SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
Annual Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
For the Fiscal Year Ended December 31, 1996 Commission File No. 0-17565
FIRST UNITED BANCORPORATION
(Exact name of Registrant as specified in its charter)
South Carolina 41-1440792
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
304 North Main Street, Anderson, South Carolina 29621
(Address of Principal Executive Offices, Including Zip Code)
Registrant's Telephone Number, Including Area Code:
(864) 224-1112
Securities Registered pursuant to Section 12(b) of the Act:
None
Securities Registered pursuant to Section 12(g) of the Act:
Common Stock, $1.67 Par Value
(Title of Class)
Indicate by checkmark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past ninety (90) days. YES [X] NO [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to the
Form 10-K. [X]
The aggregate market value of the voting Common Stock, $1.67 par value, held by
non-affiliates of the Registrant on March 14, 1997 was approximately
$24,075,274.50. As of March 14, 1997, there were 2,590,958 shares of
Registrant's Common Stock, $1.67 par value, outstanding. For purposes of the
foregoing calculation only, all directors and executive officers of the
Registrant have been deemed affiliates.
Documents Incorporated by Reference
(1) Portions of the Registrant's 1996 Annual Report to Shareholders for the
fiscal year ended December 31, 1996 ("1996 Annual Report to Shareholders"), are
incorporated by reference into Part II hereof.
(2) Portions of the Registrant's definitive Proxy Statement for its April 22,
1997 Annual Meeting of Shareholders ("Proxy Statement") are incorporated by
reference into Part III hereof.
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PART I
Item 1. Business
First United Bancorporation (the "Company") is a South Carolina corporation
which was organized in July 1987, to become a bank holding company. The Company
has four wholly-owned subsidiaries: Anderson National Bank, Anderson, South
Carolina, a national bank organized in 1984, Spartanburg National Bank,
Spartanburg, South Carolina, a national bank organized in 1988, the Community
Bank of Greenville, National Association, Greenville, South Carolina, a national
bank organized in 1996 (sometimes referred to herein as "the Banks"), and Quick
Credit Corporation ("Quick Credit"), a consumer loan company organized in 1988.
The Company engages in no significant operations other than the ownership
of its four subsidiaries. The Company conducts its business from eight banking
offices and twenty-two consumer finance offices located throughout South
Carolina.
General Business
Some of the major services which the Company provides through its
banking subsidiaries include checking, NOW accounts, savings and other time
deposits of various types, alternative investment products such as annuities and
mutual funds, loans for business, agriculture, real estate, personal use, home
improvement and automobiles, credit cards, letters of credit, home equity lines
of credit, safe deposit boxes, bank money orders, wire transfer service and use
of ATM facilities. The Company has no material concentration of deposits from
any single customer or group of customers. No significant portion of its loans
is concentrated within a single industry or group of related industries. The
Company also provides small consumer loans of up to $1,000 through its consumer
finance company subsidiary, Quick Credit. There are no material seasonal factors
that would have an adverse effect on the Company. The Company does not have
foreign loans.
Territory Served and Competition
Anderson National Bank serves its customers from two locations in the
City of Anderson, South Carolina, one location in Pelzer, South Carolina, and
one location in Williamston, South Carolina. Anderson is located approximately
25 miles southwest of Greenville, South Carolina, in the fast growing Interstate
- - 85 corridor between Charlotte, North Carolina and Atlanta, Georgia. The town
of Pelzer, South Carolina is located approximately 17 miles northeast of
Anderson. The town of Williamston, South Carolina is located approximately 16
miles northeast of Anderson.
Spartanburg National Bank serves its customers from three locations in
Spartanburg, South Carolina. Spartanburg is located approximately 30 miles
northeast of Greenville and, like Anderson, is located in the fast growing
Interstate - 85 corridor between Charlotte and Atlanta.
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The Community Bank of Greenville serves customers from a single
location in Greenville, South Carolina. Greenville is located between Anderson
and Spartanburg and is also in the Interstate-85 corridor between Charlotte and
Atlanta.
Quick Credit serves its customers from locations in Anderson,
Greenville, Greenwood, Laurens, Seneca, Easley, Florence, Spartanburg, Marion,
Sumter, Cayce, Kingstree, Orangeburg, North Charleston, Abbeville, Newberry,
Hartsville, Rock Hill, Gaffney, Aiken, Camden and Columbia, South Carolina.
Each subsidiary bank of the Company is an independent bank, and, therefore,
each bank is responsible for developing and maintaining its own customers and
accounts. Located in Anderson, South Carolina, Anderson National Bank's customer
base has been primarily derived from Anderson County, South Carolina.
Spartanburg National Bank's primary service area is Spartanburg County, South
Carolina. The Community Bank of Greenville's primary service area is Greenville
County, South Carolina. The Banks compete with several major banks which
dominate the commercial banking industry in their service areas and in South
Carolina generally. In addition, the Banks compete with savings institutions and
credit unions. In Anderson County, there are 30 competitor bank branches, 17
savings institution branches and 9 credit union branches. In Greenville County
there are 110 competitor bank branches, 21 savings institution branches and 15
credit union branches. In Spartanburg County there are 49 competitor bank
branches, 15 savings institution branches and 7 credit union branches. Anderson
National Bank has approximately 5 1/2% of the deposits in Anderson County,
Spartanburg National Bank has approximately 4 1/2% of the deposits in
Spartanburg County and The Community Bank of Greenville has less than 1% of the
deposits in Greenville County. Several competitor institutions have
substantially greater resources and higher lending limits than the Banks and
they perform certain functions for their customers, including trust services and
investment banking services, which none of the Banks is equipped to offer
directly. However, the Banks do offer some of these services through
correspondent banks. In addition to commercial banks, savings institutions and
credit unions, the Banks compete for deposits and loans with other financial
intermediaries and investment alternatives, including, but not limited to
mortgage companies, captive finance companies, money market mutual funds,
brokerage firms, governmental and corporation bonds and other securities.
Various of these nonbank competitors are not subject to the same regulatory
restrictions as the Company and its subsidiaries and many have substantially
greater resources than the Company.
Competition among consumer finance companies is not generally as
intense as that among banks. Most consumer finance companies are allowed only
one outstanding loan per customer, and the amounts of such loans are restricted
by state law according to the type of license granted by the South Carolina
State Board of Financial Institutions. Numerous other finance companies which
offer similar types of loans are located in the areas served by Quick Credit.
As a bank holding company, the Company is a legal entity separate and
distinct from its subsidiaries. The Company coordinates the financial resources
of the consolidated enterprise and maintains financial, operational and
administrative systems that allow centralized evaluation of subsidiary
operations and coordination of selected policies and activities. The Company's
operating revenues and net income are derived primarily from its subsidiaries
through dividends, fees for services performed and interest on advances and
loans.
Employees
As of December 31, 1996, the Company had 186 full-time employees and 16
part-time employees. The Company considers its relationship with its employees
to be good. The employee benefit programs the Company provides include group
life, health and dental insurance, paid vacation, sick leave, educational
opportunities, a stock option plan for officers and key employees, a split
dollar life insurance plan for executive officers, a contributory deferred
compensation plan, and a 401K plan for employees.
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Supervision and Regulation
Bank holding companies and banks are extensively regulated under
federal and state law. To the extent that the following information describes
statutory and regulatory provisions, it is qualified in its entirety by
reference to such statutes and regulations. Any change in applicable law or
regulation may have a material effect on the business of the Company and its
subsidiaries.
Bank Holding Company Regulation
The Company is registered as a "bank holding company" with the Board of
Governors of the Federal Reserve System ("Federal Reserve"), and is subject to
supervision by the Federal Reserve under the Bank Holding Company Act ("BHC
Act"). The Company is required to file with the Federal Reserve periodic reports
and such additional information as the Federal Reserve may require pursuant to
the BHC Act. The Federal Reserve examines the Company, and may examine the
subsidiary Banks and Quick Credit.
The BHC Act requires prior Federal Reserve approval for, among other
things, the acquisition by a bank holding company of direct or indirect
ownership or control of more than 5% of the voting shares or substantially all
the assets of any bank, or for a merger or consolidation of a bank holding
company with another bank holding company. With certain exceptions, the BHC Act
prohibits a bank holding company from acquiring direct or indirect ownership or
control of voting shares of any company which is not a bank or bank holding
company and from engaging directly or indirectly in any activity other than
banking or managing or controlling banks or performing services for its
authorized subsidiaries. A bank holding company may, however, engage in or
acquire an interest in a company that engages in activities which the Federal
Reserve has determined by regulation or order to be so closely related to
banking or managing or controlling banks as to be a proper incident thereto.
The Company is also registered under the bank holding company laws of
South Carolina. Accordingly, the Company is subject to regulation and
supervision by the South Carolina State Board of Financial Institutions (the
"State Board").
A registered South Carolina bank holding company must provide the State
Board with information with respect to the financial condition, operations,
management and inter-company relationships of the holding company and its
subsidiaries. The State Board also may require such other information as is
necessary to keep itself informed about whether the provisions of South Carolina
law and the regulations and orders issued thereunder by the State Board have
been complied with, and the State Board may examine any bank holding company and
its subsidiaries.
Under the South Carolina Bank Holding Company Act (the "SCBHCA"), it is
unlawful without the prior approval of the State Board for any South Carolina
bank holding company (i) to acquire direct or indirect ownership or control of
more than 5% of the voting shares of any bank or any other bank holding company,
(ii) to acquire all or substantially all of the assets of a bank or any other
bank holding company, or (iii) to merge or consolidate with any other bank
holding company.
As stated above, the Company is a legal entity separate and distinct
from the subsidiary Banks and its other subsidiary. Various legal limitations
place restrictions on the ability of the subsidiary Banks to lend or otherwise
supply funds to the Company or its non-bank subsidiaries. The Company, Anderson
National Bank and Spartanburg National Bank are, and The Community Bank of
Greenville will be, subject to Section 23A of the Federal Reserve Act. Section
23A defines "covered transactions", which include extensions of credit, and
limits a bank's covered transactions with any affiliate to 10% of such bank's
capital and surplus. All covered transactions with all affiliates cannot in the
aggregate exceed 20% of a bank's capital and surplus. All covered and exempt
transactions between a bank and its affiliates must be on terms and conditions
consistent with safe and sound banking practices, and banks and their
subsidiaries are prohibited from purchasing low-quality assets from the bank's
affiliates. Finally, Section 23A requires that all of a bank's extensions of
credit to an affiliate be appropriately secured by acceptable collateral,
generally United States government or agency securities. The Company, Anderson
National Bank, Spartanburg
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National Bank, and The Community Bank of Greenville are subject to Section 23B
of the Federal Reserve Act, which generally limits covered and other
transactions among affiliates to terms and circumstances, including credit
standards, that are substantially the same or at least as favorable to a bank
holding company, a bank or a subsidiary of either as prevailing at the time for
transactions with unaffiliated companies.
In July 1994, South Carolina enacted legislation which effectively
provides that, after June 30, 1996, out-of-state bank holding companies
(including bank holding companies in the Southern Region, as defined under the
statute) may acquire other banks or bank holding companies having offices in
South Carolina upon the approval of the State Board and compliance with certain
other conditions, including that the effect of the transaction not lessen
competition and that the laws of the state in which the out-of-state bank
holding company filing the applications has its principal place of business
permit South Carolina bank holding companies to acquire banks and bank holding
companies in that state. Although such legislation may increase takeover
activity in South Carolina, the Company does not believe that such legislation
will have a material impact on its competitive position. However, no assurance
of such fact may be given.
Congress recently enacted the Riegle-Neal Interstate Banking and
Branching Efficiency Act of 1994, which will increase the ability of bank
holding companies and banks to operate across state lines. Under the Riegle-Neal
Interstate Banking and Branching Efficiency Act of 1994, the existing
restrictions on interstate acquisitions of banks by bank holding companies will
be repealed one year following enactment, such that the Company and any other
bank holding company located in South Carolina would be able to acquire a bank
located in any other state, and a bank holding company located outside South
Carolina could acquire any South Carolina-based bank, in either case subject to
certain deposit percentage and other restrictions. The legislation also provides
that, unless an individual state elects beforehand either (i) to accelerate the
effective date or (ii) to prohibit out-of-state banks from operating interstate
branches within its territory, on or after June 1, 1997, adequately capitalized
and managed bank holding companies will be able to consolidate their multistate
bank operations into a single bank subsidiary and to branch interstate through
acquisitions. De novo branching by an out-of-state bank would be permitted only
if it is expressly permitted by the laws of the host state. The authority of a
bank to establish and operate branches within a state will continue to be
subject to applicable state branching laws. South Carolina law was amended,
effective July 1, 1996, to permit such interstate branching but not de novo
branching by an out-of-state bank. The Company believes that this legislation
may result in increased takeover activity of South Carolina financial
institutions by out-of-state financial institutions. However, the Company does
not presently anticipate that such legislation will have a material impact on
its operations or future plans.
Obligations of Holding Company to its Subsidiary Banks
Under the policy of the Federal Reserve, a bank holding company is
required to serve as a source of financial strength to its subsidiary depository
institutions and to commit resources to support such institutions in
circumstances where it might not do so absent such policy. Under the Federal
Deposit Insurance Corporation Improvement Act of 1991 ("1991 Banking Law"), to
avoid receivership of its insured depository institution subsidiary, a bank
holding company is required to guarantee the compliance of any insured
depository institution subsidiary that may become "undercapitalized" with the
terms of any capital restoration plan filed by such subsidiary with its
appropriate federal banking agency up to the lesser of (i) an amount equal to 5%
of the institution's total assets at the time the institution became
undercapitalized, or (ii) the amount which is necessary (or would have been
necessary) to bring the institution into compliance with all applicable capital
standards as of the time the institution fails to comply with such capital
restoration plan. Under the BHCA, the Federal Reserve has the authority to
require a bank holding company to terminate any activity or to relinquish
control of a nonbank subsidiary (other than a nonbank subsidiary of a bank) upon
the Federal Reserve's determination that such activity or control constitutes a
serious risk to the financial soundness and stability of any bank subsidiary of
the bank holding company.
In addition, the "cross-guarantee" provisions of the Federal Deposit
Insurance Act, as amended ("FDIA"), require insured depository institutions
under common control to reimburse the FDIC for any loss suffered or reasonably
anticipated by either the Savings Association Insurance Fund or the Bank
Insurance Fund of the FDIC as a result of the default of a commonly controlled
insured depository institution or for any assistance provided by
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the FDIC to a commonly controlled insured depository institution in danger of
default. The FDIC may decline to enforce the cross-guarantee provisions if it
determines that a waiver is in the best interest of the SAIF or the BIF or both.
The FDIC's claim for damages is superior to claims of stockholders of the
insured depository institution or its holding company but is subordinate to
claims of depositors, secured creditors and holders of subordinated debt (other
than affiliates) of the commonly controlled insured depository institutions.
The FDIA also provides that amounts received from the liquidation or
other resolution of any insured depository institution by any receiver must be
distributed (after payment of secured claims) to pay the deposit liabilities of
the institution prior to payment of any other general or unsecured senior
liability, subordinated liability, general creditor or stockholder. This
provision would give depositors a preference over general and subordinated
creditors and stockholders in the event a receiver is appointed to distribute
the assets of the Banks.
Any capital loans by a bank holding company to any of its subsidiary
banks are subordinate in right of payment to deposits and to certain other
indebtedness of such subsidiary bank. In the event of a bank holding company's
bankruptcy, any commitment by the bank holding company to a federal bank
regulatory agency to maintain the capital of a subsidiary bank will be assumed
by the bankruptcy trustee and entitled to a priority of payment.
Under the National Bank Act, if the capital stock of a national bank is
impaired by losses or otherwise, the Office of the Comptroller of the Currency
("OCC") is authorized to require payment of the deficiency by assessment upon
the bank's shareholders', pro rata, and to the extent necessary, if any such
assessment is not paid by any shareholder after three months notice, to sell the
stock of such shareholder to make good the deficiency.
Capital Adequacy
The various federal bank regulators, including the Federal Reserve and
the OCC, have adopted risk-based capital requirements for assessing bank holding
company and bank capital adequacy. These standards define what qualifies as
capital and establish minimum capital standards in relation to assets and
off-balance sheet exposures, as adjusted for credit risks. Capital is classified
into two tiers. For bank holding companies, Tier 1 or "core" capital consists
primarily of common shareholders' equity, perpetual preferred stock (subject to
certain limitations) and minority interests in the common equity accounts of
consolidated subsidiaries, and is reduced by goodwill and certain investments in
other corporations ("Tier 1 Capital"). Tier 2 capital consists of the allowance
for possible loan losses (subject to certain limitations), and certain
subordinated debt, "hybrid capital instruments", subordinated and perpetual debt
and intermediate term and other preferred stock ("Tier 2 Capital"). A minimum
ratio of total capital to risk- weighted assets of 8.00% is required and Tier 1
capital must be at least 50% of total capital. The Federal Reserve also has
adopted a minimum leverage ratio of Tier 1 Capital to total assets (not
risk-weighted) of 3%. The 3% Tier 1 Capital to total assets ratio constitutes
the leverage standard for bank holding companies and national banks, and will be
used in conjunction with the risk-based ratio in determining the overall capital
adequacy of banking organizations.
The Federal Reserve and the OCC have emphasized that the foregoing
standards are supervisory minimums and that an institution would be permitted to
maintain such levels of capital only if it had a composite rating of "1" under
the regulatory rating systems for bank holding companies and banks. All other
bank holding companies are required to maintain a leverage ratio of 3% plus at
least 1% to 2% of additional capital. These rules further provide that banking
organizations experiencing internal growth or making acquisitions will be
expected to maintain capital positions substantially above the minimum
supervisory levels and comparable to peer group averages, without significant
reliance on intangible assets. The Federal Reserve continues to consider a
"tangible Tier 1 leverage ratio" in evaluation proposals for expansion or new
activities. The tangible Tier 1 leverage ratio is the ratio of a banking
organization's Tier 1 Capital less all intangibles, to total assets, less all
intangibles. The Federal Reserve has not advised the Company of any specific
minimum leverage ratio applicable to it. As of December 31, 1996, the Company,
Anderson National Bank, Spartanburg National Bank, and The Community Bank of
Greenville have leverage ratios of 6.72%, 7.25%, 6.74%; and 10.45% respectively,
and total risk adjusted capital ratios of 10.30%, 10.35%, 9.99% and 18.76%,
respectively.
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Payment of Dividends
If a national bank's surplus fund equals the amount of its capital
stock, the directors may declare quarterly, semi-annual or annual dividends out
of the bank's net profits, after deduction of losses and bad debts. If the
surplus fund does not equal the amount of capital stock, a dividend may not be
paid until one-tenth of the bank's net profits of the preceding half year, in
the case of quarterly or semi-annual dividends, or the preceding two years, in
the case of an annual dividend, are transferred to the surplus fund.
The approval of the OCC is required if the total of all dividends
declared by a national bank in any calendar year will exceed the total of its
retained net profits of that year combined with its retained net profits of the
two preceding years, less any required transfers to surplus or a fund for the
retirement of any preferred stock. OCC regulations provide that provisions for
possible credit losses cannot be added back to net income and charge-offs cannot
be deducted from net income in calculating the level of net profits available
for the payment of dividends.
The payment of dividends by the Banks may also be affected or limited
by other factors, such as the requirements to maintain adequate capital above
regulatory guidelines. In addition, if, in the opinion of the OCC, a bank under
its jurisdiction is engaged in or is about to engage in an unsafe or unsound
practice (which, depending on the financial condition of the bank, could include
the payment of dividends), the OCC may require, after notice and hearing, that
such bank cease and desist from such practice. The OCC has indicated that paying
dividends that deplete a national bank's capital base to an inadequate level
would be an unsafe and unsound banking practice. The Federal Reserve, the OCC
and the FDIC have issued policy statements which provide that bank holding
companies and insured banks should generally only pay dividends out of current
operating earnings.
In 1996, Anderson National Bank paid dividends of $750,000 to the
Company. Neither Spartanburg National Bank nor The Community Bank of Greenville
paid dividends in 1996.
Bank Regulation
The Banks are subject to supervision and examination by the OCC. The
OCC regulates and monitors all areas of the Banks' operations, including loans,
mortgages, issuance of securities, capital adequacy, payment of dividends, and
establishment of branches. Interest and certain other charges collected or
contracted for by the Banks are also subject also to state usury laws and
certain federal laws concerning interest rates. The Banks are members of the
Federal Reserve System, and their deposits are insured by the FDIC up to the
maximum permitted by law.
Under present law, the Banks currently may establish and operate
branches throughout the State of South Carolina, subject to the maintenance of
adequate capital for each branch and the receipt of OCC approval.
Insurance of Deposits
As FDIC-insured institutions, the Banks are subject to insurance
assessments imposed by the FDIC. Under current law, the insurance assessment to
be paid by FDIC-insured institutions shall be as specified in a schedule
required to be issued by the FDIC that specifies, at semi-annual intervals,
target reserve ratios designed to increase the FDIC insurance fund's reserve
ratio to 1.25% of estimated insured deposits (or such higher ratio as the FDIC
may determine in accordance with the statute) in 15 years. Further, the FDIC is
authorized to impose one or more special assessments in any amount deemed
necessary to enable repayment of amounts borrowed by the FDIC from the United
States Department of the Treasury.
Effective December 11, 1996, the FDIC implemented a risk-based
assessment schedule, having assessments ranging from 0.00% to 0.27% of an
institution's average assessment base. The actual assessment to be paid by each
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FDIC-insured institution is based on the institution's assessment risk
classification, which is determined based on whether the institution is
considered "well capitalized," "adequately capitalized" or "undercapitalized",
as such terms have been defined in applicable federal regulations and whether
such institution is considered by its supervisory agency to be financially sound
or to have supervisory concerns. Under uniform regulations defining such capital
levels issued by each of the federal banking agencies, a bank is considered
"well capitalized" if it has (i) a total risk-based capital ratio of 10% or
greater, (ii) a Tier 1 risk-based capital ratio of 6% or greater, (iii) a
leverage ratio of 5% or greater, and (iv) is not subject to any order or written
directive to meet and maintain a specific capital level for any capital measure.
An "adequately capitalized" bank is defined as one that has (i) a total
risk-based capital ratio of 8% or greater, (ii) a Tier 1 risk-based capital
ratio of 4% or greater, and (iii) a leverage ratio of 4% or greater (or 3% or
greater in the case of a bank with a composite CAMEL rating of 1). A bank is
considered "undercapitalized" if it has (i) a total risk-based capital ratio of
less than 8%, (ii) a Tier 1 risk-based capital ratio of less than 4%, or (iii) a
leverage ratio of less than 4% (or 3% in the case of a bank with a composite
CAMEL rating of 1). As a result of the current provisions of federal law, the
assessment rates on deposits could increase over present levels. Based on the
current financial condition and capital levels of the Banks, the Company does
not expect that the current FDIC risk-based assessment schedule will have a
material adverse effect on the Banks' earnings. The Banks' risk-based insurance
assessments currently are set at 0.00% for the first half of 1997.
The FDIC may increase or decrease the new assessment rates semiannually
up to a maximum increase or decrease of 5 basis points.
Legislation
In 1989 and again in 1991, Congress enacted comprehensive legislation
affecting the commercial banking and thrift industries: the Financial
Institutions Reform, Recovery and Enforcement Act (FIRREA") and the 1991 Banking
Law. FIRREA, among other things, abolished the Federal Savings and Loan
Insurance Corporation and established two new insurance funds under the
jurisdiction of the FDIC: the Bank Insurance Fund ("BIF"), which insures most
commercial banks, including Anderson National Bank and Spartanburg National
Bank, and the Savings Association Insurance Fund ("SAIF"), which insures most
thrift institutions. The Company expects that The Community Bank of Greenville,
N.A. will be insured by the BIF.
