FIRST
CHARTER
CORPORATION
1995
ANNUAL REPORT
(Logos of First Charter National Bank and Bank of Union appear here)
Your Best Lifetime Financial Partners
CORPORATE INFORMATION
CORPORATE HEADQUARTERS
First Charter Corporation
22 Union Street, North
P. O. Box 228
Concord, N. C. 28026-0228
(704) 786-3300
NC Toll Free 1-800-422-4650
AUDITORS
KPMG Peat Marwick LLP
Suite 2800
Two First Union Center
Charlotte, N. C. 28282
CORPORATE COUNSEL
Smith Helms Mulliss & Moore, L.L.P.
227 North Tryon Street
Charlotte, N. C. 28202
SUBSIDIARIES
First Charter National Bank
P. O. Box 228
Concord, N. C. 28026-0228
Bank of Union
201 North Charlotte Avenue
Monroe, N.C. 28112
STOCK LISTING
The NASDAQ National Market
Symbol: FCTR
MARKET MAKERS
Dean Witter Reynolds, Inc.
Interstate/Johnson Lane Corporation
J.C. Bradford Co.
Wheat First Securities, Inc..
Legg Mason Wood Walker, Inc.
TRANSFER AGENT
First Charter National Bank
SHAREHOLDERS' MEETING
Rolling Hills Country Club
Monroe, N.C.
May 7, 1996 at 3:00 p.m.
FORM 10-K
Copies of First Charter Corporation's Annual
Report to the Securities and Exchange Commis-
sion, Form 10-K, may be obtained without charge
by writing :
Robert O. Bratton
Chief Financial Officer
P. O. Box 228
Concord, N.C. 28026-0228
STOCK INFORMATION AND DIVIDENDS
First Charter Corporation's common stock, $5
par value (the "Common Stock"), is traded on the
National Association of Securities Dealers
Automated Quotation National Market System
("The NASDAQ National Market") under the
symbol "FCTR". The following table sets forth the
high and low sales price for the Common Stock for
the periods indicated, as reported on the
NASDAQ National Market, and adjusted to reflect
the stock split effected in the form of a
33 1/3% stock dividend paid in the fourth quarter
of 1994. The table also sets forth per share cash
dividend information for the periods indicated, as
adjusted to reflect the stock split effected in the
form of a 33 1/3% stock dividend paid in the
fourth quarter of 1994. See "Management's
Discussion and Analysis of Results of Operations
and Financial Condition" contained elsewhere in
this report for a description of limitations on the
ability of the Corporation to pay dividends.
As of February 29, 1996, there were 2,276
shareholders of record of the Corporation's
Common Stock.
QUARTERLY COMMON STOCK PRICE RANGES AND DIVIDENDS
1995 1994
QUARTER HIGH LOW DIVIDEND High Low Dividend
First Quarter $15.25 $14.50 $ .13 $12.94 $11.06 $.09
Second Quarter 19.25 14.50 .13 14.63 12.56 .09
Third Quarter 21.25 18.50 .13 15.00 13.88 .10
Fourth Quarter 22.50 20.50 .13 15.50 14.44 .13
First Charter Corporation and Subsidiaries
SELECTED CONSOLIDATED FINANCIAL DATA
The following table sets forth certain selected consolidated financial data
concerning First Charter Corporation for the five years ended December 31, 1995.
All financial data has been adjusted to reflect the acquisition of Bank of
Union in 1995 which was accounted for as a pooling of interests. Additionally,
all per share data has been retroactively adjusted to reflect a stock split
effected in the form of a 33 1/3% stock dividend declared in the fourth quarter
of 1994 and a 20% stock dividend declared in the fourth quarter of 1992. This
information should be read in conjunction with the Management's Discussion and
Analysis of Financial Condition and Results of Operations appearing elsewhere in
this report, and is qualified in its entirety by reference to the more detailed
consolidated financial statements of the Corporation and notes thereto.
Years ended December 31,
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) 1995 1994 1993 1992 1991
INCOME STATEMENT DATA:
Interest income.............................. $ 37,194 $ 29,983 $ 26,021 $25,791 $ 27,978
Interest expense............................. 15,210 10,548 9,358 10,799 14,519
Net interest income.......................... 21,984 19,435 16,663 14,992 13,459
Provision for loan losses.................... 1,465 839 835 942 1,679
Net interest income after provision for
loan losses................................. 20,519 18,596 15,828 14,050 11,780
Noninterest income........................... 5,392 4,758 5,007 4,495 3,889
Noninterest expense.......................... 15,688 14,131 13,823 13,218 12,177
Income before income taxes................... 10,223 9,223 7,012 5,327 3,492
Income taxes................................. 3,220 2,653 1,828 1,212 657
Net income before cumulative effect
of change in accounting principle........... 7,003 6,570 5,184 4,115 2,835
Cumulative effect of change in
accounting principle........................ - - 300 - -
Net income................................. $ 7,003 $ 6,570 $ 5,484 $ 4,115 $ 2,835
PER SHARE DATA:
Net income before cumulative effect of
accounting change (primary and
fully diluted).............................. $ 1.11 $ 1.05 $ 0.82 $ 0.65 $ 0.45
Net income (primary and fully diluted)....... 1.11 1.05 0.87 0.65 0.45
Cash dividends declared...................... 0.52 0.41 0.31 0.25 0.23
Period-end book value........................ 8.57 7.58 7.07 6.34 5.89
BALANCE SHEET DATA (AT PERIOD END):
Securities available for sale................ $132,358 $ 37,531 $ 34,613 $ - $ -
Investment securities........................ - 82,115 71,751 101,154 84,231
Loans, net................................... 327,887 283,531 245,294 227,695 213,078
Allowance for loan losses.................... 4,856 4,131 3,900 3,958 3,165
Total assets................................. 509,395 447,099 391,594 371,062 334,494
Deposits..................................... 415,056 372,821 336,270 314,605 288,051
Borrowed funds............................... 35,262 22,441 7,450 13,847 5,700
Total liabilities............................ 455,971 399,923 347,398 331,016 297,377
Total shareholders' equity................... 53,424 47,176 44,196 40,046 37,117
RATIOS:
Net income to average shareholders' equity... 13.93% 14.34% 13.10% 10.66% 7.83%
Net income to average total assets........... 1.50 1.59 1.48 1.19 0.87
Net interest income to average earning
assets (tax equivalent)..................... 5.35 5.40 5.20 5.01 4.84
Average loans to average deposits............ 78.23 75.11 73.92 75.13 76.34
Net loans charged off during period to
average loans............................... 0.25 0.23 0.39 0.07 0.66
1
LETTER TO SHAREHOLDERS
(Photo appears here with the following caption.)
LAWRECE M. KIMBROUGH (LEFT), PRESIDENT AND CHIEF EXECUTIVE OFFICER OF FIRST
CHARTER CORPORATION AND FIRST CHARTER NATIONAL BANK, AND H. CLARK GOODWIN,
PRESIDENT AND CHIEF EXECUTIVE OFFICER OF BANK OF UNION.
Dear Fellow Shareholders:
We consider 1995 to have been an extremely successful year for your
Corporation. It culminated with a singular event - our merger with Bank of
Union. This transaction created the largest community banking company serving
the Greater Charlotte Metropolitan Area with combined year-end assets of $509
million.
1995 was Year Three of our five-year strategic plan and this merger
represents a significant step toward the realization of the challenging goals
we've established for ourselves. In our resolve to be a high performance,
independent, community-oriented financial services company, it is essential that
we remain focused on our obsession or strategic intent to be regarded as THE
BEST LIFETIME FINANCIAL PARTNER in all of the markets we serve.
A critically important objective for First Charter is that everyone in our
organization become more externally focused with greater effort concentrated on
achieving one-stop shopping for all of our customers. Without question,
providing them with greater convenience and value is the key to our future.
The merger will benefit our customers. A greater range of products will be
available through both bank subsidiaries. Pricing on some of our services will
be even more competitive. And with the impact that a greater depth of
management resources can bring to product development, launch dates for new
services will be accelerated.
With a very pro-active stance on increasing customer satisfaction, First
Charter National Bank has restructured how it operates its financial services
centers, formerly called branches, and how it serves its customers. And Bank of
Union
(continued on page 4)
2
(Map appears here depicting the Full Service Offices of First Charter
National Bank and Bank of Union.)
First Charter also offers three drive-in locations and a network of Automatic
Teller Machines. HONOR(R), VISA(R) or PLUS(R) access is available. Bank of
Union provides VISA CheckCard, a debit card offering 24-hour account access
wherever a VISA, HONOR or CIRRUS(R) symbol is displayed.
(Logos of First Charter National Bank and Bank of Union appear here)
Your Best Lifetime Financial Partners
3
Earnings Per Share
(A graph appears here with the following plot points.)
91 92 93 94 95
0.45 0.65 0.87 1.05 1.11
will be doing the same. The staff at each center works as a team to market
cohesively services appropriate to that particular locality. Personnel are
designated FINANCIAL SERVICES PARTNERS to reflect more accurately their focus.
We're automating many processes, previously performed manually, that will
expedite servicing time.
This motivation to enhance customer value explains the fervor behind the
marketing of our Automated Teller Machines, Direct Deposit and First
Phone(TM)services, and our CheckCard/VISA(R) debit card. First Charter National
Bank ATM customers now receive same day credit for all deposits made up to 8:00
p.m. The merger with Bank of Union provides us with an excellent opportunity to
assess and implement the best operational practices and technologies.
This aggressive pursuit of best practices is closely tied to an examination
of potential marketing synergies and progress in this respect can already be
reported. First Charter National Bank has changed over its merchant and
consumer card
(Photo appears here with the following caption.)
The Board of Directors for Bank of Union includes (sitting l-to-r) Joseph L.
Little; Lane D. Vickery; Dennison A. Davis; John A. Crook, Jr.; James B.
Fincher; Fred C. Long, together with (l-to-r) Dr. William C. Deskins; Callie F.
King; J. Earl Culbreth; Dr. Jerry E. McGee; H. Clark Goodwin; Frank H.
Hawfield, Jr.; David C. McGuirt and Earl J. Haigler. Not pictured: Charles
(Pete) E. Husley.
4
(Photo appears here with the following caption.)
The senior management team includes (l-to-r in foreground) Edward (Ned) B.
McConnell and Patricia K. Horton, together with (l-to-r) James (Jim) T.
Matthews, Jr.; Donna J. Kenney; Robert G. Fox, Jr.; Phillip M. Floyd; Robert
(Bob) O. Bratton; David C. McGuirt and Kathryn B. Reese.
processing to an arrangement through Bank of Union. This will
result in greater efficiency of service and lower rates for First Charter
merchant customers. First Charter National Bank has also adopted the Bank of
Union approach to mortgage origination and the sale of mortgages in the
secondary market.
Several First Charter retail and commercial services will soon be available
through Bank of Union. An example would be First Charter's check imaging
service that provides customers with convenient digital reproductions of
canceled checks. Another would be our PC-based Charter Linksm cash management
system that electronically transmits important customer information to and from
the bank within a secure and accessible environment.
It is of paramount interest to us that our merger with Bank of Union
directly benefit you as a shareholder. From greater opportunities to increase
revenue, improve internal operating
Common Stock
Price Performance
12/31 Closing Price
(A graph appears here with the following plot points.)
91 92 93 94 95
5.25 7.50 11.25 14.63 22.25
5
Cash Dividends
(Dividends per common share)
(A graph appears here with the following plot points.)
1991 1992 1993 1994 1995
$.23 $.25 %.31 $.41 $.52
efficiencies and add management strength, we hope to capitalize on our
strengths by continuing to seek strategic alliances with other community
banking organizations in our market region. We believe that our efforts will
be enhanced by a multi-bank approach which offers continuity of established
identity, philosophy, management and customer service.
A very significant contributor to First Charter's success has been our
Trust and Investment Services Division and 1995 was no exception. The year was
the most profitable in the history of the division and substantial opportunities
for growth lie ahead. For one, Bank of Union has not offered trust services so
its markets offer excellent expansion prospects.
Our Trust and Investment Services Division has begun to see progress with
its fee-generating services that emphasize financial counselling and such
services are a perfect complement to our very successful FirstPARTNERSsm asset
allocation program. The division concluded 1995 with the finalization of a
comprehensive strategic plan for the coming year and beyond. Included is the
introduction during the first half of 1996 of full service brokerage services
and the sale of both annuities and mutual funds.
6
Asset Growth
Dollars in millions
(A graph appears here with the following plot points.)
91 92 93 94 95
334.5 371.1 391.6 447.1 509.4
Deposit Growth
Dollars in millions
(A graph appears here with the following plot points.)
91 92 93 94 95
288.1 314.6 336.3 372.8 415.1
Loan Growth
Dollars in millions
(A graph appears here with the following plot points.)
91 92 93 94 95
213.1 227.7 245.3 283.6 327.9
(Photo appears here with the following caption.)
D.C. Linn, Jr. will be warmly remembered for his countless contributions to
First Charter.
Our upcoming Annual Meeting of Shareholders will mark the capstone for 40
years of distinguished service by D. C. Linn, Jr., retiring Vice Chairman of
both our First Charter Corporation Board of Directors and the Board for First
Charter National Bank. D. C., a prominent Landis businessman, served for many
years on the Board for Merchants & Farmers Bank which merged into First Charter
in 1987. Through his unerring counsel, D. C. has contributed greatly to your
Corporation. I am certain that everyone in the First Charter family joins me in
wishing him well during the coming years.
Finally, we expect 1996 to be an exciting year for First Charter. We're
striving to reach the objectives we've established for ourselves and to realize
the benefits of sound strategy and effective execution. With our unswerving
commitment to being our markets' BEST LIFETIME FINANCIAL PARTNER, we have
achieved goals at an accelerating pace. How we move ahead from here will be
determined by how successful we are in attaining excellence in everything we do.
