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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, 2000
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
-----------------------------
(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, 2001 was approximately $805,006,000.
As of February 28, 2001, United Bankshares, Inc. had 41,690,387 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, 2000
portions of which are incorporated by reference in Parts I, II and IV of this
Form 10-K.
2. Definitive Proxy Statement dated April 9, 2001 for the 2001 Annual
Shareholders' Meeting to be held on May 21, 2001, portions of which are
incorporated by reference in Part III of this Form 10-K.
Page 1 of 131 pages. Index to Exhibits is on page 30 .
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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, 2000, 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.................................. 25
Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT.............................................. 25
Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.......... 25
Part VI
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Item 14. EXHIBITS, FINANCIAL STATEMENTS, SCHEDULES AND REPORTS
ON FORM 8-K............................................. 26
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
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United Bankshares, Inc. ("United") is a West Virginia corporation
registered as a bank holding company pursuant to the Bank Holding Company Act of
1956, as amended. United was incorporated on March 26, 1982, organized on
September 9, 1982, and began conducting business on May 1, 1984 with the
acquisition of three wholly-owned subsidiaries. Since its formation in 1982,
United has acquired twenty-four banking institutions. United has two banking
subsidiaries, United National Bank ("UNB") and United Bank. United also owns
nonbank subsidiaries that engage in mortgage banking, asset management,
investment banking and financial planning.
Offices
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The headquarters of United are located in 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
seventy-seven offices--fifty-two offices located throughout West Virginia,
twenty-two 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
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As of December 31, 2000 United and its subsidiaries had approximately 1,253
full-time equivalent employees and officers. A collective bargaining unit
represents none of these employees, and management considers employee relations
to be excellent.
Business of United
- ------------------
As a bank holding company registered under the Bank Holding Company Act of
1956, as amended,
3
United's present business is community and mortgage banking. As of December 31,
2000, United's consolidated assets approximated $4.9 billion and total
shareholders' equity approximated $431 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, UNB and
United Bank offer credit card services including accounts issued under the name
of certain correspondent banks.
UNB and United Bank each maintains a trust department which acts as trustee
under wills, trust and pension and profit sharing plans, as executors and
administrators of estates, and as guardians for estates of minors and
incompetents, and in addition performs a variety of investment and security
services. Trust services are available to customers of affiliate banks. UNB
provides services to its correspondent banks such as check clearing, safekeeping
and the buying and selling of federal funds.
United Brokerage Services, Inc., a wholly-owned subsidiary of UNB, is a
fully-disclosed broker/dealer and a registered Investment Advisor with the
National Association of Securities Dealers, Inc. and the Securities and Exchange
Commission and a member of the Securities Investor Protection Corporation.
United Brokerage Services, Inc. offers a wide range of investment products as
well as comprehensive financial planning and asset management services to the
general public.
UNB is a member of a regional network of automated teller machines known as
the MAC ATM network while United Bank participates in the MOST network. Through
MAC and MOST, all of United's subsidiary banks are participants in a network
known as Cirrus, which provides banking on a nationwide basis.
Lending Activities
- ------------------
United's loan portfolio, net of unearned income, increased $22.4 million to
$3.19 billion in 2000 and is comprised of commercial, real estate and consumer
loans including credit card and home equity loans. Commercial and commercial
real estate loans increased $29.8 million or 5.6% and $69.8 million or 7.9%,
respectively. Consumer loans, net of unearned income, decreased $41.6 million or
11.7% while residential real estate loans also decreased $35.6 million or 2.6%.
4
As of December 31, 2000, approximately $348 million or 11% 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%.
The December 31, 2000 position in high loan-to-value loans is significantly
less than the December 31, 1999 and 1998 amounts of $401 million and $617
million, respectively, or 12% and 20% of total loans, respectively, of which
$456 million was held in the loans held for sale category on United's balance
sheet at December 31, 1998.
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. Coal mining
companies make up an insignificant portion of loans in the portfolio. 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 review and independent
evaluation of virtually all larger balance commercial loans by the loan
committee prior to approval.
Real Estate Loans
- -----------------
Commercial real estate loans consist of commercial mortgages, which
generally are secured by nonresidential and multi-family residential properties.
Also included in this portfolio are loans that are secured by owner-occupied
real estate, but made for purposes other than the construction or purchase of
real estate. Commercial real estate loans carry many of the same customers and
industry risks as the commercial loan portfolio. Real estate mortgage loans to
consumers are secured primarily by a first lien deed of trust. These loans are
traditional one-to-four family residential mortgages. The loans generally do
not exceed an 80% loan to value ratio at the loan origination date and most are
at a variable rate of interest. These loans are considered to contain normal
risk.
Consumer Loans
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Consumer loans are secured by automobiles, boats, recreational vehicles,
and other personal property. Personal loans, home equity, student loans and
unsecured credit card receivables are also included as consumer loans. United
monitors the risk associated with these types of loans by monitoring such
factors as portfolio growth, lending policies and economic conditions.
Underwriting standards are continually evaluated and modified based upon these
factors.
5
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, 2000, the balance of mortgage loans being
serviced by United for others was insignificant.
Secondary Markets
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United National Bank and George Mason Mortgage, LLC ("GMMC"), a wholly-
owned subsidiary of United Bank, are engaged in the operation of a general
mortgage and agency business, including the conducting of mortgage loan
servicing activities for certain loans, the origination and acquisition of
residential real estate loans for resale and generally the activities commonly
conducted by a mortgage banking company. These loans are for single, owner-
occupied residences with either adjustable or fixed rate terms, with a variety
of maturities tailored to effectively serve its markets.
GMMC primarily originates permanent residential mortgage loans in the
northern Virginia market while UNB's originations are predominately in its West
Virginia markets. Mortgage loan originations are generally intended to be sold
in the secondary market.
During 2000, United originated $1.2 billion of real estate loans for sale
in the secondary market and sold $1.1 billion of loans designated as held for
sale in the secondary market. Proceeds received from the sales of these loans
during 2000 were $1.1 billion.
The principal sources of revenue from United's mortgage banking business
are: (i) loan origination fees; (ii) gains or losses from the sale of loans, if
any; (iii) interest earned on mortgage loans during the period that they are
held by United pending sale; and (iv) loan servicing fees.
6
Investment Activities
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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.
During 2000 United recognized net losses of $13.86 million from the
available for sale portfolio. A significant portion of the losses was the
result of United's restructuring of its available for sale investment portfolio
late during the fourth quarter of 2000. United used the proceeds of
approximately $542 million from the sales to acquire investment securities that
will provide an increased yield above those sold. During 1999 and 1998, United
recognized net gains of $677 thousand, $2.37 million, respectively, from the
available for sale portfolio. The net gain in 1998 included a $2.49 million
gain recognized on an available for sale equity security exchanged in an
unaffiliated merger transaction consummated at the end of the first quarter of
1998. Additionally, the 1998 net gain included approximately $300 thousand of
net losses from calls of held to maturity securities.
At December 31, 2000, 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, 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
7
Statistical Areas (MSA): the Parkersburg MSA, the Charleston MSA, the Huntington
MSA, the Wheeling MSA and the Weirton MSA. United's Virginia markets include the
Washington, D.C. Metropolitan area. United considers the above counties and
MSA's to be the primary market area for the business of its banking
subsidiaries.
With prior regulatory approval, West Virginia and Virginia banks are
permitted unlimited branch banking throughout the state. In addition,
interstate acquisitions of and by West Virginia and Virginia banks and bank
holding companies are permissible on a reciprocal basis, as well as reciprocal
interstate acquisitions by thrift institutions. These conditions serve to
intensify competition within United's market.
As of December 31, 2000, there were 48 bank holding companies in the State
of West Virginia registered with the Federal Reserve System and the West
Virginia Board of Banking and Financial Institutions and 76 bank holding
companies in the Commonwealth of Virginia registered with the Federal Reserve
System and the Virginia Corporation Commission. These holding companies are
headquartered in various West Virginia and Virginia cities and control banks
throughout West Virginia and Virginia, which compete for business as well as for
the acquisition of additional banks.
Economic Characteristics of Primary Market Area
- -----------------------------------------------
Although the market area of the banking subsidiaries encompasses a portion
of the coal fields located in southern West Virginia, an area of the state which
has been economically depressed, the coal related loans in the loan portfolio of
the banking subsidiaries constitute less than 2% of United's total loans
outstanding. The state of West Virginia has a more diversified economy than it
had during the peak periods of coal production with the chemical manufacturing
industry accounting for 18% of the entire manufacturing workforce and 30% of the
manufacturing wages, according to West Virginia state records. This diversified
economy has contributed to the positive trends in the number of payroll jobs
created and unemployment rates in recent years as the number of payroll jobs
increased 4,000 during calendar year 2000 and the state's overall unemployment
rate has declined from 10.5% in 1991 to 5.5% in December 2000. West Virginia's
unemployment rate for all of 2000 averaged 5.5%, 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 2000 was
1.9%. The 1.9% unemployment rate was the first time the rate fell below 2.0% in
48 years. Additionally, the Virginia Employment Commission reported that record
levels were set with increased nonagricultural employment and increased factory
wages in December 2000. The Northern Virginia metropolitan area's unemployment
rate was at 1.1%, lowest among Virginia's eight metropolitan areas, as of
December 2000.
Regulation and Supervision
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United, as a bank holding company, is subject to the restrictions of the
Bank Holding Company Act of 1956, as amended, and is registered pursuant to its
provisions. As such, United is subject to the reporting requirements of and
examination by the Board of Governors of the Federal Reserve System ("Board of
8
Governors").
The Bank Holding Company Act prohibits the acquisition by a bank holding
company of direct or indirect ownership of more than five percent of the voting
shares of any bank within the United States without prior approval of the Board
of Governors. With certain exceptions, a bank holding company also is
prohibited from acquiring direct or indirect ownership or control of more than
five percent of the voting shares of any company which is not a bank, and from
engaging directly or indirectly in business unrelated to the business of
banking, or managing or controlling banks.
The Board of Governors of the Federal Reserve System, in its Regulation Y,
permits bank holding companies to engage in non-banking activities closely
related to banking or managing or controlling banks. Approval of the Board of
Governors is necessary to engage in these activities or to make acquisitions of
corporations engaging in these activities. In addition, on a case by case
basis, the Board of Governors may approve other non-banking activities.
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.
UNB, as national banking associations, is subject to supervision,
examination and regulation by the Office of the Comptroller of the Currency.
UNB is also a member of the Federal Reserve System, and as such, is subject to
applicable provisions of the Federal Reserve Act and regulations issued
thereunder.
United Bank, as a Virginia state member bank, is subject to supervision,
examination and regulation by the Federal Reserve System, and as such, is
subject to applicable provisions of the Federal Reserve Act and regulations
issued thereunder. United Bank is subject to regulation by the Virginia
Corporation Commission's Bureau of Financial Institutions.
The deposits of United's wholly-owned banking subsidiaries are insured by
the Federal Deposit Insurance Corporation ("FDIC") to the extent provided by
law. Accordingly, these banks are also subject to 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 30 of the Annual Report to
Shareholders for the year ended December 31, 2000, 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
- -----
As of December 31, 2000, 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 1,616,498 shares held as treasury shares. The outstanding shares are
held by approximately 12,006 shareholders of record as of December 31, 2000. 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
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The shareholders of United are entitled to receive dividends when and as
declared by its Board of Directors. Dividends are paid quarterly. Dividends
were $0.84 per share in 2000, $0.82 per share in 1999 and $0.75 per share in
1998. 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. The ability of national banks to pay dividends is
subject to certain limitations imposed by the national banking
11
laws. Generally, the most restrictive provision requires approval by the Office
of the Comptroller of the Currency ("OCC") if dividends declared in any year
exceed the current year's net income, as defined, plus the retained net profits
of the two preceding years. Payment of dividends by United's state member bank
is regulated by the Federal Reserve System and generally, the prior approval of
the Federal Reserve Board ("FRB") is required if the total dividends declared by
a state member bank in any calendar year exceeds its net profits, as defined,
for that year combined with its retained net profits for the preceding two
years. Additionally, prior approval of both the OCC and the FRB is required when
a national bank or state member bank has deficit retained earnings but has
sufficient current year's net income, as defined, plus the retained net profits
of the two preceding years. The OCC and FRB may prohibit dividends if it deems
the payment to be an unsafe or unsound banking practice. The OCC has issued
guidelines for dividend payments by national banks, emphasizing that proper
dividend size depends on the bank's earnings and capital while the FRB has
issued similar guidelines pertaining to state member banks. See Note N - 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:
2001 Dividends High Low
---- --------- ---- ---
First Quarter through February 28, 2001 (1) $23.13 $20.19
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
1999
----
Fourth Quarter $0.21 $26.25 $22.63
Third Quarter $0.21 $27.25 $23.38
Second Quarter $0.20 $27.38 $22.88
First Quarter $0.20 $27.69 $22.75
(1) On February 26, 2001, United declared a dividend of $0.22 per share,
payable April 2, 2001, to shareholders of record as of March 9, 2001.
12
UNITED BANKSHARES, INC.
FORM 10-K, PART II
Item 6. Selected Financial Data
Information relating to selected financial data on page 38 of the Annual
Report to Shareholders for the year ended December 31, 2000, 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 39 through 51 inclusive, of the Annual Report to
Shareholders for the year ended December 31, 2000, is incorporated herein by
reference.
Item 7a. Quantitative and Qualitative Disclosures About Market Risk
Quantitative and Qualitative Disclosures About Market Risk on pages 44
through 46 inclusive, of the Annual Report to Shareholders for the year ended
December 31, 2000, 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, 2000, 1999
and 1998 with the interest and rate earned or paid on such amount.
Year Ended Year Ended Year Ended
December 31, 2000 December 31, 1999 December 31, 1998
-------------------------- -------------------------- ---------------------------
Average Avg. Average Avg. Average Avg.
