FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission file number 0-15829
FIRST CHARTER CORPORATION
(Exact name of registrant as specified in its charter)
North Carolina 56-1355866
(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
22 Union Street, North, Concord, North Carolina 28025
(Address of principal executive offices) (Zip Code)
(704) 786-3300
(Registrant's telephone number, including area code)
N/A
(Former name, former address and former fiscal year,
if changed since last report)
Indicate by check mark 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 90 days.
Yes X No
APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY
PROCEEDINGS DURING THE PRECEDING FIVE YEARS:
Indicate by check mark whether the registrant has filed all documents and
reports required to be filed by Sections 12, 13 or 15(d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a plan
confirmed by a court. Yes No
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practicable date.
7,555,753 shares of Common Stock, $5.00 par value, outstanding as of
August 14, 1997.
PART 1. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
FIRST CHARTER CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands) June 30, December 31,
1997 1996
ASSETS Unaudited
Cash and due from banks . . . . . . . . . . . $ 28,316 $ 31,300
Interest bearing bank deposits . . . . . . . 3,244 10,850
Securities available for sale:
U.S. Government obligations . . . . . . . . 25,316 28,099
U.S. Government agency obligations . . . . 9,725 11,583
Mortgage-backed securities . . . . . . . . 13,103 14,513
State and municipal obligations, nontaxable 72,041 72,050
Other . . . . . . . . . . . . . . . . . . . 9,102 5,876
Total securities available for sale . . . 129,287 132,121
Loans . . . . . . . . . . . . . . . . . . . . 392,017 360,673
Less: Unearned income . . . . . . . . . . . (274) (192)
Allowance for loan losses . . . . . . (5,510) (5,128)
Loans, net . . . . . . . . . . . . . . . . . 386,233 355,353
Premises and equipment, net . . . . . . . . . 12,131 11,385
Other assets . . . . . . . . . . . . . . . . 5,946 5,847
Total assets . . . . . . . . . . . . . . $ 565,157 $ 546,856
LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits, domestic:
Noninterest bearing demand . . . . . . . . $ 79,270 $ 85,863
Interest bearing:
NOW accounts . . . . . . . . . . . . . . . 73,497 76,644
Time . . . . . . . . . . . . . . . . . . . 260,951 253,753
Certificates of deposit greater
than $100,000 . . . . . . . . . . . . . . 57,026 38,955
Total deposits . . . . . . . . . . . . . 470,744 455,215
Other borrowings . . . . . . . . . . . . . . 27,921 27,261
Other liabilities . . . . . . . . . . . . . . 3,874 4,971
Total liabilities . . . . . . . . . . . . 502,539 487,447
Shareholders' equity:
Common stock - $5 par value; authorized,
10,000,000 shares; issued and outstanding,
7,560,524 shares at 6/30/97 and 6,301,213
shares at 12/31/96 . . . . . . . . . . . . 37,803 31,506
Additional paid-in capital . . . . . . . . . -- 578
Unrealized gain on securities available
for sale, net . . . . . . . . . . . . . . . 1,989 1,670
Retained earnings . . . . . . . . . . . . . . 22,826 25,655
Total shareholders' equity . . . . . . . 62,618 59,409
Total liabilities and shareholders' equity $ 565,157 $ 546,856
See accompanying notes to consolidated financial statements.
FIRST CHARTER CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME (Unaudited)
(Dollars in thousands, except per share data) For Six Months Ended
June 30, June 30,
Interest Income: 1997 1996
Interest and fees on loans . . . . . . . . . . . . . . . $ 17,365 $ 15,925
Federal funds sold . . . . . . . . . . . . . . . . . . . 2 76
Interest bearing bank deposits . . . . . . . . . . . . . 88 179
Securities available for sale . . . . . . . . . . . . . . 3,604 3,763
Total interest income . . . . . . . . . . . . . . . . 21,059 19,943
Interest Expense:
Deposits:
Demand . . . . . . . . . . . . . . . . . . . . . . . . 701 651
Money Market . . . . . . . . . . . . . . . . . . . . . 578 567
Savings and Time . . . . . . . . . . . . . . . . . . . 6,708 6,682
Other borrowings . . . . . . . . . . . . . . . . . . . . 753 656
Total interest expense . . . . . . . . . . . . . . . 8,740 8,556
Net interest income . . . . . . . . . . . . . . . . . 12,319 11,387
Provision for loan losses . . . . . . . . . . . . . . . . 685 620
Net interest income after provision for loan losses . 11,634 10,767
Noninterest income:
Trust income . . . . . . . . . . . . . . . . . . . . . . 830 714
Service charges on deposit accounts . . . . . . . . . . . 1,578 1,316
Insurance and other commissions . . . . . . . . . . . . . 74 94
Securities available for sale transactions, net . . . . . 404 145
Other . . . . . . . . . . . . . . . . . . . . . . . . . . 1,023 799
Total noninterest income . . . . . . . . . . . . . . 3,909 3,068
Noninterest expense:
Salaries and fringe benefits . . . . . . . . . . . . . . 4,704 4,209
Occupancy and equipment . . . . . . . . . . . . . . . . . 1,364 1,124
Other . . . . . . . . . . . . . . . . . . . . . . . . . . 2,550 2,238
Total noninterest expense . . . . . . . . . . . . . . 8,618 7,571
Income before income taxes . . . . . . . . . . . . . 6,925 6,264
Income taxes . . . . . . . . . . . . . . . . . . . . . . 2,049 1,912
Net Income . . . . . . . . . . . . . . . . . . . . . $ 4,876 $ 4,352
See accompanying notes to consolidated financial statements.
