UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1995
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from Commission file number
to 0-5583
UNITED CAROLINA BANCSHARES CORPORATION
(Exact name of Registrant as specified in its Charter)
North Carolina 56-0954530
(State of Incorporation) (I.R.S. Employer Identification No.)
127 West Webster Street
Whiteville, North Carolina 28472
(Address of principal executive offices) (Zip Code)
(910) 642-5131
(Registrant's telephone number, including area code)
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 X NO
As of October 26, 1995, there were 14,768,740 outstanding shares of
Registrant's $4.00 par value common capital stock which is the only class of
securities issued by the Registrant.
Total of 32 pages
PART I - FINANCIAL INFORMATION
Item 1: Financial Statements
United Carolina Bancshares Corporation and Subsidiaries
Consolidated Balance Sheets
September 30, December 31,
1995 1994
------------- ------------
(In thousands)
Assets:
Cash and due from banks - noninterest-bearing $ 142,793 $ 147,450
Federal funds sold and other short-term
investments 111,820 82,250
Securities available for sale (amortized
costs of $536,154,000 in 1995 and
$383,913,000 in 1994) 537,859 376,913
Investment securities (approximate
market values of $230,147,000 in
1995 and $202,372,000 in 1994) 228,307 208,249
Loans, net of unearned income 2,635,535 2,418,158
Less reserve for credit losses (40,493) (38,681)
------------ ------------
Net loans 2,595,042 2,379,477
------------
Premises and equipment 53,700 52,585
Other assets 97,122 84,714
------------ ------------
Total assets $ 3,766,643 $ 3,331,638
============ ============
Liabilities and stockholders' equity:
Deposits:
Noninterest-bearing demand deposits $ 539,532 $ 515,403
Interest-bearing deposits:
NOW, savings, and money market deposits 1,248,235 1,145,717
Certificates of deposit of
$100,000 or more 179,972 186,448
Other time deposits 1,430,467 1,093,031
------------
Total deposits 3,398,206 2,940,599
Short-term borrowings 28,552 86,228
Mortgages and other notes payable 2,981 2,305
Other liabilities 44,589 39,017
------------ ------------
Total liabilities 3,474,328 3,068,149
------------ ------------
Stockholders' equity:
Preferred stock, par value $10 per share:
Authorized 2,000,000 shares; none issued
Common stock, par value $4 per share:
Authorized 40,000,000 shares; issued
14,768,740 shares in 1995 and
14,700,066 shares in 1994 59,075 58,800
Surplus 42,441 42,505
Retained earnings 190,045 167,477
Unrealized gains (losses) on securities
available for sale, net of deferred
income taxes 754 (5,293)
------------ ------------
Total stockholders' equity 292,315 263,489
------------ ------------
Total liabilities and
stockholders' equity $ 3,766,643 $ 3,331,638
============ ============
See accompanying Notes to Consolidated Financial Statements
United Carolina Bancshares Corporation and Subsidiaries
Consolidated Statements of Income
Three Months Ended Nine Months Ended
September 30, September 30,
----------------------- -----------------------
1995 1994 1995 1994
---------- ---------- ---------- ----------
(Dollars in thousands except
per share amounts)
Interest income:
Interest on loans $ 61,635 $ 51,383 $ 177,917 $ 146,882
Interest and dividends on:
Taxable securities 10,042 6,198 24,922 18,347
Tax-exempt securities 912 1,168 2,862 3,749
Interest on federal funds sold and
other short-term investments 1,840 545 4,808 871
---------- ---------- ---------- ----------
Total interest income 74,429 59,294 210,509 169,849
---------- ---------- ---------- ----------
Interest expense:
Interest on deposits 33,929 21,505 91,137 60,484
Interest on short-term borrowings 441 665 2,093 1,916
Interest on long-term borrowings 45 39 125 125
----------
Total interest expense 34,415 22,209 93,355 62,525
---------- ---------- ---------- ----------
Net interest income 40,014 37,085 117,154 107,324
Provision for credit losses 1,000 809 4,400 2,771
----------
Net interest income after provision for
credit losses 39,014 36,276 112,754 104,553
---------- ---------- ---------- ----------
Noninterest income:
Service charges on deposit accounts 5,658 5,681 16,682 17,000
Trust income 1,168 1,263 3,844 3,835
Insurance commissions 1,452 864 3,622 2,532
Mortgage banking fees 1,179 788 2,939 2,718
Brokerage and annuity commissions 616 574 1,686 1,816
Other service charges, commissions,
and fees 1,380 1,304 3,627 3,604
Gains on mortgages originated
for resale 255 53 439 308
Gains on trading account securities 2 2 3 7
Gains on dispositions of investment
securities 4 -- 7 5
Other operating income 188 169 506 620
---------- ---------- ---------- ----------
Total noninterest income 11,902 10,698 33,355 32,445
---------- ---------- ---------- ----------
Noninterest expenses:
Personnel expense 18,609 18,550 54,733 54,740
Occupancy expense 2,325 2,409 6,673 6,843
Equipment expense 1,614 1,479 4,720 4,557
Other operating expenses,
excluding restructuring charges 8,626 9,446 27,768 27,178
Restructuring charges -- 300 -- 1,300
---------- ---------- ---------- ----------
Total noninterest expenses 31,174 32,184 93,894 94,618
---------- ---------- ---------- ----------
Income before income taxes 19,742 14,790 52,215 42,380
Income tax provision 7,288 5,443 19,027 15,316
---------- ---------- ---------- ----------
Income before cumulative effect
of a change in accounting method 12,454 9,347 33,188 27,064
Cumulative effect of a change in
accounting method -- -- -- (316)
---------- ---------- ---------- ----------
Net income $ 12,454 $ 9,347 $ 33,188 $ 26,748
========== ========== ========== ==========
Per share data:
Income before cumulative effect of
a change in accounting method $ .84 $ .64 $ 2.25 $ 1.85
========== ========== ========== ==========
Net income $ .84 $ .64 $ 2.25 $ 1.83
========== ========== ========== ==========
Cash dividends declared $ .25 $ .22 $ .72 $ .62
========== ========== ========== ==========
Book value at end of period $ 19.79 $ 18.11 $ 19.79 $ 18.11
========== ========== ========== ==========
Average number of shares outstanding 14,768,740 14,668,354 14,743,956 14,649,384
========== ========== ========== ==========
See accompanying Notes to Consolidated Financial Statements
United Carolina Bancshares Corporation and Subsidiaries
Consolidated Statements of Stockholders' Equity
Nine Months Ended September 30, 1995 and 1994
Unrealized
Common Stock Gains
------------------------ (Losses) on
Number of Aggregate Securities Total
Shares Par Retained Available Stockholders'
Outstanding Value Surplus Earnings For Sale Equity
----------- --------- ------- -------- ----------- -------------
(Dollars in thousands)
Balance, January 1, 1995 14,700,066 $ 58,800 $42,505 $167,477 $ (5,293) $ 263,489
Net income -- -- -- 33,188 -- 33,188
Cash dividends declared,
$.72 per share -- -- -- (10,620) -- (10,620)
Issuance of common stock:
Stock option plan 24,461 98 149 -- -- 247
Insurance agency merger 44,213 177 (213) -- -- (36)
Unrealized gains on
securities available
for sale, net of
applicable deferred
income taxes -- -- -- -- 6,047 6,047
----------- --------- ------- -------- ----------- -------------
Balance, September 30, 1995 14,768,740 $ 59,075 $42,441 $190,045 $ 754 $ 292,315
