UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D. C. 20549 Exhibit Index Page 31 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 March 31, 1996 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 May 10, 1996, there were 24,196,005 outstanding shares of Registrant's $4.00 par value common capital stock which is the only class of securities issued by the Registrant. Page 1 of 53 pages PART I - FINANCIAL INFORMATION Item 1: Financial Statements United Carolina Bancshares Corporation and Subsidiaries Consolidated Balance Sheets March 31, December 31, 1995 199 ------------ -------------- (In thousands) Assets: Cash and due from banks - noninterest-bearing $ 178,313 $ 179,679 Federal funds sold and other short-term investments 138,609 45,413 Securities available for sale (amortized costs of $773,062,000 in 1996 and $764,923,000 in 1995) 773,833 769,956 Investment securities (approximate market values of $59,025,000 in 1996 and $99,270,000 in 1995) 57,437 97,354 Loans, net of unearned income 2,881,844 2,826,987 Less reserve for credit losses (44,382) (43,464) ----------- ----------- Net loans 2,837,462 2,783,523 ----------- ----------- Premises and equipment 57,295 58,002 Other assets 116,578 103,591 ----------- ----------- Total assets $ 4,159,527 $ 4,037,518 =========== =========== Liabilities and stockholders' equity: Deposits: Noninterest-bearing demand deposits $ 613,707 $ 578,864 Interest-bearing deposits: NOW, savings, and money market deposits 1,340,586 1,354,193 Certificates of deposit of $100,000 or more 230,810 206,235 Other time deposits 1,526,382 1,498,359 ----------- Total deposits 3,711,485 3,637,651 Short-term borrowings 67,632 30,439 Mortgages and other notes payable 2,829 2,975 Other liabilities 50,169 43,305 ----------- ----------- Total liabilities 3,832,115 3,714,370 ----------- ----------- 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 24,166,878 shares in 1996 and 24,137,791 shares in 1995 96,667 96,551 Surplus 50,492 50,183 Retained earnings 180,028 173,491 Unrealized gains on securities available for sale, net of deferred income taxes 225 2,923 ----------- ----------- Total stockholders' equity 327,412 323,148 ----------- ----------- Total liabilities and stockholders' equity $ 4,159,527 $ 4,037,518 =========== =========== See accompanying Notes to Consolidated Financial Statements 2 United Carolina Bancshares Corporation and Subsidiaries Consolidated Statements of Income Three Months Ended March 31, --------------------------- 1996 1995 ------------ ------------ (Dollars in thousands except per share amounts) Interest income: Interest on loans $ 65,169 $ 59,704 Interest and dividends on: Taxable securities 11,227 7,388 Tax-exempt securities 851 1,034 Interest on federal funds sold and other short-term investments 1,269 574 ------------ ----------- Total interest income 78,516 68,700 ------------ ----------- Interest expense: Interest on deposits 35,270 26,884 Interest on short-term borrowings 408 940 Interest on long-term borrowings 44 39 ------------ ----------- Total interest expense 35,722 27,863 ------------ ----------- Net interest income 42,794 40,837 Provision for credit losses 2,200 2,279 ------------ ----------- Net interest income after provision for credit losses 40,594 38,558 Noninterest income: Service charges on deposit accounts 6,154 5,696 Trust income 1,594 1,237 Insurance commissions 1,533 1,224 Mortgage banking fees 1,133 848 Brokerage and annuity commissions 566 601 Other service charges, commissions, and fees 1,436 1,087 Gains on mortgages originated for resale 217 41 Gains on trading account securities -- 1 Gains (losses) on dispositions of securities (193) 3 Gains (losses) on dispositions of fixed assets (539) 9 Other operating income 266 245 ------------ ----------- Total noninterest income 12,167 10,992 ------------ ----------- Noninterest expenses: Personnel expense 21,751 19,340 Occupancy expense 2,536 2,424 Equipment expense 1,805 1,785 Other operating expenses 10,113 9,628 ------------ ----------- Total noninterest expenses 36,205 33,177 ------------ ----------- Income before income taxes 16,556 16,373 Income tax provision 6,003 5,848 ------------ ----------- Net income $ 10,553 $ 10,525 ============ =========== Per share data: Net income $ .44 $ .44 ============ =========== Cash dividends declared $ .18 $ .147 ============ =========== Book value at end of period $ 13.55 $ 12.20 ============ =========== Average number of shares outstanding 24,140,761 24,038,698 ============ =========== See accompanying Notes to Consolidated Financial Statements 3 United Carolina Bancshares Corporation and Subsidiaries Consolidated Statements of Stockholders' Equity Three Months Ended March 31, 1996 and 1995 Unrealized Common Stock Gains -------------------------- (Losses) on Number of Aggregate Securities Total Shares Par Retained Available Stockholders' Outstanding Value Surplus Earnings For Sale, Net Equity ----------- ----------- ----------- ----------- ------------- ------------- (Dollars in thousands) Balance, January 1, 1996, as previously reported 22,153,110 $ 88,612 $ 42,441 $ 167,826 $ 2,898 $ 301,777 Merger with of Seaboard Savings Bank and Triad Bank 1,984,681 7,939 7,742 5,665 25 21,371 ----------- ----------- ----------- ----------- ----------- ----------- Balance, January 1, 1996, as restated 24,137,791 96,551 50,183 173,491 2,923 323,148 Net income -- -- -- 10,553 -- 10,553 Cash dividends declared, $.18 per share -- -- -- (4,063) -- (4,063) Issuance of common stock by pooled institution prior to merger 29,949 120 327 45 -- 492 Retirement of common stock (862) (4) (18) 2 -- (20) Unrealized losses on securities available for sale, net of applicable