FIRST CHARTER CORPORATION AND SUBSIDIARIES
EARNINGS PER SHARE DATA (Unaudited)
For Six Months Ended
June 30, June 30,
1997 1996
Primary income per share data:
Net income . . . . . . . . . . . . . . . . . . . . . . $ 0.64 $ 0.57
Average common equivalent shares . . . . . . . . . . . 7,621,636 7,578,893
Income per share data assuming full dilution:
Net income . . . . . . . . . . . . . . . . . . . . . . $ 0.64 $ 0.57
Average common equivalent shares . . . . . . . . . . . 7,647,055 7,578,893
Cash dividends declared . . . . . . . . . . . . . . . . . $ 0.25 $ 0.25
See accompanying notes to consolidated financial statements.
FIRST CHARTER CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME (Unaudited)
(Dollars in thousands, except per share data) For Three Months Ended
June 30, June 30,
Interest Income: 1997 1996
Interest and fees on loans . . . . . . . . . . . . . . . $ 8,992 $ 8,012
Federal funds sold . . . . . . . . . . . . . . . . . . . 2 63
Interest bearing bank deposits . . . . . . . . . . . . . 59 100
Securities available for sale . . . . . . . . . . . . . . 1,790 1,851
Total interest income . . . . . . . . . . . . . . . . 10,843 10,026
Interest Expense:
Deposits:
Demand . . . . . . . . . . . . . . . . . . . . . . . . 355 331
Money Market . . . . . . . . . . . . . . . . . . . . . 304 284
Savings and Time . . . . . . . . . . . . . . . . . . . 3,452 3,361
Other borrowings . . . . . . . . . . . . . . . . . . . . 351 320
Total interest expense . . . . . . . . . . . . . . . 4,462 4,296
Net interest income . . . . . . . . . . . . . . . . . 6,381 5,730
Provision for loan losses . . . . . . . . . . . . . . . . 425 300
Net interest income after provision for loan losses . 5,956 5,430
Noninterest income:
Trust income . . . . . . . . . . . . . . . . . . . . . . 420 370
Service charges on deposit accounts . . . . . . . . . . . 825 687
Insurance and other commissions . . . . . . . . . . . . . 34 46
Securities available for sale transactions, net . . . . . 156 141
Other . . . . . . . . . . . . . . . . . . . . . . . . . . 517 449
Total noninterest income . . . . . . . . . . . . . . 1,952 1,693
Noninterest expense:
Salaries and fringe benefits . . . . . . . . . . . . . . 2,344 2,158
Occupancy and equipment . . . . . . . . . . . . . . . . . 701 596
Other . . . . . . . . . . . . . . . . . . . . . . . . . . 1,378 1,200
Total noninterest expense . . . . . . . . . . . . . . 4,423 3,954
Income before income taxes . . . . . . . . . . . . . 3,485 3,169
Income taxes . . . . . . . . . . . . . . . . . . . . . . 1,032 982
Net Income . . . . . . . . . . . . . . . . . . . . . $ 2,453 $ 2,187
See accompanying notes to consolidated financial statements.
FIRST CHARTER CORPORATION AND SUBSIDIARIES
EARNINGS PER SHARE DATA (Unaudited)
For Three Months Ended
June 30, June 30,
1997 1996
Primary income per share data:
Net income . . . . . . . . . . . . . . . . . . . . . . $ 0.32 $ 0.29
Average common equivalent shares . . . . . . . . . . . 7,626,563 7,586,132
Income per share data assuming full dilution:
Net income . . . . . . . . . . . . . . . . . . . . . . $ 0.32 $0.29
Average common equivalent shares . . . . . . . . . . . 7,646,338 7,586,132
Cash dividends declared . . . . . . . . . . . . . . . . . $ 0.125 $ 0.125
See accompanying notes to consolidated financial statements.
