-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, JCu6ooDbBBBaihTCUC3iTr6nG3XGhZDBeMzNvBsFTMnxuZ8rB0P2Uwu+WXF91oIE 83wdCygwf2zxZN9uPfgP/Q== 0000950169-98-000353.txt : 19980331 0000950169-98-000353.hdr.sgml : 19980331 ACCESSION NUMBER: 0000950169-98-000353 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 9 CONFORMED PERIOD OF REPORT: 19971231 FILED AS OF DATE: 19980330 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: UNITED BANKSHARES INC/WV CENTRAL INDEX KEY: 0000729986 STANDARD INDUSTRIAL CLASSIFICATION: NATIONAL COMMERCIAL BANKS [6021] IRS NUMBER: 550641179 STATE OF INCORPORATION: WV FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 002-86947 FILM NUMBER: 98579733 BUSINESS ADDRESS: STREET 1: 300 UNITED CTR STREET 2: 500 VIRGINIA ST E CITY: CHARLESTON STATE: WV ZIP: 25301 BUSINESS PHONE: 3044248761 MAIL ADDRESS: STREET 1: 300 UNITED CT STREET 2: 500 VIRGINIA SUITE CITY: CHARLESTON STATE: WV ZIP: 25301 10-K 1 UNITED BANKSHARES, INC. FORM 10-K 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, 1997 Commission File Number: 0-13322 UNITED BANKSHARES, INC. ----------------------- (Exact name of registrant as specified in its charter) WEST VIRGINIA 55-0641179 ------------- ---------- (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 300 UNITED CENTER 500 VIRGINIA STREET, EAST CHARLESTON, WEST VIRGINIA 25301 - ------------------------- ----- (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: (304) 424-8761 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, 1998 was approximately $581,969,282. As of February 28, 1998, United Bankshares, Inc. had 30,020,176 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, 1997, portions of which are incorporated by reference in Parts I, II and IV of this Form 10-K. 2. Definitive Proxy Statement dated April 7, 1998 for the 1998 Annual Shareholders' Meeting to be held on May 18, 1998, portions of which are incorporated by reference in Part III of this Form 10-K. Page 1 of 88 pages. Index to Exhibits is on page 32 . ---- ---- 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, 1997, nor the proxy statement for the annual United shareholders' meeting had been mailed to shareholders. CROSS-REFERENCE INDEX PART I Page - ------ ---- Item 1. BUSINESS . . . . . . . . . . . . . . . . . . . . . . . . 3 Item 2. PROPERTIES . . . . . . . . . . . . . . . . . . . . . . . 3 Item 3. LEGAL PROCEEDINGS . . . . . . . . . . . . . . . . . . . 13 Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS . . 13 PART II - ------- Item 5. MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED SHAREHOLDER MATTERS . . . . . . . . . . . . . . . . . . 14 Item 6. SELECTED FINANCIAL DATA . . . . . . . . . . . . . . . . 18 Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS . . . . . . . . . . 18 Item 7a QUALITATIVE AND QUANTITATIVE DISCLOSURES ABOUT MARKET RISK . . . . . . . . . . . . . . . . . . . . . . 18 Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA . . . . . . 28 Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURES . . . . . . . . 28 PART III - -------- Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT . . 29 Item 11. EXECUTIVE COMPENSATION . . . . . . . . . . . . . . . . 29 Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT . . . . . . . . . . . . . . . . . . . . . . 29 Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS . . . . 29 PART VI - ------- Item 14. EXHIBITS, FINANCIAL STATEMENTS, SCHEDULES AND REPORTS ON FORM 8-K . . . . . . . . . . . . . . . . . . . . . 30 2 UNITED BANKSHARES, INC. FORM 10-K, PART I ITEM 1. BUSINESS ITEM 2. PROPERTIES The following discussion satisfies the reporting requirements of Items 1 and 2. 3 DESCRIPTION OF UNITED BANKSHARES, INC. Organizational History and Subsidiaries - --------------------------------------- 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 and organized on September 9, 1982. United began conducting business on May 1, 1984 with the acquisition of three wholly-owned subsidiaries. On October 1, 1985, these three subsidiaries were merged and on November 1, 1985, were renamed United National Bank ("UNB"). Since that time UNB has acquired through merger or consolidation the following banks: Heritage Bancorp, Inc. (a holding company); First National Bank of Ripley; Kanawha Banking and Trust Company; Ohio Valley National Bank; Elk National Bank; Montgomery National Bank, the sole subsidiary of Liberty Bancshares Inc., a bank holding company; First Bank of Ceredo, the bank subsidiary of Financial Future Corporation, a bank holding company; CB&T Westover Bank; the Star City Branch of Community Bank & Trust, N. A.; and First Empire Federal Savings & Loan Association, the sole subsidiary of Eagle Bancorp, Inc., a bank holding company. On June 30, 1996 United formed United Mortgage Company, Inc., a wholly-owned subsidiary of UNB, with its wholly-owned subsidiaries United Mortgage Center, Inc. and United Home Lending Services, Inc. The business of United Mortgage Company, Inc. and its subsidiaries is the origination of residential real estate loans for resale, the conducting of mortgage loan servicing activities for certain loans, and generally the activities commonly conducted by a mortgage banking company. On September 1, 1993, UBC Holding Company, ("UBC"), a United subsidiary, was formed to effect the Financial Future Corporation transaction. UBC is a second tier holding company with UNB currently being its only subsidiary. On August 9, 1990, United acquired BankFirst Corporation ("BankFirst"), a one bank holding company based in McLean, Virginia. BankFirst was merged with UBF Holding Company, Inc. ("UBF"), a United subsidiary formed to effect this acquisition. UBF acquired Bank First, N.A. ("Bank First"), the subsidiary of BankFirst. On October 11, 1995, United formed Commercial Interim Bank, Inc. ("Interim Bank"), a state member bank located in Arlington, Virginia, to facilitate the acquisition of First Commercial Bank of Arlington, Virginia ("FCB"). United then merged Bank First into Interim Bank from its wholly owned subsidiary, UBF. Concurrent with the merger of Bank First into Interim Bank, UBF was merged into United. United acquired FCB on October 31, 1995 and merged it into Interim Bank. United then effected a name change of Interim Bank to First Commercial Bank. On March 18, 1996 First Commercial Bank's name was changed to United Bank. 4 On August 1, 1997, United acquired First Patriot Bankshares Corporation ("Patriot") of Reston, Virginia and its wholly-owned subsidiary, Patriot National Bank. Patriot was merged into UB Holding Company, Inc. ("UB"), a United subsidiary formed to consummate this acquisition. Patriot National Bank was merged into United Bank. United National Bank-South ("UNB-S"), was formed on November 1, 1992, as a part of United's acquisition of Summit Holding Corporation and its lead bank, Raleigh County National Bank. On January 27, 1996, UNB-S was merged into and became a part of UNB. Offices of UNB-S became branch offices of UNB. In December 1996, United Brokerage Services, Inc., a wholly-owned subsidiary of UNB began operations. United Brokerage Services, Inc. is a fully-disclosed broker/dealer and is a registered Investment Advisor with the National Association of Securities Dealers, Inc. and the Securities and Exchange Commission and a member of the Securities Investor Protection Corporation. United Brokerage Services, Inc. offers a wide range of investment products as well as comprehensive financial planning and asset management services to the general public. Offices - ------- The headquarters of United are located in United Center at 500 Virginia Street, East, Charleston, West Virginia. The main office of UNB is located at 514 Market Street, Parkersburg, West Virginia. United's corporate offices and UNB's executive offices are also located in Parkersburg at Fifth and Avery Streets. Currently, UNB operates forty-three offices located throughout West Virginia. UNB owns all of these facilities except for two in the Parkersburg area, three in the Charleston area, two in the Beckley area and one in each Wheeling, Summersville and Clarksburg, all of which are leased under operating leases. The main facility of UNB's Wheeling office is leased from Ogden Newspapers, Inc. Additionally, UNB operates a loan production office located in Bridgeport, West Virginia. The main office of United Bank is located at 3801 Wilson Boulevard, Arlington, Virginia, with seven offices in Fairfax County and an office in each of Loudoun and Prince William Counties. United Bank leases all of these facilities under operating lease agreements except for the two offices in Arlington and Reston, which are owned facilities. Employees - --------- As of December 31, 1997 United and its subsidiaries had approximately 972 full-time equivalent employees and officers. None of these employees is represented by a collective bargaining unit, and management considers employee relations to be excellent. 5 Business of United - ------------------ As a bank holding company registered under the Bank Holding Company Act of 1956, as amended, United's present business is the operation of its bank subsidiaries. As of December 31, 1997, United's consolidated assets approximated $2.7 billion and total shareholders' equity approximated $279 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 - ---------------------------- All of United's subsidiary banks are full-service commercial banks and, as such, engage in 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 also 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. UNB 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. 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. 6 Lending Activities - ------------------ United's total loan portfolio, net of unearned income, increased $212.88 million, or 11.5%, to $2.06 billion in 1997 and is comprised of commercial, real estate and consumer loans including credit card and home equity loans. Commercial and real estate loans increased $119.89 million or 48.2% and $89.11 million or 6.5%, respectively, while consumer loans, net of unearned income, remained flat. Commercial Loans - ---------------- The commercial loan portfolio consists of loans to corporate borrowers in small to mid-size industrial and commercial companies, as well as automobile dealers, service, retail and wholesale merchants. Coal mining companies make up an insignificant portion of loans in the portfolio. Collateral securing these loans includes equipment, machinery, inventory, receivables, vehicles and commercial real estate. Commercial loans are considered to contain a higher level of risk than other loan types although care is taken to minimize these risks. Numerous risk factors impact this portfolio including industry specific risks such as economy, new technology, labor rates and cyclicality, as well as customer specific factors, such as cash flow, financial structure, operating controls and asset quality. United diversifies risk within this portfolio by closely monitoring industry concentrations and portfolios to ensure that it does not exceed established lending guidelines. Diversification is intended to limit the risk of loss from any single unexpected economic event or trend. Underwriting standards require a comprehensive review and independent evaluation of virtually all larger balance commercial loans by the loan committee prior to approval with ongoing updates of the loan portfolio. Real Estate Loans - ----------------- Commercial real estate loans consist of commercial mortgages, which generally are secured by nonresidential and multi-family residential properties. Also included in this portfolio are loans that are secured by owner-occupied real estate, but made for purposes other than the construction or purchase of real estate. Commercial real estate loans carry many of the same customers and industry risks as the commercial loan portfolio. Real estate mortgage loans to consumers are secured primarily by a first lien deed of trust. These loans are traditional one-to-four family residential mortgages. The loans generally do not exceed an 80% loan to value ratio at the loan origination date and most are at a variable rate of interest. These loans are considered to contain normal risk. Consumer Loans - -------------- Consumer loans are secured by automobiles, boats, recreational vehicles, and other personal property. Personal loans, home equity, student loans and unsecured credit card receivables are also included as consumer loans. United monitors the risk associated with these types of 7 loans by monitoring such factors as portfolio growth, lending policies and economic conditions. Underwriting standards are continually evaluated and modified based upon these factors. Underwriting Standards - ---------------------- United's loan underwriting guidelines and standards are updated periodically and are presented for approval by each of the respective Boards of Directors of its subsidiary banks. The purpose of the standards and guidelines is to grant loans on a sound and collectible basis; to invest available funds in a safe, profitable manner; to serve the legitimate credit needs of the communities of United's primary market area; and ensure that all loan applicants receive fair and equal treatment in the lending process. It is the intent of the underwriting 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 and justify a loan with slight 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. United, with the formation of United Home Lending Service, Inc., has entered the mortgage banking business. As of December 31, 1997, the balance of mortgage loans being serviced by United for others was $242.78 million. Secondary Markets - ----------------- During 1997, United originated $143.19 million of real estate loans for sale in the secondary market and sold $135.76 million of loans designated as held for sale in the secondary market. Proceeds received from the sales of these loans during 1997 was $138.28 million. 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; (iv) loan servicing fees; and (v) gain or loss on the close out of the hedge instrument used to offset the risk that changes in interest rate may have on the value of United's mortgage loan inventory. 8 Investment Activities - --------------------- United's investment policy stresses the management of the investment securities portfolio, which includes both securities held to maturity and securities available for sale, to maximize return over the long-term in a manner that is consistent with good banking practices and relative safety of principal. United currently does not engage in trading account activity. The Asset/Liability Committee of United is responsible for the coordination and evaluation of the investment portfolio. Sources of funds for investment activities include "core deposits". Core deposits include certain demand deposits, statement and special savings and NOW accounts. These deposits are relatively stable and they are the lowest cost source of funds available to United. Short-term borrowings have also been a significant source of funds. These include federal funds purchased and securities sold under agreements to repurchase and FHLB borrowings. Repurchase agreements represent funds which are generally obtained as the result of a competitive bidding process. United's investment portfolio remains comprised largely 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 1997, United did not sell any securities. United incurred net losses of $98 thousand from sales from the available for sale portfolio in 1996. United enters into hedging transactions that utilize forward contracts for the delivery of mortgage-backed securities as hedge vehicles to offset the risk that a change in interest rates will result in a decrease in the value of United's current mortgage loan inventory or its commitments to originate mortgage loans (the "pipeline"). The risk of loss is then matched with the appropriate hedge vehicle. United's policies generally require that it hedge substantially all of its inventory of conforming and government loans. Realized gains and losses on forward commitments are recorded in mortgage banking income in the period settlement occurs. Unrealized gains or losses are considered in the lower of cost or market valuation of loans held for sale. At December 31, 1997, United had open commitments amounting to approximately $2 million to sell mortgage-backed securities with varying settlement dates generally not extending beyond March 1998. As such, United is not exposed to significant risk nor will it derive any significant benefit from changes in interest rates on the price of the mortgage loan inventory, net of gains or losses of associated hedge positions. 9 Operating Subsidiaries - ---------------------- During 1996, UNB chartered two operating subsidiaries, United Brokerage Services, Inc. and United Mortgage Company, Inc. United Brokerage Services, Inc. is a fully-disclosed broker/dealer and a registered Investment Advisor with the National Association of Securities Dealers, Inc. and the Securities and Exchange Commission and a member of the Securities Investor Protection Corporation. United Brokerage Services, Inc. offers a wide range of investment products as well as comprehensive financial planning and asset management services to the general public. United Mortgage Company, Inc. was formed in connection with the merger of Eagle Bancorp, Inc. ("Eagle") with and into United and the related merger of First Empire Federal Savings and Loan Association ("First Empire") with and into UNB. In accordance with the merger agreement, UNB requested and received regulatory approval to form and operate United Mortgage Company, Inc. The business of United Mortgage Company, Inc. will be the origination and acquisition of residential real estate loans for resale, the conducting of mortgage loan servicing activities for certain loans, and generally the activities commonly conducted by a mortgage banking company. Competition - ----------- United faces a high degree of competition in nearly all of the markets it serves. These markets may generally be defined as Wood, Kanawha, Monongalia, Jackson, Cabell, Hancock, Ohio, Marshall, Gilmer, Lewis, Webster, Boone, Logan, Nicholas, Fayette and Raleigh Counties in West Virginia; Lawrence, Belmont, Jefferson and Washington Counties in Ohio; and Arlington, Loudoun, Prince William and Fairfax Counties in Virginia, located adjacent to the Washington D.C. area, which is in close proximity to West Virginia's eastern panhandle. United competes in Ohio markets because of the close proximity to the Ohio border of certain subsidiary offices. Included in United's markets are the Parkersburg Metropolitan Statistical Area (MSA), the Charleston MSA, the Huntington MSA, the Wheeling MSA and the Weirton MSA. These represent the five largest West Virginia MSA's. United considers the above counties and MSA's to be the primary market area for the business of its banking subsidiaries. West Virginia banks are permitted unlimited branch banking throughout the state. In addition, interstate acquisitions of and by West Virginia banks and bank holding companies are permissible on a reciprocal basis. West Virginia also allows reciprocal interstate acquisitions by thrift institutions. These conditions serve to intensify competition within United's market. As of December 31, 1997, there were 53 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 86 10 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 encompass a portion of the coal fields located in southern West Virginia, an area of the state which has been economically depressed, the coal related loans in the loan portfolio of the banking subsidiaries constitute less than 2% of United's total loans outstanding. The state of West Virginia has a more diversified economy than it had during the peak periods of coal production with the chemical manufacturing industry accounting for 19% of the entire manufacturing workforce and 33% of the manufacturing wages, according to West Virginia state records. This diversified economy has contributed to the positive trends in the number of payroll jobs created and unemployment rates in recent years as the number of payroll jobs increased 13,600 during calendar year 1997 and the state's overall unemployment rate has declined from 10.5% in 1991 to 6.5% in December 1997 - the lowest unemployment rate in nearly 20 years, according to available information from the West Virginia Bureau of Employment Programs. United's northern Virginia subsidiary banks 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 1997 was 3.1%. The 3.1% rate was the lowest rate reported in over 27 years. Additionally, the Virginia Employment Commission reported that record levels were set with increased nonagricultural employment and increased manufacturing salaries in December 1997. Regulation and Supervision - -------------------------- United, as a bank holding company, is subject to the restrictions of the Bank Holding Company Act of 1956, as amended, and is registered pursuant to its provisions. As such, United is subject to the reporting requirements of and examination by the Board of Governors of the Federal Reserve System ("Board of Governors"). 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. 11 The Board of Governors of the Federal Reserve System, in its Regulation Y, permits bank holding companies to engage in non-banking activities closely related to banking or managing or controlling banks. Approval of the Board of Governors is necessary to engage in these activities or to make acquisitions of corporations engaging in these activities. In addition, on a case by case basis, the Board of Governors may approve other non-banking activities. As a bank holding company doing business in West Virginia, United is also subject to regulation and examination by the West Virginia Board of Banking and Financial Institutions (the "West Virginia Banking Board") and must submit annual reports to the department. Further, any acquisition application which United must submit to the Board of Governors must also be submitted to the West Virginia Banking Board for approval. United is also registered under and is subject to the requirements of the Securities Exchange Act of 1934, as amended. UNB, as national banking associations, is subject to supervision, examination and regulation by the Office of the Comptroller of the Currency. UNB is also a member of the Federal Reserve System, and as such, is subject to applicable provisions of the Federal Reserve Act and regulations issued thereunder. United Bank, as a Virginia state member bank, is subject to supervision, examination and regulation by the Federal Reserve System, and as such, is subject to applicable provisions of the Federal Reserve Act and regulations issued thereunder. United Bank is subject to regulation by the Virginia Corporation Commission's Bureau of Financial Institutions. The deposits of United's wholly-owned banking subsidiaries are insured by the Federal Deposit Insurance Corporation ("FDIC") to the extent provided by law. Accordingly, these banks are also subject to regulation by the FDIC. 12 UNITED BANKSHARES, INC. FORM 10-K, PART I ITEM 3. LEGAL PROCEEDINGS Litigation - ---------- Information relating to litigation on page 29 of the Annual Report to Shareholders for the year ended December 31, 1997, 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. 13 UNITED BANKSHARES, INC. FORM 10-K, PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED SHAREHOLDER MATTERS 14 Stock - ----- As of December 31, 1997, 20,000,000 shares of common stock, par value $2.50 per share, were authorized for United, of which 14,983,758 were issued, including 311,372 shares held as treasury shares. The outstanding shares are held by approximately 5,225 shareholders of record as of December 31, 1997. At the Special Shareholders' Meeting held on March 9, 1998, the shareholders of United approved a proposal to increase United's authorized shares from 20,000,000 to 41,000,000. 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 currently involved in certain mergers in which additional shares will be issued and recognizes that additional shares could be issued for other appropriate purposes. On February 23, 1998, the Board of Directors approved a proposal to amend United's Articles of Incorporation to increase the number of authorized shares from 41,000,000 to 100,000,000. The proposed increase in authorized shares is in response to the availability of shares for the aforementioned incentive plans and the proposed merger with Fed One Bancorp, Inc., which is expected to be consummated early during the fourth quarter of 1998. The proposal, which will be presented for approval at a yet unscheduled special shareholders meeting during 1998, will require the approval of a majority of the outstanding shares of United common stock entitled to vote on the matter. 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. 15 Dividends - --------- On November 24, 1997, the Board of Directors of United declared a two for one stock split in the form of a 100% stock dividend payable on March 27, 1998, to shareholders of record as of March 13, 1998. The change in capital structure due to the 100% stock dividend has been given retroactive effect in the December 31, 1997 balance sheet and all references to shares and per share data have been retroactively restated for the effect of the 100% stock dividend. The shareholders of United are entitled to receive dividends when and as declared by its Board of Directors. Dividends are paid quarterly. Dividends were $0.68 per share in 1997, $0.62 per share in 1996 and $0.59 per share in 1995. 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 laws. Generally, the most restrictive provision requires approval by the Office of the Comptroller of the Currency ("OCC") if dividends declared in any year exceed the current year's net income, as defined, plus the retained net profits of the two preceding years. Payment of dividends by United's state member bank is regulated by the Federal Reserve System and generally, the prior approval of the Federal Reserve Board ("FRB") is required if the total dividends declared by a state member bank in any calendar year exceeds its net profits, as defined, for that year combined with its retained net profits for the preceding two years. Additionally, prior approval of both the OCC and the FRB is required when a national bank or state member bank has deficit retained earnings but has sufficient current year's net income, as defined, plus the retained net profits of the two preceding years. The OCC and FRB may prohibit dividends if it deems the payment to be an unsafe or unsound banking practice. The OCC has issued guidelines for dividend payments by national banks, emphasizing that proper dividend size depends on the bank's earnings and capital while the FRB has issued similar guidelines pertaining to state member banks. See Note M - Notes to Consolidated Financial Statements, which is incorporated herein by reference. Market and Stock Prices of United - --------------------------------- United Bankshares, Inc. stock is traded over the counter on the National Association of Securities Dealers Automated Quotations System ("NASDAQ") under the trading symbol UBSI. The high and low prices listed on the following page are based upon information available to United's management from NASDAQ listings. No attempt has been made by United's management to ascertain the prices for every sale of its stock during the periods indicated. However, based on 16 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, as adjusted for the 100% stock dividend paid on March 27, 1998 to shareholders of record as of March 13, 1998. The following table presents the dividends and high and low prices of United's common stock during the periods set forth below: United Historical Basis ----------------- 1998 Dividends High Low ---- --------- ---- --- First Quarter through February 27, 1998 (1) $25.41 $23.13 1997 ---- Fourth Quarter $0.18 $24.38 $21.80 Third Quarter $0.17 $23.63 $19.13 Second Quarter $0.17 $21.25 $17.19 First Quarter $0.16 $17.44 $16.13 1996 ---- Fourth Quarter $0.16 $16.50 $14.63 Third Quarter $0.16 $15.13 $13.13 Second Quarter $0.15 $14.88 $13.38 First Quarter $0.15 $15.00 $14.25 (1) On February 24, 1998, United declared a dividend of $0.18 per share, payable April 1, 1998, to shareholders of record as of March 13, 1998. 17 UNITED BANKSHARES, INC. FORM 10-K, PART II ITEM 6. SELECTED FINANCIAL DATA Information relating to selected financial data on page 37 of the Annual Report to Shareholders for the year ended December 31, 1997, 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 38 through 50 inclusive, of the Annual Report to Shareholders for the year ended December 31, 1997, is incorporated herein by reference. ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK Quantitative and Qualitative Disclosures About Market Risk on pages 43 through 45 inclusive, of the Annual Report to Shareholders for the year ended December 31, 1997, is incorporated herein by reference. 18 UNITED BANKSHARES, INC. AND SUBSIDIARIES 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, 1997, 1996 and 1995 with the interest and rate earned or paid on such amount.
Year Ended Year Ended Year Ended December 31 December 31 December 31 1997 1996 1995 ---------------------------- -------------------------- -------------------------- (Dollars in Average Avg. Average Avg. Average Avg. Thousands) Balance Interest Rate Balance Interest Rate Balance Interest Rate ------- -------- ----- ------- -------- ----- ------- -------- ---- ASSETS Earning assets: Federal funds sold and securities purchased under agreements to resell and other short-term investments $ 4,342 $ 184 4.25% $ 2,996 $ 157 5.24% $ 18,365 $ 1,107 6.03% Investment Securities: Taxable 354,312 23,828 6.73% 292,339 18,455 6.31% 297,963 18,516 6.21% Tax exempt (1) 32,197 2,970 9.22% 38,282 3,603 9.41% 46,924 4,560 9.72% ---------- -------- ---- ---------- -------- ---- ---------- -------- ---- Total Securities 386,509 26,798 6.93% 330,621 22,058 6.67% 344,887 23,076 6.69% Loans, net of unearned income (1) (2) 1,905,706 165,705 8.70% 1,786,376 152,615 8.54% 1,673,568 144,594 8.64% Allowance for possible loan losses (23,314) (22,660) (22,685) ---------- ---------- ---------- Net Loans 1,882,392 8.80% 1,763,716 8.65% 1,650,883 8.76% ---------- -------- ---- ---------- -------- ---- ---------- -------- ---- Total earning assets 2,273,243 192,687 8.48% 2,097,333 174,830 8.34% 2,014,135 168,777 8.38% Other assets 160,178 -------- 166,095 -------- 148,625 -------- ---------- ---------- ---------- TOTAL ASSETS $2,433,421 $2,263,428 $2,162,760 ========== ========== ========== LIABILITIES Interest-Bearing Funds: Interest-bearing deposits $1,675,288 $ 74,400 4.44% $1,536,641 $ 63,917 4.16% $1,510,880 $ 62,231 4.12% Federal funds purchased, repurchase agreements and other short-term borrowings 117,290 5,275 4.50% 87,015 3,770 4.33% 83,016 3,809 4.59% FHLB advances 82,556 4,824 5.84% 99,184 5,498 5.54% 69,580 4,127 5.93% ---------- -------- ---- ---------- -------- ---- ---------- -------- ---- Total Interest-Bearing Funds 1,875,134 84,499 4.51% 1,722,840 73,185 4.25% 1,663,476 70,167 4.22% Demand deposits 257,210 -------- 251,641 -------- 234,455 -------- Accrued expenses and other liabilities 33,071 34,292 28,115 ---------- ---------- ---------- TOTAL LIABILITIES 2,165,415 2,008,773 1,926,046 Shareholders' Equity 268,006 254,655 236,714 ---------- ---------- ---------- TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $2,433,421 $2,263,428 $2,162,760 ========== ========== ========== NET INTEREST INCOME $108,188 $101,645 $ 98,610 ======== ======== ======== INTEREST SPREAD 3.97% 4.09% 4.16% NET INTEREST MARGIN 4.76% 4.85% 4.90%
(1) The interest income and the yields on nontaxable loans and investment securities are presented on a tax-equivalent basis using the statutory federal income tax rate of 35%. (2) Nonaccruing loans are included in the daily average loan amounts outstanding. 19 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).
