Item 1. BUSINESS................................................... 3
Item 2.
Item 2. Properties
The following discussion satisfies the reporting requirements of Items 1 and 2.
DESCRIPTION OF UNITED BANKSHARES, INC.
Organizational History and Subsidiaries - ---------------------------------------
United Bankshares, Inc. (United) is a West Virginia corporation registered as a bank holding company pursuant to the Bank Holding Company Act of 1956, as amended. United was incorporated on March 26, 1982, organized on September 9, 1982, and began conducting business on May 1, 1984 with the acquisition of three wholly-owned subsidiaries. Since its formation in 1982, United has acquired twenty-five banking institutions. At December 31, 2001, United had two banking subsidiaries, United National Bank (UNB) and United Bank. At the close of business on March 22, 2002, UNB converted its national banking association charter to a State of West Virginia charter with membership in the Federal Reserve System. Upon conversion, United has two banking subsidiaries (the Banking Subsidiaries) each named United Bank, one operating under the laws of West Virginia and the other operating under the laws of Virginia. United also owns nonbank subsidiaries that engage in mortgage banking, asset management, investment banking and financial planning.
Offices - -------
United is headquartered in the United Center at 500 Virginia Street, East, Charleston, West Virginia. United's executive offices are located in Parkersburg, West Virginia at Fifth and Avery Streets. United operates eighty-three offices--fifty offices located throughout West Virginia, thirty offices throughout the Northern Virginia, Maryland and Washington, D.C. areas and three in Ohio. United owns all its West Virginia facilities except for two in the Parkersburg area, three in the Wheeling area, three in the Charleston area, two in the Beckley area and one each in Summersville and Clarksburg, all of which are leased under operating leases. United leases all of its facilities under operating lease agreements in the Northern Virginia, Maryland and Washington, D.C. areas except for two offices, one each in Fairfax and Vienna, Virginia which are owned facilities.
Employees - ---------
As of December 31, 2001 United and its subsidiaries had approximately 1,361 full-time equivalent employees and officers. A collective bargaining unit represents none of these employees, and management considers employee relations to be excellent.
Business of United - ------------------
As a bank holding company registered under the Bank Holding Company Act of 1956, as amended, United's present business is community and mortgage banking. As of December 31, 2001, United's consolidated assets approximated $5.6 billion and total shareholders' equity approximated $507 million.
United is permitted to acquire other banks and bank holding companies, as well as thrift institutions. United is also permitted to engage in certain non-banking activities which are closely related to banking under the provisions of the Bank Holding Company Act and the Federal Reserve Board's Regulation Y. Management continues to consider such opportunities as they arise, and in this regard, management from time to time makes inquiries, proposals, offers or expressions of interest as to potential opportunities; although no agreements or understandings to acquire other banks or bank holding companies or nonbanking subsidiaries or to engage in other nonbanking activities, other than those identified herein, presently exist.
Business of Subsidiary Banks - ----------------------------
United, through its subsidiaries, engages primarily in community banking and mortgage banking and additionally offers most types of business permitted by law and regulation. Included among the banking services offered are the acceptance of deposits in checking, savings, time and money market accounts; the making and servicing of personal, commercial, floor plan and student loans; and the making of construction and real estate loans. Also offered are individual retirement accounts, safe deposit boxes, wire transfers and other standard banking products and services. As a part of their lending function, the Banking Subsidiaries offer credit card services including accounts issued under the name of certain correspondent banks.
The Banking Subsidiaries each maintain a trust department which acts as trustee under wills, trust and pension and profit sharing plans, as executors and administrators of estates, and as guardians for estates of minors and incompetents, and in addition performs a variety of investment and security services. Trust services are available to customers of affiliate banks. United Bank (WV) provides services to its correspondent banks such as check clearing, safekeeping and the buying and selling of federal funds.
United Brokerage Services, Inc., a wholly-owned subsidiary of United Bank (WV), is a fully-disclosed broker/dealer and a registered Investment Advisor with the National Association of Securities Dealers, Inc. and the Securities and Exchange Commission and a member of the Securities Investor Protection Corporation. United Brokerage Services, Inc. offers a wide range of investment products as well as comprehensive financial planning and asset management services to the general public.
United Bank (WV) is a member of a regional network of automated teller machines known as the MAC ATM network while United Bank (VA) participates in the MOST network. Through MAC and MOST, the Banking Subsidiaries are participants in a network known as Cirrus, which provides banking on a nationwide basis.
Lending Activities - ------------------
United's loan portfolio, net of unearned income, increased $309.8 million to $3.50 billion in 2001 due
mainly to the acquisition of Century Bancshares, Inc. (Century) in the fourth quarter of 2001. The loan portfolio is comprised of commercial, real estate and consumer loans including credit card and home equity loans. Including the acquisition of Century, commercial and commercial real estate loans increased $97.2 million or 17.2% and $180.1 million or 25.3%, respectively. Consumer loans, net of unearned income, increased $37.5 million or 11.9% while residential real estate loans decreased $39.2 million or 2.9%.
As of December 31, 2001, approximately $321 million or 7.9% of United's loan portfolio were real estate loans that met the regulatory definition of a high loan-to-value loan. A high loan-to-value real estate loan is defined as any loan, line of credit, or combination of credits secured by liens on or interests in real estate that equals or exceeds 90% of the real estate's appraised value, unless the loan has other appropriate credit support. Appropriate credit support may include mortgage insurance, readily marketable collateral, or other acceptable collateral that reduces the loan-to-value ratio below 90%.
Commercial Loans - ----------------
The commercial loan portfolio consists of loans to corporate borrowers primarily in small to mid-size industrial and commercial companies, as well as automobile dealers, service, retail and wholesale merchants. Collateral securing these loans include equipment, machinery, inventory, receivables, vehicles and commercial real estate. Commercial loans are considered to contain a higher level of risk than other loan types although care is taken to minimize these risks. Numerous risk factors impact this portfolio including industry specific risks such as economy, new technology, labor rates and cyclicality, as well as customer specific factors, such as cash flow, financial structure, operating controls and asset quality. United diversifies risk within this portfolio by closely monitoring industry concentrations and portfolios to ensure that it does not exceed established lending guidelines. Diversification is intended to limit the risk of loss from any single unexpected economic event or trend. Underwriting standards require a comprehensive credit analysis and independent evaluation of virtually all larger balance commercial loans by the loan committee prior to approval.
Real Estate Loans - -----------------
Commercial real estate loans consist of commercial mortgages, which generally are secured by nonresidential and multi-family residential properties. Also included in this portfolio are loans that are secured by owner-occupied real estate, but made for purposes other than the construction or purchase of real estate. Commercial real estate loans carry many of the same customers and industry risks as the commercial loan portfolio. Real estate mortgage loans to consumers are secured primarily by a first lien deed of trust. These loans are traditional one-to-four family residential mortgages. The loans generally do not exceed an 80% loan to value ratio at the loan origination date and most are at a variable rate of interest. These loans are considered to contain normal risk.
Consumer Loans - --------------
Consumer loans are secured by automobiles, boats, recreational vehicles, and other personal property. Personal loans, home equity, student loans and unsecured credit card receivables are also included as consumer loans. United monitors the risk associated with these types of loans by monitoring such factors as portfolio growth, lending policies and economic conditions. Underwriting standards are continually
evaluated and modified based upon these factors.
Underwriting Standards - ----------------------
United's loan underwriting guidelines and standards are updated periodically and are presented for approval by each of the respective Boards of Directors of its subsidiary banks. The purpose of the standards and guidelines is to grant loans on a sound and collectible basis; to invest available funds in a safe, profitable manner; to serve the legitimate credit needs of the communities of United's primary market area; and ensure that all loan applicants receive fair and equal treatment in the lending process. It is the intent of the underwriting guidelines and standards to: minimize loan losses by carefully investigating the credit history of each applicant, verify the source of repayment and the ability of the applicant to repay, collateralize those loans in which collateral is deemed to be required, exercise care in the documentation of the application, review, approval, and origination process, and administer a comprehensive loan collection program. The above guidelines are adhered to and subject to the experience, background and personal judgment of the loan officer assigned to the loan application. A loan officer may grant, with justification, a loan with variances from the underwriting guidelines and standards. However, the loan officer may not exceed their respective lending authority without obtaining the prior, proper approval from a superior, a regional supervisor, or the Loan Committee, whichever is deemed appropriate for the nature of the variance.
Loan Origination and Processing - -------------------------------
United generally originates loans within the primary market area of its banking subsidiaries. United may from time to time make loans to borrowers and/or on properties outside of its primary market area as an accommodation to its customers. Processing of all loans is centralized in the Charleston, West Virginia office. As of December 31, 2001, the balance of mortgage loans being serviced by United for others was insignificant.
Secondary Markets - -----------------
United Bank (WV) and George Mason Mortgage, LLC (GMMC), a wholly-owned subsidiary of United Bank (VA), are engaged in the operation of a general mortgage and agency business, including the conducting of mortgage loan servicing activities for certain loans, the origination and acquisition of residential real estate loans for resale and generally the activities commonly conducted by a mortgage banking company. These loans are for single, owner-occupied residences with either adjustable or fixed rate terms, with a variety of maturities tailored to effectively serve its markets.
GMMC primarily originates permanent residential mortgage loans in the northern Virginia market while United Bank (WV)'s originations are predominately in its West Virginia markets. Mortgage loan originations are generally intended to be sold in the secondary market.
During 2001, United originated $2.3 billion of real estate loans for sale in the secondary market and sold $2.2 billion of loans designated as held for sale in the secondary market. Proceeds received from the sales of these loans during 2001 were $2.2 billion.
The principal sources of revenue from United's mortgage banking business are: (i) loan origination
fees; (ii) gains or losses from the sale of loans, if any; (iii) interest earned on mortgage loans during the period that they are held by United pending sale; and (iv) loan servicing fees.
Investment Activities - ---------------------
United's investment policy stresses the management of the investment securities portfolio, which includes both securities held to maturity and securities available for sale, to maximize return over the long-term in a manner that is consistent with good banking practices and relative safety of principal. United currently does not engage in trading account activity. The Asset/Liability Committee of United is responsible for the coordination and evaluation of the investment portfolio.
Sources of funds for investment activities include "core deposits". Core deposits include certain demand deposits, statement and special savings and NOW accounts. These deposits are relatively stable and they are the lowest cost source of funds available to United. Short-term borrowings have also been a significant source of funds. These include federal funds purchased and securities sold under agreements to repurchase and FHLB borrowings. Repurchase agreements represent funds that are generally obtained as the result of a competitive bidding process.
United's investment portfolio is comprised largely of mortgage-backed securities. Additionally United has a substantial amount of U.S. Treasury securities and obligations of U.S. Agencies and Corporations. Obligations of States and Political Subdivisions are comprised of municipal securities with an average quality of not less than an "A" rating.
United recognized net losses of $518 thousand and $13.86 million for the years of 2001 and 2000, respectively, from the available for sale portfolio. A significant portion of the losses for 2000 was the result of United's restructuring of its available for sale investment portfolio late during the fourth quarter of 2001. United used a majority of the proceeds of approximately $433 million from the sales to acquire investment securities that provided an increased yield above those sold.
At December 31, 2001, United had no open commitments to sell mortgage-backed securities. As such, United is not exposed to significant risk nor will it derive any significant benefit from changes in interest rates on the price of the mortgage loan inventory.
Competition - -----------
United faces a high degree of competition in all of the markets it serves. These markets may generally be defined as Wood, Kanawha, Monongalia, Jackson, Cabell, Brooke, Hancock, Ohio, Marshall, Gilmer, Harrison, Lewis, Webster, Boone, Logan, Nicholas, Fayette and Raleigh Counties in West Virginia; Lawrence, Belmont, Jefferson and Washington Counties in Ohio; Montgomery County in Maryland and Arlington, Alexandria, Loudoun, Prince William and Fairfax Counties in Virginia, located adjacent to the Washington D.C. area, which is in close proximity to Jefferson and Berkeley Counties in West Virginia's eastern panhandle. United competes in Ohio markets because of the close proximity to the Ohio border of certain subsidiary offices. Included in United's West Virginia markets are the five largest West Virginia Metropolitan Statistical Areas (MSA): the Parkersburg MSA, the Charleston MSA, the Huntington MSA,
the Wheeling MSA and the Weirton MSA. United's Virginia markets include the Washington, D.C. Metropolitan area. United considers the above counties and MSA's to be the primary market area for the business of its banking subsidiaries.
With prior regulatory approval, West Virginia and Virginia banks are permitted unlimited branch banking throughout the state. In addition, interstate acquisitions of and by West Virginia and Virginia banks and bank holding companies are permissible on a reciprocal basis, as well as reciprocal interstate acquisitions by thrift institutions. These conditions serve to intensify competition within United's market.
As of December 31, 2001, there were 60 bank holding companies operating in the State of West Virginia registered with the Federal Reserve System and the West Virginia Board of Banking and Financial Institutions and 74 bank holding companies operating in the Commonwealth of Virginia registered with the Federal Reserve System and the Virginia Corporation Commission. These holding companies are headquartered in various West Virginia and Virginia cities and control banks throughout West Virginia and Virginia, which compete for business as well as for the acquisition of additional banks.
Economic Characteristics of Primary Market Area - -----------------------------------------------
West Virginia's unemployment rate for all of 2001 averaged 4.9%, which was the lowest average annual unemployment rate since the current statistical system began in 1976, according to available information from the West Virginia Bureau of Employment Programs. The state of West Virginia has a more diversified economy than it had during the peak periods of coal production with the chemical manufacturing industry accounting for 17% of the entire manufacturing workforce and 29% of the manufacturing wages, according to West Virginia state records. This diversified economy has contributed to a positive trend in unemployment rates in recent years as the state's overall unemployment rate has declined from 10.5% in 1991 to 4.5% in December 2001. West Virginia's unemployment rate for all of 2001 averaged 4.9%, which was the lowest average annual unemployment rate since the current statistical system began in 1976, according to available information from the West Virginia Bureau of Employment Programs.
United's northern Virginia subsidiary banking offices are located in markets that reflect very low unemployment rate levels and increased wage levels over a year ago. According to information available from the Virginia Employment Commission, Virginia's unemployment rate as of December 2001 was 3.6%. The 3.6% December 2001 unemployment rate, while above December 2000's 1.9% rate, was still well below the U.S. December 2001 unemployment level of 5.4%. The 2001 unemployment rate average of 3.0% compared to 2.2% for 2000. Most of the 2001 unemployment increase came in the second half of the year, especially after September 11. The Northern Virginia metropolitan area's unemployment rate was at 2.7%, second lowest among Virginia's eight metropolitan areas, as of December 2001.
Regulation and Supervision - --------------------------
United, as a bank holding company, is subject to the restrictions of the Bank Holding Company Act of 1956, as amended, and is registered pursuant to its provisions. As such, United is subject to the reporting requirements of and examination by the Board of Governors of the Federal Reserve System ("Board of Governors").