7
Our guiding principle is that continuous improvement is essential.
Everyone at First Charter serves the customer and teamwork is the way to get
things done. The sum of our efforts is greater than any individual effort. If
we keep these precepts foremost in all of our activities, I anticipate a
rewarding future for our customers, our employees and for you, our valued
shareholders.
Sincerely,
(Signature of Lawrence M. Kimbrough)
Lawrence M. Kimbrough
President and Chief Executive Officer
(First Charter logo appears here)
The largest community banking company serving the Greater Charlotte Metropolitan
Area
8
INDEPENDENT AUDITORS' REPORT
The Board of Directors
First Charter Corporation
We have audited the accompanying consolidated balance sheets of First
Charter Corporation and subsidiaries as of December 31, 1995 and 1994, and the
related consolidated statements of income, shareholders' equity, and cash flows
for each of the years in the three-year period ended December 31, 1995. These
consolidated financial statements are the responsibility of the Corporation's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of First
Charter Corporation and subsidiaries at December 31, 1995 and 1994, and the
results of their operations and cash flows for each of the years in the three-
year period ended December 31, 1995, in conformity with generally accepted
accounting principles.
As discussed in notes 1(a) and 1(e) to the consolidated financial
statements, First Charter adopted the provisions of Statement of Financial
Accounting Standards No. 115, "Accounting for Certain Investments in Debt and
Equity Securities," on December 31, 1993 and Statement of Financial Accounting
Standards No. 109, "Accounting for Income Taxes," on January 1, 1993.
KPMG Peat Marwick LLP
Charlotte, North Carolina
January 19, 1996
9
FIRST CHARTER CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
December 31,
1995 1994
ASSETS
Cash and due from banks..................................... $ 30,642,072 $ 25,875,086
Federal funds sold.......................................... - 625,000
Interest bearing time deposits.............................. 3,000,000 1,000,000
Securities available for sale: (note 4)
U. S. Government obligations.............................. 23,363,185 18,042,074
U. S. Government agency obligations....................... 26,523,683 10,894,904
Mortgage-backed securities................................ 18,289,995 5,329,353
State and municipal obligations, nontaxable............... 59,052,874 -
Other..................................................... 5,128,031 3,264,282
Total securities available for sale................... 132,357,768 37,530,613
Investment securities: (note 5)
(market value of $79,281,767 in 1994)
U. S. Government obligations.............................. - 5,968,198
U. S. Governent agency obligations........................ - 15,582,341
Mortgage-backed securities................................ - 16,591,307
State and municipal obligations, nontaxable............... - 43,973,064
Total Investment securities........................... - 82,114,910
Loans (notes 6, 7, and 14).................................. 333,038,730 287,862,709
Less: Unearned income..................................... (295,701) (201,331)
Allowance for loan losses............................. (4,855,540) (4,130,778)
Loans, net................................................ 327,887,489 283,530,600
Premises and equipment, net (note 8)........................ 9,833,489 8,843,591
Other assets (note 6)....................................... 5,674,487 7,579,688
Total assets.......................................... $509,395,305 $447,099,488
LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits, domestic:
Demand.................................................... $ 72,285,910 $ 63,700,329
NOW accounts.............................................. 66,813,791 62,533,748
Time...................................................... 275,956,530 246,586,303
Total deposits........................................ 415,056,231 372,820,380
Other borrowings (note 9)................................... 35,262,202 22,441,328
Other liabilities........................................... 5,652,799 4,661,752
Total liabilities..................................... 455,971,232 399,923,460
SHAREHOLDERS' EQUITY (NOTE 13):
Common stock - $5 par value; authorized,
10,000,000 shares; issued and outstanding,
6,236,014 shares in 1995 and 6,227,713
shares in 1994............................................ 31,180,070 31,138,565
Unrealized gains (losses) on securities available for
sale...................................................... 1,666,036 (216,586)
Retained earnings........................................... 20,577,967 16,254,049
Total shareholders' equity............................ 53,424,073 47,176,028
Commitments (note 14)
Total liabilities and shareholders' equity............ $509,395,305 $447,099,488
See accompanying notes to consolidated financial statements.
10
FIRST CHARTER CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
Years Ended December 31,
1995 1994 1993
Interest income:
Interest and fees on loans................................ $ 29,355,702 $ 22,940,715 $ 19,294,607
Federal funds sold........................................ 325,839 219,253 126,962
Securities available for sale............................. 2,752,841 2,389,480 --
Other..................................................... 587,833 131,587 49,073
Investment securities:
Taxable................................................. 1,962,846 1,762,106 4,254,715
Non-taxable............................................. 2,209,227 2,539,854 2,295,183
Total interest income.................................. 37,194,288 29,982,995 26,020,540
Interest expense:
Deposits:
Demand................................................. 1,285,471 1,213,129 1,190,799
Money Market........................................... 1,208,095 1,128,565 1,295,788
Savings and Time....................................... 11,591,566 7,540,654 6,636,549
Other borrowings.......................................... 1,124,782 665,708 234,399
Total interest expense................................. 15,209,914 10,548,056 9,357,535
Net interest income....................................... 21,984,374 19,434,939 16,663,005
Provision for loan losses (note 7)........................... 1,465,000 839,000 835,000
Net interest income after provision for loan losses....... 20,519,374 18,595,939 15,828,005
Noninterest income:
Trust income.............................................. 1,555,911 1,382,159 1,262,459
Service charges on deposit accounts....................... 2,418,746 2,370,889 2,302,302
Insurance and other commissions........................... 209,721 220,167 194,102
Securities available for sale transactions, net........... 4,298 3,690 --
Investment securities transactions, net................... (7,394) 38,761 310,188
Other..................................................... 1,210,468 742,784 937,738
Total noninterest income............................... 5,391,750 4,758,450 5,006,789
Noninterest expense:
Salaries and fringe benefits (note 12).................... 7,982,760 7,432,971 7,268,978
Occupancy and equipment................................... 2,012,837 1,884,713 1,932,724
Other (note 10)........................................... 5,692,965 4,813,631 4,620,887
Total noninterest expense.............................. 15,688,562 14,131,315 13,822,589
Income before income taxes............................. 10,222,562 9,223,074 7,012,205
Income taxes (note 11)....................................... 3,219,500 2,653,400 1,827,997
Net income before cumulative effect of a change
in accounting principle.............................. 7,003,062 6,569,674 5,184,208
Cumulative effect on prior years (to December 31, 1992)
of changing the method of accounting for income taxes..... -- -- 300,000
Net income............................................. $ 7,003,062 $ 6,569,674 $ 5,484,208
Primary income per share data:
Net income before cumulative effect.................... $ 1.11 $ 1.05 $ 0.82
Net income from cumulative effect...................... -- -- 0.05
Net income............................................. $ 1.11 $ 1.05 $ 0.87
Average common and common equivalent shares............ 6,283,925 6,280,718 6,311,502
Income per share data assuming full dilution:
Net income before cumulative effect.................... $ 1.11 $ 1.05 $ 0.82
Net income from cumulative effect...................... -- -- 0.05
Net income............................................. $ 1.11 $ 1.05 $ 0.87
Average common and common equivalent shares............ 6,295,972 6,281,018 6,316,649
See accompanying notes to consolidated financial statements.
11
First Charter Corporation and Subsidiaries
Consolidated Statements of Shareholders' Equity
UNREALIZED
GAINS (LOSSES)
ADDITIONAL ON SECURITIES
COMMON PAID-IN RETAINED AVAILABLE
STOCK CAPITAL EARNINGS FOR SALE TOTAL
Balance, December 31, 1992....................... $25,025,795 $ 5,328,485 $ 9,692,113 $ -- $40,046,393
Net income for 1993.............................. -- -- 5,484,208 -- 5,484,208
Cash dividends of $.31 per share................. -- -- (1,437,955) -- (1,437,955)
Purchase and retirement of common stock (65,603
shares)........................................ (328,015) (370,980) -- -- (698,995)
Stock options exercised and Dividend Reinvestment
Plan stock issued (8,138) shares............... 40,692 42,188 -- -- 82,880
Pre-merger transactions of pooled bank........... 383,893 144,858 (520,086) -- 8,665
Unrealized gain on securities available for
sale........................................... -- -- -- 710,346 710,346
Balance, December 31, 1993....................... 25,122,365 5,144,551 13,218,280 710,346 44,195,542
Net income for 1994............................ -- -- 6,569,674 -- 6,569,674
Cash dividends of $.41 per share................. -- -- (1,892,627) -- (1,892,627)
Purchase and retirement of common stock (80,857
shares)........................................ (404,283) (741,380) (68,773) -- (1,214,436)
Stock options exercised and Dividend Reinvestment
Plan stock issued (46,000 shares).............. 229,999 212,184 -- -- 442,183
Stock split effected in the form of a 33 1/3%
stock dividend................................. 5,798,151 (4,953,762) (844,389) -- --
Pre-merger transactions of pooled bank............ 392,333 338,407 (728,116) -- 2,624
Unrealized loss on securities available for
sale........................................... -- -- -- (926,932) (926,932)
Balance December 31, 1994........................ 31,138,565 -- 16,254,049 (216,586) 47,176,028
Net income for 1995.............................. -- -- 7,003,062 -- 7,003,062
Cash dividends of $.52 per share................. -- -- (2,618,026) -- (2,618,026)
Purchase and retirement of common stock (40,781
shares)........................................ (203,904) (363,438) (61,118) -- (628,460)
Stock options exercised and Dividend Reinvestment
Plan stock issued (43,614 shares).............. 218,070 359,234 -- -- 577,304
Pre-merger transactions of pooled bank........... 27,339 4,204 -- -- 31,543
Unrealized gain on securities available for
sale........................................... -- -- -- 1,882,622 1,882,622
Balance December 31, 1995........................ $31,180,070 $ -- $20,577,967 $ 1,666,036 $53,424,073
See accompanying notes to consolidated financial statements.
12
FIRST CHARTER CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended December 31,
1995 1994 1993
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income................................................ $ 7,003,062 $ 6,569,674 $ 5,484,208
Adjustments to reconcile net income to net
cash provided by operating activities:
Provision for loan losses............................... 1,465,000 839,000 835,000
Depreciation............................................ 921,278 803,926 871,957
Premium amortization and discount accretion,
net................................................... (224,590) (26,662) 327,812
Net gain on investment securities transactions.......... (4,298) (38,761) (310,188)
Net loss (gain) on securities available for sale
transactions.......................................... 7,394 (3,690) -
Net loss (gain) on sale of premises and
equipment............................................. 116,692 (7,858) -
Origination of mortgage loans held for sale............. (22,959,719) (12,123,159) (19,813,597)
Proceeds from sale of mortgage loans available for
sale.................................................. 22,804,790 13,238,920 18,335,046
Decrease (increase) in other assets..................... 733,623 (445,620) (312,151)
Increase in other liabilities........................... 955,625 962,187 1,113,448
Net cash provided by operating activities.............. 10,818,857 9,767,957 6,531,535
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from maturities of interest bearing time
deposits................................................ 3,500,000 2,000,000 1,500,000
Proceeds from sales of investment securities.............. 1,725,292 3,010,938 12,683,131
Proceeds from sales of securities available for
sale.................................................... 14,930,426 5,598,210 -
Proceeds from maturities and issuer calls of
investment securities, net............................. 34,397,767 35,453,460 20,048,664
Proceeds from maturities of securities available for
sale.................................................... 16,695,590 5,457,603 -
Purchase of interest bearing time deposits................ (5,500,000) (1,000,000) (3,500,000)
Purchase of investment securities......................... (35,594,564) (48,525,128) (36,795,518)
Purchase of securities available for sale................. (41,627,902) (15,388,313) -
Net increase in loans..................................... (45,678,491) (40,220,927) (17,101,009)
Proceeds from sales of premises and equipment............. 30,424 16,463 -
Purchase of premises and equipment........................ (2,009,921) (1,383,191) (873,058)
Net cash used by investing activities.................. (59,131,379) (54,980,885) (24,037,790)
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase in demand, NOW,
money market, and savings accounts..................... 23,966,500 32,605,664 30,910,498
Net increase (decrease) in certificates of deposit........ 18,269,351 3,945,204 (9,245,912)
Net increase (decrease) in other borrowings............... 12,820,874 14,990,998 (6,396,349)
Net increase in advances for taxes and insurance.......... 35,422 22,121 -
Purchase of common stock.................................. (626,416) (1,214,436) (698,995)
Proceeds from issuance of common stock.................... 575,260 442,183 82,880
Pre-merger transactions of pooled bank.................... 31,543 2,624 8,665
Dividends paid............................................ (2,618,026) (1,892,627) (1,437,955)
Net cash provided by financing activities.............. 52,454,508 48,901,731 13,222,832
Net increase (decrease) in cash and cash
equivalents.......................................... 4,141,986 3,688,803 (4,283,423)
Cash and cash equivalents at beginning of
period............................................... 26,500,086 22,811,283 27,094,706
Cash and cash equivalents at end of period............. $ 30,642,072 $ 26,500,086 $ 22,811,283
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the year for:
Interest............................................... $ 15,012,643 $ 10,444,613 $ 9,484,129
Income taxes........................................... $ 3,827,600 $ 2,480,299 $ 2,164,443
SUPPLEMENTAL DISCLOSURE OF NON-CASH TRANSACTIONS:
Transfers of loans, premises and equipment
to other real estate owned............................. $ 11,531 $ 77,902 $ 414,472
Investment securities transferred to available for
sale.................................................... $ 82,034,110 $ - $ 33,597,668
Unrealized gain (loss) in value of securities
available for sale
(net of tax effect of $1,134,740, ($561,865),
and $454,156
for 1995, 1994, and 1993, respectively)................ $ 1,882,622 $ (926,932) $ 710,346
Issuance of stock dividends............................... $ - $ 5,798,151 $ -
See accompanying notes to consolidated financial statements.
