97 ANNUAL REPORT
(watermark image of FIRST CHARTER)
FIRST CHARTER
FIRST
CHARTER
(icon of a building) Full Service Offices
(icon of a bullet) 24 Hour ATM Banking
(icon of a flag) Drive-In Locations
BANK OF
UNION
(icon of a star) Full Service Offices
(icon of a square) 24-Hour ATM Banking
(picture of a map of North and South Carolina FIRST CHARTER & BANK OF
UNION and ATM bank location(s).)
First Charter Corporation and Subsidiaries
Selected Consolidated Financial Data
The following table sets forth certain selected consolidated financial data
concerning First Charter Corporation (the "Corporation") for the five years
ended December 31, 1997. All financial data has been adjusted to reflect the
acquisition of Carolina State Bank in 1997 and the acquisition of Bank of Union
in 1995, each of which was accounted for as a pooling of interests.
Additionally, all per share data has been retroactively adjusted to reflect a
6-for-5 stock split declared in the second quarter of 1997 and a stock split
effected in the form of a 33 1/3% stock dividend declared in the fourth quarter
of 1994. This information should be read in conjunction with the Management's
Discussion and Analysis of Financial Condition and Results of Operations
appearing elsewhere in this report, and is qualified in its entirety by
reference to the more detailed consolidated financial statements of the
Corporation and notes thereto.
Years ended December 31,
(Dollars in thousands, except per share amounts) 1997 1996 1995 1994 1993
Income Statement Data:
Interest income............................... $ 55,954 $ 50,907 $ 45,935 $ 35,824 $ 30,228
Interest expense.............................. 24,751 22,797 19,836 13,265 11,407
---------- ---------- --------- --------- ---------
Net interest income........................... 31,203 28,110 26,099 22,559 18,821
Provision for loan losses..................... 2,702 1,540 1,991 1,105 1,134
Net interest income after provision for
loan losses............................... 28,501 26,570 24,108 21,454 17,687
Noninterest income............................ 9,452 7,271 6,278 5,560 5,394
Noninterest expense........................... 25,642 19,354 19,181 17,283 16,067
------ ------ ------ ------ ------
Income before income taxes.................... 12,311 14,487 11,205 9,731 7,014
Income taxes.................................. 3,910 4,418 2,901 2,653 1,828
----- ----- ----- ----- -----
Net income before cumulative effect
of change in accounting principle......... 8,401 10,069 8,304 7,078 5,186
Cumulative effect of change in
accounting principle...................... -- -- -- -- 300
---------- ---------- --------- --------- ---------
Net income.................................... $ 8,401 $ 10,069 $ 8,304 $ 7,078 $ 5,486
---------- ---------- --------- --------- ---------
Per Share Data:
Basic net income before cumulative effect of
accounting change ........................ $ 0.91 $ 1.10 $ 0.95 $ 0.81 $ 0.61
Diluted net income before cumulative effect
of accounting change..................... 0.90 1.09 0.94 0.80 0.61
Basic net income ............................. 0.91 1.10 0.95 0.81 0.65
Diluted net income............................ 0.90 1.09 0.94 0.80 0.64
Cash dividends declared....................... 0.53 0.50 0.43 0.34 0.26
Period-end book value......................... 8.39 7.80 7.08 6.18 5.79
Balance Sheet Data (at period end):
Securities available for sale................. $ 177,031 $ 143,665 $ 151,252 $ 44,966 $ 34,613
Investment securities......................... -- 13,940 8,959 93,541 78,973
Loans, net.................................... 515,799 449,988 408,761 346,412 289,487
Allowance for loan losses..................... 8,004 6,528 6,056 5,056 4,605
Total assets.................................. 761,694 680,257 626,490 536,182 454,469
Deposits...................................... 621,354 569,856 515,434 450,986 393,398
Borrowed funds................................ 53,279 32,895 39,714 25,374 8,100
Total liabilities............................. 683,890 608,536 561,919 482,090 405,422
Total shareholders' equity.................... 77,804 71,721 64,571 54,092 49,047
Ratios:
Net income to average shareholders' equity.... 11.04% 14.77% 14.28% 13.48% 11.12%
Net income to average total assets............ 1.20 1.55 1.45 1.44 1.29
Net interest income to average earning assets
(tax equivalent).......................... 5.01 4.92 5.13 5.40 5.21
Average loans to average deposits............. 83.92 80.11 80.48 77.93 74.76
Net loans charged off during period
to average loans.......................... 0.25 0.24 0.26 0.23 0.33
FIRST CHARTER CORPORATION
Dear Fellow Shareholders:
(picture appears here of Board of Directors)
1997 was a banner year for our First Charter Corporation. Our merger with
Carolina State Bank became effective on December 22, 1997, giving us a
substantial presence in the new markets of Cleveland and Rutherford Counties.
Although Carolina State Bank had been in operation for only a few years, John
Godbold and his team have established a sound book of business, which we look
forward to building upon together over the coming years. First Charter National
Bank has certainly been welcomed warmly in Shelby, Boiling Springs, Kings
Mountain, Forest City and surrounding environs.
We realized record earnings in 1997 totaling $11 million, or $1.19 basic
income per share, before nonrecurring pretax charges of $3.4 million ($2.6
million net of income tax) associated with completing the acquisition of
Carolina State Bank. Excluding the nonrecurring charges, 1997 earnings per share
increased 8.8% compared to 1996. First Charter's 1997 results, excluding the
nonrecurring charges, produced a return on average assets of 1.57% and a return
on average equity of 14.40%, compared to prior year ratios of 1.55% and 14.77%,
respectively.
Including nonrecurring charges, First Charter earned $8.4 million, or $0.91
basic income per share, for the year ended 1997, compared to $10.1 million or
$1.10 basic income per share in 1996. The 1997 results also reflect a $1.4
million provision for loan losses recorded by Carolina State Bank in 1997
compared to $619,757 for 1996, in recognition of increased 1997 charge-offs and
portfolio growth.
Total assets at December 31, 1997 were $762 million, up 12.0% from December
31, 1996. Gross loans increased 15% to $524 million, and total deposits
increased 9% to $621 million from the previous year-end. Total shareholders'
equity was $78 million at December 31, 1997, which represents a book value per
share of $8.39 and an equity-to-assets ratio of 10.21%. At year-end 1997, First
Charter had 9,268,573 shares outstanding. The closing price of First Charter
Corporation Common Stock at December 31, 1997 was $26.00 per share resulting in
a market capitalization for the Corporation of $241 million.
Although we recognized substantial nonrecurring charges relating to our
merger with Carolina State Bank, we were very satisfied with our operating
results for 1997. With our focus on shareholder value, we felt it prudent to
maximize our investment in the future by assuring a strong balance sheet on
which to build. We are excited about 1998 and beyond.
We are pleased to report the addition of three new directors to our First
Charter Corporation board and three new directors to the board of First Charter
National Bank as a result of our merger with Carolina State Bank. Charles F.
Harry, III, former Chairman of the Board, and John J. Godbold, Jr., former
President and Chief Executive Officer of Carolina State Bank, along with T. Carl
Dedmon became directors of the Corporation at the effective date of the merger.
In addition, Dr. Joe B. Godfrey of Forest City, James M. Rose, Sr. of Shelby
and Larry D. Hamrick, Sr. of Kings Mountain were each elected to the Board of
Directors of First Charter National Bank. The board of Carolina State Bank was
characterized by its aggressive look to
2
1997 ANNUAL REPORT
the future, and we welcome these dynamic directors to First Charter and look
forward to working with them.
Our plans for 1998 and following are ambitious. We are in the midst of a
strategic planning process at First Charter, and we are committed more than ever
to the concept of a community-based financial services company. The roadmap we
follow is our strategic plan, and we revisit it regularly to test its premises
and to sharpen our strategic vision. Although we know that we cannot be all
things to all people, we are constantly evaluating the breadth of our products
and services and the means by which those products and services are provided to
assure that we are in fact your best lifetime financial partner.
Bankers and those who analyze banking companies for the investing public look
to the efficiency ratio as a measure for present and future profitability
potential. Our 1997 efficiency ratio at 53.1% compares favorably with peer
banks, and so in 1998 we have chosen to make certain critical investments for
the future and for the long range value of our company to our shareholders.
Specifically, in 1998 we intend to invest in several new positions at the
Corporation, including a Director of Marketing, a Human Resources Director, a
Commercial Sales Manager, a Database Marketing Manager, and many more. The
hiring and nurturing of strong leadership is the single most important
ingredient to future success, and we are firmly committed to find, challenge and
keep the finest management talent that we can.
Continuing investments in new technologies will play a major role in the
strategic direction of First Charter Corporation. Our customers truly do define
convenience, and we are working diligently to provide all possible convenient
ways to do business with First Charter National Bank and Bank of Union. Whether
the customer prefers our financial services centers or one of our many ATMs or
the flexibility of our 24-hour First Phone service or PC home banking, we intend
to provide the solution. What we do know about our existing customers and our
customers of the future is that their needs and wants are quite diverse and our
services must be every bit as broad and flexible.
In 1998 we will relocate into a new Bank of Union financial services center
in Matthews to serve an already strong base of customers there. In addition, we
plan to open a de novo Bank of Union center in Mint Hill on NC Highway 51 near
the center of town. Both of these new facilities reflect our commitment to these
growing communities of eastern Mecklenburg County and to our strong belief that
a convenient physical presence is still an important means of delivering banking
services to our customers.
The future is bright for your First Charter Corporation. Over the past five
years, the value of your First Charter investment has increased almost fivefold.
This is an impressive record, but our charge is to make it continue. As we work
to fulfill our strategic vision, our driving motivation will be to take
advantage of that bright future to assure a superior return to you as
shareholders of our fine company.
(picture appears here of Board of Directors)
Sincerely,
/s/ Lawrence M. Kimbrough
Lawrence M. Kimbrough
President and Chief Executive Officer
3
FIRST CHARTER CORPORATION
First Charter Corporation Board of Directors
William R. Black, M.D.
Oncologist
Michael R. Coltrane
President and Chief Executive Officer,
CT Communications, Inc.
Vice Chairman,
First Charter Corporation
J. Roy Davis, Jr.
Owner and Chief Executive Officer,
S&D Coffee, Inc.
Chairman,
First Charter Corporation
T. Carl Dedmon
President,
N/S Carolina Storage Systems, Inc.
James B. Fincher
Owner and President,
Mineral Springs Milling and Farm Supplies, Inc.
John J. Godbold
Executive Vice President,
First Charter National Bank
H. Clark Goodwin
President and Chief Executive Officer,
Bank of Union
Charles F. Harry, III
President,
Grover Enterprises
Frank H. Hawfield, Jr.
Owner and President,
Firestone Home and Auto Supply Store
J. Knox Hillman, Jr.
Owner and Chief Executive Officer,
Shuford Insurance Agency, Inc.
Branson C. Jones
Industry Consultant and Advisor,
Oiles America Corporation
Lawrence M. Kimbrough
President and
Chief Executive Officer,
First Charter Corporation and
First Charter National Bank
Jerry E. McGee
President,
Wingate University
Hugh H. Morrison
President,
E. L. Morrison Co., Inc.
Thomas R. Revels
President and
Chief Executive Officer,
Novant/Presbyterian Health Services
Bank of Union Board of Directors
J. Roy Davis, Jr.
Owner and Chief Executive Officer,
S&D Coffee, Inc.
Chairman,
First Charter Corporation
Theodore C. Dellinger
Owner and Chief Executive Officer,
Dellinger, Inc.
William C. Deskins, M.D.
Family Practice,
Monroe Family Medical Center, P.A.
James B. Fincher
Owner and President,
Mineral Springs Milling and Farm Supplies, Inc.
H. Clark Goodwin
President and Chief Executive Officer,
Bank of Union
Frank H. Hawfield, Jr.
Owner and President,
Firestone Home and Auto Supply Store
Lawrence M. Kimbrough
President and
Chief Executive Officer,
First Charter Corporation and
First Charter National Bank
Joseph L. Little
Retired
Jerry E. McGee
President,
Wingate University
David C. McGuirt
Executive Vice President
and Corporate Secretary,
Bank of Union
David H. Stewart, Jr.
General Manager,
Berkshire Weaving, Inc.
Lane D. Vickery
Vice President,
Scott Wholesale Co.
Philip L. Wally
Executive Vice President/ General Manager,
Union Electric Membership Corporation
First Charter National Bank Board of Directors
Jane B. Brown
Private Investor
Grady S. Carpenter
President,
Security Oil Company, Inc.
J. Roy Davis, Jr.
Owner and Chief Executive Officer,
S&D Coffee, Inc.
Chairman,
First Charter Corporation
Joe B. Godfrey, M.D.
Family Practice
Larry D. Hamrick, Sr.
Owner,
Warlick and Hamrick Associates,
Insurance and Real Estate
Branson C. Jones
Industry Consultant and Advisor,
Oiles America Corporation
Lawrence M. Kimbrough
President and
Chief Executive Officer,
First Charter Corporation and
First Charter National Bank
Robert F. Lowrance
Owner and President,
A&A Realty Company
Ellen Linn Messinger
Private Investor
Hugh H. Morrison
President,
E. L. Morrison Co., Inc.
T. David Propst
President,
Earl's Tire Store, Inc.
James M. Rose, Sr.
President,
Leasing Services, Inc.
Robert L. Wall
Retired
James B. Widenhouse
Private Investor
4
1997 ANNUAL REPORT
Independent Auditors' Report
The Board of Directors
First Charter Corporation
We have audited the accompanying consolidated balance sheets of First Charter
Corporation and subsidiaries as of December 31, 1997 and 1996, and the related
consolidated statements of income, shareholders' equity, and cash flows for each
of the years in the three-year period ended December 31, 1997. These
consolidated financial statements are the responsibility of the Corporation's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of First Charter
Corporation and subsidiaries at December 31, 1997 and 1996, and the results of
their operations and cash flows for each of the years in the three-year period
ended December 31, 1997, in conformity with generally accepted accounting
principles.
KPMG Peat Marwick LLP
Charlotte, North Carolina
January 23, 1998
5
FIRST CHARTER CORPORATION
First Charter Corporation and Subsidiaries
Consolidated Balance Sheets
December 31,
(Dollars in thousands) 1997 1996
Assets
Cash and due from banks ................................................................ $ 33,077 $ 34,517
Interest bearing bank deposits ......................................................... 7,975 10,855
Federal funds sold ..................................................................... -- 4,510
Investment securities, market value of $13,979 in 1996 ................................. -- 13,940
Securities available for sale:
U.S. Government obligations ....................................................... 22,333 39,095
U.S. Government agency obligations ................................................ 45,863 11,583
Mortgage-backed securities ........................................................ 9,676 14,513
State and municipal obligations, nontaxable ....................................... 85,532 72,050
Other ............................................................................. 13,627 6,424
------- -------
Total securities available for sale .......................................... 177,031 143,665
------- -------
Loans .................................................................................. 524,076 456,709
Less: Unearned income............................................................... (273) (193)
Allowance for loans losses.................................................... (8,004) (6,528)
------- -------
Loans, net.......................................................................... 515,799 449,988
------- -------
Premises and equipment, net............................................................. 15,949 13,954
Other assets............................................................................ 11,863 8,828
------ -----
Total assets................................................................... $761,694 $680,257
======== ========
Liabilities and Shareholders' Equity
Deposits, domestic :
Noninterest bearing demand ........................................................ $ 94,434 $ 94,160
Interest bearing:
NOW accounts .................................................................. 95,343 89,693
Time .......................................................................... 365,442 329,129
Certificates of deposit greater than $100 ..................................... 66,135 56,874
-------- --------
Total deposits ........................................................... 621,354 569,856
Other borrowings ....................................................................... 53,279 32,895
Other liabilities ...................................................................... 9,257 5,785
-------- --------
Total liabilities ............................................................. 683,890 608,536
------- --------
Shareholders' equity:
Common stock - no par value; authorized,
25,000,000 shares; issued and outstanding,
9,268,573 shares in 1997 and 9,197,266 shares in 1996 ............................. 49,514 43,101
Unrealized gains on securities available for sale, net ................................. 3,188 1,688
Retained earnings ...................................................................... 25,102 26,932
------ ------
Total shareholders' equity .................................................... 77,804 71,721
------ ------
Total liabilities and shareholders' equity .................................... $761,694 $680,257
======== ========
See accompanying notes to consolidated financial statements.
