FORM 10-KSB
ANNUAL OR TRANSITIONAL REPORT
UNDER SECTION 13 OR 15(d)
(As last amended by Each Act Rel No. 35113, eff. 1/30/95.)
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
[X] ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
For the fiscal year ended December 31, 1997
--------------------------------
[ ] TRANSITION REPORT UNDER SECTION 13 0R 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
COMMISSION FILE NUMBER 333-3296
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UNITED COMMUNITY BANKSHARES, INC.
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(Name of small business issuer in its charter)
Virginia 54-1801876
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(State or other jurisdiction of (I.R.S. Employer Indentification No.)
incorporation or organization)
(757) 562-5184
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(registration's telephone number, including area code)
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Securities registered under Section 12(b) of the Exchange Act: Not applicable
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Securities registered under Section 12(g) of the Exchange Act: Common Stock , $1.00 par value
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(Title of Class)
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Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 12 months 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 in response to Item 405 of
Regulation S-B contained in this form, and no disclosure will be contained, to
the best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-KSB or any
amendment to this 10-KSB. [X]
As of March 23, 1998, the aggregate market value of the 1,450,796 shares of
common stock of the Registrant issued and outstanding, which excludes 378,413
shares held by all directors and officers of the Registrant, was approximately
$23,756,785. This amount is based on $16.375 market value per share.
At December 31, 1997, the Registrant had outstanding 1, 829,209 shares of Common
Stock.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the 1997 Annual Report to Shareholders for the year ended December
31, 1997 are incorporated by reference into Part II, Items 6-7 of the Form
10-KSB.
Portions of the definitive Proxy Statement prepared for the 1998 Annual Meeting
of Stockholders (Definitive Proxy Statement") are incorporated by reference into
Part III, Items 9-12, of this Form 10-KSB.
<PAGE>
PART I
Item 1. Description of Business
United Community Bankshares, Inc. ("UCB"), the Company, was organized and
chartered under the laws of the Commonwealth of Virginia on March 28, 1996 and
commenced operations on August 1, 1996 as a bank holding company. On August 1,
1996, the effective date, The Bank of Franklin ("BOF") and The Bank of Sussex
and Surry ("BSS"), the "Banks", both Virginia nonmember banks, became wholly
owned subsidiaries of UCB. The consummation of the affiliation of the Banks was
a result of a definitive agreement entered into on January 25, 1996. The Banks
have retained their respective names, banking offices, executive officers and
board of directors.
On the effect date, each of the common shares of both BOF and BSS were exchanged
for 4.806 and 3.00 common shares of UCB, respectively. This resulted in the
issuance of 1,829,209 common shares of UCB stock. Former common shareholders of
BOF received their fractional shares in cash totaling $3,542. UCB also paid a
cash dividend of $.14 per common share or a total of $259,089 on September 30,
1996.
BOF has five full service banking offices, two in the City of Franklin, and one
each in the City of Suffolk (Holland) and the Towns of Courtland and Newsoms,
Virginia. BSS has three full service banking offices in the Towns of Wakefield,
Ivor and Surry, Virginia. The Banks provide a wide range of financial services,
principally to individuals and to small and medium-sized businesses, including
individual and commercial demand, savings, and time deposit accounts,
commercial, agricultural and consumer loans, credit cards, traveler checks, safe
deposit facilities, ATM services, sales of United States Savings Bonds,
collection items and official checks. BSS also offers a wide array of real
estate mortgage products including a long term fixed-rate mortgage product which
is sold in a secondary market. BSS is authorized to provide trust services, but
does not currently do so.
The banking industry is highly competitive in the Banks market area. There are
approximately five banks engaged in business in the general market area in which
the Banks operate, including three community banks, and four state-wide banking
organizations as well as a credit union. Also in this general market area, is a
Farm Credit Bank, which is highly competitive in the agricultural loan market.
The Banks encounters competition for deposits and loans from the aforementioned
competitors in the areas in which they operate, as well as credit unions and
finance companies. In addition, the Banks must compete for deposits with Money
Market mutual funds which are marketed nationally, insurance brokers and local
offices of stock brokerage firms.
The Banks are not dependent upon an individual customer, or segment of
customers, the loss of which would have a material adverse impact on its
operations.
BOF had 45 full-time equivalent employees as of December 31, 1997, while BSS and
UCB had 27 and one full-time equivalent employees for the same period end,
respectively. None of these employees are represented by any collective
bargaining unit. The Company and the Banks considers relations with its
employees to be good.
Supervision and Regulation
The Company is subject to state and federal banking laws and regulations which
impose specific requirements or restrictions, and provide for general regulatory
oversight with respect to virtually all aspects of operations, including, but
not limited to, maintenance of cash reserves, loans, mortgages, maintenance of
minimum capital, payment of dividends, and establishment of branch offices. As
state-chartered banks and members of the Federal Reserve System, the Banks are
supervised and regularly examined by the Federal Reserve and the Bureau of
Financial Institutions of the Commonwealth of Virginia.
Mergers and Acquisitions. The Bank Hold Company Act formerly prohibited the
Federal Reserve from approving an application from a bank holding company to
acquire shares of a bank located outside the state in which the operations of
the holding company's banking subsidiaries were principally conducted, unless
such an application was specifically authorized by statute of the state in which
the bank whose shares were to be acquired was located. However, under recently
enacted federal legislation, the restriction to interstate acquisitions was
abolished effective September 29, 1995, and bank holding companies from any
state may now acquire banks and bank holding companies located in any other
state. Banks also will be able to branch across state lines effective June 1,
1997, provided certain conditions are met, including that applicable state law
must expressly permit such interstate branching. Under Virginia law, effective
July 1, 1995, Virginia banks can branch across state lines in those states with
which Virginia has reciprocal agreements. Although this will have a significant
impact on the bank industry, it is not possible to determine, with any degree of
certainty, its impact of individual institutions.
Deposit Insurance. Section 38 of the Federal Deposit Insurance Act, as amended
by the Federal Deposit Insurance Corporation Improvement Act ("FDICIA"),
requires that the federal banking agencies establish five capital levels for
insured depository institutions - "well capitalized," "adequately capitalized,"
"undercapitalized," "significantly undercapitalized," and "critically
undercapitalized". The Act also requires or permits such agencies to take
certain
<PAGE>
supervisory actions should an insured institution's capital level fall. The
Banks were notified by the Board of Governors of the Federal Reserve System (the
"Federal Reserve Board") that they are classified as "well capitalized"
institutions for this purpose. An "adequately capitalized" institution is
restricted from accepting brokered deposits. A "significantly undercapitalized"
institution must develop a capital restoration plan and is subject to a number
of mandatory and discretionary supervisory actions. These powers and authorities
are in addition to the traditional powers of the federal banking agencies to
deal with undercapitalized institutions. As more fully disclosed in the
following paragraph, the FDIC deposit insurance premiums required to be paid by
institutions depend, in part, on their capital levels, and undercapitalized
institutions will be required to pay significantly greater premiums than more
highly capitalized institutions.
The FDIC has implemented a risk-based deposit insurance assessment system under
which the assessment rate for an insured institutions may vary according to
regulatory capital levels of the institution and other factors (including
supervisory evaluations). Effective January 1, 1996, depository institutions
insured by the Bank Insurance Fund ("BIF"), ranked in the top risk
classification category of well capitalized, are required to pay only the
statutory minimum assessment of $2,000 annually for deposit insurance, while all
other banks are required to pay premiums ranging from .03% to .30% of domestic
deposits. These rate schedules are subject to future adjustments by the FDIC. In
addition, the FDIC has authority to impose special assessments from time to
time.
The Deposit Insurance Funds Act of 1996 (the "Funds Act") was enacted on
September 30, 1996. Among other provisions, the Funds Act: (1) requires that
certain depository institutions pay a one-time special assessment (65.7 cents
per $100 of SAIF-assessable deposits) to the FDIC to capitalize the Savings
Association Insurance Fund ("SAIF") at its statutorily required reserve ratio of
1.25% of insurable deposits; (2) exempts certain depository institutions with
SAIF assessable deposits that meet any of several specified criteria from paying
the special assessment; (3) authorizes the Financing Corporation ("FICO") to
impose periodic assessments on depository institutions that are members of BIF,
in addition to institutions that are members of SAIF, in order to spread the
cost of interest payments on outstanding FICO bonds over a larger number of
institutions. Until this change in the law, only SAIF members bore the cost of
funding these interest payments. FICO assessment rates for the first semiannual
period of 1997 were set at 1.30% annually for BIF-assessable deposits and 6.48%
annually for SAIF-assessable deposits. These rates may be adjusted quarterly to
reflect changes in assessment bases for the BIF and the SAIF. By law, the FICO
rate on BIF-assessable deposits must be one-fifth the rate on SAIF-assessable
deposits until the insurance funds merge or until January 1, 2000, whichever
occurs first.
Regulations. On December 15, 1994, the Federal Reserve Board, the Office of
Thrift Supervision, the Office of the Controller of the Currency ("OCC"), and
the FDIC (collectively the "agencies") issued a final rule entitled, Risk-Based
Capital Standards: Concentration of Credit Risk and Risks of Nontraditional
Activities. The final rule amends the risk-based capital standards by explicitly
identifying concentrations of credit risk and certain risks arising from
nontraditional activities, as well as an institution's ability to manage these
risks, as important factors in assessing an institution's ability to manage
these risks, as important factors in assessing an institution's overall capital
adequacy. While no quantitative measure of such risk is included in the final
rule, to the extent appropriate, the agencies will issue examination guidelines
on new developments in nontraditional activities or concentrations of credit to
ensure that adequate account is taken of the risks of these activities.
Moreover, the agencies also believe that institutions identified through the
examination process as having significant exposure to concentration of credit
risk, or as not adequately managing concentration risk, should hold capital in
excess of the regulatory minimums. Therefore, due to the subjective nature of
this final rule, the Company is unable to determine what effect, if any, this
rule may have on regulatory capital requirements.
On August 2, 1995, the OCC, the Federal Reserve Board, and the FDIC
(collectively the "banking agencies") issued a final rule entitled, Risk-Based
Capital Standards: Interest Rate Risk. The final rule implements minimum capital
standards for interest rate risk exposures in a two-step process. The final rule
implements the first step of that process by revising the capital standards of
the banking agencies to explicitly include a bank's exposure to declines in the
economic value of its capital due to changes in interest rates as a factor that
the banking agencies intend to implement this rule on a case-by-case basis
during the examination process. The second step of the banking agencies' process
will be to issue a proposed rule that would established an explicit minimum
capital charge for interest rate risk, based on the level of the bank's measured
interest rate risk exposure. Due to the subjective nature of the first phase of
this final rule, the Banks are unable to determine what effect, if any, this
rule may have on its regulatory capital requirements.
On November 16, 1995, the Federal Reserve Board issued guidelines entitled,
Federal Reserve Guidelines for Rating Risk Management at State Member Banks and
Bank Holding Companies (the "Guidelines"). The Guidelines specify that
principles of sound management should apply to the entire spectrum of risks
facing a banking institution including, but not limited to, credit, market,
liquidity, operational, legal, and reputational risk and that, for state member
banks, a single numerical rating for risk management should be provided as part
of the examination process. The Guidelines also specify that examination reports
should make reference to the types and nature of corrective actions that need to
be taken by institutions to address noted risk management and internal control
deficiencies. Where appropriate, institutions should also be advised that the
Federal Reserve Board will initiate supervisory actions if the failure to
separate critical operational duties creates the potential for serious losses or
if material deficiencies or situations that threaten the safe and sound conduct
<PAGE>
of their activities are not adequately addressed in a timely manner. Due to the
subjective nature of the risk-management evaluation, the Banks are not able to
determine what effect, if any this rule may have on the operation of the Banks.
On October 1, 1996, the banking agencies issued new guidelines amending the
Interagency Guidelines Establishing Standards for Safety and Soundness (the
"Guidelines") to include asset quality and earnings standards. The Guidelines
adopted pursuant to the requirements of Section 39 of the Federal Deposit
Insurance Act. The Guidelines require financial institutions to identify problem
assets and estimate inherent losses. In order to comply with these Guidelines a
financial institution shall: (1) consider the size and potential risks of
material concentrations of credit risk; (2) compare the level of problem assets
to the level of capital and establish reserves sufficient to absorb anticipated
losses on those and other assets; (3) take appropriate corrective action to
resolve problem assets, as appropriate; and (4) provide periodic asset quality
reports to the board of directors to assess the level of asset risk. The
earnings standards specified by the Guidelines require an institution to compare
its earnings trends (relative to equity, assets, and other common benchmarks)
with its historical experience and with the earnings trends of its peers. The
Guidelines, relative to the earnings standards, require the institution to: (1)
evaluate the adequacy of earnings with regard to the institution's relative size
and complexity, and the risk profile of the institution's assets and operations;
(2) assess the source, volatility, and sustainability of earnings; (3) evaluate
the effect of nonrecurring or extraordinary income or expense; (4) take steps to
ensure that earnings are sufficient to maintain adequate capital and reserves
after considering asset quality and the institution's rate of growth; and (5)
provide periodic reports with adequate information for management and the board
of directors to assess earnings performance. The Guidelines note that the
complexity and sophistication of and institution's monitoring, reporting
systems, and corrective actions should be commensurate with the size, nature and
scope of the institution's operations. The Banks do not believe that these
Guidelines will materially effect their operations or financial condition.
The Federal Financial Institutions Examination Council ("FFIEC") approved
revisions to the reporting requirements for the Reports of Condition and Income
(Call Report) that took effect as of March 31, 1997. The revisions that are
expected to have the greatest impact on most financial institutions will be the
adoption of generally accepted accounting principles ("GAAP") as the reporting
basis for the balance sheet, income statement and related Call Report schedules.
This involves the revision of Call Report instructions that currently depart
from GAAP, the addition of a small number new items to meet supervisory data
needs resulting from the adoption of GAAP, and the modification of other
existing Call Report items or instructions. In the March 31, 1997 Call
Report, financial institutions are required to adopt the provisions of
Financial Accounting Standards Board ("FASB") Statement No. 125, Accounting for
Transfers and Servicing of Financial Assets and Extinguishments of
Liabilities, for transfers and servicing of assets occurring after December 31,
1996. AS FASB 125 provides standards for distinguishing the transfer of
financial assets from secured borrowings and, therefore, the recognition
and derecognition of financial assets, regulatory capital calculations
could be significantly impacted. The Banks have considered the relevant
provisions of FASB 125, and assessing the accounting treatment and legal
ramifications of modifying participation agreements. Additional information
with respect to this pronouncement is included in "Management's Discussion
and Analysis of Financial Condition and Results of Operations" under Recent
Accounting Pronouncements, and is incorporated by reference thereto.
On December 20, 1996 the FDIC Board of Directors adopted the FFIEC's updated
statement of policy entitled Uniform Financial Institutions Rating System
("UFIRS"). The updated UFIRS replaces the previous rating system established in
the 1979 statement of policy, and was effective January 1, 1997. Under the
existing UFIRS, each financial institution is assigned a composite rating based
on an evaluation and rating of five essential components of an institution's
financial condition and operations. The five component areas are Capital
Adequacy, Asset Quality, Management, Earnings and Liquidity ("CAMEL"). The
updated UFIRS includes the addition of a sixth component for Sensitivity to
market risk ("CAMELS"). The new sixth component addresses the degree to which
changes in interest rates, foreign exchange rates, commodity prices or equity
prices can adversely affect a financial institution's earnings or capital. The
new component focuses on an institution's ability to monitor and manage its
market risk, and will provide an institution's management with a clearer and
more focused indication of supervisory concerns in this area. The Banks do not
believe that this statement of policy will materially effect their operations.
