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 March 31, 1997
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 9, 1997, there were 24,390,133 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 28 pages
PART I - FINANCIAL INFORMATION
Item 1: Financial Statements
United Carolina Bancshares Corporation and Subsidiaries
Consolidated Balance Sheets
March 31, December 31,
1997 1996
------------ ------------
(In thousands)
Assets:
Cash and due from banks - noninterest-bearing $ 150,980 $ 199,487
Federal funds sold and other short-term
investments 92,632 90,964
Securities available for sale (amortized
costs of $872,131,000 in 1997
and $877,268,000 in 1996) 869,359 877,432
Investment securities (approximate market
values of $45,548,000 in 1997
and $47,334,000 in 1996) 44,417 46,090
Loans, net of unearned income 3,215,839 3,149,697
Less reserve for credit losses (48,266) (46,138)
----------- -----------
Net loans 3,167,573 3,103,559
----------- -----------
Premises and equipment 54,759 55,872
Other assets 108,119 114,439
----------- -----------
Total assets $ 4,487,839 $ 4,487,843
=========== ===========
Liabilities and stockholders' equity:
Deposits:
Noninterest-bearing demand deposits $ 609,696 $ 633,014
Interest-bearing deposits:
NOW, savings, and money market deposits 1,477,074 1,449,133
Certificates of deposit of
$100,000 or more 315,112 315,671
Other time deposits 1,636,770 1,651,608
----------- -----------
Total deposits 4,038,652 4,049,426
Short-term borrowings 39,862 42,521
Mortgages and other notes payable 2,251 2,273
Other liabilities 48,226 43,154
----------- -----------
Total liabilities 4,128,991 4,137,374
----------- -----------
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
24,386,811 shares in 1997 and
24,316,631 shares in 1996 97,547 97,267
Surplus 52,722 51,676
Retained earnings 210,488 201,596
Unrealized losses on
securities available for sale,
net of deferred income taxes (1,909) (70)
----------- -----------
Total stockholders' equity 358,848 350,469
----------- -----------
Total liabilities and
stockholders' equity $ 4,487,839 $ 4,487,843
=========== ===========
See accompanying Notes to Consolidated Financial Statements
2
United Carolina Bancshares Corporation and Subsidiaries
Consolidated Statements of Income
Three Months Ended
March 31,
------------------------
1997 1996
----------- ----------
(Dollars in thousands
except per share amounts)
Interest income:
Interest on loans $ 71,581 $ 65,169
Interest and dividends on:
Taxable securities 12,785 11,227
Tax-exempt securities 653 851
Interest on federal funds sold and
other short-term investments 717 1,269
85,736 78,516
-------- --------
Interest expense:
Interest on deposits 38,377 35,270
Interest on short-term borrowings 328 408
Interest on long-term borrowings 29 44
-------- --------
Total interest expense 38,734 35,722
-------- --------
Net interest income 47,002 42,794
Provision for credit losses 3,850 2,200
-------- --------
Net interest income after provision
for credit losses 43,152 40,594
-------- --------
Noninterest income:
Service charges on deposit accounts 5,855 6,154
Trust income 1,514 1,594
Insurance commissions 1,893 1,533
Mortgage banking fees 1,091 1,133
Brokerage and annuity commissions 810 566
Other service charges, commissions, and fees 2,039 1,436
Gains on mortgages originated for resale 176 217
Gains on trading account securities 1 --
Gains (losses) on dispositions of securities
available for sale 3 (257)
Gains on dispositions of investment securities -- 64
Gains (losses) on dispositions of fixed assets 81 (539)
Other operating income 214 266
-------- --------
Total noninterest income 13,677 12,167
-------- --------
Noninterest expenses:
Personnel expense 21,128 21,751
Occupancy expense 2,596 2,536
Equipment expense 1,737 1,805
Other operating expenses 10,622 10,113
-------- --------
Total noninterest expenses 36,083 36,205
-------- --------
Income before income taxes 20,746 16,556
Income tax provision 7,467 6,003
-------- --------
Net income $ 13,279 $ 10,553
======== ========
Per share data:
Net income $ .55 $ .44
======== =========
Cash dividends declared $ .18 $ .18
======== =========
Book value at end of period $ 14.71 $ 13,55
======== =========
Average number of shares outstanding 24,360,323 24,140,761
========== ===========
See accompanying Notes to Consolidated Financial Statements
3
United Carolina Bancshares Corporation and Subsidiaries
Consolidated Statements of Stockholders' Equity
Three Months Ended March 31, 1997 and 1996
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, 1997 24,316,631 $ 97,267 $ 51,676 $ 201,596 $ (70) $ 350,469
