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EXHIBIT 13.1
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ANNUAL REPORT 1999
EXPECT MORE FROM US
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FIRST CHARTER
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TABLE OF CONTENTS
Financial Highlights. . . . . . . . . . . . . . . . . . . . . 1
Letter to our Shareholders. . . . . . . . . . . . . . . . . . 2 - 6
First Charter At A Glance . . . . . . . . . . . . . . . . . . 7
Business Line Review. . . . . . . . . . . . . . . . . . . . . 8 - 13
Strategic Expansion . . . . . . . . . . . . . . . . . . . . . 14 - 15
Community Commitment. . . . . . . . . . . . . . . . . . . . . 16
Financial Information . . . . . . . . . . . . . . . . . . . . 17 - 61
Officers & Directors. . . . . . . . . . . . . . . . . . . . . 62 - 63
Board of Directors. . . . . . . . . . . . . . . . . . . . . . 62
Corporate Information . . . . . . . . . . . . . . . . . . . . 64
Operating Team. . . . . . . . . . . . . . . . . . . . . . . . 65
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[MAP OF CFBI and FCTR COMBINED FRANCHISE]
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CORPORATE PROFILE
First Charter Corporation is the holding company for First Charter National
Bank. Headquartered in Concord, NC, First Charter has served the financial needs
of businesses and individuals in the Charlotte metropolitan region for 112
years. Common stock for First Charter is traded under the symbol "FCTR" on the
NASDAQ National Market.
FIRST CHARTER
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FIRST CHARTER CORPORATION AND SUBSIDIARIES
SELECTED CONSOLIDATED FINANCIAL DATA
The following table sets forth certain selected consolidated financial data
concerning First Charter Corporation (the "Corporation") for the five years
ended December 31, 1999. All financial data has been adjusted to reflect the
acquisition of Bank of Union in 1995, the acquisition of Carolina State Bank in
1997 and the acquisition of HFNC Financial Corp. in 1998, each of which was
accounted for as a pooling of interests. Additionally, all per share data has
been retroactively adjusted to reflect a 6-for-5 stock split declared in the
second quarter of 1997. This information should be read in conjunction with the
Management's Discussion and Analysis of Financial Condition and Results of
Operations appearing elsewhere in this report, and is qualified in its entirety
by reference to the more detailed consolidated financial statements of the
Corporation and notes thereto.
Years ended December 31,
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(Dollars in thousands, except per share amounts) 1999 1998 1997 1996 1995
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INCOME STATEMENT DATA:
Interest income............................... $ 136,717 $ 136,509 $ 123,130 $ 116,371 $ 98,209
Interest expense.............................. 67,269 70,623 62,827 57,416 47,844
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Net interest income........................... 69,448 65,886 60,303 58,955 50,365
Provision for loan losses..................... 3,350 2,376 2,684 1,481 2,328
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Net interest income after provision for
loan losses............................... 66,098 63,510 57,619 57,474 48,037
Noninterest income............................ 18,213 13,650 15,082 8,156 7,125
Noninterest expense (2)....................... 45,869 59,166 42,765 39,169 31,817
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Income before income taxes.................... 38,442 17,994 29,936 26,461 23,345
Income taxes.................................. 12,350 8,758 10,765 9,028 7,467
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Net income.................................... $ 26,092 $ 9,236 $ 19,171 $ 17,433 $ 15,878
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PER SHARE DATA:
Basic net income.............................. $ 1.45 0.51 1.06 0.95 0.95
Diluted net income............................ 1.45 0.50 1.03 0.94 0.94
Cash dividends declared (1)................... 0.68 0.61 0.53 0.50 0.43
Period-end book value......................... 12.96 13.34 12.79 12.25 7.08
BALANCE SHEET DATA (AT PERIOD END):
Securities available for sale................. $ 342,136 $ 331,799 $ 315,565 $ 325,825 $399,694
Investment securities......................... -- -- -- 13,940 8,959
Loans, net.................................... 1,408,953 1,406,967 1,246,228 1,108,311 913,892
Allowance for loan losses..................... 17,339 15,554 15,263 14,140 13,552
Total assets.................................. 1,894,317 1,864,357 1,672,641 1,573,177 1,415,368
Deposits...................................... 1,149,512 1,123,035 1,059,262 1,013,696 964,005
Borrowed funds................................ 491,976 469,944 350,079 309,895 124,714
Total liabilities............................. 1,666,605 1,618,385 1,428,732 1,340,396 1,104,293
Total shareholders' equity.................... 227,712 245,972 243,909 232,781 311,075
RATIOS:
Net income to average shareholders' equity (2) 11.34% 3.68% 7.47% 6.20% 7.44%
Net income to average total assets (2)........ 1.43 0.52 1.21 1.16 1.34
Net interest income to average earning assets
(tax equivalent).......................... 4.21 4.07 4.12 4.23 4.34
Average loans to average deposits............. 123.74 128.35 107.89 104.68 86.33
Net loans charged off during period
to average loans.......................... 0.09 0.15 0.16 0.09 0.23
(1) First Charter Corporation historical cash dividends declared.
(2) Noninterest expense for the years ended 1998, 1997 and 1995 include pretax
merger related expenses of $18,192, $3,356 and $1,062, respectively.
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SHAREHOLDER LETTER
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DEAR FELLOW SHAREHOLDERS:
1999 was a year of expecting more and achieving more than we had imagined. We
expanded our geographic reach, broadened our service offerings, strengthened our
financial performance, significantly grew our core loans and deposits, completed
our largest acquisition and launched an intensive company-wide service quality
initiative.
The introduction of "Expect More from Us" in early 1999 as our brand advertising
signature verbalized the daily commitment each First Charter team member has to
exceeding the expectations of each other, our customers, our shareholders and
our communities. Far beyond its use in our advertising efforts, "Expect More
from Us" is what makes us different.
THE RHYTHM OF LEADERSHIP
A corporate-wide commitment to "expecting more" enables every employee to be a
leader, which is central to transforming our work force into an interdependent,
internally motivated, enthusiastic team. At First Charter, leadership is a
consistent, powerful rhythm throughout the entire organization.
In the last two years, First Charter has endeavored not only to grow its
geographic reach, but also to broaden the array of services offered to
customers. By doing so, we have entered into a new arena of highly competitive
markets and dynamic change. As Group Executive for Service and Chief Financial
Officer, Robert O. Bratton has helped steer First Charter through more than 25
years of growth and change. Although Bob and I have 40 years of First Charter
experience between us, we realized that to meet the challenges of the future
growth would require the broadening of our executive leadership team.
Robert E. James, Jr., joined the executive management team in 1999 as the Group
Executive for Sales and Marketing. Drawing on more than 26 years of financial
services experience at Centura Bank, Bob is focusing his team on a proactive
approach to service and sales. With the addition of more experienced,
specialized sales teams and the development of new products, our sales efforts
can reach a broader customer base with more customized solutions.
Realizing that our growth and geographic expansion brings many infrastructure
challenges, we brought C. Thomas McFarland on board as Group Executive for
Technology and Operations. Challenged with keeping us technologically
competitive and integrating acquired institutions, Tom brings 19 years of
organizational experience with BB&T.
Most recently, Stephen M. Rownd joined the team as Group Executive and Chief
Credit Officer bringing us almost 20 years of experience in the financial
services industry, most recently at SunTrust. Consistent with our commitment
to strong financial performance, Steve will focus on energizing our lending
culture by strengthening our loan quality and improving our lending excellence.
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[PHOTO]
We also strengthened our business line and staff management teams. In addition
to our existing seasoned team members, we hired proven managers in retail sales,
commercial sales, mortgage services, insurance, audit, compliance, brokerage and
financial management.
Challenged to inspire leadership throughout every aspect of our business, all of
our senior managers participate in an intensive leadership development process
that focuses on creating a better understanding of their individual styles of
leadership. By committing themselves to nurturing and empowering employees on a
daily basis, our managers are creating a leadership model that strengthens our
ability to respond quickly and surely to changes in the marketplace and
capitalizes on the many talents of our First Charter team.
STRATEGIC FOCUS
Leadership is the fuel that propels us toward our strategic focus: First Charter
will be the First Choice for Financial Services by our Customers. To achieve our
"first choice" goal, we must offer a full spectrum of financial services and
deliver these services efficiently and proactively in an environment committed
to the highest standards of service quality. The following strategic initiatives
are critical to our becoming the "first choice for financial services."
CONTINUING COMMITMENT
TO UNPARALLELED SERVICE
As financial services become more of a commodity, the differentiating factor
among competitors is service quality. Throughout our 112-year history,
delivering exceptional service to our customers has been the cornerstone of our
competitive advantage. Nevertheless, in 1999, while competing banks were
deemphasizing the value of face-to-face customer service First Charter launched
an intensive, company-wide service quality initiative designed to raise our
service from exceptional to extraordinary.
We began by surveying more than 12,000 retail and commercial customers
regarding their experience with service at First Charter. We received
overwhelmingly high marks in several critical areas, confirming our belief that
we consistently deliver outstanding customer service every day. More than 70
percent of our customers stated that they were "very satisfied" with the service
they receive at First Charter, which was significantly better than our major
competitors.
With these leading scores as our starting point, we launched a company-wide
service quality training program. From the Chief Executive, to tellers, to our
internal audit staff, every First Charter employee received intensive training
in effective customer relations. The training was accomplished in just 90 days.
Going forward, each new employee will complete this course during his or her
first three months at First Charter.
In 2000, service quality will continue to be at the core of our competitive
advantage. Service improvement initiatives are ongoing at First Charter.
Cross-functional action teams have been chartered to improve our performance in
several areas, including problem resolution and customer communication. We
believe the best time to improve service is when you are providing great service
already.
FOSTERING AN ENERGETIC AND
PROACTIVE SALES CULTURE
The sales culture at First Charter is empowered by our commitment to service.
First Charter approaches every customer interaction with a service mindset,
exploring all options thoroughly, and offering each customer a well-planned
solution. We believe that the path to a successful sale begins with good
service.
In 1999, we strengthened our commercial and retail sales teams by hiring
seasoned professionals with exceptional sales records and sophisticated levels
of sales experience. In 2000, we will expand and strengthen the skills of our
entire sales force through an intensive development program we call ExSEL.
Standing for "Extraordinary Sales, Exceptional Leadership," the program
capitalizes on our strong commitment to service and the "Expect More from Us"
tradition. Developed through a partnership with Cohen Brown, a leading sales
training company, ExSEL will be fully implemented in all sales divisions before
the end of the year.
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SHAREHOLDER LETTER
DEVELOPING AND INTEGRATING
TECHNOLOGICAL ADVANCES
First Charter is constantly evaluating and implementing new technologies to
better serve our customers and to operate more efficiently. One trend that we
have embraced is the increasing use of digital technology. In 1999, we
strengthened our digital infrastructure, which improves our support functions
and prepares the way for a number of new computer-based products and services in
2000, like internet banking. In addition, all employees will be able to send and
receive email via the internet, which will enhance our effectiveness in
communicating with our external service providers.
In 2000 we will be upgrading our core computer system to a high-tech financial
operating system that will smoothly accommodate our growth and facilitate the
expansion of our product offerings. Along with this change, we will be
implementing a new telecommunications system throughout our financial centers to
make our voice mail system easier to use and more customer-friendly.
The introduction of a new mobile work force solution will enable our sales team
and telecommuting employees to have full access to all relevant First Charter
systems anytime and anywhere. So, whether they are with a customer or traveling
on business, our employees can have 24-hour access to essential information.
Technology will take center stage in the first quarter of 2001 when we open the
First Charter Center. Featuring the latest in computer and telephonic systems,
the state-of-the-art facility will seamlessly integrate many facets of our work
force.
As most of the world breathed a sigh of relief at midnight on Dec. 31, 1999, we
realized that our Y2K preparedness efforts yielded an unexpected bonus. TEAM
2000 touched virtually everyone in the company at one point or another, and
required energetic commitment, exceptional organization and company-wide
teamwork. Successfully meeting the Y2K challenge taught us new ways to be more
responsive and efficient by improving many processes and procedures, including
software, systems, communications and crisis planning.
CREATING NEW MARKETS THROUGH CAREFULLY
MANAGED EXPANSION
First Charter has an aggressive, strategically sound growth strategy. 1999 saw
the smooth integration of HFNC Financial Corporation, the holding company for
Home Federal Savings and Loan Association. The integration was so successful
that one of the former Home Federal financial centers led the company in our
most recent sales campaign.
In November 1999 we entered into a definitive agreement to acquire Carolina
First Bancshares, Inc. This acquisition will effectively expand our reach in the
western regions of the state. Carolina First BancShares operates 31 full service
financial centers spanning 12 counties. Strengthening our presence in several
attractive, high growth markets, such as Lincolnton and Mooresville, enables us
to deliver our products and services to an expanded customer base, continue our
strong earnings growth and create greater value for our customers and
shareholders.
First Charter Insurance Services also expanded into new markets and broadened
its customer base through the acquisition of five strong insurance agencies in
the last 14 months. First Charter Insurance Services now operates offices in
Charlotte, Huntersville, Monroe and Shelby.
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DEEPENING OUR MARKET REACH BY IMPROVING MARKET AWARENESS
1999 brought new milestones in marketing and advertising. We created and
launched an integrated brand advertising campaign, effectively communicating our
"Expect More from Us" commitment and increasing awareness of First Charter
throughout our markets. Using a carefully blended mix of television, newspaper,
direct mail and radio, we targeted new and existing customers and encouraged
them to find out how First Charter could help them achieve their financial
dreams.
In 2000, we will continue to raise awareness of First Charter, constantly
differentiating ourselves through our commitment to service quality and always
giving more than the customer expects.
A key element to our success will be the effective use of information about our
marketplace. In 2000, we will begin development of an enterprise-wide customer
information system designed to gain more insight into customer needs and
experiences, subsequently enabling us to deliver more customized products and
services.
CONSISTENTLY DELIVERING STRONG FINANCIAL PERFORMANCE
1999 proved to be a year of opportunity and marked success in the financial
performance of First Charter. We achieved strong revenue increases in our
commercial loan, financial management, brokerage and insurance business lines.
The leadership of First Charter believes that our operating results are
demonstrated more clearly by measuring recurring net income, which principally
excludes nonrecurring items such as the effect of costs associated with the
completion of mergers and acquisitions, and other times. Recurring net income
for the year ended December 31, 1999 amounted to $23.8 million, or $1.32 per
diluted share, compared to recurring net income of $22.0 million, or $1.19 per
diluted share for the same period in 1998, an increase of 8.0 percent.
Consistent with our determination to build maximum value for our shareholders,
the Board of Directors approved a stock repurchase plan in April 1999, through
which 994,148 shares were acquired. We believe that our stock continues to be an
attractive investment with the potential for continued long-term growth.
Net interest income for the year ended December 31, 1999
increased 5.4 percent to $69.4 million, compared to $65.9 million in the
comparable period in 1998. This increase was driven primarily by decreases in
the cost of funding. Noninterest income for the year ended December 31, 1999
totaled $18.2 million compared to $13.7 million for the same period in 1998, an
increase of 33.4 percent. For comparative purposes, the 1999 results include
total gains of $3.5 million from the sales of property and mortgage loans, while
the 1998 results included total gains of $2.4 million from the sale of
securities and the sale of First Charter's merchant card program. Excluding
these items, noninterest income increased 30.1 percent for the year ended
December 31, 1999 compared to the same period in 1998.
Noninterest expense for the year ended December 31, 1999 totaled $45.9 million
compared to $59.2 million for the same period in 1998. For comparative purposes,
the 1998 results included merger costs associated with the acquisition of HFNC
Financial Corp. totaling $18.2 million. Excluding the merger costs, noninterest
expense for the year ended December 31, 1999 increased 12.0 percent compared to
the same period in 1998.
Net loans at December 31, 1999 amounted to $1.4 billion. Although this amount is
unchanged from prior periods, it also includes the sale of more than $147
million of 30 year fixed rate mortgages in April 1999. Our goal was to replace a
large amount of fixed rate, inflexible assets with variable rate assets during
this period of rising interest rates. We accomplished that goal by growing our
commercial loan portfolio by $182 million in 1999.
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SHAREHOLDER LETTER
At the end of 1999, total shareholders' equity was $227.7 million, which
represents a period end equity-to-assets ratio of 12.0 percent. Based on the
$14.875 closing price of First Charter Corporation common stock at December 31,
1999, the Corporation had a market capitalization of $261.4 million.
We are committed to being a high performing institution. The three financial
strategies of 1999 that will continue into 2000 are: (1) aggressively grow loans
and deposits; (2) continue to improve the strength of our balance sheet; and,
(3) increase non-interest fee income from a variety of sources, including
brokerage services, asset management and insurance services.
MAINTAINING OUR COMMITMENT TO COMMUNITY
One of our core beliefs is that good business begins in the communities we
serve. Knowing that one good act can create an endless ripple effect of benefits
for our customers and the community, we adhere to a local market management
philosophy: No matter how we grow, we are committed to investing in the
communities in which we are privileged to serve.
Throughout this report you will find stories about First Charter employees whose
daily commitment to "Expect More from Us" permeates everything they do. Whether
it's spending extra time with a customer to make sure the absolutely best
solution is found, or giving their time and energy to the communities in which
they live, First Charter employees are committed to being involved, helping
people as best they can. We believe it's good business to empower and support
every employee in their endeavors to be leaders in their jobs, their communities
and their families, so that they can, in turn, better support our customers in
their endeavors.
THE FUTURE OF LEADERSHIP
Looking to the years ahead at First Charter, I am confident in the abilities and
character of our leadership team. Moreover, every employee at First Charter will
be encouraged to take a leadership role in fulfilling our commitment to
shareholders, customers, and our communities. I believe our future is in good
hands and that you can always "Expect More from Us".
Sincerely,
/S/ Lawrence M. Kimbrough
Lawrence M. Kimbrough
President & Chief Executive Officer
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FIRST CHARTER AT A GLANCE
FIRST CHARGER STRATEGIC FOCUS:
To be the First Choice for Financial Services by our Customers through the
efficient and convenient delivery of a wide array of financial services with the
best service quality in the market.
CORE OPERATING STRATEGIES
- Continuing commitment to unparalleled service
- Fostering an energetic and proactive sales culture
- Developing and integrating technological advances
- Creating new markets through carefully managed expansion
- Deepening our market reach by improving market awareness
- Consistently delivering strong financial performance
- Maintaining our commitment to community
PRODUCT ARRAY
BANKING SERVICES
CONSUMER COMMERCIAL
Deposits: Checking, Savings, Deposits: Checking, Savings,
CDs & Money Markets CDs & Money Markets
Installment Loans Loans & Lines of Credit
Credit Cards Cash Sweep Accounts
Mortgages & Real Estate Loans
Home Equity Loans
FINANCIAL SERVICES
CONSUMER COMMERCIAL
Trust & Investment Management Retirement Plan Services
Mutual Funds Cash Management
Discount & Full-Service Brokerage Merchant Processing
Financial Planning Asset Based Lending
Insurance: Property, Casualty, Insurance: Property, Casualty,
Homeowners & Life Life & Group Health
COMMERCIAL LOANS
(in millions)
[GRAPH]
NET REVENUE
(in millions)
[GRAPH]
DEPOSITS
(in millions)
[GRAPH]
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BUSINESS LINE REVIEW
The thriving Charlotte metropolitan region has more than 1.6 million potential
retail customers and more than 15,000 small to medium-sized businesses. The
projected total population growth for 1998 - 2003 for the First Charter markets
is a compelling 8.51 percent, compared with 7.17 percent for North Carolina and
4.26 for the United States. This is the dynamic and high growth market before
us, and our strategic focus for this attractive landscape of opportunity is to
become the First Choice for Financial Services by our Customers.
BUILDING THE FOUNDATION FOR GROWTH
In 1995, First Charter was a community bank intent on accomplishing what no
other financial institution of our size was successfully doing - transforming
itself into a high-performance, comprehensive financial services company without
losing our sense of community. We realized that achieving this goal would take
geographic expansion, solid financial health, pro-active sales, the addition of
new products, services and technologies, and an unwavering commitment to
customer service. Most importantly, we recognized the need to strengthen and
broaden the leadership of First Charter. The company we were creating required
us not only to further develop the skills of the existing managers, but also to
recruit several additional executives needed to help us grow.
Over the years First Charter has built a strong reputation and an extraordinary
level of trust among its customers for banking services. However, many of our
customers also needed additional financial services, such as insurance or
investments, which were often scattered among a variety of providers. Seeing an
opportunity to create a convenient, comprehensive solution, we expanded our
business lines, adding brokerage and insurance. Through a solutions-driven,
internal referral program, we are able to offer customers a seamlessly
integrated array of financial services that can be accessed conveniently in
person, by phone, through our growing ATM network, and via the internet.
TOTAL ASSETS
(in millions)
[GRAPH]
DIVIDENDS
[GRAPH]
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BECOMING THE FIRST CHOICE
Today, First Charter is more than a community bank - we are an integrated
financial services company with a strong, active commitment to the communities
we serve.
We expect to reach our goal of becoming the "First Choice for Financial
Services" because we are successfully integrating our service ideals with:
- - Pro-Active, Cross-Selling Sales Culture. First Charter will never sell
customers products they do not need. However, our goal is to sell them
every dollar's worth of products they do need.
Our sales team does not want any customer to "ask" for a product. The
team is dedicated to developing an understanding of a customer's needs
and proactively suggesting products that meet those needs. ExSEL, our
new sales training and leadership program, is designed to improve the
consultative sales skills of our already energetic sales force.
- - Management and Team Specialization. By developing experienced and
knowledgeable managers throughout the organization and letting them
create highly trained employee teams, we can increase our ability to
know our customers and deliver more customized products and services
to them.
- - Investment in Technology. By improving our digital infrastructure, we
can support more efficient internal processes and deliver better
products to our customers. The introduction of mobile technology
solutions for our sales team will enable us to provide
up-to-the-minute information in a customer's office or when traveling.
