1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2001
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
Commission File Number 0-15829
FIRST CHARTER CORPORATION
(Exact name of registrant as specified in its charter)
NORTH CAROLINA 56-1355866
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
10200 DAVID TAYLOR DRIVE, CHARLOTTE, NC 28262-2373
(Address of Principal Executive Offices) (Zip Code)
Registrant's telephone number, including area code (704) 688-4300
Indicate by check mark whether the Registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
As of August 9, 2001 the Registrant had outstanding 31,221,374 shares
of Common Stock, no par value.
2
FIRST CHARTER CORPORATION
JUNE 30, 2001 FORM 10-Q
-------------------------------------------------------------------------------------------------------------
INDEX
Page
----
PART I Item 1. Financial Statements:
FINANCIAL Consolidated Balance Sheets at June 30, 2001 2
INFORMATION and December 31, 2000
Consolidated Statements of Income for the Three 3
and Six Months Ended June 30, 2001 and 2000
Consolidated Statements of Shareholders' 4
Equity for the Six Months Ended
June 30, 2001 and 2000
Consolidated Statements of Cash Flows for the 5
Six Months Ended June 30, 2001 and 2000
Notes to Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial 9
Condition and Results of Operations
Item 3. Quantitative and Qualitative Disclosures about 21
Market Risk
-------------------------------------------------------------------------------------------------------------
PART II
OTHER INFORMATION Item 1. Legal Proceedings 21
Item 2. Changes in Securities and Use of Proceeds 21
Item 3. Defaults Upon Senior Securities 21
Item 4. Submission of Matters to a Vote of Security Holders 22
Item 6. Exhibits and Reports on Form 8-K 22
Signature 23
Index to Exhibits 24
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PART 1. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
FIRST CHARTER CORPORATION AND SUBSIDIARIES
Consolidated Balance Sheets
JUNE 30, December 31,
2001 2000
----------- ------------
(Dollars in thousands, except share data) (UNAUDITED)
ASSETS:
Cash and due from banks $ 75,696 $ 71,196
Federal funds sold 902 1,015
Interest bearing bank deposits 4,439 122,461
---------- ----------
Cash and cash equivalents 81,037 194,672
---------- ----------
Securities available for sale (cost of $924,942 at June 30, 2001 and $437,684
at December 31, 2000; carrying amount of pledged collateral
at June 30, 2001, $146,768) 939,993 441,031
Loans 1,969,887 2,157,622
Less: Unearned income (222) (215)
Allowance for loan losses (28,049) (28,447)
---------- ----------
Loans, net 1,941,616 2,128,960
---------- ----------
Premises and equipment, net 97,270 76,666
Other assets 79,073 90,870
---------- ----------
TOTAL ASSETS $3,138,989 $2,932,199
========== ==========
LIABILITIES:
Deposits, domestic:
Noninterest bearing demand $ 257,443 $ 242,983
Interest bearing 1,861,584 1,755,251
---------- ----------
Total deposits 2,119,027 1,998,234
---------- ----------
Other borrowings 643,483 570,024
Other liabilities 52,375 54,654
---------- ----------
TOTAL LIABILITIES 2,814,885 2,622,912
---------- ----------
SHAREHOLDERS' EQUITY:
Preferred stock - no par value; authorized 2,000,000 shares; no shares
issued and outstanding -- --
Common stock - no par value; authorized 100,000,000 shares;
issued and outstanding 31,721,374 and 31,601,263 shares 152,869 151,486
Retained earnings 162,057 155,762
Accumulated other comprehensive income:
Unrealized gains on securities available for sale, net 9,178 2,039
---------- ----------
TOTAL SHAREHOLDERS' EQUITY 324,104 309,287
---------- ----------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $3,138,989 $2,932,199
========== ==========
See accompanying notes to consolidated financial statements.
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FIRST CHARTER CORPORATION AND SUBSIDIARIES
Consolidated Statements of Income
(Unaudited)
FOR THE THREE MONTHS FOR THE SIX MONTHS
ENDED JUNE 30, ENDED JUNE 30,
----------------------------- ---------------------------
(Dollars in thousands, except share and per share data) 2001 2000 2001 2000
----------------------------- ---------------------------
INTEREST INCOME:
Loans $ 40,496 $ 45,066 $ 84,312 $ 88,469
Federal funds sold 15 135 46 218
Interest bearing bank deposits 81 32 237 76
Securities 14,799 8,009 24,866 16,117
----------------------------- ---------------------------
Total interest income 55,391 53,242 109,461 104,880
----------------------------- ---------------------------
INTEREST EXPENSE:
Deposits 20,638 17,413 41,767 34,265
Federal funds purchased and securities
sold under agreements to repurchase 1,509 1,807 3,029 3,362
Federal Home Loan Bank and other borrowings 6,896 6,979 12,938 13,171
----------------------------- ---------------------------
Total interest expense 29,043 26,199 57,734 50,798
----------------------------- ---------------------------
NET INTEREST INCOME 26,348 27,043 51,727 54,082
PROVISION FOR LOAN LOSSES 1,190 1,370 1,940 3,340
----------------------------- ---------------------------
NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES 25,158 25,673 49,787 50,742
NONINTEREST INCOME:
Service charges on deposit accounts 3,383 3,091 6,301 5,642
Financial management income 640 698 1,415 1,378
Gain on sale of securities 282 260 549 412
Income (loss) from equity method investees (102) 446 9 446
Mortgage loan fees 749 101 1,258 353
Brokerage services income 520 366 914 742
Insurance services income 1,865 1,744 3,856 3,556
Other 1,477 1,208 2,932 2,660
----------------------------- ---------------------------
Total noninterest income 8,814 7,914 17,234 15,189
----------------------------- ---------------------------
NONINTEREST EXPENSE:
Salaries and employee benefits 10,659 10,433 21,012 21,061
Occupancy and equipment 3,799 3,171 7,369 6,253
Data processing 759 864 1,355 1,775
Advertising 552 684 1,195 1,171
Postage and supplies 1,136 1,174 2,325 2,095
Professional services 1,418 732 2,582 1,553
Telephone 347 336 638 668
Restructuring charges and merger-related -- 16,250 -- 16,250
Other 2,208 2,026 4,445 4,675
----------------------------- ---------------------------
Total noninterest expense 20,878 35,670 40,921 55,501
----------------------------- ---------------------------
INCOME (LOSS) BEFORE INCOME TAXES 13,094 (2,083) 26,100 10,430
INCOME TAXES 4,223 681 8,385 4,625
----------------------------- ---------------------------
NET INCOME (LOSS) $ 8,871 $ (2,764) $ 17,715 $ 5,805
============================= ===========================
NET INCOME (LOSS) PER SHARE:
Basic $ 0.28 $ (0.09) $ 0.56 $ 0.19
Diluted $ 0.28 $ (0.09) $ 0.56 $ 0.18
WEIGHTED AVERAGE SHARES:
Basic 31,719,241 31,402,488 31,708,003 31,323,794
Diluted 31,906,705 31,584,528 31,870,134 31,492,212
See accompanying notes to consolidated financial statements.
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FIRST CHARTER CORPORATION AND SUBSIDIARIES
Consolidated Statements of Shareholders' Equity
(Unaudited)
----------------------------------------------------------------
ACCUMULATED
COMMON STOCK OTHER
------------------------ RETAINED COMPREHENSIVE
(Dollars in thousands, except share data) SHARES AMOUNT EARNINGS INCOME (LOSS) TOTAL
----------------------------------------------------------------
BALANCE, DECEMBER 31, 1999 31,100,310 $ 146,438 $ 151,215 $(7,385) $ 290,268
Comprehensive income:
Net income -- -- 5,805 -- 5,805
Unrealized loss on securities
available for sale, net -- -- -- (1,374) (1,374)
---------
Total comprehensive income 4,431
Cash dividends -- -- (8,720) -- (8,720)
Stock options exercised and Dividend
Reinvestment Plan stock issued 189,426 737 -- -- 737
Shares issued in connection with
business acquisition 122,263 2,025 -- -- 2,025
Purchase and retirement of common stock (2,730) (26) -- -- (26)
----------------------------------------------------------------
BALANCE, JUNE 30, 2000 31,409,269 $ 149,174 $ 148,300 $(8,759) $ 288,715
================================================================
BALANCE, DECEMBER 31, 2000 31,601,263 151,486 155,762 2,039 309,287
Comprehensive income:
Net income -- -- 17,715 -- 17,715
Unrealized gain on securities
available for sale, net -- -- -- 7,139 7,139
---------
Total comprehensive income 24,854
Cash dividends -- -- (11,420) -- (11,420)
Stock options exercised and Dividend
Reinvestment Plan stock issued 127,111 1,495 -- -- 1,495
Purchase and retirement of common stock (7,000) (112) -- -- (112)
----------------------------------------------------------------
Balance, June 30, 2001 31,721,374 $ 152,869 $ 162,057 $ 9,178 $ 324,104
================================================================
See accompanying notes to consolidated financial statements.
