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FORM 10-K
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Annual Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
For the Fiscal Year Ended DECEMBER 31, 1997
Commission File Number: 0-13322
UNITED BANKSHARES, INC.
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(Exact name of registrant as specified in its charter)
WEST VIRGINIA 55-0641179
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
300 UNITED CENTER
500 VIRGINIA STREET, EAST
CHARLESTON, WEST VIRGINIA 25301
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (304) 424-8761
Securities registered pursuant to section 12(b) of the Act: NONE
Securities registered pursuant to 12(g) of the Act:
COMMON STOCK, $2.50 PAR VALUE
-----------------------------
(Title of Class)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such report(s), and (2) has been subject to such
filing requirements for the past 90 days. YES [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in part III of this Form 10-K or any
amendment to this Form 10-K. [ ]
The aggregate market value of United Bankshares, Inc. common stock,
representing all of its voting stock, that was held by non-affiliates on
February 28, 1998 was approximately $581,969,282.
As of February 28, 1998, United Bankshares, Inc. had 30,020,176
shares of common stock outstanding with a par value of $2.50.
Documents Incorporated By Reference
1. Annual Report to Shareholders for the fiscal year ended December 31, 1997,
portions of which are incorporated by reference in Parts I, II and IV of this
Form 10-K.
2. Definitive Proxy Statement dated April 7, 1998 for the 1998 Annual
Shareholders' Meeting to be held on May 18, 1998, portions of which are
incorporated by reference in Part III of this Form 10-K.
Page 1 of 88 pages. Index to Exhibits is on page 32 .
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UNITED BANKSHARES, INC.
FORM 10-K
(Continued)
As of the date of filing this Annual report, neither the annual shareholders'
report for the year ended December 31, 1997, nor the proxy statement for the
annual United shareholders' meeting had been mailed to shareholders.
CROSS-REFERENCE INDEX
PART I Page
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Item 1. BUSINESS . . . . . . . . . . . . . . . . . . . . . . . . 3
Item 2. PROPERTIES . . . . . . . . . . . . . . . . . . . . . . . 3
Item 3. LEGAL PROCEEDINGS . . . . . . . . . . . . . . . . . . . 13
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS . . 13
PART II
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Item 5. MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED
SHAREHOLDER MATTERS . . . . . . . . . . . . . . . . . . 14
Item 6. SELECTED FINANCIAL DATA . . . . . . . . . . . . . . . . 18
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS . . . . . . . . . . 18
Item 7a QUALITATIVE AND QUANTITATIVE DISCLOSURES ABOUT
MARKET RISK . . . . . . . . . . . . . . . . . . . . . . 18
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA . . . . . . 28
Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
ON ACCOUNTING AND FINANCIAL DISCLOSURES . . . . . . . . 28
PART III
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Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT . . 29
Item 11. EXECUTIVE COMPENSATION . . . . . . . . . . . . . . . . 29
Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT . . . . . . . . . . . . . . . . . . . . . . 29
Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS . . . . 29
PART VI
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Item 14. EXHIBITS, FINANCIAL STATEMENTS, SCHEDULES AND REPORTS
ON FORM 8-K . . . . . . . . . . . . . . . . . . . . . 30
2
UNITED BANKSHARES, INC.
FORM 10-K, PART I
ITEM 1. BUSINESS
ITEM 2. PROPERTIES
The following discussion satisfies the reporting requirements of Items
1 and 2.
3
DESCRIPTION OF UNITED BANKSHARES, INC.
Organizational History and Subsidiaries
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United Bankshares, Inc. ("United") is a West Virginia corporation
registered as a bank holding company pursuant to the Bank Holding Company Act of
1956, as amended. United was incorporated on March 26, 1982 and organized on
September 9, 1982. United began conducting business on May 1, 1984 with the
acquisition of three wholly-owned subsidiaries. On October 1, 1985, these three
subsidiaries were merged and on November 1, 1985, were renamed United National
Bank ("UNB").
Since that time UNB has acquired through merger or consolidation the
following banks: Heritage Bancorp, Inc. (a holding company); First National Bank
of Ripley; Kanawha Banking and Trust Company; Ohio Valley National Bank; Elk
National Bank; Montgomery National Bank, the sole subsidiary of Liberty
Bancshares Inc., a bank holding company; First Bank of Ceredo, the bank
subsidiary of Financial Future Corporation, a bank holding company; CB&T
Westover Bank; the Star City Branch of Community Bank & Trust, N. A.; and First
Empire Federal Savings & Loan Association, the sole subsidiary of Eagle Bancorp,
Inc., a bank holding company.
On June 30, 1996 United formed United Mortgage Company, Inc., a
wholly-owned subsidiary of UNB, with its wholly-owned subsidiaries United
Mortgage Center, Inc. and United Home Lending Services, Inc. The business of
United Mortgage Company, Inc. and its subsidiaries is the origination of
residential real estate loans for resale, the conducting of mortgage loan
servicing activities for certain loans, and generally the activities commonly
conducted by a mortgage banking company.
On September 1, 1993, UBC Holding Company, ("UBC"), a United
subsidiary, was formed to effect the Financial Future Corporation transaction.
UBC is a second tier holding company with UNB currently being its only
subsidiary.
On August 9, 1990, United acquired BankFirst Corporation ("BankFirst"),
a one bank holding company based in McLean, Virginia. BankFirst was merged with
UBF Holding Company, Inc. ("UBF"), a United subsidiary formed to effect this
acquisition. UBF acquired Bank First, N.A. ("Bank First"), the subsidiary of
BankFirst.
On October 11, 1995, United formed Commercial Interim Bank, Inc.
("Interim Bank"), a state member bank located in Arlington, Virginia, to
facilitate the acquisition of First Commercial Bank of Arlington, Virginia
("FCB"). United then merged Bank First into Interim Bank from its wholly owned
subsidiary, UBF. Concurrent with the merger of Bank First into Interim Bank, UBF
was merged into United. United acquired FCB on October 31, 1995 and merged it
into Interim Bank. United then effected a name change of Interim Bank to First
Commercial Bank. On March 18, 1996 First Commercial Bank's name was changed to
United Bank.
4
On August 1, 1997, United acquired First Patriot Bankshares Corporation
("Patriot") of Reston, Virginia and its wholly-owned subsidiary, Patriot
National Bank. Patriot was merged into UB Holding Company, Inc. ("UB"), a United
subsidiary formed to consummate this acquisition. Patriot National Bank was
merged into United Bank.
United National Bank-South ("UNB-S"), was formed on November 1, 1992,
as a part of United's acquisition of Summit Holding Corporation and its lead
bank, Raleigh County National Bank. On January 27, 1996, UNB-S was merged into
and became a part of UNB. Offices of UNB-S became branch offices of UNB.
In December 1996, United Brokerage Services, Inc., a wholly-owned
subsidiary of UNB began operations. United Brokerage Services, Inc. is
a fully-disclosed broker/dealer and is a registered Investment Advisor
with the National Association of Securities Dealers, Inc. and the
Securities and Exchange Commission and a member of the Securities
Investor Protection Corporation. United Brokerage Services, Inc. offers
a wide range of investment products as well as comprehensive financial
planning and asset management services to the general public.
Offices
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The headquarters of United are located in United Center at 500 Virginia
Street, East, Charleston, West Virginia.
The main office of UNB is located at 514 Market Street, Parkersburg,
West Virginia. United's corporate offices and UNB's executive offices are also
located in Parkersburg at Fifth and Avery Streets. Currently, UNB operates
forty-three offices located throughout West Virginia. UNB owns all of these
facilities except for two in the Parkersburg area, three in the Charleston area,
two in the Beckley area and one in each Wheeling, Summersville and Clarksburg,
all of which are leased under operating leases. The main facility of UNB's
Wheeling office is leased from Ogden Newspapers, Inc. Additionally, UNB operates
a loan production office located in Bridgeport, West Virginia.
The main office of United Bank is located at 3801 Wilson Boulevard,
Arlington, Virginia, with seven offices in Fairfax County and an office in each
of Loudoun and Prince William Counties. United Bank leases all of these
facilities under operating lease agreements except for the two offices in
Arlington and Reston, which are owned facilities.
Employees
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As of December 31, 1997 United and its subsidiaries had approximately
972 full-time equivalent employees and officers. None of these employees is
represented by a collective bargaining unit, and management considers employee
relations to be excellent.
5
Business of United
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As a bank holding company registered under the Bank Holding Company Act
of 1956, as amended, United's present business is the operation of its bank
subsidiaries. As of December 31, 1997, United's consolidated assets approximated
$2.7 billion and total shareholders' equity approximated $279 million.
United is permitted to acquire other banks and bank holding companies,
as well as thrift institutions. United is also permitted to engage in certain
non-banking activities which are closely related to banking under the provisions
of the Bank Holding Company Act and the Federal Reserve Board's Regulation Y.
Management continues to consider such opportunities as they arise, and in this
regard, management from time to time makes inquiries, proposals, offers or
expressions of interest as to potential opportunities; although no agreements or
understandings to acquire other banks or bank holding companies or nonbanking
subsidiaries or to engage in other nonbanking activities, other than those
identified herein, presently exist.
Business of Subsidiary Banks
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All of United's subsidiary banks are full-service commercial banks and,
as such, engage in most types of business permitted by law and regulation.
Included among the banking services offered are the acceptance of deposits in
checking, savings, time and money market accounts; the making and servicing of
personal, commercial, floor plan and student loans; and the making of
construction and real estate loans. Also offered are individual retirement
accounts, safe deposit boxes, wire transfers and other standard banking products
and services. As a part of their lending function, UNB and United Bank offer
credit card services including accounts issued under the name of certain
correspondent banks.
