SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
EXHIBIT INDEX - PAGE 69
FORM 10-K
(Mark One)
[(check mark)] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934 [FEE REQUIRED]
For the fiscal year ended December 31, 1995
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
ACT OF 1934 [NO FEE REQUIRED]
For the transition period from to
Commission file number: 05583
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 Number)
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)
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act: Common Stock
Par Value $4.00 per share
(Title of Class)
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 (Check mark) No
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. (Check mark)
The aggregate market value of Registrant's Common Stock held by
non-affiliates of Registrant as of February 23, 1996, was $564,734,940.
On March 22, 1996, there were 22,571,753 outstanding shares of Registrant's
$4.00 par value common capital stock which is the only class of securities
issued by Registrant.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of Registrant's proxy statement for its 1996 Annual Meeting of
Shareholders filed with the Securities and Exchange Commission pursuant to
Regulation 14A are incorporated in Part III of this Report.
1
CROSS REFERENCE INDEX
PAGE
PART I Item 1 Business
Description of Business.............................................................. 3-5
Statistical Information
Net Interest Income Analysis -- Taxable Equivalent Basis............................. 11
Net Interest Income and Volume/Rate Variance -- Taxable Equivalent Basis............. 12
Investment Portfolio................................................................. 19,41-43
Securities -- Maturity/Yield Schedule................................................ 19
Types of Loans....................................................................... 21,22,44-46
Loan Maturities...................................................................... 21
Interest Sensitivity................................................................. 29
Loan Loss Experience................................................................. 25
Average Deposits..................................................................... 27
Maturity Distribution of Large Denomination Time Deposits............................ 29
Return on Equity and Assets.......................................................... 9,31
Short-Term Borrowings................................................................ 28
Item 1(a) Executive Officers of Registrant..................................................... 5,6
Item 2 Properties........................................................................... 6
Item 3 Legal Proceedings.................................................................... 6
Item 4 Submission of Matters to a Vote of Security Holders.................................. 6
PART II Item 5 Market for the Registrant's Common Stock and Related Shareholder Matters............. 7
Item 6 Selected Financial Data.............................................................. 9
Item 7 Management's Discussion and Analysis of Financial Condition and
Results of Operations................................................................ 9-33
Item 8 Financial Statements and Supplementary Data
Consolidated Balance Sheets at December 31, 1995 and 1994............................ 34
Consolidated Statements of Income for each of the years in the three-year period
ended December 31, 1995......................................................... 35
Consolidated Statements of Shareholders' Equity for each of the years in the
three-year period ended December 31, 1995....................................... 36
Consolidated Statements of Cash Flows for each of the years in the three-year period
ended December 31, 1995......................................................... 37
Notes to Consolidated Financial Statements........................................... 38-65
Independent Auditors' Report......................................................... 66
Quarterly Financial Summary for 1995 and 1994........................................ 61,62
Item 9 Changes In and Disagreements with Accountants on Accounting and
Financial Disclosures................................................................ 7
PART III Item 10 Directors and Executive Officers of the Registrant................................... 8
Item 11 Executive Compensation............................................................... 8
Item 12 Security Ownership of Certain Beneficial Owners and Management....................... 8
Item 13 Certain Relationships and Related Transactions....................................... 8
PART IV Item 14 Exhibits, Financial Statement Schedules, and Reports on Form 8-K..................... 67
(a)(1) Financial Statements (See Item 8 for reference)
(2) Financial Statement Schedules (Not applicable)
(3) Exhibits
(b) Reports on Form 8-K
Exhibit Index............................................................................................... 69
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DESCRIPTION OF BUSINESS
REGISTRANT
United Carolina Bancshares Corporation ("UCB") is a North Carolina bank
holding company which was incorporated in 1969. UCB's primary business is the
ownership of the capital stock and promotion of the general business and
development of its two wholly-owned bank subsidiaries, United Carolina Bank and
United Carolina Bank of South Carolina. UCB's operating revenue and net income
are derived primarily from its bank subsidiaries through the payment of
dividends and service fees. At December 31, 1995, UCB and its subsidiaries had
consolidated total assets of $3.79 billion and total shareholders' equity of
$301.78 million.
BANK SUBSIDIARIES
United Carolina Bank is a state-chartered, non-member commercial bank
headquartered in Whiteville, North Carolina. The Bank was chartered in 1981 in
connection with the consolidation of two wholly-owned subsidiary banks of UCB
which had been in continuous operation in North Carolina since 1926 and 1930,
respectively. United Carolina Bank currently operates 125 banking offices in 79
communities which are located primarily in the eastern, central and southern
piedmont sections of North Carolina. United Carolina Bank provides commercial
and consumer banking services, including deposit, lending, trust, investment and
related financial services, to the general public, other banks and financial
institutions, and governmental units and agencies located in its geographic
markets. United Carolina Bank, as agent, also provides insurance services and
products, including bonds, and property and casualty insurance. The Bank has
three wholly owned subsidiaries: UCB Investor Services, Inc., United Premium
Services, Inc., and Webster Street Corporation. UCB Investor Services, Inc. is a
registered broker-dealer which provides brokerage services to the general public
in both North and South Carolina. All securities orders are taken by UCB
Investor Services on an agency basis for commission, and all executions and
clearings of securities sales are handled by an unaffiliated brokerage firm as
correspondent for UCB Investor Services. United Premium Services, Inc. provides
insurance premium financing to the general public, and Webster Street
Corporation is a Delaware chartered investment holding company which holds
investment grade securities. At December 31, 1995, United Carolina Bank had
total assets of $3.41 billion, loans of $2.44 billion and total equity capital
of $256.9 million.
United Carolina Bank of South Carolina is a federally insured,
state-chartered commercial bank headquartered in Greer, South Carolina which
operates 14 banking offices in 8 communities located in Greenville, Spartanburg
and Horry Counties, South Carolina. The Bank was organized in 1986 in connection
with the UCB's acquisition by merger of the Bank of Greer which had been in
continuous operation since 1925. United Carolina Bank of South Carolina provides
commercial and consumer banking services, including deposit, lending, trust,
investment and related financial services, to the general public in its
geographic markets. At December 31, 1995, United Carolina Bank of South Carolina
had total assets of $361.2 million, loans of $224.3 million and equity capital
of $25.5 million.
NON-BANK SUBSIDIARIES
UCB has one non-bank subsidiary, UCB Facilities Corporation, which provides
building contractor services to UCB and its subsidiaries. UCB Facilities
Corporation is not a "significant subsidiary" as defined in the accounting rules
of the Securities and Exchange Commission.
RECENT DEVELOPMENTS
During May 1995, UCB's bank subsidiary, United Carolina Bank, consummated
the acquisition of 12 North Carolina branch banking offices which were required
to be divested by BB&T Financial Corporation and Southern National Corporation
in their merger-of-equals transaction. In the acquisition, United Carolina Bank
assumed $178.7 million in deposits and purchased $26.8 million in loans from the
divesting institutions. Two of the branch banking offices acquired by United
Carolina Bank in the transaction with aggregate deposits and loans of $32.7
million and $4.9 million, respectively, were sold to third party banks during
the fourth quarter of 1995 and one of the branch banking offices was
consolidated with an existing branch banking office of United Carolina Bank.
During October 1995, UCB and its bank subsidiary, United Carolina Bank,
announced two separate agreements, respectively, to acquire by merger Seaboard
Savings Bank, Inc. SSB, headquartered in Plymouth, N.C. ("Seaboard"), and Triad
Bank, headquartered in Greensboro, N.C. ("Triad"). On January 25, 1996,
acquisition of Seaboard, which operated 3 North Carolina branch banking offices,
was consummated by UCB and United Carolina Bank pursuant to the parties'
definitive merger agreement. On January 25, 1996, Seaboard reported $46.3
million in total assets and $40.7 million in total deposits. At December 31,
1995, Triad, which operates 11 North Carolina branch banking offices, reported
$205.1 million in total
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assets, $130 million in loans and $186.1 million in total deposits, and had
common stockholders' equity totalling $15.8 million. It is anticipated that
UCB's acquisition of Triad by merger will be consummated in the first quarter of
1996.
EMPLOYEES
As of February 29, 1996, UCB and its subsidiaries employed a total of 1,144
full-time and 835 part-time employees.
SUPERVISION AND REGULATION
As a registered bank holding company, UCB is subject to supervision and
regulation by the Board of Governors of the Federal Reserve System under the
Bank Holding Company Act of 1956 and by the North Carolina Commissioner of Banks
under the North Carolina Bank Holding Company Act of 1984. As a publicly traded
company, UCB is required to file periodic reports under the Securities Exchange
Act of 1934 and is therefore subject to supervision and regulation by the
Securities and Exchange Commission. UCB's bank subsidiaries operate under the
jurisdiction of the Federal Deposit Insurance Corporation and the banking
commissions of their respective states of incorporation, and are subject to the
laws administered by those authorities and the rules and regulations promulgated
thereunder.
Banking is a business which is pervasively affected by state and federal
regulation. The operational and financial burden of compliance with banking laws
and regulations continues to increase for UCB's bank subsidiaries and the
banking industry generally.
INTERSTATE BANKING
The North Carolina Reciprocal Interstate Banking Act permits any
out-of-state bank holding company in the United States, with the approval of the
North Carolina Commissioner of Banks and appropriate federal regulators, to
acquire a North Carolina bank holding company or a North Carolina bank to the
same extent that the home state of the acquiror permits a North Carolina bank
holding company to acquire a bank or bank holding company in that state. The
North Carolina Interstate Branching Act permits any out-of-state bank, with the
approval of the North Carolina Commissioner of Banks and appropriate federal
regulators, to establish a branch banking office within North Carolina either by
DE NOVO entry; the purchase of an existing branch office; the purchase of all or
substantially all of the assets of a North Carolina bank; or, merger or
consolidation.
The Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994
enacted by the U.S. Congress permits a bank holding company to acquire banks
located in any state beginning September 29, 1995; commencing June 1, 1997,
banks will be permitted to merge across state lines (thereby creating interstate
branches), except where the home state of a bank has enacted a law opting out of
interstate bank mergers; commencing June 1, 1997, banks will be permitted to
branch DE NOVO into any state in which the bank does not already have a branch
if the state has enacted a law opting in for the purpose of DE NOVO interstate
bank branching; and, commencing September 29, 1995, banks may receive deposits,
renew time deposits, close loans, service loans, and receive payments on loans
and other obligations as agent for any bank or thrift affiliate, whether the
affiliate is located in a different state or the same state as the agent bank.
GOVERNMENT MONETARY POLICY AND ECONOMIC CONTROLS
As a bank holding company whose primary asset is the ownership of the
capital stock of its subsidiary banks, UCB is directly affected by government
monetary and fiscal policy and by regulatory measures affecting the banking
industry and the economy in general. The Board of Governors of the Federal
Reserve System has broad powers to expand and contract the supply of money and
credit. Among the instruments of monetary policy used by the Federal Reserve
Board to implement its objectives are: open market operations in U.S. Government
securities; changes in the discount rate on bank borrowings; and, changes in the
reserve requirements on bank deposits. These means are used in varying
combinations to influence overall growth of bank loans, investments and
deposits, and also affect interest rates charged on loans or paid for deposits.
UCB's subsidiary banks are not members of the Federal Reserve System, but are
subject to reserve requirements imposed on non-member banks by the Board. The
monetary policies of the Federal Reserve System have had a significant effect on
the operating results of commercial banks in the past and are expected to
continue to do so in the future.
COMPETITION
The banking laws of North Carolina and South Carolina allow statewide
branching; therefore, commercial banking in the Carolinas is highly competitive.
UCB's bank subsidiaries compete in many of their markets with larger banking
organizations, which have broader geographic markets and higher lending limits
and which can make more effective use of media
4
advertising, support services and electronic technology than UCB and its bank
subsidiaries. The principal methods of competition among banks involve the
periodic adjustment of interest rates paid on deposits and charged for loans,
and service and convenience to the banking public.
In addition, UCB's bank subsidiaries also compete in their respective
market areas with other financial institutions, including savings and loan
associations, credit unions, securities firms, insurance companies, leasing
companies, finance companies, and loan production offices of out-of-state
financial institutions.
It is anticipated that the North Carolina Reciprocal Interstate Banking Act
and Interstate Branching Act, and the Riegle-Neal Interstate Banking and
Branching Efficiency Act of 1994, will lead to increased bank competition in the
Carolinas, but the extent and timing of such increased competition cannot be
predicted.
EXECUTIVE OFFICERS OF REGISTRANT
The names and ages of UCB's executive officers (designated by asterisk) and
other significant employees of UCB, and their positions and offices held with
UCB and/or its bank subsidiaries, are listed below.
* E. Rhone Sasser, age 59, is Chairman of the Board (since April 1986) and
Chief Executive Officer (since 1983) of UCB. Mr. Sasser is Chairman of the
Executive Committee of UCB's Board and he has been a Director of UCB since 1981.
Mr. Sasser also serves as: Chairman of the Board, Chief Executive Officer, and
Chairman of the Executive Committee of United Carolina Bank; Chairman of the
Board and member of the Executive Committee of United Carolina Bank of South
Carolina; and Director of UCB Investor Services, Inc. He has been employed by
UCB and United Carolina Bank or one of its predecessors for 28 years.
* Kenneth L. Miller, Jr., age 49, is President of UCB and its subsidiary,
United Carolina Bank (since July 1995). Prior to his appointment as President,
Mr. Miller was Executive Vice President of UCB and United Carolina Bank, and was
principally responsible for the administration of banking services in the
Carolinas. He serves as a Director of United Carolina Bank of South Carolina and
UCB Investor Services, Inc. Mr. Miller has been employed by UCB and United
Carolina Bank for 14 years.
* Jeff D. Etheridge, Jr., age 47, is Executive Vice President of UCB (since
October 1986) and its subsidiary, United Carolina Bank (since July 1985). He has
been employed by UCB and United Carolina Bank or one of its predecessors for 17
years. Mr. Etheridge is principally responsible for credit administration.
* Ronald C. Monger, age 47, is Executive Vice President (since January
1992) and Chief Financial Officer (since January 1985) of UCB and its
subsidiary, United Carolina Bank. He serves as a Director of UCB Investor
Services, Inc. and Webster Street Corporation. Mr. Monger has been employed by
UCB and United Carolina Bank or one of its predecessors for 19 years.
* David L. Thomas, age 49, is Executive Vice President of UCB and its
subsidiary, United Carolina Bank (since October 1986). He serves as a Director
of UCB Investor Services, Inc. Mr. Thomas has been employed by Registrant and
United Carolina Bank for 14 years. He is principally responsible for the
administration of trust and related non-banking services.
* Thomas A. Nicholson, Jr., age 51, is Senior Vice President of UCB (since
1991) and its subsidiary, United Carolina Bank (since 1984). Mr. Nicholson has
been employed by United Carolina Bank for 11 years. He is principally
responsible for human resources administration and management of UCB's
facilities.
* Howard V. Hudson, Jr., age 50, is Secretary and General Counsel of UCB
and its subsidiary, United Carolina Bank (since 1987). He also serves as
Secretary of United Carolina Bank of South Carolina, and as a Director of UCB
Investor Services, Inc. Mr. Hudson has been employed by United Carolina Bank for
15 years.
Preston E. Davenport, Jr., age 47, is Executive Vice President of United
Carolina Bank (since January 1994). He previously served as a Senior Vice
President and Regional Banking Executive of United Carolina Bank for 6 years.
Mr. Davenport has been employed by United Carolina Bank for 16 years. He is
principally responsible for administration of banking services for United
Carolina Bank.
Samuel K. Ulmer, age 61, is Senior Vice President and Operations and Data
Processing Group Executive (since 1982) of United Carolina Bank. Mr. Ulmer has
been employed by United Carolina Bank for 13 years.
C. Michael Uzzell, age 59, is President, Chief Executive Officer, Chairman
of the Executive Committee and Director of United Carolina Bank of South
Carolina (since December 1991). He previously served as Senior Vice President
and Regional
5
Banking Executive of Registrant's subsidiary, United Carolina Bank, for 12
years. Mr. Uzzell has been employed by one of UCB's subsidiary banks for 24
years.
Each of the above named officers holds his respective position and office
with UCB or, as appropriate, with its bank subsidiary until the earlier of his
annual reelection, the appointment of his successor, or his removal by the UCB
or subsidiary's Board of Directors.
PROPERTIES
UCB's principal executive offices are located at 127 West Webster Street,
Whiteville, North Carolina 28472 which also serve as the principal offices of
United Carolina Bank and UCB Investor Services, Inc. The Whiteville executive
office complex is owned by United Carolina Bank.
As of March 1, 1996, UCB and its subsidiaries occupied a total of 155
buildings, of which 139 were used partly or wholly as deposit taking branches.
Of the occupied buildings, United Carolina Bank owns in fee 73 buildings, and
United Carolina Bank of South Carolina owns in fee 6 buildings. The remaining
buildings are leased by the bank subsidiaries from third parties. Financial
information with respect to the real estate lease commitments of Registrant's
bank subsidiaries is incorporated herein by reference from Note 11 on page 56
herein. All facilities owned or leased by UCB and its subsidiaries are
considered by management to be adequate for the proper conduct of business. In
addition to the improved properties referenced above, UCB's subsidiaries own or
hold options on various parcels of unimproved realty for future expansion of
business.
Information with respect to mortgages on the properties described above is
incorporated herein by reference from Note 7 on page 48 herein.
LEGAL PROCEEDINGS
Various legal proceedings arising in the ordinary course of business are
pending or threatened against UCB's bank subsidiaries. In the opinion of
management and its counsel, none of such pending or threatened legal proceedings
will have a material adverse effect on the consolidated financial position,
results of operations and/or liquidity of UCB and its subsidiaries.
SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matter was submitted to a vote of UCB's security holders through
solicitation of proxies or otherwise during the fourth quarter of 1995.
6
MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS
UCB's common stock is traded on the NASDAQ National Market System under the
trading symbol UCAR.
The accompanying table sets forth the high and low per share prices of
UCB's common stock as reported by the National Association of Securities Dealers
Automated Quotation system (NASDAQ) and cash dividends per share declared for
the periods indicated. The per share prices reported represent actual
transactions and do not include markups, markdowns, or commissions. All per
share prices and dividends have been adjusted to reflect retroactively a 3-for-2
stock split effected in the form of a stock dividend declared January 17, 1996.
CASH
PRICE RANGE DIVIDENDS
QUARTER LOW HIGH DECLARED
1995 4th $ 22.50 $ 26.00 $.167
3rd 20.17 24.50 .167
2nd 19.33 20.67 .167
1st 16.17 19.33 .146
1994 4th 15.33 18.17 .147
3rd 15.33 18.50 .147
2nd 13.67 15.83 .133
1st 14.00 15.17 .133
The approximate number of record holders of UCB's common stock was 9,300 as
of February 23, 1996 (UCB's record date for purposes of its 1996 Annual Meeting
of Shareholders).
UCB's ability to pay cash dividends is subject to statutory restrictions
applicable to North Carolina business corporations in general. In this regard,
UCB is prohibited by North Carolina law from making any distribution to
shareholders, including the payment of cash dividends, which would render UCB
insolvent or unable to meet its obligations as they become due in the ordinary
course of business. Cash dividends from UCB's bank subsidiaries are the primary
source of funds for the payment of UCB's cash dividends. United Carolina Bank is
subject to certain statutory restrictions applicable to North Carolina banks
requiring that cash dividends be paid only from undivided profits. United
Carolina Bank of South Carolina is prohibited by South Carolina law from paying
any dividend which would render the Bank insolvent or unable to meet its
obligations as they come due. In addition, the payment of any proposed cash
dividend by United Carolina Bank of South Carolina must be approved by the South
Carolina State Board of Financial Institutions. At December 31, 1995, UCB's
North Carolina bank subsidiary had retained earnings of $193.5 million legally
available under North Carolina law for dividend payments. At December 31, 1995,
UCB's South Carolina subsidiary bank had total stockholder equity of $25.5
million. UCB's bank subsidiaries are also subject to capital guidelines
promulgated pursuant to federal banking law which, in the event of a failure to
meet minimum standards, could restrict dividend payment.
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE
During the two (2) years preceding December 31, 1995, there has been no
change in UCB's independent auditor. Further, there has been no disagreement
between UCB and its independent auditor on any matter of accounting principles
or practices, financial statement disclosure, or auditing scope or procedure
which would cause the auditor to make reference to such a matter in its report
on UCB's financial statements.
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DIRECTORS AND EXECUTIVE OFFICERS OF REGISTRANT
The following thirteen (13) persons serve on UCB's Board of Directors:
E. Rhone Sasser
Chairman of the Board and Chief Executive Officer of UCB and
United Carolina Bank; Chairman of the Board of United
Carolina Bank of South Carolina
J.W. Adams
Retired bank executive
John V. Andrews
President of Teledyne Allvac
Russell M. Carter
President of Atlantic Corporation of Wilmington, Inc.
W. Eugene Carter
Owner of W.E. Carter Realty
Alfred E. Cleveland
Attorney
James L. Cresimore
Chairman of Associated Brokers, Inc.; Allegiance Brokers,
Inc.; and Smithfield Companies, Inc.
Thomas P. Dillon
Business Consultant
C. Frank Griffin
Attorney
James C. High
President of the News Reporter Company, Inc.
Jack E. Shaw
Chief Executive Officer of Shaw Resources, Inc.
Harold B. Wells
President of Wells Oldsmobile, Inc.
Charles M. Winston
Chairman of the Board of Winston Hotels, Inc.
Information concerning the directors' ages, business experience, positions
and offices held with UCB, and term of office is incorporated herein by
reference from pages 3 and 4 of UCB's proxy statement for its 1996 Annual
Meeting of Shareholders filed with the Securities and Exchange Commission.
Reference is made to pages 5 and 6 herein for information concerning UCB's
executive officers.
EXECUTIVE COMPENSATION
Information concerning (a) executive compensation and employment contracts
is incorporated herein by reference from pages 6 (beginning with the section
"Executive Compensation") through the subsection "Pension Plan" ending on page
10 and pages 14 and 15 ("Employment Agreements") of UCB's proxy statement for
its 1996 Annual Meeting of Shareholders filed with the Securities and Exchange
Commission; (b) directors' compensation is incorporated herein by reference from
pages 4 and 5 of said proxy statement; and (c) compensation committee interlocks
and insider participation in compensation decisions is incorporated herein by
reference from pages 5 and 6 of said proxy statement.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Information concerning the beneficial ownership of UCB's common stock by
its directors, director nominees, executive officers named in the Summary
Compensation Table of UCB's proxy statement for its 1996 Annual Meeting of
Shareholders filed with the Securities and Exchange Commission, all directors
and executive officers as a group, and by persons known to UCB to be the
beneficial owner of more than 5% of its common stock, is incorporated herein by
reference from pages 1 and 2 of UCB's proxy statement for its 1996 Annual
Meeting of Shareholders filed with the Securities and Exchange Commission.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information concerning certain business relationships and transactions
between UCB and certain of its directors and executive officers is incorporated
herein by reference from pages 5 and 6 of UCB's proxy statement for its 1996
Annual Meeting of Shareholders filed with the Securities and Exchange
Commission.
8
UNITED CAROLINA BANCSHARES CORPORATION AND SUBSIDIARIES
Management's Discussion and Analysis of Financial Condition
and Results of Operations
EARNINGS OVERVIEW
Income before the cumulative effect of a change in accounting method
totaled $44,199,000 for the year ended December 31, 1995, an increase of 47.0%
over the $30,066,000 earned in 1994. Net income for 1995 increased 48.6% over
the $29,750,000 earned in 1994 after including the cumulative effect of a
required change in accounting for postemployment benefits. For 1994, income
before the cumulative effects of changes in accounting methods decreased
$2,551,000, or 7.8%, from the $32,617,000 earned in 1993, while net income
decreased 11.1% from the $33,472,000 earned in 1993 after including the
cumulative effect of a required change in accounting for deferred income taxes.
TABLE 1.
SELECTED FINANCIAL DATA
Years Ended December 31,
1995 1994 1993 1992
(Dollars in thousands except per share amounts)
Summary of operations:
Interest income................................................. $ 285,455 $ 231,856 $ 206,452 $ 211,795
Interest expense................................................ 127,569 87,021 78,701 91,805
Net interest income........................................... 157,886 144,835 127,751 119,990
Provision for credit losses..................................... 6,800 3,371 4,993 11,920
Net interest income after provision for credit losses......... 151,086 141,464 122,758 108,070
Noninterest income.............................................. 45,051 42,975 41,294 38,634
Noninterest expenses, excluding restructuring charges........... 126,768 125,269 115,593 105,307
Restructuring charges........................................... -- 11,906 -- --
Income before income taxes...................................... 69,369 47,264 48,459 41,397
Income tax provision.......................................... 25,170 17,198 15,842 12,968
Income before cumulative effects of changes in accounting
methods....................................................... 44,199 30,066 32,617 28,429
Cumulative effects of changes in accounting methods........... -- (316) 855 --
Net income...................................................... $ 44,199 $ 29,750 $ 33,472 $ 28,429
Per share data(1):
Income before cumulative effects of changes in accounting
methods..................................................... $ 2.00 $ 1.37 $ 1.49 $ 1.31
Net income.................................................... $ 2.00 $ 1.35 $ 1.53 $ 1.31
Cash dividends declared....................................... $ .647 $ .56 $ .507 $ .44
Book value at end of year..................................... $ 13.62 $ 11.95 $ 11.48 $ 10.46
Balance sheet data at year-end:
Total assets.................................................... $3,785,796 $3,331,638 $3,132,849 $2,874,077
Total earning assets............................................ 3,508,964 3,085,570 2,873,901 2,644,736
Loans, net of unearned income................................... 2,659,943 2,418,158 2,226,425 1,897,906
Total deposits.................................................. 3,410,627 2,940,599 2,811,656 2,540,843
Stockholders' equity............................................ $ 301,777 $ 263,489 $ 251,915 $ 228,437
Average balance sheet data:
Total assets.................................................... $3,601,835 $3,190,756 $2,932,951 $2,780,564
Total earning assets............................................ 3,368,346 2,973,425 2,721,807 2,580,599
Loans, net of unearned income................................... 2,574,086 2,319,309 2,019,087 1,864,292
Total deposits.................................................. 3,235,209 2,836,243 2,606,340 2,476,963
Stockholders' equity............................................ $ 280,617 $ 259,584 $ 239,488 $ 217,779
Performance ratios:
Income before cumulative effects of changes in accounting
methods as a percent of:
Average stockholders' equity.................................. 15.75% 11.58% 13.62% 13.05%
Average total assets.......................................... 1.23% .94% 1.11% 1.02%
1991
Summary of operations:
Interest income................................................. $ 234,722
Interest expense................................................ 122,807
Net interest income........................................... 111,915
Provision for credit losses..................................... 14,616
Net interest income after provision for credit losses......... 97,299
Noninterest income.............................................. 35,711
Noninterest expenses, excluding restructuring charges........... 99,916
Restructuring charges........................................... --
Income before income taxes...................................... 33,094
Income tax provision.......................................... 9,713
Income before cumulative effects of changes in accounting
methods....................................................... 23,381
Cumulative effects of changes in accounting methods........... --
Net income...................................................... $ 23,381
Per share data(1):
Income before cumulative effects of changes in accounting
methods..................................................... $ 1.07
Net income.................................................... $ 1.07
Cash dividends declared....................................... $ .407
Book value at end of year..................................... $ 9.58
Balance sheet data at year-end:
Total assets.................................................... $2,679,227
Total earning assets............................................ 2,451,087
Loans, net of unearned income................................... 1,818,847
Total deposits.................................................. 2,424,742
Stockholders' equity............................................ $ 208,942
Average balance sheet data:
Total assets.................................................... $2,657,284
Total earning assets............................................ 2,415,833
Loans, net of unearned income................................... 1,760,035
Total deposits.................................................. 2,406,175
Stockholders' equity............................................ $ 197,891
Performance ratios:
Income before cumulative effects of changes in accounting
methods as a percent of:
Average stockholders' equity.................................. 11.82%
Average total assets.......................................... .88%
(1) PER SHARE AMOUNTS, OTHER THAN CASH DIVIDENDS DECLARED, HAVE BEEN ADJUSTED TO
REFLECT RETROACTIVELY THE IMPACT OF SHARES ISSUED IN CONNECTION WITH
ACQUISITIONS ACCOUNTED FOR AS POOLINGS-OF-INTERESTS AND THE 3-FOR-2 STOCK
SPLIT EFFECTED IN THE FORM OF A STOCK DIVIDEND DECLARED JANUARY 17, 1996.