deferred income taxes -- -- -- -- (2,698) (2,698) ----------- ----------- ----------- ----------- ----------- ----------- Balance, March 31, 1996 24,166,878 $ 96,667 $ 50,492 $ 180,028 $ 225 $ 327,412 =========== =========== =========== =========== =========== =========== Balance, January 1, 1995, as previously reported 22,050,099 $ 88,200 $ 42,505 $ 138,077 $ (5,293) $ 263,489 Merger with Seaboard Savings Bank and Triad Bank 1,967,626 7,871 7,629 3,876 (267) 19,109 ----------- ----------- ----------- ----------- ----------- ----------- Balance, January 1, 1995, as restated 24,017,725 96,071 50,134 141,953 (5,560) 282,598 Net income -- -- -- 10,525 -- 10,525 Cash dividends declared: $.147 per share -- -- -- (3,238) -- (3,238) By pooled institution prior to merger -- -- -- (31) -- (31) Issuance of common stock: Under stock option plan 24,855 99 102 (32) -- 169 By pooled institution prior to merger 1,818 7 8 8 -- 23 Unrealized gains on securities available for sale, net of applicable deferred income taxes -- -- -- -- 3,385 3,385 ----------- ----------- ----------- ----------- ----------- ----------- Balance, March 31, 1995 24,044,398 $ 96,177 $ 50,244 $ 149,185 $ (2,175) $ 293,431 =========== =========== =========== =========== =========== =========== See acompanying Notes to Consolidated Financial Statements 4 United Carolina Bancshares Corporation and Subsidiaries Consolidated Statements of Cash Flows Three Months Ended March 31, --------------------- 1996 1995 --------- --------- (In thousands) Increase (decrease) in cash and cash equivalents: Cash flows from operating activities: Net income $ 10,553 $ 10,525 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization, net of accretion 2,476 2,146 Provision for credit losses 2,200 2,279 Net increase in loans originated for resale (1,842) (6,988) Provision for deferred taxes and increase in taxes payable 5,059 5,773 Increase in accrued interest receivable 343 418 Increase in prepaid expenses (1,728) (732) Decrease in other accounts receivable 3,256 2,459 Increase (decrease) in accrued interest payable (371) 421 Increase (decrease) in accrued expenses 1,451 (1,218) Increase (decrease) in deferred loan fees, net of deferred costs (189) 222 Other, net 838 116 --------- --------- Total adjustments 11,493 4,896 --------- --------- Net cash provided by operating activities 22,046 15,421 --------- --------- Cash flows from investing activities: Proceeds from maturities and issuer calls of securities available for sale 236,585 54,049 Proceeds from maturities and issuer calls of investment securities 3,523 7,444 Proceeds from sales of investment securities -- 3,810 Purchases of securities available for sale (208,487) (45,974) Purchases of investment securities -- (1,009) Net increase in loans outstanding (54,717) (81,580) Purchases of premises and equipment (1,377) (1,476) Proceeds from sales of premises and equipment 100 259 Purchases of mortgage loan servicing rights (624) (319) Sales of foreclosed assets 189 1,354 Other, net (12,697) 1,730 --------- --------- Net cash used by investing activities (37,505) (61,712) --------- --------- Cash flows from financing activities: Net increase in deposit accounts 73,833 82,191 Net increase in federal funds purchased 3,375 2,385 Net increase (decrease) in securities sold under agreement to repurchase 33,104 (28,190) Net increase (decrease) in other short-term borrowings 714 (368) Repayments of mortgages and other notes payable (146) (17) Issuance of common stock, net 472 192 Dividends paid (4,063) (3,269) --------- --------- Net cash provided by financing activities 107,289 52,924 --------- --------- Net increase in cash and cash equivalents 91,830 6,633 Cash and cash equivalents at beginning of period 225,092 244,660 --------- --------- Cash and cash equivalents at end of period $ 316,922 $ 251,293 ========= ========= Statement Continued on Next Page 5 Supplemental disclosures of cash flow information: Cash paid during the period for: Interest $ 36,093 $ 28,284 ======== ======== Income taxes $ 944 $ 90 ======== ======== Significant noncash transactions: Loans transferred to real estate acquired in settlement of debt $ 602 $ 1,237 ======== ======== Loans originated to facilitate the sale of foreclosed assets $ 45 $ 251 ======== ======== Unrealized gains (losses) on securities available for sale $ (4,256) $ 7,185 ======== ======== Investment securities transferred to available for sale portfolio in connection with business combination $ 36,646 $ -- ======== ======== Available for sale securities transferred to investment portfolio in connection with business combination $ 240 $ -- ======== ======== See accompanying Notes to Consolidated Financial Statements 6 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 March 31, 1996, and December 31, 1995, and operating results of United Carolina Bancshares Corporation and its subsidiaries for the three-month periods ended March 31, 1996 and 1995. All adjustments made to the unaudited financial statements were of a normal recurring nature. The results of operations for the first three months of 1996 are not necessarily indicative of the results of operations for the entire year. As discussed in Note 13, during the three months ended March 31, 1996, the corporation consummated mergers with Triad Bank and Seaboard Savings Bank, both of which were accounted for as poolings-of-interests. Accordingly, the accompanying consolidated financial statements have been restated to include the accounts of Triad Bank and Seaboard Savings Bank for all periods presented. Note 2. Securities: The following is a summary of the securities portfolios by major classification: March 31, 1996 -------------------------------------------------------- Approximate Amortized Unrealized Unrealized Market Cost Gains Losses Value --------- ---------- ---------- ----------- (In thousands) Securities available for sale: United States government securities $667,036 $ 3,244 $ 1,686 $ 668,594 Obligations of United States government agencies and corporations (1) 59,185 19 99 59,105 Mortgage-backed securities (2) 32,966 60 770 32,256 Obligations of states and political subdivisions 1,100 3 -- 1103 Federal Home Loan Bank stock 12,200 -- -- 12,200 Other securities 575 -- -- 575 -------- ---------- ---------- ----------- Total securities available for sale $773,062 $ 3,326 $ 2,555 $ 773,833 ======== ========== ========== =========== Investment securities: Obligations of states and political subdivisions $ 57,437 $ 1,643 $ 55 59,025 -------- ---------- ---------- ----------- Total investment securities $ 57,437 $ 1,643 $ 55 $ 59,025 ======== ========== ========== =========== <FN> (1) At March 31, 1996, UCB owned securities issued by United States government agencies with an amortized cost of $7,646,000 and a market value of $7,667,000 that were considered structured notes and therefore met the regulatory definition of high-risk securities. (2) At March 31, 1996, UCB owned collateralized mortgage obligations issued by the Federal Home Loan Mortgage Corporation (FHLMC) which had an amortized cost of $11,749,000 and a market value of $11,534,000; and collateralized mortgage obligations issued by the Federal National Mortgage Association (FNMA) which had an amortized cost of $13,767,000 and a market value of $13,366,000. In addition, UCB owned mortgage-backed pass-through securities guaranteed by the Government National Mortgage Association (GNMA) which had an amortized cost of $1,145,000 and a market value of $1,165,000; mortgage-backed pass-through securities guaranteed by FNMA with an amortized cost of $2,326,000 and a market value of $2,275,000; and mortgage-backed pass-through securities guaranteed by FHLMC with an amortized cost of $3,595,000 and a market value of $3,511,000. UCB also owned collateralized mortgage obligations issued by a private issuer and guaranteed by the Government National Mortgage Association (GNMA) which had an amortized cost of $384,000 and a market value of $405,000. </FN> 7 Notes to Consolidated Financial Statements (Continued) Note 2. Securities - Continued December 31, 1995 -------------------------------------------------------- Approximate Amortized Unrealized Unrealized Market Cost Gains Losses Value --------- ---------- ---------- ----------- (In thousands) Securities available for sale: United States government securities $585,795 $ 5,521 $ 127 $ 591,189 Obligations of United States government agencies and corporations 136,590 4 74 136,520 Mortgage-backed securities 29,628 53 346 29,335 Obligations of states and political subdivisions 1,340 2 -- 1,342 Federal Home Loan Bank stock 10,941 -- -- 10,941 Other securities 629 -- -- 629 -------- ---------- -------- ---------- Total securities available for sale $764,923 $ 5,580 $ 547 $ 769,956 ======== ======== ======== ========== Investment securities: United States government securities $ 10,396 $ 141 $ 168 $ 10,369 Obligations of United States government agencies and corporations 21,713 -- -- 21,713 Mortgage-backed securities 4,508 16 44 4,480 Obligations of states and political subdivisions 60,660 2,011 40 62,631 Other securities 77 -- -- 77 -------- -------- -------- ---------- Total investment securities $ 97,354 $ 2,168 $ 252 $ 99,270 ======== ======== ======== ========== Note 3. Loans: The consolidated loan portfolio is summarized by major classification as follows: March 31, December 31, 1996 1995 ----------- ------------ (In thousands) Loans secured by real estate: Construction and land acquisition and development $ 231,187 $ 226,326 Secured by nonfarm, nonresidential properties 623,054 620,367 Secured by farmland 93,686 90,658 Secured by multifamily residences 71,936 65,097 ----------- ----------- Total loans secured by real estate, excluding loans secured by 1-4 family residences 1,019,863 1,002,448 ----------- ----------- Revolving credit secured by 1-4 family residences 142,452 140,032 Other loans secured by 1-4 family residences 625,036 613,846 ----------- ----------- Total loans secured by 1-4 family residences 767,488 753,878 ----------- ----------- Total loans secured by real estate 1,787,351 1,756,326 Commercial, financial, and agricultural loans, excluding loans secured by real estate 311,992 296,778 Loans to individuals for household, family, and other personal expenditures, excluding loans secured by real estate 691,882 691,193 All other loans 91,247 83,507 ----------- ----------- Total loans 2,882,472 2,827,804 Unearned income (628) (817) ----------- ----------- Loans, net of unearned income $ 2,881,844 $ 2,826,987 =========== =========== 8 Notes to Consolidated Financial Statements (Continued) Note 4. Nonperforming and Problem Assets: The following is a summary of nonperforming and problem assets: March 31, December 31, 1996 1995 --------- ------------ (In thousands) Foreclosed assets $ 5,500 $ 5,234 Nonaccrual loans 6,800 6,403 --------- ------------ Total nonperforming assets 12,300 11,637 Loans 90 days or more past due, excluding nonaccrual loans 6,884 5,554 --------- ------------ Total problem assets $ 19,184 $ 17,191 ========= ============ Note 5. Reserve for Credit Losses: The following table sets forth the analysis of the consolidated reserve for credit losses: Three Months Ended March 31, --------------------- 1996 1995 --------- --------- (In thousands) Balance, beginning of period $ 43,464 $ 41,341 Provision for credit losses 2,200 