REPORT TO STOCKHOLDERS
OFFICE OF THRIFT SUPERVISION
WASHINGTON, DC 20552
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended: DECEMBER 31, 1997
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Office of Thrift Supervision File Number: 1291
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UNITED FEDERAL SAVINGS BANK
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(Exact Name of Registrant as specified in its Charter)
UNITED STATES OF AMERICA 56-0380638
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(State or other jurisdiction of (IRS Employer I.D. No.)
incorporation or organization)
116 S. FRANKLIN ST., PO BOX 1120, ROCKY MOUNT, NC, 27802-1120
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(Address of Principal Executive Office)
Registrant's telephone number, including area code: (919) 446-9191
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Securities registered pursuant to Section 12(b) of the Act: NONE
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Securities registered pursuant to Section 12g of the Act:
COMMON STOCK, PAR VALUE $.01
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(Title of Class)
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act 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___
Check if there is no disclosure of delinquent filers pursuant to Item 405 of
regulation S-K in this form, and no disclosure will be contained, to the best of
registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of the Form 10-K or any amendment to this
Form 10-K. [ X ]
The aggregate market value of the voting stock held by non-affiliates of the
issuer, based upon the closing price of its Common Stock on March 16, 1998, as
quoted on NASDAQ Stock Market, was approximately $44,716,000. Solely for
purposes of this calculation, the shares held by directors and executive
officers of the registrant are deemed to be shares held by affiliates.
As of March 16, 1998, there were issued and outstanding 3,261,314 shares of the
registrant's common stock.
DOCUMENTS INCORPORATED BY REFERENCE
I. PORTIONS OF THE 1997 ANNUAL REPORT TO STOCKHOLDERS. (PARTS I, II AND III)
II. PORTIONS OF THE PROXY STATEMENT FOR THE 1998 ANNUAL MEETING OF STOCKHOLDERS
(PART III)
INDEX
PAGE
PART I
Item 1. Business............................................................. 3
Item 2. Properties........................................................... 22
Item 3. Legal Proceedings.................................................... 22
Item 4. Submission of Matters to a Vote of
Security Holders................................................ 22
PART II
Item 5. Market for Registrant's Common Equity and Related
Stockholders Matters................................................ 23
Item 6. Selected Financial Data.............................................. 23
Item 7. Management's Discussion and Analysis of
Financial Condition and Results of Operations........................ 23
Item 7a. Quantitative and Qualitative Disclosures About Market Risk............ 23
Item 8. Financial Statements................................................. 23
Item 9. Changes in and Disagreements With Accountants
on Accounting and Financial Disclosure.......................... 23
PART III
Item 10. Directors and Executive Officers of
the Registrant................................................. 24
Item 11. Executive Compensation............................................... 24
Item 12. Security Ownership of Certain Beneficial
Owners and Management............................................. 24
Item 13. Certain Relationships and Related Transactions....................... 24
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8K...... 25
SIGNATURES.............................................................................. 26
2
PART I
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ITEM 1. BUSINESS
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GENERAL
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United Federal Savings Bank (the "Bank" or "United") is a federally-chartered
stock savings bank which was originally organized as a mutual institution in
1902 and converted to capital stock form in 1980.
United's principal business consists of attracting time and demand deposits from
the general public and using such deposits, together with borrowings and other
funds, to originate first mortgage loans on residential real estate, residential
construction loans and consumer and commercial loans. Income is principally
derived from interest earned on loans and other investments, fees earned on
loans serviced for other investors and gains on sale of loans. The Bank's major
item of expense is interest paid on savings deposits and borrowings. United's
operations are conducted through a main office located in Rocky Mount, twelve
full-service branch offices located in Rocky Mount (2), Pinetops, Raleigh, Cary,
Wilson, Warrenton, Morehead City, New Bern, Greenville, Tarboro and Spring Hope
and two loan origination offices located in Charlotte and Wilmington, North
Carolina.
United is subject to comprehensive examination and regulation by the Office of
Thrift Supervision ("OTS"). It is a member of the Federal Home Loan Bank of
Atlanta ("FHLB of Atlanta" or "FHLB"), which is one of the 12 regional banks
comprising the Federal Home Loan Bank System ("FHLB System"). Deposits in the
Bank are insured up to $100,000 per insured member by the Federal Deposit
Insurance Corporation (the "FDIC") through the Savings Association Insurance
Fund ("SAIF"). Applicable regulations govern, among other things, the Bank's
lending and investment powers, the types of accounts it is permitted to offer,
the types of business in which it may engage and requirements for regulatory
capital. The Bank is further subject to regulations of the Board of Governors of
the Federal Reserve System (the "Federal Reserve Board") governing reserves
required to be maintained against deposits and certain other matters.
On December 24, 1997, the Bank signed a letter of intent to be acquired by
Triangle Bancorp, Inc., and merge with Triangle Bank. The definitive agreement
was signed on March 4, 1998. If the transaction is completed as proposed, United
Federal 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 and a larger branch network.
SELECTED CONSOLIDATED FINANCIAL DATA
- ------------------------------------
Certain information concerning the consolidated financial position of the Bank
and results of operations is presented on page 2 of the 1997 Annual Report under
"Selected Consolidated Financial Data". Other pertinent information concerning
the Bank is presented below.
At or For the Year Ended December 31,
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1997 1996 1995 1994 1993
---- ---- ---- ---- ----
Stockholders' equity to assets
at year end 7.22% 7.75% 8.39% 7.22% 7.25%
Tangible capital ratio 7.20% 7.55% 8.14% 7.49% 7.25%
Core or leverage capital ratio 7.20% 7.55% 8.14% 7.49% 7.25%
Risk-based capital ratio 10.10% 12.46% 16.91% 17.92% 18.31%
3
At or For the Year Ended December 31,
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1997 1996 1995 1994 1993
---- ---- ---- ---- ----
Number of:
Real estate loans 1,973 1,515 1,391 1,613 1,619
Consumer loans 3,700 4,007 2,234 2,032 1,786
Deposit accounts 22,820 20,499 19,903 18,259 18,154
Offices open:
Full service 13 10 9 9 9
Loan origination 2 2 2 2 2
Loans serviced for other investors:
Dollar amount (in millions) $460 $447 $494 $518 $574
Number of loans 8,112 7,809 8,460 8,827 9,885
MARKET RISK
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The operating results of the Bank depend primarily on its net interest income
which is determined primarily by the difference, or spread, between the return
on interest-earning assets, and the cost of interest-bearing liabilities.
Interest rates can have a material market risk impact on the operating results
of the Bank due to the potential of economic losses associated with future
changes in interest rates. These economic losses can be reflected as a loss of
future net interest income and/or loss of current fair market values of interest
sensitive financial instruments. Interest rate risk is the most significant
market risk affecting the Bank. Other types of market risk, such as foreign
currency and commodity price risk, do not arise in the normal course of the
Bank's business activities. In addition, the Bank does not currently engage in
trading activities or use derivative instruments to control interest rate risk.
The Bank's asset and liability management objectives are to (i) improve the rate
sensitivity of its interest-earning assets in relation to interest-bearing
liabilities, and (ii) maintain an appropriate ratio of interest-sensitive assets
to interest-sensitive liabilities with comparable maturities. Management
realizes certain risks are inherent and its goal is to minimize interest rate
risk.
Management uses both the standard GAP analysis and interest rate shock
simulation reports to monitor its interest rate risk. The Bank's primary method
to achieve its asset liability management objective has been to originate
adjustable-rate mortgage loans, sell long-term fixed-rate residential mortgages,
and emphasize prime-based commercial real estate loans and relatively short-term
consumer loans.
A "gap" analysis compares the maturities and repricing opportunities of
interest-earning assets and interest-bearing liabilities. The Bank's "gap" is
typically described as the difference between the amounts of such assets and
liabilities which reprice within a period of time. In a declining interest rate
environment a positive gap, or a situation where the Bank's interest-earning
assets subject to repricing exceed the level of interest-bearing liabilities
which will mature or reprice during a given period, would generally have a
negative impact on the Bank's net interest income. Conversely, an increase in
general market rates will generally tend to favorably affect the Bank's net
interest income in a positive gap environment. The Bank's gap analysis is
included in the annual report to stockholders and is incorporated by reference.
Another approach used to quantify interest rate risk is the net portfolio value
"NPV" analysis, which measures the difference in present value of expected cash
flows from the Bank's assets and liabilities in the event of a range of assumed
changes in market rates. The Bank's NPV analysis, which is included in the
annual report to stockholders and is incorporated by reference, sets forth at
December 31, 1997 the estimated changes in NPV resulting from instantaneous and
sustained parallel shifts in the yield curve, measured at plus or minus 400
basis points, and in increments of 100 basis points.