Item 2. Description of Property
United Community Bankshares, Inc., the parent company, did not own any real or
tangible personal property as of December 31, 1997.
The Bank of Franklin
BOF's main office is located at 100 East Fourth Avenue in Franklin, Virginia.
The College Drive branch office is located at 201 North College Drive, Franklin,
Virginia. The main office and the College Drive branch office maintain ATM
facilities. The Courtland branch is located at Shands Shopping Center, 22736
Main Street, Courtland, Virginia; the Newsoms branch at 22334 General Thomas
Highway, Newsoms, Virginia; and the Holland branch at 6617 Holland Road,
Suffolk, Virginia. Other properties owned include three two-story houses located
at 403, 405, and 407 Middle Street, Franklin, Virginia. The houses are held for
rental purposes and possible further expansion. The properties are rented to
individuals for living quarters. The Bank also owns a parcel of land and a
two-car garage located at 200 East Fourth
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Avenue, Franklin, Virginia. The Bank has retained this property for storage and
employee parking and may use this property for future expansion. The Courtland
branch is the only leased property. All properties are in good condition.
The Bank of Sussex and Surry
BSS's main office is located at 205 Railroad Avenue in Wakefield, Virginia. The
Ivor branch office is located at 8314 Main Street, Ivor, Virginia and the Surry
branch Office is located at 207 Colonial Trail East, Surry, Virginia. BSS also
owns property located on 535 County Drive (Highway 460) in the Town of Wakefield
on which it has a remote stand-alone ATM facility. This property is also owned
for possible future expansion purposes. All of these properties are owned by BSS
and in good condition.
Item 3. Legal Proceedings
In the course of its operations, United Community Bankshares, Inc. and its
subsidiaries are aware of only one material pending or threatened litigation,
unasserted claims and/or assessments through December 31, 1997, or subsequent
thereto. This suit is described below. The only other litigation in which UCB
and its subsidiaries, BOF and BSS, are involved are collection suits involving
delinquent loan accounts in the normal course of business.
Fidelity National Title Insurance Company of New York, successor by merger to
Security Title and Guaranty Company (the "Title Company"), filed suit against
the Bank of Sussex and Surry in November, 1997.
The Title Company issued a title insurance policy in favor of the BSS (the
"Title Policy") insuring that the Bank had a first priority deed of trust lien
on a one-quarter interest in certain real property located in Isle of Wight
County, Virginia (the "Isle of Wight Property"). The Circuit Court for Isle of
Wight entered a Final Decree on March 6, 1996 that Farmers Bank, Windsor had a
first priority deed of trust lien on that one-quarter interest in the Isle of
Wight Property and that BSS had a second priority deed of trust lien on that
same one-quarter interest.
The Title Company seeks the following relief: (i) a declaratory judgment that
the first priority deed of trust lien in favor of Farmers Bank, Windsor on the
one-quarter interest Isle of Wight Property Wight County be excluded from
coverage under the Title Policy, (ii) that the Title Policy be reformed to
exclude the Farmers Bank, Windsor deed of trust from coverage under the Title
Policy and (iii) that the Title Company be reimbursed for its costs and
attorneys' fees.
BSS intends to vigorously defend this suit. At this time, the Bank's legal
counsel is unable to express any view as to the possible outcome of this matter.
Counsel notes, however, that if this matter is resolved in a manner adverse to
the interests of the Bank, the amount of any loss that will be sustained by BSS
will not be more than the approximately $75,000.00 expended by the Title Company
for costs and attorneys' fees.
Item 4. Submission of Matters to a Vote of Security Holders
No matters were submitted to UCB shareholders for a vote during the fourth
quarter of the year-end December 31, 1997.
PART II
Item 5. Market for Common Equity and Related Stockholder Matters
United Community Bankshares, Inc. has arrangements with Wheat First Union,
Davenport & Company of Virginia, and Scott Stringfellow to make a market in the
Company's common stock. UCB stock is listed on the OTC Bulletin Board under the
symbol "UCMB". Listing on the bulletin board began December 17, 1996. Buy or
sell transactions may be effected through either of these brokerage firms.
The Bank of Franklin serves as UCB's transfer agent. Any inquiries concerning
the disposition of UCB securities should be directed to United Community
Bankshares, Inc. corporate headquarters in Franklin, Virginia.
United Community Bankshares, Inc. was capitalized on August 1, 1996, pursuant to
a share exchange between UCB and the subsequent subsidiary Banks, BOF and BSS.
See "Item 1. Description of Business." High and low sales prices of UCB Common
Stock are set forth in the following table. Quoted sale prices through December
17, 1996 were from UCB records, while sale prices after this date are from the
three aforementioned brokers. UCB Common Stock is thinly traded, therefore, the
volume of trading has been insufficient to establish a meaningful market price.
Sales Prices and Dividends Paid per Share
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High Low Dividend
1997
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4th Quarter $14.00 $12.50
3rd Quarter $13.375 $12.00 $0.16
2nd Quarter $13.00 $11.50
1st Quarter $12.50 $10.25 $0.15
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1996
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4th Quarter
Dec. 17 - Dec. 31 $11.00 $11.00
Oct. 1 - Dec. 16 $12.00 $10.00
3rd Quarter No trades No trades $0.14
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On January 24, 1998, the declaration date, the Board of Directors approved the
payment of a semi-annual cash dividend of $.17 per share for shareholders of
record on February 27, 1998. The dividend, totaling approximately $310,966, is
payable on March 31, 1998.
As of February 27, 1998 UCB had 986 shareholders of record of its Common Stock.
Item 6. Management's Discussion and Analysis or Plan of Operation
The information under Management's Discussion and Analysis of Financial
Condition and Results of Operations on pages 3 to 13 of the 1997 Annual Report
to Shareholders is hereby incorporated by reference.
Item 7. Financial Statements
The financial statements on pages 14 to 35 of the 1997 Annual Report to
Shareholders is hereby incorporated by reference.
Item 8. Changes in and Disagreements With Accountants on Accounting and
Financial Disclosure
None.
PART III
Item 9. Directors, Executive Officers, Promoters, and Control Persons;
Compliance With Section 16(a) of the Exchange Act.
Incorporated by reference to the Proxy Statement for the 1998 Annual Meeting of
Shareholders.
Item 10. Executive Compensation
Incorporated by reference to the Proxy Statement for the 1998 Annual Meeting of
Shareholders.
Item 11. Security Ownership of Certain Beneficial Owners and Management
Incorporated by reference to the Proxy Statement for the 1998 Annual Meeting of
Shareholders.
Item 12. Certain Relationships and Related Transactions
Incorporated by reference to the Proxy Statement for the 1998 Annual Meeting of
Shareholders.
PART IV
Item 13. Exhibits and Reports on Form 8-K
a. Exhibits
United Community Bankshares, Inc., 1997 Annual Report
b. Form 8-K.
No Form 8-K filed during the fourth quarter of 1997.
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UNITED
COMMUNITY
BANKSHARES, INC.
1997
ANNUAL
REPORT
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<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
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The following discussion provides information about the major components of the
results of operations and financial condition, liquidity and capital resources
of United Community Bankshares, Inc. ("UCB" or the "Company") and its wholly
owned subsidiaries, The Bank of Franklin ("BOF") and The Bank of Sussex and
Surry ("BSS"), collectively referred to as the Banks. This discussion and
analysis should be read in conjunction with the Consolidated Financial
Statements and Notes to the Consolidated Financial Statements.
Overview
UCB reported net income of $2,230,438 in 1997, compared to $1,922,905 in 1996,
representing an increase of 16.0%. Basic earnings per share increased to $1.22
per share in 1997 compared to $1.05 per share in 1996. The increased earnings
during this period were primarily due to higher levels of net interest income
and a decrease in noninterest expenses, which were partially offset by increases
in provision for loan losses and income tax expense. UCB incurred one-time
merger related expenses of $189,758 in 1996.
Profitability as measured by the Company's return on average equity (ROE)
increased to 11.31% in 1997, up from 10.68% in 1996. Another key indicator of
performance, the return on average assets (ROA) for 1996 was 1.49%, an increase
from 1.33% in 1996. Without the one-time merger related expenses, ROE and ROA in
1996 would have been 11.73% and 1.46%, respectively.
For the year 1997, UCB had a dividend payout ratio of 25.4%, which compared to a
29.8% ratio for the year 1996. The average equity to average asset ratio
increased from 12.43% for 1996 to 13.15% for 1997. Average assets grew by 3.5%
while average equity increased 9.6% from 1996 to 1997.
The Company's assets at year-end 1997 were $155.9 million, up by 4.0%, over
year-end 1996 of $149.9 million. Net loans outstanding at year-end 1997 were
$81.4 million, up from the year-end level for 1996 of $77.0 million, posting a
$4.4 million increase or 5.8%. Total deposits at year-end were $133.4 million
and $129.8 million at year-end 1997 and 1996, respectively, an increase of $3.6
million or 2.8%.
RESULTS OF OPERATIONS
Net Interest Income
The principal source of earnings for the Company is net interest income. Net
interest income equals the amount by which interest income exceeds interest
expense. Changes in volume and mix of interest-earning assets and
interest-bearing liabilities, as well as their respective yields and rates, have
a significant impact on the level of net interest income.
During 1997, on a tax equivalent basis, net interest income increased 6.2% to
$6.5 million from $6.2 million in 1996. This was a result of a $439,000 increase
in interest income which exceeded a $57,000 increase in interest expense. The
increase in interest income was largely due to: a) increased loan volume, which
on an average net loan basis increased 10.2% to $81.7 million from $74.1 million
in 1996; b) increases in sales of average federal funds, which increased 4.2% to
$3.9 million from $3.7 million in 1997 and 1996, respectively; and c) decreases
in average investment securities of $3.3 million to $54.6 million from $57.9
million in 1997 and 1996, respectively. The increase in average earning assets
was funded by the growth in deposits. Average interest-bearing deposits
increased 2.1% to $109.9 million from $107.6 million in 1997 and 1996,
respectively. The yield on interest earning assets increased to 8.10% in 1997
compared to 8.04% in 1996. Funding costs on interest bearing deposits and
short-term borrowings decreased to 4.33% in 1997 from 4.38% in 1996. The net
interest margin increased to 4.67% in 1997 from 4.54% in 1996.
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2
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
================================================================================
The following table depicts interest income on average earning assets and
related yields, as well as interest expense on average interest-bearing
liabilities and related rates paid for the periods indicated.
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AVERAGE BALANCES, INCOME AND EXPENSE, YIELDS AND RATES
(Dollars in Thousands)
Twelve Months Ended December 31,
1997 1996
--------------------------------------- ------------------------------------------
Average Income/ Yield Average Income/ Yield
Balance Expense Rate Balance Expense Rate
------------- ------------ ---------- -------------- -------------- ---------
ASSETS:
Securities:
<S> <C> <C> <C> <C> <C> <C>
Taxable $ 35,589 $ 2,160 6.07% $ 38,469 $ 2,332 6.06%
Tax-exempt (1) 19,019 1,402 7.37% 19,408 1,446 7.45%
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Total Securities 54,608 3,562 6.52% 57,877 3,778 6.53%
Loans, net (2) 81,666 7,573 9.27% 74,128 6,925 9.34%
Federal funds sold 3,858 212 5.50% 3,702 205 5.54%
------------- ------------ -------------- --------------
Total earning assets 140,132 $ 11,347 8.10% 135,707 $ 10,908 8.04%
Less: Allowance for loan losses (1,187) (1,250)
Total nonearning assets 11,018 10,462
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Total assets $ 149,963 $ 144,919
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LIABILITIES and STOCKHOLDERS' EQUITY:
Interest-bearing deposits:
Checking $ 16,702 $ 458 2.74% $ 16,469 $ 472 2.87%
Regular savings and club accounts 11,940 362 3.03% 11,725 358 3.05%
Money market savings 19,470 677 3.48% 20,213 711 3.52%
Certificates of deposit
Over $100,000 10,770 575 5.34% 10,040 529 5.27%
$100,000 and under 51,039 2,678 5.25% 49,181 2,639 5.37%
------------- ------------ -------------- --------------
Total interest-bearing deposits 109,921 4,750 4.32% 107,628 4,709 4.38%
Short-term borrowings 1,095 58 5.30% 857 42 4.90%
------------- ------------ -------------- --------------
Total interest-bearing liabilities 111,016 $ 4,808 4.33% 108,485 $ 4,751 4.38%
============ ==============
Noninterest-bearing liabilities
Demand deposits 18,215 17,584
Other noninterest-bearing liabilities 1,003 842
------------- --------------
Total liabilities 130,234 126,911
Shareholders' equity 19,729 18,008
------------- --------------
Total liabilities and stockholders' equity $ 149,963 $ 144,919
============= ==============
Net interest income $ 6,539 $ 6,157
============ ==============
Interest rate spread (3) 3.77% 3.66%
Net interest margin (4) 4.67% 4.54%
</TABLE>
- --------------------------------------------
(1) Income and yields are reported on a taxable equivalent basis assuming a
federal tax rate of 34%. The Banks are exempt from from state income taxes.
(2) For the purpose of these calculations, nonaccruing loans are included in
the daily average loan amounts outstanding.
(3) Represents the differences between the yield on total average earning
assets and the cost of total interest-bearing liabilities.
(4) Represents the ratio of net interest-earnings to the average balance of
interest-earning assets.
================================================================================
3
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
================================================================================
Interest income and expenses are affected by fluctuations in interest rates, by
changes in the volumes of earning assets and interest-bearing liabilities, and
by the interaction of rate and volume factors. The following table analyzes the
direct causes of the year-to-year changes in net interest earnings on a taxable
equivalent basis. Rate/volume variance, the third element in the calculation,
along with rate and volume variances, are not shown separately, but is allocated
to the rate and volume variances in proportion to the relationship of the
absolute dollar amounts of the change in each. Nonaccruing loans are included in
average loans outstanding.
