FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from _________________________ to ___________________
Commission file number_______________________0-15829___________________________
FIRST CHARTER CORPORATION
_______________________________________________________________________________
(Exact name of registrant as specified in its charter)
North Carolina 56-1355866
_______________________________________ ______________________________________
(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
22 Union Street, North, Concord, North Carolina 28025
__________________________________________________________________
(Address of principal executive offices) (Zip Code)
(704) 786-3300
___________________________________________________________________________
(Registrant's telephone number, including area code)
N/A
____________________________________________________________________________
(Former name, former address and former fiscal year,
if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
___ ___
APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY
PROCEEDINGS DURING THE PRECEDING FIVE YEARS:
Indicate by check mark whether the registrant has filed all documents and
reports required to be filed by Sections 12, 13 or 15(d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities
under a plan confirmed by a court. Yes No
__ __
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of the latest practicable date.
9,346,611 shares of Common Stock, no par value, outstanding as of May
15, 1998.
PART 1. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
FIRST CHARTER CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
MARCH 31, December 31,
1998 1997
- --------------------------------------------------------------------------------------------------------------------
(DOLLARS IN THOUSANDS) (UNAUDITED) (UNAUDITED)
- --------------------------------------------------------------------------------------------------------------------
ASSETS
Cash and due from banks................................................... $ 32,963 $ 33,077
Interest bearing bank deposits............................................ 7,870 7,975
Securities available for sale:
U.S. Government obligations.......................................... 13,811 22,333
U.S. Government agency obligations................................... 45,313 45,863
Mortgage-backed securities........................................... 8,736 9,676
State and municipal obligations, nontaxable.......................... 86,189 85,532
Other................................................................ 13,211 13,627
---------------------------------
Total securities available for sale............................. 167,260 177,031
---------------------------------
Loans..................................................................... 548,920 524,076
Less: Unearned income................................................ (204) (273)
Allowance for loan losses...................................... (8,088) (8,004)
---------------------------------
Loans, net........................................................... 540,628 515,799
---------------------------------
Premises and equipment, net............................................... 16,071 15,949
Other assets.............................................................. 10,991 11,863
---------------------------------
Total assets.................................................... $ 775,783 $ 761,694
=================================
LIABILITIES AND SHAREHOLDERS' EQUITY Deposits, domestic:
Noninterest bearing demand........................................... $ 93,875 $ 94,434
Interest bearing:
NOW accounts.................................................... 96,326 95,343
Time............................................................ 373,291 365,442
Certificates of deposit greater than $100,000................... 72,342 66,135
---------------------------------
Total deposits............................................ 635,834 621,354
Other borrowings.......................................................... 53,017 53,279
Other liabilities......................................................... 5,759 9,257
---------------------------------
Total liabilities............................................... 694,610 683,890
---------------------------------
SHAREHOLDERS' EQUITY:
Common stock - no par value; authorized, 25,000,000
shares; issued and outstanding, 9,328,545 shares
at 3/31/98 and 9,268,573 shares at 12/31/97.......................... 50,516 49,514
Retained earnings......................................................... 26,807 25,102
Accumulated other comprehensive income:
Unrealized gain on securities available for sale, net................ 3,850 3,188
-------------------------------
Total shareholders' equity...................................... 81,173 77,804
-------------------------------
Total liabilities and shareholders' equity...................... $ 775,783 $ 761,694
===============================
See accompanying notes to consolidated financial statements.