4
LENDING ACTIVITIES
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In the past, the Bank's lending focus was solely on the origination or purchase
of fixed rate residential mortgage loans for subsequent sale in the secondary
mortgage markets. Such loans conform with underwriting requirements established
by quasi-governmental agencies responsible for the issuance of mortgage-backed,
pass-through securities. Those loans are typically sold or carried in the Bank's
"held for sale" portfolio at the lower of aggregate cost, net of discount points
and loan fees, or market value. Vigorous competition from other financial
institutions, mortgage companies and brokers have squeezed the profit margins on
originating and selling mortgage loans without the profits available from
selling or retaining the associated servicing rights. Selling loans servicing
released has become the Bank's primary method of sale for held-for-sale loans,
but the Bank has the ability to retain the servicing rights due to recent
accounting pronouncements which allow the recording of servicing rights on loans
which are originated and subsequently securitized or sold in the secondary
market. Because the Bank sells substantially all of its residential mortgage
loans, loan growth has been provided primarily by consumer, commercial and
residential construction lending. Commercial and construction and to a lesser
extent consumer loans are mostly prime interest rate based loans. While not
abandoning its mortgage-banking operation, the origination of commercial and
retail loans has been emphasized to expand the scope of its operations to that
of a community bank.
The objective of the mortgage-banking operation has been to build and maintain
the Bank's portfolio of loans serviced for other investors. At December 31,
1997, United serviced $459.9 million in loans for other investors, compared to
$446.9 million and $493.7 million at December 31, 1996 and 1995, respectively.
Although the Bank added $56.8 million, $21.6 million and $31.0 million to the
servicing portfolio through originations or purchases during 1997, 1996 and
1995, respectively, repayments within the servicing portfolio and the Bank's
recent practice of selling its mortgage originations servicing released have
prevented greater growth of the servicing portfolio. Due to accounting
pronouncements, certain loan servicing rights on loans originated and sold prior
to 1996 are not reflected on the statement of financial condition but are a
valuable asset which the Bank seeks to manage through purchase and sales
activity. United would like to maintain the servicing portfolio at its current
level or to gradually increase it through prudent purchases of servicing and
additions through loan originations. However, the level of loan prepayments
within the portfolio and the availability and pricing of loan servicing packages
may affect the Bank's ability to stabilize or increase the servicing portfolio.
Servicing fee income for 1997 amounted to $1.7 million compared to $1.7 million
and $1.9 million for 1996 and 1995, respectively. Until the Bank can stabilize
or increase the mortgage servicing portfolio, future servicing income may be
negatively impacted by loan prepayments. Notes 5 and 9 to the Consolidated
Financial Statements in the 1997 Annual Report contain additional information
concerning the loan servicing portfolio and the valuation of the servicing
rights.
The Bank also offers consumer, commercial and real estate construction loans.
Consistent with the changes in its lending emphasis, the Bank plans to emphasize
prime-based commercial and construction loans and relatively short-term consumer
loans, which have higher yields and shorter terms than both fixed and
adjustable-rate, long-term mortgage loans, assisting in accomplishing the Bank's
asset and liability management goals.
Consumer loans are generally secured by automobiles, other personal property or
residential real estate (home improvement loans or equity lines of credit). The
Bank also makes unsecured loans based on the credit-worthiness of the borrower.
At December 31, 1997, consumer loans totaled $47.2 million, which amounted to
18.6% of the Bank's total loan portfolio.
Commercial loans are generally secured by income producing property such as
apartment buildings and other rental property, land and buildings used in a
business and personal property such as automobile floorplans. Commercial loans
usually include the personal guarantee of the borrowers. At December 31, 1997,
commercial loans totaled $102.7 million, which amounted to 40.4% of the Bank's
total loan portfolio.
5
Construction loans consist primarily of loans for construction of single-family
housing. Construction loans are made to builders for pre-sold and speculative
residential construction and to individual borrowers for construction of primary
residences. The Bank generally limits this type of lending to separate loans on
each building site and generally does not lend on large-scale acquisition and
development projects such as housing subdivisions. At December 31, 1997, the
disbursed portion of construction loans totaled $36.6 million, which amounted to
14.4% of the Bank's total loan portfolio.
The following table sets forth the dollar amount of loans at December 31, 1997
based on their contractual terms to maturity.
Maturing Within Year(s)
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(In Thousands)
Four to Six to Eleven to Over
One Two Three Five Ten Fifteen Fifteen
--- --- ----- ---- --- ------- -------
Residential
Mortgage loans:
Fixed rate $432 $930 $1,387 $914 $1,852 $6,797 $3,908
Variable rate 1,171 2,522 3,762 2,479 5,023 18,436 18,789
Construction loans 31,339 4,806 188 200 32 - -
Commercial loans 12,564 4,990 8,863 31,670 29,522 11,951 3,174
Consumer loans 5,573 1,042 2,739 11,409 3,825 1,740 20,918
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$51,079 $14,290 $16,939 $46,672 $40,254 $38,924 $46,789
==========================================================================================
The foregoing table does not reflect possible repayments due to loan
refinancings, prepayments or enforcement of due-on-sale clauses, which give the
Bank the right to declare a conventional loan immediately due and payable in the
event, among other things, that the borrower sells the real estate property
subject to the mortgage.
6
The following table sets forth selected data relating to the composition of the
Bank's loan portfolio by type of loan:
December 31,
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1997 1996 1995 1994 1993
---- ---- ---- ---- ----
Type of Loan: (In Thousands)
Real estate loans:
One-to-four residential $ 68,402 $ 76,951 $ 82,273 $ 80,819 $ 70,461
Construction 58,336 34,327 31,033 24,843 10,903
Commercial and multifamily 102,734 56,801 23,366 11,278 13,826
Installment loans to individuals 47,246 35,018 19,155 13,564 11,558
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276,718 203,097 155,827 130,504 106,748
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Less:
Allowance for loan losses 2,844 2,849 2,977 3,763 4,370
Unamortized loan fees and discounts 534 437 609 486 453
Undisbursed portion of loans in process 21,771 12,888 13,416 11,208 5,137
Deferred recovery 1,000
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25,149 16,174 17,002 15,457 10,960
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$ 251,569 $ 186,923 $ 138,825 $ 115,047 $ 95,788
========================================================================
In the past, United augmented its own mortgage loan originations by purchasing
loans from other financial institutions. Purchasing gave the Bank access to a
wider market area without expanding the number of its office locations or
personnel. The Bank began phasing out this practice in 1993 and did not purchase
any mortgage loans in 1997. The following table reflects the Bank's loan
origination and purchase activities for the periods indicated.
Years Ended December 31,
1997 1996 1995
(In Thousands)
Loans Originated:
Construction loans $ 71,384 $ 46,777 $ 28,889
Loans on existing property 45,363 40,416 38,104
Commercial 42,087 32,815 13,308
Consumer 39,222 23,680 12,528
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198,056 143,688 92,829
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Loans Purchased:
Commercial participations -- 2,075 --
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Total loans originated and purchased $ 198,056 $ 145,763 $ 92,829
==================================================
7
Loan sales are a primary source of liquidity to the Bank. Loan sales also
generate current income to the Bank and, with the servicing retained, help build
the Bank's portfolio of loans serviced for other investors. Principally all
other loan sales in 1997, 1996 and 1995 were sold with the servicing rights
released. The following provides the composition of loans sold for the periods
indicated.
Years Ended December 31,
1997 1996 1995
---- ---- ----
(In Thousands)
Loans Sold:
FHLMC cash window (whole loans) $ 1,256 $ 1,840 $ 643
N.C. Housing Finance Agency (whole loans) 1,507 1,346
Other financial institutions (whole loans) 31,511 27,684 16,978
------------------------------------------------------
$ 34,274 $ 30,870 $ 17,621
======================================================
LENDING POLICIES
United's residential mortgage lending is subject to its non-discriminatory
underwriting standards and to loan origination procedures prescribed by the
Bank's Board of Directors. Appraisals of property by independent appraisers
approved by the Board of Directors are required. Such appraisals must meet
Federal Home Loan Mortgage Corporation guidelines. Detailed loan applications
are obtained to determine the borrower's ability to repay, and the more
significant items on these applications are verified through the use of credit
reports, financial statements and confirmations. All mortgage loan applications
are reviewed by the Bank's loan committee and the actions of the committee are
ratified by the Board of Directors.