The Bank Holding Company Act prohibits the acquisition by a bank holding company of direct or indirect ownership of more than five percent of the voting shares of any bank within the United States without prior approval of the Board of Governors. With certain exceptions, a bank holding company also is prohibited from acquiring direct or indirect ownership or control of more than five percent of the voting shares of any company which is not a bank, and from engaging directly or indirectly in business unrelated to the business of banking, or managing or controlling banks.
The Board of Governors of the Federal Reserve System, in its Regulation Y, permits bank holding companies to engage in non-banking activities closely related to banking or managing or controlling banks. Approval of the Board of Governors is necessary to engage in these activities or to make acquisitions of corporations engaging in these activities. In addition, on a case by case basis, the Board of Governors may approve other non-banking activities.
On November 12, 1999 the Gramm-Leach-Bliley Act was signed into law. The Act modernizes the regulatory framework for financial services in the United States and allows banks, securities firms, and insurance companies to affiliate more directly than they have been permitted to do in the past. Under the Act, a bank holding company may become a "financial holding company" to offer a much broader range of financial products and services than had been previously possible under the traditional banking structure, provided that the bank holding company meets certain certification requirements of the Federal Reserve. United is presently in the process of analyzing the opportunities, requirements, and pitfalls the Act presents.
As a bank holding company doing business in West Virginia, United is also subject to regulation and examination by the West Virginia Board of Banking and Financial Institutions (the "West Virginia Banking Board") and must submit annual reports to the department. Further, any acquisition application that United must submit to the Board of Governors must also be submitted to the West Virginia Banking Board for approval.
United is also registered under and is subject to the requirements of the Securities Exchange Act of 1934, as amended.
The Banking Subsidiaries, as state member banks, are subject to supervision, examination and regulation by the Federal Reserve System, and as such, are subject to applicable provisions of the Federal Reserve Act and regulations issued thereunder. Each bank is subject to regulation by their state banking authority.
The deposits of United's wholly-owned banking subsidiaries are insured by the Federal Deposit Insurance Corporation ("FDIC") to the extent provided by law. Accordingly, these banks are also subject to regulation by the FDIC.
UNITED BANKSHARES, INC. FORM 10-K, PART I
Item 3.
Item 3. Legal Proceedings
Litigation - ----------
Information relating to litigation on page 33 of the Annual Report to ---- Shareholders for the year ended December 31, 2001, is incorporated herein by reference.
Item 4.
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.
UNITED BANKSHARES, INC. FORM 10-K, PART II
Item 5.
Item 5. Market for Registrant's Common Stock and Related Shareholder Matters
Stock - -----
As of December 31, 2001, 100,000,000 shares of common stock, par value $2.50 per share, were authorized for United, of which 43,381,769 were issued, including 455,258 shares held as treasury shares. The outstanding shares are held by approximately 11,474 shareholders of record as of December 31, 2001. The unissued portion of United' s authorized common stock (subject to registration approval by the SEC) and the treasury shares are available for issuance as the Board of Directors determines advisable. United offers its shareholders the opportunity to invest dividends in shares of United stock through its dividend reinvestment plan. United has also established stock option plans and a stock bonus plan as incentive for certain eligible officers. In addition to the above incentive plans, United is occasionally involved in certain mergers in which additional shares could be issued and recognizes that additional shares could be issued for other appropriate purposes.
The Board of Directors believes that the availability of authorized but unissued common stock of United is of considerable value if opportunities should arise for the acquisition of another business through the issuance of United's stock. Shareholders do not have preemptive rights, which allows United to issue additional authorized shares without first offering them to current shareholders.
United has only one class of stock and all voting rights are vested in the holders of United's stock. On all matters subject to a vote of shareholders, the shareholders of United will be entitled to one vote for each share of common stock owned. Shareholders of United have cumulative voting rights with regard to election of directors. At the present time, no senior securities of United are outstanding, nor does the Board of Directors presently contemplate issuing senior securities.
There are no preemptive or conversion rights or, redemption or sinking fund provisions with respect to United's Stock. All of the issued and outstanding shares of United's stock are fully paid and non- assessable.
Dividends - ---------
The shareholders of United are entitled to receive dividends when and as declared by its Board of Directors. Dividends are paid quarterly. Dividends were $0.91 per share in 2001, $0.84 per share in 2000 and $0.82 per share in 1999. Dividends are paid from funds legally available; therefore, the payment of dividends is subject to the restrictions set forth in the West Virginia Corporation Act. See "Market and Stock Prices of United" for quarterly dividend information.
Payment of dividends by United is dependent upon payment of dividends to it by its subsidiary banks.
Payment of dividends by United's state member banks is regulated by the Federal Reserve System and generally, the prior approval of the Federal Reserve Board (FRB) is required if the total dividends declared by a state member bank in any calendar year exceeds its net profits, as defined, for that year combined with its retained net profits for the preceding two years. Additionally, prior approval of the FRB is required when a state member bank has deficit retained earnings but has sufficient current year's net income, as defined, plus the retained net profits of the two preceding years. The FRB may prohibit dividends if it deems the payment to be an unsafe or unsound banking practice. The FRB has issued guidelines for dividend payments by state member banks emphasizing that proper dividend size depends on the bank's earnings and capital. See Note O - Notes to Consolidated Financial Statements, which is incorporated herein by reference.
Market and Stock Prices of United - ---------------------------------
United Bankshares, Inc. stock is traded over the counter on the National Association of Securities Dealers Automated Quotations System (NASDAQ) under the trading symbol UBSI.
The high and low prices listed below are based upon information available to United's management from NASDAQ listings. No attempt has been made by United's management to ascertain the prices for every sale of its stock during the periods indicated. However, based on the information available, United's management believes that the prices fairly represent the amounts at which United's stock was traded during the periods indicated.
The following table presents the dividends and high and low prices of United's common stock during the periods set forth below:
2002 Dividends High Low ---- --------- ------ ------ First Quarter through February 28, 2002 (1) $29.50 $27.56 ---- Fourth Quarter $0.23 $29.50 $26.25 Third Quarter $0.23 $28.33 $23.20 Second Quarter $0.23 $27.00 $21.55 First Quarter $0.22 $23.25 $19.44 ---- Fourth Quarter $0.21 $22.13 $17.25 Third Quarter $0.21 $20.88 $18.38 Second Quarter $0.21 $22.38 $16.38 First Quarter $0.21 $24.44 $17.00
(1) On February 25, 2002, United declared a dividend of $0.23 per share, payable April 1, 2002, to shareholders of record as of March 8, 2002.
UNITED BANKSHARES, INC. FORM 10-K, PART II
Item 6.
Item 6. Selected Financial Data
Information relating to selected financial data on page 43 of the Annual ---- Report to Shareholders for the year ended December 31, 2001, is incorporated herein by reference.
Item 7.
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations
Management's Discussion and Analysis of Financial Condition and Results of Operations on pages 44 through 57 inclusive, of the Annual Report to ---- ---- Shareholders for the year ended December 31, 2001, is incorporated herein by reference.
Item 7a.
Item 7a. Quantitative and Qualitative Disclosures About Market Risk
Quantitative and Qualitative Disclosures About Market Risk on pages 50 ---- through 52 inclusive, of the Annual Report to Shareholders for the year ended ---- December 31, 2001, is incorporated herein by reference.
DISTRIBUTION OF ASSETS, LIABILITIES AND SHAREHOLDERS' EQUITY INTEREST RATES AND INTEREST DIFFERENTIAL:
The following table shows the daily average balance of major categories of assets and liabilities for each of the three years ended December 31, 2001, 2000 and 1999 with the interest and rate earned or paid on such amount.
(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.
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).
(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.
UNITED BANKSHARES, INC. AND SUBSIDIARIES
LOAN PORTFOLIO
TYPES OF LOANS
The following is a summary of loans outstanding at December 31:
The following is a summary of loans outstanding as a percent of total loans at December 31:
2001 2000 1999 1998 1997 ------ ------ ------ ------ ------ Commercial, financial and agricultural 18.90% 17.69% 16.88% 19.18% 18.13% Real estate mortgage 65.48% 67.31% 67.33% 63.95% 62.97% Real estate construction 5.57% 5.15% 4.56% 5.32% 5.59% Consumer 10.05% 9.85% 11.23% 11.55% 13.31% ------ ------ ------ ------ ------
TOTAL 100.00% 100.00% 100.00% 100.00% 100.00% ====== ====== ====== ====== ======
REMAINING LOAN MATURITIES
The following table shows the maturity of commercial, financial, and agricultural loans and real estate construction outstanding as of December 31, 2001:
Less Than One To Greater Than One Year Five Years Five Years Total --------- ---------- ------------ -------- (In thousands) Commercial, financial and agricultural $356,813 $184,464 $120,793 $662,070 Real estate construction 195,063 195,063 -------- -------- -------- --------
Total $551,876 $184,464 $120,793 $857,133 ======== ======== ======== ========
UNITED BANKSHARES, INC. AND SUBSIDIARIES
At December 31, 2001, commercial, financial and agricultural loans maturing within one to five years and in more than five years are interest sensitive as follows:
One to Over Five Years Five Years ---------- ---------- (In thousands) Outstanding with fixed interest rates $ 99,120 $ 86,427 Outstanding with adjustable rates 85,344 34,366 -------- --------
$184,464 $120,793 ======== ========
There were no real estate construction loans with maturities greater than one year.
RISK ELEMENTS
Nonperforming Assets
Nonperforming assets include loans and securities on which no interest is currently being accrued, principal or interest has been in default for a period of 90 days or more and, in the case of loans, for which the terms have been modified due to a deterioration in the financial position of the borrower. Management is not aware of any other significant loans or securities, groups of loans or securities, or segments of the loan or investment portfolio not included below or disclosed elsewhere herein where there are serious doubts as to the ability of the borrowers or issuers to comply with the present repayment terms of the debt. The following table summarizes nonperforming assets for the indicated periods.
Loans and securities are designated as nonaccrual when, in the opinion of management, the collection of principal or interest is doubtful. This generally occurs when a loan or security becomes 90 days past due as to principal or interest unless the loan or security is both well secured and in the process of collection. When interest accruals are discontinued, unpaid interest credited to income in the current year is reversed, and, in the case of loans, unpaid interest accrued in prior years is charged to the allowance for loan losses. See Note E to the consolidated financial statements for additional information regarding nonperforming loans, impaired loans and credit risk concentration.
UNITED BANKSHARES, INC. AND SUBSIDIARIES
INVESTMENT PORTFOLIO
The following is a summary of the amortized cost of held to maturity securities at December 31,:
2001 2000 1999 -------- -------- -------- (In thousands) U.S. Treasury and other U.S. Government agencies and corporations $ 29,935 $ 55,724 $ 56,734 States and political subdivisions 89,540 93,006 97,824 Mortgage-backed securities 4,278 70,279 90,850 Other 157,683 161,059 19,782 -------- -------- --------
TOTAL HELD TO MATURITY SECURITIES $281,436 $380,068 $265,190 ======== ======== ========
The following is a summary of the amortized cost of available for sale securities at December 31,:
2001 2000 1999 ---------- -------- ---------- (In thousands)
U.S. Treasury securities and obligations of U.S. Government agencies and corporations $ 61,082 $160,702 $ 276,558 States and political subdivisions 62,188 52,095 48,914 Mortgage-backed securities 861,799 574,292 693,828 Marketable equity securities 8,254 8,551 8,369 Other 140,392 69,723 229,277 ---------- -------- ----------
TOTAL AVAILABLE FOR SALE SECURITIES $1,133,715 $865,363 $1,256,946 ========== ======== ==========
The fair value of mortgage-backed securities is affected by changes in interest rates and prepayment risk. When interest rates decline, prepayment speeds generally accelerate due to homeowners refinancing their mortgages at lower interest rates. This may result in the proceeds being reinvested at lower interest rates. Rising interest rates may decrease the assumed prepayment speed. Slower prepayment speeds may extend the maturity of the security beyond its estimated maturity. Therefore, investors may not be able to invest at current higher market rates due to the extended expected maturity of the security. United had net unrealized gains of $15,800 and $2,318 on all mortgage-backed securities at December 31, 2001 and 2000, respectively.
The following table sets forth the maturities of all securities at December 31, 2001, and the weighted average yields of such securities (calculated on the basis of the cost and the effective yields weighted for the scheduled maturity of each security).
(1) Tax-equivalent adjustments (using a 35% federal rate) have been made in calculating yields on obligations of states and political subdivisions. (2) Includes marketable equity securities available for sale.
NOTE: There are no securities with a single issuer whose book value in the aggregate exceeds 10% of total shareholders' equity.
UNITED BANKSHARES, INC. AND SUBSIDIARIES
SHORT-TERM BORROWINGS
The following table shows the distribution of United's short-term borrowings and the weighted average interest rates thereon at the end of each of the last three years. Also provided are the maximum amount of borrowings and the average amounts of borrowings as well as weighted average interest rates for the last three years.
Federal Securities Sold Funds Under Agreements Purchased To Repurchase --------- ----------------
(Dollars in thousands) At December 31: 2001 $43,831 $477,796 2000 15,720 313,349 1999 44,120 349,129
Weighted average interest rate at year end: 2001 1.7% 2.0% 2000 6.6% 5.2% 1999 5.0% 5.0%
Maximum amount outstanding at any month's end: 2001 $43,831 $503,887 2000 45,515 417,866 1999 64,921 440,281
Average amount outstanding during the year: 2001 $16,290 $390,545 2000 15,332 351,816 1999 27,774 335,908
Weighted average interest rate During the year: 2001 2.9% 3.5% 2000 6.3% 5.3% 1999 5.4% 4.6%
At December 31, 2001, repurchase agreements include $346,957 in overnight accounts. The remaining balance principally consists of agreements having maturities under 2 years. The rates offered on these funds vary according to movements in the federal funds and short-term investment market rates.
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:
Maturities of time certificates of deposit of $100,000 or more outstanding at December 31, 2001 are summarized as follows:
(In thousands)
3 months or less $ 91,024 Over 3 through 6 months 90,804 Over 6 through 12 months 108,261 Over 12 months 108,843 --------
TOTAL $398,932 ========
RETURN ON EQUITY AND ASSETS
The following table shows selected consolidated operating and capital ratios for each of the last three years ended December 31:
2001 2000 1999 ----- ----- -----
Return on average assets 1.59% 1.19% 1.44% Return on average equity 17.51% 14.41% 16.73% Dividend payout ratio (1) 47.63% 59.83% 50.35% Average equity to average assets ratio 9.06% 8.29% 8.62%
(1) Based on historical results of United before the effects of restatements for pooling of interests business combinations.
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:
(1) Excludes loans held for sale.