FIRST CHARTER CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY (Unaudited)
For The Six Months Ended June 30, 1997 and 1996
Unrealized
Gains
(Losses)
on
Add'l Securities
Common Paid-in Retained Available
(Dollars in thousands) Stock Capital Earnings for Sale,net Total
Balance, December 31, 1995... $ 31,180 $ -- $ 20,578 $ 1,666 $ 53,424
Net income for the
six months ended
June 30, 1996............... -- -- 4,352 -- 4,352
Cash dividends of $.30
(.25 restated)per share..... -- -- (1,883) -- (1,883)
Purchase and retirement
of 3,140 shares of
common stock................ (16) (46) -- -- (62)
Stock options exercised
and Dividend Reinvestment
Plan stock issued totaling
53,904 shares............... 270 484 -- -- 754
Unrealized loss on
securities available
for sale.................... -- -- -- (1,655) (1,655)
Balance, June 30, 1996....... $ 31,434 $ 438 $ 23,047 $ 11 $ 54,930
Balance, December 31, 1996... $ 31,506 $ 578 $ 25,655 $ 1,670 $ 59,409
Net income for the
six months ended
June 30, 1997............... -- -- 4,876 -- 4,876
Cash dividends of $.25
per share................... -- -- (1,891) -- (1,891)
Purchase and retirement
of 39,834 shares of
common stock................ (199) (576) -- -- (775)
Stock options exercised
and Dividend Reinvestment
Plan stock issued totaling
39,173 shares............... 196 489 (5) -- 680
6-for-5 stock split.......... 6,300 (491) (5,809) -- --
Unrealized gain on
securities available
for sale.................... -- -- -- 319 319
Balance, June 30, 1997....... $ 37,803 $ -- $ 22,826 $ 1,989 $ 62,618
See accompanying notes to consolidated financial statements.
FIRST CHARTER CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
For Six Months Ended
(Dollars in thousands) June 30,1997 June 30, 1996
Cash flows from operating activities:
Net income . . . . . . . . . . . . . . . . . . . . . . . . $ 4,876 $ 4,352
Adjustments to reconcile net income to net
cash provided by operating activities:
Provision for loan losses . . . . . . . . . . . . . . . 685 620
Depreciation . . . . . . . . . . . . . . . . . . . . . . 785 524
Premium amortization and discount accretion, net . . . . (25) 18
Net gain on securities available for sale transactions . (404) (141)
Net gain on sale of premises and equipment . . . . . . . (12) --
Origination of mortgage loans held for sale . . . . . . (1,483) (10,409)
Proceeds from sale of mortgage loans available for sale . 1,192 10,151
Decrease (increase) in other assets . . . . . . . . . . (305) 8
Decrease in other liabilities . . . . . . . . . . . . . (1,097) (1,028)
Net cash provided by operating activities . . . . . . 4,212 4,095
Cash flows from investing activities:
Proceeds from sales of securities available for sale . . . 3,902 5,926
Proceeds from maturities of securities available for sale . 11,182 14,566
Purchase of securities available for sale . . . . . . . . (11,296) (18,939)
Net increase in loans . . . . . . . . . . . . . . . . . . (31,274) (17,343)
Proceeds from sales of premises and equipment . . . . . . 254 --
Purchase of premises and equipment . . . . . . . . . . . . (1,773) (1,450)
Net cash used in investing activities . . . . . . . . . (29,005) (17,240)
Cash flows from financing activities:
Net increase (decrease) in demand, NOW, money market and
savings accounts . . . . . . . . . . . . . . . . . . . . (15,797) 4,897
Net increase in certificates of deposit . . . . . . . . . 31,326 18,524
Net increase (decrease) in other borrowings . . . . . . . 660 (9,823)
Net decrease in advances for taxes and insurance . . . . . -- (61)
Purchase of common stock . . . . . . . . . . . . . . . . . (775) (62)
Proceeds from issuance of common stock . . . . . . . . . . 680 753
Dividends paid . . . . . . . . . . . . . . . . . . . . . . (1,891) (1,883)
Net cash provided by financing activities . . . . . . 14,203 12,345
Net decrease in cash and cash equivalents . . . . . . . . (10,590) (800)
Cash and cash equivalents at beginning of period . . . . . 42,150 33,642
Cash and cash equivalents at end of period . . . . . . . . $ 31,560 $ 32,842
(Continued)
FIRST CHARTER CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) (Continued)
For Six Months Ended
(Dollars in thousands) June 30,1997 June 30,1996
Supplemental disclosures of cash flow information:
Cash paid during the year for:
Interest . . . . . . . . . . . . . . . . . . . . . . . . . $ 8,671 $ 8,243
Income taxes . . . . . . . . . . . . . . . . . . . . . . . $ 1,767 $ 1,727
Supplemental disclosure of non-cash transactions:
Transfer of loans, premises and equipment to other
real estate owned . . . . . . . . . . . . . . . . . . . . $ -- $ 582
Unrealized gains (loss) in value of securities available
for sale (net of tax effect of $206,000 and ($1,057,000)
for 6/30/97 and 6/30/96, respectively) . . . . . . . . . . $ 319 $ (1,655)
See accompanying notes to consolidated financial statements.
