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 September 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.
7,565,558 shares of Common Stock, $5.00 par value, outstanding as of
November 14, 1997.
PART 1. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
FIRST CHARTER CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands) September 30, December 31,
1997 1996
ASSETS Unaudited
Cash and due from banks . . . . . . . . . . . $ 27,974 $ 31,300
Interest bearing bank deposits . . . . . . . 12,351 10,850
Securities available for sale:
U.S. Government obligations . . . . . . . . 22,850 28,099
U.S. Government agency obligations . . . . 14,705 11,583
Mortgage-backed securities . . . . . . . . 12,197 14,513
State and municipal obligations, nontaxable 75,140 72,050
Other . . . . . . . . . . . . . . . . . . . 10,548 5,876
Total securities available for sale . . . 135,440 132,121
Loans . . . . . . . . . . . . . . . . . . . . 397,863 360,673
Less: Unearned income . . . . . . . . . . . (306) (192)
Allowance for loan losses . . . . . . (5,583) (5,128)
Loans, net . . . . . . . . . . . . . . . . . 391,974 355,353
Premises and equipment, net . . . . . . . . . 12,730 11,385
Other assets . . . . . . . . . . . . . . . . 5,475 5,847
Total assets . . . . . . . . . . . . . . $ 585,944 $ 546,856
LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits, domestic:
Noninterest bearing demand . . . . . . . . $ 77,616 $ 85,863
Interest bearing:
NOW accounts . . . . . . . . . . . . . . . 77,042 76,644
Time . . . . . . . . . . . . . . . . . . . 267,826 253,753
Certificates of deposit greater
than $100,000 . . . . . . . . . . . . . . 64,444 38,955
Total deposits . . . . . . . . . . . . . 486,928 455,215
Other borrowings . . . . . . . . . . . . . . 29,720 27,261
Other liabilities. . . . . . . . . . . . . . 4,466 4,971
Total liabilities . . . . . . . . . . . . 521,114 487,447
Shareholders' equity:
Common stock - $5 par value; authorized,
10,000,000 shares; issued and outstanding,
7,555,927 shares at 9/30/97 and 6,301,213
shares at 12/31/96 . . . . . . . . . . . . 37,780 31,506
Additional paid-in capital . . . . . . . . . 4 578
Unrealized gain on securities available
for sale, net . . . . . . . . . . . . . . . 2,923 1,670
Retained earnings . . . . . . . . . . . . . . 24,123 25,655
Total shareholders' equity . . . . . . . 64,830 59,409
Total liabilities and shareholders' equity $ 585,944 $ 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 Nine Months Ended
Sept. 30, Sept. 30,
Interest Income: 1997 1996
Interest and fees on loans . . . . . . . . . . . . . . . $ 26,799 $ 24,115
Federal funds sold . . . . . . . . . . . . . . . . . . . 22 140
Interest bearing bank deposits . . . . . . . . . . . . . 242 279
Securities available for sale . . . . . . . . . . . . . . 5,392 5,604
Total interest income . . . . . . . . . . . . . . . . 32,455 30,138
Interest Expense:
Deposits:
Demand . . . . . . . . . . . . . . . . . . . . . . . . 1,070 987
Money Market . . . . . . . . . . . . . . . . . . . . . 924 869
Savings and Time . . . . . . . . . . . . . . . . . . . 10,434 10,062
Other borrowings . . . . . . . . . . . . . . . . . . . . 1,136 996
Total interest expense . . . . . . . . . . . . . . . 13,564 12,914
Net interest income . . . . . . . . . . . . . . . . . 18,891 17,224
Provision for loan losses . . . . . . . . . . . . . . . . 885 820
Net interest income after provision for loan losses . 18,006 16,404
Noninterest income:
Trust income . . . . . . . . . . . . . . . . . . . . . . 1,280 1,059
Service charges on deposit accounts . . . . . . . . . . . 2,381 1,961
Insurance and other commissions . . . . . . . . . . . . . 104 127
Securities available for sale transactions, net . . . . . 404 246
Other . . . . . . . . . . . . . . . . . . . . . . . . . . 1,556 1,180
Total noninterest income . . . . . . . . . . . . . . 5,725 4,573
Noninterest expense:
Salaries and fringe benefits . . . . . . . . . . . . . . 7,131 6,521
Occupancy and equipment . . . . . . . . . . . . . . . . . 2,137 1,739
Other . . . . . . . . . . . . . . . . . . . . . . . . . . 3,959 3,428
Total noninterest expense . . . . . . . . . . . . . . 13,227 11,688
Income before income taxes . . . . . . . . . . . . . 10,504 9,289
Income taxes . . . . . . . . . . . . . . . . . . . . . . 3,103 2,749
Net Income . . . . . . . . . . . . . . . . . . . . . $ 7,401 $ 6,540
See accompanying notes to consolidated financial statements.