6
1997 ANNUAL REPORT
First Charter Corporation and Subsidiaries
Consolidated Statements of Income
Years Ended December 31,
(Dollars in thousands, except per share amounts) 1997 1996 1995
Interest income:
Interest and fees on loans........................... $ 46,427 $ 41,170 $ 36,619
Federal funds sold................................... 160 266 483
Interest bearing bank deposits....................... 433 460 593
Securities available for sale........................ 8,113 8,304 3,179
Investment securities:
Taxable.......................................... 766 707 2,852
Non-taxable...................................... 55 -- 2,209
------ ------ -----
Total interest income........................ 55,954 50,907 45,935
------ ------ ------
Interest expense:
Deposits ............................................ 22,812 21,143 18,481
Federal funds purchased and securities
sold under agreements to repurchase.............. 1,256 1,006 727
Federal Home Loan Bank borrowings.................... 683 648 628
------ ------ ------
Total interest expense...................... 24,751 22,797 19,836
------ ------ ------
Net interest income.................... 31,203 28,110 26,099
Provision for loan losses................................. 2,702 1,540 1,991
----- ----- -----
Net interest income after provision for loan losses.. 28,501 26,570 24,108
------ ------ ------
Noninterest income:
Trust income......................................... 1,901 1,490 1,556
Service charges on deposit accounts.................. 3,928 3,291 2,909
Insurance and other commissions...................... 867 569 408
Securities available for sale transactions, net...... 832 243 4
Investment securities transactions, net.............. -- -- (29)
Other................................................ 1,924 1,678 1,430
----- ----- ----
Total noninterest income ........................ 9,452 7,271 6,278
----- ----- -----
Noninterest expense:
Salaries and fringe benefits......................... 11,415 10,538 9,549
Occupancy and equipment.............................. 3,815 2,923 2,670
Other ............................................... 10,412 5,893 6,962
------ ----- -----
Total noninterest expense ....................... 25,642 19,354 19,181
------ ------ ------
Income before income taxes ...................... 12,311 14,487 11,205
Income taxes ............................................ 3,910 4,418 2,901
----- ----- -----
Net income....................................... $ 8,401 $ 10,069 $ 8,304
============== ============== ==============
Basic net income per share ...................... $ 0.91 $ 1.10 $ 0.95
============== ============== ==============
Weighted average common shares .................. 9,236,786 9,183,738 8,779,066
Diluted net income per share ................... $ 0.90 $ 1.09 $ 0.94
============== ============== ============
Weighted average common and common
equivalent shares........................... 9,339,060 9,234,946 8,846,355
See accompanying notes to consolidated financial statements.
7
FIRST CHARTER CORPORATION
First Charter Corporation and Subsidiaries
Consolidated Statements of Shareholders' Equity
Unrealized
Gains (Losses)
on Securities
Common Stock Retained Available for
(Dollars in thousands) Shares Amount Earnings Sale, Net Total
---------------------------------------------------------------------------------------------------------------------------
Balance December 31, 1994................. 7,076,165 $ 39,553 $ 15,013 $ (474) $ 54,092
Net income for 1995....................... -- -- 8,304 -- 8,304
Cash dividends of $.43 per share.......... -- -- (2,618) -- (2,618)
Purchase and retirement of
common stock ......................... (40,781) (567) (61) -- (628)
Stock options exercised and Dividend
Reinvestment Plan stock issued........ 43,614 577 -- -- 577
Pre-merger transactions of pooled bank.... 247,352 2,632 -- -- 2,632
Unrealized gain on securities
available for sale, net .............. -- -- -- 2,212 2,212
--------- ------ ------ ----- ------
Balance December 31, 1995................. 7,326,350 42,195 20,638 1,738 64,571
Net income for 1996....................... -- -- 10,069 -- 10,069
Cash dividends of $.50 per share.......... -- -- (3,775) -- (3,775)
Purchase and retirement of
common stock ......................... (22,858) (486) -- -- (486)
Stock options exercised and Dividend
Reinvestment Plan stock issued........ 88,057 1,390 -- -- 1,390
Pre-merger transactions of pooled bank.... 205 2 -- -- 2
Unrealized loss on securities
available for sale, net............... -- -- -- (50) (50)
--------- ------ ------ ----- ------
Balance December 31, 1996................. 7,391,754 43,101 26,932 1,688 71,721
Net income for 1997....................... -- -- 8,401 -- 8,401
Cash dividends of $.53 per share.......... -- -- (4,246) -- (4,246)
Purchase and retirement of
common stock ......................... (64,118) (1,126) (193) -- (1,319)
Stock options exercised and Dividend
Reinvestment Plan stock issued........ 69,560 1,263 17 -- 1,280
6-for-5 stock split....................... 1,260,172 5,809 (5,809) -- --
Pre-merger transactions of pooled bank.... 611,205 467 -- -- 467
Unrealized gain on securities
available for sale, net............... -- -- -- 1,500 1,500
--------- --------- ---------- --------- --------
Balance December 31, 1997................. 9,268,573 $ 49,514 $ 25,102 $ 3,188 $ 77,804
========= ========= ========= ========= ========
See accompanying notes to consolidated financial statements.
8
1997 ANNUAL REPORT
First Charter Corporation and Subsidiaries
Consolidated Statements of Cash Flows
Years Ended December 31,
(Dollars in thousands) 1997 1996 1995
Cash flows from operating activities:
Net income................................................. $ 8,401 $ 10,069 $ 8,304
Adjustments to reconcile net income to net
cash provided by operating activities:
Provision for loan losses.............................. 2,702 1,540 1,991
Depreciation and amortization.......................... 2,158 1,494 1,143
Premium amortization and (discount accretion), net..... (233) 58 (189)
Net loss on investment securities transactions......... -- -- 29
Net gain on securities available for sale transactions. (832) (243) (4)
Net loss (gain) on sale of premises and equipment...... (12) 4 43
Origination of mortgage loans held for sale............ (11,843) (11,011) (22,960)
Proceeds from sale of mortgage loans available for sale 10,671 10,946 22,805
Decrease (increase) in other assets.................... (2,170) 276 (221)
Increase (decrease) in other liabilities............... 1,971 (985) 1,664
----- ---- -----
Net cash provided by operating activities 10,813 12,148 12,605
------ ------ ------
Cash flows from investing activities:
Proceeds from sales of investment securities............... -- -- 1,725
Proceeds from sales of securities available for sale....... 33,585 6,091 17,753
Proceeds from maturities and issuer calls of
investment securities, net............................. 1,500 -- 34,898
Proceeds from maturities of securities available for sale.. 32,092 43,165 18,696
Purchase of investment securities.......................... (1,813) (4,948) (47,515)
Purchase of securities available for sale.................. (81,256) (41,525) (43,738)
Net increase in loans...................................... (67,774) (43,133) (64,197)
Proceeds from sales of premises and equipment.............. 254 144 304
Purchase of premises and equipment......................... (4,295) (3,701) (2,132)
------- -------- -------
Net cash used by investing activities.................. (87,707) (43,907) (84,206)
------- -------- --------
Cash flows from financing activities:
Net increase in demand, NOW,
money market, and savings accounts..................... 22,367 28,071 25,149
Net increase in certificates of deposit.................... 29,132 26,350 39,300
Net increase (decrease) in securities sold under repurchase
agreements and other borrowings........................ 20,383 (6,819) 13,716
Purchase of common stock...................................... (1,319) (486) (628)
Proceeds from issuance of common stock........................ 1,280 1,390 577
Pre-merger transactions of pooled bank........................ 467 2 2,632
Dividends paid................................................ (4,246) (3,775) (2,618)
------- ------- ------
Net cash provided by financing activities.............. 68,064 44,733 78,128
------- ------ ------
Net increase (decrease) in cash and cash equivalents (8,830) 12,974 6,527
Cash and cash equivalents at beginning of period....... 49,882 36,908 30,381
------ ------ ------
Cash and cash equivalents at end of period............. $ 41,052 $ 49,882 $ 36,908
========== =========== ===========
Supplemental disclosures of cash flow information:
Cash paid during the year for:
Interest............................................... $ 20,020 $ 22,378 $ 19,589
========== =========== ===========
Income taxes........................................... $ 4,915 $ 4,677 $ 3,828
========== =========== ===========
Supplemental disclosure of non-cash transactions:
Transfers of loans, premises and equipment
to other real estate owned............................. $ 434 $ 889 $ 12
========== =========== ===========
Investment securities transferred to available for sale....... $ 14,825 $ -- $ 95,498
========== =========== ===========
Unrealized gain (loss) in value of securities available for sale
(net of tax effect of $960, ($33), and $1,414.
for 1997, 1996, and 1995, respectively)................... $ 1,500 $ (50) $ 2,212
========== =========== ===========
See accompanying notes to consolidated financial statements.
9
FIRST CHARTER CORPORATION
First Charter Corporation and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 1997, 1996, and 1995
(1) Summary of Significant Accounting Policies
The following is a description of the more significant accounting and
reporting policies which First Charter Corporation (the "Corporation") and its
subsidiaries, First Charter National Bank ("First Charter ") and Bank of Union
("Union") (collectively referred to as the "Banks"), follow in preparing and
presenting their consolidated financial statements. In consolidation, all
significant intercompany accounts and transactions have been eliminated. All
historical financial data has been adjusted to reflect the acquisition of
Carolina State Bank ("CSB") in 1997 and the acquisition of Bank of Union in
1995, each of which was accounted for as a pooling of interests (Note 2).
(a) Securities - The Corporation accounts for investment securities under
the provisions of the Financial Accounting Standards Board (FASB)'s Statement of
Financial Accounting Standards (Standard) No. 115, "Accounting for Certain
Investments in Debt and Equity Securities." At December 31, 1997 all of the
Corporation's securities are categorized as available-for-sale and, accordingly,
are reported at fair value, with any unrealized gains or losses, net of taxes,
shown as a separate component of shareholders' equity. The Corporation intends
to hold these available-for-sale securities for an indefinite period of time but
may sell them prior to maturity.
Gains and losses on sales of securities are recognized when realized on a
specific identification basis. Premiums and discounts are amortized into
interest income using a level yield method.
(b) Loans - Loans are carried at their principal amount outstanding.
Interest income is recorded as earned on an accrual basis. The determination to
discontinue the accrual of interest is based on a review of each loan.
Generally, interest is discontinued on loans 90 days past due as to principal or
interest unless in management's opinion collection of both principal and
interest is assured by way of collateralization, guarantees or other security
and the loan is in the process of collection. Loans are returned to accrual
status when management determines, based on an evaluation of the underlying
collateral together with the borrower's payment record and financial condition,
that the borrower has the ability and intent to meet the contractual obligations
of the loan agreement.
In accordance with Standard No. 114, "Accounting by Creditors for
Impairment of a Loan," management considers a loan to be impaired when, based on
current information and events, it is probable that a creditor will be unable to
collect all amounts due according to contractual terms of the loan agreement.
Factors that influence management's judgment include, but are not limited to,
loan payment pattern, source of repayment, and value of collateral. A loan would
not be considered impaired if an insignificant delay in loan payment occurs and
management expects to collect all amounts due. The major sources for
identification of loans to be evaluated for impairment include past due and
nonaccrual reports, internally generated lists of loans of certain risk grades,
and regulatory reports of examination.
The Corporation uses the allowance method to provide for loan losses.
Accordingly, all loan losses are charged to the allowance for loan losses and
all recoveries are credited to it. The provision for loan losses is based on
past loan loss experience and other factors which, in management's judgment,
deserve current recognition in estimating possible loan losses. Such other
factors considered by management include the growth and composition of the loan
portfolio, the relationship of the allowance for loan losses to outstanding
loans, and economic conditions.
Allowances for loan losses related to loans that are identified as impaired
in accordance with Standard No. 114 are based on discounted cash flows using the
loans' initial interest rates or the fair value of the collateral if the loan is
collateral dependent. Large groups of smaller-balanced, homogenous loans that
are collectively evaluated for impairment (residential mortgage and consumer
installment loans) are excluded from this impairment evaluation in accordance
with Standard No. 114, and their allowance is calculated in accordance with the
allowance for loan losses policy discussed above.
10
1997 ANNUAL REPORT
Management considers the December 31, 1997 allowance for loan losses
adequate to cover inherent losses in the Banks' loan portfolios. Management
believes it has established the allowance in accordance with generally accepted
accounting principles and in consideration of the current economic environment.
While management uses the best information available to make evaluations, future
additions to the allowance may be necessary based on changes in economic and
other conditions. Additionally, various regulatory agencies, as an integral part
of their examination process, periodically review the Bank's allowance for loan
losses. Such agencies may require the recognition of additions to the allowance
based on their judgments of information available to them at the time of their
examinations.
Mortgage loans held for sale are valued at the lower of cost or market as
determined by outstanding commitments from investors or current investor yield
requirements, calculated on the aggregate loan basis.
(c) Depreciation - Depreciation and amortization of premises and equipment
are computed using the straight-line method over the estimated useful lives. The
useful lives range from three to seven years for furniture and equipment, from
fifteen to forty years for buildings and over the terms of the respective
leases.
(d) Foreclosed Properties - Foreclosed properties are included in other
assets and represent real estate acquired through foreclosure or deed in lieu
thereof and are carried at the lower of cost (principal balance of the former
loan plus costs of obtaining title and possession) or fair value, less estimated
costs to sell. Generally such properties are appraised annually and the carrying
value, if greater than the appraised value, is adjusted with a charge to income.
(e) Income Taxes - Deferred tax assets and liabilities are recognized for
the future tax consequences attributable to differences between the financial
statement carrying amounts of existing assets and liabilities and their
respective tax bases. Deferred tax assets and liabilities are measured using the
enacted tax rates expected to apply to taxable income in the years in which
those temporary differences are expected to be recovered or settled. The effect
on deferred tax assets and liabilities of a change in tax rates is recognized in
income in the period that includes the enactment date.
(f) Loan Fees and Costs - Nonrefundable loan fees and certain direct costs
associated with originating or acquiring loans are deferred and recognized over
the life of the related loans as an adjustment to interest income.
(g) Cash Flows - For purposes of reporting cash flows, cash and cash
equivalents include cash on hand, amounts due from banks and federal funds sold.
Generally, federal funds are sold for one-day periods.
(h) Derivative Financial Instruments - All derivative financial instruments
held by the Corporation are held for purposes other than trading. The
Corporation uses interest rate floors for interest rate risk management.
Interest rate floors are designated as a hedge against variable rate commercial
loans. The net interest payable or receivable on floors is accrued and
recognized as an adjustment to interest income or interest expense of the
related asset or liability. Premiums paid for purchased floors are amortized
over the shorter of the term of the floor or the related asset or liability.