2
First Charter Corporation and Subsidiaries
Consolidated Statements of Income (Unaudited)
For the Three Months Ended
- --------------------------------------------------------------------------------------------------------------
March 31, March 31,
(Dollars in thousands, except per share amounts) 1998 1997
- --------------------------------------------------------------------------------------------------------------
Interest income:
Interest and fees on loans........................................ $ 12,521 $ 10,683
Federal funds sold................................................ - 58
Interest bearing bank deposits.................................... 51 29
Securities available for sale..................................... 2,358 2,016
Investment securities:
Taxable....................................................... - 203
Non-taxable................................................... - 1
----------------------------
Total interest income.................................... 14,930 12,990
----------------------------
Interest expense:
Deposits.......................................................... 5,820 5,314
Federal funds purchased and securities
sold under agreements to repurchase........................... 366 255
Federal Home Loan Bank borrowings................................. 255 238
----------------------------
Total interest expense................................... 6,441 5,807
----------------------------
Net interest income................................... 8,489 7,183
Provision for loan losses.............................................. 710 409
----------------------------
Net interest income after provision for loan losses............... 7,779 6,774
----------------------------
Noninterest income:
Trust income...................................................... 470 409
Service charges on deposit accounts............................... 1,014 895
Insurance and other commissions................................... 316 248
Securities available for sale transactions, net................... 79 248
Other............................................................. 687 413
----------------------------
Total noninterest income..................................... 2,566 2,213
----------------------------
Noninterest expense:
Salaries and fringe benefits...................................... 3,492 2,806
Occupancy and equipment........................................... 997 804
Other............................................................. 1,600 1,527
---------------------------
Total noninterest expense.................................... 6,089 5,137
---------------------------
Income before income taxes................................... 4,256 3,850
Income taxes........................................................... 1,245 1,164
---------------------------
Net income................................................... $ 3,011 $ 2,686
===========================
Basic net income per share............................................. $ 0.32 $ 0.29
===========================
Weighted average common shares......................................... 9,310,298 9,205,381
Diluted net income per share........................................... $ 0.32 $ 0.29
===========================
Weighted average common and common
equivalent shares................................................. 9,460,050 9,272,252
Cash dividends declared................................................ $ 0.14 $ 0.125
===========================
See accompanying notes to consolidated financial statements.
3
First Charter Corporation and Subsidiaries
Consolidated Statement of Shareholders' Equity (Unaudited)
For The Three Months Ended March 31, 1998 and 1997
Accumulated
Other
Common Stock Retained Comprehensive
---------------------------
(Dollars in thousands) Shares Total Earnings Income Total
- --------------------------------------------------------------------------------------------------------------------------------
Balance December 31, 1996.................. 7,391,754 $ 43,101 $ 26,932 $ 1,688 $ 71,721
Net income through March 31, 1997.......... - - 2,686 - 2,686
Cash dividends of $0.125 per share......... - - (946) - (946)
Purchase and retirement of
common stock........................... (12,773) (280) - - (280)
Stock options exercised and Dividend
Reinvestment Plan stock issued......... 18,647 338 - - 338
6-for-5 Stock Split........................ 1,261,418 5,701 (5,701) - -
Pre-merger transactions of pooled bank..... 545,271 - - - -
Unrealized loss on securities
available for sale, net................ - - - (642) (642)
-------------------------------------------------------------------------------------
Balance March 31, 1997..................... 9,204,317 $ 48,860 $ 22,971 $ 1,046 $ 72,877
=====================================================================================
Balance December 31, 1997.................. 9,268,573 49,514 25,102 3,188 77,804
Net income through March 31, 1998.......... - - 3,011 - 3,011
Cash dividends of $0.14 per share.......... - - (1,306) - (1,306)
Purchase and retirement of
common stock........................... (684) (18) - - (18)
Stock options exercised and Dividend
Reinvestment Plan stock issued......... 60,656 1,020 - - 1,020
Unrealized gain on securities
available for sale, net................ - - - 662 662
--------------------------------------------------------------------------------------
Balance March 31, 1998..................... 9,328,545 $ 50,516 $ 26,807 $ 3,850 $ 81,173
======================================================================================
See accompanying notes to consolidated financial statements.