FIRST CHARTER CORPORATION AND SUBSIDIARIES
EARNINGS PER SHARE DATA (Unaudited)
For Nine Months Ended
Sept. 30, Sept. 30,
1997 1996
Primary income per share data:
Net income . . . . . . . . . . . . . . . . . . . . . . $ 0.97 $ 0.87
Average common equivalent shares . . . . . . . . . . . 7,632,789 7,585,273
Income per share data assuming full dilution:
Net income . . . . . . . . . . . . . . . . . . . . . . $ 0.97 $ 0.87
Average common equivalent shares . . . . . . . . . . . 7,656,479 7,585,273
Cash dividends declared . . . . . . . . . . . . . . . . . $ 0.39 $ 0.38
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
Sept. 30, Sept. 30,
Interest Income: 1997 1996
Interest and fees on loans . . . . . . . . . . . . . . . $ 9,434 $ 8,189
Federal funds sold . . . . . . . . . . . . . . . . . . . 20 64
Interest bearing bank deposits . . . . . . . . . . . . . 154 100
Securities available for sale . . . . . . . . . . . . . . 1,788 1,841
Total interest income . . . . . . . . . . . . . . . . 11,396 10,194
Interest Expense:
Deposits:
Demand . . . . . . . . . . . . . . . . . . . . . . . . 369 335
Money Market . . . . . . . . . . . . . . . . . . . . . 346 302
Savings and Time . . . . . . . . . . . . . . . . . . . 3,726 3,380
Other borrowings . . . . . . . . . . . . . . . . . . . . 383 340
Total interest expense . . . . . . . . . . . . . . . 4,824 4,357
Net interest income . . . . . . . . . . . . . . . . . 6,572 5,837
Provision for loan losses . . . . . . . . . . . . . . . . 200 200
Net interest income after provision for loan losses . 6,372 5,637
Noninterest income:
Trust income . . . . . . . . . . . . . . . . . . . . . . 450 345
Service charges on deposit accounts . . . . . . . . . . . 803 644
Insurance and other commissions . . . . . . . . . . . . . 30 34
Securities available for sale transactions, net . . . . . -- 101
Other . . . . . . . . . . . . . . . . . . . . . . . . . . 533 381
Total noninterest income . . . . . . . . . . . . . . 1,816 1,505
Noninterest expense:
Salaries and fringe benefits . . . . . . . . . . . . . . 2,427 2,312
Occupancy and equipment . . . . . . . . . . . . . . . . . 773 615
Other . . . . . . . . . . . . . . . . . . . . . . . . . . 1,409 1,190
Total noninterest expense . . . . . . . . . . . . . . 4,609 4,117
Income before income taxes . . . . . . . . . . . . . 3,579 3,025
Income taxes . . . . . . . . . . . . . . . . . . . . . . 1,054 837
Net Income . . . . . . . . . . . . . . . . . . . . . $ 2,525 $ 2,188
See accompanying notes to consolidated financial statements.
FIRST CHARTER CORPORATION AND SUBSIDIARIES
EARNINGS PER SHARE DATA (Unaudited)
For Three Months Ended
Sept. 30, Sept. 30,
1997 1996
Primary income per share data:
Net income . . . . . . . . . . . . . . . . . . . . . . $ 0.33 $ 0.29
Average common equivalent shares . . . . . . . . . . . 7,651,470 7,604,460
Income per share data assuming full dilution:
Net income . . . . . . . . . . . . . . . . . . . . . . $ 0.33 $ 0.29
Average common equivalent shares . . . . . . . . . . . 7,651,470 7,605,313
Cash dividends declared . . . . . . . . . . . . . . . . . $ 0.14 $ 0.125
See accompanying notes to consolidated financial statements.
