OFFICE OF THRIFT SUPERVISION
DEPARTMENT OF THE TREASURY
Washington D.C. 20552
FORM 10-Q
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF
1934
For the quarterly period ended March 31, 1998
_______________________________
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the transition period from to
_______________________ _______________
Office of Thrift Supervision Docket Number: 1291
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UNITED FEDERAL SAVINGS BANK
---------------------------
(Exact name of registrant as specified in its charter)
United States 56-0380638
------------- ----------
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
116 S. Franklin Street
PO Box 1120, Rocky Mount, North Carolina 27802-1120
-----------------------------------------------------
(Address of principal executive office) (Zip code)
(919)-446-9191
--------------
(Registrant's telephone number)
N/A
---
(Former name, former address and former fiscal year, if changed since last
report)
Indicate by check [check mark] whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities and Exchange Act
of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
---- -----
As of May 6, 1998 there were issued and outstanding 3,263,314 shares of the
Registrant's common stock, no par value.
UNITED FEDERAL SAVINGS BANK
CONTENTS
PART I - FINANCIAL INFORMATION Pages
Item 1. Financial Statements
Consolidated statements of financial condition at March 31, 1998 and
December 31, 1997 1-2
Consolidated statements of income for the three months ended March
31, 1998 and March 31, 1997 3
Consolidated statements of comprehensive income for the three months
ended March 31, 1998 and 1997 4
Consolidated statements of cash flows for the three months ended March 31, 1998
and March 31, 1997 5-6
Notes to consolidated financial statements 7-9
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 10-15
Item 3. Quantitative and Qualitative Disclosures about Market Risk 15
PART II - OTHER INFORMATION
Item 1. Legal Proceedings 16
Item 2. Changes in Securities 16
Item 3. Defaults upon Senior Securities 16
Item 4. Submission of Matters to a Vote of Security Holders 16
Item 5. Other Information 16
Item 6. Exhibits and Reports on Form 8-K 16
Signatures 17
UNITED FEDERAL SAVINGS BANK AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
MARCH 31, 1998 AND DECEMBER 31, 1997
March 31, December 31,
ASSETS 1998 1997
- -------------------------------------------------------------------------------------------------------------------
(Unaudited)
Cash and short-term cash investments:
Interest-earning $ 10,377,508 $ 11,167,588
Noninterest-earning 3,827,287 5,777,967
Investment securities:
Available for sale, at fair value 12,141,156 12,136,381
Nonmarketable equity securities 1,504,100 1,504,100
Mortgage-backed securities:
Held to maturity, at amortized cost 5,566,197 5,872,568
Loans receivable, net:
Held for investment 256,468,974 251,568,497
Held for sale 2,274,397 3,018,957
Accrued interest receivable:
Loans 1,856,739 1,866,770
Mortgage-backed securities 36,800 38,823
Investment securities 221,251 409,950
Real estate acquired in settlement of loans, net 823,761 287,684
Premises and equipment, net 5,618,651 5,739,942
Prepaid expenses and other assets 1,145,250 850,006
Mortgage servicing rights 2,911,908 3,005,691
Refundable income taxes 57,512 341,751
Deferred income taxes 818,667 820,339
---------------- ----------------
TOTAL ASSETS $ 305,650,158 $ 304,407,014
================ ================
1
March 31, December 31,
LIABILITIES AND STOCKHOLDERS' EQUITY 1998 1997
- -------------------------------------------------------------------------------------------------------------------
(Unaudited)
Liabilities:
Deposits $ 268,362,030 $ 265,907,502
Advances from the Federal Home Loan Bank of Atlanta 5,000,000 10,000,000
Advance payments by borrowers for taxes and insurance 4,398,643 2,340,383
Payments due to investors for loans serviced 3,697,646 2,813,131
Accrued expenses and other liabilities 1,286,817 1,366,166
---------------- ----------------
TOTAL LIABILITIES 282,745,136 282,427,182
---------------- ----------------
Stockholders' equity:
Common stock, par value $ .01 per share, authorized 10,000,000
shares, issued 3,263,314 shares in 1998 and 3,169,314 in 1997 32,633 31,693
Additional paid-in capital 4,210,708 3,563,368
Retained earnings, substantially restricted 18,592,072 18,318,009
Unrealized gain on available for sale securities, net of deferred
taxes of $40,882 ($39,209 at December 31, 1997) 69,609 66,762
---------------- ----------------
TOTAL STOCKHOLDERS' EQUITY 22,905,022 21,979,832
---------------- ----------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 305,650,158 $ 304,407,014
================ ================
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
2
UNITED FEDERAL SAVINGS BANK
CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
THREE MONTHS ENDED MARCH 31, 1998 AND 1997
1998 1997
- ------------------------------------------------------------------------------------------------------------------
Interest and dividend income:
Loans $ 5,779,240 $ 4,249,452
Mortgage-backed securities 112,461 429,182
Investment securities 233,169 417,035
Short-term cash investments 163,232 145,492
---------------- ----------------
TOTAL INTEREST INCOME 6,288,102 5,241,161
---------------- ----------------
Interest Expense:
Interest on deposits 3,445,059 3,028,464
Interest on borrowings 75,247
---------------- ----------------
TOTAL INTEREST EXPENSE 3,520,306 3,028,464
---------------- ----------------
NET INTEREST INCOME 2,767,796 2,212,697
Provision for loan losses 300,000 35,412
---------------- ----------------
NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES 2,467,796 2,177,285
---------------- ----------------
Noninterest income:
Loan servicing fees, net of amortization of servicing rights 231,413 340,687
Other loan charges and fees 260,392 240,795
Gain on sale of loans 150,889 74,509
Gain on sale of investment and mortgage-backed securities 73,177
Deposit fees 151,818 132,795
Other 47,308 17,149
---------------- ----------------
841,820 879,112
---------------- ----------------
Noninterest expense:
Compensation and employee benefits 1,417,353 1,269,927
Occupancy 168,620 173,382
Equipment rental and maintenance 158,040 103,015
Data processing 206,511 157,108
Telephone and postage 122,117 111,927
Other 495,901 420,469
---------------- ----------------
2,568,542 2,235,828
---------------- ----------------
INCOME BEFORE INCOME TAXES 741,074 820,569
Income taxes 271,331 295,922
---------------- ----------------
NET INCOME $ 469,743 $ 524,647
================ ================
Earnings per share-basic $ 0.15 $ 0.17
---------------- ----------------
Earnings per share-diluted $ 0.14 $ 0.17
---------------- ----------------
Cash dividends per share $ 0.06 $ 0.05
---------------- ----------------
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
3
UNITED FEDERAL SAVINGS BANK AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED)
THREE MONTHS ENDED MARCH 31, 1998 AND 1997
1998 1997
- -----------------------------------------------------------------------------------------------------------------
Net income $ 469,743 $ 524,647
---------------- ----------------
Other comprehensive income, net of tax:
Unrealized gains on securities:
Unrealized holding gains arising during the period 2,847 8,588
Less: reclassification adjustment for gains included in
net income -- (46,101)
---------------- ----------------
OTHER COMPREHENSIVE INCOME 2,847 (37,513)
---------------- ----------------
COMPREHENSIVE INCOME $ 472,590 $ 487,134
================ ================
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
4
UNITED FEDERAL SAVINGS BANK
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
THREE MONTHS ENDED MARCH 31, 1998 AND 1997
1998 1997
- ------------------------------------------------------------------------------------------------------------------
Cash Flows From Operating Activities
Cash Flows From Operating Activities
Net income $ 469,743 $ 524,647
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation 163,321 132,326
Net (gain) loss on disposal of real estate owned 8,481
Provision for loan losses 300,000 35,412
Provision for REO losses 91,891 12,607
Amortization of mortgage servicing rights 177,835 69,224
(Increase) decrease in deferred income tax assets 1,672 932
(Gain) loss on sale of investments and MBS's (73,177)
(Gain) loss on sale of loans (150,889) (74,509)
Purchase or origination of loans held for sale (18,204,764) (6,284,795)
Proceeds from loans held for sale 19,100,213 7,741,290
Changes in assets and liabilities:
(Increase) decrease in:
Prepaid expenses and other assets (295,244) (401,651)
Accrued interest receivable (200,753) 4,016
Refundable income taxes 284,239
Increase (decrease) in:
Accrued expenses and other liabilities (79,349) 287,882
Income taxes payable 293,875
---------------- ----------------
NET CASH PROVIDED BY OPERATING ACTIVITIES 1,657,915 2,276,560
---------------- ----------------
Cash Flows From Investing Activities
Loans originated and purchased (34,807,000) (24,042,190)
Principal collected on loans and MBS's 29,506,669 15,192,589
Proceeds from sales of available for sale MBS's 6,598,763
Proceeds from sale of real estate acquired in settlement of loans 7,500
Cost of loan servicing rights acquired 93,783 81,062
Purchase of property and equipment (42,030) (346,095)
---------------- ----------------
NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES (5,248,578) (2,508,371)
---------------- ----------------
5
UNITED FEDERAL SAVINGS BANK
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