2,279 Recovery of losses previously charged off 788 963 Losses charged to reserve (2,070) (1,307) -------- -------- Balance, end of period $ 44,382 $ 43,276 ======== ======== 9 Notes to Consolidated Financial Statements (Continued) Note 6. Short-Term Borrowings: The following table sets forth certain data with respect to UCB's short-term borrowings: March 31, 1996 December 31, 1995 -------------------------------------------- -------------------------------------------- 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 $ 20,195 $ 44,040 $ 3,397 $ -- $ 16,820 $ 10,936 $ 2,683 $ -- Maximum amount outstanding at any month-end during the period 20,315 44,040 3,894 -- 22,610 28,216 4,250 25,000 Average balance outstanding during the period 20,524 9,354 2,812 -- 17,227 11,636 3,098 13,412 Average interest rate paid during the period 5.22% 4.81% 4.41% -- % 5.79% 5.25% 5.62% 6.48% Average interest rate payable at end of period 5.44% 4.92% 5.10% -- % 5.50% 4.70% 5.15% -- % 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. 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 fund 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. 10 Notes to Consolidated Financial Statements (Continued) Note 7. Mortgages and Other Notes Payable: Mortgages payable totaled $105,000 at March 31, 1996, and $121,000 at December 31, 1995. The mortgages bear interest at annual rates ranging from 8.75% to 10% and are collateralized by premises with book values of approximately $468,000 at March 31, 1996, and $470,000 at December 31, 1995. The mortgages are payable primarily in monthly installments totaling approximately $3,000, including interest. Other notes payable totaled $125,000 at December 31, 1995, and consisted of an unsecured note payable which bore interest at an annual rate of 12%, payable monthly, with the principal paid on March 1, 1996. Advances from the Federal Home Loan Bank of Atlanta with initial maturities of more than one year totaled $2,724,000 at March 31, 1996, and $2,729,000 at December 31, 1995. 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 beginning November 24, 1996. 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. 11 Notes to Consolidated Financial Statements (Continued) Note 9. Supplementary Income Statement Information: The following is a breakdown of items included in "Other operating expenses" on the consolidated statements of income: Three Months Ended March 31, ------------------ 1996 1995 ------- ------- (In thousands) Other operating expenses: Data processing fees and software expense $ 1,472 $ 1,159 Marketing and business development 1,140 1,077 Postage and delivery 1,038 953 Professional services 1,013 768 Printing, stationery, and supplies 926 782 Telephone expense 888 664 Travel expense 451 427 Insurance and taxes, other than taxes on income 385 397 Noncredit losses 231 228 Amortization of goodwill and other intangible assets 639 233 Amortization of capitalized mortgage servicing rights 218 137 Donations 105 76 FDIC deposit insurance premiums 67 1,732 Other expenses 1,540 995 ------- ------- Total other operating expenses $10,113 $ 9,628 ======= ======= Note 10. Per Share Data: Earnings per share are computed based on the weighted average number of shares outstanding during each period, adjusted retroactively for the pooling-of-interests mergers with Seaboard Savings Bank and Triad Bank, and the 3-for-2 stock split effected in the form of a stock dividend declared January 17, 1996. Cash dividends per share are computed based on the historical number of shares outstanding at date of declaration adjusted retroactively for the 3-for-2 stock split. Book values per share are computed based on the number of shares outstanding at the end of each period, adjusted retroactively for the mergers with Seaboard Savings Bank and Triad Bank and the 3-for-2 stock split. Dilution of earnings per share that would result from the exercise of all outstanding stock options was immaterial. 12 Notes to Consolidated Financial Statements (Continued) Note 11. 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 12. 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' business. 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 financial position of UCB and its subsidiaries. Note 13. Mergers and Acquisitions: On April 28, 1995, UCB issued 66,320 shares of common stock to consummate the merger with United Agencies, Inc., a general insurance agency located in Wilmington, North Carolina. Total assets of $252,000 were acquired in the transaction. 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 acquired the deposits and certain other assets of twelve North Carolina bank branches from another financial institution. At the date of acquisition, the acquired branches had $26.8 million in loans and $178.7 million in deposits. Subsequent to the acquisition, two of the branches not located in existing UCB markets were sold to two commercial banks. These branches had $4.8 million in loans and $32.6 million in deposits when sold. A premium of $10.1 million was paid for the assumed deposit base of the branches retained. Effective January 25, 1996, UCB consummated a merger with Seaboard Savings Bank, Inc., Plymouth, North Carolina. Under terms of the agreement, UCB exchanged 418,641 shares of common stock for all of the outstanding shares of Seaboard common stock. The merger was accounted for as a pooling-of-interests, and accordingly, the accompanying consolidated financial statements have been restated to include the accounts of Seaboard Savings Bank for all periods presented. Effective March 29, 1996, UCB consummated a merger with Triad Bank headquartered in Greensboro, North Carolina. Under terms of the agreement, UCB exchanged 1,551,874 shares of common stock for all of the outstanding shares of Triad common stock. The merger was accounted for as a pooling-of-interests, and accordingly, the accompanying consolidated financial statements have been restated to include the accounts of Triad Bank for all periods presented. 