UNB also maintains a trust department which acts as trustee under
wills, trust and pension and profit sharing plans, as executors and
administrators of estates, and as guardians for estates of minors and
incompetents, and in addition performs a variety of investment and security
services. UNB trust services are available to customers of affiliate banks. UNB
provides services to its correspondent banks such as check clearing, safekeeping
and the buying and selling of federal funds.
UNB is a member of a regional network of automated teller machines
known as the MAC ATM network while United Bank participates in the MOST network.
Through MAC and MOST, all of United's subsidiary banks are participants in a
network known as Cirrus which provides banking on a nationwide basis.
6
Lending Activities
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United's total loan portfolio, net of unearned income, increased
$212.88 million, or 11.5%, to $2.06 billion in 1997 and is comprised of
commercial, real estate and consumer loans including credit card and home equity
loans. Commercial and real estate loans increased $119.89 million or 48.2% and
$89.11 million or 6.5%, respectively, while consumer loans, net of unearned
income, remained flat.
Commercial Loans
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The commercial loan portfolio consists of loans to corporate borrowers
in small to mid-size industrial and commercial companies, as well as automobile
dealers, service, retail and wholesale merchants. Coal mining companies make up
an insignificant portion of loans in the portfolio. Collateral securing these
loans includes equipment, machinery, inventory, receivables, vehicles and
commercial real estate. Commercial loans are considered to contain a higher
level of risk than other loan types although care is taken to minimize these
risks. Numerous risk factors impact this portfolio including industry specific
risks such as economy, new technology, labor rates and cyclicality, as well as
customer specific factors, such as cash flow, financial structure, operating
controls and asset quality. United diversifies risk within this portfolio by
closely monitoring industry concentrations and portfolios to ensure that it does
not exceed established lending guidelines. Diversification is intended to limit
the risk of loss from any single unexpected economic event or trend.
Underwriting standards require a comprehensive review and independent evaluation
of virtually all larger balance commercial loans by the loan committee prior to
approval with ongoing updates of the loan portfolio.
Real Estate Loans
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Commercial real estate loans consist of commercial mortgages, which
generally are secured by nonresidential and multi-family residential properties.
Also included in this portfolio are loans that are secured by owner-occupied
real estate, but made for purposes other than the construction or purchase of
real estate. Commercial real estate loans carry many of the same customers and
industry risks as the commercial loan portfolio. Real estate mortgage loans to
consumers are secured primarily by a first lien deed of trust. These loans are
traditional one-to-four family residential mortgages. The loans generally do not
exceed an 80% loan to value ratio at the loan origination date and most are at a
variable rate of interest. These loans are considered to contain normal risk.
Consumer Loans
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Consumer loans are secured by automobiles, boats, recreational
vehicles, and other personal property. Personal loans, home equity, student
loans and unsecured credit card receivables are also included as consumer loans.
United monitors the risk associated with these types of
7
loans by monitoring such factors as portfolio growth, lending policies and
economic conditions. Underwriting standards are continually evaluated and
modified based upon these factors.
Underwriting Standards
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United's loan underwriting guidelines and standards are updated
periodically and are presented for approval by each of the respective Boards of
Directors of its subsidiary banks. The purpose of the standards and guidelines
is to grant loans on a sound and collectible basis; to invest available funds in
a safe, profitable manner; to serve the legitimate credit needs of the
communities of United's primary market area; and ensure that all loan applicants
receive fair and equal treatment in the lending process. It is the intent of the
underwriting guidelines and standards to: minimize loan losses by carefully
investigating the credit history of each applicant, verify the source of
repayment and the ability of the applicant to repay, collateralize those loans
in which collateral is deemed to be required, exercise care in the documentation
of the application, review, approval, and origination process, and administer a
comprehensive loan collection program. The above guidelines are adhered to and
subject to the experience, background and personal judgment of the loan officer
assigned to the loan application. A loan officer may grant and justify a loan
with slight variances from the underwriting guidelines and standards. However,
the loan officer may not exceed their respective lending authority without
obtaining the prior, proper approval from a superior, a regional supervisor, or
the Loan Committee, whichever is deemed appropriate for the nature of the
variance.
Loan Origination and Processing
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United generally originates loans within the primary market area of its
banking subsidiaries. United may from time to time make loans to borrowers
and/or on properties outside of its primary market area as an accommodation to
its customers. Processing of all loans is centralized in the Charleston, West
Virginia office. United, with the formation of United Home Lending Service,
Inc., has entered the mortgage banking business. As of December 31, 1997, the
balance of mortgage loans being serviced by United for others was $242.78
million.
Secondary Markets
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During 1997, United originated $143.19 million of real estate loans for
sale in the secondary market and sold $135.76 million of loans designated as
held for sale in the secondary market. Proceeds received from the sales of these
loans during 1997 was $138.28 million.
The principal sources of revenue from United's mortgage banking
business are: (i) loan origination fees; (ii) gains or losses from the sale of
loans, if any; (iii) interest earned on mortgage loans during the period that
they are held by United pending sale; (iv) loan servicing fees; and (v) gain or
loss on the close out of the hedge instrument used to offset the risk that
changes in interest rate may have on the value of United's mortgage loan
inventory.
8
Investment Activities
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United's investment policy stresses the management of the investment
securities portfolio, which includes both securities held to maturity and
securities available for sale, to maximize return over the long-term in a manner
that is consistent with good banking practices and relative safety of principal.
United currently does not engage in trading account activity. The
Asset/Liability Committee of United is responsible for the coordination and
evaluation of the investment portfolio.
Sources of funds for investment activities include "core deposits".
Core deposits include certain demand deposits, statement and special savings and
NOW accounts. These deposits are relatively stable and they are the lowest cost
source of funds available to United. Short-term borrowings have also been a
significant source of funds. These include federal funds purchased and
securities sold under agreements to repurchase and FHLB borrowings. Repurchase
agreements represent funds which are generally obtained as the result of a
competitive bidding process.
United's investment portfolio remains comprised largely of U.S.
Treasury securities and obligations of U.S. Agencies and Corporations.
Obligations of States and Political Subdivisions are comprised of municipal
securities with an average quality of not less than an "A" rating.
During 1997, United did not sell any securities. United incurred net
losses of $98 thousand from sales from the available for sale portfolio in 1996.
United enters into hedging transactions that utilize forward contracts
for the delivery of mortgage-backed securities as hedge vehicles to offset the
risk that a change in interest rates will result in a decrease in the value of
United's current mortgage loan inventory or its commitments to originate
mortgage loans (the "pipeline"). The risk of loss is then matched with the
appropriate hedge vehicle. United's policies generally require that it hedge
substantially all of its inventory of conforming and government loans. Realized
gains and losses on forward commitments are recorded in mortgage banking income
in the period settlement occurs. Unrealized gains or losses are considered in
the lower of cost or market valuation of loans held for sale.
At December 31, 1997, United had open commitments amounting to
approximately $2 million to sell mortgage-backed securities with varying
settlement dates generally not extending beyond March 1998. As such, United is
not exposed to significant risk nor will it derive any significant benefit from
changes in interest rates on the price of the mortgage loan inventory, net of
gains or losses of associated hedge positions.
9
Operating Subsidiaries
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During 1996, UNB chartered two operating subsidiaries, United
Brokerage Services, Inc. and United Mortgage Company, Inc.
United Brokerage Services, Inc. is a fully-disclosed broker/dealer
and a registered Investment Advisor with the National Association of
Securities Dealers, Inc. and the Securities and Exchange Commission and
a member of the Securities Investor Protection Corporation. United
Brokerage Services, Inc. offers a wide range of investment products as
well as comprehensive financial planning and asset management services
to the general public.
United Mortgage Company, Inc. was formed in connection with the merger
of Eagle Bancorp, Inc. ("Eagle") with and into United and the related merger of
First Empire Federal Savings and Loan Association ("First Empire") with and into
UNB. In accordance with the merger agreement, UNB requested and received
regulatory approval to form and operate United Mortgage Company, Inc. The
business of United Mortgage Company, Inc. will be the origination and
acquisition of residential real estate loans for resale, the conducting of
mortgage loan servicing activities for certain loans, and generally the
activities commonly conducted by a mortgage banking company.
Competition
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United faces a high degree of competition in nearly all of the markets
it serves. These markets may generally be defined as Wood, Kanawha, Monongalia,
Jackson, Cabell, Hancock, Ohio, Marshall, Gilmer, Lewis, Webster, Boone, Logan,
Nicholas, Fayette and Raleigh Counties in West Virginia; Lawrence, Belmont,
Jefferson and Washington Counties in Ohio; and Arlington, Loudoun, Prince
William and Fairfax Counties in Virginia, located adjacent to the Washington
D.C. area, which is in close proximity to West Virginia's eastern panhandle.
United competes in Ohio markets because of the close proximity to the Ohio
border of certain subsidiary offices. Included in United's markets are the
Parkersburg Metropolitan Statistical Area (MSA), the Charleston MSA, the
Huntington MSA, the Wheeling MSA and the Weirton MSA. These represent the five
largest West Virginia MSA's. United considers the above counties and MSA's to be
the primary market area for the business of its banking subsidiaries.
West Virginia banks are permitted unlimited branch banking throughout
the state. In addition, interstate acquisitions of and by West Virginia banks
and bank holding companies are permissible on a reciprocal basis. West Virginia
also allows reciprocal interstate acquisitions by thrift institutions. These
conditions serve to intensify competition within United's market.
As of December 31, 1997, there were 53 bank holding companies in the
State of West Virginia registered with the Federal Reserve System and the West
Virginia Board of Banking and Financial Institutions and 86
10
bank holding companies in the Commonwealth of Virginia registered with the
Federal Reserve System and the Virginia Corporation Commission. These holding
companies are headquartered in various West Virginia and Virginia cities and
control banks throughout West Virginia and Virginia, which compete for business
as well as for the acquisition of additional banks.