=========== ========= ======= ======== =========== =============
Balance, January 1, 1994 14,625,641 $ 58,503 $42,901 $149,666 $ 845 $ 251,915
Net income -- -- -- 26,748 -- 26,748
Cash dividends declared,
$.62 per share -- -- -- (8,706) -- (8,706)
Issuance of common stock:
Insurance agency merger 27,743 111 (346) -- -- (235)
By pooled bank prior
to acquisition 39,060 156 240 -- -- 396
Retirement of common stock (1,038) (4) (24) -- -- (28)
Unrealized losses on
securities available
for sale, net of
applicable deferred
income taxes -- -- -- -- (4,027) (4,027)
----------- --------- ------- -------- ----------- -------------
Balance, September 30, 1994 14,691,406 $ 58,766 $42,771 $167,708 $ (3,182) $ 266,063
=========== ========= ======= ======== =========== =============
See accompanying Notes to Consolidated Financial Statements
United Carolina Bancshares Corporation and Subsidiaries
Consolidated Statements of Cash Flows
Nine Months Ended
September 30,
----------------------
1995 1994
--------- ---------
(In thousands)
Increase (decrease) in cash and cash equivalents:
Cash flows from operating activities:
Net income $ 33,188 $ 26,748
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization,
net of accretion 6,880 5,813
Provision for credit losses 4,400 2,771
Net (increase) decrease in loans
originated for resale (14,345) 23,966
Provision for deferred taxes and
increase in taxes payable 2,234 31
Increase in accrued interest receivable (5,077) (2,637)
(Increase) decrease in prepaid expenses 2,019 (2,024)
Increase in other accounts receivable 1,149 224
Increase (decrease) in accrued
interest payable 2,391 (54)
Increase in accrued expenses 536 3,906
Increase (decrease) in deferred loan
fees, net of deferred costs (357) 41
Decrease in unearned income on loans (1) (44)
Other, net 231 185
--------- ---------
Total adjustments 60 32,178
--------- ---------
Net cash provided by operating
activities 33,248 58,926
--------- ---------
Cash flows from investing activities:
Proceeds from maturities and issuer calls
of securities available for sale 402,319 125,594
Proceeds from maturities and issuer calls
of investment securities 10,508 5,055
Proceeds from sales of investment securities 3,810 18,000
Purchases of securities available for sale (554,624) (111,736)
Purchases of investment securities (34,733) (2,625)
Net increase in loans outstanding (179,210) (158,467)
Purchases of premises and equipment (1,807) (2,472)
Proceeds from sales of premises and equipment 151 318
Purchases of mortgage loan servicing rights (1,400) (180)
Sales of foreclosed assets 1,093 2,019
Purchase of branches, net of cash received 136,569 --
Other, net (2,571) 21,741
--------- ---------
Net cash used by investing activities (219,895) (102,753)
--------- ---------
Cash flows from financing activities:
Net increase in deposit accounts 278,935 74,097
Net increase (decrease) in federal funds
purchased 5,220 (16,845)
Net increase (decrease) in securities
sold under agreement to repurchase (39,270) 6,198
Net increase (decrease) in other
short-term borrowings (23,626) 23,898
Proceeds from issuance of long-term debt 702 --
Repayments of mortgages and other
notes payable (28) (127)
Issuance of common stock 247 396
Retirement of common stock -- (28)
Dividends paid (10,620) (8,706)
--------- ---------
Net cash provided by financing
activities 211,560 78,883
--------- ---------
Net increase in cash and cash equivalents 24,913 35,056
Cash and cash equivalents at beginning of period 229,700 171,238
--------- ---------
Cash and cash equivalents at end of period $ 254,613 $ 206,294
========= =========
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest $ 90,964 $ 62,579
========= =========
Income taxes $ 16,794 $ 15,285
========= =========
Significant noncash transactions:
Loans transferred to real estate acquired
in settlement of debt $ 1,134 $ 2,636
========= =========
Loans originated to facilitate the sale
of foreclosed assets $ 397 $ --
========= =========
Issuance of common stock in merger acquisitions $ 36 $ 235
========= =========
Unrealized gains (losses) on securities
available for sale $ 8,706 $ (6,538)
========= =========
See accompanying Notes to Consolidated Financial Statements
United Carolina Bancshares Corporation and Subsidiaries
Notes to Consolidated Financial Statements
Note 1.
Basis of Presentation:
The accompanying consolidated financial statements, which are unaudited,
reflect all adjustments which are, in the opinion of management, necessary for a
fair presentation of the financial position at September 30, 1995, and the
results of operations of United Carolina Bancshares Corporation and its
subsidiaries for the three- and nine-month periods ended September 30, 1995 and
1994 and its cash flows for the nine-month periods ended September 30, 1995 and
1994. All adjustments made to the unaudited financial statements were of a
normal recurring nature. The results of operations for the first nine months of
1995 are not necessarily indicative of the results of operations for the entire
year.
Note 2.
Securities:
The following is a summary of the securities portfolios by major
classification:
September 30, 1995
----------------------------------------------------
Approximate
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
--------- ---------- ---------- -----------
(In thousands)
Securities available for sale:
United States government securities $ 337,467 $ 2,638 $ 159 $ 339,946
Obligations of United States government
agencies and corporations 160,140 -- 37 160,103
Mortgage-backed securities 28,306(1) 40 774 27,572(1)
Federal Home Loan Bank stock 10,144 -- -- 10,144
Other securities 97 -- 3 94
--------- ---------- ---------- -----------
Total securities available for sale $ 536,154 $ 2,678 $ 973 $ 537,859
========= ========== ========== ===========
Investment securities:
United States government securities $ 164,402 $ 215 $ 553 $ 164,064
Obligations of United States government
agencies and corporations 1,995 2 52 1,945
Obligations of states and political subdivisions 61,379 2,263 35 63,607
Other securities 531 -- -- 531
--------- ---------- ---------- -----------
Total investment securities $ 228,307 $ 2,480 $ 640 $ 230,147
========= ========== ========== ===========
<FN>
(1) At September 30, 1995, UCB owned collateralized mortgage obligations
issued by the Federal Home Loan Mortgage corporation (FHLMC) which had an
amortized cost of $12,348,000 and a market value of $12,039,000. In
addition, UCB owned collateralized mortgage obligations issued by the
Federal National Mortgage Association (FNMA) which had an amortized cost of
$13,417,000 and a market value of $13,023,000. UCB also owned
collateralized mortgage obligations issued by a private issuer secured by
mortgage-backed securities guaranteed by the Government National Mortgage
Association (GNMA). These securities had an amortized cost of $430,000 and
a market value of $459,000. Other mortgage-backed pass-through securities
issued by various United States government agencies and corporations
totaling $2,111,000 were also held at September 30, 1995. These securities
had a market value of $2,051,000. At September 30, 1995, none of the
collateralized mortgage obligations owned by UCB were considered high-risk
mortgage securities under current regulatory guidelines.
