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FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from ____________________ to _________________________
Commission file number 0-15829
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FIRST CHARTER CORPORATION
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(Exact name of registrant as specified in its charter)
North Carolina 56-1355866
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(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
22 Union Street North, Concord, North Carolina 28025
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(Address of principal executive offices) (Zip Code)
(704) 786-3300
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(Registrant's telephone number, including area code)
N/A
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(Former name, former address and former fiscal year,
if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
----- -----
APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY
PROCEEDINGS DURING THE PRECEDING FIVE YEARS:
Indicate by check mark whether the registrant has filed all documents
and reports required to be filed by Sections 12, 13 or 15(d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a plan
confirmed by a court. Yes No
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APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of the latest practicable date.
17,740,755 shares of Common Stock, no par value, outstanding as of July
30, 1999.
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PART 1. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
FIRST CHARTER CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
JUNE 30, DECEMBER 31,
1999 1998
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(Dollars in thousands) (UNAUDITED)
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ASSETS:
Cash and due from banks ...................................... $ 40,957 $ 41,884
Federal funds sold ........................................... -- 6,402
Interest bearing bank deposits ............................... 4,002 11,713
Securities available for sale ................................ 324,931 331,799
Loans ........................................................ 1,374,225 1,422,676
Less: Unearned income .................................. (241) (155)
Allowance for loan losses ........................ (16,649) (15,554)
------------------------------
Loans, net .............................................. 1,357,335 1,406,967
------------------------------
Premises and equipment, net .................................. 31,791 30,603
Other assets ................................................. 33,034 34,989
------------------------------
Total assets ........................................ $ 1,792,050 $ 1,864,357
==============================
LIABILITIES AND SHAREHOLDERS' EQUITY:
Deposits, domestic:
Noninterest bearing demand .......................... $ 122,278 $ 119,519
Interest bearing .................................... 1,007,173 1,003,516
------------------------------
Total deposits ............................. 1,129,451 1,123,035
Other borrowings ............................................. 400,196 469,944
Other liabilities ............................................ 30,763 25,406
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Total liabilities ................................... 1,560,410 1,618,385
------------------------------
Shareholders' equity:
Common stock - no par value; authorized 50,000,000 shares,
issued and outstanding 17,817,786 shares at 6/30/99 and
18,442,202 shares at 12/31/98 ........................... 105,463 121,416
Retained earnings ............................................ 124,627 118,078
Accumulated other comprehensive income:
Unrealized gain on securities available for sale, net ...... 1,550 6,478
------------------------------
Total shareholders' equity .............................. 231,640 245,972
------------------------------
Total liabilities and shareholders' equity .............. $ 1,792,050 $ 1,864,357
==============================
See accompanying notes to consolidated financial statements.
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FIRST CHARTER CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
FOR THE THREE MONTHS ENDED
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JUNE 30, June 30,
(Dollars in thousands, except per share data) 1999 1998
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Interest income:
Loans ................................................ $ 28,518 $ 29,023
Federal funds sold ................................... 7 309
Interest bearing bank deposits ....................... 64 60
Securities available for sale ........................ 4,643 4,785
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Total interest income .......................... 33,232 34,177
-----------------------------
Interest expense:
Deposits ............................................. 10,954 11,413
Federal funds purchased and securities
sold under agreements to repurchase .............. 804 1,785
Federal Home Loan Bank and other borrowings .......... 4,352 4,493
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Total interest expense ....................... 16,110 17,691
-----------------------------
Net interest income .............. 17,122 16,486
Provision for loan losses .................................... 1,250 600
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Net interest income after provision for loan losses... 15,872 15,886
Noninterest income:
Trust income ......................................... 565 477
Service charges on deposit accounts .................. 1,134 1,049
Insurance and other commissions ...................... 926 294
Securities available for sale transactions, net ...... 274 970
Gain on sale of loans ................................ 1,757 --
Other ................................................ 704 1,322
-----------------------------
Total noninterest income ..................... 5,360 4,112
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Noninterest expense:
Salaries and fringe benefits ......................... 5,886 6,044
Occupancy and equipment .............................. 1,851 1,448
Other ................................................ 3,958 2,325
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Total noninterest expense .................... 11,695 9,817
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Income before income taxes ....... 9,537 10,181
Income taxes ................................................. 3,016 3,547
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Net income ................................................... $ 6,521 $ 6,634
=============================
Net income per share:
Basic ........................................ $ 0.36 $ 0.36
Diluted ...................................... $ 0.36 $ 0.35
Weighted average common and common equivalent shares:
Basic ......................................... 18,224,986 18,360,121
Diluted ....................................... 18,326,670 18,745,541
See accompanying notes to consolidated financial statements.
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FIRST CHARTER CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
FOR THE SIX MONTHS ENDED
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JUNE 30, June 30,
(Dollars in thousands, except per share data) 1999 1998
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Interest income:
Loans ................................................ $ 58,313 $ 57,187
Federal funds sold ................................... 109 485
Interest bearing bank deposits ....................... 201 131
Securities available for sale ........................ 9,376 9,472
-------------------------------
Total interest income .......................... 67,999 67,275
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Interest expense:
Deposits ............................................. 22,243 22,824
Federal funds purchased and securities
sold under agreements to repurchase .............. 2,023 3,453
Federal Home Loan Bank and other borrowings .......... 9,381 8,194
-------------------------------
Total interest expense ....................... 33,647 34,471
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Net interest income .............. 34,352 32,804
Provision for loan losses .................................... 2,225 1,262
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Net interest income after provision for loan losses... 32,127 31,542
Noninterest income:
Trust income ......................................... 1,100 947
Service charges on deposit accounts .................. 2,172 2,108
Insurance and other commissions ...................... 1,983 624
Securities available for sale transactions, net ...... 618 1,957
Gain on sale of loans ................................ 1,757 --
Other ................................................ 1,511 2,142
-------------------------------
Total noninterest income ..................... 9,141 7,778
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Noninterest expense:
Salaries and fringe benefits ......................... 11,606 11,750
Occupancy and equipment .............................. 3,580 2,794
Other ................................................ 7,409 5,150
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Total noninterest expense .................... 22,595 19,694
-------------------------------
Income before income taxes ....... 18,673 19,626
Income taxes ................................................. 5,979 6,822
-------------------------------
Net income ................................................... $ 12,694 $ 12,804
===============================
Net income per share:
Basic ........................................ $ 0.69 $ 0.70
Diluted ...................................... $ 0.69 $ 0.68
Weighted average common and common equivalent shares:
Basic ........................................ 18,356,140 18,315,048
Diluted ...................................... 18,429,095 18,712,537
See accompanying note to consolidated financial statements.