Economic Characteristics of Primary Market Area
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Although the market area of the banking subsidiaries encompass a
portion of the coal fields located in southern West Virginia, an area of the
state which has been economically depressed, the coal related loans in the loan
portfolio of the banking subsidiaries constitute less than 2% of United's total
loans outstanding. The state of West Virginia has a more diversified economy
than it had during the peak periods of coal production with the chemical
manufacturing industry accounting for 19% of the entire manufacturing workforce
and 33% of the manufacturing wages, according to West Virginia state records.
This diversified economy has contributed to the positive trends in the number of
payroll jobs created and unemployment rates in recent years as the number of
payroll jobs increased 13,600 during calendar year 1997 and the state's overall
unemployment rate has declined from 10.5% in 1991 to 6.5% in December 1997 - the
lowest unemployment rate in nearly 20 years, according to available information
from the West Virginia Bureau of Employment Programs.
United's northern Virginia subsidiary banks are located in markets that
reflect very low unemployment rate levels and increased wage levels over a year
ago. According to information available from the Virginia Employment Commission,
Virginia's unemployment rate as of December 1997 was 3.1%. The 3.1% rate was the
lowest rate reported in over 27 years. Additionally, the Virginia Employment
Commission reported that record levels were set with increased nonagricultural
employment and increased manufacturing salaries in December 1997.
Regulation and Supervision
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United, as a bank holding company, is subject to the restrictions of
the Bank Holding Company Act of 1956, as amended, and is registered pursuant to
its provisions. As such, United is subject to the reporting requirements of and
examination by the Board of Governors of the Federal Reserve System ("Board of
Governors").
The Bank Holding Company Act prohibits the acquisition by a bank
holding company of direct or indirect ownership of more than five percent of the
voting shares of any bank within the United States without prior approval of the
Board of Governors. With certain exceptions, a bank holding company also is
prohibited from acquiring direct or indirect ownership or control of more than
five percent of the voting shares of any company which is not a bank, and from
engaging directly or indirectly in business unrelated to the business of
banking, or managing or controlling banks.
11
The Board of Governors of the Federal Reserve System, in its Regulation
Y, permits bank holding companies to engage in non-banking activities closely
related to banking or managing or controlling banks. Approval of the Board of
Governors is necessary to engage in these activities or to make acquisitions of
corporations engaging in these activities. In addition, on a case by case basis,
the Board of Governors may approve other non-banking activities.
As a bank holding company doing business in West Virginia, United is
also subject to regulation and examination by the West Virginia Board of Banking
and Financial Institutions (the "West Virginia Banking Board") and must submit
annual reports to the department. Further, any acquisition application which
United must submit to the Board of Governors must also be submitted to the West
Virginia Banking Board for approval.
United is also registered under and is subject to the requirements of
the Securities Exchange Act of 1934, as amended.
UNB, as national banking associations, is subject to supervision,
examination and regulation by the Office of the Comptroller of the Currency. UNB
is also a member of the Federal Reserve System, and as such, is subject to
applicable provisions of the Federal Reserve Act and regulations issued
thereunder.
United Bank, as a Virginia state member bank, is subject to
supervision, examination and regulation by the Federal Reserve System, and as
such, is subject to applicable provisions of the Federal Reserve Act and
regulations issued thereunder. United Bank is subject to regulation by the
Virginia Corporation Commission's Bureau of Financial Institutions.
The deposits of United's wholly-owned banking subsidiaries are insured
by the Federal Deposit Insurance Corporation ("FDIC") to the extent provided by
law. Accordingly, these banks are also subject to regulation by the FDIC.
12
UNITED BANKSHARES, INC.
FORM 10-K, PART I
ITEM 3. LEGAL PROCEEDINGS
Litigation
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Information relating to litigation on page 29 of the Annual Report to
Shareholders for the year ended December 31, 1997, is incorporated herein by
reference.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
No matters were submitted to a vote of security holders during the
fourth quarter of the fiscal year covered by this report.
13
UNITED BANKSHARES, INC.
FORM 10-K, PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED
SHAREHOLDER MATTERS
14
Stock
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As of December 31, 1997, 20,000,000 shares of common stock, par value
$2.50 per share, were authorized for United, of which 14,983,758 were issued,
including 311,372 shares held as treasury shares. The outstanding shares are
held by approximately 5,225 shareholders of record as of December 31, 1997. At
the Special Shareholders' Meeting held on March 9, 1998, the shareholders of
United approved a proposal to increase United's authorized shares from
20,000,000 to 41,000,000. The unissued portion of United's authorized common
stock (subject to registration approval by the SEC) and the treasury shares are
available for issuance as the Board of Directors determines advisable. United
offers its shareholders the opportunity to invest dividends in shares of United
stock through its dividend reinvestment plan. United has also established stock
option plans and a stock bonus plan as incentive for certain eligible officers.
In addition to the above incentive plans, United is currently involved in
certain mergers in which additional shares will be issued and recognizes that
additional shares could be issued for other appropriate purposes.
On February 23, 1998, the Board of Directors approved a proposal to
amend United's Articles of Incorporation to increase the number of authorized
shares from 41,000,000 to 100,000,000. The proposed increase in authorized
shares is in response to the availability of shares for the aforementioned
incentive plans and the proposed merger with Fed One Bancorp, Inc., which is
expected to be consummated early during the fourth quarter of 1998. The
proposal, which will be presented for approval at a yet unscheduled special
shareholders meeting during 1998, will require the approval of a majority of the
outstanding shares of United common stock entitled to vote on the matter.
The Board of Directors believes that the availability of authorized but
unissued common stock of United is of considerable value if opportunities should
arise for the acquisition of another business through the issuance of United's
stock. Shareholders do not have preemptive rights, which allows United to issue
additional authorized shares without first offering them to current
shareholders.
United has only one class of stock and all voting rights are vested in
the holders of United's stock. On all matters subject to a vote of shareholders,
the shareholders of United will be entitled to one vote for each share of common
stock owned. Shareholders of United have cumulative voting rights with regard to
election of directors. At the present time, no senior securities of United are
outstanding, nor does the Board of Directors presently contemplate issuing
senior securities.
There are no preemptive or conversion rights or, redemption or sinking
fund provisions with respect to United's Stock. All of the issued and
outstanding shares of United's stock are fully paid and non-assessable.
15
Dividends
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On November 24, 1997, the Board of Directors of United declared a two
for one stock split in the form of a 100% stock dividend payable on March 27,
1998, to shareholders of record as of March 13, 1998. The change in capital
structure due to the 100% stock dividend has been given retroactive effect in
the December 31, 1997 balance sheet and all references to shares and per share
data have been retroactively restated for the effect of the 100% stock dividend.
The shareholders of United are entitled to receive dividends when and
as declared by its Board of Directors. Dividends are paid quarterly. Dividends
were $0.68 per share in 1997, $0.62 per share in 1996 and $0.59 per share in
1995. Dividends are paid from funds legally available; therefore, the payment of
dividends is subject to the restrictions set forth in the West Virginia
Corporation Act. See "Market and Stock Prices of United" for quarterly dividend
information.
Payment of Dividends by United is dependent upon payment of dividends to it by
its subsidiary banks. The ability of national banks to pay dividends is subject
to certain limitations imposed by the national banking laws. Generally, the most
restrictive provision requires approval by the Office of the Comptroller of the
Currency ("OCC") if dividends declared in any year exceed the current year's net
income, as defined, plus the retained net profits of the two preceding years.
Payment of dividends by United's state member bank is regulated by the Federal
Reserve System and generally, the prior approval of the Federal Reserve Board
("FRB") is required if the total dividends declared by a state member bank in
any calendar year exceeds its net profits, as defined, for that year combined
with its retained net profits for the preceding two years. Additionally, prior
approval of both the OCC and the FRB is required when a national bank or state
member bank has deficit retained earnings but has sufficient current year's net
income, as defined, plus the retained net profits of the two preceding years.
The OCC and FRB may prohibit dividends if it deems the payment to be an unsafe
or unsound banking practice. The OCC has issued guidelines for dividend payments
by national banks, emphasizing that proper dividend size depends on the bank's
earnings and capital while the FRB has issued similar guidelines pertaining to
state member banks. See Note M - Notes to Consolidated Financial Statements,
which is incorporated herein by reference.
Market and Stock Prices of United
- ---------------------------------
United Bankshares, Inc. stock is traded over the counter on the
National Association of Securities Dealers Automated Quotations System
("NASDAQ") under the trading symbol UBSI.
The high and low prices listed on the following page are based upon
information available to United's management from NASDAQ listings. No attempt
has been made by United's management to ascertain the prices for every sale of
its stock during the periods indicated. However, based on
16
the information available, United's management believes that the prices fairly
represent the amounts at which United's stock was traded during the periods
indicated, as adjusted for the 100% stock dividend paid on March 27, 1998 to
shareholders of record as of March 13, 1998.
The following table presents the dividends and high and low prices of
United's common stock during the periods set forth below:
United Historical
Basis
-----------------
1998 Dividends High Low
---- --------- ---- ---
First Quarter through
February 27, 1998 (1) $25.41 $23.13
1997
----
Fourth Quarter $0.18 $24.38 $21.80
Third Quarter $0.17 $23.63 $19.13
Second Quarter $0.17 $21.25 $17.19
First Quarter $0.16 $17.44 $16.13
1996
----
Fourth Quarter $0.16 $16.50 $14.63
Third Quarter $0.16 $15.13 $13.13
Second Quarter $0.15 $14.88 $13.38
First Quarter $0.15 $15.00 $14.25
(1) On February 24, 1998, United declared a dividend of $0.18 per share, payable
April 1, 1998, to shareholders of record as of March 13, 1998.
17
UNITED BANKSHARES, INC.