Pursuant to OTS guidelines, the Bank generally limits the dollar amount of real
estate loans to the following loan-to-value ratios:
Raw land 65%
Land development 75%
Construction for commercial, multifamilly,
and other nonresidential properties 80%
Improved property 85%
Owner-occupied one-to-four residential 95%
Maximum loan-to-value ratios for each type of real estate loan are established
by the Bank's Board of Directors. The Bank generally will lend up to 95% of the
appraised value of single-family residential dwellings if private mortgage
insurance is obtained insuring the portion of the principal amount of the loan
that exceeds 80% of the appraised value of the property. On FHA insured or VA
guaranteed loans, the Bank may lend up to the maximum percentage of the
appraised value acceptable to the insuring or guaranteeing agency.
INTEREST RATES AND LOAN FEES
Interest rates charged by the Bank are principally affected by the demand for
loans, the supply of money available for lending purposes, competitive
conditions and market interest rates. Those factors are, in turn, affected by
general economic conditions and factors such as monetary policies of the Federal
Reserve Board, the general supply of money in the economy, legislative and tax
policies and governmental budgetary matters.
In addition to the interest earned, the Bank receives fees and points for
originating and servicing loans, making loan commitments, allowing loan
prepayments and loan modifications, late payments, change of property ownership,
inspections made during the course of construction and miscellaneous loan
services.
8
The income realized from these fees varies with the volume and type of
loans, and the fee rates vary from time to time depending on the supply of funds
and other competitive and economic conditions in local lending markets. The Bank
uses a method approximating the interest method to amortize deferred origination
fees. Any unamortized fees or points on loans sold or paid off are credited to
income at the time of such event. United's interest rates and loan fees are
generally competitive with other financial institutions in its normal lending
markets.
The following table presents information relating to servicing and other fees
taken into income and the balance of deferred fees on loans for the years
indicated.
Years Ended December 31,
1997 1996 1995
---- ---- ----
(In Thousands)
Loan fees and service charges earned during the period $2,469 $2,475 $2,603
As a percent of net interest income 24.4% 30.3% 36.1%
Deferred loan fees and discounts at year end $534 $437 $608
NON-PERFORMING ASSETS AND ASSET CLASSIFICATION
When a borrower fails to make a required payment on a loan, United attempts to
cure the default by contacting the borrower. In general, contact is made after a
payment is more than 15 days past the due date and a late charge is assessed at
that time. In most cases, defaults are cured promptly. If a borrower fails to
make required payments on a loan within 30 days of the date due, the loan is
reported as delinquent by the Bank. If the delinquency is not cured within 90
days, and is not cured through the Bank's normal collection procedures, or an
acceptable arrangement is not worked out with the borrower, the Bank usually
initiates foreclosure proceedings if the collateral involves real estate. If the
loan remains delinquent, the mortgaged property is sold at a foreclosure sale
and the Bank's bid may result in United acquiring the property. The property is
then held by the Bank until a buyer can be located. United typically encourages
the buyer to arrange financing through a third party or the Bank may provide
financing to facilitate the sale, generally with terms more favorable than
normally permitted by the Bank's underwriting standards.
The Bank generally reports loans and real estate owned as nonperforming when (i)
loans have ceased to accrue interest ("nonaccrual loans"), (ii) loans whose
terms have been modified due to the inability of the debtor to meet the original
terms of the agreement ("restructured loans") and (iii) real estate is acquired
through foreclosure or other collateral is taken in repossessions.
Loans are placed on nonaccrual status when, in the judgment of management, there
is reasonable doubt as to their collectability. At that time, all previously
accrued but unpaid interest is deducted from interest income. Absence evidence
to the contrary, United places loans which are delinquent 90 days or more on
nonaccrual status.
9
The following table sets forth information regarding non-accrual loans, loans
which are 90 days or more delinquent but on which United is accruing interest
and other real estate owned by the Bank at the dates indicated.
Years Ended December 31,
------------------------
1997 1996 1995 1994 1993
---- ---- ---- ---- ----
(Dollars In Thousands)
Residential real estate loans (1):
Nonaccrual loans $ 986 $ 825 $ 1,224 $ 800 $ 1,455
Accruing loans 90 days or more delinquent -- 576 558 555 665
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Total 986 1,401 1,782 1,355 2,120
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Nonresidential real estate loans:
Nonaccrual loans 632 424
Accruing loans 90 days or more delinquent 455 445 462 478
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Total 1,087 424 445 462 478
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Consumer loans:
Nonaccrual loans 801 1,788 1,963 2,398 1,748
Accruing loans 90 days or more delinquent 140 295 663 627 789
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Total 941 2,083 2,626 3,025 2,537
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Total nonperforming loans:
Nonaccrual loans 2,419 3,037 3,187 3,198 3,203
Accruing loans 90 days or more delinquent 595 871 1,666 1,644 1,932
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Total 3,014 3,908 4,853 4,842 5,135
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Total nonperforming loans 3,014 3,908 4,853 4,842 5,135
Real estate acquired through foreclosure and
repossessions 383 71 208 266 293
----------------------------------------------------------------
Total nonperforming assets $ 3,397 $ 3,979 $ 5,061 $ 5,108 $ 5,428
----------------------------------------------------------------
Total nonperforming loans to total loans 1.18% 2.09% 3.43% 4.16% 4.62%
Total nonperfoming assets to total assets 1.12% 1.53% 2.05% 2.12% 2.24%
(1) Includes FHA and VA loans which are guaranteed.
At December 31, 1997, 1996 and 1995, non-accruing residential real estate loans
consisted primarily of loans insured by FHA or VA. The principal balances of
these loans are generally federally insured. In addition, at December 31, 1997,
1996, and 1995, the largest component of non-accrual consumer loans consisted of
loans financing memberships in a campground project amounting to $437,000, $1.7
million and $2.0 million, respectively, and were fully reserved as to loan loss
allowances. A former day-care center in Cary, North Carolina is responsible for
the entire nonaccrual balance in the commercial loan category above at December
31, 1997. The property was foreclosed upon in February 1998, and the Bank
believes that the potential loss associated with sale of the property is
$50,000. If interest had been recognized on nonperforming loans at their stated
rates during the years 1997, 1996, and 1995, interest income would have been
increased by approximately $44,000, $21,000 and $28,000, respectively.
OTS regulations provide for a system of asset classification employing
Substandard, Doubtful and Loss categories. Financial institutions are required
to classify their problem assets using the critieria established by the asset
classification regulations. In addition, OTS examiners have the authority to
adjust the internal classifications provided by an institution and require
institutions to establish additional allowances if the examiners conclude that
current valuation allowances are inadequate.
10
The regulation requires the establishment of specific loss allowances or the
charge-off for the portion of assets classified as Loss. The asset
classifications are defined as follows:
Substandard: Inadequate protection by the current net worth or paying capacity of the borrower or
of the collateral pledged, and having well-defined weaknesses.
Doubtful: Having the same weakness as Substandard but the weaknesses are so pronounced that
collection or liquidation in full is questionable and improbable.
Loss: Asset considered uncollectible or of such little value that a specific loss allowance
is warranted, or the asset should be written off entirely.
The rule requires that general valuation allowances be established for assets
classified as Substandard or Doubtful and that a 100% specific allowance or
direct write-off be established for assets classified as Loss. Those valuation
allowances are designed to be adequate to absorb losses and are established in
accordance with generally accepted accounting principles (GAAP).
At December 31, 1997, the Bank's classified assets were as follows.
(Dollars in Thousands)
Substandard $1,934
Doubtful -
Loss 495
------------
Total $2,429
============
Classified assets to total assets .80%
============
At December 31, 1997, the more significant items comprising classified assets
were as follows:
*Classified as substandard:
$362,000 of non-performing residential loans.
$728,000 of commercial real estate loans.
$349,000 of the balance of real estate owned and repossessions not
specifically reserved.
$495,000 of consumer loans.
*Classified as loss:
Specific loss allowances of $437,000 on campground membership loans.
Specific loss allowances of $34,000 on real estate owned and
repossessions.
Specific loss allowances of $15,000 on residential loans.
Specific loss allowances of $9,000 on consumer loans.
ALLOWANCES FOR LOSSES ON LOANS
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
11
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.
United adopted SFAS No. 114 during 1995 which requires establishment of specific
loan loss allowances on impaired loans. A loan is considered impaired if the
present value of future cash flows discounted using the loan's effective
interest rate is less than the carrying value of the loan. An impaired loan can
also be valued based upon its fair value or the market value of the underlying
collateral if the loan is primarily collateral dependent.