FIRREA permitted bank holding companies to acquire savings associations
subject to appropriate regulatory approvals. The entities acquired may be
operated as separate savings associations, converted into banks or, if certain
conditions are satisfied, merged into existing bank affiliates.
FIRREA also imposed, with certain limited exceptions, a
"cross-guarantee" on the part of commonly controlled depository institutions, as
discussed above under "Obligations of Holding Company to its Subsidiary Banks."
The 1991 Banking Law supplements the federal banking agencies' broad
powers to take corrective action to resolve problems of insured depository
institutions, generally authorizing earlier intervention in the affairs of a
particular institution and imposing express requirements that are tied to the
institution's level of capital. If a depository institution fails to meet
regulatory capital requirements specified in the 1991 Banking Law, regulatory
agencies can require submission and funding of a capital restoration plan by the
institution, place limits on its activities, require the raising of additional
capital and, ultimately, require the appointment of a conservator or receiver
for the institution. Where a capital restoration plan is required, the
regulatory agency may require a bank holding company to guarantee as a condition
of approval of the plan the lower of 5% of an undercapitalized subsidiary's
assets or the amount required to meet regulatory capital requirements. If the
controlling bank holding company fails to fulfill its obligations with respect
to such a plan and files (or has filed against it) a petition under the federal
Bankruptcy Code, the claim would be entitled to a priority in such bankruptcy
proceeding over third party creditors of the bank holding company.
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The 1991 Banking Law required each federal banking agency, including
the Federal Reserve, to revise its risk-based capital standards to ensure that
those standards take adequate account of interest rate risk, concentration of
credit risk and the risks of non-traditional activities, as well as reflect the
actual performance and expected risk of loss on multi-family mortgages. The
Federal Reserve, the FDIC and the OCC have issued a joint rule amending the
capital standards to specify that the banking agencies will include in their
evaluations of a bank's capital adequacy an assessment of the exposure to
declines in the economic value of the bank's capital due to changes in interest
rates. The agencies have also issued a joint policy statement that provides
bankers guidance on sound practices for managing interest rate risk. The policy
statement identifies the key elements of sound interest rate risk management and
describes prudent principles and practices for each element, emphasizing the
importance of adequate oversight by a bank's board of directors and senior
management and of a comprehensive risk management process. The policy statement
also outlines the critical factors that will affect the agencies' evaluation of
a bank's interest rate risk when making a determination of capital adequacy. In
adopting the policy statement, the agencies have asserted their intention to
continue to place significant emphasis on the level of a bank's interest rate
risk exposure and the quality of its risk management process when evaluating a
bank's capital adequacy.
The Federal Reserve, the FDIC, the Office of the Comptroller of the
Currency and the Office of Thrift Supervision have also issued a joint rule
amending the risk-based capital guidelines to take account of concentration of
credit risk and the risk of non-traditional activities. The rule amends each
agency's risk-based capital standards by explicitly identifying concentration of
credit risk and the risk arising from other sources, as well as an institution's
ability to manage these risks, as important factors to be taken into account by
the agency in assessing an institution's overall capital adequacy.
The 1991 Banking Law also restricts the acceptance of brokered deposits
by insured depository institutions and contains a number of consumer banking
provisions, including disclosure requirements and substantive contractual
limitations with respect to deposit accounts.
The 1991 Banking Law also required each of the federal banking agencies
to develop regulations addressing certain safety and soundness standards for
insured depository institutions and depository institution holding companies,
including operational and managerial standards, asset quality, earnings and
stock valuation standards, as well as compensation standards (but not dollar
levels of compensation). On September 23, 1994, the Riegle Community Development
and Regulatory Improvement Act of 1994 amended the 1991 Banking Law to authorize
the agencies to establish safety and soundness standards by regulation or by
guideline. Accordingly, the federal banking agencies have issued Interagency
Guidelines Establishing Standards for Safety and Soundness, which set forth
general operational and managerial standards in the areas of internal controls,
information systems and internal audit systems, loan documentation, credit
underwriting, interest rate exposure, asset growth and compensation, fees and
benefits. The Guidelines also prohibit payment of excessive compensation as an
unsafe and unsound practice. Compensation is defined as excessive if it is
unreasonable or disproportionate to the services actually performed. Bank
holding companies are not subject to the Guidelines. The Guidelines contemplate
that each federal agency will determine compliance with these standards through
the examination process, and if necessary to correct weaknesses, require an
institution to file a written safety and soundness compliance plan. The Company
does not expect the Guidelines to materially change current operations of the
Banks.
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Enforcement Policies and Actions
FIRREA significantly increased the enforcement powers of the OCC, the
Federal Reserve and the other federal depository institution regulators, and
authorizes the imposition of civil money penalties of from $5,000 per day up to
$1,000,000 per day for violations of federal banking laws and regulations.
Persons who are affiliated with depository institutions and are found to have
violated federal banking laws and regulations can be removed from any office
held in such institution and banned for life from participating in the affairs
of such an institution. The banking regulators have not hesitated to use the new
enforcement authorities provided them under FIRREA.
Community Reinvestment Act
The Banks are subject to the requirements of the Community Reinvestment
Act (the "CRA"). The CRA requires that financial institutions have an
affirmative and ongoing obligation to meet the credit needs of their local
communities, including low- and moderate-income neighborhoods, consistent with
the safe and sound operation of those institutions. Each financial institution's
efforts in meeting the community credit needs are evaluated as part of the
examination process pursuant to twelve assessment factors. These factors also
are considered in evaluating mergers, acquisitions and applications to open a
branch or facility. Both Banks received ratings of satisfactory in their most
recent evaluations.
The federal banking agencies, including the OCC, have issued a joint
rule that changes the method of evaluating an institution's CRA performance. The
new rule evaluates institutions based on their actual performance (rather than
efforts) in meeting community credit needs. Subject to certain exceptions, the
OCC assesses the CRA performance of a bank by applying lending, investment and
service tests. The lending test evaluates a bank's record of helping to meet the
credit needs of its assessment area through its lending activities by
considering a bank's home mortgage, small business, small farm, community
development, and consumer lending. The investment test evaluates a bank's record
of helping to meet the credit needs of its assessment area through qualified
investments that benefit its assessment area or a broader statewide or regional
area that includes the bank's assessment area. The service test evaluates a
bank's record of helping to meet the credit needs of its assessment area by
analyzing both the availability and effectiveness of a bank's systems for
delivering retail banking services and the extent and innovativeness of its
community development services. The OCC assigns a rating to a bank of
"outstanding," satisfactory," "needs to improve," or "substantial noncompliance"
based on the bank's performance under the lending, investment and service tests.
To evaluate compliance with the tests, subject to certain exceptions, banks will
be required to collect and report to the OCC extensive demographic and loan
data.
For banks with total assets of less than $250 million that are
affiliates of a holding company with banking and thrift assets of less than $1
billion, such as the Banks and Company, the OCC evaluates the bank's record of
helping to meet the credit needs of its assessment area pursuant to the
following criteria: (1) the bank's loan-to-deposit ratio, adjusted for seasonal
variation and, as appropriate, other lending-related activities, such as loan
originations for sale to the secondary markets, community development loans, or
qualified investments; (2) the percentage of loans and, as appropriate, other
lending-related activities located in the bank's assessment area; (3) the bank's
record of lending to and, as appropriate, engaging in other lending-related
activities for borrowers of different income levels and businesses and farms of
different sizes; (4) the geographic distribution of the bank's loans; and (5)
the bank's record of taking action, if warranted, in response to written
complaints about its performance in helping to meet credit needs in its
assessment area. Small banks may also elect to be assessed under the generally
applicable standards of the rule, but to do so a small bank must collect and
report extensive data.
A bank may also submit a strategic plan to the OCC and be evaluated on
its performance under the plan.
10
<PAGE>
Other Laws and Regulations
Interest and certain other charges collected or contracted for by the
Banks are subject to state usury laws and certain federal laws concerning
interest rates. The Banks' operations are also subject to certain federal laws
applicable to credit transactions, such as the federal Truth-In-Lending Act
governing disclosures of credit terms to consumer borrowers, CRA requiring
financial institutions to meet their obligations to provide for the total credit
needs of the communities they serve, including investing their assets in loans
to low- and moderate-income borrowers, the Home Mortgage Disclosure Act of 1975
requiring financial institutions to provide information to enable the public and
public officials to determine whether a financial institution is fulfilling its
obligation to help meet the housing needs of the community it serves, the Equal
Credit Opportunity Act prohibiting discrimination on the basis of race, creed or
other prohibited factors in extending credit, the Fair Credit Reporting Act of
1978 governing the use and provision of information to credit reporting
agencies, the Fair Debt Collection Act governing the manner in which consumer
debts may be collected by collection agencies, and the rules and regulations of
the various federal agencies charged with the responsibility of implementing
such federal laws. The deposit operations of the Banks also are subject to the
Right to Financial Privacy Act, which imposes a duty to maintain confidentiality
of consumer financial records and prescribes procedures for complying with
administrative subpoenas of financial records, and the Electronic Funds Transfer
Act and Regulation E issued by the Federal Reserve to implement that act, which
govern automatic deposits to and withdrawals from deposit accounts and
customers' rights and liabilities arising from the use of automated teller
machines and other electronic banking services.
From time to time, bills are pending before the United States Congress
which contain wide-ranging proposals for altering the structure, regulation and
competitive relationships of the nation's financial institutions. Among such
bills are proposals to prohibit banks and bank holding companies from conducting
certain types of activities, to subject banks to increased disclosure and
reporting requirements, to alter the statutory separation of commercial and
investment banking, and to further expand the powers of banks, bank holding
companies and competitors of banks. It cannot be predicted whether or in what
form any of these proposals will be adopted or to the extent to which the
business of the Company and its subsidiaries may be affected thereby.
Fiscal and Monetary Policy
Banking is a business which depends on interest rate differentials. In
general, the difference between the interest paid by a bank on its deposits and
its other borrowings, and the interest received by a bank on its loans and
securities holdings, constitutes the major portion of a bank's earnings. Thus,
the earnings and growth of the Company will be subject to the influence of
economic conditions generally, both domestic and foreign, and also to the
monetary and fiscal policies of the United States and its agencies, particularly
the Federal Reserve. The Federal Reserve regulates the supply of money through
various means, including open-market dealings in United States government
securities, the discount rate at which banks may borrow from the Federal
Reserve, and the reserve requirements on deposits. The nature and timing of any
changes in such policies and their impact on the Company cannot be predicted.
Consumer Finance Regulation
The Company's consumer finance subsidiary, Quick Credit, is supervised
by the State Board of Financial Institutions. Quick Credit is required to file
annual reports with, and is subject to annual examinations by the State Board of
Financial Institutions. Quick Credit must comply with all federal and state
regulations pertaining to extensions of credit. South Carolina law limits
consumer finance companies to one outstanding loan per customer, and places
limitations on the interest rates charged by such companies.
Item 2. Properties
The Company's principal executive offices are located in a building in
the downtown area of Anderson, South Carolina, and contain approximately 17,700
square feet of space. The building is owned by Anderson National Bank and is
occupied exclusively by the Company and Anderson National Bank.
11
<PAGE>
Anderson National Bank maintains three branch offices; one in Anderson
containing 5,800 square feet of space, which is owned by the bank; another
office in the town of Pelzer, South Carolina, containing approximately 2,000
square feet of space, which is leased by the bank, and another office in the
town of Williamston, South Carolina, containing approximately 1,300 square feet
of space, which is leased by the bank.
Spartanburg National Bank has a main office and two branch facilities
both located in Spartanburg, South Carolina with square footage of 8,800, 3,300,
and 3,300, respectively. All are owned by Spartanburg National Bank and occupied
exclusively by Spartanburg National Bank.
Quick Credit Corporation maintains offices in Anderson, Greenville,
Greenwood, Laurens, Seneca, Easley, Florence, Spartanburg, Marion, Sumter,
Cayce, Kingstree, Orangeburg, North Charleston, Abbeville, Newberry, Hartsville,
Rock Hill, Gaffney, Aiken, Camden, and Columbia, South Carolina. The combined
square footage of these twenty-two offices is approximately 29,000 square feet.
All offices are leased with the terms of the various leases expiring in years
1997 through 2001.
The Community Bank of Greenville, N.A. has one office located at 211
Patewood Drive, Greenville, South Carolina 29616, containing approximately 6,800
square feet.
The building is owned and occupied exclusively by The Community Bank of
Greenville.
Item 3. Legal proceedings
Although the Company is from time to time a party to various legal
proceedings arising out of the ordinary course of business, management believes
there is no proceeding threatened or pending against the Company that could
result in a materially adverse change in the business or financial condition of
the Company.
Item 4. Submission of Matters to a Vote of Security Holders
No matters were submitted to a vote of shareholders in the fourth
quarter of the Company's fiscal year.
PART II
Item 5. Market for the Registrant's Common Equity and Related Stockholder
Matters
The Common Stock of the Company began trading on the Nasdaq National
Market segment of the Nasdaq Stock Market under the trading symbol FUSC on
February 8, 1995. Prior to the listing on Nasdaq there was no established public
trading market for the Company's stock. The following table sets forth the high
and low trade prices for the common stock for the indicated 1995 and 1996
periods, adjusted to give retroactive effect to the two stock dividends paid in
each of 1995 and 1996. The source of the quotations is the National Association
of Securities Dealers, Inc. monthly statistical reports. Market quotations
reflect interdealer prices, without retail mark-up, mark-down or commission and
may not necessarily represent actual transactions.
<TABLE>
<CAPTION>
1995 1996
---- ----
1st Qtr. 2nd Qtr. 3rd Qtr. 4th Qtr. 1st Qtr. 2nd Qtr. 3rd Qtr. 4th Qtr.
-------- -------- -------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
High $11.88 $14.00 $15.50 $18.25 $17.50 $16.00 $13.50 $13.00
Low 8.50 10.50 12.75 14.25 15.00 12.50 11.00 10.50
</TABLE>
12
<PAGE>
As of December 31, 1996, First United Bancorporation had approximately
587 shareholders of record. Two 5% stock dividends were paid in each of 1995 and
1996. The Company paid quarterly cash dividends of $.03 per share for each of
the four quarters in 1995 and 1996. Future cash dividends will be determined by
the Company's Board of Directors in light of circumstances existing from time to
time, including the Company's growth, profitability, financial condition,
results of operations and other factors deemed relevant by the Company's Board
of Directors. See Item 1. Business - Payment of Dividends and Note 14 of the
Notes to Consolidated Financial Statements for information about limits on
payment of dividends by the Company's subsidiaries.
First United Bancorporation has not sold any securities during the period
covered by this report other than in transctions registered pursuant to the
Securities Act of 1933.
Item 6. Selected Financial Data
SELECTED CONSOLIDATED FINANCIAL DATA
The following tables set forth certain selected consolidated financial
data concerning the Company. The selected consolidated financial data has been
derived from consolidated financial statements which have been audited. This
information should be read in conjunction with Management's Discussion and
Analysis of Results of Operations and Financial Condition and is qualified in
its entirety by reference to the more detailed consolidated financial statements
and the notes thereto contained elsewhere in this report (in thousands, except
per share data).
13
<PAGE>
<TABLE>
<CAPTION>
Years Ended December 31,
INCOME STATEMENT DATA: 1992 1993 1994 1995 1996
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Interest income............................. $ 13,438 $ 13,280 $ 15,545 $ 19,666 $ 24,375
Interest expense............................ 5,755 4,525 4,769 7,038 9,439
Net interest income before
provision for loan losses.............. 7,683 8,755 10,776 12,628 14,936
Provision for loan losses................... 391 282 397 779 2,149
Net interest income......................... 7,292 8,473 10,379 11,849 12,787
Non-interest income ........................ 1,362 2,019 1,738 1,883 2,073
Non-interest expense ....................... 7,037 8,032 8,957 10,028 11,891
Income (loss) before income taxes........... 1,617 2,460 3,160 3,704 2,969
Provision for income
taxes (benefit)........................ 579 850 1,082 1,291 1,023
Cumulative effect of change in
accounting method...................... - (56) - - -
Net income (loss) .......................... $ 1,038 $ 1,666 $ 2,078 $ 2,413 $ 1,946
<CAPTION>
PER SHARE DATA:
<S> <C> <C> <C> <C> <C>
Net income (loss) per common share:(2)
Primary ............................. $ 0.41 $ 0.66 $ 0.81 $ 0.90 $ 0.72
Fully diluted.......................... 0.41 0.66 0.81 0.89 0.72
Average common shares outstanding (ooo's) (2)
Primary ......................... 2,511 2,511 2,564 2,696 2,712
Fully diluted.......................... 2,511 2,511 2,564 2,711 2,712
Cash dividends declared per common
share (1)............................. $ - $ - $ 0.03 $ 0.12 $ 0.12
OTHER DATA:
Return on average assets.................... .71% 1.13% 1.32% 1.36% .86%
Return on average shareholders'
equity .............................. 10.44 14.83 15.92 15.72 11.14
Average equity to assets ratio.............. 6.86 7.63 8.27 8.62 7.70
<CAPTION>
At December 31,
BALANCE SHEET DATA: 1992 1993 1994 1995 1996
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Securities held to maturity................. $ 17,796 $ 9,528 $ 9,233 $ 9,481 $ 7,843
Securities available for sale............... 13,359 23,227 22,081 19,032 26,304
Net loans .............................. 90,007 100,488 117,896 145,674 202,391
Total assets .............................. 143,449 150,038 165,203 194,414 270,195
Deposits .............................. 123,752 127,424 137,666 160,381 218,219
Total liabilities........................... 132,991 137,752 151,612 178,007 251,910
Total shareholders' equity.................. 10,458 12,286 13,591 16,407 18,285
- - - - - -
</TABLE>
(1) The Company declared an initial $.03 per share dividend in the fourth
quarter of 1994 and declared dividends of .03 per share per quarter in 1995
and 1996. Prior to 1994 the Company had not declared any cash dividends.
(2) Per share data has been adjusted to reflect the payment of 5% stock
dividends in 1992 and 1993, the 10% stock dividend and the three for two
stock split in 1994, and the two 5% stock dividends in each of 1995 and
1996.
14
<PAGE>
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
Management's Discussion and Analysis is provided to afford the Company's
shareholders a clearer understanding of the major elements of the Company's
results of operations, financial condition, liquidity and capital resources. The
following discussion should be read in conjunction with the consolidated
financial statements, related notes included elsewhere herein and the Company's
1996 Form l0-K.
Discussion of Changes in Financial Condition
Total assets increased $75,781,000, or 39.0%, from $194,414,000 at December 31,
1995 to $270,195,000 at December 31, 1996.
Total outstanding loans, the largest single category of assets, increased
$57,557,000, or 38.9%, to $205,551,000 at December 31, 1996, as a result of an
increase in the amount of outstanding loans at the Company's three bank
subsidiaries. Total loans outstanding at December 31, 1996 for Spartanburg
National Bank amounted to $90,833,000, a $17,144,000, or 23.3%, increase over
the $73,689,000 reported at December 31, 1995. Total outstanding loans, net of
intercompany loans, at Anderson National Bank at December 31, 1996 amounted to
$85,610,000, an increase of $22,476,000, or 35.6%, over total outstanding loans,
net of intercompany loans, of $63,134,000 at December 31, 1995. The Community
Bank of Greenville, National Association ("The Community Bank of Greenville"),
which officially opened for business on April 17, 1996, reported total
outstanding loans of $19,036,000 at December 31, 1996.
While the Company's bank subsidiaries experienced significant loan growth during
1996, the Company's consumer finance subsidiary, Quick Credit Corporation,
experienced a decrease in total outstanding loans of $1,099,000, or 9.8%. Total
loans outstanding at December 31, 1996 for Quick Credit Corporation amounted to
$10,072,000 compared to $11,171,000 at December 31, 1995. The decrease in Quick
Credit Corporation's outstanding loans resulted largely from an increase in the
amount of loan charge-offs during 1996.
Premises, furniture and equipment increased $2,039,000, or 36.5%, during the
period ended December 31, 1996. This increase is largely attributable to
building and equipment costs associated with the Company's newest bank
subsidiary, The Community Bank of Greenville, which officially opened for
business on April 17, 1996, and to building and equipment costs associated with
a new branch facility for Spartanburg National Bank which officially opened for
business on September 16, 1996.
The Company's securities portfolios, collectively, at amortized cost, increased
$5,634,000, or 19.8%, from year-end 1995 levels as a result of securities
purchased by The Community Bank of Greenville during the period ended December
31, 1996. Cash and due from banks increased $1,775,000, or 27.9%, to $8,128,000
at December 31, 1996. This increase is largely the result of additional
uncollected funds in correspondent bank accounts at quarter-end resulting from a
larger deposit base at December 31, 1996. The amount of Federal funds sold at
December 31, 1996 was $13,700,000, or 168.6%, higher than the amount sold at
December 31, 1995 largely as a result of amounts sold by The Community Bank of
Greenville.
Other real estate owned, comprised of four parcels, amounted to $85,000 at
December 31, 1996 compared to $74,000 at December 31, 1995. Management is
pursuing liquidation of these four pieces of property.
Other assets increased $1,005,000, or 32.3%, during the period ended December
31, 1996 largely as a result of increases in tax benefits associated with
year-to-date losses attributable to The Community Bank of Greenville, and to an
increase in interest receivable on loans resulting from a larger base of
outstanding loans at December 31, 1996.
15
<PAGE>
Total liabilities increased $73,903,000, or 41.5%, largely as a result of a
$57,838,000, or 36.1%, increase in total deposits at the Company's bank
subsidiaries. Of the $57,838,000 increase in total deposits, $33,215,000, or
57.4%, is attributable to new deposits generated by the Community Bank of
Greenville since opening on April 17, 1996. During 1996, Anderson National Bank
experienced an increase in deposits of $10,284,000, or 13.1%, and Spartanburg
National Bank experienced an increase in its deposits of $14,745,000, or 18.0%.
The largest dollar increase in a single category of deposits was in certificates
of deposits of $100,000 or less, which increased $29,263,000, or 44.7% during
the period ended December 31, 1996. The largest percentage increase in a single
category of deposits was in certificates of deposit of $100,000 or more, which
increased 72.2%, or $17,218,000, during the period. The increases in these two
categories of deposits are largely the result of deposits generated by The
Community Bank of Greenville. During the period ended December 31, 1996, the
Company also experienced an increase in savings and money market deposits of
$8,693,000, or 34.2%, which resulted largely from growth in these deposits at
Anderson National Bank and Spartanburg National Bank. The Company also
experienced modest growth of 10.7% in non-interest bearing demand deposits
during the period while the level of NOW accounts remained relatively unchanged
from the year-end 1995 level.
Securities Sold Under Agreements to Repurchase, comprised largely of overnight
repurchase agreements, increased $5,071,000, or 163.8%, during the period
largely as a result of a single temporary quarter-end investment of funds by a
single customer of Spartanburg National Bank. Federal Home Loan Bank advances
increased $7,920,000, or 272.2%, to $10,830,000 at December 31, 1996. These
additional advances were utilized to help fund the loan growth at Anderson
National Bank and Spartanburg National Bank during 1996. Other borrowed funds,
comprised of Federal funds purchased, various types of borrowings by Quick
Credit Corporation and borrowings by the parent company, increased $2,430,000,
or 28.0%, during 1996. During the period ended December 31, 1996, the Company
borrowed an additional $4,100,000 under an existing line of credit with a third
party lender to fully capitalize The Community Bank of Greenville and for
general corporate purposes while Quick Credit Corporation reduced its
outstanding debt with its third party lender to $1,670,000. During the period
ended December 31, 1996 the Company satisfied all outstanding capitalized lease
obligations.