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FIRST CHARTER CORPORATION AND SUBSIDIARIES
Consolidated Statements of Cash Flows
(Unaudited)
SIX MONTHS
ENDED JUNE 30,
-------------------------------
(Dollars in thousands) 2001 2000
-------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 17,715 $ 5,805
Adjustments to reconcile net income to net cash provided by operating activities:
Provision for loan losses 1,940 3,340
Depreciation 3,742 3,112
Premium amortization and discount accretion, net (388) 37
Net gain on securities available for sale transactions (549) (412)
Net gain on sale of other real estate (53) (57)
Net loss on sale of mortgage loans -- 99
Net loss on sale of premises and equipment 12 4
Origination of mortgage loans held for sale (93,755) (27,311)
Proceeds from sale of mortgage loans held for sale 85,064 71,521
Decrease (increase) in other assets 7,697 (17,363)
(Decrease) increase in other liabilities (2,279) 13,838
-------------------------------
Net cash provided by operating activities 19,146 52,613
-------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sales of securities available for sale 65,264 32,276
Proceeds from maturities of securities available for sale 105,740 26,630
Purchase of securities available for sale (490,333) (37,987)
Proceeds from issuer calls and maturities of securities held to maturity -- 758
Net decrease (increase) in loans 25,267 (170,074)
Proceeds from sales of other real estate 1,425 1,533
Net purchases of premises and equipment (24,359) (9,845)
-------------------------------
Net cash used in investing activities (316,996) (156,709)
-------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase (decrease) in demand, money market and savings accounts 25,958 (29,903)
Net increase in certificates of deposit 94,835 84,370
Net increase in securities sold under repurchase
agreements and other borrowings 73,459 42,123
Purchase and retirement of common stock (112) (26)
Proceeds from issuance of common stock 1,495 737
Dividends paid (11,420) (8,720)
-------------------------------
Net cash provided by financing activities 184,215 88,581
-------------------------------
Net decrease in cash and cash equivalents (113,635) (15,515)
Cash and cash equivalents at beginning of period 194,672 97,668
-------------------------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 81,037 $ 82,153
===============================
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid for interest $ 27,847 $ 50,011
Cash paid for income taxes 8,582 860
SUPPLEMENTAL DISCLOSURE OF NON-CASH TRANSACTIONS:
Transfer of loans and premises and equipment to other real estate owned (1,836) (2,796)
Unrealized gain on securities available for sale
(net of tax effect of $2,784 and $(529) for the six months ended
June 30, 2001 and 2000, respectively) 7,139 (1,374)
Issuance of common stock for business acquisitions -- 2,025
Loans securitized and retained in the available for sale portfolio 166,992 --
Transfer of loans in portfolio to held for sale -- 45,252
Transfer of securities held to maturity to available for sale -- 35,324
See accompanying notes to consolidated financial statements.
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FIRST CHARTER CORPORATION AND SUBSIDIARIES
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
First Charter Corporation (the "Corporation") is a bank holding
company established as a North Carolina Corporation in 1983. Its principal
asset is the stock of its subsidiary, First Charter Bank ("FCB" or the "Bank").
FCB is a full service bank, which operates 52 financial centers, five insurance
offices and 99 ATMs (automated teller machines). These facilities are located
in Ashe, Alleghany, Avery, Buncombe, Cabarrus, Cleveland, Guilford, Iredell,
Jackson, Lincoln, McDowell, Mecklenburg, Rowan, Rutherford, Swain, Transylvania
and Union counties of North Carolina. Through its subsidiary First Charter
Brokerage Services, the Bank offers full service and discount brokerage
services, insurance and annuity sales and financial planning services pursuant
to a third party arrangement with UVEST Investment Services. The Bank also
operates four other subsidiaries: First Charter Insurance Services, Inc., First
Charter Realty Investment, Inc., FCB Real Estate, Inc., and First Charter
Leasing, Inc. First Charter Insurance Services, Inc. is a North Carolina
corporation formed to meet the insurance needs of businesses and individuals
throughout the Charlotte metropolitan area. First Charter Realty Investment,
Inc. is a Delaware corporation organized as a holding company for FCB Real
Estate, Inc. a real estate investment trust organized in North Carolina. First
Charter Leasing, Inc. is a North Carolina corporation, which leases commercial
equipment. The Bank also has a majority ownership in Lincoln Center through the
Bank's investment in Mallard Creek, LLC. Lincoln Center is a three-story office
building occupied in part by a branch of FCB.
NOTE ONE - ACCOUNTING POLICIES
The consolidated financial statements include the accounts of the
Corporation and its wholly owned subsidiary, FCB. In consolidation, all
intercompany accounts and transactions have been eliminated.
The information contained in the consolidated financial statements is
unaudited. The preparation of consolidated financial statements in conformity
with accounting principles generally accepted in the United States of America
requires management to make estimates and assumptions that affect reported
amounts of assets and liabilities and disclosure of contingent liabilities at
the date of the financial statements, as well as the amounts of income and
expenses during the reporting period. Actual results could differ from those
estimates.
The information furnished in this report reflects all adjustments
which are, in the opinion of management, necessary to present a fair statement
of the financial condition and the results of operations for interim periods.
All such adjustments were of a normal recurring nature. Certain amounts
reported in prior periods have been reclassified to conform with the current
period presentation. Such reclassifications have no effect on net income or
shareholders' equity as previously reported.
Accounting policies followed in the presentation of interim financial
results are presented on pages 37 to 41 of the Corporation's Annual Report on
Form 10-K for the year ended December 31, 2000.
Statement of Financial Accounting Standards No. 133 (SFAS No. 133),
"Accounting for Derivative Instruments and Hedging Activities," establishes
accounting and reporting standards for derivatives and hedging activities. It
requires that all derivatives be recognized as assets or liabilities on the
balance sheet and that such instruments be carried at fair market value through
adjustments to either other comprehensive income or current earnings or both,
as appropriate. SFAS No. 133 was originally effective for financial statements
issued for all fiscal quarters of fiscal years beginning after June 15, 1999.
The implementation date of SFAS No. 133 was delayed by Statement of Financial
Accounting Standards No. 137 "Accounting for Derivative Instruments and Hedging
Activities--Deferral of the Effective Date of FASB Statement No. 133" to the
first fiscal quarters of fiscal years beginning after June 15, 2000.
Accordingly, the Corporation adopted SFAS No. 133 on January 1, 2001. The
impact to the Corporation upon adoption was immaterial.
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In September 2000, the Financial Accounting Standards Board (FASB)
issued Statement of Financial Accounting Standards No. 140 (SFAS No. 140),
"Accounting for Transfers and Servicing of Financial Assets and Extinguishments
of Liabilities- a replacement of FASB Statement 125", which revises the
criteria for accounting for securitizations and other transfers of financial
assets and collateral, and introduces new disclosures. The enhanced disclosure
requirements are effective for year-end 2000. The other provisions of SFAS No.
140 apply prospectively to transfers of financial assets and extinguishments of
liabilities occurring after March 31, 2001. Accordingly, the Corporation
adopted SFAS No. 140 on April 1, 2001. The impact to the Corporation upon
adoption was immaterial.
NOTE TWO - NET INCOME PER SHARE
Basic net income per share is computed by dividing net income by the
weighted average number of shares of common stock outstanding for the periods
presented. Diluted net income per share reflects the potential dilution that
could occur if all of the currently outstanding stock options on the
Corporation's common stock are fully exercised. The numerators of the basic net
income per share computations are the same as the numerators of the diluted net
income per share computations for all periods presented. A reconciliation of
the denominator of the basic net income per share computations to the
denominator of the diluted net income per share computations is as follows:
THREE MONTHS SIX MONTHS
ENDED JUNE 30 ENDED JUNE 30
----------------------------------------------------------
2001 2000 2001 2000
----------------------------------------------------------
Basic net income per share denominator:
Weighted average number of
common shares outstanding 31,719,241 31,402,488 31,708,003 31,323,794
Dilutive effect arising from
assumed exercise of stock options 187,464 182,040 162,131 168,418
----------------------------------------------------------
Diluted net income per share denominator 31,906,705 31,584,528 31,870,134 31,492,212
==========================================================
The Corporation paid cash dividends of $0.18 and $0.36 per share for
the three and six months ended June 30, 2001, respectively, compared to $0.17
and $0.34 per share for the comparable 2000 periods.