UNITED BANKSHARES, INC. AND SUBSIDIARIES
SUMMARY OF LOAN LOSS EXPERIENCE--Continued
Allocation of allowance for loan losses December 31 --------------------------------------------------- 2001 2000 1999 1998 1997
Commercial, financial and Agricultural $22,605 $12,762 $14,432 $13,772 $10,115
Real estate 10,795 12,713 9,861 3,587 3,452
Real estate construction 2,097 1,372 754 1,086 674
Consumer and other 4,004 3,533 2,735 3,747 3,221
Unallocated 7,907 10,152 11,817 16,997 14,474 ------- ------- ------- ------- -------
Total $47,408 $40,532 $39,599 $39,189 $31,936 ======= ======= ======= ======= =======
UNITED BANKSHARES, INC. FORM 10-K, PART II
Item 8.
Item 8. Financial Statements and Supplementary Data
(a) - FINANCIAL STATEMENTS REQUIRED BY REGULATION S-X
Information relating to financial statements on pages 11 through 41 -- -- inclusive of the Annual Report to Shareholders for the year ended December 31, 2001, is incorporated herein by reference.
(b) - SUPPLEMENTARY FINANCIAL INFORMATION
(1) Selected Quarterly Financial Data
Information relating to selected quarterly financial data on page 42 of the -- Annual Report to Shareholders for the year ended December 31, 2001, is incorporated herein by reference.
(2) Information on the Effects of Changing Prices
Information relating to effects of changing prices on page 49 of the Annual -- Report to Shareholders for the year ended December 31, 2001, is incorporated herein by reference.
Item 9.
Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURES
This item is omitted since it is not applicable.
UNITED BANKSHARES, INC. FORM 10-K, PART III
Item 10.
Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Information regarding directors and executive officers of the registrant on pages 2 through 4 inclusive, pages 14 though 16 inclusive, and page 19 , of the - - -- -- -- Proxy Statement for the 2002 Annual Shareholders' Meeting is incorporated herein by reference.
Item 11.
Item 11. EXECUTIVE COMPENSATION
Information regarding executive compensation on pages 10 through 13 -- -- inclusive, of the Proxy Statement for the 2002 Annual Shareholders' Meeting is incorporated herein by reference.
Item 12.
Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Information regarding security ownership of certain beneficial owners and management on pages 2 through 4 inclusive and pages 9 and 11 , of the Proxy - - - -- Statement for the 2002 Annual Shareholders' Meeting is incorporated herein by reference.
Item 13.
Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information regarding certain relationships and related transactions on pages 2 , 7 , 8 , and 13 of the Proxy Statement for the 2002 Annual - - - -- Shareholders' Meeting is incorporated herein by reference.
UNITED BANKSHARES, INC. FORM 10-K, PART IV
Item 14.
Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) List of Documents Filed as Part of This Report:
(1) Financial Statements
The financial statements listed below are incorporated herein by reference from the Annual Report to Shareholders for the year ended December 31, 2001 at Item 8a. Page references are to such Annual report.
Financial Statements: Page References - -------------------- ---------------
Report of Independent Auditors............................... 11 Consolidated Balance Sheets.................................. 12 Consolidated Statements of Income............................ 13 Consolidated Statements of Changes in Shareholders' Equity... 14 Consolidated Statements of Cash Flows........................ 15 Notes to Consolidated Financial Statements................... 16
(2) Financial Statement Schedules
United is not filing separate financial statement schedules because of the absence of conditions under which they are required or because the required information is included in the consolidated financial statements or notes thereto.
(3) Exhibits Required by Item 601
Listing of Exhibits - See the Exhibits' Index on page 29 of this -- Form 10-K.
(b) Reports on Form 8-K
On December 10, 2001, United Bankshares, Inc. filed a Current Report under Items 5 and 7 to report the completion of its acquisition of Century Bancshares, Inc.
On January 22, 2002, United Bankshares, Inc. filed a Current Report under Items 5 and 7 to report the results of operations for the fourth quarter and year of 2002.
On February 28, 2002, United Bankshares, Inc. filed a Current Report under Items 5 and 7 to announce a stock repurchase plan.
(c) Exhibits -- The exhibits to this Form 10-K begin on page 79. --
(d) Consolidated Financial Statement Schedules -- All other schedules for which provision is made in the applicable accounting regulation of the Securities and Exchange Commission are not required under the related instructions or are inapplicable or pertain to items as to which the required disclosures have been made elsewhere in the financial statements and notes thereto, and therefor have been omitted.
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
(continued)
UNITED BANKSHARES, INC.
FORM 10-K
INDEX TO EXHIBITS
Item 14.
Sequential S-K Item 601 Page Description Table Reference Number (a) - ----------- --------------- ----------
Articles of Incorporation and Bylaws: (3)
(a) Bylaws (e)
(b) Articles of Incorporation (d)
Investments (4) N/A
Voting Trust Agreement (9) N/A
Material Contracts (10)
(a) Employment Agreement with I. N. Smith, Jr. (b)
(b) Employment Agreement with Richard M. Adams (10.1) 79
(c) Supplemental Retirement Agreement with Richard M. Adams (10.2) 93
(d) Lease on Branch Office in Charleston Town Center, Charleston, West Virginia (b)
(e) Lease on United Center, Charleston, West Virginia (f)
(f) Employment Contract with Douglass H. Adams (c)
Sequential S-K Item 601 Page Description Table Reference Number (a) - ----------- --------------- ----------
(g) Data processing contract with FISERV (j)
(h) Supplemental Retirement Contract with Douglass H. Adams (g)
(i) Executive Officer Change (h) of Control Agreements (j)
(j) Employment Contract with Bernard H. Clineburg (i)
(k) Employment Contract with Joseph S. Bracewell (10.3) 101
Statement Re: Computation of Ratios (12) 106
Annual Report to Security Holders, et al. (13) 32
Letter Re: Change in accounting principles (18) N/A
Previously Unfiled Documents (19) N/A
Subsidiaries of the Registrant (21) 107
Published Report Regarding Matters Submitted to a Vote of Security Holders (22) N/A
Consent of Ernst & Young LLP (23) 108
Sequential S-K Item 601 Page Description Table Reference Number (a) - ----------- --------------- ----------
Power of Attorney (24) N/A
Additional Exhibits: (28) N/A
Footnotes - ---------
(a) N/A = Not Applicable
(b) Incorporated into this filing by reference to Exhibit 10 of the 1985 Form 10-K for Intermountain Bankshares, Inc., File No. 0-12356
(c) Incorporated into this filing by reference to Part II of Form S-4 Registration Statement of United Bankshares, Inc., Registration No. 33-19968 filed February 3, 1988
(d) Incorporated into this filing by reference to Exhibits to the 1989 10-K for United Bankshares, Inc., File No. 0-13322
(e) Incorporated into this filing by reference to Exhibits to the 1990 10-K for United Bankshares, Inc., File No. 0-13322
(f) Incorporated into this filing by reference to Exhibits to the 1991 10-K for United Bankshares, Inc., File No. 0-13322
(g) Incorporated into this filing by reference to Exhibits to the 1992 10-K for United Bankshares, Inc., File No. 0-13322
(h) Incorporated into this filing by reference to Exhibits to the 1993 10-K for United Bankshares, Inc., File No. 0-13322
(i) Incorporated into this filing by reference to Part II of Form S-4 Registration Statement of United Bankshares, Inc., Registration No. 333-44993 filed January 27, 1998
(j) Incorporated into this filing by reference to Exhibits to the 2000 10-K for United Bankshares, Inc., File No. 0-13322
UNITED BANKSHARES, INC. AND SUBSIDIARIES
SELECTED FINANCIAL DATA (Dollars in thousands, except per share data)
(1) Cash dividends are the amounts declared by United and do not include cash dividends of acquired subsidiaries prior to the dates of consummation.
UNITED BANKSHARES, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
FORWARD-LOOKING STATEMENTS
Congress passed the Private Securities Litigation Act of 1995 to encourage corporations to provide investors with information about the company's anticipated future financial performance, goals, and strategies. The act provides a safe haven for such disclosure; in other words, protection from unwarranted litigation if actual results are not the same as management expectations.
United desires to provide its shareholders with sound information about past performance and future trends. Consequently, any forward-looking statements contained in this report, in a report incorporated by reference to this report, or made by management of United in this report, in any other reports and filings, in press releases and in oral statements, involves numerous assumptions, risks and uncertainties. Actual results could differ materially from those contained in or implied by United's statements for a variety of factors including, but not limited to: changes in economic conditions; movements in interest rates; competitive pressures on product pricing and services; success and timing of business strategies; the nature and extent of governmental actions and reforms; and rapidly changing technology and evolving banking industry standards.
INTRODUCTION
The following discussion and analysis presents the significant changes in financial condition and the results of operations of United and its subsidiaries for the periods indicated below. This discussion and the consolidated financial statements and the notes to consolidated financial statements include the accounts of United Bankshares, Inc. and its wholly-owned subsidiaries, unless otherwise indicated.
This discussion and analysis should be read in conjunction with the consolidated financial statements and accompanying notes thereto, which are included elsewhere in this document.
The following broad overview of the financial condition and results of operations is not intended to replace the more detailed discussion, which is presented under specific headings on the following pages.
2001 COMPARED TO 2000
OVERVIEW
At the close of business on December 7, 2001, United acquired 100% of the outstanding common stock of Century Bancshares, Inc., Washington, D.C. (Century) in a transaction valued at approximately $63.8 million. The transaction was accounted for using the purchase method of accounting and, accordingly, the following discussion includes the financial position and results of operations of Century from the effective merger date forward. At consummation, Century had assets of approximately $414 million, loans of $295 million, deposits of $330 million and shareholders' equity of $20 million.
EARNINGS SUMMARY
For the year ended December 31, 2001, net income increased 35.63% to $80.0 million from $59.0 million for the year ended December 31, 2000. On a diluted per share basis, net income of $1.90 for 2001 increased 35.71% from $1.40 in 2000.
Results for 2000 include the recognition of approximately $20.09 million ($13.51 million after tax) of balance sheet restructuring and other charges. Excluding these charges, United earned $72.5 million or $1.72 per diluted share for the year 2000.
The 2001 results represented a return on average shareholders' equity of 17.51% and a return on average assets of 1.59%. These key financial performance indicators compare favorably with national peer grouping information provided by Keefe, Bruyette, & Woods, of 16.39% and 1.25%, respectively. United continues to be one of the nation's best-performing regional banking companies.
Dividends per share increased from $0.84 in 2000 to a record level of $0.91 per share in 2001. United paid approximately $37.0 million in dividends to common shareholders in 2001 compared with $35.5 million in 2000. This was the twenty-eighth consecutive year of dividend increases to shareholders.
Net interest income grew $5.0 million or 2.79% for the year of 2001 when compared to 2000. Noninterest income increased $28.4 million or 84.11% for 2001 when compared to 2000 while noninterest expense increased $5.3 million or 4.82% over the same time period. However, for the year 2000, noninterest income included balance sheet restructuring losses of $15.01 million ($10.10 million after tax) resulting from losses on sales and write-downs on securities, while noninterest expense includes other significant charges of $3.99 million ($2.68 million after tax), primarily related to litigation expense of $1.63 million ($1.09 million after tax) and $2.36 million ($1.59 million after tax) of other charges that mostly include salary incentive and benefit plan costs.
The effective tax rate of 32.63% for the year ended December 31, 2001 was comparable to 32.75% for 2000.
FINANCIAL CONDITION SUMMARY
Including the acquisition of Century, United's total assets as of December 31, 2001 were $5.63 billion, an increase of $727.2 million or 14.83% from year end 2000. United's available for sale securities portfolio increased $282.01 million while securities held to maturity decreased $98.63 million as compared to year end 2000. Total loans, including loans held for sale, increased $474.6 million or 13.98%. Cash and cash equivalents increased $12.78 million while nonearning assets increased $63.31 million in 2001.
Total deposits at December 31, 2001 increased $396.34 million or 11.69% since year end 2000. In terms of composition, interest-bearing deposits increased $281.97 million while noninterest-bearing deposits increased $114.37 million from December 31, 2000. United's total borrowed funds increased $232.16 million, or 22.32%, as short-term borrowings increased $193.41 million. United increased these borrowings to take advantage of lower short-term interest rates. FHLB borrowings increased $29.94 million. Accrued expenses and other liabilities increased $23.07 million or 54.93% since year end 2000.
Shareholders' equity increased $75.66 million or 17.56% from December 31, 2000 translating into a book
value per share of $11.80. The increase in shareholders' equity was due to net retained earnings in excess of dividends for the year of $41.90 million and a decrease in treasury stock of $25.36 million as 1,981,423 shares were issued from treasury stock for the acquisition of Century. During 2001, 1,080,000 shares were repurchased under a plan announced by United in May of 2000 authorizing the repurchase of up to 1.675 million shares of its common stock on the open market. Through December 31, 2001, 1,299,300 shares have been repurchased since the plan's inception. United continues to balance capital adequacy and the return to shareholders. At December 31, 2001, United's regulatory capital ratios, including those of its bank subsidiaries, exceeded the levels established for well-capitalized institutions.
The following discussion explains in more detail the results of operations and changes in financial condition by major category.
Net Interest Income
Net interest income represents the primary component of United's earnings. It is the difference between interest income from earning assets and interest expense incurred to fund these assets. Net interest income is impacted by changes in the volume and mix of interest-earning assets and interest-bearing liabilities, as well as changes in market interest rates. Such changes, and their impact on net interest income in 2001, are summarized below.
Tax-equivalent net interest income of $196.74 million for the year 2001 increased $5.57 million from $191.17 million for the year of 2000. The main reason for the increase from the previous year was due to an increase in average earning assets of $115.94 million. United's tax-equivalent net interest margin was 4.12% for the year of 2001 and 4.11% for the same time period in 2000. United maintains a fairly balanced portfolio of interest-rate sensitive assets and liabilities in order to manage interest rate risk and thus minimize the impact of fluctuating interest rates. In 2001, the net interest margin percentage increased one basis point for the year despite 11 Federal Funds interest rate reductions. In 2000, the net interest margin percentage declined only one basis point for the year despite six Federal Funds rate increases from mid 1999 through mid 2000.
Total interest income of $360.61 million decreased 4.56% for the year 2001 as a result of a lower yield on average interest-earning assets. Overall, the yield on average interest-earning assets decreased 55 basis points from 8.34% in 2000 to 7.79% in 2001. The yield on average loans, net of unearned income, decreased 71 basis points to 8.16% in the year 2001 from to 8.87% in 2000. The yield on average securities was 6.68% for the year 2001 as compared to 6.86% for 2000.
Total interest expense decreased $22.26 million or 11.26% in 2001 compared to 2000. This decrease was attributed primarily to changes in the funding mix during 2001. During 2001, United utilized lower cost deposits and short-term wholesale funding sources to support asset growth rather than long-term, higher cost FHLB advances. The average cost of funds decreased from 4.95% in 2000 to 4.37% in 2001. United's average interest-bearing deposits increased $135.30 million and average short-term borrowings increased $39.85 million while average FHLB and other long-term borrowings decreased $155.14 million.