Shareholders' equity increased $1,878,000 from December 31, 1995 to December 31,
1996 as a result of net earnings for the period of $1,946,000 and the exercise
of stock options under the Company's Employee Stock Option Plans in the amount
of $175,000. These additions to shareholders' equity were partially offset by
the declaration and payment of cash dividends and cash in lieu of fractional
shares on the two 5% stock dividends issued in 1996 in the amount of $298,000
and a decrease in the amount of net unrealized losses on the Company's
"available for sale" securities portfolio of $55,000 during the period.
Results of Operations
The following discussion relates to the results of operations for the year ended
December 31, 1996 compared with the year ended December 31, 1995, and the year
ended December 31, 1995 compared with the year ended December 31, 1994.
1996 compared with 1995
General
The consolidated Company's operations for the twelve-months ended December 31,
1996 resulted in net income of $1,946,000, a 19.4% decrease from the $2,413,000
in net income recorded in 1995. The decrease in consolidated earnings for 1996
is attributable to a $1,370,000, or 175.9%, increase in the provision for loan
losses and start up expenses and early operating losses totalling $701,000,
pre-tax, incurred in 1996 associated with the Company's new bank subsidiary, The
Community Bank of Greenville. The large increase in the Company's provision for
loan losses is mainly attributable to an increase of $1,003,000, or 137.8%, in
the provision made by Quick Credit Corporation in 1996. During 1996, the Company
also incurred interest expense of $245,000 associated with borrowings used to
capitalize The Community Bank of Greenville and $213,000 in consulting fees
associated with the Company's re-engineering of its banking operations.
16
<PAGE>
Anderson National Bank recorded net earnings of $1,527,000 in 1996, a 36.3%
increase over the $1,120,000 recorded in 1995. The increase in earnings for this
subsidiary resulted primarily from an increase in net interest income of
$946,000, or 22.8%.
Spartanburg National Bank recorded net earnings of $1,096,000 in 1996, a 22.9%
increase over the $892,000 recorded for 1995. The increase in earnings for this
subsidiary, like that of Anderson National Bank's, resulted largely from an
increase in net interest income of $661,000, or 17.3%.
As anticipated, The Community Bank of Greenville recorded net losses of $460,000
in 1996. Of the $460,000 in losses recorded, $57,000, or 12.4%, were incurred
prior to commencing banking operations.
Quick Credit Corporation recorded a net loss of $15,000 in 1996 compared to net
earnings of $545,000 in 1995. The loss recorded for this subsidiary for 1996
resulted primarily from higher loan charge-offs which required a significant
increase in the provision for loan losses in 1996 (see "Provision and Allowance
for Loan Losses, Loan Loss Experience") and an increase in other operating
expenses.
Interest Income, Interest Expense and Net Interest Income
Net interest income, the major component of the Company's income, is the amount
by which interest and fees on interest earning assets exceeds the interest paid
on interest bearing deposits and other interest bearing funds. The Company's net
interest income increased $2,308,000, or 18.3%, to $14,936,000 for the
year-ended December 31, 1996 compared to $12,628,000 for the year-ended December
31, 1995. The increase is largely attributable to an increase in interest income
on loans at the Company's banking subsidiaries resulting from an increase in the
volume of outstanding loans during 1996.
The Company's total interest income increased $4,709,000, or 23.9%, to
$24,375,000 in 1996 compared to $19,666,000 for 1995. The increase is largely
attributable to a $4,330,000, or 24.5% increase in loan interest income
resulting from a $38,724,000, or 29.1%, increase in the volume of average
outstanding loans in 1996. The average yield on loans for 1996 was 12.79%
compared to 13.26% for 1995.
Average balances on securities and federal funds sold, collectively, increased
by $7,281,000, or 22.1%, in 1996 when compared to 1995. Largely as a result of
this increase, interest income on these categories of earning assets,
collectively, increased $379,000, or 19.0% .
Interest expense on deposits increased $2,028,000, or 34.5%, to $7,899,000 in
1996 compared to $5,871,000 for 1995. The increase is attributable to an
increase of $37,352,000, or 29.5%, in the volume of average interest-bearing
deposits in 1996 when compared to 1995, coupled with an increase in the
Company's costs of interest-bearing deposits resulting from increases in the
rates paid for those deposits. The weighted average cost of interest-bearing
deposits for 1996 was 4.83% compared to 4.64% for 1995.
Interest expense on Securities Sold Under Repurchase Agreements declined
slightly in 1996 as a result of a decline in the rates paid on these short-term
funds in 1996. Interest expense incurred by the Company's banking subsidiaries
on average borrowings of $6,738,000 from the Federal Home Loan Bank of Atlanta
in 1996 amounted to $412,000, a 95.3% increase over the $211,000 incurred in
1995 and resulted from an increase in the average amount borrowed during 1996.
Interest expense on the various categories of other interest-bearing
liabilities, which includes Capitalized Leases, Subordinated Debt, Federal Funds
Purchased and Other Borrowed Funds, collectively, increased $186,000, or 23.6%,
in 1996 when compared to 1995. The increase in interest expense associated with
these other interest-bearing liabilities is primarily attributable to an
increase in interest expense at the parent company level on borrowings utilized
to capitalize The Community Bank of Greenville.
17
<PAGE>
Provision and Allowance for Loan Losses
The net provision for loan losses was $2,149,000 in 1996 compared to $779,000 in
1995, a $1,370,000, or 175.9%, increase. This increase is attributable to
increases in the provisions made by Spartanburg National Bank and Quick Credit
Corporation in 1996 when compared to 1995 and to provisions made by The
Community Bank of Greenville in 1996 as it began to establish its allowance. The
increase made by Spartanburg National Bank was a result of the significant loan
growth experienced by this subsidiary during 1996 as Spartanburg National Bank
made provisions of $225,000 in 1996 compared to $201,000 in 1995. Quick Credit
Corporation made provisions of $1,731,000 in 1996 compared to $728,000 in 1995,
an increase of $1,003,000, or 137.8%. The increase in Quick Credit Corporation's
provision in 1996 resulted from an increase in the number and volume of loans
charged off in 1996 (see "Provision and Allowance for Loan Losses, Loan Loss
Experience"). Anderson National Bank recorded a negative provision for loan
losses in 1995 of $150,000 as a result of continued improvement in the overall
quality of its loan portfolio. Anderson National Bank made no provisions in
1996. The Community Bank of Greenville made provisions for loan losses totalling
$193,000 in 1996 as it began to establish its allowance for loan losses.
At December 31, 1996, the allowance for loan losses as a percentage of
outstanding loans was 1.54% compared to 1.57% at December 31, 1995. For a
discussion of the allowance for loan losses and factors considered by the
Company in determining the adequacy of the allowance for loan losses, see
"Provision and Allowance for Loan Losses, Loan Loss Experience".
At December 31, 1996 the Company had $437,000 in nonaccrual loans which are
considered impaired loans, $416,000 in loans past due 90 days or more and still
accruing interest and $85,000 in OREO, compared to $241,000, $271,000, and
$74,000, respectively, at December 31, 1995. Loans on nonaccrual amounted to
0.22% of total loans at December 31, 1996, compared to 0.17% at December 31,
1995. At December 31, 1996 and December 31, 1995 the Company did not have a
material amount of restructured loans.
In the cases of all non-performing loans, management of the Company has reviewed
the carrying value of any underlying collateral. In those cases where the
collateral value may be less than the carrying value of the loan the Company has
taken specific write downs to the credits, even though such credits may still be
performing. Management of the Company does not believe it has any non-accrual
loan which, individually, could materially impact the reserve for loan losses or
long term future operating results of the Company.
18
<PAGE>
The Company records real estate acquired through foreclosure at the lower of
cost or estimated market value less estimated selling costs. Estimated market
value is based upon the assumption of a sale in the normal course of business
and not on a quick liquidation or distress basis. Estimated market value is
established by independent appraisal at the time acquisition is completed.
Management believes that other real estate owned at December 31, 1996 will not
require significant write-downs in future accounting periods and therefore, will
not have a significant effect on the Company's future operations.
Other Income
Total consolidated other income increased $190,000 or 10.1%, in 1996. The
increase in total consolidated other income resulted largely from an increase of
$123,000, or 192.2%, in recorded gains on the sale of government guaranteed
loans in 1996 versus 1995, a $72,000, or 91.1%, increase in fee income generated
from the sale of alternative investment products and an increase in service
charge income on deposit accounts of $34,000, or 5.5%, at the Company's banking
subsidiaries. The increase in total other income resulting from the increases in
the previously mentioned categories was partially offset by a decrease of $6,000
in 1996 in fee income generated from the Company's mortgage lending activities
and the lack of any gains on the sale of OREO recorded in 1996 versus $25,000
recorded in 1995.
Other Expenses
Total other expenses increased $1,863,000, or 18.6%, in 1996 over 1995.
Salaries, wages and benefits ("personnel expense"), the largest category of
other expenses, increased $1,001,000, or 17.4%, in 1996 over 1995. The increase
in personnel expense resulted from additions to the staff of Quick Credit
Corporation associated with four additional offices opened during the last six
months of 1995 which were fully operational for all of 1996, personnel expenses
associated with the Company's new bank subsidiary, The Community Bank of
Greenville, and increases in personnel expenses at the Company's two other bank
subsidiaries.
Occupancy expense increased $132,000, or 20.9%, during 1996 as a result of
additional expenses associated with the new offices of Quick Credit Corporation
opened during the second half of 1995, additional expenses attributable to The
Community Bank of Greenville which opened during the second quarter of 1996 and
to additional expenses attributable to a second branch office of Spartanburg
National Bank opened during the third quarter of 1996. Furniture and equipment
expenses decreased $24,000, or 4.0%, in 1996 as a result of a decline in
depreciation expense associated with the Company's data processing equipment
which was sold during the second quarter of 1995.
Other operating expenses, the second largest category of other expenses,
increased $754,000, or 24.8%, during 1996 largely as a result of $213,000 in
consulting fees associated with the Company's re-engineering project absorbed in
1996, additional expenses associated with The Community Bank of Greenville which
opened during the early part of the second quarter of 1996, additional expenses
associated with the new offices of Quick Credit Corporation opened during the
second half of 1995, and data processing expense associated with the Company's
outsourcing of its data processing function.
19
<PAGE>
Income Taxes
As a result of a decrease in income before income taxes, the Company incurred
income tax expense of $1,023,000 for 1996 compared to income tax expense of
$1,291,000 for 1995.
1995 compared with 1994
General
The Company's consolidated operations for the twelve-months ended December 31,
1995 resulted in net income of $2,413,000, a 16.1% increase over the $2,078,000
in net income recorded in 1994. The increase in consolidated earnings for 1995
is attributable to a $1,852,000, or 17.2%, increase in the Company's
consolidated net interest income resulting largely from an increase in
consolidated loan interest income of $4,171,000, or 30.9%, at the Company's
three subsidiaries. For the year ended December 31, 1995, the Company recorded
and absorbed expenses, net of income tax benefits, totaling $116,000 which were
associated with the formation and organization of its new bank subsidiary, The
Community Bank of Greenville.
Anderson National Bank recorded net earnings of $1,120,000 for the year-ended
December 31, 1995, a $287,000, or 34.5%, increase over the $833,000 recorded in
1994. The increase in earnings for this subsidiary resulted primarily from an
increase in this subsidiary's net interest income of $361,000, or 9.5%, and a
negative provision for loan losses of $150,000 recorded in 1995 as a result of
the continued improvement in the quality of this subsidiary's loan portfolio.
Spartanburg National Bank recorded net earnings of $892,000 for the year-ended
December 31,1995, a $125,000, or 16.3%, increase over the $767,000 recorded in
1994. The increase in earnings for this subsidiary resulted from an increase in
net interest income of $546,000, or 16.7%. The increase in net interest income
for this subsidiary is attributable to an increase in loan interest income of
$1,607,000, or 34.2%. The increase in revenues derived from Spartanburg National
Bank's loan portfolio resulted from an increase in the volume of outstanding
loans in 1995 coupled with an increase in loan yields.
The Company's consumer finance subsidiary, Quick Credit Corporation, recorded
net earnings of $546,000 for the year- ended December 31, 1995, a $24,000, or
4.6%, increase over the $522,000 recorded for 1994. Although this subsidiary
experienced an increase in its net interest income of $929,000, or 25.1%, and
experienced an increase in other income items of $44,000 or 15.0%, in 1995, the
effects of these increases were almost entirely offset by an increase in the
provision for loan losses of $381,000, or 109.8% (see "Provision and Allowance
for Loan Losses, Loan Loss Experience").
Interest Income, Interest Expense and Net Interest Income
The Company's net interest income increased 17.2% to $12,628,000 for the
year-ended December 31, 1995 compared to $10,776,000 for the year-ended December
31, 1994. The increase is attributable to an increase in interest income on
loans resulting from an increase in the volume of outstanding loans at each of
the Company's subsidiaries during 1995, coupled with an increase in loan yields
on the Company's banking subsidiaries' loan portfolios resulting from increases
in the prime lending rate during the early part of 1995.
20
<PAGE>
The Company's total interest income increased $4,121,000, or 26.5%, to
$19,666,000 in 1995 compared to $15,545,000 for 1994. The increase is largely
attributable to a $4,171,000, or 30.9%, increase in loan interest income
resulting from a $23,285,000, or 21.2%, increase in the volume of average
outstanding loans in 1995 coupled with an increase in the average yield on loans
in 1995 of 13.1% over 1994. The average yield on loans for 1995 was 13.88%
compared to 12.27% for 1994.
Average balances on securities and federal funds sold, collectively, decreased
by $2,983,000, or 8.3%, in 1995 over 1994. As a result of the decrease in the
volume of these categories of earning assets, interest income associated with
these two categories, collectively, decreased $50,000.
Interest expense on deposits increased $1,793,000, or 44.0%, to $5,871,000 in
1995 compared to $4,078,000 for 1994. The increase is attributable to increases
in the Company's costs of interest-bearing deposits resulting from increases in
market interest rates in 1995 and an increase of $11,062,000, or 9.6%, in the
volume of average interest-bearing deposits for 1995. The weighted average cost
of interest-bearing deposits for 1995 was 4.64% compared to 3.53% for 1994.
Although average balances on Securities Sold Under Repurchase Agreements
decreased $266,000, or 7.6%, in 1995 when compared to 1994, interest expense on
this category of interest-bearing liabilities increased $50,000, or 42.4%, as a
result of higher market rates of interest paid during 1995. Interest expense
incurred by the Company's banking subsidiaries on average borrowings of
$3,081,000 from the Federal Home Loan Bank of Atlanta for 1995 amounted to
$211,000. The Company's banking subsidiaries had nominal Federal Home Loan Bank
of Atlanta borrowings during 1994 with interest expense for 1994 amounting to
$29,000. Interest expense on the various categories of other interest-bearing
liabilities, which includes Capitalized Leases, Subordinated Debt, Federal Funds
Purchased and Other Borrowed Funds, collectively, increased $189,000, or 34.7%,
in 1995 when compared to 1994. The increase in interest expense associated with
these other interest-bearing liabilities is attributable largely to an increase
in the volume of average borrowings by Quick Credit Corporation, primarily from
a third party lender, coupled with an increase in the rate paid for these funds
in 1995 as a result of increases in the prime lending rate during 1995. Interest
paid by Quick Credit Corporation on borrowings from unaffiliated third parties
amounted to $768,000 in 1995 compared to $523,000 in 1994, an increase of
$245,000, or 46.9%.
Provision and Allowance for Loan Losses
The net provision for loan losses was $779,000 in 1995 compared to $397,000 in
1994, a $382,000, or 96.2% increase. This increase is attributable to increases
in the provisions made by Spartanburg National Bank and Quick Credit Corporation
in 1995 when compared to 1994. The increase made by Spartanburg National Bank
was a result of the significant loan growth experienced by this subsidiary
during 1995. Spartanburg National Bank made provisions of $201,000 in 1995
compared to $50,000 in 1994. Quick Credit Corporation made provisions of
$728,000 in 1995 compared to $347,000 in 1994, an increase of $381,000, or
109.8%. The increase in Quick Credit Corporation's provision in 1995 resulted
from an increase in the number and volume of loans charged off and an increase
in the volume of outstanding loans during 1995 (see "Provision and Allowance for
Loan Losses, Loan Loss Experience"). Anderson National Bank recorded a negative
provision for loan losses in 1995 of $150,000 as a result of continued
improvement in the overall quality of its loan portfolio. Anderson National Bank
made no provisions in 1994.
At December 31, 1995, the allowance for loan losses as a percentage of
outstanding loans was 1.57% compared to 1.62% at December 31, 1994. For a
discussion of the allowance for loan losses and factors considered by the
Company in determining the adequacy of the allowance for loan losses, see
"Provision and Allowance for Loan Losses, Loan Loss Experience".
At December 31, 1995 the Company had $241,000 in non-accrual loans, which are
considered impaired loans, $271,000 in loans past due 90 days or more and still
accruing interest and $74,000 in OREO, compared to $281,000, $144,000, and
$74,000, respectively, at December 31, 1994. Loans on non-accrual amounted to
0.17% of total loans at December 31, 1995, compared to 0.23% at December 31,
1994. At December 31, 1995 and 1994 the Company did not have a material amount
of restructured loans.
Other Income
Total consolidated other income increased $145,000, or 8.3%, in 1995. The
increase in 1995 resulted primarily from an increase of $55,000, or 7.5%, in
service charges and fees on deposit accounts at the Company's banking
21
<PAGE>
subsidiaries, an increase in commissions received on the sale of credit related
insurance by Quick Credit Corporation of $59,000, or 26.0%, as a result of the
increase in the volume of loans at this subsidiary during 1995 and refunds of
FDIC premiums at the Company's banking subsidiaries, which totaled $85,000 in
1995. The Company experienced a decline in fee income generated from the sale of
alternative investment products (mutual funds and annuities) of $30,000, or
27.8%, during 1995 as a result of a decrease in the volume of sales of these
types of products. The Company's mortgage lending activities, which had been
sluggish during the first six months of 1995, rebounded during the second half
of 1995 and as a result, fee income generated by this activity for 1995 amounted
to $199,000, a 17.1% increase over the $170,000 generated in 1994. During 1995,
the Company recorded gains on the sale of Other Real Estate Owned of $25,000
compared to gains on the sale of Other Real Estate Owned in 1994 of $52,000. The
Company also recorded gains on the sale of SBA loans during 1995 of $64,000
compared to $61,000 recorded in 1994.
Other Expenses
Total other expenses increased $1,071,000, or 12.0%, in 1995 over 1994.
Salaries, wages and benefits, the largest category of other expenses, increased
$701,000, or 13.9%, in 1995 over 1994. Of the increase in personnel expense,
$321,000, or 45.8%, resulted from additions to the staff of Quick Credit
Corporation associated with the opening of five new offices in 1995 and
approximately 12.6% of the increase in personnel expenses resulted from
personnel expenses associated with the formation of the Company's proposed new
bank subsidiary. The remaining increase in personnel expenses is attributable to
increases in personnel expenses at the Company's two banking subsidiaries.
Occupancy expense increased $68,000, or 12.1%, in 1995 over 1994 largely as a
result of expenses associated with the five new additional offices for Quick
Credit Corporation established during 1995.
Furniture and equipment expense decreased $104,000, or 14.8%, in 1995 over 1994
largely as a result of a decline in depreciation expense associated with the
Company's data processing equipment which was sold during the second quarter of
1995.
Other operating expenses, the second largest category of other expenses,
increased $302,000, or 9.1%, in 1995. This increase is largely the result of
costs associated with the additional offices of Quick Credit Corporation opened
in 1995, higher expenses associated with growth at the Company's banking
subsidiaries and costs associated with the outsourcing of the Company's data
processing function.
Income Taxes
As a result of increased income before income taxes, the Company incurred income
tax expense of $1,291,000 for an effective tax rate of 34.9% in 1995 compared to
income tax expense of $1,082,000 and an effective tax rate of 34.2% in 1994.
Net Interest Income
Net interest income, the difference between the interest earned on earning
assets and the interest paid for funds acquired to support those assets, is the
principal source of the Company's operating income. Net interest income was
$10,776,000, $12,628,000 and 14,936,000 for 1994, 1995 and 1996, respectively.
The Company's average interest rate spread, the difference between the average
interest rate earned on interest-earning assets and the average interest rate
paid on interest-bearing liabilities, has increased in recent years because of
the Company's balance sheet structure and the trend towards lower market
interest rates. Changes in prior regulations have allowed commercial banks new
accounts such as NOW accounts, Super NOW accounts and money market deposit
accounts. These accounts, which are not subject to interest rate ceilings, have
enabled banks to attract deposits which were previously in money market accounts
of non-bank financial institutions. The result of these new accounts is a
continuation of the trend toward higher costs of deposits. The Company believes
it has emphasized proper management of interest rate spreads to offset the
higher costs of deposits. The Company manages interest rate spreads by
monitoring the maturity of assets and related liabilities, interest rates, risk
exposure, liquidity, funding sources and capital resources. The objective of
such monitoring is to maximize net interest income over an extended period of
time while maintaining associated risk within prescribed policy limits. The
average interest rate spread was 6.84% in 1994, 6.82% in 1995 and 6.39% in 1996.
The following table presents the average balance sheets, the average yield and
the interest earned on interest-earning assets, and the average rate and the
interest paid on interest-bearing liabilities of the Company for the last three
fiscal years.
22
<PAGE>
<TABLE>
Average Balances and Net Interest Income Analysis
(dollars in thousands)
<CAPTION>
Year Ended December 31,
1994
Interest
Average Income/ Average
Balances Expense Rate/Yield
Assets:
<S> <C> <C> <C>
Cash and due from banks - demand ........................................... $ 7,211 $ - - %
Net loans (1)............................................................... 110,046 13,504 12.27
Taxable securities.......................................................... 26,496 1,558 5.88
Non-taxable investment securities(4)........................................ 4,890 245 5.01
Federal funds sold and securities
purchased under agreements
to resell .............................................................. 4,630 238 5.14
Bank premises and equipment, net ........................................... 3,740 - -
Other assets ............................................................... 2,544 - -
Allowance for loan losses .................................................. (1,796) - -
---------- --------- --------
Total assets ....................................................... 157,761 - -
---------- --------- --------
Total interest-earning assets....................................... $ 146,062 $ 15,545 10.64%
========== ====== ========
Liabilities and Shareholders' Equity:
Interest-bearing demand deposits............................................ $ 22,678 $ 529 2.33%
Non-interest-bearing demand deposits........................................ 17,727 - -
Savings deposits............................................................ 23,971 699 2.92
Time deposits............................................................... 68,791 2,850 4.14
Securities sold under agreements to
repurchase and federal funds
purchased............................................................... 3,486 118 3.38
Capitalized lease payable................................................... 287 23 8.01
Commercial paper ........................................................... 83 5 6.02
Notes payable............................................................... 5,733 515 8.98
Subordinated notes.......................................................... 400 30 7.50
Other liabilities........................................................... 1,555 - -
Shareholders' equity ....................................................... 13,050 - -
---------- --------- --------
Total liabilities and
shareholders' equity ............................................ 157,761 - -
---------- --------- --------
Total interest-bearing
liabilities ..................................................... $ 125,429 $ 4,769 3.80%
========== ========= ========
Excess of interest-earning assets
over interest-bearing liabilities................................ $ 20,633
==========
Net interest income................................................. $10,776
=========
Interest rate spread (2) ........................................... 6.84%
Net yield on earning assets (3)..................................... 7.38%
</TABLE>
- - - - - - - - - - -
(1) Non-accruing loans have been included in the average balances.