FORM 10-K, PART II
ITEM 6. SELECTED FINANCIAL DATA
Information relating to selected financial data on page 37 of the
Annual Report to Shareholders for the year ended December 31, 1997, is
incorporated herein by reference.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Management's Discussion and Analysis of Financial Condition and Results
of Operations on pages 38 through 50 inclusive, of the Annual Report to
Shareholders for the year ended December 31, 1997, is incorporated herein by
reference.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Quantitative and Qualitative Disclosures About Market Risk on pages 43
through 45 inclusive, of the Annual Report to Shareholders for the year ended
December 31, 1997, is incorporated herein by reference.
18
UNITED BANKSHARES, INC. AND SUBSIDIARIES
DISTRIBUTION OF ASSETS, LIABILITIES AND SHAREHOLDERS' EQUITY
INTEREST RATES AND INTEREST DIFFERENTIAL:
The following table shows the daily average balance of major categories of
assets and liabilities for each of the three years ended December 31, 1997, 1996
and 1995 with the interest and rate earned or paid on such amount.
Year Ended Year Ended Year Ended
December 31 December 31 December 31
1997 1996 1995
---------------------------- -------------------------- --------------------------
(Dollars in Average Avg. Average Avg. Average Avg.
Thousands) Balance Interest Rate Balance Interest Rate Balance Interest Rate
------- -------- ----- ------- -------- ----- ------- -------- ----
ASSETS
Earning assets:
Federal funds sold and securities
purchased under agreements to
resell and other short-term
investments $ 4,342 $ 184 4.25% $ 2,996 $ 157 5.24% $ 18,365 $ 1,107 6.03%
Investment Securities:
Taxable 354,312 23,828 6.73% 292,339 18,455 6.31% 297,963 18,516 6.21%
Tax exempt (1) 32,197 2,970 9.22% 38,282 3,603 9.41% 46,924 4,560 9.72%
---------- -------- ---- ---------- -------- ---- ---------- -------- ----
Total Securities 386,509 26,798 6.93% 330,621 22,058 6.67% 344,887 23,076 6.69%
Loans, net of unearned
income (1) (2) 1,905,706 165,705 8.70% 1,786,376 152,615 8.54% 1,673,568 144,594 8.64%
Allowance for possible loan
losses (23,314) (22,660) (22,685)
---------- ---------- ----------
Net Loans 1,882,392 8.80% 1,763,716 8.65% 1,650,883 8.76%
---------- -------- ---- ---------- -------- ---- ---------- -------- ----
Total earning assets 2,273,243 192,687 8.48% 2,097,333 174,830 8.34% 2,014,135 168,777 8.38%
Other assets 160,178 -------- 166,095 -------- 148,625 --------
---------- ---------- ----------
TOTAL ASSETS $2,433,421 $2,263,428 $2,162,760
========== ========== ==========
LIABILITIES
Interest-Bearing Funds:
Interest-bearing deposits $1,675,288 $ 74,400 4.44% $1,536,641 $ 63,917 4.16% $1,510,880 $ 62,231 4.12%
Federal funds purchased,
repurchase agreements
and other short-term
borrowings 117,290 5,275 4.50% 87,015 3,770 4.33% 83,016 3,809 4.59%
FHLB advances 82,556 4,824 5.84% 99,184 5,498 5.54% 69,580 4,127 5.93%
---------- -------- ---- ---------- -------- ---- ---------- -------- ----
Total Interest-Bearing Funds 1,875,134 84,499 4.51% 1,722,840 73,185 4.25% 1,663,476 70,167 4.22%
Demand deposits 257,210 -------- 251,641 -------- 234,455 --------
Accrued expenses and other
liabilities 33,071 34,292 28,115
---------- ---------- ----------
TOTAL LIABILITIES 2,165,415 2,008,773 1,926,046
Shareholders' Equity 268,006 254,655 236,714
---------- ---------- ----------
TOTAL LIABILITIES AND
SHAREHOLDERS' EQUITY $2,433,421 $2,263,428 $2,162,760
========== ========== ==========
NET INTEREST INCOME $108,188 $101,645 $ 98,610
======== ======== ========
INTEREST SPREAD 3.97% 4.09% 4.16%
NET INTEREST MARGIN 4.76% 4.85% 4.90%
(1) The interest income and the yields on nontaxable loans and
investment securities are presented on a tax-equivalent basis
using the statutory federal income tax rate of 35%.
(2) Nonaccruing loans are included in the daily average loan amounts
outstanding.
19
UNITED BANKSHARES, INC. AND SUBSIDIARIES
RATE/VOLUME ANALYSIS
The following table sets forth a summary of the changes in interest earned and
interest paid detailing the amounts attributable to (i) changes in volume
(change in the average volume times the prior year's average rate), (ii) changes
in rate (change in the average rate times the prior year's average volume), and
(iii) changes in rate/volume (change in the average volume times the change in
average rate).
1997 Compared to 1996 1996 Compared to 1995
------------------------------------- --------------------------------------
Increase (Decrease) Due to Increase (Decrease) Due to
------------------------------------- --------------------------------------
Rate/ Rate/
Volume Rate Volume Total Volume Rate Volume Total
------ ---- ------ ----- ------ ---- ------ -----
(In thousands) (In thousands)
Interest income:
Federal funds sold, securities purchased
under agreements to resell and other
short-term investments $ 71 $ (30) $ 14 $ 27 $ (926) $ (145) $ 121 $ (950)
Investment securities:
Taxable 3,912 1,205 256 5,373 (349) 294 (6) (61)
Tax exempt (1) (573) (72) 12 (633) (840) (144) 27 (957)
Loans (1),(2) 10,266 2,645 179 13,090 9,881 (1,741) (119) 8,021
------- ------- ---- ------- ------ ------- ----- ------
TOTAL INTEREST INCOME 13,676 3,748 433 17,857 7,766 (1,736) 23 6,053
------- ------- ---- ------- ------ ------- ----- ------
Interest expense:
Interest-bearing deposits $ 5,767 $ 4,326 $390 $10,483 1,061 641 11 1,686
Federal funds purchased, repurchase
agreements, and other short-term
borrowings 1,312 143 50 1,505 183 (212) (10) (39)
FHLB advances (922) 298 (50) (674) 1,756 (270) (115) 1,371
------- ------- ---- ------- ------ ------- ----- ------
TOTAL INTEREST EXPENSE 6,157 4,767 390 11,314 3,000 132 (114) 3,018
------- ------- ---- ------- ------ ------- ----- ------
NET INTEREST INCOME $ 7,519 $(1,019) $ 43 $ 6,543 $4,766 $(1,868) $ 137 $3,035
======= ======= ==== ======= ====== ======= ===== ======
(1) Yields and interest income on tax exempt loans and investment securities
are computed on a fully tax-equivalent basis using the statutory federal
income tax rate of 35%.
(2) Nonaccruing loans are included in the daily average loan amounts
outstanding.
20
UNITED BANKSHARES, INC. AND SUBSIDIARIES
LOAN PORTFOLIO
TYPES OF LOANS
The following is a summary of loans outstanding at December 31:
1997 1996 1995 1994 1993
----------- ----------- ----------- ----------- -----------
(In thousands)
Commercial, financial
and agricultural $ 368,654 $ 248,762 $ 218,800 $ 208,491 $ 218,559
Real estate mortgage 1,372,722 1,329,661 1,267,889 1,194,805 1,003,805
Real estate construction 93,918 42,343 21,808 17,523 14,651
Consumer 232,191 232,004 229,457 237,928 233,698
Less: Unearned interest (6,998) (5,165) (4,968) (6,472) (7,880)
---------- ---------- ---------- ---------- ----------
Total loans 2,060,487 1,847,605 1,732,986 1,652,275 1,462,574
Allowance for possible
loan losses (24,786) (22,283) (22,545) (22,304) (20,975)
---------- ---------- ---------- ---------- ----------
TOTAL LOANS, NET $2,035,701 $1,825,322 $1,710,441 $1,629,971 $1,441,599
========== ========== ========== ========== ==========
At December 31, 1997, real estate mortgage loans include $936,498 in single
family residential real estate loans and $392,818 in commercial real estate
loans.
The following is a summary of loans outstanding as a percent of total loans at
December 31:
1997 1996 1995 1994 1993
--------- ---------- ---------- ---------- ----------
Commercial, financial
and agricultural 17.89% 13.46% 12.59% 12.57% 14.86%
Real estate mortgage 66.62% 71.97% 72.96% 72.03% 68.25%
Real estate construction 4.56% 2.29% 1.25% 1.06% 1.00%
Consumer 10.93% 12.28% 13.20% 14.34% 15.89%
------- -------- -------- ------- -------
TOTAL 100.00% 100.00% 100.00% 100.00% 100.00%
======= ======= ======= ======= =======
REMAINING LOAN MATURITIES
The following table shows the maturity of commercial, financial, and
agricultural loans and real estate construction outstanding as of December 31,
1997:
Less Than One To Greater Than
One Year Five Years Five Years Total
--------- ---------- ------------ -----
(In thousands)
Commercial, financial
and agricultural $135,582 $128,384 $104,688 $368,654
Real estate construction 93,918 93,918
-------- -------- -------- --------
Total $229,500 $128,384 $104,688 $462,572
======== ======== ======== ========
21
UNITED BANKSHARES, INC. AND SUBSIDIARIES
At December 31, 1997, commercial, financial and agricultural loans maturing
within one to five years and in more than five years are interest sensitive as
follows:
One to Over
Five Years Five Years
---------- ----------
(In thousands)
Outstanding with fixed interest rates $ 70,049 $ 41,447
Outstanding with adjustable rates 58,335 63,241
-------- --------
$128,384 $104,688
======== ========
There were no real estate construction loans with maturities greater than one
year.