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FIRST CHARTER CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(Unaudited)
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ESOP and Accumulated
Common Stock Unvested Other
------------------------ Retained Restricted Comprehensive
(Dollars in thousands) Shares Amount Earnings Stock Income Total
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Balance, December 31, 1997 ................ 19,068,298 $ 139,712 $ 119,899 $(21,234) $ 5,532 $ 243,909
Comprehensive income:
Net income through June 30, 1998 ...... -- -- 12,804 -- -- 12,804
Unrealized loss on securities available
for sale, net ..................... -- -- -- -- (266) (266)
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Total comprehensive income 12,538
Cash dividends ............................ -- -- (5,233) -- -- (5,233)
Purchase and retirement of common stock ... (684) (18) -- -- -- (18)
Stock options exercised and Dividend
Reinvestment Plan stock issued ....... 93,430 1,567 -- -- -- 1,567
Pre-merger transactions of pooled bank .... -- (36) -- 1,818 -- 1,782
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Balance, June 30, 1998 .................... 19,161,044 $ 141,225 $ 127,470 $(19,416) $ 5,266 $ 254,545
=============================================================================
Balance, December 31, 1998 ................ 18,442,202 $ 121,416 $ 118,078 $ -- $ 6,478 $ 245,972
Comprehensive income:
Net income through June 30, 1999 ...... -- -- 12,694 -- -- 12,694
Unrealized loss on securities
available for sale, net ........... -- -- -- -- (4,928) (4,928)
---------
Total comprehensive income 7,766
Cash dividends ............................ -- -- (6,145) -- -- (6,145)
Shares issued in connection with
insurance agency acquisition .......... 68,551 1,273 -- -- -- 1,273
Purchase and retirement of common stock ... (739,617) (17,680) -- -- -- (17,680)
Stock options exercised ................... 46,650 454 -- -- -- 454
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Balance, June 30, 1999 .................... 17,817,786 $ 105,463 $ 124,627 $ -- $ 1,550 $ 231,640
=============================================================================
See accompanying notes to consolidated financial statements.
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FIRST CHARTER CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
FOR THE SIX MONTHS ENDED
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JUNE 30, JUNE 30,
(Dollars in Thousands) 1999 1998
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CASH FLOWS FROM OPERATING ACTIVITIES:
Net income.................................................. $ 12,694 $ 12,804
Adjustments to reconcile net income to net cash provided
by operating activities:
Provision for loan losses................................. 2,225 1,262
Depreciation.............................................. 1,916 1,389
Premium amortization and discount accretion, net.......... 103 160
Net gain on securities available for sale transactions.... (618) (1,957)
Amortization of unearned stock compensation............... -- 1,783
Net gain on sale of other real estate..................... (59) (434)
Net gain on sale of mortgage loans........................ (1,757) --
Net loss on sale of premises and equipment................ 22 --
Origination of mortgage loans held for sale............... (28,340) (35,874)
Proceeds from sale of mortgage loans available for sale... 178,830 36,074
Decrease in other assets.................................. 5,883 1,266
Increase (decrease) in other liabilities.................. 5,356 (907)
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Net cash provided by operating activities.......... 176,255 15,566
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CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sales of securities available for sale...... 7,589 13,887
Proceeds from maturities of securities available for sale. 34,912 54,098
Purchase of securities available for sale................. (43,019) (64,849)
Net increase in loans..................................... (103,375) (126,156)
Proceeds from sales of other real estate.................. 2,427 3,203
Proceeds from sales of premises and equipment............. 540 --
Purchase of premises and equipment........................ (3,666) (2,386)
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Net cash used by investing activities.............. (104,592) (122,203)
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase in demand, money market and savings
accounts................................................ 25,439 13,843
Net increase (decrease) in certificates of deposit........ (19,023) 7,608
Net increase (decrease) in securities sold under
repurchase agreements and other borrowings.............. (69,748) 97,304
Purchase and retirement of common stock................... (17,680) (18)
Proceeds from issuance of common stock.................... 454 1,567
Dividends paid............................................ (6,145) (5,233)
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Net cash provided (used) by financing activities... (86,703) 115,071
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Net increase (decrease) in cash and cash
equivalents....................................... (15,040) 8,434
Cash and cash equivalents at beginning of period... 59,999 58,730
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Cash and cash equivalents at end of period......... $ 44,959 $ 67,164
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SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the year for:
Interest................................................ $ 32,778 $ 33,712
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Income taxes............................................ $ 4,873 $ 7,997
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SUPPLEMENTAL DISCLOSURE OF NON-CASH TRANSACTIONS:
Transfer of loans and premises and equipment to
other real estate owned................................... $ 1,107 $ 3,052
========= =========
Unrealized loss on securities available for sale
(net of tax benefit of $2,973 and $157 for June 30,
1999 and June 30, 1998, respectively)................... 4,928 $ 266
========= =========
Transfer of loans in portfolio to available for sale...... $ 147,555 $ --
========= =========
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FIRST CHARTER CORPORATION AND SUBSIDIARIES
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
June 30, 1999 AND 1998 (UNAUDITED)
1. The accompanying consolidated financial statements present the
consolidated financial condition and results of operations of First
Charter Corporation (the "Corporation") and its wholly owned
subsidiary, First Charter National Bank (the "Bank"), a commercial bank
operating in Mecklenburg, Cabarrus, Union, Rowan, Rutherford and
Cleveland counties of North Carolina. In addition, through its
subsidiary First Charter Brokerage Services, the Bank offers discount
brokerage services, insurance and annuity sales and financial planning
services pursuant to a third party arrangement with UVEST Investment
Services. The Bank also operates three other subsidiaries. First
Charter Insurance Services, Inc. is a North Carolina corporation formed
to meet the insurance needs of businesses and individuals throughout
the Charlotte metropolitan area. First Charter Realty Investment Inc.
is a Delaware corporation organized as a holding company for FCNB Real
Estate Inc, a real estate investment trust organized in North Carolina.
The preparation of the consolidated financial statements in conformity
with generally accepted accounting principles requires management to
make estimates and assumptions that affect reported amounts of assets
and liabilities and disclosure of contingent liabilities at the date of
the financial statements, as well as the amounts of income and expenses
during the reporting period. Actual results could differ from those
estimates.