(2) The interest rate spread is the interest-earning assets rate minus the
interest-bearing liabilities rate. (3) Net yield on total earning
assets is computed by dividing net interest income by total average
interest-earning assets. (4) Yields on non-taxable investment
securities have not been adjusted to arrive at a tax equivalent rate as
the adjustment would be immaterial.
23
<PAGE>
<TABLE>
Average Balances and Net Interest Income Analysis
(dollars in thousands)
<CAPTION>
At
Year Ended December 31, Year-end
1995 1996 1996
--------------------------------------------- ----------------------------------------------- ----
Interest Interest
Average Income/ Average Average Income/ Average
Balances Expense Rate/Yield Balances Expense Rate/Yield Rate
-------- ------- ---------- -------- ------- ---------- ----
<S> <C> <C> <C> <C> <C> <C> <C>
$ 6,052 $ - -% $ 7,048 $ - -% -%
133,331 17,675 13.26 172,055 22,005 12.82 12.54
24,892 1,535 6.17 25,471 1,585 6.22 6.13
5,262 261 4.96 5,354 256 4.78 4.86
2,879 195 6.77 9,489 529 5.57 5.25
4,645 - - 6,551 - - -
3,042 - - 3,513 - - -
(2,096) - - (2,633) - - -
-------- ----- -------- ------- --------- -----
178,007 - - 226,848 - - -
-------- ------- ----- -------- ------- --------- -----
166,364 $19,666 11.82% 212,369 $24,375 11.48% 11.39%
======== ======= ===== -------- ------- --------- ------
$ 23,099 $ 574 2.48% $ 25,226 $585 2.32% 2.28%
20,102 - - 21,494 - - -
23,218 785 3.38 30,182 1,094 3.62 3.75
80,185 4,512 5.63 108,446 6,220 5.74 5.84
3,220 178 5.53 3,923 151 3.87 2.64
49 4 8.16 8 1 12.50 -
- - - - - -
10,404 945 9.09 17,032 1,314 7.71 7.76
446 40 8.97 800 74 9.25 8.83
1,934 - - 2,284 - - -
15,350 - - 17,453 - - -
-------- ------- ----- -------- ------- --------- ------
178,007 - - 226,848 - - -
-------- ------- ----- -------- ------- --------- ------
$140,621 $ 7,038 5.00% $185,617 $ 9,439 5.09% 5.25%
======== ======= ===== ======== ======= ========= ======
$ 25,743 $ 26,752
======== ========
$12,628 $14,936
======= =======
6.82% 6.39% 6.14%
7.59% 7.03%
</TABLE>
24
<PAGE>
Net interest income is affected by changes in the average rate earned on
interest-earning assets and the average rate paid on interest-bearing
liabilities. In addition, net interest income is affected by changes in the
volume of interest-earning assets and interest-bearing liabilities. The
following table sets forth the dollar amount of increase in interest income and
interest expense resulting from changes in the volume of interest-earning assets
and interest-bearing liabilities and from changes in yields and rates.
<TABLE>
Volume and Rate Variance Analysis
(dollars in thousands)
<CAPTION>
1994 compared with 1995 1995 compared with 1996
------------------------------------ -----------------------------
Volume (1) Rate (1) Total Volume(1) Rate(1) Total
---------- -------- ----- ------ ---- -----
<S> <C> <C> <C> <C> <C> <C>
Net loans (2) ................................. $ 3,020 $ 1,151 $ 4,171 $ 4,932 $ (602) $ 4,330
Investment securities.......................... (101) 94 (7) 39 6 45
Federal funds sold and interest-earning
deposits ................................. (295) 252 (43) 362 (28) 334
------ ------- -------- -------- --------- --------
Interest income ..................... 2,624 1,497 4,121 5,333 (624) 4,709
------ ------- -------- ----- --------- --------
Interest-bearing deposits...................... 419 1,374 1,793 1,792 236 2,028
Other borrowings............................... 323 153 476 508 (135) 373
------ ------- -------- -------- --------- --------
Interest expense .................... 742 1,527 2,269 2,300 101 2,401
------ ------- -------- -------- -------- --------
Net interest income.................. $ 1,882 $ (30) $ 1,852 $ 3,033 $ (725) $ 2,308
====== ======= ======== ======== ======== -=======
</TABLE>
(1) The rate/volume variance for each category has been allocated on a
consistent basis between rate and volume variances based on the percentage
of rate or volume variance to the sum of the two absolute variances.
(2) Non-accruing loans have been included.
Interest Rate Sensitivity and Asset/Liability Management
An important aspect of achieving satisfactory levels of net income is the
management of the composition and maturities of rate sensitive assets and
liabilities in order to optimize net interest income as interest rates earned on
assets and paid on liabilities fluctuate from time to time.
The interest sensitivity gap is the difference between total interest sensitive
assets and liabilities in a given time period. The objective of interest
sensitivity management is to maintain reasonably stable growth in net interest
income despite changes in market interest rates by maintaining the proper mix of
interest sensitive assets and liabilities. Management seeks to maintain a
general equilibrium between interest sensitive assets and liabilities in order
to insulate net interest income from significant adverse changes in market
rates.
25
<PAGE>
The following table sets forth the Company's interest sensitivity position as of
December 31, 1996.
<TABLE>
Interest Sensitivity Analysis
(dollars in thousands)
<CAPTION>
Total
Sensitive Over 12
Within Months or
One Year Non-sensitive Total
Interest earning assets:
<S> <C> <C> <C>
Federal funds sold................................... % 13,700 $ - $ 13,700
Securities .......................................... 11,737 22,424 34,161
Loans receivable (1)................................. 116,003 89,548 205,551
--------- --------- ---------
Interest-earning assets ............................. 141,440 111,972 253,412
--------- --------- ---------
Interest bearing liabilities:
Deposits............................................. 177,339 17,700 195,039
Securities sold under repurchase agreements.......... 8,167 -- 8,167
Other borrowed funds................................. 21,640 1,090 22,730
--------- --------- ---------
Interest-bearing liabilities ........................ 207,146 18,790 225,936
--------- --------- ---------
Interest sensitivity gap............................. $ (65,706) $ 93,182 $ 27,476
========= ========= =========
Interest sensitivity ratio........................... .46
=========
</TABLE>
(1) Non-accrual loans have been included.
At December 31, 1996, approximately 55.8% of the Company's interest-earning
assets repriced or matured within one year compared to approximately 91.7% of
interest-bearing liabilities.
Asset/liability management is the process by which the Company monitors and
controls the mix and maturities of its assets and liabilities. The essential
purposes of asset/liability management are to ensure adequate liquidity and to
maintain an appropriate balance between interest sensitive assets and
liabilities.
Each of the Company's banking subsidiaries has established an Asset/Liability
Management Committee. These Committees use a variety of tools to analyze
interest rate sensitivity, including a static gap presentation and a simulation
model. A "static gap" presentation reflects the difference between total
interest-sensitive assets and liabilities within certain time periods. While the
static gap is a widely-used measure of interest sensitivity, it is not, in
management's opinion, a true indicator of a company's sensitivity position. It
presents a static view of the timing of maturities and repricing opportunities,
without taking into consideration that changes in interest rates do not affect
all assets and liabilities equally. For example, rates paid on a substantial
portion of savings and core time deposits may contractually change within a
relatively short time frame, but those rates are significantly less
interest-sensitive than market based rates such as those paid on non-core
deposits. Accordingly, a liability sensitive gap position is not as indicative
of a company's true interest sensitivity as would be the case for an
organization which depends to a greater extent on purchased funds to support
earning assets. Net interest income would also be impacted by other significant
factors in a given interest rate environment, including the spread between the
prime rate and the incremental borrowing cost and the volume and mix of earning
asset growth. Accordingly, the Company's banking subsidiaries use an
asset/liability simulation model which quantifies balance sheet and earnings
variations under different interest rate environments to measure and manage
interest rate risk.
26
<PAGE>
Quick Credit considers liquidity and interest rate risk in pricing its loans
which are funded through retained earnings and borrowings under an existing line
of credit with an unaffiliated bank. Securities Portfolio
The following table shows maturities of the Company's securities at amortized
cost held at December 31, 1996, and the weighted average yields.
<TABLE>
Securities Portfolio Maturity Schedule
(dollars in thousands)
<CAPTION>
After After
One Year Five Years
Within But Within But Within After
One Year Five Years Ten Years Ten Years
Amount Yield Amount Yield Amount Yield Amount Yield
------ ----- ------ ----- ------ ----- ------ -----
<S> <C> <C> <C> <C> <C> <C> <C> <C>
U.S. Treasury securities........... $ 2,802 6.25% $ 3,383 5.69% $ - - $ - - %
U.S. Government agencies........... 1,033 5.87 12,076 5.97 1,837 6.90 5,817 6.60
State, county and municipal (1).... 735 8.18 3,967 7.18 725 9.90 - -
Federal Reserve stock and other.... - - - - - - 1,786 7.11
------- ------ --------- ------ ------- ------ ------- -----
$ 4,570 6.48% $ 19,426 6.17% $ 2,562 7.75% $ 7,603 6.72%
======= ====== ========= ====== ======= ====== ======= =====
</TABLE>
(1) Yields have been adjusted to a tax equivalent basis assuming a 34% Federal
Tax Rate.
See note 4 of the Notes to Consolidated Financial Statements for the composition
of the securities portfolios. The weighted average yields shown previously are
calculated on the basis of cost and effective yields for the scheduled maturity
of each security. At December 31, 1996, the market value of the Company's
securities portfolios was $149,000 greater than its amortized cost, the average
maturity of the securities portfolios was 4.01 years and the average adjusted
tax equivalent yield on such portfolios was 6.49%. Certain securities contain
call provisions which could decrease their anticipated maturity. Certain
securities also contain rate adjustment provisions which could either increase
or decrease their yields.
Decisions involving securities are based upon management's expectations for
interest rate movements, overall market conditions, the composition and
structure of the balance sheet, and computer-based simulations of the financial
impacts of alternative rate/maturity scenarios. The Company does not purchase or
hold securities for trading purposes. However, certain securities may be sold
prior to their maturity. Such securities available for sale, at amortized cost,
amounted to $26,318,000 at December 31, 1996 and are classified as available for
sale and recorded on the Company's balance sheet at market value of $26,304,000.
27
<PAGE>
Loan Portfolio
The Company's management believes the loan portfolio is adequately diversified.
The amount of loans outstanding at the indicated dates are shown in the
following table according to the type of loan.
<TABLE>
Loan Portfolio Composition
(dollars in thousands)
<CAPTION>
December 31,
1992 1993 1994 1995 1996
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Commercial, financial and ..................................... $15,035 $ 13,382 $ 18,469 $ 25,684 $ 42,859
agricultural
Real estate- construction and land ............................ 2,669 4,540 5,040 9,111 21,754
development
Real estate mortgage(1) ....................................... 48,735 60,795 71,282 84,418 104,218
Installment loans to individuals and other loans .............. 25,728 23,465 25,049 28,781 36,720
------- -------- -------- -------- --------
Total .................................................... $92,167 $102,182 $119,840 $147,994 $205,551
======= ======== ======== ======== ========
</TABLE>
(1) Includes loans secured by real estate and mortgage loans presently held for
sale.
The Company has no foreign loans and few agricultural loans. Anderson National
Bank's and Spartanburg National Bank's mortgage loan departments package
mortgage loans for sale to others, but do not generally service such loans. At
December 31, 1996, the Company had $120,000 in mortgage loans held for resale to
others. The Company's real estate loans are primarily construction loans and
loans secured by real estate, both commercial and residential, located within
the Company's trade areas. The Company does not actively pursue long-term, fixed
rate mortgage loans for retention in its loan portfolio. Commercial loans are
spread throughout a variety of industries, with no industry or group of related
industries accounting for a significant portion of the commercial loan
portfolio. These loans may be made on either a secured or unsecured basis. When
taken, security consists of liens on inventories, receivables, equipment, and
furniture and fixtures. Unsecured commercial loans are generally short-term with
emphasis on repayment strengths and low debt to worth ratios. As of December 31,
1996, approximately $10,891,000 or 25.4% of commercial, financial and
agricultural loans were unsecured. A significant portion of the installment
loans to individuals are secured by automobiles and other personal effects. Also
included in net installment loans to individuals are $11.2 million and $10.1
million at December 31, 1995 and 1996, respectively, of high rate consumer
finance loans which have been originated by the Company's subsidiary, Quick
Credit Corporation. These loans generally carry higher risk of nonpayment than
the other categories of loans, but the increased risk is substantially offset by
the smaller amounts of such loans and higher rates charged thereon.
28
<PAGE>
The following table sets forth the maturity distribution of the Company's gross
loans by type, as of December 31, 1996, as well as the type of interest rate
requirement on such loans.
<TABLE>
Loan Portfolio Maturity Schedule
(dollars in thousands)
<CAPTION>
December 31, 1996
-----------------
One Year One to Five Years
Or Less Five Years or More Total
------- ---------- ------- -----
<S> <C> <C> <C> <C>
Commercial, financial and agricultural......... $ 33,027 $ 9,394 $ 438 $ 42,859
Real estate-construction and land
development................................ 18,072 3,682 - 21,754
Real estate-mortgage .......................... 45,154 54,055 5,009 104,218
Installment loans to individuals
and all other loans........................ 18,787 16,549 1,384 36,720
--------- --------- --------- ----------
Total ................................... $ 115,040 $ 83,680 $ 6,831 $ 205,551
========= ========= ========= ==========
Predetermined rate, maturing................... $ 32,997 $ 72,788 $ 6,505 $ 112,290
Variable rate, maturing........................ $ 82,043 $ 10,892 $ 326 $ 93,261
</TABLE>
Provision and Allowance for Loan Losses, Loan Loss Experience
The purpose of the Company's allowance for loan losses is to absorb loan losses
that occur in the loan portfolios of its subsidiaries. Management determines the
adequacy of the allowance quarterly and considers a variety of factors in
establishing a level of the allowance for losses and the related provision,
which is charged to expense. Factors considered in determining the adequacy of
the reserve for loan losses include: (1) previously classified loans deemed less
than 100% collectible, (2) loans reflecting a recurring delinquent status, (3)
past-due loans on which interest is not being collected in accordance with the
terms of the loan, and loans whose terms have been modified by reducing the
interest rates or deferring interest, (4) excessive loan renewals or payment
extensions, (5) general and local economic conditions, (6) risk in consumer
credit products, (7) subjective considerations as a result of internal
discussions with the Company's loan officers, (8) known loan deteriorations
and/or concentrations of credit, (9) historical loss experience based on volume
and types of loans, (10) trends in portfolio volume, maturity and composition,
(11) projected collateral values, (12) off balance sheet risk, and (13) depth
and experience of the Company's existing lending staff. By considering the above
factors, management attempts to determine the amount of reserves necessary to
provide for potential losses in the loan portfolios of its subsidiaries, however
the amount of reserves may change in response to changes in the financial
condition of larger borrowers, changes in the Company's local economies and
expected industry trends .
The allowance for loan losses represents management's estimate of an amount
adequate in relation to the risk of future losses inherent in the loan portfolio
and also reflects the consideration of the amount of high rate/higher risk loans
held by the Company's consumer finance subsidiary, Quick Credit Corporation.
29
<PAGE>
While it is the Company's policy to charge off in the current period loans in
which a loss is considered probable, there are additional risks of future losses
which cannot be quantified precisely or attributed to particular loans or
classes of loans. Because these risks include the state of the economy, industry
trends and conditions affecting individual borrowers, management's judgment of
the allowance is necessarily approximate and imprecise. The Company is also
subject to regulatory examinations and determinations as to adequacy, which may
take into account such factors as the methodology used to calculate the
allowance for loan losses and the size of the allowance for loan losses in
comparison to a group of peer companies identified by the regulatory agencies.
In assessing the adequacy of the allowance, management relies predominantly on
its ongoing review of the loan portfolio, which is undertaken both to ascertain
whether there are probable losses which must be charged off and to assess the
risk characteristics of the portfolio in the aggregate. The review considers the
judgments of management and also those of bank regulatory agencies that review
the loan portfolio as part of their regular examination process. The
Comptroller, as part of its routine examination process of various national
banks, including the Banks, may require additions to the allowance for loan
losses based upon the regulators' credit evaluations differing from those of
management.
On December 31, 1996, the allowance for loan losses was $3,160,000, or $840,000,
(36.2%), higher than one year earlier. The ratio of the allowance for loan
losses to net loans outstanding was 1.54% at December 31, 1996 compared to 1.57%
at December 31, 1995 (See "Results of Operation") . During 1996, the Company
experienced net charge-offs of $1,309,000, or 0.76% of average loans, compared
to net charge-offs of $411,000, or 0.31% of average loans, in 1995. Installment
loan net charge-offs were $1,228,000 in 1996 versus $495,000 in 1995. Commercial
loan net charge-offs were $71,000 in 1996 compared to net charge-offs of $50,000
in 1995. Real estate loan net charge-offs were $10,000 in 1996 compared to net
charge-offs of $134,000 in 1995.
The Company made net provisions for loan losses of $397,000, $779,000 and
$2,149,000 for the years ended December 31, 1994, 1995 and 1996, respectively.
In fiscal 1994, Anderson National Bank made no provisions for loan losses. In
fiscal 1995, Anderson National Bank recorded a negative provision for loan
losses of $150,000 because of continued improvement in the quality of its loan
portfolio. In fiscal 1996, Anderson National Bank made no provisions for loan
losses. In fiscal 1994 and 1995 Anderson National Bank recorded net recoveries
of $80,000 and $107,000, respectively. In fiscal 1996, Anderson National Bank
recorded net charge-offs of $73,000.
In fiscal 1994, 1995 and 1996, Spartanburg National Bank recorded provisions for
loan losses of $50,000, $201,000 and $225,000, respectively. In fiscal 1994,
1995 and 1996, Spartanburg National Bank experienced net charge-offs of $1,000,
$19,000 and $91,000, respectively.
30
<PAGE>
In fiscal 1994, 1995 and 1996, Quick Credit Corporation recorded provisions for
loan losses of $347,000, $728,000 and $1,731,000, respectively. In fiscal 1994,
1995 and 1996, Quick Credit Corporation experienced net charge-offs of $241,000,
$499,000 and $1,144,000, respectively. The significant increase in net
charge-offs and related increase in this subsidiary's provision is believed by
management to be an industry-wide trend. Quick Credit Corporation's customers
are generally in the low-to-moderate income group of borrowers. Over the past
several years there has been a proliferation of small consumer loan companies
and other consumer debt providers competing for pieces of this segment of the
consumer debt market. It is not unusual for customers of Quick Credit
Corporation to simultaneously have loans outstanding at several other small loan
companies which results in some customers incurring more debt than they can
service. During 1996, approximately 3,714, or 14.5%, of Quick Credit
Corporation's loans were deemed uncollectible, either through their inability to
make scheduled payments or through declaration of bankruptcy, and, therefore,
charged-off. As a result of the historically high charge-offs experienced in
1996 and because management anticipates higher than normal charge-offs in 1997,
Quick Credit Corporation has increased its loan loss reserve as a percentage of
outstanding loans, net of unearned income, from 5.4% at December 31, 1995 to
11.80% at December 31, 1996. In addition, the Company has reviewed is loan
criteria and has tightened slightly its underwriting standards.
Prior to mid 1996 First United had a full-time internal loan review officer to
perform periodic evaluations of the Company's loan portfolios including all
materially classified loans. In mid-1996, the Company outsourced its internal
loan review function to an outside third party. The Company's management
believes they have in place the controls and personnel to adequately monitor its
loan portfolios.
Management continues to closely monitor the levels of non-performing and
potential problem loans and will address the weaknesses in these credits to
enhance the amount of ultimate collection or recovery on these assets. Should
increases in the overall level of non-performing and potential problem loans
accelerate from the current trend, management will adjust the methodology for
determining the allowance for loan losses and will increase the provision and
allowance for loan losses. This would likely decrease net income.
31
<PAGE>
The following table sets forth the allocation of the allowance by category at
December 31, 1995 and 1996.
<TABLE>
Allocation of Allowance for Loan Losses
(dollars in thousands)
<CAPTION>
December 31,
------------
1992 1993 1994 1995 1996
---- ---- ---- ---- ----
% of % of % of % of % of
Amount Category Amount Category Amount Category Amount Category Amount Category
------ -------- --------------- ------ -------- ------ -------- ------ --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Commercial, financial
and agricultural ....... $ 156 1.0% $ 244 1.8% $ 334 1.8% $ 509 2.1% $ 852 2.0%
Real Estate:
Construction and
land development .... 13 .5 75 1.7 56 1.1 84 0.9 132 0.6
Mortgage ............ 696 1.4 888 1.5 978 1.4 922 1.1 791 0.8
Installment loans to
individuals and
other loans ............ 504 2.0 487 2.1 576 2.1 805 2.6 1,385 3.8
------ --- ------ --- ------ --- ------ --- ------ ---
Total ............... $1,369 1.5% $1,694 1.7% $1,944 1.6% $2,320 1.6% $3,160 1.5%
====== === ====== === ====== === ====== === ====== ===
</TABLE>
32
<PAGE>
The following table summarizes loan balances of the Company at the end of each
period and averages for each period, changes in the allowance arising from
charge-offs and recoveries by category, and additions to the allowance which
have been charged to expense.
<TABLE>
Summary of Loan Loss Experience
(dollars in thousands)
<CAPTION>
December 31,
1992 1993 1994 1995 1996
---- ---- ---- ---- ----
Total loans outstanding at the end of period, net of
<S> <C> <C> <C> <C> <C>
unearned income..................................... $ 91,376 $ 102,182 $ 119,840 $ 147,994 $ 205,551
========= ========== ========= ========== =========
Average amount of loans outstanding, net of
unearned income..................................... $ 95,284 $ 95,296 $ 110,046 $ 133,331 $172,055
========= ========== ========= ========== =========
Balance of allowance for loan losses at beginning
of year ........................................... $ 2,150 $ 1,369 $ 1,694 $ 1,944 $2,320
--------- ---------- --------- ---------- ------
Loans charged-off:
Commercial, financial and agricultural.............. $ 162 49 $ - $ 72 77
Real estate-construction............................ - - - - -
Real estate-mortgage ............................... 475 - 23 5 14
Installment loans to individuals ................... 724 241 311 568 1,303
--------- ---------- --------- ---------- ---------
Total charge-offs ......................... 1,361 290 334 645 1,394
--------- ---------- --------- ---------- ---------
Recoveries of loans previously charged off:
Commercial, financial and agricultural ............. 46 165 69 22 6
Real estate-construction............................ - 25 2 69 1
Real estate-mortgage................................ 7 2 12 70 3
Installment loans to individuals.................... 136 116 89 73 75
--------- ---------- --------- ---------- ---------
Total recoveries........................... 189 308 172 234 85
--------- ---------- --------- ---------- ---------
Net charge-offs (recoveries) .............. 1,172 (18) 162 411 1,309
--------- ---------- --------- ---------- ---------
Additions to allowance from mergers and acquisitions..... - 25 15 8 -
Additions to allowance charged to expense ............... 391 282 397 779 2,149
--------- ---------- --------- ---------- ---------
Balance of allowance for loan losses at end of period.... $ 1,369 $ 1,694 $ 1,944 $ 2,320 $ 3,160
========= ========== ========= ========== =========
Ratios:
Net charge-offs (recoveries) during year to average
loans outstanding during year.................. 1.23% (.01)% .15% .31% .76%
Net charge-offs (recoveries) to loans at end of year 1.28 (.01) .14 .28 .64
Allowance for loan losses to average loans.......... 1.43 1.78 1.76 1.74 1.84
Allowance for loan losses to loans at end of year... 1.49 1.65 1.62 1.57 1.54
Net charge-offs (recoveries) to allowance
for loan losses ............................... 85.60 (1.06) 8.33 17.72 41.42
Net charge-offs (recoveries) to provision
for loan losses ............................... 299.74 (6.38) 40.80 52.76 60.91
</TABLE>
33
<PAGE>
Management considers the allowance for loan losses adequate to cover inherent
losses on the loans outstanding at December 31, 1996. In the opinion of
management, there are no material risks or significant loan concentrations in
the present loan portfolio. It must be emphasized, however, that the
determination of the allowance for loan losses using the Company's procedures
and methods rests upon various judgments and assumptions about future economic
conditions and other factors affecting loans. No assurance can be given that the
Company will not in any particular period sustain loan losses which are sizable
in relation to the amount reserved or that subsequent evaluation of the loan
portfolio, in light of conditions and factors then prevailing, will not require
significant changes in the allowance for loan losses or future charges to
earnings. The allowance for loan losses is also subject to review and approval
by various regulatory agencies through their periodic examinations of the
Company's subsidiaries. Such examinations could result in required changes to
the allowance for loan losses.