FIRST CHARTER CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY (Unaudited)
For The Nine Months Ended September 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
nine months ended
Sept. 30, 1996............... -- -- 6,540 -- 6,540
Cash dividends of $0.38
per share.................... -- -- (2,829) -- (2,829)
Purchase and retirement
of 3,140 shares of
common stock................. (16) (46) -- -- (62)
Stock options exercised
and Dividend Reinvestment
Plan stock issued totaling
70,356 shares................ 352 719 -- -- 1,071
Unrealized loss on
securities available
for sale, net................ -- -- -- (1,166) (1,166)
Balance, Sept. 30, 1996.. ....$ 31,516 $ 673 $ 24,289 $ 500 $ 56,978
Balance, December 31, 1996.... $ 31,506 $ 578 $ 25,655 $ 1,670 $ 59,409
Net income for the
nine months ended
Sept. 30, 1997............... -- -- 7,401 -- 7,401
Cash dividends of $0.39
per share.................... -- -- (2,947) -- (2,947)
Purchase and retirement
of 61,890 shares of
common stock................. (310) (827) (161) -- (1,298)
Stock options exercised
and Dividend Reinvestment
Plan stock issued totaling
56,919 shares................ 284 744 (16) -- 1,012
6-for-5 stock split........... 6,300 (491) (5,809) -- --
Unrealized gain on
securities available
for sale, net................ -- -- -- 1,253 1,253
Balance, Sept. 30, 1997.......$ 37,780 $ 4 $ 24,123 $ 2,923 $ 64,830
See accompanying notes to consolidated financial statements.
FIRST CHARTER CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
For Nine Months Ended
(Dollars in thousands) Sept.30,1997 Sept.30, 1996
Cash flows from operating activities:
Net income . . . . . . . . . . . . . . . . . . . . . . . . $ 7,401 $ 6,540
Adjustments to reconcile net income to net
cash provided by operating activities:
Provision for loan losses . . . . . . . . . . . . . . . 895 820
Depreciation . . . . . . . . . . . . . . . . . . . . . . 1,157 845
Premium amortization and discount accretion, net . . . . (112) 67
Net gain on securities available for
sale transactions . . . . . . . . . . . . . . . . . . . (404) (246)
Net loss (gain) on sale of premises and equipment . . . (12) 4
Origination of mortgage loans held for sale . . . . . . (7,620) (14,671)
Proceeds from sale of mortgage loans available for sale . 6,757 13,931
Increase in other assets . . . . . . . . . . . . . . . . (429) (1,725)
Decrease in other liabilities . . . . . . . . . . . . . (505) (1,907)
Net cash provided by operating activities . . . . . . 7,128 3,658
Cash flows from investing activities:
Proceeds from sales of securities available for sale . . . 3,902 6,072
Proceeds from maturities of securities available for sale . 14,644 24,194
Purchase of securities available for sale . . . . . . . . (19,295) (29,513)
Net increase in loans . . . . . . . . . . . . . . . . . . (36,653) (17,677)
Proceeds from sales of premises and equipment . . . . . . 254 107
Purchase of premises and equipment . . . . . . . . . . . . (2,744) (1,979)
Net cash used in investing activities . . . . . . . . . (39,892) (18,796)
Cash flows from financing activities:
Net increase (decrease) in demand, NOW, money market and
savings accounts . . . . . . . . . . . . . . . . . . . . (9,303) 14,187
Net increase in certificates of deposit . . . . . . . . . 41,016 17,294
Net increase (decrease) in other borrowings . . . . . . . 2,459 (7,976)
Net decrease in advances for taxes and insurance . . . . . -- (61)
Purchase of common stock . . . . . . . . . . . . . . . . . (1,298) (62)
Proceeds from issuance of common stock . . . . . . . . . . 1,012 1,070
Dividends paid . . . . . . . . . . . . . . . . . . . . . . (2,947) (2,829)
Net cash provided by financing activities . . . . . . 30,939 21,623
Net increase (decrease) in cash and cash equivalents . . . (1,825) 6,485
Cash and cash equivalents at beginning of period . . . . . 42,150 33,642
Cash and cash equivalents at end of period . . . . . . . . $ 40,325 $ 40,127
(Continued)
FIRST CHARTER CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) (Continued)
For Nine Months Ended
(Dollars in thousands) Sept 30,1997 Sept. 30,1996
Supplemental disclosures of cash flow information:
Cash paid during the year for:
Interest . . . . . . . . . . . . . . . . . . . . . . . . . $ 13,331 $ 12,641
Income taxes . . . . . . . . . . . . . . . . . . . . . . . $ 2,842 $ 2,477
Supplemental disclosure of non-cash transactions:
Transfer of loans, premises and equipment to other
real estate owned . . . . . . . . . . . . . . . . . . . . $ -- $ 608
Unrealized gains (loss) in value of securities available
for sale (net of tax effect of $801,000 and ($707,000)
for 9/30/97 and 9/30/96, respectively) . . . . . . . . . . $ 1,253 $ (1,666)
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 presented. All such adjustments were of a normal
recurring nature.