CASH DIVIDENDS PER SHARE HAVE BEEN ADJUSTED TO REFLECT RETROACTIVELY THE
STOCK SPLIT.
9
On a per share basis, income before the cumulative effect of a change in
accounting method amounted to $2.00 in 1995, an increase of 46.0% over the $1.37
per share earned in 1994 which represented a decline of 8.1% from the 1993
earnings of $1.49 per share. Net income per share for 1995 was $2.00, a 48.1%
increase over the net income of $1.35 per share earned in 1994 which represented
a decline of 11.8% from the 1993 net income per share of $1.53. (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 1994 results included nonrecurring restructuring charges totaling
$11,906,000, or $.34 per share after applicable income tax benefits. Excluding
the net effect of these charges, income per share before the cumulative effect
of a change in accounting method for 1995 increased 17.0% over the 1994 results
on a pro forma basis. The 1994 results, excluding the effect of the
restructuring charges, were 14.8% above the 1993 level.
The increase in 1995 earnings compared to 1994 was primarily due to an 8.5%
increase in tax-equivalent net interest income resulting from growth in average
earning assets of 13.3% together with an increase of only 1.3% in noninterest
expenses, excluding restructuring charges. In 1995, tax-equivalent net interest
income increased $12,592,000 over 1994, and noninterest income increased
$2,242,000, or 5.2%. The provision for credit losses increased $3,429,000 in
1995 from $3,371,000 in 1994 while noninterest expenses, excluding restructuring
charges, were $1,499,000, or 1.2%, over the 1994 expenses.
Excluding the effect of the restructuring charges, 1994 income before the
cumulative effects of changes in accounting methods was primarily influenced by
higher levels of tax-equivalent net interest income and a decline in the
provision for credit losses when compared to 1993. In 1994, tax-equivalent net
interest income increased $16,890,000, or 12.9%, over 1993, and noninterest
income increased $1,681,000, or 4.1%, while the provision for credit losses
decreased $1,622,000, or 32.5%, from the previous year, and noninterest
expenses, excluding restructuring charges, increased $9,676,000, or 8.4%.
MERGERS AND ACQUISITIONS
On April 28, 1995, UCB issued 44,213 (66,320 after giving effect to the
3-for-2 stock split declared January 17, 1996) shares of common stock to
consummate the acquisition by merger of United Agencies, Inc., a general
insurance agency located in Wilmington, North Carolina, by the North Carolina
subsidiary bank. The merger was accounted for as a pooling-of-interests;
however, due to the immateriality of the transaction in relation to UCB's
consolidated financial position and operating results, prior period financial
statements have not been restated.
On May 19, 1995, UCB's North Carolina subsidiary bank purchased 12 branch
offices from another financial institution. As a part of the transaction, UCB
purchased $26.8 million in loans and assumed $178.7 million in deposits. Two of
the branch offices acquired in the transaction were sold to third-party banks
during the fourth quarter of 1995. The divested 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.
UCB's North Carolina subsidiary bank acquired two insurance agencies in
mergers consummated during 1994. On March 31, 1994, Sanford Real Estate, Loan, &
Insurance Company, a general insurance agency with offices in three North
Carolina communities, was acquired through the issuance of 27,743 (41,614 after
giving effect to the 3-for-2 stock split declared January 17, 1996) shares of
UCB common stock. Effective November 30, 1994, Executive Insurance Company,
Inc., a general insurance agency in Charlotte, North Carolina, was acquired
through the issuance of 8,660 (12,990 after giving effect to the 3-for-2 stock
split declared January 17, 1996) shares of UCB common stock. Each of these
transactions was accounted for as a pooling-of-interests; however, due to the
immateriality of the size of the insurance agencies in relation to UCB's
consolidated financial position and operating results, prior period financial
statements have not been restated.
Effective August 31, 1994, UCB's North Carolina subsidiary bank acquired
the Bank of Iredell, headquartered in Statesville, North Carolina, in a merger
transaction. Bank of Iredell had five branch offices with $88.7 million in total
assets and $80.4 million in total deposits at the date of acquisition. UCB
exchanged 642,003 (963,004 after giving effect to the 3-for-2 stock split
declared January 17, 1996) shares of common stock for the outstanding shares of
common stock of Bank of Iredell. The merger was accounted for as a
pooling-of-interests, and, accordingly, all financial data has been restated to
include the accounts of the Bank of Iredell for all periods presented.
NET INTEREST INCOME
Net interest income, on a fully tax-equivalent basis, amounted to
$160,346,000 in 1995, $147,754,000 in 1994, and $130,864,000 in 1993.
Tax-equivalent net interest income as a percentage of average earning assets
amounted to 4.76% in
10
1995, 4.97% in 1994, and 4.81% in 1993. The major components of tax-equivalent
net interest income for the three years ended December 31, 1995, are shown in
Table 2.
TABLE 2.
SELECTED AVERAGE BALANCES, TAX-EQUIVALENT NET INTEREST INCOME, AND AVERAGE RATES
EARNED OR PAID
Years Ended December 31,
1995 1994 1993
INTEREST AVERAGE Interest Average
INCOME RATE Income Rate
AVERAGE OR EARNED Average or Earned Average
BALANCE EXPENSE(1) OR PAID Balance Expense(1) or Paid Balance
(Dollars in thousands)
Assets:
Earning assets:
Loans, net of
unearned income(2)........... $2,574,086 $240,198 9.33% $2,319,309 $200,284 8.64% $2,019,087
Taxable securities............. 623,364 35,536 5.70 519,000 24,695 4.76 506,072
Tax-exempt securities.......... 63,474 5,788 9.12 86,888 7,513 8.65 99,155
Federal funds sold and other
short-term investments....... 107,422 6,393 5.95 48,228 2,283 4.73 97,493
Total earning assets....... 3,368,346 287,915 8.55 2,973,425 234,775 7.90 2,721,807
Other assets..................... 233,489 217,331 211,144
Total assets............... $3,601,835 $3,190,756 $2,932,951
Liabilities and stockholders'
equity:
Interest-bearing liabilities:
Interest-bearing deposits:
NOW deposits................. $ 344,519 5,626 1.63 $ 337,623 5,831 1.73 $ 309,976
Savings and money market
deposits................... 867,874 33,378 3.85 839,276 24,377 2.90 796,147
Certificates of deposit of
$100,000 or more........... 188,182 10,755 5.72 163,956 7,345 4.48 133,102
Other time deposits.......... 1,335,395 75,175 5.63 1,016,164 46,517 4.58 925,107
Total interest-bearing
deposits................. 2,735,970 124,934 4.57 2,357,019 84,070 3.57 2,164,332
Short-term borrowings............ 42,316 2,464 5.82 67,173 2,787 4.15 65,223
Long-term borrowings............. 2,886 171 5.93 2,337 164 7.02 1,234
Total interest-bearing
liabilities.............. 2,781,172 127,569 4.59 2,426,529 87,021 3.59 2,230,789
Demand deposits.................. 499,239 479,224 442,008
Other liabilities................ 40,807 25,419 20,666
Stockholders' equity............. 280,617 259,584 239,488
Total liabilities and
stockholders' equity..... $3,601,835 $3,190,756 $2,932,951
Net interest income as a percent
of total earning assets........ $3,368,346 $160,346 4.76% $2,973,425 $147,754 4.97% $2,721,807
Interest Average
Income Rate
or Earned
Expense(1) or Paid
<
Assets:
Earning assets:
Loans, net of
unearned income(2)........... $173,363 8.59%
Taxable securities............. 25,036 4.95
Tax-exempt securities.......... 8,248 8.32
Federal funds sold and other
short-term investments....... 2,918 2.99
Total earning assets....... 209,565 7.70
Other assets.....................
Total assets...............
Liabilities and stockholders'
equity:
Interest-bearing liabilities:
Interest-bearing deposits:
NOW deposits................. 5,885 1.90
Savings and money market
deposits................... 20,916 2.63
Certificates of deposit of
$100,000 or more........... 5,320 4.00
Other time deposits.......... 44,626 4.82
Total interest-bearing
deposits................. 76,747 3.55
Short-term borrowings............ 1,880 2.88
Long-term borrowings............. 74 6.00
Total interest-bearing
liabilities.............. 78,701 3.53
Demand deposits..................
Other liabilities................
Stockholders' equity.............
Total liabilities and
stockholders' equity.....
Net interest income as a percent
of total earning assets........ $130,864 4.81%
(1) TAX-EQUIVALENT ADJUSTMENTS (BASED ON A 35% TAX RATE): 1995, $2,460,000;
1994, $2,919,000; AND 1993, $3,113,000.
(2) NONACCRUAL LOANS ARE INCLUDED IN LOANS, NET OF UNEARNED INCOME.
The growth in tax-equivalent net interest income realized in 1995 as
compared to 1994 was primarily the result of a 13.3% increase in the volume of
earning assets, as the net yield on earning assets declined to 4.76% in 1995
from 4.97% in 1994. This decline in the net yield on earning assets was
principally due to increased competition for core deposits and changes in the
mix of interest-bearing deposits to a higher percentage of consumer certificates
of deposit and a lower percentage of NOW, savings, and money market deposits.
This has resulted in the average rate paid on interest-bearing deposits
increasing 1.00% in 1995 compared to 1994 while the yield on average earning
assets increased .65% in the same period. In addition, an increase in the
percentage of average earning assets funded by interest-bearing liabilities from
the prior year and a change in the mix of average earning assets both had
adverse effects on the net tax-equivalent yield on earning assets in 1995 as
compared to the previous year. The percentage of average earning assets funded
by interest-bearing liabilities increased to 82.57% in 1995 from 81.61% in 1994.
For 1995, the percentage of average earning assets comprised of loans
11
declined to 76.4% from 78.0% in 1994 due in large part to the previously
mentioned branches purchased during 1995. These branches accounted for $95.6
million in average earning assets for the year but only $23.1 million in average
loans.
Changes in the mix of earning assets from securities and short-term
investments to a higher composition of loans positively impacted tax-equivalent
net interest income for 1994 as compared to 1993. The average balances of loans
increased 14.9% over the previous year while average total earning assets
increased 9.2% over 1993. The percentage of average earning assets comprised of
loans increased 3.8% in 1994 from 74.2% in 1993.
Net interest income for 1995 and 1994 was also aided by the interest rate
environment experienced during the past two years. Increases in the prime
lending rate as well as higher yields on securities and short-term investments
increased the tax-equivalent yield on earning assets to 8.55% in 1995 from 7.90%
in 1994 and 7.70% in 1993. As previously discussed, the increase in the yield on
earning assets was more than offset by the increase in the rates paid on
interest-bearing deposits during 1995. In 1994, rates paid on interest-bearing
deposits were relatively unchanged from 1993 as UCB paid an average rate of
3.57% on interest-bearing deposits in 1994 compared to 3.55% in 1993. This was
primarily the result of average rates paid on NOW, savings, and the majority of
money market deposits reacting slowly to increases in short-term money market
rates. The effects on tax-equivalent net interest income from volume and rate
changes are summarized in Table 3.
TABLE 3.
EFFECTS ON TAX-EQUIVALENT NET INTEREST INCOME FROM VOLUME AND RATE CHANGES
Years Ended December 31,
1995 1994
CHANGES IN CHANGES IN TOTAL Changes in Changes in
AVERAGE AVERAGE INCREASE Average Average
VOLUME(1) RATES(1) (DECREASE) Volume(1) Rates(1)
(In thousands)
Interest income (tax-equivalent):
Loans.............................................. $ 23,024 $ 16,890 $ 39,914 $ 25,920 $ 1,001
Taxable securities................................. 5,462 5,379 10,841 630 (971)
Tax-exempt securities.............................. (2,117) 392 (1,725) (1,051) 316
Federal funds sold and other short-term
investments..................................... 3,398 712 4,110 (1,874) 1,239
Total interest income......................... 29,767 23,373 53,140 23,625 1,585
Interest expense:
NOW deposits....................................... 117 (322) (205) 501 (555)
Savings and money market deposits.................. 857 8,144 9,001 1,174 2,287
Certificates of deposit of $100,000 or more........ 1,190 2,220 3,410 1,331 694
Other time deposits................................ 16,553 12,105 28,658 4,244 (2,353)
Interest-bearing deposits.......................... 18,717 22,147 40,864 7,250 73
Short-term borrowings.............................. (1,230) 907 (323) 58 849
Long-term borrowings............................... 35 (28) 7 75 15
Total interest expense........................ 17,522 23,026 40,548 7,383 937
Net interest income........................... $ 12,245 $ 347 $ 12,592 $ 16,242 $ 648
Total
Increase
(Decrease)
Interest income (tax-equivalent):
Loans.............................................. $ 26,921
Taxable securities................................. (341)
Tax-exempt securities.............................. (735)
Federal funds sold and other short-term
investments..................................... (635)
Total interest income......................... 25,210
Interest expense:
NOW deposits....................................... (54)
Savings and money market deposits.................. 3,461
Certificates of deposit of $100,000 or more........ 2,025
Other time deposits................................ 1,891
Interest-bearing deposits.......................... 7,323
Short-term borrowings.............................. 907
Long-term borrowings............................... 90
Total interest expense........................ 8,320
Net interest income........................... $ 16,890
(1) CHANGES ATTRIBUTABLE TO BOTH VOLUME AND RATE ARE ALLOCATED ON A WEIGHTED
BASIS.
NONINTEREST INCOME
Noninterest income amounted to $45,051,000 in 1995, an increase of
$2,076,000, or 4.8%, over 1994. Noninterest income for 1994 totaled $42,975,000,
which represented an increase of $1,681,000, or 4.1%, over 1993. Core
noninterest income (noninterest income before gains (losses) on mortgages
originated for resale, trading account securities, dispositions of investment
securities and securities available for sale, and disposals of fixed assets)
amounted to $44,714,000 in 1995, an increase of $2,010,000, or 4.7%, over 1994.
In 1994, core noninterest income totaled $42,704,000, an increase of $2,423,000,
or 6.0%, over 1993. The majority of growth in core noninterest income in 1995
compared to 1994 and in 1994 compared to 1993 was due to increases in fees and
commissions generated from nondeposit services.
12
Trust revenues increased $80,000, or 1.5%, in 1995 over the 1994 revenues,
which were $355,000, or 7.4%, higher than 1993. The increases were primarily due
to growth in the number of managed trust accounts. Total trust assets under
administration amounted to $1,684,346,000 at December 31, 1995, $1,486,923,000
at December 31, 1994, and $1,626,716,000 at December 31, 1993. The decline in
trust assets under administration in 1994 from 1993 was due to the transfer of
self-directed IRAs from UCB's trust department to an unaffiliated custodian and
the liquidation of a large custodial account; however, the number of managed
accounts grew in 1994, which had a positive effect on trust income for that
year.
Mortgage banking fees (primarily fees received for servicing loans and fees
on loans originated and sold in the secondary market) increased $477,000, or
13.5%, in 1995 over 1994 as a result of moderate purchases of servicing rights
and increased volumes of in-house originations. Mortgage servicing fees recorded
in 1994 decreased $488,000, or 12.1%, in 1994 from 1993 due to a decline in the
average servicing fee, as well as a decline in the number of loans originated
and sold to outside investors. The decline in the volume of originations was
primarily caused by the rising interest rate environment experienced during the
last three quarters of 1994. The aggregate principal balance of the portfolio of
mortgage loans serviced for third parties amounted to $696,535,000 at December
31, 1995, $641,455,000 at December 31, 1994, and $604,843,000 at December 31,
1993. Gains of $716,000 were recognized during 1995 on the sale of mortgages
originated or purchased for sale in the secondary market. This compares to gains
of $319,000 in 1994 and $929,000 in 1993. The gains in 1995 included $592,000
recorded pursuant to the prospective adoption of the provisions of Financial
Accounting Standards No. 122 (FAS 122), "Accounting for Mortgage Servicing
Rights, an amendment of FASB Statement No. 65," effective April 1, 1995. This
statement amends certain provisions of FAS 65 to eliminate the distinction
between rights to service mortgage loans for others that are acquired through
loan origination activities and rights to service mortgage loans for others that
are acquired through purchase transactions. Under FAS 65, the cost of originated
mortgage servicing rights was not recognized as an asset and was charged to
earnings when the related loan was sold. As a result of adopting FAS 122,
beginning April 1995, the estimated fair values of the rights to service
mortgage loans for others have been capitalized on loans originated by UCB that
are sold in the secondary market.
Insurance commissions increased $1,446,000, or 41.5%, in 1995 over 1994,
and $1,133,000, or 48.3%, in 1994 compared to 1993, primarily as the result of
the previously discussed mergers with two general insurance agencies in 1994 and
one in April 1995. Fees received on credit cards and discounts from clearing
merchants' credit card receipts increased $73,000, or 2.7%, in 1995 over 1994
which increased $88,000, or 3.4%, over 1993 as the result of higher volumes of
credit cards issued and merchant transactions processed. Brokerage and annuity
commissions declined $179,000, or 7.8%, in 1995 from 1994 which increased
$365,000, or 18.8%, over 1993. The decrease in 1995 resulted from a decline in
sales volume from the previous year in annuities ($197,000 or 21.8%) and
brokerage fees ($192,000 or 42.6%) while the increase in 1994 over 1993 was
principally due to a significant increase in annuity commissions ($320,000 or
54.8%).
The primary sources of noninterest income for the three years ended
December 31, 1995, are summarized in Table 4.
13
TABLE 4.
SUMMARY OF NONINTEREST INCOME
Years Ended December 31,
1995 1994 1993
(In thousands)
Service charges on deposit accounts.......................................................... $22,692 $22,644 $21,937
Trust income................................................................................. 5,243 5,163 4,808
Insurance commissions........................................................................ 4,927 3,481 2,348
Mortgage banking fees........................................................................ 4,015 3,538 4,026
Bankcard fees and merchant discount.......................................................... 2,780 2,707 2,619
Brokerage and annuity commissions............................................................ 2,130 2,309 1,944
Other service charges and fees............................................................... 2,145 2,024 1,851
Other operating income....................................................................... 782 838 748
Total core noninterest income........................................................... 44,714 42,704 40,281
Net gains on mortgages originated for resale................................................. 716 319 929
Net gains on trading account securities...................................................... 4 8 9
Net losses on dispositions of securities available for sale.................................. -- (32) --
Net gains on dispositions of investment securities........................................... 7 5 58
Net gains (losses) on disposal of fixed assets............................................... (390) (29) 17
Total noninterest income................................................................ $45,051 $42,975 $41,294
NONINTEREST EXPENSES, EXCLUDING RESTRUCTURING CHARGES
Noninterest expenses, excluding restructuring charges, totaled $126,768,000
in 1995, $125,269,000 in 1994, and $115,593,000 in 1993. These amounts represent
increases of $1,499,000, or 1.2%, in 1995 over 1994 and $9,676,000, or 8.4%, in
1994 over 1993.
Personnel expense, the largest component of noninterest expenses, decreased
$691,000, or .9%, to $73,017,000 in 1994. In 1994, personnel expense totaled
$73,708,000, which was an increase of $7,248,000, or 10.9%, over 1993. Salaries
and wages for 1995 amounted to $54,302,000, a decrease of $42,000 from the 1994
expense. This decrease was due to a net reduction of 190, or 9.9%, in the
average number of full-time equivalent employees which more than offset
increases in base compensation granted during the year. The net reduction in the
average number of full-time equivalent employees was principally due to the
previously mentioned restructuring plan which included the consolidation or sale
of 15 branch offices, staffing level changes at all branches, and the
centralization of certain functions. These initiatives to reduce staff were
partially offset by the previously discussed acquisitions which increased the
average number of full-time equivalent employees by 72 for 1995. Excluding the
effect of these acquisitions, on a pro forma basis, the average number of
full-time equivalent employees decreased by 262, or 13.6%, from 1994. Other
compensation expense for 1995 increased $462,000, or 11.8%, from 1994 primarily
due to increases in temporary employment fees as a result of staffing level
changes made in conjunction with the restructuring.
14
TABLE 5.
SUMMARY OF NONINTEREST EXPENSES, EXCLUDING RESTRUCTURING CHARGES
Years Ended December 31,
1995 1994 1993
(In thousands)
Salaries and wages....................................................................... $ 54,302 $ 54,344 $ 49,854
Other compensation....................................................................... 4,389 3,927 3,093
Employee benefits........................................................................ 14,326 15,437 13,513
Total personnel expense............................................................. 73,017 73,708 66,460
Occupancy expense........................................................................ 9,078 9,289 9,023
Equipment expense........................................................................ 6,231 6,037 5,456
Data processing fees and software expense................................................ 5,245 4,102 3,779
Marketing and business development....................................................... 4,423 3,841 3,803
Postage and delivery..................................................................... 3,674 3,293 2,888
FDIC deposit insurance premiums.......................................................... 3,593 6,138 5,663
Outside services......................................................................... 3,514 3,240 2,791
Printing, stationery, and supplies....................................................... 3,502 2,654 2,687
Telephone expense........................................................................ 2,838 2,153 2,132
Travel expense........................................................................... 1,805 1,940 1,735
Amortization of capitalized mortgage servicing rights.................................... 691 1,440 2,167
Noncredit losses......................................................................... 1,857 1,309 1,467
Amortization of goodwill and other intangible assets..................................... 2,197 950 438
Other operating expenses................................................................. 5,103 5,175 5,104
Total noninterest expenses, excluding restructuring charges......................... $126,768 $125,269 $115,593
Salaries and wages for 1994 amounted to $54,344,000, an increase of
$4,490,000, or 9.0%, from the 1993 expense of $49,854,000. This increase was
attributable to normal increases in base compensation and an increase of 37 in
the average number of full-time equivalent employees compared to the prior year.
The increase in average full-time equivalent employees was primarily due to the
acquisition of Home Federal Savings Bank of Eastern North Carolina (Home
Federal) in November 1993 and the acquisitions by merger of three general
insurance agencies during 1994 and 1993. Other compensation expense for 1994
increased $834,000, or 27.0%, from 1993 primarily due to increases in
compensation related to UCB's annual and long-term management incentive plans.
Expenses for employee benefits decreased $1,111,000, or 7.2%, to
$14,326,000 in 1995 from $15,437,000 in 1994, which was an increase of
$1,924,000, or 14.2%, over the 1993 expenses. The decrease in the expenses for
1995 was primarily attributable to the net reduction in the average number of
employees as discussed above. For 1995, the net cost of providing medical, life,
and disability coverages for employees declined $488,000, or 11.9%; expenses
associated with the defined benefit pension plans decreased $472,000, or 13.8%;
and payroll taxes decreased $177,000, or 4.3%.
The increase in benefits expense for 1994 compared to 1993 was primarily
attributable to increased net costs of providing group medical, life, and
disability insurance coverages for employees, increased expenses associated with
the defined benefit pension plans and other postretirement benefit plans, and an
increase in the costs of UCB's employee savings plan 401(k) plan. The net costs
of providing group medical, life, and disability coverages for employees
increased $749,000 compared to 1993 as the result of the increased number of
employees covered as well as the general inflationary trend for medical
services. Pension and other postretirement benefit expenses increased $320,000,
or 7.7%, primarily due to an increase in the number of covered employees as a
result of the acquisitions of Home Federal and the general insurance agency in
Charlotte as well as increased imputed interest expense on projected benefit
obligations which continued to grow in concert with the increasing average
length of service and age of the workforce. The increase in contributions to the
employee savings plan amounted to $358,000, or 17.3%, and was primarily the
result of the increased number of personnel previously discussed.
Occupancy expense decreased $211,000, or 2.3%, during 1995 compared to an
increase of $266,000, or 2.9%, during 1994. The decreases in cost recorded
during 1995 were primarily the result of the elimination of branch locations as
a part of implementing the restructuring plan referred to above. During 1994,
facilities depreciation expense increased $195,000, or
15
11.6%, while expenses for premises maintenance contracts increased $130,000, or
12.8%. These cost increases were primarily due to the addition of the eight
branches in the Home Federal acquisition, the addition of four facilities in the
insurance agencies mergers, and the opening of two additional branch offices.
Equipment expense for 1995 was $6,231,000, an increase of $194,000, or
3.2%, over the $6,037,000 incurred during 1994, which represented an increase of
$581,000, or 10.6%, over the 1993 expense of $5,456,000. Furniture and equipment
depreciation expense for 1995 increased $84,000, or 2.8%, and expenses for the
purchase of noncapitalized furniture increased $125,000, or 39.7%, during 1995
primarily due to purchases related to the previously mentioned acquisition of
branch offices from another financial institution and the installation of
digital imaging equipment in certain support areas. During 1994, furniture and
equipment depreciation expense increased $405,000 (15.9%), and maintenance
contracts on furniture and equipment increased $259,000 (13.9%). These increases
were the result of upgrades made in acquired facilities, additional maintenance
contracts on upgraded equipment in support areas, new mainframe computer
equipment, and implementation of a branch automation project.
Deposit insurance premiums paid to the Federal Deposit Insurance
Corporation (FDIC) decreased $2,545,000, or 41.5%, to $3,593,000 from $6,138,000
in 1994 which was a $475,000, or 8.4%, increase over the 1993 expense of
$5,663,000. The decrease in the 1995 expense resulted from the reduction in the
assessment rate from $.23 to $.04 per $100 of deposits that was adopted by the
FDIC effective June 1, 1995. The premium increase in 1994 reflects growth in
deposits over the prior year as the assessment rate remained constant at $.23
per $100 in deposits for both years.
Data processing fees and software expense increased $1,143,000, or 27.9%,
to $5,245,000 in 1995 from $4,102,000 in 1994. The 1994 expense increased
$323,000, or 8.5%, over the 1993 expense of $3,779,000. The increase incurred
during 1995 was primarily due to higher software expense resulting from the
replacement of mainframe applications software and purchase of software designed
to automate certain labor-intensive tasks as part of the previously discussed
restructuring plan. The increased expense incurred in 1994 was primarily
attributable to $325,000 in costs incurred to cancel a data processing contract
as a part of the Bank of Iredell merger and a $401,000 (43.9%) increase in the
cost of processing credit card transactions due to a change in third-party
processor pricing and increased transaction volume. The aforementioned increases
in expense were partially offset by a decrease of $548,000 in noncapitalized
software. This decrease was the result of costs incurred during 1993 related to
the implementation of a branch automation project.
Marketing and business development expense increased $582,000, or 15.2%,
during 1995 and $38,000, or 1.0%, during 1994. The 1995 increase was primarily
due to increased advertising related to campaigns designed to increase
commercial and consumer loan volume and deposit balances.
Outside services expense totaled $3,514,000 in 1995, $3,240,000 in 1994,
and $2,791,000 in 1993. The 1995 increase of $274,000 (8.5%) over 1994 was
primarily due to merger expense related to the insurance agency acquired during
the year and professional fees incurred in connection with the pending mergers
with Seaboard Savings Bank, Inc. and Triad Bank, both of which are scheduled to
close during the first quarter of 1996. In addition, professional services
expense included approximately $114,000 in costs associated with the replacement
of UCB's main applications software systems. The 1994 increase of $449,000
(16.1%) over 1993 was primarily due to expenses related to the Bank of Iredell
merger.