FIRST CHARTER CORPORATION AND SUBSIDIARIES
NOTES TO INTERIM FINANCIAL STATEMENTS (Unaudited)
1. Primary earnings per share and income per share assuming
full dilution are computed based on the weighted average
number of shares outstanding during the period, including
Common Stock equivalent shares applicable to stock options,
assuming the exercise of outstanding stock options at market
value per share. All per share data has been retroactively
adjusted to reflect a 6-for-5 stock split declared in the
second quarter of 1997.
2. In certain instances, amounts reported in the 1996 financial
statements have been reclassified to present them in the
format selected for 1997. Such reclassifications have no
effect on net income or shareholders' equity as previously
reported.
3. The information furnished in this report reflects all
adjustments which are, in the opinion of management,
necessary to present a fair statement of the financial
condition and the results of operations for the interim
periods. All such adjustments were of a normal recurring
nature.
4. On June 30, 1997, First Charter Corporation (the
"Corporation") and Carolina State Bank ("CSB") entered into
a Letter of Intent (the "Letter of Intent") for the
acquisition of CSB by the Corporation (the "Acquisition").
In the Acquisition, the Corporation will acquire all of the
outstanding shares of common stock, $4.50 par value per
share, of CSB (the "CSB Common Stock") in exchange for 1.023
shares of common stock, $5.00 par value per share, of the
Corporation (the "Corporation's Common Stock") for each
share of CSB Common Stock. Pursuant to the Letter of
Intent, the Corporation and CSB will negotiate a definitive
agreement (the "Merger Agreement") providing for the
Acquisition and containing customary terms and conditions
for closing. As of June 30, 1997, 1,662,192 shares of CSB
Common Stock were issued and outstanding, and there were
outstanding employee stock options to purchase 58,600
shares.
The Acquisition is intended to qualify as a tax-free
reorganization and is anticipated to be accounted for as a
pooling of interests. Consummation of the Acquisition is
subject to certain additional conditions, including but not
limited to (i) the negotiation of the Merger Agreement; (ii)
the approvals of the shareholders of the Corporation and
CSB; (iii) the approvals of applicable banking regulatory
authorities; and (iv) the effectiveness of a registration
statement related to the Corporation's Common Stock to be
issued in the Acquisition.
Immediately following the execution of the Letter of Intent,
the Corporation and CSB entered into a Stock Option
Agreement dated June 30, 1997, pursuant to which CSB granted
the Corporation an irrevocable option to purchase up to
330,776 shares of CSB Common Stock (19.9% of the CSB Common
Stock outstanding, before giving effect to the exercise of
the option) at a price of $13.25 per share (the "Option").
The number of shares of CSB Common Stock subject to the
Option will be increased to the extent that CSB issues
additional shares of CSB Common Stock (otherwise than
pursuant to an exercise of the Option) such that the number
of shares of CSB Common Stock subject to option continues to
equal 19.9% of the CSB Common Stock then issued and
outstanding, without giving effect to the issuance of shares
pursuant to an exercise of the Option. The Option was
granted by CSB as a condition of and in consideration for
the Corporation's offer and entering into the Letter of
Intent. The Option is exercisable only upon the occurrence
of certain events generally related to a change in control
of or a material business combination of CSB. The Option
also allows the holder thereof to require that CSB
repurchase (at a price determined as specified in the Stock
Option Agreement) the Option or the shares of CSB Common
Stock acquired pursuant to the exercise of the CSB Option if
certain conditions are met.
CSB is a North Carolina state-chartered commercial bank with
four banking offices in Cleveland and Rutherford Counties,
North Carolina. As of June 30, 1997, CSB had total assets
of approximately $141,489,000, total deposits of
approximately $128,091,000 and shareholders' equity of
approximately $13,398,000.
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The consolidated balance sheets of First Charter
Corporation (the "Corporation") represent account balances for
the Corporation and its wholly owned banking subsidiaries, First
Charter National Bank ("FCNB") and Bank of Union ("Union").
LIQUIDITY
FCNB and Union (the "Banks") derive the major source of
their liquidity from their core deposit base. Liquidity is
further provided by loan repayments, maturities in the investment
portfolios, the ability to secure public deposits, the
availability of federal fund lines at correspondent banks and the
ability to borrow from the Federal Reserve Bank ("FRB") discount
window. In addition to these sources, the Banks are members of
the Federal Home Loan Bank ("FHLB") System which provides access
to FHLB lending sources. Another source of liquidity is the
securities available for sale portfolios which may be sold in
response to liquidity needs. Management believes the Banks'
sources of liquidity are adequate to meet operating needs and
deposit withdrawal requirements.