RISK ELEMENTS
Nonperforming Loans
Nonperforming loans include loans on which no interest is currently being
accrued, loans which are past due 90 days or more as to principal or interest
payments, and loans for which the terms have been modified due to a
deterioration in the financial position of the borrower. Management is not aware
of any other significant loans, groups of loans, or segments of the loan
portfolio not included below where there are serious doubts as to the ability of
the borrowers to comply with the present loan repayment terms. The following
table summarizes nonperforming loans for the indicated periods.
December 31
---------------------------------------------------------------------
1997 1996 1995 1994 1993
---------- ---------- ---------- ---------- ----------
(In thousands)
Nonaccrual loans $ 4,156 $ 4,361 $ 6,298 $4,719 $ 9,687
Troubled debt restructurings 2,453
Loans which are contractually past due 90
days or more as to interest or principal,
and are still accruing interest 11,342 5,831 4,692 2,851 3,080
------- ------- ------- ------ -------
TOTAL $15,498 $10,192 $10,990 $7,570 $15,220
======= ======= ======= ====== =======
Loans are designated as nonaccrual when, in the opinion of management, the
collection of principal or interest is doubtful. This generally occurs when a
loan becomes 90 days past due as to principal or interest unless the loan is
both well secured and in the process of collection. When interest accruals are
discontinued, unpaid interest credited to income in the current year is
reversed, and unpaid interest accrued in prior years is charged to the allowance
for loan losses. See Note D to the consolidated financial statements for
additional information regarding nonperforming loans and credit risk
concentration.
22
UNITED BANKSHARES, INC. AND SUBSIDIARIES
INVESTMENT PORTFOLIO
The following is a summary of the amortized cost of held to maturity securities
held to maturity at December 31,:
1997 1996 1995
------------ ------------ ------------
(In thousands)
U.S. Treasury and other U.S. Government
agencies and corporations $ 97,847 $ 77,704 $ 15,897
States and political subdivisions 32,650 36,136 43,324
Mortgage-backed securities 41,874 54,977 56,416
Other 6,923 1,885 6,252
-------- -------- --------
TOTAL HELD TO MATURITY SECURITIES $179,294 $170,702 $121,889
======== ======== ========
The following is a summary of the amortized cost of available for sale
securities at December 31,:
1997 1996 1995
------------ ------------ ------------
(In thousands)
U.S. Treasury securities and obligations of
U.S. Government agencies and corporations $142,688 $115,018 $150,460
Mortgage-backed securities 102,955 24,982 30,036
Marketable equity securities 4,300 3,655 2,662
Other 15,496 16,506 13,808
-------- -------- --------
TOTAL AVAILABLE FOR SALE SECURITIES $265,439 $160,161 $194,696
======== ======== ========
The fair value of mortgage-backed securities is affected by changes in interest
rates and prepayment risk. When interest rates decline, prepayment speeds
generally accelerate due to homeowners refinancing their mortgages at lower
interest rates. This may result in the proceeds being reinvested at lower
interest rates. Rising interest rates may decrease the assumed prepayment speed.
Slower prepayment speeds may extend the maturity of the security beyond its
estimated maturity. Therefore, investors may not be able to invest at current
higher market rates due to the extended expected maturity of the security.
United had a net unrealized gain of $1,554 on all mortgage-backed securities at
December 31, 1997, as compared to a net unrealized loss of $977 at December 31,
1996.
The following table sets forth the maturities of all securities at December 31,
1997, and the weighted average yields of such securities (calculated on the
basis of the cost and the effective yields weighted for the scheduled maturity
of each security).
After 1 But After 5 But
Within 1 Year Within 5 Years Within 10 Years After 10 Years
--------------- --------------- ----------------- --------------
Amount Yield Amount Yield Amount Yield Amount Yield
------ ----- ------ ----- ------ ----- ------ -----
(In thousands)
U.S. Treasury and other
U.S. Government agencies
and corporations $51,735 5.01% $129,004 6.54% $90,972 7.43% $115,421 7.15%
States and political
subdivisions (1) 4,133 10.48% 8,552 8.58% 8,608 8.90% 11,357 9.36%
Other 1,923 8.52% 82 6.60% 31,375 5.45%
(1) Tax-equivalent adjustments (using a 35% federal rate) have been made in
calculating yields on obligations of states and political subdivisions.
NOTE: There are no securities with a single issuer whose book value in the
aggregate exceeds 10% of total shareholders' equity.
23
UNITED BANKSHARES, INC. AND SUBSIDIARIES
SHORT-TERM BORROWINGS
The following table shows the distribution of United's short-term borrowings and
the weighted average interest rates thereon at the end of each of the last three
years. Also provided are the maximum amount of borrowings and the average
amounts of borrowings as well as weighted average interest rates for the last
three years.
Federal Securities Sold
Funds Under Agreements
Purchased to Repurchase
--------- ----------------
(In thousands)
At December 31:
1997 $20,961 $109,909
1996 4,491 71,091
1995 26,378 55,789
Weighted average interest rate at year end:
1997 6.7% 4.4%
1996 6.8% 4.2%
1995 5.9% 4.4%
Maximum amount outstanding at any month's end:
1997 $27,900 $123,949
1996 33,510 79,664
1995 33,941 81,720
Average amount outstanding during the year:
1997 $21,725 $95,565
1996 20,685 66,463
1995 12,264 70,752
Weighted average interest rate during the year:
1997 5.6% 4.2%
1996 5.6% 4.0%
1995 6.0% 4.3%
At December 31, 1997, repurchase agreements include $86,599 in overnight
accounts. The remaining balance principally consists of agreements having
maturities ranging from 2-90 days. The rates offered on these funds vary
according to movements in the federal funds and short-term investment market
rates.
24
UNITED BANKSHARES, INC. AND SUBSIDIARIES
DEPOSITS
The average daily amount of deposits and rates paid on such deposits is
summarized for the years ended December 31:
1997 1996 1995
--------------- ---------------- -----------------
Amount Rate Amount Rate Amount Rate
------ ---- ------ ---- ------ ----
(In thousands)
Noninterest bearing
demand deposits $ 257,210 $ 251,641 $ 234,455
Interest bearing
demand deposits 36,559 2.40% 127,867 2.50% 268,108 2.33%
Savings deposits 695,026 2.94% 581,117 2.69% 464,107 3.16%
Time deposits 943,703 5.55% 827,657 5.45% 778,665 5.31%
---------- ---------- ----------
TOTAL $1,932,498 4.44% $1,788,282 4.16% $1,745,335 4.12%
========== ========== ==========
Maturities of time certificates of deposit of $100,000 or more outstanding at
December 31, 1997 are summarized as follows:
(In thousands)
3 months or less $ 47,974
Over 3 through 6 months 21,626
Over 6 through 12 months 59,444
Over 12 months 58,621
--------
TOTAL $187,665
========
RETURN ON EQUITY AND ASSETS
The following table shows selected consolidated operating and capital ratios for
each of the last three years ended December 31:
1997 1996 1995
-------- -------- --------
Return on average assets 1.68% 1.35% 1.52%
Return on average equity 15.28% 11.98% 13.86%
Dividend payout ratio (1) 49.69% 58.49% 49.21%
Average equity to average
assets ratio 11.01% 11.25% 10.94%
(1) Based on historical results of United before the effects of restatements for
pooling of interests business combinations.
25
UNITED BANKSHARES, INC. AND SUBSIDIARIES
SUMMARY OF LOAN LOSS EXPERIENCE
The following table summarizes United's loan loss experience for each of the
five years ended December 31:
1997 1996 1995 1994 1993
---------- ---------- ---------- ---------- ----------
(In thousands)
Balance of allowance for possible loan
losses at beginning of year $ 22,283 $ 22,545 $ 22,304 $ 20,975 $ 17,485
Allowance of purchased company at date
of acquisition 2,695 1,017 504
Loans charged off:
Commercial, financial and agricultural 1,223 2,207 1,952 788 1,088
Real estate 394 230 722 82 711
Real estate construction
Consumer and other 2,202 1,087 950 980 1,015
---------- ---------- ---------- ---------- ----------
TOTAL CHARGE-OFFS 3,819 3,524 3,624 1,770 2,814
Recoveries:
Commercial, financial and agricultural 218 219 189 577 438
Real estate 87 135 65 13 231
Real estate construction
Consumer and other 222 298 274 307 301
---------- ---------- ---------- ---------- ----------
TOTAL RECOVERIES 527 652 528 897 970
NET LOANS CHARGED OFF 3,292 2,872 3,096 873 1,844
Addition to allowance (1) 3,100 2,610 2,320 2,202 4,830
---------- ---------- ---------- ---------- ----------
BALANCE OF ALLOWANCE FOR POSSIBLE
LOAN LOSSES AT END OF YEAR $ 24,786 $ 22,283 $ 22,545 $ 22,304 $ 20,975
========== ========== ========== ========== ==========
Totals loans outstanding at the end of period $2,060,487 $1,847,605 $1,732,986 $1,652,275 $1,462,574
Average loans outstanding during
period (net of unearned income) $1,905,706 $1,786,376 $1,673,568 $1,556,844 $1,402,609
Net charge-offs as a percentage of
average loans outstanding 0.17% 0.16% 0.18% 0.06% 0.13%
Allowance for possible loan losses as
a percentage of nonperforming loans 159.9% 218.6% 205.1% 294.6% 137.8%
(1) The amount charged to operations and the related balance in the allowance
for possible loan losses is based upon periodic evaluations of the loan
portfolio by management. These evaluations consider several factors
including, but not limited to, general economic conditions, loan portfolio
composition, prior loan loss experience and management's estimation of
future potential losses.
Quarterly reviews of individual loans as well as the loan portfolio as a
whole are made by management and the credit department. Management performs
extensive procedures in granting and monitoring loans on a continual basis.
Further, management believes that the allowance for loan losses is adequate
to absorb anticipated losses.