4. On August 15, 1997, First Charter Corporation (the
"Corporation") and Carolina State Bank ("CSB") entered into
a definitive agreement (the "Merger Agreement") 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. As of September 30, 1997,
1,662,792 shares of CSB Common Stock were issued and
outstanding, and there were outstanding employee stock
options to purchase 58,000 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 approvals of the shareholders of the
Corporation and CSB; (ii) the approvals of applicable
banking regulatory authorities; and (iii) the effectiveness
of a registration statement related to the Corporation's
Common Stock to be issued in the Acquisition.
In connection with the execution of a Letter of Intent with
respect to the Acquisition on June 30, 1997, 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 otherwise than with the
Corporation or its subsidiaries. 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 September 30, 1997, CSB had total
assets of approximately $142,923,000, total deposits of
approximately $122,547,000 and shareholders' equity of
approximately $13,503,000.
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 September 30, 1997, total shareholders' equity was
$64,829,820, or $8.58 per share compared to $59,409,181, or $7.86
per share at December 31, 1996.
At September 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 $ 61,860 10.78% $61,860 14.34% $67,254 15.59%
Required 22,953 4.00 17,261 4.00 34,522 8.00
Excess 38,907 6.78 44,599 10.34 32,732 7.59
(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.
*Denotes forward-looking statement. See "MANAGEMENT'S DISCUSSION
AND ANALYSIS - FACTORS THAT MAY AFFECT FUTURE RESULTS"
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 adverse effect on the Corporation's liquidity, capital
resources, or operations.*
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
Net income for the three month period ended September 30,
1997 was $2,524,718, or $0.33 per share versus $2,187,824, or
$0.29 per share for the comparable period in 1996, which
represents a 15.4% increase. Net income for the nine month
period ended September 30, 1997 was $7,400,818, or $0.97 per
share versus $6,540,267, or $0.87 per share for the comparable
period in 1996, which represents a 13.2% increase. The increases
for the three and nine month periods ending September 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 1.79% versus
1.68% and a return on average equity of 15.92% versus 15.67%, for
the periods ended September 30, 1997 and September 30, 1996,
respectively.
Total assets at September 30, 1997 were $585,943,581
compared to $546,856,181 at December 31, 1996. Loan demand was
strong during the first nine months of 1997. As a result, gross
loans increased 10.3% to $397,863,338 from $360,673,182 at
December 31, 1996. Total deposits increased 7.0% to $486,927,505
from $455,214,521 at December 31, 1996. During the first nine
months of 1997, certificates of deposit increased primarily due
to several advertising campaigns which raised approximately $20.0
million in new deposits with maturities of nine, eighteen or
twenty-four months. Additionally, $10.0 million was added in
public deposits with maturities of six months. Management does
not anticipate renewing these public deposits upon their
maturity. The increase in total deposits was 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 $135,439,907 at
September 30, 1997 for an increase of approximately $3.3 million
from December 31, 1996. The increase was due to approximately
$2.1 million in unrealized gains in value and $1.2 million in
acquisitions of securities. During the year, as maturities,
sales, or paydowns occurred on securities, the proceeds were
*Denotes forward-looking statement. See "MANAGEMENT'S DISCUSSION
AND ANALYSIS - FACTORS THAT MAY AFFECT FUTURE RESULTS"
utilized to meet loan demand and reinvested in additional
securities. The carrying value of securities available for sale
was $4,792,327 above their amortized cost at September 30, 1997,
which represents gross unrealized gains of $5,037,579 and gross
unrealized losses of $245,252.
