10-K 1 0001.txt UNITED BANKSHARES, INC. FORM 10-K SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the Fiscal Year Ended December 31, 2000 Commission File Number: 0-13322 United Bankshares, Inc. ----------------------- (Exact name of registrant as specified in its charter) West Virginia 55-0641179 ------------- ---------- (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 300 United Center 500 Virginia Street, East Charleston, West Virginia 25301 ------------------------- ----- (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: (304) 424-8704 Securities registered pursuant to section 12(b) of the Act: None Securities registered pursuant to 12(g) of the Act: Common Stock, $2.50 Par Value ----------------------------- (Title of Class) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such report(s), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [_] Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of the registrant's knowledge, in definitive proxy or information statements incorporated by reference in part III of this Form 10-K or any amendment to this Form 10-K. [_] The aggregate market value of United Bankshares, Inc. common stock, representing all of its voting stock, that was held by non-affiliates on February 28, 2001 was approximately $805,006,000. As of February 28, 2001, United Bankshares, Inc. had 41,690,387 shares of common stock outstanding with a par value of $2.50. Documents Incorporated By Reference 1. Annual Report to Shareholders for the fiscal year ended December 31, 2000 portions of which are incorporated by reference in Parts I, II and IV of this Form 10-K. 2. Definitive Proxy Statement dated April 9, 2001 for the 2001 Annual Shareholders' Meeting to be held on May 21, 2001, portions of which are incorporated by reference in Part III of this Form 10-K. Page 1 of 131 pages. Index to Exhibits is on page 30 . --------- --------- UNITED BANKSHARES, INC. FORM 10-K (Continued) As of the date of filing this Annual report, neither the annual shareholders' report for the year ended December 31, 2000, nor the proxy statement for the annual United shareholders' meeting had been mailed to shareholders. CROSS-REFERENCE INDEX
Page ---- Part I ------ Item 1. BUSINESS................................................ 3 Item 2. PROPERTIES.............................................. 3 Item 3. LEGAL PROCEEDINGS....................................... 10 Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS..... 10 Part II ------- Item 5. MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED SHAREHOLDER MATTERS..................................... 11 Item 6. SELECTED FINANCIAL DATA................................. 13 Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS..................... 13 Item 7a. QUALITATIVE AND QUANTITATIVE DISCLOSURES ABOUT MARKET RISK............................................. 13 Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA............. 23 Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURES................. 23 Part III -------- Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT...... 24 Item 11. EXECUTIVE COMPENSATION.................................. 25 Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.............................................. 25 Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.......... 25 Part VI ------- Item 14. EXHIBITS, FINANCIAL STATEMENTS, SCHEDULES AND REPORTS ON FORM 8-K............................................. 26
2 UNITED BANKSHARES, INC. FORM 10-K, PART I Item 1. Business Item 2. Properties The following discussion satisfies the reporting requirements of Items 1 and 2. DESCRIPTION OF UNITED BANKSHARES, INC. Organizational History and Subsidiaries --------------------------------------- United Bankshares, Inc. ("United") is a West Virginia corporation registered as a bank holding company pursuant to the Bank Holding Company Act of 1956, as amended. United was incorporated on March 26, 1982, organized on September 9, 1982, and began conducting business on May 1, 1984 with the acquisition of three wholly-owned subsidiaries. Since its formation in 1982, United has acquired twenty-four banking institutions. United has two banking subsidiaries, United National Bank ("UNB") and United Bank. United also owns nonbank subsidiaries that engage in mortgage banking, asset management, investment banking and financial planning. Offices ------- The headquarters of United are located in United Center at 500 Virginia Street, East, Charleston, West Virginia. United's executive offices are located in Parkersburg, West Virginia at Fifth and Avery Streets. United operates seventy-seven offices--fifty-two offices located throughout West Virginia, twenty-two offices throughout the Northern Virginia, Maryland and Washington, D.C. areas and three in Ohio. United owns all its West Virginia facilities except for two in the Parkersburg area, three in the Wheeling area, three in the Charleston area, two in the Beckley area and one each in Summersville and Clarksburg, all of which are leased under operating leases. United leases all of its facilities under operating lease agreements in the Northern Virginia, Maryland and Washington, D.C. areas except for two offices, one each in Fairfax and Vienna, Virginia which are owned facilities. Employees --------- As of December 31, 2000 United and its subsidiaries had approximately 1,253 full-time equivalent employees and officers. A collective bargaining unit represents none of these employees, and management considers employee relations to be excellent. Business of United ------------------ As a bank holding company registered under the Bank Holding Company Act of 1956, as amended, 3 United's present business is community and mortgage banking. As of December 31, 2000, United's consolidated assets approximated $4.9 billion and total shareholders' equity approximated $431 million. United is permitted to acquire other banks and bank holding companies, as well as thrift institutions. United is also permitted to engage in certain non- banking activities which are closely related to banking under the provisions of the Bank Holding Company Act and the Federal Reserve Board's Regulation Y. Management continues to consider such opportunities as they arise, and in this regard, management from time to time makes inquiries, proposals, offers or expressions of interest as to potential opportunities; although no agreements or understandings to acquire other banks or bank holding companies or nonbanking subsidiaries or to engage in other nonbanking activities, other than those identified herein, presently exist. Business of Subsidiary Banks ---------------------------- United, through its subsidiaries, engages primarily in community banking and mortgage banking and additionally offers most types of business permitted by law and regulation. Included among the banking services offered are the acceptance of deposits in checking, savings, time and money market accounts; the making and servicing of personal, commercial, floor plan and student loans; and the making of construction and real estate loans. Also offered are individual retirement accounts, safe deposit boxes, wire transfers and other standard banking products and services. As a part of their lending function, UNB and United Bank offer credit card services including accounts issued under the name of certain correspondent banks. UNB and United Bank each maintains a trust department which acts as trustee under wills, trust and pension and profit sharing plans, as executors and administrators of estates, and as guardians for estates of minors and incompetents, and in addition performs a variety of investment and security services. Trust services are available to customers of affiliate banks. UNB provides services to its correspondent banks such as check clearing, safekeeping and the buying and selling of federal funds. United Brokerage Services, Inc., a wholly-owned subsidiary of UNB, is a fully-disclosed broker/dealer and a registered Investment Advisor with the National Association of Securities Dealers, Inc. and the Securities and Exchange Commission and a member of the Securities Investor Protection Corporation. United Brokerage Services, Inc. offers a wide range of investment products as well as comprehensive financial planning and asset management services to the general public. UNB is a member of a regional network of automated teller machines known as the MAC ATM network while United Bank participates in the MOST network. Through MAC and MOST, all of United's subsidiary banks are participants in a network known as Cirrus, which provides banking on a nationwide basis. Lending Activities ------------------ United's loan portfolio, net of unearned income, increased $22.4 million to $3.19 billion in 2000 and is comprised of commercial, real estate and consumer loans including credit card and home equity loans. Commercial and commercial real estate loans increased $29.8 million or 5.6% and $69.8 million or 7.9%, respectively. Consumer loans, net of unearned income, decreased $41.6 million or 11.7% while residential real estate loans also decreased $35.6 million or 2.6%. 4 As of December 31, 2000, approximately $348 million or 11% of United's loan portfolio were real estate loans that met the regulatory definition of a high loan-to-value loan. A high loan-to-value real estate loan is defined as any loan, line of credit, or combination of credits secured by liens on or interests in real estate that equals or exceeds 90% of the real estate's appraised value, unless the loan has other appropriate credit support. Appropriate credit support may include mortgage insurance, readily marketable collateral, or other acceptable collateral that reduces the loan-to-value ratio below 90%. The December 31, 2000 position in high loan-to-value loans is significantly less than the December 31, 1999 and 1998 amounts of $401 million and $617 million, respectively, or 12% and 20% of total loans, respectively, of which $456 million was held in the loans held for sale category on United's balance sheet at December 31, 1998. Commercial Loans ---------------- The commercial loan portfolio consists of loans to corporate borrowers primarily in small to mid-size industrial and commercial companies, as well as automobile dealers, service, retail and wholesale merchants. Coal mining companies make up an insignificant portion of loans in the portfolio. Collateral securing these loans include equipment, machinery, inventory, receivables, vehicles and commercial real estate. Commercial loans are considered to contain a higher level of risk than other loan types although care is taken to minimize these risks. Numerous risk factors impact this portfolio including industry specific risks such as economy, new technology, labor rates and cyclicality, as well as customer specific factors, such as cash flow, financial structure, operating controls and asset quality. United diversifies risk within this portfolio by closely monitoring industry concentrations and portfolios to ensure that it does not exceed established lending guidelines. Diversification is intended to limit the risk of loss from any single unexpected economic event or trend. Underwriting standards require a comprehensive review and independent evaluation of virtually all larger balance commercial loans by the loan committee prior to approval. Real Estate Loans ----------------- Commercial real estate loans consist of commercial mortgages, which generally are secured by nonresidential and multi-family residential properties. Also included in this portfolio are loans that are secured by owner-occupied real estate, but made for purposes other than the construction or purchase of real estate. Commercial real estate loans carry many of the same customers and industry risks as the commercial loan portfolio. Real estate mortgage loans to consumers are secured primarily by a first lien deed of trust. These loans are traditional one-to-four family residential mortgages. The loans generally do not exceed an 80% loan to value ratio at the loan origination date and most are at a variable rate of interest. These loans are considered to contain normal risk. Consumer Loans -------------- Consumer loans are secured by automobiles, boats, recreational vehicles, and other personal property. Personal loans, home equity, student loans and unsecured credit card receivables are also included as consumer loans. United monitors the risk associated with these types of loans by monitoring such factors as portfolio growth, lending policies and economic conditions. Underwriting standards are continually evaluated and modified based upon these factors. 5 Underwriting Standards ---------------------- United's loan underwriting guidelines and standards are updated periodically and are presented for approval by each of the respective Boards of Directors of its subsidiary banks. The purpose of the standards and guidelines is to grant loans on a sound and collectible basis; to invest available funds in a safe, profitable manner; to serve the legitimate credit needs of the communities of United's primary market area; and ensure that all loan applicants receive fair and equal treatment in the lending process. It is the intent of the underwriting guidelines and standards to: minimize loan losses by carefully investigating the credit history of each applicant, verify the source of repayment and the ability of the applicant to repay, collateralize those loans in which collateral is deemed to be required, exercise care in the documentation of the application, review, approval, and origination process, and administer a comprehensive loan collection program. The above guidelines are adhered to and subject to the experience, background and personal judgment of the loan officer assigned to the loan application. A loan officer may grant, with justification, a loan with variances from the underwriting guidelines and standards. However, the loan officer may not exceed their respective lending authority without obtaining the prior, proper approval from a superior, a regional supervisor, or the Loan Committee, whichever is deemed appropriate for the nature of the variance. Loan Origination and Processing ------------------------------- United generally originates loans within the primary market area of its banking subsidiaries. United may from time to time make loans to borrowers and/or on properties outside of its primary market area as an accommodation to its customers. Processing of all loans is centralized in the Charleston, West Virginia office. As of December 31, 2000, the balance of mortgage loans being serviced by United for others was insignificant. Secondary Markets ----------------- United National Bank and George Mason Mortgage, LLC ("GMMC"), a wholly- owned subsidiary of United Bank, are engaged in the operation of a general mortgage and agency business, including the conducting of mortgage loan servicing activities for certain loans, the origination and acquisition of residential real estate loans for resale and generally the activities commonly conducted by a mortgage banking company. These loans are for single, owner- occupied residences with either adjustable or fixed rate terms, with a variety of maturities tailored to effectively serve its markets. GMMC primarily originates permanent residential mortgage loans in the northern Virginia market while UNB's originations are predominately in its West Virginia markets. Mortgage loan originations are generally intended to be sold in the secondary market. During 2000, United originated $1.2 billion of real estate loans for sale in the secondary market and sold $1.1 billion of loans designated as held for sale in the secondary market. Proceeds received from the sales of these loans during 2000 were $1.1 billion. The principal sources of revenue from United's mortgage banking business are: (i) loan origination fees; (ii) gains or losses from the sale of loans, if any; (iii) interest earned on mortgage loans during the period that they are held by United pending sale; and (iv) loan servicing fees. 6 Investment Activities --------------------- United's investment policy stresses the management of the investment securities portfolio, which includes both securities held to maturity and securities available for sale, to maximize return over the long-term in a manner that is consistent with good banking practices and relative safety of principal. United currently does not engage in trading account activity. The Asset/Liability Committee of United is responsible for the coordination and evaluation of the investment portfolio. Sources of funds for investment activities include "core deposits". Core deposits include certain demand deposits, statement and special savings and NOW accounts. These deposits are relatively stable and they are the lowest cost source of funds available to United. Short-term borrowings have also been a significant source of funds. These include federal funds purchased and securities sold under agreements to repurchase and FHLB borrowings. Repurchase agreements represent funds that are generally obtained as the result of a competitive bidding process. United's investment portfolio is comprised largely of mortgage-backed securities. Additionally United has a substantial amount of U.S. Treasury securities and obligations of U.S. Agencies and Corporations. Obligations of States and Political Subdivisions are comprised of municipal securities with an average quality of not less than an "A" rating. During 2000 United recognized net losses of $13.86 million from the available for sale portfolio. A significant portion of the losses was the result of United's restructuring of its available for sale investment portfolio late during the fourth quarter of 2000. United used the proceeds of approximately $542 million from the sales to acquire investment securities that will provide an increased yield above those sold. During 1999 and 1998, United recognized net gains of $677 thousand, $2.37 million, respectively, from the available for sale portfolio. The net gain in 1998 included a $2.49 million gain recognized on an available for sale equity security exchanged in an unaffiliated merger transaction consummated at the end of the first quarter of 1998. Additionally, the 1998 net gain included approximately $300 thousand of net losses from calls of held to maturity securities. At December 31, 2000, United had no open commitments to sell mortgage- backed securities. As such, United is not exposed to significant risk nor will it derive any significant benefit from changes in interest rates on the price of the mortgage loan inventory. Competition ----------- United faces a high degree of competition in all of the markets it serves. These markets may generally be defined as Wood, Kanawha, Monongalia, Jackson, Cabell, Brooke, Hancock, Ohio, Marshall, Gilmer, Harrison, Lewis, Webster, Boone, Logan, Nicholas, Fayette and Raleigh Counties in West Virginia; Lawrence, Belmont, Jefferson and Washington Counties in Ohio; Montgomery County in Maryland and Arlington, Loudoun, Prince William and Fairfax Counties in Virginia, located adjacent to the Washington D.C. area, which is in close proximity to Jefferson and Berkeley Counties in West Virginia's eastern panhandle. United competes in Ohio markets because of the close proximity to the Ohio border of certain subsidiary offices. Included in United's West Virginia markets are the five largest West Virginia Metropolitan 7 Statistical Areas (MSA): the Parkersburg MSA, the Charleston MSA, the Huntington MSA, the Wheeling MSA and the Weirton MSA. United's Virginia markets include the Washington, D.C. Metropolitan area. United considers the above counties and MSA's to be the primary market area for the business of its banking subsidiaries. With prior regulatory approval, West Virginia and Virginia banks are permitted unlimited branch banking throughout the state. In addition, interstate acquisitions of and by West Virginia and Virginia banks and bank holding companies are permissible on a reciprocal basis, as well as reciprocal interstate acquisitions by thrift institutions. These conditions serve to intensify competition within United's market. As of December 31, 2000, there were 48 bank holding companies in the State of West Virginia registered with the Federal Reserve System and the West Virginia Board of Banking and Financial Institutions and 76 bank holding companies in the Commonwealth of Virginia registered with the Federal Reserve System and the Virginia Corporation Commission. These holding companies are headquartered in various West Virginia and Virginia cities and control banks throughout West Virginia and Virginia, which compete for business as well as for the acquisition of additional banks. Economic Characteristics of Primary Market Area ----------------------------------------------- Although the market area of the banking subsidiaries encompasses a portion of the coal fields located in southern West Virginia, an area of the state which has been economically depressed, the coal related loans in the loan portfolio of the banking subsidiaries constitute less than 2% of United's total loans outstanding. The state of West Virginia has a more diversified economy than it had during the peak periods of coal production with the chemical manufacturing industry accounting for 18% of the entire manufacturing workforce and 30% of the manufacturing wages, according to West Virginia state records. This diversified economy has contributed to the positive trends in the number of payroll jobs created and unemployment rates in recent years as the number of payroll jobs increased 4,000 during calendar year 2000 and the state's overall unemployment rate has declined from 10.5% in 1991 to 5.5% in December 2000. West Virginia's unemployment rate for all of 2000 averaged 5.5%, which was the lowest average annual unemployment rate since the current statistical system began in 1976, according to available information from the West Virginia Bureau of Employment Programs. United's northern Virginia subsidiary banking offices are located in markets that reflect very low unemployment rate levels and increased wage levels over a year ago. According to information available from the Virginia Employment Commission, Virginia's unemployment rate as of December 2000 was 1.9%. The 1.9% unemployment rate was the first time the rate fell below 2.0% in 48 years. Additionally, the Virginia Employment Commission reported that record levels were set with increased nonagricultural employment and increased factory wages in December 2000. The Northern Virginia metropolitan area's unemployment rate was at 1.1%, lowest among Virginia's eight metropolitan areas, as of December 2000. Regulation and Supervision -------------------------- United, as a bank holding company, is subject to the restrictions of the Bank Holding Company Act of 1956, as amended, and is registered pursuant to its provisions. As such, United is subject to the reporting requirements of and examination by the Board of Governors of the Federal Reserve System ("Board of 8 Governors"). The Bank Holding Company Act prohibits the acquisition by a bank holding company of direct or indirect ownership of more than five percent of the voting shares of any bank within the United States without prior approval of the Board of Governors. With certain exceptions, a bank holding company also is prohibited from acquiring direct or indirect ownership or control of more than five percent of the voting shares of any company which is not a bank, and from engaging directly or indirectly in business unrelated to the business of banking, or managing or controlling banks. The Board of Governors of the Federal Reserve System, in its Regulation Y, permits bank holding companies to engage in non-banking activities closely related to banking or managing or controlling banks. Approval of the Board of Governors is necessary to engage in these activities or to make acquisitions of corporations engaging in these activities. In addition, on a case by case basis, the Board of Governors may approve other non-banking activities. On November 12, 1999 the Gramm-Leach-Bliley Act was signed into law. The Act modernizes the regulatory framework for financial services in the United States and allows banks, securities firms, and insurance companies to affiliate more directly than they have been permitted to do in the past. Under the Act, a bank holding company may become a "financial holding company" to offer a much broader range of financial products and services than had been previously possible under the traditional banking structure, provided that the bank holding company meets certain certification requirements of the Federal Reserve. United is presently in the process of analyzing the opportunities, requirements, and pitfalls the Act presents. As a bank holding company doing business in West Virginia, United is also subject to regulation and examination by the West Virginia Board of Banking and Financial Institutions (the "West Virginia Banking Board") and must submit annual reports to the department. Further, any acquisition application that United must submit to the Board of Governors must also be submitted to the West Virginia Banking Board for approval. United is also registered under and is subject to the requirements of the Securities Exchange Act of 1934, as amended. UNB, as national banking associations, is subject to supervision, examination and regulation by the Office of the Comptroller of the Currency. UNB is also a member of the Federal Reserve System, and as such, is subject to applicable provisions of the Federal Reserve Act and regulations issued thereunder. United Bank, as a Virginia state member bank, is subject to supervision, examination and regulation by the Federal Reserve System, and as such, is subject to applicable provisions of the Federal Reserve Act and regulations issued thereunder. United Bank is subject to regulation by the Virginia Corporation Commission's Bureau of Financial Institutions. The deposits of United's wholly-owned banking subsidiaries are insured by the Federal Deposit Insurance Corporation ("FDIC") to the extent provided by law. Accordingly, these banks are also subject to regulation by the FDIC. 9 UNITED BANKSHARES, INC. FORM 10-K, PART I Item 3. Legal Proceedings Litigation ---------- Information relating to litigation on page 30 of the Annual Report to Shareholders for the year ended December 31, 2000, is incorporated herein by reference. Item 4. Submission of Matters to a Vote of Security Holders. No matters were submitted to a vote of security holders during the fourth quarter of the fiscal year covered by this report. 10 UNITED BANKSHARES, INC. FORM 10-K, PART II Item 5. Market for Registrant's Common Stock and Related Shareholder Matters Stock ----- As of December 31, 2000, 100,000,000 shares of common stock, par value $2.50 per share, were authorized for United, of which 43,381,769 were issued, including 1,616,498 shares held as treasury shares. The outstanding shares are held by approximately 12,006 shareholders of record as of December 31, 2000. The unissued portion of United's authorized common stock (subject to registration approval by the SEC) and the treasury shares are available for issuance as the Board of Directors determines advisable. United offers its shareholders the opportunity to invest dividends in shares of United stock through its dividend reinvestment plan. United has also established stock option plans and a stock bonus plan as incentive for certain eligible officers. In addition to the above incentive plans, United is occasionally involved in certain mergers in which additional shares could be issued and recognizes that additional shares could be issued for other appropriate purposes. The Board of Directors believes that the availability of authorized but unissued common stock of United is of considerable value if opportunities should arise for the acquisition of another business through the issuance of United's stock. Shareholders do not have preemptive rights, which allows United to issue additional authorized shares without first offering them to current shareholders. United has only one class of stock and all voting rights are vested in the holders of United's stock. On all matters subject to a vote of shareholders, the shareholders of United will be entitled to one vote for each share of common stock owned. Shareholders of United have cumulative voting rights with regard to election of directors. At the present time, no senior securities of United are outstanding, nor does the Board of Directors presently contemplate issuing senior securities. There are no preemptive or conversion rights or, redemption or sinking fund provisions with respect to United's Stock. All of the issued and outstanding shares of United's stock are fully paid and non- assessable. Dividends --------- The shareholders of United are entitled to receive dividends when and as declared by its Board of Directors. Dividends are paid quarterly. Dividends were $0.84 per share in 2000, $0.82 per share in 1999 and $0.75 per share in 1998. Dividends are paid from funds legally available; therefore, the payment of dividends is subject to the restrictions set forth in the West Virginia Corporation Act. See "Market and Stock Prices of United" for quarterly dividend information. Payment of Dividends by United is dependent upon payment of dividends to it by its subsidiary banks. The ability of national banks to pay dividends is subject to certain limitations imposed by the national banking 11 laws. Generally, the most restrictive provision requires approval by the Office of the Comptroller of the Currency ("OCC") if dividends declared in any year exceed the current year's net income, as defined, plus the retained net profits of the two preceding years. Payment of dividends by United's state member bank is regulated by the Federal Reserve System and generally, the prior approval of the Federal Reserve Board ("FRB") is required if the total dividends declared by a state member bank in any calendar year exceeds its net profits, as defined, for that year combined with its retained net profits for the preceding two years. Additionally, prior approval of both the OCC and the FRB is required when a national bank or state member bank has deficit retained earnings but has sufficient current year's net income, as defined, plus the retained net profits of the two preceding years. The OCC and FRB may prohibit dividends if it deems the payment to be an unsafe or unsound banking practice. The OCC has issued guidelines for dividend payments by national banks, emphasizing that proper dividend size depends on the bank's earnings and capital while the FRB has issued similar guidelines pertaining to state member banks. See Note N - Notes to Consolidated Financial Statements, which is incorporated herein by reference. Market and Stock Prices of United --------------------------------- United Bankshares, Inc. stock is traded over the counter on the National Association of Securities Dealers Automated Quotations System ("NASDAQ") under the trading symbol UBSI. The high and low prices listed below are based upon information available to United's management from NASDAQ listings. No attempt has been made by United's management to ascertain the prices for every sale of its stock during the periods indicated. However, based on the information available, United's management believes that the prices fairly represent the amounts at which United's stock was traded during the periods indicated. The following table presents the dividends and high and low prices of United's common stock during the periods set forth below:
2001 Dividends High Low ---- --------- ---- --- First Quarter through February 28, 2001 (1) $23.13 $20.19 2000 ---- Fourth Quarter $0.21 $22.13 $17.25 Third Quarter $0.21 $20.88 $18.38 Second Quarter $0.21 $22.38 $16.38 First Quarter $0.21 $24.44 $17.00 1999 ---- Fourth Quarter $0.21 $26.25 $22.63 Third Quarter $0.21 $27.25 $23.38 Second Quarter $0.20 $27.38 $22.88 First Quarter $0.20 $27.69 $22.75
(1) On February 26, 2001, United declared a dividend of $0.22 per share, payable April 2, 2001, to shareholders of record as of March 9, 2001. 12 UNITED BANKSHARES, INC. FORM 10-K, PART II Item 6. Selected Financial Data Information relating to selected financial data on page 38 of the Annual Report to Shareholders for the year ended December 31, 2000, is incorporated herein by reference. Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations Management's Discussion and Analysis of Financial Condition and Results of Operations on pages 39 through 51 inclusive, of the Annual Report to Shareholders for the year ended December 31, 2000, is incorporated herein by reference. Item 7a. Quantitative and Qualitative Disclosures About Market Risk Quantitative and Qualitative Disclosures About Market Risk on pages 44 through 46 inclusive, of the Annual Report to Shareholders for the year ended December 31, 2000, is incorporated herein by reference. 13 DISTRIBUTION OF ASSETS, LIABILITIES AND SHAREHOLDERS' EQUITY INTEREST RATES AND INTEREST DIFFERENTIAL: The following table shows the daily average balance of major categories of assets and liabilities for each of the three years ended December 31, 2000, 1999 and 1998 with the interest and rate earned or paid on such amount.