26
UNITED BANKSHARES, INC. AND SUBSIDIARIES
SUMMARY OF LOAN LOSS EXPERIENCE--Continued
Allocation of allowance for
possible loan losses
December 31
------------------------------------------------------------
1997 1996 1995 1994 1993
--------- --------- --------- --------- ----------
Commercial, financial and
agricultural $ 7,680 $7,175 $6,891 $7,526 $ 8,109
Real estate 265 667 771 613 476
Real estate construction
Consumer and other 2,149 1,072 1,484 1,313 1,733
------- ------ ------ ------ -------
Total $10,094 $8,914 $9,146 $9,452 $10,318
======= ====== ====== ====== =======
The portion of the allowance for loan losses that is not specifically allocated
to individual credits has been apportioned among the separate loan portfolios
based on the relative risk and relative size of each portfolio.
% of Allowance per Category to Total Allocated Allowance
- --------------------------------------------------------
December 31
------------------------------------------------------------
1997 1996 1995 1994 1993
--------- --------- --------- --------- ----------
Commercial, financial and
agricultural 76.08% 80.49% 74.62% 79.62% 78.59%
Real estate 2.63% 7.48% 8.66% 6.49% 4.61%
Real estate construction
Consumer and other 21.29% 12.03% 16.72% 13.89% 16.80%
------ ------ ------ ------ ------
Total 100.00% 100.00% 100.00% 100.00% 100.00%
====== ====== ====== ====== ======
27
UNITED BANKSHARES, INC.
FORM 10-K, PART II
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
(A) - FINANCIAL STATEMENTS REQUIRED BY REGULATION S-X
Information relating to financial statements on pages 9 through 36 inclusive
of the Annual Report to Shareholders for the year ended December 31, 1997, is
incorporated herein by reference.
(B) - SUPPLEMENTARY FINANCIAL INFORMATION
(1) Selected Quarterly Financial Data
Information relating to selected quarterly financial data on page 36 of the
Annual Report to Shareholders for the year ended December 31, 1997, is
incorporated herein by reference.
(2) Information on the Effects of Changing Prices
Information relating to effects of changing prices on page 42 of the Annual
Report to Shareholders for the year ended December 31, 1997, is incorporated
herein by reference.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURES
This item is omitted since it is not applicable.
28
UNITED BANKSHARES, INC.
FORM 10-K, PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Information regarding directors and executive officers of the registrant on
pages 2 through 7 inclusive, of the Proxy Statement for the 1998 Annual
Shareholders' Meeting is incorporated herein by reference.
ITEM 11. EXECUTIVE COMPENSATION
Information regarding executive compensation on pages 8 through 11
inclusive, of the Proxy Statement for the 1998 Annual Shareholders' Meeting is
incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT
Information regarding security ownership of certain beneficial owners and
management on pages 2 through 6 inclusive, of the Proxy Statement for the 1998
Annual Shareholders' Meeting is incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information regarding certain relationships and related transactions on
pages 2, 3, 6, 14 and 15 of the Proxy Statement for the 1998 Annual
Shareholders' Meeting is incorporated herein by reference.
29
UNITED BANKSHARES, INC.
FORM 10-K, PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON
FORM 8-K
(a) List of Documents Filed as Part of This Report:
(1) Financial Statements
The financial statements listed below are incorporated
herein by reference from the Annual Report to Shareholders for the year ended
December 31, 1997 at Item 8a. Page references are to such Annual report.
Financial Statements: Page References
- --------------------- ---------------
Report of Independent Auditors............................... 9
Consolidated Balance Sheets.................................. 10
Consolidated Statements of Income............................ 11
Consolidated Statements of Changes in Shareholders' Equity... 12
Consolidated Statements of Cash Flows........................ 13
Notes to Consolidated Financial Statements................... 14
(2) Financial Statement Schedules
United is not filing separate financial statement
schedules because of the absence of conditions under which they are required or
because the required information is included in the consolidated financial
statements or notes thereto.
(3) Exhibits Required by Item 601
Listing of Exhibits - See the Exhibits' Index on page 32
of this Form 10-K.
(b) Reports on Form 8-K
On November 7, 1997, United Bankshares, Inc. filed pro
forma financial information in connection with the pending merger of United
Bankshares, Inc. and George Mason Bankshares, Inc.
On November 25, 1997, United Bankshares, Inc. declared a
100% stock dividend to shareholders and modified the stock repurchase plan.
(c) Exhibits -- The exhibits to this Form 10-K begin on page
35.
(d) Consolidated Financial Statement Schedules -- All other
schedules for which provision is made in the applicable
accounting regulation of the Securities and Exchange
Commission are not required under the related
instructions or are inapplicable or pertain to items as
to which the required disclosures have been made
elsewhere in the financial statements and notes thereto,
and therefor have been omitted.
30
SIGNATURES
Pursuant to the requirements of Section 13 or 15 (d) of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned thereunto duly authorized.
UNITED BANKSHARES, INC.
(Registrant)
By /s/ Richard M. Adams
_____________________
Chairman of the Board
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the registrant and
in the capacities and on the dates indicated.
Signatures Title Date
/s/ Richard M. Adams Chairman of the Board, March 30, 1998
_____________________________ Director, Chief Execu-
tive Officer
/s/ Steven E. Wilson Chief Financial Officer March 30, 1998
_____________________________ Chief Accounting Officer
/s/ F.T. Graff, Jr. Director March 30, 1998
_____________________________
/s/ I.N. Smith, Jr. Director March 30, 1998
_____________________________
/s/ Thomas J. Blair, III Director March 30, 1998
_____________________________
/s/ H. Smoot Fahlgren Director March 30, 1998
_____________________________
/s/ Theodore J. Georgelas Director March 30, 1998
_____________________________
/s/ William W. Wagner Director March 30, 1998
_____________________________
/s/ Harry L. Buch Director March 30, 1998
_____________________________
/s/ Warren A. Thornhill, III Director March 30, 1998
_____________________________
/s/ Robert P. McLean Director March 30, 1998
_____________________________
/s/ Harold L. Wilkes Director March 30, 1998
_____________________________
/s/ P. Clinton Winter, Jr. Director March 30, 1998
_____________________________
/s/ R. Terry Butcher Director March 30, 1998
_____________________________
/s/ Charles E. Stealey Director March 30, 1998
_____________________________
31
UNITED BANKSHARES, INC.
FORM 10-K
INDEX TO EXHIBITS
ITEM 14.
S-K Item 601 Sequential Page
Description Table Reference Number (a)
- ----------- --------------- ---------------
Articles of Incorporation and
Bylaws: (3)
(a) Bylaws (g)
(b) Articles of Incorporation (f)
Investments (4) N/A
Voting Trust Agreement (9) N/A
Material Contracts (10)
(a) Employment Agreement with
I. N. Smith, Jr. (b)
(b) Employment Agreement with
Richard M. Adams (e)
(c) Lease on Branch Office in
Charleston Town Center,
Charleston, West Virginia (b)
(d) Lease on United Center,
Charleston, West Virginia (h)
(e) Lease with Polymerland, Inc.
on UNB Square (h)
(f) Lease and Agreement between
Valley Savings and Loan
Company (Lessor) and Dorothy
Adams, Richard M. Adams and
Douglass H. Adams (Lessees) (c)
(g) Agreement between Dorothy
D. Adams (Lessors) and Valley
Savings and Loan Company (Lessees) (c)
32
S-K Item 601 Sequential Page
Description Table Reference Number (a)
----------- --------------- ---------------
(h) Employment Contract with
Douglass H. Adams (d)
(i) Employment Contract with
Thomas A. McPherson (d)
(j) Data processing contract
with FISERV (k)
(k) Supplemental Retirement
Contract with Richard M.
Adams (i)
(l) Supplemental Retirement
Contract with Douglass H.
Adams (i)
(m) Executive Officer Change
of Control Agreements (j)
(n) Data processing contract
with ALTELL (l)
Statement Re: Computation of Per
Share Earnings (11) 82
Statement Re: Computation of
Ratios (12) 83
Annual Report to Security Holders,
et al. (13) 35
Letter Re: Change in accounting
principles (18) N/A
Previously Unfiled Documents (19) N/A
Subsidiaries of the Registrant (21) 84
Published Report Regarding Matters
Submitted to a Vote of Security
Holders (22) N/A
Consent of Ernst & Young LLP (23) 85
Power of Attorney (24) N/A
Financial Data Schedule (27.1) 86
Restated Financial Data Schedule (27.2) 87
33
S-K Item 601 Sequential Page
Description Table Reference Number (a)
----------- --------------- ---------------
Restated Financial Data Schedule (27.3) 88
Additional Exhibits: (28) N/A
Footnotes
(a) N/A = Not Applicable
(b) Incorporated into this filing by reference to Exhibit 10 of the 1985
Form 10-K for Intermountain Bankshares, Inc., File No. 0-12356
(c) Incorporated into this filing by reference to Exhibit 10 of the 1986
Form 10-K for United Bankshares, Inc., File No. 0-13322
(d) Incorporated into this filing by reference to Part II of Form S-4
Registration Statement of United Bankshares, Inc., Registration No.
