10-Q
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
FORM 10-Q
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þ |
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Quarterly Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934 |
For Quarter Ended September 30, 2007
Or
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o |
|
Transition Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934 |
For the transition period
Commission File Number: 0-13322
United Bankshares, Inc.
(Exact name of registrant as specified in its charter)
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West Virginia
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55-0641179 |
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(State or other jurisdiction of
incorporation or organization)
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(I.R.S. Employer
Identification No.) |
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300 United Center
500 Virginia Street, East
Charleston, West Virginia
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25301 |
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(Address of Principal Executive Offices)
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Zip Code |
Registrants Telephone Number, including Area Code: (304) 424-8800
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for
such shorter period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days.
Yes þ No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer,
or a non-accelerated filer. See definition of accelerated and large accelerated filer in Rule
12b-2 of the Exchange Act. (Check one):
Large accelerated filer þ Accelerated Filer o Non-accelerated Filer o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the
Exchange Act.)
Yes o No þ
Indicate the number of shares outstanding of each of the issuers classes of common stock, as of
the latest practicable date.
Class Common Stock, $2.50 Par Value; 43,212,399 shares outstanding as of October 31, 2007.
UNITED BANKSHARES, INC. AND SUBSIDIARIES
FORM 10-Q
TABLE OF CONTENTS
2
PART I FINANCIAL INFORMATION
Item 1. FINANCIAL STATEMENTS (UNAUDITED)
The September 30, 2007 and December 31, 2006, consolidated balance sheets of United Bankshares,
Inc. and Subsidiaries (United or the Company), consolidated statements of income for the three
and nine months ended September 30, 2007 and 2006, the related consolidated statement of changes in
shareholders equity for the nine months ended September 30, 2007, the related condensed
consolidated statements of cash flows for the nine months ended September 30, 2007 and 2006, and the notes to
consolidated financial statements appear on the following pages.
3
CONSOLIDATED BALANCE SHEETS
UNITED BANKSHARES, INC. AND SUBSIDIARIES
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September 30 |
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December 31 |
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2007 |
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2006 |
|
(Dollars in thousands, except par value) |
|
(Unaudited) |
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|
(Note 1) |
|
Assets |
|
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|
|
|
|
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Cash and due from banks |
|
$ |
167,228 |
|
|
$ |
217,562 |
|
Interest-bearing deposits with other banks |
|
|
24,789 |
|
|
|
22,882 |
|
Federal funds sold |
|
|
12,444 |
|
|
|
18,569 |
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|
|
|
|
|
|
|
Total cash and cash equivalents |
|
|
204,461 |
|
|
|
259,013 |
|
Securities available for sale at estimated fair value
(amortized cost-$1,102,410 at September 30, 2007 and
$1,016,840 at December 31, 2006) |
|
|
1,098,548 |
|
|
|
1,010,252 |
|
Securities held to maturity (estimated fair value-$158,350 at
September 30, 2007 and $215,678 at December 31, 2006) |
|
|
158,252 |
|
|
|
212,296 |
|
Other investment securities |
|
|
66,469 |
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|
|
52,922 |
|
Loans held for sale |
|
|
954 |
|
|
|
2,041 |
|
Loans |
|
|
5,593,245 |
|
|
|
4,813,708 |
|
Less: Unearned income |
|
|
(6,919 |
) |
|
|
(6,961 |
) |
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|
|
|
|
|
|
Loans net of unearned income |
|
|
5,586,326 |
|
|
|
4,806,747 |
|
Less: Allowance for loan losses |
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|
(50,353 |
) |
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|
(43,629 |
) |
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|
|
|
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Net loans |
|
|
5,535,973 |
|
|
|
4,763,118 |
|
Bank premises and equipment |
|
|
62,026 |
|
|
|
38,111 |
|
Goodwill |
|
|
312,857 |
|
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|
167,421 |
|
Accrued interest receivable |
|
|
38,835 |
|
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|
34,508 |
|
Other assets |
|
|
207,313 |
|
|
|
177,916 |
|
|
|
|
|
|
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TOTAL ASSETS |
|
$ |
7,685,688 |
|
|
$ |
6,717,598 |
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|
|
|
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|
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Liabilities |
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Deposits: |
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Noninterest-bearing |
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$ |
874,696 |
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$ |
903,207 |
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Interest-bearing |
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4,471,530 |
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3,924,985 |
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|
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Total deposits |
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5,346,226 |
|
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4,828,192 |
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Borrowings: |
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|
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|
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Federal funds purchased |
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|
78,405 |
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|
|
97,720 |
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Securities sold under agreements to repurchase |
|
|
575,206 |
|
|
|
460,858 |
|
Federal Home Loan Bank borrowings |
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|
643,672 |
|
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|
533,899 |
|
Other short-term borrowings |
|
|
2,007 |
|
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|
3,688 |
|
Other long-term borrowings |
|
|
206,459 |
|
|
|
85,301 |
|
Allowance for lending-related commitments |
|
|
8,264 |
|
|
|
8,742 |
|
Accrued expenses and other liabilities |
|
|
70,180 |
|
|
|
65,106 |
|
|
|
|
|
|
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TOTAL LIABILITIES |
|
|
6,930,419 |
|
|
|
6,083,506 |
|
Shareholders Equity |
|
|
|
|
|
|
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|
Common stock, $2.50 par value; Authorized-100,000,000
shares; issued-44,320,832 at September 30, 2007 and December
31, 2006, including 1,138,504 and 3,261,931 shares in
treasury at September 30, 2007 and December 31, 2006,
respectively |
|
|
110,802 |
|
|
|
110,802 |
|
Surplus |
|
|
99,145 |
|
|
|
93,680 |
|
Retained earnings |
|
|
598,770 |
|
|
|
559,257 |
|
Accumulated other comprehensive loss |
|
|
(13,904 |
) |
|
|
(15,791 |
) |
Treasury stock, at cost |
|
|
(39,544 |
) |
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|
(113,856 |
) |
|
|
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|
|
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TOTAL SHAREHOLDERS EQUITY |
|
|
755,269 |
|
|
|
634,092 |
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|
|
|
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TOTAL LIABILITIES AND SHAREHOLDERS EQUITY |
|
$ |
7,685,688 |
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|
$ |
6,717,598 |
|
|
|
|
|
|
|
|
See notes to consolidated unaudited financial statements.
4
CONSOLIDATED STATEMENTS OF INCOME (Unaudited)
UNITED BANKSHARES, INC. AND SUBSIDIARIES
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Three Months Ended |
|
Nine Months Ended |
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|
September 30 |
|
September 30 |
(Dollars in thousands, except per share data) |
|
2007 |
|
2006 |
|
2007 |
|
2006 |
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|
Interest income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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Interest and fees on loans |
|
$ |
99,240 |
|
|
$ |
84,288 |
|
|
$ |
267,111 |
|
|
$ |
242,537 |
|
Interest on federal funds sold and other short-term
investments |
|
|
876 |
|
|
|
515 |
|
|
|
1,980 |
|
|
|
1,235 |
|
Interest and dividends on securities: |
|
|
|
|
|
|
|
|
|
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|
|
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|
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|
Taxable |
|
|
13,832 |
|
|
|
13,934 |
|
|
|
40,446 |
|
|
|
43,371 |
|
Tax-exempt |
|
|
3,361 |
|
|
|
3,698 |
|
|
|
10,096 |
|
|
|
11,334 |
|
|
|
|
|
|
Total interest income |
|
|
117,309 |
|
|
|
102,435 |
|
|
|
319,633 |
|
|
|
298,477 |
|
|
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|
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|
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|
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|
|
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Interest expense |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest on deposits |
|
|
40,176 |
|
|
|
32,312 |
|
|
|
107,574 |
|
|
|
84,807 |
|
Interest on short-term borrowings |
|
|
8,220 |
|
|
|
7,142 |
|
|
|
22,846 |
|
|
|
23,029 |
|
Interest on long-term borrowings |
|
|
9,801 |
|
|
|
8,052 |
|
|
|
24,619 |
|
|
|
25,111 |
|
|
|
|
|
|
Total interest expense |
|
|
58,197 |
|
|
|
47,506 |
|
|
|
155,039 |
|
|
|
132,947 |
|
|
|
|
|
|
Net interest income |
|
|
59,112 |
|
|
|
54,929 |
|
|
|
164,594 |
|
|
|
165,530 |
|
Provision for credit losses |
|
|
1,550 |
|
|
|
571 |
|
|
|
2,750 |
|
|
|
1,169 |
|
|
|
|
|
|
Net interest income after provision for credit losses |
|
|
57,562 |
|
|
|
54,358 |
|
|
|
161,844 |
|
|
|
164,361 |
|
Other income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fees from trust and brokerage services |
|
|
3,788 |
|
|
|
3,190 |
|
|
|
11,097 |
|
|
|
9,857 |
|
Fees from deposit services |
|
|
9,087 |
|
|
|
7,367 |
|
|
|
24,134 |
|
|
|
21,575 |
|
Other service charges, commissions, and fees |
|
|
2,285 |
|
|
|
1,785 |
|
|
|
5,769 |
|
|
|
5,202 |
|
Income from bank-owned life insurance |
|
|
1,179 |
|
|
|
1,181 |
|
|
|
3,965 |
|
|
|
3,285 |
|
Income from mortgage banking |
|
|
124 |
|
|
|
236 |
|
|
|
447 |
|
|
|
615 |
|
Security gains (losses) |
|
|
172 |
|
|
|
(134 |
) |
|
|
494 |
|
|
|
(3,071 |
) |
(Loss) Gain on termination of interest rate swaps associated
with prepayment of FHLB advances |
|
|
|
|
|
|
(7,659 |
) |
|
|
787 |
|
|
|
(4,599 |
) |
Other income |
|
|
691 |
|
|
|
248 |
|
|
|
2,074 |
|
|
|
1,437 |
|
|
|
|
|
|
Total other income |
|
|
17,326 |
|
|
|
6,214 |
|
|
|
48,767 |
|
|
|
34,301 |
|
Other expense |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Salaries and employee benefits |
|
|
17,452 |
|
|
|
15,740 |
|
|
|
46,830 |
|
|
|
46,789 |
|
Net occupancy expense |
|
|
3,823 |
|
|
|
3,031 |
|
|
|
10,393 |
|
|
|
9,458 |
|
Equipment expense |
|
|
2,059 |
|
|
|
1,567 |
|
|
|
4,867 |
|
|
|
4,599 |
|
Data processing expense |
|
|
2,448 |
|
|
|
1,477 |
|
|
|
6,401 |
|
|
|
4,428 |
|
Bankcard processing expense |
|
|
1,445 |
|
|
|
1,257 |
|
|
|
3,857 |
|
|
|
3,507 |
|
Prepayment penalties on FHLB advance |
|
|
|
|
|
|
8,261 |
|
|
|
786 |
|
|
|
8,261 |
|
Other expense |
|
|
11,795 |
|
|
|
8,881 |
|
|
|
29,879 |
|
|
|
27,523 |
|
|
|
|
|
|
Total other expense |
|
|
39,022 |
|
|
|
40,214 |
|
|
|
103,013 |
|
|
|
104,565 |
|
|
|
|
|
|
Income before income taxes |
|
|
35,866 |
|
|
|
20,358 |
|
|
|
107,598 |
|
|
|
94,097 |
|
Income taxes |
|
|
10,063 |
|
|
|
6,193 |
|
|
|
32,876 |
|
|
|
29,863 |
|
|
|
|
|
|
Net income |
|
$ |
25,803 |
|
|
$ |
14,165 |
|
|
$ |
74,722 |
|
|
$ |
64,234 |
|
|
|
|
|
|
Earnings per common share: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
|
$ |
0.60 |
|
|
$ |
0.34 |
|
|
$ |
1.80 |
|
|
$ |
1.54 |
|
|
|
|
|
|
Diluted |
|
$ |
0.60 |
|
|
$ |
0.34 |
|
|
$ |
1.79 |
|
|
$ |
1.53 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dividends per common share |
|
$ |
0.28 |
|
|
$ |
0.27 |
|
|
$ |
0.84 |
|
|
$ |
0.81 |
|
|
|
|
|
|
Average outstanding shares: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
|
|
42,731,909 |
|
|
|
41,373,945 |
|
|
|
41,458,388 |
|
|
|
41,658,678 |
|
Diluted |
|
|
42,998,484 |
|
|
|
41,775,111 |
|
|
|
41,811,493 |
|
|
|
42,075,862 |
|
See notes to consolidated unaudited financial statements.
5
CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS EQUITY (Unaudited)
UNITED BANKSHARES, INC. AND SUBSIDIARIES
|
|
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|
|
|
|
|
|
|
|
|
|
|
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|
|
|
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|
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|
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|
Nine Months Ended September 30, 2007 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated |
|
|
|
|
|
|
|
|
Common Stock |
|
|
|
|
|
|
|
|
|
Other |
|
|
|
|
|
Total |
|
|
|
|
|
|
Par |
|
|
|
|
|
Retained |
|
Comprehensive |
|
Treasury |
|
Shareholders |
(Dollars in thousands, except per share data) |
|
Shares |
|
Value |
|
Surplus |
|
Earnings |
|
Income (Loss) |
|
Stock |
|
Equity |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at January 1, 2007 |
|
|
44,320,832 |
|
|
$ |
110,802 |
|
|
$ |
93,680 |
|
|
$ |
559,257 |
|
|
|
($15,791 |
) |
|
|
($113,856 |
) |
|
$ |
634,092 |
|
Cumulative effect of adopting FASB
Interpretation No. 48 (FIN 48),
Accounting for Uncertainty in
Income Taxes, an interpretation of
FASB Statement No. 109, at January
1, 2007 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(300 |
) |
|
|
|
|
|
|
|
|
|
|
(300 |
) |
Comprehensive income: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
74,722 |
|
|
|
|
|
|
|
|
|
|
|
74,722 |
|
Other comprehensive income, net of tax: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized gain on securities of $2,091
net of reclassification
adjustment for gains included
in net income of $321 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,770 |
|
|
|
|
|
|
|
1,770 |
|
Unrealized loss on cash flow hedge, net
of tax of $1,600 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(2,972 |
) |
|
|
|
|
|
|
(2,972 |
) |
Termination of cash flow hedge, net of
tax of $1,033 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,919 |
|
|
|
|
|
|
|
1,919 |
|
Remaining unrealized loss related to the
call of securities previously
transferred from available for sale
to held to maturity investment
portfolio |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
778 |
|
|
|
|
|
|
|
778 |
|
Accretion of the unrealized loss for
securities transferred from the
available for sale to the held to
maturity investment portfolio |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
203 |
|
|
|
|
|
|
|
203 |
|
Pension plans amortization of
transition asset, prior service cost,
and actuarial loss, net of tax of
$125 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
189 |
|
|
|
|
|
|
|
189 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
76,609 |
|
Acquisition of Premier Community Bankshares,
Inc. (2,684,068 shares) |
|
|
|
|
|
|
|
|
|
|
8,443 |
|
|
|
|
|
|
|
|
|
|
|
93,707 |
|
|
|
102,150 |
|
Purchase of treasury stock
(746,472 shares) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(25,869 |
) |
|
|
(25,869 |
) |
Distribution of treasury stock for deferred
compensation plan (2,000 shares) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
59 |
|
|
|
59 |
|
Cash dividends ($0.84 per share) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(34,909 |
) |
|
|
|
|
|
|
|
|
|
|
(34,909 |
) |
Common stock options exercised (183,831 shares) |
|
|
|
|
|
|
|
|
|
|
(2,978 |
) |
|
|
|
|
|
|
|
|
|
|
6,415 |
|
|
|
3,437 |
|
|
|
|
Balance at September 30, 2007 |
|
|
44,320,832 |
|
|
$ |
110,802 |
|
|
$ |
99,145 |
|
|
$ |
598,770 |
|
|
|
($13,904 |
) |
|
|
($39,544 |
) |
|
$ |
755,269 |
|
|
|
|
See notes to consolidated unaudited financial statements
6
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
UNITED BANKSHARES, INC. AND SUBSIDIARIES
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended |
|
|
September 30 |
(Dollars in thousands) |
|
2007 |
|
2006 |
|
|
|
|
|
|
|
|
|
|
|
|
NET CASH PROVIDED BY OPERATING ACTIVITIES |
|
$ |
67,820 |
|
|
$ |
54,453 |
|
|
|
|
|
|
|
|
|
|
INVESTING ACTIVITIES |
|
|
|
|
|
|
|
|
Proceeds from maturities and calls of securities held to maturity |
|
|
56,287 |
|
|
|
13,672 |
|
Proceeds from sales of securities held to maturity |
|
|
475 |
|
|
|
|
|
Purchases of securities held to maturity |
|
|
(445 |
) |
|
|
(587 |
) |
Proceeds from sales of securities available for sale |
|
|
9,587 |
|
|
|
135,381 |
|
Proceeds from maturities and calls of securities available for sale |
|
|
493,245 |
|
|
|
277,647 |
|
Purchases of securities available for sale |
|
|
(558,412 |
) |
|
|
(222,645 |
) |
Net purchases of bank premises and equipment |
|
|
(2,107 |
) |
|
|
(2,391 |
) |
Net cash of acquired subsidiary |
|
|
(35,778 |
) |
|
|
|
|
Net change in other investment securities |
|
|
(8,978 |
) |
|
|
9,545 |
|
Net change in loans |
|
|
(32,141 |
) |
|
|
(103,046 |
) |
|
|
|
NET CASH (USED IN) PROVIDED BY INVESTING ACTIVITIES |
|
|
(78,267 |
) |
|
|
107,576 |
|
|
|
|
|
|
|
|
|
|
|
|
|
FINANCING ACTIVITIES |
|
|
|
|
|
|
|
|
Cash dividends paid |
|
|
(34,335 |
) |
|
|
(33,907 |
) |
Excess tax benefits from stock-based compensation arrangements |
|
|
796 |
|
|
|
499 |
|
Acquisition of treasury stock |
|
|
(24,885 |
) |
|
|
(36,503 |
) |
Net proceeds from issuance of trust preferred securities |
|
|
82,475 |
|
|
|
|
|
Proceeds from exercise of stock options |
|
|
2,416 |
|
|
|
5,561 |
|
Distribution of treasury stock for deferred compensation plan |
|
|
59 |
|
|
|
35 |
|
Proceeds from long-term Federal Home Loan Bank borrowings |
|
|
333,900 |
|
|
|
200,000 |
|
Repayment of long-term Federal Home Loan Bank borrowings |
|
|
(234,127 |
) |
|
|
(252,067 |
) |
Changes in: |
|
|
|
|
|
|
|
|
Deposits |
|
|
(198,834 |
) |
|
|
133,103 |
|
Federal funds purchased, securities sold under agreements
to repurchase and other short-term borrowings |
|
|
28,430 |
|
|
|
(214,176 |
) |
|
|
|
NET CASH USED IN FINANCING ACTIVITIES |
|
|
(44,105 |
) |
|
|
(197,455 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
Decrease in cash and cash equivalents |
|
|
(54,552 |
) |
|
|
(35,426 |
) |
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at beginning of year |
|
|
259,013 |
|
|
|
207,962 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at end of period |
|
$ |
204,461 |
|
|
$ |
172,536 |
|
|
|
|
See notes to consolidated unaudited financial statements.