1997 Compared to 1996 1996 Compared to 1995 ------------------------------------- -------------------------------------- Increase (Decrease) Due to Increase (Decrease) Due to ------------------------------------- -------------------------------------- Rate/ Rate/ Volume Rate Volume Total Volume Rate Volume Total ------ ---- ------ ----- ------ ---- ------ ----- (In thousands) (In thousands) Interest income: Federal funds sold, securities purchased under agreements to resell and other short-term investments $ 71 $ (30) $ 14 $ 27 $ (926) $ (145) $ 121 $ (950) Investment securities: Taxable 3,912 1,205 256 5,373 (349) 294 (6) (61) Tax exempt (1) (573) (72) 12 (633) (840) (144) 27 (957) Loans (1),(2) 10,266 2,645 179 13,090 9,881 (1,741) (119) 8,021 ------- ------- ---- ------- ------ ------- ----- ------ TOTAL INTEREST INCOME 13,676 3,748 433 17,857 7,766 (1,736) 23 6,053 ------- ------- ---- ------- ------ ------- ----- ------ Interest expense: Interest-bearing deposits $ 5,767 $ 4,326 $390 $10,483 1,061 641 11 1,686 Federal funds purchased, repurchase agreements, and other short-term borrowings 1,312 143 50 1,505 183 (212) (10) (39) FHLB advances (922) 298 (50) (674) 1,756 (270) (115) 1,371 ------- ------- ---- ------- ------ ------- ----- ------ TOTAL INTEREST EXPENSE 6,157 4,767 390 11,314 3,000 132 (114) 3,018 ------- ------- ---- ------- ------ ------- ----- ------ NET INTEREST INCOME $ 7,519 $(1,019) $ 43 $ 6,543 $4,766 $(1,868) $ 137 $3,035 ======= ======= ==== ======= ====== ======= ===== ======
(1) Yields and interest income on tax exempt loans and investment securities are computed on a fully tax-equivalent basis using the statutory federal income tax rate of 35%. (2) Nonaccruing loans are included in the daily average loan amounts outstanding. 20 UNITED BANKSHARES, INC. AND SUBSIDIARIES LOAN PORTFOLIO TYPES OF LOANS The following is a summary of loans outstanding at December 31:
1997 1996 1995 1994 1993 ----------- ----------- ----------- ----------- ----------- (In thousands) Commercial, financial and agricultural $ 368,654 $ 248,762 $ 218,800 $ 208,491 $ 218,559 Real estate mortgage 1,372,722 1,329,661 1,267,889 1,194,805 1,003,805 Real estate construction 93,918 42,343 21,808 17,523 14,651 Consumer 232,191 232,004 229,457 237,928 233,698 Less: Unearned interest (6,998) (5,165) (4,968) (6,472) (7,880) ---------- ---------- ---------- ---------- ---------- Total loans 2,060,487 1,847,605 1,732,986 1,652,275 1,462,574 Allowance for possible loan losses (24,786) (22,283) (22,545) (22,304) (20,975) ---------- ---------- ---------- ---------- ---------- TOTAL LOANS, NET $2,035,701 $1,825,322 $1,710,441 $1,629,971 $1,441,599 ========== ========== ========== ========== ==========
At December 31, 1997, real estate mortgage loans include $936,498 in single family residential real estate loans and $392,818 in commercial real estate loans. The following is a summary of loans outstanding as a percent of total loans at December 31:
1997 1996 1995 1994 1993 --------- ---------- ---------- ---------- ---------- Commercial, financial and agricultural 17.89% 13.46% 12.59% 12.57% 14.86% Real estate mortgage 66.62% 71.97% 72.96% 72.03% 68.25% Real estate construction 4.56% 2.29% 1.25% 1.06% 1.00% Consumer 10.93% 12.28% 13.20% 14.34% 15.89% ------- -------- -------- ------- ------- 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, 1997:
Less Than One To Greater Than One Year Five Years Five Years Total --------- ---------- ------------ ----- (In thousands) Commercial, financial and agricultural $135,582 $128,384 $104,688 $368,654 Real estate construction 93,918 93,918 -------- -------- -------- -------- Total $229,500 $128,384 $104,688 $462,572 ======== ======== ======== ========
21 UNITED BANKSHARES, INC. AND SUBSIDIARIES At December 31, 1997, 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 $ 70,049 $ 41,447 Outstanding with adjustable rates 58,335 63,241 -------- -------- $128,384 $104,688 ======== ======== There were no real estate construction loans with maturities greater than one year. RISK ELEMENTS Nonperforming Loans Nonperforming loans include loans on which no interest is currently being accrued, loans which are past due 90 days or more as to principal or interest payments, and loans for which the terms have been modified due to a deterioration in the financial position of the borrower. Management is not aware of any other significant loans, groups of loans, or segments of the loan portfolio not included below where there are serious doubts as to the ability of the borrowers to comply with the present loan repayment terms. The following table summarizes nonperforming loans for the indicated periods.
December 31 --------------------------------------------------------------------- 1997 1996 1995 1994 1993 ---------- ---------- ---------- ---------- ---------- (In thousands) Nonaccrual loans $ 4,156 $ 4,361 $ 6,298 $4,719 $ 9,687 Troubled debt restructurings 2,453 Loans which are contractually past due 90 days or more as to interest or principal, and are still accruing interest 11,342 5,831 4,692 2,851 3,080 ------- ------- ------- ------ ------- TOTAL $15,498 $10,192 $10,990 $7,570 $15,220 ======= ======= ======= ====== =======
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 and credit risk concentration. 22 UNITED BANKSHARES, INC. AND SUBSIDIARIES INVESTMENT PORTFOLIO The following is a summary of the amortized cost of held to maturity securities held to maturity at December 31,:
1997 1996 1995 ------------ ------------ ------------ (In thousands) U.S. Treasury and other U.S. Government agencies and corporations $ 97,847 $ 77,704 $ 15,897 States and political subdivisions 32,650 36,136 43,324 Mortgage-backed securities 41,874 54,977 56,416 Other 6,923 1,885 6,252 -------- -------- -------- TOTAL HELD TO MATURITY SECURITIES $179,294 $170,702 $121,889 ======== ======== ========
The following is a summary of the amortized cost of available for sale securities at December 31,:
1997 1996 1995 ------------ ------------ ------------ (In thousands) U.S. Treasury securities and obligations of U.S. Government agencies and corporations $142,688 $115,018 $150,460 Mortgage-backed securities 102,955 24,982 30,036 Marketable equity securities 4,300 3,655 2,662 Other 15,496 16,506 13,808 -------- -------- -------- TOTAL AVAILABLE FOR SALE SECURITIES $265,439 $160,161 $194,696 ======== ======== ========
The fair value of mortgage-backed securities is affected by changes in interest rates and prepayment risk. When interest rates decline, prepayment speeds generally accelerate due to homeowners refinancing their mortgages at lower interest rates. This may result in the proceeds being reinvested at lower interest rates. Rising interest rates may decrease the assumed prepayment speed. Slower prepayment speeds may extend the maturity of the security beyond its estimated maturity. Therefore, investors may not be able to invest at current higher market rates due to the extended expected maturity of the security. United had a net unrealized gain of $1,554 on all mortgage-backed securities at December 31, 1997, as compared to a net unrealized loss of $977 at December 31, 1996. The following table sets forth the maturities of all securities at December 31, 1997, and the weighted average yields of such securities (calculated on the basis of the cost and the effective yields weighted for the scheduled maturity of each security).
After 1 But After 5 But Within 1 Year Within 5 Years Within 10 Years After 10 Years --------------- --------------- ----------------- -------------- Amount Yield Amount Yield Amount Yield Amount Yield ------ ----- ------ ----- ------ ----- ------ ----- (In thousands) U.S. Treasury and other U.S. Government agencies and corporations $51,735 5.01% $129,004 6.54% $90,972 7.43% $115,421 7.15% States and political subdivisions (1) 4,133 10.48% 8,552 8.58% 8,608 8.90% 11,357 9.36% Other 1,923 8.52% 82 6.60% 31,375 5.45%
(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. 23 UNITED BANKSHARES, INC. AND SUBSIDIARIES SHORT-TERM BORROWINGS The following table shows the distribution of United's short-term borrowings and the weighted average interest rates thereon at the end of each of the last three years. Also provided are the maximum amount of borrowings and the average amounts of borrowings as well as weighted average interest rates for the last three years.
Federal Securities Sold Funds Under Agreements Purchased to Repurchase --------- ---------------- (In thousands) At December 31: 1997 $20,961 $109,909 1996 4,491 71,091 1995 26,378 55,789 Weighted average interest rate at year end: 1997 6.7% 4.4% 1996 6.8% 4.2% 1995 5.9% 4.4% Maximum amount outstanding at any month's end: 1997 $27,900 $123,949 1996 33,510 79,664 1995 33,941 81,720 Average amount outstanding during the year: 1997 $21,725 $95,565 1996 20,685 66,463 1995 12,264 70,752 Weighted average interest rate during the year: 1997 5.6% 4.2% 1996 5.6% 4.0% 1995 6.0% 4.3%
At December 31, 1997, repurchase agreements include $86,599 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. 24 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:
1997 1996 1995 --------------- ---------------- ----------------- Amount Rate Amount Rate Amount Rate ------ ---- ------ ---- ------ ---- (In thousands) Noninterest bearing demand deposits $ 257,210 $ 251,641 $ 234,455 Interest bearing demand deposits 36,559 2.40% 127,867 2.50% 268,108 2.33% Savings deposits 695,026 2.94% 581,117 2.69% 464,107 3.16% Time deposits 943,703 5.55% 827,657 5.45% 778,665 5.31% ---------- ---------- ---------- TOTAL $1,932,498 4.44% $1,788,282 4.16% $1,745,335 4.12% ========== ========== ==========
Maturities of time certificates of deposit of $100,000 or more outstanding at December 31, 1997 are summarized as follows: (In thousands) 3 months or less $ 47,974 Over 3 through 6 months 21,626 Over 6 through 12 months 59,444 Over 12 months 58,621 -------- TOTAL $187,665 ======== 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:
1997 1996 1995 -------- -------- -------- Return on average assets 1.68% 1.35% 1.52% Return on average equity 15.28% 11.98% 13.86% Dividend payout ratio (1) 49.69% 58.49% 49.21% Average equity to average assets ratio 11.01% 11.25% 10.94%
(1) Based on historical results of United before the effects of restatements for pooling of interests business combinations. 25 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:
1997 1996 1995 1994 1993 ---------- ---------- ---------- ---------- ---------- (In thousands) Balance of allowance for possible loan losses at beginning of year $ 22,283 $ 22,545 $ 22,304 $ 20,975 $ 17,485 Allowance of purchased company at date of acquisition 2,695 1,017 504 Loans charged off: Commercial, financial and agricultural 1,223 2,207 1,952 788 1,088 Real estate 394 230 722 82 711 Real estate construction Consumer and other 2,202 1,087 950 980 1,015 ---------- ---------- ---------- ---------- ---------- TOTAL CHARGE-OFFS 3,819 3,524 3,624 1,770 2,814 Recoveries: Commercial, financial and agricultural 218 219 189 577 438 Real estate 87 135 65 13 231 Real estate construction Consumer and other 222 298 274 307 301 ---------- ---------- ---------- ---------- ---------- TOTAL RECOVERIES 527 652 528 897 970 NET LOANS CHARGED OFF 3,292 2,872 3,096 873 1,844 Addition to allowance (1) 3,100 2,610 2,320 2,202 4,830 ---------- ---------- ---------- ---------- ---------- BALANCE OF ALLOWANCE FOR POSSIBLE LOAN LOSSES AT END OF YEAR $ 24,786 $ 22,283 $ 22,545 $ 22,304 $ 20,975 ========== ========== ========== ========== ========== Totals loans outstanding at the end of period $2,060,487 $1,847,605 $1,732,986 $1,652,275 $1,462,574 Average loans outstanding during period (net of unearned income) $1,905,706 $1,786,376 $1,673,568 $1,556,844 $1,402,609 Net charge-offs as a percentage of average loans outstanding 0.17% 0.16% 0.18% 0.06% 0.13% Allowance for possible loan losses as a percentage of nonperforming loans 159.9% 218.6% 205.1% 294.6% 137.8%
(1) The amount charged to operations and the related balance in the allowance for possible loan losses is based upon periodic evaluations of the loan portfolio by management. These evaluations consider several factors including, but not limited to, general economic conditions, loan portfolio composition, prior loan loss experience and management's estimation of future potential losses. Quarterly reviews of individual loans as well as the loan portfolio as a whole are made by management and the credit department. Management performs extensive procedures in granting and monitoring loans on a continual basis. Further, management believes that the allowance for loan losses is adequate to absorb anticipated losses. 26 UNITED BANKSHARES, INC. AND SUBSIDIARIES SUMMARY OF LOAN LOSS EXPERIENCE--Continued Allocation of allowance for possible loan losses
December 31 ------------------------------------------------------------ 1997 1996 1995 1994 1993 --------- --------- --------- --------- ---------- Commercial, financial and agricultural $ 7,680 $7,175 $6,891 $7,526 $ 8,109 Real estate 265 667 771 613 476 Real estate construction Consumer and other 2,149 1,072 1,484 1,313 1,733 ------- ------ ------ ------ ------- Total $10,094 $8,914 $9,146 $9,452 $10,318 ======= ====== ====== ====== =======
The portion of the allowance for loan losses that is not specifically allocated to individual credits has been apportioned among the separate loan portfolios based on the relative risk and relative size of each portfolio. % of Allowance per Category to Total Allocated Allowance - --------------------------------------------------------
December 31 ------------------------------------------------------------ 1997 1996 1995 1994 1993 --------- --------- --------- --------- ---------- Commercial, financial and agricultural 76.08% 80.49% 74.62% 79.62% 78.59% Real estate 2.63% 7.48% 8.66% 6.49% 4.61% Real estate construction Consumer and other 21.29% 12.03% 16.72% 13.89% 16.80% ------ ------ ------ ------ ------ Total 100.00% 100.00% 100.00% 100.00% 100.00% ====== ====== ====== ====== ======
27 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 36 inclusive of the Annual Report to Shareholders for the year ended December 31, 1997, is incorporated herein by reference. (B) - SUPPLEMENTARY FINANCIAL INFORMATION (1) Selected Quarterly Financial Data Information relating to selected quarterly financial data on page 36 of the Annual Report to Shareholders for the year ended December 31, 1997, is incorporated herein by reference. (2) Information on the Effects of Changing Prices Information relating to effects of changing prices on page 42 of the Annual Report to Shareholders for the year ended December 31, 1997, 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. 28 UNITED BANKSHARES, INC. FORM 10-K, PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT Information regarding directors and executive officers of the registrant on pages 2 through 7 inclusive, of the Proxy Statement for the 1998 Annual Shareholders' Meeting is incorporated herein by reference. ITEM 11. EXECUTIVE COMPENSATION Information regarding executive compensation on pages 8 through 11 inclusive, of the Proxy Statement for the 1998 Annual Shareholders' Meeting is incorporated herein by reference. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT Information regarding security ownership of certain beneficial owners and management on pages 2 through 6 inclusive, of the Proxy Statement for the 1998 Annual Shareholders' Meeting is incorporated herein by reference. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS Information regarding certain relationships and related transactions on pages 2, 3, 6, 14 and 15 of the Proxy Statement for the 1998 Annual Shareholders' Meeting is incorporated herein by reference. 29 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, 1997 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 32 of this Form 10-K. (b) Reports on Form 8-K On November 7, 1997, United Bankshares, Inc. filed pro forma financial information in connection with the pending merger of United Bankshares, Inc. and George Mason Bankshares, Inc. On November 25, 1997, United Bankshares, Inc. declared a 100% stock dividend to shareholders and modified the stock repurchase plan. (c) Exhibits -- The exhibits to this Form 10-K begin on page 35. (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. 30 SIGNATURES Pursuant to the requirements of Section 13 or 15 (d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. UNITED BANKSHARES, INC. (Registrant) By /s/ Richard M. Adams _____________________ Chairman of the Board Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
Signatures Title Date /s/ Richard M. Adams Chairman of the Board, March 30, 1998 _____________________________ Director, Chief Execu- tive Officer /s/ Steven E. Wilson Chief Financial Officer March 30, 1998 _____________________________ Chief Accounting Officer /s/ F.T. Graff, Jr. Director March 30, 1998 _____________________________ /s/ I.N. Smith, Jr. Director March 30, 1998 _____________________________ /s/ Thomas J. Blair, III Director March 30, 1998 _____________________________ /s/ H. Smoot Fahlgren Director March 30, 1998 _____________________________ /s/ Theodore J. Georgelas Director March 30, 1998 _____________________________ /s/ William W. Wagner Director March 30, 1998 _____________________________ /s/ Harry L. Buch Director March 30, 1998 _____________________________ /s/ Warren A. Thornhill, III Director March 30, 1998 _____________________________ /s/ Robert P. McLean Director March 30, 1998 _____________________________ /s/ Harold L. Wilkes Director March 30, 1998 _____________________________ /s/ P. Clinton Winter, Jr. Director March 30, 1998 _____________________________ /s/ R. Terry Butcher Director March 30, 1998 _____________________________ /s/ Charles E. Stealey Director March 30, 1998 _____________________________
31 UNITED BANKSHARES, INC. FORM 10-K INDEX TO EXHIBITS ITEM 14.
S-K Item 601 Sequential Page Description Table Reference Number (a) - ----------- --------------- --------------- Articles of Incorporation and Bylaws: (3) (a) Bylaws (g) (b) Articles of Incorporation (f) Investments (4) N/A Voting Trust Agreement (9) N/A Material Contracts (10) (a) Employment Agreement with I. N. Smith, Jr. (b) (b) Employment Agreement with Richard M. Adams (e) (c) Lease on Branch Office in Charleston Town Center, Charleston, West Virginia (b) (d) Lease on United Center, Charleston, West Virginia (h) (e) Lease with Polymerland, Inc. on UNB Square (h) (f) Lease and Agreement between Valley Savings and Loan Company (Lessor) and Dorothy Adams, Richard M. Adams and Douglass H. Adams (Lessees) (c) (g) Agreement between Dorothy D. Adams (Lessors) and Valley Savings and Loan Company (Lessees) (c)
32
S-K Item 601 Sequential Page Description Table Reference Number (a) ----------- --------------- --------------- (h) Employment Contract with Douglass H. Adams (d) (i) Employment Contract with Thomas A. McPherson (d) (j) Data processing contract with FISERV (k) (k) Supplemental Retirement Contract with Richard M. Adams (i) (l) Supplemental Retirement Contract with Douglass H. Adams (i) (m) Executive Officer Change of Control Agreements (j) (n) Data processing contract with ALTELL (l) Statement Re: Computation of Per Share Earnings (11) 82 Statement Re: Computation of Ratios (12) 83 Annual Report to Security Holders, et al. (13) 35 Letter Re: Change in accounting principles (18) N/A Previously Unfiled Documents (19) N/A Subsidiaries of the Registrant (21) 84 Published Report Regarding Matters Submitted to a Vote of Security Holders (22) N/A Consent of Ernst & Young LLP (23) 85 Power of Attorney (24) N/A Financial Data Schedule (27.1) 86 Restated Financial Data Schedule (27.2) 87
33
S-K Item 601 Sequential Page Description Table Reference Number (a) ----------- --------------- --------------- Restated Financial Data Schedule (27.3) 88 Additional Exhibits: (28) N/A Footnotes
(a) N/A = Not Applicable (b) Incorporated into this filing by reference to Exhibit 10 of the 1985 Form 10-K for Intermountain Bankshares, Inc., File No. 0-12356 (c) Incorporated into this filing by reference to Exhibit 10 of the 1986 Form 10-K for United Bankshares, Inc., File No. 0-13322 (d) Incorporated into this filing by reference to Part II of Form S-4 Registration Statement of United Bankshares, Inc., Registration No. 33-19968 filed February 3, 1988 (e) Incorporated into this filing by reference to Exhibits to the 1988 10-K for United Bankshares, Inc., File No. 0-13322 (f) Incorporated into this filing by reference to Exhibits to the 1989 10-K for United Bankshares, Inc., File No. 0-13322 (g) Incorporated into this filing by reference to Exhibits to the 1990 10-K for United Bankshares, Inc., File No. 0-13322 (h) Incorporated into this filing by reference to Exhibits to the 1991 10-K for United Bankshares, Inc., File No. 0-13322 (i) Incorporated into this filing by reference to Exhibits to the 1992 10-K for United Bankshares, Inc., File No. 0-13322 (j) Incorporated into this filing by reference to Exhibits to the 1993 10-K for United Bankshares, Inc., File No. 0-13322 (k) Incorporated into this filing by reference to Exhibits to the 1994 10-K as amended by Form 10K/A filed February 8, 1996, for United Bankshares, Inc., File No. 0-13322 (l) Incorporated into this filing by reference to Exhibits to the 1996 10-K for United Bankshares, Inc., File No. 0-13322 34 UNITED BANKSHARES, INC. AND SUBSIDIARIES SELECTED FINANCIAL DATA (Dollars in thousands except per share data)
Five Year Summary ---------------------------------------------------------------------------------- 1997 1996 1995 1994 1993 --------- --------- --------- --------- ---------- SUMMARY OF OPERATIONS: Total interest income $ 190,252 $ 172,358 $ 165,815 $ 147,637 $ 140,624 Total interest expense 84,499 73,185 70,167 55,672 55,037 Net interest income 105,753 99,173 95,648 91,965 85,587 Provision for loan losses 3,100 2,610 2,320 2,202 4,830 Other income 19,732 14,189 14,752 12,238 14,300 Other expense 59,949 63,549 57,481 55,908 56,107 Income taxes 21,497 16,691 17,782 15,709 12,482 Income before cumulative effect of accounting change 40,939 30,512 32,817 30,384 26,468 Net income 40,939 30,512 32,817 30,384 27,797 Cash dividends(2) 20,344 17,847 13,817 12,604 10,918 PER COMMON SHARE: (1) Income before cumulative effect of accounting change: Basic $1.37 $1.01 $1.10 $1.01 $0.88 Diluted 1.35 1.00 1.09 1.00 0.88 Net income: Basic $1.37 $1.01 $1.10 $1.01 $0.92 Diluted 1.35 1.00 1.09 1.00 0.92 Cash dividends(2) 0.68 0.62 0.59 0.53 0.48 Book value per share 9.33 8.57 8.23 7.55 7.11 SELECTED RATIOS: Return on average shareholders' equity 15.28% 11.98% 13.86% 13.67% 13.41% Return on average assets 1.68% 1.35% 1.52% 1.44% 1.39% Dividend payout ratio (2) 49.69% 58.49% 49.21% 50.61% 50.30% SELECTED BALANCE SHEET DATA: Average assets $2,433,421 $2,263,428 $2,162,760 $2,107,476 $2,006,875 Investment securities 453,162 332,331 321,019 372,069 439,699 Total loans 2,060,487 1,847,605 1,732,986 1,652,275 1,462,574 Total assets 2,699,790 2,326,877 2,210,230 2,170,340 2,035,452 Total deposits 2,106,047 1,827,554 1,774,599 1,714,190 1,699,131 Long-term borrowings 3,695 25,621 34,497 84,374 32,564 Total borrowings and other liabilities 314,305 240,809 186,397 230,516 122,274 Shareholders' equity 279,438 258,514 249,234 225,634 214,047
(1) All references to shares and per share data have been retroactively restated for the effect of a two-for-one stock split effected in the form of a 100% stock dividend distributed on March 27, 1998, to shareholders of record as of March 13, 1998. (2) Cash dividends are the amounts declared by United and do not include cash dividends of acquired subsidiaries prior to the dates of consummation. 35 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: 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. 36 1997 COMPARED TO 1996 OVERVIEW In November 1997, United's Board of Directors approved a two-for-one stock split effected in the form of a 100% stock dividend that was distributed on March 27, 1998, to shareholders of record as of March 13, 1998. The change in capital structure due to the dividend has been given retroactive effect in the December 31, 1997 balance sheet and all references to shares and per share data have been retroactively restated for the effect of the dividend. On August 1, 1997, United acquired 100% of the outstanding common stock of First Patriot Bankshares Corporation, Reston, Virginia ("Patriot") for cash consideration of approximately $39.22 million. The transaction was accounted for using the purchase method of accounting and, accordingly, the following discussion includes the financial position and results of operations of Patriot from the effective merger date forward. At the time of consummation, Patriot had assets of approximately $211 million, securities available for sale of $37 million, loans, net of unearned income, of $135 million, other assets of $34 million (including $26 million of goodwill), deposits of $154 million and other liabilities of $57 million, all of which reflected purchase accounting adjustments. EARNINGS SUMMARY For the year ended December 31, 1997, net income increased 34.2% to $40,939,000. Net income per share of $1.35 for the year increased 35.0% from $1.00 in 1996. Dividends per share increased 9.7% from $0.62 in 1996 to a record level of $0.68 per share in 1997. This was the twenty-fourth consecutive year of dividend increases to shareholders. United's return on average assets of 1.68% for 1997 compared very favorably with regional and national peer grouping information provided by Wheat, First Securities, Inc. of 1.32% and 1.18%. United's return on average shareholders' equity of 15.28%, as compared with regional and national peer group information of 16.20% and 15.58%, is indicative of United's very strong capital levels. 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. United has strong core earnings driven by a net interest margin of 4.76% for 1997. Net interest income increased by $6.58 million or 6.63% for the year ended December 31, 1997 as compared to the same period for 1996. The provision for loan losses of $3.10 million increased $0.49 million or 18.77% when compared to the year ended December 31, 1996. Noninterest income, including income from mortgage banking operations, increased $5.54 million or 39.07% for 1997 when compared to 1996. Noninterest expenses decreased $3.60 million or 5.66% for 1997 compared to the same period in 1996. The effective tax rate for the year ended December 31, 1997 approximated 34.43% compared to 35.36% for 1996. 37 FINANCIAL CONDITION SUMMARY Total assets were $2.70 billion at December 31, 1997, up $372.91 million or 16.0% compared with year-end 1996. Loans, net of unearned income, reflected a $212.88 million increase from 1996 to 1997 due to the acquisition of Patriot and internal growth. Investment securities reflected a $120.83 million increase for 1997 as compared with year-end 1996 as a result of United's securitization of approximately $87 million of fixed rate mortgage loans during 1997. All other assets increased $41.05 million. Approximately $26 million of the increase was due to goodwill associated with the third quarter acquisition of Patriot. Total deposits grew $278.49 million or 15.2% from year-end 1996 due to United's offering of new deposit products introduced in late 1996 and the acquisition of Patriot during the third quarter of 1997. Since December 31, 1996, United has realized an increase of $221.61 million in interest-bearing deposits and a $56.88 million increase in noninterest- bearing deposits. United's short-term borrowings increased $55.29 million and its FHLB borrowings increased $10.06 million as United utilized these sources of funds to fund the cash acquisition of Patriot and to help fund loan growth. Accrued expenses and other liabilities increased $8.14 million or 25.0% since year-end 1996 as a result of the acquisition of Patriot and higher merger expenses. Shareholders' equity increased $20.92 million or 8.1% from December 31, 1996 to December 31, 1997. United continues to maintain an appropriate balance between capital adequacy and return to shareholders. At December 31, 1997, United's regulatory capital ratios, including those of its bank subsidiaries, exceeded the levels established for well- capitalized institutions. The following discussion explains in more detail the results of operations and changes in financial condition by major category. NET INTEREST INCOME Net interest income represents the primary component of United's earnings. It is the difference between interest and fee income from earning assets and interest expense incurred to fund these assets. Net interest income is impacted by changes in the volume and mix of interest-earning assets and interest-bearing liabilities, as well as changes in market interest rates. Such changes, and their impact on net interest income in 1997, are summarized below. For the years ended December 31, 1997 and 1996, net interest income approximated $105,753,000 and $99,173,000, respectively. On a tax- equivalent basis the net interest margin was strong at 4.76% in 1997 and 4.85% in 1996 which are well above national peer group margins of 4.06% in 1997 and 4.18% in 1996. Total interest income of $190,252,000 increased 10.4% in 1997 over 1996 as a result of higher volumes of interest-earning assets and slightly 38 higher yields. Higher average loan volumes of approximately $119 million, resulting primarily from the acquisition of Patriot, contributed to the increase. From December 31, 1996 to December 31, 1997, United experienced a moderate increase in consumer loans of 5.4%, while commercial loans showed an increase of 31.5%. Mortgage loans decreased slightly from 1996 by 1.9% due mainly to the sale of real estate loans by United's mortgage banking subsidiary. Total interest expense increased $11,314,000 or 15.5% in 1997 compared to 1996. This increase was attributed primarily to United's acquisition of Patriot, competitive pricing of interest-bearing deposits in its markets and continued change in the retail deposit mix as customers shifted funds into products offering higher yields. United's average interest-bearing deposits increased by $138,647,000 or 9.0% in 1997, while its average FHLB advances decreased $16,628,000 or 16.8% and average short-term borrowings increased $30,275,000 or 34.8%. The average cost of funds, which increased from 4.25% in 1996 to 4.51% in 1997, reflected the general upward trend in United's market interest rates during 1997 due to competitive pressures. PROVISION FOR LOAN LOSSES United evaluates the adequacy of the allowance for loan losses on a quarterly basis and its loan administration policies are focused upon the risk characteristics of the loan portfolio. United's process of 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. See Note D to the Consolidated Financial Statements for a discussion of concentrations of credit risk. Nonperforming loans were $15,498,000 at December 31, 1997 and $10,192,000 at December 31, 1996, an increase of 52.1%. This increase can be attributed to United's acquisition of approximately $2.5 million of nonperforming loans from the Patriot transaction in the third quarter of 1997 and decreasing consumer credit quality trends. Loans past due 90 days or more increased $5,511,000 or 94.5% during 1997; nonaccrual loans decreased $205,000 or 4.7% since year-end 1996. Nonperforming loans represented 0.57% of total assets at the end of 1997, as compared to 0.41% for United's national peer group. At year-end 1997 and 1996, the allowance for loan losses was 1.20% and 1.21% of total loans, net of unearned income. At December 31, 1997 and 1996, the ratio of the allowance for loan losses to nonperforming loans was 159.9% and 218.6%, respectively. Management believes that the allowance for loan losses of $24,786,000 at December 31, 1997, is adequate to provide for potential losses on existing loans based on information currently available. For the years ended December 31, 1997 and 1996, the provision for loan losses was $3,100,000 and $2,610,000, respectively. The increase in the 39 provision for 1997 when compared to 1996 was to conform the allowance for loan losses on Patriot's loan portfolio with United's loan valuation policies and in response to growth in the portfolio. The provision for loan losses charged to operations is based on management's evaluation of individual credits, past loan loss experience, and other factors which, in management's judgment, deserve recognition in estimating possible loan losses. Such other factors considered by management include growth and composition of the loan portfolio, known deterioration in certain classes of loans or collateral, trends in delinquencies and current economic conditions. Total net charge-offs were $3,289,000 in 1997 and $2,872,000 in 1996, which represents 0.17% and 0.16% of average loans for the respective years. United's ratio of net charge-offs to average loans was better than its peer group's ratio of 0.49% in 1997 and 0.23% in 1996. 