 63 63
------- ------- -------
Net periodic pension (benefit) cost ($1,928) ($1,885) $ 134
======= ======= =======
A reconciliation of the changes in benefit obligation and plan assets for the
defined benefit retirement plan is as follows:
(In thousands) December 31,
--------------------
2001 2000
-------- --------
Benefit obligation at beginning
of year $ 26,922 $ 24,257
Service cost 1,426 1,344
Interest cost 2,179 2,050
Actuarial loss 3,133 243
Benefits paid (1,072) (972)
-------- --------
Benefit obligation at end of year 32,588 26,922
-------- --------
Fair value of plan assets at
beginning of year 45,846 41,060
Actual return on plan assets (8,200) 4,020
Employer contribution 1,738
Benefits paid (1,072) (972)
-------- --------
Fair value of plan assets at
end of year 36,574 45,846
-------- --------
Funded status 3,986 18,924
Unrecognized net actuarial gain 2,808 (13,991)
Unrecognized prior service cost 72 136
Unrecognized net transition asset (169) (301)
-------- --------
Pension asset $ 6,697 $ 4,768
======== ========
At December 31, 2001 and 2000, the weighted average discount rate of 7.75% and
8.25%, respectively, and the rate of increase in future compensation levels of
5% for both years were used in determining the actuarial present value of the
projected benefit obligation. The weighted-average expected long-term rate of
return on United's plan assets was 9.75% for the years ended December 31, 2001
and 2000 and 9.0% for the year ended December 31, 1999. The benefit obligation
at December 31, 2001 increased from December 31, 2000, due to changes in the
obligation-related assumptions.
68
NOTE K--EMPLOYEE BENEFIT PLANS - continued
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 15% 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 $733,000, $906,000
and $1,166,000 in 2001, 2000 and 1999, respectively.
The assets of United's defined benefit plan and 401(k) Plan each include
investments in United common stock. At December 31, 2001, the combined plan
assets included 717,712 shares of United common stock with an approximate fair
value of $20,713,000. Dividends paid on United common stock held by the plans
approximated $658,000 for the year ended December 31, 2001.
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 that provide
for the granting of stock options of up to 4,400,000 shares of common stock. At
December 31, 2001, United had available 1,740,800 shares of common stock
available for future grants to key employees. 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, 2001:
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
- -----------------------------------------------------------------------------------
$ 4.26 to $ 27.00 1,952,283 7.0 years $18.12 1,507,076 $16.66
69
NOTE K--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, 1999 1,632,291 $27.00 $2.98
Granted 227,800 25.63
Exercised 281,960 22.00 2.98
Forfeited 39,738 27.00 14.88
---------
Outstanding at December 31, 1999 1,538,393 27.00 2.98
Granted 230,400 19.19
Exercised 197,663 15.00 6.88
Forfeited 57,439 27.00 22.00
---------
Outstanding at December 31, 2000 1,513,691 27.00 2.98
Granted 259,200 27.12
Exercised 259,817 27.00 2.98
Assumed in acquisition of subsidiary 512,973 19.48 4.26
Forfeited 73,764 27.00 9.62
---------
Outstanding at December 31, 2001 1,952,283 $27.12 $4.26
========= ===============
Exercisable at:
December 31, 1999 1,156,568 $27.00 $2.98
December 31, 2000 1,086,291 $27.00 $2.98
December 31, 2001 1,507,076 $27.00 $4.26
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:
(Dollars in thousands, except per share) Year Ended December 31,
---------------------------
2001 2000 1999
------- ------- -------
Pro forma net income $79,704 $58,379 $70,019
Pro forma diluted earnings per share $ 1.89 $ 1.38 $ 1.60
The estimated fair value of the options at the date of grant was $5.54, $3.83
and $5.64 for the options granted during 2001, 2000 and 1999 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 2001, 2000 and 1999, respectively: risk-free interest rates of
4.86%, 6.20% and 5.79%; dividend yields of 3.43%, 4.38%, and 3.43%; volatility
factors of the expected market price of United's common stock of 0.217, 0.221
and 0.211; 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 that 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.
70
NOTE L--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
$937,933,000 and $1,086,455,000 of loan commitments outstanding as of December
31, 2001 and 2000, 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
$103,446,000 and $89,013,000 as of December 31, 2001 and 2000, respectively.
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.