New telecommunications and email enhancements allow us to better
communicate with internal and external audiences, providing even more
responsive service.
[PHOTO]
Carolyn Fritzsche's passion is to make a positive impact on people's lives. As
a Help Desk Specialist in Technical Services, she loves her job. She can be
found always working to resolve a computer issue promptly and easily, or
training new employees on the First Charter office system.
As a member of her community, she is impacting lives through her love of
running. In the last five years, Carolyn has run nine marathons to benefit
charities that are close to her heart, including the Run for Peace, which
benefits a local battered women's shelter and a family crisis center. She has
also run several times in the Race for the Cure, which benefits the Leukemia
Society.
Despite her hectic training schedule and full-time position, Carolyn is also
dedicated to helping those in her professional field. This year she will begin
teaching a night class in office systems at a local community college.
"Marathons and education are very similar - they both require strength,
commitment, endurance and most of all passion. My passion is to help others
achieve their dreams - whether it's a cure for cancer or a college degree," she
said.
"Leadership requires genuine concern
for others and a commitment to
delivering more than what's required."
Robert O. Bratton
Group Executive for Service and CFO
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BUSINESS REVIEW
RETAIL FINANCIAL SERVICES
The First Charter Retail Financial Services Division finished 1999 with new
leadership by industry veteran Richard A. Manley and eight financial center
manager additions. The division had its most successful home equity sales
campaign in history, generating more than $23 million in new lines in just two
months.
Enhancements to the First Charter call center in 1999 will continue into
2000, including the implementation of our pro-active sales program. Our goal is
to transform the call center from an in-bound-only customer service center to a
profit center. Experienced customer relationship representatives will contact
existing customers, help them evaluate their needs, and offer them solutions
that fit their lifestyle and financial situation.
Among the new services created in 1999 was Professional and Executive Banking.
This program is designed to provide sophisticated financial services for those
affluent business owners and professionals who have more complex financial
needs and require a higher level of expertise.
In 2000, First Charter will continue the technological enhancements needed to
offer additional service options for our customers, such as Internet banking.
MORTGAGE SERVICES
In 1999, Richard H. Lester joined First Charter to lead our dynamic Mortgage
Services Division. We are transforming from a portfolio lender to a secondary
market origination source. By rearranging the workflow process to the point
where flexibility for the customer is paramount, the customer can now choose
from almost 40 different loan program options, and a credit decision can be made
in a matter of hours. First Charter also began offering a newly enhanced
construction/perm loan in 1999, giving customers a single closing.
The division launched a customer satisfaction tracking process. The results of
the benchmark survey were exceptional, with 93 percent of customers saying that
they would use First Charter Mortgage Services again. Future survey results
will be used to improve the mortgage application process and develop new
services.
When First Charter opens a new financial center, our primary goal is to become
immersed in that community. We operate not only as a natural part of the
business environment, but also as a good corporate citizen, helping businesses
and individuals achieve their financial dreams.
Sharon Hanson joined the First Charter team in 1998 as Financial Center Manager
for our new Mint Hill location. When she joined First Charter, the financial
center only had about four customers per day in the drive thru. Today, more
than 700 customers use the drive thru every week. Deposits and loan growth have
set records and new customers are added weekly.
The Mint Hill team is actively involved in the local business association and
participates in a number of community activities. Sharon and her team organize
food drives three or four times a year to help those less fortunate in the
community. They also developed an educational and savings account program for
more than 100 elementary and secondary students to teach them the importance of
sound financial management.
"Our main goal is to make our customers and our community feel like family,"
Sharon said. "The success of this financial center isn't just mine - it really
belongs to my team. Most importantly, it is the community's success."
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"A real leader practices leadership every day
- - at work, at home and in the community."
Robert G. Fox, Jr.
Executive Vice President
and Senior Lending Officer
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A number of new mortgage services are planned for 2000, including online
mortgage applications and approvals over the Internet. Later in the year, the
First Charter website will offer mortgage calculators and links to other useful
sites. Our investment in a new mortgage origination system will enable First
Charter to offer instant point of sale approvals in many of our financial
centers.
COMMERCIAL FINANCIAL SERVICES
The Commercial Sales Division grew significantly in 1999, closing $391 million
in new loans and earning more than $1.8 million in fee income related to
commercial lending. Sound lending decisions continue to be the bedrock of our
performance.
Darren Radson, the division's leader, joined First Charter in 1998 and added
six commercial relationship officers to his team in 1999. Based on a philosophy
of responsiveness and flexibility, the enhanced sales force prides itself on
providing customized solutions with speed and accuracy. The Commercial Sales
Division successfully penetrated the Charlotte market in 1999. Targeted growth
in North Mecklenburg, Cleveland, Cabarrus and Union counties will be enhanced
in 2000 with the addition of the commercial sales force from Carolina First
Bancshares, Inc.
Robert G. Fox, Jr., Executive Vice President and Senior Lending Officer, has
created a team of seasoned specialists who will focus on our large corporate
relationships, correspondent banking and real estate lending.
In 1999 the division began offering a sophisticated, yet flexible, cash
management service, which allowed the sales team to target new customers with
complex cash management needs.
In 2000, First Charter will introduce a new auto borrow feature on sweep
accounts, enabling our sophisticated commercial customers to apply excess funds
more effectively.
BROKERAGE SERVICES
Led by industry veteran Phillip Floyd, First Charter Brokerage Services
experienced a 42 percent increase in revenues over 1998, primarily due to
several very successful promotions and the implementation of effective
cross-selling techniques throughout the retail financial centers.
The subsidiary offers both full service and discount brokerage services. In an
effort to deliver investment services to a broader segment of our customer
base, First Charter will be adding investment counselors to many of our
financial centers, launching a new Series 6 platform program, and expanding the
Series 7 platform.
[PHOTO]
One of the reasons First Charter is able to deliver prompt and efficient service
to customers is because of our employees' emphasis on providing the same level
of superior service to each other.
As a Senior Business Analyst for all voice communications at First Charter, Juan
King interacts with every department and location within the Company. Whether
it's getting a new financial center's communication system up and running in
time to serve customers, or working with a fellow employee on the phone to
resolve a complicated system error, Juan's motto is, "no problem," and he is not
happy until the person he is trying to help is satisfied.
But his commitment to helping others doesn't stop at work. Far from his high
tech position at First Charter, Juan is also helping people find hope at a
special care facility for elderly patients. Through a program with his church,
he regularly spends time with the patients, getting to know them, sharing
stories and listening to them talk about their lives.
"Sharing stories and listening to their words of wisdom is an honor to the
memory of my grandfather, who took the time to share with me," Juan said. "I
visit with the patients because I like to help them learn to smile again. I have
never expected anything in return from them, but seeing hope in their eyes gives
me more joy than they can ever know."
"Effective leadership transcends the local environment
and flows throughout the entire organization."
C. Thomas McFarland
Group Executive for
Technology and Operations
11
17
[PHOTO "DAVIDSON COLLEGE CREW TEAM"]
12
18
FINANCIAL MANAGEMENT GROUP
Revenues from trust services grew 15 percent in 1999 to their highest level in
First Charter history. With more than $380 million in assets under management,
the Financial Management Group, also led by Phillip M. Floyd, expanded its
geographic reach into Charlotte by taking advantage of the newly acquired Home
Federal customer base.
The introduction of two new services in 1999 significantly strengthened our
capabilities. First Charter introduced a new generation of 401(k) plans with
the unveiling of its daily valuation option, which allows the customer to have
access to their investment accounts via the Internet. The daily valuation
401(k) plan also offers multiple mutual fund families, allowing a variety of
investment choices per account. In 1999,the division also enhanced its custom
portfolio services, offering customers even greater flexibility when investing
in individual securities.
With the addition of the Carolina First BancShares markets in 2000, First
Charter will have the opportunity to cross-sell financial management trust
services to many new customers.
INSURANCE SERVICES
In its first full year of operation, First Charter Insurance Services turned in
a strong performance, acquiring and integrating five insurance agencies and
exceeding their revenue and expense goals. The efforts were spearheaded by
Clarkson B. McLean, who joined First Charter in 1998 with 25 years of industry
experience.
In 1999, First Charter Insurance Services also expanded its Huntersville agency
and enhanced its agency management system to provide better service and improve
productivity and efficiency levels.
In 2000, First Charter Insurance Services will expand its product offerings and
continue to target books of business and agencies for potential acquisition.
[PHOTO]
Heavy snow days in the Charlotte region are rare. People that actually brave the
elements to get to work on a snow day are even more uncommon, especially when
the office is officially closed.
Knowing that severely inclement weather can be a common cause of serious house
damage and other claims, Joe Trull, the First Charter Insurance Services
personal lines manager, decided to try to get to the office to help customers
anyway...in his convertible.
Amazingly enough he made it into the office. He immediately began to take calls
that were flooding in from anxious customers. One customer had just endured the
trauma of a serious house fire, which had left his home demolished and
unlivable. Joe tracked down all the necessary parties, including the adjuster
who had also been unable to get to work, and helped arrange for temporary
accommodations for the homeowner.
Without Joe's dedicated sense of leadership and "Expect More from Me" attitude,
one of our valuable customers would have been left out in the cold one bitter
winter night, homeless and devastated.
"A true leader has an unwavering commitment to
service and the internal motivation to go beyond
the call of duty."
Kathleen M. Harris
Senior Vice President for Strategic Initiatives
13
19
STRATEGIC EXPANSION
FIRST CHARTER WELCOMES CAROLINA FIRST BANCHSARES
In a competitive environment where mergers may fail to fulfill expectations,
First Charter has been successful in smoothly integrating acquisitions that have
expanded its geographic reach, broadened its customer base and enhanced its
value for shareholders.
In November 1999,First Charter entered into a definitive merger agreement with
Carolina First BancShares, Inc., the parent company of Lincoln Bank, Cabarrus
Bank and Community Bank & Trust. With similar operating philosophies and
business cultures, the joining of these two service-minded financial
institutions will provide First Charter with a number of significant strategic
advantages.
- - With 31 branch offices spanning a 12 county region, Carolina First
BancShares offers First Charter a solid springboard for growth and an
opportunity to meet customers' needs wherever they live, work and play.
Following the merger, these customers will have access to additional
products, including: insurance, brokerage, financial management and
sophisticated commercial banking services.
- - The strong financial performance and market share growth of Carolina
First BancShares will further strengthen the First Charter loan and
deposit portfolios and balance sheet.
- - Carolina First BancShares has a strong leadership team that offers
First Charter a wealth of experience and a commitment to excellence.
- - The outstanding reputation for quality service enjoyed by the Carolina
First BancShares family of banks is closely aligned with the strategic
focus of First Charter to be the First Choice for Financial Services by
our Customers.
- - With overlapping franchises, a number of synergies are expected once
the merger is completed. In addition, the larger critical mass of the
new combined organization will enable us to continue our investment in
personnel and technology.
- - The deep commitment of the Carolina First BancShares team to community
involvement and local market management is a natural fit with the First
Charter tradition of "Expect More from Us."
[PHOTO OF JAMES E. BURT, III, RONNIE D. BLANTON, JAN H. HOLLAR, JIM R. BEAM,
RONALD D. SMITH]
The Carolina First BancShares Executive Leadership Team
14
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"The merger with First Charter will give our customers a variety of benefits,
including a more extensive network of branches and ATMs, full service telephone
banking, and a broader array of financial services to meet their needs. We are
excited about the opportunities that will result from the merger of our two
companies and confident that our employees and shareholders will recognize the
advantages brought by First Charter's depth of management, commitment to
exceptional service quality and marketplace momentum."
James E. Burt, III
President and CEO
Carolina First BancShares
[PHOTO OF DAVIDSON COLLEGE CREW TEAM]
15
21
COMMITMENT TO COMMUNITY
OUR COMMUNITIES CAN EXPECT MORE FROM US
Community. It means more than a place to us. At First Charter, we adhere to a
local market management philosophy, which means no matter how we grow, we are
committed to investing in the communities in which we are privileged to serve.
For us, "investing" means more than financial contributions as a corporation. In
fact, many times it is the commitment our employees have to giving that extra
time, extra energy and an extra hand to a local charity or community
organization.
We believe that being involved in a community helps us better understand the
needs and dreams of the people in that community, and enables us to serve them
more effectively. "Expect More From Us" means bringing more than sound financial
solutions to businesses and individuals, it means working side-by-side with our
neighbors and friends to help make our communities healthier, stronger and safer
places to live and work.
[PHOTO]
On a very cold day, more than 200 First Charter employees and their family
members turned out for the recent Juvenile Diabetes Foundation annual
walk-a-thon to raise funds for a cure, forming a sea of red sweatshirts and
smiling faces.
16
22
INDEPENDENT AUDITORS' REPORT
The Board of Directors
First Charter Corporation
We have audited the accompanying consolidated balance sheets of First Charter
Corporation and subsidiaries (the "Company") as of December 31, 1999 and 1998,
and the related consolidated statements of income, shareholders' equity, and
cash flows for each of the years in the three-year period ended December 31,
1999. These consolidated financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of First Charter
Corporation and subsidiaries as of December 31, 1999 and 1998, and the results
of their operations and their cash flows for each of the years in the three-year
period ended December 31, 1999, in conformity with generally accepted accounting
principles.
KPMG LLP
Charlotte, North Carolina
January 18, 2000
17
23
FIRST CHARTER CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
December 31,
- --------------------------------------------------------------------------------------------------------
(Dollars in thousands) 1999 1998
- --------------------------------------------------------------------------------------------------------
ASSETS
Cash and due from banks...................................... $ 59,967 $ 41,884
Federal funds sold........................................... 665 6,402
Interest bearing bank deposits............................... 1,995 11,713
-----------------------------------
Cash and cash equivalents............................... 62,627 59,999
Securities available for sale, cost of $349,124 in 1999
and $321,357 in 1998.................................... 342,136 331,799
Loans........................................................ 1,426,495 1,422,676
Less: Unearned income................................... (203) (155)
Allowance for loan losses......................... (17,339) (15,554)
-----------------------------------
Loans, net.............................................. 1,408,953 1,406,967
-----------------------------------
Premises and equipment, net.................................. 43,592 30,603
Other assets................................................. 37,009 34,989
-----------------------------------
Total assets........................................ $ 1,894,317 $ 1,864,357
===================================
LIABILITIES AND SHAREHOLDERS' EQUITY Deposits, domestic:
Noninterest bearing demand.............................. $ 130,613 $ 119,519
Interest bearing........................................ 1,018,899 1,003,516
-----------------------------------
Total deposits...................................... 1,149,512 1,123,035
Other borrowings............................................. 491,976 469,944
Other liabilities............................................ 25,117 25,406
-----------------------------------
Total liabilities................................... $ 1,666,605 $ 1,618,385
===================================
Shareholders' equity:
Common stock - no par value; authorized: 50,000,000 shares;
issued and outstanding: 17,571,729 shares in 1999 and
18,442,202 shares in 1998............................... $ 99,905 $ 121,416
Retained earnings............................................ 132,053 118,078
Accumulated other comprehensive income:
Unrealized gains (losses) on securities available for
sale, net........................................... (4,246) 6,478
-----------------------------------
Total shareholders' equity.......................... 227,712 245,972
-----------------------------------
Total liabilities and shareholders' equity.......... $ 1,894,317 $ 1,864,357
===================================
See accompanying notes to consolidated financial statements.
18
24
FIRST CHARTER CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
Years Ended December 31,
- ---------------------------------------------------------------------------------------------------------------
(Dollars in thousands, except share and per share amounts) 1999 1998 1997
- ---------------------------------------------------------------------------------------------------------------
Interest income:
Loans................................................ $ 116,834 $ 116,376 $ 100,921
Federal funds sold................................... 129 1,026 1,012
Interest bearing bank deposits....................... 274 201 795
Securities available for sale........................ 19,480 18,906 19,581
Investment securities held to maturity............... -- -- 821
-------------------------------------------------
Total interest income............................ 136,717 136,509 123,130
-------------------------------------------------
Interest expense:
Deposits ............................................ 44,371 46,141 46,332
Federal funds purchased and securities
sold under agreements to repurchase.............. 1,571 6,957 7,689
Federal Home Loan Bank and other borrowings.......... 21,327 17,525 8,806
-------------------------------------------------
Total interest expense........................... 67,269 70,623 62,827
-------------------------------------------------
Net interest income..................... 69,448 65,886 60,303
Provision for loan losses................................. 3,350 2,376 2,684
-------------------------------------------------
Net interest income after provision for loan losses.. 66,098 63,510 57,619
-------------------------------------------------
Noninterest income:
Trust income......................................... 2,303 2,006 1,901
Service charges on deposit accounts.................. 4,929 4,320 4,116
Insurance and other commissions...................... 4,871 1,121 959
Securities available for sale transactions, net...... 1,158 2,222 5,694
Gain on sale of loans................................ 1,757 -- --
Gain on sale of properties........................... 1,752 -- --
Other................................................ 1,443 3,981 2,412
-------------------------------------------------
Total noninterest income......................... 18,213 13,650 15,082
-------------------------------------------------
Noninterest expense:
Salaries and fringe benefits......................... 24,057 22,904 21,721
Occupancy and equipment.............................. 7,570 6,205 5,436
Restructuring and merger-related costs............... -- 18,192 3,356
Other ............................................... 14,242 11,865 12,252
-------------------------------------------------
Total noninterest expense........................ 45,869 59,166 42,765
-------------------------------------------------
Income before income taxes ................. 38,442 17,994 29,936
Income taxes.............................................. 12,350 8,758 10,765
-------------------------------------------------
Net income....................................... $ 26,092 $ 9,236 $ 19,171
=================================================
Net income per share:
Basic............................................ $ 1.45 $ 0.51 $ 1.06
Diluted.......................................... $ 1.45 $ 0.50 $ 1.03
Weighted average shares:
Basic............................................ 17,985,960 18,273,281 18,154,131
Diluted.......................................... 18,053,064 18,571,805 18,697,448
See accompanying notes to consolidated financial statements.
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FIRST CHARTER CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
Unearned
ESOP and Accumulated
Common Stock Unvested Other
------------ Retained Restricted Comprehensive
(Dollars in thousands) Shares Amount Earnings Stock Income Total
- -----------------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 1996.................. 18,451,651 $ 139,050 $ 111,230 $ (23,138) $ 5,639 $232,781
Comprehensive income:
Net income for 1997..................... -- -- 19,171 -- -- 19,171
Unrealized gain on securities available
for sale, net......................... -- -- -- -- 1,249 1,249
Total comprehensive income......... 20,420
Cash dividends.............................. -- (78,918) (8,619) -- -- (87,537)
Purchase and retirement of common stock..... (64,118) (1,126) (194) -- -- (1,320)
Purchase of shares by ESOP and restricted
stock trust............................. -- -- -- (17,707) -- (17,707)
Shares released from ESOP and restricted
stock trusts............................ -- 332 -- 4,873 -- 5,205
Stock options exercised and Dividend
Reinvestment Plan stock issued.......... 69,560 1,263 17 -- -- 1,280
Pre-merger transactions of pooled bank...... 611,205 467 -- -- -- 467
Equity adjustment to conform fiscal periods. -- 78,644 (1,706) 14,738 (1,356) 90,320
-----------------------------------------------------------------------------------
Balance, December 31, 1997.................. 19,068,298 139,712 119,899 (21,234) 5,532 243,909
Comprehensive income:
Net income for 1998..................... -- -- 9,236 -- -- 9,236
Unrealized gain on securities available
for sale, net......................... -- -- -- -- 946 946
Total comprehensive income......... 10,182
Cash dividends ............................. -- -- (11,057) -- -- (11,057)
Purchase and retirement of common stock .... (759,650) (18,074) -- -- -- (18,074)
Shares released from ESOP and restricted
stock trusts............................ (51,072) (3,407) -- 21,234 -- 17,827
Shares issued for business acquisition...... 60,843 1,057 -- -- -- 1,057
Stock options exercised and Dividend
Reinvestment Plan stock issued.......... 123,783 2,128 -- -- -- 2,128
-----------------------------------------------------------------------------------
Balance, December 31, 1998.................. 18,442,202 121,416 118,078 -- 6,478 245,972
Comprehensive income:
Net income for 1999..................... -- -- 26,092 -- -- 26,092
Unrealized loss on securities available
for sale, net......................... -- -- -- -- (10,724) (10,724)
Total comprehensive income......... 15,368
Cash dividends ............................. -- -- (12,117) -- -- (12,117)
Shares issued for business acquisition...... 68,551 1,273 -- -- -- 1,273
Purchase and retirement of common stock..... (994,148) (23,388) -- -- -- (23,388)
Stock options exercised and Dividend
Reinvestment Plan stock issued.......... 55,124 604 -- -- -- 604
-----------------------------------------------------------------------------------
Balance, December 31, 1999.................. 17,571,729 $ 99,905 $ 132,053 $ -- $ (4,246) $227,712
===================================================================================
See accompanying notes to consolidated financial statements.
