UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2001
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
Commission File Number 0-15829
FIRST CHARTER CORPORATION
(Exact name of registrant as specified in its charter)
NORTH CAROLINA 56-1355866
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
10200 DAVID TAYLOR DRIVE, CHARLOTTE, NC 28262-2373
(Address of Principal Executive Offices) (Zip Code)
Registrant's telephone number, including area code (704) 688-4300
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
As of November 1, 2001 the Registrant had outstanding 31,231,943 shares
of Common Stock, no par value.
FIRST CHARTER CORPORATION
SEPTEMBER 30, 2001 FORM 10-Q
--------------------------------------------------------------------------------
INDEX
Page
----
PART I Item 1. Financial Statements:
FINANCIAL. Consolidated Balance Sheets at September 30, 2001 2
INFORMATION and December 31, 2000
Consolidated Statements of Income for the Three 3
and Nine Months Ended September 30, 2001 and 2000
Consolidated Statements of Shareholders' 4
Equity for the Nine Months Ended
September 30, 2001 and 2000
Consolidated Statements of Cash Flows for the 5
Nine Months Ended September 30, 2001 and 2000
Notes to Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial 10
Condition and Results of Operations
Item 3. Quantitative and Qualitative Disclosures about 22
Market Risk
------------------------------------------------------------------------------------------------
PART II
OTHER INFORMATION Item 1. Legal Proceedings 22
Item 2. Changes in Securities and Use of Proceeds 22
Item 3. Defaults Upon Senior Securities 22
Item 4. Submission of Matters to a Vote of Security Holders 23
Item 6. Exhibits and Reports on Form 8-K 23
Signature 24
PART 1. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
FIRST CHARTER CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
SEPTEMBER 30 December 31
2001 2000
------------------------------------------------------------------------------------------------------------------
(Dollars in thousands, except share data) (UNAUDITED)
------------------------------------------------------------------------------------------------------------------
ASSETS:
Cash and due from banks $ 79,288 $ 71,196
Federal funds sold -- 1,015
Interest bearing bank deposits 3,194 122,461
------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents 82,482 194,672
------------------------------------------------------------------------------------------------------------------
Securities available for sale (cost of $1,105,349 at September 30, 2001 and
$437,684 at December 31, 2000; carrying amount of pledged collateral
at September 30, 2001, $141,149) 1,134,374 441,031
Loans 1,987,397 2,157,622
Less: Unearned income (227) (215)
Allowance for loan losses (28,221) (28,447)
------------------------------------------------------------------------------------------------------------------
Loans, net 1,958,949 2,128,960
------------------------------------------------------------------------------------------------------------------
Premises and equipment, net 97,804 76,666
Other assets 75,261 90,870
------------------------------------------------------------------------------------------------------------------
TOTAL ASSETS $ 3,348,870 $ 2,932,199
==================================================================================================================
LIABILITIES:
Deposits, domestic:
Noninterest bearing demand $ 262,331 $ 242,983
Interest bearing 1,901,468 1,755,251
------------------------------------------------------------------------------------------------------------------
Total deposits 2,163,799 1,998,234
------------------------------------------------------------------------------------------------------------------
Other borrowings 806,141 570,024
Other liabilities 51,357 54,654
------------------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES 3,021,297 2,622,912
------------------------------------------------------------------------------------------------------------------
SHAREHOLDERS' EQUITY:
Preferred stock - no par value; authorized 2,000,000 shares; no shares
issued and outstanding -- --
Common stock - no par value; authorized 100,000,000 shares;
issued and outstanding 31,223,450 and 31,601,263 shares 143,974 151,486
Common stock held in Rabbi Trust for deferred compensation (370) --
Deferred compensation 370 --
Retained earnings 165,896 155,762
Accumulated other comprehensive income:
Unrealized gains on securities available for sale, net 17,703 2,039
------------------------------------------------------------------------------------------------------------------
TOTAL SHAREHOLDERS' EQUITY 327,573 309,287
------------------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 3,348,870 $ 2,932,199
==================================================================================================================
See accompanying notes to consolidated financial statements.
2
FIRST CHARTER CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
FOR THE THREE MONTHS FOR THE NINE MONTHS
ENDED SEPTEMBER 30 ENDED SEPTEMBER 30
--------------------- -----------------------
(Dollars in thousands, except share and per share data) 2001 2000 2001 2000
------------------------------------------------------------------------------ -----------------------
INTEREST INCOME:
Loans $ 39,045 $ 47,026 $ 123,357 $ 135,495
Federal funds sold 11 17 57 235
Interest bearing bank deposits 51 49 288 125
Securities 15,542 7,647 40,408 23,764
------------------------------------------------------------------------------ -----------------------
Total interest income 54,649 54,739 164,110 159,619
------------------------------------------------------------------------------ -----------------------
INTEREST EXPENSE:
Deposits 19,704 19,461 61,471 53,726
Federal funds purchased and securities
sold under agreements to repurchase 1,302 1,707 4,331 5,069
Federal Home Loan Bank and other borrowings 6,820 6,897 19,758 20,068
------------------------------------------------------------------------------ -----------------------
Total interest expense 27,826 28,065 85,560 78,863
------------------------------------------------------------------------------ -----------------------
NET INTEREST INCOME 26,823 26,674 78,550 80,756
PROVISION FOR LOAN LOSSES 1,325 2,200 3,265 5,540
------------------------------------------------------------------------------ -----------------------
NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES 25,498 24,474 75,285 75,216
NONINTEREST INCOME:
Service charges on deposit accounts 3,465 2,710 9,766 8,352
Financial management income 569 832 1,984 2,210
Gain (loss) on sale of securities 824 (3,425) 1,373 (3,013)
Income from equity method investees 73 4,106 82 4,552
Mortgage loan fees 662 301 1,920 654
Brokerage services income 476 380 1,390 1,122
Insurance services income 1,959 1,636 5,815 5,192
Gain on sale of property 129 -- 129 --
Trading gains 829 -- 1,062 --
Other 1,370 1,146 4,069 3,806
------------------------------------------------------------------------------ -----------------------
Total noninterest income 10,356 7,686 27,590 22,875
------------------------------------------------------------------------------ -----------------------
NONINTEREST EXPENSE:
Salaries and employee benefits 11,206 9,521 32,218 30,582
Occupancy and equipment 3,434 2,898 10,803 9,151
Data processing 806 318 2,161 2,093
Advertising 593 715 1,788 1,886
Postage and supplies 1,340 1,251 3,665 3,346
Professional services 1,614 1,267 4,196 2,820
Telephone 431 396 1,069 1,064
Restructuring charges and merger-related -- -- -- 16,250
Other 2,468 1,391 6,913 6,066
------------------------------------------------------------------------------ -----------------------
Total noninterest expense 21,892 17,757 62,813 73,258
------------------------------------------------------------------------------ -----------------------
INCOME BEFORE INCOME TAXES 13,962 14,403 40,062 24,833
INCOME TAXES 4,502 4,464 12,887 9,089
------------------------------------------------------------------------------ -----------------------
NET INCOME $ 9,460 $ 9,939 $ 27,175 $ 15,744
============================================================================== =======================
NET INCOME PER SHARE:
Basic $ 0.30 $ 0.32 $ 0.86 $ 0.50
Diluted $ 0.30 $ 0.31 $ 0.86 $ 0.50
WEIGHTED AVERAGE SHARES:
Basic 31,314,550 31,503,251 31,575,452 31,384,049
Diluted 31,545,721 31,646,483 31,760,942 31,544,011
See accompanying notes to consolidated financial statements.
3
FIRST CHARTER CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(Unaudited)
----------------------------------------------------------------------------------------------------------------------------
COMMON STOCK
HELD IN RABBI ACCUMULATED
COMMON STOCK TRUST FOR OTHER
------------------- DEFERRED DEFERRED RETAINED COMPREHENSIVE
(Dollars in thousands, except share data) SHARES AMOUNT COMPENSATION COMPENSATION EARNINGS INCOME (LOSS) TOTAL
-----------------------------------------------------------------------------------------------------------------------------
BALANCE, DECEMBER 31, 1999 31,100,310 $146,438 $ -- $ -- $ 151,215 $ (7,385) $ 290,268
Comprehensive income:
Net income -- -- -- -- 15,744 -- 15,744
Unrealized loss on securities available
for sale, net -- -- -- -- -- 3,712 3,712
---------
Total comprehensive income 19,456
Cash dividends -- -- -- -- (14,920) -- (14,920)
Stock options exercised and Dividend
Reinvestment Plan stock issued 300,794 2,250 -- -- -- -- 2,250
Shares issued in connection with
business acquisition 122,263 2,025 -- -- -- -- 2,025
Purchase and retirement of common stock (2,730) (29) -- -- -- -- (29)
-----------------------------------------------------------------------------------------------------------------------------
BALANCE, SEPTEMBER 30, 2000 31,520,637 $150,684 $ -- $ -- $ 152,039 $ (3,673) $ 299,050
-----------------------------------------------------------------------------------------------------------------------------
BALANCE, DECEMBER 31, 2000 31,601,263 $151,486 $ -- $ -- $ 155,762 $ 2,039 $ 309,287
Comprehensive income:
Net income -- -- -- -- 27,175 -- 27,175
Unrealized gain on securities available
for sale, net -- -- -- -- -- 15,664 15,664
---------
Total comprehensive income 42,839
Deferred compensation -- -- (370) -- -- -- (370)
Common stock purchased by Rabbi Trust
for deferred compensation -- -- -- 370 -- -- 370
Cash dividends -- -- -- -- (17,041) -- (17,041)
Stock options exercised and Dividend
Reinvestment Plan stock issued 129,187 1,530 -- -- -- -- 1,530
Purchase and retirement of common stock (507,000) (9,042) -- -- -- -- (9,042)
-----------------------------------------------------------------------------------------------------------------------------
BALANCE, SEPTEMBER 30, 2001 31,223,450 $143,974 $ (370) $ 370 $ 165,896 $ 17,703 $ 327,573
=============================================================================================================================
See accompanying notes to consolidated financial statements.