Amortization of capitalized mortgage loan servicing rights decreased
$749,000, or 52.0%, during 1995 to $691,000 from $1,440,000 in 1994, which was a
decrease of $727,000, or 33.5%, from the 1993 expense. The decrease in the 1995
expense from the prior year was due to large packages of servicing rights
purchased in prior years becoming fully amortized at the end of 1994. The high
level of expense for 1993 compared to the level in 1994 resulted from
adjustments made in 1993 to the amortization periods utilized in order to
reflect changes in market conditions. As previously discussed, UCB adopted the
provisions of FAS 122, "Accounting for Mortgage Servicing Rights, an amendment
of FASB Statement No. 65," effective April 1, 1995. As a result of adopting FAS
122, the estimated fair values of the rights to service mortgage loans for
others have been capitalized on loans originated by UCB and sold in the
secondary market. At December 31, 1995, unamortized originated mortgage
servicing rights totaling $448,000, net of a $104,000 valuation reserve, were
carried as an intangible asset on UCB's books. Amortization of originated
mortgage servicing rights totaled $94,000 during 1995 and is included in the
capitalized mortgage loan servicing rights amortization discussed above for
comparison purposes. At December 31, 1995, unamortized purchased mortgage
servicing rights totaling $3,235,000 were carried as an intangible asset on
UCB's books compared to $2,555,000 at December 31, 1994, and $3,294,000 at
December 31, 1993. The aggregate unpaid principal balances of the mortgage loans
on which servicing rights were purchased or capitalized amounted to
$501,936,000, at December 31, 1995, $408,187,000 at December 31, 1994, and
$484,267,000 at December 31, 1993.
16
Noncredit losses increased $548,000 to $1,857,000 in 1995 from $1,309,000
in 1994. The 1994 expense represented a decrease of $158,000 from the 1993 total
of $1,467,000. The increase in the 1995 expense was primarily due to charges
incurred to adjust the carrying value of foreclosed property to the expected net
realizable value and losses arising from matters other than the collection of
loans. The decline in the 1994 expense relative to the 1993 level was primarily
attributable to the decline in net losses and other expenses related to
foreclosed assets. In 1995, the net losses and other expenses related to
foreclosed assets amounted to $665,000 compared to $453,000 in 1994 and $750,000
in 1993.
Amortization of goodwill and other intangible assets increased to
$2,197,000 in 1995 from $950,000 in 1994 and $438,000 in 1993. The increase in
1995 expense resulted primarily from an increase of $1,365,000 in the
amortization of deposit base premiums, principally due to the previously
discussed purchase of 12 branches during the year. This was partially offset by
a decrease of $135,000 in goodwill amortization due to the sale of two branch
operations as part of implementing the previously mentioned restructuring plan.
The increase in 1994 expense compared to 1993 resulted from an increase in
goodwill amortization due to the acquisition of Home Federal in November 1993.
The increases in the remaining categories of noninterest expenses incurred
during 1995 and 1994 were primarily related to the continued expansion of
operations. Table 5 represents a breakdown of noninterest expenses, other than
restructuring charges, for the three years ended December 31, 1995.
RESTRUCTURING CHARGES
In October 1994, the Boards of Directors of UCB and its bank subsidiaries,
United Carolina Bank and United Carolina Bank of South Carolina, approved a plan
to restructure the operations of the aforementioned bank subsidiaries to
streamline procedures in a manner to enhance the quality of financial services
provided to customers and increase operating efficiency. The major elements of
the plan included staffing level changes at all branches to better match
customer arrival patterns, a reduction in full-time staff positions as a result
of the centralization of certain functions and automation of many labor-
intensive tasks, and the consolidation or divestiture of certain branch offices.
Restructuring charges to implement the reorganization plan totaled
$11,906,000 in 1994. The plan included the elimination of approximately 235 jobs
that were classified as regular full-time positions through either a special
early retirement program or severance arrangements. Positions throughout the
company were eliminated, with the largest percentage of jobs being eliminated or
positions reduced in the branch operations. All employees 50 years of age or
older with a combined age plus years of service totaling 70 or more were offered
special early retirement benefits. The costs associated with increases in the
actuarially determined pension and postretirement medical expenses totaled
$9,427,000. Severance arrangements were awarded to employees whose positions
were scheduled to be eliminated and who either were not eligible for the special
early retirement benefits or who chose not to accept the special early
retirement offer. Expense related to the severance arrangements totaled
$346,000.
The restructuring plan included discontinuing the operation of 15 branch
offices through the consolidation of operations into other UCB offices or the
divestiture of the branch locations. The estimated net cost of eliminating these
offices, including transferring the deposits, was $801,000. Included in this
cost was $1,149,000 of unamortized goodwill related to branch offices in
communities where UCB did not have nearby locations, and, therefore, it was
likely that a substantial amount of the customer accounts associated with these
branch offices would move to other financial institutions.
Professional fees associated with the restructuring plan totaled
$1,280,000. These included fees for the services of a consulting firm retained
to assist management in analyzing operations and developing the reorganization
plan and fees relating to the design and implementation of the special
retirement benefits and severance awards. A summary of the restructuring charges
is presented in Table 6.
17
TABLE 6.
SUMMARY OF RESTRUCTURING CHARGES
Total Charged Accrued
Against 1994 Liability at Amounts
Operating December 31, Paid
Results 1994 During 1995
(In thousands)
Retirement benefits.............................................. $ 8,297 $ 177 $ 177
Postretirement medical expense................................... 1,130 -- --
Severance benefits............................................... 346 315 315
Total personnel costs.......................................... 9,773 492 492
Professional fees relating to restructuring plan................. 1,280 20 20
Loss on divestiture or closing of branch operations.............. 801 801 663
Other restructuring costs........................................ 52 -- --
Total restructuring charges.................................... 11,906 1,313 1,175
Applicable income tax benefit.................................... (4,307) (66) (11)
Restructuring charges, net of applicable income tax benefit.... $ 7,599 $1,247 $ 1,164
Reduction in earnings per share from restructuring charges, net
of applicable income tax benefit............................ $ .34
Accrued
Liability at
December 31,
1995
Retirement benefits.............................................. $--
Postretirement medical expense................................... --
Severance benefits............................................... --
Total personnel costs.......................................... --
Professional fees relating to restructuring plan................. --
Loss on divestiture or closing of branch operations.............. 138
Other restructuring costs........................................ --
Total restructuring charges.................................... 138
Applicable income tax benefit.................................... (55)
Restructuring charges, net of applicable income tax benefit.... $ 83
Reduction in earnings per share from restructuring charges, net
of applicable income tax benefit............................
INCOME TAXES
UCB's effective income tax rate was 36.3% in 1995, 36.4% in 1994, and 32.7%
in 1993. The increase in the effective tax rate during 1995 and 1994 compared to
1993 was the result of the decline in the percentage of income derived from tax-
exempt securities and loans as well as significant nondeductible expenses
related to the merger activity and the restructuring charges previously
discussed.
The effective income tax rate on income before taxes was lower than the
combined statutory federal and state rates primarily because interest earned on
investments in debt instruments of states, counties, and municipalities is
exempt from federal income tax and may be exempt from state income tax.
Substantially all income earned on securities of the United States government or
its agencies is exempt from state income taxes.
CUMULATIVE EFFECTS OF CHANGES IN ACCOUNTING METHODS
Effective January 1, 1994, UCB adopted Financial Accounting Standards No.
112 (FAS 112), "Employers' Accounting for Postemployment Benefits," which
requires the accrual of expenses for the estimated cost of benefits provided for
employees after employment but before retirement. The adoption of FAS 112
required immediate recognition of the actuarially determined liability for
postemployment benefits which amounted to $529,000 at December 31, 1993. The
mandatory adoption of FAS 112 resulted in a charge against net income of
$316,000, net of deferred income taxes, which was recorded as a cumulative
effect of a change in accounting method during the first quarter of 1994.
Effective January 1, 1993, UCB adopted Financial Accounting Standards No.
109 (FAS 109), "Accounting for Income Taxes," which requires a balance sheet
approach to financial accounting for income taxes. The mandatory adoption of FAS
109 resulted in an increase in net income of $855,000, which was recorded as a
cumulative effect of a change in accounting method. The adoption of FAS 109
should have no significant impact on the effective tax rate applicable to future
operating results except as may result from future changes, if enacted, in the
tax code.
SECURITIES
Average aggregate securities available for sale and investment securities
totaled $686,838,000 in 1995, an increase of $80,950,000, or 13.4%, from
$605,888,000 in 1994 which was $661,000, or .1%, greater than the average for
1993. The growth in average securities during 1995 was primarily the result of a
higher level of growth in deposits relative to the growth in loans. A portion of
the relative disparity in growth rates between deposits and loans was due to the
previously discussed deposit balances related to the branches purchased effected
in May 1995. The absence of growth experienced during 1994 was primarily the
result of loan growth of a magnitude to absorb increases in funds provided.
18
During 1995, UCB was able to replace maturing securities with higher
yielding securities, thereby raising the average tax-equivalent yield on
securities available for sale and investment securities to 6.02% from 5.32% in
1994. The declining interest rate environment that existed throughout 1993 and
continued through the first quarter of 1994 along with the relatively
short-weighted average remaining maturity of UCB's securities portfolios caused
the average tax-equivalent yield on investment securities and securities
available for sale to decline to 5.32% in 1994 from 5.50% in 1993.
TABLE 7.
SECURITIES PORTFOLIOS MATURITY SCHEDULE
Scheduled Maturities at December 31, 1995
After 5 Years Total
After 1 Year Through 10
1 Year or Less Through 5 Years Years After 10 Years
Amount Yield Amount Yield Amount Yield Amount Yield Amount
(Dollars in thousands)
Securities available for sale at
approximate market value:
United States government
securities......................... $146,363 5.91 % $440,388 5.98 % $ -- -- % $ -- -- % $586,751
Obligations of United States
government agencies and
corporations....................... 132,162 5.69 1,571 5.91 288 5.88 -- -- 134,021
Obligations of states and political
subdivisions(1).................... -- -- -- -- 1,002 6.52 100 7.42 1,102
Mortgage-backed securities(2)........ -- -- 26,865 5.72 -- -- -- -- 26,865
Federal Home Loan Bank stock......... -- -- -- -- -- -- 10,144 7.25 10,144
Other securities..................... 47 10.08 5 5.50 -- -- 562 -- 614
Total securities available for
sale............................. $278,572 5.80 % $468,829 5.96 % $1,290 6.37 % $10,806 6.87 % $759,497
Investment securities at amortized
cost:
Obligations of states and political
subdivisions(3).................... $ 12,356 9.81 % $ 22,842 8.99 % $19,982 8.22 % $4,247 9.75 % $ 59,427
Total investment securities........ $ 12,356 9.81 % $ 22,842 8.99 % $19,982 8.22 % $4,247 9.75 % $ 59,427
Average
Maturity
Yield (Years)
Securities available for sale at
approximate market value:
United States government
securities......................... 5.96 % 1.50
Obligations of United States
government agencies and
corporations....................... 5.69 .17
Obligations of states and political
subdivisions(1).................... 6.60 6.67
Mortgage-backed securities(2)........ 5.72 2.92
Federal Home Loan Bank stock......... 7.25 --
Other securities..................... -- --
Total securities available for
sale............................. 5.92 % 1.33
Investment securities at amortized
cost:
Obligations of states and political
subdivisions(3).................... 8.96 % 4.50
Total investment securities........ 8.96 % 4.50
(1) IMPACT ON YIELDS FROM TAX-EQUIVALENT ADJUSTMENTS (BASED ON A 35% TAX RATE):
AFTER FIVE YEARS THROUGH TEN YEARS, 2.28%; AFTER TEN YEARS, 2.60%; TOTAL,
2.31%.
(2) AT DECEMBER 31, 1995, UCB OWNED COLLATERALIZED MORTGAGE OBLIGATIONS ISSUED
BY THE FEDERAL HOME LOAN MORTGAGE CORPORATION (FHLMC) WHICH HAD AN AMORTIZED
COST OF $11,721,000 AND A MARKET VALUE OF $11,593,000. UCB ALSO OWNED
COLLATERALIZED MORTGAGE OBLIGATIONS ISSUED BY THE FEDERAL NATIONAL MORTGAGE
ASSOCIATION (FNMA). THESE SECURITIES HAD AN AMORTIZED COST OF $13,045,000
AND A MARKET VALUE OF $12,874,000. UCB ALSO OWNED COLLATERALIZED MORTGAGE
OBLIGATIONS ISSUED BY A PRIVATE ISSUER AND GUARANTEED BY THE GOVERNMENT
NATIONAL MORTGAGE ASSOCIATION (GNMA). THESE SECURITIES HAD AN AMORTIZED COST
OF $405,000 AND A MARKET VALUE OF $436,000. OTHER MORTGAGE-BACKED
PASS-THROUGH SECURITIES ISSUED BY VARIOUS UNITED STATES GOVERNMENT AGENCIES
AND CORPORATIONS HAVING A BOOK VALUE OF $1,995,000 AND A MARKET VALUE OF
$1,962,000 WERE ALSO HELD AT DECEMBER 31, 1995. THE MORTGAGE-BACKED
SECURITIES ARE SHOWN AT THEIR WEIGHTED AVERAGE EXPECTED LIFE OBTAINED FROM
AN OUTSIDE EVALUATION OF THE AVERAGE REMAINING LIFE OF EACH SECURITY BASED
ON HISTORIC PREPAYMENT SPEEDS OF THE UNDERLYING MORTGAGES AT DECEMBER 31,
1995.
(3) IMPACT ON YIELDS FROM TAX-EQUIVALENT ADJUSTMENTS (BASED ON A 35% TAX RATE):
ONE YEAR OR LESS, 3.43%; AFTER ONE YEAR THROUGH FIVE YEARS, 3.15%; AFTER
FIVE YEARS THROUGH TEN YEARS, 2.88%; AFTER TEN YEARS, 3.41%; TOTAL, 3.14%.
At December 31, 1995, net unrealized gains of $4,993,000 were included in
the carrying value of securities classified by UCB as available for sale
compared to net unrealized losses of $7,000,000 at December 31, 1994. The net
unrealized losses in the available for sale portfolio at December 31, 1994, were
considered by management to be of a temporary nature and caused by fluctuations
in market interest rates, not by concerns about the ability of the issuers to
meet their obligations. Net unrealized gains, net of applicable deferred income
tax benefits, of $2,898,000 were reported as a separate component of
stockholders' equity at December 31, 1995, compared to net unrealized losses,
net of deferred income taxes, of $5,293,000 at December 31, 1994, and net
unrealized gains, net of deferred income taxes, of $845,000 at December 31,
1993.
UCB has invested in mortgage-backed securities with approximate market
values totaling $26,865,000 with expected average lives of two to five years.
These investments were classified as available for sale at December 31, 1995,
and were comprised of $24,903,000 in collateralized mortgage obligations issued
by agencies of the United States government or secured by mortgage-backed
securities guaranteed by United States government agencies and corporations. Of
these, $12,874,000 were issued by the Federal National Mortgage Association,
$11,593,000 were issued by the Federal Home Loan Mortgage Corporation, and
$436,000 were issued by various private issuers and secured by mortgage-backed
securities guaranteed by the Government National Mortgage Association. Other
mortgage-backed pass-through securities issued by various
19
United States government agencies and corporations totaling $1,962,000 were also
held at December 31, 1995. None of these securities were classified as high-risk
pursuant to existing bank regulatory guidelines.
The market value of the investment securities portfolio exceeded the book
value by $1,912,000 at December 31, 1995. The book value of the investment
securities portfolio exceeded the market value by $5,877,000 at December 31,
1994. The net unrealized losses in the investment securities portfolio at
December 31, 1994, were considered by management to be of a temporary nature and
caused by fluctuations in market interest rates, not by concerns about the
ability of the issuers to meet their obligations. The market value of investment
securities exceeded the book value by $7,070,000 at December 31, 1993.
UCB's investments in state and municipal obligations totaled $60,529,000 at
December 31, 1995. Securities issued by the State of North Carolina and
municipalities located within North Carolina amounted to $29,071,000 and
represented 48.0% of total investments in state and municipal obligations; and
securities issued by the State of South Carolina and municipalities located
within South Carolina amounted to $15,225,000, or 25.2%, of the total.
At December 31, 1995, $26,341,000, or 43.5%, of UCB's municipal bond
holdings was composed of securities rated AAA by Moody's Investor Services (or
an equivalent rating by a comparable rating service); $4,440,000, or 7.3%, was
rated AA; $25,246,000, or 41.7%, was rated A; and $2,214,000, or 3.7%, was rated
BAA. UCB also owned municipal bonds with a book value of $166,000 at December
31, 1995, that had ratings of less than investment grade and securities with a
book value of $2,120,000 at December 31, 1995, which had not been rated by a
rating agency. Included in the unrated securities were bonds with a book value
of $1,381,000 that are collateralized by United States government securities.
The majority of the balance of unrated municipal bonds as well as the securities
that had ratings of less than investment grade were bonds issued by
municipalities located within UCB's market areas. UCB monitors the operation of
these municipalities, and it is management's opinion that no more than a normal
risk of loss exists on these securities.
During the period of November 15, 1995, through December 31, 1995, the
Financial Accounting Standards Board permitted a one-time opportunity for
institutions to reassess the designations of all securities and to redesignate
securities if deemed appropriate. On December 29, 1995, UCB reclassified
securities with a market value of $202,073,000 to securities available for sale
from securities held to maturity. This included $198,590,000 in United States
government securities, $1,859,000 in United States government agencies
securities, $1,102,000 in state and municipal securities, and $522,000 in other
securities. The United States government and government agencies securities were
reclassified since their average remaining maturity was approximately two years
and more closely matched the maturity of existing available for sale United
States government and government agencies securities held by UCB. The state and
municipal obligations were transferred to allow UCB the flexibility to exercise
put options contained in the original indenture agreements should market
conditions dictate such actions.
Other than the mortgage-backed securities previously discussed, UCB owned
no investment securities at December 31, 1995, which were considered derivative
investments by regulatory authorities.
A summary of UCB's securities portfolios as of the end of 1995 is presented
in Table 7 and in Note 2 of the notes to the consolidated financial statements.
LOANS
Average loans amounted to $2,574,086,000 in 1995, an increase of
$254,777,000, or 11.0%, over 1994. This compares to a growth in average loans
during 1994 of $300,222,000, or 14.9%, over 1993. At December 31, 1995, loans,
net of unearned income, totaled $2,659,943,000, which was $241,785,000, or
10.0%, higher than loans outstanding at December 31, 1994. At year-end 1994,
loans totaled $2,418,158,000, which was an increase of $191,733,000, or 8.6%,
over December 31, 1993. The loan growth experienced during the past two years
has resulted from increases in consumer loans other than those secured by real
estate, loans secured by 1-4 family residences, and loans for business and
investment purposes, much of which is secured by real estate.
20
TABLE 8.
SUMMARY OF LOANS PORTFOLIO
December 31,
1995 1994 1993 1992
% OF % of % of % of
TOTAL Total Total Total
AMOUNT LOANS Amount Loans Amount Loans Amount Loans
(Dollars in thousands)
Breakdown of loans at
year-end:
Loans secured by real
estate:
Construction and land
acquisition and
development............. $ 210,658 7.92 % $ 175,975 7.28 % $ 158,538 7.12 % $ 164,394 8.66%
Secured by nonfarm,
nonresidential
properties.............. 580,047 21.80 533,521 22.05 521,286 23.40 465,106 24.49
Secured by farmland....... 88,980 3.34 82,542 3.41 68,608 3.08 62,741 3.30
Secured by multifamily
residences.............. 60,878 2.29 62,183 2.57 51,818 2.33 33,377 1.76
Total loans secured by real
estate, excluding loans
secured by 1-4 family
residences(1)............. 940,563 35.35 854,221 35.31 800,250 35.93 725,618 38.21
Revolving credit secured
by 1-4 family
residences.............. 130,457 4.90 116,672 4.82 111,878 5.02 113,654 5.99
Other loans secured by 1-4
family residences....... 565,633 21.26 535,139 22.12 497,148 22.32 373,763 19.68
Total loans secured by 1-4
family residences......... 696,090 26.16 651,811 26.94 609,026 27.34 487,417 25.67
Total loans secured by
real estate............... 1,636,653 61.51 1,506,032 62.25 1,409,276 63.27 1,213,035 63.88
Commercial, financial, and
agricultural loans,
excluding loans secured by
real estate............... 267,302 10.05 237,656 9.82 239,908 10.77 223,568 11.77
Loans to individuals for
household, family, and
other personal
expenditures, excluding
loans secured by real
estate.................... 673,123 25.30 607,606 25.12 510,647 22.92 409,207 21.55
All other loans............. 83,471 3.14 67,852 2.81 67,761 3.04 53,163 2.80
Total loans................. 2,660,549 100.00 % 2,419,146 100.00 % 2,227,592 100.00 % 1,898,973 100.00%
Unearned income........... (606) (988) (1,167) (1,067)
Total loans, net of unearned
income.................... $2,659,943 $2,418,158 $2,226,425 $1,897,906
1991
% of
Total
Amount Loans
Breakdown of loans at
year-end:
Loans secured by real
estate:
Construction and land
acquisition and
development............. $ 156,948 8.63 %
Secured by nonfarm,
nonresidential
properties.............. 433,191 23.80
Secured by farmland....... 41,421 2.28
Secured by multifamily
residences.............. 28,132 1.55
Total loans secured by real
estate, excluding loans
secured by 1-4 family
residences(1)............. 659,692 36.26
Revolving credit secured
by 1-4 family
residences.............. 106,046 5.83
Other loans secured by 1-4
family residences....... 347,702 19.11
Total loans secured by 1-4
family residences......... 453,748 24.94
Total loans secured by
real estate............... 1,113,440 61.20
Commercial, financial, and
agricultural loans,
excluding loans secured by
real estate............... 263,349 14.48
Loans to individuals for
household, family, and
other personal
expenditures, excluding
loans secured by real
estate.................... 388,211 21.34
All other loans............. 54,270 2.98
Total loans................. 1,819,270 100.00 %
Unearned income........... (423)
Total loans, net of unearned
income.................... $1,818,847
Maturity schedule of selected categories of loans at December 31, 1995(2):
Construction Secured by
and Land Nonfarm, Secured by Commercial,
Acquisition and Nonresidential Secured by Multifamily Financial, and
Development Properties Farmland Residences Agricultural
(In thousands)
Due on demand............................ $ 52,360 $ 20,454 $ 205 $ 669 $ 15,064
Due in 1 year or less.................... 81,950 82,944 10,832 7,151 98,984
Due after 1 year through 5 years:
Floating interest rates................ 26,704 155,176 17,446 15,409 55,752
Fixed interest rates................... 32,490 177,294 13,663 16,821 66,863
Due after 5 years:
Floating interest rates................ 4,193 77,054 45,300 13,701 8,362
Fixed interest rates................... 12,961 67,125 1,534 7,127 22,277
Total................................ $ 210,658 $580,047 $ 88,980 $60,878 $267,302
Total
Due on demand............................ $ 88,752
Due in 1 year or less.................... 281,861
Due after 1 year through 5 years:
Floating interest rates................ 270,487
Fixed interest rates................... 307,131
Due after 5 years:
Floating interest rates................ 148,610
Fixed interest rates................... 111,024
Total................................ $ 1,207,865
(1) INCLUDES $16,084,000 AT DECEMBER 31, 1995; $4,821,000 AT DECEMBER 31, 1994;
$25,876,000 AT DECEMBER 31, 1993; $21,118,000 AT DECEMBER 31, 1992; AND
$15,891,000 AT DECEMBER 31, 1991, IN PERMANENT MORTGAGES ORIGINATED FOR SALE
IN THE SECONDARY MARKET WHICH ARE STATED AT THE LOWER OF AGGREGATE COST OR
MARKET VALUE.
(2) UCB'S EXPERIENCE HAS BEEN THAT CERTAIN LOANS WILL BE RENEWED, RESCHEDULED,
OR REPAID PRIOR TO THE STATED MATURITY. ADDITIONALLY, A SIGNIFICANT NUMBER
OF LOANS WILL BE RESCHEDULED AT MATURITY PURSUANT TO THE ORIGINAL TERMS OF
THE CREDIT AGREEMENTS, PROVIDED THAT APPLICABLE TERMS AND CONDITIONS HAVE
BEEN MET. ACCORDINGLY, THE ABOVE MATURITY SCHEDULE SHOULD NOT BE REGARDED AS
A FORECAST OF FUTURE CASH COLLECTIONS.
21
A large portion of UCB's loan portfolio has historically been composed of
loans secured by various types of real estate. At December 31, 1995,
$1,636,653,000, or 61.5%, of UCB's loans was secured by liens on real property.
Included in this total are $696,090,000, or 26.2% of total loans, in credit
secured by liens on 1-4 family residential properties; and $940,563,000, or
35.3% of total loans, in credit secured by liens on other types of real estate.
Approximately $458,031,000 of loans secured by real estate other than 1-4 family
residences depended on cash flow from sales of properties, proceeds from
permanent loans, or lease or rental payments generated by the collateral as the
primary source of repayment. The remaining approximately $482,532,000 in loans
secured by real estate other than 1-4 family residences depended on sources of
repayment by the borrower other than cash flow from the sale, refinancing, or
operation of the collateral, with the collateral serving as a contingent source
of repayment. These loans are typically extensions of credit to businesses
secured by liens on the business facilities or other real property owned by the
borrower. A breakdown of loans secured by real estate other than 1-4 family
residences is shown in Table 9.
A summary of the loan portfolio as of December 31, 1995, and at the end of
the preceding four years is shown in Table 8.
TABLE 9.
SUMMARY OF LOANS SECURED BY REAL ESTATE, EXCLUDING LOANS SECURED BY 1- 4 FAMILY
RESIDENCES
December 31, 1995
Owner-Occupied Nonowner-Occupied Total
% of % of % of
Total Total Total
Amount Loans Amount Loans Amount Loans
(Dollars in thousands)
Loans secured by real estate, excluding loans secured by 1-4
family residences:
Construction and land acquisition
and development(1)..................................... $ 55,085 2.07% $155,573 5.85% $210,658 7.92%
Secured by nonfarm, nonresidential properties:
Manufacturing, warehouse, and other industrial
properties........................................... 156,072 5.87 120,049 4.51 276,121 10.38
Shopping centers, restaurants, and other retail
properties........................................... 34,461 1.29 29,817 1.13 64,278 2.42
Office buildings....................................... 21,425 .81 24,595 .92 46,020 1.73
Hotel/motel............................................ -- -- 30,356 1.14 30,356 1.14
All other.............................................. 126,509 4.75 36,763 1.38 163,272 6.13
Total loans secured by nonfarm, nonresidential
properties........................................ 338,467 12.72 241,580 9.08 580,047 21.80
Secured by farmland....................................... 88,980 3.34 -- -- 88,980 3.34
Secured by multifamily residences......................... -- -- 60,878 2.29 60,878 2.29
Total loans secured by real estate, excluding loans
secured by 1-4 family residences.................. $482,532 18.13% $458,031 17.22% $940,563 35.35%
(1) CONSTRUCTION AND LAND ACQUISITION AND DEVELOPMENT LOANS SEGREGATED BETWEEN
LOANS TO "PERMANENT" OWNERS OF PROPERTY (OWNER-OCCUPIED) AND LOANS TO REAL
ESTATE DEVELOPERS AND/OR BUILDERS (NONOWNER-OCCUPIED).
NONPERFORMING AND PROBLEM ASSETS
Nonperforming assets, which consists of foreclosed assets, nonaccrual
loans, and restructured loans, totaled $9,913,000 in the aggregate at December
31, 1995, $19,319,000 at December 31, 1994, and $27,413,000 at December 31,
1993. Nonperforming assets as a percentage of loans and foreclosed assets at
year-end amounted to .37% in 1995, .80% in 1994, and 1.23% in 1993. Total
problem assets (nonperforming assets and loans 90 days or more past due)
amounted to $15,155,000 at December 31, 1995, $23,953,000 at December 31, 1994,
and $34,279,000 at December 31, 1993. Total problem assets as a percentage of
loans and foreclosed assets at year-end was .57% in 1995, .99% in 1994, and
1.54% in 1993. A summary of nonperforming and problem assets outstanding at the
end of each of the past five years is shown in Table 10.