<TABLE>
<CAPTION>
VOLUME AND RATE ANALYSIS
(In thousands)
1997 vs. 1996 1996 vs. 1995
Increase (Decrease) Increase (Decrease)
Due to Changes in: Due to Changes in:
------------------------------ ------------------------------
Volume Rate Total Volume Rate Total
--------- --------- --------- --------- --------- ---------
Assets:
Securities:
<S> <C> <C> <C> <C> <C> <C>
Taxable ($175) $3 ($172) $ 327 $ (58) $ 269
Tax-exempt (29) (15) (44) 301 71 372
Loans (net) 699 (51) 648 720 (121) 599
Federal funds sold 9 (2) 7 (144) (13) (157)
--------- --------- --------- --------- --------- ---------
Total earning assets 504 (65) 439 1,204 (121) 1,083
--------- --------- --------- --------- --------- ---------
Interest-bearing deposits:
Checking 7 (21) (14) 99 (12) 87
Regular savings & club accounts 7 (3) 4 22 (13) 9
Money market savings (26) (8) (34) 35 (17) 18
Certificate of deposit:
Over $100,000 39 7 46 2 20 22
$100,000 and under 98 (59) 39 387 26 413
Short-term borrowings 12 4 16 39 1 40
--------- --------- --------- --------- --------- ---------
Total interest-bearing liabilities 137 (80) 57 584 5 589
--------- --------- --------- --------- --------- ---------
Net interest income $367 $15 $382 $620 ($126) $494
========= ========= ========= ========= ========= =========
</TABLE>
Interest Sensitivity
Paramount to earnings performance and the maintenance of sufficient liquidity is
the effective management of interest rate risk, commonly referred to as
asset/liability management. The interest sensitivity position ("gap") is the
difference between interest sensitive assets and interest sensitive liabilities
in a specific time interval. The gap can be managed by repricing assets or
liabilities, affected by selling securities available for sale, by replacing an
asset or liability at maturity, or by adjusting the interest rate or the life of
an asset or liability. Matching of assets and liabilities repricing in the same
interval help to hedge the risk and minimize the impact on interest income in
periods of rising and falling interest rates.
The Banks evaluate interest sensitivity risk in accordance with their asset
liability policies, and then formulate strategy regarding asset originations,
pricing, funding sources, and off-balance sheet commitments in order to decrease
sensitivity risk. These strategies are based on management's outlook regarding
future interest rate movements, the state of the regional and national economy,
and other financial and business risk factors. The Banks establish prices for
deposits and loans based primarily on local market conditions.
At December 31, 1997, the Company had $8.2 million more in liabilities than
assets repricing within one year or less and was, therefore, in a liability
sensitive position for that period with a negative 5.71% cumulative static gap.
Generally, positive gaps affect net interest margins and earnings negatively in
periods of falling rates, and conversely, higher negative gaps adversely impact
net interest margin and earnings in periods of rising rates as a higher volume
of liabilities will reprice quicker than assets over the period for which the
gap is computed. To soften the potential impact of changes in interest rates,
$39.0 million of total loans, at December 31, 1997, were either accruing at a
variable interest rate
================================================================================
4
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
================================================================================
or maturing within one year. In addition, at December 31, 1997, federal funds
sold, which are repriceable daily, were $10.8 million and investment securities
maturing or repricing within one year totaled $17.2 million, which could be sold
quickly to meet special funding needs or to adjust the Company's interest rate
sensitivity position.
The following table presents the Company's interest sensitivity position at
December 31, 1997. This is a one-day position which is continually changing and
is not necessarily indicative of the Company's position at any other time.
<TABLE>
<CAPTION>
INTEREST SENSITIVITY ANALYSIS
(Dollars in Thousands)
December 31, 1997 (1)
------------------------------------------------------------------------
Within 90-365 1 to 5 Over
90 Days Days Years 5 Years Total
------------ ------------- ------------ ------------ ---------------
Earning Assets:
<S> <C> <C> <C> <C> <C> <C>
Loans, net (2) $ 28,850 $ 10,220 $ 39,631 $ 3,675 $ 82,376
Securities (3) 10,019 7,181 21,808 12,555 51,563
Federal funds sold and other 10,814 - - - 10,814
============ ============= ============ ============ ===============
Total earning assets $ 49,683 $ 17,401 $ 61,439 $ 16,230 $ 144,753
============ ============= ============ ============ ===============
Interest-bearing liabilities:
Deposits:
Interest checking (4) $ 1,465 $ 4,389 $ 11,721 $ - $ 17,575
Regular and Christmas Club savings (4) 1,599 2,780 5,520 2,076 11,975
Money market savings 19,365 - - - 19,365
Certificates of deposit:
$100,000 and over 3,222 5,878 2,860 - 11,960
Less than $100,000 12,776 23,560 15,460 6 51,802
Short-term borrowings 309 - - - 309
============ ============= ============ ============ ===============
Total interest-bearing liabilities $ 38,736 $ 36,607 $ 35,561 $ 2,082 $ 112,986
============ ============= ============ ============ ===============
Period gap $ 10,947 $ (19,206) $ 25,878 $ 14,148 $ 31,767
Cumulative gap $ 10,947 $ (8,259) $ 17,619 $ 31,767
Ratio of cumulative gap to total
earning assets 7.56% -5.71% 12.17% 21.95%
</TABLE>
- -----------------------------------------------
(1) The repricing dates may differ from maturity dates for certain assets
due to prepayment assumptions.
(2) Excludes nonaccrual loans.
(3) Securities classified "available for sale" are carried at estimated fair
value. Securities classified "held to maturity" are carried at amortized
cost.
(4) The Company has found that its regular savings and interest checking
historically represent core deposits and are not sensitive to changes in
related market rates and, therefore, have been spread across the
columns.
Noninterest income
Noninterest income slightly decreased 1.5% to $864,409 in 1997 from $877,395 in
1996. Service charges on deposit accounts and overdraft charges increased by
approximately $25,000. This increase was offset by reductions in gains on sales
of investment securities of approximately $9,000 and miscellaneous income of
approximately $24,000.
================================================================================
5
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
================================================================================
Noninterest Income
(Dollars in Thousands)
Year Ended December 31,
-------------------------------
1997 1996
-------------- -------------
Overdraft charges on deposit accounts $ 494 $ 465
Other service charges on deposit accounts 191 195
Fees for other customer services 125 130
Securities gains, net 4 13
Other operating income 50 74
============== =============
Total noninterest income $ 864 $ 877
============== =============
Noninterest expenses
Noninterest expenses for 1997 were $3.873 million, down from $3.926 million for
1996, representing a 1.4% decrease. One-time merger related expenses totaled
approximately $190,000 in 1996. As previously mentioned, the holding company was
formed in 1996. Miscellaneous expenses also decreased $46,000 from 1996 to 1997.
These decreases were partially offset by the following increases: 1) an increase
in salaries and employee benefits of $82,000, arising from general pay increases
and increased staffing levels due to the continued growth of the Company; 2) an
increase in professional fees of $83,000, resulting from the consolidation of
the employee benefit program and the establishment of a stock option program for
key employees; 3) a $20,000 increase in occupancy costs; and 4) an $11,000
increase in FDIC Insurance premiums. Premiums for FDIC Insurance increased due
to increased rates for banks insured by the Bank Insurance Fund.
NONINTEREST EXPENSES
(Dollars in Thousands)
Year Ended December 31,
-----------------------
1997 1996
---- ----
Salaries and employee benefits $2,165 $2,083
Occupancy expenses 284 264
Depreciation and equipment maintenance 269 240
FDIC assessment 15 4
Postage 99 103
Professional fees 210 128
Franchise, state and local taxes 127 164
Merger related expenses - 190
Other operating expenses 704 750
------ ------
Total noninterest expenses $3,873 $3,926
------ ------
Income Taxes
Applicable income taxes on 1997 earnings amounted to $693,000, resulting in an
effective tax rate of 23.7% compared to $597,000, or 23.7%, in 1996.
Note 8 to UCB's Financial Statements provides a reconciliation between the
amount of income tax expense computed using the federal statutory tax rate with
the Company's reported tax expense. Also, included in Note 8 is information
regarding the principal items giving rise to deferred taxes as of December 31,
1997 and 1996.
================================================================================
6
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
================================================================================
Asset Quality
Allowance for Loan Losses. The allowance is to provide for potential losses
inherent in the loan portfolio. Among other factors, management considers the
Company's historical loss experience, the size and composition of the loan
portfolio, the value and adequacy of collateral and guarantors, nonperforming
credits and current and anticipated economic conditions. There are additional
risks of future loan losses which cannot be precisely quantified or attributed
to particular loans or classes of loans. Since those risks include general
economic trends, as well as conditions affecting individual borrowers, the
allowance for loan losses is an estimate. The allowance is also subject to
regulatory examinations and determination as to adequacy, which may take into
account such factors as the methodology used to calculate the allowance, and the
size of the allowance in comparison to peer banks identified by regulatory
agencies.
In 1997, the Company had $128,750 in provision expense compared to $101,000 in
1996. Loans charged off, which are charged directly to the allowance when they
occur, during 1997 amounted to $332,000 compared to $254,000 in 1996. Recoveries
amounted to $100,000 and $112,000 during 1997 and 1996, respectively. The ratio
of net charge-offs to average outstanding loans was 0.29% in 1997 and 0.19% in
1996. Management feels that the reserve is adequate to absorb any losses on
existing loans that may become uncollectible. See Note 4 to UCB's Financial
Statements for more information concerning the Company's loan loss and recovery
experience for the past two years.
Nonperforming assets. Total nonperforming assets, which consist of nonaccrual
loans and foreclosed properties, were $350,000 at December 31, 1997, a slight
increase of $3,000 or 0.9% from a level of $347,000 at December 31, 1996. Total
nonperforming assets and loans over 90 days past due and accruing interest were
0.57% of period-end loans and foreclosed property as of December 31, 1997 as
compared to 1.08% at December 31, 1996. At December 31, 1997, in addition to
loan on either nonaccrual status or loans past due 90 days or more and still
accruing interest, UCB had approximately $4,324,947 of loans that had been
internally classified. These loans require more than usual attention and are
potential problems. UCB considered these loans in establishing the level of the
allowance for loan losses. The following table summarizes nonperforming assets
for the past two years.
NONPERFORMING ASSETS
(Dollars in Thousands)
December 31,
------------
1997 1996
----- ------
Nonaccrual loans $ 180 $ 182
Restructured loans - -
Foreclosed properties 170 165
--- ---
Total nonperforming assets $ 350 $ 347
=== ===
Loans past due 90 days accruing interest $ 119 $ 499
==== ====
Allowance for loan losses to year-end loans 1.34% 1.55%
Allowance for loan losses to nonaccrual loans 614.44% 664.29%
Nonperforming assets and loans past due 90
days accruing interest to year-end loans
and foreclosed property 0.57% 1.08%
Net charge-offs to average loans outstanding
during the year 0.29% 0.19%
The Company places a loan on nonaccrual status when management believes, after
considering economic and business conditions and collection efforts, that the
borrower's financial condition is such that collection of both principal and
interest is doubtful. UCB's policy is to place loans on nonaccrual status if
principal or interest is past due for 90 days or more unless the debt is both
well secured and in the process of being collected. For 1997 and 1996, $13,553
and $19,375, respectively, in gross interest income would have been recorded if
nonaccrual loans had been current throughout the period outstanding. For the
period ended December 31, 1997 and 1996, interest income received on nonaccrual
loans was negligible. Impaired loans at December 31, 1997 and 1996 were not
significant.
================================================================================
7
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
================================================================================
FINANCIAL CONDITION
Loan Portfolio
Loans, net of unearned income and the allowance for loan losses, were $81.4
million at December 31, 1997, an increase from $77.0 million at December 31,
1996, a $4.4 million or 5.8% increase. This is consistent with management's
efforts to increase the level of loans during 1997.
Loans secured by real estate comprise 54.7% of the total loan portfolio as of
December 31, 1997, and include a diverse portfolio of which single family
residential loans comprise 27.8% of the loan portfolio. Loans secured by
commercial real estate comprised 20.7%, while traditional commercial loans
comprised 19.7% of total loans. The commercial category also includes loans
secured by other forms of collateral as well as some unsecured debt. Loans
secured by agricultural real estate and other loans to the agricultural sector
comprised 3.0% and 8.5%, respectively, of the loan portfolio as of December 31,
1997. Other loans to the agricultural sector include unsecured loans and loans
secured by farm equipment, crops and other collateral. The Company's consumer
portfolio comprised 17.1% of total loans as of December 31, 1997. Real estate
construction loans accounted for 3.1% of total loans outstanding as of December
31, 1997. The Company has no loans outstanding to foreign countries.
During the normal course of business, the Company makes various commitments and
incurs certain contingent liabilities which are disclosed but not reflected in
its financial statements. These commitments and contingent liabilities include
commitments to extend credit and financial standby letters of credit. At
December 31, 1997, commitments for standby letters of credit and guarantees
written were $883,000 and commitments to extend credit were $12.1 million. At
December 31, 1996, commitments for standby letters of credit and guarantees
written were $1.1 million and commitments to extend credit totaled $13.8
million.
Interest income on installment, agricultural, commercial, and real estate
mortgage loans was computed on the principal balance outstanding. Most variable
rate loans carry an interest rate tied to the Banks' base lending rates, which
are set by the Banks, or to Money Center Prime, as published in the Wall Street
Journal.
Note 4 to UCB's Financial Statements provides a schedule of loans by type and
other information.
Investment Securities
The investment securities portfolio plays a primary role in the management of
interest rate sensitivity of the Company and generates substantial interest
income. In addition, the portfolio serves as a source of liquidity for depositor
and loan demands and is used as needed to meet collateral requirements.
The securities portfolio consists of two components, investment securities held
to maturity and securities available for sale, as prescribed by FASB Statement
No. 115, Accounting for Certain Investments in Debt and Equity Securities ("FASB
115"). Securities are classified as securities held to maturity based on
management's intent and the Company's ability, at the time of purchase, to hold
such securities to maturity. These securities are carried at amortized cost.
Securities which may be sold in response to changes in market interest rates,
changes in the securities' prepayment risk, increases in loan demand, general
liquidity needs and other similar factors are classified as available for sale
and are carried at estimated fair value.
At year-end 1997, total investment securities were $51.6 million, down from
$56.4 million at year-end 1996. The decline in the securities portfolio is
primarily due to the investment of proceeds from the sales and maturities of
securities in loans rather than new securities. Excluding U.S. Treasuries and
securities of U.S. agencies, neither the aggregate book value nor the aggregate
market value of the securities of any issuer exceeded ten percent of the
Company's stockholders' equity. The following table presents information
pertaining to the composition of the investment securities portfolio. Additional
information on the Company's investment securities portfolio is in Note 3 to
UCB's Financial Statements.
================================================================================
8
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
================================================================================
MATURITIES OF SECURITIES HELD AS OF DECEMBER 31, 1997
(Dollars in thousands)
<TABLE>
<CAPTION>
Over 10
Years &
1 Year 1 to 5 5 to 10 Equity
or Less Years Years Securities Total
------- ----- ----- ---------- -----
US Agency securities:
<S> <C> <C> <C> <C> <C>
Amortized cost $ 3,157 $15,550 $ 2,573 $1,622 $22,902
Fair value 3,151 15,499 2,570 1,629 22,849
Weighted average yield 5.47% 5.91% 6.34% 6.41% 5.93%
US Treasury securities:
Amortized cost $ 800 $ - $ 263 $ - $ 1,063
Fair value 798 - 263 - 1,061
Weighted average yield 5.16% 0.00% 7.06% 0.00% 5.63%
State and Political Subdivisions:
Amortized cost $ 951 $ 6,564 $14,135 $ 786 $22,436
Fair value 958 6,653 14,457 821 22,889
Weighted average yield 7.71% 7.41% 7.23% 7.82% 7.32%
Other Securities:
Amortized cost $ 1,250 $ 1,559 $ 734 $ 514 $ 4,057
Fair value 1,251 1,572 743 1,262 4,828
Weighted average yield 6.05% 6.83% 6.84% 7.05% 6.62%
Total Securities(1):
Amortized cost $ 6,158 $23,673 $17,705 $ 2,922 $50,458
Fair value 6,158 23,724 18,033 3,712 51,627
Weighted average yield 5.89% 6.39% 7.08% 6.90% 6.60%
----------------------
(1) Yields on tax-exempt securities are computed on a
taxable-equivalent basis.