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. At December 31, 1997, impaired loans were $12,602,000, an increase of $2,285,000 or 22.1% from the $10,317,000 in impaired loans at December 31, 1996, due primarily to the acquisition of Patriot in 1997. For further details, see Note D to the Consolidated Financial Statements. OTHER INCOME Noninterest income has been and will continue to be an important factor for improving United's profitability. Accordingly, management continues to evaluate areas where noninterest income can be enhanced. Noninterest income increased $5,543,000 or 39.1% for 1997 when compared to 1996. Other income consists of all revenues which are not included in interest and fee income related to earning assets. The increase in noninterest income for 1997 was primarily the result of $3,135,000 of income generated from the sale and servicing of loans by United's mortgage banking subsidiary as compared to a loss of $431,000 during the subsidiary's first year of operation in 1996. Contributing to this increase in income from the mortgage banking operations have been fees generated from the $87 million loan securitization in 1997. Service charges and fees from customer accounts increased $1,202,000 or 10.6% in 1997. This income includes charges and fees related to various banking services provided by United. The increase was primarily due to a combination of increased fees in bankcard accounts and an increased fee structure for sales of checking related products. Trust income increased $383,000 or 12.0% in 1997 due to an increased volume of trust business. 40 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 46.5%, 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. In total, other expense decreased $3,600,000 or 5.7%. Salaries and employee benefits expense decreased $1,359,000 or 4.7% in 1997 as compared to 1996. The higher salaries and benefits costs for 1996 were attributable to severance and benefit pay of displaced Eagle executive officers, employment contracts and employees at locations where United consolidated certain branches. As of December 31, 1997 and 1996, United employed 972 and 893 full-time equivalent employees, respectively. Net occupancy expense in 1997 slightly exceeded 1996 levels by $167,000 or 2.8% primarily due to the acquisition of Patriot, decreased rental income and an increase in building rental expense and higher depreciation and real property taxes for company-owned buildings. The overall changes in net occupancy expense for 1997 were insignificant with no material increase or decrease in any one expense category. Remaining other expense decreased $2,408,000 or 8.4% in 1997 compared to 1996. This decrease in other expense for 1997 related primarily to decreases in deposit insurance expense due to the 1996 SAIF assessment. INCOME TAXES For the year ended December 31, 1997, income tax expense approximated $21,497,000 compared to $16,691,000 for 1996. The increase of $4,806,000 or 28.8% for 1997 when compared to 1996 was primarily the result of increased pretax income in 1997. United's effective tax rate approximated 34.4% in 1997 and 35.4% in 1996. This decrease was due to effective tax planning strategies. At December 31, 1997, gross deferred tax assets totaled approximately $14.0 million. The allowance for loan losses and various accrued liabilities represent the most significant temporary differences. QUARTERLY RESULTS The first and second quarters of 1997 showed large increases in earnings in comparison to those same two quarters of 1996 as United returned to more normal levels of core income and expenses after the Eagle merger. The 1996 results contained significant reengineering and merger-related and one-time special charges associated with the Eagle merger which distorted United's true financial performance. 41 In the third quarter of 1997, United reported a decrease in earnings from the same period in 1996. Third quarter 1996 earnings were higher as a result of legislation which relieved United of $3,086,000 in income tax expense that related to the bad debt recapture associated with the Eagle merger. Net income for the fourth quarter of 1997 was $10,426,000, an increase of 4.9% from the $9,936,000 earned in the fourth quarter of 1996. On a per share basis, fourth quarter earnings were $0.34 per share in 1997 and $0.33 per share in 1996. The increase in earnings was due primarily to an increase in net interest income. Additional quarterly financial data for 1997 and 1996 may be found in Note P to the Consolidated Financial Statements. THE EFFECT OF INFLATION United's income statements generally reflect the effects of inflation. Since interest rates, loan demand and deposit levels are impacted by inflation, the resulting changes in the interest sensitive assets and liabilities are included in net interest income. Similarly, operating expenses such as salaries, rents and maintenance include changing prices resulting from inflation. One item that would not reflect inflationary changes is depreciation expense. Subsequent to the acquisition of depreciable assets, inflation causes price levels to rise; therefore, historically presented dollar values do not reflect this inflationary condition. With inflation levels at relatively low levels and monetary and fiscal policies being implemented to keep the inflation rate increases within an acceptable range, management expects the impact of inflation would continue to be minimal in the near future. MARKET RISK The objective of United's Asset/Liability Management function is to maintain consistent growth in net interest income within United's policy guidelines. This objective is accomplished through the management of balance sheet liquidity and interest rate risk exposures due to changes in economic condition, interest rate levels and customer preferences. Management considers interest rate risk to be United's most significant market risk. Interest rate risk is the exposure to adverse changes in the net interest income of United as a result of changes in interest rates. Consistency in United's earnings is largely dependent on the effective management of interest rate risk. United employs a variety of measurement techniques to identify and manage its exposure to changing interest rates. One such technique utilizes an earnings simulation model to analyze net interest income sensitivity to movements in interest rates. The model is based on actual cash flows and repricing characteristics for on and off-balance 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 42 projections for activity levels in product lines offered by United. Assumptions based on the historical behavior of deposit rates and balances in relation to changes in interest rates are also incorporated into the model. These assumptions are inherently uncertain and, as a result, the model cannot precisely measure net interest income or precisely predict the impact of fluctuations in interest rates on net interest income. Actual results will differ from simulated results due to timing, magnitude and frequency of interest rate changes as well as changes in market conditions and management strategies. Interest sensitive assets and liabilities are defined as those assets or liabilities that mature or are repriced within a designated time- frame. The principal function of interest rate risk management is to maintain an appropriate relationship between those assets and liabilities that are sensitive to changing market interest rates. United closely monitors the sensitivity of its assets and liabilities on an on-going basis and projects the effect of various interest rate changes on its net interest margin. The difference between rate sensitive assets and rate sensitive liabilities for specified periods of time is known as the "GAP." As shown in the interest rate sensitivity gap table in this section, United was liability sensitive (excess of liabilities over assets) in the one year horizon. On the surface, this would indicate that rising market interest rates would reduce United's earnings and declining market interest rates would increase earnings. United, however, has not experienced the kind of earnings volatility indicated from the cumulative gap. This is because a significant portion of United's retail deposit base does not reprice on a contractual basis. Management has estimated, based upon historical analyses, that savings deposits are less sensitive to interest rate changes than are other forms of deposits. The GAP table presented herein has been adapted to show the estimated differences in interest rate sensitivity which result when the retail deposit base is assumed to reprice in a manner consistent with historical trends. (See "Management Adjustments" in the GAP table). Using these estimates, United was asset sensitive in the one year horizon in the amount of $63,198,000 or 2.50% of the cumulative gap to related earning assets. To aid in interest rate management, United's lead bank, UNB, is a member of the Federal Home Loan Bank of Pittsburgh (FHLB). The use of FHLB advances provides United with a low risk means of matching maturities of earning assets and interest-bearing funds to achieve a desired interest rate spread over the life of the earning assets. Interest rate risk management focuses on maintaining consistent growth in net interest income within Board-approved policy limits. United's Asset/Liability Management Committee (ALCO), which includes senior management representatives and reports to the Board of Directors, monitors and manages interest rate risk to maintain an acceptable level of change to net interest income as a result of changes in interest rates. Policy established for interest rate risk is stated in terms of the change in net interest income over a twelve month horizon given an 43 immediate and sustained increase or decrease in interest rates. The current limits approved by the Board of Directors are plus or minus 10% for each 100 basis point increase or decrease in interest rates. The following table shows United's estimated earnings sensitivity profile after management's adjustments as of December 31, 1997: Change in Interest Rates Percentage Change in (basis points) Net Interest Income -------------- -------------------- +200 1.94% -200 -2.70% Given an immediate, sustained 200 basis point upward shock to the yield curve used in the simulation model, it is estimated net interest income for United would increase by 1.94% over one year. A 200 basis point immediate, sustained downward shock in the yield curve would decrease net interest income by an estimated 2.70% over one year. All of these estimated changes in net interest income are within the policy guidelines established by the Board of Directors. 44 The following table shows the interest rate sensitivity GAP as of December 31, 1997: INTEREST RATE SENSITIVITY GAP
Days ------------------------------ Total 1 - 5 Over 5 0 - 90 91 - 180 181 - 365 One Year Years Years Total ------ -------- --------- -------- ----- ----- ----- (Dollars in Thousands) ASSETS INTEREST-EARNING ASSETS: Federal funds sold and securities purchased under agreements to resell and other short- term investments $ 9,725 $ 9,725 $ 9,725 Investment and marketable equity securities: Taxable 19,990 $ 3,460 $ 1,818 25,268 $ 139,439 $255,805 420,512 Tax-exempt 1,090 3,196 4,286 9,158 19,206 32,650 Loans, net of unearned income 666,093 165,950 307,717 1,139,760 615,057 305,670 2,060,487 ---------- --------- --------- ---------- --------- -------- ---------- Total Interest-Earning Assets $ 695,808 $ 170,500 $ 312,731 $1,179,039 $ 763,654 $580,681 $2,523,374 ========== ========= ========= ========== ========= ======== ========== LIABILITIES INTEREST-BEARING FUNDS: Savings and NOW accounts $ 762,358 $ 762,358 $ 762,358 Time deposits of $100,000 & over 47,974 $ 21,626 $ 59,444 129,044 $ 58,069 $ 552 187,665 Other time deposits 178,376 165,038 199,569 542,983 293,338 1,773 838,094 Federal funds purchased, repurchase agreements and other short-term borrowing 130,870 130,870 130,870 FHLB advances 139,000 139,000 3,695 142,695 ---------- --------- --------- ---------- --------- -------- ---------- Total Interest-Bearing Funds $1,258,578 $ 186,664 $ 259,013 $1,704,255 $ 351,407 $ 6,020 $2,061,682 ========== ========= ========= ========== ========= ======== ========== Interest Sensitivity Gap $ (562,770) $ (16,164) $ 53,718 $ (525,216) $ 412,247 $574,661 $ 461,692 ========== ========= ========= ========== ========= ======== ========== Cumulative Gap $ (562,770) $(578,934) $(525,216) $ (525,216) $(112,969) $461,692 $ 461,692 ========== ========= ========= ========== ========= ======== ========== Cumulative Gap as a Percentage of Total Earning Assets (22.30%) (22.94%) (20.81%) (20.81%) (4.48%) 18.30% 18.30% Management Adjustments $ 735,518 $ (49,059) $ (98,045) $ 588,414 $(588,414) $ 0 Off-Balance Sheet Activities ---------- --------- --------- ---------- --------- -------- ---------- Cumulative Management Adjusted Gap and Off- Balance Sheet Activities $ 172,748 $ 107,525 $ 63,198 $ 63,198 $(112,969) $461,692 $ 461,692 ========== ========= ========= ========== ========= ======== ========== Cumulative Management Adjusted Gap and Off- Balance Sheet Activities as a Percentage of Total Earning Assets 6.85% 4.26% 2.50% 2.50% (4.48%) 18.30% 18.30% ========== ========= ========= ========== ========= ======== ==========
45 LIQUIDITY AND CAPITAL RESOURCES In the opinion of management, United maintains liquidity which is sufficient to satisfy its depositors' requirements and the credit needs of its customers. Like all banks, United depends upon its ability to renew maturing deposits and other liabilities on a daily basis and to acquire new funds in a variety of markets. A significant source of funds available to United is "core deposits". Core deposits include certain demand deposits, statement and special savings and NOW accounts. These deposits are relatively stable and they are the lowest cost source of funds available to United. Short-term borrowings have also been a significant source of funds. These include federal funds purchased and securities sold under agreements to repurchase as well as advances from the FHLB. Repurchase agreements represent funds that are generally obtained as the result of a competitive bidding process. Liquid assets are cash and those items readily convertible to cash. All banks must maintain sufficient balances of cash and near-cash items to meet the day-to-day demands of customers. Other than cash and due from banks, the available for sale securities portfolio and maturing loans are the primary sources of liquidity. The goal of liquidity management is to ensure the ability to access funding which enables United to efficiently satisfy the cash flow requirements of depositors and borrowers and meet United's cash needs. Liquidity is managed by monitoring funds availability from a number of primary sources. Substantial funding is available from cash and cash equivalents, unused short-term borrowings and a geographically dispersed network of subsidiary banks providing access to a diversified and substantial retail deposit market. Short-term needs can be met through a wide array of sources such as correspondent and downstream correspondent federal funds and utilization of 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 1997 of $32,642,000 were 50.1% lower than the $66,449,000 in 1996 primarily as a result of an increase of approximately $28,594,000 of excess originations of loans for sale over proceeds from the sale of loans. In 1997, investing activities resulted in a use of cash of $180,573,000 as compared to 1996 in which investing activities resulted in a use of cash of $160,168,000. The primary reason for the increase in the use of cash for investing activities was that the net difference of security purchases over proceeds from sales, maturities and calls of securities, increased from a net use of $11,702,000 in 1996 to a net use of $76,400,000 in 1997 or an increase 46 of $64,698,000. Additionally, as a use of cash for investing activities, approximately $28,929,000 of net cash was paid by United during 1997 to acquire all of the outstanding shares of Patriot. These increases in uses of cash for investing activities were partially offset by a decline in net loan originations of $73,303,000 in 1997 as compared to 1996. Financing activities resulted in a source of cash in 1997 of $148,583,000 primarily due to an increase in deposits of $122,735,000 and an increase in net borrowings from the FHLB of Pittsburgh and other short-term borrowings of $9,804,000 and $40,071,000, respectively. These sources of cash for financing activities were partially offset by payment of $19,831,000 of cash dividends to shareholders and $5,754,000 for the purchase of treasury stock for use in United's employee benefit plans. See the Consolidated Statement of Cash Flows in the Consolidated Financial Statements. United anticipates no problems in its ability to service its obligations over the next 12 months. There are no known trends, demands, commitments, or events that will result in or that are reasonably likely to result in United's liquidity increasing or decreasing in any material way. United also has significant lines of credit available to it. See Note G, Notes to Consolidated Financial Statements. Management is not aware of any current recommendations by regulatory authorities which, if implemented, would have a material effect on liquidity, capital resources or operations. The asset and liability committee monitors liquidity to ascertain that a strong liquidity position is maintained. In addition, variable rate loans are a priority. These policies should help to protect net interest income against fluctuations in interest rates. United also seeks to maintain a proper relationship between capital and total assets to support growth and sustain earnings. United's average equity to average asset ratio was 11.01% in 1997 and 11.25% in 1996. United's risk-based capital ratio was 13.46% in 1997 and 16.54% in 1996 which are both significantly higher than the minimum regulatory requirements. United's Tier 1 capital and leverage ratios of 12.21% and 9.21%, respectively, at December 31, 1997, are also strong relative to its peers and are well above regulatory minimums to be classified as a "well capitalized" institution. See Note M, Notes to Consolidated Financial Statements. COMMITMENTS The following table indicates the outstanding loan commitments of United in the categories stated: December 31 1997 ------------- Lines of credit authorized, but unused $455,767,000 Letters of credit 36,243,000 ------------ $492,010,000 ============ 47 Past experience has shown that, of the foregoing commitments, approximately 12-15% can reasonably be expected to be funded within a one year period. For more information, see Note J to the Consolidated Financial Statements. YEAR 2000 ISSUE The Year 2000 Issue is the result of computer programs being written using two digits rather than four to define the applicable year. Any of a company's hardware, date-driven automated equipment or computer programs that have time-sensitive software may recognize a date using "00" as the year 1900 rather than the year 2000. This faulty recognition could result in a system failure or miscalculations causing disruptions of operations, including, among other things, a temporary inability to process transactions, send invoices or engage in similar normal business activities. Based on a recent assessment, United determined that it will be required to modify or replace portions of its software so that its computer systems will function properly with respect to dates in the year 2000 and thereafter. United currently believes that with modifications to existing software and conversions to new software, the Year 2000 Issue will not pose significant operational problems for its computer systems. However, if such modifications and conversions are not made, or are not completed timely, the Year 2000 Issue could have a material impact on United's operations. United has initiated formal communications with all of its significant suppliers and customers to determine the extent to which United's interface systems are vulnerable to those third parties' failure to remediate their own Year 2000 Issues. United's total Year 2000 project costs and estimates to complete include the estimated costs and time associated with the impact of third party Year 2000 Issues based on presently available information. However, there can be no guarantee that the systems and applications of other companies on which United's systems rely will be timely converted or that a failure to convert by another company, or a conversion that is incompatible with United's systems and applications, would not have a material adverse effect on United. United will utilize both internal and external resources to reprogram, or replace, and test the Year 2000 modifications. United anticipates completing the Year 2000 project within one year but not later than December 31, 1998, which is prior to any anticipated impact on United's operating systems. The total cost of the Year 2000 project is estimated at $2.0 million and is being funded through cash flows, which will be expensed as incurred over the next two years. The Year 2000 costs are not expected to have a material adverse effect on United's results of operations or cash flows. To date United has incurred and expensed approximately $100,000 related to the assessment of, and preliminary efforts in connection with, the Year 2000 project and the development of a Year 2000 plan of operation. 48 The costs of the Year 2000 project and the date on which United believes it will complete the Year 2000 modifications are based on management's best estimates, which were derived utilizing numerous assumptions of future events, including the continued availability of certain resources, third party vendor modification plans and other factors. There can be no guarantee, however, that these estimates will be achieved and actual results could differ materially from those anticipated. Specific factors that might cause such material differences include, but are not limited to, the availability and cost of trained programming personnel, the ability to locate and correct all relevant computer coding, and similar uncertainties. 1996 COMPARED TO 1995 The following Earnings Summary is a broad overview of the financial condition and results of operations and is not intended to replace the more detailed discussion which is presented under the specific headings below. EARNINGS SUMMARY For the year ended December 31, 1996, net income decreased 7.0% to $30,512,000. Net income per share of $1.00 for the year decreased 8.3% from $1.09 in 1995. Dividends per share increased 6.0% from $0.59 in 1995 to a record level of $0.62 per share in 1996. This was the twenty-third consecutive year of dividend increases to shareholders. During 1996, United recorded approximately $6,845,000 of merger-related and one-time special charges associated with the Eagle merger. These charges included, among other items, severance pay and benefits for displaced Eagle officers and employees, costs to consolidate duplicate facilities, employee training, new product promotions, computer conversions and additional deposit insurance as a result of the Savings Association Insurance Fund ("SAIF") recapitalization legislation. Despite these significant one-time expenses, United's return on average assets of 1.35% compared very favorably with regional and national peer grouping information provided by Wheat, First Securities, Inc. of 1.19% and 1.18%. United's return on average shareholders' equity of 11.98%, as compared with regional and national peer group information of 15.56% and 15.14%, is indicative of United's very strong capital levels. The following discussion explains in more detail the results of operations and changes in financial condition by major category. NET INTEREST INCOME For the years ended December 31, 1996 and 1995, net interest income approximated $99,173,000 and $95,648,000, respectively. On a tax-equivalent basis the net interest margin was strong at 4.85% in 1996 and 4.90% in 1995. 49 Total interest income of $172,358,000 increased 4.0% in 1996 over 1995 as a result of higher volumes of interest-earning assets. Higher average loan volumes of approximately $113 million, resulting primarily from an acquisition, contributed to the increase. From December 31, 1995 to December 31, 1996, United experienced a moderate increase in consumer loans of 1.1%, while commercial loans and mortgage loans showed increases of 13.7% and 6.4%, respectively. Total interest expense increased $3,018,000 or 4.3% in 1996. This increase was attributed primarily to United's competitive pricing of interest-bearing deposits in its markets and continued change in the retail deposit mix as customers shifted funds into products offering higher yields. United's average interest-bearing deposits increased by $25,761,000 or 1.7% in 1996, while its average FHLB advances increased $29,604,000 or 42.6% and average short-term borrowings increased $3,999,000 or 4.8%. United made greater use of FHLB advances as the cost of those advances declined from 5.93% in 1995 to 5.54% in 1996. United utilized FHLB advances during 1996 to fund the growth in the mortgage loan portfolio. The average cost of funds, which increased from 4.22% in 1995 to 4.25% in 1996, reflected the general upward trend in market interest rates during 1996. PROVISION FOR LOAN LOSSES United evaluates the adequacy of the allowance for loan losses on a quarterly basis and its loan administration policies are focused upon the risk characteristics of the loan portfolio. Nonperforming loans were $10,192,000 at December 31, 1996 and $10,990,000 at December 31, 1995, a decrease of 7.3%. The level of nonperforming assets decreased as a result of the charge-off of certain large balance commercial credits. The components of nonperforming loans include nonaccrual loans and loans that are contractually past due 90 days or more as to interest or principal, but have not been placed on nonaccrual. Loans past due 90 days or more increased $1,139,000 or 24.3% during 1996; nonaccrual loans decreased $1,937,000 or 30.8% since year-end 1995. Nonperforming loans represented 0.44% of total assets at the end of 1996, as compared to 0.52% for United's national peer group. At year-end 1996 and 1995, the allowance for loan losses was 1.21% and 1.30% of total loans, net of unearned income. At December 31, 1996 and 1995, the ratio of the allowance for loan losses to nonperforming loans was 218.6% and 205.1%, respectively. For the years ended December 31, 1996 and 1995, the provision for loan losses was $2,610,000 and $2,320,000, respectively. The increase in the provision for 1996 when compared to 1995 was to conform the allowance for loan losses on Eagle's loan portfolio with United's loan valuation policies and in response to growth in the portfolio. Total net charge-offs were $2,872,000 in 1996 and $3,096,000 in 1995, which represents 0.16% and 0.18% of average loans for the respective years. United's ratio of net charge-offs to average loans was better than its peer group's ratio of 0.23% in 1996 and was comparable to its peer group's ratio of 0.19% in 1995. 50 At December 31, 1996, impaired loans were $10,317,000, an increase of $1,525,000 or 17.4% from the $8,792,000 in impaired loans at December 31, 1995. OTHER INCOME Noninterest income decreased $563,000 or 3.8% for 1996 when compared to 1995. Other income consists of all revenues which are not included in interest and fee income related to earning assets. The decrease in noninterest income for 1996 was primarily the result of the approximate $2,000,000 loss on loans sold in United's newly formed mortgage banking subsidiary. These sales were necessary to strategically align the mortgage banking operations with United's interest rate risk position. Excluding gains and losses on sales of securities and mortgage banking activities, noninterest income increased $978,000 or 7.1% in 1996 primarily as a result of increased service charges and fees from customer accounts. Trust income increased $275,000 or 9.5% in 1996 due to repricing of services and an increased volume of trust business. Service charges, commissions and fees increased by $1,396,000 or 14.1% in 1996. The increase was primarily attributable to conforming the former Eagle offices' service charge and fee structures to United's and increased return check charges and bankcard fees. This income includes charges and fees related to various banking services provided by United. The increase was primarily due to a combination of increased fees in bankcard accounts and an increased fee structure for sales of checking related products. Securities transactions resulted in a net loss of $98,000 in 1996. The proceeds from these sales of approximately $17 million were reinvested in similar securities yielding a higher rate of return. There were no securities sales in 1995. OTHER EXPENSE Other expense includes all items of expense other than interest expense, the provision for loan losses and income tax expense. In total, other expense increased $6,068,000 or 10.6%. The increase was primarily due to the one-time and merger-related charges recorded in the first and second quarters and the additional third quarter deposit insurance expense as a result of the SAIF recapitalization legislation. Salaries and employee benefits expense increased $2,887,000 or 11.2% in 1996. Nearly all of the increase for 1996 was attributable to severance and benefit pay of displaced Eagle executive officers, employment contracts and employees at locations where United consolidated certain branches. As of December 31, 1996 and 1995, United employed 893 and 946 full-time equivalent employees, respectively. 51 Net occupancy expense in 1996 exceeded 1995 levels by $319,000 or 5.5% primarily due to decreased rental income and an increase in real property repairs and utilities expense. The overall changes in net occupancy expense for 1996 were insignificant with no material increase or decrease in any one expense category. Remaining other expense increased $2,862,000 or 11.1% in 1996 compared to 1995. The increase in other expense for 1996 related primarily to the additional deposit insurance expense as a result of the SAIF recapitalization legislation, higher insurance expense, advertising, consulting and legal expense, losses on sales and write-downs of assets, EDP fees, office supplies, and goodwill amortization. Included in these increased costs was $1,483,000 of one-time charges which related to reengineering costs incurred to improve efficiency, productivity and strengthen United's competitiveness. Additionally, the added expenses of a purchase accounting acquisition included in 1996, but not in the first ten months of 1995, have contributed to the overall increase in noninterest expense. INCOME TAXES For the year ended December 31, 1996, income taxes approximated $16,691,000 compared to $17,782,000 for 1995. The decrease of $1,091,000 or 6.7% for 1996 when compared to 1995 was primarily the result of decreased pretax income. United's effective tax rates were approximately 35% for 1996 and 1995. 52 Report Of Ernst & Young LLP Independent Auditors Board of Directors and Shareholders United Bankshares, Inc. and Subsidiaries We have audited the accompanying consolidated balance sheets of United Bankshares, Inc. and subsidiaries as of December 31, 1997 and 1996, 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, 1997. 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 generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of United Bankshares, Inc. and subsidiaries at December 31, 1997 and 1996, and the consolidated results of their operations and their cash flows for each of the three years in the period ended December 31, 1997, in conformity with generally accepted accounting principles. /s/ Ernst & Young LLP _____________________ Charleston, West Virginia February 27, 1998, except for Note O, as to which the date is March 27, 1998 53 Consolidated Balance Sheets United Bankshares, Inc. and Subsidiaries