Net income -- -- -- 13,279 -- 13,279
Cash dividends declared,
$.18 per share -- -- -- (4,387) -- (4,387)
Issuance of common stock
under stock option plans 71,010 284 1,079 -- -- 1,363
Retirement of common stock (830) (4) (33) -- -- (37)
Unrealized losses on securities
available for sale, net of
applicable deferred income
taxes -- -- -- -- (1,839) (1,839)
----------- ----------- ----------- ----------- ----------- -----------
Balance, March 31, 1997 24,386,811 $ 97,547 $ 52,722 $ 210,488 $ (1,909) $ 358,848
=========== =========== =========== =========== =========== ===========
Balance, January 1, 1996 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
=========== =========== =========== =========== =========== ===========
See accompanying Notes to Consolidated Financial Statements
4
United Carolina Bancshares Corporation and Subsidiaries
Consolidated Statements of Cash Flows
Three Months Ended
March 31,
----------------------
1997 1996
-------- ---------
(In thousands)
Increase (decrease) in cash and cash equivalents:
Cash flows from operating activities:
Net income $ 13,279 $ 10,553
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization,
net of accretion 2,605 2,476
Provision for credit losses 3,850 2,200
Net (increase) decrease in loans
originated for resale 996 (1,842)
Provision for deferred taxes and
increase in taxes payable 6,038 5,059
(Increase) decrease in accrued interest
receivable (906) 343
Increase in prepaid expenses (355) (1,728)
Decrease in other accounts receivable 3,040 3,256
Decrease in accrued interest payable (76) (371)
Increase (decrease) in accrued expenses (468) 1,451
Decrease in deferred loan fees,
net of deferred costs (1,341) (189)
Other, net (109) 838
--------- ---------
Total adjustments 13,274 11,493
--------- ---------
Net cash provided by
operating activities 26,553 22,046
--------- ---------
Cash flows from investing activities:
Proceeds from maturities and issuer calls
of securities available for sale 135,641 236,585
Proceeds from maturities and issuer calls
of investment securities 1,641 3,523
Purchases of securities available for sale (130,308) (208,487)
Net increase in loans outstanding (68,112) (54,717)
Purchases of premises and equipment (399) (1,377)
Proceeds from sales of premises and equipment 91 100
Purchases and originations of mortgage
loan servicing rights (387) (624)
Sales of foreclosed assets 727 189
Other, net 5,002 (12,697)
--------- ---------
Net cash used by investing activities (56,104) (37,505)
--------- ---------
Cash flows from financing activities:
Net increase (decrease) in deposit accounts (10,774) 73,833
Net increase (decrease) in federal funds
purchased (1,465) 3,375
Net increase in securities sold under
agreement to repurchase 2,117 33,104
Net increase (decrease) in other
short-term borrowings (3,311) 714
Repayments of mortgages and other
notes payable (22) (146)
Issuance of common stock 554 492
Retirement of common stock -- 20
Dividends paid (4,387) (4,063)
---------- ---------
Net cash provided (used)
by financing activities (17,288) 107,289
--------- ---------
Net increase (decrease) in cash and
cash equivalents (46,839) 91,830
Cash and cash equivalents at beginning of period 290,451 225,092
--------- ---------
Cash and cash equivalents at end of period $ 243,612 $ 316,922
========= =========
Statement Continued on Next Page
5
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest $ 38,810 $ 36,093
======== ========
Income taxes $ 1,429 $ 944
======== ========
Significant noncash transactions:
Loans transferred to real estate acquired
in settlement of debt $ 593 $ 602
======== ========
Loans originated to facilitate the sale
of foreclosed assets $ -- $ 45
======== ========
Unrealized losses on securities
available for sale $ (2,935) $ (4,256)
======== ========
Investment securities transferred
to available for sale portfolio
in connection with business combinations $ -- $ 36,646
======== ========
Available for sale securities transferred
to investment portfolio in connection
with business combinations $ -- $ 240
======== ========
Tax benefits related to exercise
of stock options $ 772 $ --
======== ========
Retirement of common stock in payment
for shares acquired upon option exercise $ 37 $ --
======== ========
Prepaid assets transferred to fixed assets $ 9,000 $ --
======== ========
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, 1997, and December 31,
1996, and operating results of United Carolina Bancshares Corporation and its
subsidiaries for the three-month periods ended March 31, 1997 and 1996. All