NOTE THREE - MERGERS AND ACQUISITIONS
(a) Business Insurers of Guilford County. On September 1, 2000,
Business Insurers of Guilford County ("Business Insurers") was merged into
First Charter Insurance Services. As a result of this merger, approximately
283,000 shares of the Corporation's common stock were issued. This merger was
accounted for as a pooling of interests, and accordingly all financial results
for prior periods have been restated to include the financial results of both
entities. In connection with the Business Insurers merger, the Corporation
recorded pre-tax restructuring charges and merger-related expenses of
approximately $575,000 ($425,000 after-tax), all of which had been incurred at
June 30, 2001.
(b) Carolina First BancShares, Inc. On April 4, 2000, Carolina
First BancShares, Inc. ("Carolina First" or "CFBI") was merged into the
Corporation (the "Merger"). In accordance with the terms of the Merger
Agreement, each share of the $2.50 par value common stock of Carolina First was
converted into 2.267 shares of the no par value common stock of the
Corporation, resulting in the net issuance of approximately 13.3 million common
shares to the former Carolina First shareholders. The Merger was accounted for
as a pooling of interests, and accordingly all financial results for prior
periods have been restated to include the financial results of both entities.
In connection with this transaction, the Corporation recorded pre-tax
restructuring charges and merger-related expenses of approximately $15.7
million ($11.9 million after-tax).
Carolina First was a bank holding company operating 31 branch offices
principally in the greater Charlotte, North Carolina area. At April 4, 2000,
Carolina First had total consolidated assets of approximately $791.7 million,
total consolidated loans of approximately $545.9 million, total consolidated
deposits of approximately $674.8 million and total consolidated shareholders'
equity of approximately $67.5 million.
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The following table indicates the primary components of the Carolina
First and Business Insurers restructuring charges and merger-related expenses,
including the amounts incurred through June 30, 2001, and the amounts remaining
as accrued expenses in other liabilities at June 30, 2001. All of the remaining
accrual at June 30, 2001 relates to the Carolina First merger.
Total Restructuring Incurred Remaining
Charges and Merger- through accrual at
(Dollars in thousands) Related Expenses June 30, 2001 June 30, 2001
--------------------------------------------------------
Professional costs $ 3,907 $ 3,907 $ --
Employee related costs 5,336 4,112 1,224
Equipment writedowns 4,125 4,125 --
Conversion costs 1,114 1,114 --
Lease buyouts 909 695 214
Printing and filing fees 187 187 --
Other 672 672 --
------------------------------------------------
Total $ 16,250 $ 14,812 $ 1,438
================================================
The employee-related costs include accruals for payments to be made in
connection with the involuntary termination of approximately 130 employees who
had been notified that their positions were redundant within the combined
organizations and, therefore, no longer needed. These personnel were terminated
from various areas of the Corporation. Other restructuring activities included
closing and consolidating 14 branch facilities that were redundant,
consolidating back-office functions and converting all of Carolina First's
systems to the Corporation systems. The remaining restructuring charge accrual
at June 30, 2001 consists of lease contract payments on closed facilities to be
paid through 2010 and contract payments to former employees to be paid through
2007. The Corporation does not currently anticipate any additional material
merger-related expenses, or any material changes to the restructuring charge
accrual, in 2001 related to the Merger.
NOTE FOUR - IMPAIRED LOANS
The recorded investment in impaired loans was $17.7 million (all of
which was on nonaccrual status) at both June 30, 2001 and December 31, 2000.
The related allowance for loan losses on impaired loans was $4.2 million and
$4.7 million at June 30, 2001 and December 31, 2000, respectively. The average
recorded investment in impaired loans for the six months ended June 30, 2001
and 2000 was $18.6 million and $11.7 million, respectively.
NOTE FIVE - STOCK REPURCHASE PROGRAM
On April 27, 2001, First Charter Corporation's Board of Directors
authorized the repurchase of up to 1 million shares of the Corporation's common
stock. Through June 30, 2001, the Corporations had repurchased 7,000 shares of
its common stock at an average per-share price of $16.07, which reduced
shareholder's equity by $112,490.
NOTE SIX - CONVERSION TO STATE CHARTER BANK
On June 22, 2001, First Charter's banking subsidiary completed its
conversion from a national bank to First Charter Bank, a North Carolina state
bank. That change was completed after a cost benefit analysis of supervisory
regulatory charges and does not represent any disagreement with the Company's
former regulators. The bank will continue to operate its financial center
network franchise under the "First Charter" brand name.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion and analysis should be read in conjunction
with the consolidated financial statements of the Corporation and the notes
thereto, as restated to reflect the Corporation's various mergers.
The following discussion contains certain forward-looking statements
about the Corporation's financial condition and results of operations, which
are subject to certain risks and uncertainties that could cause actual results
to differ materially from those reflected in the forward-looking statements.
Readers are cautioned not to place undue reliance on these forward-looking
statements, which reflect management's judgment only as of the date hereof. The
Corporation undertakes no obligation to publicly revise these forward-looking
statements to reflect events and circumstances that arise after the date
hereof.
Factors that may cause actual results to differ materially from these
forward looking statements include, among others, the following possibilities:
(1) projected business increases in connection with the implementation of our
business plan are lower than expected; (2) competitive pressure among financial
services companies increases significantly; (3) costs or difficulties related
to the integration of acquisitions or expenses in general are greater than
expected; (4) general economic conditions, in the markets in which the company
does business, are less favorable than expected; (5) changes in the interest
rate environment reduce interest margins and affect funding sources; (6)
changes in market rates and prices may adversely affect the value of financial
products; (7) any inability to generate liquidity necessary to meet loan demand
or other cash needs; (8) any inability to accurately predict the adequacy of
the loan loss allowance needs; (9) legislation or regulatory requirements or
changes adversely affect the businesses in which the company is engaged; and
(10) decisions to change the business mix of the company.
OVERVIEW
The Corporation is a regional financial services company with assets
of $3.14 billion and is the holding company for First Charter Bank ("FCB"). On
June 22, 2001, First Charter's banking subsidiary completed its conversion from
a national bank to First Charter Bank, a North Carolina state bank. That change
was completed after a cost benefit analysis of supervisory regulatory charges
and does not represent any disagreement with the Company's former regulators.
The bank will continue to operate its financial center network franchise under
the "First Charter" brand name. FCB operates 52 financial centers, five
insurance offices and 99 ATMs located in 17 counties throughout the western
half of North Carolina. FCB provides businesses and individuals with a broad
range of financial services, including banking, comprehensive financial
planning, funds management, investments, insurance, mortgages and a full array
of employee benefit programs.
The Corporation's results of operations and financial position are
described in the following sections.
Refer to TABLE ONE for quarterly and six month selected financial
data.
RESULTS OF OPERATIONS
EARNINGS SUMMARY
Net income amounted to $8.9 million, or $0.28 per diluted common
share, for the three months ended June 30, 2001, compared to a net loss of $2.8
million, or $0.09 net loss per diluted common share, for the three months ended
June 30, 2000, representing an increase in net income of $11.7 million. The
increase in net income is primarily attributable to restructuring charges and
merger-related expenses of $16.3 million pre-tax ($12.3 million, or $0.39 per
diluted share after-tax) which occurred during the three months ended June 30,
2000.
Net income amounted to $17.7 million, or $0.56 per diluted common
share, for the six months ended June 30, 2001, compared to $5.8 million, or
$0.18 per diluted common share, for the six months ended June 30, 2000,
representing an increase in net income of $11.9 million. The increase in net
income is primarily attributable to restructuring charges and merger-related
expenses of $16.3 million pre-tax ($12.3 million, or $0.39 per diluted share
after-tax) which occurred during the three months ended June 30, 2000. The
items affecting net income are discussed further in the following sections.