</TABLE>
Deposits
Deposits provide funding for the Banks investment in loans and securities. A
primary objective is to increase core deposits as a means to fund asset growth
at less cost. It is anticipated that competition for deposits will increase
within the Banks' primary market areas. At the same time, interest paid for
deposits must be managed carefully to control the level of interest expense.
Total deposits grew by $3.7 million or 2.8% from $129.8 million at December 31,
1996 to $133.5 million at December 31, 1997. Noninterest bearing deposits
increased by $536,000 or 2.6% from $20.3 million at the end of 1996 to $20.8
million at the end of 1997. Interest bearing deposits were $112.7 million as of
December 31, 1997, increasing by $3.2 million or 2.9%, from year-end 1996 of
$109.5 million. From 1996 to 1997, certificates of deposits increased by $3.8
million and money market account decreased by $1.2 million. Noninterest bearing
deposits were 15.6% of total deposits at both December 31, 1997 and 1996. More
information on interest bearing deposits is contained in Note 6 to UCB's
Financial Statements.
The Banks offer individuals and small-to-medium sized businesses a variety of
deposit accounts, including checking, savings, money market, and certificate of
deposits. Certificates of deposit are obtained primarily from the communities
the Banks serve. The Banks also carry interest-bearing deposits with state and
local municipal governments. The following table summarizes the average deposits
and rates paid during 1997 and 1996.
================================================================================
9
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
================================================================================
AVERAGE DEPOSITS AND RATES PAID
(Dollars in Thousands)
<TABLE>
<CAPTION>
For the Year Ended December 31,
-------------------------------
1997 1996
---- ----
Amount Rate Amount Rate
------ ---- ------ ----
<S> <C> <C>
Noninterest-bearing accounts $18,215 - $17,584 -
------- -------
Interest-bearing accounts
Interest checking 16,702 2.74% $ 16,469 2.87%
Money market 19,470 3.48% 20,213 3.52%
Regular savings 11,940 3.03% 11,725 3.05%
Time deposits
Less than $100,000 51,039 5.23% 49,181 5.36%
$100,000 and over 10,770 5.37% 10,040 5.27%
--------
Total interest-bearing 109,921 4.33% 107,628 4.38%
------- -------
Total deposits $128,136 $125,212
-------- --------
</TABLE>
Short-term Borrowings
In the course of operations, due to fluctuations in loan and deposit levels, the
Banks occasionally find it necessary to purchase federal funds on a short-term
basis. The Banks maintain federal funds line arrangements with several regional
banks, whereby they may collectively purchase funds totaling $15,277,000. The
Company has been, and continues to be, a net provider of funds in the market
place. Based on certain criteria and acceptable collateral, BOF and BSS may each
borrow $6.5 million from the Federal Home Loan Bank. As of December 31, 1997,
the Banks had no outstanding borrowings on these lines.
BOF offers overnight repurchase agreements to a commercial customer, which
amounted to $309,000 at year-end 1997 and $229,000 at year-end 1996. Further
information on short-term borrowings is contained in Note 10 to UCB's Financial
Statements.
Capital Resources
The adequacy of the Banks' capital is reviewed by management on an ongoing basis
with reference to the size, composition, and quality of the Banks' resources and
consistent with regulatory requirement and industry standards. Management seeks
to maintain a capital structure that will assure an adequate level of capital to
support anticipated asset growth and absorb potential losses.
The Federal Reserve, along with the Comptroller of the Currency and the Federal
Deposit Insurance Corporation, have adopted new capital guidelines to supplement
the existing definitions of capital for regulatory purposes and to establish
minimum capital standards. Specifically, the guidelines categorize assets and
off-balance sheet items into four risk-weighted categories. At the end of
December 31, 1997 and 1996, the required minimum ratio of qualifying total
capital to risk-weighted assets was 8%, of which 4% must be tier-one capital.
Tier-one capital includes stockholders' equity, retained earnings and a limited
amount of perpetual preferred stock, less certain goodwill items. At December
31, 1997, on a consolidated basis UCB's total risk-based capital ratio was
21.11%, BOF's was 16.71% and BSS's was 27.80%, all of which were well above the
regulatory minimum of 8.0%. As of December 31, 1996, the total risk-based
capital ratio for UCB, BOF and BSS were 19.48%, 15.58% and 24.83%, respectively.
Further information on capital adequacy for the Banks may be found in Note 7 of
UCB's Financial Statements.
Liquidity
Liquidity represents an institution's ability to meet present and future
financial obligations through either the sale of existing assets or the
acquisition of additional funds through short-term borrowings. Liquid assets
include cash, interest-bearing deposits with banks, federal funds sold and
investments and loans maturing within one year. As a result of the
================================================================================
10
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
================================================================================
Company's management of liquid assets, and the ability to generate liquidity
through liability fundings, management believes that the Company maintains
overall liquidity sufficient to satisfy its depositors' requirements and to meet
customers' credit needs.
Cash and cash equivalents totaled $17.2 million and $11.2 million for
the years ended December 31, 1997 and 1996, respectively. At December
31, 1997, cash, securities classified as available for sale and
federal funds sold were $59.0 million, 39.3% of total earning assets,
compared to $57.2 million, 41.7% of total earning assets at December
31, 1996. Asset liquidity is also provided by managing both loan and
securities maturities.
Additional sources of liquidity available to the Company include its subsidiary
Banks' capacity to borrow additional funds through several established federal
funds arrangements and the Federal Home Loan Bank. The Company has no long-term
debt and no material commitments for capital expenditures.
Effects of Inflation and Changing Prices in Seasonality
The financial statements and related data presented herein were 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 relative purchasing power of money over
time due to inflation.
The effect of changing prices on financial institutions is typically different
from other industries, as the Company's assets and liabilities are monetary in
nature. Interest rates are significantly impacted by inflation, but neither the
timing nor the magnitude of the changes are directly related to price level
indices.
Because of the seasonality of the agricultural industry, the volume of loans and
deposits typically fluctuate during the year. Loans are typically heaviest from
April to November and deposits are typically their lowest during the same
period. At the end of the year and the beginning of the following year, loans
decrease as they are repaid and deposits increase as a result of the sale of the
fall harvest.
New Accounting Pronouncements
During June 1997, the Financial Accounting Standards Board ("FASB") issued FASB
Statement No. 130, Reporting Comprehensive Income. This pronouncement
established standards for reporting and display of comprehensive income and its
components (revenues, expenses, gains and losses) in a full set of general
purpose financial statements. SFAS No. 130 is effective for financial statement
periods beginning after December 15, 1997. As the Company's only known item of
comprehensive income is the unrealized appreciation or depreciation on
investment securities available-for-sale, management does not expect the
application of this pronouncement to have a material impact on the Company's
financial statements.
Additionally during June of 1997, SFAS No. 131, Disclosures about Segment of an
Enterprise and Related Information, was issued. This pronouncement establishes
standards for the way that public enterprises report information about operating
segments in annual financial statements and requires that those enterprises
report selected information about operation segments in annual and interim
financial reports to shareholders. It also establishes standards for related
disclosures about products and services, geographic areas and major customers.
This statement becomes effective for financial statements for periods beginning
after December 15, 1997. Management is currently assessing the impact of this
statement on the Company's future disclosures.
SFAS No. 132, Employers' Disclosures about Pension and Other Post Retirement
Benefits, revises disclosures regarding pension and other post retirement
benefits and standardizes certain disclosure requirements regarding these items.
This Statement is effective for fiscal years beginning after December 15, 1997.
Management will assess the impact, if any, of this Statement on the Company's
future disclosures.
Year 2000 Project
The Year 2000 technology problem presents risks to all corporations due to the
potential failure of date related systems. United Community Bankshares and its
subsidiaries have undertaken a variety of measures to ensure that hardware and
software systems will be century date compliant. The Banks have established
project plans, completed hardware and
================================================================================
11
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
================================================================================
software inventories and developed preliminary impact assessments. The Banks
have initiated contacts with vendors for specific project compliance
confirmation.
As a result of these efforts, the Company determined that replacement
of BSS' core processing systems was required and either upgrade or
replacement of BOF's computer system was also needed. Subsequent to
year-end, the Company signed a contract with Jack Henry & Associates,
Inc. to convert and consolidate the Company's core processing
computer systems. As a result, several back office operations will
be consolidated and both Banks will use the same computer system.
Completion of the conversion is scheduled for the third quarter of 1998.
Testing of primary software applications will be conducted in conjunction with
regularly scheduled testing and is not expect to result in material additional
costs. The testing phase is expected to be completed by year-end 1998. In
addition to efforts to ensure readiness of internal systems, the Banks have
informed many retail and commercial customers of the need to address the Year
2000 issue. Based upon the results of the preliminary impact assessment and
information provided by vendors, management believes that its plan for
determining century date compliance is adequate and that the Company will not
incur significant incremental costs to achieve compliance.
================================================================================
12
<PAGE>
REPORT OF INDEPENDENT AUDITORS
================================================================================
GOODMAN & COMPANY, L.L.P.
CERTIFIED PUBLIC ACCOUNTANTS
The Board of Directors and Stockholders
United Community Bankshares, Inc.
Franklin, Virginia
We have audited the accompanying consolidated balance sheets of United Community
Bankshares, Inc. and subsidiaries as of December 31, 1997 and 1996, and the
related consolidated statements of income, stockholders' equity, and cash flows
for the years then ended. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the consolidated financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the consolidated financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of United
Community Bankshares, Inc. and subsidiaries as of December 31, 1997 and 1996,
and the results of their operations and their cash flows for the years then
ended in conformity with generally accepted accounting principles.
/s/
One Commercial Place
Norfolk, Virginia
January 30, 1998
================================================================================
13
<PAGE>
UNITED COMMUNITY BANKSHARES, INC.
- --------------------------------------------------------------------------------
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
December 31,
-----------------------------------------------
1997 1996
------------------- -------------------
ASSETS
Cash and cash equivalents
<S> <C> <C>
Cash and due from banks $ 6,361,985 $ 7,262,129
Federal funds sold 10,813,898 3,889,538
------------------- -------------------
Total cash and cash equivalents 17,175,883 11,151,667
Securities available for sale 41,855,787 46,064,158
Securities held to maturity, at amortized cost
(Fair value approximates $9,771,869 and $10,196,586
at December 31, 1997 and 1996) 9,707,815 10,325,502
------------------- -------------------
Total securities 51,563,602 56,389,660
Loans, net of unearned income 82,555,220 78,163,083
Less: allowance for loan losses 1,105,901 1,209,365
------------------- -------------------
Net loans 81,449,319 76,953,718
Premises and equipment, net 1,923,248 1,975,687
Accrued interest 1,663,452 1,698,586
Intangibles, net 668,211 719,037
Other assets 1,508,536 989,284
------------------- -------------------
Total assets $ 155,952,251 $ 149,877,639
=================== ===================
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits
Noninterest-bearing demand $ 20,827,839 $ 20,292,314
Interest-bearing 112,676,628 109,533,322
------------------- -------------------
Total deposits 133,504,467 129,825,636
Short-term borrowings 309,108 229,207
Deferred compensation 122,846 188,802
Accrued interest payable 426,502 400,069
Other liabilities 557,822 254,470
------------------- -------------------
Total liabilities 134,920,745 130,898,184
------------------- -------------------
Stockholders' equity
Preferred stock, $1.00 par value; authorized 1,000,000 shares;
none outstanding - -
Common stock, $1.00 par value; authorized 6,000,000 shares;
issued and outstanding 1,829,209 shares in 1997 and 1996 1,829,209 1,829,209
Additional paid-in capital 3,059,038 3,059,038
Retained earnings 15,412,800 13,749,417
Net unrealized gains on securities available for sale, net of taxes
of $376,306 in 1997 and $176,082 in 1996 730,459 341,791
------------------- -------------------
Total stockholders' equity 21,031,506 18,979,455
------------------- -------------------
Total liabilities and stockholders' equity $ 155,952,251 $ 149,877,639
=================== ===================
</TABLE>
The notes to the consolidated financial statements are an intregal part of this
statement.
================================================================================
14
<PAGE>
UNITED COMMUNITY BANKSHARES, INC.
- --------------------------------------------------------------------------------
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
Years Ended December 31,
----------------------------------------
1997 1996
------------------ ------------------
Interest income
<S> <C> <C>
Interest and fees on loans $ 7,572,609 $ 6,925,331
Interest on investment securities:
Taxable 2,159,357 2,332,960
Non-taxable 925,702 953,877
------------------ ------------------
3,085,059 3,286,837
Interest on federal funds sold 211,607 205,682
------------------ ------------------
Total interest income 10,869,275 10,417,850
Interest expense
Interest on deposits 4,750,375 4,706,435
Interest on short-term borrowings 58,078 42,538
------------------ ------------------
Total interest expense 4,808,453 4,748,973
------------------ ------------------
Net interest income 6,060,822 5,668,877
Provision for loan losses 128,750 101,000
------------------ ------------------
Net interest income after provision for loan losses 5,932,072 5,567,877
Noninterest income
Service charges and fees 810,730 793,104
Gain on sale of available-for-sale securities 3,935 12,734
Other 49,744 71,557
------------------ ------------------
Total noninterest income 864,409 877,395
Noninterest expenses
Salaries and employee benefits 2,164,873 2,083,205
Occupancy expenses 283,817 264,257
Depreciation and equipment maintenance 268,945 240,435
FDIC insurance 14,762 4,000
Professional fees 210,472 127,673
Postage 99,487 103,403
Merger related expenses - 189,758
Other 830,338 913,455
------------------ ------------------
Total noninterest expenses 3,872,694 3,926,186
------------------ ------------------
Income before income taxes 2,923,787 2,519,086
Income tax expense 693,349 596,181
------------------ ------------------
Net income $ 2,230,438 $ 1,922,905
================== ==================
Net income per share - basic and diluted $ 1.22 $ 1.05
</TABLE>
The notes to the consolidated financial statements are an intregal part of this
statement.
================================================================================
15
<PAGE>
UNITED COMMUNITY BANKSHARES, INC.
- --------------------------------------------------------------------------------
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1997 AND 1996
<TABLE>
<CAPTION>
Net Unrealized
Additional Gain (Loss)
Common Paid-In Retained on Securities
Stock Capital Earnings Available for Sale Total
----------------- ----------------- ------------------- -------------------- -------------
<S> <C> <C> <C> <C> <C> <C>
BALANCE - JANUARY 1, 1996 $ 1,829,209 $ 3,062,580 $ 12,398,702 $ 462,778 $ 17,753,269
Net income - - 1,922,905 - 1,922,905
Cash dividends declared
($.31 per share) - - (572,190) - (572,190)
Other - (3,542) - - (3,542)
Change in unrealized gains and
losses on securities available
for sale, net of tax of $62,319 - - - (120,987) (120,987)
----------------- ----------------- ------------------- ------------------ --------------
BALANCE - DECEMBER 31, 1996 1,829,209 3,059,038 13,749,417 341,791 18,979,455
Net income - - 2,230,438 - 2,230,438
Cash dividends declared
($.31 per share) - - (567,055) - (567,055)
Change in unrealized gains and
losses on securities available
for sale, net of tax of $200,224 - - - 388,668 388,668
----------------- ----------------- ------------------- ------------------ --------------
BALANCE - DECEMBER 31, 1997 $ 1,829,209 $ 3,059,038 $ 15,412,800 $ 730,459 $ 21,031,506
----------------- ----------------- ------------------- ------------------- --------------
</TABLE>
The notes to the consolidated financial statements are an intregal part of this
statement.