4
FIRST CHARTER CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
NINE MONTHS
ENDED SEPTEMBER 30
-------------------------------------------------------------------------------------------------------------
(Dollars in thousands) 2001 2000
-------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 27,175 $ 15,744
Adjustments to reconcile net income to net cash provided by operating activities:
Provision for loan losses 3,265 5,540
Depreciation 5,636 4,434
Premium amortization and discount accretion, net (541) 37
Net (gain) loss on securities available for sale transactions (1,373) 3,013
Net (gain) loss on sale of other real estate (9) 93
Net (gain) loss on sale of property (129) --
Income from equity method investees (82) (4,552)
Net loss on sale of mortgage loans -- 99
Net loss on sale of premises and equipment 12 13
Origination of mortgage loans held for sale (148,350) (44,351)
Proceeds from sale of mortgage loans held for sale 139,659 86,175
Decrease (increase) in other assets 4,383 (13,760)
(Decrease) increase in other liabilities (2,235) 15,756
-------------------------------------------------------------------------------------------------------------
Net cash provided by operating activities 27,411 68,241
-------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sales of securities available for sale 97,798 124,261
Proceeds from maturities of securities available for sale 178,145 44,847
Purchase of securities available for sale (774,702) (116,475)
Proceeds from issuer calls and maturities of securities held to maturity -- 758
Net decrease (increase) in loans 5,863 (191,087)
Proceeds from sales of other real estate 2,512 1,520
Net purchases of premises and equipment (26,786) (21,366)
Acquisition of business activities, net of cash paid 439 --
-------------------------------------------------------------------------------------------------------------
Net cash used in investing activities (516,731) (157,542)
-------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase (decrease) in demand, money market and savings accounts 42,765 (47,227)
Net increase in certificates of deposit 122,800 153,175
Net increase (decrease) in securities sold under repurchase
agreements and other borrowings 236,118 (22,259)
Purchase and retirement of common stock (9,042) (29)
Proceeds from issuance of common stock 1,530 2,250
Dividends paid (17,041) (14,920)
-------------------------------------------------------------------------------------------------------------
Net cash provided by financing activities 377,130 70,990
-------------------------------------------------------------------------------------------------------------
Net decrease in cash and cash equivalents (112,190) (18,311)
Cash and cash equivalents at beginning of period 194,672 97,668
-------------------------------------------------------------------------------------------------------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 82,482 $ 79,357
=============================================================================================================
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid for interest $ 84,889 $ 76,705
Cash paid for income taxes 14,292 888
SUPPLEMENTAL DISCLOSURE OF NON-CASH TRANSACTIONS:
Transfer of loans and premises and equipment to other real estate owned 2,582 3,386
Unrealized gain on securities available for sale
(net of tax effect of $6,109 and $1,429 for the nine months ended
September 30, 2001 and 2000, respectively) 15,664 3,712
Issuance of common stock for business acquisitions -- 2,025
Loans securitized and retained in the available for sale portfolio 166,992 --
Transfer of loans in portfolio to held for sale -- 45,252
Transfer of securities held to maturity to available for sale -- 35,324
See accompanying notes to consolidated financial statements.
5
FIRST CHARTER CORPORATION AND SUBSIDIARIES
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
First Charter Corporation (the "Corporation") is a bank holding company
established as a North Carolina Corporation in 1983. Its principal asset is the
stock of its subsidiary, First Charter Bank ("FCB" or the "Bank"). FCB is a full
service bank, which operates 52 financial centers, five insurance offices and 99
ATMs (automated teller machines). These facilities are located in Ashe,
Alleghany, Avery, Buncombe, Cabarrus, Cleveland, Guilford, Iredell, Jackson,
Lincoln, McDowell, Mecklenburg, Rowan, Rutherford, Swain, Transylvania and Union
counties of North Carolina. Through its subsidiary First Charter Brokerage
Services, the Bank offers full service and 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 four
other subsidiaries: First Charter Insurance Services, Inc., First Charter Realty
Investments, Inc., FCB Real Estate, Inc., and First Charter Leasing, 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 Investments, Inc. is a Delaware
corporation organized as a holding company for FCB Real Estate, Inc. a real
estate investment trust organized in North Carolina. First Charter Leasing, Inc.
is a North Carolina corporation, which leases commercial equipment. The Bank
also has a majority ownership in Lincoln Center through the Bank's investment in
Mallard Creek, LLC. Lincoln Center is a three-story office building occupied in
part by a branch of FCB.
NOTE ONE - ACCOUNTING POLICIES
The consolidated financial statements include the accounts of the
Corporation and its wholly owned subsidiary, FCB. In consolidation, all
intercompany accounts and transactions have been eliminated.
The information contained in the consolidated financial statements is
unaudited. The preparation of consolidated financial statements in conformity
with accounting principles generally accepted in the United States of America
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.
The information furnished in this report reflects all adjustments which
are, in the opinion of management, necessary to present a fair statement of the
financial condition and the results of operations for interim periods. All such
adjustments were of a normal recurring nature. Certain amounts reported in prior
periods have been reclassified to conform with the current period presentation.
Such reclassifications have no effect on net income or shareholders' equity as
previously reported.
Accounting policies followed in the presentation of interim financial
results are presented on pages 37 to 41 of the Corporation's Annual Report on
Form 10-K for the year ended December 31, 2000.
Statement of Financial Accounting Standards No. 133 (SFAS 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 recognized as assets or liabilities on the
balance sheet and that such instruments be carried at fair value through
adjustments to either other comprehensive income or current earnings or both, as
appropriate. SFAS No. 133 was originally effective for financial statements
issued for all fiscal quarters of fiscal years beginning after June 15, 1999.
The implementation date of SFAS No. 133 was delayed by Statement of Financial
Accounting Standards No. 137 "Accounting for Derivative Instruments and Hedging
Activities--Deferral of the Effective Date of FASB Statement No. 133" to the
first fiscal quarters of fiscal years beginning after June 15, 2000.
Accordingly, the Corporation adopted SFAS No. 133 on January 1, 2001. The impact
to the Corporation upon adoption was immaterial.
In September 2000, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards No. 140 (SFAS No. 140), "Accounting
for Transfers and Servicing of Financial Assets and Extinguishments of
Liabilities- a replacement of FASB Statement 125", which revises the criteria
for accounting for securitizations and other transfers of financial assets and
collateral, and introduces new disclosures. The enhanced disclosure requirements
were effective for year-end 2000. The other provisions of SFAS No. 140 apply
prospectively to transfers of financial assets and extinguishments of
liabilities occurring after March 31, 2001. Accordingly, the Corporation adopted
SFAS No. 140 on April 1, 2001. The impact to the Corporation upon adoption was
immaterial.
6
In July 2001, the FASB issued Statement of Financial Accounting Standards
No. 141 (SFAS No. 141), "Business Combinations", and Statement of Financial
Accounting Standards No. 142 (SFAS No. 142), "Goodwill and Other Intangible
Assets". SFAS 141 requires that the purchase method of accounting be used for
all business combinations initiated after June 30, 2001. SFAS 141 also specifies
criteria which must be met for intangible assets acquired in a purchase method
business combination to be recognized and reported apart from goodwill. SFAS 142
will require that goodwill and intangible assets with indefinite useful lives no
longer be amortized, but instead tested for impairment at least annually in
accordance with the provisions of SFAS 142. SFAS 142 will also require that
identifiable intangible assets with definite useful lives be amortized over
their respective estimated useful lives to their estimated residual values, and
reviewed for impairment in accordance with SFAS No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of".
The Corporation was required to adopt the provisions of SFAS 141 as of June
30, 2001 and will adopt SFAS 142 effective January 1, 2002. Furthermore, any
goodwill and any intangible asset determined to have an indefinite useful life
that are acquired in a purchase business combination completed after June 30,
2001 will not be amortized, but will continue to be evaluated for impairment in
accordance with the appropriate accounting literature issued prior to SFAS 142.
Goodwill and intangible assets acquired in business combinations completed
before July 1, 2001 will continue to be amortized prior to the adoption of SFAS
142. Because of the extensive effort needed to comply with adopting SFAS 141 and
142, it is not practicable to reasonably estimate the impact of adopting these
statements on the Corporation's financial statements at this time, including
whether any transitional impairment losses will be required to be recognized as
the cumulative effect of a change in accounting principle.