13 Notes to Consolidated Financial Statements (Continued) The consolidated statement of income for the three months ended March 31, 1996, includes $3,969,000 of total income, $2,345,000 of net interest income, and $1,748,000 of net losses related to the operations of the two pooled financial institutions prior to their respective merger dates. The following presents on a pro forma basis the contributions of Seaboard Savings Bank and Triad Bank to the restated results of UCB for the three months ended March 31, 1995, as previously reported. UCB as Seaboard Previously Savings Triad UCB as Reported Bank Bank Restated ---------- -------- ----- -------- Three Months Ended March 31, 1995: Total income 74,916 1,006 3,770 79,692 Net interest income 38,213 389 2,235 40,837 Net income 10,120 96 309 10,525 On March 26, 1996, UCB reached an agreement in principal to enter into a merger transaction with Tomlinson Insurors, Inc. ("Tomlinson"), a general insurance agency in Fayetteville, North Carolina which will result in Tomlinson becoming a part of UCB's North Carolina subsidiary bank. Under terms of the agreement, UCB will exchange a maximum of 44,290 shares of common stock for the net business assets of Tomlinson Insurors, Inc. It is anticipated that the transaction will be completed in the third quarter of 1996, subject to regulatory approvals. 14 Item 2: Management's Discussion and Analysis of Financial Condition and Results of Operations Results of Operations - Three Months Ended March 31, 1996, Compared to 1995 Summary Net income totaled $10,553,000, or $.44 per share, for the three months ended March 31, 1996. For the comparable quarter of 1995, net income amounted to $10,525,000, or $.44 per share. All per share data has been restated to reflect the 3-for-2 stock split effected in the form of a stock dividend declared January 17, 1996. The 1996 results included the effect of nonrecurring charges and expenses totaling $1,554,000, net of applicable income tax benefits, incurred in connection with the completion of the mergers with Seaboard Savings Bank and Triad Bank during the quarter. Excluding the effects of the items related to the mergers, on a pro forma basis, earnings for the first quarter of 1996 amounted to $12,107,000, or $.50 per share. Both the mergers were accounted for as poolings-of-interests, and, accordingly, all financial data has been restated to include the accounts of Seaboard Savings Bank and Triad Bank for all periods presented. Net Interest Income Net interest income increased $1,957,000, or 4.8%, for the three months ended March 31, 1996, compared to the first quarter of 1995. This was the result of an increase of $495,863,000, or 15.1%, in the level of average earning assets with a decrease of .16% in the overall tax-equivalent yield, combined with an increase of $442,194,000, or 16.5%, in the average balance of interest-bearing liabilities with an increase of .38% in the average rate paid. In May 1995, UCB purchased twelve branch offices from another financial institution, including the 15 purchase of certain loans and the assumption of applicable deposit liabilities. Two of the branch offices acquired in the transaction were sold to third-party banks during the fourth quarter of 1995. These transactions resulted in a net increase of $131,215,000 in average earning assets and $129,007,000 in average interest-bearing liabilities for the three months ended March 31, 1996, compared to the first quarter of 1995. The net tax-equivalent yield on earning assets decreased to 4.62% in the first quarter of 1996 from 5.13% in the same period of 1995. The continued 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 .42% in the first three months of 1996 compared to 1995 while the yield on average earning assets decreased by .16% 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 1996 as compared to 1995. The percentage of average earning assets funded by interest-bearing liabilities increased to 82.75% in the first quarter of 1996 from 81.78% in the comparable period of 1995 while the percentage of average earning assets comprised of loans declined to 75.61% for the three months ended March 31, 1996, compared to 79.63% the prior year. Interest income from loans increased $5,465,000, or 9.2%, over the first three months of 1995 due to an increase of $243,009,000, or 9.3%, in average loans outstanding as the tax-equivalent yield on average loans outstanding declined to 9.20% from 9.29% in 1995. The decrease in the yield on the loan portfolio for 1996 was primarily the result of a lower prevailing 16 prime lending rate which averaged 8.34% during the first quarter of 1996 compared to 8.83% in the first three months of 1995. Approximately 40% of UCB's loans outstanding at March 31, 1996, 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 three months of 1996 increased $3,656,000, or 43.4%, from the first three months of 1995. This was due to an increase in the tax-equivalent yield on the aggregate portfolio to 6.09% from 5.79% 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 $198,215,000, or 31.5%, from the corresponding period of 1995. Interest income from federal funds sold and other short-term investments totaled $1,269,000 in the first quarter of 1996, an increase of $695,000 over the same period of 1995. This was the result of an increase of $54,639,000 in the average balances