4
First Charter Corporation and Subsidiaries
Consolidated Statements of Cash Flows (Unaudited)
For the Three Months Ended
- ----------------------------------------------------------------------------------------------------------------
March 31, March 31,
(Dollars in thousands) 1998 1997
- ----------------------------------------------------------------------------------------------------------------
Cash flows from operating activities:
Net income.............................................................. $ 3,011 $ 2,686
Adjustments to reconcile net income to net cash provided (used)
by operating activities:
Provision for loan losses........................................... 710 409
Depreciation........................................................ 557 436
Premium amortization and discount accretion, net.................... 35 (10)
Net gain on securities available for sale transactions.............. (79) (248)
Net loss (gain) on sale of premises and equipment................... 1 (12)
Origination of mortgage loans held for sale......................... (20,511) ( 662)
Proceeds from sale of mortgage loans available for sale............. 13,755 744
Decrease in other assets............................................ 1,328 21,364
Decrease in other liabilities....................................... (3,498) (23,681)
-------------------------
Net cash provided (used) by operating activities............. (4,691) 1,026
-------------------------
Cash flows from investing activities:
Proceeds from sales of securities available for sale.................... 11,963 447
Proceeds from maturities of securities available for sale............... 2,664 8,275
Purchase of investment securities....................................... - (763)
Purchase of securities available for sale............................... (3,726) (10,612)
Net increase in loans................................................... (19,662) (13,588)
Proceeds from sales of premises and equipment........................... - 13
Purchases of premises and equipment..................................... (681) (1,075)
------------------------
Net cash used by investing activities............................. (9,442) (17,303)
------------------------
Cash flows from financing activities:
Net increase (decrease) in demand, NOW, money market
and savings accounts................................................. 15,990 (16,297)
Net increase (decrease) in certificates of deposit...................... (1,510) 8,599
Net increase (decrease) in securities sold under repurchase
agreements and other borrowings...................................... (262) 2,188
Purchase and retirement of common stock................................ (18) (280)
Proceeds from issuance of common stock.................................. 1,020 337
Dividends paid.......................................................... (1,306) (946)
-----------------------
Net cash provided (used) by financing activities..................... 13,914 (6,399)
-----------------------
Net decrease in cash and cash equivalents............................ (219) (22,676)
Cash and cash equivalents at beginning of period..................... 41,052 49,882
-----------------------
Cash and cash equivalents at end of period........................... $ 40,833 $ 27,206
=======================
Supplemental disclosures of cash flow information: Cash paid during the year
for:
Interest............................................................. $ 6,400 $ 5,846
=======================
Income taxes......................................................... $ 1,398 $ 980
=======================
Supplemental disclosures of non-cash transactions:
Transfer of loans, premises and equipment
to other real estate owned........................................... $ 879 $ -
-----------------------
Investment securities transferred to available for sale................. $ - $ 14,285
=======================
Unrealized gain (loss) in value of securities available for sale (net of tax
effect of $423 and ($391) for March 31, 1998 and
March 31, 1997, respectively)........................................ $ 662 $ (642)
======================
See accompanying notes to consolidated financial statements.
5
FIRST CHARTER CORPORATION AND SUBSIDIARIES
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
1. All financial data has been adjusted to reflect the acquisition of
Carolina State Bank in December 1997, which was accounted for as a
pooling-of-interests.
2. The Corporation calculates its basic and diluted income per share in
accordance with the Financial
Accounting Standards Board (FASB) Standard No. 128, "Earnings per Share".
Basic net income per share is computed by dividing net income by the weighted
average number of shares of common stock outstanding for the year. Diluted
net income per share reflects the potential dilution that could occur if the
Corporation's common stock equivalents, which consist of dilutive stock
options, 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 the 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:
Three Months Ended March 31,
-----------------------------
1998 1997
Basic EPS denominator:
Weighted average number of common
shares outstanding.................................... 9,310,298 9,205,381
Dilutive effect arising from assumed
exercise of stock options............................. 149,752 66,871
---------------------------
Diluted EPS denominator................................... 9,460,050 9,272,252
==========================
Income per share for the three months ended March 31, 1997, has
been restated to reflect a 6-for-5 stock split declared in the
second quarter of 1997.
3. In certain instances, amounts reported in the 1997 consolidated
financial statements have been reclassified to present them in the
format selected for 1998. Such reclassifications have no effect on
net income or shareholders' equity as previously reported.
4. The information furnished in this report reflects all adjustments
which are, in the opinion of management, necessary to present a
fair statement of the financial condition and the results of
operations for the interim period. All such adjustments were of a
normal recurring nature.
5. On January 1, 1998 the Corporation adopted Statement of Financial
Accounting Standards No. 130 "Reporting Comprehensive Income". As
required by the SFAS No. 130, prior year information has been
modified to conform with the new presentation.