THREE MONTHS ENDED MARCH 31, 1998 AND 1997
1998 1997
- ------------------------------------------------------------------------------------------------------------------
Cash Flows From Financing Activities
Net increase (decrease) in deposits $ 2,454,528 $ 5,780,684
Repayment of FHLB advances (5,000,000)
Increase in payments due to investors for loans serviced 884,515 881,105
Cash dividends paid (195,680) (153,316)
Stock options exercised 648,280 7,812
Increase in advance payments by borrowers
for taxes and insurance 2,058,260 1,854,752
---------------- ---------------
NET CASH PROVIDED BY FINANCING ACTIVITIES 849,903 8,371,037
---------------- ---------------
NET INCREASE IN CASH AND CASH EQUIVALENTS (2,740,760) 8,139,226
Cash and cash equivalents:
Beginning 16,945,555 10,577,897
---------------- ---------------
Ending $ 14,204,795 $ 18,717,123
================ ===============
Supplemental Disclosures of Cash Flow Information
Cash payments for:
Interest $ 3,569,218 $ 3,029,508
================ ===============
Income taxes $ 1,692 $ --
================ ===============
Cash and cash equivalents:
Cash and short-term investments:
Interest-bearing $ 10,377,508 $ 16,213,622
Noninterest-bearing 3,827,287 2,503,501
---------------- ---------------
$ 14,204,795 $ 18,717,123
================ ===============
Supplemental Disclosures of Noncash Investing Transactions
Loans transferred to Real Estate Owned $ 626,718 $ --
================ ===============
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
6
UNITED FEDERAL SAVINGS BANK AND SUBSIDIARY
NOTE A NATURE OF BUSINESS
The Bank is a federally chartered savings bank primarily engaged in the business
of obtaining deposits and granting credit to the general public in the form of
mortgage, commercial and retail loans. The Bank operates from thirteen full
service banking facilities located in eastern North Carolina and from two loan
offices located in Charlotte and Wilmington, North Carolina. The Bank is
regulated by the Office of Thrift Supervision (OTS) and its deposits are insured
by the Federal Deposit Insurance Corporation (FDIC).
NOTE B BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements, except for the
statement of financial condition at December 31, 1997, (which is audited) have
been prepared in accordance with generally accepted accounting principles for
interim financial information and with the instructions to Form 10-Q and
Regulation S-X. Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles for complete
financial statements. In the opinion of management, all adjustments (none of
which were other than normal recurring accruals) necessary for a fair
presentation of the financial position and results of operations for the periods
presented have been included. The financial statements of the Bank are presented
on a consolidated basis with those of its subsidiary, First Service Corporation.
The results of operations for the three month period ended March 31, 1998 are
not necessarily indicative of the results of operations that may be expected for
the year ended December 31, 1998.
The accounting policies followed are as set forth in Note 1 of the Notes to
Financial Statements in the Bank's 1997 annual report on Form 10-K. During the
current quarter, the Bank adopted Statement of Financial Accounting Standard
("SFAS") No. 130, "REPORTING COMPREHENSIVE INCOME." This statement was adopted
effective January 1, 1998 as explained in Note F below.
The Bank was also required to adopt SFAS No. 127, "DEFERRAL OF THE EFFECTIVE
DATE OF CERTAIN PROVISIONS OF FASB STATEMENT NO. 125," which delayed the
effective date for the reporting requirements established by SFAS No. 125 for
the transfers of certain assets, primarily repurchase agreements, dollar-rolls,
and similar transactions until periods after December 31, 1997. The adoption of
SFAS No. 127 did not have an impact on the Bank's financial statements because
Bank does not currently hold such instruments. The repurchase agreements the
Bank has entered into in prior periods typically met the requirements under the
Statement to be treated as collateralized borrowings.
The FASB has also issued SFAS No. 131, "DISCLOSURES ABOUT SEGMENTS OF AN
ENTERPRISE AND RELATED INFORMATION," which is effective for years beginning
after December 15, 1997, but need not be applied to interim financial statements
in the initial year of application. The statement establishes standards for the
way that public business enterprises report information about operating segments
in financial statements. It also establishes standards for related disclosures
about products and services, geographic areas, and major customers. Operating
segments are components of an enterprise that are internally evaluated
separately in deciding how to allocate resources and in assessing performance.