The Bank's impaired loans consist of certain consumer installment loans for
memberships in a campground facility amounting to approximately $437,000,
$1,870,000 and $2,430,000 at December 31, 1997, 1996 and 1995, respectively.
Included in the preceding table are specific allowances established for these
impaired loans totaling approximately $437,000, $1,730,000 and $1,963,000 at
December 31, 1997, 1996 and 1995, respectively. The Bank charged-off $1,255,000
of fully reserved membership installment loans during 1997.
The following table presents activity in United's allowance for loan losses for
the years indicated.
December 31,
------------
1997 1996 1995 1994 1993
---- ---- ---- ---- ----
(In Thousands)
Balance, beginning of period $ 2,849 $ 2,977 $ 3,763 $ 4,370 $ 5,362
------------------------------------------------------------------------
Charge-offs:
Real estate-mortgage loans - - - - -
Real estate-construction loans - - - - -
Commercial loans (80)
Consumer loans (1,379) (215) (174) (226) (438)
------------------------------------------------------------------------
(1,459) (215) (174) (226) (438)
------------------------------------------------------------------------
Recoveries:
Real estate-mortgage loans - - - - -
Real estate-construction loans - - - - -
Commercial loans - - - - -
Consumer loans 3 45 63 54 36
------------------------------------------------------------------------
3 45 63 54 36
------------------------------------------------------------------------
Net charge-offs (1,456) (170) (111) (172) (402)
------------------------------------------------------------------------
Provisions (recoveries) charged to
operations 1,451 42 (675) (435) (590)
------------------------------------------------------------------------
Balance at end of period $ 2,844 $ 2,849 $ 2,977 $ 3,763 $ 4,370
========================================================================
Percent of net charge-offs to
average loans .65% .10% .09% .17% .43%
Percent of allowance for loan losses to
loans outstanding at year end 1.12% 1.52% 2.14% 3.27% 4.56%
12
The recoveries credited to income in 1995, 1994 and 1993 resulted from
recoveries on loans previously charged off and reductions in general loan loss
allowances because of the decreasing volume of loans for which allowances were
established in those years.
The following table presents the allocation of the allowances for loan losses by
the Bank to the related outstanding loan categories at each of the dates
indicated.
December 31,
1997 1996 1995 1994 1993
---- ---- ---- ---- ----
(Dollars in Thousands)
% of % of % of % of % of
Loan Types: Amount Loans Amount Loans Amount Loans Amount Loans Amount Loans
- ---------- ------ ----- ------ ----- ------ ----- ------ ----- ------ -----
Real estate- mortgage $ 156 27% $ 211 40% $ 273 58% $ 1,240 68% $ 1,262 70%
Real estate- construction 274 14% 107 11% 88 12% 68 11% 29 6%
Commercial 1,550 40% 431 30% 399 16% 112 9% 128 13%
Consumer 864 19% 2,100 19% 2,217 14% 2,343 12% 2,951 11%
--- --- ----- --- ----- --- ----- --- ----- ---
$ 2,844 100% $ 2,849 100% $ 2,977 100% $ 3,763 100% $ 4,370 100%
===== ==== ===== ==== ===== ==== ===== ==== ===== ====
INVESTMENT ACTIVITIES
The investment policy of the Bank, as established by the Board of Directors, is
designed primarily to provide and maintain liquidity and to generate a favorable
return on investments without incurring undue interest rate risk, credit risk,
or investment portfolio asset concentrations. The Bank's investment policy is
currently implemented by the Bank's Chief Executive Officer and Chief Financial
Officer within the parameters established by the Board. The Bank is currently
authorized to invest in obligations issued and fully guaranteed by the U.S.
Government, certain federal agency obligations, certain time deposits,
investment grade corporate debt securities, mortgage-backed securities, and
other specified investments. The Bank invests in short- and medium-term
investments, such as government securities, bank certificates of deposit,
federal funds and other approved securities. Notes 1 and 2 of Notes to
Consolidated Financial Statements and "Management's Discussion and Analysis"
contained in the 1997 Annual Report provide information concerning the Bank's
investment in debt and equity securities.
DEPOSITS AND BORROWINGS
DEPOSITS. Deposits have traditionally been an important source of funding for
use in lending and for other general business purposes. The Bank offers a
variety of rates and deposit programs, short-term and long-term, designed to
attract customers in its natural market area. Rates on deposits offered by the
Bank are evaluated on a weekly basis and are priced based on investment
opportunities, competitive rates available at other depository institutions and
the cost of alternative sources of funds. The Bank relies upon its branch
network and primary market area as the principal generator of deposits and has
not utilized brokered funds. In addition, public funds on deposit with the Bank
represent less the 0.50% of total deposits outstanding at December 31, 1997.
Although market demand generally dictates which deposit maturities and rates
will be accepted by the public, the Bank aggressively markets longer term
deposits when possible to extend the maturity structure of its liabilities. At
December 31, 1997, United held accounts with aggregate balances amounting to
$265.9 million. The distribution of the Bank's certificate accounts, in terms of
maturity, is an important indicator of the relative stability of its supply of
funds. Reference is made to Note 7 to Notes to Consolidated Financial Statements
contained in the 1997 Annual Report for information relating to savings deposits
in the Bank at December 31, 1997 and 1996 and maturities of savings certificates
in years following December 31, 1997.
13
BORROWINGS. While deposit accounts have been a traditional source of funds for
United's lending activities and other general business purposes, borrowings also
provide a source of funds. The FHLB system provides advances to members for the
purpose of meeting the members' demand for funds when deposit flows are
insufficient and to assist the Bank in its residential lending commitments and
community development activities. Funds may also be borrowed from other sources
when such sources provide more favorable rates and terms. See Note 8 to Notes to
Consolidated Financial Statements for information relating to the Bank's
borrowings at December 31, 1997 and 1996.
As a member of the FHLB System, the Bank may obtain advances from the FHLB of
Atlanta pursuant to various credit programs offered from time to time. As
needed, the Bank has obtained advances under these programs secured by certain
of the Bank's residential real estate loans and debt securities. The Bank may
from time to time obtain additional advances from the FHLB of Atlanta. Under
regulations and policies adopted by the FHLB of Atlanta, the ability of the Bank
to receive such advances may be limited in certain circumstances. At December
31, 1997, the Bank had $10 million in outstanding advances.
INTEREST RATE COMPARISON AND KEY OPERATING RATIOS
The Bank's earnings depend primarily on the difference between the income it
receives from its loan portfolio and other investments, and its cost of funds,
consisting primarily of interest paid on deposits, advances from the FHLB of
Atlanta and other borrowings. Management's Discussion and Analysis in the 1997
Annual Report contains information concerning the average balances of and yields
earned and rates paid on the Bank's interest-earning assets and interest-bearing
liabilities and the Bank's net interest rate spread for the current and two
preceding fiscal years and at December 31, 1997. Certain performance ratios of
the Bank are presented under "Selected Financial Data" elsewhere in this Form
10-K and in "Selected Consolidated Financial Data" in the 1997 Annual Report.
COMPETITION
The Bank experiences strong competition within its market area for solicitation
in attracting and retaining savings deposits and in lending funds. Direct
competition for deposits comes from other savings institutions, commercial banks
and credit unions, interest-bearing securities issued by the United States
Government and its agencies, states and municipalities and corporations.
Competition for origination of real estate loans and other forms of lending
normally comes from other savings institutions, commercial banks, insurance
companies, mortgage bankers, real estate investment trusts, and other lending
institutions located both within and outside North Carolina.
SUBSIDIARIES
As a federal savings bank, United is permitted by current regulations to invest
(in capital and loans) up to 3% of its assets in service corporations, provided
any investment in excess of 2% must serve primarily community, inner-city or
community development purposes. United's wholly-owned service corporation, First
Service Corporation of North Carolina ("First Service") has, in the past,
invested in the development of real estate and related projects both directly
and through joint ventures. First Service's primary asset is the note received
from the sale of the operating assets of a subsidiary in 1991. In addition to
servicing the note receivable, annuities are sold through First Service. Net
income generated by First Service during 1997 was approximatetly $261,000. At
December 31, 1997, the Bank's investment in the stock of or loans to First
Service amounted to approximately $3.1 million.
EMPLOYEES
At December 31, 1997, the Bank employed 139 full-time and 4 part-time employees.
Management considers its relations with its employees to be excellent.
The Bank currently maintains a comprehensive employee benefits program
providing, among other items, a qualified 401-K plan. The Bank's employee
benefits are considered by management to be generally comparable with employee
benefits provided by other major employers in Bank's market area. The Bank's
employees are not represented by a collective bargaining group.