6
Comprehensive income includes net income and all changes to the
Corporation's equity, with the exception of transactions with
shareholders ("other comprehensive income"). The Corporation's only
component of other comprehensive income is the change in unrealized
gains and losses on available for sale securities.
The Corporation's total comprehensive income for the three months
ended March 31, 1998 and 1997, was $3,673,000 and $2,044,000,
respectively. Information concerning the Corporation's other
comprehensive income for the three months ended March 31, 1998 and
1997, is as follows:
(Dollars in thousands)
- --------------------------------------------------------------------------------------------------------
1998 1997
-------------------------
Unrealized gains/(losses) on available for sale securities......... $ 1,164 $ (785)
Less:
Reclassification of gains recognized in net income................. 79 248
Income tax expense/(benefit) relating to
unrealized gains on available for sale securities............... 423 (391)
-------- -----------
Other comprehensive income......................................... $ 662 $ (642)
======== ===========
7
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The consolidated balance sheets of First Charter Corporation (the
"Corporation") represent account balances for the Corporation and its wholly
owned banking subsidiaries, First Charter National Bank ("FCNB") and Bank of
Union ("Union").
The following discussion and analysis should be read in conjunction
with the consolidated financial statements of the Corporation and the notes
thereto included in this report. In addition, the following discussion contains
certain forward-looking statements. See "Factors that May Affect Future
Results."
LIQUIDITY
FCNB and Union (the "Banks") derive the major source of their
liquidity from their core deposit base. Liquidity is further provided by loan
repayments, maturities in the investment portfolios, the ability to secure
public deposits, the availability of federal fund lines at correspondent banks
and the ability to borrow from the Federal Reserve Bank 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 March 31,
1998, the Banks had two available lines of credit with the FHLB totaling $85
million, with $66 million available. Another source of liquidity is the
securities available for sale portfolios which may be sold in response to
liquidity needs. Management believes the Banks' sources of liquidity are
adequate to meet operating needs and deposit withdrawal requirements.
CAPITAL RESOURCES
At March 31, 1998, total shareholders' equity was $81,173,399, or
$8.70 per share compared to $77,804,463, or $8.39 per share at December 31,
1997.
At March 31, 1998, 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..................... $76,655 10.25% $76,655 13.03% $84,016 14.27%
Required................... 29,913 4.00 23,556 4.00 47,111 8.00
Excess..................... 46,742 6.25 53,099 9.03 36,905 6.27
(1) Percentage of total adjusted average assets. The Federal Reserve Bank
("FRB") minimum leverage ratio requirement is 3% to 5%, depending on the
institution's composite rating as determined by its regulators. The FRB has not
advised the Corporation of any specific requirements applicable to it.
(2) Percentage of risk-weighted assets.
8
REGULATORY RECOMMENDATIONS
Management is not presently aware of any current recommendations to
the Corporation or to the Banks by regulatory authorities which, if they were to
be implemented, would have a material adverse effect on the Corporation's
liquidity, capital resources, or operations.
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
Net income for the three month period ended March 31, 1998 was
$3,010,656, or $0.32 basic income per share versus $2,686,099, or $0.29 basic
income per share for the comparable period in 1997 which represents a 10.3%
increase. The increase is primarily attributable to increases in net interest
income and noninterest income which were partially offset by increases in
provision for loan losses and noninterest expenses. On an annualized basis, year
to date results represent a return on average assets of 1.62% versus 1.63% and a
return on average equity of 15.20% versus 14.82%, for the periods ended March
31, 1998 and March 31, 1997, respectively.
Total assets at March 31, 1998 were $775,783,232 compared to
$761,694,285 at December 31, 1997. Strong loan demand continued during the first
three months of 1998. As a result, gross loans increased 4.7% to $548,919,896
from $524,076,312 at December 31, 1997. Total deposits increased 2.3% to
$635,834,184 from $621,354,301 at December 31, 1997.