invested as the average yield declined to 5.48% for the first three months of 1996 from 6.04% in 1995. Interest expense on deposits increased $8,386,000, or 31.2% in the three months ended March 31, 1996, compared to 1995. The average balance of total interest-bearing deposits increased $474,951,000, or 18.2%, in the first quarter of 1996 compared to 1995 (as noted earlier, $129,007,000 of the increase was the result of the branch offices purchased during 1995). This was the result of an increase of $302,241,000, or 28.2%, in the average balances of certificates of deposit less than $100,000 and an increase of $172,595,000, or 13.1%, in the average balances of NOW, savings, money market accounts, and other time deposits. Certificates of deposit of $100,000 or more were relatively unchanged, increasing $115,000, or .1%, compared to the prior year. Certificates of deposit less than $100,000 as a percentage of total 17 interest-bearing deposits increased to 44.5% during the first quarter of 1996 from 41.0% in the first three months of 1995. The change in the mix of deposits coupled with active competition for deposits combined to increase the average rate paid on average interest-bearing deposits to 4.59% for the first quarter of 1996 from 4.17% in the same period of 1995. The average interest rate paid on short- and long-term borrowings during the first three months of 1996 decreased to 5.11% from 5.81% in 1995, principally due to a decrease in rates on Federal Funds purchased and securities sold under agreement to repurchase. The average balances of borrowed funds decreased by $32,756,000 in the first quarter of 1996 from the corresponding period of 1995. Provision and Reserve for Credit Losses The provision for credit losses amounted to $2,200,000 for the three months ended March 31, 1996, compared to $2,279,000 in 1995. Net credit losses amounted to $1,279,000, or .18% of average loans outstanding, on an annualized basis, during the first three months of 1996 compared to $344,000, or .05% of average loans outstanding, on an annualized basis, for the comparable period of 1995. The increase in net credit losses resulted primarily from an increase in losses on consumer loans. Nonperforming assets (foreclosed assets, nonaccrual loans, and restructured loans) totaled $12,300,000, or .43% of loans and foreclosed assets, at March 31, 1996, compared to $11,637,000, or .41% of loans and foreclosed assets, at December 31, 1995. Loans 90 days or more past due that continue to accrue interest totaled $6,884,000 at March 31, 1996, compared to $5,554,000 at December 31, 1995. 18 At March 31, 1996, the recorded investment in loans that are considered impaired under FAS 114 was $6,294,000, all of which were on a nonaccrual basis. Included in this amount was $1,474,000 of impaired loans for which $350,000 of the reserve for credit losses was assigned. The average recorded investment during the first three months of 1996 in loans classified as impaired at March 31, 1996, was approximately $6,983,000. For the three months ended March 31, 1996, UCB recognized interest income on these impaired loans of $8,000 using the cash basis of accounting. In addition to the nonperforming and problem assets described above, which included loans considered impaired under FAS 114, UCB had loans to various borrowers totaling approximately $9,876,000 at March 31, 1996, for which management has serious concerns regarding the ability of the borrowers to continue to comply with present loan repayment terms which could result in some or all of these loans becoming classified as problem assets. These concerns resulted from various credit considerations, including the financial position, operating results and cash flow of the borrowers, and the current estimated fair value of the underlying collateral. The reserve for credit losses amounted to $44,382,000, or 1.54% of loans outstanding, at March 31, 1996, compared to $43,464,000, or 1.54% of loans outstanding, at December 31, 1995. In determining the level of the reserve for credit losses, management takes into consideration loan volumes and outstandings, loan loss experience, delinquency trends, risk ratings assigned to nonconsumer loans, identified problem 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 19 loan portfolio at March 31, 1996; 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 $1,175,000, or 10.7%, in the first three months of 1996 over the same period of 1995. Service charges on deposit accounts increased $458,000, or 8.0%, principally due to increased business volume and price increases for certain services. Other service charges, commissions, and fees increased $1,265,000 to $6,262,000 during the first quarter of 1996 primarily due to increases in trust revenues, insurance commissions, fees for the use of automated teller machines, and mortgage banking fees. Trust revenues increased $357,000, or 28.9%, primarily due to growth in the number of managed trust accounts as well as increases in pricing on certain trust services. Commissions from the general insurance agency operations increased $384,000, or 49.0%, primarily as the result of the merger with 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 $54,000, or 19.2%, due to increased transaction volume. The implementation of a consumer debit card program in November 1995 produced $128,000 in merchant fee income during the first quarter of 1996. Mortgage banking fees increased $285,000, or 33.6%, due to an increase in loan originations. 