7
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
UNITED BANKSHARES, INC. AND SUBSIDIARIES
1. GENERAL
The accompanying unaudited consolidated interim financial statements of United Bankshares, Inc. and
Subsidiaries (United) have been prepared in accordance with accounting principles for interim
financial information generally accepted in the United States and with the instructions for Form
10-Q and Article 10 of Regulation S-X. Accordingly, the financial statements do not contain all of
the information and footnotes required by 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. The financial statements
presented as of September 30, 2007 and 2006 and for the three-month and nine-month periods then
ended have not been audited. The consolidated balance sheet as of December 31, 2006 has been
extracted from the audited financial statements included in Uniteds 2006 Annual Report to
Shareholders. The accounting and reporting policies followed in the presentation of these
financial statements are consistent with those applied in the preparation of the 2006 Annual Report
of United on Form 10-K. In the opinion of management, all adjustments necessary for a fair
presentation of financial position and results of operations for the interim periods have been
made. Such adjustments are of a normal and recurring nature.
The accompanying consolidated interim financial statements include the accounts of United and its
wholly owned subsidiaries. United considers all of its principal business activities to be bank
related. All significant intercompany accounts and transactions have been eliminated in the
consolidated financial statements. Dollars are in thousands, except per share and share data.
New Accounting Standards
In February 2007, the Financial Standards Board (FASB) issued Statement No. 159 (SFAS 159), The
Fair Value Option for Financial Assets and Financial Liabilities which provides companies with an
option to report selected financial assets and liabilities at fair value. With this Standard, the
FASB expects to reduce both the complexity in accounting for financial instruments and the
volatility in earnings caused by measuring related assets and liabilities differently. SFAS 159
also establishes presentation and disclosure requirements designed to facilitate the comparisons
between companies that choose different measurement attributes for similar types of assets and
liabilities. The Statement does not eliminate disclosure requirements included in accounting
standards. SFAS 159 is effective for financial statements issued for fiscal years beginning after
November 15, 2007. United does not expect that the adoption of this statement will have a material
impact on its consolidated financial statements.
In September 2006, the FASB published Statement No. 158 (SFAS 158), Employers Accounting for
Defined Benefit Pension and Other Postretirement Plans, an amendment of FASB Statements No. 87,
88, 106, and 132(R). SFAS 158 requires employers to recognize in their statement of financial
position an asset for a plans overfunded status or a liability for a plans underfunded status.
United is also required to recognize fluctuations in the funded status in the year in which the
changes occur through comprehensive
8
income. United adopted the recognition and disclosure provisions of SFAS 158 on December 31, 2006.
See Note 13 for additional information regarding Uniteds adoption of SFAS 158. SFAS also
requires employers to measure the funded status of a plan as of the end of the employers fiscal
year, with limited exceptions, and will be effective for United for the fiscal year ending December
31, 2008.
In September 2006, the FASB also issued Statement No. 157 (SFAS 157), Fair Value Measurements
which provides enhanced guidance for using fair value to measure assets and liabilities. SFAS 157
defines fair value, establishes a framework for measuring fair value in generally accepted
accounting principles (GAAP), and expands disclosures about fair value measurements. SFAS 157 is
effective for financial statements issued for fiscal years beginning after November 15, 2007, with
earlier adoption permitted. United is currently assessing the impact this statement will have on
its consolidated financial statements.
In July 2006, the FASB issued FASB Interpretation (FIN) No. 48 (FIN 48), Accounting for
Uncertainty in Income Taxes, to address the noncomparability in reporting tax assets and
liabilities resulting from a lack of specific guidance in FASB Statement No. 109 (SFAS 109),
Accounting for Income Taxes, on the uncertainty in income taxes recognized in an enterprises
financial statements. United has adopted FIN 48 as of January 1, 2007, as required. The cumulative
effect of adopting FIN 48 was recorded in retained earnings. The adoption of FIN 48 did not have a
significant impact on Uniteds consolidated financial statements. See Note 14 for additional
information regarding Uniteds adoption of FIN 48.
In March 2006, the FASB issued Statement No. 156 (SFAS 156), Accounting for Servicing of Financial
Assets. SFAS 156 amends SFAS No. 140, Accounting for Transfers and Servicing of Financial Assets
and Extinguishments of Liabilities. SFAS 156 permits, but does not require, an entity to choose
either the amortization method or the fair value measurement method for measuring each class of
separately recognized servicing assets and servicing liabilities. SFAS 156 was effective for United
on January 1, 2007. The implementation of SFAS 156 did not have a material impact on Uniteds
consolidated financial statements.
In February 2006, the FASB issued Statement No. 155 (SFAS 155), Accounting for Certain Hybrid
Financial Instruments-an amendment of FASB Statements No. 133 and 140. SFAS 155 amends SFAS No.
133, Accounting for Derivative Instruments and Hedging Activities, to permit fair value
remeasurement for any hybrid financial instrument with an embedded derivative that otherwise would
require bifurcation, provided that the whole instrument is accounted for on a fair value basis.
SFAS 155 amends SFAS No. 140, Accounting for the Impairment or Disposal of Long-Lived Assets, to
allow a qualifying special-purpose entity (SPE) to hold a derivative financial instrument that
pertains to a beneficial interest other than another derivative financial instrument. United
adopted SFAS 155 on January 1, 2007, as required. Its implementation did not have a material
impact on Uniteds consolidated financial statements.
On January 1, 2006, United adopted FASB Statement No. 123revised 2004 (SFAS 123R), ''Share-Based
Payment which replaced Statement of Financial Accounting Standards No. 123 (SFAS 123),
Accounting for Stock-Based Compensation and superseded APB Opinion No. 25 (APB 25), ''Accounting
for Stock Issued to Employees and amended FASB Statement No. 95, Statement of Cash Flows. Under
this transition method, compensation cost to be recognized beginning in the first quarter of 2006
would include: (a) compensation cost for all share-based payments granted prior to, but not yet
vested as of January 1, 2006,
9
based on the grant-date fair value estimated in accordance with the
original provision of SFAS 123, and (b) compensation cost for all share-based payments granted
subsequent to January 1, 2006, based on the grant-date fair value estimated in accordance with the provisions of SFAS 123R. Results for prior
periods were not restated. Due to modification on December 30, 2005 to accelerate unvested options
under Uniteds existing stock option plans and the fact that no new options were granted in 2006
and the first nine months of 2007, United did not recognize any compensation cost for 2006 and the
first nine months of 2007. See Note 12 for additional information regarding Uniteds adoption of
SFAS 123R.
2. MERGERS & ACQUISITIONS
At the opening of business on July 14, 2007, United acquired 100% of the outstanding common stock
of Premier Community Bankshares, Inc. (Premier) of Winchester, Virginia. The results of
operations of Premier, which are not significant, are included in the consolidated results of
operations from the date of acquisition. Because the results of operations of Premier are not significant,
pro forma information is not being provided. The acquisition of Premier expands Uniteds presence in
the rapidly growing and economically attractive Metro DC area and affords United the opportunity to
enter new Virginia markets in the Winchester, Harrisonburg and Charlottesville areas.
At consummation, Premier had assets of approximately $911 million, loans of $759 million, deposits
of $716 million and shareholders equity of $71 million. Premiers net income was $1.8 million or
31¢ per diluted share for the second quarter of 2007 and $3.6 million or 60¢ per diluted share for
the first half of 2007. The transaction was accounted for under the purchase method of accounting.
The aggregate purchase price was approximately $200 million, including $98 million of cash, common
stock valued at $97 million, and vested stock options exchanged valued at $5 million. The number of
shares issued in the transaction were 2,684,068, which were valued based on the average market
price of Uniteds common shares over the period including the two days before and after the terms
of the acquisition were agreed to and announced. The value of the vested stock options was
determined using the Black-Scholes option pricing model based upon 241,428 options exchanged. The
following weighted average assumptions were used to determine the value of the options exchanged:
risk-free interest rate of 4.96%, expected dividend yield of 3.00%, volatility factor of the
expected market price of Uniteds common stock of 0.219 and a weighted expected option life of 2.1
years. The preliminary purchase price has been allocated to the identifiable tangible and
intangible assets resulting in preliminary additions to goodwill and core deposit intangibles of
approximately $148 million and $11 million, respectively. In the merger, United assumed approximately $2.5
million of liabilities to provide severance benefits to terminated employees of Premier. The estimated fair values of the acquired
assets and liabilities, including identifiable intangible assets, are subject to refinement as
additional information becomes available. Any subsequent adjustments to the fair values of assets
and liabilities acquired, identifiable intangible assets, or other purchase accounting adjustments
will result in adjustments to goodwill within the first 12 months following the date of
acquisition.
3. INVESTMENT SECURITIES
The amortized cost and estimated fair values of securities available for sale are summarized on the
following page:
10
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2007 |
|
|
|
|
|
|
Gross |
|
Gross |
|
Estimated |
|
|
Amortized |
|
Unrealized |
|
Unrealized |
|
Fair |
|
|
Cost |
|
Gains |
|
Losses |
|
Value |
|
|
|
U.S. Treasury securities and
obligations of U.S. Government
corporations and agencies |
|
$ |
40,068 |
|
|
$ |
166 |
|
|
$ |
26 |
|
|
$ |
40,208 |
|
State and political subdivisions |
|
|
118,583 |
|
|
|
1,553 |
|
|
|
553 |
|
|
|
119,583 |
|
Mortgage-backed securities |
|
|
795,945 |
|
|
|
2,177 |
|
|
|
7,380 |
|
|
|
790,742 |
|
Marketable equity securities |
|
|
6,585 |
|
|
|
191 |
|
|
|
177 |
|
|
|
6,599 |
|
Other |
|
|
141,229 |
|
|
|
2,921 |
|
|
|
2,734 |
|
|
|
141,416 |
|
|
|
|
Total |
|
$ |
1,102,410 |
|
|
$ |
7,008 |
|
|
$ |
10,870 |
|
|
$ |
1,098,548 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2006 |
|
|
|
|
|
|
Gross |
|
Gross |
|
Estimated |
|
|
Amortized |
|
Unrealized |
|
Unrealized |
|
Fair |
|
|
Cost |
|
Gains |
|
Losses |
|
Value |
|
|
|
U.S. Treasury securities and
obligations of U.S. Government
corporations and agencies |
|
$ |
7,993 |
|
|
|
|
|
|
$ |
85 |
|
|
$ |
7,908 |
|
State and political subdivisions |
|
|
110,261 |
|
|
$ |
2,176 |
|
|
|
201 |
|
|
|
112,236 |
|
Mortgage-backed securities |
|
|
777,133 |
|
|
|
822 |
|
|
|
11,896 |
|
|
|
766,059 |
|
Marketable equity securities |
|
|
6,200 |
|
|
|
439 |
|
|
|
43 |
|
|
|
6,596 |
|
Other |
|
|
115,253 |
|
|
|
2,619 |
|
|
|
419 |
|
|
|
117,453 |
|
|
|
|
Total |
|
$ |
1,016,840 |
|
|
$ |
6,056 |
|
|
$ |
12,644 |
|
|
$ |
1,010,252 |
|
|
|
|
Provided below is a summary of securities available-for-sale which were in an unrealized loss
position at September 30, 2007 and December 31, 2006:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less than 12 months |
|
|
12 months or longer |
|
|
|
Market |
|
|
Unrealized |
|
|
Market |
|
|
Unrealized |
|
|
|
Value |
|
|
Losses |
|
|
Value |
|
|
Losses |
|
September 30, 2007 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Treasuries and agencies |
|
|
|
|
|
|
|
|
|
$ |
3,963 |
|
|
$ |
26 |
|
State and political |
|
$ |
21,400 |
|
|
$ |
159 |
|
|
|
27,260 |
|
|
|
394 |
|
Mortgage-backed |
|
|
67,078 |
|
|
|
448 |
|
|
|
536,485 |
|
|
|
6,932 |
|
Marketable equity securities |
|
|
750 |
|
|
|
109 |
|
|
|
132 |
|
|
|
68 |
|
Other |
|
|
62,451 |
|
|
|
2,148 |
|
|
|
19,928 |
|
|
|
586 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
151,679 |
|
|
$ |
2,864 |
|
|
$ |
587,768 |
|
|
$ |
8,006 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2006 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Treasuries and agencies |
|
$ |
1,978 |
|
|
$ |
3 |
|
|
$ |
3,905 |
|
|
$ |
82 |
|
State and political |
|
|
3,452 |
|
|
|
22 |
|
|
|
25,651 |
|
|
|
179 |
|
Mortgage-backed |
|
|
35,437 |
|
|
|
167 |
|
|
|
663,361 |
|
|
|
11,729 |
|
Marketable equity securities |
|
|
|
|
|
|
|
|
|
|
158 |
|
|
|
43 |
|
Other |
|
|
|
|
|
|
|
|
|
|
25,637 |
|
|
|
419 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
40,867 |
|
|
$ |
192 |
|
|
$ |
718,712 |
|
|
$ |
12,452 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
11
Gross unrealized losses on available for sale securities were $10,870 at September 30, 2007.
Securities in a continuous unrealized loss position for twelve months or more consisted primarily
of mortgage-backed securities. The unrealized loss on the mortgage-backed securities portfolio
relates primarily to AAA securities issued by FNMA, FHLMC, GNMA, and various other private label
issuers. Management does not believe any individual security with an unrealized loss as of
September 30, 2007 is other than temporarily impaired. United believes the decline in value is
attributable to changes in market interest rates and not the credit quality of the issuers. United
has the intent and the ability to hold these securities until such time as the value recovers or
the securities mature. However, United acknowledges that any impaired securities may be sold in
future periods in response to significant, unanticipated changes in asset/liability management
decisions, unanticipated future market movements or business plan changes.
As previously reported, at March 31, 2006, as part of a balance sheet repositioning strategy,
management specifically identified approximately $86 million of impaired, low-yielding, fixed rate
investment securities for sale. Since United did not have the positive intent to hold these
securities to recovery, United recognized a loss of approximately $2.93 million in the first
quarter of 2006 related to these securities. These securities were subsequently sold on April 4,
2006.
The amortized cost and estimated fair value of securities available for sale at September 30, 2007
and December 31, 2006 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 without
penalties.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2007 |
|
December 31, 2006 |
|
|
|
|
|
|
Estimated |
|
|
|
|
|
Estimated |
|
|
Amortized |
|
Fair |
|
Amortized |
|
Fair |
|
|
Cost |
|
Value |
|
Cost |
|
Value |
|
|
|
|
|
Due in one year or less |
|
$ |
19,337 |
|
|
$ |
19,359 |
|
|
$ |
4,427 |
|
|
$ |
4,424 |
|
Due after one year through five years |
|
|
109,487 |
|
|
|
109,053 |
|
|
|
106,890 |
|
|
|
105,431 |
|
Due after
five years through ten years |
|
|
183,767 |
|
|
|
182,568 |
|
|
|
214,164 |
|
|
|
212,051 |
|
Due after ten years |
|
|
783,234 |
|
|
|
780,969 |
|
|
|
685,159 |
|
|
|
681,750 |
|
Marketable equity securities |
|
|
6,585 |
|
|
|
6,599 |
|
|
|
6,200 |
|
|
|
6,596 |
|
|
|
|
|
|
Total |
|
$ |
1,102,410 |
|
|
$ |
1,098,548 |
|
|
$ |
1,016,840 |
|
|
$ |
1,010,252 |
|
|
|
|
|
|
The amortized cost and estimated fair values of securities held to maturity are summarized as
follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2007 |
|
|
|
|
|
|
Gross |
|
Gross |
|
Estimated |
|
|
Amortized |
|
Unrealized |
|
Unrealized |
|
Fair |
|
|
Cost |
|
Gains |
|
Losses |
|
Value |
|
|
|
|
|
U.S. Treasury securities and
obligations of U.S. Government
corporations and agencies |
|
$ |
11,600 |
|
|
$ |
865 |
|
|
|
|
|
|
$ |
12,465 |
|
State and political subdivisions |
|
|
60,623 |
|
|
|
963 |
|
|
$ |
2 |
|
|
|
61,584 |
|
Mortgage-backed securities |
|
|
176 |
|
|
|
8 |
|
|
|
|
|
|
|
184 |
|
Other |
|
|
85,853 |
|
|
|
659 |
|
|
|
2,395 |
|
|
|
84,117 |
|
|
|
|
|
|
Total |
|
$ |
158,252 |
|
|
$ |
2,495 |
|
|
$ |
2,397 |
|
|
$ |
158,350 |
|
|
|
|
|
|
12
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2006 |
|
|
|
|
|
|
Gross |
|
Gross |
|
Estimated |
|
|
Amortized |
|
Unrealized |
|
Unrealized |
|
Fair |
|
|
Cost |
|
Gains |
|
Losses |
|
Value |
|
|
|
U.S. Treasury securities and
obligations of U.S. Government
corporations and agencies |
|
$ |
11,682 |
|
|
$ |
914 |
|
|
|
|
|
|
$ |
12,596 |
|
State and political subdivisions |
|
|
62,703 |
|
|
|
1,537 |
|
|
|
|
|
|
|
64,240 |
|
Mortgage-backed securities |
|
|
234 |
|
|
|
7 |
|
|
|
|
|
|
|
241 |
|
Other |
|
|
137,677 |
|
|
|
2,112 |
|
|
$ |
1,188 |
|
|
|
138,601 |
|
|
|
|
Total |
|
$ |
212,296 |
|
|
$ |
4,570 |
|
|
$ |
1,188 |
|
|
$ |
215,678 |
|
|
|
|
The amortized cost and estimated fair value of debt securities held to maturity at September 30,
2007 and December 31, 2006 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
without penalties.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2007 |
|
December 31, 2006 |
|
|
|
|
|
|
Estimated |
|
|
|
|
|
Estimated |
|
|
Amortized |
|
Fair |
|
Amortized |
|
Fair |
|
|
Cost |
|
Value |
|
Cost |
|
Value |
|
|
|
|
|
Due in one year or less |
|
$ |
3,400 |
|
|
$ |
3,410 |
|
|
$ |
1,726 |
|
|
$ |
1,741 |
|
Due after one year through five years |
|
|
42,088 |
|
|
|
42,817 |
|
|
|
42,016 |
|
|
|
43,116 |
|
Due after
five years through ten years |
|
|
25,136 |
|
|
|
25,789 |
|
|
|
27,357 |
|
|
|
28,219 |
|
Due after ten years |
|
|
87,628 |
|
|
|
86,334 |
|
|
|
141,197 |
|
|
|
142,602 |
|
|
|
|
|
|
Total |
|
$ |
158,252 |
|
|
$ |
158,350 |
|
|
$ |
212,296 |
|
|
$ |
215,678 |
|
|
|
|
|
|
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
$959,253 and $948,623 at September 30, 2007 and December 31, 2006, respectively.