The information furnished in this report reflects all adjustments which
are, in the opinion of management, necessary to present a fair
statement of the financial condition and the results of operations for
the interim periods. All such adjustments were of a normal recurring
nature.
2. All financial data have been restated to reflect the Corporation's
merger with HFNC Financial Corp. ("HFNC") in September 1998, which was
accounted for as a pooling-of-interests.
In certain instances, amounts reported in the prior periods'
consolidated financial statements have been reclassified to present
them in the format selected for 1999. Such reclassifications have no
effect on net income or shareholders' equity as previously reported.
3. The Corporation calculates its basic and diluted income per share in
accordance with the Financial Accounting Standards Board (FASB)
Statement No. 128, "Earnings per Share." Basic net income per share is
computed by dividing net income by the weighted average number of
shares of common stock outstanding for the year. Diluted net income per
share reflects the potential dilution that could occur if the
Corporation's common stock equivalents, which consist of dilutive stock
options, are 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 the 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:
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Three Months Ended Six Months Ended
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June 30, June 30, June 30, June 30,
1999 1998 1999 1998
------------------------------------------------------------------------ --------------------------
Basic EPS denominator:
Weighted average number of
common shares outstanding....... 18,224,986 18,360,121 18,356,140 18,315,048
Dilutive effect arising from
assumed exercise of
stock options.............. 101,684 385,420 72,955 397,489
-------------------------- --------------------------
Diluted EPS denominator............. 18,326,670 18,745,541 18,429,095 18,712,537
========================== ==========================
The Corporation paid cash dividends of $0.17 and $0.15 per share during
the quarters ended June 30, 1999 and 1998, respectively.
4. The Corporation reports comprehensive income in accordance with
Statement of Financial Accounting Standards No. 130, "Reporting
Comprehensive Income". Comprehensive income includes net income and all
changes to the Corporation's equity, with the exception of transactions
with shareholders ("other comprehensive income"). The Corporation's
only component of other comprehensive income is the change in
unrealized gains and losses on available for sale securities. The
Corporation's total comprehensive income for the three months ended
June 30, 1999 and 1998 was $3.6 million and $6.2 million, respectively.
For the six months ended June 30, 1999 and 1998, the Corporation
recorded comprehensive income of $7.8 million and $12.5 million,
respectively.
Item 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The consolidated balance sheets of the Corporation represent account
balances for the Corporation and the Bank, its wholly owned banking subsidiary.
The following discussion and analysis should be read in conjunction with the
consolidated financial statements of the Corporation and the notes thereto
included in this report. In addition, the following discussion contains certain
forward-looking statements. See "Factors that May Affect Future Results".
LIQUIDITY
The Bank derives the major source of its liquidity from its core
deposit base. Liquidity is further provided by loan repayments, maturities in
the investment portfolios, the ability to secure public deposits, the
availability of federal fund lines 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
June 30, 1999, the Bank had a line of credit with the FHLB of $460.0 million,
with $90.9 million available. Another source of liquidity is the securities in
the available for sale portfolio, which may be sold in response to liquidity
needs.
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Management believes the Bank's sources of liquidity are adequate to meet
operating needs and deposit withdrawal requirements.
Due to increases in certain interest rates during the first quarter of
1999, and the resulting impact on the Corporation's interest rate risk, the
Corporation classified $147.6 million in lower-yielding mortgage loans as held
for sale during late March 1999. On March 24, 1999, the Bank entered into
agreements for the sale of these loans, with the sales closing in April. The
loans were sold with servicing rights retained. The Corporation recognized a
gain of approximately $1.8 million on the sales transaction during the second
quarter of 1999.
CAPITAL RESOURCES
At June 30, 1999, total shareholders' equity was $231.6 million,
representing a book value of $13.00 per share, compared to $246.0 million, or a
book value of $13.34 per share at December 31, 1998. The reduction in
shareholders' equity is the result of the Corporation's stock repurchase plan;
see further discussion at "RESULTS OF OPERATIONS AND FINANCIAL CONDITION --
FINANCIAL CONDITION".
At June 30, 1999, the Corporation and the Bank were in compliance with
all existing capital requirements. The Corporation's capital requirements are
summarized in the table below:
Risk-Based Capital
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Leverage Capital Tier 1 Capital Total Capital
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(Dollars in thousands) Amount Percentage (1) Amount Percentage (2) Amount Percentage (2)
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Actual..................... $227,056 12.75% $227,056 17.34% $243,425 18.59%
Required................... 71,224 4.00 52,380 4.00 104,760 8.00
Excess..................... 155,832 8.75 174,676 13.34 138,665 10.59
(1) Percentage of total adjusted average assets. The FRB minimum leverage
ratio requirement is 3% to 5%, depending on the institution's composite
rating as determined by its regulators. The FRB has not advised the
Corporation of any specific requirements applicable to it.
(2) Percentage of risk-weighted assets.
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.
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
FINANCIAL CONDITION
Total assets at June 30, 1999 amounted to $1.79 billion, compared to
$1.86 billion at December 31, 1998. Gross loans at June 30, 1999 amounted to
$1.37 billion, down from $1.42 billion at December 31, 1998. The decline of
$48.5 million was due to the sale of $147.6 million of 30-year fixed rate loans
in April, 1999. This sale was discussed at "MANAGEMENT'S
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DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS -
LIQUIDITY". The proceeds of these sales, combined with maturities and paydowns
on securities, were utilized to meet loan demand, with the excess used to reduce
borrowed funds. Strong loan growth since December 31, 1998, however, has offset
a significant portion of the effect of the loan sale. A significant amount of
this loan growth has been in the commercial portfolio.
Securities available for sale totaled $324.9 million at June 30, 1999,
representing a decrease of approximately $6.9 million from December 31, 1998.
This decrease was primarily due to calls of U.S. Government securities by the
issuing agency. The carrying value of securities available for sale was $2.5
million above their amortized cost at June 30, 1999, which represents gross
unrealized gains of $5.1 million and gross unrealized losses of $2.6 million.