14
IMPACT OF INFLATION AND CHANGING PRICES
The consolidated financial statements and related financial data presented
herein have been prepared in accordance with generally accepted accounting
principles, which require the measurement of financial position and operating
results in terms of historical dollars, without considering changes in the
relative purchasing power of money over time due to inflation.
Unlike most industrial companies, virtually all of the assets and liabilities of
a financial institution are monetary in nature. As a result, interest rates have
a more significant impact on a financial institution's performance than the
effects of general levels of inflation. Interest rates do not necessarily move
in the same direction or in the same magnitude as the price of goods and
services. In the current interest rate environment, liquidity and maturity
structure of the Bank's assets and liabilities are critical to the maintenance
of acceptable performance levels.
15
REGULATION AND SUPERVISION
GENERAL
The activities of savings institutions, such as the Bank, are governed by the
Home Owners' Loan Act, as amended (the "HOLA") and the Federal Deposit Insurance
Act ("FDI Act"). The Bank is subject to extensive regulation, examination and
supervision by the OTS, as its primary federal regulator, and the FDIC, as the
deposit insurer. The Bank is a member of the Federal Home Loan Bank ("FHLB")
System and its deposit accounts are insured up to applicable limits by the
Savings Association Insurance Fund ("SAIF") managed by the FDIC. The Bank must
file reports with the OTS and the FDIC concerning its activities and financial
condition in addition to obtaining regulatory approvals prior to entering into
certain transactions such as mergers with, or acquisitions of, other savings
institutions. The OTS and the FDIC conduct periodic examinations to test the
Bank's safety and soundness and compliance with various regulatory requirements.
This regulation and supervision establish 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 and examination policies, including
policies with respect to the classification of assets and the establishment of
adequate loan loss reserves for regulatory purposes. Any change in the
regulatory requirements and policies, whether by the OTS, the FDIC or the
Congress, could have a material adverse impact on the Bank and its operations.
Certain of the regulatory requirements applicable to the Bank are referred to
below or elsewhere herein. The description of statutory provisions and
regulations applicable to savings institutions set forth in this Form 10-K does
not purport to be a complete description of such statutes and regulations and
their effects on the Bank.
FEDERAL SAVINGS INSTITUTION REGULATION
CAPITAL REQUIREMENTS. The OTS capital regulations require savings institutions
to meet three minimum capital standards: a 1.5% tangible capital ratio, a 3%
leverage (core capital) ratio and an 8% risk-based capital ratio. In addition,
the prompt corrective action standards discussed below also establish, in
effect, a minimum 2% tangible capital standard, a 4% leverage (core) capital
ratio (3% for institutions receiving the highest rating on the CAMEL financial
institution rating system), and, together with the risk-based capital standard
itself, a 4% Tier I risk based capital standard. Core capital is defined as
common stockholder's equity (including retained earnings), certain noncumulative
perpetual preferred stock and related surplus, and minority interests in equity
accounts of consolidated subsidiaries less intangibles other than certain
purchased mortgage servicing rights and credit card relationships. The OTS
regulations also require that, in meeting the tangible, leverage (core) and
risk-based capital standards, institutions must generally deduct investments in
and loans to subsidiaries engaged in activities not permissible for a national
bank. The OTS is also authorized to impose capital requirements in excess of
these standards on individual institutions on a case-by-case basis.
The risk-based capital standard for savings institutions requires the
maintenance of Tier I (core) and total capital (which is defined as core capital
and supplementary capital) to risk-weighted assets of at least 4% and 8%,
respectively. In determining the amount of risk-weighted assets, all assets,
including certain off-balance sheet assets, are multiplied by a risk-weight
factor of 0% to 100%, as assigned by the OTS capital regulation based on the
risks OTS believes are inherent in the type of asset. The components of Tier I
(core) capital are equivalent to those discussed earlier. The components of
supplementary capital currently include cumulative preferred stock, long-term
perpetual preferred stock, mandatory convertible securities, subordinated debt
and intermediate preferred stock and the allowance for loan and lease losses
limited to a maximum of 1.25% of risk-weighted assets. Overall, the amount of
supplementary capital included as part of total capital cannot exceed 100% of
core capital.
The OTS regulatory capital requirements also incorporate an interest rate risk
component. Savings institutions with "above normal" interest rate risk exposure
are subject to a deduction from total capital for purposes of calculating their
risk-based capital requirements. A savings institution's interest rate risk is
measured by the decline in the net portfolio value of its assets (i.e., the
difference between incoming and outgoing discounted cash flows from assets,
liabilities and off-balance sheet contracts) that would result from a
hypothetical 200 basis point increase or decrease in market interest rates
divided by the estimated economic value of the institution's assets. In
calculating its total capital under the risk-based capital rule, a savings
institution whose measured interest rate risk exposure exceeds 2% must deduct
16
an amount equal to one-half of the difference between the institution's measured
interest rate risk and 2%, multiplied by the estimated economic value of the
institution's assets. The Director of the OTS may waive or defer a savings
institution's interest rate risk component on a case-by-case basis. A savings
institution with assets of less than $300 million and risk-based capital ratios
in excess of 12% is not subject to the interest rate risk component, unless the
OTS determines otherwise. For the present time, the OTS has deferred
implementation of the interest rate risk component. At December 31, 1997, the
Bank met each of its capital requirements, in each case on a fully phased-in
basis.
PROMPT CORRECTIVE REGULATORY ACTION. Under the OTS prompt corrective action
regulations, the OTS is required to take certain supervisory actions against
undercapitalized institutions, the severity of which depends upon the
institution's degree of undercapitalization. Generally, a savings institution is
considered "well capitalized" if its ratio of total capital to risk-weighted
assets is at least 10%, its ratio of Tier I (core) capital to risk-weighted
assets is at least 6%, its ratio of core capital to total assets is at least 5%,
and it is not subject to any order or directive by the OTS to meet a specific
capital level. A savings institution generally is considered "adequately
capitalized" if its ratio of total capital to risk-weighted assets is at least
8%, its ratio of Tier I (core) capital to risk-weighted assets is at least 4%,
and its ratio of core capital to total assets is at least 4% (3% if the
institution receives the highest CAMEL rating). A savings institution that has a
ratio of total capital to risk weighted assets of less than 8%, a ratio of Tier
I (core) capital to risk-weighted assets of less than 4% or a ratio of core
capital to total assets of less than 4% (3% or less for institutions with the
highest examination rating) is considered to be "undercapitalized." A savings
institution that has a total risk-based capital ratio less than 6%, a Tier 1
risk-based capital ratio of less than 3% or a leverage ratio that is less than
3% is considered to be "significantly undercapitalized" and a savings
institution that has a tangible capital to assets ratio equal to or less than 2%
is deemed to be "critically undercapitalized." Subject to a narrow exception,
the banking regulator is required to appoint a receiver or conservator for an
institution that is "critically undercapitalized." The regulation also provides
that a capital restoration plan must be filed with the OTS within 45 days of the
date a savings institution receives notice that it is "undercapitalized,"
"significantly undercapitalized" or "critically undercapitalized." Compliance
with the plan must be guaranteed by any parent holding company. In addition,
numerous mandatory supervisory actions become immediately applicable to an
undercapitalized institution, including, but not limited to, increased
monitoring by regulators and restrictions on growth, capital distributions and
expansion. The OTS could also take any one of a number of discretionary
supervisory actions, including the issuance of a capital directive and the
replacement of senior executive officers and directors. At December 31, 1997,
the Bank was considered "well capitalized" under the OTS's prompt corrective
action regulations.
INSURANCE OF DEPOSIT ACCOUNTS. Deposits of the Bank are presently insured by
SAIF. Both SAIF and the Bank Insurance Fund ("BIF"), (the deposit insurance fund
that covers most commercial bank deposits), are statutorily required to be
recapitalized to a 1.25% of insured reserve deposits ratio. Prior to 1996,
members of SAIF and BIF were paying average deposit insurance premiums of
between 24 and 25 basis points. The BIF met the required reserve in 1995,
whereas SAIF was not expected to meet or exceed the required level until 2002 at
the earliest, due to the statutory requirement that SAIF members make payments
on bonds issued in the late 1980s by the Financing Corporation ("FICO") to
recapitalize the predecessor to SAIF.
Once BIF achieved the 1.25% ratio, the FDIC adopted a new assessment rate
schedule of from 0 to 27 basis points under which 92% of BIF members paid an
annual premium of only $2,000 while retaining the previously existing assessment
rate schedule applicable to SAIF member institutions of 23 to 31 basis points.