22
At December 31, 1995, $7,775,000, or 78.4%, of UCB's nonperforming assets
was comprised of loans secured by real estate or the estimated fair value, less
estimated disposal costs, of collateral taken in full or partial settlement of
loans secured by real estate. A breakdown of nonperforming assets by major
classification is shown in Table 11.
Interest income of $34,000 was recorded in connection with loans classified
as nonaccrual at December 31, 1995. Had these loans performed in accordance with
their contractual terms, $487,000 of interest income would have been recorded
during the year. Accrual of interest income on loans is suspended when, in the
judgment of UCB's management, doubts exist as to the collectibility of
additional interest within a reasonable period of time.
TABLE 10.
SUMMARY OF NONPERFORMING AND PROBLEM ASSETS
December 31,
1995 1994 1993 1992 1991
(Dollars in thousands)
Foreclosed assets...................................................... $ 5,047 $ 5,296 $ 6,591 $12,075 $15,126
Nonaccrual loans....................................................... 4,866 5,200 11,789 18,154 19,778
Total foreclosed assets and nonaccrual loans......................... 9,913 10,496 18,380 30,229 34,904
Restructured loans(1).................................................. -- 8,823 9,033 9,232 9,423
Total nonperforming assets........................................... 9,913 19,319 27,413 39,461 44,327
Loans 90 days or more past due, excluding nonaccrual loans............. 5,242 4,634 6,866 6,170 9,504
Total problem assets................................................. $15,155 $23,953 $34,279 $45,631 $53,831
As a percent of loans and foreclosed assets at year-end:
Foreclosed assets and nonaccrual loans............................... .37% .43% .82% 1.58% 1.90%
Total nonperforming assets........................................... .37 .80 1.23 2.07 2.42
Total problem assets................................................. .57% .99% 1.54% 2.39% 2.94%
(1) REPRESENTS A REDUCED RATE LOAN PERFORMING IN ACCORDANCE WITH RESTRUCTURED
TERMS WHICH WAS REPAID DURING 1995.
Effective January 1, 1995, UCB adopted Financial Accounting Standards No.
114 (FAS 114), "Accounting by Creditors for Impairment of a Loan" and Financial
Accounting Standards No. 118 (FAS 118), "Accounting by Creditors for Impairment
of a Loan -- Income Recognition and Disclosure." These statements amended FAS 5,
"Accounting for Contingencies," to clarify that a creditor should evaluate the
collectibility of both contractual interest and principal of a receivable when
assessing the need for a loss accrual; and FAS 15, "Accounting by Debtors and
Creditors for Troubled Debt Restructurings," to require a creditor to account
for a troubled debt restructuring involving a modification of terms at fair
value as of the date of the restructuring. At December 31, 1995, the recorded
investment in loans that are considered impaired under FAS 114 was $4,866,000,
all of which was on a nonaccrual basis. Included in this amount was $1,651,000
of impaired loans for which $300,000 of the reserve for credit losses was
assigned. The average recorded investment during 1995 in loans classified as
impaired at December 31, 1995, was approximately $6,000,000. During 1995, UCB
recognized interest income on these impaired loans of $34,000 using the cash
basis of accounting. Prior to January 1, 1995, UCB measured loan impairment in a
manner generally consistent with the methods prescribed in FAS 114, and, as a
result, no additions to the reserve for credit losses were required due to the
adoption of this accounting standard.
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 $15,750,000 at December 31, 1995, 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.
23
TABLE 11.
BREAKDOWN OF NONPERFORMING ASSETS
December 31, 1995
Total
Nonperforming
Foreclosed Nonaccrual Assets Percent
Assets(1) Loans Amount of Total
(Dollars in thousands)
Loans secured by real estate:
Construction and land acquisition and development................................ $2,185 $3,696 $5,881 59.33%
Secured by nonfarm, nonresidential properties:
Manufacturing, warehouse, and other industrial properties..................... -- 200 200 2.02
Shopping centers, restaurants, and other retail properties.................... 442 25 467 4.71
All other..................................................................... 640 104 744 7.51
Total secured by nonfarm, nonresidential properties......................... 1,082 329 1,411 14.24
Secured by farmland.............................................................. -- 36 36 .35
Total loans secured by real estate, excluding loans secured by 1-4 family
residences.................................................................... 3,267 4,061 7,328 73.92
Loans secured by 1-4 family residences........................................ 392 55 447 4.51
Total loans secured by real estate............................................... 3,659 4,116 7,775 78.43
All other loans.................................................................. 1,388 750 2,138 21.57
Total....................................................................... $5,047 $4,866 $9,913 100.00%
(1) REPRESENTS CARRYING VALUE OF COLLATERAL TAKEN IN SETTLEMENT, OR PARTIAL
SETTLEMENT, OF LOANS IN INDICATED CATEGORY.
PROVISION AND RESERVE FOR CREDIT LOSSES
The provision for credit losses amounted to $6,800,000 in 1995, an increase
of $3,429,000 over the $3,371,000 provision in 1994, which was a decrease of
$1,622,000 from the $4,993,000 recorded in 1993. Credit losses, net of
recoveries, amounted to $4,964,000 in 1995 compared to $3,788,000 in 1994 and
$4,027,000 in 1993. Net credit losses amounted to .19% of average loans
outstanding during 1995, .16% in 1994, and .20% in 1993.
The reserve for credit losses amounted to $40,517,000 at December 31, 1995,
an increase of $1,836,000, or 4.7%, from the level at December 31, 1994. The
reserve for credit losses totaled $38,681,000 at December 31, 1994, which was a
decrease of $417,000, or 1.1%, from the year-end 1993 reserve. The reserve for
credit losses was equal to 1.52% of loans outstanding at December 31, 1995,
compared to 1.60% at year-end 1994 and 1.76% at year-end 1993.
24
TABLE 12.
SUMMARY OF CREDIT LOSS EXPERIENCE AND RESERVE FOR CREDIT LOSSES
Years Ended December 31,
1995 1994 1993 1992 1991
(Dollars in thousands)
Reserve for credit losses at beginning of year........................ $38,681 $39,098 $36,780 $31,399 $ 24,746
Loans charged off:
Loans secured by real estate:
Construction and land acquisition and development................ (803) (577) (1,667) (2,309) (1,290)
Other loans secured by real estate, excluding 1-4 family
residences..................................................... (831) (750) (1,828) (1,596) (3,686)
Secured by 1-4 family residences................................. (309) (516) (660) (936) (457)
Commercial, financial, and agricultural loans....................... (528) (889) (717) (1,179) (2,081)
Loans to individuals for household, family, and other personal
expenditures, excluding loans secured by real estate............. (5,381) (2,807) (2,072) (2,471) (2,534)
Total loans charged off........................................ (7,852) (5,539) (6,944) (8,491) (10,048)
Recoveries of losses previously charged off:
Loans secured by real estate:
Construction and land acquisition and development................ 392 169 606 202 132
Other loans secured by real estate, excluding 1-4 family
residences..................................................... 447 215 1,308 656 849
Secured by 1-4 family residences................................. 158 250 187 254 134
Commercial, financial, and agricultural loans....................... 994 382 296 289 448
Loans to individuals for household, family, and other personal
expenditures, excluding loans secured by real estate............. 897 735 520 551 521
All other loans..................................................... -- -- -- -- 1
Total recoveries............................................... 2,888 1,751 2,917 1,952 2,085
Net loans charged off.......................................... (4,964) (3,788) (4,027) (6,539) (7,963)
Reserve of purchased financial institution............................ -- -- 1,352 -- --
Provision for credit losses........................................... 6,800 3,371 4,993 11,920 14,616
Reserve for credit losses at end of year.............................. $40,517 $38,681 $39,098 $36,780 $ 31,399
Allocation of reserve for credit losses at end of year(1):
Loans secured by real estate.......................................... $21,337 $21,115 $21,961 $24,006 $ 17,882
Commercial, financial, and agricultural loans......................... 4,028 4,279 4,132 3,524 5,129
Loans to individuals for household, family, and other personal
expenditures, excluding loans secured by real estate................ 9,392 6,640 5,521 3,510 5,112
All other loans....................................................... 1,080 680 753 738 543
Unassigned portion of reserve for credit losses....................... 4,680 5,967 6,731 5,002 2,733
Total reserve for credit losses at end of year................. $40,517 $38,681 $39,098 $36,780 $ 31,399
Reserve for credit losses as a percent of loans outstanding at
year-end............................................................ 1.52% 1.60% 1.76% 1.94% 1.73%
Reserve for credit losses as a multiple of nonaccrual loans at
year-end............................................................ 8.33X 7.44x 3.32x 2.03x 1.59x
Reserve for credit losses as a multiple of nonaccrual and restructured
loans at year-end................................................... 8.33X 2.76x 1.88x 1.34x 1.08x
Reserve for credit losses as a multiple of loans charged off,
net of recoveries................................................... 8.16X 10.21x 9.71x 5.62x 3.94x
Provision for credit losses as a percent of loans charged off,
net of recoveries................................................... 136.99% 88.99% 123.99% 182.29% 183.55%
Recoveries of losses previously charged off as a percent of
loans charged off................................................... 36.78% 31.61% 42.01% 22.99% 20.75%
Loans charged off, net of recoveries, as a percent of average
loans outstanding................................................... .19% .16% .20% .35% .45%
(1) THE RESERVE FOR CREDIT LOSSES HAS BEEN ALLOCATED ONLY ON AN APPROXIMATE
BASIS. THE ENTIRE AMOUNT OF THE RESERVE IS AVAILABLE TO ABSORB LOSSES
OCCURRING IN ANY CATEGORY. THE ALLOCATION IS NOT NECESSARILY INDICATIVE OF
FUTURE LOSSES.
25
The increase in the provision for credit losses in 1995 compared to the
prior year was the result of the increase in net loans charged off and an
increase in the reserve for credit losses during the year. The reserve for
credit losses was increased during 1995 due to the growth in loans experienced
during the year and an increase in the loss experience, and delinquency trends
in several categories of consumer loans. The decrease in the 1994 provision for
credit losses compared to 1993 was the result of the reduction in net credit
losses sustained and the decline in nonperforming and problem loans compared to
1993. 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 the market areas served.
All loans are subject to various reviews and re-evaluations of
creditworthiness throughout the term of the agreement. These reviews focus on
such areas as the borrower's financial position, operating results and cash
flow, payment history, delinquency status, documentation, and, if applicable,
evaluation of collateral value. Loans to borrowers who currently, or in
management's judgment, may in the near future, experience difficulty in
complying with the terms of their credit are closely monitored by central credit
administration. Loans are charged off when management concludes it is probable
there will be a partial or total failure to collect the amount due. Also,
examiners from bank regulatory agencies periodically review the loan portfolio
and may require UCB 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. In management's opinion, UCB's reserve for credit losses was
adequate to absorb losses from the loan portfolio at December 31, 1995; however,
adverse changes in the economic conditions in UCB's market areas could lead to a
decline in the overall quality of the loan portfolio which could result in
future increases in credit loss provisions necessitated by higher levels of net
loan charge-offs and additions to the reserve for credit losses. A summary of
the reserve for credit losses for each of the past five years is provided in
Table 12.
DEPOSITS
UCB relies on deposits generated through its branch office network to
provide the majority of funds needed to support asset growth. More specifically,
core deposits (defined by UCB as total deposits less certificates of deposit
issued in denominations of $100,000 or more and deposits from correspondent
banks) are the primary source of funding utilized by UCB. UCB's balance sheet
growth is largely determined by the availability of deposits in its markets, the
cost of attracting available deposits, and the prospects of profitably utilizing
available deposits by increasing loans or investments.
Average total deposits for the year ended December 31, 1995, amounted to
$3,235,209,000, which was an increase of $398,966,000, or 14.1%, over 1994. The
purchase of the 12 branch offices from another financial institution added
approximately $139,368,000 to the year-end 1995 totals and $105,328,000 to
average deposits for the year. For the year ended December 31, 1994, total
deposits averaged $2,836,243,000, an increase of $229,903,000, or 8.8%, over
1993 with the purchase of Home Federal accounting for approximately $88,250,000
of the increase. Average core deposits totaled $3,045,171,000 in 1995, an
increase of $376,567,000, or 14.1%, over 1994. In 1994, average core deposits
increased $203,437,000, or 8.3%, over 1993.
Certificates of deposit in denominations of less than $100,000 increased
$323,093,000, or 35.9%, in 1995 over 1994. The increase in short-term rates
during the first half of 1995 coupled with the increased competition for core
deposits resulted in a change in the mix of interest-bearing deposits to a
higher relative percentage of consumer certificates of deposit and a lower
percentage of NOW, savings, and money market deposits. During 1994, consumer
certificates of deposit comprised 43.0% of interest-bearing deposits with 49.9%
being lower cost NOW, savings, and money market deposits. The relative
percentage of certificates of deposit increased to 48.8% of interest-bearing
deposits during 1995 with a corresponding decrease to 44.3% for NOW, savings,
and money market deposits.
The average balance of certificates of deposit issued in denominations of
$100,000 or more increased $24,226,000, or 14.8%, in 1995 over 1994. The
majority of the growth occurred during the first half of 1995 due to continued
strong loan demand which began in 1994. The deposits acquired through the
branches purchased in May 1995 alleviated the need to aggressively pursue these
deposits during the latter part of the year although UCB remained competitive in
the market with total certificates of deposit issued in denominations of
$100,000 or more totaling $174,560,000 at the end of 1995 compared to
$186,448,000 at December 31, 1994. The average balance of certificates of
deposit issued in denominations of $100,000 or more increased $30,854,000, or
23.2%, in 1994 over 1993. This reflects the increased loan demand experienced
during 1994 which necessitated that a more aggressive strategy be utilized to
attract this type of deposit.
26
Interest-bearing deposits made up 84.6% of UCB's average total deposits in
1995 compared to 83.1% in 1994 and 83.0% in 1993. Interest-bearing core deposits
comprised 83.7% of average core deposits in 1995 versus 82.2% in 1994 and 82.4%
in 1993. Average deposits for the five years ended December 31, 1995, are
summarized in Table 13.
TABLE 13.
SUMMARY OF AVERAGE DEPOSITS
Years Ended December 31,
1995 1994 1993 1992
PERCENT Percent Percent Percent
AVERAGE OF Average of Average of Average of
BALANCE TOTAL Balance Total Balance Total Balance Total
(Dollars in thousands)
Noninterest-bearing core
deposits.................... $ 497,383 15.37 % $ 475,541 16.77 % $ 433,937 16.65 % $ 367,914 14.85%
Interest-bearing core
deposits:
NOW deposits................ 344,519 10.65 337,623 11.90 309,976 11.89 272,717 11.01
Savings deposits............ 229,763 7.10 248,916 8.78 214,343 8.23 171,271 6.92
Money market deposits....... 638,111 19.72 590,360 20.81 581,804 22.32 561,095 22.65
Certificates of deposit less
than $100,000............. 1,222,259 37.78 899,166 31.70 802,585 30.79 764,554 30.87
Other time deposits......... 113,136 3.50 116,998 4.13 122,522 4.70 138,987 5.61
Total interest-bearing
core deposits........... 2,547,788 78.75 2,193,063 77.32 2,031,230 77.93 1,908,624 77.06
Total core deposits....... 3,045,171 94.12 2,668,604 94.09 2,465,167 94.58 2,276,538 91.91
Correspondent bank deposits... 1,856 .06 3,683 .13 8,071 .31 11,271 .45
Certificates of deposit of
$100,000 or more............ 188,182 5.82 163,956 5.78 133,102 5.11 189,154 7.64
Total deposits............ $ 3,235,209 100.00 % $ 2,836,243 100.00 % $ 2,606,340 100.00 % $ 2,476,963 100.00%
1991
Percent
Average of
Balance Total
Noninterest-bearing core
deposits.................... $ 319,839 13.29 %
Interest-bearing core
deposits:
NOW deposits................ 219,090 9.11
Savings deposits............ 135,172 5.62
Money market deposits....... 517,066 21.49
Certificates of deposit less
than $100,000............. 690,380 28.69
Other time deposits......... 140,996 5.86
Total interest-bearing
core deposits........... 1,702,704 70.77
Total core deposits....... 2,022,543 84.06
Correspondent bank deposits... 69,100 2.87
Certificates of deposit of
$100,000 or more............ 314,532 13.07
Total deposits............ $ 2,406,175 100.00 %
LIQUIDITY AND INTEREST-SENSITIVITY
The principal goals of UCB's asset and liability management policy are the
maintenance of adequate liquidity and the management of interest rate risk.
Liquidity is the ability to fund the needs of UCB's borrowers and depositors.
Interest rate risk management attempts to balance the effects of interest rate
changes on interest-sensitive assets and liabilities in an effort to insulate
net interest income from wide fluctuations which could result from changes in
interest rates.
27
TABLE 14.
SHORT-TERM BORROWING DATA
Securities Sold Treasury Tax
Federal Funds Under Agreement and Loan
Purchased to Repurchase Notes
(Dollars in thousands)
December 31, 1995:
Balance outstanding at end of year................................. $16,820 $ 9,828 $ 2,683
Maximum amount outstanding at any month-end
during the year................................................. 22,610 28,216 4,250
Average balance outstanding during the year........................ 17,157 10,418 3,098
Average interest rate paid during the year......................... 5.68% 5.43% 5.62%
Average interest rate payable at end of year....................... 5.50% 4.70% 5.15%
December 31, 1994:
Balance outstanding at end of year................................. $10,740 $47,612 $ 2,876
Maximum amount outstanding at any month-end
during the year................................................. 52,095 47,612 4,115
Average balance outstanding during the year........................ 19,626 22,486 2,993
Average interest rate paid during the year......................... 3.84% 4.02% 4.19%
Average interest rate payable at end of year....................... 5.30% 5.39% 5.20%
December 31, 1993:
Balance outstanding at end of year................................. $26,300 $12,666 $ 4,250
Maximum amount outstanding at any month-end
during the year................................................. 26,950 61,658 7,437
Average balance outstanding during the year........................ 25,531 36,128 3,564
Average interest rate paid during the year......................... 2.96% 2.82% 2.89%
Average interest rate payable at end of year....................... 2.90% 3.11% 2.76%
Federal
Home
Loan
Bank
Advances
December 31, 1995:
Balance outstanding at end of year................................. $ --
Maximum amount outstanding at any month-end
during the year................................................. 25,000
Average balance outstanding during the year........................ 11,643
Average interest rate paid during the year......................... 6.44%
Average interest rate payable at end of year....................... --%
December 31, 1994:
Balance outstanding at end of year................................. $ 25,000
Maximum amount outstanding at any month-end
during the year................................................. 25,000
Average balance outstanding during the year........................ 22,068
Average interest rate paid during the year......................... 4.54%
Average interest rate payable at end of year....................... 6.43%
December 31, 1993:
Balance outstanding at end of year................................. $ --
Maximum amount outstanding at any month-end
during the year................................................. --
Average balance outstanding during the year........................ --
Average interest rate paid during the year......................... --%
Average interest rate payable at end of year....................... --%
It is UCB's policy to ensure that adequate funds are available at all times
to meet the needs of its customers. Cash and cash equivalents, maturing
investment securities and loans, and securities available for sale are primary
sources of liquidity. Secondary sources of liquidity consist principally of
UCB's ability to raise funds through means other than increasing core deposits.
This includes maintaining the ability to increase the portfolio of large
denomination certificates of deposit, keeping federal funds lines from regional
and money center banks available, having access to the discount window of the
Federal Reserve Bank, as well as maintaining the ability to generate funds
through securitizing assets for sale in the secondary market and through issuing
long-term debt and equity if appropriate. In addition, UCB's North Carolina and
South Carolina subsidiary banks are members of the Federal Home Loan Bank System
which offers a variety of services to its members including credit facilities.
At December 31, 1995, UCB's subsidiary banks had immediately available credit
from the Federal Home Loan Bank of Atlanta totaling $89,792,000 collateralized
by a blanket lien on qualifying loans secured by first mortgages on 1-4 family
residences. This amount could be increased to $382,754,000 by the purchase of an
additional $31,963,000 of common stock in the Federal Home Loan Bank of Atlanta.
Additional amounts may be made available by using alternative collateralization
methods. These funds could be drawn upon to satisfy liquidity needs or for other
purposes deemed appropriate.
UCB defines interest rate risk as the effect that changes in general
interest rate trends would have on interest income and expense generated by the
various categories of earning assets and interest-bearing liabilities. It is
UCB's policy to maintain portfolios of earning assets and interest-bearing
liabilities with maturities or repricing opportunities that will afford
protection, to the extent practical, against wide interest rate fluctuations.
Table 15 shows the interest-sensitivity of UCB's balance sheet on December 31,
1995. It should be noted that this table reflects the interest-sensitivity of
the balance sheet as of a specific date and is not necessarily indicative of
UCB's position on other dates. At December 31, 1995, UCB had a cumulative
liability-sensitive static gap position (interest-bearing liabilities subject to
interest rate changes exceeded earning assets subject to changes in interest
rates) of $269,034,000 for 30 days and $874,752,000 for one year. This generally
indicates that net interest income would experience downward pressure in a
rising interest rate environment and would benefit from a declining interest
rate environment. Included in interest-bearing liabilities subject to interest
rate changes within 30 days are
28
NOW, savings, and money market deposits totaling $995,448,000 at December 31,
1995, with interest rates set by management. These types of deposits
historically have not repriced coincidentally with or in the same proportion as
general market indicators; therefore, UCB believes that in the near term net
interest income would not likely experience significant downward pressure from
rising interest rates.
TABLE 15.
INTEREST-SENSITIVITY ANALYSIS
December 31, 1995
181 Day-
1-30 Day 31-90 Day 91-180 Day 1 Year Non-
Sensitive Sensitive Sensitive Sensitive Sensitive(1) Total
(Dollars in thousands)
Earning assets:
Loans, net of unearned income............. $1,097,168 $ 68,909 $ 89,643 $ 159,829 $ 1,244,394 $2,659,943
Taxable securities........................ 104,195 79,381 30,737 74,412 469,894 758,619
Tax-exempt securities..................... 352 986 3,746 7,214 48,007 60,305
Short-term investments.................... 30,097 -- -- -- -- 30,097
Total earning assets................... $1,231,812 $ 149,276 $ 124,126 $ 241,455 $ 1,762,295 $3,508,964
Interest-bearing liabilities:
NOW deposits.............................. $ 367,519 $ -- $ -- $ -- $ -- $ 367,519
Savings deposits.......................... 219,594 -- -- -- -- 219,594
Money market deposits..................... 696,738 -- -- -- -- 696,738
Certificates of deposit of $100,000 or
more................................... 60,775 37,912 42,174 23,598 10,101 174,560
Certificates of deposit less than
$100,000............................... 109,854 169,755 536,162 242,633 244,979 1,303,383
Other time deposits....................... 17,018 9,174 14,378 44,103 28,754 113,427
Short-term borrowings..................... 29,331 -- -- -- -- 29,331
Mortgages and other notes payable......... 17 5 132 549 2,272 2,975
Total interest-bearing liabilities..... $1,500,846 $ 216,846 $ 592,846 $ 310,883 $ 286,106 $2,907,527
Cumulative interest-sensitivity gap......... $ (269,034) $(336,604) $ (805,324) $(874,752)
Cumulative ratio of interest-sensitive
assets to interest-sensitive
liabilities............................... 82.07% 80.40% 65.15% 66.63%
(1) EARNING ASSETS AND INTEREST-BEARING LIABILITIES THAT ARE NOT SENSITIVE TO
INTEREST RATE CHANGES WITHIN ONE YEAR BECAUSE OF MATURITIES OR FIXED
INTEREST RATES.
CAPITAL RESOURCES AND DIVIDENDS
Stockholders' equity increased 14.5% to $301,777,000 at December 31, 1995,
from the 1994 year-end total of $263,489,000 primarily as a result of earnings
retained after dividends. Average stockholders' equity as a percentage of
average total assets amounted to 7.79% in 1995, 8.14% in 1994, and 8.17% in
1993.
Regulatory guidelines relating to capital adequacy in effect at December
31, 1995, included minimum risk-based ratios which assess capital adequacy while
encompassing all credit risks, including those related to off-balance sheet
activities. Capital ratios under these guidelines are computed by weighting the
relative credit risk of each asset category, including off-balance sheet assets
to derive risk-weighted assets. The risk-based guidelines require minimum ratios
of core (Tier I) capital (common stockholders' equity, net of intangible assets
other than mortgage servicing rights, and qualifying perpetual preferred stock,
subject to certain limitations) to risk-weighted assets of 4.0% and total
regulatory capital (core capital, unallocated reserve for credit losses up to
1.25% of risk-weighted assets, mandatory convertible securities, preferred
stock, and subordinated debt, subject to certain limitations) to risk-weighted
assets of 8.0%. As of December 31, 1995, UCB had a ratio of core (Tier I)
capital to risk-weighted assets of 10.86% and a ratio of total regulatory
capital to risk-weighted assets of 12.11%.
29
In addition to the guidelines discussed above, a minimum leverage ratio of
core (Tier I) capital, as defined for risk-based guidelines, to average total
assets for the previous quarter is required by federal bank regulators, ranging
from 3% to 5%, subject to federal bank regulatory evaluation of the
organization's overall safety and soundness. At December 31, 1995, UCB had a
ratio of year-end core (Tier I) capital to average total assets less intangible
assets other than purchased mortgage servicing rights for the three months ended
December 31, 1995, of 7.57%.
TABLE 16.
RISK-BASED CAPITAL AND INTANGIBLE ASSETS
December 31,
1995 1994 1993
(Dollars in thousands)
Stockholders' equity................................................................ $ 301,777 $ 263,489 $ 251,915
Intangible assets, excluding capitalized mortgage servicing rights.................. (14,663) (7,977) (8,990)
Unrealized (gains) losses on securities available for sale, net of deferred
income taxes...................................................................... (2,898) 5,293 (845)
Tier I capital.................................................................... 284,216 260,805 242,080
Qualifying reserve for credit losses (limited to 1.25% of risk-weighted assets)..... 32,700 29,850 28,045
Tier II capital................................................................... 32,700 29,850 28,045
Total regulatory capital............................................................ $ 316,916 $ 290,655 $ 270,125
Total risk-weighted assets.......................................................... $2,615,967 $2,388,015 $2,265,785
Tier I capital as a percent of risk-weighted assets................................. 10.86% 10.92% 10.68%
Total regulatory capital as a percent of risk-weighted assets....................... 12.11% 12.17% 11.93%
Leverage ratio(1)................................................................... 7.57% 7.97% 7.96%
Intangible assets:
Purchased deposit-base premiums................................................... $ 9,219 $ 381 $ 508
Goodwill and other intangible assets.............................................. 5,444 7,596 8,482
Total intangible assets, excluding capitalized mortgage servicing rights............ 14,663 7,977 8,990
Capitalized mortgage servicing rights(2).......................................... 3,683 2,555 3,294
Total intangible assets............................................................. $ 18,346 $ 10,532 $ 12,284
(1) COMPUTED BY DIVIDING PERIOD-END TIER I CAPITAL BY AVERAGE TOTAL ASSETS LESS
INTANGIBLE ASSETS OTHER THAN PURCHASED MORTGAGE SERVICING RIGHTS FOR THE
THREE MONTHS ENDED DECEMBER 31.
(2) CAPITALIZED MORTGAGE SERVICING RIGHTS HAD AN ESTIMATED FAIR VALUE OF
$4,939,000 AT DECEMBER 31, 1995; $4,898,000 AT DECEMBER 31, 1994; AND
$5,101,000 AT DECEMBER 31, 1993.
The FDIC has issued regulations assigning each financial institution to one
of three capital groups (well capitalized, adequately capitalized, or
undercapitalized) based on the relative strength of its capital ratios. In order
to be considered well capitalized, a financial institution must have a total
risk-based capital ratio greater than 10%, Tier 1 risk-based capital ratio
greater than 6%, and Tier 1 leverage capital ratio greater than 5%. Based on
these requirements, UCB is currently considered to be well capitalized. Table 16
sets forth summary information with respect to UCB's regulatory capital ratios
at December 31, 1995, 1994, and 1993.