Balance Interest Rate Balance Interest Rate Balance Interest Rate
-------------------------- -------------------------- ---------------------------
ASSETS
Earning Assets:
Federal funds sold, securities repurchased
under agreements to resell & other
short-term investments $ 17,362 $ 1,171 6.74% $ 8,390 $ 522 6.22% $ 28,270 $ 1,472 5.21%
Investment Securities:
Taxable 1,163,824 79,190 6.80% 1,295,851 85,392 6.59% 876,167 55,550 6.34%
Tax-exempt (1) (2) 198,943 14,282 7.18% 202,435 14,402 7.11% 66,019 5,262 7.97%
-------------------------- -------------------------- ---------------------------
Total Securities 1,362,767 93,472 6.86% 1,498,286 99,794 6.66% 942,186 60,812 6.45%
Loans, net of unearned
Income (1) (2) (3) 3,320,065 294,297 8.86% 3,110,785 262,622 8.44% 3,053,948 267,186 8.75%
Allowance for loan losses (39,437) (39,615) (35,598)
---------- --------- ---------
Net loans 3,280,628 8.98% 3,071,170 8.55% 3,018,350 8.85%
-------------------------- -------------------------- ---------------------------
Total earning assets 4,660,757 $388,940 8.34% 4,577,846 $362,938 7.93% 3,988,806 $329,470 8.26%
-------- -------- --------
Other assets 275,848 289,675 250,002
---------- ---------- ----------
TOTAL ASSETS $4,936,605 $4,867,521 $4,238,808
========== ========== ==========
LIABILITIES
Interest-Bearing Funds:
Interest-bearing deposits $2,775,938 $125,847 4.53% $2,890,065 $122,651 4.24% $2,791,996 $128,976 4.62%
Federal funds purchased, repurchase
agreements & other short-term
borrowings 370,679 19,898 5.37% 367,342 17,104 4.66% 228,923 10,732 4.69%
FHLB advances 851,486 52,021 6.11% 653,579 34,647 5.30% 282,741 15,646 5.53%
-------------------------- -------------------------- ---------------------------
Total Interest-Bearing Funds 3,998,103 197,766 4.95% 3,910,986 174,402 4.46% 3,303,660 155,354 4.70%
-------- -------- --------
Demand deposits 473,205 468,238 452,300
Accrued expenses and other liabilities 55,992 68,478 70,572
---------- ---------- ----------
TOTAL LIABILITIES 4,527,300 4,447,702 3,826,532
SHAREHOLDERS' EQUITY 409,305 419,819 412,276
---------- ---------- ----------
TOTAL LIABILITIES AND
SHAREHOLDERS' EQUITY $4,936,605 $4,867,521 $4,238,808
========== ========== ==========
NET INTEREST INCOME $191,174 $188,536 $174,116
======== ======== ========
INTEREST SPREAD 3.40% 3.47% 3.56%
NET INTEREST MARGIN 4.11% 4.12% 4.37%
(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).
2000 Compared to 1999 1999 Compared to 1998
------------------------------------------ -----------------------------------------
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 $ 558 $ 44 $ 47 $ 649 ($1,035) $ 287 ($202) ($950)
Investment securities:
Taxable (8,701) 2,782 (283) (6,202) 26,608 2,186 1,048 29,842
Tax exempt (1), (2) (249) 131 (2) (120) 10,873 (565) (1,168) 9,140
Loans (1),(2),(3) 17,911 12,885 879 31,675 4,676 (9,081) (159) (4,564)
--------- ------- ------- -------- --------- --------- ------- --------
TOTAL INTEREST INCOME 9,519 15,842 641 26,002 41,122 (7,173) (481) 33,468
--------- ------- ------- -------- --------- --------- ------- --------
Interest expense:
Interest-bearing deposits ($4,843) $ 8,370 ($331) $ 3,196 $ 4,530 ($10,487) ($368) ($6,325)
Federal funds purchased, repurchase
Agreements, and other short-term
Borrowings 155 2,615 24 2,794 6,489 (73) (44) 6,372
FHLB advances 10,491 5,283 1,600 17,374 20,521 (658) (862) 19,001
--------- ------- ------- -------- --------- --------- ------- --------
TOTAL INTEREST EXPENSE 5,803 16,268 1,293 23,364 31,540 (11,218) (1,274) 19,048
--------- ------- ------- -------- --------- --------- ------- --------
NET INTEREST INCOME $ 3,716 ($426) ($652) $ 2,638 $ 9,582 $ 4,045 $ 793 $ 14,420
========= ======= ======= ======== ========= ========= ======= ========
(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:
2000 1999 1998 1997 1996
----------- ------------ ------------ -------------- ------------
(In thousands)
Commercial, financial
and agricultural $ 564,887 $ 535,116 $ 508,601 $ 487,706 $ 328,248
Real estate mortgage 2,148,751 2,134,370 1,696,233 1,693,819 1,611,801
Real estate construction 164,505 144,634 141,026 150,429 90,817
Consumer 319,351 363,272 313,464 364,951 328,928
Less: Unearned interest (5,000) (7,296) (6,933) (7,066) (5,223)
------------ ------------ ------------ ------------ ------------
Total loans 3,192,494 3,170,096 2,652,391 2,689,839 2,354,571
Allowance for loan losses (40,532) (39,599) (39,189) (31,936) (29,376)
------------ ------------ ------------ ------------ ------------
TOTAL LOANS, NET $ 3,151,962 $ 3,130,497 $ 2,613,202 $ 2,657,903 $ 2,325,195
============ ============ ============ ============ ============
Loans held for sale $ 203,831 $ 117,825 $ 720,607 $ 97,619 $ 74,465
============ ============ ============ ============ ============
The following is a summary of loans outstanding as a percent of total loans at
December 31:
2000 1999 1998 1997 1996
------------ ------------ ------------ -------------- ------------
Commercial, financial
and agricultural 17.69% 16.88% 19.18% 18.13% 13.94%
Real estate mortgage 67.31% 67.33% 63.95% 62.97% 68.45%
Real estate construction 5.15% 4.56% 5.32% 5.59% 3.86%
Consumer 9.85% 11.23% 11.55% 13.31% 13.75%
------------ ------------ ------------ ------------ ------------
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,
2000:
Less Than One To Greater Than
One Year Five Years Five Years Total
------------------ ------------------ ------------------ ------------------
(In thousands)
Commercial, financial
and agricultural $329,920 $131,522 $103,445 $564,887
Real estate construction 164,505 164,505
------------------ ------------------ ------------------ ------------------
Total $494,425 $131,522 $103,445 $729,392
================== ================== ================== ==================
16
UNITED BANKSHARES, INC. AND SUBSIDIARIES
At December 31, 2000, 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 $ 77,596 $ 63,429
Outstanding with adjustable rates 53,926 40,016
------------------ ------------------
$131,522 $103,445
There were no real estate construction loans with maturities greater than one
year.
RISK ELEMENTS
Nonperforming Loans
Nonperforming loans include loans on which no interest is currently being
accrued, loans which are past due 90 days or more as to principal or interest
payments, and loans for which the terms have been modified due to a
deterioration in the financial position of the borrower. Management is not aware
of any other significant loans, groups of loans, or segments of the loan
portfolio not included below or disclosed elsewhere herein where there are
serious doubts as to the ability of the borrowers to comply with the present
loan repayment terms. The following table summarizes nonperforming loans for the
indicated periods.
December
-------------------------------------------------------------------------------------
2000 1999 1998 1997 1996
----------- -------------- ---------------- -------------- --------------
(In thousands)
Nonaccrual loans $ 8,131 $12,327 $ 9,139 $ 5,815 $ 6,373
Troubled debt restructurings 95
Loans which are contractually past due 90
days or more as to interest or principal,
and are still accruing interest 4,717 8,415 9,528 12,877 6,317
----------- -------------- ---------------- -------------- --------------
TOTAL $12,848 $20,742 $18,667 $18,692 $12,785
=========== ============== ================ ============== ==============
Loans are designated as nonaccrual when, in the opinion of management, the
collection of principal or interest is doubtful. This generally occurs when a
loan becomes 90 days past due as to principal or interest unless the loan is
both well secured and in the process of collection. When interest accruals are
discontinued, unpaid interest credited to income in the current year is
reversed, and unpaid interest accrued in prior years is charged to the allowance
for loan losses. See Note D to the consolidated financial statements for
additional information regarding nonperforming loans, impaired loans and credit
risk concentration. Other real estate owned is not material.
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,:
2000 1999 1998
---------- ---------- ----------
(In thousands)
U.S. Treasury and other U.S. Government
agencies and corporations $ 55,724 $ 56,734 $121,474
States and political subdivisions 93,006 97,824 82,011
Mortgage-backed securities 70,279 90,850 139,002
Other 161,059 19,782 19,664
---------- ---------- ----------
TOTAL HELD TO MATURITY SECURITIES $380,068 $265,190 $362,151
========== ========== ==========
The following is a summary of the amortized cost of available for sale
securities at December 31,:
2000 1999 1998
---------- ---------- ----------
(In thousands)
U.S. Treasury securities and obligations of
U.S. Government agencies and corporations $160,702 $ 276,558 $198,151
States and political subdivisions 52,095 48,914 27,474
Mortgage-backed securities 574,292 693,828 279,618
Marketable equity securities 8,551 8,369 9,211
Other 69,723 229,277 43,120
---------- ---------- ----------
TOTAL AVAILABLE FOR SALE SECURITIES $865,363 $1,256,946 $557,574
========== ========== ==========
The fair value of mortgage-backed securities is affected by changes in interest
rates and prepayment risk. When interest rates decline, prepayment speeds
generally accelerate due to homeowners refinancing their mortgages at lower
interest rates. This may result in the proceeds being reinvested at lower
interest rates. Rising interest rates may decrease the assumed prepayment speed.
Slower prepayment speeds may extend the maturity of the security beyond its
estimated maturity. Therefore, investors may not be able to invest at current
higher market rates due to the extended expected maturity of the security.
United had a net unrealized gains of $2,318 on all mortgage-backed securities at
December 31, 2000, as compared to a net unrealized loss of $23,932 at December
31, 1999.
The following table sets forth the maturities of all securities at December 31,
2000, 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 $24,876 6.18% $70,367 6.38% $85,129 7.07% $ 34,776 7.33%
States and political subdivisions (1) 3,031 7.97% 11,743 8.26% 37,961 7.58% 92,098 7.51%
Mortgage-backed securities 465 6.09% 22,653 6.70% 79,840 6.38% 543,931 6.78%
Other 11,337 7.01% 34,681 6.62% 192,446 7.82%
(1) Tax-equivalent adjustments (using a 35% federal rate) have been made in
calculating yields on obligations of states and political subdivisions.
NOTE: There are no securities with a single issuer whose book value in the
aggregate exceeds 10% of total shareholders' equity.
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:
2000 $15,720 $313,349
1999 44,120 349,129
1998 7,260 236,535
Weighted average interest rate
at year end:
2000 6.6% 5.2%
1999 5.0% 5.0%
1998 5.6% 4.6%
Maximum amount outstanding at
any month's end:
2000 $45,515 $417,866
1999 64,921 440,281
1998 35,416 236,535
Average amount outstanding during
the year:
2000 $15,332 $351,816
1999 27,774 335,908
1998 24,334 201,475
Weighted average interest rate
During the year:
2000 6.3% 5.3%
1999 5.4% 4.6%
1998 5.6% 4.7%
At December 31, 2000, repurchase agreements include $235,096 in overnight
accounts. The remaining balance principally consists of agreements having
maturities ranging from 2-90 days. The rates offered on these funds vary
according to movements in the federal funds and short-term investment market
rates.
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:
2000 1999 1998
----------------------------- ------------------------------ ---------------------------
Amount Rate Amount Rate Amount Rate
------------ ------------ ------------ ----------- ------------- ----------
(Dollars in thousands)
Noninterest bearing
demand deposits $ 473,205 $ 468,238 $ 452,300
Interest bearing
demand deposits 354,771 1.35% 335,231 1.60% 312,317 2.37%
Savings deposits 784,005 3.65% 865,351 3.36% 817,852 3.49%
Time deposits 1,637,162 5.65% 1,689,483 5.28% 1,661,827 5.60%
------------ ------------ ------------ ----------- ------------- ----------
TOTAL $3,249,143 4.53% $3,358,303 4.24% $3,244,296 4.62%
============ ============ =============
Maturities of time certificates of deposit of $100,000 or more outstanding at
December 31, 2000 are summarized as follows:
(In thousands)
3 months or less $ 76,246
Over 3 through 6 months 80,712
Over 6 through 12 months 115,530
Over 12 months 116,969
------------
TOTAL $ 389,457
============
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:
2000 1999 1998
-------- -------- --------
Return on average assets 1.19% 1.44% 1.05%
Return on average equity 14.41% 16.73% 10.77%
Dividend payout ratio (1) 59.83% 50.35% 63.77%
Average equity to average
assets ratio 8.29% 8.63% 9.73%
(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:
2000 1999 1998 1997 1996
---------- ---------- ---------- ---------- ----------
(Dollars in thousands)
Balance of allowance for possible loan
losses at beginning of year $ 39,599 $ 39,189 $ 31,936 $ 29,376 $ 29,531
Allowance of purchased company at date
of acquisition 2,695
Loans charged off:
Commercial, financial and agricultural 2,482 3,896 800 1,352 2,310
Real estate 10,570 3,290 3,070 447 406
Real estate construction
Consumer and other 2,793 2,050 2,400 2,436 1,199
---------- ---------- ---------- ---------- ----------
TOTAL CHARGE-OFFS 15,845 9,236 6,270 4,235 3,915
Recoveries:
Commercial, financial and agricultural 374 341 729 292 283
Real estate 226 156 217 263 237
Real estate construction
Consumer and other 433 349 421 265 359
---------- ---------- ---------- ---------- ----------
TOTAL RECOVERIES 1,033 846 1,367 820 879
---------- ---------- ---------- ---------- ----------
NET LOANS CHARGED OFF 14,812 8,390 4,903 3,415 3,036
Addition to allowance (1) 15,745 8,800 12,156 3,280 2,881
---------- ---------- ---------- ---------- ----------
BALANCE OF ALLOWANCE FOR
LOAN LOSSES AT END OF YEAR $ 40,532 $ 39,599 $ 39,189 $ 31,936 $ 29,376
========== ========== ========== ========== ==========
Loans outstanding at the end of period (gross) $3,197,494 $3,170,096 $2,652,391 $2,689,839 $2,354,571
Average loans outstanding during
period (net of unearned income) $3,320,065 $2,975,116 $2,668,460 $2,472,293 $2,245,292
Net charge-offs as a percentage of
average loans outstanding 0.45% 0.28% 0.18% 0.14% 0.14%
Allowance for loan losses as
a percentage of nonperforming loans 315.5% 190.9% 209.9% 170.9% 229.8%
(1) The amount charged to operations and the related balance in the allowance
for loan losses is based upon periodic evaluations of the loan portfolio by
management. These evaluations consider several factors including, but not
limited to, general economic conditions, loan portfolio composition, prior
loan loss experience and management's estimation of probable losses.