Upon the early termination of floors, the net proceeds received or paid,
including premiums, are deferred and included in other assets or liabilities and
amortized over the shorter of the remaining contract life or the maturity of the
related asset or liability. Upon disposition or settlement of the asset or
liability being hedged, deferral accounting is discontinued and any other
related premium is recognized in earnings.
(i) Net Income Per Share - In February 1997, the FASB issued Standard No.
128, "Earnings Per Share," which applies to all entities with publicly held
common stock or potential common stock. This statement replaces the presentation
of primary earnings per share ("EPS") with a presentation of basic EPS. It also
requires dual presentation of basic and diluted EPS on the face of the income
statement for all entities with complex capital structures, and it requires a
reconciliation of the numerator and denominator of the basic EPS computation to
the numerator and denominator of the diluted EPS computation. Standard No. 128
requires restatement of all prior-period EPS data presented. The Corporation
adopted this statement for the year ended December 31, 1997. Therefore, the EPS
data for the years ended December 31, 1996 and 1995 have been restated to comply
with this statement.
11
FIRST CHARTER COPORATION
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, were 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 EPS computations to the denominator of the diluted EPS
computations is as follows:
Years Ended December 31,
1997 1996 1995
Basic EPS denominator:
Weighted average number of common shares
outstanding................................. 9,236,786 9,183,738 8,779,066
Dilutive effect arising from assumed exercise
of stock options........................... 102,274 51,208 67,289
------- ------ ------
Diluted EPS denominator....................... 9,339,060 9,234,946 8,846,355
========= ========= =========
Income per share for periods prior to 1997 has been restated to reflect the
6-for-5 stock split declared in the second quarter of 1997.
(j) Stock-Based Compensation - Standard No. 123, "Accounting for
Stock-Based Compensation", was issued by the FASB in October 1995. Standard No.
123 requires that the fair value of employee stock-based compensation plans be
recorded as a component of compensation expense in the statement of income as of
the date of grant of awards related to such plans or that the impact of such
fair value on net income and earnings per share be disclosed on a pro forma
basis in a footnote to the financial statements for awards granted after
December 15, 1994, if the accounting for such awards continues to be in
accordance with Accounting Principles Board Opinion No. 25, "Accounting for
Stock Issued to Employees" (APB 25). The Corporation adopted Standard No. 123 on
January 1, 1996 and has elected to continue accounting for stock-based
compensation under the provisions of APB 25. The pro forma impact on net income
and earnings per share is disclosed in Note 15.
(2) Mergers
(a) On August 15, 1997, the Corporation entered into an Agreement and Plan
of Merger with CSB, pursuant to which CSB merged with and into First Charter
(the "Merger"). On December 22, 1997, the Merger was completed and was accounted
for as a pooling of interests. Accordingly, all current and prior years'
financial statements have been restated to combine the accounts of CSB with
those of the Corporation.
As of December 22, 1997, there were 1,663,992 shares of CSB common stock
outstanding. Each share of CSB common stock was converted into 1.023 shares of
the Corporation's common stock.
CSB was a North Carolina-chartered commercial bank providing general
banking services through a network of four branch offices located in Shelby,
Kings Mountain, Boiling Springs and Forest City, North Carolina, which are now
branches of First Charter. At December 31, 1996, CSB had total assets of
approximately $133 million and total deposits of approximately $115 million. In
the fourth quarter of 1997, the Corporation recognized $3,355,680 of costs
associated with the acquisition of CSB. The primary components of these
merger-related expenses were transaction and professional expenses and various
severance-related obligations.
12
1997 ANNUAL REPORT
Separate results of operations of the combined entities for the nine months
ended September 30, 1997, and years ended December 31, 1996 and 1995 were as
follows (dollars in thousands, except per share data):
Nine Months Ended
September 30, Years Ended December 31,
--------------------------- -------------------------------------------------------
1997 1996 1995
------------------- ------------------- -------------------
Previously Reported Previously Reported Previously Reported
------------------- ------------------- -------------------
Corp- Corp- Corp-
oration CSB Restated oration CSB Restated oration CSB Restated
------------------------------------------------------------------------------------
Net interest income..... $18,891 $4,069 $22,960 $23,313 $4,797 $28,110 $21,984 $4,115 $26,099
Net income ........ 7,401 717 8,118 8,853 1,216 10,069 7,003 1,301 8,304
Basic income
per share ............. 0.97 0.44 0.88 1.17 0.76 1.10 0.94 1.02 0.95
Diluted income
per share ............. 0.97 0.44 0.87 1.17 0.76 1.09 0.93 1.02 0.94
(b) On December 21, 1995, the Corporation completed its acquisition of Union, in
which a newly formed subsidiary of the Corporation merged with Union and Union
became a wholly owned subsidiary of the Corporation. The acquisition of Union
was accounted for as a pooling of interests.
Union is a state-chartered commercial bank organized under the laws of
North Carolina in 1985. At December 31, 1995, Union had total assets of
approximately $147 million and total deposits of approximately $129 million.
Union provides general banking services through a network of five branch offices
located in Union and Mecklenburg Counties, North Carolina. Through its
subsidiary, BOU Financial, Inc., Union also offers discount brokerage services,
insurance and annuity sales and financial planning services. In the fourth
quarter of 1995, the Corporation recognized $1,062,150 of costs associated with
the acquisition of Union. These costs included legal, accounting, investment
banking, regulatory filings, proxy printing and solicitation expenses.
(3) Financial Statement Presentations and Related Matters
The preparation of the consolidated financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect reported amounts of assets and liabilities and
disclosure of contingent liabilities at the date of the financial statements, as
well as the amounts of income and expenses during the reporting period. Actual
results could differ from those estimates.
Reclassifications of certain amounts in the 1996 and 1995 consolidated
financial statements have been made to conform with the financial statement
presentation for 1997. Such reclassifications had no effect on the net income or
shareholders' equity as previously reported.
13
FIRST CHARTER CORPORATION
(4) Securities Available for Sale
Securities available for sale at December 31, 1997 and 1996 are summarized
as follows:
Gross Gross
(Dollars in thousands) Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
----------------------------------------------------------
1997
U.S. Government obligations...................... $ 22,072 $ 267 $ 6 $ 22,333
U.S. Government agency obligations............... 45,856 43 36 45,863
Mortgage-backed securities....................... 9,596 130 50 9,676
State, county and municipal obligations.......... 83,796 1,897 161 85,532
Equity securities................................ 10,485 3,142 -- 13,627
------ ----- ---- ------
Total ...................................... $ 171,805 $ 5,479 $ 253 $ 177,031
============== ============ =========== ===============
1996
U.S. Government obligations...................... $ 38,732 $ 408 $ 45 $ 39,095
U.S. Government agency obligations............... 11,578 31 26 11,583
Mortgage-backed securities....................... 14,525 151 163 14,513
State, county and municipal obligations.......... 71,172 1,480 602 72,050
Equity securities................................ 4,893 1,542 11 6,424
----- ----- -- -----
Total ...................................... $ 140,900 $ 3,612 $ 847 $ 143,665
============== ============ =========== ===============
A schedule of debt securities by contractual maturity at December 31, 1997
is shown below on an amortized cost basis and on a market value basis. Actual
maturities could differ from contractual maturities due to call or prepayment
provisions.
Amortized Market
(Dollars in thousands) Cost Value
---- -----
Debt securities available for sale:
Due in one year or less....................... $ 13,283 $ 13,319
Due from one to five years.................... 53,195 54,190
Due from five to ten years.................... 68,277 68,900
Due after 10 years............................ 16,979 17,319
Mortgage-backed securities.................... 9,586 9,676
------- -------
Total............................................ $ 161,320 $ 163,404
======= =======
Securities with an aggregate carrying value of $70,354,000 at December 31,
1997 were pledged to secure public deposits, securities sold under agreements to
repurchase and Federal Home Loan Bank borrowings. Proceeds from the sale of
securities available for sale were $33,585,000 in 1997, $6,091,000 in 1996, and
$17,753,000 in 1995. Gross gains of $844,000 and gross losses of $12,000 were
realized in 1997. Gross gains of $265,000 and gross losses of $22,000 were
realized in 1996. Gross gains of $71,000 and gross losses of $67,000 were
realized in 1995. At December 31, 1997, the Banks owned stock in the Federal
Home Loan Bank of Atlanta with book and market values of $4,714,000, which is
included in equity securities and classified as available for sale.
14
1997 ANNUAL REPORT
(5) Investment Securities
During December 1995, the entire portfolio of First Charter Corporation
investment securities, with an amortized cost of $82,034,110 and unrealized
gains of $1,510,027, was transferred to securities available for sale, in
accordance with FASB's implementation guide for Standard 115, "Accounting for
Certain Investments in Debt and Equity Securities". In addition, following the
acquisition of CSB in 1997, First Charter transferred CSB's investment
securities with amortized cost of $13,464,188 and unrealized gains $27,073 to
securities available for sale.
Proceeds from the sale of investment securities were $1,725,292 in 1995. In
1995, mortgage-backed securities were sold, all of which had paydowns of more
than 85% of the original purchase amount. Gross gains of $18,418 and gross
losses of $46,972 were realized in 1995.
The amortized cost and estimated market values of securities held to
maturity at December 31, 1996, are presented below:
Gross Gross Estimated
Amortized Unrealized Unrealized Market
(Dollars in thousands) Cost Gains Losses Value
- ----------------------------------------------------------------------------------------------------------
U.S. Government obligations......... $13,940 $39 -- $13,979
=============================================================
(6) Loans
The Corporation's primary market area includes the states of North and
South Carolina, and predominately centers on the Metro region of Charlotte,
North Carolina. At December 31, 1997, the majority of the total loan portfolio,
as well as a substantial portion of the commercial and real estate loan
portfolios, were to borrowers within this region. The diversity of the region's
economic base tends to provide a stable lending environment. An area of
significant concentration of credit risk has not been specified due to the
diverse industrial base in the region.
Loans at December 31, 1997 and 1996 are as follows:
(Dollars in thousands) 1997 1996
- --------------------------------------------------------------------------------------------------------------
Commercial, financial and agricultural................................... $ 80,656 $ 63,552
Real estate - construction............................................... 76,429 47,133
Real estate - commercial................................................. 133,185 128,406
Real estate - residential................................................ 171,003 148,999
Installment.............................................................. 62,803 68,619
------ ------
Total............................................................... $ 524,076 $ 456,709
=============== ===============
Nonaccrual loans included above.......................................... $ 2,105 $ 1,630
Other real estate........................................................ 1,418 759
Loans 90 days or more past due and still
accruing included above............................................. 2,109 685
----- ---
Total problem assets................................................ $ 5,632 $ 3,074
=============== ===============
It is the Corporation's policy to review each prospective credit in order
to determine acceptable repayment terms, levels of collateral required, if any,
and any such other conditions as may be appropriate to secure the credit prior
to commitment. The type of collateral ranges from highly liquid assets, such as
cash on deposit, to unimproved real estate.
15
FIRST CHARTER CORPORATION
Interest income that would have been recorded on nonaccrual loans and
restructured loans for the years ended December 31, 1997, 1996, and 1995, had
they performed in accordance with their original terms, amounted to
approximately $225,000, $174,000, and $330,000, respectively. Interest income on
all such loans included in the results of operations for 1997, 1996, and 1995
amounted to approximately $22,000, $42,000, and $82,000, respectively.
In accordance with Standards No. 114 and No. 118, "Accounting by Creditors
for Impairment of a Loan - Income Recognition and Disclosures," the recorded
investment in impaired loans was $2,216,380 (of which $2,062,173 was on
nonaccrual) and $1,954,924 (of which $1,367,029 was on nonaccrual) for 1997 and
1996, respectively. The recorded investment of all impaired loans for both years
had related allowances for loan losses. The related allowance for loan losses on
these loans was $764,538 and $724,248 for 1997 and 1996, respectively. The
average recorded investment in impaired loans for 1997 was $2,363,335, and the
income recognized during 1997 was $29,453, none of which was recognized using
the cash method of income recognition. The average recorded investment in
impaired loans for 1996 was $2,473,719, and the income recognized during 1996
was $181,905, of which $75,562 was recognized using the cash method of income
recognition. The average recorded investment in impared loans for 1995 was
$3,778,224, and the income recognized during 1995 was $101,746, of which
$62,294, was recognized using the cash method of income recognition.
Other real estate increased to $1,418,000 at December 31, 1997 from
$759,000 at December 31, 1996. The components of other real estate at December
31, 1997 consisted of (i) three construction loans totaling $556,000, (ii) ten
residential loans totaling $239,000, (iii) one commercial loan totaling
$250,000, and (iv) property reclassified from premises and equipment which was
originally purchased for construction of a branch location totaling $373,000.
The components of other real estate at December 31, 1996 consisted of (i) two
construction loans totaling $304,000, (ii) one residential loan totaling $7,000,
and (iii) property reclassified from premises and equipment which was originally
purchased for construction of a branch location totaling $448,000.
The following is a reconciliation of loans outstanding to executive
officers, directors and their associates for the year ended December 31, 1997:
(Dollars in thousands)
Balance at December 31, 1996................................................................. $ 11,000
New loans.................................................................................... 3,040
Principal repayments......................................................................... (6,993)
------
Balance at December 31, 1997................................................................. $ 7,047
======
In the opinion of management, these loans are made on substantially the
same terms, including interest rates and collateral, as those prevailing at the
time for comparable transactions with other borrowers. Such loans, in the
opinion of management, do not involve more than the normal risks of
collectibility.
(7) Allowance for Loan Losses
The following is a summary of the changes in the allowance for loan losses
for each of the years in the three-year period ended December 31, 1997:
(Dollars in thousands) 1997 1996 1995
- ------------------------------------------------------------------------------------------------------------------
Beginning balance............................................. $ 6,528 $ 6,056 $ 5,056
Add:
Provision charged to operations............................... 2,702 1,540 1,991
----- ----- -----
9,230 7,596 7,047
------ ------ -----
Less:
Loan charge-offs.............................................. 1,626 1,466 1,207
Less loan recoveries........................................ 400 398 216
----- ----- -----
Net loan charge-offs..................................... 1,226 1,068 991
----- ----- ---
Ending balance................................................ $ 8,004 $ 6,528 $ 6,056
======== ========= =========
16
1997 ANNUAL REPORT
(8) Premises and Equipment
Premises and equipment at December 31, 1997 and 1996 are summarized as
follows:
(Dollars in thousands) 1997 1996
- --------------------------------------------------------------------------------------------------------------
Land............................................................................ $ 5,093 $ 4,259
Buildings....................................................................... 8,870 8,378
Furniture and equipment......................................................... 12,277 10,338
Leasehold improvements.......................................................... 892 686
------ ------
27,132 23,661
Less accumulated depreciation and amortization.................................. 11,183 9,707
------ -----
Premises and equipment, net $ 15,949 $ 13,954
============== ============
(9) Deposits
A summary of deposit balances at December 31, 1997 and 1996 is as follows:
(Dollars in thousands) 1997 1996
- --------------------------------------------------------------------------------------------------------------
Noninterest bearing demand...................................................... $ 94,434 $ 94,160
NOW accounts.................................................................... 95,343 89,693
Time:
Insured money market accounts............................................... 63,580 42,807
Savings deposits............................................................ 117,317 121,643
Certificates of deposit..................................................... 250,680 221,553
------- -------
Total........................................................................... $ 621,354 $ 569,856
=========== ===========
The aggregate amount of certificates of deposit with denominations greater
than $100,000 was $66,135,000 and $56,873,000 at December 31, 1997 and 1996,
respectively, and the related interest expense was approximately $4,003,000 and
$3,264,000 in 1997 and 1996, respectively.