Cash dividends declared by UCB totaled $.647 per share in 1995 and amounted
to $14,313,000 compared to $.56 per share, or $11,939,000, in 1994, and $.507
per share, or $10,629,000, in 1993. Total cash dividends declared as a percent
of income before the cumulative effect of a change in accounting method amounted
to 32.38% in 1995, 39.71% in 1994, and 32.59% in 1993.
30
TABLE 17.
EQUITY CAPITAL GENERATION AND CAPITAL RATIOS
Years Ended December 31,
1995 1994 1993 1992 1991
(Dollars in thousands)
Summary of changes in stockholders' equity:
Balance, January 1............................................. $263,489 $251,915 $228,437 $208,942 $190,256
Net income.................................................. 44,199 29,750 33,472 28,429 23,381
Cash dividends declared..................................... (14,313) (11,939) (10,629) (9,198) (8,502)
Net issuance of common stock................................ 211 (99) (210) 264 --
Unrealized gains (losses) on securities, net of deferred
income taxes if applicable................................ 8,191 (6,138) 845 -- 3,807
Balance, December 31........................................... $301,777 $263,489 $251,915 $228,437 $208,942
Stockholders' equity as a percent of total assets at
December 31.................................................... 7.97% 7.91% 8.04% 7.95% 7.80%
Average stockholders' equity as a percent of average
total assets................................................... 7.79 8.14 8.17 7.83 7.45
Income before cumulative effects of changes in accounting methods
as a percent of average stockholders' equity................... 15.75 11.58 13.62 13.05 11.82
Cash dividends declared as a percent of income before cumulative
effects of changes in accounting methods....................... 32.38 39.71 32.59 32.35 36.36
Income before cumulative effects of changes in accounting
methods, less cash dividends declared, as a percent of average
stockholders' equity........................................... 10.65% 6.98% 9.18% 8.83% 7.52%
UCB's policy is to pay cash dividends that approximate 30% to 35% of income
before the cumulative effect of changes in accounting methods; however, payments
that exceed this level may occur if, in management's judgment, the underlying
reason for the higher payout ratio is of a temporary or nonrecurring nature and
the dividend payments can be made without materially adversely affecting UCB's
capital ratios. Table 17 sets forth historical summary information with respect
to UCB's equity capital generation, dividend payment history, and equity capital
ratios.
At December 31, 1995, long-term debt consisted of advances from the Federal
Home Loan Bank of Atlanta of $2,728,000 and certain other loans, primarily in
the form of mortgages, which amounted to $247,000. UCB's low level of long-term
debt relative to equity capital would allow significant increases in debt levels
if market conditions were appealing and the proceeds from any debt issuances
were needed for general funding purposes or to support expansion.
UCB's expansion strategy includes the acquisition of other financial
institutions or branch offices of other financial institutions, if such
acquisitions make sense from both economic and geographic standpoints. In
addition, the opening of additional branch locations where economically feasible
will be used as a means to increase market share in current markets or to expand
to contiguous, or near-contiguous, markets. These strategies have been pursued
through the acquisitions of two financial institutions, the purchase of 12
branch offices from another financial institution, the opening of five DE NOVO
branch locations, and the acquisitions by merger of four general insurance
agencies during the last three years. Management has no current intentions to
materially change this expansion strategy.
The management of UCB continually monitors and evaluates the present and
expected business environment, including general economic conditions and changes
in regulatory requirements, and in particular, how such conditions relate, or
are likely to relate, to UCB's market areas and the operations of UCB and its
competitors. Based on such ongoing evaluations, the management of UCB is not
currently aware of any known trends, events, or uncertainties, other than those
otherwise discussed, which will have, or that are reasonably likely to have, a
material adverse effect on the liquidity, capital resources, or overall
operations of UCB.
ACCOUNTING AND REGULATORY ISSUES
As previously reported, UCB was required to adopt the provisions of
Financial Accounting Standards No. 112 (FAS 112), "Employers' Accounting for
Postemployment Benefits," which requires the accrual of expenses for the
estimated
31
cost of benefits provided for employees after employment but before retirement.
The adoption of FAS 112 required immediate recognition of the actuarially
determined liability for postemployment benefits which amounted to $529,000 at
December 31, 1993. The adoption of FAS 112 resulted in a charge against net
income of $316,000, net of deferred income taxes, which was recorded as a
cumulative effect of a change in accounting method during the first quarter of
1994.
UCB was required to adopt the provisions of Financial Accounting Standards
No. 106 (FAS 106), "Employers' Accounting for Postretirement Benefits Other Than
Pensions," effective January 1, 1993. This statement changed the prevalent
accounting practice of reporting the cost of postretirement health care benefits
on a cash basis by requiring accrual, during an employee's employment period, of
the anticipated costs of providing those benefits to an employee and the
employee's covered dependents after retirement. Further disclosure concerning
UCB's postretirement medical liability is contained in Note 8 to the
consolidated financial statements.
The mandatory adoption of Financial Accounting Standards No. 109 (FAS 109),
"Accounting for Income Taxes," was effective January 1, 1993. FAS 109 requires a
balance sheet approach to financial accounting for income taxes. Deferred tax
assets and liabilities are required to be revalued annually using current tax
rates. The adoption of FAS 109 resulted in an increase in net income of $855,000
for the year ended December 31, 1993, which was recorded as a cumulative effect
of a change in accounting method.
Effective December 31, 1993, UCB adopted the provisions of Financial
Accounting Standards No. 115 (FAS 115), "Accounting for Certain Investments in
Debt and Equity Securities." This statement requires investments in debt and
equity securities to be classified as held to maturity, trading securities, or
securities available for sale.
As previously discussed, effective January 1, 1995, UCB adopted Financial
Accounting Standards No. 114 (FAS 114), "Accounting by Creditors for Impairment
of a Loan," and Financial Accounting Standards No. 118 (FAS 118), "Accounting by
Creditors for Impairment of a Loan -- Income Recognition and Disclosure." FAS
114 amended FAS 5, "Accounting for Contingencies," to clarify that a creditor
should evaluate the collectibility of both contractual interest and principal of
a receivable when assessing the need for a loss accrual; and FAS 15, "Accounting
by Debtors and Creditors for Troubled Debt Restructurings," to require a
creditor to account for a troubled debt restructuring involving a modification
of terms at fair value as of the date of the restructuring. FAS 118 revises FAS
114 to permit companies to use their existing income recognition policies with
respect to impaired loans rather than those set forth in FAS 114 and requires a
creditor to disclose certain information concerning income recognition on
impaired loans. Prior to January 1, 1995, UCB measured loan impairment in a
manner generally consistent with the methods prescribed in FAS 114, and, as a
result, no additional reserves for credit losses were required due to the
adoption of this accounting standard.
In October 1994, the FASB issued Financial Accounting Standards No. 119
(FAS 119), "Disclosure about Derivative Financial Instruments and Fair Value of
Financial Instruments," which requires improved disclosures about derivative
financial instruments, such as futures, forward, swap or option contracts, or
other financial instruments with similar characteristics. This statement
requires that a distinction be made between financial instruments held or issued
for the purpose of trading (including dealing or other activities reported in a
trading account and measured at fair value) and financial instruments held or
issued for purposes other than trading. It also amends existing requirements of
FAS 105, "Disclosure of Information about Financial Instruments with Off-Balance
Sheet Risk and Financial Instruments with Concentrations of Credit Risk," and
FAS 107, "Disclosures about Fair Value of Financial Instruments," to require
that same distinction in certain disclosures required by those statements. UCB
adopted FAS 119 in 1994 and has made the required disclosures in its
consolidated financial statements.
As previously discussed, effective April 1, 1995, UCB adopted Financial
Accounting Standards No. 122 (FAS 122), "Accounting for Mortgage Servicing
Rights, an amendment of FASB Statement No. 65." This statement amends certain
provisions of FAS 65 to eliminate the distinction between rights to service
mortgage loans for others that are acquired through loan origination activities
and rights to service mortgage loans for others that are acquired through
purchase transactions. Under FAS 65, the cost of originated mortgage servicing
rights was not recognized as an asset and was charged to earnings when the
related loan was sold. As a result of adopting FAS 122, beginning April 1995,
the estimated fair values of the rights to service mortgage loans for others
have been capitalized on loans originated by UCB. This resulted in an increase
in the gains on the sale of mortgage loans into the secondary market totaling
$592,000 through December 31, 1995.
FAS 122 has a different cost allocation methodology than FAS 65 for
purchased mortgage servicing rights. FAS 65 allocated such costs incurred in
excess of the market value of the loans without the servicing rights, whereas
FAS 122 allocates costs based on the relative market values of the purchased
servicing rights and the related loans. The application of
32
the FAS 122 cost allocation method to purchased mortgage servicing rights
acquired during the nine months ended December 31, 1995, was not material.
FAS 122 also requires that all capitalized mortgage servicing rights be
evaluated for impairment based on the excess of the carrying amount of such
rights over their fair value. For purposes of measuring impairment, capitalized
mortgage servicing rights are stratified on the basis of one or more of the
predominant risk characteristics of the underlying loans. The adoption of FAS
122 resulted in a valuation adjustment of $104,000 to capitalized mortgage
servicing rights at December 31, 1995.
In March 1995, the FASB issued Financial Accounting Standards No. 121 (FAS
121), "Accounting for Impairment of Long-Lived Assets and for Long-Lived Assets
to Be Disposed Of," which establishes accounting standards for the impairment of
long-lived assets, certain identifiable intangibles, and goodwill related to
those assets to be held and used and for those to be disposed of. This statement
requires that long-lived assets and certain intangibles be reviewed for
impairment whenever events or changes in circumstances indicate that the
carrying value may not be recoverable. An impairment loss should be recognized
if the sum of the undiscounted future cash flows is less than the carrying
amount of the asset. Those assets to be disposed of are to be reported at the
lower of the carrying amount or fair value less costs to sell. Adoption of FAS
121 is required for fiscal years beginning after December 15, 1995. While the
effect has not yet been determined, adoption of this standard is not expected to
have a material impact on UCB's financial position or operating results.
In 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. Adoption of FAS 123 is
required for fiscal years beginning after December 15, 1995. While the effect,
if any, has not yet been determined, adoption of this standard is not expected
to have a material impact on UCB's financial position or operating results.
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.
Substantially all of the proposals under consideration contemplate obtaining the
additional funds deemed necessary for the SAIF through a special assessment to
be levied on SAIF-insured deposits. At December 31, 1995, UCB had approximately
$138 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.
33
UNITED CAROLINA BANCSHARES CORPORATION AND SUBSIDIARIES
Consolidated Balance Sheets
December 31,
1995 1994
(In thousands)
ASSETS:
Cash and due from banks -- noninterest-bearing.................................................. $ 164,935 $ 147,450
Federal funds sold and other short-term investments............................................. 30,097 82,250
Securities available for sale (amortized costs of $754,504,000 in 1995
and $383,913,000 in 1994).................................................................... 759,497 376,913
Investment securities (approximate market values of $61,339,000 in 1995
and $202,372,000 in 1994).................................................................... 59,427 208,249
Loans, net of unearned income................................................................... 2,659,943 2,418,158
Less reserve for credit losses............................................................. (40,517) (38,681)
Net loans............................................................................... 2,619,426 2,379,477
Premises and equipment.......................................................................... 52,258 52,585
Other assets.................................................................................... 100,156 84,714
Total assets............................................................................ $3,785,796 $3,331,638
LIABILITIES AND STOCKHOLDERS' EQUITY:
Deposits:
Noninterest-bearing demand deposits.......................................................... $ 535,406 $ 515,403
Interest-bearing deposits:
NOW, savings, and money market deposits.................................................... 1,283,851 1,145,717
Certificates of deposit of $100,000 or more................................................ 174,560 186,448
Other time deposits........................................................................ 1,416,810 1,093,031
Total deposits.......................................................................... 3,410,627 2,940,599
Short-term borrowings........................................................................... 29,331 86,228
Mortgages and other notes payable............................................................... 2,975 2,305
Other liabilities............................................................................... 41,086 39,017
Total liabilities....................................................................... 3,484,019 3,068,149
Stockholders' equity:
Preferred stock, par value $10 per share:
Authorized 2,000,000 shares; none issued
Common stock, par value $4 per share:
Authorized 40,000,000 shares; issued 22,153,110 shares in 1995
and 22,050,099 shares in 1994........................................................... 88,612 88,200
Surplus...................................................................................... 42,441 42,505
Retained earnings............................................................................ 167,826 138,077
Unrealized gains (losses) on securities available for sale,
net of deferred income taxes............................................................... 2,898 (5,293)
Total stockholders' equity.............................................................. 301,777 263,489
Total liabilities and stockholders' equity.............................................. $3,785,796 $3,331,638
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
34
UNITED CAROLINA BANCSHARES CORPORATION AND SUBSIDIARIES
Consolidated Statements of Income
Years Ended December 31,
1995 1994 1993
(Dollars in thousands
except per share amounts)
INTEREST INCOME:
Interest on loans...................................................................... $239,757 $199,988 $173,128
Interest and dividends on:
Taxable securities.................................................................. 35,536 24,695 25,036
Tax-exempt securities............................................................... 3,769 4,890 5,371
Interest on federal funds sold and other short-term investments........................ 6,393 2,283 2,917
Total interest income............................................................. 285,455 231,856 206,452
INTEREST EXPENSE:
Interest on deposits................................................................... 124,934 84,070 76,747
Interest on short-term borrowings...................................................... 2,464 2,787 1,880
Interest on mortgages and other notes payable.......................................... 171 164 74
Total interest expense............................................................ 127,569 87,021 78,701
NET INTEREST INCOME...................................................................... 157,886 144,835 127,751
PROVISION FOR CREDIT LOSSES.............................................................. 6,800 3,371 4,993
NET INTEREST INCOME AFTER PROVISION FOR CREDIT LOSSES.................................... 151,086 141,464 122,758
NONINTEREST INCOME:
Service charges on deposit accounts.................................................... 22,692 22,644 21,937
Trust income........................................................................... 5,243 5,163 4,808
Mortgage banking fees.................................................................. 4,015 3,538 4,026
Insurance commissions.................................................................. 4,927 3,481 2,348
Brokerage and annuity commissions...................................................... 2,130 2,309 1,944
Other service charges, commissions, and fees........................................... 4,925 4,731 4,470
Net gains on mortgages originated for resale........................................... 716 319 929
Net gains on trading account securities................................................ 4 8 9
Net losses on dispositions of securities available for sale............................ -- (32) --
Net gains on dispositions of investment securities..................................... 7 5 58
Other operating income................................................................. 392 809 765
Total noninterest income.......................................................... 45,051 42,975 41,294
NONINTEREST EXPENSES:
Personnel expense...................................................................... 73,017 73,708 66,460
Occupancy expense...................................................................... 9,078 9,289 9,023
Equipment expense...................................................................... 6,231 6,037 5,456
Other noninterest expenses, excluding restructuring charges............................ 38,442 36,235 34,654
Restructuring charges.................................................................. -- 11,906 --
Total noninterest expenses........................................................ 126,768 137,175 115,593
INCOME BEFORE INCOME TAXES............................................................... 69,369 47,264 48,459
Income tax provision................................................................... 25,170 17,198 15,842
INCOME BEFORE CUMULATIVE EFFECTS OF CHANGES IN ACCOUNTING METHODS........................ 44,199 30,066 32,617
Cumulative effects of changes in accounting methods.................................... -- (316) 855
NET INCOME............................................................................... $ 44,199 $ 29,750 $ 33,472
PER SHARE DATA:
Income before cumulative effects of changes in accounting methods...................... $ 2.00 $ 1.37 $ 1.49
Net income............................................................................. $ 2.00 $ 1.35 $ 1.53
Cash dividends declared................................................................ $ .647 $ .56 $ .507
Book value at year-end................................................................. $ 13.62 $ 11.95 $ 11.48
Average number of shares outstanding..................................................... 22,125,304 21,991,102 21,892,782
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
35
UNITED CAROLINA BANCSHARES CORPORATION AND SUBSIDIARIES
Consolidated Statements of Stockholders' Equity
THREE YEARS ENDED DECEMBER 31, 1995
Unrealized
Common Stock Gains
Number of (Losses)
Shares Aggregate Retained on
Outstanding Par Value Surplus Earnings Securities
(Dollars in thousands)
Balance, January 1, 1993, as previously reported............ 14,560,637 $58,243 $ 43,371 $126,823 $ --
3-for-2 stock split effected in the form of a
stock dividend declared January 17, 1996............... 7,280,319 29,121 -- (29,121) --
Balance, January 1, 1993, as restated....................... 21,840,956 87,364 43,371 97,702 --
Net income................................................ -- -- -- 33,472 --
Cash dividends declared, $.507 per share.................. -- -- -- (10,629) --
Issuance of common stock:
Stock option plan...................................... 34,500 138 258 (46) --
Insurance agency merger................................ 75,925 304 (565) (102) --
Retirement of common stock................................ (12,919) (52) (163) 18 --
Unrealized gains on securities available for sale,
net of applicable deferred income taxes................ -- -- -- -- 845
Balance, December 31, 1993.................................. 21,938,462 87,754 42,901 120,415 845
Net income................................................ -- -- -- 29,750 --
Cash dividends declared, $.56 per share................... -- -- -- (11,939) --
Issuance of common stock:
By pooled bank prior to merger......................... 58,590 234 240 (78) --
Insurance agencies mergers............................. 54,604 218 (612) (73) --
Retirement of common stock................................ (1,557) (6) (24) 2 --
Unrealized losses on securities available for sale,
net of applicable deferred income taxes................ -- -- -- -- (6,138)
Balance, December 31, 1994.................................. 22,050,099 88,200 42,505 138,077 (5,293)
Net income................................................ -- -- -- 44,199 --
Cash dividends declared, $.647 per share.................. -- -- -- (14,313) --
Issuance of common stock:
Insurance agency merger................................ 66,320 265 (213) (88) --
Stock option plan...................................... 36,691 147 149 (49) --
Unrealized gains on securities available for sale,
net of applicable deferred income taxes................ -- -- -- -- 8,191
Balance, December 31, 1995.................................. 22,153,110 $88,612 $ 42,441 $167,826 $ 2,898
Total
Stockholders'
Equity
Balance, January 1, 1993, as previously reported............ $ 228,437
3-for-2 stock split effected in the form of a
stock dividend declared January 17, 1996............... --
Balance, January 1, 1993, as restated....................... 228,437
Net income................................................ 33,472
Cash dividends declared, $.507 per share.................. (10,629)
Issuance of common stock:
Stock option plan...................................... 350
Insurance agency merger................................ (363)
Retirement of common stock................................ (197)
Unrealized gains on securities available for sale,
net of applicable deferred income taxes................ 845
Balance, December 31, 1993.................................. 251,915
Net income................................................ 29,750
Cash dividends declared, $.56 per share................... (11,939)
Issuance of common stock:
By pooled bank prior to merger......................... 396
Insurance agencies mergers............................. (467)
Retirement of common stock................................ (28)
Unrealized losses on securities available for sale,
net of applicable deferred income taxes................ (6,138)
Balance, December 31, 1994.................................. 263,489
Net income................................................ 44,199
Cash dividends declared, $.647 per share.................. (14,313)
Issuance of common stock:
Insurance agency merger................................ (36)
Stock option plan...................................... 247
Unrealized gains on securities available for sale,
net of applicable deferred income taxes................ 8,191
Balance, December 31, 1995.................................. $ 301,777
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
36
UNITED CAROLINA BANCSHARES CORPORATION AND SUBSIDIARIES
Consolidated Statements of Cash Flows
Years Ended December 31,
1995 1994 1993
(In thousands)
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS:
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income.............................................................................. $ 44,199 $ 29,750 $ 33,472
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization, net of accretion....................................... 9,076 7,642 8,190
Provision for credit losses........................................................... 6,800 3,371 4,993
Net (increase) decrease in loans originated for resale................................ (11,263) 21,055 (4,758)
Provision for deferred taxes and changes in taxes payable............................. 373 (3,935) (2,498)
(Increase) decrease in accrued interest receivable.................................... (6,694) (4,415) 646
(Increase) decrease in prepaid expenses............................................... 1,484 (4,601) 476
(Increase) decrease in other accounts receivable...................................... (1,843) 14,808 (16,316)
Increase (decrease) in accrued interest payable....................................... 3,160 1,329 (834)
Increase (decrease) in accrued expenses............................................... (565) 14,388 4,740
Increase (decrease) in deferred loan fees, net of deferred costs...................... (383) (281) 446
Decrease in unearned income on loans.................................................. (1) (42) (346)
Other, net............................................................................ 654 644 617
Total adjustments................................................................... 798 49,963 (4,644)
Net cash provided by operating activities........................................... 44,997 79,713 28,828
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from maturities and issuer calls of securities available for sale.............. 619,668 195,146 --
Proceeds from maturities and issuer calls of investment securities...................... 11,440 11,619 486,426
Proceeds from sales of securities available for sale.................................... -- 18,868 2,124
Proceeds from sales of investment securities............................................ 3,810 -- 1,549
Purchases of securities available for sale.............................................. (789,220) (193,037) --
Purchases of investment securities...................................................... (67,690) (858) (418,190)
Net increase in loans outstanding....................................................... (212,978) (220,214) (224,843)
Purchases of premises and equipment..................................................... (3,135) (3,727) (7,075)
Proceeds from sales of premises and equipment........................................... 816 336 208
Purchases of mortgage loan servicing rights............................................. (1,331) (701) (518)
Sales of foreclosed assets.............................................................. 1,348 4,687 12,278
Net cash acquired (paid) in purchases of branches and financial institutions............ 110,376 -- (19,022)
Other, net.............................................................................. (6,399) 6,459 (14,617)
Net cash used in investing activities............................................... (333,295) (181,422) (181,680)
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase in deposit accounts........................................................ 323,923 128,943 169,205
Net increase (decrease) in federal funds purchased...................................... 6,080 (15,560) (5,380)
Net increase (decrease) in securities sold under agreement to repurchase................ (37,784) 34,946 (36,996)
Net increase (decrease) in other short-term borrowings.................................. (25,193) 23,625 15
Proceeds from mortgages and other notes payable......................................... 702 -- 1,000
Repayments of mortgages and other notes payable......................................... (32) (212) (5,287)
Issuance of common stock for exercise of stock options.................................. 247 396 350
Retirement of common stock.............................................................. -- (28) (197)
Dividends paid.......................................................................... (14,313) (11,939) (10,629)
Net cash provided by financing activities........................................... 253,630 160,171 112,081
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS...................................... (34,668) 58,462 (40,771)
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR............................................ 229,700 171,238 212,009
CASH AND CASH EQUIVALENTS AT END OF YEAR.................................................. $ 195,032 $ 229,700 $ 171,238
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
CASH PAID DURING THE YEAR FOR:
Interest................................................................................ $ 124,409 $ 85,692 $ 79,535
Income taxes............................................................................ $ 24,630 $ 21,133 $ 17,399
SIGNIFICANT NONCASH TRANSACTIONS:
Loans transferred to real estate acquired in settlement of debt......................... $ 1,476 $ 4,162 $ 8,423
Loans originated to facilitate the sale of foreclosed assets............................ $ 638 $ 372 $ 1,912
Investment securities transferred to securities available for sale portfolio............ $ 200,834 $ 300 $ 390,814
Securities available for sale transferred to investment securities portfolio............ $ -- $ 2,316 $ --
Unrealized gains (losses) on securities available for sale.............................. $ 11,993 $ (8,408) $ 1,408
Issuance of common stock in acquisitions by merger...................................... $ (36) $ (467) $ (363)
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
37
UNITED CAROLINA BANCSHARES CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
NOTE 1 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION AND REPORTING -- The consolidated financial
statements include the accounts of United Carolina Bancshares Corporation
(Parent Company) and its subsidiaries, the principal ones being United Carolina
Bank and United Carolina Bank of South Carolina. All significant intercompany
balances and transactions have been eliminated. In certain instances, amounts
reported in prior consolidated financial statements have been reclassified to
present them in the format selected for 1995. Such reclassifications had no
effect on the net income or stockholders' equity as previously reported. The
consolidated financial statements for periods prior to 1994 have been restated
to include the accounts of the Bank of Iredell which was acquired by merger
during 1994 and accounted for as a pooling-of-interests.
BASIS OF FINANCIAL STATEMENT PRESENTATION -- The financial statements have
been prepared in conformity with generally accepted accounting principles. In
the preparation of the financial statements, management was required to make
certain estimates and assumptions that affected the reported value of certain
assets and liabilities at the end of each year presented and the revenues and
expenses for those periods.
SECURITIES AVAILABLE FOR SALE -- Securities classified as available for
sale are purchased with the intent to hold until maturity; however, infrequent
sales may be necessary due to liquidity needs arising from unanticipated deposit
and loan fluctuations, changes in regulatory capital and investment
requirements, or significant unforeseen changes in market conditions, including
interest rates and market values of securities held in the portfolio.
Investments in securities available for sale are stated at market value with the
resultant unrealized gains and losses included as a component of stockholders'
equity, net of applicable deferred income taxes. Gains and losses from sales of
securities available for sale are recognized using the identified certificate
method. See Note 2.
INVESTMENT SECURITIES -- Securities are classified as held to maturity
(investment securities) at the time of purchase when UCB has the ability and
positive intent to hold such securities to maturity. Investments in debt
securities are stated at cost, adjusted for amortization of premium and
accretion of discount computed on a level-yield basis. Gains and losses from
dispositions of investment securities are recognized using the identified
certificate method. See Note 2.
TRADING ACCOUNT SECURITIES -- Debt securities purchased with the intent to
sell at a short-term profit are classified as trading account securities and are
stated at market value at the reporting date. Realized and unrealized changes in
market value are recognized in net trading revenue in the period in which the
changes occur.
LOANS -- Loans are stated at the principal amount outstanding, less
unearned income and deferred nonrefundable loan fees, net of certain origination
costs. Interest on substantially all loans is accrued on the unpaid principal
balance outstanding. Nonrefundable loan origination fees and costs associated
with the lending process are deferred and recognized as a yield adjustment over
the life of the related loan. See Note 3.
Mortgage loans originated for sale in the secondary market are stated at
the lower of aggregate cost or market value. Origination fees applicable to
these mortgages are recorded as noninterest income, and expenses related to
these loans are charged to operations as incurred. Gains and losses on hedges of
mortgage loans held for sale in the secondary market are included in the
carrying amounts of such loans and are ultimately recognized in income as part
of the underlying gain or loss on the sale of the underlying asset. See Note 3.
Accrual of interest income on loans is suspended when, in management's
judgment, doubts exist as to the collectibility of additional interest within a
reasonable time. Loans are returned to accrual status when management
determines, based on an evaluation of the underlying collateral together with
the borrower's payment record and financial condition, that the borrower has the
ability and intent to meet the contractual obligations of the loan agreement.
See Note 3.
Real or personal properties taken in settlement of loans either through
foreclosure, repossession, or in lieu of foreclosure are carried at the lower of
the unpaid loan balance for which the property served as collateral or estimated
fair value less estimated disposal costs. Costs incurred during the period of
ownership of the property are charged to other operating expenses. Gains and
losses from disposition or revaluation of the estimated fair value of the
property after acquisition are charged or credited to other operating expenses
as incurred or realized.
38
NOTE 1 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- CONTINUED
RESERVE FOR CREDIT LOSSES -- The reserve for credit losses is established
by provisions charged to operations and is maintained at a level that, in the
opinion of management, is adequate to absorb inherent losses from the lending
activities of UCB's subsidiaries. The level of the reserve is based on
historical loss experience, adjusted when required to give current recognition
to economic and other relevant factors. In determining the level of the reserve
for credit losses, management takes into consideration loan volumes and
outstandings, loan loss experience, risk ratings assigned to nonconsumer loans,
identified problem loans, the present and expected economic conditions in
general, and, in particular, how such conditions relate to the market areas
served. Adverse changes in the economic conditions in UCB's market areas,
however, may 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. See Note 3.