71
NOTE M - UNITED BANKSHARES, INC. (PARENT COMPANY ONLY) FINANCIAL INFORMATION
Condensed Balance Sheets
(In thousands) December 31
--------------------
2001 2000
-------- --------
Assets
Cash and due from banks $ 14,458 $ 3,719
Securities available for sale 8,199 9,002
Securities held to maturity 6,855 6,859
Loans 5,700 6,905
Investment in subsidiaries:
Bank subsidiaries 494,216 411,367
Non-bank subsidiaries 1,414 1,446
Other assets 1,017 1,435
-------- --------
Total Assets $531,859 $440,733
======== ========
Liabilities and Shareholders' Equity
Line of credit from banking subsidiary $ 8,000 $ 5,000
Accrued expenses and other liabilities 17,330 4,863
Shareholders' equity (including other accumulated
comprehensive gain of $4,351 at December 31,
2001 and other accumulated comprehensive
loss of $4,964 at December 31, 2000) 506,529 430,870
-------- --------
Total Liabilities and Shareholders' Equity $531,859 $440,733
======== ========
Condensed Statements of Income
(In thousands) Year Ended December 31
-----------------------------
2001 2000 1999
-------- ------- -------
Income
Dividends from banking subsidiaries $ 71,000 $45,500 $40,352
Net interest income 1,015 1,074 1,668
Management fees:
Bank subsidiaries 4,019 4,130 4,146
Non-bank subsidiaries 12 12 12
Other income 13 2,188 1,489
-------- ------- -------
Total Income 76,059 52,904 47,667
-------- ------- -------
Expenses
Interest paid to banking subsidiary 223 372 6
Operating expenses 5,384 4,615 4,698
-------- ------- -------
Income Before Income Taxes and Equity
in Undistributed Net Income of Subsidiaries 70,452 47,917 42,963
Applicable income tax (benefit) expense (178) 798 853
-------- ------- -------
Income Before Equity in Undistributed Net
Income (loss) of Subsidiaries 70,630 47,119 42,110
Equity in undistributed net income (loss) of
subsidiaries:
Bank subsidiaries 9,392 11,795 28,102
Non-bank subsidiaries (31) 62 36
-------- ------- -------
Net Income $ 79,991 $58,976 $70,248
======== ======= =======
72
NOTE M - UNITED BANKSHARES, INC. (PARENT COMPANY ONLY) FINANCIAL INFORMATION -
continued
Condensed Statements of Cash Flows
(In thousands) Year Ended December 31
--------------------------------
2001 2000 1999
-------- -------- --------
Operating Activities
Net income $ 79,991 $ 58,976 $ 70,248
Adjustments to reconcile net income to
net cash provided by operating activities:
Equity in undistributed net income
of subsidiaries (9,361) (11,857) (28,138)
Depreciation and net amortization 11 7 12
Net loss (gain) on securities transactions 48 (2,168) (1,484)
Net change in other assets and liabilities 11,927 (9,511) 786
-------- -------- --------
Net Cash Provided by Operating Activities 82,616 35,447 41,424
-------- -------- --------
Investing Activities
Net proceeds (purchases of) from securities 302 1,464 (2,205)
Cash paid in acquisition of subsidiary (15,102)
Repayment on loan balances by customers 1,205 4,189 1,742
-------- -------- --------
Net Cash (Used in) Provided by Investing Activities (13,595) 5,653 (463)
-------- -------- --------
Financing Activities
Net advances on line of credit from subsidiary 3,000 4,000 1,000
Cash dividends paid (36,990) (35,468) (34,999)
Acquisition of treasury stock (27,059) (18,384) (26,196)
Proceeds from exercise of stock options 2,766 2,370 2,876
-------- -------- --------
Net Cash Used in Financing Activities (58,283) (47,482) (57,319)
-------- -------- --------
Increase (Decrease) in Cash and Cash Equivalents 10,738 (6,382) (16,358)
Cash and Cash Equivalents at Beginning of Year 3,719 10,101 26,459
-------- -------- --------
Cash and Cash Equivalents at End of Year $ 14,457 $ 3,719 $ 10,101
======== ======== ========
NOTE N--OTHER EXPENSE
The following details certain items of other expense for the periods indicated:
Year Ended December 31
------------------------
(In thousands) 2001 2000 1999
------ ------ ------
Other expense:
Data processing $3,488 $3,153 $3,175
Legal and consulting 2,739 3,923 1,709
Advertising 2,186 2,803 2,702
Goodwill amortization 3,287 3,266 3,279
Equipment expense 7,535 7,589 8,896
73
NOTE O--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, 2001, was approximately $49,133,000.
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 2002, the subsidiary banks of United will need regulatory approval to pay
dividends to the parent company for distribution to its shareholders.
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 $23,703,000 at
December 31, 2001, 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 assets, as defined, and
of Tier I capital, as defined, to average assets, as defined. At of December 31,
2001, United exceeds all capital adequacy requirements to which it is subject.
At December 31, 2001, 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.