================================================================================
16
<PAGE>
UNITED COMMUNITY BANKSHARES, INC.
- --------------------------------------------------------------------------------
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Years Ended December 31,
-------------------------------------
1997 1996
----------------- -----------------
OPERATING ACTIVITIES:
<S> <C> <C>
Net income $ 2,230,438 1,922,905
Adjustments to reconcile to net cash provided by operating activities:
Provision for loan losses
128,750 101,000
Depreciation and amortization
225,915 244,901
Amortization of investment security premiums, net of discounts
(3,641) (38,224)
Net (gain) loss on sale of investment securities
(3,935) (12,734)
Gain on sale of premises and equipment
(250) -
Changes in:
Interest receivable
35,134 (79,982)
Interest payable
26,433 16,855
Other assets
(519,251) (263,439)
Deferred compensation and other liabilities
37,172 (84,631)
----------------- -----------------
Net cash provided by operating activities
2,156,765 1,806,651
----------------- -----------------
INVESTING ACTIVITIES:
Proceeds from maturities and sales of available-for-sale securities
11,022,921 11,751,723
Purchases of available-for-sale securities (6,215,528) (10,812,561)
Redemptions of held-to-maturity securities
1,252,000 2,634,900
Purchases of held-to-maturity securities
(636,868) (2,231,174)
Loan originations, net of principal repayments (4,598,984) (10,870,050)
Purchases of premises and equipment
(148,017) (119,028)
Proceeds from sale of premises and equipment
250 -
----------------- -----------------
Net cash provided (used) by investing activities
675,774 (9,646,190)
----------------- -----------------
FINANCING ACTIVITIES:
Net increase (decrease) in short-term borrowings
79,901 (106,995)
Cash dividends paid
(567,055) (572,190)
Fractional share payout
- (3,542)
Net increase in noninterest bearing deposits
535,525 3,304,603
Net increase in interest bearing deposits
3,143,306 2,306,814
----------------- -----------------
Net cash provided by financing activities
3,191,677 4,928,690
----------------- -----------------
Increase (decrease) in cash and cash equivalents
6,024,216 (2,910,849)
Cash and cash equivalents at beginning of year
11,151,667 14,062,516
----------------- -----------------
Cash and cash equivalents at end of year $ 17,175,883 $ 11,151,667
================= =================
Supplemental disclosures of cash flow information
Cash paid for:
Interest on deposits and other borrowings
$ 4,782,020 $ 4,732,118
Income taxes $ 687,104 $ 664,488
</TABLE>
The notes to the consolidated financial statements are an intregal part of this
statement.
================================================================================
17
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
================================================================================
NOTE 1 -- ORGANIZATION AND BUSINESS COMBINATION
- --------------------------------------------------------------------------------
On August 1, 1996, The Bank of Franklin ("BOF") and The Bank of Sussex and Surry
("BSS"), collectively referred to as the "Banks," became affiliated pursuant to
an Agreement and Plan of Reorganization (the "Agreement") dated January 25,
1996. The transaction contemplated by the Agreement created a holding company,
United Community Bankshares, Inc. ("UCB"), which facilitated a share exchange
transaction between UCB and each of the respective banks. The stockholders of
BOF and BSS approved the Agreement at annual meetings held on June 27, 1996.
After the share exchange, BOF and BSS became wholly owned subsidiaries of UCB
and each shareholder of BOF and BSS became a shareholder of UCB. Under the terms
of the Agreement, BOF and BSS shareholders received 4.806 and 3.0 shares,
respectively, of UCB common stock for each share previously held. This resulted
in the issuance of 1,829,209 share of UCB common stock. This combination was
accounted for as a pooling of interests. In connection with this transaction,
merger expenses totaling $189,758 were recognized in 1996. On June 30, 1996, BOF
and BSS reported unaudited total assets of $82.2 million and $61.8 million,
respectively, and unaudited stockholders' equity of $8.1 million and $9.7
million, respectively.
The following summarizes the separate historical results of operations for BOF
and BSS for periods prior to the merger, during which time there were no
intercompany transactions:
<TABLE>
<CAPTION>
BOF BSS Combined
---------------- ------------------ -------------------
Six months ended June 30, 1996: (Unaudited)
<S> <C> <C>
Net interest income $ 1,576,000 $ 1,160,000 $ 2,736,000
Net income $ 601,000 $ 403,000 $ 1,004,000
</TABLE>
The combined stockholders' equity remained relatively unchanged for December 31,
1995 to June 30, 1996. BOF stockholders' equity decreased to $8.1 million at
June 30, 1996 from $8.2 million at December 31, 1995. BSS stockholders' equity
increased to $9.7 million at June 30, 1996 from $9.6 million at December 31,
1995. Theses changes resulted primarily from: (1) $601,000 and $403,000 of net
income for the BOF and BSS respectively during the six month period ended June
30, 1996; (2) a $495,000 and $219,000 increase in the net unrealized losses on
securities available for sale, net of income taxes, for the respective banks;
and (3) dividends paid of $209,000 and $107,000, for the respective banks,
during the same period.
The Banks' are state-chartered commercial banks with two offices in Franklin,
and offices in Wakefield, Courtland, Ivor, Newsoms, Suffolk and Surry, Virginia.
The Banks' primary market area is within western Tidewater, Virginia.
The Banks' principal business consists of providing a broad range of lending and
deposit services to individual and commercial customers with an emphasis on
those services traditionally associated with independent community banks. These
services include checking and savings accounts, certificates of deposit and
charge cards. The Banks' lending activities include commercial and personal
loans, lines of credit, installment loans, home improvement loans, overdraft
protection and construction loans.
NOTE 2 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
- --------------------------------------------------------------------------------
Principles of Consolidation and Basis of Presentation
The accompanying consolidated financial statements include the accounts of
United Community Bankshares, Inc. and its wholly-owned subsidiaries, The Bank of
Franklin, The Bank of Sussex and Surry, and their wholly-owned subsidiaries, The
Bank of Franklin Service Corporation and BSS Service Corporation, respectively.
All significant intercompany accounts and transactions have been eliminated.
BOF and BSS commenced operations in 1971 and 1902, respectively. The Bank of
Franklin Service Corporation and BSS Service Corporation were organized in 1996
and 1994, respectively, to facilitate investment in financial related services.
The consolidation has been prepared using the pooling of interests method of
accounting. All information included in the financial statements has been
combined as if the merger occurred at the earliest date presented.
Cash Equivalents
For purposes of reporting cash flows, cash and cash equivalents includes cash on
hand, amounts due from banks, interest-bearing deposits with banks and federal
funds sold. Generally, federal funds are sold for one-day periods.
================================================================================
18
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
================================================================================
Securities
Investments in debt securities that management has the positive intent and
ability to hold to maturity are classified as "held to maturity" and reflected
at amortized cost. Investments that are purchased and held principally for the
purpose of selling them in the near term are classified as "trading securities"
and reflected at fair value, with unrealized gains and losses included in
earnings. Neither UCB nor the Banks and their subsidiaries maintain securities
classified as trading. Securities that may be sold prior to maturity for
asset/liability management purposes, or that may be sold in response to changes
in interest rates, changes in prepayment risk, to increase regulatory capital or
other similar factors, are classified as securities available for sale.
Available-for-sale securities are carried at fair value with any adjustments to
fair value, after tax, reported as a separate component of shareholders' equity.
Declines in the fair value of individual held-to-maturity and available-for-sale
securities below their cost that are other than temporary, if any, are included
in earnings as realized losses.
Premiums and discounts are recognized in interest income using the interest
method over the period to maturity on held-to-maturity and available-for-sale
securities. Other-than-temporary declines in the fair market value of
individual held-to-maturity and available-for-sale securities result in
write-downs of the individual securities to fair market value. Gains and losses
are determined using the specific-identification method.
In December of 1995, pursuant to a special report issued by the Financial
Accounting Standards Board ("FASB") regarding the application of FASB Statement
No. 115, Accounting for Certain Investments In Debt and Equity Securities, the
Banks reassessed their intent with respect to their securities portfolios. As a
result, held-to-maturity securities, with an amortized cost basis of $25,210,316
and unrealized gains and losses of $231,048 and $297,105, respectively, were
transferred to the available-for-sale category.
Loans
Loans are reported at their principal outstanding balance net of charge-offs,
unearned income, and unamortized premiums or discounts, if any, on purchased
loans. Interest income is generally recognized when income is earned using the
interest method.
Allowance for Loan Losses
The allowance for loan losses is established through charges to earnings in the
form of a provision for loan losses. Increases and decreases in the allowance
due to changes in the measurement of impaired loans, if applicable, are included
in the provision for loan losses. Loans continue to be classified as impaired
unless they are brought fully current and the collection of scheduled interest
and principal is considered probable. When a loan or portion of a loan is
determined to be uncollectible, the portion deemed uncollectible is charged
against the allowance and subsequent recoveries, if any, are credited to the
allowance.
The Banks periodically evaluate the adequacy of the allowance for loan losses in
order to maintain the allowance at a level that is sufficient to absorb probable
credit losses. Management's evaluation of the adequacy of the allowance is based
on a review of the Banks' historical loss experience, known and inherent risks
in the loan portfolio, including adverse circumstances that may affect the
ability of the borrower to repay interest and/or principal, the estimated value
of collateral, and an analysis of the levels and trends of delinquencies, and
charge-offs. Such factors as the level and trend of interest rates and the
condition of the national and local economies are also considered. In addition,
various regulatory agencies, as an integral part of their examination process,
periodically review the Banks' allowance for losses on loans. Such agencies may
require the Banks to recognize additions to the allowance based on their
judgments of information available to them at the time of their examination.
A loan is considered impaired, based on current information and events, if it is
probable that the Banks will be unable to collect the scheduled payments of
principal or interest when due according to the contractual terms of the loan
agreement. The measurement of impaired loans is generally based on the present
value of expected future cash flows discounted at the historical effective
interest rate, except that all collateral-dependent loans are measured for
impairment based on the fair value of the collateral.
Income Recognition on Impaired and Nonaccrual Loans
Loans, including impaired loans, are generally classified as nonaccrual if they
are past due as to maturity or payment of principal or interest for a period of
more than 90 days, unless such loans are well-secured and in the process of
collection. If a loan or a portion of a loan is classified as doubtful, or is
partially charged off, the loan is generally classified as
================================================================================
19
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
================================================================================
nonaccrual. Loans that are on a current payment status or past due less than 90
days may also be classified as nonaccrual, if repayment in full of principal
and/or interest is in doubt.
Loans may be returned to accrual status when all principal and interest amounts
contractually due (including arrearages) are reasonably assured of repayment
within an acceptable period of time, and there is a sustained period of
repayment performance (generally a minimum of six months) by the borrower, in
accordance with the contractual terms of interest and principal.
While a loan is classified as nonaccrual and the future collectibility of the
recorded loan balance is doubtful, collections of interest and principal are
generally applied as a reduction to principal outstanding. When the future
collectibility of the recorded loan balance is expected, interest income may be
recognized on a cash basis. In the case where a nonaccrual loan had been
partially charged off, recognition of interest on a cash basis is limited to
that which would have been recognized on the recorded loan balance at the
contractual interest rate. Cash interest receipts in excess of that amount are
recorded as recoveries to the allowance for loan losses until prior charge-offs
have been fully recovered.
Other Real Estate Owned
Other real estate owned is comprised of real estate and other assets acquired
through foreclosure, acceptance of a deed in lieu of foreclosure, or loans in
which the Banks receive physical possession of the debtor's assets. Other real
estate owned is carried at the lower of the recorded investment in the loan or
the fair value less estimated costs to sell. Upon transfer of a loan to
foreclosed status, the fair value of the property is assessed and any excess of
the loan balance over fair value is charged against the allowance for loan
losses. Revenues and expenses related to the property, and subsequent
adjustments to fair value less estimated costs to sell are classified as an
expense for other real estate owned.
Premises and Equipment
Premises and equipment are stated at cost less accumulated depreciation. For
financial reporting purposes, assets are depreciated over their estimated useful
lives using the straight-line and accelerated methods. For income tax purposes,
the accelerated cost recovery system and the modified accelerated cost recovery
system are used. Net gains and losses on disposal or retirement of premises and
equipment are included in other income.
Intangible Assets
Intangible assets relate to the purchase of a branch by BOF in 1995 and are
amortized over fifteen years using the straight-line method.
Income Taxes
Income taxes are provided for the tax effects of the transactions reported in
the financial statements and consist of taxes currently due plus deferred taxes
related primarily to differences between the basis of available-for-sale
securities, allowance for loan losses, deferred compensation, and accumulated
depreciation for financial and income tax reporting. The deferred tax assets and
liabilities represent the future tax return consequences of those differences,
which will either be taxable or deductible when the assets and liabilities are
recovered or settled.
Off-Balance Sheet Financial Instruments
In the ordinary course of business, the Banks have entered into
off-balance-sheet financial instruments consisting of commitments to extend
credit, commitments under credit card arrangements, commercial letters of
credit, standby letters of credit, and financial guarantees written. Such
financial instruments are recorded in the financial statements when they become
payable.
Earnings Per Common Share
The company adopted FASB Statement No. 128, Earnings per Share, on December 31,
1997. This Statement established standards for computing and presenting earnings
per share ("EPS"). This Statement supersedes standards previously set in APB
Opinion No. 15, Earnings per Share. The Statement requires dual presentation of
basic and diluted EPS on the face of the income statement, and it requires a
reconciliation of the numerator and denominator of the basic EPS with the
numerator and denominator of the diluted EPS computation.
Basis EPS excludes dilution and is computed by dividing income available to
common shareholders by the weighted-average number of common shares outstanding
for the period. Diluted EPS reflects the potential dilution that could occur if
================================================================================
20
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
================================================================================
securities or other contracts to issue common stock were exercised or converted
into common stock or resulted in the issuance of common stock that then shared
in the earnings of the entity.
This statement is effective for financial statements issued for periods ending
after December 15, 1997. In accordance with the requirements of the Statement,
all prior period EPS data has been restated to reflect the change in accounting
requirements.
Use of Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reported period. Actual
results could differ from those estimates.
Material estimates that are particularly susceptible to significant change
relate to the determination of the allowance for losses on loans and the
valuation of real estate acquired in connection with foreclosures or in
satisfaction of loans. In connection with the determination of the allowances
for losses on loans and foreclosed real estate, management obtains independent
appraisals for significant properties. While management uses available
information to recognize losses on loans and foreclosed real estate, future
additions to the allowances may be necessary based on changes in local economic
conditions and other factors.
Reclassifications
Certain reclassifications have been made to prior year financial statements to
conform them to the current year's presentation.