CAPITAL RESOURCES
At June 30, 1997, total shareholders' equity was
$62,617,815, or $8.28 per share compared to $59,409,181, or $7.86
per share at December 31, 1996.
At June 30, 1997, the Corporation and the Banks were in
compliance with all existing capital requirements. The
Corporation's capital requirements are summarized in the table
below:
Risk-Based Capital
Leverage Capital Tier 1 Capital Total Capital
Amount %(1) Amount %(2) Amount %(2)
(Dollars in thousands)
Actual $ 60,569 11.24% $60,569 14.46% $65,808 15.71%
Required 21,553 4.00 16,764 4.00 33,529 8.00
Excess 39,016 7.24 43,805 10.46 32,279 7.71
(1) Percentage of total adjusted average assets. The FRB
minimum leverage ratio requirement is 3% to 5%, depending on the
institution's composite rating as determined by its regulators.
The FRB has not advised the Corporation of any specific
requirements applicable to it.
(2) Percentage of risk-weighted assets.
REGULATORY RECOMMENDATIONS
Management is not presently aware of any current
recommendations to the Corporation or to the Banks by regulatory
authorities which, if they were to be implemented, would have a
material effect on the Corporation's liquidity, capital
resources, or operations.
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
Net income for the three month period ended June 30, 1997
was $2,452,710, or $0.32 per share versus $2,187,159, or $0.29
per share for the comparable period in 1996 which represents a
12.1% increase. Net income for the six month period ended June
30, 1997 was $4,876,100, or $0.64 per share versus $4,352,443, or
$0.57 per share for the comparable period in 1996 which
represents a 12.0% increase. The increases for the three and six
month periods ending June 30, 1997 are primarily attributable to
increases in net interest income and noninterest income which
were partially offset by increases in noninterest expenses. On
an annualized basis, year to date results represent a return on
average assets of 1.82% versus 1.70% and a return on average
equity of 16.04% versus 15.82%, for the periods ended June 30,
1997 and June 30, 1996, respectively.
Total assets at June 30, 1997 were $565,157,006 compared
to $546,856,181 at December 31, 1996. Loan demand was strong
during the first six months of 1997. As a result, gross loans
increased 8.7% to $392,016,548 from $360,673,182 at December 31,
1996. Total deposits increased 3.4% to $470,744,429 from
$455,214,521 at December 31, 1996. During the first six months
of 1997, certificates of deposit increased primarily due to an
advertising campaign which raised $11.0 million in new deposits
with maturities of nine, eighteen or twenty-four months.
Additionally, $15.0 million was added in public deposits with
maturities of six months. Management anticipates renewing these
public deposits upon their maturity. The increase in deposits
were partially offset by a decrease in noninterest bearing demand
accounts. This category increased at year-end primarily due to a
large influx of corporate deposits which returned to more normal
levels in early 1997.
Securities available for sale totaled $129,287,282 at June
30, 1997 for a decrease of approximately $2.8 million from
December 31, 1996. The decrease was primarily due to utilizing
proceeds from sales, maturities and paydowns to fund increased
loan demand. Additionally, some proceeds were used to reinvest
in additional securities. U.S. Government obligations were
purchased primarily to maintain liquidity. The carrying value of
securities available for sale was $3,264,681 above their
amortized cost at June 30, 1997 which represents gross unrealized
gains of $3,927,348 and gross unrealized losses of $662,667.
For the three and six month periods ended June 30, 1997,
net interest income before provision for loan losses increased
$651,000 and $931,000, respectively, over the comparable periods
in 1996. The increases during these periods are primarily
attributable to an increase in the level of interest earning
assets, which were further enhanced by a higher net interest
margin. The net interest margin increased to 5.32% year to date
at June 30, 1997 from 5.09% for the same period in 1996. The
average yield on earning assets increased to 8.82% at June 30,
1997 compared from 8.66% at June 30, 1996, and the average rate
paid on interest-bearing liabilities decreased to 4.39% at June
30, 1997 compared to 4.44% at June 30, 1996.
Management continues to assess interest rate risk based on
an earnings simulation model. The Corporation's balance sheet is
liability sensitive, meaning that in a given period there will be
more liabilities than assets subject to immediate repricing as
market rates change. Because immediately rate sensitive
interest-bearing liabilities exceed immediately rate sensitive
assets, the earnings position could improve in a declining rate
environment and could deteriorate in a rising rate environment,
depending on the correlation of rate changes in these two
categories.