4. LOANS
Major classifications of loans are as follows:
|
|
|
|
|
|
|
|
|
|
|
September 30, |
|
|
December 31, |
|
|
|
2007 |
|
|
2006 |
|
Commercial, financial and agricultural |
|
$ |
1,071,706 |
|
|
$ |
954,024 |
|
Real estate: |
|
|
|
|
|
|
|
|
Single-family residential |
|
|
1,877,510 |
|
|
|
1,720,794 |
|
Commercial |
|
|
1,442,874 |
|
|
|
1,146,007 |
|
Construction |
|
|
640,116 |
|
|
|
523,042 |
|
Other |
|
|
189,137 |
|
|
|
119,973 |
|
Installment |
|
|
371,902 |
|
|
|
349,868 |
|
|
|
|
|
|
|
|
Total gross loans |
|
$ |
5,593,245 |
|
|
$ |
4,813,708 |
|
|
|
|
|
|
|
|
The table above does not include loans held for sale of $954 and $2,041 at September 30, 2007 and
December 31, 2006, respectively. Loans held for sale consist of single-family residential real
estate loans originated for sale in the secondary market.
13
Uniteds subsidiary banks have made loans, in the normal course of business, to the directors and
officers of United and its subsidiaries, and to their affiliates. 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 $114,492 and $122,150 at
September 30, 2007 and December 31, 2006, respectively.
5. ALLOWANCE FOR CREDIT LOSSES
United maintains an allowance for loan losses and an allowance for lending-related commitments such
as unfunded loan commitments and letters of credit. The allowance for lending-related commitments
of $8,264 and $8,742 at September 30, 2007 and December 31, 2006, respectively, is separately
classified on the balance sheet and is included in other liabilities. The combined allowances for
loan losses and lending-related commitments are referred to as the allowance for credit losses.
The allowance for credit losses is managements estimate of the probable credit losses inherent in
the lending portfolio. Managements evaluation of the adequacy of the allowance for credit losses
and the appropriate provision for credit losses is based upon a quarterly evaluation of the loan
portfolio and lending-related commitments. This evaluation is inherently subjective and requires
significant estimates, including the amounts and timing of future cash flows, value of collateral,
losses on pools of homogeneous loans based on historical loss experience, and consideration of
current economic trends, all of which are susceptible to constant and significant change. The
allowance allocated to specific credits and loan pools grouped by similar risk characteristics is
reviewed on a quarterly basis and adjusted as necessary based upon subsequent changes in
circumstances. In determining the components of the allowance for credit 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 credit losses, while recoveries of
previously charged-off amounts are credited to the allowance for credit losses. Credit expenses
related to the allowance for credit losses and the allowance for lending-related commitments are
reported in the provision for credit losses in the income statement.
A progression of the allowance for credit losses, which includes the allowance for credit losses
and the allowance for lending-related commitments, for the periods presented is summarized as
follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
Nine Months Ended |
|
|
|
September 30 |
|
|
September 30 |
|
|
|
2007 |
|
|
2006 |
|
|
2007 |
|
|
2006 |
|
Balance at beginning of period |
|
$ |
51,220 |
|
|
$ |
52,895 |
|
|
$ |
52,371 |
|
|
$ |
52,871 |
|
Allowance of purchased subsidiaries |
|
|
7,648 |
|
|
|
|
|
|
|
7,648 |
|
|
|
|
|
Provision for credit losses |
|
|
1,550 |
|
|
|
571 |
|
|
|
2,750 |
|
|
|
1,169 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
60,418 |
|
|
|
53,466 |
|
|
|
62,769 |
|
|
|
54,040 |
|
Loans charged-off |
|
|
(2,104 |
) |
|
|
(1,168 |
) |
|
|
(4,952 |
) |
|
|
(2,482 |
) |
Less: Recoveries |
|
|
303 |
|
|
|
238 |
|
|
|
800 |
|
|
|
978 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Charge-offs |
|
|
(1,801 |
) |
|
|
(930 |
) |
|
|
(4,152 |
) |
|
|
(1,504 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at end of period |
|
$ |
58,617 |
|
|
$ |
52,536 |
|
|
$ |
58,617 |
|
|
$ |
52,536 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
14
6. RISK ELEMENTS
Nonperforming assets include loans on which no interest is currently being accrued, principal or
interest has been in default for a period of 90 days or more and for which the terms have been
modified due to deterioration in the financial position of the borrower. Loans are designated as
nonaccrual when, in the opinion of management, the collection of principal or interest is doubtful.
This generally occurs when a loan becomes 90 days past due as to principal or interest unless the
loan is both well secured and in the process of collection. When interest accruals are
discontinued, unpaid interest credited to income in the current year is reversed, and unpaid
interest accrued in prior years is charged to the allowance for credit losses. Other real estate
owned consists of property acquired through foreclosure and is stated at the lower of cost or fair
value less estimated selling costs.
Nonperforming assets are summarized as follows:
|
|
|
|
|
|
|
|
|
|
|
September 30, |
|
|
December 31, |
|
|
|
2007 |
|
|
2006 |
|
Nonaccrual loans |
|
$ |
8,958 |
|
|
$ |
5,755 |
|
Loans past due 90 days or more and still accruing interest |
|
|
13,827 |
|
|
|
8,432 |
|
|
|
|
|
|
|
|
Total nonperforming loans |
|
|
22,785 |
|
|
|
14,187 |
|
Other real estate owned |
|
|
5,338 |
|
|
|
4,231 |
|
|
|
|
|
|
|
|
Total nonperforming assets |
|
$ |
28,123 |
|
|
$ |
18,418 |
|
|
|
|
|
|
|
|
Loans are designated as impaired when, in the opinion of management, the collection of principal
and interest in accordance with the contractual terms of the loan agreement is not probable. At
September 30, 2007, the recorded investment in loans that were considered to be impaired was
$29,848 (of which $8,958 were on a nonaccrual basis). Included in this amount is $23,296 of
impaired loans for which the related allowance for credit losses is $4,083 and $6,552 of impaired
loans that do not have an allowance for credit losses. At December 31, 2006, the recorded
investment in loans that were considered to be impaired was $21,963 (of which $5,755 were on a
nonaccrual basis). Included in this amount were $15,193 of impaired loans for which the related
allowance for credit losses was $3,000, and $6,770 of impaired loans that did not have an allowance
for credit losses. The average recorded investment in impaired loans during the nine months ended
September 30, 2007 and for the year ended December 31, 2006 was approximately $27,347 and $26,503,
respectively.
United recognized interest income on impaired loans of approximately $481 and $1,151 for the
quarter and nine months ended September 30, 2007, respectively, and $467 and $1,726 for the quarter
and nine months ended September 30, 2006, respectively. Substantially all of the interest income
was recognized using the accrual method of income recognition. The amount of interest income that
would have been recorded under the original terms for the above loans and nonaccrual loans was $496
and $1,464 for the quarter and nine months ended September 30, 2007, respectively, and $376 and
$1,041 for the quarter and nine months ended September 30, 2006, respectively.
Statement of Position 03-3 (SOP 03-3), Accounting for Certain Loans or Debt Securities Acquired in
a Transfer requires acquired impaired loans for which it is probable that the investor will be
unable to collect
15
all contractually required payments receivable to be recorded at the present value of amounts
expected to be received and prohibits carrying over or creating valuation allowances in the initial
accounting for these loans. Loans carried at fair value, mortgage loans held for sale, and loans to
borrowers in good standing under revolving credit agreements are excluded from the scope of SOP
03-3. The amount of impaired loans acquired from Premier on July 14, 2007 was not significant.
Additional disclosures required by SOP 03-3 are not provided because the amount was not
significant.
7. INTANGIBLE ASSETS
The following is a summary of intangible assets subject to amortization and those not subject to
amortization:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of September 30, 2007 |
|
|
|
Gross Carrying |
|
|
Accumulated |
|
|
Net Carrying |
|
|
|
Amount |
|
|
Amortization |
|
|
Amount |
|
Amortized intangible assets: |
|
|
|
|
|
|
|
|
|
|
|
|
Core deposit intangible assets |
|
$ |
30,995 |
|
|
|
($19,040 |
) |
|
$ |
11,955 |
|
|
|
|
|
|
|
|
|
|
|
Goodwill not subject to amortization |
|
|
|
|
|
|
|
|
|
$ |
312,857 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2006 |
|
|
|
Gross Carrying |
|
|
Accumulated |
|
|
Net Carrying |
|
|
|
Amount |
|
|
Amortization |
|
|
Amount |
|
Amortized intangible assets: |
|
|
|
|
|
|
|
|
|
|
|
|
Core deposit intangible assets |
|
$ |
19,890 |
|
|
|
($17,250 |
) |
|
$ |
2,640 |
|
|
|
|
|
|
|
|
|
|
|
Goodwill not subject to amortization |
|
|
|
|
|
|
|
|
|
$ |
167,421 |
|
|
|
|
|
|
|
|
|
|
|
|
|
During the third quarter of 2007, United acquired Premier adding preliminary amounts of $147,879 to
goodwill and $11,105 to core deposit intangible assets.
United incurred amortization expense of $1,000 and $1,790 for the quarter and nine months ended
September 30, 2007, respectively, and $459 and $1,453 for the quarter and nine months ended
September 30, 2006, respectively, related to intangible assets. The table presented below sets
forth the anticipated amortization expense for intangible assets for the years subsequent to 2006:
|
|
|
|
|
Year |
|
Amount |
|
2007 |
|
$ |
2,853 |
|
2008 |
|
|
3,509 |
|
2009 |
|
|
2,561 |
|
2010 |
|
|
1,884 |
|
2011+ |
|
|
2,938 |
|
8. SHORT-TERM BORROWINGS
Federal funds purchased and securities sold under agreements to repurchase are a significant source
of funds for the company. United has various unused lines of credit available from certain of its
correspondent banks in the aggregate amount of $200,000. These lines of credit, which bear interest
at prevailing market rates,
16
permit United to borrow funds in the overnight market, and are renewable annually subject to
certain conditions. At September 30, 2007, federal funds purchased were $78,405 while securities
sold under agreements to repurchase were $575,206.
United has available funds of $70,000 with two unrelated financial institutions to provide for
general liquidity needs. Both are unsecured revolving lines of credit. One has a one-year renewable
term while the other line of credit has a two-year renewable term. Each line of credit carries an
indexed floating rate of interest. At September 30, 2007, United had no outstanding balance under
these lines of credit.
In July of 2007, United borrowed funds totaling $50,000 on these two lines of credit to temporarily
fund a portion of the cash consideration for the Premier acquisition. At the funding date, the
weighted-average interest rate was 5.97% on the borrowings. United repaid the amounts in September
2007.
United Bank (VA) participates in the Treasury Investment Program, which is essentially the U.S.
Treasurys savings account for companies depositing employment and other tax payments. The bank
retains the funds in an open-ended interest-bearing note until the Treasury withdraws or calls
the funds. A maximum note balance is established and that amount must be collateralized at all
times. All tax deposits or a portion of the tax deposits up to the maximum balance are generally
available as a source of short-term investment funding. As of September 30, 2007, United Bank (VA)
had an outstanding balance of $2,007 and had additional funding available of $2,993.
9. LONG-TERM BORROWINGS
Uniteds 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 mix of single-family residential mortgage loans, commercial
loans and investment securities. At September 30, 2007, United had an unused borrowing amount of
$1,196,660 available subject to delivery of collateral after certain trigger points.
Advances may be called by the FHLB or redeemed by United based on predefined factors and penalties.
In June 2007, United prepaid two $100 million long-term FHLB advances and terminated two interest
rate swaps associated with the advances. United recognized a $787 thousand before-tax gain on the
termination of the swaps. In addition, United prepaid approximately $28.9 million of a $100 million
long-term convertible FHLB advance. United incurred a before-tax charge of approximately $786
thousand to prepay the debt. United replaced the $228.9 million of debt with a 3-year FHLB advance
and an associated interest rate swap with a total effective cost of 5.25%. The debt prepaid had an
average total effective cost of 5.40% and a remaining maturity of 6.25 years. Uniteds management
believes that the prepayment of these borrowings and the termination of the interest rate swaps
will improve Uniteds future net interest margin and enhance future earnings as well as reducing
interest rate risk by shortening the term.
During the first quarter of 2006, as part of the balance sheet repositioning, United prepaid a $50
million variable interest rate FHLB advance and terminated a fixed interest rate swap associated
with the advance. United recognized a $3.06 million before-tax gain on the termination of the
swap. No prepayment penalty was incurred in connection with the early repayment of the advance.
17
At September 30, 2007, $643,672 of FHLB advances with a weighted-average interest rate of 5.18% is
scheduled to mature within the next twelve years.
The scheduled maturities of borrowings are as follows:
|
|
|
|
|
Year |
|
Amount |
|
2007 |
|
$ |
75,000 |
|
2008 |
|
|
110,437 |
|
2009 |
|
|
50,000 |
|
2010 |
|
|
355,000 |
|
2011 and thereafter |
|
|
53,235 |
|
|
|
|
|
Total |
|
$ |
643,672 |
|
|
|
|
|
As of September 30, 2007, United had a total of eleven statutory business trusts that were formed
for the purpose of issuing or participating in pools of trust preferred capital securities (Capital
Securities) with the proceeds invested in junior subordinated debt securities (Debentures) of
United. The Debentures, which are subordinate and junior in right of payment to all present and
future senior indebtedness and certain other financial obligations of United, are the sole assets
of the trusts and Uniteds payment under the Debentures is the sole source of revenue for the
trusts. At September 30, 2007 and December 31, 2006, the outstanding balances of the Debentures
were $206,308 and $85,301 respectively, and were included in the category of long-term debt on the
Consolidated Balance Sheets entitled Other long-term borrowings. The Capital Securities are not
included as a component of shareholders equity in the Consolidated Balance Sheets. United fully
and unconditionally guarantees each individual trusts obligations under the Capital Securities.
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 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.
The Capital Securities currently qualify as Tier 1 capital of United for regulatory purposes. In
March of 2005, the banking regulatory agencies issued guidance, which did not change the regulatory
capital treatment for the Trust Preferred Securities.
In July of 2007, United, through a wholly-owned subsidiary, United Statutory Trust V, participated
in a Capital Securities offering of a third party in the amount of $50 million to help fund the
acquisition of Premier. The proceeds were invested in junior subordinated debt of United paying
interest quarterly at a fixed rate of 6.67% for the first five years and then at a floating rate
equal to 3-month LIBOR plus 155 basis points thereafter.
In September of 2007, United, through a wholly-owned subsidiary, United Statutory Trust VI,
participated in a Capital Securities offering of a third party in the amount of $30 million to help
repay the short-term borrowings used to temporarily fund the acquisition of Premier. The proceeds
were invested in junior subordinated debt of United paying interest quarterly at a fixed rate of
6.60% for the first five years and then at a floating rate equal 3 month LIBOR plus 130 basis
points thereafter. Under the terms of the transactions, both Capital Securities will have a
maturity of 30 years, and are redeemable after five years with certain
18
exceptions. For regulatory purposes, both the $50 million and the $30 million issuance of Capital
Securities qualify as Tier I capital in accordance with current regulatory reporting requirements.
As part of the acquisition of Premier on July 14, 2007, United assumed all the obligations of
Premier and its subsidiaries. Premier had a total of four statutory business trusts that were
formed for the purpose of issuing or participating in Capital Securities with the proceeds invested
in Debentures of Premier. At merger, the outstanding balance of Premiers Debentures was
approximately $39 million. The Capital Securities assumed in the Premier acquisition qualify as
Tier 1 capital of United under current regulatory reporting requirements.
10. 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, and commercial letters of credit. The instruments involve, to varying degrees, elements of
credit and interest rate risk in excess of the amount recognized in the financial statements.
Uniteds 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. Collateral may be obtained, if
deemed necessary, based on managements credit evaluation of the counterparty.
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, and historically do not, represent future cash requirements. The amount of
collateral obtained, if deemed necessary upon the extension of credit, is based on managements
credit evaluation of the counterparty. United had $1,903,091 and $1,734,299 of loan commitments
outstanding as of September 30, 2007 and December 31, 2006, respectively, the majority of which
expire within one year.
Commercial and standby letters of credit are agreements used by Uniteds 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. A commercial letter of credit is issued
specifically to facilitate trade or commerce. Typically, under the terms of a commercial letter of
credit, a commitment is drawn upon when the underlying transaction is consummated as intended
between the customer and a third party. United has issued commercial letters of credit of $1,105
and $525 as of September 30, 2007 and December 31, 2006, respectively. A standby letter of credit
is generally contingent upon the failure of a customer to perform according to the terms of an
underlying contract with a third party. United has issued standby letters of credit of $144,632 and
$112,367 as of September 30, 2007 and December 31, 2006, respectively. In accordance with FIN 45,
United has determined that substantially all of its letters of credit are renewed on an annual
basis and that the fair value of these letters of credit is immaterial.
19
11. DERIVATIVE FINANCIAL INSTRUMENTS
United uses derivative instruments to aid against adverse prices or interest rate movements on the
value of certain assets or liabilities and on future cash flows. These derivatives may consist of
interest rate swaps, caps, floors, collars, futures, forward contracts, written and purchased
options. United also executes derivative instruments with its commercial banking customers to
facilitate its risk management strategies.
United accounts for its derivative financial instruments in accordance with FASB Statement No. 133
(SFAS No. 133), Accounting for Derivative Instruments and Hedging Activities, as amended. SFAS
No. 133 requires all derivative instruments to be carried at fair value on the balance sheet.
United usually designates derivative instruments used to manage interest rate risk as hedge
relationships with certain assets, liabilities or cash flows being hedged. Certain derivatives
used for interest rate risk management are not designated in a SFAS No. 133 relationship.