</FN>
Notes to Consolidated Financial Statements (Continued)
Note 2.
Securities - Continued:
December 31, 1994
-------------------------------------------------
Approximate
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
--------- ---------- ---------- -----------
(In thousands)
Securities available for sale:
United States government securities $ 324,640 $ -- $ 4,013 $ 320,627
Obligations of United States government
agencies and corporations 18,140 -- 73 18,067
Mortgage-backed securities 30,966 -- 2,913 28,053
Federal Home Loan Bank stock 10,113 -- -- 10,113
Other securities 54 -- 1 53
--------- ---------- ---------- -----------
Total securities available for sale $ 383,913 $ -- $ 7,000 $ 376,913
========= ========== ========== ===========
Investment securities:
United States government securities $ 129,765 $ -- $ 5,630 $ 124,135
Obligations of United States government
agencies and corporations 1,995 -- 194 1,801
Obligations of states and political subdivisions 75,734 984 1,037 75,681
Other securities 755 1 1 755
--------- ---------- ---------- -----------
Total investment securities $ 208,249 $ 985 $ 6,862 $ 202,372
========= ========== ========== ===========
During the nine months ended September 30, 1995, investment securities with
a book value of $3,807,000 were put back to the issuer. The decision to exercise
the put option contained in the original bond purchase agreement was the result
of the lowering of the debt ratings on these securities to a level below the
minimum standards specified by UCB's investment policy. Gains of $3,000 were
realized on this transaction.
Notes to Consolidated Financial Statements (Continued)
Note 3.
Loans:
The consolidated loan portfolio is summarized by major classification as
follows:
September 30, December 31,
1995 1994
------------- ------------
(In thousands)
Loans secured by real estate:
Construction and land acquisition
and development $ 251,431 $ 209,792
Secured by nonfarm, nonresidential
properties 543,685 515,281
Secured by farmland 83,877 74,143
Secured by multifamily residences 59,748 60,923
------------- ------------
Total loans secured by real estate,
excluding loans secured by
1-4 family residences 938,741 860,139
------------- ------------
Revolving credit secured by
1-4 family residences 128,794 116,672
Other loans secured by 1-4 family
residences 562,814 530,912
------------- ------------
Total loans secured by
1-4 family residences 691,608 647,584
------------- ------------
Total loans secured by real estate 1,630,349 1,507,723
Commercial, financial, and
agricultural loans, excluding
loans secured by real estate 270,695 236,244
Loans to individuals for household,
family, and other personal
expenditures, excluding loans
secured by real estate 666,734 607,606
All other loans 68,389 67,573
------------- ------------
Total loans 2,636,167 2,419,146
Unearned income (632) (988)
------------- ------------
Loans, net of unearned income $ 2,635,535 $ 2,418,158
============= ============
Note 4.
Nonperforming and Problem Assets:
The following is a summary of nonperforming and problem assets:
September 30, December 31,
1995 1994
------------- ------------
(In thousands)
Foreclosed assets $ 5,366 $ 5,296
Nonaccrual loans 5,750 5,200
------------- ------------
Total foreclosed assets
and nonaccrual loans 11,116 10,496
Restructured loans (1) -- 8,823
------------- ------------
Total nonperforming assets 11,116 19,319
Loans 90 days or more past due,
excluding nonaccrual loans 4,607 4,634
------------- ------------
Total problem assets $ 15,723 $ 23,953
============= ============
(1) Represents a reduced rate loan performing in accordance with
restructured terms.
Notes to Consolidated Financial Statements (Continued)
Note 5.
Reserve for Credit Losses:
The following table sets forth the analysis of the consolidated reserve
for credit losses:
Three Months Ended Nine Months Ended
September 30, September 30,
-------------------- --------------------
1995 1994 1995 1994
-------- -------- -------- --------
(In thousands)
Balance, beginning of period $ 40,856 $ 39,753 $ 38,681 $ 39,098
Provision for credit losses 1,000 809 4,400 2,771
Recovery of losses previously
charged off 441 478 2,418 1,371
Losses charged to reserve (1,804) (1,421) (5,006) (3,621)
-------- -------- -------- --------
Balance, end of period $ 40,493 $ 39,619 $ 40,493 $ 39,619
======== ======== ======== ========
Note 6.
Short-Term Borrowings:
The following table sets forth certain data with respect to UCB's
short-term borrowings:
September 30, 1995 December 31, 1994
-------------------------------------------- --------------------------------------------
Securities Federal Securities Federal
Sold Under Treasury Home Sold Under Treasury Home
Federal Agreement Tax and Loan Federal Agreement Tax and Loan
Funds to Loan Bank Funds to Loan Bank
Purchased Repurchase Notes Advances Purchased Repurchase Notes Advances
--------- ---------- -------- -------- --------- ---------- -------- --------
(Dollars in thousands)
Balance outstanding at end
of period $ 15,960 $ 8,342 $ 4,250 $ -- $ 10,740 $ 47,612 $ 2,876 $ 25,000
Maximum amount outstanding
at any month-end during
the period 18,845 28,216 4,250 25,000 52,095 47,612 4,115 25,000
Average balance outstanding
during the period 15,886 12,931 3,173 15,568 19,626 22,486 2,169 22,068
Average interest rate paid
during the period 5.74% 5.50% 5.49% 6.44% 3.84% 4.02% 5.78% 4.54%
Average interest rate payable
at end of period 6.00% 5.34% 5.82% N/A% 5.30% 5.39% 5.25% 6.43%
Federal funds purchased represent unsecured borrowings from other
financial institutions by UCB's subsidiary banks for their own temporary funding
requirements.
Securities sold under agreement to repurchase represent short-term
borrowings by UCB's subsidiary banks with maturities ranging from 1 to 89 days
collateralized by securities of the United States government or its agencies.
Notes to Consolidated Financial Statements (Continued)
Note 6.
Short-Term Borrowings - Continued:
Treasury Tax and Loan Notes consist of the balances outstanding in UCB's
subsidiary banks' treasury tax and loan depository note accounts that are
payable on demand to the United States Treasury and collateralized by qualified
debt securities. Interest on borrowings under these arrangements is payable
monthly at 1/4% below the average federal funds rate as quoted by the Federal
Reserve Board.
Federal Home Loan Bank advances represent borrowings from the Federal Home
Loan Bank of Atlanta by UCB's North Carolina subsidiary bank pursuant to lines
of credit collateralized by a blanket lien on qualifying loans secured by first
mortgages on 1-4 family residences. These advances have an initial maturity of
less than one year with interest payable monthly.
Note 7.
Mortgages and Other Notes Payable:
Mortgages payable totaled $123,000 at September 30, 1995, and $145,000 at
December 31, 1994. The mortgages bear interest at annual rates ranging from
8.75% to 10% and are collateralized by premises with book values of
approximately $471,000 at September 30, 1995, and $476,000 at December 31, 1994.