Quarterly reviews of individual loans as well as the loan portfolio as a
whole are made by management and the credit department. Management performs
extensive procedures in granting and monitoring loans on a continual basis.
Further, management believes that the allowance for loan losses is adequate
to absorb anticipated losses.
21
UNITED BANKSHARES, INC. AND SUBSIDIARIES
SUMMARY OF LOAN LOSS EXPERIENCE--Continued
Allocation of allowance for loan losses
December 31
------------------------------------------------------------------------------------
2000 1999 1998 1997 1996
Commercial, financial and
Agricultural $12,762 $14,432 $13,772 $10,115 $ 8,261
Real estate 12,713 9,861 3,587 3,452 4,239
Real estate construction 1,372 754 1,086 674 511
Consumer and other 3,533 2,735 3,747 3,221 1,688
Unallocated 10,152 11,817 16,997 14,474 14,677
------- ------- ------- ------- -------
Total $40,532 $39,599 $39,189 $31,936 $29,376
======= ======= ======= ======= =======
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 9 through 37
inclusive of the Annual Report to Shareholders for the year ended December 31,
2000, is incorporated herein by reference.
(b) - SUPPLEMENTARY FINANCIAL INFORMATION
(1) Selected Quarterly Financial Data
Information relating to selected quarterly financial data on page 37 of the
Annual Report to Shareholders for the year ended December 31, 2000, is
incorporated herein by reference.
(2) Information on the Effects of Changing Prices
Information relating to effects of changing prices on page 44 of the Annual
Report to Shareholders for the year ended December 31, 2000, 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 4 through 9 inclusive and page 24, of the Proxy Statement for the 2001
Annual Shareholders' Meeting is incorporated herein by reference.
Change of Control Agreements
- ----------------------------
In August of 2000, United entered into agreements with Richard M. Adams,
Jr., Kendal E. Carson, James J. Consagra, Jr., and John Neuner, III to encourage
those executive officers not to seek other employment because of the possibility
that United might be acquired by another entity. The Board of Directors
determined that such an arrangement was appropriate especially in view of recent
and anticipated changes in the banking industry. The agreements were not
undertaken in the belief that a change of control was imminent.
Generally, the agreements provide severance compensation to those officers
if their employment should end under certain specified conditions after a change
of control of United. Compensation is paid upon any involuntary termination
following a change of control unless the officer is terminated for cause. In
addition, compensation will be paid after a change of control if the officer
voluntarily terminates employment because of a decrease in the total amount of
the officer's base salary below the level in effect on the date of consummation
of the change of control, without the officer's consent; a material reduction in
the importance of the officer's job responsibilities without the officer's
consent; geographical relocation of the officer without consent to an office
more than fifty (50) miles from the officer's location at the time of a change
of control; failure by United to obtain assumption of the contract by its
successor or any termination of employment within thirty-six (36) months after
consummation of a change of control which is effected for any reason other than
good cause.
Under the agreements, a change of control is deemed to occur in the event
of a change of ownership of United which must be reported to the Securities and
Exchange Commission as a change of control, including but not limited to the
acquisition by any "person" (as such term is used in Sections 13(d) and 14(d) of
the Securities and Exchange Act of 1934 (the "Exchange Act")) of direct or
indirect "beneficial ownership" (as defined by Rule 13d-3 under the Exchange
Act) of twenty-five percent (25%) or more of the combined voting power of
United's then outstanding securities, or the failure during any period of two
(2) consecutive years of individuals who at the beginning of such period
constitute the Board for any reason to constitute at least a majority thereof,
unless the election of each director who was not a director at the beginning of
such period has been approved in advance by directors representing at least two-
thirds (2/3) of the directors at the beginning of the period.
Under the agreements, severance benefits include: (a) cash payment equal to
the officers monthly base salary in effect on either (i) the date of
termination; (ii) the date immediately preceding the change of control,
whichever is higher, multiplied by the number of full months between the date
24
of termination and the date that is thirty-six (36) months after the date of
consummation of the change of control; (b) payment of cash incentive award, if
any, under United's Incentive Plan; (c) continuing participation in employee
benefit plans and programs such as retirement, disability and medical insurance
for a period of thirty-six (36) months following the date of termination. (See
Exhibit 10.2 beginning on page 124.)
Item 11. EXECUTIVE COMPENSATION
Information regarding executive compensation on pages 10 through 14
inclusive, of the Proxy Statement for the 2001 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 7 through 9 inclusive and pages 19 and 24, of the Proxy
Statement for the 2001 Annual Shareholders' Meeting is incorporated herein by
reference.
Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information regarding certain relationships and related transactions on
pages 5, 6, 7, 14 and 18 of the Proxy Statement for the 2001 Annual
Shareholders' Meeting is incorporated herein by reference.
25
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, 2000 at
Item 8a. Page references are to such Annual report.
Financial Statements: Page References
- -------------------- ---------------
Report of Independent Auditors........................................................................ 9
Consolidated Balance Sheets........................................................................... 10
Consolidated Statements of Income..................................................................... 11
Consolidated Statements of Changes in Shareholders' Equity............................................ 12
Consolidated Statements of Cash Flows................................................................. 13
Notes to Consolidated Financial Statements............................................................ 14
(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 30 of this Form
10-K.
(b) Reports on Form 8-K
On December 27, 2000, United Bankshares, Inc. filed a Current Report
under Items 5 and 7 to report a restructuring of its balance sheet.
On January 22, 2001, 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 2000.
(c) Exhibits -- The exhibits to this Form 10-K begin on page 79.
26
(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.
27
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 27, 2001
- ------------------------------
and Chief Executive Officer
/s/ Steven E. Wilson Chief Financial Officer March 27, 2001
- ------------------------------
Chief Accounting Officer
/s/ John M. McMahon Director March 27, 2001
- ------------------------------
/s/ Warren A. Thornhill, III Director March 27, 2001
- ------------------------------
/s/ H. Smoot Fahlgren Director March 27, 2001
- ------------------------------
/s/ William C. Pitt, III Director March 27, 2001
- ------------------------------
/s/ Theodore J. Georgelas Director March 27, 2001
- ------------------------------
/s/ F.T. Graff, Jr. Director March 27, 2001
- ------------------------------
/s/ Russell L. Isaacs Director March 27, 2001
- ------------------------------
/s/ Harry L. Buch Director March 27, 2001
- ------------------------------
/s/ P. Clinton Winter, Jr. Director March 27, 2001
- ------------------------------
/s/ Robert G. Astorg Director March 27, 2001
- ------------------------------
28
SIGNATURES
(continued)
Signatures Title Date
/s/ Thomas J. Blair, III Director March 27, 2001
- --------------------------
/s/ James W. Word, Jr. Director March 27, 2001
- --------------------------
/s/ I.N. Smith, Jr. Director March 27, 2001
- --------------------------
/s/ G. Ogden Nutting Director March 27, 2001
- --------------------------
29
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 (g)
(b) Articles of Incorporation (f)
Investments (4) N/A
Voting Trust Agreement (9) N/A
Material Contracts (10)
(a) Employment Agreement with
I. N. Smith, Jr. (b)
(b) Employment Agreement with
Richard M. Adams (e)
(c) Lease on Branch Office in
Charleston Town Center,
Charleston, West Virginia (b)
(d) Lease on United Center,
Charleston, West Virginia (h)
(e) Lease and Agreement between
Valley Savings and Loan
Company (Lessor) and Dorothy
Adams, Richard M. Adams and
Douglass H. Adams (Lessees) (c)
(f) Agreement between Dorothy
D. Adams (Lessors) and Valley
Savings and Loan Company (Lessees) (c)
30
Sequential
S-K Item 601 Page
Description Table Reference Number (a)
- ----------- --------------- ----------
(g) Employment Contract with
Douglass H. Adams (d)
(h) Employment Contract with
Thomas A. McPherson (d)
(i) Data processing contract
with FISERV (10.1) 79
(j) Supplemental Retirement
Contract with Richard M.
Adams (i)
(k) Supplemental Retirement
Contract with Douglass H.
Adams (i)
(l) Executive Officer Change (j)
of Control Agreements (10.2) 124
(m) Employment Contract with
Bernard H. Clineburg (k)
Statement Re: Computation of
Ratios (12) 129
Annual Report to Security Holders,
et al. (13) 33
Letter Re: Change in accounting
principles (18) N/A
Previously Unfiled Documents (19) N/A
Subsidiaries of the Registrant (21) 130
Published Report Regarding Matters
Submitted to a Vote of Security
Holders (22) N/A
Consent of Ernst & Young LLP (23) 131
31
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 Exhibit 10 of the 1986 Form
10-K for United Bankshares, Inc., File No. 0-13322
(d) Incorporated into this filing by reference to Part II of Form S-4
Registration Statement of United Bankshares, Inc., Registration No. 33-19968
filed February 3, 1988
(e) Incorporated into this filing by reference to Exhibits to the 1988 10-K for
United Bankshares, Inc., File No. 0-13322
(f) Incorporated into this filing by reference to Exhibits to the 1989 10-K for
United Bankshares, Inc., File No. 0-13322
(g) Incorporated into this filing by reference to Exhibits to the 1990 10-K for
United Bankshares, Inc., File No. 0-13322
(h) Incorporated into this filing by reference to Exhibits to the 1991 10-K for
United Bankshares, Inc., File No. 0-13322
(i) Incorporated into this filing by reference to Exhibits to the 1992 10-K for
United Bankshares, Inc., File No. 0-13322
(j) Incorporated into this filing by reference to Exhibits to the 1993 10-K for
United Bankshares, Inc., File No. 0-13322
(k) Incorporated into this filing by reference to Part II of Form S-4
Registration Statement of United Bankshares, Inc., Registration No. 333-
44993 filed January 27, 1998
32
UNITED BANKSHARES, INC. AND SUBSIDIARIES
SELECTED FINANCIAL DATA
(Dollars in thousands, except per share data)
Five Year Summary
----------------------------------------------------------------------
2000 1999 1998 1997 1996
---------- ---------- ---------- ---------- ----------
Summary of Operations:
Total interest income $ 377,847 $ 354,665 $ 325,647 $ 280,452 $ 250,641
Total interest expense 197,766 174,402 155,354 131,122 112,256
Net interest income 180,081 180,263 170,293 149,330 138,385
Provision for loan losses 15,745 8,800 12,156 3,280 2,881
Other income 33,786 51,078 41,752 37,068 29,654
Other expense 110,422 117,519 137,964 103,852 104,385
Income taxes 28,724 34,774 17,523 27,005 21,054
Net income 58,976 70,248 44,402 52,261 39,719
Cash dividends(1) 35,286 35,367 28,317 20,344 17,847
Per common share:
Net income:
Basic 1.41 1.63 1.04 1.24 0.94
Diluted 1.40 1.61 1.02 1.22 0.93
Cash dividends(1) 0.84 0.82 0.75 0.68 0.62
Book value per share 10.32 9.32 9.74 9.35 8.59
Selected Ratios:
Return on average
shareholders' equity 14.41% 16.73% 10.77% 13.92% 11.17%
Return on average assets 1.19% 1.44% 1.05% 1.42% 1.18%
Dividend payout ratio (1) 59.83% 50.35% 63.77% 49.69% 58.49%
Selected Balance Sheet Data:
Average assets $4,936,605 $4,867,521 $4,238,808 $3,682,302 $3,352,594
Investment securities 1,245,334 1,472,553 927,316 1,006,735 865,020
Loans held for sale 203,831 117,825 720,607 97,619 74,465
Total loans 3,192,494 3,170,096 2,652,391 2,689,839 2,354,571
Total assets 4,904,547 5,069,160 4,567,899 4,094,836 3,541,244
Total deposits 3,391,449 3,260,985 3,493,058 3,185,963 2,770,833
Long-term borrowings 698,204 343,847 240,867 46,674 44,877
Total borrowings
and other liabilities 1,082,228 1,412,245 653,310 512,817 407,579
Shareholders' equity 430,870 395,930 421,531 396,056 362,832
(1) Cash dividends are the amounts declared by United and do not include cash
dividends of acquired subsidiaries prior to the dates of consummation.
33
UNITED BANKSHARES, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
FORWARD-LOOKING STATEMENTS
Congress passed the Private Securities Litigation Act of 1995 to encourage
corporations to provide investors with information about the company's
anticipated future financial performance, goals, and strategies. The act
provides a safe harbor for such disclosure; in other words, protection from
unwarranted litigation if actual results are not the same as management
expectations.
United desires to provide its shareholders with sound information about past
performance and future trends. Consequently, any forward-looking statements
contained in this report, in a report incorporated by reference to this report,
or made by management of United in this report, in any other reports and
filings, in press releases and in oral statements, involves numerous
assumptions, risks and uncertainties. Actual results could differ materially
from those contained in or implied by United's statements for a variety of
factors including, but not limited to: changes in economic conditions; movements
in interest rates; competitive pressures on product pricing and services;
success and timing of business strategies; the nature and extent of governmental
actions and reforms; and rapidly changing technology and evolving banking
industry standards.
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.
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
34
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. Sales and write-downs of securities resulted in a loss of $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 2000. United recorded an additional
provision for loan losses of approximately $1.09 million ($734 thousand after-
tax) due to the effects of a slowing economy on consumer and commercial loan
customers. United also incurred litigation expense of $1.63 million ($1.09
million after-tax) as a result of a building operating lease settlement. Other
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%, respectively, 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. United, one of the nation's most profitable regional banking
companies, has a strong capital position, and is well positioned to take
advantage of future growth opportunities.
Dividends per share increased from $0.82 in 1999 to a record level of $0.84 per
share in 1999. United paid approximately $35.3 million in dividends to common
shareholders in 2000 compared with $35.4 million in 1999. This was the twenty-
seventh consecutive year of dividend increases to shareholders.
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.