Year Ended Year Ended Year Ended December 31, 2000 December 31, 1999 December 31, 1998 -------------------------- -------------------------- --------------------------- Average Avg. Average Avg. Average Avg. Balance Interest Rate Balance Interest Rate Balance Interest Rate -------------------------- -------------------------- --------------------------- ASSETS Earning Assets: Federal funds sold, securities repurchased under agreements to resell & other short-term investments $ 17,362 $ 1,171 6.74% $ 8,390 $ 522 6.22% $ 28,270 $ 1,472 5.21% Investment Securities: Taxable 1,163,824 79,190 6.80% 1,295,851 85,392 6.59% 876,167 55,550 6.34% Tax-exempt (1) (2) 198,943 14,282 7.18% 202,435 14,402 7.11% 66,019 5,262 7.97% -------------------------- -------------------------- --------------------------- Total Securities 1,362,767 93,472 6.86% 1,498,286 99,794 6.66% 942,186 60,812 6.45% Loans, net of unearned Income (1) (2) (3) 3,320,065 294,297 8.86% 3,110,785 262,622 8.44% 3,053,948 267,186 8.75% Allowance for loan losses (39,437) (39,615) (35,598) ---------- --------- --------- Net loans 3,280,628 8.98% 3,071,170 8.55% 3,018,350 8.85% -------------------------- -------------------------- --------------------------- Total earning assets 4,660,757 $388,940 8.34% 4,577,846 $362,938 7.93% 3,988,806 $329,470 8.26% -------- -------- -------- Other assets 275,848 289,675 250,002 ---------- ---------- ---------- TOTAL ASSETS $4,936,605 $4,867,521 $4,238,808 ========== ========== ========== LIABILITIES Interest-Bearing Funds: Interest-bearing deposits $2,775,938 $125,847 4.53% $2,890,065 $122,651 4.24% $2,791,996 $128,976 4.62% Federal funds purchased, repurchase agreements & other short-term borrowings 370,679 19,898 5.37% 367,342 17,104 4.66% 228,923 10,732 4.69% FHLB advances 851,486 52,021 6.11% 653,579 34,647 5.30% 282,741 15,646 5.53% -------------------------- -------------------------- --------------------------- Total Interest-Bearing Funds 3,998,103 197,766 4.95% 3,910,986 174,402 4.46% 3,303,660 155,354 4.70% -------- -------- -------- Demand deposits 473,205 468,238 452,300 Accrued expenses and other liabilities 55,992 68,478 70,572 ---------- ---------- ---------- TOTAL LIABILITIES 4,527,300 4,447,702 3,826,532 SHAREHOLDERS' EQUITY 409,305 419,819 412,276 ---------- ---------- ---------- TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $4,936,605 $4,867,521 $4,238,808 ========== ========== ========== NET INTEREST INCOME $191,174 $188,536 $174,116 ======== ======== ======== INTEREST SPREAD 3.40% 3.47% 3.56% NET INTEREST MARGIN 4.11% 4.12% 4.37%
(1) The interest income and the yields on federally nontaxable loans and investment securities are presented on a tax-equivalent basis using the statutory federal income tax rate of 35%. (2) The interest income and the yields on state nontaxable loans and investment securities are presented on a tax-equivalent basis using the statutory state income tax rate of 9%. (3) Nonaccruing loans are included in the daily average loan amounts outstanding. 14 UNITED BANKSHARES, INC. AND SUBSIDIARIES RATE/VOLUME ANALYSIS The following table sets forth a summary of the changes in interest earned and interest paid detailing the amounts attributable to (i) changes in volume (change in the average volume times the prior year's average rate), (ii) changes in rate (change in the average rate times the prior year's average volume), and (iii) changes in rate/volume (change in the average volume times the change in average rate).
2000 Compared to 1999 1999 Compared to 1998 ------------------------------------------ ----------------------------------------- Increase (Decrease) Due to Increase (Decrease) Due to ------------------------------------------ ----------------------------------------- Rate/ Rate/ Volume Rate Volume Total Volume Rate Volume Total ---------- ------ -------- ------- --------- ------ ---------- --------- Interest income: Federal funds sold, securities purchased under agreements to resell and other short-term investments $ 558 $ 44 $ 47 $ 649 ($1,035) $ 287 ($202) ($950) Investment securities: Taxable (8,701) 2,782 (283) (6,202) 26,608 2,186 1,048 29,842 Tax exempt (1), (2) (249) 131 (2) (120) 10,873 (565) (1,168) 9,140 Loans (1),(2),(3) 17,911 12,885 879 31,675 4,676 (9,081) (159) (4,564) --------- ------- ------- -------- --------- --------- ------- -------- TOTAL INTEREST INCOME 9,519 15,842 641 26,002 41,122 (7,173) (481) 33,468 --------- ------- ------- -------- --------- --------- ------- -------- Interest expense: Interest-bearing deposits ($4,843) $ 8,370 ($331) $ 3,196 $ 4,530 ($10,487) ($368) ($6,325) Federal funds purchased, repurchase Agreements, and other short-term Borrowings 155 2,615 24 2,794 6,489 (73) (44) 6,372 FHLB advances 10,491 5,283 1,600 17,374 20,521 (658) (862) 19,001 --------- ------- ------- -------- --------- --------- ------- -------- TOTAL INTEREST EXPENSE 5,803 16,268 1,293 23,364 31,540 (11,218) (1,274) 19,048 --------- ------- ------- -------- --------- --------- ------- -------- NET INTEREST INCOME $ 3,716 ($426) ($652) $ 2,638 $ 9,582 $ 4,045 $ 793 $ 14,420 ========= ======= ======= ======== ========= ========= ======= ========
(1) Yields and interest income on federally tax exempt loans and investment securities are computed on a fully tax-equivalent basis using the statutory federal income tax rate of 35%. (2) Yields and interest income on state tax exempt loans and investment securities are computed on a fully tax-equivalent basis using the statutory state income tax rate of 9%. (3) Nonaccruing loans are included in the daily average loan amounts outstanding. 15 UNITED BANKSHARES, INC. AND SUBSIDIARIES LOAN PORTFOLIO TYPES OF LOANS The following is a summary of loans outstanding at December 31:
2000 1999 1998 1997 1996 ----------- ------------ ------------ -------------- ------------ (In thousands) Commercial, financial and agricultural $ 564,887 $ 535,116 $ 508,601 $ 487,706 $ 328,248 Real estate mortgage 2,148,751 2,134,370 1,696,233 1,693,819 1,611,801 Real estate construction 164,505 144,634 141,026 150,429 90,817 Consumer 319,351 363,272 313,464 364,951 328,928 Less: Unearned interest (5,000) (7,296) (6,933) (7,066) (5,223) ------------ ------------ ------------ ------------ ------------ Total loans 3,192,494 3,170,096 2,652,391 2,689,839 2,354,571 Allowance for loan losses (40,532) (39,599) (39,189) (31,936) (29,376) ------------ ------------ ------------ ------------ ------------ TOTAL LOANS, NET $ 3,151,962 $ 3,130,497 $ 2,613,202 $ 2,657,903 $ 2,325,195 ============ ============ ============ ============ ============ Loans held for sale $ 203,831 $ 117,825 $ 720,607 $ 97,619 $ 74,465 ============ ============ ============ ============ ============
The following is a summary of loans outstanding as a percent of total loans at December 31:
2000 1999 1998 1997 1996 ------------ ------------ ------------ -------------- ------------ Commercial, financial and agricultural 17.69% 16.88% 19.18% 18.13% 13.94% Real estate mortgage 67.31% 67.33% 63.95% 62.97% 68.45% Real estate construction 5.15% 4.56% 5.32% 5.59% 3.86% Consumer 9.85% 11.23% 11.55% 13.31% 13.75% ------------ ------------ ------------ ------------ ------------ TOTAL 100.00% 100.00% 100.00% 100.00% 100.00% ============ ============ ============ ============ ============
REMAINING LOAN MATURITIES The following table shows the maturity of commercial, financial, and agricultural loans and real estate construction outstanding as of December 31, 2000:
Less Than One To Greater Than One Year Five Years Five Years Total ------------------ ------------------ ------------------ ------------------ (In thousands) Commercial, financial and agricultural $329,920 $131,522 $103,445 $564,887 Real estate construction 164,505 164,505 ------------------ ------------------ ------------------ ------------------ Total $494,425 $131,522 $103,445 $729,392 ================== ================== ================== ==================
16 UNITED BANKSHARES, INC. AND SUBSIDIARIES At December 31, 2000, commercial, financial and agricultural loans maturing within one to five years and in more than five years are interest sensitive as follows:
One to Over Five Years Five Years ------------------ ------------------ (In thousands) Outstanding with fixed interest rates $ 77,596 $ 63,429 Outstanding with adjustable rates 53,926 40,016 ------------------ ------------------ $131,522 $103,445
There were no real estate construction loans with maturities greater than one year. RISK ELEMENTS Nonperforming Loans Nonperforming loans include loans on which no interest is currently being accrued, loans which are past due 90 days or more as to principal or interest payments, and loans for which the terms have been modified due to a deterioration in the financial position of the borrower. Management is not aware of any other significant loans, groups of loans, or segments of the loan portfolio not included below or disclosed elsewhere herein where there are serious doubts as to the ability of the borrowers to comply with the present loan repayment terms. The following table summarizes nonperforming loans for the indicated periods.
December ------------------------------------------------------------------------------------- 2000 1999 1998 1997 1996 ----------- -------------- ---------------- -------------- -------------- (In thousands) Nonaccrual loans $ 8,131 $12,327 $ 9,139 $ 5,815 $ 6,373 Troubled debt restructurings 95 Loans which are contractually past due 90 days or more as to interest or principal, and are still accruing interest 4,717 8,415 9,528 12,877 6,317 ----------- -------------- ---------------- -------------- -------------- TOTAL $12,848 $20,742 $18,667 $18,692 $12,785 =========== ============== ================ ============== ==============
Loans are designated as nonaccrual when, in the opinion of management, the collection of principal or interest is doubtful. This generally occurs when a loan becomes 90 days past due as to principal or interest unless the loan is both well secured and in the process of collection. When interest accruals are discontinued, unpaid interest credited to income in the current year is reversed, and unpaid interest accrued in prior years is charged to the allowance for loan losses. See Note D to the consolidated financial statements for additional information regarding nonperforming loans, impaired loans and credit risk concentration. Other real estate owned is not material. 17 UNITED BANKSHARES, INC. AND SUBSIDIARIES INVESTMENT PORTFOLIO The following is a summary of the amortized cost of held to maturity securities at December 31,:
2000 1999 1998 ---------- ---------- ---------- (In thousands) U.S. Treasury and other U.S. Government agencies and corporations $ 55,724 $ 56,734 $121,474 States and political subdivisions 93,006 97,824 82,011 Mortgage-backed securities 70,279 90,850 139,002 Other 161,059 19,782 19,664 ---------- ---------- ---------- TOTAL HELD TO MATURITY SECURITIES $380,068 $265,190 $362,151 ========== ========== ==========
The following is a summary of the amortized cost of available for sale securities at December 31,:
2000 1999 1998 ---------- ---------- ---------- (In thousands) U.S. Treasury securities and obligations of U.S. Government agencies and corporations $160,702 $ 276,558 $198,151 States and political subdivisions 52,095 48,914 27,474 Mortgage-backed securities 574,292 693,828 279,618 Marketable equity securities 8,551 8,369 9,211 Other 69,723 229,277 43,120 ---------- ---------- ---------- TOTAL AVAILABLE FOR SALE SECURITIES $865,363 $1,256,946 $557,574 ========== ========== ==========
The fair value of mortgage-backed securities is affected by changes in interest rates and prepayment risk. When interest rates decline, prepayment speeds generally accelerate due to homeowners refinancing their mortgages at lower interest rates. This may result in the proceeds being reinvested at lower interest rates. Rising interest rates may decrease the assumed prepayment speed. Slower prepayment speeds may extend the maturity of the security beyond its estimated maturity. Therefore, investors may not be able to invest at current higher market rates due to the extended expected maturity of the security. United had a net unrealized gains of $2,318 on all mortgage-backed securities at December 31, 2000, as compared to a net unrealized loss of $23,932 at December 31, 1999. The following table sets forth the maturities of all securities at December 31, 2000, and the weighted average yields of such securities (calculated on the basis of the cost and the effective yields weighted for the scheduled maturity of each security).
After 1 But After 5 But Within 1 Year Within 5 Years Within 10 Years After 10 Years --------------- ---------------- ----------------- ---------------- Amount Yield Amount Yield Amount Yield Amount Yield ------- ------ ------ ----- ------ ----- ------ ----- (Dollars in thousands) U.S. Treasury and other U.S. Government agencies and corporations $24,876 6.18% $70,367 6.38% $85,129 7.07% $ 34,776 7.33% States and political subdivisions (1) 3,031 7.97% 11,743 8.26% 37,961 7.58% 92,098 7.51% Mortgage-backed securities 465 6.09% 22,653 6.70% 79,840 6.38% 543,931 6.78% Other 11,337 7.01% 34,681 6.62% 192,446 7.82%
(1) Tax-equivalent adjustments (using a 35% federal rate) have been made in calculating yields on obligations of states and political subdivisions. NOTE: There are no securities with a single issuer whose book value in the aggregate exceeds 10% of total shareholders' equity. 18 UNITED BANKSHARES, INC. AND SUBSIDIARIES SHORT-TERM BORROWINGS The following table shows the distribution of United's short-term borrowings and the weighted average interest rates thereon at the end of each of the last three years. Also provided are the maximum amount of borrowings and the average amounts of borrowings as well as weighted average interest rates for the last three years.