74
NOTE O--REGULATORY MATTERS - continued
United's and its subsidiary banks' (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
-------- ----- -------- ------------------------- ----------- --------------------------
As of December 31, 2001:
- ------------------------
Total Capital (to Risk-
Weighted Assets):
United Bankshares $469,527 11.4% $330,332 GREATER THAN OR EQUAL TO 8.0% $412,914 GREATER THAN OR EQUAL TO 10.0%
United National Bank 295,411 11.2% 211,773 GREATER THAN OR EQUAL TO 8.0% 264,716 GREATER THAN OR EQUAL TO 10.0%
United Bank 158,872 10.1% 126,178 GREATER THAN OR EQUAL TO 8.0% 157,722 GREATER THAN OR EQUAL TO 10.0%
Tier I Capital (to Risk-
Weighted Assets):
United Bankshares 413,319 10.0% 165,166 GREATER THAN OR EQUAL TO 4.0% 247,749 GREATER THAN OR EQUAL TO 6.0%
United National Bank 266,273 10.1% 105,886 GREATER THAN OR EQUAL TO 4.0% 158,830 GREATER THAN OR EQUAL TO 6.0%
United Bank 135,102 8.6% 63,089 GREATER THAN OR EQUAL TO 4.0% 94,633 GREATER THAN OR EQUAL TO 6.0%
Tier I Capital
(to Average Assets):
United Bankshares 413,319 8.0% 207,991 GREATER THAN OR EQUAL TO 4.0% 259,988 GREATER THAN OR EQUAL TO 5.0%
United National Bank 266,273 7.6% 139,350 GREATER THAN OR EQUAL TO 4.0% 174,187 GREATER THAN OR EQUAL TO 5.0%
United Bank 135,102 7.6% 71,013 GREATER THAN OR EQUAL TO 4.0% 88,766 GREATER THAN OR EQUAL TO 5.0%
As of December 31, 2000:
- ------------------------
Total Capital (to Risk-
Weighted Assets):
United Bankshares $437,180 11.8% $297,130 GREATER THAN OR EQUAL TO 8.0% $371,413 GREATER THAN OR EQUAL TO 10.0%
United National Bank 290,524 11.1% 210,279 GREATER THAN OR EQUAL TO 8.0% 262,849 GREATER THAN OR EQUAL TO 10.0%
United Bank 125,249 11.6% 86,122 GREATER THAN OR EQUAL TO 8.0% 107,652 GREATER THAN OR EQUAL TO 10.0%
Tier I Capital (to Risk-
Weighted Assets):
United Bankshares 396,610 10.7% 148,565 GREATER THAN OR EQUAL TO 4.0% 222,848 GREATER THAN OR EQUAL TO 6.0%
United National Bank 263,217 10.0% 105,139 GREATER THAN OR EQUAL TO 4.0% 157,709 GREATER THAN OR EQUAL TO 6.0%
United Bank 112,024 10.4% 43,061 GREATER THAN OR EQUAL TO 4.0% 64,591 GREATER THAN OR EQUAL TO 6.0%
Tier I Capital
(to Average Assets):
United Bankshares 396,610 8.2% 194,267 GREATER THAN OR EQUAL TO 4.0% 242,834 GREATER THAN OR EQUAL TO 5.0%
United National Bank 263,217 7.9% 132,743 GREATER THAN OR EQUAL TO 4.0% 165,929 GREATER THAN OR EQUAL TO 5.0%
United Bank 112,024 7.3% 61,716 GREATER THAN OR EQUAL TO 4.0% 77,146 GREATER THAN OR EQUAL TO 5.0%
NOTE P--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.
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.
75
NOTE P--FAIR VALUES OF FINANCIAL INSTRUMENTS - continued
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. The estimated fair value of loans held for sale is based upon the
market price of similar loans which is not materially different than cost due to
the short time duration between origination and sale.
Derivative Financial Instruments: The estimated fair value of derivative
- --------------------------------
financial instruments is based upon the current market price for similar
instruments.
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.
Deposits: The fair values of demand deposits (e.g., interest and noninterest
- --------
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.
Long-term Borrowings: The fair values of United's Federal Home Loan Bank
- --------------------
borrowings and Trust Preferred securities are estimated using discounted cash
flow analyses, based on United's current incremental borrowing rates for similar
types of borrowing arrangements.