35
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 million shares of
its common stock on the open market, of which 219,300 shares have been
repurchased since its implementation. United continues to balance capital
adequacy and the return to shareholders. 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
36
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
Asset quality improved significantly over the past year despite economic
pressures affecting the banking industry and United's markets. Nonperforming
loans were $12.85 million at December 31, 2000 as compared to $20.74 million at
December 31, 1999. Nonperforming loans represented 0.26% of total assets at the
end of the year 2000, as compared to 0.41% for United at the end of 1999. The
components of nonperforming loans include nonaccrual loans and loans which are
contractually past due 90 days or more as to interest or principal, but have not
been put on a nonaccrual basis. Nonaccrual loans decreased $4.19 million or
34.04% while loans past due 90 days or more decreased $3.70 million or 43.95%
since year end 1999. Total nonperforming assets of $14.96 million, including
OREO of $2.11 million at December 31, 2000, represented 0.30% of total assets at
the end of 2000.
At December 31, 2000, impaired loans were $12.50 million, a decrease of $3.14
million or 20.07% from the $15.64 million of impaired loans at December 31,
1999. 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.
Allocations are made for specific commercial loans based upon management's
estimate of the borrowers' ability to repay and other factors impacting
collectibility. Other commercial loans not specifically reviewed on an
individual basis are evaluated based on historical loss percentages, 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, 2000 produced increased allocations within
three of four loan categories from December 31, 1999. The components of the
allowance allocated to real estate increased $2.9 million, as a result of
changes in historical loss experience factors. Also the consumer loan and real
estate construction loan pools increased by $798 thousand and $618 thousand,
respectively, as a result of changes in volume and historical loss experience.
The components of the allowance allocated to commercial loans decreased $1.7
million as a result of a decrease in specific allocations on larger commercial
loans.
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.
37
Management believes that the allowance for loan losses of $40.53 million at
December 31, 2000, is adequate to provide for probable losses on existing loans
based on information currently available.
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.
Management is not aware of any potential problem loans, trends or uncertainties
which it reasonably expects will materially impact future operating results,
liquidity, or capital resources which have not been disclosed. Additionally,
management has disclosed all known material credits which cause management to
have serious doubts as to the ability of such borrowers to comply with the loan
repayment schedules.
Other Income
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 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
38
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
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 44.8%, which is well below the 57.6%
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, 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 levels and a 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.
Income Taxes
For the years ended December 31, 2000 and 1999, United's effective tax rate
approximated 33%.
Quarterly Results
The first, second and third quarters of 2000 showed increases in earnings in
comparison to those same three quarters of 1999. On a per share basis, first
quarter 2000 earnings were $0.42 per share compared to $0.39 in 1999, second
quarter 2000 earnings were $0.43 per share compared to $0.40 in 1999 while third
quarter 2000 earnings were $0.44 compared to $0.41 per share in 1999.
39
In the fourth quarter of 2000, United reported earnings per share of $0.11 as
compared to $0.41 per share for the same period in 1999. Fourth quarter 2000
results included balance sheet restructuring and other one-time charges of
approximately $20.09 million ($13.51 million after-tax).
Additional quarterly financial data for 2000 and 1999 may be found in Note Q 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
40
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.
The difference between rate sensitive assets and rate sensitive liabilities for
specified periods of time is known as the "GAP."
As shown in the interest rate sensitivity gap table in this section, United was
liability sensitive (excess of liabilities over assets) in the one-year horizon.
On the surface, this would indicate that rising market interest rates would
reduce United's earnings and declining market interest rates would increase
earnings. United, however, has not experienced the kind of earnings volatility
indicated from the cumulative gap. This is because a significant portion of
United's retail deposit base does not reprice on a contractual basis.
Management has estimated, based upon historical analyses, that savings deposits
are less sensitive to interest rate changes than are other forms of deposits.
The GAP table presented herein has been adjusted to show the estimated
differences in interest rate sensitivity which result when the retail deposit
base is assumed to reprice in a manner consistent with historical trends. (See
"Management Adjustments" in the GAP table). Using these estimates, United was
asset sensitive in the one-year horizon in the amount of $117 million or 2.51%
of the cumulative gap to related earning assets.
During 1998, United purchased fixed-rate junior-lien mortgage loans from an
unrelated third party financial institution with the intention that these loans
would be securitized and resold back to the third party lender. However, the
third party was unable to repurchase the loans and United inherited
approximately $456 million of these mortgage loans which United held for sale on
its balance sheet as of December 31, 1998. During 1999, to better manage risk,
United securitized approximately $205 million of these loans and retained a
portion of the resultant securities. At December 31, 2000, the retained
resultant securities approximated $55 million and are carried in the available
for sale investment portfolio. The remainder of these junior-lien mortgages are
held in the loan portfolio and the balance at December 31, 2000, approximated
$173 million.
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.
41
The following table shows United's estimated earnings sensitivity profile after
management's adjustments as of December 31, 2000 and 1999:
Change in
Interest Rates Percentage Change in Net Interest Income
-----------------------------------------------
(basis points) December 31, 2000 December 31, 1999
-------------- ----------------- -----------------
+200 -2.62% -8.06%
-200 -3.57% 5.17%
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 2.62% over one year as of December 31, 2000, as
compared to a decrease of 8.06% as of December 31, 1999. A 200 basis point
immediate, sustained downward shock in the yield curve would decrease net
interest income by an estimated 3.57% over one year as of December 31, 2000, as
compared to an increase of 5.17% as of December 31, 1999. All of these
estimated changes in net interest income are within the policy guidelines
established by the Board of Directors.
42
The following table shows the interest rate sensitivity GAP as of December 31,
2000:
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 $ 2,009 $ 2,009 $ 2,009
Investment and marketable
equity securities
Taxable 119,649 $ 10,282 $ 29,523 159,454 $ 107,714 $ 832,843 1,100,011
Tax-exempt 3,024 3,024 11,743 130,556 145,323
Loans, net of unearned
income 1,205,692 174,559 322,183 1,702,434 838,958 854,933 3,396,325
------------------------------------------------------------------------------------------------
Total Interest-Earning Assets $1,327,350 $ 187,865 $ 351,706 $1,866,921 $ 958,415 $1,818,332 $4,643,668
================================================================================================
LIABILITIES
Interest-Bearing Funds:
Savings and NOW accounts $1,145,921 $1,145,921 $1,145,921
Time deposits of
$100,000 & over 76,065 $ 51,268 $ 143,597 270,930 $ 117,199 $ 1,328 389,457
Other time deposits 248,875 262,396 366,449 877,720 435,907 3,029 1,316,656
Federal funds purchased,
repurchase agreements
and other short-term
borrowings 268,963 27,750 296,713 37,003 333,716
FHLB borrowings 25,000 20,311 45,311 97,500 563,701 706,512
------------------------------------------------------------------------------------------------
Total Interest-Bearing Funds $1,764,824 $ 341,414 $ 530,357 $2,636,595 $ 687,609 $ 568,058 $3,892,262
================================================================================================
Interest Sensitivity Gap ($437,474) ($153,549) ($178,651) ($769,674) $ 270,806 $1,250,274 $ 751,406
================================================================================================
Cumulative Gap ($437,474) ($591,023) ($769,674) ($769,674) ($498,868) $ 751,406 $ 751,406
================================================================================================
Cumulative Gap as a
Percentage of
Total Earning Assets (9.42%) (12.73%) (16.57%) (16.57%) (10.74%) 16.18% 16.18%
Management Adjustments $1,107,813 ($73,891) ($ 147,671) $ 866,250 ($886,250) $ 0
Off-Balance Sheet Activities
------------------------------------------------------------------------------------------------
Cumulative Management Adjusted
Gap and Off-Balance Sheet
Activities $ 670,339 $ 442,899 $ 116,576 $ 116,576 ($498,868) $ 751,406 $ 751,406
================================================================================================
Cumulative Management Adjusted
Gap and Off-Balance Sheet
Activities as a Percentage of
Total Earning Assets 14.44% 9.54% 2.51% 2.51% (10.74%) 16.18% 16.18%
=================================================================================================
43
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
which enables United to efficiently satisfy the cash flow requirements of
depositors and borrowers and meet United's cash needs. Liquidity is managed by
monitoring funds availability from a number of primary sources. Substantial
funding is available from cash and cash equivalents, unused short-term
borrowings and a geographically dispersed network of branches providing access
to a diversified and substantial retail deposit market.
Short-term needs can be met through a wide array of sources such as
correspondent and downstream correspondent federal funds and utilization of FHLB
advances.
Other sources of liquidity available to United to provide long-term as well as
short-term funding alternatives, in addition to FHLB advances, are long-term
certificates of deposit, lines of credit, and borrowings secured by bank
premises or stock of United's subsidiaries. United has no intention at this
time of utilizing any long-term funding sources other than FHLB advances and
long-term certificates of deposit.
Cash flows from operations in 2000 provided United with $743 thousand of cash
compared to cash flows provided from operations of $226.41 million in 1999
primarily as a result of approximately $79.05 million of excess originations of
mortgage loans over sales proceeds. In 1999, proceeds from sales of mortgage
loans exceeded originations by $155.95 million. In 2000, net cash of $216.64
million was provided by investing activities as compared to 1999 in which
investing activities resulted in a use of cash of $674.16 million. Cash provided
by investing activities in 2000 was primarily due to $256.10 million of excess
net proceeds from calls and maturities of investment securities over purchases
of investment securities. In 1999 cash was used in investing activities due
mainly to excess purchases of investment securities over net proceeds from calls
and maturities of securities by $383.76 million as well as to support loan
portfolio growth of $290.82 million. 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. Financing activities resulted in a source of cash in
1999 of $466.27 million primarily due to an increase in net borrowings from the
FHLB and other short-term borrowings of $607.48 million and $149.21 million,
44
respectively. The net effect of this activity was 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.
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 8.29% in 2000 and 8.63% in 1999. United's risk-based
capital ratio was 11.77% in 2000 and 11.75% in 1999 which are both significantly
higher than the minimum regulatory requirements. United's Tier 1 capital and
leverage ratios of 10.68% and 8.17%, respectively, at December 31, 2000, are
also well above regulatory minimums to be classified as a "well capitalized"
institution. See Note N, Notes to Consolidated Financial Statements.
Commitments
At December 31, 2000 United had outstanding loan commitments of $1,086,455,000
pertaining to lines of credit authorized, but unused and $89,013,000 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 K to the Consolidated Financial Statements.
1999 COMPARED TO 1998
EARNINGS SUMMARY
For the year ended December 31, 1999, net income increased 58.21% to $70.2
million from $44.4 million for the year ended December 31, 1998. On a diluted
per share basis, net income of $1.61 for the year increased 57.85% from $1.02 in
1998.
Results for 1998 include the recognition of approximately $13.7 million ($8.2
million after tax) of merger-related and one-time charges associated with the
pooling of interests acquisitions of George Mason Bankshares, Inc. and Fed One
Bancorp, Inc.
45
For the year of 1999, United's return on average shareholders' equity of 16.73%
and a return on average assets of 1.44% compared favorably with national peer
grouping information provided by Keefe, Bruyette, & Woods, of 15.86% and 1.35%,
respectively.
Dividends per share increased 9.34% from $0.75 in 1998 to a record level of
$0.82 per share in 1999. United paid approximately $35.0 million in dividends
to common shareholders in 1999 compared with $24.65 million in 1998.
Growth in earnings was a result of increases in net interest and noninterest
income as well as a reduction of noninterest expenses. Net interest income
increased by $9.97 million or 5.85% for the year ended December 31, 1999 as
compared to the same period for 1998. Noninterest income, including income from
mortgage banking operations, increased $9.33 million or 22.34% for 1999 when
compared to 1998. Noninterest expenses decreased $20.45 million or 14.82% for
1999 compared to the same period in 1998.
The effective tax rate for the year ended December 31, 1999 approximated 33.12%
compared to 28.30% for 1998.
FINANCIAL CONDITION SUMMARY
Total assets were $5.07 billion at December 31, 1999, up $501.26 million or
10.97% compared with year end 1998. United's available for sale securities
portfolio increased $642.20 million while securities held to maturity decreased
$96.96 million as compared to year end 1998. Loans held for sale decreased $603
million during 1999 due mainly to a securitization in the amount of
approximately $205 million, transfer of approximately $230 million to the loan
portfolio and sales of mortgage loans in the secondary market. Loans, net of
unearned income, reflected a $517.71 million increase from 1998 to 1999 due to
13% growth rates in both the commercial and consumer (non-mortgage) loan
portfolios, as well as the previously mentioned reclassification. Cash and cash
equivalents increased $18.51 million while nonearning assets increased $23
million in 1999 as compared with year end 1998.
Total deposits declined $232.07 million or 6.64% from year end 1998 as United
realized decreases of $169.85 million and $62.22 million in interest-bearing
deposits and noninterest-bearing deposits, respectively. United's short-term
borrowings increased $151.21 million and its FHLB borrowings increased $607.48
million as United utilized these sources of cash to fund investment and loan
growth.
Shareholders' equity decreased $25.60 million or 6.07% from December 31, 1998
due primarily to purchases of treasury stock of $26.19 million and a decline in
the fair value of United's securities available for sale portfolio of
approximately $37.16 million, net of deferred income taxes. In May of 1999,
United announced a 1.75 million share repurchase program, and by year end 1999,
United had purchased approximately 1.05 million shares. United continues to
balance capital adequacy and the return to shareholders. At December 31, 1999,
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.
46
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.
For the years ended December 31, 1999 and 1998, tax-equivalent net interest
income was $188.54 million and $174.12 million, respectively. On a tax-
equivalent basis the net interest margin was 4.12% for 1999 and 4.37% for 1998.
The decline in the margin percentage reflected a changing earning asset mix
primarily related to the securitization of higher yielding high loan-to-value
mortgage loans. As a result of the securitization, interest income on the
securities was recognized at a projected loss-adjusted yield that was
significantly less than the contractual yields of the underlying assets.
Total interest income of $354.67 million increased 8.91% in 1999 over 1998 as a
result of higher volumes of interest-earning assets. Overall, average interest-
earning assets increased $589.04 million or 14.77% during 1999 from $3.99
billion in 1998 to $4.58 billion in 1999. In particular, the average volume of
investment securities increased $556.10 million at a slightly higher yield since
December 31, 1998. During 1999, United experienced growth in all three major
loan portfolios--commercial loans increased 13.85%, consumer loans increased
13.33% and mortgage loans increased 6.42%. Commercial loan growth was due to
the more active solicitation of commercial loan volume, while the increase in
the consumer loan portfolio was mainly attributable to the introduction of
certain loan products in United's northern Virginia market.