Federal Securities Sold Funds Under Agreements Purchased To Repurchase ------------ ------------------- (Dollars in thousands) At December 31: 2000 $15,720 $313,349 1999 44,120 349,129 1998 7,260 236,535 Weighted average interest rate at year end: 2000 6.6% 5.2% 1999 5.0% 5.0% 1998 5.6% 4.6% Maximum amount outstanding at any month's end: 2000 $45,515 $417,866 1999 64,921 440,281 1998 35,416 236,535 Average amount outstanding during the year: 2000 $15,332 $351,816 1999 27,774 335,908 1998 24,334 201,475 Weighted average interest rate During the year: 2000 6.3% 5.3% 1999 5.4% 4.6% 1998 5.6% 4.7%
At December 31, 2000, repurchase agreements include $235,096 in overnight accounts. The remaining balance principally consists of agreements having maturities ranging from 2-90 days. The rates offered on these funds vary according to movements in the federal funds and short-term investment market rates. 19 UNITED BANKSHARES, INC. AND SUBSIDIARIES DEPOSITS The average daily amount of deposits and rates paid on such deposits is summarized for the years ended December 31: 2000 1999 1998 ----------------------------- ------------------------------ --------------------------- Amount Rate Amount Rate Amount Rate ------------ ------------ ------------ ----------- ------------- ---------- (Dollars in thousands) Noninterest bearing demand deposits $ 473,205 $ 468,238 $ 452,300 Interest bearing demand deposits 354,771 1.35% 335,231 1.60% 312,317 2.37% Savings deposits 784,005 3.65% 865,351 3.36% 817,852 3.49% Time deposits 1,637,162 5.65% 1,689,483 5.28% 1,661,827 5.60% ------------ ------------ ------------ ----------- ------------- ---------- TOTAL $3,249,143 4.53% $3,358,303 4.24% $3,244,296 4.62% ============ ============ =============
Maturities of time certificates of deposit of $100,000 or more outstanding at December 31, 2000 are summarized as follows: (In thousands) 3 months or less $ 76,246 Over 3 through 6 months 80,712 Over 6 through 12 months 115,530 Over 12 months 116,969 ------------ TOTAL $ 389,457 ============ RETURN ON EQUITY AND ASSETS The following table shows selected consolidated operating and capital ratios for each of the last three years ended December 31: 2000 1999 1998 -------- -------- -------- Return on average assets 1.19% 1.44% 1.05% Return on average equity 14.41% 16.73% 10.77% Dividend payout ratio (1) 59.83% 50.35% 63.77% Average equity to average assets ratio 8.29% 8.63% 9.73% (1) Based on historical results of United before the effects of restatements for pooling of interests business combinations. 20 UNITED BANKSHARES, INC. AND SUBSIDIARIES SUMMARY OF LOAN LOSS EXPERIENCE The following table summarizes United's loan loss experience for each of the five years ended December 31:
2000 1999 1998 1997 1996 ---------- ---------- ---------- ---------- ---------- (Dollars in thousands) Balance of allowance for possible loan losses at beginning of year $ 39,599 $ 39,189 $ 31,936 $ 29,376 $ 29,531 Allowance of purchased company at date of acquisition 2,695 Loans charged off: Commercial, financial and agricultural 2,482 3,896 800 1,352 2,310 Real estate 10,570 3,290 3,070 447 406 Real estate construction Consumer and other 2,793 2,050 2,400 2,436 1,199 ---------- ---------- ---------- ---------- ---------- TOTAL CHARGE-OFFS 15,845 9,236 6,270 4,235 3,915 Recoveries: Commercial, financial and agricultural 374 341 729 292 283 Real estate 226 156 217 263 237 Real estate construction Consumer and other 433 349 421 265 359 ---------- ---------- ---------- ---------- ---------- TOTAL RECOVERIES 1,033 846 1,367 820 879 ---------- ---------- ---------- ---------- ---------- NET LOANS CHARGED OFF 14,812 8,390 4,903 3,415 3,036 Addition to allowance (1) 15,745 8,800 12,156 3,280 2,881 ---------- ---------- ---------- ---------- ---------- BALANCE OF ALLOWANCE FOR LOAN LOSSES AT END OF YEAR $ 40,532 $ 39,599 $ 39,189 $ 31,936 $ 29,376 ========== ========== ========== ========== ========== Loans outstanding at the end of period (gross) $3,197,494 $3,170,096 $2,652,391 $2,689,839 $2,354,571 Average loans outstanding during period (net of unearned income) $3,320,065 $2,975,116 $2,668,460 $2,472,293 $2,245,292 Net charge-offs as a percentage of average loans outstanding 0.45% 0.28% 0.18% 0.14% 0.14% Allowance for loan losses as a percentage of nonperforming loans 315.5% 190.9% 209.9% 170.9% 229.8%
(1) The amount charged to operations and the related balance in the allowance for loan losses is based upon periodic evaluations of the loan portfolio by management. These evaluations consider several factors including, but not limited to, general economic conditions, loan portfolio composition, prior loan loss experience and management's estimation of probable losses. Quarterly reviews of individual loans as well as the loan portfolio as a whole are made by management and the credit department. Management performs extensive procedures in granting and monitoring loans on a continual basis. Further, management believes that the allowance for loan losses is adequate to absorb anticipated losses. 21 UNITED BANKSHARES, INC. AND SUBSIDIARIES SUMMARY OF LOAN LOSS EXPERIENCE--Continued
Allocation of allowance for loan losses December 31 ------------------------------------------------------------------------------------ 2000 1999 1998 1997 1996 Commercial, financial and Agricultural $12,762 $14,432 $13,772 $10,115 $ 8,261 Real estate 12,713 9,861 3,587 3,452 4,239 Real estate construction 1,372 754 1,086 674 511 Consumer and other 3,533 2,735 3,747 3,221 1,688 Unallocated 10,152 11,817 16,997 14,474 14,677 ------- ------- ------- ------- ------- Total $40,532 $39,599 $39,189 $31,936 $29,376 ======= ======= ======= ======= =======
22 UNITED BANKSHARES, INC. FORM 10-K, PART II Item 8. Financial Statements and Supplementary Data (a) - FINANCIAL STATEMENTS REQUIRED BY REGULATION S-X Information relating to financial statements on pages 9 through 37 inclusive of the Annual Report to Shareholders for the year ended December 31, 2000, is incorporated herein by reference. (b) - SUPPLEMENTARY FINANCIAL INFORMATION (1) Selected Quarterly Financial Data Information relating to selected quarterly financial data on page 37 of the Annual Report to Shareholders for the year ended December 31, 2000, is incorporated herein by reference. (2) Information on the Effects of Changing Prices Information relating to effects of changing prices on page 44 of the Annual Report to Shareholders for the year ended December 31, 2000, is incorporated herein by reference. Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURES This item is omitted since it is not applicable. 23 UNITED BANKSHARES, INC. FORM 10-K, PART III Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT Information regarding directors and executive officers of the registrant on pages 4 through 9 inclusive and page 24, of the Proxy Statement for the 2001 Annual Shareholders' Meeting is incorporated herein by reference. Change of Control Agreements ---------------------------- In August of 2000, United entered into agreements with Richard M. Adams, Jr., Kendal E. Carson, James J. Consagra, Jr., and John Neuner, III to encourage those executive officers not to seek other employment because of the possibility that United might be acquired by another entity. The Board of Directors determined that such an arrangement was appropriate especially in view of recent and anticipated changes in the banking industry. The agreements were not undertaken in the belief that a change of control was imminent. Generally, the agreements provide severance compensation to those officers if their employment should end under certain specified conditions after a change of control of United. Compensation is paid upon any involuntary termination following a change of control unless the officer is terminated for cause. In addition, compensation will be paid after a change of control if the officer voluntarily terminates employment because of a decrease in the total amount of the officer's base salary below the level in effect on the date of consummation of the change of control, without the officer's consent; a material reduction in the importance of the officer's job responsibilities without the officer's consent; geographical relocation of the officer without consent to an office more than fifty (50) miles from the officer's location at the time of a change of control; failure by United to obtain assumption of the contract by its successor or any termination of employment within thirty-six (36) months after consummation of a change of control which is effected for any reason other than good cause. Under the agreements, a change of control is deemed to occur in the event of a change of ownership of United which must be reported to the Securities and Exchange Commission as a change of control, including but not limited to the acquisition by any "person" (as such term is used in Sections 13(d) and 14(d) of the Securities and Exchange Act of 1934 (the "Exchange Act")) of direct or indirect "beneficial ownership" (as defined by Rule 13d-3 under the Exchange Act) of twenty-five percent (25%) or more of the combined voting power of United's then outstanding securities, or the failure during any period of two (2) consecutive years of individuals who at the beginning of such period constitute the Board for any reason to constitute at least a majority thereof, unless the election of each director who was not a director at the beginning of such period has been approved in advance by directors representing at least two- thirds (2/3) of the directors at the beginning of the period. Under the agreements, severance benefits include: (a) cash payment equal to the officers monthly base salary in effect on either (i) the date of termination; (ii) the date immediately preceding the change of control, whichever is higher, multiplied by the number of full months between the date 24 of termination and the date that is thirty-six (36) months after the date of consummation of the change of control; (b) payment of cash incentive award, if any, under United's Incentive Plan; (c) continuing participation in employee benefit plans and programs such as retirement, disability and medical insurance for a period of thirty-six (36) months following the date of termination. (See Exhibit 10.2 beginning on page 124.) Item 11. EXECUTIVE COMPENSATION Information regarding executive compensation on pages 10 through 14 inclusive, of the Proxy Statement for the 2001 Annual Shareholders' Meeting is incorporated herein by reference. Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT Information regarding security ownership of certain beneficial owners and management on pages 7 through 9 inclusive and pages 19 and 24, of the Proxy Statement for the 2001 Annual Shareholders' Meeting is incorporated herein by reference. Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS Information regarding certain relationships and related transactions on pages 5, 6, 7, 14 and 18 of the Proxy Statement for the 2001 Annual Shareholders' Meeting is incorporated herein by reference. 25 UNITED BANKSHARES, INC. FORM 10-K, PART IV Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K (a) List of Documents Filed as Part of This Report: (1) Financial Statements The financial statements listed below are incorporated herein by reference from the Annual Report to Shareholders for the year ended December 31, 2000 at Item 8a. Page references are to such Annual report.
Financial Statements: Page References -------------------- --------------- Report of Independent Auditors........................................................................ 9 Consolidated Balance Sheets........................................................................... 10 Consolidated Statements of Income..................................................................... 11 Consolidated Statements of Changes in Shareholders' Equity............................................ 12 Consolidated Statements of Cash Flows................................................................. 13 Notes to Consolidated Financial Statements............................................................ 14
(2) Financial Statement Schedules United is not filing separate financial statement schedules because of the absence of conditions under which they are required or because the required information is included in the consolidated financial statements or notes thereto. (3) Exhibits Required by Item 601 Listing of Exhibits - See the Exhibits' Index on page 30 of this Form 10-K. (b) Reports on Form 8-K On December 27, 2000, United Bankshares, Inc. filed a Current Report under Items 5 and 7 to report a restructuring of its balance sheet. On January 22, 2001, United Bankshares, Inc. filed a Current Report under Items 5 and 7 to report the results of operations for the fourth quarter and year of 2000. (c) Exhibits -- The exhibits to this Form 10-K begin on page 79. 26 (d) Consolidated Financial Statement Schedules -- All other schedules for which provision is made in the applicable accounting regulation of the Securities and Exchange Commission are not required under the related instructions or are inapplicable or pertain to items as to which the required disclosures have been made elsewhere in the financial statements and notes thereto, and therefor have been omitted. 27 SIGNATURES Pursuant to the requirements of Section 13 or 15 (d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. UNITED BANKSHARES, INC. (Registrant) By /s/ Richard M. Adams ---------------------- Chairman of the Board Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated. Signatures Title Date /s/ Richard M. Adams Chairman of the Board, Director, March 27, 2001 ------------------------------ and Chief Executive Officer /s/ Steven E. Wilson Chief Financial Officer March 27, 2001 ------------------------------ Chief Accounting Officer /s/ John M. McMahon Director March 27, 2001 ------------------------------ /s/ Warren A. Thornhill, III Director March 27, 2001 ------------------------------ /s/ H. Smoot Fahlgren Director March 27, 2001 ------------------------------ /s/ William C. Pitt, III Director March 27, 2001 ------------------------------ /s/ Theodore J. Georgelas Director March 27, 2001 ------------------------------ /s/ F.T. Graff, Jr. Director March 27, 2001 ------------------------------ /s/ Russell L. Isaacs Director March 27, 2001 ------------------------------ /s/ Harry L. Buch Director March 27, 2001 ------------------------------ /s/ P. Clinton Winter, Jr. Director March 27, 2001 ------------------------------ /s/ Robert G. Astorg Director March 27, 2001 ------------------------------ 28 SIGNATURES (continued) Signatures Title Date /s/ Thomas J. Blair, III Director March 27, 2001 -------------------------- /s/ James W. Word, Jr. Director March 27, 2001 -------------------------- /s/ I.N. Smith, Jr. Director March 27, 2001 -------------------------- /s/ G. Ogden Nutting Director March 27, 2001 -------------------------- 29 UNITED BANKSHARES, INC. FORM 10-K INDEX TO EXHIBITS Item 14. Sequential S-K Item 601 Page Description Table Reference Number (a) ----------- --------------- --------- Articles of Incorporation and Bylaws: (3) (a) Bylaws (g) (b) Articles of Incorporation (f) Investments (4) N/A Voting Trust Agreement (9) N/A Material Contracts (10) (a) Employment Agreement with I. N. Smith, Jr. (b) (b) Employment Agreement with Richard M. Adams (e) (c) Lease on Branch Office in Charleston Town Center, Charleston, West Virginia (b) (d) Lease on United Center, Charleston, West Virginia (h) (e) Lease and Agreement between Valley Savings and Loan Company (Lessor) and Dorothy Adams, Richard M. Adams and Douglass H. Adams (Lessees) (c) (f) Agreement between Dorothy D. Adams (Lessors) and Valley Savings and Loan Company (Lessees) (c) 30 Sequential S-K Item 601 Page Description Table Reference Number (a) ----------- --------------- ---------- (g) Employment Contract with Douglass H. Adams (d) (h) Employment Contract with Thomas A. McPherson (d) (i) Data processing contract with FISERV (10.1) 79 (j) Supplemental Retirement Contract with Richard M. Adams (i) (k) Supplemental Retirement Contract with Douglass H. Adams (i) (l) Executive Officer Change (j) of Control Agreements (10.2) 124 (m) Employment Contract with Bernard H. Clineburg (k) Statement Re: Computation of Ratios (12) 129 Annual Report to Security Holders, et al. (13) 33 Letter Re: Change in accounting principles (18) N/A Previously Unfiled Documents (19) N/A Subsidiaries of the Registrant (21) 130 Published Report Regarding Matters Submitted to a Vote of Security Holders (22) N/A Consent of Ernst & Young LLP (23) 131 31 Sequential S-K Item 601 Page Description Table Reference Number (a) ----------- --------------- ---------- Power of Attorney (24) N/A Additional Exhibits: (28) N/A Footnotes --------- (a) N/A = Not Applicable (b) Incorporated into this filing by reference to Exhibit 10 of the 1985 Form 10-K for Intermountain Bankshares, Inc., File No. 0-12356 (c) Incorporated into this filing by reference to Exhibit 10 of the 1986 Form 10-K for United Bankshares, Inc., File No. 0-13322 (d) Incorporated into this filing by reference to Part II of Form S-4 Registration Statement of United Bankshares, Inc., Registration No. 33-19968 filed February 3, 1988 (e) Incorporated into this filing by reference to Exhibits to the 1988 10-K for United Bankshares, Inc., File No. 0-13322 (f) Incorporated into this filing by reference to Exhibits to the 1989 10-K for United Bankshares, Inc., File No. 0-13322 (g) Incorporated into this filing by reference to Exhibits to the 1990 10-K for United Bankshares, Inc., File No. 0-13322 (h) Incorporated into this filing by reference to Exhibits to the 1991 10-K for United Bankshares, Inc., File No. 0-13322 (i) Incorporated into this filing by reference to Exhibits to the 1992 10-K for United Bankshares, Inc., File No. 0-13322 (j) Incorporated into this filing by reference to Exhibits to the 1993 10-K for United Bankshares, Inc., File No. 0-13322 (k) Incorporated into this filing by reference to Part II of Form S-4 Registration Statement of United Bankshares, Inc., Registration No. 333- 44993 filed January 27, 1998 32 UNITED BANKSHARES, INC. AND SUBSIDIARIES SELECTED FINANCIAL DATA (Dollars in thousands, except per share data)
Five Year Summary ---------------------------------------------------------------------- 2000 1999 1998 1997 1996 ---------- ---------- ---------- ---------- ---------- Summary of Operations: Total interest income $ 377,847 $ 354,665 $ 325,647 $ 280,452 $ 250,641 Total interest expense 197,766 174,402 155,354 131,122 112,256 Net interest income 180,081 180,263 170,293 149,330 138,385 Provision for loan losses 15,745 8,800 12,156 3,280 2,881 Other income 33,786 51,078 41,752 37,068 29,654 Other expense 110,422 117,519 137,964 103,852 104,385 Income taxes 28,724 34,774 17,523 27,005 21,054 Net income 58,976 70,248 44,402 52,261 39,719 Cash dividends(1) 35,286 35,367 28,317 20,344 17,847 Per common share: Net income: Basic 1.41 1.63 1.04 1.24 0.94 Diluted 1.40 1.61 1.02 1.22 0.93 Cash dividends(1) 0.84 0.82 0.75 0.68 0.62 Book value per share 10.32 9.32 9.74 9.35 8.59 Selected Ratios: Return on average shareholders' equity 14.41% 16.73% 10.77% 13.92% 11.17% Return on average assets 1.19% 1.44% 1.05% 1.42% 1.18% Dividend payout ratio (1) 59.83% 50.35% 63.77% 49.69% 58.49% Selected Balance Sheet Data: Average assets $4,936,605 $4,867,521 $4,238,808 $3,682,302 $3,352,594 Investment securities 1,245,334 1,472,553 927,316 1,006,735 865,020 Loans held for sale 203,831 117,825 720,607 97,619 74,465 Total loans 3,192,494 3,170,096 2,652,391 2,689,839 2,354,571 Total assets 4,904,547 5,069,160 4,567,899 4,094,836 3,541,244 Total deposits 3,391,449 3,260,985 3,493,058 3,185,963 2,770,833 Long-term borrowings 698,204 343,847 240,867 46,674 44,877 Total borrowings and other liabilities 1,082,228 1,412,245 653,310 512,817 407,579 Shareholders' equity 430,870 395,930 421,531 396,056 362,832
(1) Cash dividends are the amounts declared by United and do not include cash dividends of acquired subsidiaries prior to the dates of consummation. 33 UNITED BANKSHARES, INC. AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS FORWARD-LOOKING STATEMENTS Congress passed the Private Securities Litigation Act of 1995 to encourage corporations to provide investors with information about the company's anticipated future financial performance, goals, and strategies. The act provides a safe harbor for such disclosure; in other words, protection from unwarranted litigation if actual results are not the same as management expectations. United desires to provide its shareholders with sound information about past performance and future trends. Consequently, any forward-looking statements contained in this report, in a report incorporated by reference to this report, or made by management of United in this report, in any other reports and filings, in press releases and in oral statements, involves numerous assumptions, risks and uncertainties. Actual results could differ materially from those contained in or implied by United's statements for a variety of factors including, but not limited to: changes in economic conditions; movements in interest rates; competitive pressures on product pricing and services; success and timing of business strategies; the nature and extent of governmental actions and reforms; and rapidly changing technology and evolving banking industry standards. INTRODUCTION The following discussion and analysis presents the significant changes in financial condition and the results of operations of United and its subsidiaries for the periods indicated below. This discussion and the consolidated financial statements and the notes to consolidated financial statements include the accounts of United Bankshares, Inc. and its wholly-owned subsidiaries, unless otherwise indicated. This discussion and analysis should be read in conjunction with the consolidated financial statements and accompanying notes thereto, which are included elsewhere in this document. The following broad overview of the financial condition and results of operations is not intended to replace the more detailed discussion, which is presented under specific headings on the following pages. 2000 COMPARED TO 1999 EARNINGS SUMMARY For the year ended December 31, 2000, operating earnings were $72.5 million compared to $70.2 million for the year ended December 31, 1999. On a diluted per share basis, operating earnings were $1.72 in 2000 compared to $1.61 in 1999. Operating earnings represent earnings before balance sheet restructuring and other charges of approximately $20.09 million ($13.51 million after-tax) incurred during the fourth quarter of 2000. United restructured its 34 balance sheet by selling lower yielding, fixed-rate securities, which had been carried as available for sale. A majority of the proceeds of the sale was reinvested in higher yielding, fixed-rate securities with an average maturity comparable with those securities sold. A portion of the sale proceeds was also used to pay down short-term borrowings and to repurchase shares of United's common stock. Sales and write-downs of securities resulted in a loss of $15.01 million ($10.10 million after-tax) during the fourth quarter of 2000. In addition to the restructuring losses, United incurred other significant charges during the fourth quarter of 2000. United recorded an additional provision for loan losses of approximately $1.09 million ($734 thousand after- tax) due to the effects of a slowing economy on consumer and commercial loan customers. United also incurred litigation expense of $1.63 million ($1.09 million after-tax) as a result of a building operating lease settlement. Other charges, which related primarily to employee salary incentive and benefit plans, totaled approximately $2.36 million ($1.59 million after-tax). After these charges, diluted earnings per share were $1.40 for the year ended December 31, 2000, compared to $1.61 for the year ended December 31, 1999. Operating earnings represent a return on average shareholders' equity of 17.66% and a return on average assets of 1.47%, respectively, for the year ended December 31, 2000. These operating ratios compare favorably with national peer grouping information provided by Keefe, Bruyette, & Woods, of 14.82% and 1.16%, respectively. United, one of the nation's most profitable regional banking companies, has a strong capital position, and is well positioned to take advantage of future growth opportunities. Dividends per share increased from $0.82 in 1999 to a record level of $0.84 per share in 1999. United paid approximately $35.3 million in dividends to common shareholders in 2000 compared with $35.4 million in 1999. This was the twenty- seventh consecutive year of dividend increases to shareholders. The growth in operating earnings for the year of 2000 was a result of reducing noninterest expenses while maintaining a stable net interest margin in a challenging banking environment. Net interest income remained flat for the year of 2000 when compared to 1999 as increased deposit and funding costs resulting from six Federal Funds rate increases from mid 1999 through mid 2000 offset growth in interest income. Noninterest income, including income from mortgage banking operations, decreased $2.28 million or 4.47% for 2000 when compared to 1999 as the higher interest rates and a slowing economy caused a decline in mortgage banking results. Noninterest expenses decreased $11.09 million or 9.43% for 2000 compared to the same period in 1999. The effective tax rate for the year ended December 31, 2000 approximated 32.75% compared to 33.12% for 1999. FINANCIAL CONDITION SUMMARY Total assets were $4.90 billion at December 31, 2000, down $164.61 million or 3.25% compared with year end 1999. United's available for sale securities portfolio decreased $342.10 million while securities held to maturity increased $114.88 million as compared to year end 1999. Loans held for sale increased $86 million during 2000. Loans, net of unearned income, reflected a $22.40 million increase from 1999 to 2000 due mainly to a 6% growth rate in the commercial loan portfolio. Cash and cash equivalents decreased $15.00 million while nonearning assets increased $30.80 million in 2000 as compared with year end 1999. 