adjustments made to the unaudited financial statements were of a normal
recurring nature. The results of operations for the first three months of 1997
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:
March 31, 1997
----------------------------------------------------------
Approximate
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
--------- ---------- ----------- -----------
(In thousands)
Securities available for sale:
United States government securities $800,056 $ 429 $ 2,312 $798,173
Obligations of United States government
agencies and corporations 32,474 39 174 32,339
Mortgage-backed securities (1) 24,671 21 777 23,915
Obligations of states and political subdivisions 1,100 2 -- 1,102
Federal Home Loan Bank stock 13,429 -- -- 13,429
Other securities 401 -- -- 401
--------
Total securities available for sale $872,131 $ 491 $ 3,263 $869,359
======== ======== ======== ========
Investment securities:
Obligations of states and political subdivisions $ 44,417 $ 1,166 $ 35 $ 45,548
-------- -------- -------- --------
Total investment securities $ 44,417 $ 1,166 $ 35 $ 45,548
======== ======== ======== ========
<FN>
(1) At March 31, 1997, UCB owned collateralized mortgage obligations issued
by the Federal Home Loan Mortgage Corporation (FHLMC) which had an
amortized cost of $8,371,000 and a market value of $8,198,000; and
collateralized mortgage obligations issued by the Federal National Mortgage
Association (FNMA) which had an amortized cost of $11,146,000 and a market
value of $10,721,000. 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 $303,000 and a
market value of $312,000. Other mortgage-backed pass-through securities
issued through various United States government agencies and corporations
with a book value of $4,851,000 and a market value of $4,684,000 were also
held at March 31, 1997. At March 31, 1997, none of the collateralized
mortgage obligations owned by UCB were considered high-risk securities
under current regulatory guidelines.
</FN>
7
Notes to Consolidated Financial Statements (Continued)
Note 2. Securities - Continued
December 31, 1996
---------------------------------------------------------
Approximate
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
--------- ---------- ---------- -----------
(In thousands)
Securities available for sale:
United States government securities $784,943 $ 1,882 $ 1,125 $785,700
Obligations of United States government
agencies and corporations 52,773 59 118 52,714
Mortgage-backed securities 25,846 34 570 25,310
Obligations of states and political subdivisions 1,100 2 -- 1,102
Federal Home Loan Bank stock 12,200 -- -- 12,200
Other securities 406 -- -- 406
-------- -------- -------- --------
Total securities available for sale $877,268 $ 1,977 $ 1,813 $877,432
======== ======== ======== ========
Investment securities:
Obligations of states and political subdivisions $ 46,090 $ 1,286 $ 42 $ 47,334
-------- -------- -------- --------
Total investment securities $ 46,090 $ 1,286 $ 42 $ 47,334
======== ======== ======== ========
Note 3.
Loans:
The consolidated loan portfolio is summarized by major classification as
follows:
March 31, December 31,
1997 1996
--------- ------------
(In thousands)
Loans secured by real estate:
Construction and land acquisition and
development $ 339,626 $ 297,921
Secured by nonfarm, nonresidential properties 653,763 655,330
Secured by farmland 81,458 82,097
Secured by multifamily residences 77,298 78,008
---------- ----------
Total loans secured by real estate, excluding
loans secured by 1-4 family residences 1,152,178 1,113,356
---------- ----------
Revolving credit secured by 1-4 family residences 152,176 146,205
Other loans secured by 1-4 family residences(1) 623,153 626,888
---------- ----------
Total loans secured by 1-4 family residences 775,329 773,093
---------- ----------
Total loans secured by real estate 1,927,507 1,886,449
Commercial, financial, and agricultural loans
excluding loans secured by real estate 344,114 340,242
Loans to individuals for household, family, and
other personal expenditures, excluding loans
secured by real estate 829,796 824,569
All other loans 112,633 98,006
---------- ----------
Total loans 3,214,050 3,149,266
Net deferred origination costs 1,789 431
---------- ----------
Loans, net of unearned income $3,215,839 $3,149,697
========== ==========
(1) Includes $7,868,000 at March 31, 1997, and $8,864,000 at December 31, 1996,
in permanent mortgages originated for sale in the secondary market which are
stated at the lower of aggregate cost or market value.