NOTE TWO - 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 periods
presented. Diluted net income per share reflects the potential dilution that
could occur if all of the currently outstanding stock options on the
Corporation's common stock are fully exercised. 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 net income per share computations to the denominator of
the diluted net income per share computations is as follows:
THREE MONTHS NINE MONTHS
ENDED SEPTEMBER 30 ENDED SEPTEMBER 30
--------------------------------------------------------------
2001 2000 2001 2000
--------------------------------------------------------------
Basic net income per share denominator:
Weighted average number of
common shares outstanding 31,314,550 31,503,251 31,575,452 31,384,049
Dilutive effect arising from
assumed exercise of stock options 231,171 143,232 185,490 159,962
--------------------------------------------------------------
Diluted net income per share denominator 31,545,721 31,646,483 31,760,942 31,544,011
==============================================================
The Corporation paid cash dividends of $0.18 and $0.54 per share for the
three and nine months ended September 30, 2001, respectively, compared to $0.17
and $0.51 per share for the comparable 2000 periods.
NOTE THREE - MERGERS AND ACQUISITIONS
(a) Hoffman & Young, Inc. On July 31, 2001, the Corporation completed
the acquisition of Hoffman & Young, Inc., a Charlotte, North Carolina based
insurance company, which was merged into First Charter Insurance Services. The
purchase price consisted of $900,000 in cash and was accounted for as a
purchase.
(b) Branch Purchase. On November 17, 2000, the Corporation purchased four
financial centers with total loans of $9.4 million and total deposits of $88.3
million. Approximately $8.6 million of intangible assets were recorded as a
result of this transaction and are being amortized on a straight-line basis over
15 years. The financial centers are located in Bryson City, Jefferson, West
Jefferson and Sparta, North Carolina.
7
(c) Business Insurers of Guilford County. On September 1, 2000, Business
Insurers of Guilford County ("Business Insurers") was merged into First Charter
Insurance Services. As a result of this merger, approximately 283,000 shares of
the Corporation's common stock were issued. This merger was accounted for as a
pooling of interests, and accordingly all financial results for prior periods
have been restated to include the financial results of both entities. In
connection with the Business Insurers merger, the Corporation recorded pre-tax
restructuring charges and merger-related expenses of approximately $575,000
($425,000 after-tax), all of which had been incurred at December 31, 2001.
(d) Carolina First BancShares, Inc. On April 4, 2000, Carolina First
BancShares, Inc. ("Carolina First" or "CFBI") was merged into the Corporation
(the "Merger"). In accordance with the terms of the Merger Agreement, each share
of the $2.50 par value common stock of Carolina First was converted into 2.267
shares of the no par value common stock of the Corporation, resulting in the net
issuance of approximately 13.3 million common shares to the former Carolina
First shareholders. The Merger was accounted for as a pooling of interests, and
accordingly all financial results for prior periods have been restated to
include the financial results of both entities. In connection with this
transaction, the Corporation recorded pre-tax restructuring charges and
merger-related expenses of approximately $15.7 million ($11.9 million
after-tax).
Carolina First was a bank holding company operating 31 branch offices
principally in the greater Charlotte, North Carolina area. At April 4, 2000,
Carolina First had total consolidated assets of approximately $791.7 million,
total consolidated loans of approximately $545.9 million, total consolidated
deposits of approximately $674.8 million and total consolidated shareholders'
equity of approximately $67.5 million.
The following table indicates the primary components of the Carolina First
and Business Insurers restructuring charges and merger-related expenses,
including the amounts incurred through September 30, 2001, and the amounts
remaining as accrued expenses in other liabilities at September 30, 2001. All of
the remaining accrual at September 30, 2001 relates to the Carolina First
merger.
Total Restructuring Incurred Remaining
Charges and Merger- through accrual at
(Dollars in thousands) Related Expenses September 30, 2001 September 30, 2001
----------------------------------------------------------------------------------------------------------
Professional costs $ 3,907 $ 3,907 $ --
Employee related costs 5,336 4,331 1,005
Equipment writedowns 4,125 4,125 --
Conversion costs 1,114 1,114 --
Lease buyouts 909 762 147
Printing and filing fees 187 187 --
Other 672 672 --
------------------------------------------------------------------
Total $ 16,250 $ 15,098 $ 1,152
==================================================================
The employee-related costs include accruals for payments to be made in
connection with the involuntary termination of approximately 130 employees who
had been notified that their positions were redundant within the combined
organizations and, therefore, no longer needed. These personnel were terminated
from various areas of the Corporation. Other restructuring activities included
closing and consolidating 14 branch facilities that were redundant,
consolidating back-office functions and converting all of Carolina First's
systems to the Corporation systems. The remaining restructuring charge accrual
at September 30, 2001 consists of lease contract payments on closed facilities
to be paid through 2010 and contract payments to former employees to be paid
through 2007. The Corporation does not currently anticipate any additional
material merger-related expenses, or any material changes to the restructuring
charge accrual, in 2001 related to the Merger.
NOTE FOUR - IMPAIRED LOANS
The recorded investment in impaired loans was $17.4 million (all of which
was on nonaccrual status) and $17.7 million (all of which was on nonaccrual
status) at September 30, 2001 and December 31, 2000, respectively. The related
allowance for loan losses on impaired loans was $3.9 million and $4.7 million at
September 30, 2001 and December 31, 2000, respectively. The average recorded
investment in impaired loans for the nine months ended September 30, 2001 and
2000 was $18.7 million and $13.3 million, respectively.
8
NOTE FIVE - STOCK REPURCHASE PROGRAM
On April 27, 2001, First Charter Corporation's Board of Directors
authorized the repurchase of up to 1 million shares of the Corporation's common
stock. Through September 30, 2001, the Corporation had repurchased 507,000
shares of its common stock at an average per-share price of $17.84, which
reduced shareholders' equity by $9.0 million.
NOTE SIX - CONVERSION TO STATE CHARTER BANK
On June 22, 2001, First Charter's banking subsidiary completed its
conversion from a national bank to First Charter Bank, a North Carolina state
bank. The change was completed after a cost benefit analysis of supervisory
regulatory charges and does not represent any disagreement with the
Corporation's or the Bank's former regulators. The Bank will continue to operate
its financial center network franchise under the "First Charter" brand name.
NOTE SEVEN - DEFERRED COMPENSATION
Effective May 1, 2001, the Corporation amended and restated the First
Charter Corporation 1994 Deferred Compensation Plan for Non-Employee Directors.
Under the Deferred Compensation Plan, eligible directors may elect to defer all
or part of their director's fees for a calendar year. The amount deferred, if
any, shall be in multiples of 25% of their total director's fees. Each
participant is fully vested in his account balance under the plan. The plan
generally provides for fixed or a lump sum payment, or a combination of both,
after the participant ceases to serve as a director for any reason.
The common stock purchased by the Corporation for this deferred
compensation plan is maintained in The First Charter Corporation Directors'
Deferred Compensation Trust, a rabbi trust (the "Trust"), on behalf of the
participants. The assets of the Trust are subject to the claims of general
creditors of the Corporation. Dividends payable on the common shares held by the
Trust will be reinvested in additional shares of common stock of the Corporation
on behalf of the participants. Since the deferred compensation plan does not
provide for diversification of the Trust's assets and can only be settled with a
fixed number of shares of the Corporation's common stock, the deferred
compensation obligation is classified as a component of shareholders' equity and
the common stock held by the Trust is classified as a reduction of shareholders'
equity. Subsequent changes in the fair value of the common stock are not
reflected in earnings or shareholders' equity of the Corporation. The
obligations of the Corporation under the deferred compensation plan and the
shares held by the Trust have no net effect on net income per share.
NOTE EIGHT - TRADING ACTIVITY
The Corporation engaged in writing covered call options during the nine
months ended September 30, 2001. Under these agreements the Corporation agrees
to sell, upon election by the optionholder, a fixed income security at a fixed
price. The Corporation receives a premium from the optionholder in exchange for
writing the option contract. During the three and nine months ended September
30, 2001, the Corporation recognized income of $0.8 million and $1.1 million,
respectively, from writing covered call options. There were no written covered
call options outstanding at September 30, 2001, and there were no such contracts
written during 2000.
In addition, the Corporation had other trading losses of $24,000 related to
assets held in a trading account which totaled approximately $147,000 at
September 30, 2001.
9
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDTION AND RESULTS
OF OPERATIONS
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 Corporation's various mergers.
The following 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.
Factors that may cause actual results to differ materially from those
contemplated by such forward looking statements include, among others, the
following possibilities: (1) projected business increases in connection with the
implementation of our business plan are lower than expected; (2) competitive
pressure among financial services companies increases significantly; (3) costs
or difficulties related to the integration of acquisitions or expenses in
general are greater than expected; (4) general economic conditions, in the
markets in which the company does business, are less favorable than expected;
(5) changes in the interest rate environment reduce interest margins and affect
funding sources; (6) changes in market rates and prices may adversely affect the
value of financial products; (7) any inability to generate liquidity necessary
to meet loan demand or other cash needs; (8) any inability to accurately predict
the adequacy of the loan loss allowance needs; (9) legislation or regulatory
requirements or changes adversely affect the businesses in which the company is
engaged; and (10) decisions to change the business mix of the company.