Total deposits remained relatively unchanged at $1.13 billion, compared
to $1.12 billion at December 31, 1998. Other borrowings declined $69.7 million
or 14.8%, to $400.2 million at June 30, 1999 from $469.9 million at December 31,
1998. This decline was due to the partial use of the loan sale proceeds to
reduce borrowed funds, as discussed above. Shareholders' equity declined to
$231.6 million from $246.0 million at December 31, 1998, due to the repurchase
of the Corporation's common stock. The Corporation announced in a press release
on April 27, 1999 its intent to repurchase up to one million shares of its
common stock. As of June 30, 1999, the Corporation has repurchased and retired
739,617 shares to date, at a weighted average price of $23.90 per share. The
Corporation intends to continue its repurchase program at its discretion based
on market conditions.
RESULTS OF OPERATIONS
Net income for the three month period ended June 30, 1999 was $6.5
million, or $0.36 diluted income per share, compared to $6.6 million, or $0.35
diluted income per share for the comparable period in 1998. An increase in net
interest income of $636,000 over the 1998 quarter, an increase in noninterest
income of $1.2 million over the prior year quarter, and a decrease in income tax
expense of $531,000 were offset by increases in the provision for loan losses
and in noninterest expense of $650,000 and $1.9 million, respectively.
During the six month period ended June 30, 1999, net income remained
relatively consistent, amounting to a decrease of $110,000 from the same period
in 1998. This resulted from an increase in net interest income of $1.5 million
in 1999 compared to the 1998 period, combined with an increase in noninterest
income of $1.4 million and a decrease in income tax expense of $843,000, offset
by a $1.0 million increase in the provision for loan losses and a $2.9 million
increase in noninterest expense. On an annualized basis, 1999 year to date
results represent a return on average assets of 1.39% versus 1.49% and a return
on average equity of 10.64% versus 10.35%, for the periods ended June 30, 1999
and 1998, respectively.
For the three month period ended June 30, 1999, net interest income
increased $635,000 over the comparable period in 1998. The increase was the net
result of a decrease in total interest income of $1.0 million and a decrease in
total interest expense of $1.6 million. As discussed at "Results Of Operations
And Financial Condition--Financial Condition", the Bank sold $147.6 million of
30-year fixed rate mortgage loans in April, 1999, using the proceeds to reduce
borrowed funds and to fund new lending. This sale reduced both interest income
and interest expense. However, increased commercial lending has offset a
significant portion of the sold loans, mitigating
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much of the reduction in interest income resulting from the April loan sale and
contributing to the increase in net interest income. As a result, average loan
balances during the 1999 quarter increased to $1.36 billion from $1.34 billion
in the prior year quarter. Average loan yields during the quarter declined
somewhat to 8.42% from 8.71%, largely resulting from a 75 basis point decline in
the prime rate of interest during the latter part of 1998, which affected a
significant portion of the Bank's loan rates. An additional factor contributing
to the increase in net interest income was the Bank's reduction in the cost of
deposits. While average deposits increased 17.2% over the 1998 quarter, to $1.13
billion, the average cost of deposits declined to 3.92%, from 4.79% in the prior
year quarter. This was the result of controlling the renewal rates of higher
rate certificates of deposit and by reducing the rate paid on many checking
accounts from 2.5% to 0.65%.
Net interest income for the six month period ended June 30, 1999
increased $1.5 million, or 4.7%, over the comparable prior year period. Factors
contributing to this increase are similar to the factors discussed above
relative to the quarter ended June 30, 1999, except that the loan sale in April
1999 impacted the six month period to a lesser extent due to the length of time
these loans were outstanding.
Management continues to assess interest rate risk based on an earnings
simulation model. The Corporation's balance sheet is liability sensitive,
meaning that in a given period there will be more liabilities than assets
subject to immediate repricing as market rates change. Assuming a 300 basis
point change in interest rates over a twelve-month period, the Corporation's
sensitivity to interest rate risk has declined from approximately 6.5% of net
interest income at December 31, 1998 to approximately 4.5% at June 30, 1999.
This decrease in sensitivity was largely due to the aforementioned sale of
30-year fixed rate mortgage loans. Because immediately rate sensitive interest
bearing liabilities exceed immediately rate sensitive assets, the earnings
position could improve in a declining rate environment and could deteriorate in
a rising rate environment, depending on the correlation of rate changes in these
two categories. In the future, the Corporation is considering the limited use of
interest rate swaps, caps, or floors.
The provision for loan losses for the quarter ended June 30, 1999 was
$1.3 million, compared to $600,000 for the quarter ended June 30, 1998. The
provision for loan losses for the six months ended June 30, 1999 was $2.2
million, compared to $1.3 million for the six months ended June 30, 1998. The
increase in the provision for the three and six months ended June 30, 1999 was
partially due to the aforementioned growth in commercial lending, as commercial
loans typically require a higher reserve level than home mortgages. Commercial
loans are usually either unsecured or are secured with commercial real estate,
accounts receivable, or inventory, compared to home mortgage loans which are
generally secured by first mortgages on single family residences. Historically,
commercial loans have had a higher charge-off ratio than home mortgage loans.
Both of these factors have resulted in commercial loans being assigned a larger
reserve factor (generally 1.25% to 1.50%) in the Corporation's allowance for
loan losses model when compared to home mortgage loans (generally 0.25%). At
June 30, 1999 and December 31, 1998, the allowance for loan losses as a
percentage of gross loans was 1.21% and 1.10%, respectively. The current year
increase is due to the growing proportion of commercial loans in the
Corporation's loan portfolio.
Net charge-offs during the six months ended June 30, 1999 decreased to
$761,000, compared to net charge-offs of $1.3 million for the same period in
1998. During the first six months of 1998, a higher level of loans were
charged-off related to loans from the Carolina State Bank
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(acquired by the Bank in December 1997) loan portfolio, which had been
previously provided for in the allowance for loan losses.
As part of the continual grading process used to monitor the credit
quality of the loan portfolio, an analysis is performed monthly that is
independent from any analysis performed in conjunction with the origination of
loans. Based on this review, management believes the allowance to be adequate;
however, future adjustments may be necessary if economic and other conditions
differ substantially from management's assumptions.
In addition, various regulatory agencies, as an integral part of their
examination process, periodically review the Bank's allowance for loan losses
and losses on real estate owned. Such agencies may require the Bank to recognize
additions to the allowance based on their judgments about information available
to them at the time of their examination.
The following table presents changes in the allowance for loan losses
for the six months ended June 30, 1999, and 1998, respectively.