Thus, SAIF members, such as the Bank were placed at a substantial competitive
disadvantage to BIF members with respect to pricing of loans and deposits and
the ability to achieve lower operating costs.
On September 30, 1996, the President signed into law the Deposit Insurance Funds
Act of 1996 (the "Funds Act") which, among other things, imposed a special
one-time assessment on SAIF member institutions, including the Bank, to
recapitalize the SAIF. As required by the Funds Act, the FDIC imposed a special
assessment of 65.7 basis points on SAIF assessable deposits held as of March 31,
1995, payable November 27, 1996 (the "SAIF Special Assessment"). The SAIF
Special Assessment was recognized by the Bank as an expense in the quarter ended
September 30, 1996 and was tax deductible.
17
The SAIF Special Assessment recorded by the Bank amounted to $1.3 million on a
pre-tax basis and $0.8 million on an after-tax basis.
The Funds Act also spreads the obligations for payment of the FICO bonds across
all SAIF and BIF members. Beginning on January 1, 1997, BIF deposits were
assessed for a FICO payment of 1.3 basis points, while SAIF deposits pay 6.48
basis points. Full pro rata sharing of the FICO payments between BIF and SAIF
members will occur on the earlier of January 1, 2000 or the date the BIF and
SAIF are merged. The Funds Act specifies that the BIF and SAIF will be merged on
January 1, 1999, provided no savings associations remain as of that time.
As a result of the Funds Act, the FDIC lowered SAIF assessments to 0 to 27 basis
points as of January 1, 1997, a range comparable to that of BIF members. SAIF
members will also continue to make the FICO payments described above. Management
cannot predict the level of FDIC insurance assessments on an on-going basis,
whether the savings association charter will be eliminated or whether the BIF
and SAIF will eventually be merged.
The Bank's assessment rate for fiscal 1997 was 6.48 basis points and the premium
paid for this period was $129,000. A significant increase in SAIF insurance
premiums would likely have an adverse effect on the operating expenses and
results of operations of the Bank.
Under the FDI Act, insurance of deposits may be terminated by the FDIC upon a
finding that the institution has engaged in unsafe or unsound practices, is in
an unsafe or unsound condition to continue operations or has violated any
applicable law, regulation, rule, order or condition imposed by the FDIC or the
OTS. The management of the Bank does not know of any practice, condition or
violation that might lead to termination of deposit insurance.
THRIFT RECHARTERING LEGISLATION. The Funds Act provides that the BIF and SAIF
will merge on January 1, 1999 if there are no more savings associations as of
that date. Various proposals to eliminate the federal thrift charter, create a
uniform financial institutions charter and abolish the OTS have been introduced
in Congress. Some bills would require federal savings institutions to convert to
a national bank or some type of state charter by a specified date or they would
automatically become national banks. Converted federal thrifts would generally
be required to conform their activities to those permitted for the charter
selected and divestiture of nonconforming assets would be required over a
limited time period. State chartered thrifts would become subject to the same
federal regulation as applies to state commercial banks. A more recent bill
passed by the House Banking Committee would allow federal savings institutions
to continue to exercise activities being conducted when they convert to a bank
regardless of whether a national bank could engage in the activity. To date,
none of these bills has been voted upon by the full U.S. House of
Representatives or the U.S. Senate. The Bank is unable to predict whether such
legislation would be enacted, the extent to which the legislation would restrict
or disrupt its operations or whether the BIF and SAIF funds will eventually
merge.
LOANS TO ONE BORROWER. Under the HOLA, savings institutions are generally
subject to the limits on loans to one borrower applicable to national banks.
Generally, savings institutions may not make a loan or extend credit to a single
or related group of borrowers in excess of 15% of its unimpaired capital and
surplus. An additional amount may be lent, equal to 10% of unimpaired capital
and surplus, if such loan is secured by readily-marketable collateral, which is
defined to include certain financial instruments and bullion. At December 31,
1997, the Bank's limit on loans to one borrower was approximately $3.3 million.
At December 31, 1997, the Bank's largest aggregate outstanding balance of loans
to one borrower amounted to $3.0 million. All loans to this borrower were
current.
18
QTL TEST. The HOLA requires savings institutions to meet a QTL test. Under the
QTL test, a savings and loan association is required to maintain at least 65% of
its "portfolio assets" (total assets less (i) specified liquid assets up to 20%
of total assets; (ii) intangibles, including goodwill; and (iii) the value of
property used to conduct business) in certain "qualified thrift investments"
(primarily residential mortgages and related investments, including certain
mortgage-backed securities; small business loans, educational loans, and home
equity loans) in at least 9 months out of each 12 month period.
A savings institution that fails the QTL test is subject to certain operating
restrictions and may be required to convert to a bank charter. As of December
31, 1997, the Bank maintained 68.1% of its portfolio assets in qualified thrift
investments and, therefore, met the QTL test.
LIMITATION ON CAPITAL DISTRIBUTIONS. OTS regulations impose limitations upon all
capital distributions by savings institutions, such as cash dividends, payments
to repurchase or otherwise acquire its shares, payments to shareholders of
another institution in a cash-out merger and other distributions charged against
capital. The rule establishes three tiers of institutions, which are based
primarily on an institution's capital level. An institution that exceeds all
fully phased-in capital requirements before and after a proposed capital
distribution ("Tier 1 Bank") and has not been advised by the OTS that it is in
need of more than normal supervision, could, after prior notice but without
obtaining approval of the OTS, make capital distributions during a calendar year
equal to the greater of (i) 100% of its net earnings to date during the calendar
year plus the amount that would reduce by one-half its "surplus capital ratio"
(the excess capital over its fully phased-in capital requirements) at the
beginning of the calendar year or (ii) 75% of its net income for the previous
four quarters. Any additional capital distributions would require prior
regulatory approval. In the event the Bank's capital fell below its regulatory
requirements or the OTS notified it that it was in need of more than normal
supervision, the Bank's ability to make capital distributions could be
restricted. In addition, the OTS could prohibit a proposed capital distribution
by any institution, which would otherwise be permitted by the regulation, if the
OTS determines that such distribution would constitute an unsafe or unsound
practice. In December 1994, the OTS proposed amendments to its capital
distribution regulation that would generally authorize the payment of capital
distributions without OTS approval provided the payment does not cause the
institution to be undercapitalized within the meaning of the prompt corrective
action regulation. However, institutions in a holding company structure would
still have a prior notice requirement. At December 31, 1997, the Bank was a Tier
1 Bank.
LIQUIDITY. The Bank is required to maintain an average daily balance of
specified liquid assets equal to 4% of a liquidity base, defined as net
withdrawable deposit accounts and short-term borrowings with maturities of less
than one year. Although the liquidity requirement is currently 4%, it may be
changed from time to time by the OTS to any amount within the range of 4% to 10%
depending upon economic conditions and the savings flows of member institutions.
Monetary penalties may be imposed for failure to meet these liquidity
requirements. The Bank's liquidity ratio at December 31, 1997 was 6.97%, which
exceeded the then applicable requirements.
ASSESSMENTS. Savings institutions are required to pay assessments to the OTS to
fund the agency's operations. The general assessment, paid on a semiannual
basis, is computed upon the savings institution's total assets, including
consolidated subsidiaries, as reported in the Bank's latest quarterly thrift
financial report. The assessments paid by the Bank for the fiscal year ended
December 31, 1997 totaled $66,000.
BRANCHING. OTS resolutions permit nationwide branching by federally chartered
savings institutions to the extent allowed by federal statute. This permits
federal savings institutions to establish interstate networks and to
geographically diversify their loan portfolios and lines of business. The OTS
authority preempts any state law purporting to regulate branching by federal
savings institutions.
19
TRANSACTIONS WITH RELATED PARTIES. The Bank's authority to engage in
transactions with related parties or "affiliates" (e.g., any company that
controls or is under common control with an institution) is limited by Sections
23A and 23B of the Federal Reserve Act ("FRA"). Section 23A limits the aggregate
amount of covered transactions with any individual affiliate to 10% of the
capital and surplus of the savings institution. The aggregate amount of covered
transactions with all affiliates is limited to 20% of the savings institution's
capital and surplus. Certain transactions with affiliates are required to be
secured by collateral in an amount and of a type described in Section 23A and
the purchase of low quality assets from affiliates is generally prohibited.