13
FIRST CHARTER CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1995, 1994, AND 1993
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The following is a description of the more significant accounting and
reporting policies which First Charter Corporation (the "Corporation") and its
subsidiaries, First Charter National Bank ("First Charter") and Bank of Union
("Union") (collectively referred to as the "Banks") follow in preparing and
presenting their consolidated financial statements. In consolidation, all
significant intercompany accounts and transactions have been eliminated. All
financial data has been adjusted reflecting a merger with Bank of Union
accounted for as a pooling of interests (Note 2).
(A) SECURITIES - In May 1993, the Financial Accounting Standards Board
(FASB) issued Statement of Financial Accounting Standards (Standard) No. 115,
"Accounting for Certain Investments in Debt and Equity Securities." Standard No.
115 addresses the accounting and reporting for investments in equity securities
that have readily determinable fair values and all investments in debt
securities. At the time of purchase the classification of the securities is
determined. Securities are classified into three categories as follows:
- investment securities - reported at amortized cost,
- trading securities - reported at fair value with unrealized gains and
losses included in earnings, or
- securities available for sale - reported at fair value with unrealized
gains and losses reported as a separate component of shareholders' equity (net
of tax effect).
In November 1995, the FASB issued an implementation guide for Standard No.
115. The FASB stated that the transition provisions included in this guide
permit a one-time opportunity for companies to reconsider their ability and
intent to hold securities accounted for under Standard No. 115 as investment
securities and allow entities to transfer securities from the held to maturity
category without tainting their remaining held to maturity securities. The FASB
emphasized that this would be a one-time event and that any transfers from the
held to maturity category to the available for sale category under this
provision must be made by December 31, 1995. Pursuant to this authorization, the
Corporation reclassified all held to maturity securities into available for sale
securities.
Gains and losses on sales of securities are recognized when realized on a
specific identification basis. Premiums and discounts are amortized into
interest income using a level yield method.
(B) LOANS - Loans are carried at their principal amount outstanding.
Interest income is recorded as earned on an accrual basis. The determination to
discontinue the accrual of interest is based on a review of each loan.
Generally, interest is discontinued on loans 90 days past due as to principal or
interest unless in management's opinion collection of both principal and
interest is assured by way of collateralization, guarantees or other security
and the loan is in the process of collection.
The FASB has issued Standard No. 114, "Accounting by Creditors for
Impairment of a Loan," which requires that all creditors value all specifically
reviewed loans for which it is probable that the creditor will be unable to
collect all amounts due according to the terms of the loan agreement at the
present value of expected cash flows, market price of the loan, if available, or
value of the underlying collateral. Expected cash flows are required to be
discounted at the loan's effective interest rate.
The FASB also has issued Standard No. 118, "Accounting by Creditors for
Impairment of a Loan - Income Recognition and Disclosures," that amends Standard
No. 114 to allow a creditor to use existing methods for recognizing interest
income on an impaired loan and by requiring additional disclosures about how a
creditor recognizes interest income related to impaired loans.
The Standards do not apply to large groups of smaller-balance homogenous
loans that are collectively evaluated for impairment. For the Corporation, these
loans include residential mortgage and consumer installment loans.
14
On January 1, 1995, the provisions of Standards No. 114 and 118 were
adopted by the Corporation. The adoption of the Standards required no increase
to the allowance for loan losses and has had no impact on net income.
Management considers loans to be impaired when, based on current
information and events, it is probable the Corporation will be unable to collect
all amounts due according to the contractual terms of the loan agreement.
Factors that influence management's judgments include, but are not limited to,
loan payment patterns, source of repayment, and value of collateral. A loan
would not be considered impaired if an insignificant delay in loan payment
occurs and management expects to collect all amounts due. The major sources for
identification of loans to be evaluated for impairment include past due and
nonaccrual reports, internally generated lists of loans of certain risk grades,
and regulatory reports of examination. Impaired loans are measured using either
the discounted expected cash flow method or the value of collateral method.
Generally, cash receipts are applied under the contractual terms of the
loan agreement first to principal and then to interest income. When the ultimate
collectibility of an impaired loan's principal is in doubt, wholly or partially,
all cash receipts are applied to principal. Once the recorded principal balance
has been reduced to zero, future cash receipts are applied to interest income,
to the extent that any interest has been foregone. Further cash receipts are
recorded as recoveries of any amounts previously charged off.
A loan is also considered impaired if its terms are modified in a troubled
debt restructuring after January 1, 1995. For these accruing impaired loans,
cash receipts are typically applied to principal and interest receivable in
accordance with the terms of the restructured loan agreement. Interest income is
recognized on these loans using the accrual method of accounting. Disclosures
are set forth in Note 5.
The Corporation uses the allowance method to provide for loan losses.
Accordingly, all loan losses are charged to the allowance for loan losses and
all recoveries are credited to it. The provision for loan losses is based on
past loan loss experience and other factors which, in management's judgment,
deserve current recognition in estimating possible loan losses. Such other
factors considered by management include the growth and composition of the loan
portfolio, the relationship of the allowance for loan losses to outstanding
loans, and economic conditions. While management uses the best information
available to make evaluations, future adjustments may be necessary if economic
and other conditions differ substantially from the assumptions used.
In addition, various regulatory agencies, as an integral part of their
examination process, periodically review the Banks' allowances for loan losses
and losses on real estate owned. Such agencies may require the Banks to
recognize additions to the allowances based on their judgments about information
available to them at the time of their examination.
Mortgage loans held for sale are valued at the lower of cost or market as
determined by outstanding commitments from investors or current investor yield
requirements, calculated on the aggregate loan basis.
(C) DEPRECIATION - Depreciation and amortization of premises and equipment
are computed using the straight-line method over the estimated useful lives. The
useful lives range from three to seven years for furniture and equipment, from
fifteen to forty years for buildings and over the terms of the respective
leases.
(D) FORECLOSED PROPERTIES - Foreclosed properties are included in other
assets and represent real estate acquired through foreclosure or deed in lieu
thereof and are carried at the lower of cost (principal balance of the former
loan plus costs of obtaining title and possession) or fair value, less estimated
costs to sell. Generally such properties are appraised annually and the carrying
value, if greater than the appraised value, is adjusted with a charge to income.
(E) INCOME TAXES - In February 1992, the FASB issued Standard No. 109,
"Accounting for Income Taxes" which supersedes Standard No. 96. Under the asset
and liability method of Standard No. 109, deferred tax assets and liabilities
are recognized for the future tax consequences attributable to differences
between the financial statement carrying amounts of existing assets and
liabilities and their respective tax bases. Deferred tax assets and liabilities
are measured using the enacted tax rates expected to apply to taxable income in
the years in which those temporary differences are expected to be recovered or
settled. Under Standard No. 109, the effect on deferred tax assets and
liabilities of a change in tax rates is recognized in income in the period that
includes the enactment date.
15
Effective January 1, 1993, the Company adopted Standard No. 109 and has
reported the cumulative effect of that change in the method of accounting for
income taxes since the 1993 consolidated statement of income.
(F) INCOME PER SHARE - Primary income per share and income per share
assuming full dilution are computed based on the weighted average number of
shares outstanding, including common equivalent shares applicable to employees'
stock options. Income per share for periods prior to 1994 has been restated for
the effects of a stock split effected in the form of a 33 1/3% stock dividend
declared and distributed in the fourth quarter of 1994.
(G) LOAN FEES AND COSTS - Nonrefundable loan fees and certain direct costs
associated with originating or acquiring loans are deferred and recognized over
the life of the related loans as an adjustment to interest income.
(H) CASH FLOWS - For purposes of reporting cash flows, cash and cash
equivalents include cash on hand, amounts due from banks and federal funds sold.
Generally, federal funds are sold for one-day periods.
(I) FAIR VALUE OF FINANCIAL INSTRUMENTS - Statement of Financial Accounting
Standards No. 107, "Disclosures About Fair Value of Financial Instruments" was
issued by the FASB in December 1991. Standard No. 107 requires disclosures
about fair value of all financial instruments. Fair value estimates, methods,
and assumptions are set forth in note 15.
(2) MERGER
On September 13, 1995, the Corporation entered into an Agreement and Plan of
Merger (the "Merger Agreement") with Union, pursuant to which a newly formed
subsidiary of the Corporation merged with Union and Union became a wholly owned
subsidiary of the Corporation (the "Merger"). On December 21, 1995, the merger
was completed and accounted for as a pooling of interests. Accordingly, all
current and prior years' financial statements have been restated to combine the
accounts of Union with those of the Corporation.
As of December 21, 1995, there were 2,192,270 shares of Union common stock
outstanding. Of that amount, the Corporation owned 69,361 shares directly for
its own account. Each share of Union common stock, other than those shares
owned by the Corporation, was converted into 0.75 shares of the Corporation
common stock.
Union is a state-chartered commercial bank organized under the laws of
North Carolina in 1985. Union provides general banking services through a
network of five branch offices located in Union and Mecklenburg Counties, North
Carolina. Through its subsidiary, BOU Financial, Inc. ("BOU Financial"), Union
also offers discount brokerage services, insurance and annuity sales and
financial planning services. At December 31, 1994, Union had total assets of
approximately $123 million and total deposits of approximately $106 million. In
the fourth quarter of 1995, the Corporation recognized $1,062,150 of costs
associated with the merger. These costs include legal, accounting, investment
banking, regulatory filings, proxy printing and solicitation expenses.
Separate results of operations of the combined entities for the periods
ended September 30, 1995, December 31, 1994, and December 31, 1993 were as
follows (dollars in thousands, except per-share data):
Nine Months Ended Year Ended December 31,
September 30, 1995 1994 1993
Previously Reported Previously Reported Previously Reported
Corpor- Corpor- Corpor-
ation Union Restated ation Union Restated ation Union Restated
Net Interest Income......... $7,580 $4,290 $11,870 $ 14,498 $4,937 $ 19,435 $12,561 $4,102 $16,663
Net Income.................. 4,539 1,312 5,851 5,260 1,310 6,570 4,469 1,015 5,484
Net income per
equivalent common share... 0.97 0.60 0.93 1.12 0.60 1.05 0.95 0.47 0.87
(3) FINANCIAL STATEMENT PRESENTATIONS AND RELATED MATTERS
The preparation of the consolidated financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect reported amounts of assets and liabilities and
disclosure of contingent liabilities at the date of the financial statements, as
well as the amounts of income and expenses during the reporting period. Actual
results could differ from those estimates.
Reclassifications of certain amounts in the 1994 and 1993 consolidated
financial statements have been made to conform with the financial statement
presentation for 1995.
16
(4) SECURITIES AVAILABLE FOR SALE
Securities available for sale at December 31, 1995 and 1994 are summarized
as follows:
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED CARRYING
COST GAINS LOSSES VALUE
1995
U.S. Government obligations................ $ 22,692,044 $ 678,109 $ 6,968 $ 23,363,185
U.S. Governmentagency obligations.......... 26,389,985 155,533 21,835 26,523,683
Mortgage-backed securities................. 18,264,268 156,156 130,429 18,289,995
State, county, and municipal obligations... 57,955,994 1,665,984 569,104 59,052,874
Equity securities.......................... 4,362,413 765,618 - 5,128,031
Total.................................... $129,664,704 $3,421,400 $ 728,336 $ 132,357,768
1994
U.S. Government obligations................ $ 18,055,058 $ 39,073 $ 52,057 $ 18,042,074
U.S. Government agency obligations......... 11,107,591 - 212,687 10,894,904
Mortgage-backed securities................. 5,772,797 - 443,444 5,329,353
Equity securities.......................... 2,919,461 344,821 - 3,264,282
Total................................... $ 37,854,907 $ 383,894 $ 708,188 $ 37,530,613
Securities with an aggregate carrying value of $43,280,580 at December 31,
1995 were pledged to secure public depositsand securities sold under agreements
to repurchase. Proceeds from the sale of securities available for sale were
$14,930,426 in 1995, $5,598,210 in 1994, and none in 1993. Gross gains of
$64,030 and gross losses of $67,126 were realized in 1995. Gross gains of
$75,767 and gross losses of $72,077 were realized in 1994.
(5) INVESTMENT SECURITIES
Investment securities at December 31, 1994 are summarized as follows:
GROSS GROSS ESTIMATED
CARRYING UNREALIZED UNREALIZED MARKET
VALUE GAINS LOSSES VALUE
1994
U.S. Government obligations............... $ 5,968,198 $ - $ 234,187 $ 5,734,011
U.S. Government agency obligations....... 15,582,341 - 143,884 15,438,457
Mortgage-backed securities................ 16,591,307 84,265 931,408 15,744,164
State, county and municipal obligations... 43,973,064 761,457 2,369,386 42,365,135
Total.................................... $ 82,114,910 $ 845,722 $ 3,678,865 $ 79,281,767
During December 1995, the entire portfolio of investment securities, with an
amortized cost of $82,034,110 and unrealized gains of $1,510,027, was
transferred to securities available for sale.
Proceeds from the sale of investment securities were $1,725,292 in 1995,
$3,010,938 in 1994 and $12,683,131 in 1993. In 1995, mortgage-backed securities
were sold, all of which had paydowns of more than 85% of the original purchase
amount. During 1994, two U.S. Treasury notes were sold, both of which were sold
with less than 90 days to maturity. Gross gains of $18,418 and gross losses of
$14,120 were realized in 1995. Gross gains of $38,761 and no gross losses were
realized in 1994. Gross gains of $364,967 and gross losses of $54,779 were
realized in 1993.