35 Total deposits grew $130.46 million or 4% from year end 1999 as United realized increases of $71.82 million and $58.65 million in interest-bearing deposits and noninterest-bearing deposits, respectively. United's short-term borrowings decreased $64.53 million and its FHLB borrowings declined $246.84 million as United repaid these borrowings to restructure the balance sheet to better manage interest rate risk. Shareholders' equity increased $34.94 million or 8.82% from December 31, 1999 due to net retained earnings in excess of dividends for the year of $23.69 million and an increase in the fair value of United's securities available for sale portfolio of approximately $26.90 million, net of deferred income taxes. During 2000, United completed a plan announced in 1999 to repurchase up to 1.75 million shares of its common stock on the open market. In May of 2000, United announced a new plan to repurchase up to an additional 1.675 million shares of its common stock on the open market, of which 219,300 shares have been repurchased since its implementation. United continues to balance capital adequacy and the return to shareholders. At December 31, 2000, United's regulatory capital ratios, including those of its bank subsidiaries, exceeded the levels established for well-capitalized institutions. The following discussion explains in more detail the results of operations and changes in financial condition by major category. Net Interest Income Net interest income represents the primary component of United's earnings. It is the difference between interest income from earning assets and interest expense incurred to fund these assets. Net interest income is impacted by changes in the volume and mix of interest-earning assets and interest-bearing liabilities, as well as changes in market interest rates. Such changes, and their impact on net interest income in 2000, are summarized below. Tax-equivalent interest income increased $26.0 million or 7.2% from $362.94 million for the year of 1999 to $388.94 million for the year of 2000. For the years ended December 31, 2000 and 1999, tax-equivalent net interest income was $191.17 million and $188.54 million, respectively. The main reason for only a slight increase in tax-equivalent net interest income from the previous year was increased deposit and funding costs resulting from six Federal Funds rate increases from mid 1999 through mid 2000, which predominantly offset the growth in interest income. United's tax-equivalent net interest margin was 4.11% for the year of 2000 and 4.12% for the same time period in 1999. Total interest income of $377.85 million increased 6.54% in 2000 over 1999 as a result of a higher yield on average interest-earning assets. Overall, the yield on average interest-earning assets increased 41 basis points from 7.93% in 1999 to 8.34% in 2000. The yield on average loans, net of unearned income, increased 43 basis points to 8.87% in the year 2000 from to 8.44% in 1999. The yield on average securities was 6.86% for the year 2000 as compared to 6.66% for 1999. The average volume of interest-earning assets remained relatively flat, increasing only $82.91 million in the year of 2000. Total interest expense increased $23.36 million or 13.40% in 2000 compared to 1999. This increase was attributed primarily to increased average wholesale funding balances at higher average interest rates than in 36 1999. The average cost of funds increased from 4.46% in 1999 to 4.95% in 2000 due to higher interest rates. United's average FHLB borrowings increased $197.91 million and average short-term borrowings increased $2.79 million as average interest-bearing deposits decreased $114.13 million. Provision for Loan Losses Asset quality improved significantly over the past year despite economic pressures affecting the banking industry and United's markets. Nonperforming loans were $12.85 million at December 31, 2000 as compared to $20.74 million at December 31, 1999. Nonperforming loans represented 0.26% of total assets at the end of the year 2000, as compared to 0.41% for United at the end of 1999. The components of nonperforming loans include nonaccrual loans and loans which are contractually past due 90 days or more as to interest or principal, but have not been put on a nonaccrual basis. Nonaccrual loans decreased $4.19 million or 34.04% while loans past due 90 days or more decreased $3.70 million or 43.95% since year end 1999. Total nonperforming assets of $14.96 million, including OREO of $2.11 million at December 31, 2000, represented 0.30% of total assets at the end of 2000. At December 31, 2000, impaired loans were $12.50 million, a decrease of $3.14 million or 20.07% from the $15.64 million of impaired loans at December 31, 1999. For further details, along with a discussion of concentrations of credit risk, see Note E to the Consolidated Financial Statements. United evaluates the adequacy of the allowance for loan losses on a quarterly basis and its loan administration policies are focused upon the risk characteristics of the loan portfolio. United's process for evaluating the allowance is a formal company-wide process that focuses on early identification of potential problem credits and procedural discipline in managing and accounting for those credits. Allocations are made for specific commercial loans based upon management's estimate of the borrowers' ability to repay and other factors impacting collectibility. Other commercial loans not specifically reviewed on an individual basis are evaluated based on historical loss percentages, which are adjusted for current conditions and applied to loan pools that have been segregated by risk. Allocations for loans other than commercial loans are made based upon historical loss experience adjusted for current conditions. Differences between actual loan loss experience and estimates are reviewed on a quarterly basis and adjustments are made to those estimates. United's formal company-wide process at December 31, 2000 produced increased allocations within three of four loan categories from December 31, 1999. The components of the allowance allocated to real estate increased $2.9 million, as a result of changes in historical loss experience factors. Also the consumer loan and real estate construction loan pools increased by $798 thousand and $618 thousand, respectively, as a result of changes in volume and historical loss experience. The components of the allowance allocated to commercial loans decreased $1.7 million as a result of a decrease in specific allocations on larger commercial loans. At year end 2000 and 1999, the allowance for loan losses was 1.27% and 1.25% of total loans, net of unearned income, respectively. At December 31, 2000 and 1999, the ratio of the allowance for loan losses to nonperforming loans was 315.5% and 190.9%, respectively, reflecting the impact of the significant decline in nonperforming loans. 37 Management believes that the allowance for loan losses of $40.53 million at December 31, 2000, is adequate to provide for probable losses on existing loans based on information currently available. For the years ended December 31, 2000 and 1999, the provision for loan losses was $15.75 million and $8.80 million, respectively. Net charge-offs were $14.81 million for the year of 2000 as compared to net charge-offs of $8.39 million for the year of 1999. The increases in provision and net charge-offs for the year were primarily attributed to the addition of junior-lien mortgage loans to the loan portfolio as of October 1, 1999. The increased provision and charge-offs were offset by increased interest income recognized on these high-interest rate loans. At December 31, 2000, the balance of these junior-lien mortgage loans approximated $173 million. Management is not aware of any potential problem loans, trends or uncertainties which it reasonably expects will materially impact future operating results, liquidity, or capital resources which have not been disclosed. Additionally, management has disclosed all known material credits which cause management to have serious doubts as to the ability of such borrowers to comply with the loan repayment schedules. Other Income Noninterest income has been and will continue to be an important factor for improving United's profitability. Accordingly, management continues to evaluate areas where noninterest income can be enhanced. Other income consists of all revenues that are not included in interest and fee income related to earning assets. Noninterest income, excluding securities gains and losses and mortgage banking results, increased 11.79% for the year of 2000 when compared to the year of 1999. These results were achieved primarily due to a combination of increased revenues from the deposit services area and the trust department. Service charges, commissions and fees from customer accounts increased $2.54 million or 12.78% from 1999 due mainly to a new checking account product introduced late in 1999. This income includes charges and fees related to various banking services provided by United. Trust income and brokerage commissions increased $812 thousand or 16.43% and $222 thousand or 20.50%, respectively, in 2000 due to an increased volume of trust and brokerage business. United significantly broadened the scope and activity of its trust and brokerage service areas, especially in the northern Virginia market, to provide additional sources of fee income that complement United's traditional banking products and services. Mortgage banking results declined from the previous year due to higher interest rates and a slowing economy, both of which adversely impacted the demand for mortgage loan originations and the fees received on the sale of those mortgage loans in the secondary market. Originations of mortgage loans fell 5% or $67.4 million for the year of 2000 as compared to the same period in 1999 while proceeds from sales of mortgage loans declined 21% or $302.4 million in the year of 2000 compared to last year. During 2000, United incurred a net loss on the sale of investment securities of $13.86 million as compared to a net gain of $677 thousand during 1999. As previously mentioned, United restructured its balance sheet in the fourth quarter of 2000 by selling lower yielding, fixed-rate securities which had been carried as 38 available for sale. Sales and write-downs of securities from this restructuring resulted in loss of approximately $15.01 million ($10.10 million after-tax) during the fourth quarter of 2000. Overall, noninterest income, including net gains and losses from the sale of securities and income from mortgage banking operations, decreased $2.28 million or 4.47% for 2000 when compared to 1999. Other Expense Just as management continues to evaluate areas where noninterest income can be enhanced, it strives to improve the efficiency of its operations and thus reduce operating costs. United's cost control efforts have been very successful resulting in an efficiency ratio of 44.8%, which is well below the 57.6% reported by United's national peer group banks and its immediate in-market competitors. Other expense includes all items of expense other than interest expense, the provision for loan losses and income tax expense. Noninterest expense, excluding one-time charges of $3.99 million recognized in the fourth quarter of 2000, decreased $11.09 million or 9.43% for the year ended December 31, 2000 as compared to the year ended 1999. Including these one-time charges, total noninterest expense declined $7.10 million or 6.04% from 1999. Total salaries and benefits, excluding one-time charges of $960 thousand, decreased by 13.14% or $7.90 million for the year of 2000 compared to year of 1999. The decline was due to lower sales activity in the mortgage banking segment as compensation and incentives for its personnel are significantly tied to activity levels and a SFAS No. 87 pension benefit as a result of excess earnings within United's plan. Including the one-time expenses, total salaries and benefits declined $6.94 million or 11.54% from 1999. At December 31, 2000 and 1999, United employed 1,253 and 1,387 full-time equivalent employees, respectively. Net occupancy expense in 2000, excluding one-time charges of $108 thousand, decreased from 1999 levels by $527 thousand or 4.32%. The overall change in net occupancy expense for 2000 was mainly due to decreased building repair and maintenance expenses. Remaining other expense, excluding one-time charges of approximately $2.92 million, decreased $2.66 million or 5.89% in 2000 compared to 1999. Including the aforementioned one-time expenses, other expense remained relatively flat from 1999. Income Taxes For the years ended December 31, 2000 and 1999, United's effective tax rate approximated 33%. Quarterly Results The first, second and third quarters of 2000 showed increases in earnings in comparison to those same three quarters of 1999. On a per share basis, first quarter 2000 earnings were $0.42 per share compared to $0.39 in 1999, second quarter 2000 earnings were $0.43 per share compared to $0.40 in 1999 while third quarter 2000 earnings were $0.44 compared to $0.41 per share in 1999. 39 In the fourth quarter of 2000, United reported earnings per share of $0.11 as compared to $0.41 per share for the same period in 1999. Fourth quarter 2000 results included balance sheet restructuring and other one-time charges of approximately $20.09 million ($13.51 million after-tax). Additional quarterly financial data for 2000 and 1999 may be found in Note Q to the Consolidated Financial Statements. The Effect of Inflation United's income statements generally reflect the effects of inflation. Since interest rates, loan demand and deposit levels are impacted by inflation, the resulting changes in the interest sensitive assets and liabilities are included in net interest income. Similarly, operating expenses such as salaries, rents and maintenance include changing prices resulting from inflation. One item that would not reflect inflationary changes is depreciation expense. Subsequent to the acquisition of depreciable assets, inflation causes price levels to rise; therefore, historically presented dollar values do not reflect this inflationary condition. With inflation levels at relatively low levels and monetary and fiscal policies being implemented to keep the inflation rate increases within an acceptable range, management expects the impact of inflation would continue to be minimal in the near future. Market Risk The objective of United's Asset/Liability Management function is to maintain consistent growth in net interest income within United's policy guidelines. This objective is accomplished through the management of balance sheet liquidity and interest rate risk exposures due to changes in economic condition, interest rate levels and customer preferences. Management considers interest rate risk to be United's most significant market risk. Interest rate risk is the exposure to adverse changes in the net interest income of United as a result of changes in interest rates. Consistency in United's earnings is largely dependent on the effective management of interest rate risk. United employs a variety of measurement techniques to identify and manage its exposure to changing interest rates. One such technique utilizes an earnings simulation model to analyze net interest income sensitivity to movements in interest rates. The model is based on projected cash flows and repricing characteristics for on and off-balance sheet instruments and incorporates market-based assumptions regarding the impact of changing interest rates on the prepayment rate of certain assets and liabilities. The model also includes executive management projections for activity levels in product lines offered by United. Assumptions based on the historical behavior of deposit rates and balances in relation to changes in interest rates are also incorporated into the model. These assumptions are inherently uncertain and, as a result, the model cannot precisely measure net interest income or precisely predict the impact of fluctuations in interest rates on net interest income. Actual results will differ from simulated results due to timing, magnitude and frequency of interest rate changes as well as changes in market conditions and management strategies. Interest sensitive assets and liabilities are defined as those assets or liabilities that mature or are repriced within a designated time-frame. The principal function of interest rate risk management is to maintain an 40 appropriate relationship between those assets and liabilities that are sensitive to changing market interest rates. United closely monitors the sensitivity of its assets and liabilities on an ongoing basis and projects the effect of various interest rate changes on its net interest margin. The difference between rate sensitive assets and rate sensitive liabilities for specified periods of time is known as the "GAP." As shown in the interest rate sensitivity gap table in this section, United was liability sensitive (excess of liabilities over assets) in the one-year horizon. On the surface, this would indicate that rising market interest rates would reduce United's earnings and declining market interest rates would increase earnings. United, however, has not experienced the kind of earnings volatility indicated from the cumulative gap. This is because a significant portion of United's retail deposit base does not reprice on a contractual basis. Management has estimated, based upon historical analyses, that savings deposits are less sensitive to interest rate changes than are other forms of deposits. The GAP table presented herein has been adjusted to show the estimated differences in interest rate sensitivity which result when the retail deposit base is assumed to reprice in a manner consistent with historical trends. (See "Management Adjustments" in the GAP table). Using these estimates, United was asset sensitive in the one-year horizon in the amount of $117 million or 2.51% of the cumulative gap to related earning assets. During 1998, United purchased fixed-rate junior-lien mortgage loans from an unrelated third party financial institution with the intention that these loans would be securitized and resold back to the third party lender. However, the third party was unable to repurchase the loans and United inherited approximately $456 million of these mortgage loans which United held for sale on its balance sheet as of December 31, 1998. During 1999, to better manage risk, United securitized approximately $205 million of these loans and retained a portion of the resultant securities. At December 31, 2000, the retained resultant securities approximated $55 million and are carried in the available for sale investment portfolio. The remainder of these junior-lien mortgages are held in the loan portfolio and the balance at December 31, 2000, approximated $173 million. To aid in interest rate risk management, United's subsidiary banks are members of the Federal Home Loan Bank (FHLB). The use of FHLB borrowings provides United with a low risk means of matching maturities of earning assets and interest-bearing funds to achieve a desired interest rate spread over the life of the earning assets. Interest rate risk management focuses on maintaining consistent growth in net interest income within Board-approved policy limits. United's Asset/Liability Management Committee (ALCO), which includes senior management representatives, reports to the Board of Directors and monitors and manages interest rate risk to maintain an acceptable level of change to net interest income as a result of changes in interest rates. Policy established for interest rate risk is stated in terms of the change in net interest income over a one-year and two-year horizon given an immediate and sustained increase or decrease in interest rates. The current limits approved by the Board of Directors are structured on a staged basis with each stage requiring specific actions. 41 The following table shows United's estimated earnings sensitivity profile after management's adjustments as of December 31, 2000 and 1999:
Change in Interest Rates Percentage Change in Net Interest Income ----------------------------------------------- (basis points) December 31, 2000 December 31, 1999 -------------- ----------------- ----------------- +200 -2.62% -8.06% -200 -3.57% 5.17%
Given an immediate, sustained 200 basis point upward shock to the yield curve used in the simulation model, it is estimated that net interest income for United would decrease by 2.62% over one year as of December 31, 2000, as compared to a decrease of 8.06% as of December 31, 1999. A 200 basis point immediate, sustained downward shock in the yield curve would decrease net interest income by an estimated 3.57% over one year as of December 31, 2000, as compared to an increase of 5.17% as of December 31, 1999. All of these estimated changes in net interest income are within the policy guidelines established by the Board of Directors. 42 The following table shows the interest rate sensitivity GAP as of December 31, 2000:
Interest Rate Sensitivity Gap Days Total 1-5 Over 5 ----------------------------------------- 0-90 91-180 181-365 One Year Years Years Total ------------------------------------------------------------------------------------------------ ASSETS Interest-Earning Assets: Federal funds sold and securities purchased under agreements to resell and other short- term investments $ 2,009 $ 2,009 $ 2,009 Investment and marketable equity securities Taxable 119,649 $ 10,282 $ 29,523 159,454 $ 107,714 $ 832,843 1,100,011 Tax-exempt 3,024 3,024 11,743 130,556 145,323 Loans, net of unearned income 1,205,692 174,559 322,183 1,702,434 838,958 854,933 3,396,325 ------------------------------------------------------------------------------------------------ Total Interest-Earning Assets $1,327,350 $ 187,865 $ 351,706 $1,866,921 $ 958,415 $1,818,332 $4,643,668 ================================================================================================ LIABILITIES Interest-Bearing Funds: Savings and NOW accounts $1,145,921 $1,145,921 $1,145,921 Time deposits of $100,000 & over 76,065 $ 51,268 $ 143,597 270,930 $ 117,199 $ 1,328 389,457 Other time deposits 248,875 262,396 366,449 877,720 435,907 3,029 1,316,656 Federal funds purchased, repurchase agreements and other short-term borrowings 268,963 27,750 296,713 37,003 333,716 FHLB borrowings 25,000 20,311 45,311 97,500 563,701 706,512 ------------------------------------------------------------------------------------------------ Total Interest-Bearing Funds $1,764,824 $ 341,414 $ 530,357 $2,636,595 $ 687,609 $ 568,058 $3,892,262 ================================================================================================ Interest Sensitivity Gap ($437,474) ($153,549) ($178,651) ($769,674) $ 270,806 $1,250,274 $ 751,406 ================================================================================================ Cumulative Gap ($437,474) ($591,023) ($769,674) ($769,674) ($498,868) $ 751,406 $ 751,406 ================================================================================================ Cumulative Gap as a Percentage of Total Earning Assets (9.42%) (12.73%) (16.57%) (16.57%) (10.74%) 16.18% 16.18% Management Adjustments $1,107,813 ($73,891) ($ 147,671) $ 866,250 ($886,250) $ 0 Off-Balance Sheet Activities ------------------------------------------------------------------------------------------------ Cumulative Management Adjusted Gap and Off-Balance Sheet Activities $ 670,339 $ 442,899 $ 116,576 $ 116,576 ($498,868) $ 751,406 $ 751,406 ================================================================================================ Cumulative Management Adjusted Gap and Off-Balance Sheet Activities as a Percentage of Total Earning Assets 14.44% 9.54% 2.51% 2.51% (10.74%) 16.18% 16.18% =================================================================================================