At December 31, 1997, the scheduled maturities of all time deposits,
including certificates of deposit greater than $100,000, are as follows:
(Dollars in thousands)
1998...................................... $ 317,794
1999...................................... 105,545
2000...................................... 7,989
2001...................................... 65
2002 and after............................ 184
--------
$ 431,577
============
17
FIRST CHARTER CORPORATION
(10) Other Borrowings
The following is a schedule of securities sold under repurchase agreements,
federal funds purchased and Federal Home Loan Bank ("FHLB") borrowings:
Interest Maximum
Balance Rate Average Outstanding
as of as of Average Interest at Any
(Dollars in thousands) December 31, December 31, Balance Rate Month-end
- ------------------------------------------------------------------------------------------------------------------------
1997
Federal funds purchased and securities
sold under agreements
to repurchase ................. $ 26,346 5.03% $ 25,963 4.93% $ 28,855
FHLB borrowings..................... 26,933 6.54% 10,627 6.43% 26,934
------ ------ ------
Total ......................... $ 53,279 $ 36,590 $ 55,789
============== ============= ==============
1996
Federal funds purchased and securities
sold under agreements
to repurchase ................. $ 21,728 4.76% $ 21,773 4.61% $ 25,150
FHLB borrowings..................... 11,167 6.15% 10,385 6.24% 11,290
------ ------ ------
Total.......................... $ 32,895 $ 32,158 $ 36,440
============== ============= ==============
At December 31, 1997, the Banks had two available lines of credit with
the FHLB totaling $52.5 million with $26,933,275 outstanding. The outstanding
amounts consist of $24,400,000 maturing in 1998, $260,417 maturing in 1999,
$1,142,858 maturing in 2001, $600,000 maturing in 2003, and $530,000 maturing in
2011. In addition, the Banks are required to pledge collateral to secure the
advances as described in the line of credit agreements. The collateral consists
of FHLB stock and qualifying 1-4 family residential mortgage loans.
Federal funds purchased represent unsecured overnight borrowings from other
financial institutions by the Banks. Securities sold under agreement to
repurchase represent short-term borrowings by the Banks with maturities ranging
from 1 to 89 days collateralized by a portion of the Corporation's securities of
the United States government or its agencies, which have been delivered to a
third party custodian for safekeeping.
(11) Derivative Financial Instruments
Off-balance sheet derivative financial instruments, such as interest rate
swaps, interest rate floor and cap arrangements and interest rate futures and
option contracts, are available to the Corporation to assist in managing
interest rate risks. As of December 31, 1997, the Corporation has only used
interest rate floors. Interest rate floors are used to protect certain
designated variable rate financial instruments from the downward effects of
their repricing in the event of a decreasing rate environment. The Corporation
is using this financial instrument as a hedge against variable rate loans. The
total cost of this arrangement was $130,000, which is expensed on a
straight-line basis for the life of the instrument. The Corporation expensed
$26,000 related to this financial instrument for each of the years ended
December 31, 1997, 1996 and 1995. During part of 1997, the index rate was below
the floor rate, and the Corporation recognized $12,000 as additional interest
income on its variable rate loans. The fair value of this financial instrument
was $91,000 compared to a book value of $52,000 at December 31, 1997 and a fair
value of $276,000 compared to a book value of $78,000 at December 31, 1996. The
table below summarizes the Corporation's off-balance sheet derivative financial
instrument at December 31, 1997.
Interest rate floor agreements at December 31, 1997:
Current
Notional Floor Index Maturity
(Dollars in thousands) Amount Rate Rate Date
- ----------------------------------------------------------------------------------------------------------------------------
Interest rate floors.................................... $ 20,000 8.50% 8.50% 1/23/2000
======== ==== ==== =========
18
1997 ANNUAL REPORT
(12) Other Noninterest Expense
Components of other noninterest expense in excess of one percent of the
aggregate amount of total interest income and total noninterest income are as
follows:
(Dollars in thousands) 1997 1996 1995
- ----------------------------------------------------------------------------------------------------------------
Advertising............................................. $ 1,039 $ 644 $ 582
Data processing......................................... 744 465 260
Professional services................................... 1,416 1,109 1,043
FDIC insurance.......................................... 70 21 530
Stationery and supplies................................. 844 904 737
Merger related.......................................... 3,356 -- 1,062
All other items......................................... 2,943 2,750 2,748
----- ----- -----
Total............................................... $ 10,412 $ 5,893 $ 6,962
=============== ============= =============
(13) Income Tax
Income tax expense (benefit) consists of the following:
(Dollars in thousands) Current Deferred Total
- --------------------------------------------------------------------------------------------------------------
Year ended December 31, 1997
Federal................................................. $ 4,848 $ (1,394) $ 3,454
State................................................... 742 (286) 456
----- ------ -----
Total.............................................. $ 5,590 $ (1,680) $ 3,910
======== ======== ========
Year ended December 31, 1996
Federal................................................. $ 3,768 $ 71 $ 3,839
State................................................... 545 34 579
----- --- -----
Total.............................................. $ 4,313 $ 105 $ 4,418
======== ========= ========
Year ended December 31, 1995
Federal................................................. $ 3,414 $ (831) $ 2,583
State................................................... 477 (159) 318
----- ---- -----
Total.............................................. $ 3,891 $ (990) $ 2,901
======== ======== ========
Income tax expense differed from the amounts computed by applying the U.S.
federal income tax rate of 35% to pretax income as a result of the following:
1997 1996 1995
% of %of %of
Pretax Pretax Pretax
(Dollars in thousands) Amount Income Amount Income Amount Income
- --------------------------------------------------------------------------------------------------------------------------
Income before income taxes.............. $ 12,311 $ 14,487 $ 11,025
Tax at federal income tax rate.......... 4,309 35.0% 5,070 35.0% 3,922 35.0%
Reasons for differences:
Tax exempt income.................. (1,199) (9.7) (1,088) (7.5) (805) (7.2)
Nondeductible merger expense....... 459 3.7 -- -- 330 3.0
State income tax, net of
federal benefit................ 296 2.4 376 2.6 207 1.8
Change in deferred tax assets
valuation allowance............ -- -- -- -- (637) (5.7)
Other.............................. 45 0.4 60 0.4 (116) (1.0)
----- --- -- --- ---- ----
Total.......................... $ 3,910 31.8% $ 4,418 30.5% $ 2,901 25.9%
========= ==== ========== ==== ========== ====
19
FIRST CHARTER CORPORATION
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and deferred tax liabilities at December 31,
1997 and 1996 are presented below.
(Dollars in thousands) 1997 1996
- ---------------------------------------------------------------------------------------------------------------------
Deferred Tax Assets:
Provision for loan losses..................................................... $ 3,179 $ 2,555
Accrued expenses deductible when paid for tax purposes........................ 1,062 254
Other......................................................................... 171 105
----- -----
Total gross deferred tax assets............................................. 4,412 2,914
Less valuation allowance...................................................... -- --
----- -----
Deferred tax asset, net of valuation allowance.............................. 4,412 2,914
----- -----
Deferred Tax Liabilities:
Unrealized gain on securities available for sale.............................. (2,038) (1,077)
Deferred loan fees............................................................ (188) (172)
Fixed assets primarily due to difference in depreciation...................... (127) (122)
Loan loss reserve recapture................................................... (516) (661)
Other......................................................................... (78) (136)
------- ------
Total gross deferred tax liability........................................ (2,947) (2,168)
------ ------
Net deferred tax asset........................................................ $ 1,465 $ 746
=========== ==========
A portion of the current year change in the net deferred tax asset relates
to unrealized gains and losses on securities available for sale. The related
current period deferred tax expense of $961,000 has been recorded directly to
shareholders' equity. The balance of the change in the net deferred tax asset
results from the current period deferred tax benefit of $1,680,000.
There was no valuation allowance for deferred tax assets as of January 1,
1996. There was no change in the total valuation allowance during 1997 and 1996.
It is management's belief that realization of the deferred tax asset is more
likely than not.
Tax returns for 1994 and subsequent years are subject to examination by
taxing authorities.
(14) Retirement Plan Contributions
The Corporation has a qualified Retirement Savings Plan (401(k) Plan) for
all eligible employees of First Charter and Union. Pursuant to the Savings Plan,
an eligible employee may elect to defer between 1% and 10% of compensation. In
the discretion of the Board of Directors, the Corporation may contribute an
amount necessary to match all or a portion of a participant's elective deferrals
in an amount to be determined by the Board of Directors from time to time, up to
a maximum of 6% of a participant's compensation. In addition, the Corporation
may contribute an additional amount to each participant's Savings Plan account
as determined in the discretion of the Board of Directors. The Corporation
adopted a qualified Money Purchase Pension Plan effective January 1, 1997 for
all eligible employees of First Charter and Union. Pursuant to the Money
Purchase Plan, the Corporation contributes annually to each participant's Plan
account an amount equal to 3% of the participant's compensation. Prior to 1997,
such contributions were made to the Savings Plan. The Corporation's aggregate
contribution to the Savings Plan and Money Purchase Pension Plan was $626,941,
$559,566 and $408,421 for 1997, 1996 and 1995, respectively.
20
1997 ANNUAL REPORT
(15) Common Stock
On May 21, 1997, the Board of Directors of the Corporation declared a
6-for-5 stock split payable on July 15, 1997 to shareholders of record on June
20, 1997. All per share data in the consolidated financial statements has been
retroactively adjusted for the stock split.
On December 15, 1997, the shareholders of the Corporation approved Amended
and Restated Articles of Incorporation for the Corporation which included
amendments to, among other things, (i) increase the number of shares of common
stock that the Corporation is authorized to issue from 10,000,000 to 25,000,000
and (ii) eliminate the concept of par value in connection with the Corporation's
common stock. These changes have been reflected in the accompanying consolidated
financial statements.
The Corporation maintains the Dividend Reinvestment and Stock Purchase Plan
(the "DRIP"), pursuant to which 240,000 shares (as adjusted to reflect the stock
splits) of common stock of the Corporation have been reserved for issuance.
Shareholders may elect to participate in the DRIP and have dividends on shares
of common stock reinvested and may make optional cash payments of up to $2,500
per calendar quarter to be invested in common stock of the Corporation. Pursuant
to the terms of the DRIP, upon reinvestment of the dividends and optional cash
payments, either the Corporation can issue new shares valued at the then current
market value of the common stock or the administrator of the DRIP can purchase
shares of common stock in the open market. During 1997, the Corporation issued
56,995 shares and the administrator of the DRIP purchased 2,250 shares on the
open market.
Under the terms of the First Charter Corporation Comprehensive Stock Option
Plan (the "Comprehensive Plan"), stock options (which can be incentive stock
options or non-qualified stock options) may be periodically granted to key
employees of the Corporation or its subsidiaries. The terms and vesting
schedules of options granted under the Comprehensive Plan generally shall be
determined by the Compensation Committee of the Board of Directors of the
Corporation (the "Compensation Committee"). No options, however, may be
exercisable prior to six months following the grant date, and certain additional
restrictions, including the term and exercise price, apply with respect to any
incentive stock options. In May 1996, the shareholders of the Corporation
approved an increase in the number of shares reserved for issuance under the
Comprehensive Plan from 288,000 shares (as adjusted for the stock split) to
480,000 shares (as adjusted for the stock split). Accordingly, on January 1,
1996, the summary stock option activity table, included in this Note, has been
adjusted to reflect an increase of 192,000 shares available for grant.
In April 1995, the shareholders approved the First Charter Corporation
Restricted Stock Award Program (the "Restricted Stock Plan"). Awards of
restricted stock may be made under the Restricted Stock Plan at the discretion
of the Compensation Committee of the Board of Directors of the Corporation,
which shall determine the key participants, the number of shares awarded to
participants, and the vesting terms and conditions applicable to such awards. A
maximum of 360,000 shares of common stock (as adjusted to reflect the stock
split) are reserved for issuance under the Restricted Stock Plan. There have
been no shares granted to date under this plan.
In April 1997, the shareholders approved the First Charter Corporation
Stock Option Plan for Non-Employee Directors (the "Director Plan"). Under the
Director Plan, non-statutory stock options may be granted to non-employee
Directors of the Corporation and its subsidiaries. The terms and vesting
schedules of any options granted under the Director Plan generally shall be
determined by the Compensation Committee of the Board of Directors of the
Corporation. The exercise price for each option granted, however, shall be the
fair market value of the common stock as of the date of grant. A maximum of
180,000 shares (as adjusted to reflect the stock split) are reserved for
issuance under the Director Plan.
21
FIRST CHARTER CORPORATION
Periodically, the Corporation adopts an Employee Stock Purchase Plan (the
"ESPP"), pursuant to which stock options are granted to employees, based on
their eligibility and compensation, at a price not less than 90% of the fair
market value of the shares at the date of grant. The option and vesting period
is generally for a term of two years. A maximum of 180,000 shares (as adjusted
to reflect the stock split) are reserved for issuance under the 1996 ESPP and
180,000 shares (as adjusted to reflect stock split) are reserved for issuance
under the 1998 ESPP, which was approved by the shareholders of the Corporation
in April 1997.
At December 31, 1997, as described above, the Corporation has various
stock-based compensation plans. The Corporation adopted Standard No. 123,
"Accounting for Stock-Based Compensation" on January 1, 1996, and elected to
continue to measure compensation cost relative to these plans using APB 25. The
disclosure of the pro forma net income and earnings per share as if the fair
value based accounting method of Standard No. 123 had been used to account for
stock-based compensation is required only for awards granted after December 31,
1994, and is provided below. Consequently, the effects of applying Standard No.
123 pro forma disclosures during the initial phase-in period may not be
representative of the effects on reported net income in future years.
The following table presents the pro forma effect on net income and basic
diluted income per share of applying the fair value provisions of Standard No.
123 discussed above:
Years Ended December 31,
-------------------------------------------
(Dollars in thousands, except per share data) 1997 1996 1995
- --------------------------------------------------------------------------------------------------------
Net income:
As reported............................. $ 8,401 $ 10,069 $ 8,304
Pro forma............................... $ 8,110 $ 9,898 $ 8,108
Basic income per share:
As reported............................. $ 0.91 $ 1.10 $ 0.95
Pro forma............................... $ 0.88 $ 1.08 $ 0.92
Diluted income per share:
As reported............................. $ 0.90 $ 1.09 $ 0.94
Pro forma .............................. $ 0.87 $ 1.07 $ 0.92
The fair value of each option granted during 1997, 1996 and 1995 was
estimated using the Black-Scholes option-pricing model with the following
weighted average assumptions:
Years Ended December 31,
------------------------------------------------------------
1996 Employee Stock Purchase Plan 1997 1996 1995
--------------------------------- ------------------------------------------------------------
Dividend yield.......................... -- 2.9% N/A
Risk free interest rates................ -- 5.11% N/A
Expected lives.......................... -- 2 years N/A
Volatility.............................. -- 25% N/A
Comprehensive Stock Option Plan
-------------------------------
Dividend Yield.......................... 3.0% 2.9% 2.9%
Risk free interest rates................ 5.88 to 6.89% 6.14% 5.45% and 7.10%
Expected lives.......................... 6 years 6 years 6 years
Volatility.............................. 23% 21% 32%
Director Plan
-------------
Dividend Yield.......................... 3.0% N/A N/A
Risk free interest rates................ 6.57 and 6.67% N/A N/A
Expected lives.......................... 6 years N/A N/A
Volatility.............................. 23% N/A N/A
22
1997 ANNUAL REPORT
The following is a summary of activity under the Comprehensive Plan,
Director Plan and the 1996 and 1993 ESPP's during the periods indicated. All
options outstanding have been adjusted to reflect the 1997 stock split.