Securities available for sale totaled $167,260,349 at March 31,
1998 for a decrease of approximately $9.8 million from December 31, 1997. The
decrease was primarily due to sales of U.S. Government securities which had
yields to maturity lower than cost of funds. Therefore, the proceeds were used
to reduce borrowings. Additionally, during the quarter, as maturities or
paydowns occurred on securities, the proceeds were utilized to meet loan demand
and reinvested in additional securities. The carrying value of securities
available for sale was $2,818,000 above their amortized cost at March 31, 1998
which represents gross unrealized gains of $2,994,000 and gross unrealized
losses of $176,000.
For the three month period ended March 31, 1998, net interest
income before provision for loan losses increased $1,306,000 over the comparable
period in 1997. The increase is primarily attributable to an increase in the
level of interest earning assets, which was further enhanced by a higher net
interest margin. The net interest margin increased to 5.25% at March 31, 1998
from 5.04% at March 31, 1997. The average yield on interest-earning assets was
8.99% at March 31, 1998 compared to 8.76% at March 31, 1997, and the average
rate paid on interest-bearing liabilities decreased to 4.52% at March 31, 1998
compared to 4.57% at March 31, 1997.
Management continues to assess interest rate risk based on an
earnings simulation model. The Corporation's balance sheet is liability
sensitive, meaning that in a given period there will be more liabilities than
assets subject to immediate repricing as market rates change. Because
9
immediately rate sensitive interest-bearing liabilities exceed immediately rate
sensitive assets, the earnings position could improve in a declining rate
environment and could deteriorate in a rising rate environment, depending on the
correlation of rate changes in these two categories.
The provision for loan losses for the three months ended March 31,
1998 was $710,000, compared to $409,000 for the three months ended March 31,
1997. The increase in the provision was due to the growth in the loan portfolio
as well as higher levels of loan charge-offs. During the quarter, net
charge-offs increased to approximately $626,000 compared to net charge-offs of
approximately $276,000 for the same period of 1997. At March 31, 1998 and
December 31, 1997, the allowance for loan losses as a percentage of gross loans
was 1.50% and 1.53%, respectively. As part of the continual grading process used
to monitor the credit quality of the loan portfolio, an analysis is performed
monthly independently from any analysis in conjunction with the origination of
loans. Based on this review, management believes the allowance to be adequate;
however, future adjustments may be necessary if economic and other conditions
differ substantially from management's assumptions.
In addition, various regulatory agencies, as an integral part of
their examination process, periodically review the Banks' allowances for loan
losses and losses on real estate owned. Such agencies may require the Banks to
recognize additions to the allowances based on their judgments about information
available to them at the time of their examination.
The following table presents changes in the allowance for loan
losses for the quarters ended March 31, 1998 and 1997, respectively.
March 31, March 31,
(Dollars in thousands) 1998 1997
- ----------------------------------------------------------------------------------------------------
Beginning Balance .................................... $ 8,004 $ 6,528
Provision charged to operations........................ 710 409
Loan charge-offs....................................... (767) (344)
Less loan recoveries................................. 141 68
----- --------
Net loan charge-offs............................... (626) (276)
----- --------
Ending Balance......................................... $ 8,088 $ 6,661
====== ========
At March 31, 1998, the recorded investment in loans that were
considered to be impaired under FASB Standards No. 114, "Accounting by Creditors
for Impairment of a Loan" and No. 118, "Accounting by Creditors for Impairment
of a Loan - Income Recognition and Disclosures," was
10
$2,358,014 (of which $1,843,475 was on nonaccrual) compared to the recorded
investment in impaired loans of $2,216,380 (of which $2,062,173 was on
nonaccrual) at December 31, 1997. The related allowance for loan losses on these
loans was $725,053 and $764,538 at March 31, 1998 and December 31, 1997,
respectively. The average recorded investment in impaired loans for the three
months ended March 31, 1998 and 1997 was $2,154,680 and $1,927,932,
respectively. For the three months ended March 31, 1998 and 1997, the
Corporation recognized interest income recorded on impaired loans of $6,600 and
$7,540, respectively, none of which was recognized using the cash method of
income recognition.