Adoption of SFAS No. 131, which is disclosure related, is not expected to have
an impact on the Bank's financial statements.
7
UNITED FEDERAL SAVINGS BANK AND SUBSIDIARY
NOTE C MERGER
On March 4, 1998, United executed a definitive agreement to be acquired by
Triangle Bancorp, Inc., a bank holding company located in Raleigh, North
Carolina. The transaction, which is subject to regulatory and shareholder
approval, is expected to be completed by the third quarter of 1998, and will
provide United's customers with expanded services and a more extensive branch
network. If the transaction is completed as proposed, United shareholders will
receive .63 shares of Triangle Bancorp, Inc. stock for each share of the Bank's
stock, subject to stipulations and limitations in how the exchange rate is to be
computed at the Effective Time, as defined in the definitive agreement. The
resulting institution will have assets of approximately $2 billion.
NOTE D ALLOWANCE FOR LOAN LOSSES
Activity in the allowance for loan losses for the three-months ended March 31, 1998 and 1997 was:
1998 1997
----------------- -----------------
Balance at beginning of period $ 2,843,597 $ 2,849,258
Provision charged to earnings 300,000 35,412
Loans charged-off (471,139) (45,110)
Recoveries of previous charge-offs 6,450 5,871
----------------- -----------------
Balance at end of period $ 2,678,908 $ 2,845,431
================= =================
Included in the preceding table are $433,388 in charge-offs during the quarter
ended March 31, 1998 for certain consumer loans associated with memberships in a
campground facility. These impaired loans had been fully reserved in prior
periods. There are no remaining consumer loans associated with the campground
facility in the Bank's loan portfolio.
NOTE E EARNINGS PER SHARE
The Bank is required to report a dual presentation of basic and diluted earnings
per share. Basic earnings per share excludes dilution and is computed by
dividing income available to common stockholders by the weighted average number
of shares outstanding for the period. Diluted earnings per share reflects the
potential dilution that could occur if securities or other contracts to issue
common stock were exercised. The Bank has presented diluted earnings per share
due to the dilutive effect of outstanding stock options. The table below
provides a computation and reconciliation of basic and diluted earnings per
share for the three month periods ended March 31, 1998 and 1997.
1998 1997
--------------------------------
Income available to common stockholders- basic and diluted $ 469,743 $ 524,647
--------------------------------
Shares used in the computation of earnings per share:
Weighted average number of shares outstanding- basic 3,220,817 3,066,036
Incremental shares from assumed exercise of stock options 36,271 56,399
--------------------------------
Weighted average number of shares outstanding- diluted 3,257,088 3,122,435
================================
8
UNITED FEDERAL SAVINGS BANK AND SUBSIDIARY
NOTE F ADOPTION OF SFAS STATEMENT NO. 130
The FASB has issued SFAS No. 130, "REPORTING COMPREHENSIVE INCOME," which the
Bank was required to adopt as of January 1, 1998. The Statement requires the
classification of items of other comprehensive income by their nature in a
financial statement and to display the accumulated balance of other
comprehensive income separately from retained earnings and additional paid-in
capital in the equity section of the balance sheet. Other comprehensive income
refers to revenues, expenses, gains and losses that under generally accepted
accounting principles are included in comprehensive income but excluded from net
income, and are therefore included in changes in equity. Other comprehensive
income includes all such changes in equity other than those resulting from
investments by owners and distributions to owners.
SFAS No. 130 does not require a specific format for displaying comprehensive
income and its components in a financial statement other than it must be
displayed with the same prominence as other financial statements that constitute
a full set of financial statements. United has elected to display comprehensive
income in a separate statement of comprehensive income that begins with net
income. The only item of other comprehensive income that the Bank currently has
is associated with changes in unrealized gains and losses on securities
classified as available for sale. The tax effects related to the components of
other comprehensive income are shown below for the three month periods ended
March 31, 1998 and 1997.