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,
1997 1996
--------- ------------
(In thousands)
Foreclosed assets $ 8,004 $ 7,493
Nonaccrual loans 2,430 2,473
------- -------
Total nonperforming assets 10,434 9,966
Loans 90 days or more past due,
excluding nonaccrual loans 12,022 9,690
------- -------
Total problem assets $22,456 $19,656
======= =======
At March 31, 1997, the recorded investment in loans that are considered
impaired under Financial Accounting Statement No. 114 was $2,430,000, all of
which were on a nonaccrual basis. Included in this amount was $1,381,000 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 1997 in loans
classified as impaired at March 31, 1997, was approximately $2,414,000. For the
three months ended March 31, 1997, UCB recognized no interest income on these
impaired loans using the cash basis of accounting.
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,
----------------------
1997 1996
------- -------
(In thousands)
Balance, beginning of period $ 46,138 $ 43,464
Provision for credit losses 3,850 2,200
Recovery of losses previously charged off 1,172 788
Losses charged to reserve (2,894) (2,070)
-------- --------
Balance, end of period $ 48,266 $ 44,382
======== ========
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, 1997 December 31, 1996
or For the Three Months Then Ended or For the Year Then Ended
-------------------------------------------- --------------------------------------------
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 $10,455 $17,975 $11,432 $ -- $11,920 $15,858 $14,743 $ --
Maximum amount outstanding
at any month-end during
the period 14,925 17,975 11,432 -- 29,250 40,040 15,625 20,000
Average balance outstanding
during the period 13,496 4,734 9,499 -- 17,481 6,426 7,004 5,027
Average interest rate paid
during the period 4.88% 4.09% 5.03% -- % 5.19% 4.41% 4.92% 5.72%
Average interest rate payable
at end of period 6.88% 5.31% 5.67% -- % 6.88% 4.72% 5.04% -- %
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 $79,000 at March 31, 1997, and $97,000 at
December 31, 1996. The mortgages bear interest at annual rates ranging from
8.75% to 10% and are collateralized by premises with book values of
approximately $539,000 at March 31, 1997, and $540,000 at December 31, 1996. The
mortgages are payable primarily in monthly installments totaling approximately
$3,000, including interest.
Advances from the Federal Home Loan Bank of Atlanta with initial
maturities of more than one year totaled $2,172,000 at March 31, 1997, and
$2,176,000 at December 31, 1996. 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 8.15%, payable monthly, with
principal due at 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.
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,
------------------
1997 1996
-------- -------
(In thousands)
Other operating expenses:
Data processing fees and software expense $ 1,778 $ 1,472
Professional services 1,465 1,013
Telephone expense 1,055 888
Postage and delivery 1,046 1,038
Marketing and business development 1,041 1,140
Printing, stationery, and supplies 820 926
Amortization of goodwill and other intangible assets 551 639
Insurance and taxes, other than taxes on income 448 385
Noncredit losses 436 231
Travel expense 435 451
Amortization of capitalized mortgage servicing rights 289 218
FDIC deposit insurance premiums 101 67
Donations 27 105
Other expenses 1,130 1,540
------- -------
Total other operating expenses $10,622 $10,113
======= =======
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.
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 November 1, 1996, UCB entered into a definitive agreement to merge into
Southern National Corporation ("SNC"), headquartered in Winston-Salem, North
Carolina. Under the terms of the agreement, UCB shareholders will receive 1.135
shares (subject to possible upward adjustment) of SNC common stock for each
share of UCB common stock owned. Concurrent with the execution of the agreement,
UCB granted SNC an option to purchase up to 4,828,960 shares of UCB common
stock, subject to adjustment, at an exercise price of $30.50 per share. The
exercise of the option is permitted only upon the occurrence of certain events
which generally relate to an actual or proposed acquisition of UCB by a third
party or the acquisition by a third party of a significant interest in the
equity of UCB. The merger was approved by shareholders on April 22, 1997, and,
subject to regulatory approval, is expected to be consummated July 1, 1997.