June 30, June 30,
(Dollars in thousands) 1999 1998
- ----------------------------------------------------------------------------------------------------------------
Beginning balance.................................................... $ 15,554 $ 15,263
Provision charged to operations...................................... 2,225 1,262
Allowance related to loans sold...................................... (369) --
Loan charge-offs..................................................... (1,107) (1,588)
Less loan recoveries................................................. 346 312
---------- ----------
Net loan charge-offs........................................... (761) (1,276)
---------- ----------
Ending balance....................................................... $ 16,649 $ 15,249
========== ==========
At June 30, 1999, the recorded investment in loans that were considered
to be impaired under the FASB Standards No. 114, "Accounting by Creditors for
Impairment of a Loan" and No. 118, "Accounting by Creditors for Impairment of a
Loan Income Recognition and Disclosures," was $5.4 million (of which $4.9
million has been placed on nonaccrual status) compared to the recorded
investment in impaired loans of $3.9 million (of which $2.8 million was on
nonaccrual status) at December 31, 1998. The increase since December 1998 was
primarily due to one developer (with total balances of approximately $2.5
million) whose sales have been slower than projected, causing the borrower to
fall behind in loan payments to the Bank. The related allowance for loan losses
on impaired loans was $1.4 million and $1.3 million at June 30, 1999 and
December 31, 1998, respectively. The average recorded investment in impaired
loans for the six months ended June 30, 1999, and 1998 was $5.1 million and $3.8
million, respectively. For the six months ended June 30, 1999, and 1998, the
Corporation recognized interest income recorded on impaired loans of $153,000
and $13,000, respectively, none of which was recognized using the cash method of
income recognition.
Total problem assets at June 30, 1999 were $14.1 million or 1.03% of
gross loans, compared to $12.1 million or 0.85% at December 31, 1998. The
increase in problem assets is primarily attributable to an increase in loans
that are 90 days or more past due and still accruing
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interest. The majority of this increase is attributable to home mortgage loans
that are in the process of collection. The level of nonaccrual loans remained
essentially unchanged at June 30, 1999 when compared to nonaccrual loans at
December 31, 1998. This resulted from approximately $2.4 million of loans which
had been placed in nonaccrual status at December 31 being either collected or
returned to accrual status, the effect of which was offset by the addition of
the aforementioned $2.5 million loans to one borrower being placed in nonaccrual
status during the second quarter of 1999. The components of nonperforming and
problem assets are presented in the table below:
June 30, December 31,
(Dollars in thousands) 1999 1998
- -----------------------------------------------------------------------------------------------------
Nonaccrual loans................................................ $ 5,873 $ 5,758
Restructured loans.............................................. 388 577
Other real estate .............................................. 2,276 3,537
--------- ---------
Total non-performing assets................................. 8,537 9,872
Loans 90 days or more
past due and still accruing................................... 5,553 2,270
--------- ---------
Total problem assets............................................ $ 14,090 $ 12,142
========= =========
Interest income that would have been recorded on nonaccrual loans for
the six months ended June 30, 1999, and 1998, had they performed in accordance
with their original terms, amounted to approximately $256,000 and $167,000,
respectively. Interest income actually recorded on non-accrual loans during the
six months ended June 30, 1999 amounted to $62,000. There was no interest
recorded on non-accrual loans during the six months ended June 30, 1998.
Other real estate decreased $1.3 million due to the sales of other real
estate during the first six months of 1999. The primary components of this
decrease were the disposition of a parcel of undeveloped single family
residential property ($767,000) and a commercial building ($820,000). This
former property had been obtained by foreclosure from a large borrower who had
declared bankruptcy several years earlier.
Noninterest income increased approximately $1.2 million and $1.4
million for the three and six month periods ended June 30, 1999 over the
comparable periods in 1998. Included in these amounts, however, were gains on
sales of securities available for sale amounting to $274,000 and $618,000 during
the three and six months periods ended June 30, 1999, compared to gains of
$970,000 and $2.0 million during the comparable prior year periods. The 1999
periods also included a $1.8 million gain on the sale of loans during April
1999, with no such sale occurring during the prior year. The six months ended
June 30, 1998 included a gain of $385,000 on the sale of the Bank's merchant
credit card program, with no such sale occurring in the current year.
Noninterest income, excluding the above nonrecurring gains, amounted to $3.3
million and $6.8 million during the three and six months ended June 30, 1999,
compared to $2.8 million and $5.4 million during the comparable 1998 periods.
The major component of the increases over the prior year was income from
insurance services. This resulted from the Corporation's purchase of three
insurance agencies during the fourth quarter of 1998 and one additional agency
in the first quarter of 1999.
Noninterest expense during the quarter ended June 30, 1999 increased
approximately $1.9 million, or 19.1%, over the comparable period in 1998. The
primary components of this increase
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were an increase in occupancy expenses of $402,000, an increase in advertising
expenses of $539,000, and an increase in professional expenses of $500,000. The
occupancy expense increase was a result of the leasing of additional office
space to accommodate growth, with attendant upfitting and utility costs.
Advertising expenses increased due to a new brand advertising campaign designed
to increase First Charter's name recognition throughout the greater Charlotte
metropolitan area. Professional expenses increased due to Year 2000 preparation
expenses and to costs incurred in the formation of a real estate investment
trust. Noninterest expense for the six months ended June 30, 1999 increased $2.9
million, or 14.7% over the 1998 period. The primary components of this increase
were an increase in occupancy expenses of $786,000, an increase in advertising
expenses of $555,000, and an increase in professional expenses of $599,000. The
factors contributing to these increases are the same issues affecting the June
quarter.
Total income tax expense for the three month period ended June 30, 1999
decreased $531,000, compared to the comparable period in 1998. This was
attributable to a change in the effective tax rate from 34.8% to 31.6%,
primarily due to a reduction in state income taxes.
YEAR 2000 CONSIDERATION
Year 2000 Compliance
The "Year 2000 Issue" is a general term used to describe the various
problems that may result from the improper processing of dates and
date-sensitive calculations by computers and other machinery as the Year 2000
approaches. These problems generally arise because most computer hardware and
software historically have used only two digits to identify the applicable year.
Since there may be no accommodation for the full four-digit year, computer
programs that have date-sensitive software may recognize a date using "00" as
the year 1900 rather that the year 2000. This error could result in system
failure or miscalculations causing disruption of operations, including, among
other things a temporary inability to process customer transactions, properly
accrue interest income and expense or engage in similar normal banking
activities. In addition, non-banking systems, such as security alarms,
telephones, vaults, etc., are also subject to malfunction due to their
dependence upon software that utilizes special codes and conventions using the
date field.