33-19968 filed February 3, 1988
(e) Incorporated into this filing by reference to Exhibits to the 1988 10-K
for United Bankshares, Inc., File No. 0-13322
(f) Incorporated into this filing by reference to Exhibits to the 1989 10-K
for United Bankshares, Inc., File No. 0-13322
(g) Incorporated into this filing by reference to Exhibits to the 1990 10-K
for United Bankshares, Inc., File No. 0-13322
(h) Incorporated into this filing by reference to Exhibits to the 1991 10-K
for United Bankshares, Inc., File No. 0-13322
(i) Incorporated into this filing by reference to Exhibits to the 1992 10-K
for United Bankshares, Inc., File No. 0-13322
(j) Incorporated into this filing by reference to Exhibits to the 1993 10-K
for United Bankshares, Inc., File No. 0-13322
(k) Incorporated into this filing by reference to Exhibits to the 1994 10-K
as amended by Form 10K/A filed February 8, 1996, for United Bankshares,
Inc., File No. 0-13322
(l) Incorporated into this filing by reference to Exhibits to the 1996 10-K
for United Bankshares, Inc., File No. 0-13322
34
UNITED BANKSHARES, INC. AND SUBSIDIARIES
SELECTED FINANCIAL DATA
(Dollars in thousands except per share data)
Five Year Summary
----------------------------------------------------------------------------------
1997 1996 1995 1994 1993
--------- --------- --------- --------- ----------
SUMMARY OF OPERATIONS:
Total interest income $ 190,252 $ 172,358 $ 165,815 $ 147,637 $ 140,624
Total interest expense 84,499 73,185 70,167 55,672 55,037
Net interest income 105,753 99,173 95,648 91,965 85,587
Provision for loan losses 3,100 2,610 2,320 2,202 4,830
Other income 19,732 14,189 14,752 12,238 14,300
Other expense 59,949 63,549 57,481 55,908 56,107
Income taxes 21,497 16,691 17,782 15,709 12,482
Income before cumulative
effect of accounting change 40,939 30,512 32,817 30,384 26,468
Net income 40,939 30,512 32,817 30,384 27,797
Cash dividends(2) 20,344 17,847 13,817 12,604 10,918
PER COMMON SHARE: (1)
Income before cumulative
effect of accounting change:
Basic $1.37 $1.01 $1.10 $1.01 $0.88
Diluted 1.35 1.00 1.09 1.00 0.88
Net income:
Basic $1.37 $1.01 $1.10 $1.01 $0.92
Diluted 1.35 1.00 1.09 1.00 0.92
Cash dividends(2) 0.68 0.62 0.59 0.53 0.48
Book value per share 9.33 8.57 8.23 7.55 7.11
SELECTED RATIOS:
Return on average
shareholders' equity 15.28% 11.98% 13.86% 13.67% 13.41%
Return on average assets 1.68% 1.35% 1.52% 1.44% 1.39%
Dividend payout ratio (2) 49.69% 58.49% 49.21% 50.61% 50.30%
SELECTED BALANCE SHEET DATA:
Average assets $2,433,421 $2,263,428 $2,162,760 $2,107,476 $2,006,875
Investment securities 453,162 332,331 321,019 372,069 439,699
Total loans 2,060,487 1,847,605 1,732,986 1,652,275 1,462,574
Total assets 2,699,790 2,326,877 2,210,230 2,170,340 2,035,452
Total deposits 2,106,047 1,827,554 1,774,599 1,714,190 1,699,131
Long-term borrowings 3,695 25,621 34,497 84,374 32,564
Total borrowings
and other liabilities 314,305 240,809 186,397 230,516 122,274
Shareholders' equity 279,438 258,514 249,234 225,634 214,047
(1) All references to shares and per share data have been retroactively
restated for the effect of a two-for-one stock split effected in the form
of a 100% stock dividend distributed on March 27, 1998, to shareholders of
record as of March 13, 1998.
(2) Cash dividends are the amounts declared by United and do not include cash
dividends of acquired subsidiaries prior to the dates of consummation.
35
UNITED BANKSHARES, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
FORWARD-LOOKING STATEMENTS
Congress passed the Private Securities Litigation Act of 1995 to encourage
corporations to provide investors with information about the company's
anticipated future financial performance, goals, and strategies. The act
provides a safe harbor for such disclosure, in other words, protection from
unwarranted litigation if actual results are not the same as management
expectations.
United desires to provide its shareholders with sound information about past
performance and future trends. Consequently, any forward-looking statements
contained in this report, in a report incorporated by reference to this report,
or made by management of United in this report, in any other reports and
filings, in press releases and in oral statements, involves numerous
assumptions, risks and uncertainties. Actual results could differ materially
from those contained in or implied by United's statements for a variety of
factors including: changes in economic conditions; movements in interest rates;
competitive pressures on product pricing and services; success and timing of
business strategies; the nature and extent of governmental actions and reforms;
and rapidly changing technology and evolving banking industry standards.
INTRODUCTION
The following discussion and analysis presents the significant changes in
financial condition and the results of operations of United and its subsidiaries
for the periods indicated below. This discussion and the consolidated financial
statements and the notes to consolidated financial statements include the
accounts of United Bankshares, Inc. and its wholly-owned subsidiaries, unless
otherwise indicated.
This discussion and analysis should be read in conjunction with the consolidated
financial statements and accompanying notes thereto, which are included
elsewhere in this document.
The following broad overview of the financial condition and results of
operations is not intended to replace the more detailed discussion which is
presented under specific headings on the following pages.
36
1997 COMPARED TO 1996
OVERVIEW
In November 1997, United's Board of Directors approved a two-for-one stock split
effected in the form of a 100% stock dividend that was distributed on March 27,
1998, to shareholders of record as of March 13, 1998. The change in capital
structure due to the dividend has been given retroactive effect in the December
31, 1997 balance sheet and all references to shares and per share data have been
retroactively restated for the effect of the dividend.
On August 1, 1997, United acquired 100% of the outstanding common stock of First
Patriot Bankshares Corporation, Reston, Virginia ("Patriot") for cash
consideration of approximately $39.22 million. The transaction was accounted for
using the purchase method of accounting and, accordingly, the following
discussion includes the financial position and results of operations of Patriot
from the effective merger date forward. At the time of consummation, Patriot had
assets of approximately $211 million, securities available for sale of $37
million, loans, net of unearned income, of $135 million, other assets of $34
million (including $26 million of goodwill), deposits of $154 million and other
liabilities of $57 million, all of which reflected purchase accounting
adjustments.
EARNINGS SUMMARY
For the year ended December 31, 1997, net income increased 34.2% to $40,939,000.
Net income per share of $1.35 for the year increased 35.0% from $1.00 in 1996.
Dividends per share increased 9.7% from $0.62 in 1996 to a record level of $0.68
per share in 1997. This was the twenty-fourth consecutive year of dividend
increases to shareholders.
United's return on average assets of 1.68% for 1997 compared very favorably with
regional and national peer grouping information provided by Wheat, First
Securities, Inc. of 1.32% and 1.18%. United's return on average shareholders'
equity of 15.28%, as compared with regional and national peer group information
of 16.20% and 15.58%, is indicative of United's very strong capital levels.
United, one of the nation's most profitable regional banking companies, has a
strong capital position, and is well positioned to take advantage of future
growth opportunities.
United has strong core earnings driven by a net interest margin of 4.76% for
1997. Net interest income increased by $6.58 million or 6.63% for the year ended
December 31, 1997 as compared to the same period for 1996. The provision for
loan losses of $3.10 million increased $0.49 million or 18.77% when compared to
the year ended December 31, 1996. Noninterest income, including income from
mortgage banking operations, increased $5.54 million or 39.07% for 1997 when
compared to 1996. Noninterest expenses decreased $3.60 million or 5.66% for 1997
compared to the same period in 1996. The effective tax rate for the year ended
December 31, 1997 approximated 34.43% compared to 35.36% for 1996.
37
FINANCIAL CONDITION SUMMARY
Total assets were $2.70 billion at December 31, 1997, up $372.91 million or
16.0% compared with year-end 1996. Loans, net of unearned income, reflected a
$212.88 million increase from 1996 to 1997 due to the acquisition of Patriot and
internal growth. Investment securities reflected a $120.83 million increase for
1997 as compared with year-end 1996 as a result of United's securitization of
approximately $87 million of fixed rate mortgage loans during 1997. All other
assets increased $41.05 million. Approximately $26 million of the increase was
due to goodwill associated with the third quarter acquisition of Patriot.
Total deposits grew $278.49 million or 15.2% from year-end 1996 due to United's
offering of new deposit products introduced in late 1996 and the acquisition of
Patriot during the third quarter of 1997. Since December 31, 1996, United has
realized an increase of $221.61 million in interest-bearing deposits and a
$56.88 million increase in noninterest- bearing deposits. United's short-term
borrowings increased $55.29 million and its FHLB borrowings increased $10.06
million as United utilized these sources of funds to fund the cash acquisition
of Patriot and to help fund loan growth. Accrued expenses and other liabilities
increased $8.14 million or 25.0% since year-end 1996 as a result of the
acquisition of Patriot and higher merger expenses.
Shareholders' equity increased $20.92 million or 8.1% from December 31, 1996 to
December 31, 1997. United continues to maintain an appropriate balance between
capital adequacy and return to shareholders. At December 31, 1997, United's
regulatory capital ratios, including those of its bank subsidiaries, exceeded
the levels established for well- capitalized institutions.
The following discussion explains in more detail the results of operations and
changes in financial condition by major category.
NET INTEREST INCOME
Net interest income represents the primary component of United's earnings. It is
the difference between interest and fee income from earning assets and interest
expense incurred to fund these assets. Net interest income is impacted by
changes in the volume and mix of interest-earning assets and interest-bearing
liabilities, as well as changes in market interest rates. Such changes, and
their impact on net interest income in 1997, are summarized below.
For the years ended December 31, 1997 and 1996, net interest income approximated
$105,753,000 and $99,173,000, respectively. On a tax- equivalent basis the net
interest margin was strong at 4.76% in 1997 and 4.85% in 1996 which are well
above national peer group margins of 4.06% in 1997 and 4.18% in 1996.
Total interest income of $190,252,000 increased 10.4% in 1997 over 1996 as a
result of higher volumes of interest-earning assets and slightly
38
higher yields. Higher average loan volumes of approximately $119 million,
resulting primarily from the acquisition of Patriot, contributed to the
increase. From December 31, 1996 to December 31, 1997, United experienced a
moderate increase in consumer loans of 5.4%, while commercial loans showed an
increase of 31.5%. Mortgage loans decreased slightly from 1996 by 1.9% due
mainly to the sale of real estate loans by United's mortgage banking subsidiary.