The provision for loan losses for the three and six months
ended June 30, 1997 was $425,000 and $685,000, respectively,
compared to $300,000 and $620,000, for the three and six months
ended June 30, 1996, respectively. The increases in the
provision for the three and six months ended June 30, 1997 were
attributable to increases in gross loans outstanding, which were
partially offset by a reduction in net charge-offs. Net charge-
offs were approximately $151,000 and $303,000, for the three and
six months ended June 30, 1997 respectively, compared to net
charge-offs of approximately $186,000 and $377,000 for the same
periods of 1996. At June 30, 1997 and December 31, 1996, the
allowance for loan losses as a percentage of gross loans was
1.41% and 1.42%, respectively. Management continues to perform a
monthly analysis of the allowance utilizing a system for risk
grading the portfolio. Based on this review, management believes
the allowance to be adequate, however, future adjustments may be
necessary if economic and other conditions differ substantially
from management's assumptions.
In addition, various regulatory agencies, as an integral
part of their examination process, periodically review the Banks'
allowances for loan losses and losses on real estate owned. Such
agencies may require the Banks to recognize additions to the
allowances based on their judgments about information available
to them at the time of their examination.
The following table presents changes in the allowance for loan
losses at June 30, 1997 and 1996, respectively.
June 30, June 30,
(Dollars in thousands) 1997 1996
Beginning Balance . . . . . . . . . . $ 5,128 $ 4,856
Add:
Provision charged to operations . . . 685 620
5,813 5,476
Less:
Loan charge-offs . . . . . . . . . . 412 578
Less loan recoveries . . . . . . . 109 201
Net loan charge-offs . . . . . . 303 377
Ending Balance . . . . . . . . . . . $ 5,510 $ 5,099
At June 30, 1997, the recorded investment in loans that
were considered to be impaired under the Financial Accounting
Standards Board (FASB) Standard No. 114 and No. 118 was
$1,504,416 (of which $1,196,030 was on nonaccrual) compared to
the recorded investment in impaired loans of $1,623,924 (of which
$1,292,029 was on nonaccrual) at December 31, 1996. The related
allowance for loan losses on these loans was $589,177 and
$669,248 at June 30, 1997 and December 31, 1996, respectively.
At June 30, 1997 and December 31, 1996, there were specific
allocations of the allowance for loan loss for each impaired
loan. The average recorded investment in impaired loans for the
six months ended June 30, 1997 and 1996 was $1,564,472 and
$2,135,863, respectively. For the six months ended June 30, 1997
and 1996, the Corporation recognized interest income on impaired
loans of $15,092 and $17,128, respectively, none of which was
recognized using the cash method of income recognition.
Total problem assets at June 30, 1997 were $3,346,000 or
0.85% of gross loans, compared to $2,721,004 or 0.75% at December
31, 1996. The increase in problem assets is due primarily to
three loans totaling $700,000 which are 90 days or more past due
and still accruing. The components of nonperforming and problem
assets are presented in the table below:
June 30, December 31,
(Dollars in thousands) 1997 1996
Nonaccrual loans . . . . . $ 1,226 $ 1,338
Other real estate . . . . . 799 759
Total non-performing assets . . 2,025 2,097
Loans 90 days or more past
due and still accruing . . . 1,321 624
Total problem assets . . . . . $ 3,346 $ 2,721
Interest income that would have been recorded on
nonaccrual loans for the six months ended June 30, 1997, had they
performed in accordance with their original terms, amounted to
approximately $61,616. There was no interest income recorded on
non-accrual loans for the six months ended June 30, 1997.
Noninterest income for the three and six month periods
ended June 30, 1997 increased approximately $259,000 or 15.3% and
$841,000 or 27.4%, respectively, over the comparable periods in
1996. The factors contributing to this increase were higher
trust income primarily due to higher levels of assets under
management, gains on sales of securities available for sale,
higher service charge income on deposit accounts due to increased
fees in non-sufficient fund charges and higher commissions earned
on brokerage services resulting from increased sales volumes.
Noninterest expense for the three and six month periods
ended June 30, 1997 increased approximately $469,000 or 11.9% and
$1,047,000 or 13.8%, respectively, over the comparable periods in
1996. The increase is primarily attributable to higher salaries
and fringe benefits due to greater number of full-time
equivalents and higher occupancy and equipment expense due to
depreciation expense for new computer network technology added in
mid-1996. Additional increases were incurred in advertising,
FDIC insurance, data processing, postage, supplies and telephone
expenses.
Total income tax expense for the three and six month
periods ended June 30, 1997 increased $50,000 and $137,000,
respectively over the comparable periods in 1996. The increase
is attributable to an increase in taxable income which was
partially offset by a slight decrease in the effective tax rate.