Total interest expense increased $19.05 million or 12.26% in 1999 compared to
1998. This increase was attributed primarily to increased average wholesale
funding balances at lower average interest rates than in 1998. The average cost
of funds decreased from 4.70% in 1998 to 4.46% in 1999 in light of a rising
interest rate environment. United's average FHLB borrowings increased $370.84
million and average short-term borrowings increased $138.42 million as United
implemented a strategy during 1999 to leverage its balance sheet. Average
interest-bearing deposits increased slightly by $98.07 million or 3.52% in 1999.
Provision for Loan Losses
Nonperforming loans were $20.74 million at December 31, 1999 and $18.67 million
at December 31, 1998. Nonperforming loans as a percentage of total assets
remained constant at 0.41% for United at the end of 1999 and 1998. The
components of nonperforming loans include nonaccrual loans and loans which are
contractually past due 90 days or more as to interest or principal, but have not
been put on a nonaccrual basis. Nonaccrual loans increased $3.19 million or
34.89% while loans past due 90 days or more decreased $1.11 million or 11.69%
since year end 1998. Total nonperforming assets of $24.51 million, including
OREO of $3.76 million at December 31, 1999, represented 0.49% of total assets at
the end of 1999.
At December 31, 1999, impaired loans were $15.64 million, an increase of $4.72
million or 43.20% from the $10.92 million of impaired loans at December 31, 1998
due primarily to three collateralized commercial loans totaling $4.1 million
being classified as nonaccrual.
47
This decline in credit quality from 1998 was indicative of the trend in the
banking industry during 1999. The nonperforming assets to total assets ratio
among the nation's top-30 regional banks increased to approximately 0.42% at the
end of 1999 as compared to 0.35% at the end of 1998 according to information
from Wheat First Union Securities. Much of the deterioration nationwide has
occurred in the commercial lending area. However, credit quality remained
strong by historical standards. Bank credit quality has improved significantly
since the early 1990s in which the nonperforming assets to total assets ratio
for the 30 largest regional banks reached a high of 1.67% in 1991.
United's formal company- wide process at December 31, 1999 for loan losses
evaluation process produced increased allocations within two of four loan
categories. The components of the allowance allocated to real estate increased
$6.3 million, as a result of the addition to the loan portfolio of a large block
of junior-lien mortgage loans previously held for sale. The components of the
allowance allocated to commercial loans increased $660 thousand as a result of
the increased level of impaired assets and changes in historical loss experience
factors. Pools for consumer and real estate construction loans decreased $1.0
million and $332 thousand, respectively, as a result of changes in historical
loss experience and volume factors for these loan pools.
At year end 1999 and 1998, the allowance for loan losses was 1.25% and 1.47% of
total loans, net of unearned income, respectively. At December 31, 1999 and
1998, the ratio of the allowance for loan losses to nonperforming loans was
190.9% and 209.9%, respectively.
For the years ended December 31, 1999 and 1998, the provision for loan losses
was $8.80 million and $12.16 million, respectively. Total net charge-offs were
$8.4 million in 1999 and $4.9 million in 1998, which represents 0.28% and 0.18%
of average loans for the respective years. The increase was due to additional
net charge-offs of approximately $3.6 million in commercial loans during 1999 as
compared to 1998. Over half the increased charge-off in 1999 was due to the
charge-off of approximately $2.6 million associated with a single borrower.
Other Income
Noninterest income increased $9.33 million or 22.34% for 1999 when compared to
1998. Other income consists of all revenues that are not included in interest
and fee income related to earning assets. The increase in noninterest income
for 1999 was primarily the result of an $8.18 million increase in the mortgage
banking segment and a $1.44 million increase in trust department income. These
increases in noninterest income were partially offset by a $1.69 million decline
in net gains on securities due to a $2.49 million recognized gain on an
available for sale equity security exchanged in an unaffiliated merger
transaction consummated in 1998.
Service charges, commissions and fees from customer accounts increased $839
thousand or 4.41% from 1998 due mainly to a new checking account product
introduced during the third quarter of 1999. This income includes charges and
fees related to various banking services provided by United.
Trust income and brokerage commissions increased $820 thousand or 19.92% and
$618 thousand or 133.82%, respectively, in 1999 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
48
northern Virginia market, to provide additional sources of fee income that
complemented United's traditional banking products and services.
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 50.8% for 1999, which is well below the
58.28% reported by United's national peer group banks and its immediate in-
market competitors.
Other expense includes all items of expense other than interest expense, the
provision for loan losses and income tax expense. In total, other expense
decreased $20.45 million or 14.82%. This decrease was primarily due to the
merger-related and one-time charges associated with the George Mason and Fed One
acquisitions, as well as charges associated with the purchase acquisition of
branches in the eastern panhandle of West Virginia during 1998. These charges,
which totaled $13.7 million ($8.2 million after tax), consisted primarily of
employee benefits, severance, facilities and conversion costs to effect the
mergers. Excluding these charges, other expense still decreased $6.75 million
or 5.44%.
Salaries and employee benefits expense decreased $9.44 million or 13.57% in 1999
as compared to 1998. Much of this decrease was due to approximately $5.9 million
of severance pay and related benefits of displaced employees in the George Mason
and Fed One mergers in 1998. At December 31, 1999 and 1998, United employed
1,387 and 1,452 full-time equivalent employees, respectively.
Net occupancy expense in 1999 decreased from 1998 levels by $527 thousand or
4.14%. The overall changes in net occupancy expense for 1999 were insignificant
with no material increase or decrease in any one expense category.
Remaining other expense decreased $10.48 million or 18.82% in 1999 compared to
1998. Excluding the aforementioned merger-related expenses associated with the
George Mason and Fed One mergers and the costs associated with branch purchases
in 1998, other expense actually increased approximately $3.22 million or 7.67%.
Other expense categories that reflected increases over 1998 were collection
expenses on loans, armored car and carrier fees, ATM processing costs and
certain other general business taxes and licenses.
Income Taxes
For the year ended December 31, 1999, United's effective tax rate approximated
33% compared to 28% in 1998. The lower rate in 1998 was primarily the result of
dividends from certain subsidiaries that were liquidated in restructuring and
reorganizational initiatives.
49
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, 2000 and 1999, 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, 2000.
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, based on our audits, 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, 2000 and 1999, and the
consolidated results of their operations and their cash flows for each of the
three years in the period ended December 31, 2000, in conformity with accounting
principles generally accepted in the United States.
/s/ Ernst & Young LLP
Charleston, West Virginia
February 16, 2001
50
CONSOLIDATED BALANCE SHEETS
UNITED BANKSHARES, INC. AND SUBSIDIARIES
(Dollars in thousands, except par value) December 31
--------------------------------
2000 1999
---------------------------------
Assets
Cash and due from banks $ 142,801 $ 131,091
Interest-bearing deposits with other banks 884 8,317
Federal funds sold 1,125 20,400
---------------------------------
Total cash and cash equivalents 144,810 159,808
Securities available for sale at estimated fair value (amortized
cost-$865,363 at December 31, 2000 and $1,256,946 at December 31, 1999) 865,266 1,207,363
Securities held to maturity (estimated fair value-$378,405 at
December 31, 2000 and $258,183 at December 31, 1999) 380,068 265,190
Loans held for sale 203,831 117,825
Loans 3,197,494 3,177,392
Less: Unearned income (5,000) (7,296)
---------------------------------
Loans net of unearned income 3,192,494 3,170,096
Less: Allowance for loan losses (40,532) (39,599)
---------------------------------
Net loans 3,151,962 3,130,497
Bank premises and equipment 44,481 48,696
Accrued interest receivable 36,000 36,357
Other assets 78,129 103,424
---------------------------------
TOTAL ASSETS $4,904,547 $5,069,160
=================================
Liabilities
Domestic deposits:
Noninterest-bearing $ 539,415 $ 480,767
Interest-bearing 2,852,034 2,780,218
---------------------------------
Total deposits 3,391,449 3,260,985
Borrowings:
Federal funds purchased 15,720 44,120
Securities sold under agreements to repurchase 313,349 349,129
Federal Home Loan Bank borrowings 706,512 953,347
Other borrowings 4,647 4,998
Accrued expenses and other liabilities 42,000 60,651
---------------------------------
TOTAL LIABILITIES 4,473,677 4,673,230
Shareholders' Equity
Common stock, $2.50 par value; Authorized-100,000,000 shares; issued-
43,381,769 at December 31, 2000 and December 31, 1999, including
1,616,498 and 894,661 shares in treasury at December 31, 2000 and
December 31, 1999, respectively 108,454 108,454
Surplus 85,032 87,260
Retained earnings 278,682 254,992
Accumulated other comprehensive loss (4,964) (32,228)
Treasury stock, at cost (36,334) (22,548)
---------------------------------
TOTAL SHAREHOLDERS' EQUITY 430,870 395,930
---------------------------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $4,904,547 $5,069,160
=================================
See notes to consolidated financial statements
51
CONSOLIDATED STATEMENTS OF INCOME
UNITED BANKSHARES, INC. AND SUBSIDIARIES
(Dollars in thousands, except per share data)
Year Ended December 31
------------------------------------------
2000 1999 1998
----------- ----------- -----------
Interest income
Interest and fees on loans $ 287,277 $ 258,404 $ 265,205
Interest on federal funds sold and other short-term
investments 1,171 522 1,472
Interest and dividends on securities:
Taxable 79,190 85,392 55,550
Tax-exempt 10,209 10,347 3,420
----------- ----------- -----------
Total interest income 377,847 354,665 325,647
Interest expense
Interest on deposits 125,847 122,651 128,976
Interest on short-term borrowings 19,898 17,104 10,732
Interest on Federal Home Loan Bank borrowings 52,021 34,647 15,646
----------- ----------- -----------
Total interest expense 197,766 174,402 155,354
----------- ----------- -----------
Net interest income 180,081 180,263 170,293
Provision for loan losses 15,745 8,800 12,156
----------- ----------- -----------
Net interest income after provision for loan losses 164,336 171,463 158,137
Other income
Income from mortgage banking operations 16,340 22,392 14,211
Service charges, commissions, and fees 22,402 19,863 19,024
Trust department income 7,053 6,020 4,581
Security (losses)/gains (13,864) 677 2,370
Other income 1,855 2,126 1,566
----------- ----------- -----------
Total other income 33,786 51,078 41,752
Other expense
Salaries and employee benefits 53,174 60,111 69,550
Net occupancy expense 11,787 12,206 12,733
Other expense 45,461 45,202 55,681
----------- ----------- -----------
Total other expense 110,422 117,519 137,964
----------- ----------- -----------
Income before income taxes 87,700 105,022 61,925
Income taxes 28,724 34,774 17,523
----------- ----------- -----------
Net income $ 58,976 $ 70,248 $ 44,402
=========== =========== ===========
Earnings per common share:
Basic $ 1.41 $ 1.63 $ 1.04
=========== =========== ===========
Diluted $ 1.40 $ 1.61 $ 1.02
=========== =========== ===========
Dividends per common share $ 0.84 $ 0.82 $ 0.75
=========== =========== ===========
Average outstanding shares:
Basic 41,958,956 43,100,977 42,757,638
Diluted 42,260,270 43,722,081 43,461,222
See notes to consolidated financial statements
52
CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY
UNITED BANKSHARES, INC. AND SUBSIDIARIES
(Dollars in thousands, except per share data)
Common Stock Accumulated
---------------------- Other Total
Par Retained Comprehensive Treasury Shareholders'
Shares Value Surplus Earnings Income (Loss) Stock Equity
------------------------------------------------------------------------------------
Balance at January 1, 1998 42,635,898 $106,590 $80,803 $204,849 $ 6,333 ($2,519) $396,056
Comprehensive income:
Net income 44,402 44,402
Other comprehensive income, net of tax
Unrealized gain on securities of $335
net of reclassification adjustment for
gains included in net income of $1,734 (1,399) (1,399)
--------
Total comprehensive income 43,003
Cash dividends ($0.75 per share) (28,317) (28,317)
Fractional shares adjustment (213) (7) (7)
Purchase of treasury stock (137,300 shares) (3,610) (3,610)
Common stock options exercised (546,530
shares) 285,148 712 (1,174) (202) 5,466 4,802
Sale of treasury stock (37,376 shares) 654 654
Pre-merger transactions of pooled companies 336,000 840 8,731 (621) 8,950
------------------------------------------------------------------------------------
Balance at December 31, 1998 43,256,833 108,142 88,353 220,111 4,934 (9) 421,531
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)
Cash dividends ($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)
Cash dividends ($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
====================================================================================
See notes to consolidated financial statements
53
CONSOLIDATED STATEMENTS OF CASH FLOWS
UNITED BANKSHARES, INC. AND SUBSIDIARIES
(Dollars in thousands) Year Ended December 31
2000 1999 1998
----------- ----------- -----------
OPERATING ACTIVITIES
Net income $ 58,976 $ 70,248 $ 44,402
Adjustments to reconcile net income to net cash provided
by operating activities:
Provision for loan losses 15,745 8,800 12,156
Provision for depreciation 6,999 8,028 7,739
Amortization, net of accretion 2,517 3,370 5,913
Gain on sales of bank premises and equipment (376) (1,475) (116)
Loss (Gain) on sales and calls of securities 13,864 (677) (2,370)
Loans originated for sale (1,215,244) (1,282,629) (1,541,187)
Proceeds from sales of loans 1,136,198 1,438,580 1,405,524
Gain on sales of loans (8,210) (13,576) (13,910)
Deferred income tax benefit (6,445) (4,475) (2,788)
Changes in:
Loans held for sale 1,038 6,154 5,154
Interest receivable 357 (5,955) (6,415)
Other assets 3,659 (891) (7,049)
Accrued expenses and other liabilities (8,335) 903 (6,832)
----------- ----------- -----------
NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES 743 226,405 (99,779)
----------- ----------- -----------
INVESTING ACTIVITIES
Proceeds from maturities and calls of investment securities 26,435 152,045 142,854
Purchases of investment securities (2,630) (55,101) (110,002)
Proceeds from sales of securities available for sale 541,672 336,558
Proceeds from maturities and calls of securities available for sale 126,897 146,794 340,318
Purchases of securities available for sale (436,277) (964,059) (294,657)
Proceeds from sales of loans 471,978
Purchases of loans (943,680)
Net purchases of bank premises and equipment (2,522) 423 (6,765)
Net cash received from acquired subsidiary/branch 56,472
Net change in loans (36,932) (290,824) 38,249
----------- ----------- -----------
NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES 216,643 (674,164) (305,233)
----------- ----------- -----------
FINANCING ACTIVITIES
Cash dividends paid (35,468) (34,999) (24,651)
Acquisition of treasury stock (18,384) (26,196) (3,610)
Proceeds from exercise of stock options 2,370 2,876 4,802
Proceeds from sales of treasury stock 654
Pre-merger transactions of pooled companies 8,237
Repayment of Federal Home Loan Bank borrowings (697,565) (141,618) (227,164)
Proceeds from Federal Home Loan Bank borrowings 450,730 749,098 342,240
Purchase of fractional shares (7)
Changes in:
Time deposits 106,582 (128,286) 129,364
Other deposits 23,882 (103,814) 108,057
Federal funds purchased, securities sold under agreements
to repurchase and other borrowings (64,531) 149,208 18,360
----------- ----------- -----------
NET CASH (USED IN) PROVIDED BY FINANCING ACTIVITIES (232,384) 466,269 356,282
----------- ----------- -----------
(DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS (14,998) 18,510 (48,730)
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 159,808 141,298 190,028
----------- ----------- -----------
CASH AND CASH EQUIVALENTS AT END OF YEAR $ 144,810 $ 159,808 $ 141,298
=========== =========== ===========
See notes to consolidated financial statements
54
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
UNITED BANKSHARES, INC. AND SUBSIDIARIES
December 31, 2000
NOTE A--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Nature of Operations: United Bankshares, Inc. is a multi-bank holding company
- ---------------------
headquartered in Charleston, West Virginia. The principal markets of United
Bankshares, Inc. and subsidiaries (United) are located in Parkersburg,
Charleston, Huntington, Morgantown and Wheeling, West Virginia and Arlington,
Fairfax, Loudoun and Prince William counties, Virginia. United's principal
business activities are community banking and mortgage banking.