OVERVIEW
The Corporation is a regional financial services company with assets of
$3.35 billion and is the holding company for First Charter Bank ("FCB" or the
"Bank"). On June 22, 2001, First Charter's banking subsidiary completed its
conversion from a national bank to First Charter Bank, a North Carolina state
bank. That change was completed after a cost benefit analysis of supervisory
regulatory charges and does not represent any disagreement with the
Corporation's or the Bank's former regulators. The Bank will continue to operate
its financial center network franchise under the "First Charter" brand name. FCB
operates 52 financial centers, five insurance offices and 99 ATMs located in 17
counties throughout the western half of North Carolina. FCB provides businesses
and individuals with 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 Corporation's results of operations and financial position are
described in the following sections.
Refer to TABLE ONE for quarterly and nine month selected financial data.
RESULTS OF OPERATIONS
EARNINGS SUMMARY
Net income amounted to $9.5 million, or $0.30 per diluted common share, for
the three months ended September 30, 2001, compared to $9.9 million, or $0.31
per diluted common share, for the three months ended September 30, 2000,
representing a decrease in net income of $0.4 million or 4.8 percent.
Net income amounted to $27.2 million, or $0.86 per diluted common share,
for the nine months ended September 30, 2001, compared to $15.7 million, or
$0.50 per diluted common share, for the nine months ended September 30, 2000,
representing an increase in net income of $11.5 million or 72.6 percent. The
increase in net income is primarily attributable to restructuring charges and
merger-related expenses of $16.3 million pre-tax ($12.3 million, or $0.39 per
diluted share after-tax) which occurred during the three months ended June 30,
2000. The items affecting net income are discussed further in the following
sections.
10
TABLE ONE
SELECTED FINANCIAL DATA
<Table>
<Caption>
------------------------------------------------------------------------------------------------------------------------------
FOR THE THREE MONTHS FOR THE NINE MONTHS
ENDED SEPTEMBER 30 ENDED SEPTEMBER 30
------------------------------ ------------------------------
(Dollars in thousands, except share and per share amounts) 2001 2000 2001 2000
------------------------------------------------------------------------------------------------------------------------------
INCOME STATEMENT
Interest income $ 54,649 $ 54,739 $ 164,110 $ 159,619
Interest expense 27,826 28,065 85,560 78,863
------------------------------------------------------------------------------------------------------------------------------
Net interest income 26,823 26,674 78,550 80,756
Provision for loan losses 1,325 2,200 3,265 5,540
Noninterest income 10,356 7,686 27,590 22,875
Noninterest expense 21,892 17,757 62,813 73,258
------------------------------------------------------------------------------------------------------------------------------
Income before income taxes 13,962 14,403 40,062 24,833
Income taxes 4,502 4,464 12,887 9,089
------------------------------------------------------------------------------------------------------------------------------
Net income $ 9,460 $ 9,939 $ 27,175 $ 15,744
------------------------------------------------------------------------------------------------------------------------------
PER COMMON SHARE
Basic net income $ 0.30 $ 0.32 $ 0.86 $ 0.50
Diluted net income 0.30 0.31 0.86 0.50
Cash dividends declared (1) 0.18 0.18 0.54 0.52
Period-end book value 10.49 9.49 10.49 9.49
Average shares outstanding - basic 31,314,550 31,503,251 31,575,452 31,384,049
Average shares outstanding - diluted 31,545,721 31,646,483 31,760,942 31,544,011
RATIOS
Return on average shareholders' equity (2) 11.72 % 13.31 % 11.43 % 7.06 %
Return on average assets (2) 1.18 1.43 1.19 0.77
Net interest margin (2) 3.68 4.19 3.81 4.34
Average loans to average deposits 92.38 112.18 96.96 111.12
Average equity to average assets 10.06 10.72 10.40 10.87
Efficiency ratio (3) 59.45 46.41 59.14 67.80
SELECTED PERIOD END BALANCES
Securities available for sale $ 1,134,374 $ 474,077 $ 1,134,374 $ 474,077
Loans, net 1,958,949 2,083,283 1,958,949 2,083,283
Allowance for loan losses 28,221 27,861 28,221 27,861
Total assets 3,348,870 2,787,955 3,348,870 2,787,955
Deposits 2,163,799 1,922,440 2,163,799 1,922,440
Borrowings 806,141 519,762 806,141 519,762
Total liabilities 3,021,297 2,488,905 3,021,297 2,488,905
Total shareholders' equity 327,573 299,050 327,573 299,050
==============================================================================================================================
(1) First Charter Corporation historical cash dividends declared.
(2) Annualized
(3) Noninterest expense divided by the sum of taxable equivalent net interest
income plus noninterest income less gain on sale of securities.
NET INTEREST INCOME
An analysis of the Corporation's net interest income on a
taxable-equivalent basis and average balance sheets for the three and nine
months ended September 30, 2001 and 2000 are presented in TABLES TWO and THREE,
respectively. The changes in net interest income for the three and nine months
ended September 30, 2001 and 2000 are analyzed in TABLES FOUR and FIVE,
respectively.
Net interest income, the difference between total interest income and total
interest expense, is the Corporation's principal source of earnings. Net
interest income amounted to $26.8 million and $78.6 million for the three and
nine months ended September 30, 2001, respectively, an increase of $0.1 million
for the three months ended September 30, 2001 and a decrease of $2.2 million for
the nine months ended September 30, 2001, as compared to the same periods in
2000. The decrease for the nine months ended September 30, 2001 was the result
of the declining interest rate environment resulting from the slowing economy
which has had a negative impact on the net interest margin as variable rate
assets reprice faster than variable rate liabilities. Reduced loan demand,
several large loan payoffs and our increased selectivity in seeking new
opportunities in this economic environment have also had a negative impact on
the net interest margin.
11
Average interest earning assets increased approximately $379.1 million
to $2.96 billion for the third quarter of 2001 and $279.5 million to $2.84
billion in the first nine months of 2001, compared to the same 2000 periods.
This increase is primarily due to a $334.5 million and a $179.7 million increase
in the Corporation's average securities available for sale portfolio for the
three and nine months ended September 30, 2001, respectively, excluding the
impact of the securitization of $167.0 million of mortgage loans during the
first quarter of 2001, which was primarily due to the net purchase of
approximately $160.8 million and $493.4 million in securities available for sale
during the three and nine months ended September 30, 2001, respectively. Average
interest earning assets also increased due to the purchase of four financial
centers in November 2000, as well as growth in the Corporation's average loan
portfolio, which increased $40.7 million and $98.0 million for the three and
nine months ended September 30, 2001, respectively, excluding the impact of the
securitization of $167.0 million of mortgage loans during the first quarter of
2001. The decrease in average yield on interest earning assets to 7.41 percent
and 7.79 percent for the three and nine months ended September 30, 2001,
respectively, compared to 8.52 percent and 8.40 percent for the same 2000
periods, resulted principally from the decrease in the average prime rate during
2001 to 6.57 percent and 7.52 percent for the three and nine months ended
September 30, 2001, respectively, from 9.50 percent and 9.14 percent for the
three and nine months ended September 30, 2000, respectively. The decrease in
the average prime rate is attributable to the Federal Reserve's 350 basis point
decrease in the fed funds rate during the first nine months of 2001. The average
yield earned on loans was 7.87 percent and 8.29 percent for the three and nine
months ended September 30, 2001, respectively, compared to 8.93 percent and 8.82
percent for the same 2000 periods.
In addition to the increase in average interest earning assets, the
Corporation experienced an increase in average interest-bearing liabilities of
$81.1 million to $2.57 billion in the third quarter of 2001 and an increase of
$286.5 million to $2.45 billion in the first nine months of 2001, due to the use
of Federal Home Loan Bank ("FHLB") advances and increases in deposits to fund
securities purchases. The average rate paid on interest bearing liabilities
decreased to 4.30 percent and 4.68 percent for the three and nine months ended
September 30, 2001, respectively, compared to 5.09 percent and 4.88 in the same
2000 periods, primarily due to a decline in the average rate of borrowings. The
average rate paid on interest-bearing deposits was 4.15 percent for the three
months ended September 30, 2001, down from 4.75 percent in the same 2000 period.
The average rate paid on interest-bearing deposits was 4.54 percent for the nine
months ended September 30, 2001, up from 4.47 percent in the same 2000 period.
The rate paid on other borrowed funds decreased to 4.72 percent and 5.07 percent
for the three and nine months ended September 30, 2001, respectively, compared
to 6.08 percent for both the three and nine months ended September 30, 2000.
The net interest margin (tax adjusted net interest income divided by
average interest-earning assets) decreased 51 basis points to 3.68 percent and
53 basis points to 3.76 percent for the three and nine months ended September
30, 2001, respectively, compared to 4.19 percent and 4.29 percent in the same
2000 periods. This reflects the impact of higher levels of borrowings and
competitive forces related to loan and deposit pricing. Management believes that
further compression of the net interest margin will continue at least through
the fourth quarter of 2001.
Management assesses interest rate risk based on an earnings simulation
model. Based on the earnings simulation model, the Corporation's balance sheet
is currently asset sensitive, meaning that in a given period there will be more
assets than liabilities subject to immediate repricing as market rates change.