For the three and nine month periods ended September 30,
1997, net interest income before provision for loan losses
increased $735,000 and $1,667,000, 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 and were further enhanced by a higher net
interest margin. The net interest margin increased to 5.25% year
to date at September 30, 1997 from 5.09% for the same period in
1996. The average yield on earning assets increased to 8.76% at
September 30, 1997 compared to 8.64% at September 30, 1996, and
the average rate paid on interest-bearing liabilities decreased
to 4.39% at September 30, 1997 compared to 4.43% at September 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 nine
months ended September 30, 1997 was $200,000 and $885,000,
respectively, compared to $200,000 and $820,000, for the three
and nine months ended September 30, 1996, respectively. The
increase in the provision for the nine months ended September 30,
1997 was attributable to an increase in gross loans outstanding
and was partially offset by a reduction in net charge-offs. Net
charge-offs were approximately $127,000 and $430,000, for the
three and nine months ended September 30, 1997 respectively,
compared to net charge-offs of approximately $171,000 and
$548,000 for the same periods of 1996. At September 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.*
*Denotes forward-looking statement. See "MANAGEMENT'S DISCUSSION
AND ANALYSIS - FACTORS THAT MAY AFFECT FUTURE RESULTS"
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 September 30, 1997 and 1996, respectively.
Sept. 30, Sept 30,
(Dollars in thousands) 1997 1996
Beginning Balance . . . . . . . . . . $ 5,128 $ 4,856
Add:
Provision charged to operations . . . 885 820
6,013 5,676
Less:
Loan charge-offs . . . . . . . . . . 625 845
Less loan recoveries . . . . . . . 195 297
Net loan charge-offs . . . . . . 430 548
Ending Balance . . . . . . . . . . . $ 5,583 $ 5,128
At September 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 $1,451,663 (of which $1,155,309 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 $557,999 and
$669,248 at September 30, 1997 and December 31, 1996,
respectively. At September 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 nine months ended September 30, 1997 and 1996 was
$1,539,807 and $2,014,554, respectively. For the nine months
ended September 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 September 30, 1997 were $3,774,000
or 0.85% of gross loans, compared to $2,721,000 or 0.75% at
December 31, 1996. The increase in problem assets is due
primarily to several construction loans totaling $342,000 and
several 1-4 family residential mortgage loans totaling $415,000
which are 90 days or more past due and still accruing. The
components of nonperforming and problem assets are presented in
the table below:
September 30, December 31,
(Dollars in thousands) 1997 1996
Nonaccrual loans . . . . . $ 1,175 $ 1,338
Other real estate . . . . . 832 759
Total non-performing assets . . 2,007 2,097
Loans 90 days or more past
due and still accruing . . . 1,767 624
Total problem assets . . . . . $ 3,774 $ 2,721
Interest income that would have been recorded on
nonaccrual loans for the nine months ended September 30, 1997,
had they performed in accordance with their original terms,
amounted to approximately $87,562. There was no interest income
recorded on non-accrual loans for the nine months ended September
30, 1997.
Noninterest income for the three and nine month periods
ended September 30, 1997 increased approximately $311,000 or
20.7% and $1,152,000 or 25.2%, respectively, over the comparable
periods in 1996. The factors contributing to the increases for
the three and nine months ended September 30, 1997 were higher
trust income primarily due to higher levels of assets under
management, 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. In addition, the increase for the nine month
period includes gains on sales of securities available for sale.
Noninterest expense for the three and nine month periods
ended September 30, 1997 increased approximately $492,000 or
12.0% and $1,539,000 or 13.2%, 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 nine month
periods ended September 30, 1997 increased $217,000 and $354,000,
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 August 15, 1997, the Corporation and Carolina State
Bank ("CSB") entered into a definitive agreement (the "Merger
Agreement") 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. As of September 30, 1997, 1,662,792 shares of
CSB Common Stock were issued and outstanding, and there were
outstanding employee stock options to purchase 58,000 shares.