<TABLE>
Non-accrual and Potential Problem Loans
<CAPTION>
December 31,
-----------------------------------
1992 1993 1994 1995 1996
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Non-accrual loans...................................... $ 1,900 $ 804 $ 281 $ 241 $ 437
Past due > 90 days..................................... 114 84 144 271 416
Other restructured loans............................... - - - - -
---------- -------- -------- -------- -------
Total........................................ $ 2,014 $ 888 $ 425 $ 512 $ 853
========== ======== ======== ======== ========
</TABLE>
The Company had approximately $241,000 and $437,000 in non-accrual loans, which
are considered impaired, at December 31, 1995 and 1996, respectively. Assuming
the non-accrual loans performed in accordance with their original terms and had
been outstanding for the entire year, interest income on these loans would have
amounted to approximately $40,000 and $32,000 for 1995 and 1996, respectively.
The amount of income recognized on these loans during 1996 was not material. As
of December 31, 1995 and 1996, past due loans over 90 days amounted to $271,000
and $416,000, respectively, and constituted approximately 0.32% of total loans
at December 31, 1995 and approximately 0.21% of total loans at December 31,
1996. At December 31, 1995 and 1996, the Company did not have a material amount
of restructured loans.
A loan is placed on non-accrual status when, in management's judgment, the
collection of interest receivable on such loan appears doubtful, generally when
the loan is past due 90 days or more. Interest receivable that had been accrued
in the prior year and is subsequently determined to have doubtful collectibility
is charged to the allowance for loan losses. Payments of interest on loans which
are classified as non-accrual are recognized as principal reductions when
received. In some cases, when borrowers are experiencing financial difficulties,
loans may be restructured to provide terms significantly below the original
contractual terms.
Management of each banking subsidiary maintains a list of potential problem
loans. The problem loan list also includes all loans on non-accrual status and
all loans that are past due 90 days or more and still accruing interest. A loan
is added to the list when management becomes aware of information about possible
credit problems of borrowers that causes doubts as to the ability of such
borrowers to comply with the current loan repayment terms. The total amount of
loans outstanding at December 31, 1996 determined to be potential problem loans
was $2.8 million. ($1.8 million at Spartanburg National Bank and $1 million at
Anderson National Bank). This compares with $1.5 million of loans determined to
be problem loans at December 31, 1995. This amount does not represent
management's estimate of potential losses since the majority of such loans are
secured by real estate and other collateral. Management believes that the
allowance for loan losses as of December 31, 1996, was adequate to absorb any
losses with respect to the non-performing loans and potential problem loans as
of such date.
34
<PAGE>
At December 31, 1996 and 1995, the Company had approximately $85,000 and $74,000
of real estate acquired through foreclosure. The Company has recorded real
estate acquired through foreclosure at the lower of cost or estimated market
value less estimated selling costs. Estimated market value is based upon the
assumption of a sale in the normal course of business and not on a quick
liquidation or distress basis. Estimated market value is established by
independent appraisal at the time acquisition is completed.
Deposits
The average amount of deposits of the Company for the years ended December 31,
1995 and 1996, are summarized below.
<TABLE>
Average Deposits
(dollars in thousands)
<CAPTION>
Year Ended
December 31,
------------
1995 1996
---- ----
Average Average Average Average
Amount Rate Paid Amount Rate Paid
------ --------- ------ ---------
<S> <C> <C> <C> <C>
Interest-bearing demand deposits................. $ 23,099 2.48% $ 25,226 2.32%
Non-interest bearing demand deposits
and drafts .................................. 20,102 - 21,494 -
Savings deposits and money market accounts....... 23,218 3.38 30,182 3.62
Time deposits .................................. 80,185 5.63 108,446 5.74
--------- ------- -------- ----
Total deposits.......................... $ 146,604 4.00% $ 185,348 4.26%
========= ======= ======== ====
</TABLE>
The Company has a large, stable base of time deposits, principally certificates
of deposit and individual retirement accounts obtained primarily from customers
in South Carolina. The Company does not purchase brokered deposits.
As of December 31, 1996, the Company held approximately $41,073,000 in
certificates of deposit of $100,000 or more with approximately $9,444,000
maturing within three months, approximately $27,141,000 maturing in three months
through twelve months, and approximately $4,488,000 maturing in over twelve
months. Acquisitions of time deposits of $100,000 and over are in large part a
function of the rates a financial institution is willing to negotiate and, as
such, these deposits have many of the characteristics of shorter-term purchased
funds.
35
<PAGE>
Return on Equity and Assets
The following table shows the return on assets (net income divided by average
total assets), return on equity (net income divided by average equity), dividend
payout ratio (dividends declared per share divided by net income per share) and
equity to assets ratio (average equity divided by average total assets) for each
period indicated. <TABLE>
Return on Equity and Assets
<CAPTION>
Year Ended
December 31,
------------
1994 1995 1996
---- ---- ----
<S> <C> <C> <C>
Return on average assets ........................ 1.32% 1.36% .86%
Return on average shareholders' equity........... 15.92 15.72 11.14
Equity to assets ratio........................... 8.27 8.62 7.70
Dividend payout ratio............................ 3.03 12.12 16.67
</TABLE>
(1) The Company declared its first cash dividend in the fourth quarter of 1994.
Liquidity
Liquidity management involves meeting the cash flow requirements of the Company.
The Company's liquidity position is primarily dependent upon its need to respond
to short-term demand for funds caused by withdrawals from deposit accounts and
upon the liquidity of its assets. The Company's primary liquidity sources
include cash and due from banks, federal funds sold and "securities available
for sale". In addition, the Company (through Anderson National Bank, Spartanburg
National Bank and The Community Bank of Greenville) has the ability, on a
short-term basis, to borrow funds from the Federal Reserve System and to
purchase federal funds from other financial institutions. Spartanburg National
Bank and Anderson National Bank are also members of the Federal Home Loan Bank
System and have the ability to borrow both short and longer term funds on a
secured basis. At December 31, 1996, Anderson National Bank had $280,000 in
long-term borrowings and $8,000,000 in short-term borrowings from the Federal
Home Loan Bank of Atlanta. At December 31, 1996, Spartanburg National Bank had
$550,000 in long-term borrowings from the Federal Home Loan Bank of Atlanta and
$2,000,000 in short-term borrowings.
First United Bancorporation, the parent holding company, has limited liquidity
needs. First United requires liquidity to pay limited operating expenses and
dividends, and to service its debt. In addition, First United has two lines of
credit with third party lenders totaling $6,100,000, of which $1,350,000 was
available at December 31, 1996. One of these lines is a $6,000,000 line of
credit with an unaffiliated third party lender to be used for general corporate
purposes and allows for interest to be paid on a quarterly basis for a period of
up to five years if certain criteria are met. At the end of five years, or
sooner if the Company desires, the line of credit can be converted to a term
loan with quarterly interest payments and annual principal reductions required
over a period of five years. The line of credit bears interest at a variable
rate. On April 15,1996 the Company utilized $4,500,000 of this line to
capitalize its new bank subsidiary, The Community Bank of Greenville, National
Association, Greenville, South Carolina. Further sources of liquidity for First
United include management fees which are paid by all of its subsidiaries and
dividends from its subsidiaries.
36
<PAGE>
At December 31, 1996, the Company's consumer finance subsidiary, Quick Credit
Corporation, had debt outstanding of $800,000 in the form of subordinated debt
and $6,350,000 outstanding under an $18,000,000 line of credit secured by Quick
Credit Corporation's loans receivable with a third party lender.
Management believes its liquidity sources are adequate to meet its operating
needs and does not know of any trends, other than those previously discussed,
that may result in the Company's liquidity materially increasing or decreasing.
Capital Adequacy and Resources
The capital needs of the Company have been met through the retention of earnings
and from the proceeds of a prior public stock offering in 1988.
For bank holding companies with total assets of more than $150 million, such as
the Company, capital adequacy is generally evaluated based upon the capital of
its banking subsidiaries. Generally, the Board of Governors of the Federal
Reserve System (the "Federal Reserve Board") expects bank holding companies to
operate above minimum capital levels. The Office of the Comptroller of the
Currency ("Comptroller") regulations establish the minimum leverage capital
ratio requirement for national banks at 3% in the case of a national bank that
has the highest regulatory examination rating and is not contemplating
significant growth or expansion. All other national banks are expected to
maintain a ratio of at least 1% to 2% above the stated minimum. Furthermore, the
Comptroller reserves the right to require higher capital ratios in individual
banks on a case by case basis when, in its judgment, additional capital is
warranted by a deterioration of financial condition or when high levels of risk
otherwise exist. The Company's subsidiary banks have not been notified that they
must maintain capital levels above regulatory minimums. The Company's leverage
capital ratio was 6.72% at December 31, 1996 compared to 8.23% at December 31,
1995. The leverage capital ratios for Anderson National Bank and Spartanburg
National Bank were 7.25% and 6.74%, respectively at December 31, 1996, compared
to 7.86% and 7.01%, respectively, at December 31, 1995. The leverage capital
ratio for The Community Bank of Greenville was 10.45% at December 31, 1996. The
decrease in the leverage capital ratio for Anderson National Bank from year-end
1995 levels resulted from the payment of $750,000 in dividends to the Company
and growth experienced since December 31, 1995. The decrease in the leverage
capital ratios for Spartanburg National Bank and the consolidated company
resulted from growth experienced in 1996.
The Federal Reserve Board has adopted a risk-based capital rule which requires
bank holding companies to have qualifying capital to risk-weighted assets of at
least 8.00%, with at least 4% being "Tier 1" capital. Tier 1 capital consists
principally of common stockholders' equity, noncumulative preferred stock,
qualifying perpetual preferred stock, and minority interests in equity accounts
of consolidated subsidiaries, less goodwill and certain other intangible assets.
"Tier 2" (or supplementary) capital consists of general loan loss reserves
(subject to certain limitations), certain types of preferred stock and
subordinated debt, and certain hybrid capital instruments and other debt
securities such as equity commitment notes. A bank holding company's qualifying
capital base for purposes of its risk-based capital ratio consists of the sum of
its Tier 1 and Tier 2 capital components, provided that the maximum amount of
Tier 2 capital that may be treated as qualifying capital is limited to 100% of
Tier 1 capital. The Comptroller imposes a similar standard on national banks.
The regulatory agencies expect national banks and bank holding companies to
operate above minimum risk-based capital levels. The Company's risk-based
capital ratio was 10.30% and its Tier 1 capital to risk weighted assets ratio
was 8.92% at December 31, 1996, compared to 12.73% and 11.48%, respectively, at
December 31, 1995. The risk-based capital ratios for Anderson National Bank and
Spartanburg National Bank were 10.35% and 9.99%, respectively, at December 31,
1996 compared to 12.72% and 11.09%, respectively, at December 31, 1995. Their
Tier 1 capital to risk weighted assets ratios were 9.34% and 8.90%,
respectively, at December 31, 1996 compared to 11.47% and 9.88%, respectively,
at December 31, 1995. At December 31, 1996, the risk-based capital ratio for The
Community Bank of Greenville was 18.76% and the Tier 1 capital to risk weighted
assets ratio was 17.88%. The decline in Anderson National Bank's risk-based and
Tier 1 capital to risk weighted assets ratios from year-end 1995 levels resulted
from the payment of $750,000 in dividends to the Company during the period
ending December 31, 1996 and from growth experienced since December 31, 1995.
The decrease in the Company's and Spartanburg National Bank's risk-based and
Tier 1 capital to risk weighted assets ratios from year-end 1995 levels is a
result of growth experienced during 1996.
37
<PAGE>
The Company opened its new bank subsidiary, The Community Bank of Greenville,
National Association, in Greenville, South Carolina on April 17, 1996. The
Company capitalized this new bank subsidiary with $4.5 million of capital. The
capital required to open this new bank came from proceeds available to the
Company under a line of credit with an unaffiliated third-party lender which had
committed to lend the Company up to $6 million.
Effect of Inflation and Changing Prices
The consolidated financial statements have been prepared in accordance with
generally accepted accounting principals which require the measurement of
financial position and results of operations in terms of historical dollars,
without consideration of changes in the relative purchasing power over time due
to inflation. Unlike most other industries, virtually all of the assets and
liabilities of a financial institution are monetary in nature. As a result,
interest rates generally have a more significant effect on a financial
institution's performance than does the effect of inflation. Interest rates do
not necessarily change in the same magnitude as the prices of goods and
services.
While the effect of inflation on banks is normally not as significant as is its
influence on those businesses which have large investments in plant and
inventories, it does have an effect. During periods of high inflation, there are
normally corresponding increases in the money supply, and banks will normally
experience above average growth in assets, loans and deposits. Also, general
increases in the prices of goods and services will result in increased operating
expenses.
Accounting and Reporting Matters
In October 1995, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 123, "Accounting for
Stock-Based Compensation". SFAS No. 123 establishes a new method of accounting
for stock-based arrangements by measuring the value of a stock compensation
award by the fair value method versus the intrinsic method currently used under
the provisions of Opinion 25. If entities do not adopt the fair value method of
accounting for stock-based compensation, they will be required to disclose in
the footnotes pro forma net income and earnings per share information as if the
fair value based method had been adopted. The disclosure requirements of SFAS
No. 123 are effective for the 1996 financial statements. The Company will
continue to use the intrinsic value method for recording stock-based
compensation and has therefore expanded its disclosures.
In June 1996, the FASB issued SFAS No. 125, "Accounting for Transfers and
Servicing of Financial Assets and Extinguishment of Liabilities". The Statement
uses a "financial components" approach that focuses on control to determine the
proper accounting for financial asset transfers. Under that approach, after
financial assets are transferred, an entity would recognize on the balance sheet
all assets it controls and liabilities it has incurred. It would remove from the
balance sheet those assets it no longer controls and liabilities it has
satisfied. The statement is effective for transfers and servicing of financial
assets and extinguishment of liabilities occurring after December 31, 1996 and
is to be applied prospectively. Certain provisions of SFAS No. 125 have been
deferred for one year as a result of the FASB's issuance in December, 1996 of
SFAS No. 127, "Deferral of the Effective Date of Certain Provisions of FASB
Statement No. 125". The Company does not anticipate that adoption of this
Statement will have a material effect on the Company's financial statements.
Item 8 - Financial Statements and Supplementary Data
38
<PAGE>
Independent Auditors' Report
The Board of Directors
First United Bancorporation:
We have audited the consolidated balance sheets of First United Bancorporation
and subsidiaries (the "Company") as of December 31, 1995 and 1996 and the
related consolidated statements of income, changes in shareholders' equity, and
cash flows for each of the years in the three year period ended December 31,
1996. These consolidated financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
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 the Company at
December 31, 1995 and 1996, and the results of its operations and its cash flows
for each of the years in the three-year period ended December 31, 1996, in
conformity with generally accepted accounting principles.
Greenville, South Carolina
January 22, 1997
39
<PAGE>
FIRST UNITED BANCORPORATION
<TABLE>
Consolidated Balance Sheets
<CAPTION>
December 31, 1995 and 1996
($ in thousands)
Assets 1995 1996
------ ---- ----
<S> <C> <C>
Cash and due from banks ..................................................... $ 6,353 $ 8,128
Federal funds sold .......................................................... 5,100 13,700
Securities held to maturity (market value of $9,668 and
$8,006, respectively) ................................................... 9,481 7,843
Securities available for sale (amortized cost of $19,134 and
$26,318, respectively) ................................................. 19,032 26,304
Loans (net of allowance for loan losses of $2,320 and $3,160, respectively) . 145,674 202,391
Premises and equipment, net ................................................. 5,588 7,627
Other real estate owned, net ................................................ 74 85
Other assets ................................................................ 3,112 4,117
--------- ---------
Total assets .................................................... $ 194,414 $ 270,195
========= =========
Liabilities and Shareholders' Equity
Deposits:
Demand .................................................................. $ 20,949 $ 23,180
NOW accounts ............................................................ 24,710 25,143
Savings and money market ................................................ 25,420 34,113
Certificates of deposit greater than $100,000 ........................... 23,855 41,073
Certificates of deposit less than $100,000 and other
time deposits ....................................................... 65,447 94,710
--------- ---------
Total deposits .................................................. 160,381 218,219
Securities sold under repurchase agreements ................................. 3,096 8,167
Federal Home Loan Bank advances ............................................. 2,910 10,830
Other borrowed funds ........................................................ 9,470 11,900
Obligation under capital lease .............................................. 21 --
Other liabilities ........................................................... 2,129 2,794
--------- ---------
Total liabilities ............................................... 178,007 251,910
--------- ---------
Shareholders' equity:
Common stock, $1.67 par value; 15,000,000 shares
authorized; shares issued and outstanding -
2,314,882 in 1995 and 2,587,895 in 1996 ............................. 3,859 4,315
Additional paid-in capital .............................................. 11,269 13,965
Retained earnings ....................................................... 1,343 14
Unrealized loss on securities available for
sale, net of income taxes ........................................... (64) (9)
--------- ---------
Total shareholders' equity ...................................... 16,407 18,285
Commitments and contingencies
Total liabilities and shareholders' equity .......................... $ 194,414 $ 270,195
========= =========
</TABLE>
See accompanying notes to consolidated financial statements.
40
<PAGE>
FIRST UNITED BANCORPORATION
<TABLE>
Consolidated Statements of Income
Years Ended December 31, 1994, 1995 and 1996
<CAPTION>
1994 1995 1996
---- ---- ----
(In thousands, except per share data)
Interest income:
<S> <C> <C> <C>
Interest and fees on loans ........................................... $13,504 $17,675 $22,005
Interest on federal funds sold ....................................... 238 195 529
Interest on securities:
Taxable .......................................................... 1,558 1,535 1,585
Nontaxable ....................................................... 245 261 256
------- ------- -------
15,545 19,666 24,375
------- ------- -------
Interest expense:
Interest on deposits ................................................. 4,078 5,871 7,899
Interest on securities sold under repurchase agreements .............. 118 168 151
Interest on FHLB advances and other borrowed funds ................... 573 999 1,389
------- ------- -------
4,769 7,038 9,439
------- ------- -------
Net interest income .................................................. 10,776 12,628 14,936
Provision for loan losses ................................................ 397 779 2,149
------- ------- -------
Net interest income after provision for loan losses .................. 10,379 11,849 12,787
------- ------- -------
Other income:
Service charges on deposit accounts and other fees ................... 734 789 877
Other ................................................................ 1,004 1,094 1,196
------- ------- -------
1,738 1,883 2,073
------- ------- -------
Other expenses:
Salaries, wages and benefits ......................................... 5,061 5,762 6,763
Net occupancy expenses ............................................... 563 631 763
Other operating expenses ............................................. 3,333 3,635 4,365
------- ------- -------
8,957 10,028 11,891
------- ------- -------
Income before income taxes ............................................... 3,160 3,704 2,969
Income taxes ............................................................. 1,082 1,291 1,023
------- ------- -------
Net income ............................................................... $ 2,078 $ 2,413 $ 1,946
======= ======= =======
Net income per common share:
Primary .............................................................. $ 0.81 $ 0.90 $ 0.72
Fully diluted ........................................................ 0.81 0.89 0.72
Average common shares outstanding:
Primary .............................................................. 2,564 2,696 2,712
Fully diluted ........................................................ 2,564 2,711 2,712
Cash dividends declared per common share ................................. $ .03 $ .12 $ .12
</TABLE>
See accompanying notes to consolidated financial statements.
41
<PAGE>
<TABLE>
FIRST UNITED BANCORPORATION
Consolidated Statements of Changes in Shareholders' Equity
<CAPTION>
Years Ended December 31, 1994, 1995 and 1996
Unrealized
Gain (Loss)
on Securities
Additional Available Total
Common stock Paid-in Retained for Shareholders'
Shares Amount Capital Earnings Sale, Net Equity
------ ------ ------- -------- --------- ------
(In thousands)
<S> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1993 .................... 1,879 $3,131 $ 7,279 $ 1,712 $ 164 $ 12,286
Issuance of 187,447 shares of
common stock relating to
10% stock dividend ........................ 187 313 958 (1,274) - (3)
Cash in lieu of fractional
shares on 3 for 2 stock split ............. - - - (2) - (2)
Cash dividends declared, $.03
per share ................................. - - - (62) - (62)
Employee stock options
exercised ................................. 17 27 72 - - 99
Net income ...................................... - - - 2,078 - 2,078
Change in net unrealized loss on
securities for sale ....................... - - - - (805) (805)
----- ------ ------- ------- ----- --------
Balance at December 31, 1994 .................... 2,083 3,471 8,309 2,452 (641) 13,591
Issuance of 104,155 shares of
common stock relating to
5% stock dividend ......................... 104 174 1,194 (1,371) - (3)
Issuance of 110,201 shares of
common stock relating to
5% stock dividend ......................... 110 184 1,698 (1,887) - (5)
Cash dividends declared, $.12
per share ................................. - - - (264) - (264)
Employee stock options
exercised ................................. 18 30 68 - - 98
Net Income ...................................... - - - 2,413 - 2,413
Change in net unrealized loss on
securities available for sale ............. - - - - 577 577
----- ------ ------- ------- ----- --------
Balance at December 31, 1995 .................... 2,315 3,859 11,269 1,343 (64) 16,407
Issuance of 116,418 shares of
common stock relating to
5% stock dividend ......................... 116 195 1,260 (1,458) - (3)
Issuance of 122,959 shares of
common stock relating to
5% stock dividend ......................... 123 205 1,317 (1,525) - (3)
Cash dividends declared, $.12
per share ................................. - - - (292) - (292)
Employee stock options
exercised ................................. 34 56 119 -- - 175
Net income ...................................... - - - 1,946 - 1,946
Change in net unrealized loss on
securities available for sale ............. - - - - 55 55
----- ------ ------- ------- ----- --------
Balance at December 31, 1996 .................... 2,588 $4,315 $13,965 $ 14 $ (9) $ 18,285
===== ====== ======= ======= ===== ========
</TABLE>
See accompanying notes to consolidated financial statements.