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TABLE ONE
SELECTED FINANCIAL DATA
-------------------------------------------------------------------------
FOR THE THREE MONTHS FOR THE SIX MONTHS
ENDED JUNE 30, ENDED JUNE 30,
-------------------------------- -------------------------------
(Dollars in thousands, except
share and per share data) 2001 2000 2001 2000
-------------------------------- -------------------------------
INCOME STATEMENT
Interest income $ 55,391 $ 53,242 $ 109,461 $ 104,880
Interest expense 29,043 26,199 57,734 50,798
-------------------------------- -------------------------------
Net interest income 26,348 27,043 51,727 54,082
Provision for loan losses 1,190 1,370 1,940 3,340
Noninterest income 8,814 7,914 17,234 15,189
Noninterest expense 20,878 35,670 40,921 55,501
-------------------------------- -------------------------------
Income (loss) before income taxes 13,094 (2,083) 26,100 10,430
Income taxes 4,223 681 8,385 4,625
-------------------------------- -------------------------------
Net income (loss) $ 8,871 $ (2,764) $ 17,715 $ 5,805
================================ ===============================
PER COMMON SHARE
Basic net income (loss) $ 0.28 $ (0.09) $ 0.56 $ 0.19
Diluted net income (loss) 0.28 (0.09) $ 0.56 0.18
Cash dividends declared (1) 0.18 0.17 0.36 0.34
Period-end book value 10.22 9.19 10.22 9.19
Average shares outstanding - basic 31,719,241 31,402,488 31,708,003 31,323,794
Average shares outstanding - diluted 31,906,705 31,584,528 31,870,134 31,492,212
RATIOS
Return on average shareholders' equity (2) 11.12% (3.67)% 11.29% 0.43%
Return on average assets (2) 1.15 (0.40) 1.19 3.91
Net interest margin (2) 3.73 4.29 3.81 4.34
Average loans to average deposits 95.50 111.69 99.42 110.70
Average equity to average assets 10.33 10.93 10.58 10.94
Efficiency ratio (3) 59.05 101.37 58.97 79.53
SELECTED PERIOD END BALANCES
Securities available for sale $ 939,993 $ 500,310 $ 939,993 $ 500,310
Loans, net 1,941,616 2,062,674 1,941,616 2,062,674
Allowance for loan losses 28,049 26,700 28,049 26,700
Total assets 3,138,989 2,788,426 3,138,989 2,788,426
Deposits 2,119,027 1,870,958 2,119,027 1,870,958
Borrowings 643,483 584,144 643,483 584,144
Total liabilities 2,814,885 2,499,711 2,814,885 2,499,711
Total shareholders' equity 324,104 288,715 324,104 288,715
================================ ===============================
(1) First Charter Corporation historical cash dividends declared.
(2) Annualized
(3) Noninterest expense divided by the sum of taxable equivalent net
interest income plus noninterest income less gain on sale of securities.
NET INTEREST INCOME
An analysis of the Corporation's net interest income on a
taxable-equivalent basis and average balance sheets for the three and six
months ended June 30, 2001 and 2000 are presented in TABLES TWO and THREE,
respectively. The changes in net interest income for the three and six months
ended June 30, 2001 and 2000 are analyzed in TABLES FOUR and FIVE,
respectively.
Net interest income, the difference between total interest income and
total interest expense, is the Corporation's principal source of earnings. Net
interest income amounted to $26.3 million and $51.7 million for the three and
six months ended June 30, 2001, respectively, a decrease of $0.7 million and
$2.4 million as compared to the same periods in 2000. These decreases were the
result of a variety of factors, including reduced loan demand and a compressed
net interest margin resulting from the slowing economy; several large loan
payoffs; and our increased selectivity in seeking new opportunities in this
economic environment.
10
12
Average interest earning assets increased approximately $299.2 million
to $2.88 billion for the second quarter of 2001 and $228.8 million to $2.78
billion in the first six months of 2001, compared to the same 2000 periods. This
increase is primarily due to a $234.8 million and a $116.8 million increase in
the Corporation's average securities available for sale portfolio for the three
and six months ended June 30, 2001, respectively, excluding the impact of the
securitization of $167.0 million of mortgage loans during the first quarter of
2001. The increase was primarily due to the net purchase of approximately $63.6
million and $331.6 million in securities available for sale for the three and
six months ended June 30, 2001, respectively. Average interest earning assets
also increased due to growth in the Corporation's average loan portfolio, which
increased $66.3 million and $110.5 million for the three and six months ended
June 30, 2001, respectively, excluding the impact of the securitization of
$167.0 million of mortgage loans during the first quarter of 2001. The decrease
in average yield on interest earning assets to 7.77 percent and 8.00 percent for
the three and six months ended June 30, 2001, respectively, compared to 8.37
percent and 8.34 percent for the same 2000 periods, resulted principally from
the decrease in the average prime rate during 2001 to 7.34 percent and 8.01
percent for the three and six months ended June 30, 2001, respectively, from
9.25 percent and 8.95 percent for the three and six months ended June 30, 2000,
respectively. The decrease in the average prime rate is attributable to the
Federal Reserve's 275 basis point decrease in the fed funds rate during the
first six months of 2001. The average yield earned on loans was 8.28 percent and
8.50 percent for the three and six months ended June 30, 2001, respectively,
compared to 8.78 percent and 8.77 percent for the same 2000 periods.
In addition to the increase in average interest earning assets, the
Corporation experienced an increase in average interest-bearing liabilities of
$287.7 million to $2.48 billion in the second quarter of 2001 and an increase of
$217.9 million to $2.39 billion in the first six months of 2001, due to the use
of Federal Home Loan Bank ("FHLB") advances and increases in deposits to fund
securities purchases. The average rate paid on interest bearing liabilities
decreased to 4.69 percent for the three months ended June 30, 2001 compared to
4.80 percent in the same 2000 period, primarily due to a decline in the average
rate of borrowings. The average rate paid on interest bearing liabilities
increased to 4.88 percent for the six months ended June 30, 2001 compared to
4.71 percent during the same 2000 period, primarily due to a shift in the
deposit mix partially offset by a decline in the average rate of borrowings. The
average rate paid on interest-bearing deposits was 4.56 percent and 4.74 percent
for the three and six months ended June 30, 2001, respectively, up from 4.36
percent and 4.31 percent in the same 2000 periods. The rate paid on other
borrowed funds decreased to 5.03 percent and 5.27 percent for the three and six
months ended June 30, 2001, respectively, compared to 6.00 percent and 5.82
percent in the same 2000 periods.
The net interest margin (tax adjusted net interest income divided by
average interest-earning assets) decreased 56 basis points to 3.73 percent and
53 basis points to 3.81 percent for the three and six months ended June 30,
2001, respectively, compared to 4.29 percent and 4.34 percent in the same 2000
periods. This reflects the impact of higher levels of borrowings and competitive
forces related to loan and deposit pricing. Management believes that further
compression of the net interest margin will continue at least through the third
quarter of 2001.
Management assesses interest rate risk based on an earnings simulation
model. Based on the earnings simulation model, the Corporation's balance sheet
is currently asset sensitive, meaning that in a given period there will be more
assets than liabilities subject to immediate repricing as market rates change.
Assuming a 300 basis point pro-rata increase in interest rates over a
twelve-month period, the Corporation's sensitivity to interest rate risk would
positively impact net interest income by approximately 2.62 percent of net
interest income at June 30, 2001. Assuming a 300 basis point pro-rata decrease
in interest rates over a twelve-month period, the Corporation's sensitivity to
interest rate risk would negatively impact net interest income by approximately
1.99 percent of net interest income at June 30, 2001. Both scenarios are within
Management's acceptable range. In the future, the Corporation is considering the
limited use of interest rate swaps, caps, floors or other derivative products to
assist in interest rate risk management.
11
13
The following table includes for the three months ended June 30, 2001
and 2000 interest income on interest earning assets and related average yields,
as well as interest expense on interest bearing liabilities and related average
rates paid. In addition, the table includes the net interest margin. Average
balances were calculated based on daily averages.