Option Balance at Balance at
1997 Price January 1, Grants Exercises Forfeits December 31, Exercisable
- --------------------------------------------------------------------------------------------------------------------
Incentive Stock Options
Options............ $3.64 6,360 -- 2,880 -- 3,480 3,480
............. $ 5.34 18,720 -- 4,265 -- 14,455 14,455
............. $ 8.75 32,416 -- 3,072 288 29,056 29,056
............. $12.26 29,291 -- 952 448 27,891 22,225
............. $12.29 2,640 -- -- -- 2,640 1,584
............. $12.40 3,187 -- -- -- 3,187 1,594
............. $17.60 -- 6,000 -- -- 6,000 1,200
............. $17.92 106,320 3,600 576 1,344 108,000 54,288
............. $25.00 -- 37,200 -- -- 37,200 --
Available for grant -- 224,720 (46,800) -- 2,080 180,000 --
Director Plan
Options............ $17.71 -- 14,400 720 -- 13,680 3,860
............. $18.85 -- 26,400 100 -- 26,300 7,460
Available for grant -- 180,000 (40,800) -- -- 139,200 --
1996 Employee Stock
Purchase Plan
Options ........... $16.50 27,916 -- 23,097 4,819 -- --
1996
- --------------------------------------------------------------------------------------------------------------------
Incentive Stock Options
Options ........... $ 3.64 10,992 -- 4,632 -- 6,360 6,360
............ $ 5.34 24,384 -- 4,896 768 18,720 18,720
............ $ 8.75 36,631 -- 3,000 1,215 32,416 25,183
............ $12.26 32,640 -- 982 2,367 29,291 17,514
............ $12.29 2,640 -- -- -- 2,640 1,056
............ $12.40 3,984 -- 797 -- 3,187 797
............ $17.92 61,560 46,320 -- 1,560 106,320 24,000
Available for grant -- 265,130 (46,320) -- 5,910 224,720 --
1996 Employee Stock
Purchase Plan
Options............ $16.50 -- 30,926 -- 3,010 27,916 27,916
1995
- --------------------------------------------------------------------------------------------------------------------
Incentive Stock Options
Options............ $ 3.64 17,040 -- 5,856 192 10,992 7,632
............. $ 5.34 34,176 -- 8,256 1,536 24,384 18,047
............. $ 8.75 44,128 -- 5,929 1,568 36,631 20,951
............. $12.26 34,720 -- 640 1,440 32,640 13,056
............. $12.29 -- 2,640 -- -- 2,640 528
............. $12.40 -- 3,984 -- -- 3,984 797
............. $17.92 -- 61,560 -- -- 61,560 --
Available for grant -- 136,578 (68,184) -- 4,736 73,130 --
1993 Employee Stock
Purchase Plan
Options............ $ 8.44 30,888 -- 26,087 4,801 -- --
At December 31, 1997, there were 564 shares outstanding and exercisable
under the former Bank of Union Stock Option Plan with an average exercise price
of $6.35 and 58,104 shares outstanding and exercisable under the former Carolina
State Bank Option Plan with an average exercise price of $7.50, both of which
are not included in the table above.
23
FIRST CHARTER CORPORATION
(16) Commitments, Contingencies and Off-Balance-Sheet Risk
The Corporation is party to various financial instruments with
off-balance-sheet risk in the normal course of business to meet the financing
needs of its customers. These financial instruments include commitments to
extend credit and standby letters of credit, and involve, to varying degrees,
elements of credit and interest rate risk in excess of the amounts recognized in
the consolidated financial statements. The Corporation uses the same credit
policies in making commitments and conditional obligations as it does for
instruments reflected in the consolidated financial statements. The
creditworthiness of each customer is evaluated on a case-by-case basis.
At December 31, 1997, the Corporation's exposure to credit risk was
represented by preapproved but unused lines of credit for loans totaling
$159,709,000 and standby letters of credit aggregated $2,553,000. The amount of
collateral obtained if deemed necessary by the Corporation upon extension of
credit is based on management's credit evaluation of the borrower at that time.
The Corporation generally extends credit on a secured basis. Collateral obtained
may include, but may not be limited to, accounts receivable, inventory and
commercial and residential real estate. Management expects that these
commitments can be funded through normal operations.
The Corporation and the Banks 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 Banks.
The Banks grant primarily commercial and installment loans to customers
throughout their market areas. The Corporation's primary market area includes
the states of North and South Carolina, and predominately centers on the Metro
region of Charlotte, North Carolina. The real estate loan portfolio can be
affected by the condition of the local real estate markets.
Average daily Federal Reserve balance requirements for the year ended
December 31, 1997 amounted to $2,624,637.
(17) Fair Value of Financial Instruments
Fair value estimates of financial instruments are made at a specific point
in time, based on relevant market information and information about the
financial instrument. These estimates do not reflect any premium or discount
that could result from offering for sale at one time the Corporation's entire
holdings of a particular financial instrument. Because no market exists for a
significant portion of the Corporation's financial instruments, fair value
estimates are based on judgments regarding future expected loss experience,
current economic conditions, risk characteristics of various financial
instruments, and other factors. These estimates are subjective in nature and
involve uncertainties and matters of significant judgment and therefore cannot
be determined with precision. Changes in assumptions could significantly affect
the estimates. Where information regarding the market value of a financial
instrument is available, those values are used, as is the case with investment
securities and residential mortgage loans. In these cases, an open market exists
in which those financial instruments are actively traded.
Fair value estimates are based on existing on- and off-balance sheet
financial instruments without attempting to estimate the value of anticipated
future business and the value of assets and liabilities that are not considered
financial instruments. For example, First Charter has a substantial trust
department that contributes net fee income annually. The trust department is not
considered a financial instrument, and its value has not been incorporated into
the fair value estimates. Other significant assets and liabilities that are not
considered financial assets or liabilities include the mortgage broker
operations and premises and equipment. In addition, tax ramifications related to
the realization of the unrealized gains and losses can have a significant effect
on fair value estimates and have not been considered in any of the estimates.
24
1997 ANNUAL REPORT
The Corporation's fair value methods and assumptions are as follows:
Cash and due from banks, federal funds sold, income earned-not
collected, interest bearing bank deposits, and accrued interest payable
- the carrying value is a reasonable estimate of fair value due to the
short term nature of these financial instruments.
Available for sale securities and investment securities - fair value is
based on available quoted market prices or quoted market prices for
similar securities if a quoted market price is not available.
Loans - the carrying value for variable rate loans that are performing
is a reasonable estimate of fair value due to contractual interest
rates based on prime. Fair value for fixed rate loans is estimated
based upon discounted future cash flows using discount rates comparable
to rates currently offered for such loans. The fair value of
nonperforming loans is based on the book value of each loan, less an
applicable reserve for credit losses. The reserve for credit losses is
determined on a loan by loan basis for nonperforming assets based on
one or a combination of the following: external appraisals, internal
assessments using available market information and specific borrower
information, or discounted cash flow analysis.
Deposit accounts -the fair value of certificates of deposit is
estimated using rates currently offered for deposits of similar
remaining maturities. The fair value of all other deposit account types
is the amount payable on demand at year-end.
Short-term borrowings - the carrying value is a reasonable estimate of
fair value because these instruments are generally payable in 90 days
or less.
Long term obligations - the fair value is estimated based upon
discounted future cash flows using a discount rate comparable to the
current market rate for such borrowings.
Commitments to extend credit and standby letters of credit - the large
majority of commitments to extend credit and standby letters of credit
are at variable rates and/or have relatively short terms to maturity.
Therefore, the fair value of these financial instruments is considered
to approximate the carrying value.
Based on the limitations, methods, and assumptions noted above, the
following table presents the carrying amounts and fair values of the
Corporation's financial instruments at December 31, 1997 and 1996:
December 31,
-----------------------------------------------------------
(Dollars in thousands) 1997 1996
- ------------------------------------------------------------------------------------------------------------------------
Carrying Fair Carrying Fair
Amount Value Amount Value
------ ----- ------ -----
Financial Assets:
Cash and due from banks................................. $ 33,077 $ 33,077 $ 34,517 $ 34,517
Interest bearing bank deposits.......................... 7,975 7,975 10,855 10,855
Federal funds sold...................................... -- -- 4,510 4,510
Investment securities................................... -- -- 13,940 13,979
Securities available for sale........................... 177,031 177,031 143,665 143,665
Loans, net of reserve for loan losses................... 515,799 517,064 449,988 454,058
Income earned, not collected............................ 5,087 5,087 4,732 4,732
Financial Liabilities:
Deposits................................................ 621,354 619,904 569,856 570,983
Short-term borrowings................................... 50,746 50,746 27,729 27,728
Long-term obligations................................... 2,533 2,530 5,167 5,045
Accrued interest payable................................ 1,490 1,490 1,346 1,346
25
FIRST CHARTER CORPORATION
(18) Regulatory Matters
The Corporation and the Banks are subject to various regulatory capital
requirements administered by federal and state banking agencies. Failure to meet
minimum capital requirements can initiate certain mandatory - and possibly
discretionary - actions by regulators that, if undertaken, could have a direct
material effect on the Corporation's financial statements. Under capital
adequacy guidelines and the regulatory framework for prompt corrective action,
the Corporation and the Banks must meet specific capital guidelines that involve
quantitative measures of assets, liabilities, and certain off-balance-sheet
items as calculated under regulatory accounting practices. The capital amounts
and classifications are also subject to qualitative judgments by the regulators
about components, risk weightings, and other factors.
Quantitative measures established by regulation to ensure capital adequacy
require the Corporation and the Banks to maintain minimum amounts and ratios
(set forth in the table below) of total and Tier I capital (as defined in the
regulations) to risk-weighted assets (as defined), and of Tier I capital (as
defined) to adjusted average assets (as defined). Management believes, as of
December 31, 1997, that the Corporation and the Banks meet all capital adequacy
requirements to which they are subject.
As of December 31, 1997, the most recent notifications from the Federal
Reserve Board, the Office of the Comptroller of the Currency, and the North
Carolina State Banking Commission categorized the Corporation, First Charter,
and Union, respectively, as well capitalized under the regulatory framework for
prompt corrective action. To be categorized as well capitalized, each entity
must maintain minimum total risk-based, Tier I risk-based, and Tier I leverage
ratios as set forth in the table. There are no conditions or events since that
notification that management believes have changed any of the institutions'
categories.
26
1997 ANNUAL REPORT
The Corporation's and each Bank's actual capital amounts and ratios are also
presented in the table below:
To Be Well Capitalized
For Capital Under Current Prompt
Adequacy Purposes Corrective Action Provisions
Actual ----------------- ----------------------------
-------------- Minimum Minimum
(Dollars in thousands) Amount Ratio Amount Ratio Amount Ratio
------ ----- ------ ----- ------ -----
At December 31, 1997:
Total Capital (to Risk Weighted Assets)
Consolidated $ 81,079 14.15 % $ 45,824 8 % $ 57,279 10 %
First Charter National Bank 55,804 13.00 34,337 8 42,921 10
Bank of Union 18,178 13.22 11,002 8 13,753 10
Tier I Capital (to Risk Weighted Assets)
Consolidated $ 73,919 12.92 % $ 22,912 4 % $ 34,368 6 %
First Charter National Bank 50,439 11.77 17,169 4 25,753 6
Bank of Union 16,459 11.98 5,501 4 8,252 6
Tier I Capital (to Adjusted Average Assets)
Consolidated $ 73,919 10.65 % $ 27,773 4 % $ 34,716 5 %
First Charter National Bank 50,439 9.79 20,614 4 25,768 5
Bank of Union 16,459 9.37 7,027 4 8,783 5
At December 31, 1996:
Total Capital (to Risk Weighted Assets)
Consolidated $ 75,237 15.73 % $ 38,264 8 % $ 47,830 10 %
First Charter National Bank 54,506 15.03 29,015 8 36,269 10
Bank of Union 15,850 14.04 9,032 8 11,289 10
Tier I Capital (to Risk Weighted Assets)
Consolidated $ 69,230 14.47 % $ 19,138 4 % $ 28,706 6 %
First Charter National Bank 49,948 13.74 14,544 4 21,816 6
Bank of Union 14,439 12.79 4,516 4 6,774 6
Tier I Capital (to Adjusted Average Assets)
Consolidated $ 69,230 10.65 % $ 26,002 4 % $ 32,502 5 %
First Charter National Bank 49,948 11.02 18,130 4 22,663 5
Bank of Union 14,439 9.31 5,626 4 7,032 5
(19) First Charter Corporation (Parent Company)
The principal assets of the Parent Company are its investment in the Banks,
and its principal source of income is dividends from the Banks. Certain
regulatory and other requirements restrict the lending of funds by the Banks to
the Parent Company and the amount of dividends which can be paid to the Parent
Company. In addition, certain regulatory agencies may prohibit the payment of
dividends by the Banks if they determine that such payment would constitute an
unsafe or unsound practice. At December 31, 1997, the Banks had available
undivided profits of approximately $19,140,000 for payment of dividends without
obtaining prior regulatory approval.