42
<PAGE>
FIRST UNITED BANCORPORATION
<TABLE>
Consolidated Statements of Cash Flows
<CAPTION>
Years Ended December 31, 1994, 1995 and 1996
($ in thousands)
1994 1995 1996
---- ---- ----
Cash flows from operating activities:
<S> <C> <C> <C>
Net income ....................................................................... $ 2,078 $ 2,413 $ 1,946
Adjustments to reconcile net income to net cash provided by operating
activities:
Provision for loan losses .............................................. 397 779 2,149
Depreciation and amortization .......................................... 675 654 699
Deferred income taxes .................................................. (65) (238) (421)
Increase in other assets, net .......................................... (130) (242) (628)
Increase in other liabilities, net ..................................... 337 454 665
-------- -------- --------
Net cash provided by operating activities ......................... 3,292 3,820 4,410
-------- -------- --------
Cash flows from investing activities:
Purchases of securities held to maturity ........................................ (2,697) (880) (559)
Purchases of securities available for sale ...................................... (6,292) (3,371) (13,704)
Proceeds from maturities of securities
held to maturity ............................................................ 2,271 632 2,197
Proceeds from maturities of securities
available for sale .......................................................... 6,882 6,439 6,520
Proceeds from sales of securities
available for sale .......................................................... -- 896 --
Net increase in loans ............................................................ (17,805) (28,557) (58,866)
Net additions to premises and equipment .......................................... (446) (2,459) (2,738)
-------- -------- --------
Net cash used by investing
activities ................................................... (18,087) (27,300) (67,150)
-------- -------- --------
Cash flows from financing activities:
Net increase in deposits ......................................................... 10,242 22,715 57,838
Proceeds from other borrowed funds ............................................... 2,125 27,821 35,935
Principal repayments on other borrowed funds and
obligation under capital lease .............................................. (215) (26,353) (33,526)
Net proceeds from Federal Home Loan Bank advances ................................ 950 1,960 7,920
Net increase (decrease) in securities sold under
repurchase agreements ....................................................... 421 (202) 5,071
Proceeds from exercise of stock options .......................................... 99 98 175
Cash paid for dividends and fractional shares .................................... (67) (272) (298)
-------- -------- --------
Net cash provided by financing
activities ................................................... 13,555 25,767 73,115
-------- -------- --------
Net increase (decrease) in cash and cash equivalents .................................. (1,240) 2,287 10,375
Cash and cash equivalents, beginning of year .......................................... 10,406 9,166 11,453
-------- -------- --------
Cash and cash equivalents, end of year ................................................ $ 9,166 $ 11,453 $ 21,828
======== ======== ========
Supplemental information:
Cash paid during the year for:
Interest .................................................................... $ 4,658 $ 6,451 $ 8,887
Income taxes ................................................................ 1,057 1,468 1,451
Supplemental schedule of non-cash transactions:
Transfer from loans receivable to other real estate .............................. $ 15 $ - $ 11
Change in unrealized gain (loss) on securities available for sale, net ........... (805) 577 55
See accompanying notes to consolidated financial statements
</TABLE>
43
<PAGE>
(1) Corporate Background and Organization
First United Bancorporation (the "Company") is a bank holding company
organized in July 1987 to become the holding company for Anderson National
Bank (the "Anderson Bank") which was organized in 1984. The Company is
incorporated under the laws of the State of South Carolina and registered
under the Bank Holding Company Act of 1956, as amended.
The Company formed a second bank subsidiary, Spartanburg National Bank (the
"Spartanburg Bank"), which commenced operations on September 1, 1988. The
Company capitalized the Spartanburg Bank and purchased all of the
Spartanburg Bank's initial issuance of stock with the proceeds of a public
offering. The Spartanburg Bank is located in Spartanburg, South Carolina
and provides a full range of banking services.
The Company formed a third bank subsidiary, The Community Bank of
Greenville, National Association (the "Greenville Bank"), which commenced
operations on April 17, 1996. The Company capitalized the Greenville Bank
and purchased all of the Greenville Bank's initial issuance of stock with
the proceeds of borrowings under a line of credit with a third party
lender. The Greenville Bank is located in Greenville, South Carolina and
provides a full range of banking services. The Anderson Bank, the
Spartanburg Bank and the Greenville Bank are sometimes hereinafter
collectively referred to as the "Banks."
The Company organized another subsidiary, Quick Credit Corporation ("Quick
Credit"), a consumer finance company, which commenced operations in
February 1988. At December 31, 1996, Quick Credit had 22 offices, all
located in South Carolina.
(2) Summary of Significant Accounting Policies
The following is a description of the more significant accounting and
reporting policies which the Company follows in preparing and presenting
its consolidated financial statements.
(a) Principles of Consolidation
The accompanying consolidated financial statements include the
accounts of the Company and its wholly-owned subsidiaries. In
consolidation all significant intercompany accounts and transactions
have been eliminated.
(b) Cash and Cash Equivalents
The Company includes cash on hand, cash items in transit to
depository institutions, cash balances in depository institutions,
certificates of deposit with less than three months original
maturity, and federal funds sold as cash and cash equivalents in its
consolidated statements of cash flows.
(c) Investment Securities
Each Bank maintained liquid assets in excess of the amount required
by regulations during all periods included in these consolidated
financial statements. Liquid assets consist principally of cash,
short-term interest-bearing deposits, federal funds sold and
investment securities.
44
<PAGE>
(2) Summary of Significant Accounting Policies, Continued
On May 31, 1993, the Financial Accounting Standards Board ("FASB")
issued Statement of Financial Accounting Standards ("SFAS") No. 115,
Accounting for Certain Investments in Debt and Equity Securities
("SFAS 115"). SFAS 115 addresses the accounting and reporting for
investments in equity securities that have readily determinable fair
values other than those accounted for under the equity method or as
investments in consolidated subsidiaries - and all investments in
debt securities. The Company classifies investments, under SFAS 115,
into three categories as follows: (1) Held to Maturity Securities -
debt securities that the enterprise has the positive intent and
ability to hold to maturity, which are reported at amortized cost;
(2) Trading Securities - debt and equity securities that are bought
and held principally for the purpose of selling them in the near
term, which are reported at fair value, with unrealized gains and
losses included in earnings; and (3) Available for Sale Securities -
debt and equity securities not classified as either held to maturity
securities or trading securities, which are reported at fair value,
with unrealized gains and losses excluded from earnings and reported
as a separate component of stockholders' equity (net of tax effects).
Gain or loss on the sale of securities available for sale is based on
the specific identification method. The Company has no trading
securities. The Company designates securities as held to maturity or
available for sale at the purchase date. Unrealized losses on
securities available for sale reflecting a decline in value judged to
be other than temporary, are charged to income in the Consolidated
Statements of Income.
(d) Interest Income on Loans Receivable
Accrual of interest is discontinued on a loan when management
believes, after considering economic and business conditions and
collection efforts, that the borrower's financial condition is such
that collection of interest is doubtful. Loans are generally placed
on non-accrual when they are ninety days delinquent.
The Banks recognize interest on non-discounted loans using the simple
interest method on daily balances of the principal amounts
outstanding. Unearned income on loans made by Quick Credit is carried
as a reduction of the respective loan balances and is recognized in
income using the sum-of-the-months-digits (rule of 78's) method. Due
to the short-term maturities of Quick Credit's loans, this method
approximates a level yield.
(e) Allowance for Loan Losses
Each Bank provides for loan losses through an allowance and all
recoveries are credited to the allowance. Additions to the allowance
for loan losses are provided by charges to operations based on
various factors which, in management's judgment, deserve current
recognition in estimating possible losses. Such factors considered by
management include the market value of the underlying collateral,
growth and composition of the loan portfolios, the relationship of
the allowance for loan losses to outstanding loans, loss experience,
delinquency trends and economic conditions. Management evaluates the
carrying value of loans periodically and the allowance is adjusted
accordingly. While management uses the best information available to
make evaluations, future adjustments to the allowance may be
necessary if economic conditions differ substantially from the
assumptions used in making the evaluations. In addition, the
allowance for loan losses is subject to periodic evaluation by
various regulatory authorities and may be subject to adjustments
based upon information that is available to them at the time of their
examination.
45
<PAGE>
(2) Summary of Significant Accounting Policies, Continued
(f) Other Real Estate Owned
Other real estate owned represents real estate acquired through
foreclosure and is recorded at the lower of cost or fair value less
anticipated costs to sell.
(g) Premises and Equipment
Premises and equipment are stated at cost less accumulated
depreciation. Depreciation is calculated primarily using the
straight-line method over the estimated useful lives of the assets.
Leasehold improvements are amortized over the shorter of the life of
the asset or the lease.
(h) Income Taxes
The Company files a consolidated federal income tax return. Separate
state tax returns are filed for Anderson National Bank, Spartanburg
National Bank and The Community Bank of Greenville, N.A. First United
Bancorporation and Quick Credit file a consolidated state income tax
return.
In 1992, the FASB issued SFAS No. 109, Accounting for Incomes Taxes
("SFAS 109"). Under SFAS 109, deferred tax liabilities are recognized
on all taxable temporary differences (reversing differences where tax
deductions initially exceed financial statement expense, or income is
reported for financial statement purposes prior to being reported for
tax purposes). In addition, deferred tax assets are recognized on all
deductible temporary differences (reversing differences where
financial statement expense initially exceeds tax deductions, or
income is reported for tax purposes prior to being reported for
financial statement purposes) and operating loss and tax credit
carryforwards. Valuation allowances are established to reduce
deferred tax assets if it is determined to be "more likely than not"
that all or some portion of the potential deferred tax assets will
not be realized. Under SFAS 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.
The Company adopted SFAS 109 as of January 1, 1993. The cumulative
effect of the adoption of SFAS 109 was an increase of $56,000 in net
income for 1993, and a corresponding increase in the net deferred tax
asset. Prior years' consolidated financial statements were not
restated in connection with the adoption of SFAS 109.
(i) Per Share Data
Primary earnings per share is computed by dividing net income by the
weighted average number of shares of common stock and dilutive common
stock equivalents outstanding during the period. Fully diluted
earnings per share is computed by dividing net income by the weighted
average number of shares of common stock and common stock equivalents
outstanding during the period, with common stock equivalents
calculated based on the ending market price, if higher than the
average market price. Common stock equivalents consist of common
stock options and are computed using the treasury stock method. The
weighted average number of shares outstanding during the period for
primary and fully diluted earnings per share was adjusted to
retroactively reflect all stock dividends.
46
<PAGE>
(2) Summary of Significant Accounting Policies, Continued
(j) Fair Value of Financial Instruments
The financial statements include disclosure of fair value information
about financial instruments, whether or not recognized on the balance
sheet, for which it is practicable to estimate that value. In cases
where quoted market prices are not available, fair values are based
on estimates using present value or other valuation techniques. Those
techniques are significantly affected by the assumptions used,
including the discount rate and estimates of future cash flows. In
that regard, the derived fair value estimates cannot be substantiated
by comparison to independent markets and, in many cases, could not be
realized in immediate settlement of the financial instrument. As the
fair value of certain financial instruments and all nonfinancial
instruments are not presented, the aggregate fair value amounts
presented do not represent the underlying value of the Company.
(k) Stock-Based Compensation
In October 1995, the FASB issued SFAS No. 123, "Accounting for
Stock-Based Compensation" ("SFAS 123"). SFAS 123 establishes a new
method of accounting for stock-based arrangements by measuring the
value of a stock compensation award by the fair value method versus
the intrinsic method currently used under the provisions of Opinion
25. If entities do not adopt the fair value method of accounting for
stock-based compensation, they will be required to disclose in the
footnotes pro forma net income and earnings per share information as
if the fair value based method had been adopted. The disclosure
requirements of SFAS 123 are effective for the 1996 financial
statements. The Company will continue to use the intrinsic value
method for recording stock-based compensation and has therefore
expanded its disclosures.
(l) Use of Estimates in the Preparation of Financial Statements
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent liabilities at the date of
the financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ
from those estimates.
(m) Reclassifications
Certain minor amounts in the 1994 and 1995 consolidated financial
statements have been reclassified to conform with 1996 presentations. These
reclassifications had no impact on shareholders' equity or net income as
previously reported.
(3) Cash and Due from Banks
Anderson National Bank and Spartanburg National Bank are required by
regulation to maintain varying cash reserve balances with the Federal
Reserve System. The average amount of the cash reserve balance required
for Anderson National Bank for the years ended December 31, 1995 and 1996
was $563,000 and $614,000, respectively. At December 31, 1995 and 1996,
the calculated cash reserve required was $564,000 and $602,000,
respectively. The average amount of the cash reserve balance required for
Spartanburg National Bank for the years ended December 31, 1995 and 1996
was $351,000 and $383,000, respectively. At December 31, 1995 and 1996,
the calculated cash reserve required was $358,000 and $389,000,
respectively.
47
<PAGE>
(4) Investment Securities
The amortized cost and market value of securities held to maturity at
December 31 are as follows (dollars in thousands):
<TABLE>
<CAPTION>
1995 1996
-------------------------------------------------- ------------------------------------------
Gross Gross Gross Gross
Amortized Unrealized Unrealized Market Amortized Unrealized Unrealized Market
Cost Gains Losses Value Cost Gains Losses Value
---- ----- ------ ----- ---- ----- ------ -----
<S> <C> <C> <C> <C> <C> <C> <C> <C>
U.S. Treasury
Securities $ 1,441 $ 15 $ - $1,456 $ 899 $ 4 $ - $ 903
State, county
and municipal 5,533 108 - 5,641 5,428 111 - 5,539
Mortgage-backed
securities 2,507 64 - 2,571 1,516 48 - 1,564
--------- --------- ------ ----- ----- ----- ------ -----
$ 9,481 $ 187 $ - $9,668 $7,843 $ 163 $ - $8,006
========= ========= ====== ===== ===== ===== ====== =====
</TABLE>
The amortized cost and market values of securities available for sale at
December 31 are as follows (dollars in thousands):
<TABLE>
<CAPTION>
1995 1996
------------------------------------------- --------------------------------------------
Gross Gross Gross Gross
Amortized Unrealized Unrealized Market Amortized Unrealized Unrealized Market
Cost Gains Losses Value Cost Gains Losses Value
---- ----- ------ ----- ---- ----- ------ -----
<S> <C> <C> <C> <C> <C> <C> <C> <C>
U.S. Treasury
securities .................... $ 2,650 $ 24 $ - $ 2,674 $ 5,286 $ 4 $ - $ 5,290
U.S. Government
agencies ...................... 10,478 - 131 10,347 13,952 - 74 13,878
Mortgage-backed
securities .................... 5,240 5 - 5,245 5,294 56 - 5,350
Other securities .................. 766 - - 766 1,786 - - 1,786
------- ---- ------- ------- ------- --- ------- -------
$19,134 $ 29 $ 131 $19,032 $26,318 $60 $ 74 $26,304
======= ==== ======= ======= ======= === ======= =======
</TABLE>
The amortized cost and estimated market value of securities at December
31, 1996, by contractual maturity, are shown below (dollars in thousands):
<TABLE>
<CAPTION>
Available for Sale Held to Maturity
------------------ ----------------
Amortized Market Amortized Market
Cost Value Cost Value
---- ----- ---- -----
<S> <C> <C> <C> <C>
One year or less ............. $ 2,974 $ 2,982 $1,613 $1,620
After one year through
five years ............... 14,848 14,772 4,696 4,763
After 5 years through ........ 1,552 1,550 1,011 1,064
10 years
After 10 years ............... 6,944 7,000 523 559
--------- --------- ------ ------
Total ........................ $ 26,318 $ 26,304 $7,843 $8,006
========= ========= ====== ======
</TABLE>
48
<PAGE>
(4) Investment Securities, Continued
In 1995 the Company sold $896,000 in securities out of its available for
sale portfolio. There were no sales of securities in 1994 and 1996.
Investment securities with carrying amounts of approximately $17,669,000
and $17,618,000 at December 31, 1995 and 1996, respectively, were pledged
to secure public deposits and securities sold under repurchase agreements
and for other purposes required or permitted by law.
(5) Loans Receivable, Net
Loans receivable, net, at December 31 are summarized as follows (dollars in
thousands):
<TABLE>
<CAPTION>
1995 1996
---- ----
<S> <C> <C>
Commercial loans ...................................... $ 25,684 $ 42,867
Real estate - mortgage loans .......................... 84,418 104,218
Real estate - construction and land development loans . 9,111 21,754
Consumer loans ........................................ 28,781 36,712
Total loans ................................ 147,994 205,551
Less: Allowance for loan losses ....................... (2,320) (3,160)
------- --------
Loans receivable, net ................................. $145,674 $202,391
======= =======
</TABLE>
Loans on which the accrual of interest has been discontinued amounted to
$241,000 and $437,000 at December 31, 1995 and 1996, respectively.
Foregone interest on nonaccrual loans totaled approximately $40,000 and
$32,000 for the years ended December 31, 1995 and 1996, respectively.
Changes in the allowance for loan losses for the years ended December 31
were as follows (dollars in thousands):
<TABLE>
<CAPTION>
1994 1995 1996
---- ---- ----
<S> <C> <C> <C>
Balance, beginning of year ............ $ 1,694 $ 1,944 $ 2,320
Provision for loan losses ............. 397 779 2,149
Loans charged-off ..................... (334) (645) (1,394)
Recoveries ............................ 172 234 85
Allowance allocated to purchased loans 15 8 --
----------- ------- --------
Balance, end of year .................. $ 1,944 $ 2,320 $ 3,160
=========== ======= ========
</TABLE>
At December 31, 1996, the majority of the loan portfolio is secured by
collateral located in the State of South Carolina and there were no
significant concentrations of loans in any type of industry, type of
property or to one borrower.
At December 31, 1996, the Company has $120,000 in mortgage loans held for
sale which are recorded at the lower of their cost or market value.
49
<PAGE>
(5) Loans Receivable, Net, Continued
On January 1, 1995, the Company adopted SFAS No. 114 "Accounting by
Creditors for Impairment of a Loan." SFAS 114 requires that impaired loans
and certain restructured loans be measured at the present value of expected
future cash flows, discounted at the loan's effective interest rate, at the
loan's observable market price, or at the fair value of the collateral if
the loan is collateral dependent. A specific reserve is set up for each
impaired loan. Also on January 1, 1995, the Company adopted SFAS No. 118,
"Accounting by Creditors for Impairment of a Loan - Income Recognition and
Disclosures." SFAS 118 amends SFAS 114 in the areas of disclosure
requirements and methods for recognizing interest income on an impaired
loan.
At December 31, 1995 and 1996, loans totaling $241,000 and $437,000,
respectively, were considered to be impaired under SFAS 114. The related
allowance on these loans at December 31, 1995 and 1996 was $63,000 and
$75,000, respectively. The average amount of impaired loans during 1995 and
1996 was $187,000 and $311,000, respectively.
(6) Premises and Equipment
Premises and equipment at December 31 are as follows (dollars in
thousands):
<TABLE>
<CAPTION>
Estimated
useful
lives 1995 1996
----- ---- ----
<S> <C> <C> <C>
Land ...................................... - $ 1,818 $ 1,818
Buildings and leasehold improvements 15-30 years 3,423 4,529
Furniture, fixtures and equipment 2-8 years 2,622 4,069
Vehicles .................................. 3 years 260 266
------- -------
8,123 10,682
Accumulated depreciation .................. (2,535) (3,055)
------- -------
$ 5,588 $ 7,627
======= =======
</TABLE>
(7) Deposits
Deposits outstanding by type of account and weighted average rate are
summarized as follows (dollars in thousands):
<TABLE>
<CAPTION>
December 31,
------------
1995 1996
---- ----
Balance Rate Balance Rate
------- ---- ------- ----
<S> <C> <C> <C> <C>
Demand accounts:
Non-interest-bearing ...... $ 20,949 -% $ 23,180 -%
Interest-bearing demand
deposits ............... 24,710 2.46 25,143 2.28
Savings and money market .. 25,420 3.74 34,113 3.75
-------- ------- -------- -------
71,079 2.22 82,436 2.25
-------- ------- -------- -------
Certificate accounts:
Jumbo ..................... 23,855 6.09 41,073 5.93
Other ..................... 65,447 5.83 94,710 5.81
-------- ------- -------- -------
89,302 5.90 135,783 5.84
-------- ------- -------- -------
Total deposits ......... $ 160,381 4.28% $ 218,219 4.49%
======== ======= ======== =======
</TABLE>
50
<PAGE>
(7) Deposits, Continued
Certificate accounts by maturity at December 31 consist of the following
(dollars in thousands):
<TABLE>
<CAPTION>
1995 1996
---- ----
<S> <C> <C>
Maturing in first succeeding year .................... $ 78,775 $118,083
Maturing in second through fifth
succeeding years ................................. 10,527 17,598
Maturing in over five years .................. - 102
$ 89,302 $135,783
======= =======
</TABLE>
Interest expense by type of deposit for the years ended December 31 is
summarized as follows (dollars in thousands):
<TABLE>
<CAPTION>
1994 1995 1996
---- ---- ----
<S> <C> <C> <C>
Interest-bearing demand deposits ............. $ 529 $ 574 $ 586
Savings and money market ..................... 699 785 1,093
Certificates ................................. 2,850 4,512 6,220
------ ------ ------
$4,078 $5,871 $7,899
====== ====== ======
</TABLE>
(8) Long-term Debt
Other Borrowed Funds
Other borrowed funds at December 31 are summarized as follows (dollars in
thousands):
<TABLE>
<CAPTION>
1995 1996
---- ----
<S> <C> <C>
Line of credit payable to a commercial bank due May
1999, bearing an interest rate ranging from 9.75%
to 10.5% in 1995 and 9.38% to 9.75% in 1996 (a) $ 8,020 $ 6,350
Line of credit payable to a commercial bank, bearing an
interest rate ranging from 8.5% to 9.0% in 1995
and 6.75% to 8.50% in 1996(b) 650 4,750
Subordinated debentures due December 1999, interest
payable quarterly at 9.0% in 1995 and 8.25% in
1996 400 400
Subordinated debentures due June 1998, interest
payable quarterly at 10.25% 300 300
Subordinated debenture due October 1997, interest
payable monthly at 9.75% in 1995 and 9.25% in
1996 100 100
------ ------
$9,470 $ 11,900
====== ======
</TABLE>
51
<PAGE>
(8) Long-term Debt, Continued
(a) During 1996, the Company's subsidiary, Quick Credit, entered into an
$18,000,000 line of credit with a commercial bank secured by Quick
Credit's loans receivable of which $8,020,000 and $6,350,000 was
outstanding at December 31, 1995 and 1996, respectively. The line
expires May 1999. The line of credit allows Quick Credit to borrow
based upon a borrowing formula and requires Quick Credit to maintain
certain minimum net worth levels and debt to equity levels. At
December 31, 1996, there were no violations of covenants contained
within the loan agreement for which a waiver had not been obtained.
(b) In May, 1995 the Company entered into a combination revolving line of
credit/term loan agreement with a commercial bank secured by the
common stock of both subsidiary banks in the amount of $5,000,000. The
line of credit was increased to $6,000,000 in December 1995. The
revolving line of credit expires in May, 1999, but may be extended for
two additional one year periods of time if certain covenants are met
but not to exceed a final expiration date of May 2001. The revolving
line bears interest at a variable rate and requires quarterly interest
payments. At the expiration of the revolving line of credit the
Company can convert the balance outstanding under the revolving line
to a term loan at a fixed rate or variable rate of interest, at the
Company's discretion, for a period of up to five years, but not to
exceed a final expiration date of May 2006 with quarterly interest and
equal principal payments required. At December 31, 1996, $4,750,000
was outstanding under the revolving line of credit. The lines of
credit and term loan agreement require the Company and its banking
subsidiaries to maintain certain minimum net worth levels, cash flow
ratios and earnings levels. At December 31, 1996 the Company was in
compliance with all covenants contained within the loan agreement.
Federal Home Loan Bank Advances
The Company's banking subsidiaries had outstanding borrowings from the Federal
Home Loan Bank of Atlanta as of December 31, 1996 totaling $10,830,000,
collectively, compared to $2,910,000 collectively, at December 31, 1995. The
advances at December 31, 1996 accrue interest at rates ranging from 5.74% to
7.91% compared to rates ranging from 6.30% to 7.91% at December 31, 1995.