NOTE 3 -- SECURITIES
- --------------------------------------------------------------------------------
Securities at December 31, 1997 and 1996 are as follows:
<TABLE>
<CAPTION>
Gross Gross
Amortized Unrealized Unrealized
Cost Gains Losses Fair Value
---------------- --------------- --------------- ----------------
Securities available for sale
December 31, 1997
<S> <C> <C> <C> <C>
U.S. Government and federal agencies $ 17,201,900 $ 115,511 $ 145,713 $ 17,171,698
State and local governments 17,665,622 372,226 9,648 18,028,200
Corporate debt securities 3,780,313 29,070 2,778 3,806,605
Mortgage-backed securities 2,035,435 6,679 6,020 2,036,094
Collateralized mortgage obligations 56,942 - 3 56,939
Equity securities 10,006 746,245 - 756,251
---------------- --------------- --------------- ----------------
$ 40,750,218 $ 1,269,731 $ 164,162 $ 41,855,787
----------------- --------------- --------------- ----------------
Gross Gross
Amortized Unrealized Unrealized
Cost Gains Losses Fair Value
---------------- --------------- --------------- ----------------
Securities available for sale
December 31, 1996
U.S. Government and federal agencies $ 22,579,494 $ 18,954 $ 186,890 $ 22,411,558
State and local governments 17,078,633 182,000 4,585 17,256,048
Corporate debt securities 4,127,697 4,875 - 4,132,572
Mortgage-backed securities 1,634,498 - 15,569 1,618,929
Collateralized mortgage obligations 115,957 - 246 115,711
Equity securities 10,006 519,334 - 529,340
---------------- --------------- --------------- ----------------
$ 45,546,285 $ 725,163 $ 207,290 $ 46,064,158
----------------- --------------- --------------- ----------------
</TABLE>
================================================================================
21
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
================================================================================
<TABLE>
<CAPTION>
Gross Gross
Amortized Unrealized Unrealized
Cost Gains Losses Fair Value
---------------- --------------- --------------- ----------------
Securities Held to Maturity
December 31, 1997
<S> <C> <C> <C> <C>
U.S. federal agencies $ 4,728,786 $ - $ 26,351 $ 4,702,435
State and local governments 4,770,477 91,258 1,046 4,860,689
Other 208,552 208 15 208,745
---------------- --------------- --------------- ----------------
$ 9,707,815 $ 91,466 $ 27,412 $ 9,771,869
================ =============== =============== ================
Gross Gross
Amortized Unrealized Unrealized
Cost Gains Losses Fair Value
---------------- --------------- --------------- ----------------
Securities Held to Maturity
December 31, 1996
U.S. federal agencies $ 5,428,101 $ - $ 86,316 $ 5,341,785
State and local governments 4,797,401 - 42,520 4,754,881
Equity securities 100,000 - 80 99,920
---------------- --------------- ----------- -------------
$ 10,325,502 $ - $ 128,916 $ 10,196,586
--------------- ----------------- ----------- -------------
</TABLE>
The amortized cost and fair value of securities by maturity date at
December 31, 1997 are as follows:
<TABLE>
<CAPTION>
Securities held to maturity Securities available for sale
------------------------------------ ------------------------------------
Amortized Fair Amortized Fair
Cost Value Cost Value
---------------- ---------------- ---------------- ----------------
<S> <C> <C> <C> <C>
Due in one year or less $ 1,499,558 $ 1,496,859 $ 4,658,505 $ 4,660,993
Due from one to five years 4,432,344 4,441,152 19,240,964 19,284,185
Due from five to ten years 2,885,160 2,928,427 14,820,236 15,103,524
Due after ten years 890,753 905,431 2,020,507 2,050,834
---------------- ---------------- ---------------- ----------------
9,707,815 9,771,869 40,740,212 41,099,536
Equity securities - - 10,006 756,251
---------------- ---------------- ---------------- ----------------
Total $ 9,707,815 $ 9,771,869 $ 40,750,218 $ 41,855,787
---------------- ---------------- ---------------- ----------------
</TABLE>
At December 31, 1997 and 1996, approximately $8,331,000 and $6,374,000,
respectively, of securities were pledged to secure deposits of the U.S.
Government or the Commonwealth of Virginia. In addition, as of December 31, 1997
and 1996, approximately $983,000 and $966,000, respectively, of securities were
pledged to secure two repurchase agreements.
================================================================================
22
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
================================================================================
Gross realized gains and gross realized losses on available for sale securities
were:
<TABLE>
<CAPTION>
December 31,
----------------------------------
1997 1996
--------------- ---------------
Gross realized gains:
<S> <C> <C>
U.S. government agencies $ 3,320 $ 21,379
State and local governments 15,570 3,753
Corporate debt securities - 4,421
Mortgage backed securities 1,345 -
Equity securities 1,980 -
--------------- ---------------
$ 22,215 $ 29,553
--------------- ---------------
Gross realized losses:
U.S. government agencies $ 17,805 $ 1,750
State and local governments - 2,698
Mortgage backed securities 475 12,371
--------------- ---------------
$ 18,280 $ 16,819
--------------- ---------------
Net realized gains (losses) $ 3,935 $ 12,734
--------------- ---------------
</TABLE>
NOTE 4 -- LOANS
- --------------------------------------------------------------------------------
Loans consist of the following:
<TABLE>
<CAPTION>
December 31,
---------------------------
1997 1996
----------- ------------
(Dollars in thousands)
<S> <C> <C>
Commercial $ 16,257 $ 14,273
Agricultural 7,045 6,437
Real estate construction 2,537 2,304
Real estate mortgage:
Residential (1-4 family) 20,758 20,868
Home equity lines 2,260 2,117
Commercial 17,098 14,164
Agricultural 2,485 2,894
----------- ------------
Real estate subtotal 45,138 42,347
----------- ------------
Loans to individuals:
Consumer and installment loans 13,842 14,881
Credit card and related plans 329 277
----------- ------------
Loans to individuals subtotal 14,171 15,158
----------- ------------
Total gross loans 82,611 78,215
Less:
Allowance for loan losses 1,106 1,209
Deferred loan fees 56 52
----------- ------------
Total net loans $ 81,449 $ 76,954
----------- ------------
</TABLE>
Loans on which the accrual of interest has been discontinued amount to $180,181
and $182,060 at December 31, 1997 and 1996, respectively. Impaired loans at
December 31, 1997 and 1996 were not significant.
================================================================================
23
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
================================================================================
A summary of the activity in the allowance for loan losses account is as
follows:
Year Ended December 31,
---------------------------------------
1997 1996
----------------- ------------------
Balance, beginning of year $ 1,209,365 $ 1,250,474
Provisions charged to operations 128,750 101,000
Loans charged-off (333,099) (254,546)
Recoveries 100,885 112,437
----------------- ------------------
Balance, end of year $ 1,105,901 $ 1,209,365
----------------- ------------------
NOTE 5 -- PREMISES AND EQUIPMENT
- --------------------------------------------------------------------------------
Premises and equipment consist of the following:
<TABLE>
<CAPTION>
December 31,
------------------------------------
1997 1996
--------------- -----------------
<S> <C> <C>
Land $ 393,238 $ 393,238
Buildings and improvements 1,962,308 1,951,271
Leasehold improvements 104,066 100,515
Equipment, furniture and fixtures 2,153,864 2,022,125
--------------- -----------------
4,613,476 4,467,149
Less accumulated depreciation 2,690,228 2,491,462
--------------- -----------------
Premises and equipment, net $ 1,923,248 $1,975,687
=============== =================
</TABLE>
Depreciation charged to operating expense for the years ended December 31, 1997
and 1996 was $209,349 and $204,397, respectively.
NOTE 6 -- DEPOSITS
- --------------------------------------------------------------------------------
Interest-bearing deposits consist of the following:
<TABLE>
<CAPTION>
December 31,
-------------------------------------------------
1997 1996
--------------------- ------------------------
<S> <C> <C>
NOW accounts $ 17,574,538 $ 17,368,673
Money market accounts 19,364,840 20,553,509
Savings accounts 11,975,470 11,629,507
Certificates of deposit $100,000 and over 11,959,660 10,224,208
Other time deposits 51,802,120 49,757,425
------------------- -----------------------
Total interest-bearing deposits $ 112,676,628 $ 109,533,322
-------------------- ------------------------
</TABLE>
At December 31, 1997, the scheduled maturities of time deposits with remaining
maturities in excess of one year are as follows:
(Dollars in Thousands)
Year Maturing Amount
------------- ------
1999 $9,015
2000 5,163
2001 1,368
2002 2,772
2003 and thereafter 6
================================================================================
24
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
================================================================================
The following table summarizes the maturities of certificates of deposit with a
minimum denomination of $100,000.
(Dollars in Thousands)
Within Three Six to Over
Three to Six Twelve Twelve
Months Months Months Months Total
------ ------ ------ ------ -----
At December 31, 1997 $ 3,222 $2,123 $3,755 $ 2,860 $11,960
NOTE 7 -- STOCKHOLDERS' EQUITY AND REGULATORY MATTERS
- --------------------------------------------------------------------------------
The Banks are subject to various regulatory capital requirements administered by
the federal banking agencies. Failure to meet minimum capital requirements can
initiate certain mandatory, and possibly additional discretionary actions by
regulators that, if undertaken, could have a direct material effect on the
Banks' financial statement. Under capital adequacy guidelines and regulatory
framework for prompt corrective action, the Banks must meet specific capital
guidelines that involve quantitative measures of the Banks' assets, liabilities,
and certain off-balance-sheet items as calculated under regulatory accounting
practices. The Banks' capital amounts and classification are also subject to
qualitative judgments by the regulators about components, risk weighting, and
other factors.
Quantitative measures established by regulation to ensure capital adequacy
require the Banks to maintain minimum amounts and ratios (set forth in the table
below) of total and Tier I capital (as defined in the regulations) to
risk-weighted assets (as defined), and of Tier I capital (as defined) to average
assets (as defined). Management believes, as of December 31, 1997 that the Banks
meet all capital adequacy requirements to which they are subject.
As of December 31, 1997, the most recent notification from the Federal Deposit
Insurance Corporation categorized both Banks as well capitalized under the
regulatory framework for prompt corrective action. To be categorized as well
capitalized, the Banks must maintain minimum total risk-based, Tier I
risk-based, and Tier I leverage rations as set forth in the table. There are no
conditions or events since that notification that management believes have
changed the institutions' categories.
The Banks' actual capital amounts and ratios are also presented in the table.
<TABLE>
<CAPTION>
For Capital
Actual Adequacy Purposes
------------------------ -------------------------------
Amount Ratio Amount Ratio
------------ ----------- ---------------- -------------
As of December 31, 1997: (Dollars in Thousands)
Total Capital (to Risk Weighted Assets):
<S> <C> <C> <C> <C>
Consolidated $ 20,457 21.11% >/=$7,752 >/=8.00%
The Bank of Franklin $ 9,761 16.71% >/=$4,674 >/=8.00%
The Bank of Sussex and Surry $ 10,696 27.80% >/=$3,078 >/=8.00%
Tier I Capital (to Risk Weighted Assets):
Consolidated $ 19,351 19.97% >/=$3,876 >/=4.00%
The Bank of Franklin $ 9,081 15.54% >/=$2,337 >/=4.00%
The Bank of Sussex and Surry $ 10,270 26.69% >/=$1,539 >/=4.00%
Tier I Capital (to Average Assets):
Consolidated $ 19,351 12.69% >/=$6,101 >/=4.00%
The Bank of Franklin $ 9,081 10.35% >/=$3,508 >/=4.00%
The Bank of Sussex and Surry $ 10,270 15.84% >/=$2,593 >/=4.00%
<CAPTION>
To Be Well
Capitalized Under
Prompt Corrective
Action Provisions
----------------------------------
Amount Ratio
----------------- ---------------
Total Capital (to Risk Weighted Assets):
<S> <C>
Consolidated >/= $ N/A
The Bank of Franklin >/= $ 5,843 >/=10.00%
The Bank of Sussex and Surry >/= $ 3,848 >/=10.00%
Tier I Capital (to Risk Weighted Assets):
Consolidated >/= $ N/A
The Bank of Franklin >/= $3,506 >/=6.00%
The Bank of Sussex and Surry >/= $2,309 >/=6.00%
Tier I Capital (to Average Assets):
Consolidated >/= $ N/A
The Bank of Franklin >/= $4,385 >/=5.00%
The Bank of Sussex and Surry >/= $3,241 >/=5.00%
</TABLE>
================================================================================
25
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
==========================================================================
NOTE 8 -- INCOME TAXES
- --------------------------------------------------------------------------
The principal components of income tax expense are as follows:
Year Ended December 31,
--------------------------
1997 1996
------------ -----------
Federal income tax expense - current $ 652,648 $ 639,110
Deferred federal income tax expense (benefit)
related to temporary differences in reporting 40,701 (42,929)
------------ -----------
Income tax expense $ 693,349 $ 596,181
------------- -----------
Differences between income tax expense calculated at the statutory rate and
that shown in the statements of income are summarized as follows:
<TABLE>
<CAPTION>
Year Ended December 31,
--------------------------------
1997 1996
-------------- --------------
<S> <C> <C>
Federal income tax expense at statutory rate $ 994,088 $ 856,489
Tax effect of:
Tax exempt interest (309,931) (320,227)
Merger fees - 64,518
Other 9,192 (4,599)
-------------- --------------
Income tax expense $ 693,349 $ 596,181
-------------- --------------
</TABLE>
The Banks have the following deferred tax assets and liabilities:
<TABLE>
<CAPTION>
December 31,
---------------------------------
1997 1996
--------------- ---------------
Deferred tax assets:
<S> <C> <C>
Deferred compensation $ 41,768 $ 64,194
Accrued employee benefits 3,039 5,085
Interest on nonaccrual loans 15,835 29,427
--------------- ---------------
Total deferred tax asset 60,642 98,706
--------------- ---------------
Deferred tax liabilities:
Premises and equipment 30,212 38,226
Allowance for loan losses 96,151 89,411
Net unrealized gains on available-for-sale 376,300 176,082
securities
Discount accretion on sale of securities 16,675 10,901
Deferred fees 5,430 7,954
Pension expense 661 -
--------------- ---------------
Total deferred tax liabilities 525,429 322,574
--------------- ---------------
Net deferred tax liability $ 464,787 $ 223,868
=============== ===============
</TABLE>
NOTE 9 -- RETIREMENT PLANS
- --------------------------------------------------------------------------------
United Community Bankshares
Effective January 1, 1998, the Company adopted a defined contribution plan with
401(K) features, which covers substantially all employees of the Company and its
subsidiary Banks who have completed one year of service. Vesting in the plan
begins with the second year of participation and increases annually by 20% until
full vesting occurs after six years.
================================================================================
26
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
================================================================================
Employees may contribute up to 15% of their salaries, and the Company matches
50% of the first 6% of employee contributions. Additional contributions can be
made by the Company at the discretion of the Board of Directors. Prior to the
formation of this plan, each of the Company's subsidiary Banks had qualified
retirement plans for the future benefit of their employees. All of these plans
were terminated on December 31, 1997. The details of each Bank's plan are
detailed below.
The Bank of Franklin
The Bank had a profit-sharing plan for all eligible officers and employees.
Requirements for eligibility to participate include reaching the age of 21 and
one year of service. Vesting in the plan began in the second year of
participation and increased annually by 20% until fully vested after six years.
Employer contributions were determined annually and calculated based on the
participant's annual compensation. The amounts contributed to the plan were
$31,250 and $28,000 for 1997 and 1996, respectively.