43 Liquidity and Capital Resources In the opinion of management, United maintains liquidity that is sufficient to satisfy its depositors' requirements and the credit needs of its customers. Like all banks, United depends upon its ability to renew maturing deposits and other liabilities on a daily basis and to acquire new funds in a variety of markets. A significant source of funds available to United is "core deposits". Core deposits include certain demand deposits, statement and special savings and NOW accounts. These deposits are relatively stable and they are the lowest cost source of funds available to United. Short-term borrowings have also been a significant source of funds. These include federal funds purchased and securities sold under agreements to repurchase as well as advances from the FHLB. Repurchase agreements represent funds that are generally obtained as the result of a competitive bidding process. Liquid assets are cash and those items readily convertible to cash. All banks must maintain sufficient balances of cash and near-cash items to meet the day- to-day demands of customers. Other than cash and due from banks, the available for sale securities portfolio and maturing loans are the primary sources of liquidity. The goal of liquidity management is to ensure the ability to access funding which enables United to efficiently satisfy the cash flow requirements of depositors and borrowers and meet United's cash needs. Liquidity is managed by monitoring funds availability from a number of primary sources. Substantial funding is available from cash and cash equivalents, unused short-term borrowings and a geographically dispersed network of branches providing access to a diversified and substantial retail deposit market. Short-term needs can be met through a wide array of sources such as correspondent and downstream correspondent federal funds and utilization of FHLB advances. Other sources of liquidity available to United to provide long-term as well as short-term funding alternatives, in addition to FHLB advances, are long-term certificates of deposit, lines of credit, and borrowings secured by bank premises or stock of United's subsidiaries. United has no intention at this time of utilizing any long-term funding sources other than FHLB advances and long-term certificates of deposit. Cash flows from operations in 2000 provided United with $743 thousand of cash compared to cash flows provided from operations of $226.41 million in 1999 primarily as a result of approximately $79.05 million of excess originations of mortgage loans over sales proceeds. In 1999, proceeds from sales of mortgage loans exceeded originations by $155.95 million. In 2000, net cash of $216.64 million was provided by investing activities as compared to 1999 in which investing activities resulted in a use of cash of $674.16 million. Cash provided by investing activities in 2000 was primarily due to $256.10 million of excess net proceeds from calls and maturities of investment securities over purchases of investment securities. In 1999 cash was used in investing activities due mainly to excess purchases of investment securities over net proceeds from calls and maturities of securities by $383.76 million as well as to support loan portfolio growth of $290.82 million. For the year of 2000, net cash of $232.38 million was used in financing activities, primarily due to the net repayment of approximately $246.84 million of FHLB borrowings, payment of $35.47 million in cash dividends and $18.38 million for acquisitions of United shares under the stock repurchase programs. Financing activities resulted in a source of cash in 1999 of $466.27 million primarily due to an increase in net borrowings from the FHLB and other short-term borrowings of $607.48 million and $149.21 million, 44 respectively. The net effect of this activity was a decrease in cash and cash equivalents of $15.00 million for the year of 2000. See the Consolidated Statement of Cash Flows in the Consolidated Financial Statements. United anticipates no problems in its ability to service its obligations over the next 12 months. There are no known trends, demands, commitments, or events that will result in or that are reasonably likely to result in United's liquidity increasing or decreasing in any material way. United also has significant lines of credit available to it. See Note H, Notes to Consolidated Financial Statements. The Asset and Liability Committee monitors liquidity to ascertain that a liquidity position within certain prescribed parameters is maintained. In addition, variable rate loans are a priority. These policies help to protect net interest income against fluctuations in interest rates. No changes are anticipated in the policies of United's Asset and Liability Committee. United also seeks to maintain a proper relationship between capital and total assets to support growth and sustain earnings. United has historically generated attractive returns on shareholders' equity. United's average equity to average asset ratio was 8.29% in 2000 and 8.63% in 1999. United's risk-based capital ratio was 11.77% in 2000 and 11.75% in 1999 which are both significantly higher than the minimum regulatory requirements. United's Tier 1 capital and leverage ratios of 10.68% and 8.17%, respectively, at December 31, 2000, are also well above regulatory minimums to be classified as a "well capitalized" institution. See Note N, Notes to Consolidated Financial Statements. Commitments At December 31, 2000 United had outstanding loan commitments of $1,086,455,000 pertaining to lines of credit authorized, but unused and $89,013,000 of letters of credit to its various customers in the normal course of business. Past experience has shown that, of the foregoing commitments, approximately 12- 15% can reasonably be expected to be funded within a one-year period. For more information, see Note K to the Consolidated Financial Statements. 1999 COMPARED TO 1998 EARNINGS SUMMARY For the year ended December 31, 1999, net income increased 58.21% to $70.2 million from $44.4 million for the year ended December 31, 1998. On a diluted per share basis, net income of $1.61 for the year increased 57.85% from $1.02 in 1998. Results for 1998 include the recognition of approximately $13.7 million ($8.2 million after tax) of merger-related and one-time charges associated with the pooling of interests acquisitions of George Mason Bankshares, Inc. and Fed One Bancorp, Inc. 45 For the year of 1999, United's return on average shareholders' equity of 16.73% and a return on average assets of 1.44% compared favorably with national peer grouping information provided by Keefe, Bruyette, & Woods, of 15.86% and 1.35%, respectively. Dividends per share increased 9.34% from $0.75 in 1998 to a record level of $0.82 per share in 1999. United paid approximately $35.0 million in dividends to common shareholders in 1999 compared with $24.65 million in 1998. Growth in earnings was a result of increases in net interest and noninterest income as well as a reduction of noninterest expenses. Net interest income increased by $9.97 million or 5.85% for the year ended December 31, 1999 as compared to the same period for 1998. Noninterest income, including income from mortgage banking operations, increased $9.33 million or 22.34% for 1999 when compared to 1998. Noninterest expenses decreased $20.45 million or 14.82% for 1999 compared to the same period in 1998. The effective tax rate for the year ended December 31, 1999 approximated 33.12% compared to 28.30% for 1998. FINANCIAL CONDITION SUMMARY Total assets were $5.07 billion at December 31, 1999, up $501.26 million or 10.97% compared with year end 1998. United's available for sale securities portfolio increased $642.20 million while securities held to maturity decreased $96.96 million as compared to year end 1998. Loans held for sale decreased $603 million during 1999 due mainly to a securitization in the amount of approximately $205 million, transfer of approximately $230 million to the loan portfolio and sales of mortgage loans in the secondary market. Loans, net of unearned income, reflected a $517.71 million increase from 1998 to 1999 due to 13% growth rates in both the commercial and consumer (non-mortgage) loan portfolios, as well as the previously mentioned reclassification. Cash and cash equivalents increased $18.51 million while nonearning assets increased $23 million in 1999 as compared with year end 1998. Total deposits declined $232.07 million or 6.64% from year end 1998 as United realized decreases of $169.85 million and $62.22 million in interest-bearing deposits and noninterest-bearing deposits, respectively. United's short-term borrowings increased $151.21 million and its FHLB borrowings increased $607.48 million as United utilized these sources of cash to fund investment and loan growth. Shareholders' equity decreased $25.60 million or 6.07% from December 31, 1998 due primarily to purchases of treasury stock of $26.19 million and a decline in the fair value of United's securities available for sale portfolio of approximately $37.16 million, net of deferred income taxes. In May of 1999, United announced a 1.75 million share repurchase program, and by year end 1999, United had purchased approximately 1.05 million shares. United continues to balance capital adequacy and the return to shareholders. At December 31, 1999, United's regulatory capital ratios, including those of its bank subsidiaries, exceeded the levels established for well-capitalized institutions. The following discussion explains in more detail the results of operations and changes in financial condition by major category. 46 Net Interest Income Net interest income represents the primary component of United's earnings. It is the difference between interest income from earning assets and interest expense incurred to fund these assets. Net interest income is impacted by changes in the volume and mix of interest-earning assets and interest-bearing liabilities, as well as changes in market interest rates. For the years ended December 31, 1999 and 1998, tax-equivalent net interest income was $188.54 million and $174.12 million, respectively. On a tax- equivalent basis the net interest margin was 4.12% for 1999 and 4.37% for 1998. The decline in the margin percentage reflected a changing earning asset mix primarily related to the securitization of higher yielding high loan-to-value mortgage loans. As a result of the securitization, interest income on the securities was recognized at a projected loss-adjusted yield that was significantly less than the contractual yields of the underlying assets. Total interest income of $354.67 million increased 8.91% in 1999 over 1998 as a result of higher volumes of interest-earning assets. Overall, average interest- earning assets increased $589.04 million or 14.77% during 1999 from $3.99 billion in 1998 to $4.58 billion in 1999. In particular, the average volume of investment securities increased $556.10 million at a slightly higher yield since December 31, 1998. During 1999, United experienced growth in all three major loan portfolios--commercial loans increased 13.85%, consumer loans increased 13.33% and mortgage loans increased 6.42%. Commercial loan growth was due to the more active solicitation of commercial loan volume, while the increase in the consumer loan portfolio was mainly attributable to the introduction of certain loan products in United's northern Virginia market. Total interest expense increased $19.05 million or 12.26% in 1999 compared to 1998. This increase was attributed primarily to increased average wholesale funding balances at lower average interest rates than in 1998. The average cost of funds decreased from 4.70% in 1998 to 4.46% in 1999 in light of a rising interest rate environment. United's average FHLB borrowings increased $370.84 million and average short-term borrowings increased $138.42 million as United implemented a strategy during 1999 to leverage its balance sheet. Average interest-bearing deposits increased slightly by $98.07 million or 3.52% in 1999. Provision for Loan Losses Nonperforming loans were $20.74 million at December 31, 1999 and $18.67 million at December 31, 1998. Nonperforming loans as a percentage of total assets remained constant at 0.41% for United at the end of 1999 and 1998. The components of nonperforming loans include nonaccrual loans and loans which are contractually past due 90 days or more as to interest or principal, but have not been put on a nonaccrual basis. Nonaccrual loans increased $3.19 million or 34.89% while loans past due 90 days or more decreased $1.11 million or 11.69% since year end 1998. Total nonperforming assets of $24.51 million, including OREO of $3.76 million at December 31, 1999, represented 0.49% of total assets at the end of 1999. At December 31, 1999, impaired loans were $15.64 million, an increase of $4.72 million or 43.20% from the $10.92 million of impaired loans at December 31, 1998 due primarily to three collateralized commercial loans totaling $4.1 million being classified as nonaccrual. 47 This decline in credit quality from 1998 was indicative of the trend in the banking industry during 1999. The nonperforming assets to total assets ratio among the nation's top-30 regional banks increased to approximately 0.42% at the end of 1999 as compared to 0.35% at the end of 1998 according to information from Wheat First Union Securities. Much of the deterioration nationwide has occurred in the commercial lending area. However, credit quality remained strong by historical standards. Bank credit quality has improved significantly since the early 1990s in which the nonperforming assets to total assets ratio for the 30 largest regional banks reached a high of 1.67% in 1991. United's formal company- wide process at December 31, 1999 for loan losses evaluation process produced increased allocations within two of four loan categories. The components of the allowance allocated to real estate increased $6.3 million, as a result of the addition to the loan portfolio of a large block of junior-lien mortgage loans previously held for sale. The components of the allowance allocated to commercial loans increased $660 thousand as a result of the increased level of impaired assets and changes in historical loss experience factors. Pools for consumer and real estate construction loans decreased $1.0 million and $332 thousand, respectively, as a result of changes in historical loss experience and volume factors for these loan pools. At year end 1999 and 1998, the allowance for loan losses was 1.25% and 1.47% of total loans, net of unearned income, respectively. At December 31, 1999 and 1998, the ratio of the allowance for loan losses to nonperforming loans was 190.9% and 209.9%, respectively. For the years ended December 31, 1999 and 1998, the provision for loan losses was $8.80 million and $12.16 million, respectively. Total net charge-offs were $8.4 million in 1999 and $4.9 million in 1998, which represents 0.28% and 0.18% of average loans for the respective years. The increase was due to additional net charge-offs of approximately $3.6 million in commercial loans during 1999 as compared to 1998. Over half the increased charge-off in 1999 was due to the charge-off of approximately $2.6 million associated with a single borrower. Other Income Noninterest income increased $9.33 million or 22.34% for 1999 when compared to 1998. Other income consists of all revenues that are not included in interest and fee income related to earning assets. The increase in noninterest income for 1999 was primarily the result of an $8.18 million increase in the mortgage banking segment and a $1.44 million increase in trust department income. These increases in noninterest income were partially offset by a $1.69 million decline in net gains on securities due to a $2.49 million recognized gain on an available for sale equity security exchanged in an unaffiliated merger transaction consummated in 1998. Service charges, commissions and fees from customer accounts increased $839 thousand or 4.41% from 1998 due mainly to a new checking account product introduced during the third quarter of 1999. This income includes charges and fees related to various banking services provided by United. Trust income and brokerage commissions increased $820 thousand or 19.92% and $618 thousand or 133.82%, respectively, in 1999 due to an increased volume of trust and brokerage business. United significantly broadened the scope and activity of its trust and brokerage service areas, especially in the 48 northern Virginia market, to provide additional sources of fee income that complemented United's traditional banking products and services. Other Expense Just as management continues to evaluate areas where noninterest income can be enhanced, it strives to improve the efficiency of its operations and thus reduce operating costs. United's cost control efforts have been very successful resulting in an efficiency ratio of 50.8% for 1999, which is well below the 58.28% reported by United's national peer group banks and its immediate in- market competitors. Other expense includes all items of expense other than interest expense, the provision for loan losses and income tax expense. In total, other expense decreased $20.45 million or 14.82%. This decrease was primarily due to the merger-related and one-time charges associated with the George Mason and Fed One acquisitions, as well as charges associated with the purchase acquisition of branches in the eastern panhandle of West Virginia during 1998. These charges, which totaled $13.7 million ($8.2 million after tax), consisted primarily of employee benefits, severance, facilities and conversion costs to effect the mergers. Excluding these charges, other expense still decreased $6.75 million or 5.44%. Salaries and employee benefits expense decreased $9.44 million or 13.57% in 1999 as compared to 1998. Much of this decrease was due to approximately $5.9 million of severance pay and related benefits of displaced employees in the George Mason and Fed One mergers in 1998. At December 31, 1999 and 1998, United employed 1,387 and 1,452 full-time equivalent employees, respectively. Net occupancy expense in 1999 decreased from 1998 levels by $527 thousand or 4.14%. The overall changes in net occupancy expense for 1999 were insignificant with no material increase or decrease in any one expense category. Remaining other expense decreased $10.48 million or 18.82% in 1999 compared to 1998. Excluding the aforementioned merger-related expenses associated with the George Mason and Fed One mergers and the costs associated with branch purchases in 1998, other expense actually increased approximately $3.22 million or 7.67%. Other expense categories that reflected increases over 1998 were collection expenses on loans, armored car and carrier fees, ATM processing costs and certain other general business taxes and licenses. Income Taxes For the year ended December 31, 1999, United's effective tax rate approximated 33% compared to 28% in 1998. The lower rate in 1998 was primarily the result of dividends from certain subsidiaries that were liquidated in restructuring and reorganizational initiatives. 49 REPORT OF ERNST & YOUNG LLP INDEPENDENT AUDITORS Board of Directors and Shareholders United Bankshares, Inc. We have audited the accompanying consolidated balance sheets of United Bankshares, Inc. and subsidiaries as of December 31, 2000 and 1999, and the related consolidated statements of income, changes in shareholders' equity and cash flows for each of the three years in the period ended December 31, 2000. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, based on our audits, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of United Bankshares, Inc. and subsidiaries at December 31, 2000 and 1999, and the consolidated results of their operations and their cash flows for each of the three years in the period ended December 31, 2000, in conformity with accounting principles generally accepted in the United States. /s/ Ernst & Young LLP Charleston, West Virginia February 16, 2001 50 CONSOLIDATED BALANCE SHEETS UNITED BANKSHARES, INC. AND SUBSIDIARIES
(Dollars in thousands, except par value) December 31 -------------------------------- 2000 1999 --------------------------------- Assets Cash and due from banks $ 142,801 $ 131,091 Interest-bearing deposits with other banks 884 8,317 Federal funds sold 1,125 20,400 --------------------------------- Total cash and cash equivalents 144,810 159,808 Securities available for sale at estimated fair value (amortized cost-$865,363 at December 31, 2000 and $1,256,946 at December 31, 1999) 865,266 1,207,363 Securities held to maturity (estimated fair value-$378,405 at December 31, 2000 and $258,183 at December 31, 1999) 380,068 265,190 Loans held for sale 203,831 117,825 Loans 3,197,494 3,177,392 Less: Unearned income (5,000) (7,296) --------------------------------- Loans net of unearned income 3,192,494 3,170,096 Less: Allowance for loan losses (40,532) (39,599) --------------------------------- Net loans 3,151,962 3,130,497 Bank premises and equipment 44,481 48,696 Accrued interest receivable 36,000 36,357 Other assets 78,129 103,424 --------------------------------- TOTAL ASSETS $4,904,547 $5,069,160 ================================= Liabilities Domestic deposits: Noninterest-bearing $ 539,415 $ 480,767 Interest-bearing 2,852,034 2,780,218 --------------------------------- Total deposits 3,391,449 3,260,985 Borrowings: Federal funds purchased 15,720 44,120 Securities sold under agreements to repurchase 313,349 349,129 Federal Home Loan Bank borrowings 706,512 953,347 Other borrowings 4,647 4,998 Accrued expenses and other liabilities 42,000 60,651 --------------------------------- TOTAL LIABILITIES 4,473,677 4,673,230 Shareholders' Equity Common stock, $2.50 par value; Authorized-100,000,000 shares; issued- 43,381,769 at December 31, 2000 and December 31, 1999, including 1,616,498 and 894,661 shares in treasury at December 31, 2000 and December 31, 1999, respectively 108,454 108,454 Surplus 85,032 87,260 Retained earnings 278,682 254,992 Accumulated other comprehensive loss (4,964) (32,228) Treasury stock, at cost (36,334) (22,548) --------------------------------- TOTAL SHAREHOLDERS' EQUITY 430,870 395,930 --------------------------------- TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $4,904,547 $5,069,160 =================================
See notes to consolidated financial statements 51 CONSOLIDATED STATEMENTS OF INCOME UNITED BANKSHARES, INC. AND SUBSIDIARIES
(Dollars in thousands, except per share data) Year Ended December 31 ------------------------------------------ 2000 1999 1998 ----------- ----------- ----------- Interest income Interest and fees on loans $ 287,277 $ 258,404 $ 265,205 Interest on federal funds sold and other short-term investments 1,171 522 1,472 Interest and dividends on securities: Taxable 79,190 85,392 55,550 Tax-exempt 10,209 10,347 3,420 ----------- ----------- ----------- Total interest income 377,847 354,665 325,647 Interest expense Interest on deposits 125,847 122,651 128,976 Interest on short-term borrowings 19,898 17,104 10,732 Interest on Federal Home Loan Bank borrowings 52,021 34,647 15,646 ----------- ----------- ----------- Total interest expense 197,766 174,402 155,354 ----------- ----------- ----------- Net interest income 180,081 180,263 170,293 Provision for loan losses 15,745 8,800 12,156 ----------- ----------- ----------- Net interest income after provision for loan losses 164,336 171,463 158,137 Other income Income from mortgage banking operations 16,340 22,392 14,211 Service charges, commissions, and fees 22,402 19,863 19,024 Trust department income 7,053 6,020 4,581 Security (losses)/gains (13,864) 677 2,370 Other income 1,855 2,126 1,566 ----------- ----------- ----------- Total other income 33,786 51,078 41,752 Other expense Salaries and employee benefits 53,174 60,111 69,550 Net occupancy expense 11,787 12,206 12,733 Other expense 45,461 45,202 55,681 ----------- ----------- ----------- Total other expense 110,422 117,519 137,964 ----------- ----------- ----------- Income before income taxes 87,700 105,022 61,925 Income taxes 28,724 34,774 17,523 ----------- ----------- ----------- Net income $ 58,976 $ 70,248 $ 44,402 =========== =========== =========== Earnings per common share: Basic $ 1.41 $ 1.63 $ 1.04 =========== =========== =========== Diluted $ 1.40 $ 1.61 $ 1.02 =========== =========== =========== Dividends per common share $ 0.84 $ 0.82 $ 0.75 =========== =========== =========== Average outstanding shares: Basic 41,958,956 43,100,977 42,757,638 Diluted 42,260,270 43,722,081 43,461,222
See notes to consolidated financial statements 52 CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY UNITED BANKSHARES, INC. AND SUBSIDIARIES