Basis of Presentation: The consolidated financial statements and the notes to
- ----------------------
consolidated financial statements include the accounts of United Bankshares,
Inc. and its wholly-owned subsidiaries. All significant intercompany accounts
and transactions have been eliminated in the consolidated financial statements.
The accounting and reporting policies of United conform with 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 period data has 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 fair value. Unrealized holding
gains and losses on securities classified as available for sale are carried as a
separate component of other comprehensive income, net of deferred income taxes.
Gains or losses on sales of securities are recognized by the specific
identification method and are reported separately in the statements of income.
Loans: 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 days past due as
to principal or interest. When interest accruals are
55
NOTE A--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - continued
discontinued, unpaid interest recognized in income in the current year is
reversed, and interest accrued in prior years is charged to the allowance for
loan losses. Management may elect to continue the accrual of interest when the
estimated net realizable value of collateral exceeds the principal balance and
accrued interest, and the loan is in the process of collection.
Consistent with United's existing method of income recognition for loans,
interest on impaired loans, except those classified as nonaccrual, is recognized
as income using the accrual method. United's method of income recognition for
impaired loans that are classified as nonaccrual is to recognize interest income
on the cash basis or apply the cash receipt to principal when the ultimate
collectibility of principal is in doubt.
The principal 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.
Loans Held for Sale: Loans held for sale consist of one-to-four family
- --------------------
residential loans originated for sale in the secondary market and are carried at
the lower of cost or fair value determined on an aggregate basis. Gains and
losses on sales of loans held for sale are included in mortgage banking income.
Allowance for Loan Losses: Management's evaluation of the adequacy of the
- --------------------------
allowance for loan losses and the appropriate provision for loan losses is based
upon a quarterly evaluation of the portfolio. The allowance for loan losses
related to loans that are identified as impaired is based on the present value
of expected future cash flows using the loan's effective interest rate, or as a
practical expedient, at the loan's observable market price or the fair value of
the collateral if the loan is collateral dependent.
In determining the adequacy of the allowance for loan losses, management makes
allocations to specific commercial loans classified by management as to risk.
The amount allocated to a specific loan is based upon management's estimate of
the borrowers' ability to repay, the collateral securing the credit and other
borrower specific factors that may impact collectibility. Other commercial loans
not specifically reviewed on an individual basis are evaluated based on loan
pools using management's internal risk ratings. Allocations for these commercial
loan pools are determined based upon historical loss experience adjusted for
current conditions. Allocations for loans, other than commercial loans, are
developed on a total portfolio level based upon historical loss experience
adjusted for current conditions. While allocations are made to specific loans
and pools of loans, the allowance is available for all loan losses.
The allowance also provides for risk arising in part from, but not limited to,
potential for estimation or judgmental errors, charge-off volatility, declines
in credit quality resulting from sudden economic or industry shifts and changing
economic trends. The amounts allocated to specific credits and homogeneous loan
pools are reviewed on a quarterly basis and adjusted as necessary based upon
subsequent changes in circumstances. This evaluation is inherently subjective
and requires management to make estimates of the amounts and timing of future
cash flows.
Management believes that the allowance for loan losses is adequate to provide
for probable losses on existing loans based on information currently available.
56
NOTE A--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - continued
Receivable Sales: When United sells receivables in securitizations of
- -----------------
residential mortgage loans, it retains interest-only strips, and one or more
subordinated tranches, all of which are retained interests in the securitized
receivables. Gain or loss on sale of the receivables depends in part on the
previous carrying amount of the financial assets involved in the transfer,
allocated between the assets sold and the retained interests based on their
relative fair value at the date of transfer. To obtain fair values, quoted
market prices are used if available. However, quotes are generally not
available for retained interests, so United generally estimates fair value based
on the present value of future expected cash flows estimated using management's
best estimates of the key assumptions--credit losses, prepayment speeds, forward
yield curves, and discount rates commensurate with the risks involved.
Bank Premises and Equipment: Bank premises and equipment are stated at cost,
- ----------------------------
less allowances for depreciation and amortization. The provision for
depreciation is computed principally by the straight-line method over the
estimated useful lives of the respective assets.
Income Taxes: Deferred income taxes are provided for temporary differences
- -------------
between the tax basis of an asset or liability and its reported amount in the
financial statements at the statutory tax rate.
Intangible Assets: Intangible assets relating to the estimated value of the
- ------------------
deposit base of the acquired institutions are being amortized on an accelerated
basis over a 7 to 10 year period. The excess of the purchase price over the
fair market value of the net assets of the banks acquired (goodwill) is being
amortized on a straight-line basis over 15 to 20 years. Management reviews
intangible assets on a periodic basis and evaluates changes in facts and
circumstances that may indicate impairment in the carrying value. If this
evaluation indicates that intangible assets will not be recoverable, as
determined based on the estimated undiscounted cash flows of the entity acquired
over the remaining amortization period, the carrying amount of intangible assets
will be reduced.
At December 31, 2000 and 1999, deposit base intangibles and goodwill
approximated $38,710,000 and $41,625,000, net of accumulated amortization of
approximately $25,185,000 and $22,271,000.
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 which
would be issued assuming the exercise of common stock options. The dilutive
effect of stock options approximated 301,314, 621,104 and 703,584 shares in
2000, 1999 and 1998, respectively.
57
NOTE A--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - continued
Operating Segments - United operates in the community banking and mortgage
- ------------------
banking businesses. Business results are based upon United's management
accounting practices and as provided to the chief operating decision maker for
determination of resource allocation and performance.
New Accounting Standards: In June 1998, the Financial Accounting Standards Board
- -------------------------
(FASB) issued Statement No. 133, (SFAS No. 133), "Accounting for Derivative
Instruments and Hedging Activities" as amended by FASB issued Statement No. 137,
(SFAS No. 137). The provisions of this statement require that derivative
instruments be carried at fair value on the balance sheet. The statement
continues to allow derivative instruments to be used to hedge various risks and
sets forth specific criteria to be used to determine when hedge accounting can
be used. The statement also provides offsetting changes in fair value or cash
flows of both the derivative and the hedged asset or liability to be recognized
in earnings in the same period; however, any changes in fair value or cash flow
that represent the ineffective portion of a hedge are required to be recognized
in earnings and cannot be deferred. For derivative instruments not accounted for
as hedges, changes in fair value are required to be recognized in earnings. The
provisions of this statement become effective for United beginning January 1,
2001. The adoption of this standard is not expected to materially impact the
reported financial position or results of operations of United based on the
interpretive guidance issued by the FASB to date. The FASB continues to issue
interpretive guidance which could require changes in United's application of
this standard.
In September of 2000, the FASB issued SFAS No. 140 "Accounting for Transfers and
Servicing of Financial Assets and Extinguishments of Liabilities, a replacement
of FASB Statement No. 125" ("SFAS 140"). This statement replaces SFAS No. 125,
"Accounting for Transfers and Servicing of Financial Assets and Extinguishments
of Liabilities." It revises the standard for accounting for securitizations and
other transfers of financial assets and collateral and requires certain
disclosures, but it carries over most of SFAS's No. 125's provisions without
reconsideration. United adopted the disclosure provisions related to the
securitization of financial assets on December 31, 2000. All transactions
entered into after March 31, 2001 will be accounted for in accordance with this
standard. The adoption of this standard is not expected to have a material
impact on the financial position or results of operations of United.
During 2000, the Emerging Issues Task Force ("EITF") released 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. EITF 99-20 is
effective beginning the second quarter of 2001. On the date of adoption (i.e.
April 1, 2001), beneficial interests determined to have an other-than-temporary
impairment in accordance with EITF 99-20 would be written down to the estimated
fair value, with the amount of the write-down reported as a cumulative effect of
a change in accounting principle on the Statement of Income. Based on current
information, the adoption of EITF 99-20 is not expected to have a material
impact on the financial position or results of operations of United.
58
NOTE B--MERGERS AND ACQUISITIONS
During 1998, United acquired Fed One Bancorp, Inc., Wheeling, West Virginia (Fed
One) and George Mason Bankshares, Inc., Fairfax, Virginia (George Mason) in
common stock exchanges accounted for under the pooling of interests method.
United issued approximately 12.9 million shares in these two business
combinations. In the second and fourth quarters of 1998, as a direct result of
the George Mason and Fed One acquisitions, United recorded merger-related
charges of $13.7 million ($8.2 million after tax). The charges to operating
expenses consisted of employee benefit obligations, costs to eliminate duplicate
facilities and equipment, contract terminations, conversion costs, and
professional fees. All of the merger-related charges were paid in 1998.
NOTE C--INVESTMENT SECURITIES
The amortized cost and estimated fair values of securities available for sale
are summarized as follows:
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
=========================================================================
December 31, 1999
-------------------------------------------------------------------------
(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 $ 276,558 $ 15 $13,817 $ 262,756
State and political subdivisions 48,914 10 4,070 44,854
Mortgage-backed securities 693,828 324 24,256 669,896
Marketable equity securities 8,369 2,711 775 10,305
Other 229,277 9,725 219,552
-------------------------------------------------------------------------
Total $1,256,946 $3,060 $52,643 $1,207,363
=========================================================================
59
NOTE C--INVESTMENT SECURITIES - continued
The amortized cost and estimated fair value of securities available for sale at
December 31, 2000 by contractual maturity are shown below. Expected maturities
may differ from contractual maturities because the issuers may have the right to
call or prepay obligations with or without call or prepayment penalties.
Estimated
(In thousands) Amortized Fair
Cost Value
------------------- -------------------
Due in one year or less $ 20,690 $ 20,661
Due after one year through five years 68,436 68,238
Due after five years through ten years 146,984 147,021
Due after ten years 620,702 620,712
Marketable equity securities 8,551 8,634
------------------- -------------------
Total $865,363 $865,266
=================== ===================
The table above includes $576,610,000 of mortgage-backed securities at estimated
fair value with an amortized cost of $574,292,000. Maturities of mortgage-
backed securities are based upon the estimated average life.
Gross realized gains and losses from sales of securities available for sale were
$2,316,000 and $15,676,000; $1,759,000 and $1,076,000; and $3,020,000 and
$354,000, respectively, in 2000, 1999 and 1998.
The amortized cost and estimated fair values of securities held to maturity are
summarized as follows:
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
=========================================================================
December 31, 1999
-------------------------------------------------------------------------
(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 $ 56,734 $ 36 $2,217 $ 54,553
State and political subdivisions 97,824 769 5,084 93,509
Mortgage-backed securities 90,850 380 886 90,344
Other 19,782 4 9 19,777
-------------------------------------------------------------------------
Total $265,190 $1,189 $8,196 $258,183
=========================================================================
60
NOTE C--INVESTMENT SECURITIES - continued
At March 31, 2000, debt securities with an amortized cost of $146,229 and an
estimated fair value of $138,122 were transferred into the held to maturity
category from the available for sale category. The cumulative unrealized loss
of $8,107 at the date of transfer is retained in the carrying value of the held
to maturity securities. The cumulative unrealized loss, net of deferred taxes,
of $5,270 at the date of transfer is retained as a separate component of
shareholders' equity. Such amounts are being amortized over the estimated
remaining life of the securities. At December 31, 2000, the cumulative
unrealized loss balances, gross and net of deferred taxes, were $7,541 and
$4,902, respectively.
The amortized cost and estimated fair value of debt securities held to maturity
at December 31, 2000 by contractual maturity are shown below. Expected
maturities may differ from contractual maturities because the issuers may have
the right to call or prepay obligations with or without call or prepayment
penalties.
Estimated
(In thousands) Amortized Fair
Cost Value
------------ ----------
Due in one year or less $ 7,711 $ 7,725
Due after one year through five years 47,862 48,563
Due after five years through ten years 90,590 90,365
Due after ten years 233,905 231,752
------------ ----------
Total $380,068 $378,405
============ ==========
The table above includes $70,279,000 of mortgage-backed securities at estimated
fair value with an amortized cost of $70,648,000 at December 31, 2000.
Maturities of the mortgage-backed securities are based upon the estimated
average life.
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 $788,899,000 and $962,068,000 at December 31,
2000 and 1999, respectively.
NOTE D--SALES OF RECEIVABLES
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 which 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 as these 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 investor's interests. Their value is
subject to credit, prepayment, and interest rate risks on the transferred
financial assets. Key economic assumptions used in measuring the retained
interests at the date of securitization were as follows: a weighted-average life
of 5.3 years, expected annual credit losses of 15%, and discount rates of 8% to
18%.