Under the provisions of SFAS No. 133, United has both fair value hedges and cash flow hedges as of
September 30, 2007. Derivative instruments designated in a hedge relationship to mitigate exposure
to changes in the fair value of an asset, liability, or firm commitment attributable to a
particular risk, such as interest rate risk, are considered fair value hedges. Derivative
instruments designated in hedge relationship to mitigate exposure to variability in expected
future cash flows, or other types of forecasted transactions, are considered cash flow hedges.
For a fair value hedge, the fair value of the interest rate swap is recognized on the balance sheet
as either a freestanding asset or liability with a corresponding adjustment to the hedged financial
instrument. Subsequent adjustments due to changes in the fair value of a derivative that qualifies
as a fair value hedge are offset in current period earnings. For a cash flow hedge, the fair value
of the interest rate swap is recognized on the balance sheet as either a freestanding asset or
liability with a corresponding adjustment to other comprehensive income within shareholders
equity, net of tax. Subsequent adjustments due to changes in the fair value of a derivative that
qualifies as a cash flow hedge are offset to other comprehensive income, net of tax.
At inception of a hedge relationship, United formally documents the hedged item, the particular
risk management objective, the nature of the risk being hedged, the derivative being used, how
effectiveness of the hedge will be assessed and how the ineffectiveness of the hedge will be
measured. United also assesses hedge effectiveness at inception and on an ongoing basis using
regression analysis. Hedge ineffectiveness is measured by using the change in fair value method.
The change in fair value method compares the change in the fair value of the hedging derivative to
the change in the fair value of the hedged exposure, attributable to changes in the benchmark rate.
The portion of a hedge that is ineffective is recognized immediately in earnings. Prior to
January 1, 2006, United used the shortcut method for interest rate swaps that met the criteria as
defined under SFAS No. 133. Effective January 1, 2006, United adopted an internal policy of no
longer using the short-cut method to account for future hedging relationships entered into.
For derivatives that are not designated in a hedge relationship, changes in the fair value of the
derivatives are recognized in earnings in the same period as the change in the fair value.
In June 2007, United terminated two fixed interest rate swap designated as cash flow hedges
associated
20
with the repayment of two $100 million variable interest rate FHLB advances that were being hedged.
United recognized a $787 thousand before-tax gain on the termination of the swaps. In addition,
United prepaid approximately $28.9 million of a $100 million long-term convertible FHLB advance.
United replaced the $228.9 million of debt with a 3-year variable-interest rate FHLB advance and an
associated fixed interest rate swap designated as a cash flow hedge. During the first quarter of
2006, as part of a balance sheet repositioning strategy, United terminated a fixed interest rate
swap designated as a cash flow hedge associated with the repayment of a $50 million variable
interest rate FHLB advance that was being hedged. United recognized a $3.06 million before-tax
gain on the termination of the swap.
The following tables set forth certain information regarding the interest rate derivatives
portfolio used for interest-rate risk management purposes and designated as accounting hedges under
SFAS 133 at September 30, 2007:
Derivative Classifications and Hedging Relationships
September 30, 2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Notional |
|
|
Derivative |
|
|
|
Amount |
|
|
Asset |
|
|
Liability |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivatives Designated as Fair Value Hedges: |
|
|
|
|
|
|
|
|
|
|
|
|
Hedging Commercial Loans |
|
$ |
14,187 |
|
|
$ |
50 |
|
|
$ |
218 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Derivatives Designated as Fair Value Hedges: |
|
$ |
14,187 |
|
|
$ |
50 |
|
|
$ |
218 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivatives Designated as Cash Flow Hedges: |
|
|
|
|
|
|
|
|
|
|
|
|
Hedging FHLB Borrowings |
|
$ |
228,900 |
|
|
$ |
|
|
|
$ |
3,957 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Derivatives Designated as Cash Flow Hedges: |
|
$ |
228,900 |
|
|
$ |
|
|
|
$ |
3,957 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Derivatives Used in Interest Rate Risk
Management and Designated in SFAS 133
Relationships: |
|
$ |
243,087 |
|
|
$ |
50 |
|
|
$ |
4,175 |
|
|
|
|
|
|
|
|
|
|
|
Derivative Instruments
September 30, 2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Notional |
|
|
Average |
|
|
Average |
|
|
Estimated |
|
|
|
Amount |
|
|
Receive Rate |
|
|
Pay Rate |
|
|
Fair Value |
|
Fair Value Hedges: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pay Fixed Swap (Commercial Loans) |
|
$ |
14,187 |
|
|
|
|
|
|
|
6.27 |
% |
|
|
($168 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Derivatives Used in Fair
Value Hedges |
|
$ |
14,187 |
|
|
|
|
|
|
|
|
|
|
|
($168 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash Flow Hedges: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pay Fixed Swap (FHLB Borrowing) |
|
$ |
228,900 |
|
|
|
|
|
|
|
5.26 |
% |
|
|
($3,957 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Derivatives Used in Cash
Flow Hedges |
|
$ |
228,900 |
|
|
|
|
|
|
|
|
|
|
|
($3,957 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Derivatives Used for
Interest Rate Risk Management
and Designated in
SFAS 133 Relationships |
|
$ |
243,087 |
|
|
|
|
|
|
|
|
|
|
|
($4,125 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
21
12. STOCK BASED COMPENSATION
On January 1, 2006, United adopted Statement of Financial Accounting Standards 123R (SFAS 123R)
using the modified prospective transition method. Under this transition method, compensation cost
to be recognized beginning in the first quarter of 2006 included: (a) compensation cost for all
share-based payments granted prior to, but not yet vested as of January 1, 2006, based on the grant
date fair value estimated in accordance with the original provisions of SFAS 123, and (b)
compensation cost for all share-based payments granted subsequent to January 1, 2006, based on the
grant-date fair value estimated in accordance with the provisions of SFAS 123R. Results for prior
periods will not be restated.
On December 30, 2005, the Executive Committee of the Board of Directors of United approved the
accelerated vesting of all unvested stock options granted prior to December 30, 2005 to United
employees, including Executive Officers, under the 2001 Stock Option Plan. As a result of the
vesting acceleration, options to purchase 547,626 shares of United common stock became exercisable
immediately. United recognized a pre-tax expense of approximately $21 thousand in the fourth
quarter of 2005 for those accelerated options that were in-the-money, that is, the options
exercise price was less than the market value of Uniteds stock. Due to the modification to
accelerate the unvested options, United did not recognize any compensation cost for year 2006. In
addition, no new options were granted during 2006 and the first nine months of 2007. Accordingly,
the adoption of SFAS 123R had no impact on Uniteds consolidated statements of income or net income
per share.
At its March 20, 2006 regular meeting, Uniteds Board of Directors approved the adoption of the
2006 Stock Option Plan and directed that the 2006 Stock Option Plan be submitted to Uniteds
shareholders for approval at its Annual Meeting of Shareholders (the 2006 Annual Meeting). At the
2006 Annual Meeting, held on May 15, 2006, Uniteds shareholders approved the 2006 Stock Option
Plan. The 2006 Stock Option Plan thus became effective at the time of the shareholders approval.
A total of 1,500,000 shares of Uniteds authorized but unissued common stock are allocated for the
2006 Stock Option Plan. Each plan year, 400,000 options will be available for award to eligible
employees; however, not all 400,000 options are required to be awarded in that year. All options
granted under the 2006 Stock Option Plan will be non-statutory stock options (NSOs), i.e. options
that do not qualify as incentive stock options under Section 422 of the Internal Revenue Code.
Subject to certain change in control provisions, recipients of options will be fully vested in and
permitted to exercise options granted under the 2006 Stock Option Plan three years from the grant
date. As of September 30, 2007, no shares have been granted under the 2006 Stock Option Plan. Any
stock options granted under the 2006 Stock Option Plan in the future will be subject to the
provisions of SFAS 123R.
United currently has options outstanding from various option plans other than the 2006 Stock Option
Plan (the Prior Plans); however, no common shares of United stock are available for grants under
the Prior Plans as these plans have expired. Awards outstanding under the Prior Plans will remain
in effect in accordance with their respective terms.
22
A summary of option activity under the Plans as of September 30, 2007, and the changes during the
first nine months of 2007 are presented below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended September 30, 2007 |
|
|
|
|
|
|
|
|
|
|
|
Weighted Average |
|
|
|
|
|
|
|
Aggregate |
|
|
Remaining |
|
|
|
|
|
|
|
|
|
|
Intrinsic |
|
|
Contractual |
|
|
Exercise |
|
|
|
Shares |
|
|
Value |
|
|
Term (Yrs.) |
|
|
Price |
|
Outstanding at January 1, 2007 |
|
|
1,732,200 |
|
|
|
|
|
|
|
|
|
|
$ |
28.00 |
|
Granted |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercised |
|
|
183,831 |
|
|
|
|
|
|
|
|
|
|
|
18.50 |
|
Assumed in acquisition of subsidiary |
|
|
224,528 |
|
|
|
|
|
|
|
|
|
|
|
13.95 |
|
Forfeited or expired |
|
|
24,050 |
|
|
|
|
|
|
|
|
|
|
|
32.11 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at September 30, 2007 |
|
|
1,748,847 |
|
|
$ |
9,281 |
|
|
|
5.1 |
|
|
$ |
27.14 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable at September 30, 2007 |
|
|
1,748,847 |
|
|
$ |
9,281 |
|
|
|
5.1 |
|
|
$ |
27.14 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
In addition to the stock options detailed above, United has outstanding stock options related to a
deferred compensation plan assumed in the 1998 merger with George Mason Bankshares, Inc. (GMBS).
The stock options granted under this deferred compensation plan were to former directors of GMBS.
These options carry no exercise cost, contain no expiration date, and are eligible for dividends.
Other than additional options granted through reinvestment of dividends received, United does not
issue additional options under this deferred compensation plan. Options outstanding at September
30, 2007 were 19,547. Options granted through the reinvestment of dividends during the first nine
months of 2007 were 460. No options were exercised during the first nine months of 2007. United
records compensation expense for this plan based on the number of options outstanding and Uniteds
quoted market price of its common stock with an equivalent adjustment to the associated liability.
Cash received from options exercised under the Plans for the nine months ended September 30, 2007
and 2006 was $2.42 million and $5.56 million, respectively. During the nine months ended September
30, 2007 and 2006, 183,831 and 235,547 shares, respectively, were issued in connection with stock
option exercises. All shares issued in connection with stock option exercises were issued from
available treasury stock for the nine months ended September 30, 2007 and 2006. The total intrinsic
value of options exercised under the Plans during the nine months ended September 30, 2007 and 2006
was $2.74 million and $3.10 million, respectively.
SFAS 123R also requires the benefits of tax deductions in excess of recognized compensation cost to
be reported as a financing cash flow, rather than as an operating cash flow as required under
previous standards. This requirement will reduce net operating cash flows and increase net
financing cash flows in periods after adoption. While the company cannot estimate what those
amounts will be in the future (because they depend on, among other things, the date employees
exercise stock options), United recognized cash flows from financing activities of $796 thousand
and $499 thousand from excess tax benefits related to share-based compensation for the nine months
ended September 30, 2007 and 2006, respectively.
13. EMPLOYEE BENEFIT PLANS
United has a defined benefit retirement plan covering substantially all employees. Pension
benefits are based
23
on years of service and the average of the employees highest five consecutive plan years of basic
compensation paid during the ten plan years preceding the date of determination. Uniteds 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.
In September of 2007, after a recommendation by Uniteds Pension Committee and approval by Uniteds
Board of Directors, the United Bankshares, Inc. Pension Plan (the Plan) as it relates to
participation was amended. The decision to change the participation rules for the Plan follows
current industry trends, as many large and medium size companies have taken similar steps. The
amendment provides that employees hired on or after October 1, 2007, will not be eligible to
participate in the Plan. However, new employees will continue to be eligible to participate in
Uniteds Savings and Stock Investment 401(k) plan. This change has absolutely no impact on current
employees (those hired prior to October 1, 2007). They will continue to participate in the Plan,
with no change in benefit provisions, and will continue to be eligible to participate in Uniteds
Saving and Stock Investment 401(k) Plan.
On December 31, 2006, United adopted the recognition and disclosure provision of Statement No. 158,
Employers Accounting for Defined Benefit Pension and Other Postretirement Plans. SFAS 158
requires United to recognize the funded status of its defined benefit post-retirement plan in the
statement of financial position, with a corresponding adjustment to accumulated other comprehensive
income, net of tax. The adjustment to accumulated other comprehensive income at adoption
represents the net unrecognized actuarial losses, unrecognized prior service costs, and
unrecognized transition obligation remaining from the initial adoption of SFAS 87, all of which
were previously netted against the plans funded status in Uniteds statement of financial
positions pursuant to the provisions of SFAS 87. These amounts will be subsequently recognized as
net periodic pension cost pursuant to Uniteds historical accounting policy for amortizing such
amounts. Further, actuarial gains and losses that arise in subsequent periods and are not
recognized as net periodic pension cost in the same periods will be recognized as a component of
other comprehensive income. Those amounts will be subsequently recognized as a component of net
periodic pension cost on the same basis as the amounts recognized in accumulated other
comprehensive income at adoption of Statement 158.
The incremental effects of adopting the provision of Statement 158 on Uniteds statement of
financial position at December 31, 2006 are presented in the following table. The adoption of
Statement 158 had no effect on Uniteds consolidated statement of income for the year of 2006 and
it will not affect Uniteds operating results in future periods.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At December 31, 2006 |
|
|
Prior to Adopting |
|
Effect of Adopting |
|
As Reported at |
|
|
Statement 158 |
|
Statement 158 |
|
December 31, 2006 |
Net pension asset |
|
|
40,165 |
|
|
|
(13,217 |
) |
|
$ |
26,948 |
|
Deferred income taxes |
|
|
8,058 |
|
|
|
5,206 |
|
|
|
13,264 |
|
Accumulated other comprehensive income |
|
|
(7,780 |
) |
|
|
(8,011 |
) |
|
|
(15,791 |
) |
Included in accumulated other comprehensive income at December 31, 2006 are the following amounts
that have not yet been recognized in net periodic pension cost: unrecognized transition asset of
$701 ($425 net of
24
tax), unrecognized prior service costs of $9 ($6 net of tax) and unrecognized
actuarial losses of $13,909 ($8,430 net of tax). The expected amortization of the transition asset, prior service cost, and
actuarial loss included in accumulated other comprehensive income to be recognized in the Income
Statement for the year ended December 31, 2007 is $175 ($105 net of tax), $1 ($1 net of tax), and
$593 ($356 net of tax), respectively.
Net periodic pension cost for the three and nine months ended September 30, 2007 and 2006 included
the following components:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
Nine Months Ended |
|
|
|
September 30 |
|
|
September 30 |
|
(In thousands) |
|
2007 |
|
|
2006 |
|
|
2007 |
|
|
2006 |
|
Service cost |
|
$ |
543 |
|
|
$ |
540 |
|
|
$ |
1,611 |
|
|
$ |
1,602 |
|
Interest cost |
|
|
876 |
|
|
|
818 |
|
|
|
2,599 |
|
|
|
2,427 |
|
Expected return on plan assets |
|
|
(1,818 |
) |
|
|
(1,197 |
) |
|
|
(5,395 |
) |
|
|
(3,552 |
) |
Amortization of transition asset |
|
|
(44 |
) |
|
|
(44 |
) |
|
|
(131 |
) |
|
|
(131 |
) |
Recognized net actuarial loss |
|
|
150 |
|
|
|
233 |
|
|
|
444 |
|
|
|
693 |
|
Amortization of prior service cost |
|
|
1 |
|
|
|
1 |
|
|
|
1 |
|
|
|
1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net periodic pension (benefit) cost |
|
$ |
(292 |
) |
|
$ |
351 |
|
|
$ |
(871 |
) |
|
$ |
1,040 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-Average Assumptions: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Discount rate |
|
|
6.00 |
% |
|
|
6.00 |
% |
|
|
6.00 |
% |
|
|
6.00 |
% |
Expected return on assets |
|
|
8.50 |
% |
|
|
8.50 |
% |
|
|
8.50 |
% |
|
|
8.50 |
% |
Rate of compensation increase |
|
|
3.25 |
% |
|
|
3.25 |
% |
|
|
3.25 |
% |
|
|
3.25 |
% |
14. INCOME TAXES
In July 2006, the FASB issued Interpretation (FIN) No. 48 (FIN 48), Accounting for Uncertainty in
Income Taxes, to address concerns regarding comparability in reported tax assets and liabilities
in an enterprises financial statements resulting from a lack of specific guidance in FASB
Statement No. 109 (SFAS 109), Accounting for Income Taxes. FIN 48 prescribes a recognition
threshold of more-likely-than-not, and a measurement attribute for all tax positions taken on a tax
return, in order for those tax positions to be recognized in the financial statements. United has
adopted FIN 48 as of January 1, 2007, as required. The cumulative effect of adopting FIN 48 was
$300 thousand which was recorded in retained earnings. Also, certain amounts have been reclassified
in the statement of financial position in order to comply with the requirements of the statement.
As of September 30, 2007, United has provided a liability for $5.9 million of unrecognized tax
benefits related to various federal and state income tax matters. Of this amount, the amount that
would impact Uniteds effective tax rate, if recognized, is $5.7 million. Over the next 12
months, the statute of limitations will close on certain income tax returns filed by an acquired
subsidiary.
United is currently open to audit under the statute of limitations by the Internal Revenue Service
and State Taxing authorities for the years ended December 31, 2004 through 2006. During the third
quarter of 2007, United reduced its income tax reserve by $1.06 million due to the expiration of
the statute of limitations for examinations of certain years.
25
As of January 1, 2007, United accrued $450 thousand of interest related to uncertain tax positions.
As of September 30, 2007, the total amount of accrued interest was $458 thousand. United accounts for
interest and penalties related to uncertain tax positions as part of its provision for federal and
state income taxes.