Assuming a 300 basis point pro-rata increase in interest rates over a
twelve-month period, the Corporation's sensitivity to interest rate risk would
positively impact net interest income by approximately 4.68 percent of net
interest income at September 30, 2001. Assuming a 150 basis point pro-rata
decrease in interest rates over a twelve-month period, the Corporation's
sensitivity to interest rate risk would negatively impact net interest income by
approximately 1.39 percent of net interest income at September 30, 2001. Both
scenarios are within Management's acceptable range. In the future, the
Corporation is considering the limited use of interest rate swaps, caps, floors
or other derivative products to assist in interest rate risk management.
12
The following table includes for the three months ended September 30, 2001
and 2000 interest income on interest earning assets and related average yields,
as well as interest expense on interest bearing liabilities and related average
rates paid. In addition, the table includes the net interest margin. Average
balances were calculated based on daily averages.
TABLE TWO
AVERAGE BALANCES AND NET INTEREST INCOME ANALYSIS
---------------------------------------------------------------------------------------------------------------------------
THIRD QUARTER 2001 Third Quarter 2000
----------------------------------------------------------------------------
INTEREST AVERAGE Interest Average
AVERAGE INCOME/ YIELD/RATE Average Income/ Yield/Rate
(Dollars in thousands) BALANCE EXPENSE PAID (5) Balance Expense Paid (5)
---------------------------------------------------------------------------------------------------------------------------
INTEREST EARNING ASSETS:
Loans (1) (2) (3) $ 1,973,373 $ 39,155 7.87% $ 2,099,692 $ 47,113 8.93 %
Securities - taxable 890,556 14,525 6.52 383,694 6,535 6.78
Securities - nontaxable 86,620 1,373 6.34 91,936 1,501 6.50
Federal funds sold 1,228 11 3.54 1,083 17 6.21
Interest bearing bank deposits 5,663 51 3.54 1,969 49 9.91
---------------------------------------------------------------------------------------------------------------------------
Total earning assets (4) 2,957,440 55,115 7.41 2,578,374 55,215 8.52
---------------------------------------------------------------------------------------------------------------------------
Cash and due from banks 65,884 69,037
Other assets 161,464 125,448
---------------------------------------------------------------------------------------------------------------------------
TOTAL ASSETS $ 3,184,788 $ 2,772,859
===========================================================================================================================
INTEREST BEARING LIABILITIES:
Demand deposits 523,543 2,452 1.86 462,583 2,949 2.54
Savings deposits 114,192 485 1.68 138,813 834 2.39
Other time deposits 1,245,511 16,767 5.34 1,027,832 15,678 6.07
Other borrowings 682,498 8,122 4.72 563,377 8,604 6.08
---------------------------------------------------------------------------------------------------------------------------
Total interest bearing liabilities 2,565,744 27,826 4.30 2,192,605 28,065 5.09
---------------------------------------------------------------------------------------------------------------------------
Noninterest bearing sources:
Noninterest bearing deposits 252,971 242,477
Other liabilities 45,831 40,655
Shareholders' equity 320,242 297,122
---------------------------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES AND
SHAREHOLDERS' EQUITY $ 3,184,788 $ 2,772,859
===========================================================================================================================
Net interest spread 3.11 3.43
Impact of noninterest bearing sources 0.57 0.76
---------------------------------------------------------------------------------------------------------------------------
NET INTEREST INCOME/
YIELD ON EARNINGS ASSETS $ 27,289 3.68 % $ 27,150 4.19 %
===========================================================================================================================
(1) The preceding analysis takes into consideration the principal amount of
nonaccruing loans and only income actually collected on such loans.
(2) Average loan balances are shown net of unearned income.
(3) Includes amortization of deferred loan fees of approximately $961 and $784
for the third quarter of 2001 and 2000, respectively.
(4) Yields on nontaxable securities and loans are stated on a taxable-equivalent
basis, assuming a Federal tax rate of 35 percent, applicable state taxes and
TEFRA disallowances for the third quarter of 2001 and 2000. The adjustments made
to convert to a taxable-equivalent basis were $466 and $476 for the third
quarter of 2001 and 2000, respectively.
(5) Annualized
13
The following table includes for the nine months ended September 30, 2001
and 2000 interest income on interest earning assets and related average yields,
as well as interest expense on interest bearing liabilities and related average
rates paid. In addition, the table includes the net interest margin. Average
balances were calculated based on daily averages.
TABLE THREE
AVERAGE BALANCES AND NET INTEREST INCOME ANALYSIS
---------------------------------------------------------------------------------------------------------------------------
NINE MONTHS ENDED SEPTEMBER 30
-----------------------------------------------------------------------------
2001 2000
-----------------------------------------------------------------------------
INTEREST AVERAGE Interest Average
AVERAGE INCOME/ YIELD/RATE Average Income/ Yield/Rate
(Dollars in thousands) BALANCE EXPENSE PAID (5) Balance Expense Paid (5)
---------------------------------------------------------------------------------------------------------------------------
Interest earning assets:
Loans (1) (2) (3) $ 1,994,709 $ 123,694 8.29 % $ 2,055,665 $135,767 8.82 %
Securities - taxable 746,326 37,255 6.66 403,421 20,517 6.79
Securities - nontaxable 89,132 4,258 6.37 93,346 4,382 6.27
Federal funds sold 1,470 57 5.16 5,079 235 6.19
Interest bearing bank deposits 7,894 288 4.87 2,523 125 6.62
---------------------------------------------------------------------------------------------------------------------------
Total earning assets (4) 2,839,531 165,552 7.79 2,560,034 161,026 8.40
---------------------------------------------------------------------------------------------------------------------------
Cash and due from banks 65,881 70,055
Other assets 151,717 112,851
---------------------------------------------------------------------------------------------------------------------------
TOTAL ASSETS $ 3,057,129 $ 2,742,940
===========================================================================================================================
INTEREST BEARING LIABILITIES:
Demand deposits 506,954 8,428 2.22 488,371 9,394 2.57
Savings deposits 116,791 1,599 1.83 158,891 3,037 2.55
Other time deposits 1,187,787 51,444 5.79 960,543 41,295 5.74
Other borrowings 634,996 24,089 5.07 552,246 25,137 6.08
---------------------------------------------------------------------------------------------------------------------------
Total interest bearing liabilities 2,446,528 85,560 4.68 2,160,051 78,863 4.88
---------------------------------------------------------------------------------------------------------------------------
Noninterest bearing sources:
Noninterest bearing deposits 245,805 242,130
Other liabilities 47,006 42,701
Shareholders' equity 317,790 298,058
---------------------------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES AND
SHAREHOLDERS' EQUITY $ 3,057,129 $ 2,742,940
===========================================================================================================================
Net interest spread 3.11 3.52
Impact of noninterest bearing sources 0.65 0.77
---------------------------------------------------------------------------------------------------------------------------
NET INTEREST INCOME/
YIELD ON EARNINGS ASSETS $ 79,992 3.76 % $ 82,163 4.29 %
===========================================================================================================================
(1) The preceding analysis takes into consideration the principal amount of
nonaccruing loans and only income actually collected on such loans.
(2) Average loan balances are shown net of unearned income.
(3) Includes amortization of deferred loan fees of approximately $2,389 and
$2,766 for the nine months ended September 30, 2001 and 2000, respectively.
(4) Yields on nontaxable securities and loans are stated on a taxable-equivalent
basis, assuming a Federal tax rate of 35 percent, applicable state taxes and
TEFRA disallowances for the first six months of 2001 and 2000. The adjustments
made to convert to a taxable-equivalent basis were $1,442 and $1,407 for the
nine months ended September 30, 2001 and 2000, respectively.
(5) Annualized
14
The following tables presents the changes in net interest income from the
three months ended September 30, 2000 to September 30, 2001:
TABLE FOUR
VOLUME AND RATE VARIANCE ANALYSIS
----------------------------------------------------------------------------------------------------------------
THREE MONTHS ENDED SEPTEMBER 30
------------------------------------------------------------
INCREASE (DECREASE) IN NET INTEREST INCOME
DUE TO CHANGE IN (1)
------------------------------------------------------------
2000 2001
INCOME/ INCOME/
(DOLLARS IN THOUSANDS) EXPENSE RATE VOLUME EXPENSE
----------------------------------------------------------------------------------------------------------------
INTEREST INCOME:
Loans $ 47,113 $ (5,287) $ (2,671) $ 39,155
Securities - taxable 6,535 (461) 8,451 14,525
Securities - nontaxable 1,501 (42) (86) 1,373
Federal funds sold 17 (8) 2 11
Interest bearing bank deposits 49 (61) 63 51
----------------------------------------------------------------------------------------------------------------
TOTAL INTEREST INCOME $ 55,215 $ (5,859) $ 5,759 $ 55,115
================================================================================================================
INTEREST EXPENSE:
Demand deposits $ 2,949 $ (834) $ 337 $ 2,452
Savings deposits 834 (223) (126) 485
Other time deposits 15,678 (2,037) 3,126 16,767
Other borrowings 8,604 (2,100) 1,618 8,122
----------------------------------------------------------------------------------------------------------------
TOTAL INTEREST EXPENSE 28,065 (5,194) 4,955 27,826
----------------------------------------------------------------------------------------------------------------
NET INTEREST INCOME $ 27,150 $ (665) $ 804 $ 27,289
----------------------------------------------------------------------------------------------------------------
(1) The changes for each category of income and expense are divided between the
portion of change attributable to the variance in rate or volume for that
category. The amount of change that cannot be separated is allocated to each
variance proportionately.