TABLE TWO
AVERAGE BALANCES AND NET INTEREST INCOME ANALYSIS
----------------------------------------------------------------------------------------------------------------------------------
SECOND QUARTER 2001 Second Quarter 2000
-------------------------------------------------------------------------------------
INTEREST AVERAGE Interest Average
AVERAGE INCOME/ YIELD/RATE Average Income/ Yield/Rate
(Dollars in thousands) BALANCE EXPENSE PAID(5) Balance Expense Paid(5)
----------------------------------------------------------------------------------------------------------------------------------
INTEREST EARNING ASSETS:
Loans(1)(2)(3) $1,968,304 $40,609 8.28% $2,068,958 $45,176 8.78%
Securities - taxable 816,135 13,754 6.74 410,096 6,924 6.79
Securities - nontaxable 88,623 1,411 6.37 92,881 1,465 6.34
Federal funds sold 1,306 15 4.74 7,995 135 6.80
Interest bearing bank deposits 7,261 81 4.46 2,543 32 5.03
----------------------------------------------------------------------------------------------------------------------------------
Total earning assets(4) 2,881,629 55,870 7.77 2,582,473 53,732 8.37
----------------------------------------------------------------------------------------------------------------------------------
Cash and due from banks 64,110 73,947
Other assets 152,859 119,147
----------------------------------------------------------------------------------------------------------------------------------
TOTAL ASSETS $3,098,598 $2,775,567
==================================================================================================================================
INTEREST BEARING LIABILITIES:
Demand deposits 507,959 2,854 2.25 503,862 3,176 2.54
Savings deposits 117,371 524 1.79 166,799 1,020 2.46
Other time deposits 1,189,026 17,260 5.82 936,869 13,218 5.67
Other borrowings 670,248 8,405 5.03 589,354 8,785 6.00
----------------------------------------------------------------------------------------------------------------------------------
Total interest bearing liabilities 2,484,604 29,043 4.69 2,196,884 26,199 4.80
----------------------------------------------------------------------------------------------------------------------------------
Noninterest bearing sources:
Noninterest bearing deposits 246,641 244,940
Other liabilities 47,385 30,466
Shareholders' equity 319,968 303,277
----------------------------------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES AND
SHAREHOLDERS' EQUITY $3,098,598 $2,775,567
==================================================================================================================================
Net interest spread 3.08 3.57
Impact of noninterest bearing sources 0.65 0.72
----------------------------------------------------------------------------------------------------------------------------------
NET INTEREST INCOME
AND MARGIN $26,827 3.73% $27,533 4.29%
==================================================================================================================================
(1) The preceding analysis takes into consideration the principal amount of
nonaccruing loans and only income actually collected on such loans.
(2) Average loan balances are shown net of unearned income.
(3) Includes amortization of deferred loan fees of approximately $748 and $1,104
for the second quarter of 2001 and 2000, respectively.
(4) Yields on nontaxable securities and loans are stated on a taxable-equivalent
basis, assuming a Federal tax rate of 35 percent, applicable state taxes and
TEFRA disallowances for the second quarter of 2001 and 2000. The adjustments
made to convert to a taxable-equivalent basis were $479 and $490 for the second
quarter of 2001 and 2000, respectively.
(5) Annualized
12
14
The following table includes for the six months ended June 30, 2001 and
2000 interest income on interest earning assets and related average yields, as
well as interest expense on interest bearing liabilities and related average
rates paid. In addition, the table includes the net interest margin. Average
balances were calculated based on daily averages.
TABLE THREE
AVERAGE BALANCES AND NET INTEREST INCOME ANALYSIS
------------------------------------------------------------------------------------------------------------------------------------
SIX MONTHS ENDED JUNE 30
---------------------------------------------------------------------------------------
2001 2000
---------------------------------------------------------------------------------------
INTEREST AVERAGE Interest Average
AVERAGE INCOME/ YIELD/RATE Average Income/ Yield/Rate
(Dollars in thousands) BALANCE EXPENSE PAID(5) Balance Expense Paid(5)
------------------------------------------------------------------------------------------------------------------------------------
INTEREST EARNING ASSETS:
Loans(1)(2)(3) $2,005,554 $84,540 8.50% $2,033,409 $88,655 8.77%
Securities - taxable 673,017 22,731 6.76 414,179 13,982 6.79
Securities - nontaxable 90,408 2,883 6.38 94,060 2,880 6.16
Federal funds sold 1,592 46 5.79 6,311 218 6.96
Interest bearing bank deposits 9,028 237 5.29 2,804 76 5.46
------------------------------------------------------------------------------------------------------------------------------------
Total earning assets(4) 2,779,599 110,437 8.00 2,550,763 105,811 8.34
------------------------------------------------------------------------------------------------------------------------------------
Cash and due from banks 65,880 71,576
Other assets 146,762 106,679
------------------------------------------------------------------------------------------------------------------------------------
TOTAL ASSETS $2,992,241 $2,729,018
====================================================================================================================================
INTEREST BEARING LIABILITIES:
Demand deposits 498,522 5,977 2.42 536,896 6,446 2.41
Savings deposits 118,112 1,114 1.90 133,459 2,203 3.32
Other time deposits 1,158,446 34,676 6.04 926,622 25,616 5.56
Other borrowings 610,852 15,967 5.27 571,092 16,533 5.82
------------------------------------------------------------------------------------------------------------------------------------
Total interest bearing liabilities 2,385,932 57,734 4.88 2,168,069 50,798 4.71
------------------------------------------------------------------------------------------------------------------------------------
Noninterest bearing sources:
Noninterest bearing deposits 242,163 239,904
Other liabilities 47,602 22,361
Shareholders' equity 316,544 298,684
------------------------------------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES AND
SHAREHOLDERS' EQUITY $2,992,241 $2,729,018
====================================================================================================================================
Net interest spread 3.12 3.63
Impact of noninterest bearing sources 0.69 0.71
------------------------------------------------------------------------------------------------------------------------------------
NET INTEREST INCOME
AND MARGIN $52,703 3.81% $55,013 4.34%
====================================================================================================================================
(1) The preceding analysis takes into consideration the principal amount of
nonaccruing loans and only income actually collected on such loans.
(2) Average loan balances are shown net of unearned income.
(3) Includes amortization of deferred loan fees of approximately $1,428 and
$1,982 for the six months ended June 30, 2001 and 2000, respectively.
(4) Yields on nontaxable securities and loans are stated on a taxable-equivalent
basis, assuming a Federal tax rate of 35 percent, applicable state taxes and
TEFRA disallowances for the first six months of 2001 and 2000. The adjustments
made to convert to a taxable-equivalent basis were $976 and $931 for the six
months ended June 30, 2001 and 2000, respectively.
(5) Annualized
13
15
The following tables presents the changes in net interest income from the
three months ended June 30, 2000 to June 30, 2001:
TABLE FOUR
VOLUME AND RATE VARIANCE ANALYSIS
----------------------------------------------------------------------------------------------
THREE MONTHS ENDED JUNE 30
--------------------------------------------------------
INCREASE (DECREASE)
DUE TO CHANGE IN(1)
--------------------------------------------------------
2000 2001
INCOME/ INCOME/
(Dollars in thousands) EXPENSE RATE VOLUME EXPENSE
----------------------------------------------------------------------------------------------
INTEREST INCOME:
Loans $ 45,176 $ (2,430) $ (2,137) $ 40,609
Securities - taxable 6,924 (19) 6,849 13,754
Securities - nontaxable 1,465 13 (67) 1,411
Federal funds sold 135 (24) (96) 15
Interest bearing bank deposits 32 (7) 56 81
----------------------------------------------------------------------------------------------
TOTAL INTEREST INCOME $ 53,732 $ (2,467) $ 4,605 $ 55,870
==============================================================================================
INTEREST EXPENSE:
Demand deposits $ 3,176 $ (346) $ 24 $ 2,854
Savings deposits 1,020 (234) (262) 524
Other time deposits 13,218 434 3,608 17,260
Other borrowings 8,785 (1,490) 1,110 8,405
----------------------------------------------------------------------------------------------
TOTAL INTEREST EXPENSE 26,199 (1,636) 4,480 29,043
----------------------------------------------------------------------------------------------
NET INTEREST INCOME $ 27,533 $ (831) $ 125 $ 26,827
==============================================================================================
(1) The changes for each category of income and expense are divided between the
portion of change attributable to the variance in rate or volume for that
category. The amount of change that cannot be separated is allocated to each
variance proportionately.
The following tables presents the changes in net interest income from
the six months ended June 30, 2000 to June 30, 2001:
TABLE FIVE
VOLUME AND RATE VARIANCE ANALYSIS
----------------------------------------------------------------------------------------------
SIX MONTHS ENDED JUNE 30
--------------------------------------------------------
INCREASE (DECREASE)
DUE TO CHANGE IN (1)
--------------------------------------------------------
2000 2001
INCOME/ INCOME/
(Dollars in thousands) EXPENSE RATE VOLUME EXPENSE
----------------------------------------------------------------------------------------------
INTEREST INCOME:
Loans $ 88,655 $ (2,920) $ (1,195) $ 84,540
Securities - taxable 13,982 9 8,740 22,731
Securities - nontaxable 2,880 117 (114) 2,883
Federal funds sold 218 (23) (149) 46
Interest bearing bank deposits 76 (5) 166 237
----------------------------------------------------------------------------------------------
TOTAL INTEREST INCOME $105,811 $ (2,822) $ 7,448 $110,437
==============================================================================================
INTEREST EXPENSE:
Demand deposits $ 6,446 $ 9 $ (478) $ 5,977
Savings deposits 2,203 889 (1,978) 1,114
Other time deposits 25,616 (2,386) 11,446 34,676
Other borrowings 16,533 1,661 (2,227) 15,967
----------------------------------------------------------------------------------------------
TOTAL INTEREST EXPENSE 50,798 173 6,763 57,734
----------------------------------------------------------------------------------------------
NET INTEREST INCOME $ 55,013 $ (2,995) $ 685 $ 52,703
==============================================================================================
(1) The changes for each category of income and expense are divided
between the portion of change attributable to the variance in rate or
volume for that category. The amount of change that cannot be separated
is allocated to each variance proportionately.