On August 30, 1996, UCB issued 37,123 shares of common stock to consummate
the merger of Tomlinson Insurors, Inc., a general insurance agency in
Fayetteville, North Carolina, into UCB's North Carolina subsidiary bank.
Tomlinson Insurors had total assets of $361,000 at the date the merger was
consummated. 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.
Effective March 29, 1996, UCB consummated a merger with Triad Bank
headquartered in Greensboro, North Carolina. Triad Bank had 13 branch offices
with $207.4 million in total assets and $188.1 million in total deposits at the
merger date. Under terms of the agreement, UCB exchanged 1,595,125 shares of
common stock for all of the outstanding shares of Triad common stock. The merger
was accounted for as a pooling-of-interests.
13
Notes to Consolidated Financial Statements (Continued)
Effective January 25, 1996, UCB consummated a merger with Seaboard Savings
Bank, Inc., headquartered in Plymouth, North Carolina. Seaboard had three branch
offices with $46.3 million in total assets and $40.7 million in total deposits
at the merger date. Under the 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.
14
Item 2: Management's Discussion and Analysis of Financial Condition and Results
of Operations
Results of Operations - Three Months Ended March 31, 1997, Compared to 1996
Summary
Net income totaled $13,279,000, or $.55 per share, for the three months
ended March 31, 1997. For the comparable quarter of 1996, net income amounted to
$10,553,000, or $.44 per share. 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.
Net Interest Income
Net interest income increased $4,208,000, or 9.8%, for the three months
ended March 31, 1997, compared to the first quarter of 1996. This was due to an
increase of $401,505,000, or 10.6%, in the level of average earning assets along
with an increase in the percentage of earning assets comprised of loans. Loans,
which have higher yields than other investments, made up 76.42% of average
earning assets during the first quarter of 1997 compared to 75.61% in the
comparable period of 1996. Partially offsetting the effect of the earning asset
increases was an increase of $329,120,000, or 10.5%, in the average balance of
interest-bearing liabilities along with a shift in the mix of interest-bearing
deposits to a higher percentage of consumer certificates of deposit which
generally bear higher interest rates than NOW, savings, and money market
15
deposits. As a result of these factors, the net tax-equivalent yield on earning
assets decreased to 4.61% in the first quarter of 1997 from 4.62% in the same
period of 1996.
Interest income from loans increased $6,412,000, or 9.8%, over the
first three months of 1996 due to an increase of $337,223,000, or 11.8%, in
average loans outstanding which more than offset the effect of the decline in
the tax-equivalent yield on average loans outstanding to 9.11% from 9.20% in
1996. The decrease in the yield on the loan portfolio for 1997 was the result of
a lower prevailing prime lending rate which averaged 8.27% during the first
quarter of 1997 compared to 8.34% in the first three months of 1996 as well as
lower rates on new fixed rate consumer loans compared to the average rates on
loans in the existing portfolio. Approximately 33% of UCB's loans outstanding at
March 31, 1997, 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 1997 increased $1,360,000, or 11.3%, from the
first three months of 1996. This was due to an increase in the aggregate average
balance of investment securities and securities available for sale of
$101,606,000, or 12.3%, from the corresponding period of 1996 which more than
offset the effect of the decline in the tax-equivalent yield on the aggregate
portfolio to 6.02% from 6.09% a year earlier. Interest income from federal funds
sold and other short-term investments totaled $717,000 in the first quarter of
1997, a decrease of $552,000 from the same period of 1996. This was the result
of a decrease of $37,324,000 in the average balances invested as well as a
decrease in the average yield to 5.21% for the first three months of 1997 from
5.48% in 1996.