17
(6) LOANS
Loans at December 31, 1995 and 1994 are as follows:
1995 1994
Commercial, financial and agricultural... $ 92,325,242 $ 87,033,990
Real estate - construction............... 33,750,218 29,645,451
Real estate - mortgage................... 171,280,299 138,997,395
Installment.............................. 35,682,971 32,185,873
Total................................. $ 333,038,730 $287,862,709
Nonaccrual loans included above.......... $ 2,287,210 $ 2,521,489
Restructured loans included above........ 300,000 325,000
Total................................. $ 2,587,210 $ 2,846,489
Included in real estate mortgages were 1-4 family residential loans of
approximately $96,716,000 and $75,906,000 at December 31, 1995 and 1994,
respectively.
Interest income that would have been recorded on nonaccrual loans and
restructured loans for the years ended December 31, 1995, 1994, and 1993, had
they performed in accordance with their original terms, amounted to
approximately $307,000, $298,000, and $268,000, respectively. Interest income
on all such loans included in the results of operations for 1995, 1994, and 1993
amounted to approximately $82,000, $143,000, and $127,000, respectively.
In accordance with FASB Standards No. 114 and No. 118, the recorded
investment in impaired loans was $2,803,430 (of which $2,127,037 was on
nonaccrual). The related allowance for loan losses on these loans was
$1,203,959. The recorded investment of all impaired loans had a related
allowance for loan loss. The average recorded investment in impaired loans for
1995 was $3,069,224, and the income recognized during 1995 was $101,746, of
which $62,294 was recognized using the cash method of income recognition.
Included in other assets at December 31, 1995 and 1994 are foreclosed
properties (other real estate owned) with a net book value of $61,250 and
$1,881,700, respectively.
The following is a reconciliation of loans outstanding to executive
officers, directors and their associates for the year ended December 31, 1995:
Balance at December 31, 1994... $ 5,341,658
New loans...................... 7,776,491
Principal repayments........... (4,859,189)
Balance at December 31, 1995... $ 8,258,960
In the opinion of management, these loans are made on substantially the same
terms, including interest rates and collateral, as those prevailing at the time
for comparable transactions with other borrowers. Such loans, in the opinion
of management, do not involve more than the normal risks of collectibility.
18
(7) ALLOWANCE FOR LOAN LOSSES
The following is a summary of the changes in the allowance for loan losses
for each of the years in the three-year period ended December 31, 1995:
1995 1994 1993
Beginning balance................. $ 4,130,778 $ 3,900,303 $ 3,957,888
Add:
Provision charged to operations... 1,465,000 839,000 835,000
5,595,778 4,739,303 4,792,888
Less:
Loan charge-offs.................. 941,306 891,314 1,018,028
Less loan recoveries.............. 201,068 282,789 125,443
Net loan charge-offs............ 740,238 608,525 892,585
Ending balance.................... $ 4,855,540 $ 4,130,778 $ 3,900,303
(8) PREMISES AND EQUIPMENT
Premises and equipment at December 31, 1995 and 1994 are summarized as
follows:
1995 1994
Land............................. $ 4,190,485 $ 4,202,135
Buildings........................ 6,193,045 5,595,649
Furniture and equipment.......... 7,247,744 6,946,114
Leasehold improvements........... 555,440 558,884
18,186,714 17,302,782
Less accumulated depreciation and
amortization.................... 8,353,225 8,459,191
Premises and equipment, net...... $ 9,833,489 $ 8,843,591
(9) OTHER BORROWINGS
The following is a schedule of securities sold under repurchase agreements,
federal funds purchased and Federal Home Loan Bank ("FHLB") borrowings:
INTEREST MAXIMUM
BALANCE RATE AVERAGE OUTSTANDING
1995 AS OF AS OF AVERAGE INTEREST AT ANY
DECEMBER 31 DECEMBER 31 BALANCE RATE MONTH-END
Federal funds purchased, securities
sold under agreements
to repurchase and
FHLB borrowings.................. $ 35,262,202 5.42% $ 21,529,872 5.22% $ 35,262,202
1994
Federal funds purchased, securities
sold under agreements
to repurchase and
FHLB borrowings.................. $ 22,441,328 5.20% $ 15,360,370 4.33% $ 22,441,328
19
At December 31, 1995, the Banks had three available lines of credit with the
FHLB totaling $66.5 million with $7,514,286 outstanding. The outstanding
amounts consist of $2,000,000 maturing in 1996, $3,000,000 maturing in 1997,
$1,714,286 maturing in 2001 and $800,000 maturing in 2003. In addition, the
Banks are required to pledge collateral to secure the advances as described in
the line of credit agreements. The collateral consists of qualifying 1-4 family
residential mortgage loans.
(10) OTHER NONINTEREST EXPENSE
Components of other noninterest expense in excess of one percent of the
aggregate amount of total interest income and total noninterest income are as
follows:
1995 1994 1993
Advertising................. $ 429,867 $ 486,496 $ 404,687
Professional services....... 861,081 866,775 1,008,412
FDIC insurance.............. 422,305 754,081 698,898
Stationery and supplies..... 560,329 470,974 395,510
Merger and reorganization... 1,062,150 - -
All other items............. 2,357,233 2,235,305 2,113,380
Total.................... $5,692,965 $4,813,631 $ 4,620,887
(11)INCOME TAX
As discussed in note 1, the Corporation adopted Standard No. 109 as of
January 1, 1993. The cumulative effect of this change in accounting for income
taxes of $300,000 is determined as of January 1, 1993 and is reported separately
in the consolidated statement of earnings for the year ended December 31, 1993.
Income tax expense (benefit) consists of the following:
Current Deferred Total
Year ended December 31, 1995
Federal..................... $ 3,199,164 $ (360,706) $ 2,838,458
State....................... 477,000 (95,958) 381,042
Total.................... $ 3,676,164 $ (456,664) $ 3,219,500
Year ended December 31, 1994
Federal..................... $ 2,177,005 $ 94,326 $ 2,271,331
State....................... 356,000 26,069 382,069
Total.................... $ 2,533,005 $ 120,395 $ 2,653,400
Year ended December 31, 1993
Federal..................... $ 1,693,471 $ (82,359) $ 1,611,112
State....................... 213,000 3,885 216,885
Total.................... $ 1,906,471 $ (78,474) $ 1,827,997
20
Income tax expense was $3,219,500, $2,653,400 and $1,827,997 for the years
ended December 31, 1995, 1994 and 1993, respectively, and differed from the
amounts computed by applying the U.S. federal income tax rate of 34% to pretax
income as a result of the following:
1995 1994 1993
% OF % of % of
PRETAX Pretax Pretax
AMOUNT INCOME Amount Income Amount Income
Income before income taxes....... $ 10,222,562 $ 9,223,074 $7,012,205
Tax at federal income tax rate... 3,475,671 34.0% 3,135,845 34.0% 2,384,149 34.0%
Reasons for differences:
Tax exempt income.............. (782,174) (7.7) (815,703) (8.8) (721,789) (10.3)
Nondeductible merger expense... 321,011 3.1 - - - -
State income tax, net of
federal benefit............... 251,488 2.5 252,166 2.7 143,144 2.0
Change in deferred tax assets
valuation allowance........... (32,659) (0.3) - - 4,069 0.0
Other.......................... (13,837) (0.1) 81,092 0.9 18,424 0.3
Total......................... $ 3,219,500 31.5% $ 2,653,400 28.8% $1,827,997 26.0%
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and deferred tax liabilities at December
31, 1995 and 1994 are presented below.
1995 1994
Deferred Tax Assets:
Provision for loan losses................................. $ 1,531,000 $ 1,222,403
Accrued expenses deductible when paid for tax
purposes................................................ 133,000 67,951
Unrealized loss on securities available for sale.......... - 242,189
Other..................................................... 21,000 19,208
Total gross deferred tax assets........................ 1,685,000 1,551,751
Less valuation allowance.................................... - (32,659)
Deferred tax asset net of valuation......................... 1,685,000 1,519,092
Deferred Tax Liabilities:
Installment sale income for financial purposes over
tax purposes............................................ - (6,816)
Unrealized gain on securities available for sale.......... (728,440) -
Deferred loan fees........................................ (175,000) (85,999)
Fixed assets primarily due to difference in
depreciation............................................ (38,000) (69,092)
Tax over book accrued expenses............................ - (113,025)
Other..................................................... (73,000) (59,635)
Total gross deferred tax liability..................... (1,014,440) (334,567)
Net deferred tax asset................................. $ 670,560 $ 1,184,525
A portion of the current year change in the net deferred tax asset relates
to unrealized gains and losses on securities available for sale. The related
current period deferred taxes of $970,629 has been recorded directly to
shareholders' equity. The balance of the change in the net deferred tax asset
results from the current period deferred tax benefit of $456,664.
The valuation allowance for deferred tax assets as of January 1, 1994 was
$32,659. There was no change in the total valuation allowance during 1994,
while there was a decrease of $32,659 in 1995. It is management's belief that
realization of the deferred tax asset is more likely than not.
Tax returns for 1992 and subsequent years are subject to examination by
taxing authorities.
21
(12) RETIREMENT PLAN CONTRIBUTION
The Corporation has a qualified Retirement Savings Plan (401(k) Plan)
for all eligible employees of First Charter. The provisions of the plan
provide that the Corporation will annually contribute up to six percent
of covered compensation and match a discretionary percentage, 132% in
1995, of contributions made by participating employees. Employees
may contribute up to ten percent of their covered compensation. The
Corporation's aggregate contribution was $349,756, $355,253 and
$348,811 for 1995, 1994 and 1993, respectively.
Union has a 401(k) savings plan for all eligible employees of Union.
The plan provides for participating employees to contribute up to
fifteen percent of their covered compensation. Union will annually
match 100% of contributions made by employees up to four percent of
covered compensation. Union's expense for its contributions in 1995,
1994, and 1993, amounted to approximately $120,068, $95,890, and
$66,100, respectively. Such amounts include discretionary
contributions to the plan of $58,665, $39,000 and $20,000 for 1995,
1994, and 1993, respectively.
(13) COMMON STOCK
On October 10, 1994, the Board of Directors of the Corporation
declared a stock split effected in the form of a 33 1/3% common stock
dividend payable on December 16, 1994 to shareholders of record on
November 18, 1994. All per share data in the consolidated financial
statements has been retroactively adjusted for the stock dividends.
Under the terms of the First Charter Corporation Comprehensive
Stock Option Plan (the "Comprehensive Plan"), stock options (which
can be incentive stock options or non-qualified stock options) may
be periodically granted to key employees of the Corporation or its
subsidiaries. Depending on the type of options granted, their terms
may be for up to ten years and shall generally be exercisable in five
equal annual, cumulative installments beginning not earlier than six
months from the date of grant. In no event shall the exercise price for
each option granted be less than the fair value of the common stock
as of the date of grant. A maximum of 240,000 shares (as adjusted to
reflect the stock dividends) are reserved for issuance under the
comprehensive plan.
In April 1995, the shareholders approved the First Charter
Corporation Restricted Stock Award Program. The definition of key
participants, the number of shares awarded to participants, the
vesting terms and conditions applicable to such awards are all subject
to the discretion of the Compensation Committee of the board of the
Corporation. A maximum of 300,000 shares of Corporation common stock
(as adjusted to reflect stock dividends) are reserved for issuance
under the Restricted Plan. As of December 31, there were no shares
granted under this plan.
Periodically, the Corporation adopts the Employee Stock Purchase
Plans (the "ESPP"), pursuant to which stock options are granted to
employees, based on their eligibility and compensation, at a price
not less than 90% of the fair market value of the shares at the date of
grant. The option period is generally for a term of two years. The
1996 ESPP was approved by shareholders of the Corporation in April
1995. A maximum of 100,000 shares are reserved for issuance under the
1996 ESPP. At December 31, 1995 none have been granted.
The Corporation maintains the Dividend Reinvestment and Stock
Purchase Plan (the "DRIP"), pursuant to which 200,000 shares (as
adjusted to reflect the stock dividends) of common stock of the
Corporation have been reserved for issuance. Shareholders may elect to
participate in the DRIP and have dividends on shares of common stock
reinvested and may make optional cash payments of up to $2,500 per
calendar quarter to be invested in common stock of the Corporation.
Pursuant to the terms of the DRIP, upon reinvestment of the dividends
and optional cash payments either the Corporation can issue new shares
valued at the then current market value of the common stock or the
administrator of the DRIP can purchase shares of common stock in the
open market. During 1995, the Corporation issued 26,115 shares and the
administrator of the DRIP purchased 10,000 shares on the open market.
22
The following is a summary of activity under the Comprehensive Plan and the
1993 ESPP and the 1991 ESPP. All options outstanding have been adjusted to
reflect the stock dividends.
Option Balance at Balance at
1995 Price January 1 Grants Exercises Forfeits December 31 Exercisable
INCENTIVE STOCK OPTION
Options..................... $ 4.37 14,200 - 4,880 160 9,160 6,360
............................ $ 6.41 28,480 - 6,880 1,280 20,320 15,039
............................ $ 10.50 36,773 - 4,940 1,307 30,526 17,459
............................ $ 14.72 28,933 - 533 1,200 27,200 10,880
............................ $ 14.75 - 2,200 - - 2,200 440
............................ $ 14.88 - 3,320 - - 3,320 664
............................ $ 21.50 - 23,300 - - 23,300 -
............................ $ 21.50 - 28,000 - - 28,000 -
Available................... - 113,814 (56,820) - 3,947 60,941 -
1993 EMPLOYEE STOCK
PURCHASE PLAN
Options...................... $ 10.13 25,740 - 266 4,001 21,473 21,473
1994
INCENTIVE STOCK OPTION
Options..................... $ 4.37 17,053 - 2,053 800 14,200 8,039
............................ $ 6.41 31,787 - 2,347 960 28,480 16,320
............................ $ 10.50 38,933 - - 2,160 36,773 15,573
............................ $ 14.72 - 28,933 - - 28,933 -
Available................... - 138,827 (28,933) - 3,920 113,814 -
1991 EMPLOYEE STOCK
PURCHASE PLAN
Options...................... $ 5.25 25,990 - 25,990 - - -
1993 EMPLOYEE STOCK
PURCHASE PLAN
Options...................... $ 10.13 - 25,740 - - 25,740 -
1993
INCENTIVE STOCK OPTION
Options..................... $ 4.37 21,176 - 2,443 1,680 17,053 6,013
............................ $ 6.41 34,400 - 1,333 1,280 31,787 12,107
............................ $ 10.50 - 38,933 - - 38,933 -
Available................... - 174,800 (38,933) - 2,960 138,827 -
1991 EMPLOYEE STOCK
PURCHASE PLAN
Options...................... $ 5.25 29,857 - - 3,867 25,990 25,990
At December 31, 1995, there were 470 options remaining under the
Union Stock Option plan with an average exercise price of $7.62.