Three Months Ended March 31, 1998
-----------------------------------------------------------
Before Tax Tax Net-of-Tax
Amount Expense Amount
---------------- ----------------- -----------------
Unrealized gains on securities:
Unrealized holding gains arising during period $ 4,519 $ 1,672 $ 2,847
================ ================= =================
Three Months Ended March 31, 1997
-----------------------------------------------------------
Before Tax Tax (Expense) Net-of-Tax
Amount or Benefit Amount
---------------- ----------------- -----------------
Unrealized gains on securities:
Unrealized holding gains arising during period $ 13,632 $ (5,044) $ 8,588
Less: reclassification adjustment for gains
realized in net income (73,177) 27,076 (46,101)
---------------- ----------------- -----------------
$ (59,545) $ 22,032 $ (37,513)
================ ================= =================
9
UNITED FEDERAL SAVINGS BANK AND SUBSIDIARY
MANAGEMENT DISCUSSION AND ANALYSIS
- --------------------------------------------------------------------------------
GENERAL FINANCIAL INSTITUTION LEGISLATION AND REGULATION
United Federal Savings Bank ("United" or the "Bank") is subject to extensive
regulation, supervision and examination by the Office of Thrift Supervision
(OTS), as its chartering authority and primary federal regulator, and by the
Federal Deposit Insurance Corporation (FDIC), which insures its deposits up to
applicable limits. Such regulation and supervision establishes a comprehensive
framework of activities in which an institution can engage and is intended
primarily for the protection of the insurance fund and depositors. The
regulatory structure also gives the regulatory authorities extensive discretion
in connection with their supervisory and enforcement activities. Any change in
such regulation, whether by the OTS, the FDIC or the Congress, could have a
material impact on the Bank and its operations. United cannot predict what, if
any, future legislation may be enacted or regulations adopted or what impact any
such actions may have on the Bank. However, there have been numerous statements
by legislative and regulatory authorities regarding prospects of legislative and
regulatory changes, including consolidation of financial institution charters
and regulatory agencies, as well as finanical modernization through
Glass-Steagall reform.
ASSETS AND LIABILITIES
The Bank's total assets increased $1.2 million from $304.4 million at December
31, 1997, to $305.6 million at March 31, 1998. The increase in assets was
primarily due to increases in loans receivable ($4.2 million) and were funded by
increases in deposits and liquidation of short-term cash investments. The
increase in loans held for investment, net of principal repayments of
approximately $29.2 million, resulted from the origination of approximately
$34.8 million in loans during the period. During the three-month period ended
March 31, 1998, United originated loans totaling $18.2 million for its held for
sale portfolio, and sold $19.1 million of loans classified as held for sale. At
March 31, 1998, the market value of loans held for sale exceeded their amortized
cost and no market value allowance was required.
At March 31, 1998, the Bank had unrealized gains of $110,000 on its investments
classified as available for sale. The total net unrealized gain on the
"available for sale" portfolios, net of income tax effect, amounted to $70,000
and is identified as a separate component of stockholders' equity. During the
current quarter, none of the Bank investments matured or were sold, and no new
investments were purchased. United did not have excess liquidity for investment
purposes once loan demand was met.
Liabilities increased approximately $318,000 between December 31, 1997 and March
31, 1998, due primarily to increases of $2.5 million in deposits and $2.1
million in advance payments by borrowers for taxes and insurance, which were
offset by a decrease due to the repayment of $5 million in Federal Home Loan
Bank advances. Deposit growth occurred in all major account types, but was most
significant within the certificate category. The Bank requires escrow accounts
on substantially all residential mortgage loans owned and serviced. Escrow
accounts tend to increase during the year until the Bank remits property taxes
during the fourth quarter.
10
UNITED FEDERAL SAVINGS BANK AND SUBSIDIARY
MANAGEMENT DISCUSSION AND ANALYSIS
- --------------------------------------------------------------------------------
LIQUIDITY AND CAPITAL RESOURCES
Liquidity reflects the ability of the Bank to satisfy loan demand, deposit
withdrawals or other corporate needs. United's principal sources of liquidity
are loan sales, principal and interest payments on loans, deposits and FHLB
advances and other borrowings. The principal uses of funds are to originate
loans, purchase investment securities, and support operations. At March 31,
1998, the Bank had outstanding residential loan commitments at fixed rates
aggregating approximately $7.9 million and outstanding commercial loan
commitments at variable rates of approximately $4.0 million. The Bank also has
outstanding commitments on available lines of credit and the undisbursed portion
of construction loans. Commitments entered into to originate loans expressly
provide that if loans are not closed within a specified number of days from the
date of commitment, the commitments are subject to expiration or renegotiation.
Substantially all current outstanding commitments to originate residential
mortgage loans have been sold under rate lock-in agreements which requires the
Bank to deliver the loan, if the loan closes, to the buyer. Under those
commitments the Bank also typically sells the servicing rights to those loans.