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Interest expense on deposits increased $3,107,000, or 8.8% in the three
months ended March 31, 1997, compared to 1996. The average balance of total
interest-bearing deposits increased $334,737,000, or 10.8%, in the first quarter
of 1997 compared to 1996. This was the result of an increase of $131,261,000, or
9.6%, in the average balances of certificates of deposit less than $100,000, an
increase of $90,719,000, or 41.3%, in average certificates of deposit issued in
denominations greater than $100,000, and an increase of $112,757,000, or 7.5%,
in the average balances of NOW, savings, money market accounts, and other time
deposits. The overall interest rate paid on average interest-bearing deposits
decreased to 4.55% for the first quarter of 1997 from 4.59% in the same period
of 1996.
The average interest rate paid on short- and long-term borrowings
during the first three months of 1997 decreased to 4.83% from 5.11% in 1996,
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 $5,617,000 in the first quarter of 1997 from the corresponding
period of 1996.
Provision and Reserve for Credit Losses
The provision for credit losses amounted to $3,850,000 for the three
months ended Marcha 31, 1997, compared to $2,200,000 in 1996. Net credit losses
amounted to $1,722,000, or .22% of average loans outstanding, on an annualized
basis, during the first three months of 1997 compared to $1,282,000, or .18% of
average loans outstanding, on an annualized basis, for the comparable period of
1996. The increase in net credit losses resulted primarily from an increase in
losses on consumer loans.
17
Nonperforming assets (foreclosed assets, nonaccrual loans, and
restructured loans) totaled $10,434,000, or .32% of loans and foreclosed assets,
at March 31, 1997, compared to $9,966,000, or .32% of loans and foreclosed
assets, at December 31, 1996. Loans 90 days or more past due that continue to
accrue interest totaled $12,022,000 at March 31, 1997, compared to $9,690,000 at
December 31, 1996.
At March 31, 1997, the recorded investment in loans that are considered
impaired under FAS 114 was $2,430,000, all of which were on a nonaccrual basis.
Included in this amount was $1,381,000 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 1997 in loans classified as impaired at March
31, 1997, was approximately $2,414,000. For the three months ended Marcha 31,
1997, UCB recognized no interest income on these impaired loans 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 $16,844,000 at March 31, 1997, 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 $48,266,000, or 1.50% of
loans outstanding, at March 31, 1997, compared to $46,138,000, or 1.46% of loans
outstanding, at December 31,
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1996. 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 loan portfolio
at March 31, 1997; 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 $1,510,000, or 12.4%, in the first
three months of 1997 over the same period of 1996. Service charges on deposit
accounts decreased $299,000, or 4.9%, principally due to lower levels of fees
collected for excessive withdrawals and below minimum balances on savings and
certain types of checking accounts. Other service charges, commissions, and fees
increased $1,085,000 to $7,347,000 during the first quarter of 1997 primarily
due to increases in insurance commissions, fees for the use of automated teller
machines, and brokerage and annuity commissions. Commissions from the general
insurance agency operations increased $228,000, or 19.5%, primarily as the
result of the merger with an insurance agency in Fayetteville, North Carolina,
in August 1996. Fees collected for the use of UCB's
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automated teller machines increased $375,000, or 111.6%, due to the
implementation of a convenience fee on transactions performed by noncustomers.
The consumer debit card program produced $243,000 in merchant fee income during
the first quarter of 1997, an increase of $115,000, or 89.7%, over 1996.
Brokerage and annuity commissions earned during the first quarter of 1997
increased $244,000, or 43.1%, over 1996 due to increased mutual fund and annuity
sales volume.
Gains on sales of mortgage loans into the secondary market amounted to
$176,000 in the first quarter of 1997 compared to gains of $217,000 a year ago.
Gains on the sale of securities available for sale totaled $3,000 in the three
months ended March 31, 1997, compared to losses of $257,000 in the same period
of 1996. The 1996 losses were recorded to write-down the value of certain
securities obtained in a merger with another financial institution to their
current estimated realizable value. 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. In addition, gains of $64,000
were recorded on sales of securities classified as held to maturity during the
first quarter of 1996. These sales were also the result of securities acquired
in the mergers that did not comply with UCB's investment policies. Gains on the
disposition of fixed assets totaled $81,000 during the first quarter of 1997
compared to losses of $539,000 in the similar period of 1996. The 1996 loss
included $568,000 in write-downs on fixed assets related to the two mergers
completed during the first quarter
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of the year.