For the year ended December 31, 2000, United received cash flows of $13,325,000
on the retained interest in the securitization.
61
NOTE D--SALES OF RECEIVABLES - continued
At December 31, 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:
Carrying amount/fair value of retained interests $ 52,419
Weighted-average life (in years) 3.8
Prepayment speed assumption (annual rate) 13.50%
Decline in fair value of 10% adverse change $ 1,622
Decline in fair value of 20% adverse change $ 3,091
Expected credit losses (annual rate) 4.37%
Decline in fair value of 10% adverse change $ 2,720
Decline in fair value of 20% adverse change $ 5,756
Residual cash flows discount rate (annual rate) 7.08% - 17.73%
Decline in fair value of 10% adverse change $ 2,036
Decline in fair value of 20% adverse change $ 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 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 and increased
credit losses) that might magnify or counteract the sensitivities.
The following table presents quantitative information about delinquencies, net
credit losses, and components of securitized financial assets:
Principal Amount of Loans
(In thousands) Total Principal 60 Days
Amount of Loans or More Past Due Average Balances Net Credit Losses
--------------- -------------------------- ---------------- -----------------
Type of Loan At December 31, 2000 During 2000
- ------------------------- ------------------------------------------- ------------------------------------
Residential mortgage
loans (fixed-rate) $152,797 $2,368 $169,958 $8,297
NOTE E--LOANS
Major classifications of loans are as follows:
(In thousands) December 31
--------------------------------
2000 1999
----------- ------------
Commercial, financial and agricultural $ 564,887 $ 535,116
Real estate:
Single family residential 1,352,955 1,388,568
Commercial 711,054 701,421
Construction 164,505 144,634
Other 84,742 44,381
Installment 319,351 363,272
---------- ----------
Total gross loans $3,197,494 $3,177,392
========== ==========
62
NOTE E--LOANS - continued
The table above does not include loans held for sale of $203,831,000 and
$117,825,000 at December 31, 2000 and 1999, respectively.
An analysis of the allowance for loan losses follows:
Year Ended December 31
----------------------------------------------------
(In thousands) 2000 1999 1998
-------- -------- -------
Balance at beginning of period $39,599 $39,189 $31,936
Provision charged to expense 15,745 8,800 12,156
-------- -------- -------
55,344 47,989 44,092
-------- -------- -------
Loans charged-off 15,845 9,236 6,270
Less recoveries 1,033 846 1,367
-------- -------- -------
Net charge-offs 14,812 8,390 4,903
-------- -------- -------
Balance at end of period $40,532 $39,599 $39,189
======== ======== =======
The higher provision and charge-offs in 2000 reflect the reclassification of
certain junior-lien mortgages from available for sale securities to portfolio
loans as of October 1999. The higher provision and charge-offs were mitigated
by increased interest income on these high-interest rate loans.
United has commercial loans, including real estate and owner occupied, income
producing real estate and land development loans, of approximately
$1,275,941,000 and $1,236,537,000 as of December 31, 2000 and 1999,
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, 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 loan losses was $872,000 and $7,793,000 of impaired loans that did
not have an allowance for credit losses. At December 31, 1999, the recorded
investment in loans that were considered to be impaired was $15,643,000 (of
which $12,327,000 was on a nonaccrual basis). Included in this amount was
$3,247,000 of impaired loans for which the related allowance for credit losses
was $603,000 and $12,396,000 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, 2000, 1999 and 1998 was approximately $15,557,000, $16,681,000 and
$10,343,000, respectively.
The amount of interest income that would have been recorded on impaired loans,
which are on nonaccrual, under the original terms was $1,519,000, $2,237,000 and
$1,809,000 for the years ended December 31, 2000, 1999 and 1998, respectively.
For the years ended December 31, 2000, 1999 and 1998, United recognized interest
income on
63
NOTE E--LOANS - continued
those impaired loans of approximately $649,000, $560,000 and $461,000,
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
$124,512,000 and $86,892,000 at December 31, 2000 and 1999, respectively. During
2000, $63,659,000 of new loans were made, repayments totaled $51,887,000, and
other changes due to the change in composition of United's board members and
executive officers approximated $25,848,000.
NOTE F--BANK PREMISES AND EQUIPMENT AND LEASES
Bank premises and equipment are summarized as follows:
December 31
--------------------------------
(In thousands) 2000 1999
--------- ---------
Land $ 10,248 $ 10,393
Buildings and improvements 44,440 44,825
Leasehold improvements 9,763 9,778
Furniture, fixtures and equipment 52,629 51,285
-------- --------
117,080 116,281
Less allowance for depreciation and amortization 72,599 67,585
-------- --------
Net bank premises and equipment $ 44,481 $ 48,696
======== ========
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 $4,858,000, $4,916,000 and
$5,129,000 for the years ended December 31, 2000, 1999 and 1998, 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, 2000, consisted of the following:
Year Amount
---- ------
(In thousands)
2001 $ 3,676
2002 2,453
2003 2,092
2004 1,494
2005 965
Thereafter 2,417
-------
Total minimum lease payments $13,097
=======
64
NOTE G--DEPOSITS
The book value of deposits consisted of the following:
(In thousands) December 31
-------------------------------
2000 1999
---------- -----------
Noninterest-bearing checking $ 539,415 $ 480,767
Interest-bearing checking 87,369 87,314
Regular savings 345,369 417,911
Money market accounts 713,184 675,463
Time deposits under $100,000 1,316,655 1,415,579
Time deposits over $100,000 389,457 183,951
---------- ----------
Total deposits $3,391,449 $3,260,985
========== ==========
Interest paid on deposits and borrowings approximated $192,543,000, $172,907,000
and $153,283,000 in 2000, 1999 and 1998, respectively.
At December 31, 2000, the scheduled maturities of time deposits are as follows:
Year Amount
---- -------------
(In thousands)
2001 $1,151,933
2002 449,135
2003 56,987
2004 20,046
2005 and thereafter 28,011
----------
Total $1,706,112
==========
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 $19,493,000 and $19,800,000 at December 31, 2000
and 1999, 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, 2000, United
had approximately $393,161,000 of additional available borrowings in the form of
collateralized advances from the FHLB at prevailing interest rates.
At December 31, 2000, $25,000,000 of FHLB advances with an interest rate of
6.63% had an overnight maturity. Additionally, $681,512,000 of FHLB advances
with a weighted average interest rate of 6.28% are scheduled to mature from one
to twenty years.
65
NOTE H--BORROWINGS - continued
United also has various unused lines of credit available from certain of its
correspondent banks in the aggregate amount of $186,200,000. These lines of
credit, which bear interest at prevailing market rates, permit United to borrow
funds in the overnight market, and are renewable annually subject to certain
conditions.
At December 31, 2000 and 1999, borrowings and the related weighted average
interest rates were as follows:
2000 1999
--------------------------- ------------------------
Weighted Weighted
(Dollars in thousands) Average Average
Amount Rate Amount Rate
---------- ---------- ------------ --------
Federal funds purchased $ 15,720 6.55% $ 44,120 5.01%
Securities sold under
agreements to repurchase 313,349 5.16% 349,129 4.98%
FHLB advances 706,512 6.30% 953,347 5.28%
Other 4,647 5.72% 4,998 4.52%
---------- ----------
Total $1,040,228 $1,351,594
========== ==========
Information concerning securities sold under agreements to repurchase (in
thousands) is summarized as follows:
2000 1999
-------- ---------
Average balance during the year $351,816 $335,908
Average interest rate during the year 5.32% 4.61%
Maximum month-end balance during the year $417,866 $440,281
NOTE I--INCOME TAXES
The income tax provisions included in the consolidated statements of income are
summarized as follows:
(In thousands) Year Ended December 31
----------------------------------------------
2000 1999 1998
-------- ------- --------
Current expense:
Federal $33,579 $36,424 $18,906
State 1,590 2,825 1,405
Deferred benefit:
Federal and State (6,445) (4,475) (2,788)
-------- -------- --------
Income taxes $28,724 $34,774 $17,523
======== ======== ========
66
NOTE I--INCOME TAXES - continued
The following is a reconciliation of income tax expense to the amount computed
by applying the statutory federal income tax rate to income before income taxes:
Year Ended December 31
-----------------------------------------------------------------------
(Dollars in thousands) 2000 1999 1998
-----------------------------------------------------------------------
Amount % Amount % Amount %
---------- --------- ---------- --------- ---------- --------
Tax on income before taxes
at statutory federal rate $30,695 35.0% $36,758 35.0% $21,674 35.0%
Plus: State income taxes
net of federal tax
Benefits 1,034 1.2 1,836 1.7 913 1.5
---------- --------- ---------- --------- ---------- --------
31,729 36.2 38,594 36.7 22,587 36.5
Increase (decrease)
resulting from:
Tax-exempt interest
income (3,380) (3.9) (3,087) (2.9) (2,201) (3.6)
Nontaxable distributions
from reorganizations (5,775) (9.3)
Intangible amortization 768 0.9 778 0.7 1,152 1.9
Other items-net (393) (0.4) (1,511) (1.4) 1,760 2.8
---------- --------- ---------- --------- ---------- --------
Income taxes $28,724 32.8% $34,774 33.1% $17,523 28.3%
========== ========= ========== ========= ========== ========
Federal income tax benefit applicable to securities transactions in 2000
approximated $4,852,000. Federal income tax expense applicable to securities
transactions approximated $237,000 in 1999 and $830,000 in 1998.
Income taxes paid approximated $36,065,000, $34,333,000 and $25,387,000 in 2000,
1999 and 1998, 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.
67
NOTE I--INCOME TAXES - continued
Significant components of United's deferred tax assets and liabilities (included
in other assets) at December 31, 2000 and 1999 are as follows:
(In thousands) 2000 1999
--------------- ---------------
Deferred tax assets:
Allowance for loan losses $14,060 $13,734
Securities available for sale 2,898 17,678
Accrued benefits payable 1,497 2,414
Other accrued liabilities 4,315 4,851
Other real estate owned 639 639
Interest in securitization trust 6,499 784
Other 1,696 620
--------------- ---------------
Total deferred tax assets 31,604 40,720
--------------- ---------------
Deferred tax liabilities:
Premises and equipment 1,588 2,228
Core deposit intangibles 329 562
Income tax allowance for
loan losses 717 962
Deferred mortgage points 2,177 1,909
Other 794 725
--------------- ---------------
Total deferred tax
liabilities 5,605 6,386
--------------- ---------------
Net deferred tax assets $25,999 $34,334
=============== ===============
NOTE J--EMPLOYEE BENEFIT PLANS
United has a defined benefit retirement plan covering substantially all
employees. The benefits are based on years of service and the average of the
employee's highest five consecutive plan years of basic compensation paid during
the ten plan years preceding the date of determination. United's funding policy
is to contribute annually the maximum amount that can be deducted for federal
income tax purposes. Contributions are intended to provide not only for
benefits attributed to service to date, but also for those expected to be earned
in the future.
Net periodic pension cost included the following components:
(In thousands) Year Ended December 31,
-------------------------------------------
2000 1999 1998
----------- ------------ ------------
Service cost $ 1,344 $ 1,448 $ 799
Interest cost 2,050 1,725 1,609
Expected return on plan assets (4,075) (2,749) (2,121)
Amortization of transition asset (131) (131) (131)
Recognized net actuarial gain (1,136) (222)
Amortization of prior service cost 63 63 63
----------- ------------ ------------
Net periodic pension (benefit) cost ($1,885) $ 134 $ 219
=========== ============ ============
68
NOTE J--EMPLOYEE BENEFIT PLANS - continued
A reconciliation of the changes in benefit obligation and plan assets for the
defined benefit retirement plan is as follows:
(In thousands) December 31
-------------------------------------------
2000 1999
------------- -------------
Benefit obligation at beginning
of year $ 24,257 $ 25,653
Service cost 1,344 1,448
Interest cost 2,050 1,725
Actuarial loss (gain) 243 (3,634)
Benefits paid (972) (935)
------------- -------------
Benefit obligation at end of year 26,922 24,257
------------- -------------
Fair value of plan assets at
beginning of year 41,060 31,009
Actual return on plan assets 4,020 9,534
Employer contribution 1,738 1,452
Benefits paid (972) (935)
------------- -------------
Fair value of plan assets at
end of year 45,846 41,060
------------- -------------
Funded status 18,924 16,803
Unrecognized net actuarial gain (13,991) (15,425)
Unrecognized prior service cost 136 199
Unrecognized net transition asset (301) (432)
------------- -------------
Pension asset $ 4,768 $ 1,145
============= =============
At December 31, 2000 and 1999, the weighted average discount rate and rate of
increase in future compensation levels used in determining the actuarial present
value of the projected benefit obligation was 8.25% and 5.0%. The weighted
average expected long-term rate of return on United's plan assets was 9.75% for
the year ended December 31, 2000 and 9.0% for the years ended December 31, 1999
and 1998.
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 $906,000,
$1,166,000 and $1,175,000 in 2000, 1999 and 1998, respectively.
The assets of United's defined benefit plan and 401(k) Plan each include
investments in United common stock. At December 31, 2000, the combined plan
assets included 785,039 shares of United common stock with an approximate fair
value of $16,682,000. Dividends paid on United common stock held by the plans
approximated $563,000 for the year ended December 31, 2000.
69
NOTE J--EMPLOYEE BENEFIT PLANS - continued
United has certain other deferred compensation plans covering various key
employees. Periodic charges are made to operations so that the present value of
the liability due each employee is fully recorded as of the date of their
retirement. Amounts charged to expense have not been significant in any year.