The mortgages are payable primarily in monthly installments totaling
approximately $3,000, including interest.
Other notes payable totaled $125,000 at September 30, 1995, and December
31, 1994, and consisted of an unsecured note payable which bears interest at an
annual rate of 12%, payable monthly, with the principal due March 1, 1996.
Advances from the Federal Home Loan Bank of Atlanta with initial
maturities of more than one year totaled $2,733,000 at September 30, 1995, and
$2,035,000 at December 31, 1994. The advances are collateralized by a blanket
lien on qualifying loans secured by first mortgages on 1-4 family residences and
bear interest at rates ranging from 3.50% to 8.30%, payable monthly, with
principal due in various maturities.
Note 8.
Income Taxes:
The effective tax rate on income before income taxes is lower than the
combined statutory federal and state rates primarily because interest earned on
investments in debt instruments of state, county, and municipalities is exempt
from federal income tax and partially exempt from state income tax.
Substantially all income earned on securities of the United States government or
its agencies is exempt from state income taxes.
Notes to Consolidated Financial Statements (Continued)
Note 9.
Supplementary Income Statement Information:
The following is a breakdown of items included in "Other operating
expenses, excluding restructuring charges" on the consolidated statements of
income:
Three Months Ended Nine Months Ended
September 30, September 30,
------------------- ------------------
1995 1994 1995 1994
------- ------- ------- -------
(In thousands)
Other operating expenses:
FDIC deposit insurance
premiums $ (73) $ 1,565 $ 3,232 $ 4,572
Professional services 802 775 2,305 2,480
Advertising and marketing 1,067 907 3,152 2,835
Postage and delivery 984 841 2,769 2,481
Data processing fees and
software expense 1,229 1,288 3,630 3,158
Printing, stationery, and
supplies 821 726 2,697 2,017
Telephone expense 762 596 2,060 1,598
Travel expense 445 455 1,286 1,414
Amortization of capitalized
mortgage servicing rights 175 377 472 1,170
Insurance and taxes, other
than taxes on income 293 303 890 899
Noncredit losses 362 256 1,008 730
Contributions 71 354 223 569
Amortization of goodwill 171 203 512 614
Amortization of purchased
deposit-base premiums 640 32 887 95
Other expenses 877 768 2,645 2,546
------- ------- ------- -------
Total other operating
expenses, excluding
restructuring charges $ 8,626 $ 9,446 $27,768 $27,178
======= ======= ======= =======
Note 10.
Per Share Data:
Earnings per share are computed based on the weighted average number of
shares outstanding during each period. Cash dividends per share are computed
based on the historical number of shares outstanding at date of declaration.
Book values per share are computed based on the number of shares outstanding at
the end of each period. Dilution of earnings per share that would result from
the exercise of all outstanding stock options was immaterial.
Notes to Consolidated Financial Statements (Continued)
Note 11.
Cumulative Effect of a Change in Accounting Method:
UCB and its subsidiaries maintain a defined contribution postemployment
health care plan covering all employees who become disabled. Effective January
1, 1994, UCB adopted Financial Accounting Standards No. 112 (FAS 112),
"Employers' Accounting for Postemployment Benefits," which requires the accrual
of expenses for the estimated cost of benefits provided for employees after
employment but before retirement. The adoption of FAS 112 required immediate
recognition of the actuarially determined liability for postemployment benefits
which amounted to $529,000 at December 31, 1993. The recognition of the
liability, net of related deferred income taxes, resulted in a charge against
net income of $316,000 which was reported separately in the consolidated
statement of income during the first quarter of 1994, as a cumulative effect of
a change in accounting method. Prior to 1994, postemployment health care
expenses were charged to income as the expenses were incurred.
Note 12.
Statements of Cash Flows:
For purposes of the statements of cash flows, UCB considers cash and cash
equivalents to include cash and due from banks, federal funds sold, and other
short-term investments.
Note 13.
Legal Proceedings:
Various legal proceedings are pending or threatened against UCB and its
subsidiaries. All the foregoing are routine proceedings, pending or threatened,
which are incidental to the ordinary course of UCB's and its subsidiaries'
businesses. In the judgment of management and its counsel, none of such pending
or threatened legal proceedings will have a material adverse effect on the
consolidated operations, liquidity, or financial position of UCB and its
subsidiaries.
Note 14.
Mergers and Acquisitions:
On April 28, 1995, UCB issued 44,213 shares of common stock to consummate
the acquisition by merger of United Agencies, Inc., a general insurance agency
located in Wilmington, North Carolina. The merger was accounted for as a
pooling-of-interests; however, due to the immateriality of the transaction in
relation to UCB's consolidated financial position and operating results, prior
period financial statements have not been restated.
On May 19, 1995, UCB's North Carolina subsidiary bank purchased twelve
branch offices from subsidiaries of Southern National Corporation. As a part of
the transaction, UCB purchased $26.8 million in loans and assumed $178.7 million
Notes to Consolidated Financial Statements (Continued)
Note 14.
Mergers and Acquisitions - Continued:
in deposits. A premium of $12.3 million was paid on the assumed deposit base.
On July 24, 1995, UCB reached an agreement in principle to acquire
Seaboard Savings Bank, SSB, ("Seaboard") headquartered in Plymouth, North
Carolina in a merger transaction to be accounted for as a pooling-of-interests.
Seaboard operates three branch offices: one each in Plymouth, Williamston, and
Columbia. As of September 30, 1995, Seaboard reported total assets of $47.7
million, total loans of $37.0 million, and total deposits of $40.2 million. On
October 19, 1995, UCB executed a definitive merger agreement with Seaboard.
Under terms of the agreement, UCB will exchange .9104 shares of common stock for
each of Seaboard's shares of common stock. The aforementioned exchange rate is
subject to adjustment for increases above or decreases below predetermined
levels in registrant's average stock price per share during the thirty trading
days immediately preceding the date of issuance of the FDIC's final order
approving the merger. Completion of the transaction, which is anticipated to
occur in the first half of 1996, is subject to a number of conditions, the
affirmative vote of the shareholders of Seaboard and approval by applicable
regulatory authorities.
On October 19, 1995, UCB executed a definitive merger agreement with Triad
Bank ("Triad") headquartered in Greensboro, North Carolina, which provides for
the merger of Triad into UCB's North Carolina Subsidiary Bank in a transaction
to be accounted for as a pooling-of-interests. Triad operates eight branch
offices in Greensboro, two branch offices in Winston-Salem, and one in Asheboro,
North Carolina. At September 30, 1995, Triad had total assets of $199.2 million,
total deposits of $181.3 million, loans of $128.2 million, and stockholders'
equity of $15.0 million. Under terms of the agreement, UCB will exchange .5694
shares of common stock for each share of Triad common stock. If, however, the
average market value of UCB's common stock should be outside of a specified
range for the 30 trading days prior to the meeting of Triad's shareholders held
to consider the proposed merger, the number of UCB shares exchanged for each
Triad share could increase to .625 or decrease to .5324. Completion of the
transaction, which is anticipated to occur in the first half of 1996, is subject
to a number of conditions including the affirmative vote of the shareholders of
Triad and approval by applicable regulatory authorities.