Total noninterest expenses decreased $122,000, or .3%, in the three
months ended March 31, 1997, compared to the same period of 1996. Total
personnel expense decreased $623,000 in the three-month period of 1997 compared
to 1996. Regular and part-time salaries increased by $894,000, or 6.0%, in the
1997 period due to increases in base compensation and an increase of 30, or
1.6%, in the average number of full-time equivalent employees while other
compensation expense decreased $1,140,000, or 75.2%, primarily due to
nonrecurring merger charges totaling $945,000 recorded during the first quarter
of 1996. Employee benefits expense for the first quarter of 1997 declined
$360,000 (8.1%) from 1996 primarily due to decreased medical claims of $397,000,
or 26.8%, from the prior year and declines in plan administration expenses and
other costs related to providing employee medical benefits that totaled $24,000
in the aggregate. Medical claims during 1996 were significantly affected by
several large claims.
Occupancy expense increased $60,000, or 2.4%, during the first three
months of 1997 as compared to 1996. Repairs and maintenance expense increased
$36,000, or 8.0%, primarily due to increased maintenance contracts on
facilities. Rental expense increased $16,000, or 1.8% while real estate taxes
increased $19,000, or 7.4%, due primarily to revaluations by taxing authorities.
Equipment expense decreased $68,000, or 3.8%, for the first quarter of
1997 as compared to the same period of 1996. Repairs and maintenance expense
decreased $52,000, or 7.6%, and purchases of noncapitalized furniture and
equipment decreased $48,000, or 58.0%. These decreases were primarily due to
increased costs during 1996 associated with modifications made to the branches
acquired in the 1996 mergers. Equipment rental expense increased $32,000 (28.7%)
over 1996 primarily due to new computer and voice communication equipment
installed during the latter part of 1996.
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Other operating expenses increased $509,000, or 5.0%, during the first
three months of 1997 as compared to 1996. Professional services expense for the
first quarter of 1997 increased $452,000, or 44.6%, primarily due to expenses
related to the installation and maintenance of central computer applications
software.
Outside data processing fees increased $306,000, or 20.8%, compared to
1996 primarily due to increased software amortization expense ($303,000, or
88.3% increase) and expenses for the consumer debit card transaction program
($115,000 increase). The increases in software amortization reflect the purchase
of a new central computer software system which replaced existing core
applications software, the installation of which took place in the latter half
of 1996. These increased expenses were partially offset by a decrease of $57,000
(19.1%) in software maintenance expense due to the expiration of contracts on
replaced software.
The amortization of capitalized mortgage loan servicing rights
increased $71,000, or 32.6%, from the prior year due to purchases of servicing
rights and the capitalization of originated servicing. Telephone expense
increased $167,000, or 18.8%, as a result of increased use of an automated
response telephone system and a staffed bank-by-phone customer service
department, both of which are accessible by toll-free numbers. Amortization of
deposit-base premiums decreased $88,000, or 18.9% compared to 1996 principally
due to the elimination of amortization on a branch that was sold in the latter
half of 1996. Stationery and supplies expense decreased $106,000, or 11.4%, from
1996. The 1996 expense was impacted by the costs of converting the checking
accounts of customers of merged banks. Increases in other categories of
noninterest expenses were generally the result of increases in the costs related
to purchased services.
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Income Tax Provision
The provision for income tax increased $1,464,000 in the three months
ended March 31, 1997, compared to the corresponding period of 1996. The increase
in the income tax provision was principally the net result of an increase of
$4,190,000 in pre-tax 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. In addition, the 1996 effective
tax rate was higher than that experienced in the current year due to the
nondeductibility of certain merger-related expenses incurred during the first
quarter of 1996.
Financial Condition
The financial condition of the Corporation, with respect to liquidity
and dividends at March 31, 1997, has not changed significantly since December
31, 1996. At March 31, 1997, stockholders' equity amounted to 8.00% of total
assets compared to 7.81% at December 31, 1996. At March 31, 1997, UCB had a
ratio of core capital to risk-weighted assets of approximately 11.29% and a
ratio of total capital to risk-weighted assets of approximately 12.54%, 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, 1997, of 7.91%.
On an annualized basis, net income as a percentage of average
stockholders' equity amounted to 15.18% for the first three months of 1997
compared to 13.04% for the same period
23
of 1996. Cash dividends declared represented 33.04% of net income in the first
quarter of 1997 compared to 38.50% for the three months ended March 31, 1996.