PENDING ACQUISITION OF CAROLINA STATE BANK
On June 30, 1997, First Charter Corporation (the
"Corporation") and Carolina State Bank ("CSB") entered into a
Letter of Intent (the "Letter of Intent") for the acquisition of
CSB by the Corporation (the "Acquisition"). In the Acquisition,
the Corporation will acquire all of the outstanding shares of
common stock, $4.50 par value per share, of CSB (the "CSB Common
Stock") in exchange for 1.023 shares of common stock, $5.00 par
value per share, of the Corporation (the "Corporation's Common
Stock") for each share of CSB Common Stock. Pursuant to the
Letter of Intent, the Corporation and CSB will negotiate a
definitive agreement (the "Merger Agreement") providing for the
Acquisition and containing customary terms and conditions for
closing. As of June 30, 1997, 1,662,192 shares of CSB Common
Stock were issued and outstanding, and there were outstanding
employee stock options to purchase 58,600 shares.
The Acquisition is intended to qualify as a tax-free
reorganization and is anticipated to be accounted for as a
pooling of interests. Consummation of the Acquisition is subject
to certain additional conditions, including but not limited to
(i) the negotiation of the Merger Agreement; (ii) the approvals
of the shareholders of the Corporation and CSB; (iii) the
approvals of applicable banking regulatory authorities; and (iv)
the effectiveness of a registration statement related to the
Corporation's Common Stock to be issued in the Acquisition.
Immediately following the execution of the Letter of
Intent, the Corporation and CSB entered into a Stock Option
Agreement dated June 30, 1997, pursuant to which CSB granted the
Corporation an irrevocable option to purchase up to 330,776
shares of CSB Common Stock (19.9% of the CSB Common Stock
outstanding, before giving effect to the exercise of the option)
at a price of $13.25 per share (the "Option"). The number of
shares of CSB Common Stock subject to the Option will be
increased to the extent that CSB issues additional shares of CSB
Common Stock (otherwise than pursuant to an exercise of the
Option) such that the number of shares of CSB Common Stock
subject to option continues to equal 19.9% of the CSB Common
Stock then issued and outstanding, without giving effect to the
issuance of shares pursuant to an exercise of the Option. The
Option was granted by CSB as a condition of and in consideration
for the Corporation's offer and entering into the Letter of
Intent. The Option is exercisable only upon the occurrence of
certain events generally related to a change in control of or a
material business combination of CSB. The Option also allows the
holder thereof to require that CSB repurchase (at a price
determined as specified in the Stock Option Agreement) the Option
or the shares of CSB Common Stock acquired pursuant to the
exercise of the CSB Option if certain conditions are met.
CSB is a North Carolina state-chartered commercial bank
with four banking offices in Cleveland and Rutherford Counties,
North Carolina. As of June 30, 1997, CSB had total assets of
approximately $141,489,000, total deposits of approximately
$128,091,000 and shareholders' equity of approximately
$13,398,000.
ACCOUNTING AND REGULATORY MATTERS
In February 1997, the Financial Accounting Standards Board
(FASB) issued Statement of Financial Accounting Standards (SFAS)
No. 128, "Earnings Per Share," which establishes standards for
computing and presenting earnings per share. SFAS No. 128
simplifies the computation of earnings per share (EPS) by
replacing the presentation of "primary" earnings per share with a
presentation of "basic" EPS. Basic EPS excludes dilution and is
computed by dividing income available to common shareholders by
weighted average common shares outstanding. Diluted EPS is
computed similarly to "fully diluted" EPS under existing
accounting rules. Dual presentation of basic and diluted EPS is
required for complex capital structures. SFAS No. 128 is
effective for financial statements issued for periods ending
after December 15, 1997; earlier application is not permitted but
restatement of prior years' EPS is required. The adoption of
SFAS No. 128 is not expected to have a material effect on
previously reported earnings per share.
In February 1997, the FASB also issued SFAS No. 129,
"Disclosure of Information about Capital Structure." This
Statement establishes standards for disclosing information about
an entity's capital structure. SFAS No. 129 is effective for the
Corporation's financial statements as of December 31, 1997. The
Corporation does not anticipate that the implementation of this
Statement will have a material impact on the consolidated
financial statements.
FACTORS THAT MAY AFFECT FUTURE RESULTS
The foregoing discussion contains forward-looking
statements about the Corporation's financial condition and
results of operations, which are subject to certain risks and
uncertainties that could cause actual results to differ
materially from those reflected in the forward-looking
statements. Readers are cautioned not to place undue reliance on
these forward-looking statements, which reflect management's
judgment only as of the date hereof. The Corporation undertakes
no obligation to publicly revise these forward-looking statements
to reflect events and circumstances that arise after the date
hereof.
Factors that may cause actual results to differ materially
from these forward-looking statements include but are not limited
to the passage of unforeseen state or federal legislation or
regulation applicable to the Corporation's operations, the
Corporation's ability to accurately predict loan loss provision
needs using its present risk grading system, and the
Corporation's ability to negotiate a definitive merger agreement
with CSB on terms favorable to the Corporation.
Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET
RISK.
Not applicable.
PART II - OTHER INFORMATION
Item 4. Submission of matters to a Vote of Security Holders.