Provision for Loan Losses
Although weakening economic conditions caused an increase in nonperforming loans during the year of 2001, United's credit quality continues to compare favorably with peer and industry averages. Nonperforming loans
were $17.59 million or 0.50% of loans, net of unearned income, at December 31, 2001 compared to $12.85 million or 0.40% of loans, net of unearned income at December 31, 2000. Nonperforming loans represented 0.31% of total assets at the end of the year 2001, as compared to 0.26% for United at the end of 2000. The components of nonperforming loans include nonaccrual loans and loans that are contractually past due 90 days or more as to interest or principal, but have not been put on a nonaccrual basis. Nonaccrual loans remained relatively flat while loans past due 90 days or more increased $4.81 million or 101.87% since year end 2000. Total nonperforming assets of $30.35 million, including nonperforming securities of $10.0 million and OREO of $2.76 million at December 31, 2001, represented 0.54% of total assets at the end of 2001.
At December 31, 2001, impaired loans were $12.59 million, which was a very slight increase from the $12.50 million of impaired loans at December 31, 2000. For further details, along with a discussion of concentrations of credit risk, see Note E to the Consolidated Financial Statements.
United evaluates the adequacy of the allowance for loan losses on a quarterly basis and its loan administration policies are focused upon the risk characteristics of the loan portfolio. United's process for evaluating the allowance is a formal company-wide process that focuses on early identification of potential problem credits and procedural discipline in managing and accounting for those credits. This process determines the appropriate level of the allowance for loan losses, allocation among loan types, and the resulting provision for loan losses.
At December 31, 2001, the allowance for loan losses was $47.41 million, compared to $40.53 million at December 31, 2000. As a percentage of loans, net of unearned income, the allowance for loan losses was 1.35% and 1.27% at December 31, 2001 and 2000, respectively. The ratio of the allowance for loan losses to nonperforming loans was 269.5% and 315.5% at December 31, 2001 and 2000, respectively, which reflects the impact of the increase in nonperforming loans.
For the years ended December 31, 2001 and 2000, the provision for loan losses was $12.83 million and $15.75 million, respectively. Net charge-offs were $10.63 million for the year of 2001 as compared to net charge-offs of $14.81 million for the year of 2000. The decreases in provision and net charge-offs for the year were based upon management's ongoing evaluation of the adequacy for the loan losses and were primarily attributed to lower losses on junior-lien mortgage loans.
Allocations are made for specific commercial loans based upon management's estimate of the borrower's ability to repay and other factors impacting collectibility. Other commercial loans not specifically reviewed on an individual basis are evaluated based on historical loss percentages, which are adjusted for current conditions and applied to loan pools that have been segregated by risk. Allocations for loans other than commercial loans are made based upon historical loss experience adjusted for current conditions. Differences between actual loan loss experience and estimates are reviewed on a quarterly basis and adjustments are made to those estimates. United's formal company-wide process at December 31, 2001 produced increased allocations within three of four loan categories from December 31, 2000. The components of the allowance allocated to commercial loans and consumer loans increased $9.8 million and $471 thousand, respectively, as a result of changes in the composition and risk profile resulting from the Century merger, declining economic conditions and changes in historical loss factors. The real estate construction loan pool allocation increased $725 thousand as a result of increased loan volume and changes in historical loss factors. The components of the allowance allocated to real estate loans decreased $1.9 million as a result of changes in volume and historical loss factors.
The unallocated portion of the allowance for loan losses has continually declined over the past four years as more seasoned loss data has been developed about specific pools of loans to facilitate assignment of the allowance to more specific segments within the loan portfolio. Changes in economic conditions, more specifically the events of September 11, 2001, and the economic downturn that had begun prior to that date and continued throughout the fourth quarter of 2001, caused United to further refine its systematic methodology in the determination of the allowance for loan losses to specific loans or groups.
Management believes that the allowance for loan losses of $47.41 million at December 31, 2001 is adequate to provide for probable losses on existing loans based on information currently available.
Management is not aware of any potential problem loans, trends or uncertainties that it reasonably expects will materially impact future operating results, liquidity, or capital resources which have not been disclosed. Additionally, management has disclosed all known material credits that cause management to have serious doubts as to the ability of such borrowers to comply with the loan repayment schedules.
Other Income
Noninterest income has been, and will continue to be, an important factor for improving United's profitability. Accordingly, management continues to evaluate areas where noninterest income can be enhanced. Other income consists of all revenues that are not included in interest and fee income related to earning assets. Noninterest income, excluding securities gains and losses, increased 31.63% for the year of 2001 when compared to the year of 2000. These results were achieved primarily due to a combination of increased revenues from the mortgage banking, wealth management and deposit services areas.
Income from mortgage banking operations increased $10.18 million or 62.29% from the previous year. Mortgage loan origination activity increased 93.71% or $1.14 billion for the year of 2001 as compared to the same period in 2000 due to declining interest rates. The higher level of originations during 2001 resulted in increased loan sales in the secondary market of 94.07% or $1.06 billion compared to last year.
Service charges, commissions and fees from customer accounts increased $4.22 million or 18.65% from 2000. This income includes charges and fees related to various banking services provided by United.
Trust income and brokerage commissions increased $1.16 million or 16.45% due to an increased volume of trust and brokerage business. United continues its efforts to broaden the scope and activity of its trust and brokerage service areas, especially in the northern Virginia market, to provide additional sources of fee income that complement United's traditional banking products and services.
During 2001, United incurred a net loss on the sale of investment securities of $518 thousand as compared to a net loss of $13.86 million during 2000. United restructured its balance sheet in the fourth quarter of 2000 by selling lower yielding, fixed-rate securities that had been carried as available for sale. Sales and write-downs of securities from this restructuring resulted in loss of approximately $15.01 million ($10.10 million after-tax) in the fourth quarter of 2000.
Overall, noninterest income, including net losses from securities transactions, increased $28.42 million or 84.11% for 2001 when compared to 2000.
Other Expense
Just as management continues to evaluate areas where noninterest income can be enhanced, it strives to improve the efficiency of its operations and thus reduce operating costs. United's cost control efforts have been very successful, resulting in an efficiency ratio of 43.1%, which is well below the 57.4% reported by United's national peer group banks and its immediate in-market competitors.
Other expense includes all items of expense other than interest expense, the provision for loan losses and income tax expense. Noninterest expense increased $5.32 million or 4.82% for the year ended December 31, 2001 as compared to the year ended 2000. Results for 2000 include one-time charges of $3.99 million associated with litigation and employee salary incentive and benefit plans. Excluding these charges, total noninterest expense increased $9.31 million or 8.75% from 2000.
Total salaries and benefits increased $7.94 million or 14.92% for the year of 2001 compared to the year of 2000. The results for 2000 include one-time charges of $960 thousand. The increase was due mainly to higher sales activity in the mortgage banking segment, since compensation and incentives for its personnel are significantly tied to activity levels. Excluding the one-time expenses, total salaries and benefits increased $8.90 million or 17.04% from 2000. At December 31, 2001 and 2000, United employed 1,361 and 1,253 full-time equivalent employees, respectively.
Net occupancy expense in 2001 decreased from 2000 levels by $1.27 million or 10.80%. The lower net occupancy expense for 2001 was due mainly to decreases in both real property taxes on owned premises and rental expense on leased offices.
Remaining other expense decreased $1.34 million or 2.95% in 2001 compared to 2000. The results for 2000 include one-time charges of approximately $2.92 million. Excluding the aforementioned one-time expenses, other expense increased $1.58 million or 3.72% due mainly to expenses related to the Century merger and planning initiatives.
Income Taxes
For the year ended December 31, 2001, income taxes were $38.74 million, compared to $28.72 million for 2000. The increase of $10.02 million or 34.87% was primarily the result of increased pretax income. For the years ended December 31, 2001 and 2000, United's effective tax rates were 32.63% and 32.75%, respectively.
Quarterly Results
All four quarters of 2001 showed large increases in earnings in comparison to each of the same four quarters of 2000. On a per share basis, first quarter 2001 earnings were $0.46 per share, compared to $0.42 in 2000, second quarter 2001 earnings were $0.47 per share, compared to $0.43 in 2000, third quarter 2001 earnings were $0.48, compared to $0.44 per share in 2000 while fourth quarter 2001 earnings were $0.49, compared to $0.11 per share in 2000.
Net income for the fourth quarter of 2001 was $21.08 mi1lion, compared to $4.30 million earned in the fourth quarter of 2000. The results for the fourth quarter of 2000 included balance sheet restructuring and
other one-time charges of approximately $20.09 million ($13.51 million after tax).
Additional quarterly financial data for 2001 and 2000 may be found in Note R to the Consolidated Financial Statements.
The Effect of Inflation
United's income statements generally reflect the effects of inflation. Since interest rates, loan demand and deposit levels are impacted by inflation, the resulting changes in the interest-sensitive assets and liabilities are included in net interest income. Similarly, operating expenses such as salaries, rents and maintenance include changing prices resulting from inflation. One item that would not reflect inflationary changes is depreciation expense. Subsequent to the acquisition of depreciable assets, inflation causes price levels to rise; therefore, historically presented dollar values do not reflect this inflationary condition. With inflation levels at relatively low levels and monetary and fiscal policies being implemented to keep the inflation rate increases within an acceptable range, management expects the impact of inflation would continue to be minimal in the near future.
Market Risk
The objective of United's Asset/Liability Management function is to maintain consistent growth in net interest income within United's policy guidelines. This objective is accomplished through the management of balance sheet liquidity and interest rate risk exposures due to changes in economic condition, interest rate levels and customer preferences.
Management considers interest rate risk to be United's most significant market risk. Interest rate risk is the exposure to adverse changes in the net interest income of United as a result of changes in interest rates. Consistency in United's earnings is largely dependent on the effective management of interest rate risk.
United employs a variety of measurement techniques to identify and manage its exposure to changing interest rates. One such technique utilizes an earnings simulation model to analyze net interest income sensitivity to movements in interest rates. The model is based on projected cash flows and repricing characteristics for on- and off-balance-sheet instruments and incorporates market-based assumptions regarding the impact of changing interest rates on the prepayment rate of certain assets and liabilities. The model also includes executive management projections for activity levels in product lines offered by United. Assumptions based on the historical behavior of deposit rates and balances in relation to changes in interest rates are also incorporated into the model. These assumptions are inherently uncertain and, as a result, the model cannot precisely measure net interest income or precisely predict the impact of fluctuations in interest rates on net interest income. Actual results will differ from simulated results due to timing, magnitude and frequency of interest rate changes as well as changes in market conditions and management strategies.
Interest-sensitive assets and liabilities are defined as those assets or liabilities that mature or are repriced within a designated time frame. The principal function of interest rate risk management is to maintain an appropriate relationship between those assets and liabilities that are sensitive to changing market interest rates. United closely monitors the sensitivity of its assets and liabilities on an ongoing basis and projects the effect of various interest rate changes on its net interest margin.
The difference between rate-sensitive assets and rate-sensitive liabilities for specified periods of time is known as the "GAP."
As shown in the interest rate sensitivity GAP table in this section, United was liability-sensitive (excess of liabilities over assets) in the one-year horizon. This indicates that rising market interest rates would reduce United's earnings and declining market interest rates would increase earnings. United, however, has not experienced the kind of earnings volatility indicated from the cumulative gap. This is because a significant portion of United's retail deposit base does not reprice on a contractual basis. Management has estimated, based upon historical analyses, that savings deposits are less sensitive to interest rate changes than are other forms of deposits. The GAP table presented herein has been adjusted to show the estimated differences in interest rate sensitivity that result when the retail deposit base is assumed to reprice in a manner consistent with historical trends. (See "Management Adjustments" in the GAP table.) Using these estimates, United was liability-sensitive in the one-year horizon in the amount of $124 million or (2.33%) of the cumulative gap to related earning assets.
To aid in interest rate risk management, United's subsidiary banks are members of the Federal Home Loan Bank (FHLB). The use of FHLB borrowings provides United with a low risk means of matching maturities of earning assets and interest-bearing funds to achieve a desired interest rate spread over the life of the earning assets.
Interest rate risk management focuses on maintaining consistent growth in net interest income within Board-approved policy limits. United's Asset/Liability Management Committee (ALCO), which includes senior management representatives, reports to the Board of Directors and monitors and manages interest rate risk to maintain an acceptable level of change to net interest income as a result of changes in interest rates. Policy established for interest rate risk is stated in terms of the change in net interest income over a one-year and two-year horizon given an immediate and sustained increase or decrease in interest rates. The current limits approved by the Board of Directors are structured on a staged basis with each stage requiring specific actions.
The following table shows United's estimated earnings sensitivity profile after management's adjustments as of December 31, 2001 and 2000:
Change in Percentage Change in Net Interest Income Interest Rates ----------------------------------------- (basis points) December 31, 2001 December 31, 2000 - -------------- ----------------- ------------------- +200 -1.61% -2.62% -200 0.24% -3.57%
Given an immediate, sustained 200 basis point upward shock to the yield curve used in the simulation model, it is estimated that net interest income for United would decrease by 1.61% over one year as of December 31, 2001, as compared to a decrease of 2.62% as of December 31, 2000. A 200 basis point immediate, sustained downward shock in the yield curve would increase net interest income by an estimated 0.24% over one year as of December 31, 2001, as compared to a decrease of 3.57% as of December 31, 2000. All of these estimated changes in net interest income are within the policy guidelines established by the Board of Directors.
The following table shows the interest rate sensitivity GAP as of December 31, 2001:
Liquidity and Capital Resources
In the opinion of management, United maintains liquidity that is sufficient to satisfy its depositors' requirements and the credit needs of its customers. Like all banks, United depends upon its ability to renew maturing deposits and other liabilities on a daily basis and to acquire new funds in a variety of markets. A significant source of funds available to United is "core deposits." Core deposits include certain demand deposits, statement and special savings and NOW accounts. These deposits are relatively stable and they are the lowest-cost source of funds available to United. Short-term borrowings have also been a significant source of funds. These include federal funds purchased and securities sold under agreements to repurchase as well as advances from the FHLB. Repurchase agreements represent funds that are generally obtained as the result of a competitive bidding process.
Liquid assets are cash and those items readily convertible to cash. All banks must maintain sufficient balances of cash and near-cash items to meet the day-to-day demands of customers. Other than cash and due from banks, the available for sale securities portfolio and maturing loans are the primary sources of liquidity.
The goal of liquidity management is to ensure the ability to access funding that enables United to efficiently satisfy the cash flow requirements of depositors and borrowers and meet United's cash needs. Liquidity is managed by monitoring funds' availability from a number of primary sources. Substantial funding is available from cash and cash equivalents, unused short-term borrowings and a geographically dispersed network of branches providing access to a diversified and substantial retail deposit market.
Short-term needs can be met through a wide array of sources such as correspondent and downstream correspondent federal funds and utilization of FHLB advances.