United has various incentive stock option plans for key employees, the 1988,
1991 and 1996 plans. The plans provide for the granting of stock options of up
to 200,000, 1,000,000 and 1,200,000 shares of common stock, respectively. No
further grants will be made under the 1988, 1991 and 1996 plans. 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, 2000:
Options Outstanding Options Exercisable
- --------------------------------------------------------------------------------------------------------------------------------
Weighted-
Average Weighted- Weighted-
Remaining Average Average
Range of Number Contractual Exercise Number Exercise
Exercise Prices Outstanding Life Price Exercisable Price
- --------------------------------------------------------------------------------------------------------------------------------
$ 2.98 to $ 27.00 1,513,691 6.5 years $18.13 1,086,291 $17.45
The following is a summary of activity of United's Incentive Stock Option Plans:
Stock Range of
Options Exercise Prices
--------------- ----------------------------
Outstanding at January 1, 1998 1,969,044 $22.00 $ 2.98
Granted 236,600 27.00
Exercised 546,530 22.00 2.98
Forfeited 26,823 22.00 14.88
---------------
Outstanding at December 31, 1998 1,632,291 27.00 2.98
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
===============
Exercisable at:
December 31, 1998 1,275,776 $22.00 $ 2.98
December 31, 1999 1,156,568 $27.00 $ 2.98
December 31, 2000 1,086,291 $27.00 $ 2.98
Because the exercise price of the option granted is equal to the market price of
the underlying stock on the date of grant, no compensation expense is
recognized. The following pro forma disclosures present United's net income and
diluted earnings per share, determined as if United had recognized compensation
expense for its employee stock options under the fair value method:
(Dollars in thousands, except per share) Year Ended December 31,
--------------------------------------------------
2000 1999 1998
------------ ------------ -----------
Pro forma net income $58,379 $70,019 $44,187
Pro forma diluted earnings per share $ 1.38 $ 1.60 $ 1.02
70
NOTE J--EMPLOYEE BENEFIT PLANS - continued
The estimated fair value of the options at the date of grant was $11.55, $5.64
and $5.73 for the options granted during 2000, 1999 and 1998, 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 2000, 1999 and 1998, respectively: risk-free interest rates of
6.20%, 5.79% and 4.76%; dividend yields of 4.38%, 3.43%, and 3.04%; volatility
factors of the expected market price of United's common stock of 0.999, 0.211
and 0.210; and a weighted average expected option life of 7 years.
United provides postemployment and postretirement benefits for certain employees
at subsidiaries acquired in prior years. United accounts for such costs as
expense when paid. Accounting for such costs when paid does not produce results
materially different from those, which would result if such costs were accrued
during the period of employee service. United does not anticipate providing
postemployment or postretirement benefits to its currently active employees
after employment or retirement except on a fully contributory basis.
NOTE K--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
$1,086,455,000 and $1,254,596,000 of loan commitments outstanding as of December
31, 2000 and 1999, 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
$89,013,000 and $74,110,000 as of December 31, 2000 and 1999, 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 or results of operations.
71
NOTE L - UNITED BANKSHARES, INC. (PARENT COMPANY ONLY) FINANCIAL INFORMATION
Condensed Balance Sheets
(In thousands) December 31
-----------------------------------------
2000 1999
------------------ ------------------
Assets
Cash $ 3,719 $ 10,101
Securities available for sale 9,002 10,367
Securities held to maturity 6,859 6,643
Investment in subsidiaries:
Bank subsidiaries 411,367 371,105
Non-bank subsidiaries 1,446 1,383
Loans 6,905 11,094
Other assets 1,435 1,634
------------------ ------------------
Total Assets $440,733 $412,327
================== ==================
Liabilities and Shareholders' Equity
Line of credit from banking subsidiary $ 5,000 $ 1,000
Accrued expenses and other liabilities 4,863 15,397
Shareholders' equity (including other accumulated
comprehensive loss of $4,964 and $32,228
at December 31, 2000 and 1999, respectively) 430,870 395,930
------------------ ------------------
Total Liabilities and Shareholders' Equity $440,733 $412,327
================== ==================
Condensed Statements of Income
(In thousands) Year Ended December 31
----------------------------------------------------------------
2000 1999 1998
------------------ ------------------ ------------------
Income
Dividends from banking subsidiaries $45,500 $40,352 $40,558
Net interest income 1,074 1,668 1,394
Management fees:
Bank subsidiaries 4,130 4,146 3,928
Non-bank subsidiaries 12 12 12
Other income 2,188 1,489 2,937
------------------ ------------------ ------------------
Total Income 52,904 47,667 48,829
------------------ ------------------ ------------------
Expenses
Interest paid to banking subsidiary 372 6
Operating expenses 4,615 4,698 7,337
------------------ ------------------ ------------------
Income Before Income Taxes and Equity
in Undistributed Net Income of Subsidiaries 47,917 42,963 41,492
Applicable income tax expense 798 853 105
------------------ ------------------ ------------------
Income Before Equity in Undistributed Net
Income of Subsidiaries 47,119 42,110 41,387
Equity in undistributed net income of subsidiaries:
Bank subsidiaries 11,795 28,102 2,971
Non-bank subsidiaries 62 36 44
------------------ ------------------ ------------------
Net Income $58,976 $70,248 $44,402
================== ================== ==================
72
NOTE L - UNITED BANKSHARES, INC. (PARENT COMPANY ONLY) FINANCIAL INFORMATION -
continued
Condensed Statements of Cash Flows
(In thousands) Year Ended December 31
---------------------------------------------------------------------
2000 1999 1998
------------------- ------------------- -------------------
Operating Activities
Net income $ 58,976 $ 70,248 $ 44,402
Adjustments to reconcile net income to
net cash provided by operating activities:
Equity in undistributed net income
of subsidiaries (11,857) (28,138) (3,015)
Depreciation and net amortization 7 12 10
Net gain on sales of investment securities (2,168) (1,484) (2,912)
Net change in other assets and liabilities (9,511) 786 (771)
------------------- ------------------- -------------------
Net Cash Provided by Operating Activities 35,447 41,424 37,714
------------------- ------------------- -------------------
Investing Activities
Net proceeds (purchases of) from securities 1,464 (2,205) 3,563
Repayment on loan balances by customers 4,189 1,742 1,464
Increase in investment in subsidiaries (8,541)
------------------- ------------------- -------------------
Net Cash Provided by (Used in) Investing Activities 5,653 (463) (3,514)
------------------- ------------------- -------------------
Financing Activities
Net advances on line of credit from subsidiary 4,000 1,000
Cash dividends paid (35,468) (34,999) (24,651)
Acquisition of treasury stock (17,724) (26,196) (3,610)
Proceeds from exercise of stock options 1,710 2,876 4,802
Proceeds from sales of treasury stock 654
Pre-merger transactions of pooled companies 8,237
Purchase of fractional shares (7)
------------------- ------------------- -------------------
Net Cash Used in Financing Activities (47,482) (57,319) (14,575)
------------------- ------------------- -------------------
(Decrease) Increase in Cash and Cash Equivalents (6,382) (16,358) 19,625
Cash and Cash Equivalents at Beginning of Year 10,101 26,459 6,834
------------------- ------------------- -------------------
Cash and Cash Equivalents at End of Year $ 3,719 $ 10,101 $ 26,459
=================== =================== ===================
73
NOTE M--OTHER EXPENSE
The following details certain items of other expense for the periods indicated:
Year Ended December 31
-----------------------------------------------------
(In thousands) 2000 1999 1998
-------------- -------------- ---------------
Other expense:
Data processing $3,153 $3,175 $ 5,710
Legal and consulting 3,923 1,709 2,909
Advertising 2,803 2,702 3,011
Goodwill amortization 3,266 3,279 4,395
Equipment expense 7,589 8,896 10,188
NOTE N--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, 2000, was approximately $47,012,000.
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 2001, the retained net profits available for distribution to United
Bankshares, Inc., as dividends without regulatory approval, are approximately
$39,894,000, plus net income for the interim period through the date of
declaration.
Under Federal Reserve regulation, the banking subsidiaries are also limited as
to the amount they may loan to affiliates, including the parent company. Loans
from the banking subsidiaries to the parent company are limited to 10% of the
banking subsidiaries' capital and surplus, as defined, or $40,947,000 at
December 31, 2000, 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, 2000, United exceeds all capital adequacy requirements to which it is
subject.
74
NOTE N--REGULATORY MATTERS - continued
At December 31, 2000, the most recent notification from its regulators, United
and its subsidiary banks were categorized as well capitalized. To be categorized
as well capitalized, United must maintain minimum total risk-based, Tier I
risk-based, and Tier I leverage ratios as set forth in the following table.
There are no conditions or events since that notification that management
believes would impact United's well capitalized status.
United's and its subsidiary 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, 2000:
- ------------------------
Total Capital (to Risk-
Weighted Assets):
United Bankshares $437,180 11.8% $297,130 *8.0% $371,413 *10.0%
United National Bank 290,524 11.1% 210,279 *8.0% 262,849 *10.0%
United Bank 125,249 11.6% 86,122 *8.0% 107,652 *10.0%
Tier I Capital (to Risk-
Weighted Assets):
United Bankshares 396,610 10.7% 148,565 *4.0% 222,848 *6.0%
United National Bank 263,217 10.0% 105,139 *4.0% 157,709 *6.0%
United Bank 112,024 10.4% 43,061 *4.0% 64,591 *6.0%
Tier I Capital
(to Average Assets):
United Bankshares 396,610 8.2% 194,267 *4.0% 242,834 *5.0%
United National Bank 263,217 7.9% 132,743 *4.0% 165,929 *5.0%
United Bank 112,024 7.3% 61,716 *4.0% 77,146 *5.0%
As of December 31, 1999:
- ------------------------
Total Capital (to Risk-
Weighted Assets):
United Bankshares $426,310 11.8% $290,173 *8.0% $362,716 *10.0%
United National Bank 279,554 11.1% 201,255 *8.0% 251,569 *10.0%
United Bank 120,365 11.0% 87,332 *8.0% 109,165 *10.0%
Tier I Capital (to Risk-
Weighted Assets):
United Bankshares 385,840 10.6% 145,086 *4.0% 217,630 *6.0%
United National Bank 253,319 10.1% 100,627 *4.0% 150,941 *6.0%
United Bank 107,001 9.8% 43,666 *4.0% 65,499 *6.0%
Tier I Capital
(to Average Assets):
United Bankshares 385,840 7.7% 200,170 *4.0% 250,213 *5.0%
United National Bank 253,319 7.4% 136,875 *4.0% 171,093 *5.0%
United Bank 107,001 6.7% 63,903 *4.0% 79,879 *5.0%
* Greater than or equal to
75
NOTE O--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.
Loans: The estimated fair values of variable-rate loans that reprice frequently
- ------
with no significant change in credit risk are based on carrying values. The fair
values of certain mortgage loans (e.g., one-to-four family residential), credit
card loans, and other consumer loans are based on quoted market prices of
similar loans sold in conjunction with securitization transactions, adjusted for
differences in loan characteristics. The fair values of other loans (e.g.,
commercial real estate and rental property mortgage loans, commercial and
industrial loans, financial institution loans and agricultural loans) are
estimated using discounted cash flow analyses, using interest rates currently
being offered for loans with similar terms to borrowers of similar credit
worthiness.
Off-Balance Sheet Instruments: Fair values of United's loan commitments are
- ------------------------------
based on fees currently charged to enter into similar agreements, taking into
account the remaining terms of the agreements and the counterparties' credit
standing. The estimated fair values of these commitments approximate their
carrying values.
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.
Federal Home Loan Bank Borrowings: The fair values of United's Federal Home Loan
- ----------------------------------
Bank borrowings are estimated using discounted cash flow analyses, based on
United's current incremental borrowing rates for similar types of borrowing
arrangements.
76
NOTE O--FAIR VALUES OF FINANCIAL INSTRUMENTS - continued
The estimated fair values of United's financial instruments are summarized
below:
December 31, 2000 December 31, 1999
----------------------------------- -----------------------------------
(In thousands) Carrying Fair Carrying Fair
Amount Value Amount Value
---------------- ---------------- ---------------- ----------------
Cash and cash equivalents $ 144,810 $ 144,810 $ 159,808 $ 159,808
Securities available for sale 865,266 865,266 1,207,363 1,207,363
Securities held to maturity 380,068 378,405 265,190 258,183
Loans 3,192,494 3,181,933 3,170,096 3,106,565
Deposits 3,391,449 3,315,058 3,260,985 3,215,379
Short-term borrowings 333,716 334,146 398,247 397,653
FHLB borrowings 706,512 717,590 953,347 941,926
NOTE P--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
- ---------------------------------------------------------------------------------------------------------------------------------
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 before income taxes 7,758 93,741 3,523 105,022
Income tax expense 2,687 31,033 1,054 34,774
Net income 5,071 62,708 2,469 70,248
Average total assets 148,397 4,860,973 (141,849) 4,867,521
- ---------------------------------------------------------------------------------------------------------------------------------
1998
Net interest income $ 2,763 $ 165,813 $ 1,717 $ 170,293
Provision for loan losses 25 12,131 12,156
Net interest income after provision for loan losses 2,738 153,682 1,717 158,137
Noninterest income 24,052 14,727 2,973 41,752
Noninterest expense 19,872 112,959 5,133 137,964
Income (loss) before income taxes 6,918 55,450 (443) 61,925
Income tax expense 1,878 15,557 88 17,523
Net income (loss) 5,040 39,893 (531) 44,402
Average total assets 190,168 4,190,512 (141,872) 4,238,808
- ---------------------------------------------------------------------------------------------------------------------------------
General corporate and other includes intercompany eliminations.
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NOTE Q - QUARTERLY FINANCIAL DATA (UNAUDITED)
Quarterly financial data for 2000 and 1999 is summarized below (dollars in
thousands except for per share data):
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
1st Quarter 2nd Quarter 3rd Quarter 4th Quarter
----------- ----------- ----------- -----------
1999
- ----
Interest income $ 85,504 $ 87,022 $ 90,811 $ 91,328
Interest expense 39,533 42,415 45,822 46,632
Net interest income 45,971 44,607 44,989 44,696
Provision for loan losses 764 1,761 2,255 4,020
Income from mortgage
Banking operations 4,418 6,095 5,706 6,173
Other noninterest income 6,221 6,358 7,137 8,970
Noninterest expense 28,821 29,070 29,377 30,251
Income taxes 9,864 8,433 8,500 7,977
Net income (1) 17,161 17,796 17,700 17,591
Per share data:
- ---------------
Average shares outstanding (000s):
Basic 43,278 43,322 43,124 42,674
Diluted 43,961 44,013 43,708 43,282
Net income per share:
Basic $ 0.40 $ 0.41 $ 0.41 $ 0.41
Diluted $ 0.39 $ 0.40 $ 0.41 $ 0.41
Dividends per share $ 0.20 $ 0.20 $ 0.21 $ 0.21
(1) For further information see the related discussion "Quarterly Results"
included in Management's Discussion and Analysis.
78