The estimated fair values of United's financial instruments are summarized
below:
December 31, 2001 December 31, 2000
----------------------- -----------------------
(In thousands) Carrying Fair Carrying Fair
Amount Value Amount Value
---------- ---------- ---------- ----------
Cash and cash equivalents $ 157,594 $ 157,594 $ 144,810 $ 144,810
Securities available for sale 1,147,280 1,147,280 865,266 865,266
Securities held to maturity 281,436 280,865 380,068 378,405
Loans held for sale 368,625 368,625 203,831 203,831
Loans 3,502,334 3,579,568 3,192,494 3,181,933
Derivative financial assets 3,654 3,654
Deposits 3,787,793 3,581,245 3,391,449 3,315,058
Short-term borrowings 527,128 529,312 333,716 334,146
Long-term borrowings 745,255 784,428 706,512 717,590
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NOTE Q--SEGMENT INFORMATION
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
- -------------------------------------------------------------------------------------------------------
2001
Net interest income $ 8,006 $ 176,274 $ 824 $ 185,103
Provision for loan losses 12,833 12,833
Net interest income after provision for loan losses 8,006 163,440 824 172,270
Noninterest income 26,518 35,722 (35) 62,205
Noninterest expense 22,808 91,524 1,413 115,745
Income before income taxes 11,716 107,639 (625) 118,730
Income tax expense 3,139 35,793 (193) 38,739
Net income 8,577 71,846 (431) 79,991
Average total assets 209,701 4,851,227 (19,732) 5,041,196
- -------------------------------------------------------------------------------------------------------
2000
Net interest income $ 3,468 $ 175,808 $ 805 $ 180,081
Provision for loan losses 34 15,711 15,745
Net interest income after provision for loan losses 3,434 160,097 805 164,336
Noninterest income 16,152 15,446 2,188 33,786
Noninterest expense 14,101 95,836 485 110,422
Income before income taxes 5,485 79,707 2,508 87,700
Income tax expense 1,839 26,057 828 28,724
Net income 3,646 53,650 1,680 58,976
Average total assets 125,120 4,920,913 (109,429) 4,936,604
- -------------------------------------------------------------------------------------------------------
1999
Net interest income $ 3,480 $ 174,240 $ 2,543 $ 180,263
Provision for loan losses 19 8,781 8,800
Net interest income after provision for loan losses 3,461 165,459 2,543 171,463
Noninterest income 24,507 25,025 1,546 51,078
Noninterest expense 20,210 96,743 566 117,519
Income (loss) before income taxes 7,758 93,741 3,523 105,022
Income tax expense 2,687 31,033 1,054 34,774
Net income (loss) 5,071 62,708 2,469 70,248
Average total assets 148,397 4,860,973 (141,849) 4,867,521
- -------------------------------------------------------------------------------------------------------
General corporate and other includes intercompany eliminations.
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NOTE R - QUARTERLY FINANCIAL DATA (UNAUDITED)
Quarterly financial data for 2001 and 2000 is summarized below (dollars in
thousands except for per share data):
1st Quarter 2nd Quarter 3rd Quarter 4th Quarter
----------- ----------- ----------- -----------
2001
- ----
Interest income $91,997 $91,696 $90,296 $86,621
Interest expense 47,777 45,467 43,721 38,542
Net interest income 44,220 46,229 46,575 48,079
Provision for loan losses 2,499 2,143 4,145 4,046
Income from mortgage
Banking operations 5,225 6,469 7,343 7,481
Other noninterest income 8,720 8,427 8,413 10,127
Noninterest expense 26,996 29,453 28,882 30,414
Income taxes 9,318 9,745 9,524 10,152
Net income (1) 19,352 19,784 19,780 21,075
Per share data:
- ---------------
Average shares outstanding (000s):
Basic 41,703 41,467 41,264 41,559
Diluted 42,020 41,823 41,623 42,218
Net income per share:
Basic $ 0.46 $ 0.48 $ 0.48 $ 0.51
Diluted $ 0.46 $ 0.47 $ 0.48 $ 0.49
Dividends per share $ 0.22 $ 0.23 $ 0.23 $ 0.23
1st Quarter 2nd Quarter 3rd Quarter 4th Quarter
----------- ----------- ----------- -----------
2000
- ----
Interest income $93,268 $94,063 $95,298 $95,218
Interest expense 46,542 48,632 51,165 51,427
Net interest income 46,726 45,431 44,133 43,791
Provision for loan losses 2,547 3,851 4,439 4,908
Income from mortgage
Banking operations 3,383 4,159 5,014 3,784
Other noninterest income 7,418 8,305 8,310 (6,587)
Noninterest expense 28,143 27,106 25,463 29,710
Income taxes 8,849 8,815 8,994 2,066
Net income (1) 17,988 18,123 18,561 4,304
Per share data:
- ---------------
Average shares outstanding (000s):
Basic 42,273 41,931 41,842 41,776
Diluted 42,657 42,264 42,148 42,072
Net income per share:
Basic $ 0.43 $ 0.43 $ 0.44 $ 0.11
Diluted $ 0.42 $ 0.43 $ 0.44 $ 0.11
Dividends per share $ 0.21 $ 0.21 $ 0.21 $ 0.21
(1) For further information see the related discussion "Quarterly Results"
included in Management's Discussion and Analysis.
78