Note 15.
Restructuring Charges:
In October 1994, the Boards of Directors of UCB and its bank subsidiaries,
United Carolina Bank and United Carolina Bank of South Carolina, approved a plan
to restructure the operations of the aforementioned bank subsidiaries to
streamline procedures in a manner that would enhance the quality of financial
services provided to customers and reduce future operating costs. The major
elements of the plan included staffing level changes at all branches to better
match customer arrival patterns, a reduction in full-time staff positions as a
result of the centralization of certain functions and automation of many
labor-intensive tasks, and the consolidation or divestiture of certain branch
offices. An estimated $8 million to $10 million increase in annual pre-tax
earnings is projected as a result of the restructuring, substantially all of
Notes to Consolidated Financial Statements (Continued)
Note 15.
Restructuring Charges - Continued:
which is anticipated to be realized by 1996. The estimated increase in pre-tax
earnings from the restructuring is to be derived principally from cost savings
due to personnel reductions, most of which will be from the streamlining of
branch office staff.
The following is a summary of the accrued restructuring charges at
September 30, 1995:
Accrued Accrued
Liability at Amounts Liability at
December 31, Paid September 30,
1994 During 1995 1995
------------ ----------- -------------
(In thousands)
Retirement benefits $ 177 $ 177 $ --
Severance benefits 315 283 32
------------ ----------- -------------
Total personnel costs 492 460 32
Professional fees relating to
restructuring plan 20 14 6
Loss on divestiture or closing of
branch operations 801 655 146
------------ ----------- -------------
Total restructuring charges $ 1,313 $ 1,129 $ 184
============ =========== =============
Item 2: Management's Discussion and Analysis of Financial Condition and Results
of Operations
Results of Operations - Nine Months Ended September 30, 1995, Compared to 1994
Summary
Income before the cumulative effect of a change in accounting method
totaled $33,188,000 for the nine months ended September 30, 1995, compared to
$27,064,000 for the same period of 1994, an increase of 22.6%. On a per share
basis, income before the cumulative effect of a change in accounting method
amounted to $2.25 in the first nine months of 1995, an increase of 21.6% over
the $1.85 per share earned in the first nine months of 1994. Net income for the
nine months ended September 30, 1994, including the cumulative effect of a
required change in accounting for postemployment benefits, amounted to
$26,748,000, or $1.83 per share. The increase in income before the cumulative
effect of a change in accounting method realized in 1995 was primarily due to
increased tax-equivalent net interest income as a result of growth in average
earning assets.
Net Interest Income
Net interest income increased $9,830,000, or 9.2%, for the nine months
ended September 30, 1995, compared to the first three quarters of 1994. This was
the result of an increase of $371,610,000, or 12.6%, in the level of average
earning assets with an increase of .75% in the overall tax-equivalent yield,
combined with an increase of $333,532,000, or 13.9%, in the average balance of
interest-bearing liabilities with an increase of 1.08% in the average rate paid.
The May 19, 1995, purchase of twelve branch offices from subsidiaries of
Southern National Corporation, including the purchase of certain loans and the
assumption of applicable deposit liabilities, resulted in an increase of
$79,395,000 in average earning assets and $81,707,000 in average
interest-bearing liabilities for the nine months ended September 30, 1995.
The net tax-equivalent yield on earning assets decreased to 4.80% in
the first three quarters of 1995 from 4.98% in the same period of 1994.
Increased competition for core deposits and changes in the mix of
interest-bearing deposits to a higher percentage of consumer certificates of
deposit and a lower percentage of NOW, savings, and money market deposits have
resulted in the average rate paid on interest-bearing deposits increasing by
1.07% in the first nine months of 1995 compared to 1994 while the yield on
average earning assets increased by .75% in the same measurement period. In
addition, an increase in the percentage of average earning assets funded by
interest-bearing liabilities from the prior year and a change in the mix of
average earning assets both had adverse effects on the net tax-equivalent yield
on earning assets in 1995 as compared to 1994. The percentage of average earning
assets funded by interest-bearing liabilities increased to 82.55% in the first
three quarters of 1995 from 81.64% in the comparable period of 1994 while the
percentage of average earning assets comprised of loans declined to 77.0% for
the nine months ended September 30, 1995, compared to 78.2% the prior year.
Interest income from loans increased $31,035,000, or 21.1%, over the
first nine months of 1994 due to an increase in average loans outstanding of
$249,620,000, or 10.9%, and an increase in the tax-equivalent yield to 9.35%
from 8.55% in 1994. The increase in the yield on the loan portfolio for 1995 was
primarily the result of a higher prevailing prime lending rate which averaged
8.86% during the first three quarters of 1995 compared to 6.81% in the first
nine months of 1994. Approximately 38% of UCB's loans outstanding at September
30, 1995, had floating interest rates, most of which varied with the prime rate.
Interest income from investment securities and securities available for
sale for the first nine months of 1995 increased $5,688,000, or 25.7%, from the
first nine months of 1994. This was due to an increase in the tax-equivalent
yield on the aggregate portfolio to 5.97% from 5.25% a year earlier, primarily
due to higher rates earned on U.S. government securities, and an increase in the
aggregate average balance of investment securities and securities available for
sale of $43,613,000, or 7.1%, from the corresponding period of 1994.
Interest income from federal funds sold and other short-term
investments totaled $4,808,000 in the first three quarters of 1995, an increase
of $3,937,000 over the same period of 1994. This was the result of an increase
of $78,377,000 in the average balances invested and an increase in the average
yield to 6.01% for the first nine months of 1995 from 4.08% in 1994.
Interest expense on deposits increased $30,653,000, or 50.7% in the
nine months ended September 30, 1995, compared to 1994. The average balance of
interest-bearing deposits increased $352,936,000, or 15.1%, in the first three
quarters of 1995 compared to 1994 (as noted earlier, $81,707,000 of the increase
was the result of deposits assumed as a part of the twelve branch offices
purchased on May 19, 1995). This was the result of an increase of $314,337,000,
or 35.7%, in the average balances of certificates of deposit less than $100,000
and an increase of $36,218,000, or 23.1%, in certificates of deposit of $100,000
or more. The average balances of NOW, savings, money market accounts, and other
time deposits remained relatively unchanged, increasing $2,381,000, or .2%,
compared to the prior year. The change in the mix of deposits coupled with the
previously mentioned increased competition for deposits combined to increase the
average rate paid on average interest-bearing deposits to 4.54% for the first
three quarters of 1995 from 3.47% in the same period of 1994.
The average interest rate paid on short- and long-term borrowings
during the first nine months of 1995 increased to 5.88% from 3.91% in 1994,
principally due to the increase in rates on Federal Funds purchased and
securities sold under agreement to repurchase. The average balances of borrowed
funds decreased by $19,404,000 in the first three quarters of 1995 from the
corresponding period of 1994.