Other sources of liquidity available to United to provide long-term as well as short-term funding alternatives, in addition to FHLB advances, are long-term certificates of deposit, lines of credit, and borrowings secured by bank premises or stock of United's subsidiaries. United has no intention at this time of utilizing any long-term funding sources other than FHLB advances and long-term certificates of deposit.
Cash flows used for operations in 2001 were $57.17 million as compared to cash flows provided by operations of $743 thousand in 2000 primarily as a result of approximately $149.99 million of excess originations of mortgage loans over proceeds from the sale of loans. In 2001, net cash of $115.91 million was used in investing activities as compared to 2000 in which investing activities provided cash of $216.64 million. Cash used in investing activities in 2001 was primarily due to $91.57 million of excess purchases of investment securities over net proceeds from calls and maturities of investment securities. In 2000, cash was provided by investing activities due mainly to excess net proceeds from calls and maturities of securities over purchases of investment securities by $256.10 million. Financing activities resulted in a source of cash in 2001 of $185.86 million primarily due to an increase in short-term borrowings and deposits of $165.23 million and $73.35 million, respectively. For the year of 2000, net cash of $232.38 million was used in financing activities, primarily due to the net repayment of approximately $246.84 million of FHLB borrowings, payment of $35.47 million in cash dividends and $18.38 million for acquisitions of United shares under the stock repurchase programs. The net effect of this activity was an increase in cash and cash equivalents of $12.78 million for the year of 2001 and a decrease in cash and cash equivalents of $15.00 million for the year of 2000. See the Consolidated Statement of Cash Flows in the Consolidated Financial Statements.
United anticipates no problems in its ability to service its obligations over the next 12 months. There are no known trends, demands, commitments, or events that will result in or that are reasonably likely to result in United's liquidity increasing or decreasing in any material way. United also has significant lines of credit available to it. See Note H, Notes to Consolidated Financial Statements.
The Asset and Liability Committee monitors liquidity to ascertain that a liquidity position within certain prescribed parameters is maintained. In addition, variable rate loans are a priority. These policies help to protect net interest income against fluctuations in interest rates. No changes are anticipated in the policies of United's Asset and Liability Committee.
United also seeks to maintain a proper relationship between capital and total assets to support growth and sustain earnings. United has historically generated attractive returns on shareholders' equity. United's average equity to average asset ratio was 9.06% in 2001 and 8.29% in 2000. United's risk-based capital ratio was 11.37% in 2001 and 11.77% in 2000, which are both significantly higher than the minimum regulatory requirements. United's Tier 1 capital and leverage ratios of 10.01% and 7.95%, respectively, at December 31, 2001, are also well above regulatory minimums to be classified as a "well-capitalized" institution. See Note O, Notes to Consolidated Financial Statements.
Commitments
At December 31, 2001 United had outstanding loan commitments of $937,933,000 pertaining to lines of credit authorized but unused, and $103,446,000 of letters of credit to its various customers in the normal course of business.
Past experience has shown that, of the foregoing commitments, approximately 12-15% can reasonably be expected to be funded within a one-year period. For more information, see Note L to the Consolidated Financial Statements.
2000 COMPARED TO 1999
EARNINGS SUMMARY
For the year ended December 31, 2000, operating earnings were $72.5 million compared to $70.2 million for the year ended December 31, 1999. On a diluted per share basis, operating earnings were $1.72 in 2000 compared to $1.61 in 1999.
Operating earnings represent earnings before balance sheet restructuring and other charges of approximately $20.09 million ($13.51 million after tax) incurred during the fourth quarter of 2000. United restructured its balance sheet by selling lower yielding, fixed-rate securities, which had been carried as available for sale. A majority of the proceeds of the sale was reinvested in higher yielding, fixed-rate securities with an average maturity comparable with those securities sold. A portion of the sale proceeds was also used to pay down short-term borrowings and to repurchase shares of United's common stock. Losses on sales and write-downs of securities totaled $15.01 million ($10.10 million after tax) during the fourth quarter of 2000.
In addition to the restructuring losses, United incurred other significant charges during the fourth quarter of
2000. United incurred litigation expense of $1.63 million ($1.09 million after tax) as a result of a building operating lease settlement. Other significant charges, which related primarily to employee salary incentive and benefit plans, totaled approximately $2.36 million ($1.59 million after tax). After these charges, diluted earnings per share were $1.40 for the year ended December 31, 2000, compared to $1.61 for the year ended December 31, 1999.
Operating earnings represent a return on average shareholders' equity of 17.66% and a return on average assets of 1.47% for the year ended December 31, 2000. These operating ratios compare favorably with national peer grouping information provided by Keefe, Bruyette, & Woods, of 14.82% and 1.16%, respectively.
Dividends per share increased from $0.82 in 1999 to a record level of $0.84 per share in 2000. United paid approximately $35.3 million in dividends to common shareholders in 2000 compared with $35.4 million in 1999.
The growth in operating earnings for the year of 2000 was a result of reducing noninterest expenses while maintaining a stable net interest margin in a challenging banking environment. Net interest income remained flat for the year of 2000 when compared to 1999 as increased deposit and funding costs resulting from six Federal Funds rate increases from mid-1999 through mid-2000 offset growth in interest income. Noninterest income, including income from mortgage banking operations, decreased $2.28 million or 4.47% for 2000 when compared to 1999 as the higher interest rates and a slowing economy caused a decline in mortgage banking results. Noninterest expenses decreased $11.09 million or 9.43% for 2000 compared to the same period in 1999.
The effective tax rate for the year ended December 31, 2000 approximated 32.75% compared to 33.12% for 1999.
FINANCIAL CONDITION SUMMARY
Total assets were $4.90 billion at December 31, 2000, down $164.61 million or 3.25% compared with year end 1999. United's available for sale securities portfolio decreased $342.10 million while securities held to maturity increased $114.88 million as compared to year end 1999. Loans held for sale increased $86 million during 2000. Loans, net of unearned income, reflected a $22.40 million increase from 1999 to 2000 due mainly to a 6% growth rate in the commercial loan portfolio. Cash and cash equivalents decreased $15.00 million while nonearning assets increased $30.80 million in 2000 as compared with year end 1999.
Total deposits grew $130.46 million or 4% from year end 1999 as United realized increases of $71.82 million and $58.65 million in interest-bearing deposits and noninterest-bearing deposits, respectively. United's short-term borrowings decreased $64.53 million and its FHLB borrowings declined $246.84 million as United repaid these borrowings to restructure the balance sheet to better manage interest rate risk.
Shareholders' equity increased $34.94 million or 8.82% from December 31, 1999 due to net retained earnings in excess of dividends for the year of $23.69 million and an increase in the fair value of United's securities available for sale portfolio of approximately $26.90 million, net of deferred income taxes. During 2000, United completed a plan announced in 1999 to repurchase up to 1.75 million shares of its common stock on the open market. In May of 2000, United announced a new plan to repurchase up to an additional 1.675
million shares of its common stock on the open market, of which 219,300 shares have been repurchased since its implementation. At December 31, 2000, United's regulatory capital ratios, including those of its bank subsidiaries, exceeded the levels established for well-capitalized institutions.
The following discussion explains in more detail the results of operations and changes in financial condition by major category.
Net Interest Income
Net interest income represents the primary component of United's earnings. It is the difference between interest income from earning assets and interest expense incurred to fund these assets. Net interest income is impacted by changes in the volume and mix of interest-earning assets and interest-bearing liabilities, as well as changes in market interest rates. Such changes, and their impact on net interest income in 2000, are summarized below.
Tax-equivalent interest income increased $26.0 million or 7.2% from $362.94 million for the year of 1999 to $388.94 million for the year of 2000. For the years ended December 31, 2000 and 1999, tax-equivalent net interest income was $191.17 million and $188.54 million, respectively. The main reason for only a slight increase in tax-equivalent net interest income from the previous year was increased deposit and funding costs resulting from six Federal Funds rate increases from mid 1999 through mid 2000, which predominantly offset the growth in interest income. United's tax-equivalent net interest margin was 4.11% for the year of 2000 and 4.12% for the same time period in 1999.
Total interest income of $377.85 million increased 6.54% in 2000 over 1999 as a result of a higher yield on average interest-earning assets. Overall, the yield on average interest-earning assets increased 41 basis points from 7.93% in 1999 to 8.34% in 2000. The yield on average loans, net of unearned income, increased 43 basis points to 8.87% in the year 2000 from to 8.44% in 1999. The yield on average securities was 6.86% for the year 2000 as compared to 6.66% for 1999. The average volume of interest-earning assets remained relatively flat, increasing only $82.91 million in the year of 2000.
Total interest expense increased $23.36 million or 13.40% in 2000 compared to 1999. This increase was attributed primarily to increased average wholesale funding balances at higher average interest rates than in 1999. The average cost of funds increased from 4.46% in 1999 to 4.95% in 2000 due to higher interest rates. United's average FHLB borrowings increased $197.91 million and average short-term borrowings increased $2.79 million as average interest-bearing deposits decreased $114.13 million.
Provision for Loan Losses
For the years ended December 31, 2000 and 1999, the provision for loan losses was $15.75 million and $8.80 million, respectively. Net charge-offs were $14.81 million for the year of 2000 as compared to net charge-offs of $8.39 million for the year of 1999. The increases in provision and net charge-offs for the year were primarily attributed to the addition of junior-lien mortgage loans to the loan portfolio as of October 1, 1999. The increased provision and charge-offs were offset by increased interest income recognized on these high-interest rate loans. At December 31, 2000, the balance of these junior-lien mortgage loans approximated $173 million.
At year end 2000 and 1999, the allowance for loan losses was 1.27% and 1.25% of total loans, net of unearned income, respectively. At December 31, 2000 and 1999, the ratio of the allowance for loan losses to nonperforming loans was 315.5% and 190.9%, respectively, reflecting the impact of the significant decline in nonperforming loans.
Other Income
Noninterest income, excluding securities gains and losses and mortgage banking results, increased 11.79% for the year of 2000 when compared to the year of 1999. These results were achieved primarily due to a combination of increased revenues from the deposit services area and the trust department.
Service charges, commissions and fees from customer accounts increased $2.54 million or 12.78% from 1999 due mainly to a new checking account product introduced late in 1999. This income includes charges and fees related to various banking services provided by United.
Trust income and brokerage commissions increased $812 thousand or 16.43% and $222 thousand or 20.50%, respectively, in 2000 due to an increased volume of trust and brokerage business. United significantly broadened the scope and activity of its trust and brokerage service areas, especially in the northern Virginia market, to provide additional sources of fee income that complement United's traditional banking products and services.
Mortgage banking results declined from the previous year due to higher interest rates and a slowing economy, both of which adversely impacted the demand for mortgage loan originations and the fees received on the sale of those mortgage loans in the secondary market. Originations of mortgage loans fell 5% or $67.4 million for the year of 2000 as compared to the same period in 1999 while proceeds from sales of mortgage loans declined 21% or $302.4 million in the year of 2000 compared to last year.
During 2000, United incurred a net loss on the sale of investment securities of $13.86 million as compared to a net gain of $677 thousand during 1999. As previously mentioned, United restructured its balance sheet in the fourth quarter of 2000 by selling lower yielding, fixed-rate securities which had been carried as available for sale. Sales and write-downs of securities from this restructuring resulted in loss of approximately $15.01 million ($10.10 million after-tax) during the fourth quarter of 2000.
Overall, noninterest income, including net gains and losses from the sale of securities and income from mortgage banking operations, decreased $2.28 million or 4.47% for 2000 when compared to 1999.
Other Expense
Noninterest expense, excluding one-time charges of $3.99 million recognized in the fourth quarter of 2000, decreased $11.09 million or 9.43% for the year ended December 31, 2000 as compared to the year ended 1999. Including these one-time charges, total noninterest expense declined $7.10 million or 6.04% from 1999.
Total salaries and benefits, excluding one-time charges of $960 thousand, decreased by 13.14% or $7.90 million for the year of 2000 compared to year of 1999. The decline was due to lower sales activity in the mortgage banking segment as compensation and incentives for its personnel are significantly tied to activity
levels and an SFAS No. 87 pension benefit as a result of excess earnings within United's plan. Including the one-time expenses, total salaries and benefits declined $6.94 million or 11.54% from 1999. At December 31, 2000 and 1999, United employed 1,253 and 1,387 full-time equivalent employees, respectively.
Net occupancy expense in 2000, excluding one-time charges of $108 thousand, decreased from 1999 levels by $527 thousand or 4.32%. The overall change in net occupancy expense for 2000 was mainly due to decreased building repair and maintenance expenses.
Remaining other expense, excluding one-time charges of approximately $2.92 million, decreased $2.66 million or 5.89% in 2000 compared to 1999. Including the aforementioned one-time expenses, other expense remained relatively flat from 1999.
United's cost control efforts have been very successful, resulting in an efficiency ratio of 44.8%, which was well below the 57.6% reported by United's national peer group banks and its immediate in-market competitors.
Income Taxes
For the years ended December 31, 2000 and 1999, United's effective tax rate approximated 33%.
REPORT OF ERNST & YOUNG LLP INDEPENDENT AUDITORS
Board of Directors and Shareholders United Bankshares, Inc.
We have audited the accompanying consolidated balance sheets of United Bankshares, Inc. and subsidiaries as of December 31, 2001 and 2000, and the related consolidated statements of income, changes in shareholders' equity and cash flows for each of the three years in the period ended December 31, 2001. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted in the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of United Bankshares, Inc. and subsidiaries at December 31, 2001 and 2000, and the consolidated results of their operations and their cash flows for each of the three years in the period ended December 31, 2001, in conformity with accounting principles generally accepted in the United States.
/s/ Ernst & Young LLP
Charleston, West Virginia February 15, 2002
CONSOLIDATED BALANCE SHEETS UNITED BANKSHARES, INC. AND SUBSIDIARIES
See notes to consolidated financial statements
CONSOLIDATED STATEMENTS OF INCOME UNITED BANKSHARES, INC. AND SUBSIDIARIES
See notes to consolidated financial statements
CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY UNITED BANKSHARES, INC. AND SUBSIDIARIES
See notes to consolidated financial statements
CONSOLIDATED STATEMENTS OF CASH FLOWS UNITED BANKSHARES, INC. AND SUBSIDIARIES
See notes to consolidated financial statements
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
UNITED BANKSHARES, INC. AND SUBSIDIARIES
December 31, 2001
NOTE A--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Nature of Operations: United Bankshares, Inc. is a multi-bank holding company - -------------------- headquartered in Charleston, West Virginia. United's principal business activities are community banking and mortgage banking. The principal markets of United Bankshares, Inc. and subsidiaries (United) are Parkersburg, Charleston, Huntington, Morgantown and Wheeling, West Virginia and Arlington, Fairfax, Loudoun and Prince William counties, Virginia. United's mortgage banking activities are primarily through its wholly owned subsidiary, George Mason Mortgages, LLC.