(Dollars in thousands, except per share data) Common Stock Accumulated ---------------------- Other Total Par Retained Comprehensive Treasury Shareholders' Shares Value Surplus Earnings Income (Loss) Stock Equity ------------------------------------------------------------------------------------ Balance at January 1, 1998 42,635,898 $106,590 $80,803 $204,849 $ 6,333 ($2,519) $396,056 Comprehensive income: Net income 44,402 44,402 Other comprehensive income, net of tax Unrealized gain on securities of $335 net of reclassification adjustment for gains included in net income of $1,734 (1,399) (1,399) -------- Total comprehensive income 43,003 Cash dividends ($0.75 per share) (28,317) (28,317) Fractional shares adjustment (213) (7) (7) Purchase of treasury stock (137,300 shares) (3,610) (3,610) Common stock options exercised (546,530 shares) 285,148 712 (1,174) (202) 5,466 4,802 Sale of treasury stock (37,376 shares) 654 654 Pre-merger transactions of pooled companies 336,000 840 8,731 (621) 8,950 ------------------------------------------------------------------------------------ Balance at December 31, 1998 43,256,833 108,142 88,353 220,111 4,934 (9) 421,531 Comprehensive income: Net income 70,248 70,248 Other comprehensive income, net of tax: Unrealized loss on securities of $36,722 net of reclassification adjustment for gains included in net income of $440 (37,162) (37,162) -------- Total comprehensive income 33,086 Purchase of treasury stock (1,049,800 shares) (26,196) (26,196) Cash dividends ($0.82 per share) (35,367) (35,367) Common stock options exercised (281,960 shares) 124,936 312 (1,093) 3,657 2,876 ------------------------------------------------------------------------------------ Balance at December 31, 1999 43,381,769 108,454 87,260 254,992 (32,228) (22,548) 395,930 Comprehensive income: Net income 58,976 58,976 Other comprehensive income, net of tax: Unrealized gain on securities of $17,884 net of reclassification adjustment for losses included in net income of $9,012 26,896 26,896 Amortization of the unrealized loss for securities transferred from the available-for-sale to the held-to-maturity investment portfolio 368 368 --------- Total comprehensive income 86,240 Purchase of treasury stock (919,500 shares) (18,384) (18,384) Cash dividends ($0.84 per share) (35,286) (35,286) Common stock options exercised (197,663 shares) (2,228) 4,598 2,370 ------------------------------------------------------------------------------------ Balance at December 31, 2000 43,381,769 $108,454 $85,032 $278,682 ($4,964) ($36,334) $430,870 ====================================================================================
See notes to consolidated financial statements 53 CONSOLIDATED STATEMENTS OF CASH FLOWS UNITED BANKSHARES, INC. AND SUBSIDIARIES
(Dollars in thousands) Year Ended December 31 2000 1999 1998 ----------- ----------- ----------- OPERATING ACTIVITIES Net income $ 58,976 $ 70,248 $ 44,402 Adjustments to reconcile net income to net cash provided by operating activities: Provision for loan losses 15,745 8,800 12,156 Provision for depreciation 6,999 8,028 7,739 Amortization, net of accretion 2,517 3,370 5,913 Gain on sales of bank premises and equipment (376) (1,475) (116) Loss (Gain) on sales and calls of securities 13,864 (677) (2,370) Loans originated for sale (1,215,244) (1,282,629) (1,541,187) Proceeds from sales of loans 1,136,198 1,438,580 1,405,524 Gain on sales of loans (8,210) (13,576) (13,910) Deferred income tax benefit (6,445) (4,475) (2,788) Changes in: Loans held for sale 1,038 6,154 5,154 Interest receivable 357 (5,955) (6,415) Other assets 3,659 (891) (7,049) Accrued expenses and other liabilities (8,335) 903 (6,832) ----------- ----------- ----------- NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES 743 226,405 (99,779) ----------- ----------- ----------- INVESTING ACTIVITIES Proceeds from maturities and calls of investment securities 26,435 152,045 142,854 Purchases of investment securities (2,630) (55,101) (110,002) Proceeds from sales of securities available for sale 541,672 336,558 Proceeds from maturities and calls of securities available for sale 126,897 146,794 340,318 Purchases of securities available for sale (436,277) (964,059) (294,657) Proceeds from sales of loans 471,978 Purchases of loans (943,680) Net purchases of bank premises and equipment (2,522) 423 (6,765) Net cash received from acquired subsidiary/branch 56,472 Net change in loans (36,932) (290,824) 38,249 ----------- ----------- ----------- NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES 216,643 (674,164) (305,233) ----------- ----------- ----------- FINANCING ACTIVITIES Cash dividends paid (35,468) (34,999) (24,651) Acquisition of treasury stock (18,384) (26,196) (3,610) Proceeds from exercise of stock options 2,370 2,876 4,802 Proceeds from sales of treasury stock 654 Pre-merger transactions of pooled companies 8,237 Repayment of Federal Home Loan Bank borrowings (697,565) (141,618) (227,164) Proceeds from Federal Home Loan Bank borrowings 450,730 749,098 342,240 Purchase of fractional shares (7) Changes in: Time deposits 106,582 (128,286) 129,364 Other deposits 23,882 (103,814) 108,057 Federal funds purchased, securities sold under agreements to repurchase and other borrowings (64,531) 149,208 18,360 ----------- ----------- ----------- NET CASH (USED IN) PROVIDED BY FINANCING ACTIVITIES (232,384) 466,269 356,282 ----------- ----------- ----------- (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS (14,998) 18,510 (48,730) CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 159,808 141,298 190,028 ----------- ----------- ----------- CASH AND CASH EQUIVALENTS AT END OF YEAR $ 144,810 $ 159,808 $ 141,298 =========== =========== ===========
See notes to consolidated financial statements 54 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS UNITED BANKSHARES, INC. AND SUBSIDIARIES December 31, 2000 NOTE A--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Nature of Operations: United Bankshares, Inc. is a multi-bank holding company --------------------- headquartered in Charleston, West Virginia. The principal markets of United Bankshares, Inc. and subsidiaries (United) are located in Parkersburg, Charleston, Huntington, Morgantown and Wheeling, West Virginia and Arlington, Fairfax, Loudoun and Prince William counties, Virginia. United's principal business activities are community banking and mortgage banking. Basis of Presentation: The consolidated financial statements and the notes to ---------------------- consolidated financial statements include the accounts of United Bankshares, Inc. and its wholly-owned subsidiaries. All significant intercompany accounts and transactions have been eliminated in the consolidated financial statements. The accounting and reporting policies of United conform with accounting principles generally accepted in the United States. In preparing the consolidated financial statements, management is required to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates. A description of the significant accounting policies is presented below. Certain prior period data has been reclassified to conform to the current period presentation. The reclassifications had no effect on net income or shareholders' equity. Cash Flow Information: United considers cash and due from banks, interest- ---------------------- bearing deposits with other banks and federal funds sold as cash and cash equivalents. Securities: Management determines the appropriate classification of securities ----------- at the time of purchase. Debt securities that United has the positive intent and the ability to hold to maturity are carried at amortized cost. Securities to be held for indefinite periods of time and all marketable equity securities are classified as available for sale and carried at fair value. Unrealized holding gains and losses on securities classified as available for sale are carried as a separate component of other comprehensive income, net of deferred income taxes. Gains or losses on sales of securities are recognized by the specific identification method and are reported separately in the statements of income. Loans: Interest on loans is accrued and credited to operations using methods ------ that produce a level yield on individual principal amounts outstanding. Loan origination and commitment fees and related direct loan origination costs are deferred and amortized as an adjustment of loan yield over the estimated life of the related loan. The accrual of interest income on commercial and most consumer loans generally is discontinued when a loan becomes 90 to 120 days past due as to principal or interest. When interest accruals are 55 NOTE A--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - continued discontinued, unpaid interest recognized in income in the current year is reversed, and interest accrued in prior years is charged to the allowance for loan losses. Management may elect to continue the accrual of interest when the estimated net realizable value of collateral exceeds the principal balance and accrued interest, and the loan is in the process of collection. Consistent with United's existing method of income recognition for loans, interest on impaired loans, except those classified as nonaccrual, is recognized as income using the accrual method. United's method of income recognition for impaired loans that are classified as nonaccrual is to recognize interest income on the cash basis or apply the cash receipt to principal when the ultimate collectibility of principal is in doubt. The principal sources of revenue from United's mortgage banking business are: (i) loan origination fees; (ii) gains or losses from the sale of loans; and (iii) interest earned on mortgage loans during the period that they are held by United pending sale. Loans Held for Sale: Loans held for sale consist of one-to-four family -------------------- residential loans originated for sale in the secondary market and are carried at the lower of cost or fair value determined on an aggregate basis. Gains and losses on sales of loans held for sale are included in mortgage banking income. Allowance for Loan Losses: Management's evaluation of the adequacy of the -------------------------- allowance for loan losses and the appropriate provision for loan losses is based upon a quarterly evaluation of the portfolio. The allowance for loan losses related to loans that are identified as impaired is based on the present value of expected future cash flows using the loan's effective interest rate, or as a practical expedient, at the loan's observable market price or the fair value of the collateral if the loan is collateral dependent. In determining the adequacy of the allowance for loan losses, management makes allocations to specific commercial loans classified by management as to risk. The amount allocated to a specific loan is based upon management's estimate of the borrowers' ability to repay, the collateral securing the credit and other borrower specific factors that may impact collectibility. Other commercial loans not specifically reviewed on an individual basis are evaluated based on loan pools using management's internal risk ratings. Allocations for these commercial loan pools are determined based upon historical loss experience adjusted for current conditions. Allocations for loans, other than commercial loans, are developed on a total portfolio level based upon historical loss experience adjusted for current conditions. While allocations are made to specific loans and pools of loans, the allowance is available for all loan losses. The allowance also provides for risk arising in part from, but not limited to, potential for estimation or judgmental errors, charge-off volatility, declines in credit quality resulting from sudden economic or industry shifts and changing economic trends. The amounts allocated to specific credits and homogeneous loan pools are reviewed on a quarterly basis and adjusted as necessary based upon subsequent changes in circumstances. This evaluation is inherently subjective and requires management to make estimates of the amounts and timing of future cash flows. Management believes that the allowance for loan losses is adequate to provide for probable losses on existing loans based on information currently available. 56 NOTE A--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - continued Receivable Sales: When United sells receivables in securitizations of ----------------- residential mortgage loans, it retains interest-only strips, and one or more subordinated tranches, all of which are retained interests in the securitized receivables. Gain or loss on sale of the receivables depends in part on the previous carrying amount of the financial assets involved in the transfer, allocated between the assets sold and the retained interests based on their relative fair value at the date of transfer. To obtain fair values, quoted market prices are used if available. However, quotes are generally not available for retained interests, so United generally estimates fair value based on the present value of future expected cash flows estimated using management's best estimates of the key assumptions--credit losses, prepayment speeds, forward yield curves, and discount rates commensurate with the risks involved. Bank Premises and Equipment: Bank premises and equipment are stated at cost, ---------------------------- less allowances for depreciation and amortization. The provision for depreciation is computed principally by the straight-line method over the estimated useful lives of the respective assets. Income Taxes: Deferred income taxes are provided for temporary differences ------------- between the tax basis of an asset or liability and its reported amount in the financial statements at the statutory tax rate. Intangible Assets: Intangible assets relating to the estimated value of the ------------------ deposit base of the acquired institutions are being amortized on an accelerated basis over a 7 to 10 year period. The excess of the purchase price over the fair market value of the net assets of the banks acquired (goodwill) is being amortized on a straight-line basis over 15 to 20 years. Management reviews intangible assets on a periodic basis and evaluates changes in facts and circumstances that may indicate impairment in the carrying value. If this evaluation indicates that intangible assets will not be recoverable, as determined based on the estimated undiscounted cash flows of the entity acquired over the remaining amortization period, the carrying amount of intangible assets will be reduced. At December 31, 2000 and 1999, deposit base intangibles and goodwill approximated $38,710,000 and $41,625,000, net of accumulated amortization of approximately $25,185,000 and $22,271,000. Treasury Stock: United records common stock purchased for treasury at cost. At -------------- the date of subsequent reissue, the treasury stock account is reduced by the cost of such stock using the weighted average cost method. Trust Assets and Income: Assets held in a fiduciary or agency capacity for ------------------------ customers are not included in the balance sheets since such items are not assets of the company. Trust income is reported on a cash basis. Reporting such income on an accrual basis would not materially affect United's consolidated financial position or its results of operations as reported herein. Earnings Per Common Share: Basic earnings per common share is calculated by -------------------------- dividing net income by the weighted average number of shares of common stock outstanding for the respective period. For diluted earnings per common share, the weighted average number of shares of common stock outstanding for the respective period is increased by the number of shares of common stock which would be issued assuming the exercise of common stock options. The dilutive effect of stock options approximated 301,314, 621,104 and 703,584 shares in 2000, 1999 and 1998, respectively. 57 NOTE A--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - continued Operating Segments - United operates in the community banking and mortgage ------------------ banking businesses. Business results are based upon United's management accounting practices and as provided to the chief operating decision maker for determination of resource allocation and performance. New Accounting Standards: In June 1998, the Financial Accounting Standards Board ------------------------- (FASB) issued Statement No. 133, (SFAS No. 133), "Accounting for Derivative Instruments and Hedging Activities" as amended by FASB issued Statement No. 137, (SFAS No. 137). The provisions of this statement require that derivative instruments be carried at fair value on the balance sheet. The statement continues to allow derivative instruments to be used to hedge various risks and sets forth specific criteria to be used to determine when hedge accounting can be used. The statement also provides offsetting changes in fair value or cash flows of both the derivative and the hedged asset or liability to be recognized in earnings in the same period; however, any changes in fair value or cash flow that represent the ineffective portion of a hedge are required to be recognized in earnings and cannot be deferred. For derivative instruments not accounted for as hedges, changes in fair value are required to be recognized in earnings. The provisions of this statement become effective for United beginning January 1, 2001. The adoption of this standard is not expected to materially impact the reported financial position or results of operations of United based on the interpretive guidance issued by the FASB to date. The FASB continues to issue interpretive guidance which could require changes in United's application of this standard. In September of 2000, the FASB issued SFAS No. 140 "Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities, a replacement of FASB Statement No. 125" ("SFAS 140"). This statement replaces SFAS No. 125, "Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities." It revises the standard for accounting for securitizations and other transfers of financial assets and collateral and requires certain disclosures, but it carries over most of SFAS's No. 125's provisions without reconsideration. United adopted the disclosure provisions related to the securitization of financial assets on December 31, 2000. All transactions entered into after March 31, 2001 will be accounted for in accordance with this standard. The adoption of this standard is not expected to have a material impact on the financial position or results of operations of United. During 2000, the Emerging Issues Task Force ("EITF") released EITF Issue No. 99- 20, ("EITF 99-20"), which provides accounting guidance for the recognition of interest income and impairment on purchased and retained interests in securitized financial assets. EITF 99-20 requires that the holder of such instruments recognize the excess of all cash flows attributable to the beneficial interest using the effective yield method. In addition, EITF 99-20 provides a change in the determination of impairment, whereby if the fair value of the beneficial interest has declined below its carrying value, then an impairment analysis should be performed. If there has been an adverse change in the estimated cash flows from the previous cash flows projected, then the condition for an other-than-temporary impairment has been met and the beneficial interest should be written down to the estimated fair value. EITF 99-20 is effective beginning the second quarter of 2001. On the date of adoption (i.e. April 1, 2001), beneficial interests determined to have an other-than-temporary impairment in accordance with EITF 99-20 would be written down to the estimated fair value, with the amount of the write-down reported as a cumulative effect of a change in accounting principle on the Statement of Income. Based on current information, the adoption of EITF 99-20 is not expected to have a material impact on the financial position or results of operations of United. 58 NOTE B--MERGERS AND ACQUISITIONS During 1998, United acquired Fed One Bancorp, Inc., Wheeling, West Virginia (Fed One) and George Mason Bankshares, Inc., Fairfax, Virginia (George Mason) in common stock exchanges accounted for under the pooling of interests method. United issued approximately 12.9 million shares in these two business combinations. In the second and fourth quarters of 1998, as a direct result of the George Mason and Fed One acquisitions, United recorded merger-related charges of $13.7 million ($8.2 million after tax). The charges to operating expenses consisted of employee benefit obligations, costs to eliminate duplicate facilities and equipment, contract terminations, conversion costs, and professional fees. All of the merger-related charges were paid in 1998. NOTE C--INVESTMENT SECURITIES The amortized cost and estimated fair values of securities available for sale are summarized as follows:
December 31, 2000 ------------------------------------------------------------------------- (In thousands) Gross Gross Estimated Amortized Unrealized Unrealized Fair Cost Gains Losses Value ------------------------------------------------------------------------- U.S. Treasury securities and obligations of U.S. Government corporations and agencies $ 160,702 $ 519 $1,797 $ 159,424 State and political subdivisions 52,095 307 575 51,827 Mortgage-backed securities 574,292 4,984 2,666 576,610 Marketable equity securities 8,551 1,107 1,024 8,634 Other 69,723 952 68,771 ------------------------------------------------------------------------- Total $ 865,363 $6,917 $7,014 $ 865,266 ========================================================================= December 31, 1999 ------------------------------------------------------------------------- (In thousands) Gross Gross Estimated Amortized Unrealized Unrealized Fair Cost Gains Losses Value ------------------------------------------------------------------------- U.S. Treasury securities and obligations of U.S. Government corporations and agencies $ 276,558 $ 15 $13,817 $ 262,756 State and political subdivisions 48,914 10 4,070 44,854 Mortgage-backed securities 693,828 324 24,256 669,896 Marketable equity securities 8,369 2,711 775 10,305 Other 229,277 9,725 219,552 ------------------------------------------------------------------------- Total $1,256,946 $3,060 $52,643 $1,207,363 =========================================================================
59 NOTE C--INVESTMENT SECURITIES - continued The amortized cost and estimated fair value of securities available for sale at December 31, 2000 by contractual maturity are shown below. Expected maturities may differ from contractual maturities because the issuers may have the right to call or prepay obligations with or without call or prepayment penalties.
Estimated (In thousands) Amortized Fair Cost Value ------------------- ------------------- Due in one year or less $ 20,690 $ 20,661 Due after one year through five years 68,436 68,238 Due after five years through ten years 146,984 147,021 Due after ten years 620,702 620,712 Marketable equity securities 8,551 8,634 ------------------- ------------------- Total $865,363 $865,266 =================== ===================
The table above includes $576,610,000 of mortgage-backed securities at estimated fair value with an amortized cost of $574,292,000. Maturities of mortgage- backed securities are based upon the estimated average life. Gross realized gains and losses from sales of securities available for sale were $2,316,000 and $15,676,000; $1,759,000 and $1,076,000; and $3,020,000 and $354,000, respectively, in 2000, 1999 and 1998. The amortized cost and estimated fair values of securities held to maturity are summarized as follows:
December 31, 2000 ------------------------------------------------------------------------- (In thousands) Gross Gross Estimated Amortized Unrealized Unrealized Fair Cost Gains Losses Value ------------------------------------------------------------------------- U.S. Treasury securities and obligations of U.S. Government corporations and agencies $ 55,724 $ 225 $ 176 $ 55,773 State and political subdivisions 93,006 1,508 854 93,660 Mortgage-backed securities 70,279 654 285 70,648 Other 161,059 110 2,845 158,324 ------------------------------------------------------------------------- Total $380,068 $2,497 $4,160 $378,405 ========================================================================= December 31, 1999 ------------------------------------------------------------------------- (In thousands) Gross Gross Estimated Amortized Unrealized Unrealized Fair Cost Gains Losses Value ------------------------------------------------------------------------- U.S. Treasury securities and obligations of U.S. Government corporations and agencies $ 56,734 $ 36 $2,217 $ 54,553 State and political subdivisions 97,824 769 5,084 93,509 Mortgage-backed securities 90,850 380 886 90,344 Other 19,782 4 9 19,777 ------------------------------------------------------------------------- Total $265,190 $1,189 $8,196 $258,183 =========================================================================
60 NOTE C--INVESTMENT SECURITIES - continued At March 31, 2000, debt securities with an amortized cost of $146,229 and an estimated fair value of $138,122 were transferred into the held to maturity category from the available for sale category. The cumulative unrealized loss of $8,107 at the date of transfer is retained in the carrying value of the held to maturity securities. The cumulative unrealized loss, net of deferred taxes, of $5,270 at the date of transfer is retained as a separate component of shareholders' equity. Such amounts are being amortized over the estimated remaining life of the securities. At December 31, 2000, the cumulative unrealized loss balances, gross and net of deferred taxes, were $7,541 and $4,902, respectively. The amortized cost and estimated fair value of debt securities held to maturity at December 31, 2000 by contractual maturity are shown below. Expected maturities may differ from contractual maturities because the issuers may have the right to call or prepay obligations with or without call or prepayment penalties.