First Charter anticipates one-time merger and related
charges of $2.0 million to $2.9 million ($1.6 million to $2.2
million, net of tax effects) in connection with the Acquisition.
Professional fees associated with the transaction (including
fixed financial advisor fees as well as attorneys' and
accountants' fees) are expected to represent the largest portion
of the expenses and charges, as well as estimated expenses
associated with various severance-related obligations.*
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 approvals of the shareholders of the Corporation and CSB;
(ii) the approvals of applicable banking regulatory authorities;
and (iii) the effectiveness of a registration statement related
to the Corporation's Common Stock to be issued in the
Acquisition.
In connection with the execution of a Letter of Intent
with respect to the Acquisition on June 30, 1997, 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
otherwise than with the Corporation or its subsidiaries. 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 September 30, 1997, CSB had total assets
of approximately $142,923,000, total deposits of approximately
$122,547,000 and shareholders' equity of approximately
$13,503,000.
*Denotes forward-looking statement. See "MANAGEMENT'S DISCUSSION
AND ANALYSIS - FACTORS THAT MAY AFFECT FUTURE RESULTS"
YEAR 2000 CONSIDERATIONS
The Corporation utilizes many computer software programs
and operating systems throughout the organization. Some of these
software applications contain source code that is unable to
appropriately interpret the upcoming calendar year "2000,"
therefore some level of modification, or even possibly
replacement of such applications will be necessary. The
Corporation is currently in the process of completing its
identification of applications that are not "Year 2000"
compliant. Given information known at this time about
Corporation systems having such issues, coupled with the
Corporation's on-going, normal course-of-business efforts to
upgrade or replace business critical systems, as necessary, it is
currently not expected that the costs of becoming "Year 2000"
compliant will have a material adverse impact on the
Corporation's liquidity or its results of operations.*
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.
*Denotes forward-looking statement. See "MANAGEMENT'S DISCUSSION
AND ANALYSIS - FACTORS THAT MAY AFFECT FUTURE RESULTS"
FACTORS THAT MAY AFFECT FUTURE RESULTS
The foregoing discussion identifies certain forward-
looking statements and may contain other 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, with respect to
the merger-related expenses, the inability to consummate the
Acquisition by the end of fiscal year 1997 or the inability of
First Charter to consolidate the operations of CSB with First
Charter or to achieve technological efficiencies as soon as
anticipated.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET
RISK.
Not applicable.
PART II - OTHER INFORMATION
Item 2. Changes in Securities and Use of Proceeds
The Registrant periodically issues unregistered shares
of its Common Stock to key employees pursuant to the exercise of
options granted under its Comprehensive Stock Option Plan
pursuant to the exemption from registration set forth in Section
4(2) of the Securities Act of 1933, as amended. During the
quarter ended September 30, 1997, the Registrant issued the
following shares pursuant to such option exercises:
On July 14, 1997, the Registrant issued 3,194 shares for an
aggregate of $5,000.00.
On July 23, 1997, the Registrant issued 350 shares for an
aggregate of $1,869.00.
On August 7, 1997, the Registrant issued 648 shares for an
aggregate of $5,670.00.
On August 20, 1997, the Registrant issued 180 shares for an
aggregate of $2,208.60.
On October 20, 1997, the Registrant issued 672 shares for an
aggregate of $5,880.00.
On October 20, 1997, the Registrant issued 120 shares for an
aggregate of $2,124.00.
On October 20, 1997, the Registrant issued 100 shares for an
aggregate of $1,885.00.
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
2.1 Agreement and Plan of Merger
dated August 15, 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 August 18, 1997 and
Exhibit 2.1 of the
Registrant's Registration
Statement on Form S-4 File No.
333-35905).
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).
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.
On August 18, 1997, First Charter Corporation
filed a current report on Form 8-K, reporting
pursuant to Item 5 thereof the Agreement and Plan
of Merger dated August 15, 1997 entered into
between First Charter Corporation and Carolina
State Bank.
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: November 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