Basis of Presentation: The consolidated financial statements and the notes to - --------------------- consolidated financial statements include the accounts of United Bankshares, Inc. and its wholly owned subsidiaries. All significant intercompany accounts and transactions have been eliminated in the consolidated financial statements.
The accounting and reporting policies of United conform with accounting principles generally accepted in the United States. In preparing the consolidated financial statements, management is required to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates. A description of the significant accounting policies is presented below.
Certain prior year amounts have been reclassified to conform to the current period presentation. The reclassifications had no effect on net income or shareholders' equity.
Cash Flow Information: United considers cash and due from banks, - --------------------- interest-bearing deposits with other banks and federal funds sold as cash and cash equivalents.
Securities: Management determines the appropriate classification of securities - ---------- at the time of purchase. Debt securities that United has the positive intent and the ability to hold to maturity are carried at amortized cost. Securities to be held for indefinite periods of time and all marketable equity securities are classified as available for sale and carried at estimated fair value. Unrealized holding gains and losses on securities classified as available for sale are carried as a separate component of Accumulated Other Comprehensive Income (Loss), net of deferred income taxes.
Gains or losses on sales of securities are recognized by the specific identification method and are reported separately in the statements of income.
Loans: Loans are reported at the principal amount outstanding, net of unearned - ----- income. Interest on loans is accrued and credited to operations using methods that produce a level yield on individual principal amounts outstanding. Loan origination and commitment fees and related direct loan origination costs are deferred and amortized as an adjustment of loan yield over the estimated life of the related loan. The accrual of interest income on commercial and most consumer loans generally is discontinued when a loan becomes 90 to 120
NOTE A--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - continued
days past due as to principal or interest. When interest accruals are discontinued, unpaid interest recognized in income in the current year is reversed, and interest accrued in prior years is charged to the allowance for loan losses. Management may elect to continue the accrual of interest when the estimated net realizable value of collateral exceeds the principal balance and accrued interest, and the loan is in the process of collection.
Consistent with United's existing method of income recognition for loans, interest on impaired loans, except those classified as nonaccrual, is recognized as income using the accrual method. United's method of income recognition for impaired loans that are classified as nonaccrual is to recognize interest income on the cash basis or apply the cash receipt to principal when the ultimate collectibility of principal is in doubt.
Loans Held for Sale: Loans held for sale consist of one-to-four family - ------------------- residential loans originated for sale in the secondary market and carried at the lower of cost or fair value determined on an aggregate basis. Gains and losses on sales of loans held for sale are included in mortgage banking income.
The principal sources of revenue from United's mortgage banking business are: (i) loan origination fees; (ii) gains or losses from the sale of loans; and (iii) interest earned on mortgage loans during the period that they are held by United pending sale.
Allowance for Loan Losses: The allowance for loan losses is management's - ------------------------- estimate of the probable credit losses inherent in the loan portfolio. Management's evaluation of the adequacy of the allowance for loan losses and the appropriate provision for loan losses is based upon a quarterly evaluation of the portfolio. This evaluation is inherently subjective and requires significant estimates, including the amounts and timing of estimated future cash flows, estimated losses on pools of loans based on historical loss experience, and consideration of current economic trends, all of which are susceptible to constant and significant change. The amounts allocated to specific credits and loan pools grouped by similar risk characteristics are reviewed on a quarterly basis and adjusted as necessary based upon subsequent changes in circumstances. In determining the components of the allowance for loan losses, management considers the risk arising in part from, but not limited to, charge-off and delinquency trends, current economic and business conditions, lending policies and procedures, the size and risk characteristics of the loan portfolio, concentrations of credit, and other various factors. Loans deemed to be uncollectible are charged against the allowance for loan losses, while recoveries of previously charged-off amounts are credited to the allowance for loan losses.
In determining the adequacy of the allowance for loan losses, management makes allocations to specific commercial loans classified by management as to risk. Management determines the loan's risk by considering the borrowers' ability to repay, the collateral securing the credit and other borrower-specific factors that may impact collectibility. Specific loss allocations are based on the present value of expected future cash flows using the loan's effective interest rate, or as a practical expedient, at the loan's observable market price or the fair value of the collateral if the loan is collateral-dependent. Other commercial loans not specifically reviewed on an individual basis are evaluated based on loan pools, which are grouped by similar risk characteristics using management's internal risk ratings. Allocations for these commercial loan pools are determined based upon historical loss experience adjusted for current conditions and risk factors. Allocations for loans, other than commercial loans, are developed by applying historical loss experience adjusted for current conditions and risk factor to loan pools grouped by similar risk characteristics. While allocations are
NOTE A--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - continued
made to specific loans and pools of loans, the allowance is available for all loan losses. Management believes that the allowance for loan losses is adequate to provide for probable losses on existing loans based on information currently available.
Asset Securitization: As further discussed in Note D, United previously sold - -------------------- residential mortgage loans in a securitization transaction and retained an interest-only strip, and lower-rated subordinated classes of asset-backed securities, all of which are retained interests in the securitized assets. These retained interests in securitized assets are recorded at their estimated fair values in securities available for sale. Since quoted market prices are generally not available for retained interests, United estimates fair values based on the present value of future expected cash flows using management's best estimates of key assumptions--credit losses, prepayment speeds, forward yield curves, and discount rates commensurate with the risks involved.
On April 1, 2001, United adopted Emerging Issues Task Force (EITF) Issue No. 99-20 (EITF 99-20) which provides accounting guidance for the recognition of interest income and impairment on purchased and retained interests in securitized financial assets. EITF 99-20 requires that the holder of such instruments recognize the excess of all cash flows attributable to the beneficial interest using the effective yield method. In addition, EITF 99-20 provides a change in the determination of impairment, whereby, if the fair value of the beneficial interest has declined below its carrying value, then an impairment analysis should be performed. If there has been an adverse change in the estimated cash flows from the previous cash flows projected, then the condition for an other-than-temporary impairment has been met and the beneficial interest should be written down to the estimated fair value. The adoption of this standard did not have a material impact on the financial position or results of operations of United.
Bank Premises and Equipment: Bank premises and equipment are stated at cost, - --------------------------- less allowances for depreciation and amortization. The provision for depreciation is computed principally by the straight-line method over the estimated useful lives of the respective assets.
Income Taxes: Deferred income taxes (included in other assets) are provided for - ------------ temporary differences between the tax basis of an asset or liability and its reported amount in the financial statements at the statutory tax rate.
Intangible Assets: Intangible assets relating to the estimated value of the - ----------------- deposit base of the acquired institutions are being amortized on an accelerated basis over a 7 to 10 year period. The excess of the purchase price over the fair market value of the net assets of the banks acquired (goodwill) is being amortized on a straight-line basis over 15 to 20 years. Management reviewed intangible assets on a periodic basis and evaluated changes in facts and circumstances that may indicate impairment in the carrying value.
In July of 2001, the Financial Accounting Standards Board (FASB) issued Statement No. 141 (SFAS No. 141), "Business Combinations," and Statement No. 142 (SFAS No. 142), "Goodwill and Other Intangible Assets." SFAS No. 141 requires that the purchase method of accounting be used for all business combinations initiated after June 30, 2001. SFAS No. 141 also establishes specific criteria for the recognition of intangible assets separately from goodwill. SFAS No. 142 requires that goodwill and intangible assets with indefinite useful lives no longer be amortized, but instead tested for impairment at least annually in
NOTE A--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - continued
accordance with the provisions of SFAS No.142. However, SFAS No. 142 did not supercede FASB Statement No. 72, "Accounting for Certain Acquisitions of Banking or Thrift Institutions," and therefore, any goodwill accounted for in accordance with this Statement will continue to be amortized until further guidance is issued from the FASB. SFAS No. 142 also requires that intangible assets with definite useful lives (such as core deposit intangibles) be amortized over their respective estimated useful lives to their estimated residual values, and reviewed for impairment. The provisions of SFAS No. 142 are effective January 1, 2002 and management estimates the benefit associated with the elimination of goodwill amortization in 2002 to be approximately $1.2 million after tax, or $.03 per diluted share. SFAS No. 142 requires that a transitional impairment test of goodwill and indefinite-lived intangible assets be performed within six months of adoption and any resulting impairment loss be reported as a change in accounting principle. Based on preliminary tests performed, no recording of impairment loss is anticipated.
At December 31, 2001 and 2000, deposit base intangibles and goodwill approximated $88,240,000 and $38,710,000, net of accumulated amortization of approximately $28,469,000 and $25,185,000.
Stock Options: United has stock option plans for certain employees that are - ------------- accounted for under the intrinsic value method. Because the exercise price at the date of the grant is equal to the market value of the stock, no compensation expense is recognized.
Treasury Stock: United records common stock purchased for treasury at cost. At - -------------- the date of subsequent reissue, the treasury stock account is reduced by the cost of such stock using the weighted average cost method.
Trust Assets and Income: Assets held in a fiduciary or agency capacity for - ----------------------- customers are not included in the balance sheets since such items are not assets of the company. Trust income is reported on a cash basis. Reporting such income on an accrual basis would not materially affect United's consolidated financial position or its results of operations as reported herein.
Earnings Per Common Share: Basic earnings per common share is calculated by - ------------------------- dividing net income by the weighted average number of shares of common stock outstanding for the respective period. For diluted earnings per common share, the weighted average number of shares of common stock outstanding for the respective period is increased by the number of shares of common stock that would be issued assuming the exercise of common stock options. The dilutive effect of stock options approximated 567,615, 301,314 and 621,104 shares in 2001, 2000 and 1999, respectively.
Operating Segments: United operates in the community banking and mortgage - ------------------ banking businesses. Business results are based upon United's management accounting practices and are provided to the chief operating decision maker for determination of resource allocation and performance.
New Accounting Standards: On January 1, 2001, United adopted FASB Statement No. - ------------------------ 133 (SFAS No. 133) "Accounting for Derivative Instruments and Hedging Activities," as amended by FASB Statement No. 137 (SFAS No. 137). The adoption of this standard did not materially impact the reported financial position or results of operations of United. The provisions of this statement require that derivative instruments be
NOTE A--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - continued
carried at fair value on the balance sheet. The statement continues to allow derivative instruments to be used to hedge various risks and sets forth specific criteria to determine when hedge accounting can be used.
In accordance with current interpretations of SFAS No. 133, United is required to recognize its commitments with borrowers (interest rate lock commitments) and investors (best efforts commitments) on loans originated for sale in its mortgage banking operations. These commitments are entered into with the borrower and investor to manage the inherent interest rate and pricing risk associated with selling loans in the secondary market. These derivatives are accounted for by recognizing the fair value of the contracts and commitments on the balance sheet as either a freestanding asset or liability, with a corresponding offset recorded in other comprehensive income within shareholders' equity, net of income tax. Amounts are reclassified from other comprehensive income into the income statement in the period or periods that the hedged transaction affects earnings.
In August of 2001, the FASB issued Statement No. 144 (SFAS No. 144), "Accounting for the Impairment or Disposal of Long-Lived Assets." The adoption of this standard is not expected to have a material impact on the financial position or results of operations of United.
NOTE B--MERGERS AND ACQUISITIONS
On December 7, 2001, United acquired 100% of the outstanding common stock of Century Bancshares, Inc., Washington, D.C. (Century). The results of operations of Century, which are not significant, have been included in the consolidated results of operations from the date of acquisition. As a result of this acquisition, United increased its presence in Northern Virginia, Washington, D.C., and Montgomery County, Maryland by adding 11 full service offices.
The aggregate purchase price was $63.8 million, including $15.1 million of cash, and 1.98 million shares of common stock valued at $48.7 million. The value of the 1.98 million common shares issued was determined based on the average market price of United's common shares over the period including the two days before and after the terms of the acquisition were agreed to and announced. At consummation, Century had assets of approximately $414 million, loans of $295 million, deposits of $330 million and shareholders' equity of $20 million.
NOTE C--INVESTMENT SECURITIES
The amortized cost and estimated fair values of securities available for sale are summarized as follows:
The amortized cost and estimated fair value of securities available for sale at December 31, 2001 by contractual maturity are shown below. Expected maturities may differ from contractual maturities because the issuers may have the right to call or prepay obligations with or without call or prepayment penalties. Maturities of mortgage-backed securities with an amortized cost of $861,799,000 and an estimated fair value of $877,467,000 at December 31, 2001 are shown below based upon an estimated average life.
Estimated (In thousands) Amortized Fair Cost Value ---------- ---------- Due in one year or less $ 22,995 $ 23,089 Due after one year through five years 32,635 33,372 Due after five years through ten years 122,749 124,049 Due after ten years 947,082 958,916 Marketable equity securities 8,254 7,854 ---------- ---------- Total $1,133,715 $1,147,280 ========== ==========
Gross realized gains and losses from sales of securities available for sale were $2,382,000 and $1,605,000; $2,316,000 and $15,676,000; and $1,759,000 and $1,076,000, respectively, in 2001, 2000 and 1999.
NOTE C--INVESTMENT SECURITIES - continued
The amortized cost and estimated fair values of securities held to maturity are summarized as follows:
The amortized cost and estimated fair value of debt securities held to maturity at December 31, 2001 by contractual maturity are shown below. Expected maturities may differ from contractual maturities because the issuers may have the right to call or prepay obligations with or without call or prepayment penalties. Maturities of mortgage-backed securities with an amortized cost of $4,278,000 and an estimated fair value of $4,410,000 at December 31, 2001 are shown below based upon an estimated average life.
Estimated (In thousands) Amortized Fair Cost Value --------- --------- Due in one year or less $ 1,448 $ 1,477 Due after one year through five years 32,729 33,837 Due after five years through ten years 72,922 74,216 Due after ten years 174,337 171,335 -------- -------- Total $281,436 $280,865 ======== ========
As permitted, upon adopting SFAS No. 133 on January 1, 2001, debt securities with an amortized cost of $71,293,000 and an estimated fair value of $71,668,000 were transferred into the available for sale category from the held to maturity category.
The carrying value of securities pledged to secure public deposits, securities sold under agreements to repurchase, and for other purposes as required or permitted by law, approximated $992,341,000 and $788,899,000 at December 31, 2001 and 2000, respectively.
NOTE D--ASSET SECURITIZATION
During 1999, United sold residential mortgage loans in a securitization transaction and recognized a pretax gain of $467,000. In that securitization, United retained subordinated interests that represent United's right to future cash flows arising after the investors in the securitization trust have received the return for which they contracted. United does not receive annual servicing fees from this securitization because the loans are serviced by an independent third-party. The investors and the securitization trust have no recourse to United's other assets for failure of debtors to pay when due; however, United's retained interests are subordinate to investors' interests. The value of the retained interests is subject to credit, prepayment, and
interest rate risks on the underlying financial assets. At the date of securitization, key economic assumptions used in measuring the fair value of the retained interests were as follows: a weighted-average life of 5.3 years, expected cumulative credit losses of 15%, and discount rates of 8% to 18%.
For the years ended December 31, 2001 and 2000, United received cash of $10,926,000 and $13,325,000, respectively, on the retained interest in the securitization.