Total problem assets at March 31, 1998 were $5,879,000 or 1.07% of
gross loans, compared to $5,632,000 or 1.07% at December 31, 1997. The
components of nonperforming and problem assets are presented in the table below:
March 31, December 31,
(Dollars in thousands) 1998 1997
- -----------------------------------------------------------------------------------------------------------------
Nonaccrual loans........................................................... $ 1,924 $ 2,105
Other real estate ......................................................... 2,192 1,418
------- -----------
Total non-performing assets.............................................. 4,116 3,523
------- -----------
Loans 90 days or more
past due and still accruing.............................................. 1,763 2,109
------- -----------
Total problem assets.................................................. $ 5,879 $ 5,632
======= -----------
Interest income that would have been recorded on nonaccrual loans for the
three months ended March 31, 1998 and 1997, had they performed in accordance
with their original terms, amounted to approximately $51,000 and $29,000,
respectively. There was no interest income recorded on non-accrual loans for
the three months ended March 31, 1998 and 1997.
Other real estate increased primarily due to one loan foreclosed in
the first quarter of 1998 which was previously classified as 90 days past due or
more and still accruing. This loan was secured by collateral equal to the
carrying value of the loan.
Noninterest income increased approximately $352,000 or 15.9% for
the three month period ended March 31, 1998 over the comparable period in 1997.
The major component of this increase was in other income which relates to higher
mortgage loan income due to increased loan originations. Other factors
contributing to this increase were higher trust income primarily due to higher
levels of assets under management, higher commissions earned on brokerage
services resulting from increased sales volumes and higher service charge income
on deposit accounts due to increased non-sufficient fund charges.
Noninterest expense increased approximately $952,000, or 18.5%, for
the three month period ended March 31, 1998, over the comparable period in 1997.
The increase is primarily attributable to higher salaries and fringe benefits
due to a greater number of full-time equivalents and commissions paid on
increased mortgage and brokerage service volumes. Higher occupancy and equipment
expense due to depreciation expense for ongoing additions in computer network
11
technology. Additional increases were incurred in professional services, data
processing and postage expenses.
Total income tax expense for the three month period ended March 31,
1998 increased $81,000, over the comparable period in 1997. The increase is
attributable to an increase in taxable income which was partially offset by a
decrease in the effective tax rate from 30.2% to 29.3%.
12
YEAR 2000 CONSIDERATION
Year 2000 Compliance
The Corporation recognizes the potentially severe implications of the "Year
2000 Issue" and is actively pursuing solutions. The "Year 2000 Issue" is a
general term used to describe the various problems that may result from the
improper processing of dates and date-sensitive calculations by computers and
other machinery as the Year 2000 approaches. These problems generally arise
because most computer hardware and software historically have used only two
digits to identify the applicable year. Since there may be no accommodation for
the full four-digit year, computer programs that have date-sensitive software
may recognize a date using "00" as the year 1900 rather than the year 2000. This
error could result in system failure or miscalculations causing disruption of
operations, including among other things a temporary inability to process
customer transactions, properly accrue interest income and expense or engage in
similar normal business activities. In addition, non-banking systems, such as
security alarms, telephones, vaults, etc. are also subject to malfunction due to
their dependence upon software that utilizes special codes and conventions using
the date field.
The Board of Directors of the Corporation has approved a Year 2000 Action
Plan ("Action Plan") that has been developed in accordance with the Federal
Financial Institutions Examination Council (FFIEC) guidelines. In the imple-
mentation of the Action Plan, the Corporation has performed a thorough inventory
on all hardware, software and facilities that might be impacted by the Year 2000
Issue. The Corporation does not perform in-house programming of its software.
Therefore, it is dependent upon its third-party vendors for modifications or
conversion of its existing systems to correct the effects of the Year 2000
Issue. The Corporation is soliciting written documentation from all of its
software and hardware vendors with respect to their action plans for remediation
and testing. The vendor of the Corporation's core processing system has
indicated to the Corporation that its product will be tested and fully compliant
no later than October 18, 1998, and the Corporation receives updates on its
progress on a regular basis. Based upon this information, the Corporation
currently anticipates the renovation phase to be completed by no later than
December 31, 1998 and the Corporation will be in a position to begin internal
testing no later than that time.