Provision and Reserve for Credit Losses
The provision for credit losses amounted to $4,400,000 for the nine
months ended September 30, 1995, compared to $2,771,000 in 1994. The increase in
the 1995 provision was primarily due to the increase in loans outstanding. Net
credit losses amounted to $2,588,000, or .14% of average loans outstanding, on
an annualized basis, during the first nine months of 1995 compared to
$2,250,000, or .13% of average loans outstanding, on an annualized basis, for
the comparable period of 1994.
Nonperforming assets (foreclosed assets, nonaccrual loans, and
restructured loans) declined to $11,116,000, or .42% of loans and foreclosed
assets, at September 30, 1995, from $19,319,000, or .80% of loans and foreclosed
assets, at December 31, 1994, primarily due to the repayment of a restructured
loan which had an unpaid balance of $8,823,000 at year-end 1994. Loans 90 days
or more past due that continue to accrue interest declined to $4,607,000 at
September 30, 1995, from $4,634,000 at December 31, 1994.
Effective January 1, 1995, UCB adopted Financial Accounting Standards
No. 114 (FAS 114), "Accounting by Creditors for Impairment of a Loan" and
Financial Accounting Standards No. 118 (FAS 118), "Accounting by Creditors for
Impairment of a loan - Income Recognition and Disclosure." These statements
amended FAS 5, "Accounting for Contingencies," to clarify that a creditor should
evaluate the collectibility of both contractual interest and principal of a
receivable when assessing the need for a loss accrual; and FAS 15, "Accounting
by Debtors and Creditors for Troubled Debt Restructurings," to require a
creditor to account for a troubled debt restructuring involving a modification
of terms at fair value as of the date of the restructuring. At September 30,
1995, the recorded investment in loans that are considered impaired under FAS
114 was $18,647,000 (of which $4,633,000 were on a nonaccrual basis). Included
in this amount was $13,368,000 of impaired loans for which $2,250,000 of the
reserve for credit losses was assigned. The average recorded investment during
the first nine months of 1995 in loans classified as impaired at September 30,
1995, was approximately $19,218,000. For the nine months ended September 30,
1995, UCB recognized interest income on these impaired loans of $726,000 which
included $558,000 of interest income recognized using the cash basis of
accounting. Prior to January 1, 1995, UCB measured loan impairment in a manner
generally consistent with the methods prescribed in FAS 114 and, as a result, no
additional reserves for credit losses were required as a result of adoption of
this accounting standard.
The reserve for credit losses amounted to $40,493,000, or 1.54% of
loans outstanding, at September 30, 1995, compared to $38,681,000, or 1.60% of
loans outstanding, at December 31, 1994. In determining the level of the reserve
for credit losses, management takes into consideration loan volumes and
outstandings, loan loss experience, risk ratings assigned to nonconsumer loans,
impaired loans, the present and expected economic conditions in general, and, in
particular, how such conditions relate to UCB. In management's opinion, UCB's
reserve for credit losses was adequate to absorb losses from the loan portfolio
at September 30, 1995; however, adverse changes in the economic conditions in
UCB's market area could lead to a decline in the overall quality of the loan
portfolio and necessitate future additions to the reserve for credit losses.
Also, examiners from bank regulatory agencies periodically review UCB's loan
portfolio and may require the corporation to charge off loans and/or increase
the reserve for credit losses to reflect their assessment of the collectibility
of loans in the portfolio based on information available to them at the time of
their examination.
Noninterest Income and Expense
Total noninterest income increased $910,000, or 2.8%, in the first nine
months of 1995 over the same period of 1994. Service charges on deposit accounts
decreased $318,000, or 1.9%, principally due to lower revenues from commercial
checking accounts as a result of higher earnings credit rates. Other service
charges, commissions, and fees increased $1,213,000 to $15,718,000 during the
first three quarters of 1995 primarily due to increases in insurance
commissions, fees for the use of automated teller machines, and mortgage banking
fees. Commissions from the general insurance agency operations increased
$1,057,000, or 75.6%, primarily as the result of mergers with an insurance
agency in Charlotte, North Carolina, in November 1994 and an insurance agency in
Wilmington, North Carolina, in April 1995. Fees collected for the use of UCB's
automated teller machines by depositors of other institutions increased
$104,000, or 12.8%, due to increased transaction volume. Mortgage banking fees
increased $221,000, or 8.1%, due to an increase in loan originations. These
increases in fees were partially offset by decreases in brokerage and annuity
commissions which declined $130,000, or 7.2%, due to a lower trading volume.
Gains on sales of mortgage loans into the secondary market amounted to
$439,000 in the nine-month period of 1995 compared to gains of $308,000 a year
ago. The gains in 1995 include $334,000 recorded pursuant to the prospective
adoption of the provisions of Financial Accounting Standards No. 122 (FAS 122),
"Accounting for Mortgage Servicing Rights, an amendment of FASB Statement No.
65," effective April 1, 1995. This statement amends certain provisions of FAS 65
to eliminate the distinction between rights to service mortgage loans for others
that are acquired through loan origination activities and rights to service
mortgage loans for others that are acquired through purchase transactions. Under
FAS 65, the cost of originated mortgage servicing rights was not recognized as
an asset and was charged to earnings when the related loan was sold. As a result
of adopting FAS 122, beginning April 1995, the estimated fair values of the
rights to service mortgage loans for others have been capitalized on loans
originated by UCB.
Total noninterest expenses declined $724,000, or .8%, in the nine
months ended September 30, 1995, compared to the same period of 1994. The 1994
total included $1,300,000 in consulting fees related to the development of the
restructuring plan announced in October 1994. Total personnel expense declined
$7,000 in the nine month period of 1995 compared to 1994. Total salaries
decreased by $227,000, or .6%, in the first nine months of 1995 due to increases
in base compensation being more than offset by a decrease of 228, or 11.6%, in
the average number of full-time equivalent employees. The reduction in the
average number of full-time equivalent employees was principally due to the
previously mentioned restructuring plan which included the consolidation or sale
of fifteen branch offices, staffing level changes at all branches, and the
centralization of certain functions. The reduction in salaries was offset by
increases of $334,000 in temporary employment fees, as a result of temporary
staffing changes made in conjunction with the reorganization, and an increase of
$124,000 in management incentive compensation expense.
Occupancy expense decreased $170,000, or 2.5%, during the first nine
months of 1995 as compared to 1994. Depreciation expense decreased $141,000, or
9.8%, while repairs and maintenance decreased $137,000, or 8.7%, and utilities
expense declined $19,000, or 1.7%. These decreases were primarily due to the
elimination of branch locations as a part of implementing the restructuring plan
referred to above.
Equipment expense increased $163,000, or 3.6%, for the first three
quarters of 1995 as compared to the same period of 1994. Depreciation expense
increased $30,000, or 1.3%, and repairs and maintenance expense increased
$25,000, or 1.6%. Purchases of noncapitalized furniture and equipment increased
$74,000, or 27.4%, primarily due to purchases of communication equipment.