15. COMPREHENSIVE INCOME
The components of total comprehensive income for the three and nine months ended September 30, 2007
and 2006 are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
Nine Months Ended |
|
|
|
September 30 |
|
|
September 30 |
|
(In thousands) |
|
2007 |
|
|
2006 |
|
|
2007 |
|
|
2006 |
|
Net Income |
|
$ |
25,803 |
|
|
$ |
14,165 |
|
|
$ |
74,722 |
|
|
$ |
64,234 |
|
Securities available for sale: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net change in unrealized losses on available for sale
securities arising during the period |
|
|
7,412 |
|
|
|
13,872 |
|
|
|
3,217 |
|
|
|
1,452 |
|
Related income tax effect |
|
|
(2,594 |
) |
|
|
(4,855 |
) |
|
|
(1,126 |
) |
|
|
(508 |
) |
Net reclassification adjustment for (gains) losses included in
net income |
|
|
(172 |
) |
|
|
134 |
|
|
|
(494 |
) |
|
|
3,071 |
|
Related income tax expense (benefit) |
|
|
60 |
|
|
|
(47 |
) |
|
|
173 |
|
|
|
(1,075 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net effect on other comprehensive loss |
|
|
4,706 |
|
|
|
9,104 |
|
|
|
1,770 |
|
|
|
2,940 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Securities held to maturity: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized loss related to the call of securities previously
transferred from the available for sale to the held to maturity
investment portfolio |
|
|
29 |
|
|
|
|
|
|
|
1,197 |
|
|
|
|
|
Related income tax benefit |
|
|
(10 |
) |
|
|
|
|
|
|
(419 |
) |
|
|
|
|
Accretion on the unrealized loss for securities transferred from
the available for sale to the held to maturity investment
portfolio prior to call or maturity |
|
|
70 |
|
|
|
165 |
|
|
|
312 |
|
|
|
511 |
|
Related income tax expense |
|
|
(24 |
) |
|
|
(58 |
) |
|
|
(109 |
) |
|
|
(179 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net effect on other comprehensive income |
|
|
65 |
|
|
|
107 |
|
|
|
981 |
|
|
|
332 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flow hedge derivatives: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized gain (loss) on cash flow hedge |
|
|
(4.018 |
) |
|
|
(2,500 |
) |
|
|
(4,572 |
) |
|
|
(2,499 |
) |
Related income tax (benefit) expense |
|
|
1,406 |
|
|
|
875 |
|
|
|
1,600 |
|
|
|
874 |
|
Termination of cash flow hedge |
|
|
|
|
|
|
|
|
|
|
2,952 |
|
|
|
(2,077 |
) |
Related income tax expense |
|
|
|
|
|
|
|
|
|
|
(1,033 |
) |
|
|
727 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net effect on other comprehensive income |
|
|
(2,612 |
) |
|
|
(1,625 |
) |
|
|
(1,053 |
) |
|
|
(2,975 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
FASB 158 pension plan: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortization of transition asset |
|
|
(44 |
) |
|
|
|
|
|
|
(131 |
) |
|
|
|
|
Related income tax expense |
|
|
16 |
|
|
|
|
|
|
|
52 |
|
|
|
|
|
Amortization of prior service cost |
|
|
1 |
|
|
|
|
|
|
|
1 |
|
|
|
|
|
Related income tax benefit |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Recognized net actuarial loss |
|
|
150 |
|
|
|
|
|
|
|
444 |
|
|
|
|
|
Related income tax benefit |
|
|
(60 |
) |
|
|
|
|
|
|
(177 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net effect on other comprehensive income |
|
|
63 |
|
|
|
|
|
|
|
189 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total change in other comprehensive income |
|
|
2,222 |
|
|
|
7,586 |
|
|
|
1,887 |
|
|
|
297 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Comprehensive Income |
|
$ |
28,025 |
|
|
$ |
21,751 |
|
|
$ |
76,609 |
|
|
$ |
64,531 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
26
16. EARNINGS PER SHARE
The reconciliation of the numerator and denominator of basic earnings per share with that of
diluted earnings per share is presented as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
Nine Months Ended |
|
|
|
September 30 |
|
|
September 30 |
|
|
|
2007 |
|
|
2006 |
|
|
2007 |
|
|
2006 |
|
Basic |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Income |
|
$ |
25,803 |
|
|
$ |
14,165 |
|
|
$ |
74,722 |
|
|
$ |
64,234 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average common shares outstanding |
|
|
42,731,909 |
|
|
|
41,373,945 |
|
|
|
41,458,388 |
|
|
|
41,658,678 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings per basic common share |
|
$ |
0.60 |
|
|
$ |
0.34 |
|
|
$ |
1.80 |
|
|
$ |
1.54 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Income |
|
$ |
25,803 |
|
|
$ |
14,165 |
|
|
$ |
74,722 |
|
|
$ |
64,234 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average common shares outstanding |
|
|
42,731,909 |
|
|
|
41,373,945 |
|
|
|
41,458,388 |
|
|
|
41,658,678 |
|
Equivalents from stock options |
|
|
266,575 |
|
|
|
401,166 |
|
|
|
353,105 |
|
|
|
417,184 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average diluted shares outstanding |
|
|
42,998,484 |
|
|
|
41,775,111 |
|
|
|
41,811,493 |
|
|
|
42,075,862 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings per diluted common share |
|
$ |
0.60 |
|
|
$ |
0.34 |
|
|
$ |
1.79 |
|
|
$ |
1.53 |
|
27
|
|
|
Item 2. |
|
MANAGEMENTS 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 companys anticipated future financial performance, goals, and
strategies. The act provides a safe harbor for such disclosure, in other words, protection from
unwarranted litigation if actual results are not the same as management expectations.
United desires to provide its shareholders with sound information about past performance and future
trends. Consequently, any forward-looking statements contained in this report, in a report
incorporated by reference to this report, or made by management of United in this report, in any
other reports and filings, in press releases and in oral statements, involves numerous assumptions,
risks and uncertainties.
Actual results could differ materially from those contained in or implied by Uniteds 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.
APPLICATION OF CRITICAL ACCOUNTING POLICIES
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, assumptions and judgments that affect the amounts reported in the
financial statements and accompanying notes. These estimates, assumptions and judgments are based
on information available as of the date of the financial statements. Actual results could differ
from these estimates. These policies, along with the disclosures presented in the other financial
statement notes and in this financial review, provide information on how significant assets and
liabilities are valued in the financial statements and how those values are determined. Based on
the valuation techniques used and the sensitivity of financial statement amounts to the methods,
assumptions, and estimates underlying those amounts, management has identified the determination of
the allowance for credit losses, the valuation of derivative instruments, and the calculation of
the income tax provision to be the accounting areas that require the most subjective or complex
judgments, and as such could be most subject to revision as new information becomes available.
The allowance for credit losses represents managements estimate of the probable credit losses
inherent in the loan portfolio. Managements evaluation of the adequacy of the allowance for
credit losses and the appropriate provision for credit losses is based on 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 credit 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
28
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. The methodology used to determine the allowance for credit losses is described in Note 5
to the unaudited consolidated financial statements. A discussion of the factors leading to changes
in the amount of the allowance for credit losses is included in the Provision for Credit Losses
section of this Managements Discussion and Analysis of Financial Condition and Results of
Operations.
United uses derivative instruments as part of its risk management activities to help protect the
value of certain assets and liabilities against adverse price or interest rate movements. All
derivative instruments are carried at fair value on the balance sheet. The valuation of these
derivative instruments is considered critical because carrying assets and liabilities at fair value
inherently results in more financial statement volatility. The fair values and the information
used to record valuation adjustments for certain assets and liabilities are provided by third party
sources. Because the majority of the derivative instruments are used to protect the value of other
assets and liabilities on the balance sheet, changes in the value of the derivative instruments are
typically offset by changes in the value of the assets and liabilities being hedged, although
income statement volatility can occur if the derivative instruments are not effective in hedging
changes in the value of those assets and liabilities.
Uniteds calculation of income tax provision is complex and requires the use of estimates and
judgments in its determination. As part of Uniteds analysis and implementation of business
strategies, consideration is given to tax laws and regulations which may affect the transaction
under evaluation. This analysis includes the amount and timing of the realization of income tax
liabilities or benefits. United strives to keep abreast of changes in the tax laws and the issuance
of regulations which may impact tax reporting and provisions for income tax expense. United is also
subject to audit by federal and state authorities. Because the application of tax laws is subject
to varying interpretations, results of these audits may produce indicated liabilities which differ
from Uniteds estimates and provisions. United continually evaluates its exposure to possible tax
assessments arising from audits and records its estimate of probable exposure based on current
facts and circumstances.
Any material effect on the financial statements related to these critical accounting areas are
further discussed in this Managements Discussion and Analysis of Financial Condition and Results
of Operations.
The following is a broad overview of the financial condition and results of operations and is not
intended to replace the more detailed discussion, which is presented under specific headings on the
following pages.
FINANCIAL CONDITION
Uniteds total assets as of September 30, 2007 were $7.69 billion, an increase of $968.09 million
or 14.41% from year-end 2006, primarily the result of the acquisition of Premier Community
Bankshares, Inc. (Premier) on July 14, 2007. Investment securities increased $47.80 million or
3.75%, total portfolio loans increased $779.58 million or 16.22%, bank premises and equipment
increased $23.92 million or 62.75%, goodwill increased $145.44 million or 86.87% and other assets
increased $29.40 million or 16.52% due primarily to the Premier merger. Cash and cash equivalents
decreased $54.55 million or 21.06%. The increase in total assets is reflected in a corresponding
increase in total liabilities of $846.91 million or 13.92% from year-end 2006. The increase in
total liabilities was due mainly to an increase of $518.03 million or 10.73% and $324.28 million or 27.45% in deposits and borrowings, respectively, mainly due to the Premier
acquisition. Shareholders equity increased $121.18 million or 19.11% from year-end 2006 due
primarily to the
29
acquisition of Premier. The following discussion explains in more detail the
changes in financial condition by major category.
Cash and Cash Equivalents
Cash and cash equivalents decreased $54.55 million or 21.06% during the first nine months of 2007.
Of this total decrease, cash and due from banks decreased $50.33 million or 23.14% and federal
funds sold decreased $6.13 million or 32.99%. Interest-bearing deposits with other banks increased
$1.91 million or 8.33%. During the first nine months of 2007, net cash of $67.82 million was
provided by operating activities. Net cash of $78.27 million and $44.11 million was used in
investing and financing activities, respectively. See the unaudited Consolidated Statements of
Cash Flows for data on cash and cash equivalents provided and used in operating, investing and
financing activities for the first nine months of 2007 and 2006.
Securities
Total investment securities at September 30, 2007 increased $47.80 million or 3.75% from year-end
2006. Premier added approximately $36 million in investment securities, including purchase
accounting amounts, at merger. Securities available for sale increased $88.30 million or 8.74%.
This change in securities available for sale reflects $502.61 million in sales, maturities and
calls of securities, $558.41 million in purchases, and an increase of $2.72 million in market
value. Premier added approximately $31 million in available for sale securities. Securities held to
maturity decreased $54.04 million or 25.46% from year-end 2006 due to calls and maturities of
securities. The amortized cost and estimated fair value of investment securities, including types
and remaining maturities, is presented in Note 3 to the unaudited Notes to Consolidated Financial
Statements.
Loans
Loans held for sale decreased $1.09 million or 53.26% as loan sales in the secondary market
exceeded originations during the first nine months of 2007. Portfolio loans, net of unearned
income, increased $779.58 million or 16.22% from year-end 2006 mainly as a result of the Premier
acquisition which added approximately $751 million, including purchase accounting amounts, in
portfolio loans. Since year-end 2006, commercial real estate loans and commercial loans (not
secured by real estate) increased $296.87 million or 25.90% and $117.68 million or 12.34%,
respectively. Loans secured by other real estate increased $69.16 million or 57.65%, construction
loans increased $117.07 million or 22.38%, single-family residential real estate loans increased
$156.72 million or 9.11%, and consumer loans increased $22.03 million or 6.30%. The increases were
due primarily to the Premier merger.
30
The table below summarizes the changes in the loan categories since year-end 2006:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30 |
|
|
December 31 |
|
|
|
|
|
|
|
(Dollars in thousands) |
|
2007 |
|
|
2006 |
|
|
$ Change |
|
|
% Change |
|
Loans held for sale |
|
$ |
954 |
|
|
$ |
2,041 |
|
|
$ |
(1,087 |
) |
|
|
(53.26 |
%) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial, financial, and agricultural |
|
$ |
1,071,706 |
|
|
$ |
954,024 |
|
|
$ |
117,682 |
|
|
|
12.34 |
% |
Real Estate: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Single family residential |
|
|
1,877,510 |
|
|
|
1,720,794 |
|
|
|
156,716 |
|
|
|
9.11 |
% |
Commercial |
|
|
1,442,874 |
|
|
|
1,146,007 |
|
|
|
296,867 |
|
|
|
25.90 |
% |
Construction |
|
|
640,116 |
|
|
|
523,042 |
|
|
|
117,074 |
|
|
|
22.38 |
% |
Other |
|
|
189,137 |
|
|
|
119,973 |
|
|
|
69,164 |
|
|
|
57.65 |
% |
Consumer |
|
|
371,902 |
|
|
|
349,868 |
|
|
|
22,034 |
|
|
|
6.30 |
% |
Less: Unearned income |
|
|
(6,919 |
) |
|
|
(6,961 |
) |
|
|
42 |
|
|
|
(0.60 |
%) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Loans, net of unearned income |
|
$ |
5,586,326 |
|
|
$ |
4,806,747 |
|
|
$ |
779,579 |
|
|
|
16.22 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
For a further discussion of loans see Note 4 to the unaudited Notes to Consolidated Financial
Statements.
Goodwill
Goodwill increased $145.44 million or 86.87% since December 31, 2006. The Premier acquisition
added approximately $148 million. Goodwill was reduced in the third quarter of 2007 by $2.28
million due to expiration of the statute of limitations for income tax matters related to a prior
acquisition that were previously recorded as a part of the purchase price allocation.
Other Assets
Other assets increased $29.40 million or 16.52% from year-end 2006. The Premier merger added
approximately $12 million in other assets at merger plus an additional $11.11 million in core
deposit intangibles. The cash surrender value of bank-owned life insurance policies increased
$10.56 million as approximately $7 million was acquired from Premier while the remaining increase
was due to an increase in the cash surrender value. Investment in nonconsolidated subsidiaries
increased $3.76 million during the year due to two new statutory trust subsidiaries formed in the
third quarter of 2007 for the purpose of participating in pools of trust preferred capital
securities.
Deposits
Total deposits at September 30, 2007 increased $518.03 million or 10.73% since year-end 2006 as a
result of the Premier acquisition. Premier added approximately $717 million in deposits, including
purchase accounting amounts. In terms of composition, noninterest-bearing deposits decreased $28.51
million or 3.16% while interest-bearing deposits increased $546.55 million or 13.92% from year-end
2006.
The decrease in noninterest-bearing deposits was due mainly to a decrease in official checks of
$44.42 million as a result of a large amount of loan proceeds checks at year-end 2006. Commercial
noninterest-bearing deposits increased $22.05 million or 3.85% due mainly to the Premier
acquisition. Personal noninterest-bearing deposits declined $3.23 million or 1.31% as customers shifted money into interest-bearing products.
31
The increase in interest-bearing deposits was due mainly to the Premier merger as all major
categories of interest-bearing deposits increased. Time deposits under $100,000 increased $272.26
million, time deposits over $100,000 increased $163.69 million, interest-bearing money market
accounts (MMDAs) increased $60.23 million, NOW accounts increased $34.40 million and regular
savings increased $15.96 million.
The following table summarizes the changes in the deposit categories since year-end 2006:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30 |
|
|
December 31 |
|
|
|
|
|
|
|
(Dollars In thousands) |
|
2007 |
|
|
2006 |
|
|
$ Change |
|
|
% Change |
|
Demand deposits |
|
$ |
365,005 |
|
|
$ |
429,504 |
|
|
$ |
(64,499 |
) |
|
|
(15.02 |
%) |
Interest-bearing checking |
|
|
194,028 |
|
|
|
159,628 |
|
|
|
34,400 |
|
|
|
21.55 |
% |
Regular savings |
|
|
333,602 |
|
|
|
317,642 |
|
|
|
15,960 |
|
|
|
5.02 |
% |
Money market accounts |
|
|
1,925,523 |
|
|
|
1,829,300 |
|
|
|
96,223 |
|
|
|
5.26 |
% |
Time deposits under $100,000 |
|
|
1,590,102 |
|
|
|
1,317,839 |
|
|
|
272,263 |
|
|
|
20.66 |
% |
Time deposits over $100,000 |
|
|
937,966 |
|
|
|
774,279 |
|
|
|
163,687 |
|
|
|
21.14 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total deposits |
|
$ |
5,346,226 |
|
|
$ |
4,828,192 |
|
|
$ |
518,034 |
|
|
|
10.73 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Borrowings
Total borrowings at September 30, 2007 increased $324.28 million or 27.45% during the first nine
months of 2007. Premier added approximately $114 million at merger. Since year-end 2006, short-term
borrowings increased $48.35 million or 7.09% due to an increase of $114.35 million in securities
sold under agreements to repurchase. This increase was partially offset by reductions of $45
million in overnight FHLB borrowings and $19.32 million in federal funds purchased. Premier added
approximately $20 million in short-term borrowings at merger. Long-term borrowings increased
$275.93 million or 55.27% since year-end 2006 as long term FHLB advances increased $154.77 million
or 37.39%. Premier added approximately $55 million in FHLB advances. During the third quarter of
2007, United participated in two pools of trust preferred capital securities totaling $80 million
with the proceeds invested in junior subordinated debt securities of United. The proceeds of the
issuance were used to help fund the cash portion of the acquisition price for Premier. In addition,
United assumed approximately $39 million of junior subordinated debt securities in the Premier
merger.
In June 2007, United prepaid two $100 million long-term FHLB advances and terminated two interest
rate swaps associated with the advances. In addition, United prepaid approximately $28.9 million
of a $100 million long-term convertible FHLB advance. United incurred a before-tax charge of
approximately $786 thousand to prepay the debt and a before-tax gain of $787 thousand on the
termination of the interest rate swaps. United replaced the $228.9 million of debt with a 3-year
FHLB advance and an associated interest rate swap.
32
The table below summarizes the change in the borrowing categories since year-end 2006:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30 |
|
|
December 31 |
|
|
|
|
|
|
|
(Dollars In thousands) |
|
2007 |
|
|
2006 |
|
|
$ Change |
|
|
% Change |
|
Federal funds purchased |
|
$ |
78,405 |
|
|
$ |
97,720 |
|
|
$ |
(19,315 |
) |
|
|
(19.77 |
%) |
Securities sold under agreements to repurchase |
|
|
575,206 |
|
|
|
460,858 |
|
|
|
114,348 |
|
|
|
24.81 |
% |
Overnight FHLB advances |
|
|
75,000 |
|
|
|
120,000 |
|
|
|
(45,000 |
) |
|
|
(37.50 |
%) |
TT&L note option |
|
|
2,007 |
|
|
|
3,688 |
|
|
|
(1,681 |
) |
|
|
(45.58 |
%) |
Long-term FHLB advances |
|
|
568,672 |
|
|
|
413,899 |
|
|
|
154,773 |
|
|
|
37.39 |
% |
Issuances of trust preferred capital securities |
|
|
206,308 |
|
|
|
85,301 |
|
|
|
121,007 |
|
|
|
141.86 |
% |
Obligation under a capital lease agreement |
|
|
151 |
|
|
|
|
|
|
|
151 |
|
|
|
100.00 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total borrowings |
|
$ |
1,505,749 |
|
|
$ |
1,181,466 |
|
|
$ |
324,283 |
|
|
|
27.45 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
For a further discussion of borrowings see Notes 8 and 9 to the unaudited Notes to Consolidated
Financial Statements.