State of Readiness
The Corporation recognizes the potentially severe implications of the
Year 2000 Issue. The Board of Directors of the Corporation has approved a Year
2000 Action Plan ("Action Plan") that has been developed in accordance with the
Federal Financial Institutions Examination Council ("FFIEC") guidelines. The
Action Plan consists of five phases: (1) awareness, (2) assessment, (3)
remediation, (4) validation, and (5) implementation. The Corporation has
substantially completed all phases of its Action Plan. In completing phase 2,
the Corporation performed a thorough inventory of its Information Technology
("IT") and non-IT systems to identify all potential Year 2000 exposed systems
and equipment. The items identified in the inventory were then categorized as
"mission critical" or "non-mission critical" depending on the Corporation's
dependence on the system or equipment to perform daily operations and conduct
business. This classification allowed the Corporation to prioritize its efforts
in remediating systems and dealing with third party vendors.
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Since the Corporation generally does not perform in-house programming
of its core operating systems, it is dependent on its third-party vendors for
modifications and conversions of its existing systems to correct the effects of
the Year 2000 Issue. Accordingly, the vast majority of phases 3 and 4 involved
receiving and testing vendor solutions with the Corporation's operating systems
and equipment. The Corporation divided phase 4 validation, or testing, into its
own three step "Y2K Test Plan". In the first step of the Y2K Test Plan, the
Corporation procured written documentation from its software and hardware
vendors, as well as the providers of facilities using embedded chip technology,
with respect to its Year 2000 compliance plan. Step 1 of the Y2K Test Plan also
included the initial phase 3 remediation. Upgrades and patches were installed to
existing equipment. Step 2 of the Y2K Test Plan included testing of all the
applications in the Corporation's technology environment. For those vendors that
supply functionality as third-party processors, FFIEC proxy testing guidelines
were implemented. The Corporation recognizes the need for data and information
exchange between applications. In recognition of this constant flow of data and
information, the Corporation included a third step in its Y2K Test Plan. Step 3
was an integrated test in which applications with interfaces have been linked in
a test environment to emulate the Corporation's technology environment. Step 3
testing has been completed. Phase 5 implementation includes the business user
acceptance outlined in the FFIEC guidelines, and the Corporation has included
business user acceptance in all steps of the Y2K Test Plan. Phase 5 also
includes the Corporation's Clean Management strategy, which recognizes the need
to protect the integrity and validity of the test results by keeping the
production environment the same as the testing environment. The Corporation's
Clean Management strategy will remain in place throughout 1999.
The September 1998 merger with HFNC Financial Corp. and the Bank's
related March 1999 merger with HFNC's subsidiary, Home Federal Savings and Loan
Association ("Home Federal"), are not expected to significantly impact the
Action Plan or the Corporation's state of readiness for Year 2000 compliance.
The Corporation has incorporated all surviving Home Federal IT and non-IT
systems in all phases of its Year 2000 Action Plan.
The Corporation also has developed a communication and assessment plan
for its customers. Pursuant to the plan, the Corporation has initiated contact
with many of its key customers to determine such customers' plans with respect
to the Year 2000 Issue and the Corporation's vulnerability to any such
customer's failure to remediate its own Year 2000 Issue. As most corporate
customers depend on computer systems that must be Year 2000 compliant, a
disruption in their businesses may result in potentially significant financial
difficulties that could affect their creditworthiness. The Corporation has also
implemented underwriting procedures to reflect the importance of the Year 2000
Issue in evaluating new credit relationships. Significant business interruptions
or failures by key business customers, suppliers, trading partners or
governmental agencies resulting from the effects of the Year 2000 Issue could
have a material adverse effect on the Corporation.
Year 2000 Costs
Since the Corporation relies on third party vendors for substantially
all of its IT systems, the expected cost to the Corporation of the Year 2000
project is not expected to exceed $500,000. Included in this amount are costs
for hardware, software and facilities upgrades, customer communications,
testing, and other direct, incremental costs required to pursue the Action Plan.
Not
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included in this estimate are the indirect costs associated with the involvement
of existing employees in daily Year 2000 Action Plan activities, an amount that
has not been quantified by management. All remediation costs will be expensed in
the period incurred and will be funded through normal operating cash flow. Year
2000 project costs during the three and six month periods ended June 30, 1999
were $140,000 and $195,000, respectively; all such costs to date total
approximately $320,000.
Risks of Year 2000 Issues
The Year 2000 Issue is widespread throughout the entire global economy,
potentially affecting almost any company with any dependence on information
technology. The Corporation has attempted to assess the risk to the Corporation
of the most reasonably likely worst-case scenarios involving Year 2000
noncompliance on the part of the Corporation or entities with which it does
significant business. Such risks generally fall into one of two categories:
internal risk, or the risk that the Corporation's IT and/or non-IT systems will
fail and will have a material impact on the Corporation's financial condition or
results of operations, and external risk, or the risk that the IT or non-IT
systems of parties external to the Corporation will fail, resulting in a
material impact on the Corporation's financial condition or results of
operations. In the opinion of the management of the Corporation, the internal
risk of Year 2000 non-compliance, in a reasonable worst-case scenario, could
involve either (i) credit losses arising from borrowers inability to perform
under the terms of their loan agreements due to Year 2000-related problems
having a material impact on their cash flows, or (ii) the inability to perform
certain routine customer transactions due to the Year 2000 non-compliance of
parties external to the Corporation (e.g., utility or communications vendors).
To mitigate these risks, the Corporation is developing a contingency plan.
The costs of the Year 2000 project and the schedule for achieving Year
2000 compliance are based on management's best estimates, which were derived
using numerous assumptions of future events, such as the availability of certain
resources (including internal and external resources), third-party vendor plans
and other factors. However, there can be no guarantee that these estimates will
be achieved at the cost disclosed or within the timeframes indicated, and actual
results could differ materially from these plans.
Contingency Planning
The Corporation has developed two contingency plans: a Remediation
Contingency Plan and a Business Resumption Contingency Plan. The Remediation
Contingency Plan has been used throughout the remediation process as a plan for
selecting alternate software solutions should an existing application fail to
pass the Corporation's Year 2000 criteria. The Corporation has substantially
completed its application testing. However, should the Corporation experience
problems after January 1, 2000 it will use the Remediation Plan to consider
alternatives.