United is required by regulation to maintain certain levels of liquidity.
Regulations currently in effect require the Bank to maintain liquid assets of
not less the 4% of net withdrawable deposits and short-term borrowings due
within one year. Throughout the three months ended March 31, 1998, United was in
compliance with that regulation.
United is subject to three capital requirements mandated by the OTS. OTS
supervised institutions must have tangible capital equal to 1.5% of tangible
assets, core capital equal to 3% of adjusted tangible assets and risk-based
capital equal to 8% of risk-weighted assets. At March 31, 1998, the following
presents United's regulatory capital ratios:
March 31, 1998
--------------------------------------------------------
Tangible Core Risk-Based
Capital Capital Capital
--------------------------------------------------------
Capital as a percentage of qualifying assets:
Actual 7.48 % 7.48 % 10.11 %
Required 1.50 % 3.00 % 8.00 %
--------------------------------------------------------
Excess regulatory capital 5.98 % 4.48 % 3.11 %
========================================================
As indicated by the preceding schedule, United meets all current capital
requirements. Under the prompt corrective regulations promulgated pursuant to
the Federal Deposit Insurance Corporation Improvement Act of 1991, the Bank is
currently classified as "well capitalized".
11
UNITED FEDERAL SAVINGS BANK AND SUBSIDIARY
MANAGEMENT DISCUSSION AND ANALYSIS
- --------------------------------------------------------------------------------
CLASSIFICATION OF ASSETS
Regulations require that general allowances be established for potential losses
on assets classified as Substandard or Doubtful and a 100% specific reserve or
direct write-off for assets classified as Loss. Those valuation allowances must
be adequate to absorb existing loan losses, known or inherent, and be
established in accordance with generally accepted accounting principles (GAAP).
At March 31, 1998, United had consolidated allowances, both general and
specific, amounting to $2.8 million or 113% of classified assets.
At March 31, 1998, United's classified assets were as follows:
(In Thousands)
Substandard $ 2,322
Doubtful -0-
Loss 159
--------
Total $2,481
======
Ratio of Classified Assets to Total Assets 0.81%
--------
Included in the Substandard category are $76,000 in residential mortgage loans
secured by owner-occupied properties that are 90 days or more past due and in
various stages of foreclosure, $0.6 million of consumer loans, $0.3 million of
construction loans, $0.6 million in commercial loans secured by real estate, and
$0.9 million of the portion of real estate owned and repossed collateral
allocated to the substandard category.
The Loss category consists of the specific loss allowances on consumer loans,
real estate owned, repossed collateral, and mortgage loans in process of
foreclosure. Those allowances have previously been charged to operations through
loss provisions. The Bank does not expect any additional losses in excess of the
specific allowances already provided. However, United reviews all assets on a
regular basis and additional allowances will be provided as required.
The most significant classified asset is $602,000 in real estate acquired
through foreclosure on a former day care center in Apex, North Carolina. The
property is under contract to be sold for $535,000 and $67,000 in specific loss
allowances have been established on the property at March 31, 1998.
12
UNITED FEDERAL SAVINGS BANK AND SUBSIDIARY
MANAGEMENT DISCUSSION AND ANALYSIS
- --------------------------------------------------------------------------------
RESULTS OF OPERATIONS
For the three-month period ended March 31, 1998, the Bank reported net income of
$469,743 ($0.14 per share, diluted) compared to net income of $524,647 ($0.17
per share, diluted) for the comparable period of 1997. Significant variations in
the Bank's reported results between the first quarter of 1998 and 1997 are
discussed below:
NET INTEREST INCOME:
Net interest income increased by $555,099 (25.1%) during the first quarter of
1998 as compared to the corresponding 1997 period. The increase resulted
primarily from growth in commercial and retail lending between the periods,
which enhanced the Bank's yield on interest earning assets and provided for an
overall increase in the volume of interest earning assets. The Bank had $192
million in commercial, construction and retail loans outstanding at March 31,
1998 as compared to $121 million outstanding at March 31, 1997. As a result, the
Bank's interest rate spread increased from 3.35% for the quarter ended March 31,
1997 to 3.63% for the quarter ended March 31, 1998. United's yield on interest
earning assets increased by 33 basis points from 8.41% for the first quarter of
1997 to 8.74% during the current quarter. The Bank's cost of funds increased by
5 basis points from the first quarter of 1997 to the first quarter of 1998, and
amounted to 5.11% at March 31, 1998.