(Dollars in thousands, except par value) December 31 -------------------------- 1997 1996 ----------- ----------- Assets Cash and due from banks $ 80,447 $ 86,328 Interest-bearing deposits with other banks 8,725 195 Federal funds sold 1,000 2,997 ----------- ----------- Total cash and cash equivalents 90,172 89,520 Securities available for sale at estimated fair value (amortized cost --$265,439 at December 31, 1997 and $160,161 at December 31, 1996) 273,868 161,629 Securities held to maturity (estimated fair value--$181,185 at December 31, 1997 and $173,697 at December 31, 1996) 179,294 170,702 Loans 2,067,485 1,852,770 Less: Unearned income (6,998) (5,165) ----------- ----------- Loans net of unearned income 2,060,487 1,847,605 Less: Allowance for loan losses (24,786) (22,283) ----------- ----------- Net loans 2,035,701 1,825,322 Bank premises and equipment 39,490 33,550 Accrued interest receivable 16,040 13,508 Other assets 65,225 32,646 ----------- ----------- Total Assets $ 2,699,790 $ 2,326,877 =========== =========== Liabilities Domestic deposits: Noninterest-bearing $ 317,930 $ 261,048 Interest-bearing 1,788,117 1,566,506 ----------- ----------- Total Deposits 2,106,047 1,827,554 Borrowings: Federal funds purchased 20,961 4,491 Securities sold under agreements to repurchase 109,909 71,091 Federal Home Loan Bank borrowings 142,695 132,631 Accrued expenses and other liabilities 40,740 32,596 ----------- ----------- Total Liabilities 2,420,352 2,068,363 Shareholders' Equity Common stock, $2.50 par value; Authorized--41,000,000 shares at December 31, 1997 and 20,000,000 at December 31, 1996; issued-- 30,590,260 at December 31, 1997 and 15,295,130 at December 31, 1996, including 622,744 and 205,495 shares in treasury at December 31, 1997 and 1996, respectively 76,476 38,238 Surplus 41,014 41,438 Retained earnings 165,896 183,539 Net unrealized holding gain on securities available for sale, net of deferred income taxes 5,479 954 Treasury stock, at cost (9,427) (5,655) ----------- ----------- Total Shareholders' Equity 279,438 258,514 ----------- ----------- Total Liabilities and Shareholders' Equity $ 2,699,790 $ 2,326,877 =========== ===========
See notes to consolidated financial statements 54 Consolidated Statements of Income United Bankshares, Inc. and Subsidiaries
(Dollars in thousands, except per share data) Year Ended December 31 ------------------------------------------- 1997 1996 1995 ------------ ------------ ------------ Interest Income Interest and fees on loans $ 164,310 $ 151,404 $ 143,228 Interest on federal funds sold and other short-term investments 184 157 1,107 Interest and dividends on securities: Taxable 23,828 18,455 18,516 Exempt from federal taxes 1,930 2,342 2,964 ------------ ------------ ------------ Total Interest Income 190,252 172,358 165,815 ------------ ------------ ------------ Interest Expense Interest on deposits 74,400 63,917 62,231 Interest on short-term borrowings 5,275 3,770 3,809 Interest on Federal Home Loan Bank advances 4,824 5,498 4,127 ------------ ------------ ------------ Total Interest Expense 84,499 73,185 70,167 ------------ ------------ ------------ Net Interest Income 105,753 99,173 95,648 Provision for Loan Losses 3,100 2,610 2,320 ------------ ------------ ------------ Net Interest Income After Provision for Loan Losses 102,653 96,563 93,328 ------------ ------------ ------------ Other Income Trust department income 3,569 3,186 2,911 Service charges, commissions, and fees 12,500 11,298 9,902 Other income (loss) 3,663 (295) 1,939 ------------ ------------ ------------ Total Other Income 19,732 14,189 14,752 ------------ ------------ ------------ Other Expense Salaries and employee benefits 27,384 28,743 25,856 Net occupancy expense 6,238 6,071 5,752 Other expense 26,327 28,735 25,873 ------------ ------------ ------------ Total Other Expense 59,949 63,549 57,481 ------------ ------------ ------------ Income Before Income Taxes 62,436 47,203 50,599 Income Taxes 21,497 16,691 17,782 ------------ ------------ ------------ Net Income $ 40,939 $ 30,512 $ 32,817 ============ ============ ============ Earnings per common share: Basic $ 1.37 $ 1.01 $ 1.10 ============ ============ ============ Diluted $ 1.35 $ 1.00 $ 1.09 ============ ============ ============ Dividends per common share $ 0.68 $ 0.62 $ 0.59 ============ ============ ============ Average outstanding shares: Basic 29,954,116 30,281,260 29,966,308 Diluted 30,271,992 30,435,674 30,134,572
See notes to consolidated financial statements 55 Consolidated Statements of Changes in Shareholders' Equity United Bankshares, Inc. and Subsidiaries
(Dollars in thousands, except per share data) Net Unrealized Holding Common Stock (Loss) Gain -------------------- on Securities Total Par Retained Available Treasury Shareholders' Shares Value Surplus Earnings for Sale Stock Equity ---------- ------- ------- -------- --------- --------- ------------ Balance at January 1, 1995 15,093,157 $37,733 $36,726 $154,985 $ (464) $(3,346) $225,634 Net income 32,817 32,817 Cash dividends ($0.59 per share) (13,817) (13,817) Net change in unrealized holding loss on securities available for sale 1,873 1,873 Fractional shares adjustment (7) Acquisition of First Commercial Bank 202,125 505 5,558 6,063 Purchase of treasury stock (47,500 shares) (1,273) (1,273) Common stock options exercised (44,500 shares) (423) 1,089 666 Pre-merger dividends of pooled company (2,729) (2,729) ---------- ------ ------ ------- ----- ------- ------- Balance at December 31, 1995 15,295,275 38,238 41,861 171,256 1,409 (3,530) 249,234 Net income 30,512 30,512 Cash dividends ($0.62 per share) (17,847) (17,847) Net change in unrealized holding gain on securities available for sale (455) (455) Fractional shares adjustment (145) (4) (4) Purchase of treasury stock (113,000 shares) (3,395) (3,395) Common stock options exercised (48,025 shares) (419) 1,270 851 Pre-merger dividends of pooled company (382) (382) ---------- ------ ------ ------- ----- ------- ------- Balance at December 31, 1996 15,295,130 38,238 41,438 183,539 954 (5,655) 258,514 Net income 40,939 40,939 Cash dividends ($0.68 per share) (20,344) (20,344) Net change in unrealized holding gain on securities available for sale 4,525 4,525 Purchase of treasury stock (167,100 shares) (5,754) (5,754) Common stock options exercised (45,232 shares) (424) 1,376 952 Sale of treasury stock (15,991 shares) 606 606 Two-for-one stock split effected in the form of a 100% stock dividend 15,295,130 38,238 (38,238) ---------- ------- ------- --------- ------- ------- -------- Balance at December 31, 1997 30,590,260 $76,476 $41,014 $ 165,896 $ 5,479 $(9,427) $279,438 ========== ======= ======= ========= ======= ======= ========
See notes to consolidated financial statements. 56 Consolidated Statements of Cash Flows United Bankshares, Inc. and Subsidiaries
(Dollars in thousands) Year Ended December 31 ----------------------------------------- 1997 1996 1995 --------- -------- -------- Operating Activities Net income $ 40,939 $ 30,512 $ 32,817 Adjustments to reconcile net income to net cash provided by operating activities: Provision for loan losses 3,100 2,610 2,320 Provision for depreciation 3,486 3,080 2,926 Amortization, net of accretion 2,082 1,091 35 (Gain) loss on sales of bank premises and equipment (534) 140 (35) Net losses on sales of securities available for sale 98 Loans originated for sale (143,195) (26,157) (9,438) Proceeds from loans sold 138,283 49,839 10,053 (Gain) loss on sales of loans (2,521) 728 (1,012) Deferred income tax expense (benefit) 387 (9) 141 Originations of student loans (465) Proceeds from sales of student loans 4,580 Changes in: Interest receivable (949) 285 (766) Other assets (10,181) (3,461) 2,601 Accrued expenses and other liabilities 1,745 3,113 2,227 --------- -------- -------- Net Cash Provided By Operating Activities 32,642 66,449 41,404 --------- -------- -------- Investing Activities Proceeds from maturities and calls of investment securities 24,950 23,053 32,624 Purchases of investment securities (33,488) (78,177) (6,995) Proceeds from sales of securities available for sale 16,518 Proceeds from maturities and calls of securities available for sale 149,275 203,395 108,706 Purchases of securities available for sale (217,137) (176,491) (70,746) Proceeds from sales of loans 49,127 Net purchases of bank premises and equipment (2,085) (2,004) (1,972) Net cash paid for acquired subsidiary (28,929) (1,742) Net change in loans (73,159) (146,462) (90,117) --------- -------- -------- Net Cash (Used In) Provided By Investing Activities (180,573) (160,168) 18,885 --------- -------- -------- Financing Activities Cash dividends paid (19,831) (16,541) (10,273) Acquisition of treasury stock (5,754) (3,395) (1,273) Proceeds from exercise of stock options 952 851 666 Proceeds from sales of treasury stock 606 Pre-merger dividends of pooled company (382) (2,729) Repayment of Federal Home Loan Bank borrowings (280,359) (414,007) (379,134) Proceeds from Federal Home Loan Bank borrowings 290,163 471,141 316,257 Purchase of fractional shares (4) Changes in: Time deposits 96,950 25,161 127,570 Other deposits 25,785 28,023 (117,776) Federal funds purchased and securities sold under agreements to repurchase 40,071 (6,585) 10,358 --------- -------- -------- Net Cash Provided By (Used In) Financing Activities 148,583 84,262 (56,334) --------- -------- -------- Increase (Decrease) In Cash and Cash Equivalents 652 (9,457) 3,955 Cash and Cash Equivalents at Beginning of Year 89,520 98,977 95,022 --------- -------- -------- Cash and Cash Equivalents at End of Year $ 90,172 $ 89,520 $ 98,977 ========= ======== ========
See notes to consolidated financial statements. 57 Notes to Consolidated Financial Statements December 31, 1997 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 considers all of its principal business activities to be bank related. 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. Certain prior period data has been reclassified to conform with the current period presentation. The reclassifications had no effect on net income or shareholders' equity. The accounting and reporting policies of United conform with generally accepted accounting principles. The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates. A description of the significant accounting policies is presented below. 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 shareholders' equity, 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. 58 Note A--Summary of Significant Accounting Policies--continued Loans: Interest on loans is accrued and credited to operations using methods that produce a level yield on principal amounts outstanding. Loan origination and commitment fees and related direct loan origination costs are deferred and amortized as an adjustment of loan yield over the estimated life of the related loan. The accrual of interest income on commercial and most consumer loans generally is discontinued when a loan becomes 90 days past due as to principal or interest. When interest accruals are discontinued, unpaid interest recognized in income in the current year is reversed, and interest accrued in prior years is charged to the allowance for loan losses. Management may elect to continue the accrual of interest when the estimated net realizable value of collateral exceeds the principal balance and accrued interest, and the loan is in the process of collection. Consistent with United's existing method of income recognition for loans, interest on impaired loans, except those classified as nonaccrual, is recognized as income using the accrual method. United's method of income recognition for impaired loans that are classified as nonaccrual is to recognize interest income on the cash basis or apply the cash receipt to principal when the ultimate collectibility of principal is in doubt. The principal 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; (iv) loan servicing fees; and (v) gain or loss on the close-out of the hedge instrument used to offset the risk that changes in interest rate may have on the value of United's mortgage loan inventory. Derivative Financial Instruments: United enters into hedging transactions that utilize forward contracts for the delivery of mortgage-backed securities as hedge vehicles to offset the risk that a change in interest rates will result in a decrease in the value of United's current mortgage loan inventory or its commitments to originate mortgage loans (the "pipeline"). The risk of loss is then matched with the appropriate hedge vehicle. United's policies generally require that it hedge substantially all of its inventory of conforming and government loans. Realized gains and losses on forward commitments are recorded in mortgage banking income in the period settlement occurs. Unrealized gains or losses are considered in the lower of cost or market valuation of loans held for 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. 59 Note A--Summary of Significant Accounting Policies--continued 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 providing for loan losses, United considers all significant factors that affect the collectibility of loans. Such factors considered by management include, among others, growth and composition of the loan portfolio, known deterioration in certain classes of loans or collateral, trends in delinquencies, and current economic conditions. 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 potential losses on existing loans based on information currently available. Bank Premises and Equipment: Bank premises and equipment are stated at cost, less allowances for depreciation and amortization. The provision for depreciation is computed principally by the straight-line method over the estimated useful lives of the respective assets. Income Taxes: Deferred income taxes are provided for temporary differences between the tax basis of an asset or liability and its reported amount in the financial statements at the statutory tax rate. Intangible Assets: Intangible assets relating to the estimated value of the deposit base of the acquired institutions are being amortized on an accelerated basis over a 7 to 10 year period. The excess of the purchase price over the fair market value of the net assets of the banks acquired (goodwill) is being amortized on a straight-line basis over 15 to 20 years. The carrying amount of goodwill is evaluated if facts and circumstances suggest that it may be impaired. If this evaluation indicates that goodwill 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 goodwill will be reduced. At December 31, 1997 and 1996, deposit base intangibles and goodwill approximated $37,332,000 and $11,959,000 net of accumulated amortization of approximately $12,318,000 and $9,888,000. Trust Assets and Income: Assets held in a fiduciary or agency capacity for subsidiary bank customers are not included in the balance sheets since such items are not assets of the subsidiary banks. Trust department 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. 60 Notes to Consolidated Financial Statements Note A--Summary of Significant Accounting Policies--continued Earnings Per Common Share: In 1997, United adopted FASB Statement No. 128 (SFAS No. 128), "Earnings Per Share." SFAS No. 128 requires the presentation of basic and diluted earnings per common share for all periods. 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 317,876, 154,414 and 168,264 shares in 1997, 1996 and 1995, respectively. Prior period earnings per common share amounts have been restated to reflect the adoption of SFAS No. 128. The results of this change were insignificant. New Accounting Standards: In June 1996, the FASB issued Statement No. 125, (SFAS No. 125), "Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities," which supersedes SFAS No. 76, "Extinguishment of Debt." SFAS No. 125 prescribes the accounting treatment for securitization transactions based on a financial components approach with an emphasis on physical control, such as the ability to pledge or exchange the securitized assets, while prior rules emphasize the economic risks or rewards of ownership of the assets. Additionally, SFAS No. 125 applies to repurchase agreements, securities lending, loan participations, and other financial component transfers and exchanges. Under the financial components approach of SFAS No. 125, both the transferor and transferee will recognize on its balance sheet the assets and liabilities, or components thereof, that it controls and derecognize from the balance sheet the assets and liabilities that were surrendered or extinguished in the transfer. The new rules have not had a material effect on United's financial position and results of operations. In June 1997, the FASB issued Statement No. 130, (SFAS No. 130), "Reporting Comprehensive Income." This statement, which is effective for years beginning after December 15, 1997, requires companies to report and display comprehensive income and its components. United is reviewing the components of comprehensive income as outlined by SFAS No. 130 and plans to disclose the information as required. In June 1997, the FASB issued Statement No. 131, (SFAS No. 131), "Disclosures about Segments of an Enterprise and Related Information." SFAS No. 131 provides guidance for the way public enterprises report information about operating segments in annual financial statements and requires selected information about operating segments in interim financial reports. It also requires certain related disclosures about products and services, geographic areas and major customers. The segment and other information disclosures are required for years beginning after December 15, 1997. United is currently reviewing its methodology used for determining operating segment results. These standards, when implemented, are not expected to materially impact the reported financial position or results of operations of United. 61 Note B--Mergers and Acquisitions United has entered into an agreement with George Mason Bankshares, Inc., Fairfax, Virginia ("George Mason") to exchange 1.70 shares, as adjusted for the 100% stock dividend, of United common stock for each of the 5,277,301 common shares of George Mason. The transaction will be accounted for using the pooling of interests method of accounting. It is anticipated that the proposed merger will be consummated early during the second quarter of 1998. Additionally, United has entered into an agreement with Fed One Bancorp, Inc., Wheeling, West Virginia ("Fed One") to exchange 1.50 shares, as adjusted for the 100% stock dividend, of United common stock for each of the 2,373,181 common shares of Fed One. The transaction will be accounted for using the pooling of interests method of accounting. It is anticipated that the proposed merger will be consummated early during the fourth quarter of 1998. The following represents unaudited selected pro forma financial information regarding the effects of the transactions as though United, George Mason and Fed One had been combined for all periods presented:
(In thousands, except per share data) United United, and George George Mason and George Mason Fed Fed One United Mason Combined One Combined -------- ------- --------- ------- -------- 1997 Net interest income $105,753 $31,945 $137,698 $11,632 $149,330 Net income 40,939 8,080 49,019 3,242 52,261 Earnings per common share: Basic $1.37 $1.58 $1.27 $1.43 $1.24 Diluted $1.35 $1.54 $1.25 $1.36 $1.22 1996 Net interest income $ 99,173 $27,463 $126,636 $11,749 $138,385 Net income 30,512 6,883 37,395 2,324 39,719 Earnings per common share: Basic $1.01 $1.38 $0.97 $0.97 $0.94 Diluted $1.00 $1.35 $0.96 $0.94 $0.93 1995 Net interest income $ 95,648 $24,170 $119,818 $11,697 $131,515 Net income 32,817 6,292 39,109 3,250 42,359 Earnings per common share: Basic $1.10 $1.30 $1.02 $1.24 $1.01 Diluted $1.09 $1.28 $1.02 $1.20 $1.00
The data set forth above is not necessarily indicative of the results of operations or the combined financial position of United that would have resulted had the merger been consummated at the beginning of the applicable periods indicated, nor is it necessarily indicative of the results of operations in future periods or the future financial position of the combined entities. 62 Note B--Mergers and Acquisitions--continued On August 1, 1997, United acquired 100% of the outstanding common stock of First Patriot Bankshares Corporation, Reston, Virginia ("Patriot") for cash consideration of approximately $39.2 million. The transaction has been accounted for using the purchase method of accounting. At consummation, Patriot had assets of approximately $211 million, loans of $135 million, deposits of $154 million and shareholders' equity of $11 million, all of which reflected purchase accounting adjustments. The results of operations of Patriot, which are not significant, have been included in the consolidated results of operations from the date of acquisition. Note C--Investment Securities The amortized cost and estimated fair values of securities available for sale are summarized as follows:
(In thousands) December 31, 1997 ------------------------------------------------------ Gross Gross Estimated Amortized Unrealized Unrealized Fair Cost Gains Losses Value --------- ---------- ---------- --------- U.S. Treasury securities and obligations of U.S. Government corporations and agencies $142,688 $ 500 $239 $142,949 Mortgage-backed securities 102,955 1,527 20 104,462 Marketable equity securities 4,300 6,741 11,041 Other 15,496 80 15,416 -------- ------ ---- -------- Total $265,439 $8,768 $339 $273,868 ======== ====== ==== ========
(In thousands) December 31, 1996 ----------------------------------------------------- Gross Gross Estimated Amortized Unrealized Unrealized Fair Cost Gains Losses Value --------- ---------- ---------- --------- U.S. Treasury securities and obligations of U.S. Government corporations and agencies $115,018 $ 443 $ 444 $115,017 Mortgage-backed securities 24,982 92 565 24,509 Marketable equity securities 3,655 2,158 5,813 Other 16,506 7 223 16,290 -------- ------ ------ -------- Total $160,161 $2,700 $1,232 $161,629 ======== ====== ====== ========
63 Note C--Investment Securities--continued The amortized cost and estimated fair value of securities available for sale at December 31, 1997, by contractual maturity are as follows: (In thousands) Estimated Amortized Fair Cost Value --------- --------- Due in one year or less $ 36,604 $ 37,043 Due after one year through five years 86,721 87,031 Due after five years through ten years 20,861 20,868 Due after ten years 116,953 117,885 Marketable equity securities 4,300 11,041 -------- -------- Total $265,439 $273,868 ======== ======== The table above includes $104,462,000 of mortgage-backed securities at estimated fair value with an amortized cost of $102,955,000. 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 $96,000 and $194,000, respectively, in 1996. There were no sales in 1997 and 1995. The amortized cost and estimated fair values of securities held to maturity are summarized as follows:
(In thousands) December 31, 1997 --------------------------------------------- Gross Gross Estimated Amortized Unrealized Unrealized Fair Cost Gains Losses Value --------- ---------- ---------- --------- U.S. Treasury securities and obligations of U.S. Government corporations and agencies $ 97,847 $ 551 $ 22 $ 98,376 State and political subdivisions 32,650 1,323 8 33,965 Mortgage-backed securities 41,874 154 107 41,921 Other 6,923 6,923 -------- ------ ---- -------- Total $179,294 $2,028 $137 $181,185 ======== ====== ==== ========
(In thousands) December 31, 1996 --------------------------------------------- Gross Gross Estimated Amortized Unrealized Unrealized Fair Cost Gains Losses Value --------- ---------- ---------- --------- U.S. Treasury securities and obligations of U.S. Government corporations and agencies $ 77,704 $2,131 $ 87 $ 79,748 State and political subdivisions 36,136 1,487 32 37,591 Mortgage-backed securities 54,977 250 754 54,473 Other 1,885 1,885 -------- ------ ---- -------- Total $170,702 $3,868 $873 $173,697 ======== ====== ==== ========
64 Note C--Investment Securities--continued The amortized cost and estimated fair value of debt securities held to maturity at December 31, 1997 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. (In thousands) Estimated Amortized Fair Cost Value --------- --------- Due in one year or less $ 18,825 $ 18,887 Due after one year through five years 52,448 53,033 Due after five years through ten years 78,794 79,399 Due after ten years 29,227 29,866 -------- -------- Total $179,294 $181,185 ======== ======== The table above includes $41,874,000 of mortgage-backed securities with an estimated fair value of $41,921,000 at December 31, 1997. 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 $277,098,000 and $204,254,000 at December 31, 1997 and 1996, respectively. Note D--Loans Major classifications of loans are as follows: (In thousands) December 31 ------------------------ 1997 1996 --------- --------- Commercial, financial, and agricultural $ 368,654 $ 248,762 Real estate: Single family residential 929,490 953,000 Commercial 392,818 355,431 Construction 93,918 42,343 Other 43,406 19,748 Installment 232,191 232,004 ---------- ---------- 2,060,477 1,851,288 Loans held for sale 7,008 1,482 ---------- ---------- Total gross loans $2,067,485 $1,852,770 ========== ========== An analysis of the allowance for loan losses follows: (In thousands) Year Ended December 31 ------------------------------ 1997 1996 1995 ------- ------- ------- Balance at beginning of year $22,283 $22,545 $22,304 Allowance of purchased subsidiaries 2,695 1,017 Provision for loan losses 3,100 2,610 2,320 ------- ------- ------- 28,078 25,155 25,641 ------- ------- ------- Loans charged off 3,819 3,524 3,624 Recoveries 527 652 528 ------- ------- ------- Net charge offs 3,292 2,872 3,096 ------- ------- ------- Balance at end of year $24,786 $22,283 $22,545 ======= ======= ======= 65 Note D--Loans--continued United's lending is centered in the West Virginia and Virginia markets and is focused on retail consumer and small and middle market commercial lending. United has commercial real estate loans, including owner occupied, income producing real estate and land development loans, of approximately $392,818,000 and $355,431,000 as of December 31, 1997 and 1996, 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, 1997, the recorded investment in loans that were considered to be impaired was $12,602,000 (of which $4,156,000 was on a nonaccrual basis). Included in this amount was $5,319,000 of impaired loans for which the related allowance for credit losses was $1,438,000 and $7,283,000 of impaired loans that did not have an allowance for credit losses. At December 31, 1996, the recorded investment in loans that were considered to be impaired was $10,317,000 (of which $4,361,000 was on a nonaccrual basis). Included in this amount was $5,631,000 of impaired loans for which the related allowance for credit losses was $1,451,000 and $4,686,000 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, 1997, 1996 and 1995 was approximately $11,482,000, $9,442,000 and $9,545,000, respectively. The amount of interest income that would have been recorded on impaired loans under the original terms was $1,471,000, $1,464,000 and $1,045,000 for the years ended December 31, 1997, 1996 and 1995, respectively. For the years ended December 31, 1997, 1996 and 1995, United recognized interest income on those impaired loans of approximately $907,000, $638,000 and $412,000, 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 $83,660,000 and $72,367,000 at December 31, 1997 and 1996, respectively. During 1997, $36,929,000 of new loans were made, repayments totaled $30,045,000, and other changes due to the change in composition of United's board members and executive officers approximated $4,409,000. 66 Note E--Bank Premises and Equipment and Leases Bank premises and equipment are summarized as follows: (In thousands) December 31 --------------------- 1997 1996 ------- ------- Land $ 8,921 $ 7,892 Buildings and improvements 35,540 34,414 Leasehold improvements 5,002 5,784 Furniture, fixtures, and equipment 31,701 30,093 ------- ------- 81,164 78,183 Less allowance for depreciation and amortization 41,674 44,633 ------- ------- Net bank premises and equipment $39,490 $33,550 ======= ======= 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 operating leases approximated $2,019,000, $1,908,000 and $1,822,000 for the years ended December 31, 1997, 1996, and 1995, 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, 1997, consisted of the following: (In thousands) Year Amount ---- ------- 1998 $ 2,333 1999 2,196 2000 1,801 2001 1,766 2002 1,368 Thereafter 1,236 ------- Total minimum lease payments $10,700 ======= Note F--Deposits The book value of deposits consisted of the following: (In thousands) December 31 -------------------------- 1997 1996 ---------- ---------- Noninterest-bearing checking $ 317,930 $ 261,048 Interest-bearing checking 52,506 62,783 Regular savings 288,504 293,755 Money market accounts 421,348 362,223 Time deposits under $100,000 838,094 709,309 Time deposits over $100,000 187,665 138,436 ---------- ---------- Total deposits $2,106,047 $1,827,554 ========== ========== Interest paid on deposits and borrowings approximated $82,959,000, $72,568,000 and $63,167,000 in 1997, 1996 and 1995, respectively. 67 Note F--Deposits--continued At December 31, 1997, the scheduled maturities of time deposits are as follows: (In thousands) Year Amount ---- ---------- 1998 $ 668,860 1999 297,332 2000 37,119 2001 9,481 2002 and thereafter 12,967 ---------- Total minimum lease payments $1,025,759 ========== 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 $21,253,000 and $18,335,000 at December 31, 1997 and 1996, respectively. Note G--Borrowings United's lead subsidiary, United National Bank (UNB), is a member of the Federal Home Loan Bank of Pittsburgh (FHLB). Membership in the FHLB makes available short-term and long-term borrowings from collateralized advances. At December 31, 1997, United had approximately $549,633,000 of available borrowings in the form of collateralized advances from the FHLB at prevailing interest rates. At December 31, 1997, $139,000,000 of FHLB advances with an interest rate of 6.50% had an overnight maturity. Additionally, $3,695,000 of FHLB advances with a weighted average interest rate of 6.06% are scheduled to mature from fourteen to twenty years. UNB also has various unused lines of credit available from certain of its correspondent banks in the aggregate amount of $128,000,000. These lines of credit, which bear interest at prevailing market rates, permit UNB to borrow funds in the overnight market, and are renewable annually subject to certain conditions. At December 31, 1997 and 1996, borrowings and the related weighted average interest rate were as follows:
(In thousands) 1997 1996 --------------------- ---------------------- Weighted Weighted Average Average Amount Rate Amount Rate -------- -------- -------- -------- Federal funds purchased $ 20,961 6.73% $ 4,491 6.81% Securities sold under agreements to repurchase 109,909 4.37% 71,091 4.16% FHLB advances 142,695 6.49% 132,631 6.63% -------- -------- Total $273,565 $208,213 ======== ========
68 Note G--Borrowings--continued Information concerning securities sold under agreements to repurchase (in thousands) is summarized as follows: 1997 1996 -------- ------- Average balance during the year $ 95,565 $66,463 Average interest rate during the year 4.24% 4.04% Maximum month-end balance during the year $123,949 $79,664 Note H--Income Taxes The income tax provisions included in the consolidated statements of income are summarized as follows: (In thousands) Year Ended December 31 ------------------------------------ 1997 1996 1995 ------- ------- ------- Current expense: Federal $20,163 $15,271 $15,313 State 947 1,429 2,328 Deferred expense (benefit): Federal and State 387 (9) 141 ------- ------- ------- Income taxes $21,497 $16,691 $17,782 ======= ======= ======= 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:
(In thousands) Year Ended December 31 ---------------------------------------------------------------- 1997 1996 1995 ----------------- ------------------ ------------------ Amount % Amount % Amount % ------- ---- ------- ---- ------- ---- Tax on income before taxes at statutory federal rate $21,853 35.0% $16,521 35.0% $17,710 35.0% Plus: State income taxes net of federal tax benefits 632 1.0 929 2.0 1,619 3.2 ------- ---- ------- ---- ------- ---- 22,485 36.0 17,450 37.0 19,329 38.2 Increase (decrease) resulting from: Tax-exempt interest income (1,410) (2.3) (1,464) (3.1) (1,683) (3.3) Other items-net 422 0.7 705 1.5 136 0.2 ------- ---- ------- ---- ------- ---- Income taxes $21,497 34.4% $16,691 35.4% $17,782 35.1% ======= ==== ======= ==== ======= ====