Accrued Expenses and Other Liabilities
Accrued expenses and other liabilities at September 30, 2007 increased $5.07 million or 7.79% from
year-end 2006. Premier added approximately $12 million at merger. Otherwise, the derivative
liability associated with interest rate swaps increased $1.70 million due to a change in value.
Partially offsetting these increases was a decrease of $8.99 million in income taxes payable due to
a timing difference in payments.
Shareholders Equity
Shareholders equity at September 30, 2007 increased $121.18 million or 19.11% from year-end 2006
mainly as a result of the Premier acquisition. The Premier transaction added approximately $102
million as 2,684,068 shares were issued from treasury for the merger at a cost of $93.71 million.
Earnings net of dividends declared for the first nine months of 2007 were $39.81 million.
During the first nine months of 2007, a total of 718,500 shares at a cost of $24.87 million were
repurchased under a plan approved by Uniteds Board of Directors in May of 2006 to repurchase up to
1.7 million shares of Uniteds common stock on the open market. Since its inception, United has
repurchased a total of 1,377,800 shares under the plan as of September 30, 2007.
Accumulated other comprehensive income increased $1.89 million due mainly to an increase of $1.77
million, net of deferred income taxes, in the fair value of Uniteds available for sale investment
portfolio, which was partially offset by a decrease of $1.05 million, net of deferred income taxes,
in the fair value adjustments on cash flow hedges.
RESULTS OF OPERATIONS
Overview
Net income for the first nine months and third quarter of 2007 was $74.72 million or $1.79 per
diluted share and $25.80 million or $0.60 per diluted share, respectively. As previously mentioned,
United completed its
33
acquisition of Premier Community Bankshares, Inc. (Premier) during the third
quarter of 2007. The financial results of Premier are included in Uniteds results from the July 14, 2007 acquisition date.
Net income for the first nine months and third quarter of 2006 was $64.23 million or $1.53 per
diluted share and $14.17 million or $0.34 per diluted share, respectively. The results for the
third quarter of 2006 included significant charges to prepay certain Federal Home Loan Bank (FHLB)
long-term advances and terminate interest rate swaps associated with these advances. In addition to
these significant charges, the results for the first nine months of 2006 included the results of a
repositioning of Uniteds balance sheet in the first quarter of 2006. The balance sheet
repositioning resulted in a loss from the sale of investment securities and a gain on the
termination of an interest rate swap associated with the prepayment of an FHLB advance. Further
information is provided in a more detailed discussion below.
Uniteds annualized return on average assets for the first nine months of 2007 was 1.45% and return
on average shareholders equity was 14.81% as compared to 1.29% and 13.38% for the first nine
months of 2006. For the third quarter of 2007, Uniteds annualized return on average assets was
1.37% while the return on average equity was 13.91% as compared to 0.85% and 8.83%, respectively,
for the third quarter of 2006.
Tax-equivalent net interest income for the first nine months of 2007 was $176.90 million which was
flat from the prior years first nine months. Tax-equivalent net interest income increased $4.50
million or 7.65% for the third quarter of 2007 as compared to the same period of 2006. The
provision for credit losses was $2.75 million for the first nine months of 2007 as compared to
$1.17 million for the first nine months of 2006. For the quarters ended September 30, 2007 and
2006, the provision for credit losses was $1.55 million and $571 thousand, respectively.
Noninterest income was $48.77 million for the first nine months of 2007, up $14.47 million from the
first nine months of 2006. Included in total noninterest income for the first nine months of 2007
was a before-tax gain of $787 thousand on the termination of interest rate swaps associated with
the prepayment of FHLB advances as compared to a before-tax loss of $4.60 million for the first
nine months of 2006. In addition, Uniteds income from investment security transactions increased
$3.57 million for the first nine months of 2007 as compared to the same period last year as United
incurred a net loss on security transactions of $2.93 million in the first quarter of 2006 due to
an other than temporary impairment on approximately $86 million of low-yielding fixed rate
investment securities which United subsequently sold as part of its balance sheet repositioning.
For the third quarter of 2007, noninterest income was $17.33 million, an increase of $11.11 million
from the third quarter of 2006. The increase resulted mainly from a before-tax loss of $7.66
million on the termination of an interest rate swap associated with the prepayment of an FHLB
advance during the third quarter of 2006.
Noninterest expense decreased $1.55 million or 1.48% for the first nine months of 2007 compared to
the same period in 2006. Results for the first nine months of 2007 included $1.33 million of
expenses and integration costs related to the Premier merger. Results for the first nine months of
2007 and 2006 both included penalties to prepay FHLB advances of $786 thousand and $8.26 million,
respectively. For the third quarter of 2007, noninterest expense decreased $1.19 million or 2.96%
from the third quarter of 2006. Included in the results for the third quarter of 2007 were
expenses related to the Premier merger while the results for the third quarter of 2006 included
penalties to prepay FHLB advances. Merger expenses and related integration costs of the Premier
acquisition were $1.01 million for the third quarter of 2007. Uniteds
34
effective tax rate was 30.55% and 31.74% for the first nine months of 2007 and 2006, respectively, and
28.06% and 30.42% for the third quarter of 2007 and 2006, respectively. During the third quarter of
2007, United reduced its income tax reserve by $1.06 million due to the expiration of the statute
of limitations for examinations of certain years which resulted in a lower estimated effective tax
rate for 2007.
Net Interest Income
Tax-equivalent net interest for the first nine months of 2007 was $176.90 million which was
virtually flat from the prior years first nine months. Average earning assets increased $148.39
million or 2.43% as average net loans increased $255.16 million or 5.45% due mainly to the Premier
acquisition. In addition, the average yield on earning assets for the first nine months of 2007
increased 31 basis points from the first nine months of 2006 due to higher interest rates. However,
as a result of the higher interest rates, the average cost of funds for the first nine months of
2007 increased 41 basis points from the first nine months of 2006. In addition, for the nine
months ended September 30, 2007, interest income from Uniteds asset securitization decreased $1.22
million or 34.07% from the same period in 2006. The net interest margin for the first nine months
of 2007 was 3.78%, down 9 basis points from a net interest margin of 3.87% during the same period
last year.
Tax-equivalent net interest income for the third quarter of 2007 was $63.32 million, an increase of
$4.50 million or 7.65% from the third quarter of 2006. This increase in tax-equivalent net interest
income was primarily attributable to a $672.12 million or 11.08% increase in average earning assets
resulting primarily from the Premier acquisition. Average net loans increased $663.08 million or
14.03% while average investment securities declined $26.13 million or 2.01%. In addition, the
average yield on earning assets for the third quarter of 2007 increased 20 basis points from the
third quarter of 2006. Partially offsetting these increases to net interest income was a 26 basis
point increase in the cost of funds from the third quarter of 2006. The net interest margin for the
third quarter of 2007 was 3.75%, down 12 basis points from a net interest margin of 3.87% for the
third quarter of 2006.
On a linked-quarter basis, Uniteds tax-equivalent net interest income for the third quarter of
2007 increased $6.42 million or 11.27% from the second quarter of 2007. This increase in
tax-equivalent net interest income was due primarily to a $736.72 million or 12.28% increase in
average earning assets resulting mainly from the Premier acquisition. Average net loans increased
$672.06 million or 14.25% and average investment securities increased $37.20 million or 3.00%. In
addition, the average yield on earning assets increased 11 basis points for the quarter. Partially
offsetting these increases to net interest income was an 8 basis point increase in the cost of
funds from the second quarter of 2007. The net interest margin for the third quarter of 2007 of
3.75% was a decrease of 5 basis points from the net interest margin of 3.80% for the second quarter
of 2007.
35
Tables 1 and 2 below show the unaudited consolidated daily average balance of major categories of
assets and liabilities for the three-month and nine-month periods ended September 30, 2007 and
2006, respectively, with the interest and rate earned or paid on such amount. The interest income
and yields on federally nontaxable loans and investment securities are presented on a
tax-equivalent basis using the statutory federal income tax rate of 35%. The interest income and
yield on state nontaxable loans and investment securities are presented on a tax-equivalent basis
using the statutory state income tax rate of 9%.
Table 1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
Three Months Ended |
|
|
|
September 30, 2007 |
|
|
September 30, 2006 |
|
|
|
Average |
|
|
|
|
|
|
Avg. |
|
|
Average |
|
|
|
|
|
|
Avg. |
|
(Dollars in thousands) |
|
Balance |
|
|
Interest |
|
|
Rate |
|
|
Balance |
|
|
Interest |
|
|
Rate |
|
|
|
|
|
|
ASSETS |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earning Assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal funds sold and securities repurchased
under agreements to resell and other
short-term investments |
|
$ |
73,025 |
|
|
$ |
876 |
|
|
|
4.76 |
% |
|
$ |
37,862 |
|
|
$ |
515 |
|
|
|
5.41 |
% |
Investment Securities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Taxable |
|
|
1,055,455 |
|
|
|
13,832 |
|
|
|
5.24 |
% |
|
|
1,074,752 |
|
|
|
13,934 |
|
|
|
5.19 |
% |
Tax-exempt (1) (2) |
|
|
221,351 |
|
|
|
4,549 |
|
|
|
8.22 |
% |
|
|
228,185 |
|
|
|
4,918 |
|
|
|
8.62 |
% |
|
|
|
|
|
Total Securities |
|
|
1,276,806 |
|
|
|
18,381 |
|
|
|
5.76 |
% |
|
|
1,302,937 |
|
|
|
18,852 |
|
|
|
5.79 |
% |
Loans, net of unearned income (1) (2) (3) |
|
|
5,436,915 |
|
|
|
102,262 |
|
|
|
7.47 |
% |
|
|
4,768,835 |
|
|
|
86,959 |
|
|
|
7.25 |
% |
Allowance for loan losses |
|
|
(49,088 |
) |
|
|
|
|
|
|
|
|
|
|
(44,087 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loans |
|
|
5,387,827 |
|
|
|
|
|
|
|
7.54 |
% |
|
|
4,724,748 |
|
|
|
|
|
|
|
7.31 |
% |
|
|
|
|
|
Total earning assets |
|
|
6,737,658 |
|
|
$ |
121,519 |
|
|
|
7.17 |
% |
|
|
6,065,547 |
|
|
$ |
106,326 |
|
|
|
6.97 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Other assets |
|
|
759,307 |
|
|
|
|
|
|
|
|
|
|
|
560,501 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
TOTAL ASSETS |
|
$ |
7,496,965 |
|
|
|
|
|
|
|
|
|
|
$ |
6,626,048 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-Bearing Funds: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-bearing deposits |
|
$ |
4,391,017 |
|
|
$ |
40,176 |
|
|
|
3.63 |
% |
|
$ |
3,897,572 |
|
|
$ |
32,312 |
|
|
|
3.29 |
% |
Short-term borrowings |
|
|
712,609 |
|
|
|
8,220 |
|
|
|
4.58 |
% |
|
|
680,201 |
|
|
|
7,142 |
|
|
|
4.17 |
% |
Long-term borrowings |
|
|
714,870 |
|
|
|
9,801 |
|
|
|
5.44 |
% |
|
|
497,516 |
|
|
|
8,052 |
|
|
|
6.42 |
% |
|
|
|
|
|
Total Interest-Bearing Funds |
|
|
5,818,496 |
|
|
|
58,197 |
|
|
|
3.97 |
% |
|
|
5,075,289 |
|
|
|
47,506 |
|
|
|
3.71 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Noninterest-bearing deposits |
|
|
876,034 |
|
|
|
|
|
|
|
|
|
|
|
852,850 |
|
|
|
|
|
|
|
|
|
Accrued expenses and other liabilities |
|
|
66,534 |
|
|
|
|
|
|
|
|
|
|
|
61,216 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
TOTAL LIABILITIES |
|
|
6,761,064 |
|
|
|
|
|
|
|
|
|
|
|
5,989,355 |
|
|
|
|
|
|
|
|
|
SHAREHOLDERS EQUITY |
|
|
735,901 |
|
|
|
|
|
|
|
|
|
|
|
636,693 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
TOTAL LIABILITIES AND
SHAREHOLDERS EQUITY |
|
$ |
7,496,965 |
|
|
|
|
|
|
|
|
|
|
$ |
6,626,048 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NET INTEREST INCOME |
|
|
|
|
|
$ |
63,322 |
|
|
|
|
|
|
|
|
|
|
$ |
58,820 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
INTEREST SPREAD |
|
|
|
|
|
|
|
|
|
|
3.20 |
% |
|
|
|
|
|
|
|
|
|
|
3.26 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NET INTEREST MARGIN |
|
|
|
|
|
|
|
|
|
|
3.75 |
% |
|
|
|
|
|
|
|
|
|
|
3.87 |
% |
|
|
|
(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. |
36
Table 2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended |
|
|
Nine Months Ended |
|
|
|
|
September 30, 2007 |
|
|
September 30, 2006 |
|
|
|
Average |
|
|
|
|
|
|
Avg. |
|
|
Average |
|
|
|
|
|
|
Avg. |
|
(Dollars in thousands) |
|
Balance |
|
|
Interest |
|
|
Rate |
|
|
Balance |
|
|
Interest |
|
|
Rate |
|
|
|
|
|
|
ASSETS |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earning Assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal funds sold and securities repurchased
under agreements to resell and other
short-term investments |
|
$ |
51,807 |
|
|
$ |
1,980 |
|
|
|
5.11 |
% |
|
$ |
39,856 |
|
|
$ |
1,235 |
|
|
|
4.14 |
% |
Investment Securities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Taxable |
|
|
1,041,117 |
|
|
|
40,446 |
|
|
|
5.18 |
% |
|
|
1,147,628 |
|
|
|
43,371 |
|
|
|
5.04 |
% |
Tax-exempt (1) (2) |
|
|
221,716 |
|
|
|
13,631 |
|
|
|
8.20 |
% |
|
|
233,930 |
|
|
|
15,062 |
|
|
|
8.59 |
% |
|
|
|
|
|
Total Securities |
|
|
1,262,833 |
|
|
|
54,077 |
|
|
|
5.71 |
% |
|
|
1,381,558 |
|
|
|
58,433 |
|
|
|
5.64 |
% |
Loans, net of unearned income (1) (2) (3) |
|
|
4,982,200 |
|
|
|
275,883 |
|
|
|
7.40 |
% |
|
|
4,725,633 |
|
|
|
250,216 |
|
|
|
7.08 |
% |
Allowance for loan losses |
|
|
(45,560 |
) |
|
|
|
|
|
|
|
|
|
|
(44,153 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loans |
|
|
4,936,640 |
|
|
|
|
|
|
|
7.47 |
% |
|
|
4,681,480 |
|
|
|
|
|
|
|
7.14 |
% |
|
|
|
|
|
Total earning assets |
|
|
6,251,280 |
|
|
$ |
331,940 |
|
|
|
7.10 |
% |
|
|
6,102,894 |
|
|
$ |
309,884 |
|
|
|
6.79 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Other assets |
|
|
624,307 |
|
|
|
|
|
|
|
|
|
|
|
558,016 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
TOTAL ASSETS |
|
$ |
6,875,587 |
|
|
|
|
|
|
|
|
|
|
$ |
6,660,910 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-Bearing Funds: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-bearing deposits |
|
$ |
4,040,301 |
|
|
$ |
107,574 |
|
|
|
3.56 |
% |
|
$ |
3,792,935 |
|
|
$ |
84,807 |
|
|
|
2.99 |
% |
Short-term borrowings |
|
|
679,128 |
|
|
|
22,846 |
|
|
|
4.50 |
% |
|
|
776,772 |
|
|
|
23,029 |
|
|
|
3.96 |
% |
Long-term borrowings |
|
|
582,512 |
|
|
|
24,619 |
|
|
|
5.65 |
% |
|
|
512,314 |
|
|
|
25,111 |
|
|
|
6.55 |
% |
|
|
|
|
|
Total Interest-Bearing Funds |
|
|
5,301,941 |
|
|
|
155,039 |
|
|
|
3.91 |
% |
|
|
5,082,021 |
|
|
|
132,947 |
|
|
|
3.50 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-interest bearing deposits |
|
|
831,739 |
|
|
|
|
|
|
|
|
|
|
|
875,556 |
|
|
|
|
|
|
|
|
|
Accrued expenses and other liabilities |
|
|
67,190 |
|
|
|
|
|
|
|
|
|
|
|
61,668 |
|
|
|
|
|
|
|
|
|
TOTAL LIABILITIES |
|
|
6,200,870 |
|
|
|
|
|
|
|
|
|
|
|
6,019,245 |
|
|
|
|
|
|
|
|
|
SHAREHOLDERS EQUITY |
|
|
674,717 |
|
|
|
|
|
|
|
|
|
|
|
641,665 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
TOTAL LIABILITIES AND SHAREHOLDERS
EQUITY |
|
$ |
6,875,587 |
|
|
|
|
|
|
|
|
|
|
$ |
6,660,910 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NET INTEREST INCOME |
|
|
|
|
|
$ |
176,901 |
|
|
|
|
|
|
|
|
|
|
$ |
176,937 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
INTEREST SPREAD |
|
|
|
|
|
|
|
|
|
|
3.19 |
% |
|
|
|
|
|
|
|
|
|
|
3.29 |
% |
|
NET INTEREST MARGIN |
|
|
|
|
|
|
|
|
|
|
3.78 |
% |
|
|
|
|
|
|
|
|
|
|
3.87 |
% |
|
|
|
(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. |
Provision for Credit Losses
At September 30, 2007, nonperforming loans were $22.79 million or 0.41% of loans, net of unearned
income compared to nonperforming loans of $14.19 million or 0.30% of loans, net of unearned income
at December 31, 2006, respectively. The increase was due largely to nonperforming loans of $5.63
million added from the Premier merger. The components of nonperforming loans include nonaccrual
loans and
37
loans, which are contractually past due 90 days or more as to interest or principal, but have not
been put on a nonaccrual basis. At September 30, 2007, nonaccrual loans were $8.96 million, an
increase of $3.20 million from $5.76 million at year-end 2006. Premier added $2.23 million in
nonaccrual loans. Loans past due 90 days or more were $13.83 million at September 30, 2007, an
increase of $5.40 million from $8.43 million at year-end 2006. Premier added $3.40 million in loans
past due 90 days or more. Otherwise, the additional increase in nonaccrual loans and loans past due
90 days or more were due mainly to the addition of certain residential real estate construction
credits originated by a former United loan officer with an outstanding balance of $3.67 million
being either 90-plus days delinquent or on nonaccrual status as of September 30, 2007. Total
nonperforming assets of $28.12 million, including OREO of $5.34 million at September 30, 2007,
represented 0.37% of total assets at the end of the third quarter which compares favorably to
Uniteds most recently reported peer group banking companies (bank holding companies with total
assets between $5 and $10 billion) percentage of 0.45%. For a summary of nonperforming assets, see
Note 6 to the unaudited Notes to Consolidated Financial Statements.