PROVISION FOR LOAN LOSSES:
Provisions for loan losses, which are charged to operations and the resulting
loan loss allowances, are based on the Bank's evaluation of the risk
characteristics of its loan portfolios and provided at levels management
believes will be adequate to absorb losses on existing loans within the Bank's
portfolio. In estimating losses, management considers the estimated fair value
of the collateral, past experience and present indicators such as delinquency
rates and prevailing market conditions which could affect the borrowers ability
to repay. The general allowance is affected by the total size of the loan
portfolio, the relative weighting by risk category of the loans in the
portfolio, the level of classified loans and loan delinquencies, and other
considerations. General provisions for losses on commercial, consumer, and other
loans are based on estimating existing inherent losses in the portfolios.
Estimates by management of potential losses on specific loans is based upon an
analysis of the collectibility of the loans upon review of known weaknesses in
the lending relationships. Uncertainties inherent in the estimation process may
cause management's estimate of the allowance for loan losses to change in the
future.
During the first quarter of 1998, the Bank provided $300,000 in additional loan
loss provisions to support the inherent risks associated with the increase in
its commercial and retail loan portfolios. Those loan portfolios grew by 58.7%
from the first quarter of 1997 to the first quarter of 1998. During the first
quarter of 1997, the Bank charged $35,412 to provision for loan losses. During
the quarter ended March 31, l998, the Bank charged-off $471,139 in loans, which
included $433,389 in certain consumer installment loans for memberships in a
campground facility which were originated by the Bank in the late 1980's and
early 1990's, and had been fully reserved. Previous collection efforts had
generated partial repayment activity on the campground loans, but any future
recoveries will be sporadic. The Bank charged off loans totaling $45,110 against
the allowance in the first quarter of 1997.
13
UNITED FEDERAL SAVINGS BANK AND SUBSIDIARY
MANAGEMENT DISCUSSION AND ANALYSIS
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NONINTEREST INCOME:
Noninterest income amounted to $841,820 for current quarter compared to $879,112
for the corresponding 1997 period.
Loan servicing fee income decreased $109,274 (32.1%) in the three-month period
of 1998 compared to the 1997 period. Amortization of mortgage servicing rights
is netted against loan servicing income, and increased by $111,461 between the
current quarter and the same quarter one year earlier due to the high level of
refinancings which occured during the first three months of 1998. United's loan
servicing portfolio amounted to approximately $439 million at March 31, 1998,
compared to $460 million at December 31, 1997. The Bank has the capacity to add
servicing without increasing direct expenses. If the Bank increases the mortgage
servicing portfolio, future servicing income will be positively impacted.
However, during the current quarter, the Bank sold loans originated for the
secondary market servicing released. Future servicing income and the Bank's
ability to increase the servicing portfolio will be affected by the level of
loan prepayments within the portfolio.
Sale of loans in the secondary market resulted in gains of $150,889 for the
current quarter compared to gains of $74,509 for the corresponding 1997 period.
The heavy refinancing boom which occured in the current quarter was primarily
responsible for the increased gains. Gain on sale of loans is comprised of cash
or discount gains, plus the value of the retained mortgage servicing rights. For
those loans on which the Bank sells the servicing rights, the servicing release
fee received is included in computation of the gain.
During the current quarter, United did not sell any investment securities.
During the quarter ended March 31, 1997, the Bank sold available for sale
mortgage-backed securities with an amortized cost of $6.5 million for a gain of
$73,177. The securities were sold to provide liquidity for loan originations.
Sources of other noninterest income consists primarily of fees and service
charges on deposit accounts. Deposits fees increased by $19,023 during the
current quarter to $151,818 from $132,795 reported in the same period of 1997.
The fees increased due to increased levels of customer accounts on which such
fees are charged.
NONINTEREST EXPENSE:
Noninterest expense increased by $332,714 from $2,235,828 for the three months
ended March 31, 1997 to $2,568,542 for the first quarter of 1998.
The largest single component of noninterest expense, "compensation and employee
benefits", increased by $147,426 primarily due to the personnel requirements of
opening a new branch facility in Tarboro during the second quarter of 1997, and
due to the personnel required to oversee the increased levels of commercial and
consumer lending. Management frequently reviews staffing needs, consolidating,
eliminating or creating positions to enhance the operational and cost
effectiveness of the Bank.