Advances to Anderson National Bank totaled $8,280,000 and $360,000 at December
31, 1996 and 1995, respectively. Of the advances outstanding at December 31,
1996, $280,000 is being amortized over 10 years with $20,000 semi-annual
payments required through August 2004, and $8,000,000 of these advances are due
in $4,000,000 increments in January and July of 1997, respectively. These
advances are secured by a blanket lien on Anderson National Bank's fist mortgage
real estate loans. Advances to Spartanburg National Bank totaled $2,550,000 at
December 31, 1996 and 1995. Of the advances outstanding at December 31, 1996,
$550,000 is due in October 1999, and $2,000,000 of the advances are due in
January of 1997. These advances are secured by certain of Spartanburg National
Bank's securities and by a blanket lien on Spartanburg National Bank's first
mortgage real estate loans.
Other
The Company also has a line of credit facility with an unrelated commercial bank
which is unsecured and provides that the Company may borrow up to $100,000, all
of which is available at December 31, 1996. Borrowings under this credit
facility bear interest at the prime rate.
52
<PAGE>
(9) Securities Sold Under Repurchase Agreements
Securities sold under repurchase agreements, payable within one year
and collateralized by investment securities at December 31 are
summarized as follows (dollars in thousands):
<TABLE>
<CAPTION>
1994 1995 1996
---- ---- ----
<S> <C> <C> <C>
Balance at December 31 $ 3,298 $ 3,096 $ 8,167
------ -------- --------
Weighted average interest rate
at December 31 3.78% 4.94% 2.64%
------ --------- --------
Maximum amount outstanding at
any month end during the year $ 4,599 $ 4,068 $ 8,167
------ -------- --------
Average monthly balance outstanding
during the year $ 3,486 $ 3,220 $ 3,923
------ -------- --------
Average interest during the year 3.38% 5.53% 3.87%
------ -------- -------
</TABLE>
(10) Commitments, Contingencies and Off-Balance Sheet Risk
The Company has entered into a number of noncancellable operating
lease agreements, primarily for land, buildings and equipment for
operations. Many of these leases contain renewal options and
escalation clauses, and in some instances, the annual rent will be
renegotiated upon lease renewal. In addition, the Company pays
maintenance, property taxes and insurance on certain leased
properties.
At December 31, 1996, minimum rental commitments based on the
remaining noncancellable lease terms without consideration of renewal
options are summarized as follows (dollars in thousands):
<TABLE>
<CAPTION>
<S> <C>
1997 ................................ $ 192
1998 ................................ 153
1999 ................................ 87
2000 ................................ 41
2001 and thereafter ................. 19
------
Total minimum obligation ............ $ 492
======
</TABLE>
During 1994, 1995 and 1996, the Company paid rent expense of approximately
$167,000, $180,000 and $223,000, respectively.
Commitments to extend credit are agreements to lend to customers as long
as there is no violation of any condition established in the contract.
These commitments generally have fixed expiration dates or other
termination clauses and may require payment of a fee. Since many of these
commitments are expected to expire without being drawn upon, the total
commitment amounts do not necessarily represent future cash requirements.
Each customer's credit worthiness is evaluated on a case-by-case basis and
collateral is obtained if deemed necessary. At December 31, 1996 and 1995,
the Banks had commitments to extend credit of approximately $44,403,000
and $26,906,000, respectively. This amount includes unused credit card and
home mortgage equity lines.
53
<PAGE>
(10) Commitments, Contingencies and Off-Balance Sheet Risk, Continued
Standby letters of credit are commitments issued by the Banks to guarantee
the performance of a customer to a third party. The Banks had
approximately $1,497,000 in outstanding standby letters of credit at
December 31, 1996.
The Banks are parties to financial instruments with off-balance sheet risk
in the normal course of business to meet the financial needs of their
customers and to reduce their own exposure to fluctuations in interest
rates. Theses financial instruments include commitments to extend credit
and standby letters of credit. These instruments involve, to varying
degrees, elements of credit and interest rate risk in excess of the
amounts recognized in the Consolidated Balance Sheets. The contract amount
of these instruments reflects the extent of involvement that the Banks
have in classes of financial instruments.
The Banks use the same credit policies in making commitments to extend
credit and in issuing standby letters of credit that are used for
on-balance sheet instruments. The Company's exposure to credit loss for
commitments to extend credit and standby letters of credit in the event of
the other party's nonperformance is represented by the contract amount of
the instrument and is essentially the same as that involved in extensions
of loans with collateral being obtained if deemed necessary.
(11) Income Taxes
Income tax expense (benefit) for the years ended December 31 is as follows
(dollars in thousands):
<TABLE>
<CAPTION>
1994 1995 1996
---- ---- ----
<S> <C> <C> <C>
Current tax provision:
Federal ......................... $ 1,032 $ 1,383 $ 1,298
State ........................... 115 146 146
-------- ------- --------
1,147 1,529 1,444
-------- ------- --------
Deferred tax provision (benefit):
Federal ......................... (62) (218) (375)
State ........................... (3) (20) (46)
-------- ------- ---------
(65) (238) (421)
-------- ------- ---------
Total tax provision .......... $ 1,082 $ 1,291 $ 1,023
======== ======= ========
</TABLE>
54
<PAGE>
(11) Income Taxes, Continued
The Company's effective tax rate varies from the Federal statutory tax
rate of 34%. The reasons for the differences are as follows (dollars in
thousands):
<TABLE>
<CAPTION>
1994 1995 1996
------------------ ------------------- -----------------
% of % of % of
Pretax Pretax Pretax
Amount Income Amount Income Amount Income
------ ------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C> <C>
Computed "expected"
tax expense ............. $ 1,074 34% $ 1,259 34% $ 1,010 34%
Effect of:
State income tax,
net of federal
benefit .............. 74 2.3 83 2.2 66 2.3
Tax-exempt interest
income ............... (77) (2.4) (74) (2.0) (83) (2.8)
Other, net .............. 11 0.3 23 0.7 30 1.0
------- ------- ------- ------- ------- ----
$ 1,082 34.2% $ 1,291 34.9% $ 1,023 34.5%
======= ======= ======= ======= ======= ====
</TABLE>
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and deferred tax liabilities at
December 31, are presented below (dollars in thousands):
<TABLE>
<CAPTION>
1995 1996
---- ----
<S> <C> <C>
Deferred tax assets:
Loan loss reserves $ 465 $ 789
Deferred compensation 208 230
Unrealized investment security losses 33 5
Other 100 193
------- -------
Total gross deferred tax assets $ 806 $ 1,217
------- -------
Deferred tax liabilities:
Fixed asset basis for financial reporting purposes
in excess of tax basis $ 42 $ 51
Other 13 22
------- -------
Total gross deferred tax liabilities 55 73
------- -------
Net deferred tax asset $ 751 $ 1,144
======= =======
</TABLE>
A portion of the change in the net deferred tax asset relates to unrealized
gains and losses on securities available for sale. The related current
period deferred tax expense of $28,000 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 $421,000. The
net deferred tax asset is included in other assets in the accompanying
consolidated balance sheets.
The valuation allowance for deferred tax assets as of January 1, 1995 and
1996 was zero. The net change in the total valuation allowance for the
years ended December 31, 1995 and 1996 was zero. No valuation allowance has
been established as it is management's contention that realization of the
net deferred tax asset is more likely than not due primarily to refundable
taxes in carryback periods and conservative estimates of future taxable
income. The Company's income tax returns for 1993 and subsequent years are
subject to review by the taxing authorities.
55
<PAGE>
(12) Shareholders' Equity
On May 2, 1994 the Board declared a ten percent stock dividend. On May 22,
1995 and October 22, 1995 the Company's Board of Directors declared
additional five percent stock dividends. On June 17, 1996 and November 15,
1996 the Company's Board of Directors declared additional five percent
stock dividends. Accordingly, outstanding shares of common stock were
increased and a transfer representing the fair market value of additional
shares issued was made from retained earnings to common stock at par value,
cash for payment of fractional shares and the balance to additional paid-in
capital.
On October 25, 1994, the Board of Directors declared a three-for-two stock
split payable to stockholders of record as of November 8, 1994. The
distribution date was November 22, 1994 with fractional shares paid in cash
based on the adjusted market value of the stock at the distribution date.
All share and per share amounts for all periods have been retroactively
restated to reflect the stock split and the various stock dividends.
(13) Stock Options
In 1987, the Company adopted a stock option plan (the "1987 Plan") which
provides for granting key employees options to purchase the Company's
common stock at an option price equal to fair market value at the date of
grant. Option prices and number of shares have been adjusted for the stock
dividends and split discussed in note 12. The Company reserved 166,114
shares for issuance pursuant to the 1987 Plan. Options vest in four
increments of 25% each on the first four anniversaries of the date of grant
and can be exercised within ten years of the date of grant.
At December 31, 1996, under the 1987 Plan options to purchase 163,725
shares were outstanding, 2,389 shares were available for grant and 160,215
shares were exercisable. Stock option activity to date is as follows:
<TABLE>
<CAPTION>
Outstanding Exercisable
<S> <C> <C>
Granted at $5.45 per share in 1987 ................................ 36,566 36,566
Granted at $4.95 per share in 1987 ................................ 42,153 42,153
Granted at $4.95 per share in 1988 ................................ 36,347 36,347
Granted at $4.95 per share in 1989 ................................ 8,126 8,126
Granted at $4.95 per share in 1990 ................................ 3,657 3,657
Granted at $4.07 per share in 1991 ................................ 5,534 5,534
Granted at $3.83 per share in 1992 ................................ 24,322 24,322
Granted at $4.99 per share in 1994 ................................ 7,020 3,510
--------- --------
163,725 160,215
========= ========
</TABLE>
During 1996, options to purchase 28,174 were exercised at an average price
of $4.88 per share. In 1995, options to purchase 18,237 shares were
exercised at an average price of $5.40 per share. In 1994, options to
purchase 14,229 shares were exercised at an average price of $7.01 per
share. Prior to 1994, no stock options were exercised.
In 1994, the Company adopted an additional stock option plan (the "1994
Plan"). The Company reserved 188,783 shares for issuance pursuant to the
Plan. Options vest in four increments of 25% each on the first four
anniversaries of the date of grant and can be exercised within ten years
from the date of the grant.
56
<PAGE>
(13) Stock Options, Continued
At December 31, 1996, under the 1994 Plan, options to purchase 77,430
options were outstanding, 111,353 were available for grant, and 18,825
were exercisable. Stock option activity to date is as follows:
<TABLE>
<CAPTION>
Outstanding Exercisable
<S> <C> <C>
Granted at $4.99 in 1994 ............................ 9,025 4,512
Granted at $5.07 in 1994 ............................ 7,216 2,705
Granted at $6.99 in 1994 ............................ 12,155 6,078
Granted at $9.46 in 1995 ............................ 22,122 5,530
Granted at $11.43 in 1996 ........................... 4,200 -0-
Granted at $13.15 in 1996 ........................... 9,372 -0-
Granted at $14.97 in 1996 ........................... 13,340 -0-
------- --------
77,430 18,825
</TABLE>
During 1996, options to purchase 5,462 shares were exercised at an average
price of $6.81 per share. During 1995, options to purchase 955 shares were
exercised at an average price of $5.50. Prior to 1995 no stock options
were exercised.
The Company applies Accounting Principles Board ("APB") Opinion No. 25 and
related interpretations in accounting for its stock option plans.
Accordingly, no compensation cost has been recognized for these plans. Had
compensation cost for the plans been determined consistent with SFAS No.
123, the Company's net income and earnings per share would have been
reduced to the pro forma amounts indicated below:
<TABLE>
<CAPTION>
1995 1996
-------------------
(In thousands, except
per share data)
<S> <C> <C>
Net income As reported .............. $ 2,413 $1,946
Pro forma ................ 2,398 1,904
Primary earnings As reported .............. $ .90 $ .72
per share Pro forma ................ .89 .70
Fully diluted As reported .............. $ .89 $ .72
earnings per Pro forma .................. .88 .70
share
</TABLE>
(14) Restrictions on Subsidiary Dividends, Loans or Advances
The dividends that may be paid by the Banks to the Company are subject to
legal limitations and regulatory capital requirements. Prior approval of
the Comptroller of the Currency is required if the total of all dividends
declared by a national bank in any calendar year exceeds that Bank's net
profits (as defined) for that year combined with its retained net profits
(as defined) for the two preceding calendar years. During 1995 and 1996,
dividends were declared by Anderson National Bank. No dividends have been
declared by Spartanburg National Bank or The Community Bank of Greenville,
N.A.
Under Federal Reserve Board regulations, the amounts of loans or advances
from the banking subsidiaries to the Company are also restricted.
57
<PAGE>
(15) Other Operating Expenses
Other operating expenses for the years ended December 31 are as follows
(dollars in thousands):
<TABLE>
<CAPTION>
1994 1995 1996
---- ---- ----
<S> <C> <C> <C>
Data processing expense .................. $ 309 $ 251 $ 241
Printing, stationery and supplies ........ 241 220 341
Depreciation on premises and equipment ... 599 543 575
Legal and professional fees .............. 168 217 467
Advertising .............................. 306 340 521
Regulatory assessments ................... 358 314 97
Postage .................................. 158 181 234
Other .................................... 1,194 1,569 1,889
------ ------ ------
$3,333 $3,635 $4,365
====== ====== ======
</TABLE>
(16) Employee Benefits
Effective April 1, 1989, the Company adopted a tax deferred savings plan
(the "Plan") under Section 401(k) of the Internal Revenue Code (IRC) which
covers substantially all of the Company's employees. The Plan provides for
voluntary contributions up to a maximum of 15% of an employee's gross
earnings or the maximum permitted by the IRC, whichever is lower. The
Company matches the participants' contributions up to a maximum of 3% of an
employee's salary. Participants are fully vested in both their
contributions and the Company's contributions at all times. The Company's
contributions to the Plan were $91,075, $91,383 and $103,360 in 1994, 1995
and 1996, respectively.
Effective January 1, 1989, the Company established a deferred compensation
plan for its directors and certain executive officers whereby the
director/officer may elect to defer fees/salaries. Amounts deferred under
this plan accrue interest at the Banks' prime rate plus 1%. The
accompanying consolidated financial statements include $109,600, $117,467
and $109,500 of compensation expense deferred in 1994, 1995 and 1996,
respectively. The deferred compensation plan is funded with life insurance
policies which are payable to the Company in the event of the employee's
death and which will accumulate a cash value approximating the amount of
deferred compensation over time until the employee's retirement. The
deferred compensation liability was $608,635 and $664,078 as of December
31, 1995 and 1996, respectively.
58
<PAGE>
(17) Regulatory Matters
The Company and its bank subsidiaries are subject to various regulatory
capital requirements administered by the federal banking agencies. Failure
to meet minimum capital requirements can initiate certain mandatory - and
possible additional discretionary - actions by regulators that, if
undertaken, could have a direct material effect on the Company's financial
statements. Under capital adequacy guidelines and the regulatory framework
for prompt corrective action, the Company and its bank subsidiaries (the
"entities") must meet specific capital guidelines that involve quantitative
measures of the entities' assets, liabilities, and certain
off-balance-sheet items as calculated under regulatory accounting
practices. The entities' capital amounts and classification are also
subject to qualitative judgments by the regulators about components, risk
weightings, and other factors.
Quantitative measures established by regulation to ensure capital adequacy
require the entities to maintain minimum amounts and ratios (set forth in
the table below) of total and Tier I capital (as defined in the
regulations) to risk-weighted assets (as defined), and of Tier I capital
(as defined) to average assets (as defined). Management believes, as of
December 31, 1996, that the entities meet all capital adequacy requirements
to which they are subject.
As of December 31, 1996, the most recent notification from the Office of
the Comptroller of the Currency categorized the entities as adequately
capitalized under the regulatory framework for prompt corrective action. To
be categorized as adequately capitalized the entities must maintain minimum
total risk-based, Tier I risk-based, and Tier I leverage ratios as set
forth in the table. There are no conditions or events since that
notification that management believes have changed the entities' category.
59
<PAGE>
(17) Regulatory Matters, Continued
Following are the required and actual capital amounts and ratios for the
Company and its bank subsidiaries as of December 31, 1996:
<TABLE>
<CAPTION>
To Be Well
Capitalized Under
For Capital Prompt Corrective
Actual Adequacy Purposes: Action Provisions:
------ ------------------ ------------------
<S> <C> <C> <C> <C> <C> <C>
First United Bancorporation
Total Capital
(to Risk Weighted Assets) $20,928,000 10.30% $16,260,000 8.00% $20,326,000 10.00%
Tier 1 Capital
(to Risk Weighted Assets) $18,140,000 8.92% $8,130,000 4.00% $12,195,000 6.00%
Tier 1 Capital
(to Average Assets) $18,140,000 8.00% $9,074,000 4.00% $11,342,000 5.00%
Anderson National Bank
Total Capital
(to Risk Weighted Assets) $8,709,000 10.35% $6,734,640 8.00% $8,418,300 10.00%
Tier 1 Capital
(to Risk Weighted Assets) $7,865,000 9.34% $3,367,320 4.00% $5,050,980 6.00%
Tier 1 Capital
(to Average Assets) $7,865,000 8.01% $3,926,760 4.00% $4,908,450 5.00%
Spartanburg National Bank
Total Capital
(to Risk Weighted Assets) $8,601,000 9.99% $6,889,920 8.00% $8,612,400 10.00%
Tier 1 Capital
(to Risk Weighted Assets) $7,667,000 8.90% $3,444,960 4.00% $5,167,440 6.00%
Tier 1 Capital
(to Average Assets) $7,667,000 7.62% $4,023,560 4.00% $5,029,450 5.00%
Community Bank of Greenville
Total Capital
(to Risk Weighted Assets) $4,116,000 18.76% $1,755,120 8.00% $2,193,900 10.00%
Tier 1 Capital
(to Risk Weighted Assets) $3,923,000 17.88% $ 852,600 4.00% $1,316,340 6.00%
Tier 1 Capital
(to Average Assets) $3,923,000 23.15% $ 677,720 4.00% $ 847,150 5.00%
</TABLE>
60
<PAGE>
(18) Related Party Transactions
In the ordinary course of business, the Company's banking subsidiaries
make loans to their directors and officers and their related interests.
Related party loans are made on substantially the same terms, including
interest rates and collateral, as those prevailing at the time for
comparable transactions with unrelated persons and do not involve more
than the normal risk of collectibility. Activity in related party loans is
as follows (dollars in thousands):
<TABLE>
<CAPTION>
1995 1996
---- ----
<S> <C> <C>
Outstanding loans at beginning of year ........... $ 2,702 $ 2,894
Loans originated ................................. 1,319 2,315
Principal collected on loans ..................... (1,127) (1,124)
------- --------
Outstanding loans at end of year ................. $ 2,894 $ 4,085
======= =======
</TABLE>
In September 1988, Anderson National Bank entered into a noncancellable
operating lease for a branch facility with a partnership in which an
officer of the Company is a partner. The lease has a remaining term of
approximately two years, provides for various renewal options and requires
monthly rental payments of $2,000.
In March 1990, Anderson National Bank entered into a noncancellable
operating lease for a branch facility with a previous director of this
subsidiary. The lease has a remaining term of approximately four years,
provides for various renewal options and requires monthly rental payments
of $500.
61
<PAGE>
(19) Condensed Financial Information
Condensed financial information for First United Bancorporation (parent
company) is as follows (in thousands):
Balance Sheet Data:
<TABLE>
<CAPTION>
December 31,
1995 1996
Assets
<S> <C> <C>
Cash ............................................................. $ 18 $ 323
Investment in subsidiaries ....................................... 15,273 21,225
Due from subsidiaries ............................................ 1,194 997
Premises and other assets ........................................ 1,322 780
------- -------
Total assets .......................................... $17,807 $23,325
======= =======
Liabilities and Shareholders' Equity
Liabilities:
Other borrowed funds ......................................... $ 1,170 $ 4,750
Other liabilities ............................................ 230 290
------- -------
Total liabilities ..................................... 1,400 5,040
Shareholders' equity ............................................. 16,407 18,285
------- -------
Total liabilities and shareholders' equity ............ $17,807 $23,325
======= =======
</TABLE>
Income Statement Data:
<TABLE>
<CAPTION>
Years ended December 31,
------------------------
1994 1995 1996
---- ---- ----
<S> <C> <C> <C>
Interest income ..................................................... $ 12 $ 75 $ 69
Interest expense .................................................... (5) (42) (259)
------- ------- -------
Net interest income (expense) ............................ 7 33 (190)
Dividend income from subsidiaries ................................... 250 1,017 750
Other income ........................................................ 961 1,281 1,566
Other expenses ...................................................... (1,035) (1,359) (1,692)
------- ------- -------
176 939 624
------- ------- -------
Income before income tax expense
and equity in undistributed earnings
of subsidiaries ................................................. 183 972 434
Income tax benefit .................................................. 23 17 115
Equity in undistributed earnings
of subsidiaries ................................................. 1,872 1,424 1,397
------- ------- -------
Net income .......................................................... $2,078 $ 2,413 $ 1,946
======= ======= =======
</TABLE>
62
<PAGE>
(19) Condensed Financial Information, Continued
<TABLE>
<CAPTION>
Year ended December 31,
-----------------------
1994 1995 1996
---- ---- ----
<S> <C> <C> <C>
Cash Flow Data:
Cash flows from operating activities:
Net income ...................................................... $ 2,078 $ 2,413 $ 1,946
Adjustments to reconcile net income
to net cash provided (used) by operating
activities:
Equity in undistributed earnings
of subsidiaries ...................................... (1,872) (1,424) (1,397)
Other, net ............................................... (141) (1,210) 603
------- ------- -------
Net cash provided (used) by
operating activities ............................. 65 (221) 1,152
------- ------- -------
Cash flows from investing activities:
(Increase) decrease in due from subsidiaries .................... (303) (717) 196
Investment in subsidiaries ............................... - (100) (4,500)
------- ------- -------
Net cash used by
investing activities ............................. (303) (817) (4,304)
------- ------- -------
Cash flows provided by financing activities:
Net increase in other borrowed funds ............................ 100 1,170 3,580
Issuance of common stock ........................................ 99 98 175
Cash paid for dividends and fractional shares ................... (5) (273) (298)
------- ------- -------
Net cash provided by
financing activities ............................. 194 995 3,457
------- ------- -------
Net increase (decrease) in cash ..................................... (44) (43) 305
Cash, beginning of year ............................................. 105 61 18
------- ------- -------
Cash, end of year ................................................... $ 61 $ 18 $ 323
======= ======= =======
Cash paid during the year for:
Interest ........................................................ $ 2 $ 36 $ 248
Taxes ........................................................... $ 947 $ 1,391 $ 1,338
</TABLE>
(20) Fair Value of Financial Instruments
SFAS No. 107, "Disclosures about Fair Value of Financial Instruments,"
requires disclosure of fair value information, whether or not recognized in
the statement of financial position, when it is practicable to estimate the
fair value. SFAS 107 defines a financial instrument as cash, evidence of an
ownership interest in an entity or contractual obligations which require
the exchange of cash or other financial instruments. Certain items are
specifically excluded from the disclosure requirements, including the
Company's Common and Preferred stock, premises and equipment, and certain
other assets and liabilities.
63
<PAGE>
(20) Fair Value of Financial Instruments, Continued
Fair value approximates book value for the following financial instruments
due to the short-term nature of the instrument: cash and due from banks,
federal funds sold, securities sold under repurchase agreements, and other
short-term borrowings.
Fair value for variable rate loans that reprice frequently is based on the
carrying value. Fair value for mortgage loans, consumer loans and all other
loans (primarily commercial and industrial loans) is based on the
discounted present value of the estimated
future cash flows. Discount rates used in these computations approximate
the rates currently offered for similar loans of comparable terms and
credit quality.