MORTGAGE SERVICING RIGHTS -- Purchased mortgage servicing rights represent
the acquisition costs, net of accumulated amortization, of mortgage servicing
rights purchased from third parties. Originated mortgage servicing rights
represent the capitalized estimated fair values of the rights to service
mortgage loans for others on loans originated by UCB for sale in the secondary
market. Mortgage servicing rights are currently amortized over a period of seven
years, adjusted when appropriate to give effect to changes in prepayment speeds
of the underlying mortgages. In accordance with bank regulatory requirements, an
outside party valued the portfolio of purchased mortgage servicing rights as of
the end of each calendar quarter during the three years ended December 31, 1995,
for the purpose of calculating regulatory capital and regulatory capital ratios.
These valuations were performed using discounted cash flows as a basis for
determining fair value. See Note 4.
PREMISES AND EQUIPMENT -- Premises and equipment are stated at cost less
accumulated depreciation. Depreciation is computed by the straight-line method
over the estimated useful lives of the assets. Leasehold improvements are
amortized over the terms of the respective leases or estimated useful lives of
the improvements, whichever is shorter. For income tax purposes, depreciation is
computed primarily using an accelerated method. Gains from sale/leaseback
transactions are amortized over the terms of the respective leases of the
facilities as reductions in occupancy expense. See Note 5.
INTANGIBLE ASSETS -- Purchased deposit-base premiums represent the portion
of the purchase price of acquired branch operations allocated to the core
deposit base. Purchased deposit-base premiums are amortized on an accelerated
method over a seven-year period.
Goodwill, all of which arose from the 1993 acquisition of Home Federal
Savings Bank of Eastern North Carolina, is being amortized on a straight-line
basis over ten years. Management reviews the appropriateness of the amortization
period and the balance of goodwill outstanding when economic events occur which
may negatively impact the value of such goodwill to UCB and adjusts the
remaining goodwill amortization period and/or balance as deemed appropriate.
INCOME AND EXPENSE RECOGNITION -- The accrual method of accounting is used
for all significant categories of income and expense. Immaterial amounts of
insurance commissions, trust income, and other miscellaneous fees are reported
when received.
PENSION PLANS -- The qualified defined benefit pension plan covers all
employees with one or more years of service with UCB or its subsidiaries.
Pension costs are accounted for in accordance with the requirements of Financial
Accounting Standards No. 87 (FAS 87), "Employers' Accounting for Pensions." The
projected unit credit method is utilized for computing net periodic pension
cost. UCB's funding policy is to contribute annually an amount calculated under
the normal cost actuarial method. See Note 8.
The nonqualified supplemental pension plan covers designated senior
officers with one or more years of service with UCB or its subsidiaries. Pension
costs are accounted for in accordance with the requirements of FAS 87 utilizing
the projected unit credit method for computing net periodic pension costs. UCB's
policy is to fund supplemental pension benefits on a cash basis. See Note 8.
39
NOTE 1 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- CONTINUED
POSTRETIREMENT MEDICAL BENEFITS -- UCB provides health care benefits to
retired employees. Beginning in 1993, postretirement medical costs were
accounted for in accordance with the requirements of Financial Accounting
Standards No. 106 (FAS 106), "Employers' Accounting for Postretirement Benefits
Other Than Pensions." The net claims model is utilized to determine UCB's
projected liability. UCB's policy is to fund current claims as presented. Prior
to 1993, UCB accounted for postretirement medical benefits on a cash basis. See
Note 8.
POSTEMPLOYMENT MEDICAL BENEFITS -- UCB provides health care benefits to
substantially all employees who have become disabled. Beginning in 1994,
postemployment medical costs are accounted for in accordance with the
requirements of Financial Accounting Standards No. 112 (FAS 112), "Employers'
Accounting for Postemployment Benefits." The net claims model is utilized to
determine UCB's projected liability. UCB's policy is to fund current claims as
presented. Prior to 1994, UCB accounted for postemployment medical benefits on a
cash basis. See Note 8.
INCOME TAX PROVISION -- The income tax provision is based on financial
statement income adjusted for certain items, primarily tax-exempt interest. The
account includes a provision for deferred income taxes which arise from the
income tax effect of the differences in the carrying values of assets and
liabilities reported for financial statement and income tax purposes. See Note
9.
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.
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 acquisition by merger of the Bank of Iredell, (see
Note 17), 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 acquisition by merger of Bank of Iredell 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.
40
NOTE 2 -- SECURITIES
The Financial Accounting Standards Board (FASB) has issued Financial
Accounting Standards No. 115 (FAS 115), "Accounting for Certain Investments in
Debt and Equity Securities." This statement addresses the accounting and
reporting for investments in equity securities that have readily determinable
fair values and for all investments in debt securities. These investments are to
be classified in three categories and accounted for as follows: (1) debt
securities that the entity has the positive intent and the ability to hold to
maturity are classified as held to maturity and reported at amortized cost; (2)
debt and equity securities that are bought and held principally for the purpose
of selling them in the near term are classified as trading securities and
reported at fair value, with unrealized gains and losses included in earnings;
and (3) debt and equity securities not classified as either held to maturity or
trading securities are classified as available for sale and reported at fair
value, with net unrealized gains and losses excluded from earnings and reported
as a separate component of stockholders' equity. While effective for fiscal
years beginning after December 15, 1993, UCB adopted FAS 115 on December 31,
1993, as allowed by the statement. The adoption affected only the held to
maturity and available for sale classifications, with the net unrealized gains
on securities available for sale, net of applicable deferred income taxes,
reported as a separate component of stockholders' equity. Upon adopting the
statement, UCB reassessed the appropriateness of previous classifications and
reclassified securities as needed. Prior to this statement, securities available
for sale were reported at the lower of cost or market value with net unrealized
losses on this portfolio recognized by a charge against earnings.
During 1994, pursuant to the provisions of FAS 115, securities classified
as held to maturity by a pooled bank with an amortized cost of $300,000 were
transferred to the available for sale category. In addition, securities
classified as available for sale by a pooled bank with an amortized cost of
$2,316,000 were transferred to the held to maturity category. These transfers
were instituted to conform the acquired portfolio of securities to the
classifications used by UCB.
During the period of November 15, 1995, through December 31, 1995, the
Financial Accounting Standards Board permitted a one-time reassessment of the
appropriateness of the designations of all securities and a redesignation of
securities if appropriate. As a result of this reassessment, UCB reclassified
securities with a book value of $200,834,000 and a market value of $202,073,000
to securities available for sale from investment securities.
41
NOTE 2 -- SECURITIES -- CONTINUED
The following is a summary of the securities portfolios by major
classification:
December 31,
1995 1994 1993
APPROXIMATE Approximate
AMORTIZED UNREALIZED UNREALIZED MARKET Amortized Unrealized Unrealized Market Amortized
COST GAINS LOSSES VALUE Cost Gains Losses Value Cost
(In thousands)
Securities available for
sale:
United States government
securities............... $581,389 $5,461 $ 99 $ 586,751 $324,640 $-- $4,013 $ 320,627 $ 335,226
Obligations of United
States government
agencies and
corporations............. 134,091 4 74 134,021 18,140 -- 73 18,067 28,767
Mortgage-backed
securities(1)............ 27,166 40 341 26,865 30,966 -- 2,913 28,053 15,748
Obligations of states and
political subdivisions... 1,100 2 -- 1,102 -- -- -- -- 18,000
Federal Home Loan Bank
stock.................... 10,144 -- -- 10,144 10,113 -- -- 10,113 8,821
Other securities.......... 614 -- -- 614 54 -- 1 53 --
Total securities
available for
sale.................. $754,504 $5,507 $514 $ 759,497 $383,913 $-- $7,000 $ 376,913 $ 406,562
Investment securities:
United States government
securities............... $ -- $-- $-- $ -- $129,765 $-- $5,630 $ 124,135 $ 130,825
Obligations of United
States government
agencies and
corporations............. -- -- -- -- 1,995 -- 194 1,801 1,895
Mortgage-backed
securities............... -- -- -- -- -- -- -- -- 2,827
Obligations of states and
political subdivisions... 59,427 1,952 40 61,339 75,734 984 1,037 75,681 81,313
Other securities.......... -- -- -- -- 755 1 1 755 792
Total investment
securities............ $ 59,427 $1,952 $ 40 $ 61,339 $208,249 $985 $6,862 $ 202,372 $ 217,652
Approximate
Unrealized Unrealized Market
Gains Losses Value
Securities available for
sale:
United States government
securities............... $1,626 $145 $ 336,707
Obligations of United
States government
agencies and
corporations............. 2 23 28,746
Mortgage-backed
securities(1)............ 79 131 15,696
Obligations of states and
political subdivisions... -- -- 18,000
Federal Home Loan Bank
stock.................... -- -- 8,821
Other securities.......... -- -- --
Total securities
available for
sale.................. $1,707 $299 $ 407,970
Investment securities:
United States government
securities............... $2,773 $ 46 $ 133,552
Obligations of United
States government
agencies and
corporations............. 14 14 1,895
Mortgage-backed
securities............... 29 40 2,816
Obligations of states and
political subdivisions... 4,427 73 85,667
Other securities.......... -- -- 792
Total investment
securities............ $7,243 $173 $ 224,722
(1) AT DECEMBER 31, 1995, UCB OWNED COLLATERALIZED MORTGAGE OBLIGATIONS ISSUED
BY THE FEDERAL HOME LOAN MORTGAGE CORPORATION (FHLMC) WHICH HAD AN AMORTIZED
COST OF $11,721,000 AND A MARKET VALUE OF $11,593,000; AND COLLATERALIZED
MORTGAGE OBLIGATIONS ISSUED BY THE FEDERAL NATIONAL MORTGAGE ASSOCIATION
(FNMA) WHICH HAD AN AMORTIZED COST OF $13,045,000 AND A MARKET VALUE OF
$12,874,000. UCB ALSO OWNED COLLATERALIZED MORTGAGE OBLIGATIONS ISSUED BY A
PRIVATE ISSUER AND GUARANTEED BY THE GOVERNMENT NATIONAL MORTGAGE
ASSOCIATION (GNMA). THESE SECURITIES HAD AN AMORTIZED COST OF $405,000 AND A
MARKET VALUE OF $436,000. OTHER MORTGAGE-BACKED PASS-THROUGH SECURITIES
ISSUED BY VARIOUS UNITED STATES GOVERNMENT AGENCIES AND CORPORATIONS WITH A
BOOK VALUE OF $1,995,000 AND A MARKET VALUE OF $1,962,000 WERE ALSO HELD AT
DECEMBER 31, 1995. AT DECEMBER 31, 1995, NONE OF THE COLLATERALIZED MORTGAGE
OBLIGATIONS OWNED BY UCB WERE CONSIDERED HIGH-RISK MORTGAGE SECURITIES UNDER
CURRENT REGULATORY GUIDELINES.
The aggregate amortized cost and approximate market value of the securities
available for sale and investment securities portfolios at December 31, 1995, by
remaining contractual maturity are summarized as follows:
Securities Available
for Sale Investment Securities
Approximate Approximate
Amortized Market Amortized Market
Cost Value Cost Value
(In thousands)
Debt securities:
Due in 1 year or less............................................ $ 277,531 $ 278,572 $12,356 $12,551
Due in 1 year through 5 years.................................... 437,703 441,964 22,842 23,636
Due after 5 years through 10 years............................... 1,298 1,290 19,982 20,629
Due after 10 years............................................... 100 100 4,247 4,523
Mortgage-backed securities....................................... 27,166 26,865 -- --
Total debt securities......................................... 743,798 748,791 59,427 61,339
Equity securities.................................................. 10,706(1) 10,706(1) -- --
Total securities.............................................. $ 754,504 $ 759,497 $59,427 $61,339
(1) AT DECEMBER 31, 1995, UCB OWNED STOCK IN THE FEDERAL HOME LOAN BANK OF
ATLANTA WITH BOOK AND MARKET VALUES OF $10,144,000, WHICH IS INCLUDED IN
EQUITY SECURITIES AND CLASSIFIED AS AVAILABLE FOR SALE.
During 1995, investment securities with a book value of $3,807,000 were put
back to the issuer. The decision to exercise the put option contained in the
original bond purchase agreement was the result of the lowering of the debt
ratings on these securities to a level below the minimum standards specified by
UCB's investment policy. Gains of $3,000 were realized on this transaction.
42
NOTE 2 -- SECURITIES -- CONTINUED
Proceeds from the sale of investments in securities classified as available
for sale amounted to $18,868,000 in 1994. Losses of $32,000 in 1994 were
realized on these sales.
Proceeds from the sale of debt securities for the year ended December 31,
1993, amounted to $3,673,000. Gains of $53,000 were realized on these sales
during 1993.
Securities with book values of $383,071,000 at December 31, 1995, and
$397,165,000 at December 31, 1994, were pledged to secure public funds on
deposit, securities sold under agreement to repurchase, and for other purposes
required by law. See Note 6.
At December 31, 1995, UCB owned securities of no issuers other than the
United States government that exceeded 10% of UCB's stockholders' equity.
At December 31, 1995, UCB owned municipal bonds with a book value of
$166,000 that had ratings of less than investment grade and securities with a
book value of $2,120,000 at December 31, 1995, which had not been rated by a
rating agency. Included in the unrated securities were bonds with a book value
of $1,381,000 that are collateralized by United States government securities.
The majority of the balance of unrated municipal bonds as well as the securities
that had ratings of less than investment grade were bonds issued by
municipalities located within UCB's market areas. UCB monitors the operations of
these municipalities, and it is management's opinion that no more than a normal
risk of loss exists on these securities.
Other than the mortgage-backed securities discussed above, UCB owned no
securities at December 31, 1995, which were considered derivative investments by
regulatory authorities.
43
NOTE 3 -- LOANS AND RESERVE FOR CREDIT LOSSES
The following is a summary of loans outstanding by major classification:
December 31,
1995 1994
(In thousands)
Loans secured by real estate:
Construction and land acquisition and development............................................... $ 210,658 $ 175,975
Secured by nonfarm, nonresidential properties................................................... 580,047 533,521
Secured by farmland............................................................................. 88,980 82,542
Secured by multifamily residences............................................................... 60,878 62,183
Total loans secured by real estate, excluding loans secured by 1-4 family
residences................................................................................. 940,563 854,221
Revolving credit secured by 1-4 family residences............................................... 130,457 116,672
Other loans secured by 1-4 family residences(1)................................................. 565,633 535,139
Total loans secured by 1-4 family residences................................................. 696,090 651,811
Total loans secured by real estate........................................................... 1,636,653 1,506,032
Commercial, financial, and agricultural loans, excluding loans secured by real estate............. 267,302 237,656
Loans to individuals for household, family, and other personal expenditures,
excluding loans secured by real estate.......................................................... 673,123 607,606
All other loans and lease receivables............................................................. 83,471 67,852
Total loans.................................................................................. 2,660,549 2,419,146
Unearned income................................................................................. (606) (988)
Loans, net of unearned income................................................................ $2,659,943 $2,418,158
(1) INCLUDES $16,084,000 AT DECEMBER 31, 1995, AND $4,821,000 AT DECEMBER 31,
1994, IN PERMANENT MORTGAGES ORIGINATED FOR SALE IN THE SECONDARY MARKET
WHICH ARE STATED AT THE LOWER OF AGGREGATE COST OR MARKET VALUE.
It is UCB's policy to review each prospective credit in order to determine
acceptable repayment terms, levels of collateral required, if any, and such
other conditions as may be appropriate to secure the credit prior to commitment.
The type of collateral accepted ranges from highly liquid assets, such as cash
on deposit, to unimproved real estate.
At December 31, 1995, substantially all of UCB's loan portfolio was
originated by UCB to borrowers either domiciled in or who had business
operations in North Carolina or South Carolina. UCB had no excessive
concentrations of credit to borrowers in any market. At December 31, 1995,
$1,636,653,000, or 61.5%, of UCB's loan portfolio was composed of loans
collateralized by liens on real estate which included $696,090,000 (26.2% of
total loans) in loans collateralized by liens on 1-4 family residences.
The following is a summary of nonperforming and problem assets. Net
unrecorded and foregone interest income of $453,000 in 1995, $629,000 in 1994,
and $997,000 in 1993 was attributable to loans carried in nonaccrual status and
loans accounted for as troubled debt restructurings at each year-end.
December 31,
1995 1994
(In thousands)
Foreclosed assets....................................................................................... $ 5,047 $ 5,296
Nonaccrual loans........................................................................................ 4,866 5,200
Total foreclosed assets and nonaccrual loans.......................................................... 9,913 10,496
Restructured loans(1)................................................................................... -- 8,823
Total nonperforming assets............................................................................ 9,913 19,319
Loans 90 days or more past due, excluding nonaccrual loans.............................................. 5,242 4,634
Total problem assets.................................................................................. $15,155 $23,953
(1) REPRESENTS A REDUCED RATE LOAN PERFORMING IN ACCORDANCE WITH RESTRUCTURED
TERMS WHICH WAS REPAID IN 1995.
44
NOTE 3 -- LOANS AND RESERVE FOR CREDIT LOSSES -- CONTINUED
The following table sets forth the analysis of the consolidated reserve for
credit losses:
Years Ended December 31,
1995 1994 1993
(In thousands)
Balance, January 1........................................................................... $38,681 $39,098 $36,780
Reserve of purchased financial institution................................................. -- -- 1,352
Provision for credit losses................................................................ 6,800 3,371 4,993
Recoveries of losses previously charged off................................................ 2,888 1,751 2,917
Losses charged to reserve.................................................................. (7,852) (5,539) (6,944)
Balance, December 31......................................................................... $40,517 $38,681 $39,098
UCB's subsidiary banks have had loan transactions with directors and
executive officers of UCB and its subsidiaries and their associates. In
management's opinion, all such loans were made on the same terms, including
interest rates and collateral, as those prevailing for comparable transactions
with other persons and did not involve more than the normal risk of
collectibility or present other unfavorable features. None of these loans were
classified as problem assets at December 31, 1995. Summary data with respect to
these transactions follows:
Balance at
Beginning Amounts
of Year(1) Additions Collected(2)
(In thousands)
Year ended December 31, 1995............................................... $ 41,506 $ 53,493 $ 54,026
Balance at
End of Year(1)
Year ended December 31, 1995............................................... $ 40,973
(1) DOES NOT INCLUDE LOANS TO UNAFFILIATED BORROWERS PURCHASED FROM CERTAIN
DIRECTORS OF UCB AND ITS SUBSIDIARIES AND THEIR ASSOCIATES FOR WHICH THE
DIRECTORS AND THEIR ASSOCIATES HAVE NO DIRECT OR CONTINGENT LIABILITY FOR
REPAYMENT. THE LOANS, WHICH HAVE NONPREFERENTIAL TERMS, HAD AGGREGATE
PRINCIPAL BALANCES OUTSTANDING OF $33,755,000 AT JANUARY 1, 1995, AND
$39,526,000 AT DECEMBER 31, 1995.
(2) INCLUDES JANUARY 1, 1995, BALANCES OF LOANS TOTALING $96,000 TO DIRECTORS
AND EXECUTIVE OFFICERS OF UCB AND ITS SUBSIDIARIES AND THEIR ASSOCIATES WHO
WERE NOT SERVING IN SUCH CAPACITY AT DECEMBER 31, 1995.
45
NOTE 3 -- LOANS AND RESERVE FOR CREDIT LOSSES -- CONTINUED
Effective January 1, 1995, UCB adopted Financial Accounting Standards No.
114 (FAS 114), "Accounting by Creditors for Impairment of a Loan," and Financial
Accounting Standards No. 118 (FAS 118), "Accounting by Creditors for Impairment
of a Loan-Income Recognition and Disclosure." These statements amend FAS 5,
"Accounting for Contingencies," to clarify that a creditor should evaluate the
collectibility of both contractual interest and principal of a receivable when
assessing the need for a loss accrual; and FAS 15, "Accounting by Debtors and
Creditors for Troubled Debt Restructurings," to require a creditor to account
for a troubled debt restructuring involving a modification of terms at fair
value as of the date of the restructuring. At December 31, 1995, the recorded
investment in loans that are considered impaired under FAS 114 was $4,866,000
all of which was on a nonaccrual basis. Included in this amount was $1,651,000
of impaired loans for which $300,000 of the reserve for credit losses was
assigned. The average recorded investment during 1995 in loans classified as
impaired at December 31, 1995, was approximately $6,000,000. During 1995, UCB
recognized interest income on these impaired loans of $34,000 using the cash
basis of accounting. Prior to January 1, 1995, UCB measured loan impairment in a
manner generally consistent with the methods prescribed in FAS 114, and, as a
result, no additions to the reserve for credit losses were required due to the
adoption of this accounting standard.
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 $15,750,000 at December 31, 1995, 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.
NOTE 4 -- MORTGAGE SERVICING RIGHTS
Effective April 1, 1995, UCB adopted the provisions of Financial Accounting
Standards No. 122 (FAS 122), "Accounting for Mortgage Servicing Rights, an
amendment of FASB Statement No. 65." This statement amends certain provisions of
FAS 65 to eliminate the distinction between rights to service mortgage loans for
others that are acquired through loan origination activities and rights to
service mortgage loans for others that are acquired through purchase
transactions. Under FAS 65, the cost of originated mortgage servicing rights was
not recognized as an asset and was charged to earnings when the related loan was
sold. As a result of adopting FAS 122, beginning April 1995, the estimated fair
values of the rights to service mortgage loans for others have been capitalized
on loans originated by UCB. This resulted in an increase in the gains on the
sale of mortgage loans into the secondary market totaling $592,000 during 1995.
FAS 122 has a different cost allocation methodology than FAS 65 for
purchased mortgage servicing rights. FAS 65 allocated such costs incurred in
excess of the market value of the loans without the servicing rights, whereas
FAS 122 allocates costs based on the relative market values of the purchased
servicing rights and the related loans. The application of the FAS 122 cost
allocation method to purchased mortgage servicing rights acquired during 1995
was not material.
FAS 122 also requires that all capitalized servicing rights be evaluated
for impairment based on the excess of the carrying amount of such rights over
their fair value. For purposes of measuring impairment, capitalized mortgage
servicing rights are stratified on the basis of one or more of the predominant
risk characteristics of the underlying loans. The adoption of FAS 122 resulted
in an impairment adjustment to capitalized mortgage servicing rights of $104,000
at December 31, 1995.
The following is an analysis of capitalized mortgage servicing rights:
Year Ended
December 31, 1995
(In thousands)
Balance, January 1......................................................................................... $ 2,555
Originated servicing rights.............................................................................. 592
Purchased servicing rights............................................................................... 1,331
Amortization............................................................................................. (691)
Balance, December 31....................................................................................... 3,787
Valuation allowance...................................................................................... (104)
Net balance, December 31................................................................................... $ 3,683
46
NOTE 5 -- PREMISES AND EQUIPMENT
A summary of premises and equipment is as follows:
Accumulated Net Book
Cost Depreciation Value
(In thousands)
December 31, 1995:
Land..................................................................................... $13,778 $-- $ 13,778
Buildings and leasehold improvements..................................................... 49,699 20,621 29,078
Furniture and equipment.................................................................. 30,212 20,810 9,402
Total................................................................................. $93,689 $41,431 $ 52,258
December 31, 1994:
Land..................................................................................... $13,574 $-- $ 13,574
Buildings and leasehold improvements..................................................... 48,322 19,018 29,304
Furniture and equipment.................................................................. 28,102 18,395 9,707
Total................................................................................. $89,998 $37,413 $ 52,585
Depreciation expense is included in the consolidated statements of income
as follows:
Years Ended December 31,
1995 1994 1993
(In thousands)
Depreciation charged to occupancy expense................................................... $1,737 $1,879 $1,684
Depreciation charged to equipment expense................................................... 3,042 2,958 2,553
Depreciation charged to other operating expenses............................................ 185 190 207
Total depreciation expense................................................................ $4,964 $5,027 $4,444
NOTE 6 -- SHORT-TERM BORROWINGS
Short-term borrowings are summarized as follows:
December 31,
1995 1994
(In thousands)
Federal funds purchased.............................................................................. $16,820 $10,740
Securities sold under agreement to repurchase........................................................ 9,828 47,612
Treasury tax and loan depository note accounts....................................................... 2,683 2,876
Federal Home Loan Bank advances...................................................................... -- 25,000
Total short-term borrowings........................................................................ $29,331 $86,228
Federal funds purchased represent unsecured overnight borrowings from other
financial institutions by UCB's subsidiary banks. 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 depository
note accounts are payable on demand to the United States Treasury by UCB's
subsidiary banks and are collateralized by state, county, and municipal
securities. Interest on borrowings under these arrangements is payable monthly
at .25% below the average federal funds rate as quoted by the Federal Reserve
Board. Federal Home Loan Bank advances represented borrowings from the Federal
Home Loan Bank of Atlanta by UCB's subsidiary banks pursuant to lines of credit
collateralized by a blanket lien on qualifying loans secured by first mortgages
on 1-4 family residences. These advances had an initial maturity of less than
one year with interest payable monthly.
47
NOTE 7 -- MORTGAGES AND OTHER NOTES PAYABLE
Mortgages payable totaled $121,000 at December 31, 1995, and $145,000 at
December 31, 1994. The mortgages bear interest at annual rates ranging from
8.75% to 10% and are collateralized by premises with book values of $470,000 at
December 31, 1995, and $476,000 at December 31, 1994. The mortgages are payable
primarily in monthly installments totaling approximately $3,000, including
interest.
Other notes payable totaled $125,000 at December 31, 1995 and 1994, and
consisted of an unsecured note payable which bears interest at an annual rate of
10%, payable monthly, with the principal due March 1, 1996.
Advances from the Federal Home Loan Bank of Atlanta with an initial
maturity of more than one year totaled $2,729,000 at December 31, 1995, and
$2,035,000 at December 31, 1994. The advances are collateralized by a blanket
lien on qualifying loans secured by first mortgages on 1-4 family residences and
bear interest at rates ranging from 3.50% to 8.30%, payable monthly, with
principal due at various maturities beginning November 24, 1996.
At December 31, 1995, UCB's subsidiary banks had immediately available
credit lines from the Federal Home Loan Bank of Atlanta totaling $89,792,000
collateralized by blanket liens on qualifying loans secured by first mortgages
on 1-4 family residences. This amount could be increased to $382,754,000 by the
purchase of an additional $31,963,000 of common stock in the Federal Home Loan
Bank of Atlanta by UCB's subsidiary banks.
NOTE 8 -- EMPLOYEE BENEFIT AND INCENTIVE COMPENSATION PLANS
UCB and its subsidiaries maintain a noncontributory qualified defined
benefit pension plan covering all eligible employees with one or more years of
service as of the beginning of the plan's fiscal year. Benefits are based on
years of service and the average of the highest basic compensation paid in any
five consecutive calendar years during the ten calendar years preceding the
earlier of the employee's actual or normal retirement age.
The net periodic pension cost charged to operating expense related to this
plan was $2,378,000 in 1995, $3,030,000 in 1994, and $2,872,000 in 1993. In
addition, $5,707,000 was expensed during 1994 in connection with the
restructuring charges incurred. See Note 18.