27
FIRST CHARTER CORPORATION
The Parent Company's balance sheet data as of December 31, 1997 and 1996 and
related income and cash flow statement data for each of the years in the
three-year period ended December 31, 1997 are as follows:
(Dollars in thousands) 1997 1996 1995
- -------------------------------------------------------------------------------------------------------------------
Balance sheet data:
Cash................................................. $ 357 $ 1,398
Securities available for sale........................ 8,569 4,072
Investment in subsidiaries........................... 68,866 65,943
Receivable from subsidiaries......................... 1,700 1,200
Fixed assets......................................... 316 553
Other assets......................................... 528 19
------ ------
$ 80,336 $ 73,185
====== ======
Accrued liabilities.................................. $ 2,532 $ 1,464
Shareholders' equity................................. 77,804 71,721
------ ------
$ 80,336 $ 73,185
====== ======
Income statement data:
Dividends from subsidiaries.......................... $ 5,900 $ 4,600 $ 3,750
Other operating income (expense)..................... 578 308 (713)
--- --- ----
Income before equity in undistributed net
income of subsidiaries........................... 6,478 4,908 3,037
Equity in undistributed net income of subsidiaries... 1,923 5,161 5,267
----- ----- -----
Net income ...................................... $ 8,401 $ 10,069 $ 8,304
============= =============== ==============
Cash flow statement data:
Cash flows from operating activities:
Net income............................................ $ 8,401 $ 10,069 $ 8,304
Net gain on securities available for sale transactions (752) (265) --
Increase (decrease) in accrued liabilities........... 440 (486) 750
Decrease (increase) in other assets.................. (508) 2 (1)
Increase in receivable from subsidiaries............. (500) (405) (195)
Increase in investment in subsidiaries............... (2,408) (5,163) (7,899)
------ ------ ------
Net cash provided by operating activities................... 4,673 3,752 959
----- ----- ---
Cash flows from investing activities:
Purchase of securities available for sale............ (3,444) (762) (906)
Proceeds from sale of securities available for sale.. 1,311 733 --
Purchase of premises and equipment................... (2) -- (1)
Proceeds from sale of premises and equipment......... 239 30 5
--- -- -
Net cash provided (used) by investing activities............ (1,896) 1 (902)
----- --- ----
Cash flows from financing activities:
Purchase of common stock............................. (1,319) (486) (628)
Proceeds from issuance of common stock upon
exercise of stock options........................ 1,280 1,390 577
Pre-merger transactions of pooled bank............... 467 2 2,632
Cash dividends paid.................................. (4,246) (3,775) (2,618)
------ ------ ------
Net cash used by financing activities................ (3,818) (2,869) (37)
Net increase (decrease) in cash.................. (1,041) 884 20
Cash at beginning of year........................ 1,398 514 494
----- ------ ------
Cash at end of year........ ......................... $ 357 $ 1,398 $ 514
============ ============== ===========
28
1997 ANNUAL REPORT
(20) Selected Quarterly Financial Information (Unaudited)
1997
- ----------------------------------------------------------------------------------------------------------------
First Second Third Fourth
(Dollars in thousands, except income per share) Quarter Quarter Quarter Quarter Total
- ----------------------------------------------------------------------------------------------------------------
Total interest income............................ $ 12,990 $ 13,805 $ 14,458 $ 14,701 $ 55,954
Total interest expense........................... 5,807 6,043 6,443 6,458 24,751
----- ----- ----- ----- ------
Net interest income.............................. 7,183 7,762 8,015 8,243 31,203
Provision for loan losses........................ 409 607 796 890 2,702
Total noninterest income......................... 2,214 2,257 2,118 2,863 9,452
Total noninterest expense........................ 5,138 5,363 5,617 9,524 25,642
----- ----- ----- ----- ------
Net income before income taxes................... 3,850 4,049 3,720 692 12,311
Income taxes..................................... 1,164 1,235 1,102 409 3,910
----- ----- ----- --- -----
Net income....................................... $ 2,686 $ 2,814 $ 2,618 $ 283 $ 8,401
========= ========= ========= ========= ========
Per share data:
Basic income per share........................... $ 0.29 $ 0.31 $ 0.28 $ 0.03 $ 0.91
========= ========= ========= ========= ========
Diluted income per share......................... $ 0.29 $ 0.30 $ 0.28 $ 0.03 $ 0.90
========= ========= ========= ========= ========
1996
- ----------------------------------------------------------------------------------------------------------------
First Second Third Fourth
(Dollars in thousands, except income per share) Quarter Quarter Quarter Quarter Total
- ----------------------------------------------------------------------------------------------------------------
Total interest income............................ $ 12,371 $ 12,556 $ 12,908 $ 13,072 $ 50,907
Total interest expense........................... 5,577 5,638 5,774 5,808 22,797
----- ----- ----- ----- ------
Net interest income.............................. 6,794 6,918 7,134 7,264 28,110
Provision for loan losses........................ 451 425 341 323 1,540
Total noninterest income......................... 1,614 1,972 1,749 1,936 7,271
Total noninterest expense........................ 4,435 4,732 5,006 5,181 19,354
----- ----- ----- ----- ------
Net income before income taxes................... 3,522 3,733 3,536 3,696 14,487
Income taxes..................................... 1,081 1,187 1,022 1,128 4,418
----- ----- ----- ----- -----
Net income....................................... $ 2,441 $ 2,546 $ 2,514 $ 2,568 $ 10,069
========= ========= ========= ========= ========
Per share data:
Basic income per share........................... $ 0.27 $ 0.28 $ 0.27 $ 0.28 $ 1.10
========= ========= ========= ========= ========
Diluted income per share......................... $ 0.27 $ 0.27 $ 0.27 $ 0.28 $ 1.09
========= ========= ========= ========= ========
29
FIRST CHARTER CORPORATION
First Charter Corporation and Subsidiaries
Management's Discussion and Analysis of Financial
Condition and Results of Operations
First Charter Corporation (the "Corporation") is a multi-bank holding
company established as a North Carolina Corporation in 1983, with two wholly
owned bank subsidiaries, First Charter National Bank ("First Charter") and Bank
of Union ("Union") (collectively referred to as the "Banks"). The Corporation's
principal executive offices are located in Concord, North Carolina. First
Charter is a full-service bank and trust company with sixteen offices located in
Cabarrus, Rowan, Cleveland, Rutherford and northern Mecklenburg Counties, North
Carolina. Union is a full-service bank with five offices located in Union and
southern Mecklenburg Counties, North Carolina.
Union was acquired by the Corporation on December 21, 1995. In
addition, on December 22, 1997, the Corporation acquired Carolina State Bank
("CSB") through the merger of CSB into First Charter. CSB was a state-charted
commercial bank with four banking offices in Cleveland and Rutherford Counties,
North Carolina. These offices now operate as First Charter offices. Each of the
acquisitions was accounted for as a pooling of interests and, accordingly, all
financial data for the periods prior to the respective dates of acquisition has
been restated to combine the accounts of Union and CSB with those of the
Corporation.
In connection with the acquisition of CSB, each share of CSB common
stock was converted into 1.023 shares of the Corporation's common stock, with
cash paid in lieu of the issuance of fractional shares. As of December 22, 1997,
a total of 1,663,992 shares of CSB common stock were issued and outstanding, and
there were outstanding employee stock options to purchase 56,800 shares. At
December 31, 1996, CSB had total assets of approximately $133 million and total
deposits of approximately $115 million. In the fourth quarter of 1997, the
Corporation recognized pretax charges of $3.4 million associated with completing
the acquisition of CSB.
Through their branch locations, the Banks provide a wide range of
banking products, including checking accounts; NOW accounts; "Money Market Rate"
accounts; certificates of deposit; individual retirement accounts; overdraft
protection; commercial, consumer, agriculture, real estate, residential mortgage
and home equity loans; personal and corporate trust services; safe deposit
boxes; and automated banking. In addition, through BOU Financial, Inc., a
subsidiary of Union, the Banks also offer discount brokerage services, insurance
and annuity sales and financial planning services pursuant to a third party
arrangement with UVEST Investment Services.
The following discussion and analysis should be read in conjunction
with the consolidated financial statements of the Corporation and the notes
thereto included elsewhere in this report. In addition, the following discussion
contains certain forward-looking statements. See "Factors that May Affect Future
Results."
30
1997 ANNUAL REPORT
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
1997 VERSUS 1996
Overview
The Corporation earned $8.4 million or $0.91 basic income per share in
1997, a 16.5% decrease from $10.1 million or $1.10 basic income per share in
1996. Excluding the nonrecurring charges associated with the acquisition of CSB,
1997 earnings per share increased 8.8% compared to 1996. Key factors
contributing to the increase in net income, excluding the nonrecurring charges,
were an increase of 11% in net interest income and an increase in noninterest
income of 30%. These increases were partially offset by an increase of 75.5% in
the provision for loan losses and an increase of 15% in noninterest expense.
Earnings in 1997, excluding the nonrecurring charges, equate to a return on
average assets of 1.57% for 1997, compared to 1.55% for 1996, and a return on
average equity of 14.40% in 1997, versus 14.77% in 1996.
Total assets at December 31, 1997, were $762 million, up 12.0% from the
level at year-end 1996. Gross loans increased 15% to $524 million and total
deposits increased 9% to $621 million.
The following sections discuss the Corporation's strategy and status in
the areas of liquidity, asset-liability management and capital resources.
Liquidity
Liquidity is the ability to maintain cash flows adequate to fund
operations and meet obligations and other commitments on a timely and
cost-effective basis. Liquidity is provided by the ability to attract deposits,
flexible repricing schedules in a sizable portion of the loan portfolio, current
earnings, a strong capital base and the ability to use alternative funding
sources that complement normal sources. Management's asset-liability policy is
to maximize the net interest income while continuing to provide adequate
liquidity to meet continuing loan demand and withdrawal requirements and to
service normal operating expenses.
If additional funding sources were needed, the Banks have access to
federal fund lines at correspondent banks and borrowings from the Federal
Reserve discount window. In addition to these sources, the Banks are members of
the Federal Home Loan Bank ("FHLB") System, which provides access to FHLB
lending sources. At December 31, 1997, the Banks had two available lines of
credit with FHLB totaling $52.5 million with $25.6 million available.
Another source of liquidity is the securities available for sale
portfolio. See "Balance Sheet Analysis Securities Available for Sale" for a
further discussion. Management believes the Banks' sources of liquidity are
adequate to meet loan demand, operating needs and deposit withdrawal
requirements.
Asset-Liability Management and Interest
Rate Sensitivity
The primary objective of the Corporation's asset-liability management
strategy is to reduce the risk of a significant decrease in net interest income
caused by interest rate changes without unduly penalizing current earnings. One
method used to manage interest rate sensitivity is to measure, over various time
periods, the interest rate
31
FIRST CHARTER CORPORATION
sensitivity positions, or gaps; however, this method addresses only the
magnitude of timing differences and does not address earnings or market value.
Management uses an earnings simulation model to assess the amount of earnings at
risk due to changes in interest rates. This model is updated quarterly and is
based on a range of interest rate scenarios. Under the Corporation's policy, the
limit for interest rate risk is 10% of net interest margin when considering an
increase or decrease in interest rates of 300 basis points over a twelve-month
period. Management believes this method more accurately measures interest rate
risk. These targeted guidelines were achieved during 1997.
The Banks' balance sheets are liability sensitive, meaning that in a
given period there will be more liabilities than assets subject to immediate
repricing as market rates change. Because immediately rate sensitive interest
bearing liabilities exceed rate sensitive assets, the earnings position could
improve in a declining rate environment and could deteriorate in a rising rate
environment, depending on the correlation of rate changes in these two
categories. At December 31, 1997 total rate sensitive liabilities due within one
year were $394.5 million compared to rate sensitive assets of $304.0 million,
for a cumulative gap of $90.5 million. Interest sensitivity of the Corporation's
balance sheet as of a specific date is not necessarily indicative of the
Corporation's position on other dates.
From time to time, the Corporation may use derivative financial
instruments including futures, forwards, interest rate swaps, option contracts,
and other financial instruments with similar characteristics. The Corporation
currently has an interest rate floor transaction arrangement which it uses as a
hedge against variable rate loans. This interest rate floor transaction has a
notional amount of $20 million and a floor rate of 8.5%, compared to the current
index of 8.5%, maturing on January 23, 2000. Additionally, the Corporation is
party to financial instruments with off-balance sheet risk in the normal course
of business to meet the financing needs of its customers. These financial
instruments include commitments to extend credit and standby letters of credit.
These instruments involve to varying degrees elements of credit and interest
rate risk in excess of the amount recognized in the consolidated balance sheets.
Commitments to extend credit are agreements to lend to a customer so long as
there is no violation of any condition established in the contract. Commitments
generally have fixed expiration dates and may require collateral from the
borrower if deemed necessary by the Corporation. Standby letters of credit are
conditional commitments issued by the Corporation to guarantee the performance
of a customer to a third party up to a stipulated amount and with specified
terms and conditions.
Commitments to extend credit and standby letters of credit are not
recorded as an asset or liability by the Corporation until the instrument is
exercised, see "Balance Sheet Analysis - Loans".
32
1997 ANNUAL REPORT
The following table presents the scheduled maturity of market risk
sensitive instruments at December 31, 1997:
(Dollars in thousands)
There
Maturing in: 1998 1999 2000 2001 2002 -after Total
- ----------------------------------------------------------------------------------------------------------------
ASSETS
Debt securities..... $ 13,787 $ 8,445 $ 18,237 $ 6,503 $ 21,500 $ 92,848 $ 161,320
Loans............... 130,569 68,393 73,254 53,133 47,628 142,822 515,799
----------------------------------------------------------------------------------------
Total............ $ 144,356 $ 76,838 $ 91,491 $ 59,636 $ 69,128 $ 235,670 $ 677,119
========================================================================================
LIABILITIES
Savings, NOW
and IMMA's....... $ 370,675 $ -- $ -- $ -- $ -- $ -- $ 370,675
CD's................ 136,896 105,545 7,989 65 -- 184 250,679
Short-term
Borrowings....... 50,746 -- -- -- -- -- 50,746
Long-term
Borrowings....... -- 260 1,143 -- 600 530 2,533
----------------------------------------------------------------------------------------
Total.......... $ 558,317 $ 105,805 $ 9,132 $ 65 $ 600 $ 714 $ 674,633
========================================================================================
The following table presents the average interest rate and estimated
fair value of market risk sensitive instruments at December 31, 1997:
Average Estimated
(Dollars in thousands) Total Interest Rate Fair Value
- --------------------------------------------------------------------------
ASSETS
Debt Securities.......... $161,320 7.15% $163,404
Loans.................... 515,799 9.24 517,064
-----------------------------------------
Total .............. $677,119 8.74 $680,468
=========================================
LIABILITIES
Savings, NOW
and IMMA's............. $370,675 3.32 $370,375
CD's..................... 250,679 5.69 249,229
Short-term
Borrowings............. 50,746 5.47 50,746
Long-term
Borrowings............. 2,533 6.56 2,530
-----------------------------------------
Total............... $674,633 4.37 $672,880
=========================================
===============================================================================
Capital Resources
At December 31, 1997, total shareholders' equity was $78 million, an
8.5% increase from December 31, 1996. The increase in capital is primarily
attributable to 1997 earnings. Cash dividends declared per share in 1997 were
$0.53 compared to $0.50 in 1996.
On December 15, 1997, the shareholders of the Corporation approved
Amended and Restated Articles of Incorporation for the Corporation which
33
FIRST CHARTER CORPORATION
included amendments (i) increasing the number of shares of common stock that the
Corporation is authorized to issue from 10,000,000 to 25,000,000 and (ii)
eliminating the concept of par value in connection with the Corporation's common
stock. These changes have been reflected in the accompanying consolidated
financial statements.
The principal asset of the parent company is its investment in the
Banks. Thus, the parent company derives its principal source of income through
dividends from the Banks. Certain regulatory and other requirements restrict the
lending of funds by the Banks to the parent company and the amount of dividends
which can be paid to the parent company. In addition, certain regulatory
agencies may prohibit the payment of dividends by the Banks if they determine
that such payment would constitute an unsafe or unsound practice. At December
31, 1997, the Banks had available undivided profits of approximately $19.1
million for payments of dividends without obtaining prior regulatory approval.
The Corporation and the Banks must comply with regulatory capital
requirements established by the applicable federal regulatory agencies. Under
the Federal Reserve Board (the "FRB") standards, the Corporation must maintain a
minimum ratio of Tier I Capital (as defined) to total risk-weighted assets of
4.00% and a minimum ratio of Total Capital (as defined) to risk-weighted assets
of 8.00%. Tier I Capital is comprised of total shareholders' equity calculated
in accordance with generally accepted accounting principles less certain
intangible assets, less unrealized gains or losses on securities available for
sale and Total Capital is comprised of Tier I Capital plus certain adjustments,
the largest of which for the Corporation is the general allowance for loan
losses (up to 1.25% of risk weighted assets). Tier 1 Capital must consist of at
least 50% of Total Capital. Risk-weighted assets refer to the on-and off-balance
sheet exposures of the Corporation adjusted for their related risk levels using
amounts set forth in FRB regulations.
In addition to the aforementioned risk-based capital requirements, the
Corporation is subject to a leverage capital requirement, requiring a minimum
ratio of Tier I Capital (as defined previously) to total adjusted average assets
of 3% to 5%.