The following tables presents the changes in net interest income from the
nine months ended September 30, 2000 to September 30, 2001:
TABLE FIVE
VOLUME AND RATE VARIANCE ANALYSIS
----------------------------------------------------------------------------------------------------------------
NINE MONTHS ENDED SEPTEMBER 30
--------------------------------------------------------------
INCREASE (DECREASE) IN NET INTEREST INCOME
DUE TO CHANGE IN (1)
--------------------------------------------------------------
2000 2001
INCOME/ INCOME/
(Dollars in thousands) EXPENSE RATE VOLUME EXPENSE
----------------------------------------------------------------------------------------------------------------
Interest income:
Loans $135,767 $ (8,171) $ (3,902) $123,694
Securities - taxable 20,517 (540) 17,278 37,255
Securities - nontaxable 4,382 75 (199) 4,258
Federal funds sold 235 (25) (153) 57
Interest bearing bank deposits 125 (69) 232 288
----------------------------------------------------------------------------------------------------------------
TOTAL INTEREST INCOME $161,026 $ (8,730) $ 13,256 $165,552
================================================================================================================
Interest expense:
Demand deposits $ 9,394 $ 1,299 $(2,265) $ 8,428
Savings deposits 3,037 747 (2,185) 1,599
Other time deposits 41,295 (343) 10,492 51,444
Other borrowings 25,137 4,502 (5,550) 24,089
----------------------------------------------------------------------------------------------------------------
TOTAL INTEREST EXPENSE 78,863 6,205 492 85,560
----------------------------------------------------------------------------------------------------------------
NET INTEREST INCOME $ 82,163 $(14,935) $ 12,764 $ 79,992
----------------------------------------------------------------------------------------------------------------
(1) The changes for each category of income and expense are divided between the
portion of change attributable to the variance in rate or volume for that
category. The amount of change that cannot be separated is allocated to each
variance proportionately.
15
PROVISION FOR LOAN LOSSES
The provision for loan losses for the three and nine months ended September
30, 2001 amounted to $1.3 million and $3.3 million, respectively, compared to
$2.2 million and $5.5 million for the comparable 2000 periods. The decrease in
the provision for loan losses was due to lower loan volume in 2001 and a
significant increase in nonaccrual loans in 2000, which did not recur in 2001.
Partially offsetting these factors in 2001 was the effect of higher net
charge-offs. Gross loans decreased $3.3 million during the nine months ended
September 30, 2001, excluding the $167.0 million loan securitization, compared
to an increase in gross loans of $188.7 million during the comparable 2000
period, excluding the effect of a $45.3 million loan sale during May of 2000.
The May 2000 loan sale removed $45.3 million in lower-yielding mortgage loans
from the loan portfolio.
Nonaccrual loans increased $12.7 million during the three months ended
September 30, 2000, compared to a decrease of $2.1 million during the three
months ended September 30, 2001. During the three months ended September 30,
2000, management noted the significant change in nonaccrual loans and concluded
that additional provisions for loan losses were necessary because of changes in
the portfolio's perceived risk profile and the effects of higher interest rates
and slower economic growth on some customers.
Net charge-offs were $1.2 million or 0.23 percent of average loans and $3.1
million or 0.21 percent of average loans for the three and nine months ended
September 30, 2001, respectively, compared to $1.0 million or 0.20 percent of
average loans and $2.6 million or 0.17 percent of average loans for the
comparable 2000 periods. The increase in net charge-offs was primarily due to
the effects of slower economic growth on certain customers within the portfolio.
Due to the current economic environment Management believes net charge-offs for
the three months ended December 31, 2001 could be higher than the net
charge-offs for the three months ended September 30, 2001.
NONINTEREST INCOME
Noninterest income increased 35 percent and 21 percent to $10.4 million and
$27.6 million for the three and nine months ended September 30, 2001,
respectively, compared to $7.7 million and $22.8 million for the comparable 2000
periods. This increase was driven primarily by a 27.9 percent and a 16.9 percent
increase in service charge income on deposit accounts for the three months and
nine months ended September 30, 2001 compared to the same 2000 periods, which
was due to re-pricing opportunities resulting from the acquisition of Carolina
First. In addition, the declining rate environment has increased mortgage
origination volume. This has resulted in additional loan sales to the secondary
market and correspondingly greater fee income. Continued growth of First Charter
Insurance Services, higher brokerage revenue and trading gains also increased
noninterest income. Premiums earned on written covered call options on fixed
income securities accounts for a majority of our trading gains.
NONINTEREST EXPENSE
Noninterest expense increased $4.1 million to $21.9 for the three months
ended September 30, 2001 from $17.8 million in the comparable 2000 period. The
increase was mainly attributable to an increase in occupancy and equipment
expense as a result of the move into the new First Charter Center and
investments in people and technology to position First Charter for growth.
Noninterest expense decreased 14 percent to $62.8 million for the nine months
ended September 30, 2001, compared to $73.3 million for the comparable 2000
period. The decrease was attributable to the restructuring charges and
merger-related expenses of $16.3 million during the quarter ended June 30, 2000,
associated with the acquisition of Carolina First. This decrease was partially
offset during 2001 by the additional operating costs associated with the four
financial centers acquired during the fourth quarter of 2000, an increase in
occupancy and equipment expense as a result of the move into the new First
Charter Center and investments in people and technology to position the
Corporation for growth.
16
INCOME TAXES
Total income tax expense for the three and nine months ended September 30,
2001 was $4.5 million and $12.9 million, respectively, compared to $4.5 million
and $9.1 million for the same periods in 2000. The increase in the tax expense
for the nine months ended September 30, 2001, was attributable to an increase in
taxable income. The increase in tax expense, however, was not proportionate with
the increase in income because portions of the restructuring charges and
merger-related expenses in 2000 were not deductible. This created a decrease in
the effective tax rate to 32.2 percent for the nine months ended September 30,
2001 from 36.6 percent for the nine months ended September 30, 2000.
FINANCIAL CONDITION
SUMMARY
Total assets at September 30, 2001 amounted to $3.35 billion, compared to
$2.93 billion at December 31, 2000 and $2.79 billion at September 30, 2000. Net
loans at September 30, 2001 amounted to $1.96 billion, compared to $2.13 billion
at December 31, 2000 and $2.08 billion at September 30, 2000. This decrease from
prior periods was due to the securitization of $167.0 million of mortgage loans
in February 2001. These loans were securitized because of a decrease in interest
rates and the resulting impact of that condition on the Corporation's interest
rate risk. The securitized mortgage loans are now classified as mortgage backed
securities in our available for sale portfolio.
The securities available for sale portfolio increased to $1.13 billion at
September 30, 2001, compared to $441.0 million at December 31, 2000, and $474.1
million at September 30, 2000. The increase in securities available for sale was
due to the securitization of $167.0 million of mortgage loans in February 2001,
as well as the net purchase of $493.4 million in securities available for sale
made to increase our interest earning assets. The carrying value of securities
available for sale was approximately $29.0 million above their amortized cost at
September 30, 2001, which represents gross unrealized gains of $29.1 million and
gross unrealized losses of $0.1 million. In conjunction with the Merger, the
Corporation transferred $35.3 million of Carolina First's securities classified
as held to maturity to available for sale due to the significance of the impact
on the Corporation's interest rate forecast as compared to corporate policy.
Total deposits at September 30, 2001 amounted to $2.16 billion, compared to
$2.00 billion at December 31, 2000 and $1.92 billion at September 30, 2000.
Shareholders' equity at September 30, 2001 was $327.6 million, which represented
a book value per share of $10.49 and an equity-to-assets percentage of 9.78
percent. The securities available for sale portfolio's unrealized net gain has
increased from $2.0 million (net of tax) at December 31, 2000 to an unrealized
net gain of $17.7 million (net of tax) at September 30, 2001.
Other borrowings increased to $806.1 million at September 30, 2001,
compared to $570.0 million at December 31, 2000, and $519.8 million at September
30, 2000. The increase was primarily due to increases in Federal Home Loan Bank
advances principally used to fund security purchases.
NONPERFORMING ASSETS
The total of nonperforming assets remained relatively constant at $29.6
million at both September 30, 2001 and December 31, 2000 and increased $1.4
million compared to September 30, 2000. As a percentage of total assets,
nonperforming assets have decreased to 0.88 percent at September 30, 2001
compared to 1.01 percent at both December 31, 2000 and September 30, 2000,
respectively. The decrease in the percentage of nonperforming assets to total
assets from September 30, 2000 was primarily due to the increase in securities
available for sale described above.