The major assumptions used in preparing the actuarial calculations for the
qualified defined benefit pension plan are set forth in the following table:
Years Ended December 31,
1995 1994 1993
Weighted average discount rate.................................................................. 7.5% 8.0% 7.0%
Expected long-term return on plan assets........................................................ 8.0% 8.0% 8.0%
Expected increase in salary levels.............................................................. 5.5% 5.5% 5.5%
48
NOTE 8 -- EMPLOYEE BENEFIT AND INCENTIVE COMPENSATION PLANS -- CONTINUED
The following table sets forth the qualified pension plan's funded status
and amounts recognized in UCB's Consolidated Balance Sheets:
December 31,
1995 1994
(In thousands)
Actuarial present value of accumulated benefit obligation:
Vested benefits.................................................................................... $ 39,317 $ 35,756
Nonvested benefits................................................................................. 484 217
Total present value of accumulated benefit obligation........................................... $ 39,801 $ 35,973
Projected benefit obligation......................................................................... $ 53,126 $ 47,370
Plan assets at fair value, primarily marketable securities........................................... (45,496) (35,682)
Projected benefit obligation in excess of plan assets................................................ 7,630 11,688
Unrecognized net transition asset being amortized over 17 years...................................... 2,562 2,847
Unrecognized prior service cost...................................................................... (782) (860)
Unrecognized net loss................................................................................ (4,046) (4,899)
Accrued plan liability included in the consolidated balance sheets................................. $ 5,364 $ 8,776
The net periodic pension cost applicable to the qualified pension plan
included the following components:
Years Ended December 31,
1995 1994 1993
(In thousands)
Service costs-benefits earned during the period................................................ $1,927 $ 2,502 $ 2,337
Interest costs on projected benefit obligation................................................. 3,712 3,132 2,827
Return on plan assets.......................................................................... (6,443) 561 (1,899)
Net amortization and deferrals................................................................. 3,182 (3,165) (393)
Net pension expense applicable to qualified plan............................................. $2,378 $ 3,030 $ 2,872
UCB and its subsidiaries maintain a nonqualified supplemental pension plan
to provide benefits to senior officers where the salary replacement ratio under
UCB's qualified defined benefit plan is projected to be less than 60% of final
average pay at normal retirement. This plan is designed to provide a minimum
level of benefits after consideration of benefits received from UCB's qualified
pension plan, 50% of primary social security, and pension benefits received from
previous employers. The net periodic pension cost charged to operations for the
supplemental pension plan was $562,000 in 1995, $383,000 in 1994, and $241,000
in 1993. In addition, $2,347,000 was expensed during 1994 in connection with the
restructuring charges incurred. See Note 18.
The major assumptions used in preparing the actuarial calculations for the
nonqualified supplemental pension plan are as follows:
Years Ended December 31,
1995 1994 1993
Weighted average discount rate.................................................................. 7.5% 8.0% 7.0%
Expected increase in salary levels.............................................................. 5.5% 5.5% 5.5%
49
NOTE 8 -- EMPLOYEE BENEFIT AND INCENTIVE COMPENSATION PLANS -- CONTINUED
The following table sets forth the supplemental pension plan's funded
status and amounts recognized in UCB's Consolidated Balance Sheets:
December 31,
1995 1994
(In thousands)
Actuarial present value of accumulated benefit obligation:
Vested benefits......................................................................................... $4,140 $ 3,093
Nonvested benefits...................................................................................... 521 518
Total present value of accumulated benefit obligation................................................ $4,661 $ 3,611
Projected benefit obligation.............................................................................. $5,155 $ 4,495
Plan assets at fair value................................................................................. -- --
Projected benefit obligation in excess of plan assets..................................................... 5,155 4,495
Intangible asset to recognize minimum liability........................................................... 487 132
Unrecognized prior service costs.......................................................................... (950) (1,052)
Unrecognized net gain (loss).............................................................................. (190) 36
Accrued plan liability included in the consolidated balance sheets................................... $4,502 $ 3,611
The net periodic pension cost applicable to the supplemental pension plan
included the following components:
Years Ended
December 31,
1995 1994 1993
(In thousands)
Service costs-benefits earned during the period....................................................... $101 $124 $104
Interest costs on projected benefit obligation........................................................ 360 153 72
Amortization of prior service cost.................................................................... 101 106 65
Pension expense applicable to supplemental plan..................................................... $562 $383 $241
UCB and its subsidiaries maintain a defined benefit retiree health care
plan covering all employees who retire after age 55 with ten years of service.
Lifetime benefits provided by the plan for each covered employee is limited to
$1,000,000. Retired employees may purchase similar health care benefits for
their spouses, subject to the same lifetime limitation. Effective January 1,
1993, UCB adopted FAS 106, "Employers' Accounting for Postretirement Benefits
Other than Pensions," which requires the recognition of the accumulated benefit
obligation for UCB's retiree health care plan as well as the periodic costs of
providing retiree health coverage. The actuarial present value of the
accumulated postretirement health care benefit obligation amounted to $7,890,000
at January 1, 1993, and is being amortized over 20 years.
Net periodic retiree health care expense charged to operations was
$1,116,000 in 1995, $1,026,000 in 1994, and $1,038,000 in 1993. In addition,
$1,130,000 was expensed during 1994 in connection with the restructuring charges
incurred. See Note 18. The projected benefit obligation was determined using a
weighted average discount rate of 7.5% at December 31, 1995, and 8.0% at
December 31, 1994, and an expected inflation rate for health care expenses for
each year starting at 14.0% in the current year and graded to 6.0% after five
years. The projected benefit obligation at December 31, 1993, was determined
using a weighted average discount rate of 7.0% and an expected inflation rate
for health care expenses starting at 16.5% in the current year and graded to
6.5% after seven years. Increasing the health care cost trend rates by one
percentage point would increase the accumulated postretirement benefit
obligation at December 31, 1995, by $657,000 and annual aggregate service and
interest costs by $53,000.
50
NOTE 8 -- EMPLOYEE BENEFIT AND INCENTIVE COMPENSATION PLANS -- CONTINUED
The following table sets forth the retiree health care plan's funded status
and amounts recognized in UCB's Consolidated Balance Sheets:
December 31,
1995 1994
(In thousands)
Actuarial present value of accumulated benefit obligation:
Retirees............................................................................................... $ 8,421 $ 7,310
Fully eligible active plan participants................................................................ 193 142
Other active plan participants......................................................................... 967 791
Total present value of accumulated benefit obligation............................................... 9,581 8,243
Plan assets at fair value................................................................................ -- --
Present value of accumulated benefit obligation in excess of plan assets................................. 9,581 8,243
Unrecognized net transition asset being recognized over 20 years......................................... (6,707) (7,101)
Unrecognized net gain.................................................................................... 771 1,613
Accrued plan liability included in the consolidated balance sheets.................................. $ 3,645 $ 2,755
Postretirement health care expense included the following components:
Years Ended
December 31,
1995 1994 1993
(In thousands)
Service costs-benefits earned during the period.................................................. $ 76 $ 110 $ 100
Interest costs on present value of accumulated benefit obligation................................ 672 523 544
Net amortization and deferrals................................................................... 368 393 394
Postretirement health care expense............................................................. $1,116 $1,026 $1,038
UCB and its subsidiaries maintain a defined contribution postemployment
health care plan covering all employees who become disabled. Lifetime benefits
provided by the plan for each covered disabled former employee is limited to
$1,000,000. Similar health care benefits may be purchased for their spouses,
subject to the same lifetime limitation. Effective January 1, 1994, UCB adopted
FAS 112, "Employers' Accounting for Postemployment Benefits," which requires the
accrual of expenses for the estimated cost of benefits provided for employees
after employment but before retirement. The adoption of FAS 112 required
immediate recognition of the actuarially determined liability for postemployment
benefits which amounted to $529,000 at December 31, 1993. The recognition of the
liability, net of related deferred income taxes, resulted in a charge against
net income of $316,000 which was reported separately in the consolidated
statement of income for the year ended December 31, 1994, as a cumulative effect
of a change in accounting method. The net periodic postemployment health care
expense charged to operations was $37,000 in 1995 and $52,000 in 1994. Prior to
1994, postemployment health care expenses were charged to income as the expenses
were incurred.
The accumulated postemployment health care benefit obligation at December
31, 1995, amounted to $394,000 and $478,000 at December 31, 1994. The
accumulated postemployment health care benefit obligation at December 31, 1995
and 1994, was determined using a weighted average discount rate of 8.0% and an
expected inflation rate for health care expenses starting at 14.0% in the
current year and graded to 6.5% after five years. The accumulated postemployment
health care benefit obligation at January 1, 1994, was determined using a
weighted average discount rate of 7.0% and an expected inflation rate for health
care expenses starting at 15.5% in the current year and graded to 6.5% after
seven years.
UCB maintains a tax-qualified employee savings plan which was established
pursuant to Section 401(k) of the Internal Revenue Code. Regular employees who
participate may contribute up to 6% of their annual compensation (not to exceed
$9,000) to the plan. UCB contributes an amount equal to the employee's
contribution and may make an additional discretionary profit-sharing
contribution to the plan. Total employer contributions to the savings plan
amounted to $2,381,000 in 1995, $2,425,000 in 1994, and $2,066,000 in 1993. No
discretionary profit-sharing contributions have been made to the plan since its
inception in 1985. The plan purchased 322,121 shares of UCB common stock during
the year ended December 31, 1995, 370,753 shares during 1994, and 302,899 shares
during 1993. The plan held 2,503,158 shares of UCB common stock at December 31,
1995, 2,478,139 shares at December 31, 1994, and 2,201,902 shares at December
31, 1993.
51
NOTE 8 -- EMPLOYEE BENEFIT AND INCENTIVE COMPENSATION PLANS -- CONTINUED
Effective January 1, 1994, UCB established a long-term incentive
compensation plan for the benefit of members of senior management. Under the
terms of the plan, awards, which have a value contingent upon the level of
future corporate performance compared to predetermined targets, have been
granted subject to a five-year vesting period. Any payments to participants
pursuant to this plan will generally be made in UCB common stock at the end of
the vesting period except under certain defined circumstances. Charges to
operating expenses in connection with the 1994 long-term incentive plan amounted
to $836,000 in 1995 and $557,000 in 1994.
UCB previously had a long-term incentive compensation plan participated in
by members of senior management. Under the terms of this plan, base units which
have a fixed cash value and performance units with a cash value contingent upon
future corporate performance were granted subject to, in most cases, a five-year
vesting period. At the end of the vesting period, participants will receive
payment in cash for the value of the base units and performance units. Charges
to operating expenses in connection with the long-term cash incentive plan
amounted to $282,000 in 1993. As a result of the establishment of the
above-described long-term incentive plan effective January 1, 1994, this plan
was terminated, and unvested awards were paid on a prorated basis to the plan
participants.
UCB has a nonqualified stock option plan. Under the terms of the plan,
options to purchase up to 300,000 shares may be granted to members of UCB's
senior management. The option price per share is the median bid/asked closing
price per share of UCB's common stock as quoted by the National Association of
Securities Dealers Automated Quotation system on the date of the grant. Options
may be exercised within periods ranging from two to five years following, in
most cases, a five-year vesting period. No options to purchase shares were
granted under this plan during 1995.
During 1995, UCB established a Stock Option and Incentive Award Plan. Under
terms of the plan, options to purchase up to 900,000 shares may be granted to
members of UCB's management. The option price per share of options granted under
the plan was the median bid/asked closing price per share of UCB's common stock
as quoted by the National Association of Securities Dealers Automated Quotation
system on the date of the grant. Options may be exercised after vesting periods
ranging from two to five years. The plan is subject to shareholder approval and
is designed to replace the nonqualified stock option plan described above.
The following table sets forth the pertinent data regarding the options
outstanding, all of which are nonqualified, with respect to UCB's stock option
plans:
Years Ended December 31,
1995 1994 1993
WEIGHTED Weighted
NUMBER AVERAGE Number Average Number
OF SHARES(1) PRICE(1) of Shares(1) Price(1) of Shares(1)
Options outstanding at beginning of year............... 204,790 $10.44 254,380 $ 9.32 215,166
Options granted........................................ 71,456 20.83 9,000 18.17 82,888
Options exercised...................................... (36,691) 6.76 (58,590) 6.76 (34,500)
Options forfeited...................................... (10)(2) 11.40 -- -- (9,174)
Options outstanding at end of year..................... 239,545 $14.11 204,790 $10.44 254,380
Options exercisable at end of year..................... 11,836 $ 6.76 48,530 $ 6.76 --
Weighted
Average
Price(1)
Options outstanding at beginning of year............... $ 9.07
Options granted........................................ 10.01
Options exercised...................................... 10.12
Options forfeited...................................... 6.76
Options outstanding at end of year..................... $ 9.32
Options exercisable at end of year..................... $--
(1) ADJUSTED FOR THE 3-FOR-2 STOCK SPLIT EFFECTED IN THE FORM OF A STOCK
DIVIDEND DECLARED JANUARY 17, 1996.
(2) SHARES FORFEITED DUE TO TRUNCATION OF FRACTIONAL SHARES CAUSED BY
RESTATEMENT FOR 3-FOR-2 STOCK SPLIT EFFECTED IN THE FORM OF A STOCK DIVIDEND
DECLARED JANUARY 17, 1996.
Effective January 1, 1994, UCB established the Management Incentive Plan to
provide annual incentive compensation in addition to base salary to key
management and staff employees. The maximum aggregate incentive compensation
which may be awarded pursuant to this plan in any year is determined based on a
percentage of the participants' base salaries for the calendar year adjusted to
reflect UCB's achievement of the corporate performance target for net operating
earnings per share (income per share before cumulative effects of changes in
accounting methods for the calendar year adjusted for the net effect of
poolings-of-interest merger acquisitions, restructuring charges, and certain
other adjustments) and, in some cases, the attainment of performance targets
established for individual operating units. The charge to operating expenses in
connection with the Management Incentive Plan was $1,958,000 in 1995 and
$2,351,000 in 1994.
52
NOTE 8 -- EMPLOYEE BENEFIT AND INCENTIVE COMPENSATION PLANS -- CONTINUED
UCB previously had two annual incentive plans to provide incentive
compensation in addition to base salary to key management and staff employees.
The Senior Management Incentive Plan was established to provide incentive
compensation to executive and senior officers while the Management Incentive
Plan provided incentive compensation to mid-management officers. These plans
were terminated as of October 1, 1993, and replaced by a new annual incentive
plan which is discussed above. The charge to operating expenses in connection
with the Senior Management Incentive Plan was $925,000 in 1993 while the charge
for the Management Incentive Plan was $375,000 in 1993.
NOTE 9 -- INCOME TAX PROVISION
Components of the consolidated income tax provision are as follows:
Years Ended December 31,
1995 1994 1993
(In thousands)
Taxes currently payable:
Federal................................................................................ $23,030 $16,974 $15,066
State.................................................................................. 2,943 2,357 1,855
Total taxes currently payable....................................................... 25,973 19,331 16,921
Net deferred income tax benefits:
Federal................................................................................ (601) (1,682) (956)
State.................................................................................. (202) (451) (123)
Total net deferred income tax benefits.............................................. (803) (2,133) (1,079)
Total income tax provision............................................................... $25,170 $17,198 $15,842
Total income tax expense for the periods shown below is less than the
amount computed by applying the statutory federal income tax rate (35% in 1995,
1994, and 1993) to income before income taxes for the following reasons:
Years Ended December 31,
1995 1994 1993
(In thousands)
Computed income tax provision................................................................ $24,279 $16,542 $16,961
Increase (decrease) in taxes resulting from:
Tax-exempt income on investments........................................................ (1,729) (1,935) (2,077)
State income taxes, net of federal tax benefit.......................................... 1,782 1,239 1,110
Other, net.............................................................................. 838 1,352 (152)
Total income tax provision................................................................... $25,170 $17,198 $15,842
Income tax provision related to gains (losses) on dispositions of securities................. $ 3 $ (11) $ 23
Effective January 1, 1993, UCB adopted Financial Accounting Standards No.
109 (FAS 109), "Accounting for Income Taxes." This statement requires a balance
sheet approach to financial accounting for income taxes. Deferred tax assets and
liabilities are required to be revalued annually using enacted tax rates
expected to apply to taxable income in the years in which those temporary
differences are expected to be recovered or settled. Subsequent changes in tax
rates will require adjustments to these assets and liabilities. The cumulative
effect of this change in accounting for income taxes was $855,000 and was
reported separately in the consolidated statement of income for the year ended
December 31, 1993, as the cumulative effect of a change in accounting method.
Prior years' consolidated financial statements have not been restated to apply
the provisions of FAS 109.
53
NOTE 9 -- INCOME TAX PROVISION -- CONTINUED
At December 31, 1995, UCB had recorded a net deferred tax asset of
$14,641,000. This deferred tax asset is less than the income taxes paid in prior
years that are currently available to offset tax losses, therefore, no valuation
allowance is necessary for deferred tax assets at December 31, 1995. The sources
and tax effects of temporary differences that give rise to significant portions
of the deferred tax assets and deferred tax liabilities are shown below:
December 31,
1995 1994
(In thousands)
Reserve for credit losses.............................................................................. $ 16,223 $15,488
Deferred gains on asset sales.......................................................................... 767 839
Benefit plan accruals.................................................................................. 5,721 6,092
Deferred compensation accruals......................................................................... 558 1,165
Other temporary differences creating deferred tax assets............................................... 1,970 3,167
Total deferred tax assets............................................................................ 25,239 26,751
Accelerated depreciation............................................................................... (3,088) (3,215)
Deferred loan origination fees, net of deferred costs.................................................. (1,389) (1,293)
Other temporary differences creating deferred tax liabilities.......................................... (6,121) (4,654)
Total deferred tax liabilities....................................................................... (10,598) (9,162)
Net deferred tax assets........................................................................... $ 14,641 $17,589
NOTE 10 -- SUPPLEMENTARY INCOME STATEMENT INFORMATION
The following is a breakdown of items included in "Other noninterest
expenses, excluding restructuring charges" on the consolidated statements of
income:
Years Ended December 31,
1995 1994 1993
(In thousands)
Other noninterest expenses, excluding restructuring charges:
Data processing fees and software expense.................................................. $ 5,245 $ 4,102 $ 3,779
Marketing and business development......................................................... 4,423 3,841 3,803
Postage and delivery....................................................................... 3,674 3,293 2,888
FDIC deposit insurance premiums............................................................ 3,593 6,138 5,663
Outside services........................................................................... 3,514 3,240 2,791
Printing, stationery, and supplies......................................................... 3,502 2,654 2,687
Telephone expense.......................................................................... 2,838 2,153 2,132
Amortization of goodwill and other intangible assets....................................... 2,197 950 438
Noncredit losses........................................................................... 1,857 1,309 1,467
Travel expense............................................................................. 1,805 1,940 1,735
Insurance and taxes, other than taxes on income............................................ 1,239 1,209 1,160
Amortization of capitalized mortgage servicing rights...................................... 691 1,440 2,167
Subscriptions and dues..................................................................... 571 594 585
Donations.................................................................................. 316 668 521
Other expenses............................................................................. 2,977 2,704 2,838
Total other noninterest expenses, excluding restructuring charges....................... $ 38,442 $ 36,235 $ 34,654
54
NOTE 11 -- COMMITMENTS AND CONTINGENT LIABILITIES
FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET RISKS -- In the normal course
of business, UCB's banking subsidiaries are parties to financial instruments
with off-balance sheet risks. These financial instruments include commitments to
extend credit, financial guarantees, standby letters of credit, permanent
mortgage loans sold with limited recourse provisions, and forward contracts
represented by commitments to sell securitized mortgage loans. Although the
principal balances of these instruments are not reflected in the accompanying
financial statements, credit and market risks are inherent in these
transactions.
UCB's exposure to credit loss in the event of nonperformance by the party
to whom credit or financial guarantees have been extended is represented by the
contractual amount of the financial instruments. UCB maintains the same credit
policies in making off-balance sheet commitments and financial guarantees as it
does for its on-balance sheet instruments.
Forward contracts to deliver securitized mortgage loans do not represent
exposure to credit loss; rather, they represent market exposure to potential
interest rate risk. UCB controls the market risk of its forward contracts to
deliver securitized mortgage loans by monitoring the volume of loan applications
in process, the estimated closure rate of applications in process, the volume of
commitments to purchase mortgage loans originated by third parties, and the
overall direction of mortgage rates in the secondary market.
The following table sets forth the pertinent information concerning UCB's
off-balance sheet financial instruments with credit or market risk at year-end:
December 31, 1995
Contract Amount
(In thousands)
Off-balance sheet financial instruments whose contract amounts represent credit risk:
Unfunded commitments to extend credit:
Commercial real estate, construction, and land acquisition and development loans.................... $ 201,259
Revolving consumer lines of credit secured primarily by junior liens on 1-4 family residences....... 126,720
Credit card and other unsecured consumer credit lines............................................... 123,952
All other loans..................................................................................... 236,311
Total unfunded commitments to extend credit....................................................... $ 688,242
Standby letters of credit........................................................................... $ 17,356
Permanent mortgage loans sold with limited recourse................................................. $ 4,144
Financial instruments whose contract amounts exceed the amount of credit risk:
Forward contracts to deliver securitized mortgage loans................................................ $ 47,358
Commitments to extend credit are agreements to lend which remain
outstanding over a specified period (usually one year) unless conditions stated
in the contract have been violated. Many of the commitments are expected to
expire without being drawn upon; therefore, the total unfunded commitment
amounts do not necessarily represent future cash requirements. Collateral
obtained, if any, upon extension of credit is based on management's credit
evaluation of the borrower. The collateral may include, but is not limited to,
marketable securities and other liquid assets, accounts receivable, inventory,
and real and personal property. Except for $26,378,000 in commercial lines of
credit which have maturities of more than one year and do not require a separate
credit decision before being drawn upon, UCB's loan commitments are short-term
(less than one year) by contract or are generally restricted to separate credit
decisions for advances pursuant to the commitments.
Included in commitments to extend credit are commitments to originate
residential mortgage loans to be held for sale of approximately $15,476,000 at
December 31, 1995, and $4,311,000 at December 31, 1994, with terms generally not
exceeding 90 days. As discussed in Note 3, mortgage loans held for sale, which
are carried at the lower of aggregate cost or market value and are included in
total loans, were approximately $16,084,000 and $4,821,000 at December 31, 1995
and 1994, respectively. In connection with the commitments to originate
residential mortgage loans and mortgage loans held for sale, management has
entered into forward commitments to sell residential mortgage loans totaling
$47,358,000 at December 31, 1995, and $6,894,000 at December 31, 1994. Such
forward commitments are entered into to reduce UCB's exposure to
55
NOTE 11 -- COMMITMENTS AND CONTINGENT LIABILITIES -- CONTINUED
market risk arising from potential changes in interest rates, which could alter
the underlying market value of the commitments to originate residential mortgage
loans and of mortgage loans held for sale. The forward commitments are at fixed
prices and are scheduled to settle at specified dates which generally do not
exceed 90 days. Loans held for sale and the commitments to originate residential
mortgage loans are valued using the fixed prices of the forward commitments to
sell mortgage loans. Loans held for sale and commitments to originate
residential mortgage loans not covered by existing forward commitments to sell
loans are valued using quoted market prices appropriate for the related loan
characteristics and interest rate levels. Forward commitments not fully
satisfied by loans held for sale and commitments to originate mortgage loans are
valued based on what it would cost to purchase loans in the open market to
fulfill the commitments. The net result of this valuation process is used in
recording the carrying value of mortage loans held for sale at the lower of
aggregate cost or fair value. The fair value of the mortgage loans held for sale
exceeded the aggregate cost by $256,000 at December 31, 1995, and $13,000 at the
end of 1994.
Standby letters of credit and financial guarantees written are commitments
issued by UCB's subsidiary banks to guarantee the performance of a customer to a
third party. The financial instruments are generally short-term (less than one
year) as stated in the contract or are cancelable by UCB at any time. The credit
risk involved in issuing letters of credit is substantially equivalent to that
involved in extending loan commitments, and, accordingly, underwriting
requirements are essentially identical.
Various proposals are currently being considered by committees of the
United States Congress concerning a possible merger of the SAIF and BIF of the
FDIC. One of the principal issues under discussion is the amount of additional
funds needed to recapitalize the SAIF prior to such a merger. Substantially all
of the proposals under consideration contemplate a one-time special assessment
to be levied on SAIF-insured deposits, which assessment has ranged from $.66 to
$.85 per $100 of SAIF-insured deposits maintained by the institution assessed.
In addition, the various proposals differ as to whether the proposed assessment
will be deductible for tax purposes by the institution assessed. At December 31,
1995, UCB had approximately $138 million of SAIF-insured deposits. Due to the
uncertainty as to which, if any, of the various proposals will be adopted and
the ultimate amount and tax deductibility of the assessment to be levied on UCB,
the impact of the proposals and the possible assessment on UCB is impossible to
predict with certainty at this time.
LEASE COMMITMENTS -- Subsidiaries of UCB occupy premises and use equipment
under operating lease agreements. Rental expense under such agreements was as
follows:
Years Ended December 31,
1995 1994 1993
(In thousands)
Rent on premises............................................................................ $ 3,141 $ 3,128 $ 3,097
Rent on equipment........................................................................... 443 448 473
Total rental expense...................................................................... $ 3,584 $ 3,576 $ 3,570
A summary of lease commitments outstanding at December 31, 1995, with terms
of more than 12 months follows. Commitments related to equipment leases are
primarily for data processing equipment as leases on other equipment are
generally cancelable within one year.
Premises Equipment Total
(In thousands)
Years ending December 31,
1996........................................................................................ $ 3,527 $ 268 $ 3,795
1997........................................................................................ 3,541 240 3,781
1998........................................................................................ 3,448 144 3,592
1999........................................................................................ 2,996 38 3,034
2000........................................................................................ 2,767 -- 2,767
Thereafter.................................................................................. 17,533 -- 17,533
Total commitments......................................................................... $ 33,812 $ 690 $ 34,502
Substantially all leases on premises have renewal options, most of which
will likely be exercised. If exercised, additional lease expense of at least
$63,576,000 in the aggregate will be incurred during the option periods.
Therefore, it is not expected that future lease expense will be less than the
expense for 1995.
56
NOTE 11 -- COMMITMENTS AND CONTINGENT LIABILITIES -- CONTINUED
The above lease commitments are based upon current and future rentals as
stated in the lease agreements. No estimates have been included for future
rental increases that may result from adjustments related to the Consumer Price
Index or other cost of living standards that are included in the terms of
certain of the above leases. In management's opinion, any future increases in
rentals that may result from such adjustments are not expected to impact
materially the overall operating results of UCB on a consolidated basis.
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, none of such pending
or threatened legal proceedings will have a material adverse effect on the
consolidated operations, liquidity, or financial position of UCB and its
subsidiaries.
NOTE 12 -- FAIR VALUE OF FINANCIAL INSTRUMENTS
FAS 107, "Disclosures about Fair Value of Financial Instruments," requires
corporations to disclose the fair value of its financial instruments, whether or
not recognized in the balance sheet, where it is practical to estimate that
value.
Fair value estimates made as of December 31, 1995 and 1994, are based on
relevant market information about the financial instruments. These estimates do
not reflect any premium or discount that could result from offering for sale at
one time the corporation's entire holding of a particular financial instrument.
In cases where quoted market prices are not available, fair value estimates are
based on judgments regarding future expected loss experience, current economic
conditions, risk characteristics of various financial instruments, and other
factors. These estimates are subjective in nature and involve uncertainties and
matters of significant judgment and, therefore, cannot be determined with
precision. Changes in assumptions could significantly affect the estimates. In
addition, the tax ramifications related to the realization of the unrealized
gains and losses can have a significant effect on fair value estimates and have
not been considered in the estimates.
The following methods and assumptions were used by UCB in estimating its
fair value disclosures for financial instruments:
CASH AND CASH EQUIVALENTS -- The carrying amounts reported in the balance
sheets for cash and short-term instruments approximate those assets' fair
values.
SECURITIES AVAILABLE FOR SALE AND INVESTMENT SECURITIES -- Fair values were
based on quoted market prices, where available. If quoted market prices were not
available, fair values were based on quoted market prices of comparable
instruments.
LOANS -- The carrying values, reduced by estimated inherent credit losses,
of variable-rate loans and other loans with short-term characteristics were
considered fair values. The fair value of certain 1-4 family residential loans
was based on quoted market prices of similar loans sold in conjunction with
securitization transactions, adjusted for differences in loan characteristics
and credit losses inherent in the portfolio. For other loans, the fair market
values were calculated by discounting scheduled future cash flows using current
interest rates offered on loans with similar terms adjusted to reflect the
estimated credit losses inherent in the portfolio.
ACCRUED INTEREST RECEIVABLE AND ACCRUED INTEREST PAYABLE -- The carrying
amounts reported in the balance sheets for accrued interest receivable and
accrued interest payable approximate their fair values.