20 These increases in fees were partially offset by decreases in brokerage and annuity commissions which declined $35,000, or 5.8%, due to lower trading volume. Gains on sales of mortgage loans into the secondary market amounted to $217,000 in the three-month period of 1996 compared to gains of $41,000 a year ago. The gains in 1996 include $232,000 recorded pursuant to the April 1995 adoption of the provisions of Financial Accounting Standards No. 122 (FAS 122). Losses on the sale of investment securities totaled $193,000 in the three months ended March 31, 1996, compared to gains of $3,000 in the same period of 1995. The 1996 amount includes $257,000 in losses recorded to write-down the value of certain securities obtained in the previously mentioned merger with Triad Bank to their current estimated realizable value of $10,676,000. These securities, which consisted of structured notes and other investments with derivative features, did not comply with UCB's investment policy and were therefore reclassified at the merger date from investment securities to available for sale securities. They were then disposed of during the second quarter of 1996. Losses on the disposition of fixed assets totaled $539,000 during the first quarter of 1996 compared to gains of $9,000 in the similar period of 1995. The 1996 loss included $568,000 in write-downs on fixed assets related to the mergers completed during the first quarter. Total noninterest expenses increased $3,028,000, or 9.1%, in the three months ended March 31, 1996, compared to the same period of 1995. Total personnel expense increased $2,411,000 in the three-month period of 1996 compared to 1995. Regular and part-time salaries increased by $676,000, or 4.8%, in the first three months of 1996 due to increases in base compensation and an increase of 76, or 4.2%, in the average number of full-time equivalent 21 employees. The increase in the average number of full-time equivalent employees was principally due to the previously mentioned branch acquisitions and the acquisition of the Wilmington insurance agency in April 1995. Other compensation expense increased $1,348,000, or 142.0%, primarily due to nonrecurring merger charges totaling $945,000. Occupancy expense increased $112,000, or 4.6%, during the first three months of 1996 as compared to 1995. Depreciation expense increased $12,000, or 2.5%, while rental expense increased $102,000, or 13.2%, due to the increase in branch locations and insurance agency offices from the prior year. Equipment expense increased $20,000, or 1.1%, for the first quarter of 1996 as compared to the same period of 1995. Repairs and maintenance expense increased $59,000, or 9.4% and purchases of noncapitalized furniture and equipment increased $18,000, or 28.2%, primarily due to increased costs associated with the branches acquired during 1995 and the expenses associated with modifications made to the branches acquired in the 1996 mergers. Other operating expenses increased $485,000, or 5.0%, during the first three months of 1996 as compared to 1995. The most significant factor affecting other operating expenses was a reduction in deposit insurance premiums which decreased $1,665,000, or 96.1%, from the three-month period of 1995. This was due to a reduction in the assessment rate from $.23 to $.04 effective June 1, 1995, and a subsequent reduction to virtually zero on nonthrift deposits effective January 1, 1996. Marketing and business development expenses increased $63,000, or 5.8%, primarily due to increased advertising related to campaigns designed to increase installment loan volume and deposit balances. Professional services expense for the first quarter of 1996 increased $246,000, or 32.0%. The current year's professional services included expenses applicable to 22 UCB's acquisitions by merger of Seaboard and Triad totaling $146,000, while the 1995 expenses were reduced by legal fees refunded in a bankruptcy proceeding involving a current customer. Outside data processing fees increased $313,000, or 27.0%, compared to 1995 primarily due to increased software amortization expense ($62,000, or 22.2% increase) and increased software maintenance costs ($123,000, or 71.0 %), and expenses for the consumer debit card transaction program previously mentioned ($73,000 increase). The increases in software amortization and software maintenance costs reflect the purchase of computer software related to the automation of certain labor-intensive tasks and the replacement of existing applications software. The amortization of capitalized mortgage loan servicing rights increased $80,000, or 59.1%, from the prior year due to the capitalization of originated servicing rights beginning April 1, 1995, as previously discussed. Telephone expense increased $224,000, or 33.7%, as a result of increased use of an automated response telephone system and the introduction in 1995 of a staffed bank-by-phone customer service department, both of which are accessible by toll-free numbers. Amortization of deposit base premiums increased $440,000 from $24,000 in 1995 as the result of the May 1995 branch purchases referred to previously. 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 $155,000 in the three months ended March 31, 1996, compared to the corresponding period of 1995. The increase in the income tax provision 23 was principally the net result of an increase of $183,000 in pre-tax income and an increase of $157,000 in nondeductible merger related expenses. 