At September 30, 2007, impaired loans were $29.85 million, which was an increase of $7.89 million
from the $21.96 million in impaired loans at December 31, 2006. This increase in impaired loans
was due primarily to the addition of two large collateralized commercial credits with a total
balance of $7.32 million and to an increase of $2.92 million from the above mentioned certain
residential real estate construction credits. Charge-offs of $1.30 million and $3.02 million were
recognized on the real estate construction credits during the third quarter and first nine months
of 2007, respectively, which were previously reported as impaired with specific allowances
allocated in the companys allowance for credit losses. Based on current information and events,
United believes it is probable that the borrowers will not be able to repay all amounts due
according to the contractual terms of the loan agreements and therefore, specific allowances in the
companys allowance for credit losses have been allocated for all of these loans. For further
details regarding impaired loans, see Note 6 to the unaudited Consolidated Financial Statements.
United evaluates the adequacy of the allowance for credit losses and its loan administration
policies are focused upon the risk characteristics of the loan portfolio. Uniteds 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 credit losses, allocation among
loan types and lending-related commitments, and the resulting provision for credit losses.
United maintains an allowance for loan losses and an allowance for lending-related commitments.
The combined allowances for loan losses and lending-related commitments are referred to as the
allowance for credit losses. At September 30, 2007, the allowance for credit losses was $58.62
million as compared to $52.37 million at December 31, 2006. As a percentage of loans, net of
unearned income, the allowance for credit losses was 1.05% at September 30, 2007 and 1.09% of
loans, net of unearned income at December 31, 2006. The ratio of the allowance for credit losses
to nonperforming loans was 257.3% and 369.2% at September 30, 2007 and December 31, 2006,
respectively.
The provision for credit losses for the first nine months of 2007 and 2006 was $2.75 million and
$1.17 million, respectively. For the quarters ended September 30, 2007 and 2006, the provision for
credit losses was $1.55 million and $571 thousand, respectively. Net charge-offs for the first
nine months of 2007 were $4.15 million as compared to $1.50 million for the first nine months of
2006. Net charge-offs were $1.80
38
million for the third quarter of 2007 as compared to net charge-offs of $930 thousand for the same
quarter in 2006. Annualized net charge-offs as a percentage of average loans were 0.13% and 0.11%
for the third quarter and first nine months of 2007, respectively. These ratios also compare
favorably to Uniteds most recently reported peer group banking companies net charge-offs to
average loans percentage of 0.18% for the quarter and 0.21% year-to-date. The increase in net
charge-offs from last years third quarter and first nine months was due mainly to the charge-offs
of $1.30 million and $3.02 million for the third quarter and first nine months of 2007 on the
residential real estate construction credits mentioned above. Note 5 to the accompanying unaudited
Notes to Consolidated Financial Statements provides a progression of the allowance for credit
losses.
In determining the adequacy of the allowance for credit losses, management makes allocations to
specific commercial loans classified by management as to the level of risk. Management determines
the loans 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 loans effective interest rate,
or as a practical expedient, at the loans 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 managements 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 factors to loan pools grouped by similar
risk characteristics. While allocations are made to specific loans and pools of loans, the
allowance is available for all credit losses. The allowance for imprecision is a relatively small
component of the total allowance for credit losses and recognizes the normal variance resulting
from the process of estimation. Differences between actual loan loss experience and estimates are
reviewed on a quarterly basis and adjustments are made to those estimates.
Uniteds formal company-wide process at September 30, 2007 produced increased allocations in three
of the four loan categories. The components of the allowance allocated to commercial loans
increased by $4.5 million due to the impact of the acquired loans from Premier, increased loan
outstandings net of the acquisition and higher qualitative factors. Consumer loans increased $221
thousand also as a result of the Premier acquisition. The real estate construction loan pool
allocations rose during the first nine months by $2.4 million primarily due to the Premier
acquisition and a special allocation of $834 million related to the single family residential
construction loan pool. The components of the allowance allocated to real estate loans decreased by
$204 thousand due to reductions in high loan to value outstandings, as well as changes in loan
volume and qualitative factors. The unfunded commitments liability decreased by $478 thousand to
$8.3 million.
An allowance is established for probable credit losses on impaired loans via specific allocations.
Nonperforming commercial loans and leases are regularly reviewed to identify impairment. A loan or
lease is impaired when, based on current information and events, it is probable that the bank will
not be able to collect all amounts contractually due. Measuring impairment of a loan requires
judgment and estimates, and the eventual outcomes may differ from those estimates. Impairment is
measured based upon the present value of expected future cash flows from the loan discounted at the
loans effective rate, the loans observable market price or the fair value of collateral, if the
loan is collateral dependent. When the selected measure is less than the recorded investment in the
loan, an impairment has occurred. The allowance for
39
impaired loans was $4.1 million at September 30, 2007 and $3.0 million at December 31, 2006. Compared to the prior
year-end, this element of the allowance increased by $1.1 million due to the combination of the
Premier acquisition and higher specific allocations in the commercial and real estate construction
and development loan pools.
An allowance is also recognized for imprecision inherent in loan loss migration models and other
estimates of loss. There are many factors affecting the allowance for loan losses and allowance for
lending-related commitments; some are quantitative while others require qualitative judgment.
Although management believes its methodology for determining the allowance adequately considers all
of the potential factors to identify and quantify probable losses in the portfolio, the process
includes subjective elements and is therefore susceptible to change. This estimate for imprecision
has been established to recognize the variance, within a reasonable margin, of the loss estimation
process. The estimate for imprecision decreased at September 30, 2007 by $177 thousand to $1.5
million. This represents only 2.53% of the banks total allowance for credit loss and in as much as
this variance approximates a pre-determined narrow parameter, the methodology has confirmed that
the Companys allowance for credit loss is at an appropriate level.
Management believes that the allowance for credit losses of $58.62 million at September 30, 2007 is
adequate to provide for probable losses on existing loans and loan-related commitments based on
information currently available.
Uniteds loan administration policies are focused on the risk characteristics of the loan portfolio
in terms of loan approval and credit quality. The commercial loan portfolio is monitored for
possible concentrations of credit in one or more industries. Management has lending limits as a
percentage of capital per type of credit concentration in an effort to ensure adequate
diversification within the portfolio. Most of Uniteds commercial loans are secured by real estate
located in West Virginia, Southeastern Ohio, Virginia and Maryland. It is the opinion of
management that these commercial loans do not pose any unusual risks and that adequate
consideration has been given to these loans in establishing the allowance for credit losses.
Management is not aware of any potential problem loans, trends or uncertainties, which it
reasonably expects, will materially impact future operating results, liquidity, or capital
resources which have not been disclosed. Additionally, management has disclosed all known material
credits, which cause management to have serious doubts as to the ability of such borrowers to
comply with the loan repayment schedules.
Other Income
Other income consists of all revenues, which are not included in interest and fee income related to
earning assets. Noninterest income has been and will continue to be an important factor for
improving Uniteds profitability. Recognizing the importance, management continues to evaluate
areas where noninterest income can be enhanced.
Noninterest income was $48.77 million for the first nine months of 2007, up $14.47 million when
compared to the first nine months of 2006. Included in total noninterest income for the first nine
months of 2007 was a before-tax gain of $787 thousand on the termination of interest rate swaps
associated with the prepayment of FHLB advances as compared to a before-tax loss of $4.60 million
for the first nine months of 2006. In addition, Uniteds income from investment security
transactions increased $3.57 million for the first nine
40
months of 2007 as compared to the same
period last year as United incurred a net loss on security transactions of $2.93 million in the first quarter of 2006 due to an other than temporary
impairment on approximately $86 million of low-yielding fixed rate investment securities which
United subsequently sold as part of its balance sheet repositioning. Excluding the results of the
interest rate swap terminations and investment security transactions, noninterest income for the
first nine months of 2007 would have increased $5.52 million or 13.14% from the first nine months
of 2006.
For the third quarter of 2007, noninterest income was $17.33 million, an increase of $11.11 million
from the third quarter of 2006. The increase was mainly due to a before-tax loss of approximately
$7.66 million in the third quarter of 2006 on the termination of interest rate swaps associated
with the prepayment of FHLB advances. Excluding the amounts associated with interest rate swap
terminations and security transactions, noninterest income for the third quarter of 2007 would have
increased $3.15 million or 22.47% from the third quarter of 2006.
The rise in noninterest income in the first nine months of 2007 from the same period in 2006 was
due in large part to an increase of $2.56 million or 11.86% in fees from deposit services mainly as
a result of Uniteds High Performance Checking program and the Premier acquisition. For the third
quarter of 2007, fees from deposit services increased $1.72 million or 23.35% as compared to the
same period in 2006. In particular, insufficient funds (NSF) fees increased $2.12 million and $1.35
million during the first nine months and third quarter of 2007, respectively, and check card fees
increased $821 thousand and $391 thousand, respectively. Deposit service charges and account
analysis fees declined $266 thousand and $243 thousand, respectively, for the first nine months of
2007 as compared to the same period in 2006. For the third quarter of 2007, deposit service charges
and account analysis fees declined $60 thousand and $94 thousand, respectively, compared to the
third quarter of 2006.
Revenue from trust and brokerage services for the first nine months of 2007 grew $1.24 million or
12.58% from the first nine months of 2006. For the third quarter of 2007, revenue from trust and
brokerage services grew $598 thousand or 18.75% from the prior years third quarter. 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 Uniteds traditional banking products and services. The northern Virginia market
provides a relatively large number of potential customers with high per capita incomes.
Income from bank-owned life insurance increased $680 thousand or 20.70% for the first nine months
of 2007 as compared to last years first nine months due to an increase in the cash surrender
value, but was relatively flat for the third quarter of 2007 as compared to the third quarter of
2006.
Mortgage banking income decreased $168 thousand or 27.32% for the first nine months of 2007 from
the same period in 2006 due to fewer sales. Mortgage loan sales were $32.19 million in the first
nine months 2007 as compared to $40.90 million in the first nine months of 2006. Mortgage banking
income for the third quarter of 2007 decreased $112 thousand or 47.46% when compared to the same
period in 2006 due once again to fewer sales. Mortgage loan sales were $9.47 million in the third
quarter of 2007 as compared to $18.60 million in the third quarter of 2006.
Fees from bankcard transactions increased $507 thousand or 12.64% and $310 thousand or 22.03% for
the
41
first nine months and third quarter of 2007 as compared to the same time periods last year due
to increased volume.
Other income increased $637 thousand and $443 thousand for the first nine months and third quarter
of 2007, respectively. Income from the outsourcing of official checks processing for the first nine
months and third quarter of 2007 increased $477 thousand and $101 thousand, respectively, over the
same periods last year.
On a linked-quarter basis, noninterest income increased $801 thousand from the second quarter of
2007. Included in the results from the second quarter of 2007 was the previously mentioned
before-tax gain of $787 thousand on the termination of interest rate swaps associated with the
prepayment of FHLB advances. Excluding the results of the interest rate swap terminations and
investment security transactions, noninterest income for the third quarter of 2007 would have
increased $1.58 million or 10.15% from the second quarter of 2007 as deposit service fees increased
$1.22 million or 15.48% and bankcard transaction fees increased $272 thousand or 18.85%.
Other Expenses
Just as management continues to evaluate areas where noninterest income can be enhanced, it strives
to improve the efficiency of its operations to reduce costs. Other expenses include all items of
expense other than interest expense, the provision for loan losses, and income taxes.
For the first nine months of 2007, noninterest expenses decreased $1.55 million or 1.48% from the
first nine months of 2006. Results for the first nine months of 2007 included expenses related to
the Premier merger. Results for the first nine months of 2007 and 2006 both included penalties to
prepay FHLB advances. Merger expenses and related integration costs of the Premier acquisition
were $1.33 million for the first nine months of 2007. United incurred before-tax penalties of $786
thousand and $8.26 million to prepay FHLB advances during the first nine months of 2007 and 2006,
respectively.
Noninterest expenses decreased $1.19 million or 2.96% for the third quarter of 2007 compared to the
same period in 2006. Included in the results for the third quarter of 2007 were expenses related to
the Premier merger while the results for the third quarter of 2006 included penalties to prepay
FHLB advances. Merger expenses and related integration costs of the Premier acquisition were $1.01
million for the third quarter of 2007. United incurred before-tax penalties of approximately $8.26
million to prepay FHLB advances during the third quarter of 2006.
Salaries and benefits expense for the first nine months of 2007 was flat from the first nine months
of 2006, increasing $41 thousand or less than 1%. Salaries increased $1.83 million or 5.06% due
mainly to the additional employees from the Premier merger while benefits expense decreased $1.13
million or 12.21% due to a decrease of $1.99 million in pension expense. During the third quarter
of 2006, United made a significant contribution to its pension plan as allowed by the Pension
Protection Act of 2006. This large contribution has resulted in decreased pension expense for
United in the year 2007 as compared to 2006. Salaries and benefits expense for the third quarter
of 2007 increased $1.71 million or 10.88% from the third quarter of 2006. Salaries increased $1.52
million or 12.21% due mainly to the additional employees from the Premier merger. Pension expense
for the third quarter of 2007 decreased $565 thousand from the same
42
period in 2006.
Net occupancy expense for the first nine months and third quarter of 2007 increased $935 thousand
or 9.89% and $792 thousand or 26.13% from the first nine months and third quarter of 2006, respectively.
The increases were due mainly to additional building depreciation, building rental expense, and
real property taxes from the branches added in the Premier merger.
Data processing expense increased $1.97 million or 44.56% and $971 thousand or 65.74% for the first
nine months and third quarter of 2007, respectively, as compared to the first nine months and third
quarter of 2006. The increases were primarily due to additional outsourcing of processing functions
and a change in processing procedures in addition to the Premier merger. The outsourcing of
functions was partially offset by a reduction in personnel expense while the change in processing
procedures is expected to result in future cost savings as United meets the requirements of Check
21.
Other expenses increased $2.36 million or 8.56% and $2.91 million or 32.81% for the first nine
months and third quarter of 2007 as compared to the first nine months and third quarter of 2006.
Included in other expenses for 2007 are merger and related integration costs of $1.33 million and
$1.01 million for the Premier acquisition. In addition, amortization of core deposit intangibles
for the first nine months and third quarter of 2007 increased $337 thousand and $542 thousand,
respectively, from the same time periods in 2006 due to the Premier merger. Other expenses of note
that increased for the first nine months and third quarter of 2007 from last years results were
loan collection, armored carrier, postage, ATM and bankcard processing costs. Marketing and related
costs of Uniteds High Performance Checking program declined $759 thousand and $55 thousand in the
first nine months and third quarter of 2007, respectively, as compared to the first nine months and
third quarter of 2006.
On a linked-quarter basis, noninterest expense for the third quarter of 2007 increased $6.53
million from the second quarter of 2007 due mainly to the Premier merger. Accordingly, most major
categories of noninterest expense showed increases. In particular, salaries and employee benefits
expense increased $2.82 million, net occupancy expense increased $709 thousand, equipment expense
increased $702 thousand, core deposit amortization increased $618 thousand and armored carrier
expense increased $468 thousand all mainly the result of the Premier merger. Merger expenses and
related integration costs of the Premier acquisition were $1.01 million for the third quarter of
2007 as compared to $263 thousand for the second quarter of 2007. Included in noninterest expense
for the second quarter of 2007 was a before-tax penalty of $786 thousand to prepay approximately
$28.9 million of a $100 million long-term convertible FHLB advance.
As previously discussed in Note 11 of the unaudited Notes to Consolidated Financial Statements
contained within this document, United adopted SFAS 123R on January 1, 2006 using the modified
prospective transition method. SFAS 123R requires the measurement of all employee share-based
payments to employees, including grants of employee stock options, using a fair-value based method
and the recording of such expense in our consolidated statements of income. Under this transition
method, compensation cost to be recognized beginning in the first quarter of 2006 included: (a)
compensation cost for all share-based payments granted prior to, but not yet vested as of January
1, 2006, based on the grant date fair value estimated in accordance with the original provisions of
SFAS 123, and (b) compensation cost for all share-based payments granted subsequent to January 1,
2006, based on the grant-date fair value estimated in accordance with the provisions of SFAS 123R.
Results for prior periods were not restated. Due to a
43
modification on December 30, 2005 to
accelerate any unvested options under Uniteds existing stock option plans and the fact that no new
options have been granted during 2006 and the first nine months of 2007, United did not recognize
any compensation cost for the third quarter and first nine months of 2007 and 2006.
The 2006 Stock Option Plan was approved by Uniteds shareholders on May 15, 2006. As of September
30, 2007, no stock options have been granted under the 2006 Stock Option Plan. Any stock options
granted under the 2006 Stock Option Plan in the future will be subject to the provisions of SFAS
123R. A Form S-8 was filed on October 25, 2006 with the Securities and Exchange Commission to
register all the shares available for the 2006 Stock Option Plan.
Income Taxes
For the first nine months of 2007 and 2006, income taxes were $32.88 million and $29.86 million,
respectively. For the third quarter of 2007, income taxes were $10.06 million as compared to $6.19
million for the third quarter of 2006. During the third quarter of 2007, United reduced its income
tax reserve by $1.06 million due to the expiration of the statute of limitations for examinations
of certain years. Uniteds effective tax rates for the first nine months of 2007 and 2006 were
30.55% and 31.74%, respectively. For the quarters ended September 30, 2007 and 2006, Uniteds
effective tax rates were 28.06% and 30.42%, respectively.
Contractual Obligations, Commitments, Contingent Liabilities and Off-Balance Sheet Arrangements
United has various financial obligations, including contractual obligations and commitments, that
may require future cash payments. Please refer to Uniteds Annual Report on Form 10-K for the year
ended December 31, 2006 for disclosures with respect to Uniteds fixed and determinable contractual
obligations. There have been no material changes outside the ordinary course of business since
year-end 2006 in the specified contractual obligations disclosed in the Annual Report on Form 10-K.
On January 1, 2007, United adopted the provisions of FIN 48. As of September 30, 2007, United
recorded a liability for uncertain tax positions, including interest and penalties, of $5.9 million
in accordance with FIN 48. This liability represents an estimate of tax positions that United has
taken in its tax returns which may ultimately not be sustained upon examination by tax authorities.