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UNITED FEDERAL SAVINGS BANK AND SUBSIDIARY
MANAGEMENT DISCUSSION AND ANALYSIS
NONINTEREST EXPENSE:
Equipment rental and maintenance increased by $55,025 during the current quarter
as compared to the same period one year earlier primarily due to increased
expense associated with the furnishing and equipment needs of the Tarboro branch
as well as enhancements to the Bank's current technology. Data processing
expense increased by $49,403 to $206,511 for the three months ended March 31,
1998 from $157,108 for the same three month period in 1997 due to the increase
in the number of customer accounts processed and due to the terms of a new data
processing contract entered into in March, 1998. Substantially all of the Bank's
data processing needs are contracted out to a third-party service provider. The
Bank's current contract expired effective February 28, 1998 and was renegotiated
on a month-to-month basis due to the pending merger with Triangle Bancorp, Inc.
Because of the short-term nature of the contract, the Bank expects that its
monthly data processing expense will double. Other categories of noninterest
expense did not fluctuate significantly between the first quarter of 1998 and
the same period in 1997, except for certain nonrecurring merger related expense
amounting to approximately $60,000 which was incurred during the current
quarter. Income tax expense is provided based on an estimated effective tax rate
which encompasses both deferred and currently payable taxes. The Bank's
effective tax rate was 37% and 36% for the three months ended March 31, 1998 and
1997, respectively.
YEAR 2000 ISSUE:
The "Year 2000" problem arises because many software packages were designed for
a six-digit date format. For example, March 31, 1998 would translate as
03-31-98. However, when the year 2000 occurs, these same computer programs may
not be able to distinguish January 1, 2000 (01-01-00) as anything other than
January 1, 1900, one hundred years earlier. Computers and other electronic
devices with embedded computer chips which are not "Year 2000" compliant may
either shut down and refuse to operate, or perform wildly inaccurate
calculations. The downtime to deal with these issues could be financially
harmful. The Bank established a steering committeee and an action plan during
1997 to deal with the "Year 2000" issues and assess their impact on the Bank's
operations. The action plan calls for the Bank to have completed all corrections
required by the "Year 2000" issue by December 31, 1998, with only final testing
during 1999. All material data processing functions of the Bank which could be
affected by this problem are provided by outside third party service bureaus who
have advised the Bank that they expect to have resolved such issues before the
year 2000. However, if the service bureaus are unable to resolve potential
problems in time, the Bank would likely experience significant data processing
delays, mistakes or failures. These delays, mistakes or failures could have a
material adverse impact on the financial condition and results of operations of
the Bank. Cost incurred in dealing with the "Year 2000" issue must be expensed.
Based upon current assessments, management does not believe that such costs will
be material to the Bank's financial statements. As a part of the Bank's action
plan, we also plan to contact our commercial loan customers and assess whether
our borrowers are 1) aware of the "Year 2000" issues, and 2) whether our
borrowers have begun to make a self-assessment of how the "Year 2000" issue
affects them, and 3) whether our borrowers will develop plans to deal with and
test for the necessary "Year 2000" software changes.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
At March 31, 1998, there are no significant changes in market risk from amounts
disclosed in the Bank's Form 10-K as December 31, 1997.
15
UNITIED FEDERAL SAVINGS BANK AND SUBSIDIARY
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PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
There are no pending legal proceedings of a material nature to which United
Federal Savings Bank, or any of its subsidiaries is a party to or to which any
of their property is subject.
ITEM 2. CHANGES IN SECURITIES
Not applicable
ITEM 3. DEFAULT UPON SENIOR SECURITIES
Not applicable
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable
ITEM 5. OTHER INFORMATION
Not applicable
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
3.1 Federal stock savings bank charter as declared effective on May 30, 1990 is
incorporated by reference from the Form 10-K for the year ended December
30, 1991, filed on March 30, 1992
3.2 By-Laws as amended on April 26, 1990 are incorporated by reference from the
Form 10-K for the year ended December 30, 1991 filed on March 30, 1992
(b) Reports on Form 8-K:
On March 4, 1998, the Bank filed a Form 8-K to disclose that on March 4, 1998,
United executed a definitive agreement to be acquired by Triangle Bancorp, Inc.,
a bank holding company located in Raleigh, North Carolina.
16
UNITED FEDERAL SAVINGS BANK AND SUBSIDIARY
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SIGNATURES
Pursuant to the requirement 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 FEDERAL SAVINGS BANK
(Registrant)
DATE: May 6, 1998 /s/ John A. Barker
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President and Chief Executive Officer
DATE: May 6, 1998 Robert C. White
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Senior Vice President and Chief Financial Officer
17