Federal income tax benefit applicable to securities transactions approximated $34,000 in 1996. There were no securities transactions in 1997 and 1995. Income taxes paid approximated $21,876,000, $14,035,000 and $19,052,000 in 1997, 1996 and 1995, respectively. 69 Note H--Income Taxes--continued Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. Significant components of United's deferred tax assets and liabilities (included in other assets) at December 31, 1997 and 1996 are as follows: (In thousands) 1997 1996 ------- ------- Deferred tax assets: Allowance for loan losses $ 9,321 $ 8,889 Accrued benefits payable 1,366 1,600 Other accrued liabilities 2,874 2,213 Net deferred loan fees 295 488 Other real estate owned 117 69 Other 363 ------- ------- Total deferred tax assets 13,973 13,622 ------- ------- Deferred tax liabilities: Premises and equipment 2,498 1,784 Core deposit intangibles 887 417 Income tax allowance for loan losses 1,462 1,462 Prepaid assets 169 149 Deferred mortgage points 1,663 1,582 Securities available for sale 2,950 514 Other 492 441 ------- ------- Total deferred tax liabilities 10,121 6,349 ------- ------- Net deferred tax assets $ 3,852 $ 7,273 ======= ======= Note I--Employee Benefit Plans United has a defined benefit retirement plan covering substantially all employees. The benefits are based on years of service and the average of the employee's highest five consecutive plan years of basic compensation paid during the ten plan years preceding the date of determination. United's funding policy is to contribute annually the maximum amount that can be deducted for federal income tax purposes. Contributions are intended to provide not only for benefits attributed to service to date, but also for those expected to be earned in the future. Net periodic pension cost included the following components:
(In thousands) Year Ended December 31 --------------------------------------- 1997 1996 1995 ------- ------- ------- Service cost $ 739 $ 861 $ 718 Interest cost on projected benefit obligation 1,451 1,439 1,263 Actual return on plan assets (4,402) (2,849) (3,499) Net amortization and deferral 2,395 1,014 1,852 ------- ------- ------- Net periodic pension cost $ 183 $ 465 $ 334 ======= ======= =======
70 Note I--Employee Benefit Plans--continued The following table sets forth the funded status of United's defined benefit plan and amounts recognized in the respective consolidated balance sheets:
(In thousands) December 31 -------------------------- 1997 1996 -------- -------- Vested benefit obligation $(16,986) $(15,715) Nonvested benefit obligation (452) (408) -------- -------- Accumulated benefit obligation (17,438) (16,123) Effect of future pay increases (4,472) (5,046) -------- -------- Projected benefit obligation for services rendered to date (21,910) (21,169) Plan assets at fair value, primarily marketable securities 27,040 23,109 -------- -------- Excess of plan assets over projected benefit obligation 5,130 1,940 Unrecognized net gain from past experience different from that assumed and effects of changes in assumptions (5,318) (1,877) Unrecognized prior service cost 325 388 Unrecognized transition asset (695) (826) -------- -------- Accrued pension liability included in other liabilities $ (558) $ (375) ======== ========
At December 31, 1997, the weighted average discount rate and rate of increase in future compensation levels used in determining the actuarial present value of the projected benefit obligation was 7.25% and 4.5%. At December 31, 1996, the weighted average discount rate and rate of increase in future compensation levels used in determining the actuarial present value of the projected benefit obligation was 7.5% and 4.5%. The weighted average expected long-term rate of return on United's plan assets was 9.00% for the years ended December 31, 1997, 1996 and 1995. The United Savings and Stock Investment Plan (the Plan) is a deferred compensation plan under Section 401(k) of the Internal Revenue Code. All employees who complete one year of service are eligible to participate in the Plan. Each participant may contribute from 1% to 10% of pre-tax earnings to his or her account which may be invested in any of four investment options chosen by the employee. United matches 100% of the first 2% of salary deferred and 25% of the next 2% of salary deferred with United common stock. Vesting is 100% for employee deferrals and the United match at the time the employee makes his/her deferral. United's expense relating to the Plan approximated $410,000, $330,000 and $297,000 in 1997, 1996 and 1995, respectively. 71 Note I--Employee Benefit Plans--continued The assets of United's defined benefit plan and 401(k) Plan each include investments in United common stock. At December 31, 1997, the combined plan assets included 679,518 shares of United common stock with an approximate fair value of $16,223,000. 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 three incentive stock option plans for key employees, the 1988, 1991 and 1996 plans. The plans provide for the granting of stock options of up to 200,000, 1,000,000 and 1,200,000 shares of common stock, respectively. No further grants will be made under the 1988 and 1991 plans. At December 31, 1997, 779,122 options were available for future grant under the 1996 plan. Under the provisions of the plans, the option price per share shall not be less than the fair market value of United's common stock on the date of grant. Accordingly, no compensation expense is recognized for these options. The following table summarizes information about stock options outstanding at December 31, 1997:
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 ---------------- ----------- ----------- --------- ----------- --------- $ 5.50 to $ 7.00 40,600 3 years $ 6.62 40,600 $ 6.62 $ 6.88 to $15.00 610,232 6 years 12.18 565,056 11.95 $14.88 to $22.00 417,374 9 years 18.56 99,844 14.88
The following is a summary of activity of United's Incentive Stock Option Plans:
Stock Options Range of Exercise Prices --------- ------------------------ Outstanding at January 1, 1995 769,350 $13.50 $ 5.50 Granted 200,000 15.00 Exercised 89,000 13.50 5.50 Forfeited 18,900 13.50 9.88 --------- Outstanding at December 31, 1995 861,450 15.00 5.50 Granted 218,972 14.88 Exercised 96,050 13.50 5.50 Forfeited 4,130 15.00 11.50 --------- Outstanding at December 31, 1996 980,242 15.00 5.50 Granted 215,500 22.00 Exercised 91,136 15.00 6.63 Forfeited 36,400 15.00 11.50 --------- Outstanding at December 31, 1997 1,068,206 $22.00 $ 5.50 ========= Exercisable at: December 31, 1995 527,274 $13.50 $ 5.50 December 31, 1996 619,998 $15.00 $ 5.50 December 31, 1997 705,500 $15.00 $ 5.50
72 Note I--Employee Benefit Plans--continued 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. Pro forma net income and earnings per share, determined as if United had recognized compensation expense for its employee stock options under the fair value method, have not been presented because the effect of applying the fair value method prescribed by SFAS 123 to the 1997, 1996 and 1995 options awarded produces amounts that are not materially different from amounts reported herein. The estimated fair value of the options at the date of grant was $10.12, $5.88, and $5.69 for the options granted during 1997, 1996, and 1995, 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 1997, 1996, and 1995, respectively: risk-free interest rates of 6.44%, 6.78%, and 6.24%; dividend yields of 3.08%, 4.10%, and 4.00%; volatility factors of the expected market price of United's common stock of 0.182, 0.185, and 0.185; and a weighted average expected option life of 7 years. United provides postemployment and postretirement benefits for certain employees at subsidiaries acquired in prior years. United accounts for such costs as expense when paid. Accounting for such costs when paid does not produce results materially different from those which would result if such costs were accrued during the period of employee service. United does not anticipate providing postemployment or postretirement benefits to its currently active employees after employment or retirement except on a fully contributory basis. Note J--Commitments and Contingent Liabilities United is a party to financial instruments with off-balance-sheet risk in the normal course of business to meet the financing needs of its customers and to alter its own exposure to fluctuations in interest rates. These financial instruments include loan commitments, standby letters of credit, forward contracts for the delivery of mortgage-backed securities and interest rate swap agreements. The instruments involve, to varying degrees, elements of credit and interest rate risk in excess of the amount recognized in the financial statements. United's maximum exposure to credit loss in the event of nonperformance by the counterparty to the financial instrument for the loan commitments and standby letters of credit is the contractual or notional amount of those instruments. United uses the same policies in making commitments and conditional obligations as it does for on-balance sheet instruments. Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the commitment contract. Commitments generally have fixed expiration dates or other termination clauses and may require the payment of a fee. Since many of the commitments are expected to expire without being drawn upon, the total 73 Note J--Commitments and Contingent Liabilities--continued 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 $455,767,000 and $337,582,000 of loan commitments outstanding as of December 31, 1997 and 1996, 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 $36,243,000 and $24,837,000 as of December 31, 1997 and 1996, respectively. At December 31, 1997, United had open commitments amounting to approximately $2,000,000 to sell mortgage-backed securities with varying settlement dates generally not extending beyond March 1998. As such, United is not exposed to significant risk nor will it derive any significant benefit from changes in interest rates on the price of the mortgage loan inventory, net of gains or losses of associated hedge positions. Management does not anticipate any material losses as a result of these loan commitments, standby letters of credit and forward contracts for the delivery of mortgage-backed securities. In the normal course of business, United and its subsidiaries are currently involved in various legal proceedings. Management is vigorously pursuing all its legal and factual defenses and, after consultation with legal counsel, believes that all such litigation will be resolved with no material effect on United's financial position or results of operations. 74 Note K--United Bankshares, Inc. (Parent Company Only) Financial Information Condensed Balance Sheets
(In thousands) December 31 -------------------- 1997 1996 ------- -------- Assets Cash $ 6,834 $ 12,958 Securities available for sale 16,742 10,813 Securities held to maturity 1,521 1,520 Investment in subsidiaries: Bank subsidiaries 250,087 238,902 Non-bank subsidiaries 1,303 1,264 Loans 14,300 Other assets 1,297 272 -------- -------- Total Assets $292,084 $265,729 ======== ======== Liabilities and Shareholders' Equity Accrued expenses and other liabilities $ 12,646 $ 7,215 Shareholders' equity (including a net unrealized holding gain of $5,479 and $954 on securities available for sale at December 31, 1997 and 1996, respectively) 279,438 258,514 -------- -------- Total Liabilities and Shareholders' Equity $292,084 $265,729 ======== ========
Condensed Statements of Income
(In thousands) Year Ended December 31 ----------------------------------------- 1997 1996 1995 ------- ------- ------- Income Dividends from bank subsidiaries $ 69,637 $17,847 $26,496 Interest and fees on loans 85 Management fees: Bank subsidiaries 3,476 3,467 3,018 Non-bank subsidiaries 12 12 12 Other income 707 557 268 -------- ------- ------- Total Income 73,917 21,883 29,794 Expenses Operating expenses 5,516 4,725 4,606 -------- ------- ------- Income Before Income Taxes and (Excess Dividends) Equity in Undistributed Net Income of Subsidiaries 68,401 17,158 25,188 Applicable income tax benefit (424) (12) (269) -------- ------- ------- Income Before (Excess Dividends) Equity in Undistributed Net Income of Subsidiaries 68,825 17,170 25,457 Equity in (excess dividends) undistributed net income of subsidiaries: Bank subsidiaries (27,925) 13,302 7,349 Non-bank subsidiaries 39 40 11 -------- ------- ------- Net Income $ 40,939 $30,512 $32,817 ======== ======= =======
75 Note K--United Bankshares, Inc. (Parent Company Only) Financial Information--continued Condensed Statements of Cash Flows
(In thousands) Year Ended December 31 ----------------------------------------- 1997 1996 1995 -------- -------- -------- Operating Activities: Net income $ 40,939 $ 30,512 $ 32,817 Adjustments to reconcile net income to net cash provided by operating activities: Equity in excess dividends (undistributed net income) of subsidiaries 27,886 (13,342) (7,360) Depreciation and net amortization 11 26 33 Net gain on sales of investment securities (24) Net change in other assets and liabilities 2,276 (106) 790 -------- -------- -------- Net Cash Provided by Operating Activities 71,112 17,066 26,280 -------- -------- -------- Investing Activities Net purchases of securities available for sale (1,346) 1,585 (8,439) Purchase of loans (14,300) Increase in investment in subsidiaries (1) (2,400) Cash paid in acquisition of subsidiary (37,562) (5,280) -------- -------- -------- Net Cash (Used in) Provided by Investing Activities (53,209) 1,585 (16,119) -------- -------- -------- Financing Activities Cash dividends paid (19,831) (16,541) (10,273) Pre-merger dividends of pooled company (382) (2,729) Acquisition of treasury stock (5,754) (3,395) (1,273) Proceeds from the sale of treasury stock 606 Proceeds from exercise of stock options 952 851 666 Purchase of fractional shares (4) -------- -------- -------- Net Cash Used in Financing Activities (24,027) (19,471) (13,609) -------- -------- -------- Decrease in Cash and Cash Equivalents (6,124) (820) (3,448) Cash and Cash Equivalents at Beginning of Year 12,958 13,778 17,226 -------- -------- -------- Cash and Cash Equivalents at End of Year $ 6,834 $ 12,958 $ 13,778 ======== ======== ========
76 Note L--Other Income and Expense The following details certain items of other income and expense for the periods indicated:
(In thousands) Year Ended December 31 ----------------------------------- 1997 1996 1995 ------ ------ ------ Other income: Service charges and fees on deposits $8,672 $8,014 $7,063 Bankcard 2,717 2,048 1,739 Net income (loss) from mortgage banking operations 3,135 (431) 1,012 Loss on sales of investment securities (98) Other income 528 234 927 Other expense: Data processing $2,146 $2,974 $2,548 FDIC insurance expense 119 2,986 2,364 Legal and consulting 871 2,138 2,595 Advertising 1,618 2,173 1,747 Goodwill amortization 2,750 1,915 1,551 Equipment expense 3,512 3,191 3,021
Note M--Regulatory Matters The subsidiary banks are required to maintain average reserve balances with their respective Federal Reserve Bank. The average amount of those reserve balances for the year ended December 31, 1997, was approximately $23,698,000. 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 1998, the retained net profits available for distribution to United Bankshares, Inc., as dividends without regulatory approval, are approximately $3,876,000, 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 $13,475,000 at December 31, 1997, 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 quantitative measures of the banks' assets, liabilities, and certain off-balance sheet items as cal- 77 Note M--Regulatory Matters--continued culated 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. Management believes, as of December 31, 1997, that United exceeds all capital adequacy requirements to which it is subject. As of December 31, 1997, 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 have changed United's category. United's and United's lead bank's, United National Bank, capital amounts (in thousands of dollars) and ratios are presented in the following table.
Actual ------------------ Amount Ratio ------- ----- As of December 31, 1997: Total Capital (to Risk- Weighted Assets): United Bankshares $261,646 13.5% United National Bank 204,907 12.5% Tier I Capital (to Risk- Weighted Assets): United Bankshares 237,342 12.2% United National Bank 184,451 11.3% Tier I Capital (to Average Assets): United Bankshares 237,342 9.2% United National Bank 184,451 8.1% As of December 31, 1996: Total Capital (to Risk- Weighted Assets): United Bankshares $263,759 16.5% United National Bank 231,697 15.2% Tier I Capital (to Risk- Weighted Assets): United Bankshares 243,827 15.3% United National Bank 212,635 13.9% Tier I Capital (to Average Assets): United Bankshares 243,827 10.8% United National Bank 212,635 9.8%
For Capital To Be Well Adequacy Purposes Capitalized ------------------------------------------ ------------------------------------------- Amount Ratio Amount Ratio ------- ----- ------- ----- As of December 31, 1997: Total Capital (to Risk- Weighted Assets): United Bankshares $155,546 (greater than or equal to)8.0% $194,433 (greater than or equal to)10.0% United National Bank 130,917 (greater than or equal to)8.0% 163,647 (greater than or equal to)10.0% Tier I Capital (to Risk- Weighted Assets): United Bankshares 77,773 (greater than or equal to)4.0% 116,660 (greater than or equal to) 6.0% United National Bank 65,459 (greater than or equal to)4.0% 98,188 (greater than or equal to) 6.0% Tier I Capital (to Average Assets): United Bankshares 103,037 (greater than or equal to)4.0% 128,796 (greater than or equal to) 5.0% United National Bank 91,559 (greater than or equal to)4.0% 114,449 (greater than or equal to) 5.0% As of December 31, 1996: Total Capital (to Risk- Weighted Assets): United Bankshares $127,564 (greater than or equal to)8.0% $159,455 (greater than or equal to)10.0% United National Bank 122,000 (greater than or equal to)8.0% 152,500 (greater than or equal to)10.0% Tier I Capital (to Risk- Weighted Assets): United Bankshares 63,782 (greater than or equal to)4.0% 95,673 (greater than or equal to) 6.0% United National Bank 61,000 (greater than or equal to)4.0% 91,500 (greater than or equal to) 6.0% Tier I Capital (to Average Assets): United Bankshares 90,537 (greater than or equal to)4.0% 113,171 (greater than or equal to) 5.0% United National Bank 86,902 (greater than or equal to)4.0% 108,627 (greater than or equal to) 5.0%
78 Note N--Fair Values of Financial Instruments The following methods and assumptions were used by United in estimating its fair value disclosures for financial instruments: Cash and Cash Equivalents: The carrying amounts reported in the balance sheet for cash and cash equivalents approximate those assets' fair values. Securities: The estimated fair values of securities are based on quoted market prices, where available. If quoted market prices are not available, fair values are based on quoted market prices of comparable instruments. Loans: The estimated fair values of variable-rate loans that reprice frequently with no significant change in credit risk are based on carrying values. The fair values of certain mortgage loans (e.g., one-to-four family residential), credit card loans, and other consumer loans are based on quoted market prices of similar loans sold in conjunction with securitization transactions, adjusted for differences in loan characteristics. The fair values of other loans (e.g., commercial real estate and rental property mortgage loans, commercial and industrial loans, financial institution loans, and agricultural loans) are estimated using discounted cash flow analyses, using interest rates currently being offered for loans with similar terms to borrowers of similar credit worthiness. Off-Balance Sheet Instruments: Fair values of United's loan commitments are based on fees currently charged to enter into similar agreements, taking into account the remaining terms of the agreements and the counterparties' credit standing. The estimated fair values of these commitments approximate their carrying values. The fair value of forward contracts for the delivery of mortgage-backed securities in connection with its mortgage banking activities is based upon quoted market prices or prices of similar instruments when available. Deposits: The fair values of demand deposits (e.g., interest and 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. 79 Note N--Fair Values of Financial Instruments--continued 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. The estimated fair values of United's financial instruments are summarized below:
(In thousands) December 31, 1997 December 31, 1996 --------------------------- --------------------------- Carrying Fair Carrying Fair Amount Value Amount Value ---------- ---------- ---------- ---------- Cash and cash equivalents $ 90,172 $ 90,172 $ 89,520 $ 89,520 Securities available for sale 273,868 273,868 161,629 161,629 Securities held to maturity 179,294 181,185 170,702 173,505 Loans 2,035,701 2,052,751 1,825,322 1,835,619 Deposits 2,106,047 2,107,804 1,827,554 1,827,609 Short-term borrowings 130,870 130,870 75,582 75,582 FHLB borrowings 142,695 142,781 132,631 132,553
(In thousands) December 31, 1997 December 31, 1996 ------------------------- ------------------------- Notional Fair Notional Fair Amount Value Amount Value -------- ------- -------- ------- Off-Balance Sheet: Forward contracts related to mortgage banking operations $ 1,425 $ 1,426 6,000 6,022
Note O--Stock Split In November 1997, United's Board of Directors approved a two-for-one stock split effected in the form of a 100% stock dividend to be distributed on March 27, 1998, to shareholders of record as of March 13, 1998. The change in capital structure due to the dividend has been given retroactive effect in the December 31, 1997 balance sheet and all references to shares and per share data have been retroactively restated for the effect of the 100% stock dividend. 80 Note P--Quarterly Financial Data (Unaudited) Quarterly financial data for 1997 and 1996 is summarized below:
(Dollars in thousands except per share data) 1st Quarter 2nd Quarter 3rd Quarter 4th Quarter ----------- ----------- ----------- ----------- 1997 Interest income $44,300 $45,345 $48,825 $51,782 Interest expense 19,158 19,948 21,953 23,440 Net interest income 25,142 25,397 26,872 28,342 Provision for loan losses 600 550 1,000 950 Income from mortgage banking operations 294 313 1,858 670 Other noninterest income 3,788 3,889 4,326 4,594 Noninterest expense 13,627 13,542 16,263 16,517 Income taxes 4,949 5,387 5,448 5,713 Net income 10,048 10,120 10,345 10,426 Per share data: Average shares outstanding (000s): Basic 30,071 29,898 29,906 29,960 Diluted 30,325 30,188 30,295 30,348 Net income per share: (1) Basic $0.33 $0.34 $0.35 $0.35 Diluted $0.33 $0.34 $0.34 $0.34 Dividends per share $0.16 $0.17 $0.17 $0.18 1996 Interest income $42,188 $41,527 $44,609 $44,034 Interest expense 17,697 17,436 18,865 19,187 Net interest income 24,491 24,091 25,744 24,847 Provision for loan losses 611 949 600 450 Income (loss) from mortgage banking operations 58 (1,963) 802 672 Other noninterest income 3,523 3,691 3,753 3,653 Noninterest expense 14,812 18,192 16,540 14,005 Income taxes (2) 4,560 5,414 1,936 4,781 Net income 8,089 1,264 11,223 9,936 Per share data: Average shares outstanding (000s): Basic 30,293 30,293 30,303 30,237 Diluted 30,436 30,445 30,459 30,426 Net income per share: (1) Basic $0.27 $0.04 $0.37 $0.33 Diluted $0.27 $0.04 $0.37 $0.33 Dividends per share $0.15 $0.15 $0.16 $0.16
(1) Earnings per share amounts have been restated to comply with SFAS No. 128. (2) In the second quarter of 1996, United recorded additional income tax expense of $3,086 due to the recapture of Eagle's bad debt reserve into taxable income. However, as a result of legislation enacted during the third quarter of 1996, United was relieved of the liability. 81
EX-11 2 EXHIBIT 11 Exhibit 11 Statement Re: Computation of Earnings Per Share UNITED BANKSHARES, INC. AND SUBSIDIARIES Earnings Per Share
For the Year Ended December 31 1997 1996 1995 ---- ---- ---- BASIC: - ------ Average Number of Common Shares 29,954,116 30,281,260 29,966,308 =========== =========== =========== Net Income $40,939,000 $30,512,000 $32,817,000 Preferred Dividends ----------- ----------- ----------- Available to Common Shares $40,939,000 $30,512,000 $32,817,000 =========== =========== =========== Earnings Per Common Share: $1.37 $1.01 $1.10 =========== =========== =========== DILUTED: - -------- Average Number of Common Shares 29,954,116 30,281,260 29,966,308 Average Number of Common Share Equivalents 317,876 154,414 168,264 ----------- ----------- ----------- Average Shares and Share Equivalents Outstanding 30,271,992 30,435,674 30,134,572 =========== =========== =========== Net Income $40,939,000 $30,512,000 $32,817,000 Preferred Dividends ----------- ----------- ----------- Available to Common Shares $40,939,000 $30,512,000 $32,817,000 =========== =========== =========== Earnings Per Common Share - assuming dilution: $1.35 $1.00 $1.09 =========== =========== ===========
82
EX-12 3 EXHIBIT 12 Exhibit 12 Computation of Ratios Net Income Per Share = Net Income/Average Common Shares Outstanding Cash Dividends Per Share = Dividends Paid/Average Common Shares Outstanding Book Value Per Share = Total Shareholders' Equity/Average Common Shares Outstanding Return on Average Assets = Net Income/Average Assets Return on Average Shareholders' = Net Income/Average Shareholders' Equity Equity Net Interest Margin = Net Interest Income/Average Earning Assets Noninterest Expense to Average = Noninterest Expense/Average Assets Assets Efficiency Ratio = Noninterest Expense/(Net Interest Income Plus Noninterest Income) Average Loans to Deposits = Average Net Loans/Average Deposits Outstanding Dividend Payout = Dividends Declared/Net Income Average Shareholders' Equity to = Average Shareholders' Equity/Average Average Assets Assets Tier I Capital Ratio = Shareholders' Equity--Intangible Assets--Securities Mark-to-market Capital Reserve (Tier I Capital)/ Risk Adjusted Assets Total Capital Ratio = Tier I Capital Plus Allowance for Loan Losses/Risk Adjusted Assets Tier I Leverage Ratio = Tier I Capital/Average Assets Net Charge-offs to Average Loans = (Gross Charge-offs Less Recoveries)/ Average Net Loans Non-performing Loans to Period End = (Nonaccrual Loans Plus Loans Past Due Loans 90 Days or Greater)/Gross Loans Net of Unearned Interest) Non-performing Assets to Period End = (Nonaccrual Loans Plus Loans Past Due Assets 90 Days or Greater Plus Other Real Estate)/Total Assets Allowance for Loan Losses to Period = Loan Loss Reserve/(Gross Loans Net End Loans of Unearned Interest Allowance for Loan Losses to Non- = Loan Loss Reserve/(Nonaccrual Loans Performing Loans Plus Loans Past Due 90 days or Greater)
83
EX-13 4 EXHIBIT 13 Report Of Ernst & Young LLP Independent Auditors Board of Directors and Shareholders United Bankshares, Inc. and Subsidiaries We have audited the accompanying consolidated balance sheets of United Bankshares, Inc. and subsidiaries as of December 31, 1997 and 1996, 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, 1997. 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 generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of United Bankshares, Inc. and subsidiaries at December 31, 1997 and 1996, and the consolidated results of their operations and their cash flows for each of the three years in the period ended December 31, 1997, in conformity with generally accepted accounting principles. /s/ Ernst & Young LLP _____________________ Charleston, West Virginia February 27, 1998, except for Note O, as to which the date is March 27, 1998 84 Consolidated Balance Sheets United Bankshares, Inc. and Subsidiaries
(Dollars in thousands, except par value) December 31 -------------------------- 1997 1996 ----------- ----------- Assets Cash and due from banks $ 80,447 $ 86,328 Interest-bearing deposits with other banks 8,725 195 Federal funds sold 1,000 2,997 ----------- ----------- Total cash and cash equivalents 90,172 89,520 Securities available for sale at estimated fair value (amortized cost --$265,439 at December 31, 1997 and $160,161 at December 31, 1996) 273,868 161,629 Securities held to maturity (estimated fair value--$181,185 at December 31, 1997 and $173,697 at December 31, 1996) 179,294 170,702 Loans 2,067,485 1,852,770 Less: Unearned income (6,998) (5,165) ----------- ----------- Loans net of unearned income 2,060,487 1,847,605 Less: Allowance for loan losses (24,786) (22,283) ----------- ----------- Net loans 2,035,701 1,825,322 Bank premises and equipment 39,490 33,550 Accrued interest receivable 16,040 13,508 Other assets 65,225 32,646 ----------- ----------- Total Assets $ 2,699,790 $ 2,326,877 =========== =========== Liabilities Domestic deposits: Noninterest-bearing $ 317,930 $ 261,048 Interest-bearing 1,788,117 1,566,506 ----------- ----------- Total Deposits 2,106,047 1,827,554 Borrowings: Federal funds purchased 20,961 4,491 Securities sold under agreements to repurchase 109,909 71,091 Federal Home Loan Bank borrowings 142,695 132,631 Accrued expenses and other liabilities 40,740 32,596 ----------- ----------- Total Liabilities 2,420,352 2,068,363 Shareholders' Equity Common stock, $2.50 par value; Authorized--41,000,000 shares at December 31, 1997 and 20,000,000 at December 31, 1996; issued-- 30,590,260 at December 31, 1997 and 15,295,130 at December 31, 1996, including 622,744 and 205,495 shares in treasury at December 31, 1997 and 1996, respectively 76,476 38,238 Surplus 41,014 41,438 Retained earnings 165,896 183,539 Net unrealized holding gain on securities available for sale, net of deferred income taxes 5,479 954 Treasury stock, at cost (9,427) (5,655) ----------- ----------- Total Shareholders' Equity 279,438 258,514 ----------- ----------- Total Liabilities and Shareholders' Equity $ 2,699,790 $ 2,326,877 =========== ===========
See notes to consolidated financial statements 85 Consolidated Statements of Income United Bankshares, Inc. and Subsidiaries
(Dollars in thousands, except per share data) Year Ended December 31 ------------------------------------------- 1997 1996 1995 ------------ ------------ ------------ Interest Income Interest and fees on loans $ 164,310 $ 151,404 $ 143,228 Interest on federal funds sold and other short-term investments 184 157 1,107 Interest and dividends on securities: Taxable 23,828 18,455 18,516 Exempt from federal taxes 1,930 2,342 2,964 ------------ ------------ ------------ Total Interest Income 190,252 172,358 165,815 ------------ ------------ ------------ Interest Expense Interest on deposits 74,400 63,917 62,231 Interest on short-term borrowings 5,275 3,770 3,809 Interest on Federal Home Loan Bank advances 4,824 5,498 4,127 ------------ ------------ ------------ Total Interest Expense 84,499 73,185 70,167 ------------ ------------ ------------ Net Interest Income 105,753 99,173 95,648 Provision for Loan Losses 3,100 2,610 2,320 ------------ ------------ ------------ Net Interest Income After Provision for Loan Losses 102,653 96,563 93,328 ------------ ------------ ------------ Other Income Trust department income 3,569 3,186 2,911 Service charges, commissions, and fees 12,500 11,298 9,902 Other income (loss) 3,663 (295) 1,939 ------------ ------------ ------------ Total Other Income 19,732 14,189 14,752 ------------ ------------ ------------ Other Expense Salaries and employee benefits 27,384 28,743 25,856 Net occupancy expense 6,238 6,071 5,752 Other expense 26,327 28,735 25,873 ------------ ------------ ------------ Total Other Expense 59,949 63,549 57,481 ------------ ------------ ------------ Income Before Income Taxes 62,436 47,203 50,599 Income Taxes 21,497 16,691 17,782 ------------ ------------ ------------ Net Income $ 40,939 $ 30,512 $ 32,817 ============ ============ ============ Earnings per common share: Basic $ 1.37 $ 1.01 $ 1.10 ============ ============ ============ Diluted $ 1.35 $ 1.00 $ 1.09 ============ ============ ============ Dividends per common share $ 0.68 $ 0.62 $ 0.59 ============ ============ ============ Average outstanding shares: Basic 29,954,116 30,281,260 29,966,308 Diluted 30,271,992 30,435,674 30,134,572
See notes to consolidated financial statements 86 Consolidated Statements of Changes in Shareholders' Equity United Bankshares, Inc. and Subsidiaries