Section 23B generally provides that certain transactions with affiliates,
including loans and asset purchases, must be on terms and under circumstances,
including credit standards, that are substantially the same or at least as
favorable to the institution as those prevailing at the time for comparable
transactions with non-affiliated companies. In addition, savings institutions
are prohibited from lending to any affiliate that is engaged in activities that
are not permissible for bank holding companies and no savings institution may
purchase the securities of any affiliate other than a subsidiary.
The Bank's authority to extend credit to executive officers, directors and 10%
shareholders ("insiders"), as well as entities such persons control, is governed
by Sections 22(g) and 22(h) of the FRA and Regulation O thereunder. Among other
things, such loans are required to be made on terms substantially the same as
those offered to unaffiliated individuals and to not involve more than the
normal risk of repayment. Recent legislation created an exception for loans made
pursuant to a benefit or compensation program that is widely available to all
employees of the institution and does not give preference to insiders over other
employees. Regulation O also places individual and aggregate limits on the
amount of loans the Bank may make to such persons based, in part, on the Bank's
capital position and requires certain board approval procedures to be followed.
ENFORCEMENT. Under the FDI Act, the OTS has primary enforcement responsibility
over savings institutions and has the authority to bring actions against the
institution and all "institution-affiliated parties," including stockholders,
and any attorneys, appraisers and accountants who knowingly or recklessly
participate in wrongful action likely to have an adverse effect on an insured
institution. Formal enforcement action may range from the issuance of a capital
directive or cease and desist order to removal of officers and/or directors to
institution of receivership, conservatorship or termination of deposit
insurance. Civil penalties cover a wide range of violations and can amount to
$25,000 per day, or even $1 million per day in especially egregious cases. Under
the FDI Act, the FDIC has the authority to recommend to the Director of the OTS
enforcement action to be taken with respect to a particular savings institution.
If action is not taken by the Director, the FDIC has authority to take such
action under certain circumstances. Federal law also establishes criminal
penalties for certain violations.
STANDARDS FOR SAFETY AND SOUNDNESS. The federal banking agencies have developed
Interagency Guidelines Prescribing Standards for Safety and Soundness
("Guidelines") and a final rule which will implement safety and soundness
standards required under the FDI Act. The Guidelines set forth the safety and
soundness standards that the federal banking agencies use to identify and
address problems at insured depository institutions before capital becomes
impaired. The standards set forth in the Guidelines address internal controls
and information systems; internal audit system; credit underwriting; loan
documentation; interest rate risk exposure; asset growth; asset quality;
earnings; and compensation, fees and benefits. If the appropriate federal
banking agency determines that an institution fails to meet any standard
prescribed by the Guidelines, the agency may require the institution to submit
to the agency an acceptable plan to achieve compliance with the standard, as
required by the FDI Act. The final rule will establish deadlines for the
submission and review of such safety and soundness compliance plans when such
plans are required.
FEDERAL HOME LOAN BANK SYSTEM. The Bank is a member of the FHLB System, which
consists of 12 regional FHLBs. The FHLB provides a central credit facility
primarily for member institutions. The Bank, as a member of the FHLB of Atlanta,
is required to acquire and hold shares of capital stock in that FHLB in an
amount at least equal to the greater of 1% of the aggregate principal amount of
its unpaid residential mortgage loans and similar obligations at the beginning
of each year, 0.3% of total assets at the beginning of each year, or 1/20 of its
advances (borrowings) from the FHLB of Atlanta. The Bank was in compliance with
this requirement, with an investment in FHLB of Atlanta stock at December 31,
1997, of $1.5 million. FHLB advances must be secured by specified types of
collateral and must be obtained primarily for the purpose of providing funds for
residential housing finance.
20
The FHLBs are required to provide funds to cover certain obligations on bonds
issued to fund the resolution of insolvent thrifts and to contribute funds for
affordable housing programs. These requirements could reduce the amount of
dividends that the FHLBs pay to their members and could also result in the FHLBs
imposing a higher rate of interest on advances to their members. Dividends from
the FHLB of Atlanta to the Bank amounted to $109,000 during each of the years in
the three year period ended December 31, 1997. If dividends were reduced, or
interest on FHLB advances increased, the Bank's net interest income might also
be reduced.
FEDERAL RESERVE SYSTEM. The Federal Reserve Board regulations require savings
institutions to maintain non-interest earning reserves against their transaction
accounts (primarily NOW and regular checking accounts). During fiscal 1997, the
Federal Reserve Board regulations generally required that reserves be maintained
against aggregate transaction accounts as follows: for accounts aggregating
$52.0 million or less (subject to adjustment by the Federal Reserve Board) the
reserve requirement is 3%; and for accounts aggregating greater than $52.0
million, the reserve requirement is $1.6 million plus 10% (subject to adjustment
by the Federal Reserve Board between 8% and 14%) against that portion of total
transaction accounts in excess of $52.0 million. The first $4.4 million of
otherwise reservable balances (subject to adjustments by the Federal Reserve
Board) were exempted from the reserve requirements. The Bank maintained
compliance with the foregoing requirements. For 1998, the Federal Reserve Board
has decreased from $49.3 to $47.3 million the amount of transaction accounts
subject to the 3% reserve requirement and to increase the amount of exempt
reservable balances from $4.4 million to $4.7 million. The balances maintained
to meet the reserve requirements imposed by the Federal Reserve Board may be
used to satisfy liquidity requirements imposed by the OTS.
FEDERAL SECURITIES LAWS. The Bank's Common Stock is registered under the
Securities Exchange Act of 1934. The Bank is subject to the information, proxy
solicitation, insider trading restrictions and other requirements under the
Exchange Act.
FEDERAL AND STATE TAXATION.
The Bank and its subsidiaries report their income on a consolidated basis using
the accrual method of accounting, and are subject to federal income taxation in
the same manner as other corporations with some exceptions, including
particularly the Bank's reserve for bad debts discussed below. The following
discussion of tax matters is intended only as a summary and does not purport to
be a comprehensive description of the tax rules applicable to the Bank. The Bank
was audited by the IRS during 1997, which covered only the Bank's 1995 tax year.
No significant assessments occurred as a result of the IRS examination. For its
1997 taxable year, the Bank is subject to a maximum federal income tax rate of
34%.
For fiscal years beginning prior to December 31, 1995, thrift institutions which
qualified under certain definitional tests and other conditions of the Internal
Revenue Code of 1986 (the "Code") were permitted to use certain favorable
provisions to calculate their deductions from taxable income for annual
additions to their bad debt reserve. A reserve could be established for bad
debts on qualifying real property loans (generally secured by interests in real
property improved or to be improved) under (i) the Percentage of Taxable Income
Method (the "PTI Method") or (ii) the Experience Method. The reserve for
nonqualifying loans was computed using the Experience Method.
The Small Business Job Protection Act of 1996 (the "1996 Act"), which was
enacted on August 20, 1996, required savings institutions to recapture (I.E.,
take into income) certain portions of their accumulated bad debt reserves. The
1996 Act repeals the percentage of taxable income method of accounting for bad
debts effective for tax years beginning after 1995. Thrift institutions that are
treated as small banks (generally those with assets of less than $500 million)
are allowed to utilize the Experience Method applicable to such institutions,
while thrift institutions that are treated as large banks (generally those
exceeding $500 million in assets) are required to use only the specific
charge-off method. Thus, the PTI Method of accounting for bad debts is no longer
available for any financial institution.
21
Use of the PTI Method had the effect of reducing the marginal rate of federal
tax on the Bank's income to 32.2%, exclusive of any minimum or environmental
tax, as compared to the maximum corporate federal income tax rate of 35%.
A thrift institution required to change its method of computing reserves for bad
debts will treat such change as a change in method of accounting, initiated by
the taxpayer, and having been made with the consent of the IRS. Any adjustment
required to be taken into income with respect to such change in method of
accounting generally will be taken into income ratably over a six-taxable year
period, beginning with the first taxable year beginning after 1995, subject to
the residential loan requirement.
Under the residential loan requirement provision, the recapture required by the
1996 Act will be suspended for each of two successive taxable years, beginning
with the Bank's 1996 taxable year, in which the Bank originates a minimum of
certain residential loans based upon the average of the principal amounts of
such loans made by the Bank during its six taxable years preceding its current
taxable year. However, the Bank elected to begin its required recapture over a
six year period in 1996.