14
16
PROVISION FOR LOAN LOSSES
The provision for loan losses for the three and six months ended June
30, 2001 amounted to $1.2 million and $1.9 million, respectively, compared to
$1.4 million and $3.3 million for the comparable 2000 periods. The decrease in
the provision for loan losses was due to lower loan growth in 2001, the effect
of which was partially offset by higher net charge-offs. Gross loans decreased
$20.7 million during the six months ended June 30, 2001, excluding the $167.0
million loan securitization, compared to an increase in gross loans of $121.5
million during the comparable 2000 period.
Net charge-offs were $1.2 million or 0.24 percent of average loans and
$1.9 million or 0.19 percent of average loans for the three and six months ended
June 30, 2001, respectively, compared to $0.5 million or 0.10 percent of average
loans and $1.5 million or 0.15 percent of average loans for the comparable 2000
periods. The increase in net charge-offs was primarily due to the effects of
slower economic growth on certain customers within the portfolio.
NONINTEREST INCOME
Noninterest income increased 11 percent and 13 percent to $8.8 million
and $17.2 million for the three and six months ended June 30, 2001,
respectively, compared to $7.9 million and $15.2 million for the comparable 2000
periods. This increase was driven primarily by a 9.4 percent and an 11.7 percent
increase in service charge income on deposit accounts for the three months and
six months ended June 30, 2001 compared to the same 2000 periods, which was due
to re-pricing opportunities resulting from the acquisition of Carolina First. In
addition, the declining rate environment has increased mortgage origination
volume. This has resulted in additional loan sales to the secondary market and
correspondingly greater fee income. Growth of First Charter Insurance Services
and financial management income also increased noninterest income.
NONINTEREST EXPENSE
Noninterest expense decreased 42 percent and 26 percent to $20.9
million and $40.9 million for the three and six months ended June 30, 2001,
respectively, compared to $35.7 million and $55.5 million for the comparable
2000 periods. These decreases were attributable to the restructuring charges and
merger-related expenses of $16.3 million during the quarter ended June 30, 2000,
associated with the acquisition of Carolina First, and a decrease in salaries
and employee benefits expenses during 2001 due to synergies realized as part of
the Carolina First acquisition. These decreases were partially offset during
2001 by the additional operating costs associated with the four financial
centers acquired during the fourth quarter of 2000 and an increase in occupancy
and equipment expense as a result of the move into the new First Charter Center.
INCOME TAXES
Total income tax expense for the three and six months ended June 30,
2001 was $4.2 million and $8.4 million, respectively, compared to $0.7 million
and $4.6 million for the same periods in 2000. The increase was attributable to
an increase in taxable income. The increase in tax expense, however, was not
proportionate with the increase in income because portions of the restructuring
charges and merger-related expenses in 2000 were not deductible. This created a
decrease in the effective tax rate to 32.1 percent for the six months ended June
30, 2001 from 44.3 percent for the six months ended June 30, 2000.
FINANCIAL CONDITION
SUMMARY
Total assets at June 30, 2001 amounted to $3.14 billion, compared to
$2.93 billion at December 31, 2000 and $2.79 billion at June 30, 2000. Net loans
at June 30, 2001 amounted to $1.94 billion, compared to $2.13 billion at
December 31, 2000 and $2.06 billion at June 30, 2000. This decrease from prior
periods was due to the securitization of $167.0 million of mortgage loans in
February 2001. These loans were securitized because of a decrease in interest
rates and the resulting impact of that condition on the Corporation's interest
rate risk. The securitized mortgage loans are now classified as mortgage backed
securities in our available for sale portfolio.
15
17
The securities available for sale portfolio increased to $940.0 million
at June 30, 2001, compared to $441.0 million at December 31, 2000, and $500.3
million at June 30, 2000. The increase in securities available for sale was due
to the $167.0 million mortgage loan securitization, as well as purchases of
securities available for sale made to increase our interest earning assets. The
carrying value of securities available for sale was approximately $15.1 million
above their amortized cost at June 30, 2001, which represents gross unrealized
gains of $16.0 million and gross unrealized losses of $0.9 million. In
conjunction with the Merger, the Corporation transferred $35.3 million of
Carolina First's securities classified as held to maturity to available for sale
due to the significance of the impact on the Corporation's interest rate
forecast as compared to corporate policy.
Total deposits at June 30, 2001 amounted to $2.12 billion, compared to
$2.00 billion at December 31, 2000 and $1.87 billion at June 30, 2000.
Shareholders' equity at June 30, 2001 was $324.1 million, which represented a
book value per share of $10.22 and an equity-to-assets percentage of 10.33
percent. The securities available for sale portfolio's unrealized net gain has
increased from $2.0 million (net of tax) at December 31, 2000 to an unrealized
net gain of $9.2 million (net of tax) at June 30, 2001.
NONPERFORMING ASSETS
The total of nonperforming assets at June 30, 2001 increased to $32.1
million compared to $29.6 million and $15.8 million at December 31, 2000 and
June 30, 2000, respectively. As a percentage of total assets, nonperforming
assets have increased to 1.02 percent at June 30, 2001 compared to 1.01 percent
and 0.57 percent at December 31, 2000 and June 30, 2000, respectively. The
increase over June 30, 2000 was primarily due to the effect of slower economic
growth on certain customers.
Total nonperforming assets and loans 90 days or more past due and still
accruing interest at June 30, 2001 were $32.3 million or 1.62 percent of total
loans and other real estate, compared to $30.0 million or 1.37 percent of total
loans and other real estate at December 31, 2000. These ratios were primarily
impacted by the first quarter 2001 securitization of $167.0 million of mortgage
loans. In addition, total nonperforming assets and loans 90 days or more past
due and still accruing have increased during the period due to an increase in
nonaccrual loans of $2.0 million and a $0.5 million increase in other real
estate owned. The increase in nonaccrual loans was not concentrated in any one
industry and was primarily due to several large credits secured by real estate
and the effect of slower economic growth on certain customers. The components of
nonperforming and loans 90 days or more past due and still accruing are
presented in the table below:
TABLE SIX
NONPERFORMING AND PROBLEM ASSETS
--------------------------------------------------------------------------------
JUNE 30, December 31,
(Dollars in thousands) 2001 2000
--------------------------------------------------------------------------------
Nonaccrual loans $ 28,605 $ 26,587
Other real estate 3,454 2,989
--------------------------------------------------------------------------------
Total nonperforming assets 32,059 29,576
--------------------------------------------------------------------------------
Loans 90 days or more past due
and still accruing interest 199 430
--------------------------------------------------------------------------------
Total nonperforming assets and loans 90 days or
more past due and still accruing interest $ 32,258 $ 30,006
================================================================================
16
18
ALLOWANCE FOR LOAN LOSSES
All estimates of the loan portfolio risk, including the adequacy of the
allowance for loan losses, are subject to general and local economic conditions,
among other factors, which are unpredictable and beyond the Corporation's
control. Since a significant portion of the loan portfolio is comprised of real
estate loans and loans to area businesses, the Corporation is subject to
continued risk that the real estate market and economic conditions could
continue to change and could result in future losses and require increases in
the provision for loan losses.
Management currently uses several measures to assess and control the
loan portfolio risk. For example, all loans over a certain dollar amount must
receive an in-depth review by an analyst in the Bank's Credit Department. Any
issues regarding risk assessments of those credits are addressed by the Bank's
Senior Risk Managers and factored into management's decision to originate or
renew the loan. Furthermore, large commitments are reviewed by both a Board of
Directors Loan Committee and an Executive Loan Committee comprised of executive
management, the chief credit officer and senior lending officers of the Bank.