A Business Resumption Contingency Plan has also been developed to
mitigate the potential effects of a disruption in normal business operations, if
one should occur despite the best efforts of the Corporation. The Plan includes
specific identification of manual solutions should an automated solution be
temporarily unavailable. The Plan also includes scenarios addressing an outage
of telecommunications and electricity. As a part of the Plan, the Corporation
has secured a
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generator for the main operations facility. Personnel will be deployed during
the morning of January 1, 2000 to assess the ability of the Corporation to
operate normally. Resources will be assigned to all applications, financial
service centers and ATM's. The results will be compiled in a centralized area.
After the compilation, technical resources will be deployed based on a business
impact analysis and vendors will be notified. The Corporation has asked all
employees to refrain from taking vacation from December 15, 1999 to January 15,
2000. The Corporation will have staff available the entire weekend of January 1,
2000 to assist in any problem resolution. The Business Resumption Contingency
Plan will be tested on September 9, 1999 (9/9/99), due to the significance of
this date in many programming languages.
Year 2000 Readiness Disclosure
All Year 2000 discussion is designated as Year 2000 Readiness
Disclosures. Year 2000 Readiness Disclosures are covered under the Year 2000
Information and Readiness Disclosure Act passed on October 19, 1998.
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 included as assets or liabilities in the
balance sheet and that such instruments be carried at fair market value through
adjustments to either other comprehensive income or current earnings or both, as
appropriate. The Corporation is in the process of assessing the impact of this
Standard. The Standard was originally effective for financial statements issued
for all fiscal quarters of fiscal years beginning after June 15, 1999. The
implementation date of SFAS No. 133 has been 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 fiscal
quarters of fiscal years beginning after June 15, 2000.
Statement of Financial Accounting Standards No. 134, "Accounting for
Mortgage-Backed Securities Retained after the Securitization of Mortgage Loans
Held for Sale by a Mortgage Banking Enterprise," establishes accounting and
reporting standards for certain mortgage banking activities. It conforms the
subsequent accounting for securities retained after the securitization of other
types of assets. This Standard was adopted in the first quarter of 1999; its
effect on the Corporation has not been material.
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.
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FACTORS THAT MAY AFFECT FUTURE RESULTS
The foregoing discussion contains certain forward-looking statements
about the Corporation's financial condition and results of operations, which are
subject to certain risks and uncertainties that could cause actual results to
differ materially from those reflected in the forward-looking statements.
Readers are cautioned not to place undue reliance on these forward-looking
statements, which reflect management's judgment only as of the date hereof. The
Corporation undertakes no obligation to publicly revise these forward-looking
statements to reflect events and circumstances that arise after the date hereof.
Factors that may cause actual results to differ materially from these
forward-looking statements include, but are not limited to, the passage of
unforeseen state or federal legislation or regulation applicable to the
Corporation's operations, the Corporation's ability to accurately predict the
adequacy of the loan loss allowance needs using its present risk grading system,
the ability to generate liquidity if necessary to meet loan demand, the ability
to manage unforeseen domestic and global rapid changes in interest rates, and
the reliance on third party vendors to become Year 2000 compliant.
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Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
The following table presents the scheduled maturity of market risk
sensitive instruments at June 30, 1999:
(Dollars in thousands)
There
Maturing in: 1 Year 2 Years 3 Years 4 Years 5 Years -after Total
- -----------------------------------------------------------------------------------------------------------------
ASSETS
Debt securities..... $ 9,008 $ 23,173 $ 15,499 $ 39,801 $ 54,323 $ 145,191 $ 286,995
Loans............... 298,373 54,743 76,814 79,977 171,994 675,434 1,357,335
-----------------------------------------------------------------------------------------
Total............ $ 307,381 $ 77,916 $ 92,313 $ 119,778 $ 226,317 $ 820,625 $1,644,330
=========================================================================================
LIABILITIES
Savings, NOW, Demand
and IMMA's....... $ 554,238 $ -- $ -- $ -- $ -- $ -- $ 554,238
CD's................ 474,624 24,928 68,567 5,162 1,000 932 575,213
Short-term
borrowings....... 121,862 -- -- -- -- -- 121,862
Long-term
borrowings....... 31,426 426 283 114,840 55,090 76,269 278,334
-----------------------------------------------------------------------------------------
Total.......... $1,182,150 $ 25,354 $ 68,850 $ 120,002 $ 56,090 $ 77,201 $1,529,647
=========================================================================================
The following table presents the average interest rate and estimated
fair value of market risk sensitive instruments at June 30, 1999:
Average Estimated
(Dollars in thousands) Total Interest Rate Fair Value
- -------------------------------------------------------------------------------------
ASSETS
Debt Securities.......... $ 286,995 6.51% $ 286,995
Loans.................... 1,357,335 8.20 1,359,701
---------- ----------
Total .............. $1,644,330 7.91 $1,646,696
========== ==========
LIABILITIES
Savings, NOW, Demand
and IMMA's............. $ 554,238 2.31 $ 553,949
CD's..................... 575,213 5.28 572,717
Short-term
borrowings............. 121,862 5.11 121,866
Long-term
borrowings............. 278,334 5.22 269,776
---------- ----------
Total............... $1,529,647 4.18 $1,518,308
========== ==========
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PART II - OTHER INFORMATION
Item 1. Legal Proceedings
In June 1995, a lawsuit was initiated against Home Federal (a former
subsidiary of the Corporation that was merged into the Bank in March 1999) by a
borrower's affiliated companies in which the plaintiffs alleged that Home
Federal wrongfully set-off certain funds in an account being held and maintained
by Home Federal. In addition, the plaintiffs alleged that as a result of the
wrongful set-off, Home Federal wrongfully dishonored a check in the amount of
$270,000. Plaintiffs further alleged that the actions on behalf of Home Federal
constituted unfair and deceptive trade practices, thereby entitling plaintiffs
to recover treble damages and attorneys' fees. Home Federal denied any
wrongdoing and filed a motion for summary judgment. Upon consideration of the
motion, the United States Bankruptcy Judge entered a Recommended Order Granting
Summary Judgement, recommending the dismissal of all claims asserted against
Home Federal. In October 1997, the United States District Court entered an order
granting summary judgment in favor of Home Federal. The Fourth Circuit Court of
Appeals, on June 8, 1999 affirmed the grant of summary judgement and dismissal
of the matter.