Since the ultimate amount and timing of any future cash settlements cannot be predicted with
reasonable certainty, this estimated liability is excluded from the contractual obligations table.
United also enters into derivative contracts, mainly to protect against adverse interest rate
movements on the value of certain assets or liabilities, under which it is required to either pay
cash to or receive cash from counterparties depending on changes in interest rates. Derivative
contracts are carried at fair value and not notional value on the consolidated balance sheet.
Further discussion of derivative instruments is presented in Note 11 to the unaudited Notes to
Consolidated Financial Statements.
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. These financial instruments include loan
commitments and standby letters of credit. Uniteds 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
44
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. Since many of the commitments are expected to expire without being drawn upon, the
total commitment amount does not necessarily represent future cash requirements. Further discussion of off-balance sheet commitments is included in Note
10 to the unaudited Notes to Consolidated Financial Statements.
Liquidity
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. To help attract these lower cost deposits, United introduced its High
Performance Checking program during the first quarter of 2006. 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 which are 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 and
Uniteds cash needs. Other than cash and due from banks, the available for sale securities
portfolio and maturing loans are the primary sources of liquidity.
The goal of liquidity management is to ensure the ability to access funding which enables United to
efficiently satisfy the cash flow requirements of depositors and borrowers and meet Uniteds 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 borrowing 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 outside sources such as correspondent and
downstream correspondent federal funds and utilization of Federal Home Loan Bank 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,
borrowings that are secured by bank premises or stock of Uniteds subsidiaries and issuances of
trust preferred securities. In the normal course of business, United through its Asset Liability
Committee evaluates these as well as other alternative funding strategies that may be utilized to
meet short-term and long-term funding needs.
For the nine months ended September 30, 2007, cash of $67.82 million was provided by operating
activities. Net cash of $78.27 million was used in investing activities which was mainly due to net
cash paid of $35.78 million for the acquisition of Premier and net cash used for loan growth of
$32.14 million. During the first nine months of 2007, net cash of $44.11 million was used in
financing activities due primarily to a decline in deposits of $198.83 million and the repayment of
overnight FHLB borrowings and federal funds purchased
45
in the amount of $45 million and $38.67
million, respectively. Other uses of cash for financing activities included payment of $34.34
million and $24.89 million, respectively, for cash dividends and acquisitions of United shares
under the stock repurchase program. Cash provided by financing activities included an increase in securities sold under agreements to repurchase of $114.35 million and net proceeds of $99.77
million and $82.48 million, respectively, from long-term FHLB borrowings and trust preferred
issuances. The net effect of cash flow activities was a decrease in cash and cash equivalents of
$54.55 million for the first nine months of 2007.
United anticipates it can meet its obligations over the next 12 months and has no material
commitments for capital expenditures. There are no known trends, demands, commitments, or events
that will result in or that are reasonably likely to result in Uniteds liquidity increasing or
decreasing in any material way. United also has lines of credit available. See Notes 8 and 9 to
the accompanying unaudited Notes to Consolidated Financial Statements for more details regarding
the amounts available to United under line of credit.
The Asset Liability Committee monitors liquidity to ascertain that a liquidity position within
certain prescribed parameters is maintained. No changes are anticipated in the policies of
Uniteds Asset Liability Committee.
Capital Resources
Uniteds capital position is financially sound. United 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. Based on regulatory requirements, United and
its banking subsidiaries are categorized as well capitalized institutions. Uniteds risk-based
capital ratios of 11.26% at September 30, 2007 and 11.15% at December 31, 2006, were both
significantly higher than the minimum regulatory requirements. Uniteds Tier I capital and leverage
ratios of 10.18% and 8.84%, respectively, at September 30, 2007, are also well above regulatory
minimum requirements.
Total shareholders equity was $755.27 million, an increase of $121.18 million or 19.11% from
December 31, 2006. Uniteds equity to assets ratio was 9.83% at September 30, 2007 as compared to
9.44% at December 31, 2006. The primary capital ratio, capital and reserves to total assets and
reserves, was 10.51% at September 30, 2007 as compared to 10.14% at December 31, 2006. Uniteds
average equity to average asset ratio was 9.82% and 9.61% for the quarters ended September 30, 2007
and 2006, respectively. For the first nine months of 2007 and 2006, the average equity to average
assets ratio was 9.81% and 9.63%, respectively. All of these financial measurements reflect a
financially sound position.
During the third quarter of 2007, Uniteds Board of Directors declared a cash dividend of $0.28 per
share. Cash dividends were $0.84 per common share for the first nine months of 2007. Total cash
dividends declared were $12.09 million for the third quarter of 2007 and $34.91 million for the
first nine months of 2007, an increase of 8.34% and 3.59% over comparable periods of 2006. The year
2007 is expected to be the thirty-fourth consecutive year of dividend increases to United
shareholders.
46
Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The objective of Uniteds Asset Liability Management function is to maintain consistent growth in
net interest income within Uniteds policy guidelines. This objective is accomplished through the
management of balance sheet liquidity and interest rate risk exposures due to changes in economic
conditions, interest rate levels and customer preferences.
Interest Rate Risk
Management considers interest rate risk to be Uniteds most significant market risk. Interest rate
risk is the exposure to adverse changes in Uniteds net interest income as a result of changes in
interest rates. Uniteds earnings are largely dependent on the effective management of interest
rate risk.
Management of interest rate risk focuses on maintaining consistent growth in net interest income
within Board-approved policy limits. Uniteds Asset Liability Management Committee (ALCO), which
includes senior management representatives and reports to the Board of Directors, monitors and
manages interest rate risk to maintain an acceptable level of change to net interest income as a
result of changes in interest rates. Policy established for interest rate risk is stated in terms
of the change in net interest income over a 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.
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 the
sensitivity of net interest income to movements in interest rates. The model is based on actual
cash flows and repricing characteristics for on and off-balance sheet instruments and incorporates
market-based assumptions regarding the impact of changing interest rates on the prepayment rate of
certain assets and liabilities. The model also includes executive management projections for
activity levels in product lines offered by United. Assumptions based on the historical behavior of
deposit rates and balances in relation to changes in interest rates are also incorporated into the
model. Rate scenarios could involve parallel or nonparallel shifts in the yield curve, depending on
historical, current, and expected conditions, as well as the need to capture any material effects
of explicit or embedded options. 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 managements 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. The difference between rate sensitive assets and rate
sensitive liabilities for specified periods of time is known as the GAP. Earnings-simulation
analysis captures not only the potential of these interest sensitive assets and liabilities to
mature or reprice but also the probability that they will do so. Moreover, earnings-simulation
analysis considers the relative sensitivities of these balance sheet items and projects their
behavior over an extended period of time. United closely monitors the sensitivity of its assets and
liabilities on an on-going basis and projects the effect of various interest rate changes on its
net interest
47
margin.
The following table shows Uniteds estimated earnings sensitivity profile as of September 30, 2007
and December 31, 2006:
|
|
|
|
|
Change in |
|
|
Interest Rates |
|
Percentage Change in Net Interest Income |
(basis points) |
|
September 30, 2007 |
|
December 31, 2006 |
+200
|
|
2.07%
|
|
3.04% |
+100
|
|
1.09%
|
|
1.50% |
-100
|
|
-0.29%
|
|
-0.76% |
-200
|
|
-3.50%
|
|
-5.11% |
At September 30, 2007, given an immediate, sustained 100 basis point upward shock to the yield
curve used in the simulation model, net interest income for United is estimated to increase by
1.09% over one year as compared to an increase of 1.50% at December 31, 2006. A 200 basis point
immediate, sustained upward shock in the yield curve would increase net interest income by a
estimated 2.07% over one year as of September 30, 2007, as compared to an increase of 3.04% as of
December 31, 2006. A 100 basis point immediate, sustained downward shock in the yield curve would
decrease net interest income by a estimated 0.29% over one year as of September 30, 2007, as
compared to a decrease of 0.76% as of December 31, 2006. A 200 basis point immediate, sustained
downward shock in the yield curve would decrease net interest income by an estimated 3.50% over one
year as compared to a decrease of 5.11% over one year as of December 31, 2006.
This analysis does not include the potential increased refinancing activities, which should lessen
the negative impact on net income from falling rates. While it is unlikely market rates would
immediately move 100 or 200 basis points upward or downward on a sustained basis, this is another
tool used by management and the Board of Directors to gauge interest rate risk. All of these
estimated changes in net interest income are and were within the policy guidelines established by
the Board of Directors.
To further aid in interest rate management, Uniteds subsidiary banks are members of the Federal
Home Loan Bank (FHLB). The use of FHLB advances provides United with a low risk means of matching
maturities of earning assets and interest-bearing funds to achieve a desired interest rate spread
over the life of the earning assets. In addition, United uses credit with large regional banks and
trust preferred securities to provide funding.
As part of its interest rate risk management strategy, United may use derivative instruments to
protect against adverse price or interest rate movements on the value of certain assets or
liabilities and on future cash flows. These derivatives commonly consist of interest rate swaps,
caps, floors, collars, futures, forward contracts, written and purchased options. Interest rate
swaps obligate two parties to exchange one or more payments generally calculated with reference to
a fixed or variable rate of interest applied to the notional amount. United accounts for its
derivative activities in accordance with the provisions of SFAS No. 133, Accounting for Derivative
Instruments and Hedging Activities.
During 1999, to better manage risk, United sold fixed-rate residential mortgage loans in a
securitization transaction. In that securitization, United retained a subordinated interest that
represented Uniteds right to future cash flows arising after third party investors in the
securitization trust have received the return for
48
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 Uniteds other assets for failure of debtors to pay when due; however, Uniteds retained
interests are subordinate to investors interests. The book value and fair value of the
subordinated interest are subject to credit, prepayment, and interest rate risks on the underlying
fixed-rate residential mortgage loans in the securitization.
At the date of securitization, key economic assumptions used in measuring the fair value of the
subordinated interest were as follows: a weighted average life of 5.3 years, expected cumulative
default rate of 15%, and residual cash flows discount rates of 8% to 18%. At June 30, 2007 and
December 31, 2006, the fair values of the subordinated interest and the cost of the available for
sale securities was zero.
At September 30, 2007, the principal balances of the residential mortgage loans held in the
securitization trust were approximately $7.89 million. Principal amounts owed to third party
investors and to United in the securitization were approximately $3.00 million and $4.89 million,
respectively, at September 30, 2007. The weighted average term to maturity of the underlying
mortgages approximated 12.5 years as of September 30, 2007. During the three and nine months ended
September 30, 2007, United received cash of $780 thousand and $2.37 million, respectively, from its
subordinated interest in the securitization.
The amount of future cash flows from Uniteds subordinated interest is highly dependent upon future
prepayments and defaults. Accordingly, the amount and timing of future cash flows to United is
uncertain at this time.
The following table presents quantitative information about delinquencies, net credit losses, and
components of the underlying securitized fixed-rate residential mortgage loans:
|
|
|
|
|
|
|
|
|
|
|
September 30, |
|
December 31, |
|
|
2007 |
|
2006 |
Total principal amount of loans |
|
$ |
7,890 |
|
|
$ |
10,382 |
|
Principal amount of loans
60 days or more past due |
|
|
135 |
|
|
|
114 |
|
Year-to-date average balances |
|
|
9,192 |
|
|
|
13,000 |
|
Year-to-date net credit (recoveries)
losses |
|
|
(73 |
) |
|
|
369 |
|
Extension Risk
A key feature of most mortgage loans is the ability of the borrower to repay principal earlier than
scheduled. This is called a prepayment. Prepayments arise primarily due to sale of the underlying
property, refinancing, or foreclosure. In general, declining interest rates tend to increase
prepayments, and rising interest rates tend to slow prepayments. Like other fixed-income
securities, when interest rates rise, the value of mortgage- related securities generally decline.
The rate of prepayments on underlying mortgages will affect the price and volatility of
mortgage-related securities and may shorten or extend the effective maturity of the security beyond
what was anticipated at the time of purchase. If interest rates rise, Uniteds holdings of
mortgage- related securities may experience reduced returns if the borrowers of the underlying
mortgages pay off their mortgages later than anticipated. This is generally referred to as
extension risk.
49
At September 30, 2007, Uniteds mortgage related securities portfolio had an amortized cost of $796
million, of which approximately $712 million or 89% were fixed rate collateralized mortgage
obligations (CMOs). These fixed rate CMOs consisted primarily of planned amortization class (PACs) and accretion
directed (VADMs) bonds having an average life of approximately 2.3 years and a weighted average
yield of 4.69%, under current projected prepayment assumptions. These securities are expected to
have very little extension risk in a rising rate environment. Current models show that given an
immediate, sustained upward shock of 300 basis points, the average life of these securities would
extend to 2.5 years. The projected price decline of the fixed rate CMO portfolio in rates up 300
basis points would be 6.41%, less than the price decline of a 3 year Treasury note. By comparison,
the price decline of a 30-year current coupon mortgage backed security (MBS) in rates higher by 300
basis points would be approximately 17%.
United had approximately $15 million in 30-year mortgage backed securities with a projected yield
of 6.63% and a projected average life of 4.5 years on September 30, 2007. These bonds are projected
to be good risk/reward securities in stable rates, rates down moderately and rates up moderately
due to the high yield and premium book price. However, should rates increase 300 basis points, the
average life will extend and these bonds will experience significant price depreciation, but not as
significant as current coupon pools.
The remaining 9% of the mortgage related securities portfolio at September 30, 2007, included
adjustable rate securities (ARMs), balloon securities, and 10-year and 15-year mortgage backed
pass-through securities.
Item 4. CONTROLS AND PROCEDURES
As of September 30, 2007, an evaluation was performed under the supervision of and with the
participation of Uniteds management, including the Chief Executive Officer (CEO) and Chief
Financial Officer (CFO), of the effectiveness of the design and operation of Uniteds disclosure
controls and procedures. Based on that evaluation, Uniteds management, including the CEO and CFO,
concluded that Uniteds disclosure controls and procedures as of September 30, 2007 were effective
in ensuring that information required to be disclosed in the Quarterly Report on Form 10-Q was
recorded, processed, summarized and reported within the time period required by the Securities and
Exchange Commissions rules and forms. There have been no changes in Uniteds internal control
over financial reporting that occurred during the quarter ended September 30, 2007, or in other
factors that has materially affected or is reasonably likely to materially affect Uniteds internal
control over financial reporting.
50
PART II OTHER INFORMATION
Item 1. LEGAL PROCEEDINGS
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 Uniteds financial position.
Item 1A. RISK FACTORS
In addition to the other information set forth in this report, please refer to Uniteds Annual
Report on Form 10-K for the year ended December 31, 2006 for disclosures with respect to Uniteds
risk factors which could materially affect Uniteds business, financial condition or future
results. The risks described in the Annual Report on Form 10-K are not the only risks facing
United. Additional risks and uncertainties not currently known to United or that United currently
deems to be immaterial also may materially adversely affect Uniteds business, financial condition
and/or operating results. There are no material changes from the risk factors disclosed in
Uniteds Annual Report on Form 10-K for the year ended, December 31, 2006.
Item 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
There have been no United equity securities sales during the first nine months of 2007 that were
not registered. The table below includes certain information regarding Uniteds purchase of its
common shares during the quarter ended September 30, 2007:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Number of |
|
Maximum Number of |
|
|
Total Number |
|
Average |
|
Shares Purchased as |
|
Shares that May Yet |
|
|
of Shares |
|
Price Paid |
|
Part of Publicly |
|
be Purchased Under |
Period |
|
Purchased (1) |
|
per Share |
|
Announced Plans (2) |
|
the Plans (2) |
|
7/01 7/31/2007 |
|
|
105,024 |
|
|
$ |
31.48 |
|
|
|
105,000 |
|
|
|
322,200 |
|
8/01 8/31/2007 |
|
|
13 |
|
|
$ |
32.22 |
|
|
|
|
|
|
|
322,200 |
|
9/01 9/30/2007 |
|
|
28 |
|
|
$ |
29.42 |
|
|
|
|
|
|
|
322,200 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
105,065 |
|
|
$ |
31.48 |
|
|
|
105,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Includes shares purchased in open market transactions by United for a rabbi
trust to provide payment of benefits under a deferred compensation plan for
certain key officers of United and its subsidiaries. For the three months ended
September 30, 2007, the following shares were purchased for the deferred
compensation plan: July 2007 24 shares at an average price of $34.92; August
2007 13 shares at an average price of $32.22; and September 2007 28 shares
at an average price of $29.42. |
51
|
|
|
(2) |
|
In May of 2006, Uniteds Board of Directors approved a repurchase plan to
repurchase up to 1.7 million shares of Uniteds common stock on the open market
(the 2006 Plan). The timing, price and quantity of purchases under the plan are
at the discretion of management and the plan may be discontinued, suspended or
restarted at any time depending on the facts and circumstances. |
Item 3. DEFAULTS UPON SENIOR SECURITIES
None.
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
Item 5. OTHER INFORMATION
|
(a) |
|
None. |
|
|
(b) |
|
No changes were made to the procedures by which security holders may recommend
nominees to Uniteds Board of Directors. |
Item 6. EXHIBITS
Exhibits required by Item 601 of Regulation S-K
|
|
|
Exhibit 3.1 |
|
Articles of Incorporation (incorporated by reference to Exhibits to the 1989
Form 10-K of United Bankshares, Inc., File No. 0-13322) |
|
|
|
Exhibit 3.2 |
|
Bylaws (incorporated by reference to Exhibits to the 1990 Form 10-K of United
Bankshares, Inc., File No. 0-13322) |
|
|
|
Exhibit 31.1 |
|
Certification as Adopted Pursuant to Section 302(a) of the Sarbanes-Oxley Act
of 2002 by Chief Executive Officer |
|
|
|
Exhibit 31.2 |
|
Certification as Adopted Pursuant to Section 302(a) of the Sarbanes-Oxley Act
of 2002 by Chief Financial Officer |
|
|
|
Exhibit 32.1 |
|
Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002 by Chief Executive Officer |
|
|
|
Exhibit 32.2 |
|
Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002 by Chief Financial Officer |
52
SIGNATURES
Pursuant to the requirements 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)
|
|
Date: November 7, 2007 |
/s/ Richard M. Adams
|
|
|
Richard M. Adams, Chairman of |
|
|
the Board and Chief Executive
Officer |
|
|
|
|
|
|
|
|
|
|
Date: November 7, 2007 |
/s/ Steven E. Wilson
|
|
|
Steven E. Wilson, Executive |
|
|
Vice President, Treasurer, Secretary and Chief Financial Officer |
|
|
53