The Corporation also continues to employ an independent third party risk
assessment group to review the underwriting, documentation and risk grading
analysis. This third party group reviews all loan relationships above a certain
dollar amount and a sampling of all other credits. The third party's evaluation
and report is shared with Executive Management, the Loan and Audit Committee of
the Bank and, ultimately, is reported to the Board of Directors of the Bank and
the Corporation.
Management uses the information developed from the procedures described
above in evaluating and grading the loan portfolio. This continual grading
process is used to monitor the credit quality of the loan portfolio and to
assist management in determining the appropriate levels of the allowance for
loan losses.
As part of the continual grading process, individual commercial loans
are assigned a credit risk grade based on their credit quality, which is subject
to change as conditions warrant. Any changes in those risk assessments as
determined by the outside risk assessment group, regulatory examiners or the
Corporation's Risk Management Division are also considered in the allowance for
loan losses analysis. Management considers certain commercial loans on
nonaccrual status to be individually impaired and measures such impairment based
upon the value of the collateral. An estimate of an allowance is made for all
other graded loans in the portfolio based on their assigned credit risk grade,
type of loan and other matters related to credit risk. In the allowance for loan
loss analysis process, the Bank also aggregates non-graded loans into pools of
similar credits and reviews the historical loss experience associated with these
pools as additional criteria to allocate the allowance to each category. The
Bank also considers the impact of the area, local, regional and national
economies in making estimates of the allowance for loan losses.
At June 30, 2001 the allowance for loan losses was $28.0 million or
1.42 percent of gross loans compared to $26.7 million or 1.28 percent at June
30, 2000. The increase in the allowance for loan losses as a percentage of gross
loans is primarily attributable to the mortgage loan securitization, which
removed $417,000 of allowance for loan losses when the loans were securitized
and reclassified from loans into securities available for sale. Securitized
loans consisted of residential mortgage loans, which generally have a lower
percentage of allocated allowance for loan losses. TABLE SEVEN provides the
changes in the allowance for loan losses for the three and six months ended June
30, 2001 and 2000.
Management considers the allowance for loan losses adequate to cover
inherent losses in the Bank's loan portfolio as of the date of the financial
statements. Management believes it has established the allowance in
consideration of the current economic environment. While management uses the
best information available to make evaluations, future additions to the
allowance may be necessary based on changes in economic and other conditions.
Additionally, various regulatory agencies, as an integral part of their
examination process, periodically review the Bank's allowances for loan losses.
Such agencies may require the recognition of adjustments to the allowances based
on their judgments of information available to them at the time of their
examinations.
17
19
TABLE SEVEN
ALLOWANCE FOR LOAN LOSSES
----------------------------------------------------------------------------------------------------------------------------
THREE MONTHS SIX MONTHS
ENDED JUNE 30, ENDED JUNE 30,
--------------------------------------------------------------------
(Dollars in thousands) 2001 2000 2001 2000
----------------------------------------------------------------------------------------------------------------------------
BALANCE, BEGINNING OF PERIOD $ 28,049 $ 25,979 $ 28,447 $ 25,002
----------------------------------------------------------------------------------------------------------------------------
LOAN CHARGE-OFFS:
Commercial, financial and agricultural 679 578 1,133 1,370
Real estate - construction -- -- -- --
Real estate - mortgage 211 94 211 181
Installment 475 33 971 429
----------------------------------------------------------------------------------------------------------------------------
Total loans charged-off 1,365 705 2,315 1,980
----------------------------------------------------------------------------------------------------------------------------
RECOVERIES OF LOANS PREVIOUSLY CHARGED-OFF:
Commercial, financial and agricultural 71 95 151 270
Real estate - construction -- -- -- --
Real estate - mortgage 7 14 61 26
Installment 97 60 182 155
----------------------------------------------------------------------------------------------------------------------------
Total recoveries of loans previously charged-off 175 169 394 451
----------------------------------------------------------------------------------------------------------------------------
Net charge-offs 1,190 536 1,921 1,529
----------------------------------------------------------------------------------------------------------------------------
Provision for loan losses 1,190 1,370 1,940 3,340
Adjustment for loans sold and securitized -- (113) (417) (113)
----------------------------------------------------------------------------------------------------------------------------
BALANCE, JUNE 30 $ 28,049 $ 26,700 $ 28,049 $ 26,700
============================================================================================================================
Average loans, net of unearned
income $ 1,968,304 $ 2,068,958 $ 2,005,554 $ 2,033,409
Net charge-offs to average loans (annualized) 0.24% 0.10% 0.19% 0.15%
Allowance for loan losses to
gross loans at June 30 1.42 1.28 1.42 1.28
----------------------------------------------------------------------------------------------------------------------------
LIQUIDITY
The Bank derives a major source of its liquidity from its core deposit
base. Liquidity is further provided by loan repayments, brokered deposits,
maturities in the securities available for sale portfolio, the ability to secure
public deposits, the availability of federal fund lines and repurchase
agreements at correspondent banks and the ability to borrow from the Federal
Reserve Bank ("FRB") discount window. In addition to these sources, the Bank is
a member of the Federal Home Loan Bank ("FHLB") System, which provides access to
FHLB lending sources. At June 30, 2001, the Bank had a line of credit with the
FHLB of $586.3 million, with $510.7 million advanced to the Bank and $75.6
million remaining available. Another source of liquidity is the securities in
the available for sale portfolio, which may be sold in response to liquidity
needs. The Bank's loan-to-deposit ratio at June 30, 2001 was 0.93 percent
compared to 1.08 percent at December 31, 2000. Management believes the Bank's
sources of liquidity are adequate to meet operating needs and deposit withdrawal
requirements.
CAPITAL RESOURCES
At June 30, 2001, total shareholders' equity was $324.1 million,
representing a book value of $10.22 per share, compared to $309.3 million, or a
book value of $9.79 per share at December 31, 2000. The increase was primarily
due to net earnings (net income less dividends) of $6.3 million combined with
the recognition of $7.1 million after-tax unrealized gains on available for sale
securities, the receipt of $1.5 million from the sale of approximately 127,111
shares of common stock issued for stock options and Dividend Reinvestment Plans
and the payment of $112,000 for the purchase and retirement of 7,000 shares of
common stock.
18
20
At June 30, 2001, the Corporation and the Bank were in compliance with
all existing capital requirements. The most recent notifications from the
Corporation's and the Bank's various regulators categorized the Corporation and
the Bank as well capitalized under the regulatory framework for prompt
corrective action. There are no events or conditions since those notifications
that management believes have changed either of the entities' categories. The
Corporation's capital requirements are summarized in the table below:
------------------------------------------------------
RISK-BASED CAPITAL
------------------------------------------------------
LEVERAGE CAPITAL TIER 1 CAPITAL TOTAL CAPITAL
--------------------------------------------------------------------------------------------------------------
(DOLLARS IN THOUSANDS) AMOUNT PERCENTAGE(1) AMOUNT PERCENTAGE(2) AMOUNT PERCENTAGE(2)
--------------------------------------------------------------------------------------------------------------
Actual $295,950 9.61% $295,950 13.65% $323,829 14.93%
Required 123,182 4.00 86,739 4.00 173,478 8.00
Excess 172,768 5.61 209,211 9.65 150,351 6.93
(1) Percentage of total adjusted average assets. The FRB minimum leverage
ratio requirement is 3 percent to 5 percent, depending on the
institution's composite rating as determined by its regulators. The FRB
has not advised the Corporation of any specific requirements applicable
to it.
(2) Percentage of risk-weighted assets.
REGULATORY RECOMMENDATIONS
Management is not presently aware of any current recommendations to the
Corporation or to the Bank by regulatory authorities which, if they were to be
implemented, would have a material adverse effect on the Corporation's or the
Bank's liquidity, capital resources, or operations.
ACCOUNTING AND REGULATORY MATTERS
Statement of Financial Accounting Standards No. 133 (SFAS No. 133),
"Accounting for Derivative Instruments and Hedging Activities," establishes
accounting and reporting standards for derivatives and hedging activities. It
requires that all derivatives be recognized as assets or liabilities on the
balance sheet and that such instruments be carried at fair market value through
adjustments to either other comprehensive income or current earnings or both, as
appropriate. SFAS No. 133 was originally effective for financial statements
issued for all fiscal quarters of fiscal years beginning after June 15, 1999.
The implementation date of SFAS No. 133 was delayed by Statement of Financial
Accounting Standards No. 137 "Accounting for Derivative Instruments and Hedging
Activities--Deferral of the Effective Date of FASB Statement No. 133" to the
first fiscal quarters of fiscal years beginning after June 15, 2000.