In December 1996, Home Federal filed a suit against the borrower and
his company and against the borrower's wife, daughters, and a company owned by
his wife and daughter, alleging transfers of assets to the wife, daughter, and
their company in fraud of creditors, and asking that the fraudulent transfers be
set aside. The objective of the lawsuit is to recover assets, which may be used
to satisfy a portion of the judgments obtained in favor of Home Federal prior to
litigation. The borrower's wife filed a counterclaim against Home Federal
alleging that she borrowed $750,000 from another financial institution, secured
by a deed of trust on her principal residence, the proceeds of which were paid
to Home Federal for application on a debt owed by one of her husband's
corporations, claiming that officers of Home Federal promised to resume making
loans to her husband's corporation after the payment. The Corporation, as
successor in interest to Home Federal, and its officers vigorously deny all of
her allegations. The counterclaim seeks actual and punitive damages together
with interest and attorneys' fees. In June 1998, Home Federal removed this case
to the United States Bankruptcy Court for the Western District of North
Carolina, Charlotte Division, due to the fact that the defendant was the debtor
in a pending bankruptcy case. The Corporation believes it has strong defenses to
the defendant's counterclaim, but counsel for the Corporation cannot, at this
time, give an opinion as to the likely outcome of this matter.
In February 1997, two companies affiliated with those referred to in
the first paragraph above filed an additional action against two executive
officers of Home Federal and against an officer of another financial
institution. The action was removed from the state court to the United States
Bankruptcy Court for the Western District of North Carolina. At the same time,
the borrower, who is affiliated with all of these companies, also filed an
action in the Superior Court of Mecklenburg County, North Carolina against the
two executive officers of Home Federal and against an officer of another
financial institution. The Complaints in both actions assert virtually identical
claims. The plaintiffs in both lawsuits allege that the officers of both
financial institutions engaged in a conspiracy to wrongfully declare loans to be
in default so as to eliminate those companies as borrowers of Home Federal.
Plaintiffs claim actual damages, treble damages, and punitive damages together
with interest, attorneys' fees, and other costs. Plaintiffs allege
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misrepresentation, breach of fiduciary duty, constructive fraud, interference
with business expectancy, wrongful bank account set-off, and unfair and
deceptive acts and practices. All defendants filed motions for summary judgments
in the action pending in the bankruptcy court, which were granted. No appeal was
taken and that matter is now concluded. All defendants also filed motions for
summary judgment in the state court action which were also granted, and that
lawsuit was dismissed in January 1998 by the Superior Court of Mecklenburg
County. The plaintiff appealed the order granting summary judgment to the North
Carolina Court of Appeals. In July 1998, the defendants removed the state court
case to the United States Bankruptcy Court for the Western District of North
Carolina, Charlotte Division, due to the fact that the plaintiff was a debtor in
a pending bankruptcy case. As a result of the removal, the North Carolina Court
of Appeals entered an order staying further proceedings in the North Carolina
Court of Appeals in August 1998. Thereafter, the United States Bankruptcy Court
adopted the ruling of the state court and also dismissed the lawsuit. The
plaintiff is attempting to appeal that dismissal. The Corporation, as successor
in interest to Home Federal, has agreed to indemnify both of its officers with
respect to costs, expense, and liability which might arise in connection with
both of these cases.
In July 1997, the above borrower and affiliated companies filed an
additional action against HFNC, Home Federal, and the other financial
institution referred to in the paragraph above, alleging that previous judgments
in favor of Home Federal and the other financial institution obtained in prior
litigation were obtained by the perpetration of fraud on the Bankruptcy Court,
U.S. District Court, and the Fourth Circuit Court of Appeals. The plaintiffs
sought to have the judgments set aside on that basis. All defendants filed
motions for summary judgment and dismissal, which were granted, and the lawsuit
was dismissed on September 24, 1998. The borrower, individually, has appealed
the Order dismissing the lawsuit to the Fourth Circuit Court of Appeals. That
appeal is pending.
Management continues to deny any liability in the above-described cases
and continues to vigorously defend against the claims. However, there can be no
assurance of the ultimate outcome of the litigation, or the range of potential
loss, if any.
The Corporation and the Bank are defendants in certain other claims and
legal actions arising in the ordinary course of business. In the opinion of
management, after consultation with legal counsel, the ultimate disposition of
these other matters is not expected to have a material adverse effect on the
consolidated operations, liquidity or financial position of the Corporation or
the Bank.
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Item 4. Submission of matters to a Vote of Security Holders.
(a) First Charter Corporation's Annual Meeting of
Shareholders was held on April 27, 1999.
(b) The following directors were elected for three-year
terms expiring in 2002:
For Withheld
---------------- -------------
William R. Black 13,709,586 155,110
John J. Godbold, Jr. 13,775,012 89,685
John M. McCaskill 13,774,680 90,017
Frank H. Hawfield, Jr. 13,774,866 89,830
The following directors' terms of office continued after the
Annual Meeting:
J. Knox Hillman, Jr.
Lawrence M. Kimbrough
Dr. Jerry E. McGee
Thomas R. Revels
Michael R. Coltrane
J. Roy Davis, Jr.
Charles F. Harry, III
Hugh M. Morrison
A brief description of the other matters (exclusive of
procedural matters) voted upon at the meeting is set forth below:
A motion to ratify the action of the Board of Directors in
selection of KPMG LLP as independent public accountants for 1999 was adopted by
a vote of the majority of the votes cast with respect to shares of the
Corporation's Common Stock, as follows:
For: 13,776,422
Against: 33,697
Abstained: 54,578
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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, 1998 (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).
27 Financial Data Schedules
(b) Reports on Form 8-K
(i) On April 15, 1999, the Corporation filed a Current Report
on Form 8-K, reporting pursuant to Item 5 thereof its earnings
for the fiscal quarter ended March 31, 1999.
(ii) On April 27, 1999, the Corporation filed a Current Report
on Form 8-K, reporting pursuant to Item 5 thereof its planned
repurchase of up to one million shares of its common stock,
and the Corporation's declaration of a $0.17 per share
dividend for the second quarter.
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Signatures
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
FIRST CHARTER CORPORATION
(Registrant)
Date: August 5, 1999 By: /s/ Robert O. Bratton
------------------------------------
Robert O. Bratton
Executive Vice President &
Principal Financial and
Accounting Officer
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EXHIBIT INDEX
Exhibit No.
(per Exhibit Table
in item 601 of Sequential
Regulation S-K) Description of Exhibits Page Number
27 Financial Data Schedules (for SEC use only)
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