Other operating expenses increased $590,000, or 2.2%, during the first
nine months of 1995 as compared to 1994. The most significant factor affecting
other operating expenses was a reduction in deposit insurance premiums which
decreased $1,340,000, or 29.3%, from the nine-month period of 1994. This was due
to a reduction in the assessment rate from $.23 to $.04 per $100 of deposits
that was adopted by the Federal Deposit Insurance Corporation in September
retroactive to June 1, 1995, and resulted in UCB's receipt of $1,729,000 in
premium rebates that were applicable to the June 1 through September 30 period
of 1995. Marketing and business development expenses increased $317,000, or
11.2%, primarily due to increased advertising related to campaigns designed to
increase commercial loan volume and deposit balances. Professional services
expense for the first three quarters decreased $175,000, or 7.1%. The current
year's expenses were reduced by legal fees refunded in a bankruptcy proceeding
involving a current customer, while 1994 professional services included expenses
applicable to UCB's acquisitions by merger of Bank of Iredell and Sanford Real
Estate, Loan & Insurance.
Outside data processing fees increased $472,000, or 14.9%, compared to
1994 due to increased software amortization expense ($680,000, or 245.9%
increase), increases in purchases of noncapitalized software ($112,000, or
87.0%), and increased costs related to processing credit card transactions
($81,000, or 9.9 % increase). The increases in software amortization and
purchases of noncapitalized software expense reflect the purchase of computer
software related to the automation of certain labor-intensive tasks as part of
the previously discussed restructuring plan. The credit card processing expense
for 1994 reflects credits received from vendors for the volume of transactions
processed and for new contract agreements. These increases were partially offset
by a decrease of $503,000, or 41.6%, in other computer services expense. The
1994 expense included expenses related to UCB's acquisition by merger of Bank of
Iredell.
The amortization of purchased mortgage loan servicing rights decreased
$698,000, or 59.7%, from the prior year due to large packages of servicing
rights purchased in prior years becoming fully amortized at the end of 1994.
Telephone expense increased $462,000, or 28.9%, as a result of the installation
of an automated voice response telephone system and the introduction of a
staffed bank-by-phone customer service department, both of which are accessible
by toll-free numbers. In addition, the 1994 expense was reduced by $130,000 in
vendor credits which did not recur in 1995. Increases in other categories of
noninterest expenses were generally the result of increases in the costs related
to purchased services.
Income Tax Provision
The provision for income tax increased $3,711,000 in the nine months
ended September 30, 1995, compared to the corresponding period of 1994. The
increase in the income tax provision was principally the net result of an
increase of $9,835,000 in pre-tax income and a decrease of $617,000 in
tax-exempt income.
The effective income tax rate on income before taxes is lower than the
combined statutory federal and state rates primarily because interest earned on
investments in debt instruments of states, counties, and municipalities is
exempt from federal income tax and may be exempt from state income tax.
Substantially all income earned on securities of the United States government or
its agencies is exempt from state income taxes.
Cumulative Effect of a Change in Accounting Method
Effective January 1, 1994, UCB adopted Financial Accounting Standards
No. 112 (FAS 112), "Employers' Accounting for Postemployment Benefits," which
requires the accrual of expenses for the estimated cost of benefits provided for
employees after employment but before retirement. The adoption of FAS 112
required immediate recognition of the actuarially determined liability for
postemployment benefits which amounted to $529,000 at December 31, 1993. The
mandatory adoption of FAS 112 resulted in a charge against net income of
$316,000, net of deferred income taxes, which was recorded as a cumulative
effect of a change in accounting method during the first quarter of 1994.
Results of Operations - Three Months Ended September 30, 1995, Compared to 1994
Summary
Net income for the three months ended September 30, 1995, amounted to
$12,454,000, or $.84 per share, compared to $9,347,000, or $.64 per share, for
the third quarter of 1994. The 1995 operating results represent an increase of
$3,107,000, or 33.2%, over the third quarter of 1994 (31.3% increase in earnings
per share). The increase in earnings was primarily the result of increased
tax-equivalent net interest income as a result of growth in average earning
assets and a decrease in total noninterest expenses, principally due to a
reduction in deposit insurance costs as a result of a decrease in the assessment
rate from $.23 to $.04 per $100 in deposits.
Net Interest Income
Net interest income increased $2,929,000 (7.9%) in the third quarter of
1995 compared to 1994. This was the net result of an increase of $512,220,000
(17.1%) in the average level of earning assets, an increase of .54% in the
overall tax-equivalent yield on earning assets, combined with an increase of
$470,840,000 (19.3%) in the average balance of interest-bearing liabilities, and
an increase of 1.08% in the average rate paid on interest-bearing liabilities.
As previously discussed, UCB purchased twelve branch office operations from the
subsidiaries of Southern National Corporation. This resulted in an increase of
$161,980,000 in average earning assets and $166,364,000 in average
interest-bearing liabilities for the third quarter of 1995. The tax-equivalent
net interest yield on average earning assets declined to 4.61% in the third
quarter of 1995 from 5.02% in the same period of 1994 due primarily to the
increased cost of deposits relative to the increase in yields on earning assets
as more fully discussed in the nine month discussion of operations.
Provision for Credit Losses
The provision for credit losses increased $191,000 (23.6%) to
$1,000,000 in the third quarter of 1995 compared to 1994. The increase was
principally due to higher levels of net credit losses in comparison to the third
quarter of the prior year. Net credit losses for the three months ended
September 30, 1995, were $1,363,000, or .21% of average loans on an annualized
basis, compared to $943,000, or .16% of average loans, on an annualized basis in
1994.
Noninterest Income and Expense
Noninterest income increased $1,204,000 (11.3%) during the third
quarter of 1995 compared to 1994. Service charges on deposit accounts decreased
$23,000 (.4%) from the prior year due to a decline in revenues from commercial
accounts as discussed in connection with the nine-month operating results.
Discount brokerage fees increased $42,000, or 7.3%, due to an increase in
trading volume. Commissions from the general insurance agency operations
increased $517,000, or 98.7% as a result of the insurance agency mergers
previously mentioned. Mortgage banking fees increased $391,000, or 49.6%, due to
increased loan origination activity during the quarter compared to the same
period of 1994. Gains on the origination of mortgage loans for sale in the
secondary market amounted to $255,000 in the third quarter of 1995, compared to
gains of $53,000 realized in the same period of 1994.
Total noninterest expense decreased $1,010,000 (3.1%) during the three
months ended September 30, 1995, compared to 1994. The 1994 total included
$300,000 in consulting fees relating to the development of the 1994
restructuring plan previously discussed. Deposit premium expense was $1,565,000
for the third quarter of 1994 compared to a net expense credit of $73,000 in
1995. This decrease of $1,638,000 was the result of the reduction in the
assessment rate from $.23 to $.04 per $100 of deposits that was adopted by the
FDIC in September retroactive to June 1, 1995, as previously mentioned. Changes
in other categories of expenses were mainly the result of those factors covered
in the nine-month discussion.