17
Total nonperforming assets and loans 90 days or more past due and still
accruing interest at September 30, 2001 were $29.7 million or 1.49 percent of
total loans and other real estate, compared to $30.0 million or 1.37 percent of
total loans and other real estate at December 31, 2000. These ratios were
primarily impacted by the first quarter 2001 securitization of $167.0 million of
mortgage loans. Nonaccrual loans at September 30, 2001 remained relatively
constant at $29.5 million, compared to $29.6 at December 31, 2000. Nonaccrual
loans at September 30, 2001 were not concentrated in any one industry and
primarily consisted of several large credits secured by real estate. The
components of nonperforming assets and loans 90 days or more past due and still
accruing are presented in the table below:
TABLE SIX
NONPERFORMING AND PROBLEM ASSETS
---------------------------------------------------------------------------------------------------
SEPTEMBER 30 December 31
(Dollars in thousands) 2001 2000
---------------------------------------------------------------------------------------------------
Nonaccrual loans $ 26,502 $ 26,587
Other real estate 3,067 2,989
---------------------------------------------------------------------------------------------------
Total nonperforming assets 29,569 29,576
---------------------------------------------------------------------------------------------------
Loans 90 days or more past due and still accruing interest 114 430
---------------------------------------------------------------------------------------------------
Total nonperforming assets and loans 90 days or
more past due and still accruing interest $ 29,683 $ 30,006
===================================================================================================
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 the Corporation's
control. Since a significant portion of the loan portfolio is comprised of real
estate loans and loans to area businesses, the Corporation is subject to
continued risk that the real estate market and economic conditions could
continue to change and could result in future losses and 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 Department. Any issues
regarding risk assessments of those credits are addressed by the Bank's Senior
Risk Managers and factored into management's decision to originate or renew the
loan. Furthermore, large commitments are reviewed by both a Board of Directors
Loan Committee and an Executive Loan Committee comprised of executive
management, the chief credit officer and senior lending officers of the Bank.
The Corporation also continues to employ an independent third party risk
assessment group to review the underwriting, documentation and risk grading
analysis. This third party group reviews all loan relationships above a certain
dollar amount and a sampling of all other credits. The third party's evaluation
and report is shared with Executive Management, the Loan and Audit Committee of
the Bank and, ultimately, is reported to the Board of Directors of the Bank and
the Corporation.
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, individual commercial loans are
assigned a credit risk grade based on their credit quality, which is subject to
change as conditions warrant. Any changes in those risk assessments as
determined by the outside risk assessment group, regulatory examiners or the
Corporation's Risk Management Division are also considered in the allowance for
loan losses analysis. Management considers certain commercial loans on
nonaccrual status to be individually impaired and measures such impairment and
the related allowance for loan loss based upon the value of the collateral. An
estimate of an allowance is made for all other graded loans in the portfolio
based on their assigned credit risk grade, type of loan and other matters
related to credit risk. In the allowance for loan loss analysis process, the
Bank also aggregates non-graded 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 Bank also considers the
impact of the area, local, regional and national economies in making estimates
of the allowance for loan losses.
18
At September 30, 2001 the allowance for loan losses was $28.2 million or
1.42 percent of gross loans compared to $27.9 million or 1.32 percent at
September 30, 2000. The increase in the allowance for loan losses as a
percentage of gross loans is primarily attributable to the mortgage loan
securitization, which removed $417,000 of allowance for loan losses when the
loans were securitized and reclassified from loans into securities available for
sale. Securitized loans consisted of residential mortgage loans, which generally
have a lower percentage of allocated allowance for loan losses. TABLE SEVEN
provides the changes in the allowance for loan losses for the three and nine
months ended September 30, 2001 and 2000.
Management considers the allowance for loan losses adequate to cover
inherent losses in the Bank's loan portfolio as of the date of the financial
statements. Management believes it has established the allowance 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 allowances for loan losses.
Such agencies may require the recognition of adjustments to the allowances based
on their judgments of information available to them at the time of their
examinations.
TABLE SEVEN
ALLOWANCE FOR LOAN LOSSES
---------------------------------------------------------------------------------------------------------------------------
THREE MONTHS NINE MONTHS
ENDED SEPTEMBER 30 ENDED SEPTEMBER 30
--------------------------------------------------------------------
(Dollars in thousands) 2001 2000 2001 2000
---------------------------------------------------------------------------------------------------------------------------
BALANCE, BEGINNING OF PERIOD $ 28,049 $ 26,700 $ 28,447 $ 25,002
---------------------------------------------------------------------------------------------------------------------------
LOAN CHARGE-OFFS:
Commercial, financial and agricultural 226 533 1,359 1,903
Real estate - construction 50 - 50 -
Real estate - mortgage 296 95 507 276
Installment 800 812 1,771 1,241
---------------------------------------------------------------------------------------------------------------------------
Total loans charged-off 1,372 1,440 3,687 3,420
---------------------------------------------------------------------------------------------------------------------------
RECOVERIES OF LOANS PREVIOUSLY CHARGED-OFF:
Commercial, financial and agricultural 38 305 189 575
Real estate - construction 2 - 2 -
Real estate - mortgage 108 10 169 36
Installment 71 86 253 241
---------------------------------------------------------------------------------------------------------------------------
Total recoveries of loans previously charged-off 219 401 613 852
---------------------------------------------------------------------------------------------------------------------------
Net charge-offs 1,153 1,039 3,074 2,568
---------------------------------------------------------------------------------------------------------------------------
Provision for loan losses 1,325 2,200 3,265 5,540
Adjustment for loans sold and securitized - - (417) (113)
---------------------------------------------------------------------------------------------------------------------------
BALANCE, SEPTEMBER 30 $ 28,221 $ 27,861 $ 28,221 $ 27,861
---------------------------------------------------------------------------------------------------------------------------
Average loans, net of unearned income $ 1,973,373 $ 2,099,692 $ 1,994,709 $ 2,055,665
Net charge-offs to average loans (annualized) 0.23 % 0.20 % 0.21 % 0.17 %
Allowance for loan losses to gross loans at September 30 1.42 1.32 1.42 1.32
---------------------------------------------------------------------------------------------------------------------------
LIQUIDITY
The Bank derives a major source of its liquidity from its core deposit
base. Liquidity is further provided by loan repayments, brokered deposits,
maturities in the securities available for sale portfolio, the ability to secure
public deposits, the availability of federal fund lines and repurchase
agreements at correspondent banks and the ability to borrow from the Federal
Reserve Bank ("FRB") discount window. In addition to these sources, the Bank is
a member of the Federal Home Loan Bank ("FHLB") System, which provides access to
FHLB lending sources. At September 30, 2001, the Bank had a line of credit with
the FHLB of $735.1 million, with $665.4 million advanced to the Bank and $69.7
million remaining available. Another source of liquidity is the securities in
the available for sale portfolio, which may be sold in response to liquidity
needs. The Bank's loan-to-deposit ratio at September 30, 2001 was 0.92 percent
compared to 1.08 percent at December 31, 2000. Management believes the Bank's
sources of liquidity are adequate to meet operating needs and deposit withdrawal
requirements.
19
CAPITAL RESOURCES
At September 30, 2001, total shareholders' equity was $327.6 million,
representing a book value of $10.49 per share, compared to $309.3 million, or a
book value of $9.79 per share at December 31, 2000. The increase was primarily
due to net earnings (net income less dividends) of $10.1 million combined with
the recognition of an additional $15.7 million after-tax unrealized gains on
available for sale securities, the receipt of $1.5 million from the sale of
approximately 129,187 shares of common stock issued for stock options and
Dividend Reinvestment Plans and the payment of $9.0 million for the purchase and
retirement of 507,000 shares of common stock.
At September 30, 2001, the Corporation and the Bank were in compliance with
all existing capital requirements. The most recent notifications from the
Corporation's and the Bank's various regulators categorized the Corporation and
the Bank as well capitalized under the regulatory framework for prompt
corrective action. There are no events or conditions since those notifications
that management believes have changed either of the entities' categories. The
Corporation's capital requirements are summarized in the table below:
RISK-BASED CAPITAL
-------------------------------------------------------
LEVERAGE CAPITAL TIER 1 CAPITAL TOTAL CAPITAL
------------------------------------------------------------------------------------------------------------
(DOLLARS IN THOUSANDS) AMOUNT PERCENTAGE (1) AMOUNT PERCENTAGE (2) AMOUNT PERCENTAGE (2)
------------------------------------------------------------------------------------------------------------
Actual $ 291,282 9.20 % $ 291,282 13.18 % $319,670 14.46 %
Required 126,645 4.00 88,423 4.00 176,846 8.00
Excess 164,637 5.20 202,859 9.18 142,824 6.46
(1) Percentage of total adjusted average assets. The FRB minimum leverage
ratio requirement is 3 percent to 5 percent, depending on the
institution's composite rating as determined by its regulators. The FRB
has not advised the Corporation of any specific requirements applicable
to it.
(2) Percentage of risk-weighted assets.
REGULATORY RECOMMENDATIONS
Management is not presently aware of any current recommendations to the
Corporation or to the Bank by regulatory authorities which, if they were to be
implemented, would have a material adverse effect on the Corporation's or the
Bank's liquidity, capital resources, or operations.
ACCOUNTING AND REGULATORY MATTERS
Statement of Financial Accounting Standards No. 133 (SFAS 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 recognized as assets or liabilities on the
balance sheet and that such instruments be carried at fair value through
adjustments to either other comprehensive income or current earnings or both, as
appropriate. SFAS No. 133 was originally effective for financial statements
issued for all fiscal quarters of fiscal years beginning after June 15, 1999.