(Dollars in thousands, except per share data) Net Unrealized Holding Common Stock (Loss) Gain -------------------- on Securities Total Par Retained Available Treasury Shareholders' Shares Value Surplus Earnings for Sale Stock Equity ---------- ------- ------- -------- --------- --------- ------------ Balance at January 1, 1995 15,093,157 $37,733 $36,726 $154,985 $ (464) $(3,346) $225,634 Net income 32,817 32,817 Cash dividends ($0.59 per share) (13,817) (13,817) Net change in unrealized holding loss on securities available for sale 1,873 1,873 Fractional shares adjustment (7) Acquisition of First Commercial Bank 202,125 505 5,558 6,063 Purchase of treasury stock (47,500 shares) (1,273) (1,273) Common stock options exercised (44,500 shares) (423) 1,089 666 Pre-merger dividends of pooled company (2,729) (2,729) ---------- ------ ------ ------- ----- ------- ------- Balance at December 31, 1995 15,295,275 38,238 41,861 171,256 1,409 (3,530) 249,234 Net income 30,512 30,512 Cash dividends ($0.62 per share) (17,847) (17,847) Net change in unrealized holding gain on securities available for sale (455) (455) Fractional shares adjustment (145) (4) (4) Purchase of treasury stock (113,000 shares) (3,395) (3,395) Common stock options exercised (48,025 shares) (419) 1,270 851 Pre-merger dividends of pooled company (382) (382) ---------- ------ ------ ------- ----- ------- ------- Balance at December 31, 1996 15,295,130 38,238 41,438 183,539 954 (5,655) 258,514 Net income 40,939 40,939 Cash dividends ($0.68 per share) (20,344) (20,344) Net change in unrealized holding gain on securities available for sale 4,525 4,525 Purchase of treasury stock (167,100 shares) (5,754) (5,754) Common stock options exercised (45,232 shares) (424) 1,376 952 Sale of treasury stock (15,991 shares) 606 606 Two-for-one stock split effected in the form of a 100% stock dividend 15,295,130 38,238 (38,238) ---------- ------- ------- --------- ------- ------- -------- Balance at December 31, 1997 30,590,260 $76,476 $41,014 $ 165,896 $ 5,479 $(9,427) $279,438 ========== ======= ======= ========= ======= ======= ========
See notes to consolidated financial statements. 87 Consolidated Statements of Cash Flows United Bankshares, Inc. and Subsidiaries
(Dollars in thousands) Year Ended December 31 ----------------------------------------- 1997 1996 1995 --------- -------- -------- Operating Activities Net income $ 40,939 $ 30,512 $ 32,817 Adjustments to reconcile net income to net cash provided by operating activities: Provision for loan losses 3,100 2,610 2,320 Provision for depreciation 3,486 3,080 2,926 Amortization, net of accretion 2,082 1,091 35 (Gain) loss on sales of bank premises and equipment (534) 140 (35) Net losses on sales of securities available for sale 98 Loans originated for sale (143,195) (26,157) (9,438) Proceeds from loans sold 138,283 49,839 10,053 (Gain) loss on sales of loans (2,521) 728 (1,012) Deferred income tax expense (benefit) 387 (9) 141 Originations of student loans (465) Proceeds from sales of student loans 4,580 Changes in: Interest receivable (949) 285 (766) Other assets (10,181) (3,461) 2,601 Accrued expenses and other liabilities 1,745 3,113 2,227 --------- -------- -------- Net Cash Provided By Operating Activities 32,642 66,449 41,404 --------- -------- -------- Investing Activities Proceeds from maturities and calls of investment securities 24,950 23,053 32,624 Purchases of investment securities (33,488) (78,177) (6,995) Proceeds from sales of securities available for sale 16,518 Proceeds from maturities and calls of securities available for sale 149,275 203,395 108,706 Purchases of securities available for sale (217,137) (176,491) (70,746) Proceeds from sales of loans 49,127 Net purchases of bank premises and equipment (2,085) (2,004) (1,972) Net cash paid for acquired subsidiary (28,929) (1,742) Net change in loans (73,159) (146,462) (90,117) --------- -------- -------- Net Cash (Used In) Provided By Investing Activities (180,573) (160,168) 18,885 --------- -------- -------- Financing Activities Cash dividends paid (19,831) (16,541) (10,273) Acquisition of treasury stock (5,754) (3,395) (1,273) Proceeds from exercise of stock options 952 851 666 Proceeds from sales of treasury stock 606 Pre-merger dividends of pooled company (382) (2,729) Repayment of Federal Home Loan Bank borrowings (280,359) (414,007) (379,134) Proceeds from Federal Home Loan Bank borrowings 290,163 471,141 316,257 Purchase of fractional shares (4) Changes in: Time deposits 96,950 25,161 127,570 Other deposits 25,785 28,023 (117,776) Federal funds purchased and securities sold under agreements to repurchase 40,071 (6,585) 10,358 --------- -------- -------- Net Cash Provided By (Used In) Financing Activities 148,583 84,262 (56,334) --------- -------- -------- Increase (Decrease) In Cash and Cash Equivalents 652 (9,457) 3,955 Cash and Cash Equivalents at Beginning of Year 89,520 98,977 95,022 --------- -------- -------- Cash and Cash Equivalents at End of Year $ 90,172 $ 89,520 $ 98,977 ========= ======== ========
See notes to consolidated financial statements. 88 Notes to Consolidated Financial Statements December 31, 1997 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 considers all of its principal business activities to be bank related. 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. Certain prior period data has been reclassified to conform with the current period presentation. The reclassifications had no effect on net income or shareholders' equity. The accounting and reporting policies of United conform with generally accepted accounting principles. The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates. A description of the significant accounting policies is presented below. 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 shareholders' equity, 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 principal amounts outstanding. Loan origination and commitment fees and related direct loan origination costs are deferred and amortized as an adjustment of loan yield over the estimated life of the related loan. The accrual of interest income on commercial and most consumer loans generally is discontinued when a loan becomes 90 days past due as to principal or interest. When interest accruals are discontinued, unpaid interest recognized in income in the current year is reversed, and interest accrued in prior years is charged to the allowance for loan losses. Management may elect to continue the accrual of interest when the estimated net realizable value of collateral exceeds the principal balance and accrued interest, and the loan is in the process of collection. Consistent with United's existing method of income recognition for loans, interest on impaired loans, except those classified as nonaccrual, is recognized as income using the accrual method. United's method of income recognition for impaired loans that are classified as nonaccrual is to recognize interest income on the cash basis or apply the cash receipt to principal when the ultimate collectibility of principal is in doubt. The principal 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; (iv) loan servicing fees; and (v) gain or loss on the close-out of the hedge instrument used to offset the risk that changes in interest rate may have on the value of United's mortgage loan inventory. 89 Note A--Summary of Significant Accounting Policies (continued) Derivative Financial Instruments: United enters into hedging transactions that utilize forward contracts for the delivery of mortgage-backed securities as hedge vehicles to offset the risk that a change in interest rates will result in a decrease in the value of United's current mortgage loan inventory or its commitments to originate mortgage loans (the "pipeline"). The risk of loss is then matched with the appropriate hedge vehicle. United's policies generally require that it hedge substantially all of its inventory of conforming and government loans. Realized gains and losses on forward commitments are recorded in mortgage banking income in the period settlement occurs. Unrealized gains or losses are considered in the lower of cost or market valuation of loans held for 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. 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 providing for loan losses, United considers all significant factors that affect the collectibility of loans. Such factors considered by management include, among others, growth and composition of the loan portfolio, known deterioration in certain classes of loans or collateral, trends in delinquencies, and current economic conditions. 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 potential losses on existing loans based on information currently available. Bank Premises and Equipment: Bank premises and equipment are stated at cost, less allowances for depreciation and amortization. The provision for depreciation is computed principally by the straight-line method over the estimated useful lives of the respective assets. Income Taxes: Deferred income taxes are provided for temporary differences between the tax basis of an asset or liability and its reported amount in the financial statements at the statutory tax rate. Intangible Assets: Intangible assets relating to the estimated value of the deposit base of the acquired institutions are being amortized on an accelerated basis over a 7 to 10 year period. The excess of the purchase price over the fair market value of the net assets of the banks acquired (goodwill) is being amortized on a straight-line basis over 15 to 20 years. The carrying amount of goodwill is evaluated if facts and circumstances suggest that it may be impaired. If this evaluation indicates that goodwill 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 goodwill will be reduced. At December 31, 1997 and 1996, deposit base intangibles and goodwill approximated $37,332,000 and $11,959,000 net of accumulated amortization of approximately $12,318,000 and $9,888,000. Trust Assets and Income: Assets held in a fiduciary or agency capacity for subsidiary bank customers are not included in the balance sheets since such items are not assets of the subsidiary banks. Trust department 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. 90 Notes to Consolidated Financial Statements Note A--Summary of Significant Accounting Policies--continued Earnings Per Common Share: In 1997, United adopted FASB Statement No. 128 (SFAS No. 128), "Earnings Per Share." SFAS No. 128 requires the presentation of basic and diluted earnings per common share for all periods. 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 317,876, 154,414 and 168,264 shares in 1997, 1996 and 1995, respectively. Prior period earnings per common share amounts have been restated to reflect the adoption of SFAS No. 128. The results of this change were insignificant. New Accounting Standards: In June 1996, the FASB issued Statement No. 125, (SFAS No. 125), "Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities," which supersedes SFAS No. 76, "Extinguishment of Debt." SFAS No. 125 prescribes the accounting treatment for securitization transactions based on a financial components approach with an emphasis on physical control, such as the ability to pledge or exchange the securitized assets, while prior rules emphasize the economic risks or rewards of ownership of the assets. Additionally, SFAS No. 125 applies to repurchase agreements, securities lending, loan participations, and other financial component transfers and exchanges. Under the financial components approach of SFAS No. 125, both the transferor and transferee will recognize on its balance sheet the assets and liabilities, or components thereof, that it controls and derecognize from the balance sheet the assets and liabilities that were surrendered or extinguished in the transfer. The new rules have not had a material effect on United's financial position and results of operations. In June 1997, the FASB issued Statement No. 130, (SFAS No. 130), "Reporting Comprehensive Income." This statement, which is effective for years beginning after December 15, 1997, requires companies to report and display comprehensive income and its components. United is reviewing the components of comprehensive income as outlined by SFAS No. 130 and plans to disclose the information as required. In June 1997, the FASB issued Statement No. 131, (SFAS No. 131), "Disclosures about Segments of an Enterprise and Related Information." SFAS No. 131 provides guidance for the way public enterprises report information about operating segments in annual financial statements and requires selected information about operating segments in interim financial reports. It also requires certain related disclosures about products and services, geographic areas and major customers. The segment and other information disclosures are required for years beginning after December 15, 1997. United is currently reviewing its methodology used for determining operating segment results. These standards, when implemented, are not expected to materially impact the reported financial position or results of operations of United. Note B--Mergers and Acquisitions United has entered into an agreement with George Mason Bankshares, Inc., Fairfax, Virginia ("George Mason") to exchange 1.70 shares, as adjusted for the 100% stock dividend, of United common stock for each of the 5,277,301 common shares of George Mason. The transaction will be accounted for using the pooling of interests method of accounting. It is anticipated that the proposed merger will be consummated early during the second quarter of 1998. Additionally, United has entered into an agreement with Fed One Bancorp, Inc., Wheeling, West Virginia ("Fed One") to exchange 1.50 shares, as adjusted for the 100% stock dividend, of United common stock for each of the 91 2,373,181 common shares of Fed One. The transaction will be accounted for using the pooling of interests method of accounting. It is anticipated that the proposed merger will be consummated early during the fourth quarter of 1998. The following represents unaudited selected pro forma financial information regarding the effects of the transactions as though United, George Mason and Fed One had been combined for all periods presented:
(In thousands, except per share data) United United, and George George Mason and George Mason Fed Fed One United Mason Combined One Combined -------- ------- --------- ------- -------- 1997 Net interest income $105,753 $31,945 $137,698 $11,632 $149,330 Net income 40,939 8,080 49,019 3,242 52,261 Earnings per common share: Basic $1.37 $1.58 $1.27 $1.43 $1.24 Diluted $1.35 $1.54 $1.25 $1.36 $1.22 1996 Net interest income $ 99,173 $27,463 $126,636 $11,749 $138,385 Net income 30,512 6,883 37,395 2,324 39,719 Earnings per common share: Basic $1.01 $1.38 $0.97 $0.97 $0.94 Diluted $1.00 $1.35 $0.96 $0.94 $0.93 1995 Net interest income $ 95,648 $24,170 $119,818 $11,697 $131,515 Net income 32,817 6,292 39,109 3,250 42,359 Earnings per common share: Basic $1.10 $1.30 $1.02 $1.24 $1.01 Diluted $1.09 $1.28 $1.02 $1.20 $1.00
The data set forth above is not necessarily indicative of the results of operations or the combined financial position of United that would have resulted had the merger been consummated at the beginning of the applicable periods indicated, nor is it necessarily indicative of the results of operations in future periods or the future financial position of the combined entities. On August 1, 1997, United acquired 100% of the outstanding common stock of First Patriot Bankshares Corporation, Reston, Virginia ("Patriot") for cash consideration of approximately $39.2 million. The transaction has been accounted for using the purchase method of accounting. At consummation, Patriot had assets of approximately $211 million, loans of $135 million, deposits of $154 million and shareholders' equity of $11 million, all of which reflected purchase accounting adjustments. The results of operations of Patriot, which are not significant, have been included in the consolidated results of operations from the date of acquisition. 92 Notes to Consolidated Financial Statements Note C--Investment Securities The amortized cost and estimated fair values of securities available for sale are summarized as follows:
(In thousands) December 31, 1997 ------------------------------------------------------ Gross Gross Estimated Amortized Unrealized Unrealized Fair Cost Gains Losses Value --------- ---------- ---------- --------- U.S. Treasury securities and obligations of U.S. Government corporations and agencies $142,688 $ 500 $239 $142,949 Mortgage-backed securities 102,955 1,527 20 104,462 Marketable equity securities 4,300 6,741 11,041 Other 15,496 80 15,416 -------- ------ ---- -------- Total $265,439 $8,768 $339 $273,868 ======== ====== ==== ========
(In thousands) December 31, 1996 ----------------------------------------------------- Gross Gross Estimated Amortized Unrealized Unrealized Fair Cost Gains Losses Value --------- ---------- ---------- --------- U.S. Treasury securities and obligations of U.S. Government corporations and agencies $115,018 $ 443 $ 444 $115,017 Mortgage-backed securities 24,982 92 565 24,509 Marketable equity securities 3,655 2,158 5,813 Other 16,506 7 223 16,290 -------- ------ ------ -------- Total $160,161 $2,700 $1,232 $161,629 ======== ====== ====== ========
The amortized cost and estimated fair value of securities available for sale at December 31, 1997, by contractual maturity are as follows: (In thousands) Estimated Amortized Fair Cost Value --------- --------- Due in one year or less $ 36,604 $ 37,043 Due after one year through five years 86,721 87,031 Due after five years through ten years 20,861 20,868 Due after ten years 116,953 117,885 Marketable equity securities 4,300 11,041 -------- -------- Total $265,439 $273,868 ======== ======== The table above includes $104,462,000 of mortgage-backed securities at estimated fair value with an amortized cost of $102,955,000. 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 $96,000 and $194,000, respectively, in 1996. There were no sales in 1997 and 1995. 93 Note C--Investment Securities (continued) The amortized cost and estimated fair values of securities held to maturity are summarized as follows:
(In thousands) December 31, 1997 --------------------------------------------- Gross Gross Estimated Amortized Unrealized Unrealized Fair Cost Gains Losses Value --------- ---------- ---------- --------- U.S. Treasury securities and obligations of U.S. Government corporations and agencies $ 97,847 $ 551 $ 22 $ 98,376 State and political subdivisions 32,650 1,323 8 33,965 Mortgage-backed securities 41,874 154 107 41,921 Other 6,923 6,923 -------- ------ ---- -------- Total $179,294 $2,028 $137 $181,185 ======== ====== ==== ========
(In thousands) December 31, 1996 --------------------------------------------- Gross Gross Estimated Amortized Unrealized Unrealized Fair Cost Gains Losses Value --------- ---------- ---------- --------- U.S. Treasury securities and obligations of U.S. Government corporations and agencies $ 77,704 $2,131 $ 87 $ 79,748 State and political subdivisions 36,136 1,487 32 37,591 Mortgage-backed securities 54,977 250 754 54,473 Other 1,885 1,885 -------- ------ ---- -------- Total $170,702 $3,868 $873 $173,697 ======== ====== ==== ========
The amortized cost and estimated fair value of debt securities held to maturity at December 31, 1997 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. (In thousands) Estimated Amortized Fair Cost Value --------- --------- Due in one year or less $ 18,825 $ 18,887 Due after one year through five years 52,448 53,033 Due after five years through ten years 78,794 79,399 Due after ten years 29,227 29,866 -------- -------- Total $179,294 $181,185 ======== ======== The table above includes $41,874,000 of mortgage-backed securities with an estimated fair value of $41,921,000 at December 31, 1997. 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 $277,098,000 and $204,254,000 at December 31, 1997 and 1996, respectively. 94 Notes to Consolidated Financial Statements Note D--Loans Major classifications of loans are as follows: (In thousands) December 31 ------------------------ 1997 1996 --------- --------- Commercial, financial, and agricultural $ 368,654 $ 248,762 Real estate: Single family residential 929,490 953,000 Commercial 392,818 355,431 Construction 93,918 42,343 Other 43,406 19,748 Installment 232,191 232,004 ---------- ---------- 2,060,477 1,851,288 Loans held for sale 7,008 1,482 ---------- ---------- Total gross loans $2,067,485 $1,852,770 ========== ========== An analysis of the allowance for loan losses follows: (In thousands) Year Ended December 31 ------------------------------ 1997 1996 1995 ------- ------- ------- Balance at beginning of year $22,283 $22,545 $22,304 Allowance of purchased subsidiaries 2,695 1,017 Provision for loan losses 3,100 2,610 2,320 ------- ------- ------- 28,078 25,155 25,641 ------- ------- ------- Loans charged off 3,819 3,524 3,624 Recoveries 527 652 528 ------- ------- ------- Net charge offs 3,292 2,872 3,096 ------- ------- ------- Balance at end of year $24,786 $22,283 $22,545 ======= ======= ======= United's lending is centered in the West Virginia and Virginia markets and is focused on retail consumer and small and middle market commercial lending. United has commercial real estate loans, including owner occupied, income producing real estate and land development loans, of approximately $392,818,000 and $355,431,000 as of December 31, 1997 and 1996, 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. 95 Note D--Loans (continued) At December 31, 1997, the recorded investment in loans that were considered to be impaired was $12,602,000 (of which $4,156,000 was on a nonaccrual basis). Included in this amount was $5,319,000 of impaired loans for which the related allowance for credit losses was $1,438,000 and $7,283,000 of impaired loans that did not have an allowance for credit losses. At December 31, 1996, the recorded investment in loans that were considered to be impaired was $10,317,000 (of which $4,361,000 was on a nonaccrual basis). Included in this amount was $5,631,000 of impaired loans for which the related allowance for credit losses was $1,451,000 and $4,686,000 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, 1997, 1996 and 1995 was approximately $11,482,000, $9,442,000 and $9,545,000, respectively. The amount of interest income that would have been recorded on impaired loans under the original terms was $1,471,000, $1,464,000 and $1,045,000 for the years ended December 31, 1997, 1996 and 1995, respectively. For the years ended December 31, 1997, 1996 and 1995, United recognized interest income on those impaired loans of approximately $907,000, $638,000 and $412,000, 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 $83,660,000 and $72,367,000 at December 31, 1997 and 1996, respectively. During 1997, $36,929,000 of new loans were made, repayments totaled $30,045,000, and other changes due to the change in composition of United's board members and executive officers approximated $4,409,000. Note E--Bank Premises and Equipment and Leases Bank premises and equipment are summarized as follows: (In thousands) December 31 --------------------- 1997 1996 ------- ------- Land $ 8,921 $ 7,892 Building and improvements 35,540 34,414 Leasehold improvements 5,002 5,784 Furniture, fixtures, and equipment 31,701 30,093 ------- ------- 81,164 78,183 Less allowance for depreciation and amortization 41,674 44,633 ------- ------- Net bank premises and equipment $39,490 $33,550 ======= ======= 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 operating leases approximated $2,019,000, $1,908,000 and $1,822,000 for the years ended December 31, 1997, 1996, and 1995, respectively. 96 Notes to Consolidated Financial Statements Note E--Bank Premises and Equipment and Leases (continued) 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, 1997, consisted of the following: (In thousands) Year Amount ---- ------- 1998 $ 2,333 1999 2,196 2000 1,801 2001 1,766 2002 1,368 Thereafter 1,236 ------- Total minimum lease payments $10,700 ======= Note F--Deposits The book value of deposits consisted of the following: (In thousands) December 31 -------------------------- 1997 1996 ---------- ---------- Noninterest-bearing checking $ 317,930 $ 261,048 Interest-bearing checking 52,506 62,783 Regular savings 288,504 293,755 Money market accounts 421,348 362,223 Time deposits under $100,000 838,094 709,309 Time deposits over $100,000 187,665 138,436 ---------- ---------- Total deposits $2,106,047 $1,827,554 ========== ========== Interest paid on deposits and borrowings approximated $82,959,000, $72,568,000 and $63,167,000 in 1997, 1996 and 1995, respectively. At December 31, 1997, the scheduled maturities of time deposits are as follows: (In thousands) Year Amount ---- ---------- 1998 $ 668,860 1999 297,332 2000 37,119 2001 9,481 2002 and thereafter 12,967 ---------- Total minimum lease payments $1,025,759 ========== 97 Note F--Deposits (continued) 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 $21,253,000 and $18,335,000 at December 31, 1997 and 1996, respectively. Note G--Borrowings United's lead subsidiary, United National Bank (UNB), is a member of the Federal Home Loan Bank of Pittsburgh (FHLB). Membership in the FHLB makes available short-term and long-term borrowings from collateralized advances. At December 31, 1997, United had approximately $549,633,000 of available borrowings in the form of collateralized advances from the FHLB at prevailing interest rates. At December 31, 1997, $139,000,000 of FHLB advances with an interest rate of 6.50% had an overnight maturity. Additionally, $3,695,000 of FHLB advances with a weighted average interest rate of 6.06% are scheduled to mature from fourteen to twenty years. UNB also has various unused lines of credit available from certain of its correspondent banks in the aggregate amount of $128,000,000. These lines of credit, which bear interest at prevailing market rates, permit UNB to borrow funds in the overnight market, and are renewable annually subject to certain conditions. At December 31, 1997 and 1996, borrowings and the related weighted average interest rate were as follows:
(In thousands) 1997 1996 --------------------- ---------------------- Weighted Weighted Average Average Amount Rate Amount Rate -------- -------- -------- -------- Federal funds purchased $ 20,961 6.73% $ 4,491 6.81% Securities sold under agreements to repurchase 109,909 4.37% 71,091 4.16% FHLB advances 142,695 6.49% 132,631 6.63% -------- -------- Total $273,565 $208,213 ======== ========
Information concerning securities sold under agreements to repurchase (in thousands) is summarized as follows: 1997 1996 -------- ------- Average balance during the year $ 95,565 $66,463 Average interest rate during the year 4.24% 4.04% Maximum month-end balance during the year $123,949 $79,664 98 Notes to Consolidated Financial Statements Note H--Income Taxes The income tax provisions included in the consolidated statements of income are summarized as follows: (In thousands) Year Ended December 31 ------------------------------------ 1997 1996 1995 ------- ------- ------- Current expense: Federal $20,163 $15,271 $15,313 State 947 1,429 2,328 Deferred expense (benefit): Federal and State 387 (9) 141 ------- ------- ------- Income taxes $21,497 $16,691 $17,782 ======= ======= ======= 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:
(In thousands) Year Ended December 31 ---------------------------------------------------------------- 1997 1996 1995 ----------------- ------------------ ------------------ Amount % Amount % Amount % ------- ---- ------- ---- ------- ---- Tax on income before taxes at statutory federal rate $21,853 35.0% $16,521 35.0% $17,710 35.0% Plus: State income taxes net of federal tax benefits 632 1.0 929 2.0 1,619 3.2 ------- ---- ------- ---- ------- ---- 22,485 36.0 17,450 37.0 19,329 38.2 Increase (decrease) resulting from: Tax-exempt interest income (1,410) (2.3) (1,464) (3.1) (1,683) (3.3) Other items-net 422 0.7 705 1.5 136 0.2 ------- ---- ------- ---- ------- ---- Income taxes $21,497 34.4% $16,691 35.4% $17,782 35.1% ======= ==== ======= ==== ======= ====
Federal income tax benefit applicable to securities transactions approximated $34,000 in 1996. There were no securities transactions in 1997 and 1995. Income taxes paid approximated $21,876,000, $14,035,000 and $19,052,000 in 1997, 1996 and 1995, respectively. Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. Significant 99 Note H--Income Taxes (continued) components of United's deferred tax assets and liabilities (included in other assets) at December 31, 1997 and 1996 are as follows: (In thousands) 1997 1996 ------- ------- Deferred tax assets: Allowance for loan losses $ 9,321 $ 8,889 Accrued benefits payable 1,366 1,600 Other accrued liabilities 2,874 2,213 Net deferred loan fees 295 488 Other real estate owned 117 69 Other 363 ------- ------- Total deferred tax assets 13,973 13,622 ------- ------- Deferred tax liabilities: Premises and equipment 2,498 1,784 Core deposit intangibles 887 417 Income tax allowance for loan losses 1,462 1,462 Prepaid assets 169 149 Deferred mortgage points 1,663 1,582 Securities available for sale 2,950 514 Other 492 441 ------- ------- Total deferred tax liabilities 10,121 6,349 ------- ------- Net deferred tax assets $ 3,852 $ 7,273 ======= ======= Note I--Employee Benefit Plans United has a defined benefit retirement plan covering substantially all employees. The benefits are based on years of service and the average of the employee's highest five consecutive plan years of basic compensation paid during the ten plan years preceding the date of determination. United's funding policy is to contribute annually the maximum amount that can be deducted for federal income tax purposes. Contributions are intended to provide not only for benefits attributed to service to date, but also for those expected to be earned in the future. Net periodic pension cost included the following components:
(In thousands) Year Ended December 31 --------------------------------------- 1997 1996 1995 ------- ------- ------- Service cost $ 739 $ 861 $ 718 Interest cost on projected benefit obligation 1,451 1,439 1,263 Actual return on plan assets (4,402) (2,849) (3,499) Net amortization and deferral 2,395 1,014 1,852 ------- ------- ------- Net periodic pension cost $ 183 $ 465 $ 334 ======= ======= =======
100 Notes to Consolidated Financial Statements Note I--Employee Benefit Plans--continued The following table sets forth the funded status of United's defined benefit plan and amounts recognized in the respective consolidated balance sheets:
(In thousands) December 31 -------------------------- 1997 1996 -------- -------- Vested benefit obligation $(16,986) $(15,715) Nonvested benefit obligation (452) (408) -------- -------- Accumulated benefit obligation (17,438) (16,123) Effect of future pay increases (4,472) (5,046) -------- -------- Projected benefit obligation for services rendered to date (21,910) (21,169) Plan assets at fair value, primarily marketable securities 27,040 23,109 -------- -------- Excess of plan assets over projected benefit obligation 5,130 1,940 Unrecognized net gain from past experience different from that assumed and effects of changes in assumptions (5,318) (1,877) Unrecognized prior service cost 325 388 Unrecognized transition asset (695) (826) -------- -------- Accrued pension liability included in other liabilities $ (558) $ (375) ======== ========
At December 31, 1997, the weighted average discount rate and rate of increase in future compensation levels used in determining the actuarial present value of the projected benefit obligation was 7.25% and 4.5%. At December 31, 1996, the weighted average discount rate and rate of increase in future compensation levels used in determining the actuarial present value of the projected benefit obligation was 7.5% and 4.5%. The weighted average expected long-term rate of return on United's plan assets was 9.00% for the years ended December 31, 1997, 1996 and 1995. The United Savings and Stock Investment Plan (the Plan) is a deferred compensation plan under Section 401(k) of the Internal Revenue Code. All employees who complete one year of service are eligible to participate in the Plan. Each participant may contribute from 1% to 10% of pre-tax earnings to his or her account which may be invested in any of four investment options chosen by the employee. United matches 100% of the first 2% of salary deferred and 25% of the next 2% of salary deferred with United common stock. Vesting is 100% for employee deferrals and the United match at the time the employee makes his/her deferral. United's expense relating to the Plan approximated $410,000, $330,000 and $297,000 in 1997, 1996 and 1995, respectively. The assets of United's defined benefit plan and 401(k) Plan each include investments in United common stock. At December 31, 1997, the combined plan assets included 679,518 shares of United common stock with an approximate fair value of $16,223,000. 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. 101 Note I--Employee Benefit Plans (continued) United has three incentive stock option plans for key employees, the 1988, 1991 and 1996 plans. The plans provide for the granting of stock options of up to 200,000, 1,000,000 and 1,200,000 shares of common stock, respectively. No further grants will be made under the 1988 and 1991 plans. At December 31, 1997, 779,122 options were available for future grant under the 1996 plan. Under the provisions of the plans, the option price per share shall not be less than the fair market value of United's common stock on the date of grant. Accordingly, no compensation expense is recognized for these options. The following table summarizes information about stock options outstanding at December 31, 1997:
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 ---------------- ----------- ----------- --------- ----------- --------- $ 5.50 to $ 7.00 40,600 3 years $ 6.62 40,600 $ 6.62 $ 6.88 to $15.00 610,232 6 years 12.18 565,056 11.95 $14.88 to $22.00 417,374 9 years 18.56 99,844 14.88
The following is a summary of activity of United's Incentive Stock Option Plans:
Stock Options Range of Exercise Prices --------- ------------------------ Outstanding at January 1, 1995 769,350 $13.50 $ 5.50 Granted 200,000 15.00 Exercised 89,000 13.50 5.50 Forfeited 18,900 13.50 9.88 --------- Outstanding at December 31, 1995 861,450 15.00 5.50 Granted 218,972 14.88 Exercised 96,050 13.50 5.50 Forfeited 4,130 15.00 11.50 --------- Outstanding at December 31, 1996 980,242 15.00 5.50 Granted 215,500 22.00 Exercised 91,136 15.00 6.63 Forfeited 36,400 15.00 11.50 --------- Outstanding at December 31, 1997 1,068,206 $22.00 $ 5.50 ========= Exercisable at: December 31, 1995 527,274 $13.50 $ 5.50 December 31, 1996 619,998 $15.00 $ 5.50 December 31, 1997 705,500 $15.00 $ 5.50
102 Notes to Consolidated Financial Statements Note I--Employee Benefit Plans--continued 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. Pro forma net income and earnings per share, determined as if United had recognized compensation expense for its employee stock options under the fair value method, have not been presented because the effect of applying the fair value method prescribed by SFAS 123 to the 1997, 1996 and 1995 options awarded produces amounts that are not materially different from amounts reported herein. The estimated fair value of the options at the date of grant was $10.12, $5.88, and $5.69 for the options granted during 1997, 1996, and 1995, 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 1997, 1996, and 1995, respectively: risk-free interest rates of 6.44%, 6.78%, and 6.24%; dividend yields of 3.08%, 4.10%, and 4.00%; volatility factors of the expected market price of United's common stock of 0.182, 0.185, and 0.185; and a weighted average expected option life of 7 years. United provides postemployment and postretirement benefits for certain employees at subsidiaries acquired in prior years. United accounts for such costs as expense when paid. Accounting for such costs when paid does not produce results materially different from those which would result if such costs were accrued during the period of employee service. United does not anticipate providing postemployment or postretirement benefits to its currently active employees after employment or retirement except on a fully contributory basis. Note J--Commitments and Contingent Liabilities United is a party to financial instruments with off-balance-sheet risk in the normal course of business to meet the financing needs of its customers and to alter its own exposure to fluctuations in interest rates. These financial instruments include loan commitments, standby letters of credit, forward contracts for the delivery of mortgage-backed securities and interest rate swap agreements. The instruments involve, to varying degrees, elements of credit and interest rate risk in excess of the amount recognized in the financial statements. United's maximum exposure to credit loss in the event of nonperformance by the counterparty to the financial instrument for the loan commitments and standby letters of credit is the contractual or notional amount of those instruments. United uses the same policies in making commitments and conditional obligations as it does for on-balance sheet instruments. Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the commitment contract. Commitments generally have fixed expiration dates or other termination clauses and may require the payment of a fee. Since many of the commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. The amount of collateral obtained, if deemed necessary upon the extension of credit, is based on management's credit evaluation of the counterparty. United had approximately $455,767,000 and $337,582,000 of loan commitments outstanding as of December 31, 1997 and 1996, 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 $36,243,000 and $24,837,000 as of December 31, 1997 and 1996, respectively. At December 31, 1997, United had open commitments amounting to approximately $2,000,000 to sell mortgage-backed securities with varying settlement dates generally not extending beyond March 1998. As such, United is 103 Note J--Commitments and Contingent Liabilities (continued) not exposed to significant risk nor will it derive any significant benefit from changes in interest rates on the price of the mortgage loan inventory, net of gains or losses of associated hedge positions. Management does not anticipate any material losses as a result of these loan commitments, standby letters of credit and forward contracts for the delivery of mortgage-backed securities. In the normal course of business, United and its subsidiaries are currently involved in various legal proceedings. Management is vigorously pursuing all its legal and factual defenses and, after consultation with legal counsel, believes that all such litigation will be resolved with no material effect on United's financial position or results of operations. Note K--United Bankshares, Inc. (Parent Company Only) Financial Information Condensed Balance Sheets
(In thousands) December 31 -------------------- 1997 1996 ------- -------- Assets Cash $ 6,834 $ 12,958 Securities available for sale 16,742 10,813 Securities held to maturity 1,521 1,520 Investment in subsidiaries: Bank subsidiaries 250,087 238,902 Non-bank subsidiaries 1,303 1,264 Loans 14,300 Other assets 1,297 272 -------- -------- Total Assets $292,084 $265,729 ======== ======== Liabilities and Shareholders' Equity Accrued expenses and other liabilities $ 12,646 $ 7,215 Shareholders' equity (including a net unrealized holding gain of $5,479 and $954 on securities available for sale at December 31, 1997 and 1996, respectively) 279,438 258,514 -------- -------- Total Liabilities and Shareholders' Equity $292,084 $265,729 ======== ========
104 Notes to Consolidated Financial Statements Note K--United Bankshares, Inc. (Parent Company Only) Financial Information (continued) Condensed Statements of Income
(In thousands) Year Ended December 31 ----------------------------------------- 1997 1996 1995 ------- ------- ------- Income Dividends from bank subsidiaries $ 69,637 $17,847 $26,496 Interest and fees on loans 85 Management fees: Bank subsidiaries 3,476 3,467 3,018 Non-bank subsidiaries 12 12 12 Other income 707 557 268 -------- ------- ------- Total Income 73,917 21,883 29,794 Expenses Operating expenses 5,516 4,725 4,606 -------- ------- ------- Income Before Income Taxes and (Excess Dividends) Equity in Undistributed Net Income of Subsidiaries 68,401 17,158 25,188 Applicable income tax benefit (424) (12) (269) -------- ------- ------- Income Before (Excess Dividends) Equity in Undistributed Net Income of Subsidiaries 68,825 17,170 25,457 Equity in (excess dividends) undistributed net income of subsidiaries: Bank subsidiaries (27,925) 13,302 7,349 Non-bank subsidiaries 39 40 11 -------- ------- ------- Net Income $ 40,939 $30,512 $32,817 ======== ======= =======
105 Note K--United Bankshares, Inc. (Parent Company Only) Financial Information (continued) Condensed Statements of Cash Flows
(In thousands) Year Ended December 31 ----------------------------------------- 1997 1996 1995 -------- -------- -------- Operating Activities: Net income $ 40,939 $ 30,512 $ 32,817 Adjustments to reconcile net income to net cash provided by operating activities: Equity in excess dividends (undistributed net income) of subsidiaries 27,886 (13,342) (7,360) Depreciation and net amortization 11 26 33 Net gain on sales of investment securities (24) Net change in other assets and liabilities 2,276 (106) 790 -------- -------- -------- Net Cash Provided by Operating Activities 71,112 17,066 26,280 -------- -------- -------- Investing Activities Net purchases of securities available for sale (1,346) 1,585 (8,439) Purchase of loans (14,300) Increase in investment in subsidiaries (1) (2,400) Cash paid in acquisition of subsidiary (37,562) (5,280) -------- -------- -------- Net Cash (Used in) Provided by Investing Activities (53,209) 1,585 (16,119) -------- -------- -------- Financing Activities Cash dividends paid (19,831) (16,541) (10,273) Pre-merger dividends of pooled company (382) (2,729) Acquisition of treasury stock (5,754) (3,395) (1,273) Proceeds from the sale of treasury stock 606 Proceeds from exercise of stock options 952 851 666 Purchase of fractional shares (4) -------- -------- -------- Net Cash Used in Financing Activities (24,027) (19,471) (13,609) -------- -------- -------- Decrease in Cash and Cash Equivalents (6,124) (820) (3,448) Cash and Cash Equivalents at Beginning of Year 12,958 13,778 17,226 -------- -------- -------- Cash and Cash Equivalents at End of Year $ 6,834 $ 12,958 $ 13,778 ======== ======== ========
106 Notes to Consolidated Financial Statements Note L--Other Income and Expense The following details certain items of other income and expense for the periods indicated:
(In thousands) Year Ended December 31 ----------------------------------- 1997 1996 1995 ------ ------ ------ Other income: Service charges and fees on deposits $8,672 $8,014 $7,063 Bankcard 2,717 2,048 1,739 Net income (loss) from mortgage banking operations 3,135 (431) 1,012 Loss on sales of investment securities (98) Other income 528 234 927 Other expense: Data processing $2,146 $2,974 $2,548 FDIC insurance expense 119 2,986 2,364 Legal and consulting 871 2,138 2,595 Advertising 1,618 2,173 1,747 Goodwill amortization 2,750 1,915 1,551 Equipment expense 3,512 3,191 3,021
Note M--Regulatory Matters The subsidiary banks are required to maintain average reserve balances with their respective Federal Reserve Bank. The average amount of those reserve balances for the year ended December 31, 1997, was approximately $23,698,000. 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 1998, the retained net profits available for distribution to United Bankshares, Inc., as dividends without regulatory approval, are approximately $3,876,000, 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 $13,475,000 at December 31, 1997, 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 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 107 Note M--Regulatory Matters (continued) of Tier I capital, as defined, to average assets, as defined. Management believes, as of December 31, 1997, that United exceeds all capital adequacy requirements to which it is subject. As of December 31, 1997, 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 have changed United's category. United's and United's lead bank's, United National Bank, capital amounts (in thousands of dollars) and ratios are presented in the following table.
Actual ------------------ Amount Ratio ------- ----- As of December 31, 1997: Total Capital (to Risk- Weighted Assets): United Bankshares $261,646 13.5% United National Bank 204,907 12.5% Tier I Capital (to Risk- Weighted Assets): United Bankshares 237,342 12.2% United National Bank 184,451 11.3% Tier I Capital (to Average Assets): United Bankshares 237,342 9.2% United National Bank 184,451 8.1% As of December 31, 1996: Total Capital (to Risk- Weighted Assets): United Bankshares $263,759 16.5% United National Bank 231,697 15.2% Tier I Capital (to Risk- Weighted Assets): United Bankshares 243,827 15.3% United National Bank 212,635 13.9% Tier I Capital (to Average Assets): United Bankshares 243,827 10.8% United National Bank 212,635 9.8%
For Capital To Be Well Adequacy Purposes Capitalized ------------------------------------------ ------------------------------------------- Amount Ratio Amount Ratio ------- ----- ------- ----- As of December 31, 1997: Total Capital (to Risk- Weighted Assets): United Bankshares $155,546 (greater than or equal to)8.0% $194,433 (greater than or equal to)10.0% United National Bank 130,917 (greater than or equal to)8.0% 163,647 (greater than or equal to)10.0% Tier I Capital (to Risk- Weighted Assets): United Bankshares 77,773 (greater than or equal to)4.0% 116,660 (greater than or equal to) 6.0% United National Bank 65,459 (greater than or equal to)4.0% 98,188 (greater than or equal to) 6.0% Tier I Capital (to Average Assets): United Bankshares 103,037 (greater than or equal to)4.0% 128,796 (greater than or equal to) 5.0% United National Bank 91,559 (greater than or equal to)4.0% 114,449 (greater than or equal to) 5.0% As of December 31, 1996: Total Capital (to Risk- Weighted Assets): United Bankshares $127,564 (greater than or equal to)8.0% $159,455 (greater than or equal to)10.0% United National Bank 122,000 (greater than or equal to)8.0% 152,500 (greater than or equal to)10.0% Tier I Capital (to Risk- Weighted Assets): United Bankshares 63,782 (greater than or equal to)4.0% 95,673 (greater than or equal to) 6.0% United National Bank 61,000 (greater than or equal to)4.0% 91,500 (greater than or equal to) 6.0% Tier I Capital (to Average Assets): United Bankshares 90,537 (greater than or equal to)4.0% 113,171 (greater than or equal to) 5.0% United National Bank 86,902 (greater than or equal to)4.0% 108,627 (greater than or equal to) 5.0%
108 Notes to Consolidated Financial Statements Note N--Fair Values of Financial Instruments The following methods and assumptions were used by United in estimating its fair value disclosures for financial instruments: Cash and Cash Equivalents: The carrying amounts reported in the balance sheet for cash and cash equivalents approximate those assets' fair values. Securities: The estimated fair values of securities are based on quoted market prices, where available. If quoted market prices are not available, fair values are based on quoted market prices of comparable instruments. Loans: The estimated fair values of variable-rate loans that reprice frequently with no significant change in credit risk are based on carrying values. The fair values of certain mortgage loans (e.g., one-to-four family residential), credit card loans, and other consumer loans are based on quoted market prices of similar loans sold in conjunction with securitization transactions, adjusted for differences in loan characteristics. The fair values of other loans (e.g., commercial real estate and rental property mortgage loans, commercial and industrial loans, financial institution loans, and agricultural loans) are estimated using discounted cash flow analyses, using interest rates currently being offered for loans with similar terms to borrowers of similar credit worthiness. Off-Balance Sheet Instruments: Fair values of United's loan commitments are based on fees currently charged to enter into similar agreements, taking into account the remaining terms of the agreements and the counterparties' credit standing. The estimated fair values of these commitments approximate their carrying values. The fair value of forward contracts for the delivery of mortgage-backed securities in connection with its mortgage banking activities is based upon quoted market prices or prices of similar instruments when available. Deposits: The fair values of demand deposits (e.g., interest and 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. 109 Note N--Fair Values of Financial Statements (continued) The estimated fair values of United's financial instruments are summarized below:
(In thousands) December 31, 1997 December 31, 1996 --------------------------- --------------------------- Carrying Fair Carrying Fair Amount Value Amount Value ---------- ---------- ---------- ---------- Cash and cash equivalents $ 90,172 $ 90,172 $ 89,520 $ 89,520 Securities available for sale 273,868 273,868 161,629 161,629 Securities held to maturity 179,294 181,185 170,702 173,505 Loans 2,035,701 2,052,751 1,825,322 1,835,619 Deposits 2,106,047 2,107,804 1,827,554 1,827,609 Short-term borrowings 130,870 130,870 75,582 75,582 FHLB borrowings 142,695 142,781 132,631 132,553
(In thousands) December 31, 1997 December 31, 1996 ------------------------- ------------------------- Notional Fair Notional Fair Amount Value Amount Value -------- ------- -------- ------- Off-Balance Sheet: Forward contracts related to mortgage banking operations $ 1,425 $ 1,426 6,000 6,022
Note O--Stock Split In November 1997, United's Board of Directors approved a two-for-one stock split effected in the form of a 100% stock dividend to be distributed on March 27, 1998, to shareholders of record as of March 13, 1998. The change in capital structure due to the dividend has been given retroactive effect in the December 31, 1997 balance sheet and all references to shares and per share data have been retroactively restated for the effect of the 100% stock dividend. 110 Notes to Consolidated Financial Statements Note P--Quarterly Financial Data (Unaudited) Quarterly financial data for 1997 and 1996 is summarized below:
(Dollars in thousands except per share data) 1st Quarter 2nd Quarter 3rd Quarter 4th Quarter ----------- ----------- ----------- ----------- 1997 Interest income $44,300 $45,345 $48,825 $51,782 Interest expense 19,158 19,948 21,953 23,440 Net interest income 25,142 25,397 26,872 28,342 Provision for loan losses 600 550 1,000 950 Income from mortgage banking operations 294 313 1,858 670 Other noninterest income 3,788 3,889 4,326 4,594 Noninterest expense 13,627 13,542 16,263 16,517 Income taxes 4,949 5,387 5,448 5,713 Net income 10,048 10,120 10,345 10,426 Per share data: Average shares outstanding (000s): Basic 30,071 29,898 29,906 29,960 Diluted 30,325 30,188 30,295 30,348 Net income per share: (1) Basic $0.33 $0.34 $0.35 $0.35 Diluted $0.33 $0.34 $0.34 $0.34 Dividends per share $0.16 $0.17 $0.17 $0.18 1996 Interest income $42,188 $41,527 $44,609 $44,034 Interest expense 17,697 17,436 18,865 19,187 Net interest income 24,491 24,091 25,744 24,847 Provision for loan losses 611 949 600 450 Income (loss) from mortgage banking operations 58 (1,963) 802 672 Other noninterest income 3,523 3,691 3,753 3,653 Noninterest expense 14,812 18,192 16,540 14,005 Income taxes (2) 4,560 5,414 1,936 4,781 Net income 8,089 1,264 11,223 9,936 Per share data: Average shares outstanding (000s): Basic 30,293 30,293 30,303 30,237 Diluted 30,436 30,445 30,459 30,426 Net income per share: (1) Basic $0.27 $0.04 $0.37 $0.33 Diluted $0.27 $0.04 $0.37 $0.33 Dividends per share $0.15 $0.15 $0.16 $0.16
(1) Earnings per share amounts have been restated to comply with SFAS No. 128. (2) In the second quarter of 1996, United recorded additional income tax expense of $3,086 due to the recapture of Eagle's bad debt reserve into taxable income. However, as a result of legislation enacted during the third quarter of 1996, United was relieved of the liability. 111 Selected Financial Data
(Dollars in thousands except per share data) Five Year Summary ------------------------------------------------------------------ 1997 1996 1995 1994 1993 -------- -------- -------- -------- -------- Summary of Operations: Total interest income $190,252 $172,358 $165,815 $147,637 $140,624 Total interest expense 84,499 73,185 70,167 55,672 55,037 Net interest income 105,753 99,173 95,648 91,965 85,587 Provision for loan losses 3,100 2,610 2,320 2,202 4,830 Other income 19,732 14,189 14,752 12,238 14,300 Other expense 59,949 63,549 57,481 55,908 56,107 Income taxes 21,497 16,691 17,782 15,709 12,482 Income before cumulative effect of accounting change 40,939 30,512 32,817 30,384 26,468 Net income 40,939 30,512 32,817 30,384 27,797 Cash dividends (2) 20,344 17,847 13,817 12,604 10,918 Per common share: (1) Income before cumulative effect of accounting change: Basic $1.37 $1.01 $1.10 $1.01 $0.88 Diluted 1.35 1.00 1.09 1.00 0.88 Net income: Basic $1.37 $1.01 $1.10 $1.01 $0.92 Diluted 1.35 1.00 1.09 1.00 0.92 Cash dividends (2) 0.68 0.62 0.59 0.53 0.48 Book value per share 9.33 8.57 8.23 7.55 7.11 Selected Ratios: Return on average shareholders' equity 15.28% 11.98% 13.86% 13.67% 13.41% Return on average assets 1.68% 1.35% 1.52% 1.44% 1.39% Dividend payout ratio (2) 49.69% 58.49% 49.21% 50.61% 50.30% Selected Balance Sheet Data: Average assets $2,433,421 $2,263,428 $2,162,760 $2,107,476 $2,006,875 Investment securities 453,162 332,331 321,019 372,069 439,699 Total loans 2,060,487 1,847,605 1,732,986 1,652,275 1,462,574 Total assets 2,699,790 2,326,877 2,210,230 2,170,340 2,035,452 Total deposits 2,106,047 1,827,554 1,774,599 1,714,190 1,699,131 Long-term borrowings 3,695 25,621 34,497 84,374 32,564 Total borrowings and other liabilities 314,305 240,809 186,397 230,516 122,274 Shareholders' equity 279,438 258,514 249,234 225,634 214,047
(1) All references to shares and per share data have been retroactively restated for the effect of a two-for-one stock split effected in the form of a 100% stock dividend distributed on March 27, 1998, to shareholders of record as of March 13, 1998. (2) Cash dividends are the amounts declared by United and do not include cash dividends of acquired subsidiaries prior to the dates of consummation. 112 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: 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. 1997 Compared to 1996 Overview In November 1997, United's Board of Directors approved a two-for-one stock split effected in the form of a 100% stock dividend that was distributed on March 27, 1998, to shareholders of record as of March 13, 1998. The change in capital structure due to the dividend has been given retroactive effect in the December 31, 1997, balance sheet and all references to shares and per share data have been retroactively restated for the effect of the dividend. On August 1, 1997, United acquired 100% of the outstanding common stock of First Patriot Bankshares Corporation, Reston, Virginia ("Patriot") for cash consideration of approximately $39.22 million. The transaction was accounted for using the purchase method of accounting and, accordingly, the following discussion includes the financial position and results of operations of Patriot from the effective merger date forward. At the time of consummation, Patriot had assets of approximately $211 million, securities available for sale of $37 million, loans, net of unearned income, of $135 million, other assets of $34 million (including $26 million of goodwill), deposits of $154 million and other liabilities of $57 million, all of which reflected purchase accounting adjustments. 113 Earnings Summary For the year ended December 31, 1997, net income increased 34.2% to $40,939,000. Net income per share of $1.35 for the year increased 35.0% from $1.00 in 1996. Dividends per share increased 9.7% from $0.62 in 1996 to a record level of $0.68 per share in 1997. This was the twenty-fourth consecutive year of dividend increases to shareholders. United's return on average assets of 1.68% for 1997 compared very favorably with regional and national peer grouping information provided by Wheat, First Securities, Inc. of 1.32% and 1.18%. United's return on average shareholders' equity of 15.28%, as compared with regional and national peer group information of 16.20% and 15.58%, is indicative of United's very strong capital levels. 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. United has strong core earnings driven by a net interest margin of 4.76% for 1997. Net interest income increased by $6.58 million or 6.63% for the year ended December 31, 1997 as compared to the same period for 1996. The provision for loan losses of $3.10 million increased $0.49 million or 18.77% when compared to the year ended December 31, 1996. Noninterest income, including income from mortgage banking operations, increased $5.54 million or 39.07% for 1997 when compared to 1996. Noninterest expenses decreased $3.60 million or 5.66% for 1997 compared to the same period in 1996. The effective tax rate for the year ended December 31, 1997 approximated 34.43% compared to 35.36% for 1996. Financial Condition Summary Total assets were $2.70 billion at December 31, 1997, up $372.91 million or 16.0% compared with year-end 1996. Loans, net of unearned income, reflected a $212.88 million increase from 1996 to 1997 due to the acquisition of Patriot and internal growth. Investment securities reflected a $120.83 million increase for 1997 as compared with year-end 1996 as a result of United's securitization of approximately $87 million of fixed rate mortgage loans during 1997. All other assets increased $41.05 million. Approximately $26 million of the increase was due to goodwill associated with the third quarter acquisition of Patriot. Total deposits grew $278.49 million or 15.2% from year-end 1996 due to United's offering of new deposit products introduced in late 1996 and the acquisition of Patriot during the third quarter of 1997. Since December 31, 1996, United has realized an increase of $221.61 million in interest-bearing deposits and a $56.88 million increase in noninterest-bearing deposits. United's short-term borrowings increased $55.29 million and its FHLB borrowings increased $10.06 million as United utilized these sources of funds to fund the cash acquisition of Patriot and to help fund loan growth. Accrued expenses and other liabilities increased $8.14 million or 25.0% since year-end 1996 as a result of the acquisition of Patriot and higher merger expenses. Shareholders' equity increased $20.92 million or 8.1% from December 31, 1996 to December 31, 1997. United continues to maintain an appropriate balance between capital adequacy and return to shareholders. At December 31, 1997, 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. 114 Management's Discussion and Analysis of Financial Condition and Results of Operations Net Interest Income Net interest income represents the primary component of United's earnings. It is the difference between interest and fee income from earning assets and interest expense incurred to fund these assets. Net interest income is impacted by changes in the volume and mix of interest-earning assets and interest-bearing liabilities, as well as changes in market interest rates. Such changes, and their impact on net interest income in 1997, are summarized below. For the years ended December 31, 1997 and 1996, net interest income approximated $105,753,000 and $99,173,000, respectively. On a tax-equivalent basis the net interest margin was strong at 4.76% in 1997 and 4.85% in 1996 which are well above national peer group margins of 4.06% in 1997 and 4.18% in 1996. Total interest income of $190,252,000 increased 10.4% in 1997 over 1996 as a result of higher volumes of interest-earning assets and slightly higher yields. Higher average loan volumes of approximately $119 million, resulting primarily from the acquisition of Patriot, contributed to the increase. From December 31, 1996 to December 31, 1997, United experienced a moderate increase in consumer loans of 5.4%, while commercial loans showed an increase of 31.5%. Mortgage loans decreased slightly from 1996 by 1.9% due mainly to the sale of real estate loans by United's mortgage banking subsidiary. Total interest expense increased $11,314,000 or 15.5% in 1997 compared to 1996. This increase was attributed primarily to United's acquisition of Patriot, competitive pricing of interest-bearing deposits in its markets and continued change in the retail deposit mix as customers shifted funds into products offering higher yields. United's average interest-bearing deposits increased by $138,647,000 or 9.0% in 1997, while its average FHLB advances decreased $16,628,000 or 16.8% and average short-term borrowings increased $30,275,000 or 34.8%. The average cost of funds, which increased from 4.25% in 1996 to 4.51% in 1997, reflected the general upward trend in United's market interest rates during 1997 due to competitive pressures. Provision for Loan Losses United evaluates the adequacy of the allowance for loan losses on a quarterly basis and its loan administration policies are focused upon the risk characteristics of the loan portfolio. United's process of 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. See Note D to the Consolidated Financial Statements for a discussion of concentrations of credit risk. Nonperforming loans were $15,498,000 at December 31, 1997 and $10,192,000 at December 31, 1996, an increase of 52.1%. This increase can be attributed to United's acquisition of approximately $2.5 million of nonperforming loans from the Patriot transaction in the third quarter of 1997 and decreasing consumer credit quality trends. Loans past due 90 days or more increased $5,511,000 or 94.5% during 1997; nonaccrual loans decreased $205,000 or 4.7% since year-end 1996. Nonperforming loans represented 0.57% of total assets at the end of 1997, as compared to 0.41% for United's national peer group. At year-end 1997 and 1996, the allowance for loan losses was 1.20% and 1.21% of total loans, net of unearned income. At December 31, 1997 and 1996, the ratio of the allowance for loan losses to nonperforming loans was 159.9% and 218.6%, respectively. Management believes that the allowance for loan losses of $24,786,000 at December 31, 1997, is adequate to provide for potential losses on existing loans based on information currently available. 115 For the years ended December 31, 1997 and 1996, the provision for loan losses was $3,100,000 and $2,610,000, respectively. The increase in the provision for 1997 when compared to 1996 was to conform the allowance for loan losses on Patriot's loan portfolio with United's loan valuation policies and in response to growth in the portfolio. The provision for loan losses charged to operations is based on management's evaluation of individual credits, past loan loss experience, and other factors which, in management's judgment, deserve recognition in estimating possible loan losses. Such other factors considered by management include growth and composition of the loan portfolio, known deterioration in certain classes of loans or collateral, trends in delinquencies and current economic conditions. Total net charge-offs were $3,289,000 in 1997 and $2,872,000 in 1996, which represents 0.17% and 0.16% of average loans for the respective years. United's ratio of net charge-offs to average loans was better than its peer group's ratio of 0.49% in 1997 and 0.23% in 1996. 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. At December 31, 1997, impaired loans were $12,602,000, an increase of $2,285,000 or 22.1% from the $10,317,000 in impaired loans at December 31, 1996, due primarily to the acquisition of Patriot in 1997. For further details, see Note D to the Consolidated Financial Statements. Other Income Noninterest income has been and will continue to be an important factor for improving United's profitability. Accordingly, management continues to evaluate areas where noninterest income can be enhanced. Noninterest income increased $5,543,000 or 39.1% for 1997 when compared to 1996. Other income consists of all revenues which are not included in interest and fee income related to earning assets. The increase in noninterest income for 1997 was primarily the result of $3,135,000 of income generated from the sale and servicing of loans by United's mortgage banking subsidiary as compared to a loss of $431,000 during the subsidiary's first year of operation in 1996. Contributing to this increase in income from the mortgage banking operations have been fees generated from the $87 million loan securitization in 1997. Service charges and fees from customer accounts increased $1,202,000 or 10.6% in 1997. This income includes charges and fees related to various banking services provided by United. The increase was primarily due to a combination of increased fees in bankcard accounts and an increased fee structure for sales of checking related products. Trust income increased $383,000 or 12.0% in 1997 due to an increased volume of trust business. Other Expense Just as management continues to evaluate areas where noninterest income can be enhanced, it strives to improve the efficiency of its operations and thus reduce operating costs. United's cost control efforts have been very successful resulting in an efficiency ratio of 46.5%, 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. In total, other expense decreased $3,600,000 or 5.7%. 