At March 31, 1997, UCB owned debt securities that had not been rated by
a rating agency with a book value of $399,000. In addition, debt securities with
a book value of $152,000 were owned at March 31, 1997, that had less than
investment grade ratings. Included in the unrated securities were bonds with a
book value of $360,000 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 the 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.
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
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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.
In September 1996, the FASB issued Financial Accounting Standards No.
125 (FAS 125), "Accounting for Transfers and Servicing of Financial Assets and
Extinguishments of Liabilities," which establishes accounting standards for
determining when a liability should be considered extinguished through the
transfer of assets to a creditor or setting aside assets dedicated to eventually
settling a liability. The statement provides conditions for determining if a
transferor has surrendered control over transferred financial assets and
requirements for derecognizing a liability when it is extinguished. The
statement also requires the recognition of either a servicing asset or a
servicing liability when an entity undertakes an obligation to service financial
assets. Such servicing assets or liabilities shall be amortized in proportion to
and over the period of the estimated net servicing income or loss, as
appropriate. FAS 125 is effective for transfers and servicing of financial
assets and extinguishments of liabilities occurring after December 31, 1996, to
be only applied on a prospective basis. The adoption of FAS 125 effective
January 1, 1997, had no impact on UCB's financial condition or results of
operations.
25
In February 1997, the FASB issued Financial Accounting Standards No.
128 (FAS 128), "Earnings per Share," which establishes standards for computing
and presenting earnings per share (EPS) and applies to entities with publicly
held common stock. This statement simplifies the standards for computing
earnings per share previously found in APB Opinion No. 15, "Earnings per Share,"
and makes them comparable to international EPS standards. It replaces the
presentation of primary EPS with a presentation of basic EPS. It also requires
dual presentation of basic and diluted EPS on the face of the income statement
for all entities with complex capital structures and requires a reconciliation
of the numerator and denominator of the basic EPS computation to the numerator
and denominator of the diluted EPS computation.
Basic EPS excludes dilution and is computed by dividing income
available to common stockholders by the weighted-average number of common shares
outstanding for the period. Diluted EPS reflects the potential dilution that
could occur if securities (purchase options, warrants, convertible securities,
or contingent stock agreements) or other contracts to issue common stock were
exercised or converted into common stock or resulted in the issuance of common
stock that then shared in the earnings of the equity. Diluted EPS is computed in
a similar manner as fully diluted EPS pursuant to Opinion 15.
FAS 128 is effective for financial statements for periods ending after
December 15, 1997, including interim periods, with earlier application not
permitted. The application of FAS 128 is not anticipated to have a significant
impact on the presentation of UCB's results of operations.
In conjunction with the FASB's project concerning the presentation of
EPS (FAS 128), the Board issued Financial Accounting Standards No. 129 (FAS
129), "Disclosure of Information about Capital Structure." FAS 129 includes the
disclosure requirements regarding capital
26
structure and related disclosures previously required by APB Opinion No. 10,
"Omnibus Opinion - 1966," APB Opinion No. 15, "Earnings per Share, " and FASB
Statement No. 47, "Disclosure of Long-Term Obligations" and applies these
requirements to all entities, public and nonpublic, that have issued securities.
The statement requires disclosure in the financial statements the pertinent
rights and privileges, including any liquidation preferences, of the various
securities outstanding and the number of such shares issued upon conversion,
exercise, or satisfaction of required conditions during at least the most recent
annual fiscal period and any subsequent interim periods presented. FAS 129 is
effective for financial statements for periods ending after December 15, 1997.
The application of FAS 129 will have no impact on the current presentation of
UCB's financial condition or results of operations.
The FASB also issues exposure drafts for proposed statements of
financial accounting standards. Such exposure drafts are subject to comment from
the public, to revisions by the FASB, and to final issuance by the FASB as
statements of financial accounting standards. Management considers the effect of
any proposed statements on the corporation's consolidated financial statements
and monitors the status of any changes to issued exposure drafts and to proposed
effective dates.
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.
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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 12, 1997 By /s/ John F. Watson
-------------------------
Controller
May 12, 1997 By /s/ Ronald C. Monger
-------------------------
Executive Vice President/
Chief Financial Officer
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