(a) First Charter Corporation's Annual Meeting of
Shareholders was held on April 29, 1997.
(b) The following directors were elected for three-
year terms expiring in 2000.
Broker
For Withholding Non-Votes
Jane B. Brown 4,467,208 10,204 --
Michael R. Coltrane 4,468,457 8,955 --
J. Roy Davis, Jr. 4,475,000 2,412 --
James B. Fincher 4,469,205 8,207 --
Hugh H. Morrison 4,476,027 1,385 --
For a one year term expiring in 1998:
Broker
For Withholding Non-Votes
Branson C. Jones 4,456,046 21,366 --
The following directors' terms of office continued after the
annual meeting:
William R. Black
Grady S. Carpenter
H. Clark Goodwin
Frank H. Hawfield
J. Knox Hillman
Lawrence M. Kimbrough
Robert F. Lowrance
T. David Propst
Robert L. Wall
James B. Widenhouse
A brief description of the other matters (exclusive of
procedural matters) voted upon at the meeting is set forth below.
A motion to approve the Corporation's Stock Option Plan for
Non-Employee Directors was adopted by a vote of the majority of
the shares of the Corporation's Common Stock present or
represented by proxy and entitled to vote, as follows:
For: 4,570,716
Against: 628,258
Abstained: 43,000
Broker Non Votes: 69,199
A motion to approve the Corporation's 1998 Employee Stock
Purchase Plan was adopted by a vote of the majority of the shares
of the Corporation's Common Stock present or represented by proxy
and entitled to vote, as follows:
For: 5,163,226
Against: 64,932
Abstained: 13,816
Broker Non Votes: 69,199
A motion to ratify the action of the Board of Directors in
selection of KPMG Peat Marwick LLP as independent public
accountants for 1997 was adopted by a vote of the majority of the
votes cast with respect to shares of the Corporation's Common
Stock as follows:
For: 5,216,052
Against: 970
Abstained: 24,952
Broker Non Votes: 69,199
Item 5. Other Information
Effective July 1, 1997, the Board of Directors of the
Registrant was reorganized as follows: Each of Jane B. Brown,
Grady S. Carpenter, Robert F. Lowrance, T. David Propst, Robert
L. Wall and James B. Widenhouse resigned from the Registrant's
Board of Directors, and Mr. Thomas R. Revels was elected as a
member of the Registrant's Board of Directors in the class of
directors whose terms expire in 1999, to serve until the next
Annual Meeting of Shareholders or until his successor shall be
elected and shall qualify. As a result of this restructuring,
the number of members of the Registrant's Board of Directors was
set at twelve, consisting of the following persons serving in the
following classes:
Directors for terms to expire in 1998:
J. Knox Hillman, Jr.
Branson C. Jones
Lawrence M. Kimbrough
Jerry E. McGee
Directors for terms to expire in 1999:
William R. Black
H. Clark Goodwin
Frank H. Hawfield, Jr.
Thomas R. Revels
Directors for terms to expire in 2000:
Michael R. Coltrane
J. Roy Davis, Jr.
James B. Fincher
Hugh H. Morrison
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
Exhibit No.
(per Exhibit Table
in item 601 of
Regulation S-K) Description of Exhibits
3.1 Restated Charter of the
Registrant, incorporated
herein by reference to Exhibit
3.1 of the Registrant's Annual
Report on Form 10-K for the
fiscal year ended December 31,
1994 (Commission File No. 0-
15829).
3.2 By-laws of the Registrant, as
amended, incorporated herein
by reference to Exhibit 3.2 of
the Registrant's Annual Report
on Form 10-K for the fiscal
year ended December 31, 1995
(Commission File No. 0-15829).
10.1 Letter of Intent between First
Charter Corporation and
Carolina State Bank, dated
June 30, 1997.
10.2 Stock Option Agreement dated
June 30, 1997 between the
Registrant and Carolina State
Bank (incorporated herein by
reference to Exhibit 99.2 of
the Registrant's Current
Report on Form 8-K filed July
2, 1997.
11 Statements regarding
computation of per share
earnings.
27 Financial Data Schedules
(b) On July 2, 1997, First Charter Corporation filed a
current report on Form 8-K, generally reporting
pursuant to Item 5 thereof the Letter of Intent
and the Stock Option Agreement entered into
between First Charter Corporation and Carolina
State Bank each dated June 30, 1997.
Signatures
Pursuant to the requirements 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.
FIRST CHARTER CORPORATION
(Registrant)
Date: August 14, 1997 By: \s\ Robert O. Bratton
Robert O. Bratton
Executive Vice President &
Principal Financial and
Accounting Officer
EXHIBIT INDEX
Exhibit No.
(per Exhibit Table
in item 601 of Sequential
Regulation S-K) Description of Exhibits Page Number
11 Statements regarding
computation of per share
earnings.
27 Financial Data Schedules