Key economic assumptions used in measuring the fair value of the retained interests at December 31, 2001 and 2000 were as follows:
At December 31, 2001 and 2000, key economic assumptions and the sensitivity of the current fair value of residual cash flows to immediate 10% and 20% adverse changes in those assumptions are as follows:
December 31 ----------------- 2001 2000 ------- ------- Fair value of retained interests $48,690 $56,030
Prepayment curve: Decline in fair value of 10% adverse change $ 1,204 $ 1,622 Decline in fair value of 20% adverse change $ 2,287 $ 3,091 Default curve: Decline in fair value of 10% adverse change $ 2,598 $ 2,720 Decline in fair value of 20% adverse change $ 5,299 $ 5,756 Discount rate: Decline in fair value of 10% adverse change $ 1,422 $ 2,036 Decline in fair value of 20% adverse change $ 2,767 $ 3,939
These sensitivities are hypothetical and should be used with caution. As the figures indicate, changes in fair value based on a 10% variation in assumptions generally cannot be extrapolated because the relationship of the change in the assumption to the change in the fair value may not be linear. Also, the effect of a variation
NOTE D--ASSET SECURITIZATION - continued
in a particular assumption on the fair value of the retained interests is calculated without changing any other assumption; in reality, changes in one factor may result in changes in another factor (for example, increases in market interest rates may result in lower prepayments) that might magnify or counteract the sensitivities.
The following table presents quantitative information about delinquencies, net credit losses, and components of the underlying securitized financial assets:
NOTE E--LOANS
Major classifications of loans are as follows:
(In thousands) December 31 -------------------------- 2001 2000 ---------- ---------- Commercial, financial and agricultural $ 662,070 $ 564,887 Real estate: Single-family residential 1,313,784 1,352,955 Commercial 891,118 711,054 Construction 195,063 164,505 Other 88,416 84,742 Installment 354,934 319,351 ---------- ---------- Total gross loans $3,505,385 $3,197,494 ========== ==========
The table above does not include loans held for sale of $368,625,000 and $203,831,000 at December 31, 2001 and 2000, respectively.
An analysis of the allowance for loan losses follows:
Year Ended December 31 ------------------------------- (In thousands) 2001 2000 1999 ------- ------- -------
Balance at beginning of period $40,532 $39,599 $39,189 Allowance of purchased subsidiaries 4,673 Provision charged to expense 12,833 15,745 8,800 ------- ------- ------- 58,038 55,344 47,989 ------- ------- ------- Loans charged off 12,359 15,845 9,236 Less recoveries 1,729 1,033 846 ------- ------- -------
Net charge-offs 10,630 14,812 8,390 ------- ------- -------
Balance at end of period $47,408 $40,532 $39,599 ======= ======= =======
NOTE E--LOANS - continued
The higher provision and charge-offs in 2001 and 2000 relate to losses from certain junior-lien mortgages reclassified from available for sale securities to portfolio loans in October 2000.
United has commercial loans, including real estate and owner-occupied, income-producing real estate and land development loans, of approximately $1,553,188,000 and $1,275,941,000 as of December 31, 2001 and 2000, respectively. The loans are primarily secured by real estate located in West Virginia, Southeastern
Ohio, and Virginia. The loans were originated by United's subsidiary banks using underwriting standards as set forth by management. United's loan administration policies are focused on the risk characteristics of the loan portfolio, including commercial real estate loans, in terms of loan approval and credit quality. It is the opinion of management that these loans do not pose any unusual risks and that adequate consideration has been given to the above loans in establishing the allowance for loan losses.
At December 31, 2001, the recorded investment in loans that were considered to be impaired was $12,593,000 (of which $8,068,000 was on a nonaccrual basis). Included in this amount was $5,643,000 of impaired loans for which the related allowance for loan losses was $639,000, and $6,950,000 of impaired loans that did not have an allowance for credit losses. At December 31, 2000, the recorded investment in loans that were considered to be impaired was $12,504,000 (of which $8,131,000 was on a nonaccrual basis). Included in this amount was $4,711,000 of impaired loans for which the related allowance for credit losses was $872,000, and $7,793,000 of impaired loans that did not have an allowance for credit losses.
The average recorded investment in impaired loans during the years ended December 31, 2001, 2000 and 1999 was approximately $12,654,000, $15,557,000 and $16,681,000, respectively.
The amount of interest income that would have been recorded on impaired loans, which are on nonaccrual, under the original terms was $723,000, $1,519,000 and $2,237,000 for the years ended December 31, 2001, 2000 and 1999, respectively. For the years ended December 31, 2001, 2000 and 1999, United recognized interest income on those impaired loans of approximately $373,000, $649,000 and $560,000, respectively, substantially all of which was recognized using the accrual method of income recognition.
United's subsidiary banks have made loans, in the normal course of business, to the directors and officers of United and its subsidiaries, and to their associates. Such related party loans were made on substantially the same terms, including interest rates and collateral, as those prevailing at the time for comparable transactions with unrelated persons and did not involve more than normal risk of collectibility. The aggregate dollar amount of these loans was $107,305,000 and $124,512,000 at December 31, 2001 and 2000, respectively. During 2001, $52,861,000 of new loans were made, repayments totaled $68,791,000, and other changes due to the change in composition of United's board members and executive officers approximated $1,277,000.
NOTE F--BANK PREMISES AND EQUIPMENT AND LEASES
Bank premises and equipment are summarized as follows:
December 31 --------------------- (In thousands) 2001 2000 -------- --------
Land $ 11,799 $ 10,248 Buildings and improvements 47,115 44,440 Leasehold improvements 12,188 9,763 Furniture, fixtures and equipment 60,079 52,629 -------- -------- 131,181 117,080 Less allowance for depreciation and amortization 82,787 72,599 -------- -------- Net bank premises and equipment $ 48,394 $ 44,481 ======== ========
United and certain banking subsidiaries have entered into various noncancelable operating leases. These noncancelable operating leases are subject to renewal options under various terms and some leases provide for periodic rate adjustments based on cost-of-living index changes. Rent expense for noncancelable oper- ating leases approximated $4,813,000, $4,858,000 and $4,916,000 for the years ended December 31, 2001, 2000 and 1999, respectively.
Future minimum payments, by year and in the aggregate, under noncancelable operating leases with initial or remaining terms of one year or more, for years subsequent to December 31, 2001, consisted of the following:
Year Amount - ---- ------- (Dollars in thousands) 2002 $ 4,251 2003 3,059 2004 2,337 2005 1,835 2006 1,433 Thereafter 4,625 ------- Total minimum lease payments $17,540 =======
NOTE G--DEPOSITS
The book value of deposits consisted of the following:
(In thousands) December 31 -------------------------- 2001 2000 ---------- ---------- Noninterest-bearing checking $ 653,785 $ 539,415 Interest-bearing checking 128,211 87,369 Regular savings 367,602 345,369 Money market accounts 881,784 713,184 Time deposits under $100,000 1,357,479 1,316,655 Time deposits over $100,000 398,932 389,457 ---------- ----------
Total deposits $3,787,793 $3,391,449 ========== ==========
NOTE G--DEPOSITS- continued
Interest paid on deposits and borrowings approximated $179,338,000, $192,543,000 and $172,907,000 in 2001, 2000 and 1999, respectively.
At December 31, 2001, the scheduled maturities of time deposits are as follows:
Year Amount - ---- ---------- (Dollars in thousands) 2002 $1,272,622 2003 318,144 2004 112,354 2005 30,320 2006 and thereafter 22,971 ----------
Total $1,756,411 ==========
United's subsidiary banks have received deposits, in the normal course of business, from the directors and officers of United and its subsidiaries, and their associates. Such related party deposits were accepted on substantially the same terms, including interest rates and maturities, as those prevailing at the time for comparable transactions with unrelated persons. The aggregate dollar amount of these deposits was $18,736,000 and $19,493,000 at December 31, 2001 and 2000, respectively.
NOTE H--BORROWINGS
United's subsidiary banks are members of the Federal Home Loan Bank (FHLB). Membership in the FHLB makes available short-term and long-term borrowings from collateralized advances. All FHLB borrowings are collateralized by a similar amount of single-family residential mortgage loans. At December 31, 2001, United had approximately $561,558,000 of additional available borrowings in the form of collateralized advances from the FHLB at prevailing interest rates.
At December 31, 2001, $55,000,000 of FHLB advances with an interest rate of 1.88% had an overnight maturity. Additionally, $681,455,000 of FHLB advances with a weighted average interest rate of 6.40% are scheduled to mature from one to twenty years. At December 31, 2001, the scheduled maturities of FHLB advances are as follows:
Year Amount -------- (Dollars in thousands) 2002 $ 56,118 2003 773 2004 13,785 2005 90,000 2006 and thereafter 575,779 --------
Total $736,455 ========
United also has various unused lines of credit available from certain of its correspondent banks in the aggregate amount of $201,500,000. These lines of credit, which bear interest at prevailing market rates, permit United to borrow funds in the overnight market, and are renewable annually subject to certain conditions.
NOTE H--BORROWINGS- continued
At December 31, 2001 and 2000, borrowings and the related weighted average interest rates were as follows:
2001 2000 ---------------------- ---------------------- Weighted Weighted (Dollars in thousands) Average Average Amount Rate Amount Rate ---------- -------- ---------- -------- Federal funds purchased $ 43,831 1.66% $ 15,720 6.55% Securities sold under agreements to repurchase 477,796 2.04% 313,349 5.16% FHLB advances 736,455 6.06% 706,512 6.30%
Mandatorily redeemable capital securities of subsidiary trust 8,800 10.88% Other 5,501 1.51% 4,647 5.72% ---------- ---------- Total $1,272,383 $1,040,228 ========== ==========
Information concerning securities sold under agreements to repurchase (in thousands) is summarized as follows:
2001 2000 -------- -------- Average balance during the year $390,545 $351,816 Average interest rate during the year 3.46% 5.32% Maximum month-end balance during the year $503,887 $417,866
NOTE I--TRUST PREFERRED SECURITIES
As part of the acquisition of Century, United assumed all the obligations of Century and its subsidiaries. One such subsidiary, Century Capital Trust I (the Trust) is a statutory business trust formed during the first quarter of 2000. The Trust issued $8.8 million of capital securities (the Capital Securities) to a third party and received net cash proceeds of $8.536 million after considering the underwriter's discount. The Trust invested the proceeds in an equivalent amount of junior subordinated debt securities of Century, now United, bearing an interest rate equal to the rate on the Capital Securities. These debt securities, which are the only assets of the Trust, are subordinate and junior in right of payment to all present and future senior indebtedness (as defined in the indenture) and certain other financial obligations of Century, now United. United fully and unconditionally guarantees the Trust's obligations under the Capital Securities.
For financial reporting purposes, the Trust is treated as a subsidiary of United and consolidated in the corporate financial statements. The Capital Securities are presented as a separate category of long-term debt on the Consolidated Balance Sheets entitled "Mandatorily redeemable capital securities of subsidiary trust." The Capital Securities are not included as a component of stockholders' equity in the Consolidated Balance Sheets. For regulatory purposes, the $8.8 million of Capital Securities are included in Tier 1 capital in accordance with regulatory reporting requirements.
The Capital Securities pay cash dividends semiannually at an annual rate of 10.875% of the liquidation preference. Dividends to the holders of the Capital Securities are included in the Consolidated Statements of Income as interest expense. Under the provisions of the subordinated debt, United has the right to defer payment of interest on the subordinated debt at any time, or from time to time, for periods not exceeding five
NOTE I--TRUST PREFERRED SECURITIES- continued
years. If interest payments on the subordinated debt are deferred, the dividends on the Capital Securities are also deferred. Interest on the subordinated debt is cumulative.
Subject to the prior approval of the Federal Reserve Board, the Capital Securities, the assets of the Trust, and the common securities issued by the Trust are redeemable at the option of United in whole or in part on or after March 8, 2010, or at any time, in whole but not in part, from the date of issuance, upon the occurrence of certain events.
NOTE J--INCOME TAXES
The income tax provisions included in the consolidated statements of income are summarized as follows:
(In thousands) Year Ended December 31 ---------------------------------------- 2001 2000 1999 -------- -------- -------- Current expense: Federal $ 40,585 $ 33,579 $ 36,424 State 1,412 1,590 2,825 Deferred benefit: Federal and State (3,258) (6,445) (4,475) -------- -------- -------- Income taxes $ 38,739 $ 28,724 $ 34,774 ======== ======== ========
The following is a reconciliation of income tax expense to the amount computed by applying the statutory federal income tax rate to income before income taxes:
NOTE J--INCOME TAXES - continued
Federal income tax benefit applicable to securities transactions in 2001 and 2000 approximated $181,000 and $4,852,000, respectively. Federal income tax expense applicable to securities transactions approximated $237,000 in 1999.
Income taxes paid approximated $31,576,000, $36,065,000 and $34,333,000 in 2001, 2000 and 1999, respectively.
Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes.
Significant components of United's deferred tax assets and liabilities (included in other assets) at December 31, 2001 and 2000 are as follows:
(In thousands) 2001 2000 ------- ------- Deferred tax assets: Allowance for loan losses $16,269 $14,060 Securities available for sale 2,898 Accrued benefits payable 1,524 1,497 Other accrued liabilities 5,114 4,315 Interest in securitization trust 473 6,499 Net operating loss carryforward 2,491 Other 2,408 2,335 ------- ------- Total deferred tax assets 28,279 31,604 ------- ------- Deferred tax liabilities: Premises and equipment 792 1,588 Purchase accounting intangibles 745 329 Income tax allowance for loan losses 462 717 Deferred mortgage points 2,480 2,177 Securities available for sale 2,307 Other 749 794 ------- ------- Total deferred tax liabilities 7,535 5,605 ------- ------- Net deferred tax assets $20,744 $25,999 ======= =======
NOTE K--EMPLOYEE BENEFIT PLANS
United has a defined benefit retirement plan covering substantially all employees. The benefits are based on years of service and the average of the employee's highest five consecutive plan years of basic compensation paid during the ten plan years preceding the date of determination. United's funding policy is to contribute annually the maximum amount that can be deducted for federal income tax purposes. Contributions are intended to provide not only for benefits attributed to service to date, but also for those expected to be earned in the future.