The Bank of Sussex and Surry
The Bank sponsored a non-contributory defined benefit plan for all employees.
Pension benefits vested after five years of service and are based on year of
service and average final salary. The Bank's funding policy was to make the
minimal annual contribution that was required by applicable regulation, plus
such amounts as the Bank determined was appropriate from time to time.
The amount charged to expense for the Bank's pension plan totaled $59,363 and
$59,792 for the years ended December 31, 1997 and 1996, respectively. The
components of the pension cost charged to expense consisted of the following:
<TABLE>
<CAPTION>
1997 1996
-------------- --------------
<S> <C> <C>
Service cost $ 50,276 $ 50,276
Interest cost on projected benefit obligation 42,845 42,845
Expected return on plan assets (35,564) (35,564)
Net amortization and deferral 1,806 2,235
---------- -----------
$ 59,363 $ 59,792
---------- -----------
</TABLE>
The following table sets forth the plan's funded status, as of the most recent
actuarial valuation date, October 1, 1997, and the amount recognized in the
Bank's consolidated financial statements as of December 31:
<TABLE>
<CAPTION>
1997 1996
-------------- --------------
Actuarial present value of benefit obligations:
<S> <C> <C>
Vested benefits $ 524,491 $ 419,584
============== ==============
Accumulated benefits $ 536,180 $ 425,327
============== ==============
Projected benefit obligation $ (803,401) $ (614,540)
Plan assets at fair value 688,614 510,525
-------------- --------------
Projected benefit obligation in excess of plan assets (114,787) (104,015)
Unrecognized prior service costs (57,402) (60,990)
Unrecognized net loss 27,958 14,951
Remaining unrecognized net obligation from the beginning of the year 84,326 89,720
-------------- --------------
Liability on the balance sheet $ (59,905) $ (60,334)
-------------- --------------
</TABLE>
The weighted-average discount rate used in determining the actuarial present
value of the benefit obligations was 7% at December 31, 1997 and 1996. The
expected long-term rate of return on plan assets was 7% at December 31, 1997 and
1996. The rate of increase in future compensation levels used in determining the
actuarial present value of the benefit obligations was 6% at December 31, 1997
and 1996.
Plan assets at December 31, 1997 consist of an investment in a stock mutual
fund, and in money market, equity, fixed income and balanced funds offered by
the Virginia Bankers Association Pension Investment Program.
================================================================================
27
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
=============================================================================
NOTE 10 -- FEDERAL FUNDS PURCHASED, SECURITIES SOLD UNDER AGREEMENT TO
REPURCHASE AND OTHER BORROWED FUNDS
- --------------------------------------------------------------------------------
Federal funds purchased and securities sold under agreements to repurchase
generally mature within one to four days from the transaction date. Other
borrowed funds consist of term federal funds purchased and advances from the
Federal Home Loan Bank ("FHLB") of Atlanta and generally are repaid within one
to 120 days from the transaction date.
Information concerning securities sold under agreements to repurchase and FHLB
advances is summarized as follows:
1997 1996
----- ----
Securities Sold Under Agreements to Repurchase:
Average balance during the year $ 308,777 $ 376,564
Average interest rate during the year 4.17% 4.23%
Maximum month end balance during the year $ 554,656 $ 750,678
Federal Home Loan Bank Advances:
Average balance during the year $ 225,753 $ 372,951
Average interest rate during the year 5.78% 5.71%
Maximum month end balance during the year $2,500,000 $1,500,000
Federal Funds Purchased:
Average balance during the year $ 560,413 $ 109,888
Average interest rate during the year 5.73% 4.81%
Maximum month end balance during the year $1,748,000 $1,469,000
NOTE 11 -- COMMITMENTS AND CONTINGENCIES
- --------------------------------------------------------------------------------
BOF leases one of its branches with an operating lease. The lease term is for
one year and expires in February 1998, with an option to extend the lease for
one twelve month period. The minimum lease payments for 1998 are $12,000. Total
lease expense was $12,000 for 1997 and 1996.
BOF is a member of the Federal Home Loan Bank ("FHLB") of Atlanta. As such, the
Bank may borrow funds based on criteria established by the FHLB. As of December
31, 1997, BOF could borrow approximately $6,500,000, if collateral acceptable to
the FHLB was provided. In addition, federal funds arrangements with other
institutions provide an additional $9,277,000 of short-term borrowing capacity.
The Bank had not drawn on these lines of credit at December 31, 1997.
BSS became a member of the FHLB in 1997. As of December 31, 1997, the Bank could
borrow approximately $6,500,000, if collateral acceptable to the FHLB was
provided. In addition, BSS has federal funds arrangements with two institutions
which provide $6,000,000 of short-term borrowing capacity. At December 31, 1997,
BSS did not have an outstanding balance on these lines of credit.
The Banks are subject to claims and lawsuits that arise primarily in the
ordinary course of business. Based on information presently available and advice
received from legal counsel representing the Banks in connection with such
claims and lawsuits, it is the opinion of management that only one such lawsuit
could have a material adverse effect on the financial position of the Banks.
This suit is described below. The only other litigation in which UCB and its
subsidiaries, BOF and BSS, are involved are collection suits involving
delinquent loan accounts.
Fidelity National Title Insurance Company of New York, successor by merger to
Security Title and Guaranty Company (the "Title Company"), filed suit against
the Bank of Sussex and Surry in November, 1997. The Title Company issued a title
insurance policy in favor of the BSS (the "Title Policy") insuring that the Bank
had a first priority deed of trust lien on a one-quarter interest in certain
real property located in Isle of Wight County, Virginia (the "Isle of Wight
Property"). The Circuit Court for Isle of Wight entered a Final Decree on March
6, 1996 that Farmers Bank, Windsor had a first priority deed of trust lien on
that one-quarter interest in the Isle of Wight Property and that BSS had a
second priority deed of trust lien on that same one-quarter interest.
================================================================================
28
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
================================================================================
The Title Company seeks the following relief: (i) a declaratory judgment that
the first priority deed of trust lien in favor of Farmers Bank, Windsor on the
one-quarter interest Isle of Wight Property be excluded from coverage under
the Title Policy, (ii) that the Title Policy be reformed to exclude the
Farmers Bank, Windsor deed of trust from coverage under the Title Policy and
(iii) that the Title Company be reimbursed for its costs and attorneys'
fees.
BSS intends to vigorously defend this suit. At this time, the Bank's legal
counsel is unable to express any view as to the possible outcome of this matter.
Counsel notes, however, that if this matter is resolved in a manner adverse to
the interests of the Bank, the amount of any loss that will be sustained by BSS
will not be more than the approximately $75,000 expended by the Title Company
for costs and attorneys' fees.
NOTE 12 -- RELATED PARTY TRANSACTIONS
- --------------------------------------------------------------------------------
The Banks have loan and deposit transactions with its officers and directors,
and with companies in which the officers and directors have a financial
interest. Related party deposits amounted to approximately $4,002,000 and
$4,956,000 at December 31, 1997 and 1996, respectively. A summary of related
party loan activity during 1997 is as follows:
Balance, December 31, 1996 $ 1,534,918
Originations - 1997 1,461,723
Repayments - 1997 (744,037)
Net change due to changes in Board membership (23,072)
-----------------
Balance, December 31, 1997 $ 2,229,532
=================
In the opinion of management, such loans are made in the ordinary course of
business at normal credit terms, including interest rate and collateral
requirements, and do not represent more than normal credit risk. Commitments to
extend credit to related parties amounted to $597,919 and $910,416 at December
31, 1997 and 1996, respectively.
In the ordinary course of business, the Banks have engaged in certain
transactions with different directors' firms to provide legal, insurance and
real estate brokerage services.
NOTE 13 -- FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET RISK AND OTHER
DERIVATIVE FINANCIAL INSTRUMENTS AND CONCENTRATIONS OF CREDIT RISK
- --------------------------------------------------------------------------------
The Banks are party to financial instruments with off-balance sheet risk in the
normal course of business to meet the financing needs of its customers. These
financial instruments include commitments to extend credit, commercial and
standby letters of credit. Those instruments involve, to varying degrees,
elements of credit and interest-rate risk in excess of the amount recognized in
the consolidated balance sheets. The contract or notional amounts of those
instruments reflect the extent of the Banks' involvement in particular classes
of financial instruments.
The Banks' exposure to credit loss in the event of nonperformance by the other
party to the financial instrument for commitments to extend credit, commercial
and standby letters of credit, is represented by the contractual notional amount
of those instruments. The Banks use the same credit policies in making
commitments and conditional obligations as it does for on-balance sheet
instruments.
The following table summarizes the Banks' off-balance sheet financial
instruments as of December 31, 1997 and 1996. The Banks do not use these
financial instruments for trading purposes.
<TABLE>
<CAPTION>
Contract or Notional Amount
--------------------------------
1997 1996
-------------- --------------
(Dollars in Thousands)
Financial instruments whose contract amounts represent
credit risk:
Commitments to extend credit:
<S> <C> <C>
Commercial $ 7,068 $ 10,071
Commercial real estate, construction and land development 2,603 1,512
Residential real estate 1,414 1,253
Consumer 1,047 976
-------------- --------------
$ 12,132 $ 13,812
-------------- --------------
Standby letters of credit $ 133 $ 165
Commercial and similar letters of credit $ 750 $ 975
</TABLE>
================================================================================
29
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
================================================================================
Loan commitments, standby letters of credit and guarantees written have
off-balance sheet credit risk because only origination fees and accruals for
probable losses, if any, are recognized in the statement of financial position,
until the commitments are fulfilled or the standby letters of credit or
guarantees expire. Credit risk represents the accounting loss that would be
recognized at the reporting date if counterparties failed completely to perform
as contracted. The credit risk amounts are equal to the contractual amounts,
assuming that the amounts are fully advanced and that, in accordance with the
requirements of FASB Statement No. 105, DISCLOSURE OF INFORMATION ABOUT
FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET RISK AND FINANCIAL INSTRUMENTS WITH
CONCENTRATIONS OF CREDIT RISKS, collateral or other security is of no value. The
Banks' policy is to require customers to provide collateral prior to the
disbursement of approved loans. For retail loans, the Banks usually retain a
security interest in the property or products financed, which provides
repossession rights in the event of default by the customer. For business loans
and financial guarantees, collateral is usually in the form of inventory or
marketable securities (held in trust) or property (notations on title).
Commitments to Extend Credit
Commitments to extend credit are arrangements to lend to a customer, as long as
there is no violation of any condition established in the contract, and includes
unutilized credit card lines. Commitments generally have fixed expiration dates
or other termination clauses and may require payment of a fee. Since many of the
commitments are expected to expire without being drawn upon, the total
commitment amounts do not necessarily represent future cash requirements. The
majority of commitments to extend credit have terms up to one year, and
contracted interest rates in the range from 7.50% to 11.50%, except for consumer
loans. Of the total commitments and letters of credit, approximately $2.9
million had fixed rates of interest and $10.1 million had variable interest
rates. Management evaluates each customer's creditworthiness in determining the
amount of collateral to obtain. Collateral held varies but may include accounts
receivable, inventory, property, plant and equipment and real estate.
Standby Letters of Credit and Financial Guarantees Written
Standby letters of credit and financial guarantees written are conditional
commitments issued by the Banks to guarantee the performance of customers to
third parties. Those guarantees are primarily issued to support the financing
needs of the Banks' commercial customers, and are short-term in nature. The
credit risk involved in issuing letters of credit is essentially the same as
that involved in extending loan facilities to customers. The Banks hold
marketable securities as collateral supporting those commitments for which
collateral is deemed necessary.
Concentration of Credit Risk
Concentrations of credit risk (whether on or off balance sheet) arising from
financial instruments exist in relation to certain groups of customers. A group
concentration arises when a number of counterparties have similar economic
characteristics that would cause their ability to meet contractual obligations
to be similarly affected by changes in economic or other conditions. The Banks
do not have significant exposure to any individual customer or counterparty. The
major concentrations of credit risk for the Banks arise by customer loan type in
relation to loans and credit commitments, as shown in the table above. A
geographic concentration arises because the Banks operate primarily in western
Tidewater, Virginia.
The credit risk amounts represent the maximum accounting loss that would be
recognized at the reporting date if counterparties failed completely to perform
as contracted and any collateral or security proved to be of no value. The Banks
have experienced little difficulty in accessing collateral when required. The
amounts of credit risk shown, therefore, greatly exceed expected losses, which
are included in the allowance for loan losses.
NOTE 14 -- FAIR VALUE OF FINANCIAL INSTRUMENTS
- --------------------------------------------------------------------------------
FASB 107, DISCLOSURE ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS ("FASB 107"),
requires disclosure of fair value information about financial instruments,
whether or not recognized in the balance sheet, for which it is practicable to
estimate that value. In cases where quoted market prices are not available, fair
values are based on estimates using present value or other valuation techniques.
Those techniques are significantly affected by the assumptions used, including
the discount rate and estimates of future cash flows. In that regard, the
derived fair value estimates cannot be substantiated by comparison to individual
markets and, in many cases, could not be realized in immediate settlement. FASB
107 excludes certain financial instruments and all nonfinancial instruments from
its disclosure requirements. Accordingly, the aggregate fair value amounts
presented do not represent the underlying value of the Bank.
================================================================================
30
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
================================================================================
The following methods and assumptions were used by the Banks in estimating the
fair value for the consolidated financial statements as required by FASB 107:
Cash and due from banks: The carrying amount approximates fair value.
Federal funds sold: For federal funds sold, the carrying amount
approximates fair value.
Investment securities: Fair values for securities are based on published
market prices, if available. For unquoted securities, the fair value is
estimated by the Banks on the basis of financial and other information.
Loans: For loans with short-term and variable rate characteristics, the
total receivables outstanding approximate fair value. This amount excludes
any value related to account relationships. The fair value of other types
of loans is estimated by discounting future cash flows, using the
contractual rates in effect for such loans at the reporting date and
adjusting for credit risk and operating costs.
Interest receivable and Interest payable: The carrying amount approximates
fair value.
Non-interest-bearing deposits: The fair value of these instruments is the
amount payable on demand at the reporting date.
Interest-bearing deposits: The fair value of demand deposits, saving
accounts and money market deposits with no defined maturity is the amount
payable on demand at the reporting date. The fair value of certificates of
deposit is estimated by discounting the future cash flows using the current
rates at which similar deposits would be made. This amount excludes any
value related to account relationships.
Commitments to extend credit and standby and commercial letters of credit:
It is not practicable to separately estimate the fair values for
off-balance-sheet credit commitments, including standby letters of credit,
and guarantees written, due to the lack of cost-effective and reliable
measurement methods for these instruments.