23
(14) COMMITMENTS AND OFF BALANCE SHEET RISK
In the normal course of business, there are outstanding various commitments
to extend credit which are not reflected in the consolidated financial
statements. At December 31, 1995, preapproved but unused lines of credit for
loans totaled $81,154,391 and standby letters of credit aggregated $2,307,326.
These amounts represent the Banks' exposure to credit risk and, in the opinion
of management, have no more than the normal lending risk that the Banks commit
to their borrowers. If these commitments are drawn, the Banks will obtain
collateral if it is deemed necessary based on management's credit evaluation of
the borrower at that time. Collateral obtained varies but may include accounts
receivable, inventory and commercial or residential real estate. Management
expects that these commitments can be funded through normal operations.
The Banks grant primarily commercial and installment loans to customers
throughout their market areas, which consist of Cabarrus, Union, Rowan and
Mecklenburg Counties. The real estate loan portfolio can be affected by the
condition of the local real estate markets.
Average daily Federal Reserve balance requirements for the year ended
December 31, 1995 amounted to $1,601,000.
(15) FAIR VALUE OF FINANCIAL INSTRUMENTS
CASH AND DUE FROM BANKS, FEDERAL FUNDS SOLD, INTEREST BEARING DEPOSITS, AND
ACCRUED INTEREST RECEIVABLE AND PAYABLE
The carrying amounts of cash and due from banks, federal funds sold,
interest bearing deposits, and accrued interest receivable and payable
approximate fair value because of the short maturity of these instruments.
SECURITIES AVAILABLE FOR SALE AND INVESTMENT SECURITIES
The fair value of debt securities, except certain state and municipal
obligations, is estimated based on bid prices published in financial newspapers
or bid quotations received from securities dealers. The fair value of certain
state and municipal obligations is not readily available through market sources
other than dealer quotations, so fair value estimates are based on quoted market
prices of instruments similar to those being valued, adjusted for differences
between the quoted instruments and the instruments being valued.
The fair value of most equity securities is estimated at the average
between the bid and ask prices published in financial newspapers. The fair
value of the remaining equity securities is estimated at the carrying value due
to the absence of market sources and similar instruments.
SECURITIES AVAILABLE FOR SALE AT DECEMBER 31, 1995 At December 31, 1994
AMORTIZED FAIR Amortized Fair
(DOLLARS IN THOUSANDS) COST VALUE Cost Value
U.S. Government obligations
Due in one year or less.................. $ 4,897 $ 4,922 $ 7,027 $ 7,033
Due after one year through five years.... 17,795 18,441 11,028 11,009
U.S. Government agency obligations
Due in one year or less.................. 5,011 5,034 2,009 2,007
Due after one year through five years.... 21,379 21,490 9,099 8,888
Mortgage-backed securities................. 18,264 18,290 5,773 5,329
State, county and municipal obligations:
Due in one year or less.................. 976 985 - -
Due after one year through five years.... 8,915 9,344 - -
Due after five years through ten years... 34,912 35,495 - -
Due after ten years...................... 13,153 13,229 - -
Equity securities.......................... 4,363 5,128 2,812 3,265
Total securities available for sale........ $ 129,665 $ 132,358 $ 37,748 $ 37,531
24
INVESTMENT SECURITIES AT DECEMBER 31, 1995 At December 31, 1994
AMORTIZED FAIR Amortized Fair
(DOLLARS IN THOUSANDS) COST VALUE Cost Value
U. S. Government obligations:
Due in one year or less.................. $ - $ - $ 992 $ 984
After one but within five years.......... - - 4,976 4,750
U. S. Government agency obligations:
Due in one year or less.................. - - 11,466 11,433
Due after one year through five years.... - - 4,116 4,005
Mortgage-backed securities
Fixed rate............................... - - 16,591 15,744
State and municipal obligations:
Due in one year or less.................. - - 1,943 1,965
Due after one year through five years.... - - 6,803 7,005
Due after five years through ten years... - - 25,449 24,447
Due after ten years...................... - - 9,779 8,949
Total investment securities................ $ - $ - $ 82,115 $ 79,282
LOANS
For purposes of estimating fair value of loans, the portfolio is segregated
by type based on similar characteristics such as commercial, real estate
mortgage, real estate construction and installment. The portfolio is further
divided into fixed and adjustable rate interest terms and by performing and
nonperforming categories.
The fair value of performing loans is calculated by discounting estimated
cash flows using current rates at which similar loans would be made to borrowers
with similar credit risk. Cash flows for fixed rate loans are based on the
weighted average maturity of the specific loan category. The majority of
adjustable rate loans are prime based and are repriced either immediately or
monthly as prime changes.
The fair value of nonaccrual loans is based on the book value of each loan
less an applicable reserve for credit losses. The reserve for credit losses is
determined on a loan by loan basis based on either recent external appraisals or
internal assessments using available market information and specific borrower
information.
The following table presents fair value information for loans:
AT DECEMBER 31, 1995 At December 31, 1994
CARRYING ESTIMATED Carrying Estimated
(DOLLARS IN THOUSANDS) AMOUNT FAIR VALUE Amount Fair Value
Commercial, financial and agricultural... $ 91,389 $ 91,006 $ 85,674 $ 84,515
Real estate-construction................. 33,698 33,114 29,044 27,948
Real estate-mortgage..................... 169,725 168,204 138,135 134,899
Installment.............................. 35,640 34,393 32,162 31,281
Nonaccrual............................... 2,587 1,304 2,846 2,064
Total Loans.............................. 333,039 328,021 287,861 280,707
Less: Unearned income.................. (296) - (201) -
Allowance for loan losses........... (4,856) - (4,131) -
Loans, net.......................... 327,887 328,021 283,529 280,707
25
DEPOSIT LIABILITIES
The fair value of demand deposits, savings accounts and money market
deposits is the amount payable on demand as of year-end. The fair value of
certificates of deposit is based on the discounted value of contractual cash
flows. The discount rate is estimated using the rates currently offered for
deposits of similar remaining maturities.
The following table presents fair value information for deposits:
AT DECEMBER 31, 1995 At December 31, 1994
CARRYING ESTIMATED Carrying Estimated
(DOLLARS IN THOUSANDS) AMOUNT FAIR VALUE Amount Fair Value
Demand deposits - non-interest bearing... $ 72,286 $ 72,286 $ 63,700 $ 63,700
Demand deposits - interest bearing....... 66,814 66,814 62,533 62,533
Insured money market accounts............ 41,633 41,633 46,542 46,542
Savings deposits......................... 109,082 109,082 93,071 93,071
Certificates of deposit.................. 125,242 125,386 106,975 105,541
Total.................................... $ 415,057 $415,201 $ 372,821 $ 371,387
OTHER BORROWINGS
The fair value of Federal funds purchased, securities sold under agreements
to repurchase, and FHLB advances maturing within one year is the amount payable
as of year-end. The fair value of FHLB advances maturing after one year is
based on the discounted value of contractual cash flows. The discount rate is
estimated using the rates currently offered for borrowings of similar remaining
maturities.
The following table presents fair value information for other borrowings:
AT DECEMBER 31, 1995 At December 31, 1994
CARRYING ESTIMATED Carrying Estimated
(DOLLARS IN THOUSANDS) AMOUNT FAIR VALUE Amount Fair Value
Federal funds purchased and securities sold
under agreement to repurchase........... $ 27,748 $ 27,748 $ 13,541 $ 13,541
Federal Home Loan Bank advances............ 7,514 7,923 8,900 9,384
$ 35,262 $ 35,671 $ 22,441 $ 22,925
COMMITMENTS TO EXTEND CREDIT AND STANDBY LETTERS OF CREDIT
The large majority of commitments to extend credit and standby letters of
credit are at variable rates and/or have relatively short terms to maturity.
Therefore, the fair value for these financial instruments is considered to
approximate the carrying value.
26
LIMITATIONS
Fair value estimates are made at a specific point in time, based on
relevant market information and information about the financial instrument.
These estimates do not reflect any premium or discount that could result from
offering for sale at one time the Corporation's entire holdings of a particular
financial instrument. Because no market exists for a significant portion of the
Corporation's financial instruments, fair value estimates are based on judgments
regarding future expected loss experience, current economic conditions, risk
characteristics of various financial instruments, and other factors. These
estimates are subjective in nature and involve uncertainties and matters of
significant judgment and therefore cannot be determined with precision. Changes
in assumptions could significantly affect the estimates.
Fair value estimates are based on existing on-and-off balance sheet
financial instruments without attempting to estimate the value of anticipated
future business and the value of assets and liabilities that are not considered
financial instruments. For example, First Charter has a substantial trust
department that contributes net fee income annually. The trust department is not
considered a financial instrument, and its value has not been incorporated into
the fair value estimates. Other significant assets and liabilities that are not
considered financial assets or liabilities include the mortgage brokerage
operations and premises and equipment. In addition, tax ramifications related to
the realization of the unrealized gains and losses can have a significant effect
on fair value estimates and have not been considered in any of the estimates.
(16) FIRST CHARTER CORPORATION (PARENT COMPANY)
The principal assets of the Parent Company are its investment in the Banks,
and its principal source of income is dividends from the Banks. Certain
regulatory and other requirements restrict the lending of funds by the Banks to
the Parent Company and the amount of dividends which can be paid to the Parent
Company. In addition, certain regulatory agencies may prohibit the payment of
dividends by the Banks if it determines that such payment would constitute an
unsafe or unsound practice. At December 31, 1995, the Banks had available
undivided profits of approximately $15,737,000 for payment of dividends without
obtaining prior regulatory approval. At December 31, 1995, approximately
$29,940,000 of the Parent Company's investment in the Banks was restricted as to
transfer to the Parent Company without obtaining prior regulatory approval.
27
The Parent Company's balance sheet data as of December 31, 1995 and 1994 and
related income and cash flow statement data for each of the years in the three-
year period ended December 31, 1995 are as follows:
1995 1994 1993
BALANCE SHEET DATA:
Cash.................................................... $ 514,456 $ 494,685
Securities available for sale........................... 3,012,880 1,685,830
Investment in subsidiaries.............................. 50,149,461 44,525,627
Receivable from subsidiaries............................ 794,777 600,000
Fixed assets............................................ 582,850 587,035
Other assets............................................ 20,510 19,523
$ 55,074,934 $ 47,912,700
Accrued liabilities..................................... $ 1,650,861 $ 736,672
Shareholders' equity.................................... 53,424,073 47,176,028
$ 55,074,934 $ 47,912,700
INCOME STATEMENT DATA:
Dividends from subsidiaries............................. $ 3,750,000 $ 2,450,000 $ 1,438,000
Other operating income (expense)........................ (713,294) 103,292 3,765
Income before equity in undistributed net
income of subsidiaries................................. 3,036,706 2,553,292 1,441,765
Equity in undistributed net income of
subsidiaries.......................................... 3,966,356 4,016,382 4,042,443
Net income............................................. $ 7,003,062 $ 6,569,674 $ 5,484,208
CASH FLOW STATEMENT DATA:
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income.............................................. $ 7,003,062 $ 6,569,674 $ 5,484,208
Net gain on securities available for sale
transactions.......................................... - (74,142) -
Increase in accrued liabilities......................... 750,077 218,200 31,945
Increase in other assets................................ (987) - (19,079)
Increase in receivable from subsidiaries................ (194,777) (218,000) (30,000)
Increase in investment in subsidiaries.................. (3,997,899) (4,019,006) (4,051,108)
Net cash provided by operating activities.............. 3,559,476 2,476,726 1,415,966
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of available for sale securities............... (906,251) (478,635) -
Purchase of investment securities....................... - - (466,373)
Purchase of premises and equipment...................... (815) (587,035) -
Proceeds from sale of premises and equipment............ 5,000 - -
Proceeds from sale of securities available for
sale.................................................. - 163,741 -
Net cash used by investing activities.................. (902,066) (901,929) (466,373)
CASH FLOWS FROM FINANCING ACTIVITIES:
Purchase of common stock................................ (626,416) (1,214,436) (698,995)
Proceeds from issuance of common stock upon
exercise
of stock options....................................... 575,260 442,183 82,880
Pre-merger transactions of pooled bank.................. 31,543 2,624 8,665
Cash dividends paid..................................... (2,618,026) (1,892,627) (1,437,955)
Net cash used by financing activities................... (2,637,639) (2,662,256) (2,045,405)
Net increase (decrease) in cash........................ 19,771 (1,087,459) (1,095,812)
Cash at beginning of year.............................. 494,685 1,582,144 2,677,956
Cash at end of year.................................... $ 514,456 $ 494,685 $ 1,582,144
SUPPLEMENTAL DISCLOSURE OF NON-CASH TRANSACTIONS:
Investment securities transferred to available for
sale.................................................. $ - $ - $ 1,101,290
Unrealized gain in value of securities available
for sale
(net of tax effect of $164,110, $55,585 and $
78,895
for 1995, 1994 and 1993, respectively)................. $ 256,687 $ 86,942 $ 123,399
Unrealized gain (loss) in value of securities
available for sale of the
subsidiaries (net of tax effect of ($970,628),
($617,450),
and ($375,261) for 1995, 1994 and 1993,
respectively)........................................ $ 1,625,935 $ (1,013,874) $ 586,947
Issuance of stock dividend.............................. $ - $ 5,798,151 $ -
28
(17) SELECTED QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
1995
FIRST SECOND THIRD FOURTH
(DOLLARS IN THOUSANDS, EXCEPT INCOME PER SHARE) QUARTER QUARTER QUARTER QUARTER TOTAL
Total interest income........................... $ 8,652 $ 9,109 $ 9,593 $ 9,840 $37,194
Total interest expense.......................... 3,264 3,794 4,008 4,144 15,210
Net interest income............................. 5,388 5,315 5,585 5,696 21,984
Provision for loan losses....................... 265 215 410 575 1,465
Total noninterest income........................ 1,161 1,200 1,291 1,740 5,392
Total noninterest expense....................... 3,575 3,626 3,480 5,007 15,688
Net income before income taxes.................. 2,709 2,674 2,986 1,854 10,223
Income taxes.................................... 807 797 915 701 3,220
Net income...................................... $ 1,902 $ 1,877 $ 2,071 $ 1,153 $ 7,003
Per share data:
Primary income per share........................ $ 0.30 $ 0.30 $ 0.33 $ 0.18 $ 1.11
Income per share assuming full dilution......... $ 0.30 $ 0.30 $ 0.33 $ 0.18 $ 1.11
The Corporation, as previously reported, except for the fourth quarter and
year end 1995 which included the effects of the Merger:
Net income...................................... $ 1,543 $ 1,460 $ 1,536 $ 1,153 $ 7,003
Primary and fully diluted income per share...... $ 0.33 $ 0.31 $ 0.33 $ 0.18 $ 1.11
1994
First Second Third Fourth
(DOLLARS IN THOUSANDS, EXCEPT INCOME PER SHARE) Quarter Quarter Quarter Quarter Total
Total interest income........................ $ 6,600 $ 7,208 $ 7,840 $ 8,335 $ 29,983
Total interest expense....................... 2,325 2,443 2,751 3,029 10,548
Net interest income.......................... 4,275 4,765 5,089 5,306 19,435
Provision for loan losses.................... 137 195 227 280 839
Total noninterest income..................... 1,336 1,245 1,088 1,089 4,758
Total noninterest expense.................... 3,508 3,554 3,401 3,668 14,131
Net income before income taxes............... 1,966 2,261 2,549 2,447 9,223
Income taxes................................. 504 628 789 732 2,653
Net income.................................. $ 1,462 $ 1,633 $ 1,760 $ 1,715 $ 6,570
Per share data:
Primary income per share..................... $ 0.23 $ 0.26 $ 0.28 $ 0.28 $ 1.05
Income per share assuming full dilution...... $ 0.23 $ 0.26 $ 0.28 $ 0.28 $ 1.05
The Corporation, as previously reported:
Net income................................... $ 1,161 $ 1,315 $ 1,426 $ 1,358 $ 5,260
Primary and fully diluted income per share... $ 0.25 $ 0.28 $ 0.30 $ 0.29 $ 1.12
29
FIRST CHARTER CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
First Charter Corporation (the "Corporation"), headquartered in
Concord NC, is a North Carolina multiple Bank holding company. First
Charter National Bank ("First Charter") is a full-service bank and
trust company with twelve offices located in Cabarrus, Rowan and
northern Mecklenburg Counties, North Carolina. Bank of Union ("Union")
is a full service bank with five offices located in Union and
southern Mecklenburg Counties, North Carolina.