Estimated (In thousands) Amortized Fair Cost Value ------------ ---------- Due in one year or less $ 7,711 $ 7,725 Due after one year through five years 47,862 48,563 Due after five years through ten years 90,590 90,365 Due after ten years 233,905 231,752 ------------ ---------- Total $380,068 $378,405 ============ ==========
The table above includes $70,279,000 of mortgage-backed securities at estimated fair value with an amortized cost of $70,648,000 at December 31, 2000. Maturities of the mortgage-backed securities are based upon the estimated average life. The carrying value of securities pledged to secure public deposits, securities sold under agreements to repurchase, and for other purposes as required or permitted by law, approximated $788,899,000 and $962,068,000 at December 31, 2000 and 1999, respectively. NOTE D--SALES OF RECEIVABLES During 1999, United sold residential mortgage loans in a securitization transaction and recognized a pretax gain of $467,000. In that securitization, United retained subordinated interests which represent United's right to future cash flows arising after the investors in the securitization trust have received the return for which they contracted. United does not receive annual servicing fees from this securitization as these loans are serviced by an independent third-party. The investors and the securitization trust have no recourse to United's other assets for failure of debtors to pay when due; however, United's retained interests are subordinate to investor's interests. Their value is subject to credit, prepayment, and interest rate risks on the transferred financial assets. Key economic assumptions used in measuring the retained interests at the date of securitization were as follows: a weighted-average life of 5.3 years, expected annual credit losses of 15%, and discount rates of 8% to 18%. For the year ended December 31, 2000, United received cash flows of $13,325,000 on the retained interest in the securitization. 61 NOTE D--SALES OF RECEIVABLES - continued At December 31, 2000, key economic assumptions and the sensitivity of the current fair value of residual cash flows to immediate 10% and 20% adverse changes in those assumptions are as follows: Carrying amount/fair value of retained interests $ 52,419 Weighted-average life (in years) 3.8 Prepayment speed assumption (annual rate) 13.50% Decline in fair value of 10% adverse change $ 1,622 Decline in fair value of 20% adverse change $ 3,091 Expected credit losses (annual rate) 4.37% Decline in fair value of 10% adverse change $ 2,720 Decline in fair value of 20% adverse change $ 5,756 Residual cash flows discount rate (annual rate) 7.08% - 17.73% Decline in fair value of 10% adverse change $ 2,036 Decline in fair value of 20% adverse change $ 3,939
These sensitivities are hypothetical and should be used with caution. As the figures indicate, changes in fair value based on a 10% variation in assumptions generally cannot be extrapolated because the relationship of the change in the assumption to the change in the fair value may not be linear. Also, the effect of a variation in a particular assumption on the fair value of the retained interests is calculated without changing any other assumption; in reality, changes in one factor may result in changes in another factor (for example, increases in market interest rates may result in lower prepayments and increased credit losses) that might magnify or counteract the sensitivities. The following table presents quantitative information about delinquencies, net credit losses, and components of securitized financial assets:
Principal Amount of Loans (In thousands) Total Principal 60 Days Amount of Loans or More Past Due Average Balances Net Credit Losses --------------- -------------------------- ---------------- ----------------- Type of Loan At December 31, 2000 During 2000 ------------------------- ------------------------------------------- ------------------------------------ Residential mortgage loans (fixed-rate) $152,797 $2,368 $169,958 $8,297
NOTE E--LOANS Major classifications of loans are as follows:
(In thousands) December 31 -------------------------------- 2000 1999 ----------- ------------ Commercial, financial and agricultural $ 564,887 $ 535,116 Real estate: Single family residential 1,352,955 1,388,568 Commercial 711,054 701,421 Construction 164,505 144,634 Other 84,742 44,381 Installment 319,351 363,272 ---------- ---------- Total gross loans $3,197,494 $3,177,392 ========== ==========
62 NOTE E--LOANS - continued The table above does not include loans held for sale of $203,831,000 and $117,825,000 at December 31, 2000 and 1999, respectively. An analysis of the allowance for loan losses follows:
Year Ended December 31 ---------------------------------------------------- (In thousands) 2000 1999 1998 -------- -------- ------- Balance at beginning of period $39,599 $39,189 $31,936 Provision charged to expense 15,745 8,800 12,156 -------- -------- ------- 55,344 47,989 44,092 -------- -------- ------- Loans charged-off 15,845 9,236 6,270 Less recoveries 1,033 846 1,367 -------- -------- ------- Net charge-offs 14,812 8,390 4,903 -------- -------- ------- Balance at end of period $40,532 $39,599 $39,189 ======== ======== =======
The higher provision and charge-offs in 2000 reflect the reclassification of certain junior-lien mortgages from available for sale securities to portfolio loans as of October 1999. The higher provision and charge-offs were mitigated by increased interest income on these high-interest rate loans. United has commercial loans, including real estate and owner occupied, income producing real estate and land development loans, of approximately $1,275,941,000 and $1,236,537,000 as of December 31, 2000 and 1999, respectively. The loans are primarily secured by real estate located in West Virginia, Southeastern Ohio, and Virginia. The loans were originated by United's subsidiary banks using underwriting standards as set forth by management. United's loan administration policies are focused on the risk characteristics of the loan portfolio, including commercial real estate loans, in terms of loan approval and credit quality. It is the opinion of management that these loans do not pose any unusual risks and that adequate consideration has been given to the above loans in establishing the allowance for loan losses. At December 31, 2000, the recorded investment in loans that were considered to be impaired was $12,504,000 (of which $8,131,000 was on a nonaccrual basis). Included in this amount was $4,711,000 of impaired loans for which the related allowance for loan losses was $872,000 and $7,793,000 of impaired loans that did not have an allowance for credit losses. At December 31, 1999, the recorded investment in loans that were considered to be impaired was $15,643,000 (of which $12,327,000 was on a nonaccrual basis). Included in this amount was $3,247,000 of impaired loans for which the related allowance for credit losses was $603,000 and $12,396,000 of impaired loans that did not have an allowance for credit losses. The average recorded investment in impaired loans during the years ended December 31, 2000, 1999 and 1998 was approximately $15,557,000, $16,681,000 and $10,343,000, respectively. The amount of interest income that would have been recorded on impaired loans, which are on nonaccrual, under the original terms was $1,519,000, $2,237,000 and $1,809,000 for the years ended December 31, 2000, 1999 and 1998, respectively. For the years ended December 31, 2000, 1999 and 1998, United recognized interest income on 63 NOTE E--LOANS - continued those impaired loans of approximately $649,000, $560,000 and $461,000, respectively, substantially all of which was recognized using the accrual method of income recognition. United's subsidiary banks have made loans, in the normal course of business, to the directors and officers of United and its subsidiaries, and to their associates. Such related party loans were made on substantially the same terms, including interest rates and collateral, as those prevailing at the time for comparable transactions with unrelated persons and did not involve more than normal risk of collectibility. The aggregate dollar amount of these loans was $124,512,000 and $86,892,000 at December 31, 2000 and 1999, respectively. During 2000, $63,659,000 of new loans were made, repayments totaled $51,887,000, and other changes due to the change in composition of United's board members and executive officers approximated $25,848,000. NOTE F--BANK PREMISES AND EQUIPMENT AND LEASES Bank premises and equipment are summarized as follows:
December 31 -------------------------------- (In thousands) 2000 1999 --------- --------- Land $ 10,248 $ 10,393 Buildings and improvements 44,440 44,825 Leasehold improvements 9,763 9,778 Furniture, fixtures and equipment 52,629 51,285 -------- -------- 117,080 116,281 Less allowance for depreciation and amortization 72,599 67,585 -------- -------- Net bank premises and equipment $ 44,481 $ 48,696 ======== ========
United and certain banking subsidiaries have entered into various noncancelable operating leases. These noncancelable operating leases are subject to renewal options under various terms and some leases provide for periodic rate adjustments based on cost-of-living index changes. Rent expense for noncancelable oper-ating leases approximated $4,858,000, $4,916,000 and $5,129,000 for the years ended December 31, 2000, 1999 and 1998, respectively. Future minimum payments, by year and in the aggregate, under noncancelable operating leases with initial or remaining terms of one year or more, for years subsequent to December 31, 2000, consisted of the following: Year Amount ---- ------ (In thousands) 2001 $ 3,676 2002 2,453 2003 2,092 2004 1,494 2005 965 Thereafter 2,417 ------- Total minimum lease payments $13,097 ======= 64 NOTE G--DEPOSITS The book value of deposits consisted of the following:
(In thousands) December 31 ------------------------------- 2000 1999 ---------- ----------- Noninterest-bearing checking $ 539,415 $ 480,767 Interest-bearing checking 87,369 87,314 Regular savings 345,369 417,911 Money market accounts 713,184 675,463 Time deposits under $100,000 1,316,655 1,415,579 Time deposits over $100,000 389,457 183,951 ---------- ---------- Total deposits $3,391,449 $3,260,985 ========== ==========
Interest paid on deposits and borrowings approximated $192,543,000, $172,907,000 and $153,283,000 in 2000, 1999 and 1998, respectively. At December 31, 2000, the scheduled maturities of time deposits are as follows: Year Amount ---- ------------- (In thousands) 2001 $1,151,933 2002 449,135 2003 56,987 2004 20,046 2005 and thereafter 28,011 ---------- Total $1,706,112 ========== United's subsidiary banks have received deposits, in the normal course of business, from the directors and officers of United and its subsidiaries, and their associates. Such related party deposits were accepted on substantially the same terms, including interest rates and maturities, as those prevailing at the time for comparable transactions with unrelated persons. The aggregate dollar amount of these deposits was $19,493,000 and $19,800,000 at December 31, 2000 and 1999, respectively. NOTE H--BORROWINGS United's subsidiary banks are members of the Federal Home Loan Bank (FHLB). Membership in the FHLB makes available short-term and long-term borrowings from collateralized advances. All FHLB borrowings are collateralized by a similar amount of single family residential mortgage loans. At December 31, 2000, United had approximately $393,161,000 of additional available borrowings in the form of collateralized advances from the FHLB at prevailing interest rates. At December 31, 2000, $25,000,000 of FHLB advances with an interest rate of 6.63% had an overnight maturity. Additionally, $681,512,000 of FHLB advances with a weighted average interest rate of 6.28% are scheduled to mature from one to twenty years. 65 NOTE H--BORROWINGS - continued United also has various unused lines of credit available from certain of its correspondent banks in the aggregate amount of $186,200,000. These lines of credit, which bear interest at prevailing market rates, permit United to borrow funds in the overnight market, and are renewable annually subject to certain conditions. At December 31, 2000 and 1999, borrowings and the related weighted average interest rates were as follows:
2000 1999 --------------------------- ------------------------ Weighted Weighted (Dollars in thousands) Average Average Amount Rate Amount Rate ---------- ---------- ------------ -------- Federal funds purchased $ 15,720 6.55% $ 44,120 5.01% Securities sold under agreements to repurchase 313,349 5.16% 349,129 4.98% FHLB advances 706,512 6.30% 953,347 5.28% Other 4,647 5.72% 4,998 4.52% ---------- ---------- Total $1,040,228 $1,351,594 ========== ==========
Information concerning securities sold under agreements to repurchase (in thousands) is summarized as follows:
2000 1999 -------- --------- Average balance during the year $351,816 $335,908 Average interest rate during the year 5.32% 4.61% Maximum month-end balance during the year $417,866 $440,281
NOTE I--INCOME TAXES The income tax provisions included in the consolidated statements of income are summarized as follows:
(In thousands) Year Ended December 31 ---------------------------------------------- 2000 1999 1998 -------- ------- -------- Current expense: Federal $33,579 $36,424 $18,906 State 1,590 2,825 1,405 Deferred benefit: Federal and State (6,445) (4,475) (2,788) -------- -------- -------- Income taxes $28,724 $34,774 $17,523 ======== ======== ========
66 NOTE I--INCOME TAXES - continued The following is a reconciliation of income tax expense to the amount computed by applying the statutory federal income tax rate to income before income taxes:
Year Ended December 31 ----------------------------------------------------------------------- (Dollars in thousands) 2000 1999 1998 ----------------------------------------------------------------------- Amount % Amount % Amount % ---------- --------- ---------- --------- ---------- -------- Tax on income before taxes at statutory federal rate $30,695 35.0% $36,758 35.0% $21,674 35.0% Plus: State income taxes net of federal tax Benefits 1,034 1.2 1,836 1.7 913 1.5 ---------- --------- ---------- --------- ---------- -------- 31,729 36.2 38,594 36.7 22,587 36.5 Increase (decrease) resulting from: Tax-exempt interest income (3,380) (3.9) (3,087) (2.9) (2,201) (3.6) Nontaxable distributions from reorganizations (5,775) (9.3) Intangible amortization 768 0.9 778 0.7 1,152 1.9 Other items-net (393) (0.4) (1,511) (1.4) 1,760 2.8 ---------- --------- ---------- --------- ---------- -------- Income taxes $28,724 32.8% $34,774 33.1% $17,523 28.3% ========== ========= ========== ========= ========== ========
Federal income tax benefit applicable to securities transactions in 2000 approximated $4,852,000. Federal income tax expense applicable to securities transactions approximated $237,000 in 1999 and $830,000 in 1998. Income taxes paid approximated $36,065,000, $34,333,000 and $25,387,000 in 2000, 1999 and 1998, respectively. Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. 67 NOTE I--INCOME TAXES - continued Significant components of United's deferred tax assets and liabilities (included in other assets) at December 31, 2000 and 1999 are as follows:
(In thousands) 2000 1999 --------------- --------------- Deferred tax assets: Allowance for loan losses $14,060 $13,734 Securities available for sale 2,898 17,678 Accrued benefits payable 1,497 2,414 Other accrued liabilities 4,315 4,851 Other real estate owned 639 639 Interest in securitization trust 6,499 784 Other 1,696 620 --------------- --------------- Total deferred tax assets 31,604 40,720 --------------- --------------- Deferred tax liabilities: Premises and equipment 1,588 2,228 Core deposit intangibles 329 562 Income tax allowance for loan losses 717 962 Deferred mortgage points 2,177 1,909 Other 794 725 --------------- --------------- Total deferred tax liabilities 5,605 6,386 --------------- --------------- Net deferred tax assets $25,999 $34,334 =============== ===============
NOTE J--EMPLOYEE BENEFIT PLANS United has a defined benefit retirement plan covering substantially all employees. The benefits are based on years of service and the average of the employee's highest five consecutive plan years of basic compensation paid during the ten plan years preceding the date of determination. United's funding policy is to contribute annually the maximum amount that can be deducted for federal income tax purposes. Contributions are intended to provide not only for benefits attributed to service to date, but also for those expected to be earned in the future. Net periodic pension cost included the following components:
(In thousands) Year Ended December 31, ------------------------------------------- 2000 1999 1998 ----------- ------------ ------------ Service cost $ 1,344 $ 1,448 $ 799 Interest cost 2,050 1,725 1,609 Expected return on plan assets (4,075) (2,749) (2,121) Amortization of transition asset (131) (131) (131) Recognized net actuarial gain (1,136) (222) Amortization of prior service cost 63 63 63 ----------- ------------ ------------ Net periodic pension (benefit) cost ($1,885) $ 134 $ 219 =========== ============ ============
68 NOTE J--EMPLOYEE BENEFIT PLANS - continued A reconciliation of the changes in benefit obligation and plan assets for the defined benefit retirement plan is as follows:
(In thousands) December 31 ------------------------------------------- 2000 1999 ------------- ------------- Benefit obligation at beginning of year $ 24,257 $ 25,653 Service cost 1,344 1,448 Interest cost 2,050 1,725 Actuarial loss (gain) 243 (3,634) Benefits paid (972) (935) ------------- ------------- Benefit obligation at end of year 26,922 24,257 ------------- ------------- Fair value of plan assets at beginning of year 41,060 31,009 Actual return on plan assets 4,020 9,534 Employer contribution 1,738 1,452 Benefits paid (972) (935) ------------- ------------- Fair value of plan assets at end of year 45,846 41,060 ------------- ------------- Funded status 18,924 16,803 Unrecognized net actuarial gain (13,991) (15,425) Unrecognized prior service cost 136 199 Unrecognized net transition asset (301) (432) ------------- ------------- Pension asset $ 4,768 $ 1,145 ============= =============
At December 31, 2000 and 1999, the weighted average discount rate and rate of increase in future compensation levels used in determining the actuarial present value of the projected benefit obligation was 8.25% and 5.0%. The weighted average expected long-term rate of return on United's plan assets was 9.75% for the year ended December 31, 2000 and 9.0% for the years ended December 31, 1999 and 1998. The United Savings and Stock Investment Plan (the Plan) is a deferred compensation plan under Section 401(k) of the Internal Revenue Code. All employees who complete one year of service are eligible to participate in the Plan. Each participant may contribute from 1% to 15% of pre-tax earnings to his or her account, which may be invested in any of four investment options chosen by the employee. United matches 100% of the first 2% of salary deferred and 25% of the next 2% of salary deferred with United common stock. Vesting is 100% for employee deferrals and the United match at the time the employee makes his/her deferral. United's expense relating to the Plan approximated $906,000, $1,166,000 and $1,175,000 in 2000, 1999 and 1998, respectively. The assets of United's defined benefit plan and 401(k) Plan each include investments in United common stock. At December 31, 2000, the combined plan assets included 785,039 shares of United common stock with an approximate fair value of $16,682,000. Dividends paid on United common stock held by the plans approximated $563,000 for the year ended December 31, 2000. 69 NOTE J--EMPLOYEE BENEFIT PLANS - continued United has certain other deferred compensation plans covering various key employees. Periodic charges are made to operations so that the present value of the liability due each employee is fully recorded as of the date of their retirement. Amounts charged to expense have not been significant in any year. United has various incentive stock option plans for key employees, the 1988, 1991 and 1996 plans. The plans provide for the granting of stock options of up to 200,000, 1,000,000 and 1,200,000 shares of common stock, respectively. No further grants will be made under the 1988, 1991 and 1996 plans. Under the provisions of the plans, the option price per share shall not be less than the fair market value of United's common stock on the date of grant. Accordingly, no compensation expense is recognized for these options. The following table summarizes information about stock options outstanding at December 31, 2000:
Options Outstanding Options Exercisable -------------------------------------------------------------------------------------------------------------------------------- Weighted- Average Weighted- Weighted- Remaining Average Average Range of Number Contractual Exercise Number Exercise Exercise Prices Outstanding Life Price Exercisable Price -------------------------------------------------------------------------------------------------------------------------------- $ 2.98 to $ 27.00 1,513,691 6.5 years $18.13 1,086,291 $17.45
The following is a summary of activity of United's Incentive Stock Option Plans:
Stock Range of Options Exercise Prices --------------- ---------------------------- Outstanding at January 1, 1998 1,969,044 $22.00 $ 2.98 Granted 236,600 27.00 Exercised 546,530 22.00 2.98 Forfeited 26,823 22.00 14.88 --------------- Outstanding at December 31, 1998 1,632,291 27.00 2.98 Granted 227,800 25.63 Exercised 281,960 22.00 2.98 Forfeited 39,738 27.00 14.88 --------------- Outstanding at December 31, 1999 1,538,393 27.00 2.98 Granted 230,400 19.19 Exercised 197,663 15.00 6.88 Forfeited 57,439 27.00 22.00 --------------- Outstanding at December 31, 2000 1,513,691 $27.00 $ 2.98 =============== Exercisable at: December 31, 1998 1,275,776 $22.00 $ 2.98 December 31, 1999 1,156,568 $27.00 $ 2.98 December 31, 2000 1,086,291 $27.00 $ 2.98
Because the exercise price of the option granted is equal to the market price of the underlying stock on the date of grant, no compensation expense is recognized. The following pro forma disclosures present United's net income and diluted earnings per share, determined as if United had recognized compensation expense for its employee stock options under the fair value method:
(Dollars in thousands, except per share) Year Ended December 31, -------------------------------------------------- 2000 1999 1998 ------------ ------------ ----------- Pro forma net income $58,379 $70,019 $44,187 Pro forma diluted earnings per share $ 1.38 $ 1.60 $ 1.02
70 NOTE J--EMPLOYEE BENEFIT PLANS - continued The estimated fair value of the options at the date of grant was $11.55, $5.64 and $5.73 for the options granted during 2000, 1999 and 1998, respectively. The fair value of the options was estimated at the date of grant using a Black-Scholes option pricing model with the following weighted average assumptions for 2000, 1999 and 1998, respectively: risk-free interest rates of 6.20%, 5.79% and 4.76%; dividend yields of 4.38%, 3.43%, and 3.04%; volatility factors of the expected market price of United's common stock of 0.999, 0.211 and 0.210; and a weighted average expected option life of 7 years. United provides postemployment and postretirement benefits for certain employees at subsidiaries acquired in prior years. United accounts for such costs as expense when paid. Accounting for such costs when paid does not produce results materially different from those, which would result if such costs were accrued during the period of employee service. United does not anticipate providing postemployment or postretirement benefits to its currently active employees after employment or retirement except on a fully contributory basis. NOTE K--COMMITMENTS AND CONTINGENT LIABILITIES United is a party to financial instruments with off-balance-sheet risk in the normal course of business to meet the financing needs of its customers and to alter its own exposure to fluctuations in interest rates. These financial instruments include loan commitments, standby letters of credit, forward contracts for the delivery of mortgage-backed securities and interest rate swap agreements. The instruments involve, to varying degrees, elements of credit and interest rate risk in excess of the amount recognized in the financial statements. United's maximum exposure to credit loss in the event of nonperformance by the counterparty to the financial instrument for the loan commitments and standby letters of credit is the contractual or notional amount of those instruments. United uses the same policies in making commitments and conditional obligations as it does for on-balance sheet instruments. Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the commitment contract. Commitments generally have fixed expiration dates or other termination clauses and may require the payment of a fee. Since many of the commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. The amount of collateral obtained, if deemed necessary upon the extension of credit, is based on management's credit evaluation of the counterparty. United had approximately $1,086,455,000 and $1,254,596,000 of loan commitments outstanding as of December 31, 2000 and 1999, respectively, substantially all of which expire within one year. Commercial and standby letters of credit are agreements used by United's customers as a means of improving their credit standing in their dealings with others. Under these agreements, United guarantees certain financial commitments of its customers. United has issued commercial and standby letters of credit of $89,013,000 and $74,110,000 as of December 31, 2000 and 1999, respectively. In the normal course of business, United and its subsidiaries are currently involved in various legal proceedings. Management is vigorously pursuing all its legal and factual defenses and, after consultation with legal counsel, believes that all such litigation will be resolved with no material effect on United's financial position or results of operations. 71 NOTE L - UNITED BANKSHARES, INC. (PARENT COMPANY ONLY) FINANCIAL INFORMATION
Condensed Balance Sheets (In thousands) December 31 ----------------------------------------- 2000 1999 ------------------ ------------------ Assets Cash $ 3,719 $ 10,101 Securities available for sale 9,002 10,367 Securities held to maturity 6,859 6,643 Investment in subsidiaries: Bank subsidiaries 411,367 371,105 Non-bank subsidiaries 1,446 1,383 Loans 6,905 11,094 Other assets 1,435 1,634 ------------------ ------------------ Total Assets $440,733 $412,327 ================== ================== Liabilities and Shareholders' Equity Line of credit from banking subsidiary $ 5,000 $ 1,000 Accrued expenses and other liabilities 4,863 15,397 Shareholders' equity (including other accumulated comprehensive loss of $4,964 and $32,228 at December 31, 2000 and 1999, respectively) 430,870 395,930 ------------------ ------------------ Total Liabilities and Shareholders' Equity $440,733 $412,327 ================== ==================
Condensed Statements of Income (In thousands) Year Ended December 31 ---------------------------------------------------------------- 2000 1999 1998 ------------------ ------------------ ------------------ Income Dividends from banking subsidiaries $45,500 $40,352 $40,558 Net interest income 1,074 1,668 1,394 Management fees: Bank subsidiaries 4,130 4,146 3,928 Non-bank subsidiaries 12 12 12 Other income 2,188 1,489 2,937 ------------------ ------------------ ------------------ Total Income 52,904 47,667 48,829 ------------------ ------------------ ------------------ Expenses Interest paid to banking subsidiary 372 6 Operating expenses 4,615 4,698 7,337 ------------------ ------------------ ------------------ Income Before Income Taxes and Equity in Undistributed Net Income of Subsidiaries 47,917 42,963 41,492 Applicable income tax expense 798 853 105 ------------------ ------------------ ------------------ Income Before Equity in Undistributed Net Income of Subsidiaries 47,119 42,110 41,387 Equity in undistributed net income of subsidiaries: Bank subsidiaries 11,795 28,102 2,971 Non-bank subsidiaries 62 36 44 ------------------ ------------------ ------------------ Net Income $58,976 $70,248 $44,402 ================== ================== ==================
72 NOTE L - UNITED BANKSHARES, INC. (PARENT COMPANY ONLY) FINANCIAL INFORMATION - continued
Condensed Statements of Cash Flows (In thousands) Year Ended December 31 --------------------------------------------------------------------- 2000 1999 1998 ------------------- ------------------- ------------------- Operating Activities Net income $ 58,976 $ 70,248 $ 44,402 Adjustments to reconcile net income to net cash provided by operating activities: Equity in undistributed net income of subsidiaries (11,857) (28,138) (3,015) Depreciation and net amortization 7 12 10 Net gain on sales of investment securities (2,168) (1,484) (2,912) Net change in other assets and liabilities (9,511) 786 (771) ------------------- ------------------- ------------------- Net Cash Provided by Operating Activities 35,447 41,424 37,714 ------------------- ------------------- ------------------- Investing Activities Net proceeds (purchases of) from securities 1,464 (2,205) 3,563 Repayment on loan balances by customers 4,189 1,742 1,464 Increase in investment in subsidiaries (8,541) ------------------- ------------------- ------------------- Net Cash Provided by (Used in) Investing Activities 5,653 (463) (3,514) ------------------- ------------------- ------------------- Financing Activities Net advances on line of credit from subsidiary 4,000 1,000 Cash dividends paid (35,468) (34,999) (24,651) Acquisition of treasury stock (17,724) (26,196) (3,610) Proceeds from exercise of stock options 1,710 2,876 4,802 Proceeds from sales of treasury stock 654 Pre-merger transactions of pooled companies 8,237 Purchase of fractional shares (7) ------------------- ------------------- ------------------- Net Cash Used in Financing Activities (47,482) (57,319) (14,575) ------------------- ------------------- ------------------- (Decrease) Increase in Cash and Cash Equivalents (6,382) (16,358) 19,625 Cash and Cash Equivalents at Beginning of Year 10,101 26,459 6,834 ------------------- ------------------- ------------------- Cash and Cash Equivalents at End of Year $ 3,719 $ 10,101 $ 26,459 =================== =================== ===================
73 NOTE M--OTHER EXPENSE The following details certain items of other expense for the periods indicated:
Year Ended December 31 ----------------------------------------------------- (In thousands) 2000 1999 1998 -------------- -------------- --------------- Other expense: Data processing $3,153 $3,175 $ 5,710 Legal and consulting 3,923 1,709 2,909 Advertising 2,803 2,702 3,011 Goodwill amortization 3,266 3,279 4,395 Equipment expense 7,589 8,896 10,188
NOTE N--REGULATORY MATTERS The subsidiary banks are required to maintain average reserve balances with their respective Federal Reserve Bank. The average amount of those reserve balances for the year ended December 31, 2000, was approximately $47,012,000. The primary source of funds for the dividends paid by United Bankshares, Inc. to its shareholders is dividends received from its subsidiary banks. Dividends paid by United's subsidiary banks are subject to certain regulatory limitations. Generally, the most restrictive provision requires regulatory approval if dividends declared in any year exceed that year's net income, as defined, plus the retained net profits of the two preceding years. During 2001, the retained net profits available for distribution to United Bankshares, Inc., as dividends without regulatory approval, are approximately $39,894,000, plus net income for the interim period through the date of declaration. Under Federal Reserve regulation, the banking subsidiaries are also limited as to the amount they may loan to affiliates, including the parent company. Loans from the banking subsidiaries to the parent company are limited to 10% of the banking subsidiaries' capital and surplus, as defined, or $40,947,000 at December 31, 2000, and must be secured by qualifying collateral. United's subsidiary banks are subject to various regulatory capital requirements administered by federal banking agencies. Pursuant to capital adequacy guidelines, United's subsidiary banks must meet specific capital guidelines that involve various quantitative measures of the banks' assets, liabilities, and certain off-balance sheet items as calculated under regulatory accounting practices. United's subsidiary banks' capital amounts and classifications are also subject to qualitative judgments by the regulators about components, risk weightings, and other factors. Quantitative measures established by regulation to ensure capital adequacy require United to maintain minimum amounts and ratios of total and Tier I capital, as defined in the regulations, to risk-weighted assets, as defined, and of Tier I capital, as defined, to average assets, as defined. At of December 31, 2000, United exceeds all capital adequacy requirements to which it is subject. 74 NOTE N--REGULATORY MATTERS - continued At December 31, 2000, the most recent notification from its regulators, United and its subsidiary banks were categorized as well capitalized. To be categorized as well capitalized, United must maintain minimum total risk-based, Tier I risk-based, and Tier I leverage ratios as set forth in the following table. There are no conditions or events since that notification that management believes would impact United's well capitalized status. United's and its subsidiary banks', United National Bank and United Bank, capital amounts (in thousands of dollars) and ratios are presented in the following table.
For Capital To Be Well Actual Adequacy Purposes Capitalized --------------------------- --------------------------- --------------------------- Amount Ratio Amount Ratio Amount Ratio ------------ ------------ ------------ ------------ ------------ ------------ As of December 31, 2000: ------------------------ Total Capital (to Risk- Weighted Assets): United Bankshares $437,180 11.8% $297,130 *8.0% $371,413 *10.0% United National Bank 290,524 11.1% 210,279 *8.0% 262,849 *10.0% United Bank 125,249 11.6% 86,122 *8.0% 107,652 *10.0% Tier I Capital (to Risk- Weighted Assets): United Bankshares 396,610 10.7% 148,565 *4.0% 222,848 *6.0% United National Bank 263,217 10.0% 105,139 *4.0% 157,709 *6.0% United Bank 112,024 10.4% 43,061 *4.0% 64,591 *6.0% Tier I Capital (to Average Assets): United Bankshares 396,610 8.2% 194,267 *4.0% 242,834 *5.0% United National Bank 263,217 7.9% 132,743 *4.0% 165,929 *5.0% United Bank 112,024 7.3% 61,716 *4.0% 77,146 *5.0% As of December 31, 1999: ------------------------ Total Capital (to Risk- Weighted Assets): United Bankshares $426,310 11.8% $290,173 *8.0% $362,716 *10.0% United National Bank 279,554 11.1% 201,255 *8.0% 251,569 *10.0% United Bank 120,365 11.0% 87,332 *8.0% 109,165 *10.0% Tier I Capital (to Risk- Weighted Assets): United Bankshares 385,840 10.6% 145,086 *4.0% 217,630 *6.0% United National Bank 253,319 10.1% 100,627 *4.0% 150,941 *6.0% United Bank 107,001 9.8% 43,666 *4.0% 65,499 *6.0% Tier I Capital (to Average Assets): United Bankshares 385,840 7.7% 200,170 *4.0% 250,213 *5.0% United National Bank 253,319 7.4% 136,875 *4.0% 171,093 *5.0% United Bank 107,001 6.7% 63,903 *4.0% 79,879 *5.0%
* Greater than or equal to 75 NOTE O--FAIR VALUES OF FINANCIAL INSTRUMENTS The following methods and assumptions were used by United in estimating its fair value disclosures for financial instruments: Cash and Cash Equivalents: The carrying amounts reported in the balance sheet -------------------------- for cash and cash equivalents approximate those assets' fair values. Securities: The estimated fair values of securities are based on quoted market ----------- prices, where available. If quoted market prices are not available, fair values are based on quoted market prices of comparable instruments. Loans: The estimated fair values of variable-rate loans that reprice frequently ------ with no significant change in credit risk are based on carrying values. The fair values of certain mortgage loans (e.g., one-to-four family residential), credit card loans, and other consumer loans are based on quoted market prices of similar loans sold in conjunction with securitization transactions, adjusted for differences in loan characteristics. The fair values of other loans (e.g., commercial real estate and rental property mortgage loans, commercial and industrial loans, financial institution loans and agricultural loans) are estimated using discounted cash flow analyses, using interest rates currently being offered for loans with similar terms to borrowers of similar credit worthiness. Off-Balance Sheet Instruments: Fair values of United's loan commitments are ------------------------------ based on fees currently charged to enter into similar agreements, taking into account the remaining terms of the agreements and the counterparties' credit standing. The estimated fair values of these commitments approximate their carrying values. Deposits: The fair values of demand deposits (e.g., interest and noninterest --------- checking, regular savings and certain types of money market accounts) are, by definition, equal to the amount payable on demand at the reporting date (i.e., their carrying amounts). The carrying amounts of variable-rate, fixed-term money market accounts and certificates of deposit approximate their fair values at the reporting date. Fair values of fixed-rate certificates of deposit are estimated using a discounted cash flow calculation that applies interest rates currently being offered on certificates to a schedule of aggregated expected monthly maturities on time deposits. Short-term Borrowings: The carrying amounts of federal funds purchased, ---------------------- borrowings under repurchase agreements and other short-term borrowings approximate their fair values. Federal Home Loan Bank Borrowings: The fair values of United's Federal Home Loan ---------------------------------- Bank borrowings are estimated using discounted cash flow analyses, based on United's current incremental borrowing rates for similar types of borrowing arrangements. 76 NOTE O--FAIR VALUES OF FINANCIAL INSTRUMENTS - continued The estimated fair values of United's financial instruments are summarized below:
December 31, 2000 December 31, 1999 ----------------------------------- ----------------------------------- (In thousands) Carrying Fair Carrying Fair Amount Value Amount Value ---------------- ---------------- ---------------- ---------------- Cash and cash equivalents $ 144,810 $ 144,810 $ 159,808 $ 159,808 Securities available for sale 865,266 865,266 1,207,363 1,207,363 Securities held to maturity 380,068 378,405 265,190 258,183 Loans 3,192,494 3,181,933 3,170,096 3,106,565 Deposits 3,391,449 3,315,058 3,260,985 3,215,379 Short-term borrowings 333,716 334,146 398,247 397,653 FHLB borrowings 706,512 717,590 953,347 941,926
NOTE P--SEGMENT INFORMATION The following information is based on United's current management structure and presents results of operations as if the community banking and mortgage banking segments were operated on a stand alone basis. The results are not necessarily comparable with similar information of other companies.
General Mortgage Community Corporate (In thousands) Banking Banking and Other Consolidated --------------------------------------------------------------------------------------------------------------------------------- 2000 Net interest income $ 3,468 $ 175,808 $ 805 $ 180,081 Provision for loan losses 34 15,711 15,745 Net interest income after provision for loan losses 3,434 160,097 805 164,336 Noninterest income 16,152 15,446 2,188 33,786 Noninterest expense 14,101 95,836 485 110,422 Income before income taxes 5,485 79,707 2,508 87,700 Income tax expense 1,839 26,057 828 28,724 Net income 3,646 53,650 1,680 58,976 Average total assets 125,120 4,920,913 (109,429) 4,936,604 --------------------------------------------------------------------------------------------------------------------------------- 1999 Net interest income $ 3,480 $ 174,240 $ 2,543 $ 180,263 Provision for loan losses 19 8,781 8,800 Net interest income after provision for loan losses 3,461 165,459 2,543 171,463 Noninterest income 24,507 25,025 1,546 51,078 Noninterest expense 20,210 96,743 566 117,519 Income before income taxes 7,758 93,741 3,523 105,022 Income tax expense 2,687 31,033 1,054 34,774 Net income 5,071 62,708 2,469 70,248 Average total assets 148,397 4,860,973 (141,849) 4,867,521 --------------------------------------------------------------------------------------------------------------------------------- 1998 Net interest income $ 2,763 $ 165,813 $ 1,717 $ 170,293 Provision for loan losses 25 12,131 12,156 Net interest income after provision for loan losses 2,738 153,682 1,717 158,137 Noninterest income 24,052 14,727 2,973 41,752 Noninterest expense 19,872 112,959 5,133 137,964 Income (loss) before income taxes 6,918 55,450 (443) 61,925 Income tax expense 1,878 15,557 88 17,523 Net income (loss) 5,040 39,893 (531) 44,402 Average total assets 190,168 4,190,512 (141,872) 4,238,808 --------------------------------------------------------------------------------------------------------------------------------- General corporate and other includes intercompany eliminations.
77 NOTE Q - QUARTERLY FINANCIAL DATA (UNAUDITED) Quarterly financial data for 2000 and 1999 is summarized below (dollars in thousands except for per share data):
1st Quarter 2nd Quarter 3rd Quarter 4th Quarter ----------- ----------- ----------- ----------- 2000 ---- Interest income $ 93,268 $ 94,063 $ 95,298 $ 95,218 Interest expense 46,542 48,632 51,165 51,427 Net interest income 46,726 45,431 44,133 43,791 Provision for loan losses 2,547 3,851 4,439 4,908 Income from mortgage Banking operations 3,383 4,159 5,014 3,784 Other noninterest income 7,418 8,305 8,310 (6,587) Noninterest expense 28,143 27,106 25,463 29,710 Income taxes 8,849 8,815 8,994 2,066 Net income (1) 17,988 18,123 18,561 4,304 Per share data: --------------- Average shares outstanding (000s): Basic 42,273 41,931 41,842 41,776 Diluted 42,657 42,264 42,148 42,072 Net income per share: Basic $ 0.43 $ 0.43 $ 0.44 $ 0.11 Diluted $ 0.42 $ 0.43 $ 0.44 $ 0.11 Dividends per share $ 0.21 $ 0.21 $ 0.21 $ 0.21 1st Quarter 2nd Quarter 3rd Quarter 4th Quarter ----------- ----------- ----------- ----------- 1999 ---- Interest income $ 85,504 $ 87,022 $ 90,811 $ 91,328 Interest expense 39,533 42,415 45,822 46,632 Net interest income 45,971 44,607 44,989 44,696 Provision for loan losses 764 1,761 2,255 4,020 Income from mortgage Banking operations 4,418 6,095 5,706 6,173 Other noninterest income 6,221 6,358 7,137 8,970 Noninterest expense 28,821 29,070 29,377 30,251 Income taxes 9,864 8,433 8,500 7,977 Net income (1) 17,161 17,796 17,700 17,591 Per share data: --------------- Average shares outstanding (000s): Basic 43,278 43,322 43,124 42,674 Diluted 43,961 44,013 43,708 43,282 Net income per share: Basic $ 0.40 $ 0.41 $ 0.41 $ 0.41 Diluted $ 0.39 $ 0.40 $ 0.41 $ 0.41 Dividends per share $ 0.20 $ 0.20 $ 0.21 $ 0.21
(1) For further information see the related discussion "Quarterly Results" included in Management's Discussion and Analysis. 78