The estimated fair values of the Banks' financial instruments required to be
disclosed under FASB 107 at December 31, 1997 are as follows:
<TABLE>
<CAPTION>
1997 1996
---------------------------- --------------------------
Carrying Fair Carrying Fair
Value Value Value Value
------------- ------------- ------------- -----------
(Dollars in thousands)
Assets
<S> <C> <C> <C> <C>
Cash and due from banks $ 6,362 $ 6,362 $ 7,262 $ 7,262
Federal funds sold 10,814 10,814 3,890 3,890
Investment securities 51,564 51,628 56,390 56,261
Loans 81,449 81,457 76,954 77,789
Interest receivable 1,663 1,663 1,699 1,699
--------- ---------- --------- ---------
$ 151,852 $ 151,924 $ 146,195 $ 146,901
========= ========== ========= =========
Liabilities
Non-interest bearing deposits $ 20,829 $ 20,829 $ 20,292 $ 20,292
Interest bearing deposits 112,677 111,735 109,533 109,794
Short-term borrowings 309 309 229 229
Interest payable 427 427 399 399
--------- --------- --------- ---------
$ 134,242 $ 133,300 $ 130,453 $ 130,714
========= ========= ========= =========
</TABLE>
===============================================================================
31
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
==============================================================================
NOTE 15 - EARNINGS PER SHARE RECONCILIATION
The following is a reconciliation of the numerators and denominators of the
basic and diluted earnings per share computations.
<TABLE>
<CAPTION>
1997 1996
----------- -----------
<S> <C> <C>
Net income (Numerator, Basic and Diluted) $ 2,230,438 $ 1,922,905
Weighted-average shares outstanding (Denominator) 1,829,209 1,829,209
----------- -----------
Basic net income per share $ 1.22 $ 1.05
=========== ===========
Effect of dilutive securities:
Weighted-average shares outstanding 1,829,209 1,829,209
Effect of stock options 4,407 -
----------- -----------
Diluted average shares outstanding (Denominator) 1,833,616 1,829,209
----------- -----------
Diluted net income per share $ 1.22 $ 1.05
=========== ===========
</TABLE>
NOTE 16 - CONDENSED PARENT COMPANY ONLY FINANCIAL STATEMENTS
The following condensed financial statements for UCB should be read in
conjunction with the consolidated financial statements and notes thereto.
<TABLE>
<CAPTION>
CONDENSED STATEMENT TO FINANCIAL CONDITION
December 31,
----------------------------
1997 1996
----------- -----------
ASSETS
<S> <C> <C>
Cash $ 33,587 $ 509
Premises and equipment, net 63,115 -
Equity in net assets of the Banks 20,749,007 18,990,510
Other assets 185,797 -
----------- -----------
$21,031,506 $18,991,019
=========== ===========
LIABILITIES $ - $ 509
STOCKHOLDERS' EQUITY 21,031,506 18,990,510
----------- -----------
$21,031,506 $18,991,019
----------- -----------
</TABLE>
<TABLE>
<CAPTION>
CONDENSED STATEMENT OF OPERATIONS
Year Ended December 31,
-----------------------------
1997 1996
------------ ------------
<S> <C> <C>
Equity in earnings of the Banks $ 2,230,171 $ 1,922,905
Other income 152,874 9,000
------------ ------------
Total noninterest income 2,383,045 $ 1,931,905
Other expenses (151,503) (9,000)
------------ ------------
Income before income taxes 2,231,542 1,922,905
Income tax expense 1,104 -
------------ ------------
Net income $ 2,230,438 $ 1,922,905
------------ ------------
</TABLE>
CONDENSED STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
Years Ended December 31,
-------------------------------------
1997 1996
----------------- ----------------
Cash flows from operating activities:
<S> <C> <C>
Net income $ 2,230,438 $ 1,922,905
Adjustments to reconcile to net cash provided by
operating activities:
Equity in earnings of the Banks (2,230,171) (1,922,905)
Depreciation 4,304 -
Changes in:
Other assets (85,797) -
Other liabilities (509) 509
----------------- ----------------
Net cash provided by operating activities $ (81,735) $ 509
----------------- ----------------
Cash flows from investing activities:
Dividends received from the Banks 849,287 572,190
Purchases of premises and equipment (67,419) -
Purchases of investment (100,000) -
----------------- ----------------
Net cash used by investing activities 681,868 572,190
----------------- ----------------
Cash flows from financing activities:
Cash dividends paid (567,055) (572,190)
----------------- ----------------
Net cash used for financial activities (567,055) (572,190)
----------------- ----------------
Net increase in cash and cash equivalents 33,078 509
Cash and cash equivalents at beginning of period 509 -
================= ================
Cash and cash equivalents at end of period $ 33,587 $ 509
================= ================
</TABLE>
Certain restrictions exist regarding the ability of the Banks to transfer funds
to UCB in the form of cash dividends, loans or advances. The prior approval of
the Board of Governors of the Federal Reserve is required, if the total
dividends declared in any calendar year will exceed the sum of thr respective
net profits, as defined, for the current year, plus retained net profits for the
previous two years. As of Decemeber 31, 1997, dividends from BOF and BSS were
limited to approximately $2,388,000 and $1,636,000, respectively, under these
regulations. Under Virginia law, no dividend may be declared or paid that would
impair a Virginia chartered bank's paid-in-capital.
===============================================================================
32
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
===============================================================================
NOTE 17-STOCK COMPENSATION PLANS
================================================================================
At Decemebr 31, 1997, the Company has fixed stock compensation plans for certain
key employees. The Company applies Accounting Principles Board Opinion No. 25
("APB 25"), ACCOUNTING FOR STOCK ISSUED TO EMPLOYEES, and related
interpretations in accounting for its plans. Accordingly, no compensation cost
was recognized for these plans against earnings. For those companies applying
APB 25, FASB Statement No. 123. ACCOUNTING FOR STOCK-BASED COMPENSATION,
requires certain proforma disclosures of net income and earnings per share. Net
income and earnings per share computed under FASB Statement No. 123 do not
materially differ from the amounts reported.
All options have ten year terms, vest and become fully exercisable in six
months. The option price equals or exceeds the market price of the stock as of
the date the option was granted. The following is a summary of the Company's
stock option plan activity, and related information for the years ended
December 31, 1997 and 1996.
<TABLE>
<CAPTION>
1997 1996
------------------------------- ------------------------------
Weighted Average Weighted Average
Options Exercise Price Options Exercise Price
----------- ---------------- ----------- ----------------
<S> <C> <C>
Outstanding - Beginning of year - $ - - $ -
Granted 31,667 10.33 - -
Exercised - - - -
Forfeited - - - -
----------- --------------- ----------- -------------
Outstanding - End of year 31,667 $ 10.33 - $ -
=========== =============== =========== =============
Exercisable - End of year 1,167 $ 10.33 - $ -
=========== =============== =========== =============
</TABLE>
NOTE 18 - SUBSEQUENT EVENT
On January 24, 1998, the declaration date, the Board of Directors approved the
payment of a semi-annual cash divident of $.17 per share for shareholders of
record on February 27, 2998. The dividend, totaling $310,966, is payable on
March 31, 1998.
===============================================================================
34
<PAGE>
DIRECTORS AND OFFICERS
===============================================================================
UNITED COMMUNITY THE BANK OF THE BANK OF
BANKSHARES, INC FRANKLIN SUSSEX AND SURRY
BOARD OF DIRECTORS BOARD OF DIRECTORS BOARD OF DIRECTORS
- --------------------- ------------------ ------------------
J. Russell West Harvey G. Pope Jack P. Bain
Chairman Chairman Chairman
Harvey G. Pope Hunter Darden, Jr. L.A. Brantley
Vice Chairman Vice Chairman Vice Chairman
Jack P. Bain Charles F. Kingery J. Phillip Bain, Jr.
J. Phillip Bain, Jr. James H. Lee, III Jack Beale
D. Eugene Brittle Wenifred O. Pearce D. Eugene Brittle
Hunter Darden, Jr. Durwood V. Scott Gurney B. Cowling, Jr.
Gregor O. Huber Marion G. Smith A. Meredith Felts
Wenifred O. Pearce J.D. Spivey Gregor O. Huber
J.D. Spivey F. Bruce Stewart William B. Savedge
F. Bruce Stewart Larry W. Whitley J. Russell West
Wesley F. Wills
Officers Officers Officers
- -------- -------- --------
Wenifred O. Pearce Wenifred O. Pearce D. Eugene Brittle
President & President & President &
Chief Executive Officer Chief Executive Officer Chief Executive Officer
D. Eugene Brittle Wayne C. Carruthers, CPA Douglas A. Chessom
Executive Vice President & Senior Vice President Vice President & Cashier
Chief Opreating Officer
Wayne C. Carruthers, CPA Kyle R. Purvis, Jr. H. Massey Joyner
Chief Financial Officer Senior Vice President Vice President &
Branch Manager
David A. Patterson, CPA James H. O'Berry Jacquelin H. Scarborough
Internal Auditor Vice President Assistant Vice President
Katherine B. Perry James M. Seay, III
Vice President Assistant Vice President
& Branch Manager
G. Ronald West Faye E. Whitmore
Assistant Vice President Assistant Vice President
Kendall L. Edwards John C. Beahm
Commercial Loan Officer Assistant Cashier
& Branch Manager
Wilma Bishop
Assistant Cashier
===============================================================================
36
<PAGE>
STOCKHOLDER INFORMATION
===============================================================================-
Corporate Headquarters Investor Relations
United Community Bankshares, Inc. United Community Bankshares' Annual
100 East Fourth Avenue Report, Form 10-KSB, and other
P.O. Box 594 corporate publications are
Franklin, Virgina 23851 available to shareholders on
(757) 562-5184 request, without charge, by
writing.
Wayne C. Carruthers, CPA
Chief Financial Officer
United Community Bankshares, Inc.
Annual Meeting P.O. Box 594
The Annual Meeting of Stockholders will Franklin, Virginia 23851
be held at 10:00 a.m. on Thursday, May (757) 562-5184
28, 1998 at the Main Street Eatery, Second
Floor, 119 North Main Street, Franklin,
Virginia. All shareholders are cordially
invited to attend. Independent Auditors
Goodman & Company, L.L.P
Common Stock One Commercial Place, Suite 800
United Community Bankshares, Inc makes a Norfolk, Virginia 23510
market in its common stock through three
brokers: Davenport & Co. of Virginia, Inc;
Scott & Stringfellow, Inc.; and Wheat First Transfer Agent
Union. UCB's common stock is quoted on the The Bank of Franklin serves as
OTC Bulletin Board where our symbol is UCMB. UCB;s transfer agent. Shareholders
requiring information on stock
High and low sale prices of UCB common transfer requirements, lost
stock are set forth in the following table. certificates, dividends and other
Quoted sales prices through December 17, stockholder matters should contact:
1996 were from UCB records, while sales
prices after this date are from the three Stockholder Relations
aforementioned brokers. UCB common stock United Community Bankshares, Inc.
is thinly traded, therefore, the volume c/o The Bank of Franklin
of trading has been insufficient to P.O. Box 594
establish a meaningful market price. Franklin, Virginia 23851
(757) 562-5184
(800) 343-8241
1997 High Low Dividend
4th Quarter $14.00 $12.50
3rd Quarter $13.375 $12.00 $0.16
2nd Quarter $13.00 $11.50
1st Quarter $12.50 $10.25 $0.15
1996
4th Quarter
Dec. 17-Dec. 31 $11.00 $11.00
Oct 1-Dec. 16 $12.00 $10.00
3rd Quarter No trades No trades $0.14
On January 24, 1998, the Board of Directors declared a
cash dividend of $.17 per common share, to shareholders
of record on February 27, 1998, payable on March 31,
1998.
===============================================================================
36
<PAGE>
BANK OFFICE LOCATIONS
===============================================================================
The Bank Of Franklin The Bank of Sussex and Surry
Main Office Wakefield Office
100 East Fourth Avenue 205 Railroad Avenue
P.O. Box 594 P.O. Box 10
Franklin, Virginia 23851 Wakefield, Virginia 23888
(757) 562-5184 (757) 899-2501
College Drive Office Ivor Office
201 College Drive 8314 Main Street
Franklin, Virginia 23851 P.O. Box 287
(757) 562-3441 Ivor, Virginia 23866
(757) 859-6211
Courtland Office Surry Office
Shands Shopping Center 270 Colonial Trail East
22736 Main Street P.O. Box 208
Courtland, Virginia 23837 Surry, Virginia 23883
(757) 653-2833 (757)294-3200
Newsoms Office
22334 General Thomas Highway
Newsoms, Virginia 23874
(757) 654-6210
Holland Office
6617 Holland Road
Suffolk, Virginia 23437
(757) 657-6455
===============================================================================
<PAGE>
SUMMARY OF SELECTED CONSOLIDATED FINANCIAL DATA
===============================================================================
United Community Bankshares, Inc. and Subsidiaries
(Dollars in thousands, except per share data)
<TABLE>
<CAPTION>
1997 1996 Change
----------- --------- -----------
<S> <C> <C> <C>
Financial Condition
Total assets $ 155,888 $ 149,878 4.0%
Loans, net 81,383 76,954 5.8%
Allowance for loan
losses 1,106 $ 1,209 (8.5)%
Federal funds sold 10,814 3,890 178.0%
Investment securities 51,564 56,390 (8.6)%
Total deposits 133,439 129,826 2.8%
Stockholders' equity 21,032 18,979 10.8%
Results of Operations
Interest income $ 10,869 $ 10,418 4.3%
Interest expense 4,808 4,749 1.2%
Net interest income 6,061 5,669 6.9%
Provision for loan losses 129 101 27.7%
Income before income losses 2,924 2,519 16.1%
Net income 2,230 1,923 16.0%
Per Share Data
Basic net income $ 1.22 $ 1.05 16.2%
Diluted net income 1.22 1.05 16.2%
Cash dividends declared 0.31 0.31 0.0%
Book value at year-end 11.50 10.38 10.8%
Ratios
Return on average assets (ROA) 1.49% 1.33%
Return on average equity (ROE) 11.31% 10.68%
Ratio of average equity to average
assets 13.15% 12.43%
Total loans to deposits 61.82% 60.22%
Dividend payout ratio 25.42% 29.76%
Other Data
Basic weighted average shares
outstanding 1,829,209 1,829,209
Diluted weighted average shares
outstanding 1,833,616 1,829,209
</TABLE>
===============================================================================
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
================================================================================
==========================================================================
33
<PAGE>
SIGNATURES
In accordance with Section 13 or 15(d) of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
UNITED COMMUNITY BANKSHARES, INC.
By: /s/
----------------------------------
Wenifred O. Pearce
President, Chief Executive Officer and 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.
<TABLE>
<CAPTION>
<S> <C> <C>
/s/ /s/
___________________________ Date: April 15, 1998 ------------------------ Date: April 15, 1998
Wenifred O. Pearce J.P.Bain
President, Chief Executive Officer Director
and Director (Principal Executive Officer)
/s/ /s/
___________________________ Date: April 15, 1998 ------------------------ Date: April 15, 1998
Wayne C. Carruthers J.Philip Bain, Jr.
Chief Financial Officer Director
(Principal Financial Officer)
/s/ /s/
___________________________ Date: April 15, 1998 -------------------------- Date: April 15, 1998
D. Eugene Brittle Hunter Darden, Jr.
Executive Vice President, Chief Director
Operating Officer and Director
/s/ /s/
___________________________ Date: April 15, 1998 -------------------------- Date: April 15, 1998
J. Russell West G.O Huber
Chairman of the Board Director
/s/ /s/
___________________________ Date: April 15, 1998 ------------------------- Date: April 15, 1998
Harvey Pope J.D Spivey
Vice Chairman of the Board Director
/s/
___________________________ Date: April 15, 1998
F. Bruce Stewart
Secretary and Director
</TABLE>