Through its branch locations, First Charter and Union (the "Banks") provide
a wide range of deposit accounts; commercial, consumer, home equity and
residential mortgage loans; personal and corporate trust services; safe deposit
boxes; discount brokerage services; insurance and annuity sales; financial
planning and automated banking.
The following discussion and analysis should be read in conjunction with
the consolidated financial statements of the Corporation and the notes thereto
included elsewhere in this report.
RESULTS OF OPERATIONS AND
FINANCIAL CONDITION
1995 VERSUS 1994
OVERVIEW
On September 13, 1995, the Corporation entered into an Agreement and Plan
of Merger (the "Merger Agreement") with Union, pursuant to which a newly formed
subsidiary of the Corporation merged with Union and Union became a wholly owned
subsidiary of the Corporation (the "Merger"). On December 21, 1995, the Merger
was completed and accounted for as a pooling of interests. Accordingly, all
current and prior years' financial statements have been restated to combine the
accounts of Union with those of the Corporation.
As of December 21, 1995, there were 2,192,270 shares of Union common stock
outstanding. Of that amount, the Corporation owned 69,361 shares directly for
its own account. Each share of Union, other than those shares owned by the
Corporation, was converted into 0.75 shares of the Corporation common stock.
Union is a state-chartered commercial bank organized under the laws of
North Carolina in 1985. Union provides general banking services through a
network of five branch offices located in Union and Mecklenburg Counties, North
Carolina. Through its subsidiary, Union Financial, Inc. ("BOU Financial"), Union
also offers discount brokerage services, insurance and annuity sales and
financial planning services. At December 31, 1994, Union had total assets of
approximately $123 million and total deposits of approximately $106 million. In
the fourth quarter of 1995, the Corporation recognized $1,062,150 of costs
associated with the merger. These costs include legal, accounting, investment
banking, regulatory filing, proxy printing and solicitation expenses. It is
anticipated that an additional $75,000 of merger related expenses will be
incurred in 1996.
The Corporation earned $7,003,062, or $1.11 per share in 1995, a 6.6%
increase from $6,569,674, or $1.05 per share in 1994. A key factor contributing
to the increase in net income was a 13.1% increase in net interest income which
was partially offset by pre-tax merger related expenses of $1,062,150 connected
with the Merger of Union. Legal, accounting, investment banking, regulatory
filing, proxy printing and solicitation expenses associated with the Merger
represent the largest portion of the costs incurred, all in the fourth quarter
of 1995. These earnings equate to a return on average assets of 1.50% for 1995,
compared to 1.59% for 1994 and a return on average equity of 13.93% in 1995,
versus 14.34% in 1994.
Total assets at December 31, 1995, were $509,395,305, up 13.9% from the
level at year-end 1994. Gross loans increased 15.7% to $333,038,730 and total
deposits increased 11.3% to $415,056,231.
LIQUIDITY
Liquidity is the ability to maintain cash flows adequate to fund operations
and meet obligations and other commitments on a timely and cost-effective basis.
Liquidity is provided by the ability to attract deposits, flexible repricing
schedules in a sizeable portion of the loan portfolio, current earnings, a
strong capital base and the ability to use alternative funding sources that
complement normal sources. Management's asset-liability policy is to maintain or
enhance the net interest income and thereby provide adequate liquidity to meet
continuing loan demand and withdrawal requirements and to service normal
30
operating expenses. If additional funding sources were needed, the Banks have
access to Federal fund lines at correspondent banks and borrowings from the
Federal Reserve discount window. In addition to these sources, the Banks are
members of the Federal Home Loan Bank ("FHLB") System, which provides access to
FHLB lending sources. Another source of liquidity is the securities available
for sale portfolio. See "Securities Available for Sale" for a further
discussion. Management believes the Banks' sources of liquidity are adequate to
meet loan demand, operating needs and deposit withdrawal requirements.
ASSET LIABILITY MANAGEMENT AND INTEREST RATE SENSITIVITY
One of the primary objectives of asset/liability management is to maximize
net interest income while minimizing the earnings risk associated with changes
in interest rates. One method used to manage interest rate sensitivity is to
measure, over various time periods, the interest rate sensitivity positions, or
gaps; however, this method addresses only the magnitude of timing differences
and does not address earnings or market value. Management uses an earnings
simulation model to estimate the amount of earnings at risk due to changes in
interest rates. This model is updated periodically and is based on a range of
interest rate scenarios. The policy limits for interest rate risk is 10% of net
interest margin when considering an increase or decrease in interest rates of
300 basis points over a twelve month period. Management believes this method
more accurately measures interest rate risk.
The Banks' balance sheets are liability sensitive, meaning that in a given
period there will be more liabilities than assets subject to immediate repricing
as market rates change. Because immediately rate sensitive interest bearing
liabilities exceed rate sensitive assets, the earnings position could improve in
a declining rate environment and could deteriorate in a rising rate environment,
depending on the correlation of rate changes in these two categories. At
December 31, 1995 total rate sensitive liabilities within one year were $309.6
million compared to rate sensitive assets of $209.0 million for a cumulative gap
of $100.6 million. It should be noted that interest-sensitivity of the balance
sheet as of a specific date is not necessarily indicative of the Corporation's
position on other dates. Although interest rates increased during 1995, the
earnings position improved because interest income was positively impacted by
higher levels in the prime rate of interest more so than the negative impact on
funding cost in 1995 versus 1994. While a larger amount of liabilities are
subject to repricing, these liabilities did not reprice at the same magnitude as
the prime-based loans. As liabilities are repriced in response to rising rates,
net interest income could decline.
CAPITAL RESOURCES
At December 31, 1995, total shareholders' equity was $53,424,073, a 13.2%
increase from 1994. The increase in capital is primarily attributable to
increased retained earnings. Cash dividends declared per share in 1995 were $.52
compared to $.41 in 1994.
The principal asset of the parent company is its investment in the Banks,
and its principal source of income is dividends from the Banks. Certain
regulatory and other requirements restrict the lending of funds by the Banks to
the parent company and the amount of dividends which can be paid to the parent
company. In addition, certain regulatory agencies may prohibit the payment of
dividends by the Banks if they determine that such payment would constitute an
unsafe or unsound practice. At December 31, 1995, the Banks had available
undivided profits of approximately $15,737,000 for payment of dividends without
obtaining prior regulatory approval. At December 31, 1995, approximately
$29,940,000 of the parent company's investment in the Banks was restricted as to
transfer to the parent company without obtaining prior regulatory approval.
The Corporation must comply with regulatory capital requirements
established by the Federal Reserve Board (FRB). These standards require the
Corporation to maintain a minimum ratio of Tier I Capital (as defined) to total
risk-weighted assets of 4.00% and a minimum ratio of Total Capital (as defined)
to risk-weighted assets of 8.00%. Tier I Capital is comprised of total
shareholders' equity calculated in accordance with generally accepted accounting
principles less certain intangible assets, less unrealized gains or losses on
securities available for sale, and Total Capital is comprised of Tier I Capital
plus certain adjustments, the largest of which for the Corporation is the
general allowance for loan losses. Risk-weighted assets refer to the on- and
off-balance sheet exposures of the Corporation adjusted for their related risk
levels using amounts set forth in FRB regulations.
In addition to the risk-based capital requirements described above, the
Corporation is subject to a leverage capital requirement, which calls for a
minimum ratio of Tier I Capital (as defined previously) to total assets of 3% to
5%.
31
At December 31, 1995, the Corporation and the Banks were in compliance with
all existing capital requirements. The Corporation's capital requirements are
summarized in the table below:
Risk-Based Capital
Leverage Capital Tier 1 Capital Total Capital
Amount Percentage (1) Amount Percentage (2) Amount Percentage (2)
(Dollars in thousands)
Actual.......... $ 51,625 10.17% $ 51,625 14.28% $ 56,143 15.53%
Required...... 20,304 4.00 14,458 4.00 28,917 8.00
Excess......... 31,321 6.17 37,167 10.28 27,226 7.53
1) Percentage of total adjusted assets. The FRB minimum leverage ratio
requirement is 3% to 5%, depending on the institution's composite rating as
determined by its regulators. The FRB has not advised the Corporation of any
specific requirement applicable to it.
(2) Percentage of risk-weighted assets.
REGULATORY RECOMMENDATIONS
Management is not presently aware of any current recommendations to the
Corporation or to the Banks by regulatory authorities which, if they were to be
implemented, would have a material effect on the Corporation's liquidity,
capital resources, or operations.
BALANCE SHEET ANALYSIS
SECURITIES AVAILABLE FOR SALE
Securities available for sale are a component of the Corporation's
asset/liability management strategy and may be sold in response to liquidity
needs, changes in interest rates, changes in prepayment risk, and other factors.
They are accounted for at fair value with unrealized gains and losses recorded
as a separate component of stockholders' equity.
In November 1995, the FASB issued an implementation guide for Standard No.
115. The FASB stated that the transition provisions included in this guide
permit a one-time opportunity for companies to reconsider their ability and
intent to hold securities accounted for under Standard No. 115 as investment
securities and allow entities to transfer securities from the investment
securities category without tainting their remaining investment securities. The
FASB emphasized that this would be a one-time event and that any transfers from
the investment securities category to the available for sale category under this
provision must be made by December 31, 1995. Pursuant to this authorization, the
Corporation reclassified all investment securities into available for sale
securities.
At December 31, 1995, securities available for sale were $132,357,768 or
26.0% of total assets compared to 8.4% of total assets at year-end 1994. In
1995, during a period of rising interest rates and a time of increased loan
demand, management purchased short term agency obligations and adjustable rate
mortgage-backed securities to increase its flexibility to manage the balance
sheet and thus attempt to maintain a stable net interest margin. The fair value
of these assets is approximately $2,693,000 above their amortized cost at
December 31, 1995. The average yield on the securities available for sale
portfolio was 6.76% for 1995 and 6.69% for 1994.
The average life of the portfolio was 5.99 years at December 31, 1995
compared to 7.06 years at year-end 1994.
INVESTMENT SECURITIES
Investment securities totaled $82,114,910 or 18.4% of total assets at
December 31, 1994.
The average yield earned on investment securities in 1995 was 7.41%
compared to 7.29% in 1994 with an average maturity of 6.58 years at December 31,
1994.
LOANS
As a result of increased loan demand during 1995, gross loans increased
15.7% to $333,038,730 at December 31, 1995, from $287,862,709 at December 31,
1994. While loan demand may increase it may not increase at the same percentage
levels of increase as
32
experienced in previous years.