DEPOSIT LIABILITIES -- The fair value of deposits with no stated maturity,
such as noninterest-bearing demand deposits, NOW, savings, and money market
deposits, was, by definition, equal to the amount payable on demand as of
December 31, 1995 and 1994. The fair value of certificates of deposit was based
on the discounted value of contractual cash flows, calculated using the discount
rates that equaled the interest rates offered at the valuation date for deposits
of similar remaining maturities.
SHORT-TERM BORROWINGS -- The carrying amounts of federal funds purchased,
borrowings under repurchase agreements, and other short-term borrowings
approximated their fair values.
MORTGAGES AND OTHER NOTES PAYABLE -- Rates currently available to UCB for
debt with similar terms and remaining maturities were used to estimate fair
value of existing mortgages and other notes payable.
57
NOTE 12 -- FAIR VALUE OF FINANCIAL INSTRUMENTS -- CONTINUED
The following is a summary of the carrying amounts and estimated fair
values of UCB's financial assets and liabilities:
December 31,
1995 1994
CARRYING ESTIMATED Carrying Estimated
AMOUNT FAIR VALUE Amount Fair Value
(In thousands)
Financial assets:
Cash and due from banks -- noninterest-bearing..................... $ 164,935 $ 164,935 $ 147,450 $ 147,450
Federal funds sold and other short-term
investments..................................................... 30,097 30,097 82,250 82,250
Securities available for sale...................................... 759,497 759,497 376,913 376,913
Investment securities.............................................. 59,427 61,339 208,249 202,372
Loans, net of reserve for credit losses............................ 2,619,426 2,625,310 2,379,477 2,330,930
Accrued interest receivable........................................ $ 30,241 $ 30,241 $ 23,441 $ 23,441
Financial liabilities:
Deposits........................................................... $3,410,627 $3,417,359 $2,940,599 $2,910,130
Short-term borrowings.............................................. 29,331 29,331 86,228 86,228
Mortgages and other notes payable.................................. 2,975 2,755 2,305 2,404
Accrued interest payable........................................... $ 11,255 $ 11,255 $ 7,595 $ 7,595
At December 31, 1995 and 1994, UCB had outstanding standby letters of
credit and commitments to extend credit. These off-balance sheet financial
instruments are generally exercisable at the market rate prevailing at the date
the underlying transaction will be completed, and, therefore, they were deemed
to have no current fair market value. See Note 11.
Fair value estimates are based on existing on- and off-balance sheet
financial instruments without attempting to estimate the value of anticipated
future business and the value of assets and liabilities that are not considered
financial instruments. Significant assets and liabilities that are not
considered financial assets or liabilities include the discounted value of fee
revenues generated by the trust department, the mortgage banking operation, the
insurance department, and the brokerage operation; nor is the value of deferred
tax assets, premises and equipment, or deposit-base premiums on core deposits
considered. In addition, the value of capitalized mortgage servicing rights is
not included above; however, it is shown in the balance sheets with a remaining
unamortized cost of $3,683,000 at December 31, 1995, and $2,555,000 at December
31, 1994. The estimated fair value of all mortgage servicing rights, including
originated servicing rights not included above or in the balance sheets, was
$8,205,000 at December 31, 1995, and $8,862,000 at December 31, 1994.
NOTE 13 -- REGULATORY RESTRICTIONS
UCB and its subsidiary banks are subject to certain requirements imposed by
state and federal banking statutes and regulations. These requirements, among
other things, establish minimum levels of capital, restrict the amount of
dividends that may be distributed, and require that reserves on deposit
liabilities be maintained in the form of vault cash or noninterest-bearing
deposits with the Federal Reserve Bank.
North Carolina law prohibits United Carolina Bancshares Corporation (Parent
Company) from making any distributions to shareholders, including the payment of
cash dividends, which would render it insolvent or unable to meet its
obligations as they become due in the ordinary course of business. At December
31, 1995, United Carolina Bancshares Corporation had total stockholders' equity
of $301,777,000.
North Carolina law restricts the payment of dividends by UCB's North
Carolina subsidiary bank to the amount of its retained earnings. At December 31,
1995, the Bank had retained earnings of $193,517,000 legally available under
North Carolina law for dividend payments.
UCB's South Carolina subsidiary bank is prohibited by South Carolina law
from paying any cash dividend which would render the Bank insolvent or unable to
meet its obligations as they become due. Further, the payment of any cash
dividend is subject to the prior approval of the South Carolina State Board of
Financial Institutions. At December 31, 1995, UCB's South Carolina subsidiary
bank had total stockholder's equity of $25,475,000.
58
NOTE 13 -- REGULATORY RESTRICTIONS -- CONTINUED
In addition to the dividend restrictions imposed by state statutes, UCB and
its subsidiary banks are subject to federal regulatory risk-based capital
guidelines for banks and bank holding companies. These guidelines require
minimum ratios of core capital (common stockholders' equity, net of goodwill,
and qualifying perpetual preferred stock, subject to certain limitations) to
risk-weighted assets of 4.0% and total capital (core capital, reserve for credit
losses up to 1.25% of risk-weighted assets, mandatory convertible securities,
preferred stock, and subordinated debt, subject to certain limitations) to risk-
weighted assets of 8.0%. As of December 31, 1995, UCB and its subsidiaries
(consolidated) had a ratio of core capital to risk-weighted assets of 10.86% and
a ratio of total capital to risk-weighted assets of 12.11%. Regulatory
guidelines also require a minimum leverage ratio of core capital, as defined for
risk-based guidelines, to average total assets for the previous quarter, ranging
from 3% to 5%, subject to federal bank regulatory evaluation of the
organization's overall safety and soundness. At December 31, 1995, UCB and its
subsidiaries (consolidated) had a ratio of core capital to average total assets
less intangible assets other than capitalized mortgage servicing rights for the
three months ended December 31, 1995, of 7.57%. Pursuant to federal law, UCB and
its subsidiaries are subject to significant restrictions on operations,
including capital distributions, in the event minimum capital ratios are not
maintained.
For the reserve maintenance period in effect at December 31, 1995, UCB's
subsidiary banks were required to maintain average daily vault cash and
noninterest-bearing deposits with the Federal Reserve Bank in the aggregate
amount of $72,707,000 as reserves on deposit liabilities.
UCB's subsidiary banks are members of the Federal Home Loan Bank of Atlanta
(FHLB). Member institutions are required to maintain a minimum investment in the
common stock of the FHLB based on the asset size of the member institution and
the amount of qualifying 1-4 family residential loans. At December 31, 1995,
UCB's subsidiary banks owned $10,144,000 of FHLB common stock.
59
NOTE 14 -- PARENT COMPANY FINANCIAL DATA
Condensed financial information for United Carolina Bancshares Corporation
(Parent Company) is as follows:
December 31,
CONDENSED BALANCE SHEETS 1995 1994
(In thousands)
ASSETS:
Cash on demand deposit with bank subsidiary...................................................... $ 1,140 $ 1,415
Securities available for sale at market value:
United States government securities (amortized costs of $250,000 in 1995
and $9,762,000 in 1994)..................................................................... 251 9,742
Obligations of United States government agencies (amortized costs
of $19,555,000 in 1995 and $8,788,000 in 1994).............................................. 19,551 8,745
Total securities available for sale......................................................... 19,802 18,487
Investments in subsidiaries at underlying book value:
Bank subsidiaries.............................................................................. 282,399 244,608
Nonbank subsidiaries........................................................................... 745 741
Total investments in subsidiaries........................................................... 283,144 245,349
Other assets..................................................................................... 1,491 960
Total assets................................................................................ $ 305,577 $ 266,211
LIABILITIES AND STOCKHOLDERS' EQUITY:
Accrued taxes, expenses, and other liabilities................................................... $ 3,800 $ 2,722
Stockholders' equity............................................................................. 301,777 263,489
Total liabilities and stockholders' equity.................................................. $ 305,577 $ 266,211
Years Ended December 31,
CONDENSED STATEMENTS OF INCOME 1995 1994 1993
(In thousands)
Dividends from bank subsidiaries........................................................... $14,313 $11,939 $10,629
Interest income from bank subsidiary....................................................... 20 24 32
Management fees from bank subsidiary....................................................... 2,972 2,760 2,700
Interest on securities..................................................................... 955 774 552
Total operating income.................................................................. 18,260 15,497 13,913
Personnel expense.......................................................................... 2,097 1,990 1,535
Other expenses............................................................................. 1,544 2,006 1,188
Total operating expenses................................................................ 3,641 3,996 2,723
Income before income taxes................................................................. 14,619 11,501 11,190
Income tax provision (benefit).......................................................... 95 (150) 150
Income before equity in undistributed net income of subsidiaries........................... 14,524 11,651 11,040
Equity in undistributed net income of subsidiaries:
Bank subsidiaries..................................................................... 29,671 18,095 22,431
Nonbank subsidiaries.................................................................. 4 4 1
Net income................................................................................. $44,199 $29,750 $33,472
60
NOTE 14 -- PARENT COMPANY FINANCIAL DATA -- CONTINUED
Years Ended December 31,
CONDENSED STATEMENTS OF CASH FLOWS 1995 1994 1993
(In thousands)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income............................................................................ $ 44,199 $ 29,750 $ 33,472
Adjustments to reconcile net income to net cash provided
by operating activities:
Undistributed earnings of bank subsidiaries......................................... (29,671) (18,095) (22,431)
Undistributed earnings of nonbank subsidiaries...................................... (4) (4) (1)
Provision for deferred income taxes and decrease in taxes payable................... (295) (300) 59
Other, net.......................................................................... 819 972 (67)
Total adjustments................................................................ (29,151) (17,427) (22,440)
Net cash provided by operating activities........................................ 15,048 12,323 11,032
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of available for sale securities............................................ (39,096) (36,349) (34,922)
Maturities of available for sale securities........................................... 37,839 35,459 33,904
Decrease in investments in and advances to nonbank subsidiaries....................... -- -- 642
Net cash used by investing activities............................................ (1,257) (890) (376)
CASH FLOWS FROM FINANCING ACTIVITIES:
Issuance of common stock, net of shares retired....................................... 247 (28) 153
Dividends paid........................................................................ (14,313) (11,939) (10,629)
Net cash used by financing activities............................................ (14,066) (11,967) (10,476)
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS..................................... (275) (534) 180
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR........................................... 1,415 1,949 1,769
CASH AND CASH EQUIVALENTS AT END OF YEAR................................................. $ 1,140 $ 1,415 $ 1,949
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
CASH PAID DURING THE YEAR FOR:
Income taxes, net of reimbursements from subsidiaries................................. $ 110 $ 136 $ 238
SIGNIFICANT NONCASH TRANSACTIONS:
Unrealized gains (losses) on securities available for sale............................ $ 60 $ (58) $ (5)
Unrealized gains (losses) on subsidiaries' securities available for sale.............. $ 11,933 $ (8,350) $ 1,413
NOTE 15 -- QUARTERLY FINANCIAL DATA (UNAUDITED)
Summarized unaudited quarterly financial data for the years ended December
31, 1995 and 1994, is as follows:
1995
First Second Third Fourth
Quarter Quarter Quarter Quarter
(In thousands except per share amounts)
Net interest income............................................................. $38,213 $38,927 $40,014 $40,732
Provision for credit losses..................................................... 2,250 1,150 1,000 2,400
Noninterest income.............................................................. 10,533 10,920 11,902 11,696
Noninterest expenses............................................................ 30,654 32,066 31,174 32,874
Net income...................................................................... $10,120 $10,614 $12,454 $11,011
Per share:
Net income.................................................................... $ .46 $ .48 $ .56 $ .50
61
NOTE 15 -- QUARTERLY FINANCIAL DATA (UNAUDITED) -- CONTINUED
1994
First Second Third Fourth
Quarter Quarter Quarter Quarter
(In thousands except per share amounts)
Net interest income............................................................. $34,188 $36,051 $37,085 $37,511
Provision for credit losses..................................................... 923 1,039 809 600
Noninterest income.............................................................. 10,690 11,057 10,698 10,530
Noninterest expenses, excluding restructuring charges........................... 30,060 31,374 31,884 31,951
Restructuring charges........................................................... 400 600 300 10,606
Income before cumulative effect of a change in accounting
method........................................................................ 8,705 9,012 9,347 3,002
Cumulative effect of a change in accounting method.............................. (316) -- -- --
Net income...................................................................... $ 8,389 $ 9,012 $ 9,347 $ 3,002
Per share:
Income before cumulative effect of a change in accounting method.............. $ .40 $ .41 $ .43 $ .13
Net income.................................................................... $ .38 $ .41 $ .43 $ .13
NOTE 16 -- NORTH CAROLINA SUBSIDIARY BANK FINANCIAL DATA
The following is a summary of condensed consolidated financial data for
United Carolina Bank and its subsidiaries (North Carolina Subsidiary Bank):
December 31,
BALANCE SHEET DATA: 1995 1994
(In thousands)
ASSETS:
Cash and due from banks -- noninterest-bearing............................................... $ 160,989 $ 143,178
Federal funds sold and other short-term investments.......................................... 30,090 76,241
Securities available for sale................................................................ 638,657 314,798
Investment securities........................................................................ 47,037 180,012
Loans, net of unearned income................................................................ 2,435,589 2,206,164
Less reserve for credit losses............................................................. (37,062) (35,590)
Net loans............................................................................... 2,398,527 2,170,574
Other assets................................................................................. 138,552 125,461
Total assets............................................................................ $3,413,852 $3,010,264
LIABILITIES AND STOCKHOLDER'S EQUITY:
Deposits:
Noninterest-bearing demand deposits........................................................ $ 498,596 $ 483,459
Interest-bearing deposits.................................................................. 2,586,803 2,168,280
Total deposits.......................................................................... 3,085,399 2,651,739
Short-term borrowings........................................................................ 34,197 100,600
Mortgages and other notes payable............................................................ 2,975 2,305
Accrued taxes, expenses, and other liabilities............................................... 34,357 33,684
Total liabilities....................................................................... 3,156,928 2,788,328
Stockholder's equity......................................................................... 256,924 221,936
Total liabilities and stockholder's equity.............................................. $3,413,852 $3,010,264
62
NOTE 16 -- NORTH CAROLINA SUBSIDIARY BANK FINANCIAL DATA -- CONTINUED
Years Ended December 31,
INCOME STATEMENT DATA: 1995 1994 1993
(In thousands)
Interest income........................................................................ $ 258,889 $210,330 $ 186,683
Interest expense....................................................................... 115,078 78,682 71,165
Net interest income................................................................. 143,811 131,648 115,518
Provision for credit losses............................................................ 6,000 2,871 4,843
Net interest income after provision for credit losses............................... 137,811 128,777 110,675
Noninterest income..................................................................... 44,317 42,230 40,648
Noninterest expenses, excluding restructuring charges.................................. 118,503 116,772 108,610
Restructuring charges.................................................................. -- 10,248 --
Income before income taxes............................................................. 63,625 43,987 42,713
Income tax provision................................................................ 23,380 16,343 14,255
Income before cumulative effects of changes in accounting methods...................... 40,245 27,644 28,458
Cumulative effects of changes in accounting methods................................. -- (316) 815
Net income............................................................................. $ 40,245 $ 27,328 $ 29,273
NOTE 17 -- MERGERS AND ACQUISITIONS
On May 28, 1993, UCB issued 50,617 (75,925 after giving effect to the
3-for-2 stock split declared January 17, 1996) shares of common stock to
consummate the acquisition by merger of Price, Dulaney & Company, a general
insurance agency in Charlotte, North Carolina, by UCB's North Carolina
subsidiary bank. Total assets of $144,000 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.
Effective after the close of business on November 12, 1993, UCB's North
Carolina subsidiary bank acquired Home Federal Savings Bank of Eastern North
Carolina headquartered in Greenville, North Carolina. Home Federal had eight
branch offices with $102.4 million in total deposits and $109.6 million in total
loans at the date of acquisition. UCB's North Carolina subsidiary bank acquired
all of the outstanding shares of common stock of Home Federal for cash totaling
$20.6 million. The transaction was accounted for as a purchase, and,
accordingly, the operating results of Home Federal are included in the
consolidated operating results of UCB and subsidiaries since the date of the
acquisition. Pro forma financial data reflecting the acquisition of Home Federal
as though it had occurred at the beginning of the period are not presented due
to the immaterial effect of the transaction on the consolidated operating
results of UCB and subsidiaries.
On March 31, 1994, UCB issued 27,743 (41,614 after giving effect to the
3-for-2 stock split declared January 17, 1996) shares of common stock to
consummate the acquisition by merger of Sanford Real Estate, Loan & Insurance
Company, a general insurance agency located in Sanford, North Carolina, which
also owned and operated subsidiary agencies in Candor, North Carolina, and Tabor
City, North Carolina. Total assets of $80,000 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.
Effective August 31, 1994, UCB consummated the acquisition by merger of the
Bank of Iredell, Statesville, North Carolina. Under the terms of the merger
agreement, UCB exchanged 642,003 (963,004 after giving effect to the 3-for-2
stock split declared January 17, 1996) shares of common stock for the 813,589
outstanding shares of Bank of Iredell's 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 Bank of
Iredell for all periods presented.
On November 30, 1994, UCB issued 8,660 (12,990 after giving effect to the
3-for-2 stock split declared January 17, 1996) shares of common stock to
consummate the acquisition by merger of Executive Insurance Services, Inc., a
general insurance agency in Charlotte, North Carolina, by UCB's North Carolina
subsidiary bank. Total assets of $36,000 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.
63
NOTE 17 -- MERGERS AND ACQUISITIONS -- CONTINUED
On April 28, 1995, UCB issued 44,213 (66,320 after giving effect to the
3-for-2 stock split declared January 17, 1996) shares of common stock to
consummate the acquisition by merger of United Agencies, Inc., a general
insurance agency 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 12 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 this
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.
On October 19, 1995, UCB executed a definitive merger agreement with Triad
Bank headquartered in Greensboro, North Carolina. Triad had 11 branch offices
with $186.1 million in total deposits and $130.0 million in total loans at
December 31, 1995. Under terms of the agreement, UCB will exchange approximately
.57 of a share of its common stock (approximately .85 of a share after giving
effect to the 3-for-2 stock split declared January 17, 1996) for each of Triad
Bank's common shares. It is anticipated that this transaction, which is subject
to regulatory approval, will be completed in the first half of 1996.
Effective January 25, 1996, UCB consummated the acquisition by merger of
Seaboard Savings Bank, Inc., Plymouth, North Carolina. Under terms of the merger
agreement, UCB exchanged 279,095 (418,641 after giving effect to the 3-for-2
stock split declared January 17, 1996) shares for all of the outstanding shares
of Seaboard common stock. The merger will be accounted for as a
pooling-of-interests, and accordingly, the consolidated financial statements
will be restated at the next reporting date.
NOTE 18 -- RESTRUCTURING CHARGES
In October 1994, the Boards of Directors of UCB and its bank subsidiaries,
United Carolina Bank and United Carolina Bank of South Carolina, approved a plan
to restructure the operations of the aforementioned bank subsidiaries to
streamline procedures in a manner that would enhance the quality of financial
services provided to customers and reduce future operating costs. The major
elements of the plan included staffing level changes at all branches to better
match customer arrival patterns, a reduction in full-time staff positions as a
result of the centralization of certain functions and automation of many
labor-intensive tasks, and the consolidation or divestiture of certain branch
offices.
Restructuring charges to implement the reorganization plan totaled
$11,906,000 in 1994. The plan included the elimination of approximately 235 jobs
that were classified as regular full-time positions through either a special
early retirement program or severance arrangements. Positions throughout the
company were eliminated, with the largest percentage of jobs eliminated or
positions reduced in the branch operations. All employees 50 years of age or
older with a combined age plus years of service totaling 70 or more were offered
special early retirement benefits. The costs associated with increases in the
actuarially determined pension and postretirement medical expenses totaled
$9,427,000. Severance arrangements were awarded to employees whose positions
have been or are scheduled to be eliminated and who either were not eligible for
the special early retirement benefits or who chose not to accept the special
early retirement offer. Expense related to the severance arrangements totaled
$346,000.
The restructuring plan included discontinuing the operation of 15 branch
offices through the consolidation of operations into other UCB offices or the
divestiture of the branch locations. The estimated net cost of eliminating these
offices, including transferring the deposits, was $801,000. Included in this
cost was $1,149,000 of unamortized goodwill related to branch offices in
communities where UCB did not have nearby locations, and, therefore, it was
likely that a substantial amount of the customer accounts associated with these
branch offices would move to other financial institutions.
Professional fees associated with the restructuring plan totaled
$1,280,000. These included fees for the service of a consulting firm retained to
assist management in analyzing operations and developing the reorganization plan
and fees relating to the design and implementation of the special retirement
benefits and severance awards.
64
NOTE 18 -- RESTRUCTURING CHARGES -- CONTINUED
The following is a summary of the restructuring charges:
Total Charged Accrued
Against 1994 Liability at Amounts
Operating December 31, Paid
Results 1994 During 1995
(In thousands)
Retirement benefits................................................... $ 8,297 $ 177 $ 177
Postretirement medical expense........................................ 1,130 -- --
Severance benefits.................................................... 346 315 315
Total personnel costs............................................... 9,773 492 492
Professional fees relating to restructuring plan...................... 1,280 20 20
Loss on divestiture or closing of branch operations................... 801 801 663
Other restructuring costs............................................. 52 -- --
Total restructuring charges......................................... $11,906 $1,313 $ 1,175
Accrued
Liability at
December 31,
1995
Retirement benefits................................................... $--
Postretirement medical expense........................................ --
Severance benefits.................................................... --
Total personnel costs............................................... --
Professional fees relating to restructuring plan...................... --
Loss on divestiture or closing of branch operations................... 138
Other restructuring costs............................................. --
Total restructuring charges......................................... $138
65
INDEPENDENT AUDITORS' REPORT
THE BOARD OF DIRECTORS AND STOCKHOLDERS
UNITED CAROLINA BANCSHARES CORPORATION:
We have audited the accompanying consolidated balance sheets of United
Carolina Bancshares Corporation and subsidiaries as of December 31, 1995 and
1994, and the related consolidated statements of income, stockholders' equity,
and cash flows for each of the years in the three-year period ended December 31,
1995. These consolidated financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of United
Carolina Bancshares Corporation and subsidiaries as of December 31, 1995 and
1994, and the results of their operations and their cash flows for each of the
years in the three-year period ended December 31, 1995, in conformity with
generally accepted accounting principles.
As discussed in Notes 2 and 9, respectively, to the consolidated financial
statements, on December 31, 1993, the Corporation adopted the provisions of the
Financial Accounting Standards Board's Statement of Financial Accounting
Standards No. 115, "Accounting for Certain Investments in Debt and Equity
Securities," and on January 1, 1993, the Corporation adopted the provisions of
the Financial Accounting Standards Board's Statement of Financial Accounting
Standards No. 109, "Accounting for Income Taxes." As discussed in Note 8 to the
consolidated financial statements, on January 1, 1994, the Corporation adopted
the provisions of the Financial Accounting Standards Board's Statement of
Financial Accounting Standards No. 112, "Employers' Accounting for
Postemployment Benefits."
KPMG PEAT MARWICK LLP
Raleigh, North Carolina
January 17, 1996
66
EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
FINANCIAL STATEMENTS. Reference Item 8, Cross Reference Index on page 2,
for information concerning UCB's consolidated financial statements and report of
independent auditors.
FINANCIAL STATEMENT SCHEDULES. Not applicable.
EXHIBITS. The exhibits listed on the Exhibit Index on page 69 of this Form
10-K are incorporated herein by reference. Of these exhibits, the following
constitute management contracts or compensatory plans or arrangements between
UCB and certain of its officers, and UCB and its directors:
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT
(10)(a) UCB's 1994 Management Incentive Award Plan
(10)(b) UCB's 1994 Long Term Incentive Plan
(10)(c) UCB's Key Employee Stock Option Plan, as amended in 1992
(10)(d) UCB's form of Employment Agreement and schedule of participants
(10)(e) UCB's Benefit Equivalency Plan for Senior Management Employees of UCB and
Affiliated Companies, as amended
(10)(f) UCB's 1994 Director Retirement Plan
REPORTS ON FORM 8-K. The following Report on Form 8-K was filed by UCB with
the Securities and Exchange Commission during the fourth quarter of 1995: Report
on Form 8-K (Item 5. Other Events) dated October 19, 1995, relating to the
announcement of UCB's merger agreements with Seaboard Savings Bank, Inc. SSB and
Triad Bank.
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
UNITED CAROLINA BANCSHARES CORPORATION
BY: /S/ E. RHONE SASSER
E. RHONE SASSER
CHAIRMAN AND CHIEF EXECUTIVE OFFICER
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the date indicated.
SIGNATURE CAPACITY DATE
/s/ E. RHONE SASSER Chairman and Chief Executive Officer March 14, 1996
E. RHONE SASSER
/s/ RONALD C. MONGER Executive Vice President and March 14, 1996
Chief Financial Officer
RONALD C. MONGER (Principal Financial Officer)
/s/ JOHN F. WATSON Controller (Principal Accounting Officer) March 14, 1996
JOHN F. WATSON
/s/ J. W. ADAMS Director March 14, 1996
J. W. ADAMS
/s/ JOHN V. ANDREWS Director March 14, 1996
JOHN V. ANDREWS
67
SIGNATURE CAPACITY DATE
/s/ RUSSELL M. CARTER Director March 14, 1996
RUSSELL M. CARTER
/s/ W. E. CARTER Director March 14, 1996
W. E. CARTER
/s/ ALFRED E. CLEVELAND Director March 14, 1996
ALFRED E. CLEVELAND
/s/ JAMES L. CRESIMORE Director March 14, 1996
JAMES L. CRESIMORE
/s/ THOMAS P. DILLON Director March 14, 1996
THOMAS P. DILLON
/s/ C. FRANK GRIFFIN Director March 14, 1996
C. FRANK GRIFFIN
/s/ JAMES C. HIGH Director March 14, 1996
JAMES C. HIGH
/s/ E. RHONE SASSER Director March 14, 1996
E. RHONE SASSER
/s/ JACK E. SHAW Director March 14, 1996
JACK E. SHAW
/s/ HAROLD B. WELLS Director March 14, 1996
HAROLD B. WELLS
/s/ CHARLES M. WINSTON Director March 14, 1996
CHARLES M. WINSTON
68
EXHIBIT INDEX
EXHIBIT NUMBER
PER ITEM 601
OF REGULATION
S-K DESCRIPTION OF EXHIBIT SEQUENTIAL PAGE NUMBER
(3)(a) UCB's Restated Charter Incorporated by reference to Exhibit I to UCB's
1988 Form 10-K
(3)(b) UCB's By-laws Incorporated by reference to Exhibit (3)(b) to
UCB's 1991 Form 10-K
(4) Specimen of UCB's common stock certificate Incorporated by reference to Exhibit IV to UCB's
1988 Form 10-K
(10)(a) UCB's 1994 Management Incentive Incorporated by reference to Exhibit (10)(a) to
Award Plan, as amended Registrant's 1994 Form 10-K
(10)(b) UCB's 1994 Long Term Incentive Incorporated by reference to Exhibit (10)(b) to
Award Plan UCB's Form 10Q for the quarterly period ended
March 31, 1994
(10)(c) UCB's 1986 Key Employee Stock Option Plan, as Incorporated by reference to Exhibit (10)(c) to
amended UCB's 1992 Form 10-K
(10)(d)(1), Form of Employment Agreement between UCB, its Incorporated by reference to Exhibits
(2),(3) bank subsidiaries and eight (8) (10)(d)(1), (2) and (3) to Registrant's 1994
executive officers Form 10-K
(10)(e) UCB's Benefit Equivalency Plan for Senior Incorporated by reference to Exhibit (10)(e) to
Management Employees of UCB and Affiliated Registrant's 1994 Form 10-K
Companies, as amended
(10)(f) UCB's 1994 Director Retirement Plan Pages 70-77
(22) Subsidiaries of UCB Page 78
(24) Consent of KPMG Peat Marwick, LLP Page 79
(25) Power of Attorney Page 80
(27) Financial Data Schedule Page 81
A copy of any exhibit will be furnished to a shareholder upon written request.
69