Fair value for demand deposit accounts and interest-bearing accounts with
no fixed maturity date is equal to the carrying value. Certificate of
deposit accounts are estimated by discounting cash flows from expected
maturities using current interest rates on similar instruments.
Fair value for long-term debt is based on discounted cash flows using the
Company's current incremental borrowing rate. Investment securities are
valued using quoted market prices.
At December 31, 1996 and 1995 the Banks had outstanding standby letters of
credit, documentary letters of credit and commitments to extend credit.
These off-balance sheet financial instruments are based on fees currently
charged for similar instruments or on the estimated cost to terminate them
or otherwise settle the obligations with the counterparties at the
reporting date. At December 31, 1996 and 1995 the carrying amounts
approximated the fair values of these off-balance sheet financial
instruments.
The Company has used management's best estimate fair value based on the
above assumptions. Thus, the fair values presented may not be the amounts
which could be realized in an immediate sale or settlement of the
instrument. In addition, any income taxes or other expenses which would be
incurred in an actual sale or settlement are not taken into consideration
in the fair values presented.
64
<PAGE>
(20) Fair Value of Financial Instruments, Continued
The estimated fair values of the Company's financial instruments at
December 31 were as follows (in thousands):
<TABLE>
<CAPTION>
1996 1995
------------------------ -----------------------
Carrying Fair Carrying Fair
Amount Value Amount Value
<S> <C> <C> <C> <C>
Financial assets:
Cash and due from banks ....... $ 8,128 $ 8,128 $ 6,353 $ 6,353
Federal funds sold ............ 13,700 13,700 5,100 5,100
Securities held to maturity ... 7,843 8,006 9,481 9,668
Securities available for sale . 26,304 26,304 19,093 19,032
Loans, net .................... 202,391 203,324 145,674 145,935
Financial liabilities:
Demand deposits, NOW
accounts, savings
accounts and money
market accounts ............ 82,436 82,436 71,079 71,079
Certificates of Deposit ....... 135,783 136,220 89,302 89,673
Securities sold under
repurchase agreements ...... 8,167 8,167 3,096 3,096
Federal Home Loan Bank advances 10,830 10,830 2,910 2,910
Other borrowed funds .......... 11,900 11,900 9,470 9,470
</TABLE>
Item 9. Changes in and Disagreements With Accountants on Accounting and
Financial Disclosures.
Not applicable.
65
<PAGE>
PART III
Item 10. Directors and Executive Officers of the Registrant
The information required by this item is set forth under the heading
"MANAGEMENT" on pages 4 through 7 of the definitive proxy materials of the
Company filed in connection with its 1997 Annual Meeting of the Shareholders,
which information is incorporated herein by reference.
Item 11. Executive Compensation
The information required by this item is set forth under the heading
"EXECUTIVE COMPENSATION" on pages 8 through 12 of the definitive proxy materials
of the Company filed in connection with its 1997 Annual Meeting of Shareholders,
which information is incorporated herein by reference.
Item 12. Security Ownership of Certain Beneficial Owners and Management
The information required by this item is set forth under the heading
"PRINCIPAL SHAREHOLDERS" on pages 2 and 3 of the definitive proxy materials of
the Company filed in connection with its 1997 Annual Meeting of Shareholders,
which information is incorporated herein by reference.
Item 13. Certain Relationships and Related Transactions
The information required by this item is set forth under the heading
"CERTAIN TRANSACTIONS" on page 12 of the definitive proxy materials of the
Company filed in connection with its 1997 Annual Meeting of Shareholders, which
information is incorporated herein by reference.
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K
(a)1. Financial Statements
The following consolidated financial statements and report of independent
auditors of the Company, are included in Item 8 hereof.
Report of Independent Auditors
Consolidated Balance Sheets as of December 31, 1995 and 1996
Consolidated Statements of Income for the years ended December 31, 1994,
1995 and 1996
Consolidated Statements of Cash Flows for the years ended December 31,
1994, 1995 and 1996
Consolidated Statements of Shareholders' Equity for the years ended
December 31, 1994, 1995 and 1996
Notes to Consolidated Financial Statements
2. Financial Statement Schedules are included in the consolidated financial
statements referenced in Item 14(a)1 above
3. Exhibits
3.1 - Articles of Incorporation of the Registrant (incorporated by
reference to exhibits filed with the Registrant's Registration
Statement on Form S-4 under the Securities Act of 1933, File No.
33-16600).
3.1.1 - Articles of Amendment to the Articles of Incorporation of the
Registrant (incorporated by reference to
66
<PAGE>
exhibits filed with the Registrant's Annual Report on Form 10-K for
the Year Ended December 31, 1989, File No. 0-17565).
3.1.2 - Articles of Amendment to the Articles of Incorporation of the
Registrant, filed May 6, 1994 (incorporated by reference to exhibits
filed with the Registrant's Annual Report on Form 10-K for the Year
Ended December 31, 1994).
3.1.3. - Articles of Amendment to Articles of Incorporation of the Registrant,
filed November 28, 1994 (incorporated by reference to exhibits filed
with the Registrant's Annual Report on Form 10-K for the Year Ended
December 31, 1994).
3.2 - Bylaws of the Registrant (incorporated by reference to exhibits filed
with the Registrant's Registration Statement on Form S-4 under the
Securities Act of 1933, File No. 33-16600).
10.1 - Registrant's 1987 Stock Option Plan (incorporated by reference to
exhibits filed with the Registrant's Registration Statement on Form S-8
under the Securities Act of 1933, File No. 33-23193).
10.1.1 - Registrant's 1994 Stock Option Plan (incorporated by reference to
exhibits filed with the Registrant's Registration Statement on Form S-8
under the Securities Act of 1933, File No. 33-94282).
10.2 - Summary Plan Description and Employee Savings Plan and Trust
(incorporated by reference to exhibits filed with the Registrant's
Annual Report on Form 10-K for the Year Ended December 31, 1989, File
No. 0-17565).
10.3 - Executive Security Plan (incorporated by reference to exhibits filed
with the Registrant's Annual Report on Form 10-K for the Year Ended
December 31, 1989, File No. 0-17565).
10.4 - Split Dollar Agreement between Anderson National Bank and Mason Y.
Garrett (incorporated by reference to exhibits filed with the
Registrant's Annual Report on Form 10-K for the Year Ended December 31,
1989, File No. 0-17565).
10.5 - Split Dollar Agreement between Anderson National Bank and William B.
West (incorporated by reference to exhibits filed with the Registrant's
Annual Report on Form 10-K for the Year Ended December 31, 1989, File
No. 0-17565).
10.6 - Split Dollar Agreement between Spartanburg National Bank and James G.
Bagnal, III (incorporated by reference to exhibits filed with the
Registrant's Annual Report on Form 10-K for the Year Ended December 31,
1989, File No. 0-17565).
10.7 - Split dollar agreement between Anderson National Bank and Ronald K.
Earnest. (incorporated by reference to the exhibits filed with the
Registrant's Annual Report on Form 10-K for the Year Ended December 31,
1993)
10.8 - Employment contract between the Registrant and James G. Bagnal, III
(incorporated by reference to the exhibits filed with the Registrant's
Annual Report on Form 10-K for the Year Ended December 31, 1993).
10.9 - Employment contract between the Registrant and Ronald K. Earnest
(incorporated by reference to the exhibits filed with the Registrant's
Annual Report on Form 10-K for the Year Ended December 31, 1993).
67
<PAGE>
10.10 - Employment contract between the Registrant and William B. West
(incorporated by reference to the exhibits filed with the Registrant's
Annual Report on Form 10-K for the Year Ended December 31, 1993).
10.11 - Credit Agreement and First Modification between Registrant and Bank
South, N.A, Atlanta, GA, dated as of May 16, 1995 (incorporated by
reference to the exhibits filed with the Registrant's Quarterly Report
on Form 10-Q for the Quarter ended June 30, 1995).
10.12 - Second Modification, dated as of September 25, 1995, to Credit
Agreement between Registrant and Bank South, N.A., Atlanta, GA., dated
as of May 16, 1995 (incorporated by reference to the exhibits filed
with the Registrant's Quarterly Report on Form 10-Q for the Quarter
Ended September 30, 1995).
10.13 - Third Modification, dated as of December 5, 1995, to Credit
Agreement between Registrant and Bank South, N.A., Atlanta, GA., dated
as of May 16, 1995 (incorporated by reference to the exhibits filed
with the Registrant's Annual Report on Form 10-K for the Year ended
December 31, 1995).
10.14 - Employment Contract between the Registrant and Frank W. Wingate,
dated May 15, 1995(incorporated by reference to the exhibits filed
with the Registrant's Annual Report on Form 10-K for the Year ended
December 31, 1995).
10.15 - Fourth Modification dated as of Auguest 19, 1996 to Credit Agreement
between Registrant and NationsBank, N.A. (South) (formerly Bank South,
N.A.), Atlanta, Georgia, dated as of May 16, 1995.
21. - List of Subsidiaries.
23. - Consent of KPMG Peat Marwick LLP.
27. - Financial Data Schedule.
The exhibits listed above will be furnished to any security holder upon
written request for such exhibit to Mr. William B. West, Secretary, First United
Bancorporation, 304 North Main Street, Anderson, South Carolina 29621. The
Registrant will charge a fee of $.20 per page for photocopying such exhibit.
(b) No Current Reports on Form 8-K were filed during the fourth quarter of
1995.
(c) Exhibits - The response to this portion of Item 14 is submitted as a
separate section of this report.
68
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized, in the City of
Anderson, State of South Carolina, on the 24th day of March, 1997.
FIRST UNITED BANCORPORATION
BY s/Mason Y. Garrett
Mason Y. Garrett
President and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
Signature Title Date
s/Mason Y. Garrett President, Chief March 24, 1997
Mason Y. Garrett Executive Officer
and Director
s/William B. West Vice President March 24, 1997
William B. West (Principal Financial and
Accounting Officer) and
Director
s/James G. Bagnal, III Director March 24, 1997
James G. Bagnal, III
s/Dan C. Breeden, Jr. Director March 24, 1997
Dan C. Breeden, Jr.
s/Irvin L. Cauthen Director March 24, 1997
Irvin L. Cauthen
s/Ronald K. Earnest Director March 24, 1997
Ronald K. Earnest
s/J. Berry Garrett Director March 24, 1997
J. Berry Garrett
s/Randolph V. Hayes Director March 24, 1997
Randolph V. Hayes
s/J. Donald King
J. Donald King Director March 24, 1997
s/T. Ree McCoy, Jr. Director March 24, 1997
T. Ree McCoy, Jr.
s/G. Weston Nalley March 24, 1997
G. Weston Nalley Director
s/Robert V. Pinson Director March 24, 1997
Robert V. Pinson
s/Donald C. Roberts, M.D. Director March 24, 1997
Donald C. Roberts, M.D.
s/Harold P. Threlkeld Director March 24, 1997
Harold P. Threlkeld
s/Frank W. Wingate Director March 24, 1997
Frank W. Wingate
69
<PAGE>
<TABLE>
<CAPTION>
INDEX TO EXHIBITS
Description
<S> <C> <C>
3.1 - Articles of Incorporation of the Registrant (incorporated by Previously Filed
reference to exhibits filed with the Registrant's Registration
Statement on Form S-4 under the Securities Act of 1933, File
No. 33-16600)
3.1.1 - Articles of Amendment to the Articles of Incorporation of the Previously Filed
Registrant (incorporated by reference to exhibits filed with the
Registrant's Annual Report on Form 10-K for the Year Ended
December 31, 1989, File No. 0-17565).
3.1.2 - Articles of Amendment to the Articles of Incorporation of the Previously Filed
Registrant, filed May 6, 1994 (incorporated by reference to
exhibits filed with the Registrant's Annual Report on Form 10-K
for the Year Ended December 31, 1994).
3.1.3 - Articles of Amendment to the Articles of Incorporation of the Previously Filed
Registrant, filed November 28, 1994 (incorporated by reference
to exhibits filed with the Registrant's Annual Report on Form
10-K for the Year Ended December 31, 1994).
3.2 - Bylaws of the Registrant (incorporated by reference to exhibits Previously Filed
filed with the Registrant's Registration Statement on Form S-4
under the Securities Act of 1933, File No. 33-16600)
10.1 - Registrant's 1987 Stock Option Plan (incorporated by reference Previously Filed
to exhibits filed with the Registrant's Registration Statement on
Form S-8 under the Securities Act of 1933, File No. 33-23193)
10.1.1 - Registrant's 1994 Stock Option Plan (incorporated by reference Previously Filed
to exhibits filed with the Registrant's Registration Statement on
Form S-8 under the Securities Act of 1933, File No. 33-94282).
10.2 - Summary Plan Description and Employee Savings Plan and Previously Filed
Trust (incorporated by reference to exhibits filed with the
Registrant's Annual Report on Form 10-K for the Year Ended
December 31, 1989, File No. 0-17565).
10.3 - Executive Security Plan (incorporated by reference to exhibits Previously Filed
filed with the Registrant's Annual Report on Form 10-K for the
Year Ended December 31, 1989, File No. 0-17565).
10.4 - Split Dollar Agreement between Anderson National Bank and Previously Filed
Mason Y. Garrett (incorporated by reference to exhibits filed
with the Registrant's Annual Report on Form 10-K for the Year
Ended December 31, 1989, File No. 0-17565)
</TABLE>
70
<PAGE>
<TABLE>
<CAPTION>
INDEX TO EXHIBITS
Description
<S> <C> <C>
10.5 - Split Dollar Agreement between Anderson National Bank and Previously Filed
William B. West (incorporated by reference to exhibits filed
with the Registrant's Annual Report on Form 10-K for the Year
Ended December 31, 1989, File No. 0-17565)
10.6 - Split Dollar Agreement between Spartanburg National Bank and Previously Filed
James G. Bagnal, III (incorporated by reference to exhibits
filed with the Registrant's Annual Report on Form 10-K for the
Year Ended December 31, 1989, File No. 0-17565).
10.7 - Split dollar agreement between Anderson National Bank and Previously Filed
Ronald K. Earnest (incorporated by reference to the exhibits
filed with the Registrant's Annual Report on Form 10-K for the
Year Ended December 31, 1993).
10.8 - Employment contract between the Registrant and James G. Bagnal Previously Filed
III (incorporated by reference to the exhibits filed with the
Registrant's Annual Report on Form 10-K for the Year Ended
December 31, 1993).
10.9 - Employment contract between the Registrant and Ronald K. Previously Filed
Earnest (incorporated by reference to the exhibits filed with
the Registrant's Annual Report on Form 10-K for the Year Ended
December 31, 1993).
10.10 - Employment contract between the Registrant and William B. West Previously Filed
(incorporated by reference to the exhibits filed with the
Registrant's Annual Report on Form 10-K for the Year Ended
December 31, 1993).
10.11 - Credit Agreement and First Modification between Registrant and Previously Filed
Bank, South, N.A., Atlanta, GA, dated as of May 16, 1995
(incorporated by reference to the exhibits filed with the
Registrant's Quarterly Report on Form 10-Q for the Quarter
ended June 30, 1995).
10.12 - Second Modification, dated as of September 25, 1995, to Credit Previously Filed
Agreement between Registrant and Bank South, N.A., Atlanta,
GA., dated as of May 16, 1995 (incorporated by reference to
the exhibits filed with the Registrant's Quarterly Report on
Form 10-Q for the Quarter Ended September 30, 1995).
10.13 - Third Modification, dated as of December 5, 1995, to Credit Previously Filed
Agreement between Registrant and Bank South,N.A., Atlanta,GA.,
dates as of May 16, 1995 (incorporated by reference to the
exhibits filed with the Registrant's Annual Report on Form
10-K for the Year ended December 31, 1995).
71
<PAGE>
10.14 - Employment Contract between the Registrant and Frank W. Previously Filed
Wingate, dated May 15, 1995(incorporated by reference to the
exhibits filed with the Registrant's Annual Report on Form
10-K for the Year ended December 31, 1995).
10.15 - Fourth Modification dated as of August 19, 1996 to Credit Attached
Agreement between Registrant and NationsBank, N.A. (South)
(formerly Bank South, N.A.), dated as of May 16, 1995.
21. - List of Subsidiaries Attached
23. - Consent of KPMG Peat Marwick LLP Attached
27. - Financial Data Schedule Attached
72
</TABLE>
FOURTH MODIFICATION OF CREDIT AGREEMENT
THIS MODIFICATION is made as of this 19th day of August, 1996, by and
between NATIONSBANK, N.A. (SOUTH) ("Bank"), a national banking association which
is the successor by merger to Bank South, a Georgia banking corporation which
was the successor by merger to Bank South, N.A., a national banking association,
and FIRST UNITED BANCORPORATION, a South Carolina corporation ("Borrower").
Statement of Facts
Borrower and Bank have previously entered into that certain Credit
Agreement, dated as of May 16, 1995, as amended by the First Modification of
Credit Agreement dated as of August 3, 1995, as further amended by the Second
Modification of Credit Agreement dated as of September 25, 1995, and as further
amended by the Third Modification of Credit Agreement dated as of December 5,
1995 (the "Credit Agreement"). Borrower and Bank now desire to modify the Credit
Agreement in certain respects in accordance with the terms and conditions set
forth herein.
NOW, THEREFORE, in consideration of the premises, the covenants and
agreements contained herein, and other good and valuable consideration, the
receipt and sufficiency of which are hereby acknowledged, Borrower and Bank do
hereby agree that all capitalized terms used herein shall have the meanings
ascribed thereto in the Credit Agreement as amended herein and do hereby further
agree as follows:
Statement of Terms
1. Amendments of Credit Agreement.
Subject to the fulfillment of the conditions precedent to the
effectiveness of this Modification which are set forth below, the Credit
Agreement is hereby modified and amended as follows:
(a) Section 8.10(a) of the Credit Agreement is hereby modified and
amended by (i) deleting such Section and (ii) simultaneously substituting in
lieu thereof the following new Section 8.10(a):
"(a) Borrower shall at all times maintain consolidated Primary
Capital of not less than $15,000,000, and Borrower's
consolidated Primary Capital shall not be less than 6.5% of
its consolidated assets at any time."
(b) Section 8.10 of the Credit Agreement is hereby further modified and
amended by adding thereto the following new Section 8.10(i):
"(i) First Greenville's Primary Capital shall
not be less than 7.0% of its total assets at
any time."
<PAGE>
2. No Other Amendments.
Except for the amendments expressly set forth and referred to above,
the Credit Agreement is and shall remain unchanged and in full force and effect.
Nothing in this Modification is intended, or shall be construed, to constitute a
novation or an accord and satisfaction of the Credit Agreement or of any of the
Obligations or to modify, affect or impair the perfection or continuity of
Bank's security interest in the Collateral.
3. Representations and Warranties.
To induce Bank to enter into this Modification, Borrower does hereby
warrant, represent and covenant to Bank that:
(a) Each representation and warranty set forth in the Credit Agreement
is hereby restated and reaffirmed as true and correct on and as of the date
hereof as if such representation and warranty were made on and as of the date
hereof (except to the extent that such representation and warranty expressly
relates to a specific date), and no Default or Event of Default has occurred and
is continuing as of this date under the Credit Agreement as amended by this
Modification; and
(b) Borrower has the power and is duly authorized to enter into,
deliver and perform this Modification and this Modification is the legal, valid
and binding obligation of Borrower enforceable against it in accordance with its
terms except as such enforceability may be limited by general principles of
equity or by any bankruptcy, insolvency, reorganization or other similar laws
affecting creditors' rights in general.
4. Conditions Precedent to Effectiveness of this Modification.
The effectiveness of this Modification and the amendments provided
above are subject to the truth and accuracy in all material respects of the
representations and warranties contained in Section 3 above and to the receipt
by Bank of one or more counterparts of this Modification duly executed and
delivered by Borrower.
5. Bank Expenses.
Borrower shall reimburse Bank on demand for all costs and expenses
(including attorneys' fees) incurred by Bank in negotiating, documenting and
consummating the transactions contemplated by this Modification.
6. Counterparts.
This Modification may be executed in multiple counterparts, each of
which shall be deemed to be an original and all of which when taken together
shall constitute one and the same instrument.
<PAGE>
7. Effective Date.
This Modification shall become effective on the first business day on
which all of the conditions precedent set forth above have been met.
8. Governing Law.
This Modification shall be governed by, and construed in accordance
with, the internal laws of the State of Georgia (without giving effect to its
conflicts of law rules).
IN WITNESS WHEREOF, Borrower has executed this Modification under seal,
and Bank has executed this Modification, as of the day and year specified at the
beginning hereof.
BORROWER:
(CORPORATE SEAL) FIRST UNITED BANCORPORATION
Attest:
By: William B. West
Ronald K. Earnest Title: Senior Vice President
and Chief Financial Officer
Title: Senior Vice
President
LENDER:
NATIONSBANK, N.A. (SOUTH)
By: John L. Carter
Title: Senior Vice President
The Registrant's subsidiaries and their jurisdictions of incorporation are
as follow:
Anderson National Bank United States
Spartanburg National Bank United States
The Community Bank of Greenville, N.A. United States
Quick Credit Credit Corporation South Carolina
INDEPENDENT AUDITORS' CONSENT
The Board of Directors
First United Bancorporation
We consent to incorporation by reference into the registration statements
(Nos. 33-23193 and 33-94282) on Form S-8 of First United Bancorporation of our
report dated January 22, 1997, relating to the consolidated balance sheets of
First United Bancorporation and subsidiaries as of December 31, 1995 and 1996
and the related consolidated statements of income, changes in shareholders'
equity, and cash flows for each of the years in the three year period ended
December 31, 1996, which report appears in the December 31, 1996, annual report
on Form 10-K of First United Bancorporation.
/s/ KPMG Peat Marwick LLP
KPMG Peat Marwick LLP
Greenville, South Carolina
March 24, 1997
<TABLE> <S> <C>
<ARTICLE> 9
<LEGEND>
This schedule contains summary financial information extracted from the
Consolidated Statement of Financial Condition at December 31, 1996 and the
Consolidated Statement of Income for the Year Ended December 31, 1996 and is
qualified in its entirety by reference to such financial statements.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> DEC-31-1996
<CASH> 8,112
<INT-BEARING-DEPOSITS> 16
<FED-FUNDS-SOLD> 13,700
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 26,304
<INVESTMENTS-CARRYING> 7,843
<INVESTMENTS-MARKET> 8,006
<LOANS> 205,551
<ALLOWANCE> 3,160
<TOTAL-ASSETS> 270,195
<DEPOSITS> 218,219
<SHORT-TERM> 18,267
<LIABILITIES-OTHER> 2,794
<LONG-TERM> 12,630
0
0
<COMMON> 4,315
<OTHER-SE> 13,970
<TOTAL-LIABILITIES-AND-EQUITY> 270,195
<INTEREST-LOAN> 22,005
<INTEREST-INVEST> 2,370
<INTEREST-OTHER> 0
<INTEREST-TOTAL> 24,375
<INTEREST-DEPOSIT> 7,899
<INTEREST-EXPENSE> 9,439
<INTEREST-INCOME-NET> 14,936
<LOAN-LOSSES> 2,149
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 11,891
<INCOME-PRETAX> 2,969
<INCOME-PRE-EXTRAORDINARY> 2,969
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,946
<EPS-PRIMARY> 0.72
<EPS-DILUTED> 0.72
<YIELD-ACTUAL> 7.03
<LOANS-NON> 437
<LOANS-PAST> 416
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 2,800
<ALLOWANCE-OPEN> 2,320
<CHARGE-OFFS> 1,394
<RECOVERIES> 85
<ALLOWANCE-CLOSE> 3,160
<ALLOWANCE-DOMESTIC> 3,160
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