The loan portfolio at December 31, 1995 was composed of 27.7% commercial,
financial, and agricultural loans, 10.1% real estate construction loans, 51.5%
real estate mortgage loans, and 10.7% installment loans. This compares to a
composition of 30.2% commercial, 10.3% real estate construction, 48.3% real
estate mortgage, and 11.2% installment at December 31, 1994. The increase in
construction loans is attributable to an increase in real estate building in the
Corporation's market area. Approximately $13,880,000 of the real estate mortgage
loans are loans for which the principal source of repayment comes from the sale
of real estate. The remaining $157,400,000 of real estate mortgage loans are (i)
other commercial loans for which the primary source of repayment is derived from
the ongoing cash flow of the business and which are also collateralized by real
estate - $75,249,000, (ii) personal installment loans which are collateralized
by real estate - $32,485,000, (iii) home equity loans - $22,722,000, and (iv)
individual residential mortgage loans - $26,944,000.
ASSET QUALITY
Nonperforming assets at December 31, 1995 were $2,890,461 or 0.9% of gross
loans and foreclosed properties compared to $5,938,056 or 2.1% at December 31,
1994. The level of nonperforming assets is presented in the table below:
December 31, December 31,
1995 1994
Nonaccrual loans $2,287,210 $2,521,489
Restructured loan 300,000 325,000
Loans 90 days or more
past due and still
accruing 242,001 1,209,867
Foreclosed property 61,250 1,567,738
Other real estate 313,962
Interest income that would have been recorded on nonaccrual loans for the
year ended December 31, 1995, had they performed according to their original
terms, amounted to approximately $307,000. Interest income on nonaccrual loans
included in the results of operations for the year amounted to approximately
$82,000.
Accruing loans 90 days or more past due decreased to 0.07% of gross loans
at December 31, 1995 compared to 0.42% of gross loans at December 31, 1994.
Management's policy for any accruing loan past due greater than 90 days is to
perform an analysis of the loan, including a consideration of the financial
position of the borrower(s) and any guarantor(s) as well as the value of the
collateral, and to make an assessment as to whether collectibility of the
principal and the interest appears probable. Based on such a review, management
has determined that it is probable that the principal as well as the accruing
interest on these loans will be collected in full.
Net charge-offs for the year were $740,238 or .25% of average loans
compared to $608,525 or .23% of average loans in 1994.
Foreclosed property and other real estate declined 96.7% to $61,250 at
December 31, 1995 from $1,881,700 at December 31, 1994. The decrease in
foreclosed properties and other real estate is primarily due to the sale of two
commercial real estate properties.
Theses sales resulted in gains of approximately $188,000.
All estimates of the loan portfolio risk elements, including the adequacy
of the allowance for loan losses, are subject to general and local economic
conditions, among other factors, which are unpredictable and beyond management's
control. Since a significant portion of the loan portfolio is comprised of real
estate loans and loans to area businesses, a continued risk is that the real
estate market and economic conditions could change and could result in future
losses or require increases in the provision for loan losses. Management uses
several measures to control this risk. For example, all loans over a certain
dollar amount must receive an in-depth review by an analyst in the Banks' Credit
Administration departments. Any issues regarding risk assessments of those
credits are addressed by the Banks' loan administration and senior credit
officer and factored into management's decision to originate or renew the loan.
Large commitments above $250,000 are reviewed and approved by a Senior Loan
Committee comprised of senior management, the senior credit officer and senior
lending officers of the respective Banks. Loans above $1,500,000 are reviewed by
the Loan Committee of the Board of Directors. The Corporation also continues to
employ an independent third party risk assessment group to review the
underwriting, documentation and risk grading analysis and render a semiannual
opinion of the adequacy of the allowances for loan losses. This third party
group reviews all loan relationships over $250,000 and a sampling of all other
credits.
Management uses the information developed from the procedures described
above in evaluating and grading the loan portfolio. This continual grading
process is used to monitor the credit quality
33
of the loan portfolio and to assist management in determining the
appropriate levels of the allowance for loan losses. For a further discussion of
this system, see "Allowance and Provision for Loan Losses."
The Banks grant primarily commercial and installment loans to customers
throughout their market areas, which consists of Cabarrus, Rowan, Union and
Mecklenburg Counties. The loan portfolio can be affected by the local economic
conditions of the markets served.
In the normal course of business, there are outstanding various commitments
to extend credit which are not reflected in the consolidated financial
statements. At December 31, 1995, preapproved but unused lines of credit for
loans totaled $81,154,391 and standby letters of credit aggregated $2,307,326.
The amounts represent the Banks' exposure to credit risk and, in the opinion of
management, have no more than the normal lending risk that the Banks commit to
their borrowers. If these commitments are drawn, the Banks will obtain
collateral if it is deemed necessary based on management's credit evaluation of
the borrower. Collateral obtained varies but may include accounts receivable,
inventory, and commercial or residential real estate. Management expects that
these commitments can be funded through normal operations.
DEPOSITS
Total deposits at December 31, 1995 were $415,056,231, a 11.3% increase
from a 1994 year-end level of $372,820,380. Average non-interest bearing demand
deposits increased $9.9 million or 18.0%; average interest bearing demand
deposits increased $3.0 million or 4.9%; average insured money market accounts
decreased $5.7 million or 11.9%; average savings deposits increased $21.8
million or 27.2%; while average certificates of deposit increased $11.9 million
or 11.2%. The majority of deposit growth was in a penalty free certificate of
deposit product for customers over the age of fifty. Because the certificate is
penalty free and the customer may exercise the option to redeem the certificate
and open a new certificate at a higher rate as many times as the customer
wishes, regulation requires that the certificate be classified as a savings
deposit, thus the increase in savings deposits.
EARNINGS PERFORMANCE
NET INTEREST INCOME
Net interest income, the difference between total interest income and total
interest expense, is the Corporation's principal source of earnings. For the
year ended December 31, 1995 net interest income was $21,984,374, an increase of
13.1% from net interest income of $19,434,939 in 1994. The increase is
attributable to an increase in the level of interest earning assets slightly
offset by a decrease in the net interest margin (tax adjusted net interest
income divided by average earnings assets) to 5.35% in 1995 from 5.40% in 1994.
The decline in the margin is attributable to an increase in yields on loans
together with an increase in funding costs.
The average yield on earning assets was 8.84% in 1995 compared to 8.15% in
1994. The average rate paid on interest-bearing deposits and borrowings was
4.37% compared to 3.39% in 1994. See "Asset/Liability Management" for additional
discussion.
ALLOWANCE AND PROVISION FOR LOAN LOSSES
Management utilizes a system for risk grading the loan portfolio to
determine the appropriate amount of the allowance for loan losses. This analysis
is performed monthly and is independent of any analysis in conjunction with the
origination of loans. Individual loans are assigned a risk grade based on their
credit quality, which is subject to change as conditions warrant. Any input in
those risk assessments as determined by the outside risk assessment group is
also considered. Each grade determines the percentage of the outstanding loan
balance allocated to the loan loss reserve. Loans with the weaker credit quality
are individually analyzed to determine a specific allowance which reflects
management's best estimate of the risk associated with each credit. An estimate
of an allowance is made for all other loans in the portfolio based on their
assigned risk grade, type of loan and other matters related to credit risk. In
the allowance for loan loss analysis process, the Banks also aggregate the loans
into pools of similar credits and review the historical loss experience
associated with these pools as additional criteria to allocate the allowance to
each category. The model also takes into consideration off-balance sheet credit
loss. However, at December 31, 1995, a reserve for off-balance sheet credit loss
was not considered necessary based on management's review of off-balance sheet
items. In addition, there were no realized credit losses due to off-balance
sheet activities for the three years ended December 31, 1995.
34
The provision for loan losses for 1995 was $1,465,000 compared to $839,000
in 1994. The increase in the provision was primarily attributable to the
increase in gross loans outstanding. The allowance for loan losses as a
percentage of gross loans outstanding was 1.46% at December 31, 1995 compared to
1.44% at year-end 1994. Management feels that based on improved credit quality,
the allowance for loss is adequate.
NONINTEREST INCOME
Noninterest income was $5,391,750 in 1995 compared to $4,758,450 in 1994.
Trust income increased approximately $174,000 or 12.6%. This increase was due to
higher market values of assets under management. The increase in other
noninterest income is attributable to approximately $188,000 gains in sale of
foreclosed properties and other real estate owned, increased brokered mortgage
loan income and credit card income.
NONINTEREST EXPENSE
Total noninterest expense was $15,688,562 in 1995 compared to $14,131,315
in 1994, an 11.0% increase. Salaries and fringe benefits increased primarily due
to a greater number of full-time equivalents, annual merit increases, additional
management and branch incentives, increased 401(k) contributions and higher
health insurance premiums.
Occupancy and equipment increased approximately $128,000 or 6.8% primarily
due to an increase in depreciation expense. During 1995, the Corporation made an
investment in check imaging software and hardware.
Other noninterest expense increased approximately $879,000 or 18.3% for
1995 when compared to 1994. The increase is primarily due to Merger costs
associated with the Merger of Union of $1,062,150. These costs include legal,
accounting, investment banking, regulatory filings, proxy printing and
solicitation expenses, all of which were incurred during the fourth quarter of
1995. Stationery and supplies increased approximately $89,000 due to additional
costs associated with check imaging implemented in April of 1995. The FDIC
insurance premium was reduced from $0.23 to $0.04 per $100 of deposits in June
of 1995, resulting in a decrease of $331,776. The FDIC insurance premiums were
further reduced to $2,000 per bank annually.
All other noninterest expense increased approximately $122,000. This
increase is attributable to various items including an increase in software
maintenance, data processing expenses, postage, dues and education.
Total income tax expense for 1995 was $3,219,500 versus $2,653,400 in 1994.
The increase is attributable to an increase in income before income taxes and an
increase in the effective tax rate to 31.5% in 1995 from 28.8% in 1994. The
change in the effective rate is primarily attributable to the majority of Merger
costs for which a tax benefit is not allowed.
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
1994 VERSUS 1993
The Corporation earned $6,569,674, or $1.05 per share, in 1994, a 19.8%
increase from $5,484,208 or $0.87 per share in 1993. Of the 1993 net income
amount, $300,000 represented the cumulative effect on prior years of adopting
Financial Accounting Standards No. 109, "Accounting for Income Taxes." Earnings
increased primarily due to higher net interest income.
Total assets at December 31, 1994 were $447,099,488, up 14.2% from the
level at year-end 1993. Gross loans increased 15.5% to $287,862,709 and total
deposits increased 10.9% to $372,820,380.
The Corporation's return on average assets was 1.59% for 1994, compared
with 1.48% in 1993. The return on average equity was 14.34% in 1994, versus
13.10% in 1993.
At December 31, 1994, securities available for sale were $37,530,613 or
8.4% of total assets compared to $34,613,000 or 8.8% of total assets at year-end
1993. The fair value of these assets was approximately $218,000 below their
amortized cost at December 31, 1994. The average yield on the securities
available for sale portfolio was 6.69% for 1994.
At December 31, 1994, investment securities were $82,144,910, which
represented 18.4% of total assets. Investment securities were carried at cost,
adjusted for amortization of premiums and accretion of discounts in accordance
with Standard No. 115 because management determined that the Corporation had the
ability
35
and the intent to hold them to maturity. At December 31, 1993 investment
securities were approximately $71,751,000 which represented 16.0% of total
assets. The average yield earned on investment securities in 1994 was 7.29%
compared to 7.55% in 1993.
The loan portfolio at December 31, 1994 was composed of 30.2% commercial,
financial, and agricultural loans, 10.3% real estate construction loans, 48.3%
real estate mortgage loans, and 11.2% installment loans. This compares to a
composition of 33.3% commercial, 8.3% real estate construction, 47.3% real
estate mortgage, and 11.1% installment at December 31, 1993.
Nonperforming assets at December 31, 1994 were $5,938,056 or 2.1% of gross
loans and foreclosed properties compared to $5,674,454 or 2.3% at December 31,
1993. The level of nonperforming assets is presented in the table below.
December 31, December 31,
1994 1993
Nonaccrual loans $2,521,489 $2,315,224
Restructured loans 325,000 795,000
Loans 90 days or more
past due and
still accruing 1,209,867 217,988
Foreclosed Property 1,567,738 2,032,280
Other Real Estate 313,962 313,962
Interest income that would have been recorded on nonaccrual loans for the
year ended December 31, 1994, had they performed according to their original
terms amounted to approximately $298,000. Interest income on nonaccrual loans
included in the results of operations for the year amounted to approximately
$143,000.
Accruing loans 90 days or more past due increased to .42% of gross loans at
December 31, 1994 compared to .09% of gross loans at December 31, 1993.
Net charge-offs for the year were approximately $609,000 or .23% of average
loans compared to net charge-offs of approximately $893,000 or .39% of average
loans in 1993. The decrease in net charge-offs was primarily the result of two
fully reserved loans which were charged off in the first and second quarters of
1993.
Foreclosed property declined 22.9% to $1,567,738 at December 31, 1994 from
$2,032,280 at December 31, 1993. At December 31, 1994 two parcels of land
comprised 92.5% of the 1994 balance. These two parcels were subsequently sold in
1995.
Deposits were $372,820,380 at year-end 1994 compared with $336,269,512 at
year-end 1993, a 10.9% increase. Average non-interest bearing deposits increased
$8.8 million or 19.2%; average interest bearing demand deposits increased $6.1
million or 10.9%; average insured money market accounts decreased $3.6 million
or 7.4%; average savings deposits increased $21.0 million or 35.4%; while
average time certificates of deposit decreased $0.3 million or 0.3%. The
majority of deposit growth was in a penalty free certificate of deposit product
for customers over the age of fifty. Because the certificate is penalty free and
the customer may exercise the option to redeem the certificate and open a new
certificate at a higher rate as many times as the customer wishes, regulation
requires that the certificate be classified as a savings deposit, thus the
increase in savings deposits.