NOTE K--EMPLOYEE BENEFIT PLANS - continued
Net periodic pension cost included the following components:
(In thousands) Year Ended December 31, ----------------------------- 2001 2000 1999 ------- ------- ------- Service cost $ 1,426 $ 1,344 $ 1,448 Interest cost 2,179 2,050 1,725 Expected return on plan assets (4,420) (4,075) (2,749) Amortization of transition asset (131) (131) (131) Recognized net actuarial gain (1,045) (1,136) (222) Amortization of prior service cost 63 63 63 ------- ------- ------- Net periodic pension (benefit) cost ($1,928) ($1,885) $ 134 ======= ======= =======
A reconciliation of the changes in benefit obligation and plan assets for the defined benefit retirement plan is as follows:
(In thousands) December 31, -------------------- 2001 2000 -------- -------- Benefit obligation at beginning of year $ 26,922 $ 24,257
Service cost 1,426 1,344 Interest cost 2,179 2,050 Actuarial loss 3,133 243 Benefits paid (1,072) (972) -------- -------- Benefit obligation at end of year 32,588 26,922 -------- --------
Fair value of plan assets at beginning of year 45,846 41,060
Actual return on plan assets (8,200) 4,020 Employer contribution 1,738 Benefits paid (1,072) (972) -------- --------
Fair value of plan assets at end of year 36,574 45,846 -------- -------- Funded status 3,986 18,924
Unrecognized net actuarial gain 2,808 (13,991) Unrecognized prior service cost 72 136 Unrecognized net transition asset (169) (301) -------- --------
Pension asset $ 6,697 $ 4,768 ======== ========
At December 31, 2001 and 2000, the weighted average discount rate of 7.75% and 8.25%, respectively, and the rate of increase in future compensation levels of 5% for both years were used in determining the actuarial present value of the projected benefit obligation. The weighted-average expected long-term rate of return on United's plan assets was 9.75% for the years ended December 31, 2001 and 2000 and 9.0% for the year ended December 31, 1999. The benefit obligation at December 31, 2001 increased from December 31, 2000, due to changes in the obligation-related assumptions.
NOTE K--EMPLOYEE BENEFIT PLANS - continued
The United Savings and Stock Investment Plan (the Plan) is a deferred compensation plan under Section 401(k) of the Internal Revenue Code. All employees who complete one year of service are eligible to participate in the Plan. Each participant may contribute from 1% to 15% of pre-tax earnings to his or her account, which may be invested in any of four investment options chosen by the employee. United matches 100% of the first 2% of salary deferred and 25% of the next 2% of salary deferred with United common stock. Vesting is 100% for employee deferrals and the United match at the time the employee makes his/her deferral. United's expense relating to the Plan approximated $733,000, $906,000 and $1,166,000 in 2001, 2000 and 1999, respectively.
The assets of United's defined benefit plan and 401(k) Plan each include investments in United common stock. At December 31, 2001, the combined plan assets included 717,712 shares of United common stock with an approximate fair value of $20,713,000. Dividends paid on United common stock held by the plans approximated $658,000 for the year ended December 31, 2001.
United has certain other deferred compensation plans covering various key employees. Periodic charges are made to operations so that the present value of the liability due each employee is fully recorded as of the date of their retirement. Amounts charged to expense have not been significant in any year.
United has various incentive stock option plans for key employees that provide for the granting of stock options of up to 4,400,000 shares of common stock. At December 31, 2001, United had available 1,740,800 shares of common stock available for future grants to key employees. Under the provisions of the plans, the option price per share shall not be less than the fair market value of United's common stock on the date of grant. Accordingly, no compensation expense is recognized for these options.
The following table summarizes information about stock options outstanding at December 31, 2001:
NOTE K--EMPLOYEE BENEFIT PLANS - continued
The following is a summary of activity of United's Incentive Stock Option Plans:
Stock Range of Options Exercise Prices --------- --------------- Outstanding at January 1, 1999 1,632,291 $27.00 $2.98 Granted 227,800 25.63 Exercised 281,960 22.00 2.98 Forfeited 39,738 27.00 14.88 --------- Outstanding at December 31, 1999 1,538,393 27.00 2.98 Granted 230,400 19.19 Exercised 197,663 15.00 6.88 Forfeited 57,439 27.00 22.00 --------- Outstanding at December 31, 2000 1,513,691 27.00 2.98 Granted 259,200 27.12 Exercised 259,817 27.00 2.98 Assumed in acquisition of subsidiary 512,973 19.48 4.26 Forfeited 73,764 27.00 9.62 --------- Outstanding at December 31, 2001 1,952,283 $27.12 $4.26 ========= =============== Exercisable at: December 31, 1999 1,156,568 $27.00 $2.98 December 31, 2000 1,086,291 $27.00 $2.98 December 31, 2001 1,507,076 $27.00 $4.26
The following pro forma disclosures present United's net income and diluted earnings per share, determined as if United had recognized compensation expense for its employee stock options under the fair value method:
(Dollars in thousands, except per share) Year Ended December 31, --------------------------- 2001 2000 1999 ------- ------- ------- Pro forma net income $79,704 $58,379 $70,019 Pro forma diluted earnings per share $ 1.89 $ 1.38 $ 1.60
The estimated fair value of the options at the date of grant was $5.54, $3.83 and $5.64 for the options granted during 2001, 2000 and 1999 respectively. The fair value of the options was estimated at the date of grant using a Black-Scholes option pricing model with the following weighted average assumptions for 2001, 2000 and 1999, respectively: risk-free interest rates of 4.86%, 6.20% and 5.79%; dividend yields of 3.43%, 4.38%, and 3.43%; volatility factors of the expected market price of United's common stock of 0.217, 0.221 and 0.211; and a weighted-average expected option life of 7 years.
United provides postemployment and postretirement benefits for certain employees at subsidiaries acquired in prior years. United accounts for such costs as expense when paid. Accounting for such costs when paid does not produce results materially different from those that would result if such costs were accrued during the period of employee service. United does not anticipate providing postemployment or postretirement benefits to its currently active employees after employment or retirement except on a fully contributory basis.
NOTE L--COMMITMENTS AND CONTINGENT LIABILITIES
United is a party to financial instruments with off-balance-sheet risk in the normal course of business to meet the financing needs of its customers and to alter its own exposure to fluctuations in interest rates. These financial instruments include loan commitments, standby letters of credit, forward contracts for the delivery of mortgage-backed securities and interest rate swap agreements. The instruments involve, to varying degrees, elements of credit and interest rate risk in excess of the amount recognized in the financial statements.
United's maximum exposure to credit loss in the event of nonperformance by the counterparty to the financial instrument for the loan commitments and standby letters of credit is the contractual or notional amount of those instruments. United uses the same policies in making commitments and conditional obligations as it does for on-balance sheet instruments.
Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the commitment contract. Commitments generally have fixed expiration dates or other termination clauses and may require the payment of a fee. Since many of the commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. The amount of collateral obtained, if deemed necessary upon the extension of credit, is based on management's credit evaluation of the counterparty. United had approximately $937,933,000 and $1,086,455,000 of loan commitments outstanding as of December 31, 2001 and 2000, respectively, substantially all of which expire within one year.
Commercial and standby letters of credit are agreements used by United's customers as a means of improving their credit standing in their dealings with others. Under these agreements, United guarantees certain financial commitments of its customers. United has issued commercial and standby letters of credit of $103,446,000 and $89,013,000 as of December 31, 2001 and 2000, respectively.
In the normal course of business, United and its subsidiaries are currently involved in various legal proceedings. Management is vigorously pursuing all its legal and factual defenses and, after consultation with legal counsel, believes that all such litigation will be resolved with no material effect on United's financial position.
NOTE M - UNITED BANKSHARES, INC. (PARENT COMPANY ONLY) FINANCIAL INFORMATION
Condensed Balance Sheets
(In thousands) December 31 -------------------- 2001 2000 -------- -------- Assets Cash and due from banks $ 14,458 $ 3,719 Securities available for sale 8,199 9,002 Securities held to maturity 6,855 6,859 Loans 5,700 6,905 Investment in subsidiaries: Bank subsidiaries 494,216 411,367 Non-bank subsidiaries 1,414 1,446 Other assets 1,017 1,435 -------- --------
Total Assets $531,859 $440,733 ======== ========
Liabilities and Shareholders' Equity Line of credit from banking subsidiary $ 8,000 $ 5,000 Accrued expenses and other liabilities 17,330 4,863 Shareholders' equity (including other accumulated comprehensive gain of $4,351 at December 31, 2001 and other accumulated comprehensive loss of $4,964 at December 31, 2000) 506,529 430,870 -------- --------
Total Liabilities and Shareholders' Equity $531,859 $440,733 ======== ========
Condensed Statements of Income
(In thousands) Year Ended December 31 ----------------------------- 2001 2000 1999 -------- ------- ------- Income Dividends from banking subsidiaries $ 71,000 $45,500 $40,352 Net interest income 1,015 1,074 1,668 Management fees: Bank subsidiaries 4,019 4,130 4,146 Non-bank subsidiaries 12 12 12 Other income 13 2,188 1,489 -------- ------- -------
Total Income 76,059 52,904 47,667 -------- ------- -------
Expenses Interest paid to banking subsidiary 223 372 6 Operating expenses 5,384 4,615 4,698 -------- ------- ------- Income Before Income Taxes and Equity in Undistributed Net Income of Subsidiaries 70,452 47,917 42,963 Applicable income tax (benefit) expense (178) 798 853 -------- ------- ------- Income Before Equity in Undistributed Net Income (loss) of Subsidiaries 70,630 47,119 42,110 Equity in undistributed net income (loss) of subsidiaries: Bank subsidiaries 9,392 11,795 28,102 Non-bank subsidiaries (31) 62 36 -------- ------- -------
Net Income $ 79,991 $58,976 $70,248 ======== ======= =======
NOTE M - UNITED BANKSHARES, INC. (PARENT COMPANY ONLY) FINANCIAL INFORMATION - continued
Condensed Statements of Cash Flows
NOTE N--OTHER EXPENSE
The following details certain items of other expense for the periods indicated:
Year Ended December 31 ------------------------ (In thousands) 2001 2000 1999 ------ ------ ------
Other expense: Data processing $3,488 $3,153 $3,175 Legal and consulting 2,739 3,923 1,709 Advertising 2,186 2,803 2,702 Goodwill amortization 3,287 3,266 3,279 Equipment expense 7,535 7,589 8,896
NOTE O--REGULATORY MATTERS
The subsidiary banks are required to maintain average reserve balances with their respective Federal Reserve Bank. The average amount of those reserve balances for the year ended December 31, 2001, was approximately $49,133,000.
The primary source of funds for the dividends paid by United Bankshares, Inc. to its shareholders is dividends received from its subsidiary banks. Dividends paid by United's subsidiary banks are subject to certain regulatory limitations. Generally, the most restrictive provision requires regulatory approval if dividends declared in any year exceed that year's net income, as defined, plus the retained net profits of the two preceding years.
During 2002, the subsidiary banks of United will need regulatory approval to pay dividends to the parent company for distribution to its shareholders.
Under Federal Reserve regulation, the banking subsidiaries are also limited as to the amount they may loan to affiliates, including the parent company. Loans from the banking subsidiaries to the parent company are limited to 10% of the banking subsidiaries' capital and surplus, as defined, or $23,703,000 at December 31, 2001, and must be secured by qualifying collateral.
United's subsidiary banks are subject to various regulatory capital requirements administered by federal banking agencies. Pursuant to capital adequacy guidelines, United's subsidiary banks must meet specific capital guidelines that involve various quantitative measures of the banks' assets, liabilities, and certain off-balance-sheet items as calculated under regulatory accounting practices. United's subsidiary banks' capital amounts and classifications are also subject to qualitative judgments by the regulators about components, risk weightings, and other factors.
Quantitative measures established by regulation to ensure capital adequacy require United to maintain minimum amounts and ratios of total and Tier I capital, as defined in the regulations, to risk-weighted assets, as defined, and of Tier I capital, as defined, to average assets, as defined. At of December 31, 2001, United exceeds all capital adequacy requirements to which it is subject.
At December 31, 2001, the most recent notification from its regulators, United and its subsidiary banks were categorized as well capitalized. To be categorized as well capitalized, United must maintain minimum total risk-based, Tier I risk-based, and Tier I leverage ratios as set forth in the following table. There are no conditions or events since that notification that management believes would impact United's well-capitalized status.
NOTE O--REGULATORY MATTERS - continued
United's and its subsidiary banks' (United National Bank and United Bank) capital amounts (in thousands of dollars) and ratios are presented in the following table.
NOTE P--FAIR VALUES OF FINANCIAL INSTRUMENTS
The following methods and assumptions were used by United in estimating its fair value disclosures for financial instruments:
Cash and Cash Equivalents: The carrying amounts reported in the balance sheet - -------------------------- for cash and cash equivalents approximate those assets' fair values.
Securities: The estimated fair values of securities are based on quoted market - ----------- prices, where available. If quoted market prices are not available, fair values are based on quoted market prices of comparable instruments.
NOTE P--FAIR VALUES OF FINANCIAL INSTRUMENTS - continued
Loans: The estimated fair values of variable-rate loans that reprice frequently - ----- with no significant change in credit risk are based on carrying values. The fair values of certain mortgage loans (e.g., one-to-four family residential), credit card loans, and other consumer loans are based on quoted market prices of similar loans sold in conjunction with securitization transactions, adjusted for differences in loan characteristics. The fair values of other loans (e.g., commercial real estate and rental property mortgage loans, commercial and industrial loans, financial institution loans and agricultural loans) are estimated using discounted cash flow analyses, using interest rates currently being offered for loans with similar terms to borrowers of similar credit worthiness. The estimated fair value of loans held for sale is based upon the market price of similar loans which is not materially different than cost due to the short time duration between origination and sale.
Derivative Financial Instruments: The estimated fair value of derivative - -------------------------------- financial instruments is based upon the current market price for similar instruments.
Off-Balance Sheet Instruments: Fair values of United's loan commitments are - ----------------------------- based on fees currently charged to enter into similar agreements, taking into account the remaining terms of the agreements and the counterparties' credit standing. The estimated fair values of these commitments approximate their carrying values.
Deposits: The fair values of demand deposits (e.g., interest and noninterest - -------- checking, regular savings and certain types of money market accounts) are, by definition, equal to the amount payable on demand at the reporting date (i.e., their carrying amounts). The carrying amounts of variable-rate, fixed-term money market accounts and certificates of deposit approximate their fair values at the reporting date. Fair values of fixed-rate certificates of deposit are estimated using a discounted cash flow calculation that applies interest rates currently being offered on certificates to a schedule of aggregated expected monthly maturities on time deposits.
Short-term Borrowings: The carrying amounts of federal funds purchased, - --------------------- borrowings under repurchase agreements and other short-term borrowings approximate their fair values.
Long-term Borrowings: The fair values of United's Federal Home Loan Bank - -------------------- borrowings and Trust Preferred securities are estimated using discounted cash flow analyses, based on United's current incremental borrowing rates for similar types of borrowing arrangements.
The estimated fair values of United's financial instruments are summarized below:
NOTE Q--SEGMENT INFORMATION
The following information is based on United's current management structure and presents results of operations as if the community banking and mortgage banking segments were operated on a stand-alone basis. The results are not necessarily comparable with similar information of other companies.
NOTE R - QUARTERLY FINANCIAL DATA (UNAUDITED)
Quarterly financial data for 2001 and 2000 is summarized below (dollars in thousands except for per share data):
(1) For further information see the related discussion "Quarterly Results" included in Management's Discussion and Analysis.