116 Management's Discussion and Analysis of Financial Condition and Results of Operations Salaries and employee benefits expense decreased $1,359,000 or 4.7% in 1997 as compared to 1996. The higher salaries and benefits costs for 1996 were attributable to severance and benefit pay of displaced Eagle executive officers, employment contracts and employees at locations where United consolidated certain branches. As of December 31, 1997 and 1996, United employed 972 and 893 full-time equivalent employees, respectively. Net occupancy expense in 1997 slightly exceeded 1996 levels by $167,000 or 2.8% primarily due to the acquisition of Patriot, decreased rental income and an increase in building rental expense and higher depreciation and real property taxes for company-owned buildings. The overall changes in net occupancy expense for 1997 were insignificant with no material increase or decrease in any one expense category. Remaining other expense decreased $2,408,000 or 8.4% in 1997 compared to 1996. This decrease in other expense for 1997 related primarily to decreases in deposit insurance expense due to the 1996 SAIF assessment. Income Taxes For the year ended December 31, 1997, income tax expense approximated $21,497,000 compared to $16,691,000 for 1996. The increase of $4,806,000 or 28.8% for 1997 when compared to 1996 was primarily the result of increased pretax income in 1997. United's effective tax rate approximated 34.4% in 1997 and 35.4% in 1996. This decrease was due to effective tax planning strategies. At December 31, 1997, gross deferred tax assets totaled approximately $14.0 million. The allowance for loan losses and various accrued liabilities represent the most significant temporary differences. Quarterly Results The first and second quarters of 1997 showed large increases in earnings in comparison to those same two quarters of 1996 as United returned to more normal levels of core income and expenses after the Eagle merger. The 1996 results contained significant reengineering and merger-related and one-time special charges associated with the Eagle merger which distorted United's true financial performance. In the third quarter of 1997, United reported a decrease in earnings from the same period in 1996. Third quarter 1996 earnings were higher as a result of legislation which relieved United of $3,086,000 in income tax expense that related to the bad debt recapture associated with the Eagle merger. Net income for the fourth quarter of 1997 was $10,426,000, an increase of 4.9% from the $9,936,000 earned in the fourth quarter of 1996. On a per share basis, fourth quarter earnings were $0.34 per share in 1997 and $0.33 per share in 1996. The increase in earnings was due primarily to an increase in net interest income. Additional quarterly financial data for 1997 and 1996 may be found in Note P to the Consolidated Financial Statements. The Effect of Inflation United's income statements generally reflect the effects of inflation. Since interest rates, loan demand and deposit levels are impacted by inflation, the resulting changes in the interest sensitive assets and liabilities are included in net interest income. Similarly, operating expenses such as salaries, rents and maintenance include changing prices resulting from inflation. One item that would not reflect inflationary changes is depreciation expense. Subsequent to the acquisition of depreciable assets, inflation causes price levels to rise; therefore, historically presented dollar values do not reflect this inflationary condition. With inflation levels at relatively low levels and monetary and fiscal policies being implemented to keep the inflation rate increases within an acceptable range, management expects the impact of inflation would continue to be minimal in the near future. 117 Market Risk The objective of United's Asset/Liability Management function is to maintain consistent growth in net interest income within United's policy guidelines. This objective is accomplished through the management of balance sheet liquidity and interest rate risk exposures due to changes in economic condition, interest rate levels and customer preferences. Management considers interest rate risk to be United's most significant market risk. Interest rate risk is the exposure to adverse changes in the net interest income of United as a result of changes in interest rates. Consistency in United's earnings is largely dependent on the effective management of interest rate risk. United employs a variety of measurement techniques to identify and manage its exposure to changing interest rates. One such technique utilizes an earnings simulation model to analyze net interest income sensitivity to movements in interest rates. The model is based on actual cash flows and repricing characteristics for on and off-balance sheet instruments and incorporates market-based assumptions regarding the impact of changing interest rates on the prepayment rate of certain assets and liabilities. The model also includes executive management projections for activity levels in product lines offered by United. Assumptions based on the historical behavior of deposit rates and balances in relation to changes in interest rates are also incorporated into the model. These assumptions are inherently uncertain and, as a result, the model cannot precisely measure net interest income or precisely predict the impact of fluctuations in interest rates on net interest income. Actual results will differ from simulated results due to timing, magnitude and frequency of interest rate changes as well as changes in market conditions and management strategies. Interest sensitive assets and liabilities are defined as those assets or liabilities that mature or are repriced within a designated time-frame. The principal function of interest rate risk management is to maintain an appropriate relationship between those assets and liabilities that are sensitive to changing market interest rates. United closely monitors the sensitivity of its assets and liabilities on an on-going basis and projects the effect of various interest rate changes on its net interest margin. The difference between rate sensitive assets and rate sensitive liabilities for specified periods of time is known as the "GAP." As shown in the interest rate sensitivity gap table in this section, United was liability sensitive (excess of liabilities over assets) in the one year horizon. On the surface, this would indicate that rising market interest rates would reduce United's earnings and declining market interest rates would increase earnings. United, however, has not experienced the kind of earnings volatility indicated from the cumulative gap. This is because a significant portion of United's retail deposit base does not reprice on a contractual basis. Management has estimated, based upon historical analyses, that savings deposits are less sensitive to interest rate changes than are other forms of deposits. The GAP table presented herein has been adapted to show the estimated differences in interest rate sensitivity which result when the retail deposit base is assumed to reprice in a manner consistent with historical trends. (See "Management Adjustments" in the GAP table). Using these estimates, United was asset sensitive in the one year horizon in the amount of $63,198,000 or 2.50% of the cumulative gap to related earning assets. To aid in interest rate management, United's lead bank, UNB, is a member of the Federal Home Loan Bank of Pittsburgh (FHLB). The use of FHLB advances provides United with a low risk means of matching maturities of earning assets and interest-bearing funds to achieve a desired interest rate spread over the life of the earning assets. 118 Management's Discussion and Analysis of Financial Condition and Results of Operations Interest rate risk management focuses on maintaining consistent growth in net interest income within Board-approved policy limits. United's Asset/Liability Management Committee (ALCO), which includes senior management representatives and reports to the Board of Directors, monitors and manages interest rate risk to maintain an acceptable level of change to net interest income as a result of changes in interest rates. Policy established for interest rate risk is stated in terms of the change in net interest income over a twelve month horizon given an immediate and sustained increase or decrease in interest rates. The current limits approved by the Board of Directors are plus or minus 10% for each 100 basis point increase or decrease in interest rates. The following table shows United's estimated earnings sensitivity profile after management's adjustments as of December 31, 1997: Change in Interest Rates Percentage Change in (basis points) Net Interest Income -------------- -------------------- +200 1.94% -200 -2.70% Given an immediate, sustained 200 basis point upward shock to the yield curve used in the simulation model, it is estimated net interest income for United would increase by 1.94% over one year. A 200 basis point immediate, sustained downward shock in the yield curve would decrease net interest income by an estimated 2.70% over one year. All of these estimated changes in net interest income are within the policy guidelines established by the Board of Directors. 119 The following table shows the interest rate sensitivity GAP as of December 31, 1997:
Interest Rate Sensitivity Gap Days --------------------------------- Total 1 - 5 Over 5 (Dollars in thousands) 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 $ 9,725 $ 9,725 $ 9,725 Investment and marketable equity securities: Taxable 19,990 $ 3,460 $ 1,818 25,268 $ 139,439 $255,805 420,512 Tax-exempt 1,090 3,196 4,286 9,158 19,206 32,650 Loans, net of unearned income 666,093 165,950 307,717 1,139,760 615,057 305,670 2,060,487 --------- --------- --------- ---------- --------- -------- ---------- Total Interest-Earning Assets $ 695,808 $ 170,500 $ 312,731 $1,179,039 $ 763,654 $580,681 $2,523,374 ========= ========= ========= ========== ========= ======== ========== Liabilities Interest-Bearing Funds: Savings and NOW accounts $ 762,358 $ 762,358 $ 762,358 Time deposits of $100,000 & over 47,974 $ 21,626 $ 59,444 129,044 $ 58,069 $ 552 187,665 Other time deposits 178,376 165,038 199,569 542,983 293,338 1,773 838,094 Federal funds purchased, repurchase agreements and other short-term borrowing 130,870 130,870 130,870 FHLB advances 139,000 139,000 3,695 142,695 ---------- --------- --------- ---------- --------- -------- ---------- Total Interest-Bearing Funds $1,258,578 $ 186,664 $ 259,013 $1,704,255 $ 351,407 $ 6,020 $2,061,682 ========== ========= ========= ========== ========= ======== ========== Interest Sensitivity Gap $ (562,770) $ (16,164) $ 53,718 $ (525,216) $ 412,247 $574,661 $ 461,692 ========== ========= ========= ========== ========= ======== ========== Cumulative Gap $ (562,770) $(578,934) $(525,216) $ (525,216) $(112,969) $461,692 $ 461,692 ========== ========= ========= ========== ========= ======== ========== Cumulative Gap as a Percentage of Total Earning Assets (22.30%) (22.94%) (20.81%) (20.81%) (4.48%) 18.30% 18.30% Management Adjustments $ 735,518 $ (49,059) $ (98,045) $ 588,414 $(588,414) $ 0 Off-Balance Sheet Activities ---------- --------- --------- ---------- --------- -------- ---------- Cumulative Management Adjusted Gap and Off- Balance Sheet Activities $ 172,748 $ 107,525 $ 63,198 $ 63,198 $(112,969) $461,692 $ 461,692 ========== ========= ========= ========== ========= ======== ========== Cumulative Management Adjusted Gap and Off- Balance Sheet Activities as a Percentage of Total Earning Assets 6.85% 4.26% 2.50% 2.50% (4.48%) 18.30% 18.30% ========== ========= ========= ========== ========= ======== ==========
120 Management's Discussion and Analysis of Financial Condition and Results of Operations Liquidity and Capital Resources In the opinion of management, United maintains liquidity which is sufficient to satisfy its depositors' requirements and the credit needs of its customers. Like all banks, United depends upon its ability to renew maturing deposits and other liabilities on a daily basis and to acquire new funds in a variety of markets. A significant source of funds available to United is "core deposits". Core deposits include certain demand deposits, statement and special savings and NOW accounts. These deposits are relatively stable and they are the lowest cost source of funds available to United. Short-term borrowings have also been a significant source of funds. These include federal funds purchased and securities sold under agreements to repurchase as well as advances from the FHLB. Repurchase agreements represent funds that are generally obtained as the result of a competitive bidding process. Liquid assets are cash and those items readily convertible to cash. All banks must maintain sufficient balances of cash and near-cash items to meet the day-to-day demands of customers. Other than cash and due from banks, the available for sale securities portfolio and maturing loans are the primary sources of liquidity. The goal of liquidity management is to ensure the ability to access funding which enables United to efficiently satisfy the cash flow requirements of depositors and borrowers and meet United's cash needs. Liquidity is managed by monitoring funds availability from a number of primary sources. Substantial funding is available from cash and cash equivalents, unused short-term borrowings and a geographically dispersed network of subsidiary banks providing access to a diversified and substantial retail deposit market. Short-term needs can be met through a wide array of sources such as correspondent and downstream correspondent federal funds and utilization of 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 1997 of $32,642,000 were 50.1% lower than the $66,449,000 in 1996 primarily as a result of an increase of approximately $28,594,000 of excess originations of loans for sale over proceeds from the sale of loans. In 1997, investing activities resulted in a use of cash of $180,573,000 as compared to 1996 in which investing activities resulted in a use of cash of $160,168,000. The primary reason for the increase in the use of cash for investing activities was that the net difference of security purchases over proceeds from sales, maturities and calls of securities, increased from a net use of $11,702,000 in 1996 to a net use of $76,400,000 in 1997 or an increase of $64,698,000. Additionally, as a use of cash for investing activities, approximately $28,929,000 of net cash was paid by United during 1997 to acquire all of the outstanding shares of Patriot. These increases in uses of cash for investing activities were partially offset by a decline in net loan originations of $73,303,000 in 1997 as compared to 1996. Financing activities resulted in a source of cash in 1997 of $148,583,000 primarily due to an increase in deposits of $122,735,000 and an increase in net borrowings from the FHLB of Pittsburgh and other short-term borrowings of $9,804,000 and $40,071,000, respectively. These sources of cash for financing activities were partially offset by payment of $19,831,000 of cash dividends to shareholders and $5,754,000 for the purchase of treasury stock for use in United's employee benefit plans. See the Consolidated Statement of Cash Flows in the Consolidated Financial Statements. United anticipates no problems in its ability to service its obligations over the next 12 months. There are no known trends, demands, commitments, or events that will result in or that are reasonably likely to result in United's liquidity increasing or decreasing in any material way. United also has significant lines of credit available to it. See Note G, Notes to Consolidated Financial Statements. 121 Management is not aware of any current recommendations by regulatory authorities which, if implemented, would have a material effect on liquidity, capital resources or operations. The asset and liability committee monitors liquidity to ascertain that a strong liquidity position is maintained. In addition, variable rate loans are a priority. These policies should help to protect net interest income against fluctuations in interest rates. United also seeks to maintain a proper relationship between capital and total assets to support growth and sustain earnings. United's average equity to average asset ratio was 11.01% in 1997 and 11.25% in 1996. United's risk-based capital ratio was 13.46% in 1997 and 16.54% in 1996 which are both significantly higher than the minimum regulatory requirements. United's Tier 1 capital and leverage ratios of 12.21% and 9.21%, respectively, at December 31, 1997, are also strong relative to its peers and are well above regulatory minimums to be classified as a "well capitalized" institution. See Note M, Notes to Consolidated Financial Statements. Commitments The following table indicates the outstanding loan commitments of United in the categories stated: December 31 1997 ------------ Lines of credit authorized, but unused $455,767,000 Letters of credit 36,243,000 ------------ $492,010,000 ============ Past experience has shown that, of the foregoing commitments, approximately 12-15% can reasonably be expected to be funded within a one year period. For more information, see Note J to the Consolidated Financial Statements. Year 2000 Issue The Year 2000 Issue is the result of computer programs being written using two digits rather than four to define the applicable year. Any of a company's hardware, date-driven automated equipment or computer programs that have time-sensitive software may recognize a date using "00" as the year 1900 rather than the year 2000. This faulty recognition could result in a system failure or miscalculations causing disruptions of operations, including, among other things, a temporary inability to process transactions, send invoices or engage in similar normal business activities. Based on a recent assessment, United determined that it will be required to modify or replace portions of its software so that its computer systems will function properly with respect to dates in the year 2000 and thereafter. United currently believes that with modifications to existing software and conversions to new software, the Year 2000 Issue will not pose significant operational problems for its computer systems. However, if such modifications and conversions are not made, or are not completed timely, the Year 2000 Issue could have a material impact on United's operations. United has initiated formal communications with all of its significant suppliers and customers to determine the extent to which United's interface systems are vulnerable to those third parties' failure to remediate their own Year 2000 Issues. United's total Year 2000 project costs and estimates to complete include the estimated costs and time associated with the impact of third party Year 2000 Issues based on presently available information. However, there can be no guarantee that the systems and applications of other companies on which United's systems rely 122 Management's Discussion and Analysis of Financial Condition and Results of Operations will be timely converted or that a failure to convert by another company, or a conversion that is incompatible with United's systems and applications, would not have a material adverse effect on United. United will utilize both internal and external resources to reprogram, or replace, and test the Year 2000 modifications. United anticipates completing the Year 2000 project within one year but not later than December 31, 1998, which is prior to any anticipated impact on United's operating systems. The total cost of the Year 2000 project is estimated at $2.0 million and is being funded through cash flows, which will be expensed as incurred over the next two years. The Year 2000 costs are not expected to have a material adverse effect on United's results of operations or cash flows. To date United has incurred and expensed approximately $100,000 related to the assessment of, and preliminary efforts in connection with, the Year 2000 project and the development of a Year 2000 plan of operation. The costs of the Year 2000 project and the date on which United believes it will complete the Year 2000 modifications are based on management's best estimates, which were derived utilizing numerous assumptions of future events, including the continued availability of certain resources, third party vendor modification plans and other factors. There can be no guarantee, however, that these estimates will be achieved and actual results could differ materially from those anticipated. Specific factors that might cause such material differences include, but are not limited to, the availability and cost of trained programming personnel, the ability to locate and correct all relevant computer coding, and similar uncertainties. 1996 Compared to 1995 The following Earnings Summary is a broad overview of the financial condition and results of operations and is not intended to replace the more detailed discussion which is presented under the specific headings below. Earnings Summary For the year ended December 31, 1996, net income decreased 7.0% to $30,512,000. Net income per share of $1.00 for the year decreased 8.3% from $1.09 in 1995. Dividends per share increased 6.0% from $0.59 in 1995 to a record level of $0.62 per share in 1996. This was the twenty-third consecutive year of dividend increases to shareholders. During 1996, United recorded approximately $6,845,000 of merger-related and one-time special charges associated with the Eagle merger. These charges included, among other items, severance pay and benefits for displaced Eagle officers and employees, costs to consolidate duplicate facilities, employee training, new product promotions, computer conversions and additional deposit insurance as a result of the Savings Association Insurance Fund ("SAIF") recapitalization legislation. Despite these significant one-time expenses, United's return on average assets of 1.35% compared very favorably with regional and national peer grouping information provided by Wheat, First Securities, Inc. of 1.19% and 1.18%. United's return on average shareholders' equity of 11.98%, as compared with regional and national peer group information of 15.56% and 15.14%, is indicative of United's very strong capital levels. The following discussion explains in more detail the results of operations and changes in financial condition by major category. 123 Net Interest Income For the years ended December 31, 1996 and 1995, net interest income approximated $99,173,000 and $95,648,000, respectively. On a tax-equivalent basis the net interest margin was strong at 4.85% in 1996 and 4.90% in 1995. Total interest income of $172,358,000 increased 4.0% in 1996 over 1995 as a result of higher volumes of interest-earning assets. Higher average loan volumes of approximately $113 million, resulting primarily from an acquisition, contributed to the increase. From December 31, 1995 to December 31, 1996, United experienced a moderate increase in consumer loans of 1.1%, while commercial loans and mortgage loans showed increases of 13.7% and 6.4%, respectively. Total interest expense increased $3,018,000 or 4.3% in 1996. This increase was attributed primarily to United's competitive pricing of interest-bearing deposits in its markets and continued change in the retail deposit mix as customers shifted funds into products offering higher yields. United's average interest-bearing deposits increased by $25,761,000 or 1.7% in 1996, while its average FHLB advances increased $29,604,000 or 42.6% and average short-term borrowings increased $3,999,000 or 4.8%. United made greater use of FHLB advances as the cost of those advances declined from 5.93% in 1995 to 5.54% in 1996. United utilized FHLB advances during 1996 to fund the growth in the mortgage loan portfolio. The average cost of funds, which increased from 4.22% in 1995 to 4.25% in 1996, reflected the general upward trend in market interest rates during 1996. Provision for Loan Losses United evaluates the adequacy of the allowance for loan losses on a quarterly basis and its loan administration policies are focused upon the risk characteristics of the loan portfolio. Nonperforming loans were $10,192,000 at December 31, 1996 and $10,990,000 at December 31, 1995, a decrease of 7.3%. The level of nonperforming assets decreased as a result of the charge-off of certain large balance commercial credits. The components of nonperforming loans include nonaccrual loans and loans that are contractually past due 90 days or more as to interest or principal, but have not been placed on nonaccrual. Loans past due 90 days or more increased $1,139,000 or 24.3% during 1996; nonaccrual loans decreased $1,937,000 or 30.8% since year-end 1995. Nonperforming loans represented 0.44% of total assets at the end of 1996, as compared to 0.52% for United's national peer group. At year-end 1996 and 1995, the allowance for loan losses was 1.21% and 1.30% of total loans, net of unearned income. At December 31, 1996 and 1995, the ratio of the allowance for loan losses to nonperforming loans was 218.6% and 205.1%, respectively. For the years ended December 31, 1996 and 1995, the provision for loan losses was $2,610,000 and $2,320,000, respectively. The increase in the provision for 1996 when compared to 1995 was to conform the allowance for loan losses on Eagle's loan portfolio with United's loan valuation policies and in response to growth in the portfolio. Total net charge-offs were $2,872,000 in 1996 and $3,096,000 in 1995, which represents 0.16% and 0.18% of average loans for the respective years. United's ratio of net charge-offs to average loans was better than its peer group's ratio of 0.23% in 1996 and was comparable to its peer group's ratio of 0.19% in 1995. At December 31, 1996, impaired loans were $10,317,000, an increase of $1,525,000 or 17.4% from the $8,792,000 in impaired loans at December 31, 1995. Other Income Noninterest income decreased $563,000 or 3.8% for 1996 when compared to 1995. Other income consists of all revenues which are not included in interest and fee income related to earning assets. The decrease in noninterest 124 Management's Discussion and Analysis of Financial Condition and Results of Operations income for 1996 was primarily the result of the approximate $2,000,000 loss on loans sold in United's newly formed mortgage banking subsidiary. These sales were necessary to strategically align the mortgage banking operations with United's interest rate risk position. Excluding gains and losses on sales of securities and mortgage banking activities, noninterest income increased $978,000 or 7.1% in 1996 primarily as a result of increased service charges and fees from customer accounts. Trust income increased $275,000 or 9.5% in 1996 due to repricing of services and an increased volume of trust business. Service charges, commissions and fees increased by $1,396,000 or 14.1% in 1996. The increase was primarily attributable to conforming the former Eagle offices' service charge and fee structures to United's and increased return check charges and bankcard fees. This income includes charges and fees related to various banking services provided by United. The increase was primarily due to a combination of increased fees in bankcard accounts and an increased fee structure for sales of checking related products. Securities transactions resulted in a net loss of $98,000 in 1996. The proceeds from these sales of approximately $17 million were reinvested in similar securities yielding a higher rate of return. There were no securities sales in 1995. Other Expense Other expense includes all items of expense other than interest expense, the provision for loan losses and income tax expense. In total, other expense increased $6,068,000 or 10.6%. The increase was primarily due to the one-time and merger-related charges recorded in the first and second quarters and the additional third quarter deposit insurance expense as a result of the SAIF recapitalization legislation. Salaries and employee benefits expense increased $2,887,000 or 11.2% in 1996. Nearly all of the increase for 1996 was attributable to severance and benefit pay of displaced Eagle executive officers, employment contracts and employees at locations where United consolidated certain branches. As of December 31, 1996 and 1995, United employed 893 and 946 full-time equivalent employees, respectively. Net occupancy expense in 1996 exceeded 1995 levels by $319,000 or 5.5% primarily due to decreased rental income and an increase in real property repairs and utilities expense. The overall changes in net occupancy expense for 1996 were insignificant with no material increase or decrease in any one expense category. Remaining other expense increased $2,862,000 or 11.1% in 1996 compared to 1995. The increase in other expense for 1996 related primarily to the additional deposit insurance expense as a result of the SAIF recapitalization legislation, higher insurance expense, advertising, consulting and legal expense, losses on sales and write-downs of assets, EDP fees, office supplies, and goodwill amortization. Included in these increased costs was $1,483,000 of one-time charges which related to reengineering costs incurred to improve efficiency, productivity and strengthen United's competitiveness. Additionally, the added expenses of a purchase accounting acquisition included in 1996, but not in the first ten months of 1995, have contributed to the overall increase in noninterest expense. Income Taxes For the year ended December 31, 1996, income taxes approximated $16,691,000 compared to $17,782,000 for 1995. The decrease of $1,091,000 or 6.7% for 1996 when compared to 1995 was primarily the result of decreased pretax income. United's effective tax rates were approximately 35% for 1996 and 1995. 125
EX-21 5 EXHIBIT 21 Exhibit 21 SUBSIDIARIES OF THE REGISTRANT TITLE STATE OF INCORPORATION - ----- ---------------------- UBC Holding Company, Inc. West Virginia United National Bank West Virginia United Bank Virginia United Venture Fund, Inc. West Virginia UB Holding Company, Inc. West Virginia 126 EX-23 6 EXHIBIT 23 Exhibit 23 CONSENT OF INDEPENDENT AUDITORS We consent to the incorporation by reference in this Annual Report (Form 10-K) of United Bankshares, Inc. and Subsidiaries of our report dated February 27, 1998, included in the 1997 Annual Report to Shareholders of United Bankshares, Inc. and Subsidiaries We also consent to the incorporation by reference in the Registration Statements pertaining to the Incentive Stock Option Plan (Form S-8, No. 33-22941) and the Savings and Stock Investment Plan (Form S-8, No. 33-32522) of United Bankshares, Inc. of our report dated February 27, 1998, with respect to the consolidated financial statements of United Bankshares, Inc. and Subsidiaries incorporated by reference in the Annual Report on Form 10-K for the year ended December 31, 1997. /s/ ERNST & YOUNG LLP Charleston, West Virginia March 27, 1998 127 EX-27 7 EXHIBIT 27.1
9 12-MOS DEC-31-1997 DEC-31-1997 80,447,000 8,725,000 1,000,000 0 273,868,000 179,294,000 181,185,000 2,060,487,000 24,786,000 2,699,790,000 2,106,047,000 273,565,000 40,740,000 0 0 0 76,476,000 164,724,000 2,699,790,000 164,310,000 25,758,000 184,000 190,252,000 74,400,000 84,499,000 105,753,000 3,100,000 0 59,949,000 62,436,000 62,436,000 0 0 40,939,000 1.37 1.35 8.48 4,156,000 11,342,000 0 0 22,283,000 3,819,000 527,000 24,786,000 10,094,000 0 14,692,000
EX-27 8 EXHIBIT 27.2
9 12-MOS DEC-31-1996 DEC-31-1996 86,328,000 195,000 2,997,000 0 170,702,000 170,706,000 173,697,000 1,847,605,000 22,283,000 2,326,877,000 1,827,554,000 208,213,000 32,596,000 0 0 0 38,238,000 220,276,000 2,326,877,000 151,404,000 20,797,000 157,000 172,358,000 63,917,000 73,185,000 99,173,000 2,610,000 (98,000) 63,549,000 47,203,000 47,203,000 0 0 30,512,000 1.01 1.00 4.85 4,361,000 5,831,000 0 0 22,545,000 3,524,000 652,000 22,283,000 8,914,000 0 13,369,000
EX-27 9 EXHIBIT 27.3
9 12-MOS DEC-31-1995 DEC-31-1995 78,909,000 0 0 0 196,718,000 112,755,000 114,390,000 1,374,005,000 20,017,000 1,815,443,000 1,473,266,000 116,067,000 24,888,000 0 0 0 30,391,000 170,831,000 1,815,443,000 115,300,000 20,490,000 670,000 136,460,000 48,445,000 54,770,000 81,690,000 2,075,000 0 48,881,000 43,350,000 43,350,000 0 0 28,079,000 1.10 1.09 5.15 4,934,000 4,155,000 0 0 20,008,000 3,607,000 524,000 20,017,000 8,878,000 0 11,139,000
-----END PRIVACY-ENHANCED MESSAGE-----