For the year ended December 31, 1994 net interest income was $19,434,939,
an increase of 16.8% from net interest income of $16,646,446 in 1993. The
increase is attributable to an increase in the level of interest earning assets
as well as an improvement in the net interest margin (tax adjusted net interest
income divided by average earnings assets) to 5.40% in 1994 from 5.20% in 1993.
The improvement in the margin is attributable to an increase in yields on loans
with only a slight increase in funding costs.
The average yield on earning assets was 8.15% in 1994 compared to 7.92% in
1993. The average rate paid on interest-bearing deposits and borrowings was
3.39% in 1994 compared to 3.33% in 1993.
The provision for loan losses for 1994 was $839,000 compared to $835,000 in
1993. The allowance for loan losses as a percentage of gross loans outstanding
was 1.44% at December 31, 1994 compared to 1.56% at year-end 1993. The decrease
in allowance percentage to loans was due to an increase in loans outstanding.
Noninterest income was $4,758,450 in 1994 compared to $5,006,789 in 1993.
Trust income increased approximately $120,000 or 9.5%. The increase is
attributable to fees recognized on several estate settlements that may be
nonrecurring and an increase in fee structure. The decrease in other noninterest
income is attributable to decreases in mortgage originations sold on a brokered
basis and decreases in credit card income. Gains on investment securities
decreased due to gains on sales of investment
36
securities in 1993, and the absence of such gains in 1994.
Total noninterest expense was $14,131,315 in 1994 compared to $13,822,589
in 1993, a 2.2% increase. During the first quarter of 1994, First Charter
completed a comprehensive reorganization plan that simplified management
structure, changed some positions from full-time to part-time and eliminated
several positions. As a result of this, salary expense decreased approximately
$228,000, but was partially offset by increases in management bonuses and 401(k)
matching contributions. The increase in these two items is attributable to
improved profitability in 1994. Union salary expense increased due to annual
merit increases and higher health insurance costs. Total salaries and benefits
increased approximately $164,000 or 2.3%.
Occupancy and equipment decreased approximately $48,000 or 2.5% due to a
reduction in depreciation expense. The reduction is the result of major
investments in fixed assets during 1989 and 1988 which were fully depreciated in
1993 or mid-1994.
Total advertising expense for 1994 increased approximately $82,000 or
20.2%. The increase is attributable to production and marketing related to
several new products including a debit card, a lower cost checking and savings
account, and a first time home buyers mortgage product.
Other professional fees decreased approximately $142,000 due to fees paid
to consultants in the fourth quarter of 1993 related to the reorganization in
1994. Also, during the third quarter of 1994, a significant portion of the
investment management of trust assets, previously out-sourced, was brought
in-house.
Stationery and supplies increased approximately $75,000 due to printing and
production cost of the annual report and annual meeting.
Other noninterest expense increased approximately $122,000. This increase
is attributable to various items including an increase in software maintenance,
processing expenses and one time fees associated with the debit card, increased
postage, dues and education, and property taxes paid on a problem asset.
Total income tax expense for 1994 was $2,653,400 versus $1,827,997 in 1993.
The increase is attributable to an increase in income before income taxes and an
increase in the effective tax rate to 28.8% in 1994 from 26.1% in 1993 . The
change in the effective rate is attributable to a decrease in tax-exempt income
relative to income before income taxes.
ACCOUNTING AND REGULATORY MATTERS
The FASB has issued Standard No. 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to be Disposed Of," which requires
that long-lived assets and certain identifiable intangibles to be held and used
by an entity be reviewed for impairment whenever events or changes in
circumstances indicate that the carrying amount of an asset may not be
recoverable. An estimate of the future cash flows expected to result from the
use of the asset and its eventual disposition should be performed during a
review for recoverability. An impairment loss (based on the fair value of the
asset) is recognized if the sum of the expected future cash flows (undiscounted
and without interest charge) is less than the carrying amount of the asset.
Additionally, Standard No. 121 requires that long-lived assets and certain
identifiable intangibles to be disposed of be reported at the lower of carrying
amount or fair value less cost to sell, except for certain assets. These assets
will continue to be reported at the lower of carrying amount or net realizable
value. The periodic effect on net income of the Corporation, if any, has not
been determined. Implementation of this Standard is required for fiscal years
beginning after December 15, 1995.
The FASB also has issued Standard No. 122, "Accounting for Mortgage
Servicing Rights," which requires that a mortgage banking enterprise recognize
as separate assets the rights to service mortgage loans for others, however
those servicing rights are acquired. A mortgage banking enterprise that acquires
mortgage servicing rights through either the purchase or origination of mortgage
loans and sells or securitizes those loans with servicing rights retained should
allocate the total cost of the mortgage loans to the mortgage servicing rights
and the loans (without the mortgage servicing rights) based on their relative
fair values if it is practicable to estimate those fair values. If it is not
practicable to estimate the fair values of the mortgage servicing rights and the
mortgage loans (without the mortgage servicing rights), the entire cost of
purchasing or originating the loans should be allocated only to the mortgage
loans without the mortgage servicing rights. Additionally, this Standard
requires that a mortgage banking enterprise periodically assess its capitalized
mortgage servicing rights for impairment based on the fair value of those
rights. Standard No. 122
37
applies prospectively to transactions occurring in fiscal years beginning after
December 31, 1995. Because the Corporation generally sells mortgage loans with
servicing rights released, management does not anticipate the Standard's impact
on its financial statements to be material.
The FASB has also issued Standard No. 123, "Accounting for Stock-Based
Compensation," which requires that the fair value of employee stock-based
compensation plans be recorded as a component of compensation expense in the
statement of income as of the date of grant of awards related to such plans or
that the impact of such fair value on net income and earnings per share be
disclosed on a pro forma basis in a footnote to financial statements for awards
granted after December 15, 1994, if the accounting for such awards continues to
be in accordance with Accounting Principles Board Opinion No. 25, "Accounting
for Stock Issued to Employees" (APB 25). The corporation will continue such
accounting under the provisions of APB 25. This Standard is required for fiscal
years beginning after December 15, 1995.
38
FIRST CHARTER CORPORATION AND
FIRST CHARTER NATIONAL BANK BOARD OF DIRECTORS
WILLIAM R. BLACK, M.D.
ONCOLOGIST
JANE B. BROWN
PRIVATE INVESTOR
GRADY S. CARPENTER
PRESIDENT,
SECURITY OIL COMPANY
MICHAEL R. COLTRANE
PRESIDENT,
THE CONCORD TELEPHONE COMPANY
J. ROY DAVIS, JR.
PRESIDENT,
S & D COFFEE, INC.
CHAIRMAN,
FIRST CHARTER CORPORATION AND
FIRST CHARTER NATIONAL BANK
JAMES B. FINCHER
OWNER,
MINERAL SPRINGS FEED & FERTILIZER CO.
H. CLARK GOODWIN
PRESIDENT AND CHIEF EXECUTIVE OFFICER,
BANK OF UNION
FRANK H. HAWFIELD, JR.
OWNER AND PRESIDENT,
FRANK H. HAWFIELD, INC.
D/B/A FIRESTONE HOME AND AUTO
J. KNOX HILLMAN, JR.
PRESIDENT,
SHUFORD INSURANCE AGENCY, INC.
BRANSON C. JONES
CONSULTING VICE PRESIDENT,
OILES AMERICA CORPORATION
LAWRENCE M. KIMBROUGH
PRESIDENT AND
CHIEF EXECUTIVE OFFICER,
FIRST CHARTER CORPORATION AND
FIRST CHARTER NATIONAL BANK
DUARD C. LINN, JR.
VICE CHAIRMAN,
FIRST CHARTER CORPORATION AND
FIRST CHARTER NATIONAL BANK
ROBERT F. LOWRANCE
PRESIDENT,
A & A REALTY
JERRY E. MCGEE, ED. D.
PRESIDENT,
WINGATE UNIVERSITY
HUGH H. MORRISON
PRESIDENT,
E. L. MORRISON CO., INC.
T. DAVID PROPST
PRESIDENT,
EARL'S TIRE STORE
ROBERT L. WALL
RETIRED
JAMES B. WIDENHOUSE
PRIVATE INVESTOR
BANK OF UNION BOARD OF DIRECTORS
JOHN A. CROOK, JR.
J. EARL CULBRETH
DENNISON A. DAVIS
WILLIAM C. DESKINS, M.D.
JAMES B. FINCHER
H. CLARK GOODWIN
PRESIDENT AND CHIEF EXECUTIVE OFFICER
BANK OF UNION
EARL J. HAIGLER
FRANK H. HAWFIELD, JR.
CHARLES E. HULSEY
CALLIE F. KING
JOSEPH L. LITTLE
FRED C. LONG
JERRY E. MCGEE, ED. D.
DAVID C. MCGUIRT
LANE D. VICKERY
OFFICERS OF FIRST CHARTER CORPORATION
ROBERT O. BRATTON
EXECUTIVE VICE PRESIDENT, CHIEF OPERATING
OFFICER, TREASURER AND CHIEF FINANCIAL
OFFICER
J. ROY DAVIS, JR.
CHAIRMAN OF THE BOARD
ROSE W. EDWARDS
ASSISTANT CORPORATE SECRETARY
PHILLIP M. FLOYD
EXECUTIVE VICE PRESIDENT
ANNE C. FORREST
ASSISTANT CORPORATE SECRETARY
ROBERT G. FOX, JR.
EXECUTIVE VICE PRESIDENT
H. CLARK GOODWIN
EXECUTIVE VICE PRESIDENT
DAVID E. KEUL
ASSISTANT TREASURER
LAWRENCE M. KIMBROUGH
PRESIDENT AND CHIEF EXECUTIVE OFFICER
DUARD C. LINN, JR.
VICE CHAIRMAN
JAMES T. MATHEWS, JR.
SENIOR VICE PRESIDENT
EDWARD B. MCCONNELL
SENIOR VICE PRESIDENT
KATHRYN B. REESE
SENIOR VICE PRESIDENT
JAMES W. TOWNSEND, JR.
CORPORATE SECRETARY
39
FIRST CHARTER NATIONAL BANK
OFFICERS
John R. Baker Vice President Mavadell D. Freeman Banking Officer James T. Mathews, Jr. Senior Vice
Cheryl P. Barbee Banking Officer/ Melba M. Funderburk Banking Officer President
Assistant Linda S. Gibson Vice President Edward B. McConnell Senior Vice
Corporate Gerald R. Goodman Banking Officer President
Secretary Linda H. Griffin Assistant Vice Nancy L. Mills Vice President
Lisa B. Boylen Vice President President Michael J. Mittelman, Jr. Vice President
Robert O. Bratton Executive Vice R. Dwight Henry Vice President Dawn W. O'Dell Vice President
President Donald E. Hopkins Vice President Elizabeth Quesenberry Banking Officer
Gayle S. Brinson Banking Officer Patricia K. Horton Senior Vice Elizabeth K. Reed Vice President
Lisa T. Burns Internal Auditor President Kathryn B. Reese Senior Vice
Kenneth W. Caldwell Senior Vice Brian A. Ingold Assistant Vice President
President President/ Katherine L. Schiele Banking Officer
Elizabeth L. Cline Assistant Vice Senior Auditor Brenda S. Simpson Banking Officer
President Donna J. Kenney Senior Vice Nancy B. Smith Trust Officer
Deborah S. Cloninger Banking Officer President Pamela S. Slough Banking Officer
John R. Coley Vice President David E. Keul Vice President/ Gordon M. Stallings Assistant Vice
Carolyn M. Craver Assistant Trust Assistant President
Officer Corporate James E. Steere, III Assistant Vice
Deborah R. Deese Banking Officer Secretary President
Denise S. Dorr Banking Officer Lawrence Kimbrough President and J. W. Townsend, Jr. Senior Vice
Rose W. Edwards Assistant Vice CEO President/
President Brenda K. Kinley Assistant Vice Corporate
Thomas J. Elkins Vice President President Secretary
Phillip M. Floyd Executive Vice Marie E. Kluttz Vice President Nancy S. Verble Assistant Vice
President Charla L. Kurtz Vice President President
Anne C. Forrest Assistant Angela R. Lovelace Banking Officer Monica R. Walters Banking Officer
Corporate Sandra J. Mansur Assistant Vice Ann K. Williams Assistant Vice
Secretary President President
Robert G. Fox, Jr. Executive Vice Jerold L. Marlow Senior Vice
President President
Judith C. Fuller Vice President
BANK OF UNION
OFFICERS
William R. Adcock Vice President Patricia C. Jamison Assistant Vice Terry M. Richardson Assistant Vice
Wendy T. Barnhardt Assistant Cashier President & President
Todd C. Bennington Vice President Assistant W. Farrell Richardson Vice President
Barbara J. Cherry Assistant Cashier Secretary Pamela P. Sanders Assistant Vice
William E. Davis Senior Vice Don E. Lewis Senior Vice President &
President President Assistant
Charlie E. Efird, Jr. Vice President David C. McGuirt Executive Vice Secretary
H. Clark Goodwin President and President & A. Ray Singleton, Jr. Senior Vice
CEO Secretary President
Angela S. Helms Assistant Teresa L. Mills Assistant Vice Linda D. Thomas Assistant Vice
Secretary President President
Karen F. Hodge Assistant Vice Lisa C. Moore Assistant Harvey F. Whitley Executive
President Cashier Director
Alice K. Holmes Vice President Mary Margaret Nance Assistant BOU Financial,
Secretary Inc.
40
(Map appears here depicting the Full Service Offices of First Charter
National Bank and Bank of Union.)
Report Design: Premark, Inc., High Point, NC
Photography: J&B Kluttz Photography, Concord, NC
Printing: Concord Printing Company, Concord, NC
First Charter Corporation
Concord, NC