Total interest expense increased $11,314,000 or 15.5% in 1997 compared to 1996.
This increase was attributed primarily to United's acquisition of Patriot,
competitive pricing of interest-bearing deposits in its markets and continued
change in the retail deposit mix as customers shifted funds into products
offering higher yields. United's average interest-bearing deposits increased by
$138,647,000 or 9.0% in 1997, while its average FHLB advances decreased
$16,628,000 or 16.8% and average short-term borrowings increased $30,275,000 or
34.8%. The average cost of funds, which increased from 4.25% in 1996 to 4.51% in
1997, reflected the general upward trend in United's market interest rates
during 1997 due to competitive pressures.
PROVISION FOR LOAN LOSSES
United evaluates the adequacy of the allowance for loan losses on a quarterly
basis and its loan administration policies are focused upon the risk
characteristics of the loan portfolio. United's process of evaluating the
allowance is a formal company-wide process that focuses on early identification
of potential problem credits and procedural discipline in managing and
accounting for those credits. See Note D to the Consolidated Financial
Statements for a discussion of concentrations of credit risk.
Nonperforming loans were $15,498,000 at December 31, 1997 and $10,192,000 at
December 31, 1996, an increase of 52.1%. This increase can be attributed to
United's acquisition of approximately $2.5 million of nonperforming loans from
the Patriot transaction in the third quarter of 1997 and decreasing consumer
credit quality trends. Loans past due 90 days or more increased $5,511,000 or
94.5% during 1997; nonaccrual loans decreased $205,000 or 4.7% since year-end
1996. Nonperforming loans represented 0.57% of total assets at the end of 1997,
as compared to 0.41% for United's national peer group.
At year-end 1997 and 1996, the allowance for loan losses was 1.20% and 1.21% of
total loans, net of unearned income. At December 31, 1997 and 1996, the ratio of
the allowance for loan losses to nonperforming loans was 159.9% and 218.6%,
respectively.
Management believes that the allowance for loan losses of $24,786,000 at
December 31, 1997, is adequate to provide for potential losses on existing loans
based on information currently available.
For the years ended December 31, 1997 and 1996, the provision for loan losses
was $3,100,000 and $2,610,000, respectively. The increase in the
39
provision for 1997 when compared to 1996 was to conform the allowance for loan
losses on Patriot's loan portfolio with United's loan valuation policies and in
response to growth in the portfolio. The provision for loan losses charged to
operations is based on management's evaluation of individual credits, past loan
loss experience, and other factors which, in management's judgment, deserve
recognition in estimating possible loan losses. Such other factors considered by
management include growth and composition of the loan portfolio, known
deterioration in certain classes of loans or collateral, trends in delinquencies
and current economic conditions.
Total net charge-offs were $3,289,000 in 1997 and $2,872,000 in 1996, which
represents 0.17% and 0.16% of average loans for the respective years. United's
ratio of net charge-offs to average loans was better than its peer group's ratio
of 0.49% in 1997 and 0.23% in 1996.
Management is not aware of any potential problem loans, trends or uncertainties
which it reasonably expects will materially impact future operating results,
liquidity, or capital resources which have not been disclosed. Additionally,
management has disclosed all known material credits which cause management to
have serious doubts as to the ability of such borrowers to comply with the loan
repayment schedules.
At December 31, 1997, impaired loans were $12,602,000, an increase of $2,285,000
or 22.1% from the $10,317,000 in impaired loans at December 31, 1996, due
primarily to the acquisition of Patriot in 1997. For further details, see Note D
to the Consolidated Financial Statements.
OTHER INCOME
Noninterest income has been and will continue to be an important factor for
improving United's profitability. Accordingly, management continues to evaluate
areas where noninterest income can be enhanced. Noninterest income increased
$5,543,000 or 39.1% for 1997 when compared to 1996. Other income consists of all
revenues which are not included in interest and fee income related to earning
assets. The increase in noninterest income for 1997 was primarily the result of
$3,135,000 of income generated from the sale and servicing of loans by United's
mortgage banking subsidiary as compared to a loss of $431,000 during the
subsidiary's first year of operation in 1996. Contributing to this increase in
income from the mortgage banking operations have been fees generated from the
$87 million loan securitization in 1997.
Service charges and fees from customer accounts increased $1,202,000 or 10.6% in
1997. This income includes charges and fees related to various banking services
provided by United. The increase was primarily due to a combination of increased
fees in bankcard accounts and an increased fee structure for sales of checking
related products.
Trust income increased $383,000 or 12.0% in 1997 due to an increased volume of
trust business.
40
OTHER EXPENSE
Just as management continues to evaluate areas where noninterest income can be
enhanced, it strives to improve the efficiency of its operations and thus reduce
operating costs. United's cost control efforts have been very successful
resulting in an efficiency ratio of 46.5%, which is well below the 57.6%
reported by United's national peer group banks and its immediate in-market
competitors.
Other expense includes all items of expense other than interest expense, the
provision for loan losses and income tax expense. In total, other expense
decreased $3,600,000 or 5.7%.
Salaries and employee benefits expense decreased $1,359,000 or 4.7% in 1997 as
compared to 1996. The higher salaries and benefits costs for 1996 were
attributable to severance and benefit pay of displaced Eagle executive officers,
employment contracts and employees at locations where United consolidated
certain branches. As of December 31, 1997 and 1996, United employed 972 and 893
full-time equivalent employees, respectively.
Net occupancy expense in 1997 slightly exceeded 1996 levels by $167,000 or 2.8%
primarily due to the acquisition of Patriot, decreased rental income and an
increase in building rental expense and higher depreciation and real property
taxes for company-owned buildings. The overall changes in net occupancy expense
for 1997 were insignificant with no material increase or decrease in any one
expense category.
Remaining other expense decreased $2,408,000 or 8.4% in 1997 compared to 1996.
This decrease in other expense for 1997 related primarily to decreases in
deposit insurance expense due to the 1996 SAIF assessment.
INCOME TAXES
For the year ended December 31, 1997, income tax expense approximated
$21,497,000 compared to $16,691,000 for 1996. The increase of $4,806,000 or
28.8% for 1997 when compared to 1996 was primarily the result of increased
pretax income in 1997. United's effective tax rate approximated 34.4% in 1997
and 35.4% in 1996. This decrease was due to effective tax planning strategies.
At December 31, 1997, gross deferred tax assets totaled approximately $14.0
million. The allowance for loan losses and various accrued liabilities represent
the most significant temporary differences.
QUARTERLY RESULTS
The first and second quarters of 1997 showed large increases in earnings in
comparison to those same two quarters of 1996 as United returned to more normal
levels of core income and expenses after the Eagle merger. The 1996 results
contained significant reengineering and merger-related and one-time special
charges associated with the Eagle merger which distorted United's true financial
performance.
41
In the third quarter of 1997, United reported a decrease in earnings from the
same period in 1996. Third quarter 1996 earnings were higher as a result of
legislation which relieved United of $3,086,000 in income tax expense that
related to the bad debt recapture associated with the Eagle merger.
Net income for the fourth quarter of 1997 was $10,426,000, an increase of 4.9%
from the $9,936,000 earned in the fourth quarter of 1996. On a per share basis,
fourth quarter earnings were $0.34 per share in 1997 and $0.33 per share in
1996. The increase in earnings was due primarily to an increase in net interest
income.
Additional quarterly financial data for 1997 and 1996 may be found in Note P to
the Consolidated Financial Statements.
THE EFFECT OF INFLATION
United's income statements generally reflect the effects of inflation. Since
interest rates, loan demand and deposit levels are impacted by inflation, the
resulting changes in the interest sensitive assets and liabilities are included
in net interest income. Similarly, operating expenses such as salaries, rents
and maintenance include changing prices resulting from inflation. One item that
would not reflect inflationary changes is depreciation expense. Subsequent to
the acquisition of depreciable assets, inflation causes price levels to rise;
therefore, historically presented dollar values do not reflect this inflationary
condition. With inflation levels at relatively low levels and monetary and
fiscal policies being implemented to keep the inflation rate increases within an
acceptable range, management expects the impact of inflation would continue to
be minimal in the near future.
MARKET RISK
The objective of United's Asset/Liability Management function is to maintain
consistent growth in net interest income within United's policy guidelines. This
objective is accomplished through the management of balance sheet liquidity and
interest rate risk exposures due to changes in economic condition, interest rate
levels and customer preferences.
Management considers interest rate risk to be United's most significant market
risk. Interest rate risk is the exposure to adverse changes in the net interest
income of United as a result of changes in interest rates. Consistency in
United's earnings is largely dependent on the effective management of interest
rate risk.
United employs a variety of measurement techniques to identify and manage its
exposure to changing interest rates. One such technique utilizes an earnings
simulation model to analyze net interest income sensitivity to movements in
interest rates. The model is based on actual cash flows and repricing
characteristics for on and off-balance sheet instruments and incorporates
market-based assumptions regarding the impact of changing interest rates on the
prepayment rate of certain assets and liabilities. The model also includes
executive management
42
projections for activity levels in product lines offered by United. Assumptions
based on the historical behavior of deposit rates and balances in relation to
changes in interest rates are also incorporated into the model. These
assumptions are inherently uncertain and, as a result, the model cannot
precisely measure net interest income or precisely predict the impact of
fluctuations in interest rates on net interest income. Actual results will
differ from simulated results due to timing, magnitude and frequency of interest
rate changes as well as changes in market conditions and management strategies.
Interest sensitive assets and liabilities are defined as those assets or
liabilities that mature or are repriced within a designated time- frame. The
principal function of interest rate