Accordingly, the Corporation adopted SFAS No. 133 on January 1, 2001. The impact
to the Corporation upon adoption was immaterial.
In September 2000, the Financial Accounting Standards Board (FASB)
issued Statement of Financial Accounting Standards No. 140 (SFAS No. 140),
"Accounting for Transfers and Servicing of Financial Assets and Extinguishments
of Liabilities- a replacement of FASB Statement 125", which revises the criteria
for accounting for securitizations and other transfers of financial assets and
collateral, and introduces new disclosures. The enhanced disclosure requirements
were effective for year-end 2000. The other provisions of SFAS No. 140 apply
prospectively to transfers of financial assets and extinguishments of
liabilities occurring after March 31, 2001. Accordingly, the Corporation adopted
SFAS No. 140 on April 1, 2001. The impact to the Corporation upon adoption was
immaterial.
In July 2001, the FASB issued Statement of Financial Accounting
Standards No. 141 (SFAS No. 141), "Business Combinations", and Statement of
Financial Accounting Standards No. 142 (SFAS No. 142), "Goodwill and Other
Intangible Assets". SFAS 141 requires that the purchase method of accounting be
used for all business combinations initiated after June 30, 2001. SFAS 141 also
specifies criteria which must be met for intangible assets acquired in a
purchase method business combination to be recognized and reported apart from
goodwill. SFAS 142 will require that goodwill and intangible assets with
indefinite useful lives no longer be amortized, but instead tested for
impairment at least annually in accordance with the provisions of SFAS 142. SFAS
142 will also require that identifiable intangible assets with definite useful
lives be amortized over their respective estimated useful lives to
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their estimated residual values, and reviewed for impairment in accordance with
SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to Be Disposed Of".
The Corporation is required to adopt the provisions of SFAS 141
immediately. Furthermore, any goodwill and any intangible asset determined to
have an indefinite useful life that are acquired in a purchase business
combination completed after June 30, 2001 will not be amortized, but will
continue to be evaluated for impairment in accordance with the appropriate
accounting literature issued prior to SFAS 142. Goodwill and intangible assets
acquired in business combinations completed before July 1, 2001 will continue to
be amortized prior to the adoption of SFAS 142.
SFAS 141 will require, upon adoption of SFAS 142, that the Corporation
evaluate its existing intangible assets and goodwill that were acquired in a
prior purchase business combination, and to make any necessary reclassifications
in order to conform with the new criteria in SFAS 141 for recognition apart from
goodwill. Upon adoption of SFAS 142, the Corporation will be required to
reassess the useful lives and residual values of all intangible assets acquired
in purchase business combinations, and make any necessary amortization period
adjustments by the end of the first interim period after adoption. In addition,
to the extent an intangible asset is identified as having an indefinite useful
life, the Corporation will be required to test the intangible asset for
impairment in accordance with the provisions of SFAS 142 within the first
interim period. Any impairment loss will be measured as of the date of adoption
and recognized as the cumulative effect of a change in accounting principle in
the first interim period.
As of June 30, 2001, the Corporation has unamortized goodwill in the
amount of $12.3 million, and unamortized identifiable intangible assets in the
amount of $6.2 million, all of which will be subject to the transition
provisions of SFAS 141 and 142. Amortization expense related to goodwill was
approximately $293,000 and $479,000 for the year ended December 31, 2000 and the
six months ended June 30, 2001, respectively. Because of the extensive effort
needed to comply with adopting SFAS 141 and 142, it is not practicable to
reasonably estimate the impact of adopting these statements on the Corporation's
financial statements at this time, including whether any transitional impairment
losses will be required to be recognized as the cumulative effect of a change in
accounting principle.
From time to time, the FASB issues exposure drafts for proposed
statements of financial accounting standards. Such exposure drafts are subject
to comment from the public, to revisions by the FASB and to final issuance by
the FASB as statements of financial accounting standards. Management considers
the effect of the proposed statements on the consolidated financial statements
of the Corporation and monitors the status of changes to and proposed effective
dates of exposure drafts.
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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The following table presents the scheduled maturity of market risk
sensitive instruments at June 30, 2001:
MATURING IN 1 YEAR 2 YEARS 3 YEARS 4 YEARS 5 YEARS THEREAFTER TOTAL
------------------------------------------------------------------------------------------------------------------------------------
ASSETS:
Debt securities $ 104,089 $112,029 $100,642 $117,190 $112,426 $352,583 $ 898,959
Loans 725,268 233,979 220,651 226,534 212,928 322,256 1,941,616
------------------------------------------------------------------------------------------------------------------------------------
TOTAL $ 829,357 $346,008 $321,293 $343,724 $325,354 $674,839 $2,840,575
====================================================================================================================================
LIABILITIES:
Savings, NOW and IMMA's $ 620,833 $ 11,207 $ 203 $ 655 $ -- $ -- $ 632,898
CD's 1,092,537 101,157 23,156 11,209 627 -- 1,228,686
Short-term borrowings 437,133 -- -- -- -- -- 437,133
Long-term borrowings -- 181,040 40 40 25,040 190 206,350
------------------------------------------------------------------------------------------------------------------------------------
TOTAL $2,150,503 $293,404 $ 23,399 $ 11,904 $ 25,667 $ 190 $2,505,067
====================================================================================================================================
The following table presents the average interest rate and estimated fair
value of market risk sensitive instruments at June 30, 2001:
CARRYING AVERAGE ESTIMATED
VALUE INTEREST RATE FAIR VALUE
--------------------------------------------------------------------
ASSETS:
Debt securities $ 898,959 6.70% $ 898,959
Loans 1,941,616 8.06 1,970,777
--------------------------------------------------------------------
TOTAL $2,840,575 7.63% $2,869,736
====================================================================
LIABILITIES:
Savings, NOW and IMMA's $ 632,898 2.36% $ 633,117
CDs 1,228,686 5.56 1,235,316
Short-term borrowings 437,133 4.80 434,207
Long-term borrowings 206,350 4.76 206,350
--------------------------------------------------------------------
TOTAL $2,505,067 4.55% $2,508,990
====================================================================
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The Corporation and the Bank are defendants in certain claims and legal
actions arising in the ordinary course of business. In the opinion of
management, after consultation with legal counsel, the ultimate disposition of
these matters is not expected to have a material adverse effect on the
consolidated operations, liquidity or financial position of the Corporation or
the Bank.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
Not Applicable.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Not Applicable.
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ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
(a) First Charter Corporation's Annual Meeting of Shareholders was held on
May 17, 2001.
(b) The following are the voting results on each matter (exclusive of
procedural matters) submitted to the shareholders:
1. To elect five directors with terms expiring in 2004.
For Withheld
------------------------------
Harold D. Alexander 24,801,716 1,349,508
Lawrence M. Kimbrough 23,440,956 1,990,268
Samuel C. King, Jr. 25,171,600 259,624
Dr. Jerry E. McGee 25,128,106 303,118
Thomas R. Revels 24,747,649 683,575
2. To ratify the action of our Board of Directors in selecting KPMG LLP as
our independent certified public accountants for 2001.
For 25,169,457
Against 193,041
Abstain 68,726
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
Exhibit No.
(per Exhibit Table
in item 601 of
Regulation S-K) Description of Exhibits
3.1 Amended and Restated Articles of Incorporation of the
Corporation, incorporated herein by reference to
Exhibit 3.1 of the Corporation's Annual Report on
Form 10-K for the fiscal year ended December 31,
2000 (Commission File No. 0-15829).
3.2 By-laws of the Corporation, as amended, incorporated
herein by reference to Exhibit 3.2 of the Corporation's
Annual Report on Form 10-K for the fiscal year ended
December 31, 1995 (Commission File No. 0-15829).
10.1 First Charter Corporation Amended and Restated
Deferred Compensation Plan for Non-Employee Directors.
(b) Reports on Form 8-K
The following reports on Form 8-K were filed by the
Corporation during the quarter ended June 30, 2001:
Current Report on Form 8-K dated April 17, 2001 and filed
April 17, 2001, Items 5 and 7.
Current Report on Form 8-K dated April 18, 2001 and filed
April 18, 2001, Items 7 and 9.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
FIRST CHARTER CORPORATION
(Registrant)
Date: August 9, 2001 By: /s/ Robert O. Bratton
-----------------------------------
Robert O. Bratton
Executive Vice President &
Chief Financial Officer
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FIRST CHARTER CORPORATION
FORM 10-Q
Index to Exhibits
Exhibit Description
------- -----------
10.1 Amended and Restated Deferred Compensation Plan for Non-Employee
Directors.
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