Management of the Corporation believes that the potential effects on the
Corporation's internal operations of the Year 2000 Issue can be mitigated on
timely basis. However, if required modifications or conversions are not made or
are not completed on a timely basis, the Year 2000 Issue could disrupt normal
business operations and have a material adverse impact on the Corporation.
The Corporation also has developed a communication and assessment plan for
its customers. Pursuant to this plan, the Corporation is initiating contact with
its key customers to determine such customers' plans with respect to the Year
2000 Issue and the Corporation's vulnerability to any such customer's failure to
remediate its own Year 2000 Issue. As most corporate customers depend on
computer systems that must be Year 2000 compliant, a disruption in their
businesses may result in potentially significant financial difficulties that
could affect their creditworthiness. The Corporation is also initiating contact
with key suppliers to determine their plan with respect to the Year 2000 Issue.
There can be no guarantee that customers and suppliers will convert their
systems on a timely basis or in a manner that is compatible with the
Corporation's systems. Significant business interruptions or failures by key
business customers, suppliers, trading partners or governmental agencies
resulting from the effects of the Year 2000 Issue could have a material adverse
effect on the Corporation.
The expected cost to the Corporation of the Year 2000 project is currently
estimated at $250,000 for hardware, software and facilities upgrades, customer
communications, testing and other items required to pursue the Action Plan. All
remediation costs will be expensed in the year incurred and will be funded
through normal operating cash flow. Year 2000 project costs during the three
months ended March 31, 1998 were not material.
The costs of the Year 2000 project and the date on which the Corporation
plans to complete Year 2000 compliance are based on management's best estimates,
which were derived using numerous assumptions of future events such as the
availability of certain resources (including internal and external resources),
third-party vendor plans and other factors. However, there can be no guarantee
that these estimates will be achieved at the cost disclosed or within the time-
frame indicated, and actual results could differ materially from these plans.
Factors that might affect the timely and efficient completion of the
Corporation's Year 2000 project include, but are not limited to, vendor's
abilities to adequately correct or convert software and the effect on the
Corporation's ability to test its systems, the availability and cost of
personnel trained in the Year 2000 area, the ability to identify and correct
all relevant computer programs and similar uncertainties.
ACCOUNTING AND REGULATORY MATTERS
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 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.
In February 1998, the FASB issued SFAS No. 132, "Employer's
Disclosures about Pensions and Other Postretirement Benefits". The new statement
revises an employer's disclosure with respect to pension obligations and other
postretirement benefit plans but does not change the measurement or recognition
provisions of those plans. SFAS No. 132 provides additional information to
facilitate financial analysis and eliminates certain disclosures which are no
longer useful. The implementation of the statement is effective for fiscal years
beginning after December 15, 1997. The statement is not expected to have a
material impact on the consolidated financial statements of the Corporation.
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 and purposed effective
dates of exposure draft.
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
13
compliant and, the availability of resources for the Corporation, or its vendors
and customers, to complete their respective Year 2000 compliance effectively.
Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK.