Under the 1996 Act, for its current and future taxable years, the Bank is
permitted to make additions to its tax bad debt reserves. In addition, the Bank
is required to recapture (I.E., take into income) over a six year period the
excess of the balance of its tax bad debt reserves as of December 31, 1995 other
than its supplemental reserve for losses on loans, over the balance of such
reserves as of December 31, 1987, its base year. For this purpose, the Bank's
base year reserves have been reduced by an amount which corresponds with a
decrease in the Bank's qualifying loan portfolio since the December 31, 1987
base year. As a result of such recapture, the Bank will incur an additional tax
liability of approximately $1.4 million. Deferred taxes have been established
for the taxes associated with this recapture. At December 31, 1997, the
remaining balance of the taxes to be recaptured and the remaining deferred tax
liability associated with the recapture amounting to approximately $939,000.
Under the 1996 Act, if the Bank makes "non-dividend distributions" to
shareholders, such distributions will be considered to have been made from the
Bank's unrecaptured tax bad debt reserves (including the balance of its reserves
as of December 31, 1987) to the extent thereof, and then from the Bank's
supplemental reserve for losses on loans, to the extent thereof, and an amount
based on the amount distributed (but not in excess of the amount of such
reserves) will be included in the Bank's income. Non-dividend distributions
include distributions in excess of the Bank's current and accumulated earnings
and profits as calculated for federal income tax purposes, distributions in
redemption of stock, and distributions in partial or complete liquidation.
Dividends paid out of the Bank's current or accumulated earnings and profits
will not be so included in the Bank's income.
The amount of additional taxable income triggered by a non-dividend is an amount
that, when reduced by the tax attributable to the income, is equal to the amount
of the distribution. Thus, if the Bank makes a non-dividend distribution to
shareholders, approximately one and one-half times the amount of such
distribution (but not in excess of the amount of such reserves) would be
includable in income for federal income tax purposes, assuming a 35% federal
corporate income tax rate. The Bank does not intend to pay dividends that would
result in a recapture of any portion of its bad debt reserves.
In addition to the regular income tax, an alternative tax is imposed at a rate
of twenty percent of alternative minimum taxable income. Tax preference items
and adjustments used to calculate alternative minimum taxable income include (i)
depreciation on assets placed in service after 1986, (ii) interest on certain
tax-exempt private activity bonds acquired after August 7, 1986, (iii) an amount
equal to 75% of the amount by which a corporation's adjusted current earnings
exceed its taxable income (with certain adjustments) and (iv) the alternative
tax net operating loss that may be used to reduce alternative minimum taxable
income is limited to 90% of the alternative minimum taxable income. As of
December 31, 1997, United did not have a tax net operating loss carryforward.
Under North Carolina law, United is subject to an annual corporate income tax of
7.50% of its Federal taxable income as computed under the Code, subject to
certain prescribed adjustments. The Bank is also subject to an annual state
franchise tax, which is imposed at a rate of 0.15% applied to the greater of
United's (i) capital stock, surplus and undivided profits, (ii) investment in
tangible property in North Carolina or (iii) appraised valuation of property in
North Carolina.
22
ITEM 2. PROPERTIES
The Bank's executive offices are located at 116 South Franklin Street, Rocky
Mount, North Carolina 27804. At December 31, 1997, United operated from 13 full
service offices and 2 loan origination offices. The Bank owns the land and
building on the Rocky Mount main office along with the Sunset Avenue (Rocky
Mount), Cary, Greenville, New Bern, Wilson, and Warrenton branch offices. Other
full service branch offices consist of a mobile banking unit on leased land
(Spring Hope), buildings and improvements on leased land (Benvenue Road in Rocky
Mount and Morehead City), and leased facilities in Raleigh, Tarboro and
Pinetops. Loan origination offices in Charlotte and Wilmington are located in
rental office space. The total net book value of the facilities and related
equipment owned by the Bank was $5,740,000 at December 31, 1997. Note 12 to
Notes to Consolidated Financial Statements contained in the 1997 Annual Report
presents information on minimum rental commitments under noncancelable operating
leases at December 31, 1997 and rental expense for each of the three years in
the three year period ended December 31, 1997.
ITEM 3. LEGAL PROCEEDINGS
United is not engaged in any legal proceedings of a material nature at the
present time. However, from time to time, the Bank is a party to legal
proceedings wherein it enforces its security interest in mortgage loans
originated by the Bank. Management does not anticipate any significant losses in
connection with such actions.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
23
PART II
The information required by items 5, 6, 7 and 8 is included in United Federal's
1997 Annual Report, certain pages of which are incorporated herein by reference.
Page(s) of
Annual Report
ITEM 5. Market for the Bank's Common Stock and
Related Stockholder Matters 45
ITEM 6. Selected Financial Data 2
ITEM 7. Management's Discussion and Analysis of
Financial Condition and Results of Operations 3-14
ITEM 7A. Quantitative and Qualitative Disclosures about
Market Risk 4-6
ITEM 8. Financial Statements and Independent
Auditor's Report 15-41
ITEM 9. Disagreements on Accounting and
Financial Disclosure None
24
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The section "Election of Directors" of the Proxy Statement for the 1998 Annual
Meeting of Stockholders, is incorporated herein by reference.
The following is certain information about the Executive Officers of the Bank
who are not also directors:
NAME POSITION AGE
Norma Cuthrell Executive Vice President
and Secretary 72
Norma Cuthrell was employed by the Bank in 1962. Ms. Cuthrell's responsibilities
include savings administration and operations and she has served as a Senior and
Executive Vice President since 1974 and as Secretary since 1983.
ITEM 11. EXECUTIVE COMPENSATION
The "Executive Compensation" and "Employment Contracts" sections contained in
the Proxy Statement for the 1998 Annual Meeting of Stockholders and Notes 14 and
15 of Notes to Consolidated Financial Statements included in the Bank's 1997
Annual Report are incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
(a) Security Ownership of Certain Beneficial Owners
Information required by this item is incorporated herein by
reference to the section captioned "Principal Holders of
Voting Securities" of the Proxy Statement for the 1998 Annual
Meeting of Stockholders.
(b) Security Ownership of Management
Information required by this item is incorporated herein by
reference to the sections captioned "Principal Holders of
Voting Securities" and "Election of Directors" in the Proxy
Statement for the 1998 Annual Meeting of Stockholders.
(c) Changes in Control
On December 24, 1997, the Bank signed a letter of intent to be
acquired by Triangle Bancorp, Inc., and merge with Triangle
Bank. The definitive agreement was signed on March 4, 1998.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The section titled "Transactions with Related Persons" of the Proxy Statement
for the 1998 Annual Meeting of Stockholders is incorporated herein by reference.
25
PART IV
ITEM 14. EXHIBITS. FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(A) 1. FINANCIAL STATEMENTS
The following information is included in the Bank's 1997 Annual
Report, which information is incorporated herein by reference:
Report of Independent Certified Public Accountants
Consolidated Statements of Financial Condition at December 31, 1997 and 1996
Consolidated Statements of Income for the years ended December 31, 1997, 1996 and 1995
Consolidated Statements of Stockholders' Equity for the years ended December 31, 1997,
1996 and 1995
Consolidated Statements of Cash Flows for the years ended December 31, 1997, 1996 and 1995
Notes to Consolidated Financial Statements.
2. FINANCIAL STATEMENT SCHEDULES
All financial statement schedules are omitted because of the
absence of the conditions under which they are required or because
the required information is set forth in the consolidated
financial statements or notes thereto.
3. EXHIBITS
Exhibit No. DESCRIPTION
----------- -----------
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
13 1997 Annual Report filed herewith
21 Subsidiaries of the Registrant
22 Proxy Statement for the May 28, 1998 Annual Meeting of Stockholders
filed herewith
(B) REPORTS ON FORM 8-K
No reports on Form 8-K have been filed during the last quarter of the year ended
December 31, 1997.
26
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant as duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
UNITED FEDERAL SAVINGS BANK
BY: John A. Barker 3/25/98
_____________________________________
John A. Barker Date
President and Chief Executive Officer
Director
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 dates indicated.
By: By:
Norma Cuthrell 3/25/98 J.B.Brewer, Jr. 3/25/98
------------------------------------------ -------------------------------------------
Norma Cuthrell Date J.B. Brewer, Jr. Date
Executive Vice President and Secretary Director
By: By:
Robert C. White 3/25/98 John L. Sally 3/25/98
------------------------------------------ -------------------------------------------
Robert C. White Date John L. Sally Date
Senior Vice President and Director
Chief Financial Officer
By:
Jake L. Rosenbloom 3/25/98
-------------------------------------------
By: Jake L. Rosenbloom Date
Marshall Dunn 3/25/98 Director
------------------------------------------
Marshall Dunn Date
Director
By:
Norwood P. Blanchard 3/25/98
------------------------------------------
Norwood P. Blanchard Date
Director
27