Financial Condition
The financial condition of the Corporation, with respect to liquidity
and dividends at September 30, 1995, has not changed significantly since
December 31, 1994. At September 30, 1995, stockholders' equity amounted to 7.76%
of total assets compared to 7.91% at December 31, 1994. At September 30, 1995,
UCB had a ratio of core capital to weighted risk assets of approximately 10.53%
and a ratio of total capital to weighted risk assets of approximately 11.78%,
computed using the Federal Reserve guidelines for risk-based capital
requirements, and a ratio of quarter-end core capital to average total assets
for the three months ended September 30, 1995, of 7.35%.
On an annualized basis, income before the cumulative effect of a change
in accounting method as a percentage of average stockholders' equity amounted to
16.08% for the first nine months of 1995 compared to 14.07% for the same period
of 1994. Cash dividends declared represented 32.00% of income before the
cumulative effect of a change in accounting method in the first three quarters
of 1995 compared to 32.17% for the nine months ended September 30, 1994.
At September 30, 1995, UCB did not own any securities which met the
regulatory definition of structured notes.
At September 30, 1995, UCB owned debt securities that had not been
rated by a rating agency with a book value of $1,626,000. In addition, debt
securities with a book value of $266,000 were owned at September 30, 1995, that
had less than investment grade ratings. Included in the unrated securities were
bonds with a book value of $1,476,000 that are collateralized by U.S. government
securities. Substantially all of these investments were securities issued by
municipalities located within UCB's market area. It is management's opinion that
no more than a normal risk of loss exists on these securities.
Accounting and Regulatory Issues
As previously reported, UCB was required to adopt the provisions of
Financial Accounting Standards No. 112 (FAS 112), "Employers' Accounting for
Postemployment Benefits," which requires the accrual of expenses for the
estimated cost of benefits provided for employees after employment but before
retirement. The adoption of FAS 112 required immediate recognition of the
actuarially determined liability for postemployment benefits which amounted to
$529,000 at December 31, 1993. The adoption of FAS 112 resulted in a charge
against net income of $316,000, net of deferred income taxes which was recorded
as a cumulative effect of a change in accounting method during the first quarter
of 1994.
As previously reported, UCB was required to adopt the provisions of
Financial Accounting Standards No. 114 (FAS 114), "Accounting by Creditors for
Impairment of a Loan," which was issued in May 1993. This statement amends FAS
5, "Accounting for Contingencies," to clarify that a creditor should evaluate
the collectibility of both contractual interest and principal of a receivable
when assessing the need for a loss accrual; and FAS 15, "Accounting by Debtors
and Creditors for Troubled Debt Restructurings," to require a creditor to
account for a troubled debt restructuring involving a modification of terms at
fair value as of the date of the restructuring. In October 1994, the Financial
Accounting Standards Board issued Financial Accounting Standards No. 118 (FAS
118), "Accounting by Creditors for Impairment of a Loan - Income Recognition and
Disclosure." FAS 118 revises FAS 114 to permit companies to use their existing
income recognition policies with respect to impaired loans rather than those set
forth in FAS 114 and requires a creditor to disclose certain information
concerning income recognition on impaired loans. FAS 114 was adopted effective
January 1, 1995. UCB had previously measured loan impairment in a manner
generally consistent with the methods prescribed in FAS 114. As a result, no
additional reserves for credit losses were required as the result of adoption of
FAS 114. As previously noted, effective April 1, 1995, UCB adopted the
provisions of Financial Accounting Standards No. 122 (FAS 122), "Accounting for
Mortgage Servicing Rights, an amendment of FASB Statement No. 65." This
statement amends certain provisions of FAS 65 to eliminate the distinction
between rights to service mortgage loans for others that are acquired through
loan origination activities and rights to service mortgage loans for others that
are acquired through purchase transactions. Under FAS 65, the cost of originated
mortgage service rights was not recognized as an asset and was charged to
earnings when the related loan was sold. As a result of adopting FAS 122,
beginning April 1995, the estimated fair values of the rights to service
mortgage loans for others have been capitalized on loans originated by UCB. This
resulted in an increase in the gains on the sale of mortgage loans into the
secondary market totaling $334,000 through September 30, 1995.
FAS 122 has a different cost allocation methodology than FAS 65 for
purchased mortgage servicing rights. FAS 65 allocated such costs incurred in
excess of the market value of the loans without the servicing rights, whereas
FAS 122 allocates costs based on the relative market values of the purchased
servicing rights and the related loans. The application of the FAS 122 cost
allocation method to purchased mortgage servicing rights acquired during the
three months ended September 30, 1995, was not material.
FAS 122 also requires that all capitalized mortgage servicing rights be
evaluated for impairment based on the excess of the carrying amount of such
rights over their fair value. For purposes of measuring impairment, capitalized
mortgage servicing rights are stratified on the basis of one or more of the
predominant risk characteristics of the underlying loans. The adoption of FAS
122 resulted in no impairment adjustments to capitalized mortgage servicing
rights.
In March 1995, the FASB issued Financial Accounting Standards No. 121
(FAS 121), "Accounting for Impairment of Long-Lived Assets and for Long-Lived
Assets to Be Disposed Of," which establishes accounting standards for the
impairment of long-lived assets, certain identifiable intangibles, and goodwill
related to those assets to be held and used and for those to be disposed of.
This statement requires that long-lived assets and certain intangibles be
reviewed for impairment whenever events or changes in circumstances indicate
that the carrying value may not be recoverable. An impairment loss should be
recognized if the sum of the undiscounted future cash flows is less than the
carrying amount of the asset. Those assets to be disposed of are to be reported
at the lower of the carrying amount or fair value less costs to sell. Adoption
of FAS 121 is required for fiscal years beginning after December 15, 1995. While
the effect has not yet been determined, adoption of this standard is not
expected to have a material impact on UCB's financial position or operating
results.
In addition to the accounting standards discussed above, the FASB has
issued an exposure draft entitled: "Accounting for Stock-based Compensation."
UCB has not determined what effect, if any, the proposed standard will have on
its consolidated financial position or operating results.
Various proposals are currently being considered by committees of the
United States Congress concerning a possible merger of the Federal Deposit
Insurance Corporation's Savings Association Insurance Fund ("SAIF") with the
Bank Insurance Fund ("BIF"). One of the principal issues under discussion is the
amount of additional funds needed to capitalize the SAIF prior to such a merger.
Substantially all of the proposals under consideration contemplate obtaining the
additional funds deemed necessary for the SAIF through a special assessment to
be levied on SAIF insured deposits. At September 30, 1995, UCB had approximately
$125 million of SAIF insured deposits which may be subject to a special
assessment if a proposal similar to those that have been publicized is adopted.
UCB and its subsidiaries are subject to regulation and examination by
state and federal bank regulatory agencies and are subject to the accounting and
disclosure requirements of the Securities and Exchange Commission. There are no
pending material regulatory recommendations or actions concerning UCB with which
management has not complied.
SIGNATURE
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 CAROLINA BANCSHARES CORPORATION
October 27, 1995 By /s/ John F. Watson
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Controller
October 27, 1995 By /s/ Ronald C. Monger
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Executive Vice President &
Chief Financial Officer