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. Financial Condition The financial condition of the Corporation, with respect to liquidity and dividends at March 31, 1996, has not changed significantly since December 31, 1995. At March 31, 1996, stockholders' equity amounted to 7.87% of total assets compared to 8.00% at December 31, 1995. At March 31, 1996, UCB had a ratio of core capital to weighted risk assets of approximately 11.28% and a ratio of total capital to weighted risk assets of approximately 12.53%, 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 March 31, 1996, of 7.79%. On an annualized basis, net income as a percentage of average stockholders' equity amounted to 13.04% for the first three months of 1996 compared to 14.91% for the same period of 1995. Cash dividends declared represented 38.50% of net income in the first quarter of 1996 compared to 31.05% for the three months ended March 31, 1995. At March 31, 1996, UCB owned securities which met the regulatory definition of structured notes which were acquired in the mergers completed during the quarter. These 24 securities were written down to their market value of $7,646,000, and as previously mentioned, were disposed of subsequent to the end of the first quarter. At March 31, 1996, UCB owned debt securities that had not been rated by a rating agency with a book value of $1,752,000. In addition, debt securities with a book value of $166,000 were owned at March 31, 1996, that had less than investment grade ratings. Included in the unrated securities were bonds with a book value of $1,170,000 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 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. UCB adopted FAS 121 on January 1, 1996, with no material effect on the consolidated financial statements. 25 In October 1995, the FASB issued Financial Accounting Standards No. 123 (FAS 123), "Accounting for Stock-Based Compensation," which encourages companies to account for stock compensation awards based on their fair value at the date the awards are granted. The resulting compensation cost would be shown as an expense on the income statement. Companies may choose to continue to measure compensation for stock-based plans using the intrinsic value method of accounting prescribed by APB Opinion No. 25 (APB 25), "Accounting for Stock Issued to Employees." Entities electing to continue the accounting prescribed in APB 25 will be required to disclose in the notes to the financial statements what net income and earnings per share would have been if the fair value based method of accounting defined in FAS 123 had been applied. UCB adopted FAS 123 on January 1, 1996, and elected to continue to measure compensation cost using APB 25. UCB will make any appropriate disclosures in the consolidated financial statements for the year ending December 31, 1996, of net income and earnings per share as if the fair value-based method of accounting defined in FAS 123 had been applied. Management has not yet quantified these pro forma disclosures. 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 recapitalize the SAIF prior to such a merger. Many 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. The proposed merger of SAIF and BIF was not included in the 1996 Federal Budget legislation, and therefore, the timing and ultimate outcome of any legislation continues to be 26 uncertain. At March 31, 1996, UCB had approximately $179 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. 27 PART II - OTHER INFORMATION Item 4. Submission of Matters to a Vote of Security Holders. (a) The Annual Meeting of Shareholders of Registrant was held April 17, 1996. (c) The following matters were submitted to a vote of the Registrant's shareholders at the Annual Meeting: (1) Election of thirteen (13) directors (constituting the entire Board of Directors) for the ensuing year 1996-1997. The number of share votes cast "For" and "Withheld" with respect to the election of each director nominee was as follows: For Withheld ---------- -------- J. W. Adams 16,904,589 77,325 John V. Andrews 16,903,907 78,007 Russell M. Carter 16,901,403 80,511 W. E. Carter 16,904,846 77,068 Alfred E. Cleveland 16,906,293 75,621 James L. Cresimore 16,850,425 131,489 Thomas P. Dillon 16,898,036 83,878 C. Frank Griffin 16,903,308 78,606 James C. High 16,900,173 81,742 E. Rhone Sasser 16,876,807 105,107 Jack E. Shaw 16,905,329 76,585 Harold B. Wells 16,904,990 76,924 Charles M. Winston 16,905,640 76,274 (2) Approval of the Registrant's 1995 Stock Option and Incentive Award Plan under which stock options, stock appreciation rights, stock awards and/or performance units may be made from time to time to selected key employees of Registrant and its subsidiaries as approved by the Personnel Committee of the Board of Directors as Plan Administrator. For Against Abstain ---------- --------- -------- 15,602,581 1,070,860 344,832 28 Item 6. Exhibits and Reports on Form 8-K. (a) The following exhibit is furnished as a part of this report as required by Item 601 of Regulation S-K: Exhibit Number (10) (g): Registrant's 1995 Stock Option and Incentive Award Plan, dated July 21, 1995, as approved by Registrant's shareholders at its Annual Meeting on April 17, 1996. (b) The following report on Form 8-K was filed by Registrant with the Commission during the first quarter of 1996: Report on Form 8-K (Item 5. Other Events), dated February 9, 1996, for event occurring on January 25, 1996, relating to the consummation of Registrant's acquisition by merger of Seaboard Savings Bank, Inc. SSB. 29 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 May 13, 1996 By /s/ John F. Watson -------------------------- Controller May 13, 1996 By /s/ Ronald C. Monger -------------------------- Executive Vice President & Chief Financial Officer 30 EXHIBIT INDEX Exhibit Number per Item 601 of Regulation S-K Description of Exhibit Sequential Page Number - ---------------- ---------------------- ---------------------- (10)(g) UCB's 1995 Stock Option Pages 32-52 and Incentive Award Plan (27) Financial Data Schedule Page 53 31