===============================================================================
At December 31, 1997, the Corporation and the Banks were in compliance
with all existing capital requirements. The Corporation's capital requirements
are summarized in the table below:
Risk-Based Capital
---------------------------------------------------
Leverage Capital Tier 1 Capital Total Capital
- ------------------------------------------------------------------------------------------------------------------------
Amount Percentage (1) Amount Percentage (2) Amount Percentage (2)
- ------------------------------------------------------------------------------------------------------------------------
(Dollars in thousands)
Actual..................... $73,919 10.65% $73,919 12.92% $81,079 14.15%
Required................... 27,773 4.00 22,912 4.00 45,824 8.00
Excess.................... 46,146 6.65 51,007 8.92 35,255 6.15
==============================================================================
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 requirement
applicable to it.
2) Percentage of risk-weighted assets.
34
1997 ANNUAL REPORT
Regulatory Recommendations
Management is not presently aware of any current recommendations to the
Corporation or to the Banks by regulatory authorities which, if they were to be
implemented, would have a material effect on the Corporation's liquidity,
capital resources, or operations.
BALANCE SHEET ANALYSIS
Securities Available for Sale
Securities available for sale are a component of the Corporation's
asset-liability management strategy and may be sold in response to liquidity
needs, changes in interest rates, changes in prepayment risk, and other factors.
They are accounted for at fair value with unrealized gains and losses recorded
as a separate component of shareholders' equity.
Pursuant to the Financial Accounting Standards Board (FASB)'s Statement
of Financial Accounting Standards (Standard) No. 115, "Accounting for Certain
Investments in Debt and Equity Securities", following the acquisition of CSB,
all investment securities at CSB were reclassified to securities available for
sale. During 1997, as maturities, sales, or paydowns occurred on securities, the
proceeds were utilized to meet loan demand and to reinvest in additional
securities. During the latter part of 1997, in anticipation of lower yields,
approximately $30 million of securities that had short-term maturities or were
subject to repayment were sold. These proceeds were reinvested primarily in U.
S. government agency securities with higher spreads to the treasury yield curve
and callable within two to five years. Additionally, throughout 1997, in-state
municipal securities (maturity range of five to fifteen years) were purchased to
enhance tax equivalent net interest income.
At December 31, 1997, securities available for sale were $177.0 million
or 23.2% of total assets, compared to $143.7 million, or 21.1% of total assets,
at year-end 1996. The fair value of these assets was approximately $5.2 million
and $2.8 millionabove their amortized cost at December 31, 1997 and 1996,
respectively. The tax equivalent average yield on the securities available for
sale portfolio was 6.87% for 1997 and 7.01% for 1996. The average life of the
portfolio was 5.89 years at December 31, 1997 compared to 5.03 years at year-end
1996.
Investment Securities
As a result of the reclassification of CSB's investment securities to
securities available for sale subsequent to the acquisition of CSB, there was no
balance in investment securities at December 31, 1997. Investment securities
totaled $13.9 million or 2.0% of total assets at December 31, 1996.
The average yield earned on investment securities in 1997 was 5.81%
compared to 5.85% in 1996, with an average maturity of 1.53 years at December
31, 1996.
Loans
As a result of continued strong loan demand during 1997, gross loans
increased 14.7% to $524.1 million at December 31, 1997, from $456.7 million at
December 31, 1996. While the Corporation does anticipate that loan growth may
increase in the future, it does not anticipate that loan growth will increase at
the same rate as experienced in the previous years.
The loan portfolio at December 31, 1997 was composed of 15.4%
commercial, financial, and agricultural loans, 14.6% real estate construction
loans, 58.0% real estate mortgage loans, and 12.0% installment loans. This
compares to a composition of 13.9%
35
FIRST CHARTER CORPORATION
commercial, financial, and agricultural, 10.3% real estate construction, 60.7%
real estate mortgage, and 15.1% installment at December 31, 1996. Approximately
$15.8 million of the real estate mortgage loans are loans for which the
principal source of repayment comes from the sale of real estate. The remaining
$364.8 million of real estate mortgage loans are (i) other commercial loans for
which the primary source of repayment is derived from the ongoing cash flow of
the business and which are also collateralized by real estate - $210.9 million,
(ii) personal installment loans which are collateralized by real estate - $51.7
million, (iii) home equity loans - $46.0 million, and (iv) individual
residential mortgage loans - $56.2 million.
The Corporation's primary market area includes the states of North and
South Carolina, and predominately centers on the Metro region of Charlotte,
North Carolina. At December 31, 1997, the majority of the total loan portfolio,
as well as a substantial portion of the commercial and real estate loan
portfolio, were to borrowers within this region. The diversity of the region's
economic base tends to provide a stable lending environment. No significant
concentration of credit risk has been identified due to the diverse industrial
base in the region.
In the normal course of business, there are outstanding various
commitments to extend credit which are not reflected in the consolidated
financial statements. At December 31, 1997, pre-approved but unused lines of
credit for loans totaled $159.7 million and standby letters of credit aggregated
$2.6 million. These amounts represent the Banks' exposure to credit risk, and in
the opinion of management, have no more than the normal lending risk that the
Banks commit to their borrowers. If these commitments are drawn, the Banks will
obtain collateral if it is deemed necessary based on management's credit
evaluation of the borrower. Collateral obtained varies but may include accounts
receivable, inventory, and commercial or residential real estate. Management
expects that these commitments can be funded through normal operations.
Asset Quality
Nonperforming assets, which consist of foreclosed assets, nonaccrual
loans, and restructured loans, were $3.5 million at December 31, 1997, as
compared to $2.4 million at December 31, 1996. Non-performing assets as a
percentage of loans and foreclosed assets at year-end amounted to 0.67% in 1997
and 0.52% in 1996. Total problem assets (nonperforming assets and loans 90 days
or more past due) amounted to $5.6 million at December 31, 1997 and $3.1 million
at December 31, 1996. Total problem assets as a percentage of loans and
foreclosed assets at year end was 1.07% in 1997 and 0.67% in 1996.
The components of nonperforming and problem assets are presented in the
table below:
December 31, December 31,
(Dollars in thousands) 1997 1996
- ----------------------------------------------------------
Nonaccrual loans $2,105 $1,630
Restructured loans -- --
Other real estate 1,418 759
----- ---
Total non-
performing assets 3,523 2,389
Loans 90 days or more
past due and still
accruing 2,109 685
----- ---
Total problem assets $5,632 $3,074
====== ======
Nonaccrual loans increased primarily due to several residential
construction loans reclassified as nonaccrual from 90 days past due and still
accruing. Interest income that would have been recorded on all nonaccrual loans
for the year ended December 31, 1997, had they performed according to their
original
36
1997 ANNUAL REPORT
terms, amounted to approximately $225,000, an increase of 28.7% from December
31, 1996. Interest income on nonaccrual loans included in the results of
operations for the years ended December 31, 1997 and 1996, amounted to
approximately $22,000 and $42,000, respectively.
Accruing loans 90 days or more past due increased $1.4 million, to
0.40% of gross loans at December 31, 1997, from 0.15% of gross loans at December
31, 1996. The major components of this increase are the delinquency of a
$900,000 loan, which is secured by a source of collateral equal to the value of
the loan, several 1-4 family residential mortgages totaling $342,000, and
several loans related to the CSB loan portfolio.
Management's policy for any accruing loan past due greater than 90 days
is to perform an analysis of the loan, including a consideration of the
financial position of the borrower(s) and any guarantor(s) as well as the value
of the collateral, and to make an assessment as to whether collectibility of the
principal and the interest appears probable. Based on such a review, management
has determined it is probable that the principal as well as the accruing
interest on these loans will be collected in full.
Other real estate increased to $1,418,000 at December 31, 1997 from
$759,000 at December 31, 1996. The primary reason for the $659,000 increase is
due to $456,000 of net foreclosure activity related to the CSB loan portfolio.
Seven accounts with balances ranging from $7,400 to $250,000 aggregated
$456,000.
Credit Administration and Allowance
for Loan Losses
All estimates of the loan portfolio risk, including the adequacy of the
allowance for loan losses, are subject to general and local economic conditions,
among other factors, which are unpredictable and beyond management's control.
Since a significant portion of the loan portfolio is comprised of real estate
loans and loans to area businesses, a continued risk is that the real estate
market and economic conditions could change and could result in future losses or
require increases in the provision for loan losses.
Management 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 Banks' Credit Administration department.
Any issues regarding risk assessments of those credits are addressed by the
Banks' loan administration and senior credit officer and factored into
management's decision to originate or renew the loan. Furthermore, large
commitments are reviewed and approved by a Senior Loan Committee comprised of
senior management, the senior credit officer and senior lending officers of the
Banks and loans above predetermined amounts are reviewed by the Loan Committee
of the respective Board of Directors. The Corporation also continues to employ
an independent third party risk assessment group to review the underwriting,
documentation and risk grading analysis and render a semiannual opinion of the
adequacy of the allowances for loan losses. 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 Senior
Management and the Loan and Audit Committees of the respective Banks and,
ultimately, is reported to the respective Bank and Corporation Board of
Directors.
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
37
FIRST CHARTER CORPORATION
determining the appropriate levels of the allowance for loan losses.
As part of the continual grading process, an analysis is performed
monthly independently from any analysis in conjunction with the origination of
loans. Individual loans are assigned a risk grade based on their credit quality,
which is subject to change as conditions warrant. Any changes in those risk
assessments as determined by the outside risk assessment group is also
considered. Each grade determines the percentage of the outstanding loan balance
allocated to the loan loss reserve. Loans with the weaker credit quality are
individually analyzed to determine a specific allowance which reflects
management's best estimate of the risk associated with each credit. An estimate
of an allowance is made for all other loans in the portfolio based on their
assigned risk grade, type of loan and other matters related to credit risk. In
the allowance for loan loss analysis process, the Banks also aggregate the loans
into pools of similar credits and review the historical loss experience
associated with these pools as additional criteria to allocate the allowance to
each category. The model also takes into consideration off-balance sheet credit
risk.
The allowance for loan losses as a percentage of gross loans
outstanding was 1.53% at December 31, 1997, compared to 1.43% at year-end 1996.
Total problem assets as a percentage of gross loans outstanding was 0.59% at
December 31, 1997, compared to 0.71% at December 31, 1996.
Management considers the December 31, 1997 allowance for loan losses
adequate to cover inherent losses in the Banks' loan portfolio. Management
believes it has established the allowance in accordance with generally accepted
accounting principles and in consideration of the current economic environment.
While management uses the best information available to make evaluations, future
additions to the allowance may be necessary based on changes in economic and
other conditions. Additionally, various regulatory agencies, as an integral part
of their examination process, periodically review the Banks' allowances for loan
losses. Such agencies may require the recognition of additions to the allowances
based on their judgments of information available to them at the time of their
examinations.
Deposits
Total deposits at December 31, 1997 were $621.4 million, a 9.0%
increase from a 1996 year-end level of $569.9 million. Average noninterest
bearing demand deposits increased $4.9 million or 6.1%; average interest bearing
demand deposits increased $6.4 million or 7.7%; average insured money market
accounts increased $3.4 million or 7.2%; average savings deposits decreased $1.5
million or 1.3%; and average certificates of deposit increased $31.1 million or
14.6%. The majority of deposit growth was in certificates of deposit ("CD")
products. The increase in average CD's was primarily attributable to several CD
promotions in 1997, which raised new deposits with maturities of nine, eighteen
or twenty-four months, and to the increase in public deposits with maturities of
six months that were opened in 1997.
EARNINGS PERFORMANCE
Net Interest Income
Net interest income, the difference between total interest income and
total interest expense, is the Corporation's principal source of earnings. For
the year ended December 31, 1997, net interest income was $31.2 million, an
increase of 11.0% from net interest income of $28.1 million in 1996. The
increase is attributable to an increase in the volume of average interest
earnings assets of
38
1997 ANNUAL REPORT
approximately $52.0 million and an increase in the net interest margin (tax
adjusted net interest income divided by average interest earning assets) to
5.01% in 1997 from 4.92% in 1996. The increase in net interest margin is
attributable to an increase in the prime rate of interest late in the first
quarter of 1997 and a shift in the composition of securities and loan balances.
The average yield on interest-earning assets was 8.8% in 1997 compared
to 8.7% in 1996. The average rate paid on interest-bearing liabilities was 4.6%
in 1997, compared to 4.1% in 1996. The average yield earned on loans was 9.5% in
1997, compared to 9.4% in 1996. The average rate paid on interest-bearing
deposits was 4.6% in 1997, unchanged from 4.6% in 1996. See "Asset-Liability
Management and Interest Rate Sensitivity" for additional discussion.
Provision for Loan Losses
The provision for loan losses for 1997 was $2.7 million compared to
$1.5 million in 1996. A portion of the increase in the provision was necessary
to reflect the growth in the Banks' loan portfolio and higher levels of
nonperforming assets. Additionally, a $1.4 million provision for loan losses was
recorded for the CSB loan portfolio in 1997 in recognition of increased 1997
charge-offs and portfolio growth.
Net charge-offs for 1997 were $1.2 million or .25% of average loans
compared to $1.1 million or .24% of average loans in 1996.
Noninterest Income
Noninterest income was $9.5 million in 1997 compared to $7.3 million in
1996, for an increase of 30.0%. The increase in other noninterest income is
attributable to higher securities gains due to the sale of equity securities
held by the Corporation, higher service charge income on deposit accounts
resulting from an increase in non-sufficient fund income, higher trust income
due to greater assets under management and higher commissions earned on
brokerage services resulting from increased sales volumes.
Noninterest Expense
Excluding the $3.4 million in costs associated with the acquisition of
CSB, total noninterest expense in 1997 was $22.3 million, compared to $19.4
million in 1996, representing a 15.1% increase. The increase was primarily
attributable to increases in costs associated with salaries and benefits,
occupancy and equipment and other noninterest expense.
Salaries and fringe benefits increased primarily due to higher
full-time equivalents and annual merit increases.
Occupancy and equipment increased approximately $892,000 or 30.5%. A
primary reason for the increase is due to an increase in depreciation expense in
connection with the local area network (LAN) and the wide area network (WAN)
which were added in mid-1996. This technology continues to improve the Banks'
ability to service loan and deposit customers and to gain greater operating
efficiency. Additionally, with the Banks' continued growth, additional office
space was required, thereby the Corporation entered into several leasing
agreements for office space.
Excluding the $3.4 million in costs associated with the acquisition of
CSB, other noninterest expense increased $1.2 million, or 19.7% in 1997, when
compared to 1996. The three major components of change in this category are
advertising, data processing and professional services. During 1997, the Banks
incurred additional advertising expense primarily related to costs associated
with promoting certificates of deposit and equity
39
FIRST CHARTER CORPORATION
line products. Data processing and professional services costs increased due to
the aforementioned technology added in mid-1996 and throughout 1997. As the
Banks continue to grow and invest in technology, the Corporation anticipates
further increases in this area during 1998.
Total income tax expense for 1997 was $3.9 million versus $4.4 million
in 1996. The decrease is attributable to a decrease in taxable income, slightly
offset by an increase in the effective tax rate to 31.8% in 1997 from 30.5% in
1996. The change in the effective rate is primarily attributable to certain
nondeductible merger and acquisition costs incurred in 1997, which were
partially offset by an increase in tax-exempt income from municipal securities
in 1997.