The implementation date of SFAS No. 133 was delayed by Statement of Financial
Accounting Standards No. 137 "Accounting for Derivative Instruments and Hedging
Activities--Deferral of the Effective Date of FASB Statement No. 133" to the
first fiscal quarters of fiscal years beginning after June 15, 2000.
Accordingly, the Corporation adopted SFAS No. 133 on January 1, 2001. The impact
to the Corporation upon adoption was immaterial.
In September 2000, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards No. 140 (SFAS No. 140), "Accounting
for Transfers and Servicing of Financial Assets and Extinguishments of
Liabilities- a replacement of FASB Statement 125", which revises the criteria
for accounting for securitizations and other transfers of financial assets and
collateral, and introduces new disclosures. The enhanced disclosure requirements
were effective for year-end 2000. The other provisions of SFAS No. 140 apply
prospectively to transfers of financial assets and extinguishments of
liabilities occurring after March 31, 2001. Accordingly, the Corporation adopted
SFAS No. 140 on April 1, 2001. The impact to the Corporation upon adoption was
immaterial.
In July 2001, the FASB issued Statement of Financial Accounting Standards
No. 141 (SFAS No. 141), "Business Combinations", and Statement of Financial
Accounting Standards No. 142 (SFAS No. 142), "Goodwill and Other Intangible
Assets". SFAS 141 requires that the purchase method of accounting be used for
all business
20
combinations initiated after June 30, 2001. SFAS 141 also specifies criteria
which must be met for intangible assets acquired in a purchase method business
combination to be recognized and reported apart from goodwill. SFAS 142 will
require that goodwill and intangible assets with indefinite useful lives no
longer be amortized, but instead tested for impairment at least annually in
accordance with the provisions of SFAS 142. SFAS 142 will also require that
identifiable intangible assets with definite useful lives be amortized over
their respective estimated useful lives to their estimated residual values, and
reviewed for impairment in accordance with SFAS No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of".
The Corporation was required to adopt the provisions of SFAS 141 as of June
30, 2001 and will adopt SFAS 142 effective January 1, 2002. Furthermore, any
goodwill and any intangible asset determined to have an indefinite useful life
that are acquired in a purchase business combination completed after June 30,
2001 will not be amortized, but will continue to be evaluated for impairment in
accordance with the appropriate accounting literature issued prior to SFAS 142.
Goodwill and intangible assets acquired in business combinations completed
before July 1, 2001 will continue to be amortized prior to the adoption of SFAS
142.
SFAS 141 requires, upon adoption of SFAS 142, that the Corporation evaluate
its existing intangible assets and goodwill that were acquired in a prior
purchase business combination, and to make any necessary reclassifications in
order to conform with the new criteria in SFAS 141 for recognition apart from
goodwill. Upon adoption of SFAS 142, the Corporation will be required to
reassess the useful lives and residual values of all intangible assets acquired
in purchase business combinations, and make any necessary amortization period
adjustments by the end of the first interim period after adoption. In addition,
to the extent an intangible asset is identified as having an indefinite useful
life, the Corporation will be required to test the intangible asset for
impairment in accordance with the provisions of SFAS 142 within the first
interim period. Any impairment loss will be measured as of the date of adoption
and recognized as the cumulative effect of a change in accounting principle in
the first interim period.
As of September 30, 2001, the Corporation has unamortized goodwill in the
amount of $12.2 million, and unamortized identifiable intangible assets in the
amount of $7.1 million, all of which will be subject to the transition
provisions of SFAS 141 and 142. Amortization expense related to goodwill was
approximately $293,000 and $552,000 for the year ended December 31, 2000 and the
nine months ended September 30, 2001, respectively. Because of the extensive
effort needed to comply with adopting SFAS 141 and 142, it is not practicable to
reasonably estimate the impact of adopting these statements on the Corporation's
financial statements at this time, including whether any transitional impairment
losses will be required to be recognized as the cumulative effect of a change in
accounting principle.
In August 2001, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards No. 143 (SFAS No. 143), "Accounting
for Asset Retirement Obligations", which addresses financial accounting and
reporting for obligations associated with the retirement of tangible long-lived
assets and the associated asset retirement cost. This standard requires the
Corporation to record the fair value of an asset retirement obligation as a
liability in the period in which it incurs a legal obligation associated with
the retirement of tangible long-lived assets that result for the acquisition,
construction, development and or normal use of the assets. The Corporation also
is to record a corresponding increase to the carrying amount of the related
long-lived asset and to depreciate that cost over the life of the asset. The
liability is changed at the end of each period to reflect the passage of time
and changes in the estimated future cash flows underlying the initial fair value
measurement. This statement is effective for fiscal years beginning after June
15, 2002. At this time, the Corporation is assessing the impact of SFAS No. 143
on its financial condition and results of operations.
In October 2001, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards No. 144 (SFAS No. 144), "Accounting
for the Impairment or Disposal of Long-Lived Assets", which addresses financial
accounting and reporting for the impairment or disposal of long-lived assets.
This standard provides guidance on differentiating between long-lived assets to
be held and used, long-lived assets to be disposed of other than by sale and
long-lived assets to be disposed of by sale. SFAS No. 144 supersedes FASB
Statement of Financial Accounting Standards No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of".
SFAS No. 144 also supersedes Accounting Principals Board Opinion No. 30,
"Reporting the Results of Operations - Reporting the Effects of Disposal of a
Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring
Events and Transactions". This statement is effective for fiscal years beginning
after December 15, 2001. At this time, the Corporation is assessing the impact
of SFAS No. 144 on its financial condition and results of operations.
21
From time to time, the FASB 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 and proposed effective dates
of exposure drafts.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The following table presents the scheduled maturity of market risk
sensitive instruments at September 30, 2001:
MATURING IN 1 YEAR 2 YEARS 3 YEARS 4 YEARS 5 YEARS THEREAFTER TOTAL
------------------------------------------------------------------------------------------------------------------------------
ASSETS:
Debt securities $ 276,264 $ 252,916 $ 148,805 $ 133,008 $ 111,699 $ 163,685 $ 1,086,377
Loans 763,039 220,939 226,503 229,705 215,988 302,775 1,958,949
------------------------------------------------------------------------------------------------------------------------------
TOTAL $ 1,039,303 $ 473,855 $ 375,308 $ 362,713 $ 327,687 $ 466,460 $ 3,045,326
------------------------------------------------------------------------------------------------------------------------------
LIABILITIES:
Savings, NOW and IMMA's $ 632,925 $ 11,065 $ 168 $ 658 $ -- $ -- $ 644,816
CD's 1,070,527 126,164 45,068 8,714 5,803 376 1,256,652
Short-term borrowings 341,801 -- -- -- -- -- 341,801
Long-term borrowings -- 30,040 31,040 40 40,040 363,180 464,340
------------------------------------------------------------------------------------------------------------------------------
TOTAL $ 2,045,253 $ 167,269 $ 76,276 $ 9,412 $ 45,843 $ 363,556 $ 2,707,609
------------------------------------------------------------------------------------------------------------------------------
The following table presents the average interest rate and estimated fair
value of market risk sensitive instruments at September 30, 2001:
Carrying Average Estimated
Value Interest Rate Fair Value
---------------------------------------------------------------------------------------------------------------------
ASSETS:
Debt securities $ 1,086,377 6.55 % $ 1,086,377
Loans 1,958,949 7.78 2,018,684
---------------------------------------------------------------------------------------------------------------------
TOTAL $ 3,045,326 7.34 % $ 3,105,061
=====================================================================================================================
LIABILITIES:
Savings, NOW and IMMA's $ 644,816 1.68 % $ 645,283
CDs 1,256,652 4.95 1,266,051
Short-term borrowings 341,801 3.45 331,901
Long-term borrowings 464,340 5.12 450,891
---------------------------------------------------------------------------------------------------------------------
TOTAL $ 2,707,609 4.01 % $ 2,694,126
=====================================================================================================================
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The Corporation and the Bank are defendants in certain 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 matters is not expected to have a material adverse effect on the
consolidated operations, liquidity or financial position of the Corporation or
the Bank.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
Not Applicable.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Not Applicable.
22
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
Exhibit No.
(per Exhibit Table
in item 601 of
Regulation S-K) Description of Exhibits
3.1 Amended and Restated Articles of Incorporation
of the Corporation, incorporated herein by
reference to Exhibit 3.1 of the Corporation's
Annual Report on Form 10-K for the fiscal year
ended December 31, 2000 (Commission File
No. 0-15829).
3.2 By-laws of the Corporation, as amended,
incorporated herein by reference to
Exhibit 3.2 of the Corporation's Annual Report
on Form 10-K for the fiscal year ended
December 31, 1995 (Commission File No. 0-15829).
(b) Reports on Form 8-K
The following reports on Form 8-K were filed by the Corporation during
the quarter ended September 30, 2001:
Current Report on Form 8-K dated July 10, 2001 and filed July 10,
2001, Items 5 and 7.
Current Report on Form 8-K dated July 11, 2001 and filed July 11,
2001, Items 7 and 9.
23
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
FIRST CHARTER CORPORATION
(Registrant)
Date: November 1, 2001 By: /s/ Robert O. Bratton
---------------------------
Robert O. Bratton
Executive Vice President &
Chief Financial Officer
24