20
26
FIRST CHARTER CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended December 31,
- ---------------------------------------------------------------------------------------------------------------
(Dollars in thousands) 1999 1998 1997
- ---------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income................................................. $ 26,092 $ 9,236 $ 19,171
Adjustments to reconcile net income to net
cash provided by operating activities:
Provision for loan losses.............................. 3,350 2,376 2,684
Depreciation and amortization.......................... 4,237 3,167 2,611
Premium amortization, net.............................. 146 295 119
Net gain on securities available for sale transactions. (1,158) (2,222) (5,694)
Amortization of unearned stock compensation............ -- 17,827 5,205
Net gain on sale of other real estate.................. (597) (621) (104)
Net (gain) loss on sale of premises and equipment...... (1,777) 98 (12)
Origination of mortgage loans held for sale............ (55,911) (85,698) (11,843)
Proceeds from sale of mortgage loans held for sale..... 63,926 79,925 10,671
Decrease (increase) in other assets.................... 6,220 (8,027) (2,782)
Increase (decrease) in other liabilities............... (289) 6,015 2,665
---------------------------------------------
Net cash provided by operating activities.......... 44,239 22,371 22,691
---------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sales of securities available for sale....... 20,816 29,186 155,917
Proceeds from maturities and issuer calls of
investment securities held to maturity................. -- -- 1,500
Proceeds from maturities of securities available for sale.. 40,123 94,269 59,433
Purchase of investment securities held to maturity......... -- -- (1,813)
Purchase of securities available for sale.................. (87,692) (136,356) (113,673)
Net increase in loans...................................... (161,561) (160,978) (205,633)
Proceeds from sales of other real estate................... 3,692 4,919 1,655
Proceeds from sales of premises and equipment.............. 3,020 102 254
Proceeds from sale of loans................................ 144,855 -- --
Purchase of premises and equipment......................... (18,471) (8,879) (5,863)
---------------------------------------------
Net cash used by investing activities.................. (55,218) (177,737) (108,223)
---------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase in demand, money market, and savings accounts. 31,279 69,627 41,466
Net increase (decrease) in certificates of deposit......... (4,802) (5,854) 3,987
Net increase in securities sold under repurchase
agreements and other borrowings........................ 22,031 119,865 120,183
Purchase and retirement of common stock....................... (23,388) (18,074) (1,320)
Proceeds from issuance of common stock..................... 604 2,128 1,280
Pre-merger transactions of pooled bank..................... -- -- 467
Purchase of shares by ESOP and restricted stock trust...... -- -- (17,707)
Dividends paid............................................. (12,117) (11,057) (87,537)
---------------------------------------------
Net cash provided by financing activities.............. 13,607 156,635 60,819
---------------------------------------------
Net increase (decrease) in cash and cash equivalents... 2,628 1,269 (24,713)
Cash and cash equivalents at beginning of period....... 59,999 58,730 83,443
---------------------------------------------
Cash and cash equivalents at end of period............. $ 62,627 $ 59,999 $ 58,730
=============================================
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the year for:
Interest............................................... $ 65,413 $ 70,255 $ 58,159
=============================================
Income taxes........................................... $ 4,898 $ 11,079 $ 9,199
=============================================
SUPPLEMENTAL DISCLOSURE OF NON-CASH TRANSACTIONS:
Transfers of loans and premises and equipment
to other real estate owned............................. $ 3,354 $ 4,602 $ 3,445
=============================================
Investment securities transferred to available for sale
following business combination......................... $ -- $ -- $ 13,491
=============================================
Unrealized gain (loss) in value of securities available
for sale, net of taxes................................. $ (10,724) $ 946 $ 1,249
=============================================
Issuance of stock for business acquisition................. $ 1,273 $ 1,057 $ --
=============================================
See accompanying notes to consolidated financial statements.
21
27
FIRST CHARTER CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999, 1998 AND 1997
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The following is a description of the more significant accounting and
reporting policies which First Charter Corporation (the "Corporation") and its
subsidiary, First Charter National Bank ("FCNB" or the "Bank"), follow in
preparing and presenting their consolidated financial statements. The
consolidated financial statements have been prepared in conformity with
generally accepted accounting principles.
(a) Consolidation - The accompanying consolidated financial statements
include the accounts of the Corporation and its wholly-owned subsidiary, FCNB.
In addition, through its subsidiary First Charter Brokerage Services, the Bank
offers discount brokerage services, insurance and annuity sales and financial
planning services pursuant to a third party arrangement with UVEST Investment
Services. The Bank also operates three other subsidiaries: First Charter
Insurance Services, Inc., First Charter Realty Investment, Inc., and FCNB Real
Estate, Inc. First Charter Insurance Services, Inc. is a North Carolina
corporation formed to meet the insurance needs of businesses and individuals
throughout the Charlotte metropolitan area. First Charter Realty Investment,
Inc. is a Delaware corporation organized as a holding company for FCNB Real
Estate, Inc., a real estate investment trust organized in North Carolina. In
consolidation, all significant intercompany accounts and transactions have been
eliminated. Certain amounts reported in prior years have been reclassified to
conform with current year presentation. The reclassifications have no effect on
shareholders' equity or net income as previously reported.
(b) Business - The Bank, either directly or through its subsidiaries,
provides businesses and individuals a broad range of financial services,
including banking, comprehensive financial planning, funds management,
investments, insurance, mortgages and a full array of employee benefit programs.
The Bank is a regional financial services company with assets of $1.9 billion
operating 33 financial centers and 71 ATMs located in six counties throughout
the greater Charlotte metropolitan area.
(c) Securities - The Corporation classifies securities as trading,
available-for-sale or held-to-maturity based on management's intent at the date
of purchase. For all periods presented, all of the Corporation's securities are
categorized as available-for-sale and, accordingly, are reported at fair value,
based on quoted market prices, with any unrealized gains or losses, net of
taxes, reflected as an element of accumulated other comprehensive income. The
Corporation intends to hold these available-for-sale securities for an
indefinite period of time, but may sell them prior to maturity in response to
changes in interest rates, changes in prepayment risk, changes in the liquidity
needs of the Bank, and other factors. Securities on which there is an unrealized
loss that is deemed to be other-than-temporary are written down to fair value
with the write-down treated as a realized loss in the consolidated statement of
income.
Gains and losses on sales of securities are recognized when realized at
trade date on a specific identification basis. Premiums and discounts are
amortized into interest income using a level yield method.
(d) Loans - Loans are carried at their principal amount outstanding.
Interest income is recorded as earned on an accrual basis. The determination to
discontinue the accrual of interest is based on a review of each loan.
Generally, interest is discontinued on loans 90 days past due as to principal or
interest unless in management's opinion collection of both principal and
interest is assured by way of collateralization, guarantees or other security
and the loan is in the process of collection. Loans are returned to accrual
status when management determines, based on an evaluation of the underlying
collateral together with the borrower's payment record and financial condition,
that the borrower has the ability and intent to meet the contractual obligations
of the loan agreement.
Management considers a loan to be impaired when, based on current
information and events, it is probable that a creditor will be unable to collect
all amounts due according to contractual terms of the loan agreement. Factors
that influence management's judgment include, but are not limited to, loan
payment pattern, source of repayment, and value of collateral. A loan would not
be considered impaired if an insignificant delay in loan payment occurs and
management expects to collect all amounts due. The major sources for
identification of loans to be evaluated for
22
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impairment include past due and nonaccrual reports, internally generated lists
of loans of certain risk grades, and regulatory reports of examination.
The Corporation uses the allowance method to provide for loan losses.
Accordingly, all loan losses are charged to the allowance for loan losses and
all recoveries are credited to it. The provision for loan losses is based on
past loan loss experience and other factors which, in management's judgment,
deserve current recognition in estimating probable loan losses. Such other
factors considered by management include the growth and composition of the loan
portfolio, the relationship of the allowance for loan losses to outstanding
loans, and current economic conditions.
Allowances for loan losses related to loans that are identified as impaired
in accordance with the impairment policy set forth above are based on discounted
cash flows using the loans' initial interest rates or the fair value of the
collateral if the loans are collateral dependent. Large groups of
smaller-balance, homogenous loans that are collectively evaluated for impairment
(residential mortgage and consumer installment loans) are excluded from this
impairment evaluation and their allowance is calculated in accordance with the
allowance for loan losses policy discussed above.
Management considers the December 31, 1999 allowance for loan losses
adequate to cover inherent losses in the Bank's loan portfolio. Management
believes it has established the allowance in accordance with generally accepted
accounting principles and in consideration of the current economic environment.
While Management uses the best information available to make evaluations, future
additions to the allowance may be necessary based on changes in economic and
other conditions. Additionally, various regulatory agencies, as an integral part
of their examination process, periodically review the Banks' allowances for loan
losses. Such agencies may require the recognition of adjustments to the
allowance based on their judgments of information available to them at the time
of their examinations.
Mortgage loans held for sale are valued at the lower of cost or market as
determined by outstanding commitments from investors or current investor yield
requirements, calculated on an aggregate loan basis.
(e) Servicing Rights - Servicing rights are periodically evaluated for
impairment based on their fair value where fair value is estimated based on
market prices for similar assets and on the discounted estimated future value of
net cash flows based on market consensus loan prepayment estimates, historical
prepayment rates, interest rates and other economic factors. For purposes of
impairment evaluation, the servicing assets are stratified based on predominant
risk characteristics of the underlying loans, including loan type (conventional
or government), and note rate.
(f) Loan Fees and Costs - Nonrefundable loan fees and certain direct costs
associated with originating or acquiring loans are deferred and recognized over
the contractual life of the related loans as an adjustment to interest income.
(g) Premises and Equipment - Premises and equipment are stated at cost,
less accumulated depreciation. Depreciation and amortization of premises and
equipment are computed using the straight-line method over the estimated useful
lives. Useful lives range from three to ten years for furniture and equipment,
from fifteen to fifty years for buildings and over the terms of the respective
leases for leasehold improvements.
(h) Foreclosed Properties - Foreclosed properties are included in other
assets and represent real estate acquired through foreclosure or deed in lieu
thereof and are carried at the lower of cost or fair value, less estimated costs
to sell. Generally the fair values of such properties are evaluated annually and
the carrying value, if greater than the estimated fair value less costs to sell,
is adjusted with a charge to income.
(i) Income Taxes - Deferred tax assets and liabilities are recognized for
the future tax consequences attributable to differences between the financial
statement carrying amounts of existing assets and liabilities and their
respective tax bases. Deferred tax assets and liabilities are measured using the
enacted tax rates expected to apply to taxable income in the years in which
those temporary differences are expected to be recovered or settled. 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.
23
29
(j) Cash and Cash Equivalents - For purposes of reporting cash flows, cash
and cash equivalents include cash on hand, amounts due from banks and federal
funds sold. Generally, federal funds are sold for one-day periods.
(k) Net Income Per Share - Basic net income per share is computed by
dividing net income by the weighted average number of shares of common stock
outstanding for the year. Diluted net income per share reflects the potential
dilution that could occur if the Corporation's potential common stock and
contingently issuable shares, which consist of dilutive stock options and
restricted stock, were issued. Unallocated shares associated with an Employee
Stock Ownership Plan established by Home Federal (See Note 14) are excluded from
weighted average shares outstanding for purposes of computing basic and diluted
earnings per share. The numerators of the basic net income per share
computations are the same as the numerators of the diluted net income per share
computations for all periods presented. A reconciliation of the denominator of
the basic EPS computations to the denominator of the diluted EPS computations is
as follows:
Years Ended December 31,
---------------------------------------------------------
1999 1998 1997
---------------------------------------------------------
Basic EPS denominator - weighted average
number of common shares outstanding..... 17,985,960 18,273,281 18,154,131
Dilutive effect of assumed exercise of
stock options........................... 67,104 100,355 208,969
Dilutive effect of restricted stock assumed
to be issued............................ - 198,169 334,348
---------------------------------------------------------
Diluted EPS denominator....................... 18,053,064 18,571,805 18,697,448
=========================================================
(l) Dividends Per Share - Dividends declared by the Corporation were $0.68
per share, $0.61 per share and $0.53 per share for the years ended December 31,
1999, 1998 and 1997, respectively. Dividends declared by HFNC were $0.24 per
share and $5.28 per share for the years ended December 31, 1998 and 1997, as
adjusted to conform to the Corporation's December 31 fiscal year-end. Dividends
declared by HFNC in the year ended December 31, 1997 included a special
distribution of $5.00 per share to HFNC shareholders, substantially all of which
was deemed to represent a return of capital to shareholders.
(m) Stock-Based Compensation - The Corporation accounts for stock-based
compensation under the provisions of Accounting Principles Board Opinion No. 25.
The pro forma impact on net income and net income per share as if the fair value
of stock-based compensation plans had been recorded as a component of
compensation expense in the consolidated financial statements as of the date of
grant of awards related to such plans, pursuant to the provisions of the
Statement of Financial Accounting Standards No. 123 "Accounting for Stock Based
Compensation" is disclosed in Note 14.
(n) Comprehensive Income - Comprehensive income includes net income and all
non-owner changes to the Corporation's equity. The Corporation's only component
of other comprehensive income is the change in unrealized gains and losses on
available-for-sale securities.
The Corporation's total comprehensive income for the years ended December
31, 1999, 1998, and 1997 was $15,368,000, $10,182,000 and $20,420,000,
respectively. Information concerning the Corporation's other comprehensive
income for the years ended December 31, 1999, 1998, and 1997 is as follows:
24
30
(Dollars in thousands) Years Ended December 31,
-----------------------------------------
1999 1998 1997
-----------------------------------------
Unrealized holding gains (losses) arising
during the period $(15,340) $ 3,621 $ 7,615
Less: tax expense (benefit) on holding
gains (losses) arising during the period 5,369 (1,231) (2,665)
-----------------------------------------
(9,971) 2,390 4,950
-----------------------------------------
Less: reclassification adjustment for realized
gains included in net income............. 1,158 2,222 5,694
Less: tax expense on realized gains..... (405) (778) (1,993)
-----------------------------------------
753 1,444 3,701
-----------------------------------------
Other comprehensive income (loss)........... $(10,724) $ 946 $ 1,249
-----------------------------------------
(o) Segment Reporting - Prior to 1999, the Corporation had two reportable
segments: a bank and trust company (FCNB) and a savings and loan association
(Home Federal). FCNB offers a full array of financial services to business and
individual customers, with its loan products consisting predominately of
short-term business and individual loans. Home Federal had traditionally offered
a more limited group of loan and deposit products to individuals, consisting
primarily of mortgage loans and savings accounts. Home Federal was acquired
through the Company's merger with Home Federal's holding company, HFNC Financial
Corp., on September 30, 1998 (See Note 2), and was operated as a separate
entity. With the March 1999 completion of the integration of Home Federal into
FCNB, the Corporation ceased having two separate reportable segments. Therefore,
for 1999, the Corporation only has one reportable segment, FCNB.
During 1998 and 1997, the FCNB and Home Federal segments had no significant
intercompany transactions. Both segments operated within the greater Charlotte
metropolitan area, and the accounting policies of both segments were the same as
those described herein. The Corporation's chief operating decision maker
evaluated the segments separately based on earnings from interest earning
assets, the cost of interest bearing liabilities, noninterest sources of income
and expense, as well as total segment profitability.
Information regarding the reportable segments' separate results of
operations and segment assets is illustrated in the following tables:
1999
-----------------------------------------
(Dollars in thousands) FCNB OTHER(1) TOTALS
-----------------------------------------
Total interest income............................ $ 136,385 $ 332 $ 136,717
Total interest expense........................... 67,216 53 67,269
-----------------------------------------
Net interest income.............................. 69,169 279 69,448
Provision for loan losses........................ 3,350 - 3,350
Total noninterest income......................... 17,151 1,062 18,213
Total noninterest expense........................ 45,779 90 45,869
-----------------------------------------
Net income before income taxes................... 37,191 1,251 38,442
Income taxes..................................... 11,950 400 12,350
-----------------------------------------
Net income....................................... $ 25,241 $ 851 $ 26,092
=========================================
Total loans, net................................. $1,408,953 $ - $1,408,953
Total assets..................................... 1,874,931 19,386 1,894,317
25
31
1998
-----------------------------------------------------------
Home
(Dollars in thousands) FCNB Federal Other(1) Totals
-----------------------------------------------------------
Total interest income............................ $ 61,156 $ 75,004 $ 349 $ 136,509
Total interest expense........................... 26,707 43,852 64 70,623
-----------------------------------------------------------
Net interest income.............................. 34,449 31,152 285 65,886
Provision for loan losses........................ 2,300 76 - 2,376
Total noninterest income......................... 10,590 2,552 508 13,650
Total noninterest expense........................ 27,825 27,506 3,835 59,166
-----------------------------------------------------------
Net income before income taxes................... 14,914 6,122 (3,042) 17,994
Income taxes..................................... 4,318 4,845 (405) 8,758
-----------------------------------------------------------
Net income....................................... $ 10,596 $ 1,277 $ (2,637) $ 9,236
===========================================================
Total loans, net................................. $ 586,342 $ 820,625 $ - $ 1,406,967
Total assets..................................... 848,587 996,476 19,294 1,864,357
1997
-----------------------------------------------------------
Home
(Dollars in thousands) FCNB Federal Other(1) Totals
-----------------------------------------------------------
Total interest income............................ $ 55,869 $ 67,176 $ 85 $ 123,130
Total interest expense........................... 24,788 38,076 (37) 62,827
-----------------------------------------------------------
Net interest income.............................. 31,081 29,100 122 60,303
Provision for loan losses........................ 2,702 (18) - 2,684
Total noninterest income......................... 10,141 5,630 (689) 15,082
Total noninterest expense........................ 27,037 17,124 (1,396) 42,765
-----------------------------------------------------------
Net income before income taxes................... 11,483 17,624 829 29,936
Income taxes..................................... 3,660 6,855 250 10,765
-----------------------------------------------------------
Net income....................................... $ 7,823 $ 10,769 $ 579 $ 19,171
-----------------------------------------------------------
Total loans, net................................. $ 515,799 $ 730,429 $ - $ 1,246,228
Total assets..................................... $ 752,151 $ 910,947 $ 9,543 $ 1,672,641
(1) Included in "other" are revenues, expenses and assets of the parent
company.
(2) MERGERS
(a) Carolina First BancShares, Inc. The Corporation and Carolina First
BancShares, Inc. ("CFBI") entered into a definitive agreement and plan of merger
(the "Merger Agreement") dated as of November 7, 1999. As of December 31, 1999,
CFBI had total assets of $768.1 million. Under the terms of the agreement, CFBI
will be merged into the Corporation and each CFBI shareholder will receive 2.267
shares of the Corporation's common stock for each share of CFBI common stock.
Subject to certain conditions, including the approval of both companies'
shareholders and applicable regulatory authorities, the merger is expected to
close no later than the second quarter of 2000. The transaction is intended to
be tax-free to the shareholders of CFBI and will be accounted for as a
pooling-of-interests. As of December 31, 1999, the Corporation held 157,215
shares of CFBI representing 2.62% of CFBI outstanding stock. This investment is
reflected at a market value of $4.9 million which represents a $2.5 million
increase over cost.
(b) HFNC Financial Corp. On May 17, 1998, the Corporation entered into an
Agreement and Plan of Merger with HFNC, pursuant to which HFNC merged with and
into the Corporation (the "HFNC Merger"). On September 30, 1998, the Merger was
completed and was accounted for as a pooling of interests. Accordingly, all
current and prior periods' financial statements have been restated to combine
the accounts of HFNC with those of the corporation. The accompanying
consolidated financial statements have been restated to include the effects of
this merger for all periods presented. HFNC's fiscal period was conformed from
its June 30 year-end to the December 31 year-end of the Corporation for the
preparation of the 1998 and 1997 consolidated financial statements.
26
32
As of September 30, 1998, there were 16,949,000 shares of HFNC common stock
outstanding. Each share of HFNC common stock was converted into 0.57 shares of
the Corporation's common stock.
HFNC, a North Carolina corporation, was a unitary holding company organized
in August 1995 in connection with the conversion of Home Federal Savings and
Loan Association ("Home Federal") from mutual to stock form (the "Conversion").
The Conversion was effected on December 28, 1995, at which time Home Federal
converted to a federal stock savings and loan association and became a wholly
owned subsidiary of HFNC. Home Federal conducted its business from its main
office, eight branch offices, and a loan origination office, all located in
Mecklenburg County, North Carolina. During 1999, Home Federal was merged with
and into First Charter National Bank. At September 30, 1998, HFNC had total
consolidated assets of approximately $1.03 billion, total consolidated loans of
approximately $819.5 million, total consolidated deposits of approximately
$437.3 million, and total consolidated shareholders' equity of $174.2 million.
In the third quarter of 1998, the Corporation recognized approximately $17.6
million of costs associated with the acquisition of HFNC. The primary components
of these merger-related expenses were transaction and professional expenses and
various severance-related obligations. With the exception of certain accrued
retirement payments for former executives of HFNC, there are no remaining
accrued liabilities associated with these charges at December 31, 1999.
(c) Carolina State Bank. On August 15, 1997, the Corporation entered into
an Agreement and Plan of Merger with CSB, pursuant to which CSB merged with and
into FCNB (the "CSB Merger"). On December 22, 1997, the CSB Merger was completed
and was accounted for as a pooling of interests. As of December 22, 1997, there
were 1,663,992 shares of CSB common stock outstanding. Each share of CSB common
stock was converted into 1.023 shares of the Corporation's common stock.
CSB was a North Carolina-chartered commercial bank providing general
banking services through a network of four branch offices located in Shelby,
Kings Mountain, Boiling Springs and Forest City, North Carolina, which are now
branches of FCNB. At December 31, 1996, CSB had total assets of approximately
$133 million and total deposits of approximately $115 million. In the fourth
quarter of 1997, the Corporation recognized $3.4 million of costs associated
with the acquisition of CSB. The primary components of these merger-related
expenses were transaction and professional expenses and various
severance-related obligations.
(3) FINANCIAL STATEMENT PRESENTATION AND RELATED MATTERS
The preparation of the consolidated financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect reported amounts of assets and liabilities and
disclosure of contingent liabilities at the date of the financial statements, as
well as the amounts of income and expenses during the reporting period. Actual
results could differ from those estimates.
Reclassifications of certain amounts in the previously issued consolidated
financial statements have been made to conform to the financial statement
presentation for 1999. Such reclassifications had no effect on the net income or
shareholders' equity of the combined entity as previously reported.
(4) SECURITIES AVAILABLE FOR SALE
Securities available for sale at December 31, 1999 and 1998 are summarized
as follows:
1999
---------------------------------------------------------------
GROSS GROSS
(Dollars in thousands) AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
---------------------------------------------------------------
U.S. GOVERNMENT OBLIGATIONS...................... $ 6,003 $ 13 $ -- $ 6,016
U.S. GOVERNMENT AGENCY OBLIGATIONS............... 176,728 -- 7,971 168,757
MORTGAGE-BACKED SECURITIES....................... 39,104 99 386 38,817
STATE, COUNTY AND MUNICIPAL OBLIGATIONS.......... 89,870 472 1,892 88,450
EQUITY SECURITIES................................ 37,419 3,423 746 40,096
---------------------------------------------------------------
TOTAL....................................... $ 349,124 $ 4,007 $ 10,995 $ 342,136
===============================================================
27
33
1998
---------------------------------------------------------------
Gross Gross
(Dollars in thousands) Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
---------------------------------------------------------------
U.S. government obligations...................... $ 10,021 $ 184 $ -- $ 10,205
U.S. government agency obligations............... 153,915 1,093 355 154,653
Mortgage-backed securities....................... 35,697 539 36 36,200
State, county and municipal obligations.......... 94,016 3,484 65 97,435
Equity securities................................ 27,708 5,656 58 33,306
---------------------------------------------------------------
Total....................................... $ 321,357 $ 10,956 $ 514 $ 331,799
===============================================================
A schedule of debt securities by contractual maturity at December 31, 1999
is shown below on an amortized cost basis and on a fair value basis. Actual
maturities could differ from contractual maturities due to call or prepayment
provisions.
Amortized Fair
(Dollars in thousands) Cost Value
----------------------------
Due in one year or less............................ $ 32,299 $ 32,076
Due from one to five years......................... 137,111 133,443
Due from five to ten years......................... 53,032 51,734
Due after ten years................................ 50,159 45,970
Mortgage-backed securities......................... 39,104 38,817
----------------------------
Total.............................................. $ 311,705 $ 302,040
============================
Securities with an aggregate carrying value of $161,121,000 at December 31,
1999 were pledged to secure public deposits, securities sold under agreements to
repurchase and Federal Home Loan Bank ("FHLB") borrowings. Proceeds from the
sale of securities available for sale were $20,816,000 in 1999, $29,186,000 in
1998, and $155,917,000 in 1997. Gross gains of $1,899,000 and gross losses of
$741,000 were realized in 1999. Gross gains of $2,258,000 and gross losses of
$36,000 were realized in 1998. Gross gains of $6,825,000 and gross losses of
$1,131,000 were realized in 1997. At December 31, 1999 and 1998, the Banks owned
stock in the Federal Home Loan Bank of Atlanta with a cost basis of $22,091,400
and $18,006,500, respectively, which is included in equity securities.
In connection with the merger with CSB in 1997, FCNB transferred CSB's
investment securities with an amortized cost of $13,464,188 and unrealized gains
of $27,073 to securities available for sale.
(5) LOANS
The Corporation's primary market area includes the states of North and
South Carolina, and predominately centers on the Metro region of Charlotte,
North Carolina. At December 31, 1999, the majority of the total loan portfolio,
as well as a substantial portion of the commercial and real estate loan
portfolios, were to borrowers within this region. The diversity of the region's
economic base provides a stable lending environment. An area of significant
concentration of credit risk has not been specified due to the diverse
industrial base in the region.
Loans at December 31, 1999 and 1998 are as follows:
(Dollars in thousands) 1999 1998
- --------------------------------------------------------------------------------------------------------------
Commercial, financial and agricultural................................... $ 136,276 $ 94,425
Real estate - construction............................................... 253,272 180,475
Real estate - commercial................................................. 262,260 194,624
Real estate - residential................................................ 730,520 882,420
Installment.............................................................. 44,167 70,732
-----------------------------------
Total............................................................... $ 1,426,495 $ 1,422,676
===================================
28
34
(Dollars in thousands) 1999 1998
- --------------------------------------------------------------------------------------------------------------
Nonaccrual loans included above.......................................... $ 7,738 $ 5,758
Other real estate........................................................ 2,041 3,537
Loans 90 days or more past due and still accruing included above......... 3,460 2,270
Restructured loans....................................................... 37 577
-----------------------------------
Total problem assets................................................ $ 13,276 $ 12,142
===================================
Due to increases in certain interest rates during the first quarter of
1999, and the resulting impact on the Corporation's interest rate risk, the
Corporation classified $147.6 million in lower-yielding mortgage loans as held
for sale during March 1999, selling the loans in April 1999. The loans were sold
with servicing rights retained. The Corporation recognized a gain of
approximately $1.8 million on the sales transaction during 1999 and recorded
$1.7 million in servicing rights. The carrying value and estimated fair value of
such servicing rights is $1.5 million and $1.7 million, respectively, at
December 31, 1999.
Residential real estate loans are presented net of loans serviced for
others totaling $152.9 million and $21.0 million at December 31, 1999 and 1998,
respectively. As a result of the loan sale in the second quarter of 1999, $1.7
million in servicing rights were recognized by the Corporation. At year-end
1999, the Corporation's servicing rights were $1.5 million, with a fair value of
$1.7 million. Prior to the loan sale, the Corporation did not have servicing
rights.
Interest income that would have been recorded on nonaccrual loans and
restructured loans for the years ended December 31, 1999, 1998, and 1997, had
they performed in accordance with their original terms, amounted to
approximately $706,000, $457,000, and $767,000, respectively. Interest income on
all such loans included in the results of operations for 1999, 1998, and 1997
amounted to approximately $384,000, $124,000, and $383,000, respectively.
The recorded investment in impaired loans was $8,193,000 (of which
$7,728,000 was on nonaccrual status) and $3,897,000 (of which $2,836,000 was on
nonaccrual status) at December 31, 1999 and 1998, respectively. The related
allowance for loan losses on these loans was $2,966,000 and $1,260,000 at
December 31, 1999 and 1998, respectively. The average recorded investment in
impaired loans for 1999 was $7,553,000, and the income recognized during 1999
was $386,000, $291,000 of which was recognized using the cash method of income
recognition. The average recorded investment in impaired loans for 1998 was
$4,531,000, and the income recognized during 1998 was $107,000, $60,000 of which
was recognized using the cash method of income recognition. The average recorded
investment in impaired loans for 1997 was $4,795,000, and the income recognized
during 1997 was $67,000, $36,000 of which was recognized using the cash method
of income recognition.
The following is a reconciliation of loans outstanding to executive
officers, directors and their associates for the year ended December 31, 1999:
(Dollars in thousands)
Balance at December 31, 1998...................... $ 3,857
New loans......................................... 3,223
Principal repayments.............................. (1,876)
-----------
Balance at December 31, 1999...................... $ 5,204
===========
In the opinion of management, these loans were made on substantially the
same terms, including interest rates and collateral, as those prevailing at the
time for comparable transactions with other borrowers. Such loans, in the
opinion of management, do not involve more than the normal risks of
collectibility.
29
35
(6) ALLOWANCE FOR LOAN LOSSES
The following is a summary of the changes in the allowance for loan losses
for each of the years in the three-year period ended December 31, 1999:
(Dollars in thousands) 1999 1998 1997
- ------------------------------------------------------------------------------------------------------------------
Beginning balance............................................. $ 15,554 $ 15,263 $ 14,140
Provision charged to operations............................... 3,350 2,376 2,684
Adjustment for merged bank.................................... -- -- 269
Adjustment for loan sales..................................... (369) -- --
Charge-offs................................................... 1,915 2,737 2,261
Recoveries.................................................... 719 652 431
---------------------------------------------
Net loan charge-offs..................................... 1,196 2,085 1,830
---------------------------------------------
Ending balance................................................ $ 17,339 $ 15,554 $ 15,263
=============================================
(7) PREMISES AND EQUIPMENT
Premises and equipment at December 31, 1999 and 1998 are summarized as
follows:
(Dollars in thousands) 1999 1998
- --------------------------------------------------------------------------------------------------------------
Land............................................................................ $ 8,329 $ 10,011
Buildings....................................................................... 20,654 18,071
Furniture and equipment......................................................... 22,411 18,635
Leasehold improvements.......................................................... 1,438 1,222
Construction in progress........................................................ 12,127 1,675
----------------------------
Total premises and equipment............................................... 64,959 49,614
Less accumulated depreciation and amortization.................................. 21,367 19,011
----------------------------
Premises and equipment, net..................................................... $ 43,592 $ 30,603
============================
(8) DEPOSITS
A summary of deposit balances at December 31, 1999 and 1998 is as follows:
(Dollars in thousands) 1999 1998
- --------------------------------------------------------------------------------------------------------------
Noninterest bearing demand...................................................... $ 130,613 $ 119,519
Interest bearing demand......................................................... 124,481 132,581
Money market accounts........................................................... 199,344 142,077
Savings deposits................................................................ 105,640 134,623
Certificates of deposit......................................................... 589,434 594,235
----------------------------
Total........................................................................... $ 1,149,512 $ 1,123,035
============================
The aggregate amount of certificates of deposit with denominations greater
than $100,000 was $239,839,000 and $201,918,000 at December 31, 1999 and 1998,
respectively.
30
36
At December 31, 1999, the scheduled maturities of all certificates of deposit
are as follows:
(Dollars in thousands)
2000.................................... $ 521,534
2001.................................... 54,148
2002.................................... 10,472
2003.................................... 1,168
2004 ................................... 1,516
2005 and after.......................... 596
------------
$ 589,434
============
(9) OTHER BORROWINGS
The following is a schedule of other borrowings:
INTEREST MAXIMUM
BALANCE RATE AVERAGE OUTSTANDING
AS OF AS OF AVERAGE INTEREST AT ANY
(Dollars in thousands) DECEMBER 31, DECEMBER 31, BALANCE RATE MONTH-END
- -----------------------------------------------------------------------------------------------------------------------
1999
FEDERAL FUNDS PURCHASED AND SECURITIES
SOLD UNDER AGREEMENTS
TO REPURCHASE ................. $ 57,150 5.44% $ 67,077 5.07% $ 115,786
FHLB BORROWINGS..................... 434,826 5.11% 354,680 5.48% 434,826
OTHER............................... -- -- 887 5.84% 2,590
-------------- ------------- --------------
TOTAL.......................... $ 491,976 $ 422,644 $ 553,202
============== ============= ==============
Interest Maximum
Balance Rate Average Outstanding
as of as of Average Interest at Any
(Dollars in thousands) December 31, December 31, Balance Rate Month-end
- -----------------------------------------------------------------------------------------------------------------------
1998
Federal funds purchased and securities
sold under agreements
to repurchase ................. $ 122,355 5.69% $ 125,401 5.55% $ 130,713
FHLB borrowings..................... 344,999 5.44% 306,021 5.67% 345,899
Other............................... 2,590 7.09% 2,838 6.47% 8,315
-------------- ------------- --------------
Total.......................... $ 469,944 $ 434,260 $ 484,927
============== ============= ==============
Federal funds purchased represent unsecured overnight borrowings from other
financial institutions by the Banks. Securities sold under agreements to
repurchase represent short-term borrowings by the Banks with maturities ranging
from 1 to 89 days collateralized by a portion of the Corporation's securities of
the United States government or its agencies, which have been delivered to a
third party custodian for safekeeping.
At December 31, 1999, the Bank had one available line of credit with the
FHLB totaling $468,750,000 with approximately $434,826,000 outstanding. The
outstanding amounts consist of $156,805,000 maturing in 2000, $571,000 maturing
in 2001, $76,000,000 maturing in 2002, $13,000,000 maturing in 2003, $86,000,000
maturing in 2004, $ 26,000,000 in 2008, $76,000,000 in 2009, and $450,000
maturing in 2011. In addition, the Bank is required to pledge collateral to
secure the advances as described in the line of credit agreement. The collateral
consists of FHLB stock and qualifying 1-4 family residential mortgage loans.
31
37
(10) OTHER NONINTEREST EXPENSE
Components of other noninterest expense in excess of one percent of the
aggregate amount of total interest income and total noninterest income follow:
(Dollars in thousands) 1999 1998 1997
- ----------------------------------------------------------------------------------------------------------------
Advertising............................................. $ 2,263 $ 1,312 $ 1,996
Data processing......................................... 1,696 1,493 1,192
Professional services................................... 2,973 2,491 3,515
FDIC insurance.......................................... 316 342 353
Stationery and supplies................................. 1,606 1,281 1,009
All other items......................................... 5,388 4,946 4,187
-------------------------------------------
Total.............................................. $ 14,242 $ 11,865 $ 12,252
===========================================
(11) INCOME TAX
Income tax expense (benefit) consisted of the following:
(Dollars in thousands) Current Deferred Total
- ----------------------------------------------------------------------------------------------------------------
YEAR ENDED DECEMBER 31, 1999
FEDERAL................................................. $ 11,744 $ 402 $ 12,146
STATE................................................... 99 105 204
-------------------------------------------
TOTAL.............................................. $ 11,843 $ 507 $ 12,350
===========================================
Year ended December 31, 1998
Federal................................................. $ 8,385 $ (751) $ 7,634
State................................................... 1,268 (144) 1,124
-------------------------------------------
Total.............................................. $ 9,653 $ (895) $ 8,758
===========================================
Year ended December 31, 1997
Federal................................................. $ 10,949 $ (1,635) $ 9,314
State................................................... 1,789 (338) 1,451
-------------------------------------------
Total.............................................. $ 12,738 $ (1,973) $ 10,765
===========================================
Income tax expense differed from the amounts computed by applying the U.S.
federal income tax rate of 35% to pretax income as a result of the following:
1999 1998 1997
- ------------------------------------------------------------------------------------------------------------------------
% OF % of % of
PRETAX Pretax Pretax
(Dollars in thousands) AMOUNT INCOME Amount Income Amount Income
- ------------------------------------------------------------------------------------------------------------------------
Income before income taxes.............. $ 38,442 $ 17,994 $ 29,936
========= ========== ==========
Tax at federal income tax rate.......... 13,455 35.0% 6,298 35.0% 10,477 35.0%
Reasons for differences:
Tax exempt income.................. (1,561) (4.0) (1,398) (7.7) (1,199) (4.0)
Nondeductible merger expenses...... -- -- 3,104 17.2 459 1.5
State income tax, net of
federal benefit................ 133 0.3 730 4.1 943 3.2
Other.............................. 323 0.8 24 0.1 85 0.3
--------------------------------------------------------------------------
Total.......................... $ 12,350 32.1% $ 8,758 48.7% $ 10,765 36.0%
==========================================================================
32
38
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and deferred tax liabilities at December 31,
1999 and 1998 are presented below.
(Dollars in thousands) 1999 1998
- ---------------------------------------------------------------------------------------------------------------------
Deferred Tax Assets:
Allowance for loan losses.................................................. $ 7,047 $ 6,073
Deferred loan fees......................................................... 318 657
Accrued expenses deductible when paid for tax purposes..................... 2,134 2,366
Deferred compensation...................................................... 1,179 1,895
Unrealized losses on securities available for sale, net.................... 2,743 --
Other...................................................................... 346 570
-----------------------------
Total gross deferred tax assets........................................ 13,767 11,561
Less valuation allowance................................................... -- --
-----------------------------
Deferred tax asset, net of valuation allowance......................... 13,767 11,561
-----------------------------
Deferred Tax Liabilities:
Unrealized gains on securities available for sale, net..................... -- (3,958)
Fixed assets, primarily due to difference in depreciation.................. (72) (82)
Federal Home Loan Bank of Atlanta stock.................................... (873) (877)
Other...................................................................... (31) (47)
-----------------------------
Total gross deferred tax liability..................................... (976) (4,964)
-----------------------------
Net deferred tax asset................................................. $ 12,791 $ 6,597
=============================
A portion of the current year change in the net deferred tax asset relates
to unrealized gains and losses on securities available for sale. The related
current period deferred tax benefit of $6,701,000 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 expense of $507,000.
There was no valuation allowance for deferred tax assets as of December 31,
1999 and 1998. There was no change in the total valuation allowance during 1999
and 1998. It is management's belief that realization of the deferred tax asset
is more likely than not.
Tax returns for 1996 and subsequent years are subject to examination by
taxing authorities.
Retained income at December 31, 1999 and 1998 includes approximately $6.8
million (tax effect) representing pre-1988 tax bad debt reserve base year
reserve amounts for which no deferred income tax liability has been provided
since these reserves are not expected to reverse and may never reverse.
Circumstances that would require an accrual of a portion or all of this
unrecorded tax liability are a reduction in qualifying loan levels relative to
the end of 1987, failure to meet the definition of a bank, dividend payments in
excess of current year or accumulated tax earnings and profits, or other
distributions in dissolution, liquidation or redemption of the Corporation's
stock.
(12) EMPLOYEE BENEFIT PLANS
401(k) Plan and Money Purchase Pension Plan. The Corporation has a
qualified Retirement Savings Plan (401(k) Plan) for all eligible employees of
the Corporation. Pursuant to the Savings Plan, an eligible employee may elect to
defer between 1% and 10% of compensation. At the discretion of the Board of
Directors, the Corporation may contribute an amount necessary to match all or a
portion of a participant's elective deferrals in an amount to be determined by
the Board of Directors from time to time, up to a maximum of 6% of a
participant's compensation. In addition, the Corporation may contribute an
additional amount to each participant's Savings Plan account as determined at
the discretion of the Board of Directors. The Corporation adopted a qualified
Money Purchase Pension Plan effective January 1, 1997 for all eligible employees
of the Corporation. Pursuant to the Money Purchase Pension Plan, the Corporation
contributes annually to each participant's Plan account an amount equal to 3% of
the participant's compensation. Prior to 1997, such contributions were made to
the Savings Plan. The Corporation's aggregate contribution to the Savings Plan
and Money Purchase Pension Plan (excluding Home Federal in 1998 and 1997)
amounted to $1,235,000, $872,000, and $627,000 for 1999, 1998, and 1997,
respectively.
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39
Profit Sharing Plan. Home Federal sponsored a contributory 401(k)
profit sharing plan ("Profit Sharing Plan"). The Profit Sharing Plan permitted
all full time employees with at least one year of service to contribute up to 9%
of their salary to the plan each year. The plan provided for matching
contributions by Home Federal equal to 100% of employee contributions up to the
first 3% of compensation. Home Federal could, at its discretion, make profit
sharing contributions to the plan. Plan participants' accounts were 100% vested
in Company contributions after 5 years of qualifying service. Home Federal's
matching contributions charged to expense for 1998 and 1997 were approximately
$80,000 and $52,000, respectively. The Profit Sharing Plan was merged into First
Charter's 401(k) Plan during 1999.
(14) COMMON STOCK
The Corporation maintains the Dividend Reinvestment and Stock Purchase Plan
(the "DRIP"), pursuant to which 1,000,000 shares of common stock of the
Corporation have been reserved for issuance. Shareholders may elect to
participate in the DRIP and have dividends on shares of common stock reinvested
and may make optional cash payments of up to $3,000 per calendar quarter to be
invested in common stock of the Corporation. Pursuant to the terms of the DRIP,
upon reinvestment of the dividends and optional cash payments, the Corporation
can either issue new shares valued at the then current market value of the
common stock or the administrator of the DRIP can purchase shares of common
stock in the open market. During 1999, the Corporation issued no shares and the
administrator of the DRIP purchased 103,778 shares in the open market. During
1998, the Corporation issued 52,368 shares and the administrator of the DRIP
purchased 28,189 shares in the open market. The Corporation currently expects to
issue new shares for future investment of dividends and optional cash payments.
In April 1995, the shareholders approved the First Charter Corporation
Restricted Stock Award Program (the "Restricted Stock Plan"). Awards of
restricted stock may be made under the Restricted Stock Plan at the discretion
of the Compensation Committee of the Board of Directors of the Corporation,
which shall determine the key participants, the number of shares awarded to
participants, and the vesting terms and conditions applicable to such awards. A
maximum of 360,000 shares of common stock are reserved for issuance under the
Restricted Stock Plan. Compensation expense of approximately $62,000 and $29,000
was recognized during 1999 and 1998, respectively, in connection with the
Restricted Stock Plan. The following table presents the status of the Restricted
Stock Plan as of December 31, 1999 and 1998 and changes during the years then
ended:
Weighted Average
First Charter Restricted Stock Award Program Shares Grant Price
- ------------------------------------------------------------------------------------------------------------
Outstanding at December 31, 1997.................................. -- $ --
Granted...................................................... 5,853 25.6250
Vested....................................................... (1,170) 25.6250
Forfeited.................................................... -- --
--------
Outstanding at December 31, 1998.................................. 4,683 $ 25.6250
GRANTED...................................................... 15,000 18.5833
VESTED....................................................... (4,170) 20.5591
FORFEITED.................................................... -- --
--------
OUTSTANDING AT DECEMBER 31, 1999.................................. 15,513 $ 20.1780
========
The Management Recognition and Retention Plan ("MRRP") was sponsored by
Home Federal and provided for Home Federal's Board of Directors to award
restricted stock to officers and key employees of Home Federal as well as
non-employee directors of Home Federal. The MRRP authorized Home Federal to
grant up to 391,590 shares of Corporation stock. One-fifth of the shares granted
vested immediately upon grant, with the remainder vesting at a rate of 25% per
year over the next four anniversary dates of the grants. Approximately
$2,200,000 and $3,200,000 in compensation expense related to the MRRP was
recognized during the years ended December 31, 1998 and 1997, respectively. In
addition, the Corporation recognized approximately $6,500,000 in merger expenses
during 1998 related to the accelerated vesting of shares in connection with the
merger with HFNC, in accordance with the terms of the MRRP. Subsequent to the
consummation of the merger of the Corporation with HFNC, no further grants of
MRRP shares are to be made. The following table presents the status of the MRRP
as of December 31, 1998 and 1997 and changes during the years then ended:
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40
Weighted Average
Management Recognition and Retention Plan Shares Grant Price
- ------------------------------------------------------------------------------------------------------------
Outstanding at December 31, 1996.................................. 282,168
Granted...................................................... -- $ --
Vested....................................................... (35,313) 30.26
Forfeited.................................................... (228) 30.26
--------
Outstanding at December 31, 1997.................................. 246,627
Granted...................................................... -- --
Vested....................................................... (246,171) 30.26
Forfeited.................................................... (456) 30.26
--------
Outstanding at December 31, 1998.................................. --
========
In connection with its conversion to a stock savings and loan
association, Home Federal established an Employee Stock Ownership Plan ("ESOP").
Concurrent with the conversion, 900,000 shares of the Corporation's common stock
were purchased on December 28, 1995 by the ESOP with the proceeds of a $9.0
million loan from Home Federal's wholly owned subsidiary, HFNC Investment Corp.
A corresponding amount related to unearned ESOP shares of $11,343,587 at
December 31, 1997 is included as a reduction of shareholders' equity. In
accordance with the terms of the ESOP, all shares were considered allocated to
participants (after repayment of the debt) concurrent with the consummation of
the HFNC Merger; accordingly, there was no reduction of shareholders' equity at
December 31, 1998. As the loan is internally leveraged, the note receivable from
the ESOP is not reported as an asset nor is the ESOP's debt reported as a
liability at December 31, 1997. However, because the shares are considered
earned at the time of the Merger, the Corporation had a receivable from the ESOP
of $7,400,000 at December 31, 1998, which was payable once the ESOP had sold
sufficient shares to repay the note. During 1999, the ESOP sold 429,708 shares
of previously unallocated ESOP shares at $16.675 per share. The proceeds were
used to repay the ESOP debt in accordance with the terms of the ESOP. The
remaining 224,870 shares owned by the ESOP were then allocated to participants.
Compensation expense related to the ESOP was approximately $990,000 and
$1,670,000 for each of the years ended December 31, 1998 and 1997, respectively.
Additionally, the Corporation recognized $2,000,000 in merger expenses during
1998 related to the termination of the ESOP in connection with the merger with
HFNC.
Under the terms of the First Charter Corporation Comprehensive Stock Option
Plan (the "Comprehensive Stock Option Plan"), stock options (which can be
incentive stock options or non-qualified stock options) may be periodically
granted to key employees of the Corporation or its subsidiaries. The terms and
vesting schedules of options granted under the Comprehensive Plan generally
shall be determined by the Compensation Committee of the Board of Directors of
the Corporation (the "Compensation Committee"). However, no options may be
exercisable prior to six months following the grant date, and certain additional
restrictions, including the term and exercise price, apply with respect to any
incentive stock options.
In April 1997, the shareholders approved the First Charter Corporation
Stock Option Plan for Non-Employee Directors (the "Director Plan"). Under the
Director Plan, non-statutory stock options may be granted to non-employee
Directors of the Corporation and its subsidiaries. The terms and vesting
schedules of any options granted under the Director Plan generally shall be
determined by the Compensation Committee. The exercise price for each option
granted, however, shall be the fair value of the common stock as of the date of
grant. A maximum of 180,000 shares are reserved for issuance under the Director
Plan.
The Corporation previously adopted an Employee Stock Purchase Plan (the
"ESPP") in 1998 and 1996, pursuant to which stock options were granted to
employees, based on their eligibility and compensation, at a price of 85% to 90%
of the fair market value of the shares at the date of grant. The option and
vesting period was generally for a term of two years. A maximum of 180,000
shares are reserved for issuance under the 1996 ESPP and 180,000 shares are
reserved for issuance under the 1998 ESPP, which was approved by the
shareholders of the Corporation in April 1997.
The Board of Directors of the Corporation determined that it was in the
best interest of the Corporation to implement a new employee stock purchase plan
that can continue beyond a two-year period, to allow more flexibility
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41
with the timing of the grant of, and the exercise periods for, options granted
to employees. The 1999 ESPP described below allows for multiple grants of
options thereunder and is designed to remain in effect as long as there are
shares available under the 1999 ESPP to be granted. Pursuant to the terms of the
1999 ESPP, a maximum of 300,000 shares of the Corporation's Common Stock may be
issued to employees under the 1999 ESPP, subject to adjustment generally to
protect against dilution in the event of changes in the capitalization of the
Corporation.
The 1999 ESPP will be administered by the Compensation Committee. The
Compensation Committee will be able to prescribe rules and regulations for such
administration and to decide questions with respect to the interpretation or
application of the 1999 ESPP.
The Corporation intends that options granted under the 1999 ESPP will
satisfy the requirements of Section 423 of the Internal Revenue Code of 1986, as
amended (the "Code"), and the regulations thereunder. The 1999 ESPP, however, is
not qualified under the provisions of Section 401(a) of the Code and is not
subject to any of the provisions of the Employee Retirement Income Security Act
of 1974, as amended.
The following is a summary of activity under the Comprehensive Plan,
Director Plan and the 1999, 1998 and 1996 ESPP's during the periods indicated.
For comparison purposes, HFNC and the Corporation were consolidated using
conforming calendar years.
Option Option Price Weighted Average
Shares Per Share Exercise Price
------------------------------------------------------------
Outstanding at December 31, 1996............ 1,171,288 $ 3.64 - 25.93 $ 22.31
Granted................................ 89,134 17.60 - 25.00 20.98
Exercised.............................. 35,662 3.64 - 18.85 13.40
Forfeited.............................. 8,227 8.75 - 17.92 17.60
---------
Outstanding at December 31, 1997............ 1,216,533 3.64 - 25.93 22.54
Granted................................ 48,788 22.63 - 26.75 25.76
Exercised.............................. 41,778 3.64 - 18.85 8.85
Forfeited.............................. 23,636 17.71 - 26.75 20.10
---------
Outstanding at December 31, 1998............ 1,199,907 3.64 - 26.75 22.47
GRANTED................................ 288,361 14.93 - 24.88 18.56
EXERCISED.............................. 40,124 5.34 - 18.85 8.11
FORFEITED.............................. 20,931 14.93 - 26.75 21.35
---------
OUTSTANDING AT DECEMBER 31, 1999............ 1,427,213 3.64 - 26.75 22.11
=========
SHARES EXERCISABLE AT DECEMBER 31, 1999..... 1,156,613 $ 3.64 - 26.75 $ 22.66
=========
The weighted average remaining contractual lives of stock options were
6.10, 7.01, and 7.24 years at December 31, 1999, 1998 and 1997, respectively.
At December 31, 1999, as described above, the Corporation has various
stock-based compensation plans. The Corporation adopted SFAS 123, "Accounting
for Stock-Based Compensation" on January 1, 1996, and elected to continue to
measure compensation cost relative to these plans using APB 25. The disclosure
of the pro forma net income and earnings per share as if the fair value based
accounting method of SFAS 123 had been used to account for stock-based
compensation is required only for awards granted after December 31, 1994, and is
provided below. Consequently, the effects of applying SFAS 123 pro forma
disclosures during the initial phase-in period may not be representative of the
effects on reported net income in future years.
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42
The following table presents the pro forma effect on net income and on
basic and diluted income per share of applying the fair value provisions of SFAS
No. 123 discussed above:
Years Ended December 31,
---------------------------------------------
(Dollars in thousands, except per share data) 1999 1998 1997
---------------------------------------------------------------------------------------------------
Net income:
As reported............................. $ 26,092 $ 9,236 $ 19,171
Pro forma............................... $ 24,904 $ 7,995 $ 18,257
Basic income per share:
As reported............................. $ 1.45 $ 0.51 $ 1.06
Pro forma............................... $ 1.38 $ 0.44 $ 1.01
Diluted income per share:
As reported............................. $ 1.45 $ 0.50 $ 1.03
Pro forma............................... $ 1.38 $ 0.43 $ 0.98
The fair value of each option granted during 1999, 1998 and 1997 was
estimated using the Black-Scholes option-pricing model with the following
weighted average assumptions:
Years Ended December 31,
------------------------------------------------------
1999 1998 1997
------------------------------------------------------
Comprehensive Stock Option Plan
-------------------------------
Dividend yield.............................. 4.57% 2.4% 3.0%
Risk free interest rates.................... 4.66 TO 6.06% 5.50% to 6.65% 5.88% to 6.89%
Expected lives.............................. 6 YEARS 6 years 6 years
Volatility.................................. 38% 25% 23%
Director Plan
-------------
Dividend yield.............................. 4.57% 2.2% 3.0%
Risk free interest rates.................... 6.17% 5.64% 6.57% to 6.67%
Expected lives.............................. 6 YEARS 6 years 6 years
Volatility.................................. 38% 25% 23%
1999 Employee Stock Purchase Plan
---------------------------------
Dividend yield.............................. 4.57% N/A N/A
Risk free interest rates.................... 6.04% N/A N/A
Expected lives.............................. 6 YEARS N/A N/A
Volatility.................................. 38% N/A N/A
1998 Employee Stock Purchase Plan
---------------------------------
Dividend yield.............................. N/A 1.7% N/A
Risk free interest rates.................... N/A 6.28% N/A
Expected lives.............................. N/A 4 years N/A
Volatility.................................. N/A 18% N/A
(15) COMMITMENTS, CONTINGENCIES AND OFF-BALANCE SHEET RISK
Commitments and Off-Balance Sheet Risk. The Corporation is party to various
financial instruments with off-balance-sheet risk in the normal course of
business to meet the financing needs of its customers. These financial
instruments include commitments to extend credit and standby letters of credit,
and involve, to varying degrees, elements of credit and interest rate risk in
excess of the amounts recognized in the consolidated financial statements. The
Corporation uses the same credit policies in making commitments and conditional
obligations as it does for
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instruments reflected in the consolidated financial statements. The
creditworthiness of each customer is evaluated on a case-by-case basis.
At December 31, 1999, the Corporation's exposure to credit risk was
represented by preapproved but unused lines of credit for loans totaling
$443,553,000 and standby letters of credit aggregating $6,808,000. Management
expects that these commitments can be funded through normal operations. The
amount of collateral obtained if deemed necessary by the Corporation upon
extension of credit is based on management's credit evaluation of the
38
44
borrower at that time. The Corporation generally extends credit on a secured
basis. Collateral obtained may include, but may not be limited to, accounts
receivable, inventory and commercial and residential real estate.
The Bank grants primarily commercial and installment loans to customers
throughout its market areas. The Corporation's primary market area includes the
states of North and South Carolina, and predominately centers on the Metro
region of Charlotte, North Carolina. The real estate loan portfolio can be
affected by the condition of the local real estate markets.
Average daily Federal Reserve balance requirements for the year ended
December 31, 1999 amounted to $404,000.
Contingencies. In June 1995, a lawsuit was initiated against Home Federal
by a borrower's affiliated companies in which the plaintiffs alleged that Home
Federal wrongfully set-off certain funds in an account being held and maintained
by Home Federal. In addition, the plaintiffs alleged that as a result of the
wrongful set-off, Home Federal wrongfully dishonored a check in the amount of
$270,000. Plaintiffs further alleged that the actions on behalf of Home Federal
constituted unfair and deceptive trade practices, thereby entitling plaintiffs
to recover treble damages and attorneys' fees. Home Federal denied any
wrongdoing and filed a motion for summary judgment. Upon consideration of the
motion, the United States Bankruptcy Judge entered a Recommended Order Granting
Summary Judgement, recommending the dismissal of all claims asserted against
Home Federal. In October 1997, the United States District Court entered an order
granting summary judgment in favor of Home Federal. The plaintiff has appealed
the order of summary judgment and the case is presently pending in the Fourth
Circuit Court of Appeals.
In December 1996, Home Federal filed a suit against the borrower and his
company and against the borrower's wife, daughters, and a company owned by
his wife and daughter, alleging transfers of assets to the wife, daughter,
and their company in fraud of creditors, and asking that the fraudulent
transfers be set aside. The objective of the lawsuit is to recover assets
which may be used to satisfy a portion of the judgments obtained in favor of
Home Federal in prior litigation. In April 1997, the borrower's wife filed a
counterclaim against Home Federal alleging that she borrowed $750,000 from
another financial institution, secured by a deed of trust on her principal
residence, the proceeds of which were paid to Home Federal for application on
a debt owed by one of her husband's corporations, claiming that officers of
Home Federal promised to resume making loans to her husband's corporation
after the payment. Home Federal and its officers vigorously denied all of her
allegations. Home Federal filed a motion for summary judgment and dismissal
of the counterclaim. The motion for summary judgment was heard in the
Superior Court division of the Mecklenburg County General Court of Justice in
April 1998. In June 1998, Home Federal removed this case to the United States
Bankruptcy Court for the Western District of North Carolina, Charlotte
Division, due to the fact that the defendant was the debtor in a pending
bankruptcy case. In April 1999, Home Federal moved for summary judgement to
dismiss the counterclaims. At a hearing in May 1999, the Bankruptcy Judge
granted part and denied part of Home Federal's Motion for Summary Judgement.
The Judge dismissed the wife's counterclaim for breach of fiduciary duty, but
allowed her claim for fraud to continue. The borrower, his wife and daughter
filed a motion for jury trial. The request was not filed within the time
allowed; however, the Judge may, in his discretion, order a jury trial. We
have filed an objection to the request and a hearing on the motion is
scheduled for April 4, 2000. A trial date has not been set; however, we
anticipate a trial within 90 days. Home Federal believes it has strong
defenses to the defendant's counterclaim.
In February 1997, two companies affiliated with those referred to in the
first paragraph above filed an additional action against two executive officers
of Home Federal and against an officer of another financial institution. The
action was removed from the state court to the United States Bankruptcy Court
for the Western District of North Carolina. At the same time, the borrower, who
is affiliated with all of these companies, also filed an action in the Superior
Court of Mecklenburg County, North Carolina against the two executive officers
of Home Federal and against an officer of another financial institution. The
Complaints in both actions assert virtually identical claims. The plaintiffs in
both lawsuits allege that the officers of both financial institutions engaged in
a conspiracy to wrongfully declare loans to be in default so as to eliminate
those companies as borrowers of Home Federal. Plaintiffs claim actual damages,
treble damages, and punitive damages together with interest, attorneys' fees,
and other costs. Plaintiffs allege misrepresentation, breach of fiduciary duty,
constructive fraud, interference with business expectancy, wrongful bank account
set-off, and unfair and deceptive acts and practices. The action pending in the
bankruptcy court has been stayed. All defendants filed motions for summary
judgment in the state court action which were granted, and that lawsuit was
dismissed in January 1998 by the Superior Court of Mecklenburg County. The
plaintiff appealed the order granting summary judgment to the North Carolina
Court of Appeals. In July 1998, the defendants removed the state court case to
the United States Bankruptcy Court for the Western District of North Carolina,
Charlotte Division, due to the fact that the plaintiff was a debtor in a pending
bankruptcy case. As a result
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45
of the removal, the North Carolina Court of Appeals entered an order staying
further proceedings in the North Carolina Court of Appeals in August 1998. In
early June 1999, the United States Bankruptcy court entered its Memorandum
Decision and Order adopting the State Court dismissal of the lawsuit. In late
June 1999, the plaintiff gave notice of appeal which Home Federal is opposing.
The appeal is pending. On February 12, 2000, the borrower filed a motion to
close his bankruptcy case and remand the action to State Court. We filed an
objection to the motion. At a hearing on March 7, 2000, the Judge denied the
borrower's request to close the case and denied the borrower's motion to remand
to State Court. The Corporation is bound by Home Federal's agreement to
indemnify both of its officers with respect to costs, expense, and liability
which might arise in connection with both of these cases.
In July 1997, the above borrower and affiliated companies filed an
additional action against HFNC, Home Federal, and the other financial
institution referred to in the paragraph above, alleging that previous judgments
in favor of Home Federal and the other financial institution obtained in prior
litigation were obtained by the perpetration of fraud on the Bankruptcy Court,
U.S. District Court, and the Fourth Circuit Court of Appeals. The plaintiffs are
seeking to have the judgments set aside on that basis. All defendants filed
motions for summary judgment and dismissal which were granted, and the lawsuit
was dismissed on September 24, 1998. The borrower, individually, has appealed
the Order dismissing the lawsuit to the Fourth Circuit Court of Appeals. In
February 1999, the United States District Court entered an Order sanctioning the
attorneys for the plaintiffs and ordering that the plaintiff be prohibited from
filing any further action or proceeding in the United States District Court for
the Western District of North Carolina arising from facts involved in this
matter. The Plaintiff appealed the entry of that order. On March 6, 2000, the
United States Court of Appeals for the 4th Circuit ruled against the borrower
on both appeals and affirmed the District Court's opinion.
Management continues to deny any liability in the above-described cases and
continues to vigorously defend against the claims. However, there can be no
assurance of the ultimate outcome of the litigation, or the range of potential
loss, if any.
The Corporation and the Banks are defendants in certain other claims and
legal actions arising in the ordinary course of business. In the opinion of
management, after consultation with legal counsel, the ultimate disposition of
these other matters is not expected to have a material adverse effect on the
consolidated operations, liquidity or financial position of the Corporation or
the Banks.
(16) FAIR VALUE OF FINANCIAL INSTRUMENTS
Fair value estimates of financial instruments are made at a specific point
in time, based on relevant market information and information about the
financial instrument. These estimates do not reflect any premium or discount
that could result from offering for sale at one time the Corporation's entire
holdings of a particular financial instrument. Because no market exists for a
significant portion of the Corporation's financial instruments, fair value
estimates are based on judgments regarding future expected loss experience,
current economic conditions, risk characteristics of various financial
instruments, and other factors. These estimates are subjective in nature and
involve uncertainties and matters of significant judgment and therefore cannot
be determined with precision. Changes in assumptions could significantly affect
the estimates. Where information regarding the fair value of a financial
instrument is available, those values are used, as is the case with investment
securities and residential mortgage loans. In these cases, an open market exists
in which those financial instruments are actively traded.
Fair value estimates are based on existing on- and off-balance sheet
financial instruments without attempting to estimate the value of anticipated
future business and the value of assets and liabilities that are not considered
financial instruments. For example, FCNB has a substantial trust department that
contributes net fee income annually. The trust department is not considered a
financial instrument, and its value has not been incorporated into the fair
value estimates. Other significant assets and liabilities that are not
considered financial assets or liabilities include the mortgage broker
operations and premises and equipment. In addition, tax ramifications related to
the realization of the unrealized gains and losses can have a significant effect
on fair value estimates and have not been considered in any of the estimates.
The Corporation's fair value methods and assumptions are as follows:
Cash and due from banks, federal funds sold, interest bearing bank
deposits - the carrying value is a reasonable estimate of fair value
due to the short term nature of these financial instruments.
Securities available for sale - fair value is based on available quoted
market prices or quoted market prices for similar securities if a
quoted market price is not available.
40
46
Loans - the carrying value for variable rate loans that are performing
is a reasonable estimate of fair value due to contractual interest
rates being based on current indices. Fair value for fixed rate loans
is estimated based upon discounted future cash flows using discount
rates comparable to rates currently offered for such loans. The fair
value of nonperforming loans is based on the book value of each loan,
less an applicable reserve for credit losses. The reserve for credit
losses is determined on a loan by loan basis for nonperforming assets
based on one or a combination of the following: external appraisals,
internal assessments using available market information and specific
borrower information, or discounted cash flow analysis.
Deposit accounts -the fair value of certificates of deposit is
estimated using rates currently offered for deposits of similar
remaining maturities. The fair value of all other deposit account types
is the amount payable on demand at year-end.
Other borrowings - the carrying value for shorter-term borrowings is a
reasonable estimate of fair value because these instruments are
generally payable in 90 days or less. The fair value for borrowings
with maturities greater than one year is estimated based upon
discounted future cash flows using a discount rate comparable to the
current market rate for such borrowings.
Commitments to extend credit and standby letters of credit - the large
majority of commitments to extend credit and standby letters of credit
are at variable rates and/or have relatively short terms to maturity.
Therefore, the fair value of these financial instruments is considered
to approximate their carrying value.
Based on the limitations, methods, and assumptions noted above, the
following table presents the carrying amounts and fair values of the
Corporation's financial instruments at December 31, 1999 and 1998:
December 31,
----------------------------------------------------------
(Dollars in thousands) 1999 1998
- -----------------------------------------------------------------------------------------------------------------------
ESTIMATED Estimated
CARRYING FAIR Carrying Fair
AMOUNT VALUE Amount Value
----------------------------------------------------------
Financial assets:
Cash and due from banks................................. $ 59,967 $ 59,967 $ 41,884 $ 41,884
Federal funds sold...................................... 665 665 6,402 6,402
Interest bearing bank deposits.......................... 1,995 1,995 11,713 11,713
Securities available for sale........................... 342,136 342,136 331,799 331,799
Loans, net of allowance for loan losses................. 1,408,953 1,391,331 1,406,967 1,444,782
Financial liabilities:
Deposits................................................ 1,149,512 1,147,258 1,123,035 1,126,039
Other borrowings........................................ 491,976 489,146 469,944 472,342
(17) REGULATORY MATTERS
The Corporation and the Bank are subject to various regulatory capital
requirements administered by federal and state banking agencies. Failure to meet
minimum capital requirements can initiate certain mandatory - and possibly
discretionary - actions by regulators that, if undertaken, could have a direct
material effect on the Corporation's financial statements. Under capital
adequacy guidelines and the regulatory framework for prompt corrective action,
the Corporation and the Bank must meet specific capital guidelines that involve
quantitative measures of assets, liabilities, and certain off-balance-sheet
items as calculated under regulatory accounting practices. The capital amounts
and classifications 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 Corporation and the Bank 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 adjusted average assets (as
41
47
defined). Management believes, as of December 31, 1999, that the Corporation and
the Bank meet all capital adequacy requirements to which they are subject.
As of December 31, 1999, the most recent notifications from the
Corporation's various regulators categorized the Corporation and FCNB as well
capitalized under the regulatory framework for prompt corrective action. To be
categorized as well capitalized, each entity 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 any of the institutions' categories.
The Corporation's and the Bank's actual capital amounts and ratios are also
presented in the table below:
To Be Well Capitalized
For Capital Under Current Prompt
Adequacy Purposes Corrective Action Provisions
Actual ----------------- ----------------------------
------------------- Minimum Minimum
(Dollars in thousands) Amount Ratio Amount Ratio Amount Ratio
-------- --------- --------- ------- --------- --------
At December 31, 1999:
Total Capital (to Risk Weighted Assets)
First Charter Corporation.......... $ 245,306 18.20 % $ 107,844 8.00 % $ 134,805 10.00 %
First Charter National Bank........ 216,759 16.51 105,008 8.00 131,260 10.00
Tier I Capital (to Risk Weighted Assets)
First Charter Corporation.......... $ 228,449 16.95 % $ 53,922 4.00 % $ 80,883 6.00 %
First Charter National Bank........ 200,340 15.26 52,504 4.00 78,756 6.00
Tier I Capital (to Adjusted Average Assets)
First Charter Corporation.......... $ 228,449 12.40 % $ 73,707 4.00 % $ 92,133 5.00 %
First Charter National Bank........ 200,340 11.00 72,820 4.00 91,024 5.00
At December 31, 1998:
Total Capital (to Risk Weighted Assets)
First Charter Corporation.......... $ 251,965 20.59 % $ 97,913 8.00 % $ 122,391 10.00 %
First Charter National Bank........ 226,556 18.77 96,557 8.00 120,699 10.00
Tier I Capital (to Risk Weighted Assets)
First Charter Corporation.......... $ 236,666 19.34 % $ 48,957 4.00 % $ 73,435 6.00 %
First Charter National Bank........ 211,469 17.52 48,279 4.00 72,418 6.00
Tier I Capital (to Adjusted Average Assets)
First Charter Corporation.......... $ 236,666 13.36 % $ 70,850 4.00 % $ 88,562 5.00 %
First Charter National Bank........ 211,469 11.98 70,592 4.00 88,010 5.00
(18) FIRST CHARTER CORPORATION (PARENT COMPANY)
The principal assets of the Parent Company are its investment in the
Bank, and its principal source of income is dividends from the Bank. Certain
regulatory and other requirements restrict the lending of funds by the Bank to
the Parent Company and the amount of dividends which can be paid to the Parent
Company. In addition, certain regulatory agencies may prohibit the payment of
dividends by the Bank if they determine that such payment would constitute an
unsafe or unsound practice. At December 31, 1999, the Parent Company's $198.0
million investment in subsidiaries total amount is restricted as to transfer to
the Parent Company without obtaining prior regulatory approval.
42
48
The Parent Company's balance sheet data as of December 31, 1999 and 1998
and related statements of income and cash flow data for each of the years in the
three-year period ended December 31, 1999 are as follows:
(Dollars in thousands) 1999 1998 1997
- ----------------------------------------------------------------------------------------------------------------
BALANCE SHEET DATA:
Cash................................................. $ 9,257 $ 96
Securities available for sale........................ 14,571 11,795
Investment in subsidiaries........................... 197,953 227,891
Receivable from subsidiaries......................... 4,682 7,677
Premises and equipment............................... 316 316
Other assets......................................... 4,113 3,146
-------------------------------
$ 230,892 $ 250,921
===============================
Borrowed funds....................................... $ -- $ 2,590
Accrued liabilities.................................. 3,180 2,359
Shareholders' equity................................. 227,712 245,972
-------------------------------
$ 230,892 $ 250,921
===============================
INCOME STATEMENT DATA:
Dividends from subsidiaries.......................... $ 43,500 $ 29,160 $ 111,905
Other operating income (expense)..................... 851 (2,685) (1,669)
Income before equity in undistributed (excess of
dividends over) net income of subsidiaries....... 44,351 26,475 110,236
Excess of dividends over net income of subsidiaries.. (18,259) (17,239) (91,065)
------------------------------------------------
Net income....................................... $ 26,092 $ 9,236 $ 19,171
================================================
CASH FLOW STATEMENT DATA:
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income........................................... $ 26,092 $ 9,236 $ 19,171
Net gain on securities available for sale transactions (897) (409) (752)
Amortization of unearned stock compensation.......... -- 17,827 5,205
Increase (decrease) in accrued liabilities........... 821 (1,570) 1,826
Increase in other assets............................. (800) (1,305) (10,585)
Decrease (increase) in receivable from subsidiaries.. 2,995 (5,977) (500)
Decrease in investment in subsidiaries............... 19,474 8,130 90,773
------------------------------------------------
Net cash provided by operating activities............ 47,685 25,932 105,138
------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of securities available for sale............ (4,841) (3,406) (3,444)
Proceeds from sale of securities available for sale.. 2,535 551 1,311
Proceeds from sale of premises and equipment......... -- -- 237
------------------------------------------------
Net cash used by investing activities................ (2,306) (2,855) (1,896)
------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Purchase of common stock............................. (23,388) (18,074) (1,320)
Purchase of shares by ESOP and restricted
stock trust...................................... -- -- (17,707)
Proceeds from issuance of common stock upon
exercise of stock options........................ 1,877 3,185 1,280
Proceeds from note payable........................... -- 9,329 28,000
Repayment of note payable............................ (2,590) (6,739) (28,000)
Pre-merger transactions of pooled banks.............. -- -- 467
Cash dividends paid.................................. (12,117) (11,057) (87,537)
------------------------------------------------
Net cash used by financing activities................ (36,218) (23,356) (104,817)
------------------------------------------------
Net increase (decrease) in cash.................. 9,161 (279) (1,575)
Cash at beginning of year............................ 96 375 1,950
------------------------------------------------
Cash at end of year.................................. $ 9,257 $ 96 $ 375
================================================
43
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(19) SELECTED QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
1999
- ----------------------------------------------------------------------------------------------------------------
FIRST SECOND THIRD FOURTH
(DOLLARS IN THOUSANDS, EXCEPT INCOME PER SHARE) QUARTER QUARTER QUARTER QUARTER TOTAL
- ----------------------------------------------------------------------------------------------------------------
TOTAL INTEREST INCOME............................ $ 34,767 $ 33,232 $ 33,551 $ 35,167 $ 136,717
TOTAL INTEREST EXPENSE........................... 17,537 16,110 16,348 17,274 67,269
-------------------------------------------------------------
NET INTEREST INCOME.............................. 17,230 17,122 17,203 17,893 69,448
PROVISION FOR LOAN LOSSES........................ 975 1,250 375 750 3,350
TOTAL NONINTEREST INCOME......................... 3,781 5,360 5,373 3,699 18,213
TOTAL NONINTEREST EXPENSE........................ 10,900 11,695 11,649 11,625 45,869
-------------------------------------------------------------
NET INCOME BEFORE INCOME TAXES................... 9,136 9,537 10,552 9,217 38,442
INCOME TAXES..................................... 2,963 3,016 3,434 2,937 12,350
-------------------------------------------------------------
NET INCOME....................................... $ 6,173 $ 6,521 $ 7,118 $ 6,280 $ 26,092
=============================================================
PER SHARE DATA:
BASIC INCOME PER SHARE........................... $ 0.33 $ 0.36 $ 0.40 $ 0.36 $ 1.45
=============================================================
DILUTED INCOME PER SHARE......................... $ 0.33 $ 0.36 $ 0.40 $ 0.36 $ 1.45
=============================================================
1998
- ----------------------------------------------------------------------------------------------------------------
First Second Third Fourth
(Dollars in thousands, except income per share) Quarter Quarter Quarter Quarter Total
- ----------------------------------------------------------------------------------------------------------------
Total interest income............................ $ 33,098 $ 34,177 $ 34,628 $ 34,606 $ 136,509
Total interest expense........................... 16,781 17,690 18,139 18,013 70,623
-------------------------------------------------------------
Net interest income.............................. 16,317 16,487 16,489 16,593 65,886
Provision for loan losses........................ 662 600 655 459 2,376
Total noninterest income......................... 3,667 4,111 2,699 3,173 13,650
Total noninterest expense........................ 9,878 9,816 29,299 10,173 59,166
-------------------------------------------------------------
Net income before income taxes................... 9,444 10,182 (10,766) 9,134 17,994
Income taxes..................................... 3,274 3,548 (1,318) 3,254 8,758
-------------------------------------------------------------
Net income....................................... $ 6,170 $ 6,634 $ (9,448) $ 5,880 $ 9,236
=============================================================
Per share data:
Basic income per share........................... $ 0.34 $ 0.36 $ (0.52) $ 0.32 $ 0.51
=============================================================
Diluted income per share......................... $ 0.33 $ 0.35 $ (0.51) $ 0.32 $ 0.50
=============================================================
44
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FIRST CHARTER CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
First Charter Corporation (the "Corporation") is a bank holding company
established as a North Carolina Corporation in 1983, with one wholly-owned
banking subsidiary, First Charter National Bank ("FCNB" or the "Bank"). The
Corporation's principal executive offices are located in Concord, North
Carolina. FCNB is a full-service bank and trust company with thirty-three branch
offices and two limited service facilities located in Cabarrus, Rowan, Union,
Cleveland, Rutherford and Mecklenburg counties, North Carolina.
Through its branch locations, the Bank provides a wide range of banking
products, including interest bearing and non-interest bearing checking accounts;
"Money Market Rate" accounts; certificates of deposit; individual retirement
accounts; overdraft protection; commercial, consumer, agricultural, real estate,
residential mortgage and home equity loans; personal and corporate trust
services; safe deposit boxes; and automated banking.
In addition, through its subsidiary First Charter Brokerage Services,
the Bank offers discount brokerage services, insurance and annuity sales and
financial planning services pursuant to a third party arrangement with UVEST
Investment Services. The Bank also operates three other subsidiaries: First
Charter Insurance Services, Inc., First Charter Realty Investment, Inc., and
FCNB Real Estate, Inc. First Charter Insurance Services, Inc. is a North
Carolina corporation formed to meet the insurance needs of businesses and
individuals throughout the Charlotte metropolitan area. First Charter Realty
Investment, Inc. is a Delaware corporation organized as a holding company for
FCNB Real Estate, Inc., a real estate investment trust organized in North
Carolina. The financial results of all subsidiaries are reported on a
consolidated basis as the Corporation.
During 1998, the Corporation acquired HFNC Financial Corp. ("HFNC"), a
North Carolina Corporation organized in August 1995 by Home Federal Savings and
Loan Association ("Home Federal") for the purpose of becoming the unitary
holding company of Home Federal. Home Federal's conversion to stock form and the
concurrent offer and sale of HFNC's common stock was consummated on December 28,
1995. HFNC was merged into the Corporation effective September 30, 1998.
During 1995, the Corporation acquired Bank of Union ("Union"), a full
service bank with five offices located in Union and southern Mecklenburg
counties of North Carolina. In September 1998, Union was merged into FCNB.
During 1997, the Corporation acquired Carolina State Bank ("CSB"), which was
merged into FCNB at that time. CSB was a state-chartered commercial bank with
four banking offices in Cleveland and Rutherford Counties, North Carolina. Union
and CSB offices now operate as FCNB offices.
Each of these mergers was accounted for as a pooling-of-interests and,
accordingly, all financial data for the periods prior to the respective dates of
the mergers have been restated to combine the accounts of Union, CSB and HFNC
with those of the Corporation. In the third quarter of 1998, the Corporation
recognized pretax charges of $17.6 million associated with the merger of HFNC
and pretax charges of $560,000 associated with the
45
51
merger of Union into FCNB. The Corporation recognized pretax charges of $3.4
million in the fourth quarter of 1997 associated with the merger of CSB into
FCNB.
On November 7, 1999, First Charter Corporation entered into a
definitive merger agreement with Carolina First BancShares, Inc. ("Carolina
First") for First Charter to acquire Carolina First. As of December 31, 1999,
Carolina First had total assets of $768.1 million. Under the terms of the
agreement, Carolina First will be merged into First Charter and each Carolina
First shareholder will receive 2.267 shares of First Charter common stock for
each share of Carolina First common stock. Subject to certain conditions,
including the approval of both companies' shareholders and applicable regulatory
authorities, the merger is expected to close no later than the second quarter of
2000. The transaction is intended to be tax-free to the shareholders of Carolina
First and will be accounted for as a pooling-of-interests.
The following discussion and analysis should be read in conjunction
with the consolidated financial statements of the Corporation and the notes
thereto, as restated to reflect the aforementioned mergers. In addition, the
following discussion contains certain forward-looking statements. See "Factors
that May Affect Future Results."
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
1999 VERSUS 1998
OVERVIEW
The Corporation earned $26.1 million in 1999, or $1.45 diluted income
per share, an increase from $9.2 million, or $0.50 diluted income per share, in
1998. For comparative purposes, the 1999 results include pretax total gains of
$3.5 million ($0.13 per diluted share, after tax) on the sales of property and
mortgage loans. The 1998 results included a pretax net expense of $15.8 million
($0.69 per diluted share, after tax), which was comprised of pretax merger
expenses of $18.2 million that were offset by pretax gains totaling $2.4 million
from the nonrecurring sales of securities and First Charter's merchant card
program. For comparative purposes, recurring net income for 1999 amounted to
$23.8 million, or $1.32 per diluted share, compared to recurring net income for
1998 of $22.0 million, or $1.19 per diluted share. Recurring diluted earnings
per share increased 10.9% from 1998. Earnings in 1999, excluding the
nonrecurring items, equated to a return on average assets of 1.30%, compared to
1.24% for 1998, and a return on average equity of 10.35% in 1999, versus 8.76%
in 1998.
Total assets at December 31, 1999 and 1998 were $1.9 billion. Gross
loans at December 31, 1999 and 1998 were $1.4 billion. Due to increases in
certain interest rates during 1999, and the resulting impact on the
Corporation's interest rate risk, the Corporation sold $147.6 million in
lower-yielding mortgage loans in April of 1999. Strong commercial loan volume
during 1999 allowed the Corporation to replace the lower-yielding mortgage loans
which were sold. Total deposits increased $26.5 million, or 2.4%, to $1.1
billion and other borrowings increased $22.0 million, or 4.7%, to $492.0
million.
LIQUIDITY
Liquidity is the ability to maintain cash flows adequate to fund
operations and meet obligations and other commitments on a timely and
cost-effective basis. Liquidity is provided by the ability to attract deposits,
flexible repricing schedules in a sizable portion of the
46
52
loan portfolio, current earnings, a strong capital base and the ability to use
alternative funding sources that complement normal sources. Management's
asset-liability policy is to maximize net interest income while continuing to
provide adequate liquidity to meet continuing loan demand and deposit withdrawal
requirements and to service normal operating expenses.
If additional funding sources are needed, the Bank has access to
federal fund lines at correspondent banks and borrowings from the Federal
Reserve discount window. In addition to these sources, the Bank is a member of
the Federal Home Loan Bank of Atlanta ("FHLB"), which provides access to FHLB
lending sources. At December 31, 1999, the Bank had an available line of credit
with the FHLB totaling $468.8 million with $33.9 million available.
Another source of liquidity is the securities available for sale
portfolio. See "BALANCE SHEET ANALYSIS - Securities Available for Sale" for a
further discussion. Management believes the Bank's sources of liquidity are
adequate to meet loan demand, operating needs and deposit withdrawal
requirements.
ASSET-LIABILITY MANAGEMENT AND INTEREST RATE SENSITIVITY
The primary objective of the Corporation's asset-liability management
strategy is to reduce the risk of a significant decrease in net interest income
caused by interest rate changes without unduly penalizing current earnings. One
method used to manage interest rate sensitivity is to measure, over various time
periods, the interest rate sensitivity positions, or gaps; however, this method
addresses only the magnitude of timing differences and does not address earnings
or market value. Management uses an earnings simulation model to assess the
amount of earnings at risk due to changes in interest rates. This model is
updated at least quarterly and is based on a range of interest rate scenarios.
Under the Corporation's policy, the limit for interest rate risk is 10% of net
interest income when considering an increase or decrease in interest rates of
300 basis points over a twelve-month period. Management believes this method
more accurately measures interest rate risk. Based on an increase or decrease in
interest rates over a twelve-month period, the earnings simulation model
indicates that interest rate risk was within guidelines at approximately 3.87%
and 6.50% of net interest income at December 31, 1999 and 1998, respectively.
The Corporations'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 rate sensitive assets, the earnings position
could improve in a declining rate environment and could deteriorate in a rising
rate environment, depending on the correlation of rate changes in these two
categories. At December 31, 1999 total rate sensitive liabilities due within one
year were $1.3 billion compared to rate sensitive assets of $590.7 million, for
a negative one-year cumulative gap of approximately $707.1 million. Interest
sensitivity of the Corporation's balance sheet as of a specific date is not
necessarily indicative of the Corporation's position on other dates. Management
is developing a plan to reduce the Corporation's negative one-year cumulative
gap.
From time to time, the Corporation may use derivative financial
instruments including futures, forwards, interest rate swaps, option contracts,
and other financial instruments with similar characteristics. At
47
53
December 31, 1999, the Corporation had no derivative financial instruments.
Additionally, the Corporation is party to financial instruments with
off-balance-sheet risk in the normal course of business to meet the financing
needs of its customers. These financial instruments include commitments to
extend credit and standby letters of credit. These instruments involve, to
varying degrees, elements of credit and interest rate risk in excess of the
amount recognized in the consolidated financial statements. Commitments to
extend credit are agreements to lend to a customer so long as there is no
violation of any condition established in the contract. Commitments generally
have fixed expiration dates and may require collateral from the borrower if
deemed necessary by the Corporation. Standby letters of credit are conditional
commitments issued by the Corporation to guarantee the performance of a customer
to a third party up to a stipulated amount and with specified terms and
conditions.
Commitments to extend credit and standby letters of credit are not
recorded as an asset or liability by the Corporation until the instrument is
exercised. See "BALANCE SHEET ANALYSIS - Loans".
The following table presents the scheduled maturity of market risk
sensitive instruments at December 31, 1999:
(Dollars in thousands)
There
Maturing in: 2000 2001 2002 2003 2004 -after Total
- ----------------------------------------------------------------------------------------------------------------
ASSETS
Debt securities..... $ 32,313 $ 6,046 $ 33,214 $ 27,906 $ 41,545 $ 161,016 $ 302,040
Loans............... 254,905 117,213 87,059 108,885 127,742 713,149 1,408,953
-----------------------------------------------------------------------------------------
Total............ $ 287,218 $ 123,259 $ 120,273 $ 136,791 $ 169,287 $ 874,165 $1,710,993
=========================================================================================
LIABILITIES
Savings, NOW
and IMMA's....... $ 533,682 $ 25,794 $ 603 $ -- $ -- $ -- $ 560,078
CDs................. 521,534 54,148 10,472 1,168 1,516 596 589,434
Short-term
borrowings....... 213,955 -- -- -- -- -- 213,955
Long-term
borrowings....... -- 571 76,000 13,000 86,000 102,450 278,021
-----------------------------------------------------------------------------------------
Total.......... $1,269,171 $ 80,513 $ 87,075 $ 14,168 $ 87,516 $ 103,046 $1,641,488
=========================================================================================
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54
The following table presents the average interest rate and estimated
fair value of market risk sensitive instruments at December 31, 1999:
Carrying Average Estimated
(Dollars in thousands) Value Interest Rate Fair Value
- -------------------------------------------------------------------------------------
ASSETS
Debt securities.......... $ 302,040 5.95% $ 302,040
Loans.................... 1,408,953 8.24 1,391,331
------------- ------------
Total .............. $ 1,710,993 7.82 $ 1,693,371
============= ============
LIABILITIES
Savings, NOW
and IMMA's............. $ 560,078 2.34% $ 559,802
CDs...................... 589,434 5.45 587,456
Short-term
borrowings............. 213,955 4.86 213,963
Long-term
borrowings............. 278,021 5.19 275,183
------------- ------------
Total............... $ 1,641,488 4.27 $ 1,636,404
============= ============
CAPITAL RESOURCES
At December 31, 1999, total shareholders' equity was $227.7 million, a
7.4% decrease from December 31, 1998. The decrease in capital is primarily
attributable to the Corporation's share repurchase plan announced on April 27,
1999. The Corporation repurchased and retired 994,148 shares of First Charter
Corporation Common Stock during 1999. The Corporation will not repurchase any
additional shares under the share repurchase plan announced April 27, 1999. Cash
dividends declared per share in 1999 by the Corporation were $0.68, compared to
$0.61 in 1998 excluding HFNC.
The principal asset of the Corporation is its investment in the Bank.
Thus, the Corporation derives its principal source of income through dividends
from the Bank. Certain regulatory and other requirements restrict the lending of
funds by the Bank to the Corporation and the amount of dividends which can be
paid to the Corporation. In addition, certain regulatory agencies may prohibit
the payment of dividends by the Bank if they determine that such payment would
constitute an unsafe or unsound practice. At December 31, 1999, the Bank is
required to obtain prior regulatory approval for payments of dividends.
The Corporation and the Bank must comply with regulatory capital
requirements established by the applicable federal regulatory agencies. Under
the Federal Reserve Board (the "FRB") standards, the Corporation must maintain a
minimum ratio of Tier I Capital (as defined) to total risk-weighted assets of
4.00% and a minimum ratio of Total Capital (as defined) to risk-weighted assets
of 8.00%. Tier I Capital is comprised of total shareholders' equity calculated
in accordance with generally accepted accounting principles less certain
intangible assets and excluding unrealized gains or losses on securities
available for sale. Total Capital is comprised of Tier I Capital plus certain
adjustments, the largest of which for the Corporation is the allowance for loan
losses (up to 1.25% of risk weighted assets). Total Capital must consist of at
least 50% of Tier 1 Capital. Risk-weighted assets refer to the on- and
off-balance sheet exposures of the Corporation adjusted for their related risk
levels using amounts set forth in FRB regulations.
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55
In addition to the aforementioned risk-based capital requirements, the
Corporation is subject to a leverage capital requirement, requiring a minimum
ratio of Tier I Capital (as defined previously) to total adjusted average assets
of 3.00% to 5.00%.
At December 31, 1999, both the Corporation and the Bank were in
compliance with all existing capital requirements. The Corporation's
consolidated capital requirements are summarized in the table below:
Risk-Based Capital
--------------------------------------------------
Leverage Capital Tier 1 Capital Total Capital
- ------------------------------------------------------------------------------------------------------------------------
Amount Percentage (1) Amount Percentage (2) Amount Percentage (2)
- ------------------------------------------------------------------------------------------------------------------------
(Dollars in thousands)
Actual..................... $228,449 12.40% $228,449 16.95% $245,306 18.20%
Required................... 73,707 4.00 53,922 4.00 107,844 8.00
Excess..................... 154,742 8.40 174,527 12.95 137,462 10.20
(1) Percentage of total adjusted average assets. The FRB minimum
leverage ratio requirement is 3.00% to 5.00%, depending on the
institution's composite rating as determined by its
regulators. The FRB has not advised the Corporation of any
specific requirement applicable to it.
(2) Percentage of risk-weighted assets.
REGULATORY RECOMMENDATIONS
Management is not presently aware of any current recommendations to the
Corporation or to the Bank by regulatory authorities, which, if they were to be
implemented, would have a material effect on the Corporation's liquidity,
capital resources, or operations.
BALANCE SHEET ANALYSIS
SECURITIES AVAILABLE FOR SALE
Securities available for sale are a component of the Corporation's
asset-liability management strategy and may be sold in response to liquidity
needs, changes in interest rates, changes in prepayment risk, and other factors.
They are accounted for at fair value, with unrealized gains and losses recorded
net of tax as a component of other comprehensive income.
All securities are classified as available for sale. As maturities,
sales, or paydowns occur on securities, the proceeds are utilized to meet loan
demand and to reinvest in additional securities.
At December 31, 1999, securities available for sale were $342.1 million
or 18.1% of total assets, compared to $331.8 million, or 17.8% of total assets,
at December 31, 1998. The fair value of these securities was approximately $7.0
million below and $10.4 million above their amortized cost at December 31, 1999
and 1998, respectively. The tax equivalent average yield on the securities
available for sale portfolio was 6.62% for 1999 and 6.93% for 1998. The
weighted-average life of the portfolio was 5.80 years at December 31, 1999
compared to 9.45 years at year-end 1998.
LOANS
Due to increases in certain interest rates during 1999, and the
resulting impact on the Corporation's interest rate risk, the Corporation sold
$147.6 million in lower-yielding mortgage loans in April of 1999.
50
56
Strong commercial loan volume during 1999 allowed the Corporation to replace the
lower-yielding mortgage loans which were sold. As a result, gross loans remained
at $1.4 billion at December 31, 1999 and 1998.
The loan portfolio at December 31, 1999 was composed of 9.6%
commercial, financial, and agricultural loans, 17.8% real estate construction
loans, 69.5% real estate mortgage loans, and 3.1% installment loans. This
compares to a composition of 6.6% commercial, financial and agricultural, 12.7%
real estate construction, 75.7% real estate mortgage, and 5.0% installment at
December 31, 1998. Approximately $11.4 million of the real estate mortgage loans
at December 31, 1999 are loans for which the principal source of repayment comes
from the sale of real estate. The remaining $1.3 billion of loans collateralized
by real estate at December 31, 1999 are (i) other commercial loans for which the
primary source of repayment is derived from the ongoing cash flow of the
business and which are also collateralized by real estate - $504.3 million, (ii)
personal installment loans which are collateralized by real estate - $11.7
million, (iii) home equity loans - $90.5 million, and (iv) individual
residential mortgage loans - $639.7 million.
The Corporation's primary market area includes the states of North and
South Carolina, and predominately centers on the Metro region of Charlotte. At
December 31, 1999, the majority of the total loan portfolio, as well as a
substantial portion of the commercial and real estate loan portfolio, represents
loans to borrowers within this region. The diversity of the region's economic
base tends to provide a stable lending environment. No significant concentration
of credit risk has been identified due to the diverse industrial base in the
region.
In the normal course of business, there are various outstanding
commitments to extend credit, which are not reflected in the consolidated
financial statements. At December 31, 1999, pre-approved but unused lines of
credit for loans totaled $443.6 million and standby letters of credit aggregated
$6.8 million. These amounts represent the Bank's exposure to credit risk, and in
the opinion of management, have no more than the normal lending risk that the
Bank commits to its borrowers. If these commitments are drawn, the Bank will
obtain collateral if it is deemed necessary based on management's credit
evaluation of the borrower. Such obtained collateral varies, but may include
accounts receivable, inventory, and commercial or residential real estate.
Management expects that these commitments can be funded through normal
operations.
ASSET QUALITY
Nonperforming assets, which consist of foreclosed assets, nonaccrual
loans, and restructured loans, were $9.8 million at December 31, 1999, as
compared to $9.9 million at December 31, 1998. Non-performing assets as a
percentage of loans and foreclosed assets at year-end amounted to 0.69% in 1999
and 1998. Total problem assets (nonperforming assets and loans 90 days or more
past due) amounted to $13.3 million at December 31, 1999 and $12.1 million at
December 31, 1998. Total problem assets represented 0.93% of loans and
foreclosed assets at December 31, 1999, compared to 0.85% at December 31, 1998.
The components of nonperforming and problem assets are presented in the
table:
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57
December 31, December 31,
(Dollars in thousands) 1999 1998
- -------------------------------------------------------
Nonaccrual loans $7,738 $5,758
Restructured loans 37 577
Other real estate 2,041 3,537
------- -------
Total non-
performing assets 9,816 9,872
Loans 90 days or more
past due and still
accruing 3,460 2,270
------- -------
Total problem assets $13,276 $12,142
======= =======
Nonaccrual loans increased primarily due to the addition of two
commercial relationships to nonaccrual during 1999. These relationships are
currently in the process of collection. Interest income that would have been
recorded on all nonaccrual loans for the year ended December 31, 1999, had they
performed according to their original terms, amounted to approximately $706,000,
compared to $457,000 for the year ended December 31, 1998. Interest income on
nonaccrual loans included in the results of operations for the years ended
December 31, 1999 and 1998, amounted to approximately $384,000 and $124,000,
respectively.
Accruing loans 90 days or more past due increased to 0.24% of gross
loans at December 31, 1999, compared to 0.16% of gross loans at December 31,
1998. The increase in accruing loans 90 days or more past due can be primarily
attributed to conforming the accounting practices of Home Federal to FCNB during
1999. Prior to 1999, loans accounted for by Home Federal were automatically
placed on nonaccrual status when they reached 90 days past due. Loans accounted
for by FCNB are reviewed and a determination is made whether to place the loan
on nonaccrual status. After the consolidation of Home Federal into FCNB, the
nonaccrual policy of FCNB has been used. Application of FCNB's method to the
Home Federal loan portfolio did not have a significant effect on the results of
operations for 1999.
Management's policy for any accruing loan greater than 90 days past due
is to perform an analysis of the loan, including a consideration of the
financial position of the borrower(s) and any guarantor(s) as well as the value
of the collateral, and use this information to make an assessment as to whether
collectibility of the principal and the interest appears probable. Based on such
a review, Management has determined it is probable that the principal as well as
the accruing interest on these loans will be collected in full.
Other real estate decreased to $2.0 million at December 31, 1999 from
$3.5 million at December 31, 1998. The sale of several foreclosed properties and
branch properties no longer in use accounted for the $1.5 million decrease.
CREDIT ADMINISTRATION AND ALLOWANCE FOR LOAN LOSSES
All estimates of the loan portfolio risk, including the adequacy of the
allowance for loan losses, are subject to general and local economic conditions,
among other factors, which are unpredictable and beyond management's control.
Since a significant portion of the loan portfolio is comprised of real estate
loans and loans to area businesses, a continued risk is that the real estate
market and economic conditions could change and could result in future losses or
require increases in the provision for loan losses.
Management currently uses several measures to assess and control the
loan portfolio risk. For example, all loans over a certain dollar amount must
receive an in-depth review by an analyst in the Bank's Credit Administration
department. Any issues regarding risk assessments of those credits are addressed
by the Bank's loan administration and senior credit officer and factored into
management's decision to originate or renew the loan. Furthermore, large
commitments are reviewed and approved by a Senior Loan
52
58
Committee comprised of senior management, the senior credit officer and senior
lending officers of the Bank. The Loan Committee of the Board of Directors
reviews loans above predetermined amounts.
Management uses the information developed from the procedures described
above in evaluating and grading the loan portfolio. This continual grading
process is used to monitor the credit quality of the loan portfolio and to
assist management in determining the appropriate levels of the allowance for
loan losses.
As part of the continual grading process, an analysis is performed
monthly independently from any analysis in conjunction with the origination of
loans. Individual loans are assigned a risk grade based on their credit quality,
which is subject to change as conditions warrant. Each grade determines the
percentage of the outstanding loan balance allocated to the loan loss reserve.
Loans with weaker credit quality are individually analyzed to determine a
specific allowance, which reflects management's best estimate of the risk
associated with each credit. An estimate of an allowance is made for all other
loans in the portfolio based on their assigned risk grade, type of loan and
other matters related to credit risk. In the allowance for loan loss analysis
process, the Bank also aggregates the loans into pools of similar credits and
reviews the historical loss experience associated with these pools as additional
criteria to allocate the allowance to each category.
The allowance for loan losses as a percentage of gross loans
outstanding was 1.22% at December 31, 1999, compared to 1.09% at year-end 1998.
The increase in the allowance as a percentage of gross loans at December 31,
1999 compared to December 31, 1998 is largely attributable to the sale of $147.6
million in lower-yielding mortgage loans in April of 1999, for which $369,000 of
allowance for loan losses was removed at the time of the transaction. Mortgage
loans traditionally have had lower incurred losses than commercial loans.
Commercial loans originated during the year accounted for the majority of the
loans that replaced the mortgage loans sold, which also contributed to the
increase in the allowance as a percentage of gross loans. Total problem assets
as a percentage of gross loans outstanding was 0.93% at December 31, 1999,
compared to 0.85% at December 31, 1998.
Management considers the December 31, 1999 allowance for loan losses
adequate to cover losses that are estimated to have been incurred in the Bank's
loan portfolio. Management believes it has established the allowance in
accordance with generally accepted accounting principles and in consideration of
the current economic environment. While Management uses the best information
available to make evaluations, future additions to the allowance may be
necessary based on changes in economic and other conditions. Additionally,
various regulatory agencies, as an integral part of their examination process,
periodically review the Bank's allowance for loan losses. Such agencies may
require the recognition of adjustments to the allowance based on their judgments
of information available to them at the time of their examinations.
DEPOSITS
Total deposits at December 31, 1999 were $1.1 billion, a 2.4% increase
from December 31, 1998. Demand deposits increased $3.0 million or 1.2%; and
insured money market accounts increased $57.3 million or 40.3%; while savings
deposits decreased $29.0 million or 21.5%; and certificates of deposit decreased
$4.8 million or 0.8%. Increases in demand and money market accounts were due to
marketing campaigns directed toward packaging and promoting these accounts more
effectively,
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while the reduction in savings and certificates of deposits were due to the
Corporation's management of interest rates paid.
OTHER BORROWINGS
Other borrowings increased $22.0 million during the year, to $491.9
million at December 31, 1999, from $469.9 million at December 31, 1998. The
components of this increase consisted of an increase of $89.8 million in FHLB
advances which was partially offset by a decrease of $67.8 million in short term
borrowings consisting primarily of federal funds purchased and securities sold
under agreements to repurchase. These borrowings were principally used to fund
loan growth.
EARNINGS PERFORMANCE
NET INTEREST INCOME
Net interest income, the difference between total interest income and
total interest expense, is the Corporation's principal source of earnings. For
the year ended December 31, 1999, net interest income amounted to $69.4 million,
an increase of 5.4% from net interest income of $65.9 million in 1998. This was
attributable to an increase in average interest earning assets of $32.0 million
to $1.7 billion for the year ended December 31, 1999. This increase is primarily
due to the growth in the Corporation's average loan portfolio, which increased
$22.8 million. The decline in average yield on interest earning assets to 8.13%
during 1999, compared to 8.25% during 1998, resulted from the reduction in
average prime rate during 1999, from 8.31% in 1998 to 8.02% in 1999. The average
yield earned on loans was 8.50% in 1999, compared to 8.59% in 1998.
In addition to the increase in average interest earning assets, the
Corporation experienced an increase in average interest-bearing liabilities of
$60.0 million, or 4.4% from the prior year, due to the use of FHLB advances and
increases in deposits to fund loan growth. The average rate paid on interest
bearing liabilities declined during the period to 4.71% in 1999, compared to
5.16% in 1998. The average rate paid on interest-bearing deposits was 4.41% in
1999, down from 4.94% in 1998. Similarly, the rate paid on other borrowed funds
declined to 5.42% in 1999, compared to 5.64% in 1998.
The net interest margin (tax adjusted net interest income divided by
average interest-earning assets) increased somewhat to 4.21% in 1999, from 4.07%
in 1998. This reflects the impact of the Corporation's repricing of deposit
products during the year and its favorable effect on net interest margin
percentage. See "Asset-Liability Management and Interest Rate Sensitivity" for
additional discussion on the Corporation's management of rate sensitive assets
and liabilities.
PROVISION FOR LOAN LOSSES
The provision for loan losses in 1999 was $3.4 million compared to $2.4
million in 1998. The increase was due to the strong commercial loan volume the
Corporation incurred during 1999.
Net charge-offs for 1999 were $1.2 million or 0.09% of average loans
compared to $2.1 million or 0.15% of average loans in 1998. The decrease in net
charge-offs in 1999 was primarily due to certain problem loans acquired through
the merger of CSB in December 1997 which were charged off during early 1998.
NONINTEREST INCOME
Noninterest income was $18.2 million in 1999 compared to $13.7 million
in 1998, an increase of 33.4%. This increase is principally attributable to an
increase in fee income from the Bank's Insurance Agency subsidiary as well as
increases in service charge income,
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trust income and mortgage loan fees. For comparative purposes, the 1999 results
include total gains of $3.5 million from the sales of property and mortgage
loans, while the 1998 results include total gains of $2.4 million from the sale
of HFNC securities and the sale of the Corporation's merchant card program.
Excluding these items, noninterest income increased 30.1% from 1998 to 1999.
NONINTEREST EXPENSE
Noninterest expense decreased $13.3 million in 1999 as compared to
1998. The majority of this decrease involved merger costs of $18.2 million in
1998 primarily related to the HFNC merger. For comparative purposes, noninterest
expense, excluding the $18.2 million HFNC merger expense, increased $4.9
million, or 12.0% during 1999. Components of the current year increase included
salaries and fringe benefits, which increased $1.2 million, or 5.0%, occupancy
and equipment costs, which increased $1.4 million, or 22.0%, and marketing which
increased $1.0 million, or 72.5%. The salary and benefits costs increased due to
regular salary increases and investments in additional personnel. Occupancy and
equipment increases reflect the costs associated with additional facilities and
added technology. Marketing increases reflect the Corporation's major brand
advertising campaign designed to increase the Corporation's name recognition
throughout the greater Charlotte metropolitan region.
Total income tax expense for 1999 was $12.4 million versus $8.8 million
in 1998. The increase is attributable to an increase in taxable income for 1999
over 1998. The increase in tax expense, however, was not proportionate with the
increase in income because portions of the 1998 HFNC merger and acquisition
costs were not deductible. This created a decrease in the effective tax rate
from 48.7% in 1998 to 32.1% in 1999.
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
1998 VERSUS 1997
The Corporation earned $9.2 million or $0.50 diluted income per share
in 1998, a 51.8% decrease from $19.2 million or $1.03 diluted income per share
in 1997. Excluding the nonrecurring charges primarily associated with the HFNC
merger cost, 1998 earnings per share increased 19.0% to $1.19 diluted income per
share compared to $1.00 diluted income per share for 1997. Key factors
contributing to the increase in net income, excluding the nonrecurring charges,
were an increase of 9.3% in net interest income and an increase in noninterest
income of 10.6%. These increases were partially offset by an increase of 4.0% in
noninterest expense. Earnings in 1998, excluding the nonrecurring charges,
equate to a return on average assets of 1.24% for 1998, compared to 1.18% for
1997, and a return on average equity of 8.78% in 1998, versus 7.31% in 1997.
Total assets at December 31, 1998, were $1.9 billion, up 11.5% from the
level at year-end 1997. Gross loans increased 12.8% to $1.4 billion and total
deposits increased 6.0% to $1.1 billion.
At December 31, 1998, securities available for sale were $331.8 million
or 17.8% of total assets, compared to $315.6 million, or 18.9% of total assets,
at year-end 1997. The fair value of these assets was approximately $10.4 million
and $9.0 million above their amortized cost at December 31, 1998 and 1997,
respectively. The tax equivalent average yield on the securities available for
sale portfolio was 6.93% for 1998 and 6.72% for 1997. The average life of the
portfolio was 9.45 years at December 31, 1998 compared to 10.06 years at
year-end 1997.
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The loan portfolio at December 31, 1998 was composed of 6.6%
commercial, financial, and agricultural loans, 12.7% real estate construction
loans, 75.7% real estate mortgage loans, and 5.0% installment loans. This
compares to a composition of 6.4% commercial, financial, and agricultural, 10.5%
real estate construction, 76.1% real estate mortgage, and 7.0% installment at
December 31, 1997.
Problem assets at December 31, 1998 were $12.1 million, or 0.85% of
gross loans and foreclosed properties, compared to $12.8 million, or 1.02% at
December 31, 1997. The components of problem assets are presented in the table
below:
December 31, December 31,
(Dollars in thousands) 1998 1997
- -----------------------------------------------------
Nonaccrual loans $ 5,758 $ 6,119
Restructured loans 577 587
Other real estate 3,537 4,006
------- -------
Total non-
performing assets 9,872 10,712
Loans 90 days or more
past due and still
accruing 2,270 2,109
------- -------
Total problem assets $12,142 $12,821
======= =======
Interest income that would have been recorded on nonaccrual loans for
the years ended December 31, 1998 and 1997, had they performed according to
their original terms, amounted to approximately $457,000 and $767,000,
respectively. Interest income on nonaccrual loans included in the results of
operations for the years ended December 31, 1998 and 1997, amounted to
approximately $124,000 and $383,000, respectively.
Accruing loans 90 days or more past due decreased to 0.16% of gross
loans at December 31, 1998 compared to 0.17% of gross loans at December 31,
1997.
Net charge-offs for 1998 were $2.1 million or 0.15% of average loans
compared to $1.8 million or 0.16% of average loans in 1997.
Other real estate decreased to 3.5 million at December 31, 1998 from
$4.0 million at December 31, 1997. The primary reason for the $0.5 million
decrease is due to the sale of several foreclosed properties during 1998 which
was partially offset by the reclassification of property totaling $553,000 that
was originally purchased for the construction of a branch location. Management
decided not to construct a branch on this property; and therefore, the carrying
value of this property was reclassified from premises and equipment to other
real estate. Additionally, two residential construction loans were foreclosed in
December 1998.
Total deposits at December 31, 1998 were $1.1 billion, a 6.0% increase
from a 1997 year-end level. Demand deposits increased $37.5 million or 17.5%;
insured money market accounts increased $28.8 million or 25.4%; savings deposits
decreased $3.3 million or 2.5%; and certificates of deposit decreased $5.9
million or 1.0%. Increases in demand and money market accounts were due to
marketing campaigns directed toward packaging and promoting these accounts more
effectively, while the reduction in certificates of deposits was due to the
Corporation's management of interest rates paid as the certificates matured
during 1998.
For the year ended December 31, 1998, net interest income was $65.9
million, an increase of 9.3% from net interest income of $60.3 million in 1997.
The increase is attributable to an increase in average interest earning assets
of $178.3 million from $1.5 billion during 1997 to approximately $1.7 billion
during 1998. The net interest margin (tax adjusted net interest income divided
by average interest earning assets) declined somewhat to 4.07% in 1998 from
4.12% in 1997.
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The average yield on interest-earning assets was 8.25% in 1998 compared
to 8.28% in 1997. The average rate paid on interest-bearing liabilities was
5.16% in 1998, compared to 5.12% in 1997. The average yield earned on loans was
8.59% in 1998, compared to 8.83% in 1997. The average rate paid on
interest-bearing deposits was 4.94% in 1998, from 4.91% in 1997.
The provision for loan losses for 1998 was $2.4 million compared to
$2.7 million in 1997. The decrease in the provision was due to an incremental
$1.4 million provision for loan losses in 1997 for loans specifically identified
in the CSB loan portfolio which were deemed to have impairment losses, and, in
some cases, required charging off. When excluding the effect of this prior year
incremental provision, the current year provision increased over 1997 largely
due to growth in the Bank's loan portfolio.
Noninterest income was $13.7 million in 1998 compared to $15.1 million
in 1997, for an increase of 9.5%. The decrease in other noninterest income is
attributable to reduced securities gains in 1998 as compared to the prior year.
Security sales were reduced during 1998, reducing the amount of related gains to
$2.2 million in 1998 compared to $5.7 million in 1997. The improvement in other
noninterest income included increases in service charge income, trust income and
mortgage loan fees. In addition, the Corporation recorded a one-time gain during
1998 of approximately $450,000 from the sale of its merchant card program.
Excluding the $18.2 million in nonrecurring costs associated with the
1998 merger with HFNC and the $3.4 million in nonrecurring costs associated with
the 1997 merger with CSB, total noninterest expense in 1998 was $41.0 million,
compared to $39.4 million in 1997, representing a 4.0% increase. The increase
was primarily attributable to increases in costs associated with salaries and
benefits, occupancy and equipment and other noninterest expense.
Salaries and fringe benefits increased $1.2 million, or 5.4%, primarily
due to regular salary increases and investment in additional personnel, as well
as the increased commissions paid on higher levels of mortgage and brokerage
activity.
Occupancy and equipment increased approximately $769,000 or 14.1%. A
primary reason for the increase is due to an increase in depreciation expense in
connection with the local area network (LAN) and the wide area network (WAN)
which were added in mid-1996. This technology continues to improve the Bank's
ability to service loan and deposit customers and to gain greater operating
efficiency. Additionally, with the Bank's continued growth, additional office
space was required. The Corporation entered into several leasing agreements for
office space.
Total income tax expense for 1998 was $8.8 million versus $10.8 million
in 1997. The decrease is attributable to a decrease in taxable income resulting
from the merger expenses. The reduction in tax expense, however, was not
proportionate with the reduction in income because portions of the merger and
acquisition costs were not deductible. This created an increase in the effective
tax rate from 36.0% in 1997 to 48.7% in 1998. The 1997 rate was likewise higher
than the Corporation's "normal" tax rate due to similar nondeductible costs
associated with its 1997 merger with CSB.
ACCOUNTING AND REGULATORY MATTERS
Statement of Financial Accounting Standards No. 133, "Accounting for
Derivative Instruments and Hedging Activities," establishes accounting and
reporting standards for derivatives and hedging activities. It requires that all
derivatives be included as assets or liabilities in the balance sheet and
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that such instruments be carried at fair market value through adjustments to
either other comprehensive income or current earnings or both, as appropriate.
The Standard was originally effective for financial statements issued for all
fiscal quarters of fiscal years beginning after June 15, 1999. The
implementation date of the Standard was delayed to quarters of fiscal years
beginning after June 15, 2000 by the Statement of Financial Accounting Standards
No. 137, "Accounting for Derivative Instruments and Hedging Activities -
Deferral of the Effective Date of FASB Statement No. 133". The Corporation is in
the process of assessing the impact of this Standard.
Statement of Financial Accounting Standards No. 134, "Accounting for
Mortgage-Backed Securities Retained after the Securitization of Mortgage Loans
Held for Sale by a Mortgage Banking Enterprise," establishes accounting and
reporting standards for certain mortgage banking activities. It conforms the
subsequent accounting for securities retained after the securitization of other
types of assets. The Corporation adopted this standard in the first quarter of
1999; its effect on the Corporation was not material.
From time to time, the Financial Accounting Standards Board (FASB) also
issues exposure drafts for proposed statements of financial accounting
standards. Such exposure drafts are subject to comment from the public, to
revisions by the FASB and to final issuance by the FASB as statements of
financial accounting standards. Management considers the effect of the proposed
statements on the consolidated financial statements of the Corporation and
monitors the status of changes to issued exposure drafts and to proposed
effective dates.
In 1999, the President of the United States signed into law the
Gramm-Leach-Bliley Financial Modernization Act of 1999 ("Modernization Act").
The Modernization Act allows bank holding companies meeting management, capital
and Community Reinvestment Act standards to engage in substantially broader
range of traditionally nonbanking activities than was permissable before
enactment, including insurance underwriting and making merchant banking
investments in commercial and financial companies. It also allows insurers and
other financial services companies to acquire banks; removes various
restrictions that currently apply to bank holding company ownership of
securities firms and mutual fund advisory companies; and establishes the overall
regulatory structure applicable to bank holding companies that also engage in
insurance and securities operations. This part of the Modernization Act will
become effective 120 days after enactment. The Corporation currently believes it
meets the requirements for the broader range of activities that will be
permitted by the Modernization Act.
In addition, the Modernization Act also modifies current law related to
financial privacy and community reinvestment. The new privacy provisions
generally will prohibit financial institutions from disclosing nonpublic
personal financial information to nonaffiliated third parties unless the
customer has the opportunity to decline disclosure.
YEAR 2000
The Corporation successfully addressed the Year 2000 issue through
implementation of a systematic, disciplined plan. Other than the time and costs
involved in preparing for Year 2000, the Company is not aware of any negative
consequences involving the Company itself, its vendors, or its customers as a
result of the Y2K issue.
LEGAL PROCEEDINGS
In June 1995, a lawsuit was initiated against Home Federal by a borrower's
affiliated companies in which the plaintiffs
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alleged that Home Federal wrongfully set-off certain funds in an account being
held and maintained by Home Federal. In addition, the plaintiffs alleged that as
a result of the wrongful set-off, Home Federal wrongfully dishonored a check in
the amount of $270,000. Plaintiffs further alleged that the actions on behalf of
Home Federal constituted unfair and deceptive trade practices, thereby entitling
plaintiffs to recover treble damages and attorneys' fees. Home Federal denied
any wrongdoing and filed a motion for summary judgment. Upon consideration of
the motion, the United States Bankruptcy Judge entered a Recommended Order
Granting Summary Judgement, recommending the dismissal of all claims asserted
against Home Federal. In October 1997, the United States District Court entered
an order granting summary judgment in favor of Home Federal. The plaintiff has
appealed the order of summary judgment and the case is presently pending in the
Fourth Circuit Court of Appeals.
In December 1996, Home Federal filed a suit against the borrower and his
company and against the borrower's wife, daughters, and a company owned by his
wife and daughter, alleging transfers of assets to the wife, daughter, and their
company in fraud of creditors, and asking that the fraudulent transfers be set
aside. The objective of the lawsuit is to recover assets which may be used to
satisfy a portion of the judgments obtained in favor of Home Federal in prior
litigation. In April 1997, the borrower's wife filed a counterclaim against Home
Federal alleging that she borrowed $750,000 from another financial institution,
secured by a deed of trust on her principal residence, the proceeds of which
were paid to Home Federal for application on a debt owed by one of her husband's
corporations, claiming that officers of Home Federal promised to resume making
loans to her husband's corporation after the payment. Home Federal and its
officers vigorously denied all of her allegations. Home Federal filed a motion
for summary judgment and dismissal of the counterclaim. The motion for summary
judgment was heard in the Superior Court division of the Mecklenburg County
General Court of Justice in April 1998. In June 1998, Home Federal removed this
case to the United States Bankruptcy Court for the Western District of North
Carolina, Charlotte Division, due to the fact that the defendant was the debtor
in a pending bankruptcy case. In April 1999, Home Federal moved for summary
judgement to dismiss the counterclaims. At a hearing in May 1999, the Bankruptcy
Judge granted part and denied part of Home Federal's Motion for Summary
Judgement. The Judge dismissed the wife's counterclaim for breach of fiduciary
duty, but allowed her claim for fraud to continue. The borrower, his wife and
daughter filed a motion for jury trial. The request was not filed within the
time allowed; however, the Judge may, in his discretion, order a jury trial. We
have filed an objection to the request and a hearing on the motion is scheduled
for April 4, 2000. A trial date has not been set; however, we anticipate a trial
within 90 days. Home Federal believes it has strong defenses to the defendant's
counterclaim.
In February 1997, two companies affiliated with those referred to in the
first paragraph above filed an additional action against two executive officers
of Home Federal and against an officer of another financial institution. The
action was removed from the state court to the United States Bankruptcy Court
for the Western District of North Carolina. At the same time, the borrower, who
is affiliated with all of these companies, also filed an action in the Superior
Court of Mecklenburg County, North Carolina against the two executive officers
of Home Federal and against an officer of another financial institution. The
Complaints in both actions assert virtually identical claims. The plaintiffs in
both lawsuits allege that the officers of both financial institutions engaged in
a conspiracy to wrongfully declare loans to be in default so as to eliminate
those companies as borrowers of Home Federal. Plaintiffs claim actual damages,
treble damages, and punitive damages together with interest, attorneys' fees,
and other costs. Plaintiffs allege misrepresentation, breach of fiduciary duty,
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constructive fraud, interference with business expectancy, wrongful bank
account set-off, and unfair and deceptive acts and practices. The action pending
in the bankruptcy court has been stayed. All defendants filed motions for
summary judgment in the state court action which were granted, and that lawsuit
was dismissed in January 1998 by the Superior Court of Mecklenburg County. The
plaintiff appealed the order granting summary judgment to the North Carolina
Court of Appeals. In July 1998, the defendants removed the state court case to
the United States Bankruptcy Court for the Western District of North Carolina,
Charlotte Division, due to the fact that the plaintiff was a debtor in a pending
bankruptcy case. As a result of the removal, the North Carolina Court of Appeals
entered an order staying further proceedings in the North Carolina Court of
Appeals in August 1998. In early June 1999, the United States Bankruptcy court
entered its Memorandum Decision and Order adopting the State Court dismissal of
the lawsuit. In late June 1999, the plaintiff gave notice of appeal which Home
Federal is opposing. The appeal is pending. On February 12, 2000, the borrower
filed a motion to close his bankruptcy case and remand the action to State
Court. We filed an objection to the motion. At a hearing on March 7, 2000, the
Judge denied the borrower's request to close the case and denied the borrower's
motion to remand to State Court. The Corporation is bound by Home Federal's
agreement to indemnify both of its officers with respect to costs, expense, and
liability which might arise in connection with both of these cases.
In July 1997, the above borrower and affiliated companies filed an
additional action against HFNC, Home Federal, and the other financial
institution referred to in the paragraph above, alleging that previous judgments
in favor of Home Federal and the other financial institution obtained in prior
litigation were obtained by the perpetration of fraud on the Bankruptcy Court,
U.S. District Court, and the Fourth Circuit Court of Appeals. The plaintiffs are
seeking to have the judgments set aside on that basis. All defendants filed
motions for summary judgment and dismissal which were granted, and the lawsuit
was dismissed on September 24, 1998. The borrower, individually, has appealed
the Order dismissing the lawsuit to the Fourth Circuit Court of Appeals. In
February 1999, the United States District Court entered an Order sanctioning the
attorneys for the plaintiffs and ordering that the plaintiff be prohibited from
filing any further action or proceeding in the United States District Court for
the Western District of North Carolina arising from facts involved in this
matter. The Plaintiff appealed the entry of that order. On March 6, 2000, the
United States Court of Appeals for the 4th Circuit ruled against the borrower on
both appeals and affirmed the District Court's opinion.
Management continues to deny any liability in the above-described cases and
continues to vigorously defend against the claims. However, there can be no
assurance of the ultimate outcome of the litigation, or the range of potential
loss, if any.
The Corporation and the Bank are defendants in certain other claims and
legal actions arising in the ordinary course of business. In the opinion of
management, after consultation with legal counsel, the ultimate disposition of
these other matters is not expected to have a material adverse effect on the
consolidated operations, liquidity or financial position of the Corporation or
the Bank.
FACTORS THAT MAY AFFECT FUTURE RESULTS
The foregoing discussion contains certain 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.
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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 the
adequacy of the loan loss allowance needs using its present risk grading system,
the ability to generate liquidity if necessary to meet loan demand, the ability
to manage unforeseen domestic and global rapid changes in interest rates.
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OFFICERS & DIRECTORS
FIRST CHARTER CORPORATION BOARD OF DIRECTORS
William R. Black, M.D. Oncologist - Carolina Oncology Associates
Michael R. Coltrane President, CEO - CT Communications, Inc.
Vice Chairman - First Charter Corporation
J. Roy Davis, Jr. Owner - S&D Coffee, Inc.
Chairman - First Charter Corporation
John J. Godbold, Jr. Retired
Charles F. Harry, III President - Grover Industries, Inc.
Frank H. Hawfield, Jr. Owner, President - Firestone Home and Auto
Lawrence M. Kimbrough President, CEO -
First Charter Corporation
and First Charter National Bank
Jerry E. McGee President - Wingate University
Hugh H. Morrison President - E.L. Morrison Lumber Company
Thomas R. Revels Healthcare Consultant
FIRST CHARTER CORPORATION OFFICERS
President and Chief Executive Officer
Lawrence M. Kimbrough
Executive Vice President, Chief Operating Officer
and Chief Financial Officer
Robert O. Bratton
Executive Vice President
Phillip M. Floyd Robert G. Fox, Jr. Robert E. James, Jr.
C. Thomas McFarland Stephen M. Rownd
Senior Vice President
Laura N. Blalock Bobby D. Doby, Jr. James T. Mathews, Jr.
Vice President and Chief Auditor
William O. Turner
Corporate Secretary
James W. Townsend, Jr.
Assistant Corporate Secretary
Rose W. Edwards Anne C. Forrest David E. Keul
Assistant Treasurer
David E. Keul
FIRST CHARTER NATIONAL BANK BOARD OF DIRECTORS
William R. Black, M.D. Oncologist - Carolina Oncology Associates
Michael R. Coltrane President, CEO - CT Communications, Inc.
Vice Chairman - First Charter National Bank
J. Roy Davis, Jr. Owner - S&D Coffee, Inc.
Chairman - First Charter National Bank
John J. Godbold, Jr. Retired
H. Clark Goodwin Retired
Charles F. Harry, III President - Grover Industries, Inc.
Frank H. Hawfield, Jr. Owner, President - Firestone Home and Auto
Lawrence M. Kimbrough President, CEO -
First Charter Corporation
and First Charter National Bank
Jerry E. McGee President - Wingate University
Ellen L. Messinger Private Investor - Messinger, Inc.
Hugh M. Morrison President - E.L. Morrison Lumber Company
Thomas R. Revels Healthcare Consultant
FIRST CHARTER NATIONAL BANK OFFICERS
President and Executive Vice President Bobby D. Doby, Jr. Jerold L. Marlow
Chief Executive Officer J. Harold Barnes, Jr. Thomas J. Elkins James T. Mathews, Jr.
Lawrence M. Kimbrough Phillip M. Floyd Patricia M. Gosnell Danny H. Patton
Robert G. Fox, Jr. Kathleen M. Harris Darren M. Radson
Group Executive Vice President Patricia K. Horton Robert L. Sands
Robert O. Bratton Senior Vice President Phillip R. Jurney J. Kevin Toomb
Robert E. James, Jr. Laura N. Blalock Donna J. Kenney J. W. Townsend, Jr.
C. Thomas McFarland Lisa B. Boylen David E. Keul Will Weill, III
Stephen M. Rownd James L. Brewer Richard H. Lester L. Eugene Willard
Kenneth W. Caldwell Earl H. Lutz, Jr. John M. Woods
Jerrell M. Deaver, Jr. Richard A. Manley
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OFFICERS & DIRECTORS
FIRST CHARTER NATIONAL BANK OFFICER (CONTINUED)
Vice President Deborah W. Craig Donel T. Holcomb* Matthew M. Page
Harvey E. Baker Travis B. Edwards David E. Keul* James Rhodes
John R. Baker Cathy H. Faucette Earl H. Lutz, Jr.* Andria C. Rhymer
Thomas W. Bennett Anne C. Forrest Lynn A. McDaniel Katherine L. Schiele
Michael A. Brejda Crystal D. Funches Judy E. Montague Renata C. Schoner
Steven C. Calhoun Laurie A. Gagliano Lisa C. Parker* Earl C. Schooley
Julie J. Carter Jennifer M. Gragg Patricia E. Pate Deborah J. Thomas
Jo-Ann L. Copeland Jan G. Griffin Andria C. Rhymer* Loretta T. Thomas
E. Stephen Costner Sharon J. Hanson Tammy D. Scruggs* Matthew J. Triplett
Deborah R. Deese Robin T. Hinson E. Taylor Vickrey
Brian J. Doran Karen F. Hodge Chief Auditor Jeffrey B. Ward
C. Eugene Efird, Jr. Brian A. Ingold William O. Turner*
Kenneth L. Frie Steven C. Koman Trust Officer
Linda S. Gibson Teresa A. Laskey Banking Officer Paul M. Anderson
R. Dwight Henry Robin S. Leslie Debbie B. Alexander Michael S. Johnson*
D. Jean Hovis Sandra J. Mansur Angel M. Anderson Craig E. Kamis*
Michael S. Johnson Kevin J. Mason Wendy T. Barnhardt Eric C. Radford
Douglas L. Joyce Jesse F. Milliken Alisa R. Baucom Nancy B. Smith
Craig E. Kamis Mary T. Morgan Kati W. Beaver Danny H. Patton*
Brenda K. Kinley Dawn W. O'Dell Leah P. Berry
Carl T. Larson Lisa C. Parker Tamara C. Brewer
Gary J. Ma Renae M. Plattenberger Damon A. Cahill Assistant Trust Officer
Eleanor M. McIntire Philip Presson Deborah Starr Cloninger Carolyn M. Craver
Nancy L. Mills Elizabeth G. Quesenberry James R. Cooper
Michael J. Mittelman Marilyn L. Robertson Kathleen M. Erickson First Charter Insurance Services
Kevin T. Morgan SueAnn Schoening James A. Fletcher Clarkson B. McLean, President/CEO
Jeffrey C. Mylton Gordon M. Stallings Gail B. Fox Robert C. Boyd, Senior Vice President
Linda V. Ritter Linda H. Thomas Melba M. Funderburk Jonathan W. Cooper,
Tammy D. Scruggs Nancy S. Verble Donna B. Glover Senior Vice President/Secretary
Arnold B. Sharar Michelle L. Yagiel William S. Gray Richard H. Martin, Vice President
Gregory R. Silliman JoAnn J. Hall Joseph D. Trull, Vice President
Gary L. Slusser Corporate Secretary Connie S. Harris David E. Keul, Treasurer/Asst. Secretary
Russel D. Sprehe J.W. Townsend, Jr.* Sheryl R. Hinson
James E. Steere, III Cheryl S. Hurlocker First Charter Brokerage Services
William W. Swink Assistant Corporate Secretary Mercedes D. Ikard Phillip M. Floyd, President/CEO/Secretary
William O. Turner Cheryl P. Barbee* Richard E. James Ronnie L. Franks, Vice President
Lawrence S. Weir, III Patricia H. Blackwell* Juan R. King Michael E. Lenahan, Vice President
Mark R. Wellner Lisa P. Bryant Brian R. Kiser Nancy L. Mills, Vice President
Charles H. Wingo Mary S. Collins Kathryn W. Kluttz Harvey F. Whitley, Vice President
Rose W. Edwards Christopher B. Leazer David E. Keul, Treasurer/Asst. Secretary
Assistant Vice President Amy P. Elam Gayle S. Love
Cheryl P. Barbee Kathleen M. Erickson* Angela R. Lovelace
Patricia H. Blackwell Phillip M. Floyd* Paul A. Lyle
Bridgette M. Boggs Anne C. Forrest* Tammy S. Merck
Joyce S. Broome Gail B. Fox* Irvin L. Moore
Elizabeth L. Cline Jan G. Griffin* Mavadell D. Newsome * Indicates Duplicate Position
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CORPORATE INFORMATION
CORPORATE HEADQUARTERS
First Charter Corporation
22 Union Street, North
PO Box 228
Concord, NC 28026-0228
(704) 786-3300
Toll Free 1-800-422-4650
AUDITORS
KPMG LLP
Suite 2300
401 S. Tryon Street
Charlotte, NC 28202-1911
CORPORATE COUNSEL
Smith Helms Mulliss & Moore, L.L.P.
30th Floor
201 N. Tryon Street
Charlotte, NC 28202
SUBSIDIARY
First Charter National Bank
PO Box 228
Concord, NC 28026-0228
STOCK LISTING
The NASDAQ National Market
Symbol: FCTR
MARKET MAKERS
Dean Witter Reynolds, Inc.
Interstate/Johnson Lane Corporation
Legg Mason Wood Walker, Inc.
Robinson-Humphrey Company, LLC
Trident Securities
Wheat First Securities, Inc.
TRANSFER AGENT
Registrar and Transfer Company
SHAREHOLDERS' MEETING
Oasis Auditorium at University Place
604 Daniel Burham Way
Charlotte, NC 28262
June 6, 2000 at 5:00 p.m.
FORM 10-K
Copies of First Charter Corporation's Annual Report to the Securities and
Exchange Commission, Form 10-K, may be obtained without charge by writing:
Robert O. Bratton
Chief Financial Officer
First Charter Corporation
PO Box 228
Concord, NC 28026-0228
STOCK INFORMATION AND DIVIDENDS
First Charter Corporation's common stock, no par value (the "Common Stock"), is
reported on The Nasdaq Stock Market as a National Market Security under the
symbol "FCTR". The following table sets forth the high and low sales price for
the Common Stock for the periods indicated, as reported. The table also sets
forth per share cash dividend information for the periods indicated (as adjusted
for the stock split). See "Management's Discussion and Analysis of Financial
Condition and Results of Operations - Capital Resources" contained elsewhere in
this report for a description of limitations on the ability of the Corporation
to pay dividends.
As of March 22, 2000, there were 5,191 shareholders of record of the
Corporation's Common Stock.
QUARTERLY COMMON STOCK PRICE RANGES AND DIVIDENDS
1999 1998
---------------------------------- ----------------------------------
QUARTER High Low Dividend High Low Dividend
- -------------------------------------------------------------------------------------------------
First $19.125 $ 16.375 $ 0.170 $ 26.25 $ 23.00 $ 0.140
- -------------------------------------------------------------------------------------------------
Second 24.750 18.125 0.170 27.00 18.75 0.150
- -------------------------------------------------------------------------------------------------
Third 24.875 17.125 0.170 25.63 18.38 0.150
- -------------------------------------------------------------------------------------------------
Fourth 19.625 14.000 0.170 19.50 12.50 0.170
- -------------------------------------------------------------------------------------------------
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70
[PHOTO]
J. Kevin Toomb, Kathleen M. Harris,
James T. Mathews, Jr., Phillip M. Floyd,
David E. Keul
[PHOTO]
Darren M. Radson, Bobby D. Doby, Jr.,
Anne C. Forrest, William O. Turner,
Richard A. Manley
[PHOTO]
Jerold L. Marlow
Clarkson B. McLean
Patricia K. Horton
Laura N. Blalock
Robert G. Fox, Jr.
65
71
FIRST CHARTER
CORPORATION
P.O. Box 228, Concord, NC 28026-0228
ww.firstcharter.com