RESULTS OF OPERATIONS AND
FINANCIAL CONDITION
1996 VERSUS 1995
The Corporation earned $10.1 million, or $1.10 basic income per share,
in 1996, a 21.3% increase from $8.3 million, or $.95 basic income per share in
1995. Key factors contributing to the increase in net income were a 7.7%
increase in net interest income, a reduction in the provision for loan losses,
and the absence in 1996 of pre-tax merger related expenses of $1.1 million
incurred in 1995 in connection with the acquisition of Union. These earnings
equated to a return on average assets of 1.55% for 1996, compared to 1.45% for
1995, and a return on average equity of 14.77% in 1996, versus 14.28% in 1995.
Total assets at December 31, 1996, were $680.3 million, up 8.6% from
the level at year-end 1995. Gross loans increased 10.0% to $456.7 million and
total deposits increased 10.6% to $569.9 million at December 31, 1996 from their
levels at year-end 1995.
At December 31, 1996, securities available for sale were $143.7 million
or 21.1% of total assets compared to 24.1% of total assets at year-end 1995.
During 1996, stable interest rates and a growing economy created increased loan
demand. Maturities from both portfolios helped to fund the increased loan
demand. Concurrently, short-term agency securities (less than one year) and U.S.
Treasuries (two years to three years) were purchased to primarily maintain
liquidity while in-state municipal securities (maturity range of five to fifteen
years) were purchased to enhance tax equivalent net interest income. The fair
value of securities available for sale was approximately $2.8 million above
their amortized cost at December 31, 1996. The average yield on the securities
available for sale portfolio was 6.87% for 1996 and 6.65% for 1995. The average
life of the portfolio was 5.03 years at December 31, 1996 compared to 4.53 years
at year-end 1995.
Investment securities totaled $13.9 million or 2.0% of total assets at
December 31, 1996. The average yield earned on investment securities in 1996 was
5.87% compared to 5.73% in 1995, with an average maturity of 1.53 years at
December 31, 1996.
The loan portfolio at December 31, 1996 was composed of 13.9%
commercial, financial, and agricultural loans, 10.3% real estate construction
loans, 60.7% real estate mortgage loans, and 15.1% installment loans. This
compares to a composition of 16.0% commercial, 8.6% real estate construction,
61.5% real estate mortgage, and 13.9% installment at December 31, 1995.
Problem assets at December 31, 1996 were $3.1 million, or 0.7% of gross
loans and foreclosed properties, compared to $3.2 million or 0.8% at December
31, 1995.
40
1997 ANNUAL REPORT
The components of problem assets are presented in the table below:
December 31, December 31,
(Dollars in thousands) 1996 1995
- --------------------------------------------------------
Nonaccrual loans $1,630 $2,453
Restructured loans -- 300
Other real estate 759 61
------ ------
Total non-
performing assets 2,389 2,814
Loans 90 days or more
past due and still
accruing 685 401
------- -------
Total problem assets $3,074 $3,215
======= =======
Interest income that would have been recorded on nonaccrual loans for
the years ended December 31, 1996 and 1995, had they performed according to
their original terms, amounted to approximately $174,000 and $330,000,
respectively. Interest income on nonaccrual loans included in the results of
operations for the years ended December 31, 1996 and 1995, amounted to
approximately $42,000 and $82,000, respectively.
Accruing loans 90 days or more past due increased to 0.15% of gross
loans at December 31, 1996 compared to 0.10% of gross loans at December 31,
1995.
Net charge-offs for 1996 were $1.1 million or 0.24% of average loans
compared to $1.0 million or 0.26% of average loans in 1995.
Other real estate increased to $758,977 at December 31, 1996 from
$61,250 at December 31, 1995. Included in other real estate is the
reclassification of property totaling $434,500 that was originally purchased for
the construction of a branch location. Management decided not to construct a
branch on this property, and therefore, the carrying value of this property was
reclassified from premises and equipment to other real estate. This property is
currently being marketed and the gain or loss from its sale is not expected to
be significant. Additionally, two residential construction loans were foreclosed
in December 1996.
Total deposits at December 31, 1996 were $569.9 million, a 10.6%
increase from a 1995 year-end level of $515.4 million. Average noninterest
bearing demand deposits increased $9.0 million or 12.7%; average interest
bearing demand deposits increased $6.8 million or 9.0%; average insured money
market accounts decreased $2.4 million or 4.9%; average savings deposits
increased $11.3 million or 10.4%; and average CD's increased $34.6 million or
19.3%. The majority of deposit growth was in CD products. The increase in
average CD's was primarily attributable to an increase in public deposits.
For the year ended December 31, 1996, net interest income was $28.1
million, an increase of 7.7% from net interest income of $26.1 million in 1995.
The increase is attributable to an increase in the level of interest earning
assets slightly offset by a decrease in the net interest margin (tax adjusted
net interest income divided by average earnings assets) to 4.92% in 1996 from
5.13% in 1995. The decline in the margin is attributable to more growth in
higher yielding deposits, such as CD's, than in lower yielding deposits, such as
NOW and savings deposits.
The average yield on interest-earning assets was 8.7% in 1996 compared
to 8.8% in 1995. The average rate paid on interest-bearing liabilities was 4.6%
in 1996, compared to 4.5% in 1995. The average yield earned on loans was 9.4% in
1996, compared to 9.7% in 1995. The average rate paid on interest-bearing
deposits was 4.6% in 1996, compared to 4.5% in 1995.
41
FIRST CHARTER CORPORATION
The provision for loan losses for 1996 was $1.5 million compared to
$2.0 million in 1995. The decrease in the provision was primarily attributable
to a reduction in net charge-offs and improved asset quality. The allowance for
loan losses as a percentage of gross loans outstanding was 1.43% at December 31,
1996, compared to 1.46% at year-end 1995.
Noninterest income was $7.3 million in 1996 compared to $6.3 million in
1995. The increase in other noninterest income is attributable to higher
securities gains due to the sale of equity securities held by the Corporation,
higher service charge income on deposit accounts resulting from an increase in
non-sufficient fund income and higher mortgage loan income due to increased loan
originations.
Total noninterest expense was $19.4 million in 1996 compared to $19.2
million in 1995, a 0.9% increase. The increase was primarily attributable to
increases in costs associated with salaries and benefits, occupancy and
equipment and other noninterest expense.
Salaries and fringe benefits increased due to higher full-time
equivalents, annual merit increases and higher benefits costs.
Occupancy and equipment increased approximately $253,000 or 9.5% over
1995. This increase was primarily due to an increase in depreciation expense in
connection with the aforementioned LAN and WAN technology additions in 1996 and
in connection with the opening of a full service branch.
Other noninterest expense decreased approximately $1.1 million or 15.4%
for 1996 when compared to 1995, primarily due to the absence of merger and
acquisition expenses associated with the acquisition of Union in 1995. These
costs included legal, accounting, investment banking, regulatory filings, proxy
printing and solicitation expenses, all of which were incurred during the fourth
quarter of 1995.
Total income tax expense for 1996 was $4.4 million versus $2.9 million
in 1995. The increase is attributable both to an increase in income before
income taxes and an increase in the effective tax rate to 30.5% in 1996 from
25.9% in 1995. The change in the effective rate is primarily attributable to the
majority of merger costs for which a tax benefit was not allowed.
Accounting and Regulatory Matters
In June 1997, the Financial Accounting Standards Board ("FASB") issued
Statement No. 130, "Reporting Comprehensive Income." Statement 130 establishes
standards for reporting and display of comprehensive income and its components
(revenues, expenses, gains and losses) in a full set of general purpose
financial statements. Comprehensive income is the non-shareholder related change
in equity (net assets) of a company during a period from transactions and other
events. The provisions of this statement are effective for fiscal years
beginning after December 15, 1997, including interim periods, and requires
restatement of all prior periods presented. The implementation of the statement
will not have an impact on the consolidated financial position or consolidated
results of operations of the Corporation, but the statement will require
additional disclosures to be made.
Also in June 1997, the FASB issued SFAS No. 131, "Disclosures about
Segments of an Enterprise and Related Information," which establishes standards
for the way that business enterprises report information about operating
segments in annual financial statements and requires that these enterprises
report selected information about operating
42
1997 ANNUAL REPORT
segments in interim financial reports. It also establishes standards for related
disclosures about products and services, geographic areas and major customers.
SFAS No. 131 is effective for periods beginning after December 15, 1997 and
requires restatement of all prior periods presented. The implementation of the
statement will not have an impact on the consolidated financial position or
consolidated results of operations of the Corporation, but the statement could
require additional disclosures to be made.
From time to time, FASB also issues exposure drafts for proposed
statements of financial accounting standards. Such exposure drafts are subject
to comment from the public, to revisions by the FASB and to final issuance by
the FASB as statements of financial accounting standards. Management considers
the effect of the proposed statements on the consolidated financial statements
of the Corporation and monitors the status of changes to issued exposure drafts
and to proposed effective dates.
Year 2000 Consideration
The Corporation utilizes many computer software programs and operating
systems throughout the organization. Some of these software applications contain
source code that is unable to appropriately interpret the upcoming calendar year
"2000". Therefore some level of modification, or even possibly replacement, of
such applications will be necessary. The Corporation is currently in the process
of completing its identification of applications that are not "Year 2000"
compliant. Given information known at this time about the Corporation's
on-going, normal course-of-business efforts to upgrade or replace business
critical systems as necessary, management has not fully determined an estimated
cost to become "Year 2000" compliant. However, at December 31, 1997, management
does not anticipate the total costs of becoming "Year 2000" compliant will have
a material adverse impact on the Corporation's liquidity or its results of
operations. The Corporation is expensing all costs associated with required
system changes as the costs are incurred. As of December 31, 1997 these costs
did not exceed $25,000.
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, the
reliance on third party vendors to become Year 2000 compliant and, with respect
to the acquisition of CSB, the inability of the Corporation to consolidate the
operations of CSB with the Corporation in an efficient manner.
43
FIRST CHARTER CORPORATION
First Charter Corporation Officers
Robert O. Bratton
Executive Vice President,
Chief Operating Officer,
Treasurer and Chief Financial Officer
Michael R. Coltrane
Vice Chairman
J. Roy Davis, Jr.
Chairman of the Board
Rose W. Edwards
Assistant Corporate Secretary
Phillip M. Floyd
Executive Vice President
Anne C. Forrest
Assistant Corporate Secretary
Robert G. Fox, Jr.
Executive Vice President
John J. Godbold, Jr.
Executive Vice President
H. Clark Goodwin
Executive Vice President
Brian A. Ingold
AVP/Senior Auditor
David E. Keul
Assistant Treasurer and
Assistant Corporate Secretary
Lawrence M. Kimbrough
President and Chief Executive Officer
James T. Mathews, Jr.
Senior Vice President
Edward B. McConnell
Executive Vice President
James W. Townsend, Jr.
Corporate Secretary
First Charter National Bank and Bank of Union Officers
William R. Adcock
Harvey E. Baker
John R. Baker
Cheryl P. Barbee
Wendy T. Barnhardt
Todd C. Bennington
Kati W. Beaver
Patricia H. Blackwell
Lisa B. Boylen
Robert O. Bratton
Lisa P. Bryant
Kenneth W. Caldwell
Julie J. Carter
Barbara J. Cherry
Elizabeth L. Cline
Deborah S. Cloninger
E. Stephen Costner
Deborah W. Craig
Carolyn M. Craver
Lisa Cunningham
William E. Davis
Deborah R. Deese
Rose W. Edwards
C. Eugene Efird
Thomas J. Elkins
David L. Ellington
Phillip M. Floyd
Anne C. Forrest
Robert G. Fox
Mavadell D. Freeman
Melba M. Funderburk
Linda S. Gibson
Jan G. Griffin
H. Clark Goodwin
JoAnn J. Hall
Sandra L. Hannagan
Angela S. Helms
R. Dwight Henry
Robin T. Hinson
Karen F. Hodge
Patricia K. Horton
D. Jean Hovis
Brian A. Ingold
Patricia C. Jamison
Donna J. Kenney
David E. Keul
Lawrence M. Kimbrough
Brenda K. Kinley
Angela R. Lovelace
Earl H. Lutz, Jr.
Sandra J. Mansur
Jerold L. Marlow
James T. Mathews
Edward B. McConnell
David C. McGuirt
Jesse F. Milliken
Nancy L. Mills
Teresa L. Mills
Michael J. Mittelman, Jr.
Lisa C. Moore
Dawn W. O'Dell
Danny H. Patton
Elizabeth G. Quesenberry
Elizabeth K. Reed
M. Jay Rhodes, Jr.
W. Farrell Richardson
Brian F. Riggins
Linda V. Ritter
Katherine L. Schiele
Tammy D. Scruggs
Greg Silliman
Brenda S. Simpson
Nancy B. Smith
A. Ray Singleton
Gordon M. Stallings
James E. Steere, III
William W. Swink
J. W. Townsend, Jr.
Matthew J. Triplett
Nancy S. Verble
Kimberly J. Wertheimer
L. Eugene Willard
Ann K. Williams
Patricia G. Witter
44
1997 ANNUAL REPORT
Corporate Information
Corporate Headquarters
First Charter Corporation
22 Union Street, North
PO Box 228
Concord, NC 28026-0228
(704) 786-3300
Toll Free 1-800-422-4650
Auditors
KPMG Peat Marwick L.L.P.
Suite 2800
Two First Union Center
Charlotte, NC 28282
Corporate Counsel
Smith Helms Mulliss & Moore, L.L.P.
30th Floor
201 N. Tryon Street
Charlotte, NC 28202
Subsidiaries
First Charter National Bank
PO Box 228
Concord, NC 28026-0228
Bank of Union
201 North Charlotte Avenue
Monroe, NC 28112
Stock Listing
The NASDAQ National Market
Symbol: FCTR
Market Makers
Morgan Stanley, Dean Witter, Discover & Co.
Interstate/Johnson Lane Corporation
J.C. Bradford Co.
Wheat First Union
Legg Mason Wood Walker, Inc.
Transfer Agent
First Charter National Bank
Shareholders' Meeting
Cabarrus Country Club
Concord, NC April 28, 1998 at 5:00 p.m.
Form 10-K
Copies of First Charter Corporation's Annual Report to the Securities and
Exchange Commission, Form 10-K, may be obtained without charge by writing:
Robert O. Bratton
Chief Financial Officer
First Charter Corporation
PO Box 228
Concord, NC 28026-0228
Stock Information and Dividends
First Charter Corporation's common stock, no par value (the "Common
Stock"), is reported on The Nasdaq Stock Market as a National Market Security
under the symbol "FCTR". The following table sets forth the high and low sales
price for the Common Stock for the periods indicated, as reported. The table
also sets forth per share cash dividend information for the periods indicated
(as adjusted for the stock split). See "Management's Discussion and Analysis of
Financial Condition and Results of Operations - Capital Resources" contained
elsewhere in this report for a description of limitations on the ability of the
Corporation to pay dividends.
As of February 20, 1998, there were 3,232 shareholders of record of the
Corporation's Common Stock.
Quarterly Common Stock Price Ranges and Dividends
1997 1996
- ------------------------------------------------------------------------------
Quarter High Low Dividend High Low Dividend
- ------------------------------------------------------------------------------
First $18.54 $17.71 $.125 $18.75 $16.25 $.125
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Second 24.25 18.13 .125 17.08 14.79 .125
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Third 24.25 22.00 .140 16.04 15.21 .125
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Fourth 26.75 23.50 .140 18.75 15.21 .125
- ------------------------------------------------------------------------------
FIRST CHARTER CORPORATION
22 UNION STREET NORTH
P.O. BOX 228
CONCORD, NORTH CAROLINA 28026-0228
(watermark image of FIRST CHARTER CORPORATION)