The following table presents the scheduled maturity of market risk
sensitive instruments at March 31, 1998:
(DOLLARS IN THOUSANDS)
There
Maturing in: 1 Year 2 Years 3 Years 4 Years 5 Years -after Total
- -----------------------------------------------------------------------------------------------------------------
ASSETS
Debt securities..... $ 14,820 $ 10,403 $ 22,115 $ 11,999 $ 26,143 $ 65,754 $ 151,234
Loans............... 136,833 71,687 76,769 55,739 49,954 149,646 540,628
----------------------------------------------------------------------------------------
Total............... $ 151,653 $ 82,090 $ 98,884 $ 67,738 $ 76,097 $ 215,400 $ 691,862
========================================================================================
LIABILITIES
Savings, NOW, Demand
and IMMA's....... $ 386,664 $ -- $ -- $ -- $ -- $ -- $ 386,664
CD's................ 190,928 50,244 7,749 122 50 77 249,170
Short-term
Borrowings....... 50,897 -- -- -- -- -- 50,897
Long-term
Borrowings....... -- -- 1,000 -- 600 520 2,120
----------------------------------------------------------------------------------------
Total............... $ 628,489 $ 50,244 $ 8,749 $ 122 $ 650 $ 597 $ 688,851
========================================================================================
The following table presents the average interest rate and estimated fair value
of market risk sensitive instruments at March 31, 1998:
Average Estimated
(DOLLARS IN THOUSANDS) Total Interest Rate Fair Value
- -----------------------------------------------------------------------------
ASSETS
Debt Securities.......... $151,234 7.13% $154,049
Loans.................... 540,628 9.16 540,628
---------------------------------------------
Total ................... $691,862 8.72 $694,677
=============================================
LIABILITIES
Savings, NOW, Demand
and IMMA's............. $386,664 3.24 $386,664
CD's..................... 249,170 5.67 247,729
Short-term
Borrowings............. 50,897 5.50 50,897
Long-term
Borrowings............. 2,120 6.52 2,120
--------------------------------------------
Total.................... $688,851 4.46 $687,410
============================================
14
PART II - OTHER INFORMATION
Item 2. Changes in Securities and Use of Proceeds
The Registrant periodically issues unregistered shares of its
Common Stock to key employees pursuant to the exercise of options granted under
its Comprehensive Stock Option Plan pursuant to the exemption from registration
set forth in Section 4(2) of the Securities Act of 1933, as amended. During the
quarter ended March 31, 1998, the Registrant issued the following shares
pursuant to such option exercises:
On January 22, 1998, the Registrant issued 200 shares for an aggregate of
$2,454.00. On February 3, 1998, the Registrant issued 1,856 shares for an
aggregate of $14,036.00. On February 6, 1998, the Registrant issued 3,372 shares
for an aggregate of $28,956.00.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
Exhibit No.
(per Exhibit Table
in item 601 of
Regulation S-K) Description of Exhibits
3.1 Amended and Restated Articles of
Incorporation of the Registrant,
incorporated herein by reference to
Exhibit 3.1 of the Registrant's
Annual Report on Form 10-K for the
fiscal year ended December 31, 1997
(Commission File No. 0-15829).
3.2 By-laws of the Registrant, as amended,
incorporated herein by reference to Exhibit 3.2 of
the Registrant's Annual Report on Form 10-K for
the fiscal year ended December 31, 1995
(Commission File No. 0-15829).
11 Statement regarding computation of per share earnings.
27 Financial Data Schedules
15
(b) Reports on Form 8-K
(i) On January 6, 1998 the Registrant filed a Current
Report on Form 8-K, reporting pursuant to Item 2
thereof the Registrant's acquisition of Carolina
State Bank ("CSB") effective December 22, 1997 and
including pursuant to Item 7 thereof the following
financial statements:
o Consolidated Balance Sheet of CSB as of
September 30, 1997 (unaudited)
o Consolidated Statements of Income of CSB for the
nine months ended September 30, 1997
and 1996 (unaudited)
o Consolidated Statements of Cash Flows of CSB for
the nine months ended September 30, 1997 and
1996 (unaudited)
o Notes to the Consolidated Financial Statements
of CSB (unaudited)
o Introductory Statement to Pro Forma Condensed
Financial Information
o Pro Forma Balance Sheet as of September 30, 1997
(unaudited)
o Pro Forma Condensed Statements of Income for the
nine months ended September 30,
1997 and 1996 (unaudited)
o Notes to Unaudited Pro Forma Condensed Financial
Information
(ii) On January 28, 1998, the Registrant filed a
Current Report on Form 8-K, reporting pursuant to
Item 5 thereof (i) its earnings for the fiscal year
ended December 31, 1997, and (ii) a description of
the Registrant's Common Stock for the purpose of
updating such description previously filed with the
Securities and Exchange Commission.
16
Signatures
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
FIRST CHARTER CORPORATION
(Registrant)
Date: May 15, 1997 By \s\ Robert O. Bratton
Robert O. Bratton
Executive Vice President &
Principal Financial and
Accounting Officer
17
EXHIBIT INDEX
Exhibit No.
(per Exhibit Table
in item 601 of Sequential
Regulation S-K) Description of Exhibits Page Number
11 Statement